ICAP
Practice Kit
P
Advanced accounting
and financial reporting
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Fourth edition published by
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© Emile Woolf International
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Certified Finance and Accounting Professional
Advanced accounting and financial reporting
C
Contents
Page
Question and Answers Index
v
Section A
Questions
1
Section B
Answers
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Advanced accounting and financial reporting
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Certified Finance and Accounting Professional
Advanced accounting and financial reporting
I
Index to questions and answers
CHAPTER 1 – BUSINESS COMBINATIONS AND CONSOLIDATION
1.1
HASAN LIMITED
1
121
1.2
FLAMSTEED LTD AND HALLEY LTD
3
124
1.3
BRADLEY LTD
4
125
1.4
X LTD
5
127
1.5
KHAN LIMITED
6
129
1.6
WHITE LIMITED
7
131
CHAPTER 2 – BUSINESS COMBINATIONS ACHIEVED IN STAGES
2.1
STEP ACQUISITION
9
134
2.2
A LTD
9
134
2.3
X LTD GROUP
10
137
2.4
PLAIN LTD
12
139
2.5
MANGO LTD
13
142
CHAPTER 3 – CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
3.1
MILLARD LTD
15
145
3.2
SHERLOCK LIMITED
16
147
3.3
FAISAL LIMITED
18
150
3.4
GOLDEN LIMITED
19
154
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Advanced accounting and financial reporting
CHAPTER 4 – COMPLEX GROUPS
4.1
PARVEZ LTD
21
156
4.2
HASAN, RIAZ AND SIDDIQ
22
159
4.3
LALIWALA GROUP
23
162
4.4
SHAKIR LIMITED
24
163
4.5
ANT, BEE AND FLY
25
165
4.6
BAHAMAS LIMITED
27
167
CHAPTER 5 – ASSOCIATES AND JOINT VENTURES
5.1
JOINT ARRANGEMENTS
28
170
5.2
HELIUM
28
170
5.3
HAMACHI LTD
28
172
5.4
HIDE
30
174
5.5
HARK, SPARK AND ARK
30
175
5.6
P, S AND A
31
178
5.7
H LTD GROUP
32
180
5.8
ALPHA AND BETA
33
181
5.9
SNAKE LIMITED
34
182
CHAPTER 6 – OTHER GROUP STANDARDS
There are no specific questions in this area.
CHAPTER 7 – IAS 21: FOREIGN CURRENCY
7.1
DND LIMITED
35
184
7.2
STARLIGHT LIMITED
35
184
7.3
PERCEPT LTD
36
185
7.4
ORLANDO
37
186
7.5
MANCASTER AND STOCKPOT
38
187
7.6
A, B AND C
40
190
7.7
OMEGA LIMITED
41
193
7.8
PARENT COMPANY LIMITED
42
193
7.9
KANGAROO LIMITED
43
196
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Index to questions and answers
CHAPTER 8 – IAS 7: STATEMENTS OF CASH FLOWS
8.1
EVERNEW LTD
45
197
8.2
BISHOP GROUP
46
199
8.3
THE GRAPE GROUP
48
201
8.4
VITZ LIMITED
51
203
CHAPTER 9 – IFRS 9: FINANCIAL INSTRUMENTS: RECOGNITION AND
MEASUREMENT
9.1
AJI PANCA LTD
53
206
9.2
PASSILA LTD
53
207
9.3
FINANCIAL INSTRUMENTS
54
207
9.4
CASCABEL LTD
54
209
9.5
FAIR VALUE HEDGE ACCOUNTING
54
210
9.6
CASH FLOW HEDGE ACCOUNTING
55
211
9.7
WATERS LTD
55
212
9.8
ARIF INDUSTRIES LIMITED
56
214
9.9
QASMI INVESTMENT LIMITED
56
214
9.10
RASHID INDUSTRY LIMITED
57
216
9.11
LAHORE STEEL LIMITED
57
216
9.12
FRENCH LIMITED
58
218
CHAPTER 10 – FINANCIAL INSTRUMENTS: PRESENTATION AND DISCLOSURE
10.1
SERRANO LIMITED
59
219
10.2
POBLANO LIMITED
59
219
10.3
PIQUIN LTD
59
220
10.4
AJI LTD
60
221
10.5
CHILTEPIN LTD
60
222
10.6
HABENERO LTD
60
222
10.7
PASHAM TELECOM LIMITED
61
223
62
224
CHAPTER 11 – IAS 19: EMPLOYEE BENEFITS
11.1
LABURNUM LIMITED
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11.2
JABEL LIMITED
62
224
11.3
KAGHZI LIMITED
62
225
11.4
LASURA LTD
63
225
11.5
UNIVERSAL SOLUTIONS
63
226
11.6
DHA INTERIORS LTD
64
227
CHAPTER 12 – IFRS 2: SHARE BASED PAYMENTS
12.1
TOSHACK LTD
65
230
12.2
IFRS 2
65
230
12.3
SAVAGE LTD
65
232
12.4
YORATH LTD
66
232
12.5
QUALTECH LTD
66
233
12.6
BRIDGE LTD
66
233
12.7
CAPSTAN LTD
67
234
12.8
NEWTOWN LTD
67
234
12.9
SINDH TRANSIT LTD
67
235
12.10
XYZ LIMITED
68
236
12.11
RAVI LIMITED
69
237
12.12
COROLLA LIMITED
69
238
CHAPTER 13 – DISPOSAL OF SUBSIDIARIES
13.1
PATCHE LTD
71
240
13.2
DISPOSAL
72
242
13.3
PART DISPOSAL
72
243
13.4
THE A GROUP
73
243
13.5
BARTLETT LTD
74
245
CHAPTER 14 – IFRS-5 : NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
14.1
SAUL
75
247
14.2
SHAHID HOLDINGS
76
248
14.3
PRIMA
77
250
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Index to questions and answers
14.4
LEXUS LIMITED
78
252
79
253
CHAPTER 15 – IFRS 13: FAIR VALUE MEASUREMENT
15.1
MONIBA LIMITED
CHAPTER 16 – IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS
16.1
PARVEZ LIMITED
80
254
16.2
SACHAL LIMITED
80
254
16.3
BRILLIANT LIMITED
80
256
16.4
WAQAS LIMITED
81
257
16.5
ZEBRA LIMITED
81
259
16.6
HAWKS LIMITED
82
259
CHAPTER 17 – IFRS 16: LEASES
17.1
X LTD
84
261
17.2
PROGRESS LIMITED
84
261
17.3
MIRACLE TEXTILE LIMITED
84
263
17.4
ACACIA LTD
85
264
17.5
SHOAIB LEASING LIMITED
85
265
17.6
AKBAR LIMITED
85
267
17.7
ALI LIMITED
86
288
17.8
MOAZZAM TEXTILE MILLS LIMITED
86
288
17.9
MODIFICATION THAT DECREASES THE SCOPE
OF THE LEASE (IFRS 16, ILLUSTRATIVE
EXAMPLE 17)
86
270
MODIFICATION THAT BOTH INCREASES AND
DECREASES THE SCOPE OF THE LEASE (IFRS
16, ILLUSTRATIVE EXAMPLE 18)
87
271
17.11
SUBLEASE CLASSIFIED AS A FINANCE LEASE
(IFRS 16, ILLUSTRATIVE EXAMPLE 20)
87
273
17.12
SUBLEASE CLASSIFIED AS AN OPERATING
LEASE (IFRS 16, ILLUSTRATIVE EXAMPLE 21)
87
273
17.13
TRACK LIMITED
87
273
17.14
PATEL LIMITED
88
275
17.15
MOTORS LIMITED
88
277
17.10
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CHAPTER 18 – IAS 12: INCOME TAXES
18.1
SHAKIR INDUSTRIES
90
278
18.2
DWAYNE LTD (PART 1)
91
279
18.3
DWAYNE LTD (PART 2)
91
279
18.4
COHORT
92
280
18.5
MODEL TOWN GROUP
93
281
18.6
ELEPHANT LIMITED
94
282
18.7
ARABIAN LIMITED
95
284
CHAPTER 19 – PRESENTATION OF FINANCIAL STATEMENTS (IAS 34, IAS 24)
19.1
FAZAL LIMITED
97
287
19.2
BABER LIMITED
97
287
19.3
GOLDEN LIMITED
97
288
19.4
METAL LIMITED
98
289
19.5
ENGINA
98
290
CHAPTER 20 – IAS 33: EARNINGS PER SHARE
20.1
AIRCON LTD
100
292
20.2
CACHET LTD
101
294
20.3
MARY
102
294
20.4
MANDY
102
295
20.5
AAZ LIMITED
102
296
20.6
ABC LIMITED
103
298
20.7
ALPHA LIMITED
103
299
20.8
SAJJAD LIMITED
104
301
20.9
TIGER LIMITED
105
301
CHAPTER 21 – IAS 36: IMPAIRMENT OF ASSETS
21.1
CHARLOTTE
106
304
21.2
ABA LIMITED
106
307
21.3
HUSSAIN ASSOCIATES LTD
107
308
21.4
IMPS
108
309
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21.5
GYO MOVERS LIMITED
109
310
21.6
KHYBER LIMITED
110
312
111
313
CHAPTER 22 – IAS 40: INVESTMENT PROPERTY
22.1
VICTORIA
CHAPTER 23 – SUNDRY STANDARDS AND INTERPRETATIONS (IFRS 6, IFRS 14)
There are no specific questions in this area.
CHAPTER 24 – FIRST TIME ADOPTION OF IFRS
24.1
IFRS 1
112
315
CHAPTER 25 – SPECIALISED FINANCIAL STATEMENTS
25.1
LATEEF BANK LIMITED
113
317
25.2
AL-AMIN BANK LIMITED
113
318
25.3
IAS 26
114
318
25.4
SOGO LIMITED
114
319
25.5
JABBAR PVT LIMITED
115
320
25.6
KARACHI BANK LIMITED
116
321
25.7
LEOPARD INCOME FUND
116
321
25.8
SWIFT GENERAL INSURANCE LIMITED
117
322
25.9
CYBER BANK
118
323
CHAPTER 26 – INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS
(IPSAS)
There are no specific questions in this area.
CHAPTER 27 – ACCOUNTING FOR HYPERINFLATION
There are no specific questions in this area
CHAPTER 28 – ISLAMIC ACCOUNTING STANDARDS
28.1
SALE AND LEASE BACK TRANSACTIONS
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Advanced accounting and financial reporting
© Emile Woolf International
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Q
SECTION
Certified Finance and Accounting Professional
Advanced accounting and financial reporting
Questions
CHAPTER 1 - BUSINESS COMBINATIONS AND CONSOLIDATION
1.1.
HASAN LIMITED
On 1 April 20X5, Hasan Limited acquired 90% of the equity shares in Shakeel Limited. On the
same day Hasan Limited accepted a 10% loan note from Shakeel Limited for Rs. 200,000 which
was repayable at Rs. 40,000 per annum (on 31 March each year) over the next five years.
Shakeel Limited’s retained earnings at the date of acquisition were Rs. 2,200,000.
Statements of financial position as at 31 March 20X6
Hasan Limited
Rs.000
Rs.000
Non-current assets
Property, plant and equipment
Intangible – software
Investments – equity in Shakeel Limited
Investments – 10% loan note Shakeel Limited
Investments – others
Current assets
Inventories
Trade receivables
Shakeel Limited current account
Cash
Shakeel Limited
Rs.000
Rs.000
2,120
–
4,110
200
65
1,990
1,800
–
–
210
6,495
4,000
719
524
75
20
560
328
–
1,338
888
Total assets
7,833
4,888
Equity and liabilities:
Capital and reserves
Equity shares of Rs. 1 each
Share premium
Retained earnings
2,000
2,000
2,900
1,500
500
1,955
6,900
3,955
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Hasan Limited
Rs.000
Rs.000
Non-current liabilities
10% Loan note from Hasan Limited
Government grant
–
230
Shakeel Limited
Rs.000
Rs.000
160
40
230
Current liabilities
Trade payables
Hasan Limited current account
Income taxes payable
Operating overdraft
475
–
228
–
Total equity and liabilities
200
472
60
174
27
703
733
7,833
4,888
The following information is relevant:
(i)
Included in Shakeel Limited’s property at the date of acquisition was a leasehold property
recorded at its depreciated historical cost of Rs. 400,000. The leasehold had been sub-let
for its remaining life of only four years at an annual rental of Rs. 80,000 payable in advance
on 1 April each year. The directors of Hasan Limited are of the opinion that the fair value of
this leasehold is best reflected by the present value of its future cash flows. An appropriate
cost of capital for the group is 10% per annum.
The present value of a Rs. 1 annuity received at the end of each year where interest rates
are 10% can be taken as:
3 year annuity
Rs. 2.50
4 year annuity
Rs. 3.20
(ii)
The software of Shakeel Limited represents the depreciated cost of the development of an
integrated business accounting package. It was completed at a capitalised cost of
Rs. 2,400,000 and went on sale on 1 April 20X4. Shakeel Limited’s directors are depreciating
the software on a straight-line basis over an eight-year life (i.e. Rs. 300,000 per annum).
However, the directors of Hasan Limited are of the opinion that a five-year life would be more
appropriate as sales of business software rarely exceed this period.
(iii)
The inventory of Hasan Limited on 31 March 20X6 contains goods at a transfer price of
Rs. 25,000 that were supplied by Shakeel Limited who had marked them up with a profit of
25% on cost. Unrealised profits are adjusted for against the profit of the company that made
them.
(iv)
On 31 March 20X6, Shakeel Limited remitted to Hasan Limited a cash payment of
Rs. 55,000. This was not received by Hasan Limited until early April. It was made up of an
annual repayment of the 10% loan note of Rs. 40,000 (the interest had already been paid)
and Rs. 15,000 of the current account balance.
(v)
The accounting policy of Hasan Limited for non-controlling interests (NCI) in a subsidiary is
to value NCI at a proportionate share of the net assets.
(v)
An impairment test at 31 March 20X6 on the consolidated goodwill concluded that it should
be written down by Rs. 120,000. No other assets were impaired.
Required
Prepare the consolidated statement of financial position of Hasan Limited as at 31 March 20X6.
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Questions
1.2.
FLAMSTEED LTD AND HALLEY LTD
The draft Statement of Financial Position of Flamsteed Ltd and Halley Ltd on 30 June 20X6 were
as follows:
Statement of financial position as at 30 June 20X6
Flamsteed Ltd
Rs.’000
Assets:
Non-current Assets:
Property, plant and equipment
40,000 ordinary shares in Halley at cost
Current assets:
Inventory
Owed by Flamsteed Ltd
Receivables
Cash
Total assets
Equity and liabilities:
Equity (ordinary shares @ Rs. 1)
Revaluation surplus
Retained earnings
Current Liabilities:
Owed to Halley Ltd
Trade payables
Total equity and liabilities
Halley Ltd
Rs.’000
100,000
60,000
160,000
80,000
80,000
6,000
32,000
4,000
42,000
202,000
16,000
20,000
14,000
50,000
130,000
90,000
24,000
52,000
166,000
50,000
10,000
56,000
116,000
16,000
20,000
36,000
202,000
14,000
14,000
130,000
Additional information:
(i)
Flamsteed Ltd acquired its investment in Halley Ltd on 1 July 20X5, when the retained
earnings of Halley Ltd stood at Rs. 12,000,000.
(ii)
The agreed consideration was Rs. 60,000,000 at the date of acquisition and a further
Rs. 20,000,000 on 1 July 20X7, Flamsteed Ltd’s cost of capital is 7%.
(iii)
Halley Ltd has an internally developed brand name – TOLX – which was valued at
Rs. 10,000,000 at the date of acquisition.
(iv)
There have been no changes in the capital or revaluation surplus of Halley Ltd since the
date its shares were purchased.
(v)
At 30 June 20X6, Halley had invoiced Flamsteed Ltd for goods to the value of
Rs. 4,000,000 and Flamsteed Ltd had sent payment in full but this had not been received
by Halley Ltd.
(vi)
There is no impairment of goodwill.
(vii)
It is the group’s policy to value non-controlling interest at full fair value.
(viii)
At the acquisition date, the non-controlling interest was valued at Rs. 18,000,000.
Required
(a)
Explain any THREE sources of external information which an entity may consider in
assessing whether there is any indication that an asset may be impaired.
(b)
Prepare an extract of consolidated Statement of Financial position of Flamsteed Ltd for the
year ended 30 June 20X6, showing the assets side only.
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1.3.
BRADLEY LTD
Bradley Ltd’s purchased 960 million shares in Bliss Ltd a year ago when Bliss had a credit
balance of Rs. 190 million in retained earnings. The fair value of the non-controlling interest at
the date of acquisition was Rs. 330 million. At the date of acquisition, the freehold land of Bliss
Ltd was valued at Rs. 140 million in excess of its carrying value. The revaluation has not been
recorded in the accounts of Bliss.
The statements of financial position of Bradley Ltd and Bliss Ltd as at 31 December 20X6 are as
follows:
Bradley Ltd
Bliss Ltd
Rs. million
Rs. million
Land and building
630
556
Machinery and equipment
570
440
Investment in Bliss Ltd.
1,320
-
Non-current assets
2,520
996
714
504
1,050
252
316
60
Current Assets
2,080
816
Total Assets
4,600
1,812
Ordinary Shares at Rs. 1 each
3,000
1,200
Retained Earnings
1,160
424
Shareholders fund
4,160
1,624
440
188
4,600
1,812
Inventories
Trade receivables
Cash/bank
Current Liabilities
Trade payables
Total equity and liabilities
Bliss Ltd owes Bradley Ltd Rs. 50 million for goods purchased during the year. Inventory of Bliss
Ltd includes goods bought from Bradley Ltd at the price that includes a profit to Bradley Ltd of
Rs. 24 million.
The management of Bradley Ltd wants the financial statements to be consolidated using the
acquisition method and wishes to know whether there is goodwill on acquisition of Bliss Ltd and
the amount involved.
Required
Prepare the consolidated statement of financial position as at 31 December 20X6.
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The Institute of Chartered Accountants of Pakistan
Questions
1.4.
X LTD
The statements of financial position for X Ltd and Y Ltd as at 31 December 20X6 are provided
below:
ASSETS
X Ltd
Y Ltd
Rs.000
Rs.000
Non-current assets
Property, plant and equipment
12,000
4,000
4,000
-
16,000
4,000
Inventories
2,200
800
Receivables
3,400
900
800
300
6,400
2,000
22,400
6,000
10,000
1,000
7,500
4,000
200
-
17,700
5,000
Long term borrowings
2,700
-
Current liabilities
2,000
1,000
Total liabilities
4,700
1,000
22,400
6,000
Investment (note 1)
Current assets
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES Equity
Share capital (Rs. 1 equity shares)
Retained earnings
Other reserves
Total equity
Non-current liabilities
Total equity and liabilities
Additional information:
1.
X Ltd acquired a 75% investment in Y Ltd on 1 May 20X6 for Rs. 3,800,000. The
investment has been classified as fair value through other comprehensive income (FVOCI)
in the books of X Ltd. The gain on its subsequent measurement as at 31 December 20X6
has been recorded within other reserves in X Ltd’s individual financial statements. At the
date of acquisition Y Ltd had retained earnings of Rs. 3,200,000.
2.
It is the group policy to value non-controlling interest at fair value at the date of acquisition.
The fair value of the non-controlling interest at 1 May 20X6 was Rs. 1,600,000.
3.
As at 1 May 20X6 the fair value of the net assets acquired was the same as the book value
with the following exceptions:
The fair value of property, plant and equipment was Rs. 800,000 higher than the book
value. These assets were assessed to have an estimated useful life of 16 years from the
date of acquisition. A full year’s depreciation is charged in the year of acquisition and none
in the year of sale.
The fair value of inventories was estimated to be Rs. 200,000 higher than the book value.
All of these inventories were sold by 31 December 20X6.
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Advanced accounting and financial reporting
On acquisition X Ltd identified an intangible asset that Y Ltd developed internally but which
met the recognition criteria of IAS 38 Intangible Assets. This intangible asset is expected
to generate economic benefit from the date of acquisition until 31 December 20X7 and was
valued at Rs. 150,000 at the date of acquisition.
A contingent liability, which had a fair value of Rs. 210,000 at the date of acquisition, had a
fair value of Rs. 84,000 at 31 December 20X6.
4.
An impairment review was conducted at 31 December 20X6 and it was decided that the
goodwill on the acquisition of Y Ltd was impaired by 20%.
5.
X Ltd sold goods to Y Ltd for Rs. 300,000. Half of these goods remained in inventories at
31 December 20X6. X Ltd makes 20% margin on all sales.
6.
No dividends were paid by either entity in the year ended 31 December 20X6.
Required
Prepare the consolidated statement of financial position as at 31 December 20X6 for the X Ltd
Group.
1.5.
KHAN LIMITED
On January 1, 20X0, Khan Limited (KL) acquired 375 million ordinary shares and 40 million
preference shares in Gul Limited (GL) whose general reserve and retained earnings on
the date of acquisition, stood at Rs. 200 million and Rs. 1,000 million respectively.
The following balances were extracted from the records of KL and its subsidiary on
December 31, 20X6:
KL
GL
Dr
Cr
Dr
Cr
Rs. m
Rs. m
Rs. m
Rs. m
Ordinary share capital (Rs. 10 each)
6,800
5,000
12% Preference share capital (Rs. 10 each)
1,000
General reserve
1,750
500
Retained earnings
2,000
1,200
Loan from KL at 15% rate of interest
2,000
14% Term Finance Certificates (TFCs) (Rs. 100 each)
2,250
Accounts payable
445
190
Dividend payable – preference shares
60
Dividend payable – ordinary shares
750
300
Property, plant and equipment - at cost
16,250
- 25,000
Property, plant and equipment - acc. depreciation
9,750
17,000
Investment in ordinary shares of GL
5,500
Investment in preference shares of GL
400
Loan to GL at 15% rate of interest
2,000
Investment in KL's TFCs (purchased at par value)
1,500
Profit before tax, interest and dividend
2,865
1,550
Dividend income
273
Interest income
300
210
Dividend receivable
249
Current assets
1,069
1,316
Interest on TFCs
315
Interest on loan from KL
300
Taxation
650
474
Preference dividend
120
Ordinary dividend – interim
750
300
27,183 27,183 29,010
29,010
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Questions
Following relevant information is available:
(i)
At the date of acquisition, the fair value of buildings, included in property, plant and
equipment of GL was assessed at Rs. 1,000 million above its carrying value. All other
identifiable assets and liabilities were considered to be fairly valued. GL provides for
depreciation on buildings at 10% per annum on the straight line basis.
(ii)
GL purchased the TFCs in KL on January 1, 20X6.
(iii)
The non-controlling interests are measured at their proportionate share of the GL’s
identifiable net assets.
(iv)
There is no impairment in the value of goodwill since its acquisition.
(v)
There are no components of other comprehensive income.
Required
Prepare the following in accordance with the requirements of International Financial Reporting
Standards:
(a)
Consolidated statement of financial position as at December 31, 20X6.
(b)
Consolidated statement of comprehensive income for the year ended December 31,
20X6.
(c)
Consolidated statement of retained earnings for the year ended December 31, 20X6.
Note:
Ignore deferred tax and corresponding figures.
Notes to the above statements are not required. However, show workings wherever it is
necessary.
1.6.
WHITE LIMITED
White Limited (WL) has investments in Green Limited (GL) and Yellow Limited (YL). YL is
registered and operates in a foreign country and its functional currency is T$. Following
information has been extracted from financial statements of the three companies for the year
ended 31 December 20X6:
WL
GL
YL
------ Rs. in million ------
Assets
Property, plant and equipment
14,900
Investment property
3,000
T$ in million
325
-
800
-
Investment in GL – at cost
4,200
-
-
Investment in YL – at cost
1,500
5,400
-
Current assets
6,660
2,500
305
27,260
11,700
630
11,400
1,500
225
Retained earnings
9,500
7,900
210
Current liabilities
6,360
2,300
195
27,260
11,700
630
-
-
10%
Equity & liabilities
Share capital (Rs./T$ 10 each)
Interim dividend paid on 30 June 20X6
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Other information:
(i)
Details of investments made by WL and GL are as follows:
Investment date
Investor
Cost of
investment
Investee
No. of
shares
acquired
Retained
earnings at the
acquisition date
--------------- in million------------------1 Jan 20X5
WL
GL
Rs. 4,200
135
Rs. 3,500
1 Jan 20X6
WL
YL
T$ 75
4.5
T$ 50
1 Apr 20X6
GL
YL
T$ 270
18
T$ 90
Fair values of each share of YL as on 1 January 20X6 and 1 April 20X6 were T$ 18 and T$ 23
respectively.
(ii)
In the books of WL and GL, there is no movement in investment in YL since the date of
acquisition except the difference arising due to foreign currency translation at year end.
(iii)
Investment property in GL was purchased on 1 January 20X6 at a cost of Rs. 650 million
and rented to WL at an annual rent of Rs. 60 million on the same date. The property has a
useful life of 20 years. Both companies follow a policy of measuring their investment property
at fair value and property, plant and equipment at revalued amounts. Both companies also
charge depreciation on straight line method.
(iv)
The relevant exchange rates per T$ are as follows:
(v)
1-Jan-X6
1-Apr-X6
30-Jun-X6
31-Dec-X6
Average rate
(1 Apr to 31 Dec)
Rs. 16
Rs. 17
Rs. 18.5
Rs. 20
Rs. 18
WL values the non-controlling interest at its proportionate share of the subsidiaries’ net
identifiable assets.
Required:
Prepare WL’s consolidated statement of financial position as on 31 December 20X6 in accordance
with the requirements of International Financial Reporting Standards. (Ignore taxation)
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CHAPTER 2 - BUSINESS COMBINATIONS ACHIEVED IN STAGES
2.1.
STEP ACQUISITION
On 1 January Year 1, H purchased 25% of the equity of AS for Rs. 80 million. H then acquired an
additional 40% of the equity of AS for Rs. 160 million on 30 June Year 1. At this date it was
estimated that the fair value of the original 25% shareholding in S was Rs. 95 million.
During the year S did not issue any new shares or make any distribution to its shareholders.
The carrying value of the net assets of AS were as follows:
Rs. million
At 1 January Year 1
260
At 30 June Year 1
300
H measures non-controlling interest at acquisition at fair value. This was estimated to be Rs.
120m.
The financial year of H ends on 30 June.
Required
For the consolidated financial statements of H for the year to 30 June Year 1, state:
2.2.
(i)
the total gain or profit attributable to the investment in AS for the year
(ii)
total amount of goodwill arising with the acquisition
(iii)
the amount of goodwill attributable to the NCI.
A LTD
The statements of financial position for A Ltd and B Ltd as at 30 September 20X6 are provided
below:
A Ltd
Rs.000
B Ltd
Rs.000
ASSETS
Non-current assets
Property, plant and equipment
Investment (note 1)
Current assets
22,000
4,000
5,000
-
26,000
5,000
6,200
6,600
1,200
800
1,900
300
14,000
3,000
Total assets
40,000
8,000
EQUITY AND LIABILITIES Equity
Share capital (Rs. 1 equity shares)
Retained earnings
Other components of equity
20,000
7,500
1,000
5,000
500
Total equity
28,000
6,000
3,900
8,100
2,000
Total liabilities
12,000
2,000
Total equity and liabilities
40,000
8,000
Inventories
Receivables
Cash and cash equivalents
Non-current liabilities
5% Bonds 20X9 (note 2)
Current liabilities
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Additional information:
1.
A Ltd acquired a 15% investment in B Ltd on 1 May 20X0 for Rs. 600,000. The investment
was classified as FVTOCI and the gains earned on it have been recorded within other
reserves in A Ltd’s individual financial statements. The fair value of the 15% investment at
1 April 20X6 was Rs. 800,000.
On 1 April 20X6, A Ltd acquired an additional 60% of the equity share capital of B Ltd at a
cost of Rs. 2,900,000. In its own financial statements, A Ltd has kept its investment in B
Ltd as FVTOCI recorded at its fair value of Rs. 4,000,000 as at 30 September 20X6.
2.
A Ltd issued 4 million Rs. 1 5% redeemable bonds on 1 October 20X1 at par. The
associated costs of issue were Rs. 100,000 and the net proceeds of Rs. 3.9 million have
been recorded within non-current liabilities. The bonds are redeemable at Rs. 4.5 million
on 30 September 20X9 and the effective interest rate associated with them is
approximately 8.5%. The interest on the bonds is payable annually in arrears and the
amount due has been paid in the year to 30 September 20X6 and charged to the
statement of profit or loss.
3.
An impairment review was conducted at the year end and it was decided that the goodwill
on the acquisition of B Ltd was impaired by 10%.
4.
It is the group policy to value non-controlling interest at fair value at the date of acquisition.
The fair value of the non-controlling interest at 1 April 20X6 was Rs. 1.25 million.
5.
The profit for the year of B Ltd was Rs. 3 million, and profits are assumed to accrue evenly
throughout the year.
6.
B Ltd sold goods to A Ltd for Rs. 400,000. Half of these goods remained in inventories at
30 September 20X6. B Ltd makes 20% margin on all sales.
7.
No dividends were paid by either entity in the year to 30 September 20X6.
Required
2.3.
(a)
Explain how the investment in B Ltd should be accounted for in the consolidated financial
statements of A Ltd, following the acquisition of the additional 60% shareholding.
(b)
Prepare the consolidated statement of financial position as at 30 September 20X6 for the
A Ltd Group.
X LTD GROUP
Extracts from the financial statements of X Ltd, Y Ltd and Z Ltd are presented below.
Statements of comprehensive income for the year
ended 31 December 20X6
X Ltd
Y Ltd
Z Ltd
Rs.000
Rs.000
Rs.000
Revenue
1,200
290
150
Cost of sales
(810)
(110)
(80)
390
180
70
(100)
(40)
(20)
290
140
50
50
-
Finance costs
(45)
(10)
(5)
Profit before tax
295
130
45
Income tax expense
(80)
(30)
(15)
Profit for the year
215
100
30
Gross profit
Operating expenses
Investment income
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X Ltd
Y Ltd
Z Ltd
Rs.000
Rs.000
Rs.000
Other comprehensive income:
Revaluation of property, net of tax
60
20
10
Other comprehensive income for the year, net of tax
60
20
10
275
120
40
1,700
840
500
275
120
40
Dividends
(100)
(50)
-
Equity at 31 December 20X6
1,875
910
540
Total comprehensive income
Equity at 1 January 20X6
Total comprehensive income for the year
Additional information
1
X Ltd acquired 80% of the ordinary share capital of Y Ltd for Rs. 620,000 on 1 January
20X0 when the retained reserves of Y Ltd were Rs. 420,000. Y Ltd has 200,000 Rs. 1
ordinary shares in issue and there have been no share issues since the acquisition date.
The group policy is to measure the non-controlling interest at fair value at the date of
acquisition. The fair value of the non-controlling interest at 1 January 20X0 was Rs.
180,000.
2
On 1 January 20X0, the fair value of Y Ltd’s net assets was the same as their book value
with the exception of depreciable property, the fair value of which was Rs. 60,000 higher
than its book value. The property had a remaining useful life of 15 years at the date of
acquisition. Depreciation on property is charged to cost of sales.
3
Goodwill on the acquisition of Y Ltd was impaired for the first time by 25% in the year to
31 December 20X5. An impairment review conducted at 31 December 20X6 indicated a
further impairment of 10% of the remaining carrying value of goodwill. Impairment losses
on goodwill are charged to group operating expenses.
4
X Ltd acquired 40% of the ordinary share capital of Z Ltd on 1 July 20X1, when the equity
was Rs. 435,000.
Required
(a)
Prepare for the X Ltd Group for the year ended 31 December 20X6:
(i)
a consolidated statement of profit or loss and other comprehensive income; and
(ii)
a consolidated statement of changes in equity.
X Ltd purchased a further 10% of the ordinary share capital of Y Ltd on 1 January 20X7 for
Rs. 120,000.
(b)
(i)
Explain how the acquisition of this additional investment will be accounted for in the
consolidated financial statements of the X Ltd group for the year to 31 December
20X7.
(ii)
Calculate the debit or credit that will be made to the consolidated retained reserves
of the X Ltd group for the year to 31 December 20X7 in respect of this additional
10% share purchase.
X Ltd purchased a further 20% of the ordinary share capital of Z Ltd on 1 January 20X7.
(c)
Explain how the acquisition of the additional investment in Z Ltd will be accounted for in
the consolidated financial statements of the X Ltd group for the year to 31 December
20X7.
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2.4.
PLAIN LTD
The following statements of financial position are as at 31 March 20X6:
Plain
Stripes
Spots
Rs. m
Rs. m
Rs. m
Assets
Tangible non-current assets
1,280
440
280
477
190
130
2,284
630
410
Share capital of Rs. 1
800
240
200
Share premium
150
20
30
390
210
94
1,430
470
324
Non-current liabilities
640
30
16
Current liabilities
214
130
70
2,284
630
410
Investment in Stripes
413
Investment in Spots
60
Held to maturity investment
54
Current assets
Total assets
Equity and liabilities
Revaluation reserve
90
Retained earnings
Total equity
Total equity and liabilities
Plain acquired the following shareholdings in Stripes and Spots.
Date of acquisition
Holding
acquired
Fair value of
net assets
Rs. m
Purchase
consideration
Rs. m
Stripes
1 April 20X3
1 April 20X5
30%
50%
325
460
120
260
Spots
1 April 20X5
25%
200
60
You are also provided with the following information which will be relevant to the consolidated
financial statements of Plain.
(1)
None of the companies have issued any additional share capital since 1 April 20X3.
(2)
The financial statements of Plain have not yet been adjusted for the gain or loss arising on
gaining control of Stripes.
(3)
At 1 April 20X3, the carrying value of the net assets of Stripes was the same as their fair
value, Rs. 325 million.
(4)
Plain wishes to use the full fair value method of accounting for the acquisition of Stripes, and
at 1 April 20X5 the estimated value of goodwill attributable to non-controlling interests was
Rs. 3 million. The estimated fair value of the initial investment in 30% of the shares of Stripes
was Rs. 150 million at 31 March 20X5.
(5)
Included in the tangible non-current assets of Stripes is land valued at cost which on 1 April
20X5 had a fair value of Rs. 25 million in excess of its carrying value. There has been no
subsequent significant change in that value.
(6)
At 1 April 20X4 the fair value of Spots’s land was Rs. 16 million in excess of its carrying
value. There has been no subsequent significant change in that value.
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(7)
Goodwill arising on acquisition is tested for impairment at each year end. At 31 March 20X6
an impairment loss of Rs. 15 million was recognised for Stripes.
(8)
There has been no impairment of the investment in Spots.
(9)
During the year the directors of Plain decided to form a defined benefit pension scheme for
its employees. The company contributed cash to it of Rs. 250 million but the only accounting
entry for this has been to include it in receivables at 31 March 20X6.
At 31 March 20X6 the following details relate to the pension scheme:
Rs. m
Present value of obligation
317
Fair value of plan assets
302
Current service cost
276
Interest cost on pension scheme liabilities
41
Expected return on pension scheme assets
26
In the consolidated financial statements, the directors wish to recognise any actuarial gain
or loss immediately.
(10)
The ‘held to maturity’ investment in Plain’s financial statements is a zero coupon loan to an
unrelated third party. No interest has yet been recognised on this amount. The debt is
repayable in five years at Rs. 74 million. (Recognise interest on a straight line basis).
Required
Prepare the consolidated statement of financial position of the Plain group as at 31 March 20X6.
2.5.
MANGO LTD
The draft statements of financial position of Mango Ltd and its subsidiary at 30 November 20X6
are as follows:
Mango Ltd
Rs. m
Plum Ltd
Rs. m
Assets:
Non-current assets
Property, plant and equipment
3,295
Investments in subsidiary
1,675
2,000
4,970
2,000
Current assets
1,685
861
Total assets
6,655
2,861
850
1,020
3,340
980
250
80
Total equity
4,440
2,080
Non-current liabilities
1,895
675
320
106
Total liabilities
2,215
781
Total equity and liabilities
6,655
2,861
Equity and liabilities:
Share capital
Retained earnings
Other components of equity
Current liabilities
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The following information is relevant to the preparation of the group financial statements:
1.
On 1 December 20X3, Mango Ltd acquired 30% of the ordinary shares of Plum Ltd for a
cash consideration of Rs. 600 million. The fair value of Plum Ltd’s identifiable net assets
was Rs. 1,840 million at this date. The 30% holding gave Mango Ltd significant influence
over Plum Ltd and Mango Ltd accounted for the investment as an associate up to
1 December 20X5. Mango Ltd’s share of Plum Ltd’s undistributed profit amounted to Rs.
90 million and its share of a revaluation gain amounted to Rs. 10 million.
On 1 December 20X5, Mango Ltd acquired a further 40% of the ordinary shares of Plum
Ltd for a cash consideration of Rs. 975 million and gained control of the company. The
cash consideration has been added to the equity accounted balance for Plum Ltd at 1
December 20X5 to give the carrying amount at 30 November 20X6.
At 1 December 20X5, the fair value of the equity interest in Plum Ltd held by Mango Ltd
before the business combination was Rs. 705 million.
At 1 December 20X5, the fair value of Plum Ltd’s identifiable net assets was Rs. 2,250
million.
The retained earnings and other components of equity of Plum Ltd at 1 December 20X5
were Rs. 900 million and Rs. 70 million respectively. It is group policy to measure the noncontrolling interest at fair value. The fair value of the non-controlling interest of 30% was
assessed as Rs. 620 million
2.
At the time of the business combination with Plum Ltd, Mango Ltd has included in the fair
value of Plum Ltd’s identifiable net assets, an unrecognised contingent liability of Rs. 6
million in respect of a warranty claim in progress against Plum Ltd. In March 20X6, there
was a revision of the estimate of the liability to Rs. 5 million. The amount has met the
criteria to be recognised as a provision in current liabilities in the financial statements of
Plum Ltd and the revision of the estimate is deemed to be a measurement period
adjustment.
3.
The fair value of Plum Ltd’s identifiable net assets (Rs. 2,250 million) included an amount
of Rs. 200 million being the estimate of the fair value of buildings with the remainder
relating to non-depreciable land.
Mango Ltd had commissioned an independent valuation of the buildings of Plum Ltd which
was not complete at 1 December 20X5 and therefore not considered in the fair value of the
identifiable net assets at the acquisition date. The valuations were received on 1 April
20X6 and resulted in a decrease of Rs. 40 million in the fair value of property, plant and
equipment at the date of acquisition. The buildings have a remaining useful life of 20 years
at 1 December 20X5. Buildings are depreciated on the straight-line basis and it is group
policy to leave revaluation gains on disposal in equity.
The decrease in the fair value of the buildings does not affect the fair value of the noncontrolling interest at acquisition and has not been entered into the financial statements of
Plum Ltd.
All goodwill arising on acquisitions has been impairment tested with no impairment being
required.
Required
Prepare the group consolidated statement of financial position of Mango Ltd as at 30
November 20X6.
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Questions
CHAPTER 3 - CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
3.1.
MILLARD LTD
The profit and loss account of Millard Ltd and its subsidiary Fillmore Limited for the year ended
31 December 20X6 are as follows:
Millard
Ltd
Fillmore
Ltd
Rs.’000
Rs.’000
312,500
125.000
(125,000)
(50,000)
Gross Profit
187,500
75,000
Distribution Cost
(25,000)
(10,000)
Administrative Expenses
(20,000)
(8,000)
Operating Profit
142,500
57,000
Investment Income
7,950
-
Debenture Interest
(47,500)
(15,000)
Profit on ordinary activities before taxation
102,950
42,000
Taxation on ordinary activities
(35,000)
(17,500)
67,950
24,500
Preference
(13,750)
(4,375)
Ordinary
(20,000)
(5,250)
Retained Profits
34,200
14,875
Retained Profits: 1/1/20X6
66,750
19,500
100,950
34,375
Revenue
Cost of Sales
Profit on ordinary activities after taxation
Dividends:
Retained Profits: 31/12/20X6
Additional information:
(1)
Included in the revenue of Fillmore Limited is Rs. 12.5 million in respect of sales to Millard
Ltd, giving Fillmore Limited a profit of 25% on cost. These are sales of components that
Fillmore Limited has been supplying to Millard Ltd on a regular basis for a number of
years. The amounts included in the inventories of Millard Ltd in respect of goods
purchased from Fillmore Limited at the beginning and end of the year were as follows:
Inventories of components in Millard Ltd’s books
Rs.’000
Date
(2)
31/12/20X6
2,000
31/12/20X5
1,500
Some years ago, Millard Ltd bought 50 million ordinary shares in Fillmore Limited at a cost
of Rs. 67million. On the same date, Millard Ltd bought 25% of the debentures of Fillmore
Limited at par.
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At the date of Millard Ltd’s investment in Fillmore Limited, the statement of financial
position of Fillmore limited showed:
Rs.’000
Ordinary share capital
62,500
Preference share capital
43,750
Profit and loss account
12,500
118,750
The goodwill acquired by Millard Ltd in Fillmore Limited had been written off fully in December
20X6 as a result of impairment losses.
Required
Prepare the consolidated profit and loss account of Millard Ltd for the year. Assume that
investment income is dealt with by Millard Ltd on an accrual basis.
3.2.
SHERLOCK LTD
The following draft financial statements relate to Sherlock Ltd and its subsidiaries.
Draft statements of profit or loss and other comprehensive income for the year ended 31 December
20X6.
Revenue
Sherlock
Ltd
Mycroft
Ltd
Katie
Ltd
Rs. m
Rs. m
Rs. m
400
115
70
(312)
(65)
(36)
Gross profit
88
50
34
Other income
21
7
2
Administrative costs
(15)
(9)
(12)
Other expenses
(35)
(19)
(8)
Operating profit
59
29
16
Finance costs
(5)
(6)
(4)
Finance income
6
5
8
Profit before tax
60
28
20
(19)
(9)
(5)
Profit for the year
41
19
15
Other comprehensive income – revaluation surplus
10
Total comprehensive income for year
51
19
15
Cost of sales
Income tax expense
The following information is relevant to the preparation of the group statement of profit or loss and other
comprehensive income:
1.
On 1 January 20X5, Sherlock Ltd acquired 60% of the equity interests of Mycroft Ltd. The
purchase consideration comprised cash of Rs. 80 million.
The fair value of the identifiable net assets acquired was Rs. 110 million at that date. The
excess of the fair value of the identifiable net assets at acquisition is due to nondepreciable land.
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Sherlock Ltd measures the non-controlling interest at acquisition at its fair value. The fair
value of the non-controlling interest (NCI) in Mycroft Ltd was Rs. 45 million on 1 January
20X5.
Goodwill has been impairment tested annually and as at 31 December 20X6 had reduced
in value by 20%. At 31 December 20X6, goodwill was estimated to have a value of Rs. 2
million above its original value.
2.
Sherlock Ltd acquired 60% of Katie Ltd on 30 June 20X6. There has been no impairment
of goodwill since the date of acquisition.
3.
Sherlock Ltd sold inventory to Mycroft Ltd for Rs. 12 million making a loss of Rs. 2 million
on the transaction. The sale was at fair value and Mycroft Ltd still holds half of the
inventory at the year end.
4.
The following information relates to Sherlock Ltd’s pension scheme:
Rs. m
Plan assets at 1 January 20X6
48
Defined benefit obligation at 1 January 20X6
50
Service cost for year ended 31 December 20X6
4
Discount rate at 1 January 20X6
10%
Re-measurement loss in year ended 31 December 20X6
2
Past service cost 1 January 20X6
3
The pension costs have not yet been accounted for.
5.
On 1 January 20X5, Sherlock Ltd purchased plant for Rs. 12 million and this is being
depreciated using the straight line basis over 10 years with a zero residual value.
Sherlock Ltd measures plant of this type using the revaluation model. At 31 December
20X5, the asset was revalued to Rs. 13 million but at 31 December 20X6, the value of the
asset had fallen to Rs. 7 million. The effect of the revaluation at 31 December 20X6 had
not yet been accounted for but depreciation for the year has been charged.
6.
On 1 January 20X5, Sherlock Ltd made an award of 8,000 share Katie Ltds to each of its
seven directors. The condition attached to the award is that the directors must remain
employed by Sherlock Ltd for three years.
The fair value of each Katie Ltd at the grant date was Rs. 100 and the fair value of each
Katie Ltd at 31 December 20X6 was Rs. 110. At 31 December 20X5, it was estimated that
three directors would leave before the end of four years.
The estimate of directors who were going to leave was revised to one director at 31
December 20X6.
The share Katie Ltd expense for the year has not been included in profit or loss for the
current year and no directors had left by 31 December 20X6.
7.
A loss on an effective cash flow hedge of Mycroft Ltd of Rs. 3 million has been included in
the subsidiary’s finance costs.
8.
Any expense adjustments should be made in other expenses.
Required
Prepare a consolidated statement of profit or loss and other comprehensive income for the year
ended 31 December 20X6 for the Sherlock Ltd Group.
(Ignore the deferred tax consequences of the above events)
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3.3.
FAISAL LIMITED
Following is the summarised trial balance of Faisal Limited (FL) and its subsidiaries, Saqib Limited
(SL) and Ayaz Industries Limited (AIL) for the year ended December 31, 20X6:
FL
SL
AIL
Rs. in million
Cash and bank balances
4,920
660
2,700
Accounts receivable
6,240
2,460
6,580
14,460
4,200
5,680
Investment in SL (at cost)
9,000
-
-
Investment in AIL (at cost)
10,500
-
-
Other investments
11,100
-
-
Property, plant and equipment
22,500
3,480
5,940
Closing inventory
Dividend paid
600
Cost of sales
49,200
18,000
21,000
3,600
2,100
5,400
131,520
30,900
47,900
5,760
420
1,260
Ordinary share capital (Rs. 10 each)
30,000
12,000
6,000
Retained earnings – opening
33,780
-
5,400
Sales
57,600
16,500
33,800
2,760
1,980
1,440
540
-
-
1,080
-
-
131,520
30,900
47,900
Operating expenses
Accumulated depreciation
Accounts payable
Gain on sale of non-current assets
Dividend income
Following additional information is available:
(i)
SL was incorporated on February 1, 20X6. 75% of the shares were acquired by FL at par
value on the same date.
(ii)
FL acquired 80% of AIL on January 1, 20X6
(iii)
The following inter-company sales were made during the year 20X6:
Sales
Included in
buyer’s closing
inventories
Amount
receivable/payable
at year enzd
Gross profit %
on sales
Rs. in million
FL to AIL
2,400
900
-
20
SL to AIL
1,800
600
800
10
AIL to FL
3,600
1,200
-
30
© Emile Woolf International
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Questions
(iv)
The gain on sale of non-current assets includes a sale of an item of property, plant and
machinery by FL to SL. This transaction occurred on July 1, 20X6. SL. Details of the
transaction are as follows:
Rs. in million
Sales value
144
Less: Cost of plant and machineries
150
Accumulated depreciation
(60)
Carrying amount at date of sale
90
Gain on sale of plant
54
The plant and machinery was purchased originally by FL on July 1, 20X4, and was being
depreciated on the straight line method over a period of five years. SL computed
depreciation thereon using the same method based on the remaining useful life as at the
date of the transfer.
(v)
FL billed Rs. 100 million to each subsidiary for management services provided during the
year 20X6 and credited it to operating expenses. The invoices were paid on December 15,
20X6.
(iv)
Details of cash dividend are as follows:
Dividend
Date of declaration
Date of payment
%
FL
Nov 25, 20X6
Jan 5, 20X7
20
AIL
Oct 15, 20X6
Nov 20, 20X6
10
Required
Prepare the consolidated statement of financial position and the consolidated statement
of profit and loss of FL and its subsidiaries for the year ended December 31, 20X6. Ignore
tax and corresponding figures.
3.4.
GOLDEN LIMITED
Golden Limited (GL) is a listed company and has held shares in two companies, Yellow
Limited (YL) and Black Limited (BL), since July 1, 20X4. The details of acquisition of shares
in these companies are as follows:
(a)
GL acquired 18 million shares in YL at par, when YL’s reserves were Rs. 24 million.
The acquisition was made by issuing four shares in GL for every five shares in YL. The
market price of GL’s shares at July 1, 20X4 was Rs. 20 per share. A fair value exercise
was carried out for YL’s assets and liabilities at the time of its acquisition with the following
results:
Book Value
Fair Value
Rupees in million
Land
Machines
Investments
170
192
25
45
3
6
The remaining life of machine on acquisition was 5 years. The fair values of the assets
have not been accounted for in YL’s financial statements.
(b)
6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of
acquisition, the reserves of BL stood at Rs. 40 million.
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The summarized statements of profit or loss of the three companies for the year ended
June 30, 20X6 are as follows:
GL
YL
BL
Rupees in million
Sales
875
350
200
(567)
(206)
(244)
Gross profit / (loss)
308
144
(44)
Selling expenses
(33)
(11)
(15)
Administrative expenses
(63)
(40)
(16)
Interest expenses
(30)
(22)
(15)
Cost of sales
Other income
65
-
-
Profit/(loss) before tax
247
71
(90)
Income tax
(73)
(15)
8
Profit/(loss) for the period
174
56
(82)
The following relevant information is available:
(i)
The share capital and reserves as at July 1, 20X5 were as follows:
GL
YL
BL
Rupees in million
Ordinary share capital of Rs. 10 each
600
200
150
Reserves
652
213
108
The share capitals of all companies have remained unchanged since their incorporation.
(ii)
During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were made
at a mark-up of 25% on cost. 30% of these goods were still in the inventories of YL at
June 30, 20X6.
(iii)
GL manufactures a component used by BL. During the year, GL sold these components
amounting to Rs. 20 million to BL. Transfers are made at cost plus 15%. BL held
Rs. 11.5 million of these components in inventories at June 30, 20X6.
(iv)
All assets are depreciated on straight line method.
(v)
Other income includes dividend received from YL on April 15, 20X6.
(vi)
During the year, YL paid 20% cash dividend to its ordinary shareholders.
(vii)
An impairment test was carried out on June 30, 20X6 for the goodwill of YL and
investments in BL, appearing in the consolidated financial statements. The test indicated
that:
-
goodwill of YL was impaired by 20%;
-
due to recent losses, the fair value of investment in BL has been reduced to
Rs. 40 million.
No such impairment was required in previous years.
Required
Prepare, in a format suitable for inclusion in the annual report, a consolidated statement of
profit or loss for the year ended June 30, 20X6.
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Questions
CHAPTER 4 - COMPLEX GROUPS
4.1.
PARVEZ LTD
Statements of profit or loss for Parvez Ltd, Saad Ltd and Vazir Ltd for the year ended 31
December 20X6 are as follows:
Parvez Ltd
Saad Ltd
Vazir Ltd
Rs. 000
Rs. 000
Rs. 000
45,600
24,700
22,800
Cost of sales
(18,050)
(5,463)
(5,320)
Gross profit
27,550
19,237
17,480
Distribution costs
(3,325)
(2,137)
(1,900)
Administrative expenses
(3,475)
(950)
(1,900)
Operating profit
20,750
Revenues
Interest paid
16,150
13,680
(325)
Profit before tax
20,425
16,150
13,680
Tax
(8,300)
(5,390)
(4,241)
Profit after tax
12,125
10,760
9,439
Statements of financial position as at 31 December 20X6 are as follows:
Property, plant and equipment
35,483
24,273
13,063
Investments
Shares in Saad Ltd
6,650
Shares in Vazir Ltd
3,800
Current assets
1,568
9,025
8,883
43,701
37,098
21,946
8,000
3,000
2,000
22,638
24,075
19,898
30,638
27,075
21,898
13,063
10,023
48
43,701
37,098
21,946
Equity and liabilities
Ordinary Rs. 1 shares
Retained earnings
Current liabilities
The following information is available relating to Parvez Ltd, Saad Ltd and Vazir Ltd:
(1)
On 1 January 20X0, Parvez Ltd acquired 2,700,000 Rs. 1 ordinary shares in Saad Ltd for
Rs. 6,650,000 at which date there was a credit balance of retained earnings of Saad Ltd of
Rs. 1,425,000. No shares have been issued by Saad Ltd since Parvez Ltd acquired its
interest.
(2)
On 1 January 20X0, Saad Ltd acquired 1,600,000 Rs. 1 ordinary shares in Vazir Ltd for
Rs. 3,800,000 at which date there was a credit balance of retained earnings of Vazir Ltd of
Rs. 950,000. No shares have been issued by Vazir Ltd since Saad Ltd acquired its
interest.
(3)
During 20X6, Vazir Ltd had made inter-company sales to Saad Ltd of Rs. 480,000 making
a profit of 25% on cost and Rs. 75,000 of these goods were in inventory at 31 December
20X6.
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(4)
During 20X6, Saad Ltd had made inter-company sales to Parvez Ltd of Rs. 260,000
1
making a profit of 33 3 % on cost and Rs. 60,000 of these goods were in inventory at 31
December 20X6.
(5)
On 1 November 20X6, Parvez Ltd sold warehouse equipment to Saad Ltd for Rs. 240,000
from inventory. Saad Ltd has included this equipment in its non-current assets. The
equipment had been purchased on credit by Parvez Ltd for Rs. 200,000 in October 20X6
and this amount is included in its current liabilities as at 31 December 20X6.
(6)
Saad Ltd charges depreciation on its warehouse equipment at 20% on cost. It is company
policy to charge a full year’s depreciation in the year of acquisition to be included in the
cost of sales.
Required
4.2.
(a)
Prepare a consolidated statement of profit or loss for the Parvez Ltd Group for the year
ended 31 December 20X6.
(b)
Prepare statement of financial position as at that date.
HASAN, RIAZ AND SIDDIQ
The summarised balances extracted from the accounting records of Hasan (H) Ltd, Riaz (R) Ltd
and Siddiq (S) Ltd at 31 December 20X6 are given below:
Property, plant and equipment
H Ltd
R Ltd
S Ltd
Rs.
Rs.
Rs.
271,950
122,550
1,102,500
Investments at cost
75% holding in shares of Riaz Ltd
367,500
40% holding in shares of Siddiq Ltd
49,000
20% holding in shares of Siddiq Ltd
24,500
Inventories
526,610
163,290
85,700
Receivables
241,920
129,680
29,750
88,200
4,725
8,105
2,375,730
594,145
246,105
1,750,000
420,000
175,000
Other reserves
350,000
70,000
Accumulated profits/(losses)
180,250
17,500
(17,500)
95,480
86,645
88,605
2,375,730
594,145
246,105
Cash and bank balances
Share capital
Payables
Further information:
(1)
Hasan Ltd purchased its interest in Riaz Ltd and Siddiq Ltd in December 20X3 at which
date Siddiq Ltd had accumulated losses of Rs. 35,000, and Riaz Ltd had accumulated
profits of Rs. 35,000.
(2)
On 30 December 20X6 Hasan Ltd despatched and invoiced goods for Rs. 12,500 to Riaz
Ltd which were not recorded by the latter until 3 January 20X7. A mark-up of 25% is
added by Hasan Ltd to arrive at selling price. Riaz Ltd already had goods in inventories
which had been invoiced to them by Hasan Ltd at Rs. 10,400.
(3)
Siddiq Ltd had accumulated losses of Rs. 52,500 when Riaz Ltd purchased 35,000 shares
in 20X2.
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Questions
(4)
Hasan Ltd received a remittance of Rs. 8,000 on 2 January 20X7 which had been sent by
Riaz Ltd on 29 December 20X6.
(5)
Included in Hasan’s receivables was a balance of Rs. 25,500 owed by Riaz Ltd.
(6)
Neither Riaz Ltd nor Siddiq Ltd had any other reserves when their shares were purchased
by Hasan Ltd and Riaz Ltd.
(7)
Payables of Riaz Ltd included an amount of Rs. 5,000 due to Hasan Ltd.
Required
Prepare the consolidated statement of financial position of Hasan Ltd and its subsidiaries at 31
December 20X6.
4.3.
LALIWALA GROUP
On 1 January 20X6, Laliwala Group (LG) acquired 100% holding in PA Limited (PAL) at a
consideration of Rs. 2,000 million in cash plus replacement awards as discussed in (iv) below.
LG also paid Rs. 20 million to its bankers and lawyers in connection with the deal.
The fair value of the assets and liabilities of PAL together with their carrying values and tax base
on acquisition date are given below.
Fair value
Carrying value
Tax base
-------- Rs. in million -------Property, plant and equipment
1,532
1,259
887
490
367
290
24
24
Current assets
1,572
1,572
1,572
Total assets
3,618
3,222
2,749
634
634
634
60
17
Current liabilities
1,194
1,194
1,194
Total liabilities
1,888
1,845
1,828
Investments
Deferred tax asset - net
Long term debt
Retirement benefit obligations
N/A
-
Other information relating to acquisition of PAL:
(i) LG recognized development cost previously incurred by PAL as an intangible asset at its fair
value of Rs. 153 million. PAL had charged off these costs in 20X4.
(ii) A contingent liability of Rs. 39 million is appearing in the financial statements of PAL. LG’s
legal adviser had estimated that PAL is likely to pay Rs. 25 million to settle the claim.
(iii) PAL had assessed brought forward losses of Rs. 940 million. It is estimated that PAL would
be able to utilise losses of Rs. 500 million only. LG expects that losses of Rs. 300 million can
be used against future taxable profits of the group.
(iv) PAL had outstanding employee share options with a market based measure of Rs. 140
million. The share options were fully vested. As part of the business combination, PAL’s
outstanding share options were replaced by share options of LG with a market based
measure of Rs. 140 million and an intrinsic value of Rs. 90 million. The replacement awards
are fully vested.
On 31 December 20X6 intrinsic value of replacement awards has increased to Rs. 150
million. According to the tax law, intrinsic value of the option on the exercise date is an
admissible expense.
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Advanced accounting and financial reporting
Additional information:
(i) During the year, the following inter-company transactions took place between LG and PAL:
Sales
Included in buyer’s
closing inventories
Profit % on
sales
-------- Rs. in million -------LG to PAL
520
80
20%
PAL to LG
790
140
15%
(ii) On 1 January 20X6, LG acquired 30% shareholdings in NA Limited (NAL) at a cash
consideration of Rs. 165 million. During 20X6, NAL reported net income of Rs. 50 million out
of which it distributed dividend of Rs. 20 million.
LG plans to dispose of 40% of its total shareholdings in NAL by 30 June 20X7.
(iii) Applicable tax rates for LG and PAL are 25% and 35% respectively. Both companies are
subject to tax on dividend income and capital gain at 12.5% and 17.5% respectively.
Required:
Determine the amounts of goodwill and deferred tax to be recognised in the consolidated
financial statements of LG for the year ended 31 December 20X6, as a result of the above
transactions.
4.4.
SHAKIR LIMITED
The draft statements of financial position of Shakir Limited (SL), Mashkoor Limited (ML) and
Baqir Limited (BL) as at 30 June 20X7 are as follows:
Particulars
SL
ML
BL
----------- Rs. in million -----------
Assets:
Property, plant & equipment
16,500
5,600
11,000
Investment in ML – at cost
1,375
-
-
Investment in BL – at cost
7,500
-
-
Investment in joint operation – at cost
620
Stock-in-trade
2,414
1,460
1,750
Trade and other receivables
2,200
2,060
1,800
Cash and bank
1,600
800
1,900
31,589
9,920
17,070
20,000
2,200
10,000
Share premium
1,000
900
Retained earnings
6,189
3,200
6,000
Trade and other payables
4,400
3,620
1,070
31,589
9,920
17,070
Equity and liabilities:
Share capital (Rs. 10 per share)
-
(i) On 1 July 20X4, SL acquired 80% shares of ML when ML’s retained earnings were Rs. 1,400
million, at a cash consideration of Rs. 4,400 million. On acquisition date, fair value of net
assets was equal to their carrying value. 20% of the goodwill has been impaired till 30 June
20X6.
(ii) Following information in respect of ML is available for the year ended 30 June 20X7:
On 1 July 20X6, SL disposed of 20% holding in ML (leaving 60% with SL) for Rs. 1,188
million when ML’s share price was Rs. 26 per share.
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Questions
On 30 June 20X7, SL further disposed of 35% holding in ML (leaving 25% with SL) for Rs.
2,926 million when ML’s share price was Rs. 36 per share.
On both disposals, SL credited investment in ML with related cost and took the difference to
profit or loss account.
ML made a net profit of Rs. 700 million during the year. No dividend was declared during the
year.
SL’s receivables include Rs. 200 million due from ML.
(iii) On 1 July 20X5 SL acquired 60% holding in BL which resulted in bargain purchase of Rs.
180 million. On acquisition date, fair value of BL’s net assets was equal to their carrying
value except a building whose fair value was Rs. 200 million higher than its carrying value. Its
remaining life at the date of acquisition was 16 years.
(iv) SL’s closing stock includes goods sold by BL at 20% margin. These were invoiced at Rs. 50
million but are included in SL’s stock at NRV of Rs. 44 million.
(v) BL has 40% share in a joint operation, a power generation unit. The following information
relates to activities of the joint operation for the year ended 30 June 20X7:
The unit was constructed at a cost of Rs. 1,550 million and commenced its operation from 1
July 20X6. It has a useful life of 10 years.
Revenue from generation of electricity was Rs. 1,100 million. Power generation cost and
operating expenses paid amounted to Rs. 670 million and Rs. 130 million respectively.
All revenues and expenses of the operation have been settled during the year. However,
entries in respect of revenues/costs have not been made in the books of BL because they
have been received/paid by the other joint operator. SL and the other joint operator have
agreed to settle the outstanding balance after year end.
(vi) SL follows a policy of valuing the non-controlling interest at its proportionate share of the fair
value of the subsidiary’s identifiable net assets.
(vii) No further shares have been issued by ML and BL since their acquisition by SL.
Required:
Prepare SL’s consolidated statement of financial position as on 30 June 20X7 in accordance with
the international financial reporting standards
4.5.
ANT, BEE AND FLY
The draft statements of financial position of Ant Limited (AL), Bee Limited (BL) and Fly Limited
(FL) as at 31 December 20X7 are as follows:
AL
BL
FL
------------ Rs. in million -----------Assets
Property, plant and equipment
Investment property
Investment in BL at cost
3,510
2,835
130
45
3,540
Investment in FL at cost
-
2,400
2,200
-
Current assets
2,120
1,420
2,800
Total assets
9,300
6,700
5,000
Share capital (Rs. 10 each)
5,500
4,000
2,500
Retained earnings
2,000
1,314
1,000
Equity and liabilities
Gratuity
25
-
-
Current liabilities
1,775
1,386
1,500
Total equity and liabilities
9,300
6,700
5,000
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Other information:
(i)
Details of investments are as follows:
Date of
investment
Investor
% holding Investee
Cost of
investment
Retained earnings
of investee
------ Rs. in million -----1-Jan-20X5
AL
65%
BL
3,100
520
1-Apr-20X7
AL
10%
BL
440
815
30-Jun-20X7
BL
60%
FL
2,400
1,150
(ii)
On acquisition date of BL, fair value of its net assets was equal to their carrying value
except a plant whose fair value was Rs. 120 million whereas its carrying amount was Rs.
140 million. Value in use and remaining useful life of the plant were Rs. 150 million and 10
years respectively at that date.
(iii)
At the date of acquisition of FL, fair value of its net assets recorded in the books was equal
to their carrying value. Further, a contingent liability of Rs. 70 million was disclosed in the
financial statements of FL. AL's legal adviser had at that time estimated that this claim
would be settled at Rs. 50 million. However, it was actually settled on 15 February 20X8 at
Rs. 40 million. Date of authorisation of FL's financial statements was 10 February 20X8
and the claim was disclosed as contingent liability in FL's financial statements.
(iv)
On 1 July 20X7 AL sold its office building having carrying value of Rs. 43 million to BL at
its fair value of Rs. 50 million. The building had a remaining useful life of 5 years on the
date of disposal. On the same date, BL rented out the building to Monkey Limited for one
year.
AL group follows fair value model for investment property whereas BL uses cost model for
investment property. Fair value of the building on 31 December 20X7 was Rs. 58 million.
(v)
On 31 December 20X7 FL’s recoverable amount was estimated at Rs. 3,700 million.
(vi)
AL group follows a policy of valuing the non-controlling interest at its proportionate share of
the fair value of the subsidiary's identifiable net assets.
(vii)
The following information relates to AL's gratuity scheme for the year ended 31 December
20X7:
Rs. in million
Contribution paid
70
Benefits paid
55
Current service cost
85
Re-measurement gain
10
During the year, payments made by AL were charged to profit or loss account. No further
adjustments have been made.
Discount rate and fair value of plan assets at 1 January 20X7 were 12% per annum and Rs. 320
million respectively.
Required:
Prepare AL's consolidated statement of financial position as on 31 December 20X7 in
accordance with the requirements of IFRSs.
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Questions
4.6.
BAHAMAS LIMITED GROUP
The draft statements of financial position of Bahamas Limited (BL), Ohama Limited (OL) and
Czech Limited (CL) as at 31 December 20X8 are as follows:
BL
OL
CL
------------ Rs. in million -----------Property, plant and equipment
Goodwill
25,370
14,288
7,900
170
-
-
Investment in OL at cost
5,400
-
-
Investment in CL at cost
1,220
912
-
360
-
-
Current assets
17,480
4,800
2,800
Total assets
50,000
20,000
10,700
Share capital (Rs. 10 each)
15,000
5,000
1,200
Share premium
8,000
2,000
1,100
Surplus on revaluation
5,500
1,200
-
Retained earnings
9,500
3,000
2,000
Liabilities
12,000
8,800
6,400
Total equity and liabilities
50,000
20,000
10,700
Investment in Persian Limited at cost
Other information:
(i)
On 1 January 20X5, BL acquired 75% shares of OL Limited which resulted in goodwill of
Rs. 450 million. On acquisition date, fair value of net assets of OL was equal to their carrying
value except a building whose fair value was higher than its carrying value by Rs. 300
million. The building’s remaining useful life at the date of acquisition was 20 years.
(ii)
Immediately after acquisition, OL adopted revaluation model for all items of property, plant
and equipment to make the policy uniform with BL.
(iii)
On 1 January 20X7, BL acquired 35% shares of CL when CL had retained earnings of Rs.
700 million.
(iv)
On 1 January 20X8, OL acquired 24% shares of CL at fair value when retained earnings of
OL and CL were Rs. 2,500 million and Rs. 1,200 million respectively.
(v)
On 1 March 20X7, BL entered into an agreement with Romania Limited to set up Persian
Limited (PL), a joint arrangement. BL has 60% rights to the net assets of PL. As at 31
December 20X8, PL’s net assets comprised of fixed assets, current assets and liabilities of
Rs. 800 million, Rs. 400 million and Rs. 220 million respectively.
(vi)
PL’s current assets at 31 December 20X8 include goods costing Rs. 50 million which were
purchased from BL. Total sales by BL to PL in 20X8 amounted to Rs. 420 million which
were invoiced at cost plus 25%.
(vii)
On 1 January 20X8, OL acquired a machine on lease from BL for a non-cancellable period
of 3 years at Rs. 400 million per annum payable in arrears. The carrying value and remaining
life of the machine in BL’s books on that date was Rs. 3,500 million and 10 years
respectively. The lease has been appropriately accounted for in the above statements of
financial position. Applicable discount rate is 10%.
(viii) BL group follows a policy of valuing non-controlling interest at its proportionate share of the
fair value of the subsidiary’s identifiable net assets.
Required:
Prepare BL's consolidated statement of financial position as at 31 December 20X8 in accordance
with the requirements of IFRS.
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CHAPTER 5 - ASSOCIATES AND JOINT VENTURES
5.1.
5.2.
JOINT ARRANGEMENTS
(a)
State and explain the TWO types of joint arrangement identified in IFRS 11
(b)
A joint operator is expected to recognise and account for certain elements in relation to the
joint operations. State FIVE elements to be recognised.
(c)
State TWO characteristics of a joint arrangement.
HELIUM
The draft statements of financial position as at 31 December 20X6 of three companies are set
out below.
Helium
Sulphur
Arsenic
Rs.000
Rs.000
Rs.000
Assets
Non-current assets
Property, plant and equipment
400
100
160
Investments:
- shares in Sulphur (60%)
75
–
–
- shares in Arsenic (30%)
30
–
–
Current assets
Equity and liabilities
Share capital
Retained earnings
Non-current loans
445
——
950
——
160
——
260
——
80
——
240
——
100
650
200
——
950
——
30
180
50
——
260
——
60
100
80
——
240
——
The reserves of Sulphur and Arsenic when the investments were acquired were Rs. 70,000 and
Rs. 30,000 respectively
Required
Prepare the consolidated statement of financial position as at 31 December 20X6.
5.3.
HAMACHI LTD
Hamachi Ltd acquired 90% of Saba Ltd’s Rs. 1 ordinary shares on 1 April 20X4 paying Rs. 3.00
per share. The balance on Saba Ltd’s retained earnings at this date was Rs. 800,000. On 1
October 20X5, Hamachi Ltd acquired 30% of Anogo Ltd’s Rs. 1 ordinary shares for Rs. 3.50 per
share. The statements of financial position of the three companies at 31 March 20X6 are shown
below:
Hamachi Ltd
Rs.000 Rs.000
Saba Ltd
Rs.000 Rs.000
Anogo Ltd
Rs.000 Rs.000
8,050
4,000
12,050
3,600
910
4,510
1,650
nil
1,650
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventory
Accounts receivable
Bank
830
520
240
1,590
13,640
Total assets
© Emile Woolf International
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290
nil
28
250
350
100
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2,350
The Institute of Chartered Accountants of Pakistan
Questions
Hamachi Ltd
Rs.000 Rs.000
Saba Ltd
Rs.000 Rs.000
Anogo Ltd
Rs.000 Rs.000
5,000
1,200
600
Equity and liabilities
Equity:
Ordinary shares of Rs. 1 each
Reserves:
Retained earnings b/f
6,000
1,400
800
Profit year to 31 March 20X6
1,500
900
600
7,500
2,300
1,400
12,500
3,500
2,000
500
240
nil
Non-current liabilities
10% Loan notes
Current liabilities
Accounts payable
420
960
200
Taxation
220
250
150
nil
190
nil
Overdraft
Total equity and liabilities
640
1,400
350
13,640
5,140
2,350
The following information is relevant
(i)
Fair value adjustments
On 1 April 20X4 Saba Ltd owned an investment property that had a fair value of
Rs.120,000 in excess of its carrying value (book value). The value of this property has not
changed since acquisition. This property is included within investments in the balance
sheet.
Just prior to its acquisition, Saba Ltd was successful in applying for a six-year licence to
dispose of hazardous waste. The licence was granted by the government at no cost,
however Hamachi Ltd estimated that the licence was worth Rs. 180,000 at the date of
acquisition.
(ii)
In January 20X6 Hamachi Ltd sold goods to Anogo Ltd for Rs. 65,000. These were
transferred at a mark-up of 30% on cost. Two thirds of these goods were still in the
inventory of Anogo Ltd at 31 March 20X6.
(iii)
To facilitate the consolidation procedures the group insists that all inter-company current
account balances are settled prior to the year-end. However, a cheque for Rs. 40,000 from
Saba Ltd to Hamachi Ltd was not received until early April 20X6. Inter-company balances
are included in accounts receivable and payable as appropriate.
(iv)
Anogo Ltd is to be treated as an associated company of Hamachi Ltd.
(v)
An impairment test at 31 March 20X6 on the consolidated goodwill of Saba Ltd concluded
that it should be written down by Rs. 468,000. No other assets were impaired.
Required
(a)
Prepare the consolidated statement of financial position of Hamachi Ltd as at 31 March
20X6.
(b)
Discuss the matters to consider in determining whether an investment in another company
constitutes associated company status.
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
5.4.
HIDE
Hide holds 80% of the ordinary share capital of Seek (acquired on 1 February 20X6) and 30% of
the ordinary share capital of Arrive (acquired on 1 July 20X5).
Hide had no other investments.
The draft statements of profit or loss for the year ended 30 June 20X6, are set out below.
Hide
Rs.000
Seek
Rs.000
Arrive
Rs.000
Revenue
Operating expenses
Dividends receivable
12,614
6,160
8,640
(11,318)
(5,524)
(7,614)
150
–
–
———
——–
——–
1,446
636
1,026
Income tax
(621)
(275)
(432)
———
——–
——–
Profit after taxation
825
361
594
———
——–
——–
Included in the inventory of Seek at 30 June 20X6 was Rs. 50,000 for goods purchased from
Hide in May 20X6 which the latter company had invoiced at cost plus 25%. These were the only
goods sold by Hide to Seek but it did make sales of Rs. 180,000 to Arrive during the year. None
of these goods remained in Arrive’s inventory at the year end.
Required
Prepare a consolidated statement of profit or loss for Hide for the year ended 30 June 20X6.
5.5.
HARK, SPARK AND ARK
Hark acquired the following non-current investments on 1 April 20X5:
(1)
4 million equity shares in Spark, by means of an exchange of one share in Handel for
every one share in Spark, plus Rs. 6.05 million in cash. The professional fees associated
with the acquisition amounted to Rs. 1 million. The market price of shares in Hark at the
date of the acquisition was Rs. 9 per share. The market price of Spark shares just before
the acquisition was Rs. 7. The cash part of the consideration is deferred and will not be
paid until two years after the acquisition.
(2)
25% of the equity shares in Ark, at a cost of Rs. 6 per share. The money to make this
payment was obtained by issuing one million new shares in Hark at Rs. 9 per share.
None of these transactions has yet been recorded in the summary statements of financial
position that are shown below.
The summarised draft statements of financial position of the three companies at 31 March 20X6
are as follows.
Statement of financial position
Hark
Rs. million
Assets
Non-current assets
Property, plant and equipment
Other equity investments
Current assets
Total assets
Equity and liabilities
Equity shares of Rs. 1 each
Share premium
Retained earnings: at 1 April 20X5
- for year ended 31 March 20X6
© Emile Woolf International
30
Spark
Rs. million
Ark
Rs. million
60.0
0.8
60.8
18.2
79.0
31.0
nil
31.0
8.0
39.0
16.0
nil
16.0
9.0
25.0
16.0
2.0
36.0
8.0
62.0
5.0
4.0
16.0
3.0
28.0
6.0
4.0
8.0
2.0
20.0
The Institute of Chartered Accountants of Pakistan
Questions
Statement of financial position
Hark
Rs. million
Non-current liabilities
6% loan notes
7% loan notes
Current liabilities
Total equity and liabilities
Spark
Rs. million
Ark
Rs. million
6.0
5.0
39.0
3.0
2.0
25.0
10.0
7.0
79.0
The following information is relevant:
(1)
Hark has chosen to value the non-controlling interest in Spark using the fair value method
permitted by IFRS 3 (revised). The fair value of the non-controlling interests at the
acquisition date is estimated to be the market value of the shares before the acquisition.
(2)
At the date of acquisition of Spark, the fair values of its assets were equal to their carrying
amounts.
(3)
The cost of capital of Hark is 10% per year.
(4)
During the year ended 31 March 20X6, Spark sold goods to Hark for Rs. 3.6 million, at a
mark-up of 50% on cost. Hark had 75% of these goods in its inventory at 31 March 20X6.
(5)
There were no intra-group receivables and payables at 31 March 20X6.
(6)
On 1 April 20X5, Hark sold a group of machines to Spark at their agreed fair value of Rs. 3
million. At the time of the sale, the carrying amount of the machines was Rs. 2 million. The
estimated remaining useful life of the plant at the date of the sale was four years. Plant and
machinery is depreciated to a residual value of nil using straight-line depreciation and at 1
April 20X5 the machines had an estimated remaining life of five years.
(7)
“Other equity investments” are included in the summary statement of financial position of
Hark at their fair value on 1 April 20X5. Their fair value at 31 March 20X6 is Rs.0.65
million.
(8)
Impairment tests were carried out on 31 March 20X6. These show that there is no
impairment of the value of the investment in Ark or in the consolidated goodwill.
(9)
No dividends were paid during the year by any of the three companies.
Required
Prepare the consolidated statement of financial position for Hark as at 31 March 20X6.
5.6.
P, S AND A
The statements of financial position of three entities P, S and A are shown below, as at 31
December Year 5. However, the statement of financial position of P records its investment in
Entity A incorrectly.
Non-current assets
Property, plant and equipment
Investment in S at cost
Investment in A at cost
Current assets
Inventory
Current account with P
Current account with A
Other current assets
Total assets
© Emile Woolf International
31
P
Rs.
S
Rs.
A
Rs.
450,000
320,000
140,000
–––––––––
910,000
240,000
–––––––––
240,000
460,000
–––––––––
460,000
70,000
20,000
110,000
–––––––––
1,110,000
–––––––––
90,000
60,000
130,000
–––––––––
520,000
–––––––––
70,000
40,000
–––––––––
570,000
–––––––––
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
P
Rs.
S
Rs.
A
Rs.
100,000
160,000
650,000
–––––––––
910,000
200,000
80,000
140,000
–––––––––
420,000
100,000
120,000
250,000
–––––––––
470,000
40,000
20,000
30,000
Current account with P
-
-
20,000
Current account with S
60,000
-
-
Other current liabilities
100,000
–––––––––
1,110,000
–––––––––
80,000
–––––––––
520,000
–––––––––
50,000
–––––––––
570,000
–––––––––
Equity and reserves
Equity shares of Rs. 1
Share premium
Accumulated profits
Long-term liabilities
Current liabilities
Additional information
P bought 150,000 shares in S several years ago when the fair value of the net assets of S was
Rs. 340,000.
P bought 30,000 shares in A several years ago when A’s accumulated profits were Rs. 150,000.
There has been no change in the issued share capital or share premium of either S or A since P
acquired its shares in them.
There has been impairment of Rs. 20,000 in the goodwill relating to the investment in S, but no
impairment in the value of the investment in A.
At 31 December Year 5, A holds inventory purchased during the year from P which is valued at
Rs. 16,000 and P holds inventory purchased from S which is valued at Rs. 40,000. Sales from P
to A and from S to P are priced at a mark-up of one-third on cost.
None of the entities has paid a dividend during the year.
P uses the partial goodwill method to account for goodwill and no goodwill is attributed to the
non-controlling interests in S.
Required
Prepare the consolidated statement of financial position of the P group as at 31 December Year
5.
5.7.
H LTD GROUP
The statements of comprehensive income for H Ltd, S Ltd and A Ltd for the year ended 31 May
20X6 are shown below:
H Ltd
Rs.000
6,000
(4,800)
1,200
(64)
(336)
(30)
770
(204)
566
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Finance costs
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
© Emile Woolf International
32
S Ltd
Rs.000
3,000
(2,400)
600
(32)
(168)
(15)
385
(102)
283
A Ltd
Rs.000
1,000
(800)
200
(10)
(52)
(5)
133
(33)
100
The Institute of Chartered Accountants of Pakistan
Questions
H Ltd
Rs.000
S Ltd
Rs.000
A Ltd
Rs.000
Other comprehensive income:
Revaluation of property
Tax effect of revaluation
Other comprehensive income for the year, net of tax
200
(42)
100
(21)
30
(6)
158
79
24
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
724
362
124
Additional information:
1.
H Ltd operates a defined benefit pension plan for its employees. At the year end, there is
an actuarial loss of Rs. 52,000 on the pension plan liabilities and an actuarial gain of Rs.
40,000 on pension plan assets. These amounts are not reflected in the above statements.
In accordance with the amendment to IAS 19 Employee Benefits, H Ltd recognises
actuarial gains and losses from the defined benefit plan in other comprehensive income in
the period that they occur.
2.
H Ltd holds a 15% investment in XY which is designated as FVTOCI. The fair value of this
investment at 31 May 20X6 was Rs. 106,000. The investment is currently recorded in the
financial statements at Rs. 92,000.
3.
H Ltd owns 80% of the ordinary share capital of S Ltd and exercises control over its
operating and financial policies. H Ltd owns 30% of the ordinary share capital of A Ltd and
exerts significant influence over its operating and financial policies.
Required
Prepare the consolidated statement of profit or loss and other comprehensive income for the H
Ltd Group, taking account of the information provided in the notes above. Ignore any further
taxation effects of notes 1 and 2.
5.8.
ALPHA AND BETA
On 1 July 20X2, Alpha Limited (AL) and Beta Limited (BL) entered into an agreement to set up
two Separate Vehicles (SVs) to manufacture and distribute their products. Each company has
50% share in both SVs. The following are the extracts from draft statements of financial position
and comprehensive income of AL and the SVs for the year ended 30 June 20X6.
Statements of financial position
AL
SV-1
SV-2
AL
Rs. in millon
Property, plant and
equipment
SV-1
SV-2
Rs. in millon
2,650
750
365
Investment in SVs - at
cost
443
-
-
Stock in hand
695
250
140
Other assets
570
180
80
4,358
1,180
585
Capital
2,000
400
200
Accumulated profit
1,193
55
305
10% bank loan
500
320
Current liabilities
665
405
80
4,358
1,180
585
-
Statement of comprehensive income
AL
SV-1
SV-2
Rs. in millon
Sales
4,250
650
Less: Cost of sales
(2,993)
(480)
(750)
Gross profit
1,257
170
250
(657)
(145)
(200)
600
25
50
Less: Expenses
Net profit
© Emile Woolf International
33
1,000
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Additional information:
(i) SV-1 is classified as joint operation whereas SV-2 is classified as joint venture.
(ii) On 1 July 20X5, AL acquired 60% of BL’s ownership in SV-1 at Rs. 140 million. AL also
incurred acquisition related costs amounting to Rs. 3 million which were capitalized.
(iii) The details of transactions made during the year 20X6 between AL and the SVs and their
subsequent status are given below:
Sales
Included in
buyer’s closing
inventories
Amount
receivable/(payable) Profit % on
in the books of AL
sales
-------------- Rs. in million --------------
AL to SV-1
350
220
320
10
AL to SV-2
250
110
70
20
SV-1 to AL
190
150
(150)
30
SV-2 to AL
60
38
(20)
15
(iv) AL follows the equity method for recording its investment in joint venture whereas investment
in joint operations is recorded in accordance with IFRS 11.
Required:
In accordance with the requirements of International Financial Reporting Standards, prepare AL’s
separate statements of financial position and comprehensive income for the year ended 30 June
20X6.
5.9.
SNAKE LIMITED
Draft consolidated financial statements of H Limited (HL) for the year ended 31 December 20X7
show the following amounts:
Rs. in million
Total assets
2,500
Total liabilities
1,610
Total comprehensive income
659
During the process of finalisation, following matters have been noted:
On 31 December 20X7 HL disposed of 2.2 million shares of Snake Limited (SL) for Rs. 290 million.
HL had acquired 3 million shares of SL at fair value on 1 January 20X5. SL’s paid-up capital
consists of 10 million shares. Due to recurring losses made by SL, HL had booked impairment of
Rs. 90 million against this investment on 31 December 20X6.
Fair value per share and retained earnings of SL at respective dates were as follows:
Fair value
Rs. per share
Retained earnings
Rs. in million
1 January 20X5
200
1,700
31 December 20X6
118
1,200
31 December 20X7
128
1,350
Date
Disposal proceeds have been credited to profit or loss account. No other adjustment has been
made during the year ended 31 December 20X7.
Required:
Determine the revised amounts of total assets, total liabilities and total comprehensive income after
incorporating impact of the above adjustments, if any.
© Emile Woolf International
34
The Institute of Chartered Accountants of Pakistan
Questions
CHAPTER 7 - IAS 21: FOREIGN CURRENCY
7.1.
DND LIMITED
DND Limited is a listed company, having its operations within Pakistan. During the year ended
December 31, 20X6, the company contracted to purchase plants and machineries from a US
Company. The terms and conditions thereof, are given below:
Total cost of contract = US$ 100,000.
Payment to be made in accordance with the following schedule:
Payment Dates
Amount Payable
On signing the
contract
1-Jul-20X6
US$ 20,000
On shipment*
30-Sep-20X6
US$ 50,000
After installation
and test run
31-Jan-20X7
US$ 30,000
*(risk and rewards of ownership are transferred on
shipment)
The contract went through in accordance with the schedule and the company made all the
payments on time. The following exchange rates are available:
Dates
Exchange Rates
1-Jul-20X6
US$ 1 = Rs. 153
30-Sep-20X6
US$ 1 = Rs. 153.5
31-Dec-20X6
US$ 1 = Rs. 154
31-Jan-20X7
US$ 1 = Rs. 154.5
Required
Prepare journals to show how the above contract should be accounted for under IAS 21.
7.2.
STARLIGHT LIMITED
In December 20X4, Lahore Holdings Ltd acquired an 80% interest in a Qatari investment
company, Starlight Limited. Starlight Limited has the Qatari Rial (QR) as its functional currency.
The acquisition cost was Rs. 2,500,000 and the revenue reserves balance of Starlight Limited
stood at QR 49,300 at the acquisition date.
The following financial information was extracted from the books for the year ended 31
December 20X6.
Starlight Limited
Qatari Riyal
Turnover
344,880
Cost of sales
(249,710)
Gross profit
95,170
Expenses
(29,490)
Profit before tax
65,680
Taxation
(17,325)
Profit after tax
48,355
Interim dividend
(16,300)
Retained profit for the year
© Emile Woolf International
32,055
35
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Extract of statement of financial position at 31 December, 20X6
Qatari Riyal
Share capital
20,250
Revenue reserve
103,200
Liabilities
34,480
Note
Due to significant decline in PKR, during the last 2 years, Qatari riyal made huge exchange
gains.
Exchange rate (PKR to Qatari Riyal)
31-Dec-20X4
30
31-Dec-20X5
35
31-Dec-20X6
40
Average rate for 20X6
37.5
Required
7.3.
(a)
Prepare the translated profit and loss account of Starlight Limited.
(b)
Calculate the goodwill on consolidation and the non-controlling interest that would appear
in the consolidated statement of profit or loss.
PERCEPT LTD
Percept Ltd acquired 70% of the share capital of Trint on 1 January 20X6, a company based in
Japan for 6,900,000 Yen. The retained earnings on this date was 4,500,000 Yen. The fair value
of the identifiable net assets of the company was 12,375,000 Yen and the net asset relates to items
of property, plant and equipment. Similarly, the fair value of the non-controlling interest (NCI) in
Trint Ltd as at 1 January, 20X6 was 6,250,000 Yen. It is the policy of Percept Ltd to use the “full
goodwill method” in the preparation of the group’s financial statements. Trint Ltd’s profit for the
year ended 31 December 20X6 was 2,000,000 Yen. The acquisition on 1 January 20X6 was done
in Japan when the following exchange rates were in force:
Yen to rupees
1/1/20X6
0.9
31/12/20X6
0.8
The average rate for the year ended 31 December 20X6 was 0.85 Yen to Rs. 1.
Trint Ltd: Statement of Financial Position as at 31 December 20X6.
Yen (000)
Assets:
Non-current assets
9,500
Financial assets
1,250
10,750
Current assets
8,250
Total assets
© Emile Woolf International
19,000
36
The Institute of Chartered Accountants of Pakistan
Questions
Yen (000)
Equity and liabilities
Share capital
5,000
Retained earnings
7,500
12,500
Non-current liabilities
4,000
Current liabilities
2,500
6,500
Total equity and liabilities
19,000
Required
7.4.
(a)
Translate the statement of financial position of Trint Ltd. as at 31 December 20X6
(b)
Calculate the goodwill arising on acquisition of Trint and any gain/loss arising on
retranslation of the goodwill as at 31 December 20X6
(c)
Calculate the exchange difference arising from the translation of Trint Ltd’s net assets.
ORLANDO
Orlando is an entity whose functional currency is the US dollar. It prepares its financial
statements to 30 June each year. The following transactions take place on 21 May Year 4 when
the spot exchange rate was $1 = €0.8.
Goods were sold to Koln, a customer in Germany, for €96,000.
A specialised piece of machinery was bought from Frankfurt, a German supplier. The invoice for
the machinery is for €1,000,000.
The company receives €96,000 from Koln on 12 June Year 4.
At 31 June Year 4 it still owns the machinery purchased from Frankfurt. No depreciation has
been charged on the asset for the current period to 30 June Year 4.
The liability for the machine is settled on 31 July Year 4.
Relevant $/€ exchange rates are:
12 June Year 4 $1 = €0.9
30 June Year 4 $1 = €0.7
31 July Year 4 $1 = €0.8
Required
Show the effect on profit or loss of these transactions for:
(a)
the year to 30 June Year 4
(b)
the year to 30 June Year 5
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
7.5.
MANCASTER AND STOCKPOT
Part A
Required
(1)
(2)
Define and explain the following terms as used in IAS 21.
The effects of changes in foreign exchange rates.
(a)
Functional currency
(b)
Presentation currency
Outline the factors to be considered when determining the functional currency of an
overseas subsidiary.
Part B
The statements of financial position of Manchester and its subsidiary Stockpot at 31 March Year
4 and their statement of profit or loss for year ended on that date are set out below:
Statements of financial position at 31 March Year 4
Mancaster
$000
Stockpot
$000
€000
€000
Non-current assets:
Property, plant and equipment
Investments (notes 1 and 2)
20,000
30,000
5,500
25,500
30,000
Current assets:
Inventories
10,000
18,000
Trade receivables
10,000
15,000
Total assets
20,000
33,000
45,500
63,000
9,000
15,000
12,500
10,000
21,500
25,000
10,000
20,000
Capital and reserves:
Share capital ($1/€1 Shares)
Accumulated profits
Non-current liabilities (note 4)
Current liabilities
Trade payables
7,900
10,400
Bank overdraft
6,100
7,600
Total equity and liabilities
© Emile Woolf International
38
14,000
18,000
45,500
63,000
The Institute of Chartered Accountants of Pakistan
Questions
Statement of profit or loss – year ended 31 March Year 4
Revenue
Cost of sales (notes 2 and 5)
Gross profit
Other operating expenses
Operating profit
Investment income (note 3)
Mancaster
Stockpot
$000
€000
50,000
60,000
(25,000)
(30,000)
25,000
30,000
(15,000)
(16,000)
10,000
14,000
1,500
-
Interest payable
(1,000)
(2,000)
Profit before tax
10,500
12,000
Tax
(3,600)
(4,200)
6,900
7,800
Profit after tax
Statement of changes in equity – year ended 31 March Year 4
Mancaster
Balance at 1 April Year 3
Stockpot
Share
capital
Reserves
Share
capital
Reserves
$000
$000
€000
€000
9,000
9,500
15,000
6,600
Profit for the period
Dividends paid
Balance at 31 March Year 4
6,900
7,800
(3,900)
(4,400)
9,000
12,500
15,000
10,000
You are provided with the following additional information:
(1)
Investments represent the acquisition of 11.25 million shares in Stockpot on 31 March Year
0. The retained profits of Stockpot on this date stood at €5 million. Any goodwill arising on
the acquisition is to be treated as a foreign currency asset. Stockpot operates as a
reasonably autonomous entity on a day-to-day basis although Mancaster does control the
long-term strategy of Stockpot.
(2)
Exchange rates have been as follows:
Date
€ to $1
31 March Year 0
3.0
31 March Year 3
2.4
31 March Year 4
2.2
Average for Year 4
2.3
(3)
Investment income represents dividends received from Stockpot.
(4)
The non-current liabilities represent long-term borrowings.
Required
(a)
Translate the statement of financial position of Stockpot into the presentation currency of
dollars and prepare the consolidated statement of financial position of the group at 31
March Year 4.
(b)
Translate the statement of profit or loss of Stockpot into dollars and prepare the
consolidated statement of profit or loss of the group for the year ended 31 March Year 4.
© Emile Woolf International
39
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
7.6.
A, B AND C
Extracts from the financial statements of A, its subsidiary, B and its associate, C for the year to 30
September 20X6 are presented below:
Summarised statement of profit or loss and other
comprehensive income
Revenue
A
B
C
Rs.000
A$000
Rs.000
4,600
2,200
1,600
(3,700)
(1,600)
(1,100)
900
600
500
(200)
(150)
(100)
700
450
400
Revaluation of property, plant and equipment
200
120
70
Total other comprehensive income
Total comprehensive income
200
900
120
570
70
470
Cost of sales and operating expenses
Profit before tax
Income tax
Profit for the year
Other comprehensive income:
Statement of financial position
As at 30 September 20X6
A
B
C
Rs.000
A$000
C$000
Assets
Non-current assets
Property, plant and equipment
7,000
Investment in B
5,200
Investment in C
900
_
13,100
4,000
2,000
3,000
2,000
1,000
16,100
6,000
3,000
2,000
1,000
1,000
12,100
3,500
1,500
14,100
4,500
2,500
2,000
1,500
500
16,100
6,000
3,000
Current assets
Total assets
4,000
2,000
Equity and liabilities
Share capital
Reserves
Current liabilities
Total equity and liabilities
Additional information:
1.
The functional currency of both A and C is the Rs. and the functional currency of B is the
A$.
2.
A acquired 80% of B on 1 October 20X3 for Rs. 5,200,000 when the reserves of B was
A$1,800,000. The investment is held at cost in the individual financial statements of A.
3.
A acquired 40% of C on 1 October 20X1 for Rs. 900,000 when the reserves of C were
Rs. 700,000. The investment is held at cost in the individual financial statements of A.
4.
No impairment to either investment has occurred to date.
5.
The group policy is to value the non-controlling interest at fair value at the date of
acquisition. The fair value of the non-controlling interest of B at 1 October 20X3 was
A$600,000.
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Questions
6.
Relevant exchange rates are as follows:
1 October 20X3
Rs./A$0.5000
30 September 20X5
Rs./A$0.7100
30 September 20X6
Rs./A$0.6300
Average rate for year ended 30 September 20X6
Rs./A$0.6500
Required
Prepare the consolidated statement of profit or loss and other comprehensive income for the A
Group for the year ended 30 September 20X6 and the consolidated statement of financial
position as at that date.
7.7.
OMEGA LIMITED
Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 20X2, it acquired 20,000
ordinary shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based company at a cost
of AED 240,000 which was equivalent to Rs. 6,000,000. The face value of the shares is AED 10
each. OL intends to hold the shares to avail benefits of regular dividends and capital gains.
On 1 June 20X3, AWL was acquired by Hilal Limited (HL), which issued three shares in HL in
exchange for every four shares held in AWL.
Other relevant information is as under:
AWL
HL
Final dividend received on 31 March 20X3:
Cash
15%
-
Bonus shares
10%
-
-
20%
Final cash dividend received on 10 April 20X4
Fair value per share as at: 31 December 20X2
AED 13.00
1 June 20X3
AED 14.00
31 December 20X3
-
AED 18.00
AED 19.50
Exchange rates on various dates were as follows:
1 AED
31-Dec-20X2
31-Mar-20X3
1-Jun-20X3
31-Dec-20X3
10-Apr-20X4
Rs. 40.00
Rs.40.50
Rs. 41.00
Rs.41.70
Rs. 42.20
Required
Determine the amounts
(duly classified under appropriate heads) that would be included in OL’s statement of
comprehensive income for the year ended 31 December 20X3 in respect of the above
investment.
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Advanced accounting and financial reporting
7.8.
PARENT COMPANY LIMITED
Parent Company Limited (PCL) is a listed company and owns 80% and 75% equity in LS Limited
and FS Limited respectively. FS is registered and operates in a foreign country and its functional
currency is CU. Summarised statements of financial position as at 30 June 20X4 and other
information relating to the group companies are as under:
PCL
LS
FS
Rs. in million
CU in million
Assets
Property, plant and equipment
4,200
3,500
250
Investments in LS and FS
6,500
Current assets
3,500
4,000
450
14,200
7,500
700
Share capital (Rs. 10/CU 10 each
6,000
1,800
120
Retained earnings
3,500
900
280
Current liabilities
4,700
4,800
14,200
7,500
700
Profit after tax for the year ended
30 June 20X4
700
400
30
Final dividend for the year ended
30 June 20X3:
12%
-
Cash (paid on 1 January 20X4)
10%
20%
700
400
-
-
Equity and liabilities
15%
30
The following information is also available:
i.
Company
Investment
date
At the acquisition date
No. of
shares
acquired
Cost
Retained
earnings
Fair value
of
*
NCI
---- in million ---LS
1-Jan-20X2
120
Rs. 2,000
Rs. 250
Rs. 540
FS
1-Jul-20X2
9
CU 300
CU 160
CU 90
*NCI stands for Non-controlling interest
ii.
iii.
iv.
v.
On the date of acquisition, fair value of the net assets of LS and FS were equal to their
book value. However, a contingent liability of Rs. 25 million was disclosed in the financial
statements of LS. PCL's legal adviser had at that time estimated that LS would be liable
to pay Rs. 6 million to settle the claim and it was finally settled at the same amount in
May 20X4.
No further shares have been issued by LS and FS since their acquisitions, except for the
bonus issue as mentioned above.
An impairment test carried out on 30 June 20X4 revealed that goodwill of FS is impaired
by CU 10 million.
PCL values non-controlling interest on the date of acquisition at fair value.
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Questions
vi.
vii.
The exchange rates in terms of Rs. per CU, were as follows:
1-Jul-20X2
30-Jun-20X3
1-Jan-20X4
30-Jun-20X4
Average for 20X3-X4
Rs. 15.00
Rs. 16.80
Rs. 16.90
Rs. 17.30
Rs. 17.00
The break-up of exchange reserve in the consolidated financial statements for the year
ended 30 June 20X3 is as follows:
Relating to goodwill
Rs. 148.50 million
Relating to translation of foreign operations
Rs. 463.05 million
Required:
In accordance with the requirements of the International Financial Reporting Standards, prepare:
7.9.
(a)
Consolidated statement of financial position as at 30 June 20X4; and
(b)
Consolidated statement of other comprehensive income for the year ended 30 June 20X4.
(Ignore taxation)
KANGAROO LIMITED
Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for the
year ended 31 December 20X7. Following transactions were carried out during the year.
(i)
Foreign currency transactions:
KL purchased an investment property in United States for USD 2.6 million. 10% advance
payment was made on 1 May 20X7 and 70% payment was made on 1 July 20X7 on
transfer of title and possession of the property. The remaining amount was paid on
1 August 20X7.
On 1 September 20X7, KL rented out this property at annual rent of USD 0.24 million for
one year and received full amount in advance on the same date.
KL uses fair value model for its investment property. On 31 December 20X7, an
independent valuer determined that fair value of the property was USD 2.5 million.
Following spot exchange rates are available:
Date
USD 1
1-May-20X7
1-Jul-20X7
1-Aug-20X7
Rs. 140
Rs. 145
Rs. 148
1-Sept-20X7 31-Dec-20X7
Rs. 150
Rs. 156
Following average exchange rates are also available:
(ii)
Period
20X7
Jul to Dec 20X7
Sep to Dec 20X7
USD 1
Rs. 145
Rs. 151
Rs. 153
Equity investments:
On 1 May 20X7 KL acquired following equity investments:
Purchase price
Transaction cost
-------------------- Rs. in million --
Total
------------------
Investment A
100
2
102
Investment B
150
3
153
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Advanced accounting and financial reporting
Investment A was designated as measured at fair value through profit or loss whereas
investment B was irrevocably elected at initial recognition as measured at fair value through other
comprehensive income.
In October 20X7, KL earned dividend of Rs. 12 million and Rs. 9 million on investment A and B
respectively.
20% of investment A and 30% of investment B were sold for Rs. 23 million and Rs. 50 million
respectively in November 20X7. Transaction cost was paid at 2%.
As on 31 December 20X7, fair values of the remaining investments are given below:
Fair value
Transaction cost on disposal
Net amount
------------- Rs. in million ------------Investment A
105
2.1
102.9
Investment B
130
2.6
127.4
Required:
Prepare the extracts relevant to the above transactions from KL’s statements of financial position
and comprehensive income for the year ended 31 December 20X7, in accordance with the
IFRSs. (Comparative figures and notes to the financial statements are not required)
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Questions
CHAPTER 8 - IAS 7: STATEMENTS OF CASH FLOWS
8.1.
EVERNEW LTD
The following relates to the financial statements of Evernew Ltd.
(a)
Consolidated statement of profit or loss for the year ended 31 December 20X6
Rs.000
Operating profit
144,000
Interest expenses
(10,080)
Profit after interest
133,920
Profit from disposal of subsidiary
5,040
Profit before taxation
138,960
Taxation
(46,800)
Profit after taxation
92,160
Profit for the year attributable to:
Owners of the parent
84,960
Non-controlling interest
7,200
Retained profit c/f
(b)
92,160
Consolidated statement of financial position as at 31 December, 20X6
20X6
Rs.’000
20X5
Rs.’000
Rs.’000
Rs.’000
Assets
Non-current assets
369,720
360,000
Current assets:
Inventory
180,000
165,600
Trade receivables
151,200
136,800
63,360
14,400
Cash in hand
394,560
316,800
764,280
676,800
Ordinary share capital
144,000
144,000
Accumulated profits
317,520
232,560
Total assets
Equity and liabilities
461,520
376,560
Non-controlling interest
36,360
41,400
10% debenture
68,400
90,000
Current liabilities
Trade creditors
108,000
93,600
Taxation
46,800
39,240
Bank overdraft
43,200
36,000
Net current assets
198,000
168,840
Total equity and liabilities
764,280
676,800
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Advanced accounting and financial reporting
(c)
The following additional information is relevant:
(i)
Depreciation for the year in the consolidated profit and loss account was
Rs. 72,720,000. Non-current assets were not disposed by the group except those
made during disposal of the investment in the shares of Pastit Limited.
(ii)
Evernew Ltd sold its investment in Pastit Limited in July 20X6. The entire 80%
shareholding in the subsidiary was sold for Rs. 39.6 million. Information about the
disposal is as follows:
Rs.’000
Inventories
Receivables
Non-current assets
Trade creditors
Taxation
Bank overdraft
Debenture stock
(10,800)
(2,160)
(1,440)
(3,600)
Non-controlling interest
Rs.’000
14,400
18,000
28,800
(18,000)
43,200
(8,640)
34,560
The investment was acquired many years ago for Rs. 13.68 million when the net assets of Pastit
Limited were Rs. 14.4 million. Goodwill had been fully written off before due to impairment.
Required
Prepare the Evernew Ltd group consolidated cash flow statement for the year ended 31
December, 20X6.
8.2.
BISHOP GROUP
You are provided with the information set out below relating to a group of companies.
Consolidated statement of profit or loss for Bishop Group for the year ended 31
December 20X2
20X2
20X1
Rs.000
Rs.000
Revenue
19,308
18,173
Cost of sales
(4,315)
(4,620)
–––––––––
–––––––––
Gross profit
14,993
13,553
Distribution costs
(6,439)
(6,126)
Administrative expenses
(5,705)
(6,719)
–––––––––
–––––––––
Profit before tax and finance costs (note 1)
2,849
708
Finance income
90
75
Finance costs (note 2)
(350)
(230)
–––––––––
–––––––––
Profit before taxation
2,589
553
Income tax expense (note 3)
(800)
(125)
Profit for the year
1,789
428
–––––––––
–––––––––
Attributable to:
Equity holders of the parent
1,369
318
Non-controlling interest
420
110
–––––––––
–––––––––
1,789
428
–––––––––
–––––––––
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Questions
Summary statement of changes in equity for the year to 31 December 20X2
Issued
capital
Share
premium
B/fwd 1 Jan
7,500
77
Issue of shares
3,500
324
Foreign
currency
translation
Retained
earnings
2,100
4,905
Total
14,582
NCI
Equity
2,500
17,082
3,824
3,824
Profit for year
1,369
1,369
420
1,789
Dividends
(600)
(600)
(295)
(895)
––––––
5,674
––––––
700
––––––
19,875
––––––
175
––––––
2,800
––––––
875
––––––
22,675
––––––
Exchange gain
C/fwd 31 Dec
––––––
11,000
––––––
––––––
401
––––––
700
––––––
2,800
––––––
Notes: NCI = non-controlling interest
Exchange gain = exchange gain on translation of subsidiary
Consolidated statement of financial position as at 31 December 20X2
20X2
Rs.000
Non-current assets
Tangible assets
Investments
Current assets
Inventories
Receivables
Cash at bank and in hand
Equity and liabilities
Ordinary share capital
Share premium
Foreign currency translation
Retained earnings
Equity attributable to owners of parent
Non-controlling interest
Total equity
Current liabilities
Payables
Tax
Obligations under finance leases
Non- current liabilities
Loans
Obligations under finance leases
Provisions for liabilities and charges
Deferred tax
20X1
Rs.000
11,720
3,000
7,520
2,700
6,135
5,720
820
27,395
5,740
4,380
169
20,509
11,000
401
2,800
5,674
19,875
2,800
22,675
7,500
77
2,100
4,905
14,582
2,500
17,082
1,420
700
110
1,760
167
50
1,200
740
800
250
550
27,395
400
20,509
960
240
1,200
840
120
960
Notes to the accounts
(1)
Operating profit is stated after charging
Depreciation: Owned assets
Assets held under finance leases
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Advanced accounting and financial reporting
(2)
Rs.000
Rs.000
Loan interest
120
80
Finance charge on finance leases
205
132
25
18
350
230
Tax on income at 30%
600
90
Deferred tax
150
35
50
-
800
125
700
400
Finance costs
Exchange rate losses on long-term loans
(3)
Taxation on profits on ordinary activities
Under provision in respect of previous years
(4)
Foreign exchange differences
Gains arising on re-translation
The exchange rate gain relates to the translation of an 80% owned overseas
subsidiary, Louise, under the closing rate method. The gain comprises:
Non-current assets
424
Inventories
117
Receivables
339
Cash
53
Trade payables
(58)
875
Attributable to NCI
(175)
Attributable to owners of parent company
(5)
700
During the year non-current assets additions of Rs. 700,000 were acquired under finance
leases. Payments on finance leases are made in arrears. The net book value of noncurrent assets disposed of was Rs. 720,000, with sale proceeds of Rs. 810,000.
Required
8.3.
(a)
Prepare the group statement of cash flows of Bishop in accordance with IAS 7 together with
any required notes for the year ended 31 December 20X2.
(b)
Explain why external users of financial statements benefit from receiving a statement of cash
flows.1
THE GRAPE GROUP
The draft statements of financial position and statement of profit or loss of the Grape Group at 31
March Year 4 and 31 March Year 3 are as follows:
Notes
Year 4
Year 3
Rs.000
Rs.000
Non-current assets
Intangible assets
Property, plant and equipment
(1)
Investments – associated undertakings
© Emile Woolf International
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24
-
13,515
12,990
1,966
1,920
15,505
14,910
The Institute of Chartered Accountants of Pakistan
Questions
Notes
Current assets
Inventory
Receivables
Cash at bank and in hand
Capital and reserves
Share capital
Share premium
Accumulated profits
Non-current liabilities
Current liabilities
(2)
(3)
Statement of profit or loss: Year to 31 March
Sales revenue
Year 4
Rs.000
Year 3
Rs.000
11,657
7,209
5,190
24,056
39,561
10,530
6,936
1,728
19,194
34,104
8,100
1,989
13,200
23,289
6,900
9,372
39,561
7,425
1,470
8,700
17,595
7,890
8,619
34,104
Year 4
Year 3
Rs.000
Rs.000
74,100
59,400
(54,138)
(42,240)
Gross profit
19,962
17,160
Distribution costs
(5,889)
(4,869)
Administrative expenses
(4,092)
(3,384)
9,981
8,907
Income from interests in associates
139
144
Loss on sale of tangible non-current assets
(18)
-
Interest expense
(552)
(651)
Profit before tax
9,550
8,400
(2,950)
(2,400)
6,600
6,000
Cost of sales
Operating profit
Income tax expense
Profit after tax
Notes
(1)
Property, plant and equipment
Year 4
Year 3
Rs.000
Rs.000
Cost
At 1 April
20,598
19,416
Additions
1,875
2,022
Disposals
(429)
(840)
22,044
20,598
At 1 April
7,608
6,984
Charge for year
1,176
936
Disposals
(255)
(312)
At 31 March
8,529
7,608
13,515
12,990
At 31 March
Depreciation
Net book value
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Advanced accounting and financial reporting
(2)
Non-current liabilities
8% Loan notes
10% Unsecured loan notes
(3)
Year 4
Rs.000
6,900
6,900
Year 3
Rs.000
6,900
990
7,890
Year 4
Rs.000
6,422
2,950
9,372
Year 3
Rs.000
6,219
2,400
8,619
Current liabilities
Accounts payable
Income tax
You are provided with the following additional information:
Interest on the 8% loan note is payable half-yearly on 30 September and 31 March.
Income tax is payable nine months after the year-end.
Dividends of Rs. 2.1m and Rs. 2.4m were proposed for Year 3 and Year 4 respectively.
During the year, the Grape Group acquired 100% of the ordinary share capital of Pip. The
purchase was financed by Rs. 346,000 in cash and the issue of 54,000 ordinary shares of
Rs. 1 each. The ordinary shares had a market value of Rs. 152,000. The following figures
related to Pip at the date of acquisition:
Rs.000
Property, plant and equipment
315
Inventory
139
Receivables
85
Cash at bank and in hand
3
Payables
(68)
474
Share capital
180
Reserves
294
474
(4)
The share capital consists of Rs. 1 ordinary shares.
Required
Prepare a statement of cash flows and related notes for the Grape Group for the
year ended 31 March Year 4.
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Questions
8.4.
VITZ LIMITED
Summarised consolidated statement of financial position of Vitz Limited (VL) as at 30 June 20X8
is presented below:
Asset
20X8
Property, plant &
equipment
20X7
Equity and liabilities
3,678
2,800
4,173 Share capital
(Rs. 10 each)
569
639 Share premium
Investment in associate
670
-
Trade & other receivables
Cash and bank
20X7
Rs. in million
Goodwill
Inventories
20X8
Rs. in million
Other group reserves
2,500
300
-
3,519
2,451
1,950
1,050 Non-controlling interest
1,638
874
957
823 Trade & other payables
912
1,630
1,568
770 Deferred consideration
223
9,392
9,39
7,455
7,455
Following information is available for preparation of consolidated statement of cash flows:
i.
On 1 January 20X8, VL acquired 40% shares in Audi Limited (AL) by paying Rs. 600 million.
On that date, cash balance of AL was Rs. 100 million. AL earned profit of Rs. 800 million
(accrued evenly) during the year ended 30 June 20X8. Further, VL sold goods for Rs. 400
million to AL in 20X8 at 30% profit margin. 25% of these goods remained unsold on 30 June
20X8.
ii.
On 1 April 20X8, VL disposed of its 100% shareholdings in Subaro Limited (SL) for Rs. 1,600
million. On that date, carrying value of SL’s net assets was as follows:
Rs. in million
Property, plant and equipment
1,300
Working capital (other than bank balances)
(150)
Bank balances
100
1,250
On the date of disposal, carrying value of SL's goodwill was Rs. 200 million. SL earned profit
of Rs. 185 million (accrued evenly) during the year ended 30 June 20X8.
iii. A building having carrying value of Rs. 170 million was disposed of during the year for Rs.
350 million in cash. Another machine having carrying value of Rs. 250 million was disposed
of during the year for Rs. 230 million which will be received in August 20X8.
iv. During the year, VL disposed of 30% shareholdings (leaving 60% with VL) in Wing Limited
(WL) for Rs. 450 million when WL’s net assets and goodwill were Rs. 1,000 million and Rs.
150 million respectively.
v.
On 1 July 20X7, VL acquired its first foreign subsidiary, Ford Limited (FL) by purchasing 80%
shareholdings against:



immediate cash payment of Rs. 495 million (USD 4.5 million).
issuance of 15 million shares of VL at market value of Rs. 25 each.
deferred payment of USD 2 million payable after two years. Applicable discount rate is
8%.
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Advanced accounting and financial reporting
The fair value of net assets of FL at the date of acquisition was as follows:
USD in million
Property, plant and equipment
5.5
Working capital (other than bank balances)
3.5
Bank balances
1.0
10.0
FL earned profit of USD 1.5 million (accrued evenly) during the year ended 30 June 20X8. FL’s
goodwill was not impaired at year-end.
Exchange reserve on translation of FL comprises of Rs. 13 million for bank balances, Rs. 36
million for working capital (other than bank balances) and the remaining relates to goodwill and
property, plant and equipment.
i.
Following exchange rates are available:
1 USD to Rs.
ii.
1-Jul-20X7
31-Dec-20X7
110
115
30-Jun-20X8
120
Average
116
No dividend was paid during the year by the group.
iii. Depreciation for the year was Rs. 480 million.
iv. VL values non-controlling interest on the date of acquisition at its proportionate share of the
fair value of the subsidiaries' identifiable net assets.
Required:
Prepare VL’s consolidated statement of cash flows for the year ended 30 June 20X8 using
'indirect method' in accordance with IFRS. (Ignore corresponding figures)
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Questions
CHAPTER 9 - IFRS 9: FINANCIAL INSTRUMENTS: RECOGNITION AND
MEASUREMENT
9.1.
AJI PANCA LTD
On 1 January Year 1 Aji Panca Ltd has the following capital and reserves.
Equity
Rs.
Share capital (Rs. 1 ordinary shares)
1,000,000
Share premium
200,000
Retained earnings
5,670,300
––––––––––
6,870,300
––––––––––
During Year 1 the following transactions took place.
1 January
An issue of Rs. 100,000 8% Rs. 1 redeemable preference shares at a
premium of 60%. Issue costs are Rs. 2,237. Redemption is at 100% premium
on 31 December Year 5. The effective rate of interest is 9.5%.
31 March
An issue of 300,000 ordinary shares at a price of Rs. 1.30 per share. Issue
costs, net of tax benefit, were Rs. 20,000
30 June
A 1 for 4 bonus issue of ordinary shares.
Profit for the year, before accounting for the above, was Rs. 508,500. The dividends on the
redeemable preference shares have been charged to retained earnings.
Required
Set out capital and reserves and liabilities resulting from the above on 31 December Year 1.
9.2.
PASSILA LTD
On 1 July 20X6, Passila Ltd, issued 20,000 8% debentures at a discount of 2.5% to Rs. 97.50
each. The security is redeemable in five years’ time. The interest on the debentures is payable
bi-annually on 30 June and 31 December.
On 31 December 20X6, the Company’s year-end date, the debentures were quoted on the
Karachi Stock Exchange for Rs. 96. The company accountant has suggested each of the
following as possible valuation basis for reporting the debentures liability on the statement of
financial position as at 31 December 20X6:
(i)
Face value of the debentures.
(ii)
Face value of the debenture plus interest payment for five years.
(iii)
Market value on the statement of financial position as at the year end.
Required
(a)
Determine the face value of the debentures and the proceeds accruing to the company
(b)
Determine the amount and explain the nature of the differences between the face value
and the market value of the debentures on 1 July, 20X6.
(c)
Distinguish between nominal and effective rate of interest.
(d)
Determine the nominal interest payable on the debentures for the year ended
31 December 20X6.
(e)
State arguments for or against each of the suggested alternatives for reporting the
debentures liability on the statement of financial position as at 31 December 20X6.
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Advanced accounting and financial reporting
9.3.
FINANCIAL INSTRUMENTS
(a)
Explain the IFRS 9 rules on the recognition and measurement of financial assets and
financial liabilities.
(b)
Explain how the following should be accounted for in accordance with IAS 32 and IFRS 9
in the financial statements to 31 December Year 3.
(i)
A 3% bond was purchased on 1 January Year 3 for Rs. 250,000. The nominal value
is Rs. 300,000 and redemption will be at par on 31 December Year 6. The coupon is
received annually in arrears. The effective interest rate on the bond is 9.7%. The
company intends to hold the bond until its maturity. The market value of the bond at
31 December Year 3 is Rs. 275,000.
(ii)
An investment was made in the equity shares of XYZ. 3,000 shares were purchased
(a 1% stake) at a cost of Rs. 10 per share on 1 April Year 1. A transaction fee of Rs.
300 was charged on the purchase. The entity intended to sell the shares within three
months but the market value of the investment continued to rise and so the
company decided not to sell in the near term. The market value of the shares over
the three years has been as follows:
Rs.000
32
34
35
31 December Year 1
31 December Year 2
31 December Year 3
(iii)
9.4.
The company issued a convertible bond at par on 31 December Year 3, raising Rs.
500,000. The coupon on the bond is 4%. The rate on an equivalent redeemable
bond is 7%. The bond can be redeemed at par on 31 December Year 6 or converted
into equity shares at a rate of five shares per Rs. 100. The bond has not been
classed as fair value through profit and loss.
CASCABEL LTD
Cascabel Ltd entered into a forward contract on 31 July 20X6 to purchase A$.2 million at a
contracted rate of Rs. 1: A$0.64 on 31 October 20X6. The contract cost was nil. Cascabel Ltd
prepares its financial statements to 31 August 20X6. At 31 August 20X6 an equivalent contract
for the purchase of A$2 million could be acquired at a rate of Rs. 1: A$0.70.
Required
(a)
Explain how this financial instrument should be classified and prepare the journal entry
required for its measurement as at 31 August 20X6.
(b)
Assume now that the instrument described above was designated as a hedging instrument
in a cash flow hedge, and that the hedge was 100% effective.
Explain how the gain or loss on the instrument for the year ended 31 August 20X6 should
now be recorded and why different treatment is necessary.
9.5.
FAIR VALUE HEDGE ACCOUNTING
X Ltd holds an inventory of tin. At 30th September 20X5 X Ltd decided to hedge this position with
a 6 months forward sale of 30 tonnes of the same grade of tin.
Relevant information
Tin inventory
(Rs.)
Forward
contract (Rs.)
Carrying amount of inventory at 30 Sept 20X5, at the lower
of cost and NRV
1,000,000
N/A
Fair values at 30 Sept 20X5
1,300,000
NIL
Fair values at 31 Dec 20X5
1,200,000
95,000
Fair values at 31 March 20X6, when the tin is sold and the
contract is closed
1,150,000
142,000
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Questions
Required
(a)
Prepare journals for the year ended 31 December 20X5
(b)
Prepare the journals that are necessary at 31 March 20X6
9.6.
CASH FLOW HEDGE ACCOUNTING
At 30th November 20X5, the company decided to acquire a new drilling machine from a foreign
supplier. The machine is essential, and there is absolutely no likelihood that the purchase will be
delayed.
The price of the machine is A$400,000, payable upon delivery which is anticipated to be
28 February 20X6.
Spot rate at 30th November 20X5 is Rs.0.70 = A$1.
In order to hedge the exchange rate risk, the company enters into a forward foreign exchange
contract to buy A$400,000 forward 3 months, at a rate of 0.70 (Rs. = A$1).
At 31 December 20X5, the forward rate in the market for 2 month delivery is 0.75.
The machine was duly delivered on 28 February, and the exchange rate ruling on that day of
payment was 0.80. The forward contract was closed out. It is the company’s accounting policy to
take any deferred gains/losses on a cash flow hedge of the acquisition of a non-financial asset,
against the cost of that asset (a basis adjustment).
For both situations, ignore the effect of time value of money and transaction costs.
Required
(a)
Prepare journals for the year ended 31 December 20X5
(b)
Prepare the journals that are necessary at 28 February 20X6
(Note: A$ is a fictional currency used for the purposes of this example)
9.7.
WATERS LTD
Waters Ltd acquired the following financial assets and liabilities in 20X6.
1
On 1 September, Waters acquired 2,000 Rs. 100 nominal units of 7% treasury stock 20Y2
for Rs. 104.10 per unit. The gross redemption yield at the date of purchase was 6.30%.
Waters does not intend to hold the treasury stock until maturity, as the cash may be
required in the meantime. Interest is paid annually in arrears.
2
Waters buys and sells goods in Constantia, a country whose currency is the Prif (PR). On
3 December Waters enters into a futures contract to sell PR500,000 on 30 April 20X7 at an
agreed price of PR1.98/Rs. 1. This contract is not part of a designated hedge. The cost of
entering into the contract was Rs. 750.
3
On 5 February Waters acquired 250,000 ordinary shares in Gilmour Ltd at Rs. 4.85 per
share incurring Rs. 35,000 attributable transaction costs.
4
On 1 July Waters sells goods to Mason for Rs. 500,000 on interest free credit payable
30 June 20X7. The imputed rate of interest is 11%.
5
On 30 April Waters acquired 1,000 Rs. 100 nominal units of 8.5% treasury stock 20X8 at
Rs. 107.10 per unit. The gross redemption yield is 5.9%. Waters intends to hold the
investment to maturity. Interest is paid annually in arrears.
6
On 26 December Waters purchased Rs. 25,000 of quoted company loan notes. This asset
has been designated as being held for short-term trading purposes.
7
On 24 December Waters sold 10,000 shares 'short' in Wright Ltd for Rs. 3.60 each, hoping
that the share price would fall so that it could clear its position by buying the shares in
January 20X7 at a lower price.
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On 31 December 20X6, the values are as follows:
1
Rs. 100 nominal units of 7% treasury stock 20Y2 are trading at Rs. 98.07 per unit at 31
December 20X6. The gross redemption yield at that date is 7.3%.
2
The futures rate for a Prif contract with a delivery date of 30 April 20X7 is PR1.99/Rs. 1.
3
The shares in Gilmour are now trading at Rs. 5.20 – Rs. 5.25 per share, having an
average of Rs. 5.05 during the year. Disposal costs would be 2% of the sale proceeds.
4
Amounts receivable from Mason remain outstanding at the reporting date. The imputed
interest rate for current sales is 12%.
5
The 8.5% treasury stock 20X8 is now trading at Rs. 101.50 per unit and the gross
redemption yield is currently quoted at 7.48%.
6
The loan notes are now worth Rs. 25,500 due to the market being more confident that the
interest will be paid in full and on time.
7
Shares in Wright Ltd are now trading at Rs. 3.30 each.
Required
Explain and calculate the impact of the above transactions on the financial statements of Waters
Ltd for the year ended 31 December 20X6.
9.8.
ARIF INDUSTRIES LIMITED
Arif Industries Limited (AIL) owns and operates a textile mill with spinning and weaving units.
Due to recurring losses, AIL disposed of the weaving unit for an amount of Rs. 100 million on
July 1, 20X5 and invested the proceeds in Pakistan Investment Bonds (PIBs).
Details of investment in PIBs are as follows:
(i)
The PIBs were purchased through a commercial bank at face value. The bank initially
charged premium and investment handling charges of Rs. 4,641,483. At the time of
purchase, AIL’s intention was to liquidate the investment after four years and utilize the
realized amount for expansion of its spinning business. The bank has agreed to
repurchase the PIBs on June 30, 20X9, at their face value.
(ii)
The mark-up on PIBs is 15% for the initial two years and 20% for the remaining two
years. The effective yield on investment at the time of purchase was 15.50%.
Required
(a)
Prepare an amortisation table showing the amortised cost and interest income over the life of
the loan asset.
Following on from the facts in part (a), suppose that on June 30, 20X7 AIL decided to defer the
expansion plan by one year. The bank agreed to extend the holding period accordingly and pay
20% interest in year 5 but reduced the repurchase price by 2%.
(b)
9.9.
Prepare an amortisation table showing the amortised cost and interest income over the life of
the loan after taking account of any necessary adjustment to the carrying amount of the loan
asset.
QASMI INVESTMENT LIMITED
On 1 January 20X9 Qasmi Investment Limited (QIL) purchased 1 million 12% Term Finance
Certificates (TFCs) issued by Taj Super Stores (TSS), which operates a chain of five Super
Stores. The terms of the issue are as under:
The TFCs have a face value of Rs. 100 each and were issued at a discount of 5%. These are
redeemable at a premium of 20% after five years.
Interest on the TFCs is payable annually in arrears on 31 December each year.
Effective interest rate calculated on the above basis is 16.426% per annum.
Due to a property dispute, TSS had to temporarily discontinue operations of two stores in 20Y0.
Consequently, TSS was unable to pay interest due on 31 December 20Y0 and 31 December
20Y1.
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At the time of finalization of accounts for the year ended 31 December 20Y0, QIL was quite
hopeful of recovery of the interest and therefore, no impairment was recorded. However, in 20Y1,
after a thorough review of the whole situation, QIL’s management concluded that it would be able
to recover the face value of the TFCs along with the premium on the due date i.e. 31 December
20Y3, but the interest for the years 20Y0 to 20Y3 would not be received. Accordingly, QIL
recorded impairment in the value of the TFCs on 31 December 20Y1.
In 20Y2, TSS reached an out of court settlement of the property dispute and the stores became
operational. Subsequently, QIL and TSS agreed upon a revised payment schedule according to
which the present value of the agreed future cash flows on 31 December 20Y2 is estimated at
Rs. 115 million.
Required
Prepare journal entries in the books of QIL for the years ended 31 December 20Y1 and 20Y2.
Show all the relevant computations.
9.10.
RASHID INDUSTRIES LIMITED
On 15 October 20X6, Rashid Industries Limited (RIL) made the following investments:
No. of shares
Percentage of
shareholding acquired
*Cost of investment
(Rs. in million)
Karim Limited (KL)
155,000
4%
20
Bashir Limited (BL)
135,000
2%
65
Name of Investees
* including transaction cost
Investment in KL was made with no intention to sell the shares while investment in BL was made
with the intention to sell the shares before 31 December 20X6.
The board of directors in its meeting held on 30 November 20X6 decided that since the future
prospects of BL are quite attractive, its shares should be held till 30 June 20X8. The market rate
on 30 November 20X6 was Rs. 621.
On 31 December 20X6, RIL decided to record an impairment loss of Rs. 5 million against
investment in KL. The market price of shares of KL and BL as on 31 December 20X6 was Rs. 80
and Rs. 600 respectively.
RIL’s broker normally charges transaction costs of 0.2%.
Required:
Explain the accounting treatment of above transactions in accordance with International Financial
Reporting Standards.
9.11.
LAHORE STEEL LIMITED
Lahore Steel Limited (LSL) issued 1 million six-year debentures on 1 January 20X5 at par value
of Rs. 100 each at a fixed rate of 6% per annum. Interest payable at the end of each year
whereas the principal is to be repaid in two equal instalments at the end of 20X9 and 20Y0.
Debentures were issued with an option to convert 10 debentures into 4 ordinary shares of LSL till
the date of first principal redemption. The liability was not designated as measured at fair value
through profit or loss on initial recognition.
The market interest rate for non-convertible debentures issued by entities having similar credit
risk and loan tenor is 1-Year KIBOR + 2% per annum.
On 1 January 20X6 LSL repurchased 100,000 debentures at a premium of Rs. 5 per debenture.
Transaction cost of Rs. 2 per debenture was incurred on this redemption.
The market interest rates and market values of LSL’s shares are given below:
Date
1-Year KIBOR
Market value per share (Rs.)
1 January 20X5
5%
200
1 January 20X6
6%
250
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Required:
Prepare journal entries in the books of LSL for the year ended 31 December 20X6.
9.12.
FRENCH LIMITED
On 3 January 20X5, French Limited (FL) purchased 15,000 debentures (having face value of Rs.
100 each) issued by Greek Limited. Debentures were purchased at Rs. 97 each. However, the
fair value of each debenture as on the date of purchase was Rs. 96 in the quoted market.
Transaction cost of Rs. 35,000 was also incurred on purchase of debentures. Coupon rate is
12% which is payable annually on 31 December whereas the effective interest rate is 12.6%.
FL classified the investment in debentures as financial asset at amortised cost. At initial
recognition, FL determined that debenture was not credit impaired.
On 31 December 20X6, FL determined that there had been a significant increase in credit risk
since the acquisition of the debentures.
On 31 December 20X7, FL determined that the debenture was credit impaired.
FL’s estimates of expected credit losses in respect of the investment in debentures at different
dates are given below:
Date
Life time
12 months
3 January 20X5
Rs. 54,500
Rs. 11,200
31 December 20X5
Rs. 54,500
Rs. 11,200
31 December 20X6
Rs. 62,600
Rs. 12,400
31 December 20X7
Rs. 70,900
Rs. 14,500
31 December 20X8
Rs. 70,900
Rs. 14,500
Annual interest has been received on time each year.
Required:
Prepare journal entries in the books of FL in respect of the above for the years ended 31
December 20X5 to 31 December 20X8.
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Questions
CHAPTER 10 - FINANCIAL INSTRUMENTS: PRESENTATION AND DISCLOSURE
10.1.
SERRANO LTD
On 1 October 20X5 Serrano Ltd issued Rs. 10 million 6% convertible loan stock on the following
terms:
The issue price was at par.
The loan stock is convertible into the company’s equity shares at the option of the stockholders
four years after the date of its issue (30 September 20X9) on the basis of 20 shares for each Rs.
100 of loan stock. Alternatively, it will be redeemed at par.
Ancho Services had advised that if Serrano Ltd had issued similar loan stock without the
conversion rights, then it would have had to pay an interest (coupon) rate of 10% on the loan
stock. This is because the terms of conversion to equity shares are favourable.
Ancho Services further advised that because it is almost certain that the loan stock holders will
exercise their right to convert to equity shares, the loan stock has the substance of equity and
can be included as such on the statement of financial position. This has the added advantage of
improving/reducing the company’s gearing (debt/equity) in comparison to what would be the case
with the issue of ‘straight’ loan stock.
The present value of Rs. 1 receivable at the end of each year, based on discount rates of 6% and
10% can be taken as:
Required
In relation to the 6% convertible loan stock, calculate the finance cost to be shown in the
statement of profit or loss and the extracts from the statement of financial position for the year to
30 September 20X6; and comment on Ancho Services’ advice.
10.2.
POBLANO LTD
Poblano Ltd issued Rs. 10 million of 4% convertible loan notes on 1 October 20X5, on which
interest is paid annually in arrears on 30 September. The loan notes are convertible into equity
shares of Poblano Ltd on 30 September 20X8 at the rate of 20 shares in Poblano Ltd for every
Rs. 100 of notes. Alternatively, the notes can be redeemed on that date for cash at par, at the
option of the note holder.
If Poblano Ltd had issued straight loan notes, redeemable at par after 3 years, it would have had
to pay interest at the rate of 7% in order to persuade investors to subscribe for them.
Required
Show how the convertible loan notes would be accounted for in the financial statements of
Poblano Ltd for the year to 30 September 20X6.
10.3.
PIQUIN LTD
(a)
Piquin Ltd issued 10 million 5% convertible Rs. 1 bonds 2021 on 1 January 20X6. The
proceeds of Rs. 10 million were credited to non-current liabilities and debited to bank. The
5% interest paid has been charged to finance costs in the year to 31 December 20X6.
The market rate of interest for a similar bond with a five years term but no conversion
terms is 7%.
Required
Explain AND demonstrate how this convertible instrument would be initially measured in
accordance with IAS 32 Financial Instruments: Presentation AND subsequently measured
in accordance with IFRS 9 Financial Instruments in the financial statements for the year
ended 31 December 20X6.
(b)
The directors of Piquin Ltd want to avoid increasing the gearing of the entity. They plan to
issue 5 million 6% cumulative redeemable Rs. 1 preference shares in 20X7.
Required
Explain how the preference shares would be classified in accordance with IAS 32 Financial
Instruments: Presentation, AND the impact that this issue will have on the gearing of
Piquin Ltd.
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10.4.
AJI LTD
Aji Ltd issued Rs. 6 million 7% convertible bonds on 1 January 20X6 at par. The bonds are
redeemable at par on 31 December 20X9 or convertible at that date on the basis of two Rs. 1
ordinary shares for every nominal Rs. 10 of bonds.
At the date of issue, the prevailing market rate for similar debt without conversion rights was 9%.
The interest due was paid on 31 December 20X6 and recorded within finance costs during the
year.
Required
10.5.
(a)
Explain how convertible instruments are initially recognised, in accordance with IAS 32
Financial Instruments: Presentation, and prepare the journal entry to record the issue of
the bonds by Aji Ltd.
(b)
(i)
Explain how the bonds will be subsequently measured, in accordance with IFRS 9
Financial Instruments: Recognition and Measurement, and prepare the journal entry
to record the subsequent measurement of the bonds in the financial statements of
Aji Ltd for the year to 31 December 20X6.
(ii)
Prepare extracts that illustrate how the bonds will be presented in the statement of
financial position of Aji Ltd as at 31 December 20X6.
CHILTEPIN LTD
Chiltepin Ltd issued Rs. 4 million 5% convertible bonds on 1 October 20X5 for Rs. 3.9 million.
The bonds have a four years term and are redeemable at par. At the time the bonds were issued
the prevailing market rate for similar debt without conversion rights was 7%. The effective interest
rate associated with the bonds is 7% and the liability is measured, in accordance with IAS 39
Financial Instruments: recognition and measurement, at amortised cost. The interest due was
paid and recorded within finance costs during the year.
Required
Prepare the accounting entries to record the issue of the convertible bonds and to record the
adjustment required in respect of the interest expense on the bonds for the year ended 30
September 20X6.
10.6.
HABENERO LTD
Habenero Ltd issued 6 million 5% cumulative Rs. 1 preference shares on 1 January 20X6 and 2
million Rs. 1 ordinary shares on 1 May 20X6.
Required
(a)
(b)
Explain, with reference to the principles of IAS 32 Financial Instruments:
Presentation how both of these instruments would be classified AND how their associated
dividends would be recorded in the financial statements of Habenero Ltd for the year
ended 31 December 20X6.
Habenero Ltd acquired 500,000 shares in X on 1 November 20X6 for Rs. 2.80 per share and
classified this investment as held for trading. Habenero Ltd paid 0.5% commission on the value
of the transaction to its broker. X’s shares were trading at Rs. 3.42 on 31 December 20X6.
Required
Prepare the journal entries to record:
(i)
the initial measurement of the investment at 1 November 20X6; and
(ii)
the subsequent measurement of this investment in the financial statements of Habenero
Ltd at 31 December 20X6.
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10.7.
PASHAM TELECOM LIMITED
On 1 October 20X6, Pasham Telecom Limited (PTL) raised Rs. 900 million by issuing 5-year
Term Finance Certificates (TFCs) at par value of Rs. 1,000 each carrying interest at a fixed rate
of 8% per annum. The interest is payable at the end of each quarter whereas principal will be
repaid in lump sum at the end of 5 years.
Considering the expected decline in interest rate, PTL entered into swap agreements (at market
rates) of an equal amount i.e. Rs. 900 million. The brokerage house which facilitated the
agreements was paid a brokerage of Rs. 1.0 million. The swap agreements would allow PTL to
receive a fixed rate of 6.5% per annum whereas PTL would pay a variable rate. Both payments
would be made at the beginning of each quarter. The swap agreements have the same maturity
dates as the TFCs.
All necessary documentation was completed on 1 October 20X6 when the variable interest rate
was 6.27% per annum.
On 31 December 20X6, as a result of a rise in market interest rates, the fair value of the TFCs fell
to Rs. 992 per TFC and the net fair value of the swap was Rs. 7.29 million (loss).
Required:
Explain how the above transactions should be accounted for in the books of PTL during the year
ended 31 December 20X6 assuming that hedging criteria are met. Show all relevant calculations.
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CHAPTER 11 - IAS 19: EMPLOYEE BENEFITS
11.1.
LABURNUM LIMITED
Laburnum Limited operates a defined benefit pension plan for its employees. At 1 January 20X6
the fair value of the pension plan assets was Rs. 2,600,000 and the present value of the plan
liabilities was Rs. 2,900,000.
The actuary estimates that the current and past service costs for the year ended 31 December
20X6 is Rs. 450,000 and Rs. 90,000 respectively. The past service cost is caused by an increase
in pension benefits. The plan liabilities at 1 January and 31 December 20X6 correctly reflect the
impact of this increase.
The interest cost on the plan liabilities is estimated at 8% and the expected return on plan assets
at 5%.
The pension plan paid Rs. 240,000 to retired members in the year to 31 December 20X6.
Laburnum Limited paid Rs. 730,000 in contributions to the pension plan and this included
Rs. 90,000 in respect of past service costs.
At 31 December 20X6 the fair value of the pension plan assets is Rs. 3,400,000 and the present
value of the plan liabilities is Rs. 3,500,000.
In accordance with the amendment to IAS 19 Employee Benefits, Laburnum Limited recognises
actuarial gains and losses in other comprehensive income in the period in which they occur.
Required
Calculate the actuarial gains or losses on pension plan assets and liabilities that will be included
in other comprehensive income for the year ended 31 December 20X6. (Round all figures to the
nearest Rs.000).
11.2.
JABEL LIMITED
Jabel Limited operates a defined benefit pension plan for its employees. At 1 July 20X5 the fair
value of the pension plan assets was Rs. 1,200,000 and the present value of the plan liabilities
was Rs. 1,400,000. The interest cost on the plan liabilities was estimated at 7% and the expected
return on plan assets at 4%.
The actuary estimates that the current service cost for the year ended 30 June 20X6 is
Rs. 300,000. Jabel Limited made contributions into the pension plan of Rs. 400,000 in the year.
The pension plan paid Rs. 220,000 to retired members in the year to 30 June 20X6.
At 30 June 20X6, the fair value of the pension plan assets was Rs. 1,400,000 and the present
value of the plan liabilities was Rs. 1,600,000.
In accordance with the amendment to IAS 19 Employee Benefits, Jabel Limited recognises
actuarial gains and losses in other comprehensive income in the period in which they occur.
Required
Calculate the net expense that will be included in Jabel Limited’s profit or loss AND the amounts
that would be included in other comprehensive income in respect of actuarial gains or losses for
the year ended 30 June 20X6. (Round all workings to the nearest Rs.000)
11.3.
KAGHZI LIMITED
Kaghzi Limited operates a defined benefit pension plan for its employees. At 1 January 20X6 the
fair value of the pension plan assets was Rs. 1,400,000 and the present value of the pension
plan liabilities was Rs. 1,700,000.
The actuary estimates that the service cost for the year to 31 December 20X6 is Rs. 320,000.
The interest cost on the plan liabilities is estimated at 7% and the expected return on plan assets
at 4% for the year to 31 December 20X6. The pension plan paid Rs. 170,000 to retired members
and Kaghzi Limited paid Rs. 580,000 in contributions to the pension plan for the year to
31 December 20X6.
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Questions
At 31 December 20X6, the fair value of the pension plan assets is Rs. 2,100,000 and the present
value of the pension plan liabilities is Rs. 2,400,000. In accordance with the amendment to IAS
19 Employee Benefits, Kaghzi Limited recognises actuarial gains and losses within other
comprehensive income in the period in which they occur.
Required
Calculate the actuarial gains or losses on pension plan assets and liabilities that will be included
in Kaghzi Limited’s other comprehensive income for the year ended 31 December 20X6. (Round
all figures to the nearest Rs.000).
11.4.
LASURA LTD
Lasura Ltd operates a defined benefit pension plan for its employees. At 1 July 20X5, the fair
value of the pension plan assets was Rs. 2,200,000 and the present value of the pension plan
liabilities was Rs. 2,400,000. The interest cost on the pension plan liabilities was estimated at 8%
and the expected return on pension plan assets at 5%.
The actuary estimates that the current service cost for the year ended 30 June 20X6 is
Rs. 500,000. Lasura Ltd made contributions into the pension plan of Rs. 300,000 and the
pension plan paid Rs. 450,000 to retired members in the year to 30 June 20X6. At 30 June 20X6
the fair value of the pension plan assets was Rs. 2,300,000 and the present value of the pension
plan liabilities was Rs. 2,700,000.
Actuarial gains and losses are included within the other comprehensive income of Lasura Ltd as
incurred.
Required
11.5.
(i)
Calculate the net expense that will be included in Lasura Ltd’s profit or loss for the year
ended 30 June 20X6, in accordance with IAS 19 Employee benefits.
(ii)
Calculate the amount that will be included in Lasura Ltd’s other comprehensive income for
the year ended 30 June 20X6, in accordance with IAS 19 Employee benefits.
UNIVERSAL SOLUTIONS
(a)
(b)
Explain the following as used in IAS 19 Employee Benefits:
(i)
The term ‘defined benefit pension plan’
(ii)
The basis to be adopted in measuring scheme assets
(iii)
The basis to be adopted in measuring scheme liabilities
(iv)
Actuarial gains and losses.
Universal Solutions operates a defined benefit pension scheme on behalf of its employees.
The company conducts an annual review of funding in conjunction with their actuaries who
have supplied the following information:
At 31 Dec Year 3
At 31 Dec Year 4
Rs.
Rs.
Present value of pension fund obligations
1,200
1,300
Market value of pension fund assets
1,000
1,100
Information relevant to the actuarial valuation:
Discount rate used to determine pension fund liabilities
5%
Current service cost
Rs. 100
Contributions to the pension fund
Rs. 140
Benefits paid out amounted to
Rs. 95
Required
(i)
Show the figures that would appear on the face of the statement of financial performance
as at 31 December Year 3 and Year 4.
(ii)
Construct a journal to explain the movement on the defined benefit net asset (or net
liability) during the year ended 31 December Year 4
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11.6.
DHA INTERIORS LTD
DHA Interiors Ltd operates two pension plans.
Pension Plan 1
The terms of the plan are as follows:
(i)
employees contribute 6% of their salaries to the plan
(ii)
DHA Interiors Ltd contributes, currently, the same amount to the plan for the benefit of the
employees
(iii)
On retirement, employees are guaranteed a pension which is based upon the number of
years’ service with the company and their final salary.
(iv)
This plan was closed to new entrants from 31 October 20X5, but which was open to future
service accrual for the employees already in the scheme.
The following details relate to the plan in the year to 31 October 20X6:
Rs. m
Present value of obligation at 1 November 20X5
200
Present value of obligation at 31 October 20X6
240
Fair value of plan assets at 1 November 20X5
190
Fair value of plan assets at 31 October 20X6
225
Current service cost
20
Pension benefits paid
19
Total contributions paid to the scheme for year to 31 October 20X6
17
Actuarial gains and losses are recognised in the ‘statement of other comprehensive income
(OCI)’.
Pension Plan 2
Under the terms of the plan, DHA Interiors Ltd does not guarantee any return on the contributions
paid into the fund. The company’s legal and constructive obligation is limited to the amount that is
contributed to the fund. The following details relate to this scheme:
Rs. m
Fair value of plan assets at 31 October 20X6
21
Contributions paid by company for year to 31 October 20X6
10
Contributions paid by employees for year to 31 October 20X6
10
The discount rates for the two plans are:
Discount rate
1 November 20X5
31 October 20X6
5%
6%
Required
(a)
Explain the nature of and differences between a defined contribution plan and a defined
benefit plan with specific reference to the company’s two schemes.
(b)
Show the accounting treatment for the two DHA Interiors Ltd pension plans for the year
ended 31 October 20X6 under IAS 19 ‘Employee Benefits’.
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Questions
CHAPTER 12 - IFRS 2: SHARE BASED PAYMENTS
12.1.
TOSHACK LTD
Toshack Ltd has granted 50 share appreciation rights to each of its 1000 employees on 1
January 20X3. The rights are due to vest on 31 December 20X6, with payment being made on
31 December 20X7. Assume that 75% of the awards vest. Shares prices were:
Rs.
01/01/20X3
22
31/12/20X3
27
31/12/20X6
31
31/12/20X7
28
Required
In accordance with IFRS 2, Share Based Payment;
(i)
(ii)
12.2.
What liability would be recorded on 31 December 20X6 for the share appreciation rights?
How would the settlement of the transaction be accounted for on 31 December 20X7.
IFRS 2
(a)
IFRS 2 requires an entity to recognise share-based payment transactions in its financial
statements. These include transactions with the employees or other parties where they are
to be settled in cash, other assets or equity instruments of the entity.
The IFRS identifies three types of share-based payment transaction and sets out the
measurement principles and specific requirements for each.
Required
(b)
(i)
Suggest why there was a need for a standard in this area.
(ii)
Identify and briefly explain the three types of share based payments recognised by
IFRS 2.
A client of your firm, a listed company with a 31 December year end, contacts you for
advice on a proposed share option scheme for its employees.
On 1 January Year 5, the client granted 100 options to each of its 500 employees. The
grant is conditional upon the employee working for the client over the next three years. At
the grant date, it is estimated that the fair value of each option is Rs. 15.
Calculate the expense in profit or loss for each year of the vesting period:
(i)
assuming that the client’s expectations throughout the vesting period are that all
options will vest; and alternatively
(ii)
assuming that the client’s best estimates of the proportion of options that will vest
are as follows:
Estimate at 31 December Year 5
85%
Estimate at 31 December Year 6
88%
With 44,300 options actually vesting at 31 December Year 7.
12.3.
SAVAGE LTD
Savage Ltd granted share options to its 300 employees on 1 October 20X4. Each employee will
receive 1,000 share options provided they continue to work for Savage Ltd for the following three
years from the grant date. The fair value of the options at the grant date was Rs. 11 each. In the
year ended 30 September 20X5, 10 employees left and another 30 were expected to leave over
the next two years. For the year ended 30 September 20X6, 20 employees left and another 15
are expected to leave in the year to 30 September 20X7.
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Required
Discuss the accounting treatment to be adopted for the share options and calculate the amount
to be recognised in the statement of profit or loss in respect of these options for the year ended
30 September 20X6. Prepare appropriate accounting entries.
12.4.
YORATH LTD
Yorath Ltd granted share options to its 600 employees on 1 October 20X3. Each employee will
receive 500 share options provided they continue to work for Yorath Ltd for four years from the
grant date. The fair value of each option at the grant date was Rs. 148.
The actual and expected staff movement over the 4 years to 30 September 20X7 is given below:
20X4 20 employees left and another 50 were expected to leave over the next three years.
20X5 A further 25 employees left and another 40 were expected to leave over the next two years.
20X6 A further 15 employees left and another 20 were expected to leave the following year.
20X7 No actual figures are available to date.
The sales director of Yorath Ltd has stated in the board minutes that he disagrees with the
treatment of the share options. No cash has been paid out to employees, therefore he fails to
understand why an expense is being charged against profits.
Required
12.5.
(a)
Calculate the charge to the statement of profit or loss for the year ended 30 September
20X6 for Yorath Ltd in respect of the share options and prepare the journal entry to record
this.
(b)
Explain the principles of recognition and measurement for share-based payments as set
out in IFRS 2 Share-based Payments so as to address the concerns of the sales director.
QUALTECH LTD
(a)
Qualtech Ltd granted share options to its 300 employees on 1 January 20X5. Each
employee will receive 1,000 share options provided they continue to work for Qualtech Ltd
for 3 years from the grant date. The fair value of each option at the grant date was Rs.
122.
The actual and expected staff movement over the 3 years to 31 December 20X7 is
provided below:
20X5: 25 employees left and another 40 were expected to leave over the next two years.
20X6: A further 15 employees left and another 20 were expected to leave the following
year.
Required
12.6.
(i)
Calculate the charge to Qualtech Ltd’s statement of profit or loss for the year ended
31 December 20X6 in respect of the share options and prepare the journal entry to
record this.
(ii)
Explain how the recognition and measurement of a share-based payment would
differ if it was to be settled in cash rather than in equity, in accordance with IFRS 2
Share-based Payments.
BRIDGE LTD
Bridge Ltd granted 1,000 share options to each of its 300 employees on 1 January 20X5, with the
condition that they continue to work for Bridge Ltd for 4 years from the grant date. The fair value
of each option at the grant date was Rs. 50.
20 employees left in the year to 31 December 20X5 and at that date another 65 were expected to
leave over the next three years. 23 employees left in the year to 31 December 20X6 and at that
date another 44 were expected to leave over the next two years.
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Required
12.7.
(i)
Calculate the charge to Bridge Ltd’s statement of profit or loss for the year ended 31
December 20X6 in respect of the share options and prepare the journal entry to record
this.
(ii)
Explain why, in accordance with IFRS 2 Share-based Payment, share options, such as
those granted by Bridge Ltd, generate a charge to the statement of profit or loss despite no
cash transaction having occurred.
CAPSTAN LTD
Capstan Ltd granted 1,000 share appreciation rights (SARs), to its 300 employees on 1 January
20X5. To be eligible, employees must remain employed for 3 years from the date of issue and
the rights must be exercised in January 20X4, with settlement due in cash.
In the year to 31 December 20X5, 32 staff left and a further 35 were expected to leave over the
following two years.
In the year to 31 December 20X6, 28 staff left and a further 10 were expected to leave in the
following year.
The fair value of each SAR was Rs. 80 at 31 December 20X5 and Rs. 120 at 31 December
20X6.
Required
Prepare the accounting entry to record the expense associated with the SARs, for the year to 31
December 20X6, in accordance with IFRS 2 Share-based Payments.
12.8.
NEWTOWN LTD
Newtown Ltd granted 1,000 share appreciation rights (SARs) to each of its 500 employees on 1
July 20X4. To be eligible for the rights, employees must remain employed by Newtown Ltd for 3
years from the date of grant. The rights must be exercised in July 20X7, with settlement due in
cash.
In the year to 30 June 20X5, 42 employees left and a further 75 were expected to leave over the
following two years.
In the year to 30 June 20X6, 28 employees left and a further 25 were expected to leave in the
following year.
The fair value of each SAR was Rs. 90 at 30 June 20X5 and Rs. 110 at 30 June 20X6.
Required
12.9.
(i)
Prepare the journal entry to record the expense associated with the SARs for the year
ended 30 June 20X6, in accordance with IFRS 2 Share-based payment.
(ii)
Explain, in accordance with IFRS 2 Share-based payment, how the recognition and
measurement of a share-based payment would differ, if it was to be settled in equity rather
than cash.
SINDH TRANSIT LTD
Sindh Transit Ltd granted share options to all of its 400 employees on 1 January 20X5. Each
employee will receive 1,000 share options provided they continue to be employed by Sindh
Transit Ltd for four years from the grant date. The fair value of an option at the grant date was
Rs. 220.
On the same date Sindh Transit Ltd granted 500 share appreciation rights to each of its
employees. To be eligible, employees again have to be employed by Sindh Transit Ltd for four
years from the grant date.
The rights are exercisable in the two-month period from 1 January 20X9 and will be settled in
cash. The fair value of each share appreciation right was Rs. 120 at 31 December 20X5 and
Rs. 140 at 31 December 20X6.
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The actual and expected future staff movements as at 31 December 20X5 and 31 December
20X6 are provided below.
20X5: 15 left and another 55 were expected to leave over the next three years.
20X6: a further 22 left and another 36 were expected to leave over the next two years.
Required
12.10.
(a)
Prepare, in accordance with IFRS 2 Share-based Payment, the accounting entries
required in the financial statements of Sindh Transit Ltd for the year to 31 December 20X6
in respect of the two financial instruments identified above.
(b)
Explain the main principle of recognition set out by IFRS 2 Share-based Payment for share
based payments AND why the treatment of the two financial instruments identified above
will differ in the statement of financial position.
XYX LIMITED
The financial statements of XYZ Limited for the year ended 30 June 20X6 are in the final stage of
preparation and the following matters are under consideration:
(a)
On 1 July 20X3, XYZ offered 5000 share options each to its 10 marketing managers and
10 back office managers. The offer is conditional upon completion of three years’ service
from the date the offer was given. It was estimated at the time of offer that two managers
from each department would leave the company before the completion of 3 years. The fair
market value of the company’s shares on 1 July 20X3 was Rs. 50 per share.
Other conditions and information are as follows:
(i)
Conditions specific to marketing managers:


Marketing manager can exercise the offer if the profit of the company increases by
10% per annum on average over the next three years.
The offer can be exercised at Rs. 18 per share at the completion of vesting period.
Profit for the first two years increased by 12% and 10% respectively. However, profit for the third
year has increased by 3% only.
(ii)
Conditions specific to back office managers:



Back office managers can exercise the offer if share price of the company increases
by 10% per annum on average over the next three years.
The offer can be exercised at Rs. 23 per share at the completion of vesting period.
On 1 July 20X3, fair value of these share options was Rs. 30 per option taking into
account the estimated probability that the necessary share price growth would be
achieved.
On 1 January 20X6, the share price declined. Considering the decline, XYZ modified the share
option scheme for back office managers by reducing the exercise price to Rs. 10 per share. The
fair value of the option immediately before and after the reduction in exercise price was Rs. 5 and
Rs. 14 respectively.
(iii)
Upto 30 June 20X5, there was no change in estimate regarding number of managers
leaving the company. However, during the year ended 30 June 20X6, three managers left
the company i.e. two from marketing and one from back office.
(b)
On 1 July 20X3, XYZ purchased 1 million five year bonds issued by Ali Manufactures
Limited (AML) at a premium of Rs. 5 per bond with the intention to hold them till maturity
i.e. 30 June 20X8. The bonds will be redeemed at their face value i.e. Rs. 100 per bond.
The transaction costs associated with the acquisition of the bonds were Rs. 1.5 million.
The coupon interest rate is 6% per annum while the effective interest yield at the time of
purchase was 4.5186%.
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Due to certain financial and liquidity issues, AML restructured the payment plan with effect from
30 June 20X6, after due consultation with bondholders. Under the revised plan the maturity date
was extended by one year. Further, the coupon rate was increased to 6.25% for 20X7 and 20X8
and 6.5% for 20X9.
The management of XYZ is of the view that due to restructuring the credit risk on the loan has
increased significantly. As a result, it estimates lifetime expected credit losses of Rs. 5 million on
the investment.
Required:
In accordance with the requirement of International Financial Reporting Standards, describe the
accounting treatment in respect of the above transactions in the financial statements of XYZ
Limited for the year ended 30 June 20X6.
12.11.
RAVI LIMITED
On 1 July 20X6 Ravi Limited (RL) offered 1000 share options to each of its 500 employees. The
offer is conditional upon completion of five years’ service from the date the offer was given. The
award of options would depend on attainment of the following additional conditions:
Condition 1: Average sales for the next five years is Rs. 300 million or more.
Condition 2: At the end of the 5th year, share price of the company exceeds Rs. 200 per share.
Market values of the options at grant date were estimated as under:
Rupees
Without taking into account any of the two conditions
50
Taking into account only condition 1
44
Taking into account only condition 2
38
Taking into account both the conditions
36
Following information is available at year end:
(i)
Sales for the year ended 30 June 20X7 was Rs. 210 million however it was estimated that
sales would increase by 20% each year.
(ii)
The share price was Rs. 160 per share.
(iii)
It was estimated that 15% of the employees would leave the company before completion
of five years.
Required:
Discuss how this transaction should be recorded in RL’s books of accounts for the year ended 30
June 20X7.
12.12.
COROLLA LIMITED
On 1 January 20X4, Corolla Limited (CL) granted share options to each of its 50 executives to
purchase CL’s shares at Rs. 1,000 per share. In this respect following information is available:
(i)
The share options will vest and become exercisable upon completion of 3 years provided
that:

The executives remain in service till the vesting date.

CL’s share price increases to Rs. 1,500 per share.
(ii)
Each executive will receive 4,000 share options if average annual gross profit during the
vesting period is atleast Rs. 900 million. However, if the average gross profit exceeds Rs.
1,000 million each executive would be entitled to 6,000 share options.
(iii)
On 1 January 20X6, CL extended the vesting period to 31 December 20X7 and reduced
the exercise price to Rs. 900 per share. On 1 January 20X6, fair value of each share
option was Rs. 580 for the original share option granted (i.e. before taking into account the
re-pricing) and Rs. 710 for re-priced share option.
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Following further information is also available:
1 Jan.
20X4
----------- 31 December ----------20X4
20X5
20X6
20X7
Executives in employment
50
47
44
43
42
Executives expected to leave during
remaining vesting period
12
8
4
2
-
NA
940
820
1,270
1,200
Gross profit for the year (Rs. in million)
Fair value of each share
(Rs.)
1,400
1,450
1,550
1,480
1,650
Fair value of each option
(Rs.)
600
650
580
650
750
At each year-end, CL estimated that gross profit for the future years would approximately be the
same as of current year.
Required:
Calculate the amounts recorded in respect of share options in CL’s financial statements for the
years ended 31 December 20X4, 20X5, 20X6 and 20X7 and explain the basis of your
calculation?
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Questions
CHAPTER 13 - DISPOSAL OF SUBSIDIARIES
13.1.
PATCHE LTD
Patche Ltd owns 85% of the ordinary share capital of Somers Ltd for many years. The shares
were bought for Rs. 765 million and Somers Ltd’s reserves at the time of purchase amounted
Rs. 60 million.
On 31 March 20X6, Patche Ltd. sold 120 million of Somers Ltd shares for Rs. 480 million. The
only entry made in respect of this transaction was the receipt of the cash, which was credited to
the “investment in subsidiary” account. No dividend was paid by either entity during the period.
The summarised financial statements of the companies are as follows:
Statements of profit or loss and other comprehensive income for the year ended to 30 June
20X6.
Patche Ltd
Somers Ltd
Rs.’m
Rs.‘m
Profit before tax
390
180
(120)
(60)
270
120
60
30
330
150
1,605
534
285
-
Inventories
960
570
Trade receivables
750
525
Cash and bank
240
267
3840
1896
1,500
600
930
510
2,430
1,110
Trade payables
885
513
Income tax
240
180
Provisions
285
93
3,840
1,896
Income tax expenses
Profit for the year
Other comprehensive income that will not be
reclassified to profit or loss net of tax
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 20X6
Non-current assets:
Property, plant & equipment
Investment in Somers Ltd
Current assets:
Equity interest
Share capital: Rs. 1 ordinary shares
Reserves
Current liabilities:
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There was no impairment loss in the group during the year.
Assume that the gain as calculated in the parent’s separate financial statement will be subject to
companies’ income tax at a rate of 30%, and that profit and other comprehensive income accrue
evenly throughout the year.
Patche Ltd. group policy is to measure non-controlling interest at fair value at the date of
acquisition.
The fair value of the non-controlling interest in Somers Ltd. was Rs. 135million at the date of
acquisition.
Required
Prepare the following
13.2.
(a)
Statement of profit or loss and comprehensive income and statement of changes in equity
of Patche Ltd for the year ended 30 June 20X6.
(b)
Consolidated statement of profit or loss and comprehensive income of Patche Ltd. for the
same period.
(c)
Consolidated statement of financial position as at 30 June 20X6.
DISPOSAL
At 31 December Year 1, Hoo owned 90% of the shares in Spool. At this date the carrying amount
of the net assets of Spool in the consolidated financial statements of the Hoo Group was Rs. 800
million. None of the assets of Spool are re-valued.
On 1 January Year 2, Hoo sold 80% of the equity of Spool for Rs. 960 million in cash.
The remaining shares in Spool held by Hoo are estimated to have a fair value of Rs. 100 million.
Required
Explain how the disposal of the shares in Spool should be accounted for in the consolidated
financial statements of the Hoo Group.
13.3.
PART DISPOSAL
On 1 January Year 2, P acquired 80% of the equity of S for Rs. 620 million in cash. On 30 June
Year 2 it sold 10% of the equity in S for Rs. 94 million. S did not issue any shares or make any
distribution to its shareholders in the year to 31 December Year 2. P uses the partial goodwill
method to account for the acquisition of S and no goodwill is attributed to the non-controlling
interest.
The net assets of S were as follows, at carrying value:
Rs. million
At 1 January Year 2
700
At 31 December Year 2
900
At 31 December Year 2, P carries out an impairment review and decides that the goodwill in its
investment in S has been impaired by Rs. 8 million.
Required
Explain how the disposal of the shares in S should be accounted for.
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Questions
13.4.
THE A GROUP
The summarised statements of financial position of A and its two subsidiaries B and C at 31
December Year 3 are shown below:
Summarised statements of financial position at 31 December Year 3
A
B
C
Rs.000
Rs.000
Rs.000
Investment in subsidiaries:
B
1,164
C
1,120
Other net assets
2,516
1,260
1,400
4,800
1,260
1,400
(Rs. 1 shares)
1,500
500
400
Accumulated profits
3,300
760
1,000
4,800
1,260
1,400
Ordinary share capital
The summarised statement of profit or loss for A and B for the year ended 31 December Year 4
are as follows:
A
B
Rs.000
Rs.000
Profit before tax
1,200
Taxation
(360)
––––––
840
(60)
––––––
190
(50)
––––––
790
(20)
––––––
170
3,300
––––––
4,090
––––––
760
––––––
930
––––––
Profit after tax
Dividends paid
Retained profit for year
Retained profit at start of year
Retained profits at end of year
250
Additional information:
(i)
A acquired 80% of the ordinary share capital of B on 1 January Year 0 when the reserves
of B were Rs. 420,000.
(ii)
A acquired 90% of the ordinary share capital of C on 1January Year 1 when the reserves
of C were Rs. 320,000.
(iii)
On 1 January Year 4, A disposed of 350,000 shares in C for Rs. 1,925,000. This
transaction has not yet been accounted for by A. The remaining investment in shares of C
at this date had a fair value of Rs. 44,000.
(iv)
There were no changes in the issued share capital of the subsidiaries since acquisition by
A.
(v)
None of the companies re-value any of their non-current assets.
(vi)
The A Group uses the partial goodwill method of accounting for acquisitions and no
goodwill is attributed to non-controlling interests. There has been no impairment of
goodwill.
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Required
Prepare A’s consolidated statement of profit or loss and show the movement on consolidated
equity reserves for the year to 31 December Year 4 and a consolidated statement of financial
position as at that date.
13.5.
BARTLETT LTD
Many years ago Bartlett Ltd bought 80% of the ordinary shares of Lymon Ltd for Rs. 175,000.
On 1 July 20X6 Bartlett sold all of these shares and used the proceeds (Rs. 212,000) to
purchase 65% of the ordinary shares of Zeigler Ltd on the same date.
Statements of profit or loss for all three companies for the year ended 31 December 20X6 were
as follows.
Bartlett Ltd
Lymon Ltd
Zeigler Ltd
Rs.
Rs.
Rs.
Revenue
1,926,500
521,600
792,400
Cost of sales
1,207,200)
(386,200)
(405,900)
Gross profit
719,300
135,400
386,500
Distribution costs
(207,500)
(79,200)
(198,200)
Administrative expenses
(192,600)
(26,100)
(107,100)
319,200
30,100
81,200
(110,000)
(9,500)
(27,500)
209,200
20,600
53,700
Profit before tax
Taxation
Profit after tax
No entries have been made in Bartlett Ltd’s statement of profit or loss relating to the sale of
Lymon Ltd. Lymon’s net assets were Rs. 140,000 at the 1st January 20X6.
Goodwill arising on the acquisition of Lymon Ltd was Rs. 25,400.
Required
Prepare the consolidated statement of profit or loss for Bartlett Ltd for the year ended 31
December 20X6.
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Questions
CHAPTER 14 - IFRS-5: NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
14.1.
SAUL
Saul operates its business through a number of divisions. It has a year end of 31 December. Set
out below are extracts from the draft financial statements of Saul for the year ended 31
December Year 1.
Statement of profit or loss for the year ended 31 December Year 1
Rs.000
Revenue
3,900
Cost of sales
(2,500)
––––––
Gross profit
1,400
Distribution costs
(300)
Administrative expenses
(800)
––––––
Profit before tax
300
Income tax expense
(90)
––––––
Profit for the period
210
––––––
Statement of financial position at 31 December Year 1
Assets
Rs.000
Rs.000
Non-current assets
Property, plant and equipment
1,900
Intangible assets
40
––––––
1,940
Current assets
Inventories
350
Trade and other receivables
190
Cash
90
––––––
630
u
Total assets
––––––
2,570
––––––
Equity and liabilities
Equity
Share capital
600
Retained earnings
1,700
––––––
2,300
Current liabilities
Trade and other payables
195
Current tax payable
75
––––––
270
––––––
Total equity and liabilities
2,570
––––––
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On 30 November Year 1 Saul made the decision to close Division A, which is located in a
different part of the country and covers a separate major line of business. This decision was
immediately announced to the press and to the workforce and, by the end of Year 1, a buyer had
been found.
The directors of Saul have calculated the following.
15% of the entity’s income and expenses for the year was attributable to Division A.
No tax is attributable to Division A.
Property, plant and equipment of Rs. 510,000 and payables of Rs. 10,000 in the above statement
of financial position relate to Division A. The fair value minus costs to sell of the property, plant
and equipment is Rs. 450,000.
Required
Redraft the above financial statements to meet the provisions of IFRS 5: Non-current assets held
for sale and discontinued operations. Work to the nearest Rs.000.
14.2.
SHAHID HOLDINGS
(a)
State the definition of both non-current assets held for sale and discontinued operations
and explain the usefulness of information for discontinued operations.
Shahid Holdings is in the process of preparing its financial statements for the year ended
31 October 20X6. The company’s main activity is in the travel industry mainly selling
package holidays (flights and accommodation) to the general public through the Internet
and retail travel agencies. During the current year the number of holidays sold by travel
agencies declined dramatically and the directors decided at a board meeting on 15
October 20X6 to cease marketing holidays through its chain of travel agents and sell off
the related high-street premises. Immediately after the meeting the travel agencies’ staff
and suppliers were notified of the situation and an announcement was made in the press.
The directors wish to show the travel agencies’ results as a discontinued operation in the
financial statements to 31 October 20X6. Due to the declining business of the travel
agents, on 1 August 20X6 (three months before the year end) Shahid Holdings expanded
its Internet operations to offer car hire facilities to purchasers of its Internet holidays.
The following are Shahid Holdings’s summarised statement of profit or loss results – years
ended:
31 October 20X6
31 October 20X5
Travel
Internet
Car hire
Total
Total
agencies
Rs.’000
Rs.’000
Rs.’000
Rs.’000
Rs.’000
Revenue
23,000
14,000
2,000
39,000
40,000
Cost of sales
(18,000) (16,500)
(1,500)
(36,000)
(32,000)
 
 

Gross profit/(loss)
5,000
(2,500)
500
3,000
8,000
Operating expenses
(1,000)
(1,500)
(100)
(2,600)
(2,000)
 
 

Profit/(loss) before tax
4,000
(4,000)
400
400
6,000
 
 

The results for the travel agencies for the year ended 31 October 20X5 were: revenue Rs.
18 million, cost of sales Rs. 15 million and operating expenses of Rs. 1·5 million.
Required
(b)
Discuss whether the directors’ wish to show the travel agencies’ results as a
discontinued operation is justifiable.
(c)
Assuming the closure of the travel agencies is a discontinued operation, prepare the
(summarised) statement of profit or loss of Shahid Holdings for the year ended 31
October 20X6 together with its comparatives.
Note: Shahid Holdings discloses the analysis of its discontinued operations on the
face of its statement of profit or loss.
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Questions
14.3.
PRIMA
Prima is a listed company with a year end of 31 December. It operates two businesses, the first
is the rental of luxury yachts and the second is a chain of luxury holiday villas in Europe. The
directors have requested your advice on the following matters.
Holiday villas
Prima’s policy is to carry the holiday villas at their re-valued amount, which, based on the most
recent valuation in 20X0, was Rs. 20m (historical cost was Rs. 10m). Prima is unsure how
frequently a revaluation of such properties is required and so has instructed a surveyor to provide
an up-to-date valuation as at 31 December Year 4. This valuation has provided the following
information:
Rs. million
Replacement cost
17
Value in use
28
Open market value
25
One of the villas has received very few bookings over the past two years and so a decision was
reached to exclude it from the Year 5 brochure. It is currently up for sale. The villa has a carrying
value of Rs. 1.25m. Its value in use is only Rs.0.85m and its expected market value is Rs. 1m,
before expected agents and solicitor’s fees of Rs. 50,000. The directors are unsure as to the
accounting treatment of this villa. A number of potential buyers have expressed an interest in the
property, and it is hoped that a deal will be negotiated in the first few months of Year 5.
Prima’s accounting policy is to not charge depreciation on the villas. Its justification is that the
villas are maintained to a high standard and have useful lives of at least 50 years.
Head Office
Over the past two years, Prima has built its own head office. Construction began on 1 October
Year 2 and finished on 1 June Year 4, although minor modifications meant that the company did
not relocate until 1 September Year 4.
The site cost Rs. 1m and the costs of construction were a further Rs. 8m. Prima took out a two
year loan of Rs. 5m on 1 October Year 2, at an interest rate of 9% per annum, to help fund the
work. In order to encourage businesses to operate in areas of high unemployment, the
government offered a Rs. 1.5m grant towards the cost of construction. The terms of settlement
were that payment would only be made upon completion of the building once a government
inspection had taken place. This inspection had not taken place by the year end, but Prima is
confident that the grant will be received shortly after the year end.
The company intends to use the head office for the next 50 years and, as for the villas, does not
intend to depreciate the land or buildings.
Yachts
Prima has spent the past year designing a new range of luxury yachts. Work was completed on 1
April Year 4 at a cost of Rs. 20m. During the construction, the economy took a downturn and the
company now believes that the market value of the yachts is only Rs. 17m, although the value in
use is estimated to be Rs. 18m. The engines of the yachts have a three years life, the interior has
a two year life, and the remainder should have a life of 15 years. The engine cost is believed to
represent 15% of the total cost of manufacture and the interior approximately 25%.
Required
Explain the accounting issues relating to the villas, head office and yachts, referring to relevant
IFRS guidance. Where possible, numerical information relating to the 31 December Year 4
financial statements should be provided.
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14.4.
LEXUS LIMITED
Following information pertains to divisions A, B and C of Lexus Limited (LL):
i.
Division A was classified as held for sale in 20X6 but ceased to classify as held for sale in
20X7.
ii.
Division B was classified as held for sale in 20X6 and sold during 20X7.
iii. Division C was classified as held for sale at the start of 20X7 and sold during 20X7.
iv. All the three divisions are/were major lines of business of LL.
Based on the above information, a recently appointed accountant suggested the following
classification/presentation of these divisions in LL’s financial statements for the year ended 31
December 20X7 (20X6 shown as comparative):
Statement of financial position
Statement of comprehensive income
20X7
20X6
20X7
20X6
Division A
*Normal
*Normal
Continuing
operation
Discontinued
operation
Division B
Not
Held for sale
Discontinued
operation
Continuing
operation
Division C
Not
Held for sale
Discontinued
operation
Continuing
operation
*Not classified as held for sale
Required:
Prepare the revised table showing the correct classification/presentation of the divisions in LL’s
financial statements for the year ended 31 December 20X7.
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Questions
CHAPTER 15 - IFRS 13: FAIR VALUE MEASUREMENT
15.1.
MONIBA LIMITED
Moniba Limited holds an asset that is traded in three different active markets.
Relevant information about the asset in the three markets is as follows:
Market A
Market B
Market C
50%
30%
20%
Market share in %
--------------- Rs. per unit - -------------Entry price
30,500
31,500
30,600
Exit price
29,500
30,500
29,600
Transaction cost
700
1,500
1,000
Transport cost
800
1000
400
Required:
Identify principal and most advantageous markets along with reasons thereof. Also calculate the
fair value of the asset in these markets
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CHAPTER 16 - IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS
16.1.
PARVEZ LIMITED
The following transactions took place at Parvez Limited (PL).
(1)
On 5 March 20X7 PL sold goods to a bank for Rs.18m cash and agreed to repurchase the
goods for Rs.19m cash on 5 July 20X7. The goods will be shifted to a storage facility under
bank’s control and security.
(2)
On 31 March PL’s car manufacturing division consigned several vehicles to independent
dealers for sale to third parties. The sales price to the dealer is PL’s list price at the date of
sale to third parties. If a vehicle is unsold after six months, the dealer has a right to return
the vehicle to PL within next fifteen days.
Required
Discuss how the above transactions should be accounted for in the books of accounts of Parvez
Limited.
16.2.
SACHAL LIMITED
Sachal Limited (SL):
(a)
Sells standard computer software package meant for small and medium sized restaurant
management. This software package is sold:

at price of Rs. 1.5 million payable before delivery,

with thirty days trial time, and

without any maintenance support after trial time
As per practice, it takes around six months for the customers to use the package
independent of any support from SL. Practically, SL has to provide on-site support service
for at least six months to almost all customers free-of-cost. However, in case of customer’s
request for support beyond six months, SL provides services under a formal paid service
contract.
(b)
Provides maintenance and support for the above standard software package at a price of
Rs. 0.3 million per annum.
(c)
Provides designing and development of customized software to customers. Payment is
made monthly by customers on the basis of chargeable hours of developers of SL. First
year maintenance service is provided free-of-cost. Subsequent maintenance service is
provided at the rate of 10% of the total contract price. Thereafter, for next three years
maintenance service is provided at 5% of the contract price per annum.
Required
Explain the considerations to be taken into account in determining accounting for revenue by
Sachal Limited.
16.3.
BRILLIANT LIMITED
Brilliant Limited (BL) manufactures and sells plastic card printing machines with laminators. A
machine-specific card printing software is provided as a must part of the printing machine. BL
also sells plastic cards imported from Thailand.
BL agreed to supply the following to, Proud Learners (PL), a country-wide school network:

15 Card printing machines – Available in ready stock

8 Laminators – Would require 30 days to deliver

100,000 Plastic cards – Available in ready stock
A lump sum price of Rs.9.2 million for the total contract has been agreed between BL and school
network.
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Questions
Cost and list prices of the goods are:
Item
Price (Rs.)
Card printing machines
Cost (Rs.)
800,000
Laminators
400,000
200,000
Plastic cards
12
5
BL does not sell printing machine without laminator. However, in order to get this order BL went
against its policy. There is another supplier of imported card printing machine of almost similar
specification. This supplier sells the machine at Rs.750,000.
In most recent customers’ surveys printing machine of BL has been given 7 out of 10 points as
against 9 out of 10 given to competitors’ imported machine. There is no supplier of laminator in
the market.
Required
Identify performance obligations and allocate the transaction price to the identified performance
obligations.
16.4.
WAQAS LIMITED
Waqas Limited (WL) enters into a contract of construction of a reverse osmosis plant for the
manufacturing unit of Ali Chemical Limited (ACL) for Rs.20 million, for which WL estimated cost
is Rs.12 million. This included supply and installation of plant and related construction work. The
project is to be completed within 18 months. WL measures performance on the basis of cost
incurred.
At the end of seventh month ACL and WL agreed to modify the contract by adding construction
of an additional water reservoir at a price of Rs.2.5 million, which will supply drinking water to a
sister concern of ACL. The additional cost is estimated as Rs.1.8 million by WL. At the end of
seventh month WL incurred 4.2 million on the project.
At the end of tenth month ACL and WL agreed to modify the contract by increasing the size of
water reservoir that was included in the original design of the project. ACL and WL agreed to an
additional consideration of Rs.1 million, for which WL will incur an additional cost of Rs.1 million.
At the end of seventh month WL incurred Rs. 7.2 million on the plant project and Rs. 0.72 million
on additional reservoir.
At the end of sixteenth month ACL and WL agreed to modify the contract by adding pumping and
piping facility from plant to the manufacturing unit of ACL for a consideration of Rs.3 million. This
facility was part of the project, but at the inception this contract was awarded to another
contractor, which was terminated by ACL. The cost to be incurred by WL was estimated as
Rs.2.8 million. At the end of sixteenth month WL incurred Rs.11.7 million on the plant project and
Rs.1.35 million on additional reservoir.
Required
Advise how these transactions should be recognized in the books of Waqas Limited.
16.5.
ZEBRA LIMITED
During the year ended 31 December 20X7, following transactions were made by Zebra Limited
(ZL):
i.
On 1 October 20X7 ZL purchased a piece of land from Cow Limited (CL) having fair value of
Rs. 230 million. According to the agreement, CL has the option to receive:

75,000 shares of ZL to be issued on 30 April 20X8; or

Cash equivalent to the value of 70,000 ZL’s shares to be paid on 28 February 20X8.
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The actual/estimated fair values of ZL’s share at various dates were as follows:
Date
Fair value per share
ii.
1-Oct-20X7
31-Dec-20X7
28-Feb-20X8
30-Apr-20X8
Rs. 3,000
Rs. 2,900
Rs. 3,300
Rs. 3,400
On 1 April 20X7 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of
which Rs. 50 million was paid immediately. The balance amount is payable on 1 April 20X9.
A mega social media and print media campaign was launched to promote the channel at a
cost of Rs. 10 million. The transmission of the channel started on 1 August 20X7.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since
the renewal cost is significant, the management intends to renew the license only once and sell it
at the end of 8 years.
In the absence of any active market, the management has estimated that residual value of the
license would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended
31 December 20X7.
16.6.
HAWKS LIMITED
Draft consolidated financial statements of Hawks Limited (HL) for the year ended 31 December
20X7 show the following amounts:
Rs. in million
Total assets
2,500
Total liabilities
1,610
Total comprehensive income
659
During the process of finalisation, following matters have been noted:
i.
HL signed a contract with one of its customers, Rhino Limited (RL). Under the terms of the
contract, HL is required to:

produce a series of 5 television advertisements. Each completed advertisement has to
be approved by an independent agency for a minimum 3-star rating. After approval, copy
of the advertisement would be provided to RL who can then use it for other campaigns.
HL has no enforceable right to payment against any under production advertisement.

arrange airtime of 120 minutes for broadcasting of each advertisement. The primary
responsibility for broadcasting of these advertisements lies with HL.
HL is entitled to Rs. 80 million for the whole contract and bonus of Rs. 2 million for each
advertisement if a 5-star rating is attained.
HL considers all advertisements as equal units. The expected cost of producing each
advertisement and its broadcasting is Rs. 5 million and Rs. 9 million respectively. HL expects to
earn mark-up of 30% and 20% respectively on similar services to other clients. Historically,
advertisements produced by HL have received the minimum 3-star rating but 5-star rating is
received occasionally.
As at 31 December 20X7:

production of 3 advertisements has been completed. Two of them have received 5-star
rating whereas one has received 3-star rating. HL expects that at least one of the remaining
advertisements would get 5-star ratings.
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
broadcasting of first two advertisements has been completed whereas 70% time of the third
advertisement has been broadcasted. Bookings have been made for the broadcasting of
remaining time of third advertisement and entire time of fourth advertisement.

details of the actual cost incurred on this project are as follows:
Production cost
Broadcasting cost
Advertisement
----------- Rs. in million ----------1
4.7
8.5
2
5.6
9.2
3
4.8
8.9
4
3.1*
9.0
* in process
All the above costs have been paid and charged to profit or loss account. HL had received Rs. 40
million from RL by 31 December 20X7 which has been credited to advance from customers
account.
Required:
Determine the revised amounts of total assets, total liabilities and total comprehensive income
after incorporating impact of the above adjustments, if any.
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CHAPTER 17 - IFRS 16: LEASES
17.1.
X LTD
X Ltd is considering acquiring a machine. It has two options; cash purchase at a cost of Rs.
11,420,000 or a lease.
The terms of the lease are as follows:
(i)
The lease period is for four years from 1 January 20X6 with an annual rental of Rs.
4,000,000 payable on 31 December each year.
(ii)
The lessee is required to pay all repairs, maintenance and other incidental costs.
(iii)
The interest rate implicit in the lease is 15% p.a.
Note:
Estimated useful economic life span of the machine is four years.
Required
17.2.
(a)
Prepare a schedule of the allocation of the finance charges in the books of X Limited for
the entire lease period.
(b)
Prepare an extract of the Statement of Financial Position of X Limited for the year ended
31 December 20X6.
PROGRESS LTD
Progress Ltd. acquired a machine from Fine Rentals Ltd. on January 3, 20X6 under a lease
agreement extending over three years.
The agreement required them to make an initial deposit of Rs. 1,280,000 to be followed by three
annual payments of Rs. 800,000 on 31 December each year starting from 20X6.
The cash price of the machinery was Rs. 3,200,000 and Fine Rentals Ltd. added 12% interest
which was duly communicated to Progress Ltd.
The annuity method is used to allocate interest.
Required
17.3.
(a)
Compute the interest element and the capital portion of the annual repayments; and
(b)
Show the journal entries that will record the transaction resulting from the lease
agreement.
MIRACLE TEXTILE LIMITED
On 1 July 20X4, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank.
Details of the lease are as follows:
(i)
Cost of machine is Rs. 20 million.
(ii)
The lease term and useful life is 4 years and 10 years respectively.
(iii)
Instalment of Rs. 5.80 million is to be paid annually in advance on 1 July.
(iv)
The interest rate implicit in the lease is 15.725879%.
(v)
At the end of lease term, MTL has an option to purchase the machine on payment of
Rs. 2 million. The fair value of the machine at the end of lease term is expected to be
Rs. 3 million.
MTL depreciates the machine on the straight line method to a nil residual value.
Required
Prepare relevant extracts of the statement of financial position and related notes to the financial
statements for the year ended 30 June 20X6 along with comparative figures. Ignore taxation.
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17.4.
ACACIA LTD
On 1 April 20X5 Acacia Ltd entered into the following lease agreements. The terms of each lease
are as follows:
(1)
Plant with a fair value of Rs. 275,000 was leased under an agreement which requires
Acacia Ltd to make annual payments of Rs. 78,250 on 1 April each year, commencing on
1 April 20X5, for four years. After the four years Acacia Ltd has the option to continue to
lease the plant at a nominal rent for a further three years and is likely to do so as the asset
has an estimated useful life of six years. The present value of the lease payments is Rs.
272,850. Acacia Ltd is responsible for insuring and maintaining the plant during the period
of the lease.
(2)
Office equipment with a fair value of Rs. 24,000 was leased under a non-cancellable
agreement which requires Acacia Ltd to make annual payments of Rs. 6,000 on 1 April
each year, commencing on 1 April 20X5, for three years. The lessor remains responsible
for insuring and maintaining the equipment during the period of the lease. The equipment
has an estimated useful life of ten years. The present value of the lease payments is Rs.
16,415.
Acacia Ltd allocates finance charges on an actuarial basis. The interest rate implicit in both of the
leases is 10%.
Required
Prepare all relevant extracts from Acacia Ltd's financial statements for the year ended 31 March
20X6 in respect of the above leases. The only notes to the financial statements required are
those in respect of lease liabilities or commitments.
17.5.
SHOAIB LEASING LIMITED
Shoaib Leasing Limited (the lessor) has entered into a three year agreement with Sarfaraz
Limited (the lessee) to lease a machine with an expected useful life of 4 years. The cost of
machine is Rs. 2,100,000.
The following information relating to lease transaction is available:
(i)
Date of commencement of lease is July 1, 20X6.
(ii)
The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease term,
the value of the machine will be Rs. 300,000.
(iii)
Lease instalments of Rs. 860,000 are payable annually, in arrears, on June 30.
(iv)
The implicit interest rate is 12.9972%.
Required
(a)
Prepare the journal entries for the years ending June 30, 20X7, 20X8 and 20X9 in the
books of lessor. Ignore tax.
(b)
Produce extracts from the statement of financial position including relevant notes as at
June 30, 20X7 to show how the transactions carried out in 20X7 would be reflected in
the financial statements of the lessor.
(Disclosure of accounting policy is not required.)
17.6.
AKBAR LTD
Akbar Ltd. (AL) prepares financial statements on 31 March each year. On
1 April Year 4, AL sold a machine to another company, Shahwez Ltd. (SL), for Rs.850,000 and
then leased it back under a ten year arrangement. AL had purchased the machine exactly ten
years previously for Rs.500,000 and had charged total depreciation of Rs.60,000 on the machine
up to the date of disposal. Assume that the transfer of machine by the seller-lessee satisfies the
requirements of IFRS 15.
Details of the sale and leaseback arrangement are as follows:
Consideration received from SL Rs.850,000
Fair value at date of disposal Rs.550,000
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Lease rentals (payable at the end of each year) is Rs.100,000 and interest rate implicit in the
lease is 10% p.a
Required
How AL should reflect in its books of accounts:
17.7.
a)
Right-of-use retained by AL
b)
Gain / loss on rights transferred
ALI LIMITED
Ali Limited entered into a sale and leaseback arrangement with a bank on
1 April 20X5. The arrangement involved the sale at fair value of plant and machinery to the bank
for Rs.1,440,000.
This amount has been credited to Ali Limited’s operating income. The carrying amount of the
plant and machinery was Rs.840,000 and its remaining useful life was five years at 1 April 20X5.
No depreciation has been charged in respect of this plant and machinery for the year ended 31
March 20X6.
Under the terms of the lease, Ali Limited is to pay five annual payments at
31 March each year, of Rs.360,000 (in arrears). The first payment has been made and has been
debited to operating costs. The interest rate implicit in the lease is 8%. The transfer of asset does
not satisfy the requirements of IFRS 15.
Required
Explain how the above transaction should be accounted for, with all relevant calculations, in the
financial statements for the year ended 31 March 20X6.
17.8.
MOAZZAM TEXTILE MILLS LIMITED
Moazzam Textile Mills Limited (MTML) is facing severe financial difficulties. To improve the cash
flows, the management has decided to sell and lease back three power generators of the
company under three different sale and lease back arrangements which were signed on August
15, 20X6. At the same time, MTML enters into a contract with the buyer-lessor for the right to use
the generators for 5 years, with annual payments of Rs.1,000,000 each for Generator A and
Generator B and Rs.1,500,000 for Generator C, payable at the end of each year. The interest
rate implicit in the lease is 4.5%, The related information as on
August 15, 20X6 is given below:
Cost
Generator A
Generator B
Generator C
Rs.000
10,000
12,000
10,000
Carrying
Value
Rs.000
7,500
6,000
7,000
Fair Value
Rs.000
6,000
5,000
10,000
Value in
Use
Rs.000
6,500
5,000
12,000
Amount
of Financing
Rs.000
6,000
6,000
10,000
Required
Prepare the accounting entries that should be recorded by the company on August 15, 20X6 in
respect of the above transactions.
Note: Cost of making sale is negligible. Ignore tax and deferred tax implications, if any.
17.9.
MODIFICATION THAT DECREASES THE SCOPE OF THE LEASE (IFRS 16,
ILLUSTRATIVE EXAMPLE 17)
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease
payments are CU 50,000 payable at the end of each year. The interest rate implicit in the lease
cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is
6 per cent per annum. At the beginning of Year 6, Lessee and Lessor agree to amend the
original lease to reduce the space to only 2,500 square metres of the original space starting from
the end of the first quarter of Year 6. The annual fixed lease payments (from Year 6 to Year 10)
are CU30,000. Lessee’s incremental borrowing rate at the beginning of Year 6 is 5 per cent per
annum.
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Required
How the lessee should reflect in its books of accounts:
a) Right-of-use retained
b) Lease liability
17.10.
MODIFICATION THAT BOTH INCREASES AND DECREASES THE SCOPE OF THE
LEASE (IFRS 16, ILLUSTRATIVE EXAMPLE 18)
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease
payments are CU100,000 payable at the end of each year. The interest rate implicit in the lease
cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is
6 per cent per annum. At the beginning of Year 6, Lessee and Lessor agree to amend the
original lease to;
a) include an additional 1,500 square metres of space in the same building starting from the
beginning of Year 6 and
b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500
square metres is CU150,000 payable at the end of each year (from Year 6 to Year 8).
Lessee’s incremental borrowing rate at the beginning of Year 6 is 7 per cent per annum.
Required
How the lessee should account for;
a) Pre-modification right-of-use and lease liability
b) At the effective date of modification
c) Decrease in the lease term
d) Increase in the leased space
17.11.
SUBLEASE CLASSIFIED AS A FINANCE LEASE (IFRS 16, ILLUSTRATIVE EXAMPLE
20)
Head lease — An intermediate lessor enters into a five-year lease for 5,000 square metres of
office space (the head lease) with Entity A (the head lessor).
Sublease — At the beginning of Year 3, the intermediate lessor subleases the 5,000 square
metres of office space for the remaining three years of the head lease to a sublessee.
Required
How this transaction is accounted for in the books of intermediate lessor.
17.12.
SUBLEASE CLASSIFIED AS AN OPERATING LEASE (IFRS 16, ILLUSTRATIVE
EXAMPLE 21)
Head lease — An intermediate lessor enters into a five-year lease for 5,000 square metres of
office space (the head lease) with Entity A (the head lessor).
Sublease — At commencement of the head lease, the intermediate lessor subleases the 5,000
square metres of office space for two years to a sublessee.
Required
How this transaction is accounted for in the books of intermediate lessor
17.13.
TRACK LIMITED
On 1 July 20X4 Track Limited (TL) sold its property to Strong Bank Limited (SBL) for Rs. 600
million. The net carrying amount and market value of the property on 1 July 20X4 were Rs. 240
million and Rs. 800 million respectively. The remaining useful economic life of the property was
15 years. Under the terms of agreement, TL continues to occupy the property and is also
responsible for its maintenance. As consideration of occupation rights,
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TL pays rent of Rs. 90 million per annum, payable in arrears.
TL has the option to repurchase the property on 30 June 20X6 at Rs. 550 million. TL charges
depreciation on straight-line basis.
TL’s cost of equity is 10% whereas incremental borrowing rate is 11.052% per annum.
Applicable income tax rate is 30%.
Required:
a) Prepare accounting entries to record the above transaction for the year ended 30 June 20X5
and give brief explanation of the accounting treatment worked out by you with reference to
the relevant International Financial Reporting Standards.
b) Prepare accounting entries to record the transactions for the year ended 30 June 20X6
if TL does not exercise the option to repurchase the property on 30 June 20X6.
17.14.
PATEL LIMITED
a) Following are the details of lease related transactions of Patel Limited (PL):
On 1 July 20X5 PL acquired a plant for lease term of 5 years at Rs. 18 million per annum,
payable in arrears. Fair value and useful life of this plant as on 1 July 20X5 were Rs. 60
million and 6 years respectively. Bargain purchase option at the end of lease term would be
exercisable at Rs. 1 million. On July 20X5 PL’s incremental borrowing rate was 9% per
annum.
After one year, PL sub-let this plant for Rs. 21 million per annum, payable in arrears for lease
term of 5 years. Implicit rate of this transaction was 11% per annum.
b) On 1 July 20X4, PL acquired a building for its head office for lease term of 8 years at Rs. 50
million per annum, payable in arrears.
However, after the board’s decision of constructing own head office building, PL negotiated
with the lessor and the lease contract was amended on July 20X6 by reducing the original
lease term from 8 to 6 years with same annual payments.
Incremental borrowing rates on 1 July 20X4 and 1 July 20X6 were 12% and 10% per annum
respectively.
Required:
Prepare the extracts relevant to the above transactions from PL’s statements of financial
position and profit or loss for the year ended 30 June 20X7, in accordance with the
International Financial Reporting Standards. (Comparatives figures and notes to the financial
statements are not required)
17.15.
MOTORS LIMITED
On 1 January 20X5, Datsun Motors Limited (DML) acquired a machine on lease through Bolan
Leasing Company (BLC) to manufacture components of a new model of vehicle, on the following
terms:
i.
Non-cancellable lease period is 7 years.
ii.
The agreement contains an option for DML to extend the lease for further 3 years in which
case the legal title of the machine will be transferred to DML at the end of 10 years.
iii. Lease instalments are payable annually in advance as under:

first seven instalments at Rs. 80 million each.

three instalments at Rs. 70 million each for the optional period.
DML also incurred initial direct cost of Rs. 15 million for the lease. DML's incremental borrowing
rate on 1 January 20X5 was 8% per annum. Useful life of the machine is 12 years.
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Questions
On commencement of the lease, DML was reasonably certain that the option to extend the term
will be exercised.
However, after first year of production of the new model, DML assessed that the model is not
popular in the market. Therefore, in 20X6, DML concluded that it is not reasonably certain that
DML would exercise the option to extend the lease for three years. DML's incremental borrowing
rate on 1 January 20X6 was 9% per annum.
After another disappointing year of the new model, DML negotiated with BLC and the lease
contract was amended on 1 January 20X7 by reducing the original lease term from 7 years to 5
years with the same annual payments. DML's incremental borrowing rate on 1 January 20X7 was
10% per annum.
Required:
Determine the amounts of ‘Right of use asset’ and ‘Lease liability’ as at 31 December 20X5,
20X6 and 20X7 and reconcile the opening and closing balances of each year.
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CHAPTER 18 - IAS 12: INCOME TAXES
18.1.
SHAKIR INDUSTRIES
Given below is the statement of profit or loss and other comprehensive income of Shakir
Industries for the year ended December 31, 20X6:
20X6
Rs. m
143.00
(96.60)
46.40
(28.70)
17.70
3.40
21.10
(5.30)
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Other income
Profit before interest and tax
Financial charges
Profit before tax
15.80
Following information is available:
(i)
Operating expenses include an amount of Rs.0.7 million paid as penalty to SECP on noncompliance of certain requirements of the Companies Act, 2017.
(ii)
During the year, the company made a provision of Rs. 2.4 million for gratuity. The
actual payment on account of gratuity to outgoing members was Rs. 1.6 million.
(iii)
Lease payments made during the year amounted to Rs.0.65 million which include
financial charges of Rs.0.15 million. As at December 31, 20X6, obligations against assets
subject to finance lease stood at Rs. 1.2 million. The movement in assets held under
finance lease is as follows:
Rs. m
Opening balance – 01/01/20X6
2.50
Depreciation for the year
(iv)
(0.7)
Closing balance – 31/12/20X6
The details of owned fixed assets are as follows:
Opening balance – 01/01/20X6
Purchased during the year
1.80
Accounting
Tax
Rs. m
Rs. m
12.50
10.20
5.3
5.3
Depreciation for the year
(1.10)
(1.65)
Closing balance – 31/12/20X6
16.70
13.85
(v)
Capital work-in-progress as on December 31, 20X6 include financial charges of Rs. 2.3
million which have been capitalised in accordance with IAS-23 “Borrowing Costs”.
However, the entire financial charges are admissible, under the Income Tax Ordinance,
2002.
(vi)
Deferred tax liability and provision for gratuity as at January 1, 20X6 was Rs.0.55
million and Rs.0.7 million respectively.
(vii)
Applicable income tax rate is 35%.
Required
Based on the available information, compute the current and deferred tax expenses for the
year ended December 31, 20X6.
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18.2.
DWAYNE LTD (PART 1)
The following information has been obtained in order to allow completion of Dwayne Ltd’s
deferred tax balances as at 31st December 20X5.
Statement of financial position at 31st December 20X5 - Extracts
Carrying amount
Rs. 000
Assets
Land & buildings
Plant and equipment
Cost of investment in Larry
Investments
Dividend receivable
Liabilities
Long-term debt
Trade payables
Defined benefit liability
Deferred tax liability (31st December 20X4)
Tax base
Rs. 000
45,500
68,000
750
72,000
150
17,500
26,000
750
65,000
-
20,500
9,500
1,000
21,000
9,500
13,500
(i)
Dwayne revalues its land and buildings on an annual basis. It has no investment
properties. The fair value of land and buildings was Rs. 60 million at 31st December
20X5.The 20X5 revaluation has not yet been accounted for in Dwayne’s financial
statements. The pre-tax revaluation surplus as at 31st December 20X4 stood at Rs. 24m.
(ii)
The balance on the investments line relates to a portfolio of equity holdings. Some of these
are categorised as fair value through profit or loss and the balance as available-for-sale.
The fair value loss was Rs. 1m during 20X5. This loss is considered to be temporary in
nature. The entire portfolio of equity holdings was acquired during 20X5.
(iii)
Tax relief on the defined benefit expense is given on a cash basis.
(iv)
Dividend income is not taxed in the jurisdiction in which Dwayne operates.
(v)
Dwayne borrowed Rs. 21m just before the year end and incurred transaction costs of
500k. Transaction costs are allowable in full in the year in which a loan is raised.
(vi)
The tax rate changed from 30% to 28% in the current year.
Required
18.3.
(a)
Prepare a schedule of temporary differences and resultant deferred tax for Dwayne.
(b)
Prepare a note showing the movement on the consolidated deferred tax balance for the
year ending 31st December 20X5.
(c)
Prepare a journal showing the movement on the deferred taxation account showing the
entries due to rate changes and temporary differences arising during the period.
DWAYNE LTD (PART 2)
The investment in Dwayne’s statement of financial position is the cost of 80% of Larry. The date
of this acquisition was 31st December 20X5.
The following statement of net assets relates to Larry on 31st December 20X5.
Buildings
Plant and equipment
Inventory
Trade receivables
Defined benefit liability
Current liabilities
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Fair value
Rs. 000
600
56
152
120
(100)
(50)
778
91
Carrying amount
Rs. 000
400
46
162
120
(150)
(50)
528
Tax base
Rs. 000
300
25
144
120
–
(50)
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Required
18.4.
(a)
Prepare a schedule of temporary differences and resultant deferred tax for Larry from the
point of view of the group.
(b)
Combine the deferred tax figures to obtain the group deferred tax balance.
(c)
Prepare a note showing the movement on the consolidated deferred tax balance for the
year ending 31st December 20X5.
(d)
Calculate the goodwill arising on acquisition of Larry.
COHORT
Cohort is a private limited company and has two 100% owned subsidiaries, Legion and Air, both
themselves private limited companies. Cohort acquired Air on 1 January 20X2 for Rs. 5 million
when the fair value of the net assets was Rs. 4 million, and the tax base of the net assets was
Rs. 3.5 million. The acquisition of Air and Legion was part of a business strategy whereby Cohort
would build up the value of the group over a three-year period and then list its share capital on
the Stock Exchange.
(a)
(b)
The following details relate to the acquisition of Air, which manufactures electronic goods:
(i)
Part of the purchase price has been allocated to intangible assets because it relates
to the acquisition of a database of key customers of Air. The recognition and
measurement criteria for an intangible asset under IFRS 3 Business Combinations
and IAS 38 Intangible Assets do not appear to have been met but the directors feel
that the intangible asset of Rs. 500,000 will be allowed for tax purposes and have
computed the tax provision accordingly. However, the tax authorities could possibly
challenge this opinion.
(ii)
Air has sold goods worth Rs. 3 million to Cohort since acquisition and made a profit
of Rs. 1 million on the transaction. The inventory of these goods recorded in
Cohort’s statement of financial position at the year ending 31May 20X2 was Rs. 1.8
million.
(iii)
The retained earnings of Air at acquisition were Rs. 2 million. The directors of
Cohort have decided that, during the three years leading up to the date that they
intend to list the shares of the company, they will realise earnings through future
dividend payments from the subsidiary amounting to Rs. 500,000 per year. Tax is
payable on any remittance of dividends and no dividends have been declared for the
current year.
Legion was acquired on 1 June 20X1 and is a company which undertakes various projects
ranging from debt factoring to investing in property and commodities. The following details
relate to Legion for the year ending 31 May 20X2:
(i)
Legion has a portfolio of readily marketable government securities which are held as
current assets. These investments are stated at market value in the statement of
financial position with any gain or loss taken to profit or loss. These gains and losses
are taxed when the investments are sold. Currently the accumulated unrealised
gains are Rs. 4 million.
(ii)
Legion has calculated that it requires a general allowance of Rs. 2 million against its
total loan portfolio. Tax relief is available when the specific loan is written off.
Management feel that this part of the business will expand and thus the amount of
the general provision will increase.
(iii)
When Cohort acquired Legion it had unused tax losses brought forward. At 1 June
20X1, it appeared that Legion would have sufficient taxable profit to realise the
deferred tax asset created by these losses but subsequent events have proven that
the future taxable profit will not be sufficient to realise all of the unused tax loss.
Impairment of goodwill is not allowed as a deduction in determining taxable profit.
Required
Write a note suitable for presentation to the partner of an accounting firm setting out the
deferred tax implications of the above information for the Cohort Group of companies.
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18.5.
MODEL TOWN GROUP
The following statement of financial position relates to Model Town Group, a public limited company
at 30 June 20X6:
Rs.000
Assets:
Non-current assets:
Property, plant, and equipment
Goodwill
Other intangible assets
Financial assets (cost)
10,000
6,000
5,000
9,000
30,000
Trade receivables
Other receivables
Cash and cash equivalents
7,000
4,600
6,700
18,300
Total assets
48,300
Equity and liabilities
Share capital
Other reserves
Retained earnings
9,000
4,500
9,130
Total equity
Non-current liabilities
22,630
Long term borrowings
Deferred tax liability
Employee benefit liability
10,000
3,600
4,000
Total non-current liabilities
17,600
Current tax liability
Trade and other payables
3,070
5,000
Total current liabilities
8,070
Total liabilities
25,670
Total equity and liabilities
48,300
The following information is relevant to the above statement of financial position:
(i)
The financial assets are investments in equity. Model Town has made an irrevocable
election to recognise gains and losses on these assets in other comprehensive income.
However, they are shown in the above statement of financial position at their cost on 1 July
20X5. The market value of the assets is Rs. 10.5 million on 30 June 20X6. Taxation is
payable on the sale of the assets.
(ii)
The stated interest rate for the long term borrowing is 8 per cent. The loan of Rs. 10 million
represents a convertible bond which has a liability component of Rs. 9.6 million and an equity
component of Rs.0.4 million. The bond was issued on 30 June 20X6.
(iii)
The tax bases of the assets and liabilities are the same as their carrying amounts in the
statement of financial position at 30 June 20X6 except for the following:
(a)
© Emile Woolf International
Rs.000
Property, plant, and equipment
2,400
Trade receivables
7,500
Other receivables
5,000
Employee benefits
5,000
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(b)
Other intangible assets were development costs which were all allowed for tax
purposes when the cost was incurred in 20X5.
(c)
Trade and other payables include an accrual for compensation to be paid to
employees. This amounts to Rs. 1 million and is allowed for taxation when paid.
(iv) Goodwill is not allowable for tax purposes in this jurisdiction.
(v)
Assume taxation is payable at 30%.
Required
Calculate the provision for deferred tax at 30 June 20X6 after any necessary adjustments to the
financial statements showing how the provision for deferred taxation would be dealt with in the
financial statements.
(Assume that any adjustments do not affect current tax. You should briefly discuss the
adjustments required to calculate the provision for deferred tax).
18.6.
ELEPHANT LIMITED
Elephant Limited (EL) is in process of finalizing its financial statements for the year ended
31 December 20X7. The following information has been gathered for preparing the disclosures
relating to taxation:
(i)
Profit before tax for the year after making all necessary adjustments was Rs. 103 million.
(ii)
Expenses include:


(iii)
donations of Rs. 12 million not allowable for tax purposes.
accruals of Rs. 30 million which will be allowed in tax on payment basis.
Other income includes government grant of Rs. 10 million and dividend of Rs. 4 million.
Government grant is not taxable while dividend income is subject to tax rate of 10%.
(iv)
Accounting depreciation for the year exceeds tax depreciation by Rs. 20 million.
(v)
On 31 December 20X7 buildings were revalued for the first time resulting in a surplus of Rs.
60 million. Revaluation does not affect taxable profits.
(vi)
On 1 January 20X7 EL granted 5,000 share options each to 12 senior executives, conditional
upon the executives remaining in EL’s employment until 31 December 20X8. The exercise
price is Rs. 20 per share. On grant date, EL estimated the fair value of the share options at
Rs. 180 per option.
As on 31 December 20X7 it was estimated that 2 employees would leave EL before
31 December 20X8. Fair value of each share as on 31 December 20X7 was Rs. 150.
As per tax laws, intrinsic value of the share option on the exercise date is an admissible
expense.
(vii)
On 1 January 20X7 EL had issued 1.5 million 10% convertible Term Finance Certificates
(TFCs) of Rs. 100 each. Interest is payable annually on 31 December whereas the principal
is to be paid at the end of 20Y0. Two TFCs are convertible into one ordinary share at any
time prior to maturity. On the date of issue, the prevailing interest rate for similar debt without
conversion option was 12% per annum.
The tax authorities do not allow any deduction for the imputed discount on the liability
component of the convertible TFCs.
(viii) Net deferred tax liability as on 1 January 20X7 arose on account of:
Rs. in million
Property, plant and equipment (Rs. 95 million × 35%)
Unused tax losses (Rs. 85 million × 35%)
Deferred tax liability – net
(ix)
33.25
(29.75)
3.50
The tax rate for 20X7 is 30% while it was 35% in 20X6 and prior periods.
Required:
Prepare notes on taxation and deferred tax liability/asset for inclusion in EL’s financial statements
for the year ended 31 December 20X7, in accordance with the IFRSs.
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Questions
18.7.
ARABIAN LIMITED
Following is an extract from statement of comprehensive income of Arabian Limited (AL), for the
year ended 31 December 20X8, before incorporating the effects of tax:
Rs. in million
Profit before tax
455
Other comprehensive income:
Gain on property revaluation
240
Change in fair value of equity instrument
23
Remeasurements of defined benefit liability
(40)
Total comprehensive income
678
The following additional information has been gathered for preparing the disclosures relating to
taxation:
i.
The movement of property, plant and equipment (other than land) and related revaluation
surplus for 20X8 is as follows:
Property, plant & equipment
Accounting
WDV
Gross
revaluation
surplus*
Tax base
------------------ Rs. in million -----------------Opening balance
2,500
1,470
512
Additions
600
600
-
Revaluation surplus
240
-
240
(475)
(280)
(56)
Depreciation
*Without effect of tax
ii.
AL acquired 5% equity in Turkish Limited for Rs. 152 million on 1 April 20X8. The investment
was irrevocably classified at fair value through other comprehensive income. As per tax laws,
gain on investment is taxable upon sale.
iii. Movement in net defined benefit liability for 20X8 is as follows:
Rs. in million
Opening liability
430
Charged to profit or loss
145
Charged to other comprehensive income
Contribution to the fund
40
(260)
Closing liability
355
Under tax laws, contribution to the fund is allowed as an expense.
iv. On 1 January 20X8, AL granted share options to one of its executives, conditional upon the
executive remaining in AL’s employment until 31 December 20X0. Fair value and intrinsic
value of the options are as follows:
1 January 20X8
31 December 20X8
--------- Rs. in million --------Fair value
60
78
Intrinsic value
50
72
As per tax laws, intrinsic value of the share options on the exercise date is an admissible
expense.
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i.
Liabilities of AL as at 31 December 20X8 include an amount of Rs. 35 million which is unpaid
since June 20X5. As per tax laws, liabilities outstanding for more than 3 years are added to
income and are subsequently allowed as expense on payment basis.
ii.
Tax rate for 20X8 is 27% while it was 28% in 20X7 and prior periods.
iii. AL is subject to minimum tax of 1% of revenue which is adjustable in full from the future tax
liability (if any) in subsequent 3 years. Revenue for 20X8 amounted to Rs. 5,300 million.
iv. As on 31 December 20X7, AL had:

unutilized/adjustable minimum tax of Rs. 88 million on which deferred tax was
recognized to the extent of Rs. 55 million only.

no carried forward tax losses.
Required:
In accordance with the requirements of IFRS,
(a) prepare relevant notes on taxation and deferred tax liability/asset for the inclusion in AL's
financial statements for the year ended 31 December 20X8.
(b) redraft the extract from statement of comprehensive income incorporating the effects of tax.
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CHAPTER 19 - PRESENTATION OF FINANCIAL STATEMENTS (IAS 34, IAS 24)
19.1.
FAZAL LIMITED
Fazal Limited is engaged in the manufacturing of specialized spare parts for automobile
assemblers. During the year 20X6, the company has undertaken the following transactions with
its related parties:
(i)
Sales of Rs. 500 million were made to its only subsidiary M/s Sami Motors Limited
(SML). Being the subsidiary, a special discount of Rs. 25 million was allowed to SML.
(ii)
SML returned spare parts worth Rs. 5.5 million.
(iii)
Raw materials of Rs. 5 million were purchased from Jalal Enterprises, which is owned
by the wife of the CFO of Fazal Limited.
(iv)
Equipment worth Rs. 3 million was purchased from Khan Limited (KL). The wife of the
Production Director of the company is a director in KL.
(v)
The company awarded a contract for supply of two machines amounting to Rs. 7 million
per machine to an associated company.
(vi)
In 20X4, an advance of Rs. 2 million was given to the Chief Executive of the
company. During the year 20X6, he repaid Rs.0.3 million. The balance outstanding as on
December 31, 20X6 was Rs. 1,100,000.
Required
Prepare a note for inclusion in the company’s financial statements in accordance with the
requirement of IAS 24: Related Party Disclosures.
19.2.
BABER LIMITED
During the year ended June 30, 20X6, Baber Limited (BL) has carried out several
transactions with the following individuals/entities:
(i)
AK Associates provides information technology services to BL. One of the directors of BL
is also the partner in AK Associates.
(ii)
SS Bank Limited is the main lender. By virtue of an agreement it has appointed a nominee
director on the Board of BL.
(iii)
Mr. Zee who supplies raw materials to BL, is the brother of the Chief Executive Officer of
the company.
(iv)
JB Limited is the distributor of BL’s products and has exclusive distribution rights for
the province of Punjab.
(v)
Mr. Tee is the General Manager-Marketing of BL and is responsible for all major decisions
made in respect of sales prices and discounts.
(vi)
BL’s gratuity fund is administered by the Trustees appointed by the company.
(vii)
MM Limited is the leading supplier of BL and supplies 60% of BL’s raw materials.
(viii)
Ms. Vee who conducted various training programmes for the employees of the
company, is the wife of BL’s Chief Executive Officer.
Required
Comment as to whether the above individuals/entities are ‘related parties’ of the company or not.
Support your arguments with references from International Accounting Standards.
19.3.
GOLDEN LIMITED
The following related party transactions were carried out by Golden Limited (GL) during the
first year of its operation i.e. year ended December 31, 20X6.
(i)
Inventory costing Rs. 15 million was sold for Rs. 18 million to Platinum Limited (PL) which
owns 60% shares in GL. It is GL’s policy to add 30% margin on cost. Outstanding liability
at year end, in respect of these purchases was Rs. 6.5 million.
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(ii)
PL provided administrative services to GL. The cost of these services, if billed in the
open market, would have amounted to Rs. 350,000. No entries were made to record these
transactions, as it was agreed that the services would be provided free of charge.
(iii)
A property was sold to Silver Limited (SL), an associated company, at its fair market value
of Rs. 10 million. 50% of the amount was settled prior to year end. GL reimbursed Rs.
500,000 to SL on account of transfer and other incidental charges related to this
property.
(iv)
An interest free loan of Rs. 2 million was granted to an executive director of the company
under the terms of employment. During the year, Rs. 200,000 were repaid by the executive
director.
(v)
On July 1, 20X6 GL obtained a short term loan of Rs. 25 million from one of its major
shareholder, at the prevailing annual interest rate of 12%. The principal as well as the
accrued mark-up were outstanding at the close of the year.
Required
Prepare a note on related party transactions for inclusion in GL’s financial statements for the year
ended December 31, 20X6 showing disclosures as required under IAS - 24 (Related Party
Disclosures).
19.4.
METAL LIMITED
On 1 July 20X5, Metal Limited (ML) acquired 80% shareholdings in Copper Limited (CL), 90%
shareholdings in Zinc Limited (ZL) and 55% shareholdings in Steel Limited (SL). The following
transactions took place among these companies, during the period up to 30 June 20X6:
(i)
On 1 May 20X5, ML sold a machine to CL at 20% above the carrying amount of Rs. 16
million. CL paid the entire amount on 15 July 20X5. The useful life of the machine is 10
years.
(ii)
On 1 July 20X5, ZL awarded a contract of Rs. 15 million to Iron Builders and Developers
(IBD) for the extension of its existing factory. One of the directors of ML is also a partner in
IBD.
(iii)
Since the date of acquisition, ML has been providing management services to CL and ZL.
ML did not charge management fee for its services during the first year. However, with
effect from 1 July 20X5, management fee has been charged from each company at the
rate of Rs.0.5 million per month. Payment is made on the 10th day of the next month.
(iv)
On 1 January 20X6, ML sold goods amounting to Rs. 10 million to Gold Limited (GL). The
wife of chief financial officer of ZL is a major shareholder in GL.
Required
Prepare a note on related party disclosure including comparative figures, for inclusion in the
individual financial statements of ML, CL, ZL and SL, for the year ended 30 June 20X6.
19.5.
ENGINA
Engina, a foreign company has approached a partner in your firm to assist in obtaining local
stock exchange listing (or stock market registration) for the company. Engina is registered in a
country where transactions between related parties are considered to be normal but where such
transactions are not disclosed. The directors of Engina are reluctant to disclose the nature of
their related party transactions as they feel that although they are a normal feature of business in
their part of the world, it could cause significant problems politically and culturally to disclose
such transactions.
The partner in your firm has requested a list of all transactions with parties connected with the
company and the directors of Engina have produced the following summary:
(a)
Every month, Engina sells Rs. 50,000 of goods per month to Mr Satay, the financial
director. The financial director has set up a small retailing business for his son and the
goods are purchased at cost price for him. The annual turnover of Engina is Rs. 300
million. Additionally, Mr Satay has purchased his company car from the company for Rs.
45,000 (market value Rs. 80,000). The director, Mr Satay, earns a salary of Rs. 500,000 a
year, and has a personal fortune of many millions of pounds.
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(b)
A hotel property had been sold to a brother of Mr Soy, the Managing Director of Engina, for
Rs. 4 million (net of selling cost of Rs.0.2 million). The market value of the property was
Rs. 4.3 million but prices have been falling rapidly. The carrying value of the hotel was Rs.
5 million and its value in use was Rs. 3.6 million. There was an over-supply of hotel
accommodation due to government subsidies in an attempt to encourage hotel
development and the tourist industry.
(c)
Mr Satay owns several companies and the structure of the group is outlined below. Engina
earns 60% of its profits from transactions with Car and 40% of its profits from transactions
with Wheel. All of the above companies are incorporated in the same country.
Required
Write a report to the directors of Engina setting out the reasons why it is important to disclose
related party transactions and the nature of any disclosure required for the above transactions
under IAS 24 Related Party Disclosures.
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CHAPTER 20 - IAS 33: EARNINGS PER SHARE
20.1.
AIRCON LTD
Mr. Hamad, currently owns 20 million shares in Aircon Ltd. He recently received the published
financial statements of Aircon Ltd for the year ended 31 March 20X6. Mr Hamad is not sure how
the performance of the company during the year will affect the market value of the entity’s shares
but he is aware that the earnings per share and P / E ratio statistics are often used by analysts in
assessing the performance of listed companies.
Extracts from these published financial statements and other relevant information are given
below.
Statement of profit or loss for the period ended 31 March 20X6
20X6
Rs.’m
18,000
(11,340)
6,660
(3,420)
3,240
(540)
2,700
(846)
1,854
Revenue
Cost of sales
Gross profit
Operating expenses
Operating profit
Interest payable
Profit before tax
Taxation
Profit after tax
20X5
Rs.’m
15,300
(9,180)
6,120
(3,240)
2,880
(576)
2,304
(720)
1,584
Statement of financial position as at 31 March 20X6
20X6
Rs.’m
Intangible assets
Tangible assets
Current Assets
Inventory
Receivables
Cash in bank
2,340
2,700
180
────
Capital and Reserves
Share Capital
Share Premium
Retained Earnings
5,220
────
17,820
────
20X5
Rs.’m
1,800
2,160
162
────
2,700
4,860
1,620
────
9,180
Current Liabilities
Trade Payables
Taxation
Bank Overdraft
3,060
900
1,080
────
15% Loan Note
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Rs.’m
5,400
7,200
────
12,600
100
5,040
────
14,220
3,600
────
17,820
────
Rs.’m
6,660
────
6,660
4,122
────
10,782
────
900
900
1,206
────
3,006
2,160
756
1,260
────
4,176
────
7,182
3,600
────
10,782
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The following information is also relevant:
(i)
The share capital of the company comprises Rs. 1 equity shares only.
(ii)
On 1 October 20X5, the company made a rights issue to existing shareholders of two new
shares for every one share held at a price of Rs. 5.94 per share and paid issue cost of Rs.
180,000.
(iii)
The market price of shares immediately before the rights issue was Rs. 6.30 per share.
(iv)
No other changes took place in the equity capital of Aircon Ltd in the year ended 31 March
20X6.
Required
20.2.
(a)
Compute EPS for the year and the comparative figures that will be included in the
published financial statements of Aircon Ltd for the year ended 31 March 20X6.
(b)
Using the extracts you have been provided with, write a report to Mr Hamad identifying the
key factors which led to the change in the EPS of Aircon Ltd since the year ended 31
March 20X6.
(c)
Comment on the relevance of the EPS statistics to shareholders.
CACHET LTD
The statement of profit or loss for the year ended 31 December 20X6 relates to Cachet Ltd.
Rs.
Profit Before Tax
Rs.
121,900
Less: Taxation
52,900
69,000
Less: Transfer to general reserve
5,750
Dividends:
Preference shares
1,380
Ordinary shares
2,070
(92,00)
Retained profit
59,800
1 January 20X6, the issued share capital of Cachet Ltd was 23,000 6% preference shares of Rs.
1 each and 20,700 ordinary shares of Rs. 1 each.
Required
Calculate the basic and diluted earnings per share for the year ended 31 December, 20X6 under
the following circumstances:
(i)
No change in the issued share capital.
(ii)
The company made a bonus issue of one ordinary share for every four shares in issue at
30 September, 20X6.
(iii)
The company made a rights issue of shares on 1 October 20X6 in the proportion of 1 for
every 5 shares held at a price of Rs. 1.20. The middle market price for the shares on the
last day of quotation cum rights was Rs. 1.80 per share.
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20.3.
MARY
On 1 January Year 5, Mary had 5 million ordinary shares in issue. The following transactions in
shares took place during the next year.
1 February
A 1 for 5 bonus issue
1 April
A 1 for 2 rights issue at Rs. 1 per share. The market price of the shares prior to
the rights issue was Rs. 4.
1 June
An issue at full market price of 800,000 shares.
In Year 5 Mary made a profit before tax of Rs. 3,362,000. It paid ordinary dividends of Rs.
1,200,000 and preference dividends of Rs. 800,000. Tax was Rs. 600,500. The reported EPS for
Year 4 was Rs.0.32.
Required
Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative purposes.
20.4.
MANDY
Mandy has had 5 million shares in issue for many years. Earnings for the year ended 31
December Year 4 were Rs. 2,579,000. Earnings for the year ended 31 December Year 3 were
Rs. 1,979,000. Tax is at the rate of 30%.
Outstanding share options on 500,000 shares have also existed for a number of years. These
can be exercised at a future date at a price of Rs. 3 per share. The average market price of
shares in Year 3 was Rs. 4 and in Year 4 was Rs. 5.
On 1 April Year 3 Mandy issued Rs. 1,000,000 convertible 7% bonds. These are convertible into
ordinary shares at the following rates.
On 31 December Year 6
30 shares for every Rs. 100 of bonds
On 31 December Year 7
25 shares for every Rs. 100 of bonds
On 31 December Year 8
20 shares for every Rs. 100 of bonds
Required
Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3.
20.5.
AAZ LIMITED
The profit after tax earned by AAZ Limited during the year ended December 31, 20X6 amounted to
Rs. 127.83 million. The weighted average number of shares outstanding during the year were 85.22
million.
Details of potential ordinary shares as at December 31, 20X6 are as follows:

The company had issued debentures which are convertible into 3 million ordinary
shares. The debenture holders can exercise the option on December 31, 20X8. If the
debentures are not converted into ordinary shares they shall be redeemed on December
31, 20X8. The interest on debentures for the year 20X6 amounted to Rs. 7.5 million.

Preference shares issued in 20X3 are convertible into 4 million ordinary shares at the
option of the preference shareholders. The conversion option is exercisable on December
31, 20Y0. The dividend paid on preference shares during the year 20X6 amounted to Rs.
2.45 million.

The company has issued options carrying the right to acquire 1.5 million ordinary
shares of the company on or after December 31, 20X6 at a strike price of Rs. 9.90 per
share. During the year 20X6, the average market price of the shares was Rs. 11 per
share.
The company is subject to income tax at the rate of 30%.
Required
(a)
Compute basic and diluted earnings per share.
(b)
Prepare a note for inclusion in the company’s financial statements for the year ended
December 31, 20X6 in accordance with the requirements of International Accounting
Standards.
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20.6.
ABC LIMITED
The following information pertains to ABC Limited, in respect of year ended March 31, 20X6.
Rs. in ‘000
Consolidated profit for the year (including non-controlling interest)
15,000
Profit attributable to non-controlling interest
2,000
Dividend paid during the year to ordinary shareholders
4,000
Dividend paid on 10% Cumulative preference shares for the year 20X5
2,000
Dividend paid on 10% Cumulative preference shares for the year 20X6
2,000
Dividend declared on 12% Non-cumulative preference shares for the year 20X6
2,400
(i)
The company had 10 million ordinary shares at March 31, 20X5.
(ii)
The cumulative preference shares were issued at the time of inception of the company.
(iii)
The 12% non-cumulative preference shares are convertible into ordinary shares, on or
before December 31, 20X7 at a premium of Rs. 2 per share. The conversion rights are not
adjusted for subsequent bonus issues.
(iv)
0.50 million non-cumulative preference shares were converted into ordinary shares on July
1, 20X5.
(v)
The dividend declared on the non-cumulative preference shares, as referred above, was
paid in April 20X6.
(vi)
1.20 million right shares of Rs. 10 each were issued at a premium of Rs. 1.50 per share on
October 1, 20X5. The market price on the date of issue was Rs. 12.50 per share.
(vii)
20% bonus shares were issued on January 1, 20X6.
(viii)
Due to insufficient profit no dividend was declared during the year ended March 31,
20X5.
(ix)
The average market price for the year ended March 31, 20X6 was Rs. 15 per share.
Required
Compute the basic and diluted earnings per share and prepare a note for inclusion in the
consolidated financial statements for the year ended March 31, 20X6.
20.7.
ALPHA LIMITED
Alpha Limited (AL), a listed company, acquired 80% equity in Zee Limited (ZL) on 1 July 20X0.
The following information has been extracted from their draft financial statements:
AL
ZL
----- Rs. in '000 ----Balance as at 1 January 20X3:
Share capital (Rs. 100 each)
80,000
35,000
12% Convertible bonds (Rs. 100 each)
30,000
-
60,000
25,000
Profit for the year ended 31 December 20X3 (after tax)
Following information is also available:
(i)
The bonds were issued at par on 1 January 20X1 and are convertible at any time
before the redemption date of 31 December 20X5, at the rate of five ordinary shares
for every four bonds.
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(ii)
Cost and fair value information of ZL’s investment property is as under:
31-Dec-20X3
31-Dec-20X2
-------- Rs. in '000 -------Cost
65,000
60,000
Fair value
67,000
59,000
ZL uses cost model while the group policy is to use the fair value model to account
for investment property.
(iii)
AL operates a defined benefit gratuity scheme for its employees. The actuary’s report
has been received after the preparation of draft financial statements and provides the
following information pertaining to the year ended 31 December 20X3:
Rs. in '000
Actuarial losses
150
Current service costs
8,000
Net interest income
3,000
(iv)
On 1 August 20X3, under employees’ share option scheme, 60,000 shares were
issued by AL to its employees at Rs. 150 per share against the average market price
of Rs. 250 per share.
(v)
Dividend details are as under:
AL
ZL
20X3 (Interim)
Cash
20X2 (Final)
20X3 (Interim)
20X2 (Final)
18%
10%
12%
15%
-
20%
-
16%
Bonus shares
At the time of payment of dividend, income tax at 10% was deducted by AL and ZL.
(vi)
Applicable tax rate for business income is 35%.
Required:
Extracts from the consolidated profit and loss account of Alpha Limited (including earnings per
share) for the year ended 31 December 20X3 in accordance with the International Financial
Reporting Standards.
(Note: Comparative figures and information for notes to the financial statements are not required)
20.8.
SAJJAD LIMITED
(a)
Following information pertains to Sajjad Limited (SL) for the year ended 31 December
20X6:
(i)
The share capital of SL comprises of:
Rs. in million
Ordinary share capital (Rs. 100 each)
(ii)
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1,000
9% Class A preference shares (Rs. 100 each)
200
6% Class B preference shares (Rs. 100 each)
300
Class A preference shares which were issued on 1 January 20X4 are cumulative,
non-convertible and non-redeemable. These shares were issued at Rs. 77.22 per
share i.e. at a discount of Rs. 22.78 per share. These shareholders are entitled to
annual dividend of 9% with effect from 1 January 20X7. At the time of issue, the market
dividend yield on such type of preference shares was 9% per annum.
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(iii)
Class B preference shares which were issued on 1 January 20X6 are
non-cumulative, non-convertible and non-redeemable. The payment of dividend of
these shares was made on 29 December 20X6. These shareholders are also
entitled to participate in any remaining profits after adjusting dividend to ordinary and
preference shareholders. Such remaining profits are allocated between the Class B
shareholders and the ordinary shareholders in such a manner that the profit per
share of ordinary shareholders is twice the profit per share of Class B shareholders.
(iv)
SL earned profit after tax of Rs. 150 million during the year ended 31 December 20X6
and paid interim dividend of Rs. 2.50 per share to ordinary shareholders.
Required:
Compute basic earnings per share for the ordinary shareholders for the year ended 31 December
20X6.
20.9.
TIGER LIMITED
Following information pertains to Tiger Limited (TL):
Quarter ended 31Dec-20X7
Half year ended 31Dec-20X7
Profit after tax (Rs. in million)
140
239
Average market price per share (Rs.)
330
360
Ordinary shares

20 million shares of Rs. 100 each were outstanding as at 1 July 20X7.

4 million shares were issued on 1 August 20X7 at market price of Rs. 355 per share.
Convertible bonds

On 1 November 20X6 TL issued 0.8 million 7% convertible bonds at par value of
Rs. 1,000 each. Each bond is convertible into 3 ordinary shares at any time prior to
maturity date of 31 October 20X9. On inception the liability component was calculated as
Rs. 760 million. On the date of issue, the prevailing interest rate for similar debt without
conversion option was 9% per annum.

50% of these bonds were converted into ordinary shares on 1 November 20X7.
Warrants
On 1 January 20X6, TL issued share warrants giving the holders right to buy 6 million ordinary
shares at Rs. 340 per share. The warrants are exercisable within a period of 2 years.
Applicable tax rate is 30%.
Required:
Compute basic and diluted earnings per share to be disclosed in statement of profit or loss for
the following periods:
a) Quarter ended 31 December 20X7
b) Half year ended 31 December 20X7
(Show all relevant workings)
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CHAPTER 21 - IAS 36: IMPAIRMENT OF ASSETS
21.1.
CHARLOTTE
Charlotte Ltd is a company with a 31 December year-end.
The following is relevant to three tangible non-current assets held by Charlotte.
Machine 1
This was purchased on 1 January Year 1 for Rs. 420,000. It had an estimated residual value of
Rs. 50,000 and a useful life of ten years and was being depreciated on a straight-line basis.
On 1 January Year 6 Charlotte revalued this machine to Rs. 275,000 and reassessed its total
useful life as fifteen years with no residual value.
On 1 January Year 7 an impairment review showed machine 1’s recoverable amount to be Rs.
100,000 and its remaining useful life to be five years.
Machine 2
This was purchased on 1 January Year 1 for Rs. 500,000. It had an estimated residual value of
Rs. 60,000 and a useful life of ten years and was being depreciated on a straight-line basis.
On 1 January Year 7 this machine was classified as held for sale, at which time its fair value was
estimated at Rs. 200,000 and costs to sell at Rs. 5,000. On 31 March Year 7 the machine was
sold for Rs. 210,000.
Machine 3
This was purchased on 1 January Year 1 for Rs. 600,000. In Year 1 depreciation of Rs. 30,000
was charged. On 1 January Year 2 this machine was revalued to Rs. 800,000 and its remaining
useful life assessed as eight years.
On 1 January Year 7 this machine was classified as held for sale, at which time, its fair value was
estimated at Rs. 550,000 and costs to sell at Rs. 5,000.
On 31 March Year 7 the machine was sold for Rs. 550,000.
Tax is at the rate of 30%.
Required
Show the effect of the above on profit or loss and revaluation reserve of Charlotte in Year 7.
21.2.
ABA LIMITED
Aba Limited conducts its activities from two properties, a head office in the city centre and a
property in the countryside where staff training is conducted. Both properties were acquired on
1 April 20X3 and had estimated lives of 25 years with no residual value. The company has a
policy of carrying its land and buildings at current values. However, until recently property prices
had not changed for some years. On 1 October 20X5 the properties were revalued by a firm of
surveyors. Details of this and the original costs are:
Head office
Training premises
Land
Buildings
Rs.
Rs.
– cost 1 April 20X3
500,000
1,200,000
– revalued 1 October 20X5
700,000
1,350,000
– cost 1 April 20X3
300,000
900,000
– revalued 1 October 20X5
350,000
600,000
The fall in the value of the training premises is due mainly to damage done by the use of heavy
equipment during training. The surveyors have also reported that the expected life of the training
property in its current use will only be a further 10 years from the date of valuation. The estimated
life of the head office remained unaltered.
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Note: Aba Limited treats its land and its buildings as separate assets. Depreciation is based on
the straight-line method from the date of purchase or subsequent revaluation.
Required
Prepare extracts of the financial statements of Aba Limited in respect of the above properties for
the year to 31 March 20X6.
21.3.
HUSSAIN ASSOCIATES LTD
The assistant financial controller of the Hussain Associates Ltd group has identified the matters
below which she believes may indicate impairment of one or more assets:
(a)
Hussain Associates Ltd owns and operates an item of plant that cost Rs. 640,000 and had
accumulated depreciation of Rs. 400,000 at 1 October 20X5. It is being depreciated at
12½% on cost.
On 1 April 20X6 (exactly half way through the year) the plant was damaged when a factory
vehicle collided into it. Due to the unavailability of replacement parts, it is not possible to
repair the plant, but it still operates, albeit at a reduced capacity. It is also expected that as
a result of the damage the remaining life of the plant from the date of the damage will be
only two years.
Based on its reduced capacity, the estimated present value of the plant in use is Rs.
150,000. The plant has a current disposal value of Rs. 20,000 (which will be nil in two
years’ time), but Hussain Associates Ltd has been offered a trade-in value of Rs. 180,000
against a replacement machine which has a cost of Rs. 1 million (there would be no
disposal costs for the replaced plant). Hussain Associates Ltd is reluctant to replace the
plant as it is worried about the long-term demand for the product produced by the plant.
The trade-in value is only available if the plant is replaced.
Required
Prepare extracts from the statement of financial position and statement of profit or loss of
Hussain Associates Ltd in respect of the plant for the year ended 30 September 20X6.
Your answer should explain how you arrived at your figures.
(b)
On 1 April 20X5 Hussain Associates Ltd acquired 100% of the share capital of Sparkle
Limited, whose only activity is the extraction and sale of spa water. Sparkle Limited had
been profitable since its acquisition, but bad publicity resulting from several consumers
becoming ill due to a contamination of the spa water supply in April 20X6 has led to
unexpected losses in the last six months. The carrying amounts of Sparkle Limited’s
assets at 30 September 20X6 are:
Rs.000
Brand (Sparkle Spring – see below)
Land containing spa
7,000
12,000
Purifying and bottling plant
8,000
Inventories
5,000
32,000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of ‘Sparkle Spring’,
but because of the contamination it has re-branded its bottled water as ‘Refresh’. After a
large advertising campaign, sales are now starting to recover and are approaching
previous levels. The value of the brand in the balance sheet is the depreciated amount of
the original brand name of ‘Sparkle Spring’.
The directors have acknowledged that Rs. 1.5 million will have to be spent in the first three
months of the next accounting period to upgrade the purifying and bottling plant.
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Inventories contain some old ‘Sparkle Spring’ bottled water at a cost of Rs. 2 million; the
remaining inventories are labelled with the new brand ‘Refresh’. Samples of all the bottled
water have been tested by the health authority and have been passed as fit to sell. The old
bottled water will have to be relabelled at a cost of Rs. 250,000, but is then expected to be
sold at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in
use of Sparkle Limited at 30 September 20X6, calculated according to the guidance in IAS
36, is Rs. 20 million. There is no reliable estimate of the fair value less costs to sell of
Sparkle Limited.
Required
Calculate the amounts at which the assets of Sparkle Limited should appear in the
consolidated statement of financial position of Hussain Associates Ltd at 30 September
20X6. Your answer should explain how you arrived at your figures.
21.4.
IMPS
A division of IMPS has the following non-current assets, which are stated at their carrying values
at 31 December Year 4:
Rs. m
Rs. m
Goodwill
70
Property, plant and equipment:
Land and buildings
Plant and machinery
320
110
430
500
Because these assets are used to produce a specific product, it is possible to identify the cash
flows arising from their use. The management of IMPS believes that the value of these assets
may have become impaired, because a major competitor has developed a superior version of the
same product and, as a result, sales are expected to fall.
The following additional information is relevant:
Forecast cash inflows arising from the use of the assets are as follows:
Year ended 31 December:
Rs. m
Year 5
185
Year 6
160
Year 7
130
(i)
The directors are of the opinion that the market would expect a pre-tax return of 12% on an
investment in an entity that manufactures a product of this type.
(ii)
The land and buildings are carried at valuation. The surplus relating to the revaluation of
the land and buildings that remains in the revaluation reserve at 31 December Year 4 is
Rs. 65 million. All other non-current assets are carried at historical cost.
(iii)
The goodwill does not have a market value. It is estimated that the land and buildings
could be sold for Rs. 270 million and the plant and machinery could be sold for Rs. 50
million, net of direct selling costs.
Required
(a)
Calculate the impairment loss that will be recognised in the accounts of IMPS.
(b)
Explain how this loss will be treated in the financial statements for the year ended 31
December Year 4.
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21.5.
GYO MOVERS LIMITED
On 1 July 20X3, GYO Movers Limited (GML) acquired a business engaged in providing
transportation service and recognized goodwill of Rs. 10 million. The business operates three
different bus routes namely Green, Yellow and Orange. The business had been running
exceptionally well. However, during the year ended 30 June 20X6 entrance of new competitors
has affected its performance.
GML considers each route as a separate Cash-Generating Unit (CGU). As on 30 June 20X6,
following information is available in respect of each CGU:
Green
Yellow
Orange
Number of buses*
80
50
40
Expected remaining useful life (in years)
20
15
10
------------ Rs. in million -----------Carrying amount of buses
225
150
95
Other assets - carrying value
400
350
100
Not available
- fair value
Fair values less cost to sell of the CGU
Expected net cash flows per annum
500
450
250
70
60
50
*Assume that all buses are of same make and model.
Carrying amount of corporate assets used interchangeably by all segments are as follows:
Carrying amount
Fair value
Particulars
------------ Rs. in millions -----------Head office building
100
Not available
Computer network
55
46
Equipment
45
60
For impairment testing of each CGU, following quotations were obtained from three different
showrooms located in different cities.
Particulars
Showroom- Showroom- Showroom1
2
3
---------------- Rs. in million ----------------
Average sale price for each bus
2.52
2.62
2.50
Estimated transaction cost for disposal of each bus
0.05
0.20
0.10
Pre-tax discount rate of GML is 12%.
Required:
Prepare relevant extracts from the statement of financial position as at 30 June 20X6 in
accordance with International Financial Reporting Standards.
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21.6.
KHYBER LTD
The following details relate to a cash generating unit (CGU) of Khyber Ltd (KL) as at 30 June
20X7:
Carrying
value
Fair value less
cost to sell
----------- Rs. in million ----------Building (revaluation model)*
22
21.7
Machinery (cost model)
15
16
Equipment (cost model)
19
License (cost model)
20
18
Investment property (fair value model)
22
22
Not measurable
Investment property (cost model)
8
Not measurable
Goodwill
3
Not measurable
Inventory at NRV
8
8
*Balance of surplus on revaluation of building as on 30 June 20X7 amounted to Rs. 3 million.
Value in use and fair value less cost to sell of the CGU at 30 June 20X7 were Rs. 100 million and
Rs. 95 million respectively.
Required:
Compute the amount of impairment and allocate it to individual assets. Also calculate the amount
to be charged to profit or loss account for the year ended 30 June 20X7 under each of the
following independent situations:
i.
ii.
There has been a significant decline in budgeted net cash flows of the CGU.
KL decided to dispose of the CGU as a group in a single transaction and classified it as ‘Held
for sale’. Carrying value of all individual assets have been remeasured in accordance with
the applicable IFRSs
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CHAPTER 22 - IAS 40: INVESTMENT PROPERTY
22.1.
VICTORIA
Victoria owns several properties and has a year end of 31 December. Wherever possible,
Victoria carries investment properties under the fair value model.
Property 1 was acquired on 1 January Year 1. It had a cost of Rs. 1 million, comprising Rs.
500,000 for land and Rs. 500,000 for buildings. The buildings have a useful life of 40 years.
Victoria uses this property as its head office.
Property 2 was acquired many years ago for Rs. 1.5 million for its investment potential. On 31
December Year 7 it had a fair value of Rs. 2.3 million. By 31 December Year 8 its fair value had
risen to Rs. 2.7 million. This property has a useful life of 40 years.
Property 3 was acquired on 30 June Year 2 for Rs. 2 million for its investment potential. The
directors believe that the fair value of this property was Rs. 3 million on 31 December Year 7 and
Rs. 3.5 million on 31 December Year 8. However, due to the specialised nature of this property,
these figures cannot be corroborated. This property has a useful life of 50 years.
Required
(a)
For each of the above properties briefly state how it would be treated in the financial
statements of Victoria for the year ended 31 December Year 8, identifying any impact on
profit or loss.
(b)
Produce an analysis of property, plant and equipment for Victoria for the year ended 31
December Year 8, showing each of the above properties separately.
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CHAPTER 24 - FIRST TIME ADOPTION OF IFRS
24.1.
IFRS 1
A company which has always prepared its Financial Statements to 31 December each year,
prepared its first IFRS Financial Statements for the year ended 31 December 2016. These
statements show comparative figures for the year ended 31 December 2015.
Required
(a)
Identify the first IFRS reporting period and state the date of transition to IFRS.
(b)
Present the procedures which must be followed in order to prepare the financial
statements for the year ended 31 December 2016.
(c)
Identify the reconciliations which the company must include in its financial statements for
the year ended 31 December 2016.
(d)
State the contents of a typical statement of changes in equity.
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CHAPTER 25 - SPECIALISED FINANCIAL STATEMENTS
25.1.
LATEEF BANK LIMITED
Lateef Bank Limited (LBL) is listed on Karachi and Lahore Stock Exchanges and has 150
branches including 10 overseas branches. The LBL’s lending to financial institutions as of
September 30, 20X6 comprised of the following:
(i)
Call money lending at year end amounted to Rs. 850 million (20X5: Rs. 1,200 million).
The markup on these unsecured lendings ranged between 15% to 17% (20X5: 10% to
12%) and they matured on various dates, in October 20X6.
(ii)
Short term lending on account of repurchase agreement (reverse repo) amounted to Rs.
2,100 million (20X5: Rs. 2,850 million). These carried markup ranging from 9.5% to
13.2% (20X5: 8% to 10.5%) and matured on various dates, in October 20X6. These
were secured against Market Treasury Bills of Rs. 1,650 million (20X5: Rs. 1,850 million)
and Pakistan Investment Bonds of Rs. 450 million (20X5: Rs. 1,000 million). The market
value of these securities held as collateral, on September 30, 20X6, amounted to
Rs. 2,250 million (20X5: Rs. 2,930 million).
The above amounts include lendings in foreign currencies amounting to Rs. 110
million (20X5: Rs. 150 million).
Required
Prepare a note on lendings to financial institutions for inclusion in LBL’s financial statements for
the year ended September 30, 20X6 giving appropriate disclosures in accordance with the
guidelines issued by State Bank of Pakistan.
25.2.
AL-AMIN BANK LIMITED
Al-Amin Bank Limited is listed on all the stock exchanges in Pakistan. At year end, the
total advances amounted to Rs 75,000 million which include non-performing advances of
Rs. 5,000 million. The break-up of the non-performing advances and the provisions there-against
is as under:
20X6
Classified
lending
Category of classification
Provisions
held
Rs. in million
Other assets especially mentioned
100
5
Sub-standard
660
120
Doubtful
Loss
840
530
3,400
3,345
5,000
4,000
The sub-standard category includes advances of Rs. 260 million pertaining to overseas
operations of the bank. The required provision of Rs. 50 million has been made against such
advances.
During the year the movement in the specific provision was as under:
Rs. in million
Opening balance
3,320
Charge for the year
802
Reversals
(90)
Amounts written off
(50)
Exchange rate adjustment
18
Total
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In addition to the above specific provisions, it is the bank’s policy to make additional
general provision based on the judgment of the bank. The opening balance for general provision
was Rs. 65 million. During the year, the bank made provisions of Rs. 25 million and Rs. 15 million
against consumer and agriculture advances respectively.
Required
Prepare relevant notes on non-performing advances and provisions for inclusion in the
financial statements of Al-Amin Bank Limited giving appropriate disclosure in accordance with the
guidelines issued by the State Bank of Pakistan.
25.3.
IAS 26
IAS 26: Accounting and Reporting by Retirement Benefit Plans and IAS 19: Employee Benefits
deal with employee benefits but there are differences between the two standards.
25.4.
(a)
Highlight the main differences between IAS 26 and IAS 19.
(b)
What is a Defined Benefit Plan?
(c)
What is a Defined Contribution Plan?
(d)
Explain the meaning of the actuarial present value of promised retirement benefit.
SOGO LIMITED
SOGO Limited operates an approved funded gratuity scheme for all its employees.
Benefits under the scheme become vested after 5 years of service. No benefit is payable to an
employee if he leaves before 5 years of service. A total of 752 employees were eligible for the
benefits under the fund as of December 31, 20X6.
Following is the trial balance of the Fund as of June 30, 20X6:
Debit
Credit
Amounts in Rupees
Cash at bank - current account
17,930,120
Receivable from SOGO Limited
1,147,150
Defence Savings Certificate
102,133,664
Term Finance Certificates
11,832,089
Term Deposits
6,414,058
Investment – SUN Limited
17,594,893
Investment – PEACE Company Limited
Investment - NIT Units
587,169
16,911,510
Due to outgoing members
4,301,017
Accrued expenses
3,822
Withholding tax payable
61,251
Members Fund
142,472,122
Profit on investments
23,389,251
Dividend income
2,696,399
Contribution for the year
10,623,106
Transferred / paid to outgoing members
Bank charges
12,432,973
3,342
Audit fee
10,000
Liabilities no more payable
3,450,000
186,996,968
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Questions
Following are the details of investments and income thereon:
Balance as
at July 01,
20X5
During the year 20X6
Addition
Profit /
interest
accrued
Principal
realized
Profit /
interest
realized
21,376,809
(1,600,000)
(5,456,000)
1,655,223
(12,873,068
)
(1,893,722)
357,219
(5,300,000)
(227,792)
Government
Securities
Defence Savings
Certificate
87,812,855
-
Unlisted Securities
and deposits
Term Finance
Certificates
19,943,656
5,000,000
Term Deposits
11,584,631
-
8,220,957
9,373,936
-
-
-
587,169
-
-
-
-
16,911,510
-
-
-
-
Listed Securities
SUN Limited
PEACE Limited
NIT Units
The following gains/(losses) on restatement of investments at their fair values, have not been
accounted for:
Rupees
SUN Limited
(784,518)
PEACE Limited
317,728
NIT Units
4,026,551
Required
Prepare the following in accordance with the requirements of International Accounting
Standards:
25.5.
(a)
Statement of net assets available for benefits along with the note on investments.
(b)
Statement of changes in net assets available for benefits.
JABBAR (PVT) LIMITED
Jabbar (Pvt) Ltd (JPL) was incorporated on 1 July 20X6 and is preparing its financial statements
for the year ended 30 June 20X7 in accordance with IFRS for Small and Medium-sized Entities
(SMEs). The following matters are under consideration:
(i)
JPL has constructed an office building at a cost of Rs. 3.3 million, which was completed on
30 June 20X7. The cost includes interest of Rs. 0.3 million relating to a loan specifically
obtained to finance the construction. At year end, recoverable amount of the building has
been estimated at Rs. 3.1 million.
(ii)
On 1 January 20X7 JPL had purchased two shops A and B for Rs. 5 million and Rs. 4
million respectively. Shop A is being used by JPL for marketing purposes and shop B was
rented out soon after its purchase. At year end, shops A and B have been:

depreciated @ 5% per annum.
 revalued to Rs. 6 million and Rs. 5 million respectively.
Required:
Discuss how the above matters should be dealt with in the financial statements of JPL in
accordance with IFRS for SMEs. (Assume that cost to sell is negligible)
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25.6.
KARACHI BANK LIMITED
Following balances have been extracted from the trial balance of Karachi Bank Limited (KBL) for
the year ended 31 December 20X6.
Rs. in million
Bills discounted and purchased
679
Call money lending
650
Cash in hand
9,100
Current account with Habib Bank Limited
412
Current account with State Bank of Pakistan
14,500
Current account with National Bank of Pakistan
2,300
Deposit account with Central Bank of Afghanistan
700
Deposit account with National Bank of Pakistan
1,400
Deposit account with United Bank Limited
311
Deposits and prepayments
3,189
Interest accrued
21,450
Loans, cash credits and running finances
114,200
Market treasury bills
24,500
National Prize Bonds
68
Net investment in finance lease
4,900
Operating fixed assets
24,700
Pakistan Investment Bonds (20% given as collateral)
1,800
Provision against non-performing advances
(6,678)
Provision for diminution in value of investment
(222)
Repurchase agreement lending
6,100
Sukuk Bonds
1,200
Required:
Prepare the asset side of the statement of financial position as at 31 December 20X6 of KBL,
based on the above balances. (Notes to the financial statements are not required)
25.7.
LEOPARD INCOME FUND
Following information is available from the records of Leopard Income Fund (an open ended
mutual fund) for the year ended 30 June 20X8:
i.
Undistributed income as at 1 July 20X7 comprised of realised and unrealised income of
Rs. 97 million and Rs. 7 million respectively.
ii.
Total net assets at 1 July 20X7 amounted to Rs. 9,752 million.
iii.
Allocation of net income for the year is as follows:
Rs. in million
Total comprehensive income
214
Income already paid on units redeemed
(50)
164
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Questions
iv.
Accounting income available for distribution relating to capital gains and other than capital
gains amounts to Rs. 3 million and Rs. 161 million respectively.
v.
Distribution during the year amounted to Rs. 150 million.
vi.
Details of issuance and redemption of units during the year are as follows:
Issuance
Units in million
Redemption
388
441
----- Rs. in million ----Capital value
7,372
Element of income /(loss)
(8,382)
70
(64)*
7,442
(8,446)
*including Rs. 50 million of income already paid on units redeemed
vii.
Unrealized loss included in undistributed income as at 30 June 20X8 amounted to Rs. 4
million.
Required:
Prepare a statement of movement in unit holders’ fund for the year ended 30 June 20X8. (Ignore
disclosure of comparative figures and net assets value per unit)
25.8.
SWIFT GENERAL INSURANCE LIMITED
Following information is available for Swift General Insurance Limited for the year ended 30 June
20X8:
Rs. in ‘000
Claims paid
6,100
Finance cost
450
Income tax expense
750
Investment income
1,900
Management expenses
2,600
Net commission and other acquisition expenses
1,300
Other expenses
600
Other income
90
Reinsurance premium ceded
3,000
Reinsurance and other recoveries revenue
4,000
Rental income
950
Share of profit from associate
210
Unrealised gain on available for sale investments
580
Written gross premium
13,000
Relevant balances are as follows:
Opening
Closing
---------- Rs. in ‘000 ---------Outstanding claims
4,800
5,200
Prepaid reinsurance premium
3,500
3,600
Unearned premium reserve
7,400
7,200
Required:
Prepare statement of comprehensive income for the year ended 30 June 20X8 (as per one
statement approach) along with relevant notes.
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Advanced accounting and financial reporting
25.9.
CYBER BANK
Cyprus Bank Limited (CBL) is listed on Pakistan Stock Exchange and has 252 branches
including 10 overseas branches. Mansoor has recently joined CBL’s finance team. He has
prepared the following draft note on ‘Advances’ for inclusion in the CBL’s financial statements for
the year ended 31 December 20X8 and has submitted it for your review:
9
ADVANCES
Loans, cash credits, running finances
Performing
Non-performing
Total
----------------- Rs. in '000 ----------------Net investment in finance lease
3,036,460
264,040
3,300,500
808,990
16,510
825,500
Advances – gross
3,845,450
280,550
4,126,000
Provision against advances
(119,555)
(150,445)
(270,000)
Advances – net of provision
3,725,895
130,105
3,856,000
Bills discounted and purchased
9.1
Particulars of advances (Gross)
Rs. in '000
In local currency
2,988,200
In foreign currencies
937,800
3,926,000
9.2
Advances include Rs. 280.55 million which have been placed under non-performing
status as detailed below:
Category of classification
Non-performing loans
Provision
------------ Rs. in '000 ------------
9.3
Other Assets Especially Mentioned
20,050
-
Substandard
47,600
7,375
Doubtful
94,400
47,060
Loss
118,500
112,800
Total
280,550
167,235
Particulars of provision against advances
Specific
General
Total
---------------- Rs. in '000 ---------------Opening balance
9.4
134,493
120,938
255,431
Exchange adjustment
10,452
7,457
17,909
Net charge/(reversal) against advances
24,900
(8,840)
16,060
Written off during the year
(19,400)
-
(19,400)
Closing balance
150,445
119,555
270,000
Particulars of write offs
Rs. in '000
Against provisions
19,400
Directly charged to profit and loss account
3,800
23,200
Required:
Prepare list of errors and omissions identified from your review of the above draft note.
(Note: There are no casting errors in the given information. Redrafting of the note is not required)
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Questions
CHAPTER 28 - ISLAMIC ACCOUNTING STANDARDS
28.1.
SALE AND LEASE BACK TRANSACTIONS
In the light of Islamic Financial Accounting Standards issued by the Institute of Chartered
Accountants of Pakistan, discuss how the gain/loss on ‘sale and lease back transactions’ shall be
accounted for in the financial statements of a listed company if an asset is sold at:

fair value

above fair value

below fair value
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B
SECTION
Certified Finance and Accounting Professional
Advanced accounting and financial reporting
Answers
CHAPTER 1 - BUSINESS COMBINATIONS AND CONSOLIDATION
1.1.
HASAN LIMITED
Consolidated statement of financial position as at 31 March 20X6
Rs.000
Assets
Non-current assets
Property, plant and equipment (W1)
4,020
Goodwill (W4)
480
Software (W1)
1,440
Investments (65 + 210)
275
Rs.000
6,215
Current assets
Inventories (W2)
Trade receivables (524 + 328)
Cash and bank (20 + 55 cash in transit)
1,274
852
75
2,201
8,416
Total assets
Equity and liabilities
Capital and reserves
Equity capital
Reserves
Share premium
Retained earnings (W3)
2,000
2,000
2,420
4,420
6,420
350
Non-controlling interest (W5)
Government grants (230 + 40)
Current liabilities
Trade payables (475 + 472)
Operating overdraft
Income tax liability (228 + 174)
270
947
27
402
1,376
8,416
Total equity and liabilities
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Workings
(W1) Property, plant and equipment
Rs.000
Balance from question – Hasan Limited
2,120
Balance from question – Shakeel Limited
1,990
Fair value adjustment on acquisition (see below)
(120)
Over-depreciation re fair value adjustment year to 31 March 20X6
30
–––––––––––––
4,020
–––––––––––––
A fair value of the leasehold based on the present value of the future rentals (receivable in
advance) would be the next (non-discounted) payment of the rental plus the final three years
as an annuity at 10%:
Rs.000
PV of rental receipts: Rs. 80,000 + (Rs. 80,000  2.50)
280
Carrying value on acquisition is
(400)
–––––––––––––
Fair value reduction of leasehold
(120)
–––––––––––––
The depreciation of the leasehold in Shakeel Limited’s accounts would be Rs. 100,000 per
annum. However, in the consolidated accounts it should be Rs. 70,000 (Rs. 280,000/4).
This would require a reduction in depreciation of Rs. 30,000 in the consolidated accounts
for the next four years.
Software:
Shakeel
Limited’s
accounts
Capitalised amount
Depreciation to
31 March 20X5
Value at date of
acquisition
Depreciation to
31 March 20X6
Carrying value
31 March 20X6
Consolidated
figures
Rs.000
Rs.000
2,400
2,400
(300)
–––––
8 year life
(480)
–––––
2,100
1,920
(300)
–––––
(480)
–––––
1,800
–––––
1,440
–––––
Difference
5 year life
180 fair
value adjustment
180 additional
amortisation
(W2) Inventories
Rs.000
Amounts given in the question (719 + 560)
Unrealised profit in inventories (25  25/125)
1,279
(5)
–––––––––––––
1,274
–––––––––––––
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Answers
(W3) Retained earnings
Retained profits of Shakeel Limited, 31 March 20X6
Adjustments:
Excess charge for leasehold depreciation
Insufficient charge for Software amortisation
Unrealised profit in inventory (W2)
Rs.000
1,955
30
(180)
(5)
–––––––––––––
Adjusted retained profits at 31 March 20X6
Retained earnings of Shakeel Limited at 1 April 20X5
1,800
(2,200)
–––––––––––––
Shakeel Limited: loss for the year (post-acquisition loss)
(400)
–––––––––––––
Parent company share of post-acquisition loss (90%)
Hasan Limited reserves at 31 March 20X6
Goodwill impairment
(360)
2,900
(120)
–––––––––––––
Consolidated retained profits at 31 March 20X6
2,420
–––––––––––––
(W4) Goodwill
At acquisition date
Shares of Shakeel Limited
1,500
Share premium of Shakeel Limited
500
Retained earnings of Shakeel Limited
2,200
Fair value adjustments:
Leasehold (W1)
(120)
Software (W1)
(180)
–––––––––––––
3,900
–––––––––––––
Acquired by Hasan Limited (90%)
3,510
Cost of investment
4,110
–––––––––––––
Goodwill at acquisition
600
Impairment
(120)
–––––––––––––
Goodwill at 31 March 20X6
480
–––––––––––––
(W5) Non-controlling interests
Share capital of Shakeel Limited
Share premium of Shakeel Limited
Adjusted retained earnings of Shakeel Limited, 31 March 20X6 (W3)
Fair value adjustments:
Leasehold
Software
Rs.000
1,500
500
1,800
(120)
(180)
–––––––––––––
Total net assets at 31 March 20X6
3,500
–––––––––––––
Non-controlling interests (10%)
350
–––––––––––––
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(W6) Elimination of current accounts:
Shakeel Limited’s current account with Hasan Limited per question
Deduct cash in transit regarding this balance
Rs.000
75
(15)
–––––––––––––
Adjusted figure to cancel
60
–––––––––––––
(W7) Elimination of intra-group loan:
Rs.000
200
(40)
Investment in Hasan Limited’s books
Deduct repayment in transit
–––––––––––––
Non-current liability in Shakeel Limited’s books
160
–––––––––––––
1.2.
FLAMSTEED LTD AND HALLEY LTD
(a)
(b)
The following external sources of information may indicate that an asset is impaired.
(i)
There are observable indications that the assets value has declined during the
period significantly more than would be expected as a result of the passage of time
or normal use.
(ii)
Significant changes with an adverse effect on the entity have taken place during the
period or will take place in the near future, in the technological, market, economic or
legal environment in which the entity operates or in the market to which the asset is
dedicated.
(iii)
The carrying amount of the net asset of the entity is more than its market
capitalization.
(iv)
The carrying amount of the investment in the separate financial statements exceeds
the carrying amount in the consolidated financial statement of the investee’s net
asset, including associated goodwill, or the dividend exceeds the total
comprehensive income of the subsidiary, joint venture or associates in the period
the dividend is declared.
(v)
Market interest rate or other market rate of return on investment have increased
during the period and those increases are likely to affect the discount rate used in
calculating the asset value in use and decrease the assets recoverable amount
materially.
Extract of consolidated statement of financial position as at 30 June 20X6
Rs.‘000
Assets
Non-Current Assets
Property, Plant and Equipment (100,000 + 80,000)
Goodwill (W1)
Intangible-brand name
180,000
13,468
10,000
203,468
Current Assets
Inventory (6,000 + 16,000)
Receivables (32,000 + 14,000)
Cash (4,000 + 0 + 4,000)
76,000
279,468
Total Assets
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46,000
8,000
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Answers
Workings
(i)
Goodwill
Rs.‘000
Consideration transferred
Fair value of NCI
Net Asset acquired as represented by:
Ordinary share capital
Revaluation surplus on acquisition
Retained earnings on acquisition
Intangible assets (brand name)
Rs.‘000
77,468
18,000
95,468
50,000
10,000
12,000
10,000
(82,000)
13,468
Note
The deferred consideration has been discounted at 7% for 2 years (1 st July 20X5 – 1st July
20X7).
1.3.
BRADLEY LTD
Consolidated statement of financial position as at 31 December 20X6
Rs.’Million
Rs.’Million
Non-current assets
Goodwill (working 1)
120
Land & building (630 + 556 + 140)
1,326
Machinery & equipment (570 + 440)
1,010
2,456
Current assets
Inventory (714 +504 – 24)
1,194
Trade receivables (1,050 + 252 – 50)
1,252
Cash/Bank (316 + 60)
376
2,822
5,278
Ordinary shares of Rs. 1 each
3,000
Retained earnings (Working 3)
1,323.2
Non-controlling Int. (Working 4)
376.8
4,700
Current liabilities
Trade payables (440 + 188 - 50)
578
5,278
Workings:
1.
Rs. million
Calculation of goodwill:
Fair value of consideration
1,320
Plus fair value of NCI at acquisition
330
Less net acquisition – fair value of
Assets acquired & liability:
Share capital
Retained Earning
Fair value adj at acquisition
Goodwill
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190
140
(1,530)
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2.
Rs.’Million
Group structure
Rs.’Million
960 million
 100
1,200 million
3.
80%
Retained earnings:
As per question
1,160
Adjustment (unrealised profit)
424
(24)
Pre-acquisition retained earnings
(190)
234
Group share of post-acquisition retained earnings:
(80% x 234)
187.2
1,323.2
4. Non-controlling interest:
Fair value of NCI at acquisition
330.0
NCI’s share of post-acquisition
retained earnings (20% x 234)
46.8
376.8
Alternative workings:
(W1) Fair value adjustment:
Dr:
Consolidated land & building
Cr:
Revaluation reserve
Rs. 140 million
Rs. 140 million
(W2) Consolidation Schedule
Rs. ’M
Bliss Ltd
Bradley in
Bliss 80%
(W3)
Post –
Acq
NCI
40%
Rupees in millions
Ordinary share capital
1,200
960
240
Revaluation Res. (W1)
140
112
28
Retained earnings
424
152
84.8
Net assets acquired
187
1,224
Cost of acquisition
(1,320)
Goodwill (partial value)
(96)
Goodwill attribute to NCI (W5)
(24)
Goodwill (fair value)
24
(120)
Unrealised profit on inventory
-
NCI (fair value)
(24)
376.8
Retained earnings of Bradley Ltd
1,160
Consolidated retained earnings
1,323
(W3) Bradley in Bliss =
960𝑚 𝑠ℎ𝑎𝑟𝑒𝑠
1,200𝑚 𝑠ℎ𝑎𝑟𝑒𝑠
× 100 = 80%
(W4) Bradley’s share of Bliss’s pre-acquisition retained earnings = 80% x
= 80% x Rs. 190m =
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Answers
(W5) Goodwill attribute to NCI
Rs. m
Fair value of NCI @ date of acquisition
Less: fair value of net assets attributable to
NCI (20% x (1,200 + 140 + Rs. 190m))
Goodwill attributable to NCI
1.4.
330
306
24
X LTD
Consolidated statement of financial position as at 31 December 20X6
All workings in Rs.000
ASSETS
Non-current assets
Property, plant and equipment (12,000 + 4,000 + 750(W1))
Goodwill (W2)
Intangible asset (W1)
Rs.000
16,750
208
90
17,048
Current assets
Inventories (2,200 + 800 -30 (W3))
Receivables (3,400 + 900)
Cash and cash equivalents (800 + 300)
2,970
4,300
1,100
8,370
25,418
Total assets
EQUITY AND LIABILITIES
Equity
Share capital (Rs. 1 equity shares)
10,000
Retained earnings (W4)
7,893
Total equity attributable to parent
17,893
Non-controlling interest (W5)
1,741
Total equity
19,634
Non-current liabilities
Long term borrowings
2,700
Current liabilities (2,000 + 1,000 + 84)
3,084
Total liabilities
5,784
Total equity and liabilities
25,418
Workings
1.
Fair value adjustments
At acquisition date
Movement
31 Dec 20X6
Rs.000
Rs.000
Rs.000
PPE
800
(50)
750
Inventories
200
(200)
-
Intangible assets
150
(60)
90
Liabilities
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(210)
────
940
────
127
126
────
(184)
────
(84)
────
756
────
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
2.
Goodwill
Rs.000
Consideration transferred
Rs.000
3,800
NCI at fair value
1,600
────
5,400
Net assets at fair value:
Share capital
1,000
Retained earnings
3,200
Fair value adjustments
940
────
(5,140)
────
260
Goodwill on acquisition
20% impairment
(52)
────
208
────
Goodwill at 31 December 20X6
3.
Unrealised profit on inventories
Sales of Rs. 300k x 20% x 50% left in inventories at y/e = Rs. 30,000
4.
Retained earnings
As per SOFP
Rs.000
Rs.000
7,500
4,000
Pre-acquisition reserves
(3,200)
Adjustments arising from movement in
FV adjustments
Group share 75%
462
Unrealised profit on inventory transfer
(30)
Goodwill impairment (75% x 52)(W2)
Consolidated reserves
5.
(184)
────
616
────
(39)
────
7,893
────
Non-controlling interests
Rs.000
NCI at acquisition (at fair value)
1,600
25% x post-acquisition retained earnings Rs. 616,000 (W4)
Goodwill impairment (25% x 52)(W2)
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(13)
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─────
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Answers
1.5.
KHAN LIMITED
(a) Consolidated statement of financial position as at December 31, 20X6
Rupees in
million
ASSETS
Non-current assets
Property plant & equipment (W- 1)
14,800
Goodwill (W - 2)
100
14,900
Current assets
(1,069+ 1,316)
2,385
17,285
EQUITY AND LIABILITIES
Equity
Share capital
6,800
General reserve (W5)
1,975
Retained earnings
3,844
Non-controlling interest (W8)
2,420
Total equity
15,039
Non-current liabilities
14% Term finance certificates
(2,250-1,500)
750
(445 + 190)
635
Current liabilities
Accounts payable
Dividend payable (W3)
861
17,285
(b) Consolidated statement of comprehensive income for the year ended December 31,
20X6
Rupees in
million
Profit before tax and interest (W4)
Interest expense
4,315
(315 - 210)
Profit before tax
4,210
Taxation expense
(650 + 474)
Profit for the period
(1,124)
3,086
Other comprehensive income
Total comprehensive income
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Advanced accounting and financial reporting
Rupees in
million
Attributable to:
Equity holders of parent
Balancing
Non-controlling interest (W-7)
2,894
192
3,086
(c)
Khan Limited
Consolidated statement of retained earnings for the year ended 31 Dec 20X6
Balance as at January 1, 20X6 (W- 6)
1,700
Total comprehensive income for the year 20X6
2,894
Dividends
(750)
Balance as at December 31, 20X6
3,844
W1 – Property, plant & equipment
Cost – KL
16,250
Cost – GL
25,000
Acc. depreciation – KL
(9,750)
Acc. depreciation – GL
(17,000)
14,500
Fair value adjustment
1,000
Less: Depreciation on increased
fair value
(Rs. 1,000 x 10% x 7)
(700)
14,800
W2 – Goodwill
Purchase consideration
5,500
Less:
Share capital
(75% of 5,000)
(3,750)
Retained earnings
(75% of 1,000)
(750)
(75% of 200)
(150)
(1,000 x 75%)
(750)
General reserve
FV increase in PPE
100
W3 - Dividend payable
Ordinary dividend – KL
750
Ordinary dividend - GL
Preference dividend - GL
(300 x 25%)
75
(60 x 60%)
36
861
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Rupees in
million
W4: Profit before tax and interest
KL
2,865
GL
1,550
Current year depreciation on increased value of PPE (1,000 x 10%)
(100)
4,315
W5: General reserve
General reserve – KL
1,750
General reserve – GL
(500 – 200) x 75%
225
1,975
W6: Retained earnings
Retained earnings – KL
2,000
Retained earnings – GL
(1,200 - 1,000) x 75%
Less: Depreciation charge on increased FV
(1,000 x 6 x 10% x 75%)
150
(450)
1,700
W7: Non-controlling interest (for statement of comprehensive income)
Share from profit of GL
217
(1,550+210-300-474—120) x 25%
Less: Current year depreciation on
increased of PPE
(100 x 25%)
(25)
192
W8: Non-controlling interest (for statement of financial position)
Share capital
(5,000 x 25%)
1,250
Preference shares
(1,000 x 60%)
600
(500 x 25%)
125
(1,200 x 25%)
300
(W-7)
192
(1,000 x 25%)
250
General reserve
Opening retained earnings
Comprehensive income for the year
Increase in FV of building
Less: Depreciation charge on increased FV
(1,000 x 6 x 10% x 25%)
(150)
(300 x 0.25)
(75)
(120 x 0.6)
(72)
Less: Dividend on ordinary shares
Less: Dividend on preference shares
2,420
1.6.
WHITE LIMITED
Consolidated Statement of Finance Position as on 31 December 20X6
Assets
Rs. in million
Goodwill [56.7(W-1)×20]
1,134.00
Property, plant and equipment [14,900+3,000+(325×20)+800]
Investment property (800–800)
25,200.00
-
Current assets [6,660+2,500+(305×20)]
15,260.00
Total assets
41,594.00
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Equity & liabilities
Rs. in million
Share capital
11,400.00
Retained earnings (W-2)
15,089.65
Exchange reserves (W-5)
1,270.65
27,760.30
Non-controlling interest (W-3)
1,091.20
28,851.50
Revaluation surplus [150+650÷20]
182.50
Current liabilities [6,360+2,300+(195×20)]
12,560.00
Total equity and liabilities
41,594.00
W-1: Goodwill
Cash payment
GL
YL
Rs. in million
T $ in million
4,200.00
Fair value of previously held equity (4.5×23)
Total cash consideration and NCI
243.00
(270×90%)
103.50
4,200.00
346.50
Share capital
1,500.00
225.00
Retained earnings
3,500.00
90.00
5,000.00
315.00
4,500.00
289.80
Less : Fair value of net assets acquired
WL's share in net assets
(GL:5,000×90%),(YL:315×92%)
Bargain purchase/Goodwill
(300.00)
W-2: Consolidated retained earnings
56.70
Rs. in million
WL (Given)
9,500.00
Post-acquisition - GL [(7,900–3500)×90%
3,960.00
Post-acquisition - YL (2,148.75(W-2.1)×92%)
1,976.85
Bargain purchase (W-1)
300.00
Gain on derecognition of associate (W-4)
484.50
484.50
Reversal of exchange gain on investment in YL by WL [75×(20–17)]
(225.00)
Reversal of exchange gain on investment in YL by GL (270×(20–
17)×92%
(745.20)
Elimination of income from investment property (800–650)×90%
(135.00)
Depreciation expense to be booked for the year by GL (650÷20)
(32.50)
Rent expense to be reversed in WL books
Rent income to be reversed in GL books (60×90%)
60.00
(54.00)
15,089.65
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W-2.1: Post acquisition profit of YL
Rs. in million
Profit for nine month [{(210-90)120+(225×10%)}×18]
2,565.00
Less: 10% interim dividend (22.5×18.5)
(416.25)
2,148.75
W-3: Non-controlling interest
At acquisition (GL : (1500+3500)×10%)+(YL(225+90)×8%×17)
928.40
Post-acquisition - GL [(7,900–3500)×10%
440.00
Post-acquisition - YL (2,148.75×8%)
171.90
Reversal of exchange gain on investment in YL by GL [270×(20-17) × 8%]
(64.80)
Elimination of income from investment property (800–650 )×10%
(15.00)
Rent income to be reversed in GL books (60×10%)
(6.00)
Exchange gain relating to year-end transactions (W-5)
95.70
Indirect holding adjustment (270×10%×17)
(459)
1,091.20
W-4: Gain on derecognition of associate
Fair value of investments on 1 April 20X6 (4.5×23×17)
1,759.50
Less: Cost of investment (75×17)
(1,275.00)
Gain
484.50
W-5: Exchange reserves
Relating to goodwill
T$
Conversion
rate
Rs.
in million
Balance on acquisition date i.e. 1 April 20X6
56.70
17.00
963.90
Balance as on 31 December 20X6
56.70
20.00
1,134.00
170.10
Relating to translation of FS foreign
operations
T$
Net assets as on 31 December 20X6
435.00
20.00
8,700.00
Net assets on acquisition date
315.00
17.00
5,355.00
Profit since acquisition {120 + (225×10%)}
142.50
18.00
2,565.00
Dividend paid
(22.50)
18.50
435.00
Exchange gain for the year ended 31
December 20X6
Less: Exchange gain relating to NCI
(1,196.25×8%)
-
Conversion
rate
Rs.
in million
(416.25)
7,503.75
1,196.25
(95.70)
Exchange gain to parent
1,100.55
Total exchange reserves (170.10+1,100.55)
1,270.65
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CHAPTER 2 - BUSINESS COMBINATIONS ACHIEVED IN STAGES
2.1.
STEP ACQUISITION
The profits of AS since the investment was acquired (all retained) are Rs. 40 million (= Rs. 300m
– Rs. 260m). During this period, H held 25% of the equity of AS and it is assumed that AS is an
associate. Profits attributable to H for the year are therefore Rs. 10 million (= 25%  Rs. 40 million).
(i)
Total gain or profit attributable to the investment in AS
Rs. m
Initial investment in associate at cost
80
Share of post-investment retained profits
10
90
Fair value of investment at 30 June
95
Gain recognised when step acquisition occurs
5
The total gain/profit recognised for the year from the investment in AS is therefore Rs. 10
million + Rs. 5 million = Rs. 15 million.
(ii)
Total goodwill on acquisition
Fair value of shares that gave control (40%)
160
Fair value of previous investment (25%)
95
255
Fair value of NCI at acquisition
120
375
Net assets of AS at 30 June
(300)
Total goodwill
(iii)
75
Goodwill attributable to NCI
Fair value of investment in 25% of AS (35%  300)
Goodwill attributable to NCI (balancing figure)
Total NCI
2.2.
105
15
120
A LTD
(a)
Treatment of B Ltd
IFRS 3 Business combinations requires goodwill on acquisition to be calculated at the date
control is gained. The second acquisition gives A Ltd a 75% holding and therefore control
over B Ltd. The simple investment of 15% will be derecognised and the 75% holding will
be fully consolidated as a subsidiary in the group financial statements. The goodwill will be
calculated as the cost of the 60% acquired in the year plus the fair value of the previously
held interest of 15%, compared with the fair value of the net assets at the date of
acquisition (1 April 20X6).
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(b)
Consolidated statement of financial position as at 31 September 20X6
A Ltd
Rs.000
ASSETS
Non-current assets
Property, plant and equipment (22,000+5,000)
Goodwill (W orking 1)
27,000
405
27,405
Current assets
Inventories (6,200+800– 40 (Working 2))
Receivables (6,600+1,900)
Cash and cash equivalents (1,200+300)
6,960
8,500
1,500
16,960
44,365
Total assets
EQUITY AND LIABILITIES
Equity
Share capital (Rs. 1 equity shares)
Retained earnings (W orking 3)
Non-controlling interest (Working 4)
Total equity
20,000
8,629
28,629
1,604
30,233
Non-current liabilities
5% Bonds 20X5 (W orking 5)
Current liabilities (8,100+2,000)
Total liabilities
Total equity and liabilities
4,032
10,100
14,132
44,365
Working 1 Goodwill
Rs.000
Consideration transferred for the 60%
Rs.000
2,900
Fair value of 15% holding at 1 April 20X6
800
Fair value of non-controlling interest
1,250
4,950
Net assets acquired:
Share capital
1,000
Retained earnings (5,000- 1,500)
3,500
(4,500)
450
Impaired by 10%
(45)
Net value of goodwill
405
Working 2 Unrealised profit on inventories
Rs.000
Sales from B Ltd to A Ltd
400
50% in inventories
200
Profit margin 20% - adjust Inventories and retained
earnings of B Ltd
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Working 3 Retained earnings
A Ltd
B Ltd
Rs.000
Rs.000
7,500
5,000
As at 30 September 20X6
Pre-acquisition (5,000 – (3,000 x 6/12))
(3,500)
Less unrealised profit of B Ltd (working 2)
(40)
1,460
Group share 75%
1,095
Group share of impairment (75% x 45)
(34)
Additional finance costs on bonds (working 5)
(132)
Group profit on derecognition of FVTOCI Investment
– gain to date of deemed disposal 1 April 20X6 (800 - 600) – W6
200
Consolidated retained reserves
8,629
Working 4 Non-controlling interest
Rs.000
Fair value at 1 April 20X6
1,250
Plus 25% adjusted post-acquisition reserves 1,460 (working 3)
365
Less NCI share of goodwill impairment (25% x 45)
(11)
NCI at 30 September 20X6
1,604
Working 5 Bonds – amortised
cost
To 30 September 20X6
Rs.000
Rs.000
Rs.000
Rs.000
Opening
value
Effective
rate 8.5%
Interest paid
5% x Rs. 4m
Value at 30
September
3,900
332
(200)
4,032
The difference of Rs. 132,000 must be added to the value of the bond liability and
deducted from
A Ltd’s retained earnings.
Working 6 Other reserves and investment
IFRS 3 requires that the 15% simple investment be derecognised and on derecognition any
gain/loss would be considered realised. The gain of Rs. 200,000 (FV of Rs. 800,000 at
date of derecognition less the investment cost of Rs. 600,000) represents the group gain
and will be included in the consolidated reserves.
The balance on other reserves again relates to the treatment of the investment in the
parent’s own accounts and the gains on the investment (B Ltd) and not relevant for the
group accounts – as the B Ltd has been fully consolidated.
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2.3.
X LTD GROUP
(a)
(i)
Consolidated statement of comprehensive income for the year ended 31
December 20X6
Rs.000
Revenue (1,200 + 290)
1,490
Cost of sales (810 + 110 + 4 (W1))
(924)
Gross profit
566
Operating expenses (100 + 40 + 9 (W2))
(149)
417
Investment income
(50 – intra group dividend 40 (80% x 50))
10
Finance costs (45 + 10)
(55)
Share of associate’s profit (40% x 30)
12
Profit before tax
384
Income tax expense (80 + 30)
(110)
Profit after tax
274
Other comprehensive income
Revaluation of property, net of tax (60 + 20)
80
Share of associate’s OCI (40% x 10)
4
Other comprehensive income for the year, net of tax
84
Total comprehensive income
358
Profit for the year attributable to:
Owners of the parent (274 – 17 (W3))
257
Non-controlling interest
17
274
Total comprehensive income attributable to:
Owners of the parent (358 – 21 (W3))
337
Non-controlling interest
21
358
(ii)
Consolidated statement of changes in equity for the year ended 31 December
20X6
Equity at 1 January 20X6 (W4)/(W5)
Total comprehensive income for the year
Dividends
X Ltd
group
NCI
Total
Rs.000
Rs.000
Rs.000
1,868
216
2,084
337
21
358
(100)
Dividend paid to NCI (20% x 50)
Equity at 31 December 20X6
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(100)
(10)
(10)
227
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Workings
(W1) Net assets of subsidiary
Acquisition
1 Jan 20X0
1 Jan
20X6
31 Dec
20X6
Rs.000
Rs.000
Rs.000
Share capital
200
200
200
Retained reserves
420
640 (bal)
710
620
840
910
60
60
60
Accumulated additional depreciation
on FV adjust. (60/15 yrs = 4 per yr)
(12)
(16)
Accumulated impairment of goodwill
(W2)
(30)
(39)
858
915
Fair value adjustment
Adjusted net assets
680
Post-acquisition retained reserves to
1 Jan/31 Dec
178
235
(W2) Goodwill
Rs.000
Rs.000
Consideration transferred
620
NCI at fair value
180
800
Net assets acquired:
Share capital
200
Retained earnings
420
Fair value adjustment
60
(680)
120
Impairment 20X5 (25%)
(30)
90
Impairment 20X6 (10% of carrying value)
(9)
(W3) Non-controlling interest
Profit for year/TCI of Y Ltd
TCI
Rs.000
Rs.000
100
120
Less impairment of goodwill in the year (W2)
(9)
(9)
Less depreciation on FV adjustment for the year
(W1)
(4)
(4)
20% NCI share
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(W4) Group equity attributable to parent at 1 January 20X6
Rs.000
Parent’s equity at 1 January 20X6 as per SOCIE
Plus share of post-acquisition retained reserves of Y Ltd to
1 January 20X6 (80% x 178 (W1))
Plus share of post-acquisition retained reserves of Z Ltd to
1 January 20X6 (40% x(500-435))
Equity attributable to parent at 1 January 20X6
1,700
142
26
1,868
(W5) Group equity attributable to NCI at 1 January 20X6
Rs.000
At acquisition
180
Plus share of post-acquisition retained reserves to 1 January 20X6
(20% x 178 (W1))
Equity attributable to NCI at 1 January 20X6
(b)
(i)
36
216
Additional acquisition of shares
The purchase of the additional 10% of Y Ltd’s share capital is treated as a
transaction between owners of the entity, as NCI reduces and parent’s share
increases. No additional goodwill is calculated as X Ltd already controls Y Ltd and
goodwill is only calculated when control is attained. Any difference between the
consideration paid by X Ltd and the reduction in the NCI is adjusted through group
retained earnings.
(ii)
Adjustment to parent’s equity
Rs.000
Consideration transferred
120
Reduction in NCI at 1 January 20X7 (50% x Rs. 227,000)
Adjustment to retained earnings – debit
(c)
(114)
6
Additional investment in Z Ltd
The additional 20% investment will give X Ltd the majority holding of Z Ltd’s ordinary
shares. This gives the presumption of control, unless there is evidence to the contrary and
once control is attained Z Ltd will be treated as a subsidiary and fully consolidated.
Goodwill on acquisition is calculated at 1 January 20X7 and the existing investment will be
restated to FV at the date of acquisition
2.4.
PLAIN LTD
Consolidated statement of financial position as at 31 March 20X6
Rs. m
Assets
Tangible non-current assets (W4)
1,745
Intangible assets i–e goodwill 45 – 15 (W3)
30
Investment in associate (W5)
95
Held to maturity investment (W6)
50
Current assets (477 + 190 - 250)
417
2,337
Equity and liabilities
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Consolidated statement of financial position as at 31 March 20X6
Share capital of Rs. 1
Share premium
Revaluation reserve
Retained earnings (W8)
Rs. m
800
150
90
169
1,209
99
1,308
670
344
15
2,337
Non-controlling interest (W9)
Non-current liabilities (640 + 30)
Current liabilities (214 + 130)
Pension liability (W7)
Workings
(W1) Retained profits of Stripes
Fair value of net assets at 1 April 20X5
Fair value adjustment for land
Carrying value of net assets
Share capital plus share premium
Therefore retained earnings at 1 April 20X5
Rs. m
460
(25)
435
(260)
175
Carrying value of net assets at 1 April 20X3
Share capital plus share premium
Therefore retained earnings at 1 April 20X3
Rs. m
325
(260)
65
(W2) Gain or loss on acquiring control of Stripes
1 April 20X5
Fair value of initial investment in Stripes at 1 April 20X5
Initial cost of investment
Share of retained earnings 1 April 20X3 – 1 April 20X5
(= 30%  (175 – 65) –see W1
Carrying value of investment in associate
Loss recognised on gaining control of Stripes
Rs. m
Rs. m
150
120
33
153
(3)
This loss has not yet been recognised in the individual financial statements of Plain; it must
therefore be included in the calculation of group reserves (see Working 8).
(W3) Goodwill in Stripes at acquisition
Rs. m
150
260
410
(368)
42
3
45
Fair value of initial investment at acquisition
Cost of additional shares
Total cost
Fair value of net assets acquired (80%  460)
Goodwill at acquisition attributable to Plain
Goodwill attributable to NCI
Total goodwill at acquisition date
Goodwill in statement of financial position: There has been impairment of Rs. 15 million in
goodwill. This is apportioned between the interests of the equity owners of Plain and NCI in
the ratio 80:20.
Impairment of goodwill attributable to parent = Rs. 15m  80% = Rs. 12 million
Impairment of goodwill attributable to NCI = Rs. 15m  20% = Rs. 3 million.
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(W4) Tangible non-current assets
Rs. m
Plain
1,280
Stripes
440
Fair value adjustment
25
1,745
(W5) Investment in associate – Spots
Rs. m
Cost
60
Group share of post-acquisition profit
(324 – (200 – 16)) × 25%
35
95
Rs. m
Or
Share of net assets (25% × 324)
81
Fair value adjustment (25% × 16)
4
Goodwill [60 – (200 × 25%)]
10
95
(W6) Held to maturity investment
Rs. m
Amortised cost
Cost
54
Less: Discount (20/5)
(4)
50
Tutorial note: It is not correct to recognise interest on a straight line basis. It is used here as
a simplification. IFRS 9 requires the recognition of interest using the effective rate.
(W7) Pension
Rs. m
Scheme assets
Cash
250
Expected return
26
Actuarial gain (bal fig)
26
Fair value of scheme assets
302
Scheme liabilities
Current service cost
276
Interest cost
41
Present value of obligation
317
Pension scheme liability (317 – 302)
15
Expense in profit or loss
Current service cost
276
Interest cost
41
Expected return
(26)
Expense in profit or loss
291
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(W8) Consolidated retained earnings
Rs. m
Plain (given)
390
Stripes post-acquisition retained earnings
(210 – 175 (W1)) × 80%
28
Loss on acquiring control (W2)
(3)
Goodwill impairment attributable to parent (W3)
(12)
Share of post-acquisition profits of associate (W5)
35
Discount on investment (W6)
(4)
Pension cost (W7)
(291)
Actuarial gain (W7)
26
169
(W9) Non-controlling interest in Stripes
Rs. m
Book value (20% × 470)
94
Fair value adjustment (20% × 25)
5
Goodwill (3 – impairment 3) (W3)
99
2.5.
MANGO LTD
Consolidated statement of financial position as at 31 March 20X6
Rs. m
Non-current assets
Non-current assets (3,295 + 2,000 + 226 + 2)
Goodwill (W2)
5,523.0
89.0
Current assets (1,685 + 861)
2,546.0
Total assets
8,158.0
Equity and liabilities
Share capital
850.0
Retained earnings (W4)
3,405.9
Other components of equity (W5)
257.0
4,512.9
Non-controlling interest (W3)
649.1
5,162.0
Non-current liabilities (1,895 + 675)
Current liabilities (320 + 106)
426.0
Total equity and liabilities
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Workings
(W1a)
Net assets in subsidiary at acquisition – before measurement period
adjustments
At end of reporting
period
At
acquisition
Rs. m
Rs. m
Share capital
Retained earnings
Other components of equity
1,020
1,020
980
900
80
70
1,990
Fair value adjustments:
Contingent liability
(6)
Property
266
260
Fair value of net assets (given)
2,250
The total fair value adjustment of Rs. 260 million above is taken as a balancing
figure as is the fair value adjustment that relates to property.
The amount in respect of the contingent liability and an amount within the property
adjustments is subsequently found to be incorrect. This information came to light in
the measurement period. Therefore, they retrospectively adjust the carrying amount
of goodwill. In this case the easier approach is to calculate goodwill using the
corrected figures.
(W1b)
Net assets in subsidiary at acquisition – after measurement period
adjustments
At
consolidation
Rs. m
Share capital
Retained earnings
Rs. m
1,020
1,020
980
900
Reduction of depreciation recognised on the
buildings (Rs. 40/20 years)
2
Adjustment re recognition of the provision
5
Other components of equity
At
acquisition
987
900
80
70
2,067
1,990
Fair value adjustments:
Contingent liability (6 – 1)
Property (266 – 40)
Fair value of net assets
(5)
(5)
226
226
2,308
2,211
The contingent liability at acquisition is recognised for consolidation purposes as a
deduction from the net assets of the subsidiary. It is not recognised in the
subsidiary’s own accounts as it does not pass the IAS 37 recognition criteria.
The contingent liability has evolved into a provision by the date of consolidation.
This means that it is recognised as a liability and the amount has been expensed in
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the subsidiary’s own financial statements. The adjustment made above (Dr Fair
value adjustment and Cr Retained earnings) is made because the expense which
has been recognised by the subsidiary since the date of acquisition relates to an
amount that has already been recognised in the consolidation workings at
acquisition.
(W2)
Goodwill
Rs. m
Cost of investment
975
Fair value of initial holding
705
Fair value of NCI at date of acquisition
620
2,300
Net assets acquired (W1b)
(2,211)
89
(W3)
Non-controlling interest
Rs. m
Fair value of NCI at date of acquisition
620.0
NCI’s share of post-acquisition growth in:
Retained earnings (30% of (987 – 900))
26.1
Other components in equity (30% of (80 – 70))
3.0
649.1
(W4)
Retained earnings
Rs. m
Mango Ltd’s balance as per the question
3,340.0
fair value adjustment re initial holding (705 – 700)
Share of post-acquisition growth (70% of (987 – 900))
5.0
60.9
3,405.9
(W5)
Other components of equity
Rs. m
Mango Ltd’s balance as per the question
250.0
Share of post-acquisition growth (70% of (80 – 70))
7.0
257.0
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Answers
CHAPTER 3 - CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
3.1.
MILLARD LTD
Consolidated profit and loss account for the year ended 31 December 20X6
NOTE
Rs.’000
Revenue
(1)
425,000
Cost of sales
(2)
(162,600)
Gross profit
Distribution costs
262,400
(35,000)
Impairment losses
(4)
(7,000)
Administrative expenses
(28,000)
Operating profit
Investment income
(5)
192,400
3,750
Debenture interest
(6)
(58,750)
Profit before tax
Tax
137,400
(52,500)
Profit after tax
84,900
Non-controlling Interests
(7)
Group profit
(8,380)
76,520
Preference dividends
(13,750)
Ordinary dividends
(20,000)
Profit earned during the year
42,770
Retained profit b/f 1 January 20X6
(8)
Retained profit c/f 31 December 20X6
72,350
115,120
Workings:
1
Revenue:
Millard
Fillmore
Less: inter-company group sales
Rs.’000
125,000
50,000
(12,500)
100
162,600
2
Cost of Sales:
Millard
Fillmore
Inter-company sales
Unrealized profits (3)
3
Provision for unrealised profits on inventory
25
2000
20X6

125
1
25
1500
20X5

125
1
Charged to profit and loss a/c
© Emile Woolf International
Rs.’000
312,500
125,000
437,500
12,500
425,000
145
400
(300)
100
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Rs.’000
4
Rs.’000
Goodwill on acquisition:
Cost of investment
67,000
Net assets acquired:
- On ordinary share capital
- Profit and loss account
62,500
12,500
75,000
Percentage acquired 50/62.5 x 100 = 80%
80% of Rs. 75,000
(60,000)
Goodwill (written-off in 20X6)
5
7,000
Rs.’000
Investment income:
As per draft account
7,950
Inter-company dividend 80% x Rs. 5,250
(4,200)
Investment income
6
7
3,750
Rs.’000
Debenture interest
Parent’s
47,500
Subsidiary
15,000
Inter-company amount 25% x Rs. 15,000
(3,750)
Investment income
58,750
Non-controlling interest:
Rs.’000
Rs.’000
Profit after tax
24,500
Less: Preference dividend
(4,375)
4,375
20,125 x 20%
4,025
8,400
Non-Controlling Interest share of unrealized profit 20% x Rs. 100
(20)
8,380
8
Rs.’000
Retained Profit b/f
Parent’s
Rs.’000
66,750
Subsidiary
19,500
Pre-acquisition
(12,500)
Parent’s share
7,000 x 80%
5,600
72,350
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Answers
3.2.
SHERLOCK
Consolidated statement of comprehensive income for the year ended 31 December 20X6
Rs. m
Revenue
538.0
Cost of sales
(383.0)
Gross profit
155.0
Other income
29.0
Administrative costs
(30.0)
Other expenses
(72.6)
Operating profit
81.4
Finance costs
(10.0)
Finance income
15.0
Profit before tax
86.4
Income tax expense
(31.0)
Profit for the year
55.4
Other comprehensive income
Revaluation surplus
7.8
Remeasurement
2.0
Loss on cash flow hedge
(3.0)
6.8
Total comprehensive income for year
62.2
Profit attributable to:
Owners of the parent (balancing figure)
43.8
Non-controlling interest (W1a)
11.6
55.4
Total comprehensive income attributable to:
Owners of the parent (balancing figure)
51.8
Non-controlling interest (W1a)
10.4
62.2
Workings
W1
Balances for inclusion in the consolidated statement of comprehensive income
Sherlock
Katie Ltd
Mycroft Ltd
Adjustment Total
Ltd
(6/12)
Rs. m
Revenue
Cost of sales
Rs. m
Rs. m
400
115
35
(312)
(65)
(18)
21
7
1
Rs. m
(12) W3
12 W3
Rs. m
538
(383)
Gross profit
Other income
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Advanced accounting and financial reporting
Sherlock
Katie Ltd
Mycroft Ltd
Adjustment Total
Ltd
(6/12)
Rs. m
Rs. m
Administrative costs
(15)
(9)
(6)
Other expenses
(35)
(19)
(4)
Goodwill impairment W2
Rs. m
Rs. m
Rs. m
(30)
(3)
Pension cost W4
(7.2)
Revaluation W5
(2.4)
Share Katie Ltd W6
(2.0)
(72.6)
Operating profit
Finance costs
(5)
Cash flow hedge W7
(6)
(2)
3.0
Finance income
(10)
6
5
4
15
(19)
(9)
(3)
(31)
41
22
7
Profit before tax
Income tax expense
Profit for the year
OCI
Revaluation surplus
10
Revaluation W5
(2.2)
Remeasurement W4
7.8
2
Cash flow hedge W7
2.0
(3.0)
Total CI for year
50.8
19
(3.0)
7
6.8
W1a Non-controlling interests
Mycroft Ltd
Katie Ltd
22
7
40%
40%
NCI
8.8
2.8
Total CI for the year W1
19
7
NCI percentage holding
40%
40%
7.6
2.8
Profit for the year
NCI percentage holding
NCI
W2
Total
11.6
10.4
Goodwill write off
Rs. m
Cost of investment
80
FV of NCI at acquisition
45
125
Fair value of identifiable net assets
W3
(110)
Goodwill on acquisition
15
Write off in previous year (20%)
(3)
Inter-company trading
The inter-company trading amounts must be eliminated (i-e. sales and purchases).
There is no adjustment in respect of the loss. The question states that the sale is at fair value.
Therefore, the loss is realised. Only unrealised amounts are adjusted on consolidation.
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Answers
W4
Pension scheme
Rs. m
0.2
4.0
3.0
7.2
Amounts charged to profit or loss:
Interest (10% of (Rs. 50m – Rs,48m))
Current service cost
Past service cost
Amount charged to OCI
Remeasurement
W5
2.0
Revaluation of plant
Rs. m
Original cost (1 January 20X5)
12.0
Depreciation in year ended 31 December 20X5
(1.2)
Carrying amount before revaluation at 31 December 20X5
10.8
Revaluation recognised in year ended 31 December 20X5
2.2
Value at 31 December 20X5
13.0
Depreciation in year ended 31 December 20X6 (÷9)
(1.4)
Carrying amount before revaluation at 31 December 20X6
11.6
Fall in value to be recognised
4.6
Value at 31 December 20X6
7.0
Dr
Cr
Rs. m
Rs. m
Plant
W6
4.6
Statement of profit or loss
2.4
Other comprehensive income
2.2
Share Katie Ltd expense
Rs. m
Balance recognised in year ended 31 December 20X5
8,000 Katie Ltds  Rs. 100  4 directors  1/4
0.8
Balance recognised in year ended 31 December 20X5
8,000 Katie Ltds  Rs. 100  7 directors  2/4
2.8
Charge for the year ended 31 December 20X6
Statement of profit or loss
2.0
2.0
Equity
W7
2.0
Cash flow hedge
Mycroft Ltd’s loss on the effective cash flow hedge has been treated incorrectly. The effective part
of any gain or loss on a cash flow hedge should be recognised in other comprehensive income
and accumulated in a cash flow hedge reserve in equity.
The following corrective journal is necessary:
Loss on cash flow hedge
(in other comprehensive income)
Finance cost (profit or loss)
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3
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Advanced accounting and financial reporting
3.3.
FAISAL LIMITED
Consolidated statement of financial position as at 31 December 20X6
Rs. in million
Non-current assets
Property, plant and equipment (W1)
31,926.00
Accumulated depreciation (W1)
(7,491.00)
24,435.00
Goodwill (W6)
1,380.00
Other investments
11,100.00
36,915.00
Current assets
Inventory (W3)
23,740.00
Accounts receivable (6,240 + 2,460 + 6,580  800)
14,480.00
Cash and bank balances (4,920 + 660 + 2,700)
8,280.00
46,500.00
Total assets
83,415.00
Equity and liabilities
Share capital
30,000.00
Retained earnings (W8)
42,379.75
72,384.75
Non-controlling interest (W7)
5,655.25
78,035.00
Current liabilities
Accounts payable (2,760 + 1,980 + 1,440  800)
Total equity and liabilities
5,380.00
83,415.00
Consolidated statement of profit or loss for the year ended 31 December 20X6
Rs. in million
Sales (W4)
100,100.00
Cost of sales (W4)
(80,991.00)
Gross profit
19,109.00
Operating expenses (3,600 + 2,100 + 5,400)
(11,100.00)
8,009.00
Gain on sale of non-current assets (540 – 54)
486.00
Dividend income (1,080 – (80%  600))
600.00
Profit for the year
9,095.00
Attributable to:
Ordinary shareholders of parent
8,599.75
Non-controlling interest (W9)
495.25
9,095.00
© Emile Woolf International
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Answers
Workings (all figures in millions of rupees)
(W1)
Unrealised profit adjustments; Transfer of non-current asset
Figures in the
accounts
Figures if no
transfer had
been made
Adjustment
required
144
150
6 Dr
(24)
120
(75)
(75)
75
51 Cr
Charge for the year
24
15
9 Cr
Against FL’s figures:
Profit on disposal
54
Against SL’s figures:
Cost
Accumulated depreciation
(144/3 years)  6/12
150  3 years/5 years
(24)
Carrying amount
54 Dr
Double entry in consolidated financial statements
Dr
Profit on disposal
54
Cr
Depreciation charge for year
9
Property, plant and equipment (cost)
6
Accumulated depreciation
51
NCI in the statement of profit or loss
2.25
NCI in the statement of financial position
2.25
Being the NCI share of the depreciation adjustment (25%  9)
Consolidated balances
FL
SL
AIL
Adjustments for inter-company transfer
(W2)
Accumulated
depreciation
Rs. millions
5,760
420
1,260
51
7,491
PP and E
Rs. millions
22,500
3,480
5,940
6
31,926
Unrealised profit adjustments: Inter-company trading
FL to AIL
SL to AIL
AIL to FL
Total
2,400
1,800
3,600
7,800
Inventory held
900
600
1,200
Gross profit percentage on sale
20%
10%
30%
Unrealised profit
180
60
360
Sales
600
NCI’s share (based on selling company’s
NCI)
25%  60
15
20%  360
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Advanced accounting and financial reporting
Double entry in consolidated financial statements
Dr
Cost of sales (closing inventory)
600
Cr
Closing inventory in statement of financial position
600
NCI in the statement of financial position
87
NCI in the statement of comprehensive income
87
Impact on consolidated retained earnings (600 – 87)
(W3)
513
Consolidated inventory
Rs. millions
FL
14,460
SL
4,200
AIL
5,680
(600)
23,740
(W4)
Consolidated sales and cost of sales
Sales
Cost of sales
Rs. millions
Rs. millions
FL
57,600
49,200
SL
16,500
18,000
AIL
33,800
21,000
Inter-company sales
(7,800)
(7,800)
Unrealised profit
600
Depreciation adjustment on inter-company transfer of
non-current assets
(9)
100,100
(W5)
80,991
Net assets of SL
At
acquisition
At end of
reporting
period
Rs. millions
Rs. millions
Share capital
12,000
12,000
Retained earnings
(3,600)
-
8,400
12,000
6,000
6,000
(12,200)
5,400
18,200
11,400
Net assets of AIL
Share capital
Retained earnings
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Answers
(W6)
Goodwill
SL
AIL
Rs. millions
Rs. millions
9,000
10,500
Cost of investment
NCI at acquisition
25%  12,000 (W5)
3,000
20%  11,400 (W5)
2,280
Net assets acquired
(W7)
12,000
12,780
(12,000)
(11,400)

1,380
Non-controlling interest in statement of financial position
SL
AIL
Rs. millions
Rs. millions
NCI at acquisition
25%  12,000 (W5)
3,000
20%  11,400 (W5)
2,280
NCI’s share of post-acquisition profit / (loss)
25%  (3,600) (W5)
(900)
20%  (12,200 – 5,400) (W0)
1,360
2,100
Total (2,100 + 3,640)
3,640
5,740.00
Unrealised profit adjustments
on inter-company sale of inventory (W2)
on inter-company sale of non-current asset (W1)
(87.00)
2.25
5,655.25
(W8)
Retained earnings
Rs. millions
FL
40,200.00
Share of SL (75%  (3,600))
(2,700.00)
Share of AIL (80%  (12,200 – 5,400) (W5))
5,440.00
42,940.00
Unrealised profit adjustments
Inter-company sale of inventory (W2)
NCI share
(600.00)
87.00
(513.00)
Inter-company sale of non-current asset (W0)
Unrealised profit (W1)
(54.00)
Depreciation adjustment (W1)
9.00
NCI share of depreciation adjustment (W1)
(2.25)
(47.25)
42,379.25
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
(W9)
Non-controlling interest in statement of profit or loss
Sales
SL
Rs. millions
16,500
Cost of sales
(18,000)
(21,000)
(2,100)
(5,400)
(3,600)
7,400
25%
20%
Operating expenses
Non-controlling interest
AIL
Rs. millions
33,800
(900)
1,480
Total (1,480 – 900)
580.00
Unrealised profit adjustments
on inter-company sale of inventory (W2)
(87.00)
on inter-company sale of non-current asset (W1)
2.25
495.25
3.4.
GOLDEN LIMITED
Consolidated statement of profit or loss for the year ended June 30, 20X6
Rs. in million
Sales (875 + 350 - 40)
1,185.00
Cost of sales (567 + 206 - 33.6 (W1))
(739.40)
Gross profit
445.60
Selling expenses (33 + 11)
(44.00)
Administrative expenses (63 + 40)
(103.00)
Interest expenses (30 + 22)
(52.00)
Other income (65 - 36) [20 x Rs. 2 x 90%)
29.00
Impairment losses
Goodwill (W2)
(9.18)
Investment in associates (W3)
(25.80)
Share of loss from associates [(Rs. 82 x 40%)+0.6]
(33.40)
Profit before tax
207.22
Income tax expense (73 + 15)
(88.00)
Profit for the year
119.22
Attributable to:
Ordinary shareholders of parent
114.26
Non-controlling interest (W4)
4.96
119.22
W1: Adjustment in cost of sales
Intra-group purchases
(40.00)
Additional depreciation on machines
4.00
Unrealized profit in inventories
2.40
(33.60)
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Answers
W2: Impairment on goodwill
Rs. in million
Shares issued (18 x 4/5 x Rs. 20)
288.00
Less: Net assets acquired:
Share capital
200
Pre-acquisition reserves
24
Fair value adjustment (22 + 20 + 3)
45
269
Holding %
90%
Goodwill
(242.10)
45.90
20% Impairment in goodwill
9.18
W3: Impairment in the value of investment in associates
Cash paid (6 x 12)
72.00
Less: Post-acquisition losses:
Reserves on acquisition
40
Reserves at June 30, 20X6 (108-82)
26
(14)
% holding
40%
(5.60)
Elimination of unrealized gain to the extent of GL's share
(Rs. 11.5 x 0.15 / 1.15 x 40%)
(0.60)
65.80
Fair value as per impairment testing
(40.00)
Impairment losses
25.80
W4: Non-controlling interests
Profit of YL
56.00
Less: Additional depreciation
Unrealized profit in inventories
(4.00)
(2.40)
49.60
Non-controlling interest %
10%
4.96
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Advanced accounting and financial reporting
CHAPTER 4 - COMPLEX GROUPS
4.1.
PARVEZ LTD
(a)
Consolidated statement of profit or loss for the year ended 31 December 20X6
Rs. 000
Revenue (W4)
92,360
Cost of sales (W4)
(28,123)
Gross profit
64,237
Distribution costs (3,325 + 2,137 + 1,900)
(7,362)
Administrative expenses (3,475 + 950 + 1,900)
(6,325)
Operating profit
50,550
Interest paid
(325)
Profit before tax
50,225
Tax
(17,931)
Profit after tax
32,294
Attributable to:
Ordinary shareholders of parent
Non-controlling interest (W9)
28,580.8
3,713.2
32,294.0
(b)
Consolidated statement of financial position as at 31 December 20X6
Goodwill (W6)
Property, plant and equipment
(35,483 + 24,273 + 13,063)
Current assets (W3)
Rs. 000
3,963.5
72,819.0
19,446.0
96,228.5
Share capital
Retained earnings (W8)
Non-controlling interest (W7)
Current liabilities (13,063 + 10,023 + 48)
8,000.0
56,641.3
8,453.2
23,134.0
96,228.5
(W1)
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Answers
(W2)
Unrealised profit adjustments: Inter-company trading
Sales
Vazir to
Saad
480,000
Saad to
Parvez
260,000
740,000
Inventory held
Unrealised profit adjustment
Unrealised profit
75,000
 25/125
15,000
60,000
 33.3/133.3
15,000
30,000
NCI’s share (based on selling
company’s NCI)
10%  15
28%  15
(W3)
1,500
4,200
Double entry in consolidated financial statements
Cost of sales (closing inventory)
Closing inventory in statement of financial position
Dr
30,000
NCI in the statement of financial position
NCI in the statement of comprehensive income
5,700
Impact on consolidated retained earnings (30 – 5.7)
24,300
30,000
Consolidated current assets
Rs. 000
1,568
9,025
8,883
(30)
19,446
Consolidated sales and cost of sales
Sales
Rs. 000
45,600
24,700
22,800
(740)
Parvez
Saad
Vazir
Inter-company sales
Unrealised profit
92,360
(W5)
Cost of
sales
Rs. 000
18,050
5,463
5,320
(740)
30
28,123
Net assets summary
Saad Ltd
At date of
consolidation
At date of
acquisition
Rs. 000
Rs. 000
Share capital
Retained earnings
© Emile Woolf International
Cr
5,700
Parvez
Saad
Vazir
Unrealised profit (W2)
(W4)
Total
157
3,000
3,000
24,075
1,425
27,068
4,425
Post-acquisition
22,650
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Vazir Ltd
At date of
consolidation
At date of
acquisition
Rs. 000
Rs. 000
Share capital
Retained earnings
(W6)
2,000
2,000
19,898
950
21,898
2,950
Post-acquisition
18,948
Goodwill
In Saad Ltd
Rs. 000
6,650.0
Cost
90% × 3,800
NCI at acquisition
10% × 4,425 W5
28% × 2,950 W5
In Vazir Ltd
Rs. 000
3,420.0
442.5
826.0
4,426.0
(2,950.0)
1,296.0
7,092.5
(4,425.0)
2,667.5
Net assets at acquisition
Total
(W7)
3,963.5
Non-controlling interest (statement of financial position)
Rs. 000
NCI at acquisition
Saad Ltd: 10% × 4,425 (W5)
Vazir Ltd: 28% × 2,950 (W5)
NCI’s share of post-acquisition profits
10% × 22,650 (W5)
28% × 18,948 (W5)
NCI in Saad Ltd ’s share of net assets of Vazir Ltd
10% × 3,800
442.5
826.0
2,265.0
5,305.4
(380.0)
2,327.5
Total
Unrealised profit (W2)
(W8)
Rs. 000
6,131.4
8,458.9
(5.7)
8,453.2
Consolidated retained earnings carried forward
Rs. 000
All of Parvez Ltd
Per the question
Share of Saad Ltd
90%  22,650 (W5)
Share of Vazir Ltd
72% × 18,948 (W5)
Unrealised profit (W2)
(W9)
22,638.0
20,385.0
13,642.6
(24.3)
56,641.3
Non-controlling interest (statement of profit or loss)
Profit after tax
Non-controlling interest
© Emile Woolf International
158
Saad Ltd
Vazir Ltd
Rs. 000
Rs. 000
10,760
9,439
10%
28%
1,076
2,642.9
The Institute of Chartered Accountants of Pakistan
Answers
Total (1,076 + 2,642.9)
3,718.9
Unrealised profit (W2)
(5.7)
3,713.2
4.2.
HASAN, RIAZ AND SIDDIQ
Consolidated statement of financial position as at 31 December 20X6
Rs.
Goodwill (W6)
26,250
Property, plant and equipment (1,102,500 + 271,950 + 122,550)
1,497,000
Inventories (W4)
783,520
Receivables (241,920  8,000 W2) + 129,680 + 29,750 – 17,500 W2)
375,850
Cash and bank balances ((88,200 + 8,000 W2) + 4,725 + 8,105)
109,030
2,791,650
Share capital
1,750,000
Retained earnings (W8)
181,795
Other reserves (W9)
402,500
Non-controlling interest (W7)
191,625
Payables (95,480 + (86,645 + 12,500 W2) + 88,605 – 17,500 W2)
265,730
2,791,650
(W1)
(W2)
Group structure
Hasan’s
interest
Non-controlling
interest
(balance)
In Riaz Ltd
75%
25%
In Siddiq Ltd (40% + (75%  20%))
55%
45%
Individual company adjustments: Transaction before the year-end not yet
accounted for
Books of Riaz
Purchase of inventory from Hasan
Closing inventory
Cr
12,500
Payable (to Hasan)
© Emile Woolf International
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12,500
159
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Books of Hasan
Cash received from Riaz
Dr
Cash
Cr
8,000
Receivable (from Hasan)
8,000
The inter-company balances can be reconciled as follows after these adjustments
have been processed:
Hasan’s
financial
statements
Riaz’s
financial
statements
Receivable
Payable
Given in the question
Receivable from Riaz (note 5 in the question)
25,500
Payable to Hasan (note 7 in the question)
5,000
Cash from Riaz
(8,000)
Purchase from Hasan
12,500
17,500
17,500
These balances must be cancelled out on consolidation as follows:
Dr
Consolidated payables
Cr
17,500
Consolidated receivables
(W3)
17,500
Unrealised profit adjustments: Inter-company trading
Inventories held by Riaz purchased from Hasan
Rs.
Purchased 30 December
12,500
Purchased previously
10,400
Purchased previously
22,900
 25/125
Mark up adjustment
Unrealised profit
4,580
Double entry in consolidated financial
statements
Cost of sales (closing inventory)
Dr
Cr
4,580
Closing inventory in statement of financial
position
4,580
There is no double entry for the NCI as all sales were from the parent.
(W4)
Consolidated inventories
Rs.
Hasan
526,610
Riaz (163,290 + 12,500 (W2)
175,790
Vazir
85,700
Unrealised profit (W3)
(4,580)
783,520
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(W5)
Net assets summary
At date of
consolidation
Riaz Ltd
At date of
acquisition
Rs.
Share capital
(W6)
Rs.
420,000
420,000
Accumulated profits
17,500
35,000
Other reserves
70,000
nil
437,500
455,000
Siddiq Ltd
Postacquisition
At date of
consolidation
At date of
acquisition
Rs.
Rs.
Share capital
175,000
175,000
Accumulated losses
(17,500)
(35,000)
157,500
140,000
(17,500)
70,000
Post-acquisition
17,500
Goodwill
Cost
In Riaz
Ltd
In Siddiq Ltd
Rs.
Rs.
367,500
49,000
75% × 24,500
18,375
67,375
NCI at acquisition
25% × 455,000 W5
113,750
45% × 140,000 W5
63,000
Net assets at acquisition
481,250
130,375
(455,000)
(140,000)
26,250
(9,625)
The balance for Siddiq is a gain on a bargain purchase.
(W7)
Non-controlling interest (statement of financial position)
Rs.
Rs.
NCI at acquisition
25% × 455,000 W5
113,750
45% × 140,000 W5
63,000
NCI’s share of post-acquisition profits
25% × (17,500) (W5)
(4,375)
45% × 17,500 (W5)
7,875
NCI’s share of other reserves
25% × 70,000 (W5)
17,500
NCI in Riaz Ltd ’s share of net assets of
Siddiq Ltd
25% × 24,500
(6,125)
120,750
Total
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70,875
191,625
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(W8)
Consolidated retained earnings carried forward
All of Hasan Ltd
Per the question
Unrealised profit (W2)
Rs.
180,250
(4,580)
175,670
Share of Riaz Ltd
75% × (17,500) (W5)
Share of Siddiq Ltd
55% × 17,500 (W5)
Gain on bargain purchase (W6)
(W9)
(13,125)
9,625
9,625
181,795
Consolidated other reserves
Rs.
All of Hasan Ltd
Per the question
Share of Riaz Ltd
75% × 70,000 (W5)
4.3.
350,000
52,500
402,500
LALIWALA GROUP
Computation of goodwill
Cash consideration
2,000.00
Market based measure of replacement awards
140.00
Total consideration transferred
2,140.00
Net assets acquired
Fair value of assets
3,618.00
Fair value of liabilities
(1,888.00)
Development expenditure
153.00
Contingent liability
(25.00)
Adjustment in deferred tax (W-1)
(70.85)
1,787.15
Goodwill
352.85
Impact on deferred tax as on 31 December 20X6:
Timing
difference
Tax
rate
Effect of deferred tax on acquisition (W-1)
Deferred
tax
(70.85)
Unrealized profit on closing stock held by PAL (80×20%)
(16.00)
35.0%
(5.60)
Unrealized profit on closing stock held by LG (140×15%)
(21.00)
25.0%
(5.25)
Undistributed profit of NAL – Associate (to be realized
through dividend) [(50–20)×30%×60%)]
(5.40)
12.5%
(0.68)
Undistributed profit of NAL – Associate (Realized through
sale) [(50–30)×30%×40%)]
(3.60)
17.5%
(0.63)
(60.00)
25.0%
(15.00)
Increase in intrinsic value (150–90)
(98.01)
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W-1:
Adjustment for deferred tax on 1 January 20X6
Fair value
Property, plant and equipment
1,532
Carrying
value
Impact on
Taxable
/(deductible)
time
difference
1,259
273.00
35%
95.55
490
367
123.00
35%
43.05
60
17
(43.00)
35%
(15.05)
153
-
153.00
35%
53.55
Contingent liability
25
-
(25.00)
35%
(8.75)
Unused tax losses
300
-
(300.00)
25%
(75.00)
90
-
(90.00)
25%
(22.50)
Investments
Retirement benefit obligations
Development expenditure
Intrinsic value of share options
70.85
Net adjustment in deferred tax
4.4.
Tax
rate
Deferred
tax
liability/
(assets)
SHAKIR LIMITED
Consolidated Statement of Financial Position as on 30 June 20X7
Rs. in million
Assets:
Property, plant & equipment (W-1)
28,233.0
Investment in ML (W-5)
1,980.0
Stock-in-trade [2,414 + 1,750 – 4(W-7)]
4,160.0
Trade & other receivables [2,200+1,800+120(W-8) ]
4,120.0
Cash and bank (1,600 + 1,900)
3,500.0
41,993.0
Equity & Liabilities
Share capital
20,000.0
Group reserves (W-2)
10,031.4
Non-controlling interest (16,229 (W-7) × 40%)
6,491.6
Trade and other payables [4,400 + 1,070]
5,470.0
41,993.0
W-1: Property plant & Equipment:
SL
16,500.0
BL
11,000.0
Power generation plant [620-62 (620÷10)]
558.0
Fair value adjustment [200-25 (200x2÷16)]
175.0
28,233.0
W-2 : Group reserves
SL’s retained earnings
6,189.0
SL’s Share premium
1000.0
Impairment of ML’s goodwill [800 (W-4) × 20%]
(160.0)
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Rs. in million
Post-acquisition profit of ML
 Till last year [{5,600 – 4,500}(W-3) × 80%]
880.0
 For the year [700 × 60%]
420.0
Equity adjustment on sale of 20% shares of ML [1,188 – (5,600 (W-3) ×
20%)]
Gain on further 35% disposal (W-5)
68.0
486.0
Reversal of gain on disposal of ML (W-6)
(1,089.0)
Post-acquisition profit – BL [3,429(W-7) × 60%]
2,057.4
Bargain purchase
180.0
10,031.4
W- 3: Net Assets of ML
At reporting
At 1 July 20X6
At acquisition
------------------ Rs. in million -----------------Share capital
Share Premium
Retained Earnings
2,200.0
2,200.0
2,200.0
900.0
900.0
900.0
3,200.0
2,500.0
1,400.0
6,300.0
5,600.0
4,500.0
W-4: Computation of Goodwill on acquisition of ML
Rs. in million
Cash consideration
4,400.0
Less: Net assets acquired [4,500(W-3)×80%]
(3,600.0)
Goodwill
800.0
W-5: Gain on part disposal of ML with losing control
Consideration received
2,926.0
Fair value of residual investment [220×25%×36]
1,980.0
Net assets derecognized [6,300(W-3)×60%]
3,780.0
Goodwill derecognized (800–160)
640.0
Net assets sold
(4,420.0)
Gain on disposal
486.0
W-6: Gain on sale of ML's shares in SL's books
20% disposal [1,188 – (4,400 × 20÷80)]
88.0
35% disposal [2,926 – (4,400 × 35÷80)]
1,001.0
1,089.0
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Answers
At reporting
W-7: Net assets of BL1
--------- Rs. in million ---------
Share capital
10,000.0
Retained earnings
6,000.0
Increase in fair value of building
175.0
(200×14÷16)
10,000.0
(Bal.) 2,600.0
200.0
Share of profit from joint operation (W-8)
58.0
-
Unrealized profit of BL in SL's closing stock [44–
(50×80%)]
(4.0)
-
16,229.0
Post-acquisition profit
12,800.0
(7,500+180)÷0.6
3,429.0
W-8: Joint operation
Rs. In million
Receivable from Joint operator (1100–670–130 ) × 40%
120.0
Depreciation expense
(62.0)
BL’s share of profit of joint operation
4.5.
At acquisition
58.0
ANT, BEE AND FLY
Consolidated Statement of Financial Position
As on 31 December 20X7
Assets:
Rs. in million
Property, plant and equipment [3,510+2,835+ 2,200– (20 – 6(W-1))]
8,531.00
Goodwill [175 (W-2) + 108 (W-4)]
283.00
Investment property (130 + 45 + 5(W-1)+ 8(W-1))
188.00
Current assets (2,120 + 1,420 + 2,800)
Total Assets
6,340.00
15,342.00
Equity and liabilities
Share capital
5,500.00
Group reserves (W-5)
2,476.75
NCI (W-7)
2,631.25
Gratuity [25 + 8 (W-9)]
33.00
Current liabilities (1,775 + 1,386+ 1,500+ 40(W-3))
Total equity and liabilities
© Emile Woolf International
4,701.00
15,342.00
165
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Advanced accounting and financial reporting
Acquisition
date
W-l: Net Assets - BL
Reporting
date
1-Apr-X7
------------------ Rs. in million -----------------Share capital
4,000.00
Retained earnings
520.00
Decrease in FV of machine
(20.00)
4,000.00
4,000.00
815.00
1,314.00
(20.00)
(20.00)
4.50
6.00
-
Adjustment for uniform accounting
policy [58-45]
-
-
13.00
4,500.00
4,799.50
5,313.00
{
{
Depreciation expense
(20 x l0% x 2.25), (20 x l0% x 3)
Post-acquisition profit
299.50
W-2: Goodwill - BL
513.50
Rs. in million
3,100
Cost
(2,925)
Net assets (4,500 (W-l) x 65%)
175
W-3: Net Assets - FL
Acquisition date
Reporting date
Rs. in million
2,500
2,500
Retained earnings
1,150
1,000
Contingent liability
(50)
(40)
3,600
3,460
{
Share capital
Post-acquisition loss
(140)
W-4: Goodwill – FL
Rs. in million
Cost (2,400×75%)
1,800
Net assets [3,600 × 45% (60%×75%)]
(1,620)
On acquisition
180
Impairment (W-8)
(72)
On reporting date
108
W-5: Group reserves
Rs. in million
AL
2,000.00
Post-acquisition - BL (Up to Mar 20X7) - [(299.5 (W-l) x 65%)
(Apr to Dec 20X7) (513.5 (W-l) x 75%)]
Post-acquisition - FL (140 (W-3) x 45%)
194.68
385.12
(63.00)
Equity adjustment on further holding of 10% (W-6)
39.95
Gratuity expense (W-9)
(8.00)
Impairment of goodwill of FL (W-8)
(72.00)
2,476.75
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Answers
W-6: Equity adjustment on further holding of 10%
Rs. in million
Net assets acquired (4,799.5 (W-l) x 10%)
479.95
Cost
(440.00)
Increase in equity
39.95
W-7: NCI
Rs. in million
Acquisition - BL (4,500 × 35%)
1,575.00
Post-acquisition (Up to Mar 20X7) - BL [(299.5 (W-1) × 35%)
(Apr to Dec 20X7) (513.5 (W-1) × 25%)]
104.82
128.38
10% further acquisition (4,799.5 (W-1) × 10%)
(479.95)
Acquisition - FL (3,600 × 55%)
1,980.00
Post-acquisition - FL (140 (W-3) × 55%)
(77.00)
Indirect holding (2,400 × 25%)
(600.00)
2,631.25
W-8: Impairment of Goodwill- FL
Rs. in million
Grossing up of goodwill (180/0.45)
400
Net assets on 31 December 20X7 (W-3)
3,460
3,860
Recoverable amount
(3,700)
Notional write off
160
Impairment to be recorded (160x45%)
72
W-9: Gratuity scheme
Rs. in million
Charge for the year (P&L and OCI)
Current service cost
85
Interest cost (25×12%)
3
Re-measurement gain
(10)
78
Already charged to P&L
Contribution paid
(70)
Net increase
4.6.
8
BAHAMAS LIMITED GROUP
Consolidated statement of financial position
As on 31 December 20X8
Rs. in million
Assets:
Property, plant and equipment
Goodwill
Investment in joint venture PL
Current assets
(25,370+14,288+7,900)(W-2) 663
46,895
170+(450+(W-4) 159)
779
(W-5)
582
17,480+4,800+2,800
25,080
73,336
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Equity and liabilities
Share capital
Share premium
Surplus on revaluation
Group retained earnings
Non-controlling interest
Liabilities
5,500+[(W.2) 900×0.75]
(W-6)
(W-7)
(12,000+8,800+6,400) (W-2) 694
W-1: OL - Net assets at acquisition date
Investment at cost
Goodwill
75% net assets
Total net assets
W-2: OL - Net assets
Rs. in million
5,400
(450)
4,950
6,600
As at
At acquisition
Post31-12-20X8
date
acquisition
-------------- Rs. in million -------------5,000
5,000
2,000
2,000
1,200
1,200
300
(300)
300
1,200
900
(Bal.) (700)
3,000
3,700
Share capital
Share premium
Revaluation surplus
Fair value adjustment
Retained earnings
Reversal of lease liability
[400×{1–(1.1)-2}÷0.1]
Reversal of ROU
[400×{1-(1.1)-3}÷0.1×2÷3]
(700)
(W-1) 6,600
Net assets
W-3: CL - Net assets
694
694
(663)
(663)
3,031
11,231
3,731
4,631
As at
At acquisition
Post31-12-20X8
1-1-20X8
acquisition
-------------- Rs. in million -------------1,200
1,200
1,100
1,100
1,200
2,000
800
3,500
4,300
800
Share capital
Share premium
Retained earnings
Net assets
W-4: CL – Goodwill
Equity % of BL in CL
Direct investment at fair value
Indirect investment
Investment at cost
NCI at 47%
Fair value of net assets at acquisition date
© Emile Woolf International
4,950÷0.75
Rs. in million
15,000
8,000
6,175
13,054
4,601
26,506
73,336
168
35%+(75%×24%)
912÷0.24×0.35
912×0.75
912÷0.24×0.53
(W-3)3,500×0.47
(W-3)
Rs. in million
53%
1,330
684
2,014
1,645
(3,500)
159
The Institute of Chartered Accountants of Pakistan
Answers
W-5: Investment in Joint venture - PL (Using equity method)
Investment at cost
Share of profit from PL
[800+400220](360÷0.6)]×0.6
Unrealised profit on BL’s sales lying in PL’s stock
(800+400220) ×0.6
(50÷125×25)×0.6
W-6: Group retained earnings
BL’s retained earnings
Fair value of investment in CL exceeded its cost
OL post acquisition profit
CL post acquisition profit
Share of profit from PL
Unrealised profit on BL’s sales lying in PL’s stock
(W-4)1,3301,220
(W-2)3,731×0.75
(W-3)800×0.53
(W-5)
(W-5)
W-7: Non-controlling interest
OL – acquisition
OL - post acquisition
(W-2)6,600×0.25
(W-2)4,631×0.25
Rs. in million
360
228
588
(6)
582
Rs. in million
9,500
110
2,798
424
228
(6)
13,054
Rs. in million
1,650
1,158
2,808
CL – acquisition
CL - post acquisition
Indirect holding in CL
© Emile Woolf International
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(W-3)3,500×0.47
(W-3)800×0.47
1,645
376
912×0.25
2,021
(228)
4,601
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
CHAPTER 5 - ASSOCIATES AND JOINT VENTURES
5.1.
JOINT ARRANGEMENTS
(a)
(i)
Joint Operations
A joint operation is a joint arrangement whereby the parties that have joint control of
the arrangement have right to the assets and obligations for the liabilities relating to
the arrangement. Those parties are called joint operators.
(ii)
Joint venture
A joint venture is a joint arrangement whereby the parties that have joint control of
the arrangement have right to the net asset of the arrangement. These parties are
referred to as joint venturers.
(b)
(c)
5.2.
Elements to be recognised by a joint operator
(i)
Its assets and share of any assets held jointly
(ii)
Its liabilities and share of any liabilities incurred jointly
(iii)
Its revenue from the sale of its share of the output arising from the joint operation
(iv)
Its share of the revenue from the sale of the output by the joint operations
(v)
Its expenses and share of any expenses incurred jointly.
Characteristics of joint arrangements
(i)
The parties are bound by a contractual arrangement
(ii)
The contractual arrangement gives two or more of those parties joint control of the
arrangement.
HELIUM
Consolidated statement of financial position as at 31 December 20X6
Rs.000
Assets
Non-current assets
Property, plant and equipment
Interest in associate (W6)
Goodwill
Current assets
500
51
15
605
———
1,171
———
Total assets
Equity and liabilities
Capital and reserves
Share capital
Retained earnings (W5)
100
737
———
837
84
250
———
1,171
———
Non-controlling interest
Long-term liabilities
Total equity and liabilities
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Answers
Workings
(1)
Group structure
Helium
30%
60%
Arsenic
Sulphur
(2)
Net assets
Sulphur
Balance
sheet date
Rs.000
Share capital
Retained earnings
(3)
30
180
——
210
——
Post
Acquisition acquisition
Rs.000
Rs.000
30
70
——
100
——
–
110
Goodwill
Sulphuric
Rs.000
Cost of investment
Share of net assets acquired
(60%  100 (W2))
(4)
75
(60)
——
15
——
Non-controlling interest
Rs.000
Sulphur (40%  210)
(5)
84
——
Retained earnings
Rs.000
Helium
Sulphur (60%  110 (W2))
Arsenic (30%  (100 − 30))
(6)
650
66
21
——
737
——
Investment in associate
Rs.000
Cost
Share of post-acquisition profit (30%  (100 − 30))
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30
21
——
51
——
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Advanced accounting and financial reporting
5.3.
HAMACHI LTD
(a)
Consolidated statement of financial position as at 31 March 20X6
Rs.000
Non-current assets
Property, plant and equipment (8,050 + 3,600)
Goodwill (W2)
Licence (180 – 60) (W3)
Investments
Associate (W6)
Others (4,000 + 910 – 3,240 – 630 + 120 FV)
Rs.000
11,650
702
120
12,472
717
1,160
1,877
14,349
Current assets
Inventory (830 + 340)
Accounts receivable (520 + 290 – 40)
Bank (240 + 40)
1,170
770
280
2,220
16,569
Total assets
Equity and liabilities
Equity attributable to equity holders of the parent:
Ordinary shares of Rs. 1 each
Retained earnings (W5)
5,000
8,415
13,415
374
13,789
Non-controlling interest (W4)
Non-current liabilities
10% Loan notes (500 + 240)
Current liabilities
Accounts payable (420 + 960)
Taxation (220 + 250)
Overdraft
740
1,380
470
190
2,040
16,569
Total equity and liabilities
Workings
(W1) Net assets in subsidiary
Share capital
At
acquisition
At end of
reporting
period
Rs.000
Rs.000
1,200
1,200
800
2,300
Investment property
120
120
Licence
180
180
Retained earnings
Fair value adjustment:
Amortisation of licence 180/6 x 2yrs
(60)
2,300
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Answers
(W2) Goodwill
Rs.000
3,240
2,070
1,170
(468)
702
Cost of investment (Rs. 3  1,200  90%)
Net assets acquired (90%  2,300) (W1)
Goodwill
Less impairment
(W3) Unrealised profit in inventory
((2/3 × 65,000) × 30/130) × 30% = Rs. 3,000
Parent sells to associate, therefore reduce group retained earnings and Investment
in associate
(W4) Non-controlling interest
10%  3,740 = Rs. 374
(W5) Retained earnings
Rs.000
7,500
Hamachi Ltd
Saba Ltd – group share post-acquisition
90%  (3,740 – 2,300)
Anogo Ltd – group share post-acquisition
30%  (600  6/12)
Unrealised profit (W3)
Less impairment
1,296
90
(3)
(468)
8,415
(W6) Investment in associate
Rs.000
630
90
(3)
717
Investment at cost
Post-acquisition profit (30%  (600  1/2))
Unrealised profit in inventory
(b)
IAS 28 Investments in Associates and Joint Ventures defines associates. In order for an
investment to be classified as an investment in an associate the investor must have
‘significant influence’ over the investee. Significant influence is presumed to exist where
there is a holding of 20% or more of the voting power unless the investor can clearly
demonstrate that this is not the case. Conversely a holding of less than 20% is presumed
not to be an associate, unless it can be clearly demonstrated that the investor can exercise
significant influence. The voting rights can be held directly or through subsidiaries.
IAS 28 says that a majority holding by one investor does not preclude another investor
having significant influence. An investing company owning a majority holding in another
company normally has control over the investee and would thus class it as a subsidiary. In
normal circumstances it is difficult to see how a company could be controlled by one entity
and be significantly influenced by a different entity unless ‘control’ was passive. The 20%
test is not definitive and the following other evidence should be considered.
Does the investing company:

have representation on the Board of the investee?

participate in the policy making processes (operational and financial); have material
transactions with the investee?

interchange managerial personnel with the investee; or provide technical expertise to
the investee?
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Advanced accounting and financial reporting
5.4.
HIDE
Consolidated statement of profit or loss for the year ended 30 June 20X6
Rs.000
Revenue
Cost of sales and expenses
15,131
(13,580)
———
1,551
(736)
———
815
178
———
993
———
Operating profit before tax
Tax
Profit after tax
Share of profit of associate (30% of 594)
Profit for the year
Profit for the year attributable to members of Hide
Non-controlling interest (W2)
963
30
———
993
———
Profit for the year
Workings
(1)
Group structure
Hide
30%
80%
Arrive
Seek
(2)
Consolidation schedule
Hide
Revenue
Seek (5/12) Adjustment
Rs. 000
Rs. 000
Rs. 000
12,614
2,567
(50)
(11,318)
(2,302)
50
Total
Rs. 000
15,131
Cost of sales
Per question
Unrealised profit
50  (25/125)
(10)
Tax
(621)
Profit for the year
(13,580)
(115)
150
Non-controlling interest (%)
20%
Non-controlling interest (Rs. 000)
30
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Answers
5.5.
HARK, SPARK AND ARK
Consolidated statement of financial position as at 31 March 20X6
Rs.000
Rs.000
Non-current assets
Property, plant and equipment (working 1)
90,200
Goodwill (working 4)
23,000
Investment in associate (working 6)
9,500
Other investments
650
123,350
Current assets (working 5)
24,300
Total assets
147,650
Equity and liabilities
Equity shares of Rs. 1 each (working 3)
21,000
Share premium (working 3)
42,000
Retained earnings (working 8)
43,730
85,730
106,730
Non-controlling interests (working 7)
7,420
Total equity
114,150
Non-current liabilities
Deferred consideration for Spark shares
5,500
6% loan notes
10,000
7% loan notes
6,000
21,500
Current liabilities: 7,000 + 5,000
12,000
Total equity and liabilities
147,650
Workings
1
Property, plant and equipment (PPE)
Rs.000
Hark
60,000
Spark
31,000
Profit on transfer of machines (3 million – 2 million)
1,000
Less: Depreciation on this amount in accounts of Spark
(1,000/5 years)
(200)
Unrealised profit in machines
(800)
PPE in consolidated statement of financial position
2
Rs.000
90,200
Deferred consideration
The present value of the deferred consideration at 1 April 20X5 is Rs. 6.05 million 
1/(1.10)2 = Rs. 5 million.
During the year to 31 March 20X6 there is a finance charge of 10% (= Rs. 500,000) on this
amount, reducing the parent’s share of the consolidated profit.
The deferred consideration at 31 March 20X6 is Rs. 5 million + Rs. 500,000 =
Rs. 5,500,000. This is payable in just over 12 months and is included in the consolidated
statement of financial position as a non-current liability.
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3
Share issues
The share issues to acquire the shares in Spark and Ark are not recorded in the summary
statement of financial position of Hark (as stated in the question).
Total
Share
capital
Share
premium
To acquire the shares in Spark
Rs.000
Rs.000
Rs.000
Hark shares issued: (4 million at Rs. 9)
36,000
4,000
32,000
9,000
1,000
8,000
5,000
40,000
In summary statement of financial position
16,000
2,000
In consolidated statement of financial
position
21,000
42,000
To acquire the shares in Ark
Hark shares issued: (1 million at Rs. 9)
Increase in share capital and share premium
of Hark
4
Goodwill
Hark has acquired 4 million/5 million = 80% of the shares of Spark.
At 1 April 20X5 the fair value of the net assets of Spark was (share capital plus reserves) =
Rs.(5 + 4 + 16) million = Rs. 25 million
Rs.000
Purchase consideration paid by the parent company
Issue of 4 million shares at Rs. 9
36,000
Deferred consideration
5,000
41,000
Fair value of parent company share of net assets
(80%  Rs. 25 million)
20,000
Purchased goodwill attributable to parent
21,000
Fair value of NCI at acquisition date (1 million shares  Rs. 7)
Rs.000
7,000
NCI share of net assets at this date (20%  Rs. 25 million)
5,000
Purchased goodwill attributable to NCI
2,000
There has been no impairment of goodwill during the year.
Purchased goodwill attributable to parent
Goodwill attributable to NCI
Total goodwill in consolidated statement of financial position
Rs.000
21,000
2,000
23,000
Alternatively, total goodwill could be calculated as follows:
Purchase consideration paid by the parent company
(see above)
Fair value of NCI at acquisition date
Rs.000
41,000
7,000
48,000
Net assets of the subsidiary at the acquisition date
(at fair value)
25,000
Total goodwill (parent and NCI)
23,000
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Answers
5
Current assets
The cost of the goods sold by Spark to Hark was Rs. 3,600,000  100/150 = Rs. 2,400,000
and the profit was Rs. 1,200,000.
Since 75% of these goods are in closing inventory, the unrealised profit on intra-group sales
is 75%  Rs. 1,200,000 = Rs. 900,000. Current assets in the consolidated statement of
financial position (inventory) should be reduced by this amount.
The question states that the transaction costs of the acquisition of Spark have not yet been
recorded. These costs reduce the consolidated profit, and also (presumably) reduce the
current assets of Hark.
6
Current assets on consolidation
Rs.000
Hark
18,200
Spark
8,000
Less: unrealised profit in closing inventory
(900)
Less: expenses of acquisition of Spark
(1,000)
Current assets in consolidated statement of financial position
24,300
Investment in associate (Ark)
Since Hark owns 25% of the equity of Ark, it is assumed that Ark is an associated entity.
Rs.000
Cost of investment: 25%  6 million shares  Rs. 6
9,000
Share of post-acquisition retained profit: 25%  Rs. 2 million
500
9,500
7
Non-controlling interests
Rs.000
Share of net assets of Spark at 31 March 20X6 (20%  Rs. 28 million)
5,600
Goodwill attributable to NCI (working 4)
2,000
7,600
8
NCI share of unrealised profit in inventory (20%  Rs. 900,000)
(180)
NCI at 31 March 20X6: fair value method
7,420
Consolidated retained earnings
Rs.000
Hark retained earnings (36,000 + 8,000)
Rs.000
44,000
Spark
Profit for year ended 31 March 20X6
3,000
Unrealised profit in closing inventory
(900)
2,100
Parent company share (80%)
1,680
Share of post-acquisition retained profits of Ark
(25%  Rs. 2 million)
500
Costs of acquisition of Spark (expensed)
(1,000)
Additional finance costs: deferred consideration
(500)
Unrealised profit in machines (working 1)
(800)
Loss on other (800 – 650)
(150)
Consolidated retained earnings at 31 March 20X6
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5.6.
P, S AND A
Consolidated statement of financial position as at 31 December Year 5
Assets
Non-current assets
Rs.
Property, plant and equipment (450,000 + 240,000)
690,000
Goodwill (W3)
45,000
Investment in associates (W5)
168,800
903,800
Current assets
Inventory (70,000 + 90,000 – 10,000)
150,000
Other current assets (20,000 + 110,000 + 130,000)
260,000
Total assets
1,313,800
Equity and liabilities
Equity
Share capital
100,000
Share premium
160,000
Consolidated accumulated profits (W6)
711,300
Attributable to equity holders of the parent
971,300
Non-controlling interest in S (W4)
102,500
Total equity
1,073,800
Long-term liabilities (40,000 + 20,000)
60,000
Current liabilities (100,000 + 80,000)
180,000
Total equity and liabilities
1,313,800
Workings
P owns 75% of the equity of S and 30% of the equity of A. Therefore, S is a subsidiary and A is
an associate.
W1: Net assets summary
Calculate the net assets of S and A at the acquisition date and at the end of the reporting period.
At this stage, make any fair value adjustments and eliminate the unrealised profit in inventory.
Net assets of S
Equity shares
Share premium
Accumulated profits (per question)
At date of
consolidation
At date of
acquisition
Postacquisition
Rs.
Rs.
Rs.
200,000
200,000
-
80,000
80,000
-
140,000
60,000
80,000
410,000
340,000
W2: Unrealised profit on inter-company trading
Sale by S to P: Rs. 40,000 × 33.33/133.33 = Rs. 10,000.
Dr
Consolidated accumulated profits (75%)
7,500
Non-controlling interest (25%)
2,500
Consolidated inventory
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10,000
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Answers
Sale by P to A: Rs. 16,000 × 33.33/133.33 = Rs. 4,000.
P’s share: Rs. 4,000  30% = Rs. 1,200
Dr
Consolidated accumulated profits (75%)
Cr
1,200
Investment in associate
1,200
W3: Goodwill on acquisition of S
Rs.
Cost of the acquisition
320,000
Non-controlling interest at acquisition (25%  340,000 (W1))
85,000
405,000
Less: Fair value of identifiable net assets at acquisition (W1)
Goodwill at acquisition
(340,000)
65,000
Minus: Impairment to date
(20,000)
Balance carried forward
45,000
W4: Non-controlling interest in S
Rs.
Non-controlling interest at acquisition (25%  340,000 (W1))
85,000
Share of post-acquisition profits (25%  80,000 (W1))
20,000
Unrealised profit (W2)
(2,500)
102,500
W5: Investment in associate
Rs.
Investment at cost
140,000
P’s share of post-acquisition accumulated profits
(30%  (250,000 – 150,000)
30,000
Unrealised profit (W2)
(1,200)
168,800
W6: Consolidated accumulated profits.
Rs.
Accumulated profits of P
650,000
P’s share of post-acquisition profits of S
(75% × Rs. 70,000 (W2))
60,000
Unrealised profit (sale by S to P (W3))
(7,500)
P’s share of post-acquisition accumulated profits (W5)
30,000
Unrealised profit (W2)
(1,200)
Impairment of goodwill
(20,000)
Consolidated accumulated profits
711,300
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Advanced accounting and financial reporting
5.7.
H LTD GROUP
Consolidated statement of comprehensive income for the year ended 31 May 20X6
Rs.000
Revenue (6,000 + 3,000)
9,000
Cost of sales (4,800 + 2,400)
(7,200)
Gross profit
1,800
Distribution costs (64 + 32)
(96)
Administrative expenses (336 + 168)
Finance costs (30 + 15)
(504)
(45)
Share of profit of associate (30% x 100)
Profit before tax
30
1,185
Income tax expense (204 + 102)
(306)
PROFIT FOR THE YEAR
879
Other comprehensive income:
Revaluation of PPE (200 + 100)
300
Actuarial gain on pension plan assets
Actuarial loss on pension plan liabilities
Gain on investment
40
(52)
14
Tax effect of other comprehensive income (42 + 21)
Share of OCI of associate (net of tax) (30% x 24)
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
(63)
7
246
1,125
Rs.000
Profit for the period attributable to:
Owners of the parent entity
822.4
Non-controlling interests (20% x 283)
56.6
879
Total comprehensive income attributable to:
Owners of the parent entity
1052.6
Non-controlling interests (20% x 362)
72.4
1,125
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Answers
5.8.
ALPHA AND BETA
Statement of financial position as on 30 June 20X6
Rs. in million
Property, plant and equipment [2,650+(750×0.8)]
3,250.00
Goodwill (W-1)
11.00
Stock in hand [695+(250×0.8) – 56.45(W-2)]
838.55
Other assets [570 + (180 × 0.8) – (320 × 0.8) – (150 × 0.8)]
338.00
Investment in SV-2 (200+305)× 0.5- 11(W-2) 11 (W-2) OR
443-200 -140+[305×50%]-3 -11(W-2)
241.50
4,679.05
Share capital
2,000.00
2,000.00
Accumulated profit (W3)
1,310.05
10% bank loan [500 + (320 × 0.8)]
756.00
Current liabilities [665 + (405 × 0.8) – (320 × 0.8) – (150 × 0.8)]
613.00
4,679.05
Statement of comprehensive income for the year ended 30 June 20X6
Sales [4250 + (650×0.8) –502(W-2)]
4,268.00
Less: Cost of sales [2,993 + (480 × 0.8) – 437.4(W-2)]
(2,939.60)
Gross profit
1,328.40
Less: Expenses [657 + (145×0.8) + 3]
(776.00)
Add: Share of profit in SV-2 [(50 × 0.5) – 2.85(W-2)]
22.15
Net profit
574.55
W-1: Computation of goodwill on further investment in SV-1
Consideration paid (excluding acquisition related costs)
140.00
Less: Further share of BL acquired [400 + (55 – 25)] × [50% × 60%]
129.00
Goodwill
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W-2: Adjustments to be made due to intercompany transactions
Cost of
sales
Sales
Investment
in SV – 2
Share of
profit
from
associate
Cost of sales
adjustments
………………… Rs. In million……………
Joint venture
-
AL to CV – 2
(110 x 0.2 x 0.5)
11.00
(11.00)
-
SV-2 to AL
(38 x 0.15 x 0.5)
(2.85)
(2.85)
Joint operator
AL to SV – 1
SV-1 to AL
(350.00)
(350.00)
17.60
(17.60)
(220x0.10x0.8)
(152.00)
(190x 0.8)
(152.00)
36.00
(36.00)
(150 x0.3 x0.8)
(502.00)
(437.40)
(11.00)
(2.85)
(56.45)
W3 Accumulated Profit
Rs. in million
Parent Reserves
Parent Reserves opening (1,193-600)
593.00
Post-acquisition income from SV1 (55-25)*0.5
15.00
Post-acquisition share of profit from SV2 (305 – 50)*0.5
127.50
Current year income
574.55
1,310.05
5.9.
SNAKE LIMITED
Total assets
Total
liabilities
Total
comprehensive
income
--------------- Rs. in million --------------Given
2,500.00
1,610.00
659.00
Investment in associate
Share of profit during 20X7 (W-1)
45.00
Disposal (W-1)
(302.60)
45.00
(302.60)
(257.60)
2,242.4
Revised amounts
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(257.60)
1,610.00
401.4
The Institute of Chartered Accountants of Pakistan
Answers
W-1: Disposal of associate
Rs. in million
Disposal proceeds
290.00
FV of investment retained (0.8 × 128)
102.40
392.40
Carrying amount as at 31 December 20X7 (W-2)
(405.00)
Loss on disposal of associates
12.60
Gain already recorded to be reversed
290.00
302.60
W-2: Carrying amount of associate
Cost (3 × 200)
600.00
Share of loss till 31 December 20X6 [(1200 – 1700 ) × 30%]
(150.00)
Impairment
(90.00)
Carrying amount as at 31 December 20X6
Share of profit for 20X7 [(1350 – 1200) × 30%]
Carrying amount as at 31 December 20X7
© Emile Woolf International
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360.00
45.00
405.00
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Advanced accounting and financial reporting
CHAPTER 7 - IAS 21: FOREIGN CURRENCY
7.1.
DND LIMITED
Date
1-Jul-20X6
Description
Advance to suppliers
Dr.
Cr.
Rs.
Rs.
3,060,000
Cash
3,060,000
(Amount paid on signing the contract. Exchange
rate was Rs. 153/US$)
30-Sep-20X6
Advance to suppliers
7,675,000
Cash
7,675,000
(Amount paid on delivery. Exchange rate was Rs.
153.5/US$)
30-Sep-20X6
PPE in transit/ CWIP
15,340,000
Advance to suppliers
10,735,000
Payable to suppliers
4,605,000
(Recording of asset on the delivery date as risk
and rewards are transferred to the company)
31-Dec-20X6
Exchange loss
15,000
Payable to suppliers
15,000
(Adjustment of exchange rate as of reporting date.
Exchange rate was Rs.154/US$)
31-Jan-20X7
Property, plant and Equipment
15,340,000
PPE (In transit/ in progress)
15,340,000
(Transfer the new plants and machineries to
Property, Plant and Equipment)
31-Jan-20X7
Payable to suppliers
4,605,000
Exchange loss (Bal.)
15,000
Cash
4,620,000
(Final payment to supplier. Exchange rate was
Rs. 154.5/US$1)
7.2.
STARLIGHT LIMITED
(a)
Translated Profit and Loss Account
QR
Rate
Rs.’000
Turnover
344,880
37.5
12,933
Cost of Sales
(249,710)
37.5
(9,364)
Gross Profit
95,170
Expenses
(29,490)
Profit Before Tax
65,680
Taxation
(17,325)
Profit After Tax
48,355
Interim dividend
(16,300)
Retained profit for the year
32,055
© Emile Woolf International
184
3,569
37.5
(1,106)
2,463
37.5
(650)
1,813
37.5
(611)
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Answers
(b)
(i)
Calculation of goodwill
QR'000
Cost of investment:
QR'000
(Rs. 2,500,000 x 30 QR)
75,000
Less net assets acquired:
Share capital
20,250
Pre–acquisition reserves
49,300
69,550
Group share 80% thereon
(55,640)
Goodwill in QR
19,360
Closing conversion rate to PKR
40
Goodwill in PKR
(ii)
774,400
Non–controlling interest in statement of profit or loss:
20% x Rs. 1,813,313
7.3.
= Rs.362,662
PERCEPT LTD
Translation of financial position of Trint Ltd as at 31 December 20X6
(a)
Property plants and equipment
YEN
YEN
RATE
Rs.’000
Rs.’000
Rs.’000
12,375
0.8
9,900
Financial assets
1,250
0.8
1,000
Current assets
8,250
0.8
6,600
21,875
17,500
Share capital
5,000
0.9
4,500
Retained earnings1
4,500
0.9
4,050
Fair value adjustment
2,875
0.9
2,588
Post-acquisition (Balancing figure)
3,000
Non-current liabilities
4,000
0.8
3,200
Current liabilities
2,500
0.8
2,000
1,163
Note: Fair value of property,
plant and equipment: = 12,375 Yen – 5,000 yen (equity) - 4,500
Yen (pre-acquisition profit) = 2,875 Yen
(b)
Goodwill
Yen
Rate
‘000
Rs.
‘000
Cost of acquisition
6,900
0.9
6,210
Fair value (NCI)
6,250
0.9
(5,625)
13,150
Net asset acquired
Retranslated at the closing rate
Exchange gain on retranslation of goodwill
© Emile Woolf International
185
11,835
12,375
0.9
(11,138)
775
0.9
698
775
0.8
620
78
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Advanced accounting and financial reporting
Yen
Rate
‘000
Rs.
‘000
Parent’s share (70% x 78)
54.6
Non-controlling interest share (30% x 78)
23.4
78
(c)
Exchange rate difference arising on re-translation of Trint Ltd’s net assets
Difference from translation of opening net assets
Rs.’000
Opening rate: 12,375,000 Yen at 0.9
11,137.5
Closing rate: 12,375,000 Yen at 0.8
9,900
Exchange gain
1,237.5
Difference arising from translation of profit
Average rate (2,000 Yen at 0.85)
1,700
Closing rate (2,000 Yen at 0.8)
1,600
Exchange gain
100
Total exchange gain
1,337.5
Parent’s share of the exchange gain (70% of 1,337.5)
401.25
Non-controlling interest share of the exchange gain (30% x 1,337.5)
936.25
1,337.50
7.4.
ORLANDO
(a)
Year to June Year 4
The revenue and the receivable for the sale of €96,000 should be translated at the spot rate
of 0.8 = $120,000
The capital expenditure of €1m should also be translated at the spot rate of 0.8:
Debit Property, plant and equipment
$1,250,000
Credit: Payables
$1,250,000.
The receipt on 12 June relating to the receivable is translated at the rate at that date of 0.9.
This generates cash of $106,667 to settle a receivable of $120,000. Hence an exchange
loss of $13,333 is recognised in profit or loss.
The non-current asset is not re-translated at the year end, but the outstanding payable (a
monetary item) must be re-stated to the year end exchange rate of 0.7. This gives a yearend payable balance of $1,428,571. This has increased from the initial $1,250,000;
therefore, an exchange loss of $178,571 will be recognised in profit or loss.
(b)
Year to June Year 5
When the payable is settled after the year end at the spot rate of 0.8, it results in a payment
of $1,250,000. There is an exchange gain of $178,571 compared with the carrying value at
the end of Year 4.
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Answers
7.5.
MANCASTER AND STOCKPOT
Part A
(1)
(a)
Functional currency
Functional currency is the currency of the primary economic environment in which the
entity operates. It reflects the underlying transactions, events and conditions that
affect the company. It is not simply the currency of the country where the company is
based. For example, if a company is incorporated and listed in Pakistan but operates
in the South African mine fields, then its functional currency will be the South African
rand, not rupees, because the rand is the currency in which it generates and spends
the most cash.
(b)
Presentation currency
Presentation currency is the currency in which the financial statements are
presented. Continuing the example of the company referred to above, since the
company is listed in Pakistan it will present and file its accounts in rupees.
Transactions and balances measured in a currency other than the presentation
currency will have to be translated into the presentation currency for reporting
purposes. So the sales and operating costs incurred in South Africa will need to be
translated from Rand into Sterling.
(2)
Factors to be considered when determining the functional currency of an overseas
subsidiary
The primary economic environment in which an entity operates is defined in IAS 21 as the
one in which it primarily generates and expends cash.
Primary indicators
An entity must consider the following factors in determining its functional currency:


the currency that mainly influences sales prices for goods and services

the currency that mainly influences labour, material and other costs of goods or
services.
the country whose competitive forces and regulations mainly determined the sales
prices of its goods and services
Additional indicators
The following factors may also provide evidence:

the currency in which funds from financing activities are generated (i.e. currency
used for issuing debt and equity)

the currency in which surplus cash is invested.
Part B
(a)
Translation: Statement of financial position of Stockpot at 31 March Year 4
Property, plant and equipment
Inventories
Trade receivables
Trade payables
Bank overdraft
Non-current liabilities
EU000
Rate
$000
30,000
18,000
15,000
(10,400)
(7,600)
(20,000)
2.2
2.2
2.2
2.2
2.2
2.2
13,636
8,182
6,819
(4,727)
(3,455)
(9,091)
25,000
Issued capital
Pre-acquisition reserves
15,000
5,000
Post-acquisition reserves
20,000
5,000
25,000
© Emile Woolf International
187
11,364
3.0
3.0
balancing figure
5,000
1,667
6,667
4,697
11,364
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Consolidated statement of financial position at 31 March Year 4
$000
$000
Non-current assets
Goodwill (see workings)
682
Property, plant and equipment (20,000 + 13,636)
33,636
Current assets:
Inventories (10,000 + 8,182)
18,182
Trade receivables (10,000 + 6,819)
16,819
35,001
69,319
Capital and reserves:
Issued capital
9,000
Accumulated profits (see workings)
16,205
25,205
Non-controlling interest (see workings)
2,841
28,046
Non-current liabilities:
Loans (10,000 + 9,091)
19,091
Current liabilities:
Bank overdraft (6,100 + 3,455)
9,555
Trade payables (7,900+4,727)
12,627
22,182
69,319
(b)
Translation: Statement of profit or loss of Stockpot for year ended 31 March Year 4
Revenue
Cost of sales
Gross profit
EU000
Rate
$000
60,000
2.3
26,087
(30,000)
2.3
(13,043)
30,000
Operating expenses
(16,000)
Operating profit
14,000
Interest payable
(2,000)
Profit before tax
12,000
Tax
(4,200)
Profit after tax
7,800
13,044
2.3
(6,957)
6,087
2.3
(870)
5,217
2.3
(1,826)
3,391
The statement of profit or loss has been translated at the average rate as an approximation
to the actual (historical) rate. The closing rate is not allowed under IAS 21.
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Answers
Consolidated statement of profit or loss for the year ended 31 March Year 4
$000
Revenue (50,000 + 26,087)
76,087
Cost of sales (25,000 + 13,043)
(38,043)
Gross profit
38,044
Operating expenses (15,000 + 6,957)
(21,957)
Operating profit
16,087
Interest payable (1,000 + 870)
(1,870)
Profit before tax
14,217
Tax (3,600 + 1,826)
(5,426)
Profit after tax
8,791
Attributable to
Equity holders of the parent
7,943
Non-controlling interest (25% × 3,391) – see translation
848
8,791
Workings
(1)
Goodwill at date of acquisition
Cost of investment
$000
Rate
EU000
5,500
3
16,500
3
(15,000)
Minus: Share of net assets acquired:
Share capital (translated at 3.0)
5,000
Accumulated profits (translated at 3.0)
1,667
6,667
Group share (75%)
(2)
5,000
Goodwill
500
Re-stated to closing rate: (1,500/2.2)
682
Translation gain on goodwill – to group reserves
182
1,500
Consolidated accumulated profits
$000
Mancaster:
12,500
Stockpot: group share of post-acquisition profits (75% ×
4,697) – see translation of statement of financial position
Translation gain on goodwill
3,523
182
16,205
(3)
Non-controlling interest
$000
Non-controlling share of net assets at 31 March Year 4 :
(25% × 11,364) – see translation of Stockpot statement of
financial position
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Advanced accounting and financial reporting
7.6.
A, B AND C
Consolidated statement of comprehensive income for the year ended 30 September 20X6
Rs.000
Revenue (4,600 +3,385(W1))
7,985
Costs and expenses (3,700+2,462(W1))
(6,162)
Share of associate’s profit (W3)
160
Profit before tax
1,983
Income tax expense (200+231(W1))
(431)
Profit for the year
1,552
Other comprehensive income
Revaluation gains net of tax (200+185(W1))
385
Share of associate’s OCI (W3)
28
Forex gain in year (W4)
803
Total other comprehensive income
1,216
Total comprehensive income
2,768
Profit for year attributable to:
Equity holders of the parent
1,414
Non-controlling interest (W5)
138
1,552
Total comprehensive income attributable to:
Equity holders of the parent
2,432
Non-controlling interest (W5)
336
2,768
Consolidated statement of financial position as at 30 September 20X6
Rs.000
Assets
Non-current assets
Property, plant and equipment (7,000 + 6,349 (W1))
Goodwill (W2)
13,349
635
Investment in associate (W6)
1,220
15,204
Current assets (3,000 + 3,175 (W1))
Total assets
6,175
21,379
Equity and liabilities
Equity attributable to the parent
Share capital
2,000
Retained reserves (W8)
13,522
15,522
Non-controlling interest (W7)
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Total equity
16,998
Current liabilities (2,000 + 2,381(W1))
4,381
Total equity and liabilities
21,379
W1 Translation of B
A$000
Rate @ avge
rate
Rs.000
Statement of profit or loss and other
comprehensive income
Revenue
Cost of sales and expenses
Profit before tax
2,200
Rs./A$0.65
3,385
(1,600)
Rs./A$0.65
(2,462)
600
Income tax
(150)
Profit for year
923
Rs./A$0.65
450
(231)
692
Other comprehensive income:
Revaluation gains on PPE Total OCI
Total comprehensive income
120
Rs./A$0.65
185
120
185
570
877
Statement of financial position
Non-current assets
Property, plant and equipment
4000
@CR A$0.63
6349
Current assets
2,000
@CR A$0.63
3,175
Total assets
6,000
Share capital
1000
@HR A$0.50
2000
Pre-acquisition reserves
1800
@HR A$0.50
3600
Post-acquisition reserves
1,700
Bal fig
1,543
Total equity
4,500
Current liabilities
1,500
Equity and liabilities
6,000
W2 Goodwill
A$000
Consideration transferred
9,524
7143
@CR A$0.63
2,381
9524
Rate
Rs.000
2,600
Rs./A$0.50
5,200
600
Rs./A$0.50
1,200
Share capital
(1,000)
Rs./A$0.50
(2,000)
Retained earnings
(1,800)
Rs./A$0.50
(3,600)
NCI @ FV
Net assets acquired:1
Goodwill at 1 October 20X3
400
800
Forex loss (balancing figure)
(237)
Goodwill at 30 September 20X5
400
Rs./A$0.71
Forex gain (balancing figure)
72
Goodwill at 30 September 20X6
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Rs./A$0.63
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W3 Share of associate’s profit/OCI
Rs.000
Share of associate’s PFY (40% x Rs. 400,000)
160
Share of associate’s other comprehensive income (40% x Rs. 70,000)
28
W4 FOREX gains/losses in the year
Rs.000
Closing net assets @ CR (A$4,500,000/0.63) or from W1
7,143
Less opening net assets @ OR ((A$4,500,000 less TCI A$570,000)/0.71)
(5,535)
Less TCI for year @ average rate (A$570,000/0.65)
(877)
Forex gain on translation of subsidiary’s net assets
731
Plus Forex gain on translation of goodwill
72
Total Forex gains on translation of subsidiary
803
W5 NCI share of Profit/Total comp income
PFY
TCI
Rs.000
Rs.000
Subsidiary’s PFY/TCI (W1)
692
877
20% share
138
175
Forex gain on translation of subsidiary (20% x Rs. 803,000)
161
138
W6 Investment in associate
336
Rs.000
Investment at cost
900
Plus share of post-acquisition reserves 40% x (Rs. 1,500,000 -Rs. 700,000)
320
1,220
W7 Non-controlling interest
Rs.000
NCI on acquisition (W2)
1,200
NCI share of post-acquisition reserves of subsidiary
(20%xRs. 1,543,000(W1))
309
NCI share of net FOREX losses on translation of goodwill
(20% x Rs.(237,000-72,000))
(33)
NCI at 30 September 20X6
1,476
W8 Reserves
As per SOFP
A
B
Rs.000
Rs.000
12,100
Less pre-acquisition reserves (W1)
5,143
(3,600)
1,543
Group share 80% x Rs. 1,543,000
1,234
Group share of associate’s post-acquisition reserves
(W6)
Group share of net FOREX losses on translation of
goodwill (80% x Rs.(237,000-72,000))
Group reserves
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7.7.
OMEGA LIMITED
Extract from Statement of comprehensive income for the year ended 31 December 20X3

Profit for the year:
Rupees
Dividend received from AWL (IFRS 9,B5.7.5.1)

(20,000*10*15%*40.5)
1,215,000
Transfer of FV gain reserve of 31-12-20X2, on derecognition of AWL
investment
W.1
800,000
FV / exchange gains on valuation of AWL shares on 1-6-20X3
W.1
2,228,000
Loss on de-recognition of AWL' shares
W.1
(451,000)
FV gain/(loss) on investment
W.1
1,014,750
Exchange gain on investment
W.1
225,225
Other comprehensive income:
W-1
Date
No. of
shares
FV per
share
AED
Gain /
(loss)
Investment
AED
Conv.
@
Rupees
Remarks
Rupees
1-May-20X2
20,000
12.00
240,000
40.00
9,600,000
31-Dec-20X2
20,000
13.00
260,000
40.00
10,400,000
800,000
22,000
14.00
308,000
41.00
12,628,000
2,228,000
Gain on
valuation of
AWL on its
acquisition
by HL
18.00
297,000
41.00
12,177,000
(451,000)
Loss on derecognition
of
AWL
shares
FV gain
1-Jun-20X3
(20,000x1.1)
1-Jun-20X3
16,500
(22,000/4*3)
31-Dec-20X3
16,500
19.50
321,750
41.00
13,191,750
1,014,750
31-Dec-20X3
16,500
19.50
321,750
41.70
13,416,975
225,225
FV gain
Exchange
gain
3,816,975
7.8.
PARENT COMPANY LIMITED
(i)
Parent Company Limited
Consolidated statement of financial position as at 30 June 20X4
Assets
Rs. in million
Non-current assets
Property, plant and equipment
Intangible assets
Current assets
4,200+3,500+250×17.3
12,025.00
(W-1) 796+1,730
2,526.00
3,500+4,000+450×17.3
15,285.00
29,836.00
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Equity and liabilities
Equity attributable to owners of PL:
Rs. in million
Ordinary shares capital
6,000.00
Retained earnings
(W-4)
5,565.15
Exchange reserve
[(W-1) 253+(W-2) 813.20]] × 75%
799.65
12,364.80
W-4 (731.20+2,050)
Non-controlling interest
2,781.20
15,146.00
4,700+4,800+300×17.3
Current liabilities
14,690.00
29,836.00
(ii)
Parent Company Limited
Consolidated statement of other comprehensive income
For the year ended 30 June 20X4
Other comprehensive income:
Rs. in million
Items that may be translated to profit or loss:

Exchange gain on translation of goodwill
W-1
55.00

Exchange gain on translating of foreign operations
W-2
195.80
250.80
W-1: Goodwill and exchange gain thereon
LS
FS
---------- Rs. in million ---------Purchase consideration
NCI fair value on acquisition date
2,000
(300 × 15)
4,500
540
(90 × 15)
1,350
2,540
Net assets on acquisition date (1,800/1.2+250)
5,850
(1,750)
(120+260) × 15
6
-
Estimated liability for a pending claim
Goodwill on acquisition date i.e. 1 July 20X2
Impairment on 30 June 20X4
1,650
-
(10 × 17.3)
Goodwill as at 30 June 20X4
(173)
1,477
Goodwill as at 30 June 20X4 @ Rs. 17.30
796
(100×17.3)
Exchange gain reserve as 30 June 20X4
Exchange gain reserve as 30 June 20X3
1,730
253
(148.5 × 75%)
(198)
55
Exchange gain for the year
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W-2: Exchange reserve on translation of FS foreign operations
CU in million Conversion @ Rs. in million
Net assets as at 30 June 20X4
400.00
17.30
6,920.00
Net assets as at 30 June 20X3
(400-30+18)
388.00
16.80
6,518.40
30.00
17.00
510.00
(18.00)
16.90
(304.20)
Profit for the year
Dividend paid during the year (120×15%)
400.00
6,724.20
Exchange gain for the year ended 30
Jun 20X4
195.80
Exchange reserve as at 30 June 20X3
(463.05/75%)
617.40
Exchange gain on foreign operations
as at 30 June 20X4
W-3: FS retained earnings
813.20
CU in million Conversion @ Rs. in million
Net assets as at 30 June 20X4
400.00
17.30
6,920.00
Net assets on acquisition date
(280.00)
15.00
(4,200.00)
Post-acquisition retained earnings as at
30 June 20X4 including OCI item of
exchange gain
120.00
Exchange gain to be classified to OCI
2,720.00
W-2
(813.20)
Post-acquisition retained earnings as at
30 June 20X4
W-4: Consolidated retained earnings
and NCI
1,906.80
Retained
earnings
NCI - LS
NCI - FS
----- Rs. in million ----Balance as at 30 June 20X4
NCI fair value on acquisition date
Post-acquisition profit – LS (650×80%)
Post-acquisition profit – FS
(1,906.8×75%)
LS earnings used for bonus issue
(300×80% /20%)
Liability paid in May 20X4 booked on acq.
(6×80%/20%)
Exchange gain on translation of FS
(W-2) 1,066.20×25%
Goodwill impairment (173×75%/25%)
© Emile Woolf International
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3,500.00
-
-
-
540.00
1,350.00
520.00
130.00
-
1,430.10
-
476.70
60.00
-
1.20
-
240.00
4.80
-
-
266.55
(129.75)
-
(43.25)
5,565.15
731.20
2,050.00
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
7.9.
KANGAROO LIMITED
Extracts from the statement of financial position as on 31 December 20X7
Assets
Rs. in million
Investment property (W-1)
390.00
Investments (105 + 130) (W-2)
235.00
Liabilities
Unearned rent (0.24 m × 8 ÷12 × 150)
24.00
Extracts from the statement of comprehensive income for the year then ended
Rs. in million
Exchange loss on 20% payment (2.6 m × 20% × (145 – 148)
(1.56)
Increase in fair value of investment property (W-1)
14.30
Rent income (0.24 m × 4÷12 × 150)
12
Transaction cost – Investment A
(2.00)
Dividend income (12 + 9)
21.00
Realised gain on investment-A [(23 × 0.98 – (100 × 20%)]
2.54
Unrealised Gain – Investment-A (W-2)
25.00
Other comprehensive income
Unrealized gain- Investment-B (W-2)
22.90
Realised gain on investment-B [(50 × 0.98 – (153 × 0.3)]
3.10
W-1: Investment property
Rs. in milllion
Advance payment (2.6 × 10% × 140)
36.40
Initial recognition (2.6 × 70% × 145)
263.90
(2.6 × 20% × 145)
75.40
Total cost
375.700
Fair value (2.5 x 156)
390.00
Gain (P & L)
14.30
W-2: Investments
Investment A
Investment B
--------- Rs. in million --------Purchase price
100.00
Transaction cost *
-
Total cost
100.00
Cost of shares held at 31 Dec 20X7
Fair value - 31 Dec 20X7
Gain
(100×80%) 80.00
150.00
3.00
153.00
(153×70%)107.10
105.00
130.00
25.00
22.90
* Since Investment A is classified as FVTPL, so transaction cost is expensed out
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CHAPTER 8 - IAS 7: STATEMENTS OF CASH FLOWS
8.1.
EVERNEW LTD
Consolidated statement of cash flows for the year ended 31 December 20X6
Rs.’000
Profit before taxation
Rs.’000
138,960
Adjustment for non-cash items:
Depreciation charges
72,720
Profit on disposal of subsidiary (W.1)
(5,040)
Interest expenses (payable)
10,080
Operating profit before working
Capital changes
216,720
Changes in working capital
Increase in inventory (W2)
(28,800)
Increase in Receivables (W2)
(32,400)
Increase in Creditors (W2)
25,200
(36,000)
Cash generated from operations
180,720
Income tax paid (W.3)
(37,080)
Net cash flow from operating activities
143,640
Cash flow from investing activities:
Purchases of non-current assets (W4)
Sales of Pastit Limited (W5)
(111,240)
41,040
Net cash used in investing activities
(70,200)
Cash flow from financing activities:
Redemption of 10% debenture (W6)
(18,000)
Dividend paid to non-controlling interest (W7)
Interest paid
(3,600)
(10,080)
Net cash used in financing activities
(31,680)
Net increase in cash & cash equivalent
Cash & cash equivalent b/f (14,400 – 36,000)
Cash & cash equivalent c/f
41,760
(21,600)
20,160
Cash & cash equivalent c/f is represented by:
Cash in hand
63,360
Bank overdraft
(43,200)
20,160
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Advanced accounting and financial reporting
Workings
(W1) Profit on disposal of subsidiary:
The entire 80% shareholding was sold.
Rs.’000
Net asset of subsidiary sold (shown in the question)
43,200
Sales proceeds
39,600
Less Net asset sold x 80% = (80% x Rs. 43,200)
34,560
Profit on disposal of subsidiary
5,040
(W2) Movement in Working Capital
Add
disposal
Rs.’000
31/12/X6
Rs.’000
Less Bal.
31/12/X5
Rs.’000
Cash flow
statement
Rs.’000
Inventory
180,000
14,400
165,600
28,800
Receivables
151,200
18,000
136,800
32,400
(10,800)
(93,600)
(25,200)
Trade creditors
(108,000)
(W3) Income Tax Paid
Taxation
Rs.’000
Tax on disposal
2,160
Cash/Bank
37,080
Balance c/f
46,800
Rs.’000
Balance b/f
39,240
Tax for the year – P & L
46,800
86,040
86,040
(W4) Non-current assets
Non-current assets
Rs.’000
Rs.’000
Balance b/f
360,000
Disposal
Cash/Bank
111,240
Depreciation – (P & L)
Balance c/f
471,240
W5
28,800
72,720
369,720
471,240
Cash flow from sale of Pastit Limited
Rs.’000
As per question
39,600
Add Bank overdraft of Pastit Limited on disposal
1,440
41,040
(W6) Movement on debenture
Rs.’000
Balance b/f at 01/01/20X5
90,000
Disposal of subsidiary
(3,600)
Cash paid (bal. figure)
(18,000)
Balance c/f at 31/12/20X6
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(W7) Non-controlling interest
Rs.’000
Rs.’000
Disposal
8,640
B/d
Dividend paid to NCI
3,600
P&L
B/d
41,400
7,200
36,360
48,600
8.2.
48,600
BISHOP GROUP
(a)
Statement of cash flows for year ended 31 December 20X2
Rs.000
Cash flows from operating activities (Note 1)
Interest paid (120 + 205)
Dividends received
Taxation paid (W2)
Net cash flows from operating activities
Cash flows from investing activities:
Payments to acquire tangible non-current assets (W3)
Receipts from sale of tangible non-current assets
Purchase of investments
Rs.000
2,282
(325)
90
(117)
–––––––
1,930
(4,996)
810
(300)
–––––––
Net cash used in investing activities
(4,486)
Cash flows from financing activities:
Proceeds of share issue
Additional loans (1,200 – 800 – 25)
Capital payments under finance leases (W4)
Dividends paid to NCI (W1)
Equity dividends paid
3,824
375
(150)
(295)
(600)
–––––––
Net cash provided by financing activities
Net increase in cash and cash equivalents
Effect of exchange rate movements
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
3,154
–––––––
598
53
–––––––
651
169
–––––––
820
–––––––
Notes to the statement of cash flows
Reconciliation of operating profit to net cash inflow from operating activities
Operating profit
Depreciation
Profit on sale of non-current assets (810 – 720)
Increase in inventories (6,135 – 5,740 – 117)
Increase in receivables (5,720 – 4,380 – 339)
Decrease in payables (1,420 – 1,760 – 58)
Net cash flows from operating activities
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Rs.000
2,849
1,200
(90)
(278)
(1,001)
(398)
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Workings
(1)
Non-controlling interest
Rs.000
Dividend paid to NCI
295
Balance c/f
2,800
Rs.000
Balance b/f
Statement of profit or
loss
Exchange gain
(20% × 875)
3,095
2,500
420
175
3,095
(2)
Tax
Rs.000
Rs.000
Tax paid
117
B/f current tax
167
C/f current tax
700
B/f deferred tax
400
C/f deferred tax
550
Statement of profit or loss
800
1,367
(3)
1,367
Non-current assets
Rs.
Opening NBV
7,520
Depreciation
(1,200)
Disposals at NBV
(720)
New finance leases
700
Exchange rate gains
424
Purchase for cash
Closing NBV
4,996
11,720
(4)
Obligations under leases
Rs.000
Rs.000
Cash paid
355
Balance b/f < 1 year
50
Balance c/f < 1 year
110
Balance b/f > 1 year
250
Balance c/f > 1 year
740
Finance charge in profit or loss
205
Non-current asset additions
700
1,205
1,205
The payment of Rs. 355,000 is split as Rs. 205,000 interest and Rs. 150,000 capital as
payments are made in arrears and hence the year end payment pays off the year’s finance
cost.
(b)
The statement of profit or loss and statement of financial position are based on the
accruals concept whereas the statement of cash flows is based on the cash concept. Cash
is the 'life blood' of the company and is therefore critical to an entity’s survival. Without
cash to pay suppliers, the work force and other payables, the company will cease to
operate, irrespective of how profitable it is.
Shareholders need to know that a company is viable and has the resources to continue, and
perhaps expand, operations. Suppliers need to know they will be paid and customers need
to know the company is in a position to continue operations.
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Profit may be significantly affected by the choice of accounting policies made by a company.
This means it is more subjective than cash and more open to manipulation. However, the
statement of cash flows itself may be subject to window dressing, for example by delaying
payment of suppliers until after year end. The auditor needs to be involved in this respect to
ensure the shareholders and other users receive meaningful information.
The statement of cash flows gives additional information not provided by the other financial
statements.
8.3.
THE GRAPE GROUP
Group statement of cash flows for the year ended 31 March Year 4.
Rs.000
Cash flows from operating activities
Net profit before taxation
9,550
Adjustments for:
Depreciation (Note 1)
1,176
Loss on sale of assets
18
Income from associate
(139)
Interest expense
552
Operating profit before working capital changes
11,157
Increase in inventories (1,127 – 139)
(988)
Increase in receivables (273 – 85)
(188)
Increase in payables (203 – 68)
135
Cash generated from operations
10,116
Interest paid
(552)
Income taxes paid (W3)
(2,400)
Net cash from operating activities
7,164
Cash flows from investing activities
Acquisition of subsidiary net of cash acquired (346 – 3)
(343)
Purchase of property, plant and equipment (1,875 – 315)
Proceeds from sale of property, plant and equipment (W1)
Dividends received from associate (W2)
(1,560)
156
93
Net cash used in investing activities
(1,654)
Cash flows from financing activities
Proceeds from issuance of share capital (675 + 519 - 152)
Repayment of loan notes
1,042
(990)
Dividends paid
(2,100)
Net cash used in financing activities
(2,048)
Net increase in cash and cash equivalent
3,462
Cash and cash equivalents at beginning of period
1,728
Cash and cash equivalents at end of period
5,190
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Notes to the statement of cash flows
(1)
Major non-cash transactions
During the year the group purchased a subsidiary undertaking. Part of the consideration for
the acquisition was in the form of shares. Further details of the acquisition are given below.
(2)
Purchase of subsidiary undertaking
Rs.000
Net assets acquired:
Property, plant and equipment
315
Inventories
139
Receivables
85
Cash at bank and in hand
3
Payables
(68)
474
Goodwill
24
498
Satisfied by:
Shares allotted
152
Cash
346
498
Workings
(1)
Proceeds from sale of property, plant and equipment
Rs.000
Cost of assets sold
429
Accumulated depreciation
(2)
(255)
Loss on sale
(18)
Proceeds
156
Dividends received from associate
Interest in associate
Rs.000
Balance b/d
1,920
Share of associates' profit after
tax
139
Rs.000
Dividends received from
associates
Balance c/d
2,059
(3)
93
1,966
2,059
Taxation
Taxation
Rs.000
Rs.000
Cash paid
2,400
Balance b/d
2,400
Balance c/d
2,950
Statement of profit or loss
2,950
5,350
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Answers
8.4.
VITZ LIMITED
Consolidated statement of cash flows for the year ended 30 June 20X8
Rs. in million
Cash flow from operating activities
Profit
(W-5)817.2+(W-6)222.8
1,040
(W-3) (160–12)
(148)
(1,600–1,250–200)
(150)
Gain on disposal of property, plant & equipment
(350+230)–(170+250)
(160)
Unwinding of interest on deferred consideration
[189(W-7)×8%]
15
Exchange loss on deferred consideration
[223–(189+15)]
19
(W-2)
480
65
Adjustments for:
Share of associate profit
Gain on disposal of subsidiary SL
Depreciation
Impairment of goodwill
1,161
Increase in working capital
(W-4)
(951)
210
Cash flow from investing activities:
Acquisition of shares in associate – AL
Proceeds from disposal of subsidiary - SL
(600)
(1,600–100)
Proceeds from disposal of property, plant &
equipment
Acquisition of foreign subsidiary - FL
Purchase of property, plant and equipment
Dividend received from associate
1,500
350
(W-7) (495–110)
(385)
(W-1)
(W-3)
(1,043)
78
(100)
Cash flow from financing activities:
Proceeds from sale of shares of subsidiary – WL
Proceeds from issue of shares at premium
[(2,800+300)–(2,500+375)]
450
225
675
Net increase in cash and cash equivalents
785
Effect of exchange rate movement
13
798
Cash and cash equivalents - beginning
770
Cash and cash equivalents – ending
1,568
W-1: Additions to property, plant and equipment
Closing balance
Rs. in million
3,678
Opening balance
4,173
Transfer-in on acquisition of FL
Exchange gain relating to FL’s PPE
(W-7)
605
(122–13–36–16)
57
Transfer-out on disposal of SL
(1,300)
Carrying value of PPE disposed off
Depreciation
(170+250)
(420)
(480)
(2,635)
Additions
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W-2: Impairment of goodwill
Rs. in million
Opening balance
639
Goodwill on acquisition of FL
(W-7)
179
Exchange gain on FL's goodwill
(W-8)
16
Goodwill de-recognised on disposal of SL
(200)
634
Closing balance
(569)
Impairment of goodwill
65
W-3: Dividend from associate AL
Cost of acquisition of associate
600
Share of profit
(800×6/12×40%)
Unrealised profit on inter-co inventory
(400×30%×25%×40%)
160
(12)
748
Closing balance
(670)
Dividend from associates
78
W-4: (Increase)/Decrease in working capital
Opening balance
Working capital of subsidiary FL
(1,050+823–1,630)
243
(W-7)
385
Exchange gain on working capital FL
36
Working capital pertaining to SL disposed of during the year
150
814
Closing balance
(1,950+957–912)
Receivable for property, plant & equipment disposed off
(1,995)
230
(1,765)
(951)
W-5: Other group reserves/Profit attributable to parent
Closing balance
3,519.0
Opening balance
2,451.0
(450–300)
Equity adjustment on sale of 30% shareholdings in subsidiary
- WL
Exchange gain - attributable to parent
[122–21.2(W-6)]
150.0
100.8
(2,701.8)
Profit attributable to parent
817.2
W-6: Non-controlling interest/Profit attributable to NCI
Closing balance
1,638.0
Opening balance
874.0
NCI share of 30% in subsidiary – WL
NCI share of 20% in subsidiary – FL
Share of exchange gain on translation of operation – FL
(1,000×30%)
300.0
(W-7)
(106×20%)
220.0
21.2
(1,415.2)
Profit attributable to NCI
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Answers
W-7: Goodwill - FL:
USD in million
Rate Rs. in million
Purchase consideration:
- Cash
- Shares at market value
(15×25/110)
- Deferred consideration payable after two year
(2/(1.08)2
4.500
110
495
3.410
110
375
1.714
110
9.624
NCI
Fair value of net assets:
(10×20%)
189
1,059
2.000
110
Property, plant & equipment
5.500
110
605
Working capital
Cash
3.500
1.000
110
110
385
110
FL - Goodwill at the date of acquisition
220
(10.000)
(1,100)
1.624
179
W-8: Exchange gain reserve – FL
Rs. in million
Exchange gain on FL goodwill
Exchange gain on translation of FL operations:
- Net assets at year-end date rate
- Net assets on acquisition date rate
- Profit for the year at average rate
(W-7) 179/110×(120–110)
16
(10+1.5)×120
1,380
10×110
1.5×116
(1,100)
(174)
106
122
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CHAPTER 9 - IFRS 9: FINANCIAL INSTRUMENTS: RECOGNITION AND
MEASUREMENT
9.1.
AJI PANCA LTD
Capital and reserves
Share capital (Rs. 1 ordinary shares) (W2)
Share premium (W3)
Retained earnings
Rs.
1,625,000
6,116,812
7,741,812
Liabilities (W5)
164,751
Workings
(1)
Profit for the year
Rs.
508,500
(14,988)
493,512
Original
Minus: Finance charges (W5)
(2)
Ordinary share capital
Rs.
1,000,000
300,000
1,300,000
325,000
1,625,000
At 1 January
Issue at full price on 31 March
Bonus issue on 30 June (1,300,000 ÷ 4)
(3)
Share premium
At 1 January
Issue at full price on 31 March ((300,000  0.30) – 20,000)
Bonus issue on 30 June
(4)
Retained earnings
At 1 January
Minus: Bonus issue on 30 June (325,000 (W2) – 270,000 (W3)
Add: Profit for the year (W1)
Add back: Preference dividends charged to retained earnings
(W5)
(5)
Rs.
200,000
70,000
270,000
(270,000)
NIL
Rs.
5,670,300
(55,000)
493,512
8,000
6,116,812
Redeemable preference shares
Rs.
Liability at beginning of year
Year 1 ((100,000  Rs. 1.60) – 2,237))
Finance charge at 9.5%
Interest paid at 4%
Liability at end of year
© Emile Woolf International
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157,763
14,988
(8,000)
164,751
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Answers
9.2.
PASSILA LTD
(a)
The face value of the debentures
Rs. 100 X 20,000 = Rs. 2,000,000
The amount accrued to the company as proceeds (MV) =
Rs. 97.5 X 20,000 = Rs. 1,950,000
(b)
The difference between the face value and the market value of the debentures is
Rs. 50,000. This is as a result of discount allowed on the issue on the debentures.
Discount on debentures attracts investors.
(c)
Nominal interest rate is the rate based specifically on the face value of the loan capital.
In case of Passila Ltd., the nominal interest rate on the debentures is 8% per annum on
Rs. 2,000,000.
The effective interest is the rate based on the market value. This is the actual value
collected on issue which can be at par, discount or premium. For Passila Ltd., the
effective interest rate will be 8% of Rs. 1,950,000
(d)
The nominal interest payable
Rs. 2,000,000 X 8% X 6 months ÷ 12 months
= Rs. 80,000
(e) (i)
9.3.
The face value of Rs. 2,000,000 will be the most appropriate valuation to be
disclosed in the Statement of financial position. The management may be
interested in the quoted market value or the proceeds, but for the sake of outside
investors who would only be interested in the company having good reputations
devoid of trading losses, it is advisable that the face value be adopted.
(ii)
Disclosing the debentures’ liability at face value plus interest payment for five
years may seem proper in the eyes of external investors and credit institutions,
but principally, it would be wrong to credit debentures’ account with both the face
value and the interest payments. An interest payment on debentures is a
revenue item which is debited to the profit and loss account.
(iii)
Disclosing debentures’ liability at market value on the Statement of financial
position will amount to disclosure at replacement value. The market value
should be disclosed.
FINANCIAL INSTRUMENTS
(a)
IFRS 9 requires that all financial assets and financial liabilities are recognised at fair value
at initial recognition.
A company must classify financial assets as subsequently measured at:

amortised cost;

fair value through other comprehensive income; or

fair value through profit or loss
Amortised cost
Amortised cost is calculated as:
Initial cost recognised
Plus: Interest at the effective rate
Minus: Cash received/paid
Fair value
Fair value is defined as “the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date”.
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Financial assets
A financial asset must be measured at amortised cost if both of the following conditions are
met:

the asset is held within a business model whose objective is to hold assets in order to
collect contractual cash flows; and

the contractual terms of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal amount outstanding.
A financial asset is measured at fair value through other comprehensive income (“FVOCI”)
if both of the following criteria are met:

The objective of the business model is achieved both by collecting contractual cash flows
and selling financial assets; and

The asset’s contractual cash flows represent solely payments of principal and interest.
Financial assets included within the FVOCI category are initially recognized and
subsequently measured at fair value. Movements in the carrying amount should be
recorded through OCI, except for the recognition of impairment gains or losses, interest
revenue and foreign exchange gains and losses which are recognized in profit and loss.
Any asset which is not measured at amortised cost or other comprehensive income must
be measured at fair value through profit or loss (FVTPL). FVTPL is the residual category.
Regardless of the business model assessment, an entity can elect to classify a financial
asset at FVTPL if doing so reduces or eliminates a measurement or recognition
inconsistency (“accounting mismatch”).
Financial liabilities
Financial liabilities held for trading, (e.g. derivative liabilities), as well as loan commitments
and financial guarantee contracts that are designated at FVTPL under the fair value option,
will continue to be measured at fair value with all changes being recognised in profit or
loss. However, for all other financial liabilities designated as at FVTPL using the fair value
option, IFRS 9 requires the amount of the change in the liability’s fair value attributable to
changes in the credit risk to be recognised in OCI with the remaining amount of change in
fair value recognised in profit or loss.
Amounts presented in other comprehensive income are not subsequently transferred to
profit or loss.
A company is allowed to designate a financial liability as measured at fair value through
profit or loss. This designation can only be made if:

it eliminates or significantly reduces a measurement or recognition inconsistency; or

this would allow the company to reflect a documented risk management strategy.
However, any such designation is irrevocable.
(b)
(i)
3% Bond
The bond must initially be recorded at its purchase price of Rs. 250,000. The bond
seems to satisfy the amortised cost criteria. The company seem to operate a business
model whose objective is to hold financial assets in order to collect contractual cash
flows and it seems that the cash it will collect will be solely payment of interest and
principle. The market value is not relevant.
Interest will be credited to profit or loss using the effective interest rate, resulting in
finance income of Rs. 24,250 (9.7% × 250,000). The effective rate reflects the total
return received by the investor over the duration of the bond – being the coupon + Rs.
50,000 premium on redemption. The coupon recorded in the statement of cash flows
is Rs. 9,000 (3% × 300,000).
The difference between the effective interest and the actual coupon is added to the
investment to give an amortised cost at the end of Year 3 of Rs. 265,250 (250,000 +
24,250 – 9,000).
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Answers
(ii)
Equity shares in XYZ
The shares must be classified as FVTPL. They will initially be recorded at their cost
of Rs. 30,000. As they have been classed as ‘fair value through profit or loss’ the
transaction costs must be expensed to profit or loss immediately. At the end of each
reporting period, the shares must be re-measured to their market value, with the
resulting gain or loss being taken to profit or loss.
At 1 January Year 3, the investment has a carrying value of Rs. 34,000. By the 31
December Year 3 this value is now Rs. 35,000. A Rs. 1,000 gain will therefore be
recognised in profit or loss for the year.
(iii)
Convertible bond
A convertible bond is a compound instrument. In essence, issuing a convertible bond
is equivalent to issuing a non-convertible bond plus a call option on the entity’s shares.
Therefore, the bond should be divided into a liability portion and an equity portion in
accordance with the rules in IAS 32.
Note that the investor would have to do something similar
To establish the liability (debt) element, the future cash flows from the bond are
discounted at the normal market rate to establish the value of an equivalent but
redeemable bond.
Using a rate of 7% this gives a net present value of:
20,000 20,000 520,000


 $460,635
1.07
1.072
1.073
As the bond was issued for Rs. 500,000, it implies that the call option embedded within
the bond was sold for Rs. 39,365 (Rs. 500,000 – 460,635).
The liability component is measured at amortised cost after initial recognition. Interest
will be recognised at the effective rate of 7%. The difference between the cash interest
paid (4%) and the interest expense recognised will increase the amortised cost of the
liability year on year until the bond is redeemed.

9.4.
CASCABEL LTD
(a)
At 31 July 20X6 this instrument meets the definition of a derivative:

Small or no initial investment.

Its value is dependent on an underlying economic item; exchange rate and

Its settlement will take place at some future date.
As a derivative it should be accounted for as an “asset or liability held at fair value through
profit or loss”. The value of the derivative instrument will be the difference between the
value of the contract when settled compared with the cost of A$2m being purchased at the
spot rate at the year-end date.
Cost of A$2m at a contracted rate of A$0.64 = Rs. 3,125,000
Cost of A$2m at the forward rate of A$0.70 = Rs. 2,857,143
The derivative results in a liability at the year-end date of Rs. 267,857 (Rs. 3,125,000 Rs. 2,857,143) as the contract has unfavourable terms when compared to the spot rate.
The loss on derivative would be charged to the statement of profit or loss in the year to 31
August 20X6.
Recorded as:
(b)
Dr
Statement of profit or loss (loss on derivative)
Rs. 267,857
Cr
Liabilities – derivatives
Rs. 267,857
If the derivative was designated as a hedging instrument in a cash flow hedge then the
loss of Rs. 267,857 would be recognised in other comprehensive income until the related
cash flow (hedged item) occurred, and shown as a loss in other comprehensive income in
the year ended 31 August 20X6. This ensures that the movements in the hedged item and
the hedging item can be offset in the same accounting period.
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9.5.
FAIR VALUE HEDGE ACCOUNTING
(a) Journals at 31 December 20X5
Debit
Forward contract asset
Credit
95,000
P&L account – fair value gain
95,000
Being mark-to-market for the derivative
P&L account – fair value loss on inventory
100,000
Inventory
100,000
Being fair value loss on inventory, attributable to the risk being hedged
(b) Journals at 31 March 20X6
Debit
Forward contract asset (142000 – 95000)
Credit
47,000
P&L account – fair value gain
47,000
Being mark-to-market for the derivative
P&L account – further fair value loss on inventory
50,000
Inventory
50,000
Being fair value loss on inventory, attributable to the risk being hedged
Bank
1,150,000
P&L account
1,150,000
Being sales proceeds
Bank
142,000
Forward contract
142,000
Being forward contract closed out for cash
P&L account – cost of sales
850,000
Inventory
850,000
Being inventory carrying value now derecognised upon sale
The results of these journals can be summarised as:
Debit/(Credit)
Cash
Derivative
Inventory brought forward
Inventory
P&L
1,000,000
December:
Change in fair value (FV) of forward
95,000
Change in FV of inventory
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(100,000)
210
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Answers
Debit/(Credit)
Cash
Derivative
Inventory
P&L
March:
Change in FV of forward
47,000
(47,000)
Change in FV of inventory
(50,000)
Revenue
Close out derivative
142,000
(1,150,000)
(142,000)
Cost of sale
TOTALS
9.6.
50,000
1,150,000
1,292,000
(850,000)
850,000
NIL
292,000
NIL
CASH FLOW HEDGE ACCOUNTING
Fair value of the derivative contract at 31 December:
31 Dec
The cash flow under the contract will be 400,000 * 0.7 =
Rs. 280,000
The cash flow available in the market is 400,000 * 0.75 =
Rs. 300,000
28 Feb
Rs. 280,000
The cash flow available in the market is 400,000 * 0.80 =
Therefore the fair value of the derivative (an asset) is
Rs. 320,000
Rs. 20,000
Rs. 40,000
(a) Journals at 31 December
Debit
Forward contract
Credit
20,000
Equity – cash flow hedge reserve
20,000
Being fair value change, deferred to equity as an effective cash flow hedge
(b) Journals at 28 February
Debit
Forward contract
Credit
20,000
Equity – cash flow hedge reserve
20,000
Being fair value change January and February 20X6
Bank
40,000
Forward contract
40,000
Contract closed with payment from the FX dealer of 400,000 * (0.70-0.80) = Rs. 40,000
Property, Plant and Equipment
320,000
Bank
320,000
Being initial recognition of purchase price of machine: 400,000 * 0.80 = Rs. 320,000
Equity – cash flow hedge reserve
40,000
Property, Plant and Equipment
40,000
Being transfer of deferred gains/losses on closure of a cash flow hedge
The machine will therefore be recorded at 320,000 – 40,000 = Rs. 280,000
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The results of these journals can be summarised as:
Debit/(Credit)
Cash
Derivative
Equity
20,000
(20,000)
20,000
(20,000)
PP&E
December:
Change in (FV) of forward
February:
Change in FV of forward
Purchase of drilling rig
(320,000)
320,000
Basis adjustment
9.7.
Close out of derivative
40,000
TOTALS
(280,000)
40,000
(40,000)
-
280,000
(40,000)
-
WATERS LTD
1
Investment in 7% treasury stock 20Y2
As there is not an intention to hold the investment to maturity, the investment should be
classified as at fair value (with gains and losses recognised in profit or loss).
At initial recognition it will be measured at fair value which is the consideration given of
Rs. 208,200.
There is no interest received up to year end (first payment will be received on 31 October
20X7)
The market value of the stocks at the reporting date is Rs. 196,140 and the revaluation
loss of Rs. 12,060 will be recognised in profit or loss.
Alternative:
Waters Ltd could choose to recognise finance income in the statement of profit or loss at
6.3%  208,200  4/12 = Rs. 4,372.
The financial asset will then have a carrying amount of Rs. 212,572 (208,200 + 4,372) prior
to remeasuring to the fair value. The market value of the stocks at the reporting date is
Rs. 196,140 and the revaluation loss of Rs. 16,432 will be recognised in profit or loss.
Notice that the overall profit impact is the same in each case as *4,372 + (16,432) =
12,060.
2
Futures Prif contract
The derivative will be classified as at fair value through profit or loss.
Initial transaction costs cannot be included as part of the carrying amount and therefore
the fee of Rs. 750 will be immediately charged to profit or loss.
At the reporting date the contract is valued at the fair value of PR1.99/Rs. 1 so the loss is
Rs. 1,269 to be included in profit or loss and as a liability on the statement of financial
position
3
Investment in Gilmour Ltd
This would normally be classified as at fair value (with gains and losses recognised in
profit or loss).
On initial recognition it would be valued at fair value which would be the cost of
Rs. 1,212,500. The directly attributable transaction costs (Rs. 35,000) would be expensed
to profit or loss.
At the reporting date the shares will be valued at fair value (Rs. 5.20 per share) ignoring
selling costs = Rs. 1,300,000.
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Answers
The revaluation gain of Rs. 87,500 will be recognised in profit or loss.
Alternative:
Waters Ltd could have made an irrevocable election at initial recognition to recognise
gains and losses in other comprehensive income. If this election had been made the
shares would have been measured on initial recognition at the cost of Rs. 1,212,500 plus
directly attributable transaction costs Rs. 35,000 = Rs. 1,247,500.
At the reporting date the shares would then have been be valued at fair value with the
revaluation gain of Rs. 52,500 recognised in other comprehensive income.
4
Amount receivable from Mason
On recording the sale, the revenue needs to be discounted at the imputed rate of interest
of 11%. Revenue recognised on 1 July is therefore Rs. 450,450 (500,000  1.11).
The receivable on the statement of financial position will include the accrued interest
element of Rs. 24,775 (Rs. 450,450 x 0.11 x 6/12) and so will be Rs. 475,225 (Rs. 450,450
+ Rs. 24,775) in total. The accrued interest of Rs. 24,775 will be recognised as finance
income.
The receivable would not be adjusted for any change in interest rates.
5
Investment in 8.5% treasury stock 20X8
This would be classified as to be subsequently measured at amortised cost.
On initial recognition, it will be recorded at fair value, the cost of Rs. 107,100.
Finance income will be credited to profit or loss using the gross redemption yield of 5.9%.
Interest recognised in profit or loss will be Rs. 4,213 (Rs. 107,100  5.9%  8/12).
The investment in the statement of financial position at 31 December 20X6 will be at
Rs. 107,100 plus Rs. 4,213 = Rs. 111,313. (No interest will have been received to date as
it is paid annually in arrears).
The market value is not reflected in the statement of financial position at 31 December
20X6 but it would be disclosed in accordance with IFRS 7.
6
Investment in loan notes
The investment has been classified as financial asset at fair value through profit or loss.
On acquisition it will be recorded at its cost (= fair value) of Rs. 25,000.
At the reporting date the notes will be revalued to their fair value of Rs. 25,500 with the Rs.
500 uplift being recognised in profit or loss
7
Selling shares short
On initial recognition, the journal would be:
Rs.
Dr
Cash (10,000  Rs. 3.60)
Cr
Financial liability
Rs.
36,000
36,000
At the reporting date the financial liability must be revalued to its fair value of Rs. 33,000:
Rs.
© Emile Woolf International
Dr
Financial liability
Cr
Statement of profit or loss
Rs.
3,000
213
3,000
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
9.8.
ARIF INDUSTRIES LIMITED
(a)
Amortisation table
Interest income @
15.5%
(Cr P&L)
B = A x 15.5%
16,219,430
16,408,441
16,626,750
16,103,896
Opening
balance
20X6
20X7
20X8
20X9
(b)
A
104,641,483
105,860,913
107,269,354
103,896,104
Expected cash
flow
Closing
balance
C
(15,000,000)
(15,000,000)
(20,000,000)
(120,000,000)
E=A+B+C
105,860,913
107,269,354
103,896,104
-
Amortisation table with adjustment for future income estimate
Opening
balance
20X6
20X7
20X8
20X9
20Y0
A
104,641,483
105,860,913
108,891,888
105,770,131
102,164,501
Interest income
@ 15.5%
(Cr P&L)
Expected
cash flow
B=A x 15.5%
16,219,430
16,408,441
16,878,243
16,394,370
15,835,498
C
(15,000,000)
(15,000,000)
(20,000,000)
(20,000,000)
(118,000,000)
Effect of
change in
Closing
estimate
balance
(Cr P&L)
D
E=A+B+C+D
105,860,913
1,622,535
108,891,889
105,770,132
102,164,502
-
Computation of effect of change in estimate:
Expected cash flow
Discounted rate
(revised)
(effective rate = 15.5%)
Discounted
20X8
(20,000,000)
0.8658
17,316,017
20X9
(20,000,000)
0.7496
14,992,223
20Y0
(118,000,000)
0.6490
76,583,649
Revised present value
108,891,889
Existing present value (as at end of 20X7)
107,269,354
Effect of change in estimate
9.9.
1,622,535
QASMI INVESTMENT LIMITED
Journal entries for 31 December 20Y1 and 20Y2
Date
31-Dec-20Y1
Debit
Description
Credit
Rs. in million
Accrued Interest written off (P&L)
12.00
Accrued Interest – 20Y0
12.00
(Accrued interest on 12%TFCs for 20Y0 is no
more receivable, now written off.)
Financial assets (12% TFCs) W.3 (16.89–12.00)
Interest income (P&L)
4.89
4.89
(Interest income on 12% TFCs at 4.426% for
20Y1)
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Date
Debit
Description
Credit
Rs. in million
Impairment loss (P&L)
W.1
19.16
Financial assets (12% TFCs)
19.16
(Impairment of financial assets (12% TFCs) as
interest for 20Y0 to 20Y3 is no more receivable)
31-Dec-20Y2
Financial assets (12% TFCs)
(88.53×16.426%)
W.1
14.54
Interest income (P&L)
14.54
(Interest income for 20Y2)
Financial assets (12% TFCs)
W.2
10.31
Impairment reversal (P&L)
10.31
(Reversal of impairment of financial assets on
rescheduling of payments for TFCs)
W.1 Impairment
Carrying value of 12% TFCs on 31-12-20Y1
PV of future cash flows on 31-12-20Y1
W.3
107.69
120×[(1.16426)–2 ]
88.53
19.16
Impairment loss
W.2 Impairment Reversal
Revised carrying amount on rescheduling at lower of (A) and (B) below
113.38
(A)
PV of the future cash flow as per the agreed revised schedule
115.00
(B)
Amortised cost on impairment reversal date of 31-12-20Y2 would have
been had the impairment not been recognised. W.3
113.38
Existing carrying amount at 31-12-20Y2
88.53×1.16426
(103.07)
10.31
Impairment reversal
W.3 Original amortisation schedule
Cash flow dates
Effective interest @
Cash flow
16.426%
(Interest @ 12%)
Amortised cost
-------------------------------- Rs. in million -------------------------------01-Jan-20X9
(100×95%)
95.00
31-Dec-20X9
15.60
(12.00)
98.60
31-Dec-20Y0
16.20
(12.00)
102.80
31-Dec-20Y1
16.89
(12.00)
107.69
31-Dec-20Y2
17.69
(12.00)
113.38
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9.10.
RASHID INDUSTRIES LIMITED
Investment in KL
Initial measurement
According to IFRS 9, at initial recognition, RIL may make irrevocable election to present
subsequent changes in fair value in equity investment in other comprehensive income instead of
profit or loss account.
If RIL opted as above, investment in KL would initially be recognized at fair value plus transaction
costs i.e. Rs. 20 million.
However, if RIL opted to measure the investment at fair value through profit and loss (FVTPL),
investment should initially be measured at Rs. 19.96 million (20/1.002) and transaction costs of
Rs. 0.04 million (20–19.96) should be charged to profit and loss account.
Subsequent measurement
On 31 December 20X6, if fair value through other comprehensive income has been opted,
investment in KL should be measured at fair value of Rs. 12.4 million and a loss of Rs. 7.6 million
[20–12.4(155,000×80)] (instead of Rs. 5 million) should be booked through other comprehensive
income.
According to IFRS 9, amount presented in other comprehensive income shall not be
subsequently transferred to profit or loss. However, the entity may transfer the cumulative gain /
(loss) within equity.
If fair value through profit or loss has been opted, then RIL should account for the loss of
Rs. 7.56 million (20–0.04(transaction cost)–12.4) through profit and loss account.
Investment in BL
Initial measurement
The investment in BL should be recognized as held for trading at fair value of Rs. 64.87 million
(65÷1.002) and transaction cost of Rs. 0.13 million should be charged to profit and loss account.
Subsequent measurement
As at 30 November 20X6, the investment should be re-measured to fair value at the market price
of Rs. 83.835 million (135,000×621) and a gain of Rs. 18.965 million (83.835–64.87) shall be
booked in the profit and loss account.
Reclassification of asset
On 30 November 20X6 when RIL decided to hold the shares for a longer period, investment in
BL should be reclassified from held for trading to non-trading investment. Further, RIL may make
irrevocable election that investment in BL would be re-measured at fair value through other
comprehensive income, as discussed in the case of KL above. Similarly, treatment on
31 December 20X6 would depend on whether RIL opted to re-measure at fair value through OCI
or not.
9.11.
LAHORE STEEL LIMITED
General Journal
Debit
Date
Credit
Particulars
Rs. in million
1-Jan-20X6
Debentures (W-1)
9.63
Equity (W-3)
1.43
Cash (0.1×107)
10.70
Debt settlement gain (Balancing)
31-Dec-20X6
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Finance cost (W-1)
0.36
6.06
Cash (W-1)
5.40
Debentures (Balancing)
0.66
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W-1: Movement of liability
Rs. in million
Initial amount (W-2)
95.57
Finance cost accrued 20X5 (95.57 × 7%)
6.69
Finance cost paid 20X5 (100 × 6%)
(6.00)
Liability at the end of 20X5
96.26
10% redeemed (96.26 × 10%)
(9.63)
Liability after redemption
86.63
Finance cost accrued 20X6 (86.63 × 7%)
6.06
Finance cost paid 20X6 (90 × 6%)
(5.40)
Liability at the end 20X6
87.29
W-2: Liability component (1 January 20X5)
PV at 7% of
 interest payments for 20X5-20X9 (100 × 6% × 4.1001)
24.60
 principal payment at end of 20X9 (50 × 0.7130)
35.65
 interest payments for 20Y0 (50 × 6% × 0.6663)
2.00
 principal payment at end of 20Y0 ((50 × 0.6663)
33.32
Liability component
95.57
W-3: Equity component repurchased
Total payment (0.1 × 107)
10.70
Fair value of liability repurchased [92.69 (W-4) × 10%]
(9.27)
1.43
W-4: Fair value of liability component (1 January 20X6)
PV at 8% of
 interest payments for 20X6-20X9 ((100 × 6% × 3.3121)
19.87
 principal payment at end of 20X9 (50 × 0.7350)
36.75
 interest payments for 20Y0 (50 × 6% × 0.6806)
2.04
 principal payment at end of 20Y0 (50 × 0.6806)
34.03
92.69
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9.12.
FRENCH LIMITED
General Journal
Debit
Date
Credit
Description
-------- Rs. --------
03-01-X5
Debenture – amortised cost
(15,000×96)
Loss on initial recognition
1,440,000
15,000
Cash/Bank
1,455,000
15,000×97
Debenture – amortised cost
35,000
Cash/Bank
03-01-X5
35,000
Impairment loss (P&L)
11,200
Debenture loss allowance
31-12-X5
Cash/Bank
Debenture – amortised cost
Interest income
31-12-X6
(15,000×100×12%)
180,000
(Balancing figure)
5,850
1,475,000×12.6%
Cash/Bank
Debenture – amortised cost
185,850
(15,000×100×12%)
180,000
(Balancing figure)
6,587
(1,475,000+5,850)×12.6%
Interest income
31-12-X6
11,200
Impairment loss (P&L)
(62,600–11,200)
186,587
51,400
51,400
Debenture loss allowance
31-12-X7
Cash/Bank
Debenture – amortised cost
Interest income
31-12-X7
(15,000×100×12%)
180,000
(Balancing figure)
7,417
(1,475,000+5,850+6,587)×12.6%
Impairment loss (P&L)
(70,900–62,600)
187,417
8,300
8,300
Debenture loss allowance
31-12-X7
Cash/Bank
(15,000×100×12%)
Debenture – amortised cost
(Balancing figure)
Interest income [(1,475,000+5,850+6,587+7,417)
–70,900]×12.6%
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218
180,000
582
179,418
The Institute of Chartered Accountants of Pakistan
Answers
CHAPTER 10 - FINANCIAL INSTRUMENTS: PRESENTATION AND DISCLOSURE
10.1.
SERRANO LTD
IAS 32 Financial Instruments: Disclosure and Presentation says that the issuer of a compound
(hybrid) instrument (i.e. one that contains both a liability debt and an equity element) should
classify the instrument’s components separately. Thus the advice of Ancho Services is wrong;
convertible loan stock cannot be classified as pure equity. The proceeds of the issue have to be
split between the amount attributable to the conversion rights, which is then classed as equity,
and the balance of the proceeds being classed a liability/debt. There are several methods of
obtaining these amounts, but from the information given in the question these can only be
calculated on a ‘residual value of equity’ basis:
Cash
flows
Factor at
10%
Rs.000
Present
value
Rs.000
Year 1 interest
600
0.91
546
Year 2 interest
600
0.83
498
Year 3 interest
600
0.75
450
10,600
0.68
7,208
––––––
Year 4 interest and capital
Total value of debt component
8,702
Proceeds of the issue
10,000
––––––
Equity component (residual amount)
1,298
––––––
Statement of profit or loss:
Rs.
Interest paid (6% of Rs. 10 million)
600,000
Provision for additional finance costs
270,000
((10%  8.702m) – 0.6m)
870,000
Statement of financial position:
Non-current liabilities:
6% Convertible Loan Stock (from above)
Provision for additional finance costs
8,702,000
270,000
8,972,000
Capital and reserves:
Option to convert to equity (from above)
10.2.
1,298,000
POBLANO LTD
In the financial statements of Poblano Ltd for the year to 30 September 20X6.
In the statement of profit or loss, the finance cost relating to the loan notes is Rs. 640,000.
In the statement of financial position:
Non-current liability for the loan notes = Rs. 9,384,000
Equity component of loan notes = Rs. 856,000.
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Workings: Rs. 10 million of loan notes
Year
Annual
cash flow
Cash flows
Discount
factor at
7%
Rs.000
Present
value
Rs.000
1
Interest
400
0.93
372
2
Interest
400
0.87
348
3
Interest + Redemption
10,400
0.81
8,424
Value as straight loan notes
9,144
Issue price
10,000
Equity component (residual amount)
856
Finance cost: year to 30 September 20X6
Rs.000
Total finance cost: 9,144  7%
640
Interest payable on 30 September 20X6 (Rs. 10 million  4%)
400
Accrual to add to carrying value of debt
240
Carrying value of loan notes: 30 September 20X6
Rs.000
Initial valuation of debt element
9,144
Add accrued interest
240
Carrying amount at 30 September 20X6
10.3.
9,384
PIQUIN LTD
(a)
Convertible instrument
A convertible instrument is considered part liability and part equity. IAS 32 requires that
each part is measured separately on initial recognition. The liability element is measured
by estimating the present value of the future cash flows from the instrument (interest and
potential redemption) using a discount rate equivalent to the market rate of interest for a
similar instrument with no conversion terms. The equity element is then the balance,
calculated as follows:
PV of the principal amount Rs. 10m at 7% redeemable in 5 years
(Rs. 10m x 0.713)
PV of the interest annuity at 7% for 5 years
(5% x Rs. 10m) x 4.100
Total value of liability element
Equity element (balancing figure)
Total proceeds raised
Rs.
7,130,000
2,050,000
9,180,000
820,000
10,000,000
The equity will not be remeasured, however the liability element will be subsequently
remeasured at amortised cost using the effective interest rate of 7%. The total finance cost
for the year ended 31 December 20X6 is Rs. 642,600 (7% x 9,180,000). The coupon rate
of interest of 5% has already been charged to profit or loss in the year so a further
Rs. 142,600 should be recorded:
Dr
Finance costs
Cr
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Rs. 142,600
Financial liability
Rs. 142,600
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(b)
Preference shares
The substance of the instrument is a debt instrument. IAS 32 requires that any instrument
that contains an obligation to transfer economic benefit be classified as a liability. The
cumulative nature of the returns on the preference shares means that the outflow of benefit
is inevitable. The preference shares would then be classified as debt and would in fact
increase the gearing of the entity.
10.4.
AJI LTD
(a)
IAS 32 requires that the equity and liability elements within convertible instruments be
initially recognised separately. The initial carrying amount of the liability is estimated by
measuring the fair value of a similar liability that has no equity element. This is achieved by
calculating the present value of the future cash flows associated with the instrument
assuming that it is not converted on redemption (i-e: the interest and principal repayment
cash flows) discounted at the prevailing market rate for a similar instrument without
conversion rights. The difference between this amount and the proceeds (i-e: the residual)
is recognised as equity.
The bonds are initially recognised as:
Rs.000
Dr
Bank (proceeds of issue)
Rs.000
6,000
Cr
Liability (W1)
5,609
Cr
Equity (W2)
391
Working 1
Rs.000
Liability element
PV of the principal (at 9% after 4 years) = (Rs. 6m x 0.708)
4,248
PV of interest of 7% on Rs. 6m for 4 years = (Rs. 6m x 0.07 x 3.24)
1,361
Total value of liability element
5,609
Working 2
Rs.000
Equity element
Total proceeds raised on issue
6,000
Total value of liability element
(5,609)
Value attributable to equity
(b)
(i)
391
In accordance with IFRS 9, the liability element will be subsequently measured at
amortised cost using the effective interest rate (which in this case is the interest rate
used to discount the principal to PV, ie 9%). The equity element is not subsequently
re-measured.
The interest of Rs. 420,000 (7% x Rs. 6m) has already been paid and recorded. The
additional finance cost is recorded as:
Dr
Cr
(ii)
Finance costs (W1)
Financial liability
Extracts from statement of financial position
Equity and Liabilities
Equity - Other component of equity
Financial liability (W1)
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Rs.000
85
Rs.000
85
Rs.000
391
5,694
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Working 1
Opening balance Finance cost at 9% Interest paid 7%
Rs.000
Rs.000
Rs.000
5,609
505
Closing balance
Rs.000
(420)
5,694
Tutorial note:
The total finance cost for the year ended 31 December 20X6 is Rs. 505K, however the
interest paid of Rs. 420K has already been recorded so only the difference of Rs. 85K is
recognised.
10.5.
CHILTEPIN LTD
The convertible bonds on issue will be recorded as:
Dr Bank
Rs. 3,900,000
Cr Financial liability
Rs. 3,729,400
Cr Equity
Rs. 170,600
Workings:
Time
Narrative
Cash flow
Discount
factor (7%)
Present
value
1 to 4
Interest
5% x Rs. 4m x 3.387
3.387
677,400
4
Repayment
Rs. 4,000,000
0.763
3,052,000
Fair value of the liability
3,729,400
Fair value of equity component (balancing figure)
170,600
Total fair value (amount raised)
3,900,000
The liability will then be accounted for in accordance with IFRS 9, i.e. at amortised cost using the
effective interest rate of 7%.
y/e 30/9/20X6
Opening
carrying value
Finance cost @
7%
Interest paid
Closing
carrying value
Rs.
Rs.
Rs.
Rs.
3,729,400
261,058
(200,000)
3,790,458
The interest paid of Rs. 200,000 has already been posted, so the additional Rs. 61,058 is
recorded as:
Dr
Finance costs
Rs. 61,058
Cr Financial liability Rs. 61,058
10.6.
HABENERO LTD
(a)
The preference shares will be classified as a liability despite being called “shares”. IAS 32
requires us to consider the substance of the instrument in order to determine whether it
should be classified as debt or equity. In this case the 5% dividend payable on the shares
is cumulative which will eventually result in an outflow of economic benefit for Habenero
Ltd and hence represents an obligation. It therefore meets the definition of a liability. Once
the principal amount is classed as a liability, it follows then that any payment associated
with this instrument (in this case the 5% dividend) will be presented as a finance cost and
be charged in arriving at profit for the year.
The ordinary shares have no inherent obligation as they will not be repaid, nor do they
provide any fixed return to the shareholder. Indeed, ordinary shares contain only a residual
interest in the profits of the entity (i.e.: after all obligations have been settled) and hence
will be classified as equity. The associated dividend, when paid, will be presented in the
statement of changes in equity as a reduction in retained earnings.
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Answers
(b)
(i)
Initial recognition of the HFT investment is at fair value and transaction costs are
charged to the profit or loss:
Dr
FVTPL Investment
Cr
Rs. 1,400,000
Bank
Rs. 1,400,000
Being recognition of investment (where Rs. 1,400,000 = Rs. 2.80 x 500,000 shares)
Dr
Statement of profit or loss
Rs. 7,000
Cr
Rs. 7,000
Bank
Being write off of transaction costs (where Rs. 7,000 = Rs. 1,400,000 x 0.5%), with
the costs taken to profit or loss rather than included as part of the initial investment
(because of being classified as FVTPL).
(ii)
Subsequent measurement is at fair value with the gain or loss taken to profit or loss:
Dr
FVTPL Investment
Cr
Rs. 310,000
Statement of profit or loss Rs. 310,000
Being the gain on HFT investment (where Rs. 310,000 = Rs. (3.42 – 2.80) x 500,000
shares), with the gain being recognised in profit for the year.
10.7.
PASHAM TELECOM LIMITED
On 1 October 20X6
As the company entered into the swap agreement with the purpose of hedging the fair value of
the company’s own debt, therefore this is a fair value hedge.
The loan should initially be recognized at fair value. Swap has to be recorded initially at its fair
value. Since the swap was entered at ‘market rates’, its fair value is zero at the agreement date
and therefore no accounting entry is required on that date.
Brokerage of Rs. 1 million with respect to swap arrangement should be charged to profit and loss
account.
On 31 December 20X6
PTL should record net interest expense of Rs. 17.483 million for the quarter ended 31 December
20X6.
Rs. in million
Interest expense on TFC (900 × 8% × 3 ÷ 12)
18.000
Interest expense on SWAP (900 × 6.27% × 3 ÷ 12)
14.108
Interest income on SWAP (900 × 6.5% × 3 ÷ 12)
(14.625)
17.483
At 31 December 20X6, the hedge is required to be assessed and effectiveness of hedge is
required to be determined, to decide whether hedge accounting is to be continued or not.
Being ‘receive fixed’ and ‘pay variable’ interest rate swap, fair value hedge accounting rules are
to be applied.
Rs. in million
TFCs issued at par
900.00
Fair value at 31 December 20X6 (992×0.9)
892.80
Gain in TFCs – Other income
7.20
The swap is deemed effective and hedge accounting shall continue to be used. By considering
this, swap liability of Rs. 7.29 million should be recorded through profit and loss account and
debenture liability should be reduced by Rs. 7.2 million. (changes being reported in profit and
loss account)
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CHAPTER 11 - IAS 19: EMPLOYEE BENEFITS
11.1.
LABURNUM LIMITED
Calculation of the actuarial gain/losses in year to 31 December 20X6
FV of plan
assets
PV of plan
liabilities
Rs.000
Rs.000
2,600
2,900
Opening balance
Service cost
450
Interest cost (8% x Rs. 2,900,000)
232
Expected return (8% x Rs. 2,600,000)
208
Past service cost
90
Benefits paid
(240)
Contributions
730
3,298
Actuarial gain on assets
Actuarial loss on liabilities
Closing balance
11.2.
(240)
3,432
102
-
-
68
3,400
3,500
JABEL LIMITED
Rs.000
Statement of profit or loss expense
Service cost
300
Interest cost (7% x Rs. 1,400,000)
98
Expected return (7% x Rs. 1,200,000)
(84)
Net expense
314
The net expense in profit or loss will be Rs. 314,000.
Actuarial gains and losses
Opening balance
FV of plan
assets
PV of plan
liabilities
Rs.000
Rs.000
1,200
1,400
Service cost
300
Interest cost (7% x Rs. 1,400,000)
98
Expected return (7% x Rs. 1,200,000)
84
Benefits paid
(220)
Contributions
400
1,464
(220)
1,578
Actuarial loss on plan assets
(64)
-
Actuarial loss on plan liabilities
-
22
Closing balance
1,400
1,600
Within other comprehensive income there will be an actuarial loss on plan assets of Rs. 64,000
and an actuarial loss on plan liabilities of Rs. 22,000.
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Answers
11.3.
KAGHZI LIMITED
Calculation of the actuarial gains/losses in the year to 31 December 20X6
Opening balance
FV of plan
assets
PV of plan
liabilities
Rs.000
Rs.000
1,400
1,700
Service cost
320
Interest cost (7% x Rs. 1,700,000)
119
Expected return (7% x Rs. 1,400,000)
Benefits paid
(170)
Contributions
580
Actuarial gain on plan assets
Actuarial loss on plan liabilities
Closing balance
11.4.
98
(170)
1,908
1,969
192
-
-
431
2,100
2,400
LASURA LTD
(i)
Statement of profit or loss expense
Rs.000
Service cost
500
Interest cost (8% x Rs. 2,400,000)
192
Expected return (8% x Rs. 2,200,000)
Net expense in profit or loss
(ii)
(176)
516
Other comprehensive income
Rs.000
Actuarial gain on plan assets (W1)
Actuarial loss on plan liabilities (W1)
Net actuarial gain in OCI
(74)
58
(16)
Working 1
Opening balance
FV of
assets
PV of
liabilities
Rs.000
Rs.000
2,200
2,400
Service cost
500
Interest cost (8% x Rs. 2,400,000)
192
Expected return (8% x Rs. 2,200,000)
Contributions paid in
176
300
Paid to retired members
(450)
2,226
Actuarial gain on plan assets
2,642
74
Actuarial loss on plan liabilities
Closing balance
© Emile Woolf International
(450)
58
2,300
225
2,700
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
11.5.
UNIVERSAL SOLUTIONS
(a)
(i)
Defined benefit pension scheme
The employees of a defined benefit scheme will be guaranteed a pension based on
their final salary and their number of years of service. Accordingly, the higher paid the
employee is on retirement and the longer the length of service:
the greater the employee’s pension entitlement and
the greater the liability of the pension fund.
An actuary will advise the company of the cash contributions to be paid into the plan
each year in order to provide the promised pensions. This is a complicated calculation
involving many estimates such as employee mortality, future increases in salary and
expected future investment returns.
The employer has an open-ended liability to make additional contributions should
there be a deficit in the defined benefit pension fund. A deficit may arise, for example,
if salary levels rise more than expected or staff turnover reduces, increasing service
years.
It will be necessary for the actuary to regularly re-value the pension fund’s assets and
liabilities to assess the surplus or deficit position and revise the company’s
contributions.
(ii)
The basis to be adopted in measuring scheme assets
Assets should be measured at their fair value. For quoted securities, for example, this
means their market price.
(iii)
The basis to be adopted in measuring scheme liabilities
Liabilities should be measured on an actuarial basis (i.e. discounted cash flow), using
the projected unit method.
The projected unit method is an accrued benefits valuation method in which the
scheme’s liabilities reflect projected future earnings. To derive the scheme liabilities,
the expected future pension payments should be discounted at a rate that reflects the
time value of money, for example, using an AA (high quality) corporate bond rate.
(iv)
Actuarial gains and losses
Actuarial gains and losses are deficits or surpluses that arise because:

events have not coincided with the actuarial assumptions made at the last
valuation (experience gains and losses) or

the actuarial assumptions have changed.
For example, if the actuary forecast that investment returns were going to be 7% in a
year, but in fact the return actually achieved was only 5%, this would give rise to an
actuarial deficit.
(b)
(i)
Statement of financial position - extract
Defined benefit net liability
(ii)
Year 4
300
Dr
Cr
Journal
P&L
Interest cost
Current service cost
OCI
Cash
Defined benefit net liability
© Emile Woolf International
Year 3
200
226
10
100
110
130
140
100
The Institute of Chartered Accountants of Pakistan
Answers
Workings
Company
position
Pension fund
Opening balance 1 January Year 4
Interest cost (5%)
Current service cost
Liabilities
Assets
Statement of
financial
position
Rs.
Rs.
Rs.
(1,200)
1,000
(60)
50
(100)
Contributions to the pension fund
Benefits paid out
Amounts recorded by company
11.6.
(10)
(100)
140
95
(200)
140
(95)
(1,265)
1,095
(170)
Actuarial difference (balance)
(135)
5
(130)
Closing balance 31 Dec Year 4
(1,400)
1,100
(300)
DHA INTERIORS LTD
Report to the Directors of DHA Interiors Ltd
Terms of Reference
This report sets out the differences between a defined contribution and defined benefit plan, and
the accounting treatment of the company’s pension plans. It also discusses the principles involved
in accounting for warranty claims, and the accounting treatment of those claims.
(a)
Pension plans – IAS 19
A defined contribution plan is a pension plan whereby an employer pays fixed contributions
into a separate fund and has no legal or constructive obligation to pay further contributions
(IAS 19 paragraph 7). Payments or benefits provided to employees may be a simple
distribution of total fund assets, or a third party (an insurance company) may, for example,
agree to provide an agreed level of payments or benefits. Any actuarial and investment risks
of defined contribution plans are assumed by the employee or the third party. The employer
is not required to make up any shortfall in assets and all plans that are not defined
contribution plans are deemed to be defined benefit plans.
A defined benefit plan is any plan other than a defined contribution plan. It is the residual
category. An employer’s obligation under a defined benefit plan is to provide the agreed
amount of benefits to current and former employees. The differentiating factor between
defined benefit and defined contribution schemes is in determining where the risks lie. If an
employer cannot demonstrate that all actuarial and investment risk has been shifted to
another party and that its obligations are limited to contributions made during the period,
then the plan is a defined benefit plan. Any benefit formula that is not solely based on the
amount of contributions, or that includes a guarantee from the entity or a specified return,
means that elements of risk remain with the employer and must be accounted for as a
defined benefit plan.
For defined contribution plans, the cost recognised in the period is the contribution payable
in exchange for service rendered by employees during the period. Accounting for a defined
contribution plan is straightforward because the employer’s obligation for each period is
determined by the amount to be contributed for that period. Often, contributions are a
percentage of employee salary in the period as its base. No actuarial assumptions are
required to measure the obligation or the expense.
The employer should account for the contribution payable at the end of each period based
on employee services rendered during that period, reduced by any payments made during
the period. If the employer has made payments in excess of those required, the excess is a
prepaid expense to the extent that the excess will lead to a reduction in future contributions
or a cash refund.
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
For defined benefit plans, the amount recognised in the statement of financial position is the
present value of the defined benefit obligation (that is, the present value of expected future
payments required to settle the obligation resulting from employee service in the current and
prior periods), as reduced by the fair value of plan assets at the reporting date. If the balance
is an asset, the amount recognised may be limited under IAS 19
Pension Plan 1 is a defined benefit plan as the employer has the investment risk as the
company is guaranteeing a pension based on the service lives of the employees in the
scheme. The employer’s liability is not limited to the amount of the contributions. There is a
risk that if the investment returns fall short the employer will have to make good the shortfall
in the scheme. Pension Plan 2 is a defined contribution scheme because the employer’s
liability is limited to the contributions paid.
(b)
Accounting for the two plans
Pension Plan 1
The accounting for the defined benefit plan results in a liability of Rs. 20.5 million as at 31
October 20X6, an expense in the statement of profit or loss of Rs. 20.5 million and a charge
in other comprehensive income of Rs. 1.5 million for the year (see Appendix 1).
Pension Plan 2
The company does not recognise any assets or liabilities for the defined contribution scheme
but charges the contributions payable for the period (Rs. 10 million) to operating profit. The
contributions paid by the employees will be part of the wages and salaries cost and when
paid will reduce cash.
Appendix 1
The accounting for the defined benefit plan is as follows:
31 October 20X6
1 November 20X5
Rs. m
Rs. m
Present value of obligation
240
200
Fair value of plan assets
(225)
(190)
–––––
–––––
Liability recognised
15
10
–––––
–––––
Expense in Statement of profit or loss year ended 31 October 20X6:
Rs. m
Current service cost
20.0
Net interest expense
0.5
–––––
Expense
20·5
–––––
Analysis of amount in statement of other comprehensive income (OCI):
Actuarial loss on obligation (w2)
Actuarial gain on plan assets (w2)
Actuarial loss on obligation (net)
Rs. m
29
(27·5)
–––––
1·5
–––––
Working 1
Movement in net liability in statement of financial position at 31 October 20X6:
Rs. m
10.0
20·5
(17.0)
1.5
–––––
15.0
–––––
Opening liability
Expense
Contributions
Actuarial loss
Closing liability
© Emile Woolf International
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Answers
Working 2 – Change in present value of the obligation and fair value of plan assets
PV of
obligation
Rs.000
At start of year
(200.0)
Interest expense (5% × 200)
Fair value
of plan
assets
Net liability
Rs.000
Rs.000
190.0
(10.0)
Interest earned (5% × 270)
(10.0)
9.5
Net interest
9.5
(0.5)
Current service cost
(20.0)
Contributions paid
Benefits paid out (given)
Expected year end position
Remeasurement (balancing figure)
Actual year end position
© Emile Woolf International
(10.0)
229
(20.0)
17.0
17.0
19.0
(19.0)
0
(211.0)
197.5
(13.5)
(29.0)
27.5
(1.5)
(240.0)
225.0
(15.0)
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
CHAPTER 12 - IFRS 2: SHARE BASED PAYMENTS
12.1.
TOSHACK LTD
(i)
Liability as at 31 December 20X6:
Appreciation in price between 1/1/20X3 – 31/12/20X6
Rs. 31 – Rs. 22 =
Rs. 9
No of employees on which rights vest = 75%  1000 =
No of rights granted per employee =
50
Liability Rs. 9  750  50 =
(ii)
750
Rs. 337,500
Gain between 1/1/20X6 – 31/12/20X7
(Rs. 28 – Rs. 22)  750  50 =
Rs. 225,000
Payment to employees
Rs. 112,500
Comment: The transaction would be accounted for as a cash settled share base payment
if the entity has incurred a liability to settle in cash or other asset.
12.2.
IFRS 2
(a)
(i)
The need for accounting standard regulation
Share options are often granted to employees at an exercise price that is higher
than the market price of the shares. Therefore, the options have no intrinsic value to
the company and, prior to the issue of IFRS 2, these transactions were not generally
recognised until such time as the shares were issued. This approach could be seen
as resulting in a distortion of reported results between accounting periods and
leaving liabilities unrecorded.
In addition, the subject of accounting for share-based payments contains a number
of other contentious issues, notably relating to the measurement principles to be
applied in recognising the transactions. If employees agree to stay until their options
vest, the organisation must recognise the service they will provide in return, but how
should this be valued?
IFRS 2 was therefore issued in February 2004 to provide comprehensive guidance
on these matters.
(ii)
The three types of share based payments
These can be summarised as follows:
© Emile Woolf International
Category
Features
Equity-settled share-based
payment transactions
The entity pays for goods or services by issuing
equity instruments in the form of shares or share
options.
Cash-settled share-based
payment transactions
The entity incurs a liability for goods or services and
the settlement amount is based on the price (or
value) of the entity’s shares or other equity
instruments.
Share based payments with
cash alternatives
Transactions where an entity acquires goods or
receives services and either the entity or the
supplier can choose payment to be a cash amount
based on the price (or value) of the entity’s shares
or other equity instruments, or equity instruments of
the entity.
230
The Institute of Chartered Accountants of Pakistan
Answers
(b)
(i)
Assuming all options vest
31 December Year 5
Profit and
loss
Expected outcome
(at grant date value)
500 employees × 100 options
× Rs. 15 fair value
3 years to vest
Year 1 charge
Balance carried forward
31 December Year 6
Expected outcome (at grant date value)
500 × 100 × Rs. 15
Recognised by the year end
Minus expense previously recognised
Year 2 charge
Balance carried forward
31 December Year 7
Actual outcome (at grant date value)
500 × 100 × Rs. 15
Minus expense previously recognised
Year 3 charge
750,000
×1/3
250,000
250,000
Rs.
750,000
×2/3
500,000
(250,000)
250,000
500,000
Rs.
750,000
(500,000)
250,000
Balance at end of year 3
(ii)
750,000
Reflecting revised vesting assumptions
31 December Year 5
Expected outcome (at grant date value)
85% × 500 × 100 × Rs. 15
Year 1 charge
Balance carried forward
Profit
or loss
Rs.
Equity
637,500
×1/3
212,500
212,500
31 December Year 6
Expected outcome (at grant date value)
88% × 500 × 100 × Rs. 15
Minus expense previously recognised
Year 2 charge
Balance carried forward
31 December Year 7
Actual outcome (at grant date value)
44,300 × Rs. 15
Minus expense previously recognised
Year 3 charge
Balance at the end
© Emile Woolf International
Equity
231
660,000
×2/3
440,000
(212,500)
227,500
440,000
664,500
(440,000)
224,500
664,500
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
12.3.
SAVAGE LTD
This is an equity-settled share-based transaction and in accordance with IFRS 2 the fair value of
the share options is used to estimate the fair value of the services provided by the employees.
The total fair value is allocated over the three year vesting period and is based on the fair value
at the grant date.
20X5
Total expected expense:
1,000 options x Rs. 11 x (300 – 10 – 30)
Rs. 2,860,000
Fraction of vesting period by the year end
1/3
Expense in 20X5
Rs. 953,333
Dr Statement of profit or loss
Rs. 953,333
Cr Equity
Rs. 953,333
20X6
Total expected expense:
1,000 options x Rs. 11 x (300 -10 – 20 – 15)
Rs. 2,805,000
Fraction of vesting period by the year end
2/3
Expense recognised by the year end
12.4.
Rs. 1,870,000
Recognised in 20X5
Rs. 953,333
To be recognised in 20X6
Rs. 916,667
Dr Statement of profit or loss
Rs. 916,667
Cr Equity
Rs. 916,667
YORATH LTD
(a)
20X6 equity balance required:
Total expected expense (at end of 20X6)
500 options x Rs. 148 x 520 (600 – 20 – 25 – 15 – 20)
Fraction of vesting period by the year end
Rs. 38,480,000
¾
Expense recognised by the year end
Rs. 28,860,000
Total expected expense (at end of 20X5)
500 options x Rs. 148 x 515 (600 – 20 – 25 – 40)
Rs. 38,110,000
Fraction of vesting period by the year end
2/
4
Expense recognised by the last year end
Rs. 19,055,000
To be recognised in 20X6
Rs. 9,805,000
Recorded in 20X6 financial statements:
(b)
Dr
Statement of profit or loss – staff costs
Cr
Equity – other reserves Rs. 9,805,000
Rs. 9,805,000
The sales director is incorrect, despite no cash changing hands, the share options are
issued in exchange for employees providing services to Yorath Ltd. Possibly the options
have been given as a reward for service provided or in lieu of a pay rise or bonus which
would otherwise have been paid in cash. As there is no direct wage cost, we instead must
calculate an equivalent cost of receiving staff services and match this with the revenue that
the staff helps to generate. We do this by estimating the value inherent in the options and
allocating that over the period in which employees must remain with Yorath Ltd, in this
case 4 years.
© Emile Woolf International
232
The Institute of Chartered Accountants of Pakistan
Answers
The amount chargeable to the statement of profit or loss is based on the fair value of the
share options at the grant date. This is not subsequently remeasured as these share
options represent an equity-settled share-based payment. The equivalent cost will be
updated each year for those employees that are still eligible or expected to be eligible at
the year end to ensure that the amount charged reflects the amount that is expected to
vest.
12.5.
QUALTECH LTD
(i)
Share-based payment
Total expected expense (at end of 20X6)
1,000 options x Rs. 122 x 240 (300 – 25 – 15 – 20)
Rs. 29,280,000
2/
3
Fraction of vesting period by the year end
Expense recognised by the year end
Rs. 19,520,000
Total expected expense (at end of 20X5)
1,000 options x Rs. 122 x 235 (300 – 25 – 40)
Rs. 28,670,000
Fraction of vesting period by the year end
1/
3
Expense recognised by the last year end
Rs. 9,556,667
To be recognised in 20X6
Rs. 9,963,333
Double entry in 20X6:
Dr
Statement of profit or loss – staff costs Rs. 9,963,333
Cr
Other reserves (equity)
Rs. 9,963,333
Being the charge for share-based payment for the year ended 31 December 20X6
(ii)
12.6.
Share-based payments that are to be settled in cash would be credited instead to liabilities
in the statement of financial position and the liability would be remeasured using the fair
value of the shares at each year-end date until the end of the vesting period.
BRIDGE LTD
(i)
Statement of profit or loss charge
Total expected expense (at end of 20X6)
1,000 options x Rs. 50 x 213 (300 – 20 – 23 – 44)
Rs. 10,650,000
2/
4
Fraction of vesting period by the year end
Expense recognised by the year end
Rs. 5,325,000
Total expected expense (at end of 20X5)
1,000 options x Rs. 50 x 215 (300 – 20 – 65)
Rs. 10,750,000
Fraction of vesting period by the year end
¼
Expense recognised by the last year end
Rs. 2,687,500
To be recognised in 20X6
Rs. 2,637,500
Double entry in 20X6:
Dr
Statement of profit or loss – staff costs Rs. 2,637,500
Cr
Other reserves (equity)
Rs. 2,637,500
Being the charge for share-based payment for the year ended 31 December 20X6
© Emile Woolf International
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Advanced accounting and financial reporting
(ii)
12.7.
Share options, such as those granted by Bridge Ltd, are given by an entity in return for
services provided by its employees. In effect the share options are given to the employees
as a form of bonus or reward for these services and are therefore part of the employee’s
remuneration package. The value of these options (or relevant part thereof) must then be
reflected in the staff costs included within the statement of profit or loss.
CAPSTAN LTD
SARs are an example of a cash-settled share-based transaction and, in accordance with IFRS 2
Share-based payments, are initially measured at fair value at the grant date and subsequently
remeasured to fair value at each year-end. The liability is remeasured and any difference is
charged to the statement of profit or loss as an expense.
20X5
Total expected expense (at end of 20X5)
1,000 SARs x Rs. 80 x 233 (300 – 32 – 35)
Rs. 18,640,000
Fraction of vesting period by the year end
1/
3
Liability to be recognised by the year end
Rs. 6,213,333
Double entry in 20X5:
Dr
Statement of profit or loss – staff costs Rs. 6,213,333
Cr
Liability
Rs. 6,213,333
20X6
Total expected expense (at end of 20X6)
1,000 SARs x Rs. 120 x 230 (300 – 32 – 28 – 10)
Rs. 27,600,000
Fraction of vesting period by the year end
2/
3
Liability to be recognised by the year end
Rs. 18,400,000
Less opening liability (see above)
(Rs. 6,213,333)
To be recognised in 20X6
Rs. 12,186,667
Double entry in 20X6:
12.8.
Dr
Statement of profit or loss – staff costs Rs. 12,186,667
Cr
Liability
Rs. 12,186,667
NEWTOWN LTD
(i)
20X5
Total expected expense (at end of 20X6)
1,000 SARs x Rs. 110 x 405 (500 – 42 – 28 – 25)
Rs. 44,550,000
Fraction of vesting period by the year end
2/
3
Liability to be recognised by the year end
Rs. 29,700,000
Less opening liability:
Total expected expense (at end of 20X5)
1,000 SARs x Rs. 90 x 383 (500 – 42 – 75)
Fraction of vesting period by the year end
Rs. 34,470,000
1/
3
Liability recognised by the end of 20X5
Rs. 11,490,000
To be recognised in 20X6
Rs. 18,210,000
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Answers
Double entry in 20X6:
(ii)
Dr
Statement of profit or loss – staff costs
Rs. 18,210,000
Cr
Liability
Rs. 18,210,000
If a share-based payment was settled in equity rather than cash the implications would be:
Recognition:
There would be a credit to other reserves within equity in the statement of financial
position, rather than a liability. However, the debit would still be to staff costs.
Measurement:
The amount would be initially and subsequently measured using the fair value of the rights
at the grant date rather than re-measured at each year end.
12.9.
SINDH TRANSIT LTD
(a)
Accounting entries
Accounting entries for year ended 31 December 20X6:
Share options
Dr
Staff costs (statement of profit or loss) (W1) Rs. 17,820,000
Cr
Equity
Rs. 17,820,000
Share appreciation rights (SARs)
Dr
Staff costs (statement of profit or loss) (W2) Rs. 6,495,000
Cr
Liabilities (non-current)
Rs. 6,495,000
Working 1: Options
Total expected expense (at end of 20X6)
1,000 options x Rs. 220 x 327 (400 – 15 – 22 – 36)
Fraction of vesting period by the year end
Expense recognised by the year end
Rs. 71,940,000
2/
4
Rs. 35,970,000
Total expected expense (at end of 20X5)
1,000 options x Rs. 220 x 330 (400 – 15 – 55)
Rs. 72,600,000
Fraction of vesting period by the year end
1/
4
Expense recognised by the last year end
Rs. 18,150,000
To be recognised in 20X6
Rs. 17,820,000
Working 2: SARs
Total expected expense (at end of 20X6)
500 SARs x Rs. 140 x 327 (400 – 15 – 22 – 36)
Fraction of vesting period by the year end
Rs. 22,890,000
2/
4
Liability to be recognised by the year end
Less opening liability:
Rs. 11,445,000
Total expected expense (at end of 20X5)
500 SARs x Rs. 120 x 330 (400 – 15 – 55)
Fraction of vesting period by the year end
Rs. 19,800,000
1/
4
Liability recognised by the end of 20X5
Rs. 4,950,000
To be recognised in 20X6
Rs. 6,495,000
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
(b)
In accordance with IFRS 2, the share options and the share appreciation rights are
recognised as an expense in the statement of profit or loss as they are awarded in return
for employee service.
The treatment of each of above stated however is different in the statement of financial
position. The share appreciation rights will result in a future outflow of cash and therefore
represent an obligation and are presented as a liability. The liability should reflect the most
reliable measurement at each balance sheet date and so the total amount payable that is
estimated at each year-end date is estimated using the updated fair values.
The options represent an equity-settled share-based payment and do not meet the
definition of obligation, and so instead the entry is to equity. The equity element is
measured initially and subsequently at the fair value at the grant date.
12.10.
XYZ LIMITED
(a)
Treatment of share options issued to Marketing Managers
Since options granted to back office managers are granted under non-market condition,
any subsequent change in the non-market condition from previous estimates should be
taken in to account in estimating the expense to be recognized.
Since XYZ is not able to achieve the average 10% profit during the three years, the
expenses booked till the previous year should be reversed i.e. Rs. 853,333 [(8×(5018)×5000×2÷3]
Treatment of share options issued to Back Office Managers
Since options granted to back office managers are based on market conditions under
which the probability of meeting the condition was taken into account in fair value of share
option at the grant date, any subsequent changes in the probability of meeting the
condition has no effect on the expense recognition.
Furthermore, when a modification occurs during the vesting period, the incremental fair
value of the option is recognized over the period from the modification date until the date
when equity instruments vest.
By considering the above, XYZ should record the following expenses at 30 June 20X6 and
taking the credit effect to the equity:

In order to record modification impact, the incremental fair value of the option should
be recognized as expense i.e. Rs. 405,000 [(14-5)×5,000×9]

When options is settled, XYZ should recognize the following expense:
Rupees
Expense to be recorded at settlement date (9×30×5,000)
Expense already recorded till last year (8×30×5,000×2÷3)
1,350,000
(800,000)
550,000
(b)
Investment in bonds
Since the investment in bonds was made with the intention to hold them till maturity, these
should be recorded at amortized cost and transaction costs which are directly attributable
to the acquisition of the financial assets should be capitalized at initial recognition. The
interest revenue should be calculated by using effective interest method.
In the case of modification in cash flows, the entity should recalculate the gross carrying
amount of the bonds using original effective interest rate and recognise the difference in
P&L in either case, gain or loss.
In accordance with the requirement of impairment, an entity should recognize a loss
allowance equal to life time expected credit losses if the credit risk on that asset has
increased significantly.
© Emile Woolf International
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Answers
Based on the above, the accounting treatment of investment in bonds in the books of XYZ
at 30 June 20X6 should be as follows:

The interest revenue and premium amortization should be recorded at Rs. 4.7 million
(W-1) and Rs. 1.3 million (W-1) respectively.

The life time expectancy loss of Rs. 5 million should be charged to P & L account.

Investment in bonds should be disclosed at Rs. 99.99 million (W-1) in statement of
financial position
W-1: Amortization table
Interest
Opening
Balance
Year
income @
Expected
cash-flows
@ 6%
4.5186%
Change in
estimate
Closing
balance
Premium
amortization
----------------------------------- Rs. in million ----------------------------------20X4
106.50
4.81
(6.00)
105.31
(1.19)
20X5
105.31
4.76
(6.00)
104.07
(1.24)
20X6
104.07
4.70
(6.00)
104.99
(1.30)
2.22 (W-2)
Less: Provision for loss allowance
(5.00)
99.99
W-2 : Effect of change in estimate
Year
Expected cash flows
@ 6.25% & 6.5% (20X9)
Discounted factor
20X7
6.25
0.957
5.98
20X8
6.25
0.915
5.72
20X9
106.50
0.876
93.29
@ 4.5186%
Revised present value
104.99
Present value without the effect of change (104.07 + 4.7 – 6)
102.77
Effect of change in estimate
12.11.
Present value
(Rs. in million)
2.22
RAVI LIMITED
Amount to be charged to the profit or loss in respect of the share option scheme is as follows:
1,000 Note-1 × (500 × 85%) Note-2 × 38 Note-3 × (1÷5) Note-4 = 3,230,000
Note-1:
© Emile Woolf International
Vesting conditions, other than market conditions, shall be taken into account by
adjusting the number of equity instruments included in the measurement of the
transaction amount. Average sales would be Rs. 312.55 million (W-1) over five years
which is more than the minimum average sales of Rs. 300 million.
237
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Advanced accounting and financial reporting
Note-2:
Service condition shall be taken into account by adjusting the number of equity
instruments included in the measurement of the transaction amount. In respect of
service condition, management estimates that 15% of the employees would leave
the organization over the vesting period of five years so provision would be made
for 85% of employees i.e. 425 (500 × 85%)
Note-3:
Only market condition shall be taken into account when estimating the fair value of
the share options at the measurement date. Subsequent changes in the probability
of meeting the condition have no impact and are ignored.
Note-4:
The expense will be spread over the vesting period of 5 years.
In light of above, Rs. 3.23 million should be debited to P & L account and credited to equity
account.
W1: Average sales:
12.12.
Year
Sales
20X7
210.00
20X8
252.00
20X9
302.40
20Y0
362.88
20Y1
435.46
Average
312.55
COROLLA LIMITED
Amounts recorded in respect of share options in CL’s financial statements:
Year
Fair value per
option
No. of
share
options
No. of
executives
Equity
balance at
year-end
Period
Rs.
Expense for
the year
---- Rs. in million ----
20X4
39(47-8) ×
4,000
×
600
×
1/3
=
31.20
20X5
40(44-4) ×
-
×
600
×
2/3
=
-
×
6,000
×
600
×
3/3
=
154.80
154.80
41(43-2) ×
6,000
× 130(710–580) ×
1/2
=
15.99
15.99
170.79
170.79
43
20X6
20X7
600
31.20
(31.20)
43
×
6,000
×
×
3/3
=
154.80
-
42
×
6,000
× 130(710–580) ×
2/2
=
32.76
16.77
187.56
116.77
Explanation of basis of calculation:
Service condition/No. of executives:
Service condition shall be taken into account by adjusting the number of share options based on
expected number of executives that would remain in service till the vesting date at each year
end.
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Performance condition/No. of share options:
Performance condition other than market condition shall be taken into account by adjusting the
number of equity instruments included in the measurement of the transaction amount at each
year end. In this respect, number of options are based on expected average annual gross profit
during the vesting period as worked-out below:
Year end
Average gross profit for vesting period
No. of options
----------- Rs. in million ----------20X4
(940×3÷3) = 940
4,000
20X5
(940+820×2) ÷ 3 = 860
20X6
(940+820+1,270) ÷3= 1,010
6,000
20X7
(940+820+1,270+1,200)÷4=1,058
6,000
Nil
Market condition/Fair value per option:
Market conditions are only taken into account when estimating the fair value of the share options
at the measurement date.
CL should recognize an expense irrespective of whether market conditions are satisfied at year
end provided all other vesting conditions are satisfied.
Vesting period:
The expense is spread over the vesting period. At the grant date the vesting period was three
years which was subsequently revised to four years on 1 January 20X6.
Modification: (Extension of vesting period and repricing of option)
(i)
(ii)
(iii)
Irrespective of any modification, CL is required to recognize, as a minimum, three year
services received, measured at the grant date fair value of the equity instrument. So, for
20X6 expense will be recorded for 43 executives who have served the original vesting
period of 3 years at fair value of the options measured at grant date.
Modification of the vesting conditions in a manner that is not beneficial (increase in
vesting period) would not be taken into account.
However, repricing of the option is beneficial for executives. Therefore, increase in fair
value of share option by Rs. 130 (710–580) at the modification date would be expensed
out over the period between the modification date and the expected vesting date.
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Advanced accounting and financial reporting
CHAPTER 13 - DISPOSAL OF SUBSIDIARIES
13.1.
PATCHE LTD
(a)
(i)
Statement of comprehensive incomes for the year ended 30 June 20X6
Rs.’m
390
210
Operating profit
Profit on disposal of shares (W1)
Profit before tax
Income tax
600
(120)
Profit for the year
Other comprehensive income
480
60
540
(ii)
Statement of changes in equity for the year ended 30 June 20X6
Balance b/f (opening Balance)
Profit for the year
Retained
earning
Rs.’m
660
480
Rs.’m
2,160
480
1,500
1,140
2,640
Balance c/d
(b)
Total
Share
capital
Rs.’m
1,500
-
Consolidated statement of comprehensive incomes for the year ended 30 June
20X6
Profit before tax (390 + 180)
Income tax expenses (120 + 60)
Rs.’m
570
(180)
Profit for the year
Other comprehensive income (60 + 30)
Total comprehensive income
390
90
480
Attributable to
Non-controlling interest (W2)
Members of the parent (480 – 30)
(c)
30
450
480
Consolidated statement of financial position as at 30 June 20X6
Rs.’m
Non-current assets:
Property plant and equipment (1605 + 534)
Goodwill (W3)
2,139
240
2,379
Current assets:
Inventories (960 + 570)
1,530
Trade receivables (750 + 525)
1,275
Cash and bank (240 + 267)
507
3,312
5,691
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Answers
Rs.’m
Equity attributable to owners of the parent
Share capital
1,500.0
Reserves (W4)
1,432.5
2,932.5
Non-controlling interest (W6)
472.5
3,405
Current liabilities:
Trade payables (885 + 513)
1,398
Income tax payables (240 + 180 + 90 (W1))
510
Provisions (285 + 93)
378
2,286
5,691
Workings:
1.
Gain on disposal of shares in parent’s separate financial statement
Rs.’m
480
(180)
300
(90)
210
Fair value of consideration received
Less: Original cost of shares (765 x 20%/85%)
Parent gain
Less tax on parent’s gain (30%)
2.
Non-controlling interest (NCI)
Rs.’m
Profit for the year:
Pre-disposal periods
Post-disposal periods
=
9/
12
x 120m x 15% =
13.5
=
3/
12
x 120m x 35% =
10.5
24
Other comprehensive income
= 9/12 x 30m x 15%
Pre-disposal periods
Post-disposal periods
=
3/
12
=
3.375
x 30m x 35% =
2.625
6
30
3.
Goodwill
Consideration transferred (285 + 480)
Non-Controlling interest at fair value
Less:
Fair value of identifiable net assets
at acquisition:
Share capital
Pre-acquisition reserve
4.
Rs.’m
765
135
600
60
(660)
240
Consolidated reserves
Rs.’m
All of Patche
Per question at year-end
930.00
Adj. to equity on disposal (W5)
217.50
Tax on parent gain (W1)
(90.00)
1,057.50
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Rs.’m
Groups’ share of post-acquisition reserve of Somers:
85% (412.5 (see below) x 85%)
350.63
65% (37.5 (see below) x 65%)
24.37
1,432.50
Post-acquisition profits of Somers
Per question at year-end
Profit since the date of disposal (when Somers is a 65%
subsidiary): Rs. 150m  3/12
Balance on reserves at the date of disposal
Balance on reserves at the date of acquisition
Post-acquisition reserves up to the date of disposal (for which
period Somers was an 85% subsidiary)
5
412.5
Rs.’m
480.00
(262.50)
217.50
Non-controlling interest
Rs.’m
135.00
NCI @ acquisition
NCI share of post-acquisition reserve:
Somers (412.5 x 15%)
Somers (37.5 x 35%)
Increase in NCI (W5) (214.5 + 48)
13.2.
(37.5)
472.5
(60.0)
Adjustment to equity on disposal of shares in group financial statement
Fair value on consideration received
Increase in NCI in net asset and goodwill at disposal
(196.8 x 20%/15%)
6
510.0
61.88
13.12
262.50
472.50
DISPOSAL
Rs.
million
Consideration from sale of shares
Fair value of retained shares in Spool
Rs.
million
960
100
1,060
Net assets of Spool at carrying value
Minus: non-controlling interest de-recognised (10%  800)
800
(80)
720
Gain on sale of shares
340
None of the assets of Spool have been re-valued, therefore there is no balance on a revaluation
reserve; therefore, none of this gain should be transferred directly to retained earnings and not
reported in profit or loss.
There is no information to suggest that a reclassification adjustment is required to reclassify
income previously reported as other comprehensive income as profit or loss.
The total gain of Rs. 340 million on disposal of the shares should therefore be recognised in profit
or loss for the period.
Hoo will recognise an investment in Spool in its statement of financial position in accordance with
the requirements of IFRS 9. On initial recognition, this investment should be valued at Rs. 100
million.
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Answers
13.3.
PART DISPOSAL
The disposal of 10% of the shares in S leaves P with a controlling interest; therefore the disposal
of the shares should be accounted for as an equity transaction between owners of the group. No
gain or loss is recognised in the consolidated financial statements of P.
It is assumed that the profits of S for the year were Rs. 200 million (all retained; therefore Rs. 900
million - Rs. 700 million). At 30 June it is assumed that profits for the year to date were Rs. 100
million (= Rs. 200 million  6/12); therefore the net assets of S at this date were Rs. 800 million.
(80%  800)
(70%)
Before the share sale
After the share sale
Change in interest in S
P
Rs. m
640
560
- 80
(20%)
(30%)
NCI
Rs. m
160
240
+ 80
The shares were sold for Rs. 94 million adding to the assets in P’s statement of financial position.
The transaction should therefore be accounted for in equity as follows:
Debit: Cash
Rs. 94 million
Credit: NCI
Rs. 80 million
Credit: Reserves attributable to P (= gain = balance)
Rs. 14 million
Rs. million
1
Post-acquisition profit attributable to S (see above)
Less: Impairment of goodwill
Recognised profit
Attributable to equity owners of P
1 January – 30 June (80%  200  6/12)
1 July – 31 December (70%  200  6/12)
Goodwill impairment
Attributable to NCI
1 January – 30 June (20%  200  6/12)
1 July – 31 December (30%  200  6/12)
Rs. million
200
(8)
192
80
70
(8)
142
20
30
50
192
13.4.
THE A GROUP
As original investment in C was 90% of C’s 400,000 shares (360,000 shares). During the year A
has disposed of 350,000 of these shares, which reduces the investment from subsidiary status to
that of a ‘simple’ investment’.
A Group
Consolidated statement of financial position as at 31 December Year 4
Rs.000
428
44
6,661
7,133
Goodwill (W2, B only)
Investment in C at fair value
Other net assets (W4)
Equity
Share capital
Accumulated profits attributable to owners of A (working 1)
Equity attributable to owners of A
Non-controlling interest: 20%  (1,260 + 170)
Total equity
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1,500
5,347
6,847
286
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Statement of profit or loss for year ended 31 December Year 4
Working
A
Rs.000
1,200
(16)
1,184
237
1,421
(360)
1,061
Operating profit
Minus: Dividend from B
Gain on disposal of C (W2)
Profit before tax
Tax
Profit after tax
B
Rs.000
250
nil
250
250
(60)
190
Attributable to:
Equity owners of A (1,061 + 80%  190)
Non-controlling interest: 20% × 190
Group
Rs.000
1,450
(16)
1,434
237
1,671
(420)
1,251
1,213
38
1,251
Workings
(1)
Movement on consolidated reserves attributable to owners of parent
A
Rs.000
3,300
At 31 December Year 3 (W5)
Profit for year attributable to A
Dividends paid by A
At 31 December Year 4
(2)
B
Rs.000
272
C
Rs.000
612
Group
Rs.000
4,184
1,213
(50)
5,347
Disposal of shares in C, with loss of control
Gain to parent
Net assets of C at date of disposal: de-recognised
Purchased goodwill in C de-recognised
(see working 3)
Minus: Non-controlling interest de-recognised
(10%  1,400)
Assets attributable to A de-recognised
Fair value of investment retained
Sale proceeds
Rs.000
Rs.000
1,400
472
1,872
(140)
1,732
44
1,925
1,969
237
Total gain on disposal of shares
Since there has been no revaluation of non-current assets and there is no information about
any reclassification adjustments that might be required, it is assumed that this entire gain
should be included in profit or loss for the year.
(3)
Calculation of goodwill
Cost of Investment
Less: Group share of the fair value of the net assets at
acquisition
80% × (500 + 420)
90% × (400 + 320)
B
Rs.000
1,164
(736)
428
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C
Rs.000
1,120
(648)
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The Institute of Chartered Accountants of Pakistan
Answers
(4)
Other net assets
Rs.000
A’s net assets as 1 January Year 4
2,516
B’s net assets at 1 January Year 4
1,260
A’s retained profit year ended 31 December Year 4
790
B’s retained profit year ended 31 December Year 4
170
Proceeds of disposal of C
1,925
6,661
(5)
Calculation of post-acquisition retained profits b/f attributable to A
Rs.000
A
As given in the question
B and C
Group share of post-acquisition
3,300
B 80%  (760 - 420)
272
C 90%  (1,000 - 320)
612
Total
13.5.
4,184
BARTLETT LTD
Consolidated statement of profit or loss for the year ended 31 December 20X6
Total
Rs.
Revenue
(1,926,500 + 396,200 + 260,800)
2,583,500
Cost of sales
(1,207,200 + 202,950 + 193,100)
(1,603,250)
Gross profit
980,250
Net operating expenses
(400,100 + 152,650 + 52,650)
Operating profit
(605,400)
374,850
Profit on disposal of operations (W1)
66,360
Profit on ordinary activities before taxation
Tax on profit on ordinary activities
441,210
(110,000 + 4,750 + 13,750)
(128,500)
Profit for the year
312,710
Profit attributable to:
Rs.
Owners of the parent
286,162
Non-controlling interests (W2)
(11,458)
Profit for the year
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Workings
(1)
Profit on disposal of Lymon
Recognise:
Rs.
Proceeds
212,000
Derecognise:
Rs.
Net assets of subsidiary
Net assets at January 20X6
140,000
Profit to 1 July 20X6 (6/12 x 20,600)
10,300
150,300
Non-controlling interest (20%)
(30,060)
(120,240)
Unimpaired goodwill
(25,400)
Profit on disposal
(2)
66,360
Non-controlling interests
In Lymon Inc 20% x (6/12 x Rs. 20,600)
2,060
In Zeigler Inc 35% x (6/12 x Rs. 53,700)
9,398
11,458
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Answers
CHAPTER 14 - IFRS-5: NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
14.1.
SAUL
Statement of profit or loss for the year ended 31 December Year 1
Rs.000
Continuing operations
Revenue
Cost of sales
3,315
(2,125)
––––––
Gross profit
Distribution costs
Administrative expenses
1,190
(255)
(680)
––––––
Profit before tax
Income tax expense
255
(90)
––––––
Profit for the period from continuing operations
Discontinued operations
Loss for the period from discontinued operations (W)
165
(15)
––––––
Profit for the period
150
––––––
Statement of financial position as at 31 December Year 1
Rs.000
Assets
Non-current assets
Property, plant and equipment (1,900 – 510)
Intangible assets
Current assets
Inventories
Trade and other receivables
Cash
Rs.000
1,390
40
––––––
1,430
350
190
90
––––––
630
––––––
2,060
450
Non-current assets classified as held for sale
––––––
Total assets
2,510
––––––
Equity and liabilities
Equity
Share capital
Retained earnings (1,700 – 60)
600
1,640
––––––
Current liabilities
Trade and other payables (195 – 10)
Current tax payable
Liabilities classified as held for sale
2,240
185
75
10
––––––
270
––––––
Total equity and liabilities
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––––––
247
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Advanced accounting and financial reporting
Tutorial note
Division A is classified as discontinued in Year 1 because, although it has not been sold during
the period it meets the IFRS 5 criteria for classification as ‘held for sale’.
Working: Discontinued operation
Continuing
operations
Rs.000
Revenue
Cost of sales
Gross profit
Discontinued
operations
Rs.000
3,315
585
Rs.000
3,900
(2,125)
(375)
(2,500)
––––––
––––
––––––
1,190
210
1,400
Distribution costs
(255)
(45)
(300)
Administrative expenses
(680)
(120)
(800)
Impairment loss (510 – 450)
-
(60)
––––––
––––
––––––
Profit before tax
255
(15)
240
Income tax expense
(90)
-
––––––
Profit/(loss) for the period
14.2.
Total
––––
(60)
(90)
––––––
165
(15)
150
––––––
––––
––––––
SHAHID HOLDINGS
(a)
IFRS 5 Non-current assets held for sale and discontinued operations defines non-current
assets held for sale as those assets (or a group of assets) whose carrying amounts will be
recovered principally through a sale transaction rather than through continuing use. A
discontinued operation is a component of an entity that has either been disposed of, or is
classified as ‘held for sale’ and:
(i)
represents a separate major line of business or geographical area of operations
(ii)
is part of a single co-ordinated plan to dispose of such, or
(iii)
is a subsidiary acquired exclusively for sale.
IFRS 5 says that a ‘component of an entity’ must have operations and cash flows that can
be clearly distinguished from the rest of the entity and will in all probability have been a
cash-generating unit (or group of such units) whilst held for use. This definition also means
that a discontinued operation will also fall to be treated as a ‘disposal group’ as defined in
IFRS 5. A disposal group is a group of assets (possibly with associated liabilities) that it is
intended will be disposed of in a single transaction by sale or otherwise (closure or
abandonment). Assets held for disposal (but not those being abandoned) must be
presented separately (at the lower of cost or fair value less costs to sell) from other assets
and included as current assets (rather than as non-current assets) and any associated
liabilities must be separately presented under liabilities. The results of a discontinued
operation should be disclosed separately as a single figure (as a minimum) on the face of
the statement of profit or loss with more detailed figures disclosed either also on the face
of the statement of profit or loss or in the notes.
The intention of this requirement is to improve the usefulness of the financial statements
by improving the predictive value of the (historical) statement of profit or loss. Clearly the
results from discontinued operations should have little impact on future operating results.
Thus users can focus on the continuing activities in any assessment of future income and
profit.
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(b)
The timing of the board meeting and consequent actions and notifications is within the
accounting period ended 31 October 20X6. The notification of staff, suppliers and the
press seems to indicate that the sale will be highly probable and the directors are
committed to a plan to sell the assets and are actively locating a buyer. From the financial
and other information given in the question it appears that the travel agencies’ operations
and cash flows can be clearly distinguished from its other operations. The assets of the
travel agencies appear to meet the definition of non-current assets held for sale; however
the main difficulty is whether their sale and closure also represent a discontinued
operation. The main issue is with the wording of ‘a separate major line of business’ in part
(i) of the above definition of a discontinued operation. The company is still operating in the
holiday business, but only through Internet selling. The selling of holidays through the
Internet compared with through high-street travel agencies requires very different assets,
staff knowledge and training and has a different cost structure. It could therefore be argued
that although the company is still selling holidays the travel agencies do represent a
separate line of business. If this is the case, it seems the announced closure of the travel
agencies appears to meet the definition of a discontinued operation.
(c)
Statement of profit or loss for the year ended 31 October 20X6:
20X6
20X5
Rs.’000
Rs.’000
Continuing operations
Revenue
25,000
22,000
(19,500)
(17,000)


5,500
5,000
(1,100)

(500)

4,400
4,500
(4,000)
1,500


400
6,000


14,000
18,000
(16,500)
(15,000)


Gross profit/(loss)
(2,500)
3,000
Operating expenses
(1,500)

(1,500)

Profit/(loss) from discontinued operations
(4,000)
1,500


Cost of sales
Gross profit
Operating expenses
Profit/(loss) from continuing operations
Discontinued operations
Profit/(loss) from discontinued operations
Profit for the period
Analysis of discontinued operations
Revenue
Cost of sales
Note: other presentations may be acceptable.
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Advanced accounting and financial reporting
14.3.
PRIMA
Holiday villas
IAS 16 allows property, plant and equipment to be re-valued or left at historical cost. Revaluation
should be based on the fair value (the open market value in an arm’s length transaction).
Revaluation is not required every year, but must be conducted when it is believed that the fair
value differs materially from the carrying value.
The method of accounting for the villa that is to be sold is covered by IFRS 5 which requires that
where, at the end of a reporting period, an asset is held for sale it should be reclassified, remeasured and no longer depreciated. An asset is only classified as held for sale where the
following conditions are all met:
 The asset is available for sale in its present condition.
 The sale is believed to be highly probable:
 Appropriate level of management is committed to the sale;

There is an active programme underway to find a buyer;

The asset is marketed at a realistic price.

Completion of sale expected within 12 months of classification.
From the limited information provided it appears that these conditions have been met and
therefore, under the rules of IFRS 5, the villa should be re-measured to the lower of its carrying
value and its fair value minus costs to sell.
Therefore, the villas should be valued at 31 December Year 4 as follows:
Fair value
Carrying value
Rs.
Rs.
All villas
25.00
20.00
Property held for sale
(1.00)
(1.25)
Properties to be retained
24.00
18.75
The villas to be retained should be re-valued to Rs. 24m, resulting in an increase in the
revaluation reserve of Rs. 5.25m (24-18.75).
The villa to be sold should be written down from its carrying value to its fair value minus costs to
sell of Rs.0.95m (Rs. 1m – 50,000). This impairment of Rs. 300,000 (1.25m – 0.95m) will be
charged against the revaluation reserve for this asset. If there is insufficient revaluation reserve,
then the write down must be charged to profit or loss.
The villa held for sale must be re-classified from ‘Non-current assets’ to ‘Current assets’ as a
separate line item.
Depreciation should not be charged when an asset has been classified as held for sale.
However, the other villas should be depreciated. IAS 16 states that expenditure on repairs and
maintenance does not remove the need to depreciate an asset. The villas have a finite useful life
and therefore must be depreciated. If the residual value of these assets is greater than the
carrying value then the depreciation charge will be zero. It is not acceptable therefore to have a
policy of non-depreciation on such assets, and a prior year adjustment should be made to correct
the error if the error is material.
Head office
The head office should be recorded under property, plant and equipment at cost. IAS 23 requires
that borrowing costs should be capitalised as part of the cost of an asset if they are directly
attributable to the acquisition, construction or production of a ‘qualifying asset’. A qualifying asset
is an asset that necessarily takes a long period of time to get ready for its intended use or sale.
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In this situation the company is therefore required to capitalise the borrowing costs as part of the
asset cost. Capitalisation must cease when the asset is substantially complete. Construction
finished on 31 May Year 4 and, although minor modifications continued for a further three
months, the standard states that minor modifications indicate that the asset is substantially
complete.
Cost at 30 June Year 4
Rs.000
Rs.000
Land
Building:
1,000
Construction cost
8,000
Interest 9% × 5million × (20/12) years
(1 October Year 2 to 1 June Year 4)
750
8,750
Total
9,750
Prima is to receive a government grant. IAS 20 requires that the grant be recognised when there
is reasonable assurance that the entity will meet any conditions and receive the grant. As the
grant has not been received, a receivable will be recorded under current assets. The credit can
be treated in one of two ways:
Option 1: Record as deferred income and release to profit or loss over the useful life of the asset
Option 2: Deduct the grant from the carrying amount of the asset.
If the second option is taken, the asset will be carried at Rs. 8.25m rather than at Rs. 9.75m. The
effect on profit or loss will be the same in both cases.
Land should not normally be depreciated, because land has an indefinite useful life in most
situations. However, as buildings have a limited useful life, a residual value must be allocated to
the building and the depreciable amount must then be written off over the 50 years useful life.
Depreciation will be charged in Year 4 for the four months from 1 September to 31 December.
The estimates of residual value and useful life must be revised each year and the depreciation
amended prospectively.
Yachts
It is important to note that the yachts are held for rental purposes, so they are non-current assets,
not inventory.
The yachts cost Rs. 20 m to build, but the recoverable amount on completion (higher of value in
use and net selling price) is only Rs. 18m, and so the assets must be initially recognised at their
recoverable amount. The impairment write-down of Rs. 2 m will be charged to profit or loss in
Year 4 in accordance with IAS 36.
Recoverable
amount
Rs. m
2.7
4.5
10.8
18
Cost
Engines (15%)
Interior (25%)
Remainder (60%)
Rs. m
3
5
12
20
IAS 16 requires that each part of the asset that has a cost that is significant in relation to the total
cost must be depreciated separately. Therefore, in the first year the depreciation charge will be
as follows:
Rs. m
Engines
Rs. 2.7m × 1/3 × 9/12 =
0.675
Interior
Rs. 4.5m × 1/2 × 9/12 =
1.688
Remainder
Rs. 10.8m × 1/5 × 9/12 =
1.620
Charge to profit or loss in Year 4
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14.4.
LEXUS LIMITED
Correct classification/presentation of the divisions is as under:
Statement of financial position
20X7
20X6
Statement of comprehensive income
20X7
20X6
Division A
Normal
Held for
sale
Continuing
operation
Continuing
operation
Division B
Not appearing
Held for
sale
Discontinued
operation
Discontinued
operation
Division C
Not appearing
Normal
Discontinued
operation
Discontinued
operation
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Answers
CHAPTER 15 - IFRS 13: FAIR VALUE MEASUREMENT
15.1.
MONIBA LIMITED
Principal market
Market A is the principal market because it has highest market share
Most advantageous market
Market C is the most advantageous market because it has highest exit price - net of
transportation cost and transaction cost of Rs. 28,200 per unit (W-1)
W-1: Net proceeds to determine most advantageous market
Market A
Exit price (Rs. per unit)
Market B
29,500
30,500
Market C
29,600
Transport cost (Rs. per unit)
(800)
(1,000)
(400)
Transaction cost (Rs. per unit)
(700)
(1,500)
(1,000)
28,000
28,200
Net proceeds
28,000
Fair value of the asset in:
- Principal market (29,500 - 800)
Rs. 28,700
- Most advantageous market (29,600 - 400)
Rs. 29,200
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CHAPTER 16 - IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS
16.1.
PARVEZ LIMITED
(1)
Sale and repurchase agreement
The transaction is in the nature of sale and repurchase agreement therefore the economic
phenomenon of the transaction is that of a loan for which the goods have been given as
security. Therefore, no contract of sale of goods or services is identified.
The difference between the sale price of Rs.18 million and the repurchase price of
Rs.19 million represents the interest on the loan for a period of four months.
To account for the transaction in accordance with its substance:
(2)

The goods should remain in inventories of PL at the lower of cost and net realisable
value.

No sale should be recorded.

The amount once received from the bank should be treated as a current loan liability
of Rs.18m.

Interest should be charged applying implicit rate to profit or loss for each reporting
period.
Consignment inventories
There is a contract for sale of cars between Pervez Limited (PL) and dealer containing
confirmation of respective right and obligation, payment term, commercial substance and
probability of collection of price.
There is only one performance obligation, namely, the transfer of cars to the dealer.
As per contract, the transaction price would be list price on the date of sale to third parties
during the six months period. Thereafter, though not specifically mentioned, after the lapse
of fifteen days the list price applicable on sixteenth day would be the transaction price of
the unsold cars not returned.
Since there is only one performance obligation, the question of allocation of transaction
price does not arise till the time of sale to third parties.
PL will recognize revenue upon satisfaction of performance obligation. Performance
obligation would be satisfied once the dealer has sold any cars to third parties during the
six months period. Thereafter, if the dealer does not return the unsold cars within fifteen
days, the performance obligation would be considered as satisfied on sixteenth day.
On 31 March 20X7 the vehicles should remain in inventories in PL books of accounts.
16.2.
SACHAL LIMITED
International Financial Reporting Standard (IFRS 15) provides that the revenue is recognized:
(a)
when the performance obligation is satisfied by the entity by transferring a promised
good or service (ie an asset) to the customer; and
(b)
the asset is transferred when the customer obtains the control of that asset.
Based on this principle, the following is the considerations to be taken into account in determining
accounting for revenue:
a)
Restaurant management software
There exists a contract for sale of Restaurant management software between SL and
customers containing confirmation of respective right and obligation, payment term,
commercial substance and price is collected in advance.
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There are two performance obligations, namely:

Explicit: delivery of software and

Implicit: six months on-site support
As per contract, the transaction price is Rs.1.5 million for both performance obligations.
Based on stand-alone selling price approach, software will be priced as Rs.1.35 million
(i-e. 1.50 m – 0.15) and six months on-site support services will be priced as
Rs.0.15 million (i-e. 0.30 million x 6/12).
PL will recognize revenue from sale of software upon delivery if SL can objectively
conclude that the software meets the requirements of the customer. The term of full
payment of transaction price in advance is a reasonable evidence of clarity of
specification between SL and customer. The agreed thirty days trial time will be
considered as a formality of the contract.
PL will recognize revenue from on-site support services over six months period on
straight-line basis.
b)
Maintenance support for the standard software package
Such service is provided under a written contract that contains confirmation of respective
right and obligation, payment term, commercial substance. SL will assess the
collectability of the price if not received in advance.
The performance obligation is to provide maintenance and support services.
The price of the service is Rs.0.30 million for one year term.
Since there is only one performance obligation, the question of allocation of transaction
price does not arise.
PL will recognize revenue over a year period on straight-line basis, as in this case input
method is appropriate. The pattern of resources consumed by SL is evenly spread over
the period of contract.
c)
Customized software
Such service is provided under a written contract that contains confirmation of respective
right and obligation, payment term, commercial substance. SL will assess the
collectability of the price.
The performance obligations are:

Designing and development of customized software, and

Maintenance and support services of the said software
The price of the service will be determined on the basis of terms of contract.
The price will be allocated between the two performance obligations. Price of
maintenance services for the first year is included in the total contract price. The
allocated price would be 10% of the contract price, which is the stand-alone price of the
said services.
Satisfaction of performance obligation:
Revenue from design and development - PL will recognize revenue from design and
development over time, because the software at every stage is expected to be customer
specific and would have no alternative use for SL. The terms of payment at different
stages of project also confirms that SL would have an enforceable right to receive
payment if the contract is terminated before completion. In this case output method would
be appropriate, as the resources applied on different stages vary. Therefore, the amount
of recognized revenue would correspond to the development stage of the software at the
end of reporting period.
Revenue from Maintenance and support services - PL will recognize revenue over one
year period on straight-line basis, as in this case, input method is appropriate. The
pattern of resources consumed by SL is evenly spread over the period of contract.
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16.3.
BRILLIANT LIMITED
Identification of performance obligations
There are three performance obligations:
1.
Transfer of 15 Plastic card printing machines and its software
2.
Transfer of 8 Laminators
3.
Transfer of 100,000 plastic cards
Although the software is distinct from printing machine, but both are highly dependable to each
other and inter-related. In the context of this contract, these are providing a combined output to
PL. Therefore, software is not a separate performance obligation.
The total transaction price as per the contract is Rs.9.2 million.
On the basis of available information, the stand-alone prices of each item will be estimated using
the following approaches:
Plastic card printing machines and its software:
In the absence of observable stand-alone price, we may use ‘adjusted market assessment’
approach. The competitor’s machine is sold at Rs.750,000 which is similar (not identical) to BL’s
machine. As per given information, we may use customers’ rating for adjustment of competitors’
price that worked out as follows:
Rupees
Competitors’ price
750,000
Adjusted price of BL machine (7/9*750,000)
583,000
Total price (15*583,000)
8,745,000
Laminators:
There is neither observable stand-alone price nor any comparable competitors’ product available
in the market in which BL operates. In this case, we may use ‘expected cost plus a margin
approach’. The estimated stand-alone price is worked out as follows:
Rupees
Expected cost to BL
200,000
Margin estimated (800,000 - 600,000)/600,000 = 33%
66,000
266,000
Total price (8*266,000)
2,128,000
Plastic cards:
Observable stand-alone price is available
Total price (100,000*12)
1,200,000
Total of stand-alone prices is:
Plastic card printing machines and its software
8,745,000
Laminators
2,128,000
Plastic cards
1,200,000
Total
12,073,000
Allocation of Rs.9.2 million (transaction price) will be based on relative stand-alone prices, as the
difference of Rs.2.873 million between stand-alone price and transaction price is not specific to
any performance obligation.
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Answers
Rupees
Plastic card printing machines and its software
6,663,961
(9,200,000*8,745,000/12,073,000)
Laminators
(9,200,000*2,128,000/12,073,000)
1,621,602
Plastic cards
(9,200,000*1,200,000/12,073,000)
914, 437
Total
16.4.
9,200,000
WAQAS LIMITED
The following is the available data of the original project:
Transaction price
Rs.20 million
Cost of the project
Rs.12 million
At the signing of the contract only one performance obligation is identified. Therefore, the question
of allocation the transaction price of Rs.20 million would not arise.
The revenue would be recognized over time because the installation and construction will be done
on the land of ACL and control of asset will be transferred progressively and will create right of
payment for WL. Amount of revenue recognized would correspond to the progress of the project.
The progress will be measured using input method, that is, cost incurred plus margin.
At the end of seventh month:
Additional Reservoir:
a)
is distinct from original RO plant project
b)
increased the price of the contract by Rs.2.5 million which reflected WL’s stand-alone price
of similar construction work. The following working explains it further:
Cost estimated
Rs.1.8 million
Usual margin (8/12*100=67%)
Rs.1.2 million
Normal price
Rs.3.0 million
Agreed consideration
Rs.2.5 million
The reduced price is reasonable due to less administrative resources is to be applied for additional
work.
The contract of additional reservoir will be treated as separate contract and its revenue will be
recognized separate from original contract. The revenue from this contract will be recognized over
time, as construction of reservoir will be done on the land of ACL and control of asset will be
transferred progressively and will create right of payment for WL.
At this stage the revenue from RO plant project will be recognized as follows:
Percentage of work completed
(4.2/12.0*100)
35%
Revenue to be recognized (35%*20)
Rs.7.0 million
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At the end of tenth month:
Increasing the size of reservoir will increase the scope of the contract, but it cannot be considered
as a distinct work already agreed. Increased contract price also does not reflect WL’s stand-alone
price of similar work because it is equal to the cost of work. Therefore, WL should account for this
modification as part of single performance obligation that is partially satisfied on the date of
modification. A cumulative catch-up adjustment will be done, which is worked out as follows:
Original contract
Modified
Contract price
20.0
21.0
Total contract cost
12.0
13.0
Cost incurred so far
7.2
7.2
% of completion
60%
55%
Cumulative Revenue recognition
12.0
11.55
Difference between the two amounts of cumulative revenue will be the adjustment to the revenue
account.
Revenue from additional reservoir
% of completion (0.72/1.8 * 100)
40%
Revenue to be recognized (40% * 2.5)
Rs.1.0 million
At the end of sixteenth month:
Additional work of pumping and piping facility increased the scope of the contract. It is also distinct
from the RO plant project. However, the increased price of the contract does not reflect WL’s standalone price of similar work because it provides nominal margin to WL. Therefore, this contract
cannot be accounted for as separate contract. This contract will terminate the existing contract and
create a new contract. There will be two performance obligations (a) Transfer of RO plant; and (b)
transfer of pumping and piping facility.
The price of new contract is worked out as follows:
% of completion of existing contract (11.70/13.0*100)
90%
Rupees
Revenue recognized (21.0 * 90%)
18.9m
Remaining promised consideration (21.0 – 18.9)
2.1m
Consideration of modification
3.0m
New contract price
5.1m
Allocation of new contract price on the basis of cost plus margin approach
Total estimated cost of new modified contract (13.0+2.8)
15.8m
Less: Already incurred cost
(11.7m)
Cost to be incurred
4.1m
Allocation
RO plant project
(1.3/4.1*5.1)
1.62m
Pumping and piping facility (2.8/4.1*5.1)
3.48m
The revenue will be recognized over time.
Revenue from additional reservoir
% of completion (1.35/1.8 * 100)
75%
Revenue to be recognized (75% * Rs. 2.5m)
1.875m
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Answers
16.5.
ZEBRA LIMITED
i.
Since ZL has granted the supplier the right to choose whether the share-based transaction is
settled in cash or by issuing equity instruments, the entity has granted a compound financial
instrument.
Since the fair value of land is available so the Land will be recorded at Rs. 230 million and
corresponding effect will be taken to liability to the extent of Rs. 210 million (fair value of the
debt component on 1 October 20X7 i.e. 7,000 shares × 3,000 per share) and remaining Rs.
20 million to the equity.
On 31 December 20X7 the liability will be remeasured in accordance with the prevailing fair
value of HL’s share to Rs. 203 million (i.e. 7,000 × 2,900) and the resulting decrease of Rs. 7
million will be credited to profit and loss account.
ii.
Since a part of the payment for the license has been deferred beyond normal credit terms so
the license will be initially recognised at cash price equivalent of Rs. 80 million i.e. Rs. 50 m
plus Rs. 30 m (i.e. present value of Rs. 36.3 million discounted at 10% for 2 years.)
The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be
included in the cost of the license and will be charged to profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the
original 5 years only.
The residual value of the license will be assumed to be zero since there is no active market for
the license and there is no commitment by 3rd party to purchase the license at the end of
useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated from 1 April
20X7 when the license was available for use:
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with
increasing the liability of payable for license with same amount.
16.6.
HAWKS LIMITED
Total assets
Total
liabilities
Total
comprehensive
income
--------------- Rs. in million --------------Given
(i)
2,500.00
1,610.00
659.00
(40.00)
49.00
Revenue
Revenue to be booked (W-1)
9.00
Contract cost (W-2.1)
14.77
23.77
2,523.77
Revised amounts
14.77
(40.00)
1,570.00
63.77
722.77
W-1: Revenue to be recognized
Revenue to be booked
Bonus for
higher
rating
Total revenue to
be booked
----------------------- Rs. in million ----------------------Advertisement (at point of time)
Broadcasting (over the time)
[3×6.01(W-2)] 18.03
[(2.7×9.99(W-2)] 26.97
4.00
22.03
26.97
49.00
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W-2: Allocation of transaction price
Standalone
price (Rs. in
million)
Proportion
Contract price
(Rs. in million)
Advertisement
(5×1.3×5)32.5
37.57%
30.06
Broadcasting
(9×1.2×5)54.0
62.43%
49.94
100%
80.00
86.5
Revenue per
unit (Rs. in
million)
OR
6.01
9.99
W-2.1: Contract cost
Advertisement
Broadcasting
Total
------------------------------ Rs. in million -----------------------------Total
Charged to P & L
18.20
(15.10)
3.1
© Emile Woolf International
260
35.60
(23.93)
(8.5+9.2)+(8.9×0.7)
11.67
[9+(8.9×0.3)]
53.80
(39.03)
14.77
The Institute of Chartered Accountants of Pakistan
Answers
CHAPTER 17 - IFRS 16: LEASES
17.1.
X LTD
(a)
A
Period
B
Opening
Balance
Rs.’000
11,420
9,133
6,503
3,478
20X6
20X7
20X8
20X9
C
Fin. Charge
at 15% of B
Rs.’000
1,713
1,370
975
522
────
4,580
────
D
Rentals
E
Closing Balance
(B – (D - C)
Rs.’000
9,133
6,503
3,478
Rs.’000
4,000
4,000
4,000
4,000
────
16,000
────
(b)
Statement of Financial Position (Extract) as at 31 December 20X6
Rs.’000
Non-Current assets
(Rs.11,420,000 – Rs.2,855,00)
8,565
Non-Current Liabilities
(Obligation under lease)
6,503
Current Liabilities
Obligation under lease
(Rs.9,133,000 – Rs.6,503,000)
Note:
Annual Depreciation
=
17.2.
2,630
11,420,000
= Rs.2,855,000
4
PROGRESS LTD
(a)
Annuity method
Cash flow
Year 1
Year 2
Year 3
Rs.
Rs.
Rs.
-
-
3,200,000
Outstanding
-
1,920,000
1,350,400
Capital repayment
1,280,000
569,600
637,952
Balance
1,920,000
1,350,400
712,448
Interest @ 12% of balance
230,400
162,048
85,494
Capital repayment
569,600
637,952
714,506
800,000
800,000
800,000
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(b)
Journal entries
Dr
Rs.
Cr
Rs.
20X6
Jan. 3
Right of use - Plant and machinery
3,200,000
Fine Rentals Limited
3,200,000
Initial recognition of machine
Jan. 3
Fine Rentals Limited
1,280,000
Bank
1,280,000
Payment of initial deposit under lease
Dec. 31
Fine Rentals Limited
569,600
Interest expense
230,400
Bank
800,000
Apportionment of annual installment
between Principal repayment and interest
Dec. 31
Profit and Loss Account
Interest Expense
Write-off of FL interest expense to Profit
and loss account
230,400
Fine Rentals Ltd
637,952
Interest expense
162,048
230,400
20X7
Dec. 31
Bank
800,000
Apportionment of annual installment for
the year between Principal repayment
and interest
Dec. 31
Profit and Loss Account
Interest Expense
Write-off of FL interest expense to Profit
and loss account
162,048
Fine Rentals Limited
714,506
162,048
20X8
Dec. 31
Interest expense
85,494
Bank
800,000
Apportionment of annual installment for
the year between Principal repayment and
interest
Dec. 31
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Interest Expense
Write-off of FL interest expense to Profit
and loss account
262
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Answers
17.3.
MIRACLE TEXTILE LIMITED
Miracle Textile Limited
Statement of financial position (extracts) as at 30 June 20X6
Note
20X6
20X5
Rs.
Rs.
4
16,000,000
18,000,000
9
6,505,219
10,633,074
9
4,127,856
3,566,925
ASSETS
Non-current assets
Right of use - Machinery
LIABILITIES
Non-current liabilities
Obligation under lease
Current liabilities
Current portion of obligation
Miracle Textile Limited
Notes to the financial statements (extracts) for the year ended 30 June 20X6
4- Property, plant and equipment
20X6
20X5
Right of Use Assets
Cost
Opening balance
20,000,000
Addition during the year
-
-
20,000,000
20,000,000
20,000,000
Accumulated depreciation
Opening balance
(2,000,000)
Depreciation for the year
(2,000,000)
(2,000,000)
(4,000,000)
(2,000,000)
16,000,000
18,000,000
Balance as at 30 June
-
9- Obligations under lease (W1)
30-Jun-X6
30-Jun-X5
Lease
payment
Financial
charges
for future
periods
Present
Value
Lease
payment
Financial
charges for
future
periods
Present
Value
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Not later than
one year
5,800,000
-
5,800,000
5,800,000
-
5,800,000
Later than one
year but not
later than five
years
7,800,000
1,294,781
6,505,219
13,600,000
2,966,925
10,633,075
Later than five
years
© Emile Woolf International
-
-
-
-
-
-
13,600,000
1,294,781
12,305,219
19,400,000
2,966,925
16,433,075
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Advanced accounting and financial reporting
9.1
The Company has entered into a lease agreement with a bank in respect of a machine.
The lease liability bears interest at the rate of 15.725879% per annum. The company
has the option to purchase the machine by paying an amount of Rs.2 million at the end
of the lease term. The lease rentals are payable in annual instalments ending in
June 20X6. There are no financial restrictions in the lease agreement.
W1: Lease Schedule
Payment
date
Instalment
Principal
repayment
Interest @
15.73%
Closing
principal
-
14,200,000
01-Jul-14
20,000,000
5,800,000
5,800,000
01-Jul-15
14,200,000
5,800,000
3,566,925
2,233,075
10,633,075
01-Jul-16
10,633,075
5,800,000
4,127,856
1,672,144
6,505,219
01-Jul-17
6,505,219
5,800,000
4,776,997
1,023,003
1,728,222
1,728,222
2,000,000
1,728,222
271,778
20,000,000
5,200,000
30-Jun-18
17.4.
Opening
principal
-
ACACIA LTD
Relevant extracts
Statements of profit or loss for the year ended 31 March 20X6 (extracts)
Rs.
Depreciation (272,850 ÷ 6)
45,475
Lease payments
6,000*
Finance costs (W)
19,460
* Considering low value item as described in IFRS16
Statement of financial position as at 31 March 20X6 (extracts)
Rs.
Non-current assets
Right of use(272,850 – 45,475)
227,375
Non-current liabilities
Lease liabilities (Note 1)
135,810
Current liabilities
Lease liabilities (Note 1)
78,250
Statement of cash flows for the year ended 31 March 20X6 (extracts)
Cash flows from financing activities
Payment of lease liabilities
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Answers
Notes to the financial statements (extracts)
(1)
Analysis of lease liabilities
Gross basis
Rs.
Lease liabilities include the following:
Gross payments due within
One year
78,250
Two to five years (2 × 78,250)
156,500
234,750
Less: Finance charges allocated to future periods
((78,250 × 4) – 272,850 – 19,460)
(20,690)
214,060
(Alternatively) Net basis
Rs.
Lease liabilities include the following:
Amounts due within
One year
Two to five years
78,250
135,810
214,060
WORKING:
Lease of plant
Year to 31 March
17.5.
B/f
Payment
Capital
Interest @ 10%
C/f
Rs.
Rs.
Rs.
Rs.
Rs.
20X6
272,850
(78,250)
194,600
19,460
214,060
20X7
214,060
(78,250)
135,810
SHOAIB LEASING LIMITED
(a) Entries in the books of Lessor
Date
1-Jul-X6
Particulars
Dr.
Lease payments receivable (W1)
2,680,000
Machine
2,100,000
Unearned finance income (W1)
30-Jun-X7
Bank
580,000
860,000
Lease payments receivable
30-Jun-X7
Unearned finance income
860,000
272,941
Finance income (W2)
30-Jun-X8
Bank
272,941
860,000
Lease payments receivable
30-Jun-X8
Unearned finance income
Finance income (W2)
© Emile Woolf International
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860,000
196,640
196,640
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Advanced accounting and financial reporting
Date
30-Jun-X9
Particulars
Dr.
Bank
960,000
Lease payments receivable
30-Jun-X9
Cr.
960,000
Unearned finance income
110,419
Finance income (W2)
110,419
W1: Total finance income
Rs.
Total future lease payments (Rs.860,000 x 3)
2,580,000
Add: Purchase bargain option
100,000
Gross investment in finance lease
2,680,000
Less: Cost of assets
2,100,000
Total finance income
580,000
W2: Amortization schedule
Date
Principal
Opening
Instalment
Interest
Principal
Principal
Closing
Rs.
30-Jun-X7
2,100,000
860,000
272,941
587,059
1,512,941
30-Jun-X8
1,512,941
860,000
196,640
663,360
849,581
30-Jun-X9
849,581
960,000
110,419
849,581
nil
580,000
2,100,000
(b) Shoaib Leasing Limited
Extracts from the statement of financial position as at June 30, 20X7
Note
20X7
Rs.
Non-current Assets
Net investment in leases
10
849,578
Current Assets
Current portion of net Investment in leases
10
663,360
Net investment in leases
Lease payments receivables
10.1
Add: Residual value of leased assets (part
of LP)
1,720,000
100,000
Gross Investments in leases
1,820,000
Less: Unearned lease income
(307,062)
Net investment in leases
10.2
Less: Current portion of net investment in leases
1,512,938
(663,360)
849,578
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Answers
10.1 Lease payments
Less than one year
860,000
More than one year and less than 5 years
960,000
1,820,000
10.2 Net investment in leases
Less than one year
663,360
More than one year and less than 5 years
849,578
1,512,938
17.6.
AKBAR LTD.
a) Right-of-use retained by AL
Financing
Since the consideration (Rs.850,000) exceeds the fair value (Rs.550,000) of the machine, the
agreement contains a financing transaction.
AL initially recognises a right-of-use asset as the proportion of the carrying amount that
reflects the right of use retained. The proportion is calculated by dividing the present value of
the lease payment by fair value
=> 440,000 CV ÷ 550,000 FV × 314,457 (W-1) = Rs.251,565
W-1
Fair value of Rs.614,456 less the part of the lease payments that is just a repayment of the
financing granted to the seller-lessee (Rs.300,000) = Rs.314,456
b) Gain / loss on rights transferred
Gain (refer below) = Rs.47,109
Rs.
Consideration received
850,000
Less: Financial liability
Financing
300,000
PV of lease liability
314,456
(A)
235,544
Less: Carrying value of machine transferred
Total carrying value
440,000
Less: Right-of-use asset
251,565
(B)
Gain on rights transferred (A-B)
188,435
47,109
Accounting Entry by Akbar Ltd.
Dr.
Cr.
Rs.
Rs.
Cash
850,000
Right-of-use asset
251,565
Machine
440,000
Financial liability
614,456
Gain on rights transferred to lessor
47,109
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17.7.
ALI LIMITED
Since transfer of an asset does not satisfy the requirements of IFRS 15 therefore Ali Ltd. treats
the transaction as a financing arrangement.
The sale proceeds have been incorrectly credited to operating income, and the operating costs
have been incorrectly debited with the lease payment. Both amounts should be reversed.
Therefore, Ali Ltd. is required to adjust its books by passing the following accounting entries:
Operating income
Dr.
Cr.
Rs.
Rs.
1,440,000
Financial liability
1,440,000
Operating expense of Rs.360,000 booked erroneously is rectified by reversing it and debiting:

Interest expense of Rs.115,200 (i-e. Rs.1,440,000 x 8%)

Financial liability of Rs.244,800 (i-e. principal portion)
Rs.360,000
The accounting entry would be:
Dr.
Cr.
Rs.
Rs.
Interest expense
115,200
Financial liability
244,800
Operating Expense
360,000
The remaining liability of Rs.1,195,200 should be shown as Rs.931,200 non-current and
Rs.264,000 as current.
17.8.
MOAZZAM TEXTILE MILLS LIMITED
Generator A
The ratio between the carrying value (Rs.7,500,000) and fair value
(Rs.6,000,000) will determine the value of right-of-use as against PV of lease payments.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,000,000x[1-(1+4.5%)^-5}/4.5%
PV = Rs.4,389,977
Right-of-use
ROU = CV/FV*PV
ROU => 7,500,000/6,000,000*4,389,977 = Rs.5,487,471
Loss on sale
Loss (refer working) = Rs.402,506
Working
Consideration received
6,000,000
Less: PV of lease liability
(4,389,977)
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Less: Carrying value of machine transferred
Total carrying value
7,500,000
Less: Right-of-use asset (5,487,471)
(2,012,529)
Loss on sale = 402,506
Particulars
Debit
Credit
Rs.
Rs.
Cash
6,000,000
Right-of-use asset
5,487,471
Loss on sale
402,506
Carrying amount of Genertor
7,500,000
Lease liability
4,389,977
Generator B
Financing transaction
Since the consideration received (Rs.6,000,000) exceeds the fair value (Rs.5,000,000) of the
power generator, the agreement contains a financing transaction.
Sale and lease back
The ratio between the carrying value (Rs.6,000,000) and fair value (Rs.5,000,000) will determine
the value of right-of-use as against PV of lease payments.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,000,000x[1-(1+4.5%)^-5}/4.5%
= Rs.4,389,977
Less: Financing = Rs.1,000,000
PV = Rs.3,389,977
Right-of-use
ROU = CV/FV*PV
ROU = 6,000,000/5,000,000*3,389,977
ROU = Rs.4,067,972
Loss on sale
Loss (refer W1) = Rs.322,005
W1
Consideration received
6,000,000
Less:
PV of lease liability
(3,389,977)
Financing
(1,000,000)
1,610,023
Less: Carrying value of machine transferred
Total carrying value
6,000,000
Less: Right-of-use asset (4,067,972)
1,932,028
Loss = Rs.322,005
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Particulars
Debit
Credit
Rs.
Rs.
Cash
6,000,000
Right-of-use asset
4,067,972
Loss
322,005
Carrying amount
6,000,000
Lease liability
4,389,977
Generator C
The ratio between the carrying value (Rs.7,000,000) and fair value (Rs.10,000,000) will
determine the value of right-of-use as against PV of lease payments.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,500,000x[1-(1+4.5%)^-5}/4.5%
PV = Rs.6,584,965
Right-of-use
ROU = CV/FV*PV
ROU => 7,000,000/10,000,000*6,584,965 = Rs.4,609,475
Gain on sale
Gain (refer W2) = Rs.1,024,510
W2
Consideration received
10,000,000
Less: PV of lease liability
6,584,965
Less: Carrying value of machine transferred
Total carrying value
7,000,000
Less: Right-of-use asset (4,609,475)
2,309,525
Gain = Rs.1,024,510
Particulars
17.9.
Debit
Credit
Rs.
Rs.
Cash
10,000,000
Right-of-use asset
4,609,475
Carrying amount
7,000,000
Lease liability
6,584,965
Gain on sale
1,024,510
MODIFICATION THAT DECREASES THE SCOPE OF THE LEASE (IFRS 16,
ILLUSTRATIVE EXAMPLE 17)
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the
lease liability based on:
(a)
a five-year remaining lease term,
(b)
annual payments of CU30,000 and
(c)
Lessee’s incremental borrowing rate of 5 per cent per annum. This equals CU129,884.
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Lessee determines the proportionate decrease in the carrying amount of the right-of-use asset
on the basis of the remaining right-of-use asset (ie 2,500 square metres corresponding to 50
per cent of the original right-of-use asset).
50 per cent of the pre-modification right-of-use asset (CU184,002) is CU92,001. Fifty per cent
of the pre-modification lease liability (CU210,618) is CU105,309. Consequently, Lessee
reduces the carrying amount of the right-of-use asset by CU92,001 and the carrying amount of
the lease liability by CU105,309.
Lessee recognises the difference between the decrease in the lease liability and the decrease
in the right-of-use asset (CU105,309 – CU92,001 = CU13,308) as a gain in profit or loss at the
effective date of the modification (at the beginning of Year 6).
Lessee recognises the difference between the remaining lease liability of CU105,309 and the
modified lease liability of CU129,884 (which equals CU24,575) as an adjustment to the rightof-use asset reflecting the change in the consideration paid for the lease and the revised
discount rate.
17.10.
MODIFICATION THAT BOTH INCREASES AND DECREASES THE SCOPE OF THE LEASE
(IFRS 16, ILLUSTRATIVE EXAMPLE 18)
a)
The consideration for the increase in scope of 1,500 square metres of space is not
commensurate with the stand-alone price for that increase adjusted to reflect the
circumstances of the contract. Consequently, Lessee does not account for the increase in
scope that adds the right to use an additional 1,500 square metres of space as a separate
lease.
The pre-modification right-of-use asset and the pre-modification lease liability in relation to
the lease are as follows.
Lease liability
Right-of-use asset
Beginning
6%
Lease
Ending
Beginning
Deprecia-
Ending
balance
interest
payment
balance
balance
tion
balance
expense
charge
Year
CU
CU
CU
CU
1
736,009
44,160
(100,000)
680,169
2
680,169
40,810
(100,000)
3
620,979
37,259
4
558,238
5
491,732
6
421,236
CU
CU
CU
736,009
(73,601)
662,408
620,979
662,408
(73,601)
588,807
(100,000)
558,238
588,807
(73,601)
515,206
33,494
(100,000)
491,732
515,206
(73,601)
441,605
29,504
(100,000)
421,236
441,605
(73,601)
368,004
368,004
b)
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures
the lease liability on the basis of: (a) a three-year remaining lease term, (b) annual
payments of CU150,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per
annum. The modified liability equals CU393,647, of which (a) CU131,216 relates to the
increase of CU50,000 in the annual lease payments from Year 6 to Year 8 and (b)
CU262,431 relates to the remaining three annual lease payments of CU100,000 from Year
6 to Year 8.
c)
Decrease in the lease term
At the effective date of the modification (at the beginning of Year 6), the pre-modification
right-of-use asset is CU368,004. Lessee determines the proportionate decrease in the
carrying amount of the right-of-use asset based on the remaining right-of-use asset for the
original 2,000 square metres of office space (ie a remaining three-year lease term rather
than the original five-year lease term). The remaining right-of-use asset for the original
2,000 square metres of office space is CU220,802 (ie CU368,004 ÷ 5 × 3 years).
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At the effective date of the modification (at the beginning of Year 6), the pre-modification
lease liability is CU421,236. The remaining lease liability for the original 2,000 square
metres of office space is CU267,301 (ie present value of three annual lease payments of
CU100,000, discounted at the original discount rate of 6 per cent per annum).
Consequently, Lessee reduces the carrying amount of the right-of-use asset by
CU147,202 (CU368,004 – CU220,802), and the carrying amount of the lease liability by
CU153,935 (CU421,236 – CU267,301). Lessee recognises the difference between the
decrease in the lease liability and the decrease in the right-of-use asset (CU153,935 –
CU147,202 = CU6,733) as a gain in profit or loss at the effective date of the modification
(at the beginning of Year 6).
Lease liability
CU153,935
Right-of-use asset
CU147,202
Gain
CU6,733
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the
effect of the remeasurement of the remaining lease liability reflecting the revised discount
rate of 7 per cent per annum, which is CU4,870 (CU267,301 – CU262,431), as an
adjustment to the right-of-use asset.
d)
Lease liability
CU4,870
Right-of-use asset
CU4,870
Increase in the leased space
At the commencement date of the lease for the additional 1,500 square metres of space
(at the beginning of Year 6), Lessee recognises the increase in the lease liability related to
the increase in scope of CU131,216 (ie present value of three annual lease payments of
CU50,000, discounted at the revised interest rate of 7 per cent per annum) as an
adjustment to the right-of-use asset.
Right-of-use asset
CU131,216
Lease liability
CU131,216
The modified right-of-use asset and the modified lease liability in relation to the modified
lease are as follows.
Lease liability
Right-of-use asset
Beginning
7%
Lease
Ending
balance
interest
payment
balance
Beginning Depreciabalance
expense
CU
CU
CU
CU
6
393,647
27,556
(150,000)
271,203
7
271,203
18,984
(150,000)
8
140,187
9,813
(150,000)
272
balance
charge
Year
© Emile Woolf International
tion
Ending
CU
CU
CU
347,148
(115,716)
231,432
140,187
231,432
(115,716)
115,716
-
115,716
(115,716)
-
The Institute of Chartered Accountants of Pakistan
Answers
17.11.
SUBLEASE CLASSIFIED AS A FINANCE LEASE (IFRS 16, ILLUSTRATIVE EXAMPLE 20)
The intermediate lessor classifies the sublease by reference to the right-of-use asset arising
from the head lease. The intermediate lessor classifies the sublease as a finance lease,
having considered the requirements in paragraphs 61–66 of IFRS 16.
When the intermediate lessor enters into the sublease, the intermediate lessor:
i.
derecognises the right-of-use asset relating to the head lease that it transfers to the
sublessee and recognises the net investment in the sublease;
ii.
recognises any difference between the right-of-use asset and the net investment in the
sublease in profit or loss; and
iii. retains the lease liability relating to the head lease in its statement of financial position, which
represents the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognises both finance income on
the sublease and interest expense on the head lease.
17.12.
SUBLEASE CLASSIFIED AS AN OPERATING LEASE (IFRS 16, ILLUSTRATIVE
EXAMPLE 21)
The intermediate lessor classifies the sublease by reference to the right-of-use asset arising
from the head lease. The intermediate lessor classifies the sublease as an operating lease,
having considered the requirements in paragraphs 61–66 of IFRS 16.
When the intermediate lessor enters into the sublease, the intermediate lessor retains the
lease liability and the right-of-use asset relating to the head lease in its statement of financial
position.
During the term of the sublease, the intermediate lessor:
(a) recognises a depreciation charge for the right-of-use asset and interest on the lease liability;
and
(b) recognises lease income from the sublease.
17.13.
TRACK LIMITED
(a) Accounting entries for the year ended 30 June 20X5
Date
01-07-20X4
Debit
Description
Credit
Rs. in million
Cash
600
Financial liability
600
(Recognition of sale proceeds as financial
liability)
30-06-20X5
Interest expense (W-1)
66.31
Financial liability
66.31
(Recognition of interest expense)
30-06-20X5
Financial liability
90
Strong Bank Limited / Bank
90
(Payment of rentals)
30-06-20X5
Depreciation expense (240 ÷15)
16
Accumulated deprecation
16
(Recording of depreciation of the property)
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Date
30-06-20X5
Debit
Description
Credit
Rs. in million
Deferred tax asset (W-2)
105.70
Deferred tax income
105.70
(Creation of deferred tax asset)
Brief explanation of the accounting treatment:
In the given situation the asset has been sold but the right to use has been retained along
with the right to repurchase the asset (call option).
In such situation the transaction can either be treated as a lease or as a financing transaction.
However, since in the given situation the present value of outflows (rentals and repurchased
price) i.e. Rs. 610.45 million (W-3) is higher than original selling price, the transaction is to be
treated as a financing transaction.
(b) Accounting entries for the year ended 30 June 20X6
Debit
Date
Credit
Description
Rs. in million
30-06-20X6
Interest expense (W-1)
63.69
Financial liability
63.69
(Recognition of interest expense)
30-06-20X6
Financial liability
90.00
Strong Bank Limited / Bank
90.00
(Recognition of interest expense)
30-06-20X6
Depreciation expense (240 ÷ 15)
16.00
Accumulated deprecation
16.00
(Recording of depreciation of the
property)
30-06-20X6
Financial liability (W-1)
550
Property (240-16-16)
208
Gain on sale of property
342
(De-recognition of financial liability and
property)
30-06-20X6
Deferred tax expense (W-2)
105.70
Deferred tax assets
105.70
(Derecognition of deferred tax asset)
W-1 Repayment schedule
Date
Opening
principal
Interest @
11.052%
Payment
1-Jul-X4
Closing
principal
600.00
30-Jun-X5
600.00
66.31
(90.00)
576.31
30-Jun-X6
576.31
63.69
(90.00)
550.00
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Answers
W-2 Computation of deferred tax
Accounting
expense
Tax expense/
(income)
Temp diff
Deferred tax
@ 30%
Interest
66.32
90
(23.68)
(7.10)
Depreciation
16.00
-
16.00
4.80
Gain on sale of property
-
(360)
360
108
105.70
W-3 PV of rentals and repurchase price
1-jul-20X4
Rent payment (net of tax)
-
Repurchase price
-
30-jun-20X5
90
30-jun-20X6
90
550
-
90
640
Discount factor @ 10%
1
0.909
0.826
Cash flows
-
81.81
528.64
Net Cash flows = 610.45
17.14.
PATEL LIMITED
Statement of financial position
As on 30 June 20X7
Assets
Rs. in million
Non-current assets
Net investment in lease (W-2)
51.32
Right of use asset (W-4)
98.10
Current assets
Current portion of net investment in lease [21– 7.17 (W-2)]
13.83
Non-current liabilities
Lease liabilities [32.50 (W-1) + 86.77 (W-3)]
119.27
Current liabilities
Lease liabilities [13.83 (18 – 4.17)(W-1) + 37.57 (50 – 12.43) (W-3)]
51.40
Statement of profit or loss
For the year ended 30 June 20X7
Gain on sub-lease (W-6)
18.73
Depreciation (W-4)
32.70
Finance charges [5.31(W-1) + 15.85 (W-3)]
21.16
Finance income (W-2)
8.54
Loss on decrease in lease term of building (W-5)
8.40
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W-1: Amortization schedule of lease - plant
Date
Interest
Instalment
-------------------------- Rs. in million -------------------------*170.66
1-Jul-X5
*1[{1
Principal o/s
30-Jun-X6
6.36
18.00
59.02
30-Jun-X7
5.31
18.00
46.34
30-Jun-X8
4.17
18.00
32.50
Instalment
Principal o/s
- (1.09)-5 ÷ 0.09} X 18] – [1 x (1.09) -5]
W-2: Amortization schedule of sub lease - plant
Date
Interest
-------------------------- Rs. in million -------------------------*277.61
30-Jun-X6
*2[{1
30-Jun-X7
8.54
21.00
65.15
30-Jun-X8
7.17
21.00
51.32
- (l.ll) -5÷ 0.11} x 21]
W -3 : Amortization schedule of lease - Building (After modification)
Interest
Instalment
Principal o/s
Date
-------------------- Rs. in million -------------------1-Jul-X6
158.49
30-Jun-X7
15.85
50
124.34
30-Jun-X8
12.43
50
86.77
W-4 : Computation of right of use (ROU) asset (after modification)
Rs. in million
ROU assets – 1 July 20X4 [50 × 4.9676 [{1–
(1.12)-8÷0.12}]
Depreciation for two years (248.38 ÷ 8 × 2)
248.38
(62.10)
ROU (before modification) – 1 July 20X6
186.28
ROU derecognized due to reduction in lease term (186.29 ÷ 6 × 2)
(62.10)
124.18
Increase in ROU due to decrease in borrowing rate

PV of liability for remaining 4 years at 10% (50 × 3.1699)
158.49

PV of liability for remaining 4 years at 12% (50 × 3.0373)
(151.87)
6.62
ROU after modification – 1 July 20X6
130.80
Depreciation for the year (130.80 ÷ 4)
32.70
98.10
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Answers
W-5 : Computation of loss on decrease in lease term of building
Decrease in lease liability [205.57(50 × 4.1114) – 151.87(W-4)]
ROU derecognized (186.29 ÷ 6 × 2)
53.70
(62.10)
Loss on decrease in lease term
(8.40)
W-6 : Gain on sub lease
Net investment in sub lease [{1– (1.11)-5÷0.11}]× 21
77.61
Carrying value of ROU derecognized (70.66 ÷ 6 × 5)
(58.88)
Gain on sub lease
17.15.
18.73
DATSUN LIMITED (A)
Lease liability:
1 Jan X5
Rs. in million
Initial recognition
A
563.50
Payment
(80.00)
483.50
31 Dec X5 Interest for 20X5 @ 8%
1 Jan X6
38.68
Balance
522.18
Payment
(80.00)
442.18
Effect of reassessment in 20X6 (Balancing) B
Rs. 80 for 5 years in arrears @ 9% (80 × 3.8897)
Payment
311.17
31 Dec X6 Interest for 20X6 @ 9%
1 Jan X7
(131.01)
28.01
Balance
339.18
Payment
(80.00)
259.18
Effect of modification in 20X7 due to:
 Decrease in lease term (Balancing)
118.45
Rs. 80 for 2 years in arrear @ 9%: (80 × 1.7591)
140.73
 Increase in rate (Balancing)
Rs. 80 for 2 years in arrear @ 10%: (80×1.7355)
Payment
138.84
31 Dec X7 Interest for 20X7 @ 10%
31 Dec X7 Balance
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13.88
152.72
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CHAPTER 18 - IAS 12: INCOME TAXES
18.1.
SHAKIR INDUSTRIES
COMPUTATION OF TAX EXPENSE
FOR THE YEAR ENDED DECEMBER 31, 20X6
20X6
Rs.in million
Profit before tax
15.80
Add: Inadmissible expenses
Accounting depreciation (Rs. 1.1 million + Rs.0.7 million)
1.80
Financial charges on finance lease
0.15
Penalty paid to SECP
0.70
Provision for gratuity
2.40
5.05
Less: Admissible expenses
Rs. m
Tax depreciation
1.65
Lease payments
0.65
Payment of gratuity
1.60
Borrowing cost capitalised
2.30
6.20
Taxable profit for the year
14.65
Current tax expense @ 35%
5.13
COMPUTATION OF DEFERRED TAX EXPENSE
FOR THE YEAR ENDED DECEMBER 31, 20X6
Carrying
amount
Tax base
Temp
difference
Rs. m
Rs. m
Rs. m
Fixed assets – Owned
16.70
Fixed assets – Leased
1.80
-
1.80
Capital work in progress
2.30
-
2.30
Provision for gratuity (0.7 + 2.4 – 1.6)
(1.50)
-
(1.50)
Obligation against assets subject to finance
lease
(1.20)
-
(1.20)
13.85
Total
2.85
4.25
Deferred tax expense @ 35%
1.49
Rs.in million
Deferred tax liability (Opening)
0.55
Deferred tax expense for the year (balancing figure)
0.94
Deferred tax liability as at December 31, 20X6 (Rs. 4.25 million x 35%)
1.49
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Answers
18.2.
DWAYNE LTD (PART 1)
(a)
Buildings
Revaluation
Plant
Investments
Dividend income
Loan
Defined Benefits
liability
Carrying
value
45,500
14,500
60,000
Tax
base
17,500

17,500
Temporary
difference
68,000
72,000
150
20,500
1,000
26,000
65,000
150
21,000

42,000
7,000
500
(1,000)
To OCI
14,500
42,500
(1,000)
91,000
@ 28%
25,480
(b)
Balance B/F
Due to change in rate (13,500 × 2/30)
13,500 x 28/30
To OCI (28% x 13,500)
To statement of profit or loss (as a balancing figure)
13,500
@28%
3,780
Deferred taxation
liability
Rs. 000
13,500
(900)
12,600
3,780
9,100
25,480
(c) Journal
Debit
Deferred tax liability
Movement due to rate change:
OCI ((24,000 × 30%) × 2/30)
P&L (balancing figure)
Movement due temporary differences arising
during 20X3
OCI
P&L
18.3.
Credit
11,980
480
420
3,780
9,100
DWAYNE LTD (PART 2)
(a)
DWAYNE
LARRY
Buildings
Plant
Inventory
Retirement
benefit
Rs. 000
25,480
FV
600
56
152
(100)
Tax base
300
25
144

300
31
8
(100)
239
@28%
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67
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Deferred
taxation
liability
(b)
Balance B/F
Due to change in rate (13,500 × 2/30)
Rs. 000
13,500
(900)
13,500 x 28/30
To OCI (28% x 13,500)
To statement of profit or loss (as a balancing figure)
Due to introduction of a new subsidiary
12,600
3,780
9,100
67
25,547
(d)
Goodwill
Rs. 000
750
Cost
Less share of net assets
80% x (778 – 67)
(569)
Goodwill arising
18.4.
181
COHORT
Note for presentation to partner
Subject: Deferred Taxation
The calculation and presentation of deferred tax is considered by IAS 12 Income taxes. A
company is required to provide deferred tax on all material temporary differences using the full
provision method. Temporary differences arise because there is a difference in timing between
transactions being reflected in the financial statements and the item being taxed.
In light of the recent acquisitions of Legion and Air, deferred tax must be considered for the group
accounts. Additional tax issues arise at the group level that will not have been reflected in the
individual entity’s accounts and these points are outlined below.
Once the temporary differences have been identified, deferred tax must be provided at the tax
rate expected to be effective at the date when the tax is settled. Given this rate is not known
when the differences arise, a provision is made using the rates enacted at that time and the
estimate is then confirmed as tax changes arise.
Air
(a)
The acquisition of air mid-year gives rise to a number of issues:
(1)
Intangible asset
There is some concern that the acquisition of the database of key customers may
not be allowed for tax purposes but it has nevertheless been included in the tax
calculation on the assumption that a deduction will be allowed by the tax authorities.
If this deduction is not allowed, then an additional tax payment will need to be made
to the authorities, hence it would be prudent to recognise a liability for this amount
(probably classified as current taxation, rather than deferred taxation).
(2)
Inter-company sales
When goods are sold between group members, the profits made are seen as
unrealised in the group accounts until the items are sold outside of the group.
However, the tax authorities tax the individual entities, not the group, and so the
profit will be subject to tax at the time of the inter-company sale. The unrealised
profit represents the temporary difference on which deferred tax must be provided.
The goods were sold at a margin of 33⅓%. Goods sold for Rs. 1.8m remain in
inventory at the year end, and hence the unrealised profit, and therefore temporary
difference, is Rs.0.6m.
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(3)
Unremitted profits
Un-remitted earnings represent a temporary difference in the group accounts. This
is because the tax base is the cost of the investment, yet in the consolidated
accounts, this cost is uplifted by the post-acquisition un-remitted profits. IAS 12
requires a provision to be made on this timing difference unless the parent controls
the timing of the reversal and it is probable that the difference will not reverse for the
foreseeable future. The payment of dividends is under the control of Cohort, but we
understand that the intention is to realise these un-remitted earnings through future
dividends and hence a provision must be made.
(b)
Legion
The acquisition of Legion at the start of the year brings further deferred tax issues in the
group accounts as outlined below.
(1)
Fair value through the profit or loss investments
The fair value adjustment has been reflected in the financial statements, yet the gain
is not taxed until the investments are sold. Hence the fair value adjustment of Rs.
4m gives rise to a temporary difference upon which deferred tax must be provided.
As the gain has been taken to profit or loss rather than other comprehensive income
or reserves, the deferred tax must also be expensed to profit or loss.
(2)
General allowance
The allowance against the loan portfolio has reduced the carrying value of the loans
but the tax relief is not available until the loan is written off, and hence a temporary
difference is created on the provision. As the tax relief will reduce future tax charges,
the temporary difference of Rs. 2m gives rise to a deferred tax asset. The temporary
difference is accounted for even though there is no expectation that the difference
will reverse in the immediate future. However, a deferred tax asset can only be
reflected to the extent that it is probable that there will be future taxable profits
against which the temporary difference can be relieved.
(3)
Unrelieved tax losses
When Legion was acquired, it had unused tax losses brought forward which could,
in principle, give rise to a deferred tax asset. However, it can only be recognised to
the extent that it is believed that the loss can be recovered. Given your belief that
there will not be sufficient future profits, the deferred tax can only be partially
recognised. If the fortunes of Legion change in the future, the deferred tax asset
should then be recognised, leading to a compensating amendment to goodwill.
18.5.
MODEL TOWN GROUP
Rs.000
Property, plant and equipment
Goodwill 6,000
Other intangible assets
Financial assets (cost)
10,000
2,400
7,600
0
9,000
5,000
1,500
6,000
5,000
9,000
──────
Total non-current assets
1,500
30,000
──────
Trade receivables
Other receivables
Cash and cash equivalents
7,000
4,600
6,700
──────
Total current assets
7,500
5,000
6,700
──────
(500)
(400)
–
18,300
──────
Total assets
© Emile Woolf International
Adjustment to
financial
Tax Temporary
statements
base difference
Rs.000
Rs.000
Rs.000
48,300
──────
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Rs.000
10,000
3,600
4,000
3,070
5,000
Long term borrowings
Deferred tax liability
Employee benefits
Current tax liability
Trade and other payables
──────
Total liabilities
──────
25,670
13,600
──────
Share capital
Other reserves
9,000
4,500
Retained earnings
──────
–
1,500
400
9,130
──────
Total equity
22,630
──────
Rs.000
4,650
(570)
Deferred tax liability 15,500 @ 30%
Deferred tax asset (1,900) @ 30%
──────
Net deferred tax liability 13,600 @ 30%
Less existing liability
Adjustment to deferred tax
18.6.
Adjustment to
financial
Tax Temporary
statements
base difference
Rs.000
Rs.000
Rs.000
(400)
10,000
400
3,600
–
5,000
1,000
3,070
–
4,000
(1,000)
4,080
(3,600)
──────
480
──────
(i)
The financial assets should be valued at fair value with the increase going to OCI (Rs. 1.5
million).
(ii)
The bond should be split into its equity and liability elements as per IAS 32.
(iii)
As the development costs have been allowed for tax already, it will have a tax base of
zero. Goodwill is measured as a residual and, therefore, the impact is not measured under
IAS 12.
(iv)
The accrual for compensation will not be allowed until a later period and, therefore, will
reduce the tax base relating to trade and other payables.
ELEPHANT LIMITED
Notes to the financial statement
For the year ended 31 December 20X7
Taxation
Rs. in million
Current tax (W-1)
22.12
Deferred tax
8.45
30.57
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Reconciliation between tax expense and
accounting profit
Rs. in million
Accounting profit
Alternate
103
Tax at applicable rate / applicable tax rate
Donations not allowable (12 × 30%)
30.90
30.00%
3.60
3.50%
Exempt grant (10 × 30%)
(3.00)
(2.91%)
Low rate on dividend (4 × 20%)
(0.80)
(0.78%)
Share scheme expense not allowed
[4.5 – 3.25{(150-20)×5,000×10}÷2] × 30%
0.37
Effect of decrease in tax rate on opening deferred
tax liability [(3.5/0.35) × (0.35 – 0.3)]
(0.50)
(0.49%)
Tax expense / Average effective tax rate
30.57
29.68%
0.36%
Movement in deferred tax liability/asset
Recognised in
Closing
Opening
Equity
OCI
P&L
(Bal.)
---------------------------- Rupees in million ---------------------------Arising in respect of:
PPE
33.25
18.00
(10.75)
(60X30%)
Unused tax losses
Unpaid expense
40.50
(95-20+60) x 30%
(29.75)
29.75
-
-
(9.00)
(9.00)
(30 x 30%)
Share scheme
-
(0.98)
(0.98)
[(150-20) x 5,000 x 10]
/ 2 x 30%
TFCs
-
2.73
(0.57)
[9.11(150140.89) x
30%]
3.50
© Emile Woolf International
2.73
283
2.16
[150-(140.89+1.91)] x
30% OR (9.11-1.91) x
30%
18.00
8.45
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Advanced accounting and financial reporting
W-1: Computation of current tax
Rs. in million
Accounting profit
103.00
Donations not allowable
12.00
Unpaid expenses allowable upon payment
30.00
Exempt government grant
(10.00)
Dividend income taxable at lower rate
(4.00)
Excess accounting depreciation
20.00
Shares scheme allowable on exercise (180 × 5,000 × 10) / 2
4.50
Finance cost on TFC (140.89 (W-2) × 12%)
16.91
Interest payment (150×10%)
(15.00)
Taxable income
157.41
Unused tax losses
(85.00)
72.41
Tax @ 30%
21.72
Tax @ 10% on dividend
0.40
Current tax
22.12
W-2: Computation of liability component
PV of interest amount
PV of principal
Rs. in million
(15 × 3.0373)
45.56
(150 × 0.6355)
95.33
Liability component
18.7.
140.89
ARABIAN LIMITED
(a) Notes to the financial statements
For the year ended 31 December 20X8
1. Taxation
Rs. in million
Current tax
W-1
95.60
Deferred tax
Note 2
(11.75)
83.85
1.1 Reconciliation between tax expense and accounting profit
Rs. in million
Accounting profit
455.00
Tax at applicable rate / applicable tax rate
122.85
Previous unrecognized deferred tax on minimum tax
(88–55)
(33.00)
Effect of decrease in tax rate on opening deferred tax liability
[(288.40–120.40)/28×1]
(6.00)
Tax expense / Average effective tax rate
83.85
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2. Movement in deferred tax liability/(asset)
Opening
balance
Recognised in
Equity
OCI
P&L (Bal.)
Closing
balance
-------------------------------- Rs. in million -------------------------------Arising in respect of:
Property, plant &
equipment
288.40
64.80
(2,500-1,470)×28%
Minimum tax
Share scheme
240×27%
(55.00)
-
(87.25)
(1.08)
(2,635–1,650)×27%
55.00
-
(5.40)
(6.48)
(4×27%)
Retirement benefit
Liability added back
265.95
(72/3)×27%
(120.40)
(10.80)
430×28%
40×27%
-
35.35
(95.85)
355×27%
(9.45)
(9.45)
35×27%
Investment
-
113
(1.08)
6.21
6.21
23×27%
23×27%
60.21
(11.75)
160.38
W-1: Current tax
Rs. in million
Accounting profit
455.0
Accounting depreciation
475.0
Tax depreciation
(280.0)
Excess disposal
230–140
Shares scheme allowable on exercise
90.0
60×1/3
20.0
Liability added back
35.0
Retirement benefit expense
145.0
Retirement benefit paid
(260.0)
Taxable income
680.0
Tax @ 27%
A
183.6
Minimum tax @ 1% of 5,300
B
53.0
Higher of A and B
183.6
Adjustable minimum tax
(88.0)
Current tax
95.6
(b) Arabian Limited
Statement of comprehensive income
For the year ended 31 December 20X8
Rs. in million
Profit before tax
455.00
Taxation
Note 1
Profit after tax
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(83.85)
371.15
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Other comprehensive income
Rs. in million
Items that will not be reclassified to profit or loss:
Change in fair value of equity instruments
23.00
Gain on property, revaluation
240.00
Re-measurement of retirement
(40.00)
Income tax relating to these items
Items that may be reclassified to profit or loss
Other comprehensive income for the year- net of tax
Total comprehensive income
© Emile Woolf International
Note 2
(60.21)
-
162.79
533.94
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CHAPTER 19 - PRESENTATION OF FINANCIAL STATEMENTS (IAS 34, IAS 24)
19.1.
FAZAL LIMITED
The related parties comprise a subsidiary, an associated undertaking/an entity having significant
influence, director and key management personnel.
Aggregate transactions with related parties are as follows:
Subsidiary
Associate
Entity
having
significant
influence
Rupees
Rupees
Rupees
Director
Key
Manageme
nt
Personnel
Rupees
Transactions
Sales
Sales discount
Sales return
500,000,000
25,000,000
5,500,000
Purchase of raw
material
5,000,000
Purchase of equipment
3,000,000
Purchase of machinery
14,000,000
Balances
Advances
At beginning of the
year
1,400,000
Repaid during the year
300,000
At the end of the year
19.2.
1,100,000
(i)
Sales discount represents a special discount which is not usually allowed to other customers.
(ii)
All transactions with related parties have been carried out on commercial terms and
conditions.
BABER LIMITED
(i)
AK Associates will not be treated as related party merely on the ground that both entities
have a director in common.
However, if it can be proved that an entity has some influence on other entity; they will be
treated as related parties.
(ii)
Provider of finance is not necessarily a related party. However, SS Bank has power to
appoint its nominee director in the Board and therefore enjoys significant influence; it will be
treated as related party.
(iii)
Mr. Zee will not be treated as related party unless it can be proved that he has significant
influence over the CEO. Further, IAS 24 does not explicitly include ‘Brother’ in the definition
of close family member of an individual.
(iv)
A distributor with whom an entity transacts a significant volume of business will not be treated
as related party, merely by virtue of the resulting economic dependence.
(v)
Since Mr. Tee is the key management personnel of the company, he will be treated as related
party.
(vi)
A post-employment benefit plan for the benefits of the employee is treated as related party.
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19.3.
(vii)
A supplier with whom an entity transacts a significant volume of business cannot be termed
a related party, merely by virtue of the resulting economic dependence.
(viii)
Ms. Vee will be treated as related party as she is a close family member of CEO, and hence
in a position to influence her husband.
GOLDEN LIMITED
Notes to the Financial Statements
For the year ended December 31, 20X1
Platinum Limited is the parent company which holds majority shares of the company.
Related party transactions
The transaction with related parties are carried out in the ordinary course of business at commercial
rates except stated otherwise.
Parent
Company
Associated
Undertakings
Key
Management
Personnel
Major
Shareholders
Rupees in '000
Transactions:
Sales
18,000
Sales discount
1,500
Sale of property
10,000
Reimbursement of expenses on
sale of property
500
Interest free loans granted
2,000
Short term borrowings acquired
25,000
Interest on short term borrowings
1,500
Balances:
Accounts receivable
6,500
Loans to staff
5,000
1,800
Loans payable
25,000
Interest payable on the loan at
12%
1,500
20.1
Sales to related parties have been made at 20% mark-up as against GL's policy to sell at a
markup of 30%.
20.2
Administrative services are provided by the parent company free of cost as per the
agreement. Market value of these services is Rs. 350,000.
20.3
In respect of sale of property, a buyer is required to bear all costs incurred on transfer. But
in this case the company has reimbursed the costs to SL
20.4
The interest free loan has been granted to the executive director as per the terms of
employment.
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19.4.
METAL LIMITED
IN THE BOOKS OF METAL LIMITED
Transactions with Related Parties
Related parties comprise of the company’s subsidiaries. Transactions with related parties are as
follows:
20X3
20X2
Rupees
Subsidiaries
Sale of machine (at carrying amount plus 20%)
Management fees income (Note 23.1)
-
19,200,000
12,000,000
Management fee receivable
-
1,000,000
Other receivables - Sale of machine
-
19,200,000
No management fee was charged during the year ended 30 June 20X2. Except for this, all
transactions have been carried out on arm’s length basis, as approved by the board of directors
of the company.
IN THE BOOKS OF COPPER LIMITED
Transactions with Related Parties
Related parties comprise of Metal Limited (parent company) and its subsidiaries. Transaction
with related parties can be summarized as follows:
20X3
20X2
Rupees
Parent Company
Purchase of machine
-
Management fees (Note 23.1)
Management fee payable
19,200,000
6,000,000
-
500,000
-
Other payables - Sale of machine
23.1
19,200,000
No management fee was charged for the year ended 30 June 20X2. Except for this, all
transactions have been carried out on arm’s length basis, as approved by the board of
directors of the company.
IN THE BOOKS OF ZINC LIMITED
23 – Transactions with Related Parties
Related parties comprise of Metal Limited (parent company) and its subsidiaries. Transaction
with related parties can be summarized as follows:
20X3
20X2
Rupees
Parent Company
Contract for factory extension project (Note 23.1)
Management fees (Note 23.2)
Management fee payable
23.1
© Emile Woolf International
15,000,000
-
6,000,000
-
500,000
-
The contract has been awarded to Iron Builders and Developers in which one of the
directors of the parent company is a partner.
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23.2
No management fee was charged for the year ended 30 June 20X2. Except for this, all
transactions have been carried out on arm’s length basis, as approved by the board of
directors of the company.
IN THE BOOKS OF STEEL LIMITED
Related parties comprise of Metal Limited (parent company) and its subsidiaries. However, there
was no related party transaction during the year.
19.5.
ENGINA
Report to:
The Board of Directors of Engina
From:
XXXXXXXX
Date:
Subject:
Related party transactions
Related party transactions
This report addresses the disclosure requirements of IAS 24 Related Party Disclosures with regard to
Engina. IAS 24 requires that all entities, listed or otherwise, provide disclosure of such transactions as
they may affect the assessments made by users of an entity’s operations, risks and opportunities.
It is understood that Engina is reluctant to disclose related party transactions because they are
believed to be both politically and culturally sensitive, however the following advice must be
followed in order to secure a listing/stock exchange registration.
IAS 24: Scope and purpose
IAS 24 does not provide any exclusion from its scope, and so disclosure must be made. Related
party transactions are a normal feature of business, but an entity’s ability to succeed in business
is often affected by the strength of its relationship with other entities and individuals. The results
of the entity may be affected if these relationships were to be terminated. For example, the ability
of an entity to trade in a particular country may only be possible because of the presence of its
subsidiary in that local market. Similarly, prices and terms of trade may be preferential because
of the strength of the relationship. Therefore, IAS 24 requires knowledge of these transactions to
be provided to the reader of the financial statements.
The results of an entity may be affected even if the related party transactions do not occur. A
parent may cease trading with a business partner upon acquisition of a subsidiary that can
supply similar products.
Disclosure must be given irrespective of whether the transactions took place at an arm’s length
value, as such transactions may still be lost if the relationship is terminated. Hence the
knowledge of such transactions provides valuable information to investors and regulators.
Disclosure requirements
IAS 24 requires that, at a minimum, the following disclosures must be given:

The amount of the transaction

The amount of any outstanding balance and the terms, conditions and guarantees
attached

Allowance for any irrecoverable debts or amounts written off in the period

Disclosure that transactions were at an arm’s length value can only be given if this
information can be substantiated.
Disclosures relevant to Engina
The following outlines the related party disclosure requirements for the three transactions you
have specifically requested comment on. It is your responsibility to bring any further related party
transactions to our attention in order that they can also be incorporated into your financial
statement disclosures.
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(a)
Sale of goods to directors
The sale of goods and a company car to Mr Satay both constitute related party transactions,
due to Mr Satay’s position as a director of Engina. IAS 24 requires disclosure of all related
party transactions with key management personnel. However, accounting standards only
apply to material transactions. An item is considered material where knowledge of that
transaction might influence the decisions of a user of the financial statements. Materiality is
not just a matter of size, as small transactions with a director may still be of relevance to an
investor if the transaction is material to the director, despite not being material to the entity.
In the situation described, the transactions amount to Rs. 600,000 of sales and the sale of
a company car for Rs. 45,000 (market value Rs. 80,000). In terms of value these transactions
appear not to be material to Engina and neither do they appear to be material in value to Mr
Satay. However, given the sensitive nature of transactions with directors, and especially
senior directors like Mr Satay, the transactions should be disclosed in the financial
statements in accordance with good corporate governance practice.
Significant contracts with directors, such as these with Mr Satay, may also require disclosure
by the local Stock Exchange.
(b)
Hotel property
The sale of the hotel to the brother of Mr Soy, constitutes a related party transaction because
of Mr Soy’s status as Managing Director. The property seems to have been sold at below
market price and IAS 24 requires disclosure of any information surrounding a transaction
which will allow the reader to understand its impact on the financial statements.
The hotel had a carrying value of Rs. 5m, but given the fall in market values it should have
been written down to its recoverable amount in accordance with IAS 36 Impairment.
Recoverable amount is measured at the higher of value in use (Rs. 3.6m) and fair value
minus costs of sale (Rs. 4.3 - 0.2m). Hence the property should have been recorded in the
statement of financial position at Rs. 4.1m.
As the property was sold at Rs. 100,000 less than this impaired value, disclosure of this fact
should be made, together with any other information relevant to the reader, such as the
reason for the sale in light of the expected decline in prices in the future.
(c)
Mr Satay
Mr Satay has investments in 100% of the equity of Car and 80% of the equity of Wheel. In
turn, Wheel owns 100% of Engina. Engina and Wheel are related because of their parentsubsidiary relationship. In addition, because all three entities are under the common control
of Mr Satay, IAS 24 also considers Engina and Car to be related. Therefore, the transactions
between Engina and both Wheel and Car are related party transactions.
The transactions will need to be disclosed in the individual financial statements of all three
entities. In the group accounts, all intra-group transactions are cancelled on consolidation,
and so disclosure need not be made at this level.
Further disclosure requirements of director’s interests in the equity of Engina may be
necessary under local Companies Acts requirements and Stock Exchange rules.
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CHAPTER 20 - IAS 33: EARNINGS PER SHARE
20.1.
AIRCON LTD
(a)
Earnings Per Share
=
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
𝑁𝑜.𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑
20X6
=
20X5
=
1,854
=
Rs. 1.01
1,818
1,584 6.06
x
= Rs. 1.69
900
6.30
Rs.
Workings
1.
Calculation of theoretical ex-rights price
1 share at Rs. 6.30 each
2 rights issue for every 1 at Rs. 5.94
11.88
3 shares for
18.18
Price per share =
2.
6.30
18.18
3
=
Rs. 6.06
Weighted average number of shares
6.30
1 April – 30 Sept. 20X5 = 900m x 6/12 x
6.06
1 Oct. – 31 March 20X6 = 2,700m x 6/12
(b)
= 467.8 m
= 1,350 m
1,818 m
Report
To:
Mr Hamad
From:
Management Accountant
Date:
15 April 20X6
Subject: Evaluating the changes in EPS of Aircon Ltd
The key factors which has led to changes in the EPS of Aircon Ltd. are as follows:
Revenue and profitability
Revenue increased by Rs. 2,700 million (18%) since last year, but the gross profit and net
profit ratios have not increased proportionately largely because of cost of sales rose to
Rs. 11.3 m (20X5: Rs. 9.2 m), therefore increase of 24%. Hence, the gross profit
percentage fell from 40% to 37% in 20X6, while the net profit percentage remained
constant at 10%.
Factors responsible for the decline might be due to the inability of the entity to maintain
good profit margin coupled with the failure to also maintain good control over operating
expenses.
The more funds realised from the rights issue did not lead to any significant increase in
return on capital employed which fell from 43% (2,880/6,606) in 20X5 to 25%
(3,240/12,780) in 20X6.
Capital employed: raising over Rs. 5,760 million of new finance was largely used to
acquire intangible assets. It is hoped that this asset will start generating substantial returns
in the near future. EPS has therefore fallen from Rs. 1.69 in 20X5 to Rs. 1.01 in 20X6.
Signed
Management Accountant
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Answers
APPENDIX TO THE REPORT
The ratios that are relevant to discussion and evaluation of changes in EPS of Aircon Ltd
are those that relate to profitability and return on capital employed.
The effect of the rights issue should also be considered in the discussion in relation to how
the funds raised through the shares were employed.
TABLE OF RATIOS
(i)
Change in revenue
=
18,000  15,300
x 100 = 18% Increase
18,000
20X6
20X5
(ii)
Costs of sales/revenue
11,340
= 63%
18,000
6,120
= 40%
15,300
(iii)
Gross profit %
6,600
= 37%
18,000
6,120
= 40%
15,300
(iv)
Net profit %
1,854
= 10%
18,000
= 10%
(v)
Operating expenses %
3,420
= 19%
18,000
3,420
= 22%
15,300
(vi)
Interest payable/sales
540
= 3%
18,000
576
= 4%
15,300
(vii)
Taxation/sales
846
= 5%
18,000
720
= 5%
15,300
(viii)
Capital employed
3,240
=25%
9,180  3,600
2,880
= 43%
3,006  3,600
(ix)
Assets/turnover
18,000
= 1.41
12,780
15,300
= 2.32
6,606
Relevance of EPS to shareholders
(i)
The EPS is used to compute the price earning (P/E) ratio, a major market indicator
to determine how successful a company has been operating.
(ii)
The price earning figure is a multiple of the EPS, where the multiple represents the
number of years’ earnings required to recoup the price paid for the share.
(iii)
Rising trend in EPS is a more accurate performance indicator than rising trend in
profit after tax. The investor should consider the future economic conditions of an
entity with some other ratios such as dividend cover and ROCE.
(iv)
EPS is a measure of performance from the existing and potential investors’
perspective.
(v)
EPS show the amount available to each ordinary shareholder thereby indicating the
potential returns on individual investment.
(vi)
EPS is used to compare the activities of two entities in the same industry.
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Advanced accounting and financial reporting
20.2.
CACHET LTD
BASIC
EPS
i.
DILUTED
EPS
No change in share capital
PAT - Pref Div
=
No. of shares
×
69,000 - 1,380
20,700
100
= 3.27
─────
ii.
N/A
────
Bonus issue on 30 Sept. 20X6:
No. of shares before bonus issue
20,700
Bonus (1 for 4)
5,175
─────
25,875
─────
69,000 - 1,380
25,875
No. of shares after bonus issue
=
PAT - Pref Div
No. of shares
× 100
= 2.61
─────
iii.
N/A
────
Rights issue on 1 Oct. 20X6
Before rights issue
5 shares
1.80
20,700
9.00
37,260
Rights issue (1 for 5)
1 share
After rights issue
6 shares
1.20
───
3.00
───
4,140
─────
24,840
─────
1.70
────
1.20
────
10.20
────
4,968
─────
42,228
─────
1.70
─────
Theoretical ex-right price (Rs. 10.20/6)
Bonus element of issue increases shares to
20,000 
Full price element of issue increases shares to
20,700  6/5 = 24,840
1.8/
1.7
= 21,176
Weighted average number of shares in issue
21,176  9/12
15,882
24,840  3/12
6,210
22,092
EPS
=
20.3.
PAT - Pref Div
×
No. of shares
69,000 - 1,380
= 3.06/share
22,092
100
MARY
Rs.
2 existing shares have a cum rights value of (2  Rs. 4)
1 new share is issued for
8
1
––
3 new shares have a theoretical value of
9
––
Theoretical ex-rights prices = Rs. 9/3 = Rs. 3
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Answers
Number
of shares
Time
factor
Bonus
fraction
Brought
forward
5,000,000
1/12
6/5
Bonus issue
(1 for 5)
1,000,000
Date
1 January
1 February
Rights
fraction
Weighted
average
number of
shares
4/3
666,667
4/3
1,333,333
–––––––––
6,000,000
1 April
Rights issue
(1 for 2)
2/12
3,000,000
–––––––––
9,000,000
1 June
2/12
1,500,000
7/12
5,716,667
Issue at full
market price
800,000
–––––––––
31 December
Carried
forward
9,800,000
––––––––––
9,216,667
––––––––––
Earnings for Year 5 are (3,362,000 – 600,500 – 800,000)
Rs. 1,961,500
EPS Year 5 = 1,961,500/9,216,667 = Rs.0.21 or 21 paisa
EPS Year 4 (adjusted) = Rs.0.32 × 3/4 × 5/6 = Rs.0.20 or 20 paisa
20.4.
MANDY
Adjusted total earnings
Rs.
Reported earnings
Rs.
2,579,000
1,979,000
70,000
52,500
(21,000)
(15,750)
49,000
36,750
2,628,000
2,015,750
Add back interest saved
(1,000,000  7%) (1,000,000  7%  9/12)
Minus tax at 30%
Adjusted total earnings
Number of shares
Year 4
1 January
Number of
shares
Brought forward
5,000,000
Dilutions:
Share options (W)
200,000
Convertible shares (1,000,000 ÷ 100  30)
31 December
© Emile Woolf International
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––––––––––
5,500,000
––––––––––
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Advanced accounting and financial reporting
Year 3
Number of
shares
Weighted
average
number of
shares
Time
factor
Date
1 January
Brought forward
Share options: dilution (W)
5,000,000
125,000
1,281,250
Convertibles: dilution
5,125,000
300,000
3/12
1 April
5,425,000
9/12
4,068,750
5,350,000
Diluted EPS
Year 4 = 2,628,000/5,500,000 = Rs.0.48 or 48 paisa
Year 3 = 2,015,750/5,350,000 = Rs.0.38 or 38 paisa
Working
Cash receivable on exercise of all the options = 500,000 × Rs. 3 = Rs. 1,500,000
Year 4
Number of shares this would buy at full market price in Year 4 = Rs. 1,500,000/5 = 300,000 shares
Shares
Options
Minus number of shares at fair value
500,000
(300,000)
––––––––
Net dilution
200,000
––––––––
Year 3
Number of shares - buy at full market price in Year 3 = Rs. 1,500,000/4 = 375,000 shares
Shares
Options
Minus number of shares at fair value
500,000
(375,000)
––––––––
Net dilution
20.5.
125,000
––––––––
AAZ LIMITED
a) Step 1: Ranking in order of dilution
Increase
in
earnings
Increase in no.
of ordinary
shares
Rs.
Earnings per
incremental
shares
Rank
Rs.
Convertible Debentures
Increase in earnings
(Rs. 7.5m x 70%)
5,250,000
Increase in shares
1.75
3
0.61
2
3,000,000
Convertible Preference Shares
Increase in earnings
2,450,000
Increase in shares
© Emile Woolf International
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4,000,000
The Institute of Chartered Accountants of Pakistan
Answers
Increase in
earnings
Increase in no.
of ordinary
shares
Earnings per
incremental
shares
Rank
-
1
Options
Increase in earnings
-
Increase in shares
(1.5m x 1.1 / 11)
150,000
Step 2: Testing for dilutive effect
Profit from
operations
attributable to
ordinary
shareholders
Ordinary
Shares
Rs.
Basic Earnings per share
-
85,220,000
85,370,000
2,450,000
4,000,000
127,830,000
89,370,000
5,250,000
3,000,000
133,080,000
92,370,000
Convertible debentures (Rank 3)
1.471
-
1.469
Dilutive
1.430
Dilutive
1.44
AntiDilutive
150,000
125,380,000
Convertible preference shares
(Rank 2)
Effect
Rs.
*125,380,000
Options (Rank 1)
EPS
*Rs. 127,830,000 – Rs. 2,450,000 = Rs. 125,380,000
b)
Notes to the financial statements for the year ended December 31, 20X6
EARNINGS PER SHARE
20X6
Basic alternative to ordinary share holders
Profit (Rupees)
125,383,000
Weighted average number of ordinary shares outstanding during the
year
85,220,000
Earnings per share - basic (Rupees)
1.47
Diluted
Profit after taxation (Rupees)
127,833,000
Weighted average number of ordinary shares, options and convertible
preference shares outstanding during the year
Earnings per share - diluted (Rupees)
89,370,000
1.430
Because diluted earnings per share is increased when taking the convertible preference
shares into account (from Rs. 1.430 to Rs. 1.44), the convertible debentures are antidilutive and are ignored in the calculation of diluted earnings per share.
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20.6.
ABC LIMITED
Notes to consolidated financial statements for the year ended March 31, 20X6
Rs. in '000
Earnings per share basic
Profit after tax and non-controlling interest (15,000-2,000)
13,000
Dividend paid during the year to ordinary shareholders
(Rs. 4,000)
-
10% Cumulative preference dividend for 20X5 (Rs. 2,000)
-
10% Cumulative preference dividend for 20X6
(2,000)
Dividend declared on 12% non-cumulative preference shares for 20X6
(2,400)
8,600
Profit available for distribution to ordinary share holders
Diluted earnings per share
Profit available for distribution to ordinary share holders
8,600
Effect of dividend declared on 12% non-cumulative preference shares
convertible into ordinary shares on or before December 31, 20X7
2,400
11,000
Weighted average number of ordinary shares
W1
13,146
12% Non-cumulative preference shares convertible to ordinary shares
on or before December 31, 20X7
W3
1,771
Weighted average number of ordinary shares - diluted
14,917
Rs.
Diluted earnings per share
0.74
W1: Weighted average ordinary shares outstanding for "Basic EPS"
Date
1 April 20X5 to 30 June 20X5
Number of
shares
10,000,000
1 July - Conversion of
cumulative prefs at a premium of
Rs. 2 per share (500,000 
10/12)
1 July to 30 September
1 October
Rights issue
30 September to 31 December
1 January
Bonus issue (20%)
1 January to 31 March
Time
factor
Bonus
fractions (W3)
Weighted
average
number of
shares
× 3/12
6/51.00833
3,024,990
× 3/12
6/51.00833
3,151,031
× 3/12
6/5
3,485,000
416,667
10,416,667
1,200,000
11,616,667
2,323,333
13,940,000
× 3/12
3,485,000
Weighted average
13,146,021
W2: Calculation of bonus adjustment factor
No. of
shares
Bonus element with right issue
Outstanding shares before the exercise of rights at fair value
Rights issued at a premium of Rs. 1.5
© Emile Woolf International
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10,417
1,200
11,617
@ Rs.
Rs. in '000
12.50
11.50
130,213
13,800
144,013
The Institute of Chartered Accountants of Pakistan
Answers
Rs.
Actual cum rights price per share
12.5000
Theoretical ex-right value per share (144,013/11,617) ÷
12.3967
Adjusting factor
1.00833
Bonus issued on January 01, 20X6 (20%)
Adjusting factor (6 shares for 5 shares)
1.2
W3: Diluted EPS
Number of
shares
Basic EPS
Earnings
(Rs.)
13,146,021
8,600,000
EPS (Rs.)
0.65
Dilution:
Non-cumulative prefs in issue for the year (W4)at a
premium of Rs. 2 per share (for the whole year)
2,000,000  10/12  12/12
1,666,667
Add back dividend paid to non-cumulative prefs in
issue at the year-end
2,400,000
Non-cumulative prefs actually converted in the year
(for the part of the year before conversion)
(500,000  10/12)  3/12
i.e. 416,667  3/12
104,167
1,770,834
Adjusted figures
14,916,855
11,000,000
0.74
Diluted EPS: Rs. 11,000,000/14.917 million = Rs.0.74 per share
The non-cumulative preference shares are anti-dilutive
W4: Non-cumulative prefs in issue at the year-end
This can be found from the information about the dividend.
Rs. 2,400,000 is 12% of the nominal value of the shares.
Therefore, the nominal value is Rs. 20,000,000 (Rs. 2,400,000/0.12).
Therefore, the number of shares (at Rs. 10 per share) is 2,000,000
20.7.
ALPHA LIMITED
Alpha Limited
Extracts from consolidated profit and loss account for the year ended 31 December 20X3
Rs. in '000
Profit for the year
W.1 (49,462.16+26,950)
76,412.12
76,412.12-5,390
71,022.12
26,950*20%
5,390
Profit attributable to
• Owners of Alpha Limited
• Non-controlling interest
76,142.12
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Rupees
Earnings per share:
• Basic
W.2
72.10
• Diluted
W.2
53.39
W-1
Profit for the year
AL
ZL
(Rs. in '000)
Profit after tax
60,000.00
25,000.00
Cash dividend received from ZL (net of tax)
• Final dividend for 20X2
• Interim dividend for 20X3
FV gain on ZL's investment
property (40.35)
(35,000*15%*80%)
*90%
(3,780.00)
(35,000*1.16*12%*80%)
*90%
(3,507.84)
[67,000-(59,000+5,000)]
*65%
Cost of defined benefit
gratuity sch. (19.120)
W-2
(8,000-3,000)
*65%
1,950
(3,250.00)
49,462.16
26,950
Basic
/Diluted
earnings
(Rs. in '000)
Basic/
Diluted EPS
(Rs.)
985
71,022
72.10
Convertible 12% bonds (5
shares for 4 bonds)
(30,000/100*5/4),
(30,000*0.12*0.65)
375
2,340
Shares for no
consideration issued under
employees' share option.
(250-150)/250*60*7/12
(IAS 33.45)
14
-
1,374
73,362
Basic / diluted EPS:
Weighted
average
shares in
'000
Weighted average No. of shares:
1-Jan-20X3
1-Jan-20X3
Balance
80,000/100, 800×7/12
800
Bonus issue at 20%
(800*20%), 160×7/12
160
960
1-Aug-20X3
Shares issued under
employees' share option
scheme
(60*5/12)
25
(960+60)×5/12
Basic earnings per share (EPS)
Shares from assumed conversions:
1-Aug-20X3
1-Aug-20X3
Diluted earnings per share (EPS)
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Answers
20.8.
SAJJAD LIMITED
Rs. in million
Profit for the year
150.00
Less: Dividend
Class A Preference shareholders (9÷1.09×2)
16.51
Class B Preference shareholders (300×6%)
18.00
Profit attributable to class B preference shareholders
[90.49(W-1)×3÷(20+3)(W-2)]
11.80
46.31
Profit available for ordinary shareholders
103.69
Earnings per share (103.16÷10)
10.37
W-1 Undistributed earnings
Profit after tax
150.00
Less: Imputed dividend
(16.51)
Dividend to class B preference shares
(18.00)
Dividend to ordinary shareholders
(25.00)
Undistributed earnings
90.49
W-2: Determination of ratio for distribution of undistributed earnings between ordinary and class
B preference shareholders
No. of outstanding
shares (in million)
Ordinary shareholder
Class B preference shareholder
Weight
Product
10
2
20
3
1
3
23
20.9.
TIGER LIMITED
a) Tiger Limited
EPS for quarter ended 31 December 20X7
Basic EPS
Warrant
Bonds
Numerator
Denominator
EPS
Rs. in million
Shares in million
Rs. / share
140.00
24.80 (W-1)
5.65
-
-
140.00
24.80
5.65
1.60
0.8(2.4 ×1/3)+0.8(1.2×2/3)
5.03
8.05
(W-3)
Effect
No effect
OR 1.2+0.4(1.2÷3)
148.05
© Emile Woolf International
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5.61
Dilutive
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Rs. per share
Basic EPS
5.65
Diluted EPS
5.61
b) EPS for half year ended 31 December 20X7
Basic EPS
Numerator
Denominator
EPS
Rs. in million
Shares in million
Rs. / share
239.00
23.73 (W-2)
-
0.333
[6-(340÷360×6)]
239.00
24.06
9.93
20.02
2.00
10.01
(W-3)
1.6(2.4 ×4/6)+0.4(1.2×2/6)
Warrant
Bonds
Effect
10.07
Dilutive
OR 1.2+0.8(1.2×4÷6)
259.02
26.067
9.94
Anti-dilutive
Rs. per share
Basic EPS
10.07
Diluted EPS
9.93
W-1: Weighted average shares for quarter ended 31 December 20X7
Date
Shares
1-Oct
(20+4)
24.0
1-Nov
(0.8×3×50%)
1.20
25.2
Period
Total
Alternate
1÷3
8.00
24
2÷3
16.80
24.80
0.8
(1.2×2÷3)
24.80
W-2: Weighted average shares for half year ended 31 December 20X7
Date
Shares
1-Jul
20
1-Aug
4
Period
1÷6
24
1-Nov
3÷6
Total
Alternate
3.33
20.00
12.00
1.20
3.33
(4×5÷6)
0.4
25.20
2÷6
8.40
23.73
(1.2×2÷6)
23.73
W-3: Interest on Bonds for half year (net of tax):
First quarter
Rs. in million
July to Sep [(760×(9%×3/12×70%) ]
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Answers
Second quarter
Oct [(760×(9%×1/12×70%)]
3.99
Nov to Dec [386.20(W-4)×(9%×2/12×70%)
4.06
8.05
20.02
W-4: Carrying value of bonds after conversion
Rs. in million
Initial recognition
760.00
Interest for the year (760×9%)
68.40
Interest paid (800×7%)
(56.00)
772.40
Conversion (772.40×50%)
(386.20)
386.20
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CHAPTER 21 - IAS 36: IMPAIRMENT OF ASSETS
21.1.
CHARLOTTE
Effect on Year 7 profit or loss
Rs.
Impairment loss
Machine 1 (W1)
122,300
Machine 2 (W2)
41,000
163,300
Depreciation charge
Machine 1: (100,000 ÷ 5)
20,000
Gain on disposal
Machine 2: (W2)
10,000
Machine 3: (210,000 - 195,000 (W2))
245,000
255,000
Workings
(1)
Machine 1
Rs.
Cost on 1 January Year 1
420,000
Depreciation to 1 January Year 6
5 years  ((420,000 – 50,000)/10 years))
(185,000)
Carrying amount on 1 January Year 6
235,000
Revalued to:
275,000
Revaluation gain before tax
40,000
In the year to 31 December Year 6 (on 1 January), the asset is revalued upwards by Rs.
40,000. Of this, Rs. 28,000 is taken to the revaluation reserve and Rs. 12,000 (Rs. 40,000
 30%) to deferred tax as a liability.
Dr (Rs.)
Property, plant and equipment
Cr (Rs.)
145,000
Accumulated depreciation
185,000
Net effect on non-current assets
40,000
Revaluation surplus
28,000
Deferred tax liability
12,000
The total useful life of the asset was assessed as 15 years on 1 January Year 6. The asset
has already been owned for 5 years and depreciation in year 6 is based on the remaining
useful life of 10 years.
The company must also recognise incremental depreciation in accordance with section
235 of the Companies’ Act, 20X7. An amount equal to the incremental depreciation net of
deferred taxation must be transferred to retained earnings through the statement of
changes in equity.
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Answers
Dr (Rs.)
Depreciation charge for the year
(275,000/10 years)
Cr (Rs.)
27,500
Accumulated depreciation
27,500
Revaluation surplus
(Rs. 28,000/10 years)
2,800
Retained earnings
2,800
Impairment loss:
Rs.
Carrying amount on 1 January Year 6
275,000
Depreciation to 1 January Year 7 (275,000 ÷ (15 – 5))
(27,500)
Carrying amount at 1 January Year 7
247,500
Recoverable amount
(100,000)
Impairment loss
147,500
In the year to 31 December Year 7, the impairment loss is Rs. 147,500. Of this, Rs. 40,000
reverses the gain in the previous year. The revaluation reserve is reduced by Rs. 25,200
(Rs. 28,000 – Rs. 2,800). The remaining impairment loss of Rs. 122,300 is written off as a
loss in Year 7.
Also in the year to 31 December Year 7 the asset would be depreciated based on the
estimate of its remaining useful life of 5 years giving a charge of Rs. 20,000 (Rs. 100,000/
5 years).
(2)
Machine 2
Rs.
Cost on 1 January Year 1
500,000
Depreciation to 1 January Year 7
6 years  ((500,000 – 60,000)/10 years))
Carrying amount on 1 January Year 7
Fair value minus cost to sell (200,000 – 5,000)
Impairment loss
(264,000)
236,000
(195,000)
41,000
On 31 March Year 7 the machine is sold for Rs. 210,000 giving a gain on sale as follows:
Rs.
Proceeds
210,000
Selling costs (assumed to be as forecast)
(5,000)
205,000
Carrying amount
(195,000)
10,000
(3)
Machine 3
Rs.
1 January Year 1 Cost
600,000
Depreciation to 1 January Year 2
(30,000)
Carrying amount on 1 January Year 2
570,000
Revalued to
800,000
Taken to revaluation reserve/deferred tax
230,000
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Advanced accounting and financial reporting
The revaluation would have been accounted for as follows at 1 January Year 2
Dr (Rs.)
Property, plant and equipment
Cr (Rs.)
200,000
Accumulated depreciation
30,000
Net effect on non-current assets
230,000
Revaluation surplus
161,000
Deferred tax liability
69,000
Depreciation and incremental depreciation would have been recognised in Year 2 to Year
6 inclusive as follows:
Dr (Rs.)
Depreciation charge for the year
(800,000/8 years)
Cr (Rs.)
100,000
Accumulated depreciation
100,000
Revaluation surplus
(Rs. 161,000/8 years)
20,125
Retained earnings
20,125
This would result in balances for machine 3 and the revaluation surplus in respect of
machine 3 as follows:
Carrying amount on1 January Year 2
Depreciation (5 years)
Machine 3
Revaluation
surplus
Rs.
Rs.
800,000
230,000
(500,000)
Incremental depreciation (5 years)
(100,625)
Balance at 1 January Year 7
300,000
Fair value on classification as held for sale
550,000
Costs to sell
129,375
(5,000)
Fair value less costs to sell
545,000
Value at lower of carrying amount and fair value
less costs to sell:
300,000
On 31 March Year 7 the machine is sold for Rs. 550,000 giving a gain on sale as follows:
Rs.
Proceeds
550,000
Selling costs (assumed to be as forecast)
(5,000)
545,000
Carrying amount
(300,000)
245,000
The balance on the revalution reserve is transferred to retained earnings on the disposal of
the asset.
Dr (Rs.)
Rev1aluation surplus
129,375
Retained earnings
© Emile Woolf International
Cr (Rs.)
129,375
306
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Answers
21.2.
ABA LIMITED
Aba Limited statement of profit or loss (extracts) – year to 31 March 20X6
Rs.
Note: workings in brackets are in Rs.000
Depreciation:
head office
Rs.
– 6 months to 1 October 20X5
(1,200/25  6/12)
24,000
– 6 months to 31 March 20X6
(1,350/22.5 (W1)  6/12)
30,000
–––––––
54,000
–––––––
Depreciation: training premises
– 6 months to 1 October 20X6
(900/25  6/12)
18,000
– 6 months to 31 March 20X6
(600/10  6/12)
30,000
––––––––
48,000
––––––––
210,000
––––––––
Impairment loss (W2)
258,000
––––––––
Statement of financial position (extracts) as at 31 March 20X6
Non-current assets
Land and buildings
– head office (700 + 1,350 – 30)
2,020,000
– training premises (350 + 600 – 30)
920,000
––––––––
2,940,000
––––––––
Revaluation reserve
Head office land (700 – 500)
200,000
Building (1,350 – 1,080 (W1))
270,000
Training premises land (350 – 300)
50,000
––––––––
520,000
Transfer to realised profit (270/22.5 (W1)  6/12
re depreciation of buildings)
(6,000)
––––––––
514,000
––––––––
Workings
(W1) The date of the revaluation is two and a half years after acquisition. This means the
remaining life of the head office would be 22.5 years. The carrying value of the head office
building at the date of revaluation is Rs. 1,080,000 i.e. its cost less two and a half years at
Rs. 48,000 per annum (Rs. 1,200,000 – Rs. 120,000).
(W2) Impairment loss: the carrying value of training premises at date of revaluation is Rs. 810,000
i.e. its cost less two and a half years at Rs. 36,000 per annum (Rs. 900,000 – Rs. 90,000).
It is revalued down to Rs. 600,000 giving a loss of Rs. 210,000. As the land and the buildings
are treated as separate assets the gain on the land cannot be used to offset the loss on the
buildings.
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
21.3.
HUSSAIN ASSOCIATES LTD
(a)
Impairment of plant
The plant had a carrying amount of Rs. 240,000 on 1 October 20X5. The accident that
may have caused impairment occurred on 1 April 20X6 and an impairment test would be
done at this date. The depreciation on the plant from 1 October 20X5 to 1 April 20X6 would
be Rs. 40,000 (640,000 x 121/2% x 6/12) giving a carrying amount of Rs. 200,000 at the
date of impairment. An impairment test requires the plant’s carrying amount to be
compared with its recoverable amount. The recoverable amount of the plant is the higher
of its value in use of Rs. 150,000 or its fair value less costs to sell. If Hussain Associates
Ltd trades in the plant it would receive Rs. 180,000 by way of a part exchange, but this is
conditional on buying new plant which Hussain Associates Ltd. is reluctant to do. A more
realistic amount of the fair value of the plant is its current disposal value of only Rs.
20,000. Thus the recoverable amount would be its value in use of Rs. 150,000 giving an
impairment loss of Rs. 50,000 (Rs. 200,000 – Rs. 150,000).
The remaining effect on income would be that a depreciation charge for the last six months
of the year would be required. As the damage has reduced the remaining life to only two
years (from the date of the impairment) the remaining depreciation would be Rs. 37,500
(Rs. 150,000/ 2 years  6/12).Thus extracts from the financial statements for the year
ended 30 September 20X6 would be:
Statement of financial position
Rs.
Non-current assets
Plant (150,000 – 37,500)
112,500
Statement of profit or loss
(b)
Plant depreciation (40,000 + 37,500)
77,500
Plant impairment loss
50,000
Purchase of Sparkle
There are a number of issues relating to the carrying amount of the assets of Sparkle
Limited that have to be considered. It appears the value of the brand is based on the
original purchase of the ‘Sparkle Spring’ brand. The company no longer uses this brand
name; it has been renamed ‘Refresh’. Thus it would appear the purchased brand of
‘Sparkle Spring’ is now worthless. Sparkle Limited cannot transfer the value of the old
brand to the new brand, because this would be the recognition of an internally developed
intangible asset and the brand of ‘Refresh’ does not appear to meet the recognition criteria
in IAS 38. Thus prior to the allocation of the impairment loss the value of the brand should
be written off as it no longer exists.
The inventories are valued at cost and contain Rs. 2 million worth of old bottled water
(Sparkle Spring) that can be sold, but will have to be relabelled at a cost of Rs. 250,000.
However, as the expected selling price of these bottles will be Rs. 3 million (Rs. 2 million 
150%), their net realisable value is Rs. 2,750,000. Thus it is correct to carry them at cost
i.e. they are not impaired. The future expenditure on the plant is a matter for the following
year’s financial statements.
Applying this, the revised carrying amount of the net assets of Sparkle Limited’s cashgenerating unit (CGU) would be Rs. 25 million (Rs. 32 million – Rs. 7 million). The CGU
has a recoverable amount of Rs. 20 million, thus there is an impairment loss of Rs. 5
million. This would be applied first to goodwill (of which there is none) then to the
remaining assets pro rata. However, under IAS 2 the inventories should not be reduced as
their net realisable value is in excess of their cost. This would give revised carrying
amounts at 30 September 20X6 of:
© Emile Woolf International
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Answers
Rs.000
Brand
nil
Land containing spa: 12,000 – [(12,000/20,000)  5,000]
9,000
Purifying and bottling plant:
8,000 – [(8,000/20,000)  5,000]
6,000
Inventories
5,000
20,000
21.4.
IMPS
(a)
Impairment loss
Rs. m
Carrying value
500
Recoverable amount
(385)
Impairment loss
115
Recoverable amount is value in use (Working 1) as this is higher than the fair value less
costs of disposal (Working 2).
Workings
(1)
Value in use:
Forecast cash flows discounted at 12%:
Rs. m
Year 1 (185 × 0.893)
165.2
Year 2 (160 × 0.797)
127.5
Year 3 (130 × 0.712)
92.6
Total
(2)
385.3
The fair value less costs of disposal:
Rs. m
Goodwill
0
Freehold
270
Freehold land and buildings
50
320
(b)
Treatment of impairment loss
IAS 36 requires the impairment loss to be allocated to the various non-current assets in the
following order: firstly, goodwill, secondly, to other assets, either pro-rata or on another
more appropriate basis.
Before
impairment
Impairment
loss (W1)
After
impairment
Rs. m
Rs. m
Rs. m
70
(70)
-
Land and buildings
320
(33)
287
Plant and machinery
110
(12)
98
500
(115)
385
Goodwill
© Emile Woolf International
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Advanced accounting and financial reporting
Because the land and buildings have been re-valued, the impairment is treated as a
revaluation decrease until the carrying amount of the asset reaches its depreciated historical
cost. The revaluation reserve relating to the asset is Rs. 65 million and so is adequate to
cover the full impairment of Rs. 33m. The impairment must be separately disclosed and the
notes to the accounts must specify by class of asset the impairment recognised directly to
equity.
The impairment loss on the goodwill and plant (Rs. 82 million) must be recognised in profit
or loss for the year. The notes to the accounts must specify the line item in which the
impairment loss has been included.
Where the impairment write-down is material, information must also be provided as to the
events and circumstances that led to the loss, the nature of the assets affected, the
segment to which the asset belongs, that recoverable amount was based on value in use
and the discount rate used to calculate this.
Workings
Loss on the various non-current assets
After the impairment loss has been recognised on the goodwill there is still 115 - 70 = 45
loss to be allocated to the other noncurrent assets, on a pro-rata basis.
Loss on land and buildings:
320
x 45  33
320  110
Loss on plant and machinery:
110
x 45  12
320  110
21.5.
GYO MOVERS LIMITED
GYO Movers Ltd.
Extracts from statement of financial position As on 30 June 20X6
Fixed Asset
Rs. in million
Property, plant & equipment (W-1)
1,186.55
W-1: Determination of carrying amount after impairment
Description
Green
Other
Buses assets
Yellow
Orange
Corporate Assets
Other
Other
HO Computer
Buses assets Buses assets Goodwill
Equipment
Building Network
Total
---------------------------------------- Rs. in million ---------------------------------------Carrying amount
225.00
400.00
150.00 350.00
95.00 100.00
10.00
100.00
55.00
45.00 1,530.00
Round 1 : Allocation of impairment determined in (W-2)
-First, allocate the impairment amount to goodwill
- Second, allocate the remaining impairment amount i.e.
Rs. 333.44 (343.44-10) to all other assets proportionately
subject to limiting to FV
fair value
Carrying amount after 1st round of impairment
Round 2 : Allocation of remaining impairment
proportionately 49.12 (343.44 - 10- 284.33)
Carrying value after impairment
© Emile Woolf International
(10.00)
(27.40) *1(104.20)
197.60
(80×2.47)
197.60
197.60
(26.50) *2(91.18)
123.50
(50×2.47)
-
-
*3(26.05)
98.80
(40×2.47)
295.80
123.50 258.82
*4(23.12)
*5(20.22)
272.68
123.50 238.60
310
-
(10.00)
95.00 100.00
95.00 100.00
-
73.95
-
*6(5.78)
-
68.17
(9.00)
-
(284.33)
46.00
60.00
46.00
45.00 1,235.67
46.00
-
(49.12)
45.00 1,186.55
The Institute of Chartered Accountants of Pakistan
Answers
Description
Green
Other
Buses
assets
Yellow
Orange
Corporate Assets
Other
Other
HO Computer
Buses
Buses
Goodwill
Equipment
assets
assets
Building Network
Total
---------------------------------------- Rs. in million ---------------------------------------*1[400÷(225+400+150+350+100+55)]×333.44
*2 [350÷(225+400+150+350+100+55)]×
333.44
*4[295.80÷(295.80+258.82+73.95)]×49.12
*5[258.83÷(295.80+258.83+73.95)]×49.12
[100÷(225+400+150+350+100+55)]× 333.44
[73.95÷(295.80+258.83+73.95)]×49.12
W-2: Determination of impairment amount
Green
Yellow
Orange
Total
……….. Rs. In million ……..
Carrying value of buses
225.0
150.0
95.0
Carrying value of other assets
400.0
350.0
100.0
625.00
500.00
195.0
20
15
10
2
1.5
1
1250
750
195
2,195
Pro-rata allocation of total corporate assets and
goodwill[i.e. 10+ (100 + 55 + 45) = 210] (c)
119.59
71.75
18.66
210
Carrying amount after allocation (A+C)
744.59
571.75
213.66
1,530.00
Less: Recoverable amount (W-3)
522.90
450.00
282.50
Impairment loss
221.69
121.75
-
Carrying value of all each CGU (A)
Useful life (in years)
Weighting based on useful life (B)
Carrying amount after weighting (A×B)
1,320.00
343.44
W-3: Determination of recoverable amount
Green
Yellow
Orange
--------------- Rs. in million --------------Net cash flows
70
60
50
7.47
6.81
5.65
Value in use of each CGU (i)
522.9
408.6
282.5
Fair value less cost to sell (ii)
500.0
450.0
250.0
Recoverable amount [Higher of (i) and (ii)]
522.9
450.0
282.5
Annuity factor at 12%
© Emile Woolf International
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Advanced accounting and financial reporting
21.6.
KHYBER LIMITED
(i) Impairment of CGU under IAS 36:
Description
Carrying Fair value Goodwill Impairment Impairment
Total
less cost to
*1
*2
Round 2 impairment
value
impairment Round 1
sell
------------------ Rs. in million ------------------
Building
22.00
21.70
*0.30
Machinery
13.00
16.00
*-
Equipment
19.00
License
20.00
18.00
*2.00
Investment property
22.00
22.00
*-
Investment property
8.00
Goodwill
3.00
Inventory at NRV
8.00
Carrying value
3.86
3.00
8.00
117.00
Recoverable amount
(100.00)
Impairment required
17.00
Charged to profit or loss
(17-0.30)
16.70
3.00
-
0.30
4.38
8.24
2.00
-
-
1.62
1.84
3.46
-
-
3.00
*-
-
-
6.22
17.00
7.78
*1Allocation
of impairment loss in the ratio of 14 (17-3) ÷ 69(22+19+20+8)
of impairment loss in the ratio of 6.22 (14-7.78) ÷ 27
*Restricted to fair value less cost to sell
*2Allocation
(ii) Impairment of Disposal group under IFRS 5:
Description
Goodwill
impairment
Carrying value
Impairment of
scoped in assets*3
------------------ Rs. in million -----------------Building
22.00
4.98
Machinery
15.00
3.39
Equipment
19.00
4.30
License
20.00
4.52
Investment property
22.00
**_
Investment property
8.00
1.81
Goodwill
3.00
Inventory at NRV
*3
3.00
-
3.00
19.00
8.00
Carrying value
117.00
Fair value less cost to sell
(95.00)
Impairment required
22.00
Charged to profit or loss
22.00
**_
Allocation of impairment loss in the ratio of 19(22-3) ÷ 84(22+15+19+20+8)
** No impairment is allocated due to scope out assets
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Answers
CHAPTER 22 - IAS 40: INVESTMENT PROPERTY
22.1.
VICTORIA
(a)
Treatment in the financial statements for the year ended 31 December Year 8 (IAS 16)
Property 1
This is used by Victoria as its head office and therefore cannot be treated as an investment
property. It will be stated at cost minus accumulated depreciation in the statement of
financial position. The depreciation for the year will be charged in the statement of profit or
loss.
Property 2
This is held for its investment potential and should be treated as an investment property. It
will be carried at fair value, Victoria’s policy of choice for investment properties. It will be
revalued to fair value at each year end and any resultant gain or loss taken to the
statement of profit or loss (Rs. 400,000 gain in Year 8).
Property 3
This is held for its investment potential and should be treated as an investment property.
However, since its fair value cannot be arrived at reliably it will be held at cost minus
accumulated depreciation in the statement of financial position. The depreciation for the
year will be an expense in the statement of profit or loss.
This situation provides the exception to the rule whereby all investment properties must be
held under either the fair value model, or the cost model.
(b)
Analysis of property, plant and equipment for the year ended 31 December Year 8
Other land
and
buildings
(W1)
Investment
property
held
at fair value
Investment
property
held at cost
(W2)
Total
Rs.
Rs.
Rs.
Rs.
Cost/valuation
On 1 January Year 8
1,000,000
Revaluation
On 31 December Year 8
2,300,000
2,000,000
5,300,000
-
400,000
-
400,000
–––––––––
–––––––––
–––––––––
–––––––––
1,000,000
2,700,000
2,000,000
5,700,000
–––––––––
–––––––––
–––––––––
–––––––––
87,500
-
220,000
307,500
Accumulated depreciation
On 1 January Year 8
Charge for the year (W1)
On 31 December Year 8
12,500
-
40,000
52,500
–––––––––
–––––––––
–––––––––
–––––––––
100,000
-
260,000
360,000
–––––––––
–––––––––
–––––––––
–––––––––
Carrying amount
On 31 December Year 7
On 31 December Year 8
© Emile Woolf International
313
912,500
2,300,000
1,780,000
4,992,500
–––––––––
–––––––––
–––––––––
–––––––––
900,000
2,700,000
1,740,000
5,340,000
–––––––––
–––––––––
–––––––––
–––––––––
The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
Tutorial note
In practice, with a more complex property, plant and equipment table the investment
properties would be included within the land and buildings column with the required
disclosures being given separately in a note to the table.
Workings
(1)
Depreciation on Property 1
Brought forward (500,000 ÷ 40  7)
Year 8 (500,000 ÷ 40)
(2)
Depreciation on Property 3
Brought forward (2,000,000 ÷ 50  5.5)
Year 8 (2,000,000 ÷ 50)
© Emile Woolf International
Rs.
87,500
12,500
314
Rs.
220,000
40,000
The Institute of Chartered Accountants of Pakistan
Answers
CHAPTER 24 - FIRST TIME ADOPTION OF IFRS
24.1.
IFRS 1
(a)
An entity shall apply this IFRS if its first IFRS financial statements are for a period
beginning on or after 1 July 2009. Earlier application is permitted. Since, the entity was
preparing its first IFRS compliant financial statements in 2016, therefore, in 31 December
2016, it prepares such IFRS compliant financial statements.
(b)
The procedures which must be followed in order to prepare the Financial
Statements for the year ended 31 December 2016, are as follows:
(i)
Choice of accounting policies to be included as part of notes to the Financial
Statements
(ii)
Preparation of the opening IFRS Statements of Financial Position by applying the
following rules, except in cases where IFRS grants exemptions and /or prohibits
retrospective application:
Recognise all assets and liabilities required by IFRS
Not recognise assets and liabilities not permitted by IFRS
Reclassify all assets and liabilities and equity in accordance with IFRS
Measure all assets and liabilities in accordance with IFRS
Any gains and losses arising from this exercise should be recognised immediately in
retained earnings as at January 2016
(c)
(iii)
Since IAS 1 requires that at least one year of comparative prior period financial
information be presented, the opening Statement of Financial Position will be
1 January 2015, if not earlier.
(iv)
Preparation of full IFRS Financial Statements for the year ended 31 December
2016, which should include:

three statements of financial position

two statements of comprehensive income

two separate statements of profit or loss (if presented)

two statements of cash flows

two statements of changes in equity

related notes, including comparative information
The reconciliation which the company must include in its financial statements for the year
ended 31 December 2016, to explain how the transition from previous GAAP to IFRS
affect the reported financial position, financial performance and cash flows are as follows:
(i)
Reconciliation of equity reported under previous GAAP to equity under IFRS both (a)
at the date of the opening IFRS Statement of Financial Position and
(b) the end of the last annual period reported under the previous GAAP.
(ii)
Reconciliation of Total Comprehensive Income under IFRS for the last annual period
reported under the previous GAAP to Total Comprehensive Income under IFRS for
the same period.
(iii)
Explanation of material adjustments that were made, in adopting IFRS for the first
time, to the Statement of Financial Position, Statement of profit or loss and Statement
of Cash Flows.
(iv)
If errors in previous GAAP financial statements were discovered in the course of
transaction to IFRS, those must be separately disclosed.
(v)
If the entity recognised or reversed any impairment losses in preparing its opening
IFRS Statement of Financial Position, these must be disclosed.
(vi)
Appropriate explanations if the entity has elected to apply any of the specific
recognition and measurement exemptions permitted under IFRS 1, for example, if the
entity used fair values as deemed cost.
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
(d)
Contents of a typical statement of changes in equity are as follows:
(i)
Total comprehensive Income for the period, showing separately amounts attributable
to owners of the parent and to non-controlling interests.
(ii)
For each component of equity, the effect of retrospective application or retrospective
restatement recognised in accordance with IAS 8.
(iii)
For each component of equity, a reconciliation between the carrying amount at the
beginning and end of the period, separately disclosing
© Emile Woolf International

Profit or loss

Other comprehensive income

Transactions with owners in their capacity as owners showing separately,
contributions by and distributions to owners, and changes in ownership
interests in the subsidiaries that do not result in a loss of control.
316
The Institute of Chartered Accountants of Pakistan
Answers
CHAPTER 25 - SPECIALISED FINANCIAL STATEMENTS
25.1.
LATEEF BANK LIMITED
8
Lendings to financial institutions
Notes
20X6
20X5
Rs. in million
8.1
Call money lending
8.2
850
1,200
Repurchase agreement lending
(reverse repo)
8.3
2,100
2,850
2,950
4,050
2,840
3,900
110
150
2,950
4,050
Particulars of lending
In local currency
In foreign currencies
8.2
These are unsecured lendings to financial institutions, carrying mark up ranging from
15% to 17% (20X5: 10% to 12 % and will mature latest by October 20X6.
8.3
These are short term lendings to various financial institutions and are secured against
government securities shown in note 8.4 below. These carry mark up at rates ranging
from 9.5% to 13.2 % (20X5:8% to 10.5 %) and will mature on various dates, latest by
October 20X6.
8.4
Securities held as collateral against lending to financial institutions
Rs. in million
20X6
Held
by
bank
Further
given as
collateral
Market treasury bills
1,650
Pakistan investment
bonds
20X5
Total
Held
by
bank
Further
given as
collateral
-
1,650
1,850
-
1,850
450
-
450
1,000
-
1,000
2,100
-
2,100
2,850
-
2,850
Total
Market value of the above as at September 30, 20X6 amounted to Rs. 2,250 million
20X5: 2,930 million).
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Advanced accounting and financial reporting
25.2.
AL-AMIN BANK LIMITED
Notes to the Financial Statements for the year ended XX/XX/XX
1.1
Particulars on non-performing advances
Advances include Rs. 5,000 million which, as detailed below, have been placed under
non-performing status:
20X6
Classified
lending
Category of classification
Domestic
Provisions held
Rs. in million
Other assets especially mentioned
100
5
Sub-standard
400
70
Doubtful
840
530
3,400
3,345
4,740
3,950
260
50
5,000
4,000
Loss
Overseas
Not past due but impaired
Total
1.2
Particulars of provision against non-performing advances
20X6
Specific
General
Total
Rs. in million
Opening balance
3,320
65
3,385
Charge for the year
802
40
842
Amounts written off
(50)
-
(50)
Reversals
(90)
-
(90)
18
-
18
4,000
105
4,105
Exchange adjustments
Closing balance
25.3.
IAS 26
(a)
The differences between 1AS 26 - Accounting and Reporting by Retirement Benefit Plan
and IAS 19 - Employee Benefits are:
(i)
IAS 26 addresses the financial reporting considerations for the benefit plan itself as
the reporting entity while IAS 19 deals with employers’ accounting for the cost of
such benefits as they are earned by the employees
(ii)
These standards are thus somewhat related, but there will not be any direct interrelationship between the amounts reported in benefit plan financial statements and
amounts reported under IAS 19 by employers.
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(iii)
(b)
IAS 26 differs from IAS 19, Employee Benefits, in allowing a choice of measurement
based either on current salary levels or projected salary levels. IAS 19 requires an
actuarial valuation to be based on the latter, whereas IAS 26 requires valuation
based on present value of promised retirement benefits.
Defined Benefit Plan (DBP)
Defined benefit plans are retirement benefit plans under which amounts to be paid as
retirement benefits are determined by reference to a formula usually based on employees’
earnings and/or years of service.
(c)
Defined Contribution Plan (DCP)
Defined contribution plans are retirement benefit plans under which amounts to be paid as
retirement benefits are determined by contributions to a fund together with investment
earnings thereon.
(d)
25.4.
Actuarial present value of promised retirement benefits: This is the present value of the
expected payments by a retirement benefit plan to existing and past employees
attributable to the service already rendered.
SOGO LIMITED
(a)
SOGO Limited
Staff Gratuity Fund
Statement of net assets available for benefits as at December 31, 20X6
Note
20X6
Rupees
ASSETS
Investments
3
Receivable from SOGO Limited
159,033,144
1,147,150
Balances with banks
17,930,120
178,110,414
LIABILITIES
Payable to outgoing members
4,301,017
Accrued expenses
3,822
Withholding tax payable
61,251
4,366,090
NET ASSETS
173,744,324
REPRESENTED BY:
Members' Fund
(Rs. 142,472,122 + Rs. 27,712,441)
170,184,563
Surplus on re-measurement of investments available for sale
3,559,761
173,744,324
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(b)
SOGO Limited
Staff Gratuity Fund
Statement of changes in net assets available for benefits for the year ended December
31, 20X6
General Reserve Fund
Opening Balance
286,754,111
Contribution during the year
Transferred / paid to outgoing members
10,623,106
(12,432,973)
142,472,122
Income
Profit from investments
23,389,251
Dividend income
2,696,399
Liabilities no more payable
3,450,000
29,535,650
Expenditure
Bank charges
(3,342)
Audit fee
(10,000)
(13,342)
Net Income for the year
25.5.
27,712,441
JABBAR (PVT) LIMITED
(i)
IFRS for SMEs does not allow capitalization of borrowing cost. So capitalizing interest cost
of Rs. 0.3 million should be reversed and charged to profit and loss account.
Consequently, carrying amount of the building i.e. Rs. 3 million does not exceed the
recoverable amount of Rs. 3.1 million and therefore no impairment is required.
(ii)
IFRS for SMEs requires that investment properties must be measured subsequently at fair
value, (unless fair value cannot be measured reliably without undue cost or effort) and
PPE must be measured subsequently using the cost model. Based on this, treatment of
both shops should be as follows:

Shop A should be classified as property, plant and equipment. Revaluation surplus of
Rs. 1.125 million [6 – (5×0.975)] related to this shop should be accounted for in
revaluation surplus on revaluation of assets.

Shop B should be classified as investment property. Therefore fair value model is
appropriate as being followed by the company. However, depreciation should not be
computed under revaluation model of investment property so depreciation expense of
Rs. 0.1 million (4×5%×50%) and incorrect revaluation of Rs. 1.1 million [5 –
(4×97.5%)] should be reversed and increase in fair value of Rs. 1 million should be
credited to profit or loss account.
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25.6.
KARACHI BANK LIMITED
Karachi Bank Limited
Statement of financial position
As on 31 December 20X6
Assets:
Rs. in million
Cash and balances with treasury banks (9,100+14,500+700+2,300+68)
26,668
Balances with other banks (412+311+1,400)
2,123
Lending to financial institutions (650+6,100)
6,750
Investments – net (24,500+1,200+1,800–222)
27,278
Advances – net (114,200+4,900+679-6,678)
113,101
Operating fixed assets
24,700
Other assets (21,450+3189)
24,639
225,259
25.7.
LEOPARD INCOME FUND
Statement of movement in Unit Holders’ Fund
For the year ended 30 June 20X8
Capital value
Undistributed
income
Total
----------------- Rs. in million ----------------Net assets at beginning of the year
9,648
104
9,752
7,372
-
7,372
70
-
70
7,442
-
7,442
Issuance of 388 million units:
Capital value
Element of income
Total proceeds on issuance of units
Redemption of 441 million units:
Capital value
(8,382)
Element of loss
(8,382)
(14)
(50)
(64)
(8,396)
(50)
(8,446)
Total comprehensive income for the year
-
214
214
Distribution during the year
-
(150)
(150)
118
8,812
Total payment of redemption of units
Net assets at end of the year
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Capital value
Undistributed
income
Total
----------------- Rs. in million ----------------Undistributed income brought forward
Realized income
97
Unrealized income
7
104
Accounting income available for distribution
Relating to capital gain
3
Excluding capital gain
161
164
Distribution during the year
(150)
Undistributed income carried forward
118
Undistributed income carried forward
Realized income
122
Unrealized loss
(4)
118
25.8.
SWIFT GENERAL INSURANCE LIMITED
Statement of Comprehensive Income for the year ended 30 June 20X8
20X8
Note
N-1
Net insurance premium
Net insurance claims expense
Net commission and other acquisition costs
Insurance claims and acquisition expenses
Management expenses
Underwriting results
N-2
Rs. in 000's
10,300
2,500
1,300
(3,800)
(2,600)
3,900
Investment income
1,900
Rental income
950
Other income
Other expenses
90
(600)
Result of operating activities
6,240
Finance cost
Share of profit from associates
(450)
210
Profit before tax
Income tax expenses
6,000
(750)
Profit after tax
5,250
Other comprehensive income:
Unrealised gain on AFS investments - net
Total comprehensive income for the year
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Notes to the financial statements for the year ended 30 June 20X8
Rs in 000's
N-1: Net Insurance Premium
Written gross premium
13,000
Unearned premium reserve - opening
7,400
Unearned premium reserve - closing
(7,200)
Premium earned
13,200
Reinsurance premium ceded
3,000
Prepaid reinsurance premium-opening
3,500
Prepaid reinsurance premium-closing
(3,600)
Reinsurance expense
(2,900)
10,300
N-2: Net Insurance Claims Expense
Claims paid
6,100
Outstanding claims - closing
5,200
Outstanding claims - opening
(4,800)
Claims expense
6,500
Reinsurance & other recoveries revenue
(4,000)
2,500
25.9.
CYBER BANK
(i)
In note 9, the provision against advances has not been bifurcated into Specific and
General provision.
(ii)
Detailed note on net investment in finance lease is missing.
(iii)
In note 9.1, the total of 3,926,000 does not match total of 4,126,000 in note 9.
(iv)
In note 9.2, advances have not been classified into “Domestic” and “Overseas”.
(v)
In note 9.2, the amount of provision of 167,235 does not match with 150,445 in note 9.
(vi)
In note 9.3, the net charge / (reversal) has not been bifurcated into “charge for the year”
and “reversal for the year”.
(vii)
In note 9.3, line item for “amount charged off agricultural financing” and “other movements”
are not mentioned.
(viii) Bifurcation of provision against advances in local currency and foreign currency has not
been shown.
(ix)
Analysis of writes-off in Rs. 500,000 above or below and details of write-off Rs.500,000
and above is not disclosed.
(x)
Comparatives not given.
(xi)
Details of impact of forced sales value (FSV) on provision against advances not given.
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CHAPTER 28 - ISLAMIC ACCOUNTING STANDARDS
28.1.
SALE AND LEASE BACK TRANSACTIONS
When an asset is sold with an intention to enter into an ljarah arrangement, gain or loss shall be
recorded as follows:
Sold at fair value:
Profit or loss should be recognized immediately.
Sold at below fair value:
If the sale price is below fair value, any profit or loss should be recognized immediately except
that, if the loss is compensated by future lease payments at below market price, it should be
deferred and amortized in proportion to the lease payments over the period for which the asset is
expected to be used.
Sold at above fair value:
If the sale price is above fair value, the excess over fair value should be deferred and amortized
over the period for which the asset is expected to be used.
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