2020
FINANCIAL ACCOUNTING & REPORTING-II
F
A
ICAP past papers with solutions ,
Examiner comments & Marking plan
R
2
(AUTUMN-2014 to AUTUMN-2020)
By the Grace of Almighty Allah, I am pleased to present the questions and
answers of FINANCIAL ACCOUNTING & REPORTING-II also known as CAF-7.
This volume contains ICAP papers of last 13 attempts.
INTRODUCTION
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ICAP
Certificate in Accounting and Finance Stage Examinations
6 September 2014
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Q.1 The following balances have been extracted from the trial balance as at 30 June 2014 of Zee
Trading Limited (ZTL):
Description
Sales
Other income
Opening inventory
Purchases
Selling and distribution expenses
Administrative expenses
Financial charges
Investment at cost (50,000 shares of Rs. 100 each)
Trade receivables
Provision for doubtful debts
Finance lease obligation
Debit
Credit
------- Rs. in 000 ------80,000
5,300
4,000
35,000
15,000
9,700
7,200
6,800
10,000
380
6,890
The following matters need to be considered in finalizing the financial statements of ZTL:
(i)
As per store records, closing inventory as at 30 June 2014 amounted to Rs. 8,500,000.
Physical inventory taken on 1 July 2014 revealed the following information:
Value of goods found short by Rs. 1,500,000.
Goods costing Rs. 860,000 are obsolete. Their estimated net realizable value is
Rs. 600,000.
(ii)
As per the memorandum record of third party stock, stock in ZTL’s store ‘on sale or
return’ as at 30 June 2014 amounted to Rs. 3,000,000. It also shows that previous year in
June 2013, ZTL had sold goods held by it on sale or return basis for Rs. 2,000,000.
However, purchase of these goods was accounted for in July 2013 on receipt of invoice
amounting to Rs. 1,600,000.
(iii)
Selling and distribution expenses include trade discounts allowed to customers
amounting to Rs. 4,000,000.
(iv)
Annual finance lease installment of Rs. 5,000,000 due on 30 June 2014 was paid and
debited to finance lease obligation. However, interest thereon at 12.6% per annum due
on the closing balance has not yet been booked.
(v)
Accounting depreciation on the leased assets amounting to Rs. 3,750,000 has been
accounted for.
(vi)
Tax depreciation on the company’s owned assets for the year ended 30 June 2014
exceeded the accounting depreciation by Rs. 3,000,000.
(vii) In June 2014, ZTL received 18% cash dividend on its investments. The amount received
net of 10% tax was credited to other income.
(viii) Trade receivables as at 30 June 2013 amounted to Rs. 8,600,000. ZTL maintains a
provision for doubtful debts at 5% of trade receivables.
(ix)
Applicable tax rate for business income is 34%.
Required:
(a)
Prepare ZTL’s statement of comprehensive income for the year ended 30 June 2014 in
accordance with the requirements of the Companies Ordinance, 1984 and the
International Financial Reporting Standards.
(10)
(b)
Prepare a note to the statement of comprehensive income for the year ended
30 June 2014, relating to taxation expense and tax reconciliation.
(14)
Financial Accounting and Reporting-II
Page 2 of 4
Q.2 Industrial Chemicals Limited (ICL) completed installation of its chemical plant on
30 June 2013. Costs incurred and debited to capital work in progress are summarized as under:
Rs. in million
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Landed cost of the plant, inclusive of refundable sales tax
amounting to Rs. 15 million
Contractor's billings net of tax deducted at 5%
Cost of material and spare parts (Spares costing Rs. 6 million are in
store and can be used for maintenance of the plant)
Interest on loan acquired for installation work for the period
1 September 2012 to 30 June 2013. (The installation work
commenced two months after the schedule date of 1 September
2012 and completed on 30 June 2013)
Interest income from investment of unutilized proceeds of the loan
Allocated general and administration costs
Capital work in progress as at 30 June 2013
850
57
30
15
(2)
6
956
Test run of the plant was successfully completed on 31 August 2013 at a cost of Rs. 5 million.
Proceeds from sale of test production amounted to Rs. 3 million. Test run cost, net of sale
proceeds, has been charged to profit and loss account. On commencement of commercial
production i.e. 1 September 2013, the following estimates were worked out:
Useful life of the plant
Residual value at the end of useful life of the plant
Present value of estimated cost of decommissioning/restoration of the site
10 years
Rs. 10 million
Rs. 20 million
Interest rate prevailing in the market is 12%. ICL uses straight line method of depreciation
which is charged from the month the asset is available for use and up to the month prior to
disposal.
Required:
Prepare accounting entries from the above information for the year ended 30 June 2014
including correcting entries in accordance with the International Financial Reporting Standards. (15)
Q.3 Quality Garments Limited (QGL) is a manufacturer of readymade garments. During
May 2014, a fire broke out in one of its units which resulted in deaths and severe injuries to a
number of workers.
At the time of finalisation of QGL's financial statements for the year ended 30 June 2014, the
following issues pertaining to the fire are under consideration:
(i)
(ii)
(iii)
(iv)
Families of certain deceased workers have filed compensation claims amounting to
Rs. 60 million. A government agency has imposed a penalty of Rs. 35 million for
negligence on the part of the company. QGL's lawyers anticipate that the company
would have to pay Rs. 20 million and Rs. 10 million to settle the workers' claims and the
penalty respectively.
To maintain goodwill of the company, the Board of Directors is considering additional
payments to the families of the deceased workers amounting to Rs. 25 million.
Loss to fixed assets and inventories is estimated at Rs. 60 million. In this respect, a fire
insurance claim has been lodged. Due to certain policy clauses, QGL’s consultant
anticipates that the claim for Rs. 15 million may not be accepted. The matter is under
negotiation with the insurance company.
Due to closure of the unit for repair, QGL would not be able to meet sales orders of
Rs. 50 million. This will reduce QGL's profitability for the half year ending
31 December 2014 by Rs. 10 million.
Required:
Discuss how the above issues should be dealt with in the financial statements of QGL for the
year ended 30 June 2014. Support your answers in the context of relevant International
Financial Reporting Standards.
(13)
Financial Accounting and Reporting-II
Page 3 of 4
Q.4 Sky Limited (SL) commenced its business on 1 July 2013 by purchasing the business of Moon
Enterprises for a consideration of Rs. 60 million. The following information has been extracted
from its financial statements for the year ended 30 June 2014.
Particulars
Sales
Cost of sales
Operating and selling expenses
Bad debt expense
Loss on settlement of insurance claim
Finance charges paid
Taxation expense net of deferred tax credit
Closing stock in trade
Trade receivables
Provision for doubtful debts
Trade payables
Provision for taxation (net of payments)
Deferred tax asset
Property, plant and equipment - WDV
Debit
Credit
Rs. in million
172
80
40
6
2
8
15
10
28
6
20
5
4
105
Additional information:
(i)
At the time of acquisition, the assets and liabilities were valued as under:
Property, plant and equipment
Stock in trade
Trade receivables
Trade payables
(ii)
(iii)
Rs. in million
52
4
8
12
During the year, SL incurred a capital expenditure of Rs. 70 million.
Loss on settlement of insurance claim relates to a car which was destroyed in an
accident. Its cost and written down value at the time of accident was Rs. 5 million and
Rs. 4 million respectively. There were no other disposals during the year.
Required:
Prepare operating activities section of the statement of cash flows for the year ended
30 June 2014 using the direct method in accordance with the International Financial Reporting
Standards.
(11)
Q.5 Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on
1 July 2013. In this respect, the following information is available:
Cost of equipment
Amount received on 1 July 2013
Four annual installments payable in arrears on 30 June, each year
Guaranteed residual value on expiry of the lease
Rs. in million
28.69
3.00
7.80
5.00
Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
Required:
(a)
Prepare accounting entries for the year ended 30 June 2014 in the books of GLL to
record the transactions related to the above lease arrangement in accordance with the
requirements of International Financial Reporting Standards.
(07)
(b)
Prepare a note for inclusion in GLL's financial statements for the year ended
30 June 2014, in accordance with the requirements of International Financial Reporting
Standards.
(10)
Financial Accounting and Reporting-II
Page 4 of 4
Q.6 The following summarised statements of financial position pertain to Alpha Limited (AL) and
its subsidiary Delta Limited (DL) as at 30 June 2014.
Property, plant and equipment
Investment (2 million shares of DL)
Long term loan granted to DL
Current assets
Share capital (Rs. 100 each)
Retained earnings
Long term borrowings
Current liabilities
AL
DL
----- Rs. in million ----460
200
340
30
595
400
1,425
600
600
325
200
300
1,425
250
200
72
78
600
Following relevant information is available:
(i)
AL acquired investment in DL on 1 July 2013 when retained earnings of DL were
Rs. 140 million and the fair value of DL's net assets was equal to their carrying values.
(ii) Both the companies depreciate equipment at 10%, on straight line basis. On
30 June 2014, AL sold certain equipment to DL as detailed below:
Cost
Accumulated depreciation
Sale proceeds
(iii)
Rs. in million
40
30
25
Inter-company sales of goods are invoiced at a mark-up of 20%. The relevant details are
as under:
AL's inventory includes goods purchased from DL
DL's inventory includes goods purchased from AL
Receivable from DL on 30 June 2014 as per AL’s books
Payable to AL on 30 June 2014 as per DL’s books
(iv)
(v)
Rs. in million
27
24
19
19
Long term loan was granted to DL on 1 July 2013. It is repayable after five years and
carries interest at 12% per annum, payable on 30 June and 31 December, each year.
AL values non-controlling interest at the acquisition date at its fair value which was
Rs. 80 million.
Required:
Prepare a consolidated statement of financial position as at 30 June 2014 in accordance with
the requirements of International Financial Reporting Standards.
(15)
Q.7 List the fundamental principles as mentioned in the ICAP’s Code of Ethics and describe the
guidance expressed in respect of ‘principle of integrity’.
(05)
(THE END)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Ans.1
(a)
Zee Trading Limited
Statement of comprehensive income for the year ended 30 June 2014
Net sales
80,000-4,000
Cost of sales
W.1
Gross profit
Selling and distribution expenses
15,000-4000+120 (W.2)
Administrative expenses
9,700+1,500
Operating profit
Finance cost
7,200+(6,890+5,000)*12.6%
Other income
5,300+ (5,000*18%*10%)
Profit before tax
Taxation
Note.1
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
W.1: Cost of sales
Opening stock
Purchases
Closing stock
35,000-1,600
8,500-1,500-860+600
Stock shortages – being abnormal shortages classified as part of
administration cost
W.2: Provision for doubtful debts:
Opening balance
Written off during the year
Provision for the year (balancing)
Closing balance
(b)
(8,600*5%)
(430-380)
(10,000*5%)
Rs. in '000
76,000
(29,160)
46,840
(11,120)
(11,200)
24,520
(8,698)
5,390
21,212
(6,452)
14,760
14,760
4,000
33,400
(6,740)
30,660
(1,500)
29,160
430
(50)
120
500
Zee Trading Limited
Notes to the financial statements for the year ended 30 June 2014
Rs. in '000
1
1.1
Taxation
Current
- For the year
- Prior year
Deferred
W.1
1,600*34%
W.2
Relationship between tax expense and accounting profit
Accounting profit before tax
Applicable tax rate
Tax at the applicable rate
Tax for prior years
Lower tax rate on dividend income
Tax expenses
1,600*34%
900*24%
6,084
( 544)
912
6,452
21,212
34.00%
7,212
(544)
(216)
6,452
Page 1 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
W-1: Current tax liability
Profit before tax
Inadmissible expenses:
Provision for doubtful debts – net of written offs
W.2 (120-50)
Accounting deprecation on leased assets
Finance charges on finance lease liability
(6,890+5,000)*12.6%
Admissible expenses:
Finance lease installment for the year
Tax depreciation exceeding accounting depreciation on owned assets
Total taxable income
Dividend income taxable at 10%
(5,000*18%)
Taxable business income
Tax on business income of Rs. 17,630 at 34%
Tax on dividend income of Rs. 900 at 10%
W-2: Deferred tax expense / (credit):
Provision for doubtful debts
For the year tax depreciation exceeded accounting
depreciation on ZTL’s owned PP&E
Deferred tax pertaining to leased assets and obligations:
 Lease rental
 Depreciation on leased assets
 Finance charges on lease obligation
Ans.2
70*34%
3,000*34%
5,000×34%
(3,750) ×34%
(1,498) ×34%
21,212
70
3,750
1,498
(5,000)
(3,000)
18,530
(900)
17,630
5,994
90
6,084
(24)
1,020
1,700
(1,275)
(509)
912
Industrial Chemicals Limited
Accounting entries for the year ended 30 June 2014
Date
1-Jul-2013
1-Sep-2013
Description
Sales tax recoverable
Stores and spare parts
Retained earnings
Taxes payable
Capital work in progress
(Correction of CWIP amounts)
Property, plant and equipment
P&L account (Test run cost net of
sale proceeds)
Decommissioning liability
CWIP
(Costs allocated to chemical plant)
W.1
W.1
Debit
Credit
Rs. in million
15.00
6.00
9.00
3.00
27.00
951.00
2.00
20.00
929.00
(5-3)
(W-1)
30-Jun-2014
Depreciation expense
(951-10)/10×10/12
Accumulated depreciation
(To record depreciation for Sept. 2013 to Jun. 2014)
78.42
30-Jun-2014
(20×(1.12)-20) × 10/12
Finance expense
Decommissioning liability
(To record finance expense and adjustment to decommissioning
liability)
2.00
78.42
2.00
Page 2 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
W.1
Cost of property, plant and equipment:
Balance as at 30-6-2013
Last year’s balance sheet items incorrectly classified to CWIP:
(i) Refundable amount of sales tax
(ii) Payments to contractor accounted for net of tax
(57/95%)-57
(iii) Remaining spare parts to be used for maintenance
Last year’s PL items incorrectly classified to CWIP:
(iv) Loan interest for the period prior to installation work
15/10*2
(vi) Allocated general administration costs
Adjusted through retained earnings
Adjusted balance of CWIP
Current year’s items:
 Cost of test run, net of sale proceeds – incorrectly charged to PL
(5-3)
 Cost of decommissioning and restoration of the site
956.00
(15.00)
3.00
(6.00)
(3.00)
(6.00)
(9.00)
929.00
2.00
20.00
951.00
Ans.3 Quality Garments Limited
Accounting treatment for the issues pertaining to the fire
IAS 37 prescribes the following accounting and disclosure requirements for provisions,
contingent liabilities and contingent assets.
Provisions:
A provision shall be recognized when all of the following conditions are met:



There is a present obligation (legal or constructive) as a result of past event.
It is probable that outflow of resources will be required to settle the obligation.
A reliable estimate can be made of the amount of the obligations.
Reimbursements:
Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party:



The reimbursement shall be recognised where it is virtually certain that
reimbursement will be received.
The amount recognized in respect of the reimbursement shall not exceed the amount
of provision.
The reimbursement receivable shall be treated as a separate asset.
Disclosure for contingent liabilities and assets:
Where a disclosure of a contingent liability or a contingent asset is appropriate, for each
class of contingent liability/asset, the following disclosures are required:



A brief description of the nature of the contingent liability/asset.
Where practicable:
 an estimate of its financial effect, and
 an indication of uncertainties
The possibility of any reimbursement.
In view of the above, issues as given would be dealt in QGL’s financial statements as
under:
Page 3 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
(i)
Liability for workers’ compensation and penalty
 All the conditions as mentioned for provisions are met to the extent of Rs. 20
million for the claims of families of workers and Rs. 10 million for the penalty
levied by a government agency. Therefore, a provision of Rs. 30 million (20+10)
would be made.
 For the remaining amount of Rs. 65 million (60+35-30), it is not probable that an
outflow of economic benefits will be required . Therefore, a contingent liability
would be disclosed giving information as per the above requirements.
Ans.4
(ii)
Additional compensation for the families of the deceased workers:
The obligation for additional compensation to the families of the deceased workers is
neither legal nor constructive as the matter is still under consideration and no formal
announcement was made that may create a valid expectation. Therefore, no provision
or disclosure is required in this respect.
(iii)
Insurance claim
 As the insurance claim to the extent of Rs. 45 million (60-15) is virtually certain to
be received; an insurance claim would be recognized for this amount.
 Where an inflow for the remaining amount of Rs. 15 million is probable, a
contingent asset would be disclosed giving information as per the above
requirements.
OR
 Where an inflow for the remaining amount of Rs. 15 million is not probable, no
contingent asset should be disclosed.
(iv)
Reduction in future profit by Rs. 10 million for the half year ending 31-12-2014:
No provision or disclosure is required for future operating losses as they arise from
future events not past events.
Sky Limited
Extracts from Statement of Cash Flows for the year ended 30 June 2014
Rs. in million
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Interest paid
Taxation paid
Net cash inflow from operating activities
W-1: Payments to suppliers and employees:
Cost of sales
Increase in stock in trade
Increase in trade payables
Operating and selling expenses
Depreciation expense
(172+8-28)
(W.1)
(15+4-5)
(10-4)
(20-12)
(52+70-4)-105
152
(105)
47
(8)
(14)
25
80
6
(8)
40
(13)
105
Page 4 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Ans.5 (a) Galaxy Leasing Limited
Accounting entries for the year ended 30 June 2014
Date
1-Jul-13
1-Jul-13
Particulars
Lease receivable
Unearned finance income
Equipment/Bank
(To record sales and finance lease at commencement)
Debit
39.20
W.1
W.1
10.51
28.69
3.00
Bank
Lease receivable
(Receipt of amount on delivery of the equipments)
30-Jun-14
30-Jun-14
Credit
3.00
Unearned finance income
Finance income
(To record finance income for the year ended 30 June 2014)
3.59
Bank
7.80
3.59
Lease receivable
(To record receipt of 1st. Installment of the lease)
7.80
W-1: Amortization schedule
Date
01-Jul-2013
30-Jun-2014
30-Jun-2015
30-Jun-2016
30-Jun-2017
Principal
Closing
Interest at
Payments
repayments balance
14%
------------------------------ Rs. in million -----------------------------(3.00)
(3.00)
25.69
28.69
21.48
25.69
3.59
(7.80)
(4.21)
(4.79)
16.69
21.48
3.01
(7.80)
16.69
2.34
(7.80)
(5.46)
11.23
Opening balance
11.23
Total
1.57
6.92
10.51
7.8+5
(12.80)
28.40
(39.20)
(11.23)
21.48
(28.69)
-
(b) Galaxy Leasing Limited
Notes to the financial statements for the year ended 30 June 2014
Rs. in million
1.
1.1
Net investment in lease
Lease receivable
Unearned finance income
Net investment in lease
Current maturity
(7.8×3)+5
W.1
( 7.8-3.01)
Detail of investment in finance lease
Not later than one year
Later than one year but not later than five
years
Later than five years
28.40
(6.92)
21.48
(4.79)
16.69
Gross
Net
investment
investment
in lease
in lease
(Rs. in million)
7.80
4.79
(7.8+7.8+5)
20.60
28.40
16.69
21.48
The minimum lease payments have been discounted on interest rate of 14% per annum
to arrive at their present value. Rentals are paid annually in arrears.
Page 5 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Ans.6 Alpha Limited
Consolidated statement of financial position as at 30 June 2014
Rs. in million
ASSETS
Non-current assets:
Property, plant and equipment
Goodwill
460+200-[25-(40-30)]
W.1
Current assets
W.2
EQUITY AND LIABILITIES
Equity attributable to owners of AL:
Share capital
Retained earnings
W.3
Non-controlling interest
W.4
600.00
349.68
949.68
91.82
1,041.50
242.00
359.00
1,642.50
200+72-30
W.2
Non-current liabilities
Current liabilities
W-1: Goodwill
AL equity % in DL
Cost of investment
Fair value of NCI at the date of acquisition
FV of DL's net assets on the date of acquisition
2/2.5
80%
340.00
80.00
(390.00)
30.00
250+140
W-2: Current assets and liabilities of AL and DL:
Balance as at 30 June 2014
Elimination of inter-company balances
Unearned profit on goods sold by DL to AL
Unearned profit on goods sold by AL to DL
645.00
30.00
675.00
967.50
1,642.50
[595+400], [300+78]
[27/120*20]
[24/120*20]
Current
assets
995.00
(19.00)
(4.50)
(4.00)
967.50
W-3: Consolidated retained earnings:
Balance as at 30 June 2014 – AL
Unearned profit on goods sold by AL to DL
Elimination of inter-co. finance income of AL
Elimination of profit on sale of equipment by AL to DL
NCI Fair value at the acquisition date
Post-acquisition profit – DL
Unearned profit on goods sold by DL to AL
Elimination of inter-co. finance expense of DL
(200-140)*80%
[27/120*20]*80%
[30*12%]*80%
W4: Non-controlling Interest (NCI):
NCI Fair value at the acquisition date
Post-acquisition profit – DL
Unearned profit on goods sold by DL to AL
Elimination of inter-co. finance expense of DL
(200-140)*20%
[27/120*20]*20%
[30*12%]* 20%
[24/120*20]
[30*12%]
25-(40-30)
-
Current
liabilities
378.00
(19.00)
359.00
Rs. in
million
325.00
(4.00)
(3.60)
(15.00)
48.00
(3.60)
2.88
349.68
80.00
12.00
(0.90)
0.72
91.82
Page 6 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014
Ans.7 Fundamental principles:
(i)
(iii)
(v)
Integrity
Professional competence and due care
Professional behavior
(ii)
(iv)
Objectivity
Confidentiality
Guidance in respect of integrity:
Members should be straight forward and honest in all professional and business
relationships. A chartered accountant should not be associated with reports, returns,
communication or other information where they believe that the information:



Contains a materially false or misleading statements;
Contains statements or information furnished reckless; or
Omits or obscures information required to be included where such omission or
obscurity would be misleading.
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance
– Autumn 2014
General:
The overall performance was below average mainly due to poor performances in
Question 1(b) and Question 2. Question-wise comments are given below:
Question 1
This was a very straight-forward question requiring the students to prepare a statement of
comprehensive income along with a note on taxation expense and tax reconciliation in
accordance with the requirements of Companies Ordinance 1984 and IFRS. These types
of questions are a regular feature of almost every paper yet it seems that the amount of
efforts that is put in by the candidates in this area is quite inadequate. A focused study of
financial statements of some good listed companies is strongly advised.
Response to this question was unexpectedly very poor. Many students did not know the
correct treatment of goods under sale or return and also erred in the calculation of tax
expense, provision for doubtful debts, purchases and closing stock.
Some of the specific mistakes are noted below:

Finance charge was calculated on the amount of lease installment instead of
calculating it on Finance Lease Obligation.

Trade Discount was not deducted from sales.

Most of the students could not understand the adjustments to be made in respect of
third party stock.

Some of the line items in statement of Comprehensive income were not shown in
proper sequence as is prescribed under Companies Ordinance, 1984.

While calculating current tax liability, tax on dividend income was not considered
separately.

In arriving at taxable income, many students deducted inadmissible expenses from
accounting profit instead of adding them.

Prior year taxation related to purchases recorded in July 2013 was ignored.

Many students ignored deferred taxation altogether and those who attempted did not
Page 1 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2014
consider all items that involve timing differences. Some students treated deferred tax
credit as tax expense and vice versa.

Most of the students did not prepare tax reconciliation and most of those who
attempted it were unable to prepare a proper reconciliation as they ignored the effect
of prior year taxation and lower tax rate on dividend income.
Question 2
This was quite an easy question which required accounting entries related to installation
of plant including payment there against and correction of certain errors made in prior
years. However, somehow it proved difficult for majority of the students who made all
sort of errors as mentioned below:

Many students only made calculations and did not prepare journal entries.

Prior year items (interest on loan and allocated admin expenses) which were
incorrectly classified as CWIP in previous year should have been adjusted from
Retained Earnings. Many students adjusted them through the expense account.

Depreciation expense was calculated for the entire year.

Finance expense on decommissioning liability was mostly ignored. Most of those
who did attempt, made various types of calculation mistakes.

Adjustment related to tax deducted from contractors bills was ignored.
Question 3
This question tested the treatment of contingencies and provisions in the financial
statements. For this purpose, four situations were given and the candidates were required
to explain how each situation should be dealt with in accordance with IFRS.
Comments on each situation are given below:
(i)
Almost every student mentioned correctly that provision would be required to be
made against the claims, to the extent of the amount estimated by the lawyer.
However, many students could not elaborate further that the difference between
the amount of claims and liability estimated by the lawyer would have to be
disclosed as a contingent liability.
(ii)
Majority of the students were able to comment correctly that since the matter
relates to voluntary payments and that it is under consideration and no final
decision has been made, therefore, no provision or disclosure is required.
(iii)
The situation pertained to an insurance claim whereby it was anticipated that an
amount of Rs.15 million may or may not be received. Majority of the students
stated correctly that contingent asset should not be recognized but did not explain
further that it may or may not be disclosed depending upon whether recovery is
considered probable or not.
Page 2 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2014
(iv)
In this part, majority of the students noted correctly that expected decline in
profitability need not be disclosed but did not give any reason in justification
thereof.
Question 4
This was a simple question requiring preparation of operating activities section of the
statement of cash flows using direct method. The question was normally well answered.
The mistakes observed were as follows:

Tax paid was not correctly calculated as deferred tax asset was not taken into
consideration by most of the students.

Depreciation expense for the year was not deducted in arriving at amount paid to
suppliers and employees.

Many students made mistakes in computation of cash paid to suppliers and employees
as difference of opening and closing balances of stock in trade and current liabilities
were either ignored or incorporated incorrectly.

Many students did not in corporate payment of interest although the figure was given
in the question and no further calculation was needed.

Some students prepared cash flow using indirect method and could not secure any
mark.
Question 5
This question required accounting entries to record lease transactions and preparation of a
note for inclusion in the financial statements of a lessor. About 20% of the students had
no idea of the key concepts and did not even prepare the amortization schedule. Fully
correct answers were rare. The common mistakes were as follows:

While preparing amortization schedule, initial payment at the time of inception of
lease and/or guaranteed residual value was not taken into consideration.

Unearned finance income was not booked at the time of sales and consequently at
year end it was not taken in finance income.

Current maturity of net investment in lease was not disclosed.

Most of the students did not disclose information related to Net and Gross Investment
in lease and their bifurcation into amounts due within one year, 2-5 years and after 5
years.

Some students adjusted the finance lease income on straight line basis.

Some students did not read the question carefully and produced entries in the books
of the lessee.
Page 3 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2014

Many students did not mention dates of recording of transactions which is important
and should not be ignored.
Question 6
Consolidation was examined for the first time at this level. Keeping in view the level of
students, only the elementary concepts were tested. Majority of the students did manage
to get high marks. Few of the mistakes made by the students were as follows:

While calculating consolidated retained earnings, inter-company finance expenses
relating to DL and AL were not eliminated.

NCI at acquisition date was ignored in the calculation of Goodwill. Some students
calculated goodwill by taking net assets to the extent of group holdings. Some
students calculated Goodwill for NCI also.

Most of the students did not eliminate profit on sale of equipment from the
consolidated retained earnings.
Question 7
This question was very well attempted and most of the students were able to list the
fundamental principles of code of ethics and could describe the principle of integrity.
Fairly large number of students obtained full marks.
THE END
Page 4 of 4
Certificate in Accounting and Finance Stage Examinations
The Institute of
Chartered Accountants
of Pakistan
5 March 2015
3 hours – 100 marks
Additional reading time – 15 minutes
Financial Accounting and Reporting-II
Q.1
The following summarised Trial Balances pertain to Rivera Limited (RL) and its subsidiary
Chenab Limited (CL) for the year ended 31 December 2014:
Sales
Cost of sales
Selling and distribution expenses
Administration expenses
Finance charges
Tax expense
Share capital (Rs. 100 each)
Retained earnings – 1 January 2014
Property, plant and equipment
Current assets
Investment in CL (1.6 million shares)
Current liabilities
RL
CL
Debit Credit Debit Credit
---------- Rs. in million ---------285
320
186
240
27
25
17
15
8
10
19
12
350
200
50
36
190
263
23
35
250
35
44
720
720
600
600
Other relevant information is as under:
(i)
(ii)
RL acquired the controlling interest in CL on 1 January 2014. On the acquisition date,
fair value of CL's net assets was equal to its book value except for an office building
whose fair value exceeded its carrying value by Rs. 18 million. The remaining useful life
of the office building on the acquisition date was 15 years.
Inter-company sales are invoiced at cost plus 20%. Details of inter-company
transactions for the year ended 31 December 2014 are as follows:
(iii)
(iv)
(v)
RL sold goods amounting to Rs. 60 million to CL. At year-end, inventory of CL
included Rs. 9.60 million in respect of such goods.
CL sold goods amounting to Rs. 48 million to RL. At year-end, inventory of RL
included Rs. 16.80 million in respect of such goods.
There were no inter-company balances outstanding at the year-end.
RL values the non-controlling interest at its proportionate share of CL's identifiable net
assets.
As at 31 December 2014, goodwill of CL was impaired by 10%.
Required:
In accordance with the requirements of International Financial Reporting Standards, prepare:
(a) Consolidated Statement of Comprehensive Income for the year ended 31 December
2014.
(b) Consolidated Statement of Financial Position as at 31 December 2014.
(Ignore tax effects on the adjustments)
(11)
(06)
Financial Accounting and Reporting-II
Q.2
Page 2 of 5
On 31 December 2013, Omega Chemicals Limited (OCL) changed its valuation model from
cost to revaluation for its buildings. The following information pertains to its buildings as at
31 December 2013:
Estimated useful
life as originally
estimated
Prior to revaluation - as at 31-12-2013
Revalued
amounts as per
Accumulated
Cost
valuation report
depreciation*
---------------------- Rs. in million ----------------------
Factory buildings
20 Years
100.00
Office buildings
25 Years
164.50
*Including depreciation for the year ended 31 December 2013
37.50
26.32
52.00
149.94
As per the report of the professional valuer, there was no change in estimated useful life of the
buildings. OCL recorded revaluation effect for the office buildings on 31 December 2013 as
per the valuation report. However, no valuation effect was incorporated for the factory
buildings as the change in their value was considered to be temporary by OCL.
On 1 July 2014, one of the office buildings was sold for Rs. 30 million. On 31 December 2013,
written down value before revaluation and revalued amount of the sold building amounted to
Rs. 27.72 million and Rs. 31.92 million respectively.
On 31 December 2014, factory buildings were revalued at Rs. 64 million whereas there was
no change in value of the office buildings.
OCL uses straight line method of depreciation which is charged from the date the asset is
available for use upto the date of disposal. Revaluation is to be accounted for by using net
replacement value method.
Required:
In the light of the requirements of the International Financial Reporting Standards, prepare
accounting entries from the above information for the year ended 31 December 2014
including correcting entries. (Ignore taxation)
Q.3
(17)
The following information pertains to Zamil Limited (ZL) for the year ended
31 December 2014:
(a)
On 20 December 2014, ZL lodged a claim of Rs. 10 million with one of its vendors for
supply of inferior quality goods. On 1 February 2015, the vendor agreed to adjust
Rs. 6 million against future purchases of ZL. For the remaining claim amount, ZL took
up the matter with vendor’s parent company in UK and it is probable that 70% of the
remaining claim would be recovered.
(04)
(b)
In February 2015, it was revealed that ZL's cashier withdrew Rs. 10 million fraudulently
from ZL's bank accounts. Of these, Rs. 7 million was withdrawn before
31 December 2014. ZL and its insurance company reached an agreement for settlement
of the claim at Rs. 8 million.
(05)
(c)
In October 2014, ZL decided to relocate its production unit from Sukkur to Karachi. In
this respect, a detailed plan was approved by the management and a formal public
announcement was made on 1 December 2014. ZL has planned to complete the
relocation by the end of June 2015. The related costs have been estimated as under:
Redundancy cost
Relocation of staff to Karachi
Staff training
Salary of existing operation manager (responsible to
supervise the relocation)
Rs. in million
3.58
0.45
0.86
1.20
6.09
(04)
Financial Accounting and Reporting-II
(d)
Page 3 of 5
In December 2014, a citizen committee of the area met with the directors of the
company and lodged a complaint that ZL’s vehicles carrying chemicals are not fully
equipped with the safety equipment and resultantly creating serious threats to health of
the residents. The management held a meeting in this regard on 25 December 2014 and
decided to install the safety equipment in its vehicles.
The estimated cost of installing the equipment is Rs. 25 million. The company has
neither legal obligation nor any published policy regarding installation of such safety
equipment in its vehicles.
(04)
Required:
Discuss how each of the above issues should be dealt with in ZL’s financial statements for the
year ended 31 December 2014. (Quantify effects where practicable)
Q.4
The following information pertains to draft financial statements of Pak Ocean Limited (POL)
for the year ended 31 December 2014.
(i)
Profit after tax
Other comprehensive income
Incremental depreciation on revaluation
of property, plant and equipment
2014
2013
------ Rs. in million -----78
52
12
(5)
1.5
2.3
(ii)
Installation of an assembly plant was completed in December 2012 at a cost of
Rs. 60 million and it was ready for use on 1 February 2013. However, depreciation for
the year ended 31 December 2013 amounting to Rs. 4.5 million was worked out from
the date of production i.e. 1 April 2013. The mistake was corrected by adjusting the
profit and loss account for the year ended 31 December 2014.
(iii)
Shareholders' equity as at 1 January 2013 was as follows:
Share capital (Rs. 100 each)
Retained earnings
Rs. in million
200
45
On 30 November 2014, POL issued 25% right shares to its ordinary shareholders at
Rs. 120 per share.
(iv)
Cash dividend and bonuses declared/paid during the last three years:
Final
Cash
Bonus
31 December 2012
15%
–
31 December 2013
18%
–
31 December 2014
25%
–
*Declared with half yearly accounts
For the year ended
*Interim
Cash
Bonus
16%
–
20%
–
10%
–
Required:
Prepare Statement of Changes in Equity for the year ended 31 December 2014 in accordance
with the requirements of the Companies Ordinance, 1984 and International Financial
Reporting Standards. (Ignore taxation)
Q.5
(15)
According to the ICAP’s Code of Ethics, in complying with the fundamental principles, a
chartered accountant in business may be subject to various threats.
List categories of such threats in business and give one situation which may create such
threats.
(05)
Financial Accounting and Reporting-II
Q.6
Page 4 of 5
The following information has been extracted from the draft financial statements of Shaheen
Limited (SL) for the year ended 31 December 2014:
Statement of Financial Position as at 31 December 2014
Rs. in
Equity and liabilities
Assets
million
Share capital (Rs. 100 each)
1,200 Property, plant and equipment
Retained earnings
618 Patents
Trade payables
645 Trade receivables
Accruals and provisions
395 Inventory
Taxation
215 Prepayments and other receivables
Cash and bank balances
3,073
Rs. in
million
1,876
28
630
503
23
13
3,073
Additional information:
(i)
Closing inventory includes damaged goods costing Rs. 3 million which can be sold for
Rs. 2.5 million after repair and repacking at a cost of Rs. 0.4 million.
(ii) In December 2014, SL settled an old outstanding liability of Rs. 6 million by paying
Rs. 4.5 million. The payment was debited to trade payables. The said liability had been
written back prior to 2014.
(iii) Fair value and value in use of patents as at 31 December 2014 amounted to
Rs. 25 million and Rs. 27 million respectively.
(iv) Tax liability is net of deferred tax asset amounting to Rs. 12 million.
(v) On 1 January 2014, SL acquired five vehicles costing Rs. 8.5 million on lease. As per
the lease agreement, four annual installments of Rs. 2.5 million each are payable in
advance on 1 January, each year. The market rate of interest is 14%. While preparing
the draft financial statements, the installment paid was charged to rent expense.
(vi) SL depreciates its vehicles over a period of five years using straight line method.
(vii) Due to increasing bad debts, the management is of the view that provision for doubtful
debts need to be increased from 3% to 5% of trade receivables.
(viii) Applicable tax rate for the year is 34%.
Required:
Prepare a Statement of Financial Position as at 31 December 2014 in accordance with the
International Financial Reporting Standards and the Companies Ordinance, 1984.
(Show relevant calculations. Notes to the financial statements and comparative figures are not
required)
(17)
Q.7
On 1 July 2014, Alpha Trading Limited (ATL) signed an agreement with Quality Builders
Limited for construction of an office building at a cost of Rs. 500 million. Construction
commenced on 1 July 2014 and is planned to complete on 30 June 2016. The payments made
to the builders were as follows:
Invoice date
Payment date
Description
20-Jan-2014
10-Sep-2014
30-Dec-2014
1-Jul-2014
31-Oct-2014
31-Jan-2015
Advance
1st progress bill
2nd progress bill
Net payment
(Rs. in million)
50.00
79.90
100.30
The progress bills were paid after deduction of advance and retention money at 10% and 5%
of the gross amount of the bills respectively. Retention money is to be refunded on completion
of warranty period of one year from the date of completion of the building.
On 1 September 2014, the construction work was stopped for one month to resolve geological
complications pertaining to foundation of the building.
Financial Accounting and Reporting-II
Page 5 of 5
The construction cost has been financed from the following sources:
(i)
Bank loan of Rs. 100 million was obtained on 1 July 2014. The loan carries a mark-up
of 11% payable semi-annually on 31 December and 30 June each year. The principal is
repayable in four equal annual instalments, commencing from 1 April 2015.
(ii) Existing finance facility was used for balance payments. Average running finance
balance for the year ended 31 December 2014 was Rs. 190 million. Mark-up charges for
the year ended 31 December 2014 amounted to Rs. 24.70 million.
(iii) Surplus funds available were invested in a saving account @ 7% per annum.
ATL computes finance cost on a monthly basis.
Required:
From the above information, compute the related amounts and disclose them under
appropriate heads in ATL’s Statement of Financial Position as at 31 December 2014 in
accordance with the International Financial Reporting Standards.
(THE END)
(12)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.1
(a)
Rivera Limited
Consolidated Statement of Comprehensive Income for the year ended 31 December 2014
Sales – net
Cost of sales
(60+48)
(60+48)—(9.6/1.2*0.2=1.6)—(16.8/1.2*0.2=2.8)
RL
285.00
Working
CL
320.00
Adjust.
(108.00)
(186.00)
(240.00)
103.60
Gross profit
Selling and distribution expenses
Administration and other expenses
(27.00)
(25.00)
-
((W.1)46.8*10%=4.68)+(18/15=1.20)
(17.00)
(15.00)
(5.88)
(8.00)
(10.00)
-
(19.00)
28.00
(12.00)
18.00
-
Operating profit
Finance charges
Profit before tax
Taxation
Net profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Attributable to:
– Owners of the parent
– Non-controlling interest
W.1: Goodwill
RL equity % in CL
Cost of investment
Equity at the date of acquisition:
– Share capital
– Retained on the acquisition date
– FV of office building exceeded its carrying value
Balancing
(18-2.8-1.2) × 20%
Rs. in million
497.00
(322.40)
174.60
(52.00)
(37.88)
84.72
(18.00)
66.72
(31.00)
35.72
35.72
32.92
2.80
35.72
Rs. in million
1.6 ÷ 2 × 100
80%
250.00
200 × 80%
36 × 80%
18 × 80%
(160.00)
(28.80)
(14.40)
46.80
(b) Rivera Limited
Consolidated Statement of Financial Position as at 31 December 2014
Rs. in million
ASSETS
Non-current assets:
Property, plant and equipment
Goodwill
Current assets
EQUITY AND LIBILITIES
Equity attributable to owners of RL:
Share capital
Retained earnings
Non-controlling interest
Current liabilities
190+263+18-1.2
(W.1) 46.8*90%
23+35-2.8-1.6
50+32.92
(200+36+18)*20%)+2.80
35+44
469.80
42.12
511.92
53.60
565.52
350.00
82.92
432.68
53.60
486.52
79.00
565.52
Page 1 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.2 Omega Chemicals Limited
Accounting entries for the year ended 31 December 2014
Date
Debit
Credit
Rs. in million
Description
Factory buildings
Accumulated depreciation-Factory buildings
Factory buildings
(Reversal of accumulated depreciation on revaluation of factory
buildings on 31 December 2013)
31-Dec-2014 Retained earnings (2013 Impairment)
[52 – (100 – 37.5)]
Factory buildings
(2013 Impairment of factory buildings accounted for in 2014)
(52÷12.5W-1)
31-Dec-2014 Depreciation expense
Accumulated depreciation-Factory buildings
(Depreciation expenses for the year ended 31 December 2014)
31-Dec-2014 Accumulated depreciation-Factory buildings
Factory buildings
(Reversal of accumulated depreciation on revaluation of factory
buildings on 31 December 2014)
31-Dec-2014 Factory buildings
[64 – (52 – 4.16)]
PL account (Impairment)
[10.5 – (10.5÷12.5W-1)]
Revaluation surplus - Factory buildings (Bal.)
(Revaluation of factory buildings on 31 December 2014 and reversal
of previous impairment)
Office buildings
1-Jul-2014 Depreciation expense
[31.92 ÷ 21 × 0.5]
Accumulated depreciation-Office buildings
(Depreciation expenses for the six months ended 1 July 2014 for the
office building block sold)
1-Jul-2014 Revaluation surplus
[(31.92-27.72=4.2) ÷ 21 × 0.5]
Retained earnings
(Transfer of incremental depreciation for the six months ended 31
December 2014 to retained earnings)
1-Jul-2014 Bank
(4.2 – 0.1)
Revaluation surplus
Accumulated depreciation
30–(31.92-0.76)
Loss on sale of Office buildings
Retained earnings
Office buildings
(Sale of office building)
31-Dec-2014 Depreciation expense
(149.94 – 31.92) ÷ 21
Accumulated depreciation-Office buildings
(Depreciation expenses for the year ended 31 December 2014)
31-Dec-2014 Revaluation surplus- Office building
[149.94-(164.5-26.32)-4.2]÷21
Retained earnings
(Transfer of incremental depreciation for the year ended 31 December
2014 to retained earnings)
31-Dec-2014
37.50
37.50
10.50
10.50
4.16
4.16
4.16
4.16
16.16
9.66
6.50
0.76
0.76
0.10
0.10
30.00
4.10
0.76
1.16
4.10
31.92
5.62
5.62
0.36
0.36
W-1: Remaining useful life of the buildings on the revaluation date of 31 December 2013
Factory buildings
Office buildings
Years
20 – [(37.5 ÷ (100 ÷ 20)]
25 – [(26.32 ÷ (164.5 ÷ 25)]
12.50
21.00
Page 2 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.3 Zamil Limited
Accounting treatment and disclosure for the year ended 31 December 2014
(a)
Claim for supply of inferior quality goods
 Claim to the extent of Rs. 6 million is accepted by the vendor, therefore, a claim
would be recognized as an asset by ZL as it is virtually certain that it will be
received.
 For the probable claim amount of Rs. 2.8 million [(10-6)×70%],
– It should be treated as a loss and charged to profit and loss account and a
contingent asset amounting to Rs. 2.8 million should also be disclosed,
giving a brief description of the contingent asset at the end of the reporting
period.
 Recovery of Rs. 1.2 million [(10-6) ×30%] is not probable, therefore, it would be
charged to profit and loss account.
(b)
Withdrawal of funds from ZL's bank accounts fraudulently
 Cash withdrawal before 31 December 2014 amounted to Rs. 7 million from ZL's
bank accounts is an adjusting event as the event existed on 31 December 2014
though it was revealed after the year end. Cash lost to the extent of 80% is certain
to be received, therefore a claim of Rs. 5.6 million (7*80%) would be recognized
as an asset. Remaining amount of Rs. 1.4 million (7*20%) is no more receivable,
therefore, it would be charged to profit and loss account for the year ended 31
December 2014.
 Cash withdrawal of Rs. 3 million is a non-adjusting event as it occurred after
year end. However, if the event is considered to be material, a disclosure should
be made along with the expected recovery their against.
(c)
Relocation of unit from Sukkur to Karachi
 A provision for restructuring cost is to be recognised, as a formal restructuring
plan has been finalised and approved by the management and a formal public
announcement was made prior to 31 December 2014. Therefore, a constructive
obligation has arisen on 1 December 2014.
 However, a provision should only be made for redundancy cost of Rs. 3.58
million as it pertains to the closing of Sukkur unit.
 Costs for staff training and relocation of staff relate to future conduct of the
business and should not be recorded in the year ended 31 December 2014.
 Salary of the existing operation manager should not be recorded as it is not
incremental cost, and would be incurred whether relocation takes place or not.
(d)
Installation of safety equipment to carrying vehicles of ZL:

For the year ended 31 December 2014, ZL is not required to make any
provision for liability due to non installation of safety equipment to its
chemical carrying vehicles, as
–
There is no law requiring ZL to install the safety equipment.
–
There is no constructive obligation to install the safety equipment, since ZL
has neither past practice nor any published policy in this respect.

Although, decision has been made on 25 December 2014 to install the safety
equipment, cost would only be recorded on actual incurrence of cost.
Page 3 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.4
Pak Ocean Limited
Statement of Changes in Equity for the year ended 31 December 2014
Balance as at 1 January 2013
Total comprehensive income for the year ended
31 December 2013:
– Profit after tax : restated
[52– (4.5÷9×2)]
– Other comprehensive income
Transfer from surplus on revaluation of incremental
deprecation for the period
Bonus issue at 15% for the year ended 31 December
2012
(200 × 15%)
Interim cash dividend at 20% for the year ended 31
December 2013
(230 × 20%)
Balance as at 31 December 2013 - restated
Share
Share
Retained
Total
capital
premium earnings
------------- Rupees in million ------------200.00
45.00
245.00
30.00
230.00
(230 + 23) × 25%
Ans.5
46.00
2.30
2.30
(30.00)
-
Total comprehensive income for the year:
– Profit after tax
[78 + (4.5 ÷ 9 × 2)]
– Other comprehensive income
Transfer from surplus on revaluation of incremental
deprecation for the period
Final cash dividend at 18% for the year ended 31
(230 × 18%)
December 2013
Interim bonus issue at 10% for the year ended
31 December 2014
(230 × 10%)
25% Right issue at a premium of Rs. 20 per share
51.00
(5.00)
46.00
(46.00)
17.30
(46.00)
247.30
-
23.00
63.25
316.25
12.65
12.65
79.00
12.00
91.00
91.00
1.50
1.50
(41.40)
(41.40)
(23.00)
45.40
75.90
374.30
According to the ICAP’s Code of Ethics, the threats which a chartered accountant may face while
complying with the fundamental principles have been categorized as under:
(i)
Threat category
Self interest
(ii)
Self review




(iii)
Advocacy

(iv)
Familiarity



(v)
Intimidation


Situations
Incentive compensation arrangement
Concern over employment security
Commercial pressure from outside the employing organization
Business decisions or data being subject to review and justification by the
same chartered accountant in business responsible for making those
decisions or preparing that data.
Providing misleading and false information to promote its organization’s
position.
A chartered accountant in business in a position to influence financial or
non-financial reporting or business decisions having an immediate or
close family member who is in a position to benefit from that influence.
Long association with the business contacts influencing business
decisions.
Acceptance of a gift or preferential treatment, unless the value is clearly
insignificant.
Threat of dismissal or replacement over a disagreement about the
application of an accounting principle or the way in which financial
information is to be reported.
A dominant personality attempting to influence decisions of the
chartered accountant.
Page 4 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.6 Shaheen Limited
Statement of financial position as at 31 December 2014
Rs. in million
ASSETS
Non-current assets
Property, plant and equipment
Patents
Deferred taxation
Current assets
Inventories
Trade receivables
Prepayments and other receivables
Cash and bank balances
EQUITY AND LIABILITIES
Share capital and reserves
Share capital
Retained earnings
Non-current liabilities
Liabilities against assets subject to finance lease
Current liabilities
Current maturity of finance lease liability
Trade payables
Accruals and provisions
Taxation
[1,876 + (8.3 × 80%)]
(28-1)
(12 + W-3 4.75)
(503 – 3) + (2.5 – 0.4)
(630 ÷ 97%) × 95%
1,882.64
27.00
1,909.64
16.75
502.10
617.01
23.00
13.00
1,155.11
3,081.50
W-1
1,200.00
605.23
1,805.23
W-5 (8.3 – 4.19)
4.11
W-5
(645 + 4.5)
(395 + W-5 0.81)
215 + 12 – W-2 1.84)
1.69
649.50
395.81
225.16
1,272.16
3,081.50
W-1: Retained earnings
Balance before adjustments
(i)
Damaged goods at lower of cost and NRV
[3 – (2.5 –0.4)]
(ii)
Old outstanding liability prev. written back, now paid
(iii) Impairment of patents
(28 – 27)
(iv) Reversal of operating lease rent exp
Lease financial charges
W-5
Depreciation on leased assets
(8.3 ÷ 5)
(v)
Increase in prov. for doubtful debts
630÷97 %×( 5%–3%)
Decrease in retained earnings before tax
Decrease in tax liability
W-2
Increase in deferred tax asset
W-3
Adjusted balance
Rs. in million
618.00
(0.90)
(4.50)
(1.00)
2.50
(0.81)
(1.66)
(12.99)
(19.36)
1.84
4.75
605.23
Page 5 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
W-2: Current tax liability
Decrease in profit before tax
Tax add backs/(allowances) :
Impairment of patents
Operating lease rent
Lease finance charges
Depreciation on leased vehicles
Provision for doubtful debts
Decrease in taxable income
Decrease in tax liability at 34%
(19.36)
W-1
1.00
(2.50)
0.81
1.66
12.99
(5.40)
1.84
W-5
(8.3÷5)
W-3: Deferred Tax:
Deductible/(taxable) temporary differences:
Impairment of patents
Lease finance charges
Depreciation on leased vehicles
Lease installment
1.00
0.81
1.66
(2.50)
(0.03)
12.99
13.96
4.75
W-5
(8.3÷5)
Provision for doubtful debts
Net deductible temporary differences
Increase in deferred tax asset at 34%
W-4: Vehicles acquired on lease:
The lease will be treated as finance lease, as
(i)
The lease term is major life of the vehicles; and
(ii)
At the inception of the lease, PV of minimum lease payments amounts to at least
substantially all the fair value of the leased vehicles.
Present value of minimum lease payments:
2014
2015
Annual installments
2.50
2.50
Present value at 14%
2.50
2.19
2016
2.50
1.92
2017
2.50
1.69
Total
10.00
8.30
Leased vehicles/lease liability recognition at lower of PV of minimum lease
payments of Rs. 8.3 million and fair value of Rs. 8.5 million
8.30
W-5: Finance lease liability
Year
Opening balance
2014
2015
(A)
(W-3) 8.30
5.80
Payments in
advance
(B)
(2.50)
(2.50-0.81) (1.69)
Accrued finance
charges
C=(A-B) × 14%
0.81
0.58
Closing balance
(A-B) = D
5.80
4.11
Page 6 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2015
Ans.7 Alpha Trading Limited
Balances as would appear in Statement of Financial Position as at 31 December 2014
Rs. in million
Assets:
Property, plant and equipment:
Capital work in progress (Office building):
1st progress bill
2nd progress bill
Finance cost
79.9 ÷ 0.85
100.3 ÷ 0.85
W.1
94.00
118.00
4.06
216.06
Current assets:
Advance to contractor
50 – [10% × (94 + 118)]
Liabilities:
Long-term liabilities
Long-term loan
Retention from contractor
(94 + 118) × 5%
Current liabilities
Current maturity of long-term loan
Bills payable (net of 10% advance and 5% retention)
28.80
75.00
10.60
25.00
100.30
W.1: Capitalisation of interest:
Description
Rs. in
million
Interest %
No. of months to
31-12-2014
(excl. suspension month)
Interest
(Rs. in million)
(i) Interest on utilisation of loan:
Interest payable on specific loan
amount
100.00
11%
(6–1)
5
4.58
2
0.65
(ii) Interest on utilization of running finance facility:
Part payment of 1st. progress bill on
31 October 2014
(100-50-79.9)
(24.7÷190)
29.90
13%
(iii)Interest increase on investment of surplus amount of loan:
Interest earned from unutilized
amount of loan invested in a saving
bank account
(100-50)
50.00
Interest to be capitalized
7%
(1 Jul –
31 Oct 2014)
4
(1.17)
4.06
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance
– Spring 2015
General
Performance in the paper was below average as most of the students were unable to get
passing marks in question nos. 2, 3, 6 and 7. It was noticed that besides lack of
knowledge an important reason for poor performance was that students did not read the
requirements carefully.
Question-wise comments are as under:
Question 1
This was a simple question on consolidation and most of the candidates performed well.
The mistakes observed were as follows:

Profit margin on intercompany sales was computed incorrectly as it was taken as 20%
of the amount of sales instead of 20% of the cost of sales.

Impairment in goodwill was recorded in Statement of Financial Position but was not
recorded in Statement of Comprehensive Income.

Impact of fair value adjustment of office building, on depreciation for the year, was
ignored.

While computing non-controlling interest in Statement of Comprehensive Income, the
net profit of CL was to be adjusted as regards profit on closing inventory relating to
inter-company sales and additional depreciation on account of fair value adjustment.
Most of the students ignored either one or both of these adjustments.

While computing the parent’s share in consolidated statement of comprehensive
income, the parent’s percentage holding i.e. 80% was applied directly to the
consolidated comprehensive income which was incorrect. The easiest way to
calculate it was to deduct the share of non-controlling interest from the total
comprehensive income for the year.

Various types of errors were made in computing the consolidated retained earnings;
though it was simply required to add the opening retained earning balance with the
profit for the year attributable to owners of parent. Similar errors were also noted in
the computation of non-controlling interest for the Statement of financial position.
Page 1 of 5
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2015
Question 2
A very poor response was observed in this question which required accounting entries
related to revaluation of fixed assets. Most of the candidates could not prepare all the
accounting entries and the following types of mistakes were observed in the entries that
were prepared:

The remaining useful lives of the building were not computed. Most of the candidates
took the original estimated useful lives before revaluation, while calculating the
depreciation.

The company’s failure to record the revaluation of factory building in 2013 as stated
in the question, on the assumption that the revaluation was temporary, was an error
and it needed to be corrected by adjusting the value of factory building through the
Retained Earnings account. A large number of candidates did not pass this
adjustment.

While recording revaluation surplus of factory building, on the basis of valuation
carried out on 31 December 2014, the following types of errors were observed:
o The entire difference was taken to revaluation surplus whereas the impairment
recorded in respect of 2013 (after adjusting for depreciation) should have been
credited to the P&L (impairment account) and only the balance should have been
credited to surplus account.
o Some students who credited the P&L (impairment account), did not adjust the
depreciation for 2014, in arriving at the amount to be credited to P&L.

Depreciation (for 6 month) on office building sold on 1 July 2014 was not recorded.
Further, a significant number of students computed profit on sale of office building by
comparing the sale price with the depreciated cost instead of depreciated revalued
amount.

While recording the disposal of building, many students did not transfer the
incremental depreciation on revaluation to the retained earnings account.
Question 3
In this question four different scenarios were given and the candidates were required to
discuss how the various issues should be dealt with in the financial statements. The
comments on each situation are given below:
(a)
Most of the students correctly mentioned that claim of Rs. 6 million shall be
recognized as an asset. However, very few of them could explain that since it was
probable that 70% of the remaining amount would also be recovered, it shall be
disclosed as a contingent asset.
Page 2 of 5
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2015
(b)
Most of the candidates correctly identified fraud of Rs. 7 million i.e. amount
withdrawn before year-end, as an adjusting event and remaining amount as a nonadjusting event. However, they did not understand the correct treatment of the
amount of claim that the insurance company had agreed to pay and how to record
the amount which would not be recovered. Majority of the students were of the
view that entire loss of 2 million should be recorded in the current year. Only few
could specify correctly that only 80% of Rs. 7 million i.e. Rs. 5.6 million shall be
recognized as asset in current year and the remaining Rs. 1.4 million shall be
recognized as a loss. Further, very few students mentioned that 80% of Rs. 3
million withdrawn after year-end i.e. which would be recorded as a loss next
year, may be disclosed if considered material.
(c)
Most of the students correctly identified the event as an adjusting event; however,
some of them could not give appropriate reasons thereof. Further, many
candidates stated incorrectly that all the given costs should be recognized. In fact,
only the redundancy costs of Rs. 3.58 million should have been recognized. For
detailed explanation, the students should refer to ICAP’s suggested answer.
(d)
Most of the students were able to identify that no liability need to be recognized.
However, many students could not give appropriate reasons thereof.
Question 4
This question required preparation of statement of Changes in Equity. The performance
was good and some of the candidates were able to secure full marks also.
The following errors were however observed:

Many candidates combined profit after tax, other comprehensive income and
incremental depreciation on revaluation of property, plant and equipment; whereas, as
per IAS-1, all these items are required to be presented separately.

Re-statement of profit after tax for 2013 was either ignored or computed incorrectly.
Similarly, impact of the above re-statement on profit for 2014 was also ignored.

Interim bonus shares were not considered in the computation of right shares.

Profit after tax for the year 2013 was required to be restated because depreciation was
charged from 1 April instead of 1 February i.e. the date the asset was ready for use.
Moreover, since the error was corrected in 2014 through the P&L account, profit of
2014 needed to be corrected also. These were generally ignored. Further, some
candidates used the entire depreciation of Rs. 4.5 million (covering 11 months) for
the above adjustments instead of restricting it to the amount that was short recorded
i.e. Rs. 1.0 million.
Question 5
In this question the candidates were required to mention the threats which a chartered
accountant may face in complying with the fundamental principles and to mention one
situation which may create such threat.
Page 3 of 5
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2015
Most of the students were able to identify the five threats but many students ignored the
examples altogether or gave examples of threats faced by Chartered Accountants in
Practice instead of Chartered Accountants in Business.
Question 6
In this question, a draft Statement of Financial Position was given along with information
requiring adjustments based on IAS-2, IAS-12, IAS-17 and IAS-36 and the candidates
were required to prepare the Statement of Financial Position after incorporating the
relevant adjustments.
The overall response to this question was quite poor as majority of the students lacked the
requisite knowledge and also made various errors in the computations. Some of the
commonly observed errors are mentioned below:

Trade receivables were not grossed up before making 5% provision.

Instead of writing down the damaged goods to their net realizable value, the entire
cost was written off.

Trade payables were reduced by Rs. 4.5 million without re-instating the amount that
had been written back. On the other hand, some students re-instated the entire amount
i.e. Rs. 6 million instead of Rs. 4.5 million.

Patents were stated at the fair value whereas IAS-36 specifies that the intangible
assets should be carried at lower of cost or recoverable value, where recoverable
value means ‘fair value less cost of disposal’ or ‘value in use’, whichever is higher.

Vehicles acquired on finance lease should have been recognized at fair value of the
vehicles or the PV of minimum lease payments whichever is lower. Some candidates
computed the PV of minimum lease payments by considering the installment
payments in arrears whereas as per the question, the installments were payable in
advance. Further, the written down value was computed by dividing the cost of
vehicles with 4 years instead of the useful life of 5 years mentioned in the question.

The classification of lease liability into long term and current maturity was mostly
missed.

Computation of deferred tax liability and deferred tax assets was completely ignored
by most of the students.
Question 7
In this question the candidates were required to compute various amounts related to a
Construction Contract, for the purposes of incorporating them into the Statement of
Financial Position. It was observed that many candidates did not read the requirements
carefully and only computed the borrowing cost to be capitalized.
Page 4 of 5
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2015
Other common mistakes were as follows:

Interest on specific loan was computed for 6 months i.e. suspension of work for one
month was ignored. On the other hand, some students computed the interest income
on excess funds for 3 months i.e. ignored the one month during which the work was
suspended.

Entire amount of interest on running finance i.e. Rs. 24.7 million was capitalized
instead of computing the rate of mark-up and applying it on amount of running
finance utilized for the contract.

In computing the capital work in progress, net payments against progress bills were
considered instead of the gross amounts.

Advance and retention money was computed on the net amount of bills instead of the
gross amount.

The amount of loan was not bifurcated between long-term portion and the current
maturity.
THE END
Page 5 of 5
Certificate in Accounting and Finance Stage Examinations
12 September 2015
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Q.1
The following information has been extracted from the draft financial statements of
Himalaya Woods Limited (HWL) for the year ended 30 June 2015:
Statement of financial position as at 30 June 2015
Equity and liabilities
Share capital (Rs. 100 each)
Retained earnings
Trade and other payables
Taxation
2015
2014
Rs. in million
2,500
2,500
2,450
2,058
740
560
70
52
5,760
5,170
Assets
Property, plant and equipment
Stock in trade
Trade debts - net
Cash and bank balances
2015
2014
Rs. in million
4,261
3,773
835
795
650
585
14
17
5,760
5,170
Statement of comprehensive income for the year ended 30 June 2015
2015
Sales revenue
Cost of sales
Operating expenses
Taxation at 34%
Profit after taxation
2014
Rs. in million
20,000
15,520
(14,000)
(10,000)
(5,406)
(4,764)
(202)
(257)
392
499
Following matters are under consideration for finalisation of the financial statements:
(i)
Previous year in June 2014, goods delivered on ‘sale or return basis’ were erroneously
recorded as sale at Rs. 35 million (cost plus 40%). In July 2014, 35% of these goods
were returned by the customers and debited to sales return account.
(ii) A customer owing Rs. 20 million as on 30 June 2015 was declared bankrupt on
1 August 2015. HWL estimates that 40% of the debt would be received on liquidation.
(iii) HWL maintains a provision for doubtful debts at 4% of trade debts.
(iv) Retained earnings balance as at 30 June 2013 amounted to Rs. 1,559 million.
Required:
In accordance with the requirements of International Financial Reporting Standards,
prepare the following:
(a) Statement of financial position as at 30 June 2015
(b) Statement of comprehensive income for the year ended 30 June 2015
(c) Statement of changes in equity for the year ended 30 June 2015
(Show comparative figures. Ignore deferred tax implications and notes to the financial statements)
Q.2
(18)
Fortune Limited (FL) is quoted on the stock exchange, with revenue of over Rs. 5 billion per
annum. During the year ended 30 June 2015, FL has incurred a loss of Rs. 26 million.
The Chief Executive is of the view that declaration of loss may result in the bankers’ refusal
to renew the credit facility. Therefore, he wants to incorporate certain adjustments in the
books of account that will result in a net profit of Rs. 100 million. However, the Chief
Financial Officer (CFO), who is a chartered accountant, is of the view that all possible
adjustments allowable under the applicable accounting regulations have already been
considered and incorporated.
Required:
Identify the categories of threats to the fundamental principles of objectivity or professional
competence and due care, that may be created in the above situation and discuss the
safeguards available to the CFO in this respect, under the ICAP’s Code of Ethics.
(06)
Financial Accounting and Reporting-II
Q.3
Page 2 of 4
QP Limited (QPL) commenced construction of a warehouse on 1 July 2013 and completed
the work on 31 December 2014. In this respect the following information is available:
(i)
Prior to commencement of construction, QPL incurred the following expenses:
Consultants fee
Preparation of land
Payment of outstanding government dues for the land
(ii)
Rs. in million
1.45
0.95
0.60
The agreed contract price is Rs. 70 million. Payments made to the contractor were as
follows:
Net payments
Invoice date
Date of payments
Description
(Rs. in million)
1-Jul-2013
16-Jul-2013
10% Advance: (Deductible
from the progress bills)
7.00
30-Sep-2013
16-Oct-2013
1st progress bill
6.00
31-Dec-2013
16-Jan-2014
2nd progress bill
14.00
31-Mar-2014
16-Apr-2014
3rd progress bill
12.00
30-Jun-2014
16-Jul-2014
4th progress bill
10.00
30-Sep-2014
16-Oct-2014
5th progress bill
8.00
31-Dec-2014
16-Jan-2015
Final bill
13.00
70.00
(iii) To finance the project cost, bank loans were acquired as follows:
Description
Loan A
Loan B
Loan amounts
(Rs. in million)
30.00
40.00
Received on
Mark-up
1-Jul-2013
1-Jan-2014
10%
12%
Mark-up is payable semi-annually on 30 June and 31 December each year. The loans
are repayable in five equal instalments, commencing from 1 January 2016.
(iv)
(v)
Surplus funds, when available, were invested in short term deposits which provide a
return of 8% per annum computed on a daily basis.
The warehouse was available for use on 1 January 2015. Useful life of the warehouse
is estimated at 25 years with no residual value.
Required:
Prepare accounting entries for the year ended 30 June 2015 in the books of QPL.
(Ignore taxation. Accounting entries for the year ended 30 June 2014 are not required. Borrowing
cost calculations should be based on 360 days a year basis)
Q.4
(16)
A factory worker of Industrial Chemicals Limited (ICL) was seriously injured on 10 June
2015 during a production process. Subsequent developments in this matter are as follows:
(i)
(ii)
(iii)
On 26 July 2015, the worker filed a claim for Rs. 25 million and alleged violation of
safety measures on the part of ICL. The lawyers of ICL anticipate that there is 60%
probability that the court would award Rs. 12 million and 40% likelihood that the
amount would be Rs. 8 million.
According to the terms of the insurance policy, ICL filed a claim of Rs. 18 million
which was principally accepted by the insurance company on 5 August 2015 to the
extent of Rs. 14 million. ICL is negotiating with the insurance company and it is
probable that ICL would recover a further sum of Rs. 2 million.
On representation by the Labour Union, the management is considering to pay to the
affected worker an amount of Rs. 1.5 million, in addition to the compensation that
may be awarded by the court.
Required:
Explain accounting treatment and the disclosure requirements in respect of the above
matters in ICL's financial statements for the year ended 30 June 2015. Support your answer
by referring to the relevant guidelines contained in International Financial Reporting
Standards.
(12)
Financial Accounting and Reporting-II
Q.5
Page 3 of 4
An investor wants to analyze the performance of Zee Limited for which he has collected the
following information for the year ended 30 June 2015 and 2014:
2015
2014
Rs. in million
100.00
75.00
Profit after interest and tax
Interest expense at 12% per annum on a
long-term loan acquired on 1 January 2014
Current tax expense
Deferred tax credit/(expense)
Interim bonus issue
Final cash dividend (2013: 30%)
(9.60)
(50.00)
6.00
12%
20%
(4.80)
(35.00)
(8.00)
10%
25%
The break-up of shareholders’ equity as at 1 July 2013 was as under:
Share capital (Rs. 10 each)
Share premium
Retained earnings
Rs. in million
200
20
40
260
Required:
Compute Return on Capital Employed and Return on Shareholders’ Equity for the year
ended 30 June 2015.
(07)
Q.6
On 1 July 2014, Galaxy Limited (GL) acquired controlling interest in Beta Limited (BL).
The following information has been extracted from the financial statements of GL and BL
for the year ended 30 June 2015.
Share capital (Rs. 100 each)
Retained earnings – 1 July 2014
Profit for the year ended 30 June 2015
Shareholders’ equity/Net assets
Investment in BL (300,000 shares)
Inter-company sales (at invoice value)
Inter-company purchases remained unsold at year-end
Inter-company current account balances
GL
BL
Rs. in million
100
50
40
18
20
6
74
160
50
25
9
7
30
5
(4)
Other relevant information is as under:
(i)
On the date of acquisition, fair value of BL's net assets was equal to their book value
except for the following:
Fair value of a land exceeded its carrying value by Rs. 20 million.
The value of a plant was impaired by Rs. 10 million. The impairment was also
recorded by BL on 2 July 2014
BL measures its property, plant and equipment using cost model.
(ii) There is no change in share capital since 1 July 2014.
(iii) Inter-company sales are invoiced at cost plus 20%. The difference between the current
account balances is due to goods dispatched by GL on 30 June 2015 which were
received by BL on 5 July 2015.
(iv) GL values non-controlling interest at the acquisition date at its fair value which was
Rs. 35 million.
(v) As at 30 June 2015, goodwill of BL was impaired by 10%.
Required:
Compute the amounts of goodwill, consolidated retained earnings and non-controlling
interest as they would appear in GL's consolidated statement of financial position as at
30 June 2015.
(15)
Financial Accounting and Reporting-II
Q.7
(a)
Page 4 of 4
On 1 July 2013, Zeta Limited (ZL) acquired an industrial mixer for four years, under a
non-cancellable operating lease. The rent was agreed at Rs. 2.5 million per annum
payable in advance, with 5% annual increase.
Due to change in production plan, the mixer became surplus on 31 December 2014
and was sub-let on 1 January 2015 to Shan Enterprises for the period up to 30 June
2017. The rent was agreed at Rs. 2 million per annum payable in advance on
1 January each year.
Required:
Prepare accounting entries from the above information for the year ended
30 June 2015 in the books of ZL. (Accounting entries for the year ended 30 June 2014 are
not required)
(08)
(b)
Last year, on 1 July 2013, ZL entered into a sale and lease back agreement in respect
of one of its power generation plant. On the date of agreement, the power plant had a
book value of Rs. 23 million and remaining useful life of 6 years.
Other information related to the sale and lease-back arrangement is given below:
Proceeds from the sale of plant
Lease installment payable annually in arrears
Lease period, commencing from 1 July 2013
Rate of interest implicit in the lease
Rs. 25 million
Rs. 7 million
5 years
12.38%
Required:
Prepare a note on finance lease liability, for inclusion in ZL’s financial statements for
the year ended 30 June 2015 in accordance with the International Financial Reporting
Standards. (Comparative figures are not required)
Q.8
(11)
Opal Limited (OL) commenced research work on a new product on 1 July 2013 and entered
the development phase on 1 July 2014. In this respect, the following expenses were incurred
and debited to capital work in progress.
For the year ended
30 Jun 2015
30 Jun 2014
-------- Rs. in million -------Research and development cost
12.00
8.00
Training of technical staff
0.90
Cost of laboratory equipment *
4.00
Cost of trial run
0.60
13.50
12.00
* Purchased on 1 January 2014, having estimated useful life of five years.
Criteria for recognition of the internally generated intangible asset have been met. The
commercial production was started from 1 January 2015. It is estimated that the related
product would have a shelf life of 10 years.
Required:
Explain accounting treatment of the above in the financial statements for the year ended
30 June 2015 in the light of International Financial Reporting Standards.
(07)
(THE END)
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
A.1
(a)
Himalaya Woods Limited
Statement of financial position as at 30 June 2015
2014
(Restated)
------- Rs. in million ------2015
Equity and liabilities
Share capital (Rs. 100 each)
Retained earnings
Current liabilities
Trade and other payables
Taxation
Assets
Non-current assets
Property, plant and equipment
Current assets
Stock in trade
Trade debts
Cash and bank balances
(b)
W.2
[2014 : 795+(35÷1.4)]
W.1
2,500
2,442
4,942
2,500
2,052
4,552
740
66
806
5,748
560
49
609
5,161
4,261
3,773
835
638
14
1,487
5,748
820
551
17
1,388
5,161
Statement of comprehensive income for the year ended 30 June 2015
2014
(Restated)
---- Rs. in million ---20,035
15,485
(14,025)
(9,975)
6,010
5,510
2015
Sales
Cost of sales
Gross profit
Operating expenses
(20,000+35), (15,520–35)
[14,000+(35÷1.4)], [10,000–(35÷1.4)]
2015: [5,406+12+{(35–12)×4%}] 2014: [4,764–(35×4%)]
Profit before tax
Taxation at 34%
Profit for the year
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
(c)
(5,419)
591
(201)
390
390
(4,763)
747
(254)
493
493
Statement of changes in equity for the year ended 30 June 2015
Retained
Total
earnings
------------- Rs. in million ------------2,500
1,559
4,059
493
493
2,500
2,052
4,552
390
390
2,500
2,442
4,942
Share capital
Balance as at 30 June 2013
Profit after taxation – restated
Balance as at 30 June 2014 - restated
Profit after taxation
Balance as at 30 June 2015
Page 1 of 8
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
W.1: Trade debts
Trade debts after provision
Provision for doubtful debts at 4%
2,015
650
(650÷0.96×0.04), (585÷0.96×0.04)
Trade debts before provision
Change in opening balance
(574–609)
Correction of July 2014 sales booked in June 2014
Customer declared bankrupt on 1 August 2015
(20×60%)
A.2
Provision for doubtful debts at 4%
(665×4%), (574×4%)
W.2: Tax liability
Balance prior to adjustments
Change in opening balance
Decrease in tax liability
(49–52)
(201–202), (254–257)
27
677
(35)
35
(12)
665
(27)
638
70
(3)
(1)
66
2,014
585
24
609
(35)
574
(23)
551
52
(3)
49
Fortune Limited
Categories of threats:
The given situation may create following threats to the fundamental principles of objectivity or
professional competence and due care:
 Self-interest
 Intimidation
Safeguards available to the CFO:
If, these threats are significant, the CFO should consider and apply the following safeguards to
eliminate or reduce them to an acceptable level:
 Consultation with superiors within the employing organization, for example audit committee.
 Consultation with other body responsible for governance
 Consultation with a relevant professional body.
Where it is not possible to reduce the threats to an acceptable level, a CFO:
 should refuse to remain associated with information which is or may be misleading.
 if issuance of misleading information is either significant or persistent, he should consider
informing appropriate authorities keeping in view the confidentiality and the legal
requirements.
 may seek legal advice or resign.
Page 2 of 8
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
A.3
Quality Pharma Limited
Accounting entries for the year ended 30 Jun 2015
Date
Debit
Credit
Rs. in million
10.00
10.00
Description
16-Jul-2014 Account payable
Bank
(Payment of the 4th. progress bill liability)
30-Sep-2014 Capital work in progress
Advance payment
Account payable
(Accrual of the 5th. progress bill)
8÷90%
8.89×10%
8.89
0.89
8.00
16-Oct-2014 Account payable
Bank
(Payment of the 5th progress bill liability)
8.00
31-Dec-2014 Capital work in progress
(30×10%)÷2+(40×12%)÷2
Bank/Interest payable
(Finance cost for Jul-Dec 2014 paid and capitalised)
3.90
31-Dec-2014 Capital work in progress
Advance payment
Account payable
(Accrual of the final bill)
8.00
3.90
13÷90%
14.44×10%
14.44
31-Dec-2014 Bank
Capital work in progress
W.1
(Finance income from surplus funds: 1-7-2014 to 31-12-2014)
0.74
31-Dec-2014 Property plant and equipment - Warehouse
Capital work in progress
W.2
(Transfer of CWIP cost to property, plant and equipment)
78.55
16-Jan-2015 Account payable
Bank
(Payment of the 5th. progress bill liability)
13.00
1.44
13.00
0.74
78.55
13.00
16-Jan-2015 Bank/Interest receivable
Finance income / PL account
W.1
(Finance income from surplus funds: 1-1-2015 to 16-1-2015)
0.04
30-Jun-2015 Finance cost
(30×10%)÷2+(40×12%)÷2
Bank/Interest payable
(Finance cost for Jan-Jun 2015)
3.90
30-Jun-2015 Depreciation expense
78.55÷25÷2
Accumulated depreciation
Depreciation on warehouse from the date of availability of
use - (1 Jan to 30 Jun 2015)
1.57
0.04
3.90
1.57
Page 3 of 8
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
W.1: Finance income at 8% from the surplus funds
Payment
Dates
1-Jul-2013
16-Jul-2013
16-Oct-2013
1-Jan-2014
16-Jan-2014
16-Apr-2014
16-Jul-2014
16-Jul-2014
16-Oct-2014
31-Dec-2014
16-Jan-2015
Description
Loans
utilisation
Surplus
funds
(Rs. in million)
Proceeds from loan A
30.00
30
10% advance
(7.00)
23
1st progress bill
(6.00)
17
Proceeds from loan B
40.00
57
2nd progress bill
(14.00)
43
3rd progress bill
(12.00)
31
For the year ended 30 Jun 2014
From 1-7-2014
31
4th progress bill
(10.00)
21
5th progress bill
(8.00)
13
Completion date
13
Final bill
(13.00)
For the year ended 30 Jun 2015
W.2: Capital work in progress as at 30 June 2015
Cost incurred prior to construction
Construction cost
Finance Cost - Loan A (1 Jul 2013 - 31 Dec 2014)
Finance Cost - Loan B (1 Jan - 31 Dec 2014)
Finance income from investment of the surplus funds
Total
A.4
No. of days
15
90
75
15
90
75
15
90
75
15
Finance income from surplus
funds at 8%
CWIP
PL account
Rs. in million
0.10
0.46
0.28
0.19
0.86
0.52
To 30-6-2014
2.41
0.10
0.42
0.22
0.04
0.74
0.04
3.15
0.04
(1.45+0.95)
(3010%)÷12×18
(40×12%)
(for the construction period) (W.1)
Rs. in million
2.40
70.00
4.50
4.80
(3.15)
78.55
Industrial Chemicals Limited
Accounting treatment and disclosures for the year ended 30 June 2015
Provisions and contingent liability:
According to IAS 37, a provision shall be recognized when all of the following conditions are met:
 There is a present obligation (legal or constructive) as a result of past event.
 It is probable that outflow of resources will be required to settle the obligation.
 A reliable estimate can be made of the amount of the obligations.
In view of the above, a provision shall be made to the extent the above conditions are met as
explained under:
(i)
Rs. 12 million [OR Rs. 10.4 million (12×60%+8×40%)] for the pending claim of the worker as
it is most likely that ICL would require to pay this amount as advised by ICL’s lawyers. For
the remaining amount of Rs. 13 million (25–12) [OR Rs. 14.6 million (25–10.4)], it is not
probable that an outflow of economic benefits will be required. Therefore, a contingent
liability would be disclosed giving information as under:

A brief nature of the contingent liability.

Where practicable an estimate of finance liability and indication of uncertainties; and

The possibility of any reimbursement
(iii) As regards the additional compensation of Rs. 1.5 million under consideration of the
management, neither provision nor disclosure shall be made as the obligation is neither
legal nor constructive as the matter is still under consideration and no formal intimation was
made that may create a valid expectation in this respect.
Page 4 of 8
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
(ii) Reimbursements:
According to IAS 37, where some or all of the expenditure required to settle a provision is
expected to be reimbursed by another party:
 The reimbursement shall be recognized where it is virtually certain that reimbursement
will be received.
 The amount recognized in respect of the reimbursement shall not exceed the amount of
provision.
 The reimbursement receivable shall be treated as a separate asset.
In view of the above, accounting treatment and disclosure in respect of insurance claim will be
as under:
 Insurance claim to the extent of Rs. 14 million is accepted in principle by the insurance
company; therefore, it will be taken as ‘virtually certain to be received’. However, the
insurance claim to be recognized as receivable shall be restricted to Rs. 12 million (OR
Rs. 10.4 million) for which the provision is recorded.
 Recovery of the insurance claim to the extent of Rs. 2.0 million is probable, therefore, a
contingent asset would be disclosed for this amount giving information as under:
 A brief nature of the contingent asset; and
 An estimate of financial effect and indication of uncertainties.
A.5
(i)
Return on capital employed
Average capital employed as at 30 June 2015:
Average equity
Average long term loan
Profit before interest and tax
Return on capital employed
(ii)
Rs. in million
W.1 (275+320)÷2
(9.6÷12%)
A
(100+9.6+50–6) B
B÷A
297.50
80.00
377.50
153.60
40.69%
C
D
D÷C
297.50
100.00
33.61%
Return on shareholders' equity
Average shareholders' equity
Profit after interest and tax
Return on shareholders' equity
W.1: Average equity
Balance as at 1 July 2013
Profit after tax for the y.e. 30 Jun 2014
Final cash dividend for 2013 at 30%
10% Interim bonus issue
Balance as at 30 June 2014
Profit after tax for the y.e. 30 Jun 2015
Final cash dividend for 2014 at 25%
12% Interim bonus issue
Balance as at 30 June 2015
Share
capital
200.00
20.00
220.00
26.40
246.40
Share
premium
20.00
20.00
20.00
Retained
earnings
40.00
75.00
(60.00)
(20.00)
35.00
100.00
(55.00)
(26.40)
53.60
Total equity
260.00
75.00
(60.00)
275.00
100.00
(55.00)
320.00
Page 5 of 8
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
A.6
Galaxy Limited
Amounts as would appear in the consolidated statement of financial position as at 30 June 2015
1
Goodwill
Controlling interest
0.3÷(50÷100)×100
Rs. in million
50.00
35.00
85.00
GL cost of investment
NCI at fair value on the date of acquisition
Less: BL's net assets on acquisition date of 1 July 2014
Book value of BL's net assets
FV increase in land
Impairment of BL's plant
2
3
Goodwill as at 30 June 2014
Impairment by 10%
Goodwill after impairment as at 30 June 2015
Consolidated retained earnings
GL retained earnings as at 30 June 2015
Share of BL's post acquisition profit
Unearned profit on goods sold by GL to BL
and remained in BL's inventory as at 30 June 2015
Unearned profit on goods in transit sold by GL to BL
Goodwill impairment
Non-controlling interest
NCI at fair value on the date of acquisition
Share of BL's post acquisition profit
Goodwill impairment
60%
50+18
40+20
(W.1)14.50×60%
5÷1.2×20%
(7–4)÷1.2×20%
0.70×60%
(W.1)14.50×40%
0.70×40%
W.1: Post acquisition profit of BL
BL’s profit for the year ended 30 June 2015
Impairment of the plant as determined on 1 July 2014 adjusted by GL against
goodwill
Unearned profit on goods sold by BL to GL and remained in GL's inventory
as at 30 June 2015
9÷1.2×20%
68.00
20.00
(10.00)
78.00
7.00
(0.70)
6.30
60.00
8.70
(0.83)
(0.50)
(0.42)
66.95
35.00
5.80
(0.28)
40.52
6.00
10.00
(1.50)
14.50
Page 6 of 8
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
A.7
(a) Zeta Limited
Accounting entries for the year ended 30 June 2015
Date
1-Jul-2014
Debit
Credit
Rs. in million
2.63
2.63
Particulars
Pre-paid operating lease expense
Bank
(Payment of lease rent in advance)
31-Dec-2014 Onerous loss
W.1
Provision for onerous loss
(Recording of onerous loss on becoming the mixer
surplus and sub-letting it on a lower rent)
1-Jan-2015
1.97
1.97
Bank
Un-earned rent income
(Receipt of rent for sub-letting of the mixer)
2.00
2.00
30-Jun-2015 Lease rent expense
(2.7-1-0.31)
Un-earned rent income
2÷2
Provision for onerous loss
1.31–1
Pre-paid operating lease expense
lease rental payable
(Recording of lease rent expense for the year ended 30
June 2015)
Gross lease exp. 2.5+2.63+2.77+2.9 = 10.79/4 =
2.70
1.39
1.00
0.31
2.63
0.07
W.1: Loss on onerous contract (outflows exceeded economic benefits)
Receipts
Operating
from subpayment period
working
lease payments
letting
Six months ended 30 Jun 2015 (2.5×1.05)÷2
1.31
1.00
Year ended 30 Jun 2016
2.63×1.05
2.76
2.00
Year ended 30 Jun 2017
2.76×1.05
2.90
2.00
Total
6.97
5.00
(b)
1
Onerous
loss
0.31
0.76
0.90
1.97
Zeta Limited
Notes to the financial statements for the year ended 30 June 2015
Reconciliation between the total of future minimum
lease payments and their present value
Not later than one year
Later than one year and not later than five years
Later than five years
Lease finance charges allocated to future periods
Future minimum
lease payments
Present
Value
-------- Rs. in million --------
7.00
14.00
-
(W.1) 6.23
(W.1) 10.47
21.00
(4.30)
16.70
16.70
Page 7 of 8
Financial Accounting and Reporting - II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015
1.1 The minimum lease payments have been discounted at interest rate of 12.38% per annum to
arrive at the present value. Lease instalments are paid annually in arrears.
W.1: Repayment schedule:
Finance cost
Instalments
Balance
Date
12.38%
------------------- Rs. in million ------------------1-Jul-2013
25.00
30-Jun-2014
3.10
(7.00)
21.10
30-Jun-2015
2.61
(7.00)
16.71
30-Jun-2016
2.07
(7.00)
11.77
30-Jun-2017
1.46
(7.00)
6.23
30-Jun-2018
0.77
(7.00)
0.00
2.23
(14.00)
Total
10.00
(35.00)
A.8
PV of future
instalments
(7÷1.1238) 6.23
(6.23÷1.1238) 5.54
(5.54÷1.1238) 4.93
10.47
16.70
Opal Limited
Accounting treatment for research and development expenses
Development cost recognition as intangible asset:
Since the new product met all the criteria for the development of a product, an intangible asset
should be recognized at Rs. 13 million (12+0.4+0.6) as detailed under:

Cost of Rs. 12 million incurred during the development phase that is 1 July 2014 to
31 December 2014.

Depreciation of Rs. 0.4 million (4.0÷5×0.5) on laboratory equipment for the development
phase of six months from 1 July 2014 to 31 December 2014.

Cost of trial run amounted to Rs. 0.6 million
Amortization of intangible asset:
Since the product has a shelf life of 10 years, the amortization expense amounting to Rs. 0.65
million (13÷10×6/12) should be charged to profit and loss account for the period of six months
i.e. 1 January to 30 June 2015.
Laboratory equipment cost recognition as tangible asset:
Laboratory equipment cost should be capitalized as a tangible asset as it is having useful
life of more than one year and to be depreciated over its useful life of five years.
Research and other costs:
IAS-38 does not allow capitalization of costs pertaining to research work. Therefore, these
(i)
costs should be charged to profit and loss account in the period in which they incurred.
However, research cost of Rs. 8 million. and depreciation for the research phase of Rs. 0.4
million (4÷5×0.5) pertained to last year, therefore, comparative figures for the year ended
30 June 2014 should be restated and retained earnings be adjusted for these amounts.
(ii)
Cost for training of staff is also not allowed for capitalization and should be charged to
profit and loss account for the year ended 30 June 2015.
(iii) Depreciation of Rs. 0.4 million on laboratory equipments for the period from the
commencement of the commercial production i.e. 1 January to 30 June 2015 should be
charged to profit and loss account for the year ended 30 June 2015.
(THE END)
Page 8 of 8
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance
– Autumn 2015
General
Performance in the paper was very poor as has been the case in the past many attempts. It
has been noticed that in many questions the same types of mistakes are committed
whenever a question on that topic is asked. A typical example of this situation were
questions 3, 7 and 8.
One probable reason for the above is the lack of practice. As a result, the calculations are
performed in a haphazard and unplanned manner which results in wastage of time and
loss of some easy marks. It must be emphasized that candidates should practice solving
questions in examination conditions, to be able to perform well in the paper.
Question-wise comments are as under:
Question 1
This was a standard question which required candidates to prepare statement of financial
position, statement of comprehensive income and statement of changes in equity. The
main testing point pertained to IAS-8 “Accounting policies, changes in accounting
estimates and errors” and IAS 10 “Events after the reporting period”.
The overall performance of the students was much below the required standard. The
common mistakes observed were as follows:







Sales and cost of sales for the year 2014 were correctly adjusted but corresponding
impact on 2015 was omitted by majority of the examinees.
Many candidates presumed that since only 35% of the goods had been returned
subsequently therefore only the sales value and cost of sales of the goods that were
ultimately returned needed to be adjusted.
Majority of the students seemed confused about recording of the goods that were
returned subsequently and made various types of incorrect adjustments in respect
thereof. In fact, since the return had been debited to sales return account, there was no
need for any further adjustment in 2015 in respect thereof.
Amount of trade debts had changed due to correction of error in 2014. Consequent
change in provision for bad debt was also required but was mostly ignored.
The tax and tax liability were not re-computed based on revised profit before tax.
In statement of changes in equity, the ‘Total’ column was mostly ignored. Further,
many students started it from June 2014 instead of 30 June 2013.
When figures are restated, the word ‘restated’ should be mentioned at appropriate
places as it carries marks. Majority of the students tend to ignore this disclosure.
Page 1 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2015
Question 2
It was a fairly simple question for those who had bothered to study this topic based on
Code of Ethics, which had been included in the syllabus recently. However, the
performance was just average as majority of the candidates were able to name the
categories of threats involved but could only specify one safeguard i.e. that the CFO may
decide to resign. Other possible safeguards were discussed by only about 25% of the
candidates and very few among them could specify all the safeguards.
Question 3
This question required preparation of journal entries in respect of construction work. A
very poor response was observed as the following mistakes were commonly observed:





Workings were prepared but journal entries were either ignored altogether or only the
entry related to capitalization of borrowing cost was prepared. Those candidates who
did prepare accounting entries for the accrual of progress bills and advance payments,
quite often failed to calculate the gross amount of the bill correctly.
The finance cost was calculated on the basis of weighted average cost of capital
instead of the markup % for each loan category.
The entry to record the capitalization i.e. transfer from CWIP to Property, Plant and
Equipment was made by very few candidates. Those who did pass the entry, often
missed the pre-acquisition costs whereas some of them also included the government
dues pertaining to land, in the amount capitalized.
Mark-up paid on the loans was deducted in computing the amount of surplus funds. A
vast majority of students made various other mistakes in the determination of income
on surplus funds. Many students ignored it altogether.
During the year ended 30 June 2015, the asset was used for six months only but
depreciation was calculated on the whole year.
Question 4
This question tested the candidates’ knowledge of IAS-10 and IAS-37 in a typical
situation. When a decision has to be made regarding the making of a provision, the
candidates must specify the conditions that are required to be fulfilled and discuss
whether each condition has been fulfilled or not. Generally, the candidates do not follow
this method and arrive at their conclusion just by referring to one or two main conditions
and lose marks. For example, in part (i) of this question only a few candidates mentioned
about possibility of making a reliable estimate and majority of the students did not
mention anything as to whether outflow of economic benefits is probable or not. Other
common mistake were as follows:


The requirement to disclose the contingent liability was not discussed. Some students
only mentioned that contingent liability should be disclosed but did not give any
further details.
Many candidates identified this situation as non-adjusting event which was incorrect.
Since the event against which the claim was lodged, took place before the year end,
this was an adjusting event. Further, most of the candidates failed to recognize that
since only Rs. 12 million was being provided [as per para (i)], the receivable from the
insurance company would be booked to the extent of Rs. 12 million only. Further,
most candidates did not say anything about the contingent asset of Rs. 2 million.
Page 2 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2015

Many candidates proposed the recognition of provision of Rs. 1.5 million i.e. the
amount which the management was considering to pay in addition to the
compensation that may be awarded by the court; though the requirements of IAS 37
pertaining to recognition of provision were clearly not met.
Question 5
It was a simple question requiring calculation of return on capital employed and return on
equity. Many candidates performed very well in this question and about 10% of the
students obtained full marks. The errors observed were as follows:






Most of the candidates took profit after tax in the computation of return on capital
employed instead of profit before interest and tax.
Majority of the candidates did not compute average capital employed, though the
question clearly gave information of current and prior years.
In computing the average equity, dividend was not recognized in the correct period
i.e. many students recognized final dividend in the year in which it was declared. On
the other hand, many candidates recognized the interim dividend also in the next year.
Some candidates computed dividend on retained earnings instead of share capital.
Many candidates treated the issuance of bonus shares as an increase in equity.
Majority of the candidates ignored the fact that long-term loan was obtained in the
middle of the year.
Question 6
Since consolidation is now being tested on a regular basis, majority of the candidates
scored high marks. The mistakes observed were as follows:




In the computation of goodwill, some candidates ignored the impairment in value of
BL’s plant which resulted in negative goodwill.
In computing adjusted profit of BL, for the year, many candidates did not take the
impact of impairment of plant which was adjusted by GL against goodwill.
Many candidates adjusted the profit on entire intercompany sales in computing the
consolidated retained earning instead of computing it only on unsold stock at year
end. Further, majority of the candidates did not take the impact of goods-in-transit in
computing consolidated retained earnings. Further, some candidates computed the
difference between inter-company balances as 11 (7+4) million instead of 3 (7-4)
million.
Many candidates adjusted the entire amount of goodwill impairment against
consolidated retained earnings instead of apportioning it between consolidated
retained earnings and non-controlling interest.
Question 7
The question tested the concepts of operating and finance leases and onerous contract.
Performance in each part is discussed below:
Page 3 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2015
Question 7(a)
The overall performance was very poor. The common mistakes were as follows:




Majority of the candidates did not have any understanding about the concept of
onerous loss. They simply passed the entries of lease expense and lease income.
Majority of the candidates debited/credited operating lease expense and lease income
on cash receipt/paid basis.
Many candidates divided the total rent over the four year period by 4 to arrive at the
average annual rent and passed entries on the assumption that average annual rent
shall be recorded as expense each year.
Many candidates passed the entries as if the lease had commenced from 1 July 2014
instead of 1 July 2013.
Question 7(b)
The question required disclosure requirement with regard to a sale and lease back
arrangement. This part of the question was fairly well attempted. In most of the cases,
repayment schedule was drawn up accurately. The disclosures were drafted correctly in
majority of the cases. Mistakes observed were as follows:


Repayment schedule was prepared on the basis of book value of the power plant
instead of the sale proceeds.
Liability against assets subject to finance lease was reported as a single figure.
Amount related to less than one year, between 1 to 5 years and later than 5 years were
not disclosed. Some candidates showed the above only in respect of gross amount of
lease rentals.
Question 8
The question tested the concepts of IAS-38 “Intangible Assets”. Many candidates
obtained passing marks in this question. However, the candidates tend to ignore some
aspect of the question and lose marks. In this question, a number of students did not say
anything about depreciation/annuity. Other common mistakes were as follows:





Many candidates capitalized the cost of research work also.
The depreciation of the development phase was not capitalized and the entire
depreciation was expensed out.
Cost of laboratory equipment was included in intangible assets.
Very few students could point out the error in 2014 whereby research cost was
debited to capital work in progress and about the need to restate the retained earnings
of 2014.
Many candidates did not discuss the cost incurred in 2014 altogether. They failed to
realize that without correcting error committed in 2014, it was not possible to make
all the corrections in 2015.
THE END
Page 4 of 4
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015
Note regarding marking scheme:
The marking scheme is given as a guide. However, markers were also advised to award marks for
alternative approaches to a question and relevant/well-reasoned comments/explanations.
A.1
(a)
(b)
(c)
A.2
A.3
A.4
Mark(s)
Statement of financial position with comparative figures:
 stock in trade
 trade debtors
 taxation
 presentation and disclosure
Statement of comprehensive income with comparative figures:
 sales
 cost of sales
 operating expenses
 presentation and disclosure
Statement of changes in equity:
 presentation and disclosure


Identification of categories of threats
Discussion on safeguard available to the CFO



Determination of finance income from the surplus fund
Computation of capital work in progress
Preparation of accounting entries relating to:
 accrual of progress bills
 progress bill payments
 finance income from surplus funds
 capitalization of finance costs
 transfer from capital work in progress to property, plant and equipment
 depreciation expense
(i)

2.0
Mark(s)
1.0
5.0
Mark(s)
2.5
2.5
3.5
1.5
2.0
2.0
1.5
0.5
Accounting treatment explanation
Disclosure requirement
Mark(s)
3.0
2.0


Accounting treatment explanation
No disclosure requirement
Mark(s)
1.5
0.5


Accounting treatment explanation
Disclosure requirement
Mark(s)
3.0
2.0
(ii)

2.0
2.0
2.0
1.5


(iii)
A.5
1.0
4.5
1.5
1.5
Determination of:
 average equity
 average loan
 profit before tax and interest
 profit after tax and interest
0.5 mark for computation of each ratio
Mark(s)
4.0
1.0
0.5
0.5
1.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015
A.6
A.7

(a)
(b)
A.8


Computation of:
 goodwill
 post-acquisition profit of the subsidiary
 consolidated retained earnings
 non-controlling interest
 Computation of onerous loss
 Preparation of accounting entries relating to:
 advance lease rental payment
 receipt from sub-letting
 recording of onerous loss
 recording of lease rental expense at year end
 Computation of PV of future instalment and finance cost
 Disclosure of finance lease as per IAS-17
Accounting treatment of:
 research cost
 development cost
 training of technical staff
 laboratory equipment and depreciation thereon
 cost of trial run
Amortization of intangible assets
Mark(s)
5.5
2.5
4.5
2.5
Mark(s)
2.0
0.5
0.5
2.0
3.0
Mark(s)
4.0
7.0
Mark(s)
0.5
1.0
0.5
3.0
1.0
1.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examinations
12 March 2016
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Q.1
The summarized trial balances of Oscar Limited (OL) and United Limited (UL) as at
31 December 2015 are as follows:
Sales
Cost of sales
Operating expense
Tax expense
Share capital (Rs. 10 each)
Share premium
Retained earnings as at 1 January 2015
Current liabilities
Property, plant and equipment
Cost of investment
Stock-in-trade
Trade receivables
Cash and bank
Oscar Limited
United Limited
(OL)
(UL)
Debit
Credit
Debit
Credit
------------- Rs. in million ------------835
645
525
396
115
102
65
48
600
250
150
60
265
179
115
105
390
350
500
125
115
140
125
105
103
1,965
1,965
1,239
1,239
Additional information:
(i)
On 1 May 2015, OL acquired 80% shares of UL. UL has not recognised the value of
brand in its books of account. At the date of acquisition, the fair value of brand was
assessed at Rs. 45 million. The remaining useful life of the brand was estimated as 15
years.
(ii) OL charged Rs. 2.5 million monthly to UL for management services provided from
the date of acquisition and has credited it to operating expenses.
(iii) On 1 October 2015, UL sold a machine to OL for Rs. 24 million. The machine had
been purchased on 1 October 2013 for Rs. 26 million. On the date of acquisition the
machine was assessed as having a useful life of ten years and that estimate has not
changed. Gain on disposal was erroneously credited to sales account.
(iv) Other inter-company transactions during the year 2015 were as follows:
OL to UL
UL to OL
(v)
Included in
Sales
buyer’s closing
stock-in-trade
------------ Rs. in million -----------60
20
30
5
Profit %
25% of cost
20% of sales
UL settled the inter-company balance as on 31 December 2015 by issuing a cheque of
Rs. 30 million. However, the cheque was received by OL on 1 January 2016.
The non-controlling interest is measured at the proportionate share of UL’s
identifiable net assets.
It may be assumed that profits of both companies had accrued evenly during the year.
Required:
Prepare consolidated statement of comprehensive income for the year ended
31 December 2015 and consolidated statement of financial position as at 31 December 2015.
(18)
Financial Accounting and Reporting-II
Q.2
Page 2 of 5
Abid Limited (AL) uses the revaluation model for subsequent measurement of its property,
plant and equipment and has a policy of revaluing its assets on an annual basis using the net
replacement value method.
The following information pertains to AL’s buildings:
(i)
(ii)
(iii)
Four buildings were acquired in same vicinity on 1 January 2012 at a cost of Rs. 300
million. The useful life of the buildings on the date of acquisition was 20 years.
AL depreciates buildings on the straight line basis over their useful life.
The results of revaluations carried out during the last three years by Premier Valuation
Service, an independent firm of valuers, are as follows:
Revaluation date
1 January 2013
1 January 2014
1 January 2015
(iv)
Fair value
Rs. in million
323
252
272
On 30 June 2015, one of the buildings was sold for Rs. 80 million.
Required:
Prepare a note on “Property, plant and equipment” (including comparative figures) for
inclusion in AL’s financial statements for the year ended 31 December 2015 in accordance
with International Financial Reporting Standards. (Ignore taxation)
Q.3
Ali and Bashir are chartered accountants and have been working as Managing Director
(MD) and Chief Financial Officer (CFO) in a listed company. In a recent meeting of the
Board, the directors have decided to expand the business within six months by opening 20
retail outlets. This expansion would require financing of Rs. 300 million which may be
arranged through bank loan.
The following information has been extracted from latest draft financial statements of the
company:
Rs. in ‘000
Sales
1,700
Gross profit
545
Tax expense
23
Profit after tax
40
Total assets
2,500
Non-current assets
900
Inventories
850
Trade receivables
600
Share capital
800
Reserves
152
Long term debt @ 9%
750
Following additional information is also available:
80% of the sales are on credit.
Opening inventory was Rs. 100 million.
40% of current liabilities comprise of trade payables.
MD has advised the CFO to arrange the loan from MN Bank. He has also informed that the
President of the bank is his good friend and the loan can be arranged on a fast track basis at
a mark-up of 15% per annum, subject to the following conditions:
current ratio and quick ratio should be at least 2:1 and 1:1 respectively;
gearing ratio should not exceed 40%; and
interest cover should be at least 3.
(13)
Financial Accounting and Reporting-II
Page 3 of 5
CFO is not comfortable with this deal as the mark-up offered by the bank is much higher
than the rate on the existing loan and it is difficult for the company to meet the gearing
requirements of the bank. However, MD has asked him to make certain changes in the draft
financial statements before submission to the bank; which according to the CFO are not in
accordance with the IFRSs.
Required:
(a) Compute liquidity, working capital and debt ratios of the company.
(b) Briefly explain how the MD may be in breach of the fundamental principles of ICAP’s
code of ethics. Also state the potential threats that CFO may face under the
circumstances, along with available safeguards (if any).
Q.4
(06)
(06)
Following are the relevant extracts from the financial statements of Floor & Tiles Limited
(FTL) for the year ended 31 December 2015:
Profit before tax
Provision for gratuity for the year
Bad debts expense for the year
Capital gain (exempt from tax)
Rs. in million
80
12
10
5
The following information is also available:
(i)
Opening balances of deferred tax liability, provision for bad debts and provision for
gratuity were Rs. 5.28 million, Rs. 2 million and Rs. 13 million respectively.
(ii) The cost and other details related to buildings (owned) included in property, plant and
equipment are as follows:
Opening balance (purchased on 1 January 2013)
Cost of a building sold on 30 April 2015 (for Rs. 35 million)
Purchased on 1 July 2015
(iii)
(iv)
Rs. in million
350
30
40
Accounting depreciation on buildings is calculated @ 5% per annum on straight line
basis whereas tax depreciation is calculated @ 10% on reducing balance method.
Accounting depreciation of all other owned assets included in property, plant and
equipment is same as tax depreciation.
On 1 January 2015, a machine costing Rs. 120 million was acquired on finance lease.
Some of the relevant information is as follows:
The lease term as well as the useful life is 5 years.
Annual lease rentals amounting to Rs. 30 million are payable in advance.
The interest rate implicit in the lease is 12.59%.
This machine would be depreciated over its useful life on straight line method.
(v)
On 1 June 2015, an amount of Rs. 1 million was paid as penalty to the provincial
government due to non-compliance of environmental laws.
(vi) The amount of gratuity paid to outgoing members was Rs. 10 million.
(vii) During the year, entertainment expenses and repair expenses amounting to
Rs. 6 million and Rs. 8 million respectively, pertaining to year ended
31 December 2013 were disallowed. FTL has decided to file appeal only against the
decision regarding repair expenses.
(viii) Applicable tax rate is 32%.
Required:
Prepare a note on taxation (expense) for inclusion in FTL’s financial statements for the year
ended 31 December 2015 giving appropriate disclosures relating to current and deferred tax
expenses including a reconciliation to explain the relationship between tax expense and
accounting profit.
(17)
Financial Accounting and Reporting-II
Q.5
Page 4 of 5
The following information has been extracted from the draft financial statements of Alpha
Limited for the year ended 31 December 2015.
Assets
Property, plant & equipment
Intangible assets
Trade receivables
Advances and prepayments
Inventories
Short-term investments
Cash at bank
2015
2014
Rs. in million
223
193
68
23
45
33
84
70
60
46
12
9
8
7
500
381
Equity & Liabilities
Share capital (Rs. 10 each)
Share premium
Retained earnings
Long term loan
Deferred liabilities
Trade payables
Accrued expenses
Tax payable
2015
2014
Rs. in million
180
150
15
114
53
40
15
10
42
56
60
70
34
42
500
381
Following relevant information is available:
(i)
Depreciation has been provided on straight line basis. Estimated useful lives are as
under:
Building
20 years
All other fixed assets
10 years
(ii)
(iii)
On 1 September 2015, the company purchased new machinery costing Rs. 65 million.
A portion of building costing Rs. 20 million which was purchased on 1 July 2013 was
sold for Rs. 20 million on 30 June 2015.
(iv) Trade receivables written off during the year amounted to Rs. 5 million. It is the
policy of the company to maintain the provision for doubtful debts at 5% of trade
receivables.
(v) Advances and prepayments include advance tax of Rs. 8 million (2014: Rs. 6 million).
(vi) Long term loan was obtained on 1 August 2015. Interest on loan @ 13% is payable on
31st July each year. Interest payable for 5 months has been accrued.
(vii) Deferred liabilities comprise of unfunded gratuity of Rs. 6 million (2014: Rs. 3
million) and deferred tax of Rs. 9 million (2014: Rs. 7 million). During the year, the
company paid gratuity of Rs. 6.5 million to outgoing employees.
(viii) Tax expense for the year was Rs. 17 million. (2014: Rs. 8 million).
(ix) Right shares were issued on 1 December 2015 at Rs. 15 per share in the ratio of 1 right
share for every 5 shares held.
Required:
Prepare statement of cash flows for the year ended 31 December 2015 in accordance with
the requirements of International Financial Reporting Standards using the indirect method.
Q.6
(15)
Shalimar Industries (SI) is engaged in the manufacturing of tractors. The tractors are sold
both on cash and finance lease basis. The cash selling price and cost of each tractor is
Rs. 2.0 million and Rs. 1.6 million respectively.
On 1 January 2015, SI sold ten tractors to Caravan Transport (CT) on lease. The terms of
the lease and related information are as follows:
(i)
(ii)
(iii)
The lease period is 4 years, whereas useful life of each tractor is 5 years.
The total unguaranteed residual value at the end of lease term is Rs. 1 million.
Lease rentals amounting to Rs. 6,375,454 per annum are payable in arrears.
The rate implicit in the lease is 12%.
Required:
In accordance with the requirements of International Financial Reporting Standards,
prepare:
(a) Journal entries in the books of SI to record the transactions for the year ended
31 December 2015.
(b) A note for inclusion in SI’s financial statements, for the year ended
31 December 2015.
(08)
(07)
Financial Accounting and Reporting-II
Q.7
Page 5 of 5
The following information has been taken from the financial statements of Asif Engineering
Limited (AEL) for the year ended 31 December 2015:
Property, plant equipment
Stores and spares
Retained earnings as at 31 December
Net profit
2015
2014
2013
(draft)
---------- Rs. in million ---------2,430
2,402
2,105
73
80
70
353
224
101
129
123
112
In the above financial statements, AEL has recognised consumption of spare parts as
expense. AEL has now decided to change its above policy and classify consumption of
spares having useful life of more than one year as capital spares under property, plant and
equipment.
Following information pertains to capital spares consumed during the past three years:
Year ended
31 December 2013
31 December 2014
31 December 2015
Parts issued during
the year
Rs. in million
55
39
44
Useful life of
the issued
parts
5 years
3 years
4 years
Depreciation on these parts is to be charged using straight line method over its useful life.
Required:
In accordance with the requirements of International Financial Reporting Standards,
prepare the revised extracts (including comparative figures) of the following:
(a) Statement of financial position as at 31 December 2015
(b) Statement of comprehensive income for the year ended 31 December 2015
(c) Statement of changes in equity for the year ended 31 December 2015
(Ignore taxation)
(THE END)
(04)
(03)
(03)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.1
Oscar Limited
Consolidated statement of comprehensive income
For the year ended 31 December 2015
Sales
Cost of sales
Gross profit
Operating expenses
Profit before tax
Tax expense
Profit after tax
Other comprehensive income
Total comprehensive income
[835+(645×8÷12)](60×8÷12)–(30×8÷12)–3.2(W-1)
[525+(396×8÷12)](60×8÷12)–(30×8÷12)+4+1
[115+(102×8÷12)]+20.1(W-1)
[65+(48×8÷12)]
Total comprehensive income attributable to:
Owners of the parent – balancing figure
Non-controlling interest (W-4)
Rs. in million
1,201.80
(734.00)
467.80
(184.90)
282.90
(97.00)
185.90
185.90
173.94
11.96
185.90
Oscar Limited
Consolidated statement of financial position
As on 31 December 2015
Property, plant and equipment (W-1)
Brand/ Intangibles
Goodwill (W-3)
Stock-in-trade
Trade receivables
Cash and bank
Total Assets
Share capital (@ Rs. 10 each)
Share premium
Consolidated retained earnings
(45 – 2)
(125 + 115 – 4 –1)
(140 + 125 – 30)
(105 + 103 + 30)
(265 + 173.94)
600.00
150.00
438.94
125.36
Non-controlling interest (W-4)
Current liabilities
Total Equity and Liabilities
Rs. in millions
736.90
43.00
46.40
235.00
235.00
238.00
1,534.30
(115 + 105)
220.00
1,534.30
Workings:
W-1: Property, plant and equipment
OL and UL (390 + 350)
Reversal of gain on disposal
Reversal of depreciation on gain amount
[24 – (26÷10×8)]
(3.2÷8×0.25)
Rs. in million
740
(3.2)
0.1
736.9
Page 1 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
W-2: Adjustment for management services
No adjustment for management services in the consolidated financial statements.
W-3: Computation of Goodwill
Cost of investment
Less : Share in FV of UL's net assets at acquisition
Share capital
Share Premium
Retained earnings
(179 + 99 × 4 ÷ 12)
FV of brand
Share in FV of UL's net assets at acquisition
Goodwill
------ Rs. in million -----500
250
60
212
45
(567)
(453.60)
46.40
(567 × 0.8)
W-4: Non-controlling interest
UL's post acquisition profit
Gain on sale of machine to OL
Inventory held by OL
Amortization of brand
Total comprehensive income attributable to NCI
NCI's share of net assets at acquisition date
NCI share of net assets at consolidation date
(99  8 ÷ 12)
(W-1)
(59.80 × 0.2)
(20% of 567)
Rs. in million
66.00
(3.20)
(1.00)
(2.00)
59.80
11.96
113.40
125.36
Page 2 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.2
4 - Property, plant and equipment
2015
2014
--------- Rs. in million --------252
323
(14)
(17)
Gross carrying amount
Accumulated depreciation and impairment losses
(323÷19)
Net carrying amount
Additions
Revaluation (expense)/Income (P/L)
238
17
[272- {300-(300÷203)}]
Revaluation surplus increase/(decrease) (OCI)
17
(272-238-17)
Depreciation
(14)
[(204÷17)+(68÷17×6÷12)]
Disposal
(66)
306
(18)
(306-252-36)
(36)
[{323-(300-15)}-(38÷19)]
(14)
(252÷18)
-
[68 - (68÷17×6÷12)]
Gross carrying amount
Accumulated depreciation and impairment losses
Net carrying amount
Useful life
192
238
204
(12)
192
252
(14)
238
20 years
20 years
The last revaluation was performed on 1 January 2015 by M/s Premier Valuation Services, an
independent firm of valuers. Revaluations are performed annually.
Carrying value had the cost model been used instead
2015
2014
--------- Rs. in million --------180
255
[225 – (225÷20×4)]
[300 – (300÷20×3)]
4.1- Details of property, plant and equipment disposed of during the year
Building
Cost /
Accumulated
Carrying
Sale
Revalued
depreciation
amount
proceeds
amount
---------------------- Rs. in million ---------------------68
2
66
80
Mode of disposal
Particulars of buyers
Not mentioned
Not mentioned
Page 3 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.3
(a)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(b)
The existence of threats to fundamental principles will depend on following factors:

Whether financing from other banks is available at lower mark up;

Whether it is feasible to borrow @15% for the expansion.
If financing from other banks is available or it may not be feasible to finance the project at the rate of
15%, and still MD is pressurizing the CFO to obtain financing at higher rate of markup the MD may
be in breach of :
(i)
Principle of objectivity
It can be a bias decision on part of MD, as he may be favoring his friend who is the president of
the bank or may have any other interest in taking loan from that particular bank.
(ii)
Principle of integrity
MD may be in breach of principle of integrity because he is asking CFO to manipulate the
financial information.
Potential threat to CFO along with safeguards:
Preparation of financial information as per the instructions of MD, will result in intimidation threat
to integrity and objectivity.
Identified threat is significant as the CFO is being instructed from the highest level of management.
In order to reduce the threat to an acceptable level, the following safeguards should be applied.
 Consult with superiors such as audit committee or those charged with governance or with a
relevant professional body.
 Where it is not possible to reduce the threat to an acceptable level, CFO shall refuse to be remain
associated with the financial information.
 CFO may consider to obtain legal advice or may consider resigning from the post of CFO.
Page 4 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.4
2015
Rs. in million
4
4.1
20 – Taxation
Current
- for the year [83.11(W-1) × 32%]
- for prior year (6 × 32%)
Deferred (W-2)
26.60
1.92
(2.28)
26.24
Reconciliation of tax charge for the year
Accounting profit before tax
80.00
Applicable tax rate
32%
Tax on accounting profit at 32%
Add: Effect of permanent difference (1 × 32%)
Add: Effect of prior year taxation (6 × 32%)
Less: Effect of exempt income (5 × 32%)
25.60
0.32
1.92
(1.60)
26.24
Workings
W-1: Computation of current tax expense for the year
Rs. in million
80.00
Profit before tax
Add: Inadmissible expenses / admissible income
Accounting depreciation (W-3)
Depreciation on leased assets (120 ÷ 5)
Tax profit on disposal [35 – 24.3(W-4)]
Finance charges on leases [(120 – 30) × 12.59%]
Provision for bad debts
Provision for gratuity
Penalty paid
17.50
24.00
10.70
11.33
10.00
12.00
1.00
86.53
Less: Admissible expenses / inadmissible income
Tax depreciation (W-4)
Accounting profit on disposal [35 – 26.5 (W-3)]
Gratuity paid
Lease rental
Capital gain (exempt)
(29.92)
(8.50)
(10.00)
(30.00)
(5.00)
(83.42)
83.11
Taxable profit
W-2: Computation of deferred tax liability / (assets)
Building - owned (W-3) & (W-4)
Machine - lease [120(120÷5)]
Provision for bad debts (2 + 10)
Liabilities against assets subject to finance lease (120-30)
Accrued finance charges on lease (120–30)×12.59%
Provision for gratuity (13+12-10)
Total differences
Closing deferred tax liability (9.39×32%)
Less: Opening deferred tax liability as given
Deferred tax income for the year
Carrying
Amount
311.00
96.00
12.00
90.00
11.33
15.00
Tax Base
269.28
-
Difference
41.72
96.00
(12.00)
(90.00)
(11.33)
(15.00)
9.39
3.00
(5.28)
(2.28)
Page 5 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
W-3: Accounting depreciation
Cost
A
Building (350-30)
Purchased
Disposal
Owned assets
Less: disposed off asset
Owned assets at year end
320
40
30
390
(30)
360
Opening Acc.
Depreciation
(cost×5%× 2)
B
32
3
35
Depreciation for
the year
(cost×5%)
C
16.00
1.00
0.50
17.50
17.50
Carrying amount
D=A-B-C
272.00
39.00
26.50
337.50
(26.50)
311.00
W-4: Tax depreciation
Building (350-30)
Purchased
Disposal
Owned assets
Less: disposed off asset
Owned assets at year-end as per tax rules
Cost
Opening Acc.
Depreciation
A
B=
[A-(A×0.9×0.9)]
60.8
320
40
30
390
(30)
360
5.7
66.5
Depreciation for
the year
(cost×5%)
C = (A - B)×0.1
25.92
4.00
29.92
29.92
Carrying amount
D=A-B-C
233.28
36.00
24.30
293.58
(24.30)
269.28
Page 6 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.5
Alpha Limited
Statement of cash flows
For the year ended 31 December 2015
Rs in million
Cash flows from operating activities
Profit before tax (114 – 53 + 17)
Adjustments for:
Interest expense (40 × 0.13 × 5 ÷ 12)
Depreciation (W-1)
Gain on sale of building (20 – 18)
Bad debts expense (W-2)
Provision for gratuity (6 + 6.5 – 3)
78.00
Operating profit before working capital changes
2.17
17.00
(2.00)
5.63
9.50
32.30
110.30
(Increase)/decrease in current assets
Increase in trade debts (W-2)
Increase in inventories (60  46)
Increase in advance, and prepayments [(84 – 8) – (70 – 6)]
(17.63)
(14.00)
(12.00)
Increase/(decrease) in current liabilities
Decrease in trade payables (42  56)
Decrease in accrued expense [(60 – 2.17) – 70]
Net cash flows from operating activities
(14.00)
(12.17)
(69.80)
40.50
(25.00)
(6.50)
(31.50)
9.00
Cash flows from investing activities
Purchase of machinery
Sale proceeds from disposal of plant
Acquisition of intangibles (68 – 23)
Net cash used in investing activities
(65.00)
20.00
(45.00)
(90.00)
Cash flows from operations
Tax paid (W-3)
Gratuity paid
Cash flows from financing activities
Proceeds from issuance of right shares (150 × 0.2 × 1.5)
Proceeds from long term loan
Net cash flow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year (9+7)
Cash and cash equivalents at the end of the year (12+8)
45.00
40.00
85.00
4.00
16.00
20.00
Page 7 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
Workings:
W-1: Computation of depreciation
Rs. in million
193
65
(18)
(223)
17
Property, plant & equipment – Opening WDV
Purchases during the year
NBV of assets disposed off during the year
Property, plant & equipment – Closing WDV
Depreciation expense for the year
W-2: Computation of bad debts expense
Closing balance
Trade
Provision for
receivable
bad debts
-------- Rs. in million -------47.37
2.37
(45 ÷ 0.95)
Opening balance
(34.74)
(33 ÷ 0.95)
Written off
5.00
17.63
(47.37 - 45)
(1.74)
(34.74 - 33)
5.00
5.63
W-3: Computation of tax paid
Opening liability
Opening deferred tax liability
Closing Advance tax
Tax expense for the year
Less: Closing liability
Closing deferred tax liability
Opening advance tax
Rs. in million
42
7
8
17
(34)
(9)
(6)
25
Page 8 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.6
(a)
Date
1-Jan-15
Description
Debit (Rs.)
Lease receivable [Rs. 20,000,000 + Rs. 6,501,817(W-1)]

Cost of Goods sold [
Credit (Rs.)
26,501,816
]
15,364,482
Sales (Lower of FV i.e. Rs. 20m or PV of MLP
i.e. 6,375,454 × 3.03735)
Inventory (Rs. 1.6m × 10)
Unearned finance income (W-1)
19,364,481
16,000,000
6,501,817
31-Dec-15 Bank
6,375,454
Lease Receivable
6,375,454
31-Dec-15 Unearned finance income
Finance income
2,400,000
2,400,000
W-1: Amortization Schedule
Year ended
31-Dec-15
31-Dec-16
31-Dec-17
31-Dec-18
(b)
Net
Gross
investment in investment in
lease
lease
---------------------------------- Rupees ---------------------------------12%
20,000,000
26,501,816
6,375,454
2,400,000
3,975,454
16,024,546
20,126,362
6,375,454
1,922,946
4,452,508
11,572,038
13,750,908
6,375,454
1,388,645
4,986,809
6,585,228
7,375,454
6,375,454
790,227
5,585,227
1,000,000
1,000,000
6,501,817
Lease
installment
Interest
@ 12
Principal
Disclosure in the financial statements
1
1.1
Net investment in lease
Lease receivable (Rs. 6,375,454 × 3)
Add: Unguaranteed residual amount
Gross investment in lease
Less: Unearned finance income (6,501,817 – 2,400,000)
Net investment in finance lease
Details of investment in finance lease
Not later than one year
Later than one year but not later than five years
Later than five years
1.2
2015
Rupees
19,126,362
1,000,000
20,126,362
(4,101,817)
16,024,545
Gross investment
Net investment
in lease
in lease
---------- Rupees ---------6,375,454
4,452,508
13,750,908
11,572,038
20,126,362
16,024,546
The minimum lease payment has been discounted on interest rate of 12% to arrive at their present
value. Rentals are paid annually in arrears.
Page 9 of 10
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2016
A.7
(a)
Asif Engineering Ltd.
Extracts from statement of financial position
2015
2014 (Restated)
2013 (Restated)
----------------- Rs. in million ----------------2,498
2,461
2,149
73
80
70
421
283
145
Property, plant & equipment (W-2)
Stores and spares
Retained earnings
(b)
Extracts from statement of comprehensive income
2015
2014 (Restated)
--------- Rs. in million --------138
138
Net profit (W-1)
(c)
Extracts from statement of changes in equity
Retained earnings
Rs. in million
101
44
145
138
283
138
421
Balance as at 1 January 2014
Effect of retrospective change in accounting policy (W-1)
Balance at 1 January 2014 – restated
Total comprehensive income – 2014 (W-1)
Balance as at 1 January 2015 – (restated)
Total comprehensive income – 2015
Balance as at 31 December 2015
W-1: Computation of net profit
Depreciation expense for the year
2013
2014
2015
---------- Rs. in million ---------11
11
11
13
13
11
11
24
35
55
39
44
44
15
9
123
129
138
138
Depreciation for 2013 (55÷5)
Depreciation for 2014 (39÷3)
Depreciation for 2015 (44÷4)
Less: Amount already charged
Adjustment to be made in net profit
Profit for the year
Adjusted profit for the year
W-2: Property, plant and equipment
As given
Add: Stores issued 2013
Add: Stores issued 2014
Add: Stores issued 2015
Less: Accumulated depreciation as calculated above 2014:
11 + 24; 2015: 11 + 24 + 35
Revised carrying value
2013
2014
2015
---------- Rs. in million ---------2,105
2,402
2,430
55
55
55
0
39
39
0
0
44
(11)
2,149
(35)
2,461
(70)
2,498
(THE END)
Page 10 of 10
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance
– Spring 2016
General:
Overall performance in the paper was better than past many attempts as some good
replies/answers were seen to questions 1, 4, 5 and 6. However, the performance in the
remaining three questions was equally bad which showed that students had not covered
the entire syllabus. It was also noted that the candidates generally performed the
calculations well but were lacking in case of presentation and disclosure requirements.
Question-wise Comments:
Question 1
This was a very straight forward question which required candidates to prepare
consolidated statement of comprehensive income and consolidated statement of financial
position. A large number of candidates performed well and scored passing marks.
The following mistakes were however observed:







In the computation of goodwill, proportionate profit till the date of acquisition was
ignored.
Fair value of brand was not included in the computation of net assets, for the purpose
of calculating goodwill.
The entire year’s figures of the subsidiary were consolidated disregarding the fact that
it had been a subsidiary for eight months only.
Billing for management services was added to operating expenses, whereas it
required no adjustment.
Extra depreciation arising on the amount of gain on disposal of machine was not
eliminated.
Many candidates did not show “other comprehensive income” in preparing
consolidated statement of comprehensive income. It must be noted that even if the
amount of such income is NIL, it still has to be shown separately.
Many students also made mistakes in calculating un-realized profit on closing stock
which is a routine adjustment in consolidation questions.
Question 2
A very poor response was observed in this question which tested the presentation
disclosure requirements of IAS-16. Most of the candidates didn’t adhere to
requirement of preparing note to the financial statements and instead prepared
accounting entries which were not required. Many students just presented
computations instead of preparing the note.
and
the
the
the
Page 1 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2016
Further, disclosure requirements such as useful life of assets, who performed the
revaluation, how frequently revaluation is performed, disclosures related to disposal of
asset and carrying amount had the cost model been used, were mostly ignored.
Most of the students did not know correct treatment of increase/decrease in fair value of
fixed asset in terms of calculation as well as disclosures. In the given situation it should
have been accounted for partly through profit and loss account and partly through other
comprehensive income (OCI) depending upon whether it was a reversal of previous
increase/decrease or otherwise. However, most of the students routed it through profit
and loss or OCI only.
Question 3
This question was based on a scenario. It contained two parts both of which were to be
answered on the basis of the information contained in the scenario. Performance in each
part is discussed below:
(a)
This part required computation of liquidity, working capital and financial ratios.
The overall performance was average as the following mistakes were observed





(b)
While computing interest cover ratio, interest amount (on long-term loan) was
not added in arriving at profit before interest and tax.
Inventory days were computed using the closing inventory instead of average
inventory.
Debtor days were computed using total sales instead of credit sales.
In calculating creditor days, cost of goods sold was used instead of purchases.
Many candidates did not compute the gearing ratio.
In this part, the candidates were required to discuss certain ethical issues based on
code of ethics, the potential threats under the scenario and the available safeguards
if any. The performance in this part was very poor and many students did not
attempt it altogether.
The common mistakes were as follows:




Most of the students could not identify that objectivity and integrity principles
were being breached by the MD. Many of those who identified them did not
offer any/appropriate explanation. Many candidates discussed self-interest and
familiarity threats which were not relevant.
Intimidation threat was being faced by CFO in the given situation. Most of the
students listed down many other threats which were not relevant and thereby
exposed their lack of knowledge.
A number of students used the common phrase i.e. “if the threat is not clearly
insignificant …………………”. Very few of them could state categorically that
under the circumstances the threat was significant as the instructions were
being issued by the highest level of management.
Very few students could provide a complete list of safeguards available to
CFO.
Page 2 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2016
Question 4
This question required a note on taxation expense for inclusion in financial statements
along with the reconciliation. The overall performance was above average.
The common errors were as follows:







In arriving at taxable income, bad debt expenses less opening provision of bad debts
was added instead of adding bad debts for the year only.
The finance charge on lease was incorrectly computed as 12.59% of 120 instead of
12.59% of (120-30) as they failed to realize that since annual lease rentals were
required to be paid in advance, the amount outstanding on 1st January was the cost of
asset minus lease rental for 2015.
Accounting depreciation on buildings purchased and sold were calculated incorrectly
as entire year’s depreciation was provided on building purchased whereas no
depreciation was provided on building disposed of.
In deferred tax computation, provision for gratuity was calculated incorrectly as the
amount of gratuity paid was not deducted in arriving at the provision for gratuity.
Very few students knew that prior years’ taxation has to be shown separately and its
calculation.
Very few students appreciated the fact that if management is confident of successfully
contesting any add backs made in prior years by tax authorities, no adjustment is
required in respect thereof.
Very few students seem to know about the permanent differences and their impact on
the reconciliation.
Question 5
The overall performance in this question which required preparation of statement of cash
flows was above average. Many students scored very high marks. However, the
following mistakes were observed:





Tax expense was not added in arriving at profit before tax.
It was clearly mentioned in the question that the long-term loan had been taken on
August 1, 2015 and also that interest for five months has been accrued; still, many
candidates computed interest expense for the whole year. Further, many candidates
presumed that it had been paid also.
In computing the amount of tax paid, opening and closing balances of advance tax as
well as deferred tax needed to be considered. Many candidates ignored either one of
the two. Many candidates did not compute the amount of tax paid altogether.
Share premium was ignored in arriving at proceeds from right shares. Some
candidates showed premium received separately.
Many errors were witnessed in classification of the amounts between operating,
investing and financing activities.
Page 3 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2016
Question 6
The question tested the basic concepts of IAS-17 and required preparation of journal
entries and note for inclusion in the financial statements. The overall performance was
above average; however, most of the students passed the entries correctly but lacked the
ability to meet the disclosure requirements.
The common mistakes were as follows:




Most of the students did not understand the treatment of unguaranteed residual value
i.e. it should not be considered in determining the present value of minimum lease
payments (MLP) and that the present value thereof should be deducted in arriving at
the cost of goods sold. Further, sales should have been recognized at fair value or
present value of MLP which-ever is lower but most students showed it at fair value
although it was more than present value of MLP.
The amortization schedule was incorrectly started with the amount of Rs. 19.36
million which represented the present value of minimum lease payments.
Many candidates did not prepare the disclosure related to bifurcation of gross and net
investment in leases into amount due within one year, 2 to 5 years and more than 5
years.
Some students arrived at the net investment in finance lease by computing the present
value of gross investment in finance lease, rather than the amortization schedule.
Question 7
The question required to present the relevant extracts from statement of financial
position, statement of comprehensive income and statement of changes in equity, in the
case of a company which had changed its policy so that spares having useful life of more
than one year are now capitalized. The data provided in the question consisted of certain
relevant information based on actual figures for 2013 and 2014 and draft figures for
2015.
It proved to be the worst attempted question as only 10% of the candidates secured
passing marks. However, from the suggested answers as are available on ICAP’s website,
they would realize that the question could have been solved easily had they kept their
calm and made the calculations carefully.
Some of the mistakes observed were as follows:




Comparative figures of 2013 were not shown in extract from statement of financial
position which is required as per IAS-1.
Depreciation and accumulated depreciation were not computed correctly mainly
because depreciation on spares capitalized in 2013 was only provided for 2013 and
not in 2014 and 2015. Similar types of errors were commonly observed in the
calculation of property, plant and equipment.
Many candidates did not mention the term “Restated” in any of the statements. On the
other hand, many students used the term for the year 2015 also.
The amount of retained earnings arrived at through statement of changes in equity
was not presented in the statement of financial position.
THE END
Page 4 of 4
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2016
Note regarding marking scheme:
The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations.
A.1
A.2
Mark(s)
Consolidated statement of comprehensive income

Sales

Cost of sales

Operating expenses

Tax expense

Total comprehensive income attributable to parent company and NCI
2.0
2.0
1.5
0.5
3.0
Consolidated statement of financial position

Property, plant and equipment

Brand

Goodwill

Stock-in-trade

Trade receivables

Cash and bank

Share capital, share premium and consolidated retained earnings

Non-controlling interest

Current liabilities
2.0
0.5
2.0
1.0
0.5
0.5
1.5
0.5
0.5










A.3
(a)
(b)
Opening balances of cost, accumulated depreciation and impairment losses
and net carrying amount
Revaluation (expense) / Income (P/L)
Revaluation surplus increase / (decrease) (OCI)
Depreciation
Disposal
Closing balances of cost, accumulated depreciation and impairment losses and
net carrying amount
Disclosure relating to useful lives
Carrying value had the cost model been used instead
Details of property, plant and equipment disposed of
Other revaluation related disclosures
Computation of : (any six)
 Current ratio
 Acid test ratio
 Receivable days / turnover
 Inventory days / turnover
 Creditors days / turnover
 Gearing ratio
 Interest cover
 Brief explanation of breaches of ICAP’s code of ethics made by MD
 Identification of threats faced by CFO
 Identification of safeguards available to the CFO
1.5
2.0
2.0
1.0
1.0
1.5
0.5
1.5
1.5
0.5
1.0
1.0
1.0
1.0
1.0
1.0
1.0
3.0
1.0
2.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2016
A.4



A.5




A.6
(a)
(b)
A.7
(a)
(b)
(c)
Computation of current tax:
 Up to 01 mark for each adjustment in accounting profit before tax in order
to arrive at taxable profit
Computation of deferred tax:
 Determining the temporary difference of building
 Up to 01 mark for determining each other temporary difference
Disclosure and presentation including reconciliation of tax charge
Cash flows from operating activities
 Profit before tax
 Adjustment for non-cash transactions
 Changes in working capital
 Computation of tax paid
Cash flows from investing activities
Cash flows from financing activities
Presentation and disclosure


Preparation of amortization schedule
Preparation of accounting entries relating to :
 Recognition of sales and investment in leases
 Receipt of first lease rental
 Recording the finance income
 Disclosures in the financial statements:
 Net investment in leases
 Details of investment in finance lease
 Other disclosures
Mark(s)
6.5
2.5
4.0
4.0
1.0
4.0
4.5
2.0
1.5
1.0
1.0
2.0
4.0
1.0
1.0
2.0
4.0
1.0
Extracts from statement of financial position
Property, plant & equipment

Stores and spares

Retained earnings

Presentation and disclosure

2.5
0.5
0.5
0.5
Extracts from statement of comprehensive income
Net profit

Presentation and disclosure

2.5
0.5
Extracts from statement of changes in equity
Retained earnings

Presentation and disclosure

2.5
0.5
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examinations
10 September 2016
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Q.1
Following information has been extracted from the financial statements of Yasir Limited
(YL) and Bilal Limited (BL) for the year ended 30 June 2016.
Assets
Fixed assets
Accumulated depreciation
Investment in BL – at cost
Loan to BL
Stock in trade
Other current assets
Cash and bank
YL
BL
Rs. in million
250
540
(70)
(70)
180
470
675
16
160
150
71
50
63
151
1,165
821
Equity & Liabilities
Share capital (Rs. 10 each)
Retained earnings
Loan from YL
Creditors & other liabilities
YL
BL
Rs. in million
750
500
340
258
1,090
758
12
75
51
1,165
821
Additional information:
(i)
On 1 July 2014, YL acquired 75% shares of BL at Rs. 18 per share. On the acquisition
date, fair value of BL’s net assets was equal to its book value except for an office
building whose fair value exceeded its carrying value by Rs. 12 million. Both
companies provide depreciation on building at 5% on straight line basis.
(ii)
Year-wise net profit of both companies are given below:
2016
2015
-------- Rs. in million -------219
105
11
168
YL
BL
(iii)
The following inter-company sales were made during the year ended 30 June 2016:
Included in buyer’s
closing stock in trade
------------ Rs. in million -----------120
20
80
32
Sales
YL to BL
BL to YL
Profit %
30% on cost
15% on sale
(iv)
BL declared interim dividend of 12% in the year 2015 and final dividend of 20% for
the year 2016.
(v) The loan was granted by YL to BL on 1 July 2014 and carries interest rate of 12%
payable annually. The principal is repayable in five equal annual instalments of
Rs. 4 million each. On 30 June 2016, BL issued a cheque of Rs. 5.92 million which
was received by YL on 2 July 2016. No interest has been accrued by YL.
(vi) YL values non-controlling interest on the date of acquisition at its fair value. BL’s
share price was Rs. 15 on acquisition date.
(vii) An impairment test has indicated that goodwill of BL was impaired by 10% on
30 June 2016. There was no impairment during the previous year.
Required:
Prepare a consolidated statement of financial position as at 30 June 2016 in accordance with
the requirements of International Financial Reporting Standards.
(18)
Financial Accounting and Reporting-II
Q.2
Page 2 of 5
On 1 July 2015, Minhas Manufacturers Limited (MML) commenced construction of its new
factory building and completed the work on 30 June 2016. Following information is
available in this respect:
(i)
The agreed price of the contract was Rs. 100 million which was financed through the
following sources:
Bank loan of Rs. 80 million was obtained on 1 June 2015. The loan carries a
mark-up of 10.9436% per annum and is repayable in six semi-annual instalments
of Rs. 16 million each commencing from 30 November 2015.
The remaining amount was financed through cash withdrawals from MML’s
existing running finance facilities. Details of these facilities are as follows:
Name of
bank
Bank A
Bank B
(ii)
(iii)
Mark-up %
11%
13%
Due to delay in supply of construction material, construction work was suspended
from 1 November 2015 to 30 November 2015.
The following payments were made to the contractor net of 5% retention money
which is refundable one year after completion of the building:
Date of payment
Net amount paid
(Rs. in million)
(iv)
Running finance
Balance as on
Average
Limit
30 June 2016
balance
----------- Rs. in million ----------50
33
40
40
5
30
1-06-2015
1-08-2015
1-12-2015
1-04-2016
1-08-2016
9.5
28.5
28.5
19.0
9.5
Surplus funds, if any, were invested @ 7% per annum.
Required:
Show how the above information would be disclosed in MML’s statement of financial
position as on 30 June 2016 in accordance with the International Financial Reporting
Standards. Show all necessary workings. Borrowing costs are to be calculated on the basis of number of
months.
Q.3
(17)
The following information pertains to Neptune Limited (NL) which is engaged in the
manufacturing of batteries and chemicals:
(a)
In July 2015, NL was sued by a customer who claimed damages of Rs. 2 million on
account of supply of 2000 defective batteries in January 2015. The legal advisor at that
time anticipated that it is probable that the case would be decided in favour of the
customer.
In March 2016, an independent team submitted a report to the Court showing that
80% of the batteries were not faulty and there were minor defects in the remaining
batteries. As a result, the company's lawyer formed the view that it was highly
unlikely that the Court would award compensation to the customer.
On 5 July 2016, the Court decided the suit and ordered NL to replace all (20%) the
faulty batteries supplied to the customer.
(b)
(05)
In July 2014, NL entered into a two year contract with a supplier of raw material.
With effect from 1 November 2014, the supplier stopped the supply of raw material
and demanded price increase of 30%. Due to stoppage of supply, NL was unable to
meet its sales orders. NL filed a suit claiming damages of Rs. 40 million from the
supplier on 15 June 2015. On 30 June 2015, NL’s lawyer anticipated that NL would
be awarded damages up to 60% of its claim.
On 15 August 2016 the Court decided the case in favour of NL and awarded damages
of Rs. 30 million to the company.
(05)
Financial Accounting and Reporting-II
(c)
Page 3 of 5
On 30 April 2015, NL’s Board of Directors decided to dispose of the chemical division
which was incurring heavy losses. The decision was made public on
10 December 2015. NL commenced negotiations with Venus Limited in March 2016.
The sale was finally executed on 31 July 2016.
Costs incurred during the months of July and August 2016 in connection with the
closure of the division were as follows:
Redundancy cost
Staff training for relocation to battery segment
Operating loss from 1 July 2016 till closure of business
Rs. in million
10.5
3.5
2.0
(05)
Required:
Discuss giving reasons how each of the above issues should be dealt with in the financial
statements of NL for the years ended 30 June 2015 and 2016 in accordance with the
requirements of International Financial Reporting Standards. (Assume that NL’s financial
statements are authorized for issue three months after the year-end)
Q.4
Chand Paints Limited (CPL) is engaged in the manufacturing of chemicals and paints. In
April 2016 it was discovered that certain errors had been made in the financial statements
for the year ended 30 June 2015. The errors were corrected in 2016. The details are as
follows:
2015
After
2015
correction
Audited
of errors
---------- Rs. in million -----------
2016
(Draft)
Statement of comprehensive income
Sales tax, commission and discounts
Cost of sales
Selling and distribution expenses
Administration expenses
Other operating charges
Other operating income
Profit for the year
Statement of financial position
Trade and other receivables
Trade and other payables
(7,939)
(45,508)
(2,940)
(2,356)
(495)
920
4,089
(8,246)
(44,606)
(2,635)
(2,254)
(467)
427
3,723
(7,916)
(44,633)
(2,441)
(2,149)
(515)
509
4,359
1,839
11,600
1,613
8,894
2,025
8,670
The share capital and un-appropriated profit of CPL as on 1 July 2014 was Rs. 10,400
million and Rs. 19,089 million respectively.
The details of dividend declared are as follows:
Cash dividend – Interim
– Final
2016
10%
15%
2015
5%
10%
Required:
(a)
Prepare a correction of error note to be included in the financial statements for the
year ended 30 June 2016. (Ignore earnings per share and taxation)
(b)
Prepare the statement of changes in equity for the year ended 30 June 2016.
(10)
(08)
Financial Accounting and Reporting-II
Q.5
Page 4 of 5
Following information pertains to International Associates Limited (IAL):
(i)
Intangible assets as at 30 June 2015 were as follows:
Useful life (years)
Cost
Accumulated amortization / impairment
(ii)
Brands
Software
License
10
5
Indefinite
--------- Rs. in million --------200
80
15
40
48
-
Details of expenses incurred on a project to improve IAL’s existing production process
are as under:
Period
Up to June 2015
July 2015 – March 2016
Rs. in million
20
45
Expenses were incurred evenly during the above period. On 30 September 2015, it was
established that the project is commercially viable. The new process became
operational with effect from 1 April 2016 and it is anticipated that it will generate cost
savings of Rs. 10 million per annum for a period of 10 years.
(iii)
On 1 August 2015, IAL entered into an agreement to acquire an ERP software which
would replace its existing accounting software. The new software became operational
on 1 April 2016. IAL incurred following expenditure in respect of the ERP software:
Description
Purchase price (including 15% sales tax)
Training of staff
Consultancy charges for implementation of ERP
Rs. in million
115
2
5
ERP software has an estimated useful life of 15 years. However, IAL expects to use it
for a period of 10 years. The existing accounting software has become redundant and
is of no use for the company.
(iv)
(v)
(vi)
During the year ended 30 June 2016, IAL spent Rs. 10 million on development of a
new brand. Useful life of the brand is estimated as ten years.
The license appearing in IAL’s books was issued by the government for an indefinite
period. However, on 1 January 2016 the Government introduced a legislation under
which the existing license would have to be renewed after ten years.
IAL uses cost model to value its intangible assets and amortises them on
straight-line basis.
Required:
Prepare a note on ‘intangible assets’ for inclusion in IAL’s financial statements for the year
ended 30 June 2016 in accordance with International Financial Reporting Standards.
Q.6
(16)
Zia is a Chartered Accountant and works as a financial controller in Unique Engineering
Limited (UEL). UEL is currently considering the acquisition of Top Storage Limited (TSL)
and Zia is a member of the team which is currently negotiating the acquisition with the
management of TSL.
After becoming aware of the prospective acquisition, Zia purchased 1,000,000 shares of TSL
in the name of his wife and son.
Required:
Briefly explain how Zia is in breach of the fundamental principles of ICAP’s code of ethics.
Also explain the potential threats that may be involved in the above situation.
(06)
Financial Accounting and Reporting-II
Q.7
Page 5 of 5
Following amounts have been determined from the records of Hassan Limited.
Description
Sales
Cost of sales
Profit before interest and tax
Account receivable
Account payable
Inventory
Cash at bank / (overdraft)
2014
2015
2016
-------- Rs. in million -------100.00
120.00
135.00
75.00
90.00
101.25
6.00
5.50
5.60
16.50
25.00
35.00
13.00
14.70
15.00
18.75
26.00
30.40
5.00
(0.50)
(2.00)
Required:
Calculate liquidity ratios and working capital cycle for 2015 and 2016 and comment on the
results of your calculation, assuming that all sales and purchases are made on credit.
(THE END)
(10)
Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Autumn 2016
A.1
Yasir Limited
Consolidated Statement of financial position
As at 30 June 2016
Rs. in million
Non-current Assets
Fixed assets [180 + 470 + (12 × 0.9)]
Goodwill (W-1)
660.80
190.35
851.15
Current assets
Stock in trade [160 + 150 – 4.8(Working: 32×0.15) – 4.6(Working:
20÷1.3×0.3)]
Other current assets (71 + 50)
Cash and bank (63 + 151 + 5.92)
300.60
121.00
219.92
641.52
Total assets
1,492.67
Share capital & Reserves
Share capital
Retained earnings (W-3)
Non controlling interest (W-4)
750.00
406.20
210.47
1,366.67
Liabilities
Creditors and other liabilities (75 + 51)
126.00
Total equity & liabilities
1,492.67
W-1 : Computation of Goodwill and its impairment
Cash consideration (50 × 0.75 × 18)
Fair value of NCI (50 × 0.25 × 15)
675.00
187.50
862.50
(651.00)
211.50
(21.15)
190.35
Less: Net assets (W-2)
Goodwill on acquisition date
Less: Impairment (10%)
W-2 : Net Asset of BL on year end and on acquisition date
Share capital
Retained earnings
Increase in fair value of building
Depreciation adjustment – building (12 × 5% × 2)
Inter company sales (32 × 0.15)
Post acquisition profit (764-651)
*
30-Jun-16
At acquisition
------- Rs. in million --------500.00
500.00
*
258.00
139.00
12.00
12.00
(1.20)
(4.80)
764.00
651.00
113.00
[258 – 168 – 11+ 60(500×12%)]
Page 1 of 6
Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Autumn 2016
W-3: Consolidated retained earnings
YL as at June 30, 2016 (given)
Interest income/expense on loan (16 × 0.12)
Inter company sales (20 ÷ 1.3 × 0.3)
Parent’s share in BL’s post acquisition profit [113(W-2)×75%]
Impairment of goodwill (21.15 × 75%)
W-4: Non-controlling interest
Fair value at acquisition (50 × 0.25 × 15)
NCI’s share in BL’s post acquisition profit [113(W-2)×25%]
Impairment of goodwill (21.15 × 25%)
A.2
Rs. in million
340.00
1.92
(4.62)
84.75
(15.85)
406.20
187.50
28.25
(5.28)
210.47
Minhas Manufacturers Ltd.
Extracts from Statement of Financial position
As on 30 June 2016
Assets
Property, plant and equipment
Building (W-1)
2016
Rs. in million
106.91
Liabilities:
Long term liabilities
Bank loan [14.38(W-4) + 15.17(W-4)]
29.55
Current liabilities
Current maturity of bank loan [12.93(W-4) + 13.64(W-4)]
Short term running finance
Bills payable
Retention money
Interest payable [3.07 (W-4) × 1 ÷ 6]
26.57
38.00
10.00
4.50
0.51
W-1: Cost of building
Progress bill
Interest on specific bank loan capitalized
[(4.38(W-4) × 4 ÷ 6) + 3.74 (W-4) + (3.07 (W-4) × 1 ÷ 6)]
Less: Interest income on surplus funds – net (W-3)
W-2: Computation of capitalization rate
Average running finance (A)
Interest rate (B)
Rs. in million
40
11%
30
13%
70
100.00
7.17
(0.26)
106.91
Interest (A×B)
Rs. in million
4.4
3.9
8.3
Page 2 of 6
Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Autumn 2016
W-3: Finance income / (charges) on surplus fund/ (Overdraft utilization)
Surplus
funds/
(OD
utilization)
Rs. in million
70.5
(28.5)
42
42
(16)
26
(28.5)
(2.5)
(19)
(21.5)
(16)
(37.5)
Loan
utilization
Payment
date
Description
1-Jul-15
1-Aug-15
1-Nov-15
30-Nov-15
1-Dec-15
1-Apr-16
31-May-16
Balance b/f (80 – 9.5)
2nd progress billing
Work suspended for one month
Payment of 1st instalment
3rd progress billing
4th progress billing
Payment of 2nd instalment
Mark-up
rate%
7
7
7
11.857
11.857
11.857
No. of
months
1
3
1
0
4
2
1
For the year ended 30 June 2016
Finance income /
(charges )
CapitalP/L
ized
Rs. in million
0.41
0.74
0.25
(0.10)
(0.42)
(0.37)
0.26
0.25
W-4 : Repayment schedule of bank loan
Date
01-Jun-15
30-Nov-15
31-May-16
30-Nov-16
31-May-17
30-Nov-17
31-May-18
A.3
(a)
Instalment
16
16
16
16
16
16
Outstanding
Amount
------------------------ Rs. in million -----------------------80.00
11.62
4.38
68.38
12.26
3.74
56.12
12.93
3.07
43.19
13.64
2.36
29.55
14.38
1.62
15.17
15.17
0.83
0.00
Principal
Interest @ 5.4718 %
2015 Financial Statements:
NL should have made a provision of Rs. 2 million because:
(i) NL had a present obligation as a result of past event;
(ii) The validity of customer's claim was confirmed by the company's lawyer which shows
that an outflow will be required to settle the obligation
(iii) A reliable estimate of the amount of outflow was available.
2016 Financial Statements:
The settlement of the case in July 2016 was an adjusting event for the year ended 30 June
2016. The provision created in 2015 is to be reversed. The company should revise the
provision keeping in view of the cost of replacement less the amount that would be
recovered on disposal of faulty batteries.
(b)
2015 Financial Statements:
NL should disclose the recoverable damages as contingent assets because:
(i) IFRS does not allow recognition of a contingent asset in the financial statement;
(ii) an inflow of economic benefits is probable and is confirmed by the company's lawyer
(iii) NL should disclose the brief description of the nature of contingent assets and an
estimate of their financial effect i.e. inflow of Rs. 24 million.
2016 Financial Statements:
Since this is an adjusting event as subsequent to year ended 30 June 2016, the court has
decided to award a compensation of Rs. 30 million. After the court's order recovery of Rs.
30 million is virtually certain, as a result, it is no longer a contingent asset and it should be
recognized as an asset.
Page 3 of 6
Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Autumn 2016
(c)
2015 Financial Statements:
Neither provisions nor disclosure should be made as there is no constructive or legal
obligation as on 30 June 2015 because:
(i) NL has no detailed formal plan for the disposal
(ii) NL has not made its decision public and consequently did not raise any valid
expectation in those affected
2016 Financial Statements:
The provision should be recognized because the obligating event is the communication of
the plan to the public which creates a valid expectation that the division will be closed.
However, the provision should only be recognised to the extent of redundancy cost. IAS-37
prohibits the recognition of future operating losses and staff training costs.
A.4
(a)
Chand Paints Limited
Notes to the financial statements
for the year ended 30 June 2016
The effect of retrospective restatement on statement of comprehensive income is tabulated
below:
Increase / (decrease) in income
Increase in sales tax, commission and discounts (7,916 – 8,246)
Decrease in cost of sales (44,633 – 44,606)
Increase in selling and distribution expenses (2,441 – 2,635)
Increase in administration expenses (2,149 – 2,254)
Decrease in operating income
Decrease in other operating charges (515 – 467)
Decrease in other operating income ( 509 – 427 )
Decrease in profit for the year
2015
Rs. in million
(330)
27
(194)
(105)
(602)
48
(82)
(636)
The effect of retrospective restatement on statement of financial position for 2015 is
tabulated below:
Decrease in trade debts (2,025 – 1,613)
(412)
Increase in trade and other payables (8,894 – 8,670)
224
Decrease in un-appropriated profit
(b)
(636)
Chand Paints Limited
Statement of changes in equity
for the year ended 30 June 2016
Description
Balance as on 1 July 2014
Interim dividend for the year ended 30 June 2015 (10,400×5%)
Total comprehensive income for the year 2015 - restated
Balance as at 30 June 2015 restated
Final dividend for the year ended 30 June 2015 (10,400×10%)
Interim cash dividend for the year 2016 (10,400×10%)
Total comprehensive income for the year ended 30 June 2016
Balance as at 30 June 2016
Retained
*Total
earnings
----------Rs. in million---------10,400
19,089
29,489
(520)
(520)
3,723
3,723
10,400
22,292
32,692
(1,040)
(1,040)
(1,040)
(1,040)
4,089
4,089
10,400
24,301
34,701
Share capital
Page 4 of 6
Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Autumn 2016
A.5
International Associates Limited
Notes to the financial statements
for the year ended 30 June 2016
Note : Intangible assets
Gross carrying amount–opening balance
Accumulated amortization
Net carrying amount–opening balance
Additions
Less : Amortization for the year
Impairment loss (P/L)
Net carrying amount–closing balance
Gross carrying amount–closing balance
Accumulated amortization and
impairment loss
Net carrying amount–closing balance
Useful life ( in years)
A.6
*1
115 + 5 = 120
*2
45 × 6 ÷ 9 = 30
*3
(80÷5 × 9/12)+(120÷10×3/12)=15
*4
32 – (80÷5×9/12 = 20
DevelopTotal
ment
----------------------- Rs. in million ----------------------200
80
15
295
(40)
(48)
(88)
160
32
15
207
120*1
30.00*2
150
(20)
(15)*3
(0.75)
(0.75)
(36.50)
(20)*4
(20)
140
117
14.25
29.25
300.50
Brands
Software
License
200
200
15
30.00
445
(60)
140
(83)
117
(0.75)
14.25
(0.75)
29.25
(144.50)
300.50
10
10
10
10
Mr. Zia breached the following fundamental principles of ICAP code of ethics:
(i)
Confidentiality
Under the Code of Ethics, member must respect the confidentiality of information acquired
as a result of professional and business relationship. Confidential information acquired
should not be used for the personal advantage by a member.
In the above scenario, Mr Zia has breached the principle of confidentiality by using the
confidential information for the personal advantage since the information was not publicly
available.
(ii)
Professional behaviour
Under the Code of Ethics, member must comply with relevant laws and regulations and
should avoid any action which discredits the profession.
Since it can be a non compliance of laws and regulation, he may be in breach of the
principle of professional behaviour.
Potential threats involved in the circumstances:
Self interest threat
Since Mr. Zia is part of a team which is negotiating the price of the shares and he has
purchased shares in the name of his wife and son, it creates self interest threat and he would
be reluctant to take any decision that would be against his own interest.
Page 5 of 6
Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Autumn 2016
A.7
2015
2016
63.11 days
81.11 days
90.76 days
101.66 days
51.98 days
51.30 days
Days
63.11
90.76
(51.98)
101.89
Days
81.11
101.66
(51.30)
131.47
Current Ratio
Quick Ratio
Account Receivable
collection period
Inventory holding
period
Account payable
payment period
Working capital cycle
Average days to collect receivable
Average inventory holding period
Less : Average time to pay accounts payable
Comments

The company's liquidity position, as evidenced from the current ratio and the quick ratio,
appears to be growing stronger. However, the working capital cycle of the company is getting
longer in 2016 as compared to 2015.

The company may face liquidity problem in future, as debtors days are increasing and a large
cash is blocked in inventory.

Higher investment in working capital would result in decrease in ROCE and Return on
shareholders equity.

The increase in debtors days may suggest inefficient collection of amounts due from debtors.
(THE END)
Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance
– Autumn 2016
General:
Performance in the paper was better as compared to the past many attempts. However it
was noted that the candidates generally performed the calculations well but were lacking
in case of presentation and disclosure requirements.
Question-wise Comments:
Question 1
This question required the candidates to prepare consolidated statement of financial
position and proved to be the best attempted as about 76% students secured passing
marks. The following mistakes were however observed:




In computing the goodwill at acquisition:
o Many students did not take correct amount of retained earning as either they
failed to add back dividend of 2015 or added back dividend declared for the
year 2016.
o Non-controlling interest (NCI) was computed under the proportionate share
method instead of fair value method.
While calculating net assets of subsidiary as at 30 June 2016, depreciation on increase
in fair value of the building was deducted for one year instead of two years.
While computing consolidated retained earnings, many students failed to add back
interest on loan.
Some students failed to eliminate the intercompany loan.
Question 2
Although borrowing cost is a commonly examined topic of this paper, poor response was
observed in this question as either the students could not complete their answers or failed
to work out the correct borrowing cost for capitalization. The following mistakes were
observed in many answer scripts:



Capitalization rate was computed on the basis of total amount of facility or closing
running finance balance, instead of average balance of the two banks.
Interest pertaining to the suspension period was also capitalised.
Most of the students considered the entire amount of the installment i.e. Rs 16 million
as principal repayment instead of breaking it between interest and principal.
Consequently, the amount of interest to be capitalized was computed incorrectly and
bifurcation of the loan between long-term portion and current maturity was done
incorrectly.
Page 1 of 3
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2016


Instead of disclosing the building under the head property, plant and equipment, many
students showed it as capital work in progress, though it was specifically mentioned
in the question that the work had been completed on 30 June 2016.
The question required disclosure of all the relevant information in the statement of
financial position. However, many students disclosed building only and ignored other
items such as retention money payable, interest payable, running finance, bills
payable, etc.
Question 3
This was a fairly straight forward question based on IAS – 37 “Provisions, contingent
liabilities and contingent assets” and IAS – 10 “Events after reporting period”. The
question described three different situations pertaining to a company and the candidates
were required to discuss the accounting treatment in each case. The question was
reasonably well attempted. Performance related to each situation is discussed below:
(a)
Many students only discussed the conditions that are required to be fulfilled for
making provision but did not relate them with the situation given in the question.
Further, many students who correctly suggested that provision for Rs. 2 million
should be made in 2015, failed to mention that the said provision has to be revised,
based on the subsequent decision of the court.
(b)
Surprisingly, a number of students were of the opinion that the amount of suit filed
by the company should be recorded as an asset. Further many among those who
correctly identified the recoverable damages as contingent assets could not mention
the disclosure requirements relating to contingent asset.
(c)
Most of the students did well in this part as they correctly identified that
redundancy cost should be booked in 2016 and not in 2015 as there is no
constructive or legal obligation on 30 June 2015.
Question 4
This question required a correction of error note and statement of changes in equity to be
included in the financial statements for the year 2016. Although majority of the students
earned good marks in statement of changes in equity, they failed to perform well while
preparing the correction of error note as they failed to apply the disclosure requirements
of IAS 8 for prior period errors whereby amount of correction for each financial
statement line item affected has to be disclosed.
Question 5
This question required a note on intangible assets to be included in the financial
statements of a company. Average response was noted as a good number of students
scored passing marks but the following mistakes were also observed in many answer
scripts:


Instead of giving complete note, many students presented only the net book value of
intangibles on the face of the statement of financial position.
Many students capitalized the internally developed brand, which is incorrect as it is
Page 2 of 3
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2016





specifically excluded by IAS – 38 “Intangible Assets”.
Cost of training on ERP software was capitalized.
License cost was not amortised, although it was mentioned in the question that during
the year Government introduced a legislation under which the existing license would
have to be renewed after ten years.
Further, most of the students incorrectly capitalized the cost of new process as they
capitalized the cost incurred prior to the period on which it was established that the
project would be commercially viable.
Many students failed to calculate impairment loss on existing accounting software
which had become redundant and was of no use for the company.
Asset wise useful lives were not disclosed.
Question 6
This question was based on a simple scenario and the candidates were required to explain
the potential threat in the given scenario and the fundamental principles of ICAP’s Code
of Ethics which were being breached.
The overall performance was quite poor as most of the students could not identify the
breach of confidentiality and professional behavior in the given situation.
Question 7
This was a fairly straight forward question where the candidates were required to
calculate and analyze the liquidity ratios and working capital cycle of a company for the
years 2015 and 2016.
Generally, the question was well attempted. However, many students provided incorrect
and irrelevant comments also. Moreover, instead of taking average debtors, average
creditors and average inventory for computation of working capital cycle, many students
took the closing balances.
THE END
Page 3 of 3
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016
Note regarding marking scheme:
The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations.
A.1









Property, plant and equipment
Goodwill and its impairment
Stock in trade
Other current assets
Cash and bank
Share capital and retained earnings
Non-controlling interest
Creditors and other liabilities
Elimination of inter-company loan
A.2

Computation of:
 capitalization rate
 finance income / (charges) on surplus fund / (overdraft utilization)
 repayment schedule of bank loan
 cost of building
Disclosures and presentation

A.3
(a)


(b)


(c)


A.4
(a)
(b)
Mark(s)
1.0
5.5
1.5
0.5
1.0
4.5
2.5
0.5
1.0
2.0
5.0
2.0
3.0
5.0
Discussion on accounting treatment of the issue in 2015 financial
statements
Discussion on accounting treatment of the issue in 2016 financial
statements
3.0
Discussion on accounting treatment of the issue in 2015 financial
statements
Discussion on accounting treatment of the issue in 2016 financial
statements
3.5
Discussion on accounting treatment of the issue in 2015 financial
statements
Discussion on accounting treatment of the issue in 2016 financial
statements
1.5
2.0
1.5
3.5
Preparation of correction of error note showing effect of retrospective
restatement on the items of:
statement of comprehensive income

statement of financial position

7.0
3.0
Statement of changes in equity:
Restatement of balances

Interim and final dividends for 2015 and 2016

Total comprehensive income for 2015 and 2016

Other disclosures

1.5
3.0
1.0
2.5
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016
A.5







A.6
A.7
Opening balances of cost, accumulated amortization and impairment losses
and net carrying amount
Additions during the year:
Software

Development

Non capitalization of internally generated brand and staff training cost
Amortization
Impairment loss
Closing balances of cost, accumulated amortization and impairment losses and
net carrying amount
Disclosure relating to useful lives
Mark(s)
3.0
1.0
2.0
1.5
2.5
1.0
4.0
1.0

Brief explanation of breaches of the fundamental principles of ICAP’s code of
ethics in the given scenario
Potential threats involved in the given situation
4.0
2.0



Up to 1.5 marks for computation of each liquidity ratio for 2015 and 2016
Calculation of working capital cycle for 2015 and 2016
Comments on the results of above ratios
5.0
1.0
4.0

(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examinations
The Institute of
Chartered Accountants
of Pakistan
11 March 2017
3 hours – 100 marks
Additional reading time – 15 minutes
Financial Accounting and Reporting-II
Q.1
The following information pertains to the financial statements of Home Dynamics Limited
(HDL), a listed company, for the year ended 31 December 2016:
(i)
Profit after tax for the year:
Profit from continuing operations – net of tax
Profit from discontinued operations – net of tax
Profit after tax
(ii)
Shareholders’ equity as on 1 January 2016 comprised of:
(iii)
(iv)
(v)
Rs. in million
765
155
920
10 million ordinary shares of Rs. 10 each, having market value of Rs. 25 each.
4 million cumulative preference shares of Rs. 10 each entitled to a cumulative
dividend at 10%.
On 31 March 2016, HDL announced 40% right shares to its ordinary shareholders at
Rs. 25 per share. The entitlement date of right shares was 31 May 2016. The market
price per share immediately before the announcement date and entitlement date was
Rs. 28 and Rs. 32 respectively.
On 2 August 2016, HDL announced 20% bonus issue. The entitlement date of bonus
shares was 31 August 2016.
On 1 February 2017, the board of directors announced 20% cash dividend and
10% bonus issue being the final dividend to the ordinary shareholders and 10% cash
dividend for preference shareholders.
Required:
Calculate basic earnings per share for inclusion in HDL’s financial statements for the year
ended 31 December 2016. Show all relevant calculations.
Q.2
(10)
Atif is a chartered accountant and has been working as Manager – Accounts in an unlisted
public company MNZ Limited.
While preparing the financial statements for the year ended 31 December 2016, CFO of
MNZ who is also a chartered accountant informed Atif that the directors are considering to
have the company listed on Pakistan Stock Exchange.
Consequently, CFO wants to show higher profit and has asked Atif to identify areas where
book adjustments can be made. He has also informed that if MNZ is able to list the shares at
a price of Rs. 35 or more, all managerial staff would be given an additional bonus this year.
Required:
Briefly explain how the CFO is in breach of the fundamental principles of ICAP’s code of
ethics. Also state the potential threats that Atif may face under the above circumstances and
how he should respond.
(08)
Financial Accounting and Reporting-II
Q.3
Page 2 of 5
BB Limited (BBL) produces a single product in two factories A and B. Factory A produces
the required components which are assembled in factory B. The finished product is then sent
to distributors for sale.
Following information is available for the purpose of impairment testing:
(i)
(ii)
BBL uses cost model for subsequent measurement of property, plant and equipment.
The book value and fair value less cost to sell of BBL’s tangible assets as on
31 December 2016 were as follows:
Building
Plant
Equipment
Other assets
(iii)
(iv)
Book value
Fair value less cost to sell
Factory A
Factory B
Factory A
Factory B
-------------------- Rs. in million --------------------1,850
3,600
1,800
4,200
1,125
2,700
1,300
1,600
690
1,350
460
1,480
240
510
130
280
Goodwill appearing in the books is Rs. 100 million.
Expected cash flows of BBL in next three years are as follows:
Net operating cash inflows
Estimated sale proceeds of all assets
Costs of disposing the above assets
(v)
2017
2018
2019
------- Rs. in million ------1,650
2,450
2,900
8,200
283
Pre-tax discount rate of BBL is 9%.
Required:
(a) Identify the cash generating unit for BB Limited.
(b) Determine the carrying amount of each asset to be included in BBL’s financial
statements for the year ended 31 December 2016 in accordance with International
Financial Reporting Standards. (Ignore tax implications)
Q.4
(02)
(10)
On 1 January 2016 Maisum Limited (ML) entered into a sale and lease back agreement
with Bachat Bank in respect of a machine. The details of machine sold and leased back are
as under:
Rs. in million
Carrying value
85
Sale price to the lessor
95
Fair market value
120
The terms of lease agreement are as follows:
Lease term
Annual rentals (payable in advance)
Implicit interest rate
4 years
Rs. 21 million
9%
The transfer of machine by the seller-lessee satisfies the requirements of IFRS 15 to be
accounted for as a sale.
Required:
(a) Prepare journal entry in the books of ML to record the above transaction on
1 January 2016.
(b) Prepare relevant extracts from the statements of financial position and comprehensive
income and related notes for inclusion in ML’s financial statements, for the year
ended 31 December 2016.
(07)
(10)
Financial Accounting and Reporting-II
Q.5
Page 3 of 5
The draft summarized statements of financial position of Golden Limited (GL) and its
subsidiary Silver Limited (SL) as at 31 December 2016 are as follows:
GL
SL
---------- Rs. in million ---------1,600
500
1,465
690
327
2,068
780
5,460
1,970
Building
Plant & machinery
Investment in SL
Current assets
Share capital (Rs. 10 each)
Share premium
Retained earnings
980
730
3,150
4,860
600
5,460
Liabilities
(i)
450
150
210
810
1,160
1,970
GL acquired 60% of the shares of SL on 1 April 2016 at following consideration:
Issuance of 20 million ordinary shares at premium of Rs. 2 each;
Cash amounting to Rs. 87 million, which includes consultancy charges of
Rs. 10 million and legal expenses of Rs. 5 million.
The market value of each share of GL and SL on acquisition date was Rs. 25 and
Rs. 11 respectively. At acquisition date, retained earnings of SL were Rs. 100 million.
(ii)
The following table sets out those items whose fair value on the acquisition date was
different from their book value. These values have not been incorporated in SL’s
books of account.
Book value
Fair value
---------Rs. in million--------Building
Inventory
Provision for bad debts
(iii)
(iv)
250
112
(15)
170
62
(24)
Upon acquisition of SL, a contract for management services was also signed under
which GL would provide various management services to SL at an annual fee of
Rs. 50 million from the date of acquisition. The payment would be made in two equal
instalments payable in arrears on 1 April and 1 October.
On 30 September 2016, GL acquired a plant from SL in exchange of a building which
was currently not in use of GL. The details of plant and building are as follows:
Accumulated
*Exchange price
depreciation
------------------- Rs. in million -----------------------Building
240
130
120
Plant
200
80
120
* Equivalent to fair value
Cost
(v)
(vi)
Both companies follow cost model for subsequent measurement of property, plant and
equipment and charge depreciation on building and plant at 5% and 20% respectively
on cost.
SL paid an interim cash dividend of 10% on 31 July 2016.
GL values non-controlling interest at the acquisition date at its fair value.
Required:
Prepare a consolidated statement of financial position as at 31 December 2016 in
accordance with the requirements of International Financial Reporting Standards.
(17)
Financial Accounting and Reporting-II
Q.6
Page 4 of 5
The following trial balance pertains to Hadi Limited (HL) for the year ended
31 December 2016:
Description
Capital work-in-progress
Plant and machinery – at cost
Trade receivables
Stock-in-trade
Cash and bank
Cost of sales
Administrative expenses
Ordinary share capital (Rs. 10 each)
Retained earnings
Accumulated depreciation – Plant and machinery
Trade payables
10% long term loan
Provision for warranty
Provision for bad debts
Deferred tax liability
Sales
Debit
Credit
------- Rs. in ‘000 ------145,000
305,000
61,400
79,600
33,444
78,664
37,636
241,000
69,050
53,250
60,912
75,000
10,000
5,000
25,125
201,407
740,744
740,744
While finalizing the financial statements of HL from the above trial balance, the following
issues have been noted:
(i)
No depreciation has been charged in the current year. Depreciation is provided at
10% per annum using the straight line method.
(ii) A machine which was purchased on 1 January 2015 for Rs. 25 million was traded-in,
on 1 July 2016 for a new and more sophisticated machine. The disposal was not
recorded and the new machine was capitalized at Rs. 15 million being the net amount
paid to supplier. The trade-in allowance amounted to Rs. 20 million.
(iii) Taxation authorities allow initial and normal depreciation at 25% and 15%
respectively using reducing balance method. No tax depreciation is allowed in the
year of disposal. The tax written down value of the plant and machinery as on
1 January 2016 was Rs. 153 million.
(iv) HL maintains a provision for doubtful debts at 6% of trade receivables. On 1 February
2017, a customer owing Rs. 10 million at year-end was declared bankrupt. HL
estimates that 20% of the amount would be received on liquidation.
(v) The long term loan of Rs. 75 million was obtained on 1 January 2016, to finance the
capital work-in-progress. HL capitalizes the finance cost on such loan in accordance
with IAS-23 ‘Borrowing cost’. However, the financial charges are admissible as an
expense, under the tax laws.
(vi) HL sells goods with a 1-year warranty and it is estimated that warranty expenses are
3% of annual sales. Actual payments during the year, against warranty claims of the
products sold during current and previous years were Rs. 2.5 million and Rs. 8 million
respectively. These have been debited to administrative expenses.
(vii) On 1 January 2016, HL started research and development work for a new product. On
1 May 2016, the recognition criteria for capitalization of internally generated asset
was met. The product was launched on 1 November 2016.
HL incurred Rs. 20 million from commencement of research and development work
till launching of the product and charged it to cost of goods sold. It is estimated that
the useful life of this new product will be 20 years. It may be assumed that all costs
accrued evenly over the period.
On 31 December 2016, the recoverable amount of the development expenditure was
Rs. 10 million. For tax purposes, research and development costs are allowed to be
amortized over 10 years.
(viii) Applicable tax rate is 30%.
Financial Accounting and Reporting-II
Page 5 of 5
Required:
(a) Prepare statement of comprehensive income for the year ended 31 December 2016 in
accordance with the requirements of International Financial Reporting Standards.
(b) Compute the current and deferred tax expenses for the year ended 31 December 2016.
Q.7
(11)
(15)
Karim Limited (KL) bought a special purpose engineering plant on 1 January 2015 at a cost
of Rs. 1,755 million inclusive of sales tax @ 17% (refundable).
KL is required to decommission the plant after a period of 2 years. Decommissioning cost is
estimated at Rs. 300 million. The applicable discount rate is 11%.
KL uses the cost model for subsequent measurement of its property, plant and equipment.
Plant is being depreciated using the straight line method over its useful life.
Required:
Prepare journal entries to record the above transactions for the years 2015 and 2016.
(THE END)
(10)
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Ans.1
Continuing Discontinued
operations
operations
Net Profit attributable to ordinary shareholders
(Rs. in million) (765–4)
761.00
155.00
Weighted avg. no. of ordinary shares in issue during the
year (W-1) (in million)
16.65
16.65
Basic earnings per share (Rs.)
45.71
9.31
W-1: Weighted average no. of ordinary shares in issue during the year
(in 000’)
Bonus
Actual issue Fraction
Adjust.
Description
Date
issue
of shares of period
Factor
@ 20%
1.06667
(W-2)
Balance
1-Jan-16
10,000
5/12
1.2
Right issue
31-May-16
4,000
(10,000×0
.4)
14,000
3/12
1.2
Bonus issue 31-Aug-16
2,800
(14,000×
20%)
16,800
4/12
Bonus issue subsequent to year end @10%
(15,133.35*10%)
W-2: Adjustment factor for right issue
Shares prior to right issue at FV prevailing on
the exercise date
40% right shares issued at exercise price
Theoretical ex-right price per share (420/14)
Adjustment factor (32/30)
Weighted
shares
5,333.35
4,200.00
5,600.00
15,133.35
1,513.33
16,646.68
Value
per
share
32
25
No. of
shares
Rupees
10,000,000
4,000,000
14,000,000
320,000,000
100,000,000
420,000,000
30
1.067
Ans.2 In given situation, CFO is in breach of :
(i)
(ii)
Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional
and business relationship. Since he asked Accounts manager to identify the areas
where through adjustments, profit may be reported on higher side, he has
breached the principle of integrity.
Principle of professional behaviour:
This principle imposes an obligation on all chartered accountants to avoid any
Page 1 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
action that the chartered accountant knows or should know may discredit the
profession. Since CFO asked Accounts Manager for booking the adjustments to
increase the current year profit, which have a negative effect on the reputation of
the profession.
(iii)
Principle of objectivity:
Chartered Accountant should not compromise their professional or business
judgment because of bias, conflict of interest or the undue influence of others. In
this circumstance, he has compromised his professional and business judgment
due to biasness.
Self interest threat faced by Mr. Atif
Self interest threat occurs as a result of financial or other interest of members or their
immediate family member. In this case, he has been told by the CFO that he would be
given an additional bonus this year so he faces self interest threat.
Available safeguards
If this threat is significant Atif should consult with superiors within the organisation in
order to eliminate or reduce it to an acceptable level.
Where it is not possible to reduce the threats to an acceptable level, Atif:
(i)
(ii)
(iii)
should refuse to remain associated with information which is or may be
misleading
should consider informing appropriate authorities keeping in view the
confidentiality and the legal requirements, if issuance of misleading information
is either significant or persistent.
seek legal advice or may resign.
Ans.3 (a) Since the assets of factory A do not generate cash flows independently and they
are dependent upon sales of factory B, assets of factory A could not be treated as
separate cash generating unit and both factory A and B are to be treated as a single
cash generating unit.
(b)
Equipme
Other
Total
nt
assets
------------------------------------------- Rs. in million -----------------------------------------5,450.
100.00
00
3,825.00 2,040.00
750.00 12,165.00
(100.00)
(78.78)
(42.01)
(15.45)
(236.24)
[3825/(38 [2040/(38 [750/(38
25+2040+ 25+2040 25+2040
750)×136.
+750) +750)×1
24] ×136.24]
36.24]
Goodwill Building
Carrying value
Allocation of
impairment
determined in
(W-1)
Carrying
value after
impairment
-
5,450.
00
Plant
3,746.22
1,997.99
734.55
11,928.76
Page 2 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
W-1: Determination of impairment amount
-------- Rs. in million --------
Carrying amount (as given)
Less: Recoverable amount
Higher of:
Fair value less cost to sell (as given)
Value in use (W-2)
12,165.00
11,250.00
11,928.76
11,928.76
236.24
Impairment
W-2: Determination of value in use
Net cash flows
(Rs. in million)
2017
1,650
2018
2,450
(2,900+8,200–
2019
283)10,817
Discount rate @
9%
0.9174
0.8417
0.7722
Ans.4 (a)
Cash
Right of use (W-1)
Machine
Lease liability
[21×3.5313[{(1–(1+0.09)–3)/0.09}+1]]
Gain (balancing)
(To record sale and lease back of machine)
Lease liability
Bank
(To record payment of lease instalment)
Discounted value
(Rs. in million)
1,513.71
2,062.17
8,352.88
11,928.76
Debit
Credit
---------- Rs. in million --------95.00
70.24
85.00
74.16
6.08
21.00
21.00
W-1: Determination of value of right of use
Carrying value
85.00
Right of use =
× PV of payments =
× 99.16 (𝐖‐ 𝟐) = 70.24
fair value
120.00
W-2: Present value of payments for right of use
Lease liability (3.5313×21)
Adjustment to measure the machine at fair value (120–95)
Present value of payments for the 4 years right of use
Rs. in million
74.16
25.00
99.16
(b) Maisum Limited
Extracts from statement of financial position
As on 31 December 2016
Rs. in million
Assets
Right of use(70.24×3/4)
52.68
Liabilities
Lease liability - long term maturity (W-1)
Lease liability - current maturity (W-1)
Interest payable (W-1)
36.95
16.22
4.78
Page 3 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Rs. in million
Maisum Limited
Extracts from statement of comprehensive income
For the year ended 31 December 2016
Amortization/Depreciation expense (70.24/4)
Interest expense (W-1)
Gain on rights transferred to the buyer (lessor) [Req. (a)]
17.56
4.78
6.08
Maisum Limited
Notes to the financial statements for the year ended 31 December 2016
Note Reconciliation between the total of future
1 lease payments and their present value
Not later than one year
Later than one year and not later than five years
Later than five years
Future lease
payments
21.00
42.00
63.00
Lease finance charges allocated to future
periods
Present value
21.00
36.95
57.95
(5.05)
57.95
The lease payments have been discounted at interest rate of 9% per annum to
arrive at the present value. Lease instalments are paid annually in advance.
W-1: Amortization schedule
Date
Interest @
9%
Instalment
s
Principal
repayme
nts
1-Jan-16
1-Jan-17
1-Jan-18
1-Jan-19
21
21
**4.78
21
16.22
3.32
21
17.68
1.73
21
19.27
5.05
42
36.95
**It is recorded as an expense for the year.
Balance
74.16
53.16
36.94
19.27
0.00
PV of future
instalments
21.00
19.27
17.68
36.95
Ans.5 Golden Limited
Consolidated statement of financial position
As on 31 December 2016
Rs. in million
Non current Assets
Building (W-2)
Plant & machinery (W-2)
2,011.50
2,151.00
Current Assets
Current assets [2068+780–(112–62)–(24–15)–(50/12×3)]
2,776.50
6,939.00
Equity & liabilities
Share capital
Share premium
Consolidated retained earnings (W- 4)
980.00
730.00
3,239.90
Page 4 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Non controlling interest (W-5)
Liabilities [600+1160–(50×3/12)]
Rs. in million
241.60
1,747.50
6,939.00
W-1: Computation of goodwill
Issuance of shares (20×12)
Cash payment (87–15)
Total consideration paid
Add: FV of NCI (45 × 0.4 × 11)
Total consideration and FV of NCI
Less: FV of net assets acquired (W-3)
Bargain purchase/Negative goodwill - charged to P & L
Rs. in million
240
72
312
198
510
(561)
(51)
W-2: Property, plant & equipment
GL & SL
Decrease in fair value of building
Reversal of gain on exchange [120–(240–130)]
Increase in depreciation on reversal of exchange
transaction
Building
2,100.00
(1,600+500)
(80.00)
(10.00)
(1.50)
(4.00)
(120×5%×3/1 (200–120)×20%×
2)
3/12)
Reversal of depreciation on fair value adjustment
(80×5%×9/12)
W-3: Net Asset of SL on year end and on acquisition
date
Share capital
Share premium
Retained earnings
Decrease in fair value of building (250–170)
Decrease in fair value of inventory (112–62)
Increase in provision for bad debts (24–15)
Reversal of depreciation on fair value adjustment
(80×5%×9/12)
Post acquisition profit
Plant &
Machinery
2,155.00
(1,465+690)
-
3.00
2,011.50
2,151.00
At
31-Dec-16
acquisition
-------- Rs. in million -------450
450
150
150
210
100
(80)
(80)
(50)
(50)
(9)
(9)
3
674
113
W-4: Consolidated retained earnings
GL
Wrongly capitalization of acquisition related cost
Parent's share in SL's post acquisition profit (113(W-3)×60%)
Reversal of gain on exchange [120–(240–130)]
Increase in depreciation on building due to reversal of exchange
transaction (120×5%×3/12)
Increase in depreciation on plant & machinery on reversal of exchange
transaction [(200–120)×20%×3/12×60%]
Negative goodwill on acquisition of SL (W-1)
561
Rs. in million
3,150.00
(15.00)
67.80
(10.00)
(1.50)
(2.40)
51.00
3,239.90
Page 5 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Rs. in million
W-5: Non-controlling interest
Fair value at acquisition (45×40%×11)
NCI's share in SL's post acquisition profit (113(W-3)×40%)
Increase in depreciation on plant & machinery on reversal of exchange
transaction [(200–120)×20%×3/12×40%]
198.00
45.20
(1.60)
241.60
Ans.6 (a) Hadi Limited
Statement of comprehensive income
for the year ended 31 December 2016
Sales
Less: Cost of sales (W-1)
Gross profit
Less: Administrative expenses (W-2)
Less: Loss on sale of fixed assets [20,000-(25,000-3750)]
Net profit before tax
Taxation: Current [req (b)]
Deferred [req (b)]
Net profit after tax
Other comprehensive income
Total comprehensive income
W-1: Cost of sales
Given
Less: R & D wrongly charged to cost of sales
Depreciation expense [(305,000–25,000–15,000)×10%)
+(25,000×10%×6/12)+(35,000×10%×6/12)]
W-2: Administrative expenses
As given
Add: Bad debts expense (W-3)
Provision for warranty (W-4)
Research expense (20,000×4/10)
Amortization of development cost
[20,000×6/10=12,000/20×2/12)]
Impairment of development cost (11,900– 10,000)
Less: Payment against warranty claim of the products sold during
previous year and wrongly charged to admin expense
W-3: Bad debts expense
Provision for doubtful debts - closing balance [(61,400–
8,000)×6%]
Amount written off (10,000×80%)
Less: Provision for doubtful debts - opening balance
Bad debts expense for the year
W-4: Provision for warranty
Charge for the year (201,407×3%)
Less: Warranty expired (10,000 – 8,000)
Payment of current year already charged off
Net impact to be taken to SOCI
Rs. in '000
201,407
(88,164)
113,243
(47,382)
(1,250)
64,611
(17,527)
2,643
49,727
49,727
78,664
(20,000)
29,500
88,164
37,636
6,204
1,542
8,000
100
1,900
(8,000)
47,382
3,204
8,000
(5,000)
6,204
6,042
(2,000)
(2,500)
1,542
Page 6 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
(b) Computation of current tax
Profit before tax [req. (a)]
Add: Inadmissible expense/Admissible income
Accounting depreciation [req. (a)]
Accounting loss on disposal [req. (a)]
Tax gain on disposal (20,000–(25,000×0.75×0.85)
Accounting amortization [req. (a)]
Impairment on development expense [req. (a)]
Bad debts expense [req. (a)]
Provision for warranty (6,042–2,000)
Research expense [req. (a)]
Rs. in '000
64,611
29,500
1,250
4,063
100
1,900
6,204
4,042
8,000
Less: Admissible expense
Tax depreciation [{153–(25×0.75×0.85)}
×0.15]+[35×0.25]+[35×0.75×0.15]
*Tax amortization (20,000/10)
Bad debts written off
Finance cost on long term loan (75,000×10%)
Payment against warranty (2,500+8,000 )
Taxable profit
(33,247)
(2,000)
(8,000)
(7,500)
(10,500)
58,423
Current tax @ 30%
17,527
Computation of deferred tax
(Balance sheet approach)
Carrying
Tax base
Difference
amount
---------------- Rs. in ‘000 ----------------
Plant & machinery (W-1)
Development cost
Provision for bad debts (61,400–
8,000)×6%
Finance cost capitalized
Provision for warranty (6,042–2,500)
Total difference
221,000
10,000
(3,204)
7,500
(3,542)
Closing deferred tax liability
(74,939×30%)
Opening deferred tax liability
Deferred tax income/reversal
W-1: Plant and machinery
Carrying amount
Cost – given
Disposal of machine to be recorded
Capitalisation of machine to be recorded
Less: Accumulated depreciation (53,250+29,500–3,750)
Tax base
WDV - opening balance
WDV of machine disposed off (25,000×0.75×0.85)
Cost of machine acquired
Tax depreciation for the year
138,815
18,000
82,185
(8,000)
-
(3,204)
7,500
(3,542)
74,939
22,482
(25,125)
2,643
Rs. in '000
305,000
(25,000)
20,000
(79,000)
221,000
153,000
(15,938)
35,000
(33,247)
138,815
Page 7 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
Ans.7
Date
Description
1-Jan-2015
Plant (W-1)
Sales tax refundable
Bank
Provision for decommissioning (W-2)
(To record purchase of plant and
provision for decommissioning)
31-Dec-2015
Finance cost (W-2)
Provision for decommissioning
(To record finance cost on unwinding
of discount)
31-Dec-2015 Depreciation expense (1743.49/2)
Accumulated depreciation
(To record depreciation for the year)
Debit
Credit
--------- Rs. in million -------1,743.49
255.00
1,755.00
243.49
26.78
26.78
871.75
871.75
31-Dec-2016 Finance cost (W-2)
Provision for decommissioning
(To record finance cost on unwinding
of discount)
29.73
29.73
31-Dec-2016 Depreciation expense (1743.49/2)
Accumulated depreciation
(To record depreciation for the year)
871.75
31-Dec-2016 Provision for decommissioning
Bank
(To
record
payment
decommissioning liability)
300.00
871.75
300.00
of
31-Dec-2016 Accumulated depreciation
Plant
(To record reversal of plant &
accumulated depreciation thereon
upon end of its life)
W-1: Computation of cost of plant
Amount inclusive of sales tax
Less: Sales tax (1,755×17/117)
Amount net of sales tax
Add: Provision for decommission cost (W-2)
1,743.49
1,743.49
Rs. in
million
1,755.00
(255.00)
1,500.00
243.49
1,743.49
Page 8 of 9
Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Spring 2017
W-2: Provision for decommission cost
Amount of
Discount
Date
liability
factor @ 11%
1-Jan-15
300
0.8116
31-Dec-15
300
0.9009
31-Dec-16
300
1.0000
Liability
balance
243.49
270.27
300.00
(Rs. in million)
Finance
charges
26.78
29.73
(THE END)
Page 9 of 9
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance
– Spring 2017
General:
Performance in the paper was below the previous attempt as passing percentage declined
from 35% to 24%. It was observed that candidates were not fully prepared on some of the
topics such as consolidation and deferred tax. There was some lack of planning on the
part of the students also as a significant number attempted the lengthy questions first.
Question-wise comments
Question 1
This was a straight forward question which required candidates to calculate basic
earnings per share (“EPS”). The overall performance was good as more than 50%
candidates secured passing marks whereas 12% candidates secured full marks also. The
mistakes observed were as follows:




Amount of preference dividend was not deducted from profit.
Many candidates added the number of cumulative preference shares in calculating the
weighted average number of shares.
Profit after tax for the year was given for both continuing and discontinued
operations. Many candidates computed basic earnings per share by combining the
profits and calculated a single EPS instead of computing EPS for continuing and
discontinued operations separately. Some candidates computed the EPS on the basis
of profit from continuing operations only.
While calculating the weighted average number of shares, number of months was
calculated incorrectly i.e. by using announcement date instead of the entitlement date.
Question 2
This question was based on a simple scenario according to which the CFO of an unlisted
company asked his Manager Accounts who was also a chartered accountant, to identify
areas where book adjustments could be made to show higher profit. The requirement was
to explain how the CFO was in breach of the fundamental principles of ICAP’s Code of
Ethics and the potential threats which the Manager Accounts may have to face.
The overall performance was average as about 50% of the candidates secured passing
marks. The remaining students were unable to mention the specific fundamental
principles that were being breached. Many of them provided a complete list of principles
mentioned in the Code of Ethics. Furthermore, many students merely stated the principles
and the threats and did not offer any explanation. Some of the candidates did not read the
Page 1 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2017
question carefully and talked about breach of principles by the Manager Accounts instead
of the CFO.
Question 3
This question required the candidates to identify the cash generating unit in the given
scenario and calculate the carrying value of each asset after impairment, if any. The
overall performance was below average as only about 40% candidates were able to
secure passing marks. General mistakes observed in the answer scripts were as follows:





Each factory was treated as a separate cash generating unit (CGU). Majority of the
students failed to realise that both the factories depended on each other for
completion of the product and therefore no single factory can be classified as an
independent CGU, instead both should be classified as a single CGU. Many of those
students who correctly identified that Factory A and B are collectively one CGU did
not add goodwill of Rs. 100 million in the total carrying amount of the CGU while
calculating impairment of the CGU.
In computing the value in use, cost of disposing the assets in the year 2019 was
ignored.
Most of the students did not know that that impairment should first be charged to
goodwill and the remaining amount of impairment should be allocated.
Most of the candidates allocated impairment to building as well. Since the fair value
of buildings was more than their carrying amount, no impairment should have been
allocated to buildings.
Impairment loss was calculated for each asset instead of calculating it for the CGU as
a whole.
It was generally felt that students need more practice in IAS 36 and improve their
concepts relating to impairment of cash generating units and the treatment of goodwill in
such cases.
Question 4
This question required candidates to apply the knowledge of IFRS – 16 “Leases”. Part (a)
required journal entries related to the given scenario whereas part (b) required relevant
extracts from the financial statements and related notes. The overall performance was
above average as more than 50% candidates secured passing marks. The common
mistakes were as follows:





In computing the present value (“PV”) of payments for right of use, excess of fair
value over sale price of the machine should also have been added. Many students
ignored this.
The annual rentals were required to be paid in advance but many candidates prepared
amortization schedule as if these were payable in arrears.
Right-to-use asset was disclosed as machine.
Long term and short term maturity of lease liabilities were not shown separately.
The information relating to interest rate and terms of payment was not disclosed in
the extracts.
Page 2 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2017
Question 5
This question required the candidates to prepare consolidated statement of financial
position. The overall performance was poor as only 22% candidates secured passing
marks. The common mistakes were as under:






In computing the consideration, legal and consultancy charges included in the cash
payment of Rs. 87 million were not deducted.
NCI was calculated under the net assets method instead of fair value.
Most of the candidates apportioned the amount of negative goodwill into consolidated
retained earnings and non-controlling interest whereas entire negative goodwill has to
be taken to the consolidated retained earnings.
Gain on exchange of building was not adjusted from the amount of building and
retained earnings reported in the consolidated balance sheet and/or the increase in
depreciation as a result of the above adjustment was not accounted for.
The management charges of Rs. 50 million i.e. for the whole year were deducted
from current assets and current liabilities rather than taking the impact of three
months only.
In a number of cases, fair value adjustments at reporting date were totally ignored.
Question 6
This question contained a trial balance along with information relating to certain
adjustments which were required and certain errors that have been made in the process of
book keeping. The requirement was to prepare statement of comprehensive income and
computation of current and deferred tax.
The performance with regard to statement of comprehensive income remained relatively
better but only few could perform well with regard to deferred tax. Consequently, the
overall result was quite poor and only 6% students secured passing marks. The major
errors were as follows:
Statement of Comprehensive Income






Most of the students did not know the basis on which research and development cost
would be bifurcated between research expenses and development costs. Further,
where development cost was correctly reversed, amortisation was not provided.
It was mentioned that research and development cost has been charged to cost of
sales, however, only few candidates reversed this cost and recognized the correct
portion of research expense in administration expenses.
Depreciation of machine which was traded in, for six months i.e. when it was in the
use of the company, was not recognised.
Bad debt expense was computed incorrectly as the amount written off was not
deducted from gross trade receivables to arrive at amount used for computing
provision of bad debts.
Loss on disposal of machine was ignored whereas in many cases it was shown as part
of administration expenses.
The excess provision of warranty i.e. (Rs. 10 million less Rs. 8 million) was not
adjusted. Many candidates ignored the fact that Rs. 2.5 million had already been
charged to administration expenses.
Page 3 of 4
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2017
Taxable Income and Current Tax



Tax depreciation and initial allowance on the new machine was calculated for half
year only. In many cases, initially allowance was totally ignored.
Add back of accounting loss and addition of tax gain on disposal of old machine was
ignored
Bad debts written off were not claimed.
Deferred Tax




A significant number of students were totally confused and did not seem to have any
idea of its computation. Many students did not attempt it altogether.
Impact of borrowing cost capitalised was ignored.
Tax base of development cost was taken as the same as its carrying amount i.e.
research cost was totally ignored.
Many students did not know that provision for bad debts and provision for warranty
would result in a debit balance of deferred tax.
Question 7
The question required candidates to record journal entries related to purchase of a plant,
its decommissioning cost and its subsequent use. The overall performance was average as
about 46% candidates secured passing marks. However, about 15% of the students were
totally unaware of the concepts involve and secured zero or one mark.
The mistakes observed were as follows:




Amount of sales tax was incorrectly computed by applying 17% on cost (inclusive of
sales tax) instead of 17/117 of the cost (inclusive of sales tax) of Rs. 1,755 million.
Many candidates did not capitalise the provision for decommissioning.
Many candidates ignored the entries for unwinding of discount. Some of the
candidates passed the entries by allocating equal amounts to each of the two years.
Many students ignored the entries related to payment of decommissioning liability
and the entry to derecognise the plant.
THE END
Page 4 of 4
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017
Note regarding marking scheme:
The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in a question may exceed the total marks.
Mark(s)
A.1
A.2
A.3 (a)
A.4
Computation of weighted average number of ordinary shares:
− opening balance
− right issue (including adjustment factor for right issue)
− bonus issue
Determination of correct net profit attributable to ordinary shareholders
Computation of EPS for continuing and discontinued operations separately
1.0
4.0
2.0
1.0
2.0
0.5 mark for identification of each breach of fundamental principles and
01 mark for its explanation
Explanation of potential threats involved
Up to 01 mark for brief explanation of each available safeguard
4.5
1.5
2.0
Identification of cash generating unit
2.0
(b)
Determination of carrying amount of each asset before impairment
Computation of recoverable amount
Determination of impairment amount
Allocation of impairment among different assets including goodwill
(a)
Determination of value of right of use asset / gain on rights transferred to
the buyer (lessor)
Journal entries to record the sale and lease back transaction and payment of
lease installment
(b)
A.5
A.6
Extracts from statement of financial position
Extracts from statement of comprehensive income
Extracts from related note to the financial statements
Consolidated statement of financial position
Negative goodwill (bargain purchase) and its adjustment in retained earnings
Property, plant and equipment
Current assets
Shareholder equity
Non-controlling interest
Liabilities
(a)
Statement of Comprehensive income
Cost of sales
Administrative expenses
Other income / expense
Presentation and disclosures
1.0
5.0
0.5
3.5
4.0
3.0
3.0
2.0
5.0
4.0
3.5
1.5
4.0
3.0
1.0
3.0
6.0
1.0
1.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017
Mark(s)
(b)
A.7
Current tax:
Addition of inadmissible expenses / taxable income
Deduction of admissible expenses / non-taxable/exempt income
Determination of current tax
Deferred tax:
Relating to plant & machinery
Relating to development cost
Relating to provision for bad debts
Relating to provision for warranty
Relating to finance cost capitalized
Determination of deferred tax
Computation of:
cost of plant
provision for decommissioning
finance cost on unwinding of discount
Accounting entries to record:
purchase of plant and provision for decommissioning cost
finance cost on unwinding of discount for 2015 and 2016
depreciation for 2015 and 2016
payment of decommissioning liability
reversal of plant and accumulated depreciation at the end of useful life
4.0
3.0
0.5
3.0
1.0
1.0
1.0
1.0
0.5
1.5
0.5
1.0
2.0
2.0
1.0
1.0
1.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
11 September 2017
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Q.1
Following are the extracts from the financial statements of Universal Limited (UL) for the year
ended 30 June 2017:
Assets
Property, plant and
equipment
Deferred tax asset
Stock in trade
Trade receivables
Cash
Statement of financial position as on 30 June 2017
2017
2016
Equity & liabilities
Rs. in ‘000
Share capital (Rs. 10 each)
158,500 120,000 Retained earnings
8,500
Revaluation surplus
58,000
45,000 Debentures (Rs. 100 each)
68,000
56,000 Deferred tax liability
39,434
48,000 Interest payable
Trade payables
Accrued liabilities
Unearned maintenance
Provision for taxation
332,434 269,000
2017
2016
Rs. in ‘000
175,000 150,000
54,434
21,500
10,000
18,000
20,000
6,000
1,000
2,500
42,000
39,000
20,000
18,000
2,000
4,000
10,000
8,000
332,434 269,000
Statement of profit or loss for the year ended 30 June 2017
Rs. in '000
Sales
273,000
Cost of sales
(187,500)
Gross profit
85,500
Operating expenses
(46,766)
Other income
11,200
Profit before interest and tax
49,934
Interest expense
(2,000)
Profit before tax
47,934
Tax expense
(15,000)
Profit after tax
32,934
Additional information:
(i) 60% of sales were made on credit.
(ii) UL maintains a provision for doubtful receivables at 6%. During the year, trade receivables of
Rs. 7 million were written off.
(iii) Depreciation expense for the year was Rs. 22.5 million. 70% of the depreciation was charged
to cost of sales.
(iv) Other income comprises of:
gain of Rs. 3 million on disposal of vehicles for Rs. 12 million;
maintenance income of Rs. 8 million; and
discount of Rs. 10 per debenture which were redeemed during the year.
Required:
Prepare UL’s statement of cash flows for the year ended 30 June 2017 using direct method.
(15)
Financial Accounting and Reporting-II
Q.2
Page 2 of 5
Naba Power Limited (NPL) is preparing its financial statements for the year ended 30 June 2017.
Following issues are under consideration.
(a) NPL entered into a contract on 1 August 2016 to supply customised batteries to a new
customer. As per the terms of the agreement, NPL is required to deliver 50,000 batteries at
the end of each month from December 2016 to September 2017 at a consideration of
Rs. 15 million per month. Penalty for each late delivery or cancellation of the contract would
be Rs. 5 million and Rs. 20 million respectively.
On 1 August 2016 NPL had estimated that cost of production would be Rs. 10 million per
month. However, cost of production increased subsequently. Despite the increase in the cost
of production, NPL made timely deliveries till May 2017 at a total cost of Rs. 99 million.
Supply for June 2017 was made on 15 July 2017 at a total cost of Rs. 18 million of which
Rs. 14 million had been incurred till 30 June 2017. It is estimated that Rs. 55 million would
need to be spent to make the last 3 deliveries within time.
(06)
(b) On 15 May 2017 an explosion occurred at one of NPL’s factories. Several claims were filed
by affected employees against NPL. The details are as under:
(i) Seven injured employees made claims before 30 June 2017 and further three injured
employees lodged claims in July 2017. According to NPL’s legal advisor, the probability
that NPL would be determined to be negligent is 80%. If NPL is found negligent, the
estimated average cost of each payout will be Rs. 1 million.
(ii) Additional four employees made claims before 30 June 2017, seeking compensation for
the stress, rather than any injury, caused to them. If these claims succeed, the legal
advisor is of the view that the estimated average cost of each payout will be
Rs. 0.7 million. However, according to the legal advisor, the chance that these
employees will succeed is 30%.
(iii) 80% of all such payouts are recoverable according to the terms of the insurance policy.
(05)
(c)
On 1 November 2016 a new law was introduced requiring all factories to install specialized
safety equipment within five months. The equipment costing Rs. 15 million was ordered in
February 2017 to be installed by 30 April 2017. However the supplier delayed installation till
31 July 2017. On 5 August 2017 the company received a notice from the authorities levying a
penalty of Rs. 1.6 million i.e. Rs. 0.4 million for each month during which the violation
continued. It is probable that this penalty will be recovered from the supplier.
(04)
Required:
Discuss how each of the above issues should be dealt with in NPL’s financial statements for the
year ended 30 June 2017. (Quantify effects where practicable)
Q.3
On 1 July 2016, Sunshine Limited (SL) acquired four licenses namely A, B, C and D for a period
of ten years. The following information is available in respect of these licenses:
(i)
A
Cost of license (Rs. in million)
Expected period of cash generation
from acquisition date
Active market value at 30 June 2017
(Rs. in million)
Renewal cost (Rs. in million)
B
C
D
200
230
90
60
12 years
indefinite
6 years
12 years
170
300
65
65
85
2
No active
market
1
(ii) The renewal would allow SL to use the licenses for another five years.
(iii) SL uses the revaluation model for subsequent measurement of its intangible assets.
(iv) An independent valuer has estimated the value of license ‘D’ at Rs. 130 million.
Required:
Determine the amounts that should be recognised in respect of the licenses in the statement of
financial position and statement of profit or loss for the year ended 30 June 2017.
(10)
Financial Accounting and Reporting-II
Q.4
Page 3 of 5
The following balances are extracted from the records of Present Limited (PL) and
Future Limited (FL) for the year ended 30 June 2017:
Sales
Cost of sales
Selling and administrative expenses
Investment income
Gain on disposal of fixed assets - net
Taxation
Share capital (Rs. 10 each)
Retained earnings as on 30 June 2017
PL
FL
Debit
Credit
Debit
Credit
--------------- Rs. in million --------------2,060
1,524
1,300
846
350
225
190
50
35
80
60
3,500
2,600
1,996
704
Additional information:
(i)
PL acquired 65% shares of FL on 1 September 2016 against the following consideration:
Cash payment of Rs. 900 million.
Issuance of shares having nominal value of Rs. 1,000 million.
The fair value of each share of PL and FL on acquisition date was Rs. 16 and
Rs. 12 respectively. Retained earnings of PL and FL on the acquisition date were
Rs. 1,671 million and Rs. 506.5 million respectively.
At acquisition date, fair value of FL’s net assets was equal to their book value except a brand
which had not been recognised by FL. The fair value of the brand is assessed at
Rs. 90 million. PL estimates that benefit would be obtained from the brand for the next
10 years.
(ii)
The incomes and expenses of FL had accrued evenly during the year except investment
income. The investment income is exempt from tax and had been recognised in
August 2016 and received in September 2016.
(iii) On 1 January 2017 PL sold a manufacturing plant having carrying value of Rs. 42 million to
FL against cash consideration of Rs. 30 million. The plant had a remaining useful life of
6 years on the date of disposal.
(iv) On 1 February 2017 FL delivered goods having sale price of Rs. 100 million to PL on ‘sale
or return basis’. 40% of these goods were returned on 1 May 2017 and the remaining were
accepted by PL. 20% of the goods accepted were included in the closing inventory of PL.
FL earned a profit of 33.33% on cost.
(v) Both companies paid interim cash dividend at the rate of 5% in May 2017.
(vi) An impairment test carried out at year end has indicated that goodwill of FL has been
impaired by 10%.
(vii) PL measures the non-controlling interest at its fair value.
Required:
Prepare consolidated statement of profit or loss for the year ended 30 June 2017.
(a)
(13)
Compute the amounts of consolidated retained earnings and non-controlling interest as
(b)
would appear in the consolidated statement of financial position as at 30 June 2017.
(04)
Q.5
Usman is a Chartered Accountant and has been working as Finance Director in Mehran Limited
(ML) for the past one year. He reports to the CEO who is also a Chartered Accountant.
Recently, Usman has received a bill issued by an advertising agency which is duly approved for
payment by the Director Marketing. Usman believes that the amounts agreed to be paid under the
contract far exceed the value of services to be provided by the advertising agency and that the
payment would be redirected to obtain a sales contract. He has discussed the matter with CEO
who has advised him to process the payment in ML’s business interest. The CEO also informed
Usman that if the said contract is secured, the management staff will be entitled to a handsome
bonus.
Financial Accounting and Reporting-II
Page 4 of 5
Required:
Briefly explain how CEO is in breach of the fundamental principles of ICAP’s code of ethics. Also
state the potential threats which Usman may face under the circumstances, along with available
safeguards (if any).
(08)
Q.6
Following information has been extracted from the draft financial statements of Marvellous
Limited (ML) for the year ended 30 June 2017:
Statement of financial position
2017
2016
Rs. in million
Property, plant and equipment
700
612
Retained earnings
275
240
Deferred tax liability
58
52
Provision for taxation
12
16
Statement of profit or loss
Profit before taxation
65
Taxation
30
Profit after taxation
35
85
25
60
The following matters are under consideration of the management:
It was identified that ML’s obligation to incur decommissioning cost related to a plant has not
been recognised. The plant was acquired on 1 July 2014 and had been depreciated on straight
line basis over a useful life of four years. The expected cost of decommissioning at the end of
the life is Rs. 50 million. Applicable discount rate is 8%.
In view of significant change in the expected pattern of economic benefits from an item of the
equipment, it has been decided to change the depreciation method from reducing balance to
straight line. The equipment was purchased on 1 July 2015 at a cost of Rs. 80 million having
estimated useful life of 5 years and residual value of Rs. 16 million. The depreciation at the
rate of 27.5% on reducing balance method is included in the above draft financial statements.
The following balances pertain to ML’s statement of financial position as on 30 June 2015:
Property, plant and equipment
Retained earnings
Deferred tax liability
Provision for taxation
Rs. in million
650
180
40
24
Applicable tax rate is 30%. Tax authorities consider decommissioning cost as an expense when
paid.
Required:
Prepare extracts from the following (including comparative figures) for the year ended
30 June 2017:
(a)
Statement of financial position
(08)
(b)
Statement of profit or loss
(03)
(c)
Correction of error note
(06)
Financial Accounting and Reporting-II
Q.7
Page 5 of 5
Emotional Limited (EL) is preparing its financial statements for the year ended 30 June 2017.
Following are the details of additions to property, plant and equipment made during the year:
Addition 1: Construction of tanks and pipelines
Summary of cost incurred on tanks and pipelines is as follows:
Description
Advance to contractor
Construction permit fee
Suppliers of construction material
1st bill of contractor
2nd bill of contractor
Last bill of contractor
Rs. in million
200
100
600
500
200
200
Date of payments
1 August 2016
1 August 2016
1 September 2016
1 January 2017
1 March 2017
1 May 2017
In order to finance the project, EL obtained a 3 year loan of Rs. 1,200 million at the rate of
12% per annum on 1 August 2016. The principal is payable in three equal annual instalments
along with interest, from 1 August 2017. The surplus funds available from the loan were invested
in a saving account at 8% per annum.
The remaining cost was financed through cash withdrawals from EL’s existing running finance
facilities. Details of these facilities are as follows:
Name of
bank
Bank Q
Bank W
Running finance
Balance as on
Average
Limit
balance
30 June 2017
----------- Rs. in million ----------500
450
400
700
650
300
Mark-up %
12.5
14.0
The tanks and pipelines were put into operation upon completion on 1 April 2017.
Addition 2: Acquisition of machinery on lease
On 1 January 2017 EL acquired machinery having fair value of Rs. 185 million, on lease for a
non-cancellable period of four years. Rentals of Rs. 54 million are to be paid annually in advance
on 1 January. EL’s incremental borrowing rate is 13.7%. EL also paid initial direct cost of
Rs. 10 million in respect of the machinery.
The following information is also available:
(i) During the year ended 30 June 2017, EL made a profit before tax of Rs. 500 million, after
incorporating the effects of above transactions.
(ii) EL charges depreciation at the rate of 10% on tanks and pipelines.
(iii) EL’s tax rate is 30%. Tax authorities allow depreciation at the rate of 20% on tanks and
pipelines. Full year’s tax depreciation is allowed in the year of addition.
(iv) As per tax laws:
all lease related payments are allowed in the year of payment; and
borrowing costs are allowed when incurred.
investment income is taxable when earned.
(v)
There are no temporary differences in current and previous years other than those evident
from the information provided above.
Required:
Prepare relevant extracts from EL’s statement of financial position as on 30 June 2017. Notes to the
financial statements are not required. Borrowing costs are to be calculated on the basis of number of
months.
(THE END)
(18)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Ans.1
Universal Limited
Statement of Cash Flows
For the year ended 30 June 2017
Cash flows from operating activities
Cash receipts from customers
(Cash sales: 109,200; Credit sales: 144,034)
Cash receipts from customers - maintenance services
Cash paid to suppliers
Cash paid to other vendors
Income taxes paid (8,000+6,000+15,000–10,000+8,500)
Interest paid (2,500+2,000–1,000)
Net cash inflow from operating activities
Rs. in ‘000
(W-1)
(W-2)
(W-3)
(W-4)
Cash flows from investing activities
Purchase of property, plant and equipment
[120,000–158,500–9,000 (i.e. 12,000–3,000)–22,500+10,000]
Proceeds from disposal of vehicles
Net cash outflow from investing activities
253,234
6,000
(181,750)
(30,250)
(27,500)
(3,500)
16,234
(60,000)
12,000
(48,000)
Cash flows from financing activities
Redemption of debentures [(20,000–18,000)–(20×10)]
Proceeds from issue of shares (175,000–150,000)
Net cash inflow from financing activities
(1,800)
25,000
23,200
Net decrease in cash and cash equivalents
Cash and cash equivalent at the beginning of the year
Cash and cash equivalent at the end of the year
(8,566)
48,000
39,434
Workings:
W-1: Cash receipts from customers - sales
Trade receivables – opening (56,000÷0.94)
Sales for the year
Bad debts written off
Trade receivables – closing (68,000÷0.94)
Cash received from customers
Rs. in ‘000
59,574
273,000
(7,000)
(72,340)
253,234
W-2: Cash receipts from customers - maintenance service
Unearned maintenance – opening
Maintenance income for the year
Unearned maintenance – closing
W-3: Cash paid to suppliers
Trade payables – opening
Add: Purchases / Manufacturing cost
Stock in trade – closing
Cost of goods sold less dep. [187,500–(22,500×70%)]
Stock in trade – opening
Less: Trade payables – closing
Cash paid to suppliers
Rs. in ‘000
(4,000)
8,000
2,000
6,000
--------- Rs. in ‘000 --------39,000
58,000
171,750
(45,000)
184,750
(42,000)
181,750
Page 1 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
W-4: Cash paid to other vendors
Accrued liabilities – opening
Operating expense for the year
Depreciation (22,500×30%)
Bad debt expense
Accrued liabilities – closing
(W-4.1)
W-4.1: Bad debts expense for the year
Provision for doubtful receivables – opening (56,000÷0.94×0.06)
Bad debts written off
Provision for doubtful receivable – closing (68,000÷0.94×0.06)
Ans.2
(a)
Rs. in ‘000
18,000
46,766
(6,750)
(7,766)
(20,000)
30,250
Rs. in ‘000
(3,574)
7,000
4,340
7,766
NPL should recognize following provision / expense as on 30 June 2017:
Provision for penalty (Note 1)
Expense related to inventories recognized on lower of cost or NRV
[14 minus 11 (15–4)] (Note 2)
Provision for onerous contract [45–55] (Note 3)
Rs. in
million
05
03
10
18
Note 1:
Supply for June 2017 was made after delay of 15 days so as per terms of agreement
provision for penalty should be made for this adjusting event.
Note 2:
Since cost incurred till 30 June 2017 (Rs. 14 million) is higher than the net realizable
value of inventory i.e Rs.11 million (selling price of 15 million less 4 million cost to be
incurred) expense of Rs. 3 million related to write-down of inventory to NRV should
be recognized.
Note 3:
Since estimated cost of Rs. 55 million which would need to be spent is more than the
total revenue of Rs. 45 million for last 3 deliveries, the contract is considered as
onerous and the provision should be made at Rs. 10 million that is lower of cost of
fulfilling it (Rs. 10 million i.e 55 – 45 ) or penalty arising from failure to fulfill it (Rs 20
million).
(b)
Claim regarding NPL’s negligence
As on 30 June 2017 NPL should recognize a provision for ten injured employees
because at reporting date there is present obligation in respect of past event (injuries
suffered from explosion occurred before year end). NPL’s lawyers estimate that
probability of NPL being declared negligent is 80% which is considered as probable.
Therefore, provision should be made for total payout of Rs 10 million (1 million for
each employee).
According to the terms of insurance policy, 80% of the cost is recoverable from
insurance company so it is virtually certain that reimbursement will be made.
According to IAS 37, NPL should recognize a separate asset (receivable) of Rs. 8
million (10 million × 80%). In the statement of comprehensive income provision may
be presented net of reimbursement amount.
Page 2 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Claim seeking compensation for the stress
As per legal adviser, there is only 30% chance that the claims lodged against the
company for undue stress will succeed so payment of Rs 2.8 million (0.7 million × 4)
is possible (not a present) obligation. Consequently, provision is not required and
NPL should disclose this amount as contingent liability giving brief description of the
event and estimate of financial effect.
(c)
As on 30 June 2017, NPL should recognize expense of Rs. 1.2 million (0.4×3) in
relation to penalty for non-compliance of new law from 1 April to 30 June 2017
because at the reporting date there is a present obligation (payment of penalty) in
respect of a past event (non-compliance of statutory requirement). NPL should
disclose the penalty amount in its financial statement.
Since the reimbursement of penalty amount from the vendor is probable, the
reimbursement of only two months (May and June 2017) of Rs. 0.8 million (0.4×2)
should be disclosed as a contingent asset giving brief description of the event and
estimate of financial effect.
Ans.3
Sunshine Limited
For the year ended 30 June 2017
Rs. in million
Amount to be recognised in SOFP
Intangibles – Licenses (170+300+65+55)
Revaluation surplus
(W-1)
590
93
Amount to be recognised in SOPL
Amortization
Impairment
(W-1)
(W-1)
63
20
W-1:
Cost of licenses
Amortization for the year
Cost less amortization
Active market value
Impairment
Revaluation surplus
A
B
C
D
Total
-------------------------- Rs. in million -------------------------200
230
90
60
580
(20)
(23)
(15)
(5)
(63)
(200÷10) (230÷10)
(90÷6)
(60÷12)
180
207
75
55
517
No active
170
300
65
market
(10)
(10)
(20)
93
93
Page 3 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Ans.4
(a) Present Limited
Consolidated statement of profit or loss
For the year ended 30 June 2017
Sales [2,060+(1,524×10/12)–(100×60%)]
Less: Cost of sales (W-1)
Gross profit
Less: Selling and administrative expenses (W-2)
Net profit before other income
Other income:
Investment income [190–(2600×65%×5%)]
Gain on disposal of fixed assets [35+(42–30)]
Total other income
Net profit before tax
Less: Taxation [80+(60×10/12)]
Net profit after tax
Net profit after tax attributable to:
Owners of the parent - balancing figure
Non-controlling interest (W-3)
W-1: Cost of sales
PL
FL (846×10/12)
FL’s sales to PL (100×60%)
Increase in dep. on manufacturing plant sold by PL to FL
[42–30)/6×6/12)]
Unrealized profit included in PL’s closing stock
[(100×60%×20%)÷1.3333×0.3333]
W-2: Selling and administrative expanse
PL
FL (225×10/12)
Amortization of brand (90÷10×10/12))
Impairment of goodwill [395.50(W-2.1)×10%]
W-2.1: Computation of goodwill
Cost of investments [(100×16)+900]
Fair value of NCI [260×35%×12]
Less : Fair value of net assets acquired [2,600+506.50+90]
Goodwill
Rs. in million
3,270.00
(1,949.00)
1,321.00
(584.55)
736.45
105.50
47.00
152.50
888.95
(130.00)
758.95
662.19
96.76
758.95
Rs. in
million
1,300
705
(60)
1
3
1,949
Rs. in
million
350.00
187.50
7.50
39.55
584.55
Rs. in
million
2,500.00
1,092.00
3,592.00
3,196.50
395.50
Page 4 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
W-3: Non-controlling interest
FL's profit for ten months [(1,524–846–225–60)×10/12×35%]
Unrealized profit in closing stock [3×35%]
Increase in depreciation for machine sold by PL [1×35%]
Amortization of brand (7.5×35%)
Impairment of goodwill (39.55×35%)
(b) Consolidated retained earnings
PL's retained earning – 1 July 2016
[1996–555(i.e. 2,060–1,300–350+190+35–80)+(3500×5%)]
PL's dividend (3500×5%)
Consolidated income attributable to parent (part a)
Non-controlling interest
FV of NCI at acquisition [260×35%×12]
NCI's share in FL' s dividend [2600×5%×35%]
NCI for the year (part a)
Ans.5
Rs. in
million
114.63
(1.05)
(0.35)
(2.63)
(13.84)
96.76
Rs. in
million
1,616.00
(175.00)
662.19
2,103.19
Rs. in
million
1,092.00
(45.50)
96.76
1,143.26
Chartered Accountants should be straight forward and honest in all professional and
business relationships. Since the CEO advised Usman to process the payment about which
Usman believes that the said payment is unreasonable and would be made to obtain a sales
contract, therefore he is in breach of principle of integrity and professional behavior.
In the given circumstances, the decision of CEO may also induce lack of objectivity due to
the expected bonuses to the management.
Self interest threat faced by Usman
Usman might get influenced by the CEO due to the expected bonus therefore he might
process the payment in his own self interest.
Intimidation threat faced by Usman
Usman may have to leave this job if the disagreement continues.
Available safeguards
Where it is not possible to reduce the threats to an acceptable level, Usman:
(i)
should refuse to sign the cheque / refuse to associate with the transaction.
(ii) should consider informing appropriate authorities like Audit Committee.
(iii) seek legal advice or may resign.
Page 5 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Ans.6
(a) Marvelous Limited
Extracts from statement of financial position
2016
2015
Restated
Restated
----------------- Rs. in million ----------------714.63
630.37
677.56
2017
Assets
Property, plant & equipment
2015: (650+36.75–9.19)
2016: (612+36.75–(9.19 ×2)
2017: 700+36.75–(9.19×3)+(15.95–10.5)
Equity & liabilities
Retained earnings
2015: 180 – (2.94+9.19 – 3.64)
2016: 240 – (60 – 51.34) – 8.49
2017: 275 – (35 – 29.98) – (8.66+8.49)
Deferred tax liability
2015: (40 –3.64)
2016: [52 – 3.64 – 3.71)
2017: [58 – 3.64 – 3.71 – 2.15)
Provision for decommission
252.83
222.85
171.51
48.50
44.65
36.36
46.30
42.87
39.69
(42.87+3.43)
(39.69+3.18)
(36.75+2.94)
12.00
16.00
24.00
Provision for taxation
(b) Extract from statement of profit or loss
Profit before tax
Taxation
Profit after tax
2017
57.83
(65-3.43-9.19+5.45)
27.85
(30-2.15)
29.98
2016
Restated
72.63
(85–3.18-9.19)
21.29
(25–3.71)
51.34
(c) Correction of error note
It was identified in current year that the company did not recognise decommissioning
liability related to plant which was acquired on 1 July 2014. The effects of this error are
as follows:
Effect on the statement of profit or loss
2016
Rs. in million
Increase/(decrease) in income:
Increase in finance cost
Increase in depreciation
Decrease in profit before tax
Decrease in deferred tax liability (12.37×30%)
Decrease in profit after tax
Effect on the statement of financial position
Increase/(decrease) in retained earnings:
Increase in property, plant and equipment
Increase in provision for decommission
Decrease in deferred tax liability
Decrease in retained earnings
(3.18)
(9.19)
(12.37)
3.71
(8.66)
2016
2015
-------- Rs. in million -------18.38
(630.38–612)
(42.87)
7.35
(3.64 +3.71)
(17.14)
27.56
(677.56–650)
(39.69)
3.64
(8.49)
Page 6 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
Working:
Effects on Profit:
2017
2016
2015
------------------ Rs. in million ------------------
Correction of error:
Recording of Decommissioning liability
Increase in PPE (50÷1.084)
Increase in decommissioning liability
Increase/(decrease) in income
(Increase) in finance cost
36.75
(36.75)
(3.43)
(36.75+2.94+3.18)×0.08
(Increase) in depreciation (36.75÷4)
Change in Estimate
Reversal of dep. on RBM
(80×0.725×0.275)
Inclusion of dep. on SLM
[(80×0.725–16)÷4]
Decrease in profit before tax
Decrease in deferred tax (PBT×0.3)
Total effect on Profit
Total effect on Retained earnings
Ans.7
(3.18)
(36.75+2.94)×0.08
(9.19)
(2.94)
36.75×0.08
(9.19)
(9.19)
(12.37)
3.71
(8.66)
(17.15)
(12.13)
3.64
(8.49)
(8.49)
15.95
(10.5)
(7.17)
2.15
(5.02)
(22.17)
Emotional Limited
Extracts from Statement of Financial Position
As on 30 June 2017
Rs. in
million
Property, plant & equipment
Tanks and pipelines [1,890.76 (W-1) – 47.27(1890.76×10%×3/12)]
1,843.49
Right of use asset [180(W-3)+10 – 23.75 (190/4×0.5)]
166.25
Non-current liabilities
Liabilities against asset subject to lease (W-3)
Bank loan (1,200 – 400)
Deferred tax liability (W-5)
89.26
800.00
130.53
Current liabilities
Running finance (450+650)
Bank loan
Liabilities against asset subject to lease (W-3)
Accrued interest on lease [17.26(W-3)/2]
Interest payable on bank loan (1200×12%×11/12]
Provision for taxation (W-4)
1,100.00
400.00
36.74
8.63
132.00
19.47
W-1: Cost of tanks and pipeline
Payment to contractor (200+100+600+500+200+200)
Interest expense on specific loan (1200×12%×8/12)
Net finance income on surplus fund
Rs. in
million
1,800.00
96.00
(5.24)
1,890.76
Page 7 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017
W-2: Finance income/(charges) on surplus fund/(Overdraft utilization)
Surplus
Finance
Loan
Mark
fund/OD
income/
Payment
No. of
utilization
Description
up rate
utilization
(charges)
date
months
(%)
----- Rs. in million ----Rs. in million
1,200
12.00
0
1-Aug-16 Advance to contractor
200
1,000
8.00
0
1-Aug-16 Construction permit fee
100
900
8.00
1
6.00
Suppliers of construction
1-Sep-16
materials
600
300
8.00
4
8.00
1-Jan-17 1st bill of contractor
500
(200) 13.14
2
(4.38)
28-Feb-17 2nd bill of contractor
200
(400) 13.14
1
(4.38)
1,600
5.24
W-2.1: Computation of capitalization rate
Average running finance
(A)
Interest rate (B) (%)
Rs. in million
400
12.5
300
14
700
Interest (A×B)
Rs. in million
50
42
92
13.14%
W-3: Amortization schedule
Lease
Interest @
Principal
PV of lease
installment
13.7%
Year ended
---------------------------------- Rs. in million ---------------------------------180.00
[[{1–(1+0.137)–3/0.137}+1]×54]
1-Jan-17
54.00
54.00
126.00
1-Jan-18
54.00
17.26
36.74
89.26
W-4: Computation of current tax
Profit before taxation
Add: Accounting depreciation – pipelines
Less: Tax depreciation – pipelines (1800×20%)
Less: borrowing cost capitalized
Add: Accounting depreciation – Machinery
Add: Finance cost – lease
Less: Lease rental paid
Less: Direct cost on leased machinery
Taxable profit
Taxation (64.89×30%)
Rs. in million
500.00
47.27
(360.00)
(90.76)
23.75
8.63
(54.00)
(10.00)
64.89
19.47
W-5: Computation of deferred tax (Balance sheet approach)
Carrying
Time
Tax base
amount
difference
------------- Rs. in million ------------Tanks and pipelines
1,843.49
1,440.00
403.49
Machinery
166.25
166.25
126.00
(126.00)
Liabilities against asset subject to finance lease
Accrued interest on finance lease
8.63
(8.63)
435.11
Deferred tax expense/liability (435.11×30%)
130.53
(THE END)
Page 8 of 8
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Examiners’ comments
Financial Accounting and Reporting-II
Certificate in Accounting and Finance
Autumn 2017 Examinations
General Comments:
Overall passing ratio of 17.5% was well below the previous two results. However, 10.9%
students were just short of 5 or fewer marks and could have easily obtained them if they have
covered all areas of the syllabus. There were many strong individual performances by some
truly impressive students and one of them secured Gold Medal for the brilliant performance.
30% students lost some easy marks in Q2 & Q3 and secured less than 20% marks in respective
questions which proved vital. Performance in Q1 & 5 was above average while performance in
Q6 was extremely poor.
Overall performance indicated that students did not plan to attempt the paper properly. Many
students attempted the lengthy Q7 first and most of them spent lot of time on the question,
which triggered panic and affected their performance.
Some examination technique issues also need to be improved which would have lifted many
marginal fails into the pass category. Many students are failing because of technique rather
than knowledge or ability.
Question-wise comments:
Question 1
The question required preparation of Statement of Cash Flows using direct method. However,
it was the easiest question and 51.9% of the students secured passing marks. Direct method
was last examined in Autumn 2014; so many students had no idea of Direct Method and
consequently lost easy marks in the Operating Activities section. Majority of the students
secured passing marks from Investing and Financing activities portion. The mistakes observed
were as follows:





Cash sales were not included in receipts from customers.
Opening and closing trade receivables were not or incorrectly grossed up resulting in
incorrect cash receipt from customers.
Cash receipt from maintenance services were not reported in operating activities.
Discount on debentures was not taken into account while calculating payment for
redemption of debentures, in cash flow from financing activities.
Depreciation and bad debt expenses were not deducted from the expenses to arrive at cash
paid to suppliers and others.
Page 1 of 4
Examiners’ comments on Financial Accounting and Reporting-II,
CAF Examination Autumn 2017
Question 2
The question required discussion on treatment of the given situations relating to IAS 10 & 37
in the financial statements. Being a theoretical area, IAS 10 & 37 has quite often been an
ignored area in the past (43, 25, 19 & 20% passing in last 4 examinations). This time, only
12.9% of the students could secure passing marks in the question. Majority of them correctly
identified the underlying issues but directly jumped to the conclusion without the supporting
explanation which cost them precious marks. Many of the students just reproduced
information given in the question without explaining its impact on the financial statements or
just quoted text from the standards without reference to the question. Some of the other
common errors were as follows:
Situation (a)

The NRV adjustment was neither recognized nor explained.

Majority of the candidates were able to identify the contract as onerous. However, the
amount of provision was not correctly calculated. The students compared cost of
cancellation of contract (Rs. 20 million) with cost of making next three deliveries (Rs. 55
million) instead of comparing with the future loss of Rs. 10 million (cost of Rs. 55 million
minus revenue of Rs. 45 million).
Situation (b)



Provision was recognized for injured seven employees rather than ten employees.
Provision for injured employees was computed incorrectly as the amount of compensation
was multiplied by the success probability of 80%.
Provision was also recognized for claims lodged for stress though it should have been
disclosed as a contingent liability.
Situation (c)



Provision for penalty was booked at Rs. 1.6 million instead of Rs. 1.2 million.
Probable reimbursement was recognized as an asset. It should have been disclosed as a
contingent asset.
Reimbursement was computed at Rs. 1.2 million rather than Rs. 0.8 million.
Question 3
The question required determination of amounts to be recognised in financial statements in
respect of licenses. 33.6% of the students secured passing marks in the question while 30.9%
of the students did not appear to have any approach to their solutions and therefore scored less
than 20% marks. Only few students had idea of relevant guidelines available in the IFRSs.
Even then, students could have secured high marks by reading the relevant paragraphs of IAS
38 in the examination hall. The common errors were as follows:


Useful life of License A and B was not restricted to 10 years.
Licence B was not amortised considering the indefinite period of cash generation.
However, the licenses were acquired for ten years; hence this license was also required to
be amortized.
Page 2 of 4
Examiners’ comments on Financial Accounting and Reporting-II,
CAF Examination Autumn 2017

License D was revalued though it had no active market and it should have been measured
using Cost model.
Question 4
This question tested Consolidated Statement of Profit or Loss for the first time under the
revised syllabus. Consolidation has been a favourite area of the students (65% & 71% passed
in last two attempts). The students generally have a good working knowledge of consolidation
techniques and many students achieved high marks. However, 33.9% of the students secured
passing marks in this attempt. Some of the common mistakes were:






While computing cost of investment, the shares issued were taken at par value of Rs. 10
rather than Rs. 16.
NCI was calculated on proportionate net assets basis instead of fair value.
Investment income of FL was included in consolidation though it was earned by FL prior
to acquisition by PL.
Consolidated net profit was not bifurcated into amounts attributable to the NCI & Owners
of the parent.
Various types of errors were observed in calculation of profit attributable to NCI which
showed lack of understanding of the underlying concept.
Part (b) of the question could have been attempted either through opening reserves or
closing reserves approach. Students however remained confused between the two
alternatives and mixed them together. This clearly showed their weak concepts and lack of
understanding in this area.
Question 5
The question required explanation of fundamental principles of ICAP’s code of ethics and
available safeguards relevant to the given situation. 57.8% students obtained passing marks in
the question. The nature of the technical knowledge in this question was not high but the need
to apply that knowledge was crucial to a good answer. Explanation of the concepts seems to be
an issue for the students. The question was relatively easier and a similar question has been
examined in previous attempt. However, students correctly identified the issues but directly
jumped to the conclusion without support and explanation which cost them precious marks.
Question 6
The question required preparation of extracts from financial statements after incorporating a
correction of prior year error and change in accounting estimate. It proved to be the toughest
question of the paper. 89% of the student secured less than 20% of the marks which showed
that they had not studied this area. The students seem to have no idea about how to attempt
such a question. Many students did not attempt the question or made a halfhearted attempt.
Only 1% students could obtain passing marks. Some of the common mistakes were:


Three years statement of financial position (current year and restated for prior two years)
was not presented.
PV of decommissioning liability was correctly calculated but the same was not included in
carrying value of PPE.
Page 3 of 4
Examiners’ comments on Financial Accounting and Reporting-II,
CAF Examination Autumn 2017





Tax effects were calculated using calculations of taxable income. However, none of the
changes had any effect on current tax and the same could have been computed considering
the total change in profit.
Tax effects were ignored in computing the retained earnings balances. Further, the impacts
of adjustments in retained earnings were not accounted for in the subsequent years.
The effect of change in estimate in the year 2017 was incorrectly computed by majority of
the candidates.
The change in deprecation method was accounted for as change in accounting policy and
was adjusted retrospectively though it was a change in accounting estimate which should
be adjusted prospectively.
The correction of error note was incorrectly presented.
Question 7
The question required extracts from statement of financial position relating to the given
transactions. Overall, it was a lengthy question with a mixture of different topics. All the three
topics were examined at a medium difficulty level with lesser complexities but in a single
question. 35.3% of the students secured passing marks. Some common mistakes in this
question are described below:



Time was wasted in preparing notes to the financial statements which were not required.
Only the amounts of non-current assets were presented and other line items were ignored.
Initial direct cost of Rs. 10 million was not included in the right of use asset. Also, initial
direct cost was not shown as deduction in the calculation of taxable income.
(THE END)
Page 4 of 4
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017
Note regarding marking scheme:
The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.
Mark(s)
A.1
A.2 (a)
(b)
(c)
A.3
A.4 (a)
(b)
Cash flows from operating activities:
− Cash receipts from customers
− Cash paid to suppliers and other vendors
− Income tax paid
− Interest paid
Cash flows from investing activities
Cash flows from financing activities
Presentation and disclosure
3.0
4.0
1.5
1.0
2.5
1.5
1.5
Explanation of issue related to:
penalty for late delivery
inventories recognized on lower of cost or NRV
onerous contract
1.0
2.0
3.0
Discussion related to:
recognition of provision regarding injured employees
disclosure of contingent liability regarding employees
compensation for the stress
recognition of asset according to the terms of insurance policy
2.0
seeking
Discussion related to:
recognition of expense related to penalty for non-compliance of new law
disclosure of contingent asset related to recovery of penalty paid amount
from the supplier
1.0
2.0
2.0
2.0
Computation of:
− amortization of each license
− revaluation surplus of each license (if any)
− impairment loss of each license (if any)
Presentation and disclosure
6.0
1.0
2.0
1.0
Consolidated statement of profit or loss:
− sales
− cost of sales
− selling and administrative expenses
− other income
− net profit attributable to parent company and NCI
Computation of goodwill
Presentation and disclosure
1.0
3.0
1.0
2.0
2.0
3.0
1.0
Computation of:
Consolidated retained earnings
Non-controlling interest
2.0
2.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017
A.5
A.6
(a)
(b)
(c)
A.7
Brief explanation of breaches of ICAP’s code of ethics made by CEO
Identification of threats faced by Finance Director
Identification of safeguards available to the Finance Director
Mark(s)
4.0
2.0
2.0
Extracts from statement of financial position (including comparative
figures)
Property, plant & equipment
Retained earnings
Deferred tax liability
Provision for decommission
Provision for taxation
2.0
2.0
2.0
1.0
1.0
Extracts from statement of profit or loss (including comparative figures)
Profit before tax
Taxation
2.0
1.0
Correction of error note (including comparative figures)
Description of error
Effect on statement of profit or loss
Effect on statement of financial position
1.0
2.0
3.0
Addition 1
Computation of:
− capitalization rate
− finance income / charges on surplus fund / overdraft utilization
− cost of tanks and pipelines
Addition 2
− Determination of the amount of ‘Right of use asset’
− Amortization schedule
Computation of current tax
Computation of deferred tax
Presentation and disclosure
1.0
2.0
2.0
3.0
1.0
4.0
2.0
3.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
The Institute of
Chartered Accountants
of Pakistan
10 March 2018
3 hours – 100 marks
Additional reading time – 15 minutes
Financial Accounting and Reporting-II
Q.1
For the purpose of preparation of statement of changes in equity for the year ended
31 December 2017, Daffodil Limited (DL) has extracted the following information:
Net profit
Transfer to general reserves
Transfer of incremental depreciation
Final cash dividend
2017
2016
2015
Draft
Audited
Audited
--------- Rs. in million --------650
318
214
112
141
49
55
7.5%
Additional information:
(i)
Details of share issues:
25% right shares were issued on 1 May 2016 at Rs. 18 per share. The market price
per share immediately before the entitlement date was also Rs. 18 per share.
A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
50 million right shares were issued on 1 July 2017 at Rs. 15 per share. The market
price per share immediately before the entitlement date was Rs. 25 per share.
A bonus issue of 15% was made on 1 September 2017 as interim dividend.
(ii)
After preparing draft financial statements, it was discovered that depreciation on a
plant costing Rs. 700 million has been charged @ 25% under reducing balance method,
from the date of commencement of manufacturing i.e. 1 July 2014. However, the plant
was available for use on 1 February 2014.
(iii)
Share capital and reserves as at 31 December:
Ordinary share capital (Rs. 10 each)
General reserves
Retained earnings
2015
2014
------ Rs. in million -----1,600
1,600
1,850
1,709
1,430
1,302
Required:
Prepare DL’s statement of changes in equity for the year ended 31 December 2017 along
with comparative figures. (Ignore taxation)
(14)
Q.2
(a)
Using the information given in Question no. 1 above, compute DL’s basic earnings per
share for the year ended 31 December 2017 along with the comparative figure.
(08)
(b)
Explain how dividend on preference shares is dealt with while computing basic EPS.
(03)
Financial Accounting and Reporting-II
Q.3
Page 2 of 5
Following are the draft statement of financial position of Jasmine Limited (JL) and its
subsidiary, Sunflower Limited (SL) as on 31 December 2017:
Property, plant and equipment
Intangible assets
Investment in SL
Loan to JL
Current assets
Share capital (Rs. 10 each)
Share premium
Retained earnings
Loan from SL
Current liabilities
JL
SL
------ Rs. in million -----880
330
40
50
520
120
640
345
2,080
845
700
240
720
96
324
2,080
200
410
235
845
Additional information:
(i)
JL acquired 75% shares of SL on 1 January 2017. Cost of investment in JL’s books
consists of:
10 million JL's ordinary shares issued at Rs. 24 per share; and
cash payment of Rs. 280 million (including professional fee of Rs. 10 million for
advice on acquisition of SL)
(ii)
On acquisition date, carrying value of SL's net assets was equal to fair value except an
intangible asset (brand) whose fair value was Rs. 40 million as against carrying value
of Rs. 25 million. The remaining useful life of the brand is estimated at 5 years. The
recoverable amount of the brand at 31 December 2017 was estimated at Rs. 28 million.
(iii)
JL values non-controlling interest at fair value. The market price of SL's shares was
Rs. 36 at the date of acquisition, which has increased to Rs. 40 as of
31 December 2017.
(iv)
JL and SL showed a net profit of Rs. 200 million and Rs. 60 million respectively for
the year ended 31 December 2017.
(v)
The loan was granted on 1 July 2017 and carries mark-up of 10% per annum. A
cheque of Rs. 30 million including interest was dispatched by JL on
31 December 2017 but was received by SL after the year end. No interest has been
accrued by SL in its financial statements.
(vi)
On 1 May 2017 SL sold a machine to JL for Rs. 52 million at a gain of Rs. 12 million.
However, no payment has yet been made by JL. The remaining useful life of the
machine at the time of disposal was 2 years.
(vii) During the year, JL made sales of Rs. 250 million to SL at 20% above cost. 60% of
these goods are included in SL’s closing stock.
(viii) SL declared interim cash dividend of 10% in November 2017 which was paid on
2 January 2018. The dividend has correctly been recorded by both companies.
Required:
Prepare JL's consolidated statement of financial position as at 31 December 2017.
(15)
Financial Accounting and Reporting-II
Q.4
Page 3 of 5
The following information pertains to property, plant and equipment of Orchid Limited
(OL), a listed company:
Description
Buildings
Plant
Date of
purchase
Cost
Rs. in million
Original
useful life
Depreciation
method
1-Jan-15
1-Jan-15
600
475
30 years
25 years
Straight line
Straight line
Subsequent
measurement
model
Revaluation
Cost
Buildings
The revalued amount of buildings as determined by Shabbir Associates, an independent
valuer, on 31 December 2015 and 2017 was Rs. 700 million and Rs. 463 million respectively.
On 30 June 2017 a building having original cost of Rs. 66 million was sold to Baqir Limited
for Rs. 85 million. It was last revalued at Rs. 87 million. OL incurred a cost of Rs. 2 million
on disposal.
OL transfers the maximum possible amount from revaluation surplus to retained earnings on
an annual basis.
Plant
On 31 December 2016 the recoverable amount of the plant was assessed at Rs. 360 million
with no change in useful life.
During 2017, OL has decided to change the depreciation method for plant from straight line
to reducing balance. The new depreciation rate would be 10%.
Required:
Prepare following notes (along with comparative figures) to be presented in the financial
statements of OL for the year ended 31 December 2017 in accordance with the requirements
of relevant IFRSs and Companies Act, 2017:
(a)
(b)
Q.5
Property, plant and equipment
Change in depreciation method
(18)
(02)
Umer Sheikh, ACA is Manager Finance at Charming Limited (CL) and reports to
Abid, FCA who is the Chief Financial Officer of CL. Abid is also a close relative of the
major shareholder of CL.
CL is negotiating an important financing arrangement with Union Standard Bank (USB) in
order to expand its business in foreign markets. The rate quoted by USB is comparatively
higher than existing rates being paid by CL.
During a meeting with the Executive Vice President (EVP) of USB, where Umer Sheikh was
also present, Abid revealed that his son has applied for a house financing in USB last month
but has not received any response from USB so far. Abid requested EVP to consider his
application. EVP agreed to look into the matter. On conclusion of the meeting, Abid asked
Umer Sheikh to prepare a note for the board of directors proposing the acceptance of the rate
offered by USB.
Required:
Briefly explain how Abid may be in breach of the fundamental principles of ICAP’s code of
ethics. Also state the potential threats that Umer Sheikh may face in the above circumstances
and how he should respond.
(08)
Financial Accounting and Reporting-II
Q.6
Rose Limited (RL) is finalizing its financial statements for the year
31 December 2017. In this respect, the following information has been gathered:
(i)
Applicable tax rate is 30% except stated otherwise.
(ii)
During the year RL incurred advertising cost of Rs. 15 million.
Page 4 of 5
ended
This cost is to be allowed as tax deduction over 5 years from 2017 to 2021.
(iii)
Trade and other payables amounted to Rs. 40 million as on 31 December 2017 which
include unearned commission of Rs. 10 million.
Commission is taxable when it is earned by the company. Tax base of remaining trade
and other payables is Rs. 25 million.
(iv)
Other receivables amounted to Rs. 17 million as on 31 December 2017 which include
dividend receivable of Rs. 8 million.
Dividend income was taxable on receipt basis at 20% in 2017. However, with effect
from 1 January 2018, dividend received is exempt from tax. Tax base of remaining
other receivables is Rs. 6 million.
(v)
On 1 April 2017, RL invested Rs. 40 million in a fixed deposit account for one year at
10% per annum. Interest will be received on maturity.
Interest was taxable on receipt basis at 10% in 2017. However, with effect from
1 January 2018, interest received is taxable at 15%.
(vi)
On 1 January 2016, a machine was acquired on lease for a period of 4 years at annual
lease rental of Rs. 28 million, payable in advance. Interest rate implicit in the lease is
10%.
Under the tax laws, all lease related payments are allowed in the year of payment.
(vii) Details of fixed assets are as follows:
On 1 January 2017 RL acquired a plant at a cost of Rs. 250 million. It has been
depreciated on straight line basis over a useful life of six years. RL is also obliged
to incur decommissioning cost of Rs. 50 million at the end of useful life of the
plant. Applicable discount rate is 8%.
On 1 July 2017 RL sold one of its four buildings for Rs. 60 million. These
buildings were acquired on 1 January 2013 at a cost of Rs. 100 million each
having useful life of 30 years.
The dismantling costs will be allowed for tax purposes when paid. Tax depreciation
rate for all owned fixed assets is 10% on reducing balance method. Further, full year’s
tax depreciation is allowed in year of purchase while no depreciation is allowed in
year of disposal.
Required:
Compute the deferred tax liability/asset to be recognised in RL’s statement of financial
position as on 31 December 2017.
(16)
Financial Accounting and Reporting-II
Q.7
Page 5 of 5
Draft financial statements of Tulip Limited (TL) for the year ended 31 December 2017 show
the following amounts:
Rs. in million
Total assets
2,700
Total liabilities
1,620
Net profit for the year
398
While reviewing the draft financial statements, following matters have been noted:
(i)
TL commenced development of a new product on 1 January 2017. Following directly
attributable costs have been incurred upto the launching date of 1 October 2017 and
have been capitalized as intangible asset:
Rs. in million
Staff salary
30
Equipment (having useful life of 5 years)
360
Consumables
90
Consultant fee
212
Total
692
The recognition criteria for capitalization of internally generated intangible assets was
met on 1 March 2017. All costs have been incurred evenly during the period except
equipment which was purchased specifically for this product on 1 January 2017.
TL estimated that useful life of this new product will be 10 years. However, TL had
not charged any amortization in 2017.
(06)
(ii)
After preparation of draft financial statements, a claim of Rs. 20 million was lodged by
a customer for supplying defective units of a product in 2017. According to TL's
lawyers, the chance that claim would succeed is 80%.
At year-end, 800 units of this product were included in TL’s inventory at a cost of
Rs. 150,000 per unit. All these units have the same defects. Normal selling price of
each unit is Rs. 200,000. TL has already committed to sell 300 units to Jamal
Enterprises at a price of Rs. 220,000 per unit.
TL has estimated that Rs. 80,000 per unit would be incurred to remove the above
defect. Further, each defective unit can be sold for Rs. 130,000 in current condition.
(04)
(iii)
The receipt of Rs. 130 million on account of sale and leaseback arrangement of
machine with Sabir Limited was recorded as a financial liability on 31 December 2017.
This transfer has satisfied the requirements of IFRS 15 to be accounted for as sale of an
asset. However, the machine is still included in total assets at carrying value of
Rs. 100 million. Fair value of this machine at year end was Rs. 155 million. Under the
lease agreement, TL is required to make annual payments of Rs. 20 million for 8 years
payable in arrears. Incremental borrowing rate is 11% per annum.
(06)
Required:
Determine the revised amounts of total assets, total liabilities and net profit, after
incorporating the impact of above adjustment(s), if any.
(THE END)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ans.1
Daffodil Limited
Statement of changes in equity
For the year ended 31 December 2017
Balance as at 31 December 2015 (As given)
Effect of correction of error (W-1)
Balance as at 31 December 2015 – Restated
Final cash dividend @ 7.5% - 2015 (1,600×7.5%)
Right issue @ 25%
Ordinary
Share
General
Retained
share
Total
premium
reserves
earnings
capital
-------------------- Rs. in million -------------------1,600.00
1,850.00
1,430.00
4,880.00
(54.69)
(54.69)
1,600.00
1,850.00
1,375.31
4,825.31
(120.00)
(120.00)
400.00
320.00
720.00
(1,600×25%) (160×25%×8)
Net profit - 2016 - Restated[318+13.67(W-1)]
Transfer of incremental depreciation
Balance as at 31 December 2016 - Restated
Final bonus dividend @ 10% - 2016 (2,000×10%)
Right issue
2,000.00
200.00
500.00
(50×10)
Interim bonus dividend @ 15% - 2017 (2,700×15%)
Net profit - 2017 [650 + 10.25 (W-1)]
Transfer to general reserves
Balance as at 31 December 2017
320.00
1,850.00
331.67
49.00
5,805.98
750.00
(405.00)
660.25
(112.00)
1,579.23
660.25
7,216.23
250.00
(50×5)
405.00
3,105.00
331.67
49.00
1,635.98
(200.00)
570.00
112.00
1,962.00
W-1: Correction of error
Cost
2014
Correct
Wrong
Increase/(decrease)
depreciation @ 25% depreciation @ 25%
in depreciation
-------------------------- Rs. in million -------------------------700
700
160.42
(700 × 25% × 11 ÷ 12)
2015
134.90
(700 – 160.42) × 25%
87.50
72.92
(700 × 25% × 6 ÷ 12)
153.13
(18.23)
(700 – 87.50) × 25%
54.69
2016
101.17
(134.90 × 75%)
2017
75.88
(101.17 × 75%)
114.84
(13.67)
(153.13 × 75%)
86.13
(10.25)
(114.84 × 75%)
Page 1 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ans.2
(a)
Basic earnings per share
Net profit (Rs. in million)
Weighted average no. of ordinary shares in
issue during the year (in million)
2017
2016
660.25
331.67
(W-2) 291.87
255.02
[186.66(W-1)
×1.1×1.15×1.08]
Basic earnings (Rs. per share)
2.26
1.30
W-1: Weighted average no. of ordinary shares in issue during 2016
Outstanding
Time
Description
Date
shares
period
Balance
1-Jan-16
160
4÷12
Right issue
1-May-16
200
8÷12
Weighted
shares
53.33
133.33
186.66
W-2: Weighted average no. of ordinary shares in issue during 2017
Description
Date
Balance
Bonus issue @ 10%
Right issue
Bonus issue @ 15%
1-Jan-17
1-Apr-17
1-Jul-17
1-Sep-17
Outstanding
shares
200
220
270
310.5
Time
period
3÷12
3÷12
2÷12
4÷12
Adjustments
10%
Bonus
1.1
Right
(W-3)1.08
1.08
15%
Bonus
1.15
1.15
1.15
Weighted
shares
68.31
68.31
51.75
103.50
291.87
W-3: Adjustment factor for right issue
No. of
Value per
Total
shares
share
50
15
750
220
25
5,500
270
6,250
Theoretical ex-right price per share (6,250 ÷ 270)
Adjustment factor for right issue (25 ÷ 23.15)
(b)
23.15
1.08
If a class of preference shares is classified as liability (redeemable), any dividend
relating to that share is recognised as a finance cost in the statement of profit or loss.
Since it is already deducted from the profit or loss and so no further adjustment needs
to be made.
If a class of preference shares is classified as equity (irredeemable), dividend must be
deducted from the profit or loss.


For cumulative preference shares, above treatment shall be followed irrespective of
declaration of dividend.
For non-cumulative preference shares, above treatment shall be followed only if
dividend is declared.
Page 2 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ans.3 Jasmine Limited
Consolidated statement of financial position
As on 31 December 2017
Property, plant and equipment [880+330–8{12–(12÷2×8÷12)}]
Intangible asset (W-1)
Current assets (640+345+30–25 (150×20÷120)–15(20×75%)–52)
Share capital (Rs. 10 each)
Share premium
Consolidated retained earnings (W-4)
Non-Controlling Interest (W-5)
700.00
240.00
708.25
187.75
1,836.00
492.00
2,328.00
Current liabilities (324+235–15(20×75%)–52)
W-1: Intangible asset
JL
SL
Goodwill (W-2)
Increase in FV of brand – net of amortization [15 – 3(15 ÷ 5)]
Impairment of brand [(40 ÷ 5 × 4) – 28]
W-2: Computation of goodwill
Cash consideration (280 – 10)
Issuance of shares (10 × 24)
Fair value of NCI (20 × 25% × 36)
Fair value of net assets (W-3)
Goodwill
W-3: Net assets of SL
Share capital
Retained earnings
Increase in fair value of brand (40 – 25)
Amortization of brand due to fair value adjustment
Impairment of brand
Interest income (120 × 10% × 6 ÷ 12)
Unrealised gain on sale of machine
Post-acquisition
Rs. in million
1,202.00
203.00
923.00
2,328.00
Rs. in million
40.00
50.00
105.00
12.00
(4.00)
203.00
Rs. in million
270.00
240.00
180.00
690.00
585.00
105.00
At acquisition
At reporting
date
date
-------- Rs. in million -------200.00
200.00
370.00
410.00
(410 – 60 + 20)
15.00
15.00
(3.00)
(15÷5)
(4.00)
6.00
(8.00)
585.00
616.00
31.00
Page 3 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ans.4
W-4: Consolidated retained earnings
JL
Post-acquisition of SL [31 (W-3) × 75%]
Charge off consulting fee
Unrealised profit on closing stock (150 ÷ 120% × 20%)
Rs. in million
720.00
23.25
(10.00)
(25.00)
708.25
W-5: Non-controlling interest
At acquisition
Post-acquisition of SL [31(W-3) × 25%]
Rs. in million
180.00
7.75
187.75
Orchid Limited
Notes to the financial statement
For the year ended 31 December 2017
Property, plant and equipment:
Gross carrying amount - opening
Accumulated dep. & impairment
2017
2016
Building
Plant
Building
Plant
-------------------------------- Rs. in million -------------------------------700.00
475.00
700.00
475.00
(24.14)
(115.00)
(19.00)
(475÷25)
Opening carrying amount
675.86
Depreciation
360.00
(22.64)
[21.14 (700-87) ÷ 29] +
[1.5 (87÷ 29 × 6 ÷12)]
Disposal
(82.50)
700.00
(36)
(24.14)
(360 × 10%)
(700÷29)
-
456.00
(19.00)
(475÷25)
-
-
[87-{(87÷ 29)+
(87÷29×6 ÷ 12)}]
Impairment (P&L)
(77)
(456–19–360)
Revaluation
- surplus
- P&L
Closing carrying amount
[W-1] (90.12)
[W-1] (17.60)
463.00
Gross carrying amount - closing
Accumulated dep. & impairment
Closing carrying amount
463.00
463.00
Measurement base
Useful life (years)/depreciation rate %
Depreciation method
324.00
675.86
360.00
475.00
(151)
324.00
700.00
(24.14)
675.86
475.00
(115.00)
360.00
Building
Revaluation model
30
Straight line
Plant
Cost model
10%
Reducing balance
The last revaluation was performed on 31 December 2017 by Shabbir Associates, an independent
firm of valuers.
Carrying value of building had the cost model been
used instead
2017
480.6
2016
560
(600–66)÷30×27
(600÷30×28)
Page 4 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Following disposal has been made during the year.
cost/revalued
Book value
Sale price
Gain/(loss)
amount
------------------------- Rs. in million ------------------------Baqir Limited
87.00
82.50
85.00
0.5
Name of
purchaser
Building
Mode of
disposal
Tender
(85–2) – 82.5)
Change in estimate
In lieu of significant change in the expected pattern or consumption of the future economic benefits
embodied in the plant, company decided to change the depreciation method of plant from straight
line to reducing balance method. The new depreciation rate would be 10%.
Had the depreciation method been not changed, profit of 2017 would have been higher by
Rs. 20.35 million. (360×10%360÷23)
W-1: Revaluation of building as on 31 December 2017
Carrying value of building (675.86-22.64-82.5)
Revalued amount
Available surplus [120(700-580)-23.2(W-2)]×(27÷29)
OR [120-4.14(120÷29)-3.74{4.14-(23.2÷29×0.5)}-22(23.2÷29×27.5)]
Expense (P&L)
W-2:
Revalued amount of building sold
Carrying value (66÷30×29)
Rs. in million
570.72
463.00
107.72
(90.12)
17.60
Rs. in million
87.0
63.8
23.2
Ans.5 In the given situation, CFO may be in breach of :
(i)
Principle of professional behavior:
This principle imposes an obligation on all chartered accountants to avoid any action
that the chartered accountant knows or should know may discredit the profession.
CFO should have avoided discussing his personal interest in official meeting.
(ii)
Principle of objectivity:
Chartered Accountant should not compromise their professional or business judgment
because of bias, conflict of interest or the undue influence of others. In this
circumstance, he has compromised his professional and business judgment due to his
personal interest as he requested the EVP to consider application of his son who has
applied for house financing in USB.
(iii)
Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional and
business relationship. It seems that CFO may be inclined to accept higher mark-up
rate as compared to existing rate being paid by CL, resulting breach of integrity.
Intimidation threat faced by Mr. Umer
Umer may face intimidation threat from his superior if he would raise his objection on
acceptance of higher mark-up rate offered by the Bank specially where his superior i.e. Abid
is a relative of principal shareholder too.
Page 5 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Available safeguards
If this threat is significant Umer should consult with superiors within the organization in
order to eliminate or reduce it to an acceptable level.
Where it is not possible to reduce the threats to an acceptable level, Umer:
(i)
(ii)
(iii)
should refuse to associate with this financing arrangement.
should consider informing appropriate authorities like Audit Committee / CEO.
seek legal advice or may resign.
Ans.6 Rose Limited
Computation of deferred tax liability / asset
As on 31 December 2017
Description
(Deductible)
/Taxable
Tax base
Temporary
difference
---------- Rs. in million ----------
Carrying
value
Advertising cost
Trade & other payable
- Unearned commission
- Other
Other receivables
- Dividend receivable
- Other
Interest receivable
Tax rate
Deferred tax
(Asset)/Liability
Rs. in million
0
12
(12)
30%
(3.60)
(10)
(30)
(10)
(25)
(5)
30%
30%
(1.5)
8.00
9.00
8.00
6.00
3.00
0%
30%
0.9
3.00
-
3.00
15%
0.45
(4.64)
30%
(1.39)
9.59
30%
2.88
(34.03)
30%
(10.21)
72.85
30%
21.86
40×10%×9÷12
Machine
48.82*1
-
Finance lease liability
Interest accrued on finance
lease
(48.60) *2
(4.86)
-
(48.6×10%)
(4.64)
Plant
234.59
(250+31.5)
×(5÷6)
Provision for
decommissioning
(34.03)
225.00
(250×90%)
-
(50÷1.085)
Buildings (300×25÷30)
250
(300÷30×25)
Deferred tax liability - net
*1
*2
177.147
(300×0.95)
9.39
97.63[28×{1+(1–1.1-3)÷0.1}]×2÷4
[28×{(1–1.1-2)÷0.1}]
Page 6 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2018
Ans.7
Description
As per question
(i)
Development cost of January and February wrongly
capitalized [332(692–360)÷9×2]
Depreciation of plant to be charged off 72(360÷5)×5÷12
Amortization of development cost for 3 months
Total
Total
assets
Liabilities
---------- Rs. in million ---------398.00
2,700.00
1,620.00
Profit
(73.78)
(30.00)
(7.51)
(73.78)
(30.00)
(7.51)
(111.29)
(111.29)
(20.00)
(13.00)
(33.00)
(13.00)
(13.00)
[258.22 (332÷9×7)+42(72×7÷12)]÷(10×3÷12)]
(ii)
(iii)
Provision for claim (20×100%)
NRV adjustment (W-1)
Reversal of financial liability
Right of use asset [(100 ÷ 155)× 127.92(102.92 + 25)]
[
]
]
Lease liability [
Sale of machine
Gain on sale of machine
[(55÷155)×27.08{155-127.92(102.92+25)}]
Revised amount
(130.00)
102.92
(100.00)
9.61
9.61
263.32
Selling price
Cost to sell
Inventory (in units)
Total amount of adjustment (Rs. in million)
20.00
82.53
W-1: NRV adjustment of product A
Selling price in existing condition
Applicable NRV for inventory (Higher of a & b)
Cost
Adjustment required per unit
20.00
(a)
(b)
(17.47)
2,558.25
(27.08)
1,612.92
Committed Un committed
-------- Rs. in ‘000 -------220
200
80
80
140
120
130
130
140
130
150
150
10
20
300
500
3
10
(THE END)
Page 7 of 7
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance
– Spring 2018
General:
The overall passing ratio of 32.3% was far better than the previous two attempts (17.5%
and 24%). The highest score in the paper was 88 marks. The performance of the students
in Q.4 (PPE), Q.6 (Taxation) and Q.7 (Mixed) was below average. Though the difficulty
level of Q.6 and Q.7 was on the higher side but the poor performance in Q.4 (PPE) was
unexpected as a similar question had been previously examined in Spring 2016. Element
of selective studies was evident from the fact that a high proportion of the students could
not even obtain 25% marks in these three questions. Although students are using past
papers as a key element of their examination preparation but they should remember that
topics/sub-topics/variations not covered in past papers are also examinable.
Question-wise comments:
Question 1
The question required preparation of statement of changes in equity. 58.2% of the
students secured passing marks. Though it was an easier question of the paper but still
13.5% students did not secure any mark probably because statement of changes in equity
was last examined in Spring 2014. The mistakes observed were as follows:

The statement was presented from Jan 01, 2015 instead of December 31, 2015.

The word ‘restated’ was not mentioned for each line item which was different from
the previously reported amount.
Question 2
The question required calculation of basic earnings per share and explanation of the
treatment of dividend on preference shares while computing earnings per share. 53.8% of
the students secured passing marks in the question. Some of the common errors were as
follows:

Instead of using the adjusted profit for 2016 and 2017 for calculating EPS, profit
before adjustment was used.

In part (b) discussions on treatment of dividend on preference share while computing
EPS were often incomplete. Students did not distinguish between the different types
of preference shares i.e. irredeemable (cumulative and non-cumulative) and
redeemable preference shares.
Page 1 of 3
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2018
Question 3
The question required preparation of consolidated statement of financial position. 59.7%
of the students secured passing marks in the question. Consolidation has been a favourite
area of the students. They generally seem to have a good working knowledge of
consolidation techniques and many students achieved high marks. The common errors
were as follows:

Amortization on the brand was correctly calculated but most students calculated
impairment of the brand incorrectly.

Interim dividend of Rs. 20 million was not added back to retained earnings while
calculating the retained earnings of SL as on the acquisition date.

Dividend payable to JL and amount payable to SL in respect of purchase of machine
were not adjusted / cancelled in computing the current assets and current liabilities.
Question 4
This question required preparation of notes on property, plant and equipment and change
in depreciation method. 11.6% of the students secured passing marks in this question.
47% of the students could not even score 5 marks (out of 20) in the question. On the
overall, it was observed that students had no idea of the relevant disclosure requirements
and made half-hearted attempts in attempting the question. Some of the common
mistakes were as under:

While calculating revaluation surplus on building as on 31 December 2017, most of
the students failed to account for the impact of revaluation surplus relating to the
building which was sold during the year. Further, most of the students adjusted the
entire amount of decrease in the value of building against revaluation surplus instead
of bifurcating it between revaluation surplus and P&L.

Disclosures related to measurement method, useful life, depreciation method and
revaluation were generally not given. Disclosures related to disposal of building as
required by Fourth Schedule of the Companies Act, 2017 were also not prepared.
Question 5
The question required explanation of fundamental principles of ICAP’s code of ethics,
potential threats faced in the given circumstances and available safeguards. 50% students
obtained passing marks in the question. The technical knowledge required to solve this
question was not of a high degree but the need to apply that knowledge was crucial to a
good answer. Explanation of the concepts seems to be an issue for the students.
Generally, they identified the correct issues but directly jumped to the conclusion without
appropriate explanation which cost them precious marks. In many cases, they did not
read the question properly and answered the first part of the question from Umar’s
perspective rather than the CFO’s perspective.
Page 2 of 3
Examiners’ Comments on Financial Accounting and Reporting-II Spring 2018
Question 6
The question required computation of deferred tax liability / asset. Only 24% students
could obtain passing marks. Students seemed to have no idea about how to attempt such a
question. 16% students could not secure any mark in the question which showed that they
had not studied this area. Some of the common mistakes were as follows:

Students failed to identify that the tax base of unearned commission and dividend
receivable was the same as their carrying amounts.

Interest was taxable @ 15% so deferred tax on interest receivable should have been
calculated at this rate, but this was hardly done by any student.

Students failed to exclude decommissioning cost while computing tax base of plant.
Question 7
The question required calculation of revised amounts of total assets, total liabilities and
net profit after incorporating the impact of adjustments required under three different
situations/topics. Only 25.2% students could secure passing parks. Some common
mistakes observed are described below:

In situation (i), cost of development incurred in January and February 2017 i.e. prior
to meeting the recognition criteria, was not charged to profit and loss. Further,
depreciation of equipment used for development, after the recognition criteria has
been fulfilled i.e. 1 March to 30 September 2017, was not capitalized/added to total
assets.

In situation (ii), amount of provision was determined by multiplying the amount of
claim of Rs. 20 million with 80% (being the probability of outflow); whereas the full
amount of Rs. 20 million should have been provided. Further, separate NRV
calculations were required to be made for the committed units and uncommitted units
as their selling prices were different. However, NRV was calculated by taking same
selling price for committed as well as uncommitted units.
THE END
Page 3 of 3
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018
Note regarding marking scheme:
The marking scheme is given as a guide. Markers also award marks for alternative approaches to a
question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.
A.1
A.2 (a)
Computation of correction of error
Disclosure of following in statement of changes in equity:
− effect of correction of error in opening balance
− net profit for the year
− cash dividend
− right issue
− bonus issue
− incremental depreciation
− amount transferred to general reserves
Presentation of opening and closing balances along with comparative figures
(b)
A.3
A.4 (a)
1.0
2.0
1.0
2.0
2.0
1.0
1.0
2.0
0.5
3.0
0.25
0.5
3.5
0.25
Treatment of dividend on preference shares in computation of basic EPS
3.0
Preparation of consolidated statement of financial position:
− property, plant and equipment
− intangible asset including computation of goodwill
− current assets
− consolidated retained earnings
− non-controlling interest
− current liabilities
Presentation and disclosure
1.0
3.0
2.0
4.0
3.0
1.0
1.0
(b)
Computation of basic earnings per share for 2016:
− net profit
− weighted average number of ordinary shares in issue
− basic earnings per share
Computation of basic earnings per share for 2017:
− net profit – restated
− weighted average number of ordinary shares in issue – restated
− basic earnings per share
Mark(s)
2.0
Presentation of note in accordance with IFRS (including correct mentioning
of opening and closing balances)
Disclosure of disposal of building
Determination of depreciation for 2017 and 2016
Determination of impairment of plant
Treatment of revaluation surplus / loss
Determination and disclosure of carrying value of revalued assets under
cost model
Disclosures pertaining to revaluation, measurement base, useful life and
depreciation method
Disclosure related to change in estimate
2.0
3.5
3.5
1.0
4.0
2.0
2.0
2.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018
Mark(s)
A.5
A.6
A.7
0.5 mark for identification of each breach of fundamental principles and
01 mark for its explanation
Explanation of potential threats involved
0.5 mark for identification of each available safeguard
Deferred tax asset / liability related to:
advertising cost
trade and other payables
other receivables
interest receivable on fixed deposit account
lease related transaction
fixed assets
(i)
(ii)
(iii)
4.5
1.5
2.0
2.0
1.5
1.5
2.0
3.5
5.5
Determination of:
research cost to be charged off
depreciation of plant to be charged off
development cost to be capitalized and its amortization
impact on total assets and net profit
1.0
1.0
2.5
1.5
Determination of:
NRV adjustments for inventories
provision for claim
impact on total assets, total liabilities and net profit
2.0
0.5
1.5
Determination of:
right of use asset
lease liability
gain on disposal
impact on total assets, total liabilities and net profit
1.5
1.0
2.0
1.5
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
8 September 2018
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Q.1
Orange Limited (OL) is in the process of finalizing its financial statements for the year
ended 30 June 2018. The following information has been gathered for preparing the
disclosures related to taxation:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Profit before tax for the year ended 30 June 2018 was Rs. 508 million.
Accounting depreciation for the year exceeds tax deprecation by Rs. 45 million.
During the year, OL sold a machine whose accounting WDV exceeded tax WDV by
Rs. 15 million.
OL carries trademark of Rs. 90 million having indefinite useful life which was
acquired on 1 July 2015. Tax authorities allow its amortization over 10 years on
straight line basis.
OL sells goods with a 1-year warranty and it is estimated that warranty expenses are
2% of annual sales. Actual payments during the year related to warranty claims were
Rs. 54 million. Of these, Rs. 38 million pertain to goods sold during the previous year.
Sales for the year ended 30 June 2018 was Rs. 1,750 million. Under the tax laws, these
expenses are allowed on payment basis.
During the year, OL expensed out payments of Rs. 17.5 million related to
restructuring of one of its business segments. As per tax laws, these expenses are to be
allowed as tax expense over a period of 5 years from 2018 to 2022.
(vii) Expenses include:
accruals of Rs. 26 million which will be allowed for tax purpose on payment basis.
cash donations of Rs. 5 million which are not allowed as tax expense.
(viii) Other income includes:
commission receivable of Rs. 12 million.
dividend receivable of Rs. 35 million.
Both incomes were taxable on receipt basis at 30% up to 30 June 2018. With effect
from 1 July 2018 commission income is exempt from tax whereas dividend income is
taxable at 10% on receipt basis.
(ix)
On 30 June 2018, OL received advance rent of Rs. 16 million. Rent income is taxable
on receipt basis.
(x)
Net deferred tax liability as on 1 July 2017 arose on account of:
Property, plant and equipment
Trademark
Provision for warranty
(xi)
Rs. in million
34.5
5.4
(14.7)
25.2
Applicable tax rate is 30% except stated otherwise.
Required:
(a) Prepare a note on taxation for inclusion in OL's financial statements for the year
ended 30 June 2018 including a reconciliation to explain the relationship between tax
expense and accounting profit.
(b) Compute the deferred tax liability/asset in respect of each temporary difference.
(Comparative figures are not required)
(11)
(07)
Financial Accounting and Reporting-II
Q.2
Page 2 of 6
Following is the draft statement of financial position of Papaya Limited (PL) as on
30 June 2018:
2018
2017
Rs. in million
Property, plant & equipment 47,400 40,600
Deferred tax
250
Stock-in-trade
5,100
4,500
Trade receivables
5,330
4,780
Cash and bank balances
7,758
5,620
Assets
65,838
Equity & liabilities
Share capital
Retained earnings
Revaluation surplus
Loans and borrowing
Lease liabilities
Deferred tax
Provision for dismantling
Trade and other payables
Interest payable
Income tax payable
55,500
2018
2017
Rs. in million
9,000
6,000
29,045 22,590
3,625
2,500
11,888 14,200
950
800
1,300
210
190
7,050
6,550
270
370
3,800
1,000
65,838 55,500
Additional information:
(i)
Depreciation expense for the year was Rs. 2,450 million.
(ii)
Interest expense for the year was Rs. 1,200 million which included Rs. 20 million on
unwinding of discount related to provision for dismantling.
(iii)
Tax expense for the year was Rs. 4,500 million.
(iv)
During the year, the board declared an interim cash dividend of Rs. 600 million and
interim bonus in proportion of 1 share for every 3 shares held. Subsequently, a right
issue was also made.
(v)
During the year, PL recognised revaluation surplus of Rs. 1,600 million related to its
land.
(vi)
Each year incremental depreciation is transferred from revaluation surplus to retained
earnings.
(vii) A plant having original cost of Rs. 2,000 million and carrying value of
Rs. 1,200 million was completely destroyed by fire. The insurance claim amounting to
Rs. 800 million was received.
(viii) On 1 July 2017, machinery having fair value of Rs. 245 million were acquired on a
non-cancellable lease of five years. Rentals of Rs. 62 million are to be paid annually in
advance. PL's incremental borrowing rate is 12.08%.
(ix)
Trade and other payables include an amount of Rs. 700 million payable against
purchase of machinery.
Required:
Prepare PL's statement of cash flows for the year ended 30 June 2018 in accordance with the
requirements of IFRSs using indirect method.
Q.3
(15)
Baqir, ACA is working as Finance Manager at Kiwi Limited (KL), a listed company, and
reports to Shahid, FCA who is the Chief Financial Officer of the company.
Before the date of authorization for issuance of KL’s financial statements for the year ended
30 June 2018, Zahoor (a mutual friend of Baqir and Shahid) informed Baqir that Shahid has
recommended him to purchase KL’s shares as higher EPS is expected this year. Zahoor also
sought Baqir’s advice on this matter.
Required:
Briefly explain how Shahid may be in breach of the fundamental principles of ICAP’s code
of ethics. Also state the potential threats that Baqir may face in the above circumstances and
how he should respond.
(08)
Financial Accounting and Reporting-II
Q.4
Page 3 of 6
Apple Limited (AL) is in the process of finalizing its consolidated financial statements for
the year ended 30 June 2018. Following information pertains to the Group's intangible
assets:
(i)
As on 30 June 2017, revalued amount of AL’s license and related revaluation surplus
were Rs. 450 million and Rs. 30 million respectively.
(ii)
On 1 July 2017 AL acquired entire shareholding of Mango Limited (ML) for
Rs. 1,950 million. Fair values of net assets appearing in ML’s books on acquisition
date are given below:
Software (Rs. 100 million each)
Other net assets
Rs. in million
200
1,545
In respect of acquisition of ML, following information is also available:
(iii)
Till acquisition date, ML had incurred research & development cost of
Rs. 80 million on product 'ABC'. ML had not recognised this as an asset because
criteria for recognition of the internally generated intangible asset was met on
1 July 2017. On this date, AL estimated that the fair value of research and
development work on ABC was Rs. 95 million.
On acquisition date, fair value of ML's customer list was assessed at
Rs. 20 million.
ML incurred following expenditures on this project from 1 July 2017 till ABC’s
launching date i.e. 1 May 2018.
Market research
Product design
Cost of pilot plant (not for commercial production)
Refinement of product before commercial production
Training of production staff
Testing of pre-production
Production and launching of product
Rs. in million
5
12
48
6
8
4
105
188
(iv)
As on 1 July 2017, the fair value of AL's own customer list was assessed at
Rs. 35 million.
(v)
As on 1 July 2017, remaining useful life of all intangible assets except goodwill was
10 years.
(vi)
On 31 March 2018, ML sold one of its software for Rs. 110 million.
(vii) Group follows the revaluation model for license whereas cost model is used for other
intangible assets.
(viii) As on 30 June 2018:
fair value of licence was assessed at Rs. 350 million.
goodwill of ML has been impaired by 20%.
Required:
Prepare a note on intangible assets, for inclusion in AL's consolidated financial statements
for the year ended 30 June 2018 in accordance with the requirements of IFRSs.
(‘Total’ column is not required)
(14)
Financial Accounting and Reporting-II
Q.5
Page 4 of 6
Banana Limited (BL) is listed on Pakistan Stock Exchange and has registered office in
Karachi. BL engages in manufacturing and marketing of fertilizers. It operates a
manufacturing plant at Nawabshah.
Summarized trial balance of BL as at 30 June 2018 is given below:
Description
Advance from customers
Cash and bank balances
Intangible assets
Investment in 3 months term deposit
Land and building – revaluation model
Long term deposits with utility companies
Long term investments
Ordinary share capital
Plant and equipment – cost model
Provision for doubtful receivables
Revaluation surplus on land and building
Running finance
Share premium
Stock-in-trade
Trade and other receivables
Trade payables
Un-appropriated profit
Unclaimed dividend
Rs. in million
576
831
444
500
2,000
10
1,500
6,000
3,086
80
468
800
500
2,670
1,470
1,150
2,885
52
Additional information:
(i)
Trade and other receivables include receivables from BL’s associate i.e. Strawberry
Limited (SL) and BL’s subsidiary i.e. Pear Limited (PL) amounting to Rs. 50 million
and Rs. 20 million respectively. Provision for doubtful receivables includes provision
of Rs. 10 million against receivables from SL.
(ii)
Bad debts of Rs. 35 million were written off during the year. These include an amount
of Rs. 8 million receivable from SL.
(iii)
Authorised share capital consists of 1 billion shares of Rs. 10 each.
(iv)
80 million shares were issued as bonus shares in the previous years whereas 20 million
shares were issued as a consideration for purchase of building at market price of
Rs. 15 per share. Remaining shares were allotted for consideration paid in cash.
(v)
Guarantees issued by BL to Cherry Bank Limited against loans granted to BL’s
employees amounting to Rs. 16 million.
(vi)
During the year, BL produced 3 million tonnes of urea operating at 75% production
capacity. The shortfall was due to lower demand of product in the market.
(vii) Following decisions were taken by the board of directors in their meeting held on
16 August 2018:
Cash dividend of Rs. 3 per share for the year ended 30 June 2018 was proposed.
Financial statements for the year ended 30 June 2018 were approved.
Required:
(a) Formulate a note on accounting policy for property, plant and equipment measured
under cost model. (Assume necessary details in this respect)
(b) Prepare BL's statement of financial position as at 30 June 2018 along with the relevant
notes showing possible disclosures as required under the IFRSs and the Companies
Act, 2017. (Comparative figures and note on accounting polices are not required)
(03)
(14)
Financial Accounting and Reporting-II
Q.6
(a)
Page 5 of 6
Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL)
on 1 July 2017 on the following terms:
(i)
(ii)
(iii)
(iv)
(v)
The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment
of Rs. 48 million is receivable in arrears.
The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease instalment in the extended period will be of Rs. 15 million,
receivable in arrears. It is reasonably certain that HL will exercise this option.
The rate implicit in the lease is 10% per annum.
The useful life of machinery is 6 years.
The unguaranteed residual value at the end of lease term is estimated at
Rs. 20 million.
GLL incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million
to complete the transaction.
Required:
Prepare note(s) for inclusion in GLL’s financial statements, for the year ended
30 June 2018.
(b)
(09)
Property, plant and equipment as disclosed in the draft financial statements of Apricot
Pakistan Limited (APL) for the year ended 30 June 2018 include a plant having a
carrying value of Rs. 610 million. The performance of the plant has been deteriorating
since last year which is affecting APL’s sales.
Following information/estimates relate to the plant for the year ending 30 June 2019:
Rs. in million
Inflows from sale of product under existing condition of the plant
Operational cost other than depreciation
Depreciation
Expenses to be paid in respect of 30 June 2018 accruals
Cost of increasing the plant’s capacity
Additional inflows (net) expected from the upgrade
Interest on finance lease
Maintenance cost
Tax payment on profits
250
25
170
8
60
40
30
15
18
Cash flows from the plant are expected to decrease by 15% each year from 2020 and
onward. The plant’s residual value after its remaining useful life of 3 years is estimated
at Rs. 100 million.
An offer has been received to buy the plant immediately for Rs. 570 million but APL
has to incur the following costs.
Cost of delivery to the customer
Legal cost
Costs to re-organize the production process after
disposal of plant
Rs. in million
45
10
50
Applicable discount rate is 9%.
Required:
Calculate the amount of impairment loss (if any) on plant, for the year ended
30 June 2018.
(07)
Financial Accounting and Reporting-II
Q.7
Page 6 of 6
For the purpose of this question, assume that the date today is 15 February 2018.
Melon Limited (ML) is in the process of finalizing its financial statements for the year ended
31 December 2017. Following matters are under consideration:
(i)
ML undertook a sales campaign in December 2017 whereby customers can avail 20%
discount on the purchase of its new product by presenting a coupon, which formed
part of newspaper advertisements. The offer is valid from 1 January 2018 to
28 February 2018.
So far discounts of Rs. 4.5 million have been availed and the management estimates
that a further discount of Rs. 3 million will be given before the end of the scheme.
(ii)
On 15 December 2017, a machine was disposed of for Rs. 3.5 million to Raspberry
Limited (RL) for cash. However, as per agreement ML was also entitled to additional
amount of Rs. 1.5 million which is dependent upon passing certain production tests
after installation at RL’s premises. On 25 January 2018 RL confirmed that the
required production testing had successfully been completed.
(iii)
On 10 December 2017, a worker filed a claim of Rs. 2.5 million and alleged violation
of safety measures on the part of ML. As of 31 December 2017 the legal advisor of
ML advised that there was only a remote possibility that the Court would award any
compensation to the worker.
The case is still pending, however ML’s legal advisor now believes that there is a 40%
chance that the Court would award compensation of Rs. 2 million to the worker.
(iv)
In November 2017, as part of restructuring plan an option of early retirement in
exchange for a one-off payment of Rs. 1 million was offered to each employee aged
above 50 years. According to restructuring plan, management expects that
25 employees would accept the offer. The option can be exercised till 31 March 2018.
10 employees have already opted for the scheme till 31 December 2017. A further
6 employees have opted for the scheme after year-end.
Costs related to the restructuring except one-off payments to employees have already
been provided by ML in its financial statements.
Required:
Discuss how each of the above matters should be dealt with in ML’s financial statements for
the year ended 31 December 2017.
(THE END)
(12)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Note:
The suggested answers are provided for the guidance of the students. However, there are
alternative solution(s) to the questions which are also considered by the Examination
Department while marking the answer scripts.
Ans.1
(a)
Orange Limited
Notes to the financial statements
For the year ended 30 June 2018
Taxation:
Current tax
Deferred tax [25.2–5.6 req.(b)]
(W-1)
Reconciliation between tax expense and accounting
profit
Tax at applicable rate/applicable tax rate
(508×30%)
Exempt commission income
(12×30%)
Lower rate on dividend income
(35×20%)
Cash donations not allowable
(5×30%)
Tax expenses/Average effective tax rate
Rs. in million
152.4
(3.6)
(7.0)
1.5
143.3
W-1: Computation of current tax
Accounting profit
Excess accounting depreciation
Excess tax gain on disposal / lower tax loss on disposal
Amortization of trademark (90/10)
Warranty expense
[35(1,750×2%)–11(49–38)]
Payments against warranty
Restructuring expenses not allowed
Restructuring expenses allowed over five years
(17.5/5)
Unpaid expenses allowable upon payment
Cash donations not allowable
Exempt commission income
Dividend income taxable at lower rate
Unearned rent taxable upon receipt
Taxable income
Tax @ 30%
(b)
Rs. in million
162.9
(19.6)
143.3
Alternate
(%)
30.00
(0.71)
(1.38)
0.30
28.21
Rs. in million
508.0
45.0
15.0
(9.0)
24.0
(54.0)
17.5
(3.5)
26.0
5.0
(12.0)
(35.0)
16.0
543.0
162.9
Deferred tax liability/(asset)
Arising in respect of:
Property, plant and
equipment
Dividend income
Unpaid expense
Provision for warranty
Temporary difference
(Rs. in million)
55
Rate
30%
DTL/(A)
Rs. in million
16.5
[115 (34.5/0.3)–45–15]
35
26
19
10%
30%
30%
3.5
(7.8)
(5.7)
30%
30%
(4.8)
8.1
30%
(4.2)
[49(14.7÷0.3)+24–54]
Unearned rent
Trademark
16
27
[90–63(90/10×7)]
Restructuring cost
14
(17.5–3.5)
5.6
Page 1 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Ans.2
Papaya Limited
Statement of cash flows
For the year ended 30 June 2018
Rs. in million
Cash flows from operating activities
Profit before tax
[8,580(W-1)+4,500]
Adjustments for:
Depreciation
Loss on disposal of plant
Interest expense
(1,200 – 800)
Operating profit before working capital changes
Changes in working capital:
Increase in stock-in-trade
Increase in trade receivables
Decrease in trade and other payable
Cash generated from operations
Interest paid
Income tax paid
(4,500 – 5,100)
(4,780 – 5,330)
(7,050–6,550–700)
(W-2)
(W-3)
Net cash flows from operating activities
2,450
400
1,200
4,050
17,130
(600)
(550)
(200)
15,780
(1,280)
(3,250)
11,250
Cash flows from investing activities
Purchase of property, plant & equipment
Insurance claim proceed
Net cash flows used in investing activities
(W-4)
Cash flows from financing activities
Proceeds from issuance of shares [9,000–6,000–2,000(W-1)]
Repayment of loan and borrowing
(11,888–14,200)
Dividend paid
Lease payments
(800+250 (W-4)–950)
Net cash flows used in financing activities
Net increase in cash and cash equivalents during the year
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
W-1: Computation of profit after tax
Retained earnings - closing
Cash dividend
Bonus dividend
Incremental depreciation
Retained earnings - opening
Profit after tax
13,080
(6,000÷3)
(2,500+1,600 –3,625)
(7,900)
800
(7,100)
1,000
(2,312)
(600)
(100)
(2,012)
2,138
5,620
7,758
Rs. in million
29,045
600
2,000
(475)
(22,590)
8,580
Page 2 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
W-2: Interest paid
Interest payable - opening
Expense for the year
Interest payable - closing
Ans.3
(1,200 –20)
Rs. in million
370
1,180
(270)
1,280
W-3: Income tax paid
Tax expense for the year
Income tax payable - opening
Income tax payable - closing
Deferred tax liability - opening
Deferred tax asset- closing
Rs. in million
4,500
1,000
(3,800)
1,300
250
3,250
W-4: Payments for purchase of fixed assets
Property plant & equipment - closing
Carrying value of plant destroyed
Depreciation
Property plant & equipment - opening
Increase due to revaluation
Total additions
Right of use asset
[{((1–1.1208–4)/0.1208)+1}×62]
Additions not yet paid
Payment for addition
Rs. in million
47,400
1,200
2,450
(40,600)
(1,600)
8,850
(250)
(700)
7,900
In the given situation, CFO may be in breach of:
(i)
Principle of Professional behavior:
This principle imposes an obligation on all chartered accountants to comply with
relevant laws and regulations and avoid any action that discredits the profession.
According to Zahoor, Shahid revealed inside information to him which is noncompliance of regulations pertaining to inside information and his act may discredit
the profession as well. As a result Shahid has breached this principle.
(ii)
Principle of confidentiality:
This principle imposes an obligation on all chartered accountants to refrain from
using confidential information acquired as a result of professional and business
relationships to their personal advantage or the advantage of third parties.
In given scenario, Shahid misused the confidential information for the advantage of
his friend so Shahid has breached this principle.
Threats faced by Baqir
(i) Intimidation threat:
Baqir may face intimidation threat from his superior if he raises objection on noncompliance of regulations by Shahid.
(ii)
Self interest threat:
Baqir may also face self interest threat as his interest towards friendship with
Zahoor may be at stake if he refuses to disclose (confirm or deny) the confidential
information to him.
Page 3 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Available safeguards for Baqir:
(i)
He should refrain himself from disclosing any confidential information to his friend.
(ii) He should discuss the concerned issue with Shahid.
(iii) He should consider informing appropriate authorities like Audit Committee/CEO.
(iv) He seeks legal advice
Ans.4
Apple Limited
Notes to the consolidated financial statements
For the year ended 30 June 2018
Intangible assets:
Opening:
Revalued amount
Accumulated amortization/
Impairment
Additions:
- business acquisition
- development
Amortization
Disposal
Impairment
Revaluation
Surplus
P&L
Closing
Cost/Revalued amount
Accumulated amortization/
Impairment
Net book value
*1
*2
*3
*4
*5
*6
*7
*8
Customer
list
--------------------------- Rs. in million ---------------------------
License
Software
Goodwill
Research &
development
450.00
-
-
-
-
450.00
-
-
-
-
200.00 (W-1)90.00
(17.50)*3
(92.50)*6
(18.00)*7
90.00
72.00
95.00
70.00*1
(2.75)*4
162.25
20.00
(2.00)*5
18.00
350.00
100.00
90.00
165.00
20.00
350.00
(10.00)
90.00
(18.00)
72.00
(2.75)
162.25
(2.00)
18.00
(45.00)*2
(27.00)*8
(28.00)
350.00
= (12+48+6+4) = 70
= (450/10) = 45
= [(100/10)+(100/10×9/12)]= 17.5
= [(95+70)/10×2/12] = 2.75
= (20/10) = 2
= (100/10×9.25) = 92.5
= (90×20%) = 18
= (30–3) = 27
W-1: Computation of goodwill
Consideration
Fair value of net assets
Software
Other net assets
Research and development
Customer list
Goodwill on acquisition
Rs. in million
1,950
200
1,545
95
20
1,860
90
Page 4 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Ans.5
(a)
Accounting policy:
Property, plant and equipment are stated at cost less accumulated depreciation and
any identified impairment loss.
Cost in relation to self-constructed assets includes direct cost of material, labour and
applicable manufacturing overheads and borrowings cost on qualifying assets.
Depreciation is charged to income, unless it is included in the carrying amount of
another asset, on straight line method whereby cost of an asset is written off over its
estimated useful life at the rates given in note XX.
Residual values and the useful lives of assets are reviewed at least at each financial
year-end.
Depreciation on additions is charged from the month in which an asset is acquired
while no depreciation is charged for the month in which the asset is disposed off.
(b)
Banana Limited
Statement of financial position
As on 30 June 2018
Rs. in million
Non-current Assets
Property, plant and equipment (2,000+3,086)
Intangible assets
Long term investments
Long term deposits
Current Assets
Stock-in-trade
Trade and other receivable
Short term investment
Cash and bank balances
Share capital and reserves:
Share capital
Share premium
Unappropriated profit
Revaluation surplus on property plant & equipment
Note
5,086
444
1,500
10
7,040
2
3
Current liabilities
Trade and other payables (1,150+576)
Unclaimed dividend
Running finance
Contingencies
2,670
1,390
500
831
5,391
12,431
6,000
500
2,885
468
9,853
1,726
52
800
2,578
4
12,431
Page 5 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Banana Limited
Notes to the financial statements
For the year ended 30 June 2018
1.
Legal status and nature of business
Banana Limited (BL) is listed on the Pakistan Stock Exchange having
registered office in Karachi. BL operates its plant located at Nawabshah. BL
engages in manufacturing, and marketing of fertilizers.
2.
Trade and other receivables
Gross amount
Provision for doubtful debts
2.1 Trade receivables from related parties:
Name of related party
Strawberry Limited (Associate)
Pearl Limited (Subsidiary)
Rs. in million
1,470
(80)
1,390
Receivable
50
20
70
Provision
10
10
2.2 During the year, trade receivable from Strawberry Limited amounting to
Rs. 8 million were written off.
Rs.
3. Share capital
in million
Authorized share capital
1,000 million ordinary shares of Rs. 10 each
10,000
Issued, subscribed and paid up capital
500 million shares allotted for consideration paid in cash (bal.)
20 million shares allotted for consideration other than cash
80 million shares allotted as bonus shares
5,000
200
800
6,000
4.
Contingencies
BL has issued guarantees to Cherry Bank Limited against loans granted to
BL’s employees amounting to Rs. 16 million.
5.
Production capacity
Durign the year BL produced 3 million units operating at 75% production
capacity. The shortfall was due to lower demand of product in the market.
6.
Subsequent event
The Board of Directors in its meeting held on 16 August 2018 proposed cash
dividend of Rs. 3 per share amounting to Rs. 1.8 billion, subject to the
approval of the members in the forthcoming annual general meeting of the
company.
7.
Date of authorisation for issue
These financial statements were approved and authorised for issue by the
Board of Directors of the Company on 16 August 2018.
Page 6 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
Ans.6
(a)
Guava Limited
Notes to the financial statements
For the year ended 30 June 2018
Rs. in million
Net investment in lease:
Lease payments receivables
Residual value of machinery
Gross investment in lease
Unearned lease income (Bal.)
Net investment in lease
Current portion of net investment in lease (Bal.)
[(48×5)+(15×3)]
(W-1)
(W-1)
Maturity analysis - contractual undiscounted cash flows
Less than one year
(48×2)
One to two years
(48×2)
Two to three years
(48+15)
Three to four years
[(15×2)+20]
285.00
20.00
305.00
(51.65)
253.36
(72.43)
180.92
96.00
96.00
63.00
50.00
305.00
W-1: Amortization Schedule
Installment
Interest
Closing
Date
--------------------- Rs. in million --------------------1-Jul-17
319.06
31-Dec-17
48.00
(15.95)
(287.01)
30-Jun-18
48.00
(14.35)
(253.36)
31-Dec-18
48.00
(12.67)
(218.03)
30-Jun-19
48.00
(10.90)
(180.92)
W-2: Net investment in lease on 1 July 2017
PV of Rs. 48 million over 7 installment [48×5.7865{(1–1.05–7)÷0.05}]
PV of Rs. 15 million over 3 installment
[15×{(1–1.05–3)÷0.05}×1.05–7]
PV of Rs. 20 million of UGRV
[20×1.10–5]
(b)
Computation of impairment of plant
Carrying value
Less : Recoverable amount
Value in use (W-1)
Fair value less cost of sell (W-2)
Higher of above
Impairment
W-1: Value in use
Inflows from sale of product
Maintenance cost
Operational cost other than dep.
Cash flows - Undiscounted
PV of cash flows at 9%
PV of residual value (100/1.093)
Total value in use
Rs. in million
277.75
29.03
12.28
319.06
Rs. in million
610
537
515
537
73
2019
2020
2021
Total
--------------- Rs. in million --------------250
(15)
(25)
210
178.50
151.73
193
150
117
460
77
537
Page 7 of 8
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018
W-2: Fair value less cost to sell
Fair value of machine
Cost to sell
Cost of delivery to the customer
Legal cost involved in sale agreement
Ans.7
(i)
Rs. in million
570
(45)
(10)
515
In given scenario, present obligation was not existing at year end as the obligating
event in this case is the actual sales of the product rather than the publishing of
coupon in newspaper.
Therefore, neither provision nor disclosure of contingent liability are required in the
ML’s financial statements for the year ended 31 December 2017.
(ii)
Determination of the sale price after the reporting period for an asset sold, where
the sale had been made before the year end is considered as an adjusting event
under IAS 10.
Consequently, ML is required to book receivable of Rs. 1.5 million at year end.
Further, gain or loss on sale of machine has to be calculated by taking into account
of such receivable.
(iii) IAS 10 states that if an entity receives information after the reporting period about
conditions that existed at the end of the reporting period, it shall update disclosures
that relate to those conditions, in the light of the new information.
In light of above, ML is required to disclose the contingent liability in light of
revised opinion of ML’s lawyer i.e. 40% chances that the court would award
compensation of Rs. 2 million to the effected worker.
(iv) Announcement of restructuring plan to those employees who would be affected by
the plan raises constructive obligation on ML. According to restructuring plan,
management expects that 25 employees would accept the offer so provision/liability
should be made for Rs. 25 million (Rs. 1 million × 25 employees) irrespective of
employees who have already opted the scheme till now.
(THE END)
Page 8 of 8
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II
SESSION
Certificate in Accounting and Finance –
Autumn 2018
General
The overall passing ratio of 48% was much better than the previous result of 32.3%. In fact
it is the highest for this paper since introduction of the new education scheme. The highest
score in the paper was 91 marks.
Performances in all questions were quite good except for Q5. Poor performance in Q5 was
mainly due to the fact that such variation had not been examined previously.
Element of selective studies was evident from the fact that one fourth of the students could
not even obtain 15% marks in Q4 and Q5. Although students are using past papers as a key
element of their examination preparation but they should remember that topics/subtopics/variations not covered in past papers are also examinable.
Although many students performed well but some common and illogical mistakes were
noted. The persisting issue appears to be lack of practice and poor presentation in many
cases.
Attainment of full marks in a question is challenging but each question contains sufficient
achievable passing marks. It was observed that students spend too much time on completing
the question even though they have no idea of the difficult part of the questions. Students
are strongly advised to switch to the next question after they have spent reasonable time on
a question. This will ensure that they attempt all questions. 19.9% students were just short
of 9 or less marks and could have easily obtained them had they covered all areas on the
syllabus and/or attempted all questions in the paper.
Question-wise comments:
Question 1
The question required note on taxation and computation of deferred tax liability / asset. The
overall performance in the question was above average as 56.5% of the students secured
passing marks. Calculation of current tax was generally well dealt with. However, mistakes
were observed in reconciliation and computation of deferred tax. Some of the common
errors were as follows:


Unused opening provision of warranty was ignored while calculating warranty expense
and closing provision.
Deferred tax liability on dividend income was computed @ 30% instead of 10% and the
impact of lower rate was not presented in the reconciliation.
Page 1 of 3
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2018

Impact of excess accounting depreciation and excess tax gain was often taken
incorrectly i.e. added when it was required to be deducted and vice versa.
Question 2
The question required statement of cash flows using indirect method. The performance in
this question was excellent as 82% of the students secured passing marks. Some of the
common errors were as follows:




While calculating interest paid, students failed to incorporate the effect of unwinding of
discount on provision for dismantling.
While calculating payments for purchase of fixed assets, students deducted the amount
of right of use asset based on fair value of the machinery instead of present value of
lease payments.
Amount payable against purchase of fixed assets was neither adjusted in purchase of
fixed assets nor in changes in working capital.
Lease payments were shown in investing activities instead of financing activities.
Question 3
The question required explanation of fundamental principles of ICAP’s code of ethics,
potential threats faced in the given circumstances and available safeguards. 58.1% students
obtained passing marks in the question. The technical knowledge required to solve this
question was not of a high degree but the need to apply that knowledge was crucial to a
good answer. Explanation of the concepts seems to be an issue for the students. Generally,
they identified the correct issues but directly jumped to the conclusion without appropriate
explanation which cost them precious marks.
Question 4
The question required note on intangible assets in the consolidated financial statements. It
was based on IAS 38 and examined acquisition of intangible assets as part of business
combination. The performance in the question was below average as only 36.5% of the
students secured passing marks. Some of the common errors were as follows:




While determining the cost of development to be capitalized, expenditures which were
required to be capitalized were not capitalized and vice versa.
Parent company’s customer list was capitalized despite the same being expressly
prohibited in IAS 38.
Hardly any student bifurcated the revaluation adjustment between surplus and P&L.
IFRS requires that “additions due to business acquisition” should be separately
disclosed from other additions to the intangible assets. However, almost none of the
student presented this bifurcation.
Question 5
The question required statement of financial position along with relevant notes including
accounting policy for property, plant and equipment. This was the worst performing
question of the paper and only 7.5% of the students secured passing marks.
Page 2 of 3
Examiners’ Comments on Financial Accounting and Reporting-II Autumn 2018
Accounting policy for property, plant and equipment was only written by few. Some
students drafted disclosure note for property, plant and equipment instead of policy.
For preparing statement of financial position, amounts appearing in trial balance need to be
presented in appropriate head without any adjustments. Though, students prepared
statement of financial position but were not careful in identifying relevant line item,
presenting headings and putting sub-totals.
Most of the students did not seem to have any idea of relevant disclosure requirements.
Consequently, notes were not prepared by the majority. Students could not even secure
those marks which could have been obtained simply by copying additional information in
the notes.
Question 6
This question comprised of 2 short questions to increase the coverage of the syllabus. The
overall performance in the question was average as 44.8% of the students secured passing
marks.
Part (a) of the question required disclosure notes on lease transaction of a lessor. In many
cases, disclosures were given on the basis of IAS 17 instead of IFRS 16. Some of the other
common errors were as follows:


Lease term was taken as 3.5 years whereas it should have been 5 years as it was
reasonably certain that the option to extend the lease would be exercised.
Students were also not familiar with the requirement to disclose maturity analysis.
Part (b) of the question required calculation of impairment loss on plant. This part was not
attempted by a significant number of students. Those who attempted it usually calculated
correct fair value less cost to sell but often irrelevant items were included and relevant
items were ignored in calculating value in use.
Question 7
The question required discussion on treatment of the given matters relating to IAS 10 & 37
in the financial statements. Though students correctly identified the underlying issues but
directly jumped to the conclusion without the supporting explanation which cost them
precious marks. Many of the students just reproduced information given in the question
without explaining its impact on the financial statements or just quoted text from the
standards without reference to the question. 36.9% of the students could secure passing
marks. Some of the other common errors were as follows:


Students incorrectly stated in situation (i) that there was a present obligation due to
publishing of discount coupons in the newspaper. However, the obligating event was
the sale of the product which had not occurred till year end.
In situation (iv) almost all students suggested correctly that provision should be created.
However, the calculation of the amount of provision was often incorrect.
THE END
Page 3 of 3
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018
Note regarding marking scheme:
The marking scheme is given as a guide. Markers also award marks for alternative approaches to a
question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.
A.1 (a)
Computation of current tax
Reconciliation between tax expense and accounting profit
Presentation/disclosure
(b)
Determination of temporary difference related to property, plant and
equipment
Up to 01 mark for each of the other temporary differences
A.2
A.3
A.4
Cash flows from operating activities:
− profit before tax
− adjustment for non-cash transactions
− changes in working capital
− interest paid
− income tax paid
Cash flows from investing activities
Cash flows from financing activities:
− proceeds from issuance of shares
− lease payments
− 0.5 mark each for repayment of loan and dividend paid
Presentation and disclosure
0.5 mark for identification of each breach of fundamental principles and 01 mark
for its explanation
0.5 mark for identification of each potential threat involved and 01 mark for its
explanation
Available safeguards
Opening balances of cost, accumulated amortization and impairment losses and
net carrying amount
Additions through business acquisition
Additions through development
Disposal of software
Amortization
Impairment loss
Revaluation
Closing balances of cost, accumulated amortization and impairment losses and
net carrying amount
Computation of goodwill
Presentation and disclosure
Mark(s)
7.0
3.0
1.0
2.0
5.0
2.0
1.5
2.0
1.0
1.5
3.0
1.0
1.0
1.0
1.0
3.0
3.0
2.0
0.5
2.0
3.0
1.0
2.0
0.5
1.0
2.0
1.0
1.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018
Mark(s)
A.5 (a)
(b)
01 mark for each valid statement in accounting policy for property, plant and
equipment measured under cost model
A.6 (a)
(b)
A.7
3.0
Statement of financial position
Notes/disclosures related to:
− legal status and nature of business
− trade and other receivables
− share capital
− contingencies
− production capacity
− subsequent event
− date of authorization for issue
Presentation
5.0
Computation of net investment in lease
Amortization schedule
Disclosures related to:
− net investment in lease
− maturity analysis
2.0
2.0
1.5
2.5
2.0
0.5
0.5
0.5
0.5
1.0
3.0
2.0
Computation of:
value in use
fair value less cost to sell
impairment of plant
4.0
2.0
1.0
In respect of each matter:
01
mark
for
correct
identification
of
adjusting/non adjusting
01 mark for valid reason/basis thereof
01 mark for suggesting correct accounting treatment
subsequent
event
as
4.0
4.0
4.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
9 March 2019
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Q.1
(a)
On 1 July 2018 Rectangle Limited (RL) entered into a sale and lease back agreement
with Pentagon Leasing Limited in respect of a machine. The relevant details are as
under:
Lease term
Remaining useful life
RL’s incremental borrowing rate
Sale price to the lessor
Carrying value
Fair value
Semi-annual rentals in arrears
5 years
10 years
11% per annum
Rs. in million
60
42
55
6
The transfer of machine by the seller-lessee satisfies the requirements of IFRS 15 to be
accounted for as a sale.
Required:
(i) Prepare journal entries in the books of RL in respect of the above transaction for
the year ended 31 December 2018.
(ii) Compute the gain/loss on rights transferred to be recorded in the books of RL on
1 July 2018 if fair value of the machine was Rs. 70 million.
(b)
(07)
(02)
Square Limited (SL) is a dealer of electronic items. SL acquires refrigerators of a
particular model from a manufacturer at a discount of 15% on the retail price of
Rs. 300,000 per unit.
On 1 January 2018, SL sold 12 refrigerators to Cube Hotel at retail price on lease. The
rate of interest implicit in the lease was 10% per annum. The payment is to be made in
three equal annual instalments payable in advance. Residual value at the end of
3 years is nil.
The market rate of interest is 14% per annum.
(c)
Required:
Prepare journal entries in the books of SL in respect of above transaction for the year
ended 31 December 2018.
(07)
Discuss three shortcomings of earnings per share.
(03)
Financial Accounting and Reporting-II
Q.2
Page 2 of 5
The following summarized trial balances pertain to Arrow Limited (AL) and its subsidiary
Box Limited (BL) for the year ended 31 December 2018:
AL
Sales
Cost of sales
Operating expenses
Other income
Tax expense
Share capital (Rs. 10 each)
Share premium
Retained earnings as at 1 January 2018
Current liabilities
Property, plant and equipment
Investments
Loan to BL's Director
Current assets
BL
Debit
Credit
Debit
Credit
------------ Rs. in million -----------5,177
3,996
3,255
2,448
713
636
350
18
403
288
3,720
1,600
1,430
322
2,293
516
713
651
5,418
1,934
1,600
10
2,284
1,797
13,683
13,683
7,103
7,103
Additional information:
(i)
AL acquired 96 million shares of BL on 1 May 2018 at following consideration:
(ii)
Cash payment of Rs. 450 million
Issuance of 40 million shares of AL at Rs. 25 each
On acquisition date, carrying values of BL's net assets were equal to fair value except
the following:
A building whose fair values and value-in-use were Rs. 390 million and
Rs. 520 million respectively as against carrying value of Rs. 480 million. The
group follows cost model for subsequent measurement of property, plant and
equipment. The remaining life of building on acquisition date was 20 years. Fair
value of the building has increased to Rs. 440 million at 31 December 2018.
A brand which had not been recognized by BL. The fair value of the brand was
assessed at Rs. 162 million. It is estimated that benefit would be obtained from
the brand for the next 6 years.
(iii)
AL measures the non-controlling interest at fair value. On the date of acquisition, the
market price of BL's shares was Rs. 14 per share.
(iv) On 1 July 2018 AL sold an equipment to BL for Rs. 250 million at a gain of
Rs. 20 million. BL has charged depreciation of Rs. 12.5 million on this equipment.
(v) In each month of 2018, BL sold goods costing Rs. 40 million to AL at cost plus 20%.
At year end, 75% of the goods purchased in December were included in stock of AL.
(vi) BL's credit balance of Rs. 38 million in AL’s books does not agree with BL's books due
to Rs. 7 million charged by AL for management service on 26 December 2018. Total
management fee charged by AL to BL since acquisition amounted to Rs. 16 million.
(vii) BL declared interim cash dividend of Re. 0.50 per share in December 2018. AL has
correctly recorded the dividend in its books. However, BL has not yet accounted for
the dividend.
(viii) The incomes and expenses of BL may be assumed to have accrued evenly during the
year.
Required:
Prepare the following:
consolidated statement of profit or loss for the year ended 31 December 2018.
consolidated statement of financial position as at 31 December 2018.
(15)
(10)
Financial Accounting and Reporting-II
Q.3
Page 3 of 5
Triangle Limited (TL) was incorporated in 2017. The following information has been
gathered for preparing the disclosures related to taxation for the year ended
31 December 2018:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Profit before tax for the year amounted to Rs. 125 million (2017: Rs. 110 million)
Accounting depreciation for the year was Rs. 25 million (2017: Rs. 18 million)
Tax depreciation for the year was Rs. 21 million (2017: Rs. 42 million)
Rent is allowed for tax purposes on payment basis. Rent accrued as at
31 December 2018 amounted to Rs. 1 million (2017: Rs. 3 million)
Insurance is also allowed for tax purposes on payment basis. Prepaid insurance as at
31 December 2018 amounted to Rs. 5 million (2017: Rs. 4 million)
Other income includes:
interest of Rs. 10 million (2017: Rs. 7 million)
dividend of Rs. 6 million (2017: Rs. 8 million)
(vii) Borrowing cost of Rs. 2 million was capitalized in 2018 on an under construction
building. Borrowing cost is allowed for tax purposes in the year in which it is incurred.
(viii) Applicable tax rates are as follows:
*2018
2017
Dividend income
35%
20%
Interest income
Exempt
30%
All other incomes
35%
30%
*The rates were changed through the Finance Act enacted on 10 January 2018.
Required:
Prepare the following:
Note on taxation for inclusion in TL's financial statements for the year ended
31 December 2018 and a reconciliation to explain the relationship between tax
expense and accounting profit. (Show comparative figures)
Computation of deferred tax liability/asset in respect of each temporary difference as
at 31 December 2017 and 2018.
Q.4
Amir Ali, ACA is CFO at Circle Limited (CL) and reports to Junaid, FCA who is the CEO.
The financial year of CL ends on 30 April and its profit for the nine months ended
31 January 2019 was below target. In a management meeting held in February 2019, Junaid
has proposed the following measures to improve the results.
(i)
(ii)
Annual maintenance of the manufacturing plant which is due in March 2019 should
be deferred to May 2019. Production manager has warned that the deferral may affect
the safety of the plant. However, Junaid is of the view that the maintenance was
delayed two years ago as well and nothing adverse happened at that time.
Incorporation of the new revaluation report of CL’s buildings should be deferred to the
next year as the resulting increase in valuation is substantial and would result in
increase in the deprecation for the year. Amir had initiated the revaluation during the
year since the fair values of the buildings had increased materially. Junaid is of the
view that the buildings were revalued last year and there is no need of such frequent
revaluations.
Due to the dominant nature of Junaid, none of the participants opposed his views. The
summary to implement the above actions has been received by Amir.
Amir has recently applied for an interest free car loan from CL which is expected to be
approved in few days.
(11)
(07)
Financial Accounting and Reporting-II
Page 4 of 5
Required:
Briefly explain how Junaid may be in breach of the fundamental principles of Code of Ethics
for Chartered Accountants. Also state the potential threats that Amir may face in the above
circumstances and how he should respond.
Q.5
(09)
Octagon Pakistan Limited (OPL) in is process of preparation of financial statements for the
year ended 31 December 2018. During the year, OPL completed the construction of its head
office building. Relevant details in this respect are as follows:
(i)
Payments related to the construction of the building were as follows:
Description
Construction permit fee
Advance to contractor
1st bill of contractor
2nd bill of contractor
3rd bill of contractor
Last bill of contractor
(ii)
Date of payment
1-Jan-18
1-Jan-18
1-Feb-18
1-May-18
1-Sept-18
1-Jan-19
Rs. in million
30
80
250
360
170
150
1,040
The project was financed through the following sources:
Excess cash of Rs. 200 million available with OPL on 1 January 2018 in a saving
account at 10% per annum.
Loan of Rs. 350 million at the rate of 16% per annum obtained on
1 February 2018. The principal is payable in 5 equal annual instalments
alongwith interest, from 1 February 2019. The surplus funds available from the
loan were invested in a saving account at 10% per annum.
Withdrawals from running finance facilities arranged on 1 May 2018. The
facilities were also used to finance other needs of OPL. Details of these facilities
are as follows:
Name of bank
Bank X
Bank Y
Average
Finance
Balance as on
Limit
31 December 2018
balance
cost
------------------------ Rs. in million -----------------------130
150
140
15.4
340
600
390
44.2
(iii)
Payment of 3rd bill of contractor includes Rs. 10 million which was charged by the
contractor for damages sustained at the site on account of unexpected rains.
(iv)
The work was stopped from 16 to 31 May 2018 to meet mandatory technical
requirements. Further, on 16 September 2018, the building control authority stopped
the construction work as it raised objections on the design of the building. The matter
was resolved on 30 September 2018.
(v)
Construction of the building was completed on 31 October 2018. However, it was
inaugurated on 1 December 2018. The building has an estimated useful life of
30 years.
Required:
Prepare relevant extracts from OPL's statement of profit or loss for the year ended
31 December 2018 and statement of financial position as on that date. (Notes to the financial
statements are not required. Borrowing costs are to be calculated on the basis of number of months)
(17)
Financial Accounting and Reporting-II
Q.6
Page 5 of 5
Oval Limited (OL) deals in medicines and surgical instruments. OL is in the process of
finalizing its financial statements for the year ended 31 December 2018. Following matters
are under consideration:
(i)
OL sells instruments A-1 and B-1 with 1-year warranty. These units are purchased
from a manufacturer Star Limited (SL). The details of warranty are as under:
A-1: SL provides warranty services to the customers and recovers 50% of the cost
from OL. However, in case of SL’s default, the warranty services would have to
be provided by OL.
B-1: OL provides warranty services to the customers and recovers the entire cost
from SL.
On 31 December 2018, it is estimated that total cost of Rs. 4 million and Rs. 7 million
would be incurred in next year for providing warranty services for A-1 and B-1
respectively sold in 2018.
(ii)
In October 2018, OL was sued by a customer for Rs. 18 million on account of supply
of substandard surgical instruments.
By end of the year, OL communicated to the customer via email to pay Rs. 5 million.
In respect of the remaining amount of the claim, OL’s lawyers anticipate that there is
70% probability that the court would award Rs. 6 million and 30% probability that the
amount would be Rs. 4 million.
OL lodged a claim with the supplier in December 2018. The supplier principally
accepted the claim to the extent of Rs. 9 million. However, OL is still negotiating with
the supplier and it is probable that OL would recover a further sum of Rs. 3 million.
(iii)
OL has imported 7,000 units of a medicine at a cost of Rs. 70 million. However, in
November 2018, a study was published in a medical journal which reveals that results
of an alternate medicine are much better. At year end, 5000 units were in stock. On
25 January 2019, 4000 units were sold at Rs. 8,000 per unit. OL also paid 10%
commission.
Required:
Discuss how the above issues should be dealt with in the financial statements of OL for the
year ended 31 December 2018. Support your answers in the context of relevant IFRSs.
(THE END)
(12)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Ans.1
(a)
Rectangle Limited
General Journal
(i)
Date
1-Jul-18
Description
Cash
Right of use
42×73.15%
Machine
Lease liability 6×7.5376{(1 − 1.055−10 ) ÷ 0.055}
Gain (balancing)
Right retained {45.23–5(60–5)}÷55×100=73.15%
Right transferred 100–73.15=26.85%
31-Dec-18 Interest expense
45.23×11%×6 ÷12
Lease liability
31-Dec-18 Depreciation expense
Accumulated depreciation
30.72÷5×6÷12
(b)
2.49
2.49
3.07
3.07
31-Dec-18 Lease liability
Cash
(ii)
Debit
Credit
Rs. in million
60.00
30.72
42.00
45.23
3.49
6.00
6.00
Gain/Loss on rights transferred:
28(70–42) × 21.10% [1–{45.23+10(70-60)}÷70×100] = 5.91
Square Limited
General Journal
Date
1-Jan-18 Lease receivable
Description
Debit (Rs.)
Credit (Rs.)
3×12×109,669(300,000÷2.7355[1 + {(1 − 1.1−2 ) ÷ 0.1}]
3,948,084
Sales
109,669 ×2.6467[1 + {(1 − 1.14−2 ) ÷
3,483,131
464,953
0.14}]×12
Unearned finance income (balancing)
1-Jan-18
1-Jan-18
Cash / Bank
Lease receivable
Cost of sales
Inventory
109,669 ×12
1,316,028
300,000 × 0.85 × 12
31-Dec-18 Unearned finance income
(3,483,131–1,316,028)× 14%
Finance income
(c)
1,316,028
3,060,000
3,060,000
303,394
303,394
Shortcomings of earnings per share
EPS can have following shortcomings:
(i)
Not all entities use the same accounting policies. It may not always be possible to
make meaningful comparisons between the EPS of different entities.
(ii)
EPS does not take account of inflation, so that growth in EPS over time might be
misleading.
Page 1 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
(iii) EPS measures an entity’s profitability, but this is only part of an entity’s overall
performance. An entity’s cash flow can be just as important as its profit (and more
essential to its immediate survival). Changes in the value of assets (holding gains)
can also be an important part of performance for some entities.
Ans.2
Arrow Limited
Consolidated statement of profit or loss
For the year ended 31 December 2018
Sales
Cost of sales
Gross profit
Operating expenses
Other income
Net profit before tax
Taxation
Net profit after tax
5,177+(3,996×8/12)–384 (W-1)
(W-1)
(W-2)
(W-3)
403+192(288×8/12)
Net profit after tax attributable to:
Owners of the parent - balancing figure
Non-controlling interest
W-1: Cost of sales
AL
BL
BL’s sales to AL
Unrealized profit included in AL’s closing stock
W-2: Operating expenses
AL
BL
Depreciation on building
Amortisation of brand
Management cost not accrued in BL’s books
Elimination of management expenses
W-3: Other income
AL
BL
Unrealised gain on disposal
Management income
Dividend from BL
Negative goodwill
(W-4)
2,448×8/12
40×8×120%
40×75%×20%
636×8/12
90(480–390)÷20×8/12
162÷6×8/12
7+9
18×8/12
20(250–230)×0.95(250–12.5)÷250)
96×0.5
(W-5)
W-4: Profit attributable to NCI
BL
642(3,996–2,448–636+18–288)×8/12
Unrealized profit included in AL’s closing stock
(W-1)
Rs. in million
7,457
(4,509)
2,948
(1,143)
657
2,462
(595)
1,867
1,707
160
1,867
Rs. in million
3,255
1,632
(384)
6
4,509
Rs. in million
713
424
(3)
18
7
(16)
1,143
Rs. in million
350
12
(19)
(16)
(48)
378
657
Rs. in million
428
(6)
Page 2 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Depreciation on building
Amortisation of brand
Management cost not accrued
(W-2)
(W-2)
400×40%
3
(18)
(7)
400
160
Arrow Limited
Consolidated statement of financial position
As on 31 December 2018
Property, plant and equipment
Brand
Investments
Loan to BL’s director
Current assets
(W-6)
162–18
1,600–1,450
2,284+1,797–6–7–38–48 (96×0.5)
Share capital (Rs. 10 each)
Share premium
Consolidated retained earnings
Non-controlling interest
2,293+1,707 (PL)
896+160(PL)–32 (160×40%×0.5)
Current liabilities
713+651–38+80(160× 0.5)–48
W-5: Computation of goodwill
Cash consideration
Issuance of shares
Fair value of NCI
Fair value of net assets
Share capital
Share premium
Retained earnings
Fair value adjustment – building
Fair value adjustment – brand
Fair value of net assets
Negative Goodwill taken to P&L
40×25
160×40%×14
516+(642(W-4)×4÷12)
480–390
W-6: Property, plant and equipment
AL
BL
Decrease in fair value of building net of depreciation
Unrealised gain on disposal of equipment
90–3(W-2)
(W-3)
Rs. in million
7,246
144
150
10
3,982
11,532
3,720
1,430
4,000
1,024
10,174
1,358
11,532
Rs. in million
450
1,000
896
2,346
1,600
322
730
(90)
162
(2,724)
(378)
Rs. in million
5,418
1,934
(87)
(19)
7,246
Page 3 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Ans.3
(a)
Tax expense:
Current tax
Deferred tax
2018
2017
-------- Rs. in million -------39.9
24.7
1.6
7.5
(W-1)
[(req. (b)]
(9.1–7.5)
41.5
32. 2
Reconciliation between tax expense and accounting profit:
PBT
Tax @ 35% (2017 : 30%)
Effect of low rate on dividend
Exempt interest income
Effect of change in rate
2018
2017
-------- Rs. in million -------125.00
110.00
43.75
33.00
(0.80)
(3.50)
1.25
41.50
32.20
8 × 0.1
10×35%
7.5×5÷30
W-1:Current Tax:
2018
2017
--------- Rs. in million --------125
110
25
18
(21)
(42)
(2)
3
(1)
(4)
(10)
(8)
(2)
114
77
39.9
23.1
1.6
39.9
24.7
Profit before tax
Accounting depreciation
Tax depreciation
Rent accrued (-3+1)
Insurance prepaid (4-5)
Interest (Exempt in 2018 : Normal in 2017)
Dividend (Normal in 2018 : Low rate in 2017)
Borrowing cost
Taxable income
Tax @ 35% (2017: 30%)
Tax on dividend @ 20% in 2017
(b)
Deferred tax liability / (Assets) as at 31 December 2018:
Liability/(Asset)
Carrying
Tax base
Difference
@ 35%
value
------------------- Rs. in million ------------------PPE - Cost
2
2
0.7
- Acc. Dep.
(43)
(63)
20
7.0
(25+18)
Prepaid insurance
Accrued rent
5
(1)
(21+42)
-
5
(1)
26
1.75
(0.35)
9.1
Deferred tax liability / (Assets) as at 31 December 2017:
Liability/(Asset)
Carrying
Tax base
Difference
@ 30%
value
------------------- Rs. in million ------------------PPE - Acc. Dep.
(18)
(42)
24
7.2
Prepaid insurance
4
4
1.2
Accrued rent
(3)
(3)
(0.9)
25
7.5
Page 4 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Ans.4
In the given situation, Junaid may be in breach of the following fundamental principles of Code
of Ethics for Chartered Accountants:
(i)
Professional behavior:
This principle imposes an obligation on all chartered accountants to comply with
relevant laws and regulations and avoid any action that discredits the profession. Junaid
has breached this principle as his proposed suggestion in respect of incorporation of
the new revaluation report is not in accordance with IAS 16. Under IAS 16, carrying
amount of property carried at revaluation model should not be materially different
from its fair value so his proposal is against the requirement of IAS 16.
(ii)
Integrity:
Chartered Accountant should be straight forward and honest in all professional and
business relationship. It seems that Junaid’s decision to defer the maintenance of plant
despite warning of production manager in terms of safety of plant and nonincorporation of new annual report in financial statement would make them
misleading.
(iii)
Objectivity:
Chartered Accountant should not compromise his professional or business judgment
because of bias, conflict of interest or the undue influence of others. In this
circumstance, he has compromised his professional and business judgment by
proposing unethical/unlawful measures to just improve the falling profit of the
company.
Potential threats:
Amir may face following threats:
(i)
Self-interest threat:
Amir may face self-interest threat as the disbursement of his car loan may be at stake if
he refuses to obey the instructions.
(ii)
Intimidation threat:
Amir may face intimidation threat from Junaid as refusal to obey instruction may risk
his job.
Safeguards:
Identified threats are significant as the CFO is being instructed from the highest level of
management. In order to reduce the threat to an acceptable level, one or more of the following
safeguards should be applied:
(i)
(ii)
(iii)
(iv)
(v)
Discuss the matter with CEO and persuade him to follow code of ethics.
Consider informing appropriate authorities like audit committee.
Refuse to implement the given proposals.
Seek legal advice.
Resign.
Page 5 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
Ans.5
Octagon Limited
Statement of financial position as on 31 December 2018
Rs. in million
Non-current assets:
Building
(W-1)
Non-current liabilities:
Term loan
1075.43
350–70
Current Liabilities:
Loan
Running finance
Interest payable on loan
Payable to contractor
280.00
350÷5
130+340
350×16%×11/12
70.00
470.00
51.33
150.00
Statement of profit or loss for the year ended 31 December 2018
Investment income
Interest expense:
 Specific loan
 General borrowings
Depreciation expense
Other expenses (damages)
(W-3)
(350×16%×2.5/12)
(15.4+44.2–16.52)
0.75
(54.75)
11.67
43.08
(W-1)
W-1: Building
Permit fee
Payment to contractor
Borrowing cost capitalized
(6.01)
(10.00)
Rs. in million
30.00
1,000.00
51.44
1,081.44
(6.01)
1,075.43
80+250+360+170+150–10
(W-2)
Depreciation
1081.44÷30×2/12
W-2: Borrowing cost capitalized
Specific loan (1 Feb. to 31 Oct. excl. 15 days)
Investment income (W-3)
350×16%×8.5/12
190×10%×3/12
General borrowings (W-3)
9.56+6.96
Rs. in million
39.67
(4.75)
34.92
16.52
51.44
W-3: Finance income / charges on surplus funds / overdraft utilization
Date
Description
Utilization
Balance
01/01/18
01/01/18
01/01/18
Balance in saving account
Contractor permit fee
Advance to contractor
(30)
(80)
200
170
90
01/02/18
Specific loan
350
440
01/02/18
1st bill
(250)
190
01/05/18
2nd bill
(360)
(170)
Rate
Months
10.00
%
10.00
%
10.00
%
16.87
1
-
Income/
(Cost)
0.75
-
3
4.75
4
(9.56)
Page 6 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2019
01/09/18
3rd bill
(160)
(330)
%
16.87
%
1.5
(6.96)
(16.52)
W-4: Capitalization rate
Average balance
140
390
530
Ans.6
(i)
Amount
15.4
44.2
59.6
⇒
59.6 12
× 8
530
= 16.87%
As on 31 December 2018, OL should recognize a provision for warranty service to be
provided as there is a present obligation as a result of a past event (sale of A-1 and B-1
in 2018). The amount of provision would be:


Rs. 2 million (4×50%) in respect of A-1 as OL is liable to SL for 50% cost of
services.
Rs. 7 million (entire cost) in respect of B-1 as OL is responsible to the customers
for providing warranty services.
OL is required to disclose a contingent liability for remaining warranty cost of A-1
(which should be incurred by SL) as OL would be responsible for it in case of SL’s
default. (Joint and several liability)
Further OL should recognize a separate asset (receivable) to the extent that
reimbursements from SL in respect B-1 are virtually certain. In the statement of profit
or loss, the expense relating to warranty services may be presented net of the amount
recognized as receivable (reimbursement).
(ii)
As on 31 December 2018, OL is required to record a liability of Rs. 5 million as this has
already been approved by OL. In respect of remaining amount of the claim, a provision
of Rs. 6 million shall be made as it is most likely that OL would require to pay this amount
as advised by OL’s lawyers.
Further OL should recognize a separate asset (receivable) to the extent of Rs. 9 million
as it is accepted in principle by the supplier. Therefore, it will be taken as ‘virtually
certain to be received’. In the statement of profit or loss, the expense relating to the
provision may be presented net of amount recognized as receivable (reimbursement).
However, recovery of the claim to the extent of Rs. 3 million is probable, therefore, a
contingent asset would be disclosed.
(iii)
Introduction of new alternative drug with better results is an indication of reduction in
value of existing medicine kept in stock. It is more evident by subsequent sales of such
units at lower price i.e. Rs. 8,000 with 10% commission to distributors. According to IAS
2, inventory should be recorded at lower of cost or NRV (i.e. estimated selling price less
estimated costs necessary to make the sale). So OL is required to carry entire stock of
this medicine at NRV i.e. Rs. 36 million [5,000×7,200 (8,000 – 800)].
(THE END)
Page 7 of 7
INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
CERTIFICATE IN ACCOUNTING AND FINANCE (CAF) EXAMINATIONS
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting and Reporting-II (FAR-II)
SESSION
Spring 2019
Passing %
1
44%
2
32%
Question-wise
3
4
48%
57%
5
51%
6
20%
Overall
39%
General comments
Performance in all questions was satisfactory except for Q.6 which was based on theoretical
areas of IAS 10 and IAS 37. Students directly offered conclusion in this question without
providing the adequate explanation.
Although many students performed well, some shortcomings such as lack of practice, poor
presentation, etc. were commonly noted.
It has been observed that students often spend extra time on completing a question which
affect their performance on the other questions. Students are therefore strongly advised to
move to the next question after they have spent reasonable time on a particular question.
This would help them to attempt all questions of the paper. In this paper, 20% students were
just short of 9 or less marks and could have crossed the line had they attempted all
questions in the paper.
Question-wise common mistakes observed
Question 1(a)



Annual rate of 11% was used in calculation instead of semi-annual rate of 5.5%.
Entries for interest and depreciation expense were either omitted or recorded for full
year instead of half year.
Sales proceeds and fair value were interchanged in calculations.
Question 1(b)


Lease rental was required to be calculated by using 10% while the present value of lease
rentals (for determining sales) was required to be calculated by using 14%. Several
mistakes were observed in those calculations.
Interest receivable / finance income was computed using 10% instead of 14%.
Page 1 of 3
Examiners’ comments on Financial Accounting and Reporting-II Spring 2019
Question 1(c)
This part was not attempted by most of the students. In cases where it was attempted, only
few students were able to identify shortcomings correctly.
Question 2







Intra group sales were computed for full year instead of 8 months and/or not adjusted
for mark-up.
Adjustment to building’s depreciation was either incorrectly calculated and/or added to
operating expenses instead of subtracting from the operating expenses.
Negative goodwill was not taken to statement of profit or loss.
All adjustments related to dividend declared by BL were rarely seen in answer scripts.
In statement of financial position, the full investments figure of Rs. 1,600 million was
eliminated instead of deducting only the investment in BL amounting to Rs. 1,450
million.
Loan to BL’s director was either omitted or presented in liabilities.
In computing profit attributable to NCI, adjustments for management expense and
depreciation on building were ignored.
Question 3



While computing taxable income for 2018, opening balance of rent accrued and prepaid
insurance were ignored.
Requirement to compute deferred tax in respect of each temporary difference was
ignored.
Deferred tax liability arising due to capitalization of borrowing cost was omitted.
Question 4
Majority of the students scored average marks by correctly identifying the threats and
safeguards but only those students earned full or nearly full marks who were able to explain
that how the fundamental principles were breached by the CEO.
Question 5





The payment of Rs. 10 million for damages claimed by contractor due to unexpected
rains was not deducted from the amount capitalized for buildings.
Interest earned on excess cash available before payment of 1st bill to contractor was not
presented separately in statement of profit or loss.
The computation of interest expense on general borrowings was incorrectly computed.
Students were not able to differentiate between mandatory suspension of work and
temporary suspension due to issues. Consequently, they incorrectly computed the period
of interest capitalization.
Interest on specific borrowing after completion of building was also capitalized and not
taken to statement of profit or loss.
Prorating of interest to 8 months was ignored while calculating capitalization rate for
general borrowings.
Page 2 of 3
Examiners’ comments on Financial Accounting and Reporting-II Spring 2019
Question 6



In part (i), discussions in respect of disclosing the contingent liability for the remaining
warranty cost of A-1 and recognizing the separate assets for reimbursements in respect
of B-1 were omitted.
In part (ii), the amount of Rs. 5 million was considered / included in the provision.
In part (iii), the need to make appropriate NRV adjustment was not identified.
The End
Page 3 of 3
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019
Note regarding marking scheme:
The marking scheme is given as a guide. Markers also award marks for alternative approaches to a
question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.
Mark(s)
A.1
(a)
(i)
Computation of:
−
right of use asset
lease liability
−
−
interest and depreciation expense
Preparation of journal entries
(ii) Computation of gain/loss on rights transferred
(b)
(c)
A.2
A.3
Computation of:
− annual lease instalment
− present value of lease payments
− cost of sales and interest income
Preparation of journal entries
01 mark for each shortcoming
Consolidated statement of profit or loss
Sales
Cost of sales
Operating expenses
Other income
Profit attributable to NCI
Bargain purchase (negative goodwill)
Consolidated statement of financial position
Property, plant and equipment
Intangible asset (brand)
Investments
Loan to subsidiary’s director
Current assets
Consolidated retained earnings
Non–controlling interest
Current liabilities
Computation of current tax:
2017
−
2018
−
Computation of deferred tax liability/asset:
2017
−
2018
−
Reconciliation between tax expense and accounting profit
Presentation and disclosure
2.0
1.0
1.0
3.0
2.0
1.5
1.0
2.0
2.5
3.0
1.0
1.5
2.0
3.5
3.0
4.0
1.0
1.0
1.0
1.0
2.0
1.0
1.0
2.0
3.0
4.0
3.0
3.0
4.0
1.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019
Mark(s)
A.4
A.5
A.6
(i)
(ii)
(iii)
0.5 mark for identification of each breach of fundamental principles and 01 mark
for its explanation
0.5 mark for identification of each potential threats involved and 01 mark for its
explanation
Brief discussion on available safeguards
4.5
3.0
1.5
Computation of :
− capitalization rate
− finance income/(charges) on surplus fund/(overdraft utilization)
− cost of building and its depreciation
Extracts from statement of financial position
Extracts from statement of profit or loss
2.0
4.0
5.0
3.0
3.0
Discussion related to:
recognition of provision
recognition of asset
disclosure of contingent liability
2.0
2.0
1.0
Discussion related to:
recognition of liability and provision
recognition of asset
disclosure of contingent asset
2.0
2.0
1.0
Discussion on NRV adjustment
Computation of NRV of stock
1.0
1.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
7 September 2019
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Section A
Q.1 Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:
(i)
(ii)
On 1 October 2018, CL imported a machine from China for USD 250,000 against 60%
advance payment which was made on 1 July 2018. The remaining payment was made
on 1 April 2019.
On 1 January 2019, CL sold goods to a Dubai based company for USD 40,000 on
credit. CL received 25% amount on 1 April 2019, however, the remaining amount is
still outstanding.
Following exchange rates are available:
Date
1 USD
1 Jul 2018
Rs. 121
1 Oct 2018
Rs. 124
1 Jan 2019
Rs. 137
1 Apr 2019 30 Jun 2019
Rs. 140
Rs. 163
Average
Rs. 135
Required:
Prepare journal entries in CL’s books to record the above transactions for the year ended
30 June 2019.
(08)
Q.2 Diamond Limited, a listed company, has six operating segments. These segments do not have
similar economic characteristics. Following segment wise information is available:
Segments
A
B
C
D
E
F
Revenue
Inter-segment
Profit/(loss) Total assets
Total
---------------------------------Rs. in ‘000 --------------------------------24,000
24,000
(1,800)
5,400
184,000
8,000
192,000
(12,000)
48,000
22,000
4,500
26,500
19,000
4,500
24,000
24,000
(23,200)
6,000
23,000
23,000
2,300
6,500
25,000
3,000
28,000
2,900
18,000
278,000
39,500
317,500
(12,800)
88,400
External
Required:
Identify the reportable segments under IFRSs alongwith brief justification.
(07)
Q.3 On 1 July 2018, Gypsum Limited purchased 5,000 debentures issued by Iron Limited at par
value of Rs. 100 each. The transaction cost associated with the acquisition of the debentures
was Rs. 24,000. The coupon interest rate is 11% per annum payable annually on 30 June. On
1 July 2018, the effective interest rate was worked out at 9.5% per annum whereas the market
interest rate on similar debentures was 11% per annum.
As on 30 June 2019, the debentures were quoted on Pakistan Stock Exchange at Rs. 96 each.
Required:
Prepare journal entries for the year ended 30 June 2019 if the investment in debentures is
subsequently measured at:
(a)
(b)
amortized cost
fair value through profit or loss
(03)
(03)
Financial Accounting and Reporting-II
Page 2 of 6
Q.4 Select the most appropriate answer(s) from the options available for each of the following
Multiple Choice Questions (MCQs).
(i)
Which of the following does NOT give rise to deferred tax?
(a)
(b)
(c)
(d)
(ii)
(01)
Which TWO of the following are examples, where carrying amount is always equal to
tax base?
(a)
(b)
(c)
(d)
(iii)
Difference between accounting depreciation and tax depreciation
Expenses charged in the statement of profit or loss but not allowable in tax
Revaluation of a non-current asset but not allowable in tax
Unused tax losses
Accrued expenses that have already been deducted in determining the current tax
Allowance for bad debts where tax relief is granted when the debt is written-off
Accrued income that will never be taxable
Capitalized development costs which are allowable in tax upon payment
(02)
The following information relates to a building of Jet Limited (JL).
At 1 January 2018, the carrying amount of the building exceeded its tax base by
Rs. 1,275,000.
In 2018, JL claimed tax depreciation of Rs. 750,000 and charged accounting
depreciation of Rs. 675,000.
As at 31 December 2018, JL increased the carrying amount of the building by
Rs. 375,000 on account of revaluation. Revaluation is not allowed in tax.
Applicable tax rate is 32%.
The deferred tax liability as at 31 December 2018 in respect of building is:
(a)
(c)
(iv)
Rs. 432,000
Rs. 552,000
(02)
before the harvest
after the harvest
(b)
(d)
at the point of harvest
before, during and after the harvest
(01)
Disclosure requirements of IAS 8 in respect of change in accounting policy are NOT
applicable in case of :
(a)
(b)
(c)
(d)
(vi)
(b)
(d)
IAS 41 is applied to agricultural produce:
(a)
(c)
(v)
Rs. 384,000
Rs. 504,000
change in method for inventory valuation from FIFO to weighted average
initial adoption of revaluation model for property, plant and equipment
change in revenue recognition policy
none of the above
(01)
Which of the following is NOT a characteristic of ‘small sized company’ under the
Companies Act, 2017?
(a)
(b)
(c)
(d)
A private company
Paid-up capital upto Rs. 10 million
Total assets upto Rs. 100 million
Employees not more than 250
(01)
(vii) Which of the following should NOT be included in the initial cost of a right of use
asset?
(a)
(b)
(c)
(d)
Amount of initial measurement of the lease liability
Present value of estimated cost of dismantling the asset at the end of lease period
Payments made to the lessor before commencement of the lease
Gross lease rentals payable under the lease agreement
(01)
Financial Accounting and Reporting-II
Page 3 of 6
(viii) Wood Leasing Limited has leased certain equipment on 1 July 2018. In this respect,
following information is available:
Fair value of equipment
Amount received on 1 July 2018
Four annual instalments payable in arrears
Guaranteed residual value on expiry of the lease
Rs. in million
67.00
5.50
20.00
10.00
Useful life of the equipment is estimated at 5 years. Implicit rate in the lease is 16%.
What amount of net investment in lease will be presented in non-current assets as at
30 June 2019?
(a)
(c)
Rs. 57.72 million
Rs. 51.34 million
(b)
(d)
Rs. 46.96 million
Rs. 39.55 million
(02)
Section B
Q.5 Coal Limited (CL) is preparing its financial statements for the year ended 30 June 2019.
Following information is available:
(i)
On 1 January 2019, CL acquired a machine on lease from a bank. Fair value of
machine on acquisition was Rs. 70 million. CL incurred initial direct cost of
Rs. 5 million and received lease incentives of Rs. 2 million.
The terms agreed with the bank are as follows:
(ii)
The lease term and useful life are 4 years and 10 years respectively.
Instalment of Rs. 17 million is to be paid annually in advance on 1 January.
The rate implicit in the lease is 15.096% per annum.
At the end of the lease term, CL has an option to purchase the machine at its
estimated fair value of Rs. 25 million. It is not reasonably certain that CL will
exercise this option.
(07)
During the year, it was discovered that due to some calculation error in excel sheet, fair
value of CL’s office building was taken incorrectly as Rs. 460 million instead of
Rs. 360 million. Resultantly, the building was recorded based on incorrect revaluation
amount in CL’s financial statements for the year ended 30 June 2017.
This building was acquired on 1 July 2015 for Rs. 500 million and then revalued for the
first time on 30 June 2017.
CL follows revaluation model for subsequent measurement of its building classified as
property, plant and equipment and charges depreciation over its useful life of 10 years
using straight line method. CL accounts for revaluation on net replacement value
method and transfers the maximum possible amount from the revaluation surplus to
retained earnings on an annual basis.
As on 30 June 2019, the revalued amount of building has been determined at
Rs. 320 million.
Required:
Prepare extracts from CL’s statement of financial position and related notes to the financial
statements for the year ended 30 June 2019 alongwith comparative figures for the above.
(Note on Property, plant and equipment is not required)
(09)
Financial Accounting and Reporting-II
Page 4 of 6
Q.6 The following balances are extracted from the records of Golden Limited (GL), Silver
Limited (SL) and Bronze Limited (BL) for the year ended 30 June 2019:
GL
SL
BL
---------- Rs. in million ----------
Sales
Cost of sales
Operating expenses
Other income
Finance cost
Surplus arising on revaluation of property,
plant and equipment during the year
Investment in SL - at cost
Investment in BL - at cost
Retained earnings as at 30 June 2019
2,500
1,550
810
350
90
2,050
1,150
520
180
60
1,000
590
288
50
35
60
1,400
2,500
8,000
3,500
20
2,200
Additional information:
(i)
Details of GL’s investments are as follows:
Date of
investment
Holding %
Investee
1 Jan 17
1 Jul 18
35%
70%
BL
SL
Share capital
Retained earnings
(Rs. 10 each)
of investee
of investee
---------- Rs. in million ---------5,000
1,800
6,000
3,000
(ii)
Cost of investment in SL includes professional fee of Rs. 20 million incurred on
acquisition of SL.
(iii)
The following considerations relating to acquisition of SL's shares are still unrecorded:
Issuance of 175 million ordinary shares of GL.
Cash payment of Rs. 1,000 million after three years.
On the date of investment, the market price of shares of GL and SL were Rs. 20 and
Rs. 17 respectively. Applicable discount rate is 12%.
(iv)
At the date of acquisition of SL, carrying values of its net assets were equal to fair value
except the following:
(v)
an internally developed software by SL which had a fair value of Rs. 150 million.
The cost of Rs. 120 million incurred by SL on development had been expensed
out by SL since the software did not meet the criteria for capitalization during
development. At acquisition date, the software had a remaining useful life of
5 years.
a contingent liability of Rs. 90 million as disclosed in financial statements of SL
which had an estimated fair value of Rs. 60 million. Subsequent to acquisition,
the liability has been recognised by SL in its books at Rs. 40 million.
Following inter-company sales at cost plus 15% were made during the year ended
30 June 2019:
Included in buyer's
closing stock-in-trade
------------- Rs. in million ------------506
138
161
69
Sales
SL to GL
GL to BL
(vi)
On 1 January 2019, GL granted loans of Rs. 150 million and Rs. 130 million to SL and
BL respectively, at interest rate of 12% per annum.
Financial Accounting and Reporting-II
Page 5 of 6
(vii) GL and BL follow revaluation model whereas SL follows cost model for subsequent
measurement of property, plant and equipment. If SL had adopted the revaluation
model, SL would have recorded revaluation surplus of Rs. 35 million for the year
ended 30 June 2019.
(viii) GL measures non-controlling interest at the acquisition date at its fair value.
Required:
(a) Prepare GL’s consolidated ‘statement of profit or loss and other comprehensive
income’ for the year ended 30 June 2019.
(b) Compute the amount of investment in associate as would appear in GL’s consolidated
statement of financial position as at 30 June 2019.
(17)
(03)
Q.7 Turquoise Limited (TL) is in the process of finalizing its financial statements for the
year ended 30 June 2019. Following matters are under consideration:
(i)
(ii)
On 10 July 2019, the owner of the adjacent building filed a case against TL claiming
Rs. 50 million. The claim is made in respect of severe damage to his building during a
fire incident in TL’s head office in June 2019. He is of the view that TL was negligent
in maintaining fire safety systems in its head office. According to TL’s lawyers, there is
70% probability that TL would be found negligent and would need to pay 40% of the
amount claimed.
In May 2019, TL’s board of directors decided to relocate its regional office from
Multan to Lahore. In this respect, a detailed plan was approved by the management
and a formal public announcement was made in June. TL has planned to complete the
relocation by December 2019. The related costs have been estimated as under:
Redundancy payments
Costs of moving office equipment to Lahore
Compensation to employees agreeing to relocate
Salary of existing operation manager (responsible to
supervise the relocation)
(iii)
Rs. in million
20
3
10
2
(04)
TL had 6,000 unsold units of product A as on 30 June 2019 acquired at
Rs. 500 per unit. In June 2019, the selling price of product A has fallen to
Rs. 350 per unit.
TL acquires product A under the contract in which TL has to buy 10,000 units of
product A per month for Rs. 500 per unit. The contract is valid till 31 August 2019 and
if TL decides to cancel the contract, then it must pay a cancellation penalty of
Rs. 4 million. TL is of view that the market may not improve in near future.
(iv)
(04)
(04)
TL sells product B with a warranty of 12 months, though the manufacturer i.e. Sulphur
Limited (SL) provides a warranty of 8 months only. Warranty services are provided by
SL. However, TL is responsible if SL fails to honour its obligation for this warranty. If
warranty claim arises within 8 months, SL does not charge any cost. However, SL
charges Rs. 500, Rs. 1,000 and Rs. 2,500 for a minor, moderate and major defect
respectively in each unit if the defect arises in the extended warranty period of
4 months offered by TL. The probability that a warranty claim in respect of a unit sold
may arise, is as under:
Nature of defect
Minor
Moderate
Major
First 8 months
12%
7%
4%
Last 4 months
6%
10%
5%
During the year ended 30 June 2019, a total of 12,000 units of product B has been sold
by TL and warranty cost of Rs. 1.2 million has been paid to SL in respect of these units.
(05)
Financial Accounting and Reporting-II
Page 6 of 6
Required:
Discuss how the above issues should be dealt with in the financial statements of TL for the
year ended 30 June 2019. Support your answers in the context of relevant IFRSs.
Q.8 Zinc Limited (ZL), a broadcasting company, uses revaluation model for subsequent
measurement of its intangible assets, wherever possible. Following information pertains to
ZL’s intangible assets:
(i)
On 1 January 2018, ZL bought an incomplete research and development project from
Bee Tech at its fair value of Rs. 90 million. The purchase price was analysed as follows:
Rs. in million
30
60
Research
Development
Subsequent expenditures incurred on this project are as follows:
Further research to identify possible markets
Development
Rs. in million
10
48
Recognition criteria for capitalization of development was met on 1 March 2018. All
costs are incurred evenly from 1 January 2018 till project completion date
i.e. 31 August 2018. It is expected that newly developed technology will provide
economic benefits to ZL for the next 10 years.
On 31 December 2018, ZL received an offer of Rs. 170 million for its developed
technology.
(ii)
On 31 December 2018, ZL launched its new website for online streaming of TV shows,
movies and web series. The website’s content is also used to advertise and promote
ZL’s products. The website was developed internally and met the criteria for
recognition as an intangible asset. Directly attributable costs incurred for the website
are as follows:
Rs. in million
Undertaking feasibility studies
3
Evaluating alternative products
1
Acquisition of web servers
16
Acquisition cost of operating system of web servers
7
Registration of domain names
2
Stress testing to ensure that website operates in the intended manner
3
Designing the appearance of web pages
5
Development cost of new content related to:
online streaming
11
advertising and promoting ZL’s products
8
Advertising of the website
6
(iii)
During 2018, the licensing authority intimated that broadcasting license of one of ZL’s
channels will not be further renewed.
ZL had obtained this license for indefinite period on 1 January 2012 by paying
Rs. 150 million, subject to renewal fee of Rs. 0.3 million at every five years. Upto last
year, this license was expected to contribute to ZL’s cash inflows for indefinite period.
As on 31 December 2018, the recoverable amount of this license was assessed as
Rs. 105 million.
Required:
In accordance with the requirements of IFRSs, prepare a note on intangible assets, for
inclusion in ZL’s financial statements for the year ended 31 December 2018 in respect of the
above intangible assets. (‘Total’ column is not required)
(THE END)
(15)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
A.1
Copper Limited
General Journal
Date
Particulars
1-Jul-18
Advance payment – Machine
Cash/Bank
1-Oct-18
Machine
Advance payment
Payable
1-Jan-19
1-Apr-19
1-Apr-19
250,000×60%×121
30,550,000
Payable
Exchange loss (P&L)
Cash/Bank
40,000×137
5,480,000
5,480,000
40,000×25%×140
5,480,000×25%
1,400,000
1,370,000
30,000
Balancing figure
Balancing figure
12,400,000
1,600,000
14,000,000
250,000×40%×140
30-Jun-19 Account receivable
40,000×75%×26(163–137)
Exchange gain (P&L)
A.2
18,150,000
12,400,000
250,000×40%×124
Account receivable
Sales
Cash/Bank
Account receivable
Exchange gain (P&L)
Debit
Credit
--------- Rupees --------18,150,000
18,150,000
780,000
780,000
Quantitative thresholds for reportable segments:
Total
317,500
*37,000
88,400
Revenue
Absolute profit
Assets
10%
31,750
3,700
8,840
*Higher of total profit i.e. 24,200 or total loss i.e. 37,000
Segment
A
B
C
D
E
F
Reportable
No
Yes
Yes
Yes
No
Yes
Explanation
Because it fails to meet any of the criteria specified in IFRS-8
Because it meets all of the criteria specified in IFRS-8
Because its profit of Rs. 19,000 is greater than Rs. 3,700
Because its loss of Rs. 23,200 is greater than Rs. 3,700
Because it fails to meet any of the criteria specified in IFRS-8
Because its assets of Rs. 18,000 are greater than Rs. 8,840
Check that 75% test is satisfied: (184,000+22,000+24,000+25000)÷278,000=91%
Page 1 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
A.3
(a)
Gypsum Limited
General Journal
Date
Description
1-Jul-18
Investment/Debenture – Amortized cost
Cash/Bank
1-Jul-18
Investment/Debenture – Amortized cost
Cash/Bank
24,000
Investment/Debenture – Amortized cost
Interest income (P&L)
524,000×9.5%
49,780
Bank
500,000×11%
Investment/Debenture – Amortized cost
55,000
30-Jun-19
30-Jun-19
(b)
24,000
49,780
55,000
General Journal
Date
1-Jul-18
1-Jul-18
30-Jun-19
30-Jun-19
A.4
Debit
Credit
----- Rupees ----500,000
500,000
Description
Investment/Debenture – FVTPL
Cash/Bank
5,000×100
Transaction cost (P&L)
Cash/Bank
Bank
Interest income (P&L)
Debit
Credit
----- Rupees ----500,000
500,000
24,000
24,000
500,000×11%
Fair value adj. (P&L) 500,000480,000(5,000×96)
Investment/Debenture – FVTPL
55,000
55,000
20,000
20,000
(i)
(b)
Expenses charged in the statement of profit or loss but not allowable in tax
(ii)
(a)
(c)
Accrued expenses that have already been deducted in determining the current tax
Accrued income that will never be taxable
(iii)
(d)
Rs. 552,000
(iv)
(b)
at the point of harvest
(v)
(b)
initial adoption of revaluation model for property, plant and equipment
(vi)
(c)
Total assets upto Rs. 100 million
(vii) (d)
Gross lease rentals payable under the lease agreement
(viii) (d)
Rs. 39.55 million
Page 2 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
A.5
Coal Limited
Statement of financial position
As on 30 June 2019
2019
Building
2018
2017
Restated
Restated
------------ Rs. in million -----------320
315
360
Right of use asset (W-1)
51.41
-
-
Equity
Revaluation surplus (W-2)
20.00
-
-
Non current liabilities:
Lease liabilities (W-3)
27.60
-
-
Current liabilities:
Current portion of lease liabilities (W-3)
Interest payable [5.85(W-3)÷2]
11.15
2.93
-
-
Non-current assets:
(360÷8×7)
Coal Limited
Notes to the financial statements
For the year ended 30 June 2019
1. Maturity analysis of lease liabilities:
Not later than one year
Later than one year but not later than five years
2019
17
34
51
2018
-
2. Correction of error note:
It was identified in current year that revalued amount of one of its buildings was taken as
Rs. 460 million instead of 360 million in 2017's financial statements of the company.
Effect on the statement of profit or loss
Increase in income:
Decrease in depreciation expense
(100÷8)
Effect on the statement of financial position
Decrease in PPE
(315460×7÷8) : (360460)
Decrease in Revaluation surplus
(60×7÷8) : (400460)
Decrease in retained earnings
W-1: Right of use asset
Present value of lease rental
Initial direct cost
Lease incentive
Depreciation
2018
Rs. in million
12.50
2018
2017
---- Rs. in million ---(87.50)
(100.00)
(52.50)
(60.00)
(35.00)
(40.00)
17×3.2796 (A.F@15.096)
(58.75÷4)×(6÷12)
Rs. in million
55.75
5.00
(2.00)
58.75
(7.34)
51.41
Page 3 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
W-2: Revaluation surplus
Revalued amount
Carrying value
Less: Impairment reversal
(360÷8×6)
(40÷8×6)
Rs. in million
320.00
(270.00)
50.00
(30.00)
20.00
W-3: Lease schedule
Payment date
1-Jan-19
1-Jan-20
A.6
Opening
Principal
Interest @
Closing
Instalment
principal
repayment
15.096%
principal
--------------------------------- Rs. in million --------------------------------55.75
55.75
17.00
17.00
38.75
38.75
17.00
11.15
5.85
27.60
Golden Limited
Consolidated statement of profit or loss and other comprehensive income
For the year ended 30 June 2019
(a)
Sales
2,500+2,050–506
Cost of sales [1,550+1,150–06+18(138÷1.15×15%)+3.15(69÷1.15×15%×35%)]
Gross profit
Operating expenses
810+520+20–40+30(150÷5)
Other Income
350+180–9(150×12%×6÷12)+438.22(W-1)
Finance cost
90+60+85.44{711.78(W-1)×12%}–9
Share of Associate’s profit
137 (1,000–590–288+50–35)×35%
Net Profit
Other Comprehensive Income
Revaluation surplus
Share of Associate’s OCI
Total comprehensive income
60+35
20×35%
Profit attributable to:
Parent (Bal.)
NCI (W-2)
Total comprehensive income attributable to:
Parent (Bal.)
NCI
147.60+10.5(35×30%)
Rs. in million
4,044.00
(2,215.15)
1,828.85
(1,340.00)
959.22
(226.44)
47.95
1,269.58
95.00
7.00
1,371.58
1,121.98
147.60
1,269.58
1,213.48
158.10
1,371.58
Page 4 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
W-1: Computation of goodwill
Cash
Issuance of shares
Deferred consideration
FV of NCI
1,400–20
175×20
1,000÷1.123
600(6,000÷10)×30%×17
Share capital
Retained earnings
Contingent liability
FV of internally developed software
FV of net assets acquired
Negative goodwill/Bargain purchase
W-2: Profit attributable to NCI
Profit after tax for 2019
Amortization of software
Adjustment of unrealized profit
Reversal of contingent liability
2,050–1,150–520+180–60
150÷5
138÷1.15×15%
492×30%
(b)
A.7
Investment in Associates
Cost
Share in post acquisition profit
Share in OCI
Unrealized profit in inventory (PL)
2,200–1,800×35%
20×35%
Rs. in million
1,380.00
3,500.00
711.78
3,060.00
8,651.78
6,000.00
3,000.00
(60.00)
150.00
(9,090.00)
(438.22)
Rs. in million
500.00
(30.00)
(18.00)
40.00
492.00
147.60
Rs. in million
2,500.00
140.00
7.00
(3.15)
2,643.85
TL should recognise the provision of Rs. 20 million(50×40%) due to the following:
(i)



(ii)
Filing of case by owner of adjacent building is considered as an adjusting event
because the fire incident was occurred in June consequently evidence of conditions i.e.
severe damage to such building was exist at reporting date.
The payment is probable as according to TL’s lawyers, there is 70% probability that TL
would be determined to be negligent.
Amount can also be estimated reliably as TL’s lawyers is of view that TL will have to
pay 40% of the amount claimed.
A provision for restructuring cost is to be recognised, as a formal restructuring plan has
been finalised and approved by the management and a formal public announcement was
made prior to 30 June 2019.
However, a provision should only be made for redundancy cost of Rs. 20 million as it
pertains to the closing of Multan unit.
Costs of moving machinery to the Lahore and compensation to employees agreeing to
transfer Lahore relate to future conduct of the business / ongoing business of TL should not
be recorded in the year ended 30 June 2019.
Salary of the existing operation manager should not be recorded as it is not incremental
cost, and would be incurred whether relocation takes place or not.
Page 5 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
(iii)
In the given scenario, following two adjustments in respect of product A are required:


Since selling price is lower than cost so NRV adjustment in respect of closing inventory
at year end should be made by Rs. 900,000 [6,000×150(500-350)]
Further, as the contract become onerous, TL should also record provision for
unavoidable cost of Rs. 3 million being lower of:


(iv)
Cost of fulfilling the contract i.e. Rs. 3 million [10,000×2×150(500–350)]
Cancel the contract (penalty) i.e. Rs. 4 million
In the given scenario, warranty period is divided into two i.e. First eight months and
subsequent four months. Both periods are discussed separately below:
First 8 months:
Since SL is responsible for warranty claim arising in this period and no cost is charged by SL
so no provision is required in TL’s books. However since TL is responsible if SL does not
honour its obligation for this warranty period, TL should disclose this fact as contingent
liability.
Subsequent 4 months:
Since SL charges an amount from TL depend upon nature of defect, provision should be
recorded in TL’s books as there is present obligation as a result of past event (Sale of
Product B). Computation is as follows:
Nature of defect
Minor
Moderate
Major
Less: Already claimed
Provision to be made
% defective units
6%
10%
5%
No. of units
720
1,200
600
Rs. per unit
500
1,000
2,500
Rupees
360,000
1,200,000
1,500,000
3,060,000
(1,200,000)
1,860,000
Page 6 of 7
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019
A.8
Zinc Limited
Notes to the financial statements
For the year ended 31 December 2018
Intangible assets:
Research &
Website
License
development
----------------- Rs. in million -----------------
Opening:
Cost
Accumulated amortization/ Impairment
-
Additions:
- separate acquisition
-
90.00
150.00
150.00
21.00
-
(2+3+5+11)
- development
36.00
-
-
-
(37.50)
48×(6÷8)
Amortization
(4.20)
(90+36)÷10×4÷12
Impairment
-
150÷4
-
(7.50)
105–112.5(150÷4×3)
Closing
121.80
21.00
105.00
Cost/Revalued amount
Accumulated amortization/ Impairment
Net book value
126.00
(4.20)
121.80
21.00
21.00
150.00
(45.00)
105.00
Useful life
Amortised method
10
Straight line
NA
NA
4
Straight line
(THE END)
Page 7 of 7
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting &
Reporting II
SESSION
Certificate in Accounting and Finance (CAF)
Examination - Autumn 2019
Passing %
1
85%
2
85%
3
60%
Question-wise
4
5
40%
19%
6
22%
7
59%
8
49%
Overall
50%
General comments
An overall passing ratio of 50% is fairly consistent with last two results of 39% and 48%.
There were 19% examinees who were just short of 9 or lower marks and could have
easily obtained them if they have covered all areas on the syllabus. The highest score in
the paper was 94 marks.
The importance of the coverage of the syllabus has further increased due to the inclusion
of short questions and MCQs in the paper. Almost, all areas of the syllabus were
examined in this paper.
Although many examinees performed well, some shortcomings such as lack of practice,
poor presentation, etc. were commonly noted in numerous scripts. Examinees secured
good marks in two to three questions but failed to obtain reasonable marks in the
remaining questions.
It has been observed that examinees often spend extra time on completing a question
which affect their performance on the other questions. Examinees are therefore strongly
advised to move to the next question after they have spent reasonable time on a particular
question. This would help them to attempt all questions of the paper.
Question-wise common mistakes observed
Question 1
Advance paid for the machine on 1 July 2018 was re-translated on 1 October 2018.
Question 2


Quantitative threshold based on higher of total profit or total loss was taken on the
basis of net total of profits/losses of all segments.
“75% test” was not performed.
Page 1 of 2
Examiners’ Comments on Financial Accounting & Reporting II – CAF Examination
Autumn 2019
Question 3


Accounting for transaction cost was interchangeably recorded in (a) and (b).
In (b), entry for interest income and amount of fair value adjustment were incorrect.
Question 4

MCQs at serial (ii), (iv) and (v) were least well answered.
Question 5



In statement of financial position, balances as at 30 June 2017 were not presented.
Several types of mistakes were made in determining the amount of revaluation
surplus as on 30 June 2019 and amounts of effect on statement of financial position in
note of correction of error. Please refer suggested solution for correct amounts.
Option to purchase the machine at the end of lease term was included in lease
payments.
Question 6





Unrealized profit in respect of associate was either not adjusted or adjusted with
incorrect amount.
Amount subsequently recognized in SL’s book in respect of contingent liability at
acquisition cost was not reversed.
Profit attributable to NCI was incorrectly computed.
Total comprehensive income attributable to Parent and NCI was either not presented
or presented with incorrect amounts.
In (b), only share in profit for the year was added instead of share in post-acquisition
profit.
Question 7




Answers were correct to the extent discussed but lacked completeness.
In (ii), costs other than redundancy payments were included in the amount of
restructuring provision.
In (iii), the need of NRV adjustment in respect of closing inventory was not
discussed. Further, cost to fulfill the contract was calculated incorrectly.
In (iv), amount already claimed was not deducted for determining the provision to be
made. Further, contingent liability in respect of warranty for first 8 months was not
discussed.
Question 8



Full Rs. 48 million were capitalized as development cost.
Cost of website contained atleast one error.
Amortization of license was not considered.
(THE END)
Page 2 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019
Note regarding marking scheme:
The marking scheme is given as a guide. Markers also award marks for alternative approaches to a
question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.
Mark(s)
4.0
4.0
A.1
Journal entries related to transaction (i)
Journal entries related to transaction (ii)
A.2
Identification of reportable segments
Justification of reportable segments
3.0
4.0
A.3
(a)
Journal entries on:
1 July 2018
30 June 2019
1.5
1.5
Journal entries on:
1 July 2018
30 June 2019
1.0
2.0
(b)
A.4
Marks as mentioned on the question paper against each MCQ
A.5
(i)
(ii)
A.6
(a)
Extracts from statement of financial position
Right of use asset
Lease liabilities
Interest payable
Extracts from notes to the financial statements
Maturity analysis of obligation under lease
Extracts from statement of financial position
Building
Revaluation surplus
Extracts from notes to the financial statements
Correction of error note:
Nature of error
−
Effect on the statement of profit or loss
−
Effect on the statement of financial position
−
Consolidated statement of profit or loss and other comprehensive income
Sales
Cost of sales
Operating expenses
Other income
Finance cost
Other comprehensive income (OCI)
Share in net profit and OCI of associate
Profit attributable to parent and NCI
Total comprehensive income attributable to parent and NCI
Bargain purchase (negative goodwill)
11.0
3.0
2.0
1.0
1.0
2.5
1.5
1.0
1.0
3.0
1.0
2.0
3.0
1.0
1.0
1.0
1.0
2.5
1.0
3.5
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019
A.7
(b)
(i)
Discussion related to:
adjusting event
recognition of provision
1.5
2.5
Discussion related to:
recognition of provision
amount of provision
1.5
2.5
Discussion related to:
NRV adjustment
onerous contract
1.5
2.5
(ii)
(iii)
(iv)
A.8
Share in post-acquisition profit and OCI of associate
Adjustment of unrealized profit in inventory
Mark(s)
2.0
1.0
Discussion related to:
− disclosure of contingent liability
− recognition of provision
Computation of provision amount
Research and development
Additions
−
Amortization
−
Website
Additions
−
License
Opening balances
−
Amortization
−
Impairment
−
Presentation and disclosure
1.5
1.5
2.0
3.0
1.0
4.0
2.0
1.0
1.0
3.0
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
7 March 2020
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Instructions to examinees:
(i)
Answer all EIGHT questions.
(ii)
Answer in black pen only.
Section A
Q.1
Rocky Road Limited (RRL) had a stock of 2,000 cows on 1 January 2019.
On 1 May 2019, RRL purchased 750 cows at fair value of Rs. 56,000 per cow. Further
Rs. 2 million were incurred to transport the cows to the farm.
On 1 August 2019, RRL imported cattle feed of USD 150,000 against 70% payment. RRL
also paid 5% custom duty on import. The feed is specially designed to provide vital nutrients
to cows that keep them healthy and improve the quality of their produce. At year-end, 30% of
the amount is payable whereas 40% of the feed is unused.
Following average fair values per cow are available:
1-Jan-19
1-May-19
31-Dec-19
Rs. 50,000
Rs. 56,000
Rs. 61,000
Average for
the year
Rs. 57,000
Auctioneers charge a 2% commission on fair value from seller. Further, there is a government
levy of 3% at the time of purchase and 4% at the time of sale on fair value.
Following exchange rates are available:
Date
1-Aug-19
31-Dec-19
1 USD
Rs. 164
Rs. 152
Average
Aug-Dec
Rs. 157
Average
for the year
Rs. 159
Required:
Prepare journal entries in RRL's books to record the above information for the year ended
31 December 2019.
Q.2
(08)
Bilal has recently joined your organization. He has prepared a summary of classification and
measurement requirements of financial assets which will help him in handling the transactions
related to the financial assets. He has requested you to review the following summary:
Business model
Cash flows
Categories
Initial measurement
Subsequent
measurement
Amortized cost
Hold to collect and sell
Solely payment of
principal and interest
Debt and equity
securities
Fair value plus
transaction cost
Amortized cost
FV through OCI
Hold to collect
No condition
FV through P/L
Hold to sell
No condition
Debt securities
Equity securities
Fair value
Fair value plus
transaction cost
Fair value
Fair value less
transaction cost
Required:
Prepare the corrected summary in the light of IFRSs.
(07)
Financial Accounting and Reporting-II
Q.3
Page 2 of 7
Atif Anwar, ACA is Finance Manager at Hot Coffee Limited (HCL) and reports to
Jamal Ahmed, FCA who is the CFO.
On returning from leaves, Atif noted that draft financial statements for the year ended
31 December 2019 have been prepared. He found that financial statements have not been
updated for the revision in decommissioning cost related to a plant, as advised by the
engineering department at the start of 2019. Atif discussed the matter with Jamal who advised
him to finalize the financial statements without revising the decommissioning cost as HCL’s
profit would be decreased if revised cost would be taken into account.
Decommissioning cost related to the plant has increased from initial estimate of Rs. 50 million
to Rs. 88 million. Applicable discount rate is 12%. This plant had a useful life of 6 years when
it was purchased on 1 July 2017 at a purchase price of Rs. 860 million. HCL uses cost model
for subsequent measurement of its property, plant and equipment and follows straight line
method for charging depreciation.
Required:
(a) Compute the change in net profit, assets and liabilities if revised decommissioning cost
is included in the financial statements for the year ended 31 December 2019.
(b) Briefly explain how Jamal may be in breach of the fundamental principles of ICAP’s
Code of Ethics for Chartered Accountants.
Q.4
(05)
(03)
Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQs).
(i)
Which of the following is a monetary item?
(a)
(c)
(ii)
Advance paid
Inventories
(01)
over the period in which conditions would be fulfilled
only when the grant becomes receivable
only when the conditions are met
over the life of related biological asset
(01)
The applicable financial reporting framework and schedule of the Companies Act, 2017
for Large Sized Company are:
(a)
(b)
(c)
(d)
(iv)
(b)
(d)
A conditional grant related to a biological asset measured at its ‘fair value less estimated
point-of-sale costs’ should be recorded as income:
(a)
(b)
(c)
(d)
(iii)
Deferred tax liability
Income tax payable
IFRS and Fourth Schedule
IFRS and Fifth Schedule
Revised AFRS for SSE and Fourth Schedule
Revised AFRS for SSE and Fifth Schedule
(01)
Zameer Ansari is a car dealer. Cars are sold both on cash and finance lease basis. He
has been selling a car at the following terms:
Fair value
Annual lease rental in arrears
Market rate
Lease term
Rs. 5,000,000
Rs. 1,646,199
12% per annum
4 years
What would be the effect on sales revenue and finance income if annual lease rental is
increased to Rs. 1.8 million and all other terms remain the same?
(a)
(b)
(c)
(d)
Increase in sales revenue and increase in finance income
Decrease in sales revenue and increase in finance income
No change in sales revenue and increase in finance income
Increase in sales revenue and no change in finance income
(02)
Financial Accounting and Reporting-II
(v)
An entity purchased patent for its product A in 2014 for 20 years. In 2019, the entity
purchased patent of a competing product for 20 years to eliminate competition for
product A. However, the entity does not intend to manufacture the competing product.
The cost of purchasing second patent for competing product should be:
(a)
(b)
(c)
(d)
(vi)
Page 3 of 7
expensed out in 2019
capitalized and amortized over 20 years
capitalized and amortized over 15 years
capitalized and only assessed for impairment at year end
(01)
Computer hardware and related operating system, which is an integral part of the
computer hardware, are treated under:
(a)
(b)
(c)
(d)
IAS 16 as a combined asset
IAS 38 as a combined asset
IAS 16 for computer hardware and IAS 38 for operating system
IAS 16 or IAS 38 at the option of the entity
(01)
(vii) According to IFRSs, if a financial report contains both consolidated financial statements
of a parent, as well as parent’s separate financial statements, segment information is
required:
(a)
(b)
(c)
(d)
only in the consolidated financial statements
only in the parent’s separate financial statements
in both sets of financial statements
Either in the consolidated or parent’s separate financial statements
(01)
Section B
Q.5
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing
Rs. 200 million having useful life of 8 years. Residual value of the machine at end of its useful
life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with
Cotton Candy Limited (CCL) for a non-cancellable period of 2.5 years with effect from
1 March 2019. Under the agreement, eight instalments of Rs. 12 million are to be paid
quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL.
Incremental borrowing rate of CCL is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put
it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of FVLL and CCL
to record the above transactions.
(15)
Financial Accounting and Reporting-II
Q.6
Page 4 of 7
Following are the summarized statements of financial position of Pistachio Limited (PL),
Mint Limited (ML) and Jalapeno Limited (JL) as on 31 December 2019:
Property, plant and equipment
Investment in ML at cost
Investment in JL at cost
Inventories
Trade receivables
Cash and bank balances
Share capital (Rs. 10 per share)
Share premium
Retained earnings
Liabilities
PL
ML
JL
--------- Rs. in million --------850
750
500
900
170
300
340
200
240
200
150
60
170
50
2,520
1,460
900
1,400
780
340
2,520
700
100
480
180
1,460
400
340
160
900
Additional information:
(i)
(ii)
Details of PL's investments are as follows:
Date of
investment
Holding %
Investee
1-Jan-19
1-Apr-19
25%
80%
JL
ML
Retained earnings
of investee
Rs. in million
200
360
The following considerations relating to acquisition of ML’s shares are still unrecorded:


Transfer of PL's freehold land having carrying value and fair value of Rs. 88 million
and Rs. 108 million respectively.
Cash of Rs. 115 million would be paid in February 2020 if ML's net profit for the
year 2019 would increase by 20% as compared to last year. Fair value of this
consideration on acquisition date was estimated at Rs. 70 million. At year-end, the
said target has been achieved by ML.
(iii) On the date of investment, the fair values of each share of ML and JL were Rs. 18 and
Rs. 16 respectively.
(iv) At the date of acquisition of ML, carrying values of ML’s net assets were equal to fair
value except for inventory which was carried at Rs. 130 million and had a fair value of
Rs. 180 million. 20% of this inventory is still included in ML's inventory as at
31 December 2019.
(v) On 1 July 2019, ML sold a machine to PL for Rs. 55 million at a gain of Rs. 10 million.
The remaining useful life of the machine at the time of disposal was 5 years.
(vi) JL paid 10% dividend for the half year ended 30 June 2019. PL recorded this as other
income.
(vii) During the year, PL made sales of Rs. 72 million to JL at 20% above cost. 60% of these
goods were sold by JL during the year.
(viii) As at 31 December 2019, PL has receivable of Rs. 8 million from JL.
(ix) An impairment test carried out at year-end has indicated that goodwill of ML has been
impaired by 10%.
(x) PL measures non-controlling interest at the acquisition date at its fair value.
(xi) PL’s discount rate is 14%.
Required:
(a) Prepare PL’s consolidated statement of financial position as at 31 December 2019 in
accordance with the requirements of IFRSs.
(b) List down the additional information having no effect in your working in (a) above.
(18)
(02)
Financial Accounting and Reporting-II
Q.7
Page 5 of 7
The following balances have been extracted from the trial balance of Mint Lemonade Limited
(MLL) as at 31 December 2019:
Trade receivables
Capital work in progress
Allowance for bad debts as on 1 January 2019
Sales
Cost of goods sold
Research and development
Dividend receivable
Administrative expenses
Selling and distribution expenses
Finance cost
Dividend income
Capital gain
Other income
Rs. in million
1,200
910
44
2,500
1,320
180
10
302
200
48
30
50
36
While finalizing the financial statements of MLL, the following issues have been noted:
(i)
Trade receivables include a balance of Rs. 40 million which needs to be written off. MLL
maintains a provision for doubtful debts at 5% of trade receivables.
As per tax laws, only write offs are allowed as deduction.
(ii)
Capital work in progress includes interest cost of Rs. 84 million on specifically acquired
bank loan during the year. However, interest of Rs. 16 million earned by investing
surplus funds available from the bank loan has been included in other income.
As per tax laws, borrowing costs are allowed when incurred.
(iii) Research and development represents cost incurred for a new product started on
1 February 2019. The recognition criteria for capitalization of internally generated
intangible asset was met on 1 May 2019. The product was launched on 31 October 2019.
It is estimated that the useful life of this new product will be 5 years. It may be assumed
that all costs accrued evenly over the period.
Research and development cost is allowed as tax deduction over 10 years.
(iv)
Tax depreciation for the year ended 31 December 2019 exceeded accounting
depreciation already recorded in books, by Rs. 200 million.
(v)
Office building of ML had net book value of Rs. 900 million on 31 December 2018 with
remaining useful life of 12 years. During 2019, MLL decided to opt revaluation model
for its building. Consequently, fair value of building at start of 2019 was determined at
Rs. 1,200 million. Such revaluation has not yet been accounted for. Depreciation on
office building under cost model has already been recorded in the books.
Revaluation does not affect taxable profit.
(vi)
Capital gain is exempt from tax. Dividend was taxable on receipt basis at 15% in 2019.
However, with effect from 1 January 2020, dividend received would be taxable at 20%.
(vii) Applicable tax rate is 32% except stated otherwise.
Required:
(a) Prepare MLL’s statement of profit or loss and other comprehensive income for the year
ended 31 December 2019.
(b) Prepare note on taxation for inclusion in MLL’s financial statements for the year ended
31 December 2019 including a reconciliation to explain the relationship between tax
expense and accounting profit.
(08)
(12)
Financial Accounting and Reporting-II
Q.8
Page 6 of 7
For the purpose of this question, assume that the date today is 1 February 2020.
You are the Finance Manager of Wonderland Limited (WL). Your assistant is preparing
financial statements of WL for the year ended 31 December 2019. He has brought following
matters for your consideration:
(i)
In mid of 2019, WL launched new model of laptops with the name of Champ which
became popular among customers.
In November 2019, WL started receiving complaints about incidents of electric shock
and excessive heating. Some of these incidents resulted in serious injuries to customers.
Several customers filed claims for damages with WL for injuries. The matter was highly
publicized in media as well.
On 1 December 2019, WL suspended sales of Champ. WL conducted an inquiry which
led to the conclusion that these incidents were happening because of defective chargers.
On 25 December 2019, WL announced that all customers can collect the replacement
charger from 15 January 2020 and onwards from WL's service center without any
additional cost. The sales of Champ will also resume on the same date at a reduced
price. Further, it has been internally decided that a free USB shall be given to customers
coming for collecting replacement chargers as a good gesture.
The matter was raised with the supplier of chargers i.e. Battery Limited (BL). On
20 January 2020, BL admitted the fault and agreed to only adjust the cost of the defective
chargers against the future purchases.
In respect of this matter, your assistant has proposed a provision of Rs. 105.3 million in
financial statements for the year ended 31 December 2019 having the following breakup:
Rs. in million
1.
6.8
2.3
4.9
2.
Recovery from BL
3.
Cost of USBs to be given
4.
Expected litigation cost and settlements in respect of claims for
damages for injuries to customers including Rs. 5.4 million for
claims made in January 2020 and Rs. 10 million for claims
expected to be received in future.
25.9
5.
Decrease in WL share price in December 2019
38.4
6.
Marketing cost to be incurred in 2020 to counter the negative
publicity by the incidents
15.5
7.
(ii)
Cost of replacement chargers to be acquired for:
 customers
 wholesaler and retailers
 closing stock of Champ with WL
Decrease in gross profit for 2020 due to reduction in selling price
(11.5)
5.8
17.2
105.3
In November 2019, WL introduced a promotion scheme in which a scratch card was
included in each pack of one of its products. These cards carry cash prizes ranging from
Rs. 100 to Rs. 50,000 and are valid for claims till 29 February 2020.
All scratch cards were printed by system and packed directly into the product without
any human interaction. As per the scheme, WL had decided to include total prizes of
Rs. 25 million.
(10)
Financial Accounting and Reporting-II
Page 7 of 7
As at year-end, WL had already received claims for prizes worth Rs. 32 million. An
inquiry has led to the conclusion that the software for printing scratch card has certain
programming errors which has led to printing of unknown amount of total prizes as
compared to the original plan of WL.
Further, claim of Rs. 12 million had been received till 31 January 2020. Considering the
reputation, WL would honour all the claims.
Required:
Discuss how the above issues should be dealt with in the financial statements of WL for the
year ended 31 December 2019. Support you answer in the context of relevant IFRSs.
(THE END)
(04)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
A.1
Date
1-May-19
1-May-19
1-Aug-19
Debit
Credit
Rs. in '000
Description
Biological Assets
750×52,640(56,000×94%)
P & L / Loss on initial recognition
Cash / Bank
750×56,000×1.03
39,480
3,780
43,260
Carriage expense
Cash / Bank
2,000
2,000
Food expense / Food inventory 150,000×164×1.05
Payable
150,000×30%×164
Cash/Bank
(Bal.)
31-Dec-19 Biological Assets (W-1)
P & L / Gain on re-measurement
25,830
7,380
18,450
24,205
24,205
31-Dec-19 Payable
150,000×30%×(164–152)
P & L / Exchange gain
31-Dec-19 Food inventory
Food expense
25,830×40%
540
540
10,332
10,332
W-1: Gain on re-measurement of Biological assets
Closing carrying value
2,750×57,340(61,000×94%)
Opening
2,000×47,000(50,000×94%)
Purchase on 1-May-2019
A.2
Business model
Cash flows
Categories
Initial
measurement
Subsequent
measurement
A.3
(a)
Amortized Cost
Hold to collect
Solely payment of
principal and interest
Only debt securities
Fair value plus
transaction cost
Amortized cost
F.V through OCI
Hold to collect and
sell
Solely payment of
principal and interest
Debt and equity
securities
Fair value plus
transaction cost
Fair value
Change in net profit:
Increase in depreciation expense
Increase in finance cost
Decrease in net profit
Change in assets:
Increase in property, plant and equipment
Rs. in '000
157,685
94,000
39,480
(133,480)
24,205
F.V through P/L
Hold to sell
No condition
Debt and equity
securities
Fair value
Fair value
22.82(W-1)÷4.5
22.82(W-1)×12%
22.82–5.07
Rs. in million
(5.07)
(2.74)
(7.81)
17.75
Page 1 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
Change in liabilities:
Increase in decommissioning liability
22.82+2.74
25.56
W-1: PV of change in decommissioning liability
22.82[(88–50) ×1.12‒4.5]
(b)
In the given scenario, Jamal may be in breach of the following fundamental principles
of Code of Ethics for Chartered Accountants:
(i)
Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional
and business relationships. It seems that the decision to defer incorporation of
new decommissioning cost would make financial statements misleading.
(ii) Principle of professional behaviour:
This principle imposes an obligation on all chartered accountants to comply with
the relevant laws and regulation and avoid any action that discredits the
profession. Jamal has breached this principle as his decision to defer
incorporation of new decommissioning cost is not in accordance with IFRSs.
A.4
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(c)
(c)
(b)
(c)
(c)
(a)
(a)
Income tax payable
only when the conditions are met
IFRS and Fifth Schedule
No change in sales revenue and increase in finance income
capitalized and amortized over 15 years
IAS 16 as a combined asset
only in the consolidated financial statements
A.5
Lessor (FVLL)
Date
1-Jan-19
Debit
Credit
Rs. in million
200
200
Description
Machine
Cash/Bank
30-Nov-19 Cash
Rental income
31-Dec-19 Receivable
12
Rental income
12
12
32(12×8×1÷2.5×10÷12)–
20
20
31-Dec-19 Depreciation expense
Accumulated depreciation
(200–16)÷8
23
23
Lessee (CCL)
Date
Description
1-Mar-19
ROU
1-Apr-19
ROU
12×6.7327(1–1.04–8÷0.04)× (1.04)‒2
Lease obligation
Debit
Credit
Rs. in million
74.69
74.69
4
Cash/Bank
4
Page 2 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
30-Nov-19 Interest expense
Lease obligation
Cash/Bank
2.99+3.11+3.23 (W-1)
12.00
31-Dec-19 Interest expense
Interest payable
2.89(W-1)÷3
A.6
(a)
0.96
0.96
31-Dec-19 Depreciation expense (74.69+4)×(1÷2.5)
×(10÷12)
Accumulated depreciation
W-1: Amortization schedule
Date
1-Mar-19
30-May-19
31-Aug-19
30-Nov-19
29-Feb-20
9.33
2.67
26.23
26.23
Rs. in million
Interest
Instalments
2.99
3.11
3.23
2.89
12.00
12.00
Balance
74.69
77.68
80.79
72.02
62.91
Pistachio Limited
Consolidated statement of financial position
As on 31 December 2019
Rs. in million
Non-current assets:
Property, plant and equipment
Goodwill
Investment in associate
Current assets:
Inventories
Trade receivables
Cash and bank balances
850+750–88–9
120(W-1)–12
(W-5)
1,503.0
108.0
203.8
300+340+10(50–40)
240+200
60+170
650.0
440.0
230.0
3134.8
Equity & liabilities:
Share capital (Rs. 10 each)
Consolidated retained earnings
Non-controlling interest
Other liabilities
Contingent consideration
(W-3)
(W-4)
340+180
70+45
1,400
836.0
263.8
520.0
115.0
3,134.8
70×20%×18
900.0
108.0
70.0
252.0
1,330.0
(1,210.0)
120.0
W-1: Computation of goodwill
Cash consideration
Land at fair value
Contingent consideration
Fair value of NCI
Fair value of net assets
Goodwill
(W-2)
Page 3 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
W-2: Net assets of ML
Share capital
Share premium
Retained earnings
Fair value adjustment
Unrealised gain on disposal
Post-acquisition
W-3: Consolidated retained earnings
PL
Post-acquisition of ML
Gain on transfer of land
Impairment of goodwill
Increase in contingent consideration
Share in post - acquisition JL
Unrealised profit on inventory stock
50×20%
10×4.5÷5
At acquisition
At reporting
date
date
-------- Rs. In million -------700.0
700.0
100.0
100.0
360.0
480.0
50.0
10.0
(9.0)
1,210.0
1,281.0
71.0
71 (W-3)×80%
108–88
120×10%×80%
115–70
(340–200)×25%
72×20÷120×40%×25%
Rs. in million
780.0
56.8
20.0
(9.6)
(45.0)
35.0
(1.2)
836.0
W-4: Non-controlling interest
At acquisition
Post-acquisition of ML
Impairment of goodwill
71(W-2)×20%
120×10%×20%
252.0
14.2
(2.4)
263.8
W-5: Investment in associate - JL
At cost
Share in post-acquisition
Unrealised profit in closing inventory
(340–200)×25%
(W-3)
170.0
35.0
(1.2)
203.8
(b) Information to be ignored:
 (vi) Dividend received from JL
 (viii) Receivable from JL
 (xi) Discount rate
A.7
(a) Mint Lemonade Limited
Statement of comprehensive income for the year ended 31 December 2019
Sales
Cost of sales
Gross profit
Selling and distribution expenses
Administrative expenses
Operating profit
Finance cost
Other income
Profit before tax
Taxation
200+40+14 [(1,200–40)×5%–44]
(W-1)
30+50+20 (36‒16)
[req.(b)]
Rs. in million
2,500.00
(1,320.00)
1,180.00
(254.00)
(391.00)
535.00
(48.00)
100.00
587.00
(167.24)
Page 4 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
Profit for the year
419.76
Other comprehensive income:
Revaluation surplus
Related deferred tax
300×32%
Total comprehensive income for the year
W-1: Administrative expense
Given
R&D expense
Amortisation of intangible asset
Additional depreciation on office building
180×3÷9
120÷5×2÷12
300÷12
300.00
(96.00)
204.00
623.76
302.00
60.00
4.00
25.00
391.00
(b) Mint Lemonade Limited
Notes to the financial statements for the year ended 31 December 2019
Rs. in million
1
1.1
Taxation
Current tax
Deferred tax
(W-1)
(W-2)
Relationship between tax expense and accounting profit
Accounting profit before tax
Tax @ 32%
Effect of low rate on dividend:
20×17%(32%–15%)+10×12%(32%–20%)
Exempt income
50×32%
Average effective tax rate
W-1: Current tax liability
Profit before tax[req.(a)]
Increase in provision for doubtful debts
R&D expense
Accounting amortization
Tax amortization
Capital gain exempt
Borrowing cost
Investment income deducted from borrowing cost
Tax depreciation exceeding accounting depreciation
Dividend income taxable at different rate
Taxable business income
Tax on business income
Tax on dividend income
W-2: Deferred tax expense / (credit)
Provision for doubtful debts
For the year tax depreciation exceeded acc. dep.
Intangible
58–44
(180÷10)*
200–25
324×32%
20×15%
14×32%
175×32%
(60+4–18)×32%
106.68
60.56
167.24
587.00
187.84
(4.60)
(16.00)
167.24
587.00
14.00
60.00
4.00
(18.00)
(50.00)
(84.00)
16.00
(175.00)
(30.00)
324.00
103.68
3.00
106.68
(4.48)
56.00
(14.72)
Page 5 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Spring 2020
Borrowing cost capitalised
Dividend receivable
A.8
(i)
(84–16)×32%
10×20%
21.76
2.00
60.56
The treatment of each of item would be as follows:
1.
Cost of replacement chargers to customers, wholesaler and retailers would be
provided in 2019 due to the constructive obligation arising out of the announcement
made on 25 December 2019.
Cost of replacement chargers would be included as deduction in calculating NRV of
the closing stock of Champ and would be compared with the cost of the stock in books
for assessing potential NRV adjustment.
2.
Reimbursement from BL would be recognized in 2019 only when it is virtually
certain as at 31 December 2019 that BL would reimburse the cost which does not
seems to be the case here due to subsequent agreement of BL on 20 January 2020 for
the reimbursement.
3.
WL has no obligation as 31 December 2019 to give USBs to the customers. As giving
of USBs has not been announced. Therefore, provision need not be made at 31
December 2019.
4.
Provision for expected litigation and settlement cost in respect of all claim of Rs. 25.9
million should be made in 2019.
Sale of defective laptop is the obligating event in this respect which were made in
2019. The filing of claims in 2020 would be considered as adjusting event for 2019
financial statements.
(ii)
5.
The loss would not be recorded in WL’s book as market of company’s shares is not
reflected in the books of accounts.
6.
Marketing cost to be incurred in 2020 would not be recorded in 2019 as it is a
discretionary cost and there is no obligation to incur marketing cost at 31 December
2019.
7.
No entry needs to be made for decrease in gross profit for 2020 due to reduction in
selling price. However, the effect of decrease in selling price should be considered for
calculating NRV of the closing stock of Champ as at 31 December 2019.
In respect of claim received till year end of Rs. 32 million, WL should record an expense.
Further claim of Rs. 12 million received during January 2020 would be considered as an
adjusting event and should be recorded as an expense in 2019.
In respect of remaining claims which have not yet been received:
 WL has a present obligation to honor the claim for prizes as a result of past event i.e.
sale of product;
 It is probable that an outflow of economic benefits will be required to settle the
obligation;
 As cards of higher amount were printed and issued as compared to original plan, but
amount could not be determined due to absence of human intervention in printing the
cards.
It should be disclosed as contingent liability along with description that the amount is not
measurable due to the circumstances discussed above.
(THE END)
Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
EXAMINERS’ COMMENTS
SUBJECT
Financial Accounting &
Reporting II
SESSION
Certificate in Accounting and Finance (CAF)
Examination - Spring 2020
Passing %
1
42%
2
83%
3
44%
Question-wise
4
5
42%
19%
6
57%
7
23%
8
12%
Overall
30%
General:
An overall passing ratio of 30% is lower than the last two results of 50% and 39%. 25%
examinees were - short of 9 or lower marks that could have easily obtained them if they
had covered all areas of the syllabus. The highest score of 93 marks showed that the
paper could manage well.
The importance of the coverage of the syllabus has further increased due to the inclusion
of the short questions and MCQs in the paper. Almost, all areas of the syllabus were
examined in some way.
Performances in all questions of section B were poor except for Q6. Poor performance in
Q5 and Q8 was mainly due to the fact that such variations had not been examined
previously. Although examinees are using past papers as a key element of their
examination preparation, they need to remember that topics/sub-topics/variations not
covered in past papers are also examinable.
Question-wise common mistakes observed
Question 1



Cows purchased on 1 May 2019 were initially recognised at purchase price.
Custom duty was not included in the cost of the cattle feed.
Gain on re-measurement of biological assets was not calculated in respect of opening
stock of cows.
Question 2
The performance in this question was exceptionally well.
Page 1 of 3
Examiners’ Comments on Financial Accounting & Reporting II – CAF Examination
Spring 2020
Question 3


For calculating PV of change in decommissioning liability, examinees often used
long calculations though it could have been calculated by discounting the change in
liability at 12% for 4.5 years. Further, examinees often used 4 years or 5 years in their
calculations.
In part (b), majority of the examinees scored average marks by correctly identifying
the threats and safeguards but only those examinees earned full or nearly full marks
who were able to explain that how the fundamental principles were breached by the
CFO.
Question 4
MCQs at serial (iv) and (v) were least well answered.
Question 5




Examinees could not identify that lease should have been classified as operating in
the books of FVLL (lessor).
Adjustment for accrued rental income at 31 December 2019 was either not made or
made with incorrect amount.
Present value of the lease payments was often calculated incorrectly due to quarterly
payments and rent free period.
Depreciation on right of use assets for 2019 was calculated for 9 months.
Question 6




Contingent consideration was discounted though it was payable within one year.
Further, at reporting date, amount of contingent consideration was not updated to Rs.
115 million.
Fair value adjustment on inventory of ML at 31 December 2019 was not taken.
Unrealised profit in closing inventory of JL was deducted from inventories.
Impairment of goodwill was fully charged to consolidated retained earnings.
Question 7






Other income was included in other comprehensive income.
Examinees could not calculate the figure for doubtful debts correctly.
Examinees did not present the impact of related deferred tax on revaluation surplus.
While calculating current tax, effect of investment income deducted from borrowing
cost and additional accounting depreciation on office building were not incorporated.
The effect of low rate on dividend was not included or included with incorrect
amount in the reconciliation.
Deferred tax was not computed on borrowing cost capitalised and dividend
receivable.
Page 2 of 3
Examiners’ Comments on Financial Accounting & Reporting II – CAF Examination
Spring 2020
Question 8




Examinees just quoted text from the standards without reference to the question
and/or did not form their own opinion. Instead they relied on statement such as “if it
is an adjusting event, this should be the accounting treatment or otherwise this will be
the treatment”.
In part (i), examinees had a fair idea of treatment. However, it was generally noted
that proper reasoning for the same was not given by most of the examinees due to
which they were not able to secure high marks in this question.
Discussion on potential NRV adjustment in respect of cost of replacement chargers
and decrease is selling prices of laptop was often missing in the answers.
In part (ii), examinees did not mention treatment for remaining amount of claims
which have not yet been received, and the fact that they would be disclosed as
contingent liability along with proper description that the amount is not reasonably
measurable due to the circumstances.
The End
Page 3 of 3
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2020
Note regarding marking scheme:
The marking scheme is given as a guide. Markers also award marks for alternative approaches to a
question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.
Mark(s)
Entries on:
1 May 2019
1 August 2019
31 December 2019 for re-measurement of biological asset
31 December 2019 - Others
2.0
1.5
2.5
2.0
A.2
0.5 mark for each cell of the table
7.0
A.3
(a)
(b)
0.5 mark for identification of each breach of fundamental principles and 01 mark
for its explanation
A.1
Computation of change in decommissioning liability
Change in net profit
Change in assets and liabilities
2.0
1.5
1.5
3.0
A.4
Marks as mentioned on the question paper against each MCQ
8.0
A.5
Entries in the books of Lessor in respect of:
acquisition of machine
rental income
depreciation
0.5
3.5
1.5
Entries in the books of Lessee in respect of:
recognition of ROU
interest
depreciation
3.5
4.0
2.0
A.6
Property, plant and equipment
Goodwill
Investment in associate
Current assets
Consolidated retained earnings
Non-controlling interest
Liabilities
(a)
(b)
Up to 01 mark for each item
2.0
3.5
2.0
2.0
5.0
2.0
1.5
2.0
Page 1 of 2
Financial Accounting and Reporting - II
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2020
A.7
(a)
Adjustment to expenses
Adjustment to other income
Presentation of profit or loss
Presentation of other comprehensive income
(b)
Computation of current tax (0.5 mark for each item except depreciation
which had 01 mark)
Reconciliation between tax expense and accounting profit
Computation of deferred tax expense (01 mark for each item)
A.8
(i)
(ii)
Mark(s)
4.0
1.0
1.5
1.5
6.0
2.0
4.0
Discussion related to:
cost of replacement chargers
recovery from BL
cost of USBs to be given
expected litigation cost and settlement of claims
decrease in WL share price
marketing cost
decrease in gross profit
2.5
1.5
1.0
2.0
1.0
1.0
1.0
Discussion related to:
claims already received
claims not yet received
disclosure
1.0
1.5
1.5
(THE END)
Page 2 of 2
Certificate in Accounting and Finance Stage Examination
26 September 2020
3 hours – 100 marks
Additional reading time – 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Financial Accounting and Reporting-II
Instructions to examinees:
(i)
Answer all EIGHT questions.
(ii)
Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.
Section A
Q.1
On 1 January 2019, Jannat Limited (JL) issued 1.6 million debentures of Rs. 100 each at a
premium of Rs. 10 each. The transaction cost associated with the issuance of these debentures
was Rs. 5.5 per debenture. The coupon interest rate is 16% per annum payable annually on
31 December. Khushi Limited (KL) purchased 0.32 million of these debentures on
1 January 2019.
On 1 January 2019, the approximate effective interest rates were 15% and 14% per annum for
JL and KL respectively. As on 31 December 2019, the debentures were quoted on Pakistan
Stock Exchange at Rs. 112 each.
Debentures are subsequently measured at amortized cost by JL and fair value through profit
or loss by KL.
Required:
Prepare journal entries in the books of JL and KL for the year ended 31 December 2019.
Q.2
(07)
On 16 June 2020, an aircraft of Sukoon Airlines Limited (SAL) made an emergency landing
near a factory building. Though all persons on board were safe, the nearby factory was
damaged. As a result, two factory workers lost their lives and five workers were injured.
After one week of this accident, SAL’s CEO informed in a press conference that SAL will pay
Rs. 1.5 million for each loss of life and Rs. 1 million for each injured worker.
On 8 July 2020, the factory owner filed a claim of Rs. 25 million for factory damages. The
case is still pending; however, SAL’s legal advisor is of the view that there is 70% probability
that the amount of damages would be Rs. 20 million and 30% probability that the amount
would be Rs. 15 million.
Due to this accident, the aircraft was damaged beyond repairs and consequently SAL cannot
use this aircraft anymore. The aircraft was acquired on lease on monthly rental of
USD 0.5 million for 10 months expiring on 31 October 2020. As per lease agreement, if
aircraft faces any accident, SAL is required to pay monthly rentals to the lessor till settlement
of insurance claim. The insurance claim was settled on 31 August 2020.
Required:
In the context of relevant IFRSs, discuss how the above issues should be dealt with in the
financial statements of SAL for the year ended 30 June 2020.
(07)
Financial Accounting and Reporting-II
Q.3
Page 2 of 7
Roshni Limited (RL) is a listed company and is engaged in manufacturing of textile products.
RL generates 30% of its revenue from exports to Middle East, out of which 60% are made to
only one customer i.e. Hakeem Limited. RL has various operating segments. Apart from
external sales, some of these segments make internal sales as well.
Following amounts have been extracted from RL's draft financial statements for the
year ended 30 June 2020:
Revenue
Operating expenses
Profit before tax
Total assets
Total liabilities
Rs. in million
2,530
(2,050)
455
1,600
980
Detailed financial information is reported internally to the chief operating decision maker of
each segment. However, following disclosure on operating segments is prepared for inclusion
in notes to the financial statements for the year ended 30 June 2020:
External revenue
Operating expenses
Net interest
Profit before tax
Assets
Spinning
Weaving
Others
Total
--------------------- Rs. in million --------------------1,010
560
960
2,530
(760)
(460)
(830)
(2,050)
(43)
18
(25)
207
118
130
455
700
350
490
1,540
Required:
Prepare list of errors and omissions in the above disclosure. (Redrafting of disclosure is not required) (08)
Q.4
Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions.
(i)
In relation to IAS 21, which of the following statements is correct?
(a)
(b)
(c)
(d)
(ii)
Exchange gains and losses arising on the retranslation of monetary items are
recognised in other comprehensive income for the period
Non-monetary items carried at fair value in a foreign currency are retranslated at
the date when the fair value was measured
An intangible asset is a monetary item
Non-monetary items carried at cost in a foreign currency are retranslated at the
reporting date
(01)
An entity acquires property on lease for a non-cancellable period of 3 years. The lease
payments are payable semi-annually in arrears beginning from first year. What would
be the impact of this transaction on lessee’s current and gearing ratios upon
commencement of lease?
(a)
(b)
(c)
(d)
Decrease in current ratio as well as gearing ratio
Decrease in current ratio and increase in gearing ratio
Increase in current ratio and decrease in gearing ratio
Increase in current ratio as well as gearing ratio
(02)
Financial Accounting and Reporting-II
(iii)
Page 3 of 7
Fazl Limited owns a herd of cows recorded at Rs. 36 million on 1 January 2019. At
31 December 2019, these cows have a fair value of Rs. 50 million. A commission of 4%
would be payable upon sale.
What is the correct accounting treatment for the cows at 31 December 2019 according
to IAS 41?
(a)
(b)
(c)
(d)
(iv)
Which of the following is one of the conditions set out in IFRS 16 for an arrangement
to be classified as a lease?
(a)
(b)
(c)
(d)
(v)
The lessee has the right to obtain substantially all of the economic benefits from
use of the asset
The lease term covers substantially all of the economic life of the asset
The lessor has a substantive right of substitution
The lessor has the right to direct the use of the asset
(01)
Which of the following is NOT a disclosure requirement under the Fifth Schedule of
the Companies Act, 2017?
(a)
(b)
(c)
(d)
(vi)
Hold at Rs. 36 million
Re-measure to Rs. 50 million, taking gain of Rs. 14 million to the profit or loss
Re-measure to Rs. 48 million, taking gain of Rs. 12 million to other
comprehensive income
Re-measure to Rs. 48 million, taking gain of Rs. 12 million to the profit or loss
(01)
Distinction between capital and revenue reserves
General nature of any un-availed credit facilities
Capacity of an industrial unit
Remuneration of chief executive, directors and executives
(01)
Which of the following is correct in accordance with IAS 21?
(a)
(b)
(c)
(d)
Functional currency and presentation currency of an entity must be same
Functional currency and presentation currency of an entity must be different
Functional currency of an entity is identified by reference to environment of the
business
Functional currency of an entity is identified by reference to the functional
currency of its parent entity
(01)
(vii) IAS 41 applies to:
(a)
(b)
(c)
(d)
change in fair value of a herd of livestock
logs held for sale in a wood yard
cost of developing a new type of crop seed
cost of making irrigation system having life of more than 1 year
(01)
(viii) You are working in finance department of Kamyaab Motors Limited (KML), a listed
company. The draft results of KML for the year are encouraging and are likely to
increase KML’s share price upon public announcement. Your best friend is heavily in
debt and has recently asked for your assistance. He has helped you on numerous
occasions in the past. In the context of ICAP’s Code of Ethics, you should:
(a)
(b)
(c)
(d)
keep confidentiality about KML’s results; however, you can buy KML’s shares to
use the gain upon disposal to help your friend
tell your friend about KML’s results and let him decide whether he should buy
KML’s shares or not
keep confidentiality about KML’s results by all means
keep confidentiality about KML’s results but just tell your friend to buy the
KML’s shares
(02)
Financial Accounting and Reporting-II
Page 4 of 7
Section B
Q.5
The following amounts are extracted from the records of Manzil Limited (ML), Himmat
Limited (HL) and Koshish Limited (KL) for the year ended 31 December 2019:
Sales
Cost of sales
Operating expenses
Other income
Finance cost
Retained earnings as at 31 December 2019
ML
HL
KL
---------- Rs. in million ---------800
315
132
(540)
(180)
(97)
(114)
(60)
(6)
41
8
(20)
(12)
(5)
3,600
322
200
Additional information:
(i)
Details of ML’s investments are as follows:
(ii)
Date of
investment
Holding %
Investee
1 Aug 2015
1 May 2019
25%
60%
KL
HL
Share capital
(Rs. 10 each) of
investee
Rs. 400 million
Rs. 600 million
Consideration for acquisition of HL’s shares comprises of:


transfer of ML’s building having carrying value and fair value of Rs. 150 million
and Rs. 226 million respectively at acquisition date. The disposal of building has
been recorded at carrying value.
issuance of 16 million ordinary shares of ML after one month of acquisition. The
market price of ML’s shares at the date of acquisition was Rs. 30 each. However,
the market price increased to Rs. 32 when shares were issued.
(iii) At the date of acquisition of HL, carrying value of its net assets was equal to fair value
except the following:


A manufacturing plant whose fair value exceeded its carrying value by
Rs. 60 million. The remaining useful life of the plant on the acquisition date was
8 years.
A contingent asset of Rs. 50 million as disclosed in HL's financial statements
which had an estimated fair value of Rs. 15 million. At year-end, this contingent
asset is disclosed in HL's financial statements at Rs. 46 million.
(iv)
Impairment test carried out at year-end has indicated that goodwill of HL has been
impaired by 10%.
(v)
On 15 August 2019, HL and KL paid 5% dividend for the half year ended 30 June 2019.
ML recorded its share as other income.
(vi)
On 30 June 2019, KL sold a machine having carrying value of Rs. 60 million to ML for
Rs. 68 million. The remaining useful life of the machine at the time of disposal was
5 years.
(vii) On 15 November 2019, HL and KL purchased 600,000 and 400,000 ordinary shares of
Jazba Limited (JL) respectively at price of Rs. 150 each plus 2% transaction cost. HL
and KL classified the investment as financial asset at fair value through other
comprehensive income. These investments have not been re-measured at year-end.
Market price of JL’s share was Rs. 138 at year-end. Total share capital of JL consists of
20 million shares.
(viii) ML measures non-controlling interest at the proportionate share of acquiree’s
identifiable net assets.
Financial Accounting and Reporting-II
Page 5 of 7
Required:
Prepare ML’s consolidated statement of profit or loss and other comprehensive income for
the year ended 31 December 2019.
Q.6
(19)
Qabil Limited (QL) is in process of finalizing its financial statements for the year ended
31 December 2019. Following information pertains to QL’s intangible assets:
(i)
Intangible assets as at 31 December 2018 were as follows:
Cost
Accumulated amortization / impairment
Useful life
(ii)
Product
ERP
design
software
---- Rs. in million ---750
200
75
80
------- Years ------10
8
Cost incurred on development of product design was capitalised in 2018. The
competition for the product is increasing. QL has estimated the following net cash
inflows from the product:
Year
Net cash inflows
(Rs. in million)
2020
2021
2022
2023
2024
2025 & onwards
190
170
140
100
80
Nil
Pre-tax and post-tax discount rates are 12% and 10% respectively.
(iii)
On 1 January 2019, QL entered into an agreement to replace existing ERP software
with a new ERP software at a cost of Rs. 360 million. According to the agreement, 40%
payment was made on signing of the contract while the remaining amount was paid
evenly over customization and installation period which completed on
31 October 2019.
The entire cost of project was financed through a running finance from Honehaar Bank
at mark- up of 15% per annum. The software became operational on 1 November 2019.
QL expects to use it for a period of 9 years.
The existing ERP software will be continued till 31 December 2020.
(iv)
On 1 January 2019, QL acquired a licence for Rs. 600 million for a period of 5 years.
QL made an initial payment of Rs. 100 million and the remaining amount will be paid
in two equal instalments on 1 January 2020 and 2021. Cash price equivalent of the
license is Rs. 520 million.
On expiry of 5 years, the license is renewable for further five years at an insignificant
cost of Rs. 15 million. QL intends to renew the license and sell it at the end of 8th year.
In the absence of any active market, QL has estimated that residual value of the license
would be Rs. 80 million and Rs. 60 million at the end of 8th year and 10th year
respectively.
Required:
Prepare a note on ‘Intangible assets’ for inclusion in QL’s financial statements for the
year ended 31 December 2019 in accordance with the requirements of IFRSs.
(15)
Financial Accounting and Reporting-II
Q.7
Following information have been extracted from the
Fakhr Limited (FL) for the year ended 31 December 2019:
(i)
(ii)
financial
Page 6 of 7
statements
of
2019
2018
2017
Draft
Audited
Audited
--------- Rs. in million --------Net profit
84
98
72
Revaluation surplus arising during the year*
25
(14)
*Transfer to retained earnings is made upon de-recognition of related asset.
Share capital and reserves as at 1 January:
Share capital (Rs. 10 each)
Revaluation surplus
Retained earnings
2018
2017
----- Rs. in million ----300
300
102
102
348
276
(iii) On 1 March 2018, FL declared a final cash dividend of 10% for the year ended
31 December 2017. On 1 November 2018, FL issued 40% right shares to its ordinary
shareholders at Rs. 24 per share. On 1 August 2019, an interim bonus of 15% was
declared.
Following matters need to be incorporated in the draft financial statements of FL:
(i)
To provide more relevant and reliable information about investment property, it has
been decided to change the measurement basis for investment property from cost model
to fair value model.
The only investment property of FL is a building purchased on 1 January 2016 at a cost
of Rs. 150 million. 60% of the cost represents building component having estimated
useful life of 20 years and residual value of Rs. 10 million. The depreciation is included
in the above draft financial statements. The fair value of the investment property has
increased by 6% in each year since acquisition.
(ii)
It was identified that annual payments in respect of machine acquired on lease have
been recorded as rent expense.
FL entered into a lease agreement for a machine with Aaqil Limited (AL) for a
non-cancellable period of 7 years on 1 January 2018. Instalment of Rs. 25 million is to
be paid annually on 31 December each year. Implicit rate is 12% per annum.
Required:
Prepare FL’s statement of changes in equity (including comparative figures) for the year ended
31 December 2019. (‘Total’ column is not required)
(18)
Financial Accounting and Reporting-II
Q.8
Page 7 of 7
Dua Limited (DL) is in the process of finalizing its financial statements for the year ended
31 December 2019. The following information have been gathered for preparing the
disclosures relating to taxation:
(i)
Accounting loss before tax for the year amounted to Rs. 140 million. It includes:


(ii)
an amount of Rs. 2 million recovered from a customer whose debt had been
written off in 2018. As per tax laws, receivable written offs are allowed as
deduction.
dividend of Rs. 16 million earned against equity investment in a UK based
company. As per tax laws, this dividend income is exempt from tax in Pakistan as
20% tax was paid in UK.
The movement of owned property, plant and equipment for 2019 is as follows:
Accounting WDV
Tax base
------ Rs. in million ------Opening balance
1,700
1,116
Additions
460
480
Impairment
(72)
-*
Depreciation
(470)
(284)
Disposals
(144)
(92)
1,474
1,220
Closing balance
* impairment is not allowed for tax purposes.
Difference of Rs. 20 million in ‘Additions’ represents foreign exchange loss on
acquisition which was considered as part of the cost of the asset as per tax laws.
(iii)
As per tax laws, research expense for the year is allowable in the next year. Research
expense for the year amounted to Rs. 25 million (2018: Rs. 64 million).
(iv)
Rent expense is allowed for tax purposes on payment basis. Rent prepaid as at
31 December 2019 amounted to Rs. 6 million (2018: Rs. 1 million).
(v)
As on 31 December 2018, DL had carried forward tax losses of Rs. 90 million against
which DL had always expected that it is probable that future taxable profit will be
available.
(vi)
Tax rate is 35%.
Required:
(a)
Prepare a note on taxation for inclusion in DL's financial statements for the year ended
31 December 2019 and a reconciliation to explain the relationship between tax expense
and accounting profit.
(b)
Compute deferred tax liability/asset in respect of each temporary difference as at
31 December 2019 and 2018.
(THE END)
(11)
(05)
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
A.1
JL Books
General Journal
Date
Description
1-Jan-19
Cash/Bank
Debenture – amortized cost
1-Jan-19
Debenture – amortized cost
Cash/Bank
31-Dec-19
1,600×110
1,600×5.5
8,800
8,800
167,200(176,000–
8,800)×15%
Debenture – amortized cost (Bal.)
Interest expense
31-Dec-19 Debenture – amortized cost
Cash
Debit
Credit
----- Rs. in ‘000 ----176,000
176,000
25,080
25,080
25,600
160,000×16%
25,600
320×110
Debit
Credit
----- Rs. in ‘000 ----35,200
35,200
KL Books
General Journal
Date
1-Jan-19
Description
Investment/Debenture – FVTPL
Cash/Bank
31-Dec-19 Cash/Bank (320×100×16%)
Interest income
31-Dec-19 Investment/Debenture –FVTPL
Gain on fair value adj.(P & L) 320×2(112 –
110)
A.2
5,120
5,120
640
640
Loss/injuries of workers
As CEO committed in a press conference, it is constructive obligation/valid expectation
that SAL would compensate factory workers. Therefore, SAL should make a provision of
Rs. 8 million (2×1.5+5×1) in this regard.
Factory damages
The claim was filed subsequent to year-end but the obligating event i.e. emergency
landing occurred before the year-end so this is an adjusting event.
As per legal advisor advice, SAL would be liable to pay damages in any case but amount is
uncertain. So SAL should make a provision for most likely amount i.e. Rs. 20 million.
Aircraft lease
Since aircraft is no more usable for SAL and insurance claim is expected to settle by 31
August 2020, the contract became onerous. Therefore, SAL should make a liability for
rentals of July and August i.e. USD 1 million (0.5 × 2).
USD amount should be translated into PKR by applying closing exchange rate.
Page 1 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
A.3
List of errors/omissions










Revenue from transactions with other operating segments have not been disclosed
separately.
Revenue from reportable segments is comprised of 62% of total revenue against the
requirement of 75% so another segment needs to be disclosed separately.
Interest income of spinning and weavings segments are reported on net basis. Rather,
interest income and expense needs to be disclosed separately.
Total assets in disclosure does not match with total assets reported in financial
statements.
Segment wise liabilities have not been disclosed.
Since export represents 30% of sales, geographical segment should also be disclosed.
Sales to HL consist of 18% of total sales so it should also be disclosed separately.
Depreciation and amortization should also be disclosed.
Income tax expense should also be disclosed.
Material items of income and expense should also be disclosed.
A.4
(i)
A.5
Manzil Limited
Consolidated statement of profit or loss and other comprehensive income
For the year ended 31 December 2019
(b) Non-monetary items carried at fair value in a foreign currency are
retranslated at the date when the fair value was measured
(ii) (b) Decrease in current ratio and increase in gearing ratio
(iii) (d) Re-measure to Rs. 48 million, taking gain of Rs. 12 million to the profit or loss
(iv) (a) The lessee has the right to obtain substantially all of the economic benefits
from use of the asset
(v) (b) General nature of any un-availed credit facilities
(vi) (c) Functional currency of an entity is identified by reference to environment of
the business
(vii) (a) change in fair value of a herd of livestock
(viii) (c) keep confidentiality about KML’s results by all means
Sales
800+315×8/12
Cost of sales
540+180×8/12+5(60÷8×8÷12)
Gross profit
Operating expenses
114+60×8/12+12.4(124×10%)
Other income
41+76(226–150)–18(600×5%×60%)–5(400×5%×25%)
Share of associate’s profit
(W-2)
Finance cost
20+12×8÷12
Net Profit
Rs. in million
1,010.0
(665.0)
345.0
(166.4)
94.0
6.2
(28.0)
250.8
Other Comprehensive Income
91.8(0.6×150×1.02)–
Loss on re-measurement of investment
82.8(0.6×138)
Share of associate’s OCI
6[61.2(0.4×150×1.02)–55.2(0.4×138)]×25%
Total comprehensive income
(9.0)
(1.5)
(10.5)
240.3
Page 2 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
Profit or loss attributable to:
Owner of the parent (Bal.)
Non-controlling interests
Comprehensive income attributable to:
Owner of the parent (Bal.)
Non-controlling interests
W-1: Computation of goodwill
Building
Shares
NCI
((W-1)42–5)×40%
236.0
14.8
250.8
14.8–3.6(9×40%)
229.1
11.2
240.3
16×30
Rs. in million
226.0
480.0
706.0
388.0
(970×40%)
Net assets of ML:
Share capital
Retained earnings
322–42{(315–180–60–12)×8/12}+30(600×5%)]
Excess fair value – manufacturing plant
W-2: Share of associate’s profit
Profit
Share of unrealized profit on sale of machine
A.6
(132–97–6–5+8)×25%
(68–60)×4.5/5×25%
600.0
310.0
60.0
970.0
124.0
Rs. in million
8.0
(1.8)
6.2
Qabil Limited
Notes to the financial statements
For the year ended 31 December 2019
Intangible assets:
Opening:
1 January 2019
Acc. amortization/impairment
Separate acquisition
Amortization
Product design
ERP software
License
----------------- Rs. in million ----------------750.00
(75.00)
675.00
(112.5)
(675÷6)
200
(80)
120
(W-1) 391.50
(67.25)
60(120 ÷ 2) +7.25
520.00
(65.00)
(520–0)/8
(391.5÷9×2/12)
Impairment (bal. fig)
Closing
Cost
Acc. amortization/impairment
Measurement basis
Useful life (in years)
Amortization method
(49.5)
(W-2)513.00
750.00
(237.00)
513.00
Cost model
6
Straight line
444.25
455.00
591.50
(147.25)
444.25
520.00
(65.00)
455.00
Cost model
2–9
Straight line
Cost model
8
Straight line
Page 3 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
W-1: Cost of software
Purchase price
Borrowing cost: On advance
On remaining payments
(360×40%×15%)×(10÷12)
[(360×60%×15%)×10÷12]
÷2
W-2: Value-in-use of product
Cash flow
Years
Rs. in million
2020
190
2021
170
2022
140
2023
100
2024
80
A.7
Discount factor
12%
0.89
0.80
0.71
0.64
0.57
@
Rs. in million
360.00
18.00
13.50
391.50
Amount
Rs. in million
169
136
99
64
45
513
Fakhr Limited
Statement of changes in equity
For the year ended 31 December 2019
Ordinary
Share
Revaluation
Retained
share capital premium
surplus
earnings
-------------------- Rs. in million -------------------Balance as at 31 December 2017 (As
given)
Effect of change in accounting policy
300.00
-
-
102.00
-
348.00
26.54
(13+13.54)(W-1)
Balance as at 31 December 2017 – Restated
Final cash dividend @ 10% for 2017
Right issue @ 40%
300.00
120.00
168.00
102.00
-
374.54
(30.00)
-
(300×40%) (300÷10×40%×14)
Total comprehensive income for the year
ended 31 December 2018
– Net profit: Restated
98+14.11 (W-1)–4.99 (W-2)
– Other comprehensive income
Balance as at 31 December 2018 – Restated
Interim bonus dividend @ 15% for 2019
Total comprehensive income for the year
ended 31 December 2019
– Net profit
84+14.72 (W-1)–3.63 (W-2)
– Other comprehensive income
Balance as at 31 December 2019
W-1: Change in accounting policy
Increase in fair value
Depreciation
(150×60%-10)÷20
W-2: Correction of errors
Reversal of rent expense
-
-
-
107.12
420.00
63.00
168.00
-
(14.00)
88.00
-
451.66
(63.00)
483.00
168.00
25.00
113.00
95.09
483.75
2016
2017
2018
2019
10.72
9.00
9.54
10.11
(150×6%)
(9×106%)
(9.54×106%)
(10.11×106%
)
4.00
4.00
4.00
4.00
13.00
13.54
14.11
14.72
2018
25.00
2019
25.00
Page 4 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
Depreciation of ROU
Interest:
2018: (114.09×12%)
2019: 102.78[114.09–11.31(2513.69)]×12%
A.8
114.09(25×4.5636 @ AF 12%)÷7
(16.30)
(16.30)
(13.69)
(12.33)
(4.99)
(3.63)
(a) Dua Limited
Notes to the financial statements
For the year ended 31 December 2019
Tax expense:
Current tax
Deferred tax
(W-1)
(82.25–150.85)[req. (b)]
Reconciliation between tax expense and accounting profit:
Loss before tax
Tax @ 35%
Effect of low rate on dividend
W-1: Current Tax:
Loss before tax
Dividend income
Exchange loss capitalized
Accounting depreciation exceeded tax depreciation
Impairment loss
Lower tax base of disposals
Research for the year disallowed
Research for the previous allowed
Rent allowed on cash basis
16×15%
470–284
144–92
6–1
Adjustment of unused tax losses
Taxable income
Tax @ 35%
Tax on dividend
16×20%
Rs. in million
17.2
(68.6)
(51.4)
Rs. in million
(140.0)
(49.0)
(2.4)
(51.4)
Rs. in million
(140)
(16)
20
186
72
52
25
(64)
(5)
130
(90)
40
14.0
3.2
17.2
(b) Deferred tax liability/(asset) as at 31 December 2019:
Carrying
DTL /(A)
Tax base
Difference
value
@ 35%
------------------- Rs. in million ------------------PPE
1,474
1,220
254
88.90
Research
25
(25)
(8.75)
Prepaid rent
6
6
2.10
82.25
Deferred tax liability/(asset) as at 31 December 2018:
Carrying
DTL /(A)
Tax base Difference
value
@ 35%
---------------- Rs. in million ---------------PPE
1,700
1,116
584
204.40
Research
64
(64)
(22.40)
Page 5 of 6
Financial Accounting and Reporting-II
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020
Prepaid rent
1
Deferred tax assets on unused tax losses
(90×35%)
-
1
0.35
182.35
(31.50)
150.85
(THE END)
Page 6 of 6