Compilation of ICAP

Past Question
IFRS Based Questions

Santosh Adhikari & Kishan Thapa

Compilation of Past Papers (2008 to 2019) Santosh & Kishan

DISCLAIMER

The contents in this book is true and complete to the best of our knowledge. The authors/compilers
disclaim any liability in connection with the use of this contents.

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Compilation of Past Papers (2008 to 2019) Santosh & Kishan

Contents
Consolidated Financial Statements ............................................................................................................. 3
Investments in Associates and Joint Ventures .......................................................................................... 34
Preparation of Financial Statement ........................................................................................................... 35
Financial Instruments................................................................................................................................ 39
Earnings Per Share.................................................................................................................................... 49
Construction Contracts ............................................................................................................................. 54
Income Taxes ............................................................................................................................................ 56
Share Based Payments .............................................................................................................................. 61
Employee Benefits .................................................................................................................................... 66
Leases ....................................................................................................................................................... 69
Property, Plant & Equipment.................................................................................................................... 72
Intangible Assets ....................................................................................................................................... 75
Impairment of Assets ................................................................................................................................ 79
Non-Current Asset Held for Sale .............................................................................................................. 82
Investment Property .................................................................................................................................. 83
Other Standards ........................................................................................................................................ 84

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Consolidated Financial Statements

1. Following is the summarized trial balance of Faisal Limited (FL) and its subsidiaries, Saqib
Limited (SL) and Ayaz Industries Limited (AIL) for the year ended December 31, 2007:
Rs. In Mio.
FL SL AIL

Cash and bank balances 4,920 660 2,700

Accounts receivable 6,240 2.460 6,580
Stocks in trade - closing 14,460 4.200 5,680
Investment in subsidiaries - at cost
SL 9,000 - -
AIL 10,500 - -
Other investments 11,100 - -
Property, plant and equipment 22,500 3.480 5,940
Cost of sales 49,200 18,000 21,000
Operating expenses 3,600 2,100 5,400
Accumulated depreciation (5,760) (420) (1,260)
Ordinary share capital (Rs. 10 (30,000) (12.000) (6,000)
Retained earnings - opening (33,780) - (4,800)
Sales (57,600) (16,500) (33,800)
Accounts payable (2,760) (1.980) (1,440)
Gain on sale of fixed assets (540) - -
Dividend income (1,080) - -
Following additional information is also available:
(i) On January 1, 2007, FL acquired 480 million shares of AIL from its major shareholder
for Rs. 10,500 million.
(ii) SL was incorporated on February 1, 2007. 75% of the shares were acquired by FL at par
value on the same date.
(iii) The following intercompany sales were made during the year 2007:
Included in Amount Gross
Sales buyer’s closing receivable/payable profit % on
stocks in trade at year end sales
......................... Rs. in million .......................
FL to AIL 2,400 900 - 20
SL to AIL 1,800 600 800 10
AIL to FL 3,600 1,200 - 30
FL and its subsidiaries value stock in trade at the lower of cost or net realisable value. While
valuing FL’s stock in trade, the stock purchased from AIL has been written down by Rs. 100
million.
(iv) On July 1, 2007, FL sold certain plants and machineries to SL. Details of the transaction
are as follows:
Sales value 144
Less: Cost of plant and machineries 150
Accumulated Depreciation 60
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Net book value 90

Gain on sale of plant 54
The plants and machineries were purchased on January 1, 2005, and were being
depreciated on straight line method over a period of five years. SL computed
depreciation thereon using the same method based on the remaining useful life.
(v) FL billed Rs. 100 million to each subsidiary for management services provided during
the year 2007 and credited it to operating expenses. The invoices were paid on December
15, 2007.
Details of cash dividend are as follows:
Dividend
Date of declaration Date of payment %
FL Nov 25, 2007 Jan 5, 2008 20
AIL Oct 15, 2007 Nov 20, 2007 10
Required:
Prepare consolidated balance sheet and profit and loss account of FL and its subsidiaries for the
year ended December 31, 2007. Ignore tax and corresponding figures. (27)

2. Golden Limited (GL) is a listed company and has held shares in two companies, Yellow
Limited (YL) and Black Limited (BL), since July 1, 2006. The details of acquisition of shares
in these companies are as follows:
A. GL acquired 18 million shares in YL at par, when YL’s reserves were Rs. 24 million. The
acquisition was made by issuing four shares in GL for every five shares in YL. The market
price of GL’s shares at July 1, 2006 was Rs. 20 per share. A fair value exercise was carried
out for YL’s assets and liabilities at the time of its acquisition with the following results:
Book Value Fair Value
Rupees in million
Land 170 192
Machines 25 45
Investments 3 6
The remaining life of machine on acquisition was 5 years. The fair values of the assets
have not been accounted for in YL’s financial statements.
B. 6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of acquisition,
the reserves of BL stood at Rs. 40 million.
The summarized income statement of the three companies for the year ended June 30, 2008 are
as follows:
GL YL BL
Rupees in million
Sales 875 350 200
Cost of sales (567) (206) (244)
Gross profit / (loss) 308 144 (44)
Selling expenses (33) (ID (15)
Administrative expenses (63) (40) (16)
Interest expenses (30) (22) (15)
Other income 65 - -
Profit/(loss) before tax 247 71 (90)

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Income tax (73) (15) 8

Profit/(loss) for the period 174 56 (82)
The following relevant information is available:
GL YL BL
Rupees in mil ion
Ordinary share capital of Rs. 10 each 600 200 150
Reserves 652 213 108
(i) The share capital an d reserves as at July 1, 2007 were as follows:
(ii) The share capital of all companies have remained unchanged since their incorporation.
(iii) During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were made
at a mark up of 25% on cost. 30% of these goods were still in the inventories of YL at
June 30, 2008.
(iv) GL manufactures a component used by BL. During the year, GL sold these components
amounting to Rs. 20 million to BL. Transfers are made at cost plus 15%. BL held Rs.
11.5 million of these components in inventories at June 30, 2008.
(v) All assets are depreciated on straight line method.
(vi) Other income includes dividend received from YL on April 15, 2008.
(vii) During the year, YL paid 20% cash dividend to its ordinary shareholders.
(viii) An impairment test was carried out on June 30, 2008 for the goodwill of YL and
investments in BL, appearing in the consolidated financial statements. The test indicated
that:
■ goodwill of YL was impaired by 20%;
■ due to recent losses, the fair value of investment in BL has been reduced to Rs.40
million.
No such impairment was required in previous years.
Required:
Prepare, in a format suitable for inclusion in the annual report, a consolidated income statement
for the year ended June 30, 2008. (22)

3. On January 1, 2002, Khan Limited (KL) acquired 375 million ordinary shares and 40 million
preference shares in Gul Limited (GL) whose general reserve and retained earnings on the date
of acquisition, stood at Rs. 200 million and Rs. 1,000 million respectively.
The following balances were extracted from the records of KL and its subsidiary on December
31, 2008:

KL GL
Debit Credit Debit Credit
----- Rupees in million -----
Ordinary share capital (Rs. 10 each) - 6,800 - 5,000
12% Preference share capital (Rs. 10 each) - - - 1.000
General reserve - 1,750 -
500
Retained earnings - 2.000 - 1.200
Loan from KL at 15% rate of interest - - - 2.000
14% Tenn Finance Certificates (TFCs) (Rs. 100 - 2.250 - -

Accounts
each) payable - 445 -
190
Dividend payable - preference shares - -
60
Dividend payable - ordinary shares -
750 -
.300
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Property, plant and equipment - at cost 16,250 -

25.000 -

Property, plant and equipment - ace. depreciation -

9,750 -
17.000
Investment in ordinary shares of GL 5.500 - - -

Investment in preference shares of GL 400 - -

-
Loan to GL at 15% rate of interest 2.000 - - -
Investment inKL's TFCs (purchased at par value) - - 1.500 -
Profit before tax, interest and dividend - 2.865 - 1.550
Dividend income - 27.3 - -
Interest income - .300 - 210
Dividend receivable 249 - - -
Current assets 1.069 - 1.316 -
Interest on TFCs 315 - - -
Interest on loan from KL - - .300 -
Taxation 650 - 474 -
Preference dividend - - 120 -
Ordinary dividend - interim 750 - .300 -
27,183 27,183 29,010 29,010

Following relevant information is available:

(i) At the date of acquisition, the fair value of buildings, included in property, plant and
equipment of GL was assessed at Rs. 1,000 million above its carrying value. All other
identifiable assets and liabilities were considered to be fairly valued. GL provides for
depreciation on buildings at 10% per annum on the straight line basis.
(ii) GL purchased the TFCs in KL on January 1, 2008.
(iii) The non-controlling interests are measured at their proportionate share of the GL’s
identifiable net assets.
(iv) There is no impairment in the value of goodwill since its acquisition
(v) There are no components of other comprehensive income.
Required:
Prepare the following in accordance with the requirements of International Financial
Reporting Standards:
(a) Consolidated statement of financial position as at December 31, 2008.
(b) Consolidated statement of comprehensive income for the year ended December 31,
2008.
(c) Consolidated statement of retained earnings for the year ended December 31, 2008.

4. The statements of financial position of Habib Limited (HL), Faraz Limited (FL) and Momin
Limited (ML) as at June 30, 2009 are as follows:
HL FL ML
Rs. In Mio.
Assets
Non-current assets
Property, plant and equipment 978 595 380
Investments in FL - at cost 520 - -
Investments in ML - at cost 300 - -
1,798 595 380
Current assets
Stocks in trade 210 105 125
Trade and other receivables 122 116 128
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Cash and bank 20 38 37

352 259 290
Total assets 2,150 854 670

Equity and liabilities

Equity
Ordinary share capital (Rs. 10 Each) 800 360 100
Retained earnings 784 354 450
1,584 714 550
Non-current liabilities
12% debentures 270 - -
Current liabilities
Short term loan 124 - -
Trade and other payables 172 140 120
296 140 120
Total equity and liabilities 2,150 854 670
Following additional information is also available:
(i) HL acquired 60% shares of FL on January 1, 2003 for Rs. 400 million when the retained
earnings of FL stood at Rs. 250 million. On January 1, 2006, a further 20% shares in FL
were acquired for Rs. 120 million. FL’s retained earnings on the date of second acquisition
were Rs. 400 million.
(ii) 70% shares of ML were acquired by HL for Rs. 300 million, on July 1, 2006 when ML’s
retained earnings stood at Rs. 260 million. On December 31, 2008, HL disposed off its
entire holding in ML for Rs. 500 million. The disposal of shares has not yet been recorded
in HL’s financial statements.
(iii) On January 1, 2009, FL purchased a machine for Rs. 20 million and immediately sold it to
HL for Rs. 24 million. However, no payment has yet been made by HL. The estimated
useful life of the machine is 4 years and HL charges depreciation on the straight line
method
(iv) During the year, HL sold finished goods to FL at cost plus 20%. The amount invoiced
during the year amounted to Rs. 75 million. 60% of these goods had been sold by FL till
June 30, 2009.
(v) During the year ended June 30, 2009, FL and ML earned profits of Rs. 10 million and Rs.
50 million respectively. The profits had accrued evenly, throughout the year.
(vi) An impairment review at year end indicated that 15% of the goodwill recognised on
acquisition of FL, is required to be written off.
(vii) HL values the non-controlling interest at its proportionate share of the fair value of the
subsidiary’s identifiable net assets.
Required:
Prepare the consolidated statement of financial position of HL as at June 30, 2009 in accordance
with the requirements of International Financial Reporting Standards. (Ignore current and
deferred tax implication
5. The following information has been extracted from statements of financial position and the
comprehensive income of Parent Limited (PL), Subsidiary Limited (SL) and Jointly Controlled
Entity Limited (JCEL) for the year ended December 31, 2009.

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Statement of Financial Position

PL SL JCEL
Rupees in million
Assets
Non-current assets
Property, plant and equipment 120 40 74
Investment in SL - at cost 35 - -

Investment in JCEL - at cost 25 - -

Current assets
Stocks in trade 20 17 16
Trade and other receivables 25 5 8
Cash and bank 3 1 2
228 63 100

Equity and Liabilities

Equity
Ordinary share capital (Rs. 10 each) 50 15 50
Retained earnings 78 18 28

Long term loans 75 12 -

Current liabilities 25 18 22
228 63 100
Statement of Comprehensive Income
PL SL JCEL
Rs. In mio.
Sales 1,267 276 654
Cost of sales (928) (161) (469)
Gross profit 339 115 185
Selling expenses (174) (68) (100)
Administrative expenses (88) (30) (37)
Other income 10 - -
Financial charges (12) (4)
Taxation (26) (5) (30)
Net profit 49 8 18
Following additional information is available:
(i) PL owns 80% equity of SL which was acquired on January 1, 2009. JCEL is a jointly
controlled entity in which 50% equity is held by PL since inception.
(ii) On the date of acquisition, the book values of all the assets of SL were approximately
equal to their fair values except for the following:
Fair value Book value
Rs. in million
Equipment 15 12
Inventory 12 10

The remaining useful life of the above equipment on the date of acquisition was 3
years. The entire inventory acquired prior to acquisition was sold during 2009.

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(iii) JCEL measures inventory using the weighted average method whereas PL uses first in
first out (FIFO) method. On December 31, 2008 the cost of JCEL’s inventory using
either methods was approximately the same. However, on December 31, 2009 the
value of its inventory using the FIFO method was Rs. 14 million.
(iv) PL sells goods at cost plus 25%. During 2009 invoices raised by PL against sales made
to SL and JCEL amounted to Rs. 10 million and Rs. 20 million respectively. Out of
these, inventories worth Rs. 2 million and Rs. 4 million were held by SL and JCEL
respectively as on December 31, 2009.
(v) PL uses proportionate consolidation method for recognizing its interest in JCEL.
(vi) There is no impairment in the value of goodwill.
(vii) It is the policy of PL to value the non-controlling interest at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.

Required:
Prepare the consolidated statements of financial position and comprehensive income of PL for
the year ended December 31, 2009.

6. Rainbow Textiles Limited (RTL) is a public limited company and owns 70% holding in Fabrics
Design Limited (FDL).
FDL is located in a foreign country and its functional currency is FC. RTL acquired FDL on
July 1, 2009 for FC 12 million when FDL's share capital and retained earnings were FC 5 million
and FC 3 million respectively. On the acquisition date, fair value of FDL's net assets was FC 11
million. The fair value of all the assets except leasehold land and buildings was equal to their
carrying amounts. The remaining lease period of the land and useful life of the buildings at the
date of acquisition was 20 years. RTL and FDL use straight line method of depreciation. The
following balances were extracted from the Statement of Comprehensive Income of RTL and
FDL for the year ended June 30, 2010:

Statement of Comprehensive Income

RTL FDL
Rs. in million FC in million
Sales revenue 1,000 25
Cost of sales (450) (15)
Gross profit 550 10
Selling and administrative expenses (250) (5)
Financial expenses (25) (1)
Profit before taxation 275 4
Taxation (100) (1)
Profit after taxation 175 3
The following additional information is also available:
(i) On April 10, 2010 RTL sold goods for Rs. 30 million to FDL at a margin of 20% of selling
price. Full payment was made by FDL on May 1, 2010. No exchange gain or loss was
recorded on the transaction. Goods valuing FC 1.0 million were still in closing inventory
of FDL as of June 30, 2010.
(ii) An impairment test was carried out on June 30, 2010 which indicated that the goodwill
has been impaired by 25%.
(iii) RTL follows a policy of valuing the non-controlling interest at its proportionate share of
fair value of the subsidiaries’ identifiable net assets. (iv) FDL has not issued any shares
after the acquisition.

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(v) Exchange rates relevant to the preparation of the financial statements are as follows:
1 FC = Rs. 1 FC = Rs.
30-Jun-2009 / l-Jul-2009 22.00 30-Jun-2010 23.50
10-Apr-2010 22.50 Average rate for the year 22.75
1-May-2010 23.00

Required:
Prepare the Consolidated Statement of Comprehensive Income of Rainbow Textiles Limited for
the year ended June 30, 2010.

7. The draft statements of financial position of Oceana Global Limited (OGL), and its subsidiary
Rivera Global Limited (RGL) as of March 31, 2011 are as follows:
OGL RGL
Rs. in million
Assets
Property, plant and equipment 700 200
Intangible assets 4 -
Investment in RGL (opening balance) 23 -
Investment in RGL (acquired during the year) 108 -
Current assets 350 150
1,185 350
Equity and Liabilities
Share capital (Ordinary shares of Rs. 100 each) 300 100
Retained earnings 550 80
Fair value reserve 3 -
853 180
Non-current liabilities 150 40
Current liabilities 182 130
1,185 350
The details of OGL’s investments in RGL are as under:
Acquisition date Lace value of Purchase
shares acquired consideration
Rs. In Mio.
July 1, 2009 10 20
October 1, 2010 45 108
Other information relevant to the preparation of the consolidated financial statements is as
under:
(i) On October 1, 2010 the fair value of RGL’s assets was equal to their carrying value except
for non-depreciable land which had a fair value of Rs. 35 million as against the carrying
value of Rs. 10 million.
(ii) On October 1, 2010 the fair value of RGL’s shares that were acquired by OGL on July 1,
2009 amounted to Rs. 28 million.
(iii) RGL’s retained earnings on October 1, 2010 amounted to Rs. 60 million.
(iv) Intangible assets represent amount paid to a consultant for rendering professional services
for the acquisition of 45% equity in RGL.

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(v) During February 2011 RGL sold goods costing Rs. 25 million to OGL at a price of Rs 30
million. 25% of these goods were included in OGL’s closing inventory and 50% of the
amount was payable by OGL, as of March 31, 2011.
(vi) OGL follows a policy of valuing non-controlling interest at its fair value. The fair value
of non-controlling interest in RGL, on the acquisition date, amounted to Rs. 70 million.
Required:
Prepare a consolidated statement of financial position for Oceana Global Limited as of March
31, 2011 in accordance with International Financial Reporting Standards.

8. Alpha Pakistan Limited (APL) is a listed company and has 60% holding in Bravo Limited (BL).
The company is in the process of preparation of its consolidated financial statements for the year
ended 3 0 September 2011. Following are the extracts from the information that has been
gathered so far:
Consolidated Statement of Comprehensive Income (Draft)
2011
Rs. in million
Sales 65,000
Cost of products sold (59,110)
Other operating income 2,000
Operating expenses (3,000)
Financial expenses (890)
Income tax expense (1,200)
Profit for the year 2,800
Profit attributable to
■ Owners of the holding company 2,500
■ Non-controlling interest 300
2,800
Statement of Financial Position (Draft)
2011 2010 2011 2010
Rs. in million Rs. in million
Equity and liabilities Assets
Share capital (Rs. 10 each) 550 500 Property, plant and equipment 1,100 900
Retained earnings 5,950 1,600 Goodwill 15 15
Non-controlling interest 235 120 Long term receivable 24 29
Long term loans 440 145 Stock in trade 6,760 4,280
Deferred tax 210 10 Trade debis 7,534 5,421
Trade and other payables 4,688 1,970 Other receivables 900 725
Accrued financial expenses 35 30 Cash and bank balances 2,645 2,980
Provision for taxation 200 25
Short term borrowings 6,670 5,950
18,978 14,350 18,978 14,350
Following additional information is available:
(i) During the year, BL sold goods amounting to Rs. 140 million to APL at a margin of 25%
of cost. 40% of the above amount remained unpaid and 30% of the goods remained unsold

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as on 30 September 2011. No adjustments in this regard have been made in the above
statements.
(ii) Depreciation charge for the year was Rs. 75 million and Rs. 15 million for APL and BL
respectively.
(iii) During the year APL acquired property, plant and equipment amounting to Rs. 250 million
against a long term loan.
(iv) The amount of long term receivables represents present value of interest free loans to
employees. The gross value of the loans is Rs. 27 million (2010: Rs. 33 million).
(v) Operating expenses include bad debt expenses amounting to Rs. 44 million. During the
year, trade debtors amounting to Rs. 30 million were written off.
(vi) Trade and other payables include APL’s unclaimed dividend amounting to Rs. 8 million
(2010: Rs. 10 million). At APL’s Board meeting held on 30 November 2011, final cash
dividend of Rs.
3.0 per share has been proposed (2010: Final cash dividend of Rs 2.0 per share and 10%
bonus shares).

Required:
Prepare a consolidated statement of cash flows including all relevant notes for Alpha Pakistan
Limited for the year ended 30 September 2011 using the direct method in accordance with
International Financial Reporting Standards.

9. The following summarized statements of financial position pertain to Bee Limited and its
investee companies as at 31 December 2011:
Bee Limited Cee Limited Tee Limited
ASSETS
Non-Current assets
Property, plant and equipment 75,600 2,800 800
Investment in Cee Limited - at cost 3,900
Investment in Tee Limited - at cost 300

Current Assets
Stock in trade 24,100 1,700 700
Trade and other receivables 16,400 2,900 820
Cash and bank 800 700
121,100 8,100 2,320

EQUITY AND LIABILITIES

Equity
Ordinary share capital (Rs.10 each) 44,100 2,800 1,000
Retained earnings 15,800 1,200 900

Long term loan 36,400

Current liabilities
Trade and other payables 24,600 4,100 300
Bank overdraft 120
121,100 8,100 2,320
The following information is also available:

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(i) Bee holds 252 million shares of Cee which were acquired in 2005 when the retained
earnings of Cee stood at Rs. 350 million. At the date of acquisition, the fair values of
Cee’s net assets were the same as their carrying amounts with the exception of a legal
claim having a fair value of Rs. 7 million which had been disclosed in the financial
statements as a contingent liability. The claim was settled on 30 November 2011, for the
same amount.
(ii) Bee acquired 80% share capital of Tee several years ago for Rs. 1,200 million when Tee’s
retained earnings stood at Rs. 100 million. On 1 October 2011, Bee sold 75% of its holding
in Tee for Rs. 2,000 million. On the date of disposal, the fair value of remaining holding
was Rs. 650 million.
(iii) During the year, Cee sold goods to Bee at cost plus 25%. The amount invoiced during the
year amounted to Rs. 32 million. 40% of these goods were held by Bee at year end. Bee
has paid Rs. 20 million against the invoiced amount, upto 31 December 2011.
(iv) At year end, an impairment review indicated that 10% of Cee’s goodwill is required to be
written off.
(v) During the year ended 31 December 2011, Cee and Tee earned profits after tax of Rs. 250
million and Rs. 200 million respectively. It may be assumed that the profits had accrued
evenly throughout the year.
(vi) Bee follows a policy of valuing the non-controlling interest at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.

Required
Prepare the consolidated statement of financial position of Bee Limited as at 31 December
2011 in accordance with the requirements of International Financial Reporting Standards. (24
marks) Note:
■ Ignore tax and comparative figures.
■ Notes to the consolidated statement of financial position are not required. ■
Show workings wherever necessary.

10. Following are the extracts from the draft financial statements of three companies for the year
ended 30 June 2012:
Income Statement
Tiger Limited Panther Limited Leopard Limited
(TL) (PL) (LL)
-------------- Rs. in million ----------
Revenue 6,760 568 426
Cost of sales (4,370) (416) (218)
Gross profit 2,390 152 208
Operating expenses (1,270) (54) (132)
Profit from operations 1,120 98 76
Investment income 730 - 10
Profit before taxation 1,850 98 86
Income tax expense (400) (20) (17)
Profit for the year 1,450 78 69
Statement of Changes in Equity
Rs. In Mio
Ordinary share capital of Rs. Retained earnings
Particulars
10 each
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TL PL LL TL PL LL
As on 1 Julv 2011 10,000 800 600 2,380 270 70
Final dividend for the year
(1,000) (60)
ended 30 June 2011
Profit for die year - - - 1,450 78 69
As on 30 June 2012 10,000 800 600 2,830 348 79
The following information is also available:
(i) Several years ago, TL acquired 64 million shares in PL for Rs. 1,000 million when PL’s
retained earnings were Rs. 55 million. Up to 30 June 2011, cumulative impairment losses
of Rs. 50 million had been recognized in the consolidated financial statements, in respect
of goodwill.
On 31 December 2011, TL disposed off its entire holding in PL for Rs. 1,300 million.
(ii) On 1 July 2011, 42 million shares of LL were acquired by TL for Rs. 550 million. An
impairment review at 30 June 2012 indicated that goodwill recognized on acquisition has
been impaired by Rs. 7 million.
(iii) During the year, LL sold goods costing Rs. 50 million to TL at a mark-up of 20% on cost.
40% of these goods remained unsold on 30 June 2012.
(iv) Investment income appearing in TL’s separate income statement includes profit on sale of
PL’s shares and dividend received from LL.
(v) TL values the non-controlling interest at its proportionate share of the fair value of the
subsidiary’s identifiable net assets.
It may be assumed that profits of all companies had accrued evenly during the year.
Required:
Prepare TL’s consolidated income statement and consolidated statement of changes in equity for
the year ended 30 June 2012 in accordance with the requirements of International Financials
Reporting Standards.

11. Qudsia Limited (QL) has investments in two companies as detailed below: Manto Limited
(ML)
■ On 1 January 2010, QL acquired 40 million ordinary shares in ML, when its retained earnings
were Rs. 150 million.
■ The fair value of ML’s net assets on the acquisition date was equal to their carrying amounts.

Hali Limited (HL)

■ On 30 November 2012, QL acquired 16 million ordinary shares in HL, when its retained
earnings stood at Rs. 224 million.
■ The purchase consideration was made up of:
- Rs. 190 million in cash, paid on acquisition; and
- 4 million shares in QL. At the date of acquisition, QL’s shares were being traded at Rs.
15 per share but the price had risen to Rs. 16 per share by the time the shares were issued
on 1 January 2013.
■ The fair value of the net assets of HL on the date of acquisition by QL was equal to their
carrying amounts, except a building whose fair value exceeded its carrying amount by Rs.
28 million. The building had a remaining useful life of seven years on 30 November 2012.

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The draft summarized statements of financial position of the three companies on 31 December
2012 are shown below:
Particulars QL ML HL
-------- Rs. in million -------
Assets
Property, plant and equipment 5,000 550 500
Investment in ML 630 --
Investment in HL 190
Current assets 5,480 400 350
11,300 950 850
Equity and liabilities
Ordinary share capital (Rs.10 each) 6,000 500 400
Retained earnings 2,900 100 240
Current liabilities 2,400 350 210
11,300 950 850
The following additional information is available:
(i) QL considers ML as a cash-generating unit (CGU). As on 31 December 2012, the
recoverable amount of the CGU was estimated at Rs. 700 million.
(ii) QL values the non-controlling interest at its proportionate share of the fair value of the
subsidiary’s net identifiable assets.
(iii) On 1 October 2012, ML sold a machine to QL for Rs. 24 million. The machine had been
purchased on 1 October 2010 for Rs. 26 million. The machine was originally assessed as
having a useful life of ten years and that estimate has not changed.
(iv) In December 2012, QL sold goods to HL at cost plus 30%. The amount invoiced was Rs.
52 million. These goods remained unsold at year end and the invoiced amount was also
paid subsequent to the year end.

Required:
Prepare a consolidated statement of financial position for QL as on 31 December 2012 in
accordance with the requirements of International Financial Reporting Standards.

12. Chughtai Limited (CL) has 75% share holdings in John Limited (JL) which is registered and
operates in a foreign country. JL's functional currency is RAM. The following information has
been extracted from JL's statement of changes in equity for the year ended 31 December 2012:
Subscribed and Unappropriated
paid-up capital profit
------- RAMs in million -------
Balance as on 1 January 2012 50 85
Final dividend for the year ended 31 December -
2011- Cash dividend at 10% (5)
- Bonus shares at 20% 10 (10)
Profit after tax for the year ended 31 December - 40
2012
Balance as on 31 December 2012 60 110
Other relevant information is as under:
(i) CL's profit after tax for the year ended 31 December 2012 amounted to Rs. 700 million
which includes a cash dividend of Rs. 41 million received from JL.

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(ii) On acquisition, JL’s goodwill amounted to RAMs 30 million. However, an impairment

test carried out as at 31 December 2012 revealed that the goodwill has been impaired by
RAMs 6 million.
(iii) CL values the non-controlling interest on acquisition at fair value.
(iv) JL has not issued any ordinary shares after acquisition by CL, except for the bonus issue
as mentioned above.
(v) The following exchange rates are relevant to the financial statements:
31-Dec-2011 31-Dec-2012 Average for 2012
...................... Rs. to 1 RAM .....................
10.00 11.00 10.20

Required:
Prepare the relevant extracts from the consolidated statement of comprehensive income of CL
for the year ended 31 December 2012 in accordance with the requirements of International
Financial Reporting Standards. (16)

13. On 1 October 2012, Alpha Industries Limited (AIL) held 15% and 35% equity in Beta (Private)
Limited (BPL) and Delta (Private) Limited (DPL) respectively. The following balances pertain
to the three companies, as on the above date.
AIL BPL DPL
Rs. In Million
Share capital (Rs. 100 each) 100 60 50
Retained earnings 35 30 15
Other comprehensive income - fair value reserve related to BPL 6 - -
Total equity 141 90 65

Non-current investments - BPL*1 (Cost Rs. 18 million) 20 - -

2
Non-current investments - DPL* (Cost Rs. 40 million) 43 - -
*’ recorded as available for sale *2 recorded as investment in associate

On 1 April 2013, AIL acquired a further 55% equity in BPL when:

■ the fair value of the net assets of BPL was Rs. 100 million which was equal to their
carrying value; and
■ the fair value of the 15% equity already held in BPL was Rs. 25 million.

The purchase consideration comprised of 150,000 shares in AIL which were issued on the
date of acquisition at their market value of Rs. 160 per share and Rs. 42 million payable in
cash on 31 March 2014. AIL uses discount rate of 12% for determining the present value of
its future assets and liabilities.

Other relevant details are as follows:

(i) For the year ended 30 September 2013 the profits after tax of AIL, BPL and DPL were
Rs. 58 million, Rs. 40 million and Rs. 30 million respectively.
(ii) AIL values non-controlling interest at the acquisition date at its fair value which was Rs.
32 million.
(iii) AIL sold goods at Rs. 65 million to BPL on 1 July 2013. The sales were invoiced at 30%
above cost. 20% of these goods remained unsold as on 30 September 2013.

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(iv) DPL’s sales to AIL amounted to Rs. 70 million. DPL earns a profit of 20% of sales value.
On 30 September 2013, inventory of AIL included Rs. 20 million in respect of such
goods.
(v) For the year ended 30 September 2012 AIL, BPL and DPL paid final cash dividend of
15%, 20%, and 12% respectively.

Required:
(a) Compute the amount of goodwill, retained earnings and investment in associate as they
would appear in the consolidated statement of financial position of AIL as at 30
September 2013, in accordance with IFRS. (Ignore taxation)
(b) Describe how the investment in BPL and DPL may be accounted for and also compute
the amount of the investments as it would appear in the separate statement of financial
position of AIL as at 30 September 2013, in accordance with IFRS. (4)

14. The following balances were extracted from the Consolidated Income Statement and
Consolidated Statement of Financial Position of Karachi Group Limited (KGL) for the year
ended June 30, 2010.
Consolidated Income Statement
2010
Particulars
Rs. in million
Operating profit 189
Share of profit in associates 5
Financial expenses (14)
Profit before taxation 180
Taxation (65)
Profit for the year 115
Profit attributable to
■ Owners of the parent 100
■ Non-controlling interest 15
115

EQUITY AND LIABILITIES 2010 2009 ASSETS 2010 2009

Equity Non-current assets
Share capital 200 200 Property, plant and equipment 510 500
Retained earnings 320 250 Investment in associates 12 10
520 450 Intangible assets 30 25
Non-controlling interest 28 10 552 535
548 460
Non-current liabilities Current assets
Long term Loans 125 120 Inventories 261 200
Trade debtors and other 180 162
Current liabilities Receivables 10 -
Current maturity of long term 20 - Short term deposits 20 25
Loans 262 287 Cash and bank balances 471 387
Accrued financial expenses 8 5
Other payables 60 50
Taxation 350 342

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1,023 922 1,023 922

(i) One of KGL’s three subsidiaries, Auto Engineering Works Limited was acquired on July
1, 2009 by purchase of 80% shareholdings for Rs. 30 million. Fair value of the assets and
liabilities at the time of acquisition were as follows:
Details Rs. in million
Property, plant and equipment 20.50
Inventories 10.00
Trade debtors and other receivables 8.00
Cash and bank balances 6.00
Trade creditors and other payables (17.00)
27.50

It is KGL’s policy to value the non-controlling interest at its proportionate share of fair
value of the subsidiaries' net assets.
(ii) Book value of intangible assets on July 1, 2009 included trademarks of Rs. 6.0 million.
There was 50% impairment in the value of trademarks during the year ended June 30, 2010
(iii) The following information pertaining to property, plant and equipment is available:
■ Total depreciation charge for the year was Rs. 70.0 million.
■ A machine costing Rs. 10.0 million and having book value of Rs. 6.5 million was traded-
in with another machine having a fair market value of Rs. 7.0 million with an additional
cash payment of Rs. 1.0 million.
■ Fully depreciated assets costing Rs. 10.0 million were scrapped during the year.
■ Proceeds of a long term loan amounting to Rs. 5.0 million were specifically used for
purchase of property, plant and equipment.
(iv) The following information pertaining to property, plant and equipment is available:
■ Total depreciation charge for the year was Rs. 70.0 million.
■ A machine costing Rs. 10.0 million and having book value of Rs. 6.5 million was traded-
in with another machine having a fair market value of Rs. 7.0 million with an additional
cash payment of Rs. 1.0 million.
■ Fully depreciated assets costing Rs. 10.0 million were scrapped during the year.
■ Proceeds of a long term loan amounting to Rs. 5.0 million were specifically used for
purchase of property, plant and equipment.
(v) On August 5, 2010 the board of directors proposed a final dividend at 20% for the year
ended June 30, 2010 (2009: 15% dividend declared on August 10, 2009). Required:
• Prepare a Consolidated Statement of Cash Flows under the indirect method, for the year
ended
• June 30, 2010, including notes thereto as required by IAS 7 (Statement Of Cash Flows). (25
marks)
15. On January 1, 2008, Misbah Holding Limited, dealing in textile goods, acquired 90% ownership
interest in Salman Limited (SL), a ginning company, against cash payment of Rs. 450 million.
At that date, SL’s net identifiable assets had a book value of Rs. 350 million and fair value of
Rs. 400 million.
It is the policy of the company to measure the non-controlling interest at their proportionate
sharwke of SL’s net identifiable assets.

During the year ended December 31, 2008, SL incurred a net loss of Rs. 150 million. The
impairment testing exercise carried out at the end of the year, by a firm of consultants, showed
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that the recoverable amount of SL’s business is Rs. 200 million. However, the Board of
Directors is inclined to take a second opinion as they estimate that the recoverable amount is
Rs. 390 million.

Required:
Based on each of the two valuations, compute the amounts to be reported in the consolidated
statement of financial position as of December 31, 2008 in respect of:
■ Goodwill;
■ Net identifiable assets, and Non-controlling interest.

16. The draft statements of financial position of Ruble Limited (RL), Taka Limited (TL) and Yuan
Limited (YL) as on 31 December 2018 are as under:

RL TL YL
Rs. in million
Assets:
Property, plant and equipment 7,450 3,000 2,450
Investment in TL at cost 1,300 - -
Investment in YL at cost 900 - -
Current assets 650 500 400
10,300 3,500 2,850
Equity and liabilities:
Share capital 4,000 800 1,600
Share premium 1,100 225 -
Retained earnings 2,300 1,200 380
Bank loan 1,700 800 520
Deferred tax 250 120 15
Current liabilities 950 355 335
10,300 3,500 2,850

Other information:
i. On 1 January 2018, RL acquired 80% shares of TL from Shilling Limited (SL) at the following
consideration:
a. Cash payment of Rs. 1,300 million.
b. Transfer of RL’s freehold land having carrying value and fair value of Rs. 300 million
and Rs. 450 million respectively.
c. A bank loan payable by SL was transferred to RL. The principal amount of Rs. 200
million is repayable on 31 December 2022 and it carries interest at 12% payable annually
in arrears on 31 December each year. On the date of acquisition, the prevailing interest
rate for the similar loan was 15% per annum.
The bank loan and transfer of land have not yet been recorded by RL. However, interest
on the loan was paid by RL on the due date and charged to expense.

ii. On the date of acquisition:

a. TL's retained earnings were Rs. 750 million.
b. Fair values of TL's net assets recorded in the books were equal to their carrying values
except for a building whose fair value was higher than its carrying value by Rs. 250
million out of which Rs. 70 million relates to freehold land component. The building had
a remaining useful life of 7.5 years.

A contingent liability of Rs. 60 million was disclosed in the financial statements of TL. RL’s
legal adviser had at that time estimated that TL would be liable to pay Rs. 40 million to settle
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the claim. As at 31 December 2018, it was still appearing as contingent liability in TL’s
financial statements.

[Link] the year, the following intra-group transactions took place:

Rs. in million
Sales Included in Buyer's Profit % on sales
Closing Inventory
RL to TL 500 100 15%
TL to RL 800 150 25%

iv. On 1 June 2018, RL entered into an agreement with Franc Limited (FL) to set up YL, a joint
arrangement. RL has 60% right to the net assets of YL. RL and FL have agreed that YL’s
profit will not be distributed in near future.

v. Applicable tax rates for RL, TL and YL are 25%, 30% and 20% respectively. Gain on disposal
of land is exempt from tax. Interest expense is allowed under the tax laws on payment basis.

vi. RL values non-controlling interest on the date of acquisition at its proportionate share of the
fair value of the subsidiary's identifiable net assets.

Required:
Prepare RL's consolidated statement of financial position as on 31 December 2018 in accordance
with the requirement of IFRS. (Incorporate effect of tax, if any) (25)

17. The draft statements of financial position of Bahamas Limited (BL), Ohama Limited (OL) and
Czech Limited (CL) as at 31 December 2018 are as follows:
BL OL CL
Rs. in million
Property, plant and equipment 25,370 14,288 7,900
Goodwill 170 - -
Investment in OL at cost 5,400 - -
Investment in CL at cost 1,220 912 -
Investment in Persian Limited at cost 360 - -
Current assets 17,480 4,800 2,800
Total assets 50,000 20,000 10,700

Share capital (Rs. 10 each) 15,000 5,000 1,200

Share premium 8,000 2,000 1,100
Surplus on revaluation 5,500 1,200 -
Retained earnings 9,500 3,000 2,000
Liabilities 12,000 8,800 6,400
Total equity and liabilities 50,000 20,000 10,700

Other information:
i. On 1 January 2015, BL acquired 75% shares of OL Limited which resulted in goodwill of
Rs. 450 million. On acquisition date, fair value of net assets of OL was equal to their carrying
value except a building whose fair value was higher than its carrying value by Rs. 300
million. The building’s remaining useful life at the date of acquisition was 20 years.

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ii. Immediately after acquisition, OL adopted revaluation model for all items of property, plant
and equipment to make the policy uniform with BL.
iii. On 1 January 2017, BL acquired 35% shares of CL when CL had retained earnings of Rs.
700 million.
iv. On 1 January 2018, OL acquired 24% shares of CL at fair value when retained
earnings of OL and CL were Rs. 2,500 million and Rs. 1,200 million respectively.
v. On 1 March 2017, BL entered into an agreement with Romania Limited to set up Persian
Limited (PL), a joint arrangement. BL has 60% rights to the net assets of PL. As at 31
December 2018, PL’s net assets comprised of fixed assets, current assets and liabilities of
Rs. 800 million, Rs. 400 million and Rs. 220 million respectively.
vi. PL’s current assets at 31 December 2018 include goods costing Rs. 50 million which were
purchased from BL. Total sales by BL to PL in 2018 amounted to Rs. 420 million which
were invoiced at cost plus 25%.
vii. On 1 January 2018, OL acquired a machine on lease from BL for a non-cancellable period
of 3 years at Rs. 400 million per annum payable in arrears. The carrying value and remaining
life of the machine in BL’s books on that date was Rs. 3,500 million and 10 years
respectively. The lease has been appropriately accounted for in the above statements of
financial position. Applicable discount rate is 10%.
viii. BL group follows a policy of valuing non-controlling interest at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.

Required:
Prepare BL's consolidated statement of financial position as at 31 December 2018 in accordance `
with the requirements of IFRS. [25]

18. Summarised consolidated statement of financial position of Vitz Limited (VL) as at 30 June 2018
is presented below:
Assets 2018 2017 Equity and liabilities 2018 2017
Rs. In Millions Rs. In Millions
Property, plant & equipment 3,678 4,173 Share capital (Rs. 10 each) 2,800 2,500
Goodwill 569 639 Share premium 300 -
Investment in associate 670 - Other group reserves 3,519 2,451
Inventories 1,950 1,050 Non-controlling interest 1,638 874
Trade & other receivables 957 823 Trade & other payables 912 1,630
Cash and bank 1,568 770 Deferred consideration 223 -
9,392 7,455 9,392 7,455

Following information is available for preparation of consolidated statement of cash flows:

i. On 1 January 2018, VL acquired 40% shares in Audi Limited (AL) by paying Rs.600 million.
On that date, cash balance of AL was Rs. 100 million. AL earned profit of Rs. 800 million
(accrued evenly) during the year ended 30 June 2018. Further, VL sold goods for Rs. 400
million to AL in 2018 at 30% profit margin. 25% of these goods remained unsold on 30
June 2018.
ii. On 1 April 2018, VL disposed of its 100% shareholdings in Subaro Limited (SL) for Rs.
1,600 million. On that date, carrying value of SL’s net assets was as follows:
Rs. in million
Property, plant and equipment 1,300
Working capital (other than bank balances) (150)
Bank Balances 100
1,250

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On the date of disposal, carrying value of SL's goodwill was Rs. 200 million. SL earned
profit of Rs. 185 million (accrued evenly) during the year ended 30 June 2018.
iii. A building having carrying value of Rs. 170 million was disposed of during the year for
Rs. 350 million in cash. Another machine having carrying value of Rs. 250 million was
disposed of during the year for Rs. 230 million which will be received in August 2018.
iv. During the year, VL disposed of 30% shareholdings (leaving 60% with VL) in Wing Limited
(WL) for Rs. 450 million when WL’s net assets and goodwill were Rs. 1,000 million and Rs.
150 million respectively.
v. On 1 July 2017, VL acquired its first foreign subsidiary, Ford Limited (FL) by purchasing
80% shareholdings against:
➢ immediate cash payment of Rs. 495 million (USD 4.5 million).
➢ issuance of 15 million shares of VL at market value of Rs. 25 each.
➢ deferred payment of USD 2 million payable after two years. Applicable discount
rate is 8%.
The fair value of net assets of FL at the date of acquisition was as follows:
USD in Million
Property, plant and equipment 6
Working capital (other than bank balances) 4
Bank balances 1
10
FL earned profit of USD 1.5 million (accrued evenly) during the year ended 30 June 2018.
FL’s goodwill was not impaired at year-end.
Exchange reserve on translation of FL comprises of Rs. 13 million for bank balances, Rs.
36 million for working capital (other than bank balances) and the remaining relates to
goodwill and property, plant and equipment.
vi. Following exchange rates are available:

1-Jul-2017 31-Dec-2017 30-Jun-2018 Average

1 USD to Rs. 110 115 120 116

vii. No dividend was paid during the year by the group.

viii. Depreciation for the year was Rs. 480 million.
ix. VL values non-controlling interest on the date of acquisition at its proportionate share of the
fair value of the subsidiaries' identifiable net assets.

Required:
Prepare VL’s consolidated statement of cash flows for the year ended 30 June 2018 using
'indirect method' in accordance with IFRS. (Ignore corresponding figures)

19. The draft statements of financial position of Ant Limited (AL), Bee Limited (BL) and Fly
Limited (FL) as at 31 December 2017 are as follows:

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AL BL FL
Rs. in million
Assets
Property, plant and equipment 3,510 2,835 2,200
Investment property 130 45 -
Investment in BL at cost 3,540 - -
Investment in FL at cost - 2,400 -
Current assets 2,120 1,420 2,800
Total assets 9,300 6,700 5,000

Equity and liabilities

Share capital (Rs. 10 each) 5,500 4,000 2,500
Retained earnings 2,000 1,314 1,000
Gratuity 25 - -
Current liabilities 1,775 1,386 1,500
Total equity and liabilities 9,300 6,700 5,000

Other Information:
i. Details of the investments are as follows:
Date of Investment Investor % Holding Investee Cost of Retained earnings of
Investment investee
Rs. In million
1-Jan-15 AL 65% BL 3,100 520
1-Apr-17 AL 10% BL 440 815
30-Jun-17 BL 60% FL 2,400 1,150
ii. On acquisition date of BL, fair value of its net assets was equal to their carrying value except
a plant whose fair value was Rs. 120 million whereas its carrying amount was Rs. 140 million.
Value in use and remaining useful life of the plant were Rs. 150 million and 10 years
respectively at that date.
iii. At the date of acquisition of FL, fair value of its net assets recorded in the books was equal to
their carrying value. Further, a contingent liability of Rs. 70 million was disclosed in the
financial statements of FL. AL's legal adviser had at that time estimated that this claim
would be settled at Rs. 50 million. However, it was actually settled on 15 February 2018 at
Rs. 40 million. Date of authorisation of FL's financial statements was 10 February 2018 and
the claim was disclosed as contingent liability in FL's financial statements.
iv. On 1 July 2017 AL sold its office building having carrying value of Rs. 43 million to BL at
its fair value of Rs. 50 million. The building had a remaining useful life of 5 years on the
date of disposal. On the same date, BL rented out the building to Monkey Limited for one
year.

AL group follows fair value model for investment property whereas BL uses cost model
for investment property. Fair value of the building on 31 December 2017 was Rs. 58 million.

v. On 31 December 2017 FL’s recoverable amount was estimated at Rs. 3,700 million.
vi. AL group follows a policy of valuing the non-controlling interest at its proportionate share
of the fair value of the subsidiary's identifiable net assets.
vii. The following information relates to AL’s gratuity scheme for the year ended 31 st December
2017.
Rs. in million
Contribution paid 70
Benefits paid 55
Current service cost 85
Re-measurement gain 10

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During the year, payments made by AL were charged to profit or loss account. No further
adjustments have been made.
Discount rate and fair value of plan assets at 1 January 2017 were 12% per annum and Rs.
320 million respectively.

Required:
Prepare AL's consolidated statement of financial position as on 31 December 2017 in
accordance with the requirements of IFRSs. [25]

20. The draft statements of financial position of Shakir Limited (SL), Mashkoor Limited (ML) and
Baqir Limited (BL) as at 30 June 2017 are as follows:
Particulars SL ML BL
Rs. In Million
Assets
Property, plant & equipment 16,500 5,600 11,000
Investment in ML-at cost 1,375 - -
Investment in BL-at cost 7,500 - -
Investment in Joint operation-at cost - - 620
Stock-in-trade 2,414 1,460 1,750
Trade and other receivables 2,200 2,060 18,000
Cash and bank 1,600 800 1,900
31,589 9,920 33,270
Equity & Liabilities
Share Capital (Rs. 10 per share) 20,000 2,200 10,000
Share Premium 1,000 900 -
Retained Earnings 6,189 3,200 6,000
Trade and other payables 4,400 3,620 1,070
31,589 9,920 17,070
i. On 1 July 2014 SL acquired 80% shares of ML when ML’s retained earnings were Rs. 1,400
million, at a cash consideration of Rs. 4,400 million. On acquisition date, fair value of net
assets was equal to their carrying value. 20% of the goodwill has been impaired till 30 June
2016.
ii. Following information in respect of ML is available for the year ended 30 June 2017:
a. On 1 July 2016 SL disposed of 20% holding in ML (leaving 60% with SL) for Rs.
1,188 million when ML’s share price was Rs. 26 per share.
b. On 30 June 2017 SL further disposed of 35% holding in ML (leaving 25% with SL)
for Rs. 2,926 million when ML’s share price was Rs. 36 per share.
c. On both disposals, SL credited investment in ML with related cost and took the
difference to profit or loss account.
d. ML made a net profit of Rs. 700 million during the year. No dividend was declared
during the year.
e. SL’s receivables include Rs. 200 million due from ML.
iii. On 1 July 2015 SL acquired 60% holding in BL which resulted in bargain purchase of Rs. 180
million. On acquisition date, fair value of BL’s net assets was equal to their carrying value
except a building whose fair value was Rs. 200 million higher than its carrying value. Its
remaining life at the date of acquisition was 16 years.
iv. SL’s closing stock includes goods sold by BL at 20% margin. These were invoiced at Rs.
50 million but are included in SL’s stock at NRV of Rs. 44 million.
v. BL has 40% share in a joint operation, a power generation unit. The following information
relates to activities of the joint operation for the year ended 30 June 2017:

The unit was constructed at a cost of Rs. 1,550 million and commenced its operation from 1
July 2016. It has a useful life of 10 years.
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Revenue from generation of electricity was Rs. 1,100 million. Power generation cost and
operating expenses paid amounted to Rs. 670 million and Rs. 130 million respectively.

All revenues and expenses of the operation have been settled during the year. However, entries
in respect of revenues/costs have not been made in the books of BL because they have been
received/paid by the other joint operator. SL and the other joint operator have agreed to settle
the outstanding balance after year end.
vi. SL follows a policy of valuing the non-controlling interest at its proportionate share of the fair
value of the subsidiary’s identifiable net assets.
vii. No further shares have been issued by ML and BL since their acquisition by SL.

Required:
Prepate SL’s consolidated statement of financial position as on 30 June 2017 in accordance with IFRS.

21. White Limited (WL) has investments in Green Limited (GL) and Yellow Limited (YL). YL is
registered and operates in a foreign country and its functional currency is T$. Following information
has been extracted from financial statements of the three companies for the year ended 31 December
2016:
WL GL YL
Rs. In Million T$ in Million
Assets
Property, plant and equipment 14,900 3,000 325
Investment property - 800 -
Investment in GL – at cost 4,200 - -
Investment in YL – at cost 1,500 5,400 -
Current assets 6,660 2,500 305
27,260 11,700 630
Equity & liabilities
Share capital (Rs./T$ 10 each) 11,400 1,500 225
Retained earnings 9,500 7,900 210
Current liabilities 6,360 2,300 195
27,260 11,700 630

Interim dividend paid on 30 June 2016 - - 10%

Other Information:
i. Details of the investment made by WL and GL are as follows:
Investment date Investor Investee Cost of No. of Shares Retained Earnings
Investment acquired at the acq. date
In million
1 Jan 2015 WL GL Rs. 4,200 135 Rs. 3,500
1-Jan-16 WL YL T$ 75 4.5 T$ 50
1-Apr-16 GL YL T$ 270 18 T$ 90

Fair values of each share of YL as on 1 January 2016 and 1 April 2016 were T$ 18and T$ 23
respectively.
ii. In the books of WL and GL, there is no movement in investment in YL since the date of acquisition
except the difference arising due to foreign currency translation at year end.
iii. Investment property in GL was purchased on 1 January 2016 at a cost of Rs. 650 million and
rented to WL at an annual rent of Rs. 60 million on the same date. The property has a useful life
of 20 years. Both companies follow a policy of measuring their investment property at fair value

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and property, plant and equipment at revalued amounts. Both companies also charge depreciation
on straight line method.
iv. The relevant exchange rates per T$ are as follows:
01-Jan-16 01-Apr-16 30-Jun-16 31-Dec-16 Average Rate (1
Apr to 32 Dec)
Rs. 16 Rs. 17 Rs. 18.5 Rs. 20 Rs. 18
v. WL values the non-controlling interest at its proportionate share of the subsidiaries’ net
identifiable assets.

Required:
Prepare WL’s consolidated statement of financial position as on 31 December 2016 in accordance with
the requirements of IFRSs. (Ignore taxation) [23]

22. On 1 July 2012 Alpha Limited (AL) and Beta Limited (BL) entered into an agreement to set up two
Separate Vehicles (SVs) to manufacture and distribute their products. Each company has 50% share
in both SVs. The following are the extracts from draft statements of financial position and
comprehensive income of AL and the SVs for the year ended 30 June 2016.
Statements of financial position
AL SV-1 SV-2 AL SV-1 SV-2
Rs. in million Rs. in million
Property, plant and equipment 2,650 750 365 Capital 2,000 400 200
Investment in SVs - at cost 443 - - Accumulated profit 1,193 55 305
Stock in hand 695 250 140 10% bank loan 500 320 -
Other assets 570 180 80 Current liabilities 665 405 80
4,358 1,180 585 4,358 1,180 585

Statement of Comprehensive Income

AL SV-1 SV-2
Rs. in million
Sales 4,250 650 1,000
Less: Cost of Sales (2,993) (480) (750)
Gross Profit 1,257 170 250
Less: Expenses (657) (145) (200)
Net Profit 600 25 50

Additional Information:
i. SV-1 is classified as joint operation whereas SV-2 is classified as joint venture.
ii. On 1 July 2015, AL acquired 60% of BL’s ownership in SV-1 at Rs. 140 million. AL also incurred
acquisition related costs amounting to Rs. 3 million which were capitalized.
iii. The details of transactions made during the year 2016 between AL and the SVs and their
subsequent status are given below:
Sales Included in buyer's Amount Profit % on
closing inventory receivable/(payable) in the sales
books of AL
AL to SV-1 350 220 320 10
AL to SV-2 250 110 70 20
SV-1 to AL 190 150 (150) 30
SV-2 to AL 60 38 (20) 15
iv. AL follows the equity method for recording its investment in joint venture whereas investment
in joint operations is recorded in accordance with IFRS-11

Required:
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In accordance with the requirements of IFRS, prepare AL’s separate statement of financial position
and comprehensive income for the year ended 30 June 2016. [21]

23. Following are the extracts from consolidated financial statements of Musa Limited (ML) for the year
ended 30 June 2016:
Consolidated statement of financial position as on 30 June 2016
2016 2015
Rs. In Million
Assets
Goodwill 1,750 1,922
Investment in associates 4,100 3,528
Inventory 5,488 5,398
Trade and other receivables 4,659 4,107
Dividend receivable from associates 590 700
Other current assets 1,500 1,300
Cash and bank 4,500 3,710

Equity and liabilities

Non-controlling interest (NCI) 1,499 1,721
Trade and other payables 18,050 17,034
Dividend payable – NCI 454 252

Consolidated statement of comprehensive income for the year ended 30 June 2016
Rs. in million

Loss on disposal of subsidiary (7)

Income from associates 1,150
Profit attributable to:
– Parent shareholders 8,233
– Non-controlling interest 1,018

Following information is also available:

i. During the year, ML acquired 60% shareholding in Esquire Limited (EL), for Rs. 200
million. As consideration, ML issued 1 million shares at a market price of Rs. 150 each. The
balance was paid in cash. The value of EL’s net assets on the date of acquisition was Rs. 320
million as shown below:
Rs. in million
Property, plant and equipment 222
Inventory 100
Receivables 50
Bank overdraft (16)
Trade and other payables (36)
320
ii. During the year, ML sold entire 90% shareholding in Yonus Limited (YL) and realized
cash proceeds of Rs. 800 million. This subsidiary had been acquired several years ago for Rs. 560
million. At acquisition, the fair value of YL's net assets was Rs. 550 million. On the date of
disposal, the carrying value of YL’s net assets was Rs. 860 million as follows:
Rs. in million
Property, plant and equipment 725
Inventory 165
Cash and Bank 50
Trade and other payables (80)
860

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Up to the date of disposal, 50% of YL’s goodwill had been impaired.

iii. ML measures its non-controlling interest at the proportionate share of its subsidiaries’ net
identifiable assets.

Required:
Determine the amounts to be shown in each of the following heads of accounts in the consolidated
cash flow statement for the year ended 30 June 2016:
a. Impairment of goodwill to be reported as non-cash item. [03]
b. Dividend paid to NCI. [04]
c. Dividend received from Associates [2.5]
d. Net cash flow due to acquisition of subsidiary [1.5]
e. Net cash flow arising on disposal of subsidiary [1.5]
f. Changes in Working Capital [3.5]

24. Consolidated Financial Statements of Malik Group of Companies (MGC) for the year ended 31
December 2014 are presented below:
Consolidated statement of financial position as on 31 December 2014
2014 2013 2014 2013
Equity Rs. in million Non-current assets Rs. in million
Ordinary shares (Rs.10 each) 15,000 15,000 Goodwill 19,300 18,500
Retained earnings 17,550 10,850 Property, plant and equipment 25,450 16,250
Other reserves * 7,500 5,250 Investment in associate 6,200 5,400
40,050 31,100 50,950 40,150
Non-controlling interest 3,100 3,200

Non-current liabilities Current assets

Loans from banks 5,000 3,000 Inventories 4,700 4,350
Deferred tax 1,500 1,050 Trade and other receivables 3,900 3,300
Cash and bank 2,100 1,400
Current liabilities
Trade and other payables 8,000 7,250
Income tax 3,875 3,525
Accrued interest 125 75
61,650 49,200 61,650 49,200
* include revaluation reserve

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Consolidated statement of comprehensive income for the year ended 31 December 2014
Rs. in million
Revenue 20,900
Operating expenses (11,550)
Profit from operations 9,350
Gain on disposal of subsidiary 1,000
Finance cost (350)
Income from associates 1,150
Profit before taxation 11,150
Income tax expense (2,250)
Profit for the year 8,900
Other comprehensive income for the year
Re-measurement of post-employment benefits 2,000
Other comprehensive income from associates 500
Total comprehensive income 11,400

Profit attributable to:

■ Parent shareholders 7,950
■ Non-controlling interest 950
8,900

Total comprehensive income attributable to:

■ Parent shareholders 10,200
■ Non-controlling interest 1,200
11,400

Additional information:
i. During the year, MGC acquired 80% holding in Gomel Limited (GL) against a cash consideration
of Rs. 15,000 million. On the date of acquisition, the non- controlling interest’s holding was
measured at its fair value of Rs. 3,400 million.
The fair value of net assets of GL at acquisition comprised of the following:
Rs. in million
Property, plant and equipment 12,800
Inventory 1,500
Trade and other receivables 2,400
Cash and bank 800
Loans from banks (400)
Trade and other payables (1,800)
Income tax (400)
14,900
ii. During the year, MGC also disposed of its 60% shareholdings in Stone Limited (SL) and realised
cash proceeds of Rs. 8,500 million. This subsidiary had been acquired several years ago for Rs.
6,000 million. At acquisition, the fair value of SL’s net assets and non-controlling interest was Rs.
7,300 million and Rs. 3,200 million respectively. On the date of disposal, the net assets of SL had
a carrying value in the consolidated statement of financial position as follows:
Rs. in million
Property, plant and equipment 7,250
Inventory 1,650
Trade and other receivables 1,500
Cash and bank 500
Loans from banks (300)
Trade and other payables (800)
9,800
iii. Property, Plant and Equipment:

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➢ Depreciation charge for the year is Rs. 3,850 million.

➢ A plant having carrying value of Rs. 2,500 million was sold for Rs. 2,750 million. Gain
on disposal has been credited to operating expenses.
➢ On the basis of a professional valuation report, increase of Rs. 2,000 million has been
recognized in the value of property, plant & equipment.
iv. During the year, Rs. 1,250 million was paid as final dividend to ordinary shareholders.
Required:
Prepare consolidated statement of cash flow of MGC for the year ended 31 December 2014, using
indirect method. [22]
25. The following information has been extracted from draft financial statements of RY Limited (RYL)
and its investee companies, DT Limited (DTL) and GN Limited (GNL) for the year ended 30 June
2015:
RYL DTL GNL
Rs. In Million G$ in million
Sales 6,000 4,800 52
Cost of sales (3,200) (3,950) (32)
Gross profit 2,800 850 20
Operating costs (855) (595) (9)
Profit From operations 1,945 255 11
Investment income 1,400 26 6
Finance cost (233) (84) (2)
Profit before taxation 3,112 197 15
Income tax (568) (41) (3)
Profit after taxation 2,544 156 12

Ordinary share capital (Rs./G$ 10 each) 1,800 350 5

Retained earnings
At 1 July 2014 2,451 459 27
Profit for the year 2,544 156 12
Dividend paid* (300) (120) (8)
Shareholders’ equity 6,495 845 36
* Final dividend for the year ended 30 June 2014 paid in August 2014

Additional Information:
i. RYL bought 26.25 million shares in DTL on 1 October 2012 for Rs. 1,200 million when DTL’s
retained earnings were Rs. 240 million. At acquisition date the fair value of DTL's net assets
was equal to their carrying amount. There have been no changes in the share capital since
acquisition. The fair value of non-controlling interest on acquisition was Rs. 340 million. Prior
to 1 July 2014 impairments amounting to Rs. 250 million had been recorded in DTL’s
goodwill.
ii. On 1 January 2015, RYL sold 15.75 million shares in DTL for Rs. 1,950 million. The fair
value of RYL's remaining shares on this date was Rs. 1,300 million.
iii. On 1 October 2014 RYL bought 400,000 shares in GNL, a company located overseas, for G$
50 million. Professional fees relating to the acquisition were Rs. 100 million and these have
been added to the cost of investment. At 1 October 2014, the fair value of GNL’s net assets
was equal to their carrying amount except a building whose fair value exceeded the carrying
amount by G$ 8 million. The building had a remaining useful life of 8 years at the date of
acquisition. The market price of GNL’s shares on acquisition date was G$ 120.
iv. Investment income appearing in RYL’s separate profit and loss statement includes profit on
sale of DTL’s shares and dividend received from DTL.
v. RYL values its non-controlling interest on acquisition at fair value.
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vi. The exchange rates per G$ were as follows:

1-Oct-14 Rs. 70
30-Jun-15 Rs. 79
Average for October 2014 to June 2015 Rs. 78

It may be assumed that profits of all the companies has accrued evenly during the year.

Required:
In accordance with the requirements of IFRSs, prepare consolidated statement of comprehensive income
of RYL for the year ended 30 June 2015. (Ignore taxation) [23]

26. Alpha Limited (AL), a listed company, acquired 80% equity in Zee Limited (ZL) on 1 July 2010.
The following information has been extracted from their draft financial statements:
AL ZL
--- Rs. in '000 ------
Balance as at 1 January 2013:
Share capital (Rs. 100 each) 80,000 35,000
12% Convertible bonds (Rs. 100 each) 30,000
Profit for the year ended 31 December 2013 (after tax) 60,000 25,000
Following information is also available:

(i) The bonds were issued at par on 1 January 2011 and are convertible at any time before
the redemption date of 31 December 2015, at the rate of five ordinary shares for every
four bonds.

(ii) Cost and fair value information of ZL’s investment property is as under:
31-Dec-2013 31-Dec-2012
......... Rs. in '000 .............
Cost 65,000 60,000
Fair value 67,000 59,000

ZL uses cost model while the group policy is to use the fair value model to account
for investment property.

(iii) AL operates a defined benefit gratuity scheme for its employees. The actuary’s report
has been received after the preparation of draft financial statements and provides the
following information pertaining to the year ended 31 December 2013:
Rs. in '000
Actuarial losses 150
Current service costs 8,000
Net interest income ....... 3,000 .....

(iv) On 1 August 2013, under employees’ share option scheme, 60,000 shares were issued
by AL to its employees at Rs. 150 per share against the average market price of Rs.
250 per share.

(v) Dividend details are as under:

AL ZL
2013 (Interim) 2012 (Final) 2013 (Interim) 2012 (Final)

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Cash 18% 10% 12% 15%

Bonus shares -
20% -
16%
At the time of payment of dividend, income tax at 10% was deducted by AL and ZL.
(vi) Applicable tax rate for business income is 35%.
Required:
Extracts from the consolidated profit and loss account of Alpha Limited (including earnings
per share) for the year ended 31 December 2013 in accordance with the International
Financial Reporting Standards.

27. Parent Company Limited (PCL) is a listed company and owns 80% and 75% equity in LS Limited
and FS Limited respectively. FS is registered and operates in a foreign country and its functional
currency is CU. Summarised statements of financial position as at 30 June 2014 and other
information relating to the group companies are as under:
PCL LS FS
Rs. in million CU in
million
Assets
Property, plant and equipment 4,200 3,500 250
Investments in LS and FS 6,500 -

Current assets 3,500 4,000 450

14,200 7,500 700
Equity and liabilities
Share capital (Rs. 10/CU 10 each) 6,000 1,800 120
Retained earnings 3,500 000 280
Current liabilities 4,700 4,800 300
14,200 7,500 700

Profit after tax for the year ended 30 June 2014 700 400 30
Final dividend for the year ended 30 June 2013:
■ Cash (paid on 1 January 2014) 12% -
15%
■ Bonus shares (issued on 15 December 2013) 10% 20%

The following information is also available:

(ii) Investment Details:
At acquisition date
Investment Number of
Company Cost Retained Fair value of
Date Shares
earnings NCI
-------------------- in million ----------------------
LS 1-Jan-2012 120 Rs. 2,000 IU. 250 Rs. 540
FS 12
l-Jul-2012 9 CU 300 CU 160 CU 90
(iii) On the date of acquisition, fair value of the net assets of LS and FS were equal to their
book value. However, a contingent liability of Rs. 25 million was disclosed in the
financial statements of LS. PCL's legal adviser had at that time estimated that LS would
be liable to pay Rs. 6 million to settle the claim and it was finally settled at the same
amount in May 2014.
(iv) No further shares have been issued by LS and FS since their acquisitions, except for the
bonus issue as mentioned above.
(v) An impairment test carried out on 30 June 2014 revealed that goodwill of FS is impaired
by CU 10 million.
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(vi) PCL values non-controlling interest on the date of acquisition at fair value.
(vii) The exchange rates in terms of Rs. per CU, were as follows:
Average for
l-Jul-2012 30-Jun-2013 l-Jan-2014 30-Jun-2014
2013-14
Rs. 15.00 Rs. 16.80 Rs. 16.90 Rs. 17.30 Rs. 17.00
(viii) The break-up of exchange reserve in the consolidated financial statements for the year
ended 30 June 2013 is as follows:
Relating to goodwill Rs. 148.50 million
Relating to translation of foreign operations i Rs. 463.05 million

Required:
In accordance with the requirements of the International Financial Reporting Standards,
prepare:
(a) Consolidated statement of financial position as at 30 June 2014; and
(b) Consolidated statement of other comprehensive income for the year ended 30 June
2014. (Ignore taxation)

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Investments in Associates and Joint Ventures

1. CNC Limited, an oil and gas exploration company is operating in Pakistan for last many years.
Presently, the company is managing five joint venture projects. Summary of the company’s
ownership in the joint ventures as at December 31, 2007 is as follows:
Joint Venture Name JV-11 JV-17 JV-18 JV-20 JV-22
CNC’s Ownership 30% 60% 40% 45% 40%

CNC uses proportionate consolidation method of accounting. During the year 2007, it sold
certain assets to joint ventures, details of which are as follows:
• Vehicles having carrying value of Rs. 3 million were sold to JV-11 on April 1, 2007 at
their fair value of Rs. 2 million.
• On May 1, 2007, certain items of plant and machinery having book value of Rs. 60 million
were sold to JV-18 for Rs. 80 million, being the fair value of the assets.
Required:
(a) Prepare necessary journal entries:
(i) in the books of CNC Limited.
(ii) to record adjustments (if any) which will be required for the purpose of consolidation.
(b) Explain the rationale for the gain or loss recorded by you in Part (a) according to the
relevant International Accounting Standards.

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Preparation of Financial Statement

1. Following are the extracts from draft statement of comprehensive income of Kahkashan Limited
(KL) for the year ended March 31, 2011:
Rs. in million
Net sales 800
Cost of sales (640)
Selling and distribution expenses (32)
Administrative expenses (15)
Finance costs (10)
Other operating income 13
Profit before tax 116

The following issues need to be resolved, to finalize the accounts:

(i) On April 1, 2010 the company had issued 0.5 million 12% Term Finance Certificates
(TFCs) of Rs. 100 each. The principal amount of Rs. 50 million is included in non-current
liabilities. Interest is payable annually in arrears. On the date of issue, the prevailing
interest rate for similar debts without conversion option was 14% per annum. TFCs would
mature on March 31, 2014 but are convertible into eight ordinary shares of Rs. 10 each, at
the option of the certificate holders, at any time prior to maturity. Interest was paid on
March 31, 2011 and charged to finance cost.
(ii) KL entered into a sale and leaseback arrangement on October 1, 2010 for one of its plants
having remaining useful life of 5 years with a nil residual value. Relevant information is
as under:
Rs. In Mio.
Carrying value of the plant as of October 1, 2010 43
Selling price 53
Installments payable semi-annually, in advance, for a period of 5 years 7
Income of Rs. 10 million has been recognized on disposal of the plant and is included in
other operating income. Interest rate implicit in the lease is 13.597%.
(iii) On April 1, 2010 KL acquired 25% holding in SL Limited by purchasing 50,000 ordinary
shares for Rs 6 million. In March 2011 a dividend of Rs. 20 per share was received by KL
and credited to other operating income. SL’s profit and other comprehensive income, net
of tax, for the year ended March 31, 2011 was Rs. 10 million and Rs. 2 million respectively.
(iv) On April 1, 2006 KL had acquired a plant at a cost of Rs. 30 million. The useful life of the
plant was estimated at 15 years and it is being depreciated under the straight line method.
On October 1, 2010 the plant suffered physical damage but is still working. A valuation
was carried out to determine the impairment loss. The following information is available
from the valuer’s report received on April 5, 2011:
Value in use Rs. 16 million
Selling price, net of costs to sell Rs. 12 million
Estimated remaining useful life as of October 1, 2010 5 years
Depreciation for the year ended March 31, 2011 has been accounted for without
considering the impact of the valuer’s report.
(v) Tax assessment for the accounting year ended March 31, 2010 was finalized in February
2011 in which liabilities outstanding for more than three years amounting to Rs. 6 million

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were added to income. 30% of these liabilities have already been paid during the year
ended March 31, 2011. Tax effect of these transactions has not been accounted for.
(vi) Applicable tax rate for business income and dividend income is 35% and 10% respectively.
The amount of tax depreciation is the same as accounting depreciation, except for any
difference arising out of information provided in Para (iv).
Required:
Prepare a statement of comprehensive income for the year ended March 31, 2011 in accordance
with International Financial Reporting Standards. (25 marks)

2. On 1 October 2009 Sky Limited (SL) acquired 25% holding (2.5 million ordinary shares) in
Mars Limited (ML) for Rs. 900 million. On the date of acquisition, ML’s equity was as
follows:
Rs. in million
Ordinary share capital (Rs. 100 each) 1,000
Share premium 150
Retained earnings 2,808
12% cumulative preference share capital 200
On the above date, fair value of a building owned by ML exceeded its carrying value by Rs. 12
million and its estimated useful life was 15 years. Fair values of all other assets and liabilities
of ML were equal to their carrying values.
Following additional information is available:
(i) ML’s profit after tax for the year ended 30 September 2011 was Rs. 250 million (2010: Rs.
240 million). Dividend received from ML amounted to Rs. 30 million (2010: nil).
(ii) Cost of goods purchased from SL and included in ML’s closing inventory was Rs. 10
million (2010: Rs. 16 million). SL makes a profit of 20% on all sales.
(iii) Applicable tax rate is 35% and 10% for business and dividend income respectively.
On 1 January 2011, SL acquired 70% holding (7 million ordinary shares) in Jupiter Limited (JL)
for Rs. 1,400 million. SL has been following a policy to account for investments in associates
using equity basis of accounting. Since SL is now required to prepare consolidated financial
statements, it needs to change its accounting policy for investments in associates, for the purpose
of preparation of its separate financial statements, to comply with the requirements of
International Financial Reporting Standards.
Required:
Prepare the following notes (relevant portion only) for incorporation in the separate financial
statements of Sky Limited for the year ended 30 September 2011:
(a) Change in accounting policy (b)
Investments
(Show all the necessary disclosures and comparative figures in respect of the above, in
accordance with International Financial Reporting Standards.) (22 marks)

3. The following information has been extracted from the financial statements of Zeta Limited
(ZL) for the year ended 30 June 2014:
2014 2013 2014 2013
Assets Equity and liabilities
Rs. in million Rs. in million
Property, plant & equipment 3,814 3,460 Share capital (Rs. 10 each) 2,921 2 M0
Long-term receivables 15 31 Retained earnings 900 833
Deferred tax 28 35 Long-term borrowings 630 680

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Inventories 780 729 Current maturity of long term

borrowings 50 70
Trade and other receivables 178 138 Trade and other payables 150 120
Cash and bank 8 10 Tax payable 32 25
Short-term borrowings 140 135
4,823 4,403 4,823 4,403

(ii) Profit after tax for the year amounted to Rs. 702 million. Applicable tax rate was 34%.
(iii) For the year provision in respect of doubtful debts and obsolete inventories amounted
to Rs. 14 million and Rs. 6 million respectively.
(iv) Finance expenses net of unwinding of interest for the year amounted to Rs. 110 million.
There was no finance expense payable at the beginning and end of the year.
(v) Additions to fixed assets amounted to Rs. 694 million.
(vi) Long-term receivables represent present value of interest free loans to employees. The
gross value of the receivables is Rs. 20 million (2013: Rs. 40 million).
(vii) For the year ended 30 June 2014, final cash dividend of 25% (2013: Cash dividend at
10% and bonus shares at 15%) was approved.

Required:
(a) Prepare ZL's cash flow statement for the year ended 30 June 2014, using the indirect
method in accordance with the International Financial Reporting Standards. (08)
(b) Comment on the cash flows from operating, investing and financing activities of ZL
and give suitable recommendations as regards:
■ Financing policies
■ Dividend policy
■ Inventory and receivable management

4. Opal Industries Limited (OIL) is a listed company. As at 30 June 2014 OIL has various
investments as detailed under:
At the acquisition date
Investment Equity Cost Share capital Retained
Company date held (Rs. 100 each) earnings
Rs. in million
AL l-Jul-2012 30% 50 80 60
BL 31-Dec-2011 10% 8 70 40
GL 1-Jan-2014 65% 195 150 95
Information pertaining to profit and dividend of the investee companies is as follows:
Profit/(loss) for the year ended Final cash dividend for year ended
Company 2014 2013
2014 2013
----------- Rs. in million--------------
AL 30 28 20% 16%
BL (10) 14 18%
GL 55 50 30% 15%
BL is a listed company and fair value of its shares as at 30 June 2014 was Rs. 110 per share (2013:
Rs. 160). OIL classifies investment in BL as available for sale.
AL and GL are private companies and market value of their shares is not available.

GL is the first subsidiary of OIL, since its incorporation. Following information pertains to OIL:
2013 2012
Rs. in million
Share capital (Rs. 100 each) 2,875 2,500
Profit for the year 1,260 1,100
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Closing retained earnings balance 850 465

Final dividend - cash 25% 20%
- bonus issue -
15%
OIL’s profit for the year ended 30 June 2014 prior to taking effects of the transactions of its
investee companies was Rs. 1,450 million and it has announced a final cash dividend of 30%.
Required:
Prepare following for inclusion in the first separate financial statements of OIL for the year ended
30 June 2014 as required by the International Financial Reporting Standards.

(a) Movement in retained earnings for inclusion in the statement of changes in equity; and (06)
(b) Note on investments.

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Financial Instruments

1. DND Limited is a listed company, having its operations within Pakistan. During the year ended
December 31, 2007, the company contracted to purchase plants and machineries from a US
Company. The terms and conditions thereof, are given below:
(i) Total cost of contract = US$ 100,000.
(ii) Payment to be made in accordance with the following schedule:
Payment Dates Amount Payable
On signing the contract July 01, 2007 USS 20.000
On shipment* September 30, 2007 USS 50.000
After installation and test run January 31, 2008 USS 30.000
*(risk and rewards of ownership are transferred on shipment)
The contract went through in accordance with the schedule and the company made all the
payments on time. The following exchange rates are available:
Dates Exchange Rates
July 1, 2007 US$ 1 =Rs. 60.50
September 30, 2007 US$ 1 = Rs. 61.00
December 31, 2007 US$ 1 = Rs. 61.20
January 31, 2008 US$ 1 =Rs. 61.50
Required:
(a) Under each of the following options, prepare the necessary accounting entries on the
relevant dates including year-end adjustments:

Option 1: All payments were treated as advance payments and accounted for as financial
instrument.
Option 2: All payments were treated as progressive payments.
(b) Which of the above options would you recommend if the transaction is covered under an
irrevocable letter of credit? Give reasons for your recommendation

2. During the year ended December 31, 2008, a Pakistani Sugar Company (PSC) was facing severe
problems in meeting its foreign currency obligations especially in view of the steep increase in
the foreign exchange rates. In October 2008, PSC commenced negotiations with the foreign
lenders for restructuring of loans.
Following is a summary of the foreign exchange liabilities of the company as of December 31,
2008 prior to making adjustments on restructuring:
Lenders

SBD JICA AFI

Loan amount (US$) 350,000 500,000 270,000
Remaining number of installments including due
on December 31, 2008 5 4 3
Interest / markup rate 2.50% 3.00% 2.00%
The loans are repayable in equal annual installments. All the above liabilities are appearing
in PSC’s books at the exchange rate of US$ 1 = Rs. 65 which was the rate at the beginning
of the year. The exchange rate as at the end of the year is US$ 1 = Rs. 80.

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Agreements with SBD and AFI were finalized and signed before year-end, however, the
agreement with JICA was finalized in January 2009 but before finalization of the financial
statements. Following is the information in respect of rescheduling agreements.
Lenders

SBD JICA AFI

Revised value of loan amount (US$) 370,000 525,000 280,000
Revised present value as per original effective
interest rate (US$) 390,000 535,000 250,000
Revised present value as per market interest rate
for similar instruments (fair value) (US$) 400,000 510,000 220,000
First installment due on 31-Dec-10 31-Dec-11 31-Dec-12

Required:
(a) Prepare accounting entries in the books of PSC to record the (i)
effect of exchange differences. (ii) effect of rescheduling, if any.

(b) In respect of each of the above loans, identify the amounts to be reported
as current portion of the loan in the financial statements, as at December
31, 2008

3. Arif Industries Limited (AIL) owns and operates a textile mill with spinning and weaving units.
Due to recurring losses, AIL disposed of the weaving unit for an amount of Rs. 100 million on
July 1, 2007 and invested the proceeds in Pakistan Investment Bonds (PIBs). Details of
investment in PIBs are as follows:
(i) The PIBs were purchased through a commercial bank at face value. The bank initially
charged premium and investment handling charges of Rs. 4,641,483. At the time of
purchase, AIL had envisaged to liquidate the investment after four years and utilize the
realized amount for expansion of its spinning business. The bank had agreed to repurchase
the PIBs on June 30, 2011, at their face value.
(ii) The markup on PIBs is 15% for the initial two years and 20% for the remaining three
years. The effective yield on investment at the time of purchase was 15.50%.
However, due to economic turmoil in the European and American markets, the existing spinning
unit is working below its rated capacity. Therefore, on June 30, 2009 AIL decided to defer the
expansion plan by one year. The bank agreed to extend the holding period accordingly but
reduced the repurchase price by 2%.

Required:
Compute the amount of interest income (including the effect of revision of holding period, if
any) to be recognized in the financial years ended(ing) 2009, 2010, 2011 and 2012.

4. Global Investment Limited (GIL) is listed in Pakistan. During the year ended 30 September
2011, GIL entered into the following contracts with a UAE based company:
(i) On 28 September 2011 GIL committed to buy certain financial assets on 3 October 2011
for AED 20,000. The fair value of these assets on balance sheet date and settlement date
was AED 21,000 and AED 21,500 respectively.
(ii) On 29 September 2011 GIL agreed to sell certain financial assets on 4 October 2011
having a carrying value of AED 34,000 (Rs. 809,200) for AED 35,000. The fair value

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of these assets on the balance sheet date and settlement date was AED 35,200 and AED
34,800 respectively.

The above types of financial assets are classified by GIL as held for trading. Exchange rates on
the relevant dates were as under:
Date 1 AED = Rs.
28 September 2011 24.00
29 September 2011 23.00
30 September 2011 23.50
03 October 2011 25.00
04 October 2011 26.00
Required:
Prepare accounting entries to record the above transactions on the relevant dates in accordance
with International Financial Reporting Standards, using:
(a) Trade date accounting (b) Settlement date accounting (16 marks)

5. Zee Power Limited (ZPL) has been facing short term liquidity issues during the financial year
ended on 31 December 2011. As a result, the following transactions were undertaken:
(i) On 27 December 2011, ZPL sold its investment in listed Term Finance Certificates (TFCs)
to Vee Investment Company Limited with an agreement to buy them back in 10 days.
Relevant details are as follows:
Rupees
Sale price 10,150,000
Buy back price 10,183,337
Value in ZPL’s books as on 27 December 2011 10,144,332
Market price as on 31 December 2011 10,163,125
ZPL intends to hold these TFCs till maturity.

(ii) On 1 January 2009, ZPL had obtained a bank loan of Rs. 100 million at 10% per annum.
The interest was payable annually on 31 December and principal amount was repayable
in five equal annual installments commencing from 31 December 2009. On 1 January
2011, the bank agreed to facilitate ZPL as follows:
■ Balance amount of the principal would be paid at the end of the loan’s term i.e. on 31
December 2013.
■ With effect from 1 January 2011, interest would be paid at the rate of 10.5% per annum.
The market rate for similar debt is 10%.
(iii) On 1 July 2011, ZPL sold its plant and machinery to Kay Leasing Limited, a related party,
for Rs. 90 million and leased it back for five years at semi-annual rentals amounting to Rs.
9.66 million, payable in arrears on June 30 and December 31. The carrying amount of
plant and machinery on the date of sale was Rs. 80 million and its fair value was Rs. 60
million.

The lease qualifies as an operating lease and the rentals are based on fair market rate.

Required:

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Prepare journal entries to record the above transactions in the books of Zee Power Limited. (18
marks)

6. The following information pertains to Crow Textile Mills Limited (CTML) for the year ended
30 June 2012:
(a) Stocks include 4,000 maunds of cotton which was purchased on 1 April 2012 at a cost of Rs.
6,200 per maund. In order to protect against the impact of adverse fluctuations in the price
of cotton, on the price of its products, CTML entered into a six months futures contract on
the same day to deliver 4,000 maunds of cotton at a price of Rs. 6,300 per maund. At year
end i.e. 30 June 2012, the market price of cotton (spot) was Rs. 5,500 per maund and the
futures price for September delivery was Rs. 5,550 per maund.
All necessary conditions for hedge accounting have been complied with. (05) (b) On 1 July
2011, 2 million convertible debentures of Rs. 100 each were issued. Each debenture is
convertible into 25 ordinary shares of Rs. 10 each on 30 June 2014. Interest is payable
annually in arrears @ 8% per annum. On the date of issue, market interest rate for similar
debt without conversion option was 11% per annum. However, on account of expenditure
of Rs. 4 million, incurred on issuance of shares, the effective interest rate increased to
11.81%. (08)
Required:
Prepare Journal entries for the year ended 30 June 2012 to record the above transactions. (Show
all necessary calculations)

7. In order to pursue expansion of its business, Parrot Limited (PL) has made the following
investments during the year ended 30 June 2012:
(a) On 1 July 2011, PL acquired 20% shares of Goose Limited (GL), a listed company, when
GL’s retained earnings stood at Rs. 250 million and the fair value of its net assets was Rs.
350 million. The purchase consideration was two million ordinary shares of PL whose
market value on the date of purchase was Rs. 33 per share. PL is in a position to exercise
significant influence in finalizing the financial and operational policies of GL.
The summarized statement of financial position of GL at 30 June 2012 was as follows:
Rs. in million
Share capital (Rs. 10 each) 100
Retained earnings 280
380

Net assets 380

Recoverable amount of GL’s net assets at 30 June 2012 was Rs. 370 million.
(b) Costs incurred for development and promotion of a brand are enumerated below:
Rupees
(i) Research on size of potential market 800,000
(ii) Products designing 1,500,000
(iii) Labour costs in refinement of products 950,000
(iv) Development work undertaken to finalize the product design 11,000,000
(v) Cost of upgrading the machine 18,000,000
(vi) Staff training costs 600,000
(vii) Advertisement costs 3,400,000
Required

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Discuss how the above investments/costs would be accounted for in the consolidated financial
statement for the year ended 30 June 2010.

8. On 1 January 2009 Qasmi Investment Limited (QIL) purchased 1 million 12% Term Finance
Certificates (TFCs) issued by Taj Super Stores (TSS), which operates a chain of five Super
Stores. The terms of the issue are as under:
■ The TFCs have a face value of Rs. 100 each and were issued at a discount of 5%. These are
redeemable at a premium of 20% after five years.
■ Interest on the TFCs is payable annually in arrears on 31 December each year.

Effective interest rate calculated on the above basis is 16.426% per annum.
Due to a property dispute, TSS had to temporarily discontinue operations of two stores in 2010.
Consequently, TSS was unable to pay interest due on 31 December 2010 and 31 December
2011.

At the time of finalization of accounts for the year ended 31 December 2010, QIL was quite
hopeful of recovery of the interest and therefore, no impairment was recorded. However, in
2011, after a thorough review of the whole situation, QIL’s management concluded that it would
be able to recover the face value of the TFCs along with the premium on the due date i.e. 31
December 2013, but the interest for the years 2010 to 2013 would not be received. Accordingly,
QIL recorded impairment in the value of the TFCs on 31 December 2011.

In 2012, TSS reached an out of court settlement of the property dispute and the stores became
operational. Subsequently, QIL and TSS agreed upon a revised payment schedule according to
which the present value of the agreed future cash flows on 31 December 2012 is estimated at
Rs. 115 million.

Required:
Prepare journal entries in the books of QIL for the years ended 31 December 2011 and 2012.
Show all the relevant computations.

9. On 1 May 2017 KL acquired following equity investments:

Purchase Price Transaction cost Total
Rs. in Million
Investment A 100 2 102
Investment B 150 3 153

Investment A was designated as measured at fair value through profit or loss whereas investment
B was irrevocably elected at initial recognition as measured at fair value through other
comprehensive income.

In October 2017, KL earned dividend of Rs. 12 million and Rs. 9 million on investment
A and B respectively.

20% of investment A and 30% of investment B were sold for Rs. 23 million and Rs. 50 million
respectively in November 2017. Transaction cost was paid at 2%.

As on 31 December 2017, fair values of the remaining investments are given below:

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Purchase Price Transaction Total

cost on
disposal
Rs. in Million
Investment A 105 2.1 102.9
Investment B 130 2.6 127.4

Required:
Prepare the extracts relevant to the above transactions from KL’s statement of financial position
and comprehensive income for the year ended31 December 2017, in accordance with the IFRSs.
(Corresponding figures and notes to the financial statements are not required.)

10. Lahore Steel Limited (LSL) issued 1 million six-year debentures on 1 January 2015 at par value
of Rs. 100 each at a fixed rate of 6% per annum. Interest payable at the end of each year whereas
the principal is to be repaid in two equal instalments at the end of 2019 and 2020.

Debentures were issued with an option to convert 10 debentures into 4 ordinary shares of LSL till
the date of first principal redemption. The liability was not designated as measured at fair value
through profit or loss on initial recognition.

The market interest rate for non-convertible debentures issued by entities having similar credit risk
and loan tenor is 1-Year KIBOR + 2% per annum.

On 1 January 2016 LSL repurchased 100,000 debentures at a premium of Rs. 5 per debenture.
Transaction cost of Rs. 2 per debenture was incurred on this redemption.

The market interest rates and market values of LSL’s shares are given below:
Date 1-Year KIBOR MPS (Rs.)
1-Jan-15 5% 200
1-Jan-16 6% 250

Required:
Prepare journal entries in the books of LSL for the year ended 31 December 2016. [12]

11. On 1 October 2016, Pasham Telecom Limited (PTL) raised Rs. 900 million by issuing 5-
year Term Finance Certificates (TFCs) at par value of Rs. 1,000 each carrying interest at a fixed
rate of 8% per annum. The interest is payable at the end of each quarter whereas principal
will be repaid in lump sum at the end of 5 years.

Considering the expected decline in interest rate, PTL entered into swap agreements (at market
rates) of an equal amount i.e. Rs. 900 million. The brokerage house which facilitated the agreements
was paid a brokerage of Rs. 1.0 million. The swap agreements would allow PTL to receive a fixed
rate of 6.5% per annum whereas PTL would pay a variable rate. Both payments would be made at
the beginning of each quarter. The swap agreements have the same maturity dates as the TFCs.

All necessary documentation was completed on 1 October 2016 when the variable interest rate
was 6.27% per annum.

On 31 December 2016, as a result of a rise in market interest rates, the fair value of the TFCs
fell to Rs. 992 per TFC and the net fair value of the swap was Rs. 7.29 million (loss).

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Required:
Explain how the above transactions should be accounted for in the books of PTL during the year
ended 31 December 2016 assuming that hedging criteria are met. Show all relevant calculations.
[10]

12. On 1 July 2013, XYZ purchased 1 million five year bonds issued by Ali Manufactures Limited
(AML) at a premium of Rs. 5 per bond with the intention to hold them till maturity i.e. 30 June
2018. The bonds will be redeemed at their face value i.e. Rs. 100 per bond. The transaction
costs associated with the acquisition of the bonds were Rs. 1.5 million. The coupon interest rate
is 6% per annum while the effective interest yield at the time of purchase was 4.5186%.

Due to certain financial and liquidity issues, AML restructured the payment plan with effect from
30 June 2016, after due consultation with bondholders. Under the revised plan the maturity date
was extended by one year. Further, the coupon rate was increased to 6.25% for 2017 and 2018 and
6.5% for 2019.

The management of XYZ is of the view that due to restructuring the credit risk on the loan has
increased significantly. As a result, it estimates lifetime expected credit losses of Rs. 5 million on
the investment.

Required:
In accordance with the requirements of the IFRSs, describe the accounting treatment in respect of
the above transactions in the financial statements of XYZ Limited for the year ended 30 June 2016.
[08]

13. On 15 October 2016, Rashid Industries Limited (RIL) made the following investments:

Name of Investees No. of shares % of shareholding *Cost of investment

acquired (Rs. In million)
Karim Limited (KL) 155,000 4% 20
Bashir Limited (BL) 135,000 2% 65
* including transaction cost

Investment in KL was made with no intention to sell the shares while investment in BL was
made with the intention to sell the shares before 31 December 2016.

The board of directors in its meeting held on 30 November 2016 decided that since the future
prospects of BL are quite attractive, its shares should be held till 30 June 2018. The market rate
on 30 November 2016 was Rs. 621.

On 31 December 2016, RIL decided to record an impairment loss of Rs. 5 million against
investment in KL. The market price of shares of KL and BL as on 31 December 2016
was Rs. 80 and Rs. 600 respectively.

RIL’s broker normally charges transaction costs of 0.2%.

Required:
Explain the accounting treatment of the above transactions in accordance with IFRSs. [11]

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14. It was noted that investment in debentures has not been accounted for correctly.

On 1 January 2018, DL purchased 2.5 million debentures (having face value of Rs. 100 each)
issued by Peso Limited. Debentures were purchased at Rs. 103 each. However, the fair value of
each debenture as on the date of purchase was Rs. 105 in the quoted market. Transaction cost
of Rs. 1.5 million was also incurred on purchase of debentures.

Coupon rate of debentures is 12% which is payable annually on 31 December. DL has classified
the investment in debentures as financial asset at fair value through other comprehensive income.
At initial recognition, DL determined that debenture was not credit impaired.

DL estimated that 12 months expected credit losses in respect of the investment in debentures at
1 January 2018 and 31 December 2018 amounted to Rs. 8 million and Rs. 6 million
respectively. As on 31 December 2018, the debentures were quoted on Pakistan Stock Exchange
at Rs. 109 each.

Upon purchase, transaction price was recorded as financial asset whereas the transaction cost
was charged to profit or loss. Interest has been received and taken to profit or loss. No further
entries have been made in the books.

Required:
Determine the revised amount of assets & liabilities.

15. On 1 April 2014, ISL entered into a contract with Invest Bank. Under the contract, ISL
deposited an amount of USD 5 million, at an interest of 2.5% per annum with a maturity date of
31 March 2017. Interest will be received on maturity along with the principal. Further, an
additional 2% interest per annum would be payable by Invest Bank in the event the value of
USD increases by 5% or more. The contract is in line with ISL’s policy of making low risk
investments in foreign as well as local currencies.

Required:
Explain how the above investment should be measured in ISL’s books of account at 31 March
2015. [05]

16. You have significant investment in XYZ Limited. Your brokerage house has provided you with
a report which is based on the financial statements of XYZ Limited for the year ended 30 June
2015. You have reviewed the report and the financial statements and obtained the following
information:
i. Deferred Tax Assets
The company has recognized substantial amount of deferred tax asset in respect of carried
forward losses, which will expire in next three years. The losses were incurred during the
last five years and in current year it made a small profit before tax due to non-operating
gains.
ii. Convertible Preference Shares
Convertible preference shares have been disclosed as a liability.
iii. Unrealized gains and losses

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The company uses fair value method for investments held as “Available for sale” and “Held
for trading” and unrealised gains and losses on such investments are recorded in other
comprehensive income.

You have also received information that the company has revised its pension scheme significantly,
subsequent to the issuance of the above financial statements. However there is no information as
regards the actuarial valuation subsequent to the revision.
Required:
Assume that the report has been prepared without considering the possible impact of the
adjustments required because of the above information, if any. Discuss how this could affect the
evaluation carried out by the brokerage house in terms of liquidity, solvency and profitability
ratios and business valuation of XYZ Limited.

17. Asia Sports Limited (ASL) signed a contract on 1 May 2015 to buy high speed machines to cater
to the growing demand of its products. The machines costed USD 6 million and the amount was
paid on 1 August 2015.

ASL hedged the foreign exchange risk by entering into a 3-month forward contract with a bank
to buy USD 6 million on 1 August 2015.
The spot and forward rates per USD were as follows:
Dates Spot rates Forward rates (for delivery
on 1 August 2015)
1-May-15 Rs. 103.20 Rs. 103.63
30-Jun-15 Rs. 105.38 Rs. 105.50
1-Aug-15 Rs. 106.00 Rs. 106.00

ASL’s financial year ends on 30 June.

Required:
Show all necessary accounting entries relating to these transactions on the following dates, in
accordance with the requirements of the International Financial Reporting Standards on the
assumption that conditions for hedge accounting are met:
i. 1 May 2015
ii. 30 June 2015
iii. 1 August 2015

18. Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired 20,000
ordinary shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based company at a
cost of AED 240,000 which was equivalent to Rs. 6,000,000. The face value of the shares is
AED 10 each. OL intends to hold the shares to avail benefits of regular dividends and capital
gains.
On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares in HL
in exchange for every four shares held in AWL.
Other Relevant information are as follows:

Particulars AWL HL

Final dividend received on 31 March 2013:

Cash 15%

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Bonus shares 10%

Final cash dividend received on 10 April 2014 - 20%
Fair value per share as at: 31 December 2012 AED 13.00
1 June 2013 AED 14.00 AED 18.00
31 December 2013 - AED 19.50
Exchange rates on various dates were as follows:
31-Dec-2012 31-Mar-2013 l-Jun-2013 31-Dec-2013 10-Apr-2014
1 AED Rs. 25.00 Rs. 26.50 Rs. 28.00 Rs. 28.70 Rs. 28.20

Required:
Determine the amounts (duly classified under appropriate heads) that would be included in OL’s
statement of comprehensive income for the year ended 31 December 2013 in respect of the
above investment.

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Earnings Per Share

1. The profit after tax earned by AAZ Limited during the year ended December 31, 2007 amounted to
Rs. 127.83 million. The weighted average number of shares outstanding during the year were
85.22 million.
Details of potential ordinary shares as at December 31, 2007 are as follows:
■ The company had issued debentures which are convertible into 3 million ordinary shares.
The debenture holders can exercise the option on December 31, 2009. If the debentures
are not converted into ordinary shares they shall be redeemed on December 31, 2009. The
interest on debentures for the year 2007 amounted to Rs. 7.5 million.
■ Preference shares issued in 2004 are convertible into 4 million ordinary shares at the option
of the preference shareholders. The conversion option is exercisable on December 31,
2010. The dividend paid on preference shares during the year 2007 amounted to Rs. 2.45
million.
■ The company has issued options carrying the right to acquire 1.5 million ordinary shares of
the company on or after December 31, 2007 at a strike price of Rs. 9.90 per share. During
the year 2007, the average market price of the shares was Rs. 11 per share.

The company is subject to income tax at the rate of 30%.

Required:
(a) Compute basic and diluted earnings per share.
(b) Prepare a note for inclusion in the company’s financial statements for the year ended
December 31, 2007 in accordance with the requirements of International Accounting
Standards.

2. The following information relates to Afridi Industries Limited (AIL) for the year ended
December 31, 2008:
(i) The share capital of the company as on January 1, 2008 was Rs. 400 million of Rs. 10
each.
(ii) On March 1, 2008, AIL entered into a financing arrangement with a local bank. Under
the arrangement, all the current and long-term debts of AIL, other than trade payables,
were paid by the bank. In lieu thereof, AIL issued 4 million Convertible Term Finance
Certificates (TFCs) having a face value of Rs. 100, to the bank. These TFCs are
redeemable in five years and carry mark up at the rate of 8% per annum. The bank has
been allowed the option to convert these TFCs on the date of redemption, in the ratio
of 10 TFCs to 35 ordinary shares.
(iii) On April 1, 2008, AIL issued 30% right shares to its existing shareholders at a price
which did not contain any bonus element.
(iv) During the year, AIL earned profit before tax amounting to Rs. 120 million. This profit
includes a loss before tax from a discontinued operation, amounting to Rs. 20 million.
(v) The applicable tax rate is 35%.

Required:
Prepare extracts from the financial statements of Afridi Industries Limited for the year
ended December 31, 2008 showing all necessary disclosures related to earnings per share
and diluted earnings per share.
(Ignore corresponding figures)

3. The following information pertains to ABC Limited, in respect of year ended March 31, 2010.
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Rs. in
‘000
Consolidated profit for the year (including minority interest) 15,000
Profit attriutable to minority interest 2,000
Dividend paid during the year to ordinary shareholders 4,000
Dividend paid on 10% Cumulative Preference shares for the year 2009 2.000
Dividend paid on 10% Cumulative Preference shares for the year 2010 2.000
Dividend declared on 12% Non Cumulative Preference shares for the year 2010 2.400
(i) The dividend declared on the non-cumulative preference shares, as referred above, was
paid in April 2010.
(ii) The cumulative preference shares were issued at the time of inception of the company.
(iii) The company had 10 million ordinary shares at March 31, 2009.
(iv) The 12% non-cumulative preference shares are convertible into ordinary shares, on or
before December 31, 2011 at a premium of Rs. 2 per share. 0.50 million non
cumulative preference shares were converted into ordinary shares on July 1, 2009.
(v) 1.20 million right shares of Rs. 10 each were issued at a premium of Rs. 1.50 per share
on October 1, 2009. The market price on the date of issue was Rs. 12.50 per share.
(vi) 20% bonus shares were issued on January 1, 2010.
(vii) Due to insufficient profit no dividend was declared during the year ended March 31,
2009.
(viii) The average market price for the year ended March 31, 2010 was Rs. 15 per share.

Required:
Compute basic and diluted earnings per share and prepare a note for inclusion in the
consolidated financial statements for the year ended March 31, 2010

4. Extracts from statement of comprehensive income of Rahat Limited (RL) for the year ended
March 31, 2011 are as under:

Particulars 2011 2010

Rs. in ‘000
Profit after taxation 150,000 110,000
Exchange gain on foreign operations, net of tax 10,000 8,000
Total comprehensive income 160,000 118,000
Following further information is available:
(i) As of April 1, 2010 share capital of the company consisted of:
■ 5 million ordinary shares of Rs. 10 each.
■ 0.2 million convertible 15% cumulative preference shares of Rs. 100 each.
(ii) Each preference share is convertible into 7 ordinary shares at the option of the
shareholders. 10,0 preference shares were converted into ordinary shares on July 1, 2010.
(iii) On September 10, 2010 a right issue of one million ordinary shares had been announced
at an exercise price of Rs. 12 per share. By October 1, 2010 which was the last date to
exercise the right, all the shares had been subscribed and paid. The market price of an
ordinary share on September 10 and October 1, 2010 was Rs. 15.50 and Rs. 15
respectively.
(iv) On April 30, 2011 the Board of Directors had declared a final cash dividend of 20%
(2010:18%) for the year ended March 31, 2011.
(v) There was no movement in share capital during the previous year.

Required:
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Prepare a note related to earnings per share, for inclusion in the company’s financial statements
for the year ended March 31, 2011 in accordance with International Financial Reporting
Standards. Show comparative figures.(16 marks)

5. The following information relates to Que Limited (QL) for the year ended 31 December 2011:
(i) Issued share capital on 1 January 2011 consisted of 80 million ordinary shares of Rs. 10 each.
(ii) Profit after tax amounted to Rs. 130 million. It includes a loss after tax from a discontinued
operation, amounting to Rs. 40 million.
(iii) On 30 September 2011, QL issued 20% right shares at a price of Rs. 11 per share. The
market value of the shares immediately before the right issue was Rs. 12.50 per share.
(iv) There are 25,000 share options in existence. Each option allows the holder to acquire 120
shares at a strike price of Rs. 10 per share. The options have already vested and will expire
on 30 June 2013. The average market price of ordinary shares in 2011 was Rs. 12 per
share.
(v) QL had issued debentures in 2008 which are convertible into 6 million ordinary shares.
The debentures shall be redeemed on 31 December 2012. The conversion option is
exercisable during the last six months prior to redemption. The interest on debentures for
the year 2011 amounted to Rs. 11 million.
(vi) Preference shares issued in 2009 are convertible (at the option of the preference
shareholders) into 4 million ordinary shares on 31 December 2013. The dividend paid on
preference shares during 2011 amounted to Rs. 5.75 million. (vii) The company is subject
to income tax at the rate of 35%.

Required:
Prepare extracts from the financial statements of Que Limited for the year ended 31 December
2011 showing all necessary disclosures related to earnings per share.

6. The following information pertaining to Krishna Limited (KL) has been extracted from its
financial statements for the year ended 31 December 2012.

Total comprehensive income for the year:

Particulars Rs. in ‘000
Profit from continuing operations - net of tax 200,000
Profit from discontinued operations - net of tax 10,000
Fair value gain on investments available for sale - net of tax 16,000
Total comprehensive income 226,000
(i) Share capital as on 1 January 2012:
■ 8,000,000 Ordinary shares of Rs. 10 each.
■ 500,000 Convertible preference shares of Rs. 100 each entitled to a cumulative dividend at
12%. Each share is convertible into two ordinary shares and the dividend is paid on 28
February every year.
(ii) 20% bonus shares being the final dividend for the year ended 31 December 2011 were
issued on 31 March 2012.
(iii) On 30 April 2012, holders of 80% convertible preference shares converted their shares
into ordinary shares.
(iv) On 1 July 2012, KL issued 20% right shares to its ordinary shareholders at Rs. 70 per
share. The market price prevailing on the exercise date was Rs. 80 per share.
(v) On 1 August 2011, KL granted 2,500 share options to each of its twenty technical
managers. The managers would become eligible to exercise these options on completion

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of further five years of service with KL. By 31 December 2012, two managers had already
left and it is expected that a further six managers would leave KL before five years. As of
31 December 2012 estimated fair value of each share option was Rs. 40.

Required:
Prepare a note relating to basic and diluted earnings per share for inclusion in KL’s financial
statements for the year ended 31 December 2012, in accordance with International Financial
Reporting Standards. (15).

7. Following information pertains to Tiger Limited (TL):

Quarter ended 31- Half year ended
Dec-2017 31-Dec-2017
Profit after tax (Rs. In million) 140 239
Average market price per share (Rs.) 330 360

Ordinary shares:
➢ 20 million shares of Rs. 100 each were outstanding as at 1 July 2017.
➢ 4 million shares were issued on 1 August 2017 at market price of Rs. 355 per share.

Convertible bonds
On 1 November 2016 TL issued 0.8 million 7% convertible bonds at par value of Rs. 1,000
each. Each bond is convertible into 3 ordinary shares at any time prior to maturity date of 31
October 2019. On inception the liability component was calculated as Rs. 760 million. On the date
of issue, the prevailing interest rate for similar debt without conversion option was 9% per annum.

50% of these bonds were converted into ordinary shares on 1 November 2017.

Warrants
On 1 January 2016, TL issued share warrants giving the holders right to buy 6 million ordinary
shares at Rs. 340 per share. The warrants are exercisable within a period of 2 years.
Applicable tax rate is 30%.
Required:
Compute basic and diluted EPS to be disclosed in statement of profit or loss for the following
periods:
a. Quarter ended 31 December 2017 [06]
b. Half year ended 31 December 2017 [07]
(Show all relevant workings)

8. Following information pertains to Sajjad Limited (SL) for the year ended 31 December 2016:
i. The share capital of SL comprises of:
Rs. in million
Ordinary share capital (Rs. 100 each) 1,000
9% Class A preference shares (Rs. 100 each) 200
6% Class B preference shares (Rs. 100 each) 300
ii. Class A preference shares which were issued on 1 January 2014 are cumulative, non-
convertible and non-redeemable. These shares were issued at Rs. 77.22 per share i.e. at a
discount of Rs. 22.78 per share. These shareholders are entitled to annual dividend of 9% with

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effect from 1 January 2017. At the time of issue, the market dividend yield on such type of
preference shares was 9% per annum.
iii. Class B preference shares which were issued on 1 January 2016 are non-
cumulative, non-convertible and non-redeemable. The payment of dividend of these shares
was made on 29 December 2016. These shareholders are also entitled to participate in any
remaining profits after adjusting dividend to ordinary and preference shareholders. Such
remaining profits are allocated between the Class B shareholders and the ordinary
shareholders in such a manner that the profit per share of ordinary shareholders is twice the
profit per share of Class B shareholders.
iv. SL earned profit after tax of Rs. 150 million during the year ended 31 December 2016 and
paid interim dividend of Rs. 2.50 per share to ordinary shareholders.

Required:
Compute basic earnings per share for the ordinary shareholders for the year ended 31 December
2016. [08]
9. The following information has been extracted from draft statement of financial position of Ittehad
Industries Limited (IIL), as on 31 December 2014:
2014 2013
Rs. in million
Share capital (Rs.10 each) 1,800 1,200
Share premium 380 230
Accumulated profit 3,756 3,556
11.5% Term finance certificates (TFCs) 250 -

The following information is also available:

i. The profit after tax earned by IIL during the year ended 31 December 2014 amounted to
Rs. 225 million.
On 1 April 2014, IIL issued 25% right shares to its existing shareholders at Rs. 15 per
share. Market value of the shares prior to the issue of right shares was Rs. 25 per share.
ii. 20% bonus shares for the year ended 31 December 2013 were issued on 1 May 2014. The
right shares issued on 1 April 2014 were also entitled for the bonus.
iii. On 31 December 2014, 5 million shares were not yet vested under the employee share option
scheme. The exercise price of the option was Rs. 12 per share and average market price per
share during 2014 was Rs. 15 per share. The amount to be recognized in relation to
employee share option in profit and loss account over future accounting periods up to
vesting date is Rs. 10 million.
iv. On 1 July 2014, IIL issued TFCs which are convertible into 20 million ordinary shares on
31 December 2018.
v. IIL is subject to income tax at the rate of 35%.

Required:
Prepare relevant extracts to be reflected in the financial statements of Ittehad Industries Limited for
the year ended 31 December 2014 showing all necessary disclosures relating to earnings per share.
(Comparative figures are not required) [15]

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Construction Contracts

1. Silver Construction Limited (SCL) was incorporated on July 1, 2007 with a share capital of
Rs. 500 million. It is involved in the construction of bridges, dams, pipelines, roads etc.
During the year ended June 30, 2008, the company commenced work on six contracts, details
of which are as follows:
CONTRACTS
I II III IV V VI
--------- Rupees in million -----------
Total contract price 300 375 280 400 270 1,200
Billing up to June 30, 2008 200 110 280 235 205 1,200
Contract cost incurred up to June 30, 2008 248 68 186 246 185 1,175
Estimated further cost to complete 67 221 - 164 15 -
Following additional information is available:
(i) As per terms of Contract IV, the company will receive an additional Rs.40 million if the
construction is completed within a period of twelve months from the commencement of
the contract. The management feels that there is a 90% probability that it will be able to
meet the target.
(ii) An amount of Rs. 16 million was incurred on Contract II on account of a change in design.
The company has discussed it with the customer who has informed SCL that the amount
is on the higher side and needs to be revised.
Required:
(a) Make relevant calculations and prepare appropriate extracts to be reflected in the Balance
Sheet and Income Statement for the year ended June 30, 2008.
(b) Justify your accounting treatment in respect of the additional information provided above.

2. Modern Construction Limited (MCL) was established on July 1, 2008. It had entered into two
different contracts up to June 30, 2010 and their progress is as under:
Contract A Contract B
Contract start date 1-1-2009 1-9-2009
Work certified and billed upto June 30, 2009 25% -
Work certified and billed upto June 30, 2010 80% 20%
Work completed but not certified upto June 30, 2010 - 5%
------ Rupees in million -------
Contract price 800 400
Costs incurred upto June 30, 2009 180 -
Costs incurred during the year ended June 30, 2010 420 125
Estimated costs to complete on June 30, 2009 500 -
Estimated costs to complete on June 30, 2010 100 270
Unpaid bills (gross) as on June 30, 2010 140 -
Other relevant information is as under:
(i) The company recognizes contract revenue and expenses using % of completion method.
(ii) 10% of contract price had been paid as advance on signing of each contract and is
adjustable from the progress payments.
(iii) A progress bill is raised on the basis of work % certified by the consultant. All customers
deduct 5% retention money from the progress bills.

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(iv) Contract costs incurred during the year do not include:

■ Retainership fee amounting to Rs. 2 million paid to the consultant for technical
assistance on contracts A and B. 30% of the consultant’s time was used on contract A
and 70% on contract B.
■ Research cost for improving work quality and cost efficiency amounting to Rs. 1.9
million.
(v) The company is required to rectify all the defects during warranty period of one year. It is
estimated that rectification costs to be incurred during warranty period would be 5% of
the contract price.

Required:
Prepare appropriate extracts to be reflected in the Statement of Financial Position, Income
Statement and relevant notes to the accounts for the year ended June 30, 2010 in accordance
with IAS 11 (Construction Contracts).

3. Quality Works Limited (QWL) undertakes construction contracts. The following information
pertains to one of its contracts under progress as at 30 June 2014.
(i) Price of the contract is agreed at Rs. 3,000 million and cost to complete the contract is
estimated at Rs. 2,400 million. Construction work was started on 1 July 2012 and is
planned to complete on 31 December 2014. Progress of the contract is summarised as
under:
As at As at
30 June 2014 30 June 2013
Rs. in million
Accumulated actual costs 2,560 1,500
Revised estimated cost to complete the contract 2,000 2,600
Unpaid gross bills as at 30 June 2014 100 75
Work certified and billed 80% 45%

(ii) QWL recognises contract revenue and cost under percentage of completion method.
(iii) Actual cost includes cost of preparation of quotation amounting to Rs. 7 million.
(iv) Payment terms as agreed with the client are as under:
■ Payment of 10% of contract price on signing of the contract, adjustable from the
monthly progress billings.
■ Deduction of 5% retention money from the monthly progress billings. The amount
is refundable at the end of the warranty period i.e. one year after completion of the
contract.
(v) QWL is required to rectify defects, if any, during the warranty period. Cost of
rectification is estimated at 5% of the contract price.
Required:
In light of the International Financial Reporting Standards, prepare relevant extracts from the
following:
(a) Statement of financial position as at 30 June 2014. (08)
(b) Statement of comprehensive income for the year ended 30 June 2014. (07)
(Show comparative figures and ignore taxation)

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Income Taxes

1. Red Limited has carried out the following transactions during the year ended June 30, 2008.
• On July 1, 2007, the company has received a loan of Rs. 100 million from Green Limited -
a related party which is due for repayment after three years and does not carry any interest.
The market interest rate for similar loans is 15% per annum. Red Limited is subject to
taxation at the rate of 35%.

• On August 1, 2007, the company granted 200,000 employees’ stock options at Rs. 5, when
the market price was Rs. 13 per share. 95% of the options were exercised between March 1,
2008 and April 30, 2008. The remaining options lapsed. The share capital of the company
is divided into shares of Rs. 10 each.
• The company holds 500,000 shares of Green Limited (GL), a listed company, which were
purchased many years ago at Rs. 10 per share. The transaction cost on purchase was Rs.
120,000. The shares were classified as available for sale. On May 31, 2008, the fair value of
GL’s shares was Rs. 20 per share. On the same day, GL was acquired by Orange Limited
(OL), a listed company. As a result, Red Limited received 200,000 shares of OL which had
a market value of Rs. 65 per share, on that date.
Required:
Prepare journal entries to record the above transactions including the effect of deferred tax
thereon, if any, in the books of Red Limited, for the year ended June 30, 2008.

2. Financial statements of Niazi Company Limited (NCL) for the year ended 31 December 2012
are in the process of finalisation. In this respect, the following information has been gathered
from the company’s accounting and tax records. i.
Property, plant and equipment (PPE)
31-12-2012 31-12-2011
------- Rs. in million -------
Accounting WDV (at revalued amount) 2,700 2,000
Tax WDV 2,400 1,600
Details of the revaluation are as under:
■ Revaluation of freehold land and buildings on 31 December 2005 resulted in a
revaluation surplus of Rs. 15 million and Rs. 20 million respectively.
■ Plant and machinery costing Rs. 150 million was commissioned on 1 January 2010 with
an expected useful life of 10 years. It was revalued at Rs. 145 million on 31 December 2012. ii.
Provision for retirement benefits and doubtful debts
Rs. in million
Balance on 31 December 2011 50
Write offs during the year 5
Provision for the year, net of payments of Rs. 3 million 6
iii. Liabilities outstanding for more than three years
NCL’s tax assessment for the year ended 31 December 2010 was finalized on 30 April
2012 in which liabilities outstanding for more than three years and amounting to Rs. 8
million were added back to income.
A sum of Rs. 2 million included in the above liabilities was paid while a liability of Rs. 3
million was written back by NCL in 2012.
iv. Applicable tax rate is 35%.
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Required:
Prepare a note related to deferred tax liability/asset for inclusion in NCL’s financial statements
for the year ended 31 December 2012, in accordance with the International Financial Reporting
Standards.

3. Elephant Limited (EL) is in process of finalizing its financial statements for the year ended 31
December 2017. The following information has been gathered for preparing the disclosures
relating to taxation:
i. Profit before tax for the year after making all necessary adjustments was Rs. 103
million.
ii. Expenses include:
donations of Rs. 12 million not allowable for tax purposes.
accruals of Rs. 30 million which will be allowed in tax on payment basis.
iii. Other income includes government grant of Rs. 10 million and dividend of Rs. 4 million.
Government grant is not taxable while dividend income is subject to tax rate of 10%.
iv. Accounting depreciation for the year exceeds tax depreciation by Rs. 20 million.
v. On 31 December 2017 buildings were revalued for the first time resulting in a surplus of Rs.
60 million. Revaluation does not affect taxable profits.
vi. On 1 January 2017 EL granted 5,000 share options each to 12 senior executives, conditional upon
the executives remaining in EL’s employment until 31 December 2018. The exercise price is
Rs. 20 per share. On grant date, EL estimated the fair value of the share options at Rs. 180 per
option.

As on 31 December 2017 it was estimated that 2 employees would leave EL before 31 December
2018. Fair value of each share as on 31 December 2017 was Rs. 150.

As per tax laws, intrinsic value of the share option on the exercise date is an admissible expense.
vii. On 1 January 2017 EL had issued 1.5 million 10% convertible Teprm Finance Certificates
(TFCs) of Rs. 100 each. Interest is payable annually on 31 December whereas the principal is
to be paid at the end of 2020. Two TFCs are convertible into one ordinary share at any time
prior to maturity. On the date of issue, the prevailing interest rate for similar debt without
conversion option was 12% per annum.

The tax authorities do not allow any deduction for the imputed discount on the liability
component of the convertible TFCs.
viii. Net deferred tax liability as on 1 January 2017 arose on account of:
Rs. in million
Property, plant and equipment (Rs. 95 million × 35%) 33.25
Unused tax losses (Rs. 85 million × 35%) (29.75)
Deferred tax liability – net 3.50

ix. The tax rate for 2017 is 30% while it was 35% in 2016 and prior periods.

Required:
Prepare notes on taxation and deferred tax liability/asset for inclusion in EL’s financial
statements for the year ended 31 December 2017, in accordance with the IFRSs. [17]

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4. On 1 January 2016, Laliwala Group (LG) acquired 100% holding in PA Limited (PAL) at a
consideration of Rs. 2,000 million in cash plus replacement awards as discussed in (iv)
below. LG also paid Rs. 20 million to its bankers and lawyers in connection with the deal.

The fair value of the assets and liabilities of PAL together with their carrying values and tax base
on acquisition date are given below.
Fair Value Carrying Tax Base
Value
Rs. In Millions
Property, plant & equipment 1,532 1,259 887
Investments 490 367 290
Deferred tax asset-net 24 24 NA
Current assets 1,572 1,572 1,572
Total assets 3,618 3,222 2,749

Long term debt 634 634 634

Retirement benefit obligations 60 17 -
Current liabilities 1,194 1,194 1,194
Total liabilities 1,888 1,845 1,828

Other information relating to acquisition of PAL:

i. LG recognized development cost previously incurred by PAL as an intangible asset at its fair value
of Rs. 153 million. PAL had charged off these costs in 2014.
ii. A contingent liability of Rs. 39 million is appearing in the financial statements of PAL. LG’s
legal adviser had estimated that PAL is likely to pay Rs. 25 million to settle the claim.
iii. PAL had assessed brought forward losses of Rs. 940 million. It is estimated that PAL would be
able to utilise losses of Rs. 500 million only. LG expects that losses of Rs. 300 million can
be used against future taxable profits of the group.
iv. PAL had outstanding employee share options with a market based measure of Rs. 140
million. The share options were fully vested. As part of the business combination, PAL’s
outstanding share options were replaced by share options of LG with a market based measure
of Rs. 140 million and an intrinsic value of Rs. 90 million. The replacement awards are
fully vested.

On 31 December 2016 intrinsic value of replacement awards has increased to Rs. 150
million. According to the tax law, intrinsic value of the option on the exercise date is an admissible
expense.

Additional Information:
i. During the year, the following inter-company transactions took place between LG & PAL:

Sales Included in buyer's Profit % on

closing inventories sales
Rs. In Million
LG to PAL 520 80 20%
PAL to LG 790 140 15%
ii. On 1 January 2016, LG acquired 30% shareholdings in NA Limited (NAL) at a cash consideration
of Rs. 165 million. During 2016, NAL reported net income of Rs. 50 million out of which
it distributed dividend of Rs. 20 million.

LG plans to dispose of 40% of its total shareholdings in NAL by 30 June 2017.

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iii. Applicable tax rates for LG and PAL are 25% and 35% respectively. Both companies are subject
to tax on dividend income and capital gain at 12.5% and 17.5% respectively.

Required:
Determine the amounts of goodwill and deferred tax to be recognized in the consolidated financial
statements of LG for the year ended 31 December 2016, as a result of above transaction. [20]

5. Financial statements of Waseem Industries Limited (WIL) for the year ended 30 June 2015 are in
the process of finalization. In this respect, the following information has been gathered from WIL’s
accounting and tax records:
2015 2014
Rs. in million
Property, plant and equipment - Accounting WDV 1,950 1,800
Property, plant and equipment - Tax WDV 1,120 1,050
Provision for bad debts 110 -
Unused tax losses carried forward 40 35
Exchange translation reserve 53 145
Liabilities older than 3 years, disallowed in previous years 7 3

i. On 1 July 2013, WIL granted 600,000 share options to its Managing Director under the terms
of his employment, vesting three years later on 30 June 2016. The value of each option measured
at the grant date was Rs. 300 and the intrinsic value of each share option was Rs. 140 at 30 June
2014 and Rs. 110 at 30 June 2015. According to the tax law, intrinsic value of the option on the
exercise date is an admissible expense.
ii. A building costing Rs. 200 million was purchased on 1 July 2011 with an expected useful life
of 10 years. It was revalued at Rs. 230 million on 1 July 2013.
iii. 25% of WIL's income and expenses for both years fall under the Final Tax Regime (FTR) and
this trend is expected to continue in future also.
iv. Applicable tax rate is 32%.

Required:
Prepare a note related to deferred tax liability /asset along with the reconciliation that may be
included in WIL's financial statements for the year ended 30 June 2015, in accordance with the
International Financial Reporting Standards and the Companies Ordinance, as applicable.
(Comparative figures are not required) [15]

6. Following information pertaining to Moon Light Limited (MLL) is available for computing tax
charge/liability for inclusion in the financial statements for the year ended 31 December 2013.
Rs. In Mio.
Profit before dividend and capital gains 500
Dividend income 25
Capital gains (exempt from tax) 28
Permanent add-backs under the tax laws 35
Actuarial gains for the year on defined benefits plans (Balance as
at 31 December 2012 amounted to Rs. 140 million) 60
Other relevant information is as under:
(i) MLL’s tax assessment for the year ended 31 December 2011 was finalized in May
2013 raising an additional tax liability of Rs. 4.2 million. The assessment was not
contested and the liability was paid by MLL.

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(ii) Following details are available in respect of provision for doubtful debts:
■ Balance as at 31 December 2012 amounted to Rs. 90 million
■ Write offs against provision amounted to Rs. 25 million
■ Balance as at 31 December 2013 amounted to Rs. 125 million
(iii) Property, Plant and Equipment
2013 2012
Rs. in million
Accounting WDV 1,850 1,800
Tax WDV 1,880 I 1,750
(i) Applicable tax rates for 2012 and 2013 are 35% and 10% for business and dividend
income respectively for both years.
Required:
Prepare notes on taxation for inclusion in the financial statements of MLL for the year ended 31
December 2013, in accordance with the International Financial Reporting Standards

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Share Based Payments

1. Rahman Limited (RL) is a listed company engaged in the manufacture of leather goods. Its
financial year ends on June 30. In a meeting held on July 1, 2009 its Board of Directors
acknowledged the outstanding performance of the company’s Chief Operating Officer (COO)
and in recognition thereof, decided to allow him either of the following options:
Option I: Receive a cash payment equal to the current value of 64,000 shares of RL.
Option II: Receive 80,000 shares of RL.
However, the above offer was subject to certain conditions. These conditions and other relevant
information are as follows:

• The right is conditional upon completion of three years’ service from the date the right was
granted and the decision to select the option shall also be exercised on the completion of the
said period.
• The share price of RL on July 1, 2009 is Rs. 125 per share. It is estimated that the share price
at the end of year 2010, 2011 and 2012 will be Rs. 130, Rs. 138 and Rs. 150 respectively.
• If the COO chooses option II, he shall have to retain the shares for two years i.e. up to June
30, 2014 before being eligible to sell them. However, the fair value of the shares after taking
into account the effects of the post vesting transfer restrictions is estimated at Rs. 110 per
share.
• RL does not expect to pay any dividend during the next three years.
Required:
Prepare the journal entries:
• to record the above transactions in the books of Rahman Limited for the year ending June
30, 2010, 2011 and 2012.
• to record the settlement of right on June 30, 2012 under:
■ Option I
■ Option II.

2. Engineering Works Limited (EWL) is in the process of finalising its Financial Statements for
the year ended June 30, 2010. The issue as detailed below is being deliberated upon by the CFO.
It is the policy of EWL to pay annual bonus of Rs. 10,000 each to all of its 600 workers, after
two months of closure of the financial year. On June 1, 2010 the management announced a
scheme whereby each worker was given the option to purchase 1,000 shares of EWL on a
payment of Rs. 8 per share, in lieu of cash bonus for the year ended June 30, 2010. The face
value of the company’s shares is Rs. 10 each. The last date to exercise the option was fixed at
July 31, 2010. Other related information is as follows:

■ 60% employees exercised the option by June 30, 2010.

■ By July 31, 2010 further 20% employees had accepted this option.
■ The workers who exercise the option are required to retain the shares up to June 30, 2012
before being eligible to sell them.
■ The shares were issued on September 1, 2010.
■ The market price and fair value of the shares at various dates were as under:

10-Jun-10 31-Jul-10 01-Sep-10

1 Market price per share Rs. 32 37 42
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Fair value per share (after taking effect of post

1 vesting transfer restriction) Rs. 30 34 40
Required:
Prepare journal entries for the above transactions and adjustments during the years June 30,
2010 and 2011.
3. Quail Pakistan Limited (QPL), a listed company, is reviewing the following transactions which
have not yet been accounted for in the financial statements for the year ended 30 June 2012:
(a) On 1 July 2011, QPL announced a bonus of Rs. 30 million to its employees if they achieved
the annual budgeted targets by 30 June 2012. The bonus would be paid in the following
manner:

■ 25% of the bonus would be paid in cash on 31 December 2012 to all employees
irrespective of whether they are still working for QPL or not.
■ The balance 75% will be given in share options, to those employees who are in QPL’s
employment on 31 December 2012. The exercise date and number of options will be
fixed by the management on the same day.

The budgeted targets were achieved. The management expects that 5% employees would
leave between 30 June 2012 and 31 December 2012.

(b) On 30 June 2012, a plant having a list price of Rs. 50 million was purchased. QPL has
allowed the following options to the supplier, in respect of payment thereagainst: ■ To
receive cash equivalent to price of 1.5 million shares of the company after 3 months; or
■ To receive 1.7 million shares of the company after 6 months.

QPL estimates that price of its shares would be Rs. 35 per share after three months and Rs.
40 per share after six months.

Required:
Discuss how the above share-based transactions should be accounted for in QPL’s
financial statements for the year ended 30 June 2012. Show necessary calculations.
(Journal entries are not required)

4. On 1 January 2014, Corolla Limited (CL) granted share options to each of its 50 executives to
purchase CL’s shares at Rs. 1,000 per share. In this respect following information is available:
i. The share options will vest and become exercisable upon completion of 3 years provided that:
The executives remain in service till the vesting date.
CL’s share price increases to Rs. 1,500 per share.
ii. Each executive will receive 4,000 share options if average annual gross profit during the vesting
period is atleast Rs. 900 million. However, if the average gross profit exceeds Rs. 1,000 million
each executive would be entitled to 6,000 share options.
iii. On 1 January 2016, CL extended the vesting period to 31 December 2017 and reduced the
exercise price to Rs. 900 per share. On 1 January 2016, fair value of each share option was Rs.
580 for the original share option granted (i.e. before taking into account the re-pricing) and Rs.
710 for re-priced share option.
Following further information is also available:

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1 Jan. 31 Dec.
2014 2014 2015 2016 2017
Executives in employment 50 47 44 43 42
Executives expected to leave during 12 8 4 2 -
remaining vesting period
Gross profit for the year (Rs. in million) NA 940 820 1,270 1,200
Fair value of each share (Rs.) 1,400 1,450 1,550 1,480 1,650
Fair value of each option (Rs.) 600 650 580 650 750

At each year-end, CL estimated that gross profit for the future years would approximately be the
same as of current year.

Required:
Calculate the amounts recorded in respect of share options in CL’s financial statements for the
years ended 31 December 2014, 2015,2016 and 2017 and explain the basis of your calculation.
[16]

5. On 1 July 2016 Ravi Limited (RL) offered 1000 share options to each of its 500
employees. The offer is conditional upon completion of five years’ service from the date the
offer was given. The award of options would depend on attainment of the following additional
conditions:
Condition 1: Average sales for the next five years is Rs. 300 million or more.
Condition 2: At the end of the 5th year, share price of the company exceeds Rs. 200 per share.

Market values of the options at grant date were estimated as under:

Rupees
Without taking into account any of the two conditions 50
Taking into account only condition 1 44
Taking into account only condition 2 38
Taking into account both the conditions 36

Following information is available at year end:

i. Sales for the year ended 30 June 2017 was Rs. 210 million however it was estimated that
sales would increase by 20% each year.
ii. The share price was Rs. 160 per share.
iii. It was estimated that 15% of the employees would leave the company before completion of
five years.

Required:
Discuss how this transaction should be recorded in RL’s books of accounts for the year ended 30
June 2017. [05]

6. On 1 July 2013, XYZ offered 5000 share options each to its 10 marketing managers and 10
back office managers. The offer is conditional upon completion of three years’ service from the
date the offer was given. It was estimated at the time of offer that two managers from each
department would leave the company before the completion of 3 years. The fair market
value of the company’s shares on 1 July 2013 was Rs. 50 per share.
Other conditions and information are as follows:
i. Condition specific to Marketing managers:
Marketing manager can exercise the offer if the profit of the company increases by 10% per
annum on average over the next three years.
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The offer can be exercised at Rs. 18 per share at the completion of vesting period.
ii. Condition specific to back office managers:
Back office managers can exercise the offer if share price of the company increases by
10% per annum on average over the next three years.
The offer can be exercised at Rs. 23 per share at the completion of vesting period.
On 1 July 2013, fair value of these share options was Rs. 30 per option taking into account
the estimated probability that the necessary share price growth would be achieved.
iii. On 1 January 2016, the share price declined. Considering the decline, XYZ modified the
share option scheme for back office managers by reducing the exercise price to Rs. 10 per
share. The fair value of the option immediately before and after the reduction in exercise price
was Rs. 5 and Rs. 14 respectively.
iv. Upto 30 June 2015, there was no change in estimate regarding number of managers leaving
the company. However, during the year ended 30 June 2016, three managers left the company
i.e. two from marketing and one from back office. [10]

7. On 1 October 2017 ZL purchased a piece of land from Cow Limited (CL) having fair value of
Rs. 230 million. According to the agreement, CL has the option to receive:
➢ 75,000 shares of ZL to be issued on 30 April 2018; or
➢ Cash equivalent to the value of 70,000 ZL’s shares to be paid on 28 February 2018.
The actual/estimated fair values of ZL’s share at various dates were as follows:
Date 01-Oct-17 31-Dec-17 28-Feb-18 30-Apr-18
Fair Value per share Rs. 3,000 Rs. 2,900 Rs. 3,300 Rs. 3,400
Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended
31 December 2017. [04]

8. In 2018, it was discovered that a senior executive was granted share options on 1 January
2016 but nothing was recorded in the books in 2016 as well as in subsequent years.
DL had granted 120,000 share options to the senior executive, conditional upon the executive
remaining in DL’s employment till 31 December 2019. The exercise price per option is Rs. 90.
However, the exercise price drops to Rs. 50 if DL’s net profit increases by at least 8% in each year.

Estimated fair values of share options are as under:

On grant date On 31-12-2018
Rs. Per option
Exercise price of Rs. 90 150 190
Exercise price of Rs. 50 175 225

The increase in net profit by more than 8% was always expected. However, due to unexpected
economic conditions, DL could not achieve 8% increase in profits in 2018.

Required:
Determine the revised amounts of total assets and total liabilities after incorporating effects of the
above corrections.

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9. On 1 January 2015, Mr. Talented was appointed as the President of Meharban Bank Limited
(MBL). According to the terms of the employment contract, MBL granted Mr. Talented the right
to receive either 100,000 shares of the bank or a cash payment equivalent to the value of 80,000
shares. This grant is conditional to completion of 3 years of service with the bank and can be
exercised within 1 year of vesting date. If he chooses the share alternative he would have to hold
the shares for a period of two years after the vesting date.

The par value of MBL’s shares is Rs. 10 each. At the grant date, MBL’s share price was Rs. 145
per share. The share prices on 31 December 2015, 2016, 2017 and 2018 are estimated at Rs. 150,
Rs. 156, Rs. 165 and Rs. 175 respectively. Dividends are not expected to be announced during the
next three years.

After taking into account the effects of the post-vesting transfer restrictions, MBL estimates that
the fair value of the share alternative on the date of appointment of Mr. Talented was Rs. 135 per
share.

Required:
Suggest journal entries to record the above transactions in the books of MBL for the years ending
31 December 2015, 2016, 2017 and 2018 if Mr. Talented chooses the share alternative in July 2018.
[11]

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Employee Benefits

1. Galaxy Textiles Limited (GTL) operates a funded gratuity scheme for all its employees.
Contributions to the scheme are made on the basis of annual actuarial valuation. The following
relevant information has been extracted from the actuarial report pertaining to the year ended
March 31, 2011.
Rs. In Mio.
Present value of defined benefit obligations as of:
■ April 1,2010 133
■ March 31, 2011 166
Fair value of plan assets as of:
■ April 1, 2010 114
■ March 31, 2011 120
Net cumulative unrecognized losses as of April 1, 2010 19
Benefits paid by the plan to the employees 6
Current service cost 15
Interest cost 16
Expected return on plan assets 14

Actuarial gains and losses are recognized using the corridor method, over the expected average
remaining working lives of the employees. As of March 31, 2011 the expected average
remaining working lives of the employees was 18 years.

Required:
Prepare a note on retirement benefits for presentation in the financial statements for the year
ended March 31, 2011 in accordance with International Financial Reporting Standards. (14
marks)

2. Lion Engineering Limited (LEL) operates an approved pension scheme (defined benefit plan)
for all its permanent employees who have completed one year’s service. The details for the year
ended 30 June 2012 relating to the pension scheme are as follows:
Rs. in million
Present value of pension scheme obligation at 30 June 2011 100
Fair value of scheme’s assets at 30 June 2011 70
Unrecognized actuarial loss at 30 June 2011 20
Current service cost 29
Contribution made during the year 30
Benefits paid during the year 45
Present value of pension scheme obligation at 30 June 2012 110
Fair value of scheme’s assets at 30 June 2012 80
Additional information:
(i) With effect from 1 July 2011, LEL had amended the scheme whereby the employees’
pension entitlement had been increased. The benefits would become vested after three
years. According to actuarial valuation the present value of the cost of additional benefits
at 1 July 2011 was Rs. 15 million.
(ii) The discount rate and expected rate of return on the plan assets on 30 June 2012 were as
follows:
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Discount rate 13%

Expected rate of return on plan assets 10%
(i) LEL was required to pay Rs. 40 million to the scheme, during the year ended 30 June 2012.
Because of cash flow constraints, LEL was able to contribute Rs. 30 million only.
(ii) Average remaining working lives of employees is 10 years.
(iii) LEL uses the corridor approach to recognize actuarial gains and losses.
(iv) Last actuarial valuation was made on 30 June 2012 using the Projected Unit Credit Method.

Required:
Prepare the relevant extracts from the statement of financial position and the related notes to
the financial statements for the year ended 30 June 2012. Show all necessary workings.
(Accounting policy note is not required. Deferred tax may be ignored) (18)

3. The following information has been received from actuary in respect of DL’s pension fund for
the year ended 31 December 2018:
Rs. in million
Contribution Paid 40
Benefits Paid 32
Current Service Cost 45
Re-Measurement gain 18*
*Re-measurements were nil in 2017 and 2016.

Applicable annual discount rate and net pension liability as on 1 January 2018 were 10% and
Rs. 85 million respectively.
During the year, payments made by DL were charged to profit or loss. No further adjustment
has been made.

Required:
Determine the amount of assets and liabilities.

4. Tanzeem Limited (TL) operates a defined benefit pension plan for its employees. The following
details are available of the plan.
2014 2013
Discount rate for plan obligation 9% 8%
Expected return on plan assets 10% 9%
Rs. in million
Present value of obligation at year-end 2,040 2,300
Fair value of plan assets at year-end 1,784 2,150
Current service cost 125 143
Benefits paid during the year 99 110
Contribution made during the year 105 118

Additional Information:
➢ Present value of pension obligation and fair value of plan assets as on 1 January 2013 were
Rs. 2,050 million and Rs. 1,995 million respectively.
➢ During the year 2013, TL amended the scheme whereby the benefits available under the plan
had been increased. It resulted in an increase in the present value of the defined benefit pension
obligation by Rs. 5 million and Rs. 8 million on account of vested and non-vested benefits
respectively. The period to vest is 4 years.
➢ On 31 December 2014, TL sold a business segment to Sachai Limited (SL). Accordingly, TL
transferred the relevant component of its pension fund to SL. The present value of the defined

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benefit pension obligation transferred was Rs. 280 million and the fair value of plan assets
transferred was Rs. 240 million.
TL also made a cash payment of Rs. 20 million to SL in respect of the plan.
➢ Average remaining working lives of employees is 10 years.

Required:
i. Prepare relevant extracts to be reflected in the statement of financial position, statement of
comprehensive income and notes to the financial statements for the year ended 31 December
2014 in accordance with International Financial Reporting Standards. (Show comparative
figures) [11]
ii. Prepare entries to record pension obligations: [03]
➢ On sale of business segment to SL
➢ At the year end.

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Leases

1. Auto Construction Pakistan Limited (ACPL) is engaged in the business of renting of

construction machinery. On March 15, 2009 ACPL negotiated and finalised an agreement for
purchase of used machinery from Malaysia. The price on FOB basis was agreed at US$ 0.4
million. The machinery was loaded on the ship on April 1, 2009 and arrived at the company
premises on May 31, 2009. According to the agreement a down payment of 10% was made on
the date of loading. The remaining amount was paid on June 30, 2009. The US$ conversion
rates on April 1, May 31 and June 30 were Rs. 80.90, Rs. 81.60 and Rs. 82.70 respectively. A
cost of Rs. 4 million was incurred on freight, taxes and other charges. Economic life of the
machinery is 10 years.

On July 1, 2009, ACPL sold the machinery to Smart Investment Limited for Rs. 40 million
and leased it back under the following arrangement:

(i) Lease term of 5 years commencing from July 1, 2009.

(ii) 10 half yearly instalments of Rs. 5.50 million each payable in arrears. (iii) Interest
rate implicit in the lease at 12.506%

On July 1, 2009 ACPL rented the machinery to a customer for three years at a half yearly
rent of Rs. 5 million each, payable in advance with 5% annual increase.

Required:
Prepare notes to the financial statements for the year ended December 31, 2009 in accordance
with the requirement of IAS 17 (Leases).

2. Hi-Tech Pakistan Limited (HPL) is a public limited company and deals in medical equipments.
On 1 October 2009 HPL had introduced a Robotic Surgery System for the first time in Pakistan.

In November 2009, HPL had launched a country wide sales promotion campaign to introduce
the system in various hospitals at a cost of Rs. 16 million whereas expenditure on training of
the technical staff amounted to Rs. 12 million.

On 1 April 2010 HPL signed a lease agreement with Comforts Hospital for sale and 3-year
maintenance of the system. The terms of the agreement are as under:
Lease period 3 years
Initial payment on signing of the agreement Rs. 20 million
6 half yearly installments commencing 30 September 2010 Rs 25 million
Implicit rate of interest per annum 15.192%
Cost of the system is Rs. 100 million whereas maintenance cost of the system for the three years
was estimated at Rs. 8.4 million. To cash customers, the system is sold at a mark-up of 25% on
cost. HPL expects a gross margin of 30% on such maintenance contracts, whereas actual costs
incurred on the maintenance, during the year ended 30 September 2011 amounted to Rs. 2.5
million (2010: Rs. 1.7 million).
The hospital was unable to pay the installment due on 31 March 2011 due to solvency problems.
After intense negotiations, HPL and the hospital agreed to a restructuring arrangement, whereby
the hospital would settle its obligation by paying 4 half yearly installments of Rs. 32 million
each, commencing from 30 September 2011.

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Required:
Compute the impact of the above transactions on various items forming part of the statements
of comprehensive income and financial position of Hi-Tech Pakistan Limited for the year ended
30 September 2011 in accordance with International Financial Reporting Standards. Give
comparative figures. (Notes to the financial statements are not required.)

3. The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 are under
finalization and the following matters are under consideration:
(i) BL’s plant was commissioned and became operational on 1 April 2008 at a cost of Rs.
130 million. At the time of commissioning its useful life and present value of
decommissioning liability was estimated at 20 years and Rs. 19 million respectively.
BL’s discount rate is 10%.
There has been no change in the above estimates till 30 September 2013 except for the
decommissioning liability whose present value as at 1 April 2013 was estimated at Rs.
25 million.
(ii) On 1 October 2011, BL acquired 160,000 12% debentures of Rs. 100 each, for Rs. 15.5
million and classified them as ' held to maturity'.
On 30 September 2013, in view of financing requirements for a new project, BL is
uncertain about holding the debentures till redemption. Therefore, it has decided to
reclassify the debentures as 'available for sale'.
Other relevant information is as follows:
■ The debentures carry a fixed interest rate of 12%, payable annually in arrears.
■ The effective rate of interest is 14.09%.
■ The debentures are redeemable at Rs. 105 on 30 September 2015.
■ The market value per debenture as of 30 September 2012 and 2013 was Rs. 102 and
Rs. 104 respectively.
(iii) On 1 April 2013, BL shifted to a newly acquired building in the city center. The vacated
building was leased as follows:
Date of commencement of the lease 1 April 2013
Lease period 3 years
Six semi-annual installments payable in advance
Rs. 3 million
(to be increased by 5% annually)
On 1 April 2013, the carrying value and fair value of the vacated building was Rs. 55 million
and Rs. 70 million respectively. As at 30 September 2013 the fair value of the vacated building
was reduced to Rs. 66 million. BL uses fair value model to account for investment properties.
Required:
For each of the above matters, compute the related amounts as they would appear in the
statements of financial position and comprehensive income of Bravo Limited for the year ended
30 September 2013 in accordance with IFRS. (Ignore corresponding figures)

4. A) In December 2012, Arabian Automotives Limited (AAL) had launched a campaign to offer
Hybrid Technology cars under a finance lease arrangement.
On 1 January 2013, AAL provided 10 cars to a customer. Details of the lease of each
car are as under:
■ Rs. 300,000 were paid on delivery of the car.
■ Three equal annual installments of Rs. 580,000 each are payable in arrears.
■ Periodic servicing of the car will be free of charge for the entire lease period.
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The estimated cost of servicing a car is Rs. 10,000 per year. AAL provides such
services at cost plus 20%.
■ Actual servicing cost incurred for the year ended 31 December 2013 amounted
to Rs. 11,000
■ Implicit rate of return is 12% which is equivalent to market rate of interest.
Ex-factory price fixed by the manufacturer is Rs. 1,800,000. AAL gets 15% discount on the
ex-factory price from the manufacturer. (10)

B) On 1 January 2013, Elegant Generators Limited (EGL) sold a heavy duty generator
to Rivera Limited (RL) for Rs. 6,000,000 on the following terms and conditions.
■ 10% of sales price was paid on delivery of the generator.
■ Remaining amount was payable on 31 December 2013. Interest charge on the
amount unpaid was agreed at 6% per annum.
■ The market interest rate is 12% per annum.
In December 2013, RL conveyed its inability to pay the amount due on 31 December 2013
and requested EGL to recover the amount in installments. After negotiations,
EGL agreed to receive four half yearly installments of Rs. 1,600,000 each, commencing
from 30 June 2014. (06)
Required:
Compute the impact of the above transactions on various items forming part of profit and
loss account and statement of financial position of AAL and EGL, for the year ended 31
December 2013 in accordance with International Financial Reporting Standards.

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Property, Plant & Equipment

1. Violet Power Limited is running a coal based power project in Pakistan. The Company has built
its plant in an area which contains large reserves of coal. The company has signed a 20 years
agreement for sale of power to the Government. The period of the agreement covers a significant
portion of the useful life of the plant. The company is liable to restore the site by dismantling
and removing the plant and associated facilities on the expiry of the agreement.
Following relevant information is available:
(i) The plant commenced its production on July 1, 2007. It is the policy of the company to
measure the related assets using the cost model;
(ii) Initial cost of plant was Rs. 6,570 million including erection, installation and borrowing
costs but does not include any decommissioning cost;
(iii) Residual value of the plant is estimated at Rs. 320 million;
(iv) Initial estimate of amount required for dismantling of plant, at the time of installation of
plant was Rs. 780 million. However, such estimate was reviewed as of June 30, 2008 and
was revised to Rs. 1,021 million;
(v) The Company follows straight line method of depreciation; and
(vi) Real risk-free interest rate prevailing in the market was 8% per annum when initial
estimates of decommissioning costs were made. However, at the end of the year such rate
has dropped to 6% per annum.

Required:
Work out the carrying value of plant and decommissioning liability as of June 30, 2008.

2. Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity
from garbage collected by the civic agencies. WML had signed an agreement with the
government for allotment of a plot of land, free of cost, for 10 years. However, WML has agreed
to restore the site, at the end of the agreement.
Other relevant information is as under:
(i) Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost
would amount to Rs. 10 million.
(ii) It is the policy of the company to measure its plant and machinery using the revaluation
model.
(iii) When the plant commenced its operations i.e. on April 1, 2005 the prevailing market
based discount rate was 10%.
(iv) On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.
(v) On March 31, 2009 prevailing market based discount rate had increased to 12%.
(vi) On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million. (vii)
Useful life of the plant is 10 years and WML follows straight line method of depreciation.
(viii) Appropriate adjustments have been recorded in the prior years i.e. up to March 31,
2010.

Required:
Prepare accounting entries for the year ended March 31, 2011 based on the above information,
in accordance with International Financial Reporting Standards. (Ignore taxation.) (17
marks)

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3. Gee Investment Company Limited (GICL) acquires properties and develops them for diversified
purposes, i.e. resale, leasing and its own use. GICL applies the fair value model for investment
properties and cost model for property, plant and equipment.
The details of the buildings owned are as follows:
Fair value as on 31
Date of Cost Residual December
Property Useful value 2011 2010
acquisition life ---Rs. in million--
(years)
A 1 August 2006 20 110 14 100 150
B 1 January 2009 15 240 24 240 210
C 1 July 2009 10 160 20 150 120
D 1 July 2008 10 10 1 Not available
E 1 August 2011 20 48 4 51 -
The following information is also available:
Property A GICL had been trying to sell this property for the last two years. However, due to
weak market, the directors finally decided to lease it with effect from 1 October
2011 when its fair value was Rs. 120 million.
Property B The possession of this property was acquired from the tenants on 30 June 2010
when the company shifted its head office from Property C to Property B. The fair
value on the above date was Rs. 195 million.
Property C When the head office was shifted from this property, it was leased to a subsidiary
at market rate. On the date of lease, the fair value was equal to its carrying amount.
Property D This property is situated outside the main city and its fair value cannot be
determined. It was rented to a government organization soon after the acquisition.
Property E This property is an office building comprising of three floors. After acquisition, two
floors were rented out. On 1 November 2011, GICL established a branch office
on the third floor.
Details of costs incurred on acquisition are as follows:
Particulars Rs. in million
Purchase price 42.50
Agent’s commission 0.50
Registration fees and taxes 2.00
Administrative costs allocated 3.00
48.00
Required:
a. Prepare a note on investment property, for inclusion in GICL’s separate financial statements
for the year ended 31 December 2011. (Ignore comparative figures) (16marks)

b. Explain how Property C would be accounted for in the consolidated financial statements for
the year ended 31 December 2011. (03 marks)

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4. In view of significant changes in the technology, it has been decided to reduce the remaining
useful life of a plant by 5 years. No entry has been made for depreciation on the plant and
adjustments in related decommissioning cost for 2018.

As at 1 January 2018, the plant had a carrying value of Rs. 150 million and a remaining
useful life of 11 years. Further, in respect of this plant, revaluation surplus of Rs. 24 million and
provision for decommissioning cost of Rs. 40 million were also appearing in the books as at
that date. There is no change in expected decommissioning cost except for the timing due to
change in useful life. Applicable discount rate is 11% per annum.

It is the policy of DL to transfer revaluation surplus to retained earnings only upon disposal.

Required:
Determine the revised amount of assets and liabilities.

5. Fine Woods Limited (FWL) markets quality wood furniture through its sales offices located in
major cities of Pakistan. In March 2012, the management of FWL decided to introduce online
sales through its website. The expenses incurred in this regard during the year ended 31
December 2012 were as follows:
■ Feasibility was prepared by a consulting firm for upgrading the existing website to
facilitate online sales, at a cost of Rs. 3.5 million.
■ Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million
respectively.
■ Website was upgraded by FWL’s IT team. The directly attributable costs amounted to
Rs. 5 million.
■ Online payment system was developed by external experts at a cost of Rs. 3 million.
■ IT personnel were trained to deal with security issues relating to online transactions at a
cost of Rs. 1.5 million.

In the financial statements for the year ended 31 December, 2012 the above expenses were
classified as capital work in progress.

In January 2013, after successful testing of online sales, FWL launched a campaign for online sales
and incurred an expenditure of Rs. 2.5 million in this respect.

In view of the increase in online sales, in September 2013, the management decided to close two
of its sales offices and announced their closure effective 1 January 2014. Following information is
available in respect of the two offices:

Office A:
■ Carrying value of property, plant and equipment as at 31 December 2013 amounted to
Rs. 50 million.
■ Negotiations with a party for sale of the office are at an advance stage and it is expected
that all the formalities will be finalised by the end of June 2014. Sale price of property,
plant and equipment net of expenses is estimated at Rs. 60 million.

Office B:
■ Carrying value of property, plant and equipment as at 31 December 2013 amounted to
Rs. 65 million.
■ As advised by a property consultant, FWL is carrying out modifications of the office
premises to get a better price. The cost of modifications is estimated at Rs. 15 million to
FWL and is expected to be completed in six months. Sale price net of expenses after

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modifications is estimated at Rs. 95 million.

Required:
Discuss the accounting treatment in respect of the above, in the financial statements of FWL for the year
ended 31 December 2013 in accordance with the requirements of International Financial Reporting
Standards.

Intangible Assets

1. In 2001, the management of Comfort Shoes Limited planned to acquire an international

trademark to boost its sales and enter into the international market. In this respect, the
management carried out a market survey and analysed the information obtained to initiate the
process. The relevant information is as follows:
(i) The cost incurred on the survey and related activities during the year 2001 amounted to
Rs. 1 million.
(ii) An agreement was finalised and the company acquired the trademark effective January
1, 2002. According to the agreement Rs. 5 million were paid on signing of the
agreement and Comfort Shoes was required to pay 1% of sale proceeds of the related
products on yearly basis. The analysis carried out at that time indicated that the
trademark would have an indefinite useful life.
(iii) The company has developed many new models under this trademark and successfully
marketed them in the country as well as in international markets. However, in 2008 the
company faced unexpected competition and had to discontinue the exports. It was
estimated that due to discontinuation of exports, net cash inflows for the foreseeable
future, would reduce by 30%. As a result the management was of the view that as of
December 31, 2008 the carrying value of the trademark had reduced to 90%.
(iv) Due to continuous inflation and flooding of markets with very low priced shoes, it was
decided in December 2009 that use of the trademark would be discontinued with effect
from January 1, 2011.
Required:
(a) Explain how the above transactions should have been accounted for in the years 2001
to 2007 according to International Financial Reporting Standards (IFRSs).
(b) Prepare a note to the financial statements for the year ended December 31, 2009 in
accordance with the requirements of IFRSs. Show comparative figures.

2. Healthcare Limited (HCL) manufactures a large variety of nutrition products. In addition to its
branded products, HCL produces a special food supplement for export to Childcare Centre
(CCC) in the Middle East. Under the terms of the contract, HCL is liable to pay a
compensation of Rs. 6 million per month to CCC, if HCL is unable to supply the supplement.
On 15 March 2013, a product of HCL was found to be contaminated. On receiving the
complaint, the Health Department sealed the factory premises and initiated legal proceedings
against the company.
As per the legal advice, it is highly probable that the case would be decided against HCL. It is
expected that the decision would be announced in September 2013. The maximum fine payable
under the law is Rs. 15 million. However, the legal adviser is of the opinion that the amount of
the penalty would be Rs. 9 million approximately.
HCL has investigated the incident and the findings as reported on 5 April 2013 are as under:

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■ The contamination was caused due to the use of an ingredient supplied by Food Chemical
Enterprises (FCE) which was close to the date of expiry. However, only one product was
affected and various laboratory tests have confirmed that the contamination is not health
hazardous.
■ Production batches of the contaminated product were identified. The cost of contaminated
inventory in hand on 15 March 2013 was Rs. 70 million. The cost of unsold inventory
recalled from the customers amounted to Rs. 132 million. HCL earns a margin of 25% on all
of its products.
■ Due to closure of the factory, HCL would not be able to supply the supplement to CCC for
three months.
■ Cost of disposal of the contaminated inventory is estimated at Rs. 0.5 million.

On 6 April 2013, HCL lodged a claim for damages of Rs. 211.5 million against FCE for the cost
of contaminated inventory, cost of disposal thereof and the amount of the penalty that HCL is
likely to incur. However, no response has been received from FCE so far and HCL is considering
to file a suit for recovery of the amount.

Required:
Explain the accounting treatment and the disclosure requirements in respect of the above in
HCL’s financial statements for the year ended 31 March 2013 in accordance with the
International F inancial Reporting Standards.

3. On 1 April 2017 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of
which Rs. 50 million was paid immediately. The balance amount is payable on 1 April 2019.
A mega social media and print media campaign was launched to promote the channel at
a cost of Rs. 10 million. The transmission of the channel started on 1 August 2017.

The license is valid for 5 years but is renewable every five years at a cost of Rs. 35
million. Since the renewal cost is significant, the management intends to renew the license only
once and sell it at the end of 8 years.

In the absence of any active market, the management has estimated that residual value of the
license would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.

Applicable discount rate is 10% p.a.

Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended
31 December 2017. [05]

4. Fiji L i m i t e d (FL) is involved in the manufacturing and trading of consumer goods. The
following transactions/events have occurred during 2018.

On 1 October 2018, FL launched its own website for online sale of its products. The website’s
content is also used to advertise and promote FL’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:

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Rs. in million
Planning of the website 2.50
Web servers 10.50
Operating system of web servers 5.50
Developing code for the website application and its installation on web servers 6.00
Designing the appearance of web pages 3.50
Content development 12.50
Post launch operating cost 2.80

Currently, all the above costs are included in ‘intangible assets under development’. Calculate the
revised amount of the intangible asset. [08]

5. Beta Foods Limited (BFL) is in process of finalizing its consolidated financial statements for the
year ended 30 June 2015. Following information pertains to BFL’s intangible assets.
i. Value of intangible assets as at 30 June 2013:
Goodwill Patents
Rs. in million
Cost 1,500 400
Accumulated amortization / impairment 300 160
ii. On 1 July 2013, BFL acquired the entire shareholdings of Gamma Enterprises (GE) for Rs.
5,400 million. The value of patents, development expenditure and other net assets of GE on
the date of acquisition was Rs. 2,100 million, Rs. 48 million and Rs. 1,430 million
respectively.
The break-up of development expenditure was as follows:
Products Rs. in million
A - 214 25
B-917 23
Total 48
iii. Research and development expenditure during the year ended 30 June 2014 and 2015 was
as follows:
Year Product Name Research Development
Rs. in million
A - 214* (8) -
2014
B-917 10 45
2015 B-917 | - 50
*because of certain reasons the management had
decided to abandon this project in May 2014.

iv. Trial production of B-917 commenced in March 2015. Net cost of trial production up to 30
June 2015 amounted to Rs. 22 million.
v. Patents are amortized over their remaining useful life of 10 years on straight line method.
vi. Recoverable amounts of assets having indefinite life, determined as a result of impairment
testing, were as follows:
2015 2014
Rs. in million
Goodwill 2,800 2,550
Product B-917 160 65

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Required:
Prepare a note on intangible assets, for inclusion in BFL’s consolidated financial statements for
the year ended 30 June 2015 in accordance with the requirements of International Financial
Reporting Standards. [16]
6. Sky Link Limited (SLL) was incorporated as a public limited company on 1 July 2013. On 1
August 2013, SLL acquired an operating license from the telecommunication authority for a
mobile phone network for Rs. 50 million for twenty years. For obtaining the license, SLL paid
a professional fee of Rs. 6 million and incurred other indirect cost amounting to Rs. 4 million.
SLL’s financial year ends on 30 June each year.
SLL signed an agreement with a media house for carrying out a marketing campaign at a cost
of Rs. 25 million for the period up to 30 September 2014. The media house billed Rs. 20 million
for the activities carried out upto 30 June 2014.
The network was completed on 31 December 2013 at a cost of Rs. 1,350 million. SLL
commenced commercial operations on 1 January 2014 by announcing a normal call rate of Rs.
2.00 per minute and introducing a package comprising of free mobile phone and 1200 free
minutes per month.
The package requires payment of Rs. 3,000 per month payable in advance under a 12 month
contract. On expiry of the contract, ownership of the mobile phone would be transferred to the
subscriber. Subsequently, the subscriber would be allowed 1000 minutes for Rs. 1,250 per
month. In either case, calls in addition to the free minutes are chargeable at Rs. 1.50 per minute.
The cost of a mobile phone is Rs. 12,000 and such mobile phone is usually available in the
market at Rs. 15,000.
According to the business plan, SLL expected to sign 80,000 subscribers and earn net profit of
Rs. 30 million by the end of 30 June 2014. However, only 50,000 subscribers were signed upto
30 June 2014. Average unexpired term of 50,000 contracts is 8 months. A further subscribers
were signed in July and August 2014. During the period upto 30 June 2014, SLL incurred a loss
of Rs. 15 million. However, during the months of July and August 2014 it earned a marginal
profit of Rs. 5 million.
In a recent development, a foreign company intending to enter into Pakistan telecom market has
offered SLL a sum equivalent to Rs. 45 million for the operating license and to buy net assets at
their carrying value.
SLL’s financing cost is 12% per annum.
Required:
In accordance with the requirements of the International Financial Reporting Standards, discuss the
accounting treatment for the year ended 30 June 2014 in respect of the following:
(a) Initial recognition and subsequent measurement of operating license (09)
(b) Marketing campaign cost (01)
(c) Revenue recognition (07)
(d) Amount of revenue to be recognised in respect of the annual package, for the period

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Impairment of Assets

1. Global Air Limited (GAL) owns 100% equity in Moon (Private) Limited (MPL). On 1 July
2013,GAL decided to dispose of 90% equity in MPL. It is expected that the sale will be finalised
by 30 June 2014 at an estimated sale price of Rs. 140 million with an estimated cost to sell of Rs.
3.5 million. Relevant information pertaining to MPL is as under:
i. Assets and liabilities as of 30 June 2013:
Rs. in million
Non-current assets 105.00
Current assets 50.00
Liabilities 90.00
(i) It is estimated that MPL's trade debtors amounting to Rs. 6 million will not be recovered;
whereas provisions included in the liabilities amounting to Rs. 8 million are no more
required.
(ii) MPL's net loss after tax for the nine months period ended 30 June 2013 was Rs. 30 million.
(iii) During the period 1 July 2013 to 30 September 2013, liabilities amounting to Rs. 26
million were paid and current assets of Rs. 18 million were recovered.

Goodwill of MPL as per the consolidated statement of financial position of GAL as at 30

September 2012 amounted to Rs. 15 million.

GAL had incurred expenses amounting to Rs. 1.5 million, for disposal of the equity upto 30
September 2013.

Required:
Prepare relevant extracts from the consolidated statements of financial position and
comprehensive income of GAL for the year ended 30 September 2013, in accordance with IFRS
2. Krona Limited (KL) produces various nutrition products through its three production facilities
located at Karachi, Lahore and Peshawar. Each facility is considered as a separate cash-generating
unit (CGU).

In May 2019, several contamination cases of KL's products were reported on social media as
well as on TV channels. The adverse publicity badly affected all the products and consequently
their sales were reduced significantly. Therefore, KL conducted impairment test of all CGUs as
on 30 June 2019 though KL does not have any intention to sell any CGU in near future.

Following information was made available on 30 June 2019:

i. Assets of CGUs:
Rs. In Millions
Karachi Lahore Peshawar
Carrying amount before impairment 160 100 125
Value in use 155 115 164
Fair value less costs to sell 152 110 169

No. of Years
Remaining average useful life 18 8 6

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ii. Corporate Assets:

Carrying amount Remaining average
before impairment useful life (No. of
(Rs. million) years)
Head office assets 84 15
Product development centre 26 5

iii. The operations are conducted from the head office. Product development centre
supports Karachi and Lahore facilities only.

Required:
a. Compute carrying amounts of each CGU and corporate asset after incorporating
impairment losses under the following independent situations:
i. The relative carrying amounts of CGUs are reasonable indication of the proportion of the
corporate assets devoted to each CGU. (08)
ii. The carrying amounts of the corporate assets cannot be allocated on a reasonable
basis to the individual CGUs. (10)
b. Briefly explain why the total impairment loss in each of the above situations is different
(02)

3. The following details relate to a cash generating unit (CGU) of Khyber Ltd (KL) as at 30 June
2017:
----------- Rs. in million -----------
Carrying value Fair value less cost to sell
Building (revaluation model)* 22 21.7
Machinery (cost model) 15 16
Equipment (cost model) 19 Not measurable
License (cost model) 20 18
Investment property (fair value model) 22 22
Investment property (cost model) 8 Not measurable
Goodwill 3 Not measurable
Inventory at NRV 8 8

*Balance of surplus on revaluation of building as on 30 June 2017 amounted to Rs. 3 million.

Value in use and fair value less cost to sell of the CGU at 30 June 2017 were Rs. 100 million and
Rs. 95 million respectively.

Required:
Compute the amount of impairment and allocate it to individual assets. Also calculate the amount
to be charged to profit or loss account for the year ended 30 June 2017 under each of the following
independent situations:
a. There have been a significant decline in budgeted net cash flows of the CGU. (06)
b. KL decided to dispose of the CGU as a group in a single transaction and classified it as ‘Held
for Sale’. Carrying Value of all individual assets have been measured in accordance with the
applicable IFRSs. (06)

4. On 1 July 2013, GYO Movers Limited (GML) acquired a business engaged in providing
transportation service and recognized goodwill of Rs. 10 million. The business operates three
different bus routes namely Green, Yellow and Orange. The business had been running
exceptionally well. However, during the year ended 30 June 2016 entrance of new competitors has
affected its performance.
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GML considers each route as a separate Cash-Generating Unit (CGU). As on 30 June 2016,
following information is available in respect of each CGU:

Green Yellow Orange

Number of buses* 80 50 40
Expected remaining useful life (in years) 20 15 10
------------ Rs. in million ------------
Carrying amount of buses 225 150 95
Other assets - carrying value 400 350 100
- fair value Not available
Fair values less cost to sell of the CGU 500 450 250
Expected net cash flows per annum 70 60 50
*Assume that all buses are of same make and model.
Carrying amount of corporate assets used interchangeably by all segments are as follows:
Rs. In Millions
Head office building 100 Not available
Computer network 55 46
Equipment 45 60
For impairment testing of each CGU, following quotations were obtained from three different
showrooms located in different cities.
Rs. in million
Average sale price for each bus 2.52 2.62 2.50
Estimated transaction cost for disposal of each bus 0.05 0.20 0.10
Pre-tax discount rate of GML is 12%.
Required:
Prepare relevant extracts from the statement of financial position as at 30 June 2016 I accordance
with IFRS.

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Non-Current Asset Held for Sale

1. Following information pertains to divisions A, B and C of Lexus Limited (LL):

Division A was classified as held for sale in 2016 but ceased to classify as held for sale in 2017.
Division B was classified as held for sale in 2016 and sold during 2017.
Division C was classified as held for sale at the start of 2017 and sold during 2017.
All the three divisions are/were major lines of business of LL.

Based on the above information, a recently appointed accountant suggested the following
classification/presentation of these divisions in LL’s financial statements for the year ended 31
December 2017 (2016 shown as comparative):

Statement of Financial Position Statemet of Comprehensive Income

2017 2016 2017 2016
Division A Normal* Normal* Continuing Operation Discontinued Operation
Division B Not appearing Held for sale Discontinued Operation Continuing Operation
Division C Not appearing Held for sale Discontinued Operation Continuing Operation
*Not classified as held for sale

Required:
Prepare the revised table showing the correct classification /presentation of the divisions in LL’s
financial statements for the year ended 31 December 2017. [05]

2. On 30 June 2014, ABC Limited classified an item of property, plant and equipment as being held for
sale when its carrying amount was Rs. 240 million, its fair value was Rs. 225 million and the estimated
costs to sell were Rs. 5 million. The asset had been purchased for a cost of Rs. 300 million on 1 July
2012, and then had a 10 year useful life.

ABC failed to sell the asset and therefore on 30 June 2015 it decided to reverse the original decision
and use it in the business. At 30 June 2015, the asset had a fair value of Rs. 230 million and estimated
costs to sell amounted to Rs. 5 million. ABC estimated that annual cash flows from the asset would
be Rs. 50 million per annum for the remaining useful life of the asset.

ABC uses its weighted average cost of capital i.e. 12% as discount rate.

Required:
1. In accordance with the requirements of the International Financial Reporting Standards, discuss
how the asset should be accounted for in ABC’s financial statements for the years ended 30 June
2014 and 2015. [06]

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Investment Property

1. KL purchased an investment property in United States for USD 2.6 million. 10% advance
payment was made on 1 May 2017 and 70% payment was made on 1 July 2017 on transfer
of title and possession of the property. The remaining amount was paid on 1 August 2017.

On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one year
and received full amount in advance on the same date.

KL uses fair value model for its investment property. On 31 December 2017, an independent
valuer determined that fair value of the property was USD 2.5 million.

Following spot exchange rates are available:

Period 1-May-17 1-Jul-17 1-Aug-17 1-Sep-17 31-Dec-17
USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs. 116

Following average spot exchange rates are also available:

Period 2017 Jul-Dec 2017 Sep-Dec 2017
USD 1 Rs. 105 Rs. 111 Rs. 113

Required:
Prepare the extracts relevant to the above transactions from KL’s statements of financial position
and comprehensive income for the year ended 31 December 2017, in accordance with the IFRSs.
(Comparative figures and notes to the financial statements are not required)

2. On 1 October 2014, ISL shifted its corporate head office to a three storey building. The fair value of
building on the shifting date and as on 31 March 2014 was Rs. 325 million and Rs. 310 million
respectively.
This building was acquired five years ago at a cost of Rs. 240 million. Immediately thereafter it was
leased out to a subsidiary. Its remaining useful life is 10 years. Depreciation on ISL’s buildings is
charged on straight line basis over their useful lives.

Required:
Prepare journal entries to record the above transaction. [04]

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Other Standards
1. During the year 2007, SKY Limited developed two inter-linked websites in house. One of them
is for external users and provides information about the company’s products, operations and
financials. It can also be used for electronic order processing and accepting payments through
credit cards. The second website is for internal use like intra-net, providing and sharing
company’s policies, customer details, employees’ information, etc.

Both the websites were launched on September 30, 2007 and are now fully operational. The
company has received a few online orders which it believes will increase over time. On the other
hand, use of internal website has resulted in minor reduction in costs of communication and
certain other administrative costs. The management is optimistic that its utility will increase
significantly. However, it is not in a position to estimate the amount of economic inflows that
this website can generate.
During the year ended December 31, 2007, the company incurred the following expenditure in
the development of websites:
(i) An amount of Rs. 0.3 million was incurred on undertaking a feasibility study and defining
hardware/software specifications for the websites.
(ii) Rs. 4 million were incurred on the development of internal website while an expenditure
of Rs. 11 million has been made on development of external website. The expenditure on
external website includes an amount of Rs. 6 million paid for linking it with the credit
card clearing facilities and installation of security tools.
(iii) The company acquired two dedicated servers and one backup server costing Rs. 3 million
in total. Operating software for the server was acquired for Rs. 2.0 million whereas
software related to data processing and front-end development costed Rs. 3 million. The
management is of the view that these costs would not have been incurred if the website
project had not been initiated.
(iv) With effect from October 1, 2007 the company has signed a one year contract for website
maintenance at a cost of Rs. 2.0 million.
(v) Two IT personnel were trained to operate the websites, at a cost of Rs. 0.2 million.
(vi) Rs. 0.4 million were incurred on the promotion of its external website. The company
believes that this advertising will boost the company’s online sales.

Required:
Comment on the accounting treatment of each of the above-mentioned costs in the light of
relevant International Accounting Standards.

2. Mega Super Stores (MSS) introduced a customer loyalty scheme on 1 August 2013 which was
based on the following conditions:

■ Customers were granted 500 points with each purchase of Rs. 5,000 or above.
■ These points could be exchanged for goods supplied by MSS within two months from
the date the points were granted.
■ For every 500 points, goods having a retail price of Rs. 200 were to be given.
However, the scheme was discontinued from 1 October 2013. During the period covered by the
scheme, the customers were granted 1.5 million points out of which 0.5 million points were
redeemed. At year end, a study was carried out and it was established that approximately 30%
of the points granted would lapse unutilised. Actual results showed that finally 470,000 points
lapsed unutilised.

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MSS sells goods at a margin of 40%. No entries in respect of grant of points have been recorded
so far.
Required:
Prepare accounting entries to record the above transactions in accordance with IFRS.

3. Moniba Limited holds an asset that is traded in three different active markets. Relevant
information about the asset in the three markets is as follows:

Market A Market B Market C

Market share in % 50% 30% 20%
Rs. Per unit
Entry price 30,500 31,500 30,600
Exit price 29,500 30,500 29,600
Transaction cost 700 1,500 1,000
Transport cost 800 1,000 400

Required:
Identify principal and most advantageous markets along with reasons thereof. Also calculate the
fair value of the assets in these markets. [03]

4. Gohar Limited (GL), a listed company, is engaged in chemicals, soda ash, polyester, paints and
pharma businesses. Results of each business segment for the year ended 31 March 2015 are as
follows:
Business Sales Gross Operating Assets Liabilities
segments profit expenses
Rs. in million
Chemicals 1,790 1,101 63 637 442
Soda Ash 216 117 57 444 355
Polyester 227 48 23 115 94
Paints 247 26 16 127 108
Pharma 252 31 12 132 98

Inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million and Rs. 10 million
respectively at a contribution margin of 30%.

Operating expenses include GL’s head office expenses amounting to Rs. 75 million which have
not been allocated to any segment. Furthermore, assets and liabilities amounting to Rs. 150
million and Rs. 27 million have not been reported in the assets and liabilities of any segment.

Required:
In accordance with the requirements of IFRSs:
i. Determine the reportable segments of Gohar Limited; and [07]
ii. Show how these reportable segments and the necessary reconciliation would be disclosed in
GL’s financial statements for the year ended 31 March 2015. [08]

5. The Dairy Company (TDC) owns three farms and has a stock of 3,200 cows. During the year
ended 30 June 2015, 300 animals were born, all of which survived and were still owned by TDC
at year-end. Of those, 225 are infants whereas 75 are nine-month-old having market values of Rs.

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26,000 and Rs. 53,000 per animal respectively. The incidental costs are 2% of the transaction
price.

Required:
In accordance with the requirements of the International Financial Reporting Standards, discuss
how the gain in respect of the new born cows should be recognized in TDC’s financial statements
for the year ended 30 June 2015. (Show all necessary computations)

Any Inquiry or Suggestion??

Contact the compilers:

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