2025

ADVANCED ACCOUNTING AND

FINANCIAL REPORTING
A ICAP ATTEMPTWISE PAST PAPERS
(Updated till Winter-2024 attempt)
By the Grace of Almighty Allah, I am pleased to present the attemptwise past
papers of Advanced Accounting & Financial Reporting for CFAP-1.

A F This volume contains;

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ICAP
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2002

December 11, 2002

ADVANCED ACCOUNTING & FINANCIAL REPORTING (MARKS 100)

Module E Paper E-15 (3 hours)

Q.1 (a) The balance sheets of Latif Limited and Sharif Limited as at 31 December 2001 and
2000 are as follows:
LATIF SHARIF
LIMITED LIMITED
2001 2000 2001

Share capital (Per share of Rs.10

each) 2,706,452 1,804,301 2,967,670
Reserves 674,656 699,091 (85,338)
3,381,108 2,503,392 2,882,332

Deferred liabilities 5,183,939 2,413,909 123,386

Current liabilities and provisions 6,906,578 4,408,169 1,217,201
Bank overdraft - (858,727)
15,471,625 8,466,743 4,222,919

Tangible fixed assets 8,395,989 6,653,585 2,733,304

Investment in Sharif Limited 2,300,000 - -

Other current assets 4,040,485 1,813,158 1,489,615

Cash 735,151 - -
4,775,636 1,813,158 1,489,615
15,471,625 8,466,743 4,222,919

Additional information
1 Latif Limited applied to the court for the merger of Sharif Limited as it was holding
69% shares of Sharif Limited.
2 The Honorable High Court allowed the merger and ordered to issue 1 share of Latif
Limited in lieu of 3 shares of Sharif Limited.
3 The balance sheet of Sharif Limited was merged with Latif Limited at the balance
sheet date as all the balances represent fair values as at that date.
4 Certain figures relating to Latif Limited are as follows:

Profit before taxation 548,715

Capital expenditure 1,225,305
Taxes paid 253,545

5 All figures are in thousands

 (02)
Required:
You are required to prepare
(i) The balance sheet of Latif Limited after merger (08)
(ii) Cash flow statement (07)
Show all workings

Q.1 (b) Briefly describe the legal steps involved in a merger under the Companies Ordinance,
1984. (05)

Q.2 An enterprise has liabilities denominated in a foreign currency that result from the
acquisition of assets. After the acquisition of the asset the enterprise’s reporting
currency undergoes a severe devaluation or depreciation. As a result, significant
foreign exchange losses arise when the liability are measured at the closing rate under
IAS 21.11 (a). The Allowed Alternative Treatment in IAS 21.21 require several
conditions to apply before an enterprise may include such exchange losses in the
carrying amount of the related assets.

Required:
a) In which period the conditions that the liability “cannot be settled” and that there is “no
practical means of hedging” should be applied (2.5)
b) When the acquisition of an asset is treated as “recent” (2.5)

Make your comments in the light of interpretations issued by Standing Interpretation

Committee of International Accounting Standard Board in this regard.

Q.3 Define a ‘Business Segment’. Also list down the factors that should be considered in
determining whether products or services are related or not. (05)

Q.4 You are the auditor on the December 31, 20X8 audit of MNC Limited. 20X8 was the
first year of operations for the Company. The audit is virtually complete and the only
area that needs attention is the calculation of the tax provision. The audit has been very
“clean", and as yet no adjusting entries have been proposed; however, since no taxes
have as yet been provided for, adjusting entries will have to be suggested to the client.
Based upon the results of your audit, discussions with the company’s chief accountant
and your tax manager, you have identified the following transactions, which must be
considered in the tax calculation:
Item Amount
(Rupees)
Accounting income before tax 1,000,000
Accounting accumulated depreciation 200,000
Tax accumulated depreciation 400,000
Allowance for doubtful accounts at December 31, 20X8 150,000
Long-term debt financing expenditures 300,000
Book amortisation of long-term debt financing costs 60,000
Corporate dividends received 50,000
Accrued management bonus, payable in 20X9 100,000
 (03)

The tax regulations in the country of MNC Ltd. provide for the following:
n Depreciation of fixed assets using “accelerated” methods. The company uses the
straight-line method of depreciation for accounting purposes. The estimated useful
lives of the fixed assets are 10 years.
n Bad debts are deductible for tax purposes only when the account has actually been
directly written off (no amounts were written off during 20X8).
n Expenses incurred to acquire debt are deductible for tax purposes in the year in which
they are paid. For accounting purposes MNC Ltd. has written off Rs. 300,000 in fees
directly against the related finance, and they are being amortised over the finance
period using the effective interest rate method.
n 80% of corporate dividends received are not taxable.
n Based upon the results of the first year of operations, the Company has given bonuses
to its top managers, however they will not be paid until 20X9. Such amounts are not
deductible for tax purposes until they have been paid.
n The statutory tax rate is 50%. Tax losses can be carried forward to 15 years.

Required
a) Identify the temporary differences. Determine the amount of gross temporary
differences at December 31, 20X8. (03)

b) Calculate the net deferred tax liability or asset at December 31, 20X8 and pass
journal entry. (02)

c) Compute the amount of taxes payable that would be reported on the Company's
20X8 tax return. That is, what is the "current" tax expense? (05)

d) Prepare the recommended journal entry to record the current tax liability (MNC
Ltd. had not made any tax payments on its estimated tax liability for 20X8). (01)
e) Prepare a reconciliation of expected to actual tax expense (IAS 12.81c). (04)

Q.5 ABC Bank Limited operates a provident fund, which cover all its employees. The
present value of the obligation and the fair value of plan assets both were Rs. 1,000 at
1st October 2001. The actuarial assumptions state that the discount rate used to arrive
at the present value of the obligation is 10%. However the actuary expects that the
return on plan assets will be 12.50%.

During the year ended 30th September 2002 the company paid the benefits to his out
going employees of Rs. 250 and the contribution made in the fund is of Rs. 750.
Current service cost for the year ended 30th September 2002 is Rs. 550.

During the year the plan was amended to provide additional benefits with effect from
1st October 2000. The present value as at 30 September 2001 of additional benefits
for employee service rendered before 1st October 2001 was Rs. 150 for vested
benefits.

Net cumulative unrecognized actuarial gain at 30th September 2001 was Rs.150. The
expected average remaining working lives of employees is 5 years.

The present value of the obligation and the fair value of plan assets both were Rs.
1,750 at 30th September 2002.
 (04)

Required:
You are required to calculate:
a) Actuarial gain/ loss to be recognized as at 30th September 2002. (04)
b) Net cumulative unrecognized actuarial gain at 30th September 2002. (04)
c) Actual Return on Plan Assets for the year ended 30th September 2002. (02)

Q.6 Port Folio Management Securities Limited has the following Investment/ Loan
portfolio as on 30 June 2002:

Recoverable
Recoverable
Amount
Book Market Book Amount
Cost using
Yield Yield Value using Book
Market
Yield
Yield
Held to Maturity Securities
TFCs – Bee
Limited 10% 12% 1,250,000 1,000,000 980,000 950,000

Loan and Receivable originated

by the enterprise.
Ramzan
Industries 15% 13% 125,000 125,000 110,000 115,000
Kareem
Foundation 12% 13% 650,000 650,000 615,000 600,000

Available for Sale Security

Shares – Bee
Limited - - 1,500,000 1,000,000 N/A 800,000
Provincial
Government
Securities 7% 9% 500,000 700,000 600,000 400,000

Investment held at amortized cost

because no reliable measure of
fair value.
Convertible
Bonds 15% 12% 600,000 600,000 500,000 550,000

The company has the policy to record all the changes in the available for sale
securities, directly to the equity.

Recoverable amounts represent future expected cash flows of the securities

discounted by using Book yield and Market yield respectively. However, the
recoverable amount of the equity security is the market value in the active market of
that security.

Required:
You are required to:
a) Calculate the Impairment loss for the period under the provisions of IAS 39. (05)
b) Pass necessary accounting entries to record above impairment separately for each
class of financial instrument. (05)
 (05)

c) List down the disclosure requirement for the investment held at amortized cost
because no reliable measure is available. (05)

Q.7 List down the conditions that the enterprise should consider in assessing that an
impairment loss previously recognized might no longer exist. (05)

Q.8 You have been appointed as a financial controller of a multinational organization.

The management of the company is looking forward to make further investments in
the country and it has some opportunities in the market to buy shares of different
companies. The head office has instructed to use following share/ business valuation
models.
- Dividend Yield
- Earnings Yield
- Assets Basis
The local management has asked you to explain the use of the above models.

You are required to submit to the local BOD in a summarized form your
understanding of the above mentioned business valuation models. Your explanation
should cover the following areas:
- The basis / formula for determining Share value.
- Information required for the application of these methods.
- Advantages of these methods.
- Problems that may arise in each of these methods.
- Companies/ investors, for whom these methods are suitable. (10)

Q.9 (a) What is the formula for calculating the number of ordinary shares that are used in the
calculation of basic Earnings per Share (EPS) for periods prior to the rights issue? (2.5)
(b) When the Potential ordinary shares should be treated as dilutive? (2.5)

Q.10 Anabi Bank Limited ( a Middle East bank having branch in Pakistan) has outstanding
loans of Rs. 8.511 million out of which, Rs. 1.258 million are on non-performing
status.

Loans and advances include Bill discounted and purchase of Rs. 2.233 million out
which 1.752 million are payable out side Pakistan. The remaining advances represent
Loans, Cash Credits etc.
Overall analysis of the loan book shows that advances of Rs. 951 thousand are in
foreign currency and loans of Rs. 5.934 million are of short-term nature i.e. payable
within one year.
The detail of non-performing loans is as follows:
Outstanding Provision held
( Rs. ‘000’ )
Other Asset Especially
Mentioned (OAEM) 377 -
Substandard 277 48
Doubtful 151 54
Loss 453 230
1,258 332
 (06)

Charge for the year of provision for doubtful advances is Rs. 65 thousand is against
specific Loans and the rest is for general advances. Similarly the reversal in the
provision is Rs. 54 thousand from Specific provision and 71 thousand against general
provision.
The opening balance is Rs. 95 thousand and 182 thousand for specific and general
provisions respectively.

Required:
You are required to:
Give the necessary disclosure based on the above information in the financial
statements of Anabi Bank Limited. (05)

Q.11 What the report of a Defined Benefit Plan should contain. Explain in the light of
relevant Accounting Standard. (05)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examination Summer 2003

June 03, 2003

ADVANCED ACCOUNTING & FINANCIAL REPORTING (MARKS 100)

Module ‘E’ Paper E-15 (3 hours)

Q.1 Following is the Balance Sheet and an extract from the Profit and Loss account of A Limited for the
year ended June 30, 2002.

BALANCE SHEET
2002 2001
Rupees Rupees
Share capital 2,565,000 2,565,000
Capital reserve 160,000 160,000
Revenue reserves 6,144,100 5,837,800
________ ________
8,869,100 8,562,800

Long term loans 744,200 1,304,700

Deferred taxation 299,000 474,000

Current liabilities
Current maturity of long terms loans 536,100 545,000
Short term finance 1,650,000 0
Creditor, accrued and other liabilities 2,359,800 1,320,300
Taxation [ net of advance tax] 511,900 509,900
Proposed dividend 513,000 1,026,000

5,570,800 3,401,200
_________ _________
15,483,100 13,742,700
========= =========

Fixed assets 2,307,500 3,072,800

Capital work in progress 12,200 5,000
Long term Investment 3,406,300 3,211,800
Long term loans and advances 34,000 27,100
Long term deposit, prepayments and
deferred costs 161,500 159,200

Current Assets
Stores and spares 1,242,700 1,144,900
Stock in trade 68,000 140,800
Trade debts 769,100 704,900
Loans, advances, deposits,
990,000 520,000
Prepayments and other receivables
Short term investments 4,825,000 3,485,400
Cash and bank balances 1,666,800 1,270,800
9,561,600 7,266,800
________ ________
15,483,100 13,742,700
======== ========
 (2)

EXTRACTS FROM PROFIT AND LOSS ACCOUNT

Rupees
Profit before financial charges and
other income 3,757,100
Financial charges 333,100
________
3,424,000
Other Income 1,089,600
Other charges (323,700)
_________
Net profit before tax 4,189,900
Provision for taxation 1,546,000
_________
Profit after tax 2,643,900
Unappropriated profit b/f 337,800
_________
2,981,700
Appropriation

Transfer to general reserve 700,000

Interim dividend 1,539,000
Final dividend 513,000
2,752,000
_________
229,700
========

During the year loss of Rs.285,600 arising from valuation of investment in associated undertaking at
fair market value was debited directly to revenue reserve account.

Short-term finance is in the nature of overdraft and is payable on demand.

Creditors, accrued and other liabilities include following:

2002 2001
Accrued markup on loans 57,200 63,000
Unclaimed dividend 550,600 52,900

Depreciation for the year was Rs.889,600. During the year assets having book value of Rs.3,900
were sold for Rs.10,300

Other income include exchange gain on foreign currency investments of Rs.134,600, exchange gain
on foreign currency deposits with bank Rs.3,000, income on loans and investments including
markup charged to associated undertaking Rs.924,200.

During the year provision of Rs.41,000 was made for slow moving and obsolete spares for the first
time in the history of the company.

Loan advances deposits and prepayments include following:

2002 2001

Due from associated undertakings 702,400 212,700

Accrued income on investment and
bank deposits 206,600 196,100
 (3)

Short term investment include Pak rupees Bonds purchased 15 days prior to year end with following
maturities

2002 2001

Maturing on July 15 250,000 200,000

Maturing on September 30 200,000 300,000
Maturing on October 31 200,000 100,000

Financial charges include exchange gain of Rs.23,300 on long terms loans obtained by the
company.

Deferred cost amortized during the year was Rs.68,500

Required:

Prepare Cash Flow Statement providing all the information/notes required under IAS 7 (20)

Q. 2 a) F Limited has branches in many countries. Whilst preparing the annual accounts for
the year ended June 30, 2002 the accountant of the company observed the
following:

I. UK branch has an inventory as on June 30, 2002 valued at Pound Sterling

1,000,000. The exchange rate of one pound sterling on the date of purchase of
inventory was Rs. 90 and on June 30, 2002 was Rs. 80. The net realizable value of
inventory as on June 30,2002 was pound sterling 1,100,000.

II. US branch has an inventory as on June 30, 2002 valued at US $ 1,000,000. The
exchange rate of one US dollar on the date of purchase of inventory was Rs. 60 and
on June 30, 2002 was Rs.65. The net realizable value of inventory as on June
30,2002 was US $ 950,000. The branch has recorded the inventory at net realizable
value in its financial statements.

You are required to explain how the above positions shall be reflected in the financial statements of
the branch and the financial statements of F Limited. (06)

b) Financial statements of LBS Limited showing following financial instruments:

I. Investment in Term Finance Certificates quoted on stock exchanges carrying

markup @ 17% per annum payable semiannually.

II. Long terms loans obtained from a financial institution carrying markup @ 2%
above the State Bank of Pakistan’s discount rate.

III. Foreign currency long-term loans provided by the company to one of its associated
concern carrying interest @ 2% above London Inter Bank Market Rate. (LIBOR)

You are required to classify the above financial instrument into following financial risks as required
under IAS 32 (Financial Instrument: Disclosure and Presentation)

1. Exposed to interest rate price risk

2. Exposed to interest rate cash flow risk
3. Exposed to currency risk (06)
 (4)

Q.3 Foreign investment Ltd., has “Investment Held for Trading” in 1,000 shares of Y Ltd. which was
purchased at Rs.20. The fair value of shares on Jan 01, 2002 was Rs.30 and on Dec 31, 2002 was
Rs.35. The shares were indicated at cost in the accounts for the year ending Dec 31, 2001. The
shares were sold at Rs.32 on March 27, 2003.

Show the working in the books for the year ending Dec 31, 2002 and on disposal in accordance with
IAS 39. Explain the term “Held for Trading” and describe the disclosure in the financial statements
for the year ending Dec 31, 2002. (10)

Q.4 Foreign Investment Ltd., owns a building which is given on rent. The historical cost in the
financial statement for the year ending December 31, 2000 is included in the fixed assets at Rs.30
million. The fair value of the plaza on Jan 01, 2001 was Rs.300 million and on December 31, 2001
Rs.302 million

Show the working by adopting fair value model under IAS 40. Indicate how these transactions
would be disclosed in the financial statements for the year ending Dec 31, 2001. (10)

Q.5 Southern Ltd has recently decided to introduce a Non-Contributory Defined Benefit Pension
Scheme to cover all of its full-time employees. A separate pension fund has now been set up.

The following information has been obtained from various sources including the results of actuarial
calculations.

(i) on the recommendations of the actuary, the company intends to make payments to trustees
in respect of regular pension costs. Payments to be made on December 31, 2000 and 2001
amount to Rs 350,000 and Rs 410,000 respectively.

(ii) in addition, the company agrees to make four annual payments of Rs 200,000 each year
(payments to be made on December 31, 2000, 2001, 2002 and 2003 respectively). These
payments relate to retroactive changes in benefits (past service costs) as no pension scheme
previously existed.

You ascertain that the expected average remaining service lives of employees in the scheme is ten
years.

Required:

(a) State the main assumptions required in order to determine an appropriate charge to profit
and loss account under a Defined Benefit Scheme. (05)

(b) Explain and justify the treatment in respect of the past service costs referred to
in (ii) above. (04)

(c) Provide the relevant extracts from the balance sheets for 2000 and 2001. (04)
 (5)

Q.6 It was agreed that, with effect from 1 January 2001, Nexus Ltd would acquire the whole of the net
assets of Forte Ltd and the fixed assets, stocks and goodwill of Motiwala & Palkiwala, a
partnership, by the issue of ordinary shares of Rs 10 each fully paid at their then market value of Rs
12.50 per share.

In computing the number of shares to be issued for each business:

(a) The fixed assets were to be taken at the value placed on them by an independent valuer.

(b) Stocks were to be taken at book value subject to a deduction of Rs. 2,000 from the stocks of
Motiwala & Palkiwala for obsolete stock.

(c) In the case of Forte Ltd, debtors, creditors and balance at bank were to be taken at book
value less Rs 3,000 in respect of a bad debts.

(d) Goodwill was to be valued at two years’ purchase of the average profits of the last three
years subject only to the following adjustments:

In the case of Forte Ltd:

(i) The directors’ remuneration charged in each year was to be reduced by Rs 5000.

(ii) The depreciation charged in each year on ‘other fixed assets’ was to be substituted
with depreciation on those assets calculated at 10% of cost on a straight line basis.

In the case of Motiwala & Palkiwala:

(i) Notional salaries of Rs 10,000 pa, in total, are to be charged for the partners.

(ii) Rs 4,000, being an exceptional items of expense, was to be added back to the
profits in the year to 31 December 2000.

The summarized balance sheets of the three businesses at 31 December 2000 were:

Nexus Forte Motiwala &

Ltd Ltd Palkiwala
Rs Rs Rs

Freehold premises at cost 100,000 36,000 24,000

Other fixed assets at costs less depreciation 316,000 74,000 40,000
Stocks at cost 270,000 36,000 22,000
Debtors 246,000 86,000 42,000
Balance at bank 42,000 24,000 11,000
974,000 256,000 139,000

Ordinary shares of Rs 10 each, fully paid 600,000 100,000

Capital account:
Motiwala 61,000
Palkiwala 22,000
Profit and loss account 244,000 52,000
Creditors 130,000 104,000 56,000
974,000 256,000 139,000
 (6)

You ascertain:

Nexus Forte Motiwala

Ltd Ltd &
Palkiwala
Rs Rs Rs

(a) The depreciation deducted from the cost of

other fixed assets at 31 December 2000 124,000 50,000 20,000

(b) The independent valuations at 31 Dec. 2000

were:
Freehold premises 120,000 50,000
Other fixed assets 66,000 42,000

(c) The profits for the last three years ending

on:
31 Dec. 1998 18,000 18,000
31 Dec. 1999 24,212 13,000
31 Dec. 2000 26,200 19,000

after charging depreciation amounting to

(for the years ending):
31 Dec. 1998 10,500
31 Dec. 1999 8,916
31 Dec. 2000 9,072

(d) The other fixed assets at 31 Dec. 2000 at

cost were:
before 31 Dec. 1997 104,000
purchased 1 Jan. 1999 20,000

(e) Forte Ltd has disposed of ‘other fixed assets’ on 1 Jan. 2000 which had cost Rs 16,000 on
1 Jan. 1997.

Required:

(a) a statement showing the number of shares to be issued by Nexus Ltd to pay for the
acquisition; and

(b) the balance sheet, as far as the required information is available, of Nexus Ltd on 1 Jan.
2001 after giving effect to the issue of shares for the acquisitions. (21)

Q.7 Kamal Associates won first contract of the financial year on April 1, 2001 for destruction of a group
of ten buildings of similar size and technical specification for a price of Rs 2 million. The work was
to be completed within six months of an award of the contract failing that a penalty of 6% per
annum of the contract price would be paid to the customer for the delay.

Following information was available as at June 30, 2001; the date on which Kamal Associates close
their financial year. On that date five buildings were demolished.
 (7)

Site labour Rs 200,000; site supervision Rs 150,000; material used Rs 250,000; depreciation on
plant used at site Rs 100,000; general and administration costs Rs 50,000; research and development
costs Rs 25,000; selling costs Rs 25,000: Other construction overheads Rs 200,000.

The management of Kamal Associates compared above information with budgeted cost of the
contract and was satisfied with performance except that it would require four months to complete
the rest of the contract. Due to delay in completion and inflation, cost over run would be as follows:

Increase in wages of site labour by 10%. Escalation in material cost by 20%. Other construction
overhead would increase by 20%. Research and development cost to go down by Rs 5,000.

Subsequent to June 30, 2001 Kamal Associates was notified of a claim of Rs 50,000 from third
party for damage done to a building next to the one demolished by Kamal Associates. Kamal
Associates accepted the claim.

Required:

Prepare contract account clearly indicating profit earned or loss incurred as at the close of financial
year on June 30, 2001 in accordance with IAS 11 (revised 1993) Construction Contracts. (14)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2003

December 02, 2003

ADVANCED ACCOUNTING & FINANCIAL REPORTING (MARKS 100)

Module E (3 hours)

Q.1 The balance sheets of the three Companies as at 30 June 2003, reflect the following figures:

Company Company Company

A B C

Number of Shares issued 25,000 10,000 15,000

(All in Rupees)

Share Capital 250,000 100,000 150,000

Reserves 530,262 497,852 218,788

Long term loans 352,663 225,432 229,555

Liabilities against Finance lease 285,656 142,587 272,657
Current Liabilities
Creditors 295,124 289,587 248,751
Accrued Markup 38,473 44,589 49,442
Other Liabilities 65,258 59,564 71,546
1,817,436 1,359,611 1,240,739

Operating assets 796,257 595,857 485,565

Capital Work in progress 199,362 174,567 185,544
Long Term Investment 185,500 45,525 65,210
Current Assets
Debtors 225,403 129,658 150,457
Advances, Deposits & Prepayments 264,587 274,457 196,222
Other Receivables 146,327 139,547 157,741
1,817,436 1,359,611 1,240,739

Pattern of Share holding – Company “B” (as at 30th June 2003)

Shares %
Directors 7,500 75%
Financial Institutions 1,050 10.5%
Companies 400 4%
Foreign Individuals 550 5.5%
Others 500 5%
10,000 100%

Company Company Company

A B C
Average Market Price:
2001 41.56 71.56 33.92
2002 38.92 69.23 45.62
2003 33.92 76.45 29.12
 (2)

Company Company Company

A B C
Net Profit:
2001 19,326 14,547 12,777
2002 22,455 16,172 14,555
2003 25,478 16,389 15,741

Expected Profit Growth rate: 15% p.a 12% p.a. 10% p.a.

Value of Fixed Assets as per independent

valuers. Rs.1,004,325 Rs. 990,278 Rs. 823,125

The management of the group is planning for amalgamation of two of its companies “A” and “C”
into Company “B”. Companies “A” and “C” will be dissolved. It is estimated that the net profit
will grow at the abovementioned rates for a further period of three years.

The management had carried out the revaluation of Fixed assets of the company through
Independent valuers during the year 2003, however, the surplus on revaluation was not booked in
the financial statements.

Required:

On the basis of (i) Net Assets Value (NAV) method, and (ii) Earnings/yield basis, calculate:
(a) Goodwill arising on acquisition
(b) Revised pattern of Shareholding of Company B. (20)

Q.2
(Rupees in ‘000)
Present value of funded obligation: 01 Jan 2003 1000
Un-recognized actuarial gains: 01 Jan 2003 160
Actuarial gain to be recognized 6
Discount rate 12%
Current service cost 250
Benefits paid 120
Fair value of plan assets : 31 Dec 2003 1050
Present value of obligation : 31 Dec 2003 1122

Required:

(a) Calculate unrecognized actuarial gains / losses as at 31 Dec 2003. (10)

(b) State what type of information is required in order to calculate a defined benefit liability in
accordance with IAS-19. (05)

Q.3 XYZ Company Ltd. has produced the following Net profit figures.

(Rupees in Million)
20X6 1.1
20X7 1.5
20X8 1.8
 (3)

On 01 Jan 20X7, the number of shares outstanding was 500,000 shares. During 20X7 the
company announced a rights issue with the following details:

- Rights: 1 new share for each 5 shares outstanding

- Exercise Price: Rs. 5
- Last date to exercise rights is 01 March 20X7.

The market value of one share in XYZ Co., immediately prior to exercise on 01 March
20X7 is Rs. 11.

Required:
Calculate EPS for the years 20X6, 20X7, and 20X8. (10)

Q. 4
(a) A lessee enters a leasing arrangement on 31 December 20X3 for a piece of equipment
costing Rs.47,460. The lease requires the payment of an annual rental of Rs. 13,610 payable
in advance. The primary period of the lease is four years. After the end of primary period,
the lessee has the right to extend the lease indefinitely on payment of a nominal annual
rental. The lessee believes that the equipment will last for four years and will have no scrap
value at the end of that period. The lessee depreciates assets of this type using the straight
line basis. Both the lessor and the lessee have accounting periods ending on 31 December.

(i) Calculate the IRR of the lease.

(ii) Prepare the note of “Debtors” as it would appear in the accounts of the lessor. (10)

(b) State the disclosure requirements for Lessees in case of operating leases in accordance with
IAS – 17. (05)

Q. 5
(a) What do you understand by the term related party transaction. (01)

State the related party disclosure relating to:

(i) Related party relationship where control exists. (02)
(ii) When there has been a transaction between related parties (02)
(iii) Items of similar nature (02)

(b) How are the effects of ‘extra ordinary items’, ‘fundamental errors’ and ‘changes in
accounting policies’ reflected on the profit or loss of an entity in pursuance
of IAS-8. (10)

(c) Explain the difference between Open Ended and Closed Ended Mutual Funds. (05)

Q. 6 The Board of Directors of Kids Limited decided to dispose off, one of their segment
“Boss”. On 10th May 2002, when the assets and liabilities of “Boss” were Rs. 5,250,000
and Rs. 750,000 respectively, the approval and announcement of disposal was made. The
net recoverable amount of the assets was determined as Rs. 4,250,000.

On March 31, 2003, when the carrying amount of net assets was Rs. 3,500,000 Kids
Limited signed a legally binding contract to sell “Boss”. The sale is expected to be
completed by July 31, 2003. The recoverable amount of the net assets as on March 31, 2003
was Rs. 3,000,000. The process requires incurrence of additional cost of Rs. 1,500,000
payable by July 31, 2003. The operations of “Boss” continued throughout 2002 – 2003.
 (4)
Other data of Kids Limited includes:

2002 – 2003 2001 – 2002

Rs. Rs.
Revenue 7,000,000 7,000,000
Operating expenses 4,500,000 4,600,000
Interest expenses 1,250,000 750,000

Boss’s financial data included in the above was

2002 – 2003 2001 – 2002

Rs. Rs.
Revenue 2,000,000 2,500,000
Operating expenses 1,500,000 1,350,000
Interest expenses 250,000 250,000

The corporate tax rate is 35%.

Required:

The income statement for Kids Limited for the year ended June 30, 2003 and 2002, in the
light of IAS 35 - Discontinuing Operations. (08)

Q.7 With respect to a commercial bank, duly incorporated as a public limited company,
engaged in promoting Islamic banking products like ‘modarabas’, ‘ijaras’ and also
investment banking, draft following accounting policies after taking into account relevant
requirements of the Banking Companies Ordinance, 1962, the Companies Ordinance, 1984,
the directives issued by the State Bank of Pakistan and the International Accounting
Standards:

(a) Revenue recognition. (02)

(b) Financing. (02)
(c) Investments. (04)
(d) Sales and Purchase agreements. (02)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2004

June 07, 2004

ADVANCED ACCOUNTING & (MARKS 100)

FINANCIAL REPORTING (3 hours)

Q.1 Many years back A Ltd made investment of Rs 15 million at par in the paid up
capital of Rs 60 million of Z Ltd comprising 6 million ordinary shares of Rs 10
each. A Ltd accounted for its investment in Z Ltd using equity method of accounting
as per IAS 28 ‘Accounting for Investments in Associates’.

A Ltd profit after tax for the year ended June 30, 2003 was Rs 8 million.

Each one of the following is an independent situation:

(a) As at June 30, 2002 A Ltd reported its investment in Z Ltd at Rs 20 million.
During the year ended June 30, 2003 A Ltd received 10 % dividend in cash
from Z Ltd. Z Ltd profit after tax for the year to June 30, 2003 was Rs 10
million. Dividend from and share of profit in Z Ltd were not accounted for in
A Ltd books.
(b) As at June 30, 2002, A Ltd reported its investment in Z Ltd at Rs 2 million.
During the year ended June 30, 2003, godown of Z Ltd caught fire and
consequently its operation was stopped for a considerable time during the year.
Z Ltd incurred a loss of Rs 10 million.

Required:

Compute in each of the above case the amount to be shown in the balance sheet of A
Ltd as at June 30, 2003 in respect of:

(i) Investment in Z Ltd (09)

(ii) Profit after tax of A Ltd (05)
clearly showing nature and amount of each adjustment.

Q.2 Omega Limited has been engaged in construction business and wins a contract to
construct a flyover at “cost plus 10%” with a completion period of one year. The
company and the customer agree that the element of borrowing cost in the total cost
will be determined according to allowed alternative treatment regarding borrowing
costs given in IAS 23. The customer agrees to make progressive payments of Rs. 20
million each on the first day of fourth and seventh months and the balance on
completion of the project. The management estimates cost of the flyover at Rs. 90
million. The company’s bankers agree to finance the project @ 10% mark-up per
annum and disbursement thereof will be made in installments of Rs. 30 million each
on the first day of first, fourth and seventh month. The company realizes at the end
of third month that second installment of disbursement by the bankers need to be
paid to the company’s creditors a month later. Therefore, on receipt of second
installment, it is temporarily invested to fetch return of 2% to the company. All
disbursements made are expensed out as costs.
 (2)
Required:

Compute total costs of the flyover as per agreement between the company and the
customer at the time of completion of the project. (15)

Q.3 Following is a summarized balance sheet prepared on the basis of the requirements of
the Companies Ordinance 1984:

Rs Rs
Paid up share capital 10,000,000 Fixed assets at WDV
General reserve 5,000,000 Owned assets:
Unappropriated profit 2,000,000 Freehold land 3,000,000
17,000,000 Leasehold land 2,000,000
Surplus on revaluation of
fixed assets 3,000,000 Plant and machinery 5,000,000
Furniture and fixtures 1,000,000

Current liabilities Long term investments

Short term running In associated
finance under mark up company (using
arrangement 4,000,000 equity method of
accounting) 1,000,000
Creditors, accrued and
other liabilities 6,000,000 In listed companies 8,000,000
Unpaid dividend 1,000,000 Current assets
Proposed dividend 4,000,000 Stocks 8,000,000
Debtors 6,000,000
Cash and bank
balances 1,000,000
____________ _____________
35,000,000 35,000,000
=========== ==========

Required:

Redraft the balance sheet in summarized form in accordance with the requirements of the
International Accounting Standards (IAS) giving particular attention to nomenclatures and
placement of the balance sheet items. Do not assume any further information. Write short
note on major variation in disclosure. (15)

Q.4 K Ltd deals in various types of products and provides different types of services to its
customers. The company recognises its revenues as per requirements of IAS 18
‘Revenue’ and closes its financial year on June 30, each year. The company entered into
the following transactions during the last few days of June 2003:
 (3)

(a) On June 27, 2003, the company entered into an agreement with a customer to
supply 100 television receivers together with their installations @ Rs 20,000
per piece. On June 28, 2003, all factory tested television receivers were
delivered and accepted by the customer. On June 29, 2003, the company’s
staff installed 50 television receivers by fixing antennae and connection of
power. The company closed its dealings with its customers from June 30, 2003
to July 2, 2003 for annual stock check and other financial year end activities.
The balance television receivers were installed on the first working day in July
2003.

(b) It is the company’s policy to supply goods to retail customers on ‘Cash on

Delivery’ basis. Against a purchase order of a retailer, the company delivered
5 refrigerators @ Rs 30,000 each on June 30, 2003. As cashier of the retailer
left office early on that date, the company received cash on its next working
day.

(c) On June 28, 2003 the company sold 100,000 ordinary shares of A Ltd having a
carrying value of Rs 1 million for Rs 1.1 million and simultaneously entered
into an agreement to repurchase these shares after 3 months for Rs 1.2 million.
Terms of the agreement included that the company would transfer the title of
the shares to the buyer at the time of sale and the buyer would transfer the title
back to the company at the time of repurchase of the shares. The buyer would
return dividend, if any, declared and received on the shares during the period
from sale to repurchase to the company.

(d) The company’s selling price of television receiver is Rs 20,000. If goods are
supplied under installment sales, the selling price is Rs 24,000 payable in 12
equal installments commencing from a month after the sale is made. On June
29, 2003, the company supplied 10 television receivers under installment sales.

(e) The company makes sales of gas cooker with after sales support for one year.
On the basis of past experience, the company fixed selling price of gas cookers
as follows:
Rs
Cost of gas cooker 5,000
10% of cost as after sales support 500
20% profit on cost 1,000
Selling price 6,500

On June 28, 2003, the company sold 50 gas cookers.

(f) The company is entitled to the following dividends:

Company Date Date approved in Date of book closure Dividend

recommended AGM amount
by board Rs

X Ltd June 1, 2003 June 29, 2003 June 30, 2003 100,000
Y Ltd June 2, 2003 June 30, 2003 July 1, 2003 50,000
Z Ltd June 3, 2003 July 1, 2003 July 1, 2003 150,000
 (4)
Required:

Compute the total amount of revenue, clearly showing revenue under each type of income
together with short reason for inclusion or exclusion of the transactions in revenue
recognition. (15)

Q.5 Following information relate to the operations of Aslam Ltd for the year ended June 30,
2003:

The company sells house appliances under warranties to make good by repairs or
replacement, defects that become apparent within six months from the date of sale. Average
sales amount is Rs 100,000 per month.

On July 1, 2002, the company carried a provision of Rs 2500 for warranty claims.
According to past experience if all products sold during a month have minor defects, it will
cost Rs 1,000 to the company and for major defects Rs 10,000 will be incurred. The
company expects that 80% of the goods sold will have no defects ; 15% will have minor
defects and 5 % will have major defects.

During the year to June 30, 2003, the company incurred following actual expenditure on
warranty claims:

For sales of six months to Cost incurred

Rs
June 30, 2002 2,000
December 31, 2002 3,500
June 30, 2003 1,500

Required:

For the year ended June 30, 2003:

(a) Compute the charge to profit and loss account for warranty claims showing
complete working of the charge.
(b) Compute the amount of provision for warranty claims to be carried in the
balance sheet starting with the amount of provision at the beginning of the
year, complete movements for the year and the amount of provision required at
the end of the year. (09)

Q.6 (a) A company has incurred following expenditure during the year:

Rs
(i) Activities aimed at obtaining new knowledge 150,000
(ii) Designing ‘dies’ involving new technology 100,000
(iii) Internally generated customer list 125,000

Assume that any of the above items that can be recognized as an intangible asset meets the
recognition criteria.
 (5)
Required:

Compute cost of intangible asset and amount to be charged to profit and loss account.
(08)

(b) The company is developing a new software program to sell it in open market.
During year 2, the company has incurred expenditure on it amounting to
Rs. 1 million. The company is able to demonstrate that at year end, the new
software meets the criteria for recognition as an intangible asset except that the
company is not sure whether it can sell the software in the market.

Required:

(i) Whether the cost incurred be carried as an intangible asset or charged to profit
in the financial statements at the end of year 2. (03)

(ii) Give short reasons for the treatment you suggest in (i) above. (03)

Q.7 (a) To analyze financial statements, two methods viz. horizontal and vertical
analysis are used. What is the difference between horizontal analysis and
vertical analysis? (04)
(b) To ascertain the following ratios which of the above two methods has to be
applied to each of them?

(i) Increase in sales by 20%

(ii) Net sales to cost of sales 1.2 : 1.00
(iii) Increase in gross profit 5% over previous year
(iv) Gross profit to sales 25%
(v) Decrease in administration expenses 10%
(vi) Net sales to fixed assets 3 : 1
(vii) Net profit to equity 10%
(viii) Financial charges decreased by 5%
(ix) Dividend distributed 2% more than previous year
(x) Current assets to current liabilities 1.5 : 1.00

(05)

Q.8 Following are extracts from the draft financial statements of three different leasing
companies as at June 30, 2002:

(Rs in 000s)
A Ltd B Ltd C Ltd

Paid up share capital 200,000 200,000 200,000

Statutory reserve 175,000 225,000 205,000
Unappropriated profit from previous year 25,000 25,000 45,000
----------- ----------- ----------
400,000 450,000 450,000
====== ====== ======
 (6)

Further information:

(a) Profit after tax for the year to June 30, 2003 for each company was as follows:

A Ltd Rs 25 million; B Ltd Rs 30 million; and C Ltd Rs 40 million.

(b) Statutory reserve represents amounts set-aside in previous years as required by

Prudential Regulations applicable to leasing business. Set-aside the amount for
statutory reserve from the profit after tax for the year for each company in
accordance with the above Prudential Regulations.

(c) The board of directors of these leasing companies approved the following:

A Ltd : 10% cash dividend

B Ltd : 10% cash dividend
C Ltd : 20% bonus shares

Required:

Redraft the above extracts after incorporating the adjustments required in view of
further information. (09)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2004

December 07, 2004

ADVANCED ACCOUNTING &

FINANCIAL REPORTING (MARKS 100)
(3 hours)

Q.1 SOFT TECH LTD is a public limited company incorporated in Pakistan in January
2000. SOFT TECH purchased the whole of the share capital of E-TECH L.L.C., a
company incorporated in Jabel Ali Free Zone of Dubai. The agreed price of
Rs. 9 million was remitted through Pakistan on July 1, 2003. Fixed assets and
intangible assets (software) were revalued for the purpose of the acquisition and the
balance sheet as of July 1, 2003 has been based on these valuations.

E-TECH L.L.C. UAE

BALANCE SHEET AS ON JULY 1, 2003
UAE Dirhams

Share capital 150,000

Revaluation reserve 60,000
Unappropriated profit 195,000
Long term loan 225,000
________
630,000

Fixed assets 400,000

Intangible assets (softwares) 150,000
Net current assets 80,000
______
630,000

The summarized accounts for June 30, 2004 of both the companies are as follows:

SOFT TECH E-TECH

Rs. 000 UAE Dirhams
000
PROFIT AND LOSS ACCOUNT
Operating profit 144,000 75
Less Income tax 57,000 -
Net profit for the year 87,000 75
Unappropriated profit b/f 20,000 195
Unappropriated profit c/f 107,000 270
 (2)

BALANCE SHEET

Share capital 400,000 150

Revaluation reserve -- 60
Unappropriated profit 107,000 270
Long term loan 19,000 225
______ ____
526,000 705

Fixed assets 426,000 360

Intangible assets (software) 46,000 100
Net current assets 45,000 245
Investment in subsidiary 9,000
_______ ___
526,000 705

Relevant exchange rates (Pak Rupees per UAE Dirham):

July 1, 2003 15
Average for the year 15.88
June 30, 2004 16

Required:

Prepare consolidated accounts for SOFT TECH and its subsidiary for the year ended
June 30, 2004 as per the requirement of relevant International Accounting Standards
(IASs). (15)

Q.2 The following balances have been extracted from the ledger of GK TEXTILES (PVT)
LTD as at June 30, 2004:

DR CR
Rupees in thousand

Sales tax 44,000

Deferred Taxation 22,000
Provision for Income Tax – 2003 53,000
Advance Income Tax 2003 45,000
Advance Income Tax 2004 53,000

The following transactions of June 2004 have not yet been recorded:

(a) Local sales amounting to Rs.20 million; exports Rs.15 million; purchases
Rs. 45 million of which Rs. 5 million were from those suppliers who were not
registered with the sales tax authorities. Rate of sales tax is 15%.

(b) Provision of Income tax for 2003 represented estimated amount of tax based
on the profits of June 30, 2003. The assessment for 2003 was finalized in June
2004 and agreed liability with the taxation authority is Rs. 50 million.
 (3)

(c) Income tax for the year ended June 30, 2004 estimated at Rs.64 million.

(d) Transfer to deferred taxation account Rs. 7 million

REQUIRED:

(a) Complete and balance the above ledger accounts

(b) Prepare extracts of the profit and loss account for the year ended June 30,
2004 incorporating the effects of the above matters. (12)

Q.3 AB MOTORS CO LTD is a newly listed company on Karachi and Lahore Stock
Exchanges. For the year ending June 30, 2004 the company has done the following
transactions. The management is not clear whether or not to disclose them in the
company’s financial statements.

(i) Purchase of spare parts during the year of Rs. 10 million from a concern in
which Mr A is a sleeping partner. Mr A is the non-executive director of AB
MOTORS and has no involvement in the management of the company. He is
doing his own business in UK and only comes to Pakistan to attend the
company’s board meetings.

(ii) 90% of the company’s sale is made through its major dealer Diamond
Motors. Total sales for the year are Rs. 700 million.

(iii) Import of glass material of Rs.25 million from Fisher Co. Belgium, which is
owned by Mr B who is one of the working directors of AB MOTORS.

(iv) Purchase of industrial plot for Rs. 15 million from Mrs. Rehana who is the
wife of the Chief Executive of the company.

Required:

Director Finance of the company has asked you to advise which transactions are to
be disclosed in the Financial Statements for the year ended June 30, 2004 as per the
requirements of IAS and the Companies Ordinance 1984. (10)

Q.4 Mehran Industries Limited is a private limited company, incorporated in Pakistan,

which started its business some ten years ago and its main business is manufacturing
of high quality towels.

In September 2004 the management of the company requested its bankers for long
term finance of Rs. 100 million for modernization of plant and machinery. The
company has provided the following significant ratios (with industry comparison):
 (4)

Industry
Key ratios 2004 2003 2002 2001 average

Debt : Equity ratio 0.20 0.10 0.00 0.00 0.50

Quick ratio 0.70 1.10 1.60 1.40 1.00
Current ratio 2.20 2.90 3.20 2.70 2.50
Stock turnover (times) 2.80 4.30 6.90 N/A 6.00
Debtors days 50 37 34 N/A 33
Fixed assets turnover 12.40 10.80 11.60 N/A 13.00
Total assets turnover 1.90 2.60 3.10 N/A 2.60
Return on total assets % 2.80 6.30 12.30 N/A 9.00
Profit margin on sales % 1.40 2.40 3.90 N/A 3.50

Required:

a) Draw up a ‘Memorandum’ for the bank manager showing the strengths and
weaknesses of the above financial ratios.
b) What other factors the bank manager should consider before approving or
rejecting the loan? (15)

Q.5 The summarized balance sheet of Companies X and Y as at 30th June 2004 are as
follows:

X Y
(Rs. 000) (Rs. 000)

Share capital (ordinary shares of Rs.10/- each) 62,500 10,000

Revenue reserves:
General 7,500 6,250
Profit and loss account 6,000 5,650
Deferred taxation 5,000 2,315
81,000 24,215

Current assets:
7% Special Savings Certificates - 3,150
Stocks, debtors and cash 37,500 15,650
37,500 18,800
Current liabilities (10,250) (3,935)
27,250 14,865
Fixed assets – tangible
Land and building at cost 25,000 -
Plant, etc. at cost less depreciation 19,375 9,350
Goodwill 9,375 -

81,000 24,215

An independent valuation of the tangible fixed assets reflects the following:

Rs. 000
Land and buildings (X) 32,000
Plant etc. (X) 21,000
-do- (Y) 10,750
 (5)

The profits for the past three years, after eliminating exceptional items, and after
providing for taxation, have been:

Year ended 30th June 2002 8,925 3,250

2003 9,720 3,497
2004 10,545 4,210

The boards of the two companies have been considering the possibility of an
amalgamation as from 1st July, 2004. You are asked to value the two undertakings on
such bases as you consider appropriate, and to suggest a fair exchange ratio of the
shares in the two companies. (20)

Q.6 (a) IAS 26 ‘Accounting and Reporting by Retirement Benefit Plans’ mentions two
retirement benefit plans. Briefly explain the same. (04)

(b) Paragraph 45 of IAS 37 ‘Provisions, Contingent Liabilities and Contingent

Assets’ states that where the effect of the time value of money is material, the
amount of provision should be the present value of the expenditures expected to
be required to settle the obligation.

Paragraph 59 of the said IAS further states that provisions should be reviewed
at each balance sheet date and adjusted to reflect the current best estimate.

Required:

Prepare a journal entry for increase of Rs. 50,000 in the carrying amount of (03)
provision to reflect the effect of passage of time under IAS 37.

(c) Which of the following are a component of cost in the initial measurement of
property, plant and equipment under IAS 16:

(i) Sales tax.

(ii) Start up and pre-production cost.
(iii) Initial losses before achieving planned performance of the asset.
(iv) Abnormal wastage of material and labour while manufacturing the asset.
(v) Government grant received for an asset.
(vi) Dismantling and restoration costs. (03)

Q.7 (a) With reference to the International Accounting Standard 39 ‘Financial

Instruments Recognition and Measurement’, please explain:

(i) What are financial assets? Give three examples. (06)

(ii) How should a financial asset be recognized initially? (03)
(iii) What are the classifications of financial assets for subsequent
measurement? (03)
(iv) How should each of these financial assets be subsequently measured? (03)

(b) What is the status of application of IAS-39 in Pakistan? (03)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2005

June 07, 2005

ADVANCED ACCOUNTING &

FINANCIAL REPORTING (MARKS 100)
(3 hours)

Q.1 Chemi Limited (CL) is engaged in manufacturing, purchasing and marketing of

chemicals, including investments in other chemical manufacturing operations.

During the year ended 31 December 2004, CL changed its accounting policy with
respect to the following:

(i) In previous years, investments in associates were based on fair value method,
where such investments were initially recognized at cost and carried at fair
value to the balance sheet. Fair values of investments were determined on the
basis of market value at the balance sheet date. Adjustments arising from re-
measurement to fair value were reflected through statement of changes in
equity. This policy has been changed to bring it in line with the Group’s policy
which states that investments are initially recognized at cost and at the
subsequent reporting dates, the recoverable amounts are estimated in order to
determine the extent of impairment losses and carrying amounts of investments
are adjusted accordingly. Impairment losses are recognized as expenses.

(ii) Upto previous year, dividends and other distributions proposed after balance
sheet date but before the financial statements were authorized for issue were
recorded as liability. After the change in the 4th Schedule of the Companies
Ordinance 1984, from the current year onwards, dividends and other
distributions are to be recognized as a liability in the period in which they are
declared.
Following information is available from the financial statement of CL:

2004 2003 2002

Market value of shares of A Limited an associated
company as at 31st December (Rupees per share) 45 47 50
Recoverable amount as per IAS 36 of A Limited
(Rupees per share) 40 44 48
Net profit after tax as per old policy (Rupees in
thousand) 4,004,044 3,144,509 Not given
Capital Reserves – (Rupees in thousand) 160,000 160,000 Not given

Dividend declaration has been as under:

For 2002 declared in 2003 Rupees 8.00 per share

For 2003 declared in 2004 Rupees 10.00 per share
For 2004 declared in 2005 Rupees 12.00 per share
 (2)

Bonus shares declared and issued in 2003 @ 15%

Share Capital of CL as at 1 January 2003 – 256, 495,902 shares of Rs. 10 each
Unappropriated profits as at 1 January 2003 – Rs.8,218,203,000
Investment in A Limited - 100 million shares at Rs.50 per share.
The effective tax rate applicable to the company may be assumed at 35%.

Required:

A statement of changes in equity for the year ended 31 December 2003 and 2004 as
per IAS 8 together with relevant notes. (You may round off all rupee figures to the
nearest thousand). (20)

Q.2 Ahmed Limited (AL) is a manufacturer of leather shoes and allied products. On
January 1, 2003 it acquired the shares of the following companies:

• Bilal Limited (BL) – 90% voting interest;

• Jamal Limited (JL) – 60% voting interest.

BL further acquired 30% shares of JL on January 1, 2004.

Following balances appear in the books of AL, BL and JL as at December 31, 2004:

AL BL JL
Rupees in thousands
Investment in BL 500,000 - -
Investment in JL 250,000 150,000 -
Plant and machinery 680,000 648,800 500,000
Equipment - 1,200 -
Liabilities (300,000) (110,000) (100,000)
Capital (600,000) (450,000) (300,000)
Retained earnings (400,000) (120,000) (80,000)
Dividends declared 200,000 20,000 10,000
Sales (1,200,000) (800,000) (600,000)
Cost of sales and expenses 894,000 663,000 570,000
Dividend income (24,000) (3,000) -

Other information relating to past period is as follows:

Retained earnings (January 1, 2003) (300,000) (90,000) (40,000)

Net profit for 2003 (140,000) (60,000) (50,000)
Dividend declared 2003 40,000 30,000 10,000
Retained earnings (December 31, 2003) (400,000) (120,000) (80,000)

Note: Figures in brackets represent credit balances.

Required:

You are required to prepare consolidated balance sheet and profit and loss account
for the year ended December 31, 2004. (18)
 (3)

Q.3 (a) Explain the terms contingent liabilities and contingent assets as per IAS 37. (05)

(b) AAR Limited started to operate an offshore oilfield on January 1, 2004.

Following are some of the events which took place during the year:

(i) The head office of the company was set up in a small house leased under
an operating lease agreement. On December 31, 2004 AAR relocated its
head office to another location. The lease on the old head office
continues for the next two years. As per the agreement it cannot be
cancelled or re-let to another user. Monthly rental of the house is
Rs.50,000.
(ii) AAR’s licensing agreement to operate offshore oilfield requires it to
remove the oil rig at the end of production and restore the seabed.
Ninety percent of the eventual costs relate to the removal of the oil rig
and restoration of damage caused by building it, and ten percent arise
through the extraction of oil. At the year-end, the rig has been
constructed but no oil has been extracted. The cost of removing rig and
restoration of seabed is estimated to be Rs.10.0 million in present value
terms at the end of 10th year of operation.
(iii) Under new legislation, AAR is required to fit smoke filters to its
refinery by the end of 2004. The cost of such filters is Rs.1.0 million,
which has not been incurred till the year-end. The penalty in case of
non-compliance is Rs.0.5 million.
(iv) AAR has announced a detailed formal plan to restructure its refinery
business which gives rise to constructive obligation. As a result of this
restructuring the company will have to face future operating losses of
Rs.15.0 million in present value terms.

Required:

Give the treatment for the aforesaid events under the relevant accounting
standards together with the basis for the same. (10)

Q.4 Market Searchers Limited (MS) had 5.0 million ordinary shares at the beginning of
the year 2002. In the month of February 2003, it announced a right issue of one new
share for each five shares issued at the exercise price of Rs.5.00 per share with the
last date of exercise of right being March 1, 2003. Fair value of one ordinary share
prior to exercise on March 1, 2003 was Rs.11.

Moreover, it issued 500,000 convertible bonds on January 1, 2004. Each block of 10

bonds is convertible into 3 ordinary shares. Interest expense for the year 2004
relating to the liability component of the convertible bond is Rs.10.0 million.
Current and deferred tax relating to that interest expense is Rs.4.0 million. Interest
expense includes Rs.1.0 million being the amortization of discount arising on initial
recognition of the liability component as per IAS 32.

Net profits for the year ended on December 31 of each year are as follows:

- 2002 – Rs.1,100 million

- 2003 – Rs.1,500 million
- 2004 – Rs.1,800 million
 (4)
Required:
(a) Compute earnings per share for the years 2002, 2003 and 2004 as per IAS 33. (10)
(b) Discuss whether or not the financial instruments or other contracts that may be
settled by payment of financial assets or issuance of ordinary shares of the
reporting enterprise, at the option of the issuer or the holder are deemed to be
potential ordinary shares under IAS 33. (05)
Q.5 (a) An enterprise agrees to enter into a new lease agreement with a new lessor. The
lessor agrees to a rent free period for the first three years as incentive to the
lessee for entering into the new lease. The new lease has a term of 20 years, at a
fixed rent of Rs.200,000 per year from year 4 to 20. Determine the amount of
expense to be charged by the lessee for the first three years and the remaining
17 years. What amount would the lessor recognize as income from year 1 to
year 20? (05)
(b) Give disclosure requirements for the ‘Discontinued Operation’ under IFRS 5. (05)
(c) Discuss the implication of change in accounting policy in interim financial
reporting requirements. (05)
Q.6 Pearl Bank Limited has local currency deposits of Rs.1,300 million which includes
remunerative deposits from financial institutions of Rs.400 million as at 31st
December 2004. It also has foreign currency deposits of Rs.200 million. Deposits
from customers, other than financial institutions, are fixed, savings and current
deposits of Rs.100 million, Rs.700 million and Rs.300 million respectively.
Included in the above deposits are deposits from individuals Rs.300 million,
business and professionals Rs.250 million, textile companies Rs.400 million,
pharmaceutical companies Rs.100 million and others Rs.50 million.
Required:
You are required to give necessary disclosures in the financial statements of Pearl
Bank on the basis of above information in line with those under the Banking
Companies Ordinance, 1962. (10)
Q.7 (a) State the items which should be reconciled while preparing a reconciliation
between the information disclosed for reportable segment and the aggregated
information in the consolidated or enterprise’s financial statement as per IAS-14. (04)
(b) The following information pertains to Star Corporation and its operating segment
for the year ended June 30, 2004.
Operating Segment Revenue Profit Assets
A 10,000,000 1,750,000 20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,000,000
F 1,500,000 225,000 3,000,000
32,750,000 5,800,000 67,500,000

Required:
Indicate which of the above segments would be treated as reportable operating
segment in segment information for 2004. Also mention criteria for each case
separately. (03)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2005

December 06, 2005

ADVANCED ACCOUNTING & (MARKS 100)

FINANCIAL REPORTING (3 hours)

Q.1 T Limited, a public listed company, entered into an expansion programme on

July 1, 2004. On that date, the company purchased 80% of the share capital of Alpha
Ltd and 40% of the share capital of Beta Ltd. For Alpha, T Ltd paid total
consideration of Rs.25 million. This was settled by signing a loan agreement of
Rs.20 million carrying interest at 7% payable semi-annually and the balance by
issuing 200,000 ordinary shares of T Limited. Shares of Beta Ltd., were acquired by
a 1 for 1 share exchange. The market value of T Limited’s share at the date of
acquisition was Rs 25. The year end of all the companies is June 30.
Extracts from their balance sheets at June 30, 2005 are as under:
T Ltd Alpha Ltd Beta Ltd
Rs 000 Rs 000 Rs 000
Fixed Assets:
Land 5,000 4,000 3,500
Building 8,000 6,000 5,500
Plant 22,400 14,000 12,000
Current Assets:
Stocks 10,000 9,000 16,200
Trade debts 9,200 7,000 2,800
Cash Nil 3,000 4,300
Share Capital and Reserves:
Ordinary shares of Rs.10 each 10,000 20,000 25,000
Unappropriated profits 20,000 15,000 4,500
Current liabilities:
Creditors 12,000 5,300 13,600
Running finance 3,000 Nil Nil
Taxation 9,600 2,700 1,200
The following further information is available:
• T Ltd. has not recorded the acquisition of the above investments nor the issue of
new shares at the time of preparing the above balance sheet. However interest on
loan of Rs.20 million has already been account for.
• The book values of the assets of Alpha Ltd. and Beta Ltd., at the date of
acquisition, were considered to be a reasonable approximation of their fair values
with the exception of fixed assets of Alpha Ltd. These were considered to have
the following fair values.
Land Rs. 5.0 million
Plant Rs.16.0 million
The plant had a remaining life of 4 years at the time of acquisition.
 (2)

• The profits of Alpha Ltd. and Beta Ltd., for the year ended June 30, 2005, as
reported in their financial statements, were Rs.8 million and Rs. 2 million
respectively. No dividends have been paid by any of the companies during the
year.

Required:

Prepare the Consolidated Balance Sheet of T Ltd. as at June 30, 2005. (18)

Q.2 One of your clients has contacted you to prepare cash flow statement as per the
requirements of IAS-7 and has provided you the following information:

2005 2004
Rupees in 000
Cash and bank 21,750 17,000
Trade & other receivables 17,000 13,400
Stocks 14,000 12,000
Investments - 4,000
Building 28,000 35,000
Equipments 40,000 20,000
Preliminary expenses 5,000 6,250
Provision for doubtful debts 3,000 4,500
Accumulated depreciation – Equipments 3,500 6,000
Accumulated depreciation – Building 8,500 12,000
Creditors 12,000 10,000
Dividend payable - 6,000
Current maturity of long term loans 3,000 4,000
Long term loans 33,000 29,000
Issued, subscribed & paid up capital 40,000 28,000
Unappropriated profits 22,750 8,150

Additional data relating to the accounts for the year ended June 30, 2005 is as
follows:
− Equipment that had cost Rs.11 million and was 40% depreciated at the time of
disposal was sold for Rs.2.5 million
− Investments were sold at Rs.2.5 million above their cost. The company has
made similar sales and investments in normal course of business.
− Rs.12 million of the long term loan was settled by issuing 1,200,000 ordinary
shares of Rs.10 each.
− Cash dividend of Rs.6.0 million was paid on September 1, 2004.
− A long term loan of Rs. 16 million was obtained to finance the purchase of
equipment.
− On July 1, 2004, a portion of the building was completely destroyed by fire.
Insurance claim of Rs.15 million was received from the insurance company.
The additions to the building during the year amounted to Rs.10.5 million and
depreciation provided during the year was Rs.2.0 million.
− Interest and income taxes paid during the year were Rs.2 million and Rs.5
million respectively.
Required:
Prepare cash flow statement for the year ended June 30, 2005 showing necessary
disclosures. (15)
 (3)

Q.3 DJ Products deals in large office machines. It also offers such machines on lease.
One such machine was leased to a customer on July 1, 2004. Its particulars are as
follows:
Purchase cost of DJ Products Rs. 150,000
Useful life 8 years
Lease period 6 years
Unguaranteed residual value Rs. 10,000
Annual rental payable at beginning of each year Rs. 36,500
The customer's incremental borrowing rate is 10% whereas the discounting rate
implicit in the lease is 8%.

The present values of a single payment of Re.1 and the present values of annuities of
Re.1 received at the end of the year, are as follows:
Present value of Re.1
Year Single payment Annuities
8% 10% 8% 10%
1 0.926 0.910 0.926 0.910
2 0.857 0.826 1.783 1.736
3 0.794 0.751 2.577 2.487
4 0.735 0.683 3.312 3.170
5 0.681 0.621 3.993 3.791
6 0.630 0.564 4.623 4.355
7 0.583 0.513 5.206 4.868
8 0.540 0.467 5.747 5.335
Required:

(a) Compute the following for DJ Products as at July 1, 2004:

(i) Gross investment in the lease;
(ii) Unearned finance income.
(b) Extracts of profit and loss account and balance sheet including notes thereon, as
at June 30, 2005 including all necessary disclosures as required under IAS-17. (16)

Q.4 3S Service Limited has an asset that is being reviewed for possible impairment in
value. The cost of the asset is Rs.26 million with a salvage value of Rs.2 million and
a remaining useful life of 4 years. The asset was being depreciated applying straight
line method and estimated useful life of 6 years. This asset is a cash generating asset
with the following expected cash flows:
Year Rs.
2005 – 06 6.0 million
2006 – 07 5.0 million
2007 - 08 4.0 million
2008 – 09 3.0 million
The company uses a discount rate of 10% and presently, the asset has a market value
of Rs.15 million. It is expected that the cost of disposal will be Rs.0.8 million.
Calculate impairment loss as at June 30, 2005 under each of the following
assumptions:
(a) The company will continue to use this asset in the future.
(b) The company intends to dispose of the asset in the coming year. (08)
 (4)

Q.5 Following is the trial balance of Executive Bank Limited as at June 30, 2005:

Trial Balance
Dr. Cr.
Rs. in ‘000’
Cash in hand - local currency 167,800
- foreign currency 257,000
Current account # 23512 with SBP 480,000
Current accounts in $, ₤ and € with SBP 360,000
Deposit account in $ with Central Bank of Oman 35,000
Current account with United Bank Limited, Karachi 73,000
Current account with National Bank of Pakistan 100,000
Deposit account with Citibank New York 837,000
Investment in COIs of NBFIs 200,000
Lending to NBFIs under Reverse Repo 935,000
Treasury bills 500,000
Investments in subsidiaries 200,000
Ordinary shares of listed companies 7,000
Term finance certificates 75,000
Advances 3,500,000
Miscellaneous current assets 150,000
Fixed assets 1,245,000
Surplus on revaluation of fixed assets 120,000
Deferred tax 27,000
Bills payable 300,000
Borrowing from SBP under export re-finance 175,000
Overdrawn nostro accounts - unsecured 71,000
Borrowing under repo with local banks 275,000
Deposits from customers - fixed 1,200,000
- savings 2,600,000
- current 350,000
- miscellaneous 182,450
Payable to a leasing company under finance lease 46,000
Payable to a leasing company under operating lease 2,000
Payable to suppliers 2,000
Withholding tax payable 350
Markup payable 175,000
Share capital 1,200,000
General reserves 1,500,000
Reserve for issue of bonus shares 150,000
Statutory reserve 800,000
9,148,800 9,148,800

Following further information is available:

1. 30% of investment in treasury bills have been given as collateral.

2. Investment in ordinary shares is primarily used for trading on stock exchange.
3. 40% TFCs will mature in January 2006 whereas the rest will mature in January
2007. However the bank intends to dispose all of them in January 2006.
 (5)

Required:

Prepare the balance sheet of the bank as at June 30, 2005 alongwith the following
notes to the extent the information is available, in accordance with the laws
applicable in Pakistan:

− Cash and bank balances

− Investments (investment by segments are not required)
− Borrowings from financial institutions (15)

Q.6 As a credit analyst in a bank, you have been given the following summarized profit
and loss statement and balance sheet of XYZ Limited:

Profit and loss account

For the year ended September 30, 2005
Rs. ‘000’
Sales 62,400
Cost of goods sold 51,090
11,310
Selling and administrative expenses 1,560
Profit before interest and tax 9,750
Interest expense 1,755
Profit before tax 7,995
Tax 3,198
Profit after tax 4,797

Balance Sheet
As on September 30, 2005
Rs. ‘000’
Capital and liabilities
Paid up capital 1,365,000 shares of Rs.10 each 13,650
Retained earnings 4,680
Debentures 29,250
Creditors 7,020
Bills payable 780
Other current liabilities 3,120
58,500

Assets
Net fixed assets 31,200
Inventory 15,600
Debtors 7,825
Marketable securities 1,925
Cash 1,950
58,500

Current market price per share is Rs.22/-

 (6)

Industry’s averages are as follows:

− Current ratio 2.3

− Quick ratio 1.6
− Sales to inventory 7.0
− Average collection period 32 days
− Price per share / book value of the share 1.4
− Debt to assets ratio 38%
− Time interest earned 7
− Profit margin 8%
− Price to earning ratio 10
− Return on total assets 10%
Required:
(i) XYZ Limited has applied for a short term loan of Rs.20 million. You are
required to evaluate the financial position of XYZ Limited and advise whether
the loan may be sanctioned.
(ii) What will be your evaluation if sales to inventory ratio and average collection
period are reduced to the industry average? (12)

Q.7 You are required to draft revenue recognition policies as required by IAS-18 in
respect of the following companies:
(a) Airline, which earns revenue through carrying passengers and cargo, receives
money on tickets and airway bills some of which remain unutilized at the year
end.
(b) Manufacturing concern, which earns revenue from sale of goods, return on
bank deposits, scrap sales, commission from sale of subsidiary company’s
products and dividend income which include dividend on shares of a
subsidiary company.
(c) Natural gas supply company, engaged in transmission and distribution of
natural gas, sale and rental of gas meters and sale of gas condensate as a by-
product. Late payment surcharge is also levied on long outstanding bills.
(d) Leasing company which earns revenue from finance lease, operating lease and
other income incidental thereto. (16)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2006

June 06, 2006

ADVANCED ACCOUNTING & FINANCIAL REPORTING (MARKS 100)

(3 hours)

Q.1 Millennium Enterprises Limited (MEL) has 80% shareholding in Century Petroleum
Limited (CPL) which it had acquired on April 1, 2003. On April 1, 2005, it acquired
whole of A Limited’s equal (50%) share in the joint venture A Limited had with B
Limited in a pipeline project. The operations of the project are jointly controlled.
The purchase was made at book value.

The balance sheets of the above entities as at March 31, 2006 are given hereunder:

Joint
MEL CPL
Venture
Rupees in thousand
Non-current assets
Property, plant and equipment 416,250 153,600 63,000
Investment 160,000 12,800 ---
576,250 166,400 63,000
Current assets
Inventory 41,440 20,480 21,000
Accounts receivable 35,150 12,160 11,200
Bank 6,660 -- 9,800
83,250 32,640 42,000
Total assets 659,500 199,040 105,000

Equity and liabilities

Capital and reserves
Ordinary shares of Rs.10 each 185,000 64,000 35,000
Reserves
Accumulated profits 405,680 76,800 52,500
590,680 140,800 87,500
Current liabilities
Accounts payable 48,100 43,200 14,000
Taxation 20,720 11,200 3,500
Overdraft -- 3,840 --
68,820 58,240 17,500
Total equity and liabilities 659,500 199,040 105,000

The following information is relevant:

(i) CPL was acquired at a cost of Rs.120 million. Its accumulated profits at that
date were Rs. 28 million.

At the date of acquisition, i.e. April 1, 2003, CPL owned an item of plant that
had a fair value of Rs.20.0 million in excess of its book value. The plant had a
remaining useful life of five years. All plant and equipment is depreciated on
the straight-line basis.
 (2)

The fair value of CPL’s remaining net assets and all of the Joint Venture’s net
assets were equal to their book values at the relevant dates of acquisition.
(ii) On October 1, 2005 MEL purchased some equipment from the Joint Venture
for a consideration of Rs.7.0 million. It was sold at a mark up of 25% on cost.
The equipment is in use by MEL and is included in property plant and
equipment and being depreciated over a four-year life.
(iii) During the year ended March 31, 2006, the books of account of the Joint
Venture showed a profit of Rs.15.0 million.
(iv) The share of profit for the year in CPL and the Joint Venture has not yet been
recorded in the books of MEL.
(v) All inter company current account balances were settled prior to the year-end.

Required:
Prepare the consolidated balance sheet of MEL as at March 31, 2006. (20)

Q.2 Mughals Limited, a firm of civil contractors, specialize in construction of highways.

They entered into a contract with the National Highway Authority (NHA) in the
year 2003 for construction of National Highway covering 1500 kilometers and
having 6 lanes. However, it was agreed that work shall commence on February 1,
2004. The agreed price was Rs.3.6 billion. The company closes its accounts on May
31.

On February 1, 2005 the NHA requested the company for extending the highway by
adding two further lanes. NHA was of the view that the price of this extension shall
be in the same proportion i.e. Rs. 1.2 billion, as there has been no significant
increase in costs since the signing of the contract in 2003. However Mughals
Limited refused to accept this price. Their board of directors was of the view that
their company was in a position to sign another contract if they forego the offer by
NHA. After extensive negotiations, the price of the extended work was agreed at Rs.
1.6 billion. It was also agreed that the work on additional lanes will be carried out
simultaneously and will be completed on November 30, 2006.

The following data is available in respect of the above contract:

As at May 31
2004 2005 2006
Original Contract Rupees in million
Progressive billing to date 800 2,500 3,400
Amount received to date 600 2,400 3,240
Mobilization advance (included in the above) 180 180 180
Actual cost to date 600 2,000 2,680
Value of work certified by NHA 300 2,000 3,300
Profit (latest estimate) 600 900 720

Additional Work
Progressive billing to date -- 200 1,100
Amount received to date -- 80 800
Mobilization advance (included in the above) -- 80 80
Actual cost to date -- 100 580
Value of work certified by NHA -- -- 1,000
Profit (latest estimate) -- 700 600
 (3)

There is a clause in the agreement that NHA will pay an early completion bonus of
Rs.5.0 million per week. However in case of delay it will levy a penalty of Rs.10.0
million for each week the completion is delayed. In case of the original agreement
the company has always been confident that the contract will be completed two
weeks ahead of time and was actually completed accordingly. In case of additional
work the chances of delay at year-end were considered as:

2005 2006
Delay of two weeks Possible Probable
Delay of three weeks Remote Possible
Delay of four weeks -- Remote

Required:
(a) Discuss whether the contract for additional work shall be treated as a
separate contract or a part of the original contract, according to IAS-11
(Construction Contracts) (04)

(b) Prepare extracts of the Income Statement and Balance Sheet of Mughals
Limited for the years to May 31, 2005 and 2006 in respect of the above
contract along with necessary disclosures regarding treatment of bonus and
penalty as discussed above. (16)

Q.3 Following are some of the balances which have been extracted from the trial
balance of EZ General Insurance Company Limited for the year ended December
31, 2005:

Rs. in ‘000’
Dr. Cr.
Premium receivable 17,000
Accrued income 300
Prepayments 2,400
Premium received in advance 3,523
Amounts due to other insurers/re-insurers 3,891
Accrued expenses 765
Other creditors and accruals 7,631
Retained earnings 4,630
Other revenue reserves 8,300
Premiums written during the year 74,471
Unearned premium reserve – opening 27,700
Reinsurance expense (after adjusting prepayments) 27,058
Claims paid 43,706
Outstanding claims – opening 4,354
Reinsurance recoveries against claims (after all adjustments) 14,751
Commissions paid 7,549
Unpaid commissions – opening 4,360
Commissions from re-insurers 11,919
Management expenses 6,986
General and administration expenses 6,678
Investment income 6,521
Rental income 124
Other income 2,891
 (4)

Further breakdown of some of the above figures is as follows:

Rs. in ‘000’
Fire Marine Motor Misc.
Premiums written during the year 27,386 15,645 21,568 9,872
Unearned premium reserve – opening 11,200 1,200 10,500 4,800
Reinsurance expense (after adjusting prepayments) 11,567 6,781 4,587 4,123
Claims paid 18,567 4,567 16,897 3,675
Outstanding claims – opening 1,254 875 1,567 658
Reinsurance recoveries against claims
(after all adjustments) 7,894 1,852 3,423 1,582
Commissions paid 2,854 1,857 1,785 1,053
Unpaid commissions – opening 1,750 510 1,700 400
Commissions from re-insurers 5,405 2,975 1,587 1,952

Following additional information is available:

(i) The unearned premium reserve as at December 31, 2005 calculated in
accordance with the rules shall be as under:
Rs. in ‘000’
Fire 12,300
Marine 890
Motor 11,300
Miscellaneous 4,650

(ii) Provision for unpaid claims and claims incurred but not reported at the date
of balance sheet are estimated as under:
Rs. in ‘000’
Fire 1,680
Marine 610
Motor 1,800
Miscellaneous 450

(iii) Commission due to agents, as on December 31, 2005 was as follows:

Rs. in ‘000’
Fire 1,560
Marine 820
Motor 1,850
Miscellaneous 580

(iv) Management expenses represent those expenses which are attributable to

underwriting business. These are to be allocated to various classes of
business on the basis of premium earned during the year.

(v) Expenses not allocable to underwriting business are charged as general and
administrative expense.

(vi) For the purpose of tax provision, rate of tax is to be assumed at 35%.

Required:
Draw up the Profit and Loss Account of EZ General Insurance Company Limited
for the year 2005. Notes to the accounts are not required, however appropriate
workings should be prepared. (14)
 (5)

Q.4 Durable Electronics Limited is a manufacturing concern specializing in the

manufacturing and marketing of home appliances. The trading results for the year
ended December 31, 2005 are as follows:

Rupees in million
Profit before taxation 60
Income Tax 12
Profit after taxation 48

The details of movement in the share capital of the company during the year are as
follows:

- As on January 1, 2005, 10 million ordinary shares of Rs. 10 each were

outstanding having a market value of Rs. 350 million.

- The board of directors of the company announced an issue of right share in the
proportion of 1 for 5 at Rs. 40 per share. The entitlement date of right shares was
April 30, 2005. The market price of the shares immediately before the
entitlement date was Rs. 40 per share.

- The company announced 20% bonus shares for its shareholders on June 1, 2005.
The shareholders were informed that the share transfer books of the company
will remain closed from July 1 to July 10, both days inclusive. Transfers
received up to June 30, 2005 will be considered in time for entitlement of bonus
shares. However, right shares issued in the month of April 2005 will not be
entitled for the bonus shares. The ex-bonus market value per share was Rs. 32.

- A further right issue was made in the proportion of 1 for 4 on October 31, 2005
at a premium of Rs. 15 per share. The market value of the shares before the right
entitlement, was Rs. 33 per share.

Required:
Calculate the basic and diluted earnings per share for the year ended December 31,
2005 in accordance with IAS 33 (Earnings per share). (14)

Q.5 You are the Chief Accountant of Rubab Enterprises Limited which is engaged in
manufacturing iron and steel products. The company was set up in August 1998 and
started commercial production in November 1998. The accounting year-end of the
company is June 30.

While analyzing the company’s books of accounts for the year ended June 30, 2005,
you came across the following balances:

Rs.
Provision for taxation (Gross) 2,410,000
Deferred tax liability 4,700,000

The assessments of the past four years although completed by the taxation officer
but are still open due to appeals. The provision for taxation consists of the
following:
 (6)

Accounting Accounting Assessed Provision for

Tax Rate
year Income Income Taxation
2002 1,000,000 1,800,000 45% 810,000
2003 1,400,000 1,900,000 40% 760,000
2004 1,700,000 2,100,000 40% 840,000
2005 2,200,000 - 35% -
2,410,000

The deferred taxation is on account of the following:

Dr / (Cr)

Depreciation (4,000,000)
Leasing (2,000,000)
Penalties and fines paid by the company 100,000
Provisions for gratuity 1,000 ,000
Provisions for bad debt 200,000
( 4,700,000)
The following information is also available:

(a) The accounting depreciation for the year ended June 30, 2005 amounted to
Rs.20.50 million whereas tax depreciation as calculated by one of your sub-
ordinates amounted to Rs. 15.50 million.

(b) The company operates an unfunded gratuity scheme. Gratuity of Rs.100,000

each was paid to two of the employees who had resigned during the year. The
total provision required at year-end amounted to Rs. 3.5 million.

(c) Leased assets consisted of two machines only. In the accounting records of
the company; one of the lease has been treated as operating lease. The
machine under financial lease arrangement was sold during the year at a
profit of Rs.400,000. The lease was cancelled with the consent of the leasing
company.

(d) The company paid Rs. 1,000,000 on account of certain expenses. Your tax
advisor has informed you that only 60% of this will be allowed for tax
purposes and that too, over a period of five years (including the current year).

(e) Receivables of Rs.40,000 which were written off in the year 2002 were
recovered during the year. The same had not been allowed by the tax
authorities in the year in which they were written off.

During the year, the following decisions were made by various tax appellate
authorities:

(a) While assessing the income for the year ended June 30, 2002 the value of
closing stock had been increased by the taxation authorities by Rs. 4.0 million.
Consequential effect on opening stock of next year had however been allowed.
During the current year, add-back was declared invalid by the appellate
authority.
 (7)

(b) An expense incurred in the year 2003, amounting to Rs.0.5 million, which was
disallowed then, was declared as allowable over a period of four years.
Although the company had filed an appeal, it was of the view that the same
would not be allowed, hence it has ignored it for the purpose of calculating
deferred tax till last year.

Required:
(a) Among the transactions discussed above, identify those which give rise to
permanent timing differences. (02)

(b) Calculate the following:

i). Provision for taxation – current

ii). Provision for taxation – prior years
iii). Deferred tax – current
iv). Deferred tax – prior years
v). Deferred tax liability (18)

Q.6 XYZ Limited is a subsidiary of MAG International Limited. It has been listed on the
Karachi Stock Exchange for the past forty years.

Required:

Draft a Statement of Compliance for inclusion in the financial statements of XYZ

Limited. (06)

Q.7 Explain the concept of ‘Embedded Derivative’ as discussed in International

Accounting Standards 39 (Financial Instrument: Recognition and Measurement). (06)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2006

December 5, 2006

ADVANCED ACCOUNTING & FINANCIAL REPORTING

(MARKS 100)
Module E (3 hours)

Q.1 GIF Holdings Limited (GIF) held 75% shares of JPG Limited (JPG) and 30% shares of
BMP Limited (BMP). Their summarized balance sheets as at June 30, 2005 are as
follows:
GIF JPG BMP
-------Rupees in million -------
Investments at cost in:
JPG Limited 450 - -
BMP Limited 250 - -
Other Net assets 1,690 1,000 800
2,390 1,000 800

Share capital (Rs.10 per share) 100 100 50

Accumulated profits 2,290 900 750
2,390 1,000 800

Following additional information is also available:

(a) GIF acquired the shares of JPG many years ago when the reserves of JPG were Rs.
500 million. The reserves of BMP were Rs. 650 million when GIF bought its 30%
holding on July 01, 2004.
(b) The following transactions have taken place from July 01, 2005 to June 30, 2006:
− On January 01, 2006, GIF acquired a further 2,500,000 shares in BMP for
Rs. 705 million.
− On April 01, 2006 GIF sold its entire interest in JPG for Rs. 1.1 billion in
cash. Tax arising on this transaction was Rs. 83 million.
− The draft results of the individual companies in the period since July 01, 2005
are as follows:

GIF JPG BMP

For the year ended For the six months ended
June 30, 2006 Dec. 31, 2005 June 30, 2006
Rs. in million Rs. in million
Turnover 4,000 5,400 2,500 3,000
Profit before tax 400 320 300 340
Tax (140) (112) (105) (119)
Profit after tax 260 208 195 221

(c) While preparing the results for the year ended June 30, 2006, GIF have not given
effect to the disposal of its holding in JPG.
(d) Directors of GIF have indicated that costs of Rs. 70 million incurred and charged by
BMP in its draft results for the six-months ended June 30, 2006 had been incurred
prior to its acquisition by GIF, whereas they were recorded after January 1, 2006.
 (2)

(e) BMP has now decided to write off a debtor balance of Rs. 40 million of which
Rs. 30 million had been outstanding since December 31, 2005. For the purpose of
consolidation, Rs. 30 million will be considered to have been written off prior to
January 1, 2006.
(f) GIF is a regular supplier to BMP, and makes a pre-tax profit of 20% on sales. Sales
by GIF to BMP in the six-months ended June 30, 2006 were Rs. 800 million.
Goods invoiced at Rs. 450 million were still in BMP’s stock as at June 30, 2006.
(g) Goods invoiced by GIF to BMP in June 2006 at Rs.150 million were not reflected
in BMP’s accounts as at June 30, 2006 as they had not been delivered to BMP till
then.
(h) The management of GIF tested the goodwill amount by comparing it with its
recoverable amount and decided to reduce its value by 2.5% at June 30, 2006.
(i) Applicable tax rate is 35%. Ignore deferred tax.

Required:
Prepare the consolidated profit and loss account of GIF Holdings Limited for the year
ended June 30, 2006 and the consolidated balance sheet as at June 30, 2006. (22)

Q.2 PDF Steel Manufacturing Company Ltd. purchased a building for its proposed research
and development laboratory at a cost of Rs. 75.8 million. The building was placed in
service on July 10, 2005. The estimated useful life of the building for depreciation
purpose is 20 years. The company uses straight-line method for calculating depreciation
and there is no estimated net salvage value.

The laboratory has been designed to carry out research on various projects and will also
help the company in the production of a highly technical tool which has a wide use in
the manufacturing of ammunition. A summary of the number of projects and the cost
incurred on research and development for the year ended June 30, 2006 are as follows:

Salaries and *Other directly

No. of Training of
employee attributable
projects staff
benefits expenses
Completed projects with long
term benefits 15 5,400,000 3,000,000 1,000,000
Abandoned projects or
projects that benefit the
current period only 10 3,900,000 900,000 300,000
Projects in process – results
indeterminate 5 2,400,000 720,000 320,000
Total 30 11,700,000 4,620,000 1,620,000
* excluding depreciation

In view of the importance of some of the projects, the Government of Pakistan (GoP)
provided the company a team of experts to support the research and development
activities of the company. This team of experts worked on five projects which were
successfully completed and have long term benefits to the company. It was worked out
that had the company hired such team of experts, it would have cost them Rs. 7.5
million.

On the recommendation of the research and development team, the company acquired a
patent for manufacturing rights at a cost of Rs. 5.89 million. The patent was acquired on
October 01, 2005, and has an economic life of 10 years.

Required:
How the above items relating to research and development activities would be reported
on the company’s financial statements. Show all necessary disclosures including the
accounting policy. Assume that long term benefits mean 10 years on the average. (12)
 (3)

Q.3 RTF Sugar Mills Ltd. has been incurring losses since last many years. The statutory
audit of the company since 2004 has not yet been finalized. You have recently been
appointed as Chief Accountant of the company and have been assigned the
responsibility of finalizing the accounts for the years 2004, 2005 and 2006. As a first
step, you have reviewed the draft accounts for the year 2004 which were prepared on
August 1, 2004. You have also ascertained the following information about certain
subsequent events that may have an impact on the financial statements for the year
ended June 30, 2004:

(a) The Board of directors approved sale of a loss making segment of the company in
December 2004, which was sold in April 2005 at a profit of Rs. 123 million. The
profit has been computed on the basis of book value of assets as of April 2005;
(b) Benefits to employees under the gratuity scheme were reduced by the
management on March 30, 2005 with retrospective effect which has resulted in 50
percent decrease in the liability for gratuity (projected benefit obligation). The
original liability as of June 30, 2004 was estimated at Rs. 73 million;
(c) The government has increased the income tax rate by 5 percent in July 2006,
which if taken into account, will result in an increase in deferred tax liability by
Rs. 135 million;
(d) The company has issued a guarantee of Rs. 350 million against debts of one of its
associates on September 15, 2004;
(e) A long-term financing arrangement was rescheduled on March 31, 2005. The
current maturity of the said arrangement was Rs. 180 million as of June 30, 2004
out of which Rs. 30 million were paid before such rescheduling. After
rescheduling the first payment becomes due in 2011;
(f) Certain inventories of a specific service line could not be sold till February 2006
when these were disposed off at a loss of Rs. 83 million. No other evidence is
available regarding their net realizable value.

Required:
Consider each of the above event separately and explain briefly whether it:

− needs to be accounted for;

− needs to be disclosed; or
− does not effect the financial statements for the year 2004. (14)

Q.4 XLS Limited is a listed company and engaged in the assembling of electrical
appliances. During the year, the company changed its accounting policies in respect of
the following:

1. It has started to capitalize the borrowing costs directly attributable to the

qualifying assets. Upto June 30, 2005, the company recognized the borrowing
costs as an expense in the year in which they were incurred.
2. Provision for bad debts shall be provided at 3% instead of 2%.

The management feels that change of above policies will reflect a fair view of the
company’s financial position to the shareholders.
 (4)

Extracts from the financial statements of the company before incorporation of above
changes are given below:
2006 2005
Rs. in million
Gross profit 486 410
General and administration expenses (231) (225)
Selling and distribution expense (110) (98)
Financial charges (32) (31)
Profit before tax 113 56
Income taxes (30) (14)
Profit after tax 83 42
Retained earnings – opening 452 410
Retained earnings – closing 535 452

Following additional information is also available:

1. Details of borrowing costs expensed out in current and prior periods which are
directly attributable to the qualifying assets are as follows:

Amount
Year
Rs. in million
June 30, 2006 16
June 30, 2005 12
June 30, 2004 and before 8
2. The change in the rate of provision for bad debts has been made on the
recommendation of Recovery Department. The company has not yet made the
provision as of June 30, 2006. The details of accounts receivables are as follows:
Accounts receivable as at June 30, 2005 Rs. 100 million
Accounts receivable as at June 30, 2006 Rs. 123 million
Provision as at June 30, 2004 was Rs. 1.6 million.
3. Income tax rate was 25% for both years.
Required:
(a) Present the above changes in the Profit and Loss Account and Statement of
Changes in Equity in accordance with the requirements of IAS-8 “Accounting
Policies, Changes in Accounting Estimates and Errors”.
(b) Draft an accounting policy about the borrowing costs for disclosure in the
financial statements. (17)

Q.5 DOC Industries is engaged in manufacturing and export of cotton and linen bed sheets
to USA and Middle East. The company operates an approved funded gratuity scheme
for all eligible employees. The last actuarial valuation of the scheme was carried out
using the Projected Unit Credit Method. Following are the extracts of relevant
information from the actuarial report for valuation carried out in line with IAS – 19, as
of June 30, 2006:
Rupees
Present value of projected benefit obligations – June 30, 2005 1,930,650
Current service cost for the year 350,200
Interest cost for the year 135,650
Gratuity paid by the fund to the retiring employees 165,200
Actuarial loss on obligations, during the year 650,300
Expected return on plan assets 275,350
Contribution paid by the company to the fund during the year 425,000
Fair value of plan assets – June 30, 2005 1,420,350
Actuarial gain on plan assets during the year 135,000
 (5)

Following information is also available:

1. Additional gratuity amounting to Rs. 55,500 was paid to a retiring employee as
ex-gratia by the company which is included in both, the payments made by the
company to the fund, as well as, the payments made by the fund to the retiring
employees;
2. During the year, the management introduced a change in the plan, which has
resulted in increase in benefits. Past service cost, amounting to Rs. 273,000 against
such plan changes has not been separately disclosed in the actuarial report. When
the actuary was consulted again in this respect, he responded that such effect is
included in the actuarial loss for the year. He further informed that 70% of such
benefit is vested. It is expected that non-vested benefit will become vested over a
period of 4 years.
3. Average remaining service life of the employees was 23 years, as of June 30, 2005.
4. Discount rate of 10%, rate of return on plan assets of 10% and expected rate of
increase of salaries of 12% have been used for valuation purposes.
5. Net unrecognized actuarial loss, as at June 30, 2005 was Rs. 350,450.
6. 40% of cost of gratuity is chargeable to administrative expenses and 60% to cost of
goods sold.
7. The company follows the corridor approach for accounting of net actuarial gains
and losses.
Required:
Prepare all necessary disclosures to be incorporated in the financial statements including
accounting policy, in respect of the defined benefit gratuity scheme. Show all necessary
workings. (20)

Q.6 TMP Trust Fund is an open ended mutual fund, listed on Lahore Stock Exchange. Units
are offered for public subscription on a continuous basis and can be redeemed by
surrendering them to the fund.
Following financial information is available for the year ended June 30, 2006:
1. During the year, the fund received amounts of Rs. 210,290,408 (2005: Rs.
152,870,421) against issuance of 1,546,253 units (2005: 1,377,211 units). The
issued units include bonus units issued to unit holders.
2. 1,434,644 units (2005: 1,213,560 units) were redeemed during the year against
which an amount of Rs. 194,394,262 (2005: Rs. 133,491,600) was paid / payable
by the fund.
3. Undistributed income brought forward from previous year is Rs. 5,638,924.
4. It is the policy of the fund to recognize the distribution of cash dividend and
bonus in the year in which it is declared. The fund has announced at the year end,
bonus units of 15% (2005: 10%) and 10% cash dividend (2005: Nil).
5. No cash dividend or bonus has been distributed prior to June 30, 2005.
6. Net income of the fund is Rs. 15,532,600 (2005: Rs. 8,511,744).
7. The element of income and capital gains included in prices of units sold less those
in units redeemed representing accrued income and realized capital gains,
amounted to Rs. 1,536,360 (2005: Rs. 965,458). This amount was transferred to
profit and loss account.
8. The value of net assets at the beginning of the year was Rs. 39,674,912.
9. 550,215 units of Rs. 100 each are outstanding as at June 30, 2006.
Required:
Prepare the following statements of TMP Trust Fund for the year ended June 30, 2006
and 2005:
(i) Distribution Statement
(ii) Statement of movement in unit holders’ funds. (15)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2007

June 5, 2007

ADVANCED ACCOUNTING & FINANCIAL REPORTING (MARKS 100)

(3 hours)

Q.1 Murree Food Limited, a public company, was sued by an employee claiming damages for
Rs 4,000,000 on account of an injury caused to him as a result of alleged negligence on
the part of the company while he was working on the machine on December 18, 2006.
Before filing the suit on January 18, 2007, he contacted the management of the company
on December 28, 2006 and asked for compensation of Rs 2,500,000 which was denied.

The legal advisor of the company fears that the company may lose the suit and the court
may award compensation which may range from Rs 400,000 to Rs 2,000,000. However,
in his view the most probable amount is estimated at Rs 800,000.

Required:
(a) Describe the accounting treatment in respect of the above in the financial
statements of Murree Food Limited for the year ended December 31, 2006. Explain
your viewpoint with reasons based on relevant International Accounting Standards.
(b) Draft a suitable note for presenting the information in the financial statements. (10)

Q.2 Gilgit Company Limited holds 800,000 shares of a listed company namely Hunza Foods
Limited, which were purchased for Rs 84,400,000 as a long-term investment. On
January 15, 2007, Hunza Foods Limited announced the issuance of one right share for
every 5 shares held by the shareholders of the company. Face value of the shares is
Rs 100 per share. On the date of book closure, market value of the share (cum right) was
Rs 106 per share. The initial quoted price of the right was Rs 4 per right.

Required:
Suggest the necessary journal entries in the books of Gilgit Company Limited in case of
each of the following options:

Option # 1 If the rights are not exercised but are sold at Rs 6 per right.

Option # 2 If the rights are not exercised and are allowed to expire.

Option # 3 If the following transaction take place:

− 200,000 shares are sold at cum right price for Rs 23,000,000;
− The right to purchase 120,000 additional shares at Rs 100 per share is
exercised. Immediately after the book closure, the shares were quoted
at Rs 103 per share (ex-right); and
− 100,000 shares originally held are sold at Rs 107 per share, after the
exercise of the rights. (16)

Q.3 Skardu Limited is preparing its consolidated financial statements for the year ended
December 31, 2006. During the year 2006, it acquired shares in three companies. The
details are given hereunder:
 (2)

(a) Balakot Limited

43% shares were acquired on May 1, 2006. Balakot Limited is a major supplier of
Skardu Limited. Skardu Limited also has a written agreement with Mr. Saleem who
owns 30% of the share capital of Balakot Limited. According to the agreement,
Mr. Saleem will always vote in the same way as Skardu Limited. Skardu Limited
has also made a substantial loan to Balakot Limited after acquisition of its shares,
which is repayable on demand. Balakot Limited is currently not in a position to
repay the loan.

(b) Mangora Textile (Pvt.) Limited

The whole of the share capital was acquired on April 1, 2006. The directors of
Skardu Limited have displayed their clear intentions to sell the subsidiary within a
year. At the date of acquisition, the estimated fair value of assets was Rs 54 million
and the fair value of the liabilities was Rs 16 million. At year-end, the estimated fair
value of assets is Rs 52 million and the fair value of the liabilities is Rs 15 million.

(c) Mansehra Limited

47% of the voting shares of Mansehra Limited were acquired on June 1, 2006. Rest
of the shares are owned by two financial institutions i.e. A (20%) and B (33%).
Each financial institution has nominated three directors on the board whereas four
directors are nominated by Skardu Limited. The effective power to set Mansehra’s
operating policies lies with the four directors appointed by Skardu Limited.
However, according to the articles of association of Mansehra Limited, any change
in the capital structure requires that all the ten directors must vote in favor of the
proposal.

Required:
Discuss how these investments should be treated in the consolidated financial statements
of Skardu Limited for year ended December 31, 2006. (08)

Q.4 One of your clients has contacted you to calculate earnings per share in accordance with
the requirements of International Accounting Standards and has provided you the
following information:
(i) At the beginning of the year 2006 the company’s share capital was Rs 50 million
consisting of 5,000,000 ordinary shares of Rs 10 each. Ten percent bonus shares
were issued on April 1, 2006. Market price of ordinary shares at the beginning of
the year was Rs 33 per share. On June 30, 2006 the price was Rs 38 per share and
at the end of the year, the price was Rs 36 per share.
(ii) Profit attributable to ordinary shareholders of the company for the year 2006 is
Rs 20 million.
(iii) The company had issued convertible Term Finance Certificates (TFCs) of
Rs 120 million carrying markup at the rate of 13 percent per annum. The certificate
holders have the option to convert TFCs into ordinary shares in the ratio of
25 ordinary shares for each TFC of Rs 1,000.
(iv) The company is subject to income tax at the rate of 35%.

Required:
Calculate the basic and diluted earnings per share for the year 2006 in each of the
following situations:

(a) if none of the TFC holders opt to convert TFCs into ordinary shares;
(b) if a TFC holders who owns 40% of the total TFCs exercises his right of conversion
on the first day of July 1, 2006. (15)
 (3)

Q.5 Swat Limited is in the business of manufacturing and selling of biscuits. It sells biscuits
through its authorized partners appointed in all major cities of Pakistan.

The company accounts for taxation and deferred taxation in accordance with the
provisions of IAS 12. The relevant information relating to accounting year ended
December 31, 2006 is summarized hereunder:

Rupees
in “000”
Accounting income before tax 797,000
Accounting WDV of fixed assets as at December 31, 2006 565,500
Tax WDV of fixed assets as at December 31, 2006 243,000
Dividend income (subject to final tax at 5%) 35,000
Capital gain (exempt from tax) 135,000
Turnover for the year 3,165,500
Total turnover tax paid during the last three years 65,000
Liabilities older than 3 years, disallowed in previous years. 65,000
Provision for gratuity as at December 31, 2006 138,500
Provision for Gratuity for the year (net of payments) 33,000
Donations to unapproved institutions 5,000
Effect of prior year’s assessments finalized during the current year 6,400
Accounting depreciation for the year 103,000
Tax depreciation for the year 85,000
Fixed assets additions during the year 123,000

All the liabilities are less than three years old except for those disclosed in the above
table. No payment was made in respect of liabilities disallowed earlier.

Only one fixed asset (a vehicle) was disposed off during the year 2006 against
Rs 1,000,000. Its accounting WDV was Rs 700,000 while tax WDV was Rs 465,000. No
disposal of fixed assets took place in the year 2005.

All expenses (except donations and timing differences) are considered to be allowable for
tax purpose. Applicable tax rate is 35%.

During last three years, the company was in a loss and was paying turnover tax which is
adjustable in future under the provisions of the Income Tax Ordinance, 2001, within a
period of five years. The company had always believed that such tax credit will be
utilized in the near future.

Required:
(a) Compute the amount of deferred tax required to be reported in the balance sheets
for the years 2006 and 2005.
(b) Prepare a note to the Profit and Loss Account for the year 2006, giving appropriate
disclosures related to tax expenses. (18)

Q.6 Ayubia Limited is a public company engaged in the supply of locally assembled
machinery used in the textile industry. The management of the company feels that the
company’s sales performance will be much improved if it provides in-house after sales
services to its customers as well as prompt delivery of spare parts. For this purpose, on
May 1, 2007 the management of the company decided to acquire 100% holding in the
following companies:

− Kalam (Pvt.) Limited, an importer of spare parts used in textile machinery; and
− Ziarat (Pvt.) Limited, which provides repair and maintenance services related to
textile machinery.
 (4)

It has been agreed that the consideration for the acquisition will be ascertained by
applying the agreed price earning ratios on the estimated profits for the year ending
June 30, 2007. The price earning ratio for Kalam (Pvt.) Limited and Ziarat (Pvt.)
Limited has been agreed at 15 and 10 respectively. The shares in Ayubia Limited will be
issued to shareholders of both the companies on October 01, 2007 at a premium of
Rs 3 per share.
The following relevant information is available:
Rupees in million
Kalam Ziarat
Ayubia (Pvt.) (Pvt.)
Limited Limited Limited
Issued Share Capital: Ordinary Shares of
Rs 10 each *1,600 150 60
Estimated profits before taxation
- for the year ending June 30, 2007 *690 30 12
- for the year ending June 30, 2008 *780 35 18
Estimated net assets as on June 30, 2008 *4,890 250 70
*excluding the effect of acquisition transactions

Ayubia Limited anticipates that on May 01, 2008, it will provide a loan amounting to
Rs 30 million to Kalam (Pvt.) Limited and Rs 15 million to Ziarat (Pvt.) Limited for
restructuring and renovation of operations and working facilities. The loans will be
repaid in March 2010 and will carry a simple mark up at the rate of 13% per annum
which will be payable on quarterly basis. It also estimates that this acquisition will result
in increase in its administration expenses by Rs 2,500,000 per annum.
It is also expected that following interim dividends will be paid on June 30, 2008:
Ayubia Limited 15.0%
Kalam (Pvt.) Limited 12.5%
Ziarat (Pvt.) Limited 8.0%

Tax rate applicable to business income of all the companies is 35% whereas dividends
are taxed at 10%.
Required:
Prepare projected balance sheet and projected profit and loss account of Ayubia Limited
relating to the year ending June 30, 2008. (18)

Q.7 Naran Bank Limited is a listed banking company which has 107 branches all over
Pakistan and 2 overseas branches. Total advances by the bank at the end of the year 2006
amounted to Rs 75,350 million (2005: Rs 65,440 million). These include
Rs 3,655 million (2005: Rs 2,373 million) placed under non performing status in
accordance with the Prudential Regulations issued by State Bank of Pakistan. Details of
classified advances and the provisions thereagainst are as follows:
Rupees in million
Classified Provision
Category of Classification Advances Required / Made
2006 2005 2006 2005
Other Assets Especially Mentioned 3 2 - -
Substandard 107 70 22 46
Doubtful 103 67 47 53
Loss 3,442 2,234 2,607 1,312

An additional provision of Rs 64 million was made during the year pursuant to the State
Bank of Pakistan’s advice. The ‘Loss’ category includes advances of Rs 25 million
(2005: Rs 23 million) relating to overseas operations of the bank. The required provision
of Rs 8 million (2005: Rs 7 million) has been made against such advances.
 (5)

The movement in the provisions was as follows:

Rupees in million
2006 2005
Opening balance 1,411 944
Charge for the year (net of reversal) 1,331 467
Amounts written off during the year (2) -
2,740 1,411

In addition to the above, the bank has made the following provisions:

(i) During the year a general provision of Rs 121 million (2005: Rs 107 million) was
made against consumer financing in accordance with the requirements of the
Prudential Regulations (1.5% of secured financing and 5% of unsecured financing).
However, no amount had been written off. The opening balance of provision
against consumer financing as on January 1, 2006 amounted to Rs 242 million.

(ii) It is the bank’s policy to make a general provision in addition to the amount
determined under Prudential Regulations. Such provision is based on the judgment
of the bank. The general provision as on January 1, 2006 was Rs 765 million.
However, there was a net reversal of provision for the year 2006 amounting to
Rs 47 million. In 2005, a net provision of Rs 65 million was made.

Required:
Prepare appropriate notes to the financial statements for the years 2005 and 2006 giving
disclosures related to provisions made by the bank in accordance with the guidelines
issued by State Bank of Pakistan. (15)

(THE END)
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS – FINAL EXAMINATIONS

SUBJECT SESSION
Advanced Accounting and Financial Summer 2007
Reporting

Overall Feedback

For the first time, open book policy was introduced and the candidates were permitted to
bring in the officially published book of IASs / IFRs. The purpose of this open book
policy is to allow the candidates more time to understand the concepts and practice the
questions by relieving them of tension of memorizing and retaining the standards.

The performance was quiet discouraging. The main cause of poor performance was the
candidates’ selective study. It was evident that many candidates performed very well in
one or two questions but their performance in other questions was very poor. A
significant number of students did not attempt question 7 pertaining to financial
statements of banking companies. We once again suggest that selective studies should be
avoided in professional examinations. Candidates should go through the syllabus and
cover each and every aspect in order to achieve a positive result. Moreover, it seemed
that some of the candidates had not studied the standards at all and were perhaps of the
view that they will be able to grasp them from the book on the day of the examination.
This approach should be avoided.
Question-wise comments

Q.1 This was a very straight forward question from IAS-37 “Provisions, Contingent
Liabilities and Contingent Assets” and many candidates performed quite well.
- Few candidates correctly mentioned the conditions which need to be met for
recording a provision but either they failed to conclude that a provision is to be
made or incorrectly concluded that a provision should not be made.
- Majority of the candidates were able to quote the three conditions discussed in
IAS-37 and correctly concluded that since all the conditions have been met a
provision will have to be made. There were some candidates who mentioned
the three conditions but did not give any conclusion. Many candidates
incorrectly concluded that the provision should not be made as the case was
filed on January 18, 2007 and therefore it was a future event and should be
disclosed only as contingent liability in the financial statements. They failed to
realize that obligation was created when the employee contacted the
management of the company on December 28, 2006 and asked for
compensation. The filing of suit, its outcome and the opinion of the lawyer are
subsequent events which confirm that the obligation had been created.
Examiners’ Comments on Advanced Accounting & Financial Reporting – Summer 2007

- Most of the candidates were not able to draft a suitable note for the financial
statements. The main reason for such response was the poor drafting abilities
of the candidates. There were many others who did not know what information
has to be disclosed.

Q.2 The candidates were required to pass Journal Entries for ‘Right Issue’ under three
different options. Although only simple calculations were involved yet the
performance of the candidates was very poor. Some common mistakes are given
hereunder:

- Most of the candidates did not know about the accounting treatment of a
derivative and resultantly lost marks.

- Few candidates misconstrued the question and created entries in the

company’s books as if the company has announced a right issue for its
shareholders.

- Many candidates were of the view that there should be no accounting of right
letter. They were of the view that it should be recognized when the company
exercised its right to purchase the shares. According to IAS-39, a derivative is
classified as held for trading and is initially recognized at fair value through
profit or loss. Moreover, initial recognition should be made when the entity
becomes a party to the contract i.e. on the date of book closure. Since right
letter meets the requirements of a derivative, it should have been recognized
accordingly.

- Most of the candidates didn’t know whether the investment in Hunza Foods
Limited is to be treated as held for sale or held for trading. They tried to
deceive the examiner by not specifying any thing. But such treatment could
not gain any favour from the examiners.

Q.3 This question revolved around IAS-27 and IFRS-5. No workings were required.
The candidates were simply required to give their opinion based on the above
standards.

Our comments on each situation are given as under:

(a) Most of the students were able to conclude correctly that Balakot Limited
will be treated as a subsidiary and a line by line consolidation will be
required. They could easily identify that Skardu Limited are in a position to
control Balakot Limited on account of the following:
• 43% shareholding
• Agreement with Mr. Saleem who holds 30% shares
• Influence as a major creditor

Page 2 of 5
Examiners’ Comments on Advanced Accounting & Financial Reporting – Summer 2007

(b) This part proved difficult for the students mainly because they lacked in
depth knowledge of the Standards. Since Mangora Textile (Pvt) Ltd. was
acquired exclusively with a view to its subsequent disposal within a year, it
was not required to be consolidated. It should have been classified as held
for sale at the lower of its carrying amount and fair value less costs to sell.
Many candidates believed otherwise. Few candidates were able to correctly
explain that investments in Mangora Textile should be reported as held for
sale but failed to mention the treatment thereof in the financial statements
i.e. in the following manner:

• On the balance sheet date, Skardu Limited will have to remeasure the
investments in Mangora at the lower of its cost and Rs. 37 million being
the fair value less cost to sell.
• The assets (Rs. 52 million) and liabilities (Rs. 15 millions) will have to
be presented separately in the consolidated financial statements from any
other assets and liabilities.

(c) Skardu Limited was in a position to control the operating policies of

Mansehra Limited although they only had four out of ten directors on the
board. Therefore according to IASs it was required to be consolidated. Most
of the students were unable to realize this and concluded incorrectly that it
need not be consolidated.

Q.4 Many candidates performed extremely well in this question and secured full
marks. On the other hand, many were totally ignorant and could not secure any
mark. The mistakes generally committed by some of the average students were as
follows:
• In the first option where none of the TFC’s were converted into ordinary
shares, the students calculated the weighted average number of shares
(5,500,000 shares) quiet easily. However, in the second option, while
converting TFCs into shares, for the purpose of calculating weighted average
number of shares, many students did not consider the fact that the conversion
took place in the middle of the year i.e. on July 1, 2006.

• Many candidates ignored the effect of tax shield on profit TFCs, which
resulted in incorrect amount of diluted earnings.

Q.5 The performance of the candidates was average in this question. Following types
of mistakes were common in most examination scripts:

- Many candidates while working out the deferred tax liability for the year
2005, ignored the tax credit available against turnover tax. There were many
others who calculated deferred tax for 2006 only.

- Some candidates calculated the impact of addback on account of more than

three years old liabilities, in respect of the year 2006 only and failed to

Page 3 of 5
 Examiners’ Comments on Advanced Accounting & Financial Reporting – Summer 2007

consider the impact of such disallowances on deferred tax liability of the year
2005.

- Surprisingly, a large number of candidates did not know that prior and current
year taxes are required to be disclosed separately.

- In many scripts tax on dividend was erroneously omitted.

- In computing the taxable income for the year 2006, some candidates added
back the accounting written down value instead of accounting depreciation.

Q.6 This was a very poorly attempted question and most of the candidates failed to
comprehend the situation and lost marks. Common mistakes noted by the
examiners were as follows:

- Most of the candidates worked out the consideration for acquisition by

applying the PE ratio on estimated profit before tax instead of estimated profit
after tax.

- Many candidates did not work out the accumulated profit at the beginning of
the year and did not complete the profit and loss account beyond the figure of
“Profit for the year” .

- Many candidates worked out the dividend of Ayubia Limited by applying the
dividend percentage on profit instead of share capital.

- Even at this level some of the candidates did not know how dividend is to be
accounted for and booked it net of tax.

- Most of the calculations involved working back various figures. It was

evident that most students lacked practice and in a large number of cases
conceptual understanding was also lacking. Many of the adjustments were
totally ignored whereas in many cases the amounts which were required to be
deducted were added back and vice versa.

Q. 7 Here again, poor performance was witnessed due to selective studies. A large
number of candidates did not attempt this question mainly because they had not
bothered to study the relevant disclosure requirements and the published accounts
of the bank.

Among those who did manage to attempt the question, the following mistakes
were generally witnessed:
- Overall presentation of the answer was very poor and even those who secured
some marks were not able to present it in accordance with the legal
requirements.

Page 4 of 5
Examiners’ Comments on Advanced Accounting & Financial Reporting – Summer 2007

- Many candidates did not work out the corresponding figures for the year
2005.

- Many candidates did not classify the domestic and overseas advances
separately.

- The special provision made on the advice of State Bank was mostly ignored.

- Since the specific provision required and specific provision made was the
same, many students did not show them separately.

- Schedule of movement in the provision was missing in most cases.

(THE END)

Page 5 of 5
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2007

December 04, 2007

ADVANCED ACCOUNTING & FINANCIAL REPORTING (MARKS 100)

(3 hours)

Q.1 Ghalib Limited manufactures three products X, Y and Z. The management of the
company considers plants relating to each product as a separate Cash-Generating Unit
(CGU). The company has three Corporate Assets viz. a building, PABX system and a
computer network. On June 30, 2007, the assets were valued as under:
Carrying Recoverable
Amount* Amount
Rupees Rupees
Cash-Generating Units excluding Corporate Assets
Plant 1 – for Product X 2,500,000 1,200,000
Plant 2 – for Product Y 5,000,000 7,000,000
Plant 3 – for Product Z 10,000,000 6,400,000
17,500,000 14,600,000
Corporate Assets
Building 2,800,000
PABX system 1,400,000
Computer network 2,100,000
6,300,000
23,800,000
* Before impairment

Based on a study carried out by the company which involved consideration of various
factors, the management was able to determine that the building and the PABX system
can be allocated to plant 1,2 and 3 in the ratio of 2 : 3 : 5. However, the management
was unable to determine a reasonable and consistent basis for allocating the cost of
computer network.
Required:
Calculate the carrying amount of each CGU and Corporate Asset for reporting on the
balance sheet as at June 30, 2007 in accordance with IAS-36 ‘Impairment of Assets’. (18)

Q.2 Taqi Limited has obtained a fleet of Trucks and Busses under a three years lease contract
from Faraz Leasing Company Limited. Total cost of assets is Rs. 75 million and the
expected economic life is considered to be 15 years. Lease rentals of Rs. 12 million per
annum shall be paid at the end of each year. The market rate of return is 10%.
It has been agreed that Taqi Limited will return the assets at the end of the lease term.
According to the terms of the contract, Taqi Limited is required to deposit cash
equivalent to 20% of the total cost of the fleet before taking delivery of assets. The
deposit does not carry any return and will be refunded in full at the end of the lease term.
Required:
(a) Comment on the accounting treatment of the above arrangement, from the lessee’s
point of view.
(b) Prepare accounting entries in the books of the lessee at the inception of lease and at
the end of each year. (14)
 (2)

Q.3 Following is the consolidated balance sheet of Iqbal Limited as at June 30, 2007:

2007 2006
Rupees in million
ASSETS
Non-Current Assets
Tangible fixed assets 2,142 1,927
Goodwill 343 305
2,485 2,232
Current Assets
Cash and bank 808 700
Investments 982 560
Trade receivables 1,128 1,168
Inventory 1,850 1,715
4,768 4,143
TOTAL ASSETS 7,253 6,375

EQUITY AND LIABILITIES

Equity
Ordinary shares of Rs. 10 each 505 450
8% preference shares of Rs. 10 each 600 600
Share premium 55 -
Revaluation reserves 140 -
Accumulated profits 2,670 2,480
3,970 3,530
Minority Interest 238 200
4,208 3,730

Liability against assets subject to finance lease 300 420

Deferred tax 75 55

Current Liabilities
Running finance 940 900
Trade payables 950 720
Income tax payable 600 450
Dividends payable 180 100
2,670 2,170
TOTAL EQUITY AND LIABILITIES 7,253 6,375

Following further information has been extracted from the records:

(i) Iqbal Limited has two subsidiaries i.e. Faiz Limited and Badar Limited.
(ii) The factory buildings of Faiz Limited and Badar Limited were revalued during the
year and the surplus arising on the revaluation was credited to a revaluation reserve
account.
(iii) Certain plant and machineries belonging to Faiz Limited, acquired under finance
lease arrangement, were capitalized at Rs. 50 million.
(iv) On September 30, 2006, equipment costing Rs. 55 million carried in the books of
Iqbal Limited at Rs. 35 million as at June 30, 2006 was completely destroyed by
fire. Insurance proceed of Rs. 40 million was received on November 17, 2006.
There were no other disposal of tangible fixed assets in any of the three companies.
(v) Total depreciation in the consolidated profit and loss account amounted to Rs. 314
million which included depreciation on leased assets amounting to Rs. 38 million.
 (3)

(vi) 80% of the paid-up capital of Faiz Limited was acquired during the year for Rs. 110
million. The payment was made by issuing 5.5 million ordinary shares of Rs. 10
each at 100% premium. The net assets of Faiz Limited at the date of acquisition
were as follows:
Rs. in million
Tangible fixed assets 60
Inventories 20
Trade receivables 25
Cash 10
Trade payables (25)
90

(vii) Provision made during the year, for current and deferred tax amounted to Rs. 200
million and Rs. 20 million respectively.
(viii) Profit allocated to minority shareholders amounted to Rs. 35 million.
(ix) The details relating to dividend paid by Iqbal Limited for the year are as follows:

2007 2006
Declared on June 15, 2007 June 15, 2006
Paid on August 31, 2007 August 31, 2006
Amount Rs. 180 million Rs. 100 million

Required:
Prepare the consolidated cash flow statement for the year ended June 30, 2007. Show
necessary workings. (20)

Q.4 Mr. Hali, a stock investor, wants to invest in ordinary and/or preference shares of Ibrahim
Limited, a company listed on all stock exchanges of Pakistan. He has contacted you to
study the following financial information of Ibrahim Limited:

Profit and Loss Account for the Year Ended June 30, 2007

Rs. in million
Profit before tax 2,400
Less: Income tax @ 35% (840)
Profit after tax 1,560
Less: Preference dividend (200)
Retained profits attributable to ordinary shareholders 1,360

Balance Sheet as at June 30, 2007

Rs. in million
ASSETS
Fixed assets 23,000
Current assets 12,400
35,400
EQUITY AND LIABILITIES
1,000,000,000 ordinary shares of Rs. 10 each 10,000
10% preference shares of Rs. 10 each 2,000
12,000
Accumulated profit 3,400
Total equity 15,400

Long term loans – from commercial banks 9,800

Current liabilities 10,200

35,400
 (4)

Additional Information:
(i) At the balance sheet date, the market values of the ordinary and preference shares
of Ibrahim Limited were Rs. 15 per share and Rs. 11 per share respectively.
(ii) The board of directors announced 10% cash dividend for the year ended June 30,
2007.
(iii) The pre-tax profits for the next year are forecasted to be 5% higher as compared to
the current year.
(iv) The fair value of fixed assets as at June 30, 2007 is estimated at Rs. 26,000 million.

Required:
(a) Analyze the significant financial features which should be considered before any
decision is taken by Mr. Hali to invest in Ibrahim Limited’s ordinary and / or
preference shares.
(b) List any four types of information which may help you in a better analysis. (15)

Q.5 Momin Life Insurance Company Ltd. is engaged in individual life insurance business.
The company has established a statutory fund i.e. Investment Linked Business Fund, to
meet the requirement of the Insurance Ordinance, 2000. The following information is
available for the year ended October 31, 2007:

(i) The outstanding Balance of Investment Linked Business Fund as on November 1,

2006 amounted to Rs. 286,780 thousand which represents the following:

Rs. in ‘000’
Retained earning on other than participating business 78,719
Policyholders' liabilities 208,061

(ii) The company received dividend amounting to Rs. 52,700 thousand and interest on
government securities amounting to Rs. 65,000 thousand.
(iii) Rs. 183,450 thousand was received as premium against which an amount of Rs.
11,500 thousand was paid to re-insurance companies.
(iv) Claims amounting to Rs. 173,500 thousand were paid during the year. The
company was able to recover Rs. 17,900 thousand from its re-insurance
arrangements.
(v) During the year, the company paid Rs. 54,200 thousand on account of
management expenses.
(vi) The company has not incorporated the following adjustments in its record:

Rs. in 000’
Claims admitted but not paid by the company 9,300
Management expenses due 2,000
Accrued interest 19,300
Premium outstanding 12,000

(vii) The liabilities of policyholders as at October 31, 2007 were Rs. 249,673 thousand.
(viii) The Board of Directors has approved the transfer of Rs. 10,450 thousand to
Shareholders’ Fund.

Required:
Prepare the revenue account for the year ended October 31, 2007. Ignore the comparative
figures. (15)

Q.6 Describe how users of financial statements benefit from information relating to
discontinuing operations; and briefly explain the main disclosures in respect of
discontinuing operations. (05)
 (5)

Q.7 Mohani Fertilizer Company Limited, a listed company, operates a funded gratuity
scheme for its employees. Following relevant information has been extracted from the
actuarial reports:

June 30, 2007 June 30, 2006

Rs. in million Rs. in million
Present value of defined benefit obligations 900 600
Fair value of plan assets 750 570
Current service cost for the year 25 22
Contributions paid during the year 15 14
Benefits paid during the year 17 15
Net cumulative unrecognized gains 90
Expected return on plan assets 8% 8%
Discount rate for plan liabilities 10% 10%

The expected remaining working lives of the employees as at June 30, 2007 were 20
years.

Required:
(a) Compute the amounts which need to be reported in the Balance Sheet and the
Profit and Loss Account of Mohani Fertilizer Company Limited for the year ended
June 30, 2007.
(b) Prepare the movement schedule of net cumulative unrecognized gains / (losses) for
the year ended June 30, 2007. (13)

(THE END)
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Winter 2007

Overall Feedback

Performance in this paper was an improvement on the previous examinations. However,

it was commonly observed that many students had studied selective topics only and could
not attempt all questions.

It was observed in many scripts that in question no. 2 and 6, instead of writing the
comments on accounting treatment and describing the disclosure requirements, many
students just gave the reference of the relevant IAS/ IFRS paragraph. Here, we would
like to clarify to all students that they were awarded marks for the matter they wrote in
their answer book. They were not given any marks for just giving the reference of the
relevant paragraph of IAS/ IFRS. All students are advised to avoid such practice in their
future examinations.

Question-wise Comments:

Q.1 This question required computation of the carrying amount of all Cash Generating
Units (CGUs) and Corporate assets in accordance with the requirements of IAS-36
“Impairment of Assets”. It proved to be an easy question for the candidates and
many of them were able to secure full marks. The common mistakes were as
follows:

• While testing the impairment of individual CGU, few students incorrectly

allocated the Computer Network costs (which did not have any reasonable and
consistent basis for allocation) among CGUs.
• Many students failed to allocate the impairment loss among CGUs and
Corporate Assets.
• According to IAS 36 the impairment loss is calculated in three stages. Out of
these, two stages were tested in this question. In the first stage impairment loss
related to each CGU was to be calculated and in the second stage the aggregate
impairment loss related to all the assets was required to be computed. The
impairment loss identified with a CGU in the first stage should have been
allocated to that CGU and the relevant Corporate Assets viz Building and
PABX system. For such allocation, only that portion of the cost of Corporate
Assets should have been used which was allocable to that particular CGU, e.g.
in allocating impairment loss of Plant 1 only 20% of the cost of related
Corporate Assets should have been considered. Instead, many students
allocated the loss using the entire costs of the related Corporate Assets.

Page 1 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Winter 2007 examination

• A large number of candidates calculated the aggregate impairment loss but did
not allocate it among all CGUs and Corporate Assets.
• Further, many students who were able to allocate the aggregate impairment
loss to all CGUs and Corporate Assets, did not deduct it for arriving at the
carrying amount of the Corporate Assets and CGUs.

Q.2 Part (a) of this question was correctly attempted by most of the candidates.
However, as mentioned in overall comments, many students lost marks by just
mentioning the relevant paragraph of IAS-17 “Leases”. It was very easy for this
level of students to identify this transaction as “operating lease”. Yet some
students treated it as a finance lease without any basis or due to incorrect
calculation of the present value of minimum lease payments.

In part (b), most of the candidates correctly made the routine general entries for
leases but could not make the necessary adjustments as regards lease deposit,
according to the requirement of IAS-39 as described below:

According to para 43 and para 47 of IAS 39, the lease deposit paid should initially
be recorded at its present value, discounted at the market rate of return. The
difference between the present value and actual deposit should be amortized over
the term of the lease in accordance with IAS-17.

The difference between the present value of the amount of lease deposit, at the
beginning of each year and the present value thereof at the end of each year,
should be recorded through the profit and loss account.

Q.3 It was a simple question on consolidated cash flow statement and the examinees
were expected to perform well. However, generally the performance was not upto
the standard.

Some of the most common mistakes were as follows:

• Most examinees ignored the effect of minority interests, in arriving at the profit
before tax.

• Running finance and long term investments were classified in operating

activities instead of financing and investment activities.

• The effect of assets added through purchase of subsidiary were not excluded
for the purpose of computing the movement in working capital.

• Dividend paid to the minority interests could not be worked out correctly or
was ignored altogether.

• Cash received on purchase of subsidiary was included in cash equivalents,

instead of showing it as an inflow under the heading “investing activities”.

Page 2 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Winter 2007 examination

• The non-cash consideration (shares issued as 100% premium) for purchase of

subsidiary’s shares should have been ignored for the purposes of cash flows.
Most students included it in inflows (under the head issuance of shares) as well
as in outflows (under the head investing activities).

Q.4 This question required an analysis of the significant financial features from which
an investor considers while making a decision regarding purchase of ordinary and
preference shares. An investor is generally interested in current and future EPS,
P/E ratio, break-up value of shares, dividend yield, liquidity position, etc. Most of
the candidates failed to highlight these features and wasted their time in working
out the operational and financial ratios. Many of the students who did consider the
relevant features failed to consider the following aspects:
• Made no assumptions about the short term or the long term outlook of the
investor.
• Did not identify the bench marks for comparing the information such as
performance of quoted companies in similar sectors working under similar
conditions, comparison of dividend yield with the risk free rate of return and
the investors required rate of return etc.

In part (b) the candidates were required to list four types of information which help
the investor in analyzing the information. Very few were able to state more than
one or two relevant factors which include prospects of future growth in earnings,
alternate investment opportunities, financial information about similar companies,
attitude and motive of the investor, availability of risk free securities, etc.

Q.5 It was a simple question for those candidates who had gone through the financial
statements of insurance companies. Although the overall performance was still
below the standard yet for the first time in many attempts a reasonable number of
students seemed well prepared in the area of specialized financial statements and
were able to secure good marks.

The common mistakes and omission were as follows:

• The presentation was poor and many candidates did not have any idea about
the requirement of the question.

• Instead of adjusting the share of premium paid to re-insurers against the net
premium, many students disclosed it as an expenditure.

• Claims recovered from re-insurers were shown in income instead of netting

them against claims paid.

• Some candidates netted off the re-insurance premium against the claims
recovered from re-insurers.

• Surprisingly, few candidates worked out tax on the surplus which was totally
incorrect.

Page 3 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Winter 2007 examination

• Some of the candidates did not account for the movement in policy holders
liabilities, during the year.

• Most of the candidates failed to disclose that the closing balance of investment
linked business fund is represented by policyholders liabilities and retained
earnings on other than participating business.

Q.6 In view of the fact that it was an open book examinations, the question was easy
and many candidates obtained good marks. Most of them were able to identify the
main benefits of disclosing information on discontinued operations i.e. focusing
the attention of the stakeholders on the future course which the company is likely
to follow and the possible impact thereof on the operations of the company.

The requirement to identify the necessary information which is required to be

disclosed in respect of discontinued operations was rather easily available in the
relevant IAS and was reproduced.

Q.7 This proved to be the highest scoring question and many students were able to
secure full marks.

The common mistakes were as follows:

• Many candidates worked out the amount of plan assets, defined benefits
obligation and unrecognized actuarial gain correctly but failed to describe as to
how will they be disclosed in the financial statements.

• Many students did not recognize the actuarial gain or loss during the year. It
should have been recognized under any one of the two methods prescribed by
IAS-19.

(THE END)

Page 4 of 4
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2008

June 3, 2008

ADVANCED ACCOUNTING & FINANCIAL REPORTING (Marks 100)

(3 hours)

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

FL SL AIL
----------------Rs. in million----------------
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 each) (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 inter company sales were made during the year 2007:

Included in Amount
Gross
Sales buyer’s closing receivable/payable
profit %
stocks in trade at year end
on sales
---------------------Rs. in million---------------------
FL to AIL 2,400 900 - 20
SL to AIL 1,800 600 800 10
AIL to FL 3,600 1,200 - 30

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.
 (2)

(iv) On July 1, 2007, FL sold certain plants and machineries to SL. Details of the
transaction are as follows:
Rs. in million
Sales value 144
Less: Cost of plant and machineries 150
Accumulated depreciation (60)
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.
(iv) 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)

Q.2 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 US$ 20,000
On shipment* September 30, 2007 US$ 50,000
After installation and test run January 31, 2008 US$ 30,000
*(risk and rewards of ownership are transferred on shipment)

The contract went through in accordance with the schedule and the company made all the
payments on time. The following exchange rates are available:

Dates Exchange Rates

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. (16)
 (3)

Q.3 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:

(i) 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.
(ii) 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. (12)

Q.4 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:

ƒ 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.
ƒ 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.
ƒ 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. (18)

Q.5 SOGO Limited operates an approved funded gratuity scheme for all its employees.
Benefits under the scheme become vested after 5 years of service. No benefit is payable
to an employee if he leaves before 5 years of service. A total of 752 employees were
eligible for the benefits under the fund as of December 31, 2007.
 (4)

Following is the trial balance of the Fund as of June 30, 2007:

Debit Credit
Amounts in Rupees
Cash at bank - current account 17,930,120
Receivable from SOGO Limited 1,147,150
Defence Savings Certificate 102,133,664
Term Finance Certificates 11,832,089
Term Deposits 6,414,058
Investment – SUN Limited 17,594,893
Investment – PEACE Company Limited 587,169
Investment - NIT Units 16,911,510
Due to outgoing members 4,301,017
Accrued expenses 3,822
Withholding tax payable 61,251
Members Fund 142,472,122
Profit on investments 23,389,251
Dividend income 2,696,399
Contribution for the year 10,623,106
Transferred / paid to outgoing members 12,432,973
Bank charges 3,342
Audit fee 10,000
Liabilities no more payable 3,450,000
186,996,968 186,996,968

Following are the details of investments and income thereon:

During the year 2007

Balance
Profit / Profit /
as at Principal
Addition interest interest
July 01, 2006 realized
accrued realized
Government Securities
Defence Savings Certificate 87,812,855 - 21,376,809 (1,600,000) (5,456,000)
Unlisted Securities and deposits
Term Finance Certificates 19,943,656 5,000,000 1,655,223 (12,873,068) (1,893,722)
Term Deposits 11,584,631 - 357,219 (5,300,000) (227,792)
Listed Securities
SUN Limited 8,220,957 9,373,936 - - -
PEACE Limited 587,169 - - - -
NIT Units 16,911,510 - - - -

The following gains/(losses) on restatement of investments at their fair values, have not
been accounted for:

Rupees
SUN Limited (784,518)
PEACE Limited 317,728
NIT Units 4,026,551

Required:
Prepare the following in accordance with the requirements of International Accounting
Standards:
(a) Statement of Net Assets Available for Benefits alongwith the note on investments.
(b) Statement of changes in Net Assets Available for Benefits. (15)
 (5)

Q.6 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. (12)

(THE END)
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

Ans.1 FL Limited
Consolidated Balance Sheet
For the year ended December 31, 2007
Consolid. Consolid.
FL SL AIL
Adjust. Balance
------------------------Rupees in million-----------------
ASSETS
Fixed Assets
Property, plant and
Note G
equipment 22,500 3,480 5,940 (54.0) 31,866.00
Less: Acc. depreciation (5,760) (420) (1,260) 21.6 (7,418.40) Note H
24,447.60

Goodwill 1,860.0 1,860.00 Note A

Current Assets
Stocks in trade 14,460 4,200 5,680 (630.0) 23,710.00 Note D
Accounts receivable 6,240 2,460 6,580 (800.0) 14,480.00 Note F
Other investments 11,100 - - 11,100.00
Cash and bank balances 4,920 660 2,700 8,280.00
57,570.00

83,877.60

SHAREHOLDERS' EQUITY
Share Capital 30,000 30,000.00
Consolid. Retained Earnings 36,800.20
66,800.20

Minority Interests 5,697.40 Note J

Current Liabilities
Accounts payable 2,760 1,980 1,440 (800.0) 5,380.00
Dividend payable 6,000.0 6,000.00
11,380.00

83,877.60

Page 1 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

FL Limited
Consolidated Profit and Loss Account
For the year ended December 31, 2007

Consolid. Consolid.
FL SL AIL
Adjust. Balance
----------------------Rupees in million---------------------
Sales 57,600 16,500 33,800 (7,800.00) 100,100.00 Note C
Cost of sales 49,200 18,000 21,000 (7,234.20) 80,965.80 Note E
Gross profit 19,134.20
Less: Operating
expenses 3,600 2,100 5,400 11,100.00
Profit from operations 8,034.20
Other income
Gain on sale of assets 540 (54.00) 486.00 Note G
Dividend income 1,080 1,080.00 Note I
1,566.00
Net Profit 9,600.2
Less: Minority interests (580.00) Note J
Net profit attributable to holding company's ordinary shareholders 9,020.20
Consolidated retained earnings carried forward 33,780.00
Net profit available for appropriations 42,800.20
Less: Dividend (20%) (6,000.00)
Consolidated retained earnings brought forward 36,800.20
Note
A Goodwill computation Rs. in million
Share capital 6,000
Profit up to date of acquisition 4,800
Net Assets at acquisition 10,800

Cash paid on acquisition 10,500

480
Less: Net assets acquired (80%) 8,640 ( x 100  80%)
600
Goodwill 1,860
B No adjustment for management services in the consolidated financial statements.
C Elimination of intercompany sales amounting to Rs. 7,800 million (2,400+1,800+3,600).

Page 2 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

D Elimination of inter-company mark up from closing stock

Charged to
Total
P&L MI
-----------Rs. in million----------
Stocks held by AIL Ltd.
Rs. 900 million x 20% [80:20] 180 144 36
Rs. 600 million x 10% [80:20] 60 48 12
Stocks held by FL Ltd.
(Rs. 1,200 million + Rs. 100 million) x 30% 390 390
630 582 48
E Consolidation adjustments for cost of sales
Rs. in million
Elimination of intercompany sales (7,800.00) Note C
Elimination of intercompany markup in stocks 582.00 Note D
Elimination of excess depreciation (16.20) Note H
(7,234.2)
F Eliminated the intercompany balance in accounts payable and accounts receivable.
G Elimination of intercompany profits on sale of plants and machineries.
Elimination of excess deprecation charged amounting to Rs. 21.6 (Rs.54 million / 2.5 years).
H
75% to P&L and 25% to MI.
Since subsidiary dividend has already been received, there will be no effect on the consolidated
I
accounts.
J Minority Interests to be reported in P & L Rs. in million
SL Ltd.
Loss for the year ([16,500 - 18,000 - 2,100] x25%) (900)
AIL Ltd.
Profit for the year ([33,800 - 21,000 - 5,400} x 20%) 1,480
580
Minority Interests to be reported in Balance Sheet
SL Ltd.
Share capital (Rs. 12,000 million x 25%) 3,000
AIL Ltd.
Share capital (Rs. 6,000 million x 20%) 1,200
Opening retained earnings (Rs. 4,800 million x 20%) 960
Adjustments:
Credit to profit and loss account 580
Unrealized profit on stock (Note D) (48)
Reversal of excess depreciation (Note H) 5.4
5,697.4

Page 3 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

Ans.2 (a) Accounting Entries under Option 1

Date Description Dr. Cr.

Rs. Rs.
1-Jul-07 Advance to suppliers 1,210,000
Cash 1,210,000
(Amount paid on signing the contract. Exchange rate was
Rs. 60.5/US$)

30-Sep-07 Advance to suppliers 3,050,000

Cash 3,050,000
(Amount paid on delivery. Exchange rate was Rs.
61/US$)

30-Sep-07 PPE in transit/ CWIP 6,100,000

Advance to suppliers 4,260,000
Payable to suppliers 1,830,000
Exchange gain 10,000
(Recording of asset on the delivery date as risk and
rewards are transferred to the company)

31-Dec-
07 Exchange loss 6,000
Payable to suppliers 6,000
(Adjustment of exchange rate as of balance sheet date.
Exchange rate was Rs. 60.5/US$)

31-Jan-08 Property, plant and Equipment 6,100,000

PPE (In transit/ in progress) 6,100,000
(Transfer the new plants and machineries to Property,
Plant and Equipment)

31-Jan-08 Payable to suppliers 1,836,000

Exchange loss (Bal.) 9,000
Cash 1,845,000
(Final payment to supplier. Exchange rate was
Rs.61.5/US$1)

Page 4 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

Accounting Entries under Option 2

Date Description Dr. Cr.

Rs. Rs.
1-Jul-07 Advance to suppliers 1,210,000
Cash 1,210,000
(Amount paid on signing the contract. Exchange rate was
Rs. 60.5/US$)

30-Sep-07 Advance to suppliers 3,050,000

Cash 3,050,000
(Amount paid on delivery. Exchange rate was Rs.
61/US$)

30-Sep-07 PPE in transit/ CWIP 6,090,000

Advance to suppliers 4,260,000
Payable to suppliers 1,830,000
(Recording of asset on the delivery date as risk and
rewards are transferred to the company)

31-Dec07 Exchange loss 6,000

Payable to suppliers 6,000
(Adjustment of exchange rate as of balance sheet date.
Exchange rate was Rs. 60.5/US$)

31-Jan-08 Property, plant and Equipment 6,090,000

PPE (In transit/ in progress) 6,090,000
(Transfer the new plants and machineries to Property,
Plant and Equipment)

31-Jan-08 Payable to suppliers 1,836,000

Exchange loss (Bal.) 9,000
Cash 1,845,000
(Final payment to supplier. Exchange rate was Rs.
61.5/US$1)

(b) If the transaction is covered under an irrevocable letter of credit, I would record the transactions
as progressive payment.

Because LC is irrevocable and contract is binding on the company, this transaction should be
treated as non monetary within the meaning of IAS-21 and can not be recorded as financial
instruments.

Page 5 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

Ans. Date Description Dr. Cr.

3 Rs. Rs.
In the books of CNC Limited
Apr 1, 2007 Bank / Cash / Receivables 2,000,000
Loss on disposal 1,000,000
Vehicles 3,000,000
(Record sale of vehicle to JV-II)

May 1, 2007 Cash / Bank / Receivables 80,000,000

Property, plant and equipment 60,000,000
Gain on disposal of plant 20,000,000
(Record sale of property, plant and equip. to JV-18)
Consolidation Adjustments
Apr 1, 2007
No entry
May 1, 2007 Gain on disposal 8,000,000
Property, plant and equipment 8,000,000

Justification for Accounting Treatment of the transaction dated April 1, 2007

According to IAS 31, the venturer should recognise the full amount of any loss when the contribution
or sale provides evidence of a reduction in the net realisable value of current assets or an impairment
loss. Since the loss has already been booked in the books of CNC Limited therefore, no entry is
required at consolidation.

Justification for Accounting Treatment of the transaction dated May 1, 2007

According to IAS 31, when a venturer sells assets to a joint venture and the assets are retained by the
joint venture, and provided that the venturer has transferred the significant risks and rewards of
ownership, the venturer should recognise only that portion of the gain or loss which is attributable to
the interests of the other venturers.

Ans. Step # 1: Ranking in order of dilution

4

Earnings
Increase in no.
Increase in per
of ordinary Rank
earnings incrementa
shares
l shares
Rs. Rs.
Convertible Debentures
Increase in earnings (Rs. 7.5m x 70%) 5,250,000
Increase in shares 3,000,000 1.75 3

Convertible Preference Shares

Increase in earnings 2,450,000
Increase in shares 4,000,000 0.61 2

Options
Increase in earnings -
Increase in shares (1.5m x 1.1 / 11) 150,000 - 1

Page 6 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

Step # 2: Testing for dilutive effect

Profit from
operations
Ordinary
attributable to EPS Effect
Shares
ordinary
shareholders
Rs. Rs.

Basic Earnings per share *125,380,000 85,220,000 1.471 -

Options (Rank 1) - 150,000
125,380,000 85,370,000 1.469 Dilutive

Convertible preference shares (Rank 2) 2,450,000 4,000,000

127,830,000 89,370,000 1.430 Dilutive

Convertible debentures (Rank 3) 5,250,000 3,000,000

133,080,000 92,370,000 1.44 Anti-
Dilutive
*Rs. 127,830,000 – Rs. 2,450,000 = Rs. 125,380,000

(b) BBC Limited

Notes to the financial statements
For the year ended December 31, 2007

EARNINGS PER SHARE

2007
Basic alternative to ordinary share holders
Profit (Rupees) 125,380,000

Weighted average number of ordinary shares outstanding during the year 85,220,000

Earnings per share - basic (Rupees) 1.47

Diluted
Profit after taxation (Rupees) 127,830,000

Weighted average number of ordinary shares, options and convertible preference

shares outstanding during the year 89,370,000

Earnings per share - diluted (Rupees) 1.430

Because diluted earnings per share is increased when taking the convertible preference shares into account
(from Rs. 1.430 to Rs. 1.44), the convertible debentures are anti-dilutive and are ignored in the calculation
of diluted earnings per share.

Page 7 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

Ans.5 (a) SOGO Limited

Staff Gratuity Fund
Statement of Net Assets Available for Benefits
As at December 31, 2007
Note 2007
Rupees
ASSETS
Investments 1 159,033,144
Receivable from SOGO Limited 1,147,150
Cash at bank in current accounts 17,930,120
178,110,414
LIABILITIES
Due to outgoing members 4,301,017
Accrued expenses 3,822
Withholding tax payable 61,251
4,366,090

NET ASSETS 173,744,324

REPRESENTED BY:
Members' Fund (Rs. 142,472,122 + Rs. 27,712,441) 170,184,563
Surplus on re-measurement of investments available for sale 3,559,761
173,744,324

(b) SOGO Limited

Staff Gratuity Fund
Statement of Changes in Net Assets Available for Benefits
For the year ended December 31, 2007
2007
Rupees
Income
Contribution during the year 10,623,106
Profit from investments 23,389,251
Dividend income 2,696,399
Liabilities no more payable 3,450,000
40,158,756
Expenditure
Transferred / paid to outgoing members (12,432,973)
Bank charges (3,342)
Audit fee (10,000)
(12,446,315)
Net Income for the year 27,712,441

Page 8 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2008

Profit / Profit /
Principal
Addition interest interest
Balance as at Fair value realized Balance as at
W–1 during the accrued realized
July 01, 2006 gain / (loss) during the June 30, 2007
year during the during the
year
year year
HELD TO MATURITY
Government Securities
Defense Saving Certificates 87,812,855 - 21,376,809 - (1,600,000) (5,456,000) 102,133,664

Unlisted Securities and Deposits

Term Finance Certificates 19,943,656 5,000,000 1,655,223 - (12,873,068) (1,893,722) 11,832,089
Term Deposit 11,584,631 - 357,219 - (5,300,000) (227,792) 6,414,058
119,341,142 5,000,000 23,389,251 - (19,773,068) (7,577,514) 120,379,811

AVAILABLE FOR SALE

Listed Securities
SUN Ltd. 8,220,957 9,373,936 (784,518) - 16,810,375
PEACE Ltd. 587,169 - 317,728 - 904,897
NIT Units 16,911,510 - 4,026,551 - - 20,938,061
25,719,636 9,373,936 - 3,559,761 - - 38,653,333
145,060,778 14,373,936 23,389,251 3,559,761 (19,773,068) (7,577,514) 159,033,144

Page 9 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Suggested Solution
Final Examinations – Summer 2008

Ans.6 (i) Cost incurred in the planning stage should be expensed out as research.

(ii) (a) Cost incurred on development of internal website should be charged off because the
benefits (if any) can not be estimated reliably.
(b) Cost of External Website
- Cost incurred on development of external website including the cost of linking it to
credit card facilities should be capitalized because it can be established that external
revenue is generated directly with the use of such website through external orders.
- However, a reasonable estimate of future revenues should be made for impairment
testing.

(iii) (a) Cost of purchase of servers plus cost of their operating software should be capitalized as
tangible assets in line with the requirements of IAS 16 and depreciated according to their
expected useful economic life.
(b) Cost of purchase of software licenses other than operating software should be capitalized
as intangible assets because economic benefit is accruing to the company.

(iv) Cost of maintenance of websites is a recurring expenditure and should be expensed out.

(v) IAS-38 does not allow capitalizing the training costs. Therefore, these should be expensed out.

(vi) Cost of advertising should be expensed out, as and when incurred.

(The End)

Page 10 of 10
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Summer 2008

Overall Feedback

Overall performance indicates that students resorted to selective study. Their

performance lacked consistency. Many of them secured excellent marks in one or two
questions but failed to secure marks in the other questions. The candidates also lacked
sufficient practice in solving the questions.

Question-wise Comments

Q.1 The question was poorly attempted although the topic of consolidation is tested in
almost every attempt and the question contained relatively simple adjustments
only. The following errors were commonly observed:

1. As FL acquired the shares of SL at par, on the date of its incorporation, the

question of goodwill did not arise. Many candidates failed to realize this fact
and wasted their time in the calculation of goodwill.

2. Some candidates wasted their time in the computation of income taxes and
corresponding figures although it was specifically mentioned in the question
that taxes are to be ignored.

3. Surprisingly, some candidates reported the investment in the subsidiaries on

the consolidated balance sheet which clearly indicated their ignorance as
regards the very basic concept of consolidation.

4. While eliminating the gain on sale of plant and machinery, most students
reduced the cost of plant and machinery by the full amount, whereas they
were required to adjust the cost as well as the accumulated depreciation.

5. While accounting for inter-company transfer of fixed assets, the depreciation

expenses were overstated. Most of the students failed to incorporate
appropriate adjustment in the consolidated financial statements.

6. While eliminating the inter-company mark up from closing stocks, majority

of the candidates did not consider the fact that stock was already written
down by Rs. 100 million, in the books of Faisal Limited.

Page 1 of 5
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Summer 2008 examination

7. Significant weaknesses were seen in the students understanding as regards

the treatment/calculation of minority interest. Some students made the
following types of errors which are not expected at this level:

• The figure that is to be reported in the Balance Sheet was reported in

Profit and Loss Account and vice versa.

• The amount in balance sheet was calculated on share capital and opening
balance of retained earnings instead of the closing balance i.e. minority’s
share of current years profit was not taken into account.

8. Some of the candidates adjusted the dividend declared by the parent

company with the dividend income of the parent company.

Q.2 According to the question a company had contracted to import plant and
machinery from USA. The candidates were required to prepare accounting entries
under two different options i.e. if all the payments were treated as (i) advance
payment or (ii) progressive payments. IAS 21 “The Effect of Changes in Foreign
Currency Exchange Rate” suggests different treatment in each case.

Under Option 1

The asset is capitalized by applying the exchange rate prevailing

on the date on which the risk and rewards of ownership are
transferred, on the price of assets in foreign currency. The
difference between actual payments and the amount capitalized is
debited/credited to exchange gain/loss account.

Under Option 2

The asset is capitalized at an amount which is determined by

adding up the payments actually made (in local currency) upto the
date on which risk and rewards of ownership are transferred plus
the amount payable thereafter. The amount payable after the
transfer of ownership is converted into local currency at the rate of
exchange prevalent on the date of transfer of ownership.

Many of the students did not appear to have studied the topic and were unable to
differentiate between the two options and relied on guess work.

The other common mistakes were as under:

1. Many candidates seemed confused and interchanged the above treatments.

2. Inappropriate head of accounts such as Financial Asset Account, Progressive

Payment Account, Earned Income Account, etc. were used which was not
expected from professional level students.

Page 2 of 5
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Summer 2008 examination

3. It was clearly mentioned in the question that risk and rewards of ownership
are transferred on shipment but surprisingly many candidates debited plant
and machinery at the time of first payment. On the other hand, many
candidates debited plant and machinery on September 30, 2007 instead of
debiting plant and machinery in transit account or the capital work in
progress account.

4. Under the first option the asset should have been capitalized at
Rs. 6.1 million ($ 100,000 @ 61.00) i.e. by applying the rate of exchange
prevailing on the date on which risk and rewards of ownership were
transferred which was September 30, 2007, on the amount payable in foreign
currency.

Whereas, under the second option, the plant and machinery should have been
capitalized at Rs. 6.09 million (20,000 x 60.5 + 50,000 x 61.0 + 30,000 x
61.0) i.e. the amounts actually paid upto the date on which risks and rewards
of ownership were transferred plus the amount payable thereafter, computed
at the rate of exchange prevailing on the date of capitalization.

Most of the candidates failed to compute the two amounts correctly.

5. Very few candidates recorded exchange gain or loss on December 31, 2007.

Q.3 It was a straight forward question based on para 48 and 49 of IAS-31 “Interests in
Joint Ventures” and many students were able to secure full marks. The candidates
who didn’t perform well, usually made the following types of mistakes:

1. In the first transaction, many candidates reversed the loss attributable to CNC
Limited for the purpose of consolidation. In fact, no adjustment was required
as according to paragraph 48 of IAS-31 the venturer shall recognize the full
amount of any loss when the sale provides evidence of an impairment loss.

2. In the second transaction, instead of reversing the CNC Limited’s share of

profit, some candidates incorrectly reversed the other venturer’s share of
profit.

3. Very few of the candidates were able to explain the rationale for the gain or
loss recorded in the accounting entries. Most of them wasted lot of time as
they produced whole paragraphs from IAS-31 while explaining the rationale
instead of mentioning the relevant portions only. It also indicates that the
students do not have proper grip over the topic.

Q.4 This was an easy question on earnings per share and was well attempted by many
candidates. A similar type of illustration (example 9) is given at the end of IAS-33
“Earnings per share”.

Page 3 of 5
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Summer 2008 examination
Some of the mistakes which were commonly observed are as follows:

• Many candidates did not deduct preference dividend from profit after tax,
while calculating basic earnings per share for ordinary shareholders.

• Few candidates incorrectly provided the tax shield of 30% on dividend related
to preference shares.

• In part (b) many students did not know that they were required to test whether
the options available with the preference shareholders and debentureholders
had a dilutive or an anti-dilutive effect on the earnings per share related to
ordinary shareholders. Very few of the students disclosed the fact that the
convertible debentures had an anti-dilutive effect.

Q.5 It was an easy question from IAS-26 “Accounting and Reporting by Retirement
Benefits Plan” but probably on account of selective study, very poor performance
was observed in most of the answer scripts.

Common mistakes committed by the students were as follows:

• They were unable to differentiate between “Statement of Net Assets Available

for Benefits” and “Statement of Changes in Net Assets Available for Benefits”.

• Many students could not prepare the note on investment. Some of those who
did try to prepare it, did not disclose the movements during the year.

• Most of the candidates did not split the investments between “Held to
Maturity” and “Available for Sale”.

Q.6 This was an easy question according to which a company has incurred various
types of expenses on the development of its websites. The students were required
to comment on the accounting treatment of each expense in accordance with the
requirements of IAS-38 “Intangible Assets” and SIC-32 “Intangible Assets – Web
Site Costs”. Many candidates restricted their answers to recommending accounting
treatment only. It has been mentioned time and again that a large proportion of the
marks are allocated for assigning reasons in support of the recommended treatment
but this problem seems to persist although it has reduced significantly. Other
significant aspects of the student’s performance are discussed below:

• Many candidates recommended that the cost of undertaking a feasibility study

should be capitalized as intangible asset. In fact, such costs are incurred in the
planning stage and all costs incurred at the planning stage should be expensed
out.

• Many candidates were of the view that cost incurred on development of

internal web-site should be capitalized as an intangible asset. They failed to
read the question carefully where it was mentioned that the management is not
in a position to estimate the amount of economic inflows that this website may
generate and in such a situation, the expenditure incurred should be expensed
out.

Page 4 of 5
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Summer 2008 examination
• Most candidates were able to figure out that the cost of linking external
website to credit card should be capitalized as an intangible asset. However,
the reasons given in most of the answers were not very convincing.

• According to IAS 16 “Property, Plant and Equipment”, the servers as well as

their operating software are tangible assets. Several students recommended
that they should be capitalized as intangible assets.

• Accounting treatment of website maintenance, personnel training and

advertising costs was rather too easy at this stage and almost all candidates
declared correctly that such costs should be expensed out.

(THE END)

Page 5 of 5
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2008

December 2, 2008

ADVANCED ACCOUNTING AND FINANCIAL REPORTING (MARKS 100)

(3 hours)

Q.1 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) (11) (15)
Administrative expenses (63) (40) (16)
Interest expenses (30) (22) (15)
Other income 65 - -
Profit/(loss) before tax 247 71 (90)
Income tax (73) (15) 8
Profit/(loss) for the period 174 56 (82)

The following relevant information is available:

(i) The share capital and reserves as at July 1, 2007 were as follows:

GL YL BL
Rupees in million
Ordinary share capital of Rs. 10 each 600 200 150
Reserves 652 213 108
 (2)

The share capital of all companies have remained unchanged since their
incorporation.
(ii) During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were
made at a mark up of 25% on cost. 30% of these goods were still in the inventories
of YL at June 30, 2008.
(iii) GL manufactures a component used by BL. During the year, GL sold these
components amounting to Rs. 20 million to BL. Transfers are made at cost plus
15%. BL held Rs. 11.5 million of these components in inventories at June 30, 2008.
(iv) All assets are depreciated on straight line method.
(v) Other income includes dividend received from YL on April 15, 2008.
(vi) During the year, YL paid 20% cash dividend to its ordinary shareholders.
(vii) 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:
ƒ goodwill of YL was impaired by 20%;
ƒ 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)

Q.2 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. (19)

Q.3 Red Limited has carried out the following transactions during the year ended June 30,
2008.
(a) 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%.
 (3)

(b) 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.
(c) 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. (21)

Q.4 Blue-chip Asset Management Limited is in the process of finalizing the financial
statements of one of its open ended mutual fund. Following information is available from
the Fund’s records;

Rs. in “000”
Net assets - opening balance 350,050
Net income for the year 65,325
765,900 units issued during the year against 85,015
717,480 units redeemed during the year against 77,488

The par value of each unit is Rs. 100.

Required:
Prepare the statement of movement in unit holders’ Fund for the year ended June 30, 2008. (10)

Q.5 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. (08)
 (4)

Q.6 You are working as a Financial Analyst in Brown Venture Capital Limited. Your company
has received an offer for equity investment in a large group of companies. While reviewing
the consolidated financial statements of the group and detailed offer documents, you have
noted the following significant judgments, estimates and assumptions used in preparation
of the consolidated financial statements, which may have an impact on the independent
evaluation of the affairs and operations of the group.

Operating Lease Commitments

The Group has entered into commercial property leases as a Lessee. The Group has
determined, based on an evaluation of the terms and conditions of the arrangements, that it
does not acquire all the significant risks and rewards of ownership of these properties and
so accounts for the contracts as operating leases.
Convertible Preference Shares
The Group has determined, based on an evaluation of the significant terms and conditions
of the issue, that these securities fall under the category of liability rather than equity, and
have been disclosed and accounted for accordingly.
Pension and Other Post Employment Benefits
The cost of defined benefit pension plans and other post employment benefits is
determined using actuarial valuations. The actuarial valuation involves making
assumptions about discount rates, expected rates of return on assets, future salary
increases, mortality rates and future pension increases. Due to the long term nature of these
plans, such estimates are subject to significant uncertainty.

Impairment of Non-Financial Assets

All non-financial assets including goodwill and other intangibles are assessed for
impairment at each reporting date and at any other time when there are indications of
impairment. When value in use calculations are undertaken, management has to estimate
the expected future cash flows from the asset or cash-generating unit and choose a suitable
discount rate in order to calculate the present value of such cash flows.
Useful Lives of Property, Plant And Equipment
The Group has invested significant amounts in acquisition of items of property, plant and
equipment (PPE). Generally, the Group follows a prudent practice and estimates the useful
economic lives of such assets to the enterprise on a minimum side.
Provision for Decommissioning
The activities of the Group normally give rise to obligations for site restoration. In
determining the amount of the provision, assumptions and estimates are required in respect
of discount rates and the expected cost of dismantling and removing the plants from the
site.
Required:
You have assessed that the managements judgments, estimates and assumptions may turn
out to be incorrect. What will be the impact of any error in management’s estimates and
assumptions, on the following:

ƒ Liquidity, profitability and gearing ratios of the group;

ƒ Business valuation of the group.

Give brief explanations to justify your conclusions. (20)

(THE END)
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Final Examinations – Winter 2008
Suggested Answers

Ans.1 Golden Limited

Consolidated Income Statement
For the year ended June 30, 2008
Rs. in million
Sales (875 + 350 - 40) 1,185.00
Cost of sales (567 + 206 - 33.6 (W-1) (739.40)
Gross profit 445.60
Selling expenses (33 + 11) (44.00)
Administrative expenses (63 + 40) (103.00)
Interest expenses (30 + 22) (52.00)
Other income (65 - 36) [20 x Rs.2 x 90%) 29.00
Impairment losses
Goodwill (W-2) (9.18)
Investment in associates (W-3) (25.80)
Share of loss from associates [(Rs. 82 x 40%)+0.6] (33.40)
Profit before tax 207.22
Income tax expense (73 + 15) (88.00)
Profit for the year 119.22
Attributable to:
Ordinary shareholders of parent 114.26
Minority interest (W-4) 4.96
119.22
W-1: Adjustment in cost of sales Rs. in million
Intra-group purchases (40.00)
Additional depreciation on machines 4.00
Unrealized profit in inventories 2.40
(33.60)
W-2: Impairment on Goodwill
Shares issued (18 x 4/5 x Rs.20) 288.00
Less: Net assets acquired:
Share capital 200
Pre-acquisition reserves 24
Fair value adjustment (22 + 20 + 3) 45
269
Holding % 90% 242.10
Goodwill 45.90
20% Impairment in goodwill 9.18

W-3: Impairment in the value of investment in associates Rs. in million

Cash paid (6 x 12) 72.00
Less: Post acquisition losses:
Reserves on acquisition 40
Reserves at June 30, 2008 (108-82) 26
(14)
% holding 40% (5.60)
Elimination of unrealized gain to the extent of GL's share
(Rs. 11.5 x 0.15 / 1.15 x 40%) (0.60)
65.80
Fair value as per impairment testing 40.00
Impairment losses 25.80

Page 1 of 6
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Final Examinations – Winter 2008
Suggested Answers

W-4: Minority Interests

Profit of YL 56.00
Less: Additional depreciation (4.00)
Unrealized profit in inventories (2.40)
49.60
Minority Interest % 10%
4.96

Ans.2(a) Silver Construction Limited

Extracts from Income Statement
For the year ended June 30, 2008
Rs. in million

Contract revenue recognized 2,318.18

Contract costs recognized (2,108.00)

Silver Construction Limited

Extracts from Balance Sheet
As of June 30, 2008
Rs. in million
ASSETS
Due from customers 106.75

LIABILITIES
Due to customers 21.76

Working Schedule
I II III IV V VI Total
-----------------------------Rupees in million-------------------------
Contract price 300 375 280 400 270 1,200 2,825.00
Incentive payments - - - 40 - - 40.00
Total contract price (A) 300 375 280 440 270 1,200 2,865.00

Contract cost incurred to date (B) 248 68 186 246 185 1,175 2,108.00
Estimated further costs 67 221 - 164 15 - 467.00
Total estimated costs to complete (C) 315 289 186 410 200 1,175 2,575.00

Completion % B / C x 100 (D) 78.73% 23.53% 100% 60% 92.50% 100%

Revenue to be recognized A x D (E) 236.19 88.24 280.00 264.00 249.75 1,200 2,318.18

Expected losses from contracts (A-C) (15.00) - - - - - (15.00)

Amount recoverable from customer (E) *233.00 88.24 280.00 264.00 249.75 1,200
Progress billings 200.00 110.00 280.00 235.00 205.00 1,200
Due from customers 33.00 - - 29.00 44.75 - 106.75
Due to customers - (21.76) - - - (21.76)
* Cost to be recognized – expected losses = 248 – 15 = 233

Page 2 of 6
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Final Examinations – Winter 2008
Suggested Answers

(b) Comments on additional information

(i) Incentive payments are included in contract revenue when:

ƒ The contract is sufficiently advanced that it is probable that the specified performance standards will
be met or exceeded; and
ƒ The amount of the incentive payment can be measured reliably.
Since the Contract IV is in advance stage and the probability to achieve the target is very high, the
company should recognize the incentive payment to be received, on this contract.

(ii) Claims are recorded in contract revenue only when:

ƒ Negotiations have reached an advanced stage such that it is probable that the customer will accept the
claim; and
ƒ The amount that it is probable will be accepted by the customer can be measured reliably.

Since the claim amount can not be measured reliably, the claim should not be recognized as contract
revenue.

Ans.3 Date Particulars Dr. Cr.

(a) Jul 1, 07 Cash 100,000,000
Payable to Green Limited *65,751,623
Unwinding of discount on loan 34,248,377
* Rs. 100 million ÷ (1 + 15%)3 = Rs. 65,751,623

Jun 30, 08 Interest Expense 9,862,743

Payable to Green Limited 9,862,743
Rs. 65,751,623 x 15% = Rs. 9,862,743

Jun 30,08 Deferred Tax Expense 8,534,972

Deferred Tax Liability 8,534,972
(Rs. 34,248,377 – Rs. 9,862,743) x 35% = Rs. 8,534,972

(b) Jul 1, 07 Employee Compensation Expense (200,000 x Rs. 8) 1,600,000

Employee Stock Options Outstanding 1,600,000
(200,000 stock options to employees at Rs.5 when market price is
Rs.13)

Apr 30, 08 Bank account (190,000 x Rs. 5) 950,000

Employee stock options outstanding (190,000 x Rs. 8) 1,520,000
Equity share capital (190,000 x Rs. 10) 1,900,000
Share premium (190,000 x Rs. 3) 570,000
(190,000 equity shares of Rs.10 each at a premium of Rs.3 per
share, in exercise of stock options.)

Apr 30, 08 Employee Stock Options Outstanding (10,000 x Rs. 8) 80,000

Employee Compensation Expenses 80,000
(To record the lapse of stock options for 10,000 shares)

(c) May 31, 08 Receivable from Orange Limited 10,000,000

Equity – Fair Value Gain on AFS Investment *4,880,000
AFS Investment – GL (500,000*20) 10,000,000
Gain on de-recognition of Investment 4,880,000
500,000 x 20 - [(500,000 x 10) + 120,000 ] = Rs. 4,880,000

Page 3 of 6
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Final Examinations – Winter 2008
Suggested Answers

May 31, 08 AFS Investment – Orange Limited (65*200,000) 13,000,000

Gain on initial recognition of AFS Investment 3,000,000
Receivable from Orange Limited 10,000,000

Ans.4 Rs. in '000'

Net assets at beginning of the year 350,050
Cash received / receivable on issuance of 765,900 units 85,015
Cash paid / payable on redemption of 717,480 units (77,488)
7,527
357,577

Element of (income) / loss and capital gains included in prices

of units issued less those in units redeemed – net (2,685)
Net income for the year (recognized income for the year) 65,325
Net assets at end of the year 420,217

Working
Sold Redeemed
No. of Units 765,900 717,480

Rupees in 000
Par value of units @ Rs. 100 76,590 71,748
Sale proceed / redemption value 85,015 77,488
Element of (income) / loss (8,425) 5,740

Net element (2,685)

Rs. in million
Ans.5 Assets carrying value as at June 30, 2008 (Asset)
Cost (Given) 6,570
Decommissioning liability on July 1, 2007 (780 / (1+0.08)20) 167
Depreciation for the year (321) Working 1
Adjustment for revision in provision for decommissioning cost 157 Working 2
6,573

Decommissioning liability on June 30, 2008 (1,021 / (1+0.06)19) 337

Working 1: Depreciation for the year (P&L)

Cost 6,570
Decommissioning liability on July 1, 2007 167
Residual value (320)
6,417
Depreciation (6,417 / 20) 321

Working 2: Increase in decommissioning liability during the year ended June

30, 2008
Decommissioning liability on June 30, 2008 337
Less: Decommissioning liability on July 1, 2007 (167)
Less: Unwinding of interest for the year (167 x 8%) (13)
157

Page 4 of 6
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Final Examinations – Winter 2008
Suggested Answers

Ans.6 Expected errors /

change in Liquidity Ratios Profitability Ratios Gearing Ratios Business Valuation
assumptions
Impact: Impact: Impact: Impact:
Unfavourable Favourable Unfavourable Valuation will be
higher.

Justification: Justification: Justification: Justification:

The current portion of In case of operating Because of recording Profitability will
lease liability will lease, normally the the finance lease increase. Moreover,
negatively impact the full cost is charged obligations, gearing recording of property
If the leases turn out
liquidity ratios. earlier than useful ratios may be will increase the asset
to be finance leases
economic life of asset. negatively affected. base of the company.
Whereas in finance Both will have a
lease, depreciation positive impact on the
and financial charges valuation.
are expensed out over
the lease term which
is generally equal to
useful life.

Impact: Impact: Impact: Impact:

Favourable None. Favourable None.

Justification: Justification: Justification: Justification:

If these shares are Any classification of Because liability of Because net assets /
recorded as equity, preference shares will preference shares will income related to
If convertible then liabilities for not affect the amount / not be recognized. ordinary shareholders
preference shares are preference share income attributable to will remain the same.
accounted for as dividends will be ordinary shareholders
equity recorded when of the company.
dividend is declared
whereas in the present
case when the liability
for dividend will be
worked at year end as
current liability.
Impact: Impact: Impact: Impact:
Either favourable / Either favourable / None. Valuation may be
unfavourable unfavourable higher or lower.
(Both are possible) (Both are possible) (Both are possible)

Justification: Justification: Justification: Justification:

If assumptions used in If a certain As discussed in the Actuarial liabilities do The impact on
the actuarial valuation assumption, for case of liquidity ratio, not affect long term business valuation
turn out to be example, expected a higher than actual liabilities. Hence there will be similar to the
incorrect increase in salary* has rate of increase in will be no impact on impact on profitability
been taken as higher salary means that the gearing ratio. ratio and the impact
than actual, it means reported profit is However, it does on liquidity ratio.
that reported liability lower than the actual affect the equity but
is higher than the profit and vice versa. the consequent effect
actual liability and on gearing ratio is not
similarly, liquidity usually material.
ratio is unfavourable;
and vice versa.

Page 5 of 6
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Final Examinations – Winter 2008
Suggested Answers

Expected errors /
change in Liquidity Ratios Profitability Ratios Gearing Ratios Business Valuation
assumptions
Impact: Impact: Impact: Impact:
Either favourable / Either favourable / Either favourable / Valuation may be
unfavourable unfavourable unfavourable higher or lower.
(Both are possible) (Both are possible) (Both are possible). (Both are possible)
If future cash flow or
Justification: Justification: Justification: Justification:
discount rate used for
Liquidity ratios will Profit may have been Any error will not The company may be
valuation of non-
only be affected due reported on a higher affect the long term overvalued if
financial assets proves
to impairment related side if impairment is liabilities but may impairment is short
to be incorrect
to current assets like short recorded and have significant recorded and vice
inventory, stores, etc. vice versa. (In case of impact on equity and versa.
Goodwill, impairment hence the gearing
once provided is not ratio.
revised.)
Impact: Impact: Impact: Impact:
None. Favourable None. Valuation may be
higher.

Justification: Justification: Justification: Justification:

Actual useful lives of It does not affect the Profit may have been Any change in useful Increase in earnings
property, plant and current liabilities or reported on a lower lives do not affect will have a positive
equipment may be the current assets. side because higher long term liabilities. impact on valuation.
more than the depreciation is Hence there will be no On the other hand
assumed lives charged if useful life impact on gearing increase in net assets
is estimated on a ratio. However, it will also have a
conservative basis. does affect the equity positive impact on the
but the consequent valuation.
effect on gearing
ratios is not usually
material.
Impact: Impact: Impact: Impact:
None. Either favourable / None. Valuation may be
unfavourable. higher or lower. (Both
(Both are possible) are possible)

If expected cost of Justification: Justification: Justification: Justification:

decommissioning and It does not affect the If the assumed It will not affect long The impact will be
discount rate used to short term liabilities discount rate is on the term liabilities. Hence similar to the impact
determine its present or assets. lower side or there will be no on profitability ratio.
value, proves to be expected cost of impact on gearing
incorrect. decommissioning is ratio. However, it
on the higher side, the does affect the equity
reported profit will be but the consequent
lower and vice versa. effect on gearing ratio
is not usually
material.
(The End)

Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2009

June 2, 2009

ADVANCED ACCOUNTING AND FINANCIAL REPORTING (MARKS 100)

(3 hours)

Q.1 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% Term Finance Certificates (TFCs) (Rs. 100 each) - 2,250 - -
Accounts payable - 445 - 190
Dividend payable – preference shares - - - 60
Dividend payable – ordinary shares - 750 - 300
Property, plant and equipment - at cost 16,250 - 25,000 -
Property, plant and equipment - acc. depreciation - 9,750 - 17,000
Investment in ordinary shares of GL 5,500 - - -
Investment in preference shares of GL 400 - - -
Loan to GL at 15% rate of interest 2,000 - - -
Investment in KL's TFCs (purchased at par value) - - 1,500 -
Profit before tax, interest and dividend - 2,865 - 1,550
Dividend income - 273 - -
Interest income - 300 - 210
Dividend receivable 249 - - -
Current assets 1,069 - 1,316 -
Interest on TFCs 315 - - -
Interest on loan from KL - - 300 -
Taxation 650 - 474 -
Preference dividend - - 120 -
Ordinary dividend – interim 750 - 300 -
27,183 27,183 29,010 29,010

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.
 (2)

(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. (26)
Note:
ƒ Ignore deferred tax and corresponding figures.
ƒ Notes to the above statements are not required. However, show workings wherever it
is necessary.

Q.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.

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. (11)
 (3)

Q.3 Jamshed Limited has recently hired your services for the position of Accountant. The
following summarized trial balance for the year ended December 31, 2008 along with the
CFO’s comments, has been provided to you:

Debit Credit
CFO’s Comments
----- Rupees -----
Share capital 75,000,000
Retained earnings (1/1/2008) 54,134,997
Obligation under finance leases 15,436,900
Accounts payable 4,100,000
Owned fixed assets – net 110,187,500
Leased fixed assets – net 17,152,115
Deferred tax asset (1/1/ 2008) 750,000
Stock in trade 31,400,250
Accounts receivable 13,075,000
Provision for bad debts 653,750
Advance tax paid 11,999,247 Including tax of Rs. 51,250
deducted on dividend
received.
Cash and bank 1,025,000
Sales 177,633,594
Cost of sales excluding depreciation 122,106,875
Depreciation expense – owned assets 9,385,542 Tax depreciation for the
year is Rs. 8,501,758.
Depreciation expense – leased assets 1,815,212
Donations 562,500 Not allowable for tax
purposes.
Financial charges 2,237,500 Includes Rs. 1,750,222
relating to obligations under
finance lease.
Other expenses 6,150,000 Includes bad debt expenses
of Rs. 853,750.
Dividend income 512,500 Taxable under Final Tax
Regime.
Gain on sale of machines 375,000 Carrying amount at disposal
was Rs. 650,000.
327,846,741 327,846,741

Following relevant information is also available:

(i) Bad debts written off during the year amounted to Rs. 200,000.
(ii) There was no addition or deletion in the leased assets. The principal repayment
towards obligation under finance lease was Rs. 2,061,359.
(iii) The tax written down value of owned fixed assets as of December 31, 2007 was
Rs. 96,550,000.
(iv) During the year, the company purchased fixed assets amounting to Rs. 7,500,000.
(v) The tax written down value of machines sold was Rs. 450,000. There was no other
disposal of property, plant and equipment in the year 2008.
(vi) On account of an apparent mistake in the return relating to year ended December
31, 2007, a revised return was filed and the taxable income was reduced by
Rs. 1,800,000.
(vii) Up to the year ended December 31, 2007, the company’s assessed brought forward
losses amounted to Rs. 14,251,700.
(viii) Applicable tax rate is 35%.

Required
Prepare a note to the statement of comprehensive income for the year ended December 31,
2008, giving appropriate disclosure related to current and deferred tax expenses. (23)
 (4)

Q.4 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 share 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 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:
ƒ Goodwill;
ƒ Net identifiable assets, and
ƒ Non-controlling interest. (15)

Q.5 Akmal General Insurance Limited (AGIL) is engaged in general insurance business. The
following information is available for the year ended December 31, 2008:

(i) During the year, AGIL earned direct and facultative premiums of Rs. 5,586,382
thousand against which it incurred reinsurance expense amounting to Rs. 2,076,499
thousand. Details of premium earned and reinsurance expenses are as follows:

Fire & Marine,

Property Aviation Motor Misc.
Damage &Transport
------------------Rupees in thousand------------------
Premiums 1,905,027 883,942 2,495,120 302,293
Reinsurance expense 1,520,962 300,605 4,671 250,261

(ii) The outstanding balance of unearned premium reserve and prepaid reinsurance
premium ceded were as follows:

Fire & Marine,

Property Aviation & Motor Misc.
Damage Transport
----------------Rupees in thousand--------------
Balances as of December 31, 2008
Unearned premium reserve 1,014,552 174,780 1,053,094 152,911
Prepaid reinsurance premium ceded 741,934 93,702 311 122,866

Balances as of December 31, 2007

Unearned premium reserve 844,425 159,844 1,191,933 133,424
Prepaid reinsurance premium ceded 726,800 59,098 - 114,190

(iii) Premium received under the treaty arrangements (proportional) amounted to Rs.
167,108 thousand. The outstanding balance of unearned premiums reserve relating
to treaty arrangement as of December 31, 2008 was Rs. 56,128 thousand (2007: Rs.
61,303 thousand).

Required:
Prepare the statement of premiums for the year ended December 31, 2008. Ignore the
corresponding figures. (10)
 (5)

Q.6 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. (15)
(Ignore corresponding figures)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2009

Ans.1 Khan Limited

Consolidated Statement of Financial Position
At December 31, 2008

ASSETS Rupees in million

Non-current assets
Property plant & equipment (W- 1) 14,800
Goodwill (W - 2) 100
14,900

Current assets (1,069+ 1,316) 2,385

17,285
EQUITY AND LIABILITIES
Equity
Share capital 6,800
General reserve (W-5) 1,975
Retained earnings 3,844
12,619
Non-controlling interest (W-8) 2,420
Total equity 15,039

Non-current liabilities
14% Term finance certificates (2,250-1,500) 750

Current liabilities
Accounts payable (445 + 190) 635
Dividend payable (W - 3) 861
17,285

Khan Limited
Consolidated Statement of Comprehensive Income
For the year ended December 31, 2008

Rupees in
million
Profit before tax and interest (W - 4) 4,315
Interest expense (315 - 210) (105)
Profit before tax 4,210
Taxation expense (650 + 474) (1,124)
Profit for the period 3,086
Other comprehensive income -
Total comprehensive income 3,086

Attributable to:
Equity holders of parent Balancing 2,894
Non-controlling interest (W-7) 192
3,086

Page 1 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2009

Khan Limited
Consolidated Statement of Retained Earnings
For the year ended December 31, 2008

Rupees in million
Balance as at January 1, 2008 (W- 6) 1,700
Total comprehensive income for the year 2008 2,894
Dividends (750)
Balance as at December 31, 2008 3,844

W-1 – Property, plant & equipment

Rupees in million
Cost – KL 16,250
Cost – GL 25,000
Acc. depreciation – KL (9,750)
Acc. depreciation – GL (17,000)
14,500
Fair value adjustment 1,000
Less: Depreciation on increased fair value (Rs. 1,000 x 10% x 7) (700)
14,800

W-2 – Goodwill

Purchase consideration 5,500

Less:
Share capital (75% of 5,000) (3,750)
Retained earnings (75% of 1,000) (750)
General reserve (75% of 200) (150)
FV increase in PPE (1,000 x 75%) (750)
100

W-3 - Dividend payable

Ordinary dividend – KL 750

Ordinary dividend - GL (300 x 25%) 75
Preference dividend - GL (60 x 60%) 36
861

W-4: Profit before tax and interest

KL 2,865
GL 1,550
Current year depreciation on increased value of PPE (1,000 x 10%) (100)
4,315

W-5: General reserve

General reserve – KL 1,750

General reserve – GL (500 – 200) x 75% 225
1,975

Page 2 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2009

W - 6: Retained earnings
Rupees in million
Retained earnings – KL 2,000
Retained earnings – GL (1,200 - 1,000) x 75% 150
Less: Depreciation charge on increased FV (1,000 x 6 x 10% x 75%) (450)
1,700

W-7: Non-controlling interest (For Statement of Comprehensive Income)

Share from profit of GL (1,550+210-300-474—120)x25% 217

Less: Current year depreciation on increased of PPE (100x25%) (25)
192

W - 8: Non-controlling interest (For Statement of Financial Position)

Rupees in million
Share capital (5,000 x 25%) 1,250
Preference shares (1,000 x 60%) 600
General reserve (500 x 25%) 125
Opening Retained earnings (1,200 x 25%) 300
Comprehensive income for the year (W-7) 192
Increase in FV of building (1,000 x 25%) 250
Less: Depreciation charge on increased FV (1,000 x 6 x 10% x 25%) (150)
Less: Dividend on ordinary shares (300 x 0.25) (75)
Less: Dividend on preference shares (120 x 0.6) (72)
2,420

Ans.2 Date Particulars Dr. Cr.

(a) (i) Exchange loss 16,800,000
31-12-2008 Loan from SBD (350,000 x 15) 5,250,000
Loan from JICA (500,000 x 15) 7,500,000
Loan from AFI (270,000 x 15) 4,050,000
(To record exchange loss at year end)

(ii) Loan from SBD (old) 28,000,000

Loss on rescheduling (balancing) 4,000,000
Loan from SBD (new) (400,000 x 80) 32,000,000
(To record the de-recognition of old liability of SBD
based on testing at W-1 and recording of new liability
of SBD at fair value)

Deferred loss on rescheduling 800,000

Loan from AFI (US$ 10,000 x Rs. 80) 800,000
(To record the increase in loan amount)

Page 3 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2009

W-1: Testing for de-recognition as per criteria set out in IAS-39.

SBD JICA AFI

Carrying balance of old liability (US$) 350,000 500,000 270,000
Revised amount as per original effective
interest rate (US$) 390,000 535,000 250,000
Effect of Rescheduling % 11.43% 7.00% -7.41%
Effect > 10% Yes No No
Conclusion Derecognize No effect No effect
the old
liability and
recognize the
new liability
at fair value.

(b) Rupees
Current portion of SBD -
Current portion of JICA (250,000 x 80) 20,000,000
Current portion of AFI -
20,000,000

Ans.3 TAXATION
Rupees
Current
- for the year (W-1) 8,294,853
- for prior years (1,800,000 x 35%) (630,000)
7,664,853
Deferred (W-2) 6,402,753
14,067,606

W-1: Computation of tax expense for the year

Rupees
Accounting profit before tax
(177,633,594 + 375,000 + 512,500 – 122,106,875 – 9,385,542 – 1,815,212 – 562,500 – 2,237,500 – 6,150,000) 36,263,465
Less: Admissible deduction/Inadmissible income
Income under FTR – Dividend 512,500
Lease rentals paid (Rs. 1,750,222 + Rs. 2,061,359) 3,811,581
Tax depreciation 8,501,758
Bad debts written off 200,000
Accounting Gain on sale of machines 375,000
13,400,839

Page 4 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2009

Add: Inadmissible deduction/Admissible income

Interest paid on leases 1,750,222
Depreciation on leases 1,815,212
Accounting depreciation 9,385,542
Donations 562,500
Bad debts expense 853,750
Tax gain on sale of machines (650,000 + 375,000 - 450,000) 575,000
14,942,226
Taxable income 37,804,852
Less: Assessed tax losses (14,251,700)
23,553,152

Tax on normal income @ 35% 8,243,603

Tax on dividend income @ 10% 51,250
Total tax liability - current 8,294,853

W-2: Computation of deferred tax expense for the year

Carrying
Tax base Difference
amount
---------- Rupees ----------
Taxable temporary differences
Fixed assets - owned 110,187,500 95,098,242 15,089,258
(W-3)
Fixed assets - leased 17,152,115 - 17,152,115

Deductible temporary differences

Obligation under finance lease (15,436,900) - (15,436,900)
Provision for bad debts (653,750) (653,750)

Net temporary difference 16,150,723

Deferred Tax Liability as of December 31, 2008

(16,150,723 x 35%) 5,652,753
Add: Deferred tax asset as of December 31, 2007 750,000
Deferred tax expense for the year 6,402,753

W-3: Tax base of owned fixed assets

Rupees
Tax WDV – opening 96,550,000
Addition 7,500,000
Disposal (450,000)
Tax Depreciation (8,501,758)
95,098,242

Page 5 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Final Examinations – Summer 2009

Ans.4 OPTION 1: Based on directors’ estimate i.e. if recoverable amount is Rs. 390 million

Net Identifiable Non-Controlling

Goodwill
Assets Interest
-------------------Rupees in million ---------------
*1 *2
Balance as of January 1, 2001 400 40 90
Less: Net loss for the year (150) (15) -
250 25 90
*1 Rs. 400 million x 10%
*2 Rs. 450 million - (400 x 90%)

OPTION 2: Based on consultants’ estimate i.e. if recoverable amount is Rs. 200 million

Non-
Net Identifiable
Controlling Goodwill
Assets
Interest
-------------Rupees in million ------------
Balance as of December 31, 2008 before
impairment as computed above 250 25 90
Less: Impairment (W-1) (50) (5) (90)
Amount to be reported in SOFP 200 20 -

W-1: Impairment
Rupees in
million
Value of net identifiable assets 250.00
Goodwill of the Company (Rs. 90 x 100/90) 100.00
350.00
Less: Recoverable amount 200.00
Impairment 150.00

Allocation of impairment loss

Rs. in million
First allocated to Goodwill of controlling interest 90.00
Balance allocated to net identifiable assets (150 – 90 – 10*) 50.00

Allocable to non controlling interest (50 × 10%) 5.00

*Notional value of Goodwill relating to non-controlling interest not recorded in consolidation account.

Page 6 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Solution
Final Examinations – Summer 2009

Ans.5 Akmal General Insurance Limited

Statement of Premiums
For the year ended December 31, 2008
Rs. in thousand
PREMIUMS REINSURANCE
Net Premium
Unearned Premium Reinsurance Prepaid Reinsurance Reinsurance
Class Written Earned Revenue
Reserve Ceded Premium Ceded Expense
Opening Closing Opening Closing 2008 2007
Direct and facultative
Fire and property damage 2,075,154 844,425 1,014,552 1,905,027 1,536,096 726,800 741,934 1,520,962 384,065 -
Marine, aviation and transport 898,878 159,844 174,780 883,942 335,209 59,098 93,702 300,605 583,337 -
Motor 2,356,281 1,191,933 1,053,094 2,495,120 4,982 - 311 4,671 2,490,449 -
Miscellaneous 321,780 133,424 152,911 302,293 258,937 114,190 122,866 250,261 52,032 -
Total 5,652,093 2,329,626 2,395,337 5,586,382 2,135,224 900,088 958,471 2,076,499 3,509,883 -

Treaty - proportional 167,108 61,303 56,128 172,283 - - - - 172,283 -

Grand Total 5,819,201 2,390,929 2,451,465 5,758,665 2,135,224 900,088 958,471 2,076,499 3,682,166 -

Page 7 of 9
9-Sep-09 11:59:24 AM
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Solution
Final Examinations – Summer 2009

Ans.6 Afridi Industries Limited

Extracts from the Statement of Comprehensive Income
For the year ended December 31, 2008

Rupees in million
Profit before tax 120.0
Tax @ 35% 42.0
78.0
Other comprehensive income -
Total comprehensive income 78

Earnings per share

Basic
Continued operations (91 [W-1] ÷ 49 [W-2]) 1.86
Discontinued operations ((13) [W-1] ÷ 49 [W-2]) (0.27)
1.59
Diluted
Continued operations (108.33 [W-1] ÷ 60.67 [W-2]) 1.78
Discontinued operations ((13) [W-1] ÷ 60.67 [W-2]) (0.21)
1.57

Afridi Industries Limited

Extracts from the Notes to the Financial Statements
For the year ended December 31, 2009

Basic earnings per share

Profit attributable to ordinary shareholders (Rs. in millions) 78.00

Weighted average number of ordinary shares (numbers in millions) (W-2) (W-1) 49.00

Diluted earnings per share Rs. in million

Profit attributable to ordinary shareholders 78.00
After tax effect of finance cost on convertible TFCs (4x100x8 / 65%)x10/12 17.33
Profit after tax attributable to ordinary shareholders (diluted) 95.33

Numbers in million
Weighted average number of ordinary shares (W-2) 49.00
Effect of convertible TFCs on number of shares (W-2) 11.67
Weighted average number of ordinary shares (diluted) 60.67

Page 8 of 9
9-Sep-09 11:59:24 AM
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Solution
Final Examinations – Summer 2009

WORKINGS
W-1: Basic and diluted earnings
Continued Discontinued Total
---------- Rs. in million ------

Profit before tax 140.00 (20.00) 120

Tax (49.00) 7.00 (42)
Profit attributable to ordinary shareholders – basic
earnings 91.00 (13.00) 78
Finance cost on convertible TFCs (4 × 100 × 8% × 65%)
× 10/12 17.33 -- 17.33
Profit attributable to ordinary shareholders – diluted
earnings 108.33 (13.00) 95.33

W-2: No of ordinary shares outstanding for basic and diluted EPS computation

Numbers in million
Ordinary shares outstanding as of Jan 1, 2008 40.00
Right issued during the year (40 x 30% x 9/12) 9.00
No of ordinary shares outstanding for Basic Earnings per Share 49.00
10 TFCs convertible into 35 ordinary shares (4,000,000 × 35/10) × 10/12 11.67
No of ordinary shares outstanding for Diluted Earnings per Share 60.67

(The End)

Page 9 of 9
9-Sep-09 11:59:24 AM
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2009

December 8, 2009

ADVANCED ACCOUNTING AND FINANCIAL REPORTING (MARKS 100)

(3 hours)

Q.1 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
Rupees in million
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
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.
 (2)

(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 implications.) (25)

Q.2 Being the financial consultant of Insha Chemicals Limited (ICL), a listed company, you have
been approached to advise on certain accounting issues. Accordingly, you are required to
explain how the following transactions should be disclosed in ICL’s financial statements for
the year ended June 30, 2009 in accordance with International Financial Reporting
Standards:
(a) In a board meeting held on January 1, 2009, the board of directors showed concern
over the poor results of one of the company’s cash generating unit, Lahore Division
(LD). It was principally decided in the meeting that this division should be
discontinued.
ICL’s CEO announced the closure of LD in a press conference held on February 15,
2009. He also informed that negotiations to sell the entire division are in progress and
the sale is expected to be finalized within few months.
On June 14, 2009, the CEO reported to the board of directors that negotiations with
Bashir Limited are proceeding well and the disposal of LD is expected to materialise
before July 31, 2009. However, it is estimated that the assets would be sold at 95% of
their fair value. (08)
(b) ICL operates a factory in an underdeveloped rural area. Most of the employees in the
factory have been hired locally. On observing the positive effects of the project, the
government had approved a grant of Rs. 100 million for ICL, on February 1, 2009 for
development of a similar factory in another underdeveloped area. However, it had been
agreed that disbursement would be made in three phases. The relevant details are as
follows:
Amount
Phases Comments
Rs. in million
Before commencement 10 No condition is attached to this phase of the
of the construction grant and it was received on March 1, 2009.
During the construction 40 Total cost of construction is estimated at Rs.
of factory 200 million. The construction was 30%
complete, as of June 30, 2009. The estimated
life of the property, plant and equipment is 15
years and it would be depreciated on the
straight line basis.
When the factory 50 It has been agreed that 400 local persons would
becomes operational be employed. The amount will be given in five
equal annual installments. If employment drops
below 400 at any time in any of the five
subsequent years, no amount would be paid in
that year. (09)
 (3)

Q.3 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:
(i) 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.
(ii) 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.
(iii) 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.
(iv) RL does not expect to pay any dividend during the next three years.

Required:
Prepare the journal entries:
(a) to record the above transactions in the books of Rahman Limited for the year ending
June 30, 2010, 2011 and 2012.
(b) to record the settlement of right on June 30, 2012 under:
 Option I
 Option II. (15)

Q.4 Sachal Limited (SL) is planning to acquire 100% shareholdings in Waris Limited (WL).
Before submission of financial proposal, SL is carrying out an analysis of WL’s financial
and operating performance. The CFO of SL has gathered the following information which is
based on the financial statements for the year ended December 31, 2008:

WL’s Industry Ratios

Description
Ratios High Low Average
Operating Performance Ratios
Gross profit 29% 30% 20% 25%
Operating profit 11% 15% 10% 13%
Return on shareholders equity 9% 13% 7% 10%
Working Capital Ratios
Current ratio 1.54 : 1 2:1 1:1 1.5 : 1
Inventory turnover days 83 days 114 days 81 days 91 days
Receivables collection 93 days 95 days 60 days 74 days
Gearing Ratios
Debt equity ratio 55 : 45 60 : 40 40 : 60 50 : 50
Interest cover 1.3 times 3 times 1.2 times 2 times
Investors Ratios
Earnings per share Re. 0.9 Rs. 1.8 Re. 0.75 Rs. 1.2
Dividend per share Re. 0.2 Re. 0.9 Re. 0.25 Re. 0.6

Required:
(a) Draft a report to the board of directors, on behalf of the CFO, analyzing the financial
performance of Waris Limited by evaluating each category of ratios in comparison with
the industry. (Do not write your name or any identification in the report) (12)
(b) List any four types of additional information which would have helped you in a better
analysis. (04)
 (4)

Q.5 Lateef Bank Limited (LBL) is listed on Karachi and Lahore Stock Exchanges and has 150
branches including 10 overseas branches. The LBL’s lending to financial institutions as of
September 30, 2009 comprised of the following:
(i) Call money lending at year end amounted to Rs. 850 million (2008: Rs. 1,200 million).
The markup on these unsecured lendings ranged between 15% to 17% (2008: 10% to
12%) and they matured on various dates, in October 2009.
(ii) Short term lending on account of repurchase agreement (reverse repo) amounted to Rs.
2,100 million (2008: Rs. 2,850 million). These carried markup ranging from 9.5% to
13.2% (2008: 8% to 10.5%) and matured on various dates, in October 2009. These
were secured against Market Treasury Bills of Rs. 1,650 million (2008: Rs. 1,850
million) and Pakistan Investment Bonds of Rs. 450 million (2008: Rs. 1,000 million).
The market value of these securities held as collateral, on September 30, 2009,
amounted to Rs. 2,250 million (2008: Rs. 2,930 million).
The above amounts include lendings in foreign currencies amounting to Rs. 110 million
(2008: Rs. 150 million).

Required:
Prepare a note on “Lendings to Financial Institutions” for inclusion in LBL’s financial
statements for the year ended September 30, 2009 giving appropriate disclosures in
accordance with the guidelines issued by State Bank of Pakistan. (12)

Q.6 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. (15)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2009
A.1 Habib Limited
Consolidated Statement of Financial Position
As at June 30, 2009
Working Rs. in million
Assets
Non-current assets
Property, plant and equipment (978 + 595 - 4 + 0.5) 1,569.50
Goodwill 1 28.90

Current assets
Stocks in trade (210 + 105 - 5) 310.00
Trade and other receivables (122 + 116 – 24) 214.00
Cash and bank (20 + 38 +500) 558.00
Total assets 2,680.40

Equity and liabilities

Equity
Ordinary Share capital (Rs. 10 each) 800.00
Retained earnings 4 1,056.40
1,856.40
Non-controlling interest 5 142.00
1,998.40
Non-current liabilities
12% debentures 270.00

Current liabilities
Short term loan 124.00
Trade and other payables (172 + 140 – 24) 288.00
412.00
Total equity and liabilities 2,680.40

Working 1 - Goodwill HL
Purchase consideration 400.00
Net assets acquired
Share capital (360 x 60%) 216.00
Pre acquisition retained earnings (250 x 60%) 150.00
366.00
34.00
Less: Impairment of goodwill (Rs. 34m x 15%) (5.10)
28.90
Working 2: Step Adjustment (FL's additional acquisition)
[Para 41 & 42 of IFRS-3]
Non controlling interest before additional acquisition
(Rs. 360m + Rs. 400m) x 40% 304.00
Non controlling interest after additional acquisition
(Rs. 360m + Rs. 400m) x 20% (152.00)
Reduction in NCI 152.00

Fair value of consideration paid (120.00)

Gain to retained earnings 32.00
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2009

Working 3: Gain on disposal of ML Rs. in million

Sale proceeds 500.00
Net assets prior to disposal
Net assets at June 30, 2009 550.00
Less: Profit from Jan 1, 09 to Jun 30, 09 (Rs. 50 ÷ 2) (25.00)
Net assets at December 31, 2008 525.00
Add: Goodwill (Working 3.1) 48.00
Less: Non controlling interest (Rs. 525m x 30%) (157.50) 415.50
Gain on disposal 84.50

Working 3.1 - Goodwill of ML

Purchase consideration 300.00

Net assets acquired

Share capital (100 x 70%) 70.00
Retained earnings (260 x 70%) 182.00
252.00
48.00

Working 4: Retained Earnings

HL's retained earnings (given) 784.00
Impairment of FL's goodwill (5.10)
Post acquisition reserve of FL
(400 - 250) x 60% 90.00
(354 - 400) x 80% (36.80)
Step adjustment (Working 2) 32.00
Gain on disposal of ML 84.50
Post acquisition profit of ML ([Rs. 425m - Rs. 260m] x 70%) 115.50
Unrealized gain in inventory (5.00)
Unrealized gain in sale of machine (4m x 80%) (3.20)
Reversal of excess depreciation (4m ÷ 4 * 6 /12) 0.50
1,056.40

Working 5: Non Controlling Interest

Share in FL's net asset at June 30, 09 (Rs. 714 x 20%) 142.80
Unrealized gain in sale of machine (4m x 20%) (0.80)
142.00

A.2 (a) ICL should classify LD as a disposal group because LD’s carrying amount is to be recovered through
a sale transaction rather than continuing use.

This is an adjusting event because the following conditions specified in the IFRS 5 have been met
prior to year-end:

(i) The disposal group is available for sale in its present condition. (No changes/alterations are
intended to be made in the assets prior to the sale)

(ii) The sale is highly probable on account of management’s intention, negotiation, price is
reasonable in relation to its fair value, sale is expected within one year and no change in plan is
expected.
Consequently, LD should be recorded as “held for sale” in ICL’s financial statements and the related
disclosures should be as follows:
(i) A single amount in the Statement of Comprehensive Income comprising the total of
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2009
 the post tax profit or loss of discontinued operation and
 the post tax gain or loss recognized on the measurement to fair value less costs to sell.

(ii) An analysis of the single amount referred to in (i) above, into:

 The revenue, expenses and pre-tax profit or loss of discontinued operations;
 The gain or loss recognized on the measurement to fair value less costs to sell.
 The related income tax expense bifurcating the tax relating to:
 The profit or loss from ordinary activities of the discontinued operation for the period,
together with the corresponding amounts for each prior period presented;
 Gain or loss on discontinuance;

(iii) Net cash flows attributable to the operating, investing and financing activities of the
discontinued operations.

Additional disclosure
ICL shall disclose the following information in the notes in the period in which the disposal group
has been classified as held for sale:

(a) a description of the disposal group;

(b) a description of the facts and circumstances leading to the expected disposal, and the expected
manner and timing of that disposal

A.2 (b) According to IAS-20, Government Grants are to be recognized as income over the periods necessary
to match them with related costs which they are intended to compensate, on a systematic basis.

Rs. 10 million related to the first phase was received prior to year end and should be recognized as a
liability in the Statement of Financial Position as on June 30, 2009 because the cost of asset which
the grant is intended to compensate, have not been completed or brought into use.

Similarly, if the amount of Rs. 40 million related to the second phase is received before the
completion of the construction of the factory, it would also be recorded as a liability.

The grants related to the first two phases i.e. Rs. 10 million and Rs. 40 million can be classified as
‘grant related to asset’.

Once the construction of the factory is completed, government grant related to both phases should be
recognized as income over the period of property, plant and equipment’s depreciable life i.e. 15
years. IAS-20 allows two methods to record this income.

(i) Method 1: To show the grant as a deferred income. In this case, the grant amount of Rs. 50
million will be shown as deferred income and will be credited to income over the life of the
property, plant and equipment.

(ii) Method 2: To net off the grant against the cost of asset. In this case, depreciation will be
charged on the cost as reduced by the amount of the grant, over life of the asset i.e.15 years.

The annual amount of the grant to be received in the third phase would be recorded as income when
there is a reasonable assurance that:

 The company will comply with the condition i.e. employment of 400 locals.
 The grant will be received.
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2009
A.3 (a) Date Description Debit Credit

6/30/2010 Salaries Expense 3,039,999

Liability (Rs. 130 x 64,000 / 3) 2,773,333
Equity (Rs. 0.8m (W-1) / 3) 266,666

6/30/2011 Salaries Expense 3,381,334

Liability (Rs. 64,000 x 138 x 2/3) - Rs. 2,773,333 3,114,667
Equity (Rs. 0.8m / 3) 266,667

6/30/2012 Salaries Expense 3,978,667

Liability [(Rs. 64,000 x 150) - Rs. 2,773,333 - Rs. 3,114,667] 3,712,000
Equity (Rs. 0.8m / 3) 266,667

(b) Date Description Debit Credit

6/30/2012 If cash alternative is chosen [Para 40 of IFRS-2]

Liability (64,000 x 150) OR (2,773,333 + 3,114,667 + 3,712,000) 9,600,000
Cash / Bank 9,600,000

If share alternative is chosen [Para 39 of IFRS-2]

6/30/2012 Liability (80,000 shares) (2,773,333 + 3,114,667 + 3,712,000) 9,600,000
Equity 9,600,000

W-1: identifying the equity component

The fair value of shares alternative
(80,000 x 110 ) 8,800,000
The fair value of debt instrument
(64,000 x 125) 8,000,000
Fair value of the equity component in the compound instrument 800,000

A.4 (a) To: Board of Directors

From: Chief Financial Officer
Date: December 8, 2009
Subject: Financial and Operating Performance of Waris Limited

As requested, I have analyzed the financial performance of Waris Limited (WL) with the industry
with a view to evaluate the feasibility of launching a takeover bid. My analyses of each category of
ratios is as follows:

Profitability Ratios
The gross profit ratio is near to the highest while the operating profit is near to the lowest as
compared to similar companies. It indicates that key issue which is affecting WL’s profitability is its
lack of control over operating expenses. The positive aspect of this situation is that we may be able
to improve the profitability just by controlling the operating expenses without being required to
make significant changes in the current operations of WL.

Return on shareholders’ equity is around the average prevailing in the industry. This ratio is
obviously, related to operating profit and as discussed above it can be improved by exercising
greater control over operating expenses, after take over.

Working Capital Ratios

WL’s working capital ratios specially the current ratio indicates that the company’s liquidity position
is in line with the industry average. Hence, it seems that the company’s working capital is being
appropriately managed although there may be some room for improvement.
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2009
The inventory turnover is among the lowest in the industry which shows that sound inventory
management policies are in place.
However, the level of receivables is among the highest in the industry. The possible causes of the
situation may be as follows:

 Poor efforts in making collections

 Lack of proper credit control policies or slackness in their implementation.
 Chances of bad debts which may not have been provided.
 Sales to related parties.
 Fictitious sales.

We need to seek appropriate explanations and investigate the matters if possible.

Gearing Ratios
The debt equity ratio is on the higher side but can be restructured after acquisition. However, the
interest cover is only 1.3. It is among the lowest in the industry and is indicative of a high degree of
risk as the profits are barely able to cover the interest charges. Even a slight decline in the
profitability of the company may have highly adverse impact on the company’s bottom line.

Investor Ratios
Earning per share is on the lower side. However, it can be improved by improving profits as
discussed while comparing performance ratios. WL’s dividend payout is the lowest (22.2%) in terms
of percentage among other similar companies. Generally, past history of dividend payouts is not
relevant to our bid decision. However, low dividend may also be on account of liquidity problems
and we should consider this aspect.

Conclusion
The company’s performance indicates a mixed trend. However, it may be concluded that below
average performance, (wherever applicable) can be improved by revisiting the situation and bringing
about necessary changes in the policies.

(b) Following additional information could have been useful for a better analysis of the situation:

(i) Any recent audited or management accounts.

(ii) Comparison of accounting policies following by the companies in the same industry and the
possible impact thereof on the above ratios.
(iii) Expected growth in future earnings
(iv) Alternative investment opportunities
(v) Effect of synergy
(vi) WL’s market reputation;
(vii) Quality of human resource within the company;
(viii) Research and development activities
(ix) Legal framework and industry risks

A.5 8 LENDINGS TO FINANCIAL INSTITUTIONS

Notes 2009 2008
Rupees in million
Call money lending 8.2 850 1,200
Repurchase agreement lending (Reverse Repo) 8.3 2,100 2,850
2,950 4,050

8.1 Particulars of lending

In local currency 2,840 3,900
In foreign currencies 110 150
2,950 4,050
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2009
8.2 These are unsecured lendings to financial institutions, carrying mark up ranging from 15% to 17%
(2008: 10% to 12 % and will mature latest by October 2009.

8.3 These are short term lendings to various financial institutions and are secured against government
securities shown in note 8.4 below. These carry mark up at rates ranging from 9.5% to 13.2 %
(2008:8% to 10.5 %) and will mature on various dates, latest by October 2009.

8.4 Securities held as collateral against lending to financial institutions

Rs. in million
2009 2008
Further Further
Held by Held by
given as Total given as Total
bank bank
collateral collateral
Market Treasury Bills 1,650 - 1,650 1,850 - 1,850
Pakistan Investment Bonds 450 - 450 1,000 - 1,000
2,100 - 2,100 2,850 - 2,850

Market value of the above as at September 30, 2009 amounted to Rs. 2,250 million 2008: 2,930
million).

A.6 The figures given in the question suggest that company had the funds in addition to sale proceeds to
pay for cost associated with PIB investment. Therefore, Present Value has been taken as Rs.
104,641,483 (Rs. 100,000,000 + Rs. 4,641,483).

Interest Effect of
Opening Expected cash Income to be
income @ change in Closing balance
balance flow recognized
15.5% estimate
A B C=A x 15.5% D E=A+B+C+D C+D
----------------------------------------------------Rupees--------------------------------------------
2008 104,641,483 (15,000,000) 16,219,430 - 105,860,913 16,219,430
2009 105,860,913 (15,000,000) 16,408,441 1,622,535 108,891,889 18,030,976
2010 108,891,888 (20,000,000) 16,878,243 - 105,770,132 16,878,243
2011 105,770,131 (20,000,000) 16,394,370 - 102,164,502 16,394,370
2012 102,164,501 (118,000,000) 15,835,498 - - 15,835,498

Computation of effect of change in estimate

Discounted by
Revised Expected
Effective rate Discounted
Cash Flow
(15.5%)
2010 (20,000,000) 0.8658 17,316017
2011 (20,000,000) 0.7496 14,992,223
2012 (118,000,000) 0.6490 76,583,649
Revised present value 108,891,889
Existing Present Value (105,860,913-15,000,000+16,408,441) 107,269,354
Effect of change in estimate 1,622,535

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2010

June 8, 2010

ADVANCED ACCOUNTING AND FINANCIAL REPORTING

(MARKS 100)
(3 hours)

Q.1 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.

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
Rupees in million
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) (57)
Other income 10 - -
Financial charges (12) (4) -
Taxation (26) (5) (10)
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.
 (2)

(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.
(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 in accordance with the International Financial
Reporting Standards. (Ignore deferred tax implications) (30)

Q.2 The following information pertains to ABC Limited, in respect of year ended March 31,
2010.

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. (17)
 (3)

Q.3 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). (13)

Q.4 Secured Bank Limited (SBL) is listed on all the Stock Exchanges in Pakistan. The cost of
various types of Investments held by the bank as of December 31, 2009 are as follows:

2009 2008
Rupees in million
Market treasury bills 366 309
Pakistan investment bonds 69 61
Government of Pakistan bonds (USD/Euro) 26 30
Investments in associates 9 8
Fully paid-up ordinary shares – listed 6 5
Fully paid-up ordinary shares – unlisted 2 3
Corporate debt instruments – listed 19 30
Corporate debt instruments – unlisted 260 210
Investments of mutual funds 32 28
Overseas government securities 60 52
Other investments 19 29

Provision for diminution / impairment in the value of investments as at January 1, 2008

amounted to Rs. 28 million. Other information relevant to the provision is as under:

Impairment (reversal) / loss for the year (6) 2

Charge for the year 17 12
Amounts written off during the year 5 3

Required:
Prepare a note on ‘investments by segments’ for inclusion in SBL’s financial statements for
the year ended December 31, 2009 giving appropriate disclosures in accordance with the
guidelines issued by the State Bank of Pakistan. (12)
 (4)

Q.5 The following is a summarised trial balance of Sun Enterprises Limited for the year ended
December 31, 2009:
Debit Credit
Rupees in ‘000
Ordinary shares of Rs.10 each 50,000
Retained earnings as at January 1, 2009 15,600
Property, plant and equipment at cost 81,000
Accumulated depreciation 17,000
Note receivable 8,000
Trade receivables 16,070
Inventory as of December 31, 2009 12,400
Cash and bank 2,000
Trade payables 16,700
Income tax payable 2,400
Deferred tax liability 3,300
Provision for environmental cost 500
Sales revenue 133,300
Cost of sales 85,000
Environmental costs 500
Operating expenses 16,000
Financial charges 1,000
Tax expense 11,830
Dividends paid on equity shares 5,000
238,800 238,800

On reviewing the financial statements, the audit committee is of the view that the
requirements of the Companies Ordinance 1984 and International Financial Reporting
Standards (IFRSs) have not been fully complied. It has asked you to look into the under-
mentioned items:

(i) Note Receivable: The note receivable dated January 1, 2009 represents the amount due
from a major customer of the company. Its due date is December 31, 2011. No interest
is being charged on the note in view of the large amount of business undertaken by the
customer. Normal commercial rate for such type of unsecured financing is 12%.

(ii) Inventory/cost of sales: Inventory valuation method has been changed during the
current year, from weighted average to FIFO. The value of inventory at December 31,
2009 applying weighted average method would have been Rs. 12 million. Value of
opening inventory under the weighted average method was Rs. 8.2 million whereas its
value under the FIFO method would have been Rs. 9 million.

Cost of sales includes an amount of Rs. 3 million which was spent on repair of
uninsured property which was damaged in an earthquake.

(iii) Environmental costs: It is estimated that cost of restoring the site of mines would
amount to Rs. 5 million. The estimate is based on expected prices prevailing at the end
of useful life of the mines which is 10 years. 1/10th of the cost has been provided in the
current year. The rate of inflation over the next 10 years is estimated at 10%.

(iv) Taxation: On account of certain disallowances, the amount of tax paid by the company
in 2009 in respect of tax year 2008 exceeded the amount provided in the accounts by
Rs. 0.20 million which was debited to Deferred Tax Payable account. The company
does not intend to file an appeal against these disallowances. Current year’s taxable
income exceeds the accounting income by Rs. 3 million of which Rs. 2.50 million are
temporary timing differences. Tax rate applicable to the company is 35%.

Required:
Prepare a Profit and Loss Account for the year ended December 31, 2009 in accordance with
IFRSs. (Ignore comparative figures) (16)
 (5)

Q.6 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. (12)
(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2010

A.1 Parent Limited

Consolidated Statement of Financial Position
As at December 31, 2009

Assets Rs. in million

Non-current assets
Property, plant and equipment W1 199.0
Goodwill W2 11.0
210.0
Current assets
Stock in trade W5 43.2
Trade and other receivables (25+5+8/2) 34.0
Cash and bank (3+1+2/2) 5.0
82.2
292.2
Equity and Liabilities
Ordinary share capital 50.0
Retained earnings {(78-49)+(28-18)/2)+60.2} 94.2
144.2
Non-controlling interest (30*20%)+1) 7.0
Long term loans (75+12) 87.0
Trade and other payables (25+18+22/2) 54.0
292.2
Parent Limited
Consolidated Statement of Comprehensive Income
For the year ended December 31, 2009

Sales {(1,267+276+(654/2)-10-20/2} 1,850.0

Cost of sales W4 (1,307.3)
Gross Profit 542.7
Selling Expenses (174+68+100/2) (292.0)
Administrative expenses (88+30+57/2)+1 (147.5)
Other income 10.0
Financial charges (12+4) (16.0)
Net Profit before tax 97.2
Taxation (26+5+10/2) (36.0)
61.2
SL Non Controlling Interest W3 (1.0)
Net Profit after NCI 60.2
W1: Non-current assets
Property, plant and equipment (120+40+74/2) 197.0
Fair value adj. equipment (15-12) 3.0
Depreciation on increased value (3/3) (1.0)
199.0

W2: Goodwill – SL
Capital 15.0
Pre-acquisition profit (18-8) 10.0
Pre-acquisition equity 25.0
Fair value adjustment of equipment (15-12) 3.0
Fair value adjustment of Inventory (12-10) 2.0
Adjusted equity 30.0
PL’s share (30*80%) 24.0
PL’s investment in SL at cost (35.0)
Goodwill 11.0
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2010

W3: Non-controlling interest in SL’s profit

Profit for the year 8.0
Additional deprecation on increased value of equipment (1.0)
Reversal of profit on pre-acquisition inventory accounted for at pre-acquisition (2.0)
Adjusted profit for the year 5.0
Non-controlling interest (5*0.2) 1.0

W4: Cost of sales

Cost of sales {928+161+469/2} 1,323.5
Inter-company purchase / sale eliminated (10+20/2) (20.0)
Unearned profit on inter-company sale stock in hand (2+4/2)/1.25*0.25 0.8
Reversal of profit on pre-acquisition inventory accounted for at pre-acquisition 2.0
Decrease in closing inventory due to change from Weighted average to FIFO (16-14)/2 1.0
1,307.3

W5: Stock in trade

Stock in trade (20+17+16/2) 45.0
Unearned profit on inter-company sale stock in hand (2+4/2)/1.25*0.25 (0.8)
Decrease in closing inventory due to change from Weighted average to FIFO (16-14)/2 (1.0)
43.2

A.2 ABC Limited

Notes to Consolidated Financial Statements
For the year ended March 31, 2010
2010
Rs. in '000
Earnings per share basic
Profit after tax and minority interest (15,000-2,000) 13,000
Dividend paid during the year to ordinary shareholders (Rs. 4,000) -
10% Cumulative preference dividend for 2009 (Rs. 2,000) -
10% Cumulative preference dividend for 2010 (2,000)
Dividend declared on 12% non cumulative preference shares for 2010 (2,400)
Profit available for distribution to ordinary share holders 8,600

No. in '000
Weighted average number of ordinary shares W1 13,146
Earnings per share - Basic and diluted Rs. 0.65

Diluted earnings per share Rs. in '000

Profit available for distribution to ordinary share holders 8,600
Effect of dividend declared on 12% non cumulative preference shares convertible into
ordinary shares on or before December 31, 2011 2,400
11,000
Weighted average number of ordinary shares W1 13,146
12% Non cumulative preference shares convertible to ordinary shares on
or before December 31, 2011 W2 1,771
Weighted average number of ordinary shares - diluted 14,917
Antidiluted earning per share Rs. 0.74
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2010

W1: Weighted average ordinary shares outstanding for "Basic EPS"

No. of shares in ‘000
Time lines Bonus 2010
Actual Period
Adjustment (Weighted
shares Adjustment
factor (W3) shares)
01-04-09 to 30-06-09 Outstanding on April 1, 2009 10,000 1.008333X1.2 3/12 3,025

01-07-09 to 30-09-09 Outstanding on July 1, 2009

Opening 10,000
Conversion of 500,000 12%
Cumulative preference shares
into ordinary shares at a 417
premium of Rs. 2 per share
(500/12*10)
10,417 1.008333X1.2 3/12 3,151
01-10-09 to 31-03-10 Outstanding on Oct.1, 2009
Opening 10,417
1,200,000 shares of Rs. 10
each were issued at Rs. 11.5
per share against the market
price of 12.5 1,200
11,617 1.2 6/12 6,970
13,146

W2: Weighted average ordinary shares resulting from conversion for "Diluted EPS"
Time lines 2010
Actual Period
(Weighted
shares Adjustment
shares)
01-04-09 to 30-06-09 Outstanding on April 01, 2009 3,025
Share converted on July 1,
417
2009
Shares to be converted
(2,400/12%/10)*10/12 1667

2084 3/12 521

01-07-09 to 31-03-10 Outstanding on July 1, 2009 1667 9/12 1250

1771

W3: Calculation of bonus adjustment factor

Rs. in
No. of shares @ Rs.
'000
Bonus element with right issue
Outstanding shares before the exercise of rights at fair value 10,417 12.50 130,213
Rights issued at a premium of Rs. 1.5 1,200 11.50 13,800
11,617 144,013
Theoretical ex-right value per share (144,013/11,617) Rs. 12.3967
Adjusting factor (Fair value 12.5 / Theoretical ex-right value 12.3967) 1.00833

Bonus issued on January 01, 2010 (20%)

Adjusting factor 1.2
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2010

A.3 Auto Construction Limited

Notes to the Financial Statements
For the year ended December 31, 2009

1. Liabilities against assets subject to finance lease

Rs. in '000
Present value of minimum lease payment W1 37,001
Less: Current portion shown under current liabilities W1 (6,572)
30,429

Minimum lease Future finance PV of lease

payments cost liability 2009
------ Rs. in '000 ------
Not later than one year W2 11,000 952 10,048
Later than one year and not later than five
years W2 38,500 11,547 26,953
49,500 12,499 37,001

The minimum lease payments have been discounted at interest rate of 12.506% per annum to arrive at
the present value.

2. Operating lease rental receivable

Later than one
Not later than
year and not later Total
one year
than five years
------ Rs. in '000 ------
Future minimum lease payment W3 10,250 16,276 26,526

For the construction machinery the company has entered into an operating lease agreement on July 1,
2009 for 3 years at a half yearly rent of Rs. 5 million, payable in advance with 5% annual increase.

W1: Finance lease interest and payment schedule

Finance
Instalment Principal Closing
Instalment payment date expense @
amount recovery balance
12.506%
July 1, 2009 (Total lease amount) 40,000
31-Dec-2009 (Paid) 5,500 2,501 2,999 37,001
30-Jun-2010 5,500 2,314 3,186 33,815
31-Dec-2010 5,500 2,114 3,386 30,429
11,000 4,428 6,572
30-Jun-2011 5,500 1,903 3,597 26,832
31-Dec-2011 5,500 1,678 3,822 23,010
30-Jun-2012 5,500 1,439 4,061 18,949
31-Dec-2012 5,500 1,185 4,315 14,634
30-Jun-2013 5,500 915 4,585 10,049
31-Dec-2013 5,500 627 4,873 5,176
30-Jun-2014 5,500 324 5,176 0
Payable later than one year and
38,500 8,071 30,429
not later than five years
55,000 15,000 40,000
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2010

W2: Present value

Present value at Instalment Financial
Due date Present value
12.506% amount charges
30-Jun-2010 0.9411 5,500 5,176 324
31-Dec-2010 0.8858 5,500 4,872 628
Not later than 1 year 11,000 10,048 952
31-Dec-2010 0.8336 5,500 4,585 915
30-Jun-2011 0.7846 5,500 4,315 1,185
31-Dec-2011 0.7384 5,500 4,061 1,439
30-Jun-2012 0.6949 5,500 3,822 1,678
31-Dec-2012 0.6541 5,500 3,598 1,902
30-Jun-2013 0.6156 5,500 3,386 2,114
31-Dec-2013 0.5793 5,500 3,186 2,314
Later than 1 year and not later than 5 years 38,500 26,953 11,547

49,500 37,001 12,499

W3: Operating lease payments

Not later than 1 year 01-Jan-10 5,000
01-Jul-10 5,250 10,250
Later than one year and not later than five years 01-Jan-11 5,250
01-Jul-11 5,513
01-Jan-12 5,513 16,276
26,526

A.4 Secured Bank Limited

Notes to the financial statements
For the year ended December 31, 2009
2009 2008
Rs. in million
9. INVESTMENTS BY SEGMENTS
Federal Government Securities
Market treasury bills 366 309
Pakistan investment bonds 69 61
Government of Pakistan bonds (USD/Euro) 26 30
Investments in associated undertakings 9 8
Fully paid ordinary shares
Listed companies 6 5
Unlisted companies 2 3
Bonds, Participation Term Certificates & Term Finance Certificates
Listed securities 19 30
Unlisted securities 260 210
Other Investments
Overseas government securities 60 52
Investments of mutual funds 32 28
Others 19 29
868 765

Less: Provisions for Diminution in value of investments 9.1 (45) (39)

Net investments 823 726

 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2010

2009 2008
9.1 Particulars of Provision for Diminution in value of investments Rs. in million
Opening balance 39 28
Charge for the year 17 12
Impairment / (Reversals) (6) 2
Amounts written off (5) (3)
6 11
Closing balance 45 39

A.5 Sun Enterprises Limited

Profit and Loss Account
For the year ended December 31, 2009
Rs. in '000
-3
Net sales {133,300-(8,000-8,000*(1/1.12) } 130,994
Cost of sales W1 (85,993)
Gross profit 45,001
Operating expenses (16,000)
Financial charges 1,000+193 {5,000*(1/1.10)-10*10%=193} (1,193)
Investment income on present value of note receivable {8,000*(1/1.12)-3*12%} 683
Profit before taxation 28,491
Taxation: Current W3 (11,830)
Prior (200)
Deferred W3 1,403
(10,627)
Profit after taxation 17,864
Rupees
Basic / Diluted earnings per share (17,864/5,000) 3.57

W1: Cost of sales

Cost of sales prior to adjustments 85,000
Depreciation on environmental cost capitalised at present value W2 193
Opening Inventory adjustment (FIFO 9,000 - WA 8,200) 800
Adjusted cost of sales 85,993

W2: Environmental cost

PV of environmental cost capitalised{5,000*(1/1.1)-10} 1,928
PV of environmental cost depreciated over useful life of the mines (1,928/10) 193

W3: Taxation
Profit before tax as per Profit and Loss Account 28,491
Add backs:
Deduction from current year’s sale of difference of actual and present values of
note receivable (133,300-130,994) 2,306
Interest on present value accounted for in the books (683+193) (683)
Increase in cost of sales due to change of inventory valuation method (9,000-8,200) 800
Financial charges on present value of environmental cost allowable on incurrence 193
Accounting depreciation on present value of environmental cost capitalized W2 193
Current year’s taxable income exceeds the accounting income as given 3,000
Deduction of provision for environmental cost from Rs. 3,000 as the provision
reversed in the books (500)
2,500
Taxable income 33,800
Tax for the year @ 35% 11,830
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2010

Payment of last year tax in excess of provision 200

Deferred tax charge/(reversal)
Temporary timing differences (2,500 – 500) (Note1) (2,000)
Accounting depreciation on environmental cost capitalized allowable in the year
of incurrence of cost. (193)
Financial charges on present value of environmental cost allowable on incurrence (193)
Deferred interest income excluded for tax (2,306-683) (1,623)
(4,009)
Deferred tax credit for the year (4,009*0.35) (1,403)
Total tax for the year (28,491+500+800)*0.35+200 10,627

Note: it has been assumed that timing differences of Rs. 2.5 million as referred to in the question
included provision for environmental cost of Rs. 0.5 million.

A.6 (a) In accordance with the IAS transactions related to the trademark as given in the question should be
accounted for as explained below:
(i) As the costs and benefits of the trade mark cannot be measured reliably, and it was not even
decided at that time to buy the trademark, the cost of Rs. 1 million incurred in 2001 to carry out
market survey should have been expensed out in the year 2001.

(ii) In 2002, the rights to use the trademark for the company’s products have been obtained and costs
and benefits of the trademark were measured reliably. Therefore, initially the trademark should
have been accounted for as an intangible asset at a cost of Rs. 5 million.

At that time the trademark was estimated to have indefinite useful life as there was an
expectation that it will contribute to net cash inflows indefinitely. Therefore, the trademark
should not have been amortised.

However, the trademark should have been tested for impairment and the cost should have been
reduced, if required.

Trademark fee payable at 1% of annual sales should have been treated as a periodical cost and
charged to expense in the year of sales.

(b) Comfort Shoes Limited

Notes to the Financial Statements
For the year ended December 31, 2008

1 Intangible Assets – Trademark

2009 2008
Rupees in ‘000
January 1 4,500 5,000
Cost For the year - impairment - (500)
December 31 4,500 4,500
January 1 - -
Amortization For the year 2,250 -
December 31 2,250 -
Net book value December 31 2,250 4,500
% / useful life 50% / 2 years -

1.1 The amortisation expense for the year has been allocated to cost of sales.

(THE END)
 The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examinations – Winter 2010 December 7, 2010
Module E 100 marks - 3 hours

Q.1 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.
(v) Exchange rates relevant to the preparation of the financial statements are as follows:

1 FC = Rs. 1 FC = Rs.
30-Jun-2009 / 1-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. (23 marks)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.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.
(iv) Contract costs incurred during the year do not include:
ƒ 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.
ƒ 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). (20 marks)

Q.3 Mahfooz General Insurance Limited (MGIL) is a listed company. The information pertaining to
the business underwritten inside Pakistan for the year ended June 30, 2010 is as under:

Direct and facultative Treaty

Fire & Marine,
Accident &
property aviation & Motor Proportional
health
damage transport
------------------------------------ Rupees in million ------------------------------------
Claims:
Total claims paid 900 450 1,150 250 13
Outstanding - Opening 600 400 900 300 10
Outstanding - Closing 500 450 750 150 12

Reinsurance and other recoveries:

Total received 600 300 850 160 -
Outstanding - Opening 500 300 700 150 -
Outstanding - Closing 350 400 550 80 -

Required:
Prepare a statement of claims for the year ended June 30, 2010 in accordance with the Insurance
Ordinance, 2000. Ignore the comparative figures. (12 marks)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.4 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
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
ƒ Owners of the parent 100
ƒ Non-controlling interest 15
115

Consolidated Statement of Financial Position

Rs. in million
2010 2009 2010 2009
EQUITY AND LIABILITIES ASSETS
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 receivables 180 162
Current liabilities Short term deposits 10 -
Current maturity of long term loans 20 - Cash and bank balances 20 25
Trade creditors and other payables 262 287 471 387
Accrued financial expenses 8 5
Taxation 60 50
350 342
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:

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.
 Advanced Accounting and Financial Reporting Page 4 of 5

(iii) The following information pertaining to property, plant and equipment is available:

ƒ Total depreciation charge for the year was Rs. 70.0 million.
ƒ 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.
ƒ Fully depreciated assets costing Rs. 10.0 million were scrapped during the year.
ƒ Proceeds of a long term loan amounting to Rs. 5.0 million were specifically used for
purchase of property, plant and equipment.

(iv) 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)

Q.5 Following are the extracts from the latest annual published accounts of the two companies which
are engaged in similar types of businesses.

Statement of Financial Position

AB Limited XY Limited
Rupees in million
Property, plant and equipment 275 390
Inventories 125 45
Account receivables 130 50
Cash and bank balances 10 6
540 491

Share capital (Shares of Rs. 10 each) 210 215

Retained earnings 190 90
Long term liabilities 60 105
Current liabilities (other than bank overdraft) 80 60
Bank overdraft - 21
540 491

Income Statement for the year

Sales 900 825

Cost of sales (500) (530)
Gross profit 400 295
Operating and other expenses (135) (150)
Financial expenses (6) (10)
Profit before taxation 259 135
Taxation (100) (55)
Profit after taxation 159 80

Share market price at year end 140 50

Required:
(a) Comment on the strategic outlook of the management of the above companies based on their
debt equity ratio and liquidity position.
(b) Based on the price earnings ratio comment on the attractiveness of the two companies, from
the investors point of view. (10 marks)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.6 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:

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

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

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

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

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2010

A.1 Rainbow Textiles Limited

Consolidated Statement of Comprehensive Income
For the year ended June 30, 2010
FDL
Adjust-
1 FC = RTL 2010
FC in ments
Rs. 22.75
million
------------Rupees in million------------
568.7
Sales revenue 25.00 5 1,000.00 (30.00) 1,538.75
(341.25
Cost of sales (15.00) ) (450.00) 30.00 (761.25)
Unearned profit on inventory with FDL (1*22.5*0.2) (4.50) (4.50)
227.5
Gross profit 10.00 0 545.50 - 773.00

(113.75
Selling and distribution cost (5.00) ) (250.00) (363.75)
Dep. on increased value of land & building (3/20) (0.15) (3.41) (3.41)
Impairment of goodwill W-2 - (25.26) (25.26)

(22.7
Finance costs (1.00) 5) (25.00) (47.75)
Exchange gain on purchases (30/22.5)–
(30/23) 0.03 0.66 0.66
Profit before tax 3.88 88.25 245.24 - 333.48

(22.7
Taxation (1.00) 5) (100.00) (122.75)
Profit for the year 2.88 65.50 145.24 - 210.73
Other comprehensive income
Exchange gain on foreign operations (84.18 -65.5) W-1 18.68 18.68
Exchange gain on conversion of goodwill W-2 6.45 6.45
Total comprehensive income for the year 84.18 151.69 - 235.87
Profit attributable to:
 Non-controlling interest (65.5*30%) 19.65
 Owners of the parent (210.73-19.65) 191.08
210.73
Total comprehensive income attributable to:
 Non-controlling interest (84.18*30%) 25.25
 Owners of the parent (235.87-25.25) 210.62
235.87

W-1: FDL Post acquisition profit including exchange Conversion Rs. in

FC in million in Rupees
gain: million
Net assets at fair value as of 30-6-2010
(11+2.88) 13.88 23.50 326.18
Net assets at fair value on acquisition date of 1-7-2009 (11.00) 22.00 (242.00)
Post acquisition profit including exchange gain 84.18

W-2: Exchange gain on conversion of goodwill / impairment of goodwill

Goodwill at acquisition date of 1-7-2009 12-
(11*0.70) 4.30 22.00 94.60
Goodwill on reporting date of 30-6-2010 4.30 23.50 101.05
Exchange gain on conversion of goodwill 6.45
Impairment of goodwill by 25% of Rs. 101.05 25.26

Page 1 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2010

A.2 Extracts from Statement of Comprehensive Income for the year ended June 30, 2010
Rs. in million
Contract revenue recognized (800 x 55%) +( 400 x 25%) 540.00
Contract costs recognized (412.48+116.4) W-2 528.88

Statement of Financial Position as of June 30, 2010

Assets
Construction contracts in progress (8.12+42.3) Note-1 50.42
119.0
Account receivables (Net unpaid bills) (140*0.85) 0
Retentions held by the customers (640+80)*5% 36.00
Liabilities
Advances received from the customers {(800+400)-(640+80)}*10% 48.00

Notes to the accounts for the year ended June 30, 2010

Note 1: Construction contracts in progress A B

Rs. in million
Contract costs incurred up to June 30, 2010 (126.40 + 12.30) (c) 600.60 138.70
Recognized profit/(loss) (59.40 ×80%)/(16.40 × 100%) 47.52 (16.40)
648.12 122.30
Progress billings upto June 30, 2010 640.00 80.00
8.12 42.30

W-1 - Expected profit / (loss) on completion of the

contracts: A B
As of For
June For the the
30, year For the year
2010 2009 year 2010 2010
400.0
Contract price (a) 800.00 800.00 800.00 0
Work completion % up to June 30, 2010 (b) 80% 25% 55% 25%
125.0
contract costs incurred 600.00 180.00 420.00 0
Technical assistance fee incurred but not
allocated to the contracts 0.60 0.60 1.40
126.4
(c) 600.60 180.00 420.60 0
270.0
Estimated costs to complete 100.00 500.00 100.00 0
Estimated warranty works (5% of the contract
price) 40.00 40.00 40.00 20.00
Total estimated costs to complete the 416.4
contracts (d) 740.60 720.00 560.60 0
Estimated profit / (losse) on completion of the (16.40
contracts. (a)-(d) 59.40 )

W-2 : Contract costs to be recognised for the year ended June 30, 2010
Costs to be recognized upto June 30, 2010 W-1 (d)*(b) 592.48 104.10
Less: Costs recognised upto June 30, 2009 {(180+500)+(800*0.05)}*0.25 180.00 -
Costs for the year ended June 30, 2010 412.48 104.10
Add: Loss to be recognized {(400*0.25)+16.4}-104.1} 12.30
Contract costs to be recognised for 2010 412.48 116.40
Page 2 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2010

A.3 Mahfooz General Insurance Limited

Statement of Claims
For the year ended June 30, 2010

Business underwritten inside Pakistan

------------------------------------ Rupees in million ------------------
Reinsurance
and the

Net claims
Reinsurance and other

Reinsurance and other

expense
recoveries received

recoveries revenue
Outstanding recoveries in
Total claims paid

Claims expenses
claims respect of
outstanding
Class claims
Opening

Opening
Closing

Closing
2010

Direct and facultative

Fire and property damage 900 600 500 800 600 500 350 450 350
Marine, aviation &
transport 450 400 450 500 300 300 400 400 100
Motor 1,150 900 750 1,000 850 700 550 700 300
Accident and health 250 300 150 100 160 150 80 90 10
Total 2,750 2,200 1,850 2,400 1,910 1,650 1,380 1,640 760
Treaty
Proportional 13 10 12 15 - - - - 15
2,763 2,210 1,862 2,415 1,910 1,650 1,380 1,640 775

A.4 Karachi Group Limited

Consolidated Statement of Cash Flows
For the year ended June 30, 2010
Rs. in million
Cash flows from operating activities
Profit before tax 180.00
Adjustments for :
Share of profit in associates (5.00)
Depreciation 70.00
Trade mark impairment (6*50%) 3.00
Loss on exchange of machine (6.5+1)-7 0.50
Financial expenses 14.00
262.50
Increase in inventories (261-10-200) (51.00)
Increase in trade debtors and other receivables (180-8-162) (10.00)
Decrease in trade creditors and other payables (262-17-287) (42.00)
Cash generated from operating activities 159.50
Financial expenses paid* (5+14-8) (11.00)
Income taxes paid (50+65-60) (55.00)
Net cash from operating activities 93.50
*This may also be shown under financing activities

Cash flows from investing activities

Acquisition of subsidiary–Auto Engineering Works Ltd.(30-6) Note 1 (24.00)
Purchase of property, plant and equipment W-1 (55.00)
Dividend received from associates (10+5-12) 3.00
(76.00)

Page 3 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2010

Cash flows from financing activities

Proceeds from long term borrowings (125+20-120-5) 20.00
Dividend paid to controlling interest* (200*15%) (30.00)
Dividend paid to non-controlling interest* 28-(10+15+5.5) (2.50)
*these may also be shown under operating cash flow
(12.50)
Net increase in cash and cash equivalents 5.00
Cash and cash equivalents at beginning of the period Note 3 25.00
Cash and cash equivalents at end of the period Note 3 30.00

W-1 Purchase of property, plant and equipment

Balance - June 30, 2009 500.00
Depreciation for the year (70.00)
WDV of asset given up in trade-in (6.50)
423.50
Balance - June 30, 2010 (510.00)
Total additions for the year (86.50)
Less : Additions against loan 5.00
Fair value of subsidiary's assets acquired 20.50
New machine price adjusted against old machine (7-1) 6.00
Additions against cash payment (55.00)

Notes to the statement of cash flows

Note 1: Acquisition of subsidiary - Auto Engineering Works Limited
The control of a subsidiary, Auto Engineering Works Limited was acquired during the year.
The details of consideration paid, value of assets acquired and liabilities assumed are as
follows:
Rs. in million
Consideration paid in cash net of cash acquired (30-6) 24.00

Fair value of assets and liabilities:

Property, plant and equipments 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

Note 2: Property, plant and equipment

During the year, the group acquired property, plant and equipment with an aggregate cost
of Rs. 86.5 million as detailed below:

By acquisition of the subsidiary 20.50

Purchase against specific loan 5.00
Purchase against trade-in 6.00
Cash purchases (W-1) 55.00
86.50

Note 3: Cash and cash equivalents

2010 2009
Short term deposits 10.00 -
Cash and bank balances 20.00 25.00

Page 4 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2010

30.00 25.00

A.5 (a) AB Limited XY Limited

Debt equity ratio
Long term debts / Equity 60/400 105/305
0.15 0.34

 Debt equity ratio is useful in assessing the risk that a company may face by utilizing
excessive debt relative to its equity. The main risk may be the company’s inability to
repay the debt and interest thereon. However, profits after interest and tax earned by
the companies on the opening equity are 66% and 36% for AB and XY respectively. At
this level of profit, the above risk is less relevant in the case of AB Limited.
 It therefore seems that AB Limited is unduly risk averse and could have increased its
profitability by increasing its gearing. In this regard, the policy being followed by XY
Limited seems more appropriate.

Liquidity position
AB Limited XY Limited
Current ratio:
Current assets / Current liabilities (125+130+10)/80 (45+50+6)/(60+21)
3.31 1.25

Better current ratio is usually considered a positive sign indicating better liquidity
position of the company. However, it appears that current ratio for AB Limited is too high.

This situation is indicative of any one or more of the following:

 High levels of inventory are being maintained.
 Too lenient credit policies are being followed.
 Full benefit of suppliers' credit is not being obtained.

The above ratios should also be compared with the industry averages to assess the
performance in comparison with the general trend prevailing in the industry.

(b) Price earnings ratio (PE):

AB Limited XY Limited
140/(159/
Market price per share / Earnings per share 21) 50/(80/21.5)
18.49 13.44

 PE ratio expresses in a single figure the relationship between the market price of an
entity’s share and the earnings per share. AB Limited recovers share market price
in 18.49 years. In comparison, XY Limited is recovering market price in 13.44 years.
 A high PE ratio is an indication of investors' confidence in the company and
expectation that profit will show an increasing trend.
 However, if the ratio is too high as compared to the industry, it may indicate that
the share is overpriced.

Page 5 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Winter 2010

A.6 Debit Credit

Date Particulars
Rupees
30-Jun-2010 Bonus expenses {600 × 1,000 × (30-8)} 13,200,000
Employees share options outstanding
(600 × 1,000 × 0.6 × 22) 7,920,000
Provision for bonus (600 × 1,000 × 0.4 ×
22) 5,280,000
(To record acceptance of 60% share options
and bonus provision.)

31-Jul-2010 Provision for bonus (600 × 1,000 × 0.2 × 22) 2,640,000

Employees share options outstanding 2,640,000
(To record acceptance of further 20% share
option)

31-Jul-2010 Bonus expense (600 × 1,000 × 0.8 × 4) 1,920,000

Employees share options outstanding 1,920,000
(To record increase in fair market value per
share form Rs. 30 to Rs. 34)

31-Jul-2010 Provision for bonus

(600 × 1,000 × 0.2 × 22)-(600 × 0.2 ×
10,000) 1,440,000
Bonus expense 1,440,000
(Adjustment of bonus provision for 20%
workers not opted for the share option.)

01-Sep-2010 Provision for bonus (600 × 0.2 × 10,000) 1,200,000

Bank 1,200,000
(Cash payment of bonus)

01-Sep-2010 Bank (600 × 0.8 × 1,000 × 8) 3,840,000

Employees share options outstanding
(600 × 1,000 × 0.8 × 26) 12,480,000
Share capital (1,000 x 600 x 80% x 10) 4,800,000
Share premium {600×80%×1,000×(34–
10)} 11,520,000
(Issue of 480,000 shares of Rs. 10 each at a
premium of Rs. 24 per share, in exercise of
share option)

36,720,000 36,720,000

(THE END)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Winter 2010

Performance in this paper was an improvement on the previous attempts. However, many
students suffered from lack of knowledge and understanding of relevant IAS/IFRS in
respect of question No. 2 and more particularly question No. 6, which only hampered their
way to passing this paper.

Question-wise comments are given hereunder:

Q.1 This time the question on consolidation proved relatively easy as compared to
previous attempts. The thing which proved most difficult was the computation of
exchange gain resulting from translation of net assets into local currency and its
appropriate classification. The other common type of errors were as under:

(a) While computing unrealized gain on inventory, closing exchange rate was
used instead of rate at which inventory was transferred/sold.

(b) Some students computed exchange gain on purchases correctly but did not
translate it in to reporting currency. In some cases they failed to take the gain
to consolidated profit & loss account. Large number of students, did not
compute this gain at all.

(c) Depreciation on fair value adjustment was computed by applying closing

exchange rate instead of average rate.

(d) While computing profit attributable to non controlling interest, adjustments in

respect of depreciation on FV adjustment and exchange gain on purchase
were ignored.

(e) Surprisingly, some students computed share of profit attributable to non

consulting interest on consolidated profit instead of profit of FDL.

(f) Large number of students did not compute the exchange gain on translation
of net assets of foreign operation at all.

(g) Exchange gain on goodwill was credited to profit & loss accounts instead of
taking it to other comprehensive income directly.

(h) Students only provided the disclosure in respect of allocation of profit

attributable to non controlling interest and owner of the parent but did not
disclose the allocation of the total comprehensive income attributable to
them.

Page 1 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Winter 2010 examination

Q.2 This question aimed at testing the students knowledge and understanding of IAS-
11 (Construction contract). Common errors were as under:

(a) Estimated profit/loss in respect of each contract should have been computed
first before working out the proportionate profit on the basis of stage of
completion for contract A and charging the entire loss attributable to contract
B to current year profit. Instead, many students wasted time in computing the
percentage of completion (which was already provided in the question) for
each contract on the basis of cost data provided in the question.

(b) Cost incurred upto last year in respect of contract A was ignored while
computing cost incurred to date.

(c) Technical assistance cost and warranty work cost were ignored while
computing total estimated cost in respect of each contract.

(d) Large number of students did not provide disclosure in respect of balances of
Account receivables, Retention money and Advance received form customer.

(e) Advance received from customer and retention money were not deducted
from Account receivable.

(f) 5% of total progress billing being retention held by the customers was not
shown under current assets.

(g) Some students disclosed total net profit from both the contracts instead of
disclosing total contract revenue and total contract cost recognized for the
year.

(i) Unbilled contract revenue was ignored while computing contract revenue for
the year.

(j) While computing cost recognized upto last year in respect of contract A,
proportionate warranty cost was ignored.

Q.3 The question was simple as very few calculations were involved. Majority of the
students knew the disclosure requirements and were able to secure high marks.

Q.4 This was an easy question and large number of students secured good marks.
However, following errors were commonly observed in many scripts:

(a) While computing gain/loss on exchange of machine, additional payment of

Rs. 1 million was added to the FV of the machine instead of deducting it.

(b) Some students ignored the adjustment in respect of current assets of

subsidiary acquired during the year, while computing working capital
movement.

Page 2 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Winter 2010 examination

(c) Cash balance of the subsidiary at the time of its acquisition was not adjusted
from the consideration paid.

(d) In some cases accrued financial charges were shown under working capital
movement instead of using these balance for computing financial charges
paid.

(e) The heading “cash flow from operating activities” was not mentioned.

Q.5 The performance in this question was not up to the mark. Students wasted time in
providing computations which were not relevant for either part (a) or (b) of the
question. Large number of students were found deficient in the following areas:

(a) Large number of students only discussed the results worked out rather than
providing cogent argument to support the results.

(b) Very high current ratio as was the case in AB Limited is often on account of
poor working capital management i.e. maintaining high level of inventory,
following lenient credit policies, etc. This aspect was rarely discussed.

(c) Student failed to discuss a very important point that high level of price
earning ratio may be indicative of overpriced shares.

(d) Some students discussed profitability ratios which were not relevant.

(e) Concept of price to earning ratio was not clear as number of students either
restricted their computation to EPS or computed earning to price ratio.

(f) Most of the students failed to differentiate between gearing ratio and debt
equity ratio, which was evident from the fact that they computed the former,
instead of the latter.

(g) It is surprising, particularly at this final stage that while computing debt
equity ratio, only share capital was taken as denominator and retained
earnings was ignored.

(h) It was again surprising, that some students included current liabilities as part
of debt, while computing debt equity ratio.

Q.6 The question aimed to test students’ understanding on share based payments in
terms of IFRS-2. Large number of students did not attempt the question at all.
However, those who tried to attempt the question, did not appear to have
understood it correctly. Common types of mistakes were as under:

(a) The amount of bonus was booked to the extent of option exercised by the
employees at relevant date instead of booking the whole amount of bonus at
the vesting date and adjusting the excess amount for the portion not exercised
by the employees at the end of the vesting period.

Page 3 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Winter 2010 examination

(b) Adjustment in respect of change in fair value of the shares was not
considered.

(c) The amount of bonus was recorded at fair value instead of intrinsic value.

(d) Issuance of shares was recorded at the date of exercise of option instead of
the date on which shares were actually issued i.e. September 01, 2010.

(THE END)

Page 4 of 4
 The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examinations June 7, 2011
Reading time – 15 minutes
Summer 2011 – Module E 100 marks – 3 hours

Q.1 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:
Face value of Purchase
Acquisition date shares acquired consideration
Rs. in million
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.
(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. (16 marks)
 Advanced Accounting and Financial Reporting Page 2 of 4

Q.2 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 million
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 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)
 Advanced Accounting and Financial Reporting Page 3 of 4

Q.3 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)

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

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.
10,000 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:
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)
 Advanced Accounting and Financial Reporting Page 4 of 4

Q.5 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 million
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)

Q.6 Following information has been extracted from the records of A-One Asset Management Fund
Limited for the year ended March 31, 2011.

Rs. in million
Net assets at the beginning of the year (900 million units) 27,000
100 million units issued during the year 3,500
95 million units redeemed during the year 3,277
Investments classified as ‘available for sale’
 Fair value at year end 1,800
 Carrying value at year end 1,200
 Net unrealized appreciation in fair value of investments
at the beginning of the year 480
Investments classified as ‘at fair value through profit or loss -
held for trading’
 Fair value at year end 2,500
 Carrying value at year end 2,200
Element of income and capital gains included in prices of
units issued/redeemed and transferred to income statement 173
Capital gains 400
Other net income for the year 3,000

Final distribution for the year ended March 31, 2011 of Rs. 5.00 per unit (2010: Rs. 4.00 per unit)
was announced on April 16, 2011.

Required:
Prepare a statement of movement in unit holders' fund for the year ended March 31, 2011.
(12 marks)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2011

A.1 Oceana Global Limited

Consolidated Statement of Financial Position
As of March 31, 2011 2011
Rs. in million
Assets
Non-current assets
Property, plant and equipment {700+200+(35 –10)} 925.00
Goodwill W-1 21.00
946.00
Current assets (350+150 –1.25–15) 483.75
1,429.75
Equity and liabilities:
Capital and reserves
Share capital 300.00
Retained earnings W-2 564.31
864.31
Non-controlling interest W-3 78.44
942.75
Non-current liabilities (150+40) 190.00
Current liabilities (182+130 –15) 297.00
1,429.75
W-1 Goodwill
Fair value of 10% equity interest as of October 1, 2010 28.00
Purchase consideration for further acquisition of 45% equity 108.00
Fair value of non-controlling interest 70.00
Total purchase consideration 206.00
IGL identifiable net assets on acquisition date of Oct. 1, 2010 (100+60+35-10) (185.00)
21.00

W-2 Retained earnings – OGL

Balance as of 31-3-2011 550.00
Cost incurred during the year for acquisition of 45% equity in RGL (4.00)
Fair value reserve - transferred to PL on deemed disposal of 10% equity
in RGL 3.00
Increase in fair value of 10% equity as of October 1, 2010 (28-23) 5.00
Post acquisition profit share in RGL (80 – 60 – 1.25) × 55% 10.31
564.31

W-3 Non-controlling interest in RGL

Fair value of NCI as of October 1, 2010 70.00
NCI share in post acquisition profit (80 – 60 – 1.25 ) × 45% 8.44
78.44

W-4 Unrealized profit on inter company stock in hand (30 – 25) × 25% 1.25

Page 1 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2011

A.2 Kahkashan Limited

Statement of Comprehensive Income
For the year ended March 31, 2011 2011
Rs. in million
Sales 800.000
Cost of sales (640.000)
Gross profit 160.000
Other operating income [13-9(ii)-1(iii)] 3.000
Selling and distribution expenses (32.000)
Administrative expenses [15+5(iv)+0.6(iv)] (20.600)
Financial charges [10+0.591(i)] (10.591)
Share of profit of associates - net of tax (iii) 2.500
Profit before taxation 102.309
Taxation (v) (35.183)
Profit for the year 67.126
Other comprehensive income, net of tax
Share of other comprehensive income of associates (iii) 0.500
Total comprehensive income for the year 67.626

(i) Additional finance cost on redeemable TFC

Cash out- PV at 14% Rs. in
Date flow discount million
31-Mar-2011 PV of 1st. Year payment of interest (50*12%) 6.00 0.877 5.262
31-Mar-2012 PV of 2nd. Year payment of interest 6.00 0.769 4.614
31-Mar-2013 PV of 3rd. Year payment of interest 6.00 0.675 4.050
31-Mar-2014 PV of 4th. Year payment of interest 6.00 0.592 3.552
31-Mar-2014 PV of redemption of TFC 50.00 0.592 29.600
Liability component 47.078
Interest cost for the year on liability component
(47.078*14%) 6.591
Interest cost paid (50.00*12%) 6.000
Additional finance cost to be booked 0.591

(ii) Profit on sale and lease back of plant

Profit accounted for on disposal of plant 53-43 10.000
Profit to be booked (10/5*0.5) 1.000
Profit to be deferred over the remaining period of lease 9.000

(iii) Income from associates

Dividend income from associate undertaking previously credited to other
operating income now credited to investments (1.000)
25% Share of for the year profit of associates, net of tax (10*25%) 2.500
25% Share of other comprehensive income of associates, net of tax (2*25%) 0.500
2.000

(iv) Impairment of plant

Carrying value as of October 1, 2010 (30/15*10.5) 21.000
Recoverable amount (Higher of NRV at Rs. 12 and value in use at Rs. 16) 16.000
Impairment loss 5.000
Depreciation to be booked Apr. 1, 2010 to Sept. 30, 2010 (30/15*0.5) 1.000
Depreciation to be booked Oct. 1, 2010 to Mar. 31, 2011 (16/5*0.5) 1.600
2.600
For the year deprecation ignoring valuer’s report (30/15) (2.000)
Additional depreciation to be booked 0.600

Page 2 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2011

(v) Taxation
Taxable income
Profit before tax 102.309
Additional finance cost on TFCs (i) 0.591
Deferred profit on sale of the plant 9.000
25% Share of profit of associates excluded as taken net of tax (2.500)
Accounting depreciation on finance lease asset (53/5*0.5) 5.300
Finance charges included in lease installment {(53 – 7)*13.507/2} 3.127
Lease installment (7.000)
Impairment of the plant 5.000
Additional accounting depreciation due to damage to the plant 0.600
Total business income 116.427
Current year’s tax expense
Tax at 35% on business income 40.749
Tax at 10% on dividend income of Rs. 1.000 0.100
40.849
Prior year’s tax expense
Liabilities outstanding for more than three years added to income 6.000
Payment of liabilities outstanding for more than 3 years added to income in
prior years allowable during the year (1.800)
4.200 1.470
Deferred tax credit
Additional finance cost on TFCs 0.591
Profit on sale and leaseback of the plant deferred over the lease period 9.000
Assets / liabilities subject to finance lease (5.3 +3.127 – 7) 1.427
Impairment of the plant 5.000
Additional accounting depreciation on the plant 0.600
Balance of liabilities outstanding for more than three years added to income in
prior years (6 – 1.8) 4.200
Tax credit at 35% 20.818 (7.286)
Deferred tax expense
Tax on the difference between share of profit of associate and the dividend
received from the associate (2.500 –1.000)*10% 0.150

Net tax expense 35.183

A.3 A-6 Journal entry

Dr. Cr.
Date Particulars Ref.
Rs. in million
31-03-11 PL Account (Depreciation exp) 70,000/8 8.750
Accumulated depreciation 8.750
PL Account (Unwinding of discount) 1 0.681
Site restoration liability (Unwinding of discount) 1 0.681
Revaluation surplus (Incremental depreciation) 1 0.461
Retained earnings (Incremental depreciation) 1 0.461
PL account (Excess of increase in site restoration cost over
revaluation balance) 2.542-1.843 0.699
Revaluation surplus (Increase in site restoration cost) 2 1.843
Site restoration liability (Increase in site restoration cost) 2 2.542
12.434 12.434

Page 3 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2011

WORKING Site
Revaluation
Ref. restoration
surplus
liability
01-04-05 PV of site restoration cost of Rs. 10 million at
10% discount rate 10/(1.1)10 3.855
31-03-06 Unwinding at 10% 0.386
31-03-07 Unwinding at 10% 0.424
31-03-07 Carrying value of the plant (80+3.855)*8/10 67.084
31-03-07 Revalued amount of the plant 70.000 2.916
31-03-08 Unwinding at 10% / Incremental dep. (2.916/8) 0.467 (0.365)
31-03-09 Unwinding at 10% / Incremental dep. 0.513 (0.365)
5.645 2.186
31-03-09 Increase / (decrease) in liability / revaluation 5.066-
surplus on revision of discount rate to 12% 5.645 (0.579) 0.579
31-03-09 PV of site restoration cost of Rs. 10 million at
12% discount rate 10/(1.12)6 5.066# 2.765
31-03-10 Unwinding at 12% / Incremental dep. (2.765/6) 0.608 (0.461)
31-03-11 Unwinding at 12% / Incremental dep. 1 0.681 (0.461)
6.355 1.843
31-03-11 Increase / (decrease) in liability relating to site
8.897-
restoration costs
6.355 2 2.542 (1.843)
31-03-11 PV of site restoration cost of Rs. 14 million at
-
12% discount rate 14/(1.12)4 8.897

A.4 Rahat Limited

Notes to and forming part of the financial statements
For the year ended March 31, 2011
2011 2010
1 Earnings per share: Rs. / Shares in '000

1.1 Basic earnings per share

Profit after taxation 150,000 110,000
Dividend on 15% convertible preference shares (19,000*15%) /
(20,000*15%) (2,850) (3,000)
Profit attributable to ordinary shareholders 147,150 107,000
Restated
Weighted average number of ordinary shares in issue W1 5,638.28 5,170.36
Basic earnings per share Rs. 26.10 20.69

1.2 Diluted earnings per share

Profit after taxation 150,000 110,000
Weighted average number of shares in issue W1 5,638.28 5,170.36
Conversion of 10,000 cumulative preference shares on July 1,
2010 (10*7)/12*3 17.50 -
Adjustment for potential ordinary shares on conversion of 15%
cumulative preference shares (190*7)/(200*7) 1,330.00 1,400.00
Restated
Weighted average number of shares for diluted earnings 6,985.78 6,570.36
Diluted earnings per share Rs. 21.47 16.74

1.3 During the year the company has issued 1 million right ordinary shares at Rs. 12 per share against
the prevailing market price of Rs. 15 per share. This has resulted in restatement of basic and diluted
earnings per share for the year ended March 31, 2010.

Page 4 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2011

W-1 Weighted average ordinary shares outstanding for 'Basic EPS'

2011 2010 (Restated)

Actual Bonus Actual Bonus Weighted
Date of Weighted
Description No. of Time factor No. of factor average
issue average shares
shares (W-2) shares (W-2) shares
01-04-
Balance 10 5,000 3/12 1.034072 1,292.59 5,000 1.034072 5,170.36
Conversion of 10,000
cumulative preference 01-07-
shares 10 70
5,070 3/12 1.034072 1,310.69
01-10-
Right issue 10 1,000
6,070 6/12 - 3,035.00
Weighted average shares 5,638.28 5,170.36

W-2 Calculation of theoretical ex-right value per share and bonus adjustment factor:
Outstanding shares before the exercise of rights at fair value 5,070 15.0 76,050
Exercise of rights issued at Rs. 12 per share 1,000 12.0 12,000
6,070 88,050
Theoretical ex-right value per share 88,050/6,070 14.50576
Bonus adjustment factor 15/14.50576 1.034072

A.5 Galaxy Textiles Limited

Notes to the financial statements
For the year ended March 31, 2011 2011
Rs. in million
Gratuity Fund

1 The amounts recognized in the statement of financial position are as follows:

Present value of defined benefit obligation 1.1 166.00
Fair value of plan assets 1.2 (120.00)
Unrecognized actuarial losses W.1 46.00

1.1 Changes in the Present value of the defined benefit obligations are as follows:
Opening defined benefit obligation 133.00
Current service cost 15.00
Interest cost 16.00
Benefits paid to the employees (6.00)
Actuarial losses (balancing amount) 8.00
Closing defined benefit obligation 166.00

1.2 Changes in the fair value of plan assets are as follows:

Opening Fair value in plan assets 114.00
Expected return on plan assets 14.00
Contribution by employer 1.3 17.32
Benefits paid to the employees (6.00)
Actuarial losses (balancing amount) (19.32)
Closing fair value of plan assets 120.00

1.3 The amounts recognized in profit or loss are as follows

Current service cost 15.00
Interest on obligation 16.00
Net actuarial loss recognized in the year W-2 0.32
Expected return on plan assets (14.00)
17.32
W-1 Unrecognized actuarial losses
Opening net actuarial losses 19.00
For the year actuarial losses on plan obligation 1.1 8.00

Page 5 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examinations – Summer 2011

For the year actuarial losses on plan assets 1.2 19.32

Actuarial losses adjusted during the year W-2 (0.32)
Closing in net actuarial losses 46.00
W-2 Unrecognized loss adjusted during the year (Based on 10% corridor)
Cumulative actuarial loss as at April 1, 2010 19.00
10% of greater of:
 the present value of the defined benefit obligations of Rs. 133 million; and
 the fair value of plan assets of Rs. 114 million (13.30)
Actuarial losses exceeding 10% 5.70
Unrecognized loss adjusted during the year (5.70/18 years) 0.32

A.6 A-One Asset Management Fund Limited

Statement of Movement in Unit Holders' Fund
For the year ended March 31, 2011 2011
Rs. in million
Net assets at the beginning of the year 27,000
Issue of 100 million units 3,500
Redemption of 95 million units (3,277)
223
27,223
Element of income and capital gains included in prices of units issued / redeemed
transferred to income statement (173)
Net unrealized appreciation of re-measurement of investments classified as
available for sale (1,800-1,200-480) 120
Capital gains 400
Net unrealized appreciation on re-measurement of investments classified as
financial assets at fair value through profit or loss (2,500-2200) 300
Other net income for the year 3,000
Final distribution for the year ended March 31, 2010 at Rs. 4 per unit (900*4) (3,600)
100
Net assets at the end of the year 27,270

(The End)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Summer 2011

General:

The performance was reasonable except question nos. 2 and 3 where the students were
not well prepared. It seemed that most of them had resorted to selective studying which is
one of the main causes of the failure in almost all subjects. Lack of practice was quite
evident as many students carried out long calculations to arrive at amounts which could
have been calculated easily in far less time.

It is disappointing to note that most candidates who appear for this paper have many
years of practical experience of audit of financial statements. Yet, the answers they
produce do not reflect this fact as most of them show poor presentation, lack of
knowledge of important principles and an unprofessional approach.

Q.1 The overall performance in this question was better. However, despite the fact that
the topic of consolidation is tested in almost every attempt, there were many
students who were not able to get good marks in the question although it involved
quite simple adjustments. Some of the common mistakes witnessed in the answers
were as follows:

• Unrealized profit on inventory was not eliminated while computing post

acquisition profit of RGL. Some students considered it while computing the
post acquisition profit for retained earnings calculation but ignored it while
computing the non-controlling interest.

• While calculating goodwill many students treated the amount paid to the
consultant as part of purchase consideration. Many students ignored it
altogether although it should have been charged off against retained earnings.

• Fair value reserve on deemed disposal and increase in fair value as of Oct 1
were ignored in the calculation of Retained Earnings.

• Some students used the proportionate share method for valuation of Non
Controlling Interest whereas according to the question, fair value method was
required to be used. Moreover, the fair value of non controlling interest on the
date of acquisition, was given in the question. The only adjustment required
was to incorporate the share of post acquisition profit. However, many students
wasted time on long and mostly incorrect/incomplete workings.

Page 1 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Summer 2011 examination

Q.2 In this question concepts from various standards were tested although the main
requirement was to prepare a statement of comprehensive income. Majority of the
students performed poorly as they lacked in-depth understanding of the principles
involved. The common mistakes were as follows:

(i) Many students did not produce the appropriate format of the statement of
comprehensive income. They used the same format as was given in the
question although it was clearly mentioned in the question that these were
the extracts of the statement. Consequently, such students lost all the marks
that were assigned to the format of the statement. Among those who tried
otherwise, majority showed lack of knowledge and failed to present various
line items with their correct description and at the correct place.

(ii) A large number of candidates were entirely unaware of the concept of, or the
need to compute, the liability component of the TFCs and the revised interest
charge. Some tried to compute these but did not know the correct procedure.
Some students used the coupon rate of interest for discounting purposes
instead of the market rate.

(iii) The concept of sale and lease back was better understood and generally the
students were able to deal with this adjustment correctly. However, many
students failed to recognize that the disposal was effected in October and
hence the gain on disposal was to be recognized in respect of 6 months only.

(iv) Majority of the students correctly deducted the dividend received from the
value of investment in associates. However, only few students were able to
bifurcate the share of profit of the associate between profit for the year and
other comprehensive income. Most candidates included the entire amount in
the profit for the year.

(v) Majority of the candidates calculated the impairment correctly but erred in
calculating the depreciation for the year.

(vi) The worst performance was witnessed in the area of taxation. Conceptual
understanding was lacking completely. Many students ignored tax
calculations whereas those who did attempt, managed to get few marks only
as very few of them proceeded in a well planned and appropriate manner.

Q.3 In this question an accounting entry was required for booking unwinding of
discount, incremental depreciation on plant and increase in site restoration
liability. The question was not too difficult as many candidates were able to secure
full marks also. However, the overall performance was far below expectations.
Probably due to lack of practice, majority of the students faltered in the middle of
the question. Following are the key observations:

• Present value of site restoration cost on 1st April 2005 and on 31 March 2009
was correctly calculated but subsequent unwinding of discount was
miscalculated by many candidates.

Page 2 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Summer 2011 examination

• The decrease in present value of site restoration costs on account of change in

discount rate on March 31, 2009 resulted in a corresponding increase in
revaluation surplus. Later, the increase in the PV of restoration costs on March
31, 2011 should have been adjusted against the balance in revaluation surplus.
Very few students displayed correct understanding of this concept.

• Initial revaluation surplus of Rs. 2.916 million was correctly calculated but
subsequently the incremental depreciation was either ignored or miscalculated.
Moreover, there were many students who ignored the revaluation altogether.

• In the Journal entry incorrect descriptions were frequently observed. Many

candidates produced entries for the year 2006 to 2010 also. Such students are
advised to utilize the 15 minutes additional reading time which is now being
allowed, to understand the exact requirement of the question. Those students
who waste their time in carrying out procedures which are not required, face
serious time constraints in solving the remaining questions.

Q.4 Despite the fact that the topic of earnings per share is examined regularly, the
performance was just about average. The following errors were frequently
observed:

(i) Many students carried out the working but did not prepare the note to be
presented in the financial statement.

(ii) Comparative figures were either not given or were not restated as required
under IAS-33.

(iii) Total comprehensive income was taken as profit attributable to the ordinary
shareholders, for calculating basic and diluted earnings per share, instead of
using profit after tax. Moreover, some students did not deduct preference
dividend for arriving at the profit attributable to ordinary shareholders.

(iv) The share price at the announcement of issue of right share was used to
calculate the theoretical ex-right price and the bonus adjustment factor
instead of using the price prevailing on the last date of exercising the right.
Simple arithmetical errors were quite frequently made. Many students
ignored the bonus adjustment factor altogether.

Q.5 It was a simple question in which most of the information had already been
provided and the candidates were simply asked to make correct presentation and
disclosures in accordance with the requirement of IFRS. This question was
generally well attempted; however, virtually in all cases, contribution paid to the
Fund was not considered in the calculation of Fair Value of Plan Assets.
Consequently, actuarial loss on such plan assets could not be computed correctly.

In this question also, lot of students did not present their answers in the form of
notes to the financial statements and instead, presented calculations and workings
only.

Page 3 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting –
Summer 2011 examination

Q.6 This was another very straightforward question. Candidates were provided with all
relevant information and were only asked to prepare Statement of Movement in
Unit Holders’ Fund, of an asset management company. However, most candidates
did not seem to be well prepared. Answers were marred by poor presentations.
Frequent errors were witnessed in the classification of the line items. For instance,
Appreciation on Re-measurement of Investments Available for Sale, was not
shown separately and included in net income.

(THE END)

Page 4 of 4
 The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examination 10 December 2011
Winter 2011 100 marks - 3 hours
Module E Additional reading time - 15 minutes

Q.1 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.

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.) (16 marks)

Q.2 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 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
 Advanced Accounting and Financial Reporting Page 2 of 4

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)

Q.3 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
30 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

Consolidated 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 3,600 Goodwill 15 15
Non-controlling interest 235 120 Long term receivables 24 29
Long term loans 440 145 Stock in trade 6,760 4,280
Deferred tax 210 10 Trade debts 7,534 5,421
Trade and other payables 4,688 3,970 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 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. (Ignore corresponding figures.) (23 marks)
 Advanced Accounting and Financial Reporting Page 3 of 4

Q.4 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 2,898
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)

Q.5 XL (Private) Limited is a long established company and provides a range of services to business
organizations for development of their human resources. Most of its staff consists of qualified and
experienced professionals.
The company plans to expand its business by establishing a research division. In this respect, XL is
evaluating a proposal for raising finance by issuing ordinary shares. To estimate value of its shares,
XL has identified a listed company, PL Limited, which is engaged in similar business.
Financial statistics and other information as of 30 September 2011, for XL and PL, are given below:
XL Limited PL Limited
--- Rs. in million ---
Ordinary share capital as at 1 October 2010 (Rs. 10 each) 400 1,000
10% cumulative preference shares as at 1 October 2010 (Rs. 10 each) 120 -
Right shares issued on 1 April 2011 (Rs. 10 each) - 100
Total comprehensive income 292 600
Dividend paid 168 500
PL issued right shares on 1 April 2011 at Rs. 25 per share. The prevailing market price per share on
the date of issue and on 30 September 2011 was Rs. 35 and Rs. 40 respectively.
PL’s total comprehensive income includes unrealized gain of Rs. 15 million on investments available
for sale.
Annual rate of growth in earnings and dividends for XL and PL is estimated at 5% and 4.5%
respectively. The cost of equity of companies having similar businesses is estimated at 15% per
annum.
 Advanced Accounting and Financial Reporting Page 4 of 4

Required:
(a) Compute the value of XL’s shares as on 30 September 2011 based on:
(i) P/E ratio
(ii) Dividend yield
(b) Identify any two weaknesses of each of the above valuation methods. (13 marks)

Q.6 Al-Amin Bank Limited is listed on all the stock exchanges in Pakistan. At year end, the total
advances amounted to Rs 75,000 million which include non-performing advances of Rs. 5,000
million. The break-up of the non-performing advances and the provisions there-against is as under:

Other assets
Sub-
especially Doubtful Loss Total
Standard
mentioned
----- Rs. in million -----
Advances 100 660 840 3,400 5,000
Provisions required and held 5 120 530 3,345 4,000

The sub-standard category includes advances of Rs. 260 million pertaining to overseas operations of
the bank. The required provision of Rs. 50 million has been made against such advances.

During the year the movement in the specific provision was as under:

Rs. in million
Opening balance 3,320
Charge for the year 802
Reversals (90)
Amounts written off (50)
Exchange rate adjustment 18
Total 4,000

In addition to the above specific provisions, it is the bank’s policy to make additional general
provision based on the judgment of the bank. Opening balance for general provision was Rs. 65
million. During the year, the bank made provisions of Rs. 25 million and Rs. 15 million against
consumer and agriculture advances respectively.

Required:
Prepare relevant notes on non-performing advances and provisions for inclusion in the financial
statements of Al-Amin Bank Limited giving appropriate disclosure in accordance with the guidelines
issued by the State Bank of Pakistan. (10 marks)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2011

A.1 Hi-Tech Pakistan Limited

Year ended 30 September, 2011
2011 2010
Statement of Comprehensive Income Rs. in million
Sale revenue (100×1.25) 125.00
Revenue from maintenance contract (2011: 12/3 2010: 4.00 2.00
12/3×0.5)
Cost of sales (2010: 100+1.7) (2.5) (101.70)
Sales promotion expenses (16.00)
Staff training (12.00)
Impairment loss W2 1.60 -
Finance lease income (2011: 7.66+8.12) 15.78 8.89

Statement of Financial Position

Non-current assets
Net investment in finance lease W1/W3 29.74 64.90
Current assets
Current maturity of net investment in finance lease W1/W3 53.33 35.99
Long-term liabilities
Deferred maintenance contract revenue 6.00 10.00

WORKINGS
W1: Finance lease income and payment schedule prior to restructuring
Finance
Installment Opening Recovery of
income at Receipts Closing balance
due date balance principal
15.192% p.a.
01-Apr-2010 *137.00 (20.00) 20.00 117.00
30-Sep-2010 117.00 8.89 (25.00) 16.11 100.89
31-Mar-2011 **100.89 **7.66 (25.00) 17.34 83.55
30-Sep-2011 83.55 6.35 (25.00) 18.65 64.90
*(100*1.25)+(8.4/0.7)

W2: Impairment loss

Net investment in lease as on 31-3-2011 (**100.89+7.66 ) 108.55
Present value of 4 half yearly installments of Rs. 32 million each as on 31.03.2011
32 × (1-(1+0.15192/2)-4)/(0.15192/2) ***106.95

1.60

W3: Finance lease income and payment schedule on restructuring

Finance
Installment Opening Recovery of Closing
income at Receipts
due date balance principal balance
15.192% p.a.
30-Sep-2011 ***106.95 8.12 (32.00) 23.88 83.07
31-Mar-2012 83.07 6.31 (32.00) 25.69 57.38
30-Sep-2012 57.38 4.36 (32.00) 27.64 29.74

Page 1 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2011

A.2 (a) Trade date accounting

(i) Purchase contract
Date Description Debit Credit
28-Sep-11 Financial assets (20,000×24) 480,000
Financial liability 480,000
(To record purchase of assets)
30-Sep-11 Financial assets (21,000×23.5)-480,000) (FV23,500– EL 10,000) 13,500
Financial liability (Exchange gain) (20,000× (24-23.5) 10,000
Increase in FV - P&L 23,500
(To record change in FV and exchange rate)
03-Oct-11 Financial assets (21,500×25)-(21,000×23.5) (FV12,500 + EG 31,500) 44,000
Financial liability (480,000-10,000) 470,000
Exchange gain - P&L (21,000-20,000) × (25-23.5)
(EG 31,500 – EL 30,000) 1,500
Increase in FV - P&L (21,500-21,000) ×25 12,500
Bank (20,000×25) 500,000
(To record change in FV and exchange rate on settlement)

(ii) Sale contract

29-Sep-11 Account receivable (35,000×23) 805,000
Loss on disposal - P&L 4,200
Financial assets 809,200
(To record sale of financial assets)
30-Sep-11 Account receivable (35,000×(23.5-23) 17,500
Exchange gain - P&L 17,500
(To record account receivable at year-end exchange rate)
04-Oct-11 Bank (35,000×26) 910,000
Exchange gain - P&L 87,500
Account receivable (805,000+17,500) 822,500
(To record settlement of sale of financial assets)

A.2 (b) Settlement date accounting

(i) Purchase contract
Date Description Debit Credit
30-Sep-11 Receivables (21,000-20,000)×23.5 23,500
Increase in FV -P&L 23,500
(To record change in FV of financial assets)
03-Oct-11 Financial assets (21,500×25) 537,500
Increase in FV -P&L (500×25) 12,500
Exchange gain - P&L (1,000×(25-23.5) 1,500
Receivables 23,500
Bank (20,000×25) 500,000
(To record purchase of financial assets and settlement
thereof)

(ii) Sale contract

29-Sep-11 Exchange loss - P&L (809,200-(34,000×23)) 27,200
Financial assets (35,000×23)-809,200 4,200
Increase in FV - P&L (35,000-34,000)×23 23,000
(To record change in fair value and exchange difference)
30-Sep-11 Financial assets (35,200×23.5)-(35,000×23) 22,200
Exchange gain - P&L (35,000× (23.5-23) 17,500
Increase in FV - P&L (35,200-35,000) ×23.5 4,700
(To record account receivable at year-end exchange rate)
4-Oct-11 Bank (35,000×26) 910,000
Gain on disposal - P&L 82,800
Financial assets (35,200×23.5) 827,200
(To record settlement of sale of financial assets)

Page 2 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2011

A.3 Alpha Pakistan Limited

Consolidated statement of cash flows
For the year ended 30 September 2011
2011
Rs. in million
Cash flows from operating activities
Cash receipts from customers W1 62,759
Cash paid to suppliers and for operating expenses W2 (61,827)
Cash generated from operations 932
Financial charges paid {(30+890-35)+(33–29)–(27–24) (886)
Income tax paid (10+25+1,200–210–200) (825)
Recoveries from employees against long term receivables (33–27) 6
Net cash from operating activities (773)

Cash flows from investing activities

Purchase of property, plant and equipment(1,100+90-900-250) Note 1 (40)

Cash flows from financing activities

Dividend paid to controlling interest (10+100–8) (102)
Dividend paid to non-controlling interest {120+300–235} (185)
Proceeds from long term loans payable (440–145–250) 45
(242)
Net decrease in cash and cash equivalents (1,055)
Cash and cash equivalents at beginning of the year (5,950–2,980) (2,970)
Cash and cash equivalents at end of the year Note 2 (4,025)

Note 1: Property, plant and equipment

During the year the group acquired property, plant and equipment with an aggregate cost of
Rs 290 million as detailed below:
Cash purchases 40
Purchase against loan 250
290
Note 2: Cash and cash equivalents
Cash and bank balances 2,645
Short term borrowings (6,670)
(4,025)

WORKINGS
W1: Cash receipts from customers
Sales for the year after elimination of inter-company sales (65,000-140) 64,860
Increase in trade debts (7,534–5,421)-(140×40%)+44 (2,101)
62,759

W2: Cash paid to suppliers and for operating expenses

Cost of products sold (59,110-140) +(140×30%×25/125) 58,978
Increase in closing stock in trade (6,760–4,280)–(140×30%×25/125) 2,472
Increase in trade and other payables excluding dividend
(4,688–3,970)–(140×40%)+(10-8) (664)
Operating expenses 3,000
Depreciation (75+15) (90)
Bad debts expense (44)
Other operating income (2,000)
Increase in other receivables (900–725) 175
61,827

Page 3 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2011

A.4 Sky Limited

Notes to the financial statements
For the year ended 30 September 2011

(a) 1. Change in accounting policy

During the year the company has acquired 70% holding in Jupiter Limited on 1 January
2011. Consequently, the company has prepared the consolidated financial statements
along with its separate financial statements, for the first time for the year ended 30
September 2011.

Investment in Mars Limited was accounted for using equity basis of accounting in the
financial statements for the year ended 30 September 2010. IAS 27 and 28 requires that
investment in associates shall be accounted for in the investor's separate financial
statements either at cost or in accordance with IFRS 9 and IAS 39. Accordingly, the
company has changed its accounting policy for investment in associate from equity
basis of accounting to cost, in the separate financial statements.

1.1 Effects of change in accounting policy

In accordance with requirements of IAS 8 "Accounting policies, changes in accounting
estimates and errors" this change in accounting policy has been accounted for with
retrospective effect. Comparative information has been re-stated accordingly. The
effects of the above change, on the financial statements are as follows:

2011 2010
Rs. in million
Effect on Statement of Financial Position
Decrease in investment in the associated company W1 (194.92) (168.35)
Decrease in deferred tax liability (2011: 5.34+2.66) 8.00 5.34
(186.92) (163.01)
Effect on Statement of Comprehensive Income
Decrease in gain on acquisition of investment in the
-
associated company W1 (115.00)
Decrease in share of profit in the associated company W1 (56.57) (53.35)
Increase in dividend income 30.00 -
(26.57) (53.35)
Decrease in deferred tax expense at 10% 2.66 5.34
Net decrease in profit (23.91) (163.01)

As the investment in Mars Limited was made on 1 October 2009, there is no effect of
such change in accounting policy, prior to 1 October 2009. As a result, opening balance
sheet as at 1 October 2009 as required by IAS 1 "Presentation of Financial Statements"
has not been presented.

(b) 2. Investment at cost

2010
2011 2010 Description 2011
(Restated)
Number of shares Rs. in million
7,000,000 - Jupiter Limited - subsidiary company 1,400 -
2,500,000 2,500,000 Mars Limited - associated company 900 900
2,300 900

The company holds 70 % and 25% ownership interest in Jupiter Limited and Mars
Limited respectively.

Page 4 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2011

WORKINGS
W1 Effects of change of accounting basis from equity to cost
2011 2010
Balance as at October 1, 2010 / Investment made during the year 1,068.35 900.00
Gain on acquisition of investment in associated company
-
{25%*(1,000+150+2,898+12)}-900 115.00
Dividend received from ML (30.00) -
Profit for the year, after tax, attributable to ordinary share holders 2011:
(250-(200×12%))×25% 2010: (240-(200×12%))×25% 56.50 54.00
Profit net of tax, on inter-company stock - opening & closing
2011: 0.52-(10×0.2×0.65×0.25) 2010: (16×0.2×0.65×0.25) 0.20 (0.52)
Depreciation on fair value exceeding carrying value (12/15) ×0.65×0.25) (0.13) (0.13)
56.57 53.35
Investment in associated company - equity basis of accounting 1,094.92 1,068.35
Investment in associated company - cost basis of accounting 900.00 900.00
Decrease in investment due to change in the basis of accounting 194.92 168.35

A.5 (a) Valuation of XL's shares

(i) P/E ratio valuation

P/E ratio of PL {Market price per share Rs. 40÷Earnings per share Rs. 5.5 (W1)} 7.27
P/E ratio of XL (7.27×67% - refer note below) 4.87
Value of XL’s shares {4.87×7 (W1)×40} Rs. in million 1,364

Note: P/E ratio for an unquoted company is normally taken at 50% to 67% of P/E ratio of a
quoted company engaged in similar business. In view of better earnings per share and
growth rate estimated P/E ratio for XL may be taken at 67% of P/E ratio of PL.

(ii) Dividend yield valuation

{(168×1.05) ÷ (0.15-0.05)} Rs. in million 1,764

W1 Earnings per share

XL PL
Profit attributable to ordinary shareholders
(XL: 292-12) / (PL: 600-15) (Rs. in million) 280.00 585.00
Weighted average no. of ordinary shares (400/10)/W2 (Shares in million) 40.00 106.33
Earnings per ordinary share Rs. 7.00 5.50

W2 PL - Weighted average no. of ordinary shares for EPS

Actual no. of Bonus W. average

Description Date shares in Time adjustment shares in
million factor (W3) million
(A) (B) (C) (A)×(B) × (C)
No. of ordinary shares 1-Oct-2010 100 6/12 1.026667 51.33
Issue of right shares 1-Apr-2011 10
110 6/12 55.00
Total 106.33
OR
No. of ordinary shares 1-Oct-2010 100 1 1.026667 102.67
Issue of right shares
(10×25/35) 1-Apr-2011 7.14 6/12 1.026667 3.66
Total 106.33

W3 Bonus adjustment factor 35/{(100×35+10×25)/110 } 1.026667

Page 5 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2011

(b) Weaknesses of share valuation methods

(i) P/E ratio valuation

 It is not appropriate to apply share price of a particular date to work out P/E ratio of
PL.
 Market price of share is dependent on many factors and P/E ratio is just one such
factor.
 The decision to assume P/E ratio of an unquoted company to be 50% to 67% of that
of a quoted company is quite subjective.

(ii) Dividend yield valuation

 The cost of capital of a company depends on its capital structure. Therefore, the
assumption that cost of capital of all the companies is same is questionable.
 Current year's dividend may not be representative base from which to start.
 Accuracy of estimated future growth at a constant rate is questionable.

A.6 Al-Amin Bank Limited

Notes to the Financial Statements for the year ended __________________

1.1 Particulars on Non-performing Advances

Advances include Rs. 5,000 million which, as detailed below, have been placed under
non-performing status:
2011
Amount outstanding Provisions required and held
Category of classification
Domestic Overseas Total Domestic Overseas Total
----- Rs. in million -----
Other assets especially mentioned 100 - 100 5 - 5
Sub-standard 400 260 660 70 50 120
Doubtful 840 - 840 530 - 530
Loss 3,400 - 3,400 3,345 - 3,345
Total 4,740 260 5,000 3,950 50 4,000

1.2 Particulars of provision against Non-Performing Advances

2011
Specific General Total
----- Rs. in million -----
Opening balance 3,320 65 3,385
Charge for the year 802 40 842
Amounts written off (50) - (50)
Reversals (90) - (90)
Exchange adjustments 18 - 18
Closing balance 4,000 105 4,105

(The End)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Winter 2011

General:

It seems that most of the students resort to selective studies. This was evident from the
fact that very poor performance was witnessed in those areas which were tested after a
considerable lapse of time. Another piece of advice which is very important is that
Accounting needs a lot of practice which is often found lacking. Various types of issues
which are encountered cannot be learned merely by reading the books or IFRSs.

Question-wise comments are as under:

Q.1 The question based on lease accounting was poorly attempted. The following types
of mistakes were seen in most answer scripts:

• Majority of the students just managed to put some figures in the income
statement, the easiest ones being sales promotion expenses and staff training.

• A good majority of students correctly computed the sales revenue but forgot to
take the full cost of the system as cost of sales.

• Most of the students could not correctly calculate the opening balance of net
investment in Finance Lease. Very few students were able to prepare the lease
repayment schedule after restructuring.

• Very few students knew how to calculate impairment loss. It required

comparison of net investment in lease at the time of restructuring with present
value of cash flows subsequent to restructuring arrangement. Very few
students seemed to understand this concept.

• Finally, a majority of students failed to prepare the extracts of statement of

financial position correctly. Some of them had no clue regarding the way the
figures had to be presented.

Q.2 This question required preparation of accounting entries to record the purchase and
sale of financial assets. The performance was quite poor, on account of the
following reasons:

• Majority of the students knew about trade date accounting but had very little
idea about settlement date accounting. Many of them mixed up both the
methods.

Page 1 of 3
Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2011
• It was clearly mentioned in the question that the relevant assets are classified
as “held for trading”. However many students made the entries as if the assets
were classified as “held for sale”.

• Very few students were able to bifurcate the increase in the value of assets at
year end, between exchange gain and increase in fair value.

Q.3 This question required preparation of consolidated statement of cash flows using
Direct Method. It seemed that most of the students did not know about proper
presentation of cash flow under the direct method. About 15% of the students
ignored this instruction and prepared the cash flow using indirect method. Other
common errors were as follows:

• Only purchase of fixed assets against cash should have been included in the
outflows whereas purchase against Long Term Loan should not have been
included. Most students did not understand this point. As a result, the proceeds
of Long Term Loan were also computed incorrectly.

• Short term borrowings were not adjusted against cash and cash equivalents. On
the other hand, many students increased the cash and cash equivalents by the
amount of short term borrowing, instead of reducing it.

• Most of the students were unable to calculate the basic requirements of Cash
collected from Customers and Cash paid to suppliers correctly and missed out
several adjustments.

• Majority of the students didn’t correctly calculate the amount of financial

charges paid. They failed to comprehend that the difference between the gross
and net present value of interest free loans to employees is also accounted for
in financial charges.

• Some students incorrectly classified long term receivables in investing

activities.

• A large number of students didn’t consider the unclaimed dividend which was
included in trade and other payables, while calculating dividend payments.

• Some students also failed to account for the provision for bad debts in
computing cash received from customers. Instead, they took into account the
amount of bad debts written off.

Q.4 In this question, the candidates were required to prepare relevant notes for
incorporation in the separate financial statements of a company. Till the previous
year, the company had invested in an associated company. During the year under
consideration, it had acquired a subsidiary and hence it was required to prepare
consolidated financial statements for the first time. Till the previous year, the
company had recorded its investment in the associated company using equity
method. However, under IAS 27, when a company is preparing consolidated
financial statements then in its separate financial statements, it has to account for
its investment in the associated company, at cost.

Page 2 of 3
Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2011
As a result of the above, the company was required to change its accounting policy
also for preparation of separate accounts. Most of the students were unable to
grasp this point. Other common mistakes were as follows:

• A lot of students applied the change in accounting policy prospectively

whereas according to IAS 8 it should have been applied retrospectively.

• In the note on investment, the investments in ML and JL should have been

mentioned separately along with the number of shares. Many students did not
show the note as required.

• In the note regarding change in accounting policy, facts related to the reason
for the change was not disclosed.

• While restating the profits on account of change in accounting policy, the tax
impact was ignored.

• Most of the students did not present comparative figures although it was
clearly mentioned in the requirement of the question.

Q.5 This question required computation of the value of shares based on P/E ratio and
dividend yield along with identification of two weaknesses of each of the above
valuation methods. The question was easy and required simple computations only.
However, most students lost this easy opportunity and could not score well. Most
of the time, simple mistakes were made. Common among those were as under:

• Surprisingly, even at this level, many students were unable to calculate EPS
correctly.

• While computing P/E ratio of PL, market price of its shares was taken as Rs.
35 instead of Rs. 40.

• Dividend on cumulative preference shares was ignored while calculating the

EPS for XL’s ordinary shares.

• In part (b) some students repeated the same weaknesses in both the methods.

Q.6 This question required preparation of a note on non-performing advances and

provisions for inclusion in the financial statements of a bank. Most of the students
performed well as the question simply required putting the figures at appropriate
positions. Some of the errors which were noted were as under:

• Some students didn’t classify the outstanding amounts between overseas and
domestic.

• Many students didn’t give the “headings”.

(THE END)

Page 3 of 3
 The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examination 5 June 2012
Summer 2012 100 marks - 3 hours
Module E Additional reading time - 15 minutes

Q.1 The following summarised statements of financial position pertain to Bee Limited and its investee
companies as at 31 December 2011:
Bee Limited Cee Limited Tee Limited
--------------Rs. in million------------
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) 44,300 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:

(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.
 Advanced Accounting and Financial Reporting Page 2 of 4

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.

Q.2 Dee General Insurance Limited is a listed company. The following information relates to the year
ended 31 December 2011:
Direct and facultative Treaty
Fire and Marine,
Miscellan- Proport-
property aviation Motor
eous ional
damage and transport
----------------------------Rs. in million----------------------------
Commissions:
Paid / payable 321.41 126.87 215.00 90.94 0.30
Deferred: opening 148.79 11.31 128.50 38.59 -
Deferred: closing 160.43 5.68 114.23 35.17 -
Receipts from reinsurers 270.44 5.70 12.72 82.40 -

Net premium earned 907.75 768.70 2,745.64 948.48 0.70

During the year, management expenses (other than commission) amounted to Rs. 978 million.
These expenses are allocated on the basis of net premium earned.

Required:
Prepare a statement of expenses for inclusion in the financial statements for the year ended 31
December 2011. (Ignore comparative figures) (10 marks)

Q.3 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. (Ignore comparative figures)
(17 marks)
 Advanced Accounting and Financial Reporting Page 3 of 4

Q.4 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:
Prepare journal entries to record the above transactions in the books of Zee Power Limited.
(18 marks)

Q.5 (a) Specify the criteria for identification of operating segments, in accordance with the
International Financial Reporting Standards. (03 marks)

(b) Jay Limited is an integrated manufacturing company with five operating segments.
Following information pertains to the year ended 31 March 2012:

Internal External Total Profit /

Operating Assets Liabilities
revenue revenue revenue (loss)
segments
-----------------------Rs. in million-----------------------
A 38 705 743 194 200 130
B - 82 82 (22) 44 40
C - 300 300 81 206 125
D 35 - 35 10 75 60
E 38 90 128 (63) 50 25
Total 111 1,177 1,288 200 575 380

Required:
In respect of each operating segment explain whether it is a reportable segment. (09 marks)
 Advanced Accounting and Financial Reporting Page 4 of 4

Q.6 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:

Useful Residual Fair value as on 31 December

Date of Cost
Property life value 2011 2010
acquisition
(years) -------------------Rs. in million-----------------
A 1 August 2006 20 130 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:

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

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination

A.1 Bee Limited

Consolidated Statement of Financial Position
As at 31 December 2011

Work- Rs. in
ASSETS
ings millions
Non-current assets
Property, plant and equipment (75,600 + 2,800) 78,400.00
Investment in associates (650 + 10 (W-3)) 660.00
Goodwill 1 964.80

Current assets
Stocks in trade (24,100+1,700) - 2.56) 25,797.44
Trade debts [(16,400 + 2,900) - 12)] 19,288.00
Cash and bank (800+700) 1,500.00
126,610.24
EQUITY AND LIABILITIES
Equity attributable to parent
Ordinary share capital (Rs.10 each) 44,300.00
Retained earnings 3 16,822.50
61,122.50
Non-controlling interest [(2,800+1,200)*10%] – 10% of 2.56) 399.74
61,522.24

Long term loan 36,400.00

Current liabilities
Trade and other payables [(24,600 + 4,100) - 12] 28,688.00
Total equity and liabilities 126,610.24

WORKINGS
Working 1 : Goodwill Cee Tee
---------Rs. in million--------
Consideration transferred
Cash (Tee: Rs. 300 ÷ 0.25) 3,900.00 1,200.00
Contingent liability (at fair value) 7.00
3,907.00 1,200.00
Less: Net assets acquired
Cee (90% x (2800 + 350) (2,835.00)
Tee (80% x (1,000 + 100) (880.00)
Goodwill at acquisition 1,072.00 320.00
Less: Impairment in the value of goodwill / Adjusted on
disposal of 75% investment in Tee (W-2) (107.20) (320.00)
964.80 -

Working 2: Group share on disposal of shares of Tee

Consideration received 2,000.00
Fair value of 25% investment retained 650.00
Less: Share of carrying value when control lost
Net assets (80% x (1,900 - (Rs. 200 x 3/12)) (1,480.00)
Goodwill written off (W-1) (320.00)
850.00

Page 1 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination

Working 3: Consolidated Retained earnings Rs. in million

Bee 15,800.00
Reversal of Gain on sale of investment in Tee
(recorded in parent's book) (2,000 – [1,200x75%]) (1,100.00)
Group profit on disposal (W-2) 850.00
Cee ([1,200-350] x 90%) 765.00
Tee ([900-100] x 80%) 640.00
Less: Profit after control lost (200 x 3/12 x 80%)) (40.00)
OR (900 - 100 - (200 x 25%)) x 80% 600.00
Add: Profit from associates (Rs. 200 x 3/12 x 20%) 10.00
Add: Payment of contingent liability 7.00
Less: Goodwill impairment (W-1) (107.20)
Less: Unrealized profit in stock (32 x 40% x 25/125) X 90% (2.30)
16,822.50

A.2 Dee General Insurance Limited

Consolidated Statement of Expenses
For the year ended 31 December 2011
Deferred

Underwriting
Commissions

underwriting
management

Commission
commission

commissions

reinsurers
expense
expense

expense
Other
Class

from
Net

Net
Opening

Closing

Direct and
-------------------------------(Rs. in million)------------------------
Facultative
Fire and
321.41 148.79 160.43 309.77 165.28 475.07 270.44 204.61
property damage
Marine, aviation
126.87 11.31 5.68 132.50 139.96 272.46 5.70 266.76
and transport
Motor 215.00 128.50 114.23 229.27 499.93 729.20 12.72 716.48
Miscellaneous 90.94 38.59 35.17 94.36 172.70 267.06 82.40 184.66
754.22 327.19 315.51 765.90 977.87 1,743.77 371.26 1,372.51
Treaty
Proportional 0.30 - - 0.30 0.13 0. 43 - 0.43
Grand total 754.52 327.19 315.51 766.20 978.00 1,744.20 371.26 1,372.94

A.3 Que Limited

Extract from the Statement of Comprehensive Income
For the year ended 31 December 2011
2011
Earnings per share
Basic
Continued operations [(124,250,000 + 40,000,000) ÷ 85,224,000)] 1.93
Discontinued operations [(40,000,000) ÷ 85,224,000] (0.47)
1.46
Diluted
Continued operations [(131,400,000 + 40,000,000) ÷ 91,724,000)] 1.87
Discontinued operations [(40,000,000) ÷ 91,724,000] (0.44)
1.43

Page 2 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination

Que Industries Limited

Extract from notes to the Financial Statements
For the year ended 31 December 2012

17- Earnings per share 2011

Basic Diluted
Total comprehensive income attributable to ordinary
shareholders (Rs. in million) Note 17.1, 17.2 124.25 131.40
Weighted average number of ordinary shares outstanding
during the year Note 17.3 85,224,000 91,724,000

17.1 Reconciliation of profit for the year to Basic earnings 2011

Rs. in million
Profit for the year 130.00
Less: Preference dividend (5.75)
Basic earnings 124.25

17.2 Reconciliation of basic earnings to diluted earnings

Basic earnings 124.25
Add: Interest on convertible debentures 7.15
Diluted earnings 131.40

17.3 Reconciliation of basic number of shares to diluted number of shares

Basic number of shares 85,224,000
Options 500,000
Convertible debentures 6,000,000
Preference shares (Not adjusted being anti-dilutive) -
Diluted number of shares 91,724,000

WORKINGS

W-1 : Weighted average number of shares

Date of Actual no. Bonus
Description Time W/Avg. shares
issue of shares factor
Balance 1-Jan-11 80,000,000 3/4 1.0204 61,224,000
Right issue 30-Sep-11 16,000,000 - - -
96,000,000 1/4 1.0000 24,000,000
85,224,000
W-1.1 : Calculation of theoretical ex-right price

Shares Market
Value
Quantity Rate
Outstanding shares before the exercise of
rights at fair value 80,000,000 12.50 1,000,000,000
Exercise of right issued 16,000,000 11.00 176,000,000
96,000,000 1,176,000,000

Theoretical ex-right price per share (Rs. 1,176,000,000 ÷ 96,000,000) 12.25

Bonus adjustment factor (12.50 ÷ 12.25) 1.0204

Page 3 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination

W-2 : Ranking of dilutive instruments

Earnings per
Increase in Increase in no. of
Description incremental Rank
earnings ordinary shares
share
Convertible
1.19 2
debentures 7,150,000 6,000,000
(11,000,000 x 65%)
Options– bonus
- 500,000 - 1
element
(25,0000x120x2/12)
Preference shares 5,750,000 4,000,000 1.44 3
W-3 : Testing for dilutive effect

Profit
attributable Ordinary
EPS Effect
to ordinary shares
shareholders
Basic earnings per share 124,250,000 85,224,000 1.4579
Options - 500,000
124,250,000 85,724,000 1.4494 Dilutive
Convertible debentures 7,150,000 6,000,000
131,400,000 91,724,000 1.4326 Dilutive
Preference shares 5,750,000 4,000,000
137,150,000 95,724,000 1.4328 Anti dilutive

A.4 Date Description Debit Credit

(a) 27-Dec-11 Cash 10,150,000

Financial liability under Repo (Borrowing) 10,150,000
(Record the financial liability at its fair value)

31-Dec-11 Interest expense (Rs. 10,183,337 - Rs. 10,150,000) x 5 ÷ 10)

16,669
Financial liability under Repo (Borrowing) 16,669
(Record the accrual of interest on financial liability)

31-Dec-11 Investment in TFCs 22,332

Profit & Loss A/c (Rs. 10,166,669 - Rs. 10,144,337) 22,332
(Record the increase in TFC value)

6-Jan-12 Interest expense

(Rs. 10,183,337 - Rs. 10,150,000) x 5 ÷ 10) 16,668
Financial liability under Repo (Borrowing) 16,668
(Record interest till maturity on financial liability)

6-Jan-12 Financial liability under Repo (Borrowing) 10,183,337

Cash 10,183,337
(Record payment of financial liability under repo)

Page 4 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination

(b) 01-Jan-11 Profit and loss account 746,056

Long term loan (W-1) 746,056
(Record the revised loan at its fair value)

31-Dec-11 Interest expense (W-1) 6,074,606

Long term loan 225,394
Cash 6,300,000
(Record the interest expense for the year 2011)

(c) 1-Jul-11 Impairment loss (Rs. 80m - Rs. 60m) 20,000,000

Plant and machinery 20,000,000
(Record the impairment in the value of plant and
machinery)

1-Jul-11 Bank 90,000,000

Plant and machinery 60,000,000
Deferred profit (Rs. 90m - Rs. 60m) 30,000,000
(Record the sale of plant and machinery under sale and
leaseback arrangement)

Lease rental expense / Profit and loss account

31-Dec-11 9,660,000
Bank . 9,660,000
(Record the payment of lease rental)

31-Dec-11 Deferred profit (Rs. 30m ÷ 5) ÷2 3,000,000

Profit and loss account 3,000,000
(Record transfer of deferred profit to P & L)

W-1: Determination of Interest Expense and Fair Value of Loan

Discounted cash
Year Cash flow (Rs.) Disc. factor @10%
flow (Rs.)
31-Dec-11 (6,300,000) 0.9091 (5,727,273)
31-Dec-12 (6,300,000) 0.8264 (5,206,612)
31-Dec-13 (66,300,000) 0.7513 (49,812,171)
(60,746,056)
Less: Existing principal outstanding 60,000,000
Amount to be provided in Profit and Loss (746,056)

Amortized cost
Amortized cost
at start of the Interest Cash flow
Year at year-end
year
Rs. Rs. Rs. Rs.
31-Dec-11 60,746,056 6,074,605.56 6,300,000 60,520,661.16
31-Dec-12 60,520,661 6,052,066.12 6,300,000 60,272,727.27
31-Dec-13 60,272,727 6,027,272.73 66,300,000 -

Page 5 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination

A.5 (a)  An operating segment is a component of an entity:

o That engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity);
o Whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the
segment and assess the performance; and
o For which discrete financial information is available.

 A business activity which has yet to earn revenues, such as a start up, is an
operating segment if it is separately reported on to the chief operating decision
maker.
(b) As Jay Limited has both profit and loss making segments, the result of those in
profit and those in loss must be totaled to see which is the greater:

Profits (194+81+10) 285

Losses (22+63) (85)
200

So the 10% of profit or loss test must be applied by reference to Rs. 285 million.

Reportable
Segment Explanation
(Yes / No)
A Yes Because it generates more than 10% of revenue.
B No Because it fails to meet any of the criteria specified in
IFRS-8
C Yes Because it generates more than 10% of revenue.
D Yes Because it has more than 10% of assets.
E Yes Because its losses are more than 10% of absolute profit.

Check the 75% test is satisfied: (705+300+90)/1,177 = 93%

A.6 (a)
2011
Property

Carried at Carried at Total

cost fair value
------------Rupees------------
D,C Cost/ fair value as on 1 January 2011 10.00 120.00 130.00
Accumulated depreciation *1 (2.25) - (2.25)
Balance as on 1 January 2011 7.75 120.00 127.75
E Additions during the year *2 30.00 30.00
A Transferred from Inventory 120.00 120.00
D Depreciation *3 (0.90) (0.90)
Fair value adjustment (W-1) 14.00 14.00
Cost/fair value as on 31 December 2011 10.00 284.00 294.00
Accumulated depreciation (3.15) - (3.15)
Balance as on 31 December 2011 6.85 284.00 290.85

*1 : (Rs. 10m - Rs. 1m)/10 x 2.5 *2 : (48 - 3) x 2/3

*3 : (Rs. 10m - Rs. 1m)/10

6.1: Property B
Since property B was transferred to property plant and equipment on 30 June 2010,
it will not be considered as investment property.

Page 6 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination

6.2: Property D
This property rented out to tenants is situated outside the main city and therefore fair
value is not determinable. The building is being depreciated over a period of 10 years
on straight line method.

W-1: Fair Value Adjustment Rs. in million

Property A (120 - 100) (20.00)
Property C (150 - 120) 30.00
Property E (51 x 2/3) - 30 4.00
14.00

(b) Since the Property C is owned by GICL group and rented out to a subsidiary within
the group, it is classified as Property, Plant and Equipment in consolidated financial
statements, instead of Investment Property.

The value of Property C to be shown in Property, Plant and Equipment while

preparing the consolidated financial statements, is Rs. 125 million (160 - {(160-20) x
10% x 2.5}.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Summer 2012

General:

Overall performance reconfirms earlier observations that students resorted to selective

study as many could not answer or even attempt question # 2, 4 and 6.

Many students attempted the questions without properly reading the requirements of each
question and tried to answer in a totally different manner. For example, in question # 3
and # 6, instead of preparing disclosures/notes to financial statements, they made
numerous computations and written explanations which were not required.

It is disappointing to note that most candidates who appear for module E papers have
many years of practical experience at audit firms. Yet, the examination approach and
solutions they produce do not reflect proper presentation and in depth knowledge of
significant principles.

Question-wise comments:

Q.1 The overall performance in this question was average. Despite the fact that
consolidation is a regularly tested topic at this level, there were many students who
were not able to get good marks in the question although it involved quite simple
adjustments. Some of the common mistakes witnessed in the answers were as
follows:

1 Contingent liabilities taken over were supposed to be part of purchase

consideration. These were deducted from the net assets in calculating the
goodwill. Surprisingly, many students added contingent liabilities to the net
assets.

2 Many students didn’t calculate goodwill for Tee Ltd and also failed to
include gain on disposal of such investment correctly in the consolidated
retained earnings.

3 Impairment charge at 10% of the goodwill amount was required to be

recorded, but some of the students strangely calculated 90% of the goodwill
and then used that amount to calculate 10% impairment charge. Since
goodwill and related impairment charge is recorded in books of holding
company, it has no effect on the calculation of non-controlling interest in
Cee Ltd; some of the students also considered this charge in calculating non-
controlling interest and also adjusted group retained earnings accordingly.

Page 1 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2012

4 While calculating the profit on disposal of investment in Tee Ltd, many

students either failed to include fair value of the retained investment or
calculated such value incorrectly. Students also failed to correctly calculate
the net assets of Tee Ltd on the date when control was lost.

5 In the consolidated balance sheet, many students also included balances of

Tee Ltd, which was not supposed to be consolidated as the control had been
lost before year-end.

6 In determining the value of investment in associates, most of the students

either failed to include the share of profit of associate from the date when the
control was lost or calculated it incorrectly.

7 In calculating cost of retained investment, some of the students used original

cost instead of fair value on the date when the control was lost.

8 Some of the students either failed to eliminate intercompany receivables and

payables or used part payment of Rs. 20 million as a balance rather than
deducting it from the invoiced amount to calculate the balance.

9 While calculating the net controlling interest, some of the students didn’t
consider adjustment for intercompany profits on inventory.

Q.2 This question on statement of expenses of a general insurance company was very
simple. The students were only required to tabulate the data in the specified
format. The overall performance was very good and many students secured full
marks. However, some of the students made a number of mistakes which are listed
below:

1 Column for underwriting expenses was not shown.

2 In calculating the net commission expenses, opening deferred commission is

added to the commission paid and closing balance is deducted. Many
students reversed this order.

3 Many candidates did not show sub-totals and grand totals.

Q.3 This question on disclosure for earnings per share was straight forward and
students’ performance was fairly good. However, many of them didn’t read the
requirements of the question and either didn’t prepare the disclosure extracts or
missed out some of the disclosures.

Common mistakes were as under:

1 Majority of the students didn’t prepare separate disclosure for reconciliations

of profit for the year to basic and diluted earnings and reconciliation of basic
number of shares to diluted number of shares.

Page 2 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2012

2 In calculating the weighted average number of shares, some of the students

incorrectly applied the bonus factor to all the shares rather than only to the
opening balance.
3 While calculating basic earnings per share for ordinary shareholders, many
students didn’t deduct preference dividend from profit after tax.
Q.4 Very few candidates were able to secure passing marks in this question. Most
candidates performed lengthy calculations but these were extremely vague and
produced incorrect answers. It was quite obvious that candidates lacked knowledge
of accounting treatment of Financial Instruments. Comments on each part of the
question are given below:
(a) In this part majority of the candidates mentioned incorrect description /
account heads. For example, ‘investments’ were credited instead of
‘financial liability’. Being a buy-back agreement, the sale of TFCs was
supposed to be recorded as a financing arrangement and accordingly the
difference between the sale and repurchase amount was to be apportioned
between the two periods. Moreover, TFCs were to be revalued at year end.
Very few students understood these requirements.
(b) In this part, students were supposed to calculate the revised amount of
principal by discounting the revised cash outflows at the market interest rate.
The interest expenses for each year was required to be revised based on the
revised amount of principal. The difference between the revised and the
existing principal was to be recorded as additional interest cost in the current
year and added to the loan balance. The additional amount added to the loan
balance was to be amortized as reduction in interest cost using effective
interest rate i.e. the market rate.

Very few students could attempt this part correctly. Majority of those who
attempted it simply prepared journal entries for receipt of loan and payment
of interest without making the required adjustments.
(c) In this part, the impairment of plant and machinery was supposed to be
recorded first and then sale under sale and leaseback arrangement was to be
recorded and the resultant gain was to be deferred.

Common mistakes in this part were as under:

1 Many students recorded the net gain without recording the impairment
charge.

2 Many students recorded the full year’s amortization of deferred profit

instead of six months.

3 Similarly, many of them also recorded full year’s rental instead of six
months.

4 Many students could not use the correct account titles.

Page 3 of 4
Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2012

Q.5 This question on segment reporting had two parts: first part was a theory question
on identification of operating segments whereas the second part pertained to
identification of reporting segments using the given data.

Overall performance in this question was average. Many students gave incomplete
answers and did not know the correct interpretation/application of the criteria for
reporting segments.

Common mistakes were as follows:

1 In part (a), barring few, the candidates did not discuss the business activity
which has not started earning revenues.

2 Many students described the reporting segments criteria as operating

segment criteria.

3 Most of the students did not mention the 75% revenue testing criteria after
the identification of reportable segments. Consequently, they did not check
the criteria, while answering part (b).

4 Though majority of the students identified the greater of absolute profit or

loss criteria, but could not apply it correctly.

Q.6 This was one of the worst attempted questions in general, despite being very
straightforward. Candidates were provided with all relevant information and were
only asked to prepare a note on Investment Property for inclusion in the financial
statement. It was evident that the students did not have adequate knowledge of the
topic. Some of the major mistakes were as under:

• Candidates in general forgot that a proper disclosure was asked. They only
wrote the closing fair values of the properties instead of showing the
movements.

• Many candidates prepared separate computation in respect of each property

and did not consolidate them in the form of a note to the financial statement.

• In case of property B, candidates missed out the fact that the same was
transferred to property, plant and equipment last year, as such it should not be
disclosed as investment property.

(THE END)

Page 4 of 4
 The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examination 4 December 2012
Winter 2012 100 marks - 3 hours
Module E Additional reading time - 15 minutes
Q.1 Following are the extracts from the draft financial statements of three companies for the year
ended 30 June 2012:
INCOME STATEMENTS
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

STATEMENTS OF CHANGES IN EQUITY

Ordinary share capital
Retained earnings
of Rs. 10 each
TL PL LL TL PL LL
---------------------------Rs. in million--------------------------
As on 1 July 2011 10,000 800 600 2,380 270 70
Final dividend for the year
ended 30 June 2011 - - - (1,000) - (60)
Profit for the 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
Financial Reporting Standards. (Ignore deferred tax implications) (23)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 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)

Q.3 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. (06)

(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 (06)

Required:
Discuss how the above investments/costs would be accounted for in the consolidated financial
statement for the year ended 30 June 2012.
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.4 Primate Mart Limited (PML) operates a network of several retail stores throughout the
country. In order to retain its market share and achieve growth in revenue, PML has extended
substantial credit facilities to its major customers. Consequently, PML’s bank borrowings
have increased substantially over the past few years. PML has recently requested its bank for
further increase in its borrowing facilities.

The bank is concerned about the increase in the quantum of loans extended to PML and has
appointed you to analyse the financial performance of PML for the last three years. The
information available in respect of the company is as follows:

(i) Statement of financial position

2012 2011 2010
-------------- Rs. in million --------------
Property, plant and equipment 322 290 278
Stock-in-trade 620 540 440
Trade debts 443 385 344
Cash 15 12 12
1,400 1,227 1,074

Share capital 90 90 90
Retained earnings 282 288 291
372 378 381
Long term loans from bank 420 355 212
Short term running finance 320 200 200
Trade creditors 280 284 277
Tax payable 8 10 4
1,400 1,227 1,074

(ii) Income statement

2012 2011 2010
-------------- Rs. in million --------------
Sales – Cash 1,050 940 790
– Credit 450 380 320
Total sales 1,500 1,320 1,110
Cost of sales (996) (864) (723)
Gross profit 504 456 387
Other operating costs (384) (341) (288)
Profit from operations 120 115 99
Financial charges (102) (79) (57)
Profit before taxation 18 36 42
Taxation (6) (12) (14)
Profit for the year 12 24 28

Depreciation for the year 33 36 42

Proposed dividend 10% 20% 20%

(iii) The present borrowing limit sanctioned to PML is Rs. 750 million.

Required:
Prepare a report for the bank containing an analysis of the financial performance of the
company for the period covered by the financial statements. Your report should focus on the
particular concern of the bank regarding the rapidly increasing level of lending exposure to
PML and suggest matters which the bank may discuss with the PML’s management.
(Assume your name is Bashir Ahmed) (15)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.5 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:
Discount rate 13%
Expected rate of return on plan assets 10%

(iii) 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.
(iv) Average remaining working lives of employees is 10 years.
(v) LEL uses the corridor approach to recognize actuarial gains and losses.
(vi) 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)

Q.6 Eagle Bank Limited (EBL) is listed on all the stock exchanges in Pakistan. At the year end, the total
borrowings of the bank amounted to Rs. 29,761 million, which included borrowings outside
Pakistan amounting to Rs. 11,712 million. Details of borrowings at the year-end were as follows:

(i) All local borrowings are in Pak Rupees.

(ii) Inter-bank call money borrowings amounted to Rs. 3,600 million. These borrowings were
unsecured and carried mark-up ranging between 8.7% and 12.1% per annum.
(iii) EBL operates in several countries where it maintains nostro accounts. The overdrawn nostro
accounts amounted to Rs. 456 million. Mark-up on overdrawn nostro accounts was charged
by the foreign banks at the rates prevailing in the respective countries.
(iv) Outstanding loans from the State Bank of Pakistan (SBP) under the Export Refinance
Scheme amounted to Rs. 14,182 million. These loans carried mark-up ranging between
9.7% and 11% per annum and were secured by EBL’s cash and other securities held by SBP.
(v) The borrowings under repurchase agreements amounted to Rs. 11,523 million and carried
mark-up ranging between 6.3% and 12.5% per annum. These borrowings are secured against
government securities amounting to Rs. 24,802 million and are repayable latest by
April 2013.

Required:
Prepare note on ‘Borrowings’ for inclusion in the Financial Statements of Eagle Bank Limited with
appropriate disclosures in accordance with the State Bank of Pakistan guidelines. (10)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.7 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. (04)

(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. (05)

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)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

Ans.1 Tiger Limited

Consolidated Income Statement
For the year ended 30 June 2012
2012
Rs. in million
Revenue [6,760 + 426 – (50 × 1.2)] 7,126
Cost of sales [4,370 + 218 – (50 × 1.2) + (50 × 40% × 20% ) (4,532)
Gross profit 2,594
Operating expenses (1,270+ 132 +7) (1,409)
Profit from operations 1,185
Investment income (W-1) 398
Profit before taxation 1,583
Income tax expense (400 + 17) (417)
Profit for the year from the continuing operations 1,166
Profit for the year from the discontinued operations (W-2)] 186
1,352

Attributable to:
Equity attributable to owners of the parent (balancing) 1,342
Non-controlling interest (W-3) 10
1,352

Tiger Limited
Consolidated Statement of Changes in Equity
For the year ended 30 June 2012

Attributable to equity shareholders of

Tiger Limited Non Controlling
Total
Share Retained Interest
Total
Capital Earnings
----------------------Rs. in million-----------------------
Balance as on 1 July 2012 10,000 2,502 12,502 214 12,716
(W-4) (270 + 800) × 20%
Dividend paid for the year 2012 - (1,000) (1,000) (1,000)

Profit for the year - 1,342 1,342 10 1,352

(W-3)
Purchase of subsidiary - - - 201 201
(600 + 70) × 30%
Disposal of a subsidiary - (153) (153) (222) (375)
(W-5) (W-6)
Balance as on 30 June 2012 10,000 2,691 12,691 203 12,894

W-1: Investment income Rs. in million

Investment income of TL 730
Less: Profit on disposal of PL (1,300 - 1,000) (300)
Less: Share of LL's ordinary dividend (60 × 70%) (42)
Add: Investment income of LL 10
398

W-2: Profit from discontinued operations Rs. in million

Profit for the year (Rs. 78 × 6 ÷ 12) 39
Add: Profit on disposal of PL (W-2.1) 147
186

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

W-2.1 : Profit on disposal of interest in Panther Limited

Net assets as on 30 June 2011 (800 + 270) 1,070
Add: Profit up to 31 Dec 2011 (Rs. 78 × 6 ÷ 12) 39
Carrying value of net assets at disposal 1,109
Add: Goodwill (W-2.2) 266
Total assets disposed off 1,375
Less: Attributable to non-controlling interest (1,109 x 20%) (222)
1,153
Less: Sale proceeds 1,300
Profit on disposal 147

W-2.2 : Goodwill of Panther Limited

Cost of investment 1,000
Less: Net assets acquired [(800 + 55) × 80%] (684)
Goodwill on the date of acquisition 316
Less: Impairment to date of disposal (50)
266

W-3: Profit for the year - non-controlling interest

PL (Rs. 78 × 6 ÷ 12 × 20%) 8
LL (Rs. 69 × 30%) 21
Less: Dividend received by NCI of LL (60 × 30%) (18)
Less: Unrealized profit in inventories (50 × 40% × 20% × 30%) (1)
10

W-4: Consolidated retained earnings as on 01 July 2011

TL 2,380
Post acquisition profit of PL [80% × (270 - 55)] 172
Goodwill impairment to date of disposal - PL (50)
2,502

W-5: Disposal of Subsidiary

Post acquisition profit up to prior years [80% × (270 - 55)] 172
Profit of the year (Rs. 78 × 6 ÷ 12 × 80%) 31
Goodwill impairment to date of disposal (50)
153
W-6: Total share of NCI in PL
Post acquisition profits up to prior years ((270 + 800) x 20%) 214
Profit of the year (W-3) 8
222

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

Ans.2 (a) Dr. Cr.

Date Description
----------Rupees----------
01-04-12 Inventory / stock (4,000 × Rs. 6,200) 24,800,000
Bank / Creditor 24,800,000
(Record the purchase of stock)

Note:
The futures contract has a zero value at the date it is entered into, so no entry is made
in the financial statements.

30-06-12 Financial asset (4,000 × 750) 3,000,000

Profit and loss a/c (hedging gain) 200,000
Inventory / stock (4,000 × Rs. 700) 2,800,000
(Record the net hedging gain on the price
movement of inventory and futures)

(b) 01-07-11 Cash (200 – 4) 196,000,000

Debentures (W-1) 181,630,000
Equity (W-1) 14,370,000
(Record the proceed from issuance of debentures
in accordance with IAS-32)

30-06-12 Interest expense (181.63 × 11.81%) 21,450,000

Debentures (balancing) 5,450,000
Cash (Rs. 200 × 8%) 16,000,000
(Recognize the interest expense for the year)

W-1: Determination of Equity and Liability Components

Discount the cash flows at 11%

Present value of interest at the end of: Rs. in million

30-Jun-12 (Rs. 200 million × 8%) × [1 ÷ (1+0.11)] 14.41
30-Jun-13 (Rs. 200 million × 8%) × [1 ÷ (1+0.11)2] 12.99
30-Jun-14 (Rs. 200 million × 8%) × [1 ÷ (1+0.11)3] 11.70
30-Jun-14 Present value of principal
[Rs. 200 million × (1 ÷ (1+0.11)3] 146.24
Total liability component 185.34
Total equity element (balancing) 14.66
Proceed of issue 200.00

Allocate issue costs

Liability Equity Total
Rs. in million
Proceeds 185.34 14.66 200.00
Issue cost (3.71) (0.29) (4.00)
181.63 14.37 196.00

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

Ans.3 (a) The investment in GL should be treated as investment in associates because QPL not
only holds 20% of its investment but also exercises significant influence over GL.
Investments in associates are accounted for at cost plus post acquisition change in net
assets. (equity method)
Since the fair value of GL’s net assets on acquisition date is higher than its costs (i.e.
fair value of the shares in QPL exchanged for the shares of GL), initially the
investment would be recorded at fair value and the excess being the bargain gain
would be recognized in the income statement (as income) .
The carrying value of investment and the recoverable amount as at 30 June 2012
would be as follows:
Rs. in million
Cost of investment at acquisition (fair value) 70
Post acquisition share in profit (280 – 250) × 20% 6
Carrying value at 30 June 2012 76

Recoverable amount (370 × 20%) 74

Since the recoverable amount is less than the carrying amount, the investment at 30
June 2012 should be shown at recoverable amount i.e. Rs. 74 million. A provision
for impairment in the value of investment amounting to Rs. 2 million would be
recognized in the income statement.

(b) The invested amount in Brand should be accounted for as follows:

Expense Property,
Intangible
Income plant and
assets
Statement equipment
---------------------Rupees---------------------
Research on size of potential market (a)
800,000 - -
Product designing - (b)
1,500,000 -
Labour costs in refinement of products - (b)
950,000 -
Development work undertaken to finalize the - -
(b)
product design 11,000,000
Cost of upgrading machine - - (c)
18,000,000
Staff training costs (a)
600,000 - -
Advertisement costs (a)
3,400,000 - -
4,800,000 13,450,000 18,000,000

(a)
-38 does not allow capitalization of research cost, staff training costs and
advertisement costs as these are not directly attributable costs. Therefore these
expenditures should be expensed out.
(b)
Development expenditure is capitalized when CTML demonstrates all the
following:
• The technical feasibility of completing the intangible asset so that it will be
available for use or sale.
• CTML’s intention to complete the intangible asset and use or sell it.
• CTML’s ability to use or sell the intangible asset.
• That the intangible asset will generate probable future economic benefits.
• The availability of adequate technical, financial and other resources to complete
the development and to use or sell it.
• CTML’s ability to measure reliably the expenditure attributable to the intangible
asset during its development.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

Assuming that all these criteria are met, the cost of development should comprise
directly attributable costs necessary to create the asset and to make it capable of
operating in the manner intended by management.

The cost of upgrading the machines is tangible asset and should be regarded as
property, plant and equipment.

Ans.4 To: The bankers of Primate Mart Limited (PML)

From: Bashir Ahmed, Consultant
Subject: Financial performance 2010-12
Date: December 2012

1 Introduction
In accordance with your instructions, I set out below a review of PML’s financial
performance over the last three years. The main focus of this report is on the reasons
for the increase in the quantum of bank borrowing by PML and to consider how the
bank can safeguard its interest in the given situation. Relevant workings and
accounting ratios are included in the attached appendix.

2 Bank lending
The main reason for the steep increase in bank lending is that the entity has not been
generating sufficient cash from its operating activities over the past three years.
During the year ended 30 June 2012 and 2011, the cash generated from operating
activities (i.e. Rs. 11 million and Rs. 17 million respectively) has not been sufficient
to cover interest payments.

Despite the above, PML is continuing to pay dividends. Such dividend and the
income tax is also being funded through bank borrowings.

As at 30 June 2012, total bank borrowing amounted to Rs. 740 million out of a total
facility of Rs. 750 million. Still, the company’s BOD has approved 10% cash
dividend which would amount to Rs. 9 million.

Consequently, debt equity ratio has increased from 52% in 2010 to 69% in 2012.
Any increase in borrowing would further deteriorate the ratio.

3 Operating review

Revenue has been rising steadily over the period and operating profit as a
percentage of sales has been more or less steady. The slight decline in operating
profit is mainly on account of increase in other operating costs.

Increase in financial charges has had a significant effect on the net profit of the
company which has decreased from 2.5% of sales in 2010 to 0.8% of sales in 2012,
despite the fact that sales has increased by 35% in two years.

Moreover, there has been a large increase in trade receivables as well as stocks.
Although the number of days sales in trade debts has fallen steadily over the period,
the trade debts at the end of June 2012 still represent nearly a year’s credit sales.
This is excessive and seems to imply a poor or highly liberal credit control policy.

The increase in stocks and trade debts have used up most of the cash generated
through operating activities leading to the present pressure on bank borrowings.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

4 Matters for discussion

The bank should discuss the following issues with the PML’s management.
• The need to undertake an urgent review of credit terms being offered by PML to
its customers in order to reduce the levels of trade receivables.
• The need to reduce stock levels which seems excessive (representing over seven
months’ sales).
• The need to postpone dividend declaration till the company’s cash position
improves sufficiently.
• The need to review operating costs and introduce measures to control them as
far as possible.
• While discussing the above, a comparison with the industry practices especially
in respect of levels of trade debts and stock may be emphasised.

Appendix
2012 2011 2010
----------------Rs. in million----------------
1 Cash generated from operations
Profit before interest 120 115 -
Depreciation 33 36 -
Increase in stock-in-trade (80) (100) -
Increase in trade debts (58) (41) -
Increase in trade creditors (4) 7 -
11 17

2 Gearing (Debt Equity Ratio)

67% 59% 52%
Bank loans ÷ (Equity + Bank loans) × 100
740 ÷ (740 + 372) 555 ÷ (555 + 378) 412 ÷ (412 + 381)

3 Profit margin %
8.0% 8.7% 8.9%
Profit before interest ÷ Sales × 100
120 ÷ 1,500 × 100 115 ÷ 1,320 × 100 99 ÷ 1,110 × 100

4 Interest cover
1.18 times 1.46 times 1.74 times
Profit before interest ÷ Interest
120 ÷ 102 115 ÷ 79 99 ÷ 57

5 Net profit as % of sales

0.8% 1.8% 2.5%
Net profit ÷ Sales × 100
12 ÷ 1,500 × 100 24 ÷ 1,320 × 100 28 ÷ 1,110 × 100

6 Stock turnover
1.61 times 1.60 times 1.64 times
Cost of sales ÷ Stock in trade
996 ÷ 620 864 ÷ 540 723 ÷ 440

7 Trade debtors turnover in days

359 days 370 days 392 days
Trade debts ÷ Credit sales × 365
443 ÷ 450 × 365 385 ÷ 380 × 365 344 ÷ 320 × 365

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

Ans.5 Lion Engineering Limited

Statement of financial position
For the year ended 30 June 2012
2012
Rs. in million
CURRENT LIABILITIES
Staff retirement benefits 21

20 STAFF RETIREMENT BENEFITS

20.1 Defined benefit scheme
The company operates a funded pension scheme for all its permanent employees.
Contributions are made to the scheme based on actuarial recommendations. The
last actuarial valuations were carried out at 30 June 2012 by using the Projected
Unit Credit method.

20.1.1 Amount recognized in the statement of financial position

2012
Rs. in million
Present value of defined benefit plan 110
Less: Fair value of plant assets 80
30
Unrecognized actuarial gains (W-2) 1
Unrecognized past service costs (15 ÷ 3 x 2) (10)
Liability in the statement of financial position 21

20.1.2 Movement in the present value of the defined benefit obligation

Obligation at the beginning of the year 100
Interest cost (Rs. 100m x 13%) 13
Current service cost 29
Past service cost 15
Actuarial gains (balancing) (2)
Benefits paid (45)
Obligation at the end of the year 110

20.1.3 Movement in the fair value of plan assets

Fair value at the beginning of the year 70
Expected return on plan assets (Rs. 70 × 10%) 7
Contribution to the fund 30
Actuarial gains (balancing) 18
Benefits paid (45)
Fair value at the end of the year 80

20.1.4 Amount recognized in comprehensive income

Current service costs 29
Interest expense (Rs. 100 × 13%) 13
Expected return on plan assets (Rs. 70 × 10%) (7)
Recognized actuarial loss (W-1) 1
Past service costs recognized (15/3) 5
Pension fund expense 41

20.1.5 Principal actuarial assumptions used were as follows:

Discount rate 13%
Expected return on plan assets 10%
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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

2012
Rs. in million
W-1: Actuarial loss to be recognized
Balance at the beginning of the year 20
Less: Corridor: greater of
10% of PV of obligations at the beginning of the year (100 × 10%)
10% of the plan assets at the beginning of the year (70 × 10%) 10
10
Total gain or loss to be recognized i. e. Rs. 10 million
Actuarial loss to be recognized in the current year =
Average remaining working life i. e. 10 years
= Rs. 1 million

W-2: Unrecognized actuarial loss

Balance at the beginning of the year (20)
Actuarial gain on assets (Note 20.1.3) 18
Actuarial gain on obligation (Note 20.1.2) 2
Recognized due to corridor 1
1

Ans.6 Eagle Bank Limited

Notes to the financial statements
For the year ended 30 June 2012

14 BORROWINGS 2012
Note
Rs. in million
In Pakistan 18,049
Outside Pakistan 11,712
29,761

14.1 Particulars of Borrowings

In local currency 18,049
In foreign currency 11,712
29,761
14.2 Details of borrowings
Secured
Borrowings from State Bank of Pakistan
under export refinance scheme 14.3 14,182
Repurchase agreement borrowings 14.4 11,523
25,705
Unsecured
Interbank call money borrowings 14.5 3,600
Overdrawn nostro accounts 14.6 456
4,056
29,761

14.3 Borrowings from State Bank of Pakistan (SBP) under Export Refinance Scheme are
secured by the bank's cash and security collateral held by SBP. These carry mark-up
ranging between 9.7% and 11%.

14.4 These carry mark-up ranging between 6.3% and 12.5% per annum and are secured
against government securities of carrying value of Rs. 24,802 million. These are
repayable by April 2013.
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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination - Winter 2012

14.5 These carry mark-up rates ranging between 8.7% and 12.1% per annum.

14.6 Since, the bank operates in different countries, these carry varied mark- up rates as
given by the external banks of respective countries.

Ans.7 (a) 25% of the bonus is to be paid in cash, so a liability of Rs. 7.5 million (30 × 25%)
must be accrued.

The remaining amount of bonus is to be paid in share options. The services must be
recognized when they are received. Therefore, 12 months of the 18 months service
period up to the grant date must be recognized.

Hence, Rs. 14.25 million [(30 × 75% × 95%) × 12 ÷ 18] would be provided upto 30
June, 2012.

(b) In the given situation, the purchase of plant involves a share-based payment in
which the counterparty has a choice of settlement, either in shares or in cash.
Such transactions are treated as cash-settled to the extent that the entity has
incurred a liability i.e. Rs. 50 million.

If the value of the liability based on share price, at the time of transaction, is less
than the fair value of the plant i.e. less than Rs. 50 million, the transaction would
give rise to a compound financial instrument, with a debt and an equity element.
The fair value of the equity element would be the difference between fair value
of the plant and the fair value of the debt element of the instrument.

However, if the value of the liability based on share price at the time of
transaction is more than the fair value of the plant i.e. more than Rs. 50 million,
the difference shall be recognized as an expense.

(The End)

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 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Winter 2012

General:
It was a relatively easy paper and the performance was reasonable. However, overall
performance reconfirms earlier observations that students resort to selective study as
many did not produce proper answers of question # 2, 6 and 7.

Question-wise comments are as follows:

Question 1

Almost all students attempted this question but only about half of them could achieve
passing marks.

Common mistakes were as under:

(a) Inter-company sales and purchases were eliminated at cost instead of the invoiced
value which was supposed to be calculated by using 20% mark-up. Similarly, for
calculating inter-company profit on the closing stock, some students used the cost as
sales value and re-calculated the cost and profits using the 20% mark-up. Many
candidates deducted the inter-company profit from cost of sale, instead of adding it.

(b) The differences between income and expenses of PL (the subsidiary which was
disposed of after six months) for the six months during which it remained a
subsidiary was supposed to be included in profit from discontinued operations and
should have been disclosed in accordance with para 33 of IFRS-5. Very few
students made this presentation correctly.
Majority of the students reported proportionate income and expenses under
respective line items which was incorrect. Some of the students consolidated the full
year’s figures.

Investment income as shown in TL’s separate income statement included profit on

disposal of PL. In consolidated financial statements, this should have been included
in the profit from discontinued operations. Most of the students did not adjust it in
arriving at the consolidated investment income.

(c) While preparing ‘Statement of Changes in Equity’, only few candidates presented
the correct format. Other common errors were as follows:

(i) Many students also included the share capital of the investees in the share
capital column.

Page 1 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2012

(ii) Non-controlling interest at the time of purchase of subsidiary, during the year,
was not calculated/disclosed.

(iii) While determining the opening balance of the retained earnings, post
acquisition profits of the subsidiary were taken into consideration correctly
but goodwill impairment was ignored.

(d) In determining profit on disposal of interest in subsidiary:

(i) Goodwill was not considered. Some students adjusted goodwill but valued it
incorrectly as they ignored the amount of impairment.

(ii) Instead of eliminating the 20% non-controlling interest in the net asset value,
many students reduced sale proceeds by 20%.

Question 2

Journal Entries were required to be prepared in the light of IAS-39 in respect of two
different situations. Around 20% of the student, did not attempt this question which
confirms the trend of selective study. Comments on each part of the question are given
below:

Part (a)

This part of the question was based on hedge accounting for stock in trade. According to
the given situation, inventory was purchased @ Rs. 6,200 per maund and on the same
date a futures contract was signed for delivery of same quantity at Rs. 6,300 per maund.

Many students recorded the purchase correctly but also booked entry to record the futures
contract using various types of assumptions. Under IAS-39, no entry is required to be
made in such circumstances.

While recording the year end adjusting entry, many students recorded/adjusted the
inventory on the basis of its future price instead of spot price and did not record this
gain/loss.

Part (b)

In this case, convertible debentures were issued. Before passing the journal entries, the
candidates were required to calculate present value of the debentures at market interest
rate, determination of debt and equity element, allocation of cost of issue of shares
between debt and equity elements and calculation of interest expense using the effective
rate of interest. The performance in this part was relatively better. The mistakes which
were generally observed were as under:

• Some students calculated present value of the principle but overlooked the interest
payment. The reverse situation was also observed occasionally.

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 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2012

• Many students calculated interest expense on gross value of the liability component
instead of net value.

• Some of the students calculated the interest expenses using the coupon interest rate
instead of effective rate of interest.

• Impairment test was not carried out.

Question 3 (a)

This question was based on IAS-28 (Investment in associates). The candidates were
required to discuss the accounting treatment where a company named Parrot Limited
(PL) had purchased 20% shares in Goose Limited (GL), when fair value of GL’s net
assets was Rs. 350 million. The purchase consideration consisted of 2 million shares of
PL whose market value on the date of purchase was Rs. 33 per share. At year-end the
value of GL’s net assets had increased to Rs. 370 million; however, in GL’s financial
statements, the net assets stood at Rs. 380 million.

The overall performance was good. The mistakes which were commonly observed were
as follows:

• Instead of discussing the accounting treatment, many students prepared journal

entries.

• Many students mentioned that the investment would be treated as investment in

associate but the reason they gave was not appropriate. The treatment as investment
in associate was because according to the question, PL was able to exercise
significant influence over GL.

• The investment should have been recorded at the proportionate share of fair value of
the net assets of GL. Instead, many students mentioned that investment should be
recorded at the market value of shares issued by PL.

• Many students did not know that the excess of proportionate fair value of net assets
over the market price of shares issued as purchase consideration would be treated as
income for the year. Many students termed it as negative goodwill.

Question 3 (b)

In this part, various types of expenditures incurred on development and promotion of a

brand were given. The candidates were generally able to identify correctly as to whether
a particular expense should be capitalized or charged off. However, quite often the
explanations were missed out altogether or were not upto the mark. Moreover, many
students considered the expenditure on upgrading the machine as a part of Intangibles
rather than as addition to Property, Plant and Equipment.

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 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2012

Question 4

In this question, the candidates were asked to prepare a report based on the financial
performance of a company. The report was required to be submitted to the company’s
bank which was concerned about the significant increase in the level of company’s
borrowings. The report was also expected to contain a list of matters that the bank may
discuss with the company’s management.

This was perhaps the worst attempted question as the following issues were generally
observed:

(i) The students were generally found lacking in presentation skills. The logical flow
was missing as calculations, data and comments were all mixed up without any
logical sequence.

(ii) Many students only commented on the financial performance without focusing on
the specific requirements.

(iii) Majority of the students calculated all sorts of ratios sometimes using incorrect
formulas also. They kept on discussing the ratios without considering whether
these were relevant or not. Profitability was discussed in detail as most students
overlooked the fact that the real issue was the conversion of these profits into cash.

(iv) Following important matters were quite often ignored:

• Borrowing limits had almost been exhausted.

• Dividend was being paid in spite of the tight liquidity position of the company.

(v) The specific requirements of listing the matters that the bank may need to discuss
with the management were either ignored altogether or only one or two points were
mentioned.

Question 5

In this question the candidates were asked to prepare a note on retirement benefits
(defined benefit plan) as is presented in the financial statements. A good performance
was seen in this question as is usually the case whenever this topic is tested. This is
probably due to the fact that there is a standard format and the students are only required
to fill the various figures. The calculations involved are also straightforward with little or
no variation.

Despite the above, there were many students who still made very basic mistakes such as
the following:

(a) Description of the scheme with method of actuarial valuation was missing.

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 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2012

(b) Principal actuarial assumptions were missing.

(c) Interest cost on opening balance of defined benefit obligation was wrongly
calculated. Likewise, return on the plan assets was also miscalculated.

(d) The treatment of actuarial gains / losses was reversed i.e. gains were treated as if
they were losses and vice versa.

(e) Many students fully recognized the past service cost instead of allocating it over
three years.

Question 6

This was also a simple question. Candidates were provided with all the relevant
information and were only asked to prepare a note on ‘Borrowings’ in the financial
statements of a bank. Some of the mistakes observed, were as under:

(a) Classification of borrowings in local currency and foreign currency was incorrectly
made. Students considered only the amount of nostro accounts as foreign currency
borrowings and treated the remaining balance as local currency borrowings.

(b) Many students did not present the secured and unsecured borrowings separately.

(c) Proper descriptive notes regarding mark-up rates, collateral and repayment period
were not prepared. Some candidates ignored them altogether.

Question 7

Two situations related to share-based transactions were given and the candidates were
required to discuss the treatment thereof in the financial statements of a company:

Part (a)

According to the question, a company had announced a bonus of Rs. 30 million for its
employees if they achieved the annual targets. The announcement was made on 1st July
2011 according to which 25% of the amount was payable in cash to all employee whereas
75% of the amount was to be given in the form of share options to those employees who
would be in the employment of the company on December 31, 2012. The year-end was
June 2012. The exercise date and the number of options was to be fixed by the
management on the last day of the year.

The performance was reasonable. Almost all the students knew that the cash amount
would be recorded in full as no condition was attached to it whereas the amount to be
given as share option would be allocated proportionately between the current and the
subsequent period after taking into account the fact that 5% of the employees would leave
before the bonus becomes due.

Page 5 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2012

Part (b)

According to this question, the supplier of a plant had the option of receiving cash
equivalent to 1.5 million shares of the customer after 3 months of supply or to receive 1.7
million shares of the company after 6 months. The candidates were required to describe
the accounting treatment on the date of transaction.

Majority of the students could not identify that if the fair value of the liability was less
than fair value of the plant, the difference would be treated as the equity element. In case
the fair value of the asset was less than the fair value of the liability, the difference would
be charged off as an expense. Most of the students did not mention anything about debt
and equity elements and how these are determined.

(THE END)

Page 6 of 6
 Advanced Accounting and Financial Reporting
Final Examination 4 June 2013
Summer 2013 100 marks - 3 hours
Module E Additional reading time - 15 minutes

Q.1 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.

The draft summarised statements of financial position of the three companies on

31 December 2012 are shown below:

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.
 Advanced Accounting and Financial Reporting Page 2 of 5

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. (20)

Q.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:

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 Financial Reporting Standards. (13)

Q.3 The following information pertaining to Krishna Limited (KL) has been extracted from its
financial statements for the year ended 31 December 2012.

(i) Total comprehensive income for the year:

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

(ii) 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.
 Advanced Accounting and Financial Reporting Page 3 of 5

(iii) 20% bonus shares being the final dividend for the year ended 31 December 2011 were
issued on 31 March 2012.
(iv) On 30 April 2012, holders of 80% convertible preference shares converted their shares
into ordinary shares.
(v) 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.
(vi) 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 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)

Q.4 Ashfaq General Insurance Limited (AGIL) is engaged in general insurance business. The
following information is available for the year ended 31 December 2012:

2012
Rs. in ‘000
(i) Information extracted from statement of cash flows:
Profit received on bank deposits 4,000
Profit / interest received on investments
held for trading 28,000
held to maturity 9,000
available for sale 16,000
Dividend received from investments
held for trading 6,000
available for sale 5,000
Proceeds from disposal of investments
held for trading 39,000
available for sale 43,000

(ii) Information extracted from profit and loss account:

Loss on sale of investments held for trading 12,000
Unrealized loss on revaluation of investments held for trading 1,000
Provision for impairment in the value of investments available for sale 2,000
Amortisation of premium on investments available for sale 3,000
Gain on sale of investments available for sale 15,000
Investment related expenses 7,000

(iii) Information extracted from statement of financial position:

1-1-2012 31-12-2012
Accrued profit/interest on: --------Rs. in 000--------
- Term deposits 2,000 1,500
- Investments - held for trading 11,400 13,000
- Investments - held to maturity 600 1,800
- Investments - available for sale 2,700 3,000

Required:
Prepare the statement of investment income for inclusion in AGIL’s financial statements for
the year ended 31 December 2012. (10)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.5 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. (14)

Q.6 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 2012 - 40
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.
(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
 Advanced Accounting and Financial Reporting Page 5 of 5

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)

Q.7 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%.

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. (12)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Summer 2013

A.1 Qudsia Limited

Consolidated statement of financial position
As on 31 December 2012
Rs. in million
ASSETS
Non-current assets
Property, plant and equipment W.1 5,546.90
Goodwill W.2 [110 – (37.5 × 80%)] 80.00
Investment in associates W.3 251.47
5,878.37
Current assets (5,480 + 400) 5,880.00
11,758.37
EQUITY AND LIABILITIES
Equity attributable to owners of QL
Ordinary shares capital 6,000.00
Shares to be issued (purchase consideration payable) (4 × 15) 60.00
Retained earnings W.4 2,828.99
8,888.99
Non-controlling interest [(500 + 100 – 3.1) × 20%] 119.38
9,008.37
Current liabilities (2,400 + 350) 2,750.00
11,758.37

W.1 Property, plant and equipment

QL and ML (5,000 + 550) 5,550.00
Unrealised gain on purchase of the machine from ML
- Unrealised gain as on 01-10-2012 [24 – (26÷10×8)] (3.2)
- Realised gain for 1-10-2012 to 31-12-2012 [3.2 × 0.25÷8)] 0.1
Unrealsied gain on 31-12-2012 (3.10)
5,546.90

W.2 Goodwill in ML and its impairment

Goodwill at the date of acquisition [630 – (80% × (500 + 150)] 110.00
Goodwill impairment:
Carrying value of ML's net assets on 31-12-2012 (950-350) 600.00
Gross-up of goodwill in ML (CGU) (110 ÷ 80%) 137.50
737.50
Estimated recoverable amount of ML on 31-12-2012 (700.00)
Total impairment 37.50

W.3 Investment in associates (HL)

Cost of investment [190 + (4 × 15)] 250.00
HL’s post acquisition profits [(240 – 224) × 40%] 6.40
Additional depreciation on fair value of HL’s
building exceeding its carrying amount [(28 ÷ 7 ÷ 12) × 40% ] (0.13)
Unrealized profit on inventories sold to HL [(52×30 ÷ 130) × 40%] (4.80)
251.47

Page 1 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Summer 2013

W.4 Retained earnings QL

QL balance of retained earnings 2,900.00
Subsidiary ML:
ML post acquisition loss [(100 – 150) × 0.8] (40.00)
ML goodwill impairment W.2 (37.5 × 80%) (30.00)
Unrealized gain on purchase of the machine from ML W.1 (3.1 × 80%) (2.48)
Associate HL:
HL post acquisition profit W.3 6.40
QL’s share of additional depreciation on fair value
of HL’s building exceeding its carrying amount W.3 (0.13)
Unrealized profit on inventories sold to HL W.3 (4.80)
2,828.99

A.2 Healthcare Limited

Accounting treatment and disclosure requirements
For the year ended 31 March 2013

Recognition of provisions:
(i) Provision for fine and the cost of disposal of contaminated material:
According to IAS 37, a provision shall be recognised when all of the following
conditions are met:
 There is a present obligation (legal or constructive) as a result of a past event.
 It is probable that outflow of resources will be required to settle the obligation.
 A reliable estimate can be made of the amount of the obligation.

Since all the above conditions are met, a provision shall be made for the year ended 31
March 2013 as under:
 Penalty under the law for Rs. 9 million.
 Cost of disposal of contaminated inventory for Rs. 0.5 million.

(ii) Compensation for non-supply of food supplement to CCC:

According to IAS 37, if an entity has a contract that is onerous, the present obligation
under the contract shall be recognized and measured as a provision.

Hence HCL should make a provision for the compensation payable under the contract
i.e. Rs. 18 million. Although, the liability is payable after 31 March 2013, provision
shall be made for the year ended 31 March 2013 as the obligation event occurred before
the year-end.

An entity shall disclose the following for each class of provision:

 A brief description of the nature of the obligation and the expected timing of any
resulting outflows of economic benefits.
 An indication of the uncertainties about the amount or timing of those outflows.
Where necessary to provide adequate information, an entity shall disclose the major
assumptions made concerning future events, and
 The amount of any expected reimbursement, stating the amount of any asset that
has been recognized for that expected reimbursement.

Inventory of contaminated product and raw material returned to the supplier:

Trade receivables and sales revenue related to contaminated inventory recalled from the
customers shall be reduced by Rs. 165 million (132×1.25). Contaminated inventory costing
Rs. 202 million (70+132) shall be written off.
Page 2 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Summer 2013

Claim lodged with the supplier:

As per IAS 37:
 A claim should only be recognized when the realization of income is virtually certain
 Where an inflow of economic benefits is not certain but is probable, an entity shall give
an appropriate disclosure.
In view of the non-availability of any response from FCE, recovery of contamination claim
of Rs. 211.5 million is neither certain nor probable. Therefore, the claim shall not be
recognized nor a contingent asset be disclosed..

Contingent liability for a possible damages claims:

As per IAS 37, where the possibility of any outflow in settlement is remote, an entity shall
disclose for each class of contingent liability at the end of the reporting period a brief
description of the nature of the contingent liability and where practicable:

 An estimate of its financial effect.

 An indication of the uncertainties relating to the amount or timing of any outflow; and
 The possibility of any reimbursement.
As per the investigation report, the contamination is not health hazardous. However, there
is a remote probability that damages may be claimed by a user of the contaminated product.
As the amount of the obligation cannot be measured with sufficient reliability, HCL shall
disclose a contingent liability giving a brief description thereof.

A.3 Krishna Limited

Notes to the Financial Statements
For the year ended 31 December 2012
1. EARNINGS PER SHARE 2012
From From
continuing discontinued Total
operations operations
--------Rupees in ‘000--------
1.1 Basic earnings per share
Profit after taxation for the year 200,000 10,000
Dividend on convertible preference shares for the
year ended 31 December 2012
(500×100×20%×12%) (1,200) -
Profit attributable to ordinary shareholders 198,800 10,000

---No. of shares in ‘000---

Weighted avg. no. of ordinary shares in issue W.1 11,278 11,278

Rs. 17.63 0.89 18.52

1.2 Diluted earnings per share --------Rupees in ‘000--------

Profit after taxation for the year 200,000 10,000

---No. of shares in ‘000---

Weighted avg. no. of ordinary shares in issue W.1 11,278 11,278
Adjustment for:
- Conversion of preference shares W.3 467 467
- Employee options (20-2-6) ×2,500 30 30
11,775 11,775

Diluted earnings per share Rs. 16.99 0.85 17.84

Page 3 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Summer 2013

W.1: Weighted average no. of ordinary shares

No. of Fraction Adjust. Weighted
shares of factor average
Description Date
outstanding period (W-2) shares
--------------No. of shares in '000--------------
Balance 01-01-12 8,000
20% bonus issue (8,000×20%) 31-03-12 1,600
9,600 4/12 1.0213 3,268
Preference shares converted
into ordinary shares
(500×80%×2) 30-04-12 800
10,400 2/12 1.0213 1,770
20% Right issue (10,400×20%) 01-07-12 2,080
12,480 6/12 6,240
11,278
W-2: Adjustment factor for Right issue
Value per No. of
Rs. '000
share shares
Shares prior to right issue at FV prevailing on the
exercise date 80.00 10,400 832,000
20% right shares issued at exercise price 70.00 2,080 145,600
Theoretical ex-right value 977,600÷12,480 78.33 12,480 977,600
Adjustment factor 80÷78.33 1.0213
W.3: Assumed conversion of preference shares
No. of Weighted
Fraction of
Description Date shares average
period
outstanding shares
Preference shares converted into
ordinary shares (500×80%×2) 30-04-12 800.00 4/12 267
Remaining convertible preference
shares (500×20%×2) 200.00 1 200
467

Page 4 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Summer 2013

A.4 Ashfaq General Insurance Limited

Statement of Investment Income
For the year ended 31 December 2012

Rs. in million
Income from trading investments
Loss on sale of investments (12,000)
Dividend income 6,000
Profit / interest earned on investments 28,000 + 13,000 - 11,400 29,600
23,600
Income from non-trading investments
Held to maturity
Profit received on bank and term deposits 4,000 + 1,500 - 2,000 3,500
Profit / interest earned on investments 9,000 + 1,800 - 600 10,200
Available for sale
Profit / interest earned on investments 16000 + 3000 - 2700 16,300
Dividend income 5,000
Amortisation of premium on investments (3,000)
32,000
Gain/(Loss) on sale of non-trading investments
Available for sale 15,000
Gain/(Loss) on revaluation of investments
Held for trading (1,000)
Provision for impairment in value of investments
Available for sale (2,000)
Investment related expenses (7,000)
Net investment income 60,600

A.5 Qasmi Investment Limited

Journal entries for 31 December 2011 and 2012

Debit Credit
Date Description
Rs. in million
31-Dec-2011 Accrued Interest written off (P&L) 12.00
Accrued Interest - 2010 12.00
(Accrued interest on 12%TFCs for 2010 is no more
receivable, now written off.)
Financial assets (12% TFCs) W.3 (16.89–12.00) 4.89
Interest income (P&L) 4.89
(Interest income on 12% TFCs at 4.426% for 2011)
Impairment loss (P&L) W.1 19.16
Financial assets (12% TFCs) 19.16
(Impairment of financial assets (12% TFCs) as
interest for 2010 to 2013 is no more receivable)
31-Dec-2012 Financial assets(12% TFCs) W.1 (88.53×16.426%) 14.54
Interest income (P&L) 14.54
(Interest income for 2012)
Financial assets (12% TFCs) W.2 10.31
Impairment reversal (P&L) 10.31
(Reversal of impairment of financial assets on
rescheduling of payments for TFCs)

Page 5 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Summer 2013

W.1 Impairment
Carrying value of 12% TFCs on 31-12-2011 W.3 107.69
PV of future cash flows on 31-12-2011 120×[(1.16426)–2 ] 88.53
Impairment loss 19.16

W.2 Impairment Reversal

Revised carrying amount on rescheduling at lower of (A) and (B) below 113.38
(A) PV of the future cash flow as per the agreed revised schedule 115.00
(B) Amortised cost on impairment reversal date of 31-12-2012
would have been had the impairment not been recognised. W.3 113.38
Existing carrying amount at 31-12-2012 88.53×1.16426 (103.07)
Impairment reversal 10.31

W.3 Original amortisation schedule

Effective interest @ Cash flow
Cash flow dates Amortised cost
16.426% (Interest @ 12%)
--------------------------------Rs. in million--------------------------------
01-Jan-2009 (100×95%) 95.00
31-Dec-2009 15.60 (12.00) 98.60
31-Dec-2010 16.20 (12.00) 102.80
31-Dec-2011 16.89 (12.00) 107.69
31-Dec-2012 17.69 (12.00) 113.38

A.6 Chugtai Limited

Extracts from the consolidated statement of comprehensive income
For the year ended 31 December 2012
Rs. in million
Profit after taxation W.1 1,017.50
Other comprehensive income for the year
- Exchange gain on translation of goodwill W.2 (30 × 0.75) 22.50
- Exchange gain on translation of foreign operations-JL W.3 166.67
189.17
Total comprehensive income 1,206.67
Profit attributable to:
- Owners of the Holding company W.1 [609.5 + (408 × 75%)] 915.50
- Non-controlling interest W.1 (408 × 25%) 102.00
1,017.50
Total comprehensive income attributable to:
- Owners of the Holding company 915.5 + 22.5 + (166.67 × 75%) 1,063.00
- Non-controlling interest (Balancing) 102 + (166.67 × 0.25) 143.67
1,206.67

W.1: Consolidated profit after tax

Profit for the year – CL 700.00
Exclusion of dividend received from JL (41.00)
Goodwill impairment W.2 (66 × 75%) (49.50)
Adjusted profit for the year - CL 609.50
Profit for the year - JL (40 × 10.2) 408.00
1,017.50

Page 6 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Summer 2013

W.2: Goodwill RAMs in Conversion

Rs. in million
million rate
Opening balance 30.00 10.00 300.00
Goodwill impairment on 31-12-2012 (6.00) 11.00 (66.00)
24.00 234.00
Closing balance (at year end exchange
rate) 24.00 11.00 264.00
Exchange gain 30.00

W.3: Exchange gain on conversion of foreign operations - JL

Opening net assets 50 + 85 135.00 10.00 1,350.00
JL's profit for the year 40.00 10.20 408.00
Dividend paid by JL (5.00) 41/0.75 (54.67)
Closing net assets 170.00 1,703.33
Closing net assets (at year end exchange rate) 11.00 1,870.00
Exchange gain 166.67

A.7 Niazi Company Limited

Notes to the financial statements
For the year ended 31 December 2012

Deferred Tax Liability / (Assets) - net

Charge / Recognised
Balance Balance
(Reversal) in surplus
1 Jan 2012 31 Dec 2012
Description in PL on
revaluation
Rupees in million
Deductible temporary differences
Provision for retirement benefits and
doubtful debts (17.50) (0.35) - (17.85)
01 Jan 2012 [50 × 35%]
31 Dec 2012 [(50 – 5 + 6) × 35%]
Liabilities outstanding for more than 3
years added back to income - (1.05) - (1.05)
31 Dec 2012 [(8 – 2 – 3) × 35%]

Taxable temporary differences

Property, plant and equipments (W-1) 134.75 (49.00) 14.00 99.75
117.25 (50.40) 14.00 80.85

W-1: Property, plant and equipment:

01 Jan 2012 31 Dec 2012
Accounting WDV 2,000 2,700
Revaluation surplus on freehold land not subject to depreciation (15) (15)
Tax WDV (1,600) (2,400)
Excess of accounting WDV over tax WDV 385 285
Deferred tax liability at 35% 134.75 99.75
Deferred tax liability on revaluation of PPE on 31-12-2012 to be adjusted
against its revaluation surplus. [145 – (150 ÷ 10 × 7)] = 40 × 35% 14.00

(The End)
Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Summer 2013

General:

It seems that most of the students resort to selective studies. This was evident from the
fact that very poor performance was witnessed in those areas which were tested after a
considerable lapse of time. Selective studies should be avoided as it is the primary reason
for the failure of most candidates. Another piece of advice which is very important is that
accounting needs a lot of practice which is often found lacking. Consequently, the
students lack the ability to appropriately plan and present their answers and carry out
lengthy procedures when easy alternatives are available. Moreover, in depth
understanding of various accounting issues cannot be achieved merely by reading the
books or IFRSs.

Question-wise comments are as follows:

Question 1

Consolidation is the most commonly tested topic in this paper and usually carries a
weightage of 20 to 25 marks. Almost all the questions revolve around 15-20 major
concepts which can be mastered by a reasonable amount of concentrated effort. Usually
those students who have a good command of this topic are generally able to pass this
paper quite easily. However, in almost every attempt, most of the students make a lot of
easy mistakes and this attempt was no different. These common mistakes are enumerated
below:

(1) Students were required to compute the unrealized gain on inter-company sale of
fixed assets by first computing the gain on disposal and then calculating
depreciation for three months. The net amount was supposed to be eliminated from
Property, Plant & Equipment and Consolidated retained earnings. In many cases:

• Gain was incorrectly calculated by taking the difference between the cost and
the disposal value without considering the effect of depreciation charged.
• Depreciation on unrealized gain was calculated by using the original useful life
rather than the remaining useful life.
• The elimination of the effects of this transaction was ignored altogether.

(2) Hali Limited (HL) was not a subsidiary of Qudsia Limited (QL). Even then, many
students consolidated the balances of HL also.

Page 1 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2013
(3) Unrealized profit on intercompany sale of goods to HL, an associate, was required
to be eliminated from the value of investment with corresponding effect adjusted
against the Consolidated Retained Earnings (CRE).
• Majority of the students correctly computed the amount of inter-company
profit, but failed to make appropriate adjustments to Investment in Associates
and CRE accounts. Many of them omitted the adjustment to the Investment
account.
• Gross amount of unrealized profit was eliminated whereas only 40% of such
profit required elimination.

(4) Under the equity method, proportionate share of post acquisition profits are
recorded in the cost of investment with corresponding effect to CRE.
• Some students altogether omitted this adjustment
• Most of the students didn’t adjust the investment account and adjusted CRE
only.

(5) Most of the students computed the Goodwill amount correctly, but either did not
compute the impairment charge or determined it incorrectly.

(6) Some of the students included the original goodwill amount in the fair value of the
assets and then compared it with the recoverable amount. The correct way was to
gross up the goodwill amount rather than taking the original amount which was
only the parent’s share.

(7) Most of the candidates adjusted entire impairment loss against the value of
goodwill instead of adjusting only the portion of loss related to QL i.e 80% thereof.

(8) While calculating non-controlling interest, most of the students did not adjust
unrealized gain on machine purchased from ML.

(9) Shares to be issued as purchase consideration were included in share capital

although these were issued after year end.

(10) Cost of Investment in HL was not calculated correctly. The purchase consideration
was worked out on the basis of share price prevailing on the date of issue. It should
have been calculated on the basis of share price prevailing on the date of
acquisition.

Question 2

This question was based on a scenario whereby one of the products of a manufacturer of
health care products had been found to be contaminated. The candidates were required to
explain the accounting treatment and the disclosure requirements in the given
circumstances.

Page 2 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2013
Common mistakes observed in the answers were as follows:

• Many candidates correctly stated that all the conditions necessary to make a provision
against penalty and cost of contamination of inventory have been met. However, in
such questions, where an opinion on accounting treatment is required, it is not enough
to say that all the conditions have been met; instead, the actual conditions should also
be stated, at least in brief.

• Majority of the candidates had little idea of onerous contracts and mentioned that the
liability of Rs. 18 million need not be recognized. Some students recorded
compensation for non-supply for only fifteen days of the current year and incorrectly
omitted remaining part of the three months period probably because they thought that
the remaining amount would be provided in the next year.

• Many candidates failed to point out that possible claims by the users of the
contaminated product would be required to be disclosed as a contingent liability.

• Most of the candidates mentioned that on account of return of contaminated material,

sales revenue and trade receivable should be reduced by Rs. 132 million which was
the cost of the inventory. In fact, both items needed to be reduced by the sales value
of the goods returned.

• Many students talked about the valuation of inventories at lower of cost or net
realizable value although the contaminated products had no value and required a write
off.

• Generally, it was correctly identified that Healthcare Limited’s claim against its
supplier, being a contingent asset, should not be recognized as a receivable as it failed
to meet the criteria specified in IAS 37. But here again, most of the students did not
mention the criteria.

Question 3

The computation part of this question which required calculation and disclosure of
earnings per share was well attempted by most of the candidates. However, candidates
were not as well prepared as regards the disclosure requirements. The mistakes observed
were as follows:

• Proper disclosure format was not followed.

• Many candidates gave the information related to continued operations and

discontinued operations but did not prepare the total column.

• Reconciliation between ‘Profit after taxation for the year’ and ‘Profit attributable to
ordinary shareholders’ was wrongly calculated due to incorrect treatment of dividend
on convertible preference shares.

• Fair value gain on available for sale investment was included in the profit after tax.

Page 3 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2013
• In a large number of cases, the treatment of ‘Employee options’ was either incorrect
or missing entirely.

• While calculating the weighted average number of shares, some of the students
applied the bonus factor to all the shares instead of applying it to the opening balance.

Question 4

This question on Statement of Investment of a general insurance company was very

simple. The students were only required to tabulate the data in the specified format.
However, the performance was quite poor. It appears that most of the students did not
prepare for such question and tried to answer it on the basis of their general
understanding of an income statement.

Common mistakes were as under:

• Income from trading and non-trading investment was not shown separately.
Moreover, income from non-trading investment required further sub-classification
between Held to maturity and Available for sale.

• Loss on disposal of investments was netted off against gain from disposal of
investments.

• Impairment in the value of investment was netted against amortization of premium on

investments.

• Many candidates made basic calculation errors which are not expected at this level.

Question 5

This question required preparation of accounting entries to record the impairment and
rescheduling of financial assets in respect of years ending 31 December 2010 and 2011.
Around 25% of the students seemed totally unaware of the procedure and made wild
guesses which clearly indicated selective studies.

Common mistakes were as under:

(i) The first step in this question was to ascertain the carrying value of investment as at
31-12-2011 by preparing amortization schedule based on the original terms. Most
of the students did not understand the basic concepts specified below:

• The issue price of TFCs should have been used instead of face value.

• Interest should have been accrued on the basis of effective rate of interest.

• Annual interest payments were to be deducted in arriving at the unamortized

amount at the end of the year.

• Interest for 2010 was to be written off in 2011. This was missed by most of the
students.

Page 4 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2013
• While reversing the impairment on 31 December 2012, majority of the students
compared the present value of future inflows with the actual carrying value as
at 31 December 2012. Instead, first they should have compared the present
value of inflows with the carrying value as per the original repayment schedule
and in the next step, the lower of the above two values i.e. originally envisaged
carrying value, should have been compared with the actual carrying value as of
31 December 2012, to record the reversal.

Question 6

In this question candidates were asked to prepare relevant extracts from the consolidated
statement of comprehensive income of a company with a foreign subsidiary. Candidates
generally performed very poorly. Common observations are as under:

Consolidated profit after tax

Majority of the students eliminated the dividend received from the subsidiary correctly
but did not adjust the goodwill impairment. Some of them included impairment of
goodwill under other comprehensive income.

Goodwill impairment

The impairment testing was to be carried out at year end and was supposed to be recorded
at the exchange rate prevailing on that date. Majority of the students translated it using
the average rate.

Exchange difference on Goodwill

Exchange difference on Goodwill was supposed to be computed by deducting the

impairment expense from opening goodwill and comparing the amount arrived at in this
manner, with the value of goodwill after impairment testing at 2012 exchange rate.
Moreover, only the parent’s share of exchange translation difference was to be reported
in other comprehensive income.

• Majority of the students did not follow the above procedure and consequently arrived
at incorrect amount of exchange difference.
• Many students merged the exchange difference on goodwill and exchange difference
on translation of foreign operations. These should have been disclosed separately.

Exchange differences on translation of foreign operations

It was supposed to be computed by comparing closing net assets translated at the

exchange rate prevailing at year end with the amount arrived at by adding opening assets
at opening exchange rate and profit of the subsidiary at average rate and deducting the
dividends paid at the rate prevailing on the date of dividend payment. The common errors
were as follows:

• Majority of the students omitted dividend payment from their calculation

• Some students considered the amount of dividend paid to the parent only.

Page 5 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2013
• Many students treated unappropriated profit as the net assets (i.e. they ignored share
capital in arriving at the net assets).

Question 7

In this question the students were required to prepare a note relating to deferred tax
asset/liability for inclusion in the financial statements. Though the question was not
difficult and the calculation were quite simple yet the performance was quite pathetic. It
was evident that in-depth conceptual understanding was lacking. Moreover, majority of
the students were not familiar with the disclosure requirements, which in this case at
least, were quite straightforward.

The common errors were as follows:

• Many students showed the closing balances only. Movement between opening and
closing balances was not disclosed.

• Very few students differentiated between deductible temporary differences and

taxable temporary differences.

• Only a few students knew that deferred tax related to revaluation surplus is adjusted
against revaluation surplus.

• Deferred tax related to provision for retirement benefits and liabilities outstanding for
more than 3 years, was treated as a liability instead of asset.

• Only a few students correctly computed the deferred tax on revaluation.

(THE END)

Page 6 of 6
 Advanced Accounting and Financial Reporting
Final Examination 3 December 2013
Winter 2013 100 marks - 3 hours
Module E Additional reading time - 15 minutes

Q.1 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 - -

Non-current investments – DPL*2 (Cost Rs. 40 million) 43 - -
*1 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.
(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) (18)
(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. (04)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.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.
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. (08)

Q.3 The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 are
under finalisation 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. (06)
(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. (06)
(iii) On 1 April 2013, BL shifted to a newly acquired building in the city centre. 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. (06)
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)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.4 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 195.00
Current assets 50.00
Liabilities 90.00

(ii) 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.
(iii) MPL's net loss after tax for the nine months period ended 30 June 2013 was
Rs. 30 million.
(iv) 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. (12)

Q.5 Following is the extract of Trial Balance of Zee Bank Limited for the year ended 30 June
2013:

Rs. in million
Cash in hand - Local currency 10,000
- Foreign currency 2,000
National Prize Bonds 100
Rupee current account with SBP 30,000
Rupee current account with NBP 8,000
Foreign currency current account with SBP 3,000
Foreign currency deposit account with SBP 10,000
Deposit account with central bank of UAE 12,000
Current account with central bank of South Africa 9,800
Current account with Muslim Commercial Bank Ltd. 700
Deposit account with Barclays Bank, London 25,000
Current account with Citibank, New York 4,000

Balances with treasury banks and other banks include remunerative accounts amounting to
Rs. 10.8 million and Rs. 27.5 million respectively.

Required:
To the extent the information is available, prepare notes on ‘Cash and balances with
treasury banks’ and ‘Balances with other banks’ for inclusion in financial statements of Zee
Bank Limited for the year ended 30 June 2013, in accordance with the laws applicable in
Pakistan. (10)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.6 New Horizon (Private) Limited (NHPL) is engaged in the distribution and supply of
pharmaceutical products. The following information has been extracted from NHPL’s draft
financial statements for the year ended 30 September 2013:

Statement of comprehensive income for the year ended 30 September 2013

2013 2012
---------Rs. in million---------
Sales revenue 720.00 234.00
Cost of sales (534.00) (190.00)
Gross profit 186.00 44.00
Operating expenses (120.00) (45.00)
Operating profit/(loss) 66.00 (1.00)
Finance charges (35.00) (5.00)
Profit / (loss) before tax 31.00 (6.00)
Taxation (12.00) 1.30
Net profit / (loss) 19.00 (4.70)

Statement of financial position as at 30 September 2013

2013 2012 2013 2012
Rs. in million Rs. in million
Share capital 300.00 300.00 Property, plant & equipment 555.00 361.50
Retained earnings 65.00 46.00 Intangible assets 32.00 17.50
365.00 346.00 587.00 379.00
Long term loans 198.00 40.00
Current liabilities Current assets
Trade payables 96.00 25.00 Inventories 30.00 18.00
Other payables 5.50 1.00 Trade receivables 48.00 12.00
Borrowings 10.50 4.00 Cash and bank balances 10.00 7.00
112.00 30.00 88.00 37.00
675.00 416.00 675.00 416.00

Following further information is available:

(i) On June 2012, NHPL acquired exclusive distribution rights of a range of life saving
drugs from a Malaysian company for 12 years at a cost of Rs. 18 million. NHPL has
capitalized the cost of rights and it is to be amortized over the period of distribution
rights.
(ii) In October 2012, NHPL launched a country-wide sales promotion campaign to
introduce the Malaysian drugs. The cost of the advertisement campaign was Rs.
25million. As the benefits of the campaign are long term, NHPL has decided to
amortize the costs over a period of 5 years.
(iii) The prices offered by the Malaysian company are quite low as compared to prices of
similar quality drugs in Pakistan. Since this matter was publicized vigorously in the
advertisement campaign, the Malaysian drugs were able to capture the market.

(iv) In 2013, the sales of drugs imported from Malaysia accounted for 70% of the
company's revenue. The level of credit sales has remained constant at 40% of total
sales.

(v) NHPL is also negotiating the acquisition of distribution rights of the products of
another foreign company.

Required:
Comment on the financial and operating performance of NHPL for the year ended 30
September 2013, supported by relevant accounting ratios. (14)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.7 Dynamic Steel Limited (DSL) signed an agreement on 1 June 2013 for import of equipment
for SK 50 million. According to the agreement, the plant was delivered on 1 November
2013 and invoice thereof was paid on 1 December 2013.

In order to hedge the commitment to pay SK 50 million, on 1 June 2013, DSL entered into
a forward contract to buy the required SK on 1 December 2013 at a fixed exchange rate of
SK 1=Rupees 15. Exchange rates on various dates are as follows:

1-Jun-2013 30-Sep-2013 1-Nov-2013 1-Dec-2013

SK 1
Spot rate Rs. 14.50 12.00 11.15 10.00
Forward rate Rs. 15.00 12.39 11.35 -

It is DSL's policy to adjust any gain or loss arising on forward contracts to the carrying
value of the imported goods. DSL’s accounting year end is 30 September.

Required:
Prepare accounting entries relating to the above transactions, on each of the above dates, in
accordance with the requirement of IFRS. (16)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.1 (a) Alpha Industries Limited

Extracts of consolidated statement of financial position as of 30 September 2013

Rs. in
1 Goodwill
million
Purchase consideration
- AIL shares (150,000×160) 24.00
- Cash payable on 31 March 2014 (42÷1.12) 37.50
- Acquisition-date fair value of 15% holding 25.00
86.50
NCI at fair value at the acquisition date 32.00
Net assets acquired (100.00)
18.50
2 Consolidated retained earnings
Profit – AIL:
AIL - Retained earnings balance at 30 September 2012 35.00
AIL - profit for the year 58.00
Dividend paid by AIL for the year ended 30 Sept. 2012 (100×15%) (15.00)
Profit on deemed disposal of 15% equity in BPL (25–20) 5.00
Other comprehensive income transferred to retained earnings 6.00
Finance cost on deferred cash consideration [(37.5–(1.12)0.5–37.5] (2.19)
Unearned profit on inter-co. stock held by BL [(65×20%)÷1.3×0.3] (3.00)
83.81
Post-acquisition profit from the subsidiary (BPL) Apr-Sept 2013:
Profit for the year ended 30-9-2013 40.00
Net assets as of 1-4-2013 100.00
Dividend paid for the year ended 30-9-2012 (60×20%) 12.00
Net assets as of 30-9-2012 (90.00)
Pre-acquisition profit (October 2012 - March 2013) 22.00
Post acquisition profit share [(40–22) ×70%] 18.00 12.60
Profit from the associate - DPL
Profit for the year ended 30 September 2013 (30×35%) 10.50
Unearned profit on inter-co. stock purchased from DPL (20×0.2×35%) (1.40) 9.10

105.51
3 Investment in associate - DPL
Carrying value as of 30-9-2012 43.00
Dividend received from DPL for the year ended 30-9-2012 (50×12%)×35% (2.10)
Share of profit for the year ended 30-9-2013 (10.5-1.4) 9.10
50.00

(b) Separate statement of financial position as at 30 September 2013

According to IAS 27, when an entity prepares separate financial statements, it shall account
for investments in subsidiaries , joint ventures and associates either:
 at cost, or
 at fair value in accordance with IFRS 9.
The entity shall apply same accounting for each category of investments.
Since fair value as of 30 September 2013 for the investments in BPL and DPL is not
available, these investments can be valued at cost as under:
Investments at cost
- Beta (Private) Limited - subsidiary 18+(0.150×160)+(42÷1.12) 79.50
- Delta (Private) Limited - associate 40.00
119.50

Page 1 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.2 Mega Super Stores

Accounting entries for the customer incentive scheme
Debit Credit
Date Description
-----Rupees-----
30-Sep-2013 Sales revenue (1,500,000×70%×200÷500) 420,000
Deferred revenue 420,000
(To record points granted under the scheme)

30-Sep-2013 Deferred revenue [500,000×(200÷500)] 200,000

Sales revenue 200,000
(To record redemption of the points granted)

30-Nov-2013 Deferred revenue (420,000–200,000) 220,000

Sales revenue (1,500,000– 500,000–470,000) × 200÷500 212,000
P& L account [470,000-(1,500,000×30%)×200÷500] 8,000
(To record redemption and lapsing of the unutilised points)

Ans.3 Bravo Limited

Amounts as they would appear in the statements of financial position and comprehensive income
For the year ended 30 September 2013

--------------Rs. in million--------------
1. Decrease in decommissioning liability: Finance/
Decommission-
Depreciation P. P. & E
ing liability
expenses
Carrying value as at 30.09.2012 (130+19)÷20×(20–4.5) 115.48
[19×(1.1)4.5] 29.18
Deprecation: Oct. 2012-Mar. 2013 [(130+19)÷20×0.5] 3.73 (3.73)
Finance cost: Oct. 2012-Mar. 2013 [19×(1.1)5]- [19×(1.1)4.5] 1.42 1.42
Decrease due to revision in liability (30.6–25) (5.60) (5.60)
Revised balance as at 1-4-2013 106.15 25.00
Deprecation: Apr-Sept. 2013 (106.15÷15×0.5) 3.54 (3.54)
Finance cost: Apr-Sept. 2013 {[25×(1.1)0.5]-25} 1.22 1.22
9.91 102.61 26.22

2. Classification of debentures from 'held to maturity' to (Non-current

'available for sale' Interest assets)
Fair value
income and FV Investment
reserve
increase ‘available for
sale’
Debentures at fair value as at 30-9- 2013 [16× (104÷100)] 16.64
Interest income for the year – Statement of Profit or Loss 2.22
FV increase - Other comprehensive income for the year
[IFRS 9, Para 5.6.1] (W.1) 0.02
FV reserve for investment available for sale
(W.1) (0.02+0.56) 0.58
2.24 16.64 0.58

Working -1 (W.1): 2013 2012

Opening balance 16.32 15.50
Interest earned at 14.09% (15.76×14.09%), (15.5×14.09%) 2.22 2.18
Interest received at 12% (16×12%) (1.92) (1.92)
16.62 15.76
Debentures at fair value at Rs. 102 and 104 (16×104÷100) (16×102÷100) 16.64 16.32
Other comprehensive income - AFS reserve 0.02 0.56

Page 2 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

3. Reclassification of owner-occupied property to investment Investment

Operating
property: property/ Revaluation
lease
other surplus
income
receivable
Investment property
At fair value as of 30-9-2013 66.00
Revaluation surplus (IAS 40, Para 61) (70–55) 15.00
Revaluation surplus adjusted by decrease in FV (66–70) (4.00)
Operating lease
Lease rent to be received over the lease period [(6+6.3+6.62)=18.92]
Lease rent income for Apr-Sept. 2013 (18.92÷6) 3.15
Operating lease rent receivable at year end (3.15–3) 0.15
3.15 66.15 11.00

Ans.4 (i) Global Air Group Limited

Extracts of consolidated statement of financial position
As at 30 September 2013 2013
Rs. in million
Current Assets
Assets directly associated with the subsidiary classified as held for sale (IFRS 5, 8A) W.1 209.70

Equity and liabilities

Retained earnings W.1 153.70

Current liabilities
Liabilities directly associated with the subsidiary classified as held for sale W.1 56.00

(ii) Global Air Group Limited

Extracts of consolidated statement of comprehensive income
For the year ended 30 September 2013

Loss from operations of the subsidiary held for sale (30+18.3) 48.30

W-1: Equity balances and impairment

Adjusted
Balance Adjustments Balance
equity Impairment Transactions
Description as at as at as at
as at allocation Jul-Sep. 2013
30-6-2013 30-6-2013 30-9-2013
30-6-2013
Goodwill 15.00 15.00 (15.00) -
Non-current assets 195.00 195.00 Bal. (3.30) 191.70
Current assets 50.00 (6.00) 44.00 (26.00) 18.00
209.70
Liabilities (90.00) 8.00 (82.00) 26.00 (56.00)
Net equity 170.00 2.00 172.00 (18.30) - 153.70
Net equity at 90% (172×90%) 154.80
Sales price net of cost to sell (140-3.5) 136.50
Impairment loss 18.30

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.5 Zee Bank Limited

Notes to the Financial Statements for the year ended 30 June 2013
2013
Rs. in million
6. CASH AND BLANCES WITH TREASURY BANKS
In hand including National Prize Bonds
Local currency 10,000+100 10,100
Foreign currency 2,000
12,100
With State Bank of Pakistan in
Local currency current account 30,000
Foreign currency current account 3,000
Foreign currency deposit account 10,000
43,000
With other central banks in
Foreign currency current account 9,800
Foreign currency deposit account 12,000
21,800
With National Bank of Pakistan in
Local currency current account 8,000
84,900

The above balances include remunerative accounts amounting to Rs. 10.8 million.

7. BALANCES WITH OTHER BANKS

In Pakistan
On current account 700

Outside Pakistan
On current account 4,000
On deposit account 25,000
29,000
29,700

The above balances include remunerative accounts amounting to Rs. 27.5 million.

Page 4 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.6 New Horizon (Private) Limited

Analysis of financial and operating performance for the year ended 30 September 2013

(i) Relevant accounting ratios

Description 2013 2012

Gross profit margin 186÷720 26% 44÷234 19%
Return on capital employed 66÷(675-112) 12% (1.0)÷(416-30) (0.26)
Current ratio 88÷112 0.79 37÷30 1.23
Quick ratio (88-30)÷112 0.52 (37-18)÷30 0.63
Inventory turnover days (30×360)÷534 20 days (18×360)÷190 34 days
Debt/equity ratio 198÷365 0.54 40÷346 0.12
Interest cover 66÷35 1.89

(ii) Total sales for the current year have increased by 208% because of sales of imported drugs
from Malaysia that accounted for 70% of the total sales. Whereas sale of local
pharmaceutical products has shown declining trend as there is approximately 8%
[(720×30%-234)÷234] decline in sales of local products.

(iii) Gross profit has improved from 19% to 26%. However, the management needs to analyse
the GP ratios of local and imported products separately, to evaluate the performance
objectively.

(iv) Operating expenses have increased by 167% as against the increase in sales revenue by
208%. However, operating costs do not include all the costs associated with sales promotion
campaign. It is to be noted that IFRS does not allow capitalisation of advertising costs. If
advertising expenses were charged in accordance with the requirements of IFRS, the net
profit after tax would convert into loss after tax of Rs. 1 million.

(v) The improved profitability of NHPL is largely dependent on imported life saving drugs.
Consequently, the company is susceptible to the foreign currency risk. Any adverse
movement in foreign exchange rates may erode the profitability.

(vi) The company's liquidity position may be a matter of concern for the banks as current ratio
has declined from 1.23 to 0.79 and quick ratio has declined from 0.63 to 0.52.
(vii) Though inventory turnover days have decreased from 34 days to 20 days, the inventory at
year end represents only 20 days of sale which is quite low considering the fact that 70% of
the drugs are imported and therefore, failure to keep adequate safety stock may result in
stock-outs.
(viii) There is a need to determine reasons for a very low contribution from the sales of local
pharma products and steps be taken to increase sales and profitability of local products.
(ix) The company is highly geared and interest cover is 1.89 times only. However, return on
equity is very low at 5%, which may not be compatible with the market rate.
(x) In short, the company is in need of more funds to survive, particularly, as further expansion
is being negotiated.
(xi) In view of the above analyses, investment in NHPL will be regarded as high risk and
investors will therefore, expect a high return.

Page 5 of 6
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination ‐ Winter 2013

Ans.7 Dynamic Steel Limited

Accounting entries pertaining to forward contract

Debit Credit
Date Particulars
---Rs. in million---
1-Jun-2013 The fair value of the forward-exchange contract at inception is
– –
Zero; therefore, no accounting entry is required.
30-Sep-2013 Other comprehensive income [IAS 39, Para 95] 125.00
Profit and loss account (130.5–125.0) 5.50
Financial liability (Forward contract) 130.50
(To record loss on the forward contract since 1 June 2013)
1-Nov-2013 Other comprehensive income [IAS 39, Para 95] 42.50
Profit and loss account (52.0–42.5) 9.50
Financial liability (Forward contract) 52.00
(To record loss on the forward contract since 30 September 2013)
1-Nov-2013 Property, plant and equipment (Balancing) 725.00
Other comprehensive income (125.0+42.5) 167.50
Account payable (50×11.15) 557.50
(To record delivery of the equipment and liability at delivery date spot rate)
1-Dec-2013 Profit and loss account 67.50
Financial liability (Forward contract) 67.50
(To record loss on the forward contract since 1 November 2013)
1-Dec-2013 Account payable 557.50
Financial liability (Forward contract)
(130.5+52+67.5) 250.00
Profit and loss account (557.5–500) 57.50
Bank (50×15) 750.00
(To record settlement of account payable and the forward contract)

Working
30-Sep-2013 Loss on forward contract at forward rates (12.39–15.00)×50 (130.50)
Effect on expected cash flow at spot rates (12.00–14.50)×50 125.00
Hedge effectiveness, highly effective [IAS 39, AG105(b)] 125.0÷130.5 96%

1-Nov-2013 Loss on forward contract at forward rates (11.35–12.39)×50 (52.00)

Effect on expected cash flow at spot rates (11.15–12.00)×50 42.50
Hedge effectiveness, highly effective [IAS 39, AG105(b)] 42.5÷52.0 82%

1-Dec-2013 Loss on forward contract at forward rates (10.00–11.35)×50 (67.50)

Effect on expected cash flow at spot rates (10.00–11.15)×50 57.50
Hedge effectiveness, highly effective [IAS 39, AG105(b)] 57.5÷67.5 85%

(The End)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Winter 2013

General:

This was one of the worst attempted paper for last many attempts. Performance was
specially poor in Questions 2, 4 and 7 as these pertained to areas which are not tested
frequently, which was indicative of selective studies. Lack of practice seemed to be the
other main reason as many students carried out lengthy procedures when easy alternatives
were available. In many cases simple errors were made while it was evident that the
candidates could have avoided them because they were able to perform other similar
steps correctly. The students must understand that in depth understanding of various
accounting issues cannot be achieved merely by reading the books or IFRSs as it also
requires lot of practice.

Question-wise comments.

Question 1(a)

In this part of the question, the candidates were required to compute the goodwill,
retained earnings and investment in associate as they would appear in the consolidated
statement of financial position of a company. Only about 30% of the candidates were
able to secure passing marks in this question. The common mistakes are enumerated
below:

1 Goodwill

(i) Actual amount of cash was included in the purchase consideration, instead
of its present value. Many candidates also made errors in the calculation of
present value.

(ii) Cost of the existing shareholding was included as part of purchase

consideration instead of the fair value at the time of acquisition.

(iii) Even though it was stated in the question that fair value of net assets at the
date of acquisition was equal to their carrying value, many candidates took
the total value of shareholders’ equity at the beginning of the year or the
adjusted shareholders’ equity after adding proportionate profit for six
months as the fair value of net assets.

(iv) Fair value reserve was adjusted against fair value of net assets.

(v) Goodwill was allocated between parent and minority shareholders.

Page 1 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2013
2 Investment in Associate

(i) Cost of investment was taken as the opening balance instead of the carrying
value.

(ii) Dividend was incorrectly calculated and in many cases it was adjusted
against consolidated retained earnings instead of investment in associate.

(iii) Adjustment of unrealized profit was ignored.

3 Consolidated retained earnings

(i) In working out the unrealized profit on purchase of goods from associate
and included in closing stock, the entire amount of unrealized profit was
adjusted whereas only the portion related to proportionate holding in
associate is required to be adjusted.

In adjusting the unrealized profit on sale of goods to the subsidiary included

in the closing stock profit was computed as 30% of sales value instead of
30% of cost. Further many students did not adjust entire amount of
unrealized profit. Share of such profit relating to controlling interest was
computed hypothetically, for the purpose of adjustment.

(ii) Pre and Post acquisition profits of subsidiary

• Profit for the year was allocated on time (month) basis.

• Dividend amount was computed incorrectly.
• Adjustment for dividend was made only for the parent’s share.

(iii) At the time of acquisition of majority shares in the subsidiary, the difference
between the fair value of 15% equity already held and its book value was
supposed to be included in the consolidated retained earnings. Either this
adjustment was altogether ignored or was incorrectly computed by
comparing with the cost of investment instead of the book value. In some
cases fair value reserve was added to the cost of investment and then
compared with the fair value of 15% equity.

(iv) Many students did not transfer the fair value reserve related to BPL to
retained earnings.

Question 1(b)

In this part the performance was better as most candidates were able to specify that the
investments can be accounted for either at cost or at fair value though an important
condition that whatever method is followed should be followed for each category of
investment. Since information on fair values was not available, cost was to be used to
calculate the amounts of investments. The cost in associate was picked up easily from the
question, however, in determining the cost of investment in subsidiary, following
mistakes were committed by many students:

Page 2 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2013
• Actual amount of cash was included in the purchase consideration, instead of its
present value.
• Instead of taking the original cost of existing shares held in the subsidiary, the fair
value of the shares at the time of acquisition was assumed to be the cost.

Question 2

This question was based on IFRIC Interpretation 13 – Customer Loyalty Program. Quite
a poor performance was witnessed in this question. Many students did not attempt it
altogether whereas the following types of mistakes were commonly identified in the
submitted answers:

• Despite the fact that it was given in the question that 70% of the points earned by
the customers are expected to be redeemed many students passed journal entry
based on the total points earned.
• Cost of sale was used for recording purposes instead of sales value.
• Expense account was debited instead of sales account.
• Entry to record the difference between the estimated and the actual number of
points that lapsed was not passed.

Question 3

The question consisted of three parts. Each part pertained to different accounting
situations and the candidates were required to determine the relevant amounts as would
appear in the financial statements. The year-end was September 30, 2013.

Question 3(i)

According to the given situation, a plant had been commissioned in 2008 at a cost of Rs.
130 million and at that time, the plant’s useful life and the present value of
decommissioning liability had been estimated at 20 years and Rs. 19 million respectively.
The estimated present value of decommissioning liability on April 1, 2013 was revised to
Rs. 25 million.

Generally, the students knew the broader concept but most of them did not possess
thorough and comprehensive understanding or lacked practice of solving similar
questions. Consequently, most of the students made mistakes. Some of the common
mistakes were as under:

• Depreciation was calculated without including decommissioning cost.

• The present value of decommissioning liability based on original estimate was more
than the present value as per the latest estimate and hence the difference should have
been deducted from the existing carrying value of decommissioning liability to arrive
at the revised carrying value. Many students added it to the carrying value. Many
students credited it to profit and loss account.
• Most of the students were unable to compute the finance cost and depreciation for the
year correctly as they could not appreciate the fine difference between the
calculations related to the first six months and the latter six months.

Page 3 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2013
Question 3(ii)

According to the question, the company had acquired certain debentures. At the time of
issuance i.e. two years back, these were classified as held to maturity. However, two
years later, just before the year-end, due to change in circumstances, the company
decided to reclassify these as ‘available for sale’.

The following items were relevant in the given situation, for the purpose of presentation
in the financial statements:

• Fair value of debentures at 30 September 2013;

• Interest Income for the year ended 30 September 2013;
• Fair value increase during the year ended 30 September 2013; and
• Fair value reserve as at 30 September 2013.

Many students made the following types of mistakes:

(i) Instead of taking acquisition cost as the starting point, many students tried to re-
calculate the present value of future cash flows of the debenture which was not
required at all.

(ii) Interest receipts were calculated on the basis of acquisition cost rather than the
principal amount.

(iii) No fair value adjustment was made for the first year.

(iv) Interest income for the second year was calculated on the basis of fair value of
debentures.

(v) Fair value adjustment was presented as part of comprehensive income instead of
other comprehensive income.

Question 3(iii)

According to the situation, the company shifted its office premises and rented the existing
premises (building) for a period of three years.

The performance in this part was better. Majority of the candidates knew that the building
would be classified as Investment Property. Majority of the students also knew about the
adjustments to revaluation surplus although many students charged subsequent
adjustment in fair value to profit and loss account. The most common mistake was as
regards rental income as only few candidates knew that rental income should be
apportioned equally over the lease term.

Question 4

The performance of students in this question was very poor because a significant number
of students did know as to what the exact requirement was. Those who did know what
was required performed well though they also made various errors as enumerated below:

Page 4 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2013
• Goodwill was not taken into consideration in arriving at the net assets of the
subsidiary.
• The impairment loss was supposed to be adjusted first against goodwill and then
against non-current assets. Many students created a provision and added it to current
liabilities.
• Many candidates did not compute the impairment loss. Some of them computed it by
considering the entire net assets instead of 90% of the net assets. On the other hand,
many students compared 90% of the net assets with the estimated sale price without
considering the estimated costs to sell. Some of the candidates used actual cost to sell
instead of the estimated costs, to determine the net sale proceeds.
• In the given situation, assets previously classified as non-current assets should have
been included in current assets. Many students continued to show them as non-current
assets.
• Many candidates showed net assets i.e. did not show the assets and liabilities
separately.
• In comprehensive income statement, impairment loss was supposed to be added with
loss of the subsidiary and presented as a single line item. Many students showed them
separately whereas many students did not disclose the impairment loss altogether.
• Many candidates computed impairment loss as on September 30, 2013 instead of
June 30, 2013.

Question 5

This question required preparation of notes to the financial statements of a bank,

pertaining to ‘Cash and Bank Balances with Treasury Banks’ and ‘Balances with Other
Banks’. The question was quite simple as the students were only required to tabulate the
data in the specified format. The performance of majority of the students was good. The
common mistakes were as follows:

• Balances with central banks of other countries should have been included in the
note on “Cash and Balances with Treasury Banks”. Many candidates showed
them in the note on “Balances with other Banks”.
• Some students showed the balance with State Bank of Pakistan, other central
banks and National Bank of Pakistan as one item.
• “Balance with other banks” were not bifurcated between balances in Pakistan and
outside Pakistan.
• In the note on “Cash and Balances with Treasury Banks”, information related to
currency (local or foreign currency) and the type of account (current or deposit)
was not given.

Question 6

In this question the candidates were required to comment on the operating and financial
performance of a company duly supported with relevant accounting ratios. An average
performance was witnessed as most of the students calculated the relevant ratios correctly
however they were found lacking as far as the analytical skills were concerned.

Page 5 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2013
Some of the main weaknesses are discussed below:

1 Since data pertained to two years only it was more appropriate to calculate ratios on
year end values. Many candidates used average values for the current year and year
end values for the prior year, which resulted in a distorted analyses.

2 In majority of the cases the comments were too general, for example, many
candidates only stated that such and such ratios have increased which reflects that
the company’s performance has improved.

3 Very few candidates were able to identify the fact that profit of the company was
overstated as capitalization of expenses related to promotional campaign is not in
accordance with IFRS.

4 Only few students highlighted the fact that company’s performance was largely
dependent on imported drugs and hence the company was susceptible to the risk of
adverse movement in foreign exchange rate.

5 Almost all the students appreciated the fact that inventory days have reduced to 20.
However, very few could point out that the reduction in inventory level poses the
risk of stock-out, specially, when the major portion of the company’s sales
constituted imported products.

Question 7

This question pertained to forward exchange contracts. According to the given scenario, a
plant had been purchased which required payment in foreign currency and in order to
cover the foreign exchange risk, the purchasing company had entered into a forward
contract for purchase of foreign currency. The candidates were required to pass journal
entries to record the various events/transactions.

A very poor performance was witnessed in this question as most of the candidates
seemed to have very little or no knowledge of the relevant rules set forth in IAS 39. A
large number of students did not attempt it altogether.

Most others tried guesswork as they did not seem to understand the following:

1 The need to determine the hedge effectiveness or how it is determined.

2 The fact that the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge shall be recognized in other comprehensive
income and the ineffective portion shall be recognized in profit and loss account.

(THE END)

Page 6 of 6
 Advanced Accounting and Financial Reporting
Final Examination 3 June 2014
Summer 2014 100 marks - 3 hours
Module E Additional reading time - 15 minutes

Q.1 Following are the draft balance sheets (summarized) of Delta Limited (DL), a listed
company, and its subsidiaries, Gamma Limited (GL) and Sigma Limited (SL) as at
31 December 2013:
DL GL SL
--------- Rupees in million ---------
Non-current assets 10,000 6,100 5,400
Investment (at cost) 9,675 2,800 -
Current assets 6,325 7,100 3,100
26,000 16,000 8,500

Share capital (Rs. 100 each) 9,000 7,000 3,000

Retained earnings 7,500 2,790 3,100
Non-current liabilities 6,000 3,000 1,000
Current liabilities 3,500 3,210 1,400
26,000 16,000 8,500

The following information is also available:

(i) Investments:
Retained earnings
Investment Investment No. of shares Cost
on acquisition
by date (in million) (Rs. in million)
(Rs. in million)
DL in GL 1-Jan-2008 52.50 7,500 2,500
DL in SL 1-Jul-2009 9.00 2,175 1,400
GL in SL 1-Jul-2013 14.00 2,800 3,010

On 1 July 2013, the fair value of SL’s shares was Rs. 200 per share.
(ii) On the date of acquisition by DL, the fair value of GL’s net assets was equal to their
book value, except a piece of land whose fair value was Rs. 150 million as against its
cost of Rs. 120 million. The said land was sold for Rs. 170 million in 2013.
(iii) On 1 January 2013, DL issued 2.5 million 10% convertible term-finance certificates
(TFCs) of Rs. 100 each. The TFCs are redeemable on 31 December 2015 at par. Each
TFC is convertible into one ordinary share at the option of the certificate holder at
any time prior to maturity. On the date of issue, the prevailing market interest rate for
similar debt without conversion option was 12% per annum. The TFCs are appearing
in the draft financial statements at their par value.
Interest payable annually on 31 December each year has been paid and accounted for
in the financial statements.
(iv) The companies settled their inter-company balances on 31 December 2013. However,
a cheque of Rs. 20 million received from SL on 31 December 2013 was credited to
DL's bank account on 5 January 2014.
(v) DL values non-controlling interest at its proportionate share of the fair value of the
subsidiaries' identifiable net assets.

Required:
Prepare a consolidated statement of financial position as at 31 December 2013 in
accordance with the requirements of the International Financial Reporting Standards. (20)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 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 is as under:
AWL HL
Final dividend received on 31 March 2013:
Cash 15% -
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 1-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. (08)

Q.3 (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. 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.
(Notes to the financial statements are not required)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.4 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 million
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.
(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 1,750
(iv) 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. (16)

Q.5 Peoples Bank Limited (PBL) operates in Pakistan. Following information pertains to
advances to customers and related provisions for the year ended 31 December 2013:
(i) Information relating to non-performing advances is as under:

As at 31 December 2013
Classification of non-performing
Forced sales value Provision to be
advances Balance
of collaterals maintained at
-----Rupees in million----- %
Loss 4,500 1,300 100
Doubtful 1,400 800 50
Sub-standard 1,200 400 25
Other assets especially mentioned 150 20 -
(ii) For the year ended 31 December 2013, PBL has:

made a provision of Rs. 370 million including general provision of Rs. 55
million.

written off a sum of Rs. 160 million against the specific provision.
(iii) General provision balance as at 31 December 2013 amounted to Rs. 225 million.
Required:
Prepare relevant notes on non-performing advances and provisions thereagainst for
inclusion in the financial statements of PBL for the year ended 31 December 2013 in
accordance with the guidelines issued by the State Bank of Pakistan. (10)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.6 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)
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.
(Note: Comparative figures and information for notes to the financial statements are not required) (15)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.7 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
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. (15)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2014

Ans.1 Delta Limited

Consolidated statement of financial position as at 31 December 2013

Rs. in million
ASSETS
Non-current asset:
Property, plant and equipment (10,000+6,100+5,400) 21,500.00
Goodwill W.2 352.50
21,852.50
Current assets (6,325+7,100+3,100) 16,525.00
38,377.50
EQUITY AND LIABILITIES
Equity attributable to owners of DL:
Ordinary share capital 9,000.00
Retained earnings W.3 7,381.44
Equity component of convertible TFCs W.5 12.01
16,393.45
Non-controlling interest W.4 3,882.50
20,275.95
Non-current liabilities W.6 9,991.55
Current liabilities (3,500+3,210+1,400) 8,110.00
38,377.50

W-1 Equity % held by DL: GL SL

Direct investment by DL (52.5/70), (9/30) 75% 30%
Indirect investment by DL 75%×(14/30) 35%
75% 65%
W-2 Goodwill
Cost of investment:
Direct investment in GL 7,500.00 -
Direct investment in SL at fair value 1,800.00
Indirect investment in SL 75%×2,800 - 2,100.00
7,500.00 3,900.00
Acquisition of equity:
Share capital 75%×7,000 65%×3,000 (5,250.00) (1,950.00)
Pre-acquisition profit 75%×2,500 65%×3,010 (1,875.00) (1,956.50)
FV of GL's land in excess of book value 75%×(150-120) (22.50) -
Goodwill / (Gain from bargain purchase) 352.50 (6.50)

W-3 Retained earnings as at 31-12-2013

DL - Balance 31-12-2013 7,500.00
GL - Post acquisition profit (2,790-2500)×75% 217.50
Excess of FV of GL's land over its book value on
acquisition, included in post acquisition profit 75%×(150-120) (22.50)
SL - Post acquisition profit (3,100-3,010)×65% 58.50
Decrease in FV of shares on derecognition 1,800-2,175 (375.00)
Additional interest on TFCs at effective rate W.6 (28.56-25.00) (3.56)
Gain from bargain purchase of SL W.2 6.50
7,381.44

Page 1 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2014

W-4 Non-controlling interest

GL - Total net assets of GL (7,000+2,790) 9,790.00
Investment by GL in SL (2,800.00)
Net investment 6,990.00
Non-controlling interest 6,990×25% 1,747.50
SL (3,000+3,100)×35% 2,135.00
3,882.50

W-5 Equity component of convertible TFCs:

Proceeds from issuance of the TFCs (2.5×100) 250.00
Present value on 1-1-2013 for:
Interest payable on 31-12-2013 (250×10%)×(1.12)^-1 22.32
Interest payable on 31-12-2014 (250×10%)×(1.12)^-2 19.93
Interest payable on 31-12-2015 (250×10%)×(1.12)^-3 17.79
Principal payable on 31-12-2015 250×(1.12)^-3 177.95
Liability component 237.99
Equity component (250-237.99) 12.01

W-6 Non-current liabilities

Non-current liabilities including convertible TFCs issued (6,000+3,000+1,000) 10,000
Equity component of convertible TFCs issued (12.00)
Effective interest at 12% (237.99×12%) 28.56
Interest paid at 10% (250×10%) (25.00)
9,991.56

Ans.2 Omega Limited

Extract from Statement of comprehensive income for the year ended 31 December 2013
Rupees
 Profit for the year:
Dividend received from AWL (20,000*10*15%*26.5) 795,000
Transfer of FV gain reserve of 31-12-2012, on derecognition of
AWL investment W.1 500,000
FV / exchange gains on valuation of AWL shares on 1-6-2013 W.1 2,124,000
Loss on de-recognition of AWL' shares W.1 ( 308,000)

 Other comprehensive income:

FV gain/(loss) on investment available for sale W.1 693,000
Exchange gain on investment available for sale W.1 225,225

W-1 FV per Gain /

No. of Investment
Date share (loss) Remarks
shares
AED AED Conv.@ Rupees Rupees
1-May-2012 20,000 12.00 240,000 25.00 6,000,000
31-Dec-2012 20,000 13.00 260,000 25.00 6,500,000 500,000 FV gain
1-Jun-2013 22,000 14.00 308,000 28.00 8,624,000 2,124,000 Gain on valuation of
(20,000x1.1) AWL on its acquisition by
HL
1-Jun-2013 16,500 18.00 297,000 28.00 8,316,000 (308,000) Loss on de-recognition of
(22,000/4*3) AWL shares
31-Dec-2013 16,500 19.50 321,750 28.00 9,009,000 693,000 FV gain
31-Dec-2013 16,500 19.50 321,750 28.70 9,234,225 225,225 Exchange gain
3,234,225

Page 2 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2014

Ans.3 (a) Arabian Automotives Limited

Profit and loss account for the year ended 31 December 2013
Rupees
Sales revenue, at lower of FV and PV of min. lease payments 16,642,402
 Fair Value of 10 cars 18,000,000
 PV of minimum lease payments (W-1) 16,642,402
Finance lease income (W-2) 1,637,088
Revenue from servicing of cars (10,000*1.2)*10 120,000
Cost of sales (1,800,000*85%*10+110,000) (15,410,000)

Statement of financial position as at 31 December 2013

Non-current liabilities
Deferred servicing revenue (10,000*1.2)*10*2 240,000
Non-current assets
Net investment in finance lease (W-2) (5,680,000-608,571)+120,000 5,191,429
Current assets
Current maturity of net investment
in finance lease (W-2) (5,680,000-1,151,939)+120,000 4,648,061

W.1 Amortisation schedule for car payments

Interest at 12% PV of MLP @
Payment date Payments Balance
per annum 12% p.a.
01-Jan-2013 - (3,000,000) 13,642,402 3000,000
31-Dec-2013 1,637,088 (5,680,000) 9,599,490 5,071,429
31-Dec-2014 1,151,939 (5,680,000) 5,071,429 4,528,061
31-Dec-2015 608,571 (5,680,000) - 4,042,912
3,397,598 (20,040,000) 16,642,402

(b) Elegant Generators Limited

Profit and loss account for the year ended 31 December 2013
Rupees
Sales revenue (6,000,000*10%)+[(6,000,000*90%)*1.06/1.12] 5,710,714
Finance income (5,710,714-600,000)*12% 613,286
Impairment loss W-1 (179,831)

Statement of financial position as at 31 December 2013

Non-current assets; Account receivable W-2 2,933,428
Current assets; Account receivable (5,544,169 – 2,933,428) W-1 2,610,741

W-1 Impairment of account receivable

Rupees
Acct. receivable (including interest due) (6,000,000×90%)×1.06 5,724,000
PV at 12% per annum as at 31-12-2013 of future cash flows W-2 5,544,169
Impairment (179,831)

W.2 Amortisation schedule for revised payments:

Interest at 12% PV of MLP @
Payment date Payments Closing balance
per annum 6% for ½ year
31-Dec-2013 5,544,169 -
30-Jun-2014 332,650 (1,600,000) 4,276,819 1,509,434
31-Dec-2014 256,609 (1,600,000) 2,933,428 1,423,994
30-Jun-2015 176,006 (1,600,000) 1,509,434 1,343,391
31-Dec-2015 90,566 (1,600,000) - 1,267,350
(20,040,000) 5,544,169

Page 3 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2014

Ans.4 Moon Light Limited

Notes to the financial statements for the year ended 31 December 2013

1 Deferred tax (asset)/liability – net

(Credit)/
Balance Balance
charge for
1-Jan-2013 31-Dec-2013
the year
-----Rs. in million-----
Deductible temporary expenses
Provision for doubtful debts (31.50) (12.25) (43.75)
2012: (90*35%) 2013: (125*35%)
Actuarial gains on defined benefit plans
routed through other comprehensive income 49.00 21.00 70.00
Taxable temporary differences
Property, plant and equipment
2012: (1,800-1,750)*35% 17.50 (28.00) (10.50)
2013: (1,850-1,880)*35%
Deferred tax (asset)/liability - net 35.00 (19.25) 15.75

2 Taxation Rs. in million

Current
For the year W.1 230.00
Prior year 4.20
Deferred tax credit Note.1 (12.25+28) (40.25)
193.95

2.1 Relationship between tax expense and accounting profit

Rs. in million
Accounting profit (500+25+28) 553.00
Applicable tax rate 35.00%
Tax at the applicable tax rate 193.55
Tax for prior years 4.20
Tax effect of:
Permanent differences 35*35% 12.25
Lower tax rate at 10% on dividend income 25*(35%-10%) (6.25)
income exempt from tax 28*35% (9.80)
Tax expense /Average effective tax rate 193.95

W.1 Current tax liability Rs. in million

Accounting profit before dividend income and capital gains 500.00
Inadmissible expenses 35.00
Provision for doubtful debts made for the year 125-(90-25) 60.00
Provision for doubtful debts written off during the year (25.00)
Excess of accounting depreciation over tax depreciation 28/35% 80.00
Taxable income 650.00
Tax on business income at 35% 227.50
Tax on dividend income of Rs. 25 at 10% 2.50
Tax for the year 230.00

Page 4 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2014

Ans.5 Peoples Bank Limited

Notes to the Financial statements for the year ended 31 December 2013

10.3 Advances include Rs. 7,250 million which have been placed under non-performing
status as detailed under:
2013
Provisions
Classified
required and held
Category of Classification Advances
(After allowed
40% FSV)
Rs. in million
Other assets especially mentioned 150 -
Sub-standard [1,200-(400*40%)]*25% 1,200 260
Doubtful [1,400-(800*40%)]*50% 1,400 540
Loss [4,500-(1,300*40%)]*100% 4,500 3,980
7,250 4,780

10.4 Particulars of provision against non-performing advances

2013
Specific General Total
Rupees in million
Opening balance (Balancing) 4,625 170 4,795
Charge for the year 315 55 370
Amounts written off (160) - (160)
Closing balance 4,780 225 5,005

Ans.6 Alpha Limited

Extracts from consolidated profit and loss account for the year ended 31 December 2013
Rs. in '000
Profit for the year W.1 (49,462.16+26,950) 76,412.12
Profit attributable to
 Owners of Alpha Limited 76,412.12-5,390 71,022.12
 Non-controlling interest 26,950*20% 5,390
76,142.12

Earnings per share: Rupees

 Basic W.2 72.10
 Diluted W.2 53.39

W-1 Profit for the year AL ZL

(Rs. in '000)
Profit after tax 60,000.00 25,000.00
Cash dividend received from ZL (net of tax)
 Final dividend for 2012 (35,000*15%*80%)*90% (3,780.00)
 Interim dividend for 2013 (35,000*1.16*12%*80%)*90% (3,507.84)
FV gain on ZL's investment property (40.35) [67,000-(59,000+5,000)]*65% 1,950
Cost of defined benefit gratuity sch. (19.120) (8,000-3,000)*65% (3,250.00)
49,462.16 26,950

Page 5 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2014

W-2 Basic / diluted EPS:

Weighted Basic/Diluted
Basic/ Diluted
average shares earnings
EPS (Rs.)
in '000 (Rs. in '000)

Weighted average No. of shares:

1-Jan-2013 Balance 80,000/100, 800
1-Jan-2013 Bonus issue at 20% (800*20%), 160
960
1-Aug-2013Shares issued under employees'
share option scheme (60*5/12) 25
(960+60)×5/12
Basic earnings per share (EPS) 985 71,022 72.10
Shares from assumed conversions:
1-Aug-2013 Convertible 12% bonds (5 shares for 4 bonds)
(30,000/100*5/4), (30,000*0.12*0.65) 375 2,340
1-Aug-2013 Shares for no consideration issued under
employees' share option.
(250-150)/250*60*7/12 14 -
Diluted earnings per share (EPS) 1,374 73,362 53.39

Ans.7 Fine Woods Limited

(a) Upgrading of website and introduction of online sales (IAS 38 and SIC 32):

In accordance with IAS 38, accounting treatment of the costs incurred to introduce online sales
through its website by FWL is as under:

Costs incurred in 2012 and classified as capital work in progress:

(i) Costs incurred in respect of feasibility and training of IT personnel should be expensed out
when incurred.

As these costs were incorrectly recognized in 2012 as capital work in progress, therefore, in
2013, these should be treated as prior period errors in accordance with IAS 8.42. The
correction shall be made retrospectively by restating the comparative amounts for 2012
in respect of:

 Capital work in progress

 Retained earnings
 Relevant expenses

(ii) Cost of hardware and its operating software should be capitalized in January 2013 as
tangible asset in line with the requirements of IAS 16 and depreciated over their estimated
useful economic life.

(iii) Directly attributable costs of IT staff and experts hired externally for development of online
payment system shall be recognized as an intangible asset in January 2013 as the following
required conditions are met by FWL:
 It is probable that the expected future economic benefits that are attributable to the asset
will flow to FWL; and
 The cost of the asset can be measured reliably.

Costs incurred in 2013:

Cost incurred on online sales campaign should be expensed out when incurred.

Page 6 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2014

(b) Office-A, Non-current asset as held for sale

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than continuing use. To classify a
non-current asset as held for sale, the following conditions shall be met:

(i) The asset must be available for immediate sale in its present condition.
(ii) The sale is highly probable. For the sale to be highly probable:
 The appropriate level of management must be committed to a plan to sell the asset.
 The management is actively engaged in locating and negotiating a potential buyer.
 The asset must be actively marketed for a sale at a price that is reasonable in relation to
its current fair value.
 The sale should be expected to be completed within one year from the date of
classification.
 It is unlikely that significant change to the plan will be made or that the plan will be
withdrawn.

Office-A complies with all of the above conditions, therefore, it shall be classified as non-current
asset held for sale. Accordingly, office-A should be valued at the lower of its carrying amount and
fair value less costs to sell.

(c) Office-B, Investment property :

Office-B is under renovation and is not available for immediate sale in its present condition.
Therefore, it shall be classified as investment property, as it is held by FWL to earn capital
appreciation. For valuation of office-B, FWL shall choose a fair value model or the cost model and
shall apply that policy to all of its investment property.

(The End)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Summer 2014

General:
Performance in all the questions was disappointing except for Question 1 on
consolidation and Question 5 relating to financial statements of a bank.

The most poorly attempted were Question 2 which pertained to investment in a foreign
based company and Question 3 which had two parts, one based on leasing and the other
pertaining to restructuring of accounts receivable.

Question-wise comments are as follows:

Question 1

This was a routine and straightforward question on Consolidation involving two

subsidiaries GL and SL. In SL, the holding company (DL) had a direct as well as an
indirect investment.
A reasonably good performance was witnessed in this question as most of the students
were able to secure passing marks. The mistakes observed were as follows:

 In a number of cases, the effective holding percentage for SL was incorrectly

calculated. As a result, many students treated SL as an associate instead of a
subsidiary.
 While calculating Non-controlling interest most of the students ignored the
investment in SL by GL.
 While calculating ‘retained earnings’ only few candidates could correctly calculate
the decrease in fair value of shares of SL.
 Fair value of GL’s land in excess of book value was not deducted proportionately
from cost of investment, while calculating goodwill.
 Equity component of TFCs was mostly ignored.

Question 2

This was a conceptual question on investment in shares in an overseas company.

According to the given scenario, a Pakistani Company (OL) had acquired 2%
shareholding in a Dubai Based Company (AWL). Later, AWL was acquired by HL and
3 shares of HL were issued for every four shares held in AWL. The candidates were
required to determine the related amounts as would appear in the Statement of
Comprehensive Income.

Page 1 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2014
The performance was quite poor as a large number of students had very little idea of the
way the question was to be approached. Many students did not attempt this question
altogether which showed selective study. Those who did attempt made a number of
mistakes. Common among these were as follows:

 While preparing statement of comprehensive income, a significant number of

students could not distinguish between transactions relating to profit and loss for the
period and other comprehensive income.
 Loss on de-recognition of investee company’s shares was either ignored or calculated
incorrectly.
 Fair value gain on the investment available for sale was also ignored by many
students.
 Exchange gain was calculated by applying incorrect conversion rates.

Question 3

This question had two parts, one based on IAS 17 and the other on IAS 39. The
requirement was to compute the impact of the given transactions on items forming part of
profit and loss account and statement of financial position. In either part, the performance
remained far below the passing standard as the students seemed to lack understanding of
the underlying concept.

Part (a)

Though this part was based on a basic leasing transaction yet a number of mistakes were
witnessed. The common among those were as follows:

 Journal entries were prepared which were not required.

 Since it was a manufacturer cum lessor transaction, sales had to be recorded at lower
of fair values of the cars and present value of minimum lease payments. Most of the
students did not test this criterion.
 Most of the students did not understand that lease payments included car servicing
revenue which had to be booked at cost of servicing plus normal profit of 20% and
cost of servicing shall be deducted from the amount of installments, to arrive at lease
rentals. Some students deducted the cost instead of cost plus 20%, to arrive at the
rentals.

 Some students deducted the services income to arrive at the lease rentals but did not
show it in their final answers.

Part (b)

This part was based on a situation whereby a vendor had sold a generator with 10% down
payment and the balance to be received after one year. Interest was to be recovered on the
outstanding balance @ 6% whereas market interest rate was 12%. Later, the supplier
agreed to receive the balance amount in installments.

Page 2 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2014
The common errors were as follows:

 Sales revenues should have been calculated by taking present value of all receipts
including the amount of interest on outstanding balance. Most students took the
present value of amount excluding interest. Moreover, instead of using the market
interest rate of 12% for discounting purposes many students used the rate of interest
as was agreed between the two parties i.e. 6%.

 Most of the students did not bifurcate the account receivable between short term and
long term portions.

Question 4

In this question the candidates were required to prepare a note on taxation, for inclusion
in the financial statements of a limited company in accordance with IFRS. A below
average performance was witnessed. Very few scripts were seen where a proper format of
disclosures was prepared. Other common mistakes were as follows:

 Reconciliation of tax expenses and accounting profit was rarely prepared.

 While computing current tax liability, actuarial gains were deducted from the
accounting income.

 Impact of actuarial gains on deferred tax was ignored.

 Very few candidates understood the impact of prior year’s tax assessment on tax
reconciliation.

Question 5

This was a very simple and easy question on non-performing advances of a bank and as
described earlier, the performance was good. However, even in this question, a number of
students failed to perform well because they had little or no knowledge of the required
format. A common mistake which was committed by some of the good candidates also
was that provision was calculated without considering the forced sale value of the
collaterals.

Question 6

This question required preparation of extracts from consolidated profit and loss account
including earnings per share. A below average performance was seen in this question
also. The common mistakes were as under:

 The profits for the year attributable to owners and non-controlling interest were not
disclosed separately.

 Impact of bonus shares was ignored while calculating interim dividend from Zee
Limited (ZL) to Alpha Limited (AL).

Page 3 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2014
 In the calculation of consolidated profit, dividend received from ZL was not reduced
to after tax amount. Some students ignored the dividend altogether.

 Fair value gain on ZL’s investment property was not considered while determining
ZL’s profit for the year.

 While calculating diluted earnings per share, the impact of convertible bonds on
number of shares and/or profit was either ignored or computed incorrectly.

Question 7

This question tested concepts pertaining to IAS 8, 16, 38 and 40. The performance was
far below the level that is normally seen in such type of questions. The common mistakes
were as under:

 Instead of analyzing the given situation and commenting on the specific accounting
treatment, many students converted the question into a theory question i.e. mentioned
that if such and such conditions are met the expenses would be capitalized; otherwise
it would be charged off. Such answers could not secure any mark.

 Very few students knew that prior period errors are corrected retrospectively by
restating the comparative figures as in the case where expenses chargeable to profit
and loss were included in Capital work in progress.

 Very few candidates were able to identify that Office B was required to be classified
as Investment Property as per IAS 40 since it was not ready for sale in its existing
condition. Mostly the candidates classified it as non-current asset held for sale or non-
current asset under IAS-16. Even among those who knew about the classification as
investment property, very few could elaborate that the company may choose a fair
value model or cost model in case of all of its investment properties.

 Even those candidates who identified correctly that office ‘A’ would be classified as a
non-current asset held for sale, mostly gave incomplete reasons in support thereof.

(THE END)

Page 4 of 4
 Final Examination
Module E
The Institute of 2 December 2014
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 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
CU in
Rs. in million
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 3,500 900 280
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:

(i) No. of At the acquisition date

Investment shares Cost Retained Fair value of
Company *
date acquired earnings NCI
----------------------- in million -----------------------
LS 1-Jan-2012 120 Rs. 2,000 Rs. 250 Rs. 540
FS 1-Jul-2012 9 CU 300 CU 160 CU 90
*
NCI stands for Non controlling interest

(ii) 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.
(iii) No further shares have been issued by LS and FS since their acquisitions, except for
the bonus issue as mentioned above.
(iv) An impairment test carried out on 30 June 2014 revealed that goodwill of FS is
impaired by CU 10 million.
(v) PCL values non-controlling interest on the date of acquisition at fair value.
(vi) The exchange rates in terms of Rs. per CU, were as follows:

Average for
1-Jul-2012 30-Jun-2013 1-Jan-2014 30-Jun-2014
2013-14
Rs. 15.00 Rs. 16.80 Rs. 16.90 Rs. 17.30 Rs. 17.00
 Advanced Accounting and Financial Reporting Page 2 of 5

(vii) 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 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 (17)
(b) Consolidated statement of other comprehensive income for the year ended 30 June
2014. (Ignore taxation) (08)

Q.2 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
20,000 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
ended 30 June 2014. (03)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.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 2,900 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)

Q.4 Sigma Limited (SL) operates an approved and funded gratuity plan for its management staff
who have completed the minimum qualifying period of three years service. The plan is
administered by the trustees nominated under the trust deed. Trial balance of the fund as at
30 June 2014 is as under:
Debit Credit
Rs. in '000
Balance with bank 500
Receivable from SL 800
Investment in shares available for sale – as at 1 July 2013 8,265
Defense saving certificates (DSCs), including accrued interest 14,235
Opening balance of members' fund 18,287
Amounts payable to outgoing members 150
Accrued expenses 15
Profit from DSCs 1,698
Dividend from investment available for sale 1,380
Contribution for the year 3,000
Gratuity paid/payable to outgoing members 700
Audit fee 23
Bank charges 7
24,530 24,530

The investments as shown above costed Rs. 8,450,000. The market value of these
investments as at 30 June 2014 amounted to Rs. 8,720,000.
 Advanced Accounting and Financial Reporting Page 4 of 5

Required:
For the year ended 30 June 2014, prepare the following in accordance with the requirements
of International Financial Reporting Standards.

(a) Statement of net assets available for benefits; and (05)

(b) Statement of changes in net assets available for benefits. (04)

Q.5 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 1-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
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. (10)
(Show comparative figures and ignore taxation)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.6 The following information has been extracted from the financial statements of Zeta Limited
(ZL) for the year ended 30 June 2014:

(i) Statement of financial position:

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 2,540
Long-term receivables 15 31 Retained earnings 900 833
Deferred tax 28 35 Long-term borrowings 630 680
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 (07)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

Ans.1 (i) Parent Company Limited

Consolidated statement of financial position as at 30 June 2014
Rs. in million
Assets
Non-current assets
Property, plant and equipment 4,200+3,500+250×17.3 12,025.00
Intangible assets (W-1) 796+1,730 2,526.00
Current assets 3,500+4,000+450×17.3 15,285.00
29,836.00
Equity and liabilities
Equity attributable to owners of PL:
Ordinary shares capital 6,000.00
Retained earnings (W-4) 5,565.15
Exchange reserve [(W-1) 253+(W-2) 813.20]] × 75% 799.65
12,364.80
Non-controlling interest W-4 (731.20+2,050) 2,781.20
15,146.00
Current liabilities 4,700+4,800+300×17.3 14,690.00
29,836.00

(ii) Parent Company Limited

Consolidated statement of other comprehensive income
For the year ended 30 June 2014
Rs. in million
Other comprehensive income:
Items that may be translated to profit or loss:
 Exchange gain on translation of goodwill W-1 55.00
 Exchange gain on translating of foreign operations W-2 195.80
250.80

W-1: Goodwill and exchange gain thereon LS FS

---------- Rs. in million ----------
Purchase consideration 2,000 (300 × 15) 4,500
NCI fair value on acquisition date 540 (90 × 15) 1,350
2,540 5,850
Net assets on acquisition date (1,800/1.2+250) (1,750) (120+160) × 15 (4,200)
Estimated liability for a pending claim 6 -
Goodwill on acquisition date i.e. 1 July 2012 1,650
Impairment on 30 June 2014 - (10 × 17.3) (173)
Goodwill as at 30 June 2014 1,477
Goodwill as at 30 June 2014 @ Rs. 17.30 796 (100×17.3) 1,730
Exchange gain reserve as 30 June 2014 253
Exchange gain reserve as 30 June 2013 (148.5 × 75%) (198)
Exchange gain for the year 55

W-2: Exchange reserve on translation of FS foreign operations

CU in Conversion Rs. in
million @ million
Net assets as at 30 June 2014 400.00 17.30 6,920.00
Net assets as at 30 June 2013 (400-30+18) 388.00 16.80 6,518.40
Profit for the year 30.00 17.00 510.00
Dividend paid during the year (120×15%) (18.00) 16.90 (304.20)
400.00 6,724.20
Exchange gain for the year ended 30 Jun 2014 195.80
Exchange reserve as at 30 June 2013 (463.05/75%) 617.40
Exchange gain on foreign operations as at 30 June 2014 813.20

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

W-3: FS retained earnings CU in Conversion Rs. in

million @ million
Net assets as at 30 June 2014 400.00 17.30 6,920.00
Net assets on acquisition date (280.00) 15.00 (4,200.00)
Post-acquisition retained earnings as at 30 June 2014 including
OCI item of exchange gain 120.00 2,720.00
Exchange gain to be classified to OCI W-2 (813.20)
Post-acquisition retained earnings as at 30 June 2014 1,906.80

W-4: Consolidated retained earnings and NCI Retained

NCI - LS NCI - FS
earnings
----- Rs. in million -----
Balance as at 30 June 2014 3,500.00 - -
NCI fair value on acquisition date - 540.00 1,350.00
Post-acquisition profit – LS (650×80%) 520.00 130.00 -
Post-acquisition profit – FS (1,906.8×75%) 1,430.10 - 476.70
LS earnings used for bonus issue (300×80% /20%) 240.00 60.00 -
Liability paid in May 2014 booked on acq. (6×80%/20%) 4.80 1.20 -
Exchange gain on translation of FS (W-2) 1,066.20×25% - - 266.55
Goodwill impairment (173×75%/25%) (129.75) - (43.25)
5,565.15 731.20 2,050.00

Ans.2 Sky Link Limited

Accounting treatment in the financial statements for the year ended 30 June 2014

Treatment in accordance with the requirements of the international financial reporting standards for
the matters pertaining to the financial statements for the year ended 30 June 2014 is discussed as
under:

(a) Operating license – measurement and recognized

The operating license shall be measured initially at cost of Rs. 50 million plus Rs. 6 million of
other directly attributable cost for preparing the asset for its intended use.

For subsequent measurement, IAS allows either the cost or revaluation model. However,
revaluation model can only be used when an active market of the intangible asset exists.

In this case, the operating license shall be carried at cost less accumulated amortisations.
However, carrying value should be reviewed annually to identify any impairment.

The license has finite useful life of twenty years. The cost should therefore be amortised on a
systematic basis over its useful life. Amortisation shall begin when the asset is available for use.

In this case, the license was acquired on 1 August 2013 but it is operative from 1 January 2014.
Therefore, amortisation should commence from 1 January 2014 and it would amount to Rs.
1.43 million (56÷19.583×6÷12) for the period from 1 January to 30 June 2014.

Operating license – impairment

Significant lower number of subscribers and loss of Rs. 15 million during the first six months as
against the budgeted profit of Rs. 30 million are indicators for review of impairment.

The license itself does not generate cash flow independently of the other assets. Therefore, SLL
would be treated as a cash generating unit (CGU).

To determine impairment, recoverable amount is to be worked out by analyzing value in use

(VIU)and market value of operating license and tangible assets.

Page 2 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

The loss for the first six months seems to be mainly because of significant marketing campaign
cost as excluding this cost loss for the first six months would be reduced to Rs. 10 million (30-
20). Earning profit of Rs. 5 million during the months of July and August 2014 and signing of
further 20,000 customers are indicative of improving operating results. Therefore, VIU of CGU
is expected to exceed the carrying value of the net assets.

In view of the above, it may be concluded that there is no impairment of CGU.

(b) Cost incurred on launching of marketing campaign:

Cost incurred for launching of marketing campaign to introduce the network and sales
promotion of package offered should be expensed out when incurred. Therefore, invoices
totaling to Rs. 20 million should be charged to cost for the year ended 30 June 2014.

(c) Revenue recognition

1. Normal calls revenue should be recorded at the time call is made at Rs. 2 per minute.
2. SLL also deals in a single package which includes free mobile phone plus 1,200 free
minutes. In such combined packages, revenue recognition criteria need to be applied to
the separate components of a transaction to reflect substance. Each component of the
package should be recognized at its fair value and only recognized when it meets the
specific criteria. Accordingly, revenue shall be recognized as under:
(i) For the revenue arising from the package , it is measured at the fair value of the
consideration received or receivable taking into account any trade discount and
volume rebate allowed by the entity.
(ii) The package is comprised of two components, one is mobile phone and another is
calls duration. Revenue for mobile phone would be recognized on its delivery
whereas calls revenue would be recognized at the month-end. Revenue for both the
components would be determined as under:

Revenue to be
Discount
Fair value recognized
(Balancing)
(proportionate)
---------------------- Rupees ----------------------
Mobile set 15,000 2,671 12,329
Call charges (1,200×12×2) 28,800 5,129 23,671
43,800 7,800 36,000
(iii) Monthly calls duration in excess of free 1,200 minutes per package would be
recognised at Rs. 1.50 per minute (net of discount) .
(iv) An appropriate provision should be recorded to cover any default in payments.

(d) Revenue for average four months upto 30 June 2014 in respect of 50,000 packages is worked-
out as under:
Mobile phone revenue Calls revenue
Rs. in million
On start of package [12,329×50,000] 616.45 -
At month-end [23,671÷12×50,000] 98.63
At month-end 98.63
At month-end 98.63
At month-end 98.63

Note:
In addition to mobile set and calls charges a component of interest income may be incorporated to
take effect of financing cost of 12% per annum.

Page 3 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

Ans.3 (a) Quality Works Limited

Extracts from statement of financial position as at 30 June 2014
2014 2013
Rs. in million
Assets:
Gross amount due from customers W-3 103.00 255.50
Account receivable (net of 10% advance payment and deduction of 5%
retention) (100×85%), (75×85%) 85.00 63.75
Retention held by customers (3,000×80%×5%) (3,000×45%×5%) 120.00 67.50

Liabilities:
Advance from customers (3,000×20%×10%)(3,000×55%×10%) 60.00 165.00

(b) Quality Works Limited

Extracts from statement of comprehensive income for the year ended 30 June 2014
2014 2013
Rs. in million
Contract revenue recognised (3,000×80%-1,350), (3,000×45%) 1,050.00 1,350.00
Contract cost recognised W-2 (1,212.50) (1,237.50)
(162.50) 112.50

W-1: Expected profit/(loss) on completion of the contract As at As at

30-Jun-2014 30-Jun-2013
Contract price A 3,000.00 3,000.00
Work completed upto 30 June 2014 B 80% 45%
Actual accumulated cost incurred 2,560.00 1,500.00
Cost of quotation before award of the contract (7.00) (7.00)
Actual accumulated cost incurred C 2,553.00 1,493.00
Estimated further cost to incur Balancing 347.00 1,107.00
Estimated cost to complete 2,900.00 2,600.00
Estimated cost of warranty works at 5% 3,000×5% 150.00 150.00
Estimated cost of the contract D 3,050.00 2,750.00
Estimated profit/(loss) on completion of the contract (A-D) (50.00) 250.00

W-2: Contract cost recognition for the year ended 30 June 2013 and 2014
2014 2013
Cost recognized upto end of the year D×B 2,440.00 1,237.50
Cost recognized upto 30 June 2013 (1,237.50) -
Cost for the year 1,202.50 1,237.50
Loss to be recognised (50×20%) 10.00 -
1,212.50 1,237.50

W-3: Gross amount due from customers 2014 2013

Contract cost incurred upto end of the year C 2,553.00 1,493.00
Recognised profit/(loss) (50×100%), (250×45%) (50.00) 112.50
2,503.00 1,605.50
Progress billing upto end of the year A×B (2,400.00) (1,350.00)
Gross amount due from customers 103.00 255.50

Page 4 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

Ans.4 (a) Sigma Limited - Management staff gratuity fund

Statement of net assets available for benefits as at 30 June 2014
Rs. in '000
Assets
Investments (14,235+8,720) 22,955
Receivable from Sigma Limited 800
Balances with banks 500
Total assets available for benefits 24,255

Liabilities
Payable to outgoing members (150)
Accrued expenses (15)
(165)
Net assets 24,090
Represented by:
Members' fund 23,820
Surplus on re-measurement of investments available for sale (8,720-8,450) 270
24,090

(b) Sigma Limited - Management staff gratuity fund

Statement of changes in net assets available for benefits
For the year ended 30 June 2014
Rs. in '000
GENERAL RESERVE FUND
Balance 1 July 2013 18,287
Contribution during the year 3,000
Gratuity paid/payable to outgoing members (700)
20,587
Income:
Profit from defense saving certificates 1,698
Dividend on investments 1,380
Reversal of previous years impairment (8,450-8,265) 185
3,263
Expenditure:
Audit fee (23)
Bank charges (7)
(30)

Balance 30 June 2014 23,820

Page 5 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

Ans.5 Opal Industries Limited

Accounting treatment for various investments in first separate financial statements

In accordance with IAS 27, in separate financial statements, investments in subsidiaries, joint ventures
and associates should be valued either at cost or fair value in accordance with IFRS 9.

As OIL is preparing its first separate financial statements for the year ended 30 June 2014, there is a
change in accounting policy as investments in AL, an associate company, would be treated in 2014 at
cost as against the previous basis of equity accounting. Accordingly, comparative figures would be
restated to incorporate this change in accounting policy.

(i) Opal Industries Limited

Statement of changes in equity for the year ended 30 June 2014
Retained
earnings
Rs. in million
Balance as at 30 June 2012 465.00
Profit for the year - restated W-1 1,251.60
Final dividend for the year ended 30 June 2012:
- Cash dividend at 20% 2,500×20% (500.00)
- Bonus issue at 15% 2,500×15% (375.00)
Balance as at 30 June 2013 - restated 841.60
Profit for the year W-1 1,454.80
Final cash dividend at 25% for the year ended 30 June 2013 2,875×25% (718.75)
Balance as at 30 June 2014 1,577.65

(ii) Opal Industries Limited

Notes to the financial statements or the year ended 30 June 204

1 - Long term investments:

2013
2013 2014 2014
Description (Restated)
Number of shares Rs. in million
Subsidiary and associated companies-at cost
- 975,000 GL 195.00 -
240,000 240,000 AL 50.00 50.00

Others - Available-for sale

70,000 70,000 BL (70,000×110), (70,000×160) 7.70 11.20
310,000 1,285,000 252.70 61.20

The company holds 65% and 30% and 10% ownership interest in GL, AL and BL respectively.

W-1: OIL profit for the year after taking effect of investee companies:
2013
2014
(Revised)
Rs. in million
Profit for the year 1,450.00 1,260.00
AL - Associated company:
Reversal of previously booked profit (28×30%) - (8.40)
Dividend for the year ended 30 June 2013 (80×30%×16%) 3.84 -
BL - Available for sale:
Dividend for the year ended 30 June 2013 (70×10%×18%) 1.26
Investment impairment (7.7-8) OR (11.2-8)-(7.7-11.2) (0.30) -
1,454.80 1,251.60

Page 6 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

Ans.6 (a) Zeta Limited

Statement of cash flows for the year ended 30 June 2014
Rs. in million
Cash flows from operating activities:
Profit before tax 702/66% 1,063.64
Accounting depreciation 3,460+694-3,814 340.00
Finance cost net of un-winding interest 110.00
Recovery of long-term receivables 40-20 20.00
1,533.64
Working capital changes:
Inventories 729-780 (51.00)
Trade and other receivables 138-178 (40.00)
Trade and other payables 150-120 30.00
(61.00)
Cash generated from operations 1,472.64
Finance cost paid 110+[(40-31)-(20-15)] (114.00)
Taxes paid (-1,063.64×34%)-(35-28)+25-32 (347.64)
Net cash generated from operating activities 1,011.00
Cash flow from investing activities:
Additions to property, plant and equipment (694.00)

Cash flow from financing activities:

Repayment of long term loans (680+70)-(630+50) (70.00)
Dividend paid for 2013* 2,540×10% (254.00)
(324.00)
Net decrease in cash and cash equivalents (7.00)
Cash and cash equivalents at the beginning of the year 135-10 (125.00)
Cash and cash equivalents at the end of the year 140-8 (132.00)

(b) Comments on statement of cash flows:

(i) Operating activities:
Cash generated from operations was Rs. 1,472.64 million as against operating profit of
Rs. 1,173.64 million (1,063.64+110). The difference was on account of non-cash expense
of depreciation amounted to Rs. 340 million, recovery of Rs. 20 million from employees
as against long-term receivables and increase in working capital by Rs. 61 million.

(ii) Investing activities:

ZL is expanding its operation as evident from the net capital expenditure of Rs. 694
million incurred during the year. The additional expenditure is expected to increase the
profitability of ZL in the coming years.

(iii) Financing activities:

It appears that ZL has capability to generate adequate cash to repay loan installments
due and maintain a reasonable dividend payout.

Recommendations:
(i) Financing policy:
Finance cost net of tax benefit is Rs. 72.6 million (110*66%) which represent 8.61% of
average balance of long term loan and bank borrowings. On the other hand, profit after
tax is 19.52% of average equity balance of Rs. 3,597 million.

In view of the above, it would be more appropriate to utilise borrowed funds for

Page 7 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2014

expansion as financing cost is significantly lower than return on capital employed. In the
presence of positive financial indicators, ZL should be able to acquire external financing
at a competitive rate.

(ii) Dividend policy

For the year ended 30 June 2014, ZL announced cash dividend at 25% which is Rs. 730
million. This amount is more than the profit for the year amount to Rs.702 million. ZL
should retain some percentage of profit for expansion of the business. Bonus issue may
be an option but that should only be considered if significant growth in profit is expected.

(iii) Inventory and receivable management:

Increase as compared to previous year is 29% for trade and other receivables, 7% in
inventories and 25% in trade and other payables. This increase seems justifiable as
increase in profit indicates increase in ZL’s sales. However, only 7% increase in
inventory is noticeable. SLL should take steps to review these balances in the light of
previous benchmarks to identify corrective measures if any.

(THE END)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Winter 2014

General:

It seems that most of the students resort to selective studies. This was evident from the
fact that very poor performance was witnessed in those areas which were tested after a
considerable lapse of time. Selective studies should be avoided as it is the primary reason
for the failure of most candidates. Moreover, in depth understanding of various
accounting issues cannot be achieved merely by reading the books or IFRSs. Accounting
needs a lot of practice which is often found lacking. Consequently, the students lack the
ability to appropriately plan and present their answers and they carry out lengthy
procedures when easy alternatives are available.

Question 1

Consolidation is the most commonly tested topic in this paper and usually carries a
weightage of 20 to 25 marks. Almost all the questions revolve around 15-20 major
concepts which can be mastered by a reasonable amount of concentrated effort. Usually
those students who have a good command of this topic are generally able to pass this
paper quite easily. However, in almost every attempt, most of the students make a lot of
easy mistakes and this attempt was no different. Common mistakes are enumerated
below:

Goodwill

 To calculate net assets many students used closing balance of share capital of LS Ltd
which was incorrect because it included bonus shares issued after the acquisition date.

 Entire amount of contingent liability was deducted in arriving at net assets. Some
students deducted difference of contingent liability disclosed and paid.

 Goodwill was computed on the basis of proportionate share in the net assets whereas
according to the question PCL was following a policy of valuing NCI on the date of
acquisition at fair value.

 Impairment in Goodwill of FS Limited was converted using average rate of exchange.

 Some candidates allocated goodwill between Parent and NCI.

Page 1 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2014
Retained earnings:

 Liability booked on acquisition which was paid in May 2014 was not apportioned
between RE and NCI. Moreover, some students deducted the amount in the retained
earning calculations instead of adding it.

 Issuance of Bonus Shares was ignored. Some students calculated the amount
incorrectly by calculating 20% of present share capital.

 Exchange gain on goodwill and translation of foreign operations for the year were not
presented separately in Other Comprehensive Income.

 Changes in net assets of FS Limited from the acquisition date to date of balance sheet
was considered as profit whereas it was also required to be bifurcated between
exchange reserve and profit.

Exchange Reserve

 Majority of the students did not classify exchange reserve separately and included it
in retained earnings. Many of those students who computed the exchange reserves
correctly, showed the entire amount as part of PCL’s equity i.e. did not apportion it to
NCI.

 Almost all students considered reported opening balance as the gross reserve and did
not make any adjustment to gross up the amount. Probably they did not read the
question carefully where it was clearly stated that the given figures represented the
value of the exchange reserve as per previous year’s consolidated financial
statements.

 Quite often, incorrect exchange rates were used in translating dividend paid during
the year.

Other comprehensive income

Though only statement of other comprehensive income was required, majority of the
students prepared statement of comprehensive income.

Question 2

In this question candidates were required to discuss accounting treatment of intangibles

and revenue recognition. It proved to be the most difficult question and only a few
students could secure passing marks. It had four parts and the performance in each part is
discussed below:

Part (a)

Initial recognition and subsequent measurement of intangible asset (operating license).

Generally this part was attempted fairly. The mistakes observed were as under:

 Professional fee was not considered as part of cost of operating license.

 Other indirect costs were considered as part of cost of patent.

Page 2 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2014
 Amortization should begin from the date when asset is available for use. Majority of
the students did not discuss this aspect. Some of them recommended that amortization
should commence from the date of acquisition.

 License could not generate cash itself and hence SL had to be considered as a CGU.
This concept and the related implication was not discussed.

 Many students incorrectly concluded that impairment should be recorded because

price offered for the license by a third party was less than its carrying value. They
failed to realize that offer price may not necessarily represent fair value and that the
loss for the period was on account of the marketing campaign which was a one time
cost.

Part (b)

This part was done well as almost all students recommended correctly that cost of market
campaign shall be recorded in the period during which it is incurred. However, some
students incorrectly suggested that provisions should also be made in respect of cost of
Rs. 5 million that had to be incurred in the subsequent year.

Part (c) and (d)

The performance in both these parts was quite poor. Very few students could make out
that under IAS 18, in such combined packages, revenue recognition criteria needs to be
applied on each component of the package separately and revenue from each component
is recognized only when it meets the specific criteria specified in the IAS.

Question 3

This was a simple question on construction contract. However, majority of the students
seemed to suffer from lack of preparation probably because this topic had been tested
after a long time.

Common errors were as follow:

 Actual cost was recorded instead of determining the cost on the basis of stage of
completion.

 Costs of removing defects during warranty period were ignored.

 Gross amount due from customers was not recorded.

 Unpaid bills were recorded at their gross amounts i.e. advance and retention money
were not deducted therefrom.

 Many students did not prepare and report comparative figures.

Question 4

This question required statement of net assets available for benefits and statement of
changes in net assets of a gratuity fund. It was generally well attempted. However, about
20% of the students did not attempt it altogether, which was indicative of selective
studies.

Page 3 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2014
The common mistakes were as under:

 Investment in shares was valued at cost instead of fair value.

 Some of those who reported investment at the fair value compared it with original
cost rather than the book value and consequently ignored the reversal of previous
year’s impairment.

 Surplus on re-measurement of investment was not shown and the entire difference
between the opening and closing values was recorded as income.

Question 5

According to the given scenario, a listed company held shares in 3 companies which
included a subsidiary, an associated company and a 10% holding in the 3rd company. The
requirement was to prepare a note on (i) movement in retained earnings and (ii)
investments, for inclusion in the separate financial statements of the company.

This question on investments was least favourite among the students and about one third
of them did not attempt it. Those who did attempt, made some very fundamental errors.
The major issues which most of the students failed to understand were as follows:

 According to IAS 27, in separate financial statements, investments in subsidiaries,

joint ventures and associates are to be valued either at cost or at fair value in
accordance with IFRS 9.

 It was the first time that the company had acquired a subsidiary. Hence, it was the
first time that the company was preparing “separate financial statements” and
therefore the accounting policy for investment was to be changed as previously
investment in associate must have been accounted for under the equity method
whereas now they were required to be accounted for at cost or at fair value under
IFRS 9.
Accordingly, comparative figures were required to be restated to incorporate change
in accounting policy. Majority of the students applied the equity method of
accounting which was in contradiction with IAS 27.

Other common mistakes were as follows;

 Presentation of the SOCE was poor and restatements were not mentioned.
 In the note on investments, number of shares and investment percentages were not
disclosed.
 While calculating profit for the year after taking effect of investee companies
following aspects were either ignored or worked out incorrectly:
 AL profit was not reversed while restating the profit for the year 2013.

 Impairment in investment was not accounted for.

 Final dividend should have been shown in the following years but were shown in the
same year.

Page 4 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2014
 Comparative figures are required to be reported when available. These were mostly
ignored.

 Many students failed to correctly classify investment as investment in subsidiaries, in

associates and available for sale.

Question 6

This question required students to prepare statement of cash flows, provide comments on
different activities and give recommendation on financing policy, dividend policy and
management of inventory and receivables.

Common mistakes in the preparation of cash flows were as follows:

 Many students did not work back profit before tax and started with profit after tax.

 Majority of the students ignored the changes in deferred tax asset in calculating the
taxes paid.

 Most of the students failed to correctly incorporate the effect of un-winding of

interest while calculating the finance cost paid.

 Recovery of long-term receivables was shown as a financing activity.

 Many students included the increase/decrease in tax payable in the amount of

increase/decrease in working capital.

 Increase in share capital due to issuance of bonus shares was presented as cash inflow
from issuance of shares.

 Dividend paid which could have easily been calculated as % of opening capital was
calculated using a much lengthy method i.e. through movement in retained earnings.
In that process, many students ignored the effect of bonus shares.

While providing comments under part (b) majority of the students showed very ordinary
presentation and communication skills. In majority of the cases, the comments provided
were general in nature and restricted to mere highlighting of the facts. Some of the better
students covered apparent matters like healthy increase in cash flows, dividends
exceeding profit and the justification for increase in inventory and receivables. However,
in-depth analysis was missing specially in the case of financing policy where most of the
students could not give any worthwhile suggestion.

(THE END)

Page 5 of 5
 Final Examinations
Module E
The Institute of 4 June 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 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

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
 Advanced Accounting and Financial Reporting Page 2 of 5

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:

 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 and 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 the indirect method. (22)

Q.2 The financial statements of Integrity Steel Limited (ISL) for the year ended 31 March 2015
are in the final stage of their preparation and the following matters are under consideration:

(a) 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)
 Advanced Accounting and Financial Reporting Page 3 of 5

(b) 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)

(c) On 1 April 2014, ISL disposed of its power generation system to Komal Limited (KL)
for a consideration of Rs. 135 million. At the same time, ISL entered into a long-term
agreement with KL whereby the assets were leased back under a 10-year operating
lease. At the time of sale, the fair value and the carrying value of the assets were
Rs. 160 million. The lease rentals are Rs. 22 million per annum. The market value of
lease rentals of such type of assets is Rs. 24 million

Required:
Prepare journal entries to record the above transactions for the year ended
31 March 2015. (04)

Q.3 (a) Tanzeem Limited (TL) operates a defined benefit pension plan for its employees. The
following details relate to 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 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 the pension obligation:
 on sale of business segment to SL
 at the year-end. (03)
 Advanced Accounting and Financial Reporting Page 4 of 5

(b) 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)

Q.4 (a) Millat General Insurance Limited is a listed company. The following information for
the year ended 31 December 2014 has been extracted from the records:

Fire &
Motor Misc.
property
insurance insurance
damage
------------ Rs. in ‘000 ------------
Premium written 286,000 154,000 89,000
Unearned premium reserve - opening 42,900 20,020 14,240
Unearned premium reserve - closing 51,480 18,480 11,570
Reinsurance ceded 228,800 15,400 53,400
Prepaid reinsurance premium ceded - opening 34,320 2,002 8,544
Prepaid reinsurance premium ceded - closing 41,184 1,848 6,942
Net claims 38,803 95,000 28,029
Commission expenses 27,742 15,554 9,167

Additional information:
(i) The reinsurers allowed commission on fire & property damage and miscellaneous
insurance at the rate of 15% of the ceded amount of reinsurance.
(ii) Other direct management expenses amounting to Rs. 45 million have been
charged to revenue account of different classes of insurance in proportion to their
net premium earned.
(iii) Other operating expenses and other income for the year are Rs. 28 million and
Rs. 17 million respectively.

Required:
Prepare an extract of profit and loss account for the year ended 31 December 2014, in
accordance with the requirements of Insurance Ordinance, 2000. (08)

(b) Briefly explain the 1/24th method of determining the unearned premium reserve. (02)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.5 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:

Gross Operating
Business Sales Assets Liabilities
profit expenses
segments
------------------------- 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 International Financial Reporting Standards:
(a) determine the reportable segments of Gohar Limited; and (07)
(b) 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)

Q.6 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.
(ii) 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.
(iii) 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.
(iv) 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.
(v) On 1 July 2014, IIL issued TFCs which are convertible into 20 million ordinary shares
on 31 December 2018.
(vi) 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)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

Ans.1 MALIK GROUP OF COMPANIES

Consolidated statement of cash flows
For the year ended 31 December 2014
Cash flow from operating activities Workings Rs. in million
Profit before tax 11,150
Adjustments for:
Finance cost 350
Gain on sale of subsidiary (1,000)
Income from associate (1,150)
Depreciation 3,850
Goodwill impairment 1 800
Gain on disposal of PPE (Rs. 2,750m – Rs. 2,500m) (250)
Working capital changes
Increase in inventory 2 (500)
Decrease in receivables 2 300
Decrease in payables 2 (250)
Cash generated from operations 13,300
Finance cost paid (Rs. 75m + Rs. 350m – Rs. 125m) (300)
Income tax paid 3 (1,850)
Net cash generated from operations 11,150

Cash flow from investing activities

Acquisition of property, plant and equipment 4 (8,000)
Acquisition of a subsidiary (Rs. 15,000m – Rs. 800m) (14,200)
Proceed from disposal of property, plant and equipment 2,750
Proceed from disposal of a subsidiary (Rs. 8,500m – Rs. 500 million) 8,000
Dividend received from associate 5 850
(10,600)
Cash flow from financing activities
Increase in long term loan (Rs. 3,000m + Rs. 400m – Rs. 300 – Rs. 5,000m) 1,900
Dividends paid to parent shareholders (1,250)
Dividends paid to non-controlling interest 6 (500)
150
Increase in cash and cash equivalents 700
Opening cash and cash equivalents 1,400
Closing cash and cash equivalents 2,100

WORKINGS
W1: Goodwill impairment
Goodwill as on 1 January 2014 18,500
Add: Goodwill of subsidiary acquired during the year 1.1 3,500
Less: Goodwill of subsidiary disposed of during the year 1.1 (1,900)
Less: Goodwill as on 31 December 2014 (19,300)
Impairment (balancing figure) 800

W-1.1: Goodwill of acquired/disposed of subsidiaries Gomel Stone

Cost of investment 15,000 6,000
NCI holding at fair value 3,400 3,200
FV of subsidiary net assets at acquisition (14,900) (7,300)
Goodwill at acquisition 3,500 1,900

W-2 : Working capital changes

Inventory Receivables Payables
Opening balance as on 1 January 2014 4,350 3,300 7,250
Add: Transferred in on acquisition of subsidiary 1,500 2,400 1,800
Less: Transferred out on disposal of subsidiary (1,650) (1,500) (800)
4,200 4,200 8,250
Less: Closing balance as on 31 December 2014 (4,700) (3,900) (8,000)
Working capital changes (500) 300 250

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

W-3 : Income taxes paid

Current and deferred tax as on 1 January 2014 (Rs. 3,525m + Rs. 1,050m) 4,575
Add: Transferred in on acquisition of subsidiary 400
Add: Tax for the year 2,250
Less: Current and deferred tax as on 31 December 2014 (Rs. 3,875m + Rs. 1,500m) (5,375)
Income taxes paid during the year 1,850

W-4: Acquisition of property, plant and equipment

Balance as on 1 January 2014 16,250
Add: Transferred in on acquisition of subsidiary 12,800
Less: Transferred out on disposal of subsidiary (7,250)
Less: Depreciation charge for the year (3,850)
Add: Increase in surplus of revaluation of PPE 2,000
Less: Disposal of plant (2,500)
Less: Balance as on 31 December 2014 (25,450)
Acquisition of property, plant and equipment (8,000)

W-5: Dividend from associate

Balance as on 1 January 2014 5,400
Add: Income from associate (Rs. 1,150m + Rs. 500m) 1,650
Less: Balance as on 31 December 2014 (6,200)
Dividend received 850

W-6: Dividend to NCI

Balance as on 1 January 2014 3,200
Add: Total comprehensive income of the year 1,200
Add: Acquisition of Gomel Limited 3,400
Less: Disposal of Stone Limited (9,800 × 40% + [3,200 – (7,300 × 40%)] (4,200)
Less: Balance as on 31 December 2014 (3,100)
500

Ans.2 (a)  The deposit is considered a financial asset.

 As per IFRS-9, a financial asset is classified as measured at either amortised cost
or fair value.
 ISL should measure this investment at amortized costs because:
– It appears that the asset is held within ISL business model where the
objective is to hold assets in order to collect contractual cash flows.
– The contractual terms of the financial asset give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal
outstanding.
 The additional 2% interest is an example of an embedded derivative.
 As the host contract is a financial asset, the derivative is not separated out for the
purposes of accounting and the entire hybrid contract is accounted for together.

(b) Date Description Debit Credit

10/1/2014 Property, plant and equipment 325
Profit and loss account (325- 310) 15
Investment property 310
(Dercognize investment property and record related
gain to income statement)

3/31/2015 Depreciation (325 x 6/12 ÷ 10) 16.25

Accumulated depreciation 16.25
(Record depreciation)

Page 2 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

(c) 4/1/2014 Bank 135

Deferred loss (2×10) 20
Profit and loss account (balancing) 5
Property, plant and equipment 160
(Record sale of power generation plant on sale and
lease back)

3/31/2015 Lease rental 24

Deferred loss (20/10) 2
Bank 22
(Record lease rental along with deferred loss reversal in
accordance with para 61 of IAS-17)

Ans.3 (a) (i) Financial statement extracts

EXTRACT OF STATEMENT OF FINANCIAL POSITION

2014 2013
Deferred liabilities Rs. in million
Net defined benefit liability 256 150

EXTRACT OF STATEMENT OF COMPREHENSIVE INCOME

Profit and loss account

Operating expenses 118 160

Other comprehensive income

Re-measurement loss on defined pension plan (113) (53)

EXTRACT OF NOTES TO THE FINANCIAL STATEMENTS

28 - Staff Retirement Benefits

28.1 - Changes in the present value of the pension obligations

2014 2013
Rs. in million
Present value obligations at the beginning of the year 2,300 2,050
Interest at 9%, 8% 207 164
Current service cost 125 143
Past service cost - 13
Benefits paid (99) (110)
Settlement (Note 28.2.1) (280) -
Re-measurement (gain) / losses charged to other
comprehensive income (balancing) (213) 40
2,040 2,300

28.2 - Changes in fair value of plan assets

Fair value of plan asset at beginning of the year 2,150 1,995

Interest at 9%, 8% 194 160
Benefits paid (99) (110)
Contribution paid 105 118
Settlement (Note 28.2.1) (240) -
Re-measurement losses charged to other comprehensive
income (balancing) (326) (13)
20X8 c/f 1,784 2,150

Page 3 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

28.2.1 During 2014, the company sells one of its business segments and transfers the
relevant part of the pension plan to the purchaser. This is a settlement. The
overall gain on settlement is calculated as follows:

2014
Rs. in million
Present value of obligation settled 280
Fair value of plan assets transferred on settlement (240)
Cash transferred on settlement (20)
Gain on settlement 20
28.3 - Amounts recognized in the profit and loss account
2015 2014
Rs. in million
Current service cost 125 143
Past service cost - 13
Interest cost 207 164
Less: Intesest income on plan assets (194) (160)
Gain on settlement (20) -
118 160

(ii) Journal entries to record the present obligations

Debit Credit
Description
Rs. in million
PV of pension obligation 280
Plan assets 240
Bank 20
Gain on settlement 20
(Record gain on settlement)

Pension expense 138

Other comprehensive income 113
Cash 105
PV of pension obligations 146
(To record pension expense and its related liability)

(b) Entries in the case of equity alternative

Dr. Cr.
Date Description
------------ Rupees ------------
31-Dec-15 Profit & loss account 4,633,333
Liability (W-1) 4,000,000
Equity (W-2) 633,333
31-Dec-16 Profit & loss account 4,953,333
Liability (W-1) 4,320,000
Equity (W-2) 633,333
31-Dec-17 Profit & loss account 5,513,333
Liability (W-1) 4,880,000
Equity (W-2) 633,333
1-Jul-18 Liability (W-1) 13,200,000
Equity (W-2) 1,900,000
Retained earnings (balancing) 2,400,000
Share capital (100,000 × 10) 1,000,000
Share premium (100,000 × *165) 16,500,000

Page 4 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

Liability component Rupees

Liability to be recognized at 31-12-2015 [(80,000 × Rs. 150) ÷ 3] 4,000,000
Liability to be recognized at 31-12-2016 [(80,000 × Rs. 156 × 2 ÷ 3) – 4,000,000] 4,320,000
Liability to be recognized at 31-12-2017 [(80,000 × Rs. 165) – 4,000,000 – 4,320,000] 4,880,000
13,200,000

Equity component Rupees

Fair value of equity alternative on grant date (100,000 × Rs. 135) 13,500,000
Fair value of cash alternative on grant date (80,000 × Rs. 145) 11,600,000
Equity component 1,900,000

Charged to Profit & Loss account each year 633,333

Ans.4 (a) MILLAT GENERAL INSURANCE

Profit and loss account for the year ended 31 December 2014
Fire and
Motor Misc. 2014
Working property
insurance insurance Total
damage
--------------------- Rs. in '000 ---------------------
Revenue account
Net premium revenue 1 55,484 139,986 36,668 232,138
Net claims (38,803) (95,000) (28,029) (161,832)
Management expenses (10,756) (27,136) (7,108) (45,000)
Net commission 2 5,548 (15,554) (917) (10,923)
Underwriting result 11,473 2,296 614 14,383
Other operating expenses (28,000)
Other income 17,000
Profit before tax 3,383

W-1: Net premium revenue

Fire and
Motor Misc. 2014
property
insurance insurance Total
damage
--------------------- Rs. in '000 ---------------------
Premium written 286,000 154,000 89,000 529,000
Add: Unearned premium reserve - opening 42,900 20,020 14,240 77,160
Less: Unearned premium reserve - closing (51,480) (18,480) (11,570) (81,530)
Premium earned 277,420 155,540 91,670 524,630
Reinsurance ceded 228,800 15,400 53,400 297,600
Add: Prepaid insurance premium - opening 34,320 2,002 8,544 44,866
Less: Prepaid insurance premium - closing (41,184) (1,848) (6,942) (49,974)
Reinsurance expenses 221,936 15,554 55,002 292,492
Net premium revenue 55,484 139,986 36,668 232,138

W-2: Net commission

Commission from insurers 33,290 - 8,250 41,540
Less: Commission expense (27,742) (15,554) (9,167) (52,463)
Net commission 5,548 (15,554) (917) (10,923)

(b) If the 1/24th method is used for earned premium, the underlying assumption is that all
premiums booked during a particular month can be approximated by an annual
policy that incepts during the middle of the month. Thus premium is spread across
the months in which it is booked and the rest 12 months. This can be illustrated as
follows:

Month 1 2 3 …. 11 12 13
Spread 1/24 1/12 1/12 …. 1/12 1/12 1/24

Page 5 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

Ans.5 (a) Determination of reportable segments

Chemicals Soda Ash Polyester Paint Pharma Total

-------------------------- Rs. in million --------------------------
Sales 1,790 216 227 247 252 2,732
Less: Inter-segment sales (38) - - - - (38)
Sales to external customers 1,752 216 227 247 252 2,694

Gross profit 1,101 117 48 26 31 1,323

Operating expenses (63) (57) (23) (16) (12) (171)
Profit before tax 1,038 60 25 10 19 1,152

Assets 637 444 115 127 132 1,455

Criteria for reporting segment Reporting segment External sales of

identification identified identifying segment
1. 10% of sales i.e. Rs. 273.2 million Chemicals 65.03%
2. 10% of PBT i.e. Rs. 115.2 million - -
3. 10% of assets i.e. Rs. 145.5 million Soda Ash 8.02%
73.05%

Further segment needs to be identified as reportable segment’s external sale is less than 75%

4. Highest in term of sales and % of assets

Pharma 9.22%
amount remaining segments
82.27%

(b) Disclosure in the financial statements of Gohar Limited

34 - OPERATING SEGMENT RESULTS

Chemicals Soda Ash Pharma Others Total
------------------------ Rs. in million ------------------------
Revenue from external customers 1,752 216 252 474 2,694
Inter segment revenue 38 - - - 38
Revenue from reportable segment 1,790 216 252 2,258

Other material information

Operating expenses 63 57 12 39 171
Segment profit before tax 1,038 60 19 35 1,152
Segment assets 637 444 132 242 1,455
Segment liabilities 442 355 98 202 1,097

34.1 - Reconciliation of reportable segment revenues, profit or loss, assets and liabilities
Other than Elimination
Reportable Gohar
reportable of inter- Other
segment Limited's
segment segment adjustments
total total
total transactions
------------------------------ Rs. in million ------------------------------
Revenues 2,258 474 (38) - 2,694
Operating expenses 132 39 - 75 246
Segment profit before tax 1,117 35 (11) (75) 1,066
Segment assets 1,213 242 - 150 1,605
Segment liabilities 895 202 - 27 1,124

The reconciling items represents amounts related to corporate headquarter which are not
included in segment information.

Page 6 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

Ans.6 Ittehad Industries Limited

Extract from the statement of comprehensive income
For the year ended 31 December 2014
2014
Note Rs. in million

Profit for the year 225

Earnings per share

Basic 17 1.28
Diluted 17 1.26

Ittehad Industries Limited

Extract from notes to the Financial Statements
For the year ended 31 December 2014

2014
Earnings per share Note
Basic Diluted
Total comprehensive income attributable to ordinary
shareholders (Rs. In million) 17.1 225.00 234.34

Weighted average number of ordinary shares outstanding

during the year (In million number of shares) 17.2 175.11 186.11

Reconciliation of profit for the year to Basic earnings and diluted earnings Rs. in million
Profit for the year i.e. basic earnings 225.00
Add: Interest on term finance certificates (W-2) 9.34
Diluted earnings 234.34

Reconciliation of basic number of shares to diluted number of shares Shares in million

Basic number of shares (W-1) 175.11
Options under ESS 1.00
Convertible term finance certificates 10.00
Diluted number of shares 186.11

WORKINGS

W-1: Weighted average number of shares

No. of shares
Right bonus
Description issue/ Weightage W/Avg shares
factor (W-1.1)
outstanding
Outstanding at start of the year 120 1/4 1.0870 32.61
Right issue 150 3/4 - 112.50
Bonus issue 30 1 30.00
175.11

W-1.1: Determination of right shares bonus factor

Shares Value
Rate
Quantity Rs. in million
Outstanding shares before the exercise of rights at fair value 120 25.00 3,000
Issuance of right shares at a premium of Rs. 5 per share 30 15.00 450
150 3,450

Theoretical ex-right price per share (Rs. 3,450 ÷ 150) 23.00

Bonus adjustment factor (25 ÷ 23) 1.0870

Page 7 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

W-2: Ranking of dilutive instruments

Increase in no. Earnings per
Increase in
Description of ordinary incremental Rank
earnings
shares share
Rs. in million in million Rs.
Vested options under ESS (5m - [(5m x 12)/15) - 1 - 1
Term finance certificates (250*11.5%*65%*6/12) 9.34 10.00 0.934 2

W-3: Testing for dilutive effect

Profit
attribuatable Ordinary
EPS Effect
to ordinary shares
shareholders
Rs. in million in million Rs.
Basic earnings per share 225.00 175.11
Vested options under ESS - 1.00
225.00 176.11 1.2776 Dilutive
Term finance certificates 9.34 10.00
234.34 186.11 1.2591 Dilutive

(The End)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Summer 2015

General:

The overall performance in this attempt was better than the last few attempts mainly
because of excellent performance in question 1 in which consolidated statement of cash
flow was tested. Consolidation is a topic which is tested almost in every attempt and can
be mastered by obtaining a good understanding of a few key aspects. The candidates who
could not pass are advised to study it thoroughly.

Question 1

This question required preparation of consolidated statement of cash flows using Indirect
Method. Overall performance in this question was quite satisfactory. However, following
errors were observed in many scripts:

 While calculating the changes in working capital, majority of the students did not
incorporate working capital added and deleted on acquisition and disposal of
subsidiaries. Similar mistakes were observed in the calculation of income taxes paid
and cash flows from acquisition of property, plant and equipment.

 In arriving at cash flows from disposal and acquisition of subsidiaries the cash
balances in the subsidiaries were not adjusted.

 Gain on sale of subsidiary/income from associate were added to profit before tax
instead of being deducted.

 Impairment of goodwill was ignored. However, those who tried to calculate it,
ignored the adjustment of goodwill on acquisition and disposal of subsidiaries.

 While calculating dividend from associate, income from associate was taken as Rs.
1,150 million i.e. other comprehensive income of Rs. 500 million was ignored.

 Deferred tax was ignored while calculating income tax paid.

 Decrease in current liabilities and increase in current asset were shown as inflows.

Question 2

This question consisted of three parts. Each part pertained to different accounting
situations and the candidates were required to determine the relevant amounts as would
appear in the financial statements. The year-end was 31 March 2015. Performance in
each part is discussed below:

Page 1 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2015
(a) According to the given situation, on 1 April 2014, a company deposited an amount
of US$ 5 million with a bank, at an interest of 2.5% per annum with a maturity date
of 31 March 2017. Interest was to be received on maturity along with the principal.
Further, an additional 2% interest per annum was payable in case the value of US$
increased by 5% or more.

The performance was very poor. Though the students generally identified that the
deposit is to be classified as a financial asset but only few students could identify
that additional 2% interest was an example of embedded derivative and since the
host contract is a financial asset the derivative and the financial asset have to be
accounted for together. Further, a financial asset is measured at amortized cost or
fair value but majority of the students mentioned amortized cost only and did not
give any justification for not mentioning fair value also. Moreover , a large number
of students simply provided computation of mark-up accrued on the foreign
investment instead of explaining as to how such investment would be measured in
accordance with the guidelines provided by IFRS-9.

(b) According to the situation, a company had shifted its office premises to a property
that was previously leased out to a subsidiary. The fair values of the building at the
beginning of the year and at the time of shifting were given. The requirement of the
question was to journalize:

 The effect of increase in fair value of the building during the period under
review till the date of shifting the corporate office to that building; and
 To record the change in classification of building from investment property to
PPE due to such shifting.

Large number of students correctly changed the classification of the building but
made the following errors:

 Overall profit at the time of shifting was computed on the basis of the cost of
acquisition of the building instead of fair value as the candidates failed to
realize that previously the building was being classified as investment property
and hence it must have been stated at its fair value.

 Full year’s depreciation was charged instead of depreciation for six months i.e.
from the date the building was reclassified as Property, Plant and Equipment.

(c) This part was based on a sale and lease back situation. The important points to note
in the question were as follows:

 The asset had been sold at Rs. 25 million below its fair value.

 Part of the above loss i.e. Rs. 20 million was to be compensated by way of
lower than market rentals (24-22)x10=20.

 Consequently, loss of Rs. 20 million was to be considered as deferred loss

whereas the remaining Rs. 5 million should have been charged off.

Page 2 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2015
The overall performance was mixed. A large number of students charged the entire
loss of Rs. 25 millions, to the P&L whereas many students deferred the entire
amount. However, a large number of students got full marks also. Another common
error was that students identified the transaction as financial lease instead of
operating lease as was specifically mentioned in the question.

Question 3(a)

This question was based on IAS-19. Most of the information had already been provided
in the question and the candidates were simply asked to make correct presentation and
disclosures. The overall performance was average. The common mistakes were as
follows:

 A large number of students did not present their answers in the form of notes to the
financial statements and instead, presented calculations and workings only.

 Income on plan assets was computed by using expected rate of return on that assets
instead of the discount rate.

 The effect of transfer of plan assets and liabilities due to sale of business segments
was totally ignored by some students.

 With the exception of few, students failed to provide the descriptive disclosure of the
sale of business segment as well as the statement of the consequential gain resulting
from settlement made due to such sale.

 Large number of students did not pass the journal entries at all whereas many of them
prepared the journal entries pertaining to sale of business transaction only and ignored
the rest.

 Most of the candidates failed to classify re-measurement loss on Defined Benefit Plan
as Other Comprehensive Income.

 Any increase in the present value of defined benefit obligation, both vested as well as
non-vested has to be recorded in the year in which the scheme is changed. Many
students allocated the amount pertaining to non-vested benefits over the period of
vesting. Many students took the impact of both changes in the year 2014 instead of
2013.

 Some students adjusted the closing balances of plan assets and liabilities with the
amount of settlement.

Question 3(b)

This question pertained to share based payments. The response in this question was
average as the students were generally able to work out the equity and liability
components correctly but made errors in passing the journal entries, specially the journal
entry to record the exercise of option. The common mistakes were as follows:

 The vesting period was taken as four years i.e. upto the date of exercise of option,
instead of three years i.e. the qualifying period.

Page 3 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2015

 Instead of calculating the equity component at the time of grant of option and
spreading it over the 3 years qualifying period, many students computed it for each of
the three years separately.

 Many students ignored the equity component altogether.

 Many students passed the entry for liability component on cumulative basis.

 Some students ignored the share premium and the entry was balanced by adjusting
the amount of retained earning.

Question 4(a)

This question on statement of expenses of a general insurance company was very simple.
The students were only required to tabulate the data in the specified format. The overall
performance was very good and many students secured full marks. However, many
mistakes were also observed which are listed below:

 Net underwriting results were not shown.

 Instead of net commission, gross commission income was shown.

 Other income and other expenses were allocated to the insurance business on
different basis instead of showing them in the total column after insurance results.

 Large number of students allocated the direct management expenses on the basis of
insurance premium earned instead of net premium earned (i.e. premium earned less
the reinsurance premium) as specifically mentioned in the question.

 According to the question, the reinsurance commission was allowed only on “Fire
and Property Damage” and “Miscellaneous Insurance”; however a number of students
also computed the same on “Motor Insurance”.

 The sub-totals and grand totals were not shown.

Question 4(b)

This 2 mark question was the worst attempted question of this paper as very few students
seemed to have any idea of the 1/24th method which is used for systematic allocation of
the amount of premium. The students are advised to refer to the suggested answers
published by ICAP to seek guidance.

Question 5

In this question data related to various segments of a company was given. The
requirements were broken into two parts as discussed below:

Page 4 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2015
Question 5(a)

In this part the candidates were required to identify the reportable segments on the basis
of the given data. Majority of the students demonstrated their correct understanding of the
provisions contained in the IFRS whereby reporting segments are those which represent
at least 10% of a company’s sales, profit before tax or total assets. The errors observed
were as follows:

 Most students missed the point that total revenue from reportable segments
determined on the above basis was less than 75% and in such situation the IFRS
advises that an additional segment has to be identified.

 Impact of inter-segment sales was adjusted to the individual segments to whom these
sales were made instead of the Chemicals segment which made the sale. Many
students ignored this adjustment altogether.

 Some students worked out the reportable segments on the basis of gross profit instead
of net profit. Like-wise, some tried to determine the reportable segments on the basis
of liabilities, which is not in accordance with the IFRS.

 Assets and liabilities not allocated to any segment should have been reported
separately under adjustment items in the reconciliation statement. However, some
students allocated the same proportionately on the basis of segment assets.

Question 5(b)

In this part the requirement was to show how the reportable segments would appear in the
financial statements and to reconcile the reporting segments. Overall performance in this
question was average. Common mistakes were as follows:

 Many students clubbed the other expenses, other assets and other liabilities on the
basis of turnover instead of showing them separately.

 Majority of the students were unable to prepare the reconciliation.

 Many students did not know that all the segment-wise information is presented in the
same note. They prepared separate notes for assets and liabilities and operating
results.

Question 6

This question pertained to earnings per share and the related disclosures. As far as the
computation of earnings per share is concerned, the students performed fairly well.
However, many of them were unable to prepare the disclosure extracts. Common
mistakes were as under:

 Majority of the students did not prepare separate disclosure of reconciliation of profit
for the year to basic and diluted earnings and reconciliation of basic number of shares
to diluted number of shares.

Page 5 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2015
 In calculating the weighted average number of shares, some of the students
incorrectly applied the bonus factor to all the shares rather than only to the opening
balance. Many students ignored the bonus adjustment factor altogether.

 While calculating basic earnings per share for ordinary shareholders, many students
did not deduct preference dividend from profit after tax.

 While determining the diluted earnings and diluted number of shares, full year’s
impact of interest and number of shares were taken instead of proportioning the same
to six months. Some students also failed to adjust the effect of income tax paid on the
interest on TFCs, while computing the diluted earnings.

 The share price at the announcement of issue of right shares was used to calculate the
theoretical ex-right price and the bonus adjustment factor instead of using the price
prevailing on the last date of exercising the right.

 Many students failed to produce the working related to ranking of dilutive

instruments.

 While determining the earning per incremental share for ranking the dilutive
instrument, only the bonus element embedded in the employee share option should
have been considered. However, a number of students took the total number of
shares.

 Many candidates did not adjust interest on term finance certificates for the purpose of
calculation of diluted earnings.

(THE END)

Page 6 of 6
 Final Examinations
Module E
The Institute of 10 December 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 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.
 Advanced Accounting and Financial Reporting Page 2 of 5

(vi) The exchange rates per G$ were as follows:

1 October 2014 Rs. 76
30 June 2015 Rs. 79
Average for October 2014 to June 2015 Rs. 78
It may be assumed that profits of all companies had accrued evenly during the year.

Required:
In accordance with the requirement of International Financial Reporting Standards, prepare
consolidated statement of comprehensive income of RYL for the year ended 30 June 2015.
(Ignore taxation) (23)

Q.2 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:
Research Development
Year Product Name
------ 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
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)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.3 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:

(i) 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 60
Unused tax losses carried forward 40 35
Exchange translation reserve 53 145
Liabilities older than 3 years, disallowed in previous years 7 3

(ii) 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.
(iii) 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.
(iv) 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.
(v) 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, 1984,
as applicable. (Comparative figures are not required) (15)

Q.4 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) Unrealised gains and losses

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. (15)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.5 (a) (i) Briefly explain the term “biological asset” and state when a biological asset is
recognised in the financial statements under the International Financial
Reporting Standards. (03)

(ii) 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. 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) (03)

(b) 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:
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)

Q.6 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:

Forward rates (for delivery

Dates Spot rates
on 1 August 2015)
1 May 2015 Rs. 103.20 Rs. 103.63
30 June 2015 Rs. 105.38 Rs. 105.50
1 August 2015 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 (09)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.7 Following amounts have been extracted from the trial balance of Noble Bank Limited for
the year ended 31 December 20X5:
20X5 20X4
-------- Rupees in ‘000 --------
Cash in hand – PKR 11,395,278 14,981,446
Cash in hand – USD 2,543,750 2,417,554
Cash in hand – EUR 1,090,179 1,036,095
Current account with SBP – PKR 8,817,802 33,095,825
Current account with SBP – USD 5,641,943 5,270,462
Deposit account with SBP – USD 16,947,158 15,728,111
Current account with NBP – PKR 22,360,829 16,220,092
National Prize Bonds 5,210,150 4,532,830
Current account with Central Bank of UAE – AED 25,713,299 20,139,442
Current account with Bank of England – GBP 17,142,200 13,426,295
Deposit account with Central Bank of UAE – AED 3,245,208 1,903,748
Deposit account with Bank of England – GBP 2,163,472 1,269,165
Other information:
(i) The foreign currency current and deposit accounts include remunerative accounts of
Rs. 37,118.596 million (20X4: Rs. 34,282.789 million).
(ii) The current accounts with SBP are maintained to meet the cash reserve requirement
of the SBP.
(iii) Foreign currency deposit account with SBP is maintained for special reserve
requirement of SBP as well as USD settlement account maintained with the SBP. This
account carries nil return.
(iv) Balances held with the Central Banks of respective countries are in accordance with
the requirements of the local statutory / regulatory requirements. Since the bank
operates in different countries, these balances earn mark-up at different rates as given
by the Central Banks of respective countries.

Required:
Prepare a note on ‘Cash and balances with treasury banks’ for inclusion in financial
statements of Noble Bank Limited for the year ended 31 December 20X5, in accordance
with the laws applicable in Pakistan. (10)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

A.1 RYL Group

Statement of comprehensive income
For the year ended 30 June 2015
Workings Rs. in million

Revenue [6,000 +(52×9÷12)×78] 9,042.00

Cost of sales [3,200+(32×9÷12)×78] (5,072.00)
Gross profit 3,970.00
Operating costs 1 (1,540.00)
Profit from operations 2,430.00
Share of profit of associate (156×30%×6÷12) 23.40
Investment income 4 431.00
Finance cost [233+(2×78×9÷12)] (350.00)
Profit before taxation 2,534.40
Income tax [568 +( 3×78×9÷12)] (743.50)
Profit for the year from the continuing operations 1,790.90
Profit for the year from discontinued operations
[156×6÷12 +1,974.75(W-3)] 3 2,052.75
3,843.65
Other comprehensive income
Exchange difference on translating foreign operations
Restatement of goodwill 5 81.00
Restatement of net assets 6 113.25
194.25
Total comprehensive income for the year 4,037.90

Profit attributable to:

Non-controlling interest 7 148.20
Owners of the parent company 3,695.45
3,843.65
Total comprehensive income attributable to :
Non-controlling interest 7 187.05
Owners of the parent company 3,850.85
4,037.90

W-1: Operating costs Rs. in million

Operating costs - RYL 855.00
Operating costs - GNL [(9×9÷12)×78] 526.50
Add: Incremental depreciation (8÷8×9÷12)×78 58.50
Add: Acquisition fees 100.00
1,540.00

W-2: Computation of DTL's goodwill on disposal Rs. in million

Cost of investment 1,200.00
NCI at acquisition 340.00
Net assets (350+240) (590.00)
Goodwill 950.00
Impairment (250.00)
Goodwill at disposal 700.00

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

W-3: Gain on sale of DTL’s shares

Consideration received 1,950.00
Fair value of consideration retained i.e.30% 1,300.00
3,250.00
Less: Share of consolidated carrying value when control lost
Net assets on disposal [350+459+(156÷2)–120] 767.00
Add: Goodwill on disposal (W-2) 700.00
Less: Share of NCI [25%× net assets on disposal i.e. Rs. 767 m] (191.75)
1,275.25
Gain on sale of DTL’s shares 1,974.75

W-4: Investment income

RYL - As given 1,400.00
GNL (6×9÷12×78) 351.00
Less: Profit on disposal of DTL’s shares [1,950 – (1,200×45÷75)] (1,230.00)
Less: Dividend received from DTL (120×75%) (90.00)
431.00

W-5: Gain on goodwill translation at year end rate

G$ in million
Goodwill of GNL
Cost of investment 50
NCI at acquisition 12
62
Net asset at acquisition [5+27+(12×3÷12)-8] (27)
Add: Fair value adjustment (8)
Goodwill 27

Gain on goodwill translation - other comprehensive income [(79–76)×27] Rs. 81 million

W-6: Exchange gain difference arising on translation

G$ in million Change in rate Rs. in million
Net assets at acquisition (27+8) 35.00 79-76 = 3 105.00
Nine month profit [(12–1)×9/12]
OR (12×9÷12) – (1×9÷12) 8.25 79-78 = 1 8.25
113.25

W-7: Income attributable to non-controlling interests Rs. in million

DTL (156×6÷12 × 25%) 19.50
GNL [(12–1)×9÷12×78]×20% 128.70
Profit for the year 148.20
Share of exchange gain on restatement of goodwill of GNL (81×20%) 16.20
Share of exchange gain arising on translation (113.25×20%) 22.65
Total comprehensive income 187.05

Page 2 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

A.2 NOTE 1: INTANGIBLE ASSETS Goodwill Patent Development

2015 2014 2015 2014 2015 2014
Rs. in million Rs. in million Rs. in million
Gross carrying amount – opening balance 3,322 1,500 2,500 400 68 -
Accumulated amortization and impairment
losses (772) (300) (410) (160) (3) -
Net carrying amount - opening balance 2,550 1,200 2,090 240 65 -
Addition
- through business acquisition (W-1) - 1,822 - 2,100 - 48
- through internal development - - - - 72 53
2,550 3,022 2,090 2,340 137 101
(Less) Retirement / Disposals - - - - - (33)
(Less) Impairment loss / Add reversal of
previous impairment loss - (472) - - 3 (3)
Amortization for the year:[(400+2100)÷10] - - (250) (250) - -
Net carrying amount - closing balance 2,550 2,550 1,840 2,090 140 65
Gross carrying amount - closing balance 3,322 3,322 2,500 2,500 140 68
Accumulated amortization and impairment
losses (772) (772) (660) (410) - (3)
Net carrying amount - closing balance 2,550 2,550 1,840 2,090 140 65
Useful lives Indefinite 10 years Indefinite

W-1: Computation of goodwill Rs. in million

Patents 2,100
Development cost of new product 48
Other net assets 1,430
3,578
Consideration paid 5,400
Good will 1,822

Page 3 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

A.3 Waseem Industries Limited

Notes to the financial statements
For the year ended 30 June 2015
Deferred Tax Liability / (Assets) – net 2015
Rs. in million
Taxable temporary differences
Property, plant and equipment [(1,950–1,120) × 32% × 75%)] 199.20
Exchange translation reserve through OCI (53 ×32% × 75%) 12.72
Deductible temporary differences
Provision for doubtful debts (110 × 32% × 75%) (26.40)
Unused tax loss carried forward (40 × 32%) (12.80)
Share based payments (600,000 × 110×2÷3 × 32% × 75%) (10.56)
Liabilities outstanding more than 3 years (7 × 32% × 75%) (1.68)
Deferred tax liability/(asset) – net 160.48

Reconciliation:
Opening deferred tax liability – net (W-1) 181.76
Deferred tax recognized in OCI [{12.72-34.8(W-1)} + {-2.1(W-2)}] (24.18)
Deferred tax recognized in P&L (balancing) 2.9
Closing deferred tax liability - net 160.48

W-1: Deferred Tax Liability / (Assets) – opening balance 2014

Rs. in million
Property, plant and equipment [(1,800–1,050) × 32% ×75%)] 180.00
Exchange translation reserve through OCI (145 ×32% × 75%) 34.80
Provision for doubtful debts (60 ×32% × 75%) (14.40)
Unused tax loss carried forward (35 × 32%) (11.20)
Share based payments (600,000 × 140/3 × 32% × 75%) (6.72)
Liabilities outstanding more than 3 years (3 × 32% × 75%) (0.72)
Deferred tax liability/(asset) - net 181.76

W-2: Property, plant and equipment – Deferred tax implications Amount

Rs. in million
Written down value as on 30 June 2013 [200 – (200 ÷ 10  2)] 160.00
Less: Revalued amount (230.00)
Revaluation surplus to be recognized 70.00

Incremental depreciation (70÷8) 8.75

Deferred tax on incremental depreciation (8.75  32%  75%) 2.10

Page 4 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

A.4 Matters Liquidity Ratios Solvency Ratios Performance ratios Business valuation
Deferred tax asset: Justification: Justification: Justification: Justification:
Recording of Since deferred tax Reversal of excess On reversal of Since it would reduce
Deferred tax assets on asset is part of deferred tax assets deferred tax asset, the profitability and
carried forward losses non-current assets, it would reduce equity. profit after tax would equity of the
which are not being would not impact on Consequently gearing be reduced and company, it would
substantiated from liquidity ratios. of the company consequently affect company’s
future profits. would increase. profitability ratios valuation negatively.
would be adversely
affected.
Convertible If these shares are If these shares are Any classification of No effect because net
Preference shares: recorded as equity, disclosed as liability, preference shares will assets / income
These are treated as then liabilities for gearing of the not affect the amount related to ordinary
liability rather than preference share company would / income attributable shareholders would
equity. dividends will be increase. to ordinary remain the same.
recorded when shareholders of the
dividend is declared company.
whereas in the
present case when the
liability for dividend
will be worked at year
end as current
liability.
Unrealized gains / It is assumed that Solvency ratios would Reversal of Net assets / equity of
losses: effect of fair value has remain the same, as unrealized gain / loss company remain the
Recording of correctly been taken there is no change in on “Held for same so it would not
unrealized gains / of “Held for Trading” equity and liability of Trading” securities to affect business
losses on securities and the company. P&L account would valuation of the
“Held for Trading” therefore no impact increase / decrease company
and “Available for on liquidity ratios. the profitability of the OR
Sale” securities company. if P/E ratio is used for
through other Consequently valuation then it
comprehensive profitability ratios would affect share
income. would be affected valuation favorably /
favorably / adversely. adversely.
Pension liability: As pension liability is As it results in It would Since performance
Increase/decrease in shown under deferred increase/ decline in increase/decrease ratios are
pension liability. liability, it will not retained earnings, it salaries & allowances favorably/adversely
affect the liquidity will favorably and consequently affected due to
ratios. /adversely affect the would affect decrease/ increase in
solvency ratio. adversely/favorably salaries and allowance,
on performance ratios. the value of business
would also be
favorably/adversely
affected.
Pension liability: Justification: Justification: Justification: Justification:
Increase/decrease in Any Contribution does not Since contribution This is related to cash
contribution level. increase/decrease in affect long term amount does not flow so no impact on
contribution level liabilities as well as affect profitability of business valuation.
would equity of the the company, the However, if RIL is
deteriorate/improve Company so there performance ratios using the discounted
the liquidity ratio. would be no impact. remain the same. cash flow method for
valuation of the
Company, it would
affect its valuation
adversely/favorably
depending upon the
increase/decrease in
contribution level.

Page 5 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

A.5 (a) (i) “Biological asset” is a living animal or plant.

An entity shall recognize a biological asset if all the following conditions are met:
 The entity controls the asset as a result of past event;
 It is probable that future economic benefits associated with the asset will flow to
the entity;
 The fair value or cost of the asset can be measured reliably.

(ii)  The new born cows are biological assets and should be measured at fair value less
costs to sell, both on initial recognition and at each reporting period.
 The gains on initial recognition and the gains from change in this value should be
recognized in profit or loss for the period in which it arises. The total gains to be
recognized in the year ended 30 June 2015 is as follows:

Rupees
New born [26,000 × 225 × (100%-2%)] 5,733,000
9 month old [53,000 × 75 × (100% - 2%)] 3,895,500
9,628,500

(b) At 30 June 2014, when the asset was classified as held for sale, the asset would have to be
carried at the lower of carrying amount (i.e. Rs. 240 million), and fair value less costs to sell
of Rs. 220 million (Rs. 225 million - Rs. 5 million). Therefore the asset has fallen in value
from Rs. 240 million to Rs. 220 million, giving a charge to profits of Rs. 20 million.

On 30 June 2015, the value of the asset were as follows:

Rs in million
Carrying value (300-90) 210
Fair value (230-5) 225
Value in use (50  4.5638) 228

 Recoverable amount is the higher of fair value i.e. Rs 225 million and value in use i.e.
Rs 228 million.
 The asset should be recorded at lower of carrying value i.e. Rs 210 and recoverable
amount i.e. Rs 228 million.
 Therefore the asset should be recorded at Rs 210 million as at 30 June 2015.

Page 6 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

A.6 Cash flow hedge

Dr. Cr.
Date Description
------------ Rupees ------------
1-May-15 No entry as the fair value of the forward exchange
contract at inception is zero.

30-Jun-15 Financial asset (Forward contract) (W-1) 11,220,000

Other comprehensive income 11,220,000
(Recognize hedging gain at year end)

1-Aug-15 Financial asset (Forward contract) (W-2) 3,000,000

Other comprehensive income 3,000,000
(Recognize hedging gain at payment date)

1-Aug-15 Property, plant & equipment 621,780,000

Other comprehensive income 14,220,000
Cash 636,000,000
(Purchase of assets by making agreed payment)

1-Aug-15 Cash 14,220,000

Financial asset (Forward contract) 14,220,000
(Settlement of contract to purchase machine)

W-1: Gain on forward contract at year end

At forward rate At spot rates
633,000,000 632,280,000
Value of contract at 30 June 2015 (6m ×105.5) (6m ×105.38)
621,780,000 619,200,000
Value of contract at 1 May 2015 (6m ×103.63) (6m ×103.20)
11,220,000 13,080,000
Hedge effective % 117%
As the change in fair value of future cash flows is greater than the gain on the forward contract and is
within the range of 80-125%, the hedge is deemed to be fully effective and the whole of the gain on the
forward contract should be recognised in other comprehensive income.
W-2: Gain on forward contract at payment date
At forward rate At spot rates
636,000,000 636,000,000
Value of contract at 1 August 2015 (6m ×106.0) (6m ×106.00)
633,000,000 632,280,000
Value of contract at 30 June 2015 (6m ×105.5) (6m ×105.38)
3,000,000 3,720,000

Hedge effective % 124%

As the change in fair value of future cash flows is greater than the gain on the forward contract and
is within the range of 80-125%, the hedge is deemed to be fully effective and the whole of the gain
on the forward contract should be recognised in other comprehensive income.

Page 7 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Winter 2015

A.7 5- CASH AND BALANCES WITH TREASURY BANKS

Note 20X5 20X4
--------- Rs. in '000 ---------
In hand including National Prize Bonds
Local currency 16,605,428 19,514,276
Foreign currency 3,633,929 3,453,649
20,239,357 22,967,925
With State Bank of Pakistan in
Local currency current account 5.2 8,817,802 33,095,825
Foreign currency current account 5.2 5,641,943 5,270,462
Foreign currency deposit account 5.1/5.3 16,947,158 15,728,111
31,406,903 54,094,398
With other Central Banks in
Foreign currency current accounts 5.1/5.4 42,855,499 33,565,737
Foreign currency deposit accounts 5.1/5.4 5,408,680 3,172,913
48,264,179 36,738,650
With National Bank of Pakistan in
Local currency current account 22,360,829 16,220,092
122,271,268 130,021,065

5.1 The above balances include remunerative accounts amounting to Rs. 37,118.596 million
(20X4: Rs. 34,282.79 million).

5.2 This represents current accounts maintained for Cash Reserve Requirement of the SBP.

5.3 This represents deposit accounts maintained for Special Cash Reserve Requirement of the
SBP and US Dollar Settlement account maintained with the SBP. This carries mark-up at the
annual rate of 0% (20X4: 0%).

5.4 Balances held with the Central Banks of respective countries are in accordance with the
requirements of the local statutory / Regulatory requirements. Since the Bank operates in
different countries, these carry varied mark-up rates as given by the Central Banks of
respective countries

(The End)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Winter 2015

General

Overall performance of the students was below average. Most of the students secured
good marks in one or two questions only. The performance seemed to suffer from lack of
proper studies as well as lack of practice. For the past many attempts, it is being noted
that many students just appear in the examination with a hope of passing without any
preparation because a number of candidates are unable to secure even 30 marks. Quite
obviously, such performances cannot be attributed merely to any difficulty in paper or a
lapse in concentration. Moreover, a number of students make errors on those topics also
which are tested in every attempt.

Question-wise comments are as under:

Question 1

Due to its importance, the topic of consolidation is covered in every attempt. Still, the
overall performance in this question was average. The commonly observed errors were as
follows:

 Most of the students did not disclose discontinued operations separately.

 80% holding in GNL was acquired on 1st October 2014. A number of students
ignored this fact and consolidated full year’s figures.

 Gain on disposal of DTL’s shares should have been calculated by adding the
consideration received and fair value of the shares retained and deducting the share of
net assets of the controlling interest (75% of the net assets OR net assets minus NCI)
and the goodwill balance. Instead of taking the NCI as 25% of net assets, many
candidates tried to work out the NCI by taking the fair value of NCI on acquisition
and adding to it the post-acquisition share of profit. In doing so, they wasted time
unnecessarily and many of the candidates made mistakes in the process also. Further,
many candidates computed the gain by deducting the goodwill and net assets
proportionate to the shares sold, from the consideration received, which was
incorrect.

 Various types of errors were made while calculating exchange gain on translation of
foreign subsidiary, such as:

1. Adjustment of pre-acquisition profit for three months and/or adjustment for

dividend paid were missed while calculating net assets on acquisition.
2. Post-acquisition profit was not adjusted for incremental depreciation.
Page 1 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2015
3. Exchange gain on post-acquisition profit was computed by taking the difference
between exchange rate at year-end and exchange rate at acquisition instead of
taking the difference between exchange rate at year-end and average exchange
rate.

 After disposal of 30% holding, DTL had become an associate. Its share of profit for
the remaining period should have been disclosed as “share of profit from associates”.
Many candidates ignored it.
 In computing goodwill of GNL, majority of the candidates did not compute the net
assets on acquisition correctly. Many candidates did not deduct the dividend from net
assets and/or failed to consider the NCI at acquisition.
 The following types of errors were made in the computation of share of profit
attributable to non-controlling interest:
o Profit pertaining to NCI of DTL was ignored.
o Share of NCI in exchange gain on restatement of goodwill and/or exchange gain
on translation of net assets was ignored.
o Some candidates only allocated other comprehensive income to NCI rather than
total comprehensive income.
 Professional fee on acquisition of GNL and incremental depreciation on fair value of
building should have been adjusted through operating cost. Many students adjusted
depreciation in cost of sales and professional fee in investment income or finance
cost.

Question 2

It was a simple question on intangible assets where a note to the financial statements was
to be prepared in accordance with the disclosure requirements of IAS 38. However, it
appeared that many students lacked knowledge and/or practice, as a very poor response
was observed. Most of the candidates produced computations and presented the final
figures only rather than the complete note. Many candidates produced the answer in the
form of workings rather than a note to the financial statements. Among the rest, the
following types of errors were observed:

 Note was prepared on a consolidated basis rather than presenting each class of assets
separately.
 Impairment losses and amortization were usually clubbed together whereas they
should have been disclosed separately. Similarly, additions to internally generated
assets and those acquired through business acquisition were not disclosed separately.
Further, as regards the opening and closing balances, gross carrying amount/cost and
accumulated depreciation were not shown separately. Instead, only net carrying
amounts were disclosed.
 The useful lives of each class of assets were not disclosed in the note.
 Development costs of the abandoned project were not written off.

Page 2 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2015
Question 3

This question required a note on deferred tax liability/asset along with the reconciliation
to be presented in the financial statements of a company. Average performance was
witnessed. The common mistakes were as under:
 Baring few, the candidates were unable to consider the impact of the fact that 25% of
current and future income of the company was subject to tax under FTR. The
candidates are advised to refer to the ICAP’s suggested answers and ICAP’s technical
release for guidance on this issue.
 In the reconciliation, majority of the candidates did not show the deferred tax related
to P&L and other comprehensive income separately.
 Deferred tax liability was not computed on exchange translation reserve. Moreover,
many candidates routed the deferred tax reversal on exchange translation reserve
through the profit and loss account rather than routing it through other comprehensive
income.
 Many candidates computed deferred tax on value of share based payment incorrectly.
Instead of taking intrinsic value for such calculation, they took other values e.g. value
of option at grant date, difference between value of option and intrinsic value, etc.
Further, remaining vesting period was also taken incorrectly especially in respect of
the 2nd year.

Question 4

In this question, the candidates were provided with certain information/adjustments that
had not been taken into account in the preparation of financial statements. The candidates
were required to discuss the possible impact of such omissions on liquidity, solvency and
profitability ratios and the business valuation.
The overall performance was below average. The students generally seemed to lack
analytical and presentation skills. Many candidates did not read the requirement carefully
and gave totally irrelevant answers. The common mistakes are described below:
 Many candidates only specified positive or negative impacts without giving any
explanation or reasoning.
 Many students identified and explained the various liquidity, solvency and business
valuation ratios, which were not required.
 Since the company was in losses and in the latest year also, the profitability was due
to non-operational gains and it was also mentioned that the carry forward losses
would expire in three years, the recognition of deferred tax asset appeared to be
inappropriate. Very few candidates offered comments in this regard. Moreover, some
candidates treated deferred tax asset as part of current assets. Further, deferred tax has
no impact on current assets and liabilities but many students suggested positive or
negative impact on liquidity ratio.
 There is no impact of convertible preference shares in computing profitability ratios
and business valuation, which are computed on profits attributable to ordinary
shareholders. Majority of the candidates were not aware of it.

Page 3 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2015
 Very few students commented on pension scheme.

Question 5(a)

It was a fairly simple question and tested basic concepts of biological assets as per IAS-
41 “Agriculture”. Majority of the candidates obtained high marks in both sub-parts of the
question. The most common error in sub-part (ii) was that the incidental costs were not
deducted in computing the total gain on biological assets.

Question 5(b)

In this part, the candidates were required to determine the value at which non-current
asset may be accounted for when it was classified as being held for sale and one year
later when it was decided to use the asset in business.
The performance was above average, however, the following errors were observed:
 Majority of the students stated that assets held for sale shall be recognized at fair
value of Rs. 225 million being lower than the carrying value of Rs. 240 million.
However, the asset was required to be stated at Rs. 220 million i.e. fair value of Rs.
225 million less costs to sell amounting to Rs. 5 million.
 After it was decided to use the asset in business, it was to be carried at lower of
carrying value and recoverable amount. This aspect was correctly mentioned.
However, many candidates did not mention that recoverable amount means fair value
or value in use whichever is higher. Some of the students who covered this aspect,
failed to compute the value in use correctly.

Question 6

This question required accounting entries for a foreign currency hedging contract. Since
the signing of contract to buy machines was an unrecognized firm commitment and the
foreign exchange risk was being hedged, the entries could have been prepared either
under fair value hedge option or under the cash flow hedge option, assuming that the
hedge accounting conditions are met. The overall performance was above average. The
mistakes observed were as follows:

 Those who adopted the fair value hedge option recognized gain on hedging
instrument in other comprehensive income and recognized loss on hedge item in P&L
account whereas both i.e. gain on hedging instrument as well as loss on hedge item
should have been accounted for in profit and loss account.
 Those who adopted the cash flow hedge got confused as regard the concept of
effective/ineffective portion of the hedge. In the given situation, the entire
arrangement was an effective hedge as the hedge effectiveness was within the range
of 80-125% and entire gain on forward contract was to be taken to OCI. However,
many students recorded it through profit and loss.
 Some candidates recorded the asset on 1st May 2015 which was incorrect because the
forward exchange contract was a firm commitment which was to be fulfilled on
August 1, 2015.
 Many candidates did not prepare entry to record settlement of contract.

Page 4 of 5
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Winter 2015
Question 7

This was the easiest question which required preparation of note pertaining to cash and
balances with treasury banks for inclusion in the financial statements of a bank. Overall
performance was quite good. However, there were many candidates who had not studied
this part of the syllabus and failed to secure any mark.

Other common mistakes were as follows:

 Balances with Bank of England were not included in balances with other central
banks.
 National prize bonds were not included in cash in hand.

(THE END)

Page 5 of 5
 Final Examinations
Module E
The Institute of 9 June 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 The draft statements of financial position of Taimur Holding Limited (THL) and its
subsidiary Zafar Foods Limited (ZFL) as at 31 December 2015 are as follows:
THL ZFL
Rs. in million
Assets
Property, plant and equipment 481 735
Investments (including investment in ZFL) 1,420 10
Long term receivable 22 -
Current assets 2,142 1,636
4,065 2,381
Equity and liabilities
Share capital (Rs. 10 each) 1,120 600
Retained earnings 1,066 442
Other reserves 102 137
Non-current liabilities 263 248
Current liabilities 1,514 954
4,065 2,381
The following further information is available:
(i) On 1 January 2015, THL acquired 60% shares of ZFL at following consideration:

Payment of cash of Rs. 200 million. Rs. 100 million were paid at the date of
acquisition and the balance amount is payable on 31 December 2016.

Issuance of 28.5 million of THL’s shares. On the date of purchase, the market
price of shares of THL and ZFL were Rs. 11.50 and Rs. 16.50 respectively.

Transfer of one of THL’s freehold lands having carrying value and fair value of
Rs. 46 million and Rs. 54 million respectively on the date of transfer.
At the date of acquisition, retained earnings and other reserves were Rs. 299 million
and Rs. 26 million respectively whereas the fair values of the net assets were the same
as their carrying amount except a piece of freehold land whose fair value was assessed
at Rs. 16 million above its carrying amount. Further, a contingent liability of
Rs. 18 million was disclosed in the financial statements of ZFL on acquisition date.
THL's legal adviser had at that time estimated that ZFL would be liable to pay Rs. 6
million to settle the claim.
An error had been made in recording transaction related to transfer of land due to
which the land is still appearing in THL’s books whereas profit and loss account had
been credited by Rs. 54 million.
(ii) On 31 December 2015, a further 20% shares were acquired in ZFL for a cash
consideration of Rs. 260 million which was paid immediately.
(iii) The fair value of investment appearing in ZFL’s financial statements as at 31
December 2015 was Rs. 15 million. These investments are recorded at their fair value.
(iv) Long term receivable represents a ten-year 9% loan given to CEO as per the terms of
his employment. The loan receivable is recorded at amortized cost. The board of
directors in their meeting held in December 2015 has approved a restructuring of the
loan. Accordingly, the CEO is now required to pay Rs. 8 million per annum for three
years. The first such payment is to be made on 31 December 2016. Current market
interest rate and original effective interest rate were 10% and 8.7% respectively.
 Advanced Accounting and Financial Reporting Page 2 of 4

(v) THL intends to dispose of one of its business segments. All criteria for classification of
business segment as ‘held for sale’ were met at year end on which date the carrying
amount of the assets and liabilities of the business segment were as follows:
Rs. in million
Property, plant and equipment 60
Current assets 25
Current liabilities 10
It is estimated that fair value less costs to sell of the business segment is Rs. 55 million.
No adjustments have been made in the financial statements in this regard.
(vi) THL values non-controlling interest at its fair value.
(vii) Before acquisition of further shares as mentioned in para (ii), an impairment test was
carried out on 31 December 2015 for the impairment of goodwill. The test indicated
that recoverable amount of ZFL was Rs. 1,210 million.
(viii) THL's cost of capital is 10%.

Required:
Prepare a consolidated statement of financial position for the THL Group for the year ended
31 December 2015 (28)

Q.2 Mehran Industries Limited (MIL) operates a funded gratuity scheme for all employees. The
following relevant information has been extracted from the actuarial reports/records for the
year ended 31 December 2015:
2015 2014
Discount rate 9% 8%
Rs. in million
Present value of defined benefit obligations 482 438
Fair value of plan assets 491 449
Current service cost 19 15
Contributions paid during the year 37 21
Benefits paid during the year 23 16
Additional information:
(i) Present value of defined benefit obligations and fair value of plan assets as on
1 January 2014 were Rs. 380 million and Rs. 351 million respectively.
(ii) On 28 December 2014, MIL sold one of its divisions and transferred the relevant
portion of defined benefit plan to the buyer. The present value of defined benefit
obligation and plan assets transferred was Rs. 21 million and Rs. 19 million
respectively.
(iii) On 1 January 2015, MIL changed the terms of the scheme for employees who had
completed 4 years of service. As a result, present value of defined benefit obligation
increased by Rs. 30 million. 40% of increased obligations related to employees who
have already completed 4 years of service whereas remaining increase pertained to
employees who have provided an average of 2 years of service.
(iv) Based on the advice received from the actuary, the contribution for the year 2016 will
be Rs. 23 million.
(v) The plan assets comprise of 65% debt securities (2014: 66%), 15% mutual fund units
(2014: 10%), 10% equity (2014: 14%) and the balance in bank deposits.
(vi) The average remaining working lives of employees are 10 years.

Required:
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 2015 in accordance with International Financial Reporting Standards.
(Show comparative figures) (11)
 Advanced Accounting and Financial Reporting Page 3 of 4

Q.3 United Front (Private) Limited (UFPL) is a company engaged in manufacturing and
marketing of automotive components for auto assemblers in Pakistan. On 1 January 2015
the company entered into two sale and leaseback agreements with Sun Leasing Limited.
The details of machines sold and leased back under the two agreements are as under:
Machine-A Machine-B
Date of purchase 1-Jan-10 1-Jan-13
Cost (Rs. in million) 150 48
Useful life (in years) 10 10
Sale price to the lessor (Rs. in million) 78 41
Fair market value (Rs. in million) 80 44
The terms of lease agreements are as follows:

Machine-A Machine-B
Lease term 5 years 3 years
Annual rentals (Rs. in million) 18.283 4
Installment due in arrears in advance
Down payment 10% Nil

The market interest rate is 9.5% per annum while the market rates of rentals for machines
similar to Machine-A and Machine-B are Rs. 19 million and Rs. 7 million per annum
respectively.

Required:
Prepare the relevant extracts from the statements of financial position and comprehensive
income and the related notes to the UFPL’s financial statements for the year ended
31 December 2015, in accordance with the International Financial Reporting Standards. (18)

Q.4 Big Asset Allocation Fund (the Fund) is an open ended mutual fund and is listed on
Pakistan Stock Exchange. The net asset value of the Fund as on 1 January 2015 was
Rs. 1,550 million comprising of 41 million units. The par value of each unit is Rs. 10.

Following information has been extracted from the records of the Fund for the year ended
31 December 2015.
Rs. in million
33 million units issued during the year 1,375
29 million units redeemed during the year 1,160

Net element of income and capital gain included in prices

of units issued less those in units redeemed

Transferred to income statement 46

Transferred to distribution statement 5

Capital gains on sale of investments 48

Investments classified as ‘Available for sale’

Fair value at year-end 200

Carrying value at year-end 150

Net unrealized appreciation in fair value of
investments at the beginning of the year 60

Investments classified as ‘Held for trading’

Fair value at year-end 96

Carrying value at year-end 92

Other net income for the year 17

Final distribution for the year ended 31 December 2015 of Rs. 1 per unit (2014: Rs. 0.5 per
unit announced on 8 January 2015) was announced on 6 January 2016.
 Advanced Accounting and Financial Reporting Page 4 of 4

Required:
Prepare a statement of movement in unit holders' fund for the year ended
31 December 2015. (10)

Q.5 On 1 January 2014, Zalay Limited (ZL) acquired a plant for Rs 3,000 million. ZL has a legal
obligation to dismantle the plant at the end of its four years useful life.
On the date of acquisition it was estimated that the cost of dismantling would amount to
Rs. 400 million.
ZL uses the revaluation model for subsequent measurement of its property, plant and
equipment and accounts for revaluation on the net replacement method. Depreciation is
provided on straight line basis.
The details of revaluation carried out by the Professional Valuer and the revision in the
estimated cost of dismantling as at 31 December 2014 and 2015 are as follows:
2015 2014
Rs. in million
Revalued amount of plant and machinery * 1,200 2,250
Revised estimate of decommissioning cost 300 550
*excluding decommissioning cost
Tax and discount rates applicable to ZL are 30% and 10% respectively. The tax authorities
allow initial and normal depreciation at the rate of 50% and 10% respectively under the
reducing balance method.

Required:
Prepare journal entries to record the above transactions for the year ended 31 December
2015, in accordance with International Financial Reporting Standards. (20)

Q.6 Following are the extracts from the latest annual reports of Farhad Limited (FL) and Sajjad
Limited (SL) which are engaged in similar type of manufacturing business:
FL SL
Gross profit margin 28% 36%
Net profit margin 13% 10%
Current ratio 2.4:1 2.9:1
Quick ratio 1.4:1 2.5:1
Trade debtors collection period 58 days 50 days
Trade creditors payment period 35 days 48 days
Stock turnover 50 days 30 days
Long term debt as a percentage of equity 60% 100%
Interest cover 4 times 2.5 times
Return on capital employed 6% 13%
Both companies record their fixed assets at cost less accumulated depreciation and
impairment losses. However, FL has revalued its freehold land during the year and
incorporated the result thereof in its latest financial statements.

Required:
(a) Comment on the relative operating and financial performance of Farhad Limited and
Sajjad Limited from the above information. (08)
(b) Identify with reasons what further information you would find useful for the purpose
of your comments in (a) above. (05)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

Ans.1 Taimur Holding Limited

Consolidated statement of financial position
As at 31 December 2015
Rs. in million
Non-current Assets
Property, plant & equipment (481 + 735 + 16 – 46 – 60) 1,126.00
Goodwill [25.39 (W-1) – 9.39 (W-2)] 16.00
Investments (W-3) 610.61
Long term receivable [22 – 1.64 (W-4)] 20.36
Total non-current assets 1,772.97

Current Assets
Disposal group held for sale [60 + 25 – 20 (W -5)] 65.00
Other current assets (2,142 + 1,636 – 25) 3,753.00
Total assets 5,590.97

Share capital & Reserves

Share capital 1,120.00
Retained earnings (W-6) 1,081.53
Other reserves (W-7) 156.52

Non-controlling interest (W-8) 247.92

Non-current liabilities (263 + 248) 511.00

Current liabilities
Current liabilities associated with disposal group 10.00
Other current liabilities (1,514 + 954 – 10 + 6) 2,464.00
Total equity and liabilities 5,590.97

Workings:

W-1: Goodwill on acquisition of ZFL Rs. in million

Consideration given and fair value of NCI:
Cash 100.00
Deferred consideration [100 ÷ 82.64
Issuance of shares (28.5 × 11.5) 327.75
Fair value of land 54.00
Fair value of non-controlling interest (24 × 16.5) 396.00
960.39
Less: Fair value of net assets acquired
Share capital 600
Retained earnings 299
Other reserves 26
Contingent liability (6)
Increase in FV of land 16
935
Goodwill 25.39

W-2 : Impairment of goodwill Rs. in million

Net assets at year end - Given 1,179.00
Contingent liability (6.00)
Increase in fair value of ZFL’s investment 5.00
Increase in fair value of land 16.00
Goodwill 25.39
1,219.39
Recoverable amount as given 1,210.00
Impairment loss (9.39)

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

W-3: Investments Rs. in million

THL (1420 – 564.39 – 260) 595.61
ZFL 10.00
Increase in fair value of ZFL’s investment 5.00
610.61

W-4: Long term receivable Rs. in million

Carrying value 22.00
Present value of future cash flows (8 × 2.5449) (20.36)
Impairment to be recognized 1.64

W-5: Disposal group Rs. in million

Net assets of disposal group (60 + 25 – 10) 75
Less: Estimated fair value less cost to sell (55)
Impairment loss 20

W-6: Retained earnings Rs. in million

THL (given) 1,066.00
Transfer of land wrongly credited in P & L (46.00)
Impairment of goodwill (9.39 × 0.6) (5.63)
Impairment of long term receivables (W-4) (1.64)
Impairment loss on disposal group (W-5) (20.00)
Increase in fair value of ZFL's investment [(15 – 10) × 0.6] 3.00
Post acquisition reserves (ZFL) [(442 – 299) × 0.6] 85.80
1,081.53

W-7: Other reserves Rs. in million

THL (given) 102.00
ZFL – post acquisition [(137 – 26) × 0.6] 66.60
Adjustment to parent’s equity on acquisition of additional 20% of ZFL [(260 – 247.92 (W-8)] (12.08)
156.52

W-8 : Non-controlling interest Rs. in million

Fair value at acquisition (24 × 16.5) 396.00
Post acquisition of retained earnings [(442 – 299) × 0.4] 57.20
Post acquisition of other reserves [(137 – 26) × 0.4] 44.40
Increase in fair value of ZFL investment [(15 – 10) × 40%] 2.00
Impairment of goodwill (9.39 × 0.4) (3.76)
NCI as at 31-12-15 before acquisition of further shares 495.84
Less: 20% portion sold (495.84 ÷ 2) 247.92
Balance as at 31-12-15 247.92

Ans.2 EXTRACT OF STATEMENT OF FINANCIAL POSITION

Other assets 2015 2014

Rs. in million
Net defined benefit asset (2015: 491 – 482, 2014: 449 – 438) 9 11

EXTRACT OF STATEMENT OF COMPREHENSIVE INCOME

Profit & Loss account

Operating expenses 48 15

Other comprehensive income

Re-measurement gain on defined benefit plan (2015:21 – 12), (2014:84 –
50) 9 34

Page 2 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

EXTRACT OF NOTES TO THE FINANCIAL STATEMENTS

34 - Staff Retirement benefits
Reconciliation - present value of obligations 2015 2014
Rs. in million
Opening balances 438 380
Interest cost (2015: 438 × 9%, 2014: 380 × 8%) 39 30
Current service cost 19 15
Past service cost 30 -
Benefits paid (23) (16)
Settlement - (21)
Actuarial (gain) /loss on obligation (21) 50
Closing balances 482 438

Reconciliation - fair value of plan assets

Opening balances 449 351
Interest income (2015: 449 × 9%, 2014: 351 × 8%) 40 28
Contributions 37 21
Benefits paid (23) (16)
Settlement - (19)
Actuarial gain / (loss) on plan assets (12) 84
Closing balances 491 449

Amount recognized in the profit and loss account

Current service cost 19 15
Past service cost 30 -
Interest cost 39 30
Less: interest income on plan assets (40) (28)
Gain on settlement - (2)
48 15
Key actuarial assumptions used are as follows:
Discount factor 9% 8%
Average remaining life 10 years 10 years

Based on the actuarial advice, the amount of expected contribution to the defined benefit scheme for the
year 2016 will be Rs. 23 million.

2015 2014
Rs. in million % Rs. in million %
Plan assets comprised of:
Debt 319 65% 296 66%
Mutual fund 74 15% 45 10%
Equity 49 10% 63 14%
Bank deposits 49 10% 45 10%
491 449

Page 3 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

Ans.3 United Front (Private) Limited

Statement of financial position (Extract)
As on 31 December 2015
Rs. in ‘000
Property, plant and equipment - under finance lease
Machine – A [ 78,000 – (78,000 ÷ 5)] 62,400

Long term liabilities

Liabilities against assets subject to finance lease (W-2) 45,870

Deferred gain – net (W-1) 400

Current liabilities
Current maturity – Liabilities against assets subject to finance lease (W-2) 12,717
Statement of comprehensive income (Extract)
For the year ended 31 December 2015
Rs. in ‘000
Net gain / losses on sale of fixed assets (W-1) 5,200
Interest expense (W-2) 6,669
Operating lease rentals 4,000
Depreciation expense 15,600

Notes to the Financial statements

For the year ended 31 December 2015
Present value of
Minimum lease Finance charges
minimum lease
payment
payment
Not later than one year 18,283 5,566 12,717
Later than one year but not later than
five years 54,848 8,979 45,869
Later than five years - - -
73,131 14,545 58,586
The minimum lease payments have been discounted at interest rate of 9.5% per annum to
arrive at the present value. Lease installments are paid annually in arrears.
Operating lease commitments
Later than one
Not later than Later than five
year but not later
one year years
than five years
Future minimum lease payments 4,000 4,000 -

Workings
W-1: Gain / loss on disposal
Machine A Machine B Total
Lease type Finance lease Operating lease
------------------- Rs. in ‘000 -------------------
Gain recognized in 2015 600 4,600 5,200
[3,000 (W-1.1) ÷ 5] (W-1.2)

Gain/(loss) to be deferred 2,400 (2,000) 400

(3,000 - 600) (44,000 – 41,000) ÷ 3 × 2

W-1.1: Rs. in ‘000

Sale proceeds 78,000
Less: Carrying value (150,000 – 75,000) 75,000
3,000
Page 4 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

W-1.2: Rs. in ‘000

Fair market value 44,000
Less: Carrying value (48,000 – 9,600) 38,400
Total gain 5,600
Less: Amortization of deferred loss [(44,000 – 41,000) ÷3 ] 1,000
4,600

W-2: Lease amortization schedule

Finance expense
Instalment amount Principal Closing balance
@ 9.5%
-------------------------- Rs. in ‘000 --------------------------
*1
70,200
2015 18,283 6,669 11,614 58,586
2016 18,283 5,566 12,717 45,870
2017 18,283 4,358 13,925 31,945
2018 18,283 3,035 15,248 16,697
2019 18,283 1,586 16,696 -

*1
78,000 × 90% = 70,200

Ans.4 Big Asset Allocation Fund

Statement of movement in Unit Holders' Fund
For the year ended 31 December 2015
2015
Rs in million
Net assets at the beginning of the year 1,550.00

Issue of 33 million units 1,375.00

Redemption of 29 million units (1,160.00)
215.00
Net element of income and capital gain included in prices of items issued less those in
units redeemed
- Transferred to income statement (46.00)
- Transferred to distribution statement (5.00)
(51.00)
Net element of income and capital gain included in prices of items issued less those in
units redeemed transferred to distribution statement 5.00

Net unrealized appreciation of re-measurement of investments classified as available for

sale (200-150-60) (10.00)
Capital gains on sale of investment 48.00
Net unrealized appreciation on re-measurement of investment classified as financial
assets at fair value through profit & Loss Account 4.00
Other net income for the year 17.00
59.00
Final distribution for the year ended 31 December 201 at Rs. 0.5 per unit (0.5 × 41) (20.50)
Net assets at the end of the year 1,757.50

Net asset value at the beginning of the year (1550 ÷ 41) 37.80

Net asset value at the end of the year 39.06

Page 5 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

Units in million
Opening units 41.00
Add: Issued units 33.00
Less: Redeemed units (29.00)
Closing units 45.00

Ans.5 Debit Credit

Date Description
Rs. in million
31-Dec-15 Depreciation expense (2,663 ÷ 3) 887.74
Accumulated depreciation 887.74
(To record depreciation expense for 2015)
31-Dec-15 Revaluation surplus (W-4) 22.35
Deferred tax liability (W-4) 9.58
Retained earnings 31.93
(Transfer revaluation surplus to retained earnings to the extent of
incremental depreciation)
31-Dec-15 Finance cost (W-1) 41.32
Provision for decommission cost 41.32
(To record finance charge on unwinding of discount)
31-Dec-15 Accumulated depreciation 887.74
Plant & Machinery 887.74
31-Dec-15 Provision for decommission cost (W-1) 206.61
Revaluation surplus (W-4) 44.70
Deferred tax liability (W-4) 19.15
Impairment loss 57.09
Plant & machinery (W-2) 327.55
(To record decrease in decommissioning liability and fair value of
plant and machinery)
31-Dec-15 Deferred tax liability (274.50 - 19.16) 255.34
Deferred tax expense/income 255.34
(To record deferred tax income for 2015)

W-1: Provision for decommission cost

Amount of Discount Liability Finance
Date Increase in provision
liability factor balance charges
1-Jan-14 400 0.6830 273.00 - -
31-Dec-14 400 0.7513 300.53 27.53 -
31-Dec-14 550 0.7513 413.22 - 112.70
31-Dec-15 550 0.8264 454.55 41.32 -
31-Dec-15 300 0.8264 247.93 - (206.61)

W-2: Computation of revaluation surplus / Impairment loss

Dec-14 Dec-15
Cost / Revalued amount 3,273.00 2,663.22
Less: Depreciation (818.25) (887.74)
Carrying amount 2,454.75 1,775.48
Revalued amount 2,250.00 1,200.00
Provision for decommissioning 413.22 247.93
Total revalued amount 2,663.22 1,447.93
Revaluation surplus 208.47 (327.55)

Page 6 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

W-3: Deferred tax calculation

Deferred tax
Date Description Carrying amount Tax base Temp. diff.
@ 30%
1-Jan-14 Plant & Machinery 3,273.00 3,000
Provision for decommission liability 273.00 -
3000.00 3,000 - -

31-Dec-14 Plant & Machinery 2,663.22 1,350

3,273 – 818.25*1 + 208.47*2 3,000 – 1,650*1

Provision for decommission liability 413.22 -

273+27.53*3+112.70*4

2,250.00 1,350 900 270

31-Dec-15 Plant & Machinery 1,447.93 1,215

2,663.22-887.74*1 – 327.55*5 1,350 – 135

Provision for decommission liability 247.93 -

413.22+41.32 *3– 206.61*4

1,200.00 1,215 (15) (4.5)

Net charge / (reversal) (274.50)

*1
Depreciation , *2 Revaluation surplus, *3 Finance cost, *4 Increase/decrease in provision, *5 Impairment

W-4: Movement in Revaluation surplus

Gross Net Amount Deferred tax
Amount amount
31-Dec-14 Revaluation of plant & machinery 208.47 145.93 62.54
31-Dec-14 Increase in decommissioning liability (112.70) (78.89) (33.81)
95.78 67.04 28.73
31-Dec-15 Transfer to retained earnings (31.93) (22.35) (9.58)
63.85 44.70 19.16
31-Dec-15 Decrease in decommissioning liability 206.61 144.63 61.98
270.46 189.32 81.14
31-Dec-15 Decrease in fair value of plant and machinery (270.46) (189.32) (81.14)
- - -

Ans.6 (a) Commentary on relative operating performance

The gross profit margin of FL is less than that of SL. However, the net profit margin is
higher which indicates higher operating expenses and higher interest expenses in SL.
FL has relatively more money invested in working capital than SL. This is evident from:
 A higher debtors’ collection period which is indicative of too lenient credit policies.
 A lower trade creditors’ payment period which indicates that full benefit of suppliers’
credit is not being obtained.
 A higher stock turnover period which indicates that high level of stock are being
maintained. However, SL stock looks very low in the context of a manufacturing
concern.

Commentary on relative financial performance

Liquidity
The current and quick ratios of both companies look healthy. Further, Quick ratio of SL
indicates a very high cash balance. This seems to imply a very healthy liquidity position.
However, keeping in view the high amount of long term debt, keeping such high cash does
not seem justifiable.

Short-term liquidity may be more of an issue for FL, given its higher working capital ratios.

Page 7 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016

Gearing
SL has a higher gearing ratio than FL and, probably as a consequence of this, a lower
interest cover.

It seems that FL is a risk averse company and could have increased its profitability as well as
decreased its weighted average cost of capital by increasing its gearing. In this regard, the
policy being followed by SL seems more appropriate.

Return on capital employed (ROCE)

FL’s ROCE is significantly lower than that of SL. The revaluation of FL’s freehold land may
have been a factor as it must have resulted in an uplift of asset values.

(b) Further information needed with reasons

 Industry averages – it would help to assess the performance of the companies in
comparison with the general trend prevailing in the industry.
 Historical comparatives – Comparatives for the same period in the previous year would
help to provide a benchmark for each company.
 Dividend policy – the effect of dividend policy also needs to be considered as this could
affect a number of ratios.
 Cash flow information to establish whether FL may have short-term liquidity problems
from high working capital ratios.

(The End)

Page 8 of 8
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Final Examination - Summer 2016

General:

Performance in the paper was below average as a number of the students were not able to
get passing marks mainly due to poor performances in Question Numbers 3, 5 and 6. The
performance seemed to suffer due to inadequate studies as well as lack of practice.
Moreover, answers by a number of students demonstrated lack of planning in attempting
these questions.

Question 1

This question required students to prepare consolidated statement of financial position.

Overall performance in this question was quite satisfactory. However, many students
approached this question by following lengthy workings (e.g. goodwill of parent and NCI
was separately computed) and wasted their precious time. Other commonly observed
errors are as follows:

 While computing the goodwill on acquisition:

o Many students ignored the discounting of deferred consideration.
o A number of students either ignored the amount of contingent liability or
deducted Rs. 18 million as contingent liability instead of taking the probable
amount of Rs. 6 million as advised by the legal advisor for computing net
assets of the company.

 In computing the impairment of goodwill, many students treated the revised amount
of goodwill as the impairment.

 Many students used current market interest rate of 10% instead of original effective
interest rate of 8.7% for calculating present value of future cash flows in order to
determine impairment of long term receivables.

 While calculating retained earnings and non-controlling interest, goodwill impairment

and post-acquisition profit of ZFL was erroneously bifurcated in the ratio of 80:20
instead of 60:40. It may be noted that the 20% additional investment had been made
at the end of the year and hence the ratio applicable throughout the year was 60:40.

 Many students did not seem to understand the computation of non-controlling interest
at all because they tried to compute it on the basis of book values at the balance sheet
date after adjustment for the fair value of investments instead of computing it by
taking the fair value of NCI at acquisition and adjusting it for post-acquisition
profits/adjustments.

Page 1 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2016
 The amount representing 20% NCI acquired by the parent on December 31, 2015 was
incorrectly calculated by many students.

 While determining the consolidated property, plant and equipment, most of the
students corrected the error mentioned in the question by deducting the fair value of
Rs. 54 million instead of carrying value of Rs. 46 million.

 Most of the students did not properly disclose the assets and liabilities classified
under “disposal group held for sale”. These were required to be presented separately
from other assets and liabilities in the statement of financial position. Most of the
students disclosed it as a single figure, i.e. by netting off the liabilities against the
assets.

Question 2

Average response was observed in this question which required preparation of extracts
from statements of financial position, comprehensive income and notes to the financial
statements in respect of IAS – 19 “Employee benefits”. Some students produced
T-accounts of present value of obligations and fair value of plan assets instead of
presenting proper disclosure as required by IAS 19. Other common errors observed are as
follows:

 The disclosures relating to key actuarial assumptions (e.g. average remaining life,
discount rate, etc.) and composition of plan assets were ignored.

 Some students failed to classify re-measurement gain on defined benefit plan in other
comprehensive income and showed it in profit and loss account.

 Many students ignored the gain on settlement (sale of division) altogether.

 Instead of applying interest rate on opening balance of present value of defined

benefits obligations/fair value of plan assets, a number of students incorrectly applied
it on closing balance.

Question 3

Although the topic of sales and lease back has been tested frequently in ICAP
examinations, the performance in this question was below average. The common
mistakes noted are as follows:

 Lease of Machine A should have been classified as a finance lease whereas lease of
Machine B should have been classified as an operating lease. However, many
students treated both leases as finance lease or operating lease.

 Many students did not know how to deal with gain / loss on sale of fixed assets under
sale and lease back arrangement.

 In case of Machine A, a number of students computed gain incorrectly by taking the

difference of fair value and carrying value instead of taking the difference of sale
proceeds and carrying value. Some of the students recognized entire gain in the year
of sale instead of deferring and amortizing it over the lease term.

Page 2 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2016
 In case of Machine B many students computed the gain by deducting the carrying
value from sale proceeds instead of fair value. Further, they did not defer the loss
arising because of the difference between the fair value and sale proceeds.

 While preparing the lease amortization schedule, many students did not take into
account the effect of down payment which is not expected from the students at this
level.

 Some students capitalized Machine A at the fair value instead of lower of fair value
or present value of MLP.

 Many students did not disclose the bifurcation of MLP and present value of MLP in
three periods, i.e. not later than one year, later than one year but not later than five
years and later than five years.

Question 4

This was a straight forward question in which students were required to prepare statement
of movement in unit holders’ fund. Majority of the students performed well and obtained
good marks in this question. However, some of the common mistakes observed are as
follows:

 Net asset value (per unit) at the beginning and end of the year was not disclosed.

 Distribution of final dividend for the year ended 31 December 2014 was computed by
taking the units at year-end rather than opening units.

 Most of the students did not bifurcate ‘net element of income and capital gain
included in prices of units issued less those in units redeemed’ between amount
transferred to income statement and amount transferred to distribution statement.

Question 5

This question was based on IAS 12, IAS 16 and IFRIC 1 in which students were required
to prepare journal entries to record the given transactions. This was the worst attempted
question as majority of the students did not know the accounting treatment of
increase/decrease in estimated decommissioning cost under revaluation model and related
deferred tax implications. Other common mistakes were as follows:

 In determining the revaluation surplus/impairment loss, most of the students failed to

add the present value of estimated decommissioning cost in the revalued amount.
Moreover, few students, incorrectly added the decommissioning cost without
discounting.

 In the computation of deferred tax, a number of students did not recognize deferred
tax on revaluation surplus and provision for decommissioning.

 While computing the tax base of plant and machinery, many students added the
decommissioning cost in the tax WDV.

Page 3 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – Final
Examination Summer 2016
 While computing the tax depreciation for the year ended 30 June 2014, some students
charged the initial tax depreciation but did not charge the normal depreciation.

 Some students ignored the opening balance of deferred tax in determining the
deferred tax reversal for the year ended 30 June 2015. Consequently, deferred tax for
the year was recorded by using the closing balance of deferred tax liability.

 A number of students wasted time in passing journal entries for the year 2014 which
were not required.

Question 6(a)

This was a fairly straight forward question which required students to comment on
operating and financial performance of two companies based on given ratios. However,
overall performance was below expectations as most of the students confined their
answers by just stating which company is better or worse off without providing any
reason. Many students wasted time in offering general explanations of ratios which were
not required. Other common mistakes noted were as follows:

 Many students ignored the fact that having a very high quick ratio is not necessarily a
good strategy because the firm may forego opportunities to earn profits by keeping
more than the required liquid cash.

 Many students only stated that high gearing means a weak financial position without
mentioning its positive impact on profits of the company.

 Some students failed to explain that revaluation of fixed assets can have significant
impact on the ROCE.

Question 6(b)

In this part, students were asked to identify any further information that may be of help in
a better analysis of the situation described in part (a) and offer justifications for their
answer. Overall performance was average. However, many students misunderstood the
requirements of the question and wasted time in providing extraneous information such
as economic conditions of the country, budgeted profitability in the future, etc.

(THE END)

Page 4 of 4
 Certified Finance and Accounting Professional Stage Examinations

The Institute of 5 December 2016

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 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:

Amount receivable/
Included in buyer’s
Sales (payable) in the Profit % on
closing inventories
books of AL sales
--------------- Rs. in million ---------------
AL to SV-1 350 220 320 10
AL to SV-2 250 110 70 20
SV-1 to AL 190 150 (150) 30
SV-2 to AL 60 38 (20) 15

(iv) AL follows the equity method for recording its investment in joint venture whereas
investment in joint operations is recorded in accordance with IFRS-11.

Required:
In accordance with the requirements of International Financial Reporting Standards,
prepare AL’s separate statements of financial position and comprehensive income for the
year ended 30 June 2016. (21)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 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.

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:

Carrying amount Fair value

Particulars
------------ Rs. in millions ------------
Head office building 100 Not available
Computer network 55 46
Equipment 45 60

For impairment testing of each CGU, following quotations were obtained from three
different showrooms located in different cities.

Showroom-1 Showroom-2 Showroom-3

Particulars
---------------- 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 in
accordance with International Financial Reporting Standards. (18)

Q.3 On 1 July 2014 Track Limited (TL) sold its property to Strong Bank Limited (SBL) for
Rs. 600 million. The net carrying amount and market value of the property on 1 July 2014
were Rs. 240 million and Rs. 800 million respectively. The remaining useful economic life of
the property was 15 years. Under the terms of agreement, TL continues to occupy the
property and is also responsible for its maintenance. As consideration of occupation rights,
TL pays rent of Rs. 90 million per annum, payable in arrears.
TL has the option to repurchase the property on 30 June 2016 at Rs. 550 million. TL
charges depreciation on straight-line basis.

TL’s cost of equity is 10% whereas incremental borrowing rate is 11.052% per annum.
Applicable income tax rate is 30%.

Required:
(a) Prepare accounting entries to record the above transaction for the year ended
30 June 2015 and give brief explanation of the accounting treatment worked out by
you with reference to the relevant International Financial Reporting Standards. (11)
(b) Prepare accounting entries to record the transactions for the year ended 30 June 2016
if TL does not exercise the option to repurchase the property on 30 June 2016. (06)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.4 The financial statements of XYZ Limited for the year ended 30 June 2016 are in the final
stage of preparation and the following matters are under consideration:
(a) 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) Conditions specific to marketing managers:

Marketing manager can exercise the offer if the profit of the company
increases by 10% per annum on average over the next three years.

The offer can be exercised at Rs. 18 per share at the completion of vesting
period.
Profit for the first two years increased by 12% and 10% respectively. However,
profit for the third year has increased by 3% only.
(ii) Conditions specific to back office managers:

Back office managers can exercise the offer if share price of the company
increases by 10% per annum on average over the next three years.

The offer can be exercised at Rs. 23 per share at the completion of vesting
period.

On 1 July 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.
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.
(iii) 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)

(b) 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. (08)

Required:
In accordance with the requirement of International Financial Reporting Standards, describe
the accounting treatment in respect of the above transactions in the financial statements of
XYZ Limited for the year ended 30 June 2016.
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.5 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

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.
 Advanced Accounting and Financial Reporting Page 5 of 5

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 non-controlling interest (04)
(c) Dividend received from associates (2.5)
(d) Net cash flow due to acquisition of subsidiary (1.5)
(e) Net cash flows arising on disposal of subsidiary (1.5)
(f) Changes in working capital (3.5)

Q.6 Following information has been extracted from the records of Pak Bank Limited (PBL) for
the year ended 30 June 2016:

Rs. in
Description Other relevant information
million
Investments in:
Market Treasury Bills (T-Bills)
- Held for trading 14,893 10% have been given as collateral
- Available for sale 244,013
- Held to maturity 14,812
Pakistan Investment Bonds (PIBs)
- Available for sale 62,422 20% have been given as collateral
- Held to maturity 55,030
Ordinary shares of listed companies
- Held for trading 18,191
- Available for sale 6,685
Ordinary shares of unlisted companies
- Pak Securities (Pvt.) Limited 2,287 100% owned by PBL
- Pak Fund Limited 3,430 51% owned by PBL
- Pak Trade Services (Pvt.) Limited 4,072 25% owned by PBL
- Other unlisted companies 271
Certificates of Investment – Held to maturity 3,024
Provision for diminution in value of investments (307)
Surplus/(deficit) on revaluation of investments:
- Held for trading (9,108) 15% belong to T-Bills given as collateral
- Available for sale 7,916 20% belong to PIBs given as collateral

Required:
Prepare a note on ‘Investment by type’ for inclusion in the financial statements of Pak Bank
Limited for the year ended 30 June 2016, in accordance with the laws applicable in
Pakistan. (10)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional – Winter 2016

A.1 Alpha Limited

Statement of financial position
As on 30 June 2016
Rs. in million
Property, plant and equipment [2,650+(750×0.8)] 3,250.00
Goodwill (W-1) 11.00
Stock in hand [695+(250×0.8) – 56.45(W-2)] 838.55
Other assets [570 + (180 × 0.8) – (320 × 0.8) – (150 × 0.8)] 338.00
Investment in SV-2 (200+305)× 0.5- 11(W-2) OR 443-200 -140+[305×50%]-3 -
11(W-2) 241.50
4,679.05

Capital 2,000.00 2,000.00

Accumulated profit (W3) 1,310.05
10% bank loan [500 + (320 × 0.8)] 756.00
Current liabilities [665 + (405 × 0.8) – (320 × 0.8) – (150 × 0.8)] 613.00
4,679.05
Alpha Limited
Statement of comprehensive income
For the year ended 30 June 2016
Rs. in million
Sales [4250 + (650×0.8) –502(W-2)] 4,268.00
Less: Cost of sales [2,993 + (480 × 0.8) – 437.4(W-2)] (2,939.60)
Gross profit 1,328.40
Less: Expenses [657 + (145×0.8) + 3] (776.00)
Add: Share of profit in SV-2 [(50 × 0.5) – 2.85(W-2)] 22.15
Net profit 574.55

W-1: Computation of goodwill on further investment in SV-1

Rs. in million
Consideration paid (excluding acquisition related costs) 140.00
Less: Further share of BL acquired [400 + (55 – 25)] × [50% × 60%] 129.00
Goodwill 11.00

W-2: Adjustments to be made due to intercompany transactions

Share of
Investment in Cost of sales
Sales Cost of sales profit from
SV-2 adjustment
associate
------------------------------ Rs. in million ------------------------------
Joint venture
AL to SV-2 (110 × 0.2 × 0.5) - 11.00 (11.00)
SV-2 to AL (38 × 0.15 × 0.5) - - (2.85) (2.85)

Joint Operator
AL to SV-1 (350.00) (350.00) (17.60)
17.60 (220×0.10×0.8)
SV-1 to AL (152.00) (152.00) (36.00)
(190×0.8) 36.00 (150×0.3×0.8)
(502.00) (437.40) (11.00) (2.85) (56.45)

W3 Accumulated Profit
Parent Reserves
Parent Reserves opening (1,193-600) 593.00
Post acquisition income from SV1 (55-25)*0.5 15.00
Post acquisition share of profit from SV2 (305 – 50)*0.5 127.50
Current year income 574.55
1,310.05

Page 1 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional – Winter 2016

A.2 GYO Movers Ltd.

Extracts from statement of financial position
As on 30 June 2016
Fixed Asset Rs. in million
Property, plant & equipment (W-1) 1,186.55
W-1: Determination of carrying amount after impairment
Green Yellow Orange Corporate Assets
Other Other Other HO Computer Total
Description Buses Buses Buses Goodwill Equipment
assets assets assets Building Network
----------------------------------------------------------------- Rs. in million -----------------------------------------------------------------
Carrying amount 225.00 400.00 150.00 350.00 95.00 100.00 10.00 100.00 55.00 45.00 1,530.00
Round 1 : Allocation of impairment determined in (W-2)
-First, allocate the impairment amount to (10.00)
(10.00)
goodwill
- Second, allocate the remaining impairment
amount i.e. Rs. 333.44 (343.44-10) to all other (27.40) *1
(104.20) (26.50) (91.18)
*2
- - *3
(26.05) (9.00) - (284.33)
assets proportionately subject to limiting to FV -
fair value 197.60 123.50 98.80 46.00 60.00
(80×2.47) (50×2.47) (40×2.47)
Carrying amount after 1st round of impairment 197.60 295.80 123.50 258.82 95.00 100.00 - 73.95 46.00 45.00 1,235.67
Round 2 : Allocation of remaining impairment (23.12)
*4 *5
(20.22) *6
(5.78)
proportionately 49.12 (343.44 - 10- 284.33) - - - - (49.12)
Carrying value after impairment 197.60 272.68 123.50 238.60 95.00 100.00 - 68.17 46.00 45.00 1,186.55
*1
[400÷(225+400+150+350+100+55)]×333.44 *2
[350÷(225+400+150+350+100+55)]× 333.44 *3
[100÷(225+400+150+350+100+55)]× 333.44
*4
[295.80÷(295.80+258.82+73.95)]×49.12 *5
[258.83÷(295.80+258.83+73.95)]×49.12 *6
[73.95÷(295.80+258.83+73.95)]×49.12

W-2: Determination of impairment amount Green Yellow Orange Total

------------------ Rs. in million ------------------
Carrying value of buses 225.0 150.0 95.0
Carrying value of other assets 400.0 350.0 100.0
Carrying value of all each CGU (A) 625.00 500.00 195.00 1,320.00
Useful life (in years) 20 15 10
Weighting based on useful life (B) 2 1.5 1
Carrying amount after weighting (A×B) 1,250 750 195 2,195
Pro-rata allocation of total corporate assets and goodwill[i.e. 10+ (100 + 55 + 45) = 210]
(C) 119.59 71.75 18.66 210
Carrying amount after allocation (A+C) 744.59 571.75 213.66 1,530.00
Less: Recoverable amount (W-3) 522.90 450.00 282.50
Impairment loss 221.69 121.75 - 343.44

Page 2 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional – Winter 2016

W-3: Determination of recoverable amount

Green Yellow Orange
--------------- Rs. in million ---------------
Net cash flows 70 60 50
Annuity factor at 12% 7.47 6.81 5.65
Value in use of each CGU (i) 522.9 408.6 282.5

Fair value less cost to sell (ii) 500.0 450.0 250.0

Recoverable amount [Higher of (i) and (ii)] 522.9 450.0 282.5

A.3 (a) Accounting entries for the year ended 30 June 2015

Debit Credit
Date Description
Rs. in million
01-07-2014 Cash 600
Financial liability 600
(Recognition of sale proceeds as financial liability)

30-06-2015 Interest expense (W-1) 66.31

Financial liability 66.31
(Recognition of interest expense)

30-06-2015 Financial liability 90

Strong Bank Limited / Bank 90
(Payment of rentals)

30-06-2015 Depreciation expense (240 ÷15) 16

Accumulated deprecation 16
(Recording of depreciation of the property)

30-06-2015 Deferred tax asset (W-2) 105.70

Deferred tax income 105.70
(Creation of deferred tax asset)

Brief explanation of the accounting treatment:

In the given situation the asset has been sold but the right to use has been retained
along with the right to repurchase the asset (call option).

In such situation the transaction can either be treated as a lease or as a financing

transaction. However, since in the given situation the present value of outflows
(rentals and repurchased price) i.e. Rs. 610.45 million (W-3) is higher than original
selling price, the transaction is to be treated as a financing transaction.

Page 3 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional – Winter 2016

(b) Accounting entries for the year ended 30 June 2016

Debit Credit
Date Description
Rs. in million
30-06-2016 Interest expense (W-1) 63.69
Financial liability 63.69
(Recognition of interest expense)

30-06-2016 Financial liability 90.00

Strong Bank Limited / Bank 90.00
(Recognition of interest expense)

30-06-2016 Depreciation expense (240 ÷ 15) 16.00

Accumulated deprecation 16.00
(Recording of depreciation of the property)

30-06-2016 Financial liability (W-1) 550

Property (240-16-16) 208
Gain on sale of property 342
(De-recognition of financial liability and property)

30-06-2016 Deferred tax expense (W-2) 105.70

Deferred tax assets 105.70
(Derecognition of deferred tax asset)

W-1: Repayment schedule:

Opening Interest Closing
Date Payment
principal @ 11.052% principal
1-Jul-14 600.00
30-Jun-15 600.00 66.31 (90.00) 576.31
30-Jun-16 576.31 63.69 (90.00) 550.00

W-2: Computation of deferred tax

Accounting Tax expense/ Deferred tax
Temp diff
expense (income) @ 30%
Interest 66.32 90 (23.68) (7.10)
Depreciation 16.00 - 16.00 4.80
Gain on sale of
property - (360) 360 108
105.70

W-3: PV of rentals and repurchase price

1-Jul-14 30-Jun-15 30-Jun-16
Rent payment (net of tax) - 90 90
Repurchase price - 550
- 90 640
Discount factor @ 10% 1 0.909 0.826
Cash flows - 81.81 528.64
Net cash flows 610.45

Page 4 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional – Winter 2016

A.4 (a) Treatment of share options issued to Marketing Managers

Since options granted to back office managers are granted under non-market
condition, any subsequent change in the non-market condition from previous
estimates should be taken in to account in estimating the expense to be recognized.

Since XYZ is not able to achieve the average 10% profit during the three years, the
expenses booked till the previous year should be reversed i.e. Rs. 853,333 [(8×(50-
18)×5000×2÷3]

Treatment of share options issued to Back Office Managers

Since options granted to back office managers are based on market conditions under
which the probability of meeting the condition was taken into account in fair value of
share option at the grant date, any subsequent changes in the probability of meeting
the condition has no effect on the expense recognition.

Furthermore, when a modification occurs during the vesting period, the incremental
fair value of the option is recognized over the period from the modification date until
the date when equity instruments vest.

By considering the above, XYZ should record the following expenses at 30 June 2016
and taking the credit effect to the equity:

 In order to record modification impact, the incremental fair value of the option
should be recognized as expense i.e. Rs. 405,000 [(14-5)×5,000×9]
 When options is settled, XYZ should recognize the following expense:
Rupees
Expense to be recorded at settlement date (9×30×5,000) 1,350,000
Expense already recorded till last year (8×30×5,000×2÷3) (800,000)
550,000

(b) Investment in bonds

Since the investment in bonds was made with the intention to hold them till maturity,
these should be recorded at amortized cost and transaction costs which are directly
attributable to the acquisition of the financial assets should be capitalized at initial
recognition. The interest revenue should be calculated by using effective interest
method.
In the case of modification in cash flows, the entity should recalculate the gross
carrying amount of the bonds using original effective interest rate and recognise the
difference in P&L in either case, gain or loss.
In accordance with the requirement of impairment, an entity should recognize a loss
allowance equal to life time expected credit losses if the credit risk on that asset has
increased significantly.
Based on the above, the accounting treatment of investment in bonds in the books of
XYZ at 30 June 2016 should be as follows:
 The interest revenue and premium amortization should be recorded at Rs. 4.7
million (W-1) and Rs. 1.3 million (W-1) respectively.
 The life time expectancy loss of Rs. 5 million should be charged to P & L
account.
 Investment in bonds should be disclosed at Rs. 99.99 million (W-1) in statement
of financial position

Page 5 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional – Winter 2016

W-1: Amortization table

Interest Expected
Opening Change in Closing Premium
income @ cashflows
Year Balance estimate balance amortization
4.5186% @ 6%
----------------------------------- Rs. in million -----------------------------------
2014 106.50 4.81 (6.00) 105.31 (1.19)
2015 105.31 4.76 (6.00) 104.07 (1.24)
2016 104.07 4.70 (6.00) 2.22 (W-2) 104.99 (1.30)
Less: Provision for loss allowance (5.00)
99.99

W-2 : Effect of change in estimate

Expected cash flows Discounted factor Present value
Year
@ 6.25% & 6.5% (2019) @ 4.5186% (Rs. in million)
2017 6.25 0.957 5.98
2018 6.25 0.915 5.72
2019 106.50 0.876 93.29
Revised present value 104.99
Present value without the effect of change (104.07 + 4.7 – 6) 102.77
Effect of change in estimate 2.22

A.5 (a) Impairment of goodwill to be reported as non-cash item

Rs. in million
Goodwill at the beginning of the year 1,922.00
Add: Goodwill on acquisition of EL [200 – (320 × 60%)] 8.00
Less: Goodwill on disposal of YL [(560 – (550 × 90%)]× 50% (32.50)
Less: Goodwill at the end of the year (1,750.00)
Impairment of goodwill 147.50

(b) Dividend paid to NCI

Rs. in million
NCI balance – opening 1,721
Add : Dividend payable 252
Add : Profit attributable to NCI for the year 1,018
Add: Acquisition of EL (320 × 40%) 128
Less: Disposal of YL (860 × 10%) (86)
Less : NCI balance – closing (1,499)
Less : Dividend payable (454)
1,080

(c) Dividend received from associates

Rs. in million
Investment in associates - opening balance 3,528
Add : Dividend receivable from associates - opening balance 700
Add : Income from associates 1,150
Less : Investment in associates - closing balance (4,100)
Less : Dividend receivable from associates - closing balance (590)
688
(d) Net cash flow due to acquisition of subsidiary
Rs. in million
Cash paid to acquire subsidiary (200-150) (50)
Bank overdraft acquired on acquisition (16)
Cash outflow from acquisition of subsidiary (66)
(e) Net cash flow arising on disposal of subsidiary
Rs. in million
Sale proceeds from disposal of subsidiary 800
Cash and bank of disposed subsidiary (50)
Cash inflow from disposal of subsidiary 750

Page 6 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional – Winter 2016

(f) Changes in working capital

Trade & other Other current Trade & Other
Description Inventory
receivables assets payables
------------------------Rs. in million--------------------
Opening balance 5,398 4,107 1,300 17,034
Add: Transfer in on acquisition of
subsidiary 100 50 - 36
Less: Transfer out on disposal of
subsidiary (165) - - (80)
5,333 4,157 1,300 16,990
Less : Closing balance on 30 June 2016 (5,488) (4,659) (1,500) (18,050)
Working capital changes (155) (502) (200) 1,060

A.6 Pak Bank Limited

2016
Held by Given as
Investment by types Total
bank collateral
--------- Rs. in million ---------
Held-for-trading securities
Market treasury bills 13,404 1,489 14,893
Ordinary shares of listed companies 18,191 - 18,191
31,595 1,489 33,084
Available for sale securities
Market treasury bills 244,013 - 244,013
Pakistan Investment Bonds 49,938 12,484 62,422
Ordinary shares of listed companies 6,685 - 6,685
Ordinary shares of unlisted companies 271 - 271
300,907 12,484 313,391
Held-to-maturity securities
Market treasury bills 14,812 - 14,812
Pakistan Investment Bonds 55,030 - 55,030
Certificate of Investment 3,024 - 3,024
72,866 - 72,866
Associates
Pak Trade Services (Pvt.) Limited 4,072 - 4,072
Subsidiaries
Pak Securities (Pvt.) Limited 2,287 - 2,287
Pak Fund Limited 3,430 - 3,430
5,717 - 5,717
Investment at cost 415,157 13,973 429,130
Less: Provision for diminution in value of investments (307) - (307)
Investment (Net of provisions) 414,850 13,973 428,823
(Deficit) on revaluation of held for trading securities (7,742) (1,366) (9,108)
Surplus on revaluation of available for sale securities 6,333 1,583 7,916
Total investment at market value 413,441 14,190 427,631

(The End)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Certified Finance & Accounting
Professional (CFAP) Examination -
Winter 2016

General:

The overall performance in this paper was much below expectations. In fact, it was the
poorest performance in the last six attempts. The students generally displayed inadequate
knowledge of important concepts and the accounting standards. They also showed poor
planning in solving the questions which was most probably due to lack of practice on
their part. Several students resorted to lengthy workings where much shorter alternatives
were available. The worst performance was in Question 3 which was quite surprising as it
was a short question with no complexities and any one with reasonable knowledge of
IFRS-15 could have solved it easily.

Question wise comments are given below:

Question 1

According to this question, a company (AL) had entered into an arrangement with
another company (BL) to establish two separate vehicles (SV-1) and (SV-2) to
manufacture and distribute their products. Extracts from the draft financial statements of
AL and the two separate vehicles were provided along with certain other information.
The requirement was to prepare separate financial statements of AL after incorporating
the relevant information pertaining to the separate vehicles.

The overall performance was quite poor. Approximately 12 percent of the students did
not attempt this question which carried 21 marks, and even those students who did
attempt, made a number of crucial errors. From most of the answer scripts it appeared as
if the students did not appreciate the difference between the treatment of joint operations
and joint ventures and did not know how these are to be accounted for. The common
mistakes were as follows:

 In the case of SV-1 which was a joint operation, AL had 80% share and accordingly
80% of the assets, liabilities, revenue and expenses of SV-1 should have been
included in assets, liabilities, revenue and expenses of AL respectively. However,
most of the students consolidated 100% of the amounts. Some of them disregarded
the fact that AL held 80% share with effect from July 1, 2015 (beginning of the year)
and added only 50% of the amounts.
 SV-2 was a joint venture but instead of applying the equity method for joint venture,
several students also accounted for assets, liabilities, revenues and expenses of SV-2
as per IFRS 11.

Page 1 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2016
 Most of the students did not take into account the goodwill on further acquisition of
BL’s ownership in SV-1. Many students who did compute the goodwill, did not
deduct net income of current year from the closing balance of accumulated profit, for
determining net assets at the beginning of the year.
 Majority of the students did not adjust AL’s interest in the receivables/payables
from/to SV-1 in arriving at AL’s current assets and liabilities.
 Following common errors were observed in recording of intra group transactions:
o In case of AL’s transactions with joint operation, many students did not book
adjustments for the unrealized profit in calculating stocks in hand and cost of
sales;
o In case of AL’s sales to joint venture, many students did not adjust AL’s share in
unrealized profit while arriving at the amount of investment. .
o In case of sales of SV-2 to AL, most of the students were unable to make
adjustment in respect of AL’s share in unrealized profit while computing AL’s
share of profit in SV-2 .

 Many students did not charge-off the acquisition related cost incurred on further
investment in SV-1 and included it in the cost of investment.
 In order to calculate closing accumulated profit to be recorded in AL’s financial
statements as on 31 December 2016, AL’s net profit for the year after taking into
account of its share in revenue and expenses of SV-1 and its share in net profit of SV-
2 should have been added to the opening accumulated profit. However majority of the
students were unable to compute it correctly.

Question 2

Approximately 20 percent of the students did not attempt this question pertaining to IAS
36 on ‘Impairment of Assets’. Common mistakes were as follows:

 In order to compute impairment of all CGUs, most of the students failed to allocate
corporate assets, including goodwill among all CGUs. Those who did allocate the
assets amongst the CGUs considered only fair value of assets as a basis of allocation
and did not take cognizance of weightage of expected remaining useful life of CGUs.
 According to IFRS 13 criterion of ‘fair value measurement’, the value of buses should
have been determined by taking highest selling price, less estimated transaction cost
for disposal. However, several students computed fair value of buses by relating
prices of three showrooms with three CGUs i.e. prices quoted by Showroom 1, 2 and
3 for Green, Yellow and Orange respectively.
 The most common mistake was that either students failed to allocate the impairment
amount altogether or allocated the impairment amount among the different assets
incorrectly because while allocating the impairment, they were unable to follow the
sequence specified in paragraphs 104 and 105 of IAS 36.
 Recoverable amount is equal to fair value less cost to sell or value in use, whichever
is higher. Some students considered fair value less cost to sell as recoverable amount
and ignored the value in use altogether.
 Some students computed impairment of buses separately which is not the correct
treatment. Since buses do not generate independent cash flows, impairment should
not be determined on an individual asset rather it should be computed on the entire
cash generating unit.

Page 2 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2016
Question 3

The question was based on a transaction whereby the owner (TL) of a property had sold it
but continued to occupy it by paying rent and under a contract, was also responsible for
its maintenance and also had the option to repurchase it after two years at a specified
price. The requirement was to prepare accounting entries and offer explanation of the
treatment with reference to the appropriate IFRS.

This was the worst attempted question. Approximately 19% students did not attempt it
altogether whereas 53% did attempt but could not secure any mark. The performance was
indeed, disappointing which is indicative of the selective studies by considerable number
of students. A large number of students were not cognizant of the concept that the
transaction should not be recorded as a sale because the right to use and repurchase the
asset was retained by the seller. Rather, it should be treated as a financing arrangement as
the present value of cash outflows was more than original selling price of the asset. Even
the few students who recognized that the said transaction is a financing arrangement
made the following errors:
 explanation of the accounting treatment as required in part (a) of the question was not
offered
 deferred tax on related temporary differences was not accounted for.

Question 4(a)

In this question the students were required to describe the accounting treatment of share-
based transactions. According to the scenario, two different sets of conditions were
offered to marketing managers and back office managers. Performance in this question
was also below average. Major errors noted in the answers were as follows:

 In the explanation of accounting treatment of share options offered to marketing

managers:
o Instead of taking intrinsic value (fair value less exercise price) of share option,
some of the students took fair market value of shares to account for the expense;
o In the event of non-fulfillment of the condition associated with the offer, the
expense was required to be reversed. Some students did not offer any comment in
this regard whereas many students transferred it to retained earnings.
 While explaining accounting treatment of share option offered to back office
managers:
o Several students failed to clarify that any subsequent change in the probability of
meeting the condition would not have effect on expense recognition because the
probability of meeting the market based condition was taken into account in
determining the fair value of share option at the grant date..
o While recording the modification in the last year of the vesting period, the entire
impact of increase in fair value of the option was to be recognized in 2016,
however, some students recognized its impact proportionately for six months.
o Many students booked the expense of 2016 by assuming estimated number of
managers and ignored that 2016 was the last year of vesting period so actual
number of managers should be taken to account for the expense.

Page 3 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2016
Question 4(b)

This part of the question was based on a scenario where an investment had been made in
five-year bonds with the intention of holding them till maturity. However, the issuer had
restructured the payment plan in consultation with the bond holders. The requirement was
to describe the accounting treatment in the books of the investor. The performance in this
part was below average and only about 20% of the candidates were able to secure passing
marks. Very few of the students completed the entire question correctly. The performance
of the remaining students may be categorized as under:
 Majority of the candidates had little or no understanding of the accounting treatment
and the related issues such as initial and subsequent amount of such investment, basis
for recognizing interest revenue and the amount to be reported in statements of
comprehensive income and financial position.
 A large number of candidates were not aware that the transaction costs need to be
capitalized and ignored it completely. Some of them deducted it from the amount of
investment.
 Many students who were able to calculate the effect of change in estimated value of
the bond correctly, were unable to describe the accounting treatment of this change.

Question 5

This was a question which required students to compute the amounts to be shown in
consolidated cash flow statement under different heads of accounts. This was the best
attempted question and about 74% of the students scored passing marks.

The following discrepancies were, however, observed in the answers:

 While determining dividend received from associates and dividend paid to non-
controlling interest (NCI), some students did not consider the impact of change in
opening and closing balances of investment in associates and NCI respectively.
 In computing changes in working capital, some students did not recognize the impact
of change in other current assets.
 While computing net cash flow on acquisition of the subsidiary, bank overdraft of the
subsidiary was ignored.

Question 6

This question required preparation of a note on ‘Investment by type’ for inclusion in the
financial statements of a Bank. This question was also reasonably well attempted and
about 48% students were able to obtain passing marks. The commonly observed errors
were as follows:
 Separate column for securities given as collateral was not prepared.
 In the disclosure of ‘Available for sale’ investments ordinary shares of unlisted
companies were not included.

(THE END)

Page 4 of 4
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2016

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in a question may exceed the total marks.

Mark(s)
A.1
Statement of financial position
− Goodwill 2.0
− Stock in hand 2.5
− Investment in joint venture 3.0
− Accumulated profit 2.0
− Proportionate consolidation of all other items of joint operation 3.5

Statement of comprehensive income
− Sales 1.5
− Cost of sales 3.5
− Share of profit from associates 2.0
− Expenses 1.0

A.2
Allocation of corporate assets among all CGUs 3.0

Determination of:
− carrying amount of each CGU after allocation 2.0
− recoverable amount of each CGU 3.0
− impairment loss of each CGU 1.0

Allocation of impairment loss among assets of all CGUs and Corporate
Assets, if any 9.0

A.3 (a)
Computation of present value of rentals and its comparison with
repurchase price 2.0

Brief explanation of the accounting treatment of the given transaction 4.0

Accounting entries of 2015 relating to:
− sale proceeds 1.0
− interest expense and payment of instalment 1.5
− depreciation for the year 0.5
− deferred tax 2.0

(b) Accounting entries of 2016 relating to:

interest expense and payment of instalment 1.5

depreciation for the year 0.5

de-recognition of financial liability and property 2.0

reversal of deferred tax 2.0

A.4 (a)
Treatment of share options issued to marketing managers

− Discussion on accounting treatment 4.0

Treatment of share options issued to back office managers
− Discussion on accounting treatment 4.0
− Discussion on modification occurred during the vesting period 2.0

Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2016

Mark(s)
(b) Investment in bonds

Discussion on accounting treatment relating to:
− initial recognition of such investment 1.5
− modification in cash flows 3.5
− recognition of loss allowance 1.0
− recognition of modification loss in the books at 30 June 2016 2.0

A.5 Consolidated cash flow statement

(a) Impairment of goodwill to be reported as non-cash item 3.0
(b) Dividend paid to non-controlling interest 4.0
(c) Dividend received from associates 2.5
(d) Net cash flow due to acquisition of subsidiary 1.5
(e) Net cash flows arising on disposal of subsidiary 1.5
(f) Changes in working capital 3.5

A.6 Presentation and disclosures relating to:

Held for trading securities 2.0

Available for sale securities 2.0

Held-to-maturity securities 1.0

Associates 1.0

Subsidiaries 1.0

Provision for diminution in value of investments 1.0

Surplus / (deficit) on revaluation of such investments 2.0

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 5 June 2017

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 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$. Following
information has been extracted from financial statements of the three companies for the year
ended 31 December 2016:
WL GL YL
Assets ------ Rs. in million ------ T$ in million
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 investments made by WL and GL are as follows:
No. of Retained
Cost of
Investment shares earnings at the
Investor Investee investment
date acquired acquisition date
---------------- in million -------------------
1 Jan 2015 WL GL Rs. 4,200 135 Rs. 3,500
1 Jan 2016 WL YL T$ 75 4.5 T$ 50
1 Apr 2016 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$ 18 and
T$ 23 respectively.
(ii) In the books of WL and GL, there is no movement in investment in YL since the date
of acquisition except the difference arising due to foreign currency translation at year
end.
(iii) Investment property in GL was purchased on 1 January 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 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:
Average rate
1-Jan-16 1-Apr-16 30-Jun-16 31-Dec-16
(1 Apr to 31 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.
 Advanced Accounting and Financial Reporting Page 2 of 5

Required:
Prepare WL’s consolidated statement of financial position as on 31 December 2016 in
accordance with the requirements of International Financial Reporting Standards.
(Ignore taxation) (23)

Q.2 (a) 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 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)

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

Percentage of *Cost of
Name of Investees No. of shares shareholding 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 above transactions in accordance with
International Financial Reporting Standards. (11)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.3 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.
Carrying
Fair value Tax base
value
-------- Rs. in million --------
Property, plant and equipment 1,532 1,259 887
Investments 490 367 290
Deferred tax asset - net 24 24 N/A
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 and
PAL:
Included in buyer’s
Sales 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.
(iii) Applicable tax rates for LG and PAL are 25% and 35% respectively. Both companies
are subject to tax on dividend income and capital gain at 12.5% and 17.5%
respectively.

Required:
Determine the amounts of goodwill and deferred tax to be recognised in the consolidated
financial statements of LG for the year ended 31 December 2016, as a result of the above
transactions. (20)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.4 On 15 December 2014, Builders and Developers (BnD) announced a project to build and
sell a 5-storey building on a piece of land acquired at a cost of Rs. 50 million. In the last
week of December 2014, BnD was approached by Jannat Homes (JH) with the offer to
acquire the entire building. JH also suggested that BnD may continue to provide
maintenance services for five years after the handover of building. The agreement was
signed on 1 January 2015. As per the agreement, the entire contract amount of Rs. 275
million (in respect of the building and five years maintenance charges) was paid by JH on
signing the agreement.

According to the terms of the agreement, the construction work was to be completed within
18 months and control of the building was to be transferred immediately thereafter.

The control was transferred as agreed. The expenditures incurred on construction of the
building from 1 January 2015 to 30 June 2016 (evenly throughout the period) were as
follows:
Rs. in million
Direct materials 80.20
Direct labour 32.60
Other costs directly related to the contract 5.80

During the period 1 July 2016 to 31 December 2016, BnD incurred Rs. 3 million for
providing maintenance services relating to the building. BnD expects this rate of expenditure
to continue in future also.

BnD’s incremental borrowing rate is 9% per annum. It normally earns a profit of 30% of
cost, on the provision of maintenance services.

Required:
Prepare relevant extracts from statements of financial position and comprehensive income
of BnD for the years ended 31 December 2015 and 2016. (18)

Q.5 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).

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)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.6 (a) In the light of Islamic Financial Accounting Standards issued by the Institute of
Chartered Accountants of Pakistan, discuss how the gain/loss on ‘sale and lease back
transactions’ shall be accounted for in the financial statements of a listed company if
an asset is sold at:

fair value

above fair value

below fair value (03)

(b) Real General Insurance Limited (RGIL) is a listed company. The following
information relates to the year ended 31 December 2016:

Direct and facultative Treaty

Fire and
property Motor Miscellaneous Proportional
damage
------------------------- Rs. in million -------------------------
Net premium earned 1,215 2,207 357 -

Commissions:
Paid/payable 460 189 73 -
Deferred: opening 210 87 27 -
Deferred: closing 222 89 30 -
Receipts from reinsurers 333 - 136 -

During the year, management expenses (other than commission) amounted to

Rs. 1,096 million. These expenses are allocated by RGIL on the basis of net premium
earned.

Required:
Prepare a statement of expenses for inclusion in RGIL’s financial statements for the
year ended 31 December 2016. (Ignore comparative figures) (07)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

Ans.1 White Limited

Consolidated Statement of Finance Position
As on 31 December 2016
Rs. in million
Assets
Goodwill [56.7(W-1)×20] 1,134.00
Property, plant and equipment [14,900+3,000+(325×20)+800] 25,200.00
Investment property (800–800) -
Current assets [6,660+2,500+(305×20)] 15,260.00
Total assets 41,594.00

Equity & liabilities

Share capital 11,400.00
Retained earnings (W-2) 15,089.65
Exchange reserves (W-5) 1,270.65
27,760.30
Non controlling interest (W-3) 1,091.20
28,851.50
Revaluation surplus [150+650÷20] 182.50
Current liabilities [6,360+2,300+(195×20)] 12,560.00
Total equity and liabilities 41,594.00
W-1: Goodwill GL YL
Rs. in million T $ in million
Cash payment 4,200.00 243.00
(270×90%)

Fair value of previously held equity (4.5×23) 103.50

Total cash consideration and NCI 4,200.00 346.50
Less : Fair value of net assets acquired
Share capital 1,500.00 225.00
Retained earnings 3,500.00 90.00
5,000.00 315.00
WL's share in net assets (GL:5,000×90%),(YL:315×92%) 4,500.00 289.80
Bargain purchase/Goodwill (300.00) 56.70

W-2: Consolidated retained earnings Rs. in million

WL (Given) 9,500.00
Post acquisition - GL [(7,900–3500)×90% 3,960.00
Post acquisition - YL (2,148.75(W-2.1)×92%) 1,976.85
Bargain purchase (W-1) 300.00
Gain on derecognition of associate (W-4) 484.50
Reversal of exchange gain on investment in YL by WL [75×(20–17)] (225.00)
Reversal of exchange gain on investment in YL by GL (270×(20–17)×92% (745.20)
Elimination of income from investment property (800–650)×90% (135.00)
Depreciation expense to be booked for the year by GL (650÷20) (32.50)
Rent expense to be reversed in WL books 60.00
Rent income to be reversed in GL books (60×90%) (54.00)
15,089.65
W-2.1: Post acquisition profit of YL Rs. in million
Profit for nine month [{(210-90)120+(225×10%)}×18] 2,565.00
Less: 10% interim dividend (22.5×18.5) (416.25)
2,148.75

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

W-3: Non-controlling interest

Rs. in million
At acquisition (GL : (1500+3500)×10%)+(YL(225+90)×8%×17) 928.40
Post acquisition - GL [(7,900–3500)×10% 440.00
Post acquisition - YL (2,148.75×8%) 171.90
Reversal of exchange gain on investment in YL by GL [270×(20-17) × 8%] (64.80)
Elimination of income from investment property (800–650 )×10% (15.00)
Rent income to be reversed in GL books (60×10%) (6.00)
Exchange gain relating to year-end transactions (W-5) 95.70
Indirect holding adjustment (270×10%×17) (459)
1,091.20

W-4: Gain on derecognition of associate

Rs. in million
Fair value of investments on 1 April 2016 (4.5×23×17) 1,759.50
Less: Cost of investment (75×17) (1,275.00)
Gain 484.50

W-5: Exchange reserves

Conversion
Relating to goodwill T$ Rs. in million
rate
Balance on acquisition date i.e. 1 April 2016 56.70 17.00 963.90
Balance as on 31 December 2016 56.70 20.00 1,134.00
170.10

Relating to translation of FS foreign Conversion

T$ Rs. in million
operations rate
Net assets as on 31 December 2016 435.00 20.00 8,700.00
Net assets on acquisition date 315.00 17.00 5,355.00
Profit since acquisition {120 + (225×10%)} 142.50 18.00 2,565.00
Dividend paid (22.50) 18.50 (416.25)
435.00 7,503.75
Exchange gain for the year ended
31 December 2016 - 1,196.25
Less: Exchange gain relating to NCI
(1,196.25×8%) 95.70
Exchange gain to parent 1,100.55

Total exchange reserves (170.10+1,100.55) 1,270.65

Page 2 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

Ans.2 (a) Rs. in million

Profit for the year 150.00
Less: Dividend
Class A Preference shareholders (9÷1.09×2) 16.51
Class B Preference shareholders (300×6%) 18.00
Profit attributable to class B preference shareholders
[90.49(W-1)×3÷(20+3)(W-2)] 11.80
46.31
Profit available for ordinary shareholders 103.69

Earnings per share (103.16÷10) 10.37

W-1: Undistributed earnings

Profit after tax 150.00
Less: Imputed dividend (16.51)
Dividend to class B preference shares (18.00)
Dividend to ordinary shareholders (25.00)
Undistributed earnings 90.49

W-2: Determination of ratio for distribution of undistributed earnings between

ordinary and class B preference shareholders
No. of
outstanding shares Weight Product
(in million)
Ordinary shareholder 10 2 20
Class B preference shareholder 3 1 3
23

(b) Investment in KL
Initial measurement
According to IFRS 9, at initial recognition, RIL may make irrevocable election to
present subsequent changes in fair value in equity investment in other
comprehensive income instead of profit or loss account.
If RIL opted as above, investment in KL would initially be recognized at fair value
plus transaction costs i.e. Rs. 20 million.
However, if RIL opted to measure the investment at fair value through profit and
loss (FVTPL), investment should initially be measured at Rs. 19.96 million
(20/1.002) and transaction costs of Rs. 0.04 million (20–19.96) should be charged to
profit and loss account.
Subsequent measurement
On 31 December 2016, if fair value through other comprehensive income has been
opted, investment in KL should be measured at fair value of Rs. 12.4 million and a
loss of Rs. 7.6 million [20–12.4(155,000×80)] (instead of Rs. 5 million) should be
booked through other comprehensive income.
According to IFRS 9, amount presented in other comprehensive income shall not be
subsequently transferred to profit or loss. However, the entity may transfer the
cumulative gain / (loss) within equity.
If fair value through profit or loss has been opted, then RIL should account for the
loss of Rs. 7.56 million (20–0.04(transaction cost)–12.4) through profit and loss
account.
Page 3 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

Investment in BL

Initial measurement
The investment in BL should be recognized as held for trading at fair value of Rs.
64.87 million (65÷1.002) and transaction cost of Rs. 0.13 million should be charged
to profit and loss account.

Subsequent measurement
As at 30 November 2016, the investment should be re-measured to fair value at the
market price of Rs. 83.835 million (135,000×621) and a gain of Rs. 18.965 million
(83.835–64.87) shall be booked in the profit and loss account.

Reclassification of asset
On 30 November 2016 when RIL decided to hold the shares for a longer period,
investment in BL should be reclassified from held for trading to non-trading
investment. Further, RIL may make irrevocable election that investment in BL
would be re-measured at fair value through other comprehensive income, as
discussed in the case of KL above. Similarly, treatment on 31 December 2016 would
depend on whether RIL opted to re-measure at fair value through OCI or not.

Page 4 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

Ans.3 Computation of goodwill

Cash consideration 2,000.00
Market based measure of replacement awards 140.00
Total consideration transferred 2,140.00

Net assets acquired

Fair value of assets 3,618.00
Fair value of liabilities (1,888.00)
Development expenditure 153.00
Contingent liability (25.00)
Adjustment in deferred tax (W-1) (70.85)
1,787.15
Goodwill 352.85

Impact on deferred tax as on 31 December 2016: Timing Tax Deferred

difference rate tax
Effect of deferred tax on acquisition (W-1) (70.85)
Unrealized profit on closing stock held by PAL (80×20%) (16.00) 35.0% (5.60)
Unrealized profit on closing stock held by LG (140×15%) (21.00) 25.0% (5.25)
Undistributed profit of NAL – Associate (to be realized
through dividend) [(50–20)×30%×60%)] (5.40) 12.5% (0.68)
Undistributed profit of NAL – Associate (Realized through
sale) [(50–30)×30%×40%)] (3.60) 17.5% (0.63)
Increase in intrinsic value (150–90) (60.00) 25.0% (15.00)
(98.01)

W-1: Adjustment for deferred tax on 1 January 2016

Impact on Taxable
Fair Carrying Tax Deferred tax
/(deductible) time
value value rate liability/(assets)
difference
Property, plant and equipment 1,532 1,259 273.00 35% 95.55
Investments 490 367 123.00 35% 43.05
Retirement benefit obligations 60 17 (43.00) 35% (15.05)
Development expenditure 153 - 153.00 35% 53.55
Contingent liability 25 - (25.00) 35% (8.75)
Unused tax losses 300 - (300.00) 25% (75.00)
Intrinsic value of share options 90 - (90.00) 25% (22.50)
Net adjustment in deferred tax 70.85

Page 5 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

Ans.4 Builders & Developers

Extracts from statement of financial position
As on 31 December 2016
2016 2015
------ Rs. in million ------
Fixed Asset
Land - 50
Current Asset
Contract cost (80.20+32.60+5.8)÷18×12 - 79.07

Non current liabilities

Contract liability 27.30 35.10
(3.9×7) (39–3.9)

Current liabilities
Contract liability 7.80 264.65
(3.9×2) (236+3.9+24.75)

Builders & Developers

Extracts from statement of comprehensive income
As on 31 December 2016
2016 2015
------ Rs. in million ------
Revenue (sale of building) [275–39(3×10×1.3)]+38.24 274.24 -
Less: Contract cost
Land (50.00) -
Direct material (80.20) -
Direct labour (32.60) -
Other cost directly related to the contract (5.80) -
(168.60) -
Profit from sale of building 105.64
Revenue (maintenance service) (3×1.3) 3.90 -
Less : Contract cost (3.00) -
Profit from maintenance services 0.90 -
Gross profit 106.54
Interest expense [2016:(275+24.75)×9%×6/12; 2015:275×9%] (13.49) (24.75)
Net profit 93.05 (24.75)

Page 6 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

Ans.5 On 1 October 2016

As the company entered into the swap agreement with the purpose of hedging the fair
value of the company’s own debt, therefore this is a fair value hedge.

The loan should initially be recognized at fair value. Swap has to be recorded initially at
its fair value. Since the swap was entered at ‘market rates’, its fair value is zero at the
agreement date and therefore no accounting entry is required on that date.

Brokerage of Rs. 1 million with respect to swap arrangement should be charged to profit
and loss account.

On 31 December 2016
PTL should record net interest expense of Rs. 17.483 million for the quarter ended
31 December 2016.

Rs. in million
Interest expense on TFC (900 × 8% × 3 ÷ 12) 18.000
Interest expense on SWAP (900 × 6.27% × 3 ÷ 12) 14.108
Interest income on SWAP (900 × 6.5% × 3 ÷ 12) (14.625)
17.483

At 31 December 2016, the hedge is required to be assessed and effectiveness of hedge is

required to be determined, to decide whether hedge accounting is to be continued or not.

Being ‘receive fixed’ and ‘pay variable’ interest rate swap, fair value hedge accounting
rules are to be applied.

Rs. in million
TFCs issued at par 900.00
Fair value at 31 December 2016 (992×0.9) 892.80
Gain in TFCs – Other income 7.20

The swap is deemed effective and hedge accounting shall continue to be used. By
considering this, swap liability of Rs. 7.29 million should be recorded through profit and
loss account and debenture liability should be reduced by Rs. 7.2 million. (changes being
reported in profit and loss account)

Ans.6 (a) When an asset is sold with an intention to enter into an ljarah arrangement, gain or
loss shall be recorded as follows:

Sold at fair value:

Profit or loss should be recognized immediately.

Sold at below fair value:

If the sale price is below fair value, any profit or loss should be recognized
immediately except that, if the loss is compensated by future lease payments at
below market price, it should be deferred and amortized in proportion to the lease
payments over the period for which the asset is expected to be used.

Sold at above fair value:

If the sale price is above fair value, the excess over fair value should be deferred and
amortized over the period for which the asset is expected to be used.

(b) Real General Insurance Limited

Page 7 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2017

Statement of Expenses
For the year ended 31 December 2016

Deferred

Underwriting
Commissions

underwriting
management

Commission
commission
commissions

reinsurers
expense

expense

expense
Other
Class

from
Net

Net
Opening

Closing
Direct and
------------------------------- (Rs. in million) ------------------------
Facultative
Fire and property
460 210 222 448 352 800 333 467
damage
Motor 189 87 89 187 640 827 - 827
Miscellaneous 73 27 30 70 104 174 136 38
722 324 341 705 1,096 1,801 469 1,332
Treaty
Proportional - - - - - - - -
Grand total 722 324 341 705 1,096 1,801 469 1,332

(The End)

Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Advanced Accounting and Financial Reporting
Examiners’ comments and Suggested answer
Certified Finance and Accounting Professional (CFAP)
Summer 2017 Examinations

Overall General Comment:

Only 5.69% students passed in this attempt as compared to 8.85% in the previous attempt. In
fact, the result in the paper has been on the decline for the last five attempts. The primary
reason is that the candidates seem unable to grasp the frequent and significant changes that are
being introduced in the IFRSs. The students would have to allocate sufficient time for
preparation and practice in order to be successful in this paper.

Question-wise Comments:

Question 1

25.34% candidates secured passing marks in this question.

Common errors:

1. Candidates missed the entire workings, especially the revaluation surplus and reversal of
exchange gain on investment in YL.
2. The following types of mistakes were made in the calculation of goodwill:
 Amount of bargain purchase in case of GL was adjusted against the amount of
goodwill of YL.
 WL’s existing investment in YL at the time of obtaining the control should have
been re-measured at fair value for computing goodwill. However the re-
measurement was either ignored or fair value on 1 January 2016 i.e. T$ 18 per
share was taken instead of T$ 23 per share i.e. fair value on the date of obtaining
the control (1 April 2016).
 Share in YL was taken as 100% or 72%, instead of 92%.
3. The following types of mistakes were made in the calculation of consolidated retained
earnings and / or non-controlling interest:
 Gain on de-recognition of associate and amount of bargain purchase were ignored.
 While computing nine months profit of YL, interim dividend paid by YL was not
taken into account.
 Indirect holding adjustment was ignored.
4. The investment property which was rented out to the holding company should have been
classified as Property Plant and Equipment, in the consolidated balance sheet but was
shown as investment property.

Suggested answer:

White Limited
Consolidated Statement of Finance Position
As on 31 December 2016
Rs. in million
Assets
Goodwill [56.7(W-1)×20] 1,134.00
Property, plant and equipment [14,900+3,000+(325×20)+800] 25,200.00
Investment property (800–800) -
Current assets [6,660+2,500+(305×20)] 15,260.00
Total assets 41,594.00
Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Equity & liabilities
Share capital 11,400.00
Retained earnings (W-2) 15,089.65
Exchange reserves (W-5) 1,270.65
27,760.30
Non controlling interest (W-3) 1,091.20
28,851.50
Revaluation surplus [150+650÷20] 182.50
Current liabilities [6,360+2,300+(195×20)] 12,560.00
Total equity and liabilities 41,594.00
W-1: Goodwill GL YL
Rs. in million T $ in million
Cash payment 4,200.00 243.00
(270×90%)

Fair value of previously held equity (4.5×23) 103.50

Total cash consideration and NCI 4,200.00 346.50
Less : Fair value of net assets acquired
Share capital 1,500.00 225.00
Retained earnings 3,500.00 90.00
5,000.00 315.00
WL's share in net assets (GL:5,000×90%),(YL:315×92%) 4,500.00 289.80
Bargain purchase/Goodwill (300.00) 56.70

W-2: Consolidated retained earnings Rs. in million

WL (Given) 9,500.00
Post acquisition - GL [(7,900–3500)×90% ] 3,960.00
Post acquisition - YL (2,148.75(W-2.1)×92%) 1,976.85
Bargain purchase (W-1) 300.00
Gain on derecognition of associate (W-4) 484.50
Reversal of exchange gain on investment in YL by WL [75×(20–17)] (225.00)
Reversal of exchange gain on investment in YL by GL (270×(20–17)×92% (745.20)
Elimination of income from investment property (800–650)×90% (135.00)
Depreciation expense to be booked for the year by GL (650÷20) (32.50)
Rent expense to be reversed in WL books 60.00
Rent income to be reversed in GL books (60×90%) (54.00)
15,089.65
W-2.1: Post acquisition profit of YL Rs. in million
Profit for nine month [{(210-90)120+(225×10%)}×18] 2,565.00
Less: 10% interim dividend (22.5×18.5) (416.25)
2,148.75

W-3: Non-controlling interest

Rs. in million
At acquisition (GL : (1500+3500)×10%)+(YL(225+90)×8%×17) 928.40
Post acquisition - GL [(7,900–3500)×10% ] 440.00
Post acquisition - YL (2,148.75×8%) 171.90
Reversal of exchange gain on investment in YL by GL [270×(20-17) × 8%] (64.80)
Elimination of income from investment property (800–650 )×10% (15.00)
Rent income to be reversed in GL books (60×10%) (6.00)
Exchange gain relating to year-end transactions (W-5) 95.70
Indirect holding adjustment (270×10%×17) (459.00)
1,091.20

Page 2 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
W-4: Gain on derecognition of associate
Rs. in million
Fair value of investments on 1 April 2016 (4.5×23×17) 1,759.50
Less: Cost of investment (75×17) (1,275.00)
Gain 484.50

W-5: Exchange reserves

Conversion
Relating to goodwill T$ Rs. in million
rate
Balance on acquisition date i.e. 1 April 2016 56.70 17.00 963.90
Balance as on 31 December 2016 56.70 20.00 1,134.00
170.10

Relating to translation of FS foreign Conversion

T$ Rs. in million
operations rate
Net assets as on 31 December 2016 435.00 20.00 8,700.00
Net assets on acquisition date 315.00 17.00 5,355.00
Profit since acquisition {120 + (225×10%)} 142.50 18.00 2,565.00
Dividend paid (22.50) 18.50 (416.25)
435.00 7,503.75
Exchange gain for the year ended
31 December 2016 - 1,196.25
Less: Exchange gain relating to NCI
(1,196.25×8%) 95.70
Exchange gain to parent 1,100.55

Total exchange reserves (170.10+1,100.55) 1,270.65

Question 2

05.35% candidates secured passing marks in this question.

Common errors:

Part (a)

1. Imputed dividend to class A preference shares was ignored (not deducted) in computing
the profit available to ordinary shareholders. Some of the candidates did consider the
dividend but made various types of errors in computing it as they could not compute the
impact of discounting.
2. Various types of errors were seen in determining the ratio of distribution of undistributed
earnings between ordinary and Class B preference shareholders.
3. Instead of computing the overall basic earnings per share, the distributed earnings per
share and the undistributed earnings per share were given.

Page 3 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017

Suggested answer:

Rs. in million
Profit for the year 150.00
Less: Dividend
Class A Preference shareholders (9÷1.09×2) 16.51
Class B Preference shareholders (300×6%) 18.00
Profit attributable to class B preference shareholders [90.49(W-
1)×3÷(20+3)(W-2)] 11.80
46.31
Profit available for ordinary shareholders 103.69

Earnings per share (103.16÷10) 10.37

W-1: Undistributed earnings

Profit after tax 150.00
Less: Imputed dividend (16.51)
Dividend to class B preference shares (18.00)
Dividend to ordinary shareholders (25.00)
Undistributed earnings 90.49

W-2: Determination of ratio for distribution of undistributed earnings between

ordinary and class B preference shareholders
No. of
outstanding shares Weight Product
(in million)
Ordinary shareholder 10 2 20
Class B preference
shareholder 3 1 3
23

Part (b)

1. According to IFRS 9, at initial recognition, the company may make an irrevocable

option to present subsequent changes in fair value in non-trading equity investments
in other comprehensive income instead of profit and loss account. The accounting
treatment for investment in KL depended on whether the option was taken or not.
Similar situation applied to investment in BL when it decided to hold the shares for a
longer period. Instead, only one of the two treatments was explained.
2. Investment in KL was classified as held to maturity or available for sale instead of
non-trading investment.
3. If company elected irrevocable option to record subsequent changes in fair value
through other comprehensive income then impairment loss against non-trading
investments as given in the question should be accounted for through other
comprehensive income rather than profit or loss account. This aspect was not
explained.
4. Incorrect treatment of transaction cost was made. In the case of investment in BL and
also in case of investment in KL where irrevocable option to charge subsequent
changes through OCI was not exercised, transaction costs should have been charged
to P&L, but were capitalized.

Page 4 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Suggested answer:

Investment in KL
Initial measurement
According to IFRS 9, at initial recognition, RIL may make irrevocable election to present
subsequent changes in fair value in equity investment in other comprehensive income instead of
profit or loss account.
If RIL opted as above, investment in KL would initially be recognized at fair value plus transaction
costs i.e. Rs. 20 million.
However, if RIL opted to measure the investment at fair value through profit and loss (FVTPL),
investment should initially be measured at Rs. 19.96 million (20/1.002) and transaction costs of Rs.
0.04 million (20–19.96) should be charged to profit and loss account.
Subsequent measurement
On 31 December 2016, if fair value through other comprehensive income has been opted,
investment in KL should be measured at fair value of Rs. 12.4 million and a loss of Rs. 7.6 million
[20–12.4(155,000×80)] (instead of Rs. 5 million) should be booked through other comprehensive
income.
According to IFRS 9, amount presented in other comprehensive income shall not be subsequently
transferred to profit or loss. However, the entity may transfer the cumulative gain / (loss) within
equity.

If fair value through profit or loss has been opted, then RIL should account for the loss of Rs. 7.56
million (20–0.04(transaction cost)–12.4) through profit and loss account.

Investment in BL

Initial measurement
The investment in BL should be recognized as held for trading at fair value of Rs. 64.87 million
(65÷1.002) and transaction cost of Rs. 0.13 million should be charged to profit and loss account.

Subsequent measurement
As at 30 November 2016, the investment should be re-measured to fair value at the market price of
Rs. 83.835 million (135,000×621) and a gain of Rs. 18.965 million (83.835–64.87) shall be booked
in the profit and loss account.

Reclassification of asset
On 30 November 2016 when RIL decided to hold the shares for a longer period, investment in BL
should be reclassified from held for trading to non-trading investment. Further, RIL may make
irrevocable election that investment in BL would be re-measured at fair value through other
comprehensive income, as discussed in the case of KL above. Similarly, treatment on 31 December
2016 would depend on whether RIL opted to re-measure at fair value through OCI or not.

Question 3

01.87% candidates secured passing marks in this question.

Common errors:

1. In computing the goodwill, market based replacement award was ignored while
determining the total consideration.
2. In computing the goodwill, deferred tax was ignored.

Page 5 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017

3. In the computation of deferred tax, tax on unrealized profit on closing stock held by PAL
was taken as 25% instead of 35% whereas tax on unrealized profit on closing stock held
by LG was taken as 35% instead of 25%. Similarly, tax rate of 35% was applied on
undistributed profit of NAL in both cases i.e. where such profit was to be realised by way
of dividend and also where the profit was to be realised through sale of investments.
4. Increase in intrinsic value of replacement award from Rs. 90 million to Rs. 150 million
was ignored in the computation of deferred tax.
5. Deferred tax was computed by applying the tax rate on the difference between fair value
and tax base without taking into account the deferred tax at acquisition i.e. Rs. 24 million.

Suggested answer:

Computation of goodwill
Cash consideration 2,000.00
Market based measure of replacement awards 140.00
Total consideration transferred 2,140.00

Net assets acquired

Fair value of assets 3,618.00
Fair value of liabilities (1,888.00)
Development expenditure 153.00
Contingent liability (25.00)
Adjustment in deferred tax (W-1) (70.85)
1,787.15
Goodwill 352.85

Impact on deferred tax as on 31 December 2016: Timing Tax Deferred

difference rate tax
Effect of deferred tax on acquisition (W-1) (70.85)
Unrealized profit on closing stock held by PAL (80×20%) (16.00) 35.0% (5.60)
Unrealized profit on closing stock held by LG (140×15%) (21.00) 25.0% (5.25)
Undistributed profit of NAL – Associate (to be realized through
dividend) [(50–20)×30%×60%)] (5.40) 12.5% (0.68)
Undistributed profit of NAL – Associate (Realized through
sale) [(50–30)×30%×40%)] (3.60) 17.5% (0.63)
Increase in intrinsic value (150–90) (60.00) 25.0% (15.00)
(98.01)
W-1: Adjustment for deferred tax on 1 January 2016
Impact on Taxable
Fair Carrying Tax Deferred tax
/(deductible) time
value value rate liability/(assets)
difference
Property, plant and equipment 1,532 1,259 273.00 35% 95.55
Investments 490 367 123.00 35% 43.05
Retirement benefit obligations 60 17 (43.00) 35% (15.05)
Development expenditure 153 - 153.00 35% 53.55
Contingent liability 25 - (25.00) 35% (8.75)
Unused tax losses 300 - (300.00) 25% (75.00)
Intrinsic value of share options 90 - (90.00) 25% (22.50)
Net adjustment in deferred tax 70.85

Page 6 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Question 4

0.96% candidates secured passing marks in this question.

Common errors:

1. Percentage of completion method was used without giving any reason to support such
approach whereas revenue is to be recognized when control is transferred. Since it was
clearly mentioned in the question that control was transferred after completion of the
building, there was no point in discussing the issue further.
2. Imputed interest was not taken into consideration.
3. Revenue from maintenance service was not separated from total revenue.
4. Cost of land was not considered in the fixed assets of 2015.
5. Contract liabilities were not classified further as current and non-current.

Suggested answer:

Builders & Developers

Extracts from statement of financial position
As on 31 December 2016
2016 2015
------ Rs. in million ------
Fixed Asset
Land - 50
Current Asset
Contract cost (80.20+32.60+5.8)÷18×12 - 79.07

Non current liabilities

Contract liability 27.30 35.10
(3.9×7) (39–3.9)

Current liabilities
Contract liability 7.80 264.65
(3.9×2) (236+3.9+24.75)

Builders & Developers

Extracts from statement of comprehensive income
As on 31 December 2016
2016 2015
------ Rs. in million ------
Revenue (sale of building) [275–39(3×10×1.3)]+38.24 274.24 -
Less: Contract cost
Land (50.00) -
Direct material (80.20) -
Direct labour (32.60) -
Other cost directly related to the contract (5.80) -
(168.60) -
Profit from sale of building 105.64
Revenue (maintenance service) (3×1.3) 3.90 -
Less : Contract cost (3.00) -
Profit from maintenance services 0.90 -
Gross profit 106.54
Interest expense [2016:(275+24.75)×9%×6/12; 2015:275×9%] (13.49) (24.75)
Net profit 93.05 (24.75)

Page 7 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Question 5

01.01% candidates secured passing marks in this question.

Common errors:

1. The hedge was treated as a cash flow hedge whereas it was a fair value hedge because the
company had entered into the swap agreement with the purpose of hedging the fair value
of the company’s debt rather than its repayment.
2. Swap has to be recorded initially at its fair value. Since the swap was entered at market
rates, its fair value was zero at the agreement date and therefore no accounting entry was
required. The students generally failed to explain this point.
3. The requirement was to explain the accounting treatment whereas many students gave
general entries.
4. No comments were offered with regard to the amount of brokerage.

Suggested answer:

On 1 October 2016

As the company entered into the swap agreement with the purpose of hedging the fair value of the
company’s own debt, therefore this is a fair value hedge.

The loan should initially be recognized at fair value. Swap has to be recorded initially at its fair
value. Since the swap was entered at ‘market rates’, its fair value is zero at the agreement date and
therefore no accounting entry is required on that date.

Brokerage of Rs. 1 million with respect to swap arrangement should be charged to profit and loss
account.

On 31 December 2016

PTL should record net interest expense of Rs. 17.483 million for the quarter ended 31 December
2016.

Rs. in million
Interest expense on TFC (900 × 8% × 3 ÷ 12) 18.000
Interest expense on SWAP (900 × 6.27% × 3 ÷ 12) 14.108
Interest income on SWAP (900 × 6.5% × 3 ÷ 12) (14.625)
17.483

At 31 December 2016, the hedge is required to be assessed and effectiveness of hedge is required to
be determined, to decide whether hedge accounting is to be continued or not.

Being ‘receive fixed’ and ‘pay variable’ interest rate swap, fair value hedge accounting rules are to
be applied.

Rs. in million
TFCs issued at par 900.00
Fair value at 31 December 2016 (992×0.9) 892.80
Gain in TFCs – Other income 7.20

The swap is deemed effective and hedge accounting shall continue to be used. By considering this,
swap liability of Rs. 7.29 million should be recorded through profit and loss account and debenture
liability should be reduced by Rs. 7.2 million. (changes being reported in profit and loss account)

Page 8 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017

Question 6

77.08% candidates secured passing marks in this question.

Common error:

Part (a)

The question was quite straight forward and the performance was good but there were many
students who did not have any knowledge of the Islamic Financial Accounting Standards and
could not write anything worthwhile. Many students used guesswork i.e. tried to answer in
terms of IFRS 16.

Suggested answer:

When an asset is sold with an intention to enter into an ljarah arrangement, gain or loss shall be
recorded as follows:

Sold at fair value:

Profit or loss should be recognized immediately.

Sold at below fair value:

If the sale price is below fair value, any profit or loss should be recognized immediately except that,
if the loss is compensated by future lease payments at below market price, it should be deferred and
amortized in proportion to the lease payments over the period for which the asset is expected to be
used.

Sold at above fair value:

If the sale price is above fair value, the excess over fair value should be deferred and amortized over
the period for which the asset is expected to be used.

Part (b)

Common error:

1. Net commission expenses and underwriting expenses were not computed or computed
incorrectly.
2. Proper headings were missing.

Page 9 of 10
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Suggested answer:

Real General Insurance Limited

Statement of Expenses
For the year ended 31 December 2016

Deferred

Underwriting
Commissions

underwriting
management

Commission
commission
commissions

reinsurers
expense

expense

expense
Other
Class

from
Net

Net
Opening

Closing
Direct and
------------------------------- (Rs. in million) ------------------------
Facultative
Fire and
property 460 210 222 448 352 800 333 467
damage
Motor 189 87 89 187 640 827 - 827
Miscellaneous 73 27 30 70 104 174 136 38
722 324 341 705 1,096 1,801 469 1,332
Treaty
Proportional - - - - - - - -
Grand total 722 324 341 705 1,096 1,801 469 1,332

(The End)

Page 10 of 10
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2017

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in a question may exceed the total marks.

Mark(s)
A.1 Consolidated statement of financial position
Computation, presentation and disclosures of:
− goodwill 3.0
− property, plant and equipment 2.0
− retained earnings 5.5
− gain on de-recognition of associate 2.0
− exchange reserves 4.5
− non-controlling interest 3.0
− revaluation surplus 1.0
− other assets and liabilities 2.0

A.2 (a)
Deduction of dividend to class A and B preference shareholders from

profit after tax 3.0

Determination of profit attributable to class B preference shareholders 4.5

Computation of earnings per share 0.5

(b)
0.5 mark each for identification of classification of each investments 1.0

Initial recognition and subsequent measurement of non-trading
investment 6.0

Initial recognition and subsequent measurement of trading investment 2.0

Reclassification of investment in BL 2.0

A.3
Computation of deferred tax on acquisition in order to determine goodwill 8.0

Computation of goodwill 3.0

Determination of deferred tax as on 31 December 2016 relating to:
− unrealized profit on closing stock 3.0
− undistributed profit of associate 4.0
− intrinsic value of share options 2.0

A.4 Extracts from statement of comprehensive income

Allocation of transaction price between sale of building and income from
maintenance services 2.5

Revenue and cost relating to sale of building 3.0

Revenue and cost relating to maintenance services 2.0

Interest income / expense 3.0
Extracts from statement of financial position

Contract asset 1.5

Contract liability – non-current liability 3.0

Contract liability – current liability 3.0

Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2017

Mark(s)
A.5
Identification of fair value hedge 1.5

Recognition and measurement of TFCs and swap 5.5

Treatment of brokerage paid on hedging arrangement 1.0

Recognition of interest expense / income 2.0

A.6 (a) Treatment of gain / loss on “sale and lease back transactions” under Islamic
Financial Accounting Standards, if an asset is sold at:

fair value 0.5

above fair value 1.0

below fair value 1.5

(b)
Computation of:

− net commission expense 0.75
− other management expenses 0.75
− underwriting expense 0.75
− net underwriting expenses 0.75

Presentations and disclosures 4.0

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 4 December 2017

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 (a) The following details relate to a cash generating unit (CGU) of Khyber Ltd (KL) as at
30 June 2017:

Carrying Fair value less

value cost to sell
----------- Rs. in million -----------
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:
(i) There has been a significant decline in budgeted net cash flows of the CGU. (06)
(ii) KL decided to dispose of the CGU as a group in a single transaction and
classified it as ‘Held for sale’. Carrying value of all individual assets have been
remeasured in accordance with the applicable IFRSs. (06)

(b) 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 1000 400

Required:
Identify principal and most advantageous markets along with reasons thereof. Also
calculate the fair value of the asset in these markets. (03)
 Advanced Accounting and Financial Reporting Page 2 of 6

Q.2 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
Assets: ----------- Rs. in million -----------
Property, plant & equipment 16,500 5,600 11,000
Investment in ML – at cost 1,375 - -
Investment in BL – at cost 7,500 - -
Investment in joint operation – at cost 620
Stock-in-trade 2,414 1,460 1,750
Trade and other receivables 2,200 2,060 1,800
Cash and bank 1,600 800 1,900
31,589 9,920 17,070
Equity and 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:

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.

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.

On both disposals, SL credited investment in ML with related cost and took the
difference to profit or loss account.

ML made a net profit of Rs. 700 million during the year. No dividend was
declared during the year.

SL’s receivables include Rs. 200 million due from ML.

(iii) On 1 July 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.

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.
 Advanced Accounting and Financial Reporting Page 3 of 6

Required:
Prepare SL’s consolidated statement of financial position as on 30 June 2017 in accordance
with the International Financial Reporting Standards. (25)

Q.3 (a) Jabbar (Pvt) Ltd (JPL) was incorporated on 1 July 2016 and is preparing its financial
statements for the year ended 30 June 2017 in accordance with IFRS for Small and
Medium-sized Entities (SMEs). The following matters are under consideration:

(i) JPL has constructed an office building at a cost of Rs. 3.3 million, which was
completed on 30 June 2017. The cost includes interest of Rs. 0.3 million relating
to a loan specifically obtained to finance the construction. At year end,
recoverable amount of the building has been estimated at Rs. 3.1 million. (02)

(ii) On 1 January 2017 JPL had purchased two shops A and B for Rs. 5 million and
Rs. 4 million respectively. Shop A is being used by JPL for marketing purposes
and shop B was rented out soon after its purchase. At year end, shops A and B
have been:

depreciated @ 5% per annum.

revalued to Rs. 6 million and Rs. 5 million respectively. (04)

Required:
Discuss how the above matters should be dealt with in the financial statements of JPL
in accordance with IFRS for SMEs. (Assume that cost to sell is negligible)

(b) Following balances have been extracted from the trial balance of Karachi Bank
Limited (KBL) for the year ended 31 December 2016.

Rs. in million
Bills discounted and purchased 679
Call money lending 650
Cash in hand 9,100
Current account with Habib Bank Limited 412
Current account with State Bank of Pakistan 14,500
Current account with National Bank of Pakistan 2,300
Deposit account with Central Bank of Afghanistan 700
Deposit account with National Bank of Pakistan 1,400
Deposit account with United Bank Limited 311
Deposits and prepayments 3,189
Interest accrued 21,450
Loans, cash credits and running finances 114,200
Market treasury bills 24,500
National Prize Bonds 68
Net investment in finance lease 4,900
Operating fixed assets 24,700
Pakistan Investment Bonds (20% given as collateral) 1,800
Provision against non-performing advances (6,678)
Provision for diminution in value of investment (222)
Repurchase agreement lending 6,100
Sukuk Bonds 1,200

Required:
Prepare the asset side of the statement of financial position as at 31 December 2016 of
KBL, based on the above balances. (Notes to the financial statements are not required) (05)
 Advanced Accounting and Financial Reporting Page 4 of 6

Q.4 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:

Market value
Date 1-Year KIBOR
per share (Rs.)
1 January 2015 5% 200
1 January 2016 6% 250

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

Q.5 (a) Faraz is a chartered accountant and employed as Finance Manager of Gladiator
Limited (GL). He has recently returned after a long medical leave and has been
provided with draft financial statements of GL for the year ended 30 June 2017.
Following figures are reflected in the draft financial statements:

Rs. in million
Profit before tax 125
Total assets 1,420
Total liabilities 925
While reviewing the financial statements, he noted the following issues:
(i) Details of two of GL’s products which are carried at historical cost as on
30 June 2017, are as under:

Product A Product B
Units in inventory 5,000 20,000
Historical cost (Rs. per unit) 10,000 1,500
Estimated selling price (Rs. per unit) 9,700 1,700
Estimated cost to sell (Rs. per unit) 300 100
Current replacement cost (Rs. per unit) 9,100 1,400
Details of firm sale contracts:
Units to be sold 3,000 28,000
Contract price (Rs. per unit) 9,800 1,300
Cost to sell (Rs. per unit) 200 100 (04)
(ii) A government loan of Rs. 50 million was received on 1 July 2016. The loan
carries interest @ 6% per annum payable annually and principal is repayable on
30 June 2021. The loan was granted on certain conditions which had all been
met on 1 July 2016. The loan was not designated as measured at fair value
through profit or loss on initial recognition. The prevailing market interest rate
as on 1 July 2016 was 11% per annum.
The amount received was credited to loan and finance cost for the year has been
recorded @ 6%. (03)
 Advanced Accounting and Financial Reporting Page 5 of 6

(iii) On 1 January 2017, GL entered into a contract for the sale of a plant to Tahir
Limited for Rs. 100 million when the carrying value and remaining useful life of
the plant were Rs. 80 million and 10 years respectively. Though the plant is still
in use of GL, it was immediately derecognised from the books. Under the terms
of agreement, GL has the option to repurchase the plant by 31 December 2018
at Rs. 123.21 million. (04)
(iv) As at 30 June 2017, dismantling cost relating to a plant has increased from
initial estimate of Rs. 30 million to Rs. 40 million. Further, fair value of the
plant on that date was assessed at Rs. 112 million (net of dismantling cost). No
accounting entries have been made in respect of increase in dismantling liability
and revaluation of the plant.
The plant had a useful life of 5 years when it was purchased on 1 July 2015. The
carrying value of plant and related revaluation surplus included in the financial
statements are Rs. 135.4 million (after depreciation for the year ended
30 June 2017) and Rs. 3.15 million (after transferring incremental depreciation
for the year ended 30 June 2017) respectively.
Applicable discount rate is 8% per annum. (04)
Required:
Determine the revised amounts of profit before tax, total assets and total liabilities
after incorporating the impact of above adjustments, if any.
(b) On receiving the revised financial statements, the CEO called Faraz and briefed him
in the following manner:
“Since the position of the CFO is vacant, I intend to promote you as CFO.
GL has been through a rough year and has some disappointing results but a
reasonable profit needs to be reported for the mutual benefit of all
stakeholders. Moreover, the financial statements would also be scrutinized
by the bank to ensure that the loan covenants are met which include
maintaining total assets at 1.5 times the total liabilities.
Therefore, I want you to confirm the draft financial statements without
making any adjustment for presentation before the Board and submission to
the bank.”
Required:
Briefly explain the potential threats that Faraz may face in the above situation and
how he should respond. (04)

Q.6 (a) Following are the details of lease related transactions of Patel Limited (PL):
(i) On 1 July 2015 PL acquired a plant for lease term of 5 years at Rs. 18 million
per annum, payable in arrears. Fair value and useful life of this plant as on
1 July 2015 were Rs. 60 million and 6 years respectively. Bargain purchase
option at the end of lease term would be exercisable at Rs. 1 million. On
1 July 2015 PL’s incremental borrowing rate was 9% per annum.
After one year, PL sub-let this plant for Rs. 21 million per annum, payable in
arrears for lease term of 5 years. Implicit rate of this transaction was
11% per annum. (06)
(ii) On 1 July 2014, PL acquired a building for its head office for lease term of
8 years at Rs. 50 million per annum, payable in arrears.
However, after the board’s decision of constructing own head office building,
PL negotiated with the lessor and the lease contract was amended on
1 July 2016 by reducing the original lease term from 8 to 6 years with same
annual payments.
Incremental borrowing rates on 1 July 2014 and 1 July 2016 were 12% and
10% per annum respectively. (07)
 Advanced Accounting and Financial Reporting Page 6 of 6

Required:
Prepare the extracts relevant to the above transactions from PL’s statements of
financial position and profit or loss for the year ended 30 June 2017, in accordance
with the International Financial Reporting Standards. (Comparatives figures and notes
to the financial statements are not required)

(b) 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)

(The End)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

A.1 (a) (i) Impairment of CGU under IAS 36:

Fair value
Carrying Goodwill Impairment Impairment Total
Description less cost to
value impairment Round 1 *1 Round 2 *2 impairment
sell
------------------------------ Rs. in million ----------------------------
Building 22.00 21.70 *0.30 - 0.30
Machinery 15.00 16.00 *- - -
Equipment 19.00 3.86 4.38 8.24
License 20.00 18.00 *2.00 - 2.00
Investment property 22.00 22.00 *- - -
Investment property 8.00 1.62 1.84 3.46
Goodwill 3.00 3.00 - - 3.00
Inventory at NRV 8.00 8.00 *- - -
Carrying value 117.00 3.00 7.78 6.22 17.00
Recoverable amount (100.00)
Impairment required 17.00
Charged to profit or loss (17–0.30) 16.70
*1
Allocation of impairment loss in the ratio of 14(17-3) ÷ 69(22+19+20+8)
*2
Allocation of impairment loss in the ratio of 6.22(14-7.78) ÷ 27
*Restricted to fair value less cost to sell

(a) (ii) Impairment of Disposal group under IFRS 5:

Goodwill Impairment of
Description Carrying value
impairment scoped in assets*3
-------------------- Rs. in million --------------------
Building 22.00 4.98
Machinery 15.00 3.39
Equipment 19.00 4.30
License 20.00 4.52
Investment property 22.00 **-
Investment property 8.00 1.81
Goodwill 3.00 3.00 -
Inventory at NRV 8.00 **-
Carrying value 117.00 3.00 19.00
Fair value less cost to sell (95.00)
Impairment required 22.00
Charged to profit or loss 22.00
*3
Allocation of impairment loss in the ratio of 19(22-3) ÷ 84(22+15+19+20+8)
**No impairment is allocated due to scope out assets

(b) Principal market

Market A is the principal market because it has highest market share
Most advantageous market
Market C is the most advantageous market because it has highest exit price - net of
transportation cost and transaction cost of Rs. 28,200 per unit(W-1)
W-1 : Net proceeds to determine most advantageous market
Market A Market B Market C
Exit price (Rs. per unit) 29,500 30,500 29,600
Transport cost (Rs. per unit) (800) (1,000) (400)
Transaction cost (Rs. per unit) (700) (1,500) (1,000)
Net proceeds 28,000 28,000 28,200
Fair value of the asset in:
- Principal market (29,500 - 800) Rs. 28,700
- Most advantageous market (29,600 - 400) Rs. 29,200

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

A.2 Shakir Limited

Consolidated Statement of Financial Position
As on 30 June 2017
Rs. in million
Assets:
Property, plant & equipment (W-1) 28,233.0
Investment in ML (W-5) 1,980.0
Stock-in-trade [2,414 + 1,750 – 4(W-7)] 4,160.0
Trade & other receivables [2,200+1,800+120(W-8) ] 4,120.0
Cash and bank (1,600 + 1,900) 3,500.0
41,993.0
Equity & Liabilities
Share capital 20,000.0
Group reserves (W-2) 10,031.4
Non controlling interest (16,229 (W-7) × 40%) 6,491.6
Trade and other payables [4,400 + 1,070] 5,470.0
41,993.0

W-1: Property plant & Equipment: Rs. in million

SL 16,500.0
BL 11,000.0
Power generation plant [620 – 62 (620÷10)] 558.0
Fair value adjustment [200 – 25 (200 × 2 ÷ 16)] 175.0
28,233.0

W-2 : Group reserves

SL’s retained earnings 6,189.0
SL’s Share premium 1000.0
Impairment of ML’s goodwill [800 (W-4) × 20%] (160.0)
Post acquisition profit of ML
 Till last year [{5,600 – 4,500}(W-3) × 80%] 880.0
 For the year [700 × 60%] 420.0
Equity adjustment on sale of 20% shares of ML [1,188 – (5,600 (W-3) × 20%)] 68.0
Gain on further 35% disposal (W-5) 486.0
Reversal of gain on disposal of ML (W-6) (1,089.0)
Post acquisition profit – BL [3,429(W-7) × 60%] 2,057.4
Bargain purchase 180.0
10,031.4

W- 3: Net Assets of ML At reporting At 1 July 2016 At acquisition

------------------ Rs. in million ------------------
Share capital 2,200.0 2,200.0 2,200.0
Share Premium 900.0 900.0 900.0
Retained Earnings 3,200.0 2,500.0 1,400.0
6,300.0 5,600.0 4,500.0

W-4: Computation of Goodwill on acquisition of ML Rs. in million

Cash consideration 4,400.0
Less: Net assets acquired [4,500(W-3)×80%] (3,600.0)
Goodwill 800.0

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

W-5: Gain on part disposal of ML with losing control

Rs. in million
Consideration received 2,926.0
Fair value of residual investment [220×25%×36] 1,980.0
Net assets derecognized [6,300(W-3)×60%] 3,780.0
Goodwill derecognized (800–160) 640.0
Net assets sold (4,420.0)
Gain on disposal 486.0

W-6: Gain on sale of ML's shares in SL's books

20% disposal [1,188 – (4,400 × 20÷80)] 88.0
35% disposal [2,926 – (4,400 × 35÷80)] 1,001.0
1,089.0

W-7: Net assets of BL

At reporting At acquisition
--------- Rs. in million ---------
Share capital 10,000.0 10,000.0
Retained earnings 6,000.0 (Bal.) 2,600.0
Increase in fair value of building 175.0 200.0
(200×14÷16)
Share of profit from joint operation (W-8) 58.0 -
Unrealized profit of BL in SL's closing stock [44–(50×80%)] (4.0) -
16,229.0 12,800.0
(7,500+180)÷0.6

Post acquisition profit 3,429.0

W-8: Joint operation

Receivable from Joint operator (1100–670–130 ) × 40% 120.0
Depreciation expense (62.0)
BL’s share of profit of joint operation 58.0

A.3 (a) (i) IFRS for SMEs does not allow capitalization of borrowing cost. So capitalizing
interest cost of Rs. 0.3 million should be reversed and charged to profit and loss
account. Consequently, carrying amount of the building i.e. Rs. 3 million does not
exceed the recoverable amount of Rs. 3.1 million and therefore no impairment is
required.

(ii) IFRS for SMEs requires that investment properties must be measured subsequently at
fair value, (unless fair value cannot be measured reliably without undue cost or effort)
and PPE must be measured subsequently using the cost model. Based on this,
treatment of both shops should be as follows:

 Shop A should be classified as property, plant and equipment. Since revaluation

model is not allowed, revaluation surplus of Rs. 1.125 million [6 – (5×0.975)]
related to this shop should be reversed.

 Shop B should be classified as investment property. Therefore fair value model is

appropriate as being followed by the company. However, depreciation should
not be computed under revaluation model of investment property so depreciation
expense of Rs. 0.1 million (4×5%×50%) and incorrect revaluation of Rs. 1.1
million [5 – (4×97.5%)] should be reversed and increase in fair value of Rs. 1
million should be credited to profit or loss account.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

(b) Karachi Bank Limited

Statement of financial position
As on 31 December 2016

Assets: Rs. in million

Cash and balances with treasury banks (9,100+14,500+700+2,300+68) 26,668
Balances with other banks (412+311+1,400) 2,123
Lending to financial institutions (650+6,100) 6,750
Investments – net (24,500+1,200+1,800–222) 27,278
Advances – net (114,200+4,900+679-6,678) 113,101
Operating fixed assets 24,700
Other assets (21,450+3189) 24,639
225,259

A.4 LSL
General Journal
Debit Credit
Date Particulars
Rs. in million
1-Jan-2016 Debentures (W-1) 9.63
Equity (W-3) 1.43
Cash (0.1×107) 10.70
Debt settlement gain (Balancing) 0.36

31-Dec-2016 Finance cost (W-1) 6.06

Cash (W-1) 5.40
Debentures (Balancing) 0.66

W-1: Movement of liability Rs. in million

Initial amount (W-2) 95.57
Finance cost accrued 2015 (95.57 × 7%) 6.69
Finance cost paid 2015 (100 × 6%) (6.00)
Liability at the end of 2015 96.26
10% redeemed (96.26 × 10%) (9.63)
Liability after redemption 86.63
Finance cost accrued 2016 (86.63 × 7%) 6.06
Finance cost paid 2016 (90 × 6%) (5.40)
Liability at the end 2016 87.29

W-2: Liability component (1 January 2015)

PV at 7% of
 interest payments for 2015-2019 (100 × 6% × 4.1001) 24.60
 principal payment at end of 2019 (50 × 0.7130) 35.65
 interest payments for 2020 (50 × 6% × 0.6663) 2.00
 principal payment at end of 2020 ((50 × 0.6663) 33.32
Liability component 95.57

W-3: Equity component repurchased

Total payment (0.1 × 107) 10.70
Fair value of liability repurchased [92.69 (W-4) × 10%] (9.27)
1.43

W-4: Fair value of liability component (1 January 2016)

PV at 8% of
 interest payments for 2016-2019 ((100 × 6% × 3.3121) 19.87
 principal payment at end of 2019 (50 × 0.7350) 36.75
 interest payments for 2020 (50 × 6% × 0.6806) 2.04
 principal payment at end of 2020 (50 × 0.6806) 34.03
92.69

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

A.5 (a) Impact on

Net Total Total
profit assets liabilities
----------- Rs. in million -----------
As per question 125.00 1,420.00 925.00

(i) NRV adjustment (W-1) (8.40) (8.40)

Onerous contract of product B (8000 × 200) (1.60) 1.60

(ii) Govt. grant (W-2) 9.24 (9.24)

Finance cost[(40.76 × 11%) – (50 × 6%)] (1.48) 1.48

(iii) Reversal of disposal (20.00) 80.00 100.00

Depreciation (80 ÷ 10) × 6/12 (4.00) (4.00)
Finance cost 100 × 11%*× 6/12 (5.50) 5.50
*√( )

(iv) Revaluation of plant (W-3) 8.35

Increase in provision (W-3) 7.94
Revised Amounts 93.26 1,495.95 1,032.28

W-1: NRV adjustment Product A Product B

Total
Committed Normal Committed
---------------- Rs. in million ----------------
Cost 30.00 20.00 30.00
(28.8) (18.80) (24.00)
NRV 3,000×(9,800-200) 2,000×(9,700-300) 20,000×(1,300-100)
1.20 1.20 6.00 8.40

W-2: Government grant

Rs. in million
Total proceeds 50.00
PV at market interest rate of 11% [(50 × 6% × 3.6959) + (50 × 0.5934)] (40.76)
Component of Government grant 9.24

W-3: Revaluation of plant

Rs. in million
Net Revalued amount 112.00
PV of revised dismantling cost (40 × 0.7938) 31.75
Gross revalued amount 143.75
Carrying amount as on 30 June 2017 (135.40)
Increase in value of plant 8.35
Increase in dismantling cost 10÷(1.08)3 (7.94)
Revaluation surplus balance 3.15
(4.79)
Revaluation surplus 3.56

(b) In the given situation, Faraz may face following threats:

(i) Self-interest threat
Self-interest threat occurs as Faraz has been told by the CEO that he would be
promoted to CFO.

(ii) Intimidation threat

Faraz may quit this job if he would not confirm the draft financial statement as
per CEO’s instructions.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

Available safeguards:
Where it is not possible to reduce the threats to an acceptable level, Faraz:
(i) should refuse to remain associated with information which is or may be
misleading
(ii) should consider to consult with superiors such as audit committee or those
charged with governance or with a relevant professional body.
(iii) seek legal advice or may resign.

A.6 (a) Patel Limited

Statement of financial position
As on 30 June 2017

Assets Rs. in million

Non current assets
Net investment in lease (W-2) 51.32
Right of use asset (W-4) 98.10

Current assets
Current portion of net investment in lease [21– 7.17 (W-2)] 13.83

Non current liabilities

Lease liabilities [32.50 (W-1) + 86.77 (W-3)] 119.27

Current liabilities
Lease liabilities [13.83 (18 – 4.17)(W-1) + 37.57 (50 – 12.43) (W-3)] 51.40

Patel Limited
Statement of profit or loss
For the year ended 30 June 2017
Rs. in million
Gain on sub-lease (W-6) 18.73
Depreciation (W-4) 32.70
Finance charges [5.31(W-1) + 15.85 (W-3)] 21.16
Finance income (W-2) 8.54
Loss on decrease in lease term of building (W-5) 8.40

W-1: Amortization schedule of lease – plant

Interest Instalment Principal o/s
Date
-------------------- Rs. in million --------------------
1-Jul-15 *1
70.66
30-Jun-16 6.36 18.00 59.02
30-Jun-17 5.31 18.00 46.34
30-Jun-18 4.17 18.00 32.50
*1
{ ( ) } + [1× (1.09) 5 ]

W-2: Amortization schedule of sub lease – plant

Interest Instalment Principal o/s
Date
-------------------- Rs. in million --------------------
30-Jun-16 *2
77.61
30-Jun-17 8.54 21.00 65.15
30-Jun-18 7.17 21.00 51.32
*2
{ ( ) }

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

W -3 : Amortization schedule of lease - Building (After modification)

Interest Instalment Principal o/s
Date
-------------------- Rs. in million --------------------
1-Jul-16 158.49
30-Jun-17 15.85 50 124.34
30-Jun-18 12.43 50 86.77

W-4 : Computation of right of use (ROU) asset (after modification)

Rs. in million
ROU assets – 1 July 2014 [50 × 4.9676 [{1– (1.12)-8÷0.12}] 248.38
Depreciation for two years (248.38 ÷ 8 × 2) (62.10)
ROU (before modification) – 1 July 2016 186.28
ROU derecognized due to reduction in lease term (186.29 ÷ 6 × 2) (62.10)
124.18
Increase in ROU due to decrease in borrowing rate
 PV of liability for remaining 4 years at 10% (50 × 3.1699) 158.49
 PV of liability for remaining 4 years at 12% (50 × 3.0373) (151.87)
6.62
ROU after modification – 1 July 2016 130.80
Depreciation for the year – 2016-17 (130.80 ÷ 4) 32.70
98.10

W-5 : Computation of loss on decrease in lease term of building

Decrease in lease liability [205.57(50 × 4.1114) – 151.87(W-4)] 53.70
ROU derecognized (186.29 ÷ 6 × 2) (62.10)
Loss on decrease in lease term (8.40)

W-6 : Gain on sub lease

Net investment in sub lease [{1– (1.11)-5÷0.11}]× 21 77.61
Carrying value of ROU derecognized (70.66 ÷ 6 × 5) (58.88)
Gain on sub lease 18.73

(b) Amount to be charged to the profit or loss in respect of the share option scheme is as
follows:
1,000 Note-1 × (500 × 85%) Note-2 × 38 Note-3 × (1÷5) Note-4 = 3,230,000

Note-1: Vesting conditions, other than market conditions, shall be taken into
account by adjusting the number of equity instruments included in the
measurement of the transaction amount. Average sales would be Rs. 312.55
million (W-1) over five years which is more than the minimum average
sales of Rs. 300 million.
Note-2: Service condition shall be taken into account by adjusting the number of
equity instruments included in the measurement of the transaction amount.
In respect of service condition, management estimates that 15% of the
employees would leave the organization over the vesting period of five years so
provision would be made for 85% of employees i.e. 425 (500 × 85%)
Note-3: Only market condition shall be taken into account when estimating the fair
value of the share options at the measurement date. Subsequent changes in
the probability of meeting the condition have no impact and are ignored.
Note-4: The expense will be spread over the vesting period of 5 years.

In light of above, Rs. 3.23 million should be debited to P & L account and credited to
equity account.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

W1: Average sales:

Year Sales
2017 210.00
2018 252.00
2019 302.40
2020 362.88
2021 435.46
Average 312.55

(The End)

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 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Winter 2017

General:

The overall passing ratio of 17% in this attempt was far better than the last two results of
5.4% and 8.9%. A significant number of students (12%) were just short of 9 or fewer
marks and could have easily obtained them had they have covered all areas of the
syllabus. There were many strong individual performances by some truly impressive
students and one of them secured Gold Medal for the brilliant performance.

Performance in Q2 (consolidation) & Q6 (IFRS 16 & IFRS 2) was above average. Q4

(Financial Instruments) proved to be the result defining question of this paper. Though
the full question was based on an example given in part B of IFRSs which were available
in examination hall, 66% of the students could not even secure 20% marks in the
question due to selective studies. Poor performance was also witnessed in Q5
(Miscellaneous situations).

Students appear to struggle in applying their knowledge when questions are presented
differently. Although students use past papers as a key element of their examination
preparation but they should remember that topics/sub-topics/variations not covered in
past papers are still examinable. In this paper, variations / sub-topics in question 1b, 3a, 4
& 5a were examined for the first time and therefore the students’ performance in those
questions was below average.

Poor time management was observed in most of the copies. Q6 was an easier but lengthy
question. Students who attempted Question 6 at the start appeared to have consumed too
much time considering it as an easy question and were found struggling in attempting all
questions. Students are advised to switch to the next question once they have spent a
reasonable time on a question. There are some other examination technique issues that
need to be improved which would have lifted many marginal fails into the pass category.
Many students are failing because of technique rather than knowledge or ability.

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 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2017

Question-wise comments:

Question 1

This question consisted of two parts. The overall passing percentage in this question was
21%. Part wise comments are given below:

Part (a)

This part of the question required computation of impairment in the case of a CGU and
allocation of the impairment among different assets of the CGU & amount to be charged
to profit or loss account under two independent situations i.e. treatment as CGU under
IAS 36 and treatment as Disposal group under IFRS 5.

Students generally performed well in allocating impairment under IAS 36 but could not
identify the difference of allocation under IFRS 5.

The common mistakes observed were as follows:

Impairment under IAS 36:

 Allocated impairment was not restricted to ensure that the carrying value of an
individual asset is not reduced below the fair value less cost to sell.
 All the impairment was charged to profit and loss. The loss allocated to Building
carried at revalued amount should have been charged to revaluation surplus.

Impairment under IFRS 5:

 Impairment was allocated to inventory carried at NRV and investment property

carried at fair value though provisions of IFRS 5 do not apply on them.
 Impairment charged to P&L was reduced by the amount of revaluation surplus.

Part (b)

This part of the question was based on IFRS 13. Since IFRS 13 was examined for the
first time, only few students could secure full marks and majority of the students were
totally unaware of the underlying concepts.

Question 2

The question required preparation of Consolidated Statement of Financial Position. 50%

of the students got passing marks. The question was attempted by almost all the students.
However, the copies suggested that they invested a lot of time on the question and
consequently were found struggling in completing the paper. The students generally have
a good working knowledge of consolidation techniques and many students achieved high
marks. Many strong performances were also witnessed in this question with 10%
students scoring more than 80% marks. The common mistakes were as follows:

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 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2017

Accounting for disposal of ML:

 Equity adjustment on sale of 20% shares of ML was not reflected in Group reserves.
 Gain recorded in the books of SL on sale of ML was either not computed or
incorrectly computed. Also, such gain was not reversed / deducted in computing the
group reserves.
 Post-acquisition earning of ML was not included in group reserves. Majority of those
who included it, did not compute the correct amount.

Consolidating BL:

 Retained earnings at acquisition were incorrectly calculated.

 Adjustment for unrealized profit from stock in trade was made for Rs. 10 million
instead of Rs. 4 million. The fact that Rs. 6 million had already been adjusted by
parent on account of NRV adjustment was ignored.

Joint operation of BL:

 The power generation plant was not included in property, plant and equipment.
Moreover, few students included the full value of this plant rather than taking the
40% share.
 Receivable from Joint operator was not reflected in statement of financial position.
 BL’s share of profit of joint operation was not added in BL’s net assets at reporting
date.
 Depreciation was not deducted in computing income from Joint operation.

Question 3

This question consisted of two parts. The overall passing percentage in this question was
18% while 37% of the students did not appear to have any understanding of the topics
and scored less than 20% marks. However, the poor performance was mainly because of
part (a) as performance in part (b) was much better. Part wise comments are given below:

Part (a)

This part of the question was based on IFRSs for SMEs and was further sub-divided into
two sub-parts. The area was examined for the first time in the paper and majority of the
students were found totally unaware of this syllabus area. Even those having idea of
IFRSs for SMEs could only identify the issues correctly but directly jumped to the
conclusion without proper explanation resulting in loss of precious marks. The common
errors were as follows:

 Students failed to identify that capitalization of borrowing cost is not allowed

according to IFRS for SMEs.
 Shop A was carried at revalued amount though revaluation of property, plant and
equipment is not allowed in IFRSs for SMEs.

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 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2017

Part (b)

This part of the question required preparation of statement of financial position of a

Bank. This part was generally well attempted. However, many students ignored the fact
that the format of Statement of Financial Position of a Bank is different from other
companies and did not use the relevant format. Further, many students wasted their time
in preparing notes to the financial statements which were not required.

Question 4

The question required accounting for redemption of a compound instrument. The

question was based on example 11 of part b of IAS 32. However, 44% of the students did
not attempt the question or secured zero marks which showed that they had not studied
the examined topic. Only 9% of the students could secure passing marks. The common
mistakes were as follows:

 While calculating the liability component on initial recognition, amount of interest

and principal for 2020 were not adjusted for the half repayment to be made in 2019.
 Fair value of redeemed liability on 1 January 2016 was not computed. Consequently,
incorrect accounting entries were passed, resulting in loss of all the marks allocated
to these computations.
 Various types of errors were made in recording partial redemption of liability.
 Finance cost for 2016 was computed at revised rate of 8% instead of 7%.

Question 5

To enhance the coverage of the syllabus, this question contained five short situations on
different topics. Four of them were included as sub-parts of part (a) whereas one of them
was related to code of ethics and was presented separately as part (b) of the question.
Many students could not attempt all the sub-parts and only 12% could secure passing
parks.

Part (a)

The requirement in this part was to explain the effect of the given issues on profit before
tax, total assets and total liabilities of the company. Performance in each sub-part is
discussed below:

Part (a)(i)

This sub-part tested the concepts of NRV adjustment and provision for onerous contract.
Majority of the students identified the need for NRV adjustment but most of them could
not calculate the amount of adjustment correctly. Further, only few candidates identified
the need for provision for onerous contract.

Part (a)(ii)

This sub-part required accounting for a Government loan provided at below market
interest rate. The element of Government grant in the loan was generally calculated
correctly but effects on profit and liabilities were shown incorrectly.

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 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2017

Part (a)(iii)

This sub-part pertained to a financing transaction through a call option. Most of the
students computed incorrect amounts. A common reason for the incorrect amounts was
that simple interest rate was used to record finance cost. Since contract period was two
years, compound rate should have been used.

Part (a)(iv)

This sub-part was based on accounting for change in decommissioning liability related to
an asset carried at revalued amount. This was the worst attempted part. Majority of the
students had no idea of the relevant guidelines provided in the IFRSs and thus gave
totally irrelevant answers.

Part (b)

This part of the question contained a scenario according to which the CEO of a company
offered promotion to a company’s employee who was a chartered accountant and in
return wanted him to prepare the financial statements in such a manner as to meet the
loan covenants and show better than actual results.

Majority of the students provided general answers to the question without relating it to
the given situation. Most of the answers were incomplete and only few students
identified all the relevant threats and safeguards.

Question 6

This question consisted of two parts. The overall passing percentage in this question was
37%. Part wise comments are given below:

Part (a)

This part of the question required extracts from financial statements based on the
information relating to the given lease transactions. The question was based on two
examples from part (B) of IFRS 16. Majority of the students attempted this question at
the start of the paper and it was generally well attempted. However, since only extracts
were required, certain amounts could have been calculated directly but students spent
time in carrying out detailed calculations which were unnecessary and put time pressure
on them.

The common mistakes were as follows:

Sub-leased plant:

 Bargain purchase option was not considered in calculating original lease liability
 Useful life of the plant was taken as 5 years instead of 6 years.
 Net investment in lease was not bifurcated between current and non-current portion.

Page 5 of 6
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2017

Modification of lease agreement of building:

 Revised discount rate was used to compute loss on decrease in the lease term of
building instead of original discount rate.
 Re-measurement of lease liability was ignored.

Part (b)

In this part of the question, the requirement was to discuss how the given transaction
(pertaining to share based payments – IFRS 2) would be recorded in the books of
account. Majority of the students correctly calculated the required amounts but did not
provide proper explanation. The common errors were as follows:

 Price of Rs. 36 was used which took into account both the conditions whereas the
price of Rs. 38 should have been taken.
 Many students wrongly concluded that the expense need not be recorded since the
target sales were not achieved till year end. However, the vesting was based on 5
years average sales which was still expected to be achieved at the year end.

(THE END)

Page 6 of 6
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2017

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a) (i)
Computation of impairment loss and its allocation to individual
assets (if any) 5.0

Calculation of the amount to be charged to profit or loss account 1.0

(ii)
Computation of impairment loss and its allocation to individual

assets (if any) 5.0

Calculation of the amount to be charged to profit or loss account 1.0

(b)
Identification of principal and most advantageous markets along with

reasons 2.0

Computation of fair value of the asset under each market 1.0

A.2 Computation, presentation and disclosures of:

Property, plant and equipment 2.0

Group reserves 5.5

Non-controlling interest 1.0

Other assets and liabilities 3.0

Gain on part disposal (with and without losing control) of ML 4.5

Net profit of joint operation 4.0

Post-acquisition profit of BL 3.0

Accounting for associate 2.0

A.3 (a) (i) Accounting treatment of borrowing cost 2.0

(ii)
Classification and subsequent measurement of property, plant and

equipment 2.0

Classification and subsequent measurement of investment property 2.0

(b) Presentation relating to:

Cash and balances with treasury banks 1.0

Balance with other banks 0.5

Lending to financial institutions 0.5

Investments 1.0

Advances 1.0

Operating fixed assets 0.5

Other assets 0.5

A.4
Computation of:

− liability component of convertible debentures at issue date 2.0
− repurchase of liability and equity components 3.5
− determination of finance costs 1.5

Accounting entries to record:
− repurchase of liability and equity components 3.5
− finance cost 1.5

Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2017

Mark(s)
A.5 (a) (i) Determination of:

NRV adjustments for inventories 2.0

provision for onerous contract 1.0

impact on profit before tax, total assets and total liabilities 1.0

(ii) Determination of:

government grant and its amortization 2.0

impact on profit before tax, total assets and total liabilities 1.0

(iii)
Computation of depreciation and finance cost 1.5

Determination of impact on profit before tax, total assets and total
liabilities 2.5

(iv) Determination of:

increase in dismantling cost 1.0

revaluation surplus 2.0

impact on profit before tax, total assets and total liabilities 1.0

(b)
Explanation of potential threats involved 2.0

Discussion on available safeguards 2.0

A.6 (a) (i) Preparation of extracts from statements of financial position and profit or
loss for:

net investment in lease 2.0

lease liabilities 2.0

gain on sub-lease 1.0

finance charges/income 1.0

(ii) Preparation of extracts from statements of financial position and profit or

loss for:

right of use asset (after modification) 3.0

loss on decrease in lease term 1.5

lease liabilities 2.0

finance charges 0.5

(b) Discussion on accounting treatment of share options related to:

non-market related condition 2.0

market related condition 2.0

vesting period 1.0

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 4 June 2018

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 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 Term Finance
Certificates (TFCs) of Rs. 100 each. Interest is payable annually on 31 December
whereas the principal is to be paid at the end of 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)
 Advanced Accounting and Financial Reporting Page 2 of 6

Q.2 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:
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 investments are as follows:
Cost of Retained earnings
Date of
Investor % holding Investee investment of investee
investment
------ Rs. in million ------
1-Jan-2015 AL 65% BL 3,100 520
1-Apr-2017 AL 10% BL 440 815
30-Jun-2017 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 December 2017:
Rs. in million
Contribution paid 70
Benefits paid 55
Current service cost 85
Re-measurement gain 10
 Advanced Accounting and Financial Reporting Page 3 of 6

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)

Q.3 Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for
the year ended 31 December 2017. Following transactions were carried out during the year.

(i) Foreign currency transactions:

KL purchased an investment property in United States for USD 2.6 million. 10%
advance payment was made on 1 May 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:

Date 1-May-2017 1-Jul-2017 1-Aug-2017 1-Sept-2017 31-Dec-2017
USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs. 116

Following average exchange rates are also available:

Period 2017 Jul to Dec 2017 Sep to Dec 2017
USD 1 Rs. 105 Rs. 111 Rs. 113 (06)

(ii) Equity investments:

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:
Fair Transaction cost Net
value on disposal amount
------------- Rs. in million -------------
Investment A 105 2.1 102.9
Investment B 130 2.6 127.4 (07)
 Advanced Accounting and Financial Reporting Page 4 of 6

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)

Q.4 Draft consolidated financial statements of Hawks Limited (HL) for the year ended
31 December 2017 show the following amounts:
Rs. in million
Total assets 2,500
Total liabilities 1,610
Total comprehensive income 659
During the process of finalisation, following matters have been noted:
(i) HL signed a contract with one of its customers, Rhino Limited (RL). Under the terms
of the contract, HL is required to:

produce a series of 5 television advertisements. Each completed advertisement
has to be approved by an independent agency for a minimum 3-star rating. After
approval, copy of the advertisement would be provided to RL who can then use
it for other campaigns. HL has no enforceable right to payment against any
under production advertisement.

arrange airtime of 120 minutes for broadcasting of each advertisement. The
primary responsibility for broadcasting of these advertisements lies with HL.
HL is entitled to Rs. 80 million for the whole contract and bonus of Rs. 2 million for
each advertisement if a 5-star rating is attained.
HL considers all advertisements as equal units. The expected cost of producing each
advertisement and its broadcasting is Rs. 5 million and Rs. 9 million respectively. HL
expects to earn mark-up of 30% and 20% respectively on similar services to other
clients. Historically, advertisements produced by HL have received the minimum
3-star rating but 5-star rating is received occasionally.
As at 31 December 2017:

production of 3 advertisements has been completed. Two of them have received
5-star rating whereas one has received 3-star rating. HL expects that at least one of
the remaining advertisements would get 5-star ratings.

broadcasting of first two advertisements has been completed whereas 70% time of
the third advertisement has been broadcasted. Bookings have been made for the
broadcasting of remaining time of third advertisement and entire time of fourth
advertisement.

details of the actual cost incurred on this project are as follows:
Production cost Broadcasting cost
Advertisement
----------- Rs. in million -----------
1 4.7 8.5
2 5.6 9.2
3 4.8 8.9
4 3.1* 9.0
* in process
All the above costs have been paid and charged to profit or loss account. HL had
received Rs. 40 million from RL by 31 December 2017 which has been credited to
advance from customers account. (08)
(ii) On 31 December 2017 HL disposed of 2.2 million shares of Snake Limited (SL) for
Rs. 290 million. HL had acquired 3 million shares of SL at fair value on
1 January 2015. SL’s paid-up capital consists of 10 million shares. Due to recurring
losses made by SL, HL had booked impairment of Rs. 90 million against this
investment on 31 December 2016.
 Advanced Accounting and Financial Reporting Page 5 of 6

Fair value per share and retained earnings of SL at respective dates were as follows:
Fair value Retained earnings
Date
Rs. per share Rs. in million
1 January 2015 200 1,700
31 December 2016 118 1,200
31 December 2017 128 1,350

Disposal proceeds have been credited to profit or loss account. No other adjustment
has been made during the year ended 31 December 2017. (05)

Required:
Determine the revised amounts of total assets, total liabilities and total comprehensive
income after incorporating impact of the above adjustments, if any.

Q.5 Following information is available from the records of Leopard Income Fund (an open
ended mutual fund) for the year ended 30 June 20X8:
(i) Undistributed income as at 1 July 20X7 comprised of realised and unrealised income
of Rs. 97 million and Rs. 7 million respectively.
(ii) Total net assets at 1 July 20X7 amounted to Rs. 9,752 million.
(iii) Allocation of net income for the year is as follows:
Rs. in million
Total comprehensive income 214
Income already paid on units redeemed (50)
164
(iv) Accounting income available for distribution relating to capital gains and other than
capital gains amounts to Rs. 3 million and Rs. 161 million respectively.
(v) Distribution during the year amounted to Rs. 150 million.
(vi) Details of issuance and redemption of units during the year are as follows:
Issuance Redemption
Units in million 388 441
----- Rs. in million -----
Capital value 7,372 (8,382)
Element of income /(loss) 70 (64)*
7,442 (8,446)
*including Rs. 50 million of income already paid on units redeemed

(vii) Unrealized loss included in undistributed income as at 30 June 20X8 amounted to

Rs. 4 million.

Required:
Prepare a statement of movement in unit holders’ fund for the year ended 30 June 20X8.
(Ignore disclosure of comparative figures and net assets value per unit) (10)

Q.6 During the year ended 31 December 2017, following transactions were made by
Zebra Limited (ZL):
(i) 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 1-Oct-2017 31-Dec-2017 28-Feb-2018 30-Apr-2018
Fair value per share Rs. 3,000 Rs. 2,900 Rs. 3,300 Rs. 3,400 (04)
 Advanced Accounting and Financial Reporting Page 6 of 6

(ii) 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. (05)

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

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

Quarter ended Half year ended

31-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 earnings per share 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)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

A.1 Elephant Limited

Notes to the financial statement
For the year ended 31 December 2017

Taxation Rs. in million

Current tax (W-1) 22.12
Deferred tax 8.45
30.57

Reconciliation between tax expense and accounting

Rs. in million Alternate
profit
Accounting profit 103
Tax at applicable rate / applicable tax rate 30.90 30.00%
Donations not allowable (12 × 30%) 3.60 3.50%
Exempt grant (10 × 30%) (3.00) (2.91%)
Low rate on dividend (4 × 20%) (0.80) (0.78%)
Share scheme expense not allowed
[4.5 – 3.25{(150-20)×5,000×10}÷2] × 30% 0.37 0.36%
Effect of decrease in tax rate on opening deferred tax
liability [(3.5/0.35) × (0.35 – 0.3)] (0.50) (0.49%)
Tax expense / Average effective tax rate 30.57 29.68%

Movement in deferred tax liability/asset

Recognised in
Opening Closing
Equity OCI P&L (Bal.)
----------------------------------- Rs. in million -----------------------------------
Arising in respect of:
PPE 33.25 18.00 (10.75) 40.50
(60×30%) (95–20+60)×30%
Unused tax losses (29.75) 29.75 -
Unpaid expense - (9.00) (9.00)
(30×30%)
Share scheme - (0.98) (0.98)
[(150–20)×5,000×10]/ 2×30%
TFCs 2.73 (0.57) 2.16
[9.11(150–140.89)×30%] [150- (140.89+1.91)]×30%
OR (9.11-1.91)×30%
3.50 2.73 18.00 8.45 32.68

W-1: Computation of current tax Rs. in million

Accounting profit 103.00
Donations not allowable 12.00
Unpaid expenses allowable upon payment 30.00
Exempt government grant (10.00)
Dividend income taxable at lower rate (4.00)
Excess accounting depreciation 20.00
Shares scheme allowable on exercise (180 × 5,000 × 10) / 2 4.50
Finance cost on TFC (140.89 (W-2) × 12%) 16.91
Interest payment (150×10%) (15.00)
Taxable income 157.41
Unused tax losses (85.00)
72.41
Tax @ 30% 21.72
Tax @ 10% on dividend 0.40
Current tax 22.12

W-2: Computation of liability component Rs. in million

PV of interest amount (15 × 3.0373) 45.56
PV of principal (150 × 0.6355) 95.33
Liability component 140.89

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

A.2 Ant Limited

Consolidated Statement of Financial Position
As on 31 December 2017

Assets: Rs. in million

Property, plant and equipment [3,510+2,835+ 2,200– (20 – 6(W-1))] 8,531.00
Goodwill [175 (W-2) + 108 (W-4)] 283.00
Investment property (130 + 45 + 5(W-1)+ 8(W-1)) 188.00
Current assets (2,120 + 1,420 + 2,800) 6,340.00
Total Assets 15,342.00

Equity and liabilities

Share capital 5,500.00
Group reserves (W-5) 2,476.75
NCI (W-7) 2,631.25
Gratuity [25 + 8 (W-9)] 33.00
Current liabilities (1,775 + 1,386+ 1,500+ 40(W-3)) 4,701.00
Total equity and liabilities 15,342.00

W-1: Net Assets – BL Acquisition Reporting

1-Apr-17
date date
-------------- Rs. in million --------------
Share capital 4,000.00 4,000.00 4,000.00
Retained earnings 520.00 815.00 1,314.00
Decrease in FV of machine (20.00) (20.00) (20.00)
Depreciation expense (20×10%×2.25), (20×10%×3) - 4.50 6.00
Adjustment for uniform accounting policy [58-45] - - 13.00
4,500.00 4,799.50 5,313.00

Post acquisition profit 299.50 513.50

W-2: Goodwill – BL Rs. in million

Cost 3,100
Net assets (4,500 (W-1) × 65%) (2,925)
175

W-3: Net Assets – FL Acquisition date Reporting date

---------- Rs. in million ----------
Share capital 2,500 2,500
Retained earnings 1,150 1,000
Contingent liability (50) (40)
3,600 3,460
Post-acquisition loss (140)

W-4: Goodwill – FL Rs. in million

Cost (2,400×75%) 1,800
Net assets [3,600 × 45%(60%×75%)] (1,620)
On acquisition 180
Impairment (W-8) (72)
On reporting date 108

Page 2 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

W-5: Group reserves Rs. in million

AL 2,000.00
Post acquisition - BL (Up to Mar 2017) - [(299.5 (W-1) × 65%) 194.68
(Apr to Dec 2017) (513.5 (W-1) × 75%)] 385.12
Post acquisition - FL (140 (W-3) × 45%) (63.00)
Equity adjustment on further holding of 10% (W-6) 39.95
Gratuity expense (W-9) (8.00)
Impairment of goodwill of FL (W-8) (72.00)
2,476.75

W-6: Equity adjustment on further holding of 10% Rs. in million

Net assets acquired (4,799.5 (W-1) × 10%) 479.95
Cost (440.00)
Increase in equity 39.95

W-7: NCI Rs. in million

Acquisition - BL (4,500 × 35%) 1,575.00
Post acquisition (Up to Mar 2017) - BL [(299.5 (W-1) × 35%) 104.82
(Apr to Dec 2017) (513.5 (W-1) × 25%)] 128.38
10% further acquisition (4,799.5 (W-1) × 10%) (479.95)
Acquisition - FL (3,600 × 55%) 1,980.00
Post acquisition - FL (140 (W-3) × 55%) (77.00)
Indirect holding (2,400 × 25%) (600.00)
2,631.25

W-8: Impairment of Goodwill - FL Rs. in million

Grossing up of goodwill (180/0.45) 400
Net assets on 31 December 2017 (W-3) 3,460
3,860
Recoverable amount (3,700)
Notional write off 160
Impairment to be recorded (160 × 45%) 72

W-9: Gratuity scheme Rs. in million

Charge for the year (P&L and OCI)
Current service cost 85
Interest cost (25×12%) 3
Re-measurement gain (10)
78
Already charged to P&L
Contribution paid (70)
Net increase 8

Page 3 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

A.3 Kangaroo Limited

Statement of Financial Position
As on 31 December 2017

Assets Rs. in million

Investment property (W-1) 290.00
Investments (105 + 130) (W-2) 235.00

Liabilities
Unearned rent (0.24 × 8 ÷12 × 110) 17.60

Statement of comprehensive income

For the year ended 31 December 2017

Profit and Loss account Rs. in million

Exchange loss on 20% payment (2.6 × 20% × (105 – 108) (1.56)
Increase in fair value of investment property (W-1) 18.30
Rent income (0.24 × 4÷12 × 110) 8.80
Transaction cost – Investment-A (2.00)
Dividend income (12 + 9) 21.00
Realised gain on investment-A [(23 × 0.98 – (100 × 20%)] 2.54
Unrealised Gain – Investment-A (W-2) 25.00

Other comprehensive income

Unrealized gain- Investment-B (W-2) 22.90
Realised gain on investment-B [(50 × 0.98 – (153 × 0.3)] 3.10

W-1: Investment property Rs. in million

Advance payment (2.6 × 10% × 100) 26.00
Initial recognition (2.6 × 70% × 105) 191.10
(2.6 × 20% × 105) 54.60
Total cost 271.70
Fair value (2.5 × 116) 290.00
Gain (P & L) 18.30

W-2: Investments Investment A Investment B

--------- Rs. in million ---------
Purchase price 100.00 150.00
Transaction cost 3.00
Total cost 100.00 153.00
Cost of shares held at 31 Dec 2017 (100×80%) 80.00 (153×70%)107.10
Fair value - 31 Dec 2017 105.00 130.00
Gain 25.00 22.90

Page 4 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

A.4 Total
Total
Total assets comprehensive
liabilities
income
--------------- Rs. in million ---------------
Given 2,500.00 1,610.00 659.00

(i) Revenue
Revenue to be booked (W-1) 9.00 (40.00) 49.00
Contract cost (W-2.1) 14.77 14.77
23.77 (40.00) 63.77
(ii) Investment in associate
Share of profit during 2017 (W-3) 45.00 45.00
Disposal (W-3) (302.60) (302.60)
(257.60) (257.60)
Revised amounts 2,266.17 1,570.00 465.17

W-1: Revenue to be recognized

Bonus for higher Total revenue to
Revenue to be booked
rating be booked
----------------------- Rs. in million -----------------------
Advertisement (at point of time) [3×6.01(W-2)] 18.03 4.00 22.03
Broadcasting (over the time) [(2.7×9.99(W-2)] 26.97 26.97
49.00

W-2: Allocation of transaction price

Standalone price Contract price Revenue per unit
Proportion
(Rs. in million) (Rs. in million) (Rs. in million)
Advertisement (5×1.3×5)32.5 37.57% 30.06 OR 6.01
Broadcasting (9×1.2×5)54.0 62.43% 49.94 9.99
86.5 100% 80.00

W-2.1: Contract cost

Advertisement Broadcasting Total
------------------------------ Rs. in million ------------------------------
Total 18.20 35.60 53.80
Charged to P & L (15.10) (23.93) (39.03)
(8.5+9.2)+(8.9×0.7)
3.1 11.67 14.77
[9+(8.9×0.3)]

W-3: Disposal of associate Rs. in million

Disposal proceeds 290.00
FV of investment retained (0.8 × 128) 102.40
392.40
Carrying amount as at 31 December 2017 (W-4) (405.00)
Loss on disposal of associates 12.60
Gain already recorded to be reversed 290.00
302.60

W-4: Carrying amount of associate Rs. in million

Cost (3 × 200) 600.00
Share of loss till 31 December 2016 [(1200 – 1700 ) × 30%] (150.00)
Impairment (90.00)
Carrying amount as at 31 December 2016 360.00
Share of profit for 2017 [(1350 – 1200) × 30%] 45.00
Carrying amount as at 31 December 2017 405.00

Page 5 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

A.5 Leopard Income Fund

Statement of movement in Unit Holders’ Fund
For the year ended 30 June 20X8
Capital Undistributed
Total
value income
----------------- Rs. in million -----------------
Net assets at beginning of the year 9,648 104 9,752
Issuance of 388 million units:
Capital value 7,372 - 7,372
Element of income 70 - 70
Total proceeds on issuance of units 7,442 - 7,442

Redemption of 441 million units:

Capital value (8,382) (8,382)
Element of loss (14) (50) (64)
Total payment of redemption of units (8,396) (50) (8,446)

Total comprehensive income for the year - 214 214

Distribution during the year - (150) (150)
Net assets at end of the year 8,694 118 8,812

Undistributed income brought forward

Realized income 97
Unrealized income 7
104
Accounting income available for distribution
Relating to capital gain 3
Excluding capital gain 161
164
Distribution during the year (150)
Undistributed income carried forward 118

Undistributed income carried forward

Realized income 122
Unrealized loss (4)
118

A.6 (i) Since ZL has granted the supplier the right to choose whether the share-based
transaction is settled in cash or by issuing equity instruments, the entity has granted a
compound financial instrument.

Since the fair value of land is available so the Land will be recorded at
Rs. 230 million and corresponding effect will be taken to liability to the extent of Rs.
210 million (fair value of the debt component on 1 October 2017 i.e. 7,000 shares ×
3,000 per share) and remaining Rs. 20 million to the equity.

On 31 December 2017 the liability will be remeasured in accordance with the

prevailing fair value of HL’s share to Rs. 203 million (i.e. 7,000 × 2,900) and the
resulting decrease of Rs. 7 million will be credited to Profit and loss account.

(ii) Since a part of the payment for the license has been deferred beyond normal credit
terms so the license will be initially recognised at cash price equivalent of Rs. 80
million i.e. Rs. 50 million plus Rs. 30 million (i.e. present value of Rs. 36.3 million
discounted at 10% for 2 years.)
Page 6 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

The advertisement cost of Rs. 10 million incurred on launching of the channel cannot
be included in the cost of the license and will be charged to Profit and loss account.

Since the renewal cost is significant so the useful life of the license will be restricted to
the original 5 years only.

The residual value of the license will be assumed to be zero since there is no active
market for the license and there is no commitment by 3rd party to purchase the license
at the end of useful life.

The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated
from 1 April 2017 when the license was available for use:

Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded
with increasing the liability of payable for license with same amount.

A.7 (a) Tiger Limited

EPS for quarter ended 31 December 2017

Numerator Denominator EPS Effect

Rs. in million Shares in million Rs. / share
Basic EPS 140.00 24.80 (W-1) 5.65
Warrant - - No effect
140.00 24.80 5.65
Bonds 8.05 1.60 5.03
(W-3) 0.8(2.4 ×1/3)+0.8(1.2×2/3)
OR 1.2+0.4(1.2÷3)
148.05 26.4 5.61 Dilutive

Rs. per share

Basic EPS 5.65
Diluted EPS 5.61

(b) EPS for half year ended 31 December 2017

Numerator Denominator EPS Effect
Rs. in million Shares in million Rs. / share
Basic EPS 239.00 23.73 (W-2) 10.07
Warrant - 0.333
[6 (340÷360×6)]
239.00 24.06 9.93 Dilutive
Bonds 20.02 2.00 10.01
(W-3) 1.6(2.4 ×4/6)+0.4(1.2×2/6)
OR 1.2+0.8(1.2×4÷6)
259.02 26.067 9.94 Anti-dilutive

Rs. per share

Basic EPS 10.07
Diluted EPS 9.93

W-1: Weighted average shares for quarter ended 31 December 2017

Date Shares Period Total Alternate
1-Oct (20+4) 24.0 1÷3 8.00 24
1-Nov (0.8×3×50%) 1.20 0.8
25.2 2÷3 16.80 (1.2×2÷3)
24.80 24.80

Page 7 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

W-2: Weighted average shares for half year ended 31 December 2017
Date Shares Period Total Alternate
1-Jul 20 1÷6 3.33 20.00
1-Aug 4 3.33
24 3÷6 12.00 (4×5÷6)
1-Nov 1.20 0.4
25.20 2÷6 8.40 (1.2×2÷6)
23.73 23.73

W-3: Interest on Bonds for half year (net of tax):

First quarter Rs. in million
July to Sep [(760×(9%×3/12×70%) ] 11.97
Second quarter
Oct [(760×(9%×1/12×70%)] 3.99
Nov to Dec [386.20(W-4)×(9%×2/12×70%) 4.06
8.05
20.02

W-4: Carrying value of bonds after conversion Rs. in million

Initial recognition 760.00
Interest for the year (760×9%) 68.40
Interest paid (800×7%) (56.00)
772.40
Conversion (772.40×50%) (386.20)
386.20

(The End)

Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Summer 2018

General:

The overall passing ratio of 33.2% in this attempt was much better than the last two
results of 17.0% and 5.4%. A significant number of students (21.4%) were just short of 9
or fewer marks and could have easily obtained them had they have covered all areas of
the syllabus. There were many strong individual performances by some truly impressive
students and one of them secured Gold Medal for the brilliant performance. It’s worth
noting that full marks were obtained in every question of the paper.

Performance in Q2 (Consolidation) & Q3 (IAS 21 & IFRS 9) was above average. Q4

(IFRS 15 & IAS 28) proved to be the toughest question of the paper. 41.6% of the
students could not secure any mark in Q4.

Majority of the students appeared to have focused on selective study and displayed
inadequate knowledge of important concepts and the accounting standards. Many
students secured good marks in two to three questions but failed to obtain reasonable
marks in the remaining questions.

Question-wise comments:

Question 1

The question required preparation of notes on taxation and deferred tax liability / asset.
34.4% of the students got passing marks in this question. The copies suggested that many
students invested a lot of time on this question and consequently were found struggling in
completing the paper. The common mistakes were as follows:

 In preparing reconciliation between tax expense and accounting profits, impact of

share scheme was not incorporated. Moreover, the effect of decrease in tax rate was
mostly ignored or incorrectly calculated.
 Movement in deferred tax liability was either not prepared or prepared incorrectly.
Most of the students did not mention/disclose whether the corresponding impact of
deferred tax liability related to revaluation of PPE and TFCs would be charged to
Other Comprehensive Income, Equity or P&L.

Page 1 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2018

Question 2

The question required preparation of Consolidated Statement of Financial Position.

51.0% of the students got passing marks. The question tested the concept of increase in
equity stake in direct subsidiary and acquisition of indirect subsidiary during the year.
The question was attempted by almost all the students. The students generally have a
good working knowledge of consolidation techniques and many students achieved high
marks. The common mistakes were as follows:

 Many students ignored the downward fair value adjustment relating to the Plant
probably thinking that it had a higher value in use. However, IFRS 3 requires that net
assets of the acquiree should be measured at acquisition-date fair value.
 Adjustment for unrealized gain on disposal of office building was made though it was
not required.
 Many students could not identify the fact that the subsequent settlement of contingent
liability of FL was an adjusting event for the purpose of consolidated financial
statements.
 FL was consolidated as a direct subsidiary instead of indirect subsidiary.
 In respect of gratuity adjustment, sufficient information was available to compute
change in net liability. However, many students tried to make separate working for
movement in present value of defined benefit obligations and fair value of plan assets
which were not required and had to leave the working half way due to insufficient
information.

Question 3

The question required preparation of extracts from statements of financial position and
comprehensive income, relevant to the transactions given in the question. The first part of
the question was based on IAS 21 while the second part was based on IFRS 9. This was
the best performed question with passing percentage of 57.5%. The common errors were
as follows:

 The first part tested the concepts related to “Reporting foreign currency transactions”.
However, most of the students used rules related to “Translation to the presentation
currency”.
 Exchange loss on the amount paid on 1 August 2017 was capitalized instead of being
charged to Profit or Loss account.
 Unearned rent was treated as a monetary item whereas it is a non-monetary item and
need not be retranslated at year end. Similarly, average exchange rate was applied to
rent income which was not required.

Question 4

The question required calculation of revised amounts of total assets, total liabilities and
total comprehensive income after incorporating the impact of the required adjustments.
Only 10.0% of the students could secure passing marks. 41.6% of the students either did
not attempt the question or secured zero marks which showed that they had not studied
the examined topics. Part wise comments are given below:

Page 2 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2018

Part (i)

This was based on IFRS 15. Students were totally unaware of the underlying concepts
and made various types of mistakes. Solutions were often haphazard and totally
incorrect.

Part (ii)

This was based on IAS 28 and required accounting for part disposal of an associate. The
common mistakes were as follows:
 While computing carrying value of investment before disposal, fair value of shares
was taken into account instead of following equity method.
 Students did not adjust the carrying value of the retained investment from equity
method to fair value, at the time of disposal.

Question 5

This question required preparation of statement of movement in Unit Holders’ Fund of a

mutual fund. The passing ratio in this question was 37.8%. The common mistakes were
as follows:

 Majority of the students had no idea of the new format of the statement.
 Incorrect amounts were often used with regard to issuance of units, redemption of
units and total comprehensive income.

Question 6

This question required discussion on how the given (two) transactions (based on IFRS 2
and IAS 38) were to be recorded. The overall passing percentage in this question was
42.2%. It was generally observed that discussions were often incomplete. The common
mistakes were as follows:

 Many students did not mention the fact that liability component of the share based
transaction needs to be re-measured at reporting date.
 Life of the license was taken as 8 years instead of 5 years.
 Residual value of license was taken as Rs. 15 million or Rs. 20 million instead of Nil
value.
 Unwinding of interest on the deferred consideration (of license) was ignored.

Question 7

This question required computation of quarterly and half yearly basic and diluted
earnings per share. The passing ratio in this question was 35.5%. Quarterly and half
yearly earnings per share were examined for the first time, therefore, the students could
not handle the question well. The common mistakes were as follows:

 Weighted average number of shares was incorrectly computed. In making the

calculation, most of the students correctly multiplied the number of shares
outstanding by months outstanding but divided the same by 12 instead of 3 (for
quarterly) or 6 (for half yearly) earnings.

Page 3 of 4
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2018

 The interest amount on convertible bonds was computed incorrectly by majority of

the students as they ignored the fact that outstanding principal was required to be
adjusted on 1st November as the installment was paid on that date.
 The impact of share warrants was considered in computing the quarterly diluted
earnings per share. The students failed to realise that it was ‘out of money’ and hence
lost mark for ignoring it in the computation.

(THE END)

Page 4 of 4
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2018

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1
Computation of:
− current tax 5.0
− deferred tax 5.0

Recognition of deferred tax in P & L account 1.0

Recognition of deferred tax in OCI / equity 2.0

Reconciliation between tax expense and accounting profit 4.0

A.2 Computation, presentation and disclosures of:

property, plant and equipment 2.0

goodwill – net of impairment 7.0

investment property 1.5

gratuity 3.0

other assets and liabilities 1.5

group reserves 5.0

non-controlling interest 5.0

A.3 (i) Relevant extracts from:

statement of financial position 4.0

statement of comprehensive income 2.0

(ii) Relevant extracts from:

statement of financial position 1.5

statement of comprehensive income 5.5

A.4 (i)
Computation of following for the period ended 31 December 2017:
− contract revenue 5.0
− contract cost 1.5

Determination of the impact on total assets, total liabilities and total
comprehensive income 1.5

(ii)
Computation of loss on disposal of associate 3.0

Determination of the impact on total assets, total liabilities and total
comprehensive income 2.0

A.5 Presentation related to:

net assets at beginning of the year 1.5

issuance of units 2.5

redemption of units 2.0

total comprehensive income for the year 2.0

distribution during the year 1.0

net assets at end of the year 1.0

Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2018

Mark(s)
A.6 (i) Discussion on accounting treatment related to:

purchase of land in which the counterparty has choice of settlement 2.5

re-measurement of liability component at year end 1.5

(ii)
Computation of:

− cost of license 1.5
− amortisation expense 1.0
− interest expense on unwinding of discount 0.5

Treatment of media campaign cost 1.0

Discussion on useful life and residual value of the license 1.0

A.7 (a) Basic and diluted EPS for the quarter ended 31 December 2017

Weighted average number of shares 2.0

Impact of convertible bonds on EPS 3.0

Impact of warrants on EPS 1.0

(b) Basic and diluted EPS for the half year ended 31 December 2017

Weighted average number of shares 3.0

Impact of convertible bonds on EPS 2.5

Impact of warrants on EPS 1.5

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 3 December 2018

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 (a) 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:

1 Jan. 31 December
2014 2014 2015 2016 2017
Executives in employment 50 47 44 43 42
Executives expected to leave during
remaining vesting period 12 8 4 2 -
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 calculations. (16)
 Advanced Accounting and Financial Reporting Page 2 of 6

(b) 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 Statement of comprehensive income

2017 2016 2017 2016
Continuing Discontinued
Division A *Normal *Normal
operation operation
Discontinued Continuing
Division B Not appearing Held for sale
operation operation
Discontinued Continuing
Division C Not appearing Held for sale
operation 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)

Q.2 You are the Finance Manager of Mehran Limited (ML). Your staff has prepared draft
financial statements of ML for the year ended 31 December 2017 except statement of
changes in equity.

For the purpose of preparation of statement of changes in equity you have gathered the
following information:

(i) Share capital and reserves as at 1 January:

2016 2015
------ Rs. in million ------
Ordinary share capital (Rs. 10 each) 600 600
Share premium 250 250
Retained earnings 930 702

(ii) Net profit for 2017 (draft), 2016 (audited) and 2015 (audited) was Rs. 355 million,
Rs. 281 million and Rs. 228 million respectively. There was no item of other
comprehensive income.
(iii) A bonus issue of 15% was made on 1 April 2016 as final dividend for 2015.
(iv) An interim cash dividend of 10% was declared on 1 December 2017 which was paid
on 5 January 2018.
(v) The draft statement of financial position as on 31 December 2017 shows total assets
and total liabilities of Rs. 2,627 million and Rs. 440 million respectively.

Details of outstanding issues:

(i) At the beginning of 2017, ML relocated one of its manufacturing plants from Sukkur
to Karachi. The relocation resulted in repayment of related government grant. The
repayment of the grant has been debited directly to retained earnings. Further,
depreciation on the plant for 2017 has not been charged and cost of relocation of the
plant amounting to Rs. 12 million has been capitalised.
 Advanced Accounting and Financial Reporting Page 3 of 6

The plant was installed in Sukkur at a total cost of Rs. 400 million and had a useful
life of 8 years. The plant was available for use on 1 January 2015 and was
immediately put into use.

ML received the grant of Rs. 160 million towards cost of the plant in Sukkur. The
sanction letter states that if ML ceases to use the plant in Sukkur before
31 December 2019, it is required to repay the grant in full. The grant was recorded as
deferred income upon receipt and it has partly been transferred to profit or loss in
2015 and 2016.

(ii) Assets include an amount of Rs. 0.3 million paid on 1 October 2017 for entering into
a forward contract to buy USD 4 million on 1 March 2018.

The forward was acquired to specifically hedge the risk of any future changes in the
exchange rate related to highly probable acquisition of an equipment in March 2018
at an estimated cost of USD 4 million. No further adjustment has been made in this
respect. Following information is also available:

1-Oct-2017 31-Dec-2017
Conversion rates per USD:
- Spot rate Rs. 115.00 Rs. 117.00
- Forward contract (delivery date: 1 March 2018) Rs. 117.25 Rs. 119.50

(iii) Liabilities include entire proceeds of Rs. 150 million received on 1 January 2017 on
issuance of 1.5 million convertible debentures of Rs. 100 each. The related transaction cost
on issuance and interest paid at year end has been charged to profit or loss.

Each debenture is convertible into 2 ordinary shares of Rs. 10 each on

31 December 2020. Interest is payable at 8% per annum on 31 December each year. On
the date of issue, market interest rate for similar debt without conversion option was
11% per annum. However, on account of transaction cost of Rs. 4 million, incurred on
issuance of debentures, the effective interest rate has increased to 11.85% per annum.

(iv) ML’s obligation to incur decommissioning cost relating to a plant located in Khairpur
has not been recognised.

The plant was acquired on 1 January 2015 and had an estimated useful life of four
years. The expected cost of decommissioning at the end of its useful life is
Rs. 60 million. Applicable discount rate is 11%.

(v) Property, plant and equipment include a warehouse which was given on rent in
January 2017 for two years. Previously, the warehouse was in use of ML.

ML carries its property, plant and equipment at cost model whereas investment
property is carried at fair value model. Carrying value and remaining useful life of the
warehouse on 1 January 2017 was Rs. 55 million and 11 years respectively. Fair
values of the warehouse on 1 January 2017 and 31 December 2017 were
Rs. 80 million and Rs. 75 million respectively. Depreciation for 2017 has not yet been
charged.

Required:
(a) Determine the revised amounts of total assets and total liabilities after incorporating
effects of the above corrections. (15)
(b) Prepare ML’s statement of changes in equity for the year ended 31 December 2017
along with comparative figures after incorporating effects of the above corrections,
if any. (Ignore taxation. ‘Total’ column is not required) (10)
 Advanced Accounting and Financial Reporting Page 4 of 6

Q.3 Following information is available for Swift General Insurance Limited for the year ended
30 June 2018:

Rs. in ‘000
Claims paid 6,100
Finance cost 450
Income tax expense 750
Investment income 1,900
Management expenses 2,600
Net commission and other acquisition expenses 1,300
Other expenses 600
Other income 90
Reinsurance premium ceded 3,000
Reinsurance and other recoveries revenue 4,000
Rental income 950
Share of profit from associate 210
Unrealised gain on available for sale investments 580
Written gross premium 13,000

Relevant balances are as follows:

Opening Closing
---------- Rs. in ‘000 ----------
Outstanding claims 4,800 5,200
Prepaid reinsurance premium 3,500 3,600
Unearned premium reserve 7,400 7,200

Required:
Prepare statement of comprehensive income for the year ended 30 June 2018 (as per one
statement approach) alongwith relevant notes. (12)

Q.4 On 1 January 2015, Datsun Motors Limited (DML) acquired a machine on lease through
Bolan Leasing Company (BLC) to manufacture components of a new model of vehicle, on
the following terms:

(i) Non-cancellable lease period is 7 years.

(ii) The agreement contains an option for DML to extend the lease for further 3 years in
which case the legal title of the machine will be transferred to DML at the end of
10 years.
(iii) Lease instalments are payable annually in advance as under:

first seven instalments at Rs. 80 million each.

three instalments at Rs. 70 million each for the optional period.

DML also incurred initial direct cost of Rs. 15 million for the lease. DML's incremental
borrowing rate on 1 January 2015 was 8% per annum. Useful life of the machine is 12 years.

On commencement of the lease, DML was reasonably certain that the option to extend the
term will be exercised.

However, after first year of production of the new model, DML assessed that the model is
not popular in the market. Therefore, in 2016, DML concluded that it is not reasonably
certain that DML would exercise the option to extend the lease for three years. DML's
incremental borrowing rate on 1 January 2016 was 9% per annum.
 Advanced Accounting and Financial Reporting Page 5 of 6

After another disappointing year of the new model, DML negotiated with BLC and the
lease contract was amended on 1 January 2017 by reducing the original lease term from
7 years to 5 years with the same annual payments. DML's incremental borrowing rate on
1 January 2017 was 10% per annum.

Required:
Determine the amounts of ‘Right of use asset’ and ‘Lease liability’ as at 31 December 2015,
2016 and 2017 and reconcile the opening and closing balances of each year. (17)

Q.5 Summarised consolidated statement of financial position of Vitz Limited (VL) as at

30 June 2018 is presented below:

2018 2017 2018 2017

Assets Equity and liabilities
Rs. in million Rs. in million
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

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.
 Advanced Accounting and Financial Reporting Page 6 of 6

(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 5.5
Working capital (other than bank balances) 3.5
Bank balances 1.0
10.0

FL earned profit of USD 1.5 million (accrued evenly) during the year ended
30 June 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) (25)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

A.1 (a) Amounts recorded in respect of share options in CL’s financial statements:

Equity
No. of Fair value Expense for
No. of balance at
Year share per option Period the year
executives year-end
options
Rs. ---- Rs. in million ----
2014 39(47-8) × 4,000 × 600 × 1/3 = 31.20 31.20
2015 40(44-4) × - × 600 × 2/3 = - (31.20)
43 × 6,000 × 600 × 3/3 = 154.80 154.80
2016 41(43-2) × 6,000 × 130(710–580) × 1/2 = 15.99 15.99
170.79 170.79
43 × 6,000 × 600 × 3/3 = 154.80 -
2017 42 × 6,000 × 130(710–580) × 2/2 = 32.76 16.77
187.56 16.77

Explanation of basis of calculation:

Service condition/No. of executives:

Service condition shall be taken into account by adjusting the number of share options based on
expected number of executives that would remain in service till the vesting date at each year end.

Performance condition/No. of share options:

Performance condition other than market condition shall be taken into account by adjusting the
number of equity instruments included in the measurement of the transaction amount at each
year end. In this respect, number of options are based on expected average annual gross profit
during the vesting period as worked-out below:

Average gross profit for vesting period No. of

Year end
----------- Rs. in million ----------- options
2014 (940×3÷3) = 940 4,000
2015 (940+820×2) ÷ 3 = 860 Nil
(940+820+1,270) ÷3= 1,010
2016 6,000
2017 (940+820+1,270+1,200)÷4=1,058 6,000

Market condition/Fair value per option:

Market conditions are only taken into account when estimating the fair value of the share options
at the measurement date.

CL should recognize an expense irrespective of whether market conditions are satisfied at year
end provided all other vesting conditions are satisfied.

Vesting period:
The expense is spread over the vesting period. At the grant date the vesting period was three years
which was subsequently revised to four years on 1 January 2016.

Modification: (Extension of vesting period and repricing of option)

(i) Irrespective of any modification, CL is required to recognize, as a minimum, three year
services received, measured at the grant date fair value of the equity instrument. So, for
2016 expense will be recorded for 43 executives who have served the original vesting
period of 3 years at fair value of the options measured at grant date.
(ii) Modification of the vesting conditions in a manner that is not beneficial (increase in vesting
period) would not be taken into account.
(iii) However, repricing of the option is beneficial for executives. Therefore, increase in fair value
of share option by Rs. 130 (710–580) at the modification date would be expensed out over
the period between the modification date and the expected vesting date.

Page 1 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

(b) Correct classification/presentation of the divisions is as under:

Statement of financial position Statement of comprehensive income

2017 2016 2017 2016
Continuing Continuing
Division A Normal Held for sale
operation operation
Discontinued Discontinued
Division B Not appearing Held for sale
operation operation
Discontinued Discontinued
Division C Not appearing Normal
operation operation

A.2 (a) Effect of corrections:

Total Total Profit Profit
Others
assets liabilities for 2017 for 2016
-------------------- Rs. in million --------------------
Balances as given 2,627.00 440.00 355.00 281.00
(i) Repayment of government grant
Repayment of grant (160÷8×6) (120.00) (40.00) 160.00
Cost of relocation (12.00) (12.00)
Depreciation for
2017 (400÷8) (50.00) (50.00)
(62.00) (120.00) (102.00) 160.00
RE
(ii) Forward contract
Increase in fair value (W-1) (9–0.3) 8.70 0.70 8.00
OCI
(iii) Issuance of convertible debentures
Equity component 150–136.04 (W-2) (13.96) 13.96
Allocation of issuance cost in (136.04 : 13.96) (3.63) 4.00 (0.37)
Additional finance cost [(136.04–3.63)×11.85%–12] 3.69 (3.69)
(13.90) 0.31 13.59
Eq. Comp
(iv) Decommissioning cost
Decommissioning cost 60×( 1.11)–4 39.52 39.52
Depreciation (39.52/4)×3 years (29.64) (9.88) (9.88) (9.88)
Unwinding of interest
[(39.52×11%)×1.11×1.11)] 14.53 (5.36) (4.83) (4.35)
9.88 54.05 (15.24) (14.71) (14.23)
Op. RE
(v) Investment property
Revaluation as per IAS 16 (80–55) 25.00 25.00
Revaluation as per IAS 40 (80–75) (5.00) (5.00)
20.00 (5.00) 25.00
Rev. Surplus
2,603.58 360.15 233.77 266.29 192.36

W-1: Gain/loss on forward contract

Forward contract Spot rate
USD in
Rs. in Rs. in
million Rate Rate
million million
Value at year-end rate 4.00 119.50 478.00 117.00 468.00
Value at contract date of 1-10-2017 4.00 117.25 469.00 115.00 460.00
Gain 9.00 Loss 8.00
Hedge effective % 89%

W-2: Issuance of convertible debentures Rs. in PV factor

Rs. in million
million at 11%
PV of interest at 11% for 2017 to 020 (150×8%) 12 3.1024 37.23
PV of principal amount at the time of repayment 150 0.6587 98.81
Liability component 136.04

Page 2 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

(b) Mehran Limited

Statement of changes in equity for the year ended 31 December 2017
Equity
component
Share Share Retained Cash
of Rev. surplus
capital premium earnings flow hedge
convertible
debentures
----------------------- Rs. in million -----------------------
Balance as at 1-1-2016, as previously
reported 600.00 250.00 930.00 - - -
Effect of correction of error [a(iv)] (14.23)
Balance as at 1-1-2016 ; Restated 600.00 250.00 915.77 - -
Final bonus dividend for 2015 at 15% 90.00 (90.00)
Total comprehensive income for 2016:
- Profit for the year - Restated (a) 266.29
- Other comprehensive income -
Balance as at 31-12-2016 - Restated 690.00 250.00 1,092.06 - - -
Issue of convertible debentures
[a(iii)] 13.59
Interim cash dividend for 2017 at 10% (69.00)
Total comprehensive income for 2017:
- Profit for the year (a) 233.77
- Other comprehensive income [a(ii),(v)] - 8.00 25.00
Balance as at 31 December 2017 690.00 250.00 1,256.83 8.00 13.59 25.00

Page 3 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

A.3 Swift General Insurance Limited

Statement of Comprehensive Income for the year ended 30 June 2018

2018
Note Rs. in 000's
Net insurance premium N-1 10,300
Net insurance claims expense N-2 2,500
Net commission and other acquisition costs 1,300
Insurance claims and acquisition expenses (3,800)
Management expenses (2,600)
Underwriting results 3,900
Investment income 1,900
Rental income 950
Other income 90
Other expenses (600)
Result of operating activities 6,240
Finance cost (450)
Share of profit from associates 210
Profit before tax 6,000
Income tax expenses (750)
Profit after tax 5,250
Other comprehensive income:
Unrealised gain on AFS investments - net 580
Total comprehensive income for the year 5,830

Notes to the financial statements for the year ended 30 June 2018 Rs in 000's
N-1: Net Insurance Premium
Written gross premium 13,000
Unearned premium reserve - opening 7,400
Unearned premium reserve - closing (7,200)
Premium earned 13,200
Reinsurance premium ceded 3,000
Prepaid reinsurance premium-opening 3,500
Prepaid reinsurance premium-closing (3,600)
Reinsurance expense (2,900)
10,300
N-2: Net Insurance Claims Expense
Claims paid 6,100
Outstanding claims - closing 5,200
Outstanding claims - opening (4,800)
Claims expense 6,500
Reinsurance & other recoveries revenue (4,000)
2,500

Page 4 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

A.4 Datsun Limited

(A) Right-of-use of asset: Rs. in million

1 Jan 15 Initial measurement
Rs. 80 for 7 years advance @ 8%: 80×5.6229 449.83
Rs. 70 for 3 years advance after 7 years @ 8%: 70 × 2.783 × 1.08-7 113.67
A 563.50
Initial direct cost 15.00
578.50
31 Dec 15 Depreciation (578.50/12) (48.21)
1 Jan 16 Balance 530.29
Effect of reassessment B (131.01)
399.28
31 Dec 16 Depreciation (399.28/6) (66.55)
1 Jan 17 Balance 332.73
ROU derecognized due to reduction in lease term (332.73×2/5) (133.09)
Decrease in ROU due to increase in borrowing rate (1.89)
197.75
31 Dec 17 Depreciation 197.75/3 (65.92)
131.83

(B) Lease
liability: Rs. in million

1 Jan 15 Initial recognition A 563.50

Payment (80.00)
483.50
31 Dec 15 Interest for 2015 @ 8% 38.68
1 Jan 16 Balance 522.18
Payment (80.00)
442.18
Effect of reassessment in 2016 (Balancing) B (131.01)
Rs. 80 for 5 years in arrears @ 9% (80 × 3.8897)
311.17
Payment

31 Dec 16 Interest for 2016 @ 9% 28.01

1 Jan 17 Balance 339.18
Payment (80.00)
259.18
Effect of modification in 2017 due to:
 Decrease in lease term (Balancing) 118.45
Rs. 80 for 2 years in arrear @ 9%: (80 × 1.7591)
140.73
 Increase in rate (Balancing) (1.89)
Rs. 80 for 2 years in arrear @ 10%: (80×1.7355)
138.84
Payment

31 Dec 17 Interest for 2017 @ 10% 13.88

31 Dec 17 Balance 152.72

Page 5 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

A.5 Vitz Limited

Consolidated statement of cash flows for the year ended 30 June 2018
Rs. in million
Cash flow from operating activities
Profit (W-5)817.2+(W-6)222.8 1,040
Adjustments for:
Share of associate profit (W-3) (160–12) (148)
Gain on disposal of subsidiary SL (1,600–1,250–200) (150)
Gain on disposal of property, plant & equipment (350+230)–(170+250) (160)
Unwinding of interest on deferred consideration [189(W-7)×8%] 15
Exchange loss on deferred consideration [223–(189+15)] 19
Depreciation 480
Impairment of goodwill (W-2) 65
1,161
Increase in working capital (W-4) (951)
210
Cash flow from investing activities:
Acquisition of shares in associate – AL (600)
Proceeds from disposal of subsidiary - SL (1,600–100) 1,500
Proceeds from disposal of property, plant &
equipment 350
Acquisition of foreign subsidiary - FL (W-7) (495–110) (385)
Purchase of property, plant and equipment (W-1) (1,043)
Dividend received from associate (W-3) 78
(100)
Cash flow from financing activities:
Proceeds from sale of shares of subsidiary – WL 450
Proceeds from issue of shares at premium [(2,800+300)–(2,500+375)] 225
675
Net increase in cash and cash equivalents 785
Effect of exchange rate movement 13
798
Cash and cash equivalents - beginning 770
Cash and cash equivalents – ending 1,568

W-1: Additions to property, plant and equipment Rs. in million

Closing balance 3,678
Opening balance 4,173
Transfer-in on acquisition of FL (W-7) 605
Exchange gain relating to FL’s PPE (122–13–36–16) 57
Transfer-out on disposal of SL (1,300)
Carrying value of PPE disposed off (170+250) (420)
Depreciation (480)
(2,635)
Additions 1,043

W-2: Impairment of goodwill

Opening balance 639
Goodwill on acquisition of FL (W-7) 179
Exchange gain on FL's goodwill (W-8) 16
Goodwill de-recognised on disposal of SL (200)
634
Closing balance (569)
Impairment of goodwill 65

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

W-3: Dividend from associate AL Rs. in million

Cost of acquisition of associate 600
Share of profit (800×6/12×40%) 160
(400×30%×25%×40%
Unrealised profit on inter-co inventory ) (12)
748
Closing balance (670)
Dividend from associates 78

W-4: (Increase)/Decrease in working capital

(1,050+823–
Opening balance 1,630) 243
Working capital of subsidiary FL (W-7) 385
Exchange gain on working capital FL 36
Working capital pertaining to SL disposed of during the year 150
814
Closing balance (1,950+957–912) (1,995)
Receivable for property, plant & equipment disposed off 230
(1,765)
(951)

W-5: Other group reserves/Profit attributable to parent

Closing balance 3,519.0
Opening balance 2,451.0
Equity adjustment on sale of 30% shareholdings in subsidiary - WL (450–300) 150.0
Exchange gain - attributable to parent [122–21.2(W-6)] 100.8
(2,701.8)
Profit attributable to parent 817.2

W-6: Non-controlling interest/Profit attributable to NCI

Closing balance 1,638.0
Opening balance 874.0
NCI share of 30% in subsidiary – WL (1,000×30%) 300.0
NCI share of 20% in subsidiary – FL (W-7) 220.0
Share of exchange gain on translation of operation – FL (106×20%) 21.2
(1,415.2)
Profit attributable to NCI 222.8

W-7: Goodwill - FL: USD in million Rate Rs. in million

Purchase consideration:
- Cash 4.500 110 495
- Shares at market value (15×25/110) 3.410 110 375
- Deferred consideration payable after two year
(2/(1.08)2 1.714 110 189
9.624 1,059
NCI (10×20%) 2.000 110 220
Fair value of net assets:
Property, plant & equipment 5.500 110 605
Working capital 3.500 110 385
Cash 1.000 110 110
(10.000) (1,100)
FL - Goodwill at the date of acquisition 1.624 179

Page 7 of 8
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2018

W-8: Exchange gain reserve – FL Rs. in million

Exchange gain on FL goodwill (W-7) 179/110×(120–110) 16
Exchange gain on translation of FL operations:
- Net assets at year-end date rate (10+1.5)×120 1,380
- Net assets on acquisition date rate 10×110 (1,100)
- Profit for the year at average rate 1.5×116 (174)
106
122

(The End)

Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Winter 2018

General:

The overall passing ratio of 41.5% in this attempt was much better than the last two
results of 33.2% and 17.2%. There were many strong individual performances by some
truly impressive students and one of them secured Gold Medal for the brilliant
performance.

Performance in Q3 (General Insurance) & Q4 (IFRS 16) was above average. Q2 proved
to be the toughest question of the paper.

Majority of the students appeared to have focused on selective study and displayed
inadequate knowledge of important concepts and the accounting standards. Many
students secured good marks in two to three questions but failed to obtain reasonable
marks in the remaining questions.

Attainment of full marks in a question is challenging but each question contains

sufficient achievable passing marks. It was observed that students spent too much time
on completing a question even though they had no idea of the difficult part of the
question. Students are strongly advised to switch to the next question after they have
spent reasonable time on a question. This will ensure that they attempt all questions.
20.4% students were just short of 9 or less marks and could have easily obtained them
had they covered all areas of the syllabus and/or attempted all questions in the paper.
Students should also note that no marks are awarded for incorrect figures unless
supported by workings.

Question-wise comments:

Question 1

The question was based on IFRS 2 and IFRS 5. In this question, 42.7% of the students
got passing marks. Part-wise comments are as follows:

Question 1(a)

This part of the question required calculation of amounts in respect of share options and
their explanation. The calculations were generally well dealt with. However, the
explanations were often incomplete and/or incorrect. In many cases, students did not
provide any explanation to the calculations and lost precious marks. Other common
mistakes were as follows:

Page 1 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2018

 Students ignored the fact that expense already recorded in 2014 needed to be reversed
in 2015 as the performance condition was not met at the end of 2015 (the average
gross profit was below Rs. 900 million).
 The extension of vesting period was not beneficial and its impact should have been
ignored for the original scheme. However, many students extended the original
vesting period of 3 years to 4 years and computed incorrect figures of 2016 and 2017.
 Amounts for Original scheme and Additional benefit from re-pricing of options were
not calculated separately in respect of 2016 and 2017.

Question 1(b)

This part of the question required classification/presentation of different divisions in

financial statements. A key point was that the comparatives in statement of
comprehensive income are reclassified while comparatives for statement of financial
position are not. Answers to this part varied a lot. Many students achieved full marks
whereas some students even did not attempt it.

Question 2

The question required calculation of revised amounts of total assets and total liabilities
after incorporating the impact of five corrections and preparation of statement of changes
in equity. This was the worst performing question of the paper and only 18.8% of the
students secured passing marks. Answers were often ill-structured and figures were taken
to the statement of changes in equity without any working. As discussed earlier no marks
can be awarded if the figure is incorrect and there is no working. Other common
mistakes were as follows:

 Several types of mistakes were observed in treatment of repayment of government

grant.
 While computing increase in fair value of forward contract, the initial cost of Rs. 0.3
million was not deducted from fair value.
 While calculating the additional finance cost, students often used 11% instead of
11.85% and /or did not deduct allocated issuance cost from the liability component.
 Net impact of revaluation in investment property was taken to profit and loss account
rather than bifurcating such re-measurements to Revaluation surplus and Profit and
loss account.
 Statement of changes in equity was started from January 2015 instead of January
2016.
 Equity component of convertible debentures was not presented anywhere in the
statement of changes in equity.
 Separate columns for cash flow hedge and revaluation surplus were not presented in
the statement of changes in equity.
 The term “restated” was not mentioned with opening balances, closing balances and
profit for 2016.

Page 2 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2018

Question 3

The question required preparation of statement of comprehensive income of a General

insurances company. The performance in this question was good and 60.7% of the
students got passing marks. But surprisingly, 12.6% could not secure a single mark in
this question. Although many students scored well on this question, demonstrating a
sound knowledge of statement of comprehensive income of a general insurance, there
were some very poor and/or incomplete answers also. A significant minority
demonstrated that they did not know the difference between statement of comprehensive
income of a general insurance company and of any other company. The common
mistakes were as follows:

 Management expenses were not presented separately and the amount of underwriting
results was not computed.
 Notes for net insurance premium and net insurance claims expense were not
prepared.

Question 4

The question required determination of amounts of Right of use asset and Lease liability.
This was the best performed question with passing percentage of 62.5%. There were
some excellent attempts at this question and 10.7% students secured full marks. There
were some very well presented answers to this question, but there were some incomplete
and messy ones as well. The common errors were as follows:

 The present value of optional period was either not correctly computed or ignored at
initial recognition.
 First year depreciation was often calculated on ten years instead of twelve years.
 The treatment of reassessment and modification were often mixed up.

Question 5

This question required preparation of consolidated statement of cash flows. The passing
ratio in this question was 38.7%. The common mistakes were as follows:

 The profit before tax was required to be computed from the figures of retained
earnings and minority interest. Many students failed to understand this and arrived at
incorrect figures.
 There was confusion over the treatment of exchange gain on translation. Only the
very best students were able to take the correct effects in calculating movement of
various accounts.
 Impact of unrealized profit on inventory was ignored in determining the share of
profit from associate.
 The interest and exchange loss on deferred consideration was mostly ignored.
 The sale of shares of subsidiary to non-controlling interest was recorded in investing
activities rather than in financing activities.

(THE END)

Page 3 of 3
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2018

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a)
Calculation of no. of executives, no. of options, fair value per option and
expense for the year:
– 2014 2.0
– 2015 2.0
– 2016 3.0
– 2017 3.0

Explanation of the basis of calculation:
– Service condition 1.0
– Performance condition 1.5
– Market condition 1.0
– Vesting period 0.5
– Modification of share option scheme 2.0

(b) Classification/presentation of under disposal divisions in:

statement of financial position 2.0

statement of comprehensive income 3.0

A.2 (a) Determination of revised balances of assets, liabilities, retained earnings and
profit for the year by taking the effects of:
(i) repayment of government grant 4.0
(ii) forward contract 2.0
(iii) issuance of convertible debentures 4.0
(iv) decommissioning cost/liability 4.0
(v) investment property 1.0

(b) Preparation of statement of changes in equity:

Restatement of opening retained earnings balance 2.0

Incorporating items relating to 2016 3.0

Incorporating items relating to 2017 5.0

A.3 Preparation of following relevant notes:

Net insurance premium 2.0

Net insurance claim expense 1.5
Preparation of statement of comprehensive income (as per one statement approach):

Determination of underwriting results 3.5

Computation of profit after tax 3.5

Disclosure of other comprehensive income 1.5

Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2018

Mark(s)
A.4
Initial measurement of the right-of-use asset and liability 3.0

Computation of depreciation for 2015, 2016 and 2017 2.0

Computation of effect of reassessment of lease liability 3.0

Computation of effect of modification in decreasing the scope of the lease 5.5

Computation of interest on lease liability 3.5

A.5 Consolidated statement of cash flows:

Cash flow from operating activities:

Profit for the year 3.0

Adjustments for non-cash items:
– Share of profit from associate 2.0
– Gain on disposal of subsidiary and property, plant & equipment 2.0
– Interest and exchange loss on deferred consideration 2.0
– Computation of goodwill and impairment thereof 4.0

Increase/decrease in working capital 2.0
Cash flow from investing activities:

Acquisitions of shares in associate and subsidiary 2.0

Proceeds from disposal of subsidiary 1.0

Purchases/proceeds from disposal of property, plant & equipment 3.5

Dividend received from associate 1.5
Cash flow from financing activities:

Proceeds from sale of shares of subsidiary to NCI 1.0

Proceeds from issue of VL’s shares at premium 1.0

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 10 June 2019

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 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.
(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.
 Advanced Accounting and Financial Reporting Page 2 of 5

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

Q.2 Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The
following transactions/events have occurred during 2018.

(i) 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:
Rs. in million
Planning of the website 2.5
Web servers 10.5
Operating system of web servers 5.5
Developing code for the website application and its
installation on web servers 6.0
Designing the appearance of web pages 3.5
Content development 12.5
Post launch operating cost 2.8

Currently, all the above costs are included in ‘intangible assets under development’. (08)
(ii) FL operates a defined benefit pension scheme for its employees. The scheme shows
the following net balance as at 31 December:
2018 2017
Rs. in million
Present value of defined benefit obligations 450 380
Fair value of plan assets (610) (322)
(160) 58

This is for the first time that the fair value of plan assets exceeds the present value of
defined benefit obligations. Currently, the excess of Rs. 160 million is presented as
current assets. (04)
(iii) In October 2018, FL purchased a manufacturing plant having a fair value of
Rs. 350 million. According to the agreement, FL has the option to settle the
obligation either through:

1.6 million shares of FL to be issued in June 2019; or

fair value of 1.5 million shares of FL to be paid in cash in March 2019.
The installation of the plant was in process as at 31 December 2018. Nothing has
been recorded in the FL’s book in this respect. (06)
(iv) In December 2018, FL delivered 35,000 units of one of its products to
Dutch Limited (DL) for Rs. 15 million. DL obtained the control upon delivery and
immediately paid the full amount which was credited to revenue. However, DL has
been allowed to return unused units within 90 days and receive a full refund. Such
rights have not been granted by FL to any customer in the past. (04)
(v) On 1 January 2018, FL acquired a building on lease for a non-cancellable period of
6 years. Lease contains rent free period of 2 years and 4 annual rentals of
Rs. 60 million each are payable starting from the end of 3rd year. Applicable discount
rate is 12%. Nothing has been recorded in the FL’s books in this respect. (03)

Required:
Discuss how the above transactions/events should be dealt with in FL’s books for the year
ended 31 December 2018. (Show all calculations wherever possible. Also mention any
additional information needed to account for the above transactions/events)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.3 Cyprus Bank Limited (CBL) is listed on Pakistan Stock Exchange and has 252 branches
including 10 overseas branches. Mansoor has recently joined CBL’s finance team. He has
prepared the following draft note on ‘Advances’ for inclusion in the CBL’s financial
statements for the year ended 31 December 2018 and has submitted it for your review:

9 ADVANCES
Performing Non-performing Total
----------------- Rs. in '000 -----------------
Loans, cash credits, running finances,
net investment in finance lease etc. 3,036,460 264,040 3,300,500
Bills discounted and purchased 808,990 16,510 825,500
Advances – gross 3,845,450 280,550 4,126,000
Provision against advances (119,555) (150,445) (270,000)
Advances – net of provision 3,725,895 130,105 3,856,000

9.1 Particulars of advances (Gross)

Rs. in '000
In local currency 2,988,200
In foreign currencies 937,800
3,926,000

9.2 Advances include Rs. 280.55 million which have been placed under non-performing
status as detailed below:

Non-performing
Provision
Category of classification loans
------------ Rs. in '000 ------------
Other Assets Especially Mentioned 20,050 -
Substandard 47,600 7,375
Doubtful 94,400 47,060
Loss 118,500 112,800
Total 280,550 167,235

9.3 Particulars of provision against advances

Specific General Total
---------------- Rs. in '000 ----------------
Opening balance 134,493 120,938 255,431
Exchange adjustment 10,452 7,457 17,909
Net charge/(reversal) against advances 24,900 (8,840) 16,060
Written off during the year (19,400) - (19,400)
Closing balance 150,445 119,555 270,000

9.4 Particulars of write offs

Rs. in '000
Against provisions 19,400
Directly charged to profit and loss account 3,800
23,200

Required:
Prepare list of errors and omissions identified from your review of the above draft note.
(Note: There are no casting errors in the given information. Redrafting of the note is not
required) (10)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.4 Following is an extract from statement of comprehensive income of Arabian Limited (AL),
for the year ended 31 December 2018, before incorporating the effects of tax:
Rs. in million
Profit before tax 455
Other comprehensive income:
Gain on property revaluation 240
Change in fair value of equity instrument 23
Remeasurements of defined benefit liability (40)
Total comprehensive income 678

The following additional information has been gathered for preparing the disclosures
relating to taxation:

(i) The movement of property, plant and equipment (other than land) and related
revaluation surplus for 2018 is as follows:
Property, plant & equipment Gross
Accounting revaluation
Tax base
WDV surplus*
------------------ Rs. in million ------------------
Opening balance 2,500 1,470 512
Additions 600 600 -
Revaluation surplus 240 - 240
Depreciation (475) (280) (56)
Disposals (230) (140) (32)
Closing balance 2,635 1,650 664
*Without effect of tax

(ii) AL acquired 5% equity in Turkish Limited for Rs. 152 million on 1 April 2018. The
investment was irrevocably classified at fair value through other comprehensive
income. As per tax laws, gain on investment is taxable upon sale.

(iii) Movement in net defined benefit liability for 2018 is as follows:

Rs. in million
Opening liability 430
Charged to profit or loss 145
Charged to other comprehensive income 40
Contribution to the fund (260)
Closing liability 355

Under tax laws, contribution to the fund is allowed as an expense.

(iv) On 1 January 2018, AL granted share options to one of its executives, conditional
upon the executive remaining in AL’s employment until 31 December 2020. Fair
value and intrinsic value of the options are as follows:

1 January 2018 31 December 2018

--------- Rs. in million ---------
Fair value 60 78
Intrinsic value 50 72
As per tax laws, intrinsic value of the share options on the exercise date is an
admissible expense.

(v) Liabilities of AL as at 31 December 2018 include an amount of Rs. 35 million which

is unpaid since June 2015. As per tax laws, liabilities outstanding for more than
3 years are added to income and are subsequently allowed as expense on payment
basis.
 Advanced Accounting and Financial Reporting Page 5 of 5

(vi) Tax rate for 2018 is 27% while it was 28% in 2017 and prior periods.

(vii) AL is subject to minimum tax of 1% of revenue which is adjustable in full from the
future tax liability (if any) in subsequent 3 years. Revenue for 2018 amounted to
Rs. 5,300 million.

(viii) As on 31 December 2017, AL had:

unutilized/adjustable minimum tax of Rs. 88 million on which deferred tax was
recognized to the extent of Rs. 55 million only.

no carried forward tax losses.

Required:
In accordance with the requirements of IFRS,
(a) prepare relevant notes on taxation and deferred tax liability/asset for the inclusion in
AL's financial statements for the year ended 31 December 2018. (19)
(b) redraft the extract from statement of comprehensive income incorporating the effects
of tax. (05)

Q.5 On 3 January 2015, French Limited (FL) purchased 15,000 debentures (having face value of
Rs. 100 each) issued by Greek Limited. Debentures were purchased at Rs. 97 each.
However, the fair value of each debenture as on the date of purchase was Rs. 96 in the
quoted market. Transaction cost of Rs. 35,000 was also incurred on purchase of debentures.
Coupon rate is 12% which is payable annually on 31 December whereas the effective
interest rate is 12.6%.

FL classified the investment in debentures as financial asset at amortised cost. At initial

recognition, FL determined that debenture was not credit impaired.

On 31 December 2016, FL determined that there had been a significant increase in credit
risk since the acquisition of the debentures.

On 31 December 2017, FL determined that the debenture was credit impaired.

FL’s estimates of expected credit losses in respect of the investment in debentures at

different dates are given below:

Date Life time 12 months

3 January 2015 Rs. 54,500 Rs. 11,200
31 December 2015 Rs. 54,500 Rs. 11,200
31 December 2016 Rs. 62,600 Rs. 12,400
31 December 2017 Rs. 70,900 Rs. 14,500
31 December 2018 Rs. 70,900 Rs. 14,500

Annual interest has been received on time each year.

Required:
Prepare journal entries in the books of FL in respect of the above for the years ended
31 December 2015 to 31 December 2018. (16)

(THE END)
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2019

A.1 Bahamas Limited

Consolidated statement of financial position
As on 31 December 2018
Rs. in million
Assets:
Property, plant and equipment (25,370+14,288+7,900)(W-2) 663 46,895
Goodwill 170+(450+(W-4) 159) 779
Investment in joint venture PL (W-5) 582
Current assets 17,480+4,800+2,800 25,080
73,336
Equity and liabilities
Share capital 15,000
Share premium 8,000
Surplus on revaluation 5,500+[(W.2) 900×0.75] 6,175
Group retained earnings (W-6) 13,054
Non-controlling interest (W-7) 4,601
Liabilities (12,000+8,800+6,400)(W-2) 694 26,506
73,336

W-1: OL - Net assets at acquisition date Rs. in million

Investment at cost 5,400
Goodwill (450)
75% net assets 4,950
Total net assets 4,950÷0.75 6,600

W-2: OL - Net assets At acquisition As at Post-

date 31-12-2018 acquisition
-------------- Rs. in million --------------
Share capital 5,000 5,000 -
Share premium 2,000 2,000 -
Revaluation surplus - 1,200 1,200
Fair value adjustment 300 - (300)
300 1,200 900
Retained earnings (Bal.) (700) 3,000 3,700
Reversal of lease liability
[400×{1–(1.1)-2}÷0.1] 694 694
Reversal of ROU
[400×{1-(1.1)-3}÷0.1×2÷3] (663) (663)
(700) 3,031 3,731
Net assets (W-1)6,600 11,231 4,631

W-3: CL - Net assets At acquisition As at Post-

1-1-2018 31-12-2018 acquisition
-------------- Rs. in million --------------
Share capital 1,200 1,200 -
Share premium 1,100 1,100 -
Retained earnings 1,200 2,000 800
Net assets 3,500 4,300 800

Page 1 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2019

W-4: CL – Goodwill Rs. in million

Equity % of BL in CL 35%+(75%×24%) 53%
Direct investment at fair value 912÷0.24×0.35 1,330
Indirect investment 912×0.75 684
Investment at cost 912÷0.24×0.53 2,014
NCI at 47% (W-3)3,500×0.47 1,645
Fair value of net assets at acquisition date (W-3) (3,500)
159

W-5: Investment in Joint venture - PL (Using equity method) Rs. in million

Investment at cost 360
Share of profit from PL [800+400220](360÷0.6)]×0.6 228
(800+400220) ×0.6 588
Unrealised profit on BL’s sales lying in PL’s stock (50÷125×25)×0.6 (6)
582

W-6: Group retained earnings Rs. in million

BL’s retained earnings 9,500
Fair value of investment in CL exceeded its cost (W-4)1,3301,220 110
OL post acquisition profit (W-2)3,731×0.75 2,798
CL post acquisition profit (W-3)800×0.53 424
Share of profit from PL (W-5) 228
Unrealised profit on BL’s sales lying in PL’s stock (W-5) (6)
13,054

W-7: Non-controlling interest Rs. in million

OL – acquisition (W-2)6,600×0.25 1,650
OL - post acquisition (W-2)4,631×0.25 1,158
2,808
CL – acquisition (W-3)3,500×0.47 1,645
CL - post acquisition (W-3)800×0.47 376
2,021
Indirect holding in CL 912×0.25 (228)
4,601

Page 2 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2019

A.2 (i) Each cost would be transferred from ‘intangible assets under development’ and
would be treated as:

Planning of the website an expense

Web servers a tangible asset as per IAS 16 and depreciates
over their useful life.
Operating system of web servers an intangible asset and made part of the cost of
servers as it is integral part of the servers.
Developing code for the website an intangible asset and made part of the cost of
application and its installation on the website.
web servers
Designing the appearance of web an intangible asset and made part of the cost of
pages / Graphical design the website.
development
Content development as an expense to the extent that content is
developed to advertise and promote FL’s
products. Remaining cost would be capitalised as
an intangible asset and made part of the cost of
the website.
Post launch operating cost an expense when incurred unless it meet
recognition criteria of IAS 38

Additional information needed:

 Life of server and website, data for calculating depreciation and
amortization, method of depreciation and amortization.
 Amount of content development attributable to advertisement
 Any post launch cost that meets criteria for recognition as intangible asset

(ii) When there is a surplus in the defined benefit plan, it shall measure the net defined
benefit asset at the lower of the:
 surplus in the defined benefit plan and
 asset ceiling

Asset ceiling would be computed as the present value of any economic benefits
available in the form of refunds from the plan or reduction in the future contributions
to the plan.

The effect of restricting the asset at a lower amount would be charged to OCI.

IAS 19 does not specify whether an entity should distinguish current and non-current
portions of asset arising from post-employment benefits.

Additional information needed:

 Amount of refunds from plan or reduction in future contribution along with
timing
 Applicable discount rate

(iii) It is a share based payment transaction in which the terms of the arrangement provide
FL with choice of settlement.

Cash settled share based payment transaction

FL shall determine whether it has a present obligation to settle in cash and account
for the transaction as cash settled share based payment transaction.

Page 3 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2019

The asset and liability would be recorded at the fair value of the plant amounting to
Rs. 350 million.

Liability would be re-measured at the year end on the basis of fair value of 1.5 million
shares of FL and the difference would be taken to the profit and loss account.

Equity settled share based payment transaction

However, if there is present obligation to settle in cash, then FL should account for the
transaction as equity settled share based payment transaction.

The asset and equity would be recorded at the fair value of Rs. 350 million.

Equity would not be re-measured at year end.

Additional info needed:

 Information about assessment whether FL has a present obligation to settle
in cash or not.
 Fair value of the shares at the year end.

(iv) FL should not recognize any revenue when the control of the product is transferred
because the existence of right to return and the lack of relevant historical evidence
means that FL cannot conclude that it is highly probable that a significant reversal in
the amount of cumulative revenue will not occur. Consequently, the revenue would
be recognized after expiry of the right to return.

Till then the amount received would be recorded as liability/ contract liability /
deferred revenue.

While inventories would be transferred from stock to “Right to recover product to be

returned” asset account at its cost.

(v) Even though the agreement contains a rent-free period of two years, right of use asset
and corresponding lease liability should be recognized in the books on 1 January 2018
at the present value of lease payment
i.e. Rs. 145 million [60×1.12–2×{(1–1.12–4)÷0.12}]

Depreciation of Rs. 24.2 million (145÷6) should be recognized.

Interest of Rs. 17.4 million (145×12%) would be recognized making the lease liability
to Rs. 162.4 million.

Page 4 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2019

A.3 (i) In note 9, the provision against advances has not been bifurcated into Specific and
General provision.
(ii) Detailed note on net investment in finance lease is missing.
(iii) In note 9.1, the total of 3,926,000 does not match total of 4,126,000 in note 9.
(iv) In note 9.2, advances have not been classified into “Domestic” and “Overseas”.
(v) In note 9.2, the amount of provision of 167,235 does not match with 150,445 in note
9.
(vi) In note 9.3, the net charge / (reversal) has not been bifurcated into “charge for the
year” and “reversal for the year”.
(vii) In note 9.3, line item for “amount charged off agricultural financing” and “other
movements” are not mentioned.
(viii) Bifurcation of provision against advances in local currency and foreign currency has
not been shown.
(ix) Analysis of writes-off in Rs. 500,000 above or below and details of write-off
Rs. 500,000 and above is not disclosed.
(x) Comparatives not given.
(xi) Details of impact of forced sales value (FSV) on provision against advances not given.

A.4 (a) Notes to the financial statements

For the year ended 31 December 2018

1. Taxation
Rs. in million
Current tax W-1 95.60
Deferred tax Note 2 (11.75)
83.85

1.1 Reconciliation between tax expense and accounting profit

Rs. in million
Accounting profit 455.00
Tax at applicable rate / applicable tax rate 122.85
Previous unrecognized deferred tax on minimum tax
(88–55) (33.00)
Effect of decrease in tax rate on opening deferred tax
liability [(288.40–120.40)/28×1] (6.00)
Tax expense / Average effective tax rate 83.85

2. Movement in deferred tax liability/(asset)

Opening Recognised in Closing
balance Equity OCI P&L (Bal.) balance
-------------------------------- Rs. in million --------------------------------
Arising in respect of:
Property, plant & 288.40 64.80 (87.25) 265.95
equipment (2,500–
240×27% (2,635–1,650)×27%
1,470)×28%
Minimum tax (55.00) 55.00 -
Share scheme - (1.08) (5.40) (6.48)
(4×27%) (72/3)×27%
Retirement benefit (120.40) (10.80) 35.35 (95.85)
430×28% 40×27% 355×27%
Liability added back - (9.45) (9.45)
35×27%
Investment - 6.21 6.21
23×27% 23×27%
113 (1.08) 60.21 (11.75) 160.38

Page 5 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2019

W-1: Current tax Rs. in million

Accounting profit 455.0
Accounting depreciation 475.0
Tax depreciation (280.0)
Excess disposal 230–140 90.0
Shares scheme allowable on exercise 60×1/3 20.0
Liability added back 35.0
Retirement benefit expense 145.0
Retirement benefit paid (260.0)
Taxable income 680.0
Tax @ 27% A 183.6
Minimum tax @ 1% of 5,300 B 53.0
Higher of A and B 183.6
Adjustable minimum tax (88.0)
Current tax 95.6

(b) Arabian Limited

Statement of comprehensive income
For the year ended 31 December 2018
Rs. in million
Profit before tax 455.00
Taxation Note 1 (83.85)
Profit after tax 371.15

Other comprehensive income

Items that will not be reclassified to profit or loss:
Change in fair value of equity instruments 23.00
Gain on property, revaluation 240.00
Re-measurement of retirement (40.00)
Income tax relating to these items Note 2 (60.21)

Items that may be reclassified to profit or loss -

Other comprehensive income for the year- net of tax 162.79

Total comprehensive income 533.94

A.5 French Limited

General Journal
Debit Credit
Date Description
-------- Rs. --------
03-01-15 Debenture – amortised cost (15,000×96) 1,440,000
Loss on initial recognition 15,000
Cash/Bank 15,000×97 1,455,000

Debenture – amortised cost 35,000

Cash/Bank 35,000

03-01-15 Impairment loss (P&L) 11,200

Debenture loss allowance 11,200

Page 6 of 7
 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2019

31-12-15 Cash/Bank (15,000×100×12%) 180,000

Debenture – amortised cost (Balancing figure) 5,850
Interest income 1,475,000×12.6% 185,850

31-12-16 Cash/Bank (15,000×100×12%) 180,000

Debenture – amortised cost (Balancing figure) 6,587
Interest income (1,475,000+5,850)×12.6% 186,587

31-12-16 Impairment loss (P&L) (62,600–11,200) 51,400

Debenture loss
allowance 51,400

31-12-17 Cash/Bank (15,000×100×12%) 180,000

Debenture – amortised cost (Balancing figure) 7,417
Interest income (1,475,000+5,850+6,587)×12.6% 187,417

31-12-17 Impairment loss (P&L) (70,900–62,600) 8,300

Debenture loss
allowance 8,300

31-12-18 Cash/Bank (15,000×100×12%) 180,000

Debenture – amortised cost (Balancing figure) 582
Interest income
[(1,475,000+5,850+6,587+7,417)–70,900]×12.6% 179,418

(The End)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Summer 2019

Passing %

Question-wise
Overall
1 2 3 4 5
58% 23% 36% 26% 67% 45%

General comments

An overall passing ratio of 44.7% is improvement from the last two results of 41.4% and
33.2%. There were many impressive individual performances and one of them secured
Gold Medal. Although many examinees performed well, some shortcomings such as lack
of practice, poor presentation, etc. were commonly noted in most scripts. Many students
secured good marks in two to three questions but failed to obtain reasonable marks in the
remaining questions.

It has been observed that examinees often spend extra time on completing a question
which affect their performance in the other questions. Examinees are therefore strongly
advised to move to the next question after they have spent reasonable time on a particular
question. This would help them to attempt all questions of the paper.

Question-wise common mistakes observed

Question 1

 Lease liability and right of use asset in respect to machine leased by OL from BL
were not reversed.
 Fair value adjustment in respect of building was incorporated though it was not
required because OL had already adopted revaluation model.
 BL’s direct investment in CL was not remeasured at fair value after acquisition.
 The investment made in PL was treated as ‘joint operations’ instead of ‘Joint
venture’.
 BL’s surplus on revaluation was included in full rather than to the extent of BL’s
share.

Page 1 of 2
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2019

Question 2

 In part (i), capitalization of web servers along with its operating system under IAS 16
was either not mentioned or capitalized under IAS 38. Further, additional information
required was not mentioned.
 In part (ii), examinees failed to produce complete answer and consequently did not
secure full marks.
 In part (iii), discussion was based on share based payment transactions in which
counterparty had a choice of settlement. In fact, in the given situation, the entity i.e.
FL had the choice of settlement.
 In part (iv), examinees correctly identified that revenue should not be immediately
recognized but failed to mention the reasons properly. Further, ‘right to recover a
product to be returned asset’ and ‘deferred revenue liability’ were not discussed.

Question 3

Errors / omissions mentioned at serial (i), (vi), (viii) and (ix) in the suggested solution
were ignored.

Question 4

 Tax rate was applied on unutilized minimum tax while computing opening deferred
tax.
 Deferred tax on share scheme was calculated using fair value of shares instead of
intrinsic value.
 Effect of previously unrecognized deferred tax on minimum tax was not shown in
reconciliation between tax expense and accounting profit.
 Effects of deferred tax on equity and OCI were not separately shown anywhere.
 Redrafting of statement of comprehensive income was either not made or made
without presenting tax effects of OCI items.

Question 5

 Debenture was initially recorded at Rs. 97 i.e. at purchase price instead of Rs. 96 i.e.
quoted market price.
 Debenture cost was credited instead of crediting debenture loss allowance for
recording impairment in value of debenture.
 In 2018, interest income was computed by examinees on gross amount of debenture
instead of net debenture amount i.e. gross amount minus impairment loss.

(THE END)

Page 2 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional – Summer 2019

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1
Goodwill 4.5

Investment in joint venture – PL 3.0

Surplus on revaluation 2.5

Retained earnings 3.0

Non-controlling interest 3.0

Lease adjustments 5.0

Fair value adjustments 2.0

Other assets and liabilities 2.0

A.2 (i) Website cost:

Discussion on items to be expensed 2.5

Discussion on items to be capitalised as tangible assets 1.5

Discussion on items to be capitalised as intangible assets 4.0

(ii) Discussion on treatment of surplus in defined benefit obligation plan 4.0

(iii) Share based payment transactions:

If cash settled share based payment 3.0

If equity settled share based payment 3.0

(iv) Discussion on revenue recognition when sale of products was made with a
right to return 4.0

(v) Acquisition of a building on lease:

Discussion 1.5

Calculation 1.5

A.3
02 marks for identification of each unmatched amounts of note 4.0

01 mark for identification of each error 2.0

01 mark for identification of each omission 4.0

A.4 (a)
Computation of current tax 5.0

Notes on taxation including reconciliation 4.0

Computation of closing deferred tax liability 5.0

Movement in deferred tax liability/asset 5.0

(b)
Presentation of OCI items (net of tax) 2.0

Other disclosures 3.0

A.5 Entries on:

Initial recognition 3.0

31 December 2015 4.5

31 December 2016 3.0

31 December 2017 3.0

31 December 2018 2.5
(THE END)
Page 1 of 1
 Certified Finance and Accounting Professional Stage Examination

The Institute of 2 December 2019

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 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:

Karachi Lahore Peshawar
-------------- Rs. in million --------------
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 10 8 6

(ii) Corporate assets:

Carrying amount Remaining
before impairment average useful life
Rs. in million No. of 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)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 You are the Finance Manager of Dirham Limited (DL). Your assistant has prepared draft
financial statements of DL for the year ended 31 December 2018. However, he could not
prepare statement of changes in equity due to certain outstanding issues.

For the purpose of preparation of statement of changes in equity, the following information
is available:

(i) Share capital and reserves as on 31 December:

2017 2016 2015
------------ Rs. in million ------------
Share capital (Rs. 10 each) 700 700 700
Retained earnings 1,013 702 530
Revaluation surplus 281 172 151

(ii) Net profit for 2018 (draft), 2017 (audited) and 2016 (audited) were Rs. 198 million,
Rs. 311 million and Rs. 242 million respectively.
(iii) The draft statement of financial position as on 31 December 2018 shows total assets
and total liabilities of Rs. 2,977 million and Rs. 785 million respectively.

Details of outstanding issues:

(i) 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 option are as under:

On grant date On 31-Dec-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.

(ii) 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.
 Advanced Accounting and Financial Reporting Page 3 of 5

(iii) 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.

(iv) 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:
(a) Determine the revised amounts of total assets and total liabilities after incorporating
effects of the above corrections. (15)
(b) Prepare DL’s statement of changes in equity for the year ended 31 December 2018
along with comparative figures after incorporating effects of the above corrections, if
any. (Ignore taxation. ‘Total’ column is not required) (10)

Q.3 International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for
SMEs) applies to all entities that do not have public accountability. The users of financial
statements of these entities have a different focus from those interested in listed companies.
IFRS for SMEs attempts to meet the users’ needs while balancing the costs and benefits to
preparers. It does not require preparers of financial statements to cross-refer to full IFRS.

Required:
Discuss any eight key differences between requirements of IFRS for SMEs and full IFRS. (12)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.4 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:

Cash payment of Rs. 1,300 million.

Transfer of RL’s freehold land having carrying value and fair value of
Rs. 300 million and Rs. 450 million respectively.

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:

TL's retained earnings were Rs. 750 million.

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 the claim. As at 31 December 2018, it was still
appearing as contingent liability in TL’s financial statements.

(iii) During the year, the following intra-group transactions took place:
Included in buyer’s
Sales
closing inventory Profit % on sales
-------------- Rs. in million --------------
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.
 Advanced Accounting and Financial Reporting Page 5 of 5

(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)

Q.5 Lira and Co., Chartered Accountants (LCCA) is considering the impact of possible
adoption of IFRS 15 ‘Revenue from Contracts with Customers’ on its revenues. In this
regard, the Finance Manager of LCCA has sought your advice on the following matters:

(i) At LCCA’s year end, external audits of the financial statements of various clients are
in progress. LCCA usually raises bills for such audits on signing of the audit report
when LCCA’s enforceable right to payment has been established. However, in some
other cases, LCCA has an enforceable right to payment for the work done to date
which is non-refundable unless LCCA fails to complete the audit. In these cases,
progress bills are raised by LCCA.

(ii) LCCA has a contract with a client to provide assistance to the client’s internal audit
department for a period of 3 years. The work is performed in complete coordination
with client’s internal audit personnel and any issues identified during the course of
audit are immediately brought to the knowledge of the client.

Client’s internal audit plan is agreed in advance with LCCA. Only few internal audits
are scheduled in the months of July and August as compared to other months, due to
post year end work load at client’s other departments. LCCA deputes staff on need
basis. Contract price is billed in six equal instalments through bills raised in arrears at
the end of each half year on 30 June and 31 December.

(iii) LCCA provides/arranges employees on secondment basis to a local client and also to
its network firms abroad. In this respect, LCCA receives full amount each month and
then disburses employees’ share.

The local client requests for the specific persons which are then hired by LCCA
exclusively for the client. LCCA is not responsible for ensuring that the services are
performed by the employees in accordance with the terms and conditions of the
contract. Consideration received by LCCA is different for each employee and is based
on negotiations between employee and the client.

Network firms request for any suitable personnel for their field work. LCCA then
selects from its existing employees and seconds them to the network firms.
Consideration received by LCCA for each employee is same and is based on
negotiations between LCCA and the network firm.

Required:
(a) In respect of (i) and (ii), discuss when revenue should be recognized by LCCA. For
each situation where revenue is to be recognized over time, suggest an appropriate
method for measuring progress towards complete satisfaction of the performance
obligation. Assume that LCCA’s year end is 31 October. (10)

(b) In respect of (iii), discuss whether the revenue should be recorded as ‘Net amount’
(i.e. after deducting employees’ share) or ‘Gross amount’. (08)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.1 Krona Limited

(a) (i) Calculation of impairment:
Karachi Lahore Peshawar Total
Average useful life – years (A) 10 8 6

--------------- Rs. in million ---------------

Carrying amount before impairment (B) 160.00 100.00 125.00
Weighting based carrying amount A×B = (C) 1,600.00 800.00 750.00 3,150.00
Allocation of corporate assets:
- Head office 84/3,150×C 42.67 21.33 20.00 84.00
- Product development center* 26/(1,600+800) ×C 17.33 8.67 - 26.00
D 60.00 30.00 20.00
Carrying amount including corporate assets B+D 220.00 130.00 145.00
Recoverable amount (155.00) (115.00) (169.00)
Impairment loss 65.00 15.00 - 80.00
*Allocation based on carrying amount is also correct.
Carrying amount after impairment:
CGU Corporate
Total
Karachi Lahore Peshawar Head office Product dev.
--------------------------------- Rs. in million ---------------------------------
Carrying value 160.00 100.00 125.00 84.00 26.00 495.00
Impairment:
- Karachi (47.27) - - (12.61) (5.12) (65.00)
65/220×42.6
65/220×160 7 65/220×17.33
- Lahore - (11.54) - (2.46) (1.00) (15.00)
15/130×21.3
15/130×100 3 15/130×8.67
112.73 88.46 125.00 68.93 19.88 415.00

(a) (ii) Calculation of impairment:

1st test: CGUs without corporate assets Karachi Lahore Peshawar
---------- Rs. in million ----------
Carrying amount before impairment 160.00 100.00 125.00
Recoverable amount (155.00) (115.00) (169.00)
Impairment loss 5.00 - -

2nd test: Karachi, Lahore & Product development Rs. in million

Carrying amount: Karachi & Lahore (after 1st test) 160+100–5 255.00
Product development 26.00
Carrying amount (after 1st test) 281.00
Recoverable amount 155+115 (270.00)
Impairment loss 11.00

3rd test: All CGUs with all corporate assets

Carrying amount: Karachi, Lahore & Product dev. (after 2nd test) 281–11 270.00
Peshawar 125.00
Head office 84.00
Carrying amount (after 2nd test) 479.00
Recoverable amount 155+115+169 (439.00)
Impairment loss 40.00

Page 1 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

Carrying amount after impairment:

CGU Corporate
Total
Karachi Lahore Peshawar Head office Product dev.
--------------------------------- Rs. in million ---------------------------------
Carrying value 160.00 100.00 125.00 84.00 26.00 495.00
1st test (5.00) - - - - (5.00)
155.00 100.00 125.00 84.00 26.00 490.00
2nd test (6.07) (3.91) - - (1.02) (11.00)
11/281×155 11/281×100 11/281×26.00
148.93 96.09 125.00 84.00 24.98 479.00
3rd test (12.44) (8.02) (10.44) (7.01) (2.09) (40.00)
40/479×148.93 40/479×96.09 40/479×125.00 40/479×84 40/479×24.98
136.49 88.07 114.56 76.99 22.89 439.00

ALTERNATE

Carrying amount after impairment:

CGU Corporate
Total
Karachi Lahore Peshawar Head office Product dev.
--------------------------------- Rs. in million ---------------------------------
Carrying value 160.00 100.00 125.00 84.00 26.00 495.00
1st test (5.00) - - - - (5.00)
155.00 100.00 125.00 84.00 26.00 490.00
2nd test - - (11.00) (11.00)
155.00 100.00 125.00 84.00 15.00 479.00
3rd test (33.94) (6.06) (40.00)
40/99×84 40/99×15
155.00 100.00 125.00 50.06 8.94 439.00

Rs. in million
(b) Total impairment loss under (a)(i) 65+15 80.00
Total impairment loss under (a)(ii) 5+11+40 56.00
Difference 24.00

In (a)(ii) above, due to non-availability of reasonable basis for allocation of corporate

assets, impairment has been assessed on overall basis. This results in lesser loss in this
situation.

Peshawar CGU is not impaired and its recoverable amount is more that the carrying value
by Rs. 24 million. So on overall impairment assessment, the excess of Rs. 24
million resulted in lesser impairment loss.

Page 2 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.2 Dirham Limited

(a) Effect of corrections/issues:
Total Total Profit Profit
Other
assets liabilities for 2018 for 2017
-------------------- Rs. in million --------------------
Balances as given 2,977.00 785.00 198.00 311.00
(i) Share options
(5.25)
Expense for 2016: (120,000×175×1÷4) 5.25
Expense for 2017: [(120,000×175×2÷4) – 5.25] (5.25) 5.25
Expense for 2018: [(120,000×150×3÷4)–5.25–5.25] (3.00) 3.00
(3.00) (5.25) 13.5
Equity
(5.25)
Op RE
(ii) Plant and decommissioning cost
Depreciation on plant (150÷6) (25.00) (25.00)
Decommissioning cost revision [40×( 1.11)5 –
40] 27.40 (3.40) (24.00)
Unwinding of interest [(40.00+27.40)×11%] 7.40 (7.40)
(25.00) 34.80 (35.80) (24.00)
Rev. Sur.
(iii) Investment in debenture
Gain on initial recognition [2.5×(105–103)] 5.00 5.00
Transaction cost 1.50 1.50
Fair value adjustment [2.5×(109–105.6)] 8.50 8.50
Impairment (6.00) 6.00
15.00 0.50 14.50
OCI
(iv) Pension scheme
Increase in pension expense [45.00+(85×10%)–40] 13.50 (13.50)
Re-measurement gain (18.00) 18.00
(4.50) (13.50) 18.00
OCI
2,967.00 815.30 146.20 305.75 16.75

(b) Statement of changes in equity for the year ended 31 December 2018
Share Retained Fair value Share
Rev. surplus
capital earnings reserve options
----------------------- Rs. in million -----------------------
Balance as at 31-12-2016, as previously reported 700.00 702.00 172.00 - -
Correction of prior year’s error (5.25) 5.25
Balance as at 31-12-2016: Restated 700.00 696.75 172.00 - 5.25
Equity-settled share based payment: Restated 5.25
Total comprehensive income for 2017:
- Profit for the year: Restated 305.75
- Other comprehensive income 109.00 -
(281‒172)
Balance as at 31-12-2017: Restated 700.00 1,002.50 281.00 - 10.50
Equity-settled share based payment 3.00
Total comprehensive income for 2018:
- Profit for the year 146.20
- Other comprehensive income 18.00 (24.00) 14.50
Balance as at 31 December 2018 700.00 1,166.70 257.00 14.50 13.50

Page 3 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.3 Eight key differences between requirements of IFRS for SMEs and full IFRS:

IFRS for SMEs Full IFRS

Financial statement presentation
1. Permits to present a combined statement of Do not permit such combined statement of
income and retained earnings. income and retained earnings.

2. Does not require segment information. Require segment information for certain
entities.

3. Does not require earnings per share to be Require certain entities to present earnings
disclosed. per share.

Intangible assets
4. The intangible assets with indeterminable Require intangible assets with indefinite life to
useful life are considered to have ten years of be carried at cost less impairment loss, if any
useful life. and such assets are not depreciated.

5. The development and research expenditures Require development costs which meet the
are always recorded as an expense. specified condition to be capitalized as an
asset.

Investment property
6. Investment property whose fair value can be Allow an accounting policy choice of either fair
measure reliably without undue cost or effort value through profit or loss or a cost model
shall be measured at fair value at each (with some limited exceptions).
reporting date.

Borrowing costs
7. All borrowing costs shall be recognised as an Require borrowing costs directly attributable
expense in profit or loss. to a qualifying asset to be capitalized.

Business combination
8. The goodwill is measured at cost less The goodwill acquired in a business
accumulated amortisation and any combination is only subject to impairment
accumulated impairment losses. testing at least annually and is not amortised.

There are also other valid differences.

Page 4 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.4 Ruble Limited

Consolidated statement of financial position as on 31 December 2018
Rs. in million
Assets:
Property, plant and equipment (7,450+3,000)–300+250–24(W-2) 10,376.00
Goodwill (W-1) 375.60
Investment in joint venture - YL (W-7) 1,128.00
Current assets (650+500)–37.5 (W-2)–15 (W-4) 1,097.50
12,977.10
Equity and liabilities:
Share capital 4,000.00
Share premium 1,100.00
Group retained earnings (W-4) 2,989.31
Non-controlling interest (W-5) 469.62
Long-term loan (1,700+800)+183 (W-6) 2,683.00
Deferred tax (W-3) 390.17
Current liabilities (950+355) +40* 1,345.00
12,977.10
*May be shown separately or within non-current liabilities

W-1: Goodwill Rs. in million

Cash payment 1,300.00
Land at fair value 450 450.00
Loan at fair value 99(200×1.15–5)+ 81(200×12%×3.35216) 180.00
Cost of investment 1,930.00
Non-controlling interest on acquisition (W-2) 1,943×0.2 388.60
Net assets at acquisition (W-2) (1,943.00)
Goodwill 375.60

W-2: TL' net assets Acquisition date Reporting date

------- Rs. in million -------
Share capital 800.00 800.00
Share premium 225.00 225.00
Retained earnings 750.00 1,200.00
Fair value adjustment of building 250.00 250.00
Additional depreciation on building [(250–70)÷7.5] - (24.00)
Recognition of contingent liability (40.00) (40.00)
Unrealised profit on TL’s sale lying in RL’s stock [150×0.25] - (37.50)
Deferred tax liability (W-3) 42–16.58 (42.00) (25.42)
1,943.00 2,348.08

W-3: Deferred tax liability/(asset): Rs. in million

RL’s and TL’s balance as given 250+120 370.00
Interest on bank loan (3×0.25) (0.75)
Unrealised profit on RL’s sale lying in TL’s stock (15×0.3) (4.50)

Related to TL – at acquisition date:

Fair value adjustment of building excl. land (250–70)×0.3 54.00
Recognition of contingent liability (40×0.3) (12.00)
42.00
Related to TL – Reporting date adjustments:
Additional depreciation on FV adjustment (W-2) (24×0.3) (7.20)
Unrealised profit on TL’s sale lying in RL’s stock (W-2) (37.5×0.25) (9.38)
(16.58)
390.17

Page 5 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

W-4: Group retained earnings: Rs. in million

RL's retained earnings 2,300.00
Gain on transfer of land 450–300 150.00
TL's post acquisition profit (W-2) (2,348.08–1,943.00)×0.8 324.06
Additional interest on bank loan (W-6) 27–24 (3.00)
Related deferred tax (W-3) 0.75
(2.25)
Profit from joint venture 380×0.6 228.00
Unrealized profit on RL’s sale lying in TL’s stock (100×0.15) (15.00)
Related deferred tax (W-3) 4.50
(10.50)
2,989.31

W-5: Non-controlling interest Rs. in million

On TL's acquisition (W-1) 388.60
Post-acquisition profit of TL (W-2) (2,348.08–1,943.00)×0.2 81.02
469.62

W-6: Bank loan Rs. in million

On acquisition (W-1) 180.00
Interest cost 180×15% 27.00
Interest paid 200×12% (24.00)
Closing balance 183.00

W-7: Investment in joint venture - (using equity method) Rs. in million

Investment at cost 900.00
Share of profit from YL (W-4) 228.00
1,128.00

A.5 (a) As per para 35 of IFRS 15, an entity should recognize revenue ‘over time’ if one of the
following criteria is met:

(i) the client/customer simultaneously receive and consumes the benefits provided
by the entity’s performance as the entity performs.
(ii) the entity’s performance creates or enhances an asset that the customer controls
as the asset is created or enhanced.
(iii) the entity’s performance does not create an asset with an alternative use and the
entity has an enforceable right to payment for performance completed to date.

If performance obligation is not satisfied over time, an entity satisfies the performance
obligation at a point in time.

EXTERNAL AUDIT:
Performance of Audit services by LCCA does not meet the criteria (i) or (ii) above.

The first part of criteria (iii) is met for all audit services as partially completed audit by
LCCA does not create an asset with an alternative use.

Therefore, LCCA should recognize revenue:

 at a ‘point in time’ where LCCA’s enforceable right to payment is established only
after signing of audit report.
In these cases, revenue for audit services should only be recognized when the
control of services has been transferred i.e. when audit report has been signed and
delivered to the client.
 ‘over time’ where LCCA has enforceable right to payment for work done to date.

Page 6 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

An appropriate method for measuring progress and recognizing partial revenue for the
audits in progress at the year-end could be input method (for example: hours utilized/
cost incurred/resources consumed) or output method (for example: milestones
achieved).

INTERNAL AUDIT SERVICES:

As the work is performed in complete coordination with client and any identified issues
are immediately brought to the knowledge of the client, it can be concluded that the
client simultaneously receives and consumes the benefits provided by the LCCA’s
performance. Therefore, LCCA should recognize the revenues ‘over time’.

The revenue would be recognized over time even when LCCA does not have any
enforceable right to payment for the 4 month (July to October) of work completed as at
year.

An appropriate method could be output method where revenue is recognized on the

basis of output method (For example: milestones achieved / audits completed) or input
method (for example: hours utilized/ cost incurred/resources consumed).

(b) SECONDMENT:
Revenue should be recognized by LCCA as:
 Gross amount if working as a principal
 Net amount if working as an agent

LCCA would be a principal if it controls the specified goods or services before that good
or service is transferred to a customer.

Indicators of transfer of control are:

 Entity is primarily responsible for fulfilling the promise.
 Entity has inventory risk.
 Entity has discretion in establishing the price.

In respect of employees seconded to local client, LCCA does not obtain control as:
 LCCA is not primarily responsible for fulfilling the promise.
 LCCA does not have inventory risk as LCCA does not have the ability to direct the
use of those employees to other assignments. Or Employees are specifically hired
for the client.
 LCCA does not have discretion in establishing the price.

So LCCA is acting as an agent and should recognize revenue on “Net basis”.

In respect of employees seconded to network firms, LCCA has control over its existing
employees as:
 It can direct such employees to other assignment,
 It has inventory risk because it has to bear the cost of employees if not used at any
assignment, and
 It has price discretion.

So LCCA is acting as a principal and should recognize gross amount from network firms
as revenue. The cost of employees would be recognized as cost of fulfilling the contract.

(The End)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFIED FINANCE AND ACCOUNTING PROFESSIONAL (CFAP) EXAMINATION

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Winter 2019

Passing %

Question-wise
Overall
1 2 3 4 5
17% 22% 28% 84% 28% 31%

General comments

Overall passing ratio in this paper declined as compared to the last two results of 45% and 41%
respectively. Examinees appeared to have focused on selective study and displayed inadequate
knowledge of IAS 36 and IFRSs for SMEs which was evident from the fact that 48% of the
examinees scored less than 15% marks in Q1aii (impairment) and Q3 (IFRSs for SMEs). Further,
it has been observed that examinees often spend extra time on completing the question on
consolidation which affects their performance in the other questions. Examinees are therefore
strongly advised to move to the next question after they have spent reasonable time on a particular
question. This would help them to attempt all questions of the paper. Many examinees secured
good marks in two questions but failed to obtain reasonable marks in the remaining questions.

The highest score in the paper was 82 marks.

Question-wise common mistakes observed

Question 1

In a(i), carrying amount of product development center was allocated to all 3 CGUs. Further,
useful life was ignored while allocating carrying amount of corporate assets to CGUs.

In a(ii), examinees had no idea of the correct approach to solve the question. Examinees often
just calculated an overall impairment loss and did not perform impairment testing into 3 steps.

1b was either not attempted or contained irrelevant points which resulted in zero marks.

Page 1 of 2
Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP Examination
Winter 2019
Question 2

Vesting period of share options was taken as 3 years instead of 4 years. Further, effect of
share options was not shown as correction of prior period error.

Transaction cost of Rs. 1.5 million was added to cost of debenture while calculating gain on
initial recognition.

Adjustments in respect of pension scheme were shown in total assets instead of total
liabilities.

Unwinding of interest in case of provision for decommissioning cost was calculated on
existing provision of Rs. 40 million instead of revised provision of Rs. 67.40 million.

Statement of changes in equity was started from December 2015 instead of December 2016.
Some even presented statement of changes in equity only for the year 2018.

Separate columns for fair value reserve and share options were not presented in the statement
of changes in equity.

The term ‘restated’ was not mentioned with opening balances, closing balances and profit for
2017.

Question 3

Some examinees compared applicability and purpose of IFRS for SMEs and Full IFRS
instead of discussing the differences in their requirements.

For IFRS for SMEs, it was wrongly identified that only cost model is allowed for subsequent
measurement of property, plant and equipment.

Question 4

The investment made in YL was treated as ‘Joint operations’ instead of ‘Joint venture’.
Further, the deferred tax liability was created on share of profit from YL.

Deferred tax adjustments related to TL’s consolidation were not presented.

Question 5

In part (a), answers were often correct but lacked completeness. Examinees directly jumped to
conclusion without giving any reasons. Further, methods to measure progress for recognizing
partial revenue were not given.

In part (b), examinees had no idea of the issue examined and did irrelevant discussion. While
some examinees did not discuss indicators of transfer of control to support their conclusion.

(THE END)

Page 2 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2019

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a) (i)
Allocation of corporate assets to each CGU 4.0

Determination of recoverable amount of each CGU 1.5

Allocation of impairment loss 2.5

(ii)
1st impairment testing and its allocation 2.0

2nd impairment testing and its allocation 4.0

3rd impairment testing and its allocation 4.0

(b) 01 mark for each well explained point 2.0

A.2 (a) Determination of revised balances of assets and liabilities and corresponding
impact on profits in respect of:

share options 4.0

revision of useful life 5.0

purchase of debentures 4.0

pension fund 2.0

(b) Preparation of statement of changes in equity:

Restatement of opening retained earnings 2.0

Incorporating items relating to 2017 3.0

Incorporating items relating to 2018 5.0

A.3 1.5 marks for each correct key difference 12.0

A.4
Goodwill 4.0

Investment in joint venture – YL 2.0

Bank loan 3.0

Deferred tax 6.0

Retained earnings 3.0

Unrealised profit adjustment 2.0

Fair value adjustment 2.0

Non-controlling interest 1.0

Other assets and liabilities 2.0

A.5 (a)
External audit

− Criteria for recognition of revenue 2.0
− ‘Time’ when revenue is to be recognised 3.0
− Appropriate method for measuring progress 1.0

Internal audit
− Criteria for recognition of revenue 1.0
− ‘Time’ when revenue is to be recognised 2.0
− Appropriate method for measuring progress 1.0

Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2019

Mark(s)
(b) Revenue to be recorded as ‘Net amount’ or ‘Gross amount’:

Discussion on principal and agent 3.0

Indicators of transfer of control 3.0

Conclusion 2.0

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 7 December 2020

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 For the purpose of this question, assume that the date today is 1 February 2020.

Financial statements of Hikmat Limited (HL) for the year ended 31 December 2019 are
under preparation. In this respect, following matters are under consideration:

(a) On 1 September 2019, HL entered into a contract to develop a software for Doctor
Limited (DL) for Rs. 150 million. HL ascertained that the promised development of
software is a single performance obligation satisfied over time. The terms of the
contract include a penalty of Rs. 14 million if the development of software is not
completed before 29 February 2020. At the inception of the contract, HL determined
that the expected cost of completing the contract would be Rs. 90 million and the
software development would be completed before 29 February 2020.

Till 31 December 2019, HL incurred cost of Rs. 67.5 million. As the original contract
was 75% complete, HL has recognized revenue and profit of Rs. 112.5 million and
Rs. 45 million respectively in the draft financial statements.

However, HL and DL have amended the contract on 31 December 2019. As a result,

the consideration and expected cost increased by Rs. 70 million and Rs. 40 million
respectively. The allowable time for completion without penalty is increased by one
month only. HL now expects that the development of software would not be
completed by 31 March 2020. The additional work is not distinct from services under
original contract. No adjustment has been made in HL’s financial statements in
respect of the amendment in the contract. (07)

(b) On 29 December 2019, the board of directors of HL decided to sell one of its major
line of business. This segment earned a net loss during 2019 though it was earning
significant profits in the prior years. At year-end, it was expected to realise
Rs. 160 million from this sale. The actual sale of the segment was finalized in
January 2020 at a price of Rs. 145 million. All the criteria for classification of the
segment as ‘held for sale’ were met at 31 December 2019 when the carrying amounts
of assets and liabilities of the segment appearing in the draft financial statements were
as follow:

2019 2018
---- Rs. in million ----
Property, plant and equipment 195 224
Intangible assets 28 35
Current assets 50 60
Liabilities 90 75

No change has been made in the amounts and presentation of financial statements in
respect of the board of directors’ decision. (07)
 Advanced Accounting and Financial Reporting Page 2 of 5

(c) HL had acquired 30% shareholding in Physician Limited (PL) in 2016 for
Rs. 150 million which has been accounted for under equity method. On
31 December 2019, HL disposed of 20% shareholding in PL at a fair value of
Rs. 180 million which resulted in loss of significant influence over PL. Before
disposal, carrying amount of the investment had increased to Rs. 240 million due to
profits and other comprehensive income of PL over the years. Upon disposal, HL has
recognized the difference of sale proceeds and Rs. 160 million (240×20/30) as gain on
disposal. No other adjustment has been made. (05)

(d) During 2019, HL announced a bonus scheme for its employees. Under the scheme, all
employees completing 5 years of service at HL would be entitled to 2 bonus salaries.

HL was incorporated in 2016, so the first employee would complete 5-year period in
2021 and therefore nothing has been recorded in the HL’s financial statements. (04)

Required:
Discuss how the above matters should be dealt with in HL’s financial statements for the
year ended 31 December 2019. Show all calculations wherever possible.

Q.2 On 1 January 2016, Tabeeb Limited (TL) purchased 2 million debentures (having face value
of Rs. 100 each) issued by Fit Limited (FL) at Rs. 92 each. Transaction cost of Rs. 3 million
was also incurred on purchase of debentures.

TL classified the investment in debentures as financial asset at fair value through other
comprehensive income. At initial recognition, TL determined that debentures were not
credit impaired.

Coupon rates for the year 2016, 2017 and subsequent years are 0%, 6% and 10% per annum
respectively payable on 31 December each year. The effective interest rate is 8.9% per
annum.

On 31 December 2017, TL received the interest but due to deteriorating credit rating of FL,
TL determined that there had been a significant increase in credit risk since the acquisition
of the debentures.

On 31 December 2018, FL defaulted in payment of interest and TL determined that the

debentures were credit impaired.

On 2 January 2019, TL sold the debentures at Rs. 84 each. Transaction cost of Rs. 1 million
was also incurred on sale of debentures.

Following information regarding the 2 million debentures at various dates is also available:

Expected credit losses Fair value in

Date Life time 12 months quoted market
--------------- Rs. in million ---------------
01 January 2016 3.0 1.0 186.0
31 December 2016 4.5 1.0 211.0
31 December 2017 12.1 5.2 190.0
31 December 2018 25.3 10.1 171.2

Required:
Prepare journal entries in the books of TL in respect of the above for the years ended
31 December 2016 to 31 December 2019. (20)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.3 Health Pharma Limited (HPL) entered into the following arrangements during 2019:

(i) On 1 January 2019, HPL acquired a capsule manufacturing machine from Hi-Tech
Industries Limited for a lease term of 5 years with instalments payable annually in
advance. The useful life of the machine was estimated at 6 years.

HPL paid the 1st instalment of Rs. 50 million on 1 January 2019. However,
subsequent lease payments are subject to increase/decrease in line with consumer
price index (CPI). At lease inception, HPL estimated that CPI will increase by 10%
annually. However, CPI increased by 14% in 2019 and consequently Rs. 57 million
was paid on 1 January 2020 as 2nd instalment. At 31 December 2019, HPL estimated
that the annual increase in CPI will continue to be 14% in future years.

HPL is also required to pay a usage fee of Rs. 0.3 per capsule produced in excess of
30 million capsules per annum from the machine. At lease inception, HPL planned to
produce 40 million capsules each year during the lease term. During 2019, HPL
produced 40 million capsules and accordingly an amount of Rs. 3 million was also
paid along with 2nd instalment.

(ii) On 1 April 2019, HPL entered into a contract with Auto Limited (AL) for the use of
8 Refrigerated Trucks for a period of 3 years at semi-annual payment of Rs. 10 million
payable in arrears. AL is also required to provide two drivers along with each truck.
The amount of Rs. 10 million can be allocated to the trucks’ rental and drivers’ cost in
the ratio of 70:30 respectively.

All costs pertaining to running and maintenance of trucks, would be paid by AL.
However, HPL is required to reimburse 30% of the fuel cost to AL. Fuel cost for 2019
was Rs. 4 million. HPL paid its share of fuel cost in 2020.

HPL uses these trucks for transportation of inventory all over the country. In order to
save fuel and time, AL often replaces a similar truck at the required location from one
of AL’s nearby office. AL is also required to provide a substitute truck in case of
accident and maintenance work.

(iii) On 1 July 2019, HPL sold its warehouse building to Macro Finance Limited (MFL)
for cash of Rs. 1,400 million. Immediately before the transaction, the building was
carried at Rs. 900 million and had remaining useful life of 18 years. At the same time,
HPL entered into a contract with MFL for the right to use the warehouse building for
10 years, with annual payment of Rs. 180 million payable in arrears. Fair value of the
building at the date of sale was Rs. 1,500 million. The rate of interest implicit in the
lease is 11% per annum.

The terms and conditions of the transaction are such that the transfer of the building
by HPL satisfies the requirements for determining when a performance obligation is
satisfied in IFRS 15.

HPL's incremental borrowing rate is 12% per annum.

Required:
Prepare the extracts relevant to the above transactions from HPL's statement of financial
position and statement of profit or loss for the year ended 31 December 2019 in accordance
with the IFRS. (Comparative figures and notes to the financial statements are not required) (20)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.4 Shifa Limited (SL) has investment in following companies:

Goodwill/ (Bargain
Investment Date of
Investee Shareholding purchase) on acquisition
type investment
(Rs. in million)
1-Jan-2015 LA 55% 130
1-Jan-2019 LB 60% 220
Local
1-Apr-2019 LC 90% (60)
31-Dec-2019 LA 20% ?
Foreign 1-May-2019 FD 70% ?

A draft consolidated statement of financial position of SL and its local subsidiaries as on

31 December 2019 is as under:

Assets Rs. in million Equity and liabilities Rs. in million

Property, plant and equipment 14,200 Share capital 6,000
Goodwill 350 Group reserves 6,745
Investment property at fair value 200 Non-controlling interest 2,315
Investment at cost: Liabilities 13,360
FD (CNY 100 million) 2,000
LA (20% investment) 120
Current assets 11,550
28,420 28,420

The effects of the following have not been considered while preparing the above statement
of financial position:
(i) Investment property represents a warehouse owned by SL and rented out to LB on
1 July 2019 for 9 months at a rent of Rs. 2 million per month. Upto 30 June 2019, the
warehouse was rented out to other tenants. Carrying value and remaining useful life
of the warehouse on 1 July 2019 was Rs. 180 million and 15 years respectively. On
31 December 2019, rent of 2 months was not paid by LB.
(ii) A contingent liability of Rs. 150 million as disclosed in LB’s financial statements was
not included by SL in the net assets of LB at the acquisition date. SL's legal advisor
had at that time estimated that LB would be liable to pay Rs. 40 million to settle the
claim.
As at 31 December 2019, it was still appearing as contingent liability in LB's financial
statements while SL's legal advisor revised its estimate to Rs. 60 million to settle the
claim.
(iii) While calculating bargain purchase for LC, a purchase consideration of
Rs. 121 million, payable in cash on 31 March 2021 was not considered. Applicable
discount rate is 10% per annum.
(iv) LC which deals in office equipment, sold equipment to LB on 1 July 2019 for
Rs. 70 million at cost plus 40%. LB depreciates this equipment over 5 years.
(v) On the date of additional investment of 20% in LA, the net assets of LA other than
goodwill were amounted to Rs. 700 million.

For consolidation of FD, the following information is available:

(i) FD is registered in China and its functional currency is Chinese Yuan (CNY). On the
date of acquisition, FD’s retained earnings were CNY 20 million. Fair value of its net
assets was equal to their book value, except for an intangible asset whose fair value
was higher than its carrying value by CNY 15 million. Its remaining useful life at the
date of acquisition was estimated at 10 years
 Advanced Accounting and Financial Reporting Page 5 of 5

(ii) FD’s statement of financial position as on 31 December 2019 is as under:

CNY CNY
Assets Equity and liabilities
in million in million
Property, plant and equipment 100 Share capital 60
Intangible assets 40 Retained earnings 42
Investment property at fair value 10 Liabilities 138
Current assets 90
240 240

(iii) The exchange rates per CNY are as follows:

Average for Average for

1-May-2019 31-Dec-2019
May-Dec 2019 2019
Rs. 20 Rs. 24 Rs. 23 Rs. 22

SL values non-controlling interest at its proportionate share of the fair value of the
subsidiaries' net identifiable assets.

Required:
Prepare revised consolidated statement of financial position of SL as on 31 December 2019
in accordance with the requirements of IFRSs. (25)

Q.5 Following information is available from the records of Long Life Equity Fund (an open-end
mutual fund) for the year ended 30 June 2020:

(i) Undistributed income as at 1 July 2019 comprised of realised income and unrealised
loss of Rs. 269 million and Rs. 12 million respectively.
(ii) Total net assets at 1 July 2019 amounted to Rs. 9,690 million.
(iii) Allocation of net income for the year is as follows:
Rs. in million
Total comprehensive income 364
Income already paid on units redeemed (85)
279

(iv) Accounting income available for distribution only relates to capital gains.
(v) Final distribution of Rs. 255 million i.e. @ 5% for the year ended 30 June 2019 was
made during the year.
(vi) Details of issuance and redemption of units during the year are as follows:
Issuance Redemption
Units in million 660 750

----------- Rs. in million -----------

Capital value 12,606 (14,250)
Element of income / (loss) 120 (144)
12,726 (14,394)

(vii) Unrealized income included in undistributed income as at 30 June 2020 amounted to

Rs. 7 million.

Required:
Prepare a statement of movement in unit holders’ fund for the year ended 30 June 2020.
(Ignore disclosure of comparative figures and net assets value per unit) (12)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

A.1 (a) As the remaining goods and services to be provided using the modified contract are
not distinct from the goods and services transferred on or before the date of contract
modification; that is, the contract remains a single performance obligation.

Consequently, HL should account for the contract modification as if it were part of the
original contract. HL should update its measure of progress on the basis of revised
expected cost of completion. HL should also revise transaction price under the
contract by including the additional consideration and deducting the amount of
penalty as HL expects that work would not be completed by 31 March 2020.

At 31 December 2019, HL should make a cumulative catch-up adjustment as follows.

Original Updated
Completion %age 75% 51.9%
(67.5/90×100) (67.5/130×100)
-------- Rs. in million --------
Revenue 112.5 106.9
(51.9% × 206)
Cost 67.5 67.5
Profit 45 39.4

HL should decrease revenues and profit by Rs. 5.6 million (112.5 – 106.9)

(b) Statement of financial position:

Assets of the segment would be presented separately from other assets as “Assets of
disposal group held for sale” at lower of carrying amount and fair value less cost to
sell i.e. at Rs. 250 million (160+90) while the liabilities of the segment would be
presented separately from other liabilities as “liabilities associated with the disposal
group” at Rs. 90 million. The comparative figures for the assets and liabilities of the
segment would not be reclassified.

Statement of profit or loss

The statement would be divided into Continued and Discontinued operations.
Revenues and expenses of the segment would be presented under discontinued
operations. Comparative figures of the segment would be reclassified into the
discontinued operations. An impairment loss of Rs. 23 million (195+28+50–90–160)
should be recognized.

The subsequent sale of the segment in January 2020 at Rs. 145 million indicates that
the impairment loss for the segment might need to be adjusted if the amount
represents fair value less cost to sell of the segment as at 31 December 2019.

(c) HL should discontinue the use of the equity method from the date when its
investment ceases to be an associate. HL should measure the retained interest at fair
value as a financial asset which shall be regarded as its fair value on initial
recognition as a financial asset in accordance with IFRS 9. HL subsequently measure
the investment as either at fair value through profit or loss or fair value through other
comprehensive income.

Page 1 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

HL shall recognize in profit or loss as follows:

Rs. in million
Fair value of any retained interest (180 90
×10÷20)
Proceeds from disposing 180
270
Carrying amount of the investment (240)
Gain on disposal 30

So HL should increase the investment and gain by Rs. 10 million.

HL should reclassify a gain or loss previously recognized in other comprehensive
income by PL be reclassified to profit or loss as would have been required if PL had
directly disposed of the related assets or liabilities.

(d) Scheme announced by HL is an “other long term employee benefits” under IAS 19.
Though the first payment might be made in 2021, HL needs to record the expense in
2019 and estimate the defined benefit obligation in respect of the scheme similar to
defined benefit post retirement employee benefits.
HL shall attribute benefit to the periods of service under the plan’s benefit formula i.e.
5 year and record expenses in 2019 for benefits attributable to current and prior
years. For other long-term employee benefits, an entity shall recognise the net total of
the following amounts in profit or loss:
(i) service cost;
(ii) interest on the defined benefit liability; and
(iii) remeasurements of the net defined benefit liability

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

A.2 Tabeeb Limited

General Journal
Debit Credit
Date Description
--- Rs. in million---
01-01-16 Debenture - FV OCI 186.00
Cash/Bank 2×92 184.00
Gain on initial recognition (P&L) 2.00

Debenture - FV OCI 3.00

Cash/Bank 3.00

01-01-16 Impairment loss (P&L) 1.00

Fair value reserve (OCI) 1.00

31-12-16 Debenture - FV OCI 189×8.9% 16.82

Interest income (P&L) 16.82
31-12-16 Debenture - FV OCI 211.0– (189+16.82) 5.18
Fair value reserve (OCI) 5.18
31-12-17 Cash/Bank 200×6% 12.00
Debenture - FV OCI (Bal. fig.) 6.32
Interest income (P&L) (189.00+16.82)×8.9% 18.32
31-12-17 Impairment loss (P&L) 12.1–1.0 11.10
Fair value reserve (OCI) 11.10

31-12-17 Fair value reserve (OCI) 190–(211.00+6.32) 27.32

Debenture - FV OCI 27.32

31-12-18 Debenture - FV OCI (189.00+16.82+6.32)×8.9 % 18.88

Interest income (P&L) 18.88
31-12-18 Impairment loss (P&L) 25.3–12.1 13.2
Fair value reserve (OCI) 13.2

171.2–
31-12-18
Fair value reserve (OCI) (190+18.88) 37.68
Debenture - FV OCI 37.68
02-01-19 Cash/Bank 84×2–1 167.00
Loss on disposal (P&L) (Bal. fig.) 4.20
Debenture - FV OCI 171.20

02-01-19 Profit or loss (25.3+5.18–27.32–37.68) 34.52

Fair value reserve (OCI) 34.52

W-1: Amortised cost:

Year Opening Interest Receipt Closing
2016 189.00 16.82 - 205.82
2017 205.82 18.32 (12.00) 212.14
2018 212.14 18.88 - 231.02

Page 3 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

W-2: Fair value re-measurement:

Year Opening Interest Receipt FV adj. FV
2016 189.00 16.82 - 5.18 211.00
2017 211.00 18.32 (12.0) (27.32) 190.00
2018 190.00 18.88 - (37.68) 171.20

A.3 Health Pharma Limited

Extracts from statement of financial position as on 31 December 2019
Rs. in million
Non-current assets:
Right of use asset
Machine 201.87 (151.87 + 50) – 40.37 (PL) 161.50
Warehouse 696.04 (W-1) –34.8 (PL) 661.24

Non-current liabilities:
Lease liability
Machine 151.87 (50 ×3.0373) –31.78 120.09
Warehouse 1,060.06 (180 ×5.889) –63.39 996.67

Current Liabilities:
Current portion of lease liability
Machine 31.78(W-2)+18.22 (PL) 50.00
Warehouse 63.39(W-3)+58.3 (PL) 121.69
Usage fee - Machine (40–30)×0.3 3.00
Fuel cost - Truck 4.00×30% 1.20
Rent payable - Truck 10×3/6 5.00

Extracts from statement of profit or loss for the year ended 31 December 2019
Rs. in million
Gain on rights [(1,500–900)÷1,500]×[1,500– (1,060.06 + 100)] 135.98
transferred
Depreciation
Machine 201.86÷5 (40.37)
Warehouse - Before sale 900÷18×6/12 (25.00)
- Right of use assets 696÷10×6÷12 (34.80)
Interest expense 58.3(1060×11%×6÷12) + 18.22 (151.86×12%) (76.52)
Usage fee - Machine (40–30)×0.3 (3.00)
Vehicle rent - truck 10×9÷6 (15.00)
Fuel cost - truck (1.20)

W-1: Right of use - Warehouse

(C.V÷ F.V) × (P.V + Prepaid)=(900÷1,500)×[1,060.06+100(1,500–1,400)] 696.04

W-2: Lease schedule – Machine

Date Instalment Interest @ 12% Principal Balance
1-Jan-19 151.87
1-Jan-20 50.00 18.22 31.78 120.09

W-3: Lease schedule – Warehouse

Date Instalment Interest @ 11% Principal Balance
1-Jul-19 1060.06
30-Jun-20 180.00 116.61 63.39 996.67

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

A.4 Shifa Group of Companies

Consolidated statement of financial position as on 31 December 2019

Rs. in million
Assets
Property, plant and equipment (W-1) 16,756.0
Intangible assets other than goodwill (40+(W-4)14)×24 1,296.0
Goodwill (W-2) 1,218.0
Investment property 10×24 240.0
Current assets 11,550+(90×24) – (2×2) 13,706.0
33,216.0
Equity and liabilities
Share capital 6,000.0
Group reserves (W-3) 7,408.1
Non-controlling interest (W-5) 2992.4
Liabilities (W-6) 16,815.5
33,216.0

W-1: Property, plant and equipment Rs. in million

As given in question 14,200.0
Unrealised gain on printers sold by LC to LB 70÷1.4×0.4×4.5÷5 (18.0)
Investment property rented to LB 180–(180÷15×6÷12) 174.0
FD’s 100×24 2,400.0
16,756.0

W-2: Goodwill Rs. in million

As given 350.0
Contingent liability of LB 40×0.6 24.0
Deferred consideration for LC 100 (121×1.10–2) – 60 40.0
Goodwill of FD 100–[(60+20+15)×0.7]=33.5×24 804.0
1,218.0

W-3: Group reserves Rs. in million

As given 6,745.0
Fair value gain on SL’s investment property 200–180 (20.0)
Depreciation on SL’s warehouse 180÷15×6÷12 (6.0)
Reversal of bargain purchase of LC (60.0)
Finance cost on deferred consideration 100×0.1×9÷12 (7.5)
Unrealised gain on printers sold by LC 18 (W-1)×0.9 (16.2)
FD - post acquisition profit (W-4) 483×0.7 338.1
Equity adjustment on 20% purchase of LA (700×0.2)–120 20.0
Exchange reserve (W-4) (535–401×0.3) 414.7
7,408.1

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

W-4: Exchange gain on translation of FD

Exchange rate
CNY in million Rs. in million
Rs.
Net assets as on 31-12-2019 60+42 102.00
15–
FV adjustment (15÷10)×(8÷12) 14.00
116.00 24.00 2,784.0
Net assets on acq. date 60+20+15 95.00 20.00 1,900.0
Post-acq. profit (Balancing) 21.00 23.00 483.0
116.00 2,383.0
On translation of FD 401.0
On goodwill of FD 33.5×(24–20) 134.0
535.0

W-5: Non-controlling interest Rs. in million

As given 2,315.0
Increase in contingent liability of LB 40×0.4 (16.0)
Unrealised gain on printers sold by LC to LB 18 (W-1)×0.1 (1.8)
Acquisition of additional 20% interest in LA 700×0.2 (140.0)
Non-controlling interest - FD: 2,784 (W-4)×0.3 835.2
2,992.4

W-6: Liabilities Rs. in million

As given 13,360.0
Increase in contingent liability of LB 40.0
Deferred consideration 100[121×(1.1)–2]+(W-3)7.5 107.5
Elimination of intra-group balances 2×2 (4.0)
FD current liabilities 138×24 3,312.0
16,815.5

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2020

A.5 Long Life Equity Fund

Statement of movement in Unit Holders’ Fund
For the year ended 30 June 2020
Undistributed
Capital value Total
income
--------------- Rs. in million ---------------
Net assets at beginning of the year 9,433 257 9,690

Issuance of 660 million units:

Capital value 12,606 - 12,606
Element of income 120 - 120
Total proceeds on issuance of units 12,726 - 12,726
Redemption of 750 million units:
Capital value (14,250) (14,250)
Element of loss (59) (85) (144)
Total payment of redemption of units (14,309) (85) (14,394)
Total comprehensive income for the year 364 364
Distribution for year ended 30 June 2019 (255) (255)
Net assets at the end of the year 7,850 281 8,131
Undistributed income brought forward
Realized income 269
Unrealized loss (12)
257
Accounting income available for distribution
Relating to capital gain 279
Excluding capital gain -
279
Final distribution during the year at 5% (255)
Undistributed income carried forward 281
Undistributed income carried forward
Realized income 274
Unrealized income 7
281

(The End)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFIED FINANCE AND ACCOUNTING PROFESSIONAL (CFAP) EXAMINATION

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Financial Reporting Winter 2020

Passing %

Question-wise Overall
1 2 3 4 5
7% 51% 16% 41% 63% 32%

General comments

Overall passing ratio in this paper was consistent with last result of 31%. Majority of the examinees
displayed inadequate knowledge of IFRS 16 (Q3) which might be due to selective study. Further,
in Q1, many examinees directly jumped to the conclusion or just presented computations without
providing the reason.

There were many impressive individual performances as well. The highest score in the paper was
85 marks.

Question-wise common mistakes observed

Question 1(a)

 About half of the examinees were clueless about the area examined and scored maximum of 1
mark only.
 Most of the remaining examinees added penalty to the cost of completion instead of deducting
it from transaction price. Further, cumulative catch-up adjustment was made but the reasons for
making this adjustment were not discussed.

Question 1(b)

Answers were often correct but incomplete. Examinees did not discuss changes to be made in the
presentation of financial statements in respect of comparatives and classification. Further, very few
examinees discussed the possibility of subsequent sale at Rs. 145 million as an adjusting event.

Question 1(c)

Examinees remained restricted to computation of the gain.

Page 1 of 2
Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP Examination
Winter 2020
Question 1(d)

 Examinees concluded that the scheme should be accounted for under IFRS 2 instead of IAS 19.
 Where the examinees mentioned that the entity will be required to recognize expense in the
profit and loss statement, they did not give details of the items which should be included in the
total expense.

Question 2

 Gain on initial recognition of the debenture was taken to other comprehensive income instead
of profit or loss.
 Effect of impairment loss was not taken to other comprehensive income.
 Interest income for 2018 was not recognized.
 Cumulative loss previously recognized in other comprehensive income was not reclassified to
profit or loss as a classification adjustment upon de-recognition of the debenture.

Question 3

 In transaction (i), the initial right of use asset should have been computed using instalments
amount of Rs. 50 million but the examinees adjusted future instalments for CPI. Further, at year
end, lease liability was re-assessed using instalment amount of Rs 57 million which was not
required.
 Transaction (ii) was accounted for as a lease though the agreement did not contain lease due to
the absence of identified asset.
 In transaction (iii), the adjustment for Rs. 100 million (below fair value sale proceeds) was often
not accounted for.

Question 4

 The requirement to adjust an existing consolidated statement of financial position rather than to
prepare an original statement, seemed to throw a number of examinees clueless and highlighted
some fundamental misunderstandings.
 Unrealized gain on printers sold by LC was taken at Rs. 20 million instead of Rs. 18 million.
 Investment property rented to LB was not included in property, plant and equipment. Those
who included it in property, plant and equipment did not depreciate it.
 Contingent liability of LB was re-measured at reporting date to Rs. 60 million though it should
have been kept at its acquisition date’s fair value of Rs. 40 million.
 The entire effect of deferred consideration of LC was taken to goodwill instead of first reversing
the bargain purchase already computed and increasing the goodwill by the remaining amount.
 Intangible asset of FD was not adjusted for amortization.
 Intangible asset of FD was not included in computation of intangible assets of the group. Further
those who included intangible asset of FD, did not adjust it for amortization.

Question 5

 Though 30% examinees scored 10 or more marks in this question, many examinees had no idea
of format of the statement.
 Number of units issued and redeemed were not mentioned.
 Breakup of undistributed income into realized and unrealized income was not presented.

(THE END)

Page 2 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2020

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a)
Discussion on modification of contract 4.0

Computation and adjustment 3.0

(b)
Effect on statement of financial position 4.0

Effect on statement of profit or loss 3.0

(c)
Discussion on discontinuance of equity method and its implications 3.0

Computation and adjustment 2.0

(d)
Identification as ‘other long term employee benefits’ 2.0

Discussion on accounting under IAS 19 2.0

A.2 Entries on:

Initial recognition 3.5

31 December 2016 3.5

31 December 2017 4.5

31 December 2018 4.5

2 January 2019 4.0

A.3
Right of use asset 3.5

Non-current lease liability 3.5

Current portion of lease liability including interest 2.0

Other current liabilities 3.0

Depreciation expense 2.5

Interest expense 1.0

Gain on rights transferred 1.0

Other expenses 3.5

A.4
Property, plant and equipment 3.0

Intangible assets 4.0

Investment property 1.0

Current assets 2.0

Group reserves (other than exchange reserve) 6.0

Exchange reserves/Translation reserve 4.0

Non-controlling interest 2.0

Liabilities 3.0

A.5
Net assets at beginning and end of the year 1.5

Issuance of units 2.5

Redemption of units 3.0

Total comprehensive income and distribution 2.0

Undistributed income 3.0

(THE END)

Page 1 of 1
 Certified Finance and Accounting Professional Stage Examination

The Institute of 7 June 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 Year 2020 remained a difficult year for Pudding Limited (PL) due to COVID-19. In view of
the severe liquidity issues, PL entered into following arrangements with different banks in
the last two months of the year ended 31 December 2020:
(i) On 31 October 2020, PL defaulted in making payment of annual instalment of a loan
from Bank A. On 1 November 2020, Bank A agreed to extinguish the remaining loan
in exchange of 3 million PL’s shares having par value of Rs. 10 each.
On 1 November 2020, fair value of PL’s share was Rs. 56 each. Under the
arrangement, Bank A cannot sell these shares for a period of two years which reduces
the fair value of share by 20%.
The above mentioned loan was acquired on 1 November 2018. The original
disbursement amount was Rs. 140 million. The loan carried interest @ 10% per
annum and was repayable in 5 annual instalments of Rs. 36.93 million each.
(ii) On 1 November 2020, PL sold one of its investments in debentures for Rs. 110 million
to Bank B and simultaneously entered into a contract to buy the same debentures back
on 1 July 2021 at Rs. 119 million.
PL purchased these debentures on 1 November 2019 for Rs. 114 million (par value
Rs. 120 million). Debentures carry annual coupon at the rate of 11% per annum
payable on 31 October each year and have effective yield of 12% per annum. PL
carries this investment at amortised cost.
(iii) On 1 December 2020, PL transferred its receivables of South Region amounting to
Rs. 40 million to Bank C for an immediate cash payment of 90% of its value against
8% factoring fee. Remaining 10% amount will be paid by Bank C in 30 days. Under
the arrangement, PL is not liable to compensate Bank C for any default by PL’s
customers. 50% of receivables have not yet been recovered by Bank C till
31 December 2020.
(iv) On 1 December 2020, PL transferred its receivables of North Region amounting to
Rs. 50 million to Bank D for an immediate cash payment of 90% of its value against
3% factoring fee. Under the arrangement, PL is liable to compensate Bank D after
40 days for any default by PL’s customers in excess of 10%. PL is also entitled to
receive the amount that the Bank D will recover in excess of 90% within 40 days. Till
31 December 2020, 75% of receivables have been recovered by Bank D.
(v) On 1 December 2020, PL transferred its receivables of Central Region amounting to
Rs. 30 million to Bank E for a final payment of 95% of its value. Under the
arrangement, PL is liable to compensate Bank E after 30 days for any default by PL’s
customers upto a maximum of 4%. Till 31 December 2020, Bank E has recovered all
receivables except 3%, half of which are considered irrecoverable by PL.

Required:
Prepare journal entries in the books of PL in respect of the above for November and
December 2020. (20)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 Following are the draft statements of profit or loss of Biscotti Limited (BL), Custard Limited
(CL) and Doughnut Limited (DL) for the year ended 31 December 2020:

BL CL DL
------ Rs. in million ----- F$ in million
Revenue 9,500 3,600 250
Cost of sales (3,500) (1,860) (120)
Gross profit 6,000 1,740 130
Operating expenses (2,750) (780) (112)
Operating profit 3,250 960 18
Other income 305 120 -
Finance cost (240) (180) -
Net profit 3,315 900 18

Other information:
(i) Details of BL’s investments in CL are as follows:

CL’s share
Market Cash CL’s retained
Date of capital
% holding price of payment earnings
investment (Rs. 10 each)
each share
-------------- Rs. in million --------------
1 Jan 2017 35% Rs. 11 1,100 3,000 600
1 Apr 2020 40% Rs. 15 1,400 3,000 1,300

(ii) In addition to cash payment of Rs. 1,400 million on 1 April 2020, it was agreed on
acquisition that further cash of Rs. 320 million would be paid in March 2021 if CL's
net profit for the year 2020 would be more than Rs. 500 million. Fair value of this
consideration on acquisition date was estimated at Rs. 240 million.

(iii) On acquisition date of CL, fair value of its net assets was equal to their carrying value
except for:
 inventory which was carried at Rs. 600 million and had a fair value of
Rs. 960 million. 40% of this inventory is still included in CL's inventory as at
31 December 2020.
 a 14% bank loan of Rs. 800 million. Mark up is paid annually on 31 March
while entire principal would be paid on 31 March 2022. On acquisition date,
market rate for similar loan was 10% per annum.

(iv) On 1 January 2019, BL acquired 80% shareholding in DL for F$ 120 million. On

acquisition date, fair value of DL’s net assets was equal to their carrying value except
for an office building whose fair value was higher than its carrying value by
F$ 10 million. Remaining useful life of the building was 5 years.

(v) There was no goodwill / bargain purchase on acquisition of DL.

(vi) DL’s profit for the year ended 31 December 2019 was F$ 14 million.

(vii) DL was not acquired exclusively with a view of resale; however, owing to difficulties
in managing such major geographical operation, BL disposed of its entire
shareholdings in DL for Rs. 2,000 million on 31 December 2020. The sale proceeds
were credited to revenue. No other adjustment has been made on disposal.
 Advanced Accounting and Financial Reporting Page 3 of 5

(viii) The exchange rates per F$ are as follows:

Average rate for

1 Jan 2019 31 Dec 2019 31 Dec 2020
2019 2020
Rs. 10 Rs. 9 Rs. 11.5 Rs. 9.5 Rs. 10.5

(ix) The income and expenses of all companies may be assumed to have accrued evenly
during the year except stated otherwise.

(x) BL values non-controlling interest on the acquisition date at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.

Required:
Prepare BL’s consolidated statement of profit or loss and other comprehensive income for
the year ended 31 December 2020 in accordance with the requirements of IFRSs.
(Disclosures relating to allocation of profit or loss and comprehensive income attributable to
non-controlling interest and owners of the parent are not required) (25)

Q.3 Marmalade Limited (ML) is a manufacturer of Industrial machines. During 2020, ML

launched a new machine with model name Alpha. Each unit of Alpha is being sold for
Rs. 10 million payable upon delivery. Revenue from sale of Alpha is recognised upon
delivery to the customer premises. Further, two year support service contract for Alpha is
sold separately at Rs. 0.1 million payable monthly. Revenue from support services is
recognized over contract period. Customers can also obtain such support services from third
parties.

Sales of Alpha have remained below expectation so far. The marketing department has
proposed the following options to increase the sales of Alpha:

Option 1:
ML would offer customers a bundle of Alpha and support services at a combined price of
Rs. 11 million.

Option 2:
ML would sell Alpha at Rs. 10 million on lease. The rate of interest implicit in the lease
would be 5% per annum which is significantly lower than market interest rate of
12% per annum. Customers would pay in five equal annual instalments payable in advance.
Ownership of Alpha would be transferred to the customer at the end of five years.

Option 3:
Upon purchase of one unit of Alpha, customers would be provided with an option to
purchase another unit of Alpha within 12 months at a material discount of 25%. It is
estimated that 40% customers will avail the option.

Option 4:
Customer would be given an option to get customized version of Alpha. The price would
vary in each case; however, the customer would be required to pay the entire amount in
advance as these machines could not be sold to other customers. The manufacturing of
customized Alpha might take an average of 3 months.

Required:
Discuss the recognition and amount of revenue under each of the above independent
options. Compute the amount of revenue, wherever possible. (18)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.4 Ice Cream Limited (ICL) is a listed company. A junior accountant has prepared draft
consolidated financial statements of ICL for the year ended 31 December 2020 in which
results of Gelato Limited (GL) and Trifle Limited (TL) have also been included. However,
he could not prepare consolidated statement of changes in equity due to certain outstanding
issues.

For the purpose of preparation of consolidated statement of changes in equity, following

information is available:

(i) Share capital of ICL, consolidated retained earnings and non-controlling interest as of
31 December 2018 were Rs. 700 million, Rs. 1,013 million and Rs. 310 million
respectively.

(ii) Net profit for 2020 as per draft consolidated financial statements amounted to
Rs. 440 million (2019: Rs. 312 million) of which Rs. 60 million (2019: Rs. 50 million)
was attributable to non-controlling interest.

(iii) The draft consolidated statement of financial position as on 31 December 2020 shows
total assets and total liabilities of Rs. 3,804 million and Rs. 985 million respectively.

(iv) On 1 January 2019, ICL acquired 80% shareholding in GL for Rs. 800 million. Equity
of GL includes share capital and share premium of Rs. 500 million and
Rs. 400 million respectively. Fair value of GL’s identifiable net assets on the date of
acquisition amounted to Rs. 950 million.

(v) Following dividends were declared and paid by the group entities:

 On 1 August 2019, ICL made a bonus issue of 20%.

 On 1 March 2020, ICL declared a final cash dividend for the year 2019 at 15%.
 On 1 December 2020, GL made an interim cash dividend of 20%.

(vi) ICL values non-controlling interest on the acquisition date at its proportionate share
of the fair value of the subsidiary’s net identifiable assets.

Details of outstanding issues:

(i) On 1 January 2019, ICL acquired an asset on lease at a semi-annual rental of
Rs. 90 million payable in arrears for 5 years. Though accounting for both years have
been made, the accountant has not taken into account the fact that after expiry of first
6 months, both the lessee and the lessor has the right to terminate the lease at any time
without permission from the other party with no penalty. Discount rate of 10% per
annum has been used.

(ii) On 31 December 2020, ICL cancelled share appreciation rights (originally granted to
10 executives on 1 January 2019) and, in their place, granted 32,000 share options to
those executives on the condition that they will remain in ICL’s employment for the
next two years.

ICL originally granted 30,000 share appreciation rights to each of 10 executives that
will be settled in cash on the condition that they will remain in ICL’s employment for
the next four years.

Fair value of each share appreciation right as at 31 December 2019 and 2020 was
estimated at Rs. 150 and Rs. 190 respectively. On 31 December 2020, the fair value of
each share option was estimated at Rs. 200. All the executives are expected to remain
in employment for the required period of time.

Nothing has been recorded in 2020 in respect of share appreciation rights and their
cancellation.
 Advanced Accounting and Financial Reporting Page 5 of 5

(iii) On 31 December 2020, TL issued further shares to increase its outstanding shares
from 1 million to 2.2 million. The new shares were issued to Cookie Limited (a third
party) which then obtained controlled of TL. Market value of each TL’s share was
Rs. 300 on 31 December 2020.

ICL owns 0.6 million shares in TL since 2017. The carrying values of TL’s assets
(excluding proceeds from further issue) and TL’s liabilities in the ICL’s consolidated
financial statements as at 31 December 2020 were Rs. 405 million and Rs. 85 million
respectively. In addition, goodwill of Rs. 57 million had been recognised upon the
acquisition of TL and has not subsequently been impaired.

Required:
(a) Determine the revised amounts of total assets and total liabilities after incorporating
the effects of the above corrections. (10)
(b) Prepare ICL’s consolidated statement of changes in equity for the year ended
31 December 2020 along with comparative figures after incorporating the effects of
the above corrections, if any. (Ignore taxation. ‘Total’ column is not required.) (15)

Q.5 The following data of Jelly Life Insurance Company is available for the year ended
31 December 2020:

Description Rs. in million

Regular premium individual policies 21,533
Group policies with cash value 350
Group policies without cash value 4,108
Single premium individual policies 439
Reinsurance premium ceded 1,156
Provision for experience refund 119
Investment income 17,881
Net fair value losses on financial assets at fair value through profit or loss 2,568
Net rental income 742
Other income 362
Claims under individual policies 12,448
Claims under group policies 8,105
Recoveries from reinsurer 497
Claims related expenses 10
Net increase in insurance liabilities (other than outstanding claims) 9,325
Acquisition expense 5,892
Marketing and administrative expenses 1,386
Other expenses 211
Finance cost 20

Required:
Prepare statement of profit or loss of Jelly Life Insurance Company for the year ended
31 December 2020. (12)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2021

A.1 Pudding Limited

General Journal
Debit Credit
Date Description
--- Rs. in million ---
(i) 1 Nov 2020 Bank loan – A 140+14(140×10%)–36.93+11.71(117.07×10%) 128.78
Loss on extinguishment/Profit or loss (Bal. fig) 5.62
Share capital 30.00
Share premium (56×80%–10)×3 104.40

(ii) 1 Nov 2020 Cash 110

Repo liability / Financial liability – Bank B 110

31 Dec 2020 Investment/Interest receivable 2.28

Interest income
[114+13.68(114×12%)–13.2(120×11%)]×12%×2÷12 2.28

31 Dec 2020 Interest expense 9×2÷8 2.25

Repo / Financial liability – Bank B 2.25

(iii) 1 Dec 2020 Cash 40×90% 36.0

Receivable – Bank C 40×10% 4.0
Receivables – South Region 40.0

1 Dec 2020 Interest expense/Factoring expense/Profit and Loss 3.2

Cash 40×8% 3.2

31 Dec 2020 Cash 40×10% 4.0

Receivables – Bank C 4.0

(iv) 1 Dec 2020 Cash 50×90% 45

Loan / Financial liability – Bank D 45

1 Dec 2020 Interest expense/Factoring expense/Profit and Loss 1.5

Cash 50×3% 1.5

31 Dec 2020 Loan / Financial liability – Bank D 50×75% 37.5

Receivables – North Region 37.5

(v) 1 Dec 2020 Cash 30×95% 28.5

Loss on disposal (Bal. fig) 1.5
Receivable – Central Region 30

1 Dec 2020 Continuing involvement in transferred amounts 1.2

Liability – Bank E 30×4% 1.2

31 Dec 2020 Liability – Bank E 30×4% 1.2

Cash 0.9
Continuing involvement in transferred amounts 0.3

31 Dec 2020 Bad debt expense 30×3%×50% 0.45

Receivable – Central Region 0.45
Continuing involvement in transferred amounts 0.9

Page 1 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2021

A.2 Biscotti Limited

Consolidated statement of profit or loss and other comprehensive income
For the year ended 31 December 2020

Continuing Operations: Rs. in million

Revenue (W-1) 10,200
Cost of sales (W-2) (5,111)
Gross profit 5,089
Operating expense 2,750+585(780×9/12)+80(320–240) (3,415)
Operating profit 1,674
Share of profit from associate 900×3/12×35% 79
Other income (W-3) 863
Finance cost (W-4) (355)
Profit from continuing operations 2,261

Discontinued operations:
Profit from discontinued operations (W-6) 742.4
Net profit 3,003.4

Other comprehensive income:

Foreign currency translation differences (W-8) 421.0
Reclassification of foreign currency translation difference 265(W-8)×80% (212.0)
Other comprehensive income for the year 209.0
Comprehensive income 3,212.4

Workings
W-1: Revenue Rs. in million
BL’s 9,500–2,000 7,500
CL’s 3,600×9/12 2,700
10,200

W-2: Cost of sales

BL’s 3,500
CL’s 1,860×9/12 1,395
Fair value adjustment of inventory 360(960–600)×60% 216
5,111

W-3: Other income

BL’s 305
CL’s 120×9/12 90
Increase in fair value 1st investment in CL 1,575–1,345[1,100+700(1,300–
600)×35%] 230
Bargain purchase (W-5) 238
863

W-4: Finance cost

BL’s 240
CL’s 180×9/12 135
Decrease due to fair value adj. of loan 84(800×14%×9/12) – 64(856×10%×9/12) (20)
355

Page 2 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2021

W-5: Goodwill/bargain purchase on CL Rs. in million

Cash 1,400
Fair value of contingent payment 240
Fair value of existing investment 300(3000/10)×35%×15 1,575
NCI’s share in net assets 4,604×25% 1,151
4,366
Net assets:
Share capital 3,000
Retained earnings 1,300
Fair value adjustment of inventory 360
Fair value adjustment of loan 800 – 856(112/1.1+912/1.12) (56)
(4,604)
Bargain purchase (238)

W-6: Discontinued operations (DL)

Revenue 250×10.5 2,625
Cost of goods sold 120×10.5 (1,260)
Operating expense [112+2(10/5)]×10.5 (1,197)
16(18–2)×10.5 168
Gain on disposal of DL (W-7) 574.4
742.4

W-7: Gain on disposal of DL

Sale Proceeds 2,000.0
NCI on 31 December 2020 2,047 (W-8)×20% 409.4
Carrying value of DL as at 31 Dec 2020 (W-8) (2,047.0)
Gain on disposal 362.4
Translation gain classified as equity 265(W-8)×80% 212.0
574.4

W-8: Foreign currency translation differences Translation

Amount Exchange Amount
gain/(loss)
rate
F $ million --- Rs. in million ---
2019:
Net Assets on acquisition 120/0.8 150 10 1,500
Profit for the year 14–2(10/5) 12 9.5 114
Net Assets on 31 December 2019 162 1,614
Retranslation at closing rate on 31 Dec 19 162 9 1,458
Translation loss as on 31 December 2019 (156)
2020:
Profit for the year 18–2(10/5) 16 10.5 168
Net Assets on 31 December 2020 178 1,626
Retranslation at 31 December 2020 178 11.5 2,047
Translation gain for the year 2020 421
Translation gain as on 31 December 2020 265

Page 3 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2021

A.3 Option 1:
Revenue would be recognized in the existing manner. The total transaction price of Rs. 11
million would be allocated proportionately to two performance obligations using the stand-alone
selling prices as follows:
Standalone price Allocated price
Sale of Alpha Rs. 10 million Rs. 8.87 million
(11×10/12.4)
Support services Rs. 2.4 million Rs. 2.13 million
(0.1×24) (11×2.4/12.4)
Rs. 12.4 million Rs. 11 million

ML may also consider the effect of significant financing component as the consideration for
support services for 2 years would be received in advance.

Option 2:
Sales under this option would be accounted for under IFRS 16. ML would recognize revenue
from sale of Alpha on commencement date i.e. the date on which ML would make Alpha available
for use by customer. As ML is charging artificially low rate, the amount of revenue would be
determined as the present value of the lease payments accruing to the lessor, discounted using a
market rate of interest as follows:
 Amount of instalment 10.0 / 4.546 (5 years advance @ 5%) = Rs. 2.20 million
 Amount of revenue from sale of Alpha would be Rs. 2.20 × 4.037 (5 years advance @ 12%) =
Rs. 8.88 million

The remaining amount of Rs. 2.12 million (2.20 × 5 – 8.88) would be recognized as interest
income over the 4 year period as follows:
Interest @ 12% Installment Balance
Year
--------------------------- Rs. in million ---------------------------
0 - 2.2 6.68
1 0.80 2.2 5.28
2 0.63 2.2 3.71
3 0.45 2.2 1.96
4 0.24 2.2 -
2.12

Option 3:
ML should account for the promise to provide the discount as a performance obligation in the
contract for the sale of Alpha. The stand-alone selling price of the discount voucher can be
estimated as Rs. 1 million (10×25%×40%). Total transaction price of Rs. 10 million will be
allocated proportionately to the 2 performance obligations using stand-alone selling prices as
under:
Standalone price Allocated price
Sale of Alpha Rs. 10 million Rs. 9.09 million
Discount option Rs. 1 million Rs. 0.91 million
Rs. 11 million Rs. 10 million

Revenue from sale of Alpha would be recognized at Rs. 9.09 million upon sale of 1 st unit of Alpha.
The remaining receipt of Rs. 0.91 million would be transferred to revenue upon exercising the
discount option /purchase of another unit of Alpha or expiry of 12 months, whichever is earlier.
Option 4:
In this case, revenue from sale of Alpha would be recognized over time as ML’s performance does
not create an asset with an alternative use as machines are customized and cannot be sold to
other customers; and ML has an enforceable right to payment for performance completed to date
as the full amount would have been received in advance.
ML would need to measure the progress towards complete satisfaction of performance
obligation using appropriate method e.g. output method or input method.
Page 4 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2021

A.4 Ice Cream Limited

(a) Effect of corrections/issues:
Total Total Profit 2020 Profit 2019
assets liabilities Working for part (b)
-------------------- Rs. in million --------------------
Balances as given 3,804.00 985.00 440.0 312.0

Lease
ROU derecognized 695(90×7.722)×3/5 (417.00)
Lease liability (W-1) (456.87)
Interest (W-1)(29.09+26.04):(34.75+31.99) 55.13 66.74
Reversal of depreciation 695/5 139.00 139.00
Rent expense 90×2 (180.00) (180.00)
(417.00) (456.87) 14.13 25.74

Share appreciation rights (SARs)

Expense for 2020 17.25 (17.25)
28.5 (30,000×10×190×2/4) –
11.25 (30,000×10×150×1/4)
Impact of modification 32(32,000×10×200×2/4)–
28.5 (28.50) (3.50)
(11.25) (20.75)

Disposal of subsidiary
Net assets of FL (405) (85)
Goodwill (57)
180+85+128[(405–85)×40%]–405–
Loss on disposal 57 (69)
Fair value of investment 300×0.6 180
(282) (85) (69)

3,105 431.88 364.38 337.74

(b) Statement of changes in equity for the year ended 31 December 2020
Share Retained Share
NCI
capital earnings options
----------------------- Rs. in million -----------------------
Balance as at 31-12-2018: 700 1,013 310
Acquisition of subsidiary 950×20% 190
Bonus issue by ICL 700×20% 140 (140)
Profit for the year: Restated 337.74–50 287.74 50
Balance as at 31-12-2019: Restated 840 1,160.74 550
Final cash dividend by ICL 840×15% (126)
Disposal of TL (405–85)×40% (128)
Dividend to NCI 500×20%×20% (20)
Modification of SARs 32.00
Profit for the year 364.38–60 304.38 60
Balance as at 31 December 2020 840 1,339.12 32.00 462

W-1: Lease schedule

Interest @ 5% Instalment Closing balance
Date
----------------------- Rs. in million -----------------------
1/01/19 - 695.00
30/06/9 34.75 90.00 639.75
31/12/19 31.99 90.00 581.74
30/06/20 29.09 90.00 520.83
31/12/20 26.04 90.00 456.87

Page 5 of 6
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2021

A.5 Jelly Life Insurance Company

Statement of profit or loss
For the year ended 31 December 2020

Rs. in million
Premium revenue (21,533+350+4,108+439)–119 26,311
Premium ceded to reinsurers (1,156)
Net premium revenue 25,155

Investment income 17,881

Net fair value losses on financial assets at fair value through profit or loss (2,568)
Net rental income 742
Other income 362
16,417
Net income 41,572

Insurance benefits 12,448+8,105 20,553

Recoveries from reinsurers (497)
Claims related expenses 10
Net Insurance Benefits 20,066

Net change in insurance liabilities (other than outstanding claims) 9,325

Acquisition expenses 5,892
Marketing and administration expenses 1,386
Other expenses 211
Total Expenses 16,814
Finance cost 20
Profit for the year 4,672

(The End)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Summer 2021

Passing %

Question-wise
1 2 3 4 5 Overall
39% 40% 35% 19% 47% 32%

General comments

The overall passing ratio in this paper was consistent with last result of 32%. A
significant number of examinees (16%) were just short of 9 or fewer marks. They could
have easily obtained the short marks, if they had covered all areas of the syllabus.
Second, many examinees secured good marks in two to three questions but failed to
obtain reasonable marks in the remaining questions.

There were many impressive individual performances as well. The highest score in the
paper was 91 marks.

Question-wise common mistakes observed

Question 1

 In (i), second installment was deducted in determining amount of bank loan although
it was mentioned that PL has defaulted in making payment.
 In (ii), investment in debenture was derecognized instead of recognizing liability.
 In (iv), receivable was derecognized instead of treating the amount received as a
liability.
 In (v), the concept of ‘continuing involvement in transferred amount’ was not
applied.

Question 2

 DL was not presented as discontinued operation.

 Examinees were clueless about reclassification of foreign currency translation
differences upon disposal of DL.
 Adjustment for increase in fair value of 1st investment in CL was ignored.
 Several type of mistakes were made in respect of fair value adjustment of loan and
the corresponding adjustment to finance cost.
 Net assets of DL at acquisition was taken at F$ 120 million instead of F$ 150 million.

Page 1 of 2
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2021

Question 3

 In option 2, the amount of instalment was computed using the rate of 12% instead of
5% while the amount of revenue was computed using the rate of 5% instead of 12%.
 In option 3, stand-alone price of the discount voucher was not computed and
therefore allocation of total transaction price was not performed.
 In option 4, the issue of revenue recognition over time was not identified and the
discussions were often totally irrelevant.

Question 4

 In issue (ii), expense for 2020 in respect of share appreciation rights was not
accounted for. Further, no impact was taken to profit or loss upon modification.
 In issue (iii), examinees could not identify the deemed disposal of TL and did not
present any effect.
 Column for non-controlling interest was not presented in the statement of changes in
equity.

Question 5

 Examinees prepared statement in general format instead of the prescribed format for
life insurance companies.
 Description for sub-totals were not mentioned.

(THE END)

Page 2 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2021

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (i) Entries on 1 November 2020 3.0

(ii) Entries on:

1 November 2020 2.0

31 December 2020 3.0

(iii) Entries on:

1 December 2020 3.0

31 December 2020 1.0

(iv) Entries on:

1 December 2020 3.0

31 December 2020 0.5

(v) Entries on:

1 December 2020 2.5

31 December 2020 2.0

A.2
Revenue and cost of sales 2.0

Operating expenses 1.0

Share of profit from associate 2.0

Other income:
− Bargain purchase on CL 5.0
− Other 2.0

Finance cost 2.0

Profit from discontinued operations:
− Gain on disposal 2.5
− Other 2.5

Translation gain or loss:
− 2019 3.5
− 2020 2.5

A.3
Option 1:
− Explanation 2.0
− Computation 1.0

Option 2:
− Explanation 3.5
− Computation 3.5

Option 3:
− Explanation 3.0
− Computation 2.0

Explanation of option 4 3.0

Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2021

Mark(s)
A.4 (a) Determination of revised balances of assets and liabilities by taking the
effects of:

error in lease accounting 3.0

modification of share appreciation rights 4.0

deemed disposal of subsidiary 3.0

(b) Preparation of statement of changes in equity:

Acquisition and disposal of TL 3.5

Dividends 3.0

Modification of SARs 1.5

Profit 2019 3.0

Profit 2020 4.0

A.5 Presentation of:

net premium revenue 3.5

other items of net income 2.5

net insurance benefits 3.0

total expenses 2.5

others 0.5

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 6 December 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 Year 2021 has been a difficult year for Magellanic Limited (ML) due to COVID-19. In view
of the severe liquidity issues, ML entered into the following arrangements during 2021:
(i) On 1 January 2021, ML sold its production plant to Finance Limited (FL) for
Rs. 90 million. Immediately before the transaction, the plant was carried at
Rs. 50 million and had remaining useful life of 10 years. At the same time, ML
entered into a contract with FL to use the plant for 5 years, with annual payment of
Rs. 20 million payable in arrears. Fair value of the plant at the date of sale was
Rs. 80 million. The rate of interest implicit in the lease is 10% per annum.

The terms and conditions of the transaction are such that the transfer of the plant by
ML satisfies the requirements for determining when a performance obligation is
satisfied in IFRS 15.

(ii) On 1 January 2021, ML issued 1.5 million TFCs of Rs. 100 each for Rs. 150 million.
Each TFC is convertible on 31 December 2025 into 2 ordinary shares having par value
of Rs. 10 each. Interest is payable at 8% per annum on 31 December each year. On the
date of issue, market interest rate for similar debt without conversion option was
11% per annum. ML expects that the conversion option will not be exercised.

(iii) On 1 April 2021, ML issued 2 million bonds of Rs. 100 each for Rs. 200 million. Each
bond is mandatorily convertible on 31 March 2024 into 3 ordinary shares having
par value of Rs. 10 each. Interest is payable at 5% per annum on 31 March each year
at the discretion of ML. On the date of issue, market interest rate for similar debt with
mandatory interest and without conversion option was 11% per annum. ML intends
to pay interest in each year.

(iv) On 1 July 2021, ML issued 4 million cumulative preference shares of Rs. 100 each for
Rs. 400 million. Each preference share is entitled to a cumulative dividend at
10% per annum and has similar voting right to an ordinary share. These shares are
only redeemable at the option of ML.

ML’s outstanding ordinary shares as at 1 January 2021 were 25 million shares of

Rs. 10 each.

Required:
(a) Discuss how the above arrangements should be dealt with in ML’s financial
statements for the year ending 31 December 2021. (15)
(Show all calculations wherever possible)

(b) Calculate basic and diluted EPS of ML for the year 2021. Assume that ML would
earn a profit of Rs. 215 million for the year 2021. (06)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 Triangulum Limited (TL) is finalizing its financial statements for the year ended
31 December 2020. 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. 350 million.
(ii) TL operates a funded pension plan for its employees. Following relevant information
has been extracted from the actuarial report for the year ended 31 December 2020:
Rs. in million
Fair value of plan assets:
 1 January 2020 275
 31 December 2020 315
Present value of defined benefit obligations:
 1 January 2020 325
 31 December 2020 360
Current service cost 63
Contribution to the fund 49
Pension paid 33

Yield on high quality corporate bonds 12%

Under the tax laws, contribution to the fund is allowed as an expense.
(iii) On 1 July 2019, TL obtained a loan of USD 2 million at 1.5% per annum which was
entirely used to acquire a license from a multinational company on the same date.
The loan was repaid on 30 June 2020. However, interest on loan was paid
semi-annually. TL estimates the useful life of license to be indefinite. The exchange
rate per USD on various dates are as follows:
1 Jul 2019 31 Dec 2019 30 Jun 2020
Rs. 145 Rs. 150 Rs. 160
Under the tax laws, exchange differences arising on foreign currency loans are
added to / deducted from the cost of asset. Amortisation on license is allowed at
10% per annum on written down value. Further, full year’s tax amortisation is
allowed in the year of purchase.
(iv) On 1 January 2020, the carrying value and tax base of one of the production plants
were Rs. 150 million and Rs. 120 million respectively. TL classified the plant as held
for sale on 1 September 2020 when the fair value of plant and estimated cost of
disposal was Rs. 140 million and Rs. 10 million respectively. On 31 December 2020,
the fair value of plant and estimated cost of disposal was Rs. 144 million and
Rs. 9 million respectively.
Depreciation is charged on written down value at 12% and 20% for accounting and
tax purposes respectively.
(v) On 1 July 2019, TL acquired an investment property for Rs. 100 million. The fair
value of property as on 31 December 2019 and 2020 was Rs. 115 million and
Rs. 125 million respectively. TL follows fair value model for accounting purposes.
Tax authorities allow depreciation at 10% per annum. Further, full year’s tax
depreciation is allowed in the year of purchase.
(vi) As on 31 December 2020, taxable temporary differences on other items amounted to
Rs. 19 million (2019: Rs. 35 million).
(vii) The tax rate for the year is 30% (2019: 32%) which was enacted through Finance Act
on 15 January 2020.

Required:
Prepare relevant notes on taxation and deferred tax liability/asset for inclusion in TL’s
financial statements for the year ended 31 December 2020 in accordance with IFRSs. (20)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.3 Following are the draft statements of financial position of Andromeda Limited (AL) and
Elliptical Limited (EL) as at 31 December 2020:
AL EL
------ Rs. in million ------
Assets
Property, plant and equipment 5,300 1,700
Investments 320 650
Current assets 5,380 1,900
Assets held for sale - 400
11,000 4,650
Equity and liabilities
Share capital (Rs. 10 each) 3,400 1,100
Share premium 1,200 -
Retained earnings 3,500 2,470
Liabilities 2,900 1,080
11,000 4,650

Additional information:
(i) On 1 January 2020, AL acquired 60% shareholdings in EL through share exchange
of one share in AL for every three shares in EL. The fair values of each share of AL
and EL were Rs. 105 and Rs. 30 respectively on that date. Shares issued by AL have
not been recorded in the books.

On acquisition date, EL’s retained earnings were Rs. 2,050 million. Fair value of
EL’s net assets was equal to their carrying value except the following:
 EL’s investment represents investment in Pinwheel Limited (an associate) whose
fair value was higher than its carrying value by Rs. 100 million. Further, EL’s
share of profit from the associate for the year 2020 amounted to Rs. 120 million
and has not been recorded in EL’s books.
 Fair value of assets held for sale was higher than their carrying value by
Rs. 15 million because of ‘cost to sell’.
 Contingent assets and contingent liabilities disclosed in the financial statements
of EL at acquisition date had a fair value of Rs. 20 million and Rs. 60 million
respectively. Provision in respect of these contingent liabilities has been
recognised by EL at Rs. 35 million as at 31 December 2020.
 Value of Rs. 80 million may be attributed to the existing assembled workforce of
EL which is not recognised in EL’s books.

(ii) On 1 July 2017, AL had acquired 54 million shares of Rs. 10 each of Sombrero
Limited (SL) representing 90% shareholdings at a cash consideration of
Rs. 870 million. On acquisition date, fair value of net assets was equal to their
carrying value. SL’s goodwill had been impaired by Rs. 30 million till
31 December 2019.

On 1 January 2020, AL disposed of 30 million shares in SL. The consideration of

Rs. 550 million was credited to ‘Investments’ upon receipt. On 1 October 2020, AL
further disposed of 9.6 million shares in SL. However, AL still retains significant
influence on SL. The consideration of Rs. 208 million was credited to
‘Retained earnings’ upon receipt.

Retained earnings and fair value of each share of SL at various dates are as follows:
1 Jul 2017 1 Jan 2020 1 Oct 2020 31 Dec 2020
Retained earnings (Rs. in million) 250 340 385 410
Fair value of each share (Rs.) 13 18 19 20

(iii) AL values non-controlling interest on the acquisition date at its fair value.
 Advanced Accounting and Financial Reporting Page 4 of 5

Required:
Prepare AL’s consolidated statement of financial position as at 31 December 2020 in
accordance with the requirements of IFRSs. Also list down the information given in the
question but have no effect in your working. (25)

Q.4 You are the Finance Manager of Centaurus Limited (CL). You have been asked to prepare
the projected financial statements of CL for the year ending 31 December 2022 for
submission to its bank alongwith a loan application. The bank requires minimum return on
assets of 10% per annum and a maximum gearing ratio of 75%.

You sent the draft projected financial statements to the CEO and CFO for their suggestions
regarding three planned transactions which may be executed in two ways. Their suggestions
have been summarised below:

Planned transactions CEO’s suggestion CFO’s suggestion

Investment in Hoag Limited Acquire 1.2 million shares Acquire 1.6 million shares
(i.e. 15% shares) without (i.e. 20% shares) with
significant influence. significant influence.
Share based payment to executives Issue shares at the end of Pay cash equivalent to the
vesting period. market value of shares at
the end of vesting period.
Acquisition of warehouse Lease for four years. Lease for one year only.

Return on assets and gearing ratio as per draft projected financial statements (excluding the
three planned transactions) are computed as follows:
Profit 126 million
 Return on assets = × 100 = × 100 = 15%
Total assets 840 million
Total liabilities 340 million
 Gearing ratio = × 100 = × 100 = 68%
Total equity 500 million

Details of planned transactions:

(i) Investment in Hoag Limited (HL):
CL is planning to acquire shares of HL, a listed company on 1 April 2022.
Quoted price of each share of HL on 1 April 2022 and 31 December 2022 is expected
to be Rs. 45 and Rs. 55 respectively. Purchase of 1.2 million shares will require
additional price of Rs. 3 per share while purchase of 1.6 million shares will require
additional price of Rs. 5 per share. HL is expected to earn profit and other
comprehensive income of Rs. 62 million and Rs. 14 million respectively for the year
ending 31 December 2022. HL is not expected to pay any dividend during 2022.

CL accounts for investment in associate under equity method while other equity
investments are classified as fair value through other comprehensive income.

(ii) Share based payment to executives:

CL is planning to introduce share based payment scheme for its 8 executives on
1 January 2022. The scheme would be introduced in one of the following manners:
 Each executive would get 100,000 shares of CL upon completion of three years
of service.
 Each executive would get cash equivalent to market value of 100,000 shares of
CL upon completion of three years of service.

The fair value of each share of CL as at 1 January 2022 is estimated to be

Rs. 90 per share which is expected to increase by 16% each year.
 Advanced Accounting and Financial Reporting Page 5 of 5

(iii) Acquisition of warehouse:

CL is planning to acquire a warehouse on 1 July 2022 on lease. Following options are
under consideration:
 Lease for a non-cancellable term of four years with annual instalment of
Rs. 10 million payable in advance.
 Lease for one year at annual payment of Rs. 12 million payable in advance.

Applicable discount rate is 12%.

Required:
Calculate revised return on assets and gearing ratio if:
(a) all suggestions of CEO are implemented. (10)
(b) all suggestions of CFO are implemented. (08)
(c) the best combination of suggestions is implemented. (04)

Q.5 Whirlpool Limited (WL) operates an approved and funded gratuity plan for 150 employees.
Following information is available for the preparation of the fund’s financial statements for
the year ended 30 September 2021:

Rs. in million
Accrued expenses 0.2
Actuarial valuation fee 0.4
Bank balances 9.8
Bank charges 0.1
Contribution received 11.5
Dividend received 10.6
Listed securities 68.2
Opening balance of members’ fund 143.3
Paid to outgoing members 8.1
Pakistan Investment Bonds 56.8
Profit on investments 5.3
Sukuk certificates 27.5

Additional information:
(i) An amount of Rs. 4.3 million is payable to outgoing members as at
30 September 2021.
(ii) Increase in fair value of listed securities amounting to Rs. 3.5 million has not been
accounted for.
(iii) Audit fee of Rs. 0.5 million has not been accrued.
(iv) The latest actuarial valuation was carried out on 30 September 2021 using the
‘projected unit credit method’. The actuary has recommended WL to contribute
Rs. 13 million during the year ended 30 September 2021.
(v) Present value of the defined benefit obligations and fair value of the plan assets as on
30 September 2021 amounted to Rs. 207 million and Rs. 168 million respectively.
Salary increment and discount rate of 9% and 7% respectively were used by the
actuary in the determination of liability.

Required:
Prepare the financial statements including relevant notes (wherever possible) of WL
employees’ gratuity fund for the year ended 30 September 2021. (12)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2021

A.1 (a) (i) ML should record the transaction as “Sale and leaseback” as ML has transferred
the control of the plant to FL. Present value of the annual payments discounted
at the interest rate implicit results in a total liability of Rs. 75.82 million
(20×3.791) which is made up of additional financing obtained in excess of fair
value i.e. Rs. 10 million and the lease liability i.e. Rs. 65.82 million. ML should
derecongise the plant from the books and record a right-of-use asset arising from
the leaseback of the plant at the proportion of the previous carrying amount of
the plant that relates to the right of use retained by ML. Right of use asset of Rs.
41. 14 million would be calculated as:

Lease liability 65.82

× Carrying amount = × 50
Fair value 80

ML recognizes only the amount of the gain that relates to the rights transferred
to FL i.e. Rs. 5.32 million computed as 30×{1–(65.82÷80)}. At year-end,
interest of Rs. 7.58 million (75.82×10%) would be charged to profit or loss.
Further, depreciation on right on use asset of Rs. 8.23 million (41.14÷5) would
be charged to profit or loss.

(ii) This TFC is a compound financial instrument which comprises of a financial

liability (as ML is obliged to pay interest and principal upon redemption) and an
equity component for holder’s right to call for ML’s shares. Liability portion
would be recognized at the present value of interest and principal payments
discounted at market rate of 11% per annum i.e. Rs. 133.3 calculated as:
(150×8%×3.696+150×0.593). Residual proceeds of Rs. 16.7 million (150–133.3)
would be recognized as equity component. At year-end, interest on liability of
Rs. 14.67 million (133.3×11%) will be recognized in profit or loss at market rate.

(iii) The conversion option meets the definition of an equity instrument and
although ML intends to pay interest each year, but there is no obligation to pay
interest so the entire proceeds from issue of bond should be classified as equity.
Further, interest paid, if any, will be debited to equity as dividend and would not
be charged to profit or loss.

(iv) These preference shares should be classified as equity instruments as ML has no

obligation to redeem. Dividend, if any, on these preference shares would be
debited to equity.

(b) Basic EPS = 215–20(400×10%×6÷12) = 195 = Rs. 6.61 per share

25+4.5(2×3×9÷12) 29.5

Diluted EPS = 195+14.67(133.35×11%) = 209.67 = Rs. 6.45 per share

29.5+3(1.5×2) 32.5

Page 1 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2021

A.2 Tax expense: Rs. in million

Current tax (W-1) 104.7
Deferred tax (0.9)
103.8

Reconciliation between tax expense and accounting profit:

Profit before tax 350.0
Tax at 30% 105.0
Effect of change in rate (19.2÷32×2) (1.2)
103.8

Movement in deferred tax liability/asset

Recognized in
Opening Closing
OCI P&L (Bal.)
------------------------- Rs. in million -------------------------
Arising in respect of:
Pension liability (16.0) 7.5 (5.0) (13.5)
(275325(W-2))×32% (349(W-2))×30% (315360(W-2))×30%
License 6.4 - 2.3 8.7
(290270(W-3))×32% (290261(W-3))×30%
Plant held for sale 9.6 - 2.1 11.7
(150120)×32% {135(12024)}×30%
Investment property 8.0 - 5.2 13.2
{115(100×90%)}×32% {125(90×90%)}×30%
Other taxable differences 11.2 - (5.5) 5.7
35×32% 19×30%
19.2 7.5 (0.9) 25.8

W-1: Current tax: Rs. in million

Profit before tax 350.0
Contribution paid (49.0)
Pension expenses (63+3933)(W-2) 69.0
Exchange loss capitalized (W-3) 20.0
Tax amortisation of license (W-3) (29.0)
Accounting depreciation on plant held for sale (150×12%×8÷12) 12.0
Tax depreciation on plant held for sale (120×20%) (24.0)
Impairment loss (15012)(1449) 3.0
Fair value gain on investment property 125115 (10.0)
Tax depreciation 90×10% (9.0)
Decrease in other taxable differences 3519 16.0
Taxable income 349.0
Tax @ 30% 104.7

W-2: Pension scheme Plan assets Plan obligation

-------- Rs. in million --------
As at 31 December 2019 275 325
Interest at 12% 33 39
Current service cost - 63
Contribution to the fund 49 -
Pensions paid (33) (33)
Loss / Gain on re-measurement (bal.) (9) (34)
As at 31 December 2020 315 360

Page 2 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2021

W-3: Tax base of license TB

License cost on 1 July 2019 290
Exchange loss on translation 31 Dec 2019 [2×(150–145)] 10
Tax amortization for 2019 (290+10)×10% (30)
License on 31 Dec 2019 270
Exchange loss on loan payment 30 Jun 2020 [2×(160–150)] 20
Tax amortization (270+20)×10% (29)
License on 31 Dec 2020 261

A.3 Andromeda Limited

Consolidated statement of financial position
As at 31 December 2020
Rs. in million
Property, plant and equipment 5,300+1,700 7,000
Goodwill (W-1) 440
Investment in associates (W-8) 1,146
Current assets 5,380+1,900 7,280
Assets held for sale 400
16,266

Share capital 3,400+(22×10) 3,620

Share premium 1200+(22×95) 3,290
Consolidated retained earnings (W-6) 3,801
Non-controlling interest (W-7) 1,550
Liabilities 2,900+1,080+25(W-2) 4,005
16,266

W-1: Goodwill – EL Rs. in million

Consideration share issue 1,100÷10×60%÷3×105 2,310
Fair value of NCI 1,100÷10×40%×30 1,320
Net assets (W-2) (3,190)
440

W-2: Net assets – EL Acquisition date Reporting date

Share capital 1,100 1,100
Retained earnings 2,050 2,470
Fair value adjustment in investment in PL 100 100
Share of profit in PL - 120
Fair value of contingent liability (60) (25)
3,190 3,765

W-3: Goodwill – SL Rs. in million

Consideration paid 870
Fair value of NCI 54÷90×10×13 78
Net assets 54÷0.9×10+250 (850)
98
Impairment in previous year (30)
68

Page 3 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2021

W-4: Disposal of SL Rs. in million

Consideration received 550
Fair value of remaining investment (5430)×18 432
NCI (W-7) 84
Net assets 600+340 (940)
Goodwill (W-3) (68)
58

W-5: Partial disposal of SL Rs. in million

Consideration received 208
Proportionate disposal carrying value of SL (W-8) (180)
28

W-6: Consolidated retained earnings Rs. in million

Given 3,500
Post-acquisition – EL (3,7653,190)×60% 345
Post-acquisition till December 2019 – SL (340250)×90% 81
Impairment of goodwill – SL 30×90% (27)
Gain on disposal loss of control of SL (W-4) 58
Share of profit from associate – SL 18+6 24
Reversal of consideration wrongly credited (208)
Gain on partial disposal of SL as associate (W-5) 28
3,801

W-7: Non-controlling interest Rs. in million

SL at acquisition 60×10%×13 78
Post-acquisition – SL 90×10% 9
Impairment of SL 30×10% (3)
84
Disposal of SL (84)
At acquisition – EL (W-1) 1,320
Post-acquisition – EL (3,7653,190)×40% 230
1,550

W-8: Investment in associates Rs. in million

Investment in SL
Fair value on losing control (W-4) 432
Share of profit till September 2020 (385340)×40%(24÷60) 18
Partial disposal (432+18)×9.6÷24 (180)
Share of profit till December 2020 (410385)×24%(14.4÷60) 6
276
Investment in PL 650+100+120 870
1,146
Information having no effect:
 Fair value increase of EL’s assets held for sale of Rs. 15 million
 Value attributable to workforce of EL of Rs. 80 million
 Fair value of EL’s contingent asset of Rs. 20 million
 Fair value of SL’s share at 1 October 2020 and 31 December 2020

Page 4 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2021

A.4 (a) CEO’s suggestions: Profit Assets Liabilities Equity

--------------- Rs. in million ---------------
Given 126.0 840.0 340.0 500.0
(i) Loss on acquisition of investment
(1.2×3) (3.6) (3.6) - (3.6)
Fair value adjustment at year-end
(1.2×(55–45)) - 12.0 - 12.0
(ii) Equity settled share based payment
(0.1×8×90÷3) (24.0) - - -
(iii) Commencement of lease (10×3.4)10 - 24.0 24.0 -
Depreciation (34÷4×6÷12) (4.3) (4.3) - (4.3)
Interest (24×12%×6÷12) (1.4) -
1.4 (1.4)
92.7 868.1 365.4 502.7

Revised return on assets = 92.7÷868.1×100 = 10.7%

Revised gearing = 365.4÷502.7×100 = 72.7%

(b) CFO’s suggestions: Profit Assets Liabilities Equity

--------------- Rs. in million ---------------
Given 126.0 840.0 340.0 500.0
(i) Share of associate’s profit
(62×20%×9÷12) 9.3 9.3 - 9.3
Share of associate’s OCI
(14×20%×9÷12) - 2.1 - 2.1
(ii) Cash settled share based payment
(0.1×8×90×1.16÷3) (27.8) - 27.8 (27.8)
(iii) Warehouse on rent (6.0) (6.0) - (6.0)
101.5 845.4 367.8 477.6

Revised return on assets = 101.5÷845.4×100 = 12.0%

Revised gearing = 367.8÷477.6×100 = 77.0%

(c) Best combination: Profit Assets Liabilities Equity

--------------- Rs. in million ---------------
Given 126.0 840.0 340.0 500.0
(i) CFO’s suggestion 9.3 11.4 - 11.4
(ii) CEO’s suggestion (24.0) - - -
(iii) CFO’s suggestion (6.0) (6.0) - (6.0)
105.3 845.4 340.0 505.4

Revised return on assets = 105.3÷845.4×100 = 12.5%

Revised gearing = 340÷505.4×100 = 67.3%

Page 5 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2021

A.5 Whirlpool Employees’ Gratuity Fund

Statement of net assets available for benefits as at 30 September 2021
Rs. in million
Assets
Investments 156.0
Bank balances 9.8
165.8
Liabilities
Payable to outgoing members (4.3)
Accrued expenses 0.2+0.5 (0.7)
(5.0)
Net assets available for benefits 160.8

Represented by:
Members' fund 160.8

Whirlpool employees’ gratuity fund

Statement of changes in net assets available for benefits
For the year ended 30 September 2021

Members' fund Rs. in million

Net assets at the beginning of the year 143.3
Contribution during the year 11.5
Paid / payable to outgoing members 8.1+4.3 (12.4)
142.4
Income
Profit on investments 5.3
Dividend on investments 10.6
Fair value adjustment on investments 3.5
19.4
Expenses
Actuarial valuation (0.4)
Bank charges (0.1)
Audit fees (0.5)
(1.0)
Net assets at the end of the year 160.8

Page 6 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2021

Whirlpool employees’ gratuity fund

Notes to the financial statements
For the year ended 30 September 2021

1. Investment
Listed securities 68.2+3.5 71.7
Pakistan Investment Bond 56.8
Sukuk certificates 27.5
156.0

2. Contribution to the fund

The contribution to the fund from the company is based on actuarial advice. The latest
actuarial valuation was carried out on 30 September 2021 using the 'Projected Unit
Credit Method' as follows:
Present value of defined benefit Obligation 207
Fair value of plan assets 168
Deficit of the fund (39)

Following assumptions have been made by the actuary in the determination of liability:
The discount rate 7%
Annual rate of increase in the salaries 9%

3. Number of members
The number of members eligible for the fund as at the year-end were 150.

(The End)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Winter 2021

Passing %

Question-wise
1 2 3 4 5 Overall
55% 39% 44% 28% 44% 36%

General comments

Overall passing ratio in this paper was consistent with the last result of 32%. The highest
marks scored in the paper was 84. It was observed that many examinees secured good
marks in two to three questions but failed to obtain reasonable marks in the remaining
questions. Second, examinees appear to struggle in applying their knowledge when
questions are examined in different way. This was particularly witnessed in Q.4 where
examinees just haphazardly attempted the question and could not figure out the right
approach to attempt that question. Third, examinees who attempted Q.3 at the start,
appeared to spend too much time on this question and were found struggling in attempting
all questions. Examinees are therefore, advised to switch to the next question once they
have spent a reasonable time on a particular question.

Question-wise common mistakes observed

Question 1(a)

 In (i) & (ii), the calculations were correctly performed; however, the explanations were
either missing or incomplete resulting in loss of precious marks.
 In (iii), the bond was considered compound financial instrument instead of being
treated as only equity instrument.
 In (iv), examinees did not realize the fact that ML has no obligation to redeem and the
preference shares were treated as liability instead of equity.

Question 1(b)

Mandatory convertible bonds were not included in calculation of basic EPS.

Page 1 of 2
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2021

Question 2

 While computing current tax, adjustments for license, plant and investment property
were often correctly added or subtracted but with incorrect amount.
 Decrease in other taxable differences was not included in computing current tax.
 Tax rate of 30% was used, instead of 32% for calculating opening deferred tax and
resultantly effect of change of rate was not presented in the reconciliation.
 Effect of deferred tax to be recognised in other comprehensive income was not
computed / presented.

Question 3

 While consolidating EL:

 fair value adjustment for investment in Pinwheel Limited was not incorporated on
acquisition date.
 assets held for sale were adjusted to the fair value though they should have been
kept at fair value less cost to sell.
 In respect of disposal of shares of SL in two stages, the following were noted:
 In first disposal, examinees did not adjust the remaining investment in SL at fair
value.
 Gain on second disposal was not calculated on the basis that SL still remained an
associate.
 Examinees often treated both disposal as one disposal transaction resulting in
altogether incorrect workings.

Question 4

 In general, examinees could not grasp the approach that they needed to calculate
revised amount of assets, liabilities, profit and equity. Basic mistakes were made in
showing dual effects of each transaction.
 In part (a), loss on acquisition of investment was not recognised in profit or loss.
Further, interest and depreciation were either calculated for 12 months instead of 6
months or not calculated.
 In part (b), share of associate was taken for full year instead of restricting to 9 months.
 Part (c) was left un-attempted. A significant number of examinees who attempted this
part wasted their time in explaining the reason for selecting the best combination which
was not required.

Question 5

 Examinees prepared statement in general format instead of the applicable format for a
retirement benefit plan.
 Notes to the financial statements were either ignored or not completely prepared
although they were specifically mentioned in the requirement of the question.

(THE END)

Page 2 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2021

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a)
Arrangement 1:
− Explanation 3.0
− Computation 2.5

Arrangement 2:
− Explanation 2.5
− Computation 2.0

Arrangement 3 2.5

Arrangement 4 2.5

(b)
Basic EPS 3.0

Diluted EPS 3.0

A.2
Note on taxation including reconciliation 2.0

Note on deferred taxation:
− Opening balance 4.5
− Closing balance 3.5
− Other 2.0

Computation of current tax:
− Pension plan 2.0
− Loan for license 2.0
− Production plant 2.0
− Other 2.0

A.3
Goodwill 4.0

Investment in associate 3.5

Other assets 1.0

Share capital and premium 1.5

Consolidated retained earnings 4.5

Non-controlling interest 2.5

Liabilities 1.0

Disposals of SL 3.0

Information having no effect 4.0

A.4 (a)
Investment in HL 3.0

Share based payment 2.0

Warehouse acquisition 4.0

Ratio computation 1.0

(b)
Investment in HL 3.0

Share based payment 2.0

Warehouse acquisition 2.0

Ratio computation 1.0

(c)
01 mark for each suggestion 3.0

Ratio computation 1.0
Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2021

Mark(s)
A.5
Statement of net assets available for benefits 4.0

Statement of changes in net assets available for benefits 5.0

Notes to the financial statements 3.0

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 6 June 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 (a) During the preparation of financial statements of Quail Limited (QL) for the year ended
31 December 2021, it was noted that there is a significant decline in budgeted
net cash flows of one of QL’s Cash Generating Units (CGU). Value in use and fair
value less cost of disposal of the CGU as on 31 December 2021 were estimated at
Rs. 555 million and Rs. 568 million respectively.

Details regarding the individual assets of the CGU before impairment are as follows:

Carrying Fair value less

Value in use
value cost of disposal
--------------- Rs. in million ---------------
Building (revaluation model)* 144 140 132
Equipment (cost model) 96 68 Not measurable
Machinery (cost model) 230 199 207
License (cost model) 70 Not measurable
Goodwill 66 Not measurable
Inventory 96 106 Not relevant
*Balance of surplus on revaluation of building as on 31 December 2021 amounted to Rs. 12 million.

QL has no plans to sell this CGU in the near future.

Required:
Compute the amount of impairment loss to be taken to the statement of profit or loss
for the year ended 31 December 2021 and carrying value of each individual asset of the
CGU after impairment. (07)

(b) On 1 January 2021, Chicken Limited (CL) acquired 30% shareholding in a US based
company, Sparrow Limited (SL), for USD 5 million and obtained significant influence
over SL.

SL earned profit of USD 1.5 million for the year ended 31 December 2021. On
31 October 2021, SL paid dividend of USD 0.1 million to CL. On the same date, CL
also sold goods for USD 0.2 million to SL at 30% profit margin. 25% of these goods
remained unsold with SL on 31 December 2021. SL paid for the goods in 2022.

Following exchange rates are available:

1 Jan 2021 31 Oct 2021 31 Dec 2021 Average for 2021

1 USD to Rs. 170 174 185 180

Required:
Discuss how the investment in SL should be dealt with in CL’s consolidated financial
statements for the year ended 31 December 2021. (Show all necessary workings) (06)
 Advanced Accounting and Financial Reporting Page 2 of 6

(c) Azam is your friend and has asked for your help in making a presentation regarding
classification of equity investments and debt investments under IFRS 9. He has a clear
understanding of classification of equity investments and prepared the following
diagram:

EQUITY INVESTMENTS

Is the investment HELD Yes

FOR TRADING?

No

FVTPL
Is the FVTOCI option No
elected by management?

Yes

FVTOCI (No Recycling)

However, he is confused in classification of debt investments. He believes that

management can classify any debt investment into any measurement category
i.e. amortised cost, fair value through other comprehensive income (FVTOCI) and fair
value through profit or loss (FVTPL).

Required:
Keeping in mind the above diagram prepared by Azam for equity investments, prepare
a similar diagram for classification of debt investments under IFRS 9. (05)

Q.2 Woodpecker Limited (WL) is engaged in the business of manufacturing and supplying
industrial machinery. Naeem, ACA is WL’s financial controller and reports to Mubeen, FCA,
who is the chief financial officer. Financial statements for the year ended 31 December 2021
were prepared by Mubeen in the absence of Naeem who was on annual leaves. On returning
from annual leaves, Mubeen asked Naeem to present the financial statements to the senior
management as Mubeen would not be available for few days.

WL’s statement of financial position as on 31 December 2021 prepared by Mubeen is as follows:

Rs. in million Rs. in million

Non-current assets Equity
Property, plant and Share capital (Rs. 10 each) 2,000
equipment – owned 5,600 Convertible bonds 1,250
Right of use assets 1,240 Retained earnings 3,150
6,840 6,400
Current assets
Inventory 1,140 Liabilities 2,910
Receivables 960
Other current assets 370
2,470
9,310 9,310

Naeem identified that all budgeted targets (including profit) given by the senior management
have been achieved as per these financial statements which was quite surprising for Naeem.
He also identified that budgeted targets were not met in the first draft of the financial
statements. However, some adjustments by Mubeen resulted in meeting the targets. These
adjustments were made in respect of the following:
 Advanced Accounting and Financial Reporting Page 3 of 6

(i) On 1 January 2021, WL issued 12.5 million bonds of Rs. 100 each for Rs. 1,250 million. The
related transaction cost on issuance amounted to Rs. 50 million. Each bond is convertible on
31 December 2024 into 2 ordinary shares at the option of bond holders. Any unconverted
bonds would be redeemed on that date at par value.

Under the terms of the bond, there is no interest on bond for 2021 and 2022. However,
interest is payable at 16% per annum on 31 December 2023 and 2024. On the date of issue,
market interest rate for similar debt without conversion option was 12% per annum payable
each year. However, on account of transaction cost incurred on issuance of bonds, the
effective interest rate would increase to 13.2% per annum.

In the financial statements, the proceeds have been recorded as convertible bond classified
under equity and the transaction cost has been expensed out.

(ii) On 1 July 2021, WL sold its warehouse building to Ostrich Finance Limited (OFL) for
Rs. 1,100 million. Immediately before the transaction, the building was carried in the
books at Rs. 1,000 million and had remaining useful life of 15 years. At the same time,
WL entered into a contract with OFL for the right to use the building for 7 years, with
annual payment of Rs. 120 million payables in arrears. The rate of interest implicit in
the lease is 11% per annum. Fair value of the building at the date of sale was
Rs. 930 million. However, the building was not considered impaired due to higher value
in use.

The terms and conditions of the transfer of the building by WL satisfies the requirements
of IFRS 15 to be accounted for as sale of the asset. However, in the financial statements,
the transfer of building has not been treated as sale of the asset and consequently the
proceeds have been recorded as financial liability and interest has been accrued @ 11%.

(iii) On 1 October 2021, WL entered into a contract with Parrot Limited (PL) to supply
50 units of a specialized machine at a total consideration of Rs. 600 million. The
machines will be delivered in lots of 25 units at the end of every six months. PL has paid
10% non-refundable consideration in advance while the remaining consideration will
be paid in two equal instalments, only after delivery of each lot and not before. Upto
year ended 31 December 2021, WL had manufactured 15 units of the machine at a cost
of Rs. 120 million which will be delivered on 31 March 2022.

The sales team of WL was working on obtaining this contract since the start of 2021
and spent incremental cost of Rs. 15 million for preparing and presenting the proposal
for the contract. The team was rewarded with a bonus of Rs. 20 million on obtaining
the contract.

Since the machines are of specialised nature, revenue and receivable for 15 units
manufactured so far has been recognized without adjusting any amount from the
advance received. Further, the sales team cost of Rs. 35 million has been recorded as
contract cost which would be taken to profit or loss on completion of the contract.

Required:
(a) Prepare the revised statement of financial position after incorporating the effects of the
above matters. (19)
(b) Briefly explain how Naeem may be in breach of the fundamental principles of Code of
Ethics for Chartered Accountants if he presents the financial statements without any
changes. Also state how Naeem should respond in this situation to avoid the breach. (05)
 Advanced Accounting and Financial Reporting Page 4 of 6

Q.3 Following information has been extracted from the financial statements of Greater Flamingos
Limited (GFL), Eagle Limited (EL) and Raven Limited (RL) for the year ended
31 December 2021:

GFL EL RL
--------- Rs. in million --------
Revenue 1,462 928 450
Cost of sales (637) (380) (230)
Gross profit 825 548 220
Operating expenses (580) (323) (150)
Other income 189 86 30
Net profit for the year 2021 434 311 100

Retained earnings as at 31 December 2020 2,250 670 236

Additional information:
(i) Details of investments are as follows:

Date 1 Jan 2020 1 Apr 2020 1 Jul 2021

Investor GFL GFL EL
Investee EL RL RL
Holding % 90% 40% 20%
Fair value of each share of investee Rs. 17 Rs. 14 Rs. 21
Consideration (Rs. in million) 795 250 176
Investee’s share capital (Rs. 10 each)
(Rs. in million) 500 400 400
(ii) On 1 April 2021, GFL disposed off 7.5 million shares of EL against cash consideration
of Rs. 228 million and recorded the gain on disposal as other income.
(iii) On 1 January 2020, GFL acquired EL at bargain purchase of Rs. 170 million. On
acquisition date, fair value of EL’s net assets was equal to their carrying value.
(iv) On 1 January 2021, EL rented out one of its investment properties having remaining
useful life of twenty years to GFL, for one year at a rent of Rs. 21 million. EL had
purchased this property on 1 January 2020 for Rs. 250 million and was carried in EL’s
book at fair value of Rs. 300 million and Rs. 340 million on 31 December 2020 and
2021 respectively.
(v) On 1 August 2021, GFL paid 30% cash dividend amounting to Rs. 270 million while
EL paid 6% cash dividend for the half year ended 30 June 2021. GFL recorded its share
of EL’s dividend as other income.
(vi) RL earned a profit of Rs. 80 million during the year 2020 and did not pay any dividend.
(vii) On 31 December 2021, an impairment test carried out indicated that goodwill of RL
was impaired by 10% .
(viii) GFL group values non-controlling interest on the date of acquisition at fair value.
(ix) GFL and EL subsequently measure investment in RL at cost in their respective separate
financial statements.
(x) The income and expenses of all companies may be assumed to have accrued evenly
during the year except stated otherwise.

Required:
Prepare GFL’s consolidated:
(a) statement of profit or loss for the year ended 31 December 2021. (15)
(b) statement of changes in equity for the year ended 31 December 2021.
(Comparative figures and Column for total are not required) (10)
 Advanced Accounting and Financial Reporting Page 5 of 6

Q.4 Following are the details of few transactions of Pigeon Limited (PL):

(i) On 1 January 2021, PL approved a share based scheme for its employees who have
completed 5 years of service in PL. Under the scheme each employee will be issued
1,000 shares (having par value of Rs. 50 each) at the end of each year for three
consecutive years. There are no conditions attached other than continuous service till
the date of issuance of shares. On the grant date of 1 January 2021, total employees
eligible for the scheme were 100.
Initially, PL expected that none of the eligible employees will leave PL during the
3 years. However, 5 eligible employees left PL during 2021 and PL now expects that
further 4 and 3 employees will leave during 2022 and 2023 respectively.
Fair value of PL’s share at the grant date was Rs. 240 per share which has increased to
Rs. 265 on 31 December 2021. (05)
(ii) PL operates a funded pension plan for its employees. Following relevant information
has been extracted from the actuarial report:
2021 2020
Rs. in million
Current service cost 63 75
Negative past service cost - 120
Contribution to the fund 29 60
Pension paid 40 32
Present value of defined benefit obligations on 31 December 620 550
Fair value of plan assets on 31 December 650 612
Asset ceiling on 31 December
25 45
(Present value of economic benefits available)

The net pension liability at 1 January 2020 was reported as Rs. 80 million. Applicable
discount rate is 12% per annum. (05)
(iii) On 1 January 2020, PL leased a plant from Bulbul Limited for 8 years at Rs. 30 million,
payable annually in arrears. On that date, fair value and useful life of this plant were
Rs. 170 million and 10 years respectively, whereas, PL’s incremental borrowing rate
was 12% per annum.
On 1 January 2021, the lease contract was amended with mutual consent by reducing
the original lease term from 8 years to 5 years with the same annual payments. PL's
incremental borrowing rate on 1 January 2021 was 14% per annum. (07)
(iv) On 1 January 2020, PL purchased 5 million debentures of Kiwi Limited having face
value of Rs. 100 each for Rs. 515 million. Transaction cost of Rs. 4 million was also
incurred on purchase of debentures. At initial recognition, PL determined that
debenture was not credit impaired and classified the investment in debentures as
financial asset at fair value through other comprehensive income. Coupon rate of
debentures is 12% which is payable annually on 31 December.
Following further information regarding debentures is available:
1 Jan 2020 31 Dec 2020 31 Dec 2021
------- Amount in Rs. per debenture -------
Quoted price 105.0 109.0 111.0
12 months expected credit losses 2.0 2.5 4.0
Life time expected credit losses 8.5 12.2 15.3 (08)

Required:
Prepare the extracts (including comparative figures) relevant to the above transactions from PL's
statement of financial position and statement of profit or loss and other comprehensive income
for the year ended 31 December 2021 in accordance with the IFRSs. (Notes to the financial
statements are not required)
 Advanced Accounting and Financial Reporting Page 6 of 6

Q.5 Following disclosures have been extracted from the draft financial statements of Falcon Bank
Limited for the year ended 31 December 2021:

7 LENDINGS TO FINANCIAL INSTITUTIONS

2021 2020
Rs. in million
Call / clean money lendings 300 505
Repurchase agreement lendings (Reverse Repo) 28,000 23,500
Bai Muajjal receivable 5,205 3,506
33,505 27,511
Provision held against lending to financial institutions (3,500) (2,500)
Lending to financial institutions - net of provision 30,005 25,011

7.1 Lendings include foreign currency lendings of Rs. 9,501 million.

7.2 Securities held as collateral against lending to financial institutions

2021 2020
Rs. in million
Market Treasury Bills 14,000 10,000
Pakistan Investment Bonds 15,000 13,500
29,000 23,500

7.3 Details of provision held

2021 2020
Rs. in million
Domestic 2,140 1,860
Overseas 1,240 640
3,380 2,500

Required:
Prepare list of errors and omissions in the above disclosures. (08)
(Note: There are no casting errors in the given information. Redrafting of the note is not required)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

A.1 (a) Rs. in million

Carrying value before impairment 702.0
Recoverable amount (Higher of 568 & 555) (568.0)
Total impairment loss 134.0
Loss adjusted against revaluation surplus of building (4.0)
Impairment to be charged to profit or loss 130.0

Carrying value (CV) of individual asset after impairment

Goodwill Round 1
CV Round 2** New CV
Asset impairment Allocation* Restricted
---------------------------- Rs. in million ----------------------------
Building 144.0 - 18.1 4.0 - 140.0
Equipment 96.0 - 12.1 12.1 11.6 72.3
Machinery 230.0 - 29.0 23.0 - 207.0
License 70.0 - 8.8 8.8 8.5 52.7
Goodwill 66.0 66.0 - - - -
Inventory 96.0 - - - - 96.0
Sum 702.0 66.0 68.0 47.9 20.1 568.0
(134–66) (68.0–47.9)
*(x × 68/540)
**(x × 20.1/166 or 145.1)

(b) As CL has obtained significant influence over SL, investment in SL should be accounted
for using equity method in consolidated financial statements of CL.

Under equity method, investment is initially recognized at cost, adjusted thereafter for
the post-acquisition profit and reduced by any dividend payout by SL.

As some of the goods sold by CL to SL are still in SL’s stock, unrealized profit must be
eliminated to the extent of CL’s share. As SL is a foreign operation, SL’s balance would
be translated using closing exchange rate of Rs. 185. The resulting translation gain would
be reported as other comprehensive income.

All transactions would be translated as follows:

$ in '000 Rs./$ Rs. in million
Cost of investment 5,000 170 850.0
Share of profit for year 2021 1,500×30% 450 180 81.0
Dividend received (100) 174 (17.4)
Unrealised profit in SL’s stock (200×25%×30%×30%) (4.5) 185 (0.8)
5,345.5 912.8
Translation difference (Bal. fig.) 76.1
Total retranslated at closing rate 5,345.5 185 988.9

Page 1 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

(c)

A.2 (a) Woodpecker Limited

Statement of financial position as at 31 December 2021

Non-current assets: Rs. in million

Property, plant and equipment – owned
5,600–1,000+33.3(1,000/15×6/12) 4,633.3
Right of use assets
1,240+425.2[1,000×(565.4–170)÷930]–30.4(425.3/7×6/12) 1,634.8
6,268.1
Current assets:
Inventory 1,140+120 1,260.0
Receivables 960–180(600/50×15) 780.0
Other current assets 370–15 355.0
2,395.0
8,663.1
Equity
Share capital (Rs. 10 each) 2000.0
Equity portion of convertible bond
1,250–1063.9(W-1)–7.4(50÷1,250×186.1) 178.7
Retained earnings (W-2) 2,982.3
5,161.0
Liabilities (W-3) 3502.1
8,663.1

W-1: Liability portion of Convertible bond Rs. in million

PV of interest for 2023 @ 12% 200(1,250×16%)×1.12 -3
142.4
PV of interest for 2024 @ 12% 200×1.12-4 127.1
PV of principal repayment at the end of 4 years 1,250×1.12-4 794.4
PV of liability portion 1,063.9

Page 2 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

W-2: Retained earnings Rs. in million

Given 3,150.0

Transaction (i):
Reversal of transaction cost 50.0
Accrual of interest on liability portion (134.8)

Transaction (ii):
Reversal of depreciation on building 33.3
Depreciation on right of use assets (30.4)
2.9
Reversal of interest on loan amount 60.5
Interest on lease liability (31.1)
29.4
Loss on disposal 70(1,000–930)×{(930–395.4)/930} (40.2)

Transaction (iii):
Sales team cost (15.0)
Reversal of revenue (180.0)
Reversal of cost of sales 120.0
(60.0)
2,982.3

W-3: Liabilities
Given 2,910.0
Transaction (i):
Liability portion 1,063.9(W-1)–42.6(50÷1,250×1,063.9) 1,021.3
Interest charged on liability portion 1,021.3(1,063.9–42.6)×13.2% 134.8
1,156.1

Transaction (ii):
Reversal of interest on loan amount 1,100×11%×6/12 (60.5)
Reversal of loan amount (1,100.0)
(1160.5)

Present value of lease payments 120×4.712 565.4

Interest accrued 9.4(170×11%×6/12)+21.7(395.4×11%×6/12) 31.1
596.5
3,502.1

Page 3 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

(b) In the given situation, Naeem would be in breach of following fundamental principles of
Code of Ethics for Chartered Accountants:

(i) Integrity:
Naeem should be straightforward and honest in all professional and business
relationships. Presenting the financial statements knowing that it has been
manipulated to achieve budgeted targets would raise doubts over integrity of
Naeem.

(ii) Objectivity:
Naeem should not compromise professional or business judgements because of
bias, conflict of interest or undue influence of others. Presenting these financial
statements to obtain job related benefits for achieving target or for remaining in
good books of Mubeen (to get promotion or good increments) would affect the
objectivity of Naeem.

In order to reduce the threat to an acceptable level, one or more of the following
safeguards should be applied by Naeem:
(i) Discuss the matter with Mubeen and persuade him to correct the financial
statements.
(ii) If Mubeen refuses to correct the financial statements, Naeem should consider
informing appropriate authorities such as CEO or the audit committee.
(iii) Refuse to remain associated with misleading information OR refuse to present the
financial statements.
(iv) Resign from the job.

A.3 (a) Greater Flamingos Limited

Consolidated statement of profit or loss
For the year ended 31 December 2021
Rs. in million
Sales 1,462+928+225(450÷2) 2,615.0
Cost of sales 637+380+115(230÷2) (1,132.0)
Gross profit 1,483.0
Operating expenses 580+323+75(150÷2)+15(300÷20)–21 (972.0)
Other income (W-1) 153.0
Share of RL’s profit as associate 100×6÷12×40% 20.0
Impairment of goodwill of RL 160(W-3)×10% (16.0)
Net profit 668.0

Profit or loss attributable to:

Owner of the parent (Bal.) 598.3
Non-controlling interests (W-4) 69.7
668.0

W-1: Other income Rs. in million

GFL 189.0
EL 86.0
RL 30/2 15.0
Gain on partial disposal of EL in GFL’s book 228–132.5(795×7.5/45) (95.5)
Dividend from EL 500×6%×75% (22.5)
Rent from GFL (21.0)
Fair value gain on investment property 340–300 (40.0)
Gain on deemed de-recognition of RL as associate (W-2) 42.0
153.0
Page 4 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

W-2: Gain on deemed de-recognition of RL as associate: Rs. in million

Cost of investment 250.0
Share of profit 2020 80×9/12×40% 24.0
Share of profit 2021 100×6/12×40% 20.0
Carrying value of investment in associate 294.0
Fair value of investment in associate 40×40%×21 (336.0)
42.0

W-3: Goodwill – RL
Fair value of investment in associate (W-2) 336.0
Cost of investment by EL 176×75% 132.0
Total cost of control 468.0
Non-controlling interest 40×45%×21 378.0
Net assets of RL on acquisition:
Share capital 400.0
Retained earnings 236+(100×6/12) 286.0
(686.0)
160.0

W-4: Profit attributable to NCI

Share of RL’s profit 100×6/12×45% 22.5
Impairment of RL’s goodwill 16×45% (7.2)
Share of EL’s profit till 31 March 256(311–40–15)×3/12×10% 6.4
Share of EL’s profit after 31 March 256×9/12×25% 48.0
69.7

(b) Greater Flamingos Limited

Consolidated statement of changes in equity for the year ended 31 December 2021
Share Retained Other
NCI
capital earnings component
------------------ Rs. in million ------------------
As at 01 January 2021 900.0 2,552.0 - 97.0
(270/30%) (W-5) 85+120×10%
Partial disposal of EL - - 42.9 185.1
(W-7) (W-7)
Acquisition of RL - - - 334.0
378–176×25%

Interim cash dividend by GFL - (270.0) -

Dividend to NCI - - - (7.5)
(500×6%×25%)

Profit for the year 2021 - 598.3 - 69.7

900.0 2,880.3 42.9 678.3

W-5: Consolidated retained earnings of GFL as at 01 January 2021 Rs. in million

GFL’s 2,250.0
Share of profit of RL for 2020 80×9÷12×40% 24.0
Bargain purchase at acquisition of EL 170.0
Post-acquisition profit of EL 120(670–550(W-6))×90% 108.0
2552.0

Page 5 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

W-6: EL’s Retained earnings on acquisition Rs. in million

Cash consideration 795.0
Non-controlling interest on acquisition 50×10%×17 85.0
Bargain purchase on acquisition 170.0
1,050.0
Share capital (500.0)
550.0

W-7: Partial disposal of EL’s shareholding

Sale proceeds 228.0
Proportionate net assets 1,234(W-8)×15% (185.1)
42.9

W-8: Net assets of EL on partial disposal

Share capital 500.0
Retained earnings on 1 January 2021 670.0
Profit for 3 months of 2021 256(W-4)×3÷12 64.0
1,234.0

Page 6 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

A.4 Pigeon Limited

Statement of financial position as on 31 December 2021
2021 2020
----- Rs. in million -----
Non-current assets:
Right of use asset (W-4) 53.12 130.41
Retirement benefits – pension fund 25.00 45.00
Investment in debenture (5×111) ; (5×109) 555.00 545.00
Share capital and reserves:
Share capital 95×1,000×50 4.75
Share premium 95×1,000×190(240–50) 18.05
Share scheme 10.92+7.04 (W-1) 17.96
Fair value reserve (25.02+13.60)(W-6) 38.62 25.02
Non-current liabilities:
Lease liability (69.66–20.25) ; (136.93–13.57) (W-5) 49.41 123.36

Current liabilities:
Lease liability (30–69.66×14%) ; (30–136.93×12%) 20.25 13.57

Pigeon Limited
Statement of profit or loss and other comprehensive income
For the year ended 31 December 2021 2021 2020
----- Rs. in million -----
Profit or loss:
Share scheme expense (W-1) (40.76) -
Pension expense
Current service cost (63.00) (75.00)
Past service cost - 120.00
Net interest 5.40 (9.60)
Depreciation on right of use asset (17.71) (18.63)
Loss on lease modification 55.89–45.82 (10.07) -
Interest on lease liability (W-5) (12.24) (17.89)
Interest income (529+63.48–60)×12% ; (529×12%) 63.90 63.48
Gain on initial recognition of debentures 5×2(105–103) - 10.00
Impairment of debentures (5×1.5(4–2.5) ; (5×2.5) (7.50) (12.50)
Other comprehensive income:
Re-measurements gain on pension (W-2) 8.60 29.60
Fair value reserve (W-6) 13.60 25.02

W-1: Share scheme – 2021 Rs. in million

First 1000 95×1,000×240 22.80
Second 1000 (91×1,000×240)÷2 10.92
Third 1000 (88×1,000×240)÷3 7.04
40.76

Page 7 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

W-2: Pension fund – 2020 Rs. in million

Opening net pension liability 80.0
Current service cost 75.0
Net interest 80×12% 9.6
Past service cost (120.0)
Contribution to the fund (60.0)
Closing net asset before re-measurements (15.4)
Re-measurements taken to OCI including asset ceiling (Bal. fig.) 29.6
Closing net pension asset [lower of 62(612–550) & 45] (45.0)

W-3: Pension fund – 2021

Opening net pension asset (45.0)
Current service cost 63.0
Net interest 45×12% (5.4)
Contribution to the fund (29.0)
Closing net asset before re-measurements (16.4)
Re-measurements taken to OCI including asset ceiling (Bal. fig.) 8.6
Closing net pension asset [lower of 30(650–620) & 25] (25.0)

W-4: Right of use asset

Initial recognition on 1 Jan 2020 30×4.968 149.04
Depreciation for 2020 149.04/8 (18.63)
Closing balance for 2020 130.41
ROU derecognized due to reduction in lease term 130.41×3/7 (55.89)
Decrease in ROU due to increase in borrowing rate (W-5) (3.69)
70.83
Depreciation for 2021 70.83/4 (17.71)
Closing balance for 2021 53.12

W-5: Lease liability

Initial recognition on 1 Jan 2020 (W-4) 149.04
Interest for 2020 149.04×12% 17.89
Payment (30.00)
Closing balance for 2020 136.93
Effect of modification:
 Decrease in lease term (Bal fig) (45.82)
30×3.037 91.11
 Increase in rate (Bal fig) (3.69)
30×2.914 87.42
Interest for 2021 87.42×14% 12.24
Payment (30.00)
Closing balance for 2021 69.66

W-6: Fair value reserve

Fair value adjustment for 2020 545(5×109)–{525(5×105)+4+63.48–60} 12.52
Impairment adjustment for 2020 (PL) 12.50
Closing balance for 2020 25.02
Fair value adjustment for 2021 555(5×111)–(545+63.90–60) 6.10
Impairment adjustment for 2021 (PL) 7.50
13.60
38.62

Page 8 of 9
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2022

A.5 (i) Under note 7, disclose information about the extent and nature, including significant
terms and conditions that may affect the amount, timing and certainty of future cash
flows.
(ii) Under note 7, Bai Muajjal receivable should be bifurcated between “with State bank of
Pakistan” and “with other financial institutions’’.
(iii) Under note 7.1, comparative information should be presented.
(iv) Under note 7.2, the total of securities held as collateral against lending to financial
institution should match with repurchase agreement lendings for 2021.
(v) Under note 7.2, the following format should be presented for current and prior year as
follows:

Held by bank Further given as collateral Total

(vi) Under note 7.3, information related to “Classified Lending” for current and prior year
should also be presented.
(vii) Under note 7.3, the balance of provision held should tie up with the provision amount
reported in note 7 for 2021.
(viii) Under note 7.3, the domestic category should be further bifurcated into ‘other assets
especially mentioned’, ‘substandard’, ‘doubtful’ and ‘loss’.
(ix) Under note 7.3, the overseas category should be further bifurcated into ‘not past due but
impaired’, ‘Overdue upto 90 days’, ‘overdue 91 to 180 days’, ‘overdue 181 to 365 days’,
and ‘overdue > 365 days’.
(x) All amounts in note 7 should have been presented in “Rupees in thousand” instead of
rounding off in “Rupees in million”.

(The End)

Page 9 of 9
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Summer 2022

Passing %

Question-wise
Overall
1 2 3 4 5
66% 24% 11% 14% 36% 20%

General comments

The overall passing ratio in this paper has declined significantly. A high proportion of
examinees secured good marks in one or two questions but left the remaining questions.
It seems that they half-heartedly attempted the paper without proper preparation just to
fulfill the requirement to appear in minimum of two papers.

Poor time management was evident in many answer scripts. Examinees who started the
paper with Q3, seemed to have spent too much time on this question. Therefore, they
struggled in attempting the remaining questions. Examinees are advised to move to the
next question once they have spent a reasonable time on one question. Many examinees
did not provide workings of the final figures due to which partial marks could not be
given for partially correct figures.

Despite the general decline in performance, there were many impressive individual
performances. The highest score was 87 marks.

Question-wise common mistakes observed

Question 1

 In part (a), total impairment loss was computed correctly but the loss chargeable to
profit or loss was not presented.
 In part (b), the calculation part was generally well performed, however, the
explanations were either missing or incomplete resulting in a loss of marks. Further,
SL was not treated as a foreign operation and investment in SL was not retranslated at
the closing rate.
 In part (c), diagrams were correct to the extent presented in the answer script but
lacked completeness.

Page 1 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2022

Question 2

 Examinees presented workings/journal entries but did not fulfill the requirement of
the question by adjusting the amount in the statement of financial position. Further,
basic mistakes were made in showing the dual effects of correcting entries.
 While dealing with the matter related to the lease, examinees did not account for
adjustments related to depreciation. Further, examinees were unable to determine that
the disposal resulted in loss and made adjustments for gain on disposal.
 Examinees calculated the liability portion of the convertible bond but did not
incorporate adjustments related to transaction cost and interest in the statement of
financial position.
 In part (b), examinees wrote the principles but did not relate them to the situation
given in the question.

Question 3

 While consolidating balances of EL, examinees needed to consolidate full year

balances. However, they incorrectly applied 90% for the first 3 months and 75% for
the next 9 months.
 Similarly, while consolidating balances of RL, examinees needed to consolidate 6
months’ balances. However, they either consolidated full year balances of RL or
incorrectly applied different percentages to the 6 months’ balances. Further, the share
of profit from RL as an associate for the first 6 months was not presented.
 In computing goodwill on the acquisition of RL, indirect holding adjustment was not
made.
 Profit attributable to NCI was altogether incorrect.
 In part (b), examinees did not compute the opening balances for the statement of
changes in equity. Consequently, they did not prepare the statement at all which
resulted in loss of easy marks allocated for other line items of the statement.

Question 4

 Examinees presented workings/journal entries but did not fulfill the requirement of
the question by reporting the figures in the relevant statements.
 In respect of the shares-based scheme, vesting period of 3 years was incorrectly used
for shares to be issued each year.
 While working for pension plan for 2020, examinees tried to compute movement in
the present value of the defined benefit obligation and fair value of plan assets
separately, whereas information was only available for computing movement in net
pension liability. Further, adjustments related to the asset ceiling were ignored.
 The impact of change in rate was not considered in accounting for lease modification.
 In respect of debentures, the effect of impairment was not taken to OCI. Further, the
fair value reserve was not presented in the statement of financial position.

Page 2 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2022

Question 5

 A significant number of examinees did not attempt this question.

 Examinees who did attempt this question, made errors / omissions mentioned in
suggested solution at serial (iv), (vi), (vii) and (ix).

(THE END)

Page 3 of 3
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2022

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a)  Determining impairment to be charged to profit or loss 2.0
 Up to 01 mark for allocating loss to each asset 5.0

(b)  Explanations 3.0

 Computations 3.0

(c) 01 mark for each route of classifications 5.0

A.2 (a)  Effects of matter (i) on:

– equity 1.0
– liability 3.0
– retained earning 1.0
 Effects of matter (ii) on:
– assets 3.0
– retained earnings 3.0
– liabilities 3.0
 Effects of matter (iii) on:
– current assets 3.0
– retained earnings 2.0

(b)  Breach of principles 3.0

 Safeguards 2.0

A.3 (a)  Sales and cost of sales 1.5

 Expenses 1.5
 Other income 5.0
 Share of associate’s profit 1.0
 Profit attributable to parent and NCI 3.0
 Goodwill of RL and its impairment 3.0

(b)  Opening balance of retained earnings 3.0

 Other opening balances 1.0
 Acquisition of RL 1.5
 Partial disposal of EL 2.0
 Dividends 1.5
 Profit for the year 1.0

A.4 (i) Share based scheme

 Statement of financial position 2.0
 Statement of profit or loss and other comprehensive income 3.0

(ii) Pension plan

 Statement of financial position 1.0
 Statement of profit or loss and other comprehensive income 4.0
Page 1 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2022

Mark(s)
(iii) Lease
 Statement of financial position 4.0
 Statement of profit or loss and other comprehensive income 3.0

(iv) Debentures
 Statement of financial position 4.0
 Statement of profit or loss and other comprehensive income 4.0

A.5 01 mark for each error or omission 8.0

(THE END)

Page 2 of 2
 Certified Finance and Accounting Professional Stage Examination

The Institute of 5 December 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 (a) On 1 July 2021, Rugby Limited (RL) entered into a joint arrangement with Volleyball
Limited to set up an industrial unit, Tennis Limited (TL) with paid-up capital of
Rs. 50 million. RL has 60% share in the equity and operations of TL. The following
information relates to activities of TL for the year ended 30 June 2022:
 On 1 August 2021, TL obtained long term loan of Rs. 30 million from a
commercial bank to finance an industrial unit which was constructed at a cost of
Rs. 80 million. The unit commenced its operation from 1 October 2021 and has
useful life of ten years.
 During the year, TL earned revenues of Rs. 60 million out of which Rs. 12 million
was outstanding at year-end. TL also paid operating cost of Rs. 26 million.
 TL’s finance cost of Rs. 4 million was paid by RL which TL has agreed to settle
after the year-end.

Required:
Discuss how the above information would be dealt with in RL’s consolidated financial
statements for the year ended 30 June 2022 if TL is treated as:
(i) Joint operation (05)
(ii) Joint venture (03)
(Also calculate the amounts to be included in RL’s consolidated financial statements)

(b) You have recently joined as Finance Manager of Soccer Limited (SL), a football
manufacturer. Being one of the sponsors for the upcoming world cup in Qatar, SL’s
delegation has been invited to watch few matches of the world cup in the stadium.

You have been informed that the statutory audit of SL for the year ended 30 June 2022
is in final stage and the auditor has recommended certain material adjustments in the
financial statements before issuing an unmodified audit report. In a meeting with CFO,
who is a chartered accountant, you have been informed about the disappointment of
the SL’s directors due to selected audit adjustments which slide SL’s profit below the
target. Therefore, CFO has asked you to take up the matter with the audit engagement
partner regarding the selected adjustments and also asked you to invite the audit partner
to the trip to Qatar with SL’s delegation.

Required:
Briefly explain how CFO may be in breach of the fundamental principles of ICAP’s
Code of Ethics for Chartered Accountants. Also state the potential threats that you may
face in the above circumstances and how you should respond. (08)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 Draft financial statements of Archery Limited (AL) for the year ended 31 December 2021
show the following amounts before incorporating the outstanding issues and taxation:

Rs. in million
Total assets 1,300
Total liabilities 450
Profit before tax 250
Other comprehensive income -

Details of outstanding issues:

(i) AL operates a funded pension plan for its employees. During the year ended
31 December 2021, no entries have been made in the books of AL in respect of the
pension except for contribution paid to the fund debited to pension liability.

Following relevant information has been extracted from the actuarial report for the year
ended 31 December 2021:
Rs. in million
Fair value of plan assets on 1 January 2021 250
Present value of defined benefit obligations on 1 January 2021 350
Current service cost 73
Contribution paid to the fund 62
Pension paid by the fund 53
Actuarial gains 34
Actual return on plan assets during the year 44

Yield on high quality corporate bonds (per annum) 14%

Under the tax laws, only contribution paid to the fund is allowed as an expense.

(ii) No entries have been made in the AL’s books in the years 2020 and 2021 in respect of
share appreciation rights (SARs) scheme for employees announced on 1 January 2020.

On 1 January 2020, AL granted 100,000 cash-settled SARs to each of its 50 employees

on the conditions that they will remain in AL’s employment for 3 years and AL achieves
an average annual growth rate of 20% in revenue during the three years ending
31 December 2022.

Relevant details on various dates are as follows:

1 Jan 20 31 Dec 20 31 Dec 21
Fair value of each SAR (Rs. per share) 16 21 25
Intrinsic value of each SAR (Rs. per share) 11 15 20
AL’s expectation to meet growth target Yes No Yes
No. of employees already left till date - 2 6
Further no. of employees expected to leave 8 7 5

Under tax laws, payments against SARs are admissible as an expense.

(iii) Investment in bonds of Wrestling Limited was accounted for as a financial asset
‘subsequently measured at fair value through profit or loss’ instead of accounting for the
financial asset as ‘subsequently measured at fair value through other comprehensive
income’.

On 1 January 2021, AL purchased 4 million bonds (having face value of Rs. 50 each)
at Rs. 150 million maturing on 31 December 2025. Transaction cost of Rs. 3 million
was also incurred on purchase of bonds. Coupon rate on bonds is 8% per annum payable
annually on 31 December while effective rate of interest is 15% per annum. At initial
recognition, AL determined that bonds were not credit impaired.
 Advanced Accounting and Financial Reporting Page 3 of 5

On 31 December 2021, AL received the interest however, due to deteriorating credit

rating of the bonds, AL determined that there had been a significant increase in credit
risk since the acquisition of the bonds.

Following information regarding the 4 million bonds at various dates is also available:

Expected credit losses Fair value in

Date Life time 12 months quoted market
--------------- Rs. in million ---------------
1 January 2021 5 2 150
31 December 2021 15 7 136

Under tax laws, impairment and fair value adjustments do not affect taxable profits
while interest income is taxable at coupon rate. Further, transaction cost is allowed to
be capitalised in the cost of investment.

Required:
(a) Determine the revised amounts of total assets, total liabilities, profit before tax and other
comprehensive income after incorporating the effects of the above outstanding issues.
(Ignore taxation) (14)
(b) Prepare relevant notes on taxation and deferred tax liability / asset for inclusion in AL’s
financial statements for the year ended 31 December 2021. (Assume tax rate of 30%) (11)

Q.3 Following are the details of few transactions of Badminton Limited (BL):

(i) On 1 January 2020, BL acquired a building on lease for a non-cancellable period of

4 years at Rs. 45 million per annum, payable in arrears. The agreement contains an
option for BL to extend the lease for further 3 years at Rs. 45 million per annum payable
in arrears. On 1 January 2020, BL’s incremental borrowing rate was 15% per annum
and BL was not reasonably certain that the option to extend the term will be exercised.

However, on 1 January 2021, BL was reasonably certain that the option to extend the
term will be exercised due to increasing rentals in the markets. BL’s incremental
borrowing rate was 14% per annum on that date.

On 1 July 2021, BL sub-leased this building for a lease term of five and half years at
Rs. 24 million payable semi-annually in advance. (09)

(ii) On 1 September 2020, BL entered into a contract for the purchase of a manufacturing
plant at a cost of USD 1.5 million. On the same date, BL entered into a forward contract
with a bank for the purchase of USD 1.5 million at a fixed rate in order to hedge the
cash flows relating to purchase of the plant. The forward contract would be settled after
seven months i.e. 1 April 2021 when the payment needs to be made against the plant.

Relevant exchange rates per USD are as follows:

1-Sep-2020 31-Dec-2020 1-Apr-2021

Spot rate Rs. 167 Rs. 177 Rs. 190
Forward contract
Rs. 183 Rs. 187 NA
(settlement date 1 April 2021)

You may assume that all IFRS 9 conditions for the application of cash flow hedge
accounting have been met.

At 31 December 2021, the plant was still in installation phase and a cost of
Rs. 24 million has been incurred on the installation. (08)
 Advanced Accounting and Financial Reporting Page 4 of 5

(iii) On 1 January 2020, BL issued 4 million six-year convertible debentures at par value of
Rs. 100 each at a fixed rate of 13% per annum. Interest is payable at the end of each
year whereas the principal is to be repaid in lump sum at the end of 2025.

Debentures were issued with an option to convert 10 debentures into 3 ordinary shares
of BL till the date of redemption. On initial recognition, the liability was not designated
as subsequently measured at fair value through profit or loss. The market interest rate
for non-convertible debentures issued by entities having similar credit risk and tenure is
15% per annum.

On 1 January 2021, BL repurchased 1 million debentures at Rs. 112 per debenture.

The market interest rates and market values of BL’s shares are given below:

Interest rate Market value

Date
per annum per share (Rs.)
1 January 2020 15% 260
1 January 2021 14% 290 (08)

Required:
Prepare the extracts (including comparative figures) relevant to the above transactions from
BL's statement of financial position and statement of profit or loss and other comprehensive
income for the year ended 31 December 2021 in accordance with the IFRSs.
(Notes to the financial statements and bifurcation of current and non-current in statement of
financial position are not required.)

Q.4 Following are the draft statements of financial position of Hockey Limited (HL), Golf
Limited (GL) and Cricket Limited (CL) as at 30 June 2022:

HL GL CL
------ Rs. in million ------ C$ in million
Assets
Property, plant and equipment 6,065 3,130 330
Investment in GL 890 - -
Investment in CL 2,400 - -
Investment in a joint venture - 650 -
Current assets 2,870 2,875 170
12,225 6,655 500
Equity and liabilities
Share capital (Rs./C$ 10 each) 3,000 2,000 150
Retained earnings 6,500 3,280 235
Net pension liability 650 280 -
Other liabilities 2,075 1,095 115
12,225 6,655 500

Additional information:
(i) On 1 July 2021, HL acquired 60% shareholdings in GL. The purchase consideration
was one debenture (having par value of Rs. 50) issued by HL for every two shares held
in GL. The fair value of each share of GL was Rs. 24 on that date.
These debentures would be redeemed after 6 years at par value. The debentures carry
an interest of 14% per annum though market interest rate for similar debentures was
12% per annum. The issuance of debenture is not yet recorded in HL’s books. Annual
interest paid on 30 June 2022 was charged to profit or loss.
(ii) On acquisition date, GL’s retained earnings were Rs. 2,580 million and the fair value
of GL’s net assets was equal to their carrying value except the following:
 Advanced Accounting and Financial Reporting Page 5 of 5

 Investment in joint venture had a carrying value of Rs. 510 million using equity
method and fair value of Rs. 680 million. The fair value of investment in the joint
venture as on 30 June 2022 was estimated at Rs. 840 million.
 Land carried in GL’s book at its cost of Rs. 240 million. The land is held by GL
for the purpose of building a residential complex, however, HL intends to build a
factory on this land. Fair value of land based on its use as residential complex and
factory is estimated at Rs. 450 million and Rs. 390 million respectively.
 Net pension liability of Rs. 220 million was appearing in GL’s books. It was
estimated that the full settlement of this liability would require net amount of
Rs. 290 million on acquisition date.
(iii) On 1 January 2022, further 15% shareholdings in GL were acquired for Rs. 890 million
paid in cash. GL’s retained earnings on that date were Rs. 2,860 million.
(iv) On 1 July 2020, HL acquired 80% shareholdings in CL (a foreign company) at a
consideration of C$ 240 million.
On acquisition date, CL’s retained earnings were C$ 180 million. On the same date, fair
value of CL’s net assets was equal to their carrying value except for an office building
whose fair value was higher than its carrying value by C$ 10 million with remaining
useful life of five years.
(v) On 1 July 2021, HL disposed off 50% shareholdings (leaving 30% with HL) in CL
against cash consideration of C$ 215 million which was credited to ‘Retained earnings’
upon receipt. However, HL still retains significant influence in CL. On the date of
disposal, the fair value of CL’s share and CL’s retained earnings were C$ 25 per share
and C$ 210 million respectively.
(vi) The exchange rates per C$ are as follows:
30 June 2021/ Average rate for year
1 July 2020 30 June 2022
1 July 2021 2020-21 2021-22
Rs. 10 Rs. 12 Rs. 14 Rs. 11 Rs. 13
(vi) HL values non-controlling interest on the acquisition date at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.
Required:
Prepare HL’s consolidated statement of financial position as at 30 June 2022 in accordance
with the requirements of IFRSs. (25)

Q.5 (a) A newly hired accountant has prepared the following statement of profit or loss of Polo
General Insurance Limited for the year ended 31 December 2021 and has submitted it
for your review.
Rs. in '000
Gross written premium 165,000
Insurance claims and acquisition expenses (63,600)
Net reinsurance expense (46,550)
Management expenses (20,250)
Gross profit 34,600
Investment and other income 24,850
Other expenses (3,750)
Profit before tax 55,700
Income tax expense (21,185)
Profit after tax 34,515

Required:
Prepare list of errors and omissions in the above statement. (05)
(Note: There are no casting errors. Redrafting of the statement is not required)
(b) Briefly discuss how musta’jir (lessee) accounts for profit or loss arising on sale of an
asset in a “sales and leaseback transactions” under IFAS 2 Ijarah? (04)
(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

A.1 (a) (i) Joint operation

RL will record its 60% share in the assets and liabilities of TL on line by line basis in
the statement of financial position i.e.
 Industrial unit - Rs. 44.4 million [(80–6(80/10×9/12))×60%]
 Long term loan - Rs. 18 million (30×60%)
 Receivable from customers - Rs. 7.2 million (12×60%)
 Cash - Rs. 13.2 million (60–12–26)×60%

However, RL’s share of interest payable to RL of Rs. 2.4 million (4×60%) will be set-
off with receivable of Rs. 4 million in RL’s books and only Rs. 1.6 million would be
reported as receivable from other joint venturer.

Further, RL will record its 60% share in the income and expenses of TL on line by
line basis in the statement of profit or loss i.e.
 Revenues - Rs. 36 million (60×60%)
 Operating expenses - Rs. 15.6 million (26×60%)
 Depreciation expenses of Rs. 3.6 million (6×60%)
 Finance cost - Rs. 2.4 million (4×60%)

(ii) Joint venture

Investment in TL should be accounted for using equity method in the consolidated
financial statements of RL. Under equity method, investment is initially recognized
at cost i.e. capital contribution of Rs. 30 million (50×60%), adjusted thereafter for
share of profit of Rs. 14.4 million [(60–26–4–6)× 60%]. Further, finance cost of Rs. 4
million paid by RL will reported as receivable from TL and would not be eliminated.

(b) In the given situation, CFO might be in breach of following fundamental principles of Code
of Ethics for Chartered Accountants (CA):

(i) Integrity:
CA should be straightforward and honest in all professional and business
relationships. Offering a trip to audit partner instead of discussing the selected audit
adjustments causing decline in profit create doubts over the integrity of CFO.

(ii) Objectivity:
CA should not compromise professional or business judgements because of bias,
conflict of interest or undue influence of others. Offering a trip to audit partner in
order to meet the targets and to avoid the disappointment of directors is affecting the
objectivity of CFO.

(iii) Professional behavior:

CA should comply with relevant laws and regulations and avoid any conduct that
might discredit the profession. Offering a trip to audit partner with an intention to
influence him is the non-compliance of ICAP’s code of ethics and is reflective of non-
professional behavior of CFO.

In the given situation, following threats to compliance with the fundamental principles
arises for me:

(i) Intimidation threat:

CA will be deterred from acting objectively because of pressures or exercise of undue
influence over him. I may feel intimidation threat due to perceived pressure exerted
by the disappointment of directors.

Page 1 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

(ii) Self-interest threat:

CA’s judgement or behavior may be inappropriately influenced by financial or other
interest. I may feel self-interest threat due to losing a job in case profit target is missed.

In order to reduce the threat to an acceptable level, one or more of the following safeguards
should be applied:
(i) Refuse to offer trip to the audit partner.
(ii) Discuss all the audit adjustments with CFO on their merit and then select the
disagreed adjustments which needs to be discussed with audit partner.
(iii) Discuss the selected adjustments with audit engagement partner on the basis of merits
as per applicable financial reporting framework.
(iv) If CFO refuses to correct the financial statements, I should consider informing
appropriate authorities such as CEO or the audit committee.
(v) Refuse to remain associated with misleading financial statements.
(vi) Resign from the job.

A.2 (a) Effect of corrections/issues: Total Total Profit

OCI
assets liabilities before tax
------------ Rs. in million -----------
Balances as given 1,300 450 250 -
(i) Pension 82–(100–62) (W-1) - 44 (87) 43
(ii) SARs 39(50–6–5)×0.1×25×2÷3 - 65 (65) -
(iii) Investment in bonds:
Transaction cost 3 - 3 -
Interest income 153×15%–200×8% 7 - 7 -
Fair value adj. (W-2) (10) - 14 (24)
(160–150) (136–150) (136–160)
Impairment - - (15) 15
- 9 (9)
1,300 559 107 34

(b) Tax expense: Rs. in million

Current tax (W-3) 61.5
Deferred tax (29.4)
32.1

Reconciliation between tax expense and accounting profit:

Tax at 30% on profit before tax 107×30% 32.1

Movement in deferred tax liability/(asset)

Recognized in
Opening Closing
OCI P&L (Bal.)
------------------------- Rs. in million -------------------------
Arising in respect of:
Net pension liability (30.0) 12.9 (7.5) (24.6)
100×30% 43×30% (8762)×30% 82×30%
SARs - - (19.5) (19.5)
65×30% 65×30%
Investment at FV- OCI - (2.7) (2.4) (5.1)
(1524)×30% (1523+16)×30% (136153)×30%
(30.0) 10.2 (29.4) (49.2)

Page 2 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

W-1: Net pension liability

Obligation Plan assets Net obligation
------------ Rs. in million ------------
As at 1 January 2021 350 250 100
Contribution to the fund - 62 (62)
Pension paid (53) (53) -
Taken to profit or loss:
Current service cost 73 - 73
Interest (350×14%) ; (250×14%) 49 35 14
112 35 87
Taken to OCI:
Actuarial gain (34) - (34)
Re-measurement on plan assets (44–35) - 9 (9)
(34) 9 (43)
As at 31 December 2021 385 303 82

W-2: Fair value re-measurement

Amortised
Opening Interest @ 15% Receipt @ 8% FV
Year cost
-------------------------- Rs. in million --------------------------
2021 153 23 (16) 160 136

W-3: Current tax Rs. in million

Profit before tax 107
Contribution paid (62)
Pension expense 87
SARs expense that would be allowed on exercise 65
Impairment loss 15
Interest income at effective rate (23)
Interest received 16
Taxable income 205
Tax @ 30% 61.5

A.3 Badminton Limited

Statement of financial position as on 31 December 2021
2021 2020
------- Rs. in million -------
Assets:
Right of use asset (W-1) - 96.36
Net investment in lease (W-3) 180.37 -
Derivative (Forward contract / Hedge instrument) (W-4) - 6.00
Property, plant and equipment (W-8) 298.50 -

Share capital and reserves:

Cash flow hedge reserve (W-4) - 6.00
Equity portion in debentures (30.28–15.43) ; (400–369.72) 14.85 30.28

Liabilities:
Lease liability (W-2) 154.49 102.75
Debentures (W-9) 282.86 373.18

Page 3 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

Badminton Limited
Statement of profit or loss and other comprehensive income
For the year ended 31 December 2021 2021 2020
------- Rs. in million -------
Profit or loss:
Depreciation on right of use asset (W-1) (14.05) (32.12)
Interest on lease liability (W-2) (24.50) (19.27)
Interest income (W-3) 11.80 -
Gain on sublease 192.57(W-3)–154.55(W-1) 38.02 -
Interest on debentures (W-9) (41.98) (55.46)
Debenture settlement exp. 112–15.43(W-10)–93.30(W-9) (3.27) -

Other comprehensive income:

Cash flow hedge (W-7) ; (W-5) 4.50 6.00

W-1: Right of use asset Rs. in million

Initial recognition on 1 Jan 2020 45×2.8550 128.48
Depreciation for 2020 128.48/4 (32.12)
Closing balance for 2020 96.36
Effect of re-assessment of lease term (W-2) 72.24
168.60
Depreciation for 2021 for 6 months 168.60/6×6/12 (14.05)
Balance at the time of sublease 154.55

W-2: Lease liability Rs. in million

Initial recognition on 1 Jan 2020 (W-1) 128.48
Interest for 2020 128.48×15% 19.27
Payment (45.00)
Closing balance for 2020 102.75
Effect of re-assessment of lease term (Bal fig) 72.24
Liability after re-assessment 45×3.8887 174.99
Interest for 2021 174.99×14% 24.50
Payment (45.00)
Closing balance for 2021 154.49

W-3: Net investment in lease Rs. in million

Initial recognition on 1 July 2021 24×8.0236 192.57
First instalment (24.00)
168.57
Interest for 2021 168.57×14%×6/12 11.80
Closing balance for 2021 180.37

W-4: Fair value of forward on 31 December 2020 Rs. in million

Forward rate available on 31 December 1.5×187 280.50
Forward contract at contract rate 1.5×183 (274.50)
6.00

W-5: Effective portion on 31 December 2020 Rs. in million

Gain on hedging instrument (W-4) 6.00
Change in fair value of expected cash flows using spot rate:
250.50(1.5×167)–265.50(1.5×177) 15.00
Lower of the two 6.00

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

W-6: Fair value of forward on 1 April 2021

Rs. in million
Forward rate available on 1 April 1.5×190 285.00
Forward contract at contract rate 1.5×183 (274.50)
10.5

W-7: Effective portion on 1 April 2021 Rs. in million

Additional gain on hedging instrument 10.5(W-6)–6(W-4) 4.50
Additional change in fair value of expected cash flows:
34.50[(1.5×190)–(1.5×167)]–15(W-5) 19.50
Lower of the two 4.50

W-8: Property, plant and equipment (Plant) Rs. in million

Payment on 1 April 1.5×190 285.00
Gain on settlement of forward contract (W-6) (10.50)
1.5×183 274.50
Installation and testing cost 24.00
298.50

W-9: Debentures Rs. in million

Initial recognition:
PV @ 15% of interest 400×13%×3.7845 196.79
PV @ 15% of principal 400×1.15−6 172.93
369.72
Interest for the year 2020 369.72×15% 55.46
Payment for 2020 400×13% (52.00)
Balance at 31 December 2020 373.18
Repurchase of 25% on 1 January 2021 373.18×25% (93.30)
279.88
Interest for the year 2021 279.89×15% 41.98
Payment for 2021 300×13% (39.00)
Balance at 31 December 2021 282.86

W-10: Equity component repurchased Rs. in million

Total payment 112.00
Fair value of liability repurchased:
PV @ 14% of interest 100×13%×3.4331 (44.63)
PV @ 14% of principal 100×1.14−5 (51.94)
(96.57)
15.43

Page 5 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

A.4 Hockey Limited

Consolidated statement of financial position as on 30 June 2022
Rs. in million
Property, plant and equipment 6,065+3,130+210 9,405.0
Investment in JV 650+170 820.0
Investment in associates - CL (W-9) 1,680.0
Goodwill (W-1) 271.0
Current assets 2,870+2,875 5,745.0
17,921.0

Share capital 3,000.0

Group reserves (W-4) 5,956.9
Translation reserves (W-9) 232.5
Non-controlling interest (W-5) 1,415.0
Net pension liability 650+280 930.0
Debenture 3,247−30.4(W-4) 3,216.6
Other liabilities 2,075+1,095 3,170.0
17,921.0

W-1: Goodwill of GL Rs. in million

Cost of investment 200×60%÷2×54.1113(W-2) 3,247.0
NCI 4,960×40% 1,984.0
Net asset of GL (W-3) (4,960.0)
271.0

W-2: Market value of debenture issued Amount in Rs.

Repayment of principal 50×(1.12) −6
25.3315
Investment 7(50×14%)×4.1114 (6 years, 12%) 28.7798
54.1113

W-3: Net assets of GL A.D 15% Acquisition R.D

------------------ Rs. in million ------------------
Share capital 2,000.0 2,000.0 2,000.0
Retained earnings 2,580.0 2,860.0 3,280.0
FV adjustment for JV (680−510) 170.0 170.0 170.0
FV adjustment for land (450−240) 210.0 210.0 210.0
4,960.0 5,240.0 5,660.0

W-4: Group reserves Rs. in million

HL’s 6,500.0
Interest on debenture 389.6(3,247×12%)−420(3,000×14%) 30.4
Decrease in equity on further acquisition of GL 890−786(W-5) (104.0)
Post-acquisition GL (5,240−4,960)OR(2,860−2,580)(W-3)×60% 168.0
(5,660−5,240)OR(3,280−2,860)(W-3)×75% 315.0
Bargain purchase CL (W-6) 320.0
Post-acquisition of CL 308(W-7)×80% 246.4
Gain on disposal of CL (W-8) 963.6
Share of CL’s profit as associate (W-9) 97.5
Proceeds credited to R.E 215×12 (2,580.0)
5,956.9

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

W-5: NCI Rs. in million

At acquisition of GL (W-1) 1,984.0
Further acquisition of GL (1,984+112)×15/40 OR 5,240(W-3)×15% (786.0)
Post-acquisition – GL (2,860−2,580)(W-3)×40% 112.0
(3,280−2,860)(W-3)×25% 105.0

At acquisition of CL (W-6) 680.0

Post-acquisition of CL 308(W-7)×0.2 61.6
Translation gain of CL 708(W-7)×0.2 141.6
4,416×0.2 883.2
Disposal of CL (883.2)
1,415.0

W-6: Goodwill of CL C$ Rs. in million

@ Rs. 10
Consideration 240 2,400.0
NCI (340×20%) 68 680.0
Net assets:
Share capital 150
Retained earnings 180
Fair value adjustment of Building 10
(340) (3,400.0)
Bargain purchase (32) (320.0)

W-7: Translation of CL C$ Rate Rs. in million

Net asset at acquisition 340 10 3,400.0
Profit: 30(210−180)−2(10/5) 28 11 308.0
368 3,708.0
Translation gain (Bal. fig.) 708.0
Net asset of 30 June 2021 368×12 4,416.0

W-8: Disposal of CL Rs. in million

Consideration received 215×12 2,580.0
Fair value of remaining investment 112.5(15×0.3×25)×12 1,350.0
Net asset of CL (W-7) (4,416.0)
NCI (W-5) 883.2
(3,532.8)
Gain on disposal 397.2
Translation gain previously taken to OCI 708(W-7)×0.8 566.4
963.6

W-9: Investment in CL as associate C$ Rs. in million

Fair value of remaining investment 112.5(W-8)×12 112.5 1350.0
Share of profit 7.5[(235−210)× 30%]×13 7.5 97.5
120.0 1,447.5
Translation gain Bal. fig. 232.5
120×14 1,680.0

Page 7 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2022

A.5 (a) List of errors or omissions:

(i) Gross written premium needs to be adjusted for unearned premium reserve to arrive
at premium earned and then adjusted for reinsurance expense for net insurance
premium which would be the starting point of this statement of profit or loss.
(ii) Insurance claims and acquisition expenses should be bifurcated into:
 Net insurance claims and
 Net commission and other acquisition cost
and shown separately on the face of statement of profit or loss.
(iii) Net reinsurance expense is not shown on the face of the statement of profit or loss
instead:
 Reinsurance expense should be deducted in net insurance premium.
 Reinsurance and other recoveries revenue should be deducted in net insurance
claim expense.
(iv) Term of “Underwriting results” should be used instead of ‘Gross profit’.
(v) Investment income and rental income if any should be shown separately on the face
of the statement of profit or loss.
(vi) Comparative information should be included.

(b) When an asset is sold with an intention to enter into an ijarah arrangement, any profit or
loss based on the asset’s fair value should be recognised immediately.

If the sale price is below fair value, any profit or loss should be recognized immediately
except that, if the loss is compensated by future lease payments at below market price, it
should be deferred and amortised in proportion to the lease payments over the period for
which the asset is expected to be used.

If the sale price is above fair value, the excess over fair value should be deferred and
amortised over the period for which the asset is expected to be used.

(The End)

Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Winter 2022

Passing %

Question-wise
Overall
1 2 3 4 5
34% 27% 46% 20% 9% 28%

General comments

The overall passing percentage in this paper has increased as compared to the previous
session’s result of 20% but is fairly consistent with the average of previous sessions. The
highest score in the paper was 88 marks. However, it was observed that a high proportion
of examinees could not even secure the easy marks available in the paper. It seems that
they half-heartedly attempted the paper without proper preparation, just to fulfill the
requirement to appear in a minimum of two papers.

Poor time management was observed in many copies. Examinees who attempted Q3 or
Q4 at the start appeared to have spent too much time on these questions and were found
struggling in attempting all questions. Examinees are advised to switch to the next
question once they have spent a reasonable time on a question. Another common issue
was related to the presentation of the answer. It was sometimes difficult to award partial
marks for figures that were partially correct, as it was often challenging to trace the
origin of the figures presented in the answer due to the absence of any working reference.

Question-wise common mistakes observed

Question 1

 In part (a), the joint venture part was generally performed well, however, the
discussion on the joint operation was either missing or incomplete. Treatment of the
receivable from joint operation was almost omitted by all examinees.
 In part (b), examinees provided principles and identified potential threats, however,
they did not link those to the scenario outlined in the question.

Question 2

 Examinees presented workings/journal entries but did not fulfill the requirement of
determining revised amounts. Basic mistakes were made in showing the dual effects
of each correction.

Page 1 of 2
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2022

 In respect of pension liability, movement in net liability was computed but the
correction in total liabilities and profit was either incorrect or not presented.
 Non-recording of expenses in respect of SARs in 2020 was treated as a prior-year
error.
 In respect of investment in bonds, adjustment for interest income and fair value were
not incorporated.
 Deferred tax on SARs was calculated as if it was an equity-settled share-based
transaction.
 Movement in deferred tax liability/asset was often not prepared
 While calculating the current tax, re-measurement was adjusted and the intrinsic
value of SARs was deducted which was not required.

Question 3

 While dealing with the lease transaction, the sub-leased right of use asset was not
derecognized, and the gain on the sublease was not calculated or presented in the
statement of profit or loss. Further, some examinees calculated gain/loss on re-
assessment which was not correct.
 In respect of hedge, calculations were often correct but the cash flow hedge reserve
was not disclosed in the statement of financial position and the cash flow hedge was
not presented in other comprehensive income.
 In respect of convertible debentures, the fair value of liability repurchased was not
determined resulting in an incorrect loss on settlement. Further, the amount of equity
component was not presented in the statement of financial position.

Question 4

 While calculating goodwill on the acquisition of GL, debentures given in

consideration were recognized at par value instead of fair value. Resultantly, an
adjustment for interest on debentures was not made.
 Pension liability of GL was adjusted which was not required.
 While calculating group retained earnings, bargain purchase on the acquisition of CL
and share of profit from CL as an associate was not included.
 Profit of CL for 2020-21 was not adjusted for additional depreciation due to the fair
value adjustment of the building.
 Remaining investment in CL was not retranslated at the closing rate.

Question 5

 In part (a), errors mentioned in serial (iii) and (iv) were least identified.
 Majority of the examinees were clueless about the area examined in part (b) and did
not attempt it. Those who attempted did not discuss about the situation where the
sales price is below fair value.

(THE END)

Page 2 of 2
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2022

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)

A.1 (a) (i)  Explanation 3.0

 Calculations 2.0

(ii)  Explanation 2.0

 Calculations 1.0

(b)  Breach of the principles by CFO 3.0

 Threats faced 2.0
 Response to the situation 3.0

A.2 (a)  Pension fund 4.5

 Share appreciation rights 3.5
 Investment in bonds 6.0

(b)  Taxation note and reconciliation 1.0

 Computation of current tax 4.0
 Movement of deferred tax 6.0

A.3 (i)  Statement of financial position 5.0

 Statement of profit or loss and other comprehensive income 4.0

(ii)  Statement of financial position 4.5

 Statement of profit or loss and other comprehensive income 3.5

(iii)  Statement of financial position 4.0

 Statement of profit or loss and other comprehensive income 4.0

A.4  Property, plant and equipment and investment in joint ventures 2.0
 Investment in associates 2.0
 Computation of goodwill 4.5
 Group reserves 5.5
 Non-controlling interest 3.0
 Liabilities 2.5
 Disposal of CL 5.5

A.5 (a)  Presentation of reinsurance 2.0

 Other errors (01 mark for each) 3.0

(b)  When sale price below fair value 2.0

 Other cases (01 mark for each) 2.0

(THE END)
Page 1 of 1
 Certified Finance and Accounting Professional Stage Examination

The Institute of 5 June 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 Following are the draft statements of financial position of Rose Limited (RL), Jasmine
Limited (JL) and Lavender Limited (LL) as at 31 December 2022:
RL JL LL
------------- Rs. in million -------------
Assets
Property, plant and equipment 3,400 2,265 655
Investment in JL – at cost 88 - -
Investment in LL – at cost 400 - -
Other assets 500 1,020 235
4,388 3,285 890
Equity and liabilities
Share capital (Rs. 10 each) 1,000 800 300
Retained earnings 2,223 1,580 300
Revaluation surplus 650 - 240
Other liabilities 515 905 50
4,388 3,285 890

Additional information:
(i) On 1 March 2022, RL acquired 5% shareholding in JL at Rs. 22 per share and elected
to measure the investment as a financial asset ‘subsequently measured at fair value
through other comprehensive income’.
(ii) On 1 July 2022, RL obtained control of JL by acquiring further 60% shareholding at
the following consideration:
 Immediate issuance of two shares in RL for every five shares in JL.
 Further issuance of one share in RL for every ten shares in JL on 31 March 2023,
provided JL achieves the profit target for the year 2022.
At the acquisition date, the fair values of each share of RL and JL were Rs. 70 and
Rs. 30 respectively, which increased to Rs. 85 and Rs. 38 respectively on
31 December 2022. The fair value of JL’s share is more reliably measurable than the
fair value of RL’s share. The issuance of shares has not been recorded yet by RL in its
books. On the acquisition date, the fair value of the contingent issuance of share of RL
has been estimated at Rs. 50 per share which increased to Rs. 75 on 31 December 2022.
(iii) On 1 July 2022, JL’s retained earnings were Rs. 1,080 million and the fair value of JL’s
net assets was equal to their carrying value except for the following:
 A backlog of customer purchase orders which may be attributed fair value of
Rs. 220 million. All these orders were executed before 31 December 2022.
 Right-of-use asset for a machinery having carrying value of Rs. 90 million. The
corresponding lease liability on that date was Rs. 70 million. On the acquisition
date, the fair values of the right-of-use asset and lease liability were determined at
Rs. 100 million each. The lease term for the contract ends on 31 October 2022.
 Advanced Accounting and Financial Reporting Page 2 of 6

(iv) On 1 July 2020, RL acquired 80% shareholding in LL at goodwill of Rs. 80 million. On

the acquisition date, LL’s revaluation surplus was Rs. 60 million. The fair value of LL’s
net assets was equal to their carrying value. The goodwill has been impaired by
Rs. 50 million till 31 December 2021.
(v) On 1 April 2022, RL disposed of 30% shareholding (leaving 50% with RL) in LL at its
fair value of Rs. 28 per share. The shares were sold to Tulip Limited (TL), which already
owned 20% shareholding in LL, resulting in joint control over the net assets of LL. The
proceeds of disposal were credited to ‘retained earnings’. On that date, the retained
earnings and revaluation surplus of LL were Rs. 210 million and Rs. 190 million
respectively.
(vi) RL values non-controlling interest on the acquisition date 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 at 31 December 2022 in
accordance with the requirements of IFRSs. (25)

Q.2 You are the Manager Finance of Sunflower Limited (SL). Your CEO has provided you with
details on the following three plans along with his comments that will be presented at the next
Board of Director (BOD) meeting to be held on 20 June 2023.

Plans CEO’s comments for BOD meeting

(i) SL plans to provide interest-free loans to The scheme seems great as it will have no
employees for purchasing vehicles or profit or loss impact for SL in the current
houses. Employees who have been or next years. The loaned amount will be
associated with SL for atleast ten years will treated as prepaid salaries.
be entitled for this loan facility. These loans
will be recovered over five years through
deductions from employees’ salaries.

(ii) SL plans to invest in bonds issued by The convertible bonds can be classified
Marigold Limited (ML). Although these into any of the three classification
bonds offer lower interest rate as compared categories i.e. amortised cost, fair value
to other bonds in the market, they can be through other comprehensive income, or
converted into a fixed number of shares of fair value through profit or loss on initial
ML at the end of three years. SL intends to recognition. The classification opted
hold the bonds for three years and will initially will continue to be used even after
decide on conversion based on the market conversion into shares.
price of ML’s shares at that time. This will
be the first time that SL is making such an
investment.

(iii) SL will announce the plan to sell one of its The assets and liabilities of the segment
business segments due to consistent losses. will be presented as held for sale in
The operations of the segment will be financial statements for the year ending
gradually closed by 28 February 2024 and 30 June 2023, as the sale is highly
backlog of uncompleted customer orders probable to occur within twelve months.
will be eliminated before the sale of the Further, the revenues and expenses of the
segment. segment will be disclosed as discontinued
operation in the financial statements for
the years ending 30 June 2023 and 2024.

Required:
Keeping in view the CEO’s comments for BOD meeting, discuss how the above plans would
be dealt with in SL’s financial statements in accordance with IFRSs. (21)
 Advanced Accounting and Financial Reporting Page 3 of 6

Q.3 (a) On 1 January 2021, Aster Limited (AL) granted 10,000 share options to each of its
80 managers to purchase AL’s shares at Rs. 40 per share. The share options will vest and
become exercisable upon completion of four years, provided that managers remain in
service until the vesting period.

In 2021 and 2022, the share price of AL has not increased as expected. The management
is considering to amend the terms of the scheme, effective from 1 January 2023. Any
one of the following amendments would be made:
(i) Extend the vesting period to 31 December 2025 and reduce the exercise price to
Rs. 30 per share. The fair value of each share option immediately after the
reduction in exercise price would be Rs. 22.
(ii) Increase the number of share options for each manager to 30,000.
(iii) Cancel the scheme altogether.

The management has gathered the following actual and forecasted information:

1 January 31 December
2021 2021 2022 2023 2024
Managers in employment 80 76 74 73 70
Managers expected to leave during the
remaining vesting period 10 7 4 2 2
Fair value of each share (Rs.) 65 70 50 52 60
Fair value of each original share option (Rs.) 29 36 12 15 20
Fair value of each modified share option
as per (i) (Rs.) NA NA NA 25 30

Required:
(I) Calculate the amounts related to share options scheme that are already recorded in
AL’s financial statements for the years ended 31 December 2021 and 2022. (03)
(II) For each amendment under consideration of management, calculate the amounts
related to share options scheme to be recorded in AL’s financial statements for the
years ending 31 December 2023 and 2024. (10)

(b) One of your friends who has been working at Cosmos Limited (CL) has asked for your
help in preparing a presentation on the accounting treatment of the ‘Repurchase
provisions’ incorporated by CL in contracts with their customers. These repurchase
provisions have been newly introduced by CL in the following three forms:
(i) CL’s obligation to repurchase the asset sold (a forward);
(ii) CL’s right to repurchase the asset sold (a call option); and
(iii) CL’s obligation to repurchase the asset sold at the customer’s request (a put
option).

He has a clear understanding of the accounting treatment of a forward and a call option
and has prepared the following diagram:

Forward Call option

The customer does not obtain control of the asset

Asset repurchased for less than original selling price?

Yes No

Lease arrangement Financing arrangement

However, he is confused about the accounting treatment of a put option.

 Advanced Accounting and Financial Reporting Page 4 of 6

Required:
Keeping in mind the above diagram prepared by your friend for a forward and a call
option, prepare a similar diagram for accounting treatment of a put option under
IFRS 15. (06)

Q.4 Following are the draft statements of financial position of Daffodil Limited (DL) and Orchid
Limited (OL) as at 31 December 2022 before incorporating the effects of the outstanding
issues:
DL’s consolidated OL’s separate
Rs. in million USD in million
Assets
Property, plant and equipment 3,247 3.3
Right-of-use assets 700 -
Investments 1,000 -
Goodwill 1,050 -
Current assets 2,650 2.3
8,647 5.6
Equity and liabilities
Share capital (Rs. 10/USD 1 each) 950 1.5
Retained earnings 2,575 3.5
Exchange translation reserves 985 -
Non-controlling interest 1,798 -
Lease liabilities 658 -
Other liabilities 1,681 0.6
8,647 5.6

Outstanding issues:
(i) Apart from consolidating other subsidiaries, DL has also consolidated the balances of
OL assuming that OL’s control has been transferred to DL through acquisition of 60%
shareholding. However, DL has only significant influence over OL due to a contract
with other shareholders of OL.

On 1 January 2022, DL acquired 60% shareholding in OL, a foreign company, at a

consideration of USD 2 million. On the acquisition date, OL’s retained earnings were
USD 2.5 million and fair value of OL’s net assets was equal to their carrying value. The
relevant exchange rates per USD are as follows:

01-Jan-2022 31-Dec-2022 Average for 2022

Rs. 200 Rs. 250 Rs. 220

DL values non-controlling interest on the acquisition date at its proportionate share of

the fair value of the subsidiary’s identifiable net assets.

(ii) On 1 April 2022, DL sold its head office building to Iris Leasing (IL) for Rs. 400 million,
which was credited to the building account. Immediately before the transaction, the
building was carried in the books at Rs. 480 million and had a remaining useful life of
twenty years. At the same time, DL entered into a contract with IL for the right to use
the building for ten years, with an annual payment of Rs. 50 million payable in arrears.
The fair value of the building at the date of sale was Rs. 600 million. Applicable discount
rate is 15% per annum.

The terms and conditions of the transfer of the building by DL satisfy the requirements
of IFRS 15 to be accounted for as sale of the asset.
 Advanced Accounting and Financial Reporting Page 5 of 6

(iii) No entries have been made in the DL’s books regarding modification to terms of a loan
except fees paid for the restructuring, which were immediately expensed.

On 1 July 2022, DL entered into a restructuring plan to modify the original terms of a
loan with the bank. According to the plan, DL will make a single payment of
Rs. 920 million on 30 June 2027, instead of originally scheduled payments. The market
interest rate at the time of restructuring was 15% per annum.

On the restructuring date, the carrying amount of the original loan was Rs. 500 million,
while its effective rate was 11% per annum. The original loan was repayable in equal
annual installments in arrears, ending on 30 June 2027. A fee of Rs. 24 million was paid
for the restructuring plan.

Required:
Prepare the revised consolidated statement of financial position of DL as at 31 December 2022
after incorporating the effects of the above outstanding issues. (25)

Q.5 (a) Following is the draft statement of movement in unit holders’ fund of Flax Income Fund
for the year ended 30 June 2022:

Capital Undistributed
Total
value income
------------ Rs. in '000 ------------
Net assets at the beginning of the year 3,003,640 (163,106) 2,840,534

Issue of 5,580,000 units:

– Capital value (at net asset value per unit at
the beginning of the year) 2,790,000 - 2,790,000
– Element of income 55,800 - 55,800
Total proceeds on issuance of units 2,845,800 - 2,845,800

Redemption of units:
– Capital value (at net asset value per unit at
the beginning of the year) (2,905,000) - (2,905,000)
– Element of loss (72,540) (250,000) (322,540)
Total payment on redemption of units (2,977,540) (250,000) (3,227,540)

Total comprehensive income for the year 940,000 - 940,000

Total cash distribution (including refund of

capital) during the year - (19,250) (19,250)
Net assets at the end of the year 3,811,900 (432,356) 3,379,544

Undistributed income brought forward

– Realized income/(loss) (193,671)
– Unrealized income/(loss) 30,565
(163,106)
Accounting income available for distribution
– Relating to capital gain -
– Excluding capital gain (20,000)
(20,000)
Distribution during the year (19,250)
Undistributed income carried forward (202,356)

Required:
Prepare list of errors and omissions in the above statement. (06)
(Note: There are no casting errors in the given information. Redrafting of the statement is not
required)
 Advanced Accounting and Financial Reporting Page 6 of 6

(b) Bluebell Limited (BL) has been operating in a highly inflationary economy for the past
three years. The directors of BL are concerned that the regulator may require a
restatement of financial statements according to IAS 29 at any time. Following is the
extract from the draft statement of financial position of BL as at 31 December 2022
prepared under historical cost:

2022 2021
------ Rs. in million ------
Assets
Property, plant and equipment 600 700
Investment stated at market value 225 175
Inventories 400 250
Account receivables 186 165
Cash and bank 195 135
1,606 1,425
Liabilities
Long-term loans 471 595
Trade and other payables 287 207
758 802

Required:
For each item reported in the statement of financial position, identify whether the
balance reported (including comparatives) under historical cost needs to be restated
under IAS 29 or not. (04)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.1 Rose Limited

Consolidated statement of financial position
As on 31 December 2022
Rs. in million
Property, plant and equipment 3,400+2,265 5,665
Goodwill (W-1) 448
Investment in joint venture – LL (W-5) 490
Other assets 500+1,020 1,520
8,123

Share capital 1,000+192[(48×2÷5)×10] 1,192

Share premium 1,440(W-1)–192 1,248
Revaluation surplus 650+25(W-5) 675
Contingent shares / Other equity (W-1) 240
Consolidated retained earnings (W-6) 2,483
Fair value reserves 120(W-1)–88 32
Non-controlling interest (W-7) 833
Liabilities 515+905 1,420
8,123

W-1: Goodwill - JL Rs. in million

Fair value of exiting 5% holding 4(80×5%)×30 120
Shares issued 48(80×60%)×30 1,440
Contingent shares (48÷10)×50 240
1,800
Non-controlling interest 2,080(W-2)×35% 728
Fair value of net assets on acquisition (W-2) (2,080)
448

W-2: Net assets of JL Acquisition date Reporting date

--------- Rs. in million ---------
Share capital 800 800
Retained earnings 1,080 1,580
Purchase order backlog 220 -
Right of use asset (90) -
Lease liability 70 -
2,080 2,380

W-3: Gain on disposal of LL Rs. in million

Consideration received (30×30%)×28 252
Fair value of remaining investment (30×50%)×28 420
Non-controlling interest 700(W-3)×20% 140
Net assets 300+210+190 (700)
Unimpaired goodwill 80–50 (30)
82

W-4: Acquisition of LL Rs. in million

Cost 400
Goodwill: (80)
80% of the net asset 320
100% of the net asset 400
Less: Share capital (300)
Revaluation surplus (60)
Retained earnings on acquisition 40
Page 1 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

W-5: Investment in joint venture - LL Rs. in million

Fair value of remaining investment (W-3) 420
Share of profits (300–210)×50% 45
Share of revaluation surplus (240–190)×50% 25
490

W-6: Consolidated retained earnings Rs. in million

RL’s 2,223
Post-acquisition – JL 2,380(W-2)–2,080(W-2)×65% 195
Reversal of consideration received (W-3) (252)
Gain on disposal – LL (W-3) 82
Post-acquisition profit – LL [210–40(W-4)]×80% 136
Impairment of goodwill – LL (50)
Share of profit – LL (W-5) 45
Revaluation surplus of LL transferred to retained earnings (190–60)×80% 104
2,483

W-7: Non-controlling interest Rs. in million

On acquisition - JL (W-1) 728
Post-acquisition [2,380(W-2)–2,080(W-2)]×35% 105
833

Page 2 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.2 Matter (i):

The loaned amount would be considered as an investment in debt (Advances to Employees)
instead of prepaid salaries, where the business model is to collect the contractual cash flows. It
would be classified as a financial asset at amortised cost. It should initially be measured at fair
value plus transaction costs (if any).

However, as this is an interest free loan, the cash paid is not equivalent to the initial fair value.
Therefore, the initial fair value is calculated as the present value of future cash flows discounted
at the market interest rate for an equivalent loan.

The difference between cash paid and fair value would be treated as an employee benefit and
would be charged to profit or loss, as the employees have already fulfilled the condition of
being associated for ten years.

Every year, interest income at the market rate on interest would be recognised in profit or loss.

Matter (ii):
The convertible bond is a hybrid contract that contains a host i.e. a bond, which is within the
scope of IFRS 9. In this case, SL would analyse the convertible bond in its entirety since IFRS
9 does not separate embedded derivatives from financial assets. The contractual cash flows of
the bonds are not solely payments of principal and interest on the outstanding principal amount
because they also reflect a return that is inconsistent with a basic lending arrangement i.e. the
return is also linked to the value of the issuer’s equity. Therefore, the investment in the bonds
would be classified as a financial asset subsequently measured at fair value through profit or
loss upon initial recognition.

However, when convertible bond would be converted into shares, the shares represent a new
financial asset to be recognised by SL. SL would then need to determine the classification
category for the new equity investment. If, upon conversion, it becomes an equity investment,
SL may make an irrevocable election to present subsequent changes in the fair value of an
investment in other comprehensive income. Otherwise the equity investment would be
measured at fair value through profit or loss.

Matter (iii):
As SL intends to eliminate the backlog of uncompleted customer orders, the delay in the timing
of the transfer of the facility imposed by SL demonstrates that the facility is not available for
immediate sale. Therefore, the criterion for classification as held for sale would not be met,
and the asset and liabilities of the segment would not be presented as held for sale.

As at 30 June 2023, the segment has neither been disposed of nor is classified as held for sale,
so the revenue and expense of the segment would not be presented as discontinued operations.

However, at 30 June 2024, the segment would have been disposed of. The revenue and
expenses of the segment would be presented as discontinued operation provided this segment
is a separate major line of business or geographical area of operation of SL.

Page 3 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.3 (a) Fair value Equity

No. of Expense for
No. of per share balance at
Year share Period the year
managers option year-end
options
Rs. ---- Rs. in '000 ----
(I) Amounts already recorded
2021 69 × 10,000 × 29 × 1/4 = 5,003 5,003
(76–7)

2022 70 × 10,000 × 29 × 2/4 = 10,150 5,147

(74–4) (10,150–5,003)
(II) Amounts to be recorded under amendment (i)
71 × 10,000 × 29 × 3/4 = 15,443 5,293
(73–2) (15,443–10,150)
2023 71 × 10,000 × 10 × 1/3 = 2,367 2,367
(73–2) (22–12)
17,810 7,660
70 × 10,000 × 29 × 4/4 = 20,300 4,857
(20,300–15,443)
2024 68 × 10,000 × 10 × 2/3 = 4,533 2,166
(70–2) (22–12) (4,533–2,367)
24,833 7,023
Amounts to be recorded under amendment (ii)
71 × 10,000 × 29 × 3/4 = 15,443 5,293
(73–2) (15,443–10,150)
2023 71 × 20,000 × 12 × 1/2 = 8,520 8,520
(73–2) (30,000–10,000)
23,963 13,813
70 × 10,000 × 29 × 4/4 = 20,300 4,857
(20,300–15,443)
2024 70 × 20,000 × 12 × 2/2 = 16,800 8,280
(30,000–10,000) (16,800–8,520)
37,100 13,137
Amounts to be recorded under amendment (iii)
2023 70 × 10,000 × 29 × 4/4 = 20,300 10,150
(74–4) (20,300–10,150)

(b)
Put option

Repurchase price equal to or greater than original selling price?

Yes No

Repurchase price greater than No Customer has significant

expected market value of economic incentive to exercise
asset? the put option?

Yes Yes No

Financing Lease Sale with a

arrangement arrangement right of return

If the option lapses unexercised, CL shall derecognize the liability and recognize
revenue.

Page 4 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.4 Daffodil Limited

Consolidated statement of financial position
As at 31 December 2022
Non-current assets: Rs. in million
Property, plant and equipment (W-5) 2,345.0
Right-of-use assets (W-6) 1,033.6
Investments 1,000.0
Goodwill 1,050.0
Investment in associates (W-4) 750.0
Current assets 2,650–575(2.3×250) 2,075.0
8,253.6

Share capital 950.0

Retained earnings (W-7) 2,596.3
Exchange translation reserves 985–138(230(W-2)×60%)+130.0(W-4) 977.0
Non-controlling interest 1,798–500(W-3) 1,298.0
Lease liabilities (W-8) 937.1
Other liabilities (W-9) 1,495.2
8,253.6

W-1: Bargain purchase - OL USD in million

Rs. in million
@ Rs. 200
Consideration 2.0 400.0
Non-controlling interest 4×40% 1.6 320.0
Net assets at acquisition 1.5+2.5 (4.0) (800.0)
0.4 80.0

W-2: Translation reserve - OL USD in million Rate Rs. in million

Closing net assets at closing rate (1.5+3.5) 5.0 250.0 1,250.0
Net assets at acquisition 4.0 200.0 800.0
Post-acquisition profits (3.5–2.5) 1.0 220.0 220.0
5.0 1,020.0
Exchange difference 230.0

W-3: Non-controlling interest - OL Rs. in million

At acquisition (W-1) 320.0
Post-acquisition 220(W-2)×40% 88.0
Exchange difference 230×40% 92.0
OR 5×40%×250 500.0

W-4: Investment in associates - OL Rs. in million

Cost 2×200 400.0
Share of profit 0.4(4×60%-2)×220 + 0.6(1×60%)×220 220.0
620.0
Bal. fig. 130.0
Closing retranslated at closing rate OR 3.0(2+0.4+0.6)×250 750.0

W-5: Property, plant and equipment Rs. in million

Given 3,247.0
OL’s balance 3.3×250 (825.0)
Remaining balance of building sold 480–400 (80.0)
Depreciation charged on remaining balance of building 80÷20×9÷12 3.0
2,345.0
Page 5 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

W-6: Right of use asset Rs. in million

Given 700.0
ROU of building lease back (480÷600)×450.9[250.9(W-8)+200(600–400)] 360.7
Depreciation to be charged 360.7÷10×9÷12 (27.1)
1,033.6

W-7: Retained earnings Rs. in million

Given 2,575.0
Matter (i)
Post-acquisition profit of OL reversed 220(W-2)×60% (132.0)
Bargain purchase of OL reversed (W-1) (80.0)
Share of OL profit as associate (W-4) 220.0
Matter (ii)
Gain on sale and lease back 400+360.7–250.9–480 29.8
Depreciation on ROU (W-6) (27.1)
Depreciation on remaining balance of building (W-5) 3.0
Interest on lease liability (W-8) (28.2)
Matter (iii)
Gain on modification (500–457.4)(W-9) 42.6
Interest on new liability (W-9) (34.3)
Interest on old loan (W-9) 27.5
2,596.3

W-8: Lease liability Rs. in million

Given 658.0
Sale and lease back (Rs. 50 million for 10 years arrears @ 15%) 50×5.0187 250.9
Interest (250.9×15%)×(9÷12) 28.2
937.1

W-9: Other liabilities Rs. in million

Given 1,681.0
OL’s balance 0.6×250 (150.0)
Old loan derecognized (500.0)
Modified loan recognized 920×1.15–5 457.4
Interest on old loan recovered 500×11%×6÷12 (27.5)
Interest on modified loan 457.4×15%×6÷12 34.3
1,495.2

W-10: Modification of loan Rs. in million

Carrying value of loan 500.0
Present value of revised cash flows at original effective rate 24+920×1.11–5 570.0
Substantial/significant modification 14%

Page 6 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.5 (a) (i) Number of units are not mentioned for redemption of units.
(ii) ‘Total comprehensive income for the year’ should be classified in ‘undistributed
income’ rather than in ‘capital value’. Due to misclassification of comprehensive
income, the ‘undistributed income’ is not correctly computed.
(iii) ‘Total cash distribution’ should be bifurcated into cash and refund of capital with
details of payouts.
(iv) ‘Accounting income available for distribution’ is not correctly computed. It should
be Rs. 690 million (940–250).
(v) ‘Undistributed income carried forward’ is not divided into realized and unrealized
income/loss.
(vi) ‘Net asset value per unit’ is not disclosed at the beginning and end of the year.
(vii) ‘Undistributed income carried forward’ should be reconciled with ‘Net asset at the
end of the year’.
(viii) Comparative figures for corresponding year not presented.

(b) 2022 2021

Assets
Property, plant and equipment Restated Restated
Investment stated at market value Not restated Restated
Inventories Restated Restated
Account receivables Not Restated Restated
Cash and bank Not restated Restated

Liabilities
Long term loans Not restated Restated
Trade and other payables Not restated Restated

(The End)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Summer 2023

Passing %

Question-wise
Overall
1 2 3 4 5
34% 3% 41% 36% 31% 28%

General comments

Overall, the passing ratio in this session aligns with the results of the previous sessions.
The highest score obtained was 82 marks. However, it is concerning that a significant
number of examinees were unable to secure even the readily available easy marks on the
paper. It appears that some examinees approached the paper half-heartedly, without
adequate preparation.

Examinees seem to face difficulties in applying their knowledge when questions are
presented differently. This was particularly noticeable in Q2, where many examinees
skipped the question or provided irrelevant discussion. Another recurring problem was
related to the presentation of answers. It has become challenging to assign partial marks
for only partially correct figures, as there was often no clear audit trail to trace the origin
of these figures. Improving the ability to adapt knowledge to various question formats
and enhancing the presentation of answers would greatly benefit the examinees in
achieving better results.

Question-wise common mistakes observed

Question 1

 The number of shares issued upon the acquisition of JL was inaccurately calculated.
Additionally, contingently issuable shares were updated for fair value as of 31
December 2022 which was not required.
 The adjustment for the purchase order backlog was completely disregarded.
 The working for retained earnings of LL upon acquisition was not carried out.
 While preparing the consolidated retained earnings, two recurrent adjustments were
overlooked. Firstly, the revaluation surplus of LL was not transferred. Secondly, the
consideration received during the acquisition was not reversed.

Page 1 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2023

Question 2

 Regarding matter (i), examinees demonstrated the understanding that the loan to
employees should be recorded at fair value using amortized cost. However, a
common omission observed was the lack of discussion on how the fair value should
have been calculated and how any difference between the cash paid and fair value
should have been treated.
 Regarding matter (ii), examinees overlooked the fact that the convertible bond should
have been treated as an asset/investment rather than a liability. The majority of the
focus was on bifurcating the bond into liability and equity components, which was
not required in this situation.
 Regarding matter (iii), it seems that examinees overlooked the fact that SL had the
intention to eliminate the backlog orders. Despite this intention, they still considered
the segment as "held for sale" and concluded that it should be presented as a
discontinued operation.

Question 3

 Regarding a(i), examinees accounted for the additional expense for the amendment
incorrectly by using the fair value of Rs. 22 per option instead of recognizing the
increase in fair value, which should have been Rs. 10 per option.
 Regarding a(ii), examinees made the error of accounting for the full 30,000 options as
one scheme instead of correctly separating them into two distinct schemes of 10,000
and 20,000 options.
 In respect of amendment (iii), examinees reversed the expense already recorded in the
years 2021 and 2022.
 In response to part (b), examinees' answers fell into two categories. Firstly, 36% of
examinees seemed unfamiliar with the concept of put options for customers and did
not secure any mark. On the other hand, the remaining examinees attempted to
prepare the diagram, but they commonly omitted the crucial aspect of "customer
having a significant economic incentive to exercise the put option".

Question 4

 Regarding issue (i), examinees faced difficulty in understanding that OL’s balances
had been mistakenly consolidated and needed to be removed from the consolidated
financial statements. Some either failed to deduct OL’s balances or added OL’s
balance to the given consolidated financial statements. Others also overlooked to
retranslate OL’s balance as associated with using the closing exchange rate.
 Regarding issue (ii), many examinees omitted the reversal for depreciation already
charged on the remaining balance of the building account, and neglected to make
adjustments for depreciation to be charged on the right-of-use asset.
 Regarding issue (iii), the examinees incorrectly recognized the modified loan at Rs.
570 million instead of Rs. 457 million, and they recorded interest thereon @11%
instead of 15%.

Page 2 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2023

Question 5

 In part (a), errors or omissions mentioned in serial (ii), (iv), and (v) were least
identified by the examinees.
 In part (b), examinees were simply required to identify which items needed to be
restated, and even a random selection of "restated" or "not restated" for each item
could have earned them passing marks. However, it is concerning that 38% of
examinees were unable to secure any marks in this part. Many examinees merely
mentioned that non-monetary items would be restated for the current and previous
year without providing specific identification of the items.

(THE END)

Page 3 of 3
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2023

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1  Goodwill 5.5
 Investment in joint venture 3.5
 Gain on disposal of LL 4.0
 Consolidated retained earnings 6.5
 Non-controlling interest 1.5
 Other equity items 4.0

A.2  Up to 02 marks for each point related to Matter (i) 8.0

 Up to 02 marks for each point related to Matter (ii) 7.0
 Up to 02 marks for each point related to Matter (iii) 6.0

A.3 (a) (I)  2021 1.5

 2022 1.5

(II)  Amendment (I) 4.5

 Amendment (II) 4.0
 Amendment (III) 1.5

(b)  Identifying possible treatments 1.0

 01 mark for each route of treatment 5.0

A.4  Property, plant and equipment 2.5

 Right of use asset 2.5
 Investment in associates 2.0
 Other assets 1.5
 Retained earnings 6.5
 Exchange translation reserves 2.5
 Non-controlling interest 2.0
 Liabilities 5.5

A.5 (a) 01 mark for identifying each error or omission 6.0

(b)  2022 (0.5 mark for each line item) 3.0

 2021 1.0

(THE END)

Page 1 of 1
 Certified Finance and Accounting Professional Stage Examination

The Institute of 4 December 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.

Q.1 Following information is available regarding few transactions of Leo Limited (LL):

(i) On 1 January 2020, LL entered into a 7-year lease for office space with annual lease
payments of Rs. 40 million, payable at the end of each year. LL’s incremental borrowing
rate at the commencement date was 12% per annum.

On 1 January 2022, the lease was amended to reduce the space to 60% of the original,
with new annual payments of Rs. 28 million. LL’s incremental borrowing rate on that
date was 15% per annum.

(ii) On 31 December 2021, LL purchased bonds of Rs. 150 million at par value, issued by
one of its subsidiaries. These bonds carry an annual interest rate of 10% payable on
31 December each year, and will be redeemed after four years at par value. In contrast,
similar bonds available in the market offers interest rate of 16% per annum.

LL intends to hold the investment in bonds till redemption. Further, LL estimated that
12 months expected credit losses in respect of the investment in bonds at
31 December 2021 and 31 December 2022 amounted to Rs. 4 million and Rs. 5 million,
respectively.

(iii) On 1 January 2020, LL granted share based compensation to 40 of its employees on the
condition that they will remain in LL’s employment for 3 years. Employees would be
entitled to either 30,000 shares of LL or cash equal to the increase in fair value of
80,000 shares of LL from the grant date. LL will decide the mode of settlement at the
end of 3 years. At the grant date, LL had no present obligation to settle in cash.

On 31 December 2022, LL chooses the share alternative for settlement of the scheme.
1-Jan-20 31-Dec-20 31-Dec-21 31-Dec-22
Fair value of each equity instrument Rs. 100 Rs. 135 Rs. 155 Rs. 178
No. of employees already left till date - 2 6 9
Further no. of employees expected to leave 8 7 5 -

Required:
Prepare the relevant extracts (including comparative figures) from LL's separate statement of
financial position and statement of profit or loss and other comprehensive income for the year
ended 31 December 2022, in accordance with the IFRSs. (25)
(Notes to the financial statements and the bifurcation of current and non-current items in the
statement of financial position are not required)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 Following are the extracts from consolidated financial statements of Pisces Limited (PL):

Consolidated statement of financial position as on 30 June 2023

2023 2022
---- Rs. in million ----
Assets
Property, plant and equipment 814 795
Goodwill 118 136
Equity accounted investees 261 124
Loan to associate 40 -
Current assets other than cash balances 489 360
Cash balances 142 75
1,864 1,490
Equity and liabilities
Share capital (Rs. 10 per share) 734 650
Share premium 121 -
Consolidated retained earnings 370 265
Non-controlling interest 291 268
Long term loans 188 98
Dividend payable 16 4
Other current liabilities 144 205
1,864 1,490

Consolidated statement of profit or loss for the year ended 30 June 2023
Rs. in million
Operating profit 274
Finance cost (66)
Share of profit from equity accounted investees 81
Profit for the year from continuing operations 289
Profit from discontinued operation 33
Profit for the year 322

Profit attributable to:

 Owners of the parent 241
 Non-controlling interests 81
322

Additional information:
(i) During the year, PL entered into an agreement with another entity to set up Capricorn
Limited (CL), a joint arrangement. PL has invested Rs. 100 million in the form of cash
and has a 40% right in the net assets of CL. This amount has not yet been utilized in
CL’s operation, and remains in the form of cash.
(ii) During the year, property, plant and equipment purchased by PL and its subsidiaries
amounted to Rs. 69 million and Rs. 84 million respectively. Furthermore, one of the
subsidiaries sold an equipment for Rs. 45 million, which had a carrying value of
Rs. 56 million.
(iii) The finance cost includes foreign exchange loss of Rs. 23 million on retranslation of
the foreign currency loan.
(iv) During the year, PL acquired 70% shareholdings in Aries Limited (AL) by paying
Rs. 375 million, including Rs. 15 million for acquisition cost. The majority of this
payment was financed through a right issue to PL’s shareholders.
 Advanced Accounting and Financial Reporting Page 3 of 5

The acquisition of AL resulted in goodwill of Rs. 45 million. The carrying values of

AL’s net assets is as follows:
Acquisition date 30 June 2023
---------- Rs. in million ----------
Property, plant and equipment 265 272
Current assets other than cash balances 152 182
Cash balances 21 16
Trade payables (58) (65)
380 405

On the acquisition date, the fair value of AL’s net assets was equal to their carrying
value, except for a building whose fair value exceeded the carrying value by
Rs. 70 million. The building had a remaining useful life of ten years.
(v) During the year, PL disposed of its entire shareholdings in Virgo Limited (VL) for a
consideration of Rs. 300 million, out of which Rs. 65 million remains receivable at
year-end. The shareholding in VL, acquired many years ago for Rs. 140 million, had
resulted in a bargain purchase of Rs. 40 million. On the date of disposal, VL’s
non-controlling interest amounted to Rs. 150 million. The carrying values of VL’s net
assets (excluding cash balances) at the time of disposal were as follows:
Rs. in million
Property, plant and equipment 300
Current assets 120
Trade payables (80)
340

(vi) The profit from discontinued operation, as reported in the statement of profit or loss,
comprises of VL’s operating loss amounting to Rs. 42 million and gain on disposal of
VL amounting to Rs. 75 million.

Required:
Prepare PL’s consolidated statement of cash flows for the year ended 30 June 2023 in
accordance with IFRS. (25)

Q.3 (a) The following amounts pertain to Cancer Bank Limited (CBL) for the year ended
31 December 2022:

Rs. in million
Credit loss allowance and write offs – net 2,152
Dividend income 733
Fee and commission income 9,217
Foreign exchange income 3,160
Gain on securities – net 343
Loss from derivatives 873
Mark-up / Return / Interest earned 136,324
Mark-up / Return / Interest expensed 85,612
Operating expenses 36,825
Other charges 159
Other income 170
Taxation 13,562
Workers welfare fund 477

Required:
Prepare the statement of profit or loss for the year ended 31 December 2022 of CBL.
(Notes to the financial statements are not required) (07)

(b) Discuss key differences between requirements of IFRS for SMEs and full IFRS in
respect of Business combinations. (03)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.4 Following is the draft statement of financial position of Sagittarius Ltd (SL) as at
31 December 2022 before incorporating the effects of the outstanding issues:

Rs. in million Rs. in million

Non-current assets Equity
Property, plant and equipment 311 Share capital 740
Right of use assets 214 Retained earnings 388
Investment in associates 520 1,128
1,045 Liabilities
Lease liabilities 174
Current assets 312 Deferred tax liability 82
Asset held for sale 220 Current tax liability 54
Other liabilities 139
449
1,577 1,577

Outstanding issues:
(i) Asset held for sale represents a manufacturing plant that has been stopped using by SL,
as the demand for the related product has fallen in recent year. Currently, this plant has
no other use, but the management intends to use this plant for the upcoming products,
which are under development, and are expected to earn supernormal profits in the
coming years. On 1 May 2022, the accountant temporarily classified the plant as held
for sale. He estimated its fair value less cost to sell as Rs. 240 million and Rs. 220 million
on 1 May 2022 and 31 December 2022, respectively.

The plant, purchased on 1 May 2019 for Rs. 405 million, has been depreciated over its
useful life of 15 years until 30 April 2022. However, tax depreciation has been charged
for the entire year.

Under tax laws, impairment of the plant is not allowable as expense while depreciation
on plant is allowed till the date of disposal.

(ii) In respect of investment in Gemini Limited (GL), no further entries have been passed
in the books since recording the purchase. SL accounts for investment in associates
under the equity method.

On 1 January 2022, SL purchased a 35% stake in the ordinary shares of GL for

Rs. 375 million. During the year ended 31 December 2022, GL earned a profit of
Rs. 158 million and other comprehensive income (fair value gain on investments
subsequently measured at fair value through other comprehensive income) of
Rs. 42 million. In addition to ordinary shares, GL has 30 million cumulative preference
shares with a par value of Rs. 10 each. These shares are classified as equity in GL’s
books and are entitled to 18% dividend. However, GL has not declared any dividend in
2022.

As per tax laws, profits from an associate are only taxable upon receipt of a dividend or
upon disposal of an investment.

(iii) Share capital includes Rs. 400 million received from issuance of mandatorily
convertible bonds. No further entries have been made in respect of these bonds.

On 1 April 2022, SL issued 4 million bonds of Rs. 100 each for Rs. 400 million. Each
bond is mandatorily convertible on 31 March 2028 into 3 ordinary shares having par
value of Rs. 10 each. Interest is payable at 15% per annum on 31 March each year until
the conversion date. On the issue date, market interest rate for similar debt without
conversion was 12% per annum.

Under tax laws, interest on such bonds is not an allowable expense.

 Advanced Accounting and Financial Reporting Page 5 of 5

(iv) No entries have been made in respect of a lease arrangement with a foreign supplier.

On 1 July 2022, SL acquired a specialized machine on lease. Under the lease agreement,
an instalment of USD 0.2 million is to be paid annually in arrears. At the end of the
lease term, SL has an option to purchase the machine at USD 0.5 million. It is
reasonably certain that SL will exercise this option. The lease term is 4 years, while
useful life is 8 years. The rate implicit in the lease is 5% per annum. The following
exchange rates per USD are available:

01-Jul-2022 31-Dec-2022 Average for Jul-Dec 2022

Rs. 270 Rs. 287 Rs. 280

Under tax laws, payments made under a lease arrangement are allowable as an expense.

The applicable tax rate is 30%.

Required:
Prepare SL’s revised statement of financial position as at 31 December 2022, after
incorporating the effects of outstanding issues and tax implications of the corrections. (25)

Q.5 The following transactions pertain to Taurus Limited (TL):

(i) On 1 October 2023, TL entered into a contract with a customer to supply 180 units of
specialized vehicles for a total consideration of Rs. 360 million. The delivery and billing
schedule for vehicles is as follows:

Unit price Total

Delivery date Units
----- Rs. in million -----
31 December 2023 50 2 100
31 March 2024 60 2 120
30 June 2024 70 2 140
360

The customer has paid 20% of the consideration in advance. The remaining 80% for
each lot will be paid 15 days after delivery of each lot, but not before.
TL is entitled to an additional consideration of Rs. 54 million, payable in August 2024,
if all the delivery dates are met. It is highly probable that TL will achieve this.

TL’s sales team, which had been working on obtaining this contract since the start of
2023, was rewarded with a bonus of Rs. 21 million upon securing the contract. (08)
(ii) On 1 November 2023, TL entered into a restructuring plan to modify the terms of a loan
with a bank. According to the plan, TL will make a single payment of Rs. 760 million
on 31 October 2028, instead of originally scheduled payments. The market interest rate
at the time of restructuring was 12% per annum. A fee of Rs. 15 million was paid for
the restructuring plan.

On the restructuring date, the carrying amount of the original loan was Rs. 430 million,
with an effective interest rate of 14% per annum. The original loan was repayable in
equal annual installments due in arrears, with the final payment on 31 October 2028. (07)

Required:
Discuss how the above information would be dealt with in TL’s financial statements for the
year ending 31 December 2023.

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.1 Leo Limited

Statement of financial position as on 31 December 2022
2022 2021
------- Rs. in million -------
Assets:
Right of use asset (W-1) 68.46 130.39

Investment in subsidiary 150–124.82(W-5) 25.18 25.18

Investment in bonds 124.82(W-5)+19.97–15.00 129.79 124.82
Allowance for impairment (5.00) (4.00)

Share capital and reserves:

Share capital and premium 93.00
Share scheme (W-3) - 58.00

Liabilities:
Lease liability (W-2) 79.94 144.19

Leo Limited
Statement of profit or loss for the year ended 31 December 2022
2022 2021
------- Rs. in million -------
Depreciation on right of use asset (W-1) (17.12) (26.08)
Interest on lease liability (W-2) (14.08) (19.73)
Gain on lease modification 57.68(W-2)–52.16(W-1) 5.52
Employee compensation expense 93–58(W-3) ; 58–31(W-3) (35.00) (27.00)
Interest income on bonds 124.82(W-3)×16% 19.97
Impairment of bonds (1.00) (4.00)

W-1: Right of use asset Rs. in million

Initial recognition on 1 Jan 2020 40×4.5637 182.55
Depreciation for 2020 182.55÷7 (26.08)
Depreciation for 2021 182.55÷7 (26.08)
Closing balance for 2021 130.39
Effect of lease modification:
Proportionate reduction 130.39×40% (52.16)
Change of rate (W-2) 7.35
85.58
Depreciation for 2022 85.57÷5 (17.12)
Closing balance 68.46

Page 1 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

W-2: Lease liability Rs. in million

Initial recognition on 1 Jan 2020 (W-1) 182.55
Interest for 2020 182.55×12% 21.91
Payment (40.00)
Closing balance for 2020 164.46
Interest for 2021 164.46×12% 19.73
Payment (40.00)
144.19
Effect of lease modification:
Proportionate reduction 144.19×40% (57.68)
Change of rate Bal fig. 7.35
Liability after modification 28×3.3521 93.86
Interest for 2021 93.86×15% 14.08
Payment (28.00)
Closing balance for 2022 79.94

W-3: Cumulative amount of Employee share compensation

2020 31(40–2–7)×30,000×100×1÷3 31.00
2021 29(40–6–5)×30,000×100×2÷3 58.00
2022 31(40–9)×30,000×100×3÷3 93.00

W-4: Checking of excess on settlement of employee share compensation

Share alternate 31×30,000×178 165.54
Cash alternate 31×80,000×78(178–100) 193.44
-

W-5: Fair value of Bonds of subsidiary

PV of interest receipts 15×2.7981 41.98
PV of principal 150×0.5522 82.84
124.82

Page 2 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.2 Pisces Limited

Consolidated statement of cash flows for the year ended 30 June 2023
Rs. in million
Cash flow from operating activities
Profit 322
Adjustments for:
Finance cost 66
Share of profit from equity accounted investees (81)
Loss on disposal of property, plant & equipment 56–45 11
Gain on disposal of subsidiary VL (75)
Depreciation of property, plant & equipment (W-1) 113
Impairment of goodwill 136+45–118 63
419
Changes in working capital:
Increase in current assets (W-2) (32)
Decrease in current liabilities (W-3) (39)
(71)
Finance cost paid 66–23 (43)
305
Cash flow from investing activities:
Investment in joint arrangement – CL (100)
Purchase of property, plant and equipment 69+84 (153)
Proceeds from disposal of property, plant & equipment 45
Acquisition of subsidiary – AL 360(375–15)–21 (339)
Proceeds from disposal of subsidiary VL 235(300–65)–35(W-4) 200
Dividend from equity accounted investments 124+81+100– 261 44
Loan to associate (40)
(343)
Cash flow from financing activities:
Proceeds from issue of shares at premium 650–734–121 205
New loans acquired 98+23–188 67
Dividend paid 4+43(W-5)+136(W-6)–16 (167)
105
Net increase in cash and cash equivalents 67
Cash and cash equivalents – beginning 75
Cash and cash equivalents – ending 142

W-1: Depreciation (Property, plant and equipment) Rs. in million

Opening balance 795
Additions (69+84) 153
Acquisition of Property, plant and equipment of AL (265+70) 335
Disposal of equipment (56)
Disposal of PPE – VL (300)
Closing balance (814)
113

W-2: Increase in current assets

Opening balance 360
Current assets other than cash – AL 152
Receivables – VL 65
Closing balance (489)
Current assets of VL disposed of (120)
32
Page 3 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

W-3: Decrease in current liabilities Rs. in million

Opening balance 205
Trade payables – AL 58
Trade payables – VL (80)
Closing balance (144)
39

W-4: Cash balance of VL on disposal

Consideration 300
Non-controlling interest 150
Net assets other than cash (340)
Gain on disposal (75)
35

W-5: Dividend to non-controlling interest

Opening balance 268
Profit attributable to Non-controlling interest 81
Non-controlling interest – AL (W-7) 135
Non-controlling interest – VL (150)
Closing balance (291)
Dividend 43

W-6: Dividend to owner of the parent (Consolidated related earnings)

Opening balance 265
Profit attributable to parent 241
Closing balance (370)
136

W-7: Non-controlling interest – AL of acquisition

Fair value of net assets 380+70 450
Goodwill 45
Cash consideration 375–15 (360)
135

Page 4 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.3 (a) Cancer Bank Limited

Statement of profit or loss
For the year ended 31 December 2022
Rs. in million
Mark-up / Return / Interest earned 136,324
Mark-up / Return / Interest expensed 85,612
Net mark-up / interest income 50,712

NON MARK-UP / INTEREST INCOME

Fee and commission income 9,217

Dividend income 733
Foreign exchange income 3,160
Loss from derivatives (873)
Gain on securities 343
Other income 170
Total non-markup / interest income 12,750

Total income 63,462

NON MARK-UP/INTEREST EXPENSES

Operating expenses 36,825

Workers welfare fund 477
Other charges 159
Total non-markup / interest expenses 37,461

Profit before credit loss allowance 26,001

Credit loss allowance and write offs - net 2,152

PROFIT BEFORE TAXATION 23,849

Taxation 13,562

PROFIT AFTER TAXATION 10,287

(b) IFRS for SMEs IFRS

Cost of a business combination
The cost of a business combination The IFRSs excludes directly attributable
includes the fair value of assets given, costs from the cost of a business
liabilities incurred or assumed and equity combination and such costs are required to
instruments issued by the acquirer, in be recognized in profit or loss when
exchange for the control of the acquiree, incurred.
plus any directly attributable costs.
(IFRS for SMEs – 19.11)
Goodwill
After initial recognition, the goodwill is Under the IFRSs, the goodwill acquired in
measured at cost less accumulated a business combination is not amortised. It
amortisation and any accumulated is required to be subject to impairment
impairment losses. Goodwill is amortised testing at least annually and, additionally,
over its useful life, which is presumed to be when there is an indication of impairment
10 years if the entity is unable to make a
reliable estimate of the useful life.
(IFRS for SMEs – 19.23)
Page 5 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.4 Sagittarius Limited

Statement of financial position as at 31 December 2022
Rs. in million
Non-current assets:
Property, plant and equipment 311+220+104(W-1)–18(W-1) 617.00
Right-of-use assets 214+302.54(W-2)–18.91(W-1) 497.63
Investment in associates 520+36.4(W-1)+14.7 571.10
1,685.73
Current assets 312.00
1,997.73

Equity:
Share capital 740.00–400.00 340.00
Retained earnings (W-1) 419.28
Equity portion of bonds 400–246.67 153.33
Fair value reserve 14.70(42×35%)–4.41(14.7×30%) 10.29
923.17
Liabilities:
Lease liabilities 174.00+329.63 (W-3) 503.63
Bonds 246.67(60×4.111)+22.20(W-1) 268.87
Deferred tax liability 82+(25.8+10.92–13.80)(W-1)+4.41 109.33
Other liabilities 139.00
Current tax 54.00
1,074.83
1,997.73

W-1: Retained earnings Rs. in million

Given 388.00
Matter (i)
Reversal of impairment on plant 324(405×12÷15)–220 104. 00
Depreciation on plant 324÷12×8÷12 (18.00)
Related tax effect on deferred tax (104–18)×30% (25.80)

Matter (ii)
Share of profit from GL [158–54(300×18%)]×35% 36.40
Related tax effect on deferred tax 36.4×30% (10.92)

Matter (iii)
Interest on bond 246.67×12%×9÷12 (22.20)

Matter (iv)
Depreciation on ROU 302.54(W-2)÷8×6÷12 (18.91)
Interest liability 28,013(1,120,530×5%×6÷12)×280 (7.84)
Foreign exchange loss (W-3) (19.25)
(46.00)
Related deferred tax 46.00×30% 13.80
419.28

W-2: Right of use asset Rs. in million

Initial recognition USD @ 270
PV of instalments 200,000×3.5459 709,180 191.48
PV of purchase options 500,000×0.8227 411,350 111.06
1,120,530 302.54
Page 6 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

W-3: Foreign exchange loss Rs. in million

Closing liability @ 287 (1,120,530+28,013) × 287 329.63
Liability before retranslation 302.54+7.84 (310.38)
19.25

A.5 (i) The amount of Rs. 72 million (360×20%) would be initially recorded as contract liability.
TL should include Rs. 54 million additional consideration in the transaction price of the
contract as it is highly probable that TL will achieve the delivery dates. So revenue of
Rs. 2.3 million [(360+54)/180] should be recognised upon delivery of each vehicle.
Revenue of Rs. 115 million (50×2.3) would be recognised upon delivery of first lot of
50 vehicles on 31 December 2023 by debiting receivable with Rs. 80 million
(50×2×80%), contract liability with Rs. 20 million (50×2×20%) and contract asset with
Rs. 15 million (50×0.3).

TL should recognise an asset for the commissions to sales employees of Rs. 21 million
because it is incremental costs of obtaining the contract and is expected to be recovered
through future deliveries. This cost should be amortised on a systematic basis over the
contract period. An amount of Rs. 7 million (21×3/9) or Rs. 5.83 million (21×50/180)
should be expensed out in 2023. As a practical expedient, TL may recognise the
incremental costs of obtaining a contract as an expense when incurred as the
amortisation period is less than one year.

(ii) The present value of the new arrangement should be computed using the original
effective interest rate of 14%. Present value for the modified debt is Rs. 394.7 million
(760×1.14-5) and after including restructuring fees of Rs. 15 million, the net present value
of the new arrangement is Rs. 409.7 million. This represents 95.3% (409.7/430) of the
current carrying value of the debt as at the end of 2020 of Rs. 430 million, so that the net
present value of the modified loan (discounted at the effective interest rate of the original
loan) is 4.7% different from that of the original loan. This is less than 10%, so that the
modification is not automatically required to be treated as an extinguishment under
IFRS 9.

So, an immediate gain or loss should be recognized and the liability is not derecognised.
In this situation, this would result in the recognition of a gain of Rs. 35.3 million
(Rs. 430 million current carrying value less Rs. 394.7 million recalculated net present
value, excluding the fees). The fees would reduce the carrying value of liability to
Rs. 379.7 million (394.7 less 15). This would result in an increase in the effective interest
rate to 14.9% (the rate which reduces 760 to 379.7 in 5 years) which will be used in the
future.

(The End)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Winter 2023

Passing %
Question-wise Overall
1 2 3 4 5
53% 21% 44% 15% 23% 28%

General comments

The overall passing ratio in this particular paper stood at 28%, which is consistent with the
outcomes of the preceding session as well as the average across previous sessions. The
paper saw an attainment of the highest score at 96 marks, which shows the exemplary
performance of the top scorer. Nevertheless, it is disconcerting that 18% of examinees
failed to secure even 20 marks, a level achievable through basic preparation in the subject.
This suggests a half-hearted approach to the paper, possibly undertaken solely to meet the
minimum requirement of appearing in at least two papers

Many answer scripts revealed poor time management, with examinees dedicating
excessive time to Q1 and Q2. As a result, they struggled to attempt the remaining questions.
Examinees are strongly advised to shift to the next question after investing a reasonable
amount of time in addressing one question.

Many examinees present figures without accompanying workings. While correct figures
receive full marks, the absence of supporting workings leads to a missed opportunity for
valuable partial marks for incorrect figures that could have been awarded based on the
supporting calculations.

Question-wise common mistakes observed

Question 1

 Regarding point (i) related to the lease, examinees failed to bifurcate the impact of the
modification into proportionate reduction and change of rate. As a consequence, the
gain on the modification was also incorrect.
 Concerning point (ii), examinees lacked the understanding that the difference between
fair value and transaction amount should have been incorporated into the "Investment
in subsidiary" line item on the statement of financial position. Additionally, the
allowance for impairment was incorrectly reported in liabilities instead of being
deducted from the asset on the statement of financial position.
 Concerning point (iii), examinees applied the principles of share-based payment
transactions, where the counterparty has the choice of settlement, whereas, in this

Page 1 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2023

question, the choice of settlement rested with the entity. Those examinees who
correctly applied the appropriate treatment only reflected the expense amount in their
extracts.

Question 2

 Cash flow was started with a profit of Rs. 289 million instead of Rs. 322 million.
 While computing depreciation, examinees incorporated extra depreciation on fair value
adjustment for AL which was not required as depreciation was to be computed as a
balancing amount in property, plant and equipment account.
 Examinees consistently identified all the necessary amounts to compute working
capital changes. However, errors arose frequently as they mistakenly added instead of
subtracted, or vice versa, leading to inaccurate final amounts.
 The cash balance of VL on the disposal date was not calculated.
 Examinees overlooked the fact that the dividend should have been calculated from the
movement of NCI and retained earnings as the balancing figure.

Question 3

 In part (a), examinees instead of preparing specialized profit and loss accounts of the
bank prepared a general statement of profit or loss. Further, credit loss allowance and
write-offs were added to “non-markup expenses” instead of showing separate line
items.
 In part (b), the instruction was to discuss the key differences between the requirements
of IFRS for SMEs and full IFRS specifically related to "Business Combinations".
However, a majority of students focused on differences in areas other than Business
Combinations.

Question 4

 On the overall basis, examinees often made adjustments to assets and liabilities but the
corresponding adjustments to retained earnings were either not made or were
incorrectly made. This led to zero performance in making related tax adjustments.
Those who made tax adjustments often incorporated the tax effect in the current tax
instead of in deferred tax.
 In respect of issue (i), impairment was reversed on the basis of Rs. 240 million (i.e.,
fair value less cost to sell on 1 May 2022) instead of Rs. 220 million (i.e., fair value
less cost to sell on 31 December 2022).
 In respect of issue (ii), dividend to preference shareholders of GL was not considered
in computing share of GL’s profit. Further, the deferred tax arising on the share of GL’s
OCI was not charged to OCI.
 In respect of (iii), the interest was not accrued on bonds at year-end while others
accrued the interest at 15% instead of 12%.
 In respect of (iv), the lease liability was not retranslated using the closing exchange
rate. Depreciation on ROU and interest on lease liability was calculated for 12 months
instead of 6 months.

Page 2 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2023

Question 5

 In transaction (i), the additional consideration of Rs. 54 million was omitted from the
transaction price of the contract. Additionally, the amortization of commission to
employees was not addressed, and the practical expedient available to immediately
expense out the cost was not mentioned.
 In transaction (ii), the present value of the new arrangement was calculated using a
discount rate of 12% instead of 14%. Further, fees on restructuring were not excluded
while calculating gain, and the increase in effective interest rate was not discussed.

(THE END)

Page 3 of 3
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2023

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (i)  Statement of financial position 5.0
 Statement of profit or loss 5.0

(ii)  Statement of financial position 5.0

 Statement of profit or loss 2.0

(iii)  Statement of financial position 4.0

 Statement of profit or loss 4.0

A.2  Cash flow from operating activities

– Depreciation 2.0
– Up to 01 mark for other line items of ‘adjustment for’ 4.0
– Working capital changes 3.0
– Others 2.0
 Cash flow from investing activities
– 02 marks each for acquisition of AL and disposal of VL 4.0
– Up to 01 mark for each other items 4.0
 Cash flow from financing activities
– Dividend paid 4.0
– 01 mark for each other items 2.0

A.3 (a)  Net mark-up/interest income 1.5

 Non mark-up 2.0
 Non mark-up/interest expenses 2.0
 Others 1.5

(b) 1.5 marks for each difference 3.0

A.4  Property, plant and equipment 2.5

 Right of use asset 2.5
 Investment in associates 2.0
 Retained earnings 5.5
 Equity portion of bond 1.0
 Fair value reserve 2.0
 Lease liabilities 2.5
 Bonds 2.5
 Deferred tax liability 4.5

A.5 (i)  Initial recognition of contract liability 1.0

 Revenue recognition 3.5
 Asset for commission to sales employees 3.5

(ii)  Assessment of substantially different terms 3.5

 Accounting treatment 3.5

(THE END)
Page 1 of 1
 Certified Finance and Accounting Professional Stage Examination

The Institute of 3 June 2024

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in black pen only.

Q.1 Draft forecasted financial statements of Fork Limited (FL) for the year ending 30 June 2025
show the following amounts:
Rs. in million
Total assets 410
Total liabilities 145
Net profit 65

During the process of finalisation of the forecasted financial statements, it was noted that FL
is going to undertake a new project during the year ending 30 June 2025 whose effects have
not been incorporated. Relevant details for the project are as under:
(i) The project would require an initial investment of Rs. 100 million for the new plant and
machinery in July 2024. The useful life of the plant and machinery would be 8 years.
(ii) Revenues for the year ending 30 June 2025 are expected to be Rs. 76 million, of which
Rs. 13 million would be received after 30 June 2025.
(iii) Operating costs for the year ending 30 June 2025 are expected to be Rs. 47 million of
which Rs. 41 million will be paid before 30 June 2025.

FL is planning to finance the initial investment from one of the following two options:
(i) On 1 July 2024, FL would issue 1 million bonds for Rs. 105 million. The related
transaction cost on issuance will be Rs. 5 million. Each bond will be convertible into
2 ordinary shares on 30 June 2029 at the option of the bond holders. Any unconverted
bonds would be redeemed on that date at par value of Rs. 100 each.
Under the terms of the bonds, interest of Rs. 20 million will be paid on 30 June 2026 as
well as on 30 June 2028. On the date of issue, the market interest rate for similar debt
without a conversion option is expected to be 15% per annum. However, on account of
transaction cost incurred on the issuance of bonds, the effective interest rate would
change by 1.3% per annum.
(ii) On 1 July 2024, FL would sell its head office building to Tong Leasing (TL) for
Rs. 100 million. Immediately before the transaction, the building would be carried in
the books at Rs. 120 million and would have a remaining useful life of 20 years. At the
same time, FL would enter into a contract with TL for the right to use the building for
10 years, with an annual payment of Rs. 13 million payable in arrears on 30 June each
year. The fair value of the building at the date of sale is expected to be Rs. 150 million.
The rate of interest implicit in the lease is 15% per annum. The terms and conditions of
the transfer of the building by FL would satisfy the requirements of IFRS 15 to be
accounted for as a sale of the asset.

Required:
Determine the revised amounts of total assets, total liabilities and net profit under each of the
following independent situations:
(a) The initial investment for the project is financed through issuance of bonds. (07)
(b) The initial investment for the project is financed through sale and leaseback. (08)
 Advanced Accounting and Financial Reporting Page 2 of 6

Q.2 Following are the draft statements of profit or loss and other comprehensive income of Apron
Limited (AL), Bowl Limited (BL) and Cleaver Limited (CL) for the year ended
31 December 2023:

AL BL CL
--- Rs. in million --- F$ in '000
Revenue 1,485 924 5,500
Cost of sales (700) (528) (2,500)
Gross profit 785 396 3,000
Administrative expenses (320) (156) (1,800)
Finance cost (58) (72) -
Net profit 407 168 1,200
Other comprehensive income - - -
Total comprehensive income 407 168 1,200

Other information:
(i) On 1 March 2023, AL obtained control of BL by acquiring 70% shareholding at the
following consideration:
 Cash payment of Rs. 700 million, including acquisition-related cost of
Rs. 15 million.
 Further cash payment of Rs. 120 million to be paid in February 2024 if BL's net
profit for the year 2023 would be more than Rs. 200 million. The fair value of this
consideration on acquisition date was estimated at Rs. 80 million.
 Issuance of share options to BL’s CEO to purchase AL’s shares. These options
would replace the share options issued by BL to him on 1 March 2021. The
original share options vested on 28 February 2023 and had a fair value of
Rs. 56 million and Rs. 72 million at 1 March 2021 and 1 March 2023 respectively.
The replacement share options issued by AL does not require further services by
the BL’s CEO and had a fair value of Rs. 117 million and Rs. 136 million on
1 March 2023 and 31 December 2023 respectively.
Only cash payment of Rs. 700 million was recorded as the cost of investment in AL’s
books, and no subsequent adjustments have been made.
(ii) On the acquisition date of BL, the fair value of its net assets was equal to their carrying
value of Rs. 840 million except for:
 BL’s inventory, whose fair value was higher than its carrying value by
Rs. 70 million. By year-end, 70% of these inventory items had been sold by BL at
a profit of Rs. 40 million.
 a 10% bank loan of Rs. 450 million. Interest is paid annually on 28 February, and
the entire principal is due on 28 February 2026. On the acquisition date, market
rate for a similar loan was 14% per annum.
(iii) On 1 May 2023, AL acquired an 80% shareholding in CL for F$ 7 million paid in cash
and a further amount of F$ 3.5 million payable on 30 April 2025.
Only the cash payment was recorded as the cost of investment in AL’s books, and no
subsequent adjustments have been made.
(iv) On the acquisition date, the fair value of CL’s net assets was equal to their carrying
value of F$ 8.8 million except for research relating to a new product, which was not
recognized as an asset in CL’s books. The fair value of the research was initially
estimated by AL’s management at F$ 1.2 million. After the acquisition, an expert was
hired to calculate the fair value of the research. The expert reported after two months
that at the acquisition date, the fair value and the remaining useful life of the research
were F$ 1.8 million and 8 years respectively.
(v) On the acquisition date, the fair value of the non-controlling interest in CL was
estimated at F$ 2.2 million.
 Advanced Accounting and Financial Reporting Page 3 of 6

(vi) The exchange rates per F$ are as follows:

Average rate for

1 May 2023 31 Dec 2023
2023 May – Dec 2023
Rs. 176 Rs. 164 Rs. 172 Rs. 168

(vii) The income and expenses of all companies may be assumed to have accrued evenly
during the year unless stated otherwise.
(viii) AL values the non-controlling interest in BL on the acquisition date at its proportionate
share of the fair value of BL’s identifiable net assets, while AL values the
non-controlling interest in CL on the acquisition date at its fair value.
(ix) At year-end, it was assessed that all goodwill balances are impaired by 20%.
(x) A discount rate of 14% may be used wherever required but not given.

Required:
Prepare AL’s consolidated statement of profit or loss and other comprehensive income for the
year ended 31 December 2023 in accordance with the requirements of IFRSs. (25)
(Disclosures relating to allocation of profit or loss and comprehensive income attributable to
non-controlling interest and owners of the parent are not required)

Q.3 Saucer Insurance Limited (SIL) is engaged in the life insurance business, selling conventional,
Takaful and group life insurance policies. The following information is available regarding
premium/contribution revenue of SIL for the year ended 31 December 2023.

Rs. in million
Regular premium/contribution individual policies 24,127
Single premium/contribution individual policies 542
Group policies 3,715
Provision for experience refund 159

Reinsurance premium/contribution ceded on:

 individual policies 246
 group policies 606
Experience refund from reinsurers 85

Additional information:
(i) Further break-up for individual policies is also available:

Reinsurance
Gross premium/
premium/
contribution
contribution
------------ Rs. in million ------------
First year 5,579 41
Second year renewal 5,379 33
Subsequent years renewal 13,169 172
24,127 246

(ii) Group policies include Rs. 19 million for policies with cash value.

Required:
Prepare a note on Net Insurance Premium/Contribution Revenue of SIL for the year ended
31 December 2023. (06)
 Advanced Accounting and Financial Reporting Page 4 of 6

Q.4 (a) Masher Limited (ML) is involved in the manufacturing and trading of automobiles. On
1 March 2023, Micro Assist Welfare (MAW), an NGO, entered into a contract with
ML for the purchase of 1,000 rickshaws at a price of Rs. 400,000 per rickshaw for
distribution to needy persons. As per the contract, ML will deliver the rickshaws in two
lots of 500 each, on 15 April 2023 and 15 September 2023. The payment for each lot
will be made within 2 months after delivery. MAW will also have a right to return the
undistributed rickshaws within 3 months of delivery. Based on historical evidence, ML
estimated that MAW will return 10% of the rickshaws.

The first lot of rickshaws was delivered as planned. On 1 June 2023, MAW returned
20 rickshaws. On 5 June 2023, MAW made the payment after adjusting for the returned
rickshaws. On 15 July 2023, MAW returned the remaining 12 undistributed rickshaws.
A credit note was issued to MAW to adjust the amount in the invoice for second lot.

On 1 August 2023, the contract was modified to include a third lot of 400 rickshaws at
a price of Rs. 325,000 each, to be delivered on 15 February 2024. The additional
400 rickshaws will be sold at a lesser price due to following reasons:
 A credit/discount totalling Rs. 7.5 million was given to MAW for the below
average fuel efficiency of the rickshaws delivered in the first lot; and
 There will be no right to return in the second and third lots.

The delivery of the second lot was delayed till 15 November 2023, for which a further
price reduction of Rs. 1 million was given in the invoice for second lot.

Required:
Prepare journal entries in the books of ML in respect of the above for the year ended
31 December 2023. (No marks will be awarded on entries without dates) (08)

(b) Peeler Limited (PL) has 75% shareholding in Grater Limited (GL). PL values the
non-controlling interest in GL at the proportionate interest in GL’s net identifiable
assets. PL considers GL as a separate cash-generating unit. On acquisition of GL,
goodwill was determined to be Rs. 64 million. Because other cash‑generating units of
PL were expected to benefit from the synergies of the combination with GL, the
goodwill of Rs. 28 million related to those synergies was allocated to other
cash‑generating units within PL.

At 31 December 2023, annual impairment testing is being carried out. PL has

determined the recoverable amount of GL as Rs. 255 million. The following amounts
related to GL are included in PL’s draft consolidated financial statements for the year
ended 31 December 2023:

Carrying Fair value less

value cost to sell
--------- Rs. in million ---------
Building (revaluation model)* 77 75
Machinery (cost model) 52 43
Equipment (cost model) 67 Not measurable
Investment property (cost model) 28 Not measurable
Goodwill 64 Not measurable
Asset arising from pension benefits 15 Not measurable
Inventory (at NRV) 38 38
Net assets of GL including goodwill 341
*Balance of surplus on revaluation of building as on 31 December 2023 amounted to Rs. 10 million.

Required:
Compute carrying value of GL’s assets after allocating impairment loss. Also, compute
the amount of impairment loss to be taken to the PL’s consolidated statement of profit
or loss for the year ended 31 December 2023. (09)
 Advanced Accounting and Financial Reporting Page 5 of 6

Q.5 You are a chartered accountant working as the finance manager at Juicer Limited (JL). Due
to JL’s recent listing on Pakistan Stock Exchange, you prepared the first interim financial
statements for the quarter ended 31 May 2024 and sent them to Kashif Raza, the CEO, for
review.

The CEO has responded you with the following email:

Gentleman

I have reviewed the draft of the first quarterly financial statements that you have prepared.
Being the first interim financial statements to be published, they are extremely critical for
JL’s future success. Please update them in respect of the following matters which will reduce
their overall size and will ensure that they show true profitability:

(i) You have prepared the statement of profit or loss and the statement of comprehensive
income separately, as you do it in the annual financial statements. These two
statements should be combined into a single statement.

(ii) As recommended by our Software Development Manager, you have recorded the
development costs of software as an asset in these interim financial statements, as these
costs are expected to meet the recognition criteria during the next quarter. I believe
that we should not recognize these costs as an asset, rather expense them in these
quarterly financial statements.

(iii) Although there have been some significant transactions with the related parties during
this quarter, these may be covered in the next annual report. Hence, disclosures of
related party transactions should be removed from the quarterly financial statements.

(iv) 40% of the annual sales are usually generated during the Eid season, which will be in
the second quarter of this year. However, we are producing the inventory evenly
throughout the year, incurring significant costs. Following the matching principle, a
fair proportion of the Eid sales should be accrued in the first quarter’s financial
statements, compensating for the costs being incurred in the manufacturing of
inventories.

(v) Variable lease payments for the plant and machinery based on achieving the annual
sales target should be accrued, even though the related sales target has not been
achieved in the first quarter but is expected to be achieved during the full year.

I greatly appreciate your efforts and believe you deserve a promotion. I look forward to
seeing the revised quarterly financial statements after incorporating my suggestions.

Best regards
Kashif

Required:
(a) Analyse whether the suggestions pointed out by the CEO should be incorporated into
the quarterly financial statements in accordance with the requirements of IAS 34. (10)
(b) Briefly explain how you may be in breach of the fundamental principles of ICAP’s Code
of Ethics for Chartered Accountants if you accept all the suggestions of the CEO.
Explain how you should respond in this situation to avoid the breach. (06)
 Advanced Accounting and Financial Reporting Page 6 of 6

Q.6 Kettle Limited (KL) is finalizing its financial statements for the year ended 31 December 2023.
The following information has been gathered for preparing the disclosures relating to taxation:
(i) Profit before tax for the year, after all necessary adjustments, was Rs. 262 million.
(ii) KL operates a funded pension plan for its employees. The following relevant
information has been extracted from the actuarial report for the year ended
31 December 2023:
Rs. in million
Fair value of plan assets on 1 January 2023 280
Present value of plan obligations on 1 January 2023 320
Current service cost 63
Contribution to the fund 94
Pension paid 33
Actuarial gain arising on plan obligations 38
Return on plan assets 74
Asset ceiling on 31 December 2023
37
(Present value of economic benefits available)

Yield on high-quality corporate bonds 15%

Under the tax laws, contributions to the fund are allowed as an expense.
(iii) On 1 March 2023, KL purchased a 12% bond for Rs. 200 million with a par value of
Rs. 250 million. The bond carries an effective interest of 16%. Coupon interest is
received on 31 October each year. The bond is carried at fair value through other
comprehensive income.
At year-end, the fair value of the bonds exceeds its amortised cost by Rs. 20 million.
As at 31 December 2023, due to deteriorating credit rating of the bonds, KL determined
that there has been a significant increase in credit risk since the acquisition of the bond.
Expected credit losses related to bond were estimated as follows:

Life time 12 months

------ Rs. in million ------
1 March 2023 21 10
31 December 2023 45 18

Under the tax laws, interest income is taxable on a receipt basis, while capital gain is
taxable at the time of sale. Further, adjustment for impairment is not allowed as an
expense.
(iv) On 1 January 2023, KL setup a joint venture with another venturer at a cost of
Rs. 750 million. KL contributed 60% of the cost. Joint venture’s total comprehensive
income for the year amounted to Rs. 180 million (including other comprehensive
income of Rs. 30 million). KL received a dividend of Rs. 42 million from the joint
venture on 1 November 2023. KL has no plan to sell this investment in the near future.
Under the tax laws, dividend income is taxable on receipt basis at 20%, while capital
gain is taxable at the time of sale at 30%.
(v) As on 31 December 2023, taxable temporary differences on other items amounted to
Rs. 99 million (2022: Rs. 75 million).
(vi) The tax rate for the year is 30% except stated otherwise.

Required:
Prepare relevant notes on taxation and deferred tax liability/asset for inclusion in KL’s
financial statements for the year ended 31 December 2023 in accordance with the IFRSs. (21)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.1 (a) Total Profit

Total assets
liabilities for the year
--------------- Rs. in million ---------------
Given 410.0 145.0 65.0

Project specific
Revenues 76.0 76.0
Operating cost (41.0) 6.0 (47.0)
Depreciation 100÷8 (12.5) (12.5)
22.5 6.0 16.5
Financing
Issuance of convertible bonds (W-1) 105.0 76.2
Transaction cost 5×76.2÷105 (5.0) (3.6)
Interest (76.2–3.6)×16.3% 11.8 (11.8)
100.0 84.4 (11.8)

Revised amounts 532.5 235.4 69.7

W-1: Liability component of convertible bond @ 15% @ 16.3%

------- Rs. in million -------
PV of interest on 30 June 2026 15.1 14.7
PV of interest on 30 June 2028 11.4 10.9
PV of principal repayment at the end of 5 years 49.7 47.0
PV of liability component 76.2 72.6

(b) Total Total Profit for the

assets liabilities year
--------------- Rs. in million ---------------
Given 410.0 145.0 65.0

Project specific
Revenues 76.0 76.0
Operating cost (41.0) 6.0 (47.0)
Depreciation 100÷8 (12.5) (12.5)
22.5 6.0 16.5
Financing
Cash received 100.0
ROU 120÷150×[65.2+50(150–100)] 92.2
Building (120.0)
Lease liability 13×5.0188 65.2
Gain (150–120)×(150–65.2–50)÷150 7.0
Interest expense 65.2×15% 9.8 (9.8)
Payment of 1st instalment (13.0) (13.0)
Dep. on ROU 92.2÷10 (9.2) (9.2)
Reversal of dep. on building 120÷20 6.0 6.0
56.0 62.0 (6.0)
Revised amounts 488.5 213.0 75.5

Page 1 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.2 AL’s Consolidated statement of profit or loss and other comprehensive income
For the year ended 31 December 2023

Rs. in million
Revenue 1,485 + 770(924×10÷12) + 616(5.5×8÷12×168) 2,871.0
Cost of sales 700 + 440(528×10÷12) + 280(2.5×8÷12×168) + 49(70×70%) (1,469.0)
Gross profit 1,402.0
Administrative expenses (W-1) (813.3)
Finance cost (W-2) (137.0)
Other income (Reversal of contingent consideration) 80.0
Net profit 531.7
Other comprehensive income:
Foreign currency translation differences (W-6) (145.3)
Total comprehensive income 386.4

W-1: Administrative expenses Rs. in million

AL 320.0
BL 156×10÷12 130.0
CL 1.8×8÷12×168 201.6
Acquisition cost of BL 15.0
Remuneration expense of share option 117–72 45.0
Amortization of intangible of CL 1.8×1÷8×8÷12×168 25.2
Impairment of goodwill:
- BL 170.7(W-3)×20% 34.1
- CL 1.293(W-5)×20%×164 42.4
813.3

W-2: Finance cost

AL 58.0
BL 72×10÷12 60.0
Extra interest on BL’s loan 47.6(408.2×14%×10÷12) – 37.5(450×10%×10÷12) 10.1
Deferred considerations:
- Unwinding of interest 251(2,693×14%×8÷12) ×164 41.2
- Re-translation gain 2,693×12(176–164) (32.3)
8.9
137.0

W-3: Goodwill - BL
Cash paid 700–15 685.0
Contingent consideration 80.0
Share options 72.0
837.0
Non-controlling interest at proportionate 951.8(W-4)×30% 285.5
Fair value of net assets (W-4) (951.8)
170.7

W-4: Fair value net assets of BL at acquisition

Carrying amount 840.0
Adjustment for inventory 70.0
Adjustment for bank loan 450 – 408.2(450×10%×2.3216+450×1.14–3) 41.8
951.8

Page 2 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

W-5: Goodwill – CL F$ in '000

Cash payment 7,000
Deferred consideration 3,500×1.14–2 2,693
9,693
Non-controlling interest at fair value 2,200
Fair value of net assets:
Carrying amount (8,800)
Fair value adjustment for intangible (1,800)
(10,600)
1,293

W-6: Foreign currency translation - CL F$ in '000 Rate Rs. in million

Opening net assets 10,600 176 1,865.6
Profit for 8 months
- Given 1,200×8÷12 800
- Amortization 1,800×1÷8×8÷12 (150)
650 168 109.2
11,250 1,974.8
Closing net assets at closing rate 11,250 164 1,845.0
Loss on retranslation on net assets 129.8
Loss on retranslation of goodwill
1,293(W-5)×12(176–164) 15.5
145.3

A.3 Saucer Insurance Limited (SIL)

Notes to the Financial Statements
For the year ended 31 December 2023

Net Insurance Premium / Contribution Revenue Rs. in million

Gross premium / contribution

Regular premium / contribution individual policies

First year 5,579
Second year renewal 5,379
Subsequent year renewal 13,169

Single premium / contribution individual policies 542

Group policies with cash values 19

Group policies without cash values 3,715–19 3,696
Provision for experience refund (159)

Total gross premium / contribution 28,225

Less: Reinsurance premium / contribution ceded

On individual life first year business 41
On individual life second year business 33
On individual life renewal business 172
On group policies 606
Less: Experience refund from reinsurers (85)
Total reinsurance premium / contribution ceded 767

Net premium / contribution 27,458

Page 3 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.4 (a) Masher Limited (ML)

General Journal
Debit Credit
Date Description
----- Rs. in '000 -----
15 Apr Receivable 500×400 200,000
Revenue 500×90%×400 180,000
Contract/Refund liability 500×10%×400 20,000

1 Jun Contract/Refund liability 20×400 8,000

Receivable 8,000

5 Jun Cash (500–20)×400 192,000

Receivable 192,000

15 Jul Contract/Refund liability (500×10%–20–12)×400 7,200

Revenue 7,200

1 Aug Revenue 7,500

Contract/Refund liability 7,500

15 Nov Receivable 500×400–(12×400)–1,000 194,200

Contract/Refund liability Bal. fig. 7,700
Revenue 500×375–1,000 186,500
(500×400+400×325+7,500)/(500+400)=375

(b) Impairment loss charged to profit or loss

Rs. in million
Net assets including goodwill 341.0
Goodwill allocated to other CGUs (28.0)
313.0
Unrecognised goodwill due to NCI at proportionate 36×25/75 12.0
Adjusted carrying amount 325.0
Recoverable amount (255.0)
Impairment loss 70.0
Loss allocated to goodwill but not recognised (12.0)
Loss charged to revaluation surplus (2.0)
Impairment loss charged to profit or loss 56.0

W-1: Allocation of impairment to identifiable assets

Carrying Impairment allocation Carrying
Description value Goodwill Round 1* Round 2** value
-------------------------- Rs. in million --------------------------
Goodwill 64.0 36.0 28.0
Building 77.0 2.0 - 75.0
Machinery 52.0 5.1 2.0 44.9
Equipment 67.0 6.6 2.5 57.9
Investment property 28.0 2.8 1.0 24.2
Pension assets 15.0 - - 15.0
Inventory at NRV 38.0 - - 38.0
Carrying value 341.0 36.0 16.5 5.5 283.0
* Allocation of 22(58–36) in proportion of carrying amount. Loss on building restricted to fair
value less cost to sell.
**Allocation of remaining loss of building in proportion of carrying amount.
Page 4 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.5 (a) (i) As per IAS 34, if an entity presents items of profit or loss in a separate statement,
it presents interim condensed information from that statement. Since JL presents
both statements separately in annual financial statements, so this suggestion does
not comply with IAS 34 and a separate statement of profit or loss should be
presented in the quarterly financial statement.

(ii) As per IAS 34, an entity shall apply the definition and recognition criteria for an
intangible asset in the same way in an interim period as it applies the same in an
annual period. So, this suggestion complies with IAS 34 and recognizing
development cost as assets in an interim statement of financial position in the hope
that the recognition criteria will be met later in the financial year is not justified.

(iii) As per IAS 34, related party transactions are included in the list of events and
transactions for which disclosures would be required, if they are significant. As
mentioned in the email that the transactions with the related parties during the
quarter were significant, so this suggestion does not comply with IAS 34 and the
disclosure should not be removed from the interim financial statements.

(iv) As per IAS 34, revenues that are received seasonally within a financial year shall
not be anticipated as of an interim date if anticipation would not be appropriate at
the end of the entity’s financial year. So, this suggestion does not comply with IAS
34 and any anticipation of sales would not be appropriate.

Matching principle will not be violated as the cost of excess units produced in first
quarter will not be expensed in the first quarter, rather it will be part of the
inventories. However, IAS 34 requires that explanatory comments about the
seasonality of the operations should be added.

(v) As per IAS 34, variable lease payments based on sales can be an example of a legal
or constructive obligation that is recognised as a liability. If a lease provides for
variable payments based on the lessee achieving a certain level of annual sales, an
obligation can arise if the required level of sales is expected to be achieved during
the year and the entity, therefore, has no realistic alternative but to make the future
lease payment. So, this suggestion complies with IAS 34 and JL should accrue the
variable lease payment based on the annual sales target despite the fact that sales
target has not been met during the quarter.

(b) Fundamental principles:

In the given circumstance, I might be in breach of the following fundamental principles
of ICAP’s Code of Ethics for Chartered Accountants (CA), if I accept all the suggestions
of the CEO:

(i) Integrity:
As a CA I should be straightforward and honest in all professional and business
relationships. Presenting the financial statements after intentionally manipulating
them on the CEO’s advice to achieve desired results would raise doubts over my
integrity.

(ii) Objectivity:
As a CA, I should not allow bias, conflict of interest or undue influence of others
to override my professional or business judgements. Accepting all the suggestion
of the CEO could mean that I have allowed bias in my judgement or have accepted
undue influence of the CEO. I might accept all the suggestion of the CEO to remain
in his good books for getting job related benefits like bonus, promotion and award,
which constitute a conflict of interest.

Page 5 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

(iii) Professional behavior:

A professional accountant should comply with relevant laws and regulations and
should avoid any action or conduct which discredits the profession. So, accepting
CEOs suggestions knowing that some of them do not comply with IAS 34 would
be a breach of professional behavior.

Action points:
I should apply one or more of the following safeguards:
(i) Discuss the matter with the CEO. Acknowledge and appreciate the correct
suggestions given by him.
(ii) For the wrong suggestions, persuade him for the correct accounting treatment. The
CEO might not be from an accounting background and hence would be lacking
knowledge of the accounting standards. He might appreciate if correct accounting
treatment is explained to him with references from the standards.
(iii) If he refuses to accept the correct treatments then I should consider informing the
appropriate authorities such the audit committee or the Board of Directors.
(iv) Inform the regulatory authorities like Pakistan Stock Exchange and SECP.
(v) Refuse to apply the incorrect accounting treatments and disassociate myself with
the misleading information.
(vi) Resign from the job.

A.6 Kettle Limited

Notes to the financial statements for the year ended 31 December 2023

Tax expense: Rs. in million

Current tax (W-4) 59.9
Deferred tax 9.7
69.6

Reconciliation between tax expense and accounting profit:

Profit before tax 262.0
Tax at 30% 78.6
Effect of lower rate on dividend income 90×(30%–20%) (9.0)
Tax expense for the year 69.6

Movement in deferred tax liability/(asset):

Recognized in
Opening OCI P&L (Bal.) Closing
Charge/(Credit) Charge/(Credit)
------------------------- Rs. in million -------------------------
Arising in respect of:
Pension liability (12.0) 15.6 7.5 11.1
40×30% (38+32–18)×30% 37×30%
Bond - 19.5 (14.6) 4.9
(20+45)×30% [(W-2)216.4–200]×30%
Joint venture - 3.6 9.6 13.2
30×60%×20% [(W-3)(516–450)×20%
Other taxable differences 22.5 - 7.2 29.7
75×30% 99×30%
10.5 38.7 9.7 58.9

Page 6 of 7
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

W-1: Net plan liability Obligation Assets Net

--------------- Rs. in million ---------------
Opening balance 320.0 280.0 40.0
Current service cost 63.0 63.0
Interest at 15% 48.0 42.0 6.0
Contribution to the fund - 94.0 (94.0)
Pensions paid (33.0) (33.0) -
Actuarial gain on obligation (38.0) (38.0)
Return on assets over 15% (74–42) - 32.0 (32.0)
Closing balance 360.0 415.0 (55.0)
Effect of asset ceiling adjustment Bal. fig 18.0
Closing net asset (lower of 55 and 37) (37.0)

W-2: Bond Rs. in million

Purchase price 200.0
Interest income 21.3(200×16%×8÷12) + 5.1[(200–30+21.3)×16%×2÷12] 26.4
Interest received 250×12% (30.0)
Fair value gain 20.0
Carrying value at year end 216.4

W-3: Joint venture Rs. in million

Cost of joint venture 750×60% 450.0
Share of total comprehensive income 180×60% 108.0
KL’s share in net assets (before dividend) 558.0
Dividend received by KL (42.0)
Carrying value at year end 516.0

W-4: Current tax Rs. in million

Profit before tax 262.0
Contribution paid to pension fund (94.0)
Pension expense 63+6 (W-1) 69.0
Interest received 30.0
Interest income (W-2) (26.4)
Impairment loss on bonds 45.0
Share of profit in joint venture (180–30)×60% (90.0)
Increase in other taxable differences 99–75 (24.0)
Taxable income 171.6
Tax @ 30% 171.60×30% 51.5
Tax @ 20% on dividend 42×20% 8.4
Current tax expense 59.9

(The End)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Summer 2024

Passing %

Question-wise Overall
1 2 3 4 5 6
48% 39% 54% 35% 41% 22% 35%

General comments

The current passing rate of 35% is a modest improvement over the previous result of
28%, and also higher than the average rate of 27% for the past five sessions. This
increase can be attributed to strong performance in Q5a, which covered IAS 34 and was
examined after a long period.

Examinees often presented figures without the necessary supporting workings. Although
correct figures received full marks, the lack of accompanying calculations results in
missed opportunities for partial marks that could be awarded for incorrect figures if the
workings were shown.

In nearly every script, examinees engaged in additional work on at least one question,
which put time pressure on the remaining questions. Examples of this include journal
entries in Q1, the calculation of profit attributable to NCI in Q2, entries for cost of goods
sold in Q4a, presenting carrying values of assets in separate tables after each step of
allocation in Q4b, and journal entries in Q6 for pensions, bonds, and joint ventures.

Question-wise common mistakes observed

Question 1

 For project-specific revenues, examinees just added Rs. 13 million in assets for the
receivable and did not show any impact of the remaining Rs. 63 million.
 In 1a, the liability component was often incorrect due to the exclusion of principal
repayment. Further, the effective interest rate of 16.3% was not used for interest
accrual and/or accrual was not made.
 In 1b, the amount of right of use asset was incorrect as the effect of prepayment of
Rs. 50 million was not taken and depreciation for the building sold was not reversed.

Page 1 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2024

Question 2

 BL’s balances needed to be consolidated for only 10 months but were consolidated
for the entire year.
 CL's balances should have been translated at Rs. 168 but were translated at Rs. 172 or
occasionally at Rs. 164. A significant minority did not apply the exchange rate at all.
 Reversal of contingent consideration was not done or taken to profit or loss.
 Share options were included in the calculation of goodwill for BL but with an
incorrect amount.
 Unwinding of interest and retranslation gain on deferred consideration for CL was
not done and/or taken to other comprehensive income instead of profit or loss.
 Fair value adjustment for intangible of CL was not made or made with F$ 1.2 million
instead of F$ 1.8 million.
 While calculating foreign currency translation differences for CL, profit was not
adjusted for 8 months and/or adjustment for amortization of the intangible was not
made.

Question 3

Responses to this question were highly polarized: about 43% of students achieved nearly
full marks, whereas around 36% scored almost zero.

Question 4(a)

 Often the first incorrect journal entry led to a series of incorrect entries.
 Entry for 1 August was not made and consequently effect of Rs. 7.5 million was not
included in the calculation of revenue to be recognized on 15 Nov.

Question 4(b)

 Goodwill was not grossed up for the calculation of impairment loss. Further,
goodwill was fully impaired.
 Loss was allocated to pension assets as well and machinery was impaired to Rs. 43
million.

Question 5(a)

 Often examinees reached the correct conclusion but their reasoning was flawed or not
provided.
 Examinees often left this question in the last and attempted it incompletely, likely
because they had not studied this area thoroughly. Many answers appeared to be
guessed, indicating a lack of preparation and understanding of the topic.

Question 5(b)

Examinees often provided general explanations without linking them to the specific
situation described in the question. This lack of contextualization suggests a failure to
apply theoretical knowledge to practical scenarios.

Page 2 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Summer 2024

Question 6

 Many reconciling items were presented, even though there was only one.
 Movement of deferred tax was not provided.
 While calculating current tax, re-measurements of the net defined benefit liability
were adjusted, despite having no effect on profit before tax. Additionally, pension
payments were deducted instead of contributions to the fund, and dividends from the
joint venture were deducted instead of the share of profit in the joint venture.
 While closing deferred tax liability, tax base for bond and joint venture were
considered zero. Additionally, the tax rate of 30% was applied to differences arising
on joint venture.
 While preparing movement on net pension liability, the effects of re-measurements
were either ignored or incorrect.

(THE END)

Page 3 of 3
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Summer 2024

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1 (a) ▪ Effect of project specific transactions 2.5
▪ Issuance of bonds including transaction cost 3.0
▪ Accrual of interest 1.5

(b) ▪ Effect of sales and leaseback transactions 4.0

▪ 1st instalment including interest 2.0
▪ Adjustment for depreciations 2.0

A.2 ▪ Inclusion of balances of each entity for correct period and at correct rate 4.0
▪ Revenue and cost of sales 1.0
▪ Administrative expenses 4.0
▪ Finance cost and other income 4.0
▪ Goodwill for BL 5.5
▪ Goodwill for CL 3.0
▪ Foreign currency translation 3.5

A.3 ▪ Gross premium / contribution 3.5

▪ Reinsurance premium / contribution ceded 2.5

A.4 (a) ▪ Entry on 15 April 1.5

▪ Entries during June and July 2.0
▪ Entry on 1 August 1.5
▪ Entry on 15 November 3.0

(b) ▪ Calculation of impairment loss 3.0

▪ Allocation of impairment 4.0
▪ Non-allocation of impairment to certain assets 2.0

A.5 (a) 02 marks for discussion of each suggestion of CEO 10.0

(b) ▪ Breach of principles 3.5

▪ Action points 2.5

A.6 ▪ Disclosure for tax expense 2.5

▪ Movement of deferred tax liability / assets 7.0
▪ Calculation of current tax 4.0
▪ Movement of net pension liability 4.5
▪ Carrying value of bonds and joint venture at year-end 3.0

(THE END)

Page 1 of 1
 Certified Finance and Accounting Professional Stage Examination

The Institute of 2 December 2024

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in black pen only.

Q.1 Saroli Limited (SL) is finalizing its financial statements for the year ended 31 December 2023.
The following information has been gathered to prepare the disclosures relating to taxation:
(i) Profit before tax for the year, after all necessary adjustments, is Rs. 237 million.
(ii) On 1 January 2023, SL revalued its factory building for the second time, resulting in an
upward revaluation of Rs. 36 million. Prior to this revaluation, the carrying amount
was recorded at Rs. 162 million (gross revalued amount of Rs. 180 million and
accumulated depreciation of Rs. 18 million).
The first revaluation, on 1 January 2021, had resulted in a revaluation loss of
Rs. 24 million.
Under tax laws, revaluation has no effect. The tax base of the building on
1 January 2023 was Rs. 130 million, and depreciation at 20% on the tax base is allowed
each year.
(iii) On 1 January 2023, SL sold its manufacturing plant to Finance Limited (FL) for
Rs. 430 million. Immediately before the transaction, the plant was carried in the books
at Rs. 360 million and had a remaining useful life of 15 years. Concurrently, SL entered
into a contract with FL for the right to use the plant for 8 years, with an annual payment
of Rs. 50 million payable in arrears. The fair value of the plant at the date of sale was
Rs. 480 million. The terms and conditions of the transfer satisfies the IFRS 15
requirements for the sale of an asset.
Under tax laws, such arrangements are considered sales, and only subsequent lease
rentals are allowed as an expense. The tax base of the plant on 1 January 2023 was
Rs. 300 million, and depreciation at 20% on the tax base is allowed each year.
(iv) On 1 April 2023, SL delivered a product to a customer at a price of Rs. 100 million. It
was agreed that 30% of the transaction price is payable upfront, while the remaining
70% is payable at the end of three years from the delivery.
Under the tax laws, the full transaction price is taxable in the year of delivery.
(v) As on 31 December 2023, taxable temporary differences on other items amounted to
Rs. 75 million (2022: Rs. 99 million).
(vi) Applicable tax rate is 30%.
(vii) A discount rate of 14% per annum may be used wherever required.

Required:
Prepare relevant notes on taxation and deferred tax liability/asset for inclusion in SL’s
financial statements for the year ended 31 December 2023, in accordance with the IFRSs. (21)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 The following are the consolidated statements of financial position of Alphonso Limited (AL):
Consolidated statement of financial position as at 31 December 2023
2023 2022
Assets ----- Rs. in million -----
Property, plant and equipment 2,940 3,100
Goodwill 140 250
Investment in associate 609 -
Financial assets (FVOCI) - 150
Inventory 761 880
Receivables 750 650
Cash and cash equivalents 70 100
Total assets 5,270 5,130

Equity and liabilities

Share capital (Rs. 10 per share) 1,500 1,500
FVOCI reserve 80 60
Other reserves 2,100 1,650
Non-controlling interest 500 580
Long-term loans 520 650
Trade and other payables 570 690
Total equity and liabilities 5,270 5,130

Additional information:
(i) On 1 May 2023, AL purchased an additional 25% shareholding in Fajri Limited (FL),
increasing its total interest in FL to 35% and obtained significant influence. The original
10% investment in FL was classified as FVOCI, being the only investment under this
classification. During 2023, FL reported a profit of Rs. 120 million and paid a dividend
of Rs. 40 million to its shareholders in November 2023.
(ii) On 1 October 2023, AL disposed of 20% shareholding in Palmer Limited (PL), reducing
its ownership from 75% to 55%, for Rs. 184 million. At the disposal date, there was no
goodwill related to PL in the consolidated financial statements and break-up of PL’s net
assets was as follows:
 Property, plant, and equipment: Rs. 500 million
 Inventory: Rs. 100 million
 Receivables: Rs. 80 million
 Cash: Rs. 60 million
 Trade and other payables: Rs. 120 million
(iii) On 1 December 2023, AL disposed of its entire 60% shareholding in Raspuri Limited
(RL) for Rs. 320 million in cash, resulting in a loss of control. At the disposal date, RL’s
goodwill was Rs. 80 million and break-up of RL’s net assets was as follows:
 Property, plant, and equipment: Rs. 450 million
 Inventory: Rs. 90 million
 Receivables: Rs. 70 million
 Cash (overdrawn): Rs. 40 million
 Trade and other payables: Rs. 100 million
The shareholding in RL was acquired many years ago for Rs. 140 million.
(iv) Interest of Rs. 70 million was paid during the year, of which Rs. 15 million was
capitalized as part of the cost of constructing a new building.
(v) During the year, AL group acquired property, plant and equipment (excluding the
interest capitalised) for Rs. 560 million, of which Rs. 65 million remained unpaid at the
year-end.
(vi) During the year, dividends of Rs. 100 million were paid to non-controlling interests, and
Rs. 180 million to the owners of the parent.
(vii) AL values the non-controlling interest on the acquisition date at its proportionate share
of the fair value of identifiable net assets.
 Advanced Accounting and Financial Reporting Page 3 of 5

Required:
Prepare AL’s consolidated statement of cash flows for the year ended 31 December 2023,
using the indirect method in accordance with the IFRSs. (20)

Q.3 During the review of the draft consolidated financial statements of Chaunsa Limited (CL) for
the year ended 31 December 2023, the following errors have been noted:

(i) On 1 March 2023, CL acquired 80% shareholding in Neelum Limited (NL). While
calculating goodwill arising on the acquisition of NL, one of the consideration of
Rs. 500 million, payable after two years, was included at its gross amount
(i.e. Rs. 500 million). Further, NL’s head office building was included in net assets at its
carrying value of Rs. 800 million, although its fair value at that date was
Rs. 1,100 million. The remaining useful life of the building at acquisition date was
5 years.

(ii) On 1 May 2023, CL acquired 75% shareholding in Dusehri Limited (DL), a foreign
subsidiary with FC$ as its functional currency, for FC$ 5,000 million. While
consolidating DL’s financial statements at year-end, the exchange rate prevailing at the
acquisition date has been used for translating all amounts of DL (including goodwill).
Other consolidation adjustments have been correctly made. DL’s summarized statement
of financial position as on 31 December 2023 is as follows:

FC$ FC$
Assets Equity and liabilities
in million in million
Non-current assets 5,400 Share capital 2,160
Current assets 3,240 Retained earnings – opening 530
Profit for the year 982
1,512
Liabilities 4,968
8,640 8,640

On the acquisition date, DL’s retained earnings were FC$ 720 million. The fair value of
DL’s net assets was equal to their book value, except for an intangible asset whose fair
value exceeded its carrying value by FC$ 540 million. The remaining useful life of this
intangible asset at the acquisition date was 6 years.

The exchange rates per FC$ are as follows:

Average for Average for

1-May-2023 31-Dec-2023
May-Dec 2023 2023
Rs. 2.4 Rs. 3.0 Rs. 2.6 Rs. 2.7

Other information:
(i) CL values the non-controlling interest on the acquisition date at its proportionate share
of the fair value of identifiable net assets.
(ii) A discount rate of 14% per annum may be used wherever required.

Required:
Discuss how the identified errors should be corrected in the CL’s consolidated financial
statements for the year ended 31 December 2023. (Give correcting entries wherever possible) (20)
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.4 The following information is available regarding some transactions of Kesar Limited (KL):

(i) On 1 January 2022, KL granted 5,000 share options to each of its 1,000 regional sales
officers to purchase KL’s shares at Rs. 90 per share. These options would vest and
become exercisable upon the completion of four years, provided the officers remain in
service until the end of the vesting period and their region’s sales have increased by at
least 20% over the four-year period ending 31 December 2025.

On 1 January 2023, KL modified the share option scheme due to a change in strategy.
Under the modified scheme, the vesting period was reduced by one year so that the
options would vest on 31 December 2024 instead of 31 December 2025, while the sales
target was also reduced to 15% by 31 December 2024 (instead of the original 20% target
by 2025).

Following further information is also available:

1-Jan-22 31-Dec-22 1-Jan-23 31-Dec-23
Fair value of KL’s share Rs. 210 Rs. 240 Rs. 240 Rs. 275
Fair value of the original share option Rs. 100 Rs. 135 Rs. 135 Rs. 170
Fair value of the modified share option NA NA Rs. 175 Rs. 220
No. of officers already left till date - 20 20 60
Further no. of officers expected to leave 80 70 70 50
% of officers expected to meet target sales 60% 70% 85% 90%

(ii) On 1 January 2022, KL acquired a warehouse and logistics facility for a lease term of
10 years, with instalments payable annually in arrears. The details are as follows:
 The first instalment is Rs. 42 million. The subsequent instalments are subject to
increase/decrease in line with the Consumer Price Index (CPI), which is projected
to increase by 5% each year.
 KL’s incremental borrowing rate is 13% per annum.
 KL provided a residual value guarantee of Rs. 180 million at the end of the lease
term. On the commencement date, none of this amount is expected to be payable
by KL.

Additional information:
 On 1 January 2022, KL received a one-time payment of Rs. 5 million from the
lessor as reimbursement of relocation cost. Further, KL incurred Rs. 3 million in
legal fees to negotiate the lease and Rs. 8 million on the redesigning of the
warehouse.
 On 31 December 2023:
 an instalment of Rs. 45 million was paid, adjusted for a change in the CPI,
which is now projected to increase annually by 4%.
 KL reassessed the residual value guarantee, estimating that a guaranteed
payment of Rs. 100 million will be required at the end of lease term, a change
from the initial expected Rs. nil.
 KL’s incremental borrowing rate is 11% per annum.

Required:
Prepare the relevant extracts (including comparative figures) from KL's separate statement of
financial position and statement of profit or loss for the year ended 31 December 2023, in
accordance with the IFRSs. (16)
(Notes to the financial statements and the bifurcation of current and non-current items in the
statement of financial position are not required)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.5 In your role as Finance Manager at Tainong Limited (TL), the CFO has shared information
on two proposed transactions, along with concerns about their potential impact on TL’s
financial statements. The CFO has provided the following details about these transactions:

(i) Hedge of Equity Investment with a Put Option

TL is considering to invest in shares of a technology company and intends to hedge this
investment through put options purchased on the date of share acquisition. This option
will grant TL the right to sell the shares at a predetermined price. On acquisition, TL
will make an irrevocable election to present changes in the shares’ fair value within other
comprehensive income.

Both the investment in shares and the associated put option are expected to be held for
a specified period. TL intends to apply hedge accounting, as this hedging relationship
will meet qualifying criteria for hedge accounting.

(ii) Issuance of a Convertible Financial Instrument with Various Features

TL is considering issuing a bond that will have no maturity (perpetual bond) and will
carry a fixed annual interest. The bond may include one of the following additional
features:
 After 5 years, bondholders will have the right to convert each bond into three shares
of TL.
 TL may choose to pay interest in the form of its own shares, with the number of
shares determined based on prevailing share price on the date of payment.

Required:
(a) For transaction 1, discuss how the equity investments and associated put options would
impact TL’s profit and other comprehensive income. (06)
(b) For transaction 2, evaluate the effect of inclusion of each feature on the classification of
bond as a liability or equity in TL’s financial statements. (07)

Q.6 (a) As the Finance Manager at Raspuri Limited (RL), you are responsible for preparing
RL’s financial statements. You recently presented a draft statement of cash flows to the
CFO. After reviewing the draft, the CFO instructed you to reclassify interest paid from
operating activities to financing activities, citing the following reasons:
 RL has committed to specific targets for cash generated from operating activities,
which would not be met if the interest paid is presented in operating activities as
consistent with previous year.
 This reclassification would help achieve those targets, thereby ensuring that all
employees, including you, receive performance-related bonuses.

The CFO has assured you that IAS 7 allows flexibility in presenting cash flows related
to interest payments.

Required:
Briefly explain how the CFO may be in breach of the fundamental principles of ICAP’s
Code of Ethics for Chartered Accountants. Also, discuss the potential threats that you
may face in these circumstances. (07)

(b) A public sector entity that prepares and presents general purpose financial statements
under the cash basis of accounting must apply the requirements of IPSAS: Financial
Reporting Under the Cash Basis of Accounting. Under this standard, what are the three
components of the financial statements? (03)

(THE END)
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.1 Saroli Limited

Notes to the financial statements for the year ended 31 December 2023
Tax expense: Rs. in million
Current tax (W-3) 99.4
Deferred tax (28.3)
71.1

Reconciliation between tax expense and accounting profit:

Profit before tax 237.0
Tax at 30% 71.1
Tax expense for the year 71.1

Movement in deferred tax liability/(asset):

Recognized in
Opening OCI P&L (Bal.) Closing
Charge/(Credit) Charge/(Credit)
------------------------- Rs. in million -------------------------
Arising in respect of:
Building 9.6 4.3 11.0 24.9
(162–130)×30% (36–21.6(W-3))×30% (W-1)(187–104)×30%
Plant 18.0 (18.0) -
(360–300)×30%
ROU asset - 55.5 55.5
(211.4(W-2) –
26.4(W-3))×30%
Lease liability (64.3) (64.3)
(231.9(W-2) +
32.5(W-3)–50)×30%
Receivable (5.3) (5.3)
[(W-3)52.3(47.3+5.0) –
70]×30%
Other taxable differences 29.7 - (7.2) 22.5
99×30% 75×30%
57.3 4.3 (28.3) 33.3

W-1: Closing amounts for PPE Accounting base Tax base

Opening 162 130
Revaluation 36 -
198 130
Depreciation (W-3) (11) (26)
187 104

W-2: Journal entry on sales and leaseback:

Debit Credit
Description
----- Rs. in millions -----
Cash 430.0
ROU asset 360÷480×281.9[231.9+50(480–430)] 211.4
Lease liability 50×4.6388(8 years @ 14%) 231.9
Plant 360.0
Gain on disposal (Bal. fig.) 49.5

Page 1 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

W-3: Current tax Rs. in million

Profit before tax 237.0
Revaluation gain taken to P&L 24–2.4[24×2÷20(180÷18÷2)] (21.6)
Accounting depreciation on building 198÷18(20-2) 11.0
Tax depreciation on building 130×20% (26.0)
Gain on disposal of building (W-2) (49.5)
Depreciation of ROU asset 211.4(W-2) ÷ 8 26.4
Interest on lease liability 231.9 (W-2)×14% 32.5
Tax gain on building 430–300 130.0
Lease rental paid (50.0)
Revenue as per IFRS 15 30+70(1.14–3) (77.3)
Full transaction price 100.0
Interest income 47.3×14%×9÷12 (5.0)
Decrease in other taxable differences 99–75 24.0
Taxable income 331.5
Tax @ 30% 99.4

A.2 Alphonso Limited

Consolidated statement of cash flows for the year ended 31 December 2023
Rs. in million
Cash flow from operating activities
Profit (W-1)570 + (W-2)84 654
Adjustments for:
Interest expense 70–15 55
Share of profit from associate - FL 120×8÷12×35% (28)
Loss on disposal of subsidiary - RL (W-3) 42
Depreciation of property, plant & equipment (W-4) 285
Impairment of goodwill 250–80–140 30
1,038
Changes in working capital:
Decrease in inventory 880–90–761 29
Increase in receivable 650–70–750 (170)
Decrease in trade and other payables 690+65–100–570 (85)
(226)
812
Interest paid (May be shown in financing activities) (55)
757
Cash flow from investing activities:
Investment in associate - FL (W-5) (425)
Purchase of property, plant and equipment 560–65+15 (510)
Partial disposal of subsidiary - PL 184
Proceeds from disposal of subsidiary - RL 320+40 360
Dividend from associate - FL (May be shown in operating activities) 40×35% 14
(377)

Page 2 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

Cash flow from financing activities: Rs. in million

Dividend paid to equity holder of parent (May be shown in operating activities) (180)
Dividend paid to non-controlling interest (May be shown in operating activities) (100)
Repayment of long term loan 650–520 (130)
(410)
Net increase in cash and cash equivalents (30)
Cash and cash equivalents – beginning 100
Cash and cash equivalents – ending 70

W-1: Movement of Other reserves: Rs. in million

Closing balance 2,100
Dividend to the owners of the parent 180
Opening balance (1,650)
Gain on partial disposal (W-6) (60)
Profit attributable to the owners of the parent 570

W-2: Movement of Non–controlling interest

Disposal of RL 188
Dividends to NCI 100
Closing balance 500
Opening balance (580)
Increase due to partial disposal of PL (124)
Profit attributable to NCI 84

W-3: Disposal of subsidiary RL

Cash 320
NCI 470×40% 188
Net assets 450+90+70–40–100 (470)
Goodwill (80)
Loss on disposal (42)

W-4: Movement of Property, plant and equipment

Opening balance 3,100
Additions 520+40 560
Disposal of RL (450)
Closing balance (2,940)
270
Interest capitalized 15
Depreciation 285

W-5: Investment in associate

Closing balance 609
Dividend 40×35% 14
Share of profit 120×8÷12×35% (28)
Transfer of FVOCI 150+80–60 (170)
425

W-6: Gain on partial disposal of PL

Proceeds 184
Increase in NCI (500+100+80+60–120)×20% (124)
Gain on disposal taken to other reserves 60

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.3 Deferred consideration not discounted

According to IFRS 3, the deferred consideration should have included in the calculation of
goodwill at at its fair value which should be calculated by determining present value. So it
should have been included at Rs. 384.7 million (500×1.14–2). The error should be corrected by
Rs. 115.3 million (500–384.7):

Debit Credit
Description
----- Rs. in millions -----
Deferred consideration 115.3
Goodwill 115.3

As consideration was recorded at gross amount so interest would not have been unwinded.
So, an amount of Rs. 44.9 million (384.7×14%×10÷12) should be recorded:

Debit Credit
Description
----- Rs. in millions -----
Interest expense 44.9
Deferred consideration 44.9

Omission of Fair Value Adjustment for NL’s head office building

IFRS 3 requires all identifiable assets acquired in a business combination to be recorded at fair
value, so, NL’s head office building should have been included at the fair value and its
inclusion at carrying value has resulted in overstatement of goodwill and understatement of
NCI. The error should be corrected by:

Debit Credit
Description
----- Rs. in millions -----
Building 300.0
Goodwill 240.0
NCI 60.0

The increase in building would also result in increase in depreciation so additional

depreciation of Rs. 50 million (300÷5×10÷12) should also be incorporated.

Debit Credit
Description
----- Rs. in millions -----
Depreciation expense 50.0
Acc. Depreciation - Building 50.0

The effect of interest will be attributable to parent only. However, effect of depreciation will
be apportioned between parent and NCI in 80:20.

DL’s consolidation
For consolidating DL, year end’s exchange rate should have been used for translating closing
net assets including goodwill while average rate for the period May to December 2023 should
have been used for translating profit (items used in determining profit). The application of
correct exchange rates will result in translation gain or loss which is taken to OCI.

The given statement of financial position of DL would need to be adjusted for the fair value
adjustment on the intangible and its amortization of FC$ 540 million and its amortization of
FC$ 60 million (540/6×8/12).

Page 4 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

The computation of translation gain is as follows:

Exchange
Description Working
gain/(loss)
Rs. in million
Non-current assets 5,880(5,400+540–60)×(3–2.4) 3,528.0
Current assets 3,240×(3–2.4) 1,944.0
Liabilities 4,968×(3–2.4) (2,980.8)
Post-acquisition Profits 732(1,512–720–60)×(2.6–2.4) (146.4)
2,344.8

The application of correct exchange rates would result in following correction:

Debit Credit
Description
----- Rs. in millions -----
Non-current assets 3,528.0
Current assets 1,944.0
Liabilities 2,980.8
Profit for the year 146.4
Translation gain (OCI) 2,344.8

Goodwill arising on acquisition of DL would also be re-translated at the closing exchange rate
resulting in a gain of Rs. 1,461 million [2,435(W-1)×(3.0–2.4)].

Debit Credit
Description
----- Rs. in millions -----
Goodwill 1,461.0
Translation gain (OCI) 1,461.0

This translation gain will attributed to parent and NCI in the proportion of 75:25. However,
the gain related to goodwill will only be attributed to parent as NCI is valued at proportionate
share of net assets.

Debit Credit
Description
----- Rs. in millions -----
Translation gain (OCI) 2,344.8+1,461 3,805.8
Non-controlling interest 2,344.8×25% 586.2
Translation reserve 3,219.6

W-1: Goodwill on acquisition of DL FC$ in million

Consideration 5,000
Non-controlling interest 3,420×25% 855
Net assets on acquisition 2,160+720+540 (3,420)
2,435

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.4 Kesar Limited

Statement of financial position as on 31 December 2023 (extracts)
2023 2022
------- Rs. in million -------
Assets:
Right of use asset (W-1) 242.13 210.51
Share capital and reserves:
Share compensation scheme (W-3) 347.10 79.63
Liabilities:
Lease liability (W-2) 253.56 215.53

Kesar Limited
Statement of profit or loss for the year ended 31 December 2023 (extracts)
2023 2022
------- Rs. in million -------
Depreciation on right of use asset (W-1) (23.39) (23.39)
Interest on lease liability (W-2) (28.02) (29.63)
Share compensation expense (W-3) (267.47) (79.63)

W-1: Right of use asset Rs. in million

Initial recognition on 1 Jan 22 42×5.4262(10 years @ 13%) 227.90
Lease incentives (5.00)
Legal fees 3.00
Redesigning of warehouse 8.00
233.90
Depreciation for 2022 233.9÷10 (23.39)
Closing balance for 2022 210.51
Depreciation for 2023 233.9÷10 (23.39)
187.12
Effect of lease re-assessment:
 CPI Index (W-2) 17.39
 Residual value guarantee (W-2) 37.62
55.01
Closing balance 242.13

W-2: Lease liability Rs. in million

Initial recognition on 1 Jan 2022 (W-1) 227.90
Interest for 2022 227.90×13% 29.63
Payment (42.00)
Closing balance for 2022 215.53
Interest for 2023 215.53×13% 28.02
Payment (45.00)
198.55
Effect of lease re-assessment:
 CPI Index 215.94[45×4.7987(8 years @ 13%)]–198.55 17.39
 Residual value guarantee 100×1.13–8 37.62
55.01
Closing balance for 2023 - Liability after re-assessment 253.56

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

W-3: Employee share compensation scheme

Fair value Equity
No. of Expense for
per share balance at
Year No. of officers share Period the year
option year-end
options
Rs. ---- Rs. in million ----
2022 637 × 5,000 × 100 × 1/4 = 79.63 79.63
[(1,000–20–70)×70%]

801 × 5,000 × 100 × 2/3 = 267.00 187.37

[(1,000–60–50)×90%] (267–79.63)
2023 801 × 5,000 × 40 × 1/2 = 80.10 80.10
(175–135)
347.10 267.47

A.5 (a) Transaction 1: Hedge of Equity Portfolio with a Put Option

Equity investments:
TL plans to classify the equity investment as "Fair Value Through Other Comprehensive
Income" (FVOCI) which would result into the following impacts on profit and other
comprehensive income:
 Dividends from the investment would be taken to profit or loss.
 Fair value adjustments of the investment would be recognized directly in OCI.
 Upon disposal of the investment, the cumulative gains or losses in OCI would not
be reclassified to profit or loss but could be transferred to retained earnings.

Use of the Put Option for Hedging

This is a fair value hedge as it is a hedge of the exposure to change in fair value of a
recognized asset. Changes in the fair value of the put option (the hedging instrument) that
effectively offset fair value changes in the equity portfolio will be recognized in OCI. In
this case, the recognized hedge ineffectiveness would also be presented in OCI. Upon de-
recognition, any accumulated fair value changes on the hedging instrument, including
any ineffectiveness would not be reclassified to profit or loss but could be transferred to
retained earnings.

(b) Transaction 2: Issuance of a Convertible Financial Instrument with Various Features

Classification of perpetual bond without inclusion of additional features:

A perpetual instrument with mandatory interest payments meet the definition of a liability
because it imposes an unavoidable obligation on the issuer. The perpetual bond with a
fixed interest rate should be classified as a financial liability even if there is no maturity
date to repay principal amount.

Effect of additional features:

(i) An option to settle by issuing a fixed number of shares meets the criteria for equity
classification (i.e. fixed for fixed rule). The conversion option would be classified
as an equity component making the bond a compound financial instrument. The
amount of equity component would be determined by deducting the fair value of
the financial liability from the fair value of the bond as a whole.

(ii) The option to pay interest in shares at a value tied to the share price at the time of
payment means the number of shares issued would vary based on market value. So,
there is an obligation to deliver a variable number of shares in exchange for a fixed
amount of debt (i.e. violates fixed for fixed rule). This will cause the entire bond to
remain a financial liability (i.e. no equity component).

Page 7 of 8
 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.6 (a) The CFO may be in breach of the following fundamental principles in the ICAP’s Code
of Ethics for Chartered Accountants:

Integrity:
CA should be straightforward and honest in all professional and business relationships.
CFO’s request undermines the principle of integrity as the adjustment misrepresents the
RL’s financial performance to achieve a misleading operating cash flow target which has
not been actually achieved by RL.

Objectivity:
CA should not compromise professional or business judgements because of bias, conflict
of interest or undue influence of others. The CFO’s decision appears influenced by a desire
to meet performance targets and secure bonuses, which may impair objective judgement.

Professional behavior:
CA should comply with relevant laws and regulations and avoid any conduct that might
discredit the profession. IAS 7 requires that the interest paid should be classified in a
consistent manner from period to period and changing the classification just to achieve
the profit target does not seem a reasonable justification to change this presentation.

POTENTIAL ETHICAL THREATS

In the given situation, I may face the following threats:
Self-interest threat:
CA’s judgement or behavior may be inappropriately influenced by financial or other
interest. The reclassification could impact my performance-related bonus, creating a
conflict of interest where financial gain may influence professional judgement.

Intimidation threat:
CA will be deterred from acting objectively because of pressures or exercise of undue
influence over him. I may feel intimidation threat due to perceived pressure exerted by
the CFO. The CFO’s authority may create fear of repercussions if I do not comply.

(b) (i) A statement of cash receipts and payments which recognizes all cash receipts, cash
payments and cash balances controlled by the entity;
(ii) Accounting policies and explanatory notes; and
(iii) When the entity make publicly available its approved budget, a comparison of
budget and actual amounts either as a separate additional financial statement or as
a budget column in the statement of cash receipts and payments.

(The End)

Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Accounting and Certified Finance and Accounting Professional
Financial Reporting (CFAP) Examination - Winter 2024

Passing %

Question-wise Overall
1 2 3 4 5 6
50% 18% 31% 58% 6% 52% 32%

General comments

The current passing rate of 32% aligns closely with the previous result of 35% and shows
a modest improvement compared to the five-session average of 28%.

Examinees frequently presented figures without providing the necessary supporting

workings. While correct figures were awarded full marks, the lack of supporting
calculations resulted in missed opportunities to earn partial marks for incorrect figures,
which could have been granted if appropriate workings had been shown.

Many answer scripts indicated flawed time management, with examinees spending
disproportionate time on Q1 and Q4, leaving insufficient time for the remaining
questions. Examinees are strongly encouraged to allocate their time strategically and
move on to the next question after a reasonable duration to ensure all questions are
attempted adequately.

Question-wise common mistakes observed

Question 1

 The movement of deferred tax was not provided, as many examinees only computed
the opening and closing balances, resulting in incomplete disclosure.
 The amounts for the right-of-use asset and lease liability for the plant were
incorrectly calculated, primarily due to the mistreatment of Rs. 50 million, which
represented consideration lower than the fair value.
 Deferred tax on the receivable from the customer was not calculated.

Page 1 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2024

Question 2

 The performance in this question did not align with its difficulty level. It appears that
examinees were unprepared for a question on the statement of cash flows, possibly
due to the assumption that it would not be examined in this session following its
inclusion in Winter 2023. As a result, approximately 25% of the examinees failed to
secure any marks in this question.
 Examinees failed to recognize that the amount of profit needed to be determined as a
balancing figure in the accounts of "other reserves" and "non-controlling interest".
 The loss on disposal of RL and the proceeds from its disposal were incorrectly
calculated due to the incorrect treatment of the overdrawn cash balance of Rs. 40
million.
 Changes in working capital were calculated merely as the difference between opening
and closing balances, without considering necessary adjustments.
 The amount for investment in the associate during the year was often incorrect due to
at least one error in reconciling the opening and closing balances of the investment in
associate.
 Items related to investing activities were incorrectly classified under financing
activities and vice versa.

Question 3

 Examinees did not fully understand the requirements of the question, with several
providing either only a discussion or only entries/workings, instead of both as
required.
 For deferred consideration, the necessary correction related to the corresponding
unwinding of interest was often overlooked.
 For the fair value adjustment of the building, the entire impact of the increase in fair
value was incorrectly allocated to goodwill, without apportioning a part to the non-
controlling interest (NCI). Additionally, the necessary correction related to
depreciation was often ignored.
 In the consolidation of DL, examinees primarily focused on the calculation of
goodwill and translation gain, while the required discussion and correcting entries
were often omitted.

Question 4

 The comparative figures for 2022 were not provided, despite being explicitly required
by the question.
 The right-of-use asset as of January 1, 2022, was incorrectly calculated using variable
lease payments that increased each year instead of the fixed amount of Rs. 42 million
per year.
 While calculating the effect of reassessment, the discount rate of 11% was incorrectly
used instead of 13%.
 For employee share options, amounts for 2023 were incorrectly computed using a fair
value of Rs. 175, instead of separately applying Rs. 100 for the original grant and an
additional Rs. 40 for the effect of modification.

Page 2 of 3
 Examiners’ Comments on Advanced Accounting and Financial Reporting – CFAP
Examination Winter 2024

Question 5(a)

 36% of examinees did not secure any marks in this question and failed to identify the
correct treatment of the equity investment, which was a fundamental and relatively
straightforward aspect of the question.
 The treatment of the equity investment was often oversimplified, with many
examinees restricting their responses to "all changes to be taken to other
comprehensive income", without considering other aspects.
 Most examinees lacked an understanding of hedge accounting for equity instruments
in the given scenario and provided generic responses, hoping that one or two points
might align with the requirements of the question.

Question 5(b)

One-third of the examinees did not secure any marks in this question and failed to
identify the compound financial instrument arising from the additional feature (i), even
though it was a fundamental aspect. Those who attempted the question mostly provided
conclusions without explaining the underlying reasoning. The “fixed-for-fixed” test,
which was crucial for the correct treatment, was hardly mentioned by examinees.

Question 6(a)

Examinees wrote the principles but did not relate them to the situation given in the
question.

Question 6(b)

Instead of addressing the specific requirements of Financial Reporting under the Cash
Basis of Accounting, examinees commonly mentioned the general components of
financial statements.

(THE END)

Page 3 of 3
 ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Summary of Marking Key
Certified Finance and Accounting Professional Examination – Winter 2024

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)

A.1  Disclosure of tax expense 1.0

 Movement of deferred tax liability / asset
– Building & plant 3.5
– Right of use asset and liability 3.5
– Others 2.0
 Calculation of current tax (01 mark for each adjustment) 11.0

A.2  Cash flow from operating activities

– Profit 3.0
– Up to 1.5 marks for each line item in “Adjustments for” 5.0
– 01 mark for each line item in “Changes in working capital” 3.0
 Cash flow from investing activities (Up to 1.5 marks for each line item) 6.0
 Cash flow from financing activities (01 mark for each line item) 3.0

A.3  Deferred consideration

– Discussion 2.0
– Correcting entries 2.0
 Fair value adjustment of building
– Discussion 3.0
– Correcting entries 2.0
 Incorrect exchange rates
– Discussion 4.0
– Calculation of translation difference 3.0
– Correcting entries 4.0

A.4  Right of use asset and its depreciation 6.0

 Lease liability and interest on it 3.0
 Amounts related to employee share compensation scheme
– 2022 2.0
– 2023 5.0

A.5 (a)  Equity investment 3.0

 Put option 3.0

(b)  Perpetual bond without additional features 2.0

 Additional feature (i) 3.0
 Additional feature (ii) 2.0

A.6 (a)  Breach of principles 4.0

 Potential ethical threats 3.0

(b) 01 mark for each component 3.0

(THE END)
Page 1 of 1