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)