2020 Caf 7 Far II Examsupp2020

2020 (Revised)
FINANCIAL ACCOUNTING
AND REPORTING II
Examinable Supplements
CAF-7
Examinable
Supplement
Financial accounting and reporting II

C
Certificate in Accounting and Finance
Contents
Page
Chapter
1 Legal Background to the Preparation of Financial Statements 1
15 Ethical Issues in Financial Reporting 29
1
CHAPTER
Legal Background to the Preparation of
Financial Statements
Contents
1 Key Definitions
2 Regulatory framework for accounting in Pakistan
3 Companies Act, 2017: Fourth Schedule
4 Companies Act, 2017: Fifth Schedule
5 Objective based questions and answers
* The student must refer original handbook of IFRS.
© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

Examinable Supplement
1 KEY DEFINITIONS
Section overview
n Key definitions
Executive: An employee, other than the chief executive and directors, whose basic salary exceeds
twelve hundred thousand rupees in a financial year.
Capital reserve includes:
(i) share premium account;
(ii) reserve created under any other law for the time being in force;
(iii) reserve arising as a consequences of scheme of arrangement;
(iv) profit prior to incorporation; and
(v) any other reserve not regarded free for distribution by way of dividend
Revenue reserve means reserve that is normally regarded as available for distribution through the profit
and loss account, including general reserves and other specific reserves created out of profit and un-
appropriated or accumulated profits of previous years.

2 REGULATORY FRAMEWORK FOR ACCOUNTING IN PAKISTAN

Section overview
n Accounting regulation in Pakistan

n Companies Act, 2017: Introduction to the third, fourth and fifth schedules
n International Financial Reporting Standards
n Classification of Companies
2.1 Accounting regulation in Pakistan

The objective of financial statements is to provide information about the financial position (balance
sheet), financial performance (profit and loss) and cash flows of an entity that is useful to a wide
range of users in making economic decisions.
The Securities and Exchange Commission of Pakistan
The Securities and Exchange Commission of Pakistan (SECP) was established under the
Securities and Exchange Commission of Pakistan Act, 1997 and became operational in 1999.
It is the corporate and capital market regulatory authority in Pakistan. Its stated mission is “To
develop a fair, efficient and transparent regulatory framework, based on international legal
standards and best practices, for the protection of investors and mitigation of systemic risk aimed
at fostering growth of a robust corporate sector and broad based capital market in Pakistan” (SECP
website).
One of the roles of the SECP is to decide on accounting rules that must be applied by companies
in Pakistan.
Companies must prepare financial statements in accordance with accounting standards approved
as applicable and notified in the official gazette by the Securities and Exchange Commission of
Pakistan (SECP) and in accordance with rules in the Companies Act, 2017.
The Institute of Chartered Accountants in Pakistan (ICAP)
ICAP regulates the Chartered Accountancy profession. It is the body responsible for
recommending accounting standards for notification by the Securities and Exchange Commission
of Pakistan.
2.2 Companies Act, 2017: Introduction to the third, fourth and fifth schedules
The Companies Act, 2017 contains a series of appendices called schedules which set out detailed
requirements in certain areas.
The third schedule
This schedule lists the classification criteria of the companies on the basis of company size and
whether it is commercial or non-profit. It also specifies which companies are required to follow
requirements of fourth and fifth schedule of the Act.
The fourth schedule
This schedule sets out the disclosure requirements that must be complied with in respect of the
financial statements of a listed company.
The schedule specifies that listed companies and their subsidiaries must follow International
Financial Reporting Standards as notified for this purpose in the Official gazette.
The fifth schedule
This schedule applies to the balance sheets and profit and loss accounts of non-listed companies
(including large, medium and small sized entities) and their subsidiaries.

2.3 International Financial Reporting Standards
The International Accounting and Financial Reporting Standards are developed with the aim of
harmonising accounting procedures throughout the world.
The first International Accounting Standards (IASs) were issued in 1975 by International
Accounting Standards Committee (IASC). The IASs were supported with interpretations for
matters where there was a divergence in practice. These interpretations were issued by another
body called the Standing Interpretation Committee and were referred to as Standing
Interpretation Committee Pronouncements or SICs.
In 2001 the constitution of the IASC was changed leading to the replacement of the IASC and the
SIC by new bodies called the International Accounting Standards Board (IASB) and the
International Financial Reporting Interpretations Committee (IFRIC).
The IASB adopted all IASs and SICs that were extant at the time but said that standards written
from that time were to be called International Financial Reporting Standards (IFRS).
Interpretations are known as IFRICs.
Thus IFRS is made up as follows:
Published by the IASC (up Published by the IASB

to 2001) (from 2001)
Accounting standards IASs IFRSs
Interpretations SICs IFRICs
International accounting standards cannot be applied in any country without the approval of the
national regulators in that country. All jurisdictions have some kind of formal approval process
which is followed before IFRS can be applied in that jurisdiction.
Adoption process for IFRS in Pakistan
The adoption of an IFRS involves the following steps:
q As a first step the IFRS is considered by ICAP’s Accounting Standards Board, which
identifies any issues that may arise on adoption.
q The Board also determines how the adoption and implementation of the standard can be
facilitated. It considers issues like how long any transition period should be and whether
adoption of the standard would require changes in regulations.
q The Board also identifies the need for changes to regulations it refers the matter to the
Securities and Exchange Commission of Pakistan (SECP) (and/or the State Bank of
Pakistan (SBP) for matters affecting banks and other financial institutions). This process is
managed by the Coordination Committees of ICAP, SECP and SBP.
q After the satisfactory resolution of issues, the Board and the Council of ICAP reconsider
the matter of adoption.
q ICAP recommends the adoption to the SECP by decision of the Council. The decision to
adopt the standard rests with the SECP.
q IFRSs are adopted by the SECP by notification in the Official Gazette. When notified, the
standards have the authority of the law.

2.4 Classification of Companies

Applicable Schedule of
S. No. Classification criteria accounting Companies
framework Act, 2017
1. Public Interest Company (PIC)

Sub-categories of PIC:
a) Listed Company International Fourth
Financial Schedule
Reporting
Standards
b) Non-listed Company which is: International Fifth

(i) a public sector company as defined in the Financial Schedule
Act; or Reporting
Standards
(ii) a public utility or similar company carrying on
the business of essential public service; or
(iii) holding assets in a fiduciary capacity for a
broad group of outsiders, such as a bank,
insurance company, securities broker/dealer,
pension fund, mutual fund or investment
banking entity.
(iv) having such number of members holding
ordinary shares as may be notified; or
(v) holding assets exceeding such value as may
be notified.
2. Large Sized Company LSC
Sub-categories of LSC
a) Non-listed Company with: International Fifth
(i) paid-up capital of Rs. 200 million or more; or Financial Schedule
Reporting
(ii) turnover of Rs. 1 billion or more; or Standards
(iii) employees more than 750.
b) Foreign Company with turnover of Rs. 1 billion or
more.
c) Non-listed Company licensed / formed under International
Section 42 / Section 45 of the Act having annual Financial
gross Reporting
revenue(grants/income/subsidies/donations) Standards and
including other income/revenue of Rs. 200 million Accounting
and above. Standards for
NPOs
3. Medium Sized Company (MSC)
Sub-categories of MSC:
a) Non-listed Public Company with: Revised AFRS Fifth
(i) paid-up capital less than Rs.200 million; for SSEs Schedule
(ii) turnover less than Rs1 billion;
(iii) Employees more than 250 but less than 750.

Applicable Schedule of
S. No. Classification criteria accounting Companies
framework Act, 2017
b) Private Company with:
(i) paid-up capital of greater than Rs. 10 million
but not exceeding Rs. 200 million;
(ii) turnover greater than Rs. 100 million but not
exceeding Rs. 1 billion;
(iii) Employees more than 250 but less than 750.
c) A Foreign Company which has turnover less than
Rs. 1 billion.
d) Non-listed Company licensed / formed under Accounting
Section 42 or 45 of the Act which has annual Standards for
gross revenue NPOs
(grants/income/subsidies/donations) including
other income or revenue less than Rs.200 million.
4. Small Sized Company (SSC)
A private company having: Revised AFRS Fifth
(i) paid-up capital up to Rs. 10 million; for SSEs Schedule
(ii) turnover not exceeding Rs.100 million;
(iii) Employees not more than 250.
NOTE:
1. The classification of a company shall be based on the previous year‘s audited financial
statements.
2. The classification of a company can be changed where it does not fall under the previous
criteria for two consecutive years.
3. The number of employees means the average number of persons employed by a company in
that financial year calculated on monthly basis.

3 COMPANIES ACT, 2017: FOURTH SCHEDULE

Section overview
n General Requirements
n Requirements as to Statement of Financial Position
n Requirements as to Profit and Loss Account
3.1 General Requirements

a) All listed companies and their subsidiaries shall follow the International Financial Reporting
Standards in regard to financial statements as notified by the Commission, under Section 225
of the Companies Act, 2017 (Act);
b) The disclosure requirements, as provided in this schedule, are in addition to the disclosure
requirements prescribed in International Financial Reporting Standards notified by the
Commission unless specifically required otherwise;
c) In addition to the information expressly required to be disclosed under the Act and this
schedule, there shall be added such other information as may be considered necessary to
ensure that required disclosure is not misleading.
Example 1: Statement of Compliance

These financial statements have been prepared in accordance with the accounting and reporting
standards as applicable in Pakistan. The accounting and reporting standards as applicable in
Pakistan comprise of:
– International Financial Reporting Standards (IFRS Standards), issued by the International
Accounting Standards Board (IASB) as notified under the Companies Act, 2017; and
– Provisions of and directives issued under the Companies Act, 2017.
Where the provisions of and directives issued under the Companies Act, 2017 differ from IFRS
Standards, the provisions of and directives issued under the Companies Act, 2017 have been
followed.
d) The following shall be disclosed in the financial statements, namely:

i. General information about the company comprising the following:
• Geographical location and address of all business units including mills/plant;
• Particulars of company’s immovable fixed assets, including location and area of land;
• The capacity of an industrial unit, actual production and the reasons for shortfall;
• Number of persons employed as on the date of financial statements and average
number of employees during the year;
• Name of associated companies or related parties or undertakings along with the basis
of relationship describing common directorship and percentage of shareholding.
Example 2: Legal Status and nature of business

MT Limited (the Company) is a public limited company and was incorporated in Pakistan in 1995
under the Companies Ordinance, 1984 (now the Companies Act, 2017), and is listed on the
Pakistan Stock Exchange Limited. The registered office and factory of the Company is situated at
Multan Road, Lahore. The Company also has regional offices located in Karachi, Multan, Sukkur
and Islamabad.
The Company is principally engaged in assembling and manufacturing of agricultural machinery
and applications.

Example 3: Property, plant and equipment (Disclosed in sub-note)

The freehold land and building on owned land of the company are as follows:
- 202,343 square meters of factory land situated at Multan Road, Lahore;
- 697 square meters of land in sector F-6/1 Islamabad;
- Corporate office floors in Corporate Centre Lahore.
Example 4: Property, plant and equipment (Disclosed in sub-note)

Following are particulars of the Company’s immovable fixed assets:
Location Usage Total area (in Acres)
Shahrah-e-Roomi, Lahore Plant site and administrative offices 34.02
Herdo Sehari, Kasur Administrative offices 34.84
Lakho Baryar, Kasur Administrative offices 50.63
Example 5: Production Capacity
Design Capacity Production
2018 2017 2018 2017
Urea Tonnes ‘000 Tonnes ‘000
Lahore – Plant I 695 695 688 692
Faisalabad – Plant II 635 635 635 635
Peshawar – Plant III 718 718 714 703
2,048 2,048 2,037 2,030
The shortfall in actual production are insignificant and considered normal in the industry.
Example 6: Capacity and production
2018 2017
MWh
Installed capacity (based on 8,760 hours) 1,086,240 1,086,240
Actual energy delivered 387,435 645,395
Under-utilisation of available capacity is due to less demand by WAPDA.

Example 7: Number of employees
2018 2017
Total number of employees at end of the year 3,357 3,364
Average number of employees for the year 3,369 3,384

.
Example 8: Associated companies and undertakings
Name Percentage of shareholding Basis of relationship Common directorship
ABC Limited 58% Subsidiary Ms. S

Mr. A
Mr. B
XYZ Limited 25% More than 20% Mr. B
shareholding
KLM Limited 6% Common directors Mr. K
Mr. M
.
Example 9: Associated companies and undertakings

The names of related parties with whom the Company has entered into transactions or had
agreements / arrangements in place during the year and whose names have not been disclosed
elsewhere in these financial statements are as follows:
Percentage of
Name of the related party Basis of relationship
Shareholding %
Toyota Tsusho Corporation Associated company 20%
Tomen Power (Singapore) (Private) Limited Associated company 16%
Red Communication Arts (Private) Limited Common directorship -
Kohinoor Power Company Limited Common directorship -
Pak Elektron Limited Common directorship -
Pel Marketing (Private) Limited Common directorship -
Wartsila Pakistan (Private) Limited Common directorship -
Kohinoor Energy Limited Employees Gratuity
Common control 0.23%
Fund
. All transactions with related parties are carried out on mutually agreed terms and conditions.
ii. In respect of associated companies, subsidiaries, joint ventures or holding companies

incorporated outside Pakistan, following shall be separately disclosed;
• Name of undertaking and country of incorporation;
• Basis of association; and
• Aggregate percentage of shareholding, including shareholding through other
companies or entities;

Example 10: Related party disclosure (Disclosed in sub note)

Following particulars relate to associated companies incorporated outside Pakistan with whom the
company had entered into transactions during the year:
Name of undertaking Pakistan Maroc Phosphore S.A.
Country of incorporation Morocco
Basis of association Joint venture of OCP Group and Fauji Group
Aggregate %age of shareholding 12.5% Equity investment by the company
Example 11: Related party disclosure (Disclosed in sub note)

Following particulars relate to associated companies incorporated outside Pakistan with whom the
company had entered into transactions during the year:
Name of company Toyota Tsusho Corporation
Country of incorporation Japan
Basis of association Associated undertaking
Aggregate %age of shareholding 20%
iii. General nature of any credit facilities available to the company, other than trade credit
available in the ordinary course of business, and not availed at the date of the statement
of financial position;
Note: This is not required in fifth schedule.
Example 12: Facilities of letters of credit and letters of guarantee (Disclosed in sub note)
Facilities of letters of credit and letters of guarantee amounting to Rs 17,395,000 thousand and
Rs 239,293 thousand (2017: Rs 13,580,000 thousand and Rs 101,655 thousand) respectively are
available to the company against lien on shipping / title documents, US $ Term Deposit Receipts
and charge on assets of the company.
Example 13: Credit facilities (Disclosed in sub note)

Of the aggregate facility of Rs. 875 million (2018: Rs. 476.85 million) for opening letters of credit
and Rs. 440 million (2018: Rs. 207.05 million) for guarantees, the amount utilized as at June 30,
2019 were Rs. 4.44 million (2018: Rs. 151.4 million) and Rs. 274.43 million (2018: Rs. 207.05
million) respectively.
iv. In cases where company has made export sales following disclosures are required to be
made in respect of outstanding trade debts;
• Name of company or undertaking in case of related party; and
• Name of defaulting parties, relationship if any, and the default amount.
Note: This is not required in fifth schedule.
Example 14: Trade debts (Disclosed in sub note)

Included in due from export customers is an amount of Rs. 2.021 million (2017: 1.765 million)
receivable from ABC Shoe Company, Peru against export sales made by the Company. During the
year, the Company made export sales amounting to Rs. 6.332 million (2017: Rs. 4.077 million) to
ABC Shoe Company, Peru through bank contracts.

3.2 Requirements as to Statement of Financial Position
1. Sundry Requirements
Following items shall be disclosed as separate line items on the face of the financial statements;
(i) Revaluation surplus on property, plant and equipment;
(ii) Long term deposits and prepayments;
(iii) Unpaid dividend;
(iv) Unclaimed dividend; and
(v) Cash and bank balances.
2. Fixed Assets
Where any property or asset acquired with the funds of the company and is not held in the name
of the company or is not in the possession and control of the company, this fact along with reasons
for the property or asset not being in the name of or possession or control of the company shall be
stated; and the description and value of the property or asset, the person in whose name and
possession or control it is held shall be disclosed;
Example 15: Property, plant and equipment (Disclosed in sub note)
Land measuring 2 kanals and 2 marlas in possession of the Company, acquired in 2014 at a cost
of Rs. 57,800 thousand is not in the name of the Company due to pending legal case.
Example 16: Property, plant and equipment (Disclosed in sub note)
Land measuring 10 kanals is neither in the name of the Company nor in possession of the
Company. The Company paid Rs. 75,000 thousand in July 2017 for land to be acquired from
Pakistan Railways through open auction. The auction was later challenged in Lahore High Court
and legal case is stilling pending.
Land and building shall be distinguished between free-hold and leasehold;

Forced sale value shall be disclosed separately in case of revaluation of Property, Plant and
Equipment.
In the case of sale of fixed assets, if the aggregate book value of assets exceeds five million rupees,
following particulars of each asset, which has book value of five hundred thousand rupees or more,
shall be disclosed,
(i) cost or revalued amount, as the case may be;
(ii) the book value;
(iii) the sale price and the mode of disposal (e.g. by tender or negotiation);
(iv) the particulars of the purchaser;
(v) gain or loss; and
(vi) relationship, if any of purchaser with Company or any of its directors.

Example 17: Disposal of operating fixed assets

Book Sale Gain /
Particulars Cost Mode of
Sold to value proceeds (loss)
of assets disposal
(Rupees in thousand)
Book value greater than Rs. 500,000
Vehicle Employee: Mr. Ayaz 1,973 524 524 -
Company
Scheme
Car
Vehicle Employee: Mr. Sikandar 2,503 1,608 1,608 -
Vehicle Employee: Mr. Amir 1,124 884 884 -
Book value less than Rs. 500,000 29,952 9,366 12,948 3,582
Year ended: June 30, 2019 35,552 12,382 15,964 3,582
Year ended: June 30, 2018 31,532 17,128 17,128 -
3. Long term loans and advances

With regards to loans and advances to directors following shall be disclosed:
(i) the purposes for which loans or advances were made; and
(ii) reconciliation of the carrying amount at the beginning and end of the period, showing
disbursements and repayments;
In case of any loans or advances obtained/provided, at terms other than arm‘s length basis,
reasons thereof shall be disclosed
In respect of loans and advances to associates and related parties there shall be disclosed,
(i) the name of each associate and related party;
(i) the terms of loans and advances;
(ii) the particulars of collateral security held, if any;
(iii) the maximum aggregate amount outstanding at any time during the year calculated by
reference to month-end balances;
(iv) provisions for doubtful loans and advances; and
(v) loans and advances written off, if any.
Example 18: Long Term Loans and advances - Secured

2018 2017
Rs‘000 Rs’000
Loans and advances – considered good, to:
Executives 763,000 691,000
Other employees 719,000 618,000
1,482,000 1,309,000
Less: Amount due within twelve months 368,000 343,000
1,114,000 966,000
Reconciliation Executive Other 2018 2017

Rs‘000 Rs‘000 Rs‘000 Rs‘000
Balance at January 1 691,000 618,000 1,309,000 1,269,000
Disbursement 339,000 308,000 647,000 570,000
1,030,000 926,000 1,956,000 1,839,000
Repayments (267,000) (207,000) (474,000) (530,000)
Balance at December 31 763,000 719,000 1,482,000 1,309,000

These subsidized and interest free loans and advances are granted to employees as per the
Company’s policy and are repayable within one to ten years. House building loans carry mark-up at
4% per annum and are secured against the underlying assets.
The maximum amount of loans and advances to executives outstanding at the end of any month
during the year was Rs 805,865 thousand (2017: Rs 772,548 thousand).
.
4. Current assets
In respect of debts/receivables from associates and related parties there shall be disclosed.
(ii) the maximum aggregate amount outstanding at any time during the year calculated by
(iii) receivables, that are either past due or impaired, along with age analysis distinguishing
between trade debts, loans, advances and other receivables;
(iv) debts written off as irrecoverable, distinguishing between trade debts and other receivables;
(v) provisions for doubtful or bad debts distinguishing between trade debts, loans, advances
and other receivables; and
(vi) justification for reversal of provisions of doubtful debts, if any;
Example 19: Trade debts - Unsecured

2018 2017
Considered good Rs‘000 Rs’000
Due from customers 2,165,093 1,561,668
Due from associated undertakings 2,021 1,765
2,167,114 1,563,433
Considered doubtful
Due from customers 30,362 30,527
Less: Provision for doubtful debts (30,362) (30,527)
- -
2,167,114 1,563,433
These customers have no recent history of default.
2018 2017
Due from associated undertaking Rs‘000 Rs’000
ABC Shoe Company, Peru 2,021 1,765
Maximum aggregate amount due from associated undertakings at the end of any month in the year
was Rs. 3.319 million (2017: Rs. 1.967 million). No interest has been charged on the amounts due
from associated undertakings.
In respect of loans and advances, other than those to employees as per company’s human
resource policy or to the suppliers of goods or services, the name of the borrower and terms of
repayment if the loan or advance exceeds rupees one million, together with the particulars of
collateral security, if any, shall be disclosed separately;
Note: The requirements in above para relate to fourth schedule only and not required in fifth
schedule.

Provision, if any, made for bad or doubtful loans and advances or for diminution in the value of or
loss in respect of any asset shall be shown as a deduction from the gross amounts;
Example 20: Loans and advances

2018 2017
Rs‘000 Rs’000
Current portion of long term loans and advances 368,000 343,000
Loans and advances to employees - unsecured 27,000 17,000
Advance to suppliers – considered good 82,000 150,000
Advance to subsidiary company – interest bearing 582,000 1,122,000
1,059,000 1,632,000
Advance to subsidiary company
This represents aggregate unsecured advance to, ABCEL, subsidiary company under a revolving
credit facility upto an amount of Rs 1,500,000 thousand to meet debt servicing obligations and
other working capital requirements. This carries mark-up at 1 month KIBOR + 0.60%. The maximum
outstanding amount at the end of any month during the year was Rs 671,261 thousand (2017: Rs
1,336,386 thousand).
5. Share capital and reserves

Capital and Revenue reserves shall be clearly distinguished. Any reserve required to be
maintained under the Act shall be separately disclosed. Any legal or other restrictions, on the ability
of the company to distribute or otherwise, shall be disclosed for all kind of reserves maintained by
the company;
Example 21: Reserves

Capital Reserves 2018 2017
Rs‘000 Rs’000
Share premium 5.1 40,000 40,000
Capital redemption reserve 5.2 120,000 120,000
160,000 160,000
5.1 This represents premium of Rs. 5 per share received on public issue of 8,000,000 ordinary
shares of Rs. 10 each in 1991.
5.2 This represents reserve set up on redemption of preference shares of Rs. 120,000
thousands in 1996.
Revenue Reserves 2018 2017
Rs‘000 Rs’000
General reserve 8,802,360 8,802,360
Unappropriated profit 11,720,153 7,374,114
20,522,513 16,176,474
.
In respect of issued share capital of a company following shall be disclosed separately:

(i) shares allotted for consideration paid in cash;
(ii) shares allotted for consideration other than cash, showing separately shares issued
against property and others (to be specified);
(iii) shares allotted as bonus shares; and
(iv) treasury shares;
Shareholders agreements for voting rights, board selection, right of first refusal and block voting
shall be disclosed.

Example 22: Share Capital

Authorised share capital
2018 2017 2018 2017
Number of shares ‘000 Rs’000
10,000 10,000 Ordinary shares of Rs. 10 each 100,000 100,000
Issued, subscribed and paid up capital

2018 2017 2018 2017
Number of shares ‘000 Rs’000
Fully paid in cash
300 300 Ordinary shares of Rs. 10 each 3,000 3,000
Issued for consideration other than
cash
Issued as fully paid bonus shares
7,560 7,560 75,600 75,600
Shares issued for consideration other than cash were issued against plant and machinery.
All ordinary shares rank equally with regard to the Company’s residual assets. Holders of the shares
are entitled to dividends from time to time and are entitled to one vote per share at the general
meetings of the Company.
6. Non-current liabilities
Amount due to associated companies and related parties shall be disclosed separately
7. Current liabilities
Following items shall be disclosed as separate line items:
(i) Payable to provident fund;
(ii) Deposits, accrued liabilities and advances;
(iii) Loans from banking companies and other financial institutions, other than related parties;
(iv) Loans and advances from related parties including sponsors and directors along with
purpose and utilization of amounts; and
(v) Loans and advances shall be classified as secured and unsecured.
Example 23: Current liabilities
Note 2018 2017

Rs‘000 Rs’000
Trade and other payables 9 60,599,330 38,781,144
Mark-up and profit accrued 10 300,574 190,707
Short term borrowings - secured 11 28,526,484 11,539,083
Unclaimed dividend 638,783 437,291
Current portion of long term borrowings - secured 7 7,237,742 6,831,804
Taxation 2,641,779 1,229,780
99,944,692 59,009,809
..

Example 24: Current liabilities

Note 2019 2018
Rs‘000 Rs’000
Employee benefits 7 31,929 29,950
Short term finances - secured 8 5,354,474 5,285,780
Trade and other payables 9 53,867 84,120
Accrued finance costs 10 103,727 48,878
Unclaimed dividend 50,088 10,305
Provision for taxation – net 59,078 61,439
5,653,163 5,520,472
..
In respect of security deposit payable, following shall be disclosed:

(i) Bifurcation of amount received as security deposits for goods/services to be delivered /
provided, into amounts utilizable for company business and others;
(ii) Amount utilized for the purpose of the business from the security deposit in accordance with
requirements of written agreements, in terms of section 217 of the Act; and
(iii) Amount kept in separate bank account;
Example 25: Long Term Deposits

2019 2018
Rs‘000 Rs’000
Long term deposits from dealers 12,731 12,691
These represent security deposits received from dealers which, by virtue of agreement, are interest
free. These are repayable on cancellation of dealership contract with dealers and cannot be utilized
for the purpose of the business. These have been kept in separate bank account in accordance with
the requirements of the section 217 of the Companies Act, 2017. .
8. Contingencies and commitments

In describing legal proceedings, under any court, agency or government authority, whether local
or foreign, include name of the court, agency or authority in which the proceedings are pending,
the date instituted, the principal parties thereto, a description of the factual basis of the proceeding
and the relief sought.
Example 26: Contingencies and Commitments

Penalty of Rs 5.5 billion imposed by the Competition Commission of Pakistan (CCP) in 2013, for
alleged unreasonable increase in urea prices, had been set aside by the Competition Appellate
Tribunal with directions to the CCP to decide the case under guidelines provided by the Tribunal. No
petition was filed by the CCP for review of the decision within the stipulated time, and this option
has thus become time barred for the CCP. However, the CCP can file fresh case under the guidelines
provided by the Tribunal, but the Company remains confident of successfully defending these
unreasonable claims in future as well.
2018 2017
Commitments in respect of: Rs‘000 Rs’000
Capital expenditure 1,919,124 2,498,658
Purchase of stores, spares and other items 1,528,517 2,821,573
Investment in an associated company – ABC Limited 500,000 640,000
Investment in a Joint Venture XYZ Energy Limited 3,685,374 -
Contracted out services 392,100 221,390
Rentals under lease agreements:
Premises 254,827 312,656
Vehicles 88,226 83,674
..

Example 27: Contingencies

The Company is defending a suit for Rs. 19,579 thousand, filed in previous years by an ex-vendor
on account of damages and inconvenience. Previously, the case was pending before the Civil Court,
Lahore. However, during the last year, it was held by the Civil Court that the damages of Rs. 15,000
thousand has been awarded in favour of vendor for the aforementioned inconvenience. In addition
to that the Company is also required to pay the amount of parts already supplied by the vendor
which amounts to Rs. 4,579 thousand along with mark-up @ 7% per annum till its realization.
However, the Company has filed an appeal in the Honourable High Court, Lahore against the
aforesaid order of Civil Court. The management and the legal advisor are confident that outcome
of the case would be in the Company’s favour and no payment in this regard would be required,
hence no provision there against has been made in these financial statements.
Example 28: Commitments .
(i) Letters of credit / bank contracts other than capital expenditure are nil (June 30, 2018:
Rs. 68.13 million).
(ii) Letters of credit / bank contracts for capital expenditure Rs. 4.44 million (June 30, 2018:
Rs. 131.35 million)..
3.3 Requirements as to Statement of Profit or Loss Account

Following items shall be disclosed as deduction from turnover as separate line items:
(i) trade discount; and
(ii) sales and other taxes directly attributed to sales.
Example 29: Turnover

2018 2017
Rs‘000 Rs’000
Manufactured urea – local 74,462,673 67,095,578
Manufactured urea – export - 5,066,304
Purchased and packaged fertilizers 32,930,082 27,031,569
109,392,755 99,193,451
Sales tax (3,381,261) (5,101,021)

Trade discount (47,023) (3,378,316)
(3,428,284) (8,479,337)
105,964,471 90,714,114
..
The aggregate amount of auditors’ remuneration, showing separately fees, expenses and other
remuneration for services rendered as auditors and for services rendered in any other capacity
and stating the nature of such other services. In the case of joint auditors, the aforesaid information
shall be shown separately for each of the joint auditors;
Example 30: General

Auditors’ remuneration 2019 2018
Rs‘000 Rs’000
Audit fee 1,650 1,650
Fee for half yearly review, audit of consolidated financial
statements, review of Code of Corporate Governance and other 899 899
certifications in the capacity of external auditors
Out of pocket expenses 160 160
2,709 2,709
..

In case, donation to a single party exceeds 10 per cent of company’s total amount of donation or
Rs. 1 million, whichever is higher, name of donee(s) shall be disclosed and where any director or
his spouse has interest in the donee(s), irrespective of the amount, names of such directors along
with their interest shall be disclosed;
Example 31: Donations

Cost of sales and Distribution cost include donations amounting to Rs 60,176 thousand (2017: Rs
64,125 thousand) and Rs 24,515 thousand (2017: Rs 25,289 thousand) respectively. These are
disbursed through ABC Welfare Foundation (associated undertaking). Interest of CEO Mr. Tariq in
ABC Welfare Foundation is limited to the extent of his involvement in ABC Welfare Foundation as
Chairman. .
Complete particulars of the aggregate amount charged by the company shall be disclosed
separately for the directors, chief executive and executives together with the number of such
directors and executives such as:
(i) fees;
(ii) managerial remuneration;
(iii) commission or bonus, indicating the nature thereof;
(iv) reimbursable expenses which are in the nature of a perquisite or benefit;
(v) pension, gratuities, company's contribution to provident, superannuation and other staff
funds, compensation for loss of office and in connection with retirement from office;
(vi) other perquisites and benefits in cash or in kind stating their nature and, where practicable,
their approximate money values; and
(vii) amount for any other services rendered.
Example 32: Remuneration of Chief Executive, Directors and Executives

The aggregate amounts charged in these financial statements in respect of remuneration including
benefits applicable to the chief executive, directors and executives of the company are given below:
2018 2017
Chief Chief
Executives Executives
Executive Executive
Rs‘000 Rs‘000 Rs‘000 Rs‘000
Managerial remuneration 7,915 1,353,075 8,583 1,297,932
Contribution to provident fund 542 84,995 618 81,561
Bonus and other awards 2,783 - 3,703 561
Good performance awards - 1,458,366 - 1,394,652
Allowance and contribution to
9,030 1,186,791 11,113 1,068,165
retirement benefit plans
Total 20,270 4,083,227 24,017 3,842,871
Number of person(s) 1 339 1 336
The above were provided with medical facilities; the chief executive and certain executives were
also provided with some furnishing items and vehicles in accordance with the Company’s policy.
Gratuity is payable to the Chief Executive in accordance with the terms of employment while
contributions for executives in respect of gratuity and pension are based on actuarial valuations.
Leave encashment of Rs 4,431 thousand (2017: Nil) and Rs 57,380 thousand (2017: Rs 46,454
thousand) were paid to chief executive and executives on separation, in accordance with the
Company’s policy.
In addition, 18 (2017: 16) directors were paid aggregate fee of Rs 6,075 thousand (2017: Rs 4,625
thousand).
Directors are not paid any remuneration except meeting fee.

In case of royalties paid to companies/entities/individuals, following shall be disclosed:
(i) Name and registered address; and
(ii) Relationship with company or directors, if any.
Example 33: Royalty payments
Distribution costs 2018 2017

Rs‘000 Rs’000
Salaries and benefits 840,000 813,000
Freight 270,000 239,000
Trademark license fee Note 635,000 388,000
Depreciation 165,000 146,000
Miscellaneous 1,000 500
1,911,000 1,586,500
The trademark license fee represents the royalty fee of ABC Brands S.A.R.L., Switzerland, an
associated company situated in Avenue d’Ouchy 6, 1006 Lausanne, Switzerland.

4 COMPANIES ACT, 2017: FIFTH SCHEDULE

Section overview
n General Requirements
n Requirements as to Statement of Financial Position
n Requirements as to Profit and Loss Account
4.1 General Requirements

a) The companies other than listed companies and their subsidiaries shall follow the applicable
Financial Reporting Framework as defined in Third Schedule, in regards to financial statements
as notified by the Commission, under section 225 of the Companies Act, 2017;
b) The disclosure requirements, as provided in this schedule, are in addition to the disclosure
requirements prescribed in applicable Financial Reporting Framework notified by the
Commission unless specifically required otherwise;
c) In addition to the information expressly required to be disclosed under the Act and this
schedule, there shall be added such other information as may be necessary to ensure that
required disclosure is not misleading;
d) The following shall be disclosed in the financial statements namely:
i. General information about the company comprising the following:
q geographical location of all business units including mills/plant;
Note: Particulars of company’s immovable fixed assets, including location and area of land
is required in fourth schedule but not required in fifth schedule.
q the capacity of an industrial unit, actual production and the reasons for shortfall;
q number of persons employed as on the date of financial statements and average
number of employees during the year.
q name of associated companies or related parties or undertakings along with the basis
of relationship describing common directorship and/or percentage of shareholding;
ii In respect of associated companies, subsidiaries, joint ventures or holding companies
incorporated outside Pakistan, name of undertaking, registered address and country of
incorporation shall be disclosed;
Note: In comparison, the Fourth schedule additionally requires basis of association and
aggregate percentage of shareholding and does not require registered address to be
disclosed.
4.2 Requirements as to Statement of Financial Position

1. Sundry requirements
Following items shall be disclosed as separate line items on the face of the financial statements;
(i) revaluation surplus on property, plant and equipment;
(ii) long term deposits and prepayment;
(iii) unpaid dividend;
(iv) unclaimed dividend; and
(v) cash and bank balances.

2. Fixed assets
Where any property or asset acquired with the funds of the company, is not held in the name of
the company or is not in the possession and control of the company, this fact along with reasons
for the property or asset not being in the name of or possession or control of the company shall be
stated; and the description and value of the property or asset, the person in whose name and
possession or control it is held shall be disclosed;
Land and building shall be distinguished between freehold and leasehold.
Forced sale value shall be disclosed separately in case of revaluation of property, plant and
equipment.
In the case of sale of fixed assets, if the aggregate book value of assets exceeds five million rupees,
following particulars of each asset, which has five hundred thousand rupees or more, shall be
disclosed,
(i) cost or revalued amount, as the case may be;
(ii) the book value;
(iii) the sale price and the mode of disposal (e.g. by tender or negotiation);
(iv) the particulars of the purchaser;
(v) gain or loss; and
(vi) relationship, if any of purchaser with company or any of its directors.
3. Long term loans and advances
With regards to loans and advances to directors, following shall be disclosed:
(i) the purposes for which loans or advances were made; and
(ii) reconciliation of the carrying amount at the beginning and end of the period, showing
disbursements and repayments;
In case of any loans or advances obtained/provided, at terms other than arm’s length basis,
reasons thereof shall be disclosed;
In respect of loans, advances to associates there shall be disclosed:
(i) the name of each associate and related parties;
(ii) the terms of loans and advances;
(iii) the particulars of collateral security held, if any;
(iv) the maximum aggregate amount outstanding at any time during the year calculated by
(v) provisions for doubtful loans and advances; and
(vi) loans or advances written off, if any.
4. Current assets
In respect of debts/receivables from associates there shall be disclosed:
(ii) the maximum aggregate amount outstanding at any time during the year calculated by
(iii) receivables, that are either past due or impaired, along with age analysis distinguishing
between trade debts, loans, advances and other receivables;
(iv) debts written off as irrecoverable distinguishing between trade debts and other receivables;
(v) provisions for doubtful or bad debts distinguishing between trade debts, loans, advances
and other receivables; and
(vi) justification for reversal of provisions of doubtful debts, if any;

Provision, if any, made for bad or doubtful loans and advances or for diminution in the value of or
loss in respect of any asset shall be shown as a deduction from the gross amounts;
5. Share capital and reserves
Capital and revenue reserves shall be clearly distinguished. Any reserve required to be maintained
under the Act shall be separately disclosed. Any legal or other restrictions on the ability of the
company to distribute or otherwise apply its reserves shall also be disclosed for all kind of reserves
maintained by the company;
In respect of issued share capital of a company following shall be disclosed separately;
(i) shares allotted for consideration paid in cash;
(ii) shares allotted for consideration other than cash, showing separately shares issued against
property and others (to be specified);
(iii) shares allotted as bonus shares; and
(iv) treasury shares;
Shareholder agreements for voting rights, board selection, rights of first refusal and block voting
shall be disclosed.
6. Non-current liabilities
Amount due to associated company shall be disclosed separately.
Note: In comparison, the fourth schedule states ‘due to associated companies and related parties’.
7. Current liabilities
Following items shall be disclosed as separate line items;
(i) payable to provident fund;
(ii) deposits, accrued liabilities and advances;
(iii) loans from banking companies and other financial institutions other than associated
company;
(iv) loans and advances from associated company, sponsors and directors along with purpose
and utilization of amounts; and
(v) loans and advances shall be classified as secured and unsecured.
In respect of security deposit payable, following shall be disclosed:
(i) bifurcation of amount received as security deposits for goods/services to be
(ii) delivered/provided, into amounts utilizable for company business and others;
(iii) amount utilized for the purpose of the business from the security deposit in accordance with
requirements of written agreements, in terms of section 217 of the Act; and
(iv) amount kept in separate bank account;
8. Contingencies and commitments
In describing legal proceedings, under any court, agency or government authority, whether local
or foreign include name of the court, agency or authority in which the proceedings are pending, the
date instituted, the principal parties thereto, a description of the factual basis of the proceeding and
the relief sought.
4.3 Requirements as to Profit and Loss Account

Following items shall be disclosed as deduction from turnover as separate line items;
(i) trade discount; and
(ii) sales and other taxes directly attributable to sales.
The aggregate amount of auditors’ remuneration, showing separately fees, expenses and other
remuneration for services rendered as auditors and for services rendered in any other capacity
and stating the nature of such other services. In the case of joint auditors, the aforesaid information
shall be shown separately for each of the joint auditors;

In case, donation to a single party exceeds 10 per cent of company’s total amount of donation or
Rs. 1 million, whichever is higher, name of donee(s) shall be disclosed and where any director or
his spouse has interest in the donee(s) irrespective of the amount, names of such directors along
with their interest shall be disclosed;
Management assessment of sufficiency of tax provision made in the company’s financial
statements along with comparisons of tax provision as per accounts viz a viz tax assessment for
last three years;
Note: The requirements in above para now relate to fifth schedule only after exclusion from
fourth schedule.
Example 34: Management’s assessment on sufficiency of provision for income taxes

A comparison of provision on account of income taxes with most recent tax assessment for last
three tax years is as follows:
2018 2017 2016
(Rupees in thousand)
Tax assessed as per most recent tax assessment 2,361,733 1,998,074 869,634
Provision in accounts for income tax 2,361,733 1,997,464 869,122
The tax assessed as per most recent tax assessment for the year 2018 is based on “deemed
assessment” as per income tax return filed for respective years.
As at June 30, 2019, as per the treatments adopted in tax returns filed that are based on the
applicable tax laws and decisions of appellate authorities on similar matters, the provision in
accounts for income tax is sufficient as there are strong grounds that the said treatments are likely
to be accepted by the tax authorities.
Complete particulars of the aggregate amount charged by the company shall be disclosed
separately for the directors, chief executive and executives together with the number of such
directors and executives such as:
(i) fees;
(ii) managerial remuneration;
(iii) commission or bonus, indicating the nature thereof;
(iv) reimbursable expenses which are in the nature of a perquisite or benefit;
(v) pension, gratuities, company's contribution to provident, superannuation and other staff
funds, compensation for loss of office and in connection with retirement from office;
(vi) other perquisites and benefits in cash or in kind stating their nature and, where practicable,
their approximate money values; and
(vii) amount for any other services rendered.
In case of royalties paid to companies/entities/individuals following shall be disclosed:
(i) Name and registered address; and
(ii) Relationship with company or directors, if any.

5 OBJECTIVE BASED QUESTIONS

01. Which of the following body/institution decides on accounting rules that must be applied by companies
in Pakistan?
(a) Federal Government
(b) Securities and Exchange Commission of Pakistan
(c) State Bank of Pakistan
(d) The Institute of Chartered Accountants of Pakistan
02. Which of the following body/institution is responsible for recommending accounting standards for
notification by Securities and Exchange Commission of Pakistan?
(a) Pakistan Institute of Corporate Governance
(b) Pakistan Stock Exchange
(c) The Institute of Chartered Accountants of Pakistan
(d) Pakistan Chamber of Commerce
03. Which of the following are applicable to a company listed on Pakistan Stock Exchange?
(a) IFRSs and Fourth Schedule of Companies Act, 2017
(b) IFRSs and Fifth Schedule of Companies Act, 2017
(c) IFRSs for SMEs and Fourth Schedule of Companies Act, 2017
(d) IFRSs for SMEs and Fifth Schedule of Companies Act, 2017
04. Which of the following are applicable to a non-listed public interest company?
05. Which of the following are applicable to a non-listed large size Pakistani company?
06. How a public utility or similar company carrying on the business of essential public services shall be
classified according to Companies Act, 2017?
(a) Pubic Interest Company
(b) Large Sized Company
(c) Medium Sized Company
(d) Small Sized Company

07. A public unlisted company has paid up capital of Rs. 8 million, turnover of Rs. 90 million and 225
employees. How it shall be classified according to Companies Act, 2017?
08. A private company has paid up capital of Rs. 80 million, turnover of Rs. 900 million and 525 employees.
How it shall be classified according to Companies Act, 2017?
09. A public unlisted company has paid up capital of Rs. 80 million, turnover of Rs. 1,200 million and 225
10. A foreign company has paid up capital equivalent of Rs. 250 million, turnover of Rs. 900 million and 725
11. In the case of sale of fixed assets, if the aggregate book value of assets exceeds five hundred
thousand rupees, following particulars of each asset shall be disclosed:
(i) cost or revalued amount, as the case may be.
(ii) the book value.
(iii) the sale price and the mode of disposal (e.g. by tender or negotiation).
(iv) the particulars of the purchaser.
(v) gain or loss.
(vi) relationship, if any of purchaser with Company or any of its directors.
(a) (i), (ii) and (v) only
(b) (i) to (iv) only
(c) (i) to (v) only
(d) (i) to (vi) all

12. With regards to loans and advances to directors a company is required to disclose whether the loans
and advances have been made in compliance with the requirements of the Companies Act, 2017.
The above disclosure is required by:
(a) Fourth Schedule
(b) Fifth Schedule
(c) Both (a) and (b)
(d) Neither (a) nor (b)
13. In respect of loans and advances, other than those to the suppliers of goods or services, the name of
the borrower and terms of repayment if the loan or advance exceeds rupees one million, together with
the particulars of collateral security, if any, shall be disclosed separately.
The above disclosure is required by:
(a) Fourth Schedule
(b) Fifth Schedule
(c) Both (a) and (b)
(d) Neither (a) nor (b)
14. In Fourth and Fifth Schedule, an executive has been defined as an employee, other than the chief
executive and directors, whose basic salary exceeds a certain amount in a financial year. What is that
amount?
(a) Rs. 600,000
(b) Rs. 1,200,000
(c) Rs. 2,000,000
(d) Rs. 3,000,000
15. In respect of issued share capital of a company following shall be disclosed separately:
(i) shares allotted for consideration paid in cash.
(ii) shares allotted for consideration other than cash, showing separately shares issued against
property and others (to be specified).
(iii) shares allotted as bonus shares.
(iv) treasury shares.
(a) (i), (ii) and (iii) only
(b) (i) and (ii) only
(c) (i) and (iii) only
(d) (i) to (iv) all
16. Mercury Limited is a listed company on Pakistan Stock Exchange. Which schedule of Companies Act,
2017 is applicable to it for disclosure requirements?
___________
17. Neptune (Private) Limited is a large size company according to Third schedule of Companies Act, 2017.
Which schedule of Companies Act, 2017 is applicable to it for disclosure requirements?
___________

18. Mars Limited is public unlisted company. It is subsidiary of Mercury Limited which is listed on Pakistan
Stock Exchange. Which schedule of Companies Act, 2017 is applicable to it for disclosure
requirements?
___________
19. Which schedule of Companies Act, 2017 lists the classification criteria of the companies based on
company size?
___________
20. Earth Limited is a non-listed company but according to Third schedule of Companies Act, 2017 it is
public interest company. Which schedule of Companies Act, 2017 is applicable to it for disclosure
requirements?
___________

5 OBJECTIVE BASED ANSWERS

01. (b)
02. (c)
03. (a)
04. (b)
05. (b)
06. (a)
07. (c) If it was private company, it would have been classified as small sized company.
08. (c)
09. (b) It has turnover of more than Rs. 1 billion.
10. (c) Only turnover criteria are evaluated for foreign companies.
11. (d) All are required under Fourth and Fifth Schedule.
12. (a) This is requirement of Fourth Schedule only.
13. (a) This is requirement of Fourth Schedule only.
14. (b)
15. (d)
16. Fourth Schedule The Fourth schedule is applicable to all listed companies.
17. Fifth Schedule The Fifth schedule is applicable to non-listed companies regardless of its size.
18. Fifth Schedule The Fifth schedule also applies to private and non-listed companies that are a
subsidiary of a listed company.
19. Third Schedule The Third schedule lists the classification criteria of the company on the basis
of company size.
20. Fifth Schedule The Fifth schedule is applicable to non-listed companies even if it is public
interest company.

15
CHAPTER
Ethical Issues in Financial Reporting
Contents
1 ICAP Code of Ethics-General Application of the code
2 Section 320: Preparation and reporting of information
3 Objective based questions and answers
* The student must refer original handbook of Code of Ethics for Chartered
Accountants (Revised 2019).

1 ICAP CODE OF ETHICS – GENERAL APPLICATION OF THE CODE

Section overview
n Introduction
n The fundamental principles
n Threats to the fundamental principles
1.1 Introduction
Ethics can be difficult to define but it is principally concerned with moral principles,
character and conduct. Ethical behaviour is more than obeying laws, rules and regulations.
It is about doing ‘the right thing’. The accountancy profession is committed to acting
ethically and in the public interest.
Professional accountants may find themselves in situations where values are in conflict
with one another due to responsibilities to employers, clients and the public.
ICAP has a code of conduct which members, students, affiliates, employees of member
firms and, where applicable, member firms must follow. The code provides guidance in
situations where ethical issues arise.
Comment
Most people are honest and have integrity and will always try to behave in the right way in
a given set of circumstances. However, accountants might face situations where it is not
easy to see the most ethical course of action. One of the main roles of the ICAP code is to
provide guidance in these situations.
Impact on members
All members of ICAP are required to comply with the code of ethics. The code applies to
both accountants in practice and in business.
ICAP-Code of ethics has been bifurcated into following parts:
Part 1: Complying with the Code, Fundamental Principles and Conceptual Framework (All
Chartered Accountants)
Part 2: Chartered Accountants in Practice
Part 3: Chartered Accountants in Business
Part 4A - Independence for Audit and Review Engagements
Part 4B - Independence for Assurance Engagements other than Audit and Review
Engagements
This chapter explains some general application of the code and ethical issues surrounding
the preparation of financial statements and other financial information (section 220 of
Part3).
1.2 The fundamental principles

ICAP’s Code of Ethics expresses its guidance in terms of five fundamental principles.
These are:
q integrity;
q objectivity;
q professional competence and due care;

q confidentiality; and
q professional behaviour
Integrity
Members should be straightforward and honest in all professional and business
relationships. Integrity implies not just honesty but also fair dealing and truthfulness.
A chartered accountant should not be knowingly associated with reports, returns,
communications or other information where they believe that the information:
q Contains a materially false or misleading statement;
q Contains statements or information furnished recklessly; or
q Omits or obscures information required to be included where such omission or obscurity
would be misleading.
Objectivity
Members should not allow bias, conflicts of interest or undue influence of others to override
their professional or business judgements.
A chartered accountant may be exposed to situations that may impair objectivity. It is
impracticable to define and prescribe all such situations.
Relationships that bias or unduly influence the professional judgment of the chartered
accountant should be avoided.
Professional competence and due care
Practising as a chartered accountant involves a commitment to learning over one’s entire
working life.
Members have a duty to maintain their professional knowledge and skill at such a level
that a client or employer receives a competent service, based on current developments in
practice, legislation and techniques. Members should act diligently and in accordance with
applicable technical and professional standards.
Continuing professional development develops and maintains the capabilities that enable
a chartered accountant to perform competently within the professional environments.
Confidentiality
Members must respect the confidentiality of information acquired as a result of professional
and business relationships and should not disclose such information to third parties without
authority or unless there is a legal or professional right or duty to disclose.
Confidential information acquired as a result of professional and business relationships
should not be used for the personal advantage of members or third parties.
Example 01: UNIQUE ENGINEERING LIMITED

Zia is a Chartered Accountant and works as a financial controller in Unique Engineering
Limited (UEL). UEL is currently considering the acquisition of Top Storage Limited (TSL) and
Zia is a member of the team which is currently negotiating the acquisition with the
management of TSL.
After becoming aware of the prospective acquisition, Zia purchased 1,000,000 shares of
TSL in the name of his wife and son.
a. Breach of Fundamental Principles of Code of Ethics
Mr. Zia breached the following fundamental principles of ICAP code of ethics:
i. Confidentiality
Under the Code of Ethics, member must respect the confidentiality of information
acquired as a result of professional and business relationship. Confidential information
acquired should not be used for the personal advantage by a member.

In the above scenario, Mr Zia has breached the principle of confidentiality by using the
confidential information for the personal advantage since the information was not
publicly available.
ii. Professional behaviour
Under the Code of Ethics, member must comply with relevant laws and regulations and
should avoid any action which discredits the profession.
Since it can be a non-compliance of laws and regulation, he may be in breach of the
principle of professional behaviour.
b. Potential threats involved in the circumstances
Self-interest threat
Since Mr. Zia is part of a team which is negotiating the price of the shares and he has
purchased shares in the name of his wife and son, it creates self-interest threat and he
would be reluctant to take any decision that would be against his own interest.
Professional behaviour
Members must comply with relevant laws and regulations and should avoid any action
which discredits the profession. They should behave with courtesy and consideration
towards all with whom they come into contact in a professional capacity.
1.3 Threats to the fundamental principles

Compliance with the fundamental principles may potentially be threatened by a broad
range of circumstances. Many threats fall into the following categories:
q Self-interest;
q Self-review;
q Advocacy;
q Familiarity; and
q Intimidation.
Members must identify, evaluate and address such threats. Unless any threat is clearly
insignificant, members must implement safeguards to eliminate the threats or reduce
them to an acceptable level so that compliance with the fundamental principles is not
compromised.
Self- interest threats
Self-interest threats may occur as a result of the financial or other interests of members
or their immediate or close family members.
Such financial interests might cause members to be reluctant to take actions that would
be against their own interests.
Examples of circumstances that may create self-interest threats include, but are not
limited to:
q Incentive compensation arrangements.
q Concern over employment security.
q Commercial pressure from outside the employing organization.
Self-review threats
Self-review threats occur when a previous judgement needs to be re-evaluated by
members responsible for that judgement. For example, where a member has been
involved in maintaining the accounting records of a client he may be unwilling to find fault
with the financial statements derived from those records. Again, this would threaten the
fundamental principle of objectivity.

Circumstances that may create self-review threats include, but are not limited to, business
decisions or data being subject to review and justification by the same chartered
accountant in business responsible for making those decisions or preparing that data.
Advocacy threats
A chartered accountant in business may often need to promote the organisation’s position
by providing financial information. As long as information provided is neither false nor
misleading such actions would not create an advocacy threat.
Familiarity threats
Familiarity threats occur when, because of a close relationship, members become too
sympathetic to the interests of others. Examples of circumstances that may create
familiarity threats include:
q A chartered accountant in business in a position to influence financial or non-financial
reporting or business decisions having an immediate or close family member who is in
a position to benefit from that influence.
q Long association with business contacts influencing business decisions.
q Acceptance of a gift or preferential treatment, unless the value is clearly insignificant.
Intimidation threats
Intimidation threats occur when a member’s conduct is influenced by fear or threats (for
example, when he encounters an aggressive and dominating individual at a client or at his
employer).
Examples of circumstances that may create intimidation threats include:
q Threat of dismissal or replacement over a disagreement about the application of an
accounting principle or the way in which financial information is to be reported.
q A dominant personality attempting to influence decisions of the chartered accountant.

2 SECTION 220: PREPARATION AND PRESENTATION OF INFORMATION

Section overview
n Accountants in business
n Section 220 of the ICAP Code of Ethics
n Potential conflicts
2.1 Accountants in business

Accountants in business are often responsible for the preparation of accounting
information.
Accountants in business need to ensure that they do not prepare financial information in a
way that is misleading or that does not show a true and fair view of the entity’s operations.
Accountants who are responsible for the preparation of financial information must ensure
that the information they prepare is technically correct, reports the substance of the
transaction and is adequately disclosed.
There is a danger of influence from senior managers to present figures that inflate profit or
assets or understate liabilities. This puts the accountant in a difficult position. On one hand,
they wish to prepare proper information and on the other hand, there is a possibility they
might lose their job if they do not comply with their managers wishes.
In this case, ethics starts with the individual preparing the information. They have a difficult
decision to make; whether to keep quiet or take the matter further. If they keep quiet, they
will certainly be aware that they are not complying with the ethics of the accounting body
they belong to. If they speak out, they may be bullied at work into changing the information
or sacked.
2.2 Section 220 of the ICAP Code of Ethics

Chartered accountants in business at all levels are often involved in the preparation and
presentation of information that may either be made public or used by others inside or
outside the employing organisation including:
q Management and those charged with governance.
q Investors and lenders or other creditors.
q Regulatory bodies.
Such information may include financial or management information, for example:
q Operating and performance reports.
q Decision support analyses.
q Forecasts and budgets;
q Information provided to the internal and external auditors.
q Risk analyses.
q General and special purpose financial statements.
q Tax returns.
q Reports filed with regulatory bodies for legal and compliance purposes.
When preparing or presenting information, a chartered accountant shall:

q Prepare or present the information in accordance with a relevant reporting framework,
where applicable;

q Prepare or present the information in a manner that is intended neither to mislead nor
to influence contractual or regulatory outcomes inappropriately;
q Exercise professional judgment to:
• Represent the facts accurately and completely in all material respects;
• Describe clearly the true nature of business transactions or activities;
• Classify and record information in a timely and proper manner; and
• Not omit anything with the intention of rendering the information misleading
or of influencing contractual or regulatory outcomes inappropriately.
Use of Discretion in Preparing or Presenting Information
Preparing or presenting information might require the exercise of discretion in making
professional judgments. The chartered accountant shall not exercise such discretion
with the intention of misleading others or influencing contractual or regulatory outcomes
inappropriately.
Examples of ways in which discretion might be misused to achieve inappropriate
outcomes include:
q Determining estimates, for example, determining fair value estimates in order to
misrepresent profit or loss.
q Selecting or changing an accounting policy or method among two or more alternatives
permitted under the applicable financial reporting framework, for example, selecting a
policy for accounting for long- term contracts in order to misrepresent profit or loss.
q Determining the timing of transactions, for example, timing the sale of an asset near
the end of the fiscal year in order to mislead.
q Determining the structuring of transactions, for example, structuring financing
transactions in order to misrepresent assets and liabilities or classification of cash flows.
q Selecting disclosures, for example, omitting or obscuring information relating to
financial or operating risk in order to mislead.
When performing professional activities, especially those that do not require compliance
with a relevant reporting framework, the chartered accountant shall exercise professional
judgment to identify and consider:
(a) The purpose for which the information is to be used;
(b) The context within which it is given; and
(c) The audience to whom it is addressed.
For example, when preparing or presenting pro forma reports, budgets or forecasts, the
inclusion of relevant estimates, approximations and assumptions, where appropriate,
would enable those who might rely on such information to form their own judgments.
The chartered accountant might also consider clarifying the intended audience, context
and purpose of the information to be presented.
Relying on the Work of Others
A chartered accountant who intends to rely on the work of others, either internal or external
to the employing organization, shall exercise professional judgment to determine what
steps to take, if any, in order to fulfill his responsibilities
Factors to consider in determining whether reliance on others is reasonable include:
q The reputation and expertise of, and resources available to, the other individual or
organization.
q Whether the other individual is subject to applicable professional and ethics
standards.

Such information might be gained from prior association with, or from consulting others
about, the other individual or organization.
Addressing Information that is or Might be Misleading
When the chartered accountant knows or has reason to believe that the information with
which the accountant is associated is misleading, the accountant shall take appropriate
actions to seek to resolve the matter including:
q Discussing concerns that the information is misleading with the chartered accountant’s
superior and/or the appropriate level(s) of management within the accountant’s
employing organization or those charged with governance, and requesting such
individuals to take appropriate action to resolve the matter. Such action might include:
• Having the information corrected.
• If the information has already been disclosed to the intended users, informing
them of the correct information.
q Consulting the policies and procedures of the employing organization (for example, an
ethics or whistle-blowing policy) regarding how to address such matters internally.
The chartered accountant might determine that the employing organization has not taken
appropriate action. If the accountant continues to have reason to believe that the
information is misleading, the following further actions might be appropriate provided that
the accountant remains alert to the principle of confidentiality:
Consulting with:
q A relevant professional body.
q The internal or external auditor of the employing organization.
q Legal counsel.
q Determining whether any requirements exist to communicate to:
• Third parties, including users of the information.
• Regulatory and oversight authorities.
If after exhausting all feasible options, the chartered accountant determines that
appropriate action has not been taken and there is reason to believe that the information
is still misleading, the accountant shall refuse to be or to remain associated with the
information.
In such circumstances, it might be appropriate for a chartered accountant to resign from
the employing organization.
Documentation
The chartered accountant is encouraged to document:
q The facts.
q The accounting principles or other relevant professional standards involved.
q The communications and parties with whom matters were discussed.
q The courses of action considered.
q How the accountant attempted to address the matter(s).

Example 2.1
Ibrahim is member of ICAP working as a unit accountant.
He is a member of a bonus scheme under which, staff receive a bonus of 10% of their annual salary
if profit for the year exceeds a trigger level.
Ibrahim has been reviewing working papers prepared to support this year’s financial statements.
He has found a logic error in a spreadsheet used as a measurement tool for provisions.
Correction of this error would lead to an increase in provisions. This would decrease profit below
the trigger level for the bonus.
Analysis:
Ibrahim faces a self-interest threat which might distort his objectivity.
Ibrahim has a professional responsibility to ensure that financial information is prepared and
presented fairly, honestly and in accordance with relevant professional standards. He has further
obligations to ensure that financial information is prepared in accordance with applicable
accounting standards and that records maintained represent the facts accurately and completely
in all material respects.
Ibrahim must make the necessary adjustment even though it would lead to a loss to himself.
Example 2.2
Ali is a chartered accountant recruited on a short-term contract to assist the finance director, Bashir
(who is not a chartered accountant) in finalising the draft financial statements.
The decision on whether to employ Ali on a permanent basis rests with Bashir.
Ali has been instructed to prepare information on leases to be included in the financial statements.
He has identified a number of large leases which are being accounted for as operating leases even
though the terms of the contract contain clear indicators that the risks and benefits have passed
to the company. Changing the accounting treatment for the leases would have a material impact
on asset and liability figures.
Ali has explained this to Bashir. Bashir responded that Ali should ignore this information as the
company need to maintain a certain ratio between the assets and liabilities in the statement of
financial position.
Analysis
Ali faces a self-interest threat which might distort his objectivity.
The current accounting treatment is incorrect.
Ali has a professional responsibility to ensure that financial information is prepared and presented
fairly, honestly and in accordance with relevant professional standards. He has further obligations
to ensure that financial information is prepared in accordance with applicable accounting
standards and that records maintained represent the facts accurately and completely in all
material respects.
Possible course of action
Ali must explain his professional obligations to Bashir in particular that he cannot be party to the
preparation and presentation of knowingly misleading information.
Ali should refuse to remain associated with information that is misleading.
If Bashir refuses to allow the necessary changes to the information, Ali should take following
appropriate actions to resolve the matter:
• should report the matter to the audit committee or the other directors;
• consult the policies and procedures of the company with respect to ethics or whistle blowing
policy
• consider consulting with the relevant professional body, internal or external auditor, legal
council or informing third parties or appropriate authorities in line with the ICAP guidance on
confidentiality.
As a last resort if the company refuses to change the information Ali should resign from his post.

Example 03:
Etishad is a chartered accountant who works in a team that reports to Fahad, the finance director
of Kohat Holdings.
Fahad Is also a chartered accountant. He has a domineering personality.
Kohat Holdings revalues commercial properties as allowed by IAS 16. Valuation information
received last year showed that the fair value of the property portfolio was 2% less than the carrying
amount of the properties (with no single property being more than 4% different). A downward
revaluation was not recognised on the grounds that the carrying amount was not materially
different from the fair value.
This year’s valuation shows a continued decline in the fair value of the property portfolio. It is now
5% less than the carrying amount of the properties with some properties now being 15% below the
carrying amount.
Etishad submitted workings to Fahad in which he had recognised the downward revaluations in
accordance with IAS 16.
Fahad has sent him an email in response in which he wrote “Stop bothering me with this rubbish.
There is no need to write the properties down. The fair value of the portfolio is only 5% different
from its carrying amount. Restate the numbers immediately”.
Analysis
Etishad faces an intimidation threat which might distort his objectivity.
The current accounting treatment might be incorrect. The value of the properties as a group is
irrelevant in applying IAS 16’s revalution model. IAS 16 allows the use of a revalution model but
requires that the carrying amount of a property should not be materially different from its fair value.
This applies to individual properties not the whole class taken together.
(It could be that Fahad is correct because there is insufficient information to judge materiality in
this circumstance. However, a 15% discrepancy does sound significant).
Etishad has a professional responsibility to ensure that financial information is prepared and
presented fairly, honestly and in accordance with relevant professional standards. He has further
obligations to ensure that financial information is prepared in accordance with applicable
accounting standards and that records maintained represent the facts accurately and completely
in all material respects.
Possible course of action

Etishad should arrange a meeting with Fahad to try to explain Fahad’s misapplication of the IAS 16
guidance and to try to persuade Fahad that a change might be necessary.
Fahad should be reminded that he too is bound by the same guidance that applies to Etishad.
Indeed he has a greater responsibility as the more senior person to show leadership in this area.
Etishad cannot be party to the preparation and presentation of knowingly misleading information.
He should explain that he cannot remain associated with information that is misleading. If Fahad
refuses to allow the necessary changes to the information Etishad should take following
appropriate actions to resolve the matter:
• consult the policies and procedures of the company with respect to ethics or whistle
blowing policy to address the matter internally;
council or informing third parties or appropriate authorities in line with the ICAP guidance
on confidentiality.
As a last resort, Ehtishad should resign from his post.

Example 04: Ethical Issues

Waheed is a chartered accountant, recently employed by AA plc as deputy to the finance director,
Arif (also a chartered accountant). AA plc is listed on the Pakistan stock exchange.
On Waheed’s first day on the job he met with Arif who said ‘Look, keep it to yourself but I’m having
a second interview next week for a new job. The first thing that I need you to do is to review the
financial statements before the auditors arrive. I qualified a few years ago and am not up to date
on all of the little technicalities in IFRS. You should know these better than me and you’ll know
more about what the auditors might focus on. We must do our best to present the financial
statements in the most favourable light as the bonus paid to employees (including me) depends on
profit being more than 10% bigger than last year’s and remember that you qualify for this too. Keep
this in mind when you carry out the review as we do not really want to find anything. Do well at this
and I might put in a good word for you when I leave as I’m sure you’ll be a great replacement for
me.”
The range of comments made by Arif raises questions over his ethical behaviour and professional
standards.
A chartered accountant should be unbiased when involved in preparing and reviewing financial
information. A chartered accountant should prepare financial statements fairly, honestly, and in
accordance with relevant professional standards and must not be influenced by considerations of
the impact of reported results.
Arif’s failings
Arif appears to be influenced by the need to achieve a specified level of profit. This is not appropriate
and calls his integrity into question.
In addition, Arif’s professional competence seems to be suspect. His comment on not being up to
date on all of the little technicalities in IFRS s suggests that he has not maintained a level of
professional competence appropriate to his professional role.
ICAP members have a responsibility to engage in continuing professional development in order to
ensure that their technical knowledge and professional skills are kept up to date. Arif should seek
continuing professional development activities and improve his knowledge on ethical standards.
Furthermore, it might be expected that as Waheed’s superior he should set an example to Waheed
and guide him in his responsibilities. Clearly this is not happening.
As a member of ICAP Arif should be aware of the ICAP code of ethics. Arif should know of the danger
of self-interest threats and intimidation threats to himself and to others. His attempt to influence
the outcome of a fellow professional by applying such a threat to that individual is very
unprofessional.
Waheed’s ethical issues
Waheed faces a self-interest threat, in that there is the possibility of a bonus provided the earnings
per share figure remains the same as last year. Arif has also suggested that he can influence the
Board’s decision over employing him as a replacement finance director – another self-interest
threat to Waheed. Both of these threats must be ignored.
Arif’s comments imply that his application of professional responsibility is lacking. This may extend
into the way in which the current financial statements have been prepared. Waheed must be very
careful (as always) to carry out the review with all due care.
Waheed should first discuss his recommendations with Arif and remind his of his professional
responsibilities to ensure that the accounting standards are correctly followed. If the financial
statements are found to contain errors or incorrect accounting treatment, then they must be
amended. If Arif refuses to amend the draft financial statements, if necessary, Waheed should take
appropriate actions to resolve the matter including:
• -consult the policies and procedures of the company with respect to ethics or whistle blowing
policy to address the matter internally;
confidentiality.

Example 05: Sindh Industries Ltd

Jafar has recently been appointed as financial controller to Sindh Industries Ltd. Until a month ago,
Sindh Industries had a finance director, who resigned suddenly, due to ill health. Since Jafar joined
the company, he has learned that his resignation was related to stress caused by a series of
disagreements with the managing director about the performance of the business. The directors
have not yet appointed a replacement.
It is now March 2016 and the financial statements for the year ended 31 December 2015 are to
be finalised. The draft statement of profit or loss extract and statement of financial position are
shown below:
Draft statement of profit or loss for the year ended 31 December 2015
Rs. 000
Profit before tax 2,500
Draft statement of financial position at 31 December 2015
Rs. 000
Property, plant and equipment 12,000
Current assets 3,500
Total assets 15,500
Share capital 2,000
Retained earnings 6,000
Equity 8,000
Non-current liabilities 5,000
Current liabilities 2,500
Total equity and liabilities 15,500
During the year ended 31 December 2015 Sindh Industries entered into the following transactions.
(1) Just before the year end Sindh Industries signed a contract to deliver consultancy services
for a period of 2 years at a fee of Rs. 500,000 per annum. The full amount of this fee has
been paid in advance and is non-refundable.
(2) Sindh Industries has constructed a new factory. The construction has been financed from the
pool of existing borrowings. Land at a cost of Rs. 1.8 million was acquired on 1 February
2015 and construction began on 1 June 2015. Construction was completed on 30
September 2015 at an additional cost of Rs. 2.7 million. Although the factory was usable
from that date, full production did not commence until 1 December 2015. Throughout the
year the company’s average borrowings were as follows:
Amount Annual interest rate

Rs. %
Bank overdraft 1,000,000 9.75
Bank loan 1,750,000 10
Debenture 2,500,000 8
An amount of Rs. 450,000 has been included in property, plant and equipment in respect of
borrowing costs relating to the construction of the factory. The useful life of the factory has
been estimated at 20 years. No depreciation has been charged for the year. The reason for
this is that the factory has only been in use for one month and that the depreciation charge
would be immaterial.

(3) A blast furnace with a carrying amount at 1 January 2015 of Rs. 3.5 million has been
depreciated in the draft financial statements on the basis of a remaining life of 20 years. In
December 2015 the directors carried out a review of the useful lives of various significant
items of plant and machinery, including the blast furnace and came to the conclusion that
the useful life of the furnace was 20 years at 31 December 2015. The reasoning behind this
judgement was that the lining of the furnace had been replaced in the last week of December
20X6 at a cost of Rs. 1.4 million. Provided that the lining is replaced every five years, the life
of the furnace can be extended accordingly. You have found a report, commissioned by the
previous finance director and prepared by a firm of asset valuation specialists, which
assesses the remaining useful life of the main structure of the furnace at 1 January 2015 at
15 years and the lining of the furnace at 5 years. You have also found evidence that the
managing director has seen this report.
Jafar has had a conversation with the managing director who told him, “We need to make
the figures look as good as possible so I hope you’re not going to start being difficult. The
consultancy fee is non-refundable so there’s no reason why we can’t include it in full. I think
we should look at our depreciation policies. We’re writing off our assets over far too short a
period. As you know, we’re planning to go for a stock market listing in the near future and
being prudent and playing safe won’t help us do that. It won’t help your future with this
company either.”
Required
Discuss the ethical issues arising from your review of the draft financial statements and the actions
that you should consider.
The ethical issues arising from the review of the draft financial statements and the actions that
should be considered are as follows:
It is noticeable that all the adjustments required reduce profit. This and the background to the
previous finance director’s resignation suggest serious problems.
It is not clear who actually prepared the draft financial statements. If they were prepared by more
junior staff in the absence of a finance director, some of the adjustments (for example, the
calculation of borrowing costs to be capitalised) could be the result of genuine errors or lack of
accounting knowledge. However, it seems reasonably clear that the managing director has
attempted to influence the treatment of the revenue and the estimated useful life of at least one
significant non-current asset. (Note: the directors have reviewed the useful lives of several items of
plant and machinery and it is possible that other assets besides the furnace are being depreciated
over unrealistically long periods.)
It seems almost certain that the previous finance director resigned as a result of pressure from the
managing director (and possibly from other members of the Board) to present the financial
statements in a favourable light. The directors intend to seek a stock market listing in the near
future. Therefore, they have clear motives for manipulating the profit figure and also (perhaps) for
making controversial decisions before the financial statements come under much greater scrutiny
as a result of the listing. The job title of financial controller is also significant. It suggests that the
role has been downgraded and that the person holding it has less authority than the rest of the
Board.
Possible courses of action:
q Discuss with the managing director the financial reporting standards that apply to the
transactions and explain the implications of non-compliance. If the managing director is
himself a member of a professional body, then it might be worth pointing out to him that he
himself is bound by an ethical code.
q Advise him that as a Chartered Accountant you are bound by the ICAP code of ethics, and that
you would not be prepared to compromise your views of the figures he has prepared for career
advancement.
q Consider speaking to the other directors (or audit committee if there is one) and seeking their
support.
q Consult the policies and procedures of the company with respect to ethics or whistle blowing
policy

q Consider consulting with the relevant professional body, internal or external auditor, legal
confidentiality.
q If all else fails, then consider seeking alternative employment.
Example 06: Charming Limited

Umer Sheikh, ACA is Manager Finance at Charming Limited (CL) and reports to Abid, FCA who is
the Chief Financial Officer of CL. Abid is also a close relative of the major shareholder of CL.
CL is negotiating an important financing arrangement with Union Standard Bank (USB) in order to
expand its business in foreign markets. The rate quoted by USB is comparatively higher than
existing rates being paid by CL.
During a meeting with the Executive Vice President (EVP) of USB, where Umer Sheikh was also
present, Abid revealed that his son has applied for a house financing in USB last month but has not
received any response from USB so far. Abid requested EVP to consider his application. EVP agreed
to look into the matter. On conclusion of the meeting, Abid asked Umer Sheikh to prepare a note
for the board of directors proposing the acceptance of the rate offered by USB.
Required
Briefly explain how Abid may be in breach of the fundamental principles of ICAP’s code of ethics.
Also state the potential threats that Umer Sheikh may face in the above circumstances and how
he should respond.
In the given situation, CFO may be in breach of:
i. Principle of professional behavior:
This principle imposes an obligation on all chartered accountants to avoid any action that the
chartered accountant knows or should know may discredit the profession. CFO should have
avoided discussing his personal interest in official meeting.
ii. Principle of objectivity:
Chartered Accountant should not compromise their professional or business judgment because
of bias, conflict of interest or the undue influence of others. In this circumstance, he has
compromised his professional and business judgment due to his personal interest as he
requested the EVP to consider application of his son who has applied for house financing in USB.
iii. Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional and business
relationship. It seems that CFO may be inclined to accept higher mark-up rate as compared to
existing rate being paid by CL, resulting breach of integrity.
Intimidation threat faced by Mr. Umer
Umer may face intimidation threat from his superior if he would raise his objection on
acceptance of higher mark-up rate offered by the Bank specially where his superior i.e. Abid is
a relative of principal shareholder too.
Available safeguards
If this threat is significant Umer should consult with superiors within the organization in order to
eliminate or reduce it to an acceptable level.
Where it is not possible to reduce the threats to an acceptable level, Umer should refuse to
associate with this financing arrangement and take the following appropriate steps:
i. should consider informing appropriate authorities like Audit Committee / CEO;
ii. consult the policies and procedures of the company with respect to ethics or whistle
iii. consider consulting with the relevant professional body, internal or external auditor,
legal council or informing third parties or appropriate authorities in line with the ICAP
guidance on confidentiality;
iv. should resign.

Example 07: Mehran Limited

Usman is a Chartered Accountant and has been working as Finance Director in Mehran Limited
(ML) for the past one year. He reports to the CEO who is also a Chartered Accountant.
Recently, Usman has received a bill issued by an advertising agency which is duly approved for
payment by the Director Marketing. Usman believes that the amounts agreed to be paid under the
contract far exceed the value of services to be provided by the advertising agency and that the
payment would be redirected to obtain a sales contract. He has discussed the matter with CEO who
has advised him to process the payment in ML’s business interest. The CEO also informed Usman
that if the said contract is secured, the management staff will be entitled to a handsome bonus.
Briefly explain how CEO is in breach of the fundamental principles of ICAP’s code of ethics. Also
state the potential threats which Usman may face under the circumstances, along with available
safeguards (if any).
Chartered Accountants should be straight forward and honest in all professional and business
relationships. Since the CEO advised Usman to process the payment about which Usman believes
that the said payment is unreasonable and would be made to obtain a sales contract, therefore he
is in breach of principle of integrity and professional behavior.
In the given circumstances, the decision of CEO may also induce lack of objectivity due to the
expected bonuses to the management.
Self interest threat faced by Usman
Usman might get influenced by the CEO due to the expected bonus therefore he might process the
payment in his own self interest.
Intimidation threat faced by Usman
Usman may have to leave this job if the disagreement continues.
Where it is not possible to reduce the threats to an acceptable level, Usman:
i. should refuse to sign the cheque / refuse to associate with the transaction.
ii. should consider informing appropriate authorities like Audit Committee.
iii. consult the policies and procedures of the company with respect to ethics or whistle blowing
policy to address the matter internally
iv. Consider consulting with the relevant professional body, internal or external auditor, legal
confidentiality.
v. should resign.
Example 08: MNZ Limited

Atif is a chartered accountant and has been working as Manager – Accounts in an unlisted public
company MNZ Limited.
While preparing the financial statements for the year ended 31 December 2016, CFO of MNZ who
is also a chartered accountant informed Atif that the directors are considering to have the company
listed on Pakistan Stock Exchange.
Consequently, CFO wants to show higher profit and has asked Atif to identify areas where book
adjustments can be made. He has also informed that if MNZ is able to list the shares at a price of
Rs. 35 or more, all managerial staff would be given an additional bonus this year.
Briefly explain how the CFO is in breach of the fundamental principles of ICAP’s code of ethics. Also
state the potential threats that Atif may face under the above circumstances and how he should
respond.

In given situation, CFO is in breach of:

i. Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional and business
relationship. Since he asked Accounts manager to identify the areas where through
adjustments, profit may be reported on higher side, he has breached the principle of integrity.
ii. Principle of professional behaviour:
This principle imposes an obligation on all chartered accountants to avoid any action that the
chartered accountant knows or should know may discredit the profession. Since CFO asked
Accounts Manager for booking the adjustments to increase the current year profit, which have
a negative effect on the reputation of the profession.
iii. Principle of objectivity:
Chartered Accountant should not compromise their professional or business judgment because
of bias, conflict of interest or the undue influence of others. In this circumstance, he has
compromised his professional and business judgment due to biasness.
Self-interest threat faced by Mr. Atif
Self-interest threat occurs as a result of financial or other interest of members or their
immediate family member. In this case, he has been told by the CFO that he would be given an
additional bonus this year so he faces self-interest threat.
If this threat is significant Atif should consult with superiors within the organisation in order to
eliminate or reduce it to an acceptable level.
Where it is not possible to reduce the threats to an acceptable level, Atif:
i. should refuse to remain associated with information which is or may be misleading;
ii. should consider informing directors;
iii. consult the policies and procedures of the company with respect to ethics or whistle
iv. consider consulting with the relevant professional body, internal or external auditor, legal
on confidentiality;
v. should resign.
Example 09: Ali And Bashir

Ali and Bashir are chartered accountants and have been working as Managing Director (MD) and
Chief Financial Officer (CFO) in a listed company. In a recent meeting of the Board, the directors
have decided to expand the business within six months by opening 20 retail outlets. This expansion
would require financing of Rs. 300 million which may be arranged through bank loan.
The following information has been extracted from latest draft financial statements of the
company:
Rs. in ‘000
Sales 1,700
Gross profit 545
Tax expense 23
Profit after tax 40
Total assets 2,500
Non-current assets 900
Inventories 850
Trade receivables 600
Share capital 800
Reserves 152
Long term debt @ 9% 750

Following additional information is also available:

q 80% of the sales are on credit.
q Opening inventory was Rs. 100 million.
q 40% of current liabilities comprise of trade payables.
MD has advised the CFO to arrange the loan from MN Bank. He has also informed that the President
of the bank is his good friend and the loan can be arranged on a fast track basis at a mark-up of
15% per annum, subject to the following conditions:
q current ratio and quick ratio should be at least 2:1 and 1:1 respectively;
q gearing ratio should not exceed 40%; and
q interest cover should be at least 3.
CFO is not comfortable with this deal as the mark-up offered by the bank is much higher than the
rate on the existing loan and it is difficult for the company to meet the gearing requirements of the
bank. However, MD has asked him to make certain changes in the draft financial statements
before submission to the bank; which according to the CFO are not in accordance with the IFRSs.
In this situation, the existence of threats to fundamental principles will depend on following factors:
q Whether financing from other banks is available at lower mark up;
q Whether it is feasible to borrow @15% for the expansion.
If financing from other banks is available or it may not be feasible to finance the project at the
rate of 15%, and still MD is pressurizing the CFO to obtain financing at higher rate of mark-up
the MD may be in breach of:
q Principle of objectivity
It can be a bias decision on part of MD, as he may be favoring his friend who is the president
of the bank or may have any other interest in taking loan from that particular bank.
q Principle of integrity
MD may be in breach of principle of integrity because he is asking CFO to manipulate the
financial information.
q Potential threat to CFO along with safeguards:
Preparation of financial information as per the instructions of MD, will result in intimidation
threat to integrity and objectivity.
Identified threat is significant as the CFO is being instructed from the highest level of management.
In order to reduce the threat to an acceptable level, the following safeguards should be applied:
q Consult with superiors such as audit committee or those charged with governance.
q Consult the policies and procedures of the company with respect to ethics or whistle
blowing policy to address the matter internally.
q Consider consulting with the relevant professional body, internal or external auditor, legal
on confidentiality.
q Where it is not possible to reduce the threat to an acceptable level, CFO shall refuse to be
remain associated with the financial information and consider resigning from the post of
CFO.

Example 10:
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.”
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.
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;
(iii) consult the policies and procedures of the company with respect to ethics or whistle
(iv) consider consulting with the relevant professional body, internal or external auditor, legal
on confidentiality;
(v) may resign.

3 OBJECTIVE BASED QUESTIONS

01. Which of the following are true about “Ethics”?
(i) Ethical behaviour is more than obeying laws, rules and regulations.
(ii) Ethics is about doing ‘the right thing’.
(iii) The accountancy profession is committed to acting ethically and in the public interest.
(a) (i) and (ii) only
(b) (i) and (iii) only
(c) (ii) and (iii) only
(d) (i), (ii) and (iii) all
02. ICAP code of ethics is applicable to:

(i) Members: Accountants in practice
(ii) Students
(iii) Members: Accountants in business
03. Ibrahim is member of ICAP working as a unit accountant. He is a member of a bonus scheme
under which, staff receive a bonus of 10% of their annual salary if profit for the year exceeds a
trigger level. Ibrahim has been reviewing working papers prepared to support this year’s financial
statements. He has found a logic error in a spreadsheet used as a measurement tool for
provisions. Correction of this error would lead to an increase in provisions. This would decrease
profit below the trigger level for the bonus.
Which threat to fundamental principle Ibrahim is facing?
(a) Self-interest threat
(b) Intimidation threat
(c) Familiarity threat
(d) Advocacy threat
04. Ibrahim is member of ICAP working as a unit accountant. He is a member of a bonus scheme
under which, staff receive a bonus of 10% of their annual salary if profit for the year exceeds a
trigger level. Ibrahim has been reviewing working papers prepared to support this year’s financial
statements. He has found a logic error in a spreadsheet used as a measurement tool for
provisions. Correction of this error would lead to an increase in provisions. This would decrease
profit below the trigger level for the bonus.
Which fundamental principle is mainly affected in above situation?
(a) Integrity
(b) Objectivity
(c) Professional behaviour
(d) Confidentiality

05. Fortune Limited (FL) is quoted on the stock exchange, with revenue of over Rs. 5 billion per
Annum. During the year ended 30 June 2015, FL has incurred a loss of Rs.26 million.
The Chief Executive is of the view that declaration of loss may result in the bankers’ refusal to
renew the credit facility. Therefore, he wants to incorporate certain adjustments in the books of
account that will result in a net profit of Rs.100 million. However, the Chief Financial Officer
(CFO), who is a chartered accountant, is of the view that all possible adjustments allow able
under the applicable accounting regulations have already been considered and incorporated.
Identify TWO categories of threats to the fundamental principles of objectivity or professional
competence and due care
(b) Self-review threat
(c) Advocacy threat
(d) Intimidation threat
06. Zia is a Chartered Accountant and works as a financial controller in Unique Engineering Limited
(UEL). UEL is currently considering the acquisition of Top Storage Limited (TSL) and Zia is a
member of the team which is currently negotiating the acquisition with the management of TSL.
After becoming aware of the prospective acquisition, Zia purchased 1,000,000 shares of TSL in
the name of his wife and son.
Which of the following fundamental principles of ICAP code of ethics, Zia has breached?
(a) Objectivity and Confidentiality
(b) Confidentiality and Professional behaviour
(c) Objectivity and Professional behaviour
(d) None of above
07. Zia is a Chartered Accountant and works as a financial controller in Unique Engineering Limited
(UEL). UEL is currently considering the acquisition of Top Storage Limited (TSL) and Zia is a
member of the team which is currently negotiating the acquisition with the management of TSL.
After becoming aware of the prospective acquisition, Zia purchased 1,000,000 shares of TSL in
the name of his wife and son.
Which potential threat is involved in above circumstances?
(c) Advocacy threat
08. Atif is a chartered accountant and has been working as Manager – Accounts in an unlisted public
Rs.35 or more, all managerial staff would be given an additional bonus this year.

Which fundamental principles of ICAP code of ethics have been breached by CFO?
(a) Integrity
(b) Objectivity
(d) All of above
09. Atif is a chartered accountant and has been working as Manager – Accounts in an unlisted public
Rs.35 or more, all managerial staff would be given an additional bonus this year.
Which threat to fundamental principles is being faced by Atif?
(c) Advocacy threat
10. Integrity means:
(a) Members should be straightforward and honest in all professional and business
relationships.
(b) Members should not allow bias, conflicts of interest or undue influence of others to override
(c) Members have a duty to maintain their professional knowledge and skill at such a level
practice, legislation and techniques.
(d) Members must comply with relevant laws and regulations and should avoid any action
which discredits the profession.
11. Objectivity means:
relationships.

12. Professional competence and due care means:
relationships.
13. Professional behaviour means:
relationships.
14. Which of the following are correct responses, where it is not possible to reduce the threats to an
acceptable level:
(i) The member must refuse to remain associated with information which may be misleading
(ii) The member must report the matter to audit committee or other governance authority
within organisation.
(iii) The member may seek legal advice if it seems necessary to report the matter to legal
authorities.
15. Naveed is a chartered accountant, recently employed by KK Limited as deputy to the finance
director, Harris (also a chartered accountant). KK Limited is listed on the Pakistan stock exchange.
On Naveed’s first day on the job he met with Harris who said ‘Look, keep it to yourself but I am
having a second interview next week for a new job. The first thing that I need you to do is to review
the financial statements before the auditors arrive. I passed exams few years ago and I am not up
to date on all of the little technicalities in IFRS. You should know these better than me and you will
know more about what the auditors might focus on. Also keep in mind that you and I would be
entitled to bonus if the profits are 10% higher than last year, so I hope you understand that you do
not want to find any irregularity in the financial statements. Do well at this and your chances of
promotion are quite high.”

Which of the following fundamental principles, Harris is failing to comply with?
(a) Integrity
(b) Professional competence
(d) All of above
16. Members should be straightforward and honest in all professional and business relationships.
Name the fundamental principle indicated by above statement.
___________
17. Members should not allow bias, conflicts of interest or undue influence of others to override their
professional or business judgements.
___________
18. Members should behave with courtesy and consideration towards all with whom they come into
contact in a professional capacity.
___________
19. A threat to fundamental principles occurs when a previous judgement needs to be re-evaluated
by members responsible for that judgement.
Name the type of threat.
___________
20. A threat to fundamental principles occurs when, because of a close relationship, members become
too sympathetic to the interests of others.
Name the type of threat.
___________

3 OBJECTIVE BASED ANSWERS

01. (d) All three statements are correct.
02. (d) Applicable to all listed in the question.
03. (a) Ibrahim is facing self-interest threat.
04. (b) Objectivity is mainly affected as Ibrahim may not be able to make an
independent judgment due to his self-interest threat.
05. (a) & (d) Self- interest threat

Intimidation threat
06. (b) Zia has breached confidentiality by using inside information for his persona
advantage.
He has not behaved professionally as he disregarded the law and
regulations.
07. (a) Since Zia is part of a team which is negotiating the price of the shares and
he has purchased shares in the name of his wife and son, it creates self-
interest threat and he would be reluctant to take any decision that would
be against his own interest.
08. (d) CFO is in breach of all three fundamental principles.
09. (a) Self-interest threat occurs as a result of financial or other interest of

members or their immediate family member. In this case, he has been told
by the CFO that he would be given an additional bonus this year so he faces
self-interest threat.
10. (a)
11. (b)
12. (c)
13. (d)
14. (d) All three may be possible course of action.
15. (d) Harris is failing all three fundamental principles mentioned.
16. Integrity
17. Objectivity
18. Professional
Behaviour
19. Self-review
threat
20. Familiarity
threat

Head Office-Karachi: Chartered Accountants Avenue, Clifton, Karachi-75600
Phone: (92-21) 99251636-39, UAN: 111-000-422, Fax: (92-21) 99251626, e-mail: info@icap.org.pk
Hyderabad Office: 3rd floor, Salman Icon Tower, Main Auto Bhan Road, Near RT Restaurant,
Opp. Faysal Bank, Latifabad, Hyderabad.
Phone: (022) 3821227, e-mail: hyderabad@icap.org.pk
Sukkur Office: Admin Block Sukkur IBA, Airport Road, Sukkur
Phone: (92-71) 5806109, e-mail: sukkur@icap.org.pk
Quetta Office: Civic Business Center, Hali Road, Quetta Cantt
Phone: (92-81) 2865533, e-mail: quetta@icap.org.pk
Regional Office-Lahore: 155-156, West Wood Colony, Thokar Niaz Baig, Raiwind Road, Lahore
Phone: (92-42) 37515910-12, UAN: 111-000-422, e-mail: lahore@icap.org.pk
Islamabad Office: Sector G-10/4, Mauve Area, Islamabad
UAN: 111-000-422, Fax: (92-51) 9106095, e-mail: islamabad@icap.org.pk
Faisalabad Office: P- 3/33 East Canal road, Muhammadi Colony, Near Govt. College of Commerce Abdullahpur,
Opposite Nusrat Fateh Ali Khan under pass, Faisalabad
Phone: (92-41) 8531028, Fax: (92-41) 8712626, e-mail: faisalabad@icap.org.pk
Multan Office: 3rd Floor, Parklane Tower, Officers’ Colony, Near Eid Gaah Chowk, Khanewal Road, Multan.
Phone: (92-61) 6510511-6510611, Fax: (92-61) 6510411, e-mail: multan@icap.org.pk
Peshawar Office: House No. 30, Old Jamrud Road, University Town, Peshawar
Phone: (92-91) 5851648, Fax: (92-91) 5851649, e-mail: peshawar@icap.org.pk
Gujranwala Office: 2nd Floor, Gujranwala Business Center, Opp. Chamber of Commerce, Main G.T. Road, Gujranwala.
Phone: (92-55) 3252710, e-mail: gujranwala@icap.org.pk
Mirpur AJK Office: Basic Health Unit (BHU) Building Sector D, New City Mirpur, Azad Jammu and Kashmir
Phone: 05828-205296, e-mail: mirpur@icap.org.pk
Abbottabad Office: Yusef Jammal Plaza, Mansehra Road, Abbottabad
Phone: 0992-405515, e-mail: abbottabad@icap.org.pk
2020 (Revised)
FINANCIAL ACCOUNTING
AND REPORTING II
Examinable Supplements

2020 Caf 7 Far II Examsupp2020

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2020 (Revised)

Financial accounting and reporting II

* The student must refer original handbook of IFRS.

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan

2 REGULATORY FRAMEWORK FOR ACCOUNTING IN PAKISTAN

n Accounting regulation in Pakistan

2.1 Accounting regulation in Pakistan

© Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan

Published by the IASC (up Published by the IASB

Accounting standards IASs IFRSs

Interpretations SICs IFRICs

© Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan

2.4 Classification of Companies

1. Public Interest Company (PIC)

b) Non-listed Company which is: International Fifth

© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan

3 COMPANIES ACT, 2017: FOURTH SCHEDULE

3.1 General Requirements

Example 1: Statement of Compliance

d) The following shall be disclosed in the financial statements, namely:

Example 2: Legal Status and nature of business

© Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan

Example 3: Property, plant and equipment (Disclosed in sub-note)

Example 4: Property, plant and equipment (Disclosed in sub-note)

Location Usage Total area (in Acres)

Shahrah-e-Roomi, Lahore Plant site and administrative offices 34.02

Herdo Sehari, Kasur Administrative offices 34.84

Lakho Baryar, Kasur Administrative offices 50.63

Example 5: Production Capacity

Design Capacity Production

2018 2017 2018 2017

Urea Tonnes ‘000 Tonnes ‘000

Lahore – Plant I 695 695 688 692

Faisalabad – Plant II 635 635 635 635

Peshawar – Plant III 718 718 714 703

2,048 2,048 2,037 2,030

Example 6: Capacity and production

Installed capacity (based on 8,760 hours) 1,086,240 1,086,240

Actual energy delivered 387,435 645,395

Under-utilisation of available capacity is due to less demand by WAPDA.

© Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan

Example 7: Number of employees

Total number of employees at end of the year 3,357 3,364

Average number of employees for the year 3,369 3,384

Example 8: Associated companies and undertakings

Name Percentage of shareholding Basis of relationship Common directorship

ABC Limited 58% Subsidiary Ms. S

Example 9: Associated companies and undertakings

ii. In respect of associated companies, subsidiaries, joint ventures or holding companies

© Emile Woolf International 9 The Institute of Chartered Accountants of Pakistan

Example 10: Related party disclosure (Disclosed in sub note)

Example 11: Related party disclosure (Disclosed in sub note)

Example 13: Credit facilities (Disclosed in sub note)

Example 14: Trade debts (Disclosed in sub note)

© Emile Woolf International 10 The Institute of Chartered Accountants of Pakistan

3.2 Requirements as to Statement of Financial Position

Example 15: Property, plant and equipment (Disclosed in sub note)

Example 16: Property, plant and equipment (Disclosed in sub note)

Land and building shall be distinguished between free-hold and leasehold;

© Emile Woolf International 11 The Institute of Chartered Accountants of Pakistan

Example 17: Disposal of operating fixed assets

3. Long term loans and advances