Suggested Answer Paper Group I

Paper 1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
1. AK Ltd., operates in Nepal and has investments in two other companies. The draft
statements of financial position of all three companies as at 31st Ashadh 2076 are as
follows:

Rs. In million
Assets: AK Ltd. BK Ltd. TK Ltd.
Non – current assets
Property plant and equipment 1,440 1,100 1,300
Investments in subsidiaries
BK Ltd. 1,250
TK Ltd. 310 1,270
Financial assets 320 21 141
Total non-current assets 3,320 2,391 1,441
Current assets 895 681 150
Total assets 4,215 3,072 1,591
Equity and liabilities:
Share capital 1,750 1,210 800
Retained earnings 1,240 930 350
Other components of equity 125 80 95
Total equity 3,115 2,220 1,245
Non-current liabilities 985 765 150
Current liabilities 115 87 196
Total liabilities 1,100 852 346
Total equity and liabilities 4,215 3,072 1,591
Additional Information:
a) On 1st Shrawan 2074, AK Ltd. acquired 14% of the equity interest of TK Ltd. for a cash
consideration of Rs. 260 million and BK Ltd. acquired 70% of the equity interest of TK
Ltd. for a cash consideration of Rs. 1,270 million. At 1st Shrawan 2074, the identifiable
net assets of TK Ltd. had a fair value of Rs. 990 million, retained earnings were Rs.
190 million and other components of equity were Rs. 52 million. At 1st Shrawan 2075,
the identifiable net assets of TK Ltd. had a fair value of Rs. 1,150 million, retained
earnings were Rs. 240 million and other components of equity were Rs. 70 million. The
excess in fair value is due to revaluation of non-depreciable land which has not been
accounted for and not changed till the reporting date. The fair value of the 14% holding
of AK Ltd. in TK Ltd., which was classified as fair value through profit or loss, was Rs.
280 million at 32nd Ashad 2075 and Rs. 310 million at 31st Ashadh 2076. However, the
fair value of BK Ltd’s interest in TK Ltd. had not changed since acquisition.
b) On 1st Shrawan 2075, AK Ltd. acquired 60% of the equity interests of BK Ltd. The cost
of investment comprised cash consideration of Rs. 1,250 million. On 1st Shrawan 2075,
the fair value of the identifiable net assets acquired was Rs. 1,950 million and retained
earnings of BK Ltd. were Rs. 650 million and other component of equity were Rs. 55
million. The excess in fair value is due to revaluation of non-depreciable land which
has not been accounted for and not changed till the reporting date. It is the group’s

© The Institute of Chartered Accountants of Nepal 4

Suggested Answer Paper Group I

policy to measure the non-controlling interest at acquisition at its proportionate share

of the fair value of the subsidiary’s net assets.
c) Goodwill of BK Ltd. and TK Ltd. were tested for impairment at 31st Ashadh 2076 and
found that there was no impairment relating to TK Ltd. However, the goodwill of BK
Ltd. was fully impaired by the reporting date.
d) On 1st Shrawan 2074, AK Ltd. acquired office accommodation at a cost of Rs. 90 million
with a 30 year estimated useful life. During the year, the property market in the area
slumped and the fair value of the accommodation fell to Rs. 75 million at 32nd Ashadh
2075 and this was reflected in the financial statements. However, the market
unexpectedly recovered quickly due to the announcement of major government
investment in the area’s transport infrastructure. On 31st Ashadh 2076, the professional
valuer advised AK Ltd. that the office accommodation should now be valued at Rs. 105
million. AK Ltd. has charged depreciation for the year but has not taken into account
of the upward valuation of the office accommodation. AK Ltd. uses the revaluation
model and records any valuation change when advised to do so.
e) AK Ltd. has announced two major restructuring plans during the year. The first plan
is to reduce its capacity by closure of some of its smaller factories, which have already
been identified. This will lead to the redundancy of 500 employees, who have all
individually been selected and communicated to. The costs of this plan are Rs. 9 million
in redundancy costs, Rs. 5 million in retraining costs and Rs. 5 million in lease
termination costs. The second plan is to re-organize the finance and information
technology department over a one-year period but it does not commence until two
years’ time. The plan will result in 20% of finance staff losing their jobs during the
restructuring. The costs of this plan are Rs. 10 million in redundancy costs, Rs. 6
million in retraining costs and Rs. 7 million in equipment lease termination costs. There
are no entries made in the financial statements for the above plans.
f) The following information relates to the group pension plan of AK Ltd.:
Rs. In million
1st Shrawan 31st Ashadh
2075 2076

Fair value of plan assets 28 29

Actuarial value of defined benefit obligation 30 35
The contributions for the period received by the fund were Rs. 2 million and the
employee benefits paid in the year amounted to Rs. 3 million. The discount rate to be
used in any calculation is 5%. The current service cost for the period based on
actuarial calculations is Rs. 1 million. The above figures have not been taken into
account for the year ended 31st Ashadh 2076 except for the contributions paid which
have been entered in cash and the defined benefit obligation.
Required: (20 marks)
Prepare the group consolidated statement of financial position of AK Ltd. as at 31st
Ashadh 2076 with the notes of any of the issues dealt in the question.
Answer:
AK Ltd.
Consolidated statement of financial position

© The Institute of Chartered Accountants of Nepal 5

Suggested Answer Paper Group I

as at 31 Ashadh 2076
Assets: Rs. Million
Non-current assets:
Property, plant and equipment [1,440 + 1,100 + 1,300 + 35 + 40 (W.N 2) +
32.6 (W.N 6)] 3,947.6
Goodwill (W3) 398
Financial assets (320 + 21 + 141) 482
4,827.6
Current assets (895 + 681 + 150) 1,726
Total assets 6,553.6
Equity and liabilities
Share Capital 1,750
Retained earnings (W5) 1,356.1
Other components of equity (W5) 170.1
3,276.2
Non-controlling interest (W4) 959.4
Total Equity 4,235.6
Total non-current liabilities [985 + 765 + 150 + 6 (W.N 8)] 1,906
Current liabilities [115 + 87 + 196 + 14 (W.N 7)] 412
Total liabilities 2,318
Total Equity and Liabilities 6,553.6
Workings:

W-1: Group structure

The group effective interest in TK Ltd is:
Direct interest 14%
Indirect interest or effective interest (60% X 70%) 42%
Group effective interest 56%
The NCI interest in TK Ltd. is therefore (100% - 56%) 44%
100%
Consolidation of BK Ltd.
Group 60%
NCI (100% - 60%) 40%
100%
The acquisition date of TK Ltd. is 1st Shrawan 2075 as this is when AK Ltd. gains control
over BK Ltd. and therefore indirect control over TK Ltd.

W-2: Net assets

Rs. In million
Post-
BK Ltd Acquisition date Reporting date
Acquisition
Share capital 1,210 1,210 -
Other components 55 80 25
Retained earnings 650 930 280

© The Institute of Chartered Accountants of Nepal 6

Suggested Answer Paper Group I

Fair value adjustment – Land

(balancing figure) 35 35 -
1,950 2,255 305
TK Ltd
Share capital 800 800 -
Other components 70 95 25
Retained earnings 240 350 110
Fair value adjustment – Land
(balancing figure) 40 40 -
1,150 1,285 135
Therefore, the post-acquisition profits of BK Ltd. is Rs. 305 million (Rs. 2,255 – Rs. 1,950)
and that of TK Ltd. is Rs. 135 million (Rs. 1,285 – 1,150).
W-3: Goodwill
The cost of TK Ltd. has three elements: the cost of the direct holding, the cost of the indirect
holding and the indirect holding adjustments.
BK Ltd.
Rs. Million
Fair value of consideration 1,250
NCI at acquisition (40% X Rs. 1,950) 780
Fair value of identifiable net assets acquired (W2) (1,950)
Goodwill at acquisition 80
Impairment 2075/76 (80)
Goodwill at reporting date (fully
impaired -

Alternative:
BK Ltd.
Rs. Million
Fair value of consideration 1,250
Group share of Fair value of identifiable net assets acquired (60% X 1,950) (1,170)
Goodwill at acquisition 80
Impairment (80)
Goodwill at reporting date -

TK Ltd.
Rs. Million

Fair value of consideration:

Direct holding (Fair value at date control obtained) 280
Indirect holding 1,270
indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI at acquisition (44% X Rs. 1,150 million) 506
Less fair value of identifiable net assets (W2) (1,150)

© The Institute of Chartered Accountants of Nepal 7

Suggested Answer Paper Group I

Goodwill at reporting date 398

AK investment in TK Ltd. was held at Rs. 310 million at the reporting date. Therefore, the
fair value increase of Rs. 30 million (Rs. 310 – Rs. 280) that has arisen since the date that
control was achieved must be removed from the consolidated statements. Retained
earnings must also be reduced by Rs. 30 million.

Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
1,042
Less Group's share of fair value of identifiable net assets (56% X1,150) (644)
Goodwill at reporting date 398
Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
NCI at acquisition (44% X Rs. 1,150) 506
Less fair value of identifiable net assets (W2) (1,150)
Goodwill at reporting date 398

W-4: Non-controlling interest

Rs. Million
NCI in BK Ltd. at acquisition (40% X Rs. 1,950) 780
Add: NCI % of post-acquisition net assets (40% X (Rs. 2,255 million -
Rs. 1,950 million)) 122
Indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI in TK Ltd. at acquisition 506
NCI in post-acquisition net assets (44% X (Rs. 1,285 - Rs.
1,150) 59.4
959.4
Alternative:
Rs. Million
NCI in BK Ltd's net assets at reporting date (40% X Rs. 2,255) 902
NCI in TK Ltd's net assets at reporting date (44% X Rs. 1,285) 565.4
NCI's share of investment in BK (40% X Rs.
1,270) (508)
959.4

W - 5: Retained earnings
Rs. Million

© The Institute of Chartered Accountants of Nepal 8

Suggested Answer Paper Group I

AK Ltd 1,240
BK Ltd.: 60% X (Rs. 930 million - Rs. 650 million
(W2)) 168
TK Ltd: 56% X (Rs. 350 million - Rs. 240 million
(W2)) 61.6
Gain on TK Ltd's investment (W3) (30)
Impairment of goodwill (W3) (80)
Reversal of impairment loss (W6) 11.6
Restructuring provision (W7) (14)
Pension plan (W8) (1.1)
1,356.10

Other components of equity

Rs. Million
AK Ltd. 125
BK Ltd.: 60% X (Rs. 80 million - Rs. 55 million (W2)) 15
TK Ltd: 56% X (Rs. 95 million - Rs. 70 million (W2)) 14
Revaluation gain (W6) 21
Pension plan re-measurement (W8) (4.9)
170.1
W - 6: The office
Rs. Million
Cost of office building (1.4.2074) 90
Depreciation (90/30 years) (2074/75) (3)
Carrying amount(32.03.2075) 87
Revaluation loss - Profit or loss (balancing figure) (12)
Fair value at 32nd Ashadh 2075 75
Depreciation (75/29 years) (2075/76) (2.6)
Carrying amount (31.03.2076) 72.4
Revaluation surplus – OCI (balancing figure) 32.6
Fair value at 31st Ashadh 2076 105
If no revaluation reserve exists for an item of PPE then a downwards revaluation is
recognized in the statement of profit or loss.
Some of this reversal can be recognized in profit or loss, but this is capped at the amount
needed to increase the asset to the value it would have been had no impairment occurred.
If no impairment had occurred, the asset would have been held at Rs. 84 million (Rs. 90
million – (2 X Rs. 3)). Therefore, the gain recorded in profit or loss is Rs 11.6 million (Rs.
84 million – 72.4 million). The remainder of the gain is recognized in other comprehensive
income.
The entries will be:

Dr property, plant and equipment Rs. 32.6 million

Cr profit or loss Rs. 11.6 million
Cr other comprehensive income Rs. 21 million

© The Institute of Chartered Accountants of Nepal 9

Suggested Answer Paper Group I

W – 7: provision for restructuring

Only those costs that result directly from and are necessarily entailed by a restructuring
may be included in a restructuring provision. This includes costs such as employee
redundancy costs or lease termination costs. Expenses that relate to ongoing activities, such
as relocation and retraining, are excluded.
With regard to the service reduction, a provision should be recognized for the redundancy
and lease termination costs of Rs. 14 million. The sites and details of the redundancy costs
have been identified.
In contrast, AK Ltd. should not recognize a provision for the finance and IT department’s
re-organisation. The re-organisation is not due to start for two years. Stakeholders outside
are unlikely to have a valid expectation that management is committed to the re-
organisation as the time frame allows significant opportunities for management to change
the details of the plan or even to decide not to proceed with it. In addition, the degree of
identification of the staff to lose their jobs is not sufficiently detailed to support the
recognizing of a redundancy provision.
W-8: pension plan
In order to calculate the re-measurement component, reconcile the opening and closing net
pension deficit. The re-measurement component is accounted for in other comprehensive
income.
The liability recognized in the financial statements will be Rs. 6 million (that is, Rs. 35
million – Rs. 29 million)

Rs. Million
Net obligation at 1st Shrawan 2075 (Rs. 30 million - Rs. 28
million) 2
Net interest component (Rs. 2 million X 5%) 0.1
Contributions (2)
Service cost component 1
Re-measurement loss (balancing figure) (4.9)
Net obligation at 31st Ashadh 2076 (35 - 29) 6
The service cost component and net interest component will be charged to profit or loss
(Rs. 1.1 million) and the re-measurement loss to Other Comprehensive Income (Rs. 4.9
million). There will be no adjustment for the contributions, which have already been taken
into account.
2.
a) DD Ltd. availed a lease. The terms of the lease are as under:
i) Lease period is 3 years, in the beginning of the year 2075/76, for equipment costing
Rs. 1,000,000 and has an expected useful life of 5 years.
ii) The fair market value is also Rs. 1,000,000.
iii) The property reverts back to the lessor on termination of the lease.

© The Institute of Chartered Accountants of Nepal 10

Suggested Answer Paper Group I

iv) The unguaranteed residual value is estimated at Rs. 100,000 at the end of the year
2077/78.
v) Three equal annual payments are made at the end of each year.
Consider IRR of 10% and the present value of annuity of Re. 1 due at the end of 3rd
year at 10% is Rs. 2.4868 and PV of 3rd year is 0.7513.
Required: (4+2+2+2=10 marks)
i) Calculate annual lease payment and state whether the lease constitute finance
lease.
ii) Calculate total unearned finance income and show Journal entries for recording
the lease instalments.
b) The following information is supplied to you by Sagarmatha Ltd.:

Amount (Rs.)
Equity Shares (Face value Rs. 10) 580,000
12% Preference Shares (Face value Rs. 10) 150,000
10% Debentures (Face value Rs. 10) 500,000
Term Debt (taken at 15%) 200,000
Financial Leverage 1.2
Securities Premium A/c 50,000
General Reserve 20,000
Statutory Reserve 60,000
Income Tax Rate 30%
The industry to which Sagarmatha Ltd. belongs to has a practice of paying at least 15%
dividend to its shareholders. The ordinary shares are quoted at a premium of 400%,
preference shares at Rs. 25 and debentures at a discount of 20%.
Required: (4+4+2=10 marks)
Calculate Economic Value Added (EVA) and Market Value Added (MVA) statements
of the company and also explain the reasons for the difference, if any between the two.
Answer:
a)
i) Computation of annual lease payment to the lessor
Rs.
Cost of equipment 1,000,000
Unguaranteed residual value 100,000
PV of residual value after third year @10% (100,000 x 75,130
0.7513)
Fair value to be recovered from lease payments 924,870
(1,000,000 - 75,130)
PV of annuity for three years is 2.4868
Annual lease payments = 924,870/2.4868 371,912

© The Institute of Chartered Accountants of Nepal 11

Suggested Answer Paper Group I

The PV of lease payment i.e. Rs. 924,870 equivalent to 92.48% of the fair value.
As the present value of minimum lease payments substantially covers the initial fair
value of the leased asset and lease term covers the major part of the life of asset, it
constitutes a finance lease.
ii) Computation of Unearned finance income
Rs.
Total lease payments (Rs. 371,912 x 3) 1,115,736
Add: Unguaranteed residual value 100,000
Gross investment in the lease 1,215,736
Less: PV of investment (Rs. 75,130 +924,870) (1,000,000)
Total Unearned finance income 215,735
Journal Entry
Assets under Lease A/C Dr. Rs. 10 Lakh
To Lease Payable A/C Rs. 10 Lakh
b)
Economic Value Added (EVA) statement
Amount(Rs.)
Profit after tax (W.N 1) 280,000
Add: interest (net of tax) (80,000 x 0.70) 56,000
Return to providers of fund 336,000
Less: cost of capital (W.N 3) (171,450)
Economic value added (EVA) 164,550
Market Value Added (MVA) statement
Amount Amount
(Rs.) (Rs.)
Equity share capital (market value) (58,000 x 10 x 500%) 2,900,000
Preference share capital (15,000x25) 375,000
Debentures (50,000 x 10x80%) 400,000
Current market value of firm 3,675,000
Less: Equity share capital 580,000
Preference share capital 150,000
Debentures 500,000
Long term loan 200,000
Securities premium 50,000
General reserve 20,000
Statutory reserve 60,000 (1,560,000)
Market value added (MVA) 2,115,000
The MVA of Rs. 2,115,000 is the difference between the current market value of
Sagarmatha Ltd. and the capital contributed by the fund providers. While EVA
measures current earning efficiency of the company, MVA takes into consideration the

© The Institute of Chartered Accountants of Nepal 12

Suggested Answer Paper Group I

EVA from not only the assets in place but also from the future projects/activities of the
company. The difference between MVA and EVA thus represents the value attributed
to the future potential for the company and may change from time to time based on
market sentiments. In short the MVA is the net present value of all future EVAs.
Working Notes:
1. Calculation of net profit after interest and tax

Interest on debentures (500,000 x 10%) 50,000

Interest on long term debt (200,000 x 15%) 30,000
Total interest 80,000
Financial leverage = 1.2 = PBIT / (PBIT – Interest)
PBIT 480,000
Less: Interest (80,000)
Profit after interest before tax 400,000
Less : 30% tax (120,000)
Profit after interest and tax 280,000
2. Calculation of weighted average cost of capital (WACC)

Amount Amount Weight Cost % WACC %

Equity shareholders fund
Equity shares 580,000
Security premium 50,000
General reserve 20,000 650,000 0.43 15 6.45
Preference share 150,000 0.10 12 1.20
Debentures 500,000 0.33 7* 2.31
Long term debt 200,000 0.14 10.5* 1.47
1500,000 11.43
*Rate of interest has been calculated net of tax.
3. Cost of capital = capital employed X WACC%
= 1500,000 x 11.43%
= 171,450
3.
a) The capital structure of XYZ Ltd. on 31st Ashadh 2076 was as follows:
Equity share capital (Rs. 100 each) (Rs.) 1,800,000
12% preference capital (Rs. 100 each) (Rs.) 500,000
12% secured debentures (Rs.) 500,000
Reserves (Rs.) 500,000
Profit earned before interest and taxes during the year(Rs.) 720,000
Tax rate 25%
Normal rate of return on equity shares of the industry 15%

© The Institute of Chartered Accountants of Nepal 13

Suggested Answer Paper Group I

Subject to;
i) The profit after tax covers fixed interest and fixed dividend at least 4 times.
ii) The debt equity ratio is at least 2.
iii) Yield on shares is calculated at 60% of distributed profits and 10% of
undistributed profits.
The company has been paying regularly an equity dividend of 15%
The risk premium of dividend is generally assumed at 1%.
Required: (10 marks)
Find out the value of equity shares of the company as on 31st Ashadh 2076.
b) Bashu Kshitiz Ltd. acquired a block making machine on 1st Shrawan 2075. The cost of
the machine amounting to Rs. 1,340,000.00 was derived by Finance Office of the
company as follows:

Particulars Amount in '000 Rs.

Purchase Price 1,005.00
Installation Cost 234.50
Performance Deposit 67.00
Delivery Cost 33.50
Total cost 1,340.00
Following additional information are relevant in relation to cost of machine above:
i) The purchase price is before taking into account trade discount of 8%.
ii) Installation was done by employees of machine supplier and Bashu Kshitiz Ltd. Rs.
87,100.00 of the installation cost included above relates to what the machine
supplier paid to Bashu Kshitiz Ltd. for assisting in installation by workers of Bashu
Kshitiz Ltd. The company did not pay its employees any additional amount for being
involved in installing the new machine.
iii) Performance deposit relates to a two year maintenance service to be provided by
the supplier. It was paid on 1st Shrawan 2075. It is refundable if no works are
carried out on the machine. No maintenance works were provided by supplier in
the period to Ashadh end 2076.
iv) Delivery cost is simply an estimate of what it would have been charged by machine
supplier to deliver the machine. The machine was however delivered free of charge
as it was on promotion.
The machine qualified for an immediate government grant equal to 10% of its initial
cost calculated as per NAS 16 on a specific condition that it should remain in use over
its useful life. The grant was received by Bashu Kshitiz Ltd. on 1st Kartik 2075, the date
on which the machine was ready for its intended use. The company estimates that
depreciation on the machine at an annual rate of 20% on Straight Line Method (SLM)
basis with estimate of nil scrap value would be in compliant with the applicable
reporting standards. Also the company is considering a policy of using deferred income
to account for government grants.

© The Institute of Chartered Accountants of Nepal 14

Suggested Answer Paper Group I

Required: (10 marks)

Line items to be presented in the financial statements of Bashu Kshitiz Ltd. for the year
ended Ashadh 31, 2076. The calculation should be supported by adequate reasons.
Answer:
a)
Value of equity share = [Actual Yield / Expected Yield] X paid up value of share
= [9.92/15] X 100 = Rs. 66.13

Working Notes:
1) Calculation of profit after tax (PAT) and retained earnings: Rs.
A. Profit before interest & tax (PBIT) 720,000
B. Less: Debenture interest (Rs. 500,000 x 12%) (60,000)
C. Profit before tax 660,000
D. Less: Tax 25% (165,000)
E. Profit after tax (PAT) 495,000
F. Less: Preference Dividend (Rs. 500,000 x 12%) (60,000)
G. Less: Equity Dividend (Rs. 1,800,000 x 15%) (270,000)
Retained Earnings 165,000
2) Interest and fixed dividend coverage = (PAT + debenture interest)
Debenture interest + Pref. Dividend
= (495,000 + 60,000)
(60,000 + 60,000)
= 4.625 times
3) Debt Equity Ratio = Debentures
(Pref. Share capital + Equity share capital + Reserves)
= 500,000
(500,000 + 1,800,000 + 500,000)
= 0.179 (the ratio is less than the prescribed ratio)
4) Calculation of Yield of Equity shares
Yield on equity shares is calculated at 60% of distributed profit and 10% of
undistributed profit
60% of distributed profit (60% of Rs. 270,000) 162,000

© The Institute of Chartered Accountants of Nepal 15

Suggested Answer Paper Group I

10% of undistributed profit (10% of Rs. 165,000) 16,500

178,500
Yields on equity shares = [Yield on shares / Equity share capital] x 100
= [178,500 / 1800,000] x 100 = 9.92%
5) Calculation of expected yield on equity shares
Normal rate of return 15%
Add: Risk premium for low interest and
fixed dividend coverage (4.625 > 4) 0%
Add: Risk Premium for debt equity ratio (not required) 0%
Expected yield 15%
b)
The question deals with three items i.e. PPE, Government Grant and Prepayment. The
amount to be reported for these line items of FS are:
Line Item Amount in 000 Remarks
Non- current Assets
Property, Plant & Equipment 911.20 WN 1
Prepayment 67 N6
Current -Liability 21.44 WN2
Non- Current Liability 69.68 WN2
Income
Grant Income 16.08 WN2
Expenses
Depreciation 160.80 WN1

W. N. 1
Calculation of Carrying Amount of Machine
Purchase price 1,005.00
Trade discount @ 8% (N 1) (80.40)
Net purchase price 924.60
Installation cost (N2) 147.40
Total Initial Cost 1,072.00
Depreciation 9 Months @ 20% (N3) (160.80)
Carrying value 911.20
W. N. 2

Government grant

Government grant received (1072 x 10%) 107.20

© The Institute of Chartered Accountants of Nepal 16

Suggested Answer Paper Group I

Grant recognized as income (16.08)

Balance as on 31.3.2076 91.12

Current liability (N4) (91.12/5) 21.44 F

Non -Current Liability (N5) 69.68

N1: Trade discount not included in cost of machine as per NAS 16

N2: based on what was incurred by Basu Kshitiz Ltd. Rs. 87,100 paid to company by
the supplier for helping in installing the machine shall be set off with actual interest
cost.
N3: Proportionate depreciation for nine months.
N4: Current portion of grant i.e. income of next 12 months
N5: Non-current portion of grant, beyond 12 months.
N6: Amount paid for performance deposit of Rs. 67,000 should be treated as
prepayment in statement of financial position as at Ashadh end 2076 under non-current
assets. An amount equal to the value of repair works provided by the supplier should
be expensed to the statement of profit or loss and an equal amount transferred from the
amount. No amount is to be transferred to the statement of profit or loss nor expensed
for the year ended Ashadh end 2076 as no repair works were done by the supplier on
the machine.
4. Write short notes on the following: (5×3=15 marks)
a) Challenges faced by BFI undergoing NFRS implementation
b) Corporate Governance Reporting
c) The significance of the earnings per share (EPS) figure to the analysis of company
performance based on NAS 33.
d) Types of Hedging Relationship
e) Operating Segment
Answer:
a) Challenges faced by BFI undergoing NFRS implementation:
1. Technical Challenges:
a. Impairment of financial assets:
b. Fair value measurement criteria for assets and liabilities
c. Consolidation of financial statements
d. Disclosures requirement
e. Income recognition
2. Other Challenges:

© The Institute of Chartered Accountants of Nepal 17

Suggested Answer Paper Group I

a. Amendment to existing legal framework and policies

b. Shortage of trained and experienced resources
c. Complexity in financial reporting
d. Increased initial cost
e. Measurement of business performance
3. Change Management
b) Corporate governance involves balancing the interests of the stakeholders in a company
– these include its shareholders, management, customers, suppliers, financiers,
government and the community. Corporate governance provides the framework for
attaining a company‘s objectives and encompasses practically every sphere of
management, from action plans and internal controls to performance measurement and
corporate disclosure. Most companies strive to have a high level of corporate
governance. These days, it is not enough for a company to merely be profitable; it also
needs to demonstrate good corporate citizenship through environmental awareness,
ethical behavior and sound corporate governance practices. Good corporate governance
requires a joint effort of the promoters who need to be more transparent, responsible
and socially accountable; the shareholders who must actively participate in their
corporate affairs to help prevent any fraudulent and insider practices and; the regulatory
authority that should effectively enforce rules and regulations in order to protect the
rights of all stakeholders and create favorable environment to enhance good corporate
governance culture.
c) Significance of Earnings per Share (EPS)
• EPS gives a way to measure a company’s profits relative to the number of shares
in issue. It is argued that as owners hold equity shares, it is more relevant to them
to know how much profit each share has earned than to know the overall profit
figure.
• EPS feeds into the price / earnings ratio, one of the most important stock market
measures of value. This gives an estimate of the number of years it would take for
an investment in an equity share to return itself in earnings terms, assuming current
performance continues into the future.
• It is essential that such an important measure of performance have clear guidelines
regarding its calculation. NAS 33 Earnings per Share gives us a standardised
method of calculating both earnings, and the number of shares.
• Many investors feel that other measures are more appropriate, and that the NAS 33
definition of EPS is too conservative. NAS 33 allows alternative measures of EPS
to be published, as long as the NAS 33 figure gets equal or greater prominence.
• There is a danger in relying on a single measure of performance, as no single
measure can encapsulate all aspects of an entity’s performance.
• Also, there is a danger that EPS may be seen by unsophisticated investors as a
definite exact number, when in reality it is subject to all the accounting estimates
and judgments that are necessary in preparing a set of financial statements.
• Despite these fears, it is generally agreed that NAS 33 gives a very fair method of
calculating EPS, and that the consistency it offers is of value to the investor and
analyst.

© The Institute of Chartered Accountants of Nepal 18

Suggested Answer Paper Group I

d) Types of Hedging Relationship:

There are three types of hedge accounting: fair value hedges, cash flow hedges
and hedges of the net investment in a foreign operation.
1. Fair Value Hedges:
The risk being hedged in a fair value hedge is a change in the fair value of an
asset or a liability. For examples, changes in fair value may arise through changes
in interest rates (for fixed-rate loans), foreign exchange rates, equity prices or
commodity prices.
2. Cash Flows Hedges
The risk being hedged in a cash flow hedge is the exposure to variability in cash
flows that is attributable to a particular risk and could affect the income statement.
Volatility in future cash flows will result from changes in interest rates, exchange
rates, equity prices or commodity prices.
3. Hedges of net investment in a foreign operation
An entity may have overseas subsidiaries, associates, joint ventures or branches
(‘foreign operations’). It may hedge the currency risk associated with the
translation of the net assets of these foreign operations into the group’s currency
e) NFRS defines an operating segment as a component of an entity;
(i) That engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity)
(ii) Whose operating results are reviewed regularly by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance and
(iii) For which discrete financial information is available.
It also sets out various disclosure requirement for operating segments.
5.
a) What are the pillars of Public Expenditure and Financial Accountability (PEFA) and
how does its assessment help in strengthening Public Finance Management (PFM)
system of a country? (3.5+3.5=7 marks)

b) X Ltd. acquired a Safa Tempo business on 1st Shrawan 2075 for Rs. 4,600,000. The
values of the assets of the business at that date based on net selling prices were as
follows:

Rs. '000
Tempo 2,400
Intangible Assets (license of tempo) 600
Trade receivable 200
Cash 1,000
Trade payable (400)
3,800

© The Institute of Chartered Accountants of Nepal 19

Suggested Answer Paper Group I

On 1st Bhadra 2075, the tempo company had four of its tempos stolen. The net selling
value of four tempos was Rs. 600,000 and because of non-disclosure of certain risks to
the insurance company, the tempos were uninsured. As a result of this event, X Ltd.
wishes to recognize an impairment loss of Rs. 900,000 (inclusive of the loss of the stolen
tempos) due to the decline in the value in use of the cash generating unit, that is the
tempo business. On 1st Ashwin 2075 a rival tempo company commenced business in the
same area. It is anticipated that the business revenue of X ltd. will be reduced by 25%
leading to a decline in the present value in use of the business which is calculated at
Rs 3,000,000. The net selling value of the tempo license has fallen to Rs. 500,000 as a
result of the rival tempo operator. The net selling value of the other assets have
remained the same as at 1st Shrawan 2075 throughout the period.
Required:

Describe how X Ltd. should treat the above impairment of assets in its financial
statements as at 1st Bhadra 2075 and 1st Ashwin 2075. (4+4=8 marks)
Answer:
a) PEFA Pillars
PEFA identifies seven pillars of performance in an open and orderly PFM system that
are essential to achieving desired fiscal and budgeting outcomes. The pillars are as
follows:
1. Budget reliability
2. Transparency of public finance
3. Management of assets and liabilities
4. Policy based fiscal strategy and budgeting
5. predictability and control in budget execution
6. Accounting and reporting
7. External scrutiny and audit
Within these 7 broad areas marked by these pillars, PEFA defines 31 specific indicators
that focus on key measurable aspects of the PFM system. PEFA uses the results of the
individual indicator calculations, which are based on available evidence, to provide an
integrated assessment of PFM system against the 7 pillars of PFM performance. It then
assesses the likely impact of PFM performance levels on the three desired budgetary
outcomes, viz, aggregate fiscal discipline, strategic allocation of resources and efficient
service delivery.
b)
At 1st Bhadra 2075
1/4/2075 Impairment 1/5/2075
loss
Rs '000 Rs '000 Rs '000
Goodwill (4,600 - 3,800) 800 (300) 500
(balancing
Intangible assets 600 figure) 600

© The Institute of Chartered Accountants of Nepal 20

Suggested Answer Paper Group I

Tempos 2,400 (600) 1,800

Net assets (TR+ Cash-TP) 800 - 800
4,600 (900) 3,700
An impairment loss is recognized for the stolen vehicles. The balance of Rs 300,000 is
allocated to goodwill in the cash generating unit.

At 1st Ashwin 2075

1/5/2075 Impairment 1/6/2075
loss
Rs. '000 Rs. '000 Rs. '000
Goodwill 500 (500)
Intangible assets 600 (100) 500
Tempos 1,800 - 1,800
Net Assets 800 - 800
3,700 (600) 3,100
A further impairment loss of Rs. 600,000 (Goodwill 500 due to full in net business
revenue + 100 decline in license) is recognized. The recoverable amount falls to the
higher of net selling price (3,700- 600) or value in use (3,000). There is no indication
that other tangible assets are impaired. The loss is applied initially to the intangible
assets and then to goodwill.
6.
a) Brat Ltd. incorporated in Nepal purchased 6,000 kg of materials on 1st Ashadh 2075
to use in their production process.
The supplier is located in China where the currency is Yuan. The goods cost 300,000
Yuan and have not been paid at the year end. The relevant exchange rates are:
1st Ashadh Re. 1 = 0.05 Yuan
32nd Ashadh Re. 1 = 0.056 Yuan
Required: (3+2=5 marks)
How this transaction will be included in the financial statements of 32nd Ashadh 2075.
Also, identify the functional currency and presentation currency of Brat Ltd.
b) Progressive Ltd. operates a defined benefit pension plan for its employees. At 1st
Shrawan 2075 the fair value of the pension plan assets was Rs. 8,200,000 and the
present value of the pension plan liabilities was Rs. 8,500,000. The Actuary estimated
that, the service cost for the year to 31st Ashadh 2076 was Rs. 2,100,000. The pension
plan paid Rs. 500,000 to retired members and Progressive Ltd. paid Rs. 1,900,000 in
contributions to the pension plan in the year to 31st Ashadh 2076. The Actuary
estimated that, the relevant discount rate for the year to 31st Ashadh 2076 was 6%.
On 31st Ashadh 2076, Progressive Ltd announced improvements to the benefits offered
by the pension plan to all of its members. The Actuary estimated that, the past service
cost associated with these improvements was Rs. 2 million. At 31st Ashadh 2076 the
fair value of the pension plan assets was Rs. 10,200,000 and the present value of the
pension plan liabilities (including the past service costs) was Rs. 12,500,000.

© The Institute of Chartered Accountants of Nepal 21

Suggested Answer Paper Group I

Required: (3+2=5 marks)

In accordance with NAS 19 Employee Benefits:
i) Calculate the net actuarial gain or loss that will be included in Progressive Ltd.’s
other comprehensive income for the year ended 31st Ashadh 2076.
ii) Calculate the net pension asset or liability that will be included in Progressive
Ltd.’s statement of financial position as at 31st Ashadh 2076.
Answer:
a) Brat Ltd. should recognise the purchase of goods at the exchange rate in place at the
date of the transaction.
Therefore:
300,000 Yuan/0.05 = Rs. 6,000,000
Purchases A/c Dr. Rs. 6,000,000
Trade payables A/c Cr. Rs. 6,000,000
At the year end, the supplier has not been paid, so the liability is still outstanding. It
must be translated at the closing rate at the year end and any exchange gains or losses
recognised in the statement of profit or loss.
The liability at 32nd Ashadh 2075 is:
300,000 Yuan/0.056 = Rs. 5,357,143
It has decreased and Brat must recognise an exchange gain of Rs. 642,857 as:
Trade payables A/c Dr. Rs. 642,857
To OCI Cr. Rs. 642,857
Functional currency is the currency of the primary economic environment in which the
entity operates. In Brat Ltd.’s. case, it operates in Rs. which is the functional currency.
The presentation currency is the currency in which the financial statements are
presented. Brat Ltd. may well prepare financial statements in their functional currency
(Rs.).
b) Pension plan of Progressive Ltd.
i) Actuarial gains and losses:
FV of plan PV of plan
assets liabilities
Rs 000 Rs. 000
Opening balance (1.4.2075) 8,200 8,500
Service cost (2075/76) 2,100
Interest cost (6% x opening balances) 492 510
Benefits paid (500) (500)
Contributions 1,900

© The Institute of Chartered Accountants of Nepal 22

Suggested Answer Paper Group I

Past service cost 2,000

Total 10,092 12,610
Actuarial gain on plan assets (balancing fig) 108
Actuarial gain on plan liabilities (balancing fig) (110)
Closing Balance 10,200 12,500

The net actuarial gain in OCI is NRs. 218,000 for the year.
ii)
Statement of financial position: NRs. 000
Present value of pension plan liabilities at 31st Ashadh 2076 (12,500)
Fair value of pension plan assets at 31st Ashadh 2076 10,200
Net pension liability (2,300)

© The Institute of Chartered Accountants of Nepal 23