Paper 1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
1. The following statements of financial position are as at 31st Ashadh, 2078:
Rs. in Million

Harisiddhi Siddartha Araniko

Ltd. Ltd. Ltd.

Assets

Tangible non-current assets 1,280 440 280

Investment in Siddartha Ltd. 400 - -
Investment in Araniko Ltd. 60 - -
Current assets 544 190 130
Total assets 2,284 630 410
Equity and liabilities
Share capital 950 260 230
Revaluation reserve 90 - -
Retained earnings 390 210 94
Total equity 1,430 470 324
Non-current liabilities 640 30 16
Current liabilities 214 130 70
Total equity and liabilities 2,284 630 410

Harisiddhi Ltd. acquired the following shareholdings in Siddartha Ltd. and Araniko Ltd.:
Rs. in Million
Date of Holding Fair value Purchase
acquisition acquired of net assets consideration
Siddartha Ltd. 1st Shrawan, 2075 10% 325 30
st
1 Shrawan, 2077 70% 460 370
Araniko Ltd. 1st Shrawan, 2077 25% 200 60

The following information are relevant:

i) At 1st Shrawan, 2075, the carrying value of the net assets of Siddartha Ltd. was the same as
their fair value, Rs. 325 million.
ii) The estimated fair value of the initial investment in 10% shares of Siddartha Ltd. was Rs. 40
million at 31st Ashadh, 2077.
iii) Harisiddhi Ltd. wishes to use the full fair value method of accounting for the acquisition of
Siddartha Ltd. At 1st Shrawan, 2077 the estimated value of the non-controlling interests was
Rs. 95 million.
iv) The difference between the carrying amount of Siddartha Ltd.’s net assets and their fair value
at the date of acquisition was due to land valued at cost which, on 1st Shrawan, 2077, had a
fair value of Rs. 25 million in excess of its carrying value. There has been no subsequent
significant change in that value.
v) At 1st Shrawan, 2076 the fair value of Araniko Ltd.’s land was Rs. 16 million in excess of its
carrying value. There has been no subsequent significant change in that value.
Page 4 of 79
 vi) Goodwill arising on acquisition is tested for impairment at each year end. The recoverable
amount of goodwill in Siddartha Ltd. at 31st Ashadh, 2078 was Rs. 30 million.
vii) There has been no impairment of the investment in Araniko Ltd.
viii) During the year, the Directors of Harisiddhi Ltd. decided to form a defined benefit pension
scheme for its employees. The company contributed cash to it of Rs. 250 million but the only
accounting entry for this has been made to include it in receivables at 31st Ashadh, 2078.
At 31st Ashadh, 2078 the following details relate to the pension scheme:
Rs. in million

Present value of obligation 317

Fair value of plan assets 302
Required:
Prepare the consolidated statement of financial position of the Harisiddhi Ltd. group as at 31st
Ashadh, 2078. 20 marks

Answer
Harisiddhi Ltd. group

Consolidated statement of financial position

as at 31st Ashadh, 2078
Particulars Rs.in million
Assets
Tangible non-current assets (WN 4) 1,745
Intangible non-current assets (WN 3) 30
Investment in associate (WN 5) 95
Current assets (544 + 190 - 250) 484
2,354
Equity and liabilities
Share capital 950
Revaluation reserve 90
Retained earnings (WN 7) 186
1,226
Non-controlling interest (WN 8) 99
1,325
Non-current liabilities (640 + 30) 670
Current liabilities (214 + 130) 344
Pension liability (WN 6) 15
2,354

Page 5 of 79
Workings:
WN 1) Net assets summaries
Siddartha Ltd.:
Rs. in million
At Reporting At Acquisition Post-Acquisition
st st
On 31 Ashad, 2078 On 1 Shrawan,2077
Share capital 260 260 -
Retained earnings 210 175 (460-260-25) 35 (210-175)
FV adjustment 25 25 -
FV (given) 495 460 35
(given)
Araniko Ltd.:

Rs.in Million
At Reporting At Acquisition Post-Acquisition
On 31 Ashad, 2078 On 1 Shrawan, 2077
Share capital 230 230 -
Retained earnings 94 (46) (200-230-16) 140 (94+46)
FV adjustment 16 16 -
FV 340 200 140
(given)

WN 2) Gain or loss on acquiring control of Siddartha Ltd. on 1st shrawan, 2077:

Rs. in million
Fair value of initial investment in Siddartha Ltd. at 1 Shrawan, 2077 40
Initial cost of investment (30)
Gain to be recognised on gaining control of Siddartha Ltd. 10
This gain has not yet been recognised in the individual financial statements of Harisiddhi Ltd;
it must therefore be included in the calculation of group reserves. (See WN 8).
WN 3) Goodwill in Siddartha Ltd. at acquisition
Particulars Rs. in million
Consideration transferred to achieve control 370
Fair value of initial investment at acquisition 40
Non-controlling interest at acquisition (at fair value) 95
505

Page 6 of 79
 Fair value of net assets acquired 460
Total goodwill at acquisition date (505-460) 45
Impairment (balancing figure) (15)
Goodwill at date of consolidation (given) 30
The goodwill impairment of Rs.15 million is apportioned between the interests of the equity
owners of Harisiddhi Ltd and NCI in the ratio 80:20.
Impairment of goodwill attributable to parent = Rs. 15m × 80% = Rs. 12m
Impairment of goodwill attributable to NCI = Rs. 15m × 20% = Rs. 3m.
WN 4) Tangible non-current assets

Particulars Rs. in million

Harisiddhi Ltd. 1,280
Siddartha Ltd. 440
Fair value adjustment 25
1,745

WN 5) Investment in associate – Araniko Ltd.

Particulars Rs. in million

Cost 60
Group share of post-acquisition profit (140 × 25%) 35
95

Alternatively,
Particulars Rs. in million
Group share of Fair value of Associate at reporting date (25% x 340) 85
Goodwill in associate (60 – 50) (Consideration share of FV of Net assets) 10
95

WN 6) Pension liability
The amount paid to set the pension must be removed from receivables, and the net pension
liability must be recognised in the statement of financial position.
The entry to achieve this is as follows:
Rs. in million
Particulars Dr Cr
Retained earnings (balancing figure) 265
Receivables 250
Pension scheme liability (317 – 302) 15
Page 7 of 79
WN 7) Consolidated retained earnings

Particulars Rs. in million

Harisiddhi Ltd (given) 390
Siddartha Ltd post-acquisition retained earnings (35×80%) 28
Gain on acquiring control (WN 2) 10
Goodwill impairment attributable to parent (WN 3) (15×80%) (12)
Share of post-acquisition profits of associate (WN 5) (140×25%) 35
Pension adjustment (WN 6) (265)
186

WN 8) Non-controlling interest in Siddartha Ltd.

Rs. in million
FV at date of acquisition 95
NCI share of post-acquisition retained earnings (35 × 20%) 7
Goodwill impairment (WN 3) (15 × 20%) (3)
99
Alternatively

Rs. in million
Book value (20% × 470) 94
Fair value adjustment (20% × 25) 5
Goodwill (3 – impairment 3) (W3) [95 – (20% x 460) – 3] 0
99
2.
a) P Ltd. issued 50,000 Compulsory Cumulative Convertible Preference Shares (CCCPS) as on
st
1 Shrawan, 2077 @ Rs. 180 each. The rate of dividend is 10% payable at the end of every
year. The preference shares are convertible into 12,500 equity shares (Face value Rs.10
each) of the company at the end of 5th year from the date of allotment. When the
CCCPS are issued, the prevailing market interest rate for similar debt without conversion
option is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the total proceeds. Effective
interest rate is 15.86%.
Required: (3+7=10 marks)
i. Compute liability and equity component of the CCCPS.
ii. Pass journal entries for entire term of arrangement i.e. from the issue of preference
shares till their conversion into equity shares, keeping in view the provisions of
relevant Accounting Standards.

Page 8 of 79
b) The Z Group operates in the farming industry and has operated a number of wholly owned
subsidiaries for many years. Its financial statements for the last two years are shown below:
Consolidated Statements of profit or loss for the year ended Ashadh end.
2078 2077
(Rs. ‘000’) (Rs. ‘000’)

Revenue 94,000 68,500

Cost of Sales (46,000) (28,000)
Gross profit 48,000 40,500
Distributions costs (21,200) (19,300)
Administrative expenses (25,600) (15,400)
Profits from operations 1,200 5,800
Investment income - 600
Finance costs (120) -

Profit before tax 1,080 6,400

Taxation (300) (1,920)

Profit for the year 780 4,480

Attributable to:
Shareholders of Z 1,580 4,480
Non-controlling interest (800) -
780 4,480
Consolidated Statement of Financial Position (extracts) as at Ashadh end.

2078 2077
(Rs. ‘000’) (Rs. ‘000’)
Current assets
Inventory 6,500 4,570
Trade receivables 17,000 15,600
Bank 610 6,000
Equity
Share capital 25,000 6,000
Retained earnings 73,500 72,500
Non – controlling interest 510 -
Non-current liabilities:
Loan 20,000 -

Additional information:

Page 9 of 79
 (i) Z Group has become increasingly worried about two major areas in its business
environment. First of all, there are concerns that reliance on large supermarkets (A and B)
are putting pressure on cash flow, as the supermarkets demand long payment terms.
Secondly, the consistent increases in fuel prices mean that delivering the produce nationally
is becoming extremely expensive.
(ii) In order to deal with the above worrying concerns, Z Group purchased 80% shares of Za
Ltd. on 1st Shrawan, 2077. This was the first time Z Group had purchased a subsidiary
without owning 100% of it. Za Ltd. operates two luxury hotels in Pokhara, and Z Group
purchased Za Ltd. with a view to diversify and to provide a long term solution to the cash
flow concerns raised above.
(iii) Z Group raised finance from multiple sources to finance its activities as it did not have ready
finance. Part of this finance came from the disposal of Rs. 11 million held in investments,
making a Rs. 4.50 million gain on disposal, which is included in administrative expenses.
(iv) Za Ltd. opened a third hotel which is located in Biratnagar Farming Block in Poush 2077.
After poor initial reviews, Za Ltd. appointed an experienced and qualified Marketing
Director Ms. H in Fagun 2077. Ms. H embarked on an extensive marketing campaign.
(v) Za Ltd. acquired six (6) generators in Jestha 2078 for use when there is power outage due
to load shading. Z Group issued additional equity shares during the 2077/078 financial year
and intends to issue bonus shares in 2078/079.
(vi) The following ratios have been calculated for the year ended Ashadh end 2077:
Gross profit margin 59.1%
Operating margin 8.5%
Return on capital employed 7.4%
Inventory turnover period 60 days
Receivables collection period 83 days

Required: (2.5+7.5=10 marks)

i. Prepare the equivalent ratios for the year ended Ashadh end 2078.
ii. Analyse the financial performance and cash flows of Z Group for the year ended Ashadh end
2078, making specific reference to any concerns or expectations regarding future periods.
Answer
a)
i) CCCPS is a compound financial instrument with two components – liability representing
present value of future cash outflows and balance represents equity component.
Total proceeds = 50,000 shares x Rs. 180 each = Rs. 9,000,000
Dividend @ 10% = Rs. 900,000

a. Computation of Liability & Equity Component (Rs.)

Date Particulars Cash Discount Net present

Factor@15%
Flow Value

Page 10 of 79
 01/04/2077 0 1 0.00
Dividend
31/03/2078 900,000 0.8696 782,640
Dividend
32/03/2079 900,000 0.7561 680,490
31/03/2080 Dividend 900,000 0.6575 591,750
31/03/2081 Dividend 900,000 0.5718 514,620
31/03/2082 Dividend 900,000 0.4971 447,390
Total Liability Component 3,016,890
Total Proceeds Total Equity
9,000,000
Component (Bal fig)
5,983,110

b. Allocation of transaction costs of Rs.180000 (i.e.2% of Rs.9,000,000)

Particulars Amount Allocation Net Amount
a b a-b
Liability Component Equity 3,016,890 60,338 2,956,552
Component
5,983,110 119,662 5,863,448
Total Proceeds
9,000,000 180,000 8,820,000
c. Accounting for liability component at amortised cost

- Initial accounting = Present value of cash outflows less transaction costs

- Subsequent accounting = At amortised cost, i.e. initial fair value adjusted for
interest and repayments of the liability.

Date Opening Interest @ Cash Flow Closing

Financial (Dividend Financial
15.86%
Liability payment) Liability
B (Rs.)
A (Rs.) C (Rs.) A+B-C (Rs.)
01/04/2077 2,956,552 2,956,552
468,909 900,000
31/03/2078 2,956,552 2,525,461
400,538 900,000
31/03/2079 2,525,461 2,025,999
321,323 900,000
31/03/2080 2,025,999 1,447,322
229,545 900,000
31/03/2081 1,447,322 776,867
123,133* 900,000
31/03/2082 776,867 -
st
*Difference of Rs. 78 (adjusted in the interest value of 31 Ashadh, 2082) is due to
approximation of figures in the earlier years.

Page 11 of 79
ii) Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit

Rs. Rs.
01- Bank A/c Dr. 8,820,000
Srawan-
To Preference Shares A/c
2077 2,956,552
To Equity Component of Preference
shares A/c 5,863,448

(Being compulsorily convertible preference shares

issued. The same are divided into equity
component and liability component as per the
calculation)
31- Preference shares A/c Dr.
Asadh- 900,000
To Bank A/c
2078 900,000
(Being dividend at the coupon rate of 10%
paid to the shareholders)
31- Finance cost A/c Dr.
468,909
Asadh - To Preference Shares A/c 468,909
2078
(Being interest as per EIR method recorded)

32- Preference shares A/c Dr. 900,000

Asadh - 900,000
2079 To Bank A/c
(Being dividend at the coupon rate of 10% paid to
the shareholders)
32-
Finance cost A/c Dr. 400,538
Asadh-
400,538
2079 To Preference Shares A/c
(Being interest as per EIR method recorded)
31- Preference shares A/c Dr.
Asadh - 900,000
2080 To Bank A/c 900,000
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-
Finance cost A/c Dr. 321,323
Asadh- 321,323
2080 To Preference Shares A/c
(Being interest as per EIR method recorded)

Page 12 of 79
 31- Preference shares A/c Dr. 900,000
Asadh - 900,000
2081 To Bank A/c
(Being dividend at the coupon rate of 10% paid to
the shareholders)
31-
Finance cost A/c Dr. 229,545
Asadh -
2081 To Preference Shares A/c 229,545
(Being interest as per EIR method recorded)
31- Preference shares A/c Dr. 900,000
Asadh -
900,000
2082 To Bank A/c
(Being dividend at the coupon rate of 10% paid to
the shareholders)
Finance cost A/c Dr 123,133
31-
Asadh- To Preference Shares A/c 123,133
2082
(Being interest as per EIR method recorded)
31- Equity Component of Preference shares A/c Dr 5,863,448
Asadh-
To Equity Share Capital A/c 125,000
2082
To Securities Premium A/c 5,738,448
(Being preference shares converted in
equity shares and remaining equity
component is recognised as securities
premium)

b)
i. Ratios for the Z Group:

Ratios Formula Calculations 2077/078 2076/077

Gross profit Gross profit/sales x 100 (48,000/94,000) x 100 51.1% 59.1%

Operating Profits from (1,200/94,000) x 100 1.3% 8.5%

margin operations/sales x 100

Return on Profits from (1,200/(99,010 + 20,000) 1.0% 7.4%

capital operations/total x 100
employed shareholders fund +
long-term loan x 100

Page 13 of 79
 Inventory Inventory/cost of sales x (6,500/46,000) x 365 52 60
turnover 365 days days days
period

Receivables Receivables/sales x 365 (17,000/94,000) x 365 66 83

Collection days days days
period

ii) Analysis of the financial performance and cash flow of Z Group

Revenue and expenses have all increased during the year. It is also important to recognize that
the new Hotel was only opened in Poush 2077, so a full year’s revenue has not yet been
generated by this. Whereas revenue has increased significantly by 37.2%, it can be seen that
higher expenses have meant that the Z Group has made less profit than in the previous period.
For example, cost of sales increased exorbitantly by 64.3% from the previous year.

The gross profit margin has fallen in the year from 59.1% to 51.1%. This could be attributable
to the increased pressure on prices from supermarkets or difficult trading conditions, but could
also be as a result of the addition of Za Ltd. into the group.
It may be that the hotel industry generates much lower margins than the farming industry. The
improvement in feedback should lead to increased future bookings, so it may be that the new
hotel generates a significantly improved return in future years.
The operating margin has also deteriorated in the year. It is also important to note that there is
a significant one-off Rs. 4.5 million gain on disposal in relation to the sale of investments during
the year. Without this exceptional item, Z Group would have made a worrying loss from
operations of Rs. 3.3 million (4,500 – 1,200). The reason for this loss is due to a significant
increase in the administrative expenses, which would be Rs. 60.2 million excluding the Rs. 4.5
million profit on disposal. Therefore, the Z Group would have incurred costs relating to the
acquisition of Za Ltd, which will not be incurred in future periods.

The distribution costs have increased marginally by 9.8% during the year. This could suggest
that there has been a decline in the underlying farming business, as fuel costs have risen
significantly. It could also mean that the hotel business has extremely low distribution costs,
which is likely.

The return on capital employed has also deteriorated in the year from 7.4% to 1%, which is
expected due to the reduced operating profits. Removing the gain on disposal of the investments
would make The Z Group loss-making, meaning that it would make a negative return on capital
employed.

It thus appears that Za Ltd is a loss-making entity, as the non-controlling share of the group’s
profit is negative. As Za Ltd is the only partially (owned 80%) controlled subsidiary, the non-
controlling interest will relate solely to Za’s performance.
In addition to the reduced operating profits, the capital employed by the Z Group has increased
significantly. A total of Rs. 19 million of new shares have been issued during the year, probably
to fund the purchase of Za Ltd. There has also been a Rs. 20 million long-term loan contracted,
although it is possible that Za Ltd already had this loan and this has resulted from the
Page 14 of 79
 consolidation of Za’s assets and liabilities.
The sale of investments and share issue and potentially the contracted loan suggest that the Z
Group paid a very high price for Za Ltd. This may not have been wise if Za Ltd has low margins,
or is loss making. If Za Ltd owns the hotel premises, then this may have explained the high
price as the land is likely to hold its value, even if Za performs poorly as demonstrated.

Cash flow position

The cash balance has fallen to Rs. 0.6 million as at Ashadh end 2078. It is important to note
that the Z Group has raised significant funds during the year through a share issue, sale of
investments and the potential receipt of a long-term loan. This means that significant amount
of the cash raised is likely to have been spent on the purchase of Za Ltd and the new hotel.

However, the decrease in receivable collection period will have a positive effect on the cash
flow of the Z Group. As a hotel will largely be cash based rather than offering credit, this will
aid the cash flow of the Z Group. This means that the purchase of Za Ltd may help offset its
problems caused in the farming sector with the longer terms demanded by the supermarkets.

Another positive sign on cash flow is the reduction in the inventory turnover period. This will
be as a result of the fact that Za Ltd will not carry much inventory, as this is likely to relate to
food and drink served in the hotels.

Conclusion:
The success of the Z Group in the current year is difficult to judge; it has been a transitional
year. There are concerns over the performance of Za Ltd, although there are reasons to believe
this may improve in the instant future periods. For a more meaningful comparison, individual
financial statements of companies within the Z Group would need to be assessed.
3.
a) Mero Private Ltd. is an old company established in 2060. The company started with a very small
capital base and today it is one of the leading companies in Nepal in its industry.
The company provided a defined benefit plan to its employees. Following is the information
st st
relating to the balances of the fund’s assets and liabilities as at 1 Shrawan, 2077 and 31
Ashadh, 2078:
(Rs. in million)
st st
Particulars 1 Shrawan, 2077 31 Ashadh, 2078
Present value of benefit obligation 1,400 1,580
Fair value of plan assets 1,140 1,275
st
For the financial year ended 31 Ashadh, 2078, service cost was Rs. 55 million. The company
made a contribution of an amount of Rs. 111 million to the plan. No benefits were paid during
the year.
Consider a discount rate of 8%.
Required: (7+3=10 marks)
i. As per relevant Accounting Standard, compute the balance(s) of the company to be
st
included in its balance sheet as on 31 Ashadh, 2078 and amounts to be recognized in

Page 15 of 79
 st
the statement of profit or loss and other comprehensive income for the year ended 31
Ashadh, 2078.
ii. Give the journal entries in respect of amount(s) to be recognized as above.

b) A Ltd. is engaged in the manufacturing business. On 1 st Shrawan, 2077 it obtained a motor

vehicle on lease from a bank. Details of the lease agreement are as follows:
i.Cost of motor vehicle is Rs. 4 million.
ii.Installments of Rs. 1.2 million are to be paid annually in advance.
iii.The lease term and useful life is 4 years and 5 years respectively.
iv.The interest rate implicit in the lease is 13.701%.
v.The ownership of the motor vehicle shall not be transferred to A Ltd. by the end of the
lease term.
A Ltd. follows a policy of depreciating the motor vehicles over their useful life, on the straight-
line method. However, the tax department allows only the lease payments as a deduction from
taxable profits. The tax rate applicable to the company is 30%. A Ltd.’s accounting profit before
tax for the year ended 31st Ashadh, 2078 is Rs. 12.25 million. There are no temporary differences
other than those evident from the information provided above.

Required: 10 marks
st
Prepare journal entries in the books of A Ltd. for the year ended 31 Ashadh, 2078 to record
the above transactions including tax and deferred tax.
Answer
a)
i. Item to be included in the Balance Sheet of Mero Pvt. Ltd. as at 31st Asadh, 2078 :
Rs. in million
Closing net defined liability (1,580 – 1,275) 305
Amount to be recognized in the Statement of Profit or Loss and Other Comprehensive
Income of Mero Pvt. Ltd. for the year ended 31st Asadh, 2078:

Particulars Rs. in million

Service cost 55.00
Net interest ( WN 1) 20.80
In the statement of profit or loss 75.80
In other comprehensive income:
Re-measurement loss (WN 2) 80.20

ii. Journal entries in the books of Mero Pvt. Ltd.

Particulars Rs. in million Rs.in million
Profit & Loss Dr. 75.80
Other comprehensive income Dr. 80.20
To Cash (Contribution) 111
To Net defined benefit liability (W.N. 3) 45

Page 16 of 79
 Workings:
WN 1) Computation of Net interest taken to the Statement of Profit or Loss
= Discount rate x Opening value of net defined benefit liability
= 8% x (1,400 – 1,140)
= 8% x 260
= Rs. 20.80 million

WN 2) Computation of Re-measurement gain or loss

Actuarial gain or loss on defined benefit liability:

Particulars Rs. in million

Opening balance of liability 1,400
Current service cost 55
Interest on opening liability (1,400 x 8%) 112
Actuarial loss (Bal. fig) 13
Closing balance of liability 1,580

Actual return on plan assets:

Particulars Rs. in million

Opening balance of asset 1,140
Cash contribution 111
Actual return (Bal. fig) 24
Closing balance of asset 1,275
Interest on opening balance of plan asset
= Rs. 91.20 million (i.e. 1,140 x 8%)
Hence, there is a decrease (Loss) in plan assets due to remeasurement for which
computation is as follows:
Actual Return – Interest on opening plan asset = Rs. 24 million – Rs. 91.20 million
= Rs.67.20 million
Net re-measurement loss would be:
Actuarial loss on liability + Loss on return = Rs. (13+67.20) million
= Rs.80.20 million
WN 3) Computation of increase/ decrease in net defined benefit liability:

Particulars Rs. in million

Opening net liability ( 1,400 lacs – 1,140 lacs) 260
Closing net liability ( 1,580 lacs – 1,275 lacs) 305

Page 17 of 79
 Increase in liability 45

b)
Journal Entries in the books of A Ltd. for the year ended 31st Ashadh, 2078

Amount in Rs.

Date Particulars Dr. Cr.

1/4/2077 Motor Vehicle - cost 4,000,000

Lease Liability 4,000,000

(Capitalize the leased asset with

corresponding Liability)

1/4/2077 Lease Liability 1,200,000

Bank 1,200,000

(Recording of first lease payment)

31/3/2078 Interest Expense (W.N.1) 383,628

Interest Payable 383,628

(Recording interest expenses and

interest payable)

31/3/2078 Depreciation 1,000,000

Accumulated Depreciation 1,000,000

(Rs. 4,000,000 / 4 years) (As per
NFRS 16: Lease para 32)

31/3/2078 Tax Expense (W.N.2) 3,730,088

Current tax payable 3,730,088

(Recording of tax expenses and

tax payable)
31/3/2078 Deferred tax asset (W.N.3) 55,088

Tax expense 55,088

(Booking of Deferred tax asset)

WN 1 Lease (Payments in advance) Schedule

In Rs.

Page 18 of 79
 Liability
Payment Liability at Principal Interest @
Rental after
time beginning Element 13.701%
payment

1/4/2077 4,000,000 1,200,000 1,200,000 2,800,000 383,628

WN 2 Current tax Rs.

Accounting profit 12,250,000

Add: Depreciation on leased

motor vehicle 1,000,000

Add: Interest expense on lease 383,628

Less: Lease payment (1,200,000)

Taxable profit 12,433,628

Current tax at 30% 3,730,088

WN 3 Deferred tax CA TB Temp. Diff

Rs. Rs. Rs.

Motor Vehicle 3,000,000 0 3,000,000 TTD

Lease Liability (Non-

current + Current) 2,800,000 0 2,800,000 DTD
Interest Payable 383,628 0 383,628 DTD

Net 183,628 DTD

Deferred tax asset at 30% 55,088

4. Write short note/answer on the following: (5×3=15 marks)

a) Objectives of financial reporting
b) Cash generating unit and reason of impairment based on it rather than individual assets
c) Recognition of impairment losses in the financial statements
d) Is hedging a diversification? Explain with examples.
e) When does debt seem to be equity?
Answer
a) The following are the objectives of financial reporting:

Page 19 of 79
 (i) To provide information that is useful to present and potential investors, creditors and other
users in making rational investment, credit and similar decisions.
(ii) To provide information to help investors, creditors and others to assess the amount, timing and
uncertainty of prospective net cash inflows to the related entity.
(iii) To provide information about the economic resources of an entity, the claims to those resources
(obligations of the entity to transfer resources to other entities and owners' equity), and the
effects of transactions, events and circumstances that change resources and claims to those
resources.
(iv) To provide information about an entity’s financial performance during a period.
(v) To give information about an entity’s performance provided by measures of earnings and its
components.
(vi) To provide information about how an entity obtains and spends cash, about its borrowing and
repayment of borrowing, about its capital transactions, including cash dividends and other
distributions of entity’s resources to owners, and about other factors that may affect an entity’s
liquidity or solvency.
(vii) To provide information about how management of an entity has discharged its stewardship
responsibility to owners for the use of entity resources entrusted to it.
b) A cash generating unit is defined as the smallest possible identifiable group of assets that
generates cash inflows that are largely independent of the reporting entity’s other cash
generating units. Identifying the smallest possible group of assets is important as this means
there will be fewer assets within each cash generating unit.
To determine whether impairment of a cash generating unit has incurred, it is necessary to
compare the carrying amount of the asset with its recoverable amount. The recoverable
amount is the higher of fair value less costs of disposal and value in use.
It is not always easy to estimate value in use. In particular, it is not always practicable to
identify cash flows arising from an individual noncurrent asset. For, example, the
individual assets in a supermarket are unlikely to generate cash flows in their own right,
but when combined (as a cash generating unit), it is possible to identify the cash flows. If
this is the case, value in use should be calculated at the level of cash generating unit.
c) An impairment loss is normally charged immediately in the Income Statement / Statement of
Comprehensive Income, to the same heading as the related depreciation (i.e. cost of sales,
administration or distribution).
That is: Debit Income Statement and Credit Asset Account with the amount of the impairment loss
But, if the asset has previously been revalued upwards, the impairment should be treated as a
revaluation decrease (and shown in “Other Comprehensive Income”). That is, the loss is first set
against any revaluation surplus for that asset until the surplus relating to that asset has been
exhausted. Then, any excess is recognised as an expense in the Income Statement.
After adjusting for the impairment loss, the new carrying amount is written off over the remaining
useful life of the asset.
Any related deferred tax assets or liabilities are determined under NAS 12 by comparing the revised
carrying value of the asset with its tax base.
d) It's important to note that hedging is not the same as portfolio diversification. Diversification is a
portfolio management strategy that investors use to smooth out specific risk in one investment,
while hedging helps to decrease one's losses by taking an offsetting position. If an investor wants
Page 20 of 79
 to reduce his overall risk, the investor should not put all of their money into one investment.
Investors can spread out their money into multiple investments to reduce risk.
For example, suppose an investor has Rs. 500,000 to invest. The investor can diversify and put
their money into multiple stocks in various sectors, real estate and bonds. This technique helps to
diversify unsystematic risk; in other words, it protects the investor from being affected by any
individual event in an investment.
When an investor is worried about an adverse price decline in their investment, the investor
can hedge their investment with an offsetting position to be protected. For example, suppose an
investor is invested in 100 shares of stock in oil company XYZ and feels that the recent drop in oil
prices will have an adverse effect on its earnings. The investor does not have enough capital to
diversify their position; instead, the investor decides to hedge their position by buying options for
protection. The investor can purchase one put option to protect against a drop in the stock price,
and pays a small premium for the option. If XYZ misses its earnings estimates and prices fall, the
investor will lose money on their long position, but will make money on the put option, which
limits losses.
e) Many financial instruments have both features of debt and equity that this can lead to inconsistency
of reporting. It is not always easy to distinguish the debt and equity in an entity's statement of
financial position.
The key feature of debt is that the issuer is obliged to deliver either cash or another financial asset
to the holder. In contrast, equity is any contract that evidences a residual interest in the entity's
assets after deducting all of its liabilities. Thus, A financial instrument is an equity instrument only
if the instrument includes no contractual obligation to deliver cash or another financial asset to
another entity, and if the instrument will or may be settled in the issuer's own equity instruments.
A contract is not an equity instrument solely because it may result in the receipt or delivery of the
entity's own equity instruments. The classification of this type of contract is dependent on whether
there is variability in either the number of equity shares delivered or variability in the amount of
cash or financial assets received. A contract that will be settled by the entity receiving or delivering
a fixed number of its own equity instruments in exchange for a fixed amount of cash, or another
financial asset, is an equity instrument.
However, if there is any variability in the amount of cash or own equity instruments that will be
delivered or received, then such a contract is a financial asset or liability as applicable.
Other factors that may result in an instrument being classified as debt are:
➢ Is redemption at the option of the instrument holder?
➢ Is there a limited life to the instrument?
➢ Is redemption triggered by a future uncertain event that is beyond the control of both the
holder and issuer of the instrument?
➢ Are dividends non-discretionary?
Similarly, other factors that may result in the instrument being classified as equity are whether the
shares are non-redeemable, whether there is no liquidation date or where the dividends are
discretionary.
Some instruments are structured to contain elements of both a liability and equity in a single
instrument. Such instruments – for example, bonds that are convertible into a fixed number of
equity shares and carry interest – are accounted for as separate liability and equity components.
'Split accounting' is used to measure the liability and the equity components upon initial recognition
of the instrument. This method allocates the fair value of the consideration for the compound
instrument into its liability and equity components.
Page 21 of 79
5.
a) Elaborate the main achievements of ‘Public Financial Management Reform Program’ in
Nepal. 8 marks
b) Adarsha Ltd. made a decision to sell a business unit on 15th Aswin, 2078, and the criteria to
classify the unit as held for sale were met on 1st Kartik, 2078. Adarsha Ltd.’s accounting year
end is 31st Chaitra. At 1st Kartik, 2078, the carrying amount of the assets and liabilities of the
business unit (before any depreciation or revaluation adjustments for the year) was as follows:
(Rs.in million)

Land and buildings 120

Equipment 50
Trade receivables 30
Inventories 20
Trade payables (26)
Additional Information:

i) The land and buildings are held under the revaluation model of NAS 16: Property, Plant
and Equipment and were last revalued on 31st Chaitra, 2077 to Rs. 120 million. Their
market valuation on 1st Kartik, 2078 was Rs. 124 million and selling costs were estimated
at Rs. 2.5 million at that date. Residual value was, and continues to be, expected to be higher
than cost.
ii) The equipment is held under the cost model of NAS 16. The equipment was purchased on
1st Kartik, 2076 for Rs. 80 million and is being depreciated straight line over a four-year
period to a zero residual value. Its sale value at 1st Kartik, 2078 was Rs. 55 million. Selling
costs are insignificant.
iii) The trade receivables are recorded at invoiced value, reduced by any allowances for credit
losses recognised at 31st Chaitra, 2077. No adjustment to these allowances was necessary
at 1st Kartik, 2078. The receivables, if factored, would realise approximately Rs. 26 million,
net of transaction costs at 1st Kartik, 2078.
iv) The inventories are merchandise purchased for resale and are held at cost. Their market
value at 1st Kartik, 2078 was Rs. 28 million. Associated selling costs would amount to Rs. 1.4
million.
v) It was anticipated at 1st Kartik, 2078 that the business unit will be sold for Rs. 200 million,
net of selling costs, to a rival company in a single transaction.
Required: (3+4 =7 marks)
i. What is meant by non-current assets held for sale? Briefly explain based on NFRS.
ii. In respect of Adarsha Ltd.’s year ended 31st Chaitra, 2078, show the amount to be
recognised as non-current assets held for sale at 1st Kartik, 2078 and the impairment charge
(if any) for the business unit.
Answer
a) There has been considerable progress in recent years. The second PEFA assessment shows
improvement across several indicators. Results of these upgrades on many PFM areas can be
attributed to the first generation of PFM reforms lead by the Government of Nepal (GoN) on budget
credibility, tax policy, Treasury Single Account (TSA), financial management information system
(FMIS) improvements, external audit and public procurement system. This is a result of
Page 22 of 79
collaborative efforts from various donors who are working in this field with a common objective
of improving country capacity, improving PFM performance as measured by PEFA indicators with
an aim to achieve results on the ground through effective use of resources.
GoN has been working closely with Development Partners (DPs) in the design and implementation
of Public Financial Management (PFM) reform initiatives at the country and sector level. The
components and the activities of SPFM I has been continued in the follow-on project with
additional component regarding enhancing and sustaining the TSA system and replacement of
treasury infrastructure at earthquake affected districts. So, some of the reform activities which are
included in the second phase of PFM reform action plans are already in place in the SPFM.
Under the SPFM-I project, TSA has been rolled out across all 75 districts of Nepal, meeting the
output target one year ahead of schedule. As a result, the Government has been able to close 14,000
bank accounts. Now, TSA covers 100 percent of the budget throughout the country. Monthly
budget execution reports are now available by its FMIS and posted real time data on the FCGO
website, thereby, improving access and promoting transparency. After the success of this project,
SPFM II project has been initiated. This project will provide support in upgrading the IT
infrastructure for sustainability of the TSA system and enhance the financial management
information system (FMIS) for revenue management. These activities are important to sustain the
results obtained under the ongoing SPFM.
Through the SPFM project, commitment-recording module has also been rolled out in all 75
districts. RMIS has now been implemented in 15 districts this FY after its successful pilots in three
large revenue receiving districts (Kathmandu, Lalitpur and Bhaktapur). Therefore, the government
has online, real-time access to 90% of the revenue collections in these districts as compared to the
45% coverage in 3 districts before this reform took place.
There are ongoing efforts to improve the content, quality, comprehensiveness and timeliness of
financial reporting. Two pilots of NPSAS-compliant financial statements have been completed at
the Ministry of Physical Infrastructure and Transport and the Ministry of Women, Children, and
Social Welfare. These NPSAS-based financial reports received certification by the International
Consortium of Government Financial Management (ICGFM). Additional 14 line ministries'
personnel have been trained to prepare NPSAS-based consolidated financial statements in this
fiscal year 2015/16. Fourteen central level entities have been able to prepare NPSAS-compliant
financial statements and submitted to OAG for audit purpose for fiscal year 2014/15. The FCGO
is planning on rolling out NPSAS in the rest of the ministries in the coming fiscal year
The Office of the Auditor General (OAG), under the Strengthening the Office of the Auditor
General (SOAG) Project, has completed six ISSAI-compliant performance audits within areas like
health, local government, and water and sanitation. The end-of-project target for the number of in-
depth performance audits to be reported to Parliament has already been achieved. OAG has also
enhanced public participation in the performance audit process. The Auditor General is keen to
increase the coverage and improve the quality of performance audits and initiatives of risk based
audit.
Line ministry budget information system (LMBIS) is one of the milestones of the online program
budget submission which has created direct link between line ministries' program budget
formulation and implementation with cooperation and coordination with MoF/NPC. This system
is interlinked and interfaced with the BMIS of the MoF. Achievements on reforms of tax and
customs through massive utilization of IT system wherein, application of PAN numbers to all the
taxpayers, self-assessment of tax, on-line submission of tax reports, automation in customs and
Page 23 of 79
 valuations are major landmarks of reforms in PFM. National Planning Commission (NPC) prepares
and implements MTEF for better policy based annual budgeting and resource allocation on priority
programs and projects. Enforcement of Public Procurement Act and Rules and application of e-
procurement system by Public Procurement Monitoring Office (PPMO) make better management
of government procurement. PPMO has created a single portal of e-Government Procurement (e-
GP) System with regular basis monitoring on all the government's procurements. There have been
critical upgrades in the audit function and enhanced collaboration between OAG and CSOs. In
addition social accountability has improved with better access to entitlement information, including
to the poor, women, and marginalized people. This is facilitated in part by participation in
subnational bodies by women, marginalized and deprived groups in the budget process. Beyond
MDTF, there has been different reform initiations made by ADB and other Development Partners
supporting bilaterally in the field of PFM areas. Under SPMP-I (Strengthening Public Management
Program), ADB has been supporting for LGCDP (including reform in accounting system of local
bodies on computer/IT based), MTBF for local bodies, MC-PM, MARS (Municipal Administration
Revenue System), SNGs' PEFA Assessment, Oversight and Accountability through National
Vigilance Centre (NVC), Procurement Reform (e-GP), internal audit manual for local bodies, etc.
Finally, there has been good progress in strengthening the institutional structure guiding the
reforms. Program results and reports are being uploaded and disseminated through a Program
website, which also became fully operational in the same month. The PEFA Secretariat’s website
has also been launched and is another channel for program results and reports.
b)
i. An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than continuing use.
For this to be the case, the asset (or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets (or
disposal groups) and its sale must be highly probable.
Sale transactions include exchange of non-current assets for other non-current assets when the
exchange has commercial substance in accordance with NAS 16 Property, plant and equipment.
An entity shall measure a non-current asset (or disposal group) classified as held for sale at the
lower of its carrying amount and fair value less costs to sell.
ii. Calculation of amount to be recognized as non-current assets held for sale and the amount of
impairment charge
Carrying amount at 1st Kartik, 2078, after applying NAS 16: Rs. in million

Land and buildings 124

Equipment (50 – (80/4 years × 6/12)) 40

Trade receivables 30

Inventories 20

Trade payables (26)

188

Page 24 of 79
 Any test for impairment will be based on the disposal group as a whole. As a disposal group, fair
value less costs to sell (Rs. 200 million) is higher than carrying amount (Rs. 188 million) there is
no impairment charge.
The amount recognised as non-current assets held for sale is therefore:
Lower of CA and FV Rs. in million
Land and buildings (Rs. 124 m –Rs.2.5 m) 121.50 FV
Equipment 40.00 CA
161.50
Trade receivables and inventories are outside the scope of NFRS 5.
6.
a) The following information is available in respect of High End Ltd. for the financial year 2076/77
and 2077/78:
Net profit Rs.

FY 2076/77 2,200,000
FY 2077/78 3,000,000
Number of shares outstanding prior to right issue was 1,000,000 shares.
Right issue: One new share for each five shares outstanding.
: Right issue price Rs. 25
: Last date to exercise right 30th Kartik, 2077
Fair value of one equity share immediately prior to exercise of rights is Rs. 32.
Required: Calculate 5 marks
i. Basic earnings per share (EPS) for the FY 2076/77.
ii. Restated EPS for the FY 2076/77 for right issue.
iii. Basic EPS for the FY 2077/78.
b) G is an investment company which holds a portfolio of securities linked to the real estate market
in Nepal. The following information is available at 31st Ashadh, 2078 regarding this portfolio:
(i) The portfolio cost was Rs. 26 million 2 years ago.
(ii) Real-estate prices in Nepal are generally accepted to have dropped by 20-30% in the past 2
years.
(iii) The portfolio of securities held by G is difficult to value, as there is no active market. However,
the company has received an offer of Rs. 5.2 million for this portfolio from an investor. It has
no intention of accepting this offer although similar companies have accepted offers from this
investor due to financial difficulties.
(iv) A normal sale in the present climate could be reasonably expected to yield Rs. 12 million,
based on an analysis of transactions in similar assets.
(v) G’s valuation models suggest that the real estate market in Nepal will recover, and it expects
that the portfolio will generate Rs. 24 million (at present value) over the next three years.
Required: 5 marks
In accordance with NFRS 13: Fair Value Measurement, advise with explanation to G on the
amount it should state its investment portfolio in its financial statements to 31st Ashadh, 2078
assuming it wishes to use fair value as measured.
Page 25 of 79
Answer
a) Computation of basic earnings per share
2076/77 2077/78
Rs. Rs.

EPS for the year 2076/77 as originally reported 2.20

(Rs. 2,200,000/1,000,000)

EPS for the year 2076/77 restated for the right issue 2.12
(Rs. 2,200,000/(1,000,000 x 1.04)) (WN 1)

EPS for the year 2077/78 (including effect of right issue) 2.62
(Rs. 3,000,000 / {(1,000,000 x 1.04 x 4/12) + (1,200,000 x
8/12)}

Working notes:
1. Number of right shares = one for every five shares = 1/5th = 1,000,000 x 1/5 = 200,000
2. Computation of theoretical ex-rights fair value per share = (fair value of all outstanding shares
immediately prior to exercise of rights + total value received from exercise of rights) / (number
of shares outstanding prior to exercise + number of shares issued on the exercise)
= (Rs. 32,000,000 + Rs. 25 x 200,000) / (1,000,000 + 200,000) = Rs. 30.83
3. Computation of adjustment factor
= Fair value per share prior to exercise of rights / theoretical ex-right value per share
= Rs. 32 / Rs. 30.83
= 1.04 (approx.)
b) There are a number of potential values that could be used here. However, not all are of equal quality.

o There is an offer for the asset of Rs. 5.2 million. However, G has no intention of accepting
this offer, so it is not an active market price.

o An orderly sale would be expected to yield Rs. 12 million. This figure is arrived at after
analyzing transactions in similar assets. Therefore, this would seem to qualify as a level 2
input, and would seem reasonable to use as the basis of valuation.

o The valuation models which suggest a portfolio value of Rs. 24 million are level 3, as they
are unobservable. Therefore they are inferior to level 2 inputs. However, the fact that the
models seem to be anticipating a recovery would suggest that the valuation determined by
them would not be attainable in the current market. Therefore this value would not meet the
NFRS 13 definition of fair value.

Hence, the best estimate of fair value in this situation would be Rs. 12 million at which the
investment should be valued to present in financial statements to 31st Ashadh 2078.

Page 26 of 79