CORPORATE REPORTING

Time allowed – 3.30 hours

Total marks – 100
[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will
take account of the quality of language and of the manner in which the answers are presented. Different
parts, if any, of the same question must be answered in one place in order of sequence]
Marks
1. Sound Track Ltd., a listed company, was a growth orientated company that was dominated by its
managing director, Mr. Sharif. The company sold quality music systems direct to the public. A large
number of sales persons were employed on a commission only basis. The music systems were sent
to the sales agents who then sold them direct to the public using telephone sales techniques.
The music systems were supplied to the sales agents on a sale or return basis and Sound Track
recognized the sale of the equipment when it was received by the sales agents. Any returns of
the music systems were treated as re-purchases in the period concerned.
The company enjoyed a tremendous growth record. The main reasons for this apparent expansion
were as follows.
(1) Mr. Sharif falsified the sales records. He created several fictitious sales agents who were
responsible for 25% of the company's revenue.
(2) At the year end, Mr. Sharif dispatched nearly all of his inventories of music systems to the
sales agents and re-purchased those that they wished to return after the year end.
(3) Twenty per cent of the cost of sales were capitalized. This was achieved by falsification of
the purchase invoices with the co-operation of the supplier company. Suppliers furnished the
company with invoices for non-current assets but supplied music systems.
(4) The directors of the company enjoyed a bonus plan linked to reported profits. Executives
could earn bonuses ranging from 50% to 75% of their basic salaries. The directors did not
query the unusually rapid growth of the company, and were unaware of the fraud perpetrated
by Mr. Sharif.
Mr. Sharif spent large sums of money in creating false records and bribing accomplices in order
to conceal the fraud from the auditor. He insisted that the auditor should sign a 'confidentiality'
agreement which effectively precluded the auditor from corroborating sales with independent
third parties, and from examining the service contracts of the directors. This agreement had the
effect of preventing the auditor from discussing the affairs of the company with the sales agents.
The fraud was discovered when a disgruntled director wrote an anonymous letter to the Stock
Exchange concerning the reasons for the Sound Track growth. The auditor was subsequently sued
by a major bank that had granted a loan to Sound Track on the basis of interim financial statements.
These financial statements had been reviewed by the auditor and a review report issued.
Requirements:
(a) Explain the key audit procedures which would normally ensure that such a fraud as that
perpetrated by Mr. Sharif would be detected. 7
(b) Discuss the implications of the signing of the 'confidentiality' agreement by the auditor. 3
(c) Explain how the 'review report' issued by the auditor on the interim financial statements
differs in terms of its level of assurance from the auditor's report on the year end financial
statements. 2
(d) Discuss whether you feel that the auditor is guilty of professional negligence in not detecting
the fraud. 3

2. You have joined as Chief Financial Officer in NeuTon Ltd. which sells its own brand of Global
Positioning System (GPS). This is your first day. You commence your day by meeting with
NeuTon’s Managing Director, Sabrina Ahmed. Sabrina begins the meeting, “Welcome to
NeuTon. We are a fast-growing company with big plans. We intend to apply for a large amount

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 of foreign loan at cheaper rate than local loan. Your appointment will strengthen our accounting
team and hopefully improve our reporting practices.”
Sabrina continues, “In preparation for our application for such loan, we have to finish the
preparation of Financial Statements for the year ended December 31, 2018.”
“There are a number of outstanding accounting issues associated with the draft financial
statements for the 2018 financial year. I need you to review these issues and give necessary
adjustments and prepare Statement of Financial Positions and Statement of Comprehensive
Income for NeuTon group for the year ended on December 31, 2018 by this evening.”
The meeting with Sabrina concludes. You have just settled in your new office when you receive
the following email from Sabrina:
To: CFO (cfo@NeuTon.com)
From: Sabrina Ahmed (md@NeuTon.com)
Subject: Outstanding accounting issues and Draft Financial Statements
Hi,
As discussed this morning, please find the outstanding accounting issues in Exhibit -1. Can you
please explain and justify the necessary accounting treatment for each of the outstanding
accounting issues as per relevant IFRSs? Please provide journal entries, where appropriate as it
will help me to understand and also will help to finalize Financial Statements.
On 1 January 2018, Neuton acquired 90% of the outstanding shares of a promising software
company, VTS Ltd. VTS Ltd. developed vehicle tracking software specifically for use with
NeuTon’s GPS units.
We entered into a new sales arrangement with VTS after we acquired the company. Under the sales
arrangement, we act as a collection agent for VTS. When NeuTon sells a GPS unit, with VTS’s
software preinstalled, NeuTon collects the sales proceeds from the customer and transfers the price
of the tracking software to VTS. Outstanding amounts between the companies are recorded in current
accounts. A cheque for BDT 200,000 was sent to VTS in December 2018 as payment against the
current account. The cheque was only received by VTS on 5th January 2019.
VTS did not declare a dividend, issue any new shares, or undertake any share buybacks during
the 2018 financial year. VTS is the only subsidiary that has been acquired by NeuTon to date.
The unconsolidated financial statements for the 2018 financial year for NeuTon and VTS are
included in Exhibit - 2. Could you prepare a Group Statement of Financial Position and Group
Statement of Profit or Loss and Other Comprehensive Income?
Please send me these requirements by E-mails when you are done.
Regards,
Sabrina
Requirement:
Respond to the Email of Managing Director. 40

EXHIBIT- 1: Outstanding Accounting Issues

1. Lease
NeuTon entered into a lease of a machine with ACP Finance Ltd on 1 January 2018 for a lease term
of five years in exchange for annual lease payments of BDT 50,000. The lease payments are due at
the end of each lease year. At the end of the lease term, possession of the machine is returned to ACP
Finance. Ownership of the machine does not transfer to NeuTon at any point. The interest rate
implicit in the lease is 8%.
Our previous accountant was unsure how to account for this transaction under the new accounting
standard, IFRS 16 - Leases. The accountant simply expensed the first lease payment of BDT50,000.

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No other accounting entries have been made in relation to the lease. NeuTon’s policy is to depreciate
plant, property and equipment on a straight-line basis over five years.
2. Investment in shares
Previous CFO intend to gradually build a portfolio of equity investments for NeuTon. During 2018,
he acquired 300,000 shares in Crispy Chicken Ltd. He thought the company’s shares are undervalued
and he planned to sell the shares in the upcoming months when the price rises. He purchased the
shares for BDT 0.98 each on 15 March 2018. NeuTon’s stockbrokers charged a commission on the
purchase, totalling BDT 6,000. Crispy Chicken’s share price had increased to BDT 1.56 on 31
December 2018. Our accountant was not sure how to account for this transaction and the original
investment amount plus broker fees has been capitalised on the Statement of Financial Position of
NeuTon.
3. Government grant
NeuTon received a government grant related to an employment scheme. The conditions of the grant
state that we must employ ten staff from a government employment initiative each year for a period
of two years. The grant provides NeuTon with income of BDT 100,000 per annum to offset the cost
of salaries of the ten staff. If the grant conditions are not met in any particular year, the BDT 100,000
grant for that year must be repaid to the government immediately. We received the full amount of
the grant, BDT 200,000 on commencement of the scheme on 1 January 2018.
We met the grant conditions in 2018, but we do not expect to meet the grant condition in 2019. The
accountant wasn’t sure how to account for the above transactions and included the total amount of the
grant in a current liability account, titled ‘Government Grant’, on the statement of financial position.
4. Post-employment benefit scheme
On 1 January 2018, we commenced a defined benefit pension plan for a number of head office
employees. Under the pension scheme, NeuTon has an obligation to provide these staff with agreed
post-employment benefits. NeuTon carries the actuarial and investment risk associated with the
pension scheme.
The following information has been compiled from workings by NeuTon’s accounting staff and
actuarial reports for the 2018 financial year:
BDT
Interest Income on plan assets 16,500
Employer contributions to plan 550,000
Current service cost 600,000
Interest on plan liability 18,000
Fair value of plan assets at 31.12.2018 580,000
Present value of plan obligation at 31.12.2018 620,000
The accountant was not sure which accounting standard to apply when accounting for the pension
scheme. The only adjustment made to account for the scheme was to expense the company’s
contributions of BDT 550,000 for the 2018 financial year in the Statement of Profit or Loss and Other
Comprehensive Income and to credit the ‘Cash’ account.
Exhibit- 2: Draft Financial Statements
Statements of Financial Position as at 31 December 2018
NeuTon Ltd VTS Ltd
BDT ’000 BDT ’000
ASSETS
Non-Current Assets 13,900 3,800
Land 4,000 300
Investment in VTS Ltd 3,000 -
Intangible Assets 1,000 2,800
Property, Plant & Equipment 5,900 700
- Cost 9,900 1,500
- Accumulated Depreciation (4,000) (800)

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Current Assets 3,645 770
Equity Investment – Crispy Chciken (300,000 shares) 300 -
Current Account – NeuTon Ltd 500
Inventory 1,300 100
Trade Receivables 1,450 50
Short-term Investments 500 -
Cash 95 120
TOTAL ASSETS 17,545 4,570
EQUITY AND LIABILITIES
Equity 9,400 2,500
Ordinary Share Capital (BDT 1 shares) 3,000 1,000
Share Premium 800 -
Retained Earnings 5,600 1,500
Non-Current Liabilities
10% Debentures 5,025 1,740
Current Liabilities 3,120 330
Government Grant 200 -
Current Account – VTS Ltd 300
Trade Payables 1,220 230
Bank Overdraft 600 -
Corporation Tax 240 -
Dividends Declared 100 -
Accruals 460 100
TOTAL EQUITY AND LIABILITIES 17,545 4,570

NeuTon Ltd
Statements of Profit or Loss and Other Comprehensive Income
For the Year Ended 31 December 2018
NeuTon Ltd VTS Ltd
BDT ’000 BDT ’000
Operating Profit 1,890 800
Interest Received 4 -
Interest Paid (524) (180)
Profit Before Tax 1,370 620
Taxation (170) (70)
Profit After Tax 1,200 550

3. (a) Kumkum Ltd. pays performance bonus in the current year to its employees in cash and it has
not related to the movement in its share price. Kumkum Ltd. may settle the bonus in equity
shares instead of cash bonus. Based on bonuses paid in prior years, Kumkum Ltd. has always
settled the bonuses of eligible employees in shares.
Kumkum Ltd. grants one share option to each of its 50 employees on January 1, 2018. The
share options will vest at the end of 2 years provided that:
 the employees remain in Kumkum Ltd. employment at that date; and
 the Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) of
Kumkum Ltd. for the second year achieves a specified target.
At the grant date, each recipient is required to make a non-refundable cash payment of Tk.
3,000 to Kumkum Ltd. This payment is based on the estimated fair value (FV) of the share
option which reflects the probability that the target EBITDA will be achieved in the second
year. FV of each option would be Tk. 375 (excluding the effect of the EBITDA condition).
If Kumkum Ltd. does not achieve the target EBITDA or if an employee leaves the
employment of Kumkum Ltd. no shares will be issued and the employee will not be entitled
to a repayment. Accordingly, both service and non-market vesting conditions are deemed to
be substantive.

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 Requirement:
(i) Do the transactions entered into the above meet the definition of equity settled share
based payment transactions within the scope of IFRS 2? 6
(ii) How should the transaction in (2) above be accounted for? 6
(b) Mahin Corporation imports a wide range of food items and selling them to retailers. Atiq is
Mahin’s CEO and founder and owns 40% of Mahin’s equity shares:
1. Mahin’s largest customer, Z Ltd. accounts for 35% of Mahin’s revenue. Z Ltd. has just
completed negotiations with Mahin for a special 5% discount on all sales.
2. During the accounting period, Atiq purchased a property from Mahin for Tk. 2 million.
Mahin had previously declared the property surplus to its requirements and had valued it
at Tk.3 million.
3. Atiq’s son, Sharif is a director in a financial institution, Union Capital. During the
accounting period, Union Capital advanced Tk. 8 million to Mahin as an unsecured loan
at a favourable rate of interest.
Requirement:
Explain, with reasons, the extent to which each of the above transactions should be classified
and disclosed in accordance with IAS 24 Related Party Disclosures in Mahin Corporation
Financial Statements for the period. 5
(c) Toma Taxi Ltd. acquired a car taxi business on 31 Dec. 2017 for TK.460 millon. The value
of the assets of the business at that date based on net selling price were as follows:
Tk.’000
Vehicles 240
Intangible assets 60
Trade receivables 20
Cash 100
Trade payables (40)
380
On 1 January 2018, the taxi business had three (3) of its vehicles stolen. The net selling values of
these vehicles was Tk.60,000 and because of non-disclosure of certain risk to the insurance
company, the business was uninsured. As a result of this event, Toma Taxi wishes to recognise
an impairment loss of Tk.90,000 inclusive of the loss of the stolen vehicles due to the decline in
value of the stolen income generating unit, that is the taxi business. On 1 February 2018, a
competing taxi company commenced business in the same area. It is anticipated that the business
revenue of Toma Taxi would be reduced by 25% leading to a decline in the present value in use
of the business which is calculated at Tk.300,000. The net selling value of the taxi license has
fallen to Tk. 50,000 as a result of the rival taxi operator. The net selling values of the other assets
have remained the same as at 1 January 2018.
Requirement:
Recommend how Toma Taxi should account for the above transaction in its financial
statements in accordance with IAS 36 Impairment of Assets. 7
(d) Sanofi Ltd. has a plant which cost Tk.40,000 and was purchased on 1 January 2013 with a
useful life of 10 years. The plant was being used as part of its business operating capacity.
On 30 June 2015, Sanofi Ltd. made a decision to classify the plant as held for sale and an
agent was appointed for the sale of the plant that have started advertising the plant at a selling
price of Tk.29,000 which was considered to be its fair value. The selling expenses are
estimated to be Tk.1,500. The asset has not yet been sold by the year end of 31 December
2015 and it has a fair value less cost to sell of Tk.24,000 on this date.
Requirement:
Discuss how this will be accounted for in the financial statements of Sanofi Ltd for the year
ended 31 December, 2015 in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations. 6

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4. (a) BRB is an assurance firm with a diverse range of audit clients. One client, SBC Ltd, is listed
on the Dhaka Stock Exchange. You are the engagement partner on the audit; you have been
engagement partner for four years and have an experienced team of eight staff to carry out
the audit. The audit is made slightly more complicated because BRB rent office space from
SBC Ltd. The total rental cost of that space is about 10% of the total income from SBC Ltd.
Office space is also made available to other companies including Well Food Ltd. another of
your audit clients. You are aware from the audit of Well Food Ltd. that the company is close
to receivership and that the rent arrears is unlikely to be paid by Well Food Ltd. to SBC. In
an interesting development at the client, the Finance Director resigned just prior to the audit
commencing and the board asked BRB for assistance in preparing the financial statements.
Draft accounts were available, although the final statutory accounts had not been produced.
As part of your review of the draft accounts you notice that the revenue recognition policy
includes an estimate of future revenues from the sale of deferred assets. One of the activities of
SBC Ltd. is the purchase of oil on the futures market for delivery and resale between 6 and 12
months into the future. As the price of oil rises, the increase has been taken to the statement of
profit or loss and other comprehensive income. When queried, the directors of SBC Ltd. state
that while the accounting policy is new for the company, it is comparable with other firms in the
industry and they are adamant that no amendment will be necessary to the financial statements.
They are certain that other assurance firms will accept the policy if asked.
Requirement:
Discuss the ethical and professional issues involved with the planning of the audit of SBC
Ltd. 1
0
(b) You are the audit manager of ABC Firm of Chartered Accountants, audited XYZ Bank for the
year ended 31 December 2018. The bank’s portfolio contains overdue export bills purchased Tk.
10 billion (bn) at discount. The proceeds were supposed to realize within 120 days from the date
of export. But all these bills were overdue on the balance sheet date and requires 100 percent
provisioning in conformation to the circular issued by the central bank.
The bank did not make provisions on these overdue export bills being the performances of
the bank and capital adequacy ratio falls below required level. The bank approached to you
in writing to defer the requirement and making provisions in 2019. The bank put pressure on
the auditor to close the accounts with provisions shortfall. But auditor advised bank to discuss
the matter in the tripartite meeting (bank, auditor and central bank) so that central bank
concur the proposals in the meeting. The central bank allowed the bank’s proposal to defer
provisioning requirements and auditor close the accounts with Tk. 10 bn provision shortfall
and issued unqualified audit report.
The bank is a publicly traded company and the reported EPS increased share price. Financial
Reporting Council (FRC) opined that central bank can change the provisioning requirement
circular, they cannot defer the provisions keeping their circular in force. Recently FRC served
a notice requiring explanation from the auditor to explain his position on the provisions
shortfall and why not FRC will accuse you and penalize you accordingly for distorting EPS
and manipulation of accounts of the bank.
Requirement:
Do you agree with FCR’s views? Explain your views in regulating accounting and reporting
compliance of provisioning requirements. 5

-The end-

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