CORPORATE REPORTING

Nov-Dec 2021
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. You are Tania Mahmud, recently appointed Financial Controller of Abashan Limited who is
operating in the real estate business dealing with both private and commercial housing. After a week
of your appointment, you got an email from Finance Director:
Dear Tania,
As a Financial Controller, your first assignment will be to prepare the financial statements for the
year ended 30 June 2021. The auditors will start work on Sunday and I would like to be aware of any
confrontational financial reporting issues before they start work.
I have attached herewith some working papers containing a trial balance and outstanding issues
which have been prepared by Financial Reporting Manager. Review the outstanding issues identified
by the Manager and explain the potentially challenging financial reporting issues. Determine any
adjustments you consider necessary and explain the impact of your adjustments on the financial
statements, identifying any alternative accounting treatments. The board of directors has indicated
that accounting policies should be selected which maximize the profit in the current year.
Using the trial balance and after making adjustments for matters arising from your review of the
outstanding issues, prepare a draft statement of financial position and statement of comprehensive
income.
Requirement: Respond to the finance director's instructions. 30

Attachment: Work papers prepared by the financial reporting manager

Trial balance at 30 June 2021
Additional Information Debit Credit
BDT m BDT m
Land 1 244.0 -
Buildings – cost 1 1,061.6 -
Buildings - accumulated depreciation 1 - 660.0
Plant and equipment - cost 960.0 -
Plant and equipment - accumulated - 182.4
depreciation
Trade receivables 2&3 1,396.0 -
Cash and cash equivalents 1,464.8 -
Ordinary share capital (El shares) - 800.0
Share premium - 672.0
Retained earnings at I July 2020 - 816.0
Long-term borrowings - 640.0
Deferred tax liability at I July 2020 5 - 264.0
Trade and other payables - 439.2
Sales 2&4 - 4,398.4
Operating costs 2,579.2 -
Distribution costs 482.4 -
Administrative expenses 645.6 -
Finance costs 38.4 -
8,872.00 8,872.00

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Additional information and outstanding issues
(1) Freehold land and buildings — at 30 June 2021
Land Buildings Total
BDT m BDT m BDT m
Cost:
At 1 July 272.0 947.2 1,219.2
Additions - 214.4 214.4
Disposals (28.0) (100.0) (128.0)
At 30 June 2021 244.0 1,061.6 1,305.6
- - -
Accumulated depreciation: - - -
At 1 July - 678.4 678.4
Charge for the year - 47.2 47.2
Disposals - (65.6) (65.6)
At 30 June 2021 - 660.0 660.0
- - -
Carrying amount: - - -
At 30 June 2021 244.0 401.6 645.6
At 30 June 2020 272.0 268.8 540.8
The accounting policy states that land is not depreciated and all buildings are depreciated over their
expected useful life of 50 years with no residual value.
Additions- total BDT 214.4 million
The additions comprise two major commercial property projects (these are the first construction
projects undertaken by Abashan for a number of years):
• Renovation of Purbachal property (BDT 70.4 million)
Abashan commenced this renovation during the year ended 30 June 2021. The budgeted cost of this
project is BDT 120 million, of which BDT 96 million (80%) has been designated as capital
expenditure by the project manager. The remaining BDT 24 million is charged in the budget as
repairs and maintenance cost.
In the year ended 30 June 2021, the company incurred costs of BDT 88 million on the project.
Therefore, I have capitalized 80% of the cost incurred in line with the original budget.
• Construction of a sports stadium in Cumilla ( BDT 144 million)
On 1 July 2020, Abashan began constructing a sports stadium for a local authority, which was
expected to take 20 months to complete. Abashan agreed a total contract price of BDT 272 million.
The contract specifies that control of the sports stadium is transferred to the local authority as it is
constructed and that Abashan has an enforceable right to payment. Total contract costs were expected
to be BDT 128 million, however costs incurred at 30 June 2021 are BDT 144 million and these have
been capitalized in the year ended 30 June 2021. Reliable estimates of costs to complete the project
have been certified by the company's own surveyor to be BDT 36 million. He has also provided a
value of work completed to date of BDT 190.4 million.
In the year ended 30 June 2021, Abashan raised invoices totaling BDT 136 million to the local
authority and recognized this amount in revenue for the year. The local authority had paid all
outstanding invoices by 30 June 2021.
(2) Disposals
Abashan disposed of two properties during the year:
Cost of Cost of Accumulated depreciation at
land buildings disposal value
Property BDT m BDT m BDT m
FX House 16 64 33.6
Estate agency buildings 12 36 32.0
Total 28 100 65.6
• Uttara House
This property was leased to a third party under an agreement signed on 1 January 2021. This is a
40-year lease and the title to both the land and buildings transfers to the lessee at zero cost at the
end of the lease term. The annual rental is BDT 16 million payables in advance. The present value
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 on 1 January 2021 of the lease payments discounted at the interest rate of 10% implicit in the lease
was BDT 172 million, which clearly exceeds the carrying amount at the date of disposal and the
lease is therefore a finance lease.
I have derecognized the property and recognized a loss on disposal equal to the carrying amount of BDT
46.4 million in administrative expenses for the year ended 30 June 2021. The first annual lease payment
received on 1 January 2021 has been credited to finance costs for the year ended 30 June 2021.
• Condominium
Due to the recession Abashan has reconsidered its business model and closed down its
condominium agency office. The condominium business is now operated entirely online.
In May 2021 a contract for the sale of these buildings, including land was agreed for a price of BDT 80
million, with the sale to be completed in September 2021. A gain has been recognized in administrative
expenses in profit or loss of BDT 64 million and a receivable of BDT 80 million in trade receivables.
(3) Trade receivable and forward contract
Included in trade receivables is an amount due from a customer located abroad in Angola. The
amount (Angolan Kz 483.84 million) was initially recognized on 1 April 2021 when the spot
exchange rate was BDT 1 = Kz 5.6. At 30 June 2021, the exchange rate was BDT 1 = Kz 5.0. No
adjustment has been made to the trade receivable since it was initially recognized.
Given the size of the exposure, the company entered into a forward contract, at the same time as the
receivable was initially recognized on 1 April 2021, in order to protect cash flows from fluctuations
in the exchange rate. The forward contract is to sell Kz 483.84 million and the arrangement satisfies
the necessary criteria to be accounted for as a hedge, under IFRS 9, Financial Instruments.
At 30 June 2021, the loss in fair value of the forward contract was BDT 12 million. The company
elected to designate the spot element of the hedge as the hedging relationship. The difference between
the change in fair value of the receivable and the change in fair value of the forward contract since
inception is the interest element of the forward contract.
(4) Property management services
On 1 June 2021, Abashan entered into a contract to provide management services for 50 residential
properties owned by a local authority. The services are to be provided for three years at BDT 64
million per year starting on 1 July 2021, and the local authority has paid a deposit of BDT 8 million
on 1 June 2021. Abashan has recorded this deposit as revenue.
(5) Current and deferred taxation
I have not yet made any adjustments for deferred or current taxation, but have been told to make the
following assumptions:
• The tax rate is 24%.
• Taxable profits are calculated on the same basis as IFRS profits except for temporary
differences arising on plant and equipment.
• The deferred tax temporary taxable differences have risen by BDT 112 million over the year
to 30 June 2021 after the effects of accounting for depreciation on plant and equipment only.
No tax relief is available on freehold buildings and land.
2. You are Kamrul Ahsan and currently working as Senior Manager in Ahmed & Hoque., Chartered
Accountants (AHC). You have received following email from Mominul Hoque FCA, partner of the firm:
From : Mominul Hoque FCA
To : Kamrul Ahsan
Subject : Client Assignment
Hi Kamrul,
Welcome back to the work! Hope you had a good holiday!
We have recently had a successful bidding and won an Advisory engagement with Modern Cycle
Limited (MCL) which is a listed company. I am assigning the client to you and putting you as
manager of the engagement. I just received an email (Exhibit 1) from CEO of MCL, Mr. Tarek
Mahmud, who have confirmed our appointment as consultant. In his email he has requested some
assistance regarding some accounting issues. Mr. Mahmud has also shared Statement of Financial
Position and Statement of Profit or Loss (Exhibit 2) of MCL and its subsidiary Prominent Cycle
Limited (PCL) for the year ended 30 June 2021.

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You need to look into those issues and assist him to solve the issues. Also suggest appropriate journal
entries for adjusted trial balance before You also need to help MCL in preparing Consolidate
Statement of Financial Position and Consolidate Statement of Profit or Loss. Mr. Mahmud has shared
some additional information (Exhibit 3) that might be useful for your work.
Please note that MCL follow International Financial Reporting Standards (IFRSs) as their financial
reporting framework. Financial Statement you will prepare will be presented to auditor for auditing.
Hence, provide sufficient disclosure for their understanding.
M. Hoque
Requirements:
i) Solve the accounting issues shared by Mr. Mahmud and suggest required journal entries to adjust
MCL financial statements. 10
ii) Prepare consolidated financial statements for Modern Cycle Limited from adjusted financial
statements for MCL and PCL. 15
Exhibit 1- Email from Mr. Tarek Mahmud, CEO of MCL.
From : Tarek Mahmud
To : Mominul Hoque
Subject : Appointment as consultant and business issues.
Dear Mr. Hoque!
It’s my pleasure to inform you that our Board of Directors has reviewed the proposal for consultancy
services from your firm. They have accepted the proposal and appointed your firm as consultant of
Modern Cycle Limited (MCL) till 31 December 2022. I must congratulate you for winning this very
competitive bidding process.
Now as the consultant of MCL, I am going to assign you the first work. I have shared draft stand-
alone financial statements of MCL and Prominent Cycle Limited (PCL) for the year ended 30 June
2021 (Exhibit 2). PCL is a subsidiary of MCL where MCL owns 85% of its share. You are required
to prepare a consolidated financial statement of MCL for the year ended 30 June 2021. I have also
attached some information in Exhibit 3 which you need to consider for consolidation.
In addition to the service above, we also need assistance to deal with some accounting issues I have
listed below. You are requested to share a report explaining the way to solve these issues including
necessary journal entries to pass.
1. On 1 July 2020 MCL for the first time granted 1200 share options to each of its 300 senior
level employees with a condition that they will have to remain employed with MCL until 30
June 2023 when the options can be executed. The fair value of each share option at the grant
date is 75 Taka. During the year no employee left MCL, but management believes at least
10% of them will leave MCL by 30 June 2022 and another 15% by 30 June 2023.
2. Mr. Sattar was a manager at MCL. On 1st April 2021, he was dismissed with immediate
effect on the ground of disciplinary misconduct. As per the company policy, he was not
eligible for any compensation and company contribution on his post-retirement benefits. Mr.
Sattar claims that he has been unfairly dismissed and has taken legal action for compensation
for 6-month salary as per his job contract.
3. One 30 June 2021, MCL sold a very expensive and luxurious cycle to a customer with monthly
instalment of 20,000 taka for 12 months. The price of the cycle was calculated using a 12% per
annum finance charge. Accountant has recognized cost of sales but was not sure how to
recognize the revenue. Hence it was not recorded in the draft financial statements of MCL.
(Note: PVA1%,12 = 11.26).
4. On 1 July 2018, MCL acquired a piece of land in West Bengal, India for INR 2,000,000 when
exchange rate was BDT 1.3/INR. Land has been recognized at cost. On 30 June 2021, MCL
performed an impairment review for the land to check the effect of Covid Pandemic and found
out that the recoverable value of land is INR 1,700,000. Exchange rate on reporting date was
BDT 1.15/INR. Accountants are not sure about how much impairment loss to be recognized.
We would be grateful if your team can help us in above accounting issues and in preparing
consolidated financial statements.
Sincerely,
Tarek Mahmud

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 Exhibit 2- Stand Alone Financial statements for 30 June 2021
Stand Alone Statement of Financial Positions
MCL PCL
Assets BDT BDT
Non-current assets
Property, plant and equipment 10,106,845 4,794,848
Right of use assets 3,559,222 49,780
Investment in subsidiaries 3,808,510 -
Current assets
Inventories 7,148,934 2,324,957
Advances, deposits and prepayments 631,394 697,479
Trade receivables 1,121,242 2,873,314
Cash and cash equivalents 2,003,657 241,130
Total assets 28,379,804 10,981,508
Shareholders' equity & liabilities
Shareholders' equity
Share capital 7,803,627 4,480,600
Retained earnings (11,969,166) 316,576
Long term liabilities
Post-retirement benefit obligation 452,758 142,993
Non-current portion of lease liability 2,900,306 3,305
Current liabilities
Current portion of lease liability 720,239 23,100
Secured short term bank borrowings 3,119,226 243,850
Trade payable and other payables 4,949,227 3,214,827
Inter-company payables 20,403,587 2,556,257
Total shareholders' equity & liabilities 28,379,804 10,981,508
Stand Alone Statement of Profit or Loss
MCL PCL
BDT BDT
Revenue 15,597,041 18,254,371
Less: Cost of goods sold (15,939,888) (5,823,416)
Gross profit (342,847) 12,430,955
General and administrative expenses (7,346,370) (1,471,165)
Other income 13,379 99,087
Loss before interest and tax (7,675,837) 11,058,877
Finance expenses (356,805) (47,209)
Income tax expenses (349,835) (205,013)
Loss after tax (8,382,477) 10,806,656
Other comprehensive income - -
Total comprehensive loss for the year (8,382,477) 10,806,656
Exhibit 3- Important information for consolidation:
1. MCL acquired 85% of 448,060 shares of PCL at per on 1 January 2015 when the retained
earnings of PCL were zero.
2. The inventories of MCL include Cycle worth of BDT 850,000 which has been purchased from PCL.
3. PCL invoiced MCL with cost plus 20% markup for the sold inventories.
4. Trade receivables in MCL financial statements includes a receivable worth of BDT 750,000 from
PCL. PCL issued a cheque to MCL on 30 September 2021 which was received after the year end.
5. During the year MCL sold inventories of BDT 2,500,000 to PCL which has been sold off by
PCL before year end.
3. You are audit manager of Sadi Mohammad & Co. Chartered Accountants (SMC). You are carrying out
the planning of the audit of Smart Apparels Limited (SAL), a prominent garments manufacturing
company, for the year ending 30 June 2021. You have received following draft financial statements
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from the management. During an initial meeting, company management informed you that SAL was
greatly affected by Covid pandemic. It had smaller number of orders, but the cost of raw materials and
transportation has increased significantly. However, company was trying to recover from the effect of
Covid. To have sufficient liquidity in hand, it had disposed its unused and fully depreciated assets.
Smart Apparels Ltd.
Statement of Financial Position
As at 30 June 2021
2021 2020
Assets BDT BDT
Non-current assets
Property, plant and equipment 368,364,295 510,397,328
Right of use assets 93,620,255 189,593,946
Non-current deposits 135,827,962 133,684,574
597,812,512 833,675,848
Current assets
Inventories 389,731,106 1,181,851,806
Advances, deposits and prepayments 21,435,656 18,125,174
Inter-company receivables 643,809,053 602,402,824
Trade receivables 5,173,608 2,961,568
Cash and cash equivalents 225,149,806 327,169,249
1,285,299,229 2,132,510,621
Total assets 1,883,111,741 2,966,186,469
Equity and liabilities
Equity attributable to owners
Ordinary share capital 1,008,724,050 1,008,724,050
Retained earnings (871,259,478) (907,519,784)
137,464,572 101,204,266
Non-current liabilities
Shareholders' loan 673,667,742 952,614,680
Lease Liabilities 101,236,511 102,931,924
774,904,253 1,055,546,604
Current liabilities
Lease liability 16,925,846 114,415,139
Trade and other payables 447,309,862 599,839,432
Inter-company payables 506,507,208 1,095,181,028
970,742,916 1,809,435,599
Total equity and liabilities 1,883,111,741 2,966,186,469

Smart Apparels Ltd.

Statement of Profit or Loss and Other Comprehensive Income
For the year ended 30 June 2021
2021 2020
BDT BDT
Revenue 4,416,822,949 5,475,654,506
Cost of goods sold (4,248,914,370) (5,231,785,349)
Gross profit 167,908,579 243,869,157
Other income 110,503,406 62,238,575
Administrative expenses (157,775,428) (216,041,612)
Profit before interest and taxes 120,636,557 90,066,120
Financial expenses (39,686,080) (39,532,400)
Profit before tax 80,950,477 50,533,720
Income tax expense (44,690,171) (40,342,284)
Net Profit 36,260,306 10,191,436
Other comprehensive income - -
Total comprehensive income 36,260,306 10,191,436
Requirements:

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 (a) Analyse and comment on the financial statements of Smart Apparels Ltd. 13
(b) Prepare a briefing note for the team members explaining the areas with high audit risk based on
your analysis and audit procedures to be carried out. 10
4. (a) Delta Bakery Limited (DBL) was incorporated in 2015 with a vision to industrialize bakery
business across the country. DBL sells various bakery items like bun, cake, and cookies etc. though
the retailers like small T-stalls and general stores across the country. DBL started with cream bun
which got instant popularity among the customers. Gradually it extended its product category each
of which become very popular. DBL has two bake houses in two different parts of the country to
cover delivery in every corner of the country. These bakery items then are packed and taken to
distribution centres. Products remains as inventory of DBL unless it is sold to retailers. DBL sells
these bakery items through sales representatives who takes order from the retailers in the afternoon
and delivers the fresh products in the morning. Sales representatives collects the product sales price
in cash and deposits to the distribution house. One of the key challenges for DBL is the sort of shelf
life of these products. Very often products expires before it could be sold by the retailers. In this
situation DBL delivers replacement products to the owners. Recently a news has been published in
the newspaper and social media that food safety authority has visited DBL bake houses and found
various non-compliance of food safety code and penalized significant amount. Your firm has been
appointed as auditor of DBL upcoming year end 31 December 2021.
Requirements:
i) Identify and assess the audit risks for Delta Bakery Limited; and 4
ii) Design appropriate audit procedures to address the identified audit risks. 3
(b) Your firm is the auditor of Natural Foods Limited (NFL) which is one of the largest food
processing companies in the country. NFL which has several subsidiaries each of which is
engaged in processing and selling of various category of processed foods. Your firm is
responsible for audit of standalone and consolidated financial statements of NFL. There are
several subsidiaries of NFL which are audited by other audit firms. Your partner has asked you
to audit the related party transactions and balances and confirm whether the transactions and
balances has been properly reflected in the consolidated financial statements.
Requirements:
i) Design procedures that you would perform to audit the related party balances and confirm
that balance of related party agree with each other. 5
ii) Describe the audit procedures you would perform on the intercompany transactions and
balances where there are intra-group purchase and selling transactions. 5
5. You are the Partner at Karim Rafik & Co. Chartered Accountants (KRC). Recently your office
administration manager has notified you about following matters:
a) Muntasir is audit manager at KRC and managing a team which is involved in auditing a listed
company called Hallmarks Jewelleries Limited (Hallmark). Last week Muntasir’s father-in-
law passed away and his wife inherited 5,000 shares of Hallmark. His wife plans to hold the
shares as memory of her father and an investment for rainy day.
b) KRC maintains a provident fund for its employees which maintained by an independent
trustee board completely separated from firm management. For employees’ benefits,
significant amount of the fund is invested in Government securities and long-term deposits.
However, small portion of the fund is invested in the secondary share market. As part of the
investment plan, KRC Provident fund has purchased share of Export Star Limited (ESL)
from the secondary market. Recently, management of ESL has expressed their intention to
work with KRC and requested KRC to share audit proposal.
Requirement: Identify & comment on the ethical and other professional issues on above matters. 5

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