Financial Accounting and Reporting-II

Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.1 Computation of deferred tax liability / (asset) as on 31 December 2022

Carrying Liability/
Tax base Difference
Description value Tax rate (Asset)
---------- Rs. in million ---------- Rs. in million

Investment property 420 450 (30) 30% (9)

Inventories:
- Imported 264 304 (40) 30% (12)
(660×0.4) (264+100×0.4)
- Other 576 576 - -
840 880 (40) 30% (12)

Interest receivable 65 - 65 20% 13

Accrued expenses
- penalties (42) (42) - 30% -
- others (190) - (190) 30% (57)
(232–42)
(232) (42) (190) 30% (57)

Unused tax losses 550×30% (165)

(230)

A.2 Quantitative thresholds for reportable segments:

Total 10%
----- Rs. in million -----
Revenue 7,938 793.8
Absolute profit *925 92.5
Assets 2,210 221
*Higher of total profit i.e. 606(475+58+60+13) or total loss i.e. 925(300+45+580)

Contrary to the CEO’s point of view, DL’s components should be presented in the note of
‘operating segments’ in the following manner:
 A & G may be presented as an aggregated segment because they have similar economic
characteristics and, when combined, meet all the quantitative thresholds.
 C will be presented as a separate segment because its loss of Rs. 580 million is greater
than Rs. 92.5 million. Further, its revenue of Rs. 1,600 million is also greater than
Rs. 793.8 million.
 D will be presented as a separate segment because it meets all the quantitative thresholds.
 Components B, E, and F will be presented as a combined category of ‘All other segments’
for the following reasons:
– More than 75% i.e. 84.5%[(2600+1600+1550+125)/6950)] of the revenue is reported
by operating segments so additional reportable segments need not be identified.
– Segment B is an operating segment but fails to meet any quantitative threshold.
– Segment E is an operating segment but fails to meet any quantitative threshold.
– Segment F, despite having assets of Rs. 300 million which are greater than
Rs. 221 million, fails to meet the definition of operating segment. This is because its
revenues are merely incidental to the activities of the entity, and as a result, it does
not meet the definition of an operating segment.

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 Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.3 As per para 35 of IFRS 15, an entity transfers control of a good or service over time and,
therefore, satisfies a performance obligation and recognises revenue over time, if one of the
following criteria is met:
(a) The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs.
(b) The entity’s performance creates or enhances an asset that the customer controls as the
asset is created or enhanced.
(c) The entity’s performance does not create an asset with an alternative use to the entity
and the entity has an enforceable right to payment for performance completed to date.

(i) Beta would be simultaneously receiving and consuming the benefits of Alpha’s
performance of administrative support services so Alpha should recognize the revenue
over time. The fact that another entity would not need to re-perform the administrative
support services already provided to date by Alpha also demonstrates that Beta
simultaneously receives and consumes the benefits of the services performed by Alpha.
As criterion (a) is fulfilled, payment terms have no effect on revenue recognition.

(ii) As control of villa will be transferred to Delta upon completion of entire society, criteria
(a) or (b) have not met. The villas do seem to have an alternative use for Gamma as
they can be sold to another customer in case of termination of contract. Hence, the
revenue shall not be recognized by Gamma over time as criterion (c) above is also not
met. Revenue would be recognized when control is transferred to Delta.

(iii) Theta will be able to consume the benefits of the software upon completion, so criteria
(a) or (b) have not been met. As per criterion (c) above, the development of software
does not create an asset with an alternative use for Theta, as the software will be
designed specifically for Theta’s needs and will not be applicable for other customers.
Eta also has a right to payment for performance completed to date, as Theta cannot
terminate the contract. Therefore, Eta should recognize revenue over time in
accordance with criterion (c).

A.4 1. Long term loans

Note Rupees
Loans to:
- Directors 1.1 xxx
- Related party 1.2 xxx

Current portion of long term loans to directors (xxx)

xxx

1.1 Long term loans to directors

These are interest-free loans that have been granted for the purpose of house building.

The reconciliation of the carrying amount at the beginning and end of the period is as
under:
Rupees
Opening balance Nil
Disbursements xxx
Receipts (Nil)
Closing balance xxx

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 Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

1.2 Long term loan to related party

This represents an unsecured loan to a related party, ABC Limited, and bears interest at 16%
per annum. The repayment of full balance is due on 30 June 2026. There is no default in
respect of this loan to date. No provision has been recorded in respect of this loan to date. No
amount in respect of this loan is written off during the year 30 June 2023. The maximum
amount due as at the end of any month during the year was Rs. xxx.

A.5 Namal Leasing Limited

Statement of profit or loss for the year ended 31 December 2022
Rs. in million
Interest income 255.95×16% 40.95

Taxation:
– Current (W-1) (102.86)
– Deferred (350–342.85)×30% (2.14)

Namal Leasing Limited

Statement of financial position as on 31 December 2022
Rs. in million
Non-current assets:
Lease receivable (W-1)236.9–22.1 214.80

Current assets:
Lease receivable 60–(W-1)236.9×16% 22.10

Non-current liabilities:
Deferred tax liability 2.14

W-1: Net investment in lease Rs. in million

PV of annual installment 60×3.2743 196.44
PV of GRV 90×1.16–5 42.85
PV of UGRV 35×1.16–5 16.66
255.95
Interest for the year 40.95
First installment (60.00)
236.90

W-2: Current tax Rs. in million

Profit as per accounting records 350.00
Interest income (40.95)
Rent income 60.00
Depreciation expense (255.96–125)÷5 (26.19)
Taxable income 342.86
Current tax @ 30% 102.86

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 Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.6 (i) (d) None is correct

(ii) (c) Both are correct
(iii) (d) Rs. 1,560,000
(iv) (b) Only (II) is correct
(v) (a) Only (I) is correct
(vi) (a) Rs. 713 million
(vii) (d) ‘Lease liability’ is a monetary item while ‘Right-of-use asset’ is a non-monetary
item
(viii) (b) Investment property Property, plant and equipment
(ix) (a) Confidentiality
(c) Professional behavior
(x) (c) Birds kept for sale by a pet shop
(d) Hens kept by a poultry farm

A.7 (i) JCL has a present obligation as a result of a past event i.e., skin reactions due to testing.
It is probable that an outflow of resources would be required as both possibilities would
result in payment of damages. A reliable estimate can be made. As it is a single instance,
the most likely outcome of 70% should be considered. So, JCL should make a provision
for Rs. 120 million.

(ii) A constructive obligation for restructuring has arisen as the formal plan has been
approved by the Board, and has been communicated to all concerned before the end of
reporting period. Therefore, a provision of Rs. 174 (150+24) million should be recognized
comprising of redundancy costs and lease termination charges. Retraining cost would
not be included in the provision for restructuring, as it relates to future conduct of the
business. Gains on the expected disposal of assets are not taken into account in
measuring a restructuring provision, even if the sale of assets is envisaged as part of the
restructuring process.

(iii) JCL shall classify the bank loan as current since JCL does not have an unconditional
right to defer settlement of the loan for at least twelve months after the reporting period.
Obtaining the waiver after the year-end is a non‑adjusting event and will not change the
classification of loan from current to non-current liabilities. However, the fact of
obtaining waiver may be disclosed in the notes.

(iv) The issuance of bond at a lower amount and increase in finance cost represents future
operating losses for which provision shall not be recognized in the financial statements
for the year ended 30 June 2023.

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 Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.8 Baghsar Limited

Consolidated statement of profit or loss and other comprehensive income
For the year ended 30 June 2023
Rs. in million
Sales 3,900+1,860(2,480×9÷12)–500 5,260.0
Cost of sales 1,980+1,245(1,660×9÷12)–500+32(160×20%) (2,757.0)
Gross profit 2,503.0
Operating expenses (W-2) (1,133.0)
Other income (W-3) 949.1
Share of associate’s profit 670(1,900–810–415+90–95)×30% 201.0
Finance cost 150+45(60×9÷12)+137.6(1,078.9(W-1)×17%×9÷12) (332.6)
Net Profit 2,187.5

Other comprehensive income

Revaluation surplus arising during the year 120.0
Share of associates OCI 90×30% 27.0
147.0
Total comprehensive income 2,334.5

Profit or loss attributable to:

Owner of the parent (Bal.) 2,154.5
Non-controlling interests (W-4) 33.0
2,187.5

Comprehensive income attributable to:

Owner of the parent (Bal.) 2,301.5
Non-controlling interests (W-4) 33.0
2,334.5

W-1: Goodwill/Bargain purchase Rs. in million

Cash consideration 2,600–120 2,480.0
Deferred consideration (450×2×1.17 )+(450×1.5×1.17–3)
–2
1,078.9
3,558.9
Non-controlling interest 150(600×25%)×8.5 1,275.0
4,834.0
Net assets of BL:
Share capital 6,000.0
Retained earnings (1,650.0)
Revaluation surplus 450.0
Fair value adjustment of brand 256–160 96.0
Fair value adjustment of building 1,200–900 300.0
5,196.0
Bargain purchase (362.1)

W-2: Operating expenses

BL 500.0
RL 620×9÷12 465.0
Valuation fee 120.0
Amortization of fair value adjustment of brand 96÷4×9÷12 18.0
Impairment of brand 256–48(256÷4×9÷12)–178 30.0
1133.0

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 Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

W-3: Other income Rs. in million

BL 420.0
RL 100×9÷12 75.0
Bargain purchase (W-1) 362.1
Gain on disposal of land 932–690 242.0
Dividend from TL 5×30 (150.0)
949.1

W-4: Profit attributable to NCI

RL’s profit for 9 months 1,860–1,245–465+75–45 180
Amortisation of brand (18)
Impairment of brand (30)
132
25% attributable to NCI 33

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 Financial Accounting and Reporting-II
Suggested Answer
Certificate in Accounting and Finance – Autumn 2023

A.9 Hamal Limited

Notes to the financial statements for the year ended 31 December 2022

1. Intangible assets:
Product
Software License
development
----------------- Rs. in million -----------------
Cost/revalued amount 240 - -
Accumulated amortization (126) - -
Opening carrying value 114 - -
Addition
- Separate acquisition 410 - 174
- development - (W-1)416 -
Amortization (79) (13) (14)
41(410÷5×6÷12) + (416÷8×3÷12) (174–48)÷6×8÷12
38(114÷3)
Revaluation 176(192–16)–160(174–14) - 16
Impairment 58–76(114–38) (18)
Closing 427 403 176

Cost /Revalued amount 650 416 176

Accumulated amortization/impairment (223) (13) -
Net book value 427 403 176

Basis of measurement Cost Cost Revaluation

Useful life (in years) 5 – 8.25 8 6
Amortization method Straight line Straight line Straight line

1.2: The last revaluation of license was performed on 31 December 2022. The revalued
amount was determined with reference to active market for such licenses.

2. Correction of error:
It was identified during the year that the amount capitalized as product development in 2021
was incorrect. The effects of correction of the amounts reported in 2021 are as follows:

Effect on profit or loss: Rs. in million

Increase in research expense (1,050–420)×5÷14 (225)
Increase in depreciation on equipment (420÷5)×4÷12 (28)
(253)

Effect on statement of financial position:

Decrease in intangible assets 420+(1,050–420)×5÷14 (645)
Increase in property, plant and equipment 420–28 392
(253)

W-1: Correct balance of product development Rs. in million

Cost other than equipment (1,050–420)×8÷14 360
Depreciation on equipment (420÷5×8÷12) 56
416

(The End)

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