s

Financial Accounting
May- June 2012

Answer to the question no. 1 {a)

Lower of cost and net realisable value
The cost of inventories may not be recoverable if those inventories are damaged, if they have become
wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not
be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale
j have increased. Thus the practice of writing inventories down below cost to net realisable value is
consistent with the view that assets should not be carried in excess of amounts expected to be realised
from their sale or use.

Revalue inventory upward

Under BAS 2 (Para -33), A new assessment is made of NRV in each subsequent period. When the
circumstances that previously caused inventories to be written down below cost no longer exist or when
there is clear evidence of an increase of the NRV because of changed economic circumstances, the
amount of the written-down is reversed so that the new carrying amount is lower of cost and the revised
NRV. This occurs when an item of inventory that is written down to its NRV is still on hand in a
subsequent period and its selling price has increased. However, this upward revaluation cannot be greater
than the previous write-down, that is, this upward revaluation cannot exceed the original cost of the
inventory.

For example: On 31" December 2010, cost of inventory was BDT 50,000 and NRV was BDT 48,000.
Thus inventory had carried at NRV of BOT 48,000 by writing down of Tk. 2,000. On 31 December 2011,
NRV of the inventory rises to BDT 51,000. An upward revaluation can be made to reverse the previous
write-down. Thus on 31 December 2011, inventory will be valued at BDT 50,000, equivalent to its
original cost.

Answer to the question no. l {b)

The principle of substance over legal form is central to the accounting principles, faithful representation
and reliability of information contained in the financial statements. Below. are the circumstances when
substance is getting prioritized over legal form:

Financial instrument

Some financial instruments take the legal form of equity but are liabilities in substance as they include
contractual obligations to transfer economic benefits to the holder. For example: redeemable preference
share.

Compound financial instruments

f Compound financial instruments may combine features of both equity instruments and financial liabilities
in substance despite being treated as equity or liability from legal sense. For example: convertible
preference share or bond.

Page I3
 Consignment sales

Under such arrangements, the buyer of the goods undertakes to sell them on behalf of the original seller.
So the buyer is effectively acting as an agent. In substance the sales made by the buyer is the revenue of
the original seller. For example: Company A is an agent for Company B and so should only record a sale
on behalf of Company B in the amount of the related commission rather than whole sales amount.

Group financial statements

Consolidated financial statements need to be prepared due to the single entity concept. In substance an
entity and other entities controlled by it are single entity even though each company within the group is
itself a separate legal entity

Lease arrangement

A lease may give the lessee in substance the risks and benefits of having an asset despite of not having
any legal title and ownership. Due to the substance, this should be treated as an asset of the lessee rather
than the asset of the lessor. For example: finance lease.

Sales and lease back

A sale may be made legally which transfers the title from seller to the buyer; but in substance the buyer
continues to have the risks and benefits from the sold asset by virtue of taking back the object under lease
arrangement. Although the legal ownership has transferred but the underlying economics remain the
same and hence under the substance over form principle the sale and subsequent lease are considered one
transaction. Thus this will not be a sale in substance.

Swap of inventory

A company may swap similar type of inventory with another company to meet short tenn demand or to
meet location gap. For example: Company A requests company B to provide 1,000 MT cement in A's
Sylhet depot where B's factory is situated. Reciprocally, A will deliver same quantity of inventory to B's
Munshiganj depot where A's factory is situated. From legal point of view, each of this event would be a
transaction requiring to recognize revenue. But in substance, there would be no transaction and no
revenue would be recognized.

Repurchase agreement

An asset may be sold to a person with a simultaneous agreement to buy it back at some future date at a
price higher than the selling price. Although this is a selling transaction from legal view point; in
substance this is mere a secured Joan by pledging the asset.

Debt factoring

Non-recourse factoring means that the company has transferred all of risks related to bad debt to the
factor. Thus in substance the company should not have any receivable instrument and hence receivables
should be derecognized.

Page 14
 Answer to the question no. 1 (C)

Answer to the requirement (i)

Calculation of in'vestment in associates Taka '000
Cost of investment in Bibu Ltd
31-Mar-I0 120
31-Mar-l l 150
05-Mar-12 (86)
184
Less share of post investment net assets (88)
96

Answer to the requirement (ii)

Calculation of carrying value of goodwill of Bibu Ltd at 31.03.11

Figures in
Taka '000
Grou
Allocation of equity of Pre Post Non-
(a) associate comp»an Ac uisition Ac uisition Total Controllin Total euuit
Share capital 60.0 60.0 100.0
Revaluation surplus 12.0 12.0 20.0
Retained earnings (b) 120.5 59.5 180.0 300.0

(b) Pre-acquisition retained earnings

31-03-2010 (Tk. 130 x 35%) 45.5
31-03-2011 (Tk. 300 x 25%) 75.0
120.5

(c) Goodwill at 31.03.11 Taka '000

Cost of investments
JI-Mar-IO 120.0
31-Mar-l l 150.0
270.0
Less share of net asset in Bibu
Ltd
Share capital 60.0
Revaluation surplus (60% ofTk. 20,000) 12.0
Pre-acquisition retained earnings (b) 120.5
192.5
77.5
J
Page 15

2
 Workings

I. Dates of reporting and acquisition

Date of reporting: 30 September 2012
Date of 35% investment in Bibu Ltd- 31 March 20 l 0
Date of25% investment in Bibu Ltd - 31 March 2011
Date of 25% sale of investment from Bibu Ld - 15March 2012

2. Determination of control on group companies

Entity Group Associate group Status

· Seam Ltd l 00% 0% 0% Parent
Bibu Ltd on:
31-Mar- 10 0% 35% 65% Associate
31-Mar-II 0% 25 % 75% Associate
05-Mar-12 0% -25 % -75% Associate
0% 359% 65%

Figures in
3. Net assets Taka '000
Grou
Pre - · Post Non-
Investment Investment Total Controllin Total e uit
Bibu Ltd
Issued ordinary share capital 35.0 35.0 100.0
Retained earnings (Note - 3(a)) 88.0 (88.0) - 250.0

Post investment retained

3.a) earnings
31-03-2010 (T. 130 x 35%) 45.5
31-03-2011 (Tk. 300 x 25%) 75.0
31-03-2010 (Tk. 130 x 25%) (32.5)

88.0

Page 16
t

Answer to the question no. 2

Tazrian and Associates

Statement of Financial Position
As at 31 December 2011

Note Amount
BDT '00000
ASSETS
Non-current assets

Property, plant and equipment I 4,700.00

Intangibles 2 4.50

Current assets
Inventories 1,000.00.
Debtors 1,460.00
Advance tax 200.00
Cash and cash equivalent 80.00
Total assets 7,444.50

EQUITY AND LIABILITIES

Equity
Paid up capital 3,000.00
General reserve 550.00
Retained earnings 3 1,266.52
4,816.52
Non-current liabilities
Long term loan 2,000.00

Current liabilities
Creditors 4 242.16
Taxation 385.82

Total equity and liabilities 7,444.50

Tazrian and Associates

Statement of Comprehensive Income
For the year ended 31 December 2011

Note Amount
in Lakh Taka
Sales 3,500.00
Cost of goods sold (1,780.00)
Gross profit 1,720.00
Other income 350.00

Page 17

'>2
 Impairment loss
5 (!00.00)
Operating expenses including depreciation 6 (867.66)
Profit before tax
1,202.34
Income tax @ 35%
(420.82)
Profit for the year 781.52

Notes to the Financial Statements

Amount
in Lakh
Taka
01 Property, plant and equipment
Office equipment 4,000.00
Accumulated depreciation (1,000.00)
3,000.00
Work in progress 1,400.00
Capitalization of borrowing cost 300.00
4,700.00

During the year depreciation method has been changed to reducing balance
method from straight line method. As this is the change in estimates, change has
been made prospectively.

02 Intangibles

Total expenses for the development 12.00

Expenses incurred before the date of recognition 7.50
4.50
03 Retained earnings
Opening balance
350.00
Profit for the year
716.52
Transferred from revaluation surplus on disposal 200.00
1,266.52

04 Creditors

Trade creditors
240.00
Accruals for lease payment (4.1) 2.16
242.16

04.1 Accruals for lease payment

Total lease payment over the lease term ( (50kXl2X2) + (80kX12X3)} 40.80
Annual lease payment (straight line method as per BAS 17) 8.16
Payment made during the year 6.00
Accrual for· lease payment & understatement of operating lease expense 2.16

Page 18
 OS Impairment loss
As uncertainty now arises about the collectability of previously recognized
receivable due to restriction of Abidjan's Government to remit the amount, it is
an indication of impairment of previously recognized financial asset (accounts
receivable of Tk. 100 lakh). Thus an impairment loss of Tk. 100 fakh has been
recognized (instead of adjusting revenue which is not permitted by Para 33,
BAS-18).
100
06 Operating expenses
Operating expenses inc. depreciation 870.00
Capitalized development expenditure (Note-2) (4.50)
Understatement of lease expense (Note-4.1) 2.16
867.66
07 Contingent Asset
Assuming that it is probable that the company will get Tk. I 00 Lakh from a
customer in Abidjan for royalty fees after uplifting of current exchange
regulation or after the debtor would have found any other alternative measure. 100
It is assumed that operating expenses included total expenses of Tk. 12 lakh for Jevelopment expenses as
there is no clear direction in the question in this regard.

Answer to the question no. 3(a)

As at the end of year 1, the company is not sure about the outcome of the contract due to failure of
estimation of costs to complete the project, revenue cannot be recognized based on percentage of
completion method, that is, (150,000 X 50%) = Tk. 75,000. Nevertheless, as the company is confident
about getting back the incurred cost, revenue can be recognized to the ex tent of the incurred cost.

Para 26 of BAS 18 supports this by stating that when the outcome of the transaction involving the rendering
of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses
recogn ised that are recoverable. Hence revenue should be recognized for Tk. 60,000 only.

Answer to the question no. 3 (b)

Statement of Financial Position {Extract)
Amount (BDT)
ASSETS:
Office building at revalue amount
11,200,000
Accumulated depreciation (Note - I) 622,222
10,577,778
EQUITY:
Revaluation surplus (Note- 2) 9,700,000

Statement _of Comprehensive Income (Extract)

Other Comprehensive Income
Revaluation surplus (Note- 2 & 3) 9,700,000

Page 19

>oI
[Revalued amount (Tk. 11,200,000) + Remaining useful life (I8 years)) = Tk. 622,222
Two years ago useful life has been reduced from 20 to 5 in anticipation that the building would be
scrapped when inner city motor way would be built. However, as <luring the year that plan was scrapped, ·{
the total useful life of the building should be estimated again and can be restored as 20 years if no other-
uncertainty exists. Thus, remaining useful life of the building after the revaluation is 18 years (20- 2)
based on which depreciation was made for the year ended on 31 December 2011.

Note- 2:

Revaluation surplus is calculated as: (Tk. 11,200,000- T. 1,500,000) = Tk. 9,700,000

BAS 16 (Para- 41) provides management an option to transfer annually from revaluation surplus to
retained earnings al) amount equivalent to the excess depreciation (depreciation based on revalued amount
- depreciation based on original cost). As original cost is absent in the question, no transfer was made
between revaluation surplus and retained earnings.

Note- 3:

Tax effect on revaluation surplus is ignored due to unavailability of data. Thus revaluation surplus in
OCI reflects the gross amount.

3 (c)

All of the given information is summarized below: -

$
Dr JCr. Balance
Date Items
Taka Tak a
10/1/2005 Cost 200,000 200,000
9/30/2006 Depreciation (200,000/20) (10,000) 190,000
9/30/2007 Depreciation (10,000) 180,000
10/1/2007 Revaluation Surplus 90,000 270,000
9/30/2008 Depreciation (270,000/18) (15,000) 255,000
9/30/2009 Depreciation (15,000) 240,000
9/30/2010 Depreciation (15,000) 225,000
9/30/2011 Depreciation (15,000) 210,000
9/30/2011 Revaluation deficiency (20,000) 190,000
9/30/2011 Cost to sale (6,000) 185,000

As there was a revaluation surplus of Tk. 90,000 before the asset had been classified as held for sale, the
downward valuation of Tk. 20,000 can be adjusted with the Revaluation surplus. Thus this revaluation
deficiency does not affect in income statement.

As per BFRS 5, in this case, asset held for sale will be valued at Tk. 185,000 (Fair value 190,000 - Cost
to sell 5,000). Thus impairment loss (cost to sell) of Tk. 5,000 will only berecognized in the income
statement for the year ended on 30 September 2011.

Page 20
 Answer to the question no. 3 (d)

Despite th e fact th at P roxim a Ltd h olds 30% shar es of CM S lim ited, C M S Ltd. is not an associate of
Pro xim a as th e form er decided not to take part in ru nning the latter. T hus this investm ent in C M S Ltd. needs
to be recognized and m easured in accordance w ith BA S 39. A s m anagem ent also intends to hold this
investm ent for several years, this investme nt should be classified as A vailable for sale" and measured at
fair value. Any movement in fair valuc will be recognized in other comprehensive income,

Answer to the question no. 4

HS Ltd.
Consolidated Statement of Financial Positios
At 30 September 2010
Note Taka '000
Assets
Non-current assets
Property, plant and equipment
11 9,075,000
Goodwill
8 4,537,500
13,612,500
Current assets
Inventory
12 1,165,000
Trade and other receivables
13 904,000
Cash and cash equivalents
14 527,600
2,596,600
16,209,100
Equity and liabilities
Equity
Share capital
15 9,000,000
Retained earnings
9 2,694,163
11,694,163
Non-controlling interest
10 1,656,938
13,35 1,100

Non-current liabilities
Provisions
16 327,000
Loans
17 1,170,000
1,497,000
Current liabilities
Trade and other payables
18 865.000
Bank overdraft
19 47,000
Taxation
20 449,000
1,361,000
Total liabilities
2,858,000
Total equity and liabilities
16,209,100

Page 21

'°%>
 Consolidation
l. assumptions

The parent and its subsidiaries follows cost model for its
a) property, plant and equipments .

_Consolidation journul
2. entries
or S Ltd ·
Cr. Cr. Cr.
eference 'Dr/Cr aka aka aka aka aka aka
Particulars
Intangible asset under
Dr 500,000
1) Jevelopmenl
Cr 500,000
Retained earnings
:For transferring development
;osts to intangible asset under
levelopmenl)

Dr 160,000
) Provision account
160,000
Trade and other payables Cr
For transferring customer
:!aim from provision to
ayables

:) Retained earnings Dr 21,250

Inventory Cr 21,250
'For eliminating unrealised
rofits included in inventory
urchased from W Ltd.)

Cheques in pipeline Dr 170,000

Dy
Receivables c 170,000
'For recognising cheque
eceive information)

:) Retained earnings Dr 300,000

Goodwill :r 300,000
For recognising goodwill
impairment)

3. Dates of reporting and acquisition

Cate of reporting: 30 June 201 I
Date of investment in W Ltd - 0l July
2007
Date of investment in S Ltd • 31
March 201 I

4. Percentage of Ownership and control

Entity Group Non-group Status
H Ltd 100% 0% Parent

W Ltd (1.7m of2m Tk. I ordinary share 85 % 15% Subsidiary

S Ltd (2.8m of 4m Tk. I ordinary shares) 70 % 30% Subsidiary

Page 22
 • I

Allocation of equity of subsidiary Figures in

5. companies Taka
f. Grou
i
I Pre Post Non- Total
I w Ltd
Ac uisition Acquisition Total Controllin euuit

I Issued ordinary share capital

Retained earnings (Note 6(a) @ 859%)
1,700,000 1,700,000 J00,000 2,000,000
212,500 3,613 216,113 38,138 254,250

I S Ltd
Issued ordinary share capital 2,800,000 2,800,000 600,000 4,000,000
Retained earnings (Note 6(a) @ 70%) 1,400,000 277,200 1,677,200 718,800 2,396,000

W Lid S L
6a Adjusted retained earnings of subsidiary compunuies Taka Taka
As at 30 June 2011 (367,000) 2,396,000
Development cost for IO months to be
capitalised 600,000
Unrealised profit eliminated from
inventory 21,250
254,2.50 2,396,000

Elimination of unrealised profits on

7, inventory

Goods sold to H Ltd 170,000

Less sales to third party by W Ltd. 85,000

Goods in H Ltd's inventory 85,000

Cost of goods remained in H Ltd's
inventory 63,750
Unrealised profit 21,250

W Ltd S Ltd Total

Taka Taka Taka
8. Goodwill on consilodation
Cost of acquisition:
Cash payments 2,550,000 8,400,000 10,950,000
2,550,000 8,400,000 10,950,000
Less share of pre-acquisition equities
Ordinery share capital 1,700,000 2,800,000 4,500,000
Retained earnings 212,500 1,400,000 1,612,500
1,912,500 4,200,000 6,112,500
Goodwill at acquisition 637,500 4,200,000 4,837,500
Impairment of goodwill recognised at
30.06.11
300,000
4,537,500
9. Consolidated retained earnings
Retained earnings - H Ltd 2,734,600
Post acquisition retained earnings - W Ltd 3,613
Post acquisition retained earnings - S Ltd 277,200
Less unrealised profit on inventory (Note -
7)
(21,250)
Less impairment of goodwill (Note - 8)
(300,000)
2,694,163

Page 23
 W Ltd S Ltd Total
Taka Taka Taka
10. Non-controlling interest
Ordinary share capital 300,000 600,000 900,000 •
:
I

.I
Retained earnings 38,138 718,800 756,938
338,138 1,3 18,800 1,656.938

11. Property, plant and equipment

HLtd 1,280,000
W Ltd 1,800,000
S Ltd 5,995,000
9,075,900

12. Inventories
HLtd 785,000
W Ltd 290,000
s Ltd 90,000
Less unrealised profit (Note -7 and 2c) (21,250)
1,165.000

13. Trade and other receivables

H Ltd 240,000
WLtd 440,000
S Ltd 394,000
Cheques in pipeline (Note - 2d) (170,000 )
904,000

14. Cash end cash equivalents

HLtd 57,600
WLtd
S Ltd (Note - 2d) 300,000
Cheques in pipeline 170,000
527.600

15. Share capital

Issued capital - 9,000,000 shares ofTk. I 9,000 ,000
9,000,000

16. Provisions
H Ltd 300,000
WLtd
S Ltd (Note - 2b) 187,000
Trade and other payables - S Ltd (160,000 )
327,000

17. Loans
H Ltd 620,000
W Ltd 550,000
S Ltd
1,170,000

18. Trade and other payables

HLtd 378,000
WLtd 255,000
SLtd 72,000
Provisions - S Ltd (Note - 2b) 160,000
865,000

Page 24
19. Bank overdrafts
HLld
WLtd 47,000
S Ltd
I. r 47,000

20. Taxation
HLtd 280,000
WLtd 45,000
SLtd 124,000
449,000

t
' i5
'
,•., 18
.
• .; ?
~
~
, '4 ,3,
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Page 25
19. Bank overdrafts
H Ltd
WLtd 47,000
S Ltd
\. I 47,000
I
20. Taxation
HLtd 280,000
WLtd 45,000
S Ltd 124,000
449.000

. I

Page 25
o)
c(J
 (b)

i) The concept of substance over form states that transactions should be presented in accordance with their
underlying substance and not based on their legal form only. According to BAS 32. i is important to assess
the substance of any financial instrument to decide on whether this can be classed as a liability or an equity
item. For instance, redeemable preference shares may be an equity item by definition, however BAS 32
requires its classification as liability in accordance with the following substance factors:

These preference shares can be paid fixed annual dividend which is, in essence, interest payment on
loan.

Redeemable preference shares have a set date of redeinption (buy back) indicating a loan
repayment in substance.

I'I ii) Extracts from the Financial Statements of ABC company for the year ended December 31,2011.

I Statement of Financial Position (Extract) as at31 December, 2011

i
I Equity and Liability
I
l Capital and reserves Tk. (Million)
Irredeemable preference shares capital
10
Non Current Liability
Redeemable preference shares
20
· Income statement(Extract) for the year ended December 31, 2014

Revenue Tk. (Million)

Cost of Sales XXX
(xxx)
Gross profit
Less: Administrative Expenses XXX
Less: Financial Cost (20 m X 8%) (xxx)
(1.6)
Profit before tax·
15

Tk. (Million)
Pro fit before tax
15
Less: Interest in year 2011 (to cost)
(2)
®lMN

Add: Amortization charge added back 13

0.5
----·----------
13.5