AAFR by Sir Nasir Abbas - Removed

IAS 36 – Class notes
SCOPE
This standard shall not apply to:

(a) inventories (IAS 2);
(b) contract assets and assets arising from costs to obtain or fulfil a contract (IFRS 15);
(c) deferred tax assets (IAS 12);
(d) assets arising from employee benefits (IAS 19);
(e) financial assets (IFRS 9)
[However, it applies to financial assets classified as subsidiaries, associates & JV];
(f) investment property measured at fair value (IAS 40);
(g) biological assets measured at fair value less costs to sell (IAS 41);
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(h) contracts within the scope of IFRS 17; and
(i) non‑current assets classified as held for sale (IFRS 5).
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Exam notes:
For assets carried at revaluation model, following should be considered:
1. The only difference between “fair value” and “fair value less cost of disposal” is the direct
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incremental costs attributable to the disposal of asset.
2. If cost of disposal is negligible then recoverable amount of asset must be equal to or greater than
fair value. Therefore, when both fair value and value in use are known, then asset is only revalued
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to “fair value” and there is no need for impairment.
3. If cost of disposal is not negligible then “fair value less cost of disposal” is necessarily less than “fair
value”. Therefore, such asset is first revalued to “fair value” and then it is tested for impairment.
4. If fair value is not known and only value in use is known then asset is impaired if value in use is less
than carrying amount.
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5. Although charging of impairment loss as per IAS 36 and revaluation loss as IAS 16/38 are same, but
accumulated depreciation is eliminated only at the time of revaluation as per IAS 16/38 and not at
the time of impairment as per IAS 36.
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IDENTIFYING AN ASSET THAT MAY BE IMPAIRED
1. Carrying amount is the amount at which an asset is recognised after deducting any accumulated
depreciation (amortisation) and accumulated impairment losses thereon.
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2. The recoverable amount of an asset or a cash‑generating unit is the higher of:

• its fair value less costs of disposal
• its value in use.
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3. Impairment test is the comparison of “carrying amount [CA] determined as per relevant IAS” with
“recoverable amount [RA]”. An asset is impaired if its CA exceeds RA.
4. When an asset is tested for impairment, this may indicate that estimates of useful life, residual value
and depreciation method also need to be reviewed and adjusted even if asset is not impaired.
Nasir Abbas FCA Page 1 | 10

Timing of impairment testing:
- For intangible assets not yet available for use - For all other assets
- For intangible assets with indefinite life
- For Goodwill acquired in business combination
Impairment is tested annually (at same time every An entity shall assess at the end of each reporting
year) period whether there is any indication that an
asset may be impaired. If any such indication
exists, the entity shall estimate the recoverable
amount of the asset.
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Indications of impairment
External sources of information

(a) the asset’s value has declined during the period significantly more than expected as a result of normal
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use or passage of time.
(b) significant changes with an adverse effect on the entity, in the technology, market, economy or legal
environment.
(c) market interest rates or other market rates of return on investments have increased and those
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increases are likely to affect the discount rate used in calculating an asset’s value in use.
(d) the carrying amount of the net assets (i.e. equity) of the entity is more than its market capitalisation.
Internal sources of information

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(e) Obsolescence or physical damage of an asset.
(f) significant changes with an adverse effect on the entity, in the extent to which, or manner in which,
an asset is used
(g) economic performance of an asset is, or will be, worse than expected.
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Dividend from a subsidiary, joint venture or associate

(h) for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from
the investment and evidence is available that:
(i) the carrying amount of the investment in the separate financial statements exceeds the carrying
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amounts in the consolidated financial statements of the investee’s net assets, including associated
goodwill; or
(ii) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate
in the period the dividend is declared.
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MEASURING RECOVERABLE AMOUNT
1. It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in
use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it
is not necessary to estimate the other amount.
2. Sometimes it will not be possible to measure fair value less costs of disposal, In this case, the entity
may use the asset’s value in use as its recoverable amount.

3. If an asset’s value in use is not expected to exceed its fair value less costs of disposal, the asset’s fair
value less costs of disposal may be used as its recoverable amount. This will often be the case for an
asset that is held for disposal.
4. If recoverable amount cannot be determined for an individual asset because it does not generate cash
inflows that are largely independent of those from other assets or groups of assets, then recoverable
amount is determined for the cash‑generating unit to which the asset belongs unless either:
(a) the asset’s fair value less costs of disposal is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair
value less costs of disposal can be measured.
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Fair value less cost to sell
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1. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. (See IFRS 13 Fair Value
Measurement.)
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2. Costs of disposal are incremental costs directly attributable to the disposal of an asset or
cash‑generating unit, excluding finance costs and income tax expense.
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3. Costs of disposal, other than those that have been recognized as liabilities, are deducted in
measuring fair value less costs of disposal.
Examples
legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct
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incremental costs to bring an asset into condition for its sale.
However, termination benefits (as defined in IAS 19) and costs associated with reducing or
reorganizing a business following the disposal of an asset are not direct incremental costs to dispose
of the asset.
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Value in use
1. Value in use is the present value of the future cash flows expected to be derived from an asset or
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cash‑generating unit.
2. Estimating the value in use of an asset involves the following steps:

(a) estimating the future cash inflows and outflows to be derived from continuing use of the asset
and from its ultimate disposal; and
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(b) applying the appropriate discount rate to those future cash flows.
Future cash flows

1. cash flows should reflect all possible variations in the amount or timing of future cash flows, the result
shall be to reflect the expected present value of the future cash flows, i.e. the weighted average of all
possible outcomes [Ʃpx].
2. Base cash flow projections on budgets/forecasts which shall cover a maximum period of five years,
unless a longer period can be justified. Extrapolate the projections based on the budgets/forecasts
using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.

3. Estimates of future cash flows shall include:

(a) projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset and can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and
(c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful
life.
Net disposal value at the end of its useful life is determined in a similar way to fair value less
costs of disposal, except that, it now also includes adjustments for future price increases.
4. To avoid double‑counting, estimates of future cash flows do not include:
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(a) cash inflows from other recognized assets (for example, financial assets such as receivables); and
(b) cash outflows for recognized liabilities (for example, payables, pensions or provisions).
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5. Future cash flows shall be estimated for the asset in its current condition. Therefore, future cash flows
shall not include estimated future cash inflows or outflows that are expected to arise from:
(a) a future restructuring to which an entity is not yet committed; or
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Once the entity is committed to the restructuring:
• its estimates of future cashflows reflect the cost savings and other benefits from the
restructuring; and
• its estimates of future cash outflows for the restructuring are included in a restructuring
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provision in accordance with IAS 37.
(b) improving or enhancing the asset’s performance.

• Projections of cash outflows include those for the day‑to‑day servicing of the asset as well
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as future cash outflows (e.g. future part replacements in a single asset and replacement of
short lived assets in CGU) necessary to maintain the level of economic benefits expected to
arise from the asset in its current condition.
• In case of capital work-in-progress, the future cash flows shall also include necessary capital
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expenditure to get the asset ready for use or sale.
6. Estimates of future cash flows shall not include:

(a) cash inflows or outflows from financing activities; or
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(b) income tax receipts or payments.
7. Future cash flows are estimated in the currency in which they will be generated and then discounted
using a discount rate appropriate for that currency. An entity translates the present value using the
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spot exchange rate at the date of the value in use calculation.
Discount rate
1. The discount rate (rates) shall be a pre‑tax rate (rates) that reflect(s) current market assessments of:
(a) the time value of money; and
(b) the risks specific to the asset for which the future cash flow estimates have not been adjusted.
2. A rate that reflects current market assessments of the time value of money and the risks specific to
the asset is the return that investors would require if they were to choose an investment that would
generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to

derive from the asset (e.g. weighted average cost of capital of a listed entity that has a single asset or
a portfolio of assets similar in terms of service potential and risks to the asset under review).
3. An entity normally uses a single discount rate. However, an entity may use separate discount rates
for different future periods.
RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS
Impairment loss = Carrying amount – Recoverable amount
Accounting for impairment loss:
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If asset is carried at cost model If asset is carried at revaluation model
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Impairment loss shall be recognized in profit and Impairment loss shall be treated as a revaluation
loss immediately. decrease in accordance with relevant IAS (e.g. IAS
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16, 38)
Dr. Impairment loss (P&L) ha Dr. Revaluation surplus

Cr. Accumulated impairment loss Dr. P&L
Cr. Accumulated impairment loss
• After charging impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.
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• When impairment loss is greater than carrying amount (i.e. when recoverable amount is negative),
then entity shall recognize a liability if and only if required by another IAS.
CASH GENERATING UNITS [CGU]

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A cash‑generating unit is the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of assets.
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Identifying the CGU to which asset belongs
Example
A mining entity owns a private railway to support its mining activities. The private railway could be sold
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only for scrap value and it does not generate cash inflows that are largely independent of the cash
inflows from the other assets of the mine.
It is not possible to estimate the recoverable amount of the private railway because its value in use
cannot be determined and is probably different from scrap value. Therefore, the entity estimates the
recoverable amount of the cash‑generating unit to which the private railway belongs, ie the mine as a
whole.

1. Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be

determined for an individual asset, an entity identifies the lowest aggregation of assets that generate
largely independent cash inflows.
Example
A bus company provides services under contract with a municipality that requires minimum service on
each of five separate routes. Assets devoted to each route and the cash flows from each route can be
identified separately. One of the routes operates at a significant loss.
Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable
cash inflows that are largely independent of the cash inflows from other assets or groups of assets is
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the cash inflows generated by the five routes together. The cash‑generating unit for each route is the
bus company as a whole.
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2 In identifying whether cash inflows from an asset (or group of assets) are largely independent, an
entity considers various factors including how management monitors the entity’s operations (such as
by product lines, businesses, individual locations, districts or regional areas) or how management
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makes decisions about continuing or disposing of the entity’s assets and operations.
3. If an active market exists for the output produced by an asset or group of assets, that asset or group
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of assets shall be identified as a cash‑generating unit, even if some or all of the output is used
internally. If such cash inflows are affected by internal transfer pricing, an entity shall use
management’s best estimate of future price(s) that could be achieved in arm’s length transactions in
estimating:
(a) the future cash inflows of giving asset or CGU; and
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(b) the future cash outflows of receiving asset or CGU.
Recoverable amount and carrying amount of CGU
1. Recoverable amount of a CGU is determined using the same guidance as studied earlier for a single
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asset.
2. Carrying amount of a CGU shall be determined on a basis consistent with the way recoverable amount
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is determined.
3. The carrying amount of CGU should include carrying amounts of only those assets that can be
attributed directly or allocated on a reasonable basis to that CGU and does not include the carrying
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amount of any recognized liability unless recoverable amount of the CGU cannot be determined
without consideration of this liability (for example inclusion of provision for dismantling will reduce
the carrying amount CGU for fair comparison with recoverable amount).
4. For practical reasons, the recoverable amount of a CGU is sometimes determined after consideration
of assets that are not part of the CGU (for example, receivables or other financial assets) or liabilities
that have been recognised (for example, payables, pensions and other provisions). In such cases, the
carrying amount of the CGU shall also include such assets and liabilities only for calculating
impairment loss.

Example
A company operates a mine in a country where legislation requires that the owner must restore the
site on completion of its mining operations. A provision for the costs to replace the overburden was
recognised as soon as the overburden was removed. The carrying amount of the provision for
restoration costs is Rs. 500, which is equal to the present value of the restoration costs.
The entity is testing the mine (a CGU) for impairment. The entity has received various offers to buy the
mine at a price of around Rs. 800. This price reflects the fact that the buyer will assume the obligation
to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is
approximately Rs. 1,200, excluding restoration costs. The carrying amount of the mine is Rs. 1,000.
The cash-generating unit’s fair value less costs of disposal is Rs. 800. This amount considers restoration
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costs that have already been provided for. As a consequence, the value in use for the cash-generating
unit is determined after consideration of the restoration costs and is estimated to be Rs. 700 (i.e. Rs.
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1,200 less Rs. 500). The carrying amount of the cash-generating unit is Rs. 500 (i.e. Rs. 1,000 less Rs.
500). Therefore, the recoverable amount of the cash-generating unit exceeds its carrying amount.
Goodwill
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Allocating goodwill to cash‑generating units
1. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the
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acquisition date, be allocated to each of the acquirer’s cash‑generating units, or groups of
cash‑generating units, that is expected to benefit from the synergies of the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
2. Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual CGU, but only to groups
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of CGUs.
Testing cash‑generating units with goodwill for impairment

1. When goodwill relates to a cash‑generating unit but has not been allocated to that unit, the unit shall
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be tested for impairment, whenever there is an indication that the unit may be impaired, by
comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount.
2. A cash‑generating unit to which goodwill has been allocated shall be tested for impairment annually,
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and whenever there is an indication that the unit may be impaired, by comparing the carrying amount
of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount
of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit
shall be regarded as not impaired.
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Timing of impairment tests

1. At the time of impairment testing a cash‑generating unit to which goodwill has been allocated, there
may be an indication of an impairment of an asset within the unit containing the goodwill. In such
circumstances, the entity tests the asset for impairment first, and recognises any impairment loss for
that asset before testing for impairment the cash‑generating unit containing the goodwill.

2. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of

units containing the goodwill. In such circumstances, the entity tests the cash‑generating unit for
impairment first, and recognises any impairment loss for that unit, before testing for impairment the
group of units to which the goodwill is allocated.
Corporate assets
1. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the
cash‑generating unit under review and other cash‑generating units.
2. Corporate assets include group or divisional assets such as the building of a headquarters or a division
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of the entity, EDP equipment or a research centre. The distinctive characteristics of corporate assets
are that they do not generate cash inflows independently of other assets or groups of assets and their
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carrying amount cannot be fully attributed to the cash‑generating unit under review.
3. In testing a cash‑generating unit for impairment, an entity shall identify all the corporate assets that
relate to the cash‑generating unit under review. If a portion of the carrying amount of a corporate
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asset:
(a) can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the
carrying amount of the unit, including the portion of the carrying amount of the corporate asset
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allocated to the unit, with its recoverable amount and recognize any impairment loss.
(b) cannot be allocated on a reasonable and consistent basis to that unit, the entity shall:
(i) compare the carrying amount of the unit, excluding the corporate asset, with its recoverable
amount and recognize any impairment loss;
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(ii) identify the smallest group of cash‑generating units that includes the cash‑generating unit
under review and to which a portion of the carrying amount of the corporate asset can be
allocated on a reasonable and consistent basis; and
(iii) compare the carrying amount of that group of cash‑generating units, including the portion of
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the carrying amount of the corporate asset allocated to that group of units, with the
recoverable amount of the group of units and recognize any impairment loss.
Exam note
Recoverable amount of the group of CGUs should be given separately, however, if not given
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separately then recoverable amounts of individual CGUs are added.
Impairment loss for a CGU

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1. The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group
of units) in the following order:
(a) first, to reduce the carrying amount of any goodwill allocated to the cash‑generating unit (group
of units); and
(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount
of each asset in the unit (group of units).
2. These reductions in carrying amounts shall be treated as impairment losses on individual assets.

3. In allocating an impairment loss as above, an entity shall not reduce the carrying amount of an asset
below the highest of:
(a) its fair value less costs of disposal (if measurable);
(b) its value in use (if determinable); and
(c) zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other assets of the unit (group of units).
4. After allocating impairment loss as above, a liability shall be recognised for any remaining amount of
an impairment loss for a cash‑generating unit if, and only if, that is required by another IFRS.
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REVERSING AN IMPAIRMENT LOSS
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1. An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or
may have decreased. If any such indication exists, the entity shall estimate the recoverable amount
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of that asset.
Indications of impairment loss reversal
External sources of information

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(a) there are observable indications that the asset’s value has increased significantly during the
period.
(b) significant changes with a favourable effect on the entity in the technological, market, economic
or legal environment.
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(c) market interest rates or other market rates of return on investments have decreased during the
period to affect the discount rate used in calculating the asset’s value in use.
Internal sources of information

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(d) significant changes with a favourable effect on the entity in the extent to which, or manner in
which, the asset is used or is expected to be used.
(e) evidence is available from internal reporting that indicates that the economic performance of the
asset is, or will be, better than expected.
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2. An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if,
and only if, there has been a change in the estimates used to determine the asset’s recoverable
amount since the last impairment loss was recognised.
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3. An asset’s value in use may become greater than the asset’s carrying amount simply because the
present value of future cash inflows increases as they become closer. However, the service potential
of the asset has not increased. Therefore, an impairment loss is not reversed just because of the
passage of time (sometimes called the ‘unwinding’ of the discount), even if the recoverable amount
of the asset becomes higher than its carrying amount.

Reversal an impairment loss for an individual asset
Upper limit for reversal for individual asset

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment
loss shall not exceed the carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior years.
Accounting for impairment loss reversal:
If asset is carried at cost model If asset is carried at revaluation model
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Impairment loss reversal shall be recognized in Impairment loss shall be treated as a revaluation
profit and loss immediately. increase in accordance with relevant IAS (e.g. IAS
16, 38)
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Dr. Acc. depreciation & impairment loss Dr. Acc. depreciation & impairment loss
Cr. P&L Cr. P&L
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After reversing impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.
Reversing an impairment loss for a CGU

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1. A reversal of impairment loss for a CGU shall be allocated to the assets of the unit, except for goodwill,
pro rata with the carrying amounts of the assets
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2. These increases in carrying amounts shall be treated as reversals of impairment losses for individual
assets, as studied above.
3. In allocating a reversal of impairment loss as above, an entity shall not increase the carrying amount
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of an asset above the lowest of:

(a) its recoverable amount (if measurable); and
(b) the carrying amount that would have been determined (net of amortization or depreciation) had
no impairment loss been recognized for the asset in prior periods.
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The amount of the reversal of impairment loss that would otherwise have been allocated to the asset
shall be allocated pro rata to the other assets of the unit (group of units), except for goodwill.
4. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.

IMPAIRMENT OF ASSETS (IAS-36) - QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
Property, plant and equipment as disclosed in the draft financial statements of Apricot Pakistan Limited (APL)
for the year ended 30 June 2018 include a plant having a carrying value of Rs. 610 million. The performance of
the plant has been deteriorating since last year which is affecting APL’s sales.
Following information/estimates relate to the plant for the year ending 30 June 2019:
Rs. in million
Inflows from sale of product under existing condition of the plant 250
Operational cost other than depreciation 25
Depreciation 170
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Expenses to be paid in respect of 30 June 2018 accruals 8
Cost of increasing the plant’s capacity 60
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Additional inflows (net) expected from the upgrade 40
Interest on loan 30
Maintenance cost 15
Tax payment on profits 18
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Cash flows from the plant are expected to decrease by 15% each year from 2020 and onward. The plant’s
residual value after its remaining useful life of 3 years is estimated at Rs. 100 million.
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An offer has been received to buy the plant immediately for Rs. 570 million but APL has to incur the following
costs.
Rs. in million
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Cost of delivery to the customer 45
Legal cost 10
Costs to re-organize the production process after disposal of plant 50
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Applicable discount rate is 9%.
Required:
Calculate the amount of impairment loss (if any) on plant, for the year ended 30 June 2018. (07)
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{FAR II Autumn 2018, Q # 6(b)}
Question No. 2
Identify cash generating unit in each of the following independent situations:
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(a) Store X belongs to a retail store chain M. X makes all its retail purchases through M’s purchasing centre.
Pricing, marketing, advertising and human resources policies (except for hiring X’s cashiers and sales staff)
are decided by M. M also owns five other stores in the same city as X (although in different
neighbourhoods) and 20 other stores in other cities. All stores are managed in the same way as X.
(b) A significant raw material used for plant Y’s final production is an intermediate product bought from plant
X of the same entity. X’s products are sold to Y at a transfer price that passes all margins to X. Eighty per
cent of Y’s final production is sold to customers outside of the entity. Sixty per cent of X’s final production
is sold to Y and the remaining 40 per cent is sold to customers outside of the entity. X could sell the products
it sells to Y in an active market. Internal transfer prices are higher than market prices.
(c) A significant raw material used for plant Y’s final production is an intermediate product bought from plant
X of the same entity. X’s products are sold to Y at a transfer price that passes all margins to X. Eighty per
NASIR ABBAS FCA

cent of Y’s final production is sold to customers outside of the entity. Sixty per cent of X’s final production
is sold to Y and the remaining 40 per cent is sold to customers outside of the entity. There is no active
market for the products X sells to Y.
(d) Entity M produces a single product and owns plants A, B and C. Each plant is located in a different
continent. A produces a component that is assembled in either B or C. The combined capacity of B and C
is not fully utilised. M’s products are sold worldwide from either B or C. For example, B’s production can
be sold in C’s continent if the products can be delivered faster from B than from C. Utilisation levels of B
and C depend on the allocation of sales between the two sites. There is an active market for A’s products.
(e) Entity M produces a single product and owns plants A, B and C. Each plant is located in a different
continent. A produces a component that is assembled in either B or C. The combined capacity of B and C
is not fully utilised. M’s products are sold worldwide from either B or C. For example, B’s production can
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be sold in C’s continent if the products can be delivered faster from B than from C. Utilisation levels of B
and C depend on the allocation of sales between the two sites. There is no active market for A’s products.
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(f) A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created. The price paid
for a purchased magazine title is recognised as an intangible asset. The costs of creating magazine titles
and maintaining the existing titles are recognised as an expense when incurred. Cash inflows from direct
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sales and advertising are identifiable for each magazine title. Titles are managed by customer segments.
The level of advertising income for a magazine title depends on the range of titles in the customer segment
to which the magazine title relates. Management has a policy to abandon old titles before the end of their
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economic lives and replace them immediately with new titles for the same customer segment.
(g) M is a manufacturing company. It owns a headquarters building that used to be fully occupied for internal
use. After down-sizing, half of the building is now used internally and half rented to third parties. The lease
agreement with the tenant is for five years.
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Question No. 3
Engro Limited (EL) has various factory units, each of which is categorized as cash generating unit. Following
information relates one factory in respect of impairment test:
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(i) EL follows cost model for all property, plant and equipment.
(ii) Carrying amount of assets in CGU as at June 30, 2017 are as follows:
Rs. in million
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Land 150
Building 200
Plant and machinery 700
Equipment 180
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Furniture and fixtures 120
(iii) Goodwill allocated to this CGU amounts to Rs. 50 million.

(iv) Fair value less cost to sell of entire CGU amounts to Rs. 1,200 million. Fair value less cost to sell of land
amounts to Rs. 170 million.
(v) Remaining life of this CGU is 8 years over which following cash flows are expected:
Rs. in million
Net pre-tax cash flows:
Annual (for 5 years) 250
Year 6 180
Year 7 140
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Year 8 110
Net disposal proceeds at end of year 210
(vi) Pre-tax discount rate of EL is 10% and post-tax discount rate is 7%. Tax rate applicable to EL is 30%.
Required:
Determine the carrying amount of each asset to be included in EL’s financial statements for the year ended
June 30, 2017.
Question 4
Carrying amounts of assets in a CGU as on June 30, 2020 are as follows:
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Rs. in million
Land 1,000
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Building 1,200
Plant and machinery 1,800
Software 300
Goodwill 100
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Other information:
(i) Fair value less cost to sell of land is Rs. 950 million.
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(ii) Recoverable amount of CGU is Rs. 4,100 million.
(iii) Software is outdated and management has decided to replace shortly. In this respect a party has offered
to purchase existing software for Rs. 100 million.
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Required:
Calculate revised carrying amounts of assets after charging impairment loss.
Question 5
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Carrying amounts of assets in a CGU as on June 30, 2020 are as follows:
Rs. in million
Land 900
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Building 1,000
Equipment 400
Goodwill 100
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Inventory 100
Other information:
(i) Fair value less cost to sell of land is Rs. 950 million.
(ii) Recoverable amount of CGU is Rs. 3,200 million.
(iii) An item of plant & machinery having book value of Rs. 120 million was severely damaged as result of
recent short circuit. It has been assessed as beyond repairs. It will be disposed off shortly.
(iv) Fair value less cost to sell of inventory (i.e. NRV) is Rs. 95 million.
Required:
Calculate revised carrying amounts of assets after charging impairment loss.
NASIR ABBAS FCA

Question No. 6
BB Limited (BBL) produces a single product in two factories A and B. Factory A produces the required
components which are assembled in factory B. The finished product is then sent to distributors for sale.
Following information is available for the purpose of impairment testing:
(i) BBL uses cost model for subsequent measurement of property, plant and equipment.
(ii) The book value and fair value less cost to sell of BBL’s tangible assets as on 31 December 2016 were as
follows:
Book value Fair value less cost to sell

Factory A Factory B Factory A Factory B
h
------------------------- Rs. in million -----------------------
Building 1,850 3,600 1,800 4,200
uk
Plant 1,125 2,700 1,300 1,600
Equipment 690 1,350 460 1,480
Other assets 240 510 130 280
hr
(iii) Goodwill appearing in the books is Rs. 100 million.
(iv) Expected cash flows of BBL in next three years are as follows:
2017 2018 2019

ha ------------ Rs. in million ---------
Net operating cash inflows 1,650 2,450 2,900
Estimated sale proceeds of all assets - - 8,200
Costs of disposing the above assets - - 283
sS
(v) Pre-tax discount rate of BBL is 9%.
Required:
(a) Identify the cash generating unit for BB Limited. (02)
rd
(b) Determine the carrying amount of each asset to be included in BBL’s financial statements for the year
ended 31 December 2016 in accordance with International Financial Reporting Standards. (Ignore tax
implications) 10)
ga
{Spring 2017, Q#3}
Question No. 7
Dream Limited (DL) is a manufacturing concern engaged in export sales. Following information relating to its
Re
assets as on June 30, 2020:

Carrying Remaining
amounts useful life
CGUs: Rs. million (years)
CGU 1 1,200 5
CGU 2 2,500 10
CGU 3 300 4
Corporate assets:
Vehicles 100 10
Head office building 300 20
Equipment 150 15
NASIR ABBAS FCA

Other details:
• Following cashflows are estimated to determine value in use as on June 30, 2020:
CGU 1 CGU 2 CGU 3

-------------------------- USD in million --------------------
Net annual cashflows 2.20 2.80 0.80
• Appropriate discount rate is 12%.

• Cost to sell is negligible.
• Exchange rates for year 2020:
01-07-19 Average 30-06-20
h
Rs. per USD 150 155 160
uk
Required:
Carrying amounts of assets after charging impairment loss, if corporate assets can be allocated to each CGU on a
reasonable basis.
hr
Question No. 8
A plant was purchased and installed on July 1, 2015 at a total cost of Rs. 40 million. Initial estimate of useful
life was made at 8 years. It was tested for impairment as follows:
ha
Date Value in use Fair value less cost
to sell
June 30, 2017 Rs. 24 million Rs. 22 million
sS
June 30, 2019 Rs. 19.5 million Rs. 18 million
During 2018, estimate of useful life was reduced by 2 years. Accounting year ends on June 30th.
Required:
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Journal entries to record both impairment tests. (depreciation entries are not required)
Question No. 9
ga
31-12-18
Entity ABC tested its plant for impairment which had a carrying amount of Rs. 3,000 million and remaining life
of 10 years. Following cash flows (Rs. million) were estimated as follows:
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2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
300 280 420 520 350 420 480 480 460 400
Management has decided that plant will be restructured at an estimated cost of Rs 100 million at end of 2021.
However, no constructive obligation arose as it was not announced. Above cashflows do not include the effect
of restructuring. The restructuring would result in following additional benefits (Rs. million):
2022 2023 2024 2025 2026 2027 2028

50 30 30 30 30 20 10
Discount rate appropriate for calculation of value in use is 14% (pre-tax) or 10% (post-tax).
NASIR ABBAS FCA

31-12-19
No need to determine recoverable amount is felt.
31-12-20
ABC became committed to the restructuring and a provision for restructuring cost has been recognized. Cash
flow estimates are still the same as were on 31-12-18.
31-12-21
Restructuring actually took place and Rs. 120 million was incurred on restructuring cost. No need to determine
recoverable amount is felt.
Required:
h
All possible journal entries upto December 31, 2021.
uk
Question No. 10
Decent Limited (DL) acquired a machine on July 1, 2016 at a cost of Rs. 24 million. Useful life of machine was
estimated at 10 years. Management of DL decided to follow revaluation model for this machine. Following
values were determined for impairment testing in respect of this machine:
hr
Date Value in use Fair value Cost to sell
June 30, 2018 Rs. 15 million Rs. 17.5 million Rs. 1.1 million
June 30, 2020 Rs. 18 million Not available Not available
ha
It is DL’s policy to transfer required amount from revaluation surplus to retained earnings.
Required:
Journalize all the transactions upto June 30, 2020.
sS
Question 11
Carrying amounts of assets in a CGU as on June 30, 2018 were as follows:
Rs. in million Remaining

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useful lives
Land 1,000 -
Building 1,200 15
Plant and machinery 1,800 10
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Software 300 4
Goodwill 100 -
Equipment 500 5
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Recoverable amount of CGU was Rs. 4,100 million on June 30, 2018. On June 30, 2020, Recoverable amount of
CGU moved to Rs. 3,850 million whereas recoverable amount of Software was Rs. 130 million.
Required:
Calculate revised carrying amounts of assets after each impairment testing.
NASIR ABBAS FCA

IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Value in use
2019 2020 2021
----------- Rs. million ---------
Net operating cash flow (W-1) [LY x 0.85] 210.00 178.50 151.73
RV - - 100.00
210.00 178.50 251.73
factor @ 9% 0.917 0.841 0.772
192.57 150.12 194.33
Value in use 537.02 [A]
h
uk
Fair value less cost to sell
Rs. million
Fair value 570.00
Cost to sell:
hr
delivery cost (45.00)
legal cost (10.00)
515.00 [B]
ha
Carrying value 610.00
Recoverable amount [higher of A and B] 537.02
Impairment loss 72.98
sS
W-1 Net operating cash flow

Inflows 250.00
Operational cost (25.00)
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Maint. Cost (15.00)

210.00
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Solution No. 2
(a)
All M’s stores are in different neighbourhoods and probably have different customer bases. So, although X is
managed at a corporate level, X generates cash inflows that are largely independent of those of M’s other
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stores. Therefore, it is likely that X is a cash-generating unit.

(b)
X could sell its products in an active market and, so, generate cash inflows that would be largely independent
of the cash inflows from Y. Therefore, it is likely that X is a separate cash-generating unit, although part of its
production is used by Y. It is likely that Y is also a separate cash-generating unit. Y sells 80 per cent of its
products to customers outside of the entity. Therefore, its cash inflows can be regarded as largely independent.
Internal transfer prices do not reflect market prices for X’s output. Therefore, in determining value in use of
both X and Y, the entity adjusts financial budgets/forecasts to reflect management’s best estimate of future
prices that could be achieved in arm’s length transactions for those of X’s products that are used internally.
NASIR ABBAS FCA

(c)
It is likely that the recoverable amount of each plant cannot be assessed independently of the recoverable
amount of the other plant because:
(a) the majority of X’s production is used internally and could not be sold in an active market. So, cash inflows
of X depend on demand for Y’s products. Therefore, X cannot be considered to generate cash inflows that
are largely independent of those of Y.
(b) the two plants are managed together.
As a consequence, it is likely that X and Y together are the smallest group of assets that generates cash inflows
that are largely independent.
h
(d)
It is likely that A is a separate cash-generating unit because there is an active market for its products. Although
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there is an active market for the products assembled by B and C, cash inflows for B and C depend on the
allocation of production across the two sites. It is unlikely that the future cash inflows for B and C can be
determined individually. Therefore, it is likely that B and C together are the smallest identifiable group of assets
that generates cash inflows that are largely independent.
hr
(e)
It is likely that the recoverable amount of each plant cannot be assessed independently because:
ha
(a) there is no active market for A’s products. Therefore, A’s cash inflows depend on sales of the final product
by B and C.
(b) although there is an active market for the products assembled by B and C, cash inflows for B and C depend
on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C
sS
can be determined individually.
As a consequence, it is likely that A, B and C together (ie M as a whole) are the smallest identifiable group of
assets that generates cash inflows that are largely independent.
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(f)
It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level
ga
of advertising income for a title is influenced, to a certain extent, by the other titles in the customer segment,
cash inflows from direct sales and advertising are identifiable for each title. In addition, although titles are
managed by customer segments, decisions to abandon titles are made on an individual title basis. Therefore,
it is likely that individual magazine titles generate cash inflows that are largely independent of each other and
Re
that each magazine title is a separate cash-generating unit.
(g)
The primary purpose of the building is to serve as a corporate asset, supporting M’s manufacturing activities.
Therefore, the building as a whole cannot be considered to generate cash inflows that are largely independent
of the cash inflows from the entity as a whole. So, it is likely that the cash-generating unit for the building is M
as a whole. The building is not held as an investment. Therefore, it would not be appropriate to determine the
value in use of the building based on projections of future market related rents.
NASIR ABBAS FCA

Solution No. 3
Existing carrying amount of each asset:
Rs. in million
Land 150
Building 200
Plant & machinery 700
Equipment 180
Goodwill 50
1,400 [A]
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Total fair value less cost to sell of CGU:
Rs. in million
uk
Fair value less cost to sell 1,200 [B]
Total value in use of CGU

Cash flow Factor Present value
hr
Rs. million Rs. million
Net operating for Year 1 250.00 0.909 227
Net operating for Year 3 250.00
ha 0.751 188
sS
Net disposal proceeds 210.00 0.467 98
1,271 [C]
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Recoverable amount [higher of B or C] 1,271

Total carrying amount [A] 1,400
Impairment loss 129
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Revised carrying amount

Assets NBV Loss Revised NBV
Land 150.00 - 150.00
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Building 200.00 13.17 186.83

Plant & machinery 700.00 46.08 653.92
Equipment 180.00 11.85 168.15
Furniture and fixtures 120.00 7.90 112.10
Goodwill 50.00 50.00 -
1,400.00 129.00 1,271.00
W-1
Since fair value less cost to sell of land exceeds carrying amount therefore impairment loss is not
allocated to land
NASIR ABBAS FCA

Loss in excess of Rs. 50 million (i.e. relating to goodwill) is allocated as follows:

Assets NBV Loss
Building 200.00 13.17
Plant & machinery 700.00 46.08
Equipment 180.00 11.85
Furniture and fixtures 120.00 7.90
1,200.00 79.00
Solution No. 4
Revised
Carrying Impairment
Assets carrying
h
amount loss (W-1)
amount
---------- Rs. million --------
uk
Land 1,000 50 950
Building 1,200 154 1,046
P&M 1,800 231 1,569
Software 300 200 100
hr
Goodwill 100 100 -
Furniture & fittings 500 64 436
4,900 800 4,100
Recoverable amount
ha
4,100
Impairment loss 800
W-1 Loss allocation

sS
Since software is clearly impaired therefore it will be impaired first, then loss will be charged to GW
Limit check for assets other than GW and software:
[800 - GW(100) - Software(200) = 500]
Carrying Impairment
Assets
rd
amount loss
------ Rs. million -----
Land 1,000 111 Exceeding limit
Building 1,200 133
ga
P&M 1,800 200

Furniture & fittings 500 56
4,500 500
Re
Revised allocation of remaining loss

[800 - GW(100) - Software(200) - 50(building) = 450]
Carrying Impairment
Assets
amount loss
------ Rs. million -----
Building 1,200 154
P&M 1,800 231
Furniture & fittings 500 64
3,500 450
NASIR ABBAS FCA

Solution No. 5
Revised
Carrying Adjusted Impairment
Assets Adjustments carrying
amount NBV loss (W-1)
amount
----------------------------- Rs. million -------------------------
Land 900 900 - 900
Building 1,000 1,000 207 793
P&M 1,500 (120) 1,380 285 1,095
Equipment 400 400 83 317
Goodwill 100 100 100 -
Inventory 100 (5) 95 - 95
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4,000 3,875 675 3,200
Recoverable amount 3,200
uk
Impairment loss 675
W-1 Loss allocation

Fair value less cost to sell of land is already higher than carrying amount
hr
[675 - GW(100) = 575]
Carrying Impairment
Assets
amount loss
ha --- Rs. million ---
Building 1,000 207
P&M 1,380 285
Equipment 400 83
sS
2,780 575
Solution No. 6
(a)
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Financial statements for year ending June 30, 2015

A cash generating unit is the smallest identifiable group of assets that generates cash flows that are largely
independent of other assets or groups. Since both factories are engaged in production of single product,
therefore, both factories of BBL is a cash generating unit.
ga
(b)
Carrying amount of each asset:
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A B Total
--------------- Rs. million --------------
Building 1,850 3,600 5,450
Plant 1,125 2,700 3,825
Equipment 690 1,350 2,040
Other assets 240 510 750
Goodwill - - 100
12,165 [A]
NASIR ABBAS FCA

Total fair value less cost to sell of CGU:

A B Total
--------------- Rs. million --------------
Building 1,800 4,200 6,000
Plant 1,300 1,600 2,900
Equipment 460 1,480 1,940
Other assets 130 280 410
11,250 [B]
Total value in use of CGU

1 2 3
h
--------------- Rs. million --------------
Net operating cash flows 1,650 2,450 2,900
uk
Sale proceeds [8,200 - 283] - - 7,917
1,650 2,450 10,817
Factor @ 9% 0.917 0.842 0.772
1,514 2,062 8,353
hr
[C] 11,929
Recoverable amount [higher of B or C] 11,929

Total carrying amount [A] 12,165
Impairment loss
ha 236
sS
Revised carrying amount
Assets NBV Loss Revised NBV

Building A 1,850.00 42.00 1,808.00
Plant A 1,125.00 - 1,125.00
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Equipment A 690.00 15.67 674.33

Other assets A 240.00 5.45 234.55
Building B 3,600.00 - 3,600.00
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Plant B 2,700.00 61.30 2,638.70

Equipment B 1,350.00 - 1,350.00
Other assets B 510.00 11.58 498.42
Goodwill 100.00 100.00 -
Re
12,165.00 236.00 11,929.00
W-1
Since fair values less cost to sell of following assets exceed carrying amounts therefore impairment
loss is not allocated to them:
NBV Fair value
Plant A 1,125 1,300
Building B 3,600 4,200
Equipment B 1,350 1,480
NASIR ABBAS FCA

Loss in excess of Rs. 100 million (i.e. relating to goodwill) is allocated as

follows:
Assets NBV Loss
Building A 1,850.00 42.00
Equipment A 690.00 15.67
Other assets A 240.00 5.45
Plant B 2,700.00 61.30
Other assets B 510.00 11.58
5,990.00 136.00
Solution No. 7
h
Carrying ----------- Loss --------- Revised
Assets
amount CGU1 CGU2 NBV
uk
----------------------- Rs. million ---------------------
CGU assets 4,000.00 30.89 338.07 3,631.04
Vehicles 100.00 0.48 10.50 89.02
Building 300.00 1.44 31.50 267.06
hr
Equipment 150.00 0.72 15.75 133.33
ha 4,550.00 33.52 395.82 4,120.66
WORKINGS
W-1 Impairment loss allocation
Loss Loss
NBV NBV
CGU1 allocation CGU2 allocation
sS
-------- Rs. million ------- ------ Rs. million -------
CGU assets 1,200.00 30.89 CGU assets 2,500.00 338.07
Vehicles 18.63 0.48 Vehicles 77.64 10.50
Building 55.90 1.44 Building 232.92 31.50
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Equipment 27.95 0.72 Equipment 116.46 15.75

1,302.48 33.52 2,927.02 395.82
(W-2) (W-2)
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W-2 Impairment loss of CGU

CGU1 CGU2 CGU3 Total
--------------- Rs. million -------------
Re
Carrying amounts 1,200.00 2,500.00 300.00 4,000.00

Vehicles (W-2.1) 18.63 77.64 3.73 100.00
Building (W-2.1) 55.90 232.92 11.18 300.00
Equipment (W-2.1) 27.95 116.46 5.59 150.00
1,302.48 2,927.02 320.50
Recoverable amount (W-3) 1,268.96 2,531.20 388.80
Impairment loss 33.52 395.82 - -
NASIR ABBAS FCA

W-2.1 Ratio for allocation of corporate assets

NBV of CGU 1,200.00 2,500.00 300.00
Weights of lives 5.00 10.00 4.00
Weighted average NBV 6,000.00 25,000.00 1,200.00
32,200.00
Corporate assets are allocated to CGUs in this ratio
W-3 Recoverable amount

CGU1 CGU2 CGU3
--------------- USD million -------------
Net annual cash flows 2.20 2.80 0.80
h
Annuity factor at 12% 3.605 5.650 3.037
Value in use 7.93 15.82 2.43
uk
--------------- PKR million -------------
hr
Value in use [USD x 160] 1,268.96 2,531.20 388.80
Solution No. 8
ha ------- Rs. million ------
30-06-17 Impairment loss [P&L] 6.00
Acc. Depreciation & impairment loss 6.00
[Impairment loss charged]
sS
30-06-19 Acc. Depreciation & impairment loss 3.00

Impairment loss reversal [P&L] 3.00
[Impairment loss reversed]
rd
Workings
NBV Loss
01-07-15 Cost 40.00 -
ga
30-06-16 Dep. [40/8] (5.00) -

35.00 -
30-06-17 Dep. (5.00) -
30.00 -
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30-06-17 Impairment loss (6.00) (6.00)

24.00 (6.00)
30-06-18 Dep. [24/4] [6/4] (6.00) 1.50
18.00 (4.50)
30-06-19 Dep. (6.00) 1.50
12.00 (3.00)
30-06-19 Impairment loss reversal* 3.00 3.00
15.00 -
* Although recoverable amount is much higher but only Rs. 3 million loss can be reversed
NASIR ABBAS FCA

Solution No. 9
------- Rs. million ------

31-12-19 Depreciation 205.09

[Dep for 2019]
h
uk
[Dep for 2020]
31-12-20 Acc. depreciation & impairment loss 520.65

Impairment loss [P&L] 520.65
hr
[Impairment loss reversed]

ha
[Dep for 2021]
Workings [all figures in rupees million]

sS
W-1 NBV Loss
31-12-18 Balance 3,000.00 -
31-12-18 Impairment loss [3,000 - 2,050.85(W-1.1)] (949.15) (949.15)
2,050.85 (949.15)
rd
31-12-19 Dep. [2,050.85/10] [949.15/10] (205.09) 94.92

1,845.77 (854.24)
31-12-20 Dep. (205.09) 94.92
1,640.68 (759.32)
ga
31-12-20 Impairment loss reversal [2,161.33(W-1.1) - 1,640.68] 520.65 520.65

2,161.33 (238.67)
31-12-21 Dep. [2,161.33/8] [238.67/8] (270.17) 29.83
1,891.16 (208.84)
Re
W-1.1
Value in use: Cashflows D.F. at 14% PV
2019 300.00 0.877 263.10
2020 280.00 0.769 215.32
2021 420.00 0.675 283.50
2022 520.00 0.592 307.84
2023 350.00 0.519 181.65
2024 420.00 0.455 191.10
2025 480.00 0.399 191.52
2026 480.00 0.350 168.00
NASIR ABBAS FCA
2027 460.00 0.307 141.22

2028 400.00 0.269 107.60
2,050.85
W-1.2
Value in use: Cashflows D.F. at 14% PV
2021 420.00 0.877 368.34
2022 [520 + 50] 570.00 0.769 438.33
2023 [350 + 30] 380.00 0.675 256.50
2024 [420 + 30] 450.00 0.592 266.40
2025 [480 + 30] 510.00 0.519 264.69
h
2026 [480 + 30] 510.00 0.455 232.05
2027 [460 + 20] 480.00 0.399 191.52
uk
2028 [400 + 10] 410.00 0.350 143.50
2,161.33
hr
Solution No. 10
------- Rs. million ------
01-07-16 Plant 24.000

Cash
ha 24.000
[Plant purchased and installed]

sS
[Depreciation for 2017]

rd


ga
Plant 4.800
[Elimination of accumulated depreciation]
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30-06-18 Revaluation loss [P&L] 1.700

Plant 1.700
[Revaluation of plant]
30-06-18 Impairment loss 1.100


NASIR ABBAS FCA



Impairment loss reversal [P&L] 0.825
[Reversal of impairment loss]
Impairment
Working NBV Surplus loss
-------------- Rs. million ------------
h
01-07-16 Cost 24.000 - -
30-06-17 Dep. [20/10] (2.400) - -
uk
21.600 - -
30-06-18 Dep. (2.400) - -
19.200 - -
30-06-18 Revaluation (1.700) - (1.700)
hr
17.500 - (1.700)
30-06-18 Impairment loss * (1.100) - (1.100)
16.400 - (2.800)
30-06-19 Dep. [16.50/8] [2.80/8]
ha (2.050) - 0.350
14.350 - (2.450)
30-06-20 Dep. (2.050) - 0.350
12.300 - (2.100)
sS
30-06-20 Impairment loss reversal** 0.825 - 0.825
13.125 - (1.275)
* Impairment loss:
Value in use 15.00
FV less cost to sell [17.50 - 1.1] 16.40
rd
Recoverable amount (higher) 16.40
** Only impairment loss upto Rs. [i.e. Rs. 1.1m - Rs. 1.1 x 2/8] can be reversed
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Solution No. 11
Impairment testing on June 30, 2018
Impairment
Assets NBV Revised NBV
Re
loss (W-1)
---------- Rs. million --------
Land 1,000.00 145.83 854.17
Building 1,200.00 175.00 1,025.00
P&M 1,800.00 262.50 1,537.50
Software 300.00 43.75 256.25
Goodwill 100.00 100.00 -
Equipment 500.00 72.92 427.08
4,900.00 800.00 4,100.00
Recoverable amount 4,100.00
Impairment loss 800.00
NASIR ABBAS FCA

W-1 Loss allocation [On all assets except goodwill]

Impairment
Assets Carrying amount
loss
------ Rs. million -----
Land 1,000 145.83
Building 1,200 175.00
P&M 1,800 262.50
Software 300 43.75
Equipment 500 72.92
4,800 700.00
h
Impairment testing on June 30, 2020
Assets ----------------- Maximum upper limit for --------------- ------ Actual -----------
uk
NBV Loss
Loss Revised
Revised NBV reversal (W-
reversal NBV
2)
----------------------------------------------- Rs. million ------------------------------------------
Land 854.17 1,000.00 145.83 129.96 984.13
hr
Building [1,025 x 13/15] 888.33 1,040.00 [1,200 x 13/15] 151.67 135.16 1,023.49
P&M [1,537.50 x 8/10] 1,230.00 1,440.00 [1,800 x 8/10] 210.00 187.14 1,417.14
Software [256.25 x 2/4] 128.13 130.00 Recoverable amount 1.88 1.88 130.00
Goodwill -
ha - - - -
Equipment [427.08 x 3/5] 256.25 300.00 [500 x 3/5] 43.75 38.99 295.24
3,356.88 3,910.00 553.13 493.13 3,850.00
Recoverable amount 3,850.00

sS
Loss reversal 493.13
W-2 Reversal of loss allocation [On all assets except goodwill]

Loss
reversal
rd
------ Rs. million -----

Land 854.17 125.48
Building 888.33 130.50
ga
P&M 1,230.00 180.69

Software 128.13 18.82 Exceeding limit
3,356.88 493.13
Re
Allocation of remaining reversal after limit of software [i.e. 18.82 - 1.88 = 16.95]
Loss
reversal
------ Rs. million -----
Land 854.17 4.48
Building 888.33 4.66
P&M 1,230.00 6.46
3,228.75 16.95
NASIR ABBAS FCA

Solution [Q-1 Dec-07]
1st impairment test [CGUs excluding computer network]
Plant 1 Plant 2 Plant 3
---------------- Rs. ------------
CGU assets 2,500,000 5,000,000 10,000,000
Building [2:3:5] 560,000 840,000 1,400,000
PABX [2:3:5] 280,000 420,000 700,000
3,340,000 6,260,000 12,100,000
Recoverable amount 1,200,000 7,000,000 6,400,000
Impairment loss 2,140,000 - 5,700,000
Loss allocation in proportion of carrying amounts:

CGU assets 1,601,796 - 4,710,744
Building 358,802 - 659,504
h
PABX 179,401 - 329,752
2,140,000 - 5,700,000
uk
2nd impairment test [Group of CGUs including computer network]
Carrying amounts: Rs.
Plant 1 [2,500,000 - 1,601,796] 898,204
Plant 2 5,000,000
hr
Plant 3 [10,000,000 - 4,701,744] 5,289,256
Building [2,800,000 - 358,802 - 659,504] 1,781,693
PABX system [1,400,000 - 179,401 - 329,752] 890,847
Computer network 2,100,000
Recoverable amount [1,200 + 7,000 + 6,400]

ha 15,960,000
14,600,000
Impairment loss 1,360,000
Loss allocation in proportion of carrying amounts:

sS
Plant 1 76,539
Plant 2 426,065
Plant 3 450,714
Building 151,824
PABX system 75,912
rd
Computer network 178,947

1,360,000
Revised carrying amounts as at 30-06-07:

ga
Rs.
Plant 1 [898,204 - 76,539] 821,665
Plant 2 [5,000,000 - 426,065] 4,573,935
Plant 3 [5,289,256 - 450,714] 4,838,543
Building [1,781,693 - 151,824] 1,629,870
Re
PABX system [890,847 - 75,912] 814,935

Computer network [2,100,000 - 178,947] 1,921,053
14,600,000
Solution [Q-2 Winter 2016]
Carrying -- Impairment loss (W-1) --
Assets Revised NBV
amount Green Yellow
----------------------- Rs. million ---------------------
h
Buses [225 + 150 + 95] 470.00 27.40 26.50 416.10
Other assets [400 + 350 + 100] 850.00 160.60 80.87 608.53
Goodwill 10.00 5.69 3.42 0.89
uk
Building 100.00 22.87 7.89 69.24
Computer 55.00 5.13 3.08 46.80
Equipment 45.00 - - 45.00
1,530.00 221.69 121.75 1,186.56
hr
WORKINGS
W-1 Impairment loss allocation
ha
Maximum Loss allocation
NBV Limit (W-1.1)
loss (W-1.2)
Green
----------------------- Rs. million ----------------------
Buses 225.00 197.60 27.40 27.40
Other assets 400.00 - 400.00 160.60
Goodwill
Building
Computer
Equipment
5.69
56.95
31.32
25.63
744.59
-
-
26.20
34.17 sS
5.69
56.95
5.13
-
5.69
22.87
5.13
-
221.69
rd
Maximum Loss allocation
NBV Limit (W-1.3)
loss (W-1.4)
Yellow
----------------------- Rs. million ----------------------
ga
Buses 150.00 123.50 26.50 26.50

Other assets 350.00 - 350.00 80.87
Goodwill 3.42 - 3.42 3.42
Building 34.17 - 34.17 7.89
Computer 18.79 15.72 3.08 3.08
Re
Equipment 15.38 20.50 - -

571.75 121.75
W-1.1 W-1.3
Buses [(2.52 - 0.05) x 80] = 197.60 Buses [(2.52 - 0.05) x 50] = 123.50
Computers [31.32 x 46/55] = 26.20 Computers [18.79 x 46/55] = 15.72
Equipment [25.63 x 60/45] = 34.17 Equipment [15.38 x 60/45] = 20.50
h
W-1.2 Loss allocation W-1.4 Loss allocation
Limit check for assets other than GW and Equipment: Limit check for assets other than GW and Equipment:
uk
[221.69 - 5.69 (GW) - 0 (Equipment) = 216.00] [121.75 - 3.42 (GW) - 0 (Equipment) = 118.34]
Buses 225.00 68.14 Exceeding limit Buses 150.00 32.10 Exceeding limit
Other assets 400.00 121.13 Other assets 350.00 74.90
hr
Computer 31.32 9.48 Exceeding limit Computer 18.79 4.02 Exceeding limit
713.27 216.00 552.96 118.34
Revised allocation of remaining loss Revised allocation of remaining loss
ha
[221.69 - 5.69 (GW) - 0 (Equipment) - 27.40 (Buses) - 5.13 (Computer) = 183.47] [121.75 - 3.42 (GW) - 0 (Equipment) - 26.50 (Buses) - 3.08 (Computer) = 88.76]
Other assets 400.00 160.60 Other assets 350.00 80.87

456.95 183.47 384.17 88.76
W-2 Impairment loss of CGU
Buses
Green
225.00
Yellow sS Orange
--------------- Rs. million -------------
Total
rd
150.00 95.00 470.00
Other assets 400.00 350.00 100.00 850.00
Goodwill (W-2.1) 5.69 3.42 0.89 10.00 -
Building (W-2.1) 56.95 34.17 8.88 100.00 -
Computer (W-2.1) 31.32 18.79 4.89 55.00 -
ga
Equipment (W-2.1) 25.63 15.38 4.00 45.00 -

744.59 571.75 213.66
Recoverable amount (W-3) 522.90 450.00 282.50
Impairment loss 221.69 121.75 - -
Re
W-2.1 Ratio for allocation of GW and corporate assets
NBV of CGU 625.00 500.00 195.00

Weights of lives 2.00 1.50 1.00
h
Weighted average NBV 1,250.00 750.00 195.00
2,195.00
uk
Goodwill and corporate assets are allocated to CGUs in this ratio
W-3 Recoverable amount

Green Yellow Orange
hr
--------------- Rs. million -------------
Net cash flows 70.00 60.00 50.00
Annuity factor at 12% 7.47 6.81 5.65
Value in use 522.90 408.60 282.50
ha
Fair value less cost to sell 500.00 450.00 250.00
Recoverable amount [higher] 522.90 450.00 282.50
sS
rd
ga
Re
IFRS 5 – Class notes
SCOPE
The measurement provisions of this standard shall not apply to the assets, covered in following IFRS,
either as individual assets or as a part of a disposal group:
(a) deferred tax assets (IAS 12);
(b) assets arising from employee benefits (IAS 19);
(c) financial assets (IFRS 9);
(d) investment property measured at fair value (IAS 40);
(e) biological assets measured at fair value less costs to sell (IAS 41);
(f) groups of contracts within the scope of IFRS 17; and
h
However, classification and presentation requirements of this IFRS apply to above assets as well if these
are part of a disposal group.
uk
Disposal group:
- It is a group of assets to be disposed of, by sale or otherwise, together as a group in a single
transaction, and liabilities directly associated with those assets that will be transferred in the
transaction. The group includes goodwill acquired in a business combination if the group is a
hr
cash‑generating unit to which goodwill has been allocated.
- If a non-current asset, which falls within the scope of measurement requirements of this IFRS (e.g.
PPE), is a part of a disposal group, the measurement requirements of this IFRS apply to the disposal
ha
group as a whole (i.e. not applied to that individual non-current asset).
CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS)

sS
Classification as held for sale
1. An entity shall classify a non-current asset (or disposal group) as held for sale [sales also include
exchange of assets] if following criteria is met:
rd
• Its carrying amount will be recovered principally through a sale transaction rather than through
continuing use.
• It 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).
ga
• Its sale must be highly probable. For a sale to be highly probable:

 The appropriate level of management must be committed to a plan to sell the asset (or
disposal group).
 An active programme to locate a buyer and complete the plan must have been initiated.
Re
 The asset (or disposal group) must be actively marketed for sale at a price that is reasonable
in relation to its current fair value.
 The sale should be expected to be completed within in one year from the date of
classification.
 It is unlikely that the plan will be significantly changed or withdrawn.
Non adjusting event

If above criteria is met after the reporting period, then entity shall not classify the asset (or
disposal group) as held for sale, rather it shall be disclosed.

2. Exception for “sale within one year” condition

An extension of the period, beyond one year, required to complete the sale does not preclude the
asset (or disposal group) from being classified as held for sale if the delay is caused by events or
circumstances beyond the entity’s control and there is sufficient evidence that the entity remains
committed to its plan.
Classification as held for distribution to owners

An entity shall classify a non-current asset (or disposal group) as held for distribution to owners if following
criteria is met:
• The entity is committed to distribute the asset (or disposal group) to the owners.
h
• It must be available for immediate distribution in its present condition.
• Its distribution must be highly probable. For a distribution to be highly probable:
uk
 The actions to complete the distribution must have been initiated.
 The distribution should be expected to be completed within in one year from the date of
classification.
 It is unlikely that the plan will be significantly changed or withdrawn.
hr
Non-current assets that are to be abandoned
An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned.
ha
This is because its carrying amount will be recovered principally through continuing use. It includes the
asset (or disposal group) that is to be used to the end of its economic life and the asset (or disposal group)
that is to be closed rather than sold.
sS
MEASUREMENT
Measurement of a non-current asset (or disposal group) [Initial and subsequent]

1. A non-current asset (or disposal group) classified as held for sale shall be measured at the lower of:
rd
▪ Carrying amount; and

▪ Fair value less cost to sell
2. A non-current asset (or disposal group) classified as held for distribution to owners shall be measured
ga
at the lower of:

▪ Carrying amount; and
▪ Fair value less cost to distribute
Re
Important:
• When the sale is expected to occur beyond one year, the entity shall measure the costs to sell at
their present value. Any increase in the present value of the costs to sell that arises from the passage
of time shall be presented in profit or loss as a financing cost.
• Immediately before the initial classification of the asset (or disposal group) as held for sale, the
carrying amounts of the asset (or all the assets and liabilities in the group) shall be measured in
accordance with applicable IFRSs.

• On subsequent remeasurement of a disposal group, the carrying amounts of any assets and
liabilities that are not within the scope of the measurement requirements of this IFRS, but are
included in a disposal group classified as held for sale, shall be remeasured in accordance with
applicable IFRSs before the fair value less costs to sell of the disposal group is remeasured.
Recognition of impairment losses and reversals [Initial as well as subsequent]

Impairment loss = Carrying amount – Fair value less cost to sell
Impairment loss reversal (i.e. gain) = Fair value less cost to sell – Carrying amount
h
For individual asset:
1. An impairment loss shall be recognized in P&L for initial or subsequent write-down to fair value less
uk
cost to sell.
2. If subsequently fair value less cost to sell increases, a gain shall be recognized in P&L ONLY to the
extent to reverse the cumulative impairment loss previously recognized either as per this IFRS or as
hr
per IAS 36.
For disposal group:

1. An impairment loss shall be recognized in P&L for initial or subsequent write-down to fair value less
ha
cost to sell.
2. If subsequently fair value less cost to sell increases, a gain shall be recognized ONLY to the extent to
reverse the cumulative impairment loss previously recognized on the assets that are within the scope
of measurement requirements of this IFRS, either as per this IFRS or as per IAS 36.
sS
3. The impairment loss recognized for the group shall be allocated to all non-current assets in the group
that are within the scope of the measurement requirements of this IFRS, in following order:
• first, to reduce the carrying amount of any goodwill allocated to the group; and
• then, to the other assets of the group pro rata on the basis of the carrying amount of each asset
rd
in the group.
Any subsequent gain (i.e. loss reversal) shall be allocated to other assets of the group, except for
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goodwill, pro rata on the basis of the carrying amount of each asset in the group.
Exam note:
This loss allocation is same as studied in IAS 36 for loss allocation in CGU except here “maximum
limit for loss allocation as per IAS 36” is not applicable.
Re
Depreciation and finance cost:

▪ A non-current asset shall not be depreciated/amortized while it is classified as held for sale or held
for distribution to owners or while it is a part of disposal group classified as held for sale or held for
distribution to owners.
▪ Interest and other expenses attributable to the liabilities of a disposal group classified as held for
sale or held for distribution to owners shall however continue to be recognized.

Changes in plan of sale or distribution to owners
1. If the criteria for “held for sale” or “held for distribution to owners” classification are no longer met,
then entity shall cease to classify the asset (or disposal group) as “held for sale” or “held for
distribution to owners”.
Change between classes:
If an entity reclassifies an asset (or disposal group) directly from “held for sale” to “held for
distribution to owners” or vice verse, then this change is not considered as a change in plan,
therefore, it will be measured as per respective guidance studied earlier.
2. If an asset (or disposal group) ceases to be classified as “held for sale” or “held for distribution to
h
owners”, then it shall be measured at lower of:
uk
▪ Its carrying amount before classification, adjusted for any depreciation, amortization or
revaluations that would have been recognized had the asset (or disposal group) not been
classified as “held for sale” or “held for distribution to owners”; and
hr
▪ Its recoverable amount at the date of subsequent decision not to sell or distribute.
3. The required adjustment in carrying amount shall be immediately recognized in profit and loss from
continuing operations in the same caption as used to present earlier gain or loss.
ha
4. If an entity removes an individual asset or liability an individual asset or liability from a disposal group
classified as “held for sale” or “held for distribution to owners”:
sS
If the group still meets the classification criteria:
The remaining assets and liabilities of the disposal group to be sold shall continue to be measured as
a group.
If the group no longer meets the classification criteria:

rd
▪ The remaining non‑current assets of the group that individually meet the criteria to be classified
as “held for sale” or “held for distribution to owners” shall be measured individually at the lower
of their carrying amounts and fair values less costs to sell (or costs to distribute) at that date.
ga
▪ Any non‑current assets that do not meet the criteria for “held for sale” and “held for distribution
to owners” shall cease to be classified and be measured as per point 2 above.
PRESENTATION AND DISCLOSURES

Re
Discontinued operations
A discontinued operation is a component (e.g. a cash generating unit or group of cash generating units)
of an entity that either has been disposed of, or is classified as held for sale, and
(a) represents a separate major line of business or geographical area of operations,
(b) is part of a single co‑ordinated plan to dispose of a separate major line of business or geographical
area of operations or
(c) is a subsidiary acquired exclusively with a view to resale.

Disclosures:
An entity shall disclose:
(a) a single amount in the statement of comprehensive income comprising the total of:
(i) the post‑tax profit or loss of discontinued operations and
(ii) the post‑tax gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operation.
(b) an analysis of the single amount in (a) into:

(i) the revenue, expenses and pre‑tax profit or loss of discontinued operations and the related
income tax expense.
(ii) the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal
h
of the assets or disposal group(s) constituting the discontinued operation and the related income
tax expense.
uk
The analysis may be presented in the notes or in the statement of comprehensive income. If it is
presented in the statement of comprehensive income it shall be presented in a section identified as
relating to discontinued operations, i.e. separately from continuing operations.
hr
(c) the net cash flows attributable to the operating, investing and financing activities of discontinued
operations. These disclosures may be presented either in the notes or in the financial statements.
Comparative figures:
ha
▪ An entity shall re-present above disclosures for prior period presented in the financial statements
so that the disclosures relate to all operations that have been discontinued by the end of current
period.
▪ If an entity ceases to classify a component as held for sale, the results of operations of the
sS
component previously presented in discontinued operations shall be reclassified and included in
income from continuing operations for all periods presented.
This restatement/reclassification of comparative figures is relevant for SOCI only. Disclosure of non-
current asset or disposal group held for sale under current assets (SOFP) shall not be
rd
represented/reclassified.
Non-current asset (or disposal group) classified as held of sale

ga
1. Any gain or loss on the remeasurement of a non‑current asset (or disposal group) classified as held
for sale that does not meet the definition of a discontinued operation shall be included in profit or
loss from continuing operations.
Re
2. An entity shall present a non‑current asset classified as held for sale and the assets of a disposal group
classified as held for sale separately from other assets in the statement of financial position. The
liabilities of a disposal group classified as held for sale shall be presented separately from other
liabilities in the statement of financial position. Those assets and liabilities shall not be offset and
presented as a single amount.
3. An entity shall present separately any cumulative income or expense recognised in other
comprehensive income relating to a non‑current asset (or disposal group) classified as held for sale.

IFRS 5 – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
On 1 December 2020, a company became committed to a plan to sell a manufacturing facility and has already
found a potential buyer. The company does not intend to discontinue the operations currently carried out in
the facility. At 31 December 2020 there is a backlog of uncompleted customer orders. The company will not
be able to transfer the facility to the buyer until after it ceases to operate the facility and has eliminated the
backlog of uncompleted customer orders. This is not expected to occur until spring 2021.
Required
Can the manufacturing facility be classified as 'held for sale' at 31 December 2020?
Question No. 2
On 20 October 2019 the directors of a company made a public announcement of plans to close a steel works.
h
The closure means that the company will no longer carry out this type of operation, which until recently has
represented about 10% of its total turnover. The works will be gradually shut down over a period of several
uk
months, with complete closure expected in July 2020. At 31 December output had been significantly reduced
and some redundancies had already taken place. The cash flows, revenues and expenses relating to the steel
works can be clearly distinguished from those of the subsidiary's other operations.
Required
hr
How should the closure be treated in the financial statements for the year ended 31 December 2019?
Question No. 3
An entity is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer.
ha
The entity will continue to use the building until construction of a new headquarters building is completed. The
entity does not intend to transfer the existing building to a buyer until after construction of the new building
is completed (and it vacates the existing building).
Required:
sS
Can the building be classified as ‘held for sale’?
Question No. 4
An entity is committed to a plan to sell a manufacturing facility in its present condition and classifies the facility
as held for sale at that date. After a firm purchase commitment is obtained, the buyer’s inspection of the
rd
property identifies environmental damage not previously existed. The entity is required by the buyer to make
good the damage, which will extend the period required to complete the sale beyond one year. However, the
entity has initiated actions to make good the damage, and satisfactory rectification of the damage is highly
probable.
ga
Required:
Can the facility be classified as ‘held for sale’?
Question No. 5
Re
An entity is committed to a plan to sell a non-current asset and classifies the asset as held for sale at that date.
(a) During the initial one-year period, the market conditions that existed at the date, the asset was classified
initially as held for sale, deteriorate and, as a result, the asset is not sold by the end of that period. During
that period, the entity actively solicited but did not receive any reasonable offers to purchase the asset
and, in response, reduced the price. The asset continues to be actively marketed at a price that is
reasonable given the change in market conditions.
(b) During the following one-year period, market conditions deteriorate further, and the asset is not sold by
the end of that period. The entity believes that the market conditions will improve and has not further
reduced the price of the asset. The asset continues to be held for sale, but at a price in excess of its current
fair value.
NASIR ABBAS FCA

IFRS 5 – QUESTIONS (2)
Required:
Discuss whether the non-current asset meets the criteria for classification as held for sale in each year.
Question No. 6
On 1 January 2017, AB acquires a building for Rs. 2,000,000 with an expected life of 50 years. On 31 December
2020 AB puts the building up for immediate sale. Costs to sell the building are estimated at Rs. 100,000.
Required
Outline the accounting treatment of the above if the building had a fair value at 31 December 2020 of:
(a) Rs. 2,200,000
(b) Rs. 1,100,000
Question No. 7
h
Nash purchased a building for its own use on 1 January 2017 for Rs. 10 million and attributed it a 50 year useful
economic life. Nash uses the revaluation model to account for buildings.
uk
On 31 December 2018, this building was revalued to Rs. 12 million.
On 31 December 2019, the building met the criteria to be classified as held for sale. Its fair value was deemed
to be Rs. 11 million and the costs necessary to sell the building were estimated to be Rs. 500,000.
Required:
hr
Journalize above transactions/adjustments till 31 December 2019.
Question No. 8
An entity plans to dispose of a group of its assets. The information regarding the assets forming the disposal
group as on June 30, 2020 is as follows:
ha
Carrying amount Fair values immediately before
(Rs. million) classification as held for sale
(Rs. million)
sS
Goodwill 150 -
Property, plant & equipment 460 400
(carried at revaluation model)
Property, plant & equipment 570 -
rd
(carried at cost model)

Inventory 240 220
Financial assets (equity investment) 180 150
On June 30, 2020 the entity measured the fair value less cost to sell of the group at Rs. 1,300 million.
ga
Required:
Calculate revised carrying amounts as on June 30, 2020.
Question No. 9
Re
A building was purchased on July 1, 2015 at a cost of Rs. 40 million. Initial estimate of useful life was made at
8 years. On June 30, 2017 the building was classified as held for sale. Its fair value less cost to sell was
determined as follows:
Date Fair value less cost
to sell
June 30, 2017 Rs. 27 million
June 30, 2018 Rs. 29 million
On June 30, 2019 the plan to sell the building was changed. Recoverable amount on that date was determined
at Rs. 24 million.
Required:
All journal entries till June 30, 2019.
NASIR ABBAS FCA

IFRS – 5 - SOLUTIONS (1)
SOLUTIONS
Solution No. 1
The facility will not be transferred until the backlog of orders is completed; this demonstrates that the facility
is not available for immediate sale in its present condition. The facility cannot be classified as 'held for sale' at
31 December 2020. It must be treated in the same way as other items of property, plant and equipment: it
should continue to be depreciated and should not be separately disclosed.
Solution No. 2
Because the steel works is being closed, rather than sold, it cannot be classified as 'held for sale'. In addition,
the steel works is not a discontinued operation. Although at 31 December 2019 the group was firmly
committed to the closure, this has not yet taken place and therefore the steel works must be included in
continuing operations. Information about the planned closure could be disclosed in the notes to the financial
h
statements.
uk
Solution No. 3
The delay in the timing of the transfer of the existing building imposed by the entity (seller) demonstrates that
the building is not available for immediate sale. The criteria can not be met until the construction of the new
building in completed. Therefore, the building is not classified as held for sale.
hr
Solution No. 4
Since the delay is due to circumstances beyond entity’s control therefore this delay qualifies for exception to
one-year condition. Hence the facility shall be classified as held for sale.
ha
Solution No. 5
(a) Since the delay is due to circumstances beyond entity’s control therefore this delay qualifies for exception
to one-year condition. Hence the facility shall be classified as held for sale. At the end of the initial one-
sS
year period, the asset would continue to be classified as held for sale.
(b) In that situation, the absence of a price reduction demonstrates that the asset is not available for
immediate sale. Moreover, an asset must be marketed at a price that is reasonable in relation to its current
fair value. Therefore, the conditions for an exception to the one-year requirement would not be met. The
rd
asset would be reclassified.
Solution No. 6
ga
Until 31 December 2020 the building is a normal non-current asset and its accounting treatment is prescribed
by IAS 16. The annual depreciation charge was Rs. 40,000 (Rs. 2,000,000/50). As such, the carrying amount at
31 December 2020, prior to reclassification, was Rs. 1,840,000 [i.e. Rs. 2,000,000 – (4 × Rs. 40,000)].
Re
(a) On 31 December 2020 the building is classified as a non-current asset held for sale. It is measured at the
lower of carrying amount (i.e. Rs. 1,840,000) and fair value less costs to sell (i.e. Rs. 2,200,000 – Rs. 100,000
= Rs. 2,100,000). This means that the building will continue to be measured at Rs. 1,840,000.
(b) On 31 December 2020 the building is classified as a non-current asset held for sale. It is measured at the
lower of carrying amount (i.e. Rs. 1,840,000) and fair value less costs to sell (i.e. Rs. 1,100,000 – Rs. 100,000
= Rs. 1,000,000). The building will therefore be measured at Rs. 1,000,000 as at 31 December 2020. An
impairment loss of Rs. 840,000 will be charged to the statement of profit or loss.
NASIR ABBAS FCA

Solution No. 7
---- Rs. million ----
01-01-17 Building 10.00
Cash 10.00
[Purchase of building]

Accumulated depreciation 0.20
h
uk
31-12-18 Accumulated depreciation 0.40
Building 0.40
hr
31-12-18 Building 2.40
Revaluation surplus 2.40
[Revaluation of building]
ha
sS
31-12-19 Revaluation surplus 0.05

Retained earnings 0.05
[Incremental depreciation transfer]
rd

Building 0.25
ga
31-12-19 Revaluation surplus 0.75

Building 0.75
Re
[Revaluation of building]
31-12-19 P&L 0.50

NCA held for sale 10.50
Building 11.00
[Loss on classification as held for sale]
W-1 NBV Surplus

------ Rs. million ----
01-01-17 Initial 10.00 -
31-12-17 Dep. [10/50] (0.20) -
NASIR ABBAS FCA

9.80 -
31-12-18 Dep. (0.20) -
9.60 -
31-12-18 Revaluation 2.40 2.40
12.00 2.40
31-12-19 Dep. [12/48] [2.40/48] (0.25) (0.05)
11.75 2.35
31-12-19 Revaluation (0.75) (0.75)
11.00 1.60
Solution No. 8
h
Remeasurement
NBV just
adjustment Impairment NBV after
NBV before initial
uk
before initial loss (W-1) classification
classification
classification
-------------------------------------- Rs. million -------------------------------------
Goodwill 150.00 - 150.00 (150.00) -
hr
PPE (revaluation model) 460.00 (60.00) 400.00 (16.49) 383.51
PPE (cost model) 570.00 - 570.00 (23.51) 546.49
Inventory 240.00 (20.00) 220.00 - 220.00
Financial assets 180.00 (30.00) 150.00 - 150.00
1,600.00
ha 1,490.00 (190.00) 1,300.00
W-1 Loss allocation

sS
Goodwill 150.00 [First allocated to GW]
PPE (revaluation model) 16.49 [40 x 400/970]
PPE (cost model) 23.51 [40 x 570/970]
Inventory - Scoped out
Financial assets - Scoped out
rd
190.00 [1,490 - 1,300]

ga
Solution No. 9
Re
01-07-15 Building 40.00

Cash 40.00
[Purchase of building]
30-06-16 Depreciation [40/8] 5.00

Building 5.00

Building 5.00
NASIR ABBAS FCA

30-06-17 P&L [30 - 27] 3.00

Building 30.00
[Initial classification as held for sale]
30-06-18 NCA held for sale [29 - 27] 2.00

P&L 2.00
[Reversal of impairment loss]
30-06-19 P&L (W-1) 9.00

Building (W-1) 20.00
h
[Adjustment when classification is ceased]
uk
W-1 Rs. million
hr
Carrying amount (had asset not been classified) 20.00
[40 - 5 x 4]
Recoverable amount 24.00
ha
Lower of both 20.00
Carrying amount as per books 29.00
Immediate charge to P&L 9.00
sS
rd
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NASIR ABBAS FCA

Basic data
Following information relates to a Alpha Limited:
Statement of financial position - Extracts 2020 2019

------- Rs. million -------
Property, plant & equipment:

Division A 170 180
Other divisions 920 840
1,090 1,020
Statement of comprehensive income - Extracts
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-------- 2020 -------- -------- 2019 --------
Other Other
Division A Division A
divisions divisions
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---------------------- Rs. million ----------------------
Sales 560 1,520 430 1,330
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Cost of sales (400) (1,100) (320) (980)
Gross profit 160 420 110 350
Operating expenses (40) (130) (30) (100)
PBT ha 120 290 80 250
Tax [20%] (24) (58) (16) (50)
PAT 96 232 64 200
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Scenario I - Normal ongoing business
2020 2019
SOFP - Extracts ------- Rs. million ------
Non current assets

PPE 1,090 1,020
2020 2019
SOCI - Extracts ------- Rs. million ------
Sales 2,080 1,760
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Cost of sales (1,500) (1,300)
Gross profit 580 460
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Operating expenses (170) (130)
PBT 410 330
Tax [20%] (82) (66)
PAT 328 264
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Scenario II - Division A was classified as held for sale in 2019 and still not sold in 2020
Fair value less cost to sell was:

Rs. million
31-12-2019 165
31-12-2020 155
2020 2019
Non current assets

PPE 920 840
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Current assets
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Disposal group held for sale 155 165
2020 2019
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Sales 1,520 1,330
Cost of sales ha (1,100) (980)
Operating expenses* (130) (100)
PBT 290 250
Tax [20%] (58) (50)
Profit from continuing operations 232 200
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Profit from discontinued operations (W-1) 88 52
Profit after tax 320 252
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W-1
PBT 120 80
Loss as per IFRS 5 [165 - 155] [180 - 165] (10) (15)
110 65
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Tax [20%] (22) (13)

88 52
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* Ignore depreciation adjustment as information is not given

Scenario III - Division A was classified as held for sale in 2020

Rs. million
31-12-2020 155
2020 2019
Non current assets

PPE 920 1,020
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Current assets
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Disposal group held for sale 155 -
2020 2019
(reclassified)
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Sales ha 1,520 1,330

Cost of sales (1,100) (980)
Operating expenses (130) (100)
PBT 290 250
Tax [20%] (58) (50)
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Profit from continuing operations 232 200
Profit from discontinued operations (W-1) 84 64
Profit after tax 316 264
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W-1
PBT 120 80
Loss as per IFRS 5 [170 - 155] (15) -
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105 80
Tax [20%] (21) (16)
84 64
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Scenario IV - Division A was classified as held for sale in 2019 but ceased in 2020

Rs. million
31-12-2019 165
Value in use 173

[as on 31-12-2020]
2020 2019
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Non current assets
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PPE 1,090 840
Current assets
Disposal group held for sale - 165
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2020 2019
ha (reclassified)
Sales 2,080 1,760

Cost of sales (1,500) (1,300)
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Operating expenses (W-1) (165) (145)
PBT 415 315
Tax [20%] (83) (63)
PAT 332 252
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W-1
Operating expenses 170 130
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Loss as per IFRS 5 [180 - 165] - 15

Loss reversal as per IFRS 5 [170 - 165] (5) -
165 145
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SCOPE
This standard shall be applied in accounting for all employee benefits, except those to which IFRS 2
applies.
EMPLOYEE BENEFITS
Employee benefits are all forms of consideration given by an entity in exchange for service rendered by
employees or for the termination of employment. Employee benefits include:
(a) Short‑term employee benefits

Employee benefits (other than termination benefits) that are expected to be settled wholly before
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twelve months after the end of the annual reporting period in which the employees render the related
service.
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Examples:
(i) wages, salaries and social security contributions;
(ii) paid annual leave and paid sick leave;
(iii) profit‑sharing and bonuses; and
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(iv) non‑monetary benefits (such as medical care, housing, cars and free or subsidised goods or
services) for current employees;
(b) Post‑employment benefits

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Employee benefits (other than termination benefits and short‑term employee benefits) that are
payable after the completion of employment.
Examples:
(i) retirement benefits (e.g. pensions and lump sum payments on retirement); and
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(ii) other post‑employment benefits, such as post‑employment life insurance and post‑employment
medical care;
(c) Other long‑term employee benefits

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All employee benefits other than short‑term employee benefits, post‑employment benefits and
termination benefits.
Examples:
(i) long‑term paid absences such as long‑service leave or sabbatical leave;
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(ii) jubilee or other long‑service benefits; and

(iii) long‑term disability benefits;
(d) Termination benefits

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Employee benefits provided in exchange for the termination of an employee’s employment as a result
of either:
(i) an entity’s decision to terminate an employee’s employment before the normal retirement date;
or
(ii) an employee’s decision to accept an offer of benefits in exchange for the termination of
employment.

SHORT TERM BENEFITS – Recognition and measurement
All short-term employee benefits

When an employee has rendered service to entity during an accounting year, the entity shall recognize
the undiscounted amount of short-term benefit expected to be paid for that service as an expense, unless
any other IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)
Prepayment or accrual
If payment is different from the amount of benefits, an entity shall recognize the difference as an
accrued expense (if amount of benefits exceeds payment) or prepayment (if payment exceeds the
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amount of benefits).
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Short-term paid absences
An entity may pay employees for absence for various reasons including holidays, sickness and short‑term
disability, maternity or paternity, jury service and military service. Entitlement to paid absences falls into
two categories:
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(a) accumulating; and
(b) non‑accumulating.
Accumulating paid absences

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1. Accumulating paid absences are those that are carried forward and can be used in future periods if
the current period’s entitlement is not used in full.
2. Accumulating paid absences may be either:

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• Vesting (i.e. employees are entitled to a cash payment for unused entitlement); or
• Non‑vesting (i.e. employees are not entitled to a cash payment for unused entitlement).
3. An obligation arises as employees render service that increases their entitlement to future paid
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absences. An entity shall measure the obligation at the expected cost of accumulating paid absences
as the additional amount that the entity expects to pay as a result of the unused entitlement that has
accumulated at the end of the reporting period.
Non-vesting:
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The obligation exists, and is recognised, even if the paid absences are non‑vesting, although the
possibility that employees may leave before they use an accumulated non‑vesting entitlement
affects the measurement of that obligation.
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Non-accumulating paid absences

Non‑accumulating paid absences do not carry forward: they lapse if the current period’s entitlement is
not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the
entity. This is commonly the case for sick pay (to the extent that unused past entitlement does not
increase future entitlement), maternity or paternity leave and paid absences for jury service or military
service. An entity recognises no liability or expense until the time of the absence, because employee
service does not increase the amount of the benefit.

Profit-sharing and bonus plans

1. An entity shall recognise the expected cost of profit‑sharing and bonus payments when, and only
when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past
events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the entity has no realistic alternative but to make
the payments.
2. Under some profit‑sharing plans, employees receive a share of the profit only if they remain with the
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entity for a specified period. Such plans create a constructive obligation as employees render service
that increases the amount to be paid if they remain in service until the end of the specified period.
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The measurement of such constructive obligations reflects the possibility that some employees may
leave without receiving profit‑sharing payments.
3. An entity can make a reliable estimate of its legal or constructive obligation under a profit‑sharing or
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bonus plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amount of the benefit;
(b) the entity determines the amounts to be paid before the financial statements are authorised for
issue; or
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(c) past practice gives clear evidence of the amount of the entity’s constructive obligation.
Difference between bonus plan and dividend

An obligation under profit‑sharing and bonus plans results from employee service and not from a
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transaction with the entity’s owners. Therefore, an entity recognises the cost of profit‑sharing and
bonus plans not as a distribution of profit but as an expense.
POST-EMPLOYMENT BENEFITS
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Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans.
Defined contribution plan Defined benefit plan

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- It is a post-employment benefit plan under - It is a post-employment benefit plan other

which an entity pays fixed contribution into a than defined contribution plan. It may be
separate entity (fund) and will have no legal or unfunded or it may be fully or partially funded.
constructive obligation to pay further - Entity’s legal or constructive obligation is to
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contributions if the fund does not hold provide the agreed benefits to current and
sufficient assets to pay all employee benefits former employees.
relating to employee service in the current and - The amount of the post-employment benefit
past periods. received by the employee is determined by
- Entity’s legal or constructive obligation is defined formula for the benefit.
limited to the amount that it agrees to - The actuarial risk and investment risk fall on
contribute to the fund or an insurance the entity.
company.
- The amount of the post-employment benefit
received by the employee is the amount of

contributions (employer and employee) plus

investment returns.
- The actuarial risk and investment risk fall on
the employee.
Actuarial risk – is a risk that benefits will be less than expected

Investment risk – is a risk that assets invested will be insufficient to meet expected benefits
Defined contribution plan
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Recognition and measurement
When an employee has rendered service to entity during an accounting year, the entity shall recognize
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the contribution payable to a defined contribution plan for that service as an expense, unless any other
IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)
Prepayment or accrual
If payment is different from the amount of contribution payable, an entity shall recognize the difference
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as an accrued expense (if amount of contribution payable exceeds payment) or prepayment (if payment
exceeds the amount of contribution payable).
When contributions are not expected to be paid before twelve months after the end of year in which
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employees render the related service, these shall be discounted.
Disclosures
The entity shall disclose the amount recognized as expense for defined contribution plans.
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Defined benefit plan
Note for students:
Whole process for recognition and measurement under defined benefit plan is better understood by
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first showing the presentation in SOFP, SOCI and notes. Afterwards, all terms will be explained one by
one.
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Statement of financial position [under NCL/(NCA)]

Net defined benefit liability / (asset) XXX
Note:
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PV of defined benefit obligation XXX

Fair value of plan assets (XXX)
Net defined benefit liability / (asset)* XXX
* Asset ceiling test:

In case of net defined benefit asset, it shall be measured at the lower of:
(a) surplus in defined benefit plan (as calculated above)
(b) Present value of future economic benefits available to the entity in the form of a reduction in future
contribution or a cash refund. (same discount rate is used as used for defined benefit obligation)

Statement of comprehensive income

Current service cost * X
Past service cost * X
Net interest * X
Gain / loss on settlement * X
Other comprehensive income:
Actuarial gain/loss ** X
Return on plan assets ** X
Asset ceiling adjustment ** X
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* All these costs are shown as a single line item “salaries & wages”
** All these items are shown as a single line item “Remeasurement gain/loss”
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Notes – Reconciliation of PV of defined benefit obligation
Opening balance X
Interest cost X
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Current service cost X
Past service cost X
Benefits paid (X)
Settlement (X)
Actuarial (gain) / loss [balancing figure]
Closing balance
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X
Notes – Reconciliation of fair value of plan assets

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Opening fair value X
Interest income X
Contributions to the plan X
Benefits paid (X)
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Settlement (X)
Return on plan assets (+/-) [balancing figure] X
Closing fair value X
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1) Present value of defined benefit obligation and current service cost

1. Present value of defined benefit obligation is the present value, without deducting any plan
assets, of expected future payments required to settle the obligation resulting from employee
service in the current and prior periods. Current service cost is the increase in the present value
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of defined benefit obligation resulting from employee service in the current period.
Dr. Current service cost X

Cr. PV of Defined benefit obligation X
2. An entity shall use projected unit credit method to determine the present value of defined
obligation and related service cost. This method sees each period of service as giving rise to an
additional unit of benefit entitlement and measures each unit separately to build up the final

obligation. An entity shall attribute benefits of service under the plan’s benefit formula to periods
in which the obligation to provide post-employment benefit arises.
Example:
A lumpsum benefit equal to 1% of final salary multiplied by number of years of service will be paid
on retirement. Annual salary in year 1 is expected to be Rs. 25,000 and it is assumed to increase
8% per year. Appropriate discount rate is 10%. Assuming that employee will remain employed for
5 years, following is the calculation of defined benefit obligation and its related costs:
Lumpsum benefit = Rs. 25,000 x 1.084 x 1% x 5 = Rs. 1,700
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Benefit unit for each year service = Rs. 1,700 / 5 = Rs. 340
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Yr-1 Yr-2 Yr-3 Yr-4 Yr-5
------------------------- Rs. --------------------------
Opening balance 232 511 843 1,236
Interest cost [Opening x 10%] - 23 51 84 124
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Current service cost 232 256 281 309 340
[PV of single unit i.e. Rs. 340]
Closing balance 232 511 843 1,236 1,700
[PV of cumulative units]
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Post-employment benefit in form of annuity:
If benefit is not a lumpsum amount rather a series of payments (e.g. pension, medical facility)
then for calculation of a single unit of benefit per year of service, total amount of benefit is the
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present value, at the expected retirement date, of series of expected payments.
3. Employee service gives rise to an obligation under a defined benefit plan even if the benefits:
- are conditional on future employment (in other words they are not yet vested); or
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- become payable only if a specified event occurs when an employee is no longer employed
(e.g. medical support).
In measuring its defined benefit obligation, an entity considers the probability that some
employees may not satisfy any vesting requirements or the specified event will not occur.
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Examples:
1. A plan pays a benefit of Rs. 100 for each year of service. The benefits vest after ten years
of service.
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A benefit of Rs. 100 is attributed to each year. In each of the first ten years, the current
service cost and the present value of the obligation reflect the probability that the employee
may not complete ten years of service.
2. A plan pays a benefit of Rs. 100 for each year of service, excluding service before the age
of 25. The benefits vest immediately.
No benefit is attributed to service before the age of 25 because service before that date does
not lead to benefits (conditional or unconditional). A benefit of Rs. 100 is attributed to each
subsequent year.

4. If further service of an employee will lead to no material amount of further benefits, then all
benefit is attributed to the service periods ending on or before that date.
Examples:
1. A plan pays a lumpsum of Rs. 1,000 that vests after 10 years of service. The plan provides
no further benefit for subsequent service.
A benefit of Rs. 100 (i.e. Rs. 1,000 divided by ten) is attributed to each of the first ten years.
In each of the first ten years, the current service cost and the present value of the obligation
reflect the probability that the employee may not complete ten years of service. No benefit
is attributed to subsequent years.
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2. A plan pays a lumpsum retirement benefit of Rs. 2,000 to all employees who are still
employed at the age of 55 or above and completed twenty years of service, OR who are
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still employed at the age of 65 or above, regardless of their length of service.
For employees who join before the age of 35, service first leads to benefits under the plan
at the age of 35 (an employee could leave at the age of 30 and return at the age of 33, with
no effect on the amount or timing of benefits). Those benefits are conditional on further
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service. Also, service beyond the age of 55 will lead to no material amount of further
benefits. For these employees, the entity attributes benefit of Rs. 100 (Rs. 2,000 divided by
twenty) to each year from the age of 35 to the age of 55.
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For employees who join between the ages of 35 and 45, service beyond twenty years will
lead to no material amount of further benefits. For these employees, the entity attributes
benefit of Rs. 100 (Rs. 2,000 divided by twenty) to each of the first twenty years.
For an employee who joins at the age of 55, service beyond ten years will lead to no material
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amount of further benefits. For this employee, the entity attributes benefit of Rs. 200 (Rs.
2,000 divided by ten) to each of the first ten years.
For all employees, the current service cost and the present value of the obligation reflect the
probability that the employee may not complete the necessary period of service.
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3. A post-employment medical plan reimburses 40% of an employee’s post-employment

medical costs if the employee leaves after more than ten and less than twenty years of
service and 50% of those costs if the employee leaves after twenty or more years of
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service.
Under the plan’s benefit formula, the entity attributes 4 per cent of the present value of the
expected medical costs (40 per cent divided by ten) to each of the first ten years and 1 per
cent (10 per cent divided by ten) to each of the second ten years. The current service cost in
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each year reflects the probability that the employee may not complete the necessary period
of service to earn part or all of the benefits. For employees expected to leave within ten
years, no benefit is attributed.
5. If an employee’s service in later years will lead to a materially higher level of benefit than in earlier
years, an entity shall attribute benefit on a straight‑line basis from:
(a) the date when service by the employee first leads to benefits under the plan (whether or not
the benefits are conditional on further service) until

(b) the date when further service by the employee will lead to no material amount of further
benefits under the plan, other than from further salary increases.
That is because the employee’s service throughout the entire period will ultimately lead to a
benefit at that higher level.
Example:
A post-employment medical plan reimburses 10% of an employee’s post-employment
medical costs if the employee leaves after more than ten and less than twenty years of service
and 50% of those costs if the employee leaves after twenty or more years of service.
Service in later years will lead to a materially higher level of benefit than in earlier years.
Therefore, for employees expected to leave after twenty or more years, the entity attributes
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benefit on a straight-line basis. Service beyond twenty years will lead to no material amount of
further benefits. Therefore, the benefit attributed to each of the first twenty years is 2.5 per cent
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of the present value of the expected medical costs (50 per cent divided by twenty).
For employees expected to leave between ten and twenty years, the benefit attributed to each
of the first ten years is 1 per cent of the present value of the expected medical costs. For these
employees, no benefit is attributed to service between the end of the tenth year and the
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estimated date of leaving.
For employees expected to leave within ten years, no benefit is attributed.
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6. Estimates for defined benefit obligation and related service cost are based on actuarial
assumptions. Such assumptions shall be unbiased (i.e. neither imprudent nor excessively
conservative) and mutually compatible (i.e. reflect economic relationship between factors such
as inflation, rates of salary increase and discount rate). These assumptions are entity’s best
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estimates of the variables that will determine the ultimate cost of providing post-employment
benefits. Actuarial assumptions comprise of:
(a) Demographic assumptions that deal with matters such as:
- Mortality
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- Rate of employee turnover, disability and early retirement

- The proportion of plan members with dependents who will be eligible for benefits
- The proportion of plan members who will select each form of payment option available
under the plan terms
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- Claim rates under medical plans

(b) Financial assumptions that deal with items such as:
- The discount rate (It shall be determined in nominal terms by reference to market yield
at end of reporting period on high quality corporate bonds.)
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- Benefits levels and future salary

- In case of medical benefits, future medical costs, claim handling costs
- Tax payable by the plan on contributions relating to service
Financial assumptions shall be based on market expectations at the end of the reporting
period, for the period over which the obligations are to be settled.

7. Some defined benefit plans require employees or third parties to contribute to the cost of the
plan. It is explained in application guidance of IAS as follows:
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2) Past service cost
1. Past service cost is the change in the present value of the defined benefit obligation for employee
service in prior periods, resulting from a plan amendment (i.e. the introduction or withdrawal of
or a change to defined benefit plan) or a curtailment (i.e. significant reduction by the entity in the
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number of employees covered by a plan e.g. pant closure, discontinued operations or termination
of a plan).
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2. Past service cost may be either positive or negative. An entity shall recognize past service cost as
an expense at the earliest of:
(a) When the plan amendment or curtailment occurs; and
(b) When the entity recognises related restructuring costs or termination benefits
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Dr. Past service cost X

Cr. PV of Defined benefit obligation X
In case of negative past service cost, above entry shall be reversed.
3) Settlement
1. Settlement is a transaction that eliminates all further legal or constructive obligations for part or
all of the benefits provided under a defined benefits plan, other than a payment of benefits to
employees that set out in the terms of plan and included in the actuarial assumptions. For

example: one off transfer of significant employer obligations under the plan to an insurance
company through purchase of an insurance policy.
2. An entity shall recognize a gain or loss on settlement of a defined benefit plan when the
settlement occurs. The gain or loss on settlement is calculated as the difference between:
(a) The present value of the defined benefit obligation being settled, as determined on the date
of settlement; and
(b) The settlement price, including any plan assets transferred and any payments made directly
by the entity in connection with the settlement.
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Dr. PV of defined benefit obligation X
Cr. Plan assets / Cash X
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Dr/Cr. Gain on settlement (balancing) X
4) Interest cost
1. Interest cost is the change during the period in the present value of defined benefit obligation
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that arises from the passage of time.
2. It is calculated by applying discount rate (determined at end of last year) to year start present
value of defined benefit obligation.
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Interest cost = Opening PV of defined benefit obligation x discount rate %
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Exam note:
Generally other movements in PV of defined benefit obligation are assumed to occur at year
end. However, interest calculation will be made on time proportionate basis to accommodate
the effect of changes (e.g. benefits paid) made during the year.
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Dr. Interest cost X

Cr. PV of defined benefit obligation X
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5) Fair value of plan assets

1. Plan assets comprise of assets held by a long-term employee benefit fund and qualifying
insurance policies.
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2. Fair value of plan assets is determined at end of every year and it is deducted from present value
of defined benefit obligation in determining net defined benefit obligation/(asset).
3. For disclosures in notes, fair value of plan assets is disaggregated into classes such as cash & cash
equivalents, equity instruments, debt instruments, real estate etc.
4. Plan assets:
(a) Exclude unpaid contributions due from the reporting entity to the fund.
(b) Are reduced by accrued liabilities of the fund that do not relate to employee benefits.

6) Interest income
Interest income is calculated by applying discount rate (determined at end of last year) to year start
fair value of plan assets.
Interest income = Opening fair value of plan assets x discount rate %
Exam note:
Generally other movements in fair value of plan assets are assumed to occur at year end. However,
interest calculation will be made on time proportionate basis to accommodate the effect of changes
(e.g. benefits paid, contributions) made during the year.
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Dr. Plan assets X
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Cr. Interest cost X
7) Contributions to fund
Necessary and timely contributions are made to fund.
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Dr. Plan assets X
Cr. Cash ha X
8) Benefits paid
Post-employment benefits are paid to retiring employees out of plan assets.
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Cr. Plan assets X
9) Remeasurement
1. Actuarial gain/loss is the change during the period in the present value of defined benefit
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obligation because of changes in actuarial assumptions and experience adjustments. Such

gain/loss is recognized in other comprehensive income.
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Dr. Actuarial loss [OCI] X

Cr. PV of defined benefit obligation X
OR
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Cr. Actuarial gain [OCI] X
2. Return on plan assets is interest, dividend and other income derived from the plan assets net of
the costs of managing the plan assets. It is determined as a balancing figure in movement in fair
value of plan assets. This return is recognized in other comprehensive income.

Dr. Plan assets X

Cr. Return on plan assets [OCI] X
OR
Dr. Return on plan assets [OCI] X

Cr. Plan assets X
3. Any adjustment for asset ceiling test (other than interest as discussed in IFRIC 14) shall be
recognized in other comprehensive income.
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Reclassification to P&L:
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All above remeasurements recognized in other comprehensive income shall not be reclassified to
P&L in a subsequent period. However, an entity may transfer those amounts within equity.
Multi-employer plans
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1. Multi-employer plans are defined contribution plans or defined benefit plans that pool the assets
contributed by various entities that are not under common control and use those assets to provide
benefits to employees of more than one entity on the basis that contribution and benefit levels are
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determined without regard to the identity of the entity that employs the employees.
2. An entity shall classify a multi-employer plan as a defined contribution plan or a defined benefit plan
under the terms of the plan.
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3. If multi-employer plan is a defined benefit plan then entity shall account for its proportionate share
of the defined benefit obligation, plan assets and related costs as studied earlier. When sufficient
information is not available for defined benefit plan accounting, then entity shall account for the plan
as defined contribution plan.
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Group plans
Defined benefit plans that share risks between group entities e.g. parent and subsidiary, are not multi-
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employer plans.
State plans
An entity shall account for state plan in the same way as for a multi-employer plan.
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OTHER LONG-TERM EMPLOYEE BENEFITS
Examples:
- Long-term paid absences
- Jubilee
- Long-term disability benefits
- Profit sharing and bonuses
- Deferred remuneration


It is accounted for same as learnt for defined benefit plan except remeasurement changes are also
recognized in P&L.
TERMINATION BENEFITS
Termination benefits result from either an entity’s decision to terminate the employment or an
employee’s decision to accept an entity’s offer of benefits in exchange for termination of employment.
Recognition
An entity shall recognize a liability and expense for termination benefits at the earlier of the following
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dates:
(a) When the entity can no longer withdraw the offer of those benefits; and
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(b) When the entity recognizes cost for a restructuring that is within the scope of IAS 37 and involves the
payment of termination benefits.
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Measurement
If termination benefits are expected to be settled wholly before twelve months after the end of the year
in which the termination benefit is recognized, then entity shall account for these benefits same as short-
term benefits.
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If termination benefits are not expected to be settled wholly before twelve months after the end of the
year in which the termination benefit is recognized, then entity shall account for these benefits same as
other long-term benefits.
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Example
Background
As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that time,
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terminate the employment of all of the remaining employees at the factory. Because the entity needs
the expertise of the employees at the factory to complete some contracts, it announces a plan of
termination as follows.
Each employee who stays and renders service until the closure of the factory will receive on the
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termination date a cash payment of RS. 30,000. Employees leaving before closure of the factory will
receive RS. 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity expects 20 of
them to leave before closure. Therefore, the total expected cash outflows under the plan are RS.
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3,200,000 (ie 20 × RS. 10,000 + 100 × RS. 30,000). The entity accounts for benefits provided in exchange
for termination of employment as termination benefits and accounts for benefits provided in exchange
for services as short-term employee benefits.
Termination benefits
The benefit provided in exchange for termination of employment is RS. 10,000. This is the amount that
an entity would have to pay for terminating the employment regardless of whether the employees stay
and render service until closure of the factory or they leave before closure. Even though the employees
can leave before closure, the termination of all employees’ employment is a result of the entity’s
decision to close the factory and terminate their employment (ie all employees will leave employment

when the factory closes). Therefore the entity recognises a liability of RS. 1,200,000 (ie 120 × RS. 10,000)
for the termination benefits provided in accordance with the employee benefit plan at the earlier of
when the plan of termination is announced and when the entity recognizes the restructuring costs
associated with the closure of the factory.
Benefits provided in exchange for service

The incremental benefits that employees will receive if they provide services for the full ten-month
period are in exchange for services provided over that period. The entity accounts for them as short-
term employee benefits because the entity expects to settle them before twelve months after the end
of the annual reporting period. In this example, discounting is not required, so an expense of RS.
200,000 (ie RS. 2,000,000 ÷ 10) is recognised in each month during the service period of ten months,
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with a corresponding increase in the carrying amount of the liability.
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EMPLOYEE BENEFITS (IAS-19) - QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
Employees of Alpha Limited (AL) are entitled to 10 paid leaves for each year. Unused leaves are entitled to cash
payment on leaving the entity. Average salary of employees for the year 2020 is Rs. 30,000 per month (2019:
Rs. 25,000 per month). As on June 30, 2019 there were 115 employees and their cumulative unused
compensated absences were 540 days.
During 2020, 15 employees resigned who cashed their unused leaves of 75 days. Of remaining employees 40%
employees availed 6 leaves each and 60% employees availed 9 leaves each.
Required:
Assuming 300 working days in a year, calculate the amount of compensated absence obligation at June 30,
2020 and related expense for the year 2020.
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Question 2
Employees of Beta Limited (BL) are entitled to 5 paid leaves for each year. Unused leaves may be carried
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forward for one calendar year (i.e. non-vesting). Leaves are allowed on LIFO basis therefore leave is taken first
out of the current year’s entitlement and then out any balance brought forward from the previous year.
Average salary of employees for the year 2020 is Rs. 1,000 per day (2019: Rs. 800 per day). As on June 30, 2019
there were 100 employees and their carried forward unused compensated absences were 240 days.
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During 2020, on an average each employee availed 3 leaves. It is expected that during 2021, 70 employees will
avail 5 leaves or less, whereas 30 employees will avail 7 leaves.
Required:
Calculate the amount of compensated absence obligation at June 30, 2020 and related expense for the year
2020.
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Question 3
Gamma Limited (GL) has offered its employees (including 5 directors) following profit share for their service
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for the year:
o 10% of the profit in excess of target profit will be distributed to 5 directors, but each director can get a
maximum share equal to 20% of that profit share.
o 25% of the remaining excess profit (i.e. after deducting 10% share dedicated to directors) will be
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distributed to all employees other than directors.
However, this profit share will be distributed to only those employees (including directors) who remain
employed till June 30th next year. Target profit for the year ending December 31, 2019 was set at Rs. 8,000,000.
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However actual profit for the year 2019 was Rs. 10,500,000. Financial statements for the year ended December
31, 2019 are being finalized. It is estimated that one director will leave before June 30, 2020. Moreover, other
employees are also expected to leave as a result of which distribution of remaining excess profit to other
employees will reduce to 21%.
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Required:
Journal entry to record profit share distribution for the year ending December 31, 2019.
Question 4
An annual pension equal to 2.5% of final salary multiplied by number of years of service will be paid from
retirement till death. Annual salary in year 1 is expected to be Rs. 40,000 and it is assumed to increase 6% per
year. Appropriate discount rate is 10%.
Required:
Assuming that employee will remain employed for 5 years and will live for 4 years after retirement, show yearly
calculations for service period of 5 years relating to defined benefit obligation and related costs.
NASIR ABBAS FCA

Question 5
A company is operating two post-employment benefits plans (funded), the details of which are as follows:
Plan A
The terms of the plan are as follows.
(i) Employees contribute 6% of their salaries to the plan.
(ii) Employer contributes, currently, the same amount to the plan for the benefit of the employees.
(iii) On retirement, employees are guaranteed a pension which is based upon the number of years service with
the company and their final salary.
The following details relate to the plan in the year to December 31, 2019:
Rs. million
Present value of obligation at January 1, 2019 200
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Present value of obligation at December 31, 2019 240
Fair value of plan assets at January 1, 2019 190
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Fair value of plan assets at December 31, 2019 225
Current service cost 20
Pension benefits paid 19
Total contributions paid to the scheme for year to December 31, 2019 17
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The interest rate on high quality corporate bonds for the two plans are:
January 1, 2019 5%
December 31, 2019 6%
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Plan B
Under the terms of the plan, the company does not guarantee any return on the contributions paid into the
fund. The company's legal and constructive obligation is limited to the amount that is contributed to the fund.
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The following details relate to this scheme:
Rs. million
Fair value of plan assets at December 31, 2019 21
Contributions paid by company for year to December 31, 2019 10
Contributions paid by employees for year to December 31, 2019 10
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Required:
(a) Discuss the nature of and differences between above two plans.
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(b) Prepare extracts of SOFP, SOCI and notes for the year 2019 in respect of Plan A only.
Question 6
Savage, a public limited company, operates a funded defined benefit plan for its employees. The plan provides
a pension of 1% of the final salary for each year of service. The cost for the year is determined using the
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projected unit credit method. This reflects service rendered to the dates of valuation of the plan and
incorporates actuarial assumptions primarily regarding discount rates, which are based on the market yields
of high quality corporate bonds.
The directors have provided the following information about the defined benefit plan for the current year (year
ended June 30, 2020).
(a) The actuarial cost of providing benefits in respect of employees' service for the year to June 30, 2020 was
Rs. 40 million. This is the present value of the pension benefits earned by the employees in the year.
(b) The pension benefits paid to former employees in the year were Rs. 42 million.
(c) Savage should have paid contributions to the fund of Rs. 28 million. Because of cash flow problems Rs. 8
million of this amount had not been paid at the financial year end of June 30, 2020.
NASIR ABBAS FCA

(d) The present value of the obligation to provide benefits to current and former employees was Rs. 3,000
million at June 30, 2019 and Rs. 3,375 million at June 30, 2020.
(e) The fair value of the plan assets was Rs. 2,900 million at June 30, 2019 and Rs. 3,170 million (including the
contributions owed by Savage) at June 30, 2020.
With effect from July 1, 2019, the company had amended the plan so that the employees were now provided
with an increased pension entitlement. The actuaries computed that the present value of the cost of these
benefits at July 1, 2019 was Rs. 125 million. The interest rate on high quality corporate bonds was as follows
from the following dates:
June 30,2019 6%
June 30, 2020 7%
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Required:
Prepare extracts of SOFP, SOCI and notes for the year 2020.
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NASIR ABBAS FCA

EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Days Rate* Amount
(Rs.) (Rs.)
Balance as on 01-07-19 540 1,000 540,000
Leave encashment (75) 1,000 (75,000)
Expense for the year (balancing) 357,000
Balance as on 30-06-20 **685 1,200 822,000
* Monthly salary x 12/300
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** Year end balance = 540 - 75 + 100 x 10 - 40 x 6 - 60 x 9 = 685 days
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Solution No. 2
Since brought forward leaves balance could not be availed in 2020 and hence expired, therefore, opening
obligation must be reversed.
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Dr. Obligation for compensated absence [240 x Rs. 800] 192,000
Cr. P&L 192,000
At 30-06-20 average unused leaves balance is 2 days for 100 employees but only 30 employees are expected
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to utilize this balance in 2021 and unused leaves of 70 employees will lapse. Therefore, obligation will be
recorded for 60 days (30 x 2 days) as follows:
Dr. P&L [60 x Rs. 1,000] 60,000

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Cr. Obligation for compensated absence 60,000
Solution No. 3
Rs.
Excess profit [10,500,000 - 8,000,000] 2,500,000
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Profit distribution to directors [2,500,000 x 10% x 4/5] 200,000

Profit distribution to other employees [2,500,000 x 90% x 21%] 472,500
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672,500
Journal entry Rs. Rs.

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Dr. Employee cost 672,500

Cr. Bonus payable 672,500
Solution No. 4
Annual pension = Rs. 40,000 x 1.064 x 2.5% x 5 = Rs. 6,312

Lumpsum amount of pension (assuming 4 years remaining life) = Rs. 6,312 x annuity factor = Rs. 20,010
Benefit unit for each year service = Rs. 20,010 / 5 = Rs. 4,002
NASIR ABBAS FCA

Yr-1 Yr-2 Yr-3 Yr-4 Yr-5

------------------------- Rs. --------------------------
Opening balance - 2,733 6,013 9,922 14,553
Interest cost [Opening x 10%] - 273 601 992 1,455
Current service cost 2,733 3,007 3,308 3,639 4,002
[PV of single unit i.e. Rs. 4,002]
Closing balance 2,733 6,013 9,922 14,553 20,010
[PV of cumulative units]
Solution No. 5
(a)
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With defined contribution plans, the employer (and possibly, as here, current employees too) pay regular
contributions into the plan of a given or 'defined' amount each year. The contributions are invested, and the
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size of the post-employment benefits paid to former employees depends on how well or how badly the plan's
investments perform. If the investments perform well, the plan will be able to afford higher benefits than if
the investments performed less well. The B scheme is a defined contribution plan. The employer's liability is
limited to the contributions paid.
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With defined benefit plans, the size of the post-employment benefits is determined in advance, i.e. the
benefits are 'defined'. The employer (and possibly, as here, current employees too) pay contributions into the
plan, and the contributions are invested. The size of the contributions is set at an amount that is expected to
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earn enough investment returns to meet the obligation to pay the post-employment benefits. If, however, it
becomes apparent that the assets in the fund are insufficient, the employer will be required to make additional
contributions into the plan to make up the expected shortfall. On the other hand, if the fund's assets appear
to be larger than they need to be, and in excess of what is required to pay the post-employment benefits, the
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employer may be allowed to take a 'contribution holiday' (ie stop paying in contributions for a while).
The main difference between the two types of plans lies in who bears the risk: if the employer bears the risk,
even in a small way by guaranteeing or specifying the return, the plan is a defined benefit plan. A defined
contribution scheme must give a benefit formula based solely on the amount of the contributions.
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A defined benefit scheme may be created even if there is no legal obligation, if an employer has a practice of
guaranteeing the benefits payable. The A scheme is a defined benefit scheme. The employer, guarantees a
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pension based on the service lives of the employees in the scheme. The company's liability is not limited to the
amount of the contributions. This means that the employer bears the investment risk: if the return on the
investment is not sufficient to meet the liabilities, the company will need to make good the difference.
(b)
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Plan A
Extracts - SOFP
Rs. million
Non-current liabilities
Net defined benefit liability 15
Extracts – SOCI
Rs. million
Employee cost (20.50)
Remeasurement loss (1.50)
NASIR ABBAS FCA

Extracts – Notes
Amounts recognized in SOFP
Rs. million
PV of defined benefit obligation 240
Fair value of plan assets (225)
Amounts recognized in P&L

Rs. million
Current service cost (20)
Net interest [10 – 9.50] (0.5)
(20.5)
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Amounts recognized in OCI
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Rs. million
Actuarial loss (29.00)
Return on plan assets 27.50
(1.50)
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Reconciliation of PV of defined benefit obligation
Rs. million
Opening balance
Interest cost [200 x 5%]
ha 200.00
10.00
Current service cost 20.00
Benefits paid (19.00)
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Actuarial loss (balancing figure) 29.00
Closing balance 240.00
Reconciliation of Fair value of plan assets

Rs. million
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Opening balance 190.00

Interest income [190 x 5%] 9.50
Contributions 17.00
Benefits paid (19.00)
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Return on plan assets (balancing figure) 27.50

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Solution No. 6
Extracts - SOFP
Rs. million
Extracts – SOCI
Rs. million
Employee cost (179)
Remeasurement gain 46
NASIR ABBAS FCA

Extracts – Notes
Amounts recognized in SOFP
Rs. million
PV of defined benefit obligation 3,375
Fair value of plan assets [3,170 – 8] (3,162)
Amounts recognized in P&L

Rs. million
Current service cost (40)
Net interest [188 – 174] (14)
Past service cost (125)
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(179)
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Amounts recognized in OCI
Rs. million
Actuarial loss (64)
Return on plan assets 110
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46
Reconciliation of PV of defined benefit obligation
Opening balance
ha Rs. million
3,000
Past service cost 125
Interest cost [3,125 x 6%] 188
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Benefits paid (42)
Actuarial loss (balancing figure) 64
Closing balance 3,375
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Reconciliation of Fair value of plan assets

Rs. million
Opening balance 2,900
Interest income [2,900 x 6%] 174
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Contributions 20
Benefits paid (42)
Return on plan assets (balancing figure) 110
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NASIR ABBAS FCA

EMPLOYEE BENEFITS (IAS-19) – Amended past paper questions (1)
Question 5 [Jun-11]
Galaxy Textiles Limited (GTL) operates a funded gratuity scheme for all its employees. Contributions to the
scheme are made on the basis of annual actuarial valuation. The following relevant information has been
extracted from the actuarial report pertaining to the year ended March 31, 2011.
Rs. million
Present value of defined benefit obligation:
- April 1, 2010 133
- March 31, 2011 166
Fair value of plan assets:
- April 1, 2010 114
- March 31, 2011 120
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Benefits paid by the plan to employees 6
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Interest cost on DBO 16
Interest income on plan assets 14
Required:
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Prepare a note on retirement benefits for presentation in the financial statements for the year ended March
31, 2011 in accordance with International Financial Reporting Standards. (14)
Question 5 [Dec-12]
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Lion Engineering Limited (LEL) operates an approved pension scheme (defined benefit plan) for all its
permanent employees who have completed one year’s service. The details for the year ended 30 June 2012
relating to the pension scheme are as follows:
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Rs. million
Present value of pension scheme obligation at June 30, 2011 100
Fair value of scheme’s assets at June 30, 2011 70
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Contributions made during the year 30

Benefits paid during the year 45
Present value of pension scheme obligation at June 30, 2012 110
Fair value of scheme’s assets at June 30, 2012 80
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Additional information:
(i) With effect from 1 July 2011, LEL had amended the scheme whereby the employees’ pension entitlement
had been increased. The benefits would become vested after three years. According to actuarial valuation
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the present value of the cost of additional benefits at 1 July 2011 was Rs. 15 million.
(ii) The relevant discount rate was 13%.
(iii) LEL was required to pay Rs. 40 million to the scheme, during the year ended 30 June 2012. Because of cash
flow constraints, LEL was able to contribute Rs. 30 million only.
Required:
Prepare the relevant extracts from the statement of financial position and the related notes to the financial
statements for the year ended 30 June 2012. Show all necessary workings.
(Accounting policy note is not required. Deferred tax may be ignored) (18)
NASIR ABBAS FCA

Question 3(a) [Jun-15]

Tanzeem Limited (TL) operates a defined benefit pension plan for its employees. The following details relate
to the plan:
2014 2013
Discount rate 9% 8%
-------- Rs. million ------
Present value of obligation at year end 2,040 2,300
Fair value of plan assets at year end 1,784 2,150
Current service cost 125 143
Benefits paid during the year 99 110
Contributions made during the year 105 118
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• Present value of pension obligation and fair value of plan assets as on 1 January 2013 were Rs. 2,050 million
and Rs. 1,995 million respectively.
• During the year 2013, TL amended the scheme whereby the benefits available under the plan had been
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increased. It resulted in an increase in the present value of the defined benefit pension obligation by Rs.
13 million.
• On 31 December 2014, TL sold a business segment to Sachai Limited (SL). Accordingly, TL transferred the
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relevant component of its pension fund to SL. The present value of the defined benefit pension obligation
transferred was Rs. 280 million and the fair value of plan assets transferred was Rs. 240 million. TL also
made a cash payment of Rs. 20 million to SL in respect of the plan.
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Required:
(a) Prepare relevant extracts to be reflected in the statement of financial position, statement of
comprehensive income and notes to the financial statements for the year ended 31 December 2014 in
accordance with International Financial Reporting Standards. (Show comparative figures) (11)
(b) Prepare entries to record the pension obligation:
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- on sale of business segment to SL

- at the year-end. (03)
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Question 2 [Jun-16]
Mehran Industries Limited (MIL) operates a funded gratuity scheme for all employees. The following relevant
information has been extracted from the actuarial reports/records for the year ended 31 December 2015:
2015 2014
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Discount rate 9% 8%
-------- Rs. million ------
Present value of obligation at year end 482 438
Fair value of plan assets at year end 491 449
Benefits paid during the year 23 16
Contributions made during the year 37 21
(i) Present value of defined benefit obligations and fair value of plan assets as on 1 January 2014 were Rs. 380
million and Rs. 351 million respectively.
NASIR ABBAS FCA

(ii) On 28 December 2014, MIL sold one of its divisions and transferred the relevant portion of defined benefit
plan to the buyer. The present value of defined benefit obligation and plan assets transferred was Rs. 21
million and Rs. 19 million respectively.
(iii) On 1 January 2015, MIL changed the terms of the scheme for employees who had completed 4 years of
service. As a result, present value of defined benefit obligation increased by Rs. 30 million.
(iv) Based on the advice received from the actuary, the contribution for the year 2016 will be Rs. 23 million.
(v) The plan assets comprise of 65% debt securities (2014: 66%), 15% mutual fund units (2014: 10%), 10%
equity (2014: 14%) and the balance in bank deposits.
Required:
Prepare relevant extracts to be reflected in the statement of financial position, statement of comprehensive
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income and notes to the financial statements for the year ended 31 December 2015 in accordance with
International Financial Reporting Standards. (Show comparative figures) (11)
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NASIR ABBAS FCA

Solution [Q-5 Jun-11]

Extracts – Notes
5 – Defined benefit liability
5.1 Amounts recognized in SOFP
Rs. million
Fair value of plan assets 120
5.2 Amounts recognized in P&L

Rs. million
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Net interest cost [16 – 14] 2
17
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5.3 Amounts recognized in OCI
Rs. million
Actuarial loss 8
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Return on plan assets (i.e. loss) 19
ha 27
5.4 Reconciliation of PV of defined benefit obligation

Rs. million
Opening balance 133
Interest cost 16
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Benefits paid (6)
Actuarial (gain)/loss (balancing figure) 8
Closing balance 166
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5.5 Reconciliation of Fair value of plan assets

Rs. million
Opening balance 114
Interest income 14
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Contributions made [15 + 2] 17

Benefits paid (6)
Return on plan assets (balancing figure) (19)
Closing balance 120
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Extracts - SOFP
Rs. million
Net defined benefit liability (Note – 5) 30
Extracts – Notes
Rs. million
NASIR ABBAS FCA

Fair value of plan assets 80


Rs. million
Net interest cost [14.95 – 9.10] 5.85
49.85

Rs. million
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Actuarial gain 3.95
Return on plan assets (i.e. gain) 15.90
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19.85

Rs. million
Opening balance 100
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Interest cost [115 x 13%] 14.95
Benefits paid
ha (45)
Actuarial (gain)/loss (balancing figure) (3.95)
Closing balance 110
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Rs. million
Opening balance 70
Interest income [70 x 13%] 9.10
Contributions made 30
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Benefits paid (45)

Return on plan assets (balancing figure) 15.90
Closing balance 80
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5.6 Key actuarial assumptions

Discount rate 13%
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Solution [Q-3(a) Jun-15]

(i)
Extracts – SOFP
2014 2013
Rs. million
Non-current liabilities:
Net defined benefit liability (Note – 5) 256 150
Extracts – SOCI
2014 2013
Rs. million
Employee cost (118) (160)
NASIR ABBAS FCA


Remeasurement (loss)[213 – 326] [40 + 13] (113) (53)
Extracts – Notes
2014 2013
Rs. million
PV of defined benefit obligation 2,040 2,300
Fair value of plan assets 1,784 2,150
Net defined benefit liability 256 150
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2014 2013
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Rs. million
Net interest cost [207 – 194] [164 – 160] 13 4
Past service cost - 13
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Gain on settlement [280 – 240 – 20] 20 -

ha 2014
Rs. million
2013
Actuarial gain/(loss) 213 (40)

Return on plan assets (i.e. loss) (326) (13)
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2014 2013
Rs. million
Opening balance 2,300 2,050
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Past service cost - 13

Interest cost [2,300 x 9%] [2,050 x 8%] 207 164
Settlement (280) -
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Benefits paid (99) (110)

Actuarial (gain)/loss (balancing figure) (213) 40
Closing balance 2,040 2,300
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2014 2013
Rs. million
Interest income [2,150 x 9%][1,995 x 8%] 194 160
Contributions 105 118
Settlement (240) -
Return on plan assets (balancing figure) (326) (13)
NASIR ABBAS FCA


Discount rate 9% 8%
5.7 Settlement
During 2014, the company sells one of its business segments and transfers the relevant part of the pension
plan to the purchaser. This is a settlement. The overall gain on settlement is calculated as follows:
Rs. million
PV of benefit obligation 280
FV of plan assets (240)
Cash (20)
Gain on settlement 20
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(ii) ----- Rs. million ------
PV of DBO 280
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Plan assets 240
Cash 20
Gain on settlement 20
[Gain on settlement]
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Employee cost [125 + 13] 138
OCI 113
Plan assets [194 - 326]
ha 132
PV of DBO [207+ 125 - 213] 119
[Year-end adjustments]
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Extracts – SOFP
2015 2014
Rs. million
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Non-current assets:
Net defined benefit asset (Note – 5) 9 11
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Extracts – SOCI
2015 2014
Rs. million
Employee cost 50.71 15.23
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Remeasurement gain [24.12 – 12.41] [83.92 – 49.60] 11.71 34.32
Extracts – Notes
5 – Defined benefit asset
2015 2014
Rs. million
PV of defined benefit obligation 482 438
Fair value of plan assets 491 449
Net defined benefit asset 9 11
NASIR ABBAS FCA


2015 2014
Rs. million
Net interest cost [42.12 – 40.41] [30.40 – 28.08] 1.71 2.23
Past service cost 30 -
Gain on settlement [21 - 19] - 2

2015 2014
Rs. million
Actuarial gain/(loss) 24.12 (49.60)
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Return on plan assets gain/(loss) (12.41) 83.92
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2015 2014
Rs. million
Opening balance 438 380
hr
Past service cost 30 -
Interest cost [468 x 9%] [380 x 8%] 42.12 30.40
Settlement - (21)
Benefits paid
ha (23) (16)
Actuarial (gain)/loss (balancing figure) (24.12) 49.60
Closing balance 482 438
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2015 2014
Rs. million
Interest income [449 x 9%][351 x 8%] 40.41 28.08
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Contributions 37 21
Settlement - (19)
Return on plan assets (balancing figure) (12.41) 83.92
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Closing balance 491 449

Discount rate 9% 8%
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5.7 Future cash flows

Based on actuarial advice, the amount of expected contribution to the defined benefit scheme for the year
2016 will be Rs. 23 million.
5.8 Plan assets comprise of:

2015 2014
Rs. million
Debt securities 319 296
Mutual funds 74 45
Equity 49 63
Bank deposits 49 45
491 449
NASIR ABBAS FCA
IFRIC 14 – Class notes
BACKGROUND
IAS 19 limits the measurement of a net defined benefit asset to the lower of the surplus in the defined
benefit plan and the asset ceiling. Asset ceiling is defined as ‘the present value of any economic benefits
available in the form of refunds from the plan or reductions in future contributions to the plan’.
Questions have arisen about when refunds or reductions in future contributions should be regarded as
available, particularly when a Minimum Funding Requirement (MFR) exists. MFRs exist in many countries
to improve the security of the post-employment benefit promise made to members of an employee
benefit plan. Such requirements normally stipulate a minimum amount or level of contributions that must
be made to a plan over a given period. Therefore, an MFR may limit the ability of the entity to reduce
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future contributions.
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ISSUES
Following issues have been addressed in this IFRIC:

1. when refunds or reductions in future contributions should be regarded as available.
2. how an MFR might affect the availability of reductions in future contributions.
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3. when an MFR might give rise to a liability.
1) AVAILABILITY OF A REFFUND OR REDUCTION IN FUTURE CONTRIBUTIONS

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An entity shall determine the availability of a refund or a reduction in future contributions in accordance
with the terms and conditions of the plan and any statutory requirements in the jurisdiction of the plan.
An economic benefit, in the form of a refund or a reduction in future contributions, is available if the entity
can realize it at some point during the life of the plan or when the plan liabilities are settled. An entity
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shall determine the maximum economic benefit that is available from refunds, reduction in future
contributions or a combination of both.
Economic benefit available as refund

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The right to refund

A refund is available to an entity only if the entity has an unconditional right to a refund. It can exist
whatever the funding level of a plan at the end of the reporting period. However, if the entity’s right to a
refund of a surplus depends on the occurrence or non-occurrence of one or more uncertain future events
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not wholly within its control, the entity does not have an unconditional right and shall not recognize an
asset.
Measurement of the economic benefit

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1. An entity shall measure the economic benefit available as a refund as the amount of the surplus at
the end of the reporting period (being the fair value of the plan assets less the present value of the
defined benefit obligation) that the entity has a right to receive as a refund, less any associated costs.
For instance, if a refund would be subject to a tax other than income tax, an entity shall measure the
amount of the refund net of the tax. In measuring the amount of a refund available when the plan is
wound up, an entity shall include the costs to the plan of settling the plan liabilities and making the
refund. For example, an entity shall deduct professional fees if these are paid by the plan rather than
the entity, and the costs of any insurance premiums that may be required to secure the liability on
wind-up. [Note: It impliedly means that if a fixed certain amount of cost will be deducted then it must
be discounted using the same discount rate as used for DBO and plant assets]

IFRIC 14 – Class notes
2. If the amount of a refund is determined as the full amount or a proportion of the surplus, rather than
a fixed amount, an entity shall make no adjustment for the time value of money, even if the refund is
realizable only at a future date.
Economic benefit available as a contribution reduction

If there is no MFR for contributions relating to future service, the economic benefit available as a reduction
in future contributions is the future service cost to the entity for each period over the shorter of the
expected life of the plan and the expected life of the entity. The future service cost to the entity excludes
amounts that will be borne by employees.
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2) EFFECT OF MINIMUM FUNDING REQUIREMENT ON REDUCTION IN FUTURE CONTRIBUTIONS
If there is an MFR relating to future service, the economic benefit available as a reduction in future
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contributions is the sum of:
(a) Prepayment in respect of MFR contributions relating to future service; and
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(b) Estimated future service cost for each period over the shorter of the expected life of the plan and the
expected life of the entity less MFR contributions required for future service ignoring prepayment in
(a) above.
Limit for (b)
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While discounting the amounts in (b), if the MFR contributions required for future service exceed
the future service cost in any year, then it will be taken as a negative for discounting purpose.
However, the total present value of (b) can never be less than zero.
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3) WHEN A MINIMUM FUNDING REQUIREMENT MAY GIVE RISE TO A LIABILITY
If an entity has an obligation under an MFR to pay contributions to cover an existing shortfall on the
minimum funding basis in respect of past service, then:
(a) If MFR contributions payable will be available as a refund or reduction in future contributions after
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payment
No liability shall be recognized. (in simple words no accounting needed for this obligation)
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(b) If MFR contributions payable will NOT be available as a refund or reduction in future contributions
after payment
To the extent that the contributions payable will not be available after they are paid into the plan, the
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entity shall recognize a liability when the obligation arises.
Exam note:
- If there is existing plan surplus
Find asset ceiling adjustment for existing surplus separately and determine liability for MFR
contribution separately. Then combine both adjustments to determine final net adjustment.
- If there is existing plan deficit
First find updated plan balance after making MFR contribution (only for the purpose of
working), then determine liability adjustment on that updated balance.

LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
ABC Limited operates a funded defined benefit plan for its employees. The plan provides a pension of 1% of
the final salary for each year of service. The cost for the year is determined using the projected unit credit
method. This reflects service rendered to the dates of valuation of the plan and incorporates actuarial
assumptions primarily regarding discount rates, which are based on the market yields of high quality corporate
bonds.
Following information is available in respect of the benefit plan:
2020 2019 2018
------------ Rs. million ------------
Fair value of plan assets 1,970 1,700 1,500
PV of defined benefit obligation 1,766 1,510 1,300
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PV of economic benefits available (Asset ceiling) 220 180 170
Current service cost 280 250 210
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Contributions 160 120 100
Benefits paid 190 150 140
Discount rate 10% 10% 10%
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Required:
Prepare extracts of SOFP and SOCI for the year 2020 (also show comparative figures for 2019).
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Question 2
XYZ Limited operates a funded defined benefit plan for its employees. As per the terms and conditions of the
plan, any surplus in plan can be refunded only after following deductions:
• 5% for professional costs.
• 3% local govt. tax
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• 10% income tax
The present value of defined benefit plan and fair value of plan assets as determined at June 30, 2020 were Rs.
1,500 million and Rs. 1,700 million respectively.
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Required:
Determine the amount of net defined liability/asset to be included in statement of financial position as at June
30, 2020.
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Question 3
MNO Limited has a defined benefit plan. The MFR requires it to pay contributions to cover the future service
cost. The future service cost and related MFR contribution required as follows:
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Future service MFR

cost contribution
Year ---------- Rs. million -----------
2021 15 17
2022 15 15
2023 15 12
2024 onwards 15 11
(till perpetuity)
1,520 million and Rs. 1,600 million (including prepayment of Rs. 20 million in respect of above MFR
NASIR ABBAS FCA

contributions) respectively. Any surplus in plan cannot be refunded to the entity under any circumstances but
can be used for reductions of future contributions.
Appropriate discount rate is 7%.
Required:
Determine the amount of net defined liability/asset to be included in statement of financial position as at June
30, 2020.
Question 4
AB Limited has a funding level on the MFR basis of 80% in a benefit plan. Under the MFR, it is required to
increase the funding level to 95% immediately. As a result, it has an obligation to contribute Rs. 50 million to
the plan to cover shortfall in respect of past service. The plan rules permit a full refund of any surplus to the
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entity at the end of the life of the plan.
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Required:
Discussing the effect of MFR contribution required, determine the amount of net defined liability/asset to be
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included in statement of financial position as at June 30, 2020.
Question 5
XY Limited has a funding level on the MFR basis of 75% in a benefit plan. Under the MFR, it is required to
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increase the funding level to 100% immediately. As a result, it has an obligation to contribute Rs. 300 million
to the plan to cover shortfall in respect of past service. The plan rules permit a maximum refund of 70% of any
surplus to the entity at the end of the life of the plan.
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Required:
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Question 6
MNO Limited has a funding level on the MFR basis of 77% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% immediately. As a result, it has an obligation to contribute Rs. 300 million
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to the plan to cover shortfall in respect of past service. The plan rules permit a maximum refund of 60% of any
surplus to the entity at the end of the life of the plan.
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Required:
NASIR ABBAS FCA

Question 7
PQR Limited has a funding level on the MFR basis of 95% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% over the next 3 years. The contributions are required to cover past service
as well as future service. The plan rules do not permit any refund of any surplus to the entity at the end of the
life of the plan however can be used for reductions of future contributions.
On June 30, 2020:
- The present value of MFR contributions required for past service is approximately Rs. 300 million.
- The present value of economic benefits available as a future contribution reduction (i.e. future service cost
net of MFR contributions required) is approximately Rs. 80 million.
- The present value of defined benefit plan is Rs. 1,200 million
- Fair value of plan assets is Rs. 1,300 million.
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Required:
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NASIR ABBAS FCA

LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
2020 2019
Extracts - SOFP ------ Rs. million ------
Net defined benefit asset (W-1) 204 180
Extracts – SOCI
Employee cost (W-2) (W-3) (W-4) (262) (233)
[280 + 151 + 1 – 170] [250 + 130 + 3 – 150]
Remeasurement gain on benefit plan (W-5) 156 83
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Workings 2020 2019 2018
W-1 -------------- Rs. million ------------
Fair value of plan assets 1,970 1,700 1,500
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PV of DBO (1,766) (1,510) (1,300)
Net benefit asset 204 190 200
Asset ceiling adjustment - (10) (30)
Net benefit asset 204 180 170
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2020 2019
W-2 Reconciliation of PV of DBO ------ Rs. million ------
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Interest 151 130
Actuarial (gain)/loss 15 (20)
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W-3 Reconciliation of FV of Plan assets

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Interest 170 150
Contributions 160 120
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Return on plan assets 130 80

W-4 Asset ceiling adjustment

Interest 1 3
Remeasurement (11) (23)
Closing balance - 10
NASIR ABBAS FCA

W-5 Remeasurement
Actuarial gain /(loss) (15) 20
Asset ceiling adjustment 11 23
Return on plan assets 130 80
126 123
Solution No. 2
Rs. million
Fair value of plan assets 1,700
PV of DBO 1,500
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Surplus in plan 200
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Asset ceiling [200 x 92%] 184
Net defined benefit asset to be recognized 184
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Solution No. 3 ha Rs. million
Fair value of plan assets 1,600.00
PV of defined benefit obligation 1,520.00
Surplus 80.00
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Asset ceiling (W-1) 67.23
Net defined benefit asset 67.23

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W-1
Future MFR Contribution
Year
service cost contributions reduction
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----------- Rs. million -----------

2021 15.00 17.00 (2.00)
2022 15.00 15.00 -
2023 15.00 12.00 3.00
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2024 15.00 11.00 4.00

onwards
Rs. million
PV of future service cost less MFR 47.23
[-2 x 1.07-1 + 0 x 1.07-2 + 3 x 1.07-3 + 4 x 0.07-1 x 1.07-3]
Prepayment of MFR 20.00
Asset ceiling 67.23
NASIR ABBAS FCA

Solution No. 4
IFRIC 14 requires the entity to recognize a liability to the extent that the contributions payable are not fully
available. Payment of the contributions of Rs. 50 million will increase the IAS 19 surplus from Rs. 100 million
to Rs. 150 million. Under the rules of the plan this amount will be fully refundable to the entity with no
associated costs. Therefore, no liability is recognized for the obligation to pay the contributions and the net
defined benefit asset will be presented in SOFP at Rs. 100 million.
Solution No. 5
The payment of Rs. 300 million would increase the IAS 19 surplus of Rs. 100 million to Rs. 400 million. Of this
Rs. 400, 70% (Rs. 280 million) is refundable. The remaining Rs. 120 million (30% of Rs. 400 million) of the
contributions paid is not available to the entity. IFRIC 14 requires the entity to recognize a liability to the extent
that the additional contributions payable are not available to it. Therefore, existing surplus of Rs. 100 million
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will be reduced to its asset ceiling of Rs. 70 million and additional liability will be recorded for Rs. 90 million
(30% of Rs. 300 million). As a result the net defined benefit liability recognized in SOFP is Rs. 20 million. On
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payment of MFR contribution of Rs. 300 million, it will be converted into net defined benefit asset of Rs. 280
million.
Summary:
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Rs. million
Surplus 100.00
Asset ceiling adjustment(W-1)
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Net defined benefit liability (20.00)
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W-1
Reduction of existing surplus [Rs. 100m x 30%] (30)
Additional liability for additional contributions (90)
(120)
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Solution No. 6
The payment of Rs. 300 million would change the IAS 19 deficit of Rs. 100 to a surplus of Rs. 200 million. Of
this Rs. 200 million, 60% (Rs. 120 million) is refundable. The remaining Rs. 80 million (40% of Rs. 200 million)
of the contributions paid is not available to the entity. IFRIC 14 requires the entity to recognize a liability to the
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extent that the additional contributions payable are not available to it. Therefore, the net defined benefit
liability is Rs. 180 million, comprising the deficit of Rs. 100 million plus the additional liability of Rs. 80 million.
On payment of MFR contribution of Rs. 300 million, it will be converted into net defined benefit asset of Rs.
120 million.
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Summary:
Rs. million
Deficit (100.00)
Additional liability [200 x 40%] (80.00)
NASIR ABBAS FCA

Solution No. 7
Current surplus of Rs. 100 million can not be refunded however it can be used for future reduction in future
contributions. Only Rs. 80 million is available as economic benefit in form of reduction in future contributions,
thus it will be reduced by Rs. 20 million. Moreover, additional liability of Rs. 300 million will be recognized for
MFR in respect of past service as no refund is available.
Summary:
Rs. million
Surplus 100.00
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Asset ceiling adjustment (W-1) (320.00)
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W-1
Reduction of existing surplus [Rs. 100m - Rs. 80m] (20)
Additional liability for additional contributions (300)
(320)
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NASIR ABBAS FCA

SCOPE
1. This standard shall be applied in accounting for all share-based payment transactions, including:
(i) Equity-settled share-based payment transactions.
(ii) Cash-settled share-based payment transactions.
(iii) Transactions with options for settlement in cash or equity instruments.
Group entities:
This IFRS also applies when goods and services are received by one entity and another entity in
the same group has an obligation to settle a share-based payment transaction.
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2. This standard shall not apply to:
(i) Issue of shares to existing holders of equity instruments in their capacity as a holder of equity
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instruments. (e.g right issue)
(ii) Issue of shares in business combination.
SHARE-BASED PAYMENT TRANSACTIONS
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Share-based payment arrangement
An agreement between the entity (or another group entity or any shareholder of any group entity) and
another party (including an employee) that entitles the other party to receive:
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(a) cash or other assets of the entity for amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or another group entity, or
(b) equity instruments (including shares or share options) of the entity or another group entity,
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provided the specified vesting conditions, if any, are met.
Share-based payment transaction

A transaction in which the entity:
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(a) receives goods or services from the supplier of those goods or services (including an employee) in a
share-based payment arrangement, or
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(b) incurs an obligation to settle the transaction with the supplier in a share-based payment arrangement
when another group entity receives those goods or services.
Equity-settled share-based payment transaction

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A share-based payment transaction in which the entity:

(a) receives goods or services as consideration for its own equity instruments, or
(b) receives goods or services but has no obligation to settle the transaction with the supplier.
Cash-settled share-based payment transaction

A share-based payment transaction in which the entity acquires goods or services by incurring a liability
to transfer cash or other assets to the supplier of those goods or services for amounts that are based on
the price (or value) of equity instruments of the entity or another group entity.

RECOGNITION – General
When an entity obtains the goods or receive the services, it shall recognize the transaction:
Dr. Expense / Asset

Cr. Relevant equity account [in case of equity-settled share-based payment transaction]
Cr. Liability [in case of cash-settled share-based payment transaction]
Exam note:
IFRS 2 does not specifically mention which equity account is credited. It is better to use a separate
account e.g. “equity instruments granted” unless shares or share options are eventually issued.
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Equity instrument granted
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The right (conditional or unconditional) to an equity instrument of the entity conferred by the entity on
another party, under a share-based payment transaction.
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTION
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Overview of measurement
An entity shall measure the goods or services received and the corresponding increase in equity at the
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fair value of:
If fair value of goods or services received can be If fair value of goods or services cannot be
measured reliably: measured reliably (e.g. employee service)
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the goods or services received. the equity instrument granted.
Fair value
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The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted
could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.
(It is different from IFRS 13)
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Grant date
The date at which the entity and another party (including an employee) agree to a share-based
payment arrangement. If that agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is obtained.
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Example where fair value of goods or services cannot be measured reliably:

Background
An entity granted shares with a total fair value of Rs. 100,000 to parties other than employees who are
from a particular section of the community (historically disadvantaged individuals), as a means of
enhancing its image as a good corporate citizen. The economic benefits derived from enhancing its
corporate image could take a variety of forms, such as increasing its customer base, attracting or
retaining employees, or improving or maintaining its ability to tender successfully for business
contracts. The entity cannot identify the specific consideration received. For example, no cash was

received and no service conditions were imposed. Therefore, the identifiable consideration (nil) is less
than the fair value of the equity instruments granted (Rs. 100,000).
Application of requirements
Although the entity cannot identify the specific goods or services received, the circumstances indicate
that goods or services have been (or will be) received, and therefore IFRS 2 applies. In this situation,
because the entity cannot identify the specific goods or services received, the rebuttable presumption
in paragraph 13 of IFRS 2, that the fair value of the goods or services received can be estimated reliably,
does not apply. The entity should instead measure the goods or services received by reference to the
fair value of the equity instruments granted.
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Transactions in which services are received (e.g. employee services)
[A detailed discussion on recognition timing]
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Case I – If the equity instruments granted vests immediately [i.e. no vesting conditions]
In the absence of evidence to the contrary, the entity shall presume that services rendered by the
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counterparty as consideration for the equity instruments have been received. In this case, on grant date
the entity shall recognize the services received in full, with a corresponding increase in equity.
Case II – If the equity instruments granted requires some vesting conditions

Vesting conditions
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A condition that determines whether the entity receives the services that entitle the counterparty to
receive cash, other assets or equity instruments of the entity, under a share-based payment
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arrangement. A vesting condition is either a service condition or a performance condition.
Service condition:
A vesting condition that requires the counterparty to complete a specified period of service during
which services are provided to the entity. If the counterparty, regardless of the reason, ceases to
provide service during the vesting period, it has failed to satisfy the condition. A service condition does
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not require a performance target to be met.
Performance condition
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A vesting condition that requires:

(a) the counterparty to complete a specified period of service (ie a service condition); the service
requirement can be explicit or implicit; and
(b) specified performance target(s) to be met while the counterparty is rendering the service required
in (a) [e.g. share price growth or profits growth of the entity or its group member]. The period of
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achieving such performance target shall not extend beyond the end of above service period in (a).

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The entity shall presume that the services, to be rendered by the counterparty as consideration for those
equity instruments, will be received in the future, during the vesting period.
(a) Service condition

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If equity instruments granted do not vest until the counterparty completes a service period, the entity
shall account for those services as they are rendered by the counterparty over the vesting period,
with a corresponding increase in equity. For example, if an employee is granted share options
conditional upon completing three years’ service, then the entity shall presume that the services to
be rendered by the employee as consideration for the share options will be received in the future,
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over that three-year vesting period.
(b) Performance condition

1. If equity instrument granted is conditional upon the achievement of a performance condition and
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remaining in the entity’s employ/service until that performance condition is satisfied, the entity
shall account for the service expense with a corresponding increase in equity over the expected
vesting period.
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2. An entity shall estimate the length of the expected vesting period at the grant date, based on
most likely outcome of the performance condition. If performance condition:
is a market condition ONLY is other than a market condition:

the estimate of the length of the vesting the entity shall revise its estimate of the
period shall be consistent with the length of the vesting period, if necessary, if
assumptions used in estimating the fair value subsequent information indicates that the
of the options granted, and shall not be length of the vesting period differs from
subsequently revised. previous estimates.

Market condition
A performance condition, upon which the exercise price, vesting or exercisability of an equity
instrument depends, that is related to market price of the entity’s equity instruments (or of
group member). For example attaining a specified share price or a specified amount of intrinsic
value of share option or a specified % of total shareholders return.
Exam note:
Discussion about vesting period above can be summarized as follows:
In case of service condition:
Vesting period is the conditional service period agreed.
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In case of performance condition which is a market condition ONLY:
Vesting period is the period estimated by the management initially while estimating the fair
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value of the instrument granted. This estimate is not revised subsequently.
In case of performance condition other than a market condition:

[There may or may not be a market condition in addition to other conditions]
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Vesting period is the period estimated by the management for completion of conditions. This
estimate is subsequently reviewed and revised if needed.
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Transactions measured at fair value of equity instrument granted
[A detailed discussion on measurement]
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Case I – Fair value of equity instrument granted can be measured reliably
Determining the fair value of equity instrument granted:

An entity shall measure the fair value of equity instrument granted at measurement date based on:
- Market prices [if market prices are available]
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- Other generally accepted valuation techniques [if market prices are not available]
Measurement date:
It is the date at which fair value of the equity instrument granted is measured. Measurement date:
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For transactions with employees – is the grant date

For transactions with other parties – is the date when goods or services are received
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Exam notes for fair value:

- Fair value of “equity instrument granted (i.e. right to get shares or share options)” is by default
equal to the fair value of the related “equity instrument (i.e. share or share option itself)”.
- If Cum-dividend price of share is given then announced dividend must also be given. In that case
deduct the dividend from share price to make it Ex-dividend price. Now this ex-dividend price shall
be used as “fair value of share”.
- “Fair value” of shares shall be the market price, adjusted to take into account the terms and
conditions upon which the shares were granted. (i.e. will be given in exam)
- Fair value of share options shall be estimated by applying an option pricing model e.g. binomial
pricing model or black-scholes-merton model. (i.e. will be given in exam)

Treatment of vesting conditions:

Market condition: Any other condition:
- Market condition (e.g. target share price) shall - Such vesting conditions shall not be taken into
be taken into account when estimating the fair account when estimating the fair value of
value of the equity instrument granted. equity instruments
- If there are other performance conditions as - Instead, these conditions shall be taken into
well, then the entity shall recognize the goods account by adjusting the number of equity
or services when other vesting conditions are instruments included in the measurement of
met, irrespective of whether that market the transaction amount.
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condition is satisfied.
- The entity shall recognize the amount of goods
[Treatment of non-vesting conditions are same as or services over the vesting period on the best
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above.] available estimate of the number of equity
instruments expected to vest and shall revise
that estimate subsequently, if necessary, so
that ultimately the amount recognized for
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goods and services shall be based on the
number of equity instruments that eventually
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- Hence on a cumulative basis, no amount is

recognized for goods or services received if
the equity instruments granted do no vest
because of failure to satisfy a vesting
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condition.
Exam note:
Amount is calculated at end of every year (till vesting date) on cumulative basis as follows:
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= Best estimate of no. of equity instruments expected to eventually vest x fair value of instrument
granted at measurement date x period till reporting year end ÷ Total vesting period
Here, in case of employees, best estimate of no. of equity instruments can be further split into:
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= Number of persons x number of instruments per person
Above calculated amount is considered as closing balance of respective equity account and any change
in balance is:
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Dr. Employee cost

Cr. Equity instrument granted
[In case of negative balancing figure, above entry will be reversed]
After vesting date:

The entity shall not subsequently reverse the amount recognized for goods or services received if the
vested equity instruments are later forfeited or expired without exercise. However, entity may transfer
the amount within equity (e.g. transferred to retained earnings).

Case II – Fair value of equity instrument granted cannot be measured reliably
1. The entity shall measure the equity instruments (i.e. generally share options) initially at measurement
date at intrinsic value. This intrinsic value is remeasured subsequently on every year-end and finally
on the date of settlement (e.g. exercise, forfeiture, lapse). Any changes on this remeasurement are
recognized in P&L.
Intrinsic value of share option

= Fair value of shares – exercise price
2. The entity shall recognize the goods or services received based on the number of instruments that are
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expected to ultimately vest or ultimately be exercised. The entity shall revise that estimate, if
necessary, if subsequent information indicates that the number of instruments expected to vest
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differs from previous estimates. [i.e. same as studied earlier in “treatment of other vesting
conditions”]
3. After vesting date, the entity shall reverse the amount recognized for goods or services received if
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the share options are later forfeited, or lapse at the end of the share option’s life.
4. If an entity settles a grant, it shall account for it as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
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remaining vesting period. Moreover, any payment made to counterparty on settlement of the grant
shall be accounted for:
- Upto the amount of fair value of equity instruments granted measured at cancellation date:
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as the repurchase of equity (i.e. deduction from equity)
- Any payment in excess of the fair value:

as an expense immediately in P&L
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Modification to the terms and conditions of grant (including cancellations and settlements)
[For example, a downturn in the equity market may mean that the original option exercise price set is no
longer attractive, therefore, the exercise price is reduced (i.e. option is repriced)]
This guidance is relevant for share-based payment transactions with employees as well as transactions
with other parties that are measured at the fair value of the equity instruments granted. This guidance is
technically not necessary when equity instrument granted is measured at intrinsic value.
Case I – Modification is beneficial for counterparties (e.g. employees)
Examples – reduction in exercise price, increase in equity instruments granted, reduction in vesting
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period, reduction in performance condition (other than market condition)
Application of modification:
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1. Continue to recognize the original fair value of measurement date of the original equity instruments
granted over the original vesting period. (i.e. same as was done before modification)
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2. Any increase in total fair value at the date of modification (either due to increase in fair value or due
to increase in number of equity instruments granted) shall be recognized:
If modification occurs during vesting period

ha If modification occurs after vesting period
Over the remaining period from the Immediately
modification date until the date when the
modified equity instruments vest. OR
Over the remaining vesting period if employee

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is required to complete an additional vesting
period.
Increase in total fair value of equity instruments

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If fair value of equity instrument is increased (e.g. by reducing the exercise price)
Rs.
Fair value of instruments measured immediately after modification XXX
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Less Fair value of instruments measured immediately before modification (XXX)

Total increase in fair value XXX
If number of equity instruments is increased

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Total increase in fair value

= Total fair value of additional equity instruments granted measured at the date of modification
3. If the entity modifies the vesting conditions in a manner that is beneficial to the counterparty, the
entity shall consider the modified vesting conditions for “treatment of vesting conditions” as studied
earlier.

Case II – Modification is not beneficial for counterparties (e.g. employees)
Examples – increase in exercise price, decrease in equity instruments granted, increase in vesting period,
addition in performance condition (other than market condition)
Application of modification:
1. If the modification decreases the fair value of equity instruments granted (e.g. due to increase in
exercise price), the entity shall not account for this decrease in fair value rather it shall continue to
recognize the original fair value of measurement date of the original equity instruments granted over
the original vesting period. (i.e. same as was done before modification)
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2. If modification reduces the number of equity instruments granted, that reduction shall be accounted
for as a cancellation of that portion of grant, in accordance with Case III below.
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3. If the entity modifies the vesting conditions in a manner that is not beneficial to the counterparty, the
entity shall not consider the modified vesting conditions for “treatment of vesting conditions” as
studied earlier.
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Case III – Cancellation (other than cancellation by failure of vesting conditions)
(a) Cancellation and settlement ha

1. The entity shall account for the cancellation as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
remaining vesting period.
2. Any payment made to counterparty on settlement of the grant shall be accounted for:
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- Upto the amount of fair value of equity instruments granted measured at cancellation date:
as the repurchase of equity (i.e. deduction from equity)
- Any payment in excess of the fair value:

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as an expense immediately in P&L
3. If share-based payment arrangement included liability components, the entity shall remeasure
the fair value of the liability at the date of cancellation. Any payment made to settle the liability
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component shall be accounted for as a repayment of the liability.
(b) Cancellation and replacement with new equity instruments

The entity shall account for the grant of new equity instruments as replacement for the cancelled
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equity instruments in the same way as a modification of original grant as studied in Case I and II above.
Except here the increase in total fair value is determined as follows:
Rs. Rs.
Fair value of replacement equity instruments at replacement date X
Less:
Fair value of cancelled equity instruments immediately before cancellation X
Less: Payment made to counterparty considered as deduction from equity in (a) (X) (X)
Increase in total fair value to be accounted for X
If new instruments cannot be identified as replacement grant, then original grant shall be accounted
for as “cancelled” and new grant shall be accounted for as a new grant of equity instruments.

CASH-SETTLED SHARE-BASED PAYMENT TRANSACTION
Examples – share appreciation rights, granting shares that are redeemable either mandatorily or at
employee’s option
Measurement
The entity shall measure the goods and services received and the related liability at the fair value of the
liability (i.e. determined using an appropriate valuation model). This fair value of liability is remeasured
subsequently on every year end and finally on the date of settlement. Any changes on this remeasurement
are recognized in P&L.
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Recognition
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Case I – If the counterparty’s right to receive cash vests immediately [i.e. no vesting conditions]
In the absence of evidence to the contrary, the entity shall presume that services rendered by the
counterparty have been received. In this case, the entity shall recognize the services received in full, with
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a corresponding increase in liability.
Case II – If the transaction requires some vesting conditions

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The entity shall presume that the services to be rendered by the counterparty will be received in the
future, during the expected vesting period.
Treatment of vesting conditions:

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Market condition: Any other condition:
- Market condition (e.g. target share price) shall - Vesting conditions shall not be taken into
be taken into account when estimating the fair account when estimating the fair value of the
value of the liability. liability.
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[Treatment of non-vesting conditions are same as - Instead these conditions shall be taken into
above.] account by adjusting the number of awards
included in the measurement of the
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transaction amount.
- The entity shall recognize the amount of goods

or services over the vesting period on the best
available estimate of the number of awards
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expected to vest and shall revise that estimate

subsequently, if necessary, so that ultimately
the amount recognized for goods and services
shall be based on the number of awards that
eventually vest.
- Hence on a cumulative basis, the amount

recognized for goods or services received is
equal to the cash that is paid.

Modification to the terms and conditions that changes its classification

Application of modification: [even if it occurs after vesting period]
1. If modification changes its classification from cash-settled to equity-settled transaction, then:

(a) Equity-settled transaction shall be measured at fair value of equity instruments granted at the
modification date. It is recognized to the extent to which goods or services have been received.
(b) The liability for cash-settled transaction at modification date shall be derecognized.
(c) Any difference between (a) and (b) is recognized immediately in profit or loss.
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If a result of the modification, the vesting period is extended or shortened, then application of (a)
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reflects the modified vesting period.
2. If cash-settled transaction is cancelled and equity instruments are granted, which are identified as
replacement, then it shall also be accounted for as (1) above.
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SHARE-BASED PAYMENT TRANSACTIONS WITH A NET SETTLEMENT FEATURE FOR WHT OBLIGATIONS
1. Tax laws or regulations may oblige an entity to withhold an amount for an employee’s tax obligation
associated with a share-based payment and transfer that amount, normally in cash, to the tax
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authority on the employee’s behalf. To fulfil this obligation, the terms of the share-based payment
arrangement may permit or require the entity to withhold the number of equity instruments equal to
the monetary value of the employee’s tax obligation from the total number of equity instruments that
otherwise would have been issued to the employee upon exercise (or vesting) of the share-based
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payment (i.e. the share-based payment arrangement has a ‘net settlement feature’).
2. Since this withholding of shares is to fund the payment to the tax authority in respect of employee’s
tax obligation associated with the transaction, therefore, the payment made shall be accounted for
same as studied in Case III (a) point 2 on page 9 above.
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SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVE

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Counterparty has a choice of settlement

If entity has granted the counterparty the right to choose whether to settle a share-based payment
transaction in cash or issuance of equity instruments, the entity has granted compound financial
instruments thus it includes a debt component and an equity component. It is accounted for as follows:
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1. Total amounts of equity component and liability component are determined at grant date as follows:
Case I – If the fair value of goods or services can be measured reliably

Rs.
Total value of goods or service [Fair value of goods or service] X
Liability component [Fair value of debt component] (X)
Equity (balancing) X

Case II – If the fair value of goods or services cannot be measured [e.g. services of employees]
Rs.
Total value of goods or service [Fair value of share alternative] X
Liability component [Fair value of debt component] (X)
Equity (balancing) X
2. Once total amount is allocated, the “liability component” and “equity component” are accounted for
as studied earlier for “cash-settled share-based payment transactions” and “equity-settled share-
based payment transaction” respectively in relation to goods and service received.
3. At the settlement date, liability component shall be remeasured to its fair value with corresponding
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increase/decrease in P&L.
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4. If at settlement:
(a) Entity pays in cash rather than issuing equity instruments then:
- Payment is applied to settle the liability in full
- Equity component is transferred to any other reserve (e.g. retained earnings)
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(b) Entity issues equity instruments rather than paying cash then:
- Liability shall be transferred to equity as the consideration of the equity instruments issued
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Entity has a choice of settlement
If entity has a choice of whether to settle in cash or by issuing equity instruments, the entity shall
determine whether it has a present obligation to settle in cash or not.
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Case I – If the entity has a present obligation to settle in cash
1. It may happen if:
- Entity is legally prohibited from issuing shares
- Entity has a past practice or stated policy to settle in cash
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- Entity generally settles in cash whenever counterparty asks for cash settlement
2. It shall account for the transaction as “cash-settled share-based payment transaction”.

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Case II – If the entity has no such obligation to settle in cash

1. It shall account for the transaction as “equity-settled share-based payment transaction”.
2. Upon settlement if:
(i) Entity selects to settle in cash, the payment shall be accounted for as the repurchase of equity
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(i.e. deduction from equity.)

(ii) Entity elects to settle by issuing equity instruments, it is normally accounted for as studied earlier
for equity-settled share-based payment transaction
(iii) Entity selects out of (i) or (ii) which have higher fair value (as settlement date) then the difference
between (i) and (ii) shall be recognized as expense.

SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS (1)
PRACTICE QUESTIONS
Question 1 [IG Example 1A]
An entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee
working for the entity over the next three years. The entity estimates that the fair value of each share option
is Rs. 15.
On the basis of a weighted average probability, the entity estimates that 20 % of employees will leave during
the three-year period and therefore forfeit their rights to the share options.
Required:
Prepare extracts of SOFP and SOCI for all 3 years and journal entry of issuing share options at end of 3rd year
if:
(a) If everything turns out exactly as expected.
(b) During year 1, 20 employees leave. The entity revises its estimate of total employee departures over the
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three-year period from 20 % (100 employees) to 15 % (75 employees). During year 2, a further 22
employees leave. The entity revises its estimate of total employee departures over the three-year period
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from 15 % to 12 % (60 employees). During year 3, a further 15 employees leave. Hence, a total of 57
employees forfeited their rights to the share options during the three-year period, and a total of 44,300
share options (443 employees × 100 options per employee) vested at the end of year 3.
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Question 2 [IG Example 2]
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the
employees’ remaining in the entity’s employ during the vesting period. The shares will vest at the end of year
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1 if the entity’s earnings increase by more than 18 %; at the end of year 2 if the entity’s earnings increase by
more than an average of 13 % per year over the two-year period; and at the end of year 3 if the entity’s earnings
increase by more than an average of 10 % per year over the three-year period. The shares have a fair value of
Rs. 30 per share at the start of year 1, which equals the share price at grant date. No dividends are expected
sS
to be paid over the three-year period.
By the end of year 1, the entity’s earnings have increased by 14 %, and 30 employees have left. The entity
expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the shares
will vest at the end of year 2. The entity expects, on the basis of a weighted average probability, that a further
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30 employees will leave during year 2, and therefore expects that 440 employees will vest in 100 shares each
at the end of year 2.
By the end of year 2, the entity’s earnings have increased by only 10 % and therefore the shares do not vest at
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the end of year 2. 28 employees have left during the year. The entity expects that a further 25 employees will
leave during year 3, and that the entity’s earnings will increase by at least 6 %, thereby achieving the average
of 10 % per year.
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By the end of year 3, 23 employees have left and the entity’s earnings have increased by 8 %, resulting in an
average increase of 10.67 % per year. Therefore, 419 employees received 100 shares at the end of year 3.
Required:
Prepare extracts of SOFP and SOCI for all 3 years and journal entry of issue of shares at end of 3rd year (assuming
face value of each share Rs. 10).

At the beginning of year 1, Entity A grants share options to each of its 100 employees working in the sales
department. The share options will vest at the end of year 3, provided that the employees remain in the entity’s
employ, and provided that the volume of sales of a particular product increases by at least an average of 5 %
per year. If the volume of sales of the product increases by an average of between 5 % and 10 % per year, each
employee will receive 100 share options. If the volume of sales increases by an average of between 10 % and
NASIR ABBAS FCA

15 % each year, each employee will receive 200 share options. If the volume of sales increases by an average
of 15 % or more, each employee will receive 300 share options.
On grant date, Entity A estimates that the share options have a fair value of Rs. 20 per option. Entity A also
estimates that the volume of sales of the product will increase by an average of between 10 % and 15 % per
year, and therefore expects that, for each employee who remains in service until the end of year 3, 200 share
options will vest. The entity also estimates, on the basis of a weighted average probability, that 20 % of
employees will leave before the end of year 3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will
leave by the end of year 3. Hence, the entity expects that 80 employees will remain in service for the three-
year period. Product sales have increased by 12 % and the entity expects this rate of increase to continue over
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the next 2 years.
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By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity now expects
only three more employees will leave during year 3, and therefore expects a total of 15 employees will have
left during the three-year period, and hence 85 employees are expected to remain. Product sales have
increased by 18 %, resulting in an average of 15 % over the two years to date. The entity now expects that sales
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will average 15 % or more over the three-year period, and hence expects each sales employee to receive 300
share options at the end of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year
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period, and 86 employees remain. The entity’s sales have increased by an average of 16 % over the three years.
Therefore, each of the 86 employees receives 300 share options.
Required:
Prepare extracts of SOFP and SOCI for all 3 years.
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At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the
executive remaining in the entity’s employ until the end of year 3. The exercise price is Rs. 40. However, the
exercise price drops to Rs. 30 if the entity’s earnings increase by at least an average of 10 % per year over the
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three-year period. On grant date, the entity estimates that the fair value of the share options, with an exercise
price of Rs. 30, is Rs. 16 per option. If the exercise price is Rs. 40, the entity estimates that the share options
have a fair value of Rs. 12 per option.
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During year 1, the entity’s earnings increased by 12 %, and the entity expects that earnings will continue to
increase at this rate over the next two years. The entity therefore expects that the earnings target will be
achieved, and hence the share options will have an exercise price of Rs. 30.
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During year 2, the entity’s earnings increased by 13 %, and the entity continues to expect that the earnings
target will be achieved.
During year 3, the entity’s earnings increased by only 3 %, and therefore the earnings target was not achieved.
The executive completes three years’ service, and therefore satisfies the service condition. Because the
earnings target was not achieved, the 10,000 vested share options have an exercise price of Rs. 40.
Required:

executive remaining in the entity’s employ until the end of year 3. However, the share options cannot be
exercised unless the share price has increased from Rs. 50 at the beginning of year 1 to above Rs. 65 at the end
NASIR ABBAS FCA
of year 3. If the share price is above Rs. 65 at the end of year 3, the share options can be exercised at any time
during the next seven years, i.e. by the end of year 10.
The entity applies a binomial option pricing model, which takes into account the possibility that the share price
will exceed Rs. 65 at the end of year 3 (and hence the share options become exercisable) and the possibility
that the share price will not exceed Rs. 65 at the end of year 3 (and hence the options will be forfeited). It
estimates the fair value of the share options with this market condition to be Rs. 24 per option.
Required:

At the beginning of year 1, an entity grants 10,000 share options with a ten-year life to each of ten senior
executives. The share options will vest and become exercisable immediately if and when the entity’s share
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price increases from Rs. 50 to Rs. 70, provided that the executive remains in service until the share price target
is achieved. The entity applies a binomial option pricing model, which takes into account the possibility that
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the share price target will be achieved during the ten-year life of the options, and the possibility that the target
will not be achieved. The entity estimates that the fair value of the share options at grant date is Rs. 25 per
option. From the option pricing model, the entity determines that the mode of the distribution of possible
vesting dates is five years. In other words, of all the possible outcomes, the most likely outcome of the market
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condition is that the share price target will be achieved at the end of year 5. Therefore, the entity estimates
that the expected vesting period is five years. The entity also estimates that two executives will have left by
the end of year 5, and therefore expects that 80,000 share options (10,000 share options × 8 executives) will
vest at the end of year 5.
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Throughout years 1–4, the entity continues to estimate that a total of two executives will leave by the end of
year 5. However, in total three executives leave, one in each of years 3, 4 and 5. The share price target is
achieved at the end of year 6. Another executive leaves during year 6, before the share price target is achieved.
Required:
sS
Prepare extracts of SOFP and SOCI for 5 years.

At the beginning of year 1, an entity grants 1,000 share options to 50 employees. The share options will vest
at the end of year 3, provided the employees remain in service until then. The share options have a life of 10
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years. The exercise price is Rs. 60 and the entity’s share price is also Rs. 60 at the date of grant.
At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options
granted.
At the end of year 1, three employees have ceased employment and the entity estimates that a further seven
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employees will leave during years 2 and 3. Hence, the entity estimates that 80 per cent of the share options
will vest.
Two employees leave during year 2, and the entity revises its estimate of the number of share options that it
expects will vest to 86 per cent.
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Two employees leave during year 3. Hence, 43,000 share options vested at the end of year 3.
The entity’s share price during years 1–10, and the number of share options exercised during years 4–10, are
set out below. (Share options that were exercised during a particular year were all exercised at the end of that
year)
Year Share price at Options
year end exercised at year
end
1 63 -
2 65 -
3 75 -
4 88 6,000
5 100 8,000
NASIR ABBAS FCA

6 90 5,000
7 96 9,000
8 105 8,000
9 108 5,000
10 115 2,000
Required:
(a) Journal entries for 1st four years
(b) Also compute following figures to be shown in SOFP (separately under following heads) and SOCI for all 10
years:
o Equity instruments granted
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o Share options
o Share capital (assuming Face value of each share is Rs. 10 each)
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o Share premium

At the beginning of year 1, an entity grants 100 share options to each of its 500 employees. Each grant is
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conditional upon the employee remaining in service over the next three years. The entity estimates that the
fair value of each option is Rs. 15. On the basis of a weighted average probability, the entity estimates that 100
employees will leave during the three-year period and therefore forfeit their rights to the share options.
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Suppose that 40 employees leave during year 1. Also suppose that by the end of year 1, the entity’s share price
has dropped, and the entity reprices its share options, and that the repriced share options vest at the end of
year 3. The entity estimates that a further 70 employees will leave during years 2 and 3, and hence the total
expected employee departures over the three-year vesting period is 110 employees.
sS
During year 2, a further 35 employees leave, and the entity estimates that a further 30 employees will leave
during year 3, to bring the total expected employee departures over the three-year vesting period to 105
employees.
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During year 3, a total of 28 employees leave, and hence a total of 103 employees ceased employment during
the vesting period. For the remaining 397 employees, the share options vested at the end of year 3. The entity
estimates that, at the date of repricing, the fair value of each of the original share options granted (i.e. before
taking into account the repricing) is Rs. 5 and that the fair value of each repriced share option is Rs. 8.
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Required:
Question 9 [Self question]

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On January 1, 2019, an entity granted 100 share options to each of its 200 employees. Each grant was
conditional upon the employee remaining in service over the next four years. The entity estimated that the fair
value of each option was Rs. 20 on grant date. On the basis of a weighted average probability, the entity
estimated that 20 employees would leave during the 4-year period and therefore forfeit their rights to the
share options.
During 2019, 10 employees left and by the end of year, the entity still estimated that only 20 employees would
leave during the 4-year vesting period. During 2020, no employee left and the entity revised its estimate to a
total 15 employees leaving during 4-year vesting period. Financial year ends on every December 31st.
Required:
Prepare extracts of SOFP and SOCI for the years ending December 31, 2019 and 2020 in respect of each of the
following independent situations:
NASIR ABBAS FCA

(a) On July 1, 2020 after share price collapsed, the entity reduced the exercise price to accommodate
employees. On the date of modification, fair value of each original share option granted was Rs. 10 and
fair value of each repriced share option granted was Rs. 14.
(b) On July 1, 2020 to further motivate, the entity granted additional 30 share options each without any change
in remaining vesting period. On the date of modification, fair value of each additional share option was Rs.
24.
(c) On July 1, 2020 the entity reduced to vesting period from 4 years to 3 years.

At the beginning of year 1, the entity grants 1,000 share options to each member of its sales team, conditional
upon the employee remaining in the entity’s employ for three years, and the team selling more than 50,000
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units of a particular product over the three-year period.
The fair value of the share options is Rs. 15 per option at the date of grant.
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During year 2, the entity increases the sales target to 100,000 units. By the end of year 3, the entity has sold
55,000 units, and the share options are forfeited. Twelve members of the sales team have remained in service
for the three-year period.
Required:
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Discuss the accounting treatment of above transactions.
Question 11 [Self question]

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executive remaining in the entity’s employ until the end of year 3. At grant date, the fair value of each share
option is estimated at Rs. 12. At the beginning of year 2, the entity cancels the original grant and replaces it
with new 10,000 share options, without any change in vesting period, and also pays Rs. 2 per option as a
compensation. Immediately before cancellation, fair value of original instrument reduces to Rs. 8 whereas fair
sS
value of new replacement instruments is estimated at Rs. 17 each.
Required:
Journalize transactions for year 2 only.

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An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the
employees remain in its employ for the next three years.
During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years 2 and 3.
During year 2, 40 employees leave and the entity estimates that a further 25 will leave during year 3.
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During year 3, 22 employees leave. At the end of year 3, 150 employees exercise their SARs, another 140
employees exercise their SARs at the end of year 4 and the remaining 113 employees exercise their SARs at
the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below.
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At the end of year 3, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date
of exercise (which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below.
Year Fair value (Rs.) Intrinsic value (Rs.)
1 14.40 -
2 15.50 -
3 18.20 15.00
4 21.40 20.00
5 - 25.00
Required:
Show movement in liability for cash-settled share-based payment transaction for all 5 years.
NASIR ABBAS FCA

Question 13 [IG Example 12A]

An entity grants 100 cash-settled share appreciation rights (SARs) to each of its 500 employees on the condition
that the employees remain in its employ for the next three years and the entity reaches a revenue target (Rs.
1 billion in sales) by the end of Year 3. The entity expects all employees to remain in its employ.
For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalization as
part of the cost of an asset.
At the end of Year 1, the entity expects that the revenue target will not be achieved by the end of Year 3.
During Year 2, the entity’s revenue increased significantly and it expects that it will continue to grow.
Consequently, at the end of Year 2, the entity expects that the revenue target will be achieved by the end of
Year 3.
At the end of Year 3, the revenue target is achieved and 150 employees exercise their SARs. Another 150
employees exercise their SARs at the end of Year 4 and the remaining 200 employees exercise their SARs at
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the end of Year 5.
Using an option pricing model, the entity estimates the fair value of the SARs, ignoring the revenue target
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performance condition and the employment-service condition, at the end of each year until all of the cash-
settled share-based payments are settled. At the end of Year 3, all of the SARs vest. The following table shows
the estimated fair value of the SARs at the end of each year and the intrinsic values of the SARs at the date of
exercise (which equals the cash paid out).
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Year Fair value (Rs.) Intrinsic value
(Rs.)
1 14.40 -
2
ha 15.50 -
3 18.20 15.00
4 21.40 20.00
5 25.00 25.00
sS
Required:
Show movement in liability for cash-settled share-based payment transaction for all 5 years.
Question 14 [IG Example 12C]

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On 1 January 2017 an entity grants 100 share appreciation rights (SARs) that will be settled in cash to each of
100 employees on the condition that employees will remain employed for the next four years. On 31 December
2017 the entity estimates that the fair value of each SAR is Rs. 10 and consequently, the total fair value of the
cash-settled award is Rs. 100,000. On 31 December 2018 the estimated fair value of each SAR is Rs. 12 and
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consequently, the total fair value of the cash-settled award is Rs. 120,000.
On 31 December 2018 the entity cancels the SARs and, in their place, grants 100 share options to each
employee on the condition that each employee remains in its employ for the next two years. Therefore, the
original vesting period is not changed. On this date the fair value of each share option is Rs. 13.20 and
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consequently, the total fair value of the new grant is Rs. 132,000. All of the employees are expected to and
ultimately do provide the required service. For simplicity, this example assumes that none of the employees’
compensation qualifies for capitalisation as part of the cost of an asset.
Required:
(a) Journal entries for all 4 years till December 31, 2020.
(b) Prepare extracts of SOFP and SOCI for all 4 years.
NASIR ABBAS FCA

Question 15 [IG Example 12B]

The tax law in jurisdiction X requires entities to withhold an amount for an employee’s tax obligation associated
with a share-based payment and transfer that amount in cash to the tax authority on the employee’s behalf.
On 1 January 2021 an entity in jurisdiction X grants an award of 100 shares to an employee; that award is
conditional upon the completion of four years’ service. The entity expects that the employee will complete the
service period. For simplicity, this example assumes that none of the employee’s compensation qualifies for
capitalization as part of the cost of an asset.
The terms and conditions of the share-based payment arrangement require the entity to withhold shares from
the settlement of the award to its employee in order to settle the employee’s tax obligation (that is, the share-
based payment arrangement has a ‘net settlement feature’). Accordingly, the entity settles the transaction on
a net basis by withholding the number of shares with a fair value equal to the monetary value of the employee’s
tax obligation and issuing the remaining shares to the employee on completion of the vesting period.
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The employee’s tax obligation associated with the award is calculated based on the fair value of the shares on
the vesting date. The employee’s applicable tax rate is 40%.
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At grant date, the fair value of each share is Rs. 50. The fair value of each share at 31 December 2024 is Rs. 70.
The fair value of the shares on the vesting date is Rs. 7,000 (100 shares × Rs. 70 per share) and therefore the
employee’s tax obligation is Rs. 2,800 (100 shares × Rs. 70 × 40%).
Accordingly, on the vesting date, the entity issues 60 shares to the employee and withholds 40 shares (Rs.
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2,800 = 40 shares × Rs. 70 per share). The entity pays the fair value of the withheld shares in cash to the tax
authority on the employee’s behalf. In other words, it is as if the entity had issued all 100 vested shares to the
employee, and at the same time, repurchased 40 shares at their fair value.
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Required:
Journal entries for all years till December 31, 2024 (Assume face value of each share is Rs. 10).

sS
An entity grants to an employee the right to choose either 1,000 phantom shares, i.e. a right to a cash payment
equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three years’
service. If the employee chooses the share alternative, the shares must be held for three years after vesting
date.
At grant date, the entity’s share price is Rs. 50 per share. At the end of years 1, 2 and 3, the share price is Rs.
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52, Rs. 55 and Rs. 60 respectively. The entity does not expect to pay dividends in the next three years. After
taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date
fair value of the share alternative is Rs. 48 per share.
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At the start of year 4, the employee chooses:

Scenario 1: The cash alternative
Scenario 2: The equity alternative
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Required:
Journalize all transactions over 3 years. (assuming face value of each share Rs. 10).

At the beginning of year 1, the entity grants 10,000 shares with a fair value of Rs. 33 per share to a senior
executive, conditional upon the completion of three years’ service. By the end of year 2, the share price has
dropped to Rs. 25 per share. At that date, the entity adds a cash alternative to the grant, whereby the executive
can choose whether to receive 10,000 shares or cash equal to the value of 10,000 shares on vesting date. The
share price is Rs. 22 on vesting date.
Required:
Journal entries for all 3 years.
NASIR ABBAS FCA

SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS (1)
SOLUTIONS
Solution No. 1
(a)
Extracts – SOFP Year 1 Year 2 Year 3
------------------ Rs. ------------------
Equity 200,000 400,000 600,000
[50,000 x 80% x Rs. 15 x 1/3]
[50,000 x 80% x Rs. 15 x 2/3]
[50,000 x 80% x Rs. 15 x 3/3]
Extracts – SOCI Year 1 Year 2 Year 3

------------------ Rs. ------------------
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Employee cost 200,000 200,000 200,000
[i.e. change in equity instrument valuation]
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Rs. Rs.
Dr. Equity instrument granted 600,000
Cr. Share options 600,000
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(b)
ha ------------------ Rs. ------------------
Equity 212,500 440,000 664,500
[50,000 x 85% x Rs. 15 x 1/3]
[50,000 x 88%x Rs. 15 x 2/3]
sS
[44,300 x Rs. 15 x 3/3]

------------------ Rs. ------------------
Employee cost 212,500 227,500 224,500
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Rs. Rs.
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Solution No. 2
Re

------------------ Rs. ------------------
Equity 660,000 834,000 1,257,000
[44,000 x Rs. 30 x 1/2]
[41,700 x Rs. 30 x 2/3]
[41,900 x Rs. 30 x 3/3]

------------------ Rs. ------------------
Employee cost 660,000 174,000 423,000
NASIR ABBAS FCA

Rs. Rs.
Dr. Equity instrument granted 1,257,000
Cr. Share capital 419,000
Cr. Share premium 838,000
Solution No. 3
------------------ Rs. ------------------
Equity 106,667 340,000 516,000
[80 x 200 x Rs. 20 x 1/3]
[85 x 300 x Rs. 20 x 2/3]
[86 x 300 x Rs. 20 x 3/3]
h
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------------------ Rs. ------------------
Employee cost 106,667 233,333 176,000
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Solution No. 4
ha ------------------ Rs. ------------------
Equity 53,333 106,667 120,000
[10,000 x Rs. 16 x 1/3]
[10,000 x Rs. 16 x 2/3]
sS
[10,000 x Rs. 12 x 3/3]

------------------ Rs. ------------------
rd
Employee cost 53,333 53,334 13,333

Solution No. 5
ga

------------------ Rs. ------------------
Equity 80,000 160,000 240,000
[10,000 x Rs. 24 x 1/3]
Re
[10,000 x Rs. 24 x 2/3]

[10,000 x Rs. 24 x 3/3]

------------------ Rs. ------------------
Employee cost 80,000 80,000 80,000
NASIR ABBAS FCA

Solution No. 6
Extracts – SOFP Year 1 Year 2 Year 3 Year 4 Year 5
----------------------------------- Rs. -------------------------------
Equity 400,000 800,000 1,200,000 1,600,000 1,750,000
[80,000 x Rs. 25 x 1/5]
[80,000 x Rs. 25 x 2/5]
[80,000 x Rs. 25 x 3/5]
[80,000 x Rs. 25 x 4/5]
[70,000 x Rs. 25 x 5/5]
Extracts – SOCI Year 1 Year 2 Year 3 Year 4 Year 5

----------------------------------- Rs. -------------------------------
h
Employee cost 400,000 400,000 400,000 400,000 150,000
[i.e. change in equity
uk
instrument valuation]
Solution No. 7
(a)
hr
Year - 1 Rs. Rs.
Dr. Employee cost (W-1) 40,000
Cr. Equity instruments granted 40,000
[Year 1 expense recorded]
ha
Year - 2
sS
Year - 3
rd
Dr. Equity instruments granted 645,000

ga
[Share options actually vested]

Year - 4
Dr. Employee cost [6,000 x (88 - 75)] 78,000
Re
[Intrinsic value updated on settlement]
Dr. Cash [6,000 x Rs. 60] 360,000

Dr. Share options (W-1) 168,000
Cr. Share capital 60,000
Cr. Share premium (W-2) 468,000
[6,000 options exercised]
Dr. Employee cost [37,000 x (88 - 75)] 481,000

[Intrinsic value updated on Year 4 end]
NASIR ABBAS FCA

(b)
------------------------ SOFP -------------------------
SOCI
Equity Share Share Share
Expense/
instrument options capital premium
(income)
granted (W-1) (W-2) (W-2)
----------------------------------- Rs. -------------------------------
Year – 1 40,000 - - 40,000
Year – 2 143,333 - - 103,333
Year – 3 - 645,000 - - 501,667
Year – 4 [6,000 shares issued] - 1,036,000 60,000 468,000 559,000
Year – 5 [8,000 shares issued] - 1,160,000 140,000 1,188,000 444,000
Year – 6 [5,000 shares issued] - 720,000 190,000 1,588,000 (290,000)
h
Year – 7 [9,000 shares issued] - 540,000 280,000 2,362,000 144,000
uk
Year – 10 [2,000 shares issued] - - 430,000 3,822,000 14,000
hr
W-1 Equity instruments granted/Share options Rs.
Balance
ha -
Year 1 Settlement -
Expense (balancing) 40,000
Balance [50,000 x 80% x (63 - 60) x 1/3] 40,000
sS
Year 2 Settlement -
Balance [50,000 x 86% x (65 - 60) x 2/3] 143,333
Year 3 Settlement -
rd

Balance [43,000 x (75 - 60) x 3/3] 645,000
Year 4 Settlement [6,000 x (88 - 60)] (168,000)
ga
Balance [37,000 x (88 - 60)] 1,036,000

Balance [29,000 x (100 - 60)] 1,160,000
Re

Expense (balancing) (290,000)
Balance [24,000 x (90 - 60)] 720,000
Balance [15,000 x (96 - 60)] 540,000
Balance [7,000 x (105 - 60)] 315,000
NASIR ABBAS FCA
Balance [2,000 x (108 - 60)] 96,000

Balance -
Share Share
W-2 Share capital and Share premium capital premium
--------- Rs. -------
Issue [6,000 x 60 + 168,000 - 60,000] 60,000 468,000
Year 4
Balance 60,000 468,000
Issue [8,000 x 60 + 320,000 - 80,000] 80,000 720,000
Year 5
h
Balance 140,000 1,188,000
Issue [5,000 x 60 + 150,000 - 50,000] 50,000 400,000
Year 6
uk
Balance 190,000 1,588,000
Issue [9,000 x 60 + 324,000 - 90,000] 90,000 774,000
Year 7
Balance 280,000 2,362,000
Issue [8,000 x 60 + 360,000 - 80,000] 80,000 760,000
hr
Year 8
Balance 360,000 3,122,000
Issue [5,000 x 60 + 240,000 - 50,000] 50,000 490,000
Year 9
Balance 410,000 3,612,000
Year 10
ha
Issue [2,000 x 60 + 110,000 - 20,000] 20,000 210,000
Balance 430,000 3,822,000
sS
Solution No. 8
------------------ Rs. ------------------
Equity 195,000 454,250 714,600
rd
[(500 – 110) x 100 x Rs. 15 x 1/3]

[(500 – 105) x 100 x (Rs. 15 x 2/3 + Rs. 3 x 1/2)]
[397 x 100 x (Rs. 15 + Rs. 3)]
ga

------------------ Rs. ------------------
Employee cost 195,000 259,250 260,350
Re
Solution No. 9
(a)
Extracts – SOFP 2019 2020

-------- Rs. -------
Equity 90,000 199,800
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x 100 x (Rs. 20 x 2/4 + Rs. 4 x 0.5/2.5)]
NASIR ABBAS FCA

Extracts – SOCI 2019 2020

-------- Rs. -------
Employee cost 90,000 109,800
(b)

-------- Rs. -------
Equity 90,000 211,640
h
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x (100 x Rs. 20 x 2/4 + 30 x Rs. 24 x 0.5/2.5)]
uk
-------- Rs. -------
hr
ha
(c)

-------- Rs. -------
sS
Equity 90,000 246,667
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x 100 x Rs. 20 x 2/3)]
rd

-------- Rs. -------
ga
Solution No. 10
Re
IFRS requires, for a performance condition that is not a market condition, the entity to recognize the services
received during the vesting period based on the best available estimate of the number of equity instruments
expected to vest and to revise that estimate, if necessary, if subsequent information indicates that the number
of equity instruments expected to vest differs from previous estimates. On vesting date, the entity revises the
estimate to equal the number of equity instruments that ultimately vested.
If the entity modifies the vesting conditions in a manner that is not beneficial to the employee, the entity does
not take the modified vesting conditions into account when applying the requirements of the IFRS regarding
treatment of vesting conditions.
Therefore, because the modification to the performance condition made it less likely that the share options
will vest, which was not beneficial to the employee, the entity takes no account of the modified performance
condition when recognizing the services received. Instead, it continues to recognize the services received over
NASIR ABBAS FCA
the three-year period based on the original vesting conditions. Hence, the entity ultimately recognizes
cumulative remuneration expense of Rs. 180,000 over the three-year period (12 employees × 1,000 options ×
Rs. 15).
Solution No. 11
Year - 2 Rs. Rs.
Cr. Cash [10,000 x Rs. 2] 20,000

Cr. Equity instrument granted 115,000
h
Workings
uk
Balance -
Year 1
Balance [10,000 x Rs. 12 x 1/3] 40,000
hr
Year 2 Repurchase of equity [Rs. 2 x 10,000] (20,000)
Balance [10,000 x Rs. 12 x 2/3 + 10,000 x Rs. 11* x 1/2] 135,000
* Rs. 17 - [Rs. 8 - Rs. 2] = Rs. 11

ha
Solution No. 12
sS
Movement in liability Rs.
Balance -
Year 1 Settlement -
rd
Balance [(500 - 95) x 100 x Rs. 14.40 x 1/3] 194,400

Year 2 Settlement -
ga
Balance [(500 - 100) x 100 Rs. 15.50 x 2/3] 413,333

Year 3 Settlement [150 x 100 x Rs. 15] (225,000)
Balance [(403 - 150) x 100 x Rs. 18.20] 460,460
Re

Balance [(403 - 290) x 100 x Rs. 21.40] 241,820
Balance -
NASIR ABBAS FCA

Solution No. 13
Movement in liability Rs.
Balance -
Year 1 Settlement -
Expense (balancing) -
Balance [0 x Rs. 14.40 x 1/3] -
Year 2 Settlement -
Balance [500 x 100 Rs. 15.50 x 2/3] 516,667
h
Balance [(500 - 150) x 100 x Rs. 18.20] 637,000
uk
Balance [(500 - 300) x 100 x Rs. 21.40] 428,000
hr
Balance -
Solution No. 14
(a)
ha
Year - 1 Rs. Rs.
Cr. Liability [100,000 x 1/4] 25,000
sS
Year - 2
Cr. Liability [120,000 x 2/4- 25,000] 35,000
rd
Dr. Liability [25,000 + 35,000] 60,000

Dr. Employee cost (balancing) 6,000
Cr. Equity instrument granted [132,000 x 2/4] 66,000
ga
Year - 3
Dr. Employee cost [132,000 x 3/4 - 66,000] 33,000
Re
Year - 4
NASIR ABBAS FCA

(b)
Extracts – SOFP 2017 2018 2019 2020
---------------------- Rs. -----------------------
Equity - 66,000 99,000 132,000
Liability 25,000 - - -
Extracts – SOCI 2017 2018 2019 2020

---------------------- Rs. -----------------------
Employee cost 25,000 41,000 33,000 33,000
Solution No. 15
Year - 1 Rs. Rs.
h
Dr. Employee cost [100 x Rs. 50 x 1/4] 1,250
uk
Year - 2
hr
Year - 3
ha
Year - 4
sS

Cr. WHT payable 2,800
rd
Dr. WHT payable 2,800

Cr. Cash 2,800
ga
Dr. Equity instrument granted [5,000 - 2,800] 2,200

Cr. Share capital [60 x 10] 600
Re
Solution No. 16
Year - 1 Rs. Rs.
Dr. Employee cost [57,600(W-1) x 1/3] 19,200
Cr. Equity component [7,600(W-1) x 1/3] 2,533
Cr. Liability component [50,000(W-1) x 1/3] 16,667
[Initial recognition of transaction]
Dr. Employee cost 666

Cr. Liability component (W-2) 666
[Year end remeasurement]
NASIR ABBAS FCA

Year - 2
Cr. Equity component [7,600 x 2/3 - 2,533] 2,533
Cr. Liability component (W-2) 19,334
[Year end expenses and remeasurement]
Year - 3
Cr. Equity component [7,600 x 3/3 - 2,533 - 2,533] 2,533
h
Settlement
uk
Scenario I
Dr. Liability component (W-2) 60,000
Cr. Cash 60,000
[Cash settlement]
hr
Dr. Equity component (W-1) 7,600
Cr. Retained earnings 7,600
ha
[Transfer of equity component to retained earnings]
Scenario II
sS
Dr. Equity component (W-1) 7,600
Dr. Liability component (W-2) 60,000
Cr. Share capital [1,200 x Rs. 10] 12,000
[Issue of 1,200 shares]
rd
W-1 Initial measurement

Total amount Rs.
ga
Employee cost [1,200 x Rs. 48] 57,600

Liability component [1,000 x Rs. 50] 50,000
Equity component 7,600
Re
W-2 Liability component

Balance -
Year 1 Initial recognition [1,000 x Rs. 50 x 1/3] 16,667
Expense (balancing) 666
Balance [1,000 x Rs. 52 x 1/3] 17,333
Year 2
Balance [1,000 x Rs. 55 x 2/3] 36,667
Year 3
Settlement [1,000 x Rs. 60] 60,000
NASIR ABBAS FCA

Solution No. 17
Year - 1 Rs. Rs.
Dr. Employee cost [10,000 x Rs. 33 x 1/3] 110,000
Year - 2
Dr. Employee cost [10,000 x Rs. 33 x 2/3 - 110,000] 110,000

Cr. Liability [10,000 x Rs. 25 x 2/3] 166,667
h
Year - 3
uk
Cr. Liability [10,000 x Rs. 25 x 3/3 - 166,667] 83,333
hr
Dr. Liability [10,000 x (Rs. 25 - Rs. 22)] 30,000

Cr. Employee cost
ha 30,000
W-1
Total expense [10,000 x Rs. 33] 330,000
sS
Liability component [166,667 + 83,333] (250,000)
Already recorded in equity component 53,333
[110,000 + 110,000 - 166,667]
rd
26,667
ga
Re
NASIR ABBAS FCA

SOLUTION [Q-3(b) Jun-15]
31-12-15 Rs. Rs.
Dr. Employee cost 4,633,333
Cr. Equity component [1,900,000 (W-1) x 1/3] 633,333
Cr. Liability component (W-2) 4,000,000
31-12-16
Cr. Equity component 633,333
h
31-12-17
uk
Cr. Equity component 633,333
hr
Settlement
01-07-18 ha
[Remeasurement on settlement]
sS
Dr. Equity component (W-1) 1,900,000
Dr. Liability component (W-2) 14,000,000
Cr. Share capital [100,000 x Rs. 10] 1,000,000
Cr. Share premium 14,900,000
[Issue of 100,000 shares]
rd
W-1 Initial measurement

Total amount Rs.
Employee cost [100,000 x Rs. 135] 13,500,000
ga
Liability component [80,000 x Rs. 145] 11,600,000

Equity component 1,900,000
W-2 Liability component

Re
Balance -
Year 1
Expense (balancing) 4,000,000
Balance [80,000 x Rs. 150 x 1/3] 4,000,000
Year 2
Balance [80,000 x Rs. 156 x 2/3] 8,320,000
Year 3
Balance [80,000 x Rs. 165 x 3/3] 13,200,000
Settlement [80,000 x Rs. 175] 14,000,000
Notes:
- This offer is a share-based payment transaction only after employees accept the offer.
- Intrinsic value method will be used for IFRS 2 accounting.
Calculations:
Employees: Intrinsic values:
Total employees 600 30-06-10 [30 - 8] = 22
Opting for share options: 31-07-10 [34 - 8] = 26
[600 x 60%] 360 01-09-10 [40 - 8] = 32
[600 x 20%] 120
h
480
Opting for cash bonus 120
uk
Journal entries
30-06-10 Rs. Rs.
Dr. Employee cost (balancing) 10,320,000
hr
Cr. Share options [360 x 1,000 x 22] 7,920,000
Cr. Provision for bonus [240 x Rs. 10,000] 2,400,000
[Issue of share options to 60% employees] ha
31-07-10
Dr. Provision for bonus [120 x Rs. 10,000] 1,200,000
Dr. Employee cost (balancing) 1,920,000
sS
Cr. Share options [120 x 1,000 x 26] 3,120,000
[Issued share options to 20% employees]
01-09-10
rd
Cr. Share options [360 x 1,000 x (32 - 22) + 120 x 1,000 x (32 - 26)] 4,320,000
[Remeasurement of intrinsic value on settlement]
ga
Dr. Provision for bonus [2.4m - 1.2m] 1,200,000

Cr. Cash 1,200,000
[Payment of bonus]
Re
Dr. Cash [480 x 1,000 x Rs. 8] 3,840,000

Dr. Share options [480 x 1,000 x Rs. 32] 15,360,000
Cr. Share capital [480 x 1,000 x Rs. 10] 4,800,000
Cr. Share premium 14,400,000
[Issue of shares on exercise of share options]
IAS 21 [Separate financial statements] – Class notes
IMPORTANT CONCEPTS
Currencies
Foreign currency
It is a currency other than functional currency of the entity.
Presentation currency
It is the currency in which the financial statements are presented.
Functional currency
1. It is the currency of the primary economic environment in which the entity operates.
h
2. The primary economic environment in which an entity operates is normally the one in which it
uk
primarily generates and expends cash. An entity considers the following factors in determining its
functional currency:
(a) the currency:
(i) that mainly influences sales prices for goods and services (this will often be the currency in
hr
which sales prices for its goods and services are denominated and settled); and
(ii) of the country whose competitive forces and regulations mainly determine the sales prices of
its goods and services.
(b) the currency that mainly influences labour, material and other costs of providing goods or services
ha
(this will often be the currency in which such costs are denominated and settled).
3. The following factors may also provide evidence of an entity’s functional currency:
(a) the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are
sS
generated.
(b) the currency in which receipts from operating activities are usually retained.
4. An entity’s functional currency reflects the underlying transactions, events and conditions that are
rd
relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a
change in those underlying transactions, events and conditions.
ga
Monetary items
1. Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed
or determinable number of units of currency.
Re
2. The essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or
determinable number of units of currency.
Examples
- pensions and other employee benefits to be paid in cash
- provisions that are to be settled in cash
- lease liabilities
- cash dividends that are recognised as a liability
- a contract to receive (or deliver) a variable number of the entity’s own equity instruments or a
variable amount of assets in which the fair value to be received (or delivered) equals a fixed or
determinable number of units of currency is a monetary item.

3. Conversely, the essential feature of a non‑monetary item is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency.
Examples
- amounts prepaid for goods and services
- goodwill
- intangible assets
- inventories
- property, plant and equipment
- right‑of‑use assets
- provisions that are to be settled by the delivery of a non‑monetary asset.
h
INITIAL RECOGNITION OF FOREIGN CURRENCY TRANSACTIONS
1. A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign
uk
currency, including transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign
currency; or
hr
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign
currency.
ha
2. A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by
applying to the foreign currency amount the spot exchange rate between the functional currency and
the foreign currency at the date of the transaction.
sS
Date of the transaction
- The date of a transaction is the date on which the transaction first qualifies for recognition in
accordance with IFRSs. (Preferable for exam questions)
- For practical reasons, a rate that approximates the actual rate at the date of the transaction is
rd
often used, for example, an average rate for a week or a month might be used for all
transactions in each foreign currency occurring during that period. (Only use if asked in
question). However, if exchange rates fluctuate significantly, the use of the average rate for a
ga
period is inappropriate.
IFRIC 22 – Foreign currency transactions and advance considerations

Re
Issue
This Interpretation addresses how to determine the date of the transaction for the purpose of
determining the exchange rate to use on initial recognition of the related asset, expense or income (or
part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the
payment or receipt of advance consideration in a foreign currency.

Consensus
The date of the transaction for the purpose of determining the exchange rate to use on initial recognition
of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the
non-monetary asset or non-monetary liability arising from the payment or receipt of advance
consideration. If there are multiple payments or receipts in advance, the entity shall determine a date of
the transaction for each payment or receipt of advance consideration.
REPORTING AT THE ENDS OF SUBSEQUENT REPORTING PERIODS
h
At end of each reporting period:
Items Translation
uk
Foreign currency monetary items Using closing rate (i.e. spot exchange rate at year end).
[e.g. debtors, creditors]
Non-monetary items that are Using the exchange rate at the date of transaction.
measured in terms of historical cost in [In other words such items are never re-translated]
hr
a foreign currency
[e.g. PPE at cost model]
Non-monetary items that are Using the exchange rate at the date when fair value was
measured at fair value in a foreign
currency
ha
measured.
[e.g. Property at fair value model]
Items where carrying amount is determined as a comparison of two or more amounts

sS
The carrying amount of some items is determined by comparing two or more amounts. For example, the
carrying amount of inventories is the lower of cost and net realizable value in accordance with IAS 2
Inventories. Similarly, in accordance with IAS 36 Impairment of Assets, the carrying amount of an asset for
which there is an indication of impairment is the lower of its carrying amount before considering possible
rd
impairment losses and its recoverable amount. When such an asset is non-monetary and is measured in
a foreign currency, the carrying amount is determined by comparing:
(a) the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that
amount was determined (i.e. the rate at the date of the transaction for an item measured in terms of
ga
historical cost); and

(b) the net realizable value or recoverable amount, as appropriate, translated at the exchange rate at the
date when that value was determined (e.g. the closing rate at the end of the reporting period).
Re
The effect of this comparison may be that an impairment loss is recognized in the functional currency but
would not be recognized in the foreign currency, or vice versa.

RECOGNITION OF EXCHANGE DIFFERENCES
Monetary items Non-monetary items

Exchange differences arising on: Exchange differences arising on valuation (as per
relevant standards):
- the year-end remeasurement; and For assets whose valuation gains/losses are
- the settlement recognized in P&L (e.g. Inventory, impairment)
shall be recognized in P&L Shall be recognized in P&L
For assets whose valuation gains/losses are
h
recognized in OCI (e.g. revaluation model)
uk
Shall be recognized in OCI
Exam note:
It is automatically done when valuation gain/loss
hr
as per relevant IAS is calculated by comparing
values translated in functional currency at
valuation date.
ha
sS
rd
ga
Re

IAS 21 – QUESTIONS (1)
PRACTICE QUESTIONS
Question No. 1
Determine the functional currency in each of the following cases:
(a) Company A manufactures a product for the domestic market in Pakistan. Its sales are denominated in Pak
rupee. The sale of its product in Pakistan is affected mainly by local supply and demand and regulations.
Its inputs are sources in Pakistan and the prices of inputs are denominated in Pak rupee and mainly
influenced by economic forces and regulations of Pakistan.
(b) Company B mines a product in Pakistan. Sales of the product in denominated in US dollars. The sale price
in USD is affected by global demand for the product. About 90% of company’s costs are for expatriate staff
salaries and for chemicals and specialized machinery imported from USA. These costs are denominated
and settled in US dollars. However its other costs are incurred and settled in Pak rupee.
h
Question No. 2
uk
On December 21, 2018 40,000 units of a raw material were imported at $ 2 per unit on credit. Financial year
ends on December 31st. 60% of the payment was made on January 22, 2019 and 40% of the payment was made
on February 10, 2019. The spot exchange rates are as follows:
hr
Date Exchange rate ($ 1)
21-12-18 Rs. 110
31-12-18 Rs. 114
22-01-19
10-02-19
ha Rs. 120
Rs. 125
Required:
Journalize above transactions.
sS
Question No. 3
On July 1, 2018 Alpha Limited (AL) purchased a building in UAE for Dhs. 500,000. After initial recognition,
management decided to measure this property using fair value model in accordance with IAS 40. AL’s financial
year ends on December 31st. The fair values and spot exchange rates are as follows:
rd
Date Fair value Exchange rate

(Dhs) (Dh 1)
01-07-18 500,000 Rs. 32
ga
31-12-18 515,000 Rs. 30

31-12-19 505,000 Rs. 40
Required:
Re
Question No. 4
On January 1, 2017 Beta Limited (BL) purchased a building for administrative purposes for a liaison office in UK
for £ 100,000. Its useful life was initially estimated at 10 years. After initial recognition, management decided
to measure this property using revaluation model in accordance with IAS 16. BL’s financial year ends on
December 31st. The fair values and spot exchange rates are as follows:
Date Fair value Exchange rate

(£) (£ 1)
01-01-17 100,000 Rs. 140
01-01-18 90,000 Rs. 134
01-01-19 102,000 Rs. 136
NASIR ABBAS FCA

Required:
Prepare extracts of statement of financial position and statement of comprehensive income for the years
ending December 31, 2017, 2018 and 2019.
Question No. 5
On September 1, 2018 purchase order was issued for import of a plant at an invoice price of $ 120,000. 20%
advance was paid alongwith purchase order. Plant was received on October 1, 2018 and installed accordingly.
30% of the invoice amount was paid at the time of delivery and remaining 50% was paid on February 28, 2019.
Plant has a useful life of 10 years. Financial year ends on every 31st December. The spot exchange rates are as
follows:
Date Exchange rate ($ 1)
h
01-09-18 Rs. 110
01-10-18 Rs. 120
uk
31-12-18 Rs. 130
28-02-19 Rs. 140
Required:
hr
Question No. 6
Following transactions took place during the year ending June 30, 2019:
(a) On August 15, 2018 5,000 units of product “MN” were purchased for Dinars 5 per unit on credit. The
ha
account was fully settled on September 30, 2018.
(b) On October 1, 2018 following equity investments were made:
Company Number of Purchase Measurement policy

sS
shares Price
A 5000 $5 Fair value through OCI
B 8000 $9 Fair value through P&L
On May 1, 2019 2000 shares of company A were sold at a price of $ 5.8 per share and 1000 shares of
rd
company B were sold at a price of $ 10 per share. Market prices at June 30, 2019 of shares of company A
and B were $ 6 and $ 9.3 per share respectively.
(c) On January 1, 2019 3,000 units of product “MN were sold locally at a price of Rs. 750 per unit and remaining
2,000 units were exported at a price of € 6 per unit on credit. Sale proceeds from foreign customer were
ga
realized on July 31, 2019.

(d) On April 1, 2019 a machine was imported from Japan for ¥ 2 million. 30% advance had been piad on March
1, 2019 and remaining balance was settled on July 31, 2019. Useful life of machine has been estimated at
10 years.
Re
Following spot exchange rates in rupees are available:

Date Dinar 1 $1 €1 ¥1
15-08-18 100 - - -
30-09-18 102 - - -
01-10-18 - 110 - -
01-01-19 - - 140 -
01-03-19 - - - 2.50
01-04-19 - - - 3.00
01-05-19 - 118 - -
30-06-19 - 120 137 3.20
31-07-19 - - 132 3.50
NASIR ABBAS FCA

Required:
Calculate “total profit or loss” and “other comprehensive income” for the year ending June 30, 2019.
Question No. 7
Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:
(i) On 1 October 2018, CL imported a machine from China for USD 250,000 against 60% advance payment
which was made on 1 July 2018. The remaining payment was made on 1 April 2019.
(ii) On 1 January 2019, CL sold goods to a Dubai based company for USD 40,000 on credit. CL received 25%
amount on 1 April 2019, however, the remaining amount is still outstanding.
Following exchange rates are available:
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Date 01-Jul-18 01-Oct-18 01-Jan-19 01-Apr-19 30-Jun-19 Average
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1 USD Rs. 121 Rs. 124 Rs. 137 Rs. 140 Rs. 163 Rs. 135
Required:
Prepare journal entries in CL’s books to record the above transactions for the year ended 30 June 2019.
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NASIR ABBAS FCA

IAS – 21 - SOLUTIONS (1)
SOLUTIONS
Solution No. 1
(a) Since market forces and regulations in Pakistan’s economy largely determines the selling price and costs
of entity’s inputs, therefore its functional currency is Pak rupee.
(b) Since market forces and regulations in USA’s economy largely determines the selling price and costs of
entity’s inputs, therefore its functional currency is US dollar.
Solution No. 2
Dr. Cr.
--------- Rs. ----------
21-12-18 Inventory 8,800,000
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Creditors [40,000 x $ 2 x Rs. 110] 8,800,000
[Purchase of raw material]
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31-12-18 P&L (exchange loss) 320,000
Creditors [$ 80,000 x Rs. 4] 320,000
[Reporting at year end]
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22-01-19 P&L (exchange loss) 288,000
Creditors [$ 80,000 x Rs. 114 x 60%] 5,472,000
Cash [$80,000 x 60% x Rs. 120] 5,760,000
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[Partial settlement of creditors]
10-02-19 P&L (exchange loss) 352,000

Creditors [$ 80,000 x Rs. 114 x 40%] 3,648,000
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Cash [$80,000 x 40% x Rs. 125] 4,000,000
[Final settlement of creditors]
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Solution No. 3
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Dr. Cr.
--------- Rs. ----------
01-07-18 Investment property 16,000,000
Bank 16,000,000
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[Purchase of property]
31-12-18 P&L (FV loss) 550,000

Investment property 550,000
[Fair value adjustment at year end]
31-12-19 Investment property 4,750,000

P&L (FV gain) 4,750,000
[Fair value adjustment at year end]
NASIR ABBAS FCA

W-1
Converted
Fair value Rate value Gain/(loss)
(Dhs) (Rs/Dhs) (Rs.) (Rs.)
01-07-18 500,000 32.00 16,000,000 -
31-12-18 515,000 30.00 15,450,000 (550,000)
31-12-19 505,000 40.00 20,200,000 4,750,000
Solution No. 4
2019 2018 2017
-------------------- Rs.'000 --------------------
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Extracts – SOFP
Non-current assets
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Building (W-1) 12,138 10,720 12,600
Equity
Revaluation surplus 2,338 - -
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Extracts – SOCI
Depreciation (1,734) (1,340) (1,400)
Revaluation loss - (540) -
Revaluation loss reversal 480 - -
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Revaluation gain / (loss) 2,672 - -
W-1 NBV Surplus P&L

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-------------------- Rs.'000 --------------------
01-01-17 Cost [£ 100,000 x Rs. 140] 14,000
31-12-17 Dep [14,000 / 10] (1,400)
12,600 - -
01-01-18 Revaluation (540) - (540)
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[£ 90,000 x Rs. 134] 12,060 - (540)

31-12-18 Dep [12,060 / 9] (1,340) 60
10,720 - (480)
01-01-19 Revaluation 3,152 2,672 480
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[£ 102,000 x Rs. 136] 13,872 2,672 -

31-12-19 Dep [13,872 / 8] (1,734) (334) -
12,138 2,338 -
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Solution No. 5
Dr. Cr.
--------- Rs. ----------
01-01-18 Advance to supplier 2,640,000
Bank [$120,000 x 20% x Rs. 110] 2,640,000
[20% advance paid to supplier]
01-10-18 Plant 14,160,000

Advance to supplier 2,640,000
Bank [$ 120,000 x 30% x Rs. 120] 4,320,000
Creditors [$ 120,000 x 50% x Rs. 120] 7,200,000
[Plant is received and installed]
NASIR ABBAS FCA

31-12-18 Depreciation 354,000

Accumulated depreciation 354,000
31-12-18 P&L [exchange loss] 600,000

Creditors [$ 120,000 x 50% x Rs. 10] 600,000
[Exchange loss on creditors at year end]
28-02-19 P&L (exchange loss) 600,000

Creditors [$ 60,000 x Rs. 130] 7,800,000
Bank [$60,000 x Rs. 140] 8,400,000
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[Final settlement of creditors]
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Solution No. 6
For the year ending June 30, 2019 P&L OCI

-------- Rs. -------
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(a)
Purchases [5,000 x Dinar 5 x Rs. 100] (2,500,000) -
Exchange loss on settlement [Dinar 25,000 x Rs. 2] (50,000) -
(b)
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Profit on sale of shares:
A [2000 x ($5.8 x Rs. 118 - $5 x Rs. 110)] - 268,800
B [1000 x ($10 x Rs. 118 - $9 x Rs. 110)] 190,000 -
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Fair value gain at year end:
A [3000 x ($6 x Rs. 120 - $5 x Rs. 110)] - 510,000
B [7000 x ($9.3 x Rs. 120 - $9 x Rs. 110)] 882,000 -
(c)
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Sales [3,000 x Rs. 750 + 2,000 x € 6 x Rs. 140] 3,930,000 -

Exchange loss on debtors [2,000 x € 6 x Rs. 3] (36,000) -
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(d)
Depreciation [(¥ 2m x 30% x Rs. 2.50 + ¥ 2m x 70% x Rs. 3) / 10 x 3/12] (142,500) -
Exchange loss on creditors [¥ 2m x 70% x Rs. 0.2] (280,000) -
1,986,000 778,800
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Solution No. 7
(i) Rs '000'
Date Debit Credit
1-Jul-18 Advance for PPE 18,150
Bank [250,000 x 60% x 121] 18,150
1-Oct-18 PPE 30,550

Advance for PPE 18,150
Payable for PPE (250,000 x 40% x 124) 12,400
NASIR ABBAS FCA

1-Apr-19 Payable for PPE 12,400

Exchange Loss (P&L)(bal.) 1,600
Bank (250,000 x 40% x 140) 14,000
(ii)
1-Jan-19 Debtor 5,480
Sales [40,000 x 137] 5,480
1-Apr-19 Bank (40,000 x 25% x 140) 1,400

Debtor (5,480 x 25%) 1,370
Exchange gain(P&L)(bal.) 30
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30-Jun-19 Debtor [(30,000 x 163) - (5,480 x 75%)] 780
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Exchange gain (P&L)(Bal.) 780
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NASIR ABBAS FCA

IFRS 9 (Recognition, Classification and Measurement) – Class notes
RECOGNITION
An entity shall recognize a financial asset or a financial liability in its statement of financial position when
and only when the entity becomes party to the contractual provisions of the instrument. On initial
recognition the entity shall also classify financial asset or financial liability as per guidance discussed later
in this chapter.
Examples:
- Entity B transfers cash to Entity A as a collateral for a borrowing transaction. The cash is not legally
segregated from Entity A’s assets. Therefore, Entity A recognizes the cash as an asset and a payable
to Entity B, while Entity B derecognizes the cash and recognizes a receivable from Entity A.
- Assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or
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sell goods or services are generally not recognized until at least one of the parties has performed
under the agreement. For example, an entity that receives a firm order does not generally recognize
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an asset (and the entity that places the order does not recognize a liability) at the time of the
commitment but, instead, delays recognition until the ordered goods or services have been shipped,
delivered or rendered.
- Planned future transactions, no matter how likely, are not assets and liabilities because the entity has
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not become a party to a contract.
CLASSIFICATION OF FINANCIAL ASSETS

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Financial assets which are debt instruments of other entity [e.g. investment in debentures]
An entity shall classify financial assets as subsequently measured at:

1) Amortized cost
2) Fair value through other comprehensive income
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3) Fair value through profit or loss
1) Amortized cost
A financial asset shall be measured, except for 3(ii) below, at amortized cost if both of the following
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conditions are met:

(i) the financial asset is held within a business model whose objective is to hold financial assets in order
to collect contractual cash flows and
(ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
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payments of principal and interest on the principal amount outstanding.

Amortized cost
The amount at which the financial asset or financial liability is measured at initial recognition minus
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the principal repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount and, for financial
assets, adjusted for any loss allowance.
2) Fair value through OCI

A financial asset shall be measured, except for 3(ii) below, at fair value through other comprehensive
income if both of the following conditions are met:
(i) the financial asset is held within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets and

(ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
Business model
Any entity’s business model is determined at a level that reflects how groups of financial assets are
managed together to achieve a particular business objective. It does not depend on management’s
intentions for an individual instrument. However, an entity may have more than one business models
for managing its financial instruments. For example, an entity may hold a portfolio of investments that
it manages to collect contractual cash flows and another portfolio of investments that it manages in
order to trade to realize fair value changes.
This assessment is not performed on the basis of scenarios that the entity does not reasonably expect
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to occur, such as so-called ‘worst case’ or ‘stress case’ scenarios. For example, if an entity expects that
it will sell a particular portfolio of financial assets only in a stress case scenario, that scenario would not
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affect the entity’s assessment of the business model for those assets if the entity reasonably expects
that such a scenario will not occur.
Although the objective of an entity’s business model may be to hold financial assets in order to collect
contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity’s
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business model can be to hold financial assets to collect contractual cash flows even when sales of
financial assets occur or are expected to occur in the future.
Contractual cashflows comprise of:

Principal Interest
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It is the fair value of the financial It consists of consideration for the time value of money, for the
asset at initial recognition. credit risk associated with the principal amount outstanding
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during a particular period of time and for other basic lending
risks and costs, as well as a profit margin.
3) Fair value through P&L

A financial asset shall be measured at fair value through profit or loss if either:
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(i) it cannot be classified as measured at amortized cost or fair value through OCI; or
(ii) an entity has, at initial recognition, irrevocably designated the financial asset as measured at fair value
through P&L if doing so eliminates or significantly reduces an accounting mismatch.
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Financial assets which are equity instruments of other entity [e.g. investment in shares]
An entity shall classify financial assets as subsequently measured at:
1) Fair value through other comprehensive income
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2) Fair value through profit or loss
A financial asset shall be measured at fair value through P&L (default method) unless an entity has made
an irrevocable election, at initial recognition, for particular investments in equity instruments if these are
not held for trading to present subsequent changes in fair value in OCI.

CLASSIFICATION OF FINANCIAL LIABILITIES
An entity shall classify all financial liabilities as subsequently measured at amortized cost except for:
(a) Financial liabilities, including derivatives that are liabilities, measured at fair value through P&L
An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair
value through P&L if either:
- It eliminates or significantly reduces an accounting mismatch; or
- A group of financial liabilities is managed and its performance is evaluated on a fair value basis
in accordance with a documented risk management or investment strategy.
(b) Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or
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when the continuing involvement approach applies.
(c) Financial guarantee contracts.
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(d) Commitments to provide a loan at a below-market interest rate.
(e) Contingent consideration recognized by an acquirer in a business combination.
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INITIAL MEASUREMENT
Financial assets
amortized cost or fair value through OCI:

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Financial assets subsequently measured at Financial assets subsequently measured at fair
value at P&L:
Fair value of asset + transaction cost Fair value of asset

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Financial liabilities
Financial liabilities subsequently measured at Financial liabilities subsequently measured at fair

amortized cost: value at P&L:
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Fair value of liability – transaction cost Fair value of liability

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Transaction costs
Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset
or financial liability. An incremental cost is one that would not have been incurred if the entity had not
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acquired, issued or disposed of the financial instrument.
Examples of transactions costs:

Include Do not include
• Fees and commission paid to agent, advisers, brokers • Debt premium and discounts
and dealers • Financing costs
• Levies by regulatory agencies and security exchanges • Internal administrative or holding costs
• Transfer taxes and duties

Important for initial measurement:

• Transaction costs for financial asset or financial liability subsequently measured at fair value
through P&L are recognized as expense when incurred.
• Transaction costs expected to be incurred on transfer or disposal of a financial instrument are not
included in the measurement of the financial instrument.
• Initial measurement of trade receivables shall be made in accordance with IFRS 15.
• Generally transaction price (i.e. fair value of consideration given or received) is equal to the fair
value of financial asset or financial liability at initial recognition, however, if transaction price is
different then, the difference on initial measurement shall be charged to P&L.
• Fair value of an interest free long-term loan is measured as the present value of all future cash
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receipts discounted using the prevailing market interest rate for a similar instrument. Any additional
amount lent is an expense.
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SUBSEQUENT MEASUREMENT [IGNORING IMPAIRMENT]
Financial assets
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A financial asset which is an equity instrument of another entity
Types Treatment
(i) Equity investments which - At each reporting date and on de-recognition, the asset shall be
are not held for trading and,
at initial recognition, entity
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measured at fair value.
- Any fair value gain or loss shall be recognized in other
has made irrevocable comprehensive income.
election for this treatment - It is a non-monetary item, therefore, as per IAS 21, its related foreign
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[Fair value through OCI] exchange gain or loss shall also be recognized in OCI.
- Cumulative gain or loss recognized in OCI, shall not be reclassified to
profit or loss on de-recognition of the asset. However, it may be
transferred within equity e.g. retained earnings.
- Any dividend income shall be recognized in P&L, unless it clearly
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represents a recovery of part of the cost of investment.

(ii) All other equity - At each reporting date and on de-recognition, the asset shall be
investments measured at fair value.
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[Fair value through P&L] - Any fair value gain or loss shall be recognized in P&L.
(default measurement)
- It is non-monetary item, therefore, as per IAS 21, its related foreign
exchange gain or loss shall also be recognized in P&L.
- Any dividend income shall be recognized in P&L.
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A financial asset which is a financial liability of another entity (e.g. loans)

Types Treatment
(i) If asset is classified as - The asset shall be measured at amortized cost using effective
measured at amortized cost interest rate method.
- Interest income using effective interest rate shall be recognized in
P&L.
- It is a monetary item, therefore, as per IAS 21 its exchange gain or
loss shall be recognized in P&L.
- Any gain or loss on derecognition shall be recognized in P&L.

(ii) If asset is classified as - At each reporting date and on de-recognition, the asset shall be
measured at fair value measured at fair value with any gain or loss recognized in other
through OCI comprehensive income.
- Interest income using effective interest rate shall be recognized in
profit or loss (i.e. same as calculated in amortized cost).
- Any foreign exchange gain/loss on amortized cost measured in
foreign currency shall be recognized in P&L.
- Cumulative fair value gain or loss, previously recognized in OCI, shall
be reclassified to profit or loss on de-recognition of the asset.
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(All amounts recognized in P&L would be the same which would have
been recognized had the asset been measured at amortized cost)
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(iii) If asset is classified as - At each reporting date and on de-recognition, the asset shall be
measured at fair value measured at fair value with any gain or loss recognized in profit or
through profit or loss
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loss.
- It is a monetary item, therefore, as per IAS 21 its exchange gain or
loss shall be recognized in P&L.
- Actual interest received is recognized in profit or loss. (Need of
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accrual concept is accounted for accordingly)
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Types Treatment
(i) If liability is classified as - The liability shall be measured at amortized cost using effective
measured at amortized cost interest rate method.
(default measurement) - Interest expense using effective interest rate shall be recognized in
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P&L.
- Any gain or loss on derecognition shall be recognized in P&L.
(ii) If liability is classified as - At each reporting date, the liability shall be measured at fair value.
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measured at fair value - Any change in fair value attributable to change in own credit risk is
through profit or loss recognized in OCI [Amount presented in OCI shall not be
subsequently transferred to P&L, however, the entity may transfer
the cumulative gain or loss within equity e.g. retained earnings]. The
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remaining amount of change in the fair value of the liability shall be

presented in P&L. However, if it creates or enlarges accounting
mismatch, then entire fair value gain or loss shall be recognized in
P&L.
- Actual interest paid is recognized in profit or loss. (Need for accrual
concept is accounted for accordingly)

Estimating change in fair value of liability attributable to change in own credit risk:
Multiple methods can be used to estimate the amount of change in fair value attributable to change in
own credit risk. If the only significant relevant changes in market conditions for a liability are changes
in an observed (benchmark) interest rate, the amount of change in fair value attributable to change in
own credit risk can be estimated in following steps:
1) First find “Instrument-specific component” of IRR of the liability as
= IRR of liability at start of period (i.e. a market rate of return which is calculated using fair value of
liability and the contractual cash flows at the start of the period) LESS observed benchmark interest
rate (e.g. KIBOR) at start of period
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2) Calculate the amount of change to be presented in OCI as follows:
Rs.
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Fair value of liability at end of the period XXX
Present value of contractual cash flows of liability at end of year discounted at “Year (XXX)
end KIBOR + Instrument-specific component (as calculated in Step 1)”
(Gain)/Loss to be recognized in OCI XXX
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IFRS 9 (Recognition, Classification and Measurement) – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
Following independent situations relate to financial assets:
(1) A Limited (AL) holds investments to collect their contractual cash flows. The funding needs of AL are predictable and
the maturity of investments matches to estimated funding needs. However, AL would sell an investment in particular
circumstances, perhaps to fund unanticipated capital expenditure, or because the credit rating of the instrument falls
below that required by AL’s investment policy.
(2) B Limited (BL) purchases portfolios of financial assets such as loans. If payment on the loans is not made on a timely
basis, the entity attempts to realize the contractual cash flows through various follow-up measures. BL’s objective is
to collect the contractual cash flows and it does not manage any of the loans in this portfolio with an objective of
realizing cash by selling them.
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(3) C Limited (CL) has a business model with the objective of originating loans to customers and subsequently selling
those loans to a securitisation vehicle. The securitisation vehicle issues instruments to investors. CL controls the
securitisation vehicle and thus consolidates it. The securitisation vehicle collects the contractual cash flows from the
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loans and passes them on to its investors. It is assumed for the purposes of this example that the loans continue to
be recognised in the consolidated statement of financial position because they are not derecognised by the
securitisation vehicle.
(4) D Limited (DL) expects to pay a cash outflow in ten years to fund capital expenditure and invests excess cash in short-
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term financial assets. When the investments mature, DL reinvests the cash in new short-term financial assets. DL
maintains this strategy until the funds are needed, at which time DL uses the proceeds from the maturing financial
assets to fund the capital expenditure. Only sales that are insignificant in value occur before maturity (unless there is
an increase in credit risk).
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(5) E Limited (EL) expects to incur capital expenditure in a few years’ time. EL invests its excess cash in short and long-
term financial assets so that it can fund the expenditure when the need arises. Many of the financial assets have
contractual lives that exceed EL’s anticipated investment period. EL will hold financial assets to collect the contractual
cash flows and, when an opportunity arises, it will sell financial assets to re-invest the cash in financial assets with a
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higher return.
(6) F Bank holds financial assets to meet its everyday liquidity needs. The bank actively manages the return on the
portfolio in order to minimize the costs of managing those liquidity needs. That return consists of collecting
contractual payments as well as gains and losses from the sale of financial assets. F Bank holds financial assets to
collect contractual cash flows and sells financial assets to reinvest in higher yielding financial assets or to better match
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the duration of its liabilities. In the past, this strategy has resulted in frequent sales activity and such sales have been
significant in value. This activity is expected to continue in the future
Required:
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Briefly discuss how each of the above assets should be classified?
Question 2
Following independent situations relate to financial assets (i.e. investments in bonds):
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(1) Bond A has a stated maturity date. Payments of principal and interest on the principal amount outstanding are linked
to an inflation index of the currency in which the bond is issued.
(2) Bond B is a variable interest rate instrument with a stated maturity date that permits the borrower to choose the
market interest rate on an ongoing basis. For example, at each interest rate reset date, the borrower can choose to
pay three-month LIBOR for a three-month term or one-month LIBOR for a one-month term.
(3) Bond C has a stated maturity date and pays a variable market interest rate. That variable interest rate is capped.
(4) Bond D is a full recourse loan and is secured by collateral.
(5) Bond E is convertible into fixed number of equity instruments of the issuer.
(6) Bond F is a perpetual bond but the issuer may call the instrument at any point and pay the holder the par amount
plus accrued interest due. It pays a market interest rate but payment of interest cannot be made unless the issuer is
able to remain solvent immediately afterwards. Deferred interest does not accrue additional interest.
NASIR ABBAS FCA

Required:
For each of the above assets, briefly discuss whether contractual cashflows solely comprise of principal and interest?
Question 3
On 1 January 2018 Abacus Co purchases a debt instrument for its fair value of Rs. 100,000. The debt instrument is due to
mature on 31 December 2022 at par. The instrument has a face value of Rs. 125,000 and the instrument carries fixed
interest at 4.72% that is paid annually. (The effective interest rate is 10%.)
Required:
Show extracts of Income statement and Balance sheet for each of the five years till December 31, 2022.
Question 4
On May 14, 2018 Zain Limited (ZL) acquired 5,000 shares of a listed company for Rs. 27.50 per share (including Rs. 1.50
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per share as broker’s commission). On that date the fair value of share was Rs. 25 per share. ZL had purchased these
shares with the intention of holding in long term. Moreover, it made an irrevocable election for designation as fair value
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through other comprehensive income. On June 30, 2018 (i.e. year-end) fair value of shares moved to Rs. 28 per share.
This price further increased to Rs. 33 per share on June 30, 2019. On August 1, 2019 ZL sold 3,000 shares for Rs. 31 per
share. On June 30, 2020 fair value moved to Rs. 37 per share.
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Required:
Journalize all of the above transactions.
Question 5
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In January 1, 2018 Wolf Limited (WL) purchased 10 million shares of a listed company at a price of Rs. 25 per share
(whereas fair value was Rs. 25.50 per share). WL also paid transaction costs of Rs. 15 million. On November 30, 2018 WL
received a dividend of Rs. 4 per share. WL’s year end is December 31. At December 31, 2018, the shares were trading at
Rs. 28.
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Required:
Show the financial statements extracts of WL at December 31, 2018 relating to the investment in shares if:
(i) The shares were bought for short term trading.
(ii) The shares were bought as a source of dividend income and were the subject of an irrevocable election at initial
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recognition to recognize them at fair value through other comprehensive income.
Question 6
On January 1, 2018, Tokyo Limited (TL) bought Rs. 100,000 (nominal value) 5% bonds for Rs. 95,000 (fair value), incurring
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transactions costs of Rs. 2,000. Interest is received at end of every year. The bonds will be redeemed at a premium of Rs.
5,960 over nominal value on December 31, 2020. The effective rate of interest is 8%. The fair value of the bond was as
follows:
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Date Fair value (Rs.)

December 31, 2018 110,000
December 31, 2019 104,000
On January 1, 2020 TL sold this bond for Rs. 105,000.

Required:
Journalize all above transactions over all relevant years if:
(a) TL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) TL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
(c) TL's business model is to buy and sell bonds in the short term to gain from fair value changes.
NASIR ABBAS FCA

Question 7
On January 1, 2018, Sialkot Limited (SL) bought 100 Euro-dollar bonds at a price of $ 50 each and incurred transaction
cost of $ 0.5 per bond. The bonds will be redeemed at a premium of 20% over face value of $ 40 each after four years.
Coupon rate is 10%. The effective rate of interest is 6.80%.
The exchange rates and fair value of the bond were as follows:
Date Exchange rate Fair value

(Rs. per $) ($)
01-01-18 150 50
31-12-18 152 51
31-12-19 153 48
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Required:
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Journalize all transactions for the years ending December 31, 2018 and 2019 if:
(a) SL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) SL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
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available.
Question 8
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Decent Limited (DL) issued following bonds on January 1, 2019:
1) Face value = Rs. 150,000
Issued at a discount of 5%
Coupon rate = 7%
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Redemption after 4 years at a premium of 10%
Effective interest rate = 10.734%
Issued at a premium of 10%
Issue costs = Rs. 2,000
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Contractual cash flows:

31-12-19 – Rs. 9,500
31-12-20 – Rs. 41,500
31-12-21 – Rs. 52,700
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Coupon rate = zero
Issued at a discount of 25%
Redemption after 4 years at par
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Required:
(a) Prepare complete schedules for amortized cost calculation for each bond.
(b) Journalize all the transactions for the year ending December 31, 2019.
(c) Show extracts of SOFP and SOCI for the year ending December 31, 2019.
Question 9
On January 1, 2018 Engro Limited (EL) issued debentures (nominal value Rs. 50,000) at a premium of 10%. Coupon rate is
10% payable at end of every year. A broker commission of 4% of nominal value was paid on issuance. These debentures
will be redeemed at a premium of 5% after 3 years.
NASIR ABBAS FCA

Required:
(a) Calculate effective interest rate to be used for amortized cost calculation.
(b) Journalize all transactions for all three years.
Question 10
On January 1, 2018 Alpha Limited (AL) issued 9% debentures at nominal value of Rs. 80,000 to finance a certain investment
in assets. The management has decided to classify these debentures to be measured at fair value through profit and loss.
AL’s credit rating was also changed in subsequent years due to some factors. These debentures were revalued to fair
values as follows:
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Date of fair value Fair value
31-12-18 Rs. 88,000 (Fair value loss of Rs. 3,000 is attributable to change in credit rating of AL)
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31-12-19 Rs. 82,000 (Fair value gain of Rs. 7,000 is attributable to change in credit rating of AL)
Required:
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(a) Show extracts of Statement of comprehensive income and Statement of financial position for the years ending
December 31, 2018 and 2019.
(b) Journalize above transactions for the years ending December 31, 2018 and 2019.
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Question 11
Beta Limited (BL) issued 8% debentures some years ago. These debentures will be redeemed at par (i.e. Rs. 100,000) on
sS
December 31, 2023. On January 1, 2019 the fair value of debentures was Rs. 100,000 showing a market rate of return of
8% (i.e. IRR of fair value and contractual cashflows over remaining life). On that date KIBOR was 5%.
On December 31, 2019 KIBOR moved to 5.75% and fair value of BL’s debentures moved to Rs. 95,972 showing a market
rate of return of 9.25%.
rd
On December 31, 2020 KIBOR moved to 5.50% and fair value of BL’s debentures moved to Rs. 95,026 showing a market
rate of return of 10%.
It is BL’s policy to measure financial liabilities at fair value through P&L.

ga
Required:
Calculate fair value gain/loss to be recognized in OCI and P&L for the years ending December 31, 2019 and 2020.
Re
NASIR ABBAS FCA

IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
(1) Although AL may consider, among other information, the financial assets' fair values from a liquidity perspective (i.e.
the cash amount that would be realised if AL needs to sell assets), AL’s objective is to hold the financial assets and
collect the contractual cash flows. Therefore, these assets shall be classified as measured at amortized cost.
(2) The objective of BL’s business model is to hold financial assets to collect contractual cash flows. Therefore, these
assets shall be classified as measured at amortized cost.
(3) The consolidated group originated the loans with the objective of holding them to collect the contractual cash flows.
However, CL has an objective of realising cash flows on the loan portfolio by selling the loans to the securitisation
vehicle, so for the purposes of its separate financial statements it would not be considered to be managing this
portfolio in order to collect the contractual cash flows and thus classified as measured at fair value through OCI.
h
(4) The objective of DL’s business model is to hold financial assets to collect contractual cash flows. Selling financial
assets is only incidental to DL’s business model. Therefore, these assets shall be classified as measured at amortized
uk
cost.
(5) The objective of the business model is achieved by both collecting contractual cash flows and selling financial assets.
EL decides on an ongoing basis whether collecting contractual cash flows or selling financial assets will maximise the
hr
return on the portfolio until the need arises for the invested cash. Therefore, these assets shall be measured at fair
value through other comprehensive income.
(6) The objective of the business model is to maximise the return on the portfolio to meet everyday liquidity needs and
ha
F Bank achieves that objective by both collecting contractual cash flows and selling financial assets. In other words,
both collecting contractual cash flows and selling financial assets are integral to achieving the business model’s
objective. Therefore, these assets shall be measured at fair value through other comprehensive income.
sS
Solution No. 2
(1) The contractual cash flows are solely payments of principal and interest on the principal amount outstanding. Linking
payments of principal and interest on the principal amount outstanding to an unleveraged inflation index resets the
time value of money to a current level. In other words, the interest rate on the instrument reflects ‘real’ interest.
rd
Thus, the interest amounts are consideration for the time value of money on the principal amount outstanding.
However, if the interest payments were indexed to another variable such as the debtor’s performance (eg the
debtor’s net income) or an equity index, the contractual cash flows are not payments of principal and interest on the
principal amount outstanding.
ga
(2) The contractual cash flows are solely payments of principal and interest on the principal amount outstanding as long
as the interest paid over the life of the instrument reflects consideration for the time value of money, for the credit
risk associated with the instrument and for other basic lending risks and costs, as well as a profit margin. The fact that
Re
the LIBOR interest rate is reset during the life of the instrument does not in itself disqualify the instrument. However,
if the borrower is able to choose to pay a one-month interest rate that is reset every three months, the interest rate
is reset with a frequency that does not match the tenor of the interest rate. Consequently, the time value of money
element is modified. Similarly, if an instrument has a contractual interest rate that is based on a term that can exceed
the instrument’s remaining life (for example, if an instrument with a five-year maturity pays a variable rate that is
reset periodically but always reflects a five-year maturity), the time value of money element is modified. That is
because the interest payable in each period is disconnected from the interest period.
(3) The contractual cash flows of both:

(a) an instrument that has a fixed interest rate; and
(b) an instrument that has a variable interest rate
NASIR ABBAS FCA

are payments of principal and interest on the principal amount outstanding as long as the interest reflects
consideration for the time value of money, for the credit risk associated with the instrument during the term of the
instrument and for other basic lending risks and costs, as well as a profit margin.
(4) The fact that a full recourse loan is collateralized does not in itself affect the analysis of whether the contractual cash
flows are solely payments of principal and interest on the principal amount outstanding.
(5) The holder would analyze the convertible bond in its entirety. The contractual cash flows are not payments of
principal and interest on principal amount outstanding because they reflect a return that is inconsistent with a basic
lending arrangement i.e. the return is linked to the value of the equity of the issuer.
(6) The contractual cashflows are not payments of principal and interest on the principal amount outstanding because
h
the issuer may be required to defer interest payments and additional interest does not accrue on those deferred
interest amounts. As a result, interest amounts are not consideration for the time value of money on the principal
uk
amount outstanding.
Solution 3
hr
2018 2019 2020 2021 2022
-------------------------------------- Rs. --------------------------------------
Income statement - extracts
Interest income
ha
10,000 10,410 10,861 11,357 11,872
Balance sheet - extracts

sS
Non-current assets
Investment 104,100 108,610 113,571 - -
Current assets
Investment - - - 119,028 -
rd
W-1
Opening Closing
Date Interest Cashflow
balance balance
ga
[A] [B = A x 10%] [C] [A + B - C]
31-12-18 100,000 10,000 5,900 104,100

31-12-19 104,100 10,410 5,900 108,610
31-12-20 108,610 10,861 5,900 113,571
Re
31-12-21 113,571 11,357 5,900 119,028

31-12-22 119,028 11,872 130,900 -
Solution 4
Dr. Cr.
-------- Rs. -------
14-05-18 Investment [5,000 x (25 + 1.50)] 132,500
P&L [5,000 x (27.50 – 25 – 1.50)] 5,000
Cash [5,000 x 27.50] 137,500
[Initial recognition]
NASIR ABBAS FCA

30-06-18 Investment [5,000 x (Rs. 28 - Rs. 26.5)] 7,500

Fair value reserve [OCI] 7,500
[Re-measurement at fair value]
30-06-19 Investment [5,000 x (Rs. 33 - Rs. 28)] 25,000

01-08-19 Fair value reserve [OCI] 6,000

Investment [3,000 x (Rs. 33 – Rs. 31)] 6,000
h
01-08-19 Cash [3,000 x Rs. 31] 93,000
uk
Investment 93,000
[Sale of 3,000 shares]
hr
30-06-20 Investment [2,000 x (Rs. 37 - Rs. 33)] 8,000
ha
Solution 5
(i)
Rs. million
sS
SOCI – extracts
Dividend income [10m x Rs. 4] 40.00
Gain on initial recognition [10m x Rs. 0.50] 5.00
Transaction cost (15.00)
Fair value gain [(Rs. 28 – Rs. 25.50) x 10m] 25.00
rd
SOFP – extracts
Non-current assets
ga
Investment [10m x Rs. 28] 280.00
(ii)
SOCI – extracts
Re
Dividend income [10m x Rs. 4] 40.00

Gain on initial recognition 5.00
Fair value gain [(Rs. 28 x 10m - (Rs. 25.50 x 10m + Rs. 15m)] 10.00
SOFP – extracts
Equity
Fair value reserve 10.00
Non-current assets
Investment [10m x Rs. 28] 280.00
NASIR ABBAS FCA

Solution 6
(a) Asset shall be measured at amortized cost
Dr. Cr.
-------- Rs. -------
01-01-18 Investment [95,000 + 2,000] 97,000
Cash 97,000
31-12-18 Investment 7,760

Investment income (W-1) 7,760
[Investment income for 2018]
31-12-18 Cash [100,000 x 5%] 5,000
h
Investment 5,000
[Interest received for 2018]
uk
hr
31-12-19 Cash 5,000
Investment 5,000
ha
01-01-20 Cash 105,000
Investment (W-1) 102,741
Profit on disposal 2,259
sS
[Sale of investment]
(b) Asset shall be measured at fair value through OCI

01-01-18 Investment [95,000 + 2,000] 97,000
Cash 97,000
rd

ga
31-12-18 Cash 5,000

Investment 5,000
Re
31-12-18 Investment (W-1) 10,240

[Fair value gain 2018]

31-12-19 Cash 5,000
Investment 5,000
NASIR ABBAS FCA


[Fair value loss 2019]
01-01-20 Cash 105,000

Investment 104,000

P&L (W-1) 1,259
[Cumulative gain reclassified to P&L]
h
(c) Asset shall be measured at fair value through P&L
uk
01-01-18 Investment 95,000
P&L (transaction costs) 2,000
Cash 97,000
hr
31-12-18 Investment [110,000 - 95,000] 15,000
P&L 15,000
[Fair value gain for 2018]
ha
31-12-18 Cash 5,000
Investment income 5,000
sS
31-12-19 P&L [110,000 - 104,000] 6,000

Investment 6,000
[Fair value loss for 2019]
rd
31-12-19 Cash 5,000

Investment income 5,000
ga
01-01-20 Cash 105,000

Investment 104,000
Re
W-1
Opening Closing Fair Fair value
Date Interest Cashflow OCI
balance balance value reserve
[A] [B = A x 8%] [C] [D = A + B - C] [E] [F = E - D] [Change in F]
31-12-18 97,000 7,760 5,000 99,760 110,000 10,240 10,240

31-12-19 99,760 7,981 5,000 102,741 104,000 1,259 (8,981)
NASIR ABBAS FCA

Solution 7
(a) Measured at amortized cost Dr. Cr.
-------- Rs. -------
01-01-18 Investment [(50 + 0.5) x 100 x Rs. 150] 757,500
Cash 757,500
31-12-18 Investment [$343(W-1) x Rs. 152] 52,136

31-12-18 Cash [$400 x Rs. 152] 60,800
h
Investment 60,800
uk
31-12-19 Investment [$340(W-1) x Rs. 153] 52,020
hr
31-12-19 Cash [$400 x Rs. 153] 61,200
Investment 61,200
ha
(b) Measured at fair value through OCI Dr. Cr.

-------- Rs. -------
sS
01-01-18 Investment [(50 + 0.5) x 100 x Rs. 150] 757,500
Cash 757,500
31-12-18 Investment [$343(W-1) x Rs. 152] 52,136

rd

ga
31-12-18 Cash [$400 x Rs. 152] 60,800

Investment 60,800
Re
31-12-18 Investment (W-1) 26,364

Exchange gain (P&L) (W-2) 10,100
Fair value reserve [OCI] (W-2) 16,264
[Fair value gain & exchange gain 2018]
31-12-19 Investment [$340(W-1) x Rs. 153] 52,020

31-12-19 Cash [$400 x Rs. 153] 61,200

Investment 61,200
NASIR ABBAS FCA

31-12-19 Fair value reserve [OCI] (W-2) 36,613

Investment 31,620
Exchange gain (P&L) (W-2) 4,993
[Fair value loss & exchange gain 2019]
W-1
------------------------ $ Amortized cost ------------------------- Rupees
amortized
Date Opening Closing
Interest Cashflow cost
balance balance (translated)
h
[A] [B = A x 6.8%] [C] [D = A + B - C] [E]
31-12-18 5,050 343 400 4,993 758,936 [4,993 x 152]
uk
31-12-19 4,993 340 400 4,933 754,749 [4,933 x 153]
W-2
------------------------ Translated values (ignoring FV change) -------------------------
hr
Date Opening Exchange Closing
Interest Cashflow
balance gain/(loss) balance
(balancing figure)
--------------------------------------------- Rs. ------------------------------------------------
31-12-18 757,500 52,136
ha 60,800 10,100 758,936
31-12-19 758,936 52,020 61,200 4,993 754,749
W-3
sS
Amortized Fair value Fair value
Date OCI
cost (translated) reserve
[E] [F] [G = F – E] [Change in G]
--------------------------- Rs. -----------------------------------
rd
31-12-18 758,936 775,200 16,264 16,264

[5,100 x 152]
31-12-19 754,749 734,400 (20,349) (36,613)
[4,800 x 153]
ga
Exam note for students:

If average exchange rate for the period is given then interest income for the year can be required to be translated at
average exchange rate.
Re
Solution 8
(a) ------------------------------- Rs. -----------------------------
Bond - 1
Opening Closing
balance balance
[A] [B = A x 10.734%] [C] [A + B - C]
31-12-19 142,500 15,296 10,500 147,296

31-12-20 147,296 15,811 10,500 152,607
31-12-21 152,607 16,381 10,500 158,488
31-12-22 158,488 17,012 175,500 -
NASIR ABBAS FCA

Bond - 2 ------------------------------- Rs. -----------------------------

Opening Closing
balance balance
[A] [B = A x 8.111%] [C] [A + B - C]
31-12-19 86,000 6,975 9,500 83,475

31-12-20 83,475 6,771 41,500 48,746
31-12-21 48,746 3,954 52,700 -
Bond - 3
Opening Closing
balance balance
[A] [B = A x 7.457%] [C] [A + B - C]
h
31-12-19 75,000 5,593 - 80,593
uk
31-12-20 80,593 6,010 - 86,603
31-12-21 86,603 6,458 - 93,061
31-12-22 93,061 6,939 100,000 -
hr
(b) Dr. Cr.
Bond - 1 -------- Rs. -------
01-01-19 Cash [150,000 x 95%] 142,500

Bonds
ha 142,500
31-12-19 Finance cost [142,500 x 10.734%] 15,296

sS
Bonds 15,296
[Finance cost for the year]
31-12-19 Bonds [150,000 x 7%] 10,500

Cash 10,500
rd
[Interest payment for the year]
Bond - 2
ga
01-01-19 Cash [80,000 x 1.1 - 2,000] 86,000

Bonds 86,000
Re
31-12-19 Finance cost [86,000 x 8.111%] 6,975

Bonds 6,975
31-12-19 Bonds 9,500

Cash 9,500
[Interest payment for the year]
NASIR ABBAS FCA

Bond - 3
Dr. Cr.
-------- Rs. -------
01-01-19 Cash [100,000 x 75%] 75,000
Bonds 75,000
31-12-19 Finance cost [75,000 x 7.457%] 5,593

Bonds 5,593
Solution No. 9
h
(a) ------ 5% ------ -------- 10% -------
Factor PV Factor PV
uk
Initial recognition [50,000 x 1.1 - 50,000 x 4%] (53,000) 1.000 (53,000) 1.000 (53,000)
Year 1 payment [50,000 x 10%] 5,000 0.952 4,760 0.909 4,545
Year 2 payment [50,000 x 10%] 5,000 0.907 4,535 0.826 4,130
Year 3 payment [50,000 x 10% + 50,000 x 1.05] 57,500 0.864 49,680 0.751 43,183
hr
5,975 (1,143)
Effective interest rate = 5% + [5,975/(5,975 + 1,143)] x 5% =

ha 9.20%
(b)
Dr. Cr.
-------- Rs. -------
01-01-18 Cash 53,000
sS
Debentures 53,000
31-12-18 Finance cost 4,875

Debentures 4,875
rd
[Finance cost for the 2018]
31-12-18 Debentures 5,000

Cash 5,000
ga
[Interest payment for the 2018]

Debentures 4,863
Re
31-12-19 Debentures 5,000

Cash 5,000
[Interest payment for the 2019]

Debentures 4,762
31-12-20 Debentures 57,500

Cash 57,500
[Interest and redemption payment]
NASIR ABBAS FCA

W-1
Date Opening balance Interest Cashflow Closing balance
[A] [B = A x 9.2%] [C] [A + B - C]
31-12-18 53,000 4,875 5,000 52,875

31-12-19 52,875 4,863 5,000 52,738
31-12-20 52,738 4,762 57,500 0
Solution No. 10
(a) 2018 2019
-------------- Rs. ----------------
SOCI – extracts
h
Interest expense [80,000 x 9%] (7,200) (7,200)
uk
Fair value gain / (loss) [W-1] (5,000) (1,000)
Fair value gain / (loss) (3,000) 7,000
SOFP - extracts
hr
Equity
Fair value reserve ha (3,000) 4,000
Debentures 88,000 82,000
(b)
Dr. Cr.
sS
-------- Rs. -------
01-01-18 Cash 80,000
Debentures 80,000
rd
31-12-18 Finance cost [80,000 x 9%] 7,200

Cash 7,200
ga
31-12-18 P&L 5,000

Re
Debentures 8,000
[Fair value loss for 2018]

Cash 7,200
31-12-19 P&L 1,000

Debentures 6,000
NASIR ABBAS FCA

W-1 2018 2019

---------- Rs. ----------
FV gain/(loss) to be recognized in:
OCI (3,000) 7,000
P&L (balancing) (5,000) (1,000)
Total [88 - 80] [82 - 88] (8,000) 6,000
Solution No. 11
Calculation for 2019
01-01-19
Market rate for valuation 8%
Cashflows PV
h
(Rs.) (Rs.)
It is only shown for students
31-12-19 8,000 7,407
uk
knowledge about calculation of
31-12-20 8,000 6,859
market value which is already
31-12-21 8,000 6,351 given in questions
31-12-22 8,000 5,880
hr
31-12-23 108,000 73,503
Market value [A] 100,000
IRR 8.00%
KIBOR
ha 5.00%
Instrument-specific component for 2019 3.00%
31-12-19
sS
Market rate for valuation 9.25%
Cashflows PV
(Rs.) (Rs.) It is only shown for students
31-12-20 8,000 7,323 knowledge about calculation of
rd
31-12-21 8,000 6,703

31-12-23 108,000 75,812
Market value [B] 95,972
ga
KIBOR 5.75%
Instrument-specific component 3.00%
Discount rate to find OCI portion 8.75%
Re
Present value:
Rate to find OCI portion 8.75%
Cashflows PV
(Rs.) (Rs.)
31-12-20 8,000 7,356
31-12-21 8,000 6,764
31-12-22 8,000 6,220
31-12-23 108,000 77,216
[C] 97,557
NASIR ABBAS FCA

Fair value gain/(loss) for the year 2019 Rs.

Total fair value gain/(loss) [A - B] 4,028
Far value gain/(loss) in OCI [C - B] 1,584
Far value gain/(loss) in P&L (balancing) 2,443
Calculation for 2020

01-01-20
Market value [A] 95,972
IRR 9.25%
KIBOR 5.75%
h
Instrument-specific component for 2020 3.50%
uk
31-12-20
Market rate for valuation 10.00%
hr
Cashflows PV
It is only shown for students
(Rs.) (Rs.)
knowledge about calculation of
31-12-21 8,000 7,273
31-12-23 108,000
ha 81,142
Market value [B] 95,026
KIBOR 5.50%
sS
Instrument-specific component 3.50%
Discount rate to find OCI portion 9.00%
rd
Present value:
Rate to find OCI portion 9.00%
Cashflows PV
(Rs.) (Rs.)
ga
31-12-21 8,000 7,339

31-12-22 8,000 6,733
31-12-23 108,000 83,396
[C] 97,469
Re
Fair value gain/(loss) for the year 2019 Rs.

Total fair value gain/(loss) [A - B] 946
Far value gain/(loss) in OCI [C - B] 2,442
Far value gain/(loss) in P&L (balancing) (1,496)
NASIR ABBAS FCA

IFRS 9 (Regular way transactions and Impairment) – Class notes
REGULAR WAY PURCHASE OR SALE
It is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset
within the time frame established generally by regulation or convention in the marketplace concerned.
(e.g. Pakistan Stock Exchange)
Following two methods are allowed for accounting for regular way purchase or sale of financial assets:
1) Trade date accounting
2) Settlement date accounting
Trade date
h
The trade date is the date that an entity commits itself to purchase or sell an asset.
uk
Settlement date
The settlement date is the date that an asset is delivered to or by an entity.
1) Trade date accounting
hr
Purchase of financial asset
On trade date Financial asset is recognized at the amount as already studied earlier
ha
depending upon the class of asset (i.e. initial measurement) and a
corresponding payable is recognized as payment has not yet been
made.
sS
Dr. Financial asset (i.e. purchased)
Cr. Payable
Fair value changes at year-end Gain/loss on changes in fair value of the financial asset is accounted for
(if it arrives between Trade as studied earlier depending upon the class of asset (i.e. as follows):
rd
date and Settlement date) – Not applicable (for amortized cost class)
– Recognized in OCI (for FV through OCI class)
– Recognized in P&L (for FV through P&L class)
ga
On settlement date (i) Payable is settled
Dr. Payable
Cr. Cash
Re
(ii) Further gain/loss on changes in fair value of the financial asset is

accounted for as studied earlier depending upon the class of asset
(i.e. as follows):
– Not applicable (for amortized cost class)

Sale of financial asset
On trade date Financial asset is de-recognized and a gain or loss on de-recognition is

recognized in P&L/OCI (as studied earlier) and a corresponding
receivable is recognized at sale value (i.e. fair value at trade date).
Dr. Receivable
Cr. Financial asset
Dr. / Cr. OCI (if it would be classified as measured at FV through OCI)
Dr./Cr. P&L (if it would be classified as measured at FV through P&L)
h
[In case of debt instrument classified at fair value through OCI,
cumulative gain/loss shall be reclassified to P&L as studied earlier]
uk
Fair value changes at year-end No entry as the financial asset is already derecognized.
(if it arrives between Trade
date and Settlement date)
hr
On settlement date Receivable is settled
Dr. Cash
ha
Cr. Receivable
2) Settlement date accounting

sS
Purchase of financial asset
On trade date No accounting

rd
Fair value changes at year-end Though no investment has yet been recognized even then a gain/loss
(if it arrives between Trade on changes in fair value of the financial asset (except where it will be
date and Settlement date) classified as measured at amortized cost) is accounted for as follows (as
studied earlier depending upon the class of asset to be used):
ga
Dr. Receivable
Cr. OCI (if it would be classified as measured at FV through OCI)
Cr. P&L (if it would be classified as measured at FV through P&L
Re
[Above entry is an example of fair value gain. In case of fair value

loss, it is reverse]
On settlement date The financial asset is now recognized as follows:
If asset is classified as measured at amortized cost:

Dr. Financial asset [fair value of trade date]
Cr. Cash [fair value of trade date]

If asset is classified as measured at fair value through OCI:

Dr. Financial asset [fair value of settlement date]
Cr. Receivable
Dr./Cr. OCI [balancing figure]
If asset is classified as measured at fair value through P&L:

Dr. Financial asset [fair value of settlement date]
Cr. Receivable
Dr./Cr. P&L [balancing figure]
h
uk
Sale of financial asset
On trade date Although the financial asset is not de-recognized but a gain or loss on
changes in fair value of the financial asset is accounted for as follows:
hr
– Not applicable (for amortized cost class)
ha
Fair value changes at year- No further gain/loss on fair value changes is recognized because the
end (if it arrives between entity’s right to changes in the fair value ceased on trade date.
Trade date and Settlement
date)
sS
On settlement date The financial asset is now de-recognized as follows:
If asset was classified as measured at amortized cost:

rd
Dr. Cash [fair value of trade date]

Cr. Financial asset [Carrying amount]
Dr./Cr. Profit or loss on disposal
ga
If asset was classified as measured at fair value through OCI:

Cr. Financial asset [fair value of trade date]
Re
[In case of debt instrument, cumulative gain/loss shall be reclassified

to P&L as studied earlier]
If asset was classified as measured at fair value through P&L:

Cr. Financial asset [fair value of trade date]

IMPAIRMENT OF FINANCIAL ASSETS
Impairment does not apply to:

- Financial assets which are equity instruments of other entity
- Financial assets which are debt instruments of other entity and measured at FV through P&L
Following terms should be understood first to discuss the topic of impairment of financial assets:
Key terms
Credit loss
The difference between all contractual cash flows that are due to an entity in accordance with the
contract and all the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at
h
the original effective interest rate (or credit-adjusted effective interest rate for purchased or
originated credit-impaired financial assets).
uk
Expected credit losses
The weighted average of credit losses with the respective risks of a default occurring as the weights.
hr
Lifetime expected credit losses
The expected credit losses that result from all possible default events over the expected life of a
financial instrument. ha
12-months expected credit losses
The portion of lifetime expected credit losses that represent the expected credit losses that result
from default events on a financial instrument that are possible within the 12 months after the reporting
date.
sS
Credit-impaired financial asset
A financial asset is credit-impaired when one or more events that have a detrimental impact on the
estimated future cash flows of that financial asset have occurred.
rd
Purchased or originated credit-impaired financial asset

Purchased or originated financial asset(s) that are credit-impaired on initial recognition.
Credit-adjusted effective interest rate

ga
The rate that exactly discounts the estimated future cash payments or receipts through the expected
life of the financial asset to the amortized cost of a financial asset that is a purchased or originated
credit-impaired financial asset.
Re
1) Expected credit losses
IAS 36 covers impairment of most of the non-current assets (except for financial assets) and it operates
an incurred loss model. This means that impairment is recognized only when an event has occurred which
has caused a fall in recoverable amount of asset. However, IFRS 9 operates an expected loss model. It is
no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, an
entity always accounts for expected credit losses, and changes in those expected credit losses. The
amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since
initial recognition and, consequently, more timely information is provided about expected credit losses.

1.1 – RECOGNITION OF EXPECTED CREDIT LOSSES
(a) General approach

1. An entity shall recognize an allowance for expected losses at an amount equal to 12-months expected
credit losses at initial recognition.
2. An entity shall measure the allowance for expected credit losses at each reporting date:
If the credit risk on that financial instrument If the credit risk on that financial instrument
has increased significantly since initial has NOT increased significantly since initial
recognition: recognition:
h
At an amount equal to lifetime expected credit At an amount equal to 12-months expected
losses credit losses
uk
Important
o Changes in credit risk can be assessed on an individual or collective basis considering all
hr
reasonable and supportable information.
o When making the assessment of changes in credit risk, an entity shall use the change in the risk
of a default occurring over the expected life instead of the change in the amount of expected
credit losses.
ha
o If reasonable and supportable forward-looking information is available without undue cost or
effort, an entity cannot rely solely on past due information when determining whether credit
risk has increased significantly since initial recognition.
o There is a rebuttable presumption that the credit risk on a financial asset has increased
sS
significantly since initial recognition when contractual payments are more than 30 days past
due. However, ‘30 days past due’ is not a must for assessment of credit risk.
3. If previously a loss allowance has been recognized at lifetime expected credit losses but now the
change in credit risk is not significant since initial recognition, then entity shall measure the loss
rd
allowance at 12-months expected credit losses at current reporting date.
4. Initial recognition of loss allowance as well as any change in the amount of allowance for expected
credit losses (or reversal) shall be recognized in profit or loss as an impairment gain or loss.
ga
In case of financial asset measured at amortized cost:

Dr. Impairment loss (P&L)
Cr. Allowance for expected credit loss (it is a contra asset account)
Re
This “allowance for expected credit loss” is deducted from gross carrying amount of financial asset
so that a net position is presented in statement of financial position.
In case of financial asset (which is a debt instrument of another entity) measured at FV through OCI
Dr. Impairment loss (P&L)
Cr. Allowance for expected credit loss [OCI]
Since loss is credited to OCI, hence no allowance is deducted from gross carrying amount of
financial asset.
Notes: Above entries are given for impairment loss. These should be reversed in case of impairment
gain.

(b) Simplified approach for trade receivables, contract assets (IFRS 15) and lease receivables
In case of Trade receivable and contract assets In case of Trade receivable and contract assets
which do not contain a significant financing which contain a significant financing component
component: and Lease receivables:
Simplified approach shall be followed Simplified approach may be followed if the entity
chooses this treatment as an accounting policy.
[Otherwise general approach will be used]
Such policy may be selected for above mentioned
h
assets independently of each other.
uk
1. An allowance for expected credit losses on initial recognition as well as at each reporting date at an
amount equal to lifetime expected credit loss shall be recognized.
2. Any change in the amount of allowance for expected credit losses (or reversal) shall be recognized in
hr
profit or loss as an impairment gain or loss.
Dr. Impairment loss (P&L) ha

Cr. Allowance for expected credit loss
This “allowance for expected credit loss” is deducted from gross carrying amount of financial asset
so that a net position is presented in statement of financial position.
sS
Notes: Above entry is given for impairment loss. This should be reversed in case of impairment gain.
1.2 – MEASUREMENT OF EXPECTED CREDIT LOSSES

An entity shall measure expected credit losses of a financial instrument in a way that reflects:
rd
(a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible
outcomes;
(b) the time value of money; and
(c) reasonable and supportable information that is available without undue cost or effort at the reporting
ga
date about past events, current conditions and forecasts of future economic conditions.
2) Credit-impaired asset
Re
Evidence that a financial asset is credit-impaired include observable data about the following events:
(a) significant financial difficulty of the issuer or the borrower;

(b) a breach of contract, such as a default or past due event;
(c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial
difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise
consider;
(d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganization;

(e) the disappearance of an active market for that financial asset because of financial difficulties; or
(f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit
losses.
It may not be possible to identify a single discrete event—instead, the combined effect of several events
may have caused financial assets to become credit-impaired.
2.1 – FINANCIAL ASSET WHICH SUBSEUQUENTLY BECOMES CREDIT-IMPAIRED
1. Interest revenue shall be calculated by applying the normal effective interest rate to the amortized
h
cost of the financial asset
Interest income = (Gross carrying amount – Loss allowance) x normal effective interest rate
uk
2. Measurement and accounting for subsequent allowance for impairment loss would be same as
studied earlier for general approach. However, an adjustment would be needed (otherwise amortized
cost table will not by applying effective interest rate to opening balance of loss allowance as follows:
hr
Dr. Financial asset
Cr. Loss allowance [Opening loss allowance x effective interest %]
ha
Exam note:
1 and 2 above are easier to handle if accounted for in a compound entry.
sS
3. If in subsequent reporting periods, the credit risk on the financial instrument improves so that the
financial asset is no longer credit-impaired (e.g. improvement in the borrower’s credit rating) then we
would revert to measuring the interest income by applying the effective interest rate to the gross
carrying amount as before.
rd
2.2 – PURCHASED OR ORIGINATED CREDIT-IMPAIRED FINANCIAL ASSET
1. In some cases, a financial asset is considered credit-impaired at initial recognition because the credit
risk is very high and in a case of purchase it is acquired at a deep discount. Credit-adjusted effective
ga
interest rate is calculated using all contractual cashflows adjusted for initial estimate of the lifetime
expected credit losses.
2. Interest revenue shall be calculated by applying credit-adjusted effective interest rate to the
Re
amortized cost (i.e. net carrying amount) of the financial asset from initial recognition.
3. An entity shall only recognize the cumulative changes in lifetime expected credit losses since initial
recognition as a loss allowance for purchased or originated credit-impaired financial assets. At each
reporting date, an entity shall recognize in profit or loss the amount of the change in lifetime expected
credit losses as an impairment gain or loss. An entity shall recognize favourable changes in lifetime
expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than
the amount of expected credit losses that were included in the estimated cash flows on initial
recognition.

4. If expected credit losses are to be discounted then credit-adjusted effective interest rate determined
at initial recognition shall be used.
Helpful diagram for impairment
h
uk
hr
ha
sS
rd
ga
Re

IFRS 9 (Regular way transactions and Impairment) – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
On December 29, 2019 an entity commits itself to purchase a financial asset for Rs. 1,000, which is its fair value on
commitment (trade) date. On December 31, 2019 (i.e. year-end) and on January 4, 2020 (settlement date) the fair value
of the asset is Rs. 1,025 and Rs. 1,038 respectively.
Required:
Journal entries for the above transactions for each of the following cases:
Case – I Financial asset will be measured at amortized cost
Case – II Financial asset will be measured at fair value through OCI
Case – III Financial asset will be measured at fair value through P&L
h
Under following accounting policies:
(a) Trade date accounting
uk
(b) Settlement date accounting
Question 2
hr
On December 29, 2019 an entity commits itself to sell a financial asset for Rs. 1,010, which is its fair value on commitment
(trade) date. It had been purchased on January 1, 2019 and has a carrying amount of Rs. 1,000 on trade date. On December
31, 2019 (i.e. year-end) and on January 4, 2020 (settlement date) the fair value of the asset is Rs. 1,025 and Rs. 1,030
respectively.
Required:
ha
Journal entries for the above transactions for each of the following cases:
Case – I Financial asset was measured at amortized cost
sS
Case – II Financial asset was measured at fair value through OCI
Case – III Financial asset was measured at fair value through P&L
Under following accounting policies:
rd
(c) Trade date accounting

(d) Settlement date accounting
ga
Question 3
On December 29, 2019 an entity enters into a contract to sell Debenture A, which is measured at amortized cost, in
exchange for Bond B, which will be held for trading and thus will be measured at fair value through P&L. Debenture A had
a carrying amount of Rs. 10,000 on commitment date.
Re
Fair values of both assets were as follows:

Debenture A Bond B
Trade date (i.e. 29-12-19) Rs. 10,100 Rs. 10,100
Year end (i.e. 31-12-19) Rs. 10,120 Rs. 10,090
Settlement date (i.e. 04-01-20) Rs. 10,130 Rs. 10,070
Entity follows settlement date accounting for assets measured at amortized cost and trade date accounting for assets
held for trading.
Required:
Journal entries for the above transactions.
NASIR ABBAS FCA

Question 4
On January 1, 2018, Nobita Limited (NL) bought Rs. 200,000 (nominal value) 10% bonds, incurring transactions costs of
1% of purchase price. The bonds will be redeemed at a premium of Rs. 25% over nominal value on December 31, 2020.
The effective rate of interest is 16.6386%. The fair value of the bond was as follows:

December 31, 2018 260,000
December 31, 2019 280,000
The investment was not considered to be credit-impaired at any stage. The relevant expected credit losses, for use in
measuring the loss allowance were as follows:
Date Rs.
h
January 1, 2018 7,000
December 31, 2018 10,000
uk
December 31, 2019 12,000
Required:
hr
Journalize all above transactions over all relevant years if:
(a) NL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) NL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
ha
Question 5
sS
An entity purchased debentures of Rs. 450,000 on January 1, 2019, on which date they are not considered to be credit-
impaired. The financial asset is classified at amortized cost and has an effective interest rate of 10%. Coupon payment of
Rs. 30,000 was duly received on December 31, 2019 and December 31, 2020. The following additional information is also
available on December 31, 2019:
2019 2020
rd
Lifetime expected credit loss if there is a default (i.e. LGD) 30% 35%
[% of gross carrying amount]
Probability of default occurring within 12-months 10% 11%
Probability of default occurring within lifetime 12% 15%
ga
Required:
Extracts of SOFP and SOCI for the year ending December 31, 2019 and 2020 if risk assessment on each year end shows:
(a) There is no significant increase in credit risk since initial recognition
Re
(b) There is a significant increase in credit risk since initial recognition

(c) The asset has become credit-impaired
Question 6
On January 1, 2019 Happy Limited (HL) invested in 5,000 debentures issued by Sad Limited (SL). Each debenture is
redeemable at par (i.e. Rs. 100) after 4 years. Coupon rate was 9% payable annually. Issue price was Rs. 98 per debenture
(i.e. equal to the fair value). Transaction costs incurred amount to Rs. 2,500. Effective rate of interest was 9.4678%.
HL classified this investment at amortized cost. The investment was not credit-impaired on initial recognition. On initial
recognition HL estimated the lifetime expected credit losses to be Rs. 15,000 and the 12-month expected credit losses to
be Rs. 3,125.
NASIR ABBAS FCA

On December 31, 2019, due to high debt ratio and declining profit margins, SL issued a warning to its creditors that it is
undergoing a business restructuring process aimed at saving the business from bankruptcy. As a result, the directors of
HL determined that there was a significant increase in credit risk since the initial recognition. On that date, revised
estimates were as follows:
- The lifetime expected credit losses had increased to Rs. 17,500; and
- The 12-months expected credit loss had increased to Rs. 5,000
On December 31, 2020, the credit risk for the investment remained significantly higher than at initial recognition. On that
date, revised estimates were as follows:
- The lifetime expected credit losses had increased to Rs. 20,000; and
- The 12-months expected credit loss had increased to Rs. 8,000
h
Required:
Journal entries for the year ending December 31, 2019 and 2020 if risk assessment shows:
uk
(a) The asset was not credit-impaired at either December 31, 2019 or December 31, 2020.
(b) The asset became credit-impaired at December 31, 2019 and remained so at December 31, 2020.
hr
Question 7
On December 1, 2019 Good Limited (GL) entered into a contract with a customer for Rs. 500,000. All performance
obligations were satisfied on that date. There is no significant financing component in the contract.
ha
At December 31, 2019 GL does not believe that the increase in credit risk since initial recognition is significant.
If default occurs, GL expects to lose 80% of the gross carrying amount of the receivable. The customer pays in full on
January 15, 2020.
sS
01-12-19 31-12-19
Probability of default over the next 12-months 4% 5%
Probability of default over the lifetime 6% 7%
Required:
rd
Journal entries of above transactions.
Question 8
ga
On December 31, 2019 Mango Limited (ML) has a portfolio of receivables of Rs. 30 million. The trade receivables do not
have a significant financing component in accordance with IFRS 15.
ML has constructed following provision matrix to determine expected credit losses on the portfolio of receivables:
Re
Number of days past due

Current
1-30 31-60 61-90 More than 90
Gross carrying amount (Rs. million) 15.00 7.50 4.00 2.50 1.00
Default rate 0.3% 1.6% 3.6% 6.6% 10.6%
The loss allowance measured at end of 2018 was Rs. 350,000
Required:
Journal entry to record impairment loss on December 31, 2019.
NASIR ABBAS FCA

Question 9
On January 1, 2019 Almond Limited (AL) purchased 10% debentures (having nominal value of Rs. 60,000) at a price of Rs.
50,000. These bonds are redeemable at par on December 31, 2022. AL’s management had estimated at initial recognition
that only 85% of contractual cashflows would be recovered. As a result of which, the investment was considered as
purchased credit-impaired financial asset and credit-adjusted effective rate was estimated at 10.627%.
On December 31, 2019 Rs. 4,800 was received in respect of coupon payment of 2019 and AL’s revised its estimate of
expected default on contractual cashflows to 20%.
h
Finally on December 31, 2022 the debentures were redeemed at Rs. 58,000.
Required:
uk
All journal entries till December 31, 2022.
hr
ha
sS
rd
ga
Re
NASIR ABBAS FCA

IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Case – I Case – II Case – III
29-12-19
Financial asset 1,000 Financial asset 1,000 Financial asset 1,000

Payable 1,000 Payable 1,000 Payable 1,000
31-12-19
No entry Financial asset 25 Financial asset 25

OCI 25 P&L 25
h
04-01-20
uk
Payable 1,000 Payable 1,000 Payable 1,000
Cash 1,000 Cash 1,000 Cash 1,000
hr
Financial asset 13 Financial asset 13
OCI 13 P&L 13
ha
29-12-19
sS
No entry No entry No entry
31-12-19
No entry Receivable 25 Receivable 25

rd
OCI 25 P&L 25
04-01-20
ga

Cash 1,000 Cash 1,000 Cash 1,000
Receivable 25 Receivable 25
OCI 13 P&L 13
Re
Solution No. 2
29-12-19
Receivable 1,010 Receivable 1,010 Receivable 1,010

Profit on disposal 10 Profit on disposal 10 Profit on disposal 10
NASIR ABBAS FCA

31-12-19
04-01-20
Cash 1,010 Cash 1,010 Cash 1,010

Receivable 1,010 Receivable 1,010 Receivable 1,010

29-12-19
h
No entry Financial asset 10 Financial asset 10
uk
OCI 10 P&L 10
31-12-19
hr
04-01-20
Cash 1,010 Cash 1,010 Cash 1,010

Financial asset 1,000 OCI
ha 10 Financial asset 1,010
Profit on disposal 10 Financial asset 1,010
Profit on disposal 10
sS
Solution 3
Dr. Cr.
-------- Rs. -------
29-12-19 Bond B 10,100
rd
Payable 10,100
[initial recognition]
31-12-19 FV loss [P&L] 10

ga
Bond B 10
[FV loss at year end]
04-01-20 Payable 10,100

Re
Debenture A 10,000
Profit on disposal 100
[Derecognition of Debenture A]
04-01-20 FV loss [P&L] 20

Bond B 20
[FV loss at settlement date]
NASIR ABBAS FCA

Solution 4
(a) Asset shall be measured at amortized cost Dr. Cr.
-------- Rs. -------
01-01-18 Investment [200,000 x 1.01] 202,000
Cash 202,000
01-01-18 Impairment loss [P&L] 7,000

Loss allowance 7,000
[Initial recognition of ECL]
31-12-18 Investment 33,610
h
uk
31-12-18 Cash [200,000 x 10%] 20,000
Investment 20,000
hr
31-12-18 Impairment loss [P&L] [10,000 - 7,000] 3,000
ha
[Subsequent remeasurement of ECL]
31-12-19 Investment 35,874

sS
31-12-19 Cash 20,000

Investment 20,000
rd

ga
(b) Asset shall be measured at fair value through OCI Dr. Cr.
-------- Rs. -------
Re
01-01-18 Investment [200,000 x 1.01] 202,000

Cash 202,000

Loss allowance [OCI] 7,000
31-12-18 Investment 33,610

NASIR ABBAS FCA

31-12-18 Cash [200,000 x 10%] 20,000

Investment 20,000

31-12-18 Investment (W-1) 44,390

h
31-12-19 Investment 35,874
uk
31-12-19 Cash 20,000
hr
Investment 20,000

Loss allowance [OCI]
ha 2,000
31-12-19 Investment (W-1) 4,126

sS
W-1
rd
Opening Closing Fair Fair value

Date Interest Cashflow OCI
balance balance value reserve
[A] [B = A x 16.6386%] [C] [D = A + B - C] [E] [F = E - D] [Change in F]
ga
31-12-18 202,000 33,610 20,000 215,610 260,000 44,390 44,390

31-12-19 215,610 35,874 20,000 231,484 280,000 48,516 4,126
Re
Solution 5
(a) 2019 2020
----------- Rs. ----------
SOCI - extracts
Interest income (W-1) 45,000 46,500
Expected loss [Change in allowance(W-1)] (13,950) (4,588)
SOFP - extracts
Non-current assets
Investment (W-1) 451,050 462,962
NASIR ABBAS FCA

(b)
SOCI - extracts
Expected loss [Change in allowance(W-1)] (16,740) (8,539)
SOFP - extracts
Non-current assets
Investment (W-1) 448,260 456,221
(c)
SOCI - extracts
h
Expected loss [Change in allowance(W-1)] [25,279 – 16,740 – 1,674] (16,740) (6,865)
uk
SOFP - extracts
Non-current assets
Investment (W-1) 448,260 456,221
hr
W-1 (a) (b) (c)
---------------------- Rs. -------------------
Initial amount [A] 450,000 450,000 450,000
Interest income
ha 45,000
[A x 10%]
45,000
[A x 10%]
45,000
[A x 10%]
Cashflow (30,000) (30,000) (30,000)
Gross balance 31-12-19 [B] 465,000 465,000 465,000
sS
Loss allowance:
Impairment loss 13,950 16,740 16,740
Balance as at 31-12-19 13,950 16,740 16,740
[B x 30% x 10%] [B x 30% x 12%] [B x 30% x 12%]
rd
[C] 451,050 448,260 448,260
Gross balance 01-01-20 465,000 465,000 465,000

Interest income 46,500 46,500 44,826
ga
[B x 10%] [B x 10%] [C x 10%]

Interest adjustment for allowance [16,740 x 10%] - - 1,674
Cashflow (30,000) (30,000) (30,000)
Gross balance 31-12-20 [D] 481,500 481,500 481,500
Re
Loss allowance:
Balance as at 01-01-20 13,950 16,740 16,740
Interest adjustment - - 1,674
Impairment loss 4,588 8,539 6,865
Balance as at 31-12-20 18,538 25,279 25,279
[D x 35% x 11%] [D x 35% x 15%] [D x 35% x 15%]
462,962 456,221 456,221
NASIR ABBAS FCA

Solution 6
(a) Dr. Cr.
-------- Rs. -------
01-01-19 Investment [5,000 x 98 + 2,500] 492,500
Cash 492,500

31-12-19 Investment 46,629
h
uk
31-12-19 Cash 45,000
Investment 45,000
hr
31-12-19 Impairment loss [P&L] (W-1) 14,375
ha
31-12-20 Investment 46,783

sS
31-12-20 Cash 45,000

Investment 45,000
rd

ga
(b) Dr. Cr.

-------- Rs. -------
Re
01-01-19 Investment [5,000 x 98 + 2,500] 492,500

Cash 492,500

31-12-19 Investment 46,629

NASIR ABBAS FCA

31-12-19 Cash 45,000

Investment 45,000

31-12-20 Investment 46,783

Loss allowance (W-1) 1,657
h
31-12-20 Cash 45,000
uk
Investment 45,000
hr
31-12-20 Impairment loss [P&L] (W-1) 843
Loss allowance 843
W-1 (a) (b)

ha -------------- Rs. --------------
Initial amount [5,000 x 98 + 2,500] [A] 492,500 492,500
Interest income 46,629 46,629
sS
[A x 9.4678%] [A x 9.4678%]
Cashflow [5,000 x 100 x 9%] (45,000) (45,000)
Gross balance 31-12-19 [B] 494,129 494,129
Loss allowance:
rd
Initial amount 3,125 3,125

Impairment loss at year end 14,375 14,375
Balance as at 31-12-19 17,500 17,500
[C] 476,629 476,629
ga
Gross balance 01-01-20 494,129 494,129

Interest income 46,783 45,126
[B x 9.4678%] [C x 9.4678%]
Re
Interest adjustment for allowance [17,500 x 9.4678%] - 1,657

Cashflow (45,000) (45,000)
Gross balance 31-12-20 [D] 495,912 495,912
Loss allowance:
Balance as at 01-01-20 17,500 17,500
Interest adjustment - 1,657
Impairment loss 2,500 843
Balance as at 31-12-20 20,000 20,000
475,912 475,912
NASIR ABBAS FCA

Solution 7 Dr. Cr.

-------- Rs. -------
01-12-19 Trade receivables 500,000
Sales 500,000
01-12-19 Impairment loss [P&L] [500,000 x 80% x 6%] 24,000

31-12-19 Impairment loss [P&L] [500,000 x 80% x 7% - 2 4,000] 4,000

h
uk
15-01-20 Cash 500,000
Trade receivable 500,000
[Cash received from customer]
hr
15-01-20 Loss allowance 28,000
Impairment loss [P&L] 28,000
[Loss allowance reversed on cash recovery]
ha
Solution 8
Dr. Cr.
-------- Rs. million -------
sS
Loss allowance 0.23
[Impairment loss for 2019]
W-1
rd
Gross
Default rate Allowance
amount
(Rs. million) (Rs. million)
ga
Current 15.00 0.30% 0.05

1-30 days 7.50 1.60% 0.12
31-60 days 4.00 3.60% 0.14
61-90 days 2.50 6.60% 0.17
Re
More than 90 days 1.00 10.60% 0.11

0.58
Opening balance 0.35
0.23
Solution 9
Dr. Cr.
-------- Rs. -------
01-01-19 Investment 50,000
Cash 50,000
NASIR ABBAS FCA


31-12-19 Cash 4,800

P&L 300

[Measurement of ECL]
h
uk
Loss allowance (W-1) 318
hr
31-12-20 Cash 4,900
P&L 200
ha
31-12-20 Loss allowance (W-1) 1,451

Impairment gain [P&L] 1,451
sS

Loss allowance 198
rd
31-12-21 Cash 5,300

ga
P&L 200
Re


Loss allowance (W-1) 177
NASIR ABBAS FCA

31-12-22 Cash 58,000

P&L 58
[Redemption amount received]
W-1 Rs.
Initial amount 50,000
Interest income [50,000 x 10.627%(W-2)] 5,314
Cashflow (W-2) (5,100)
Gross balance 31-12-19 50,214
h
Loss allowance:
Impairment loss 2,992
uk
Balance 31-12-19 (W-2.1) 2,992
47,221
hr
Interest income [47,221 x 10.627%] 5,018
Interest adjustment for allowance [2,992 x 10.627%] 318
Gross balance 31-12-20
ha 50,450
Loss allowance:
Balance 01-01-20 2,992
sS
Interest adjustment 318
Impairment loss (1,451)
Balance 31-12-20 (W-.2.2) 1,859
48,590
rd

Interest adjustment for allowance [1,859 x 10.627%] 198
ga

Loss allowance:
Re
Balance 01-01-21 1,859

Interest adjustment 198
Balance 31-12-21 (W-.2.2) (1,665)
52,376

Interest adjustment for allowance [1,665 x 10.627%] (177)
Cashflow (W-2) (56,100)
Gross balance 31-12-22 -
NASIR ABBAS FCA

Loss allowance:
Balance 01-01-22 (1,665)
Interest adjustment (177)
Balance 31-12-22 -
-
W-2
Contractual Recovery Expected
Credit-adjusted effective rate cashflows expected cashflows
Transaction price (50,000) (50,000)
31-12-19 6,000 85% 5,100
h
31-12-20 6,000 85% 5,100
31-12-21 6,000 85% 5,100
uk
31-12-22 66,000 85% 56,100
Credit-adjusted effective rate 10.627%
Initial estimate of expected credit loss Rs.
hr
PV of contractual cash flows at credit-impaired effective rate 58,824
PV of expected cash flows at credit-impaired effective rate 50,000
8,824
W-2.1
31-12-19
ha
Contractual Expected
Default PV of loss
Expected credit loss cash flows credit loss
31-12-20 6,000 20% 1,200 1,085
sS
31-12-21 6,000 20% 1,200 981
31-12-22 66,000 20% 13,200 9,750
11,816
Initial estimate of credit loss 8,824
rd
Change in expected credit loss 2,992

W-2.2
31-12-20
ga
Default PV of loss
31-12-21 6,000 18% 1,080 976
31-12-22 66,000 18% 11,880 9,707
10,683
Re

Change in expected credit loss 1,859
W-2.3
31-12-21
Default PV of loss
31-12-22 66,000 12% 7,920 7,159
7,159
Change in expected credit loss (1,665)
NASIR ABBAS FCA

IFRS 9 (Re-classification, De-recognition and Modification) – Class notes
RE-CLASSIFICATION
Financial assets
1. When and only when an entity changes it business model for managing financial assets, it shall
reclassify all affected financial assets. Such changes are expected to be very infrequent. A change in
entity’s business model will occur only when an entity either begins or ceases to perform an activity
that is significant to its operations.
Examples:
- An entity has a portfolio of commercial loans that it holds to sell in the short term. The entity
acquires a company that manages commercial loans and has a business model that holds the loans
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in order to collect the contractual cash flows. The portfolio of commercial loans is no longer for
sale, and the portfolio is now managed together with the acquired commercial loans and all are
held to collect the contractual cash flows.
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- A financial services firm decides to shut down its retail mortgage business. That business no longer
accepts new business and the financial services firm is actively marketing its mortgage loan
portfolio for sale.
hr
Exam note
Since reclassification is applied to “change in business model” only, therefore technically it is not
allowed for:
- Equity investments. ha
- Investments in debt instruments for which fair value through P&L class was elected irrevocably
on initial recognition.
2. The following are not changes in business model:

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- A change in intention related to particular financial asset
- The temporary disappear of a particular market for financial assets
- A transfer of financial assets between parts of the entity with different business models.
3. The reclassification shall be applied prospectively from the reclassification date. The entity shall not
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restate any previously recognized gains, losses (including impairment gains or losses) or interest.
Reclassification date
The first day of the first reporting period following the change in business model that results in an
entity reclassifying financial assets.
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If a financial asset is reclassified out of AMORTIZED COST measurement:

Reclassified to: Treatment
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Fair value through P&L - Loss allowance is derecognized and adjusted against financial asset.
- The asset shall be measured at fair value on reclassification date.
- Any resulting fair value gain or loss shall be recognized in P&L.
Fair value through OCI - The asset shall be measured at fair value on reclassification date.
- Any resulting fair value gain or loss shall be recognized in OCI.
- The effective interest rate and the measurement of expected credit
losses shall not be adjusted as a result of the reclassification.

- The loss allowance, which is currently shown as a contra asset

account, would be de-recognized and recognized as a loss
allowance[OCI].
If a financial asset is reclassified out of FAIR VALUE through P&L measurement:

Fair value through OCI - The asset shall continue to be measured at fair value.
- The effective interest rate is calculated based on the fair value of the
asset at reclassification date.
h
- For the purpose of initial recognition of loss allowance,
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reclassification date is treated as the date of initial recognition.
Amortized cost - The asset shall be measured at fair value on reclassification date.
- Any resulting fair value gain or loss shall be recognized in P&L.
hr
- The fair value at reclassification date becomes its new gross carrying
amount.
- The effective interest rate is calculated based on the fair value of the
ha
asset at reclassification date.
- For the purpose of initial recognition of loss allowance,
reclassification date is treated as the date of initial recognition.
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If a financial asset is reclassified out of FAIR VALUE through OCI measurement:
Fair value through P&L - The asset shall continue to be measured at fair value.
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- The cumulative gain or loss (including loss allowance) previously

recognized in OCI shall be reclassified to P&L.
Amortized cost - The asset shall be measured at fair value on reclassification date.
ga
- The cumulative gain or loss previously recognized in OCI shall be

removed from equity and adjusted against the asset.
Dr. Fair value reserve [it is shown in SOCIE]

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Cr. Financial asset
- The effective interest rate and the measurement of expected credit

losses shall not be adjusted as a result of the reclassification.
- A loss allowance[OCI] would be de-recognized and recognized as a
loss allowance which would be shown as contra asset account from
the reclassification date.

An entity shall not reclassify any financial liability.
DE-RECOGNITION OF FINANCIAL ASSET
If a part of a financial asset is transferred, then following de-recognition rules should be applied to the
part only if any one of the following conditions are met:
(i) The part comprises only specifically identified cash flows from an asset (e.g. when an entity enters
into an interest rate stirp whereby the counterparty obtains the right to the interest cash flows but
not the principal cash flows from a debt instrument, the de-recognition rules are applied to interest
cashflows);
h
(ii) The part comprises only a fully proportionate share of the cash flows from an asset (e.g. when an
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entity enters into an arrangement whereby the counterparties obtain the rights to 90% share of all
cashflows of a debt instrument, the de-recognition rules are applied to 90% of those cashflows); OR
(iii) The part comprises only a fully proportionate share of specifically identified cashflows from an asset
(e.g. when an entity enters into an arrangement whereby the counterparties obtain the rights to
hr
90% share of interest cashflows of a debt instrument, the de-recognition rules are applied to 90%
of those interest cashflows).
ha
In all other cases de-recognition rules should be applied to the financial asset in its entirety.
In following guidance, term “financial asset” refers to either a part of a financial asset (as identified above)
or a financial asset in its entirety.
sS
1. An entity shall derecognize a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire, or
(b) it transfers the financial asset and the transfer qualifies for derecognition.
2. An entity transfers a financial asset if, and only if, it either:

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(a) transfers the contractual rights to receive the cash flows of the financial asset, or
(b) retains the contractual rights to receive the cash flows of the financial asset (i.e. the original asset),
but assumes a contractual obligation to pay the cash flows to one or more recipients in an
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arrangement that meets all of the following conditions:

Conditions
(i) The entity has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original asset. Short-term advances by the entity with the right
of full recovery of the amount lent plus accrued interest at market rates do not violate this
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condition.
(ii) The entity is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as security to the eventual recipients for the obligation to pay them
cash flows.
(iii) The entity has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay. In addition, the entity is not entitled to reinvest such cash
flows, except for investments in cash or cash equivalents during the short settlement period
from the collection date to the date of required remittance to the eventual recipients, and
interest earned on such investments is passed to the eventual recipients.

3. When an entity transfers a financial asset:

(a) if the entity transfers substantially all the risks and rewards of ownership
The entity shall derecognize the financial asset and recognize separately as assets or liabilities any
rights and obligations created or retained in the transfer.
Examples
(a) an unconditional sale of a financial asset;
(b) a sale of a financial asset together with an option to repurchase the financial asset at its fair
value at the time of repurchase; and
(c) a sale of a financial asset together with a put or call option that is deeply out of the money
(b) if the entity retains substantially all the risks and rewards of ownership
h
The entity shall continue to recognize the financial asset and recognize a financial liability for the
consideration received. In subsequent periods, the entity shall recognize any income on the
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transferred asset and any expense incurred on the liability.
Examples
(a) a sale and repurchase transaction where the repurchase price is a fixed price or the sale
price plus a lender’s return;
hr
(b) a securities lending agreement;
(c) a sale of a financial asset together with a total return swap that transfers the market risk
exposure back to the entity;
(d) a sale of a financial asset together with a deep in-the-money put or call option; and
ha
(e) a sale of short-term receivables in which the entity guarantees to compensate the
transferee for credit losses that are likely to occur.
(c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership
sS
[For example sale and repurchase transactions (i.e. repo transactions)]
The entity shall determine whether it has retained control of the financial asset.
(i) if the entity has not retained control (i.e. the transferee has the practical ability to sell the
financial asset), it shall derecognize the financial asset and recognize separately as assets or
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liabilities any rights and obligations created or retained in the transfer.

(ii) if the entity has retained control (i.e. the transferee does not have the practical ability to sell
the financial asset), it shall continue to recognize the financial asset to the extent of its
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continuing involvement in the financial asset. It also recognizes an associated liability.
Extent of continuing involvement

It is the extent to which entity is exposed to changes in value of the transferred asset. When
the entity’s continuing involvement takes the form of guaranteeing the transferred asset,
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the transferred asset at the date of transfer is measured at lower of (i) carrying amount of
the asset and (ii) the maximum amount of consideration received that the entity could be
required to repay (i.e. the guarantee amount). The associated liability is initially measured
at the guarantee amount. Subsequently the liability is recognized in P&L when the
obligation is satisfied.

4. On de-recognition of a financial asset in its entirety, the difference between:

(a) The carrying amount (measured at date of de-recognition); and
(b) The consideration received (including any new asset obtained less any new liability)
Shall be recognized in P&L.
5. On de-recognition of a part of an asset, the previous carrying amount of the larger financial asset shall
be allocated between the part that continues to be recognized and the part that is de-recognized, on
the basis of the relative fair values of parts on the date of transfer. The difference between:
(a) The carrying amount (measured at date of de-recognition) allocated to the part derecognized;
and
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(b) The consideration received for the part derecognized (including any new asset obtained less any
new liability)
uk
Shall be recognized in P&L.
Measurement at date of de-recognition
hr
Before making above entries for de-recognition, the carrying amount is measured at the date of de-
recognition using the same rules as studied earlier for “subsequent measurement”.
Re-classification of cumulative gain/loss on debt investment measured at FV through OCI

ha
It has already been discussed earlier in subsequent measurement that cumulative value fair gain/loss
previously recognized in OCI shall be reclassified to P&L on de-recognition.
If the asset, which is being partially de-recognized, has cumulative gain/loss in OCI, then the balance in
sS
OCI will also be allocated based on the relative fair values of parts on the date of transfer.
Some important transactions for exams:

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Repo transaction
Under repo transaction (i.e. sale and repurchase agreement) an entity sells an asset with a condition
that same asset will be repurchased after some agreed time.
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Sale of asset – If terms of sale suggest that substantially all the risks and rewards are transferred then
asset is derecognized (e.g. when repurchase price is based on fair value on repurchase date)
Secured loan – If terms of sale suggest that substantially all the risks and rewards are not transferred
(e.g. when repurchase is either at a fixed price or sale price plus lender’s rate of return). This transaction
is a secured loan in substance. Entity shall not de-recognize the asset rather it shall recognize a loan
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and account for accordingly.
Factoring
Factoring means sale of receivables to another party called “factor”. Factor provides debt collection
services and also provide a certain portion as advance. Factor service may be “with recourse” or
“without recourse”.
With recourse – Since bad debt risk is borne by the entity, therefore, any advance received is considered
as a loan and receivables are not derecognized.
Without recourse – Since bad debt risk is borne by the factor, therefore, receivables are derecognized.

Write-off
An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no
reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off
constitutes a de-recognition event.
For example, an entity plans to enforce the collateral on a financial asset and expects to recover no
more than 30 per cent of the financial asset from the collateral. If the entity has no reasonable
prospects of recovering any further cash flows from the financial asset, it should write off the remaining
70 per cent of the financial asset.
DE-RECOGNITION OF FINANCIAL LIABILITIES
h
1. An entity shall remove a financial liability (or a part of a financial liability) from its statement of
uk
financial position when, and only when, it is extinguished—i.e. when the obligation specified in the
contract is discharged (e.g. payment) or cancelled or expires (i.e. legally released from primary
responsibility for the liability).
hr
2. An exchange between an existing borrower and lender of debt instruments with substantially
different terms shall be accounted for as an extinguishment of the original financial liability and the
recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing
financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor)
ha
shall be accounted for as an extinguishment of the original financial liability and the recognition of a
new financial liability.
Substantial change
The terms are substantially different if the discounted present value of the cash flows under the
sS
new terms, including any fees paid net of any fees received (only fees paid or received between the
borrower and lender) and discounted using the original effective interest rate, is at least 10 per cent
different from the discounted present value of the remaining cash flows of the original financial
liability.
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3. The difference between:

(a) the carrying amount of a financial liability (or part of a financial liability) extinguished or
transferred to another party; and
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(b) the consideration paid, including any non-cash assets transferred or liabilities assumed
shall be recognized in profit or loss.
4. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment,

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any costs or fees incurred are recognized as part of the gain or loss on the extinguishment. If the
exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust
the carrying amount of the liability and are amortized over the remaining term of the modified liability
(i.e. using revised effective interest rate).
IFRIC 19 – Extinguishing financial liabilities with equity instruments

Background
A debtor and creditor might renegotiate the terms of a financial liability with the result that the debtor
extinguishes the liability fully or partially by issuing equity instruments to the creditor. These
transactions are sometimes referred to as ‘debt for equity swaps’.

Scope
An entity shall not apply this Interpretation to transactions in situations where:
(a) the creditor is also a direct or indirect shareholder and is acting in its capacity as a direct or indirect
existing shareholder.
(b) the creditor and the entity are controlled by the same party or parties before and after the
transaction and the substance of the transaction includes an equity distribution by, or contribution
to, the entity.
(c) extinguishing the financial liability by issuing equity shares is in accordance with the original terms
of the financial liability. (e.g. convertibles)
Consensus
h
1. When equity instruments issued to a creditor as a consideration paid to extinguish all or part of a
financial liability are recognized initially, an entity shall measure them at:
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(a) the fair value of the equity instruments issued, unless that fair value cannot be reliably
measured.
(b) If the fair value of the equity instruments issued cannot be reliably measured then the equity
instruments shall be measured to reflect the fair value of the financial liability extinguished.
hr
2. The difference between:
(i) The carrying amount of the financial liability extinguished; and
ha
(ii) The consideration paid (i.e. amount of equity instruments issued)
Shall be recognized in profit and loss.
3. If only a part of financial liability is extinguished and part of the consideration also relates to the
sS
modification of the remaining portion, then the consideration paid shall be allocated between the
part extinguished and part retained.
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MODIFICATION OF FINANCIAL ASSET (Measured at Amortized cost)
Case – I Modification does not result in de-recognition of financial asset:

ga
1. An entity shall recalculate the gross carrying amount of the financial asset and shall recognize a
modification gain or loss in profit or loss.
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2. The gross carrying amount of the financial asset shall be recalculated as the present value of the
renegotiated or modified contractual cash flows that are discounted at the financial asset’s original
effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-
impaired financial assets).
3. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are
amortized over the remaining term of the modified financial asset.

4. An entity shall assess whether there has been a significant increase in the credit risk of the financial
instrument by comparing:
(a) the risk of a default occurring at the reporting date (based on the modified contractual terms);
and
(b) the risk of a default occurring at initial recognition (based on the original, unmodified contractual
terms).
5. If the contractual cash flows on a financial asset have been renegotiated or otherwise modified, but
the financial asset is not derecognized, that financial asset is not automatically considered to have
lower credit risk. An entity shall assess whether there has been a significant increase in credit risk
since initial recognition on the basis of all reasonable and supportable information that is available
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without undue cost or effort.
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Case – II Modification results in de-recognition of financial asset:
1. The modified asset is considered a ‘new’ financial asset. Accordingly, the date of the modification shall
hr
be treated as the date of initial recognition of that financial asset when applying the impairment
requirements to the modified financial asset. This typically means measuring the loss allowance at an
amount equal to 12-month expected credit losses until the credit risk is significantly increased
afterwards.
ha
2. However, in some unusual circumstances following a modification that results in derecognition of the
original financial asset, there may be evidence that the modified financial asset is credit-impaired at
initial recognition, and thus, the financial asset should be recognized as an originated credit-impaired
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financial asset.
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IFRS 9 (Re-classification, De-recognition and Modification) – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
On January 1, 2017, Tokyo Limited (TL) invested Rs. 500,000 (i.e. equal to face value) in 8% debentures. These debentures
would be redeemed at a premium of 10%. The effective interest was 8.6687%.
Initially these debentures were classified as measured at amortized cost. However, on June 30, 2019 management of TL
changed its business model and decided to re-classify these bonds as measured at fair value through P&L.
The fair values of the debentures were as follows:

June 30, 2019 540,000
January 1, 2020 510,000
December 31, 2020 545,000
h
The debentures have never been credit-impaired and there have been no significant increase in credit risk since initial
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recognition. The expected credit losses were determined as follows:
Date 12-month credit losses Lifetime credit losses

(Rs.) (Rs.)
hr
January 1, 2017 5,000 12,500
December 31, 2017 7,000 15,000
December 31, 2018 8,000 16,700
December 31, 2019 9,200 17,000
ha
Required:
Journal entries for the years ending December 31, 2019 and 2020.
sS
Question 2
Sigma Limited (SL) purchased bonds in a company some years ago. The bonds were classified at fair value through profit
or loss since they were held for trading. The bonds have a face value of Rs. 500,000 and coupon rate of 10% per annum.
The bonds would be redeemed at a premium of 20% on December 31, 2025.
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On August 1, 2019, SL decided to change the classification from fair value through P&L to amortized cost.
The fair values of the bonds were as follows:

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December 31, 2018 545,000

August 1, 2019 570,000
January 1, 2020 590,000
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(Rs.) (Rs.)
January 1, 2018 5,000 12,500
January 1, 2019 7,000 15,000
January 1, 2020 8,000 16,700
December 31, 2020 9,200 17,000
Required:
NASIR ABBAS FCA

Question 3
Mango Limited (ML) purchased debentures of a company on January 1, 2018 for Rs. 147,408 (i.e. fair value). The face
value of debentures was Rs. 100,000 and coupon rate was 20% per annum. These would be redeemed at a premium of
23% on December 31, 2021. Effective interest rate was 10%.
On August 1, 2019, ML decided to change the classification from fair value through OCI to amortized cost.

December 31, 2018 145,350
August 1, 2019 147,500
December 31, 2019 148,850
December 31, 2020 142,000
h
uk

(Rs.) (Rs.)
hr
January 1, 2018 5,000 12,500
December 31, 2018 7,000 15,000
December 31, 2019 8,000 16,700
December 31, 2020 9,200 17,000
Required:
ha
sS
Question 4
On April 30, 2020 Alpha Limited (AL) sold 3,000 shares of a company at a price of Rs. 65 per share (fair value of share on
that date was Rs. 68). AL also incurred a transaction cost of Rs. 0.70 per share in sale transaction.
These shares had been purchased last year and were re-measured on December 31, 2019 to Rs. 62 per share.
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Required:
Journal entries to record sale of shares on April 30, 2020 if AL measures its investments in shares at:
(a) Fair value through P&L
(b) Fair value through OCI
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Question 5
On April 30, 2020 Beta Limited (BL) sold 2,000 debentures of a company at a price of Rs. 115 per debenture (fair value of
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debenture on that date was Rs. 118). BL also incurred a transaction cost of Rs. 2.50 per debenture.
These debentures had been purchased on January 1, 2018 for Rs. 105 per debenture and also incurred transaction costs
of Rs. 6,000. The effective rate was 12% whereas annual coupon payment was Rs. 15 per debenture.
December 31, 2018 220,000
December 31, 2019 226,000
Required:
Journal entries to record sale of debentures on April 30, 2020 if BL measures its investments in debentures at:
(a) Amortized cost
(b) Fair value through OCI
NASIR ABBAS FCA

Question 6
On January 1, 2020 an entity has a portfolio of loans whose coupon and effective interest rate is 10% and whose principal
amount and amortized cost is Rs. 10,000. On that date, it enters into a transaction in which, in return for a payment of Rs.
9,115, the transferee obtains the right to Rs. 9,000 of any collections of principal plus interest thereon at 9.5%. The entity
retains rights to Rs. 1,000 of any collections of principal plus interest thereon at 10%, plus the excess spread of 0.5% on
the remaining Rs. 9,000 of principal.
Collections are to be allocated between the entity and the transferee proportionately in the ratio of 1:9, but any defaults
are to be deducted from the entity’s interest of Rs. 1,000 until that interest is exhausted. The fair value of the loans at the
date of the transaction is Rs. 10,100 and the fair value of the excess spread of 0.5% is Rs. 40.
Required:
Explain the accounting treatment along with journal entry at the date of transfer.
h
Question 7
On January 1, 2019 Zee Limited (ZL) sold 2,000 debentures of a company at a price of Rs. 120 per debenture (equal to fair
value of debenture on that date) to Hexa Finance (HF) in a sale and repurchase agreement. Following terms were agreed
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in repo agreement:
- ZL will purchase the debentures on December 31, 2020 at a price of Rs. 132 per debenture (irrespective of fair value)
- Coupon payments for 2019 and 2020 will be received by HF being legal owner of debentures
[It gives an effective rate of return of HF equal to 17.106%]
hr
These debentures had been purchased on January 1, 2018 for Rs. 105 per debenture and ZL also incurred transaction
costs of Rs. 6,000. The effective rate was 12% whereas annual coupon payment was Rs. 15 per debenture.
Required:
ha
Question 8
sS
On December 1, 2019 Wee Limited (WL) sold its receivable to factors as follows:
- Receivables amounting to Rs. 800,000 were sold to Factor Aay and receives an advance of 70% immediately at an
interest of 1% per month. The factor also charged a fee of Rs. 8,000 for the service. Factor Aay will pay the balance
amount, after deducting interest and service fees, on debt settlement by customer (i.e. on December 31, 2019). The
debts are factored with recourse.
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- Receivables amounting to Rs. 500,000 were sold to a Factor Bee for an immediate payment of Rs. 400,000 and
remaining Rs. 70,000 will be paid on December 31, 2019. The debts are factored without recourse.
Required:
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Journal entries for above transactions assuming that debtors settled their accounts on December 31, 2019.
Question 9
Zalmi Limited (ZL) took a loan from Dolphin Bank amounting to Rs. 800,000 on January 1, 2017 at 10% interest payable
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annually. Final maturity of loan is on December 31, 2021. ZL also paid processing and legal charges of Rs. 30,000. As a
result its effective interest rate was 11.015%.
During 2018, ZL faced certain financial difficulties and the bank agreed to modify the existing loan. On January 1, 2019,
new terms were agreed as follows:
o ZL will not pay interest for the years 2019 and 2020
o From 2021 onwards annual interest rate will be charged at 12% (i.e. market interest rate)
o Final maturity date will be extended to December 31, 2023
o Fair value of new loan on that date was Rs. 637,755 and effective interest rate was 12%.
ZL paid Rs. 25,000 on January 1, 2019 relating to modification of the loan contract.
Required:
Journal entries for the year ending December 31, 2019.
NASIR ABBAS FCA

Question 10
Kings Limited (KL) took a loan from Sultan Bank amounting to Rs. 800,000 on January 1, 2017 at 10% interest payable
annually. Final maturity of loan is on December 31, 2021. ZL also paid processing and legal charges of Rs. 30,000. As a
result its effective interest rate was 11.015%.
During 2018, ZL faced certain financial difficulties and the bank agreed to modify the existing loan. On January 1, 2019,
new terms were agreed as follows:
o ZL will not pay interest for the years 2019 and 2020
o From 2021 onwards annual interest rate will be charged at 13% (i.e. market interest rate)
o Final maturity date will be extended to December 31, 2023
ZL paid Rs. 40,000 on January 1, 2019 relating to modification of the loan contract.
Required:
h
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Question 11
On January 1, 2017, Sidney Limited (SL) purchased 1 million 5 years debentures issued by Oval Limited (OL) at a premium
of Rs. 5 per debenture. SL also incurred transaction costs of Rs. 1.50 per debenture. Coupon rate was 6% payable annually.
The debentures would be redeemed at par value of Rs. 100 each on December 31, 2021. The effective interest rate was
hr
4.5186%.
Due to certain financial and liquidity issues, OL re-structured the payment plan with effect from January 1, 2020 after due
consultation with debenture holders. Under the revised plan the maturity date was extended by one year. further the
coupon rate was increased to 6.25% for 2020 and 2021 and 6.50% for 2022.
ha
Required:
Question 12
sS
On January 1, 2018, Mosco Limited (ML) issued 1 million debentures at par (i.e. Rs. 100 each) against purchase of a
building. Coupon rate was 12% per annum whereas effective interest was 14.5%.
On January 1, 2020 it was agreed with the creditor to settle the entire remaining liability by issue of ordinary shares of
ML (having face value of Rs. 10 each) and a result 1.8 million shares were issued. The market price of ML’s shares on
that date was Rs. 65 per share.
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Required:
Journal entry to record the issue of shares.
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NASIR ABBAS FCA

IFRS 9 (Re-classification, De-recognition and Modification) – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (AC) 43,948
Interest income 43,948
31-12-19 Cash 40,000

Investment (AC) 40,000
[Contractual cashflow for 2019]
h
31-12-19 Impairment loss [9,200 - 8,000] 1,200
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01-01-20 Loss allowance 9,200

Investment (FVPL) 510,000
hr
FV gain [P&L] (W-2) 8,275
[Reclassification adjustment]
ha
31-12-20 Cash 40,000
sS
31-12-20 Investment (FVPL) [545,000 - 510,000] 35,000

FV gain [P&L] 35,000
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W-1
Opening Closing
Date Interest Payment
balance balance
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[A] [B = A x 8.6687%] [C] [A + B - C]

31-12-17 500,000 43,344 40,000 503,344
31-12-18 503,344 43,633 40,000 506,977
31-12-19 506,977 43,948 40,000 510,925
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W-2 Rs.
Gross carrying amount 510,925
Loss allowance (9,200)
501,725
Fair value 510,000
Fair value gain 8,275
NASIR ABBAS FCA

Solution 2
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (FVPL) [590,000 - 545,000] 45,000
Fair value gain [P&L] 45,000
31-12-19 Cash [500,000 x 10%] 50,000

01-01-20 Investment (AC) 590,000
h
Investment (FVPL) 590,000
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01-01-20 Impairment loss 8,000
[Initial recognition of loss allowance]
hr
31-12-20 Investment (AC) [590,000 x 8.833%(W-1)] 52,115
ha
31-12-20 Cash 50,000
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31-12-20 Impairment loss [9,200 - 8,000] 1,200

[Measurement of loss allowance]
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ga
W-1 ---------- 5% -------- --------- 10% -------

Cashflows Factor PV Factor PV
FV at reclassification (590,000) 1.000 (590,000) 1.000 (590,000)
Year 1 payment 50,000 0.952 47,600 0.909 45,450
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Year 2 payment 50,000 0.907 45,350 0.826 41,300

Year 3 payment 50,000 0.864 43,200 0.751 37,550
Year 4 payment 50,000 0.823 41,150 0.683 34,150
Year 5 payment 50,000 0.784 39,200 0.621 31,050
Year 6 payment 650,000 0.746 484,900 0.564 366,600
111,400 (33,900)
Effective interest rate = 5% + [111,400/(111,400 + 33,900)] x 5% = 8.833%
NASIR ABBAS FCA

Solution 3
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (FVOCI) (W-1) 14,215
31-12-19 Cash 20,000

Investment (FVOCI) 20,000
31-12-19 Investment (FVOCI) (W-1) 9,285
h
FV reserve [OCI] 9,285
uk
31-12-19 Impairment loss [8,000 - 7,000] 1,000
hr
01-01-20 Loss allowance [OCI] 8,000
ha
01-01-20 Fair value reserve 12,486
sS
01-01-20 Investment (AC) 136,364

rd
31-12-20 Cash 20,000

ga
31-12-20 Investment (AC) (W-1) 13,636

Re
31-12-20 Impairment loss [9,200 - 8,000] 1,200

W-1
Opening Closing Fair value
Date Interest Payment Fair value OCI
balance balance reserve
[A] [B = A x 10%] [C] [A + B - C] [E] [F = E - D] [Change in F]
31-12-18 147,408 14,741 20,000 142,149 145,350 3,201 3,201
31-12-19 142,149 14,215 20,000 136,364 148,850 12,486 9,285
31-12-20 136,364 13,636 20,000 130,000 - - -
NASIR ABBAS FCA

Solution 4
Dr. Cr.
(a) ------------ Rs. -----------
30-04-20 Investment [3,000 x (68 – 62)] 18,000
Fair value gain [P&L] 18,000
[Remeasurement on the date of de-recognition]
30-04-20 Cash [3,000 x (65 – 0.70)] 192,900

Loss on disposal (P&L) 11,100
Investment [3,000 x 68] 204,000
h
Dr. Cr.
uk
(b) ------------ Rs. -----------
30-04-20 Investment [3,000 x (68 – 62)] 18,000
hr
30-04-20 Cash [3,000 x (65 – 0.70)] 192,900
Loss on disposal (P&L) 11,100
ha
Investment [3,000 x 68] 204,000
Solution 5
Dr. Cr.
sS
(a) ------------ Rs. -----------
30-04-20 Investment (W-1) 8,294
[Investment income for 4 months]
rd
30-04-20 Cash [2,000 x (115 - 2.50)] 225,000

Gain on disposal 9,356
ga
Dr. Cr.
(b) ------------ Rs. -----------
30-04-20 Investment (W-1) 8,294
Re

[Investment income for 4 months]
30-04-20 Investment (W-1) 1,706

30-04-20 Cash [2,000 x (115 - 2.50)] 225,000

Loss on disposal [P&L] 11,000
NASIR ABBAS FCA


Gain on disposal [P&L] 20,356
[Reclassification of cumulative gain on de-recognition]
W-1
Opening Closing Fair value
Date Interest Payment Fair value OCI
balance balance reserve
[A] [B = A x 12%] [C] [A + B - C] [E] [F = E - D] [Change in F]
31-12-18 216,000 25,920 30,000 211,920 220,000 8,080 8,080
31-12-19 211,920 25,430 30,000 207,350 226,000 18,650 10,570
30-04-20 207,350 8,294 - 215,644 236,000 20,356 1,706
[207,350 x 12% x 4/12]
h
* Initial recognition = 105 x 2000 + 6,000 = Rs. 216,000
uk
Solution 6
The entity calculates that Rs. 9,090 (90% × Rs. 10,100) of the consideration received of Rs. 9,115 represents the
consideration for a fully proportionate 90%. The remainder of the consideration received (Rs. 25) represents consideration
received for subordinating its retained interest to provide credit enhancement to the transferee for credit losses. In
hr
addition, the excess spread of 0.5% represents consideration received for the credit enhancement. Accordingly, the total
consideration received for the credit enhancement is Rs. 65 (Rs. 25 + Rs. 40).
For allocation of carrying amount to portion of asset de-recognized and portion retained, it is assumed that fair values of
both portions also have a ratio of 1:9 as follows:
ha
Allocation of carrying amount Fair value Portion Carrying amount
Rs. Rs.
Portion transferred 9,090 90% 9,000
sS
Portion retained 1,010 10% 1,000
10,100 10,000
Dr. Cr.
-------- Rs. -------
rd
01-01-20 Cash 9,115

Continuing involvement [1,000 + 40] 1,040
Liability [1,040 + 25] 1,065
ga
Financial asset (W-1) 9,000

Profit on transfer (balancing) 90
[Recognition of transfer]
Re
Solution 7
Dr. Cr.
------------ Rs. -----------
01-01-19 Cash [120 x 2,000] 240,000
Financial liability - repo 240,000
[sale of debentures]
31-12-19 Financial liability - repo [2,000 x 15] 30,000

Investment 30,000
NASIR ABBAS FCA

31-12-19 Interest expense [240,000 x 17.106%] 41,055

[Interest expense for 2019]
31-12-19 Investment (W-1) 25,430

[Interest income for 2019]
31-12-20 Financial liability - repo [2,000 x 15] 30,000

Investment 30,000
h
31-12-20 Interest expense [(240,000 + 41,055 - 30,000) x 17.106%] 42,945
uk
31-12-20 Investment (W-1) 24,882
hr
31-12-20 Financial liability - repo 264,000

ha
Cash [132 x 2,000] 264,000
[Repurchase of debentures]
sS
W-1
Opening Closing
balance balance
[A] [B = A x 12%] [C] [A + B - C]
31-12-18 216,000 25,920 30,000 211,920
rd
31-12-19 211,920 25,430 30,000 207,350

31-12-20 207,350 24,882 30,000 202,232
ga
Solution 8
Dr. Cr.
Re
(a) Factor with recourse ------------ Rs. -----------

01-12-19 Cash [800,000 x 70%] 560,000
Financial liability (Factor) 560,000
[70% advance received]
31-12-19 Cash 226,400

Financial liability (Factor) 560,000
Factor finance cost [560,000 x 1%] 5,600
Factor fees [P&L] 8,000
Receivables 800,000
[Cash settlement of receivables]
NASIR ABBAS FCA

(b) Factor without recourse ------------ Rs. -----------

01-12-19 Cash 400,000
Financial asset (Factor) 70,000
Loss on sale of receivables 30,000
Receivables 500,000
[Receivables derecognized
31-12-19 Cash 70,000

Financial asset (Factor) 70,000
[Final settlement from factor]
h
Solution 9
Dr. Cr.
------------ Rs. -----------
uk
01-01-19 Bank loan (existing) (W-1) 780,161
Gain on extinguishment 117,406
Cash 25,000
hr
Bank loan (New) 637,755
[Restructuring of loan]
31-12-19 Interest expense (W-3) 76,531

Bank loan (New)
ha 76,531
W-1 Original loan schedule

sS
Opening Closing
balance balance
[A] [B = A x 11.015%] [C] [A + B - C]
31-12-17 770,000 84,816 80,000 774,816
31-12-18 774,816 85,346 80,000 780,161
rd
31-12-19 780,161 85,935 80,000 786,096

31-12-20 786,096 86,588 80,000 792,685
31-12-21 792,685 87,315 880,000 -
ga
W-2 Testing of 10% rule

Cashflow Factor PV
[11.015%]
Re
01-01-19 25,000 1.000 25,000

31-12-19 - 0.901 -
31-12-20 - 0.811 -
31-12-21 96,000 0.731 70,176
31-12-22 96,000 0.658 63,168
31-12-23 896,000 0.593 531,328
PV of new terms at original effective rate 689,672
PV of original terms 780,161
Difference 90,489
11.60%
Since it is more than 10% therefore existing loan is derecognized
NASIR ABBAS FCA

W-3 Revised loan schedule

Opening Closing
balance balance
[A] [B = A x 12%] [C] [A + B - C]
31-12-19 637,755 76,531 - 714,286
31-12-20 714,286 85,714 - 800,000
31-12-21 800,000 96,000 96,000 800,000
31-12-22 800,000 96,000 96,000 800,000
31-12-23 800,000 96,000 896,000 -
Solution 10
Dr. Cr.
h
------------ Rs. -----------
01-01-19 Bank loan (existing) (W-1) 40,000
uk
Cash 40,000
[Restructuring cost of loan]
31-12-19 Interest expense (W-3) 66,931
hr
Bank loan (Existing) 66,931
[Interest expense for 2019] ha
W-1 Original loan schedule
Opening Closing
balance balance
sS
[A] [B = A x 11.015%] [C] [A + B - C]
31-12-17 770,000 84,816 80,000 774,816
31-12-18 774,816 85,346 80,000 780,161
31-12-19 780,161 85,935 80,000 786,096
rd
31-12-20 786,096 86,588 80,000 792,685

31-12-21 792,685 87,315 880,000 -
ga
W-2 Testing of 10% rule

Cashflow Factor PV
[11.015%]
01-01-19 40,000 1.000 40,000
Re
31-12-19 - 0.901 -
31-12-20 - 0.811 -
31-12-21 104,000 0.731 76,024
31-12-22 104,000 0.658 68,432
31-12-23 904,000 0.593 536,072
PV of new terms at original effective rate 720,528
PV of original terms 780,161
Difference 59,633
7.64%
Since it is less than 10% therefore existing loan is not derecognized
NASIR ABBAS FCA

W-3 Revised loan schedule

Opening Closing
Date Interest (W-4) Payment
balance balance
[A] [B = A x 9.0427%] [C] [A + B - C]
01-01-19 780,161 - 40,000 740,161
31-12-19 740,161 66,931 - 807,092
31-12-20 807,092 72,983 - 880,075
31-12-21 880,075 79,583 104,000 855,657
31-12-22 855,657 77,375 104,000 829,032
31-12-23 829,032 74,968 904,000 -
h
W-4 Calculation of revised effective rate
Cashflow
uk
01-01-19 (740,161)
31-12-19 -
31-12-20 -
31-12-21 104,000
hr
31-12-22 104,000
31-12-23 904,000 ha
IRR = 9.0427%
Solution 11
Dr. Cr.
--------- Rs. million --------
sS
01-01-20 Investment (W-2) 2.22
Modification gain [P&L] 2.22
[Modification gain recognized]
rd
31-12-20 Investment 4.74

Interest income (W-1) 4.74
ga
31-12-20 Cash 6.25

Investment 6.25
Re
W-1
Opening Closing
Date Modification Interest Cashflow
balance balance
[A] [B] [C = (A + B) x 4.5186%] [D] [A + B + C - D]
31-12-17 106.50 - 4.81 6.00 105.31

31-12-18 105.31 - 4.76 6.00 104.07
31-12-19 104.07 - 4.70 6.00 102.77
31-12-20 102.77 2.22 4.74 6.25 103.49
31-12-21 103.49 - 4.68 6.25 101.91
31-12-22 101.91 - 4.59 106.50 -
NASIR ABBAS FCA

W-2 Modification gain/loss

Cashflow Factor PV
[4.5186%]
31-12-20 6.25 0.957 5.98
31-12-21 6.25 0.915 5.72
31-12-22 106.50 0.876 93.29
PV of modified cashflows at original effective rate 104.99
PV of original cashflows 102.77
Modification gain 2.22
Solution 12
Dr. Cr.
h
------------ Rs. million ----------
-
uk
01-01-20 Debentures (W-1) 105.36
Loss on extinguishment 11.64
Share capital [1.8 x Rs. 10] 18.00
Share premium [1.8 x Rs. 55] 99.00
hr
[Extinguishment of financial liability]
W-1
Opening Closing
Date
balance
Interest
ha Payment
balance
[A] [B = A x 14.5%] [C] [A + B - C]
31-12-18 100.00 14.50 12.00 102.50
31-12-19 102.50 14.86 12.00 105.36
sS
rd
ga
Re
NASIR ABBAS FCA

Q-5 Jun-19 Dr. Cr.
-------- Rs. -------
03-01-15 Investment [15,000 x 96 + 35,000] 1,475,000
Loss on initial recognition [15,000 x 1] 15,000
Cash 1,490,000
31-12-15 Investment 185,850
h
31-12-15 Cash 180,000
uk
Investment 180,000
31-12-15 No entry required as there is no change in loss allowance (i.e. 11,200)
hr
31-12-16 Investment 186,587
[Investment income for 2016] ha
31-12-16 Cash 180,000
Investment 180,000
sS
31-12-17 Investment 187,417
rd

31-12-17 Cash 180,000
Investment 180,000
ga

Re
31-12-18 Investment 188,352

31-12-18 Cash 180,000
Investment 180,000
W-1 Rs.
Initial amount [15,000 x 96 + 35,000] 1,475,000
Interest income [1,475,000 x 12.60%] 185,850
Cashflow [1,500,000 x 12%] (180,000)
Gross balance 31-12-15 1,480,850
Loss allowance:
Initial amount 11,200
Impairment loss at year end -
Balance 31-12-15 11,200
1,469,650
h
Gross balance 01-01-16 1,480,850
uk
Cashflow [1,500,000 x 12%] (180,000)
Gross balance 31-12-16 1,487,437
hr
Loss allowance:
Balance 01-01-16 11,200
Impairment loss ha 51,400
Balance 31-12-16 62,600
1,424,837
Gross balance 01-01-17 1,487,437

sS
Cashflow [1,500,000 x 12%] (180,000)
Gross balance 31-12-17 1,494,854
Loss allowance:
rd
Balance 01-01-17 62,600

Balance 31-12-17 70,900
1,423,954
ga
Gross balance 01-01-18 1,494,854

Interest adjustment for allowance [70,900 x 12.60%] 8,933
Re
Cashflow [1,500,000 x 12%] (180,000)

Gross balance 31-12-18 1,503,206
Loss allowance:
Balance 01-01-17 70,900
Interest adjustment 8,933
Balance 31-12-18 70,900
1,432,306
DEFINITIONS
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
A financial asset is any asset that is:

(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are
h
potentially favourable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non‑derivative for which the entity is or may be obliged to receive a variable number of the
uk
entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the entity’s own equity instruments.
hr
Examples
Financial assets Non-financial assets
o cash o PPE
o cash at bank o Right of use asset
o trade receivables
o Notes receivables
ha o Intangible assets
o Inventory
o Loans receivables o Prepaid expenses
o Bonds receivables
sS
o Perpetual bond (For investor)
A financial liability is any liability that is:

(a) a contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
rd
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non‑derivative for which the entity is or may be obliged to deliver a variable number of the
ga
entity’s own equity instruments; or

(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial sset for a fixed number of the entity’s own equity instruments.
Re
Examples
Financial liabilities Non-financial liabilities
o trade payables o Deferred revenue
o Notes payables o Income tax payable
o Loans payables o Provisions arising out of constructive
o Bonds payables obligation (IAS 37)
o Perpetual bond (For issuer)
An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.

PRESENTATION
Liability and Equity
1. The issuer of the financial instrument shall classify the instrument (or its component parts) on initial
recognition as a financial liability or an equity instrument in accordance with the substance of the
contractual agreement and the definitions.
2. A critical feature in differentiating a financial liability from an equity instrument is the existence of a
contractual obligation of one party to the financial instrument (the issuer) either to deliver cash or
another financial asset to the other party (the holder) or to exchange financial assets or financial
liabilities with the holder under conditions that are potentially unfavourable to the issuer. Although
h
the holder of an equity instrument may be entitled to receive a pro rata share of any dividends or
other distributions of equity, the issuer does not have a contractual obligation to make such
uk
distributions because it cannot be required to deliver cash or another financial asset to another party.
3. A contract is not an equity instrument solely because it may result in the receipt or delivery of the
entity’s own equity instruments. Two examples are (a) a contract to deliver as many of the entity’s
hr
own equity instruments as are equal in value to Rs. 100, and (b) a contract to deliver as many of the
entity’s own equity instruments as are equal in value to the value of 100 ounces of gold. Such a
contract is a financial liability of the entity even though the entity must or can settle it by delivering
its own equity instruments.
ha
4. A financial instrument may require the entity to deliver cash or another financial asset, or otherwise
to settle it in such a way that it would be a financial liability, in the event of the occurrence or
non-occurrence of uncertain future events (or on the outcome of uncertain circumstances) that are
sS
beyond the control of both the issuer and the holder of the instrument, such as a change in a stock
market index, consumer price index, interest rate or taxation requirements, or the issuer’s future
revenues, net income or debt-to-equity ratio. The issuer of such an instrument does not have the
unconditional right to avoid delivering cash or another financial asset (or otherwise to settle it in such
a way that it would be a financial liability). Therefore, it is a financial liability of the issuer.
rd
Compound financial instruments

1. An entity recognizes separately the components of a financial instrument that:
ga
(a) creates a financial liability of the entity; and

(b) grants an option to the holder of the instrument to convert it into an equity instrument of the
entity.
For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary
Re
shares of the entity is a compound financial instrument. From the perspective of the entity, such an
instrument comprises two components: a financial liability (a contractual arrangement to deliver cash
or another financial asset) and an equity instrument (a call option granting the holder the right, for a
specified period of time, to convert it into a fixed number of ordinary shares of the entity). The
economic effect of issuing such an instrument is substantially the same as issuing simultaneously a
debt instrument with an early settlement provision and warrants to purchase ordinary shares, or
issuing a debt instrument with detachable share purchase warrants. Accordingly, in all cases, the
entity presents the liability and equity components separately in its statement of financial position.

2. Classification of the liability and equity components of a convertible instrument is not revised as a
result of a change in the likelihood that a conversion option will be exercised, even when exercise of
the option may appear to have become economically advantageous to some holders.
3. The initial carrying amount of a compound financial instrument is allocated to its equity and liability
components as follows:
Fair value of the instrument as a whole X
Less: Financial liability component [i.e. calculated as PV of contractual cashflows (X)
(ignoring conversion option) discounted at the market rate of interest on similar
debt instruments without conversion options]
Equity component X
h
4. Transaction costs that relate to the issue of compound financial instrument are allocated to the
uk
liability and equity components of the instrument in proportion to above allocation.
Transaction cost relating to:
Equity: Financial liability:
hr
Shall be accounted for as deduction from Shall be accounted for as already studied for initial
equity. measurement of financial liability.
Dr. Equity component Dr. Financial liability (i.e. amortized cost)
Cr. Cash OR
ha
Dr. P&L (i.e. FV through P&L)
Cr. Cash
5. Subsequently:
sS
- Financial liability component shall be measured as already studied earlier. If amortized cost
method is followed, the effective interest rate is calculated. However, in absence of any
transaction cost, the market interest rate used in point (3) above will be used as effective interest
rate.
- Equity component shall not be remeasured.
rd
6. On redemption date of instrument:
If holder opts for redemption: If holder opts for conversion:

ga
(i) Cash redemption: (i) Conversion of instrument:

Dr. Financial liability (carrying amount) Dr. Financial liability (carrying amount)
Cr. Cash (redemption amount) Cr. Share capital (face value of shares issued)
Cr. Share premium (balancing)
Re
(ii) Transfer of equity component: (ii) Transfer of equity component:

Dr. Equity component (carrying amount) Dr. Equity component (carrying amount)
Cr. Retained earnings Cr. Retained earnings
ALTERNATIVELY
Conversion of instrument
Dr. Financial liability (carrying amount)
Dr. Equity component (carrying amount)
Cr. Share capital (face value of shares issued)
Cr. Share premium (balancing)

7. When an entity extinguishes a convertible instrument before maturity through an early redemption
or repurchase in which the original conversion privileges are unchanged:
(a) the entity allocates the consideration paid for the repurchase or redemption to the liability and
equity components of the instrument at the date of the transaction and account for as follows:
Fair value of the liability component on repurchase date [A] X

[i.e. PV of remaining contractual cashflows (ignoring conversion option)
discounted at the market rate of interest on similar debt instruments
without conversion options on repurchase date]
Less: Carrying amount of liability component (X)
h
(Gain)/Loss on repurchase of liability component (charged to P&L) X
uk
Total consideration paid X
Less: Consideration for liability component [A] (X)
Consideration for equity component [B] X
hr
Dr. Financial liability [Carrying amount]
Dr/Cr. Loss or gain on repurchase of liability component [P&L]
Dr. Equity component [Consideration for equity component i.e. B]
ha
Cr. Cash [Total consideration paid]
(b) Any transaction cost paid is allocated to liability component and equity component in ratio of [A]
and [B] above mentioned in point [7(a)]. This allocated transaction cost is then accounted for as
sS
follows:
Dr. P&L [Portion allocated to liability component]

Dr. Equity component [Portion allocated to equity component]
Cr. Cash [Total transaction cost paid]
rd
(c) Any remaining balance in equity component may be transferred to another line item in equity e.g.
retained earnings.
ga
8. An entity may amend the terms of a convertible instrument to induce early conversion, for example
by offering a more favourable conversion ratio or paying other additional consideration in the event
of conversion before a specified date. The difference, at the date the terms are amended, between
Re
the fair value of the consideration the holder receives on conversion of the instrument under the
revised terms and the fair value of the consideration the holder would have received under the
original terms is recognised as a loss in profit or loss.
Treasury shares
If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted
from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation
of an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by
other members of the consolidated group.

However, when an entity holds its own equity on behalf of others, e.g. a financial institution holding its
own equity on behalf of a client, there is an agency relationship and as a result those holdings are not
included in the entity’s statement of financial position.
Interest, dividends, losses and gains
Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial
liability shall be recognized as income or expense in profit or loss. Distributions to holders of an equity
instrument shall be recognized by the entity directly in equity. Transaction costs of an equity transaction
shall be accounted for as a deduction from equity.
h
Offsetting a financial asset and a financial liability
1. A financial asset and a financial liability shall be offset and the net amount presented in the statement
uk
of financial position when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognized amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
hr
2. An entity currently has a legally enforceable right of set‑off if the right of set‑off:
(a) is not contingent on a future event; and
(b) is legally enforceable in all of the following circumstances:
ha
(i) the normal course of business;
(ii) the event of default; and
(iii) the event of insolvency or bankruptcy of the entity and all of the counterparties.
3. Offsetting a recognized financial asset and a recognized financial liability and presenting the net
sS
amount differs from the derecognition of a financial asset or a financial liability. Although offsetting
does not give rise to recognition of a gain or loss, the derecognition of a financial instrument not only
results in the removal of the previously recognized item from the statement of financial position but
also may result in recognition of a gain or loss.
rd
Preference shares
Preference shares may be issued with various rights. In determining whether a preference share is a
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financial liability or an equity instrument, an issuer assesses the particular rights attaching to the share to
determine whether it exhibits the fundamental characteristic of a financial liability.
Re

A summary of various terms relating to preference shares and the resulting accounting treatment is
outlined in the table below:
Preference shares Preference dividend Preference dividend
(Mandatory) (Discretionary)
Redeemable: It is considered as financial It is considered as compound
- Mandatory; OR liability instrument
- At the option of holder
Liability is initially measured at Liability is initially measured at
fair value i.e. present value of PV of the redemption amount
future contractual cashflows only.
Equity is initially measured as
h
residual.
uk
Unwinding of Preference Preference dividend will be
dividend as well as redemption recognized as a distribution of
amount will be recognized as equity (in SOCIE).
Interest expense in P&L using Unwinding of redemption
hr
effective interest rate method. amount will be recognized as
interest expense in P&L using
ha effective interest rate method.
Redeemable: It is considered as compound It is considered as equity

- At the option of issuer instrument
Liability is initially measured at Equity is initially measured at

sS
PV of the dividends only. the entire proceeds
residual.
rd
Unwinding of Preference Preference dividend will be

dividend will be recognized as recognized as a distribution of
Interest expense in P&L using equity (in SOCIE).
effective interest rate method.
ga
Non-redeemable It is considered as compound It is considered as equity

instrument
Liability is initially measured at Equity is initially measured at

Re
PV of the dividends only. the entire proceeds

residual.
Unwinding of preference Preference dividend will be

dividend will be recognized as recognized as a distribution of
Interest expense in P&L using equity (in SOCIE).
effective interest rate method.

PRACTICE QUESTIONS
Question 1
An entity issued 2,000 convertible bonds on January 1, 2020. The bonds have a three-year term, and are issued at par
with a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 2,000,000 but the fair value was Rs. 1,980,000. Interest
is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to
maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without
conversion options is 9 per cent.
Required:
Journal entry at initial recognition of bonds.
Question 2
A Pakistani company issued 100 5% FCCBs at a nominal value of $ 5 each on January 1, 2019. These bonds can be redeemed
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at par or converted into 25 ordinary shares per bond after 3 years. On the date of issuance, market rate of return for
similar bonds without conversion option was 9%. Exchange rates are as follows:
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Date Rs./$
01-01-19 150
31-12-19 152
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31-12-20 156
31-12-21 160
Required:
All journal entries till maturity if on maturity:
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(a) Investor opts for cash redemption.
(b) Investor opts for conversion (Assume face value of each share is Rs. 10).
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Question 3
An entity issued 1,000 convertible bonds on January 1, 2011. The bonds had a 10-year term, and were issued at par with
a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 1,000,000. Interest is payable in arrears at a nominal annual
interest rate of 10% payable every 6-months. Each bond is convertible on maturity into ordinary shares at a conversion
price of Rs. 25 per share. When the bonds were issued, the prevailing market interest rate for similar debt without
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conversion options was 11%.

On January 1, 2016 the entity repurchased the bonds at a price of Rs. 1,700 each. On that date market interest rate of
similar non-convertible bonds was 8%.
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Required:
Journal entries to record repurchase of bonds.
Question 4
An entity issued 1,000 convertible bonds on January 1, 2011. The bonds had a 10-year term, and were issued at par with
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a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 1,000,000. Interest is payable in arrears at a nominal annual
interest rate of 10% payable every 6-months. Each bond is convertible on maturity into ordinary shares at a conversion
price of Rs. 25 per share. When the bonds were issued, the prevailing market interest rate for similar debt without
conversion options was 11%.
On January 1, 2012, to induce the holder to convert the convertible debenture, the entity reduced the conversion price
to Rs. 20. Assume the market price of entity’s ordinary shares on the date of amendment is Rs. 40 per share.
Required:
Journal entry on January 1, 2012 to record the effect of amendment.
NASIR ABBAS FCA

Question 5
Following transactions relate to Aron Limited (AL):
(a) AL issued one million convertible bonds on January 1, 2018. The bonds had a term of three years and were issued
with a total fair value of Rs. 100 million which is also the par value. Interest is paid annually in arrears at a rate of 6%
per annum and bonds, without the conversion option, attracted an interest rate of 9% per annum on January 1, 2018.
The company incurred issue costs of Rs. 1 million. If the investor did not convert to shares they would have been
redeemed at par. At maturity all of the bonds were converted into 2.5 million ordinary shares of Rs. 10 each of AL.
No bonds could be converted before that date. The directors have been told that the impact of the issue costs is to
increase the effective interest rate to 9.38%.
(b) AL held a 3% holding of the shares in Smart, a public limited company, The investment was classified as an investment
in equity instruments and at December 31, 2020 had a carrying value of Rs. 5 million (brought forward from the
previous period). As permitted by IFRS 9 Financial instruments, AL had made an irrevocable election to recognize all
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changes in fair value in other comprehensive income. The cumulative gain to December 31, 2019 recognized in other
comprehensive income relating to the investment was Rs. 400,000. On December 31, 2020, the whole of the share
capital of Smart was acquired by Given, a public limited company, and as a result, AL received shares in Given with a
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fair value of Rs. 5.5 million in exchange for its holding in Smart.
(c) AL granted interest free loans to its employees on January 1, 2020 of Rs. 10 million. The loans will be paid back on
December 31, 2021 as a single payment by the employees. The market rate of interest for a two year loan on both of
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the above dates is 6% per annum.
Required:
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NASIR ABBAS FCA

IAS 32 – SOLUTIONS (1)
SOLUTIONS
Solution No. 1 Dr. Cr.
------------ Rs. -----------
01-01-20 Cash 2,000,000
Gain on initial recognition [P&L] 20,000
Financial liability (W-1) 1,848,122
Equity component (W-1) 131,878
[Initial recognition of bonds]
W-1 Rs.
Total fair value of financial instrument 1,980,000
Liability component 1,848,122
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[120,000 x annuity factor at 9% + 2,000,000 x discount factor at 9%]
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-------- Rs. -------
01-01-19 Cash 75,000
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Financial liability [449.37(W-1) x 150] 67,406
Equity component [50.63(W-1) x 150] 7,594
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31-12-19 Interest expense [40.44(W-2) x 152] 6,147
Financial liability 6,147
[Investment expense for 2019]
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31-12-19 Financial liability [25(W-2) x 152] 3,800

Cash 3,800
[Coupon paid for 2019]
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31-12-19 Exchange loss (W-2) 899

Financial liability 899
[Exchange loss at year end]
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Cash 3,900
[Coupon paid for 2020]
31-12-20 Exchange loss (W-2) 1,859

[Exchange loss at year end]

NASIR ABBAS FCA

31-12-21 Exchange loss (W-2) 1,927

[Exchange loss at settlement]
(a) Redemption
Retained earnings 7,594
Cash 84,000
[Redemption of bonds]
(b) Conversion
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Share capital [100 x 25 x RS. 10] 25,000
Share premium (balancing) 66,594
[Conversion of bonds into ordinary shares]
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W-1 $
Total fair value of financial instrument [$ 5 x 100] 500.00
Liability component [$500 x 5% x annuity factor at 9% + $500 x discount factor at 9%] 449.37
Equity component
ha 50.63
W-2
------------------------ $ Amortized cost ------------------------- Rupees
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amortized
Date Opening Closing
Interest Cashflow cost
balance balance (translated)
[A] [B = A x 9%] [C] [D = A + B - C] [E]
31-12-19 449.37 40.44 25.00 464.81 70,652 [464.81 x 152]
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31-12-20 464.81 41.83 25.00 481.64 75,136 [481.64 x 153]

31-12-21 481.64 43.36 525.00 - -
------------------------ Rs. Amortized cost -------------------------

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Date Opening Exchange Closing

Interest Cashflow
balance loss balance
[F] [G] [H] [bal. figure] [E]
31-12-19 67,406 6,147 3,800 899 70,652
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31-12-20 70,652 6,525 3,900 1,859 75,136

31-12-21 75,136 6,937 84,000 1,927 -

------------ Rs. -----------
01-01-16 Financial liability (W-2) 962,312
Loss on redemption of liability [P&L] (W-2) 118,797
Cash 1,700,000
[Repurchase of convertible bonds]
NASIR ABBAS FCA

01-01-16 Retained earnings 559,139

Equity component [618,891 – 59,752] 559,139
[Transfer of remaining balance in equity component]
W-1 Rs.
Initial measurement:
Total value of financial instrument 1,000,000
Liability component 940,248
[50,000 x annuity factor at 5.5%* + 1,000,000 x discount factor at 5.5%]
* 11% x 6/12 = 5.5%
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W-2
Loss on repurchase of liability:
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PV of remaining contractual cashflows at 8% 1,081,109
[50,000 x annuity factor at 4% + 1,000,000 x discount factor at 4%]
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Carrying amount of liability component 962,312
[50,000 x annuity factor at 5.5% + 1,000,000 x discount factor at 5.5%]
Loss on repurchase of liability component ha 118,797
Consideration for equity:

Total consideration paid 1,700,000
Consideration for liability component 1,081,109
Consideration for equity component 618,891
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Solution No. 4
Dr. Cr.
------------ Rs. -----------
01-01-12 Loss on amendment 400,000
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[Loss on amendment of conversion ratio]
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W-1 Rs.
Fair value of shares under amended terms [Rs. 1m ÷ Rs. 20 x Rs. 40] 2,000,000
Fair value of shares under original terms [Rs. 1m ÷ Rs. 25 x Rs. 40] 1,600,000
Loss on amendment 400,000
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Solution No. 5
Dr. Cr.
------------ Rs. million ----------
(a) -
31-12-20 Interest expense (W-2) 9.11
Financial liability 9.11
31-12-20 Financial liability 6.00

Cash 6.00
[Coupon payment for 2020]
NASIR ABBAS FCA

31-12-20 Financial liability (W-2) 100.00

Equity component [7.59 - 0.08](W-1) 7.52
Share capital [2.5m x 10] 25.00
Share premium (balancing) 82.52
[Conversion of bonds into shares]
(b)
31-12-20 Investment (Smart) [5.50 - 5] 0.50
FV reserve [OCI] 0.50
[Remeasurement gain on de-recognition]
31-12-20 Investment (Given) 5.50
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Investment (Smart) 5.50
[Exchange of shares]
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(c)
01-01-20 Financial asset (Loan) [10m x 1.06-2] 8.90
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Employee cost (balancing) 1.10
Cash 10.00
[Initial recognition of loan] ha
31-12-20 Financial asset (Loan) [8.90 x 6%] 0.53
Interest income 0.53
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W-1 Rs. million
Initial measurement
Total value of financial instrument 100.00
Liability component 92.41
[6m x 3-year annuity factor at 9% + 100m x discount factor at 9%]
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Equity component 7.59
Allocation of transaction cost:

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Financial liability component [1m x 92.41/100] 0.92

Equity component [1m x 7.59/100] 0.08
1.00
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W-2
Opening Closing
balance balance
[A] [B = A x 9.38%] [C] [A + B - C]
31-12-18 91.48 8.58 6.00 94.06
31-12-19 94.06 8.82 6.00 96.89
31-12-20 96.89 9.11 6.00 100.00
NASIR ABBAS FCA

Q-4 Dec-17 Dr. Cr.
------------ Rs. million -----------
Equity component (W-3) 1.23
Gain on liability repurchase [P&L] (W-3) 0.36
Cash [105 x 0.1m] 10.50
[Repurchase of convertible bonds]
01-01-16 P&L (W-4) 0.18

Equity component (W-4) 0.02
Cash [2 x 0.1m] 0.20
[Transaction costs paid]
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Financial liability 6.06
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Cash 5.40
[Coupon payment for 2016]
W-1
Initial amount (W-2)
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95.57
Interest expense [95.57m x 7%] 6.69
Cashflow [100m x 6%] (6.00)
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Balance 31-12-15 96.26
Repurchase [96.26 x 10%] (9.63)
86.63
Interest expense [86.63m x 7%] 6.06
Cashflow [90m x 6%] (5.40)
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Balance 31-12-16 87.29
W-2
Initial measurement of liability component:
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PV of interest cashflows:
2015 - 2019 [6m x 5-year annuity factor at 7% (i.e. KIBOR + 2%)] 24.60
2020 [3m x 1.07-6] 2.00
PV of principal payments:
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2019 [50m x 1.07-5] 35.65

2020 [50m x 1.07-6] 33.32
95.57
W-3
Loss on repurchase of liability Rs. million
PV of interest cashflows:
2016 - 2019 [6m x 4-year annuity factor at 8% (i.e. KIBOR + 2%)] 19.87
2020 [3m x 1.08-5] 2.04
PV of principal payments:
2019 [50m x 1.08-4] 36.75
-5
2020 [50m x 1.08 ] 34.03
Fair value of liability component on 01-01-16 92.70
Fair value of liability component repurchased [92.70 x 10%] 9.27

Carrying amount of liability component repurchased (W-1) (9.63)
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Gain on repurchase of liability component (0.36)
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Consideration allocated to equity:
Total consideration [105 x 0.1m] 10.50
Consideration for liability component (9.27)
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1.23
W-4
Allocation of transaction cost:
Financial liability component [0.2m x 9.27/10.50]
Equity component [0.2m x 1.23/10.50]
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0.02
0.20
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IFRS 9 (Hedging) – Class notes
DERIVATIVES
A financial instrument or other contract with all three of the following characteristics:
(a) its value changes in response to the change in a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other
variable (called the ‘underlying’).
(b) it requires no initial net investment or an initial net investment that is smaller than would be required
for other types of contracts that would be expected to have a similar response to changes in market
factors.
(c) it is settled at a future date.
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Examples:
Forward – a forward contract is a binding contract to buy or sell a specified amount of a specified item
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(e.g. currency, oil, gold etc.) on a specified date. Normally a commission is paid at the time of contract.
Future – a future contract is a contract to buy or sell standard amount of a particular item (e.g. currency,
copper, shares etc.) on a standard date at a price determined in market. Futures are traded in an organized
market where these contracts are mostly settled by closing out by taking opposite position (e.g. sell now
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and buy later) and net gain/loss is settled.
Option – an option contract is a right to its holder to buy or sell a particular item (e.g. shares, currency, oil
etc.) at a specified price on a specified date. Holder is not obligated to exercise the option rather it may
exercise the option only when beneficial. A premium (i.e. charges for option) is paid at the time of contract
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irrespective of whether the option is eventually exercised or not.
Swap – a swap is an agreement between parties to exchange a series of cashflow at an agreed rate. Most
commonly used type of swap arrangement is an interest rate swap where two parties agree to exchange
interest payments calculated on a notional principal. Sometimes a fee is also paid to a bank that arranges
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the swap and the said fee is also generally agreed as a % of notional principal.
Use of derivatives:
- Speculation
- Hedging
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Measurement:
If used for speculation, derivates are termed as “held for trading” and measured at fair value through P&L.
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Embedded derivatives
An embedded derivative is a component of a hybrid contract that also includes non-derivative host—
with the effect that some of the cash flows of the combined instrument vary in a way similar to a
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stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise
would be required by the contract to be modified according to a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit
index, or other variable, provided in the case of a non-financial variable that the variable is not specific
to a party to the contract.
If the host contract is not a financial asset as per IFRS 9, then an embedded derivative shall be separated
from the host and accounted for as a derivative (i.e. measured at fair value through P&L) [e.g. purchase
of convertible debenture].
However, if the host contract is a financial asset as per IFRS 9, then whole contract is accounted for as
per IFRS 9 and derivative is not separated. [e.g. purchase of a car with share warrant]

HEDGING
Hedging refers to an entity’s risk management activities that use financial instruments to manage
exposures arising from particular risks that could affect profit or loss or OCI.
Hedged item
A hedged item is a recognized asset or liability, an unrecognized firm commitment (e.g. purchase order),
highly probable forecast transaction or net investment in a foreign operation that (a) exposes the entity
to risk of changes in fair value or future cash flows and (b) is designated as being hedged.
Hedging instrument
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A hedging instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency
exchange rates only a designated non-derivative financial asset or non-derivative financial liability) whose
fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated
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hedged item.
Hedge effectiveness
Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that
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are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging
instrument.
Hedge ratio
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Hedge ratio is the relationship between the quantity of the hedging instrument and the quantity of the
hedged item in terms of their relative weighting.
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HEDGING ACCOUNTING
A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
(a) the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
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(b) at the inception of the hedging relationship there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for undertaking the
hedge. That documentation shall include identification of the hedging instrument, the hedged item,
the nature of the risk being hedged and how the entity will assess whether the hedging relationship
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meets the hedge effectiveness requirements (including its analysis of the sources of hedge
ineffectiveness and how it determines the hedge ratio).
(c) the hedging relationship meets all of the following hedge effectiveness requirements:
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(i) there is an economic relationship between the hedged item and the hedging instrument (i.e. the
hedging instrument and the hedged item have values that generally move in the opposite
direction because of the same risk, which is the hedged risk).
(ii) the effect of credit risk does not dominate the value changes that result from that economic
relationship (i.e. the gain or loss from credit risk does not frustrate the effect of changes in the
underlying on the value of the hedged item or hedging instrument); and
(iii) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the
hedged item that the entity actually hedges and the quantity of the hedging instrument that the
entity actually uses to hedge that quantity of hedged item.

An entity shall discontinue hedge accounting prospectively only when the hedging relationship (or a part
of a hedging relationship) ceases to meet the qualifying criteria. This includes instances when the hedging
instrument expires or is sold, terminated or exercised.
There are three types of hedging relationships:
1) fair value hedge
2) cash flow hedge
3) hedge of a net investment in a foreign operation (IAS 21)
Exam tips for selecting between fair value hedge and cashflow hedge:
Examples of items Hedge
Fixed rate debt (asset/liability) Fair value hedge
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Floating rate debt (asset/liability) Cashflow hedge
Highly probable forecast transaction Cashflow hedge
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Foreign currency firm commitment Entity has choice of either of the two hedges
Foreign currency receivables/payables Cashflow hedge
Recognized assets whose value changes are a Fair value hedge
concern for entity (e.g. inventory, investment in
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shares)
However, exam question may specify any hedge to be used different from above tips.
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1) Fair value hedge
It is a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized
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firm commitment, or a component of any such item, that is attributable to a particular risk and could
affect profit or loss.
Accounting for fair value hedge:

(a) the hedging gain or loss on the hedged item and the gain or loss on hedging instrument both shall
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be:
If the hedged item is an investment in equity In all other cases:

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instruments measured fair value through OCI:
Recognized in OCI Recognized in P&L

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(b) the hedging gain or loss on the hedged item shall adjust the carrying amount of the hedged item. If
the measurement of hedged item involves amortized calculation, then this adjustment in carrying
amount is taken to P&L [as mentioned in (a) above] through revised effective interest rate.
When a hedged item is an unrecognized firm commitment, the cumulative change in the fair value of
the hedged item subsequent to its designation is recognized as a firm commitment asset or a firm
commitment liability. If this commitment was to acquire an asset or assume a liability, then such firm
commitment asset or firm commitment liability shall be closed against initial carrying amount of the
asset or liability on eventual recognition.

2) Cash flow hedge

It is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated
with all, or a component of, a recognized asset or liability (such as all or some future interest payments
on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss.
Accounting for cash flow hedge:
(a) the separate component of equity associated with the hedged item (cash flow hedge reserve) is
adjusted to the lower of the following (in absolute amounts): [+/– sign of (i) will be used]
(i) the cumulative gain or loss on the hedging instrument from inception of the hedge; and
(ii) the cumulative change in fair value (present value) of the hedged item (i.e. the present value of
the cumulative change in the hedged expected future cash flows) from inception of the hedge.
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(b) the gain or loss on the hedging instrument is accounted for as follows:
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(i) the portion of the gain or loss that is determined to be an effective hedge [i.e. the portion that is
offset by the change in the cash flow hedge reserve calculated in accordance with (a)] shall be
recognized in other comprehensive income.
(ii) any remaining gain or loss on the hedging instrument [or any gain or loss required to balance the
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change in the cash flow hedge reserve calculated in accordance with (a)] is hedge ineffectiveness
that shall be recognized in profit or loss.
(c) the amount that has been accumulated in the cash flow hedge reserve in accordance with (a) shall be
accounted for as follows:
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(i) if a hedged forecast transaction subsequently results in the recognition of a non-financial asset or
non-financial liability, or a hedged forecast transaction for a non-financial asset or a non-financial
liability becomes a firm commitment for which fair value hedge accounting is applied, the entity
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shall remove that amount from the cash flow hedge reserve and include it directly in the initial
cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment
and hence it does not affect other comprehensive income.
(ii) for cash flow hedges other than those covered by (i) [e.g. financial assets], that amount shall be
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reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment in
the same period or periods during which the hedged expected future cash flows affect profit or
loss (for example, in the periods that interest income or interest expense is recognized or when a
forecast sale occurs).
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(iii) however, if that amount is a loss and an entity expects that all or a portion of that loss will not be
recovered in one or more future periods, it shall immediately reclassify the amount that is not
expected to be recovered into profit or loss as a reclassification adjustment.
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3) Hedges of a net investment in a foreign operation
It shall be accounted for similarly to cash flow hedges as follows:

(a) the portion of the gain or loss on hedging instrument that is determined to be an effective hedge shall
be recognized in OCI; and
(b) the ineffective portion shall be recognized in P&L.
The cumulative gain or loss that has been accumulated in foreign currency translation reserve shall be
reclassified from equity to P&L as a reclassification adjustment on the disposal of the foreign operation.

IFRS 9 (Hedging) – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
Journalize each of the following independent derivative transactions, entered into for speculation purposes:
(a) On May 1, 2020 A limited entered into a forward contract with Bank XYZ to purchase $ 50,000 on July 31, 2020 at an
agreed rate of Rs/$ 160. A forward commission of Rs. 0.1 per USD was paid at the time of contract. Following exchange
rates are available:
Date Forward rate (Rs/$) Spot rate (Rs/$)
01-05-20 160 (3-month forward) 158.20
30-06-20 (year-end) 162.25 (1 month forward) 161.30
31-07-20 - 163.50
(b) On June 1, 2020 B limited purchased 2000 call options on shares of ML, a listed company, on following terms:
Exercise price Rs. 45 per share
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Exercise date August 31, 2020
Premium Rs. 2 per share (it is also considered as fair value of option on that date)
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Fair value of option and shares of M limited are as follows:
Date Option Share of ML
(Rs/share) (Rs/share)
01-06-20 2.00 38
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30-06-20 (year-end) 5.50 43
31-08-20 12.00 57
(c) On June 1, 2020 C limited bought 12 crude oil future contracts, with a contract size of 150 barrels, having 30 th
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September maturity. Following are the future prices quoted in future market for 30th September crude oil futures:
Date Future price
(Rs/barrel)
01-06-20 10,000
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30-06-20 (year-end) 9,800
30-09-20 9,450
(d) Company A has a loan of Rs. 2 million with a fixed rate of 10%. Company B has a loan of Rs. 2 million with a variable
rate of KIBOR which is revised annually. On January 1, 2019 both companies agreed to swap their interest rates for
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three years. KIBOR was revised as follows:

Date KIBOR
01-01-19 10%
01-01-20 8%
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01-01-21 13%
Journalize all transactions in books of Company A for three years.
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Question 2
On December 1, 2019 A limited acquired 10,000 ounces of a Material XYZ, at a cost of Rs. 220 per ounce, which it held in
its inventories. A limited was concerned that the price of XYZ would fall, so on December 1, 2019 it sold 10,000 ounces in
future market at a price of Rs. 215 per ounce with a maturity date of March 31, 2020.
At December 31, 2019 (i.e. accounting year-end) the fair value of XYZ was Rs. 200 per ounce while the future price moved
to Rs. 198 per ounce. On March 1, 2020 A limited sold entire stock of XYZ at market price of Rs. 195 per ounce whereas
future price of 31st March XYZ future at date was Rs. 192.
Required:
All journal entries for above transactions.
NASIR ABBAS FCA

Question 3
B limited has a firm commitment to buy a machine for $ 2 million on March 31, 2020. The directors are worried about
exchange rate fluctuations. On October 1, 2019, when exchange rate was Rs/$ 150, B limited entered into a future contract
to buy $ 2 million with a maturity date of March 31, 2020 at a price of Rs. 152 per $.
At December 31, 2019 (i.e. accounting year-end) spot exchange rate moved to Rs/$ 154.50. On that date future price of
31st March $ future moved to Rs. 157 per $. Finally on 31st March 2020 spot exchange rate moved to Rs./$ 160. Useful life
of machine is 10 years.
Required:
Journal entries in respect of above information for the years ending December 31, 2019 and 2020 if on October 1, 2019
the future contract was designated as a fair value hedge for the firm commitment of purchase of machine.
Question 4
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OneAir is a successful international airline. A key factor affecting OneAir’s cashflows and profits is the price of jet fuel. On
October 1, 2019, OneAir entered into a forward contract to hedge its expected fuel requirements for the second quarter
of 2020 for delivery of 28m gallons of jet fuel on March 31, 2020 at a price of Rs. 204 per gallon. The spot price on October
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1, 2029 of jet fuel was Rs. 190 per gallon.
The airline intended to settle the contract net in cash and purchase the actual required quantity of jet fuel in the open
market on March 31, 2020.
At the company’s year end (i.e. December 31, 2019) the forward price for delivery on March 31, 2020 had risen to Rs. 216
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per gallon of
ereas spot price on that day was Rs. 200 per gallon.
All necessary documentation was set up at inception for the contract to be accounted for as a hedge. On March 31, 2020
the company settled the forward contract net in cash and purchased 30m gallons of jet fuel at the spot price on that day
of Rs. 219 per gallon.
Required:
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Journal entries for above transactions.
Question 5
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Beta limited has approved a capital budget in its board meeting on October 1, 2019 to purchase a machine on September
30, 2020 from Ceta limited for £8 million. Beta limited hedged this highly probable forecast transaction by entering into a
forward contract to buy £8 million at an agreed rate of Rs/£ 200. Spot and forward exchange rates were as follows:
Date Forward rate (Rs/£) Spot rate (Rs/£)

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01-10-19 200 (1-year forward) 180

31-12-19 (year-end) 214 (9-months forward) 190
30-09-20 - 222
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On September 30, 2020 the machine was purchased as per plan and accordingly brought into use. Its useful life was
estimated at 10 years.
Required:
Re
Question 6
Delta Limited (DL) planned to purchase an asset in July 2021. In this respect a quotation was received from a supplier in
US for $ 50,000. A forward contract was taken out to hedge currency fluctuation on March 1, 2021 with an expiry date of
August 31, 2021. On April 15, 2021 it accepted the quotation and issued purchase order for the asset to be delivered on
July 20, 2021. Full purchase amount to be settled on August 31, 2021.
NASIR ABBAS FCA

Spot and exchange rates were as follows:
Date Forward rate (Rs/$) Spot rate (Rs/$)

01-03-21 158 (6-month forward) 150
15-04-21 160 (4.5-month forward) 153
30-06-21 (year-end) 163 (2-month forward) 158
20-07-21 167 (6-month forward) 162
31-08-21 - 170
Forward hedge was designated as:

Hedge for firm commitment – Fair value hedge
Hedge for recognized asset/liability – fair value hedge
h
40% of this asset was sold on September 27, 2021 and 60% was sold on October 31, 2021.
Required:
uk
All relevant journal entries assuming that:
(a) Purchased asset was inventory.
(b) Purchased asset was an Investment.
hr
ha
sS
rd
ga
Re
NASIR ABBAS FCA

IFRS 9 (Hedging) – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Dr. Cr.
(a) ------------ Rs. -----------
01-05-20 P&L [0.1 x $ 50,000] 5,000
Cash 5,000
[Transaction cost paid]
30-06-20 Financial asset [(162.25 - 160) x $ 50,000] 112,500

P&L 112,500
[Fair value gain at year end]
h
31-07-20 Financial asset [(163.50 - 162.25) x $ 50,000] 62,500
P&L 62,500
uk
[Fair value gain on settlement date]
31-07-20 Cash [(163.50 - 160) x $ 50,000] 175,000

Financial asset 175,000
hr
[Forward contract settled]
(b)
01-06-20 Financial asset [2 x 2000]
ha 4,000
Cash 4,000
[Initial recognition of option contract]
sS
30-06-20 Financial asset [(5.50 - 2) x 2,000] 7,000
P&L 7,000
31-08-20 Financial asset [(12 - 5.50) x 2,000] 13,000

rd
P&L 13,000
[Fair value gain on settlement date]
ga
31-08-20 Cash [(57 - 45) x 2,000] 24,000

[Gain on exercise of call options]
(c)
Re
01-06-20 No entry
30-06-20 P&L (W-1) 360,000

[Fair value loss at year end]
30-09-20 P&L (W-1) 630,000

[Fair value loss on settlement date]
NASIR ABBAS FCA

30-09-20 Financial liability (W-1) 990,000

Cash 990,000
[Loss settlement on future close out]
W-1
30-06-20 Rs.
Buy 10,000
Sell 9,800
Loss (200)
Total loss [200 x 150 x 12] (360,000)
30-09-20 Rs.
h
Buy 10,000
Sell 9,450
uk
Loss (550)
Total loss [550 x 150 x 12] (990,000)
Total loss previously recognized (360,000)
(630,000)
hr
(d)
31-12-19 Finance cost [2m x 10%] 200,000
Bank 200,000
[Interest on loan for 2019]
ha
31-12-20 Finance cost [2m x 10%] 200,000
Bank 200,000
sS
31-12-20 Bank [2m x 2%(W-1)] 40,000

Finance cost 40,000
[Net receipt under swap agreement]
rd
31-12-21 Finance cost [2m x 10%] 200,000

Bank 200,000
ga
31-12-21 Finance cost 60,000

Bank [2m x 3%(W-1)] 60,000
Re
[Net payment under swap agreement]
W-1
2020 %
A receives from B 10%
A pays to B 8%
Net receipt 2%
2021 %
A receives from B 10%
A pays to B 13%
Net payment -3%
NASIR ABBAS FCA

Solution No. 2
Dr. Cr.
------------ Rs. -----------
01-12-19 Inventory [10,000 x 220] 2,200,000
Cash 2,200,000
[Purchase of 10,000 ounces of XYZ]
31-12-19 P&L [(220 - 200) x 10,000] 200,000

Inventory 200,000
[Fair value loss on inventory at year end]
h
31-12-19 Financial asset 170,000
P&L (W-1) 170,000
uk
[Fair value gain on future at year end]
01-03-20 P&L [(200 - 195) x 10,000] 50,000

Inventory 50,000
hr
[Fair value loss on inventory on sale date]

P&L (W-1)
ha 60,000
[Fair value gain on future on sale date]
01-03-20 Cash [195 x 10,000] 1,950,000

sS
Cost of sales 1,950,000
Inventory 1,950,000
Sales 1,950,000
[Sale of goods]
rd
01-03-20 Cash (W-1) 230,000

[Gain settlement on future close out]
ga
W-1
31-12-19 Rs.
Sell 215
Re
Buy 198
Gain 17
Total gain [17 x 10,000] 170,000
01-03-20 Rs.
Sell 215
Buy 192
Gain 23
Total gain [23 x 10,000] 230,000
Total gain previously recognized 170,000
60,000
NASIR ABBAS FCA

Solution No. 3
Dr. Cr.
------------ Rs. -----------
01-10-19 No entry
31-12-19 Financial asset 10,000,000

P&L (W-1) 10,000,000
31-12-19 P&L [$2m x (Rs. 154.50 - Rs. 150)] 9,000,000
h
Firm commitment liability 9,000,000
[Loss on commitment based on spot]
uk
31-03-20 Financial asset 6,000,000
P&L (W-1) 6,000,000
[Fair value gain on close out]
hr
31-03-20 Cash (W-1) 16,000,000
Financial asset 16,000,000
ha
[Gain settlement on future close out]
31-03-20 P&L [$2m x (Rs. 160 - Rs. 154.50)] 11,000,000

sS
[Loss on commitment based on spot]
31-03-20 Plant & machinery (balancing) 300,000,000

Cash [$2m x Rs. 160] 320,000,000
rd
[Purchase of plant]
31-12-20 Depreciation [Rs. 300m ÷ 10 x 9/12] 22,500,000

ga
Accumulated depreciation 22,500,000

[Dep. for the year 2020]
W-1
Re
31-12-19 Rs.
Buy 152
Sell 157
Gain 5
Total gain [$2m x Rs. 5] 10,000,000
31-03-20 Rs.
Buy 152
Sell 160
Gain 8
NASIR ABBAS FCA

Total gain [$2m x Rs. 8] 16,000,000

Total gain previously recognized 10,000,000
6,000,000
Solution No. 4
Dr. Cr.
------------ Rs. million --------
01-10-19 No entry
h
31-12-19 Financial asset (W-1) 336.00
Cashflow hedge reserve [OCI] (W-1) 280.00
uk
P&L (balancing) 56.00
[Gain on hedging instrument]
31-03-20 P&L (Fuel cost) [30m x 219] 6,570.00
hr
Cash 6,570.00
[Purchase of jet fuel from spot market]
ha
31-03-20 Cashflow hedge reserve 280.00
Cash [(219 - 204) x 28m] 420.00
Financial asset 336.00
sS
[Net settlement of forward and OCI reclassified to P&L]
W-1
31-12-19 Rs. million
Cumulative loss on hedged item [(200 - 190) x 28m] (280.00)
rd
Cumulative gain on hedging instrument [(216 - 204) x 28m] 336.00

Cash flow hedge reserve [i.e. lower of above] 280.00
Solution No. 5
ga
Dr. Cr.
------------ Rs. million --------
01-10-19 No entry
Re

[Gain on hedging instrument at year-end]

[Gain on hedging instrument on settlement date]
NASIR ABBAS FCA

30-09-20 Machine [£8m x 222] 1,776.00

Financial asset (W-2) 176.00
Cash [£8m x 200] 1,600.00
[Purchase of machine and payment through forward]
30-09-20 Cashflow hedge reserve [directly in equity] (W-2) 176.00

Machine 176.00
[Transfer of cash flow hedge reserve to cost of Machine]
31-12-20 Depreciation [(1,776 - 176) ÷ 10 x 3/12] 40.00

h
W-1
uk
Cumulative loss on hedged item [(190 - 180) x £8m] (80.00)
Cumulative gain on hedging instrument [(214 - 200) x £8m] 112.00
hr
W-2
ha
Cumulative loss on hedged item [(222 - 180) x £8m] (336.00)
Cumulative gain on hedging instrument [(222 - 200) x £8m] 176.00
sS
Additional gain on hedging instrument [176 - 112] 64.00
Change in cash flow hedge reserve [176 - 80] 96.00
Solution No. 6
(a) Dr. Cr.
rd
------------ Rs. 000 --------

01-03-21 No entry
ga

Re
15-04-21 Cashflow hedge reserve [directly in equity] 100.00

Firm commitment liability 100.00
[Direct transfer from cashflow reserve]
30-06-21 P&L (W-2) 300.00

[Forex loss on commitment at year end]
30-06-21 Financial asset [(163 - 160) x $50,000] 150.00

Forex gain 150.00
[Forex gain on forward at year end]
NASIR ABBAS FCA

20-07-21 P&L [(162 - 158) x $50,000] 200.00

[Forex loss on commitment on transaction date]
20-07-21 Inventory (balancing) 7,500.00

Creditors [$50,000 x 162] 8,100.00
[Recognition of inventory and payables]

Forex gain 350.00
[Forex gain on forward at settlement]
h
31-08-21 Forex loss 400.00
uk
Creditors [$50,000 x (170 - 162)] 400.00
[Forex loss on creditors at settlement]
hr
31-08-21 Creditors 8,500.00
Cash [$50,000 x 158] 7,900.00
[Final payment to creditors]
ha
27-09-21 Cost of sales [7,500 x 40%] 3,000.00
Inventory 3,000.00
[sale of 40% inventory]
sS
31-10-21 Cost of sales [7,500 x 60%] 4,500.00

Inventory 4,500.00
rd
W-1
15-04-21 Rs. 000
Cumulative loss on hedged item [(153 - 150) x $50,000] (150.00)
ga
Cumulative gain on hedging instrument [(160 - 158) x $50,000] 100.00

W-2
Re
30-06-21 Rs. 000

Initial recognition in firm commitment 100.00
Revised value of commitment [(158 - 150) x $50,000] 400.00
Forex loss 300.00
(b) Dr. Cr.

------------ Rs. 000 --------
01-03-21 No entry
NASIR ABBAS FCA


30-06-21 P&L (W-2) 400.00

[Forex loss on commitment at year end]

Forex gain 150.00
[Forex gain on forward at year end]
h
20-07-21 P&L [(162 - 158) x $50,000] 200.00
uk
[Forex loss on commitment on transaction date]
20-07-21 Investment (balancing) 7,500.00
hr
Creditors [$50,000 x 162] 8,100.00
[Recognition of inventory and payables]
ha
Forex gain 350.00
[Forex gain on forward at settlement]
sS
31-08-21 Forex loss 400.00
Creditors [$50,000 x (170 - 162)] 400.00
[Forex loss on creditors at settlement]
31-08-21 Creditors 8,500.00

rd

Cash [$50,000 x 158] 7,900.00
[Final payment to creditors]
ga
27-09-21 P&L [7,500 x 40%] 3,000.00

Investment 3,000.00
[sale of 40% investment]
Re
27-09-21 Cashflow hedge reserve [OCI] 40.00

P&L [100 x 40%] 40.00
[Transfer from hedge reserve]
31-10-21 Cost of sales [7,500 x 60%] 4,500.00

Inventory 4,500.00
31-10-21 Cashflow hedge reserve [OCI] 60.00

P&L [100 x 60%] 60.00
[Transfer from hedge reserve]
NASIR ABBAS FCA

Q-6 Dec-15 Dr. Cr.
--------- Rs. million ---------
01-05-15 No entry

[Gain on hedging instrument at year-end]

h
[Gain on hedging instrument on settlement date]
uk
01-08-15 Machine [$6m x 106] 636.00
Financial asset (W-2) 14.22
Cash [$6m x 103.63] 621.78
[Purchase of machine and payment through forward]
hr
01-08-15 Cashflow hedge reserve [directly in equity] (W-2) 14.22
Machine ha 14.22
[Transfer of cash flow hedge reserve to cost of Machine]
W-1
sS
Cumulative loss on hedged item [(105.38 - 103.20) x $6m] (13.08)
Cumulative gain on hedging instrument [(105.50 - 103.63) x $6m] 11.22
W-2
rd

Cumulative loss on hedged item [(106 - 103.20) x $6m] (16.80)
Cumulative gain on hedging instrument [(106 - 103.63) x $6m] 14.22
ga
Additional gain on hedging instrument [14.22 - 11.22] 3.00

Change in cash flow hedge reserve [14.22 - 11.22] 3.00
Re
IFRS 16 [Lessor] – Class notes
SCOPE
An entity shall apply this standard to all leases, including leases of right-of-use assets in a sublease, except
for:
(a) Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
(b) Leases of biological assets (IAS 41);
(c) Service concession arrangement (IFRIC 12);
(d) Licences of intellectual property granted by lessor within the scope of IFRS 15; and
(e) Rights held by a lessee under licencing agreements within the scope of IAS 38 for such items as motion
picture films, video recordings, plays, manuscripts, patents and copyrights.
[A lessee may, but is not required to, apply this standard to leases of intangible assets other than
h
those described above]
uk
Lease
1. Lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset)
hr
for a period of time in exchange for consideration. A period of time may be described in terms of
the amount of use of an identified asset (for example, the number of production units that an item
of equipment will be used to produce.)
ha
2. A contract conveys the right to control the use of an identified asset for a period of time if the
customer has, throughout the period, both of the following:
(a) The right to obtain substantially all of the economic benefits from use of the identified asset
(within the defined scope of a customer’s right to use the asset); and
sS
(b) The right to direct the use of the identified asset
3. A customer has the right to direct how and for what purpose the asset is used if, within the scope
of its right of use defined in the contract, it can change how and for what purpose the asset is used
throughout the period of use.
rd
4. A customer does not have the right to use an identifiable asset if the supplier has the substantive
right to substitute the asset throughout the period of use. A supplier’s right to substitute an asset
is substantive only if both of the following conditions exist:
ga
(a) the supplier has the practical ability to substitute alternative assets throughout the period of
use (for example, the customer cannot prevent the supplier from substituting the asset and
alternative assets are readily available to the supplier or could be sourced by the supplier within
a reasonable period of time); and
Re
(b) the supplier would benefit economically from the exercise of its right to substitute the asset
(i.e. the economic benefits associated with substituting the asset are expected to exceed the
costs associated with substituting the asset).

h
uk
hr
ha
sS
rd
ga
Re

BOOKS OF LESSOR
Lessor
An entity that provides the right to use an underlying asset for a period of time in exchange for
consideration.
IMPORTANT TERMS
1. Types of leases
- A finance lease is a lease that transfers substantially all the risks and rewards incidental to
ownership of an underlying asset. [Title may or may not eventually be transferred]
h
- An operating lease is a lease that does not transfer substantially all the risks and rewards
incidental to ownership of an underlying asset.
uk
2. The inception of the lease is the earlier of the date of a lease agreement and the date of commitment
by the parties to the principal terms and conditions of the lease.
hr
3. The commencement date of lease is the date on which a lessor makes an underlying asset available
for use by a lessee.
4. The lease term is the non-cancellable period for which a lessee has the right to use an underlying
ha
asset, together with both:
(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise
that option; and
(b) periods covered by an option to terminate the lease if the lessee is reasonably certain NOT to
sS
exercise that option.
5. Lease modification is a change in the scope of a lease, or the consideration for a lease that was not
part of the original terms and conditions of the lease (e.g. extending or shortening the contractual
lease term).
rd
6. Lease payments [LP] are the payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
ga
In-substance fixed payments exist, for example, if:

(a) payments are structured as variable lease payments, but there is no genuine variability in
those payments. Those payments contain variable clauses that do not have real economic
substance. Examples of those types of payments include:
Re
(i) payments that must be made only if an asset is proven to be capable of operating during
the lease, or only if an event occurs that has no genuine possibility of not occurring; or
(ii) payments that are initially structured as variable lease payments linked to the use of
the underlying asset but for which the variability will be resolved at some point after
the commencement date so that the payments become fixed for the remainder of the
lease term. Those payments become in-substance fixed payments when the variability
is resolved.
(b) there is more than one set of payments that a lessee could make, but only one of those sets
of payments is realistic. In this case, an entity shall consider the realistic set of payments to
be lease payments.

(c) there is more than one realistic set of payments that a lessee could make, but it must make
at least one of those sets of payments. In this case, an entity shall consider the set of
payments that aggregates to the lowest amount (on a discounted basis) to be lease
payments.
Lease incentives are the payments made by a lessor to a lessee associated with a lease, or the
reimbursement or assumption by a lessor of costs of a lessee.
(b) variable lease payments that depend on an index (e.g. consumer index) or a rate (e.g. KIBOR);
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
and
h
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
uk
Lease payments also include any residual value guarantees [GRV] provided to the lessor by the lessee,
a party related to the lessee or a third party unrelated to the lessor.
7. Residual value guarantee [GRV] is a guarantee made to a lessor by a party unrelated to the lessor
hr
that the value (or part of the value) of an underlying asset at the end of a lease will be at least a
specified amount.
8. Unguaranteed residual value [UGRV] is that portion of the residual value of the underlying asset, the
ha
realization of which by a lessor is not assured or is guaranteed solely by a party related to the lessor.
i.e. UGRV = Total expected RV – GRV
9. Initial direct costs [IDC] are Incremental costs of obtaining a lease that would not have been incurred
sS
if the lease had not been obtained.
10. Gross investment in the lease [GIL] is the sum of:

(a) The lease payments receivable by the lessor under a finance lease, and
rd
(b) Any unguaranteed residual value accruing to the lessor.

i.e. GIL = LP receivable + UGRV
ga
11. Net investment in lease [NIL] is the gross investment in the lease discounted at the interest rate
implicit in the lease.
12. Unearned finance income [UFI] is the difference between:

(a) the gross investment in the lease, and
Re
(b) the net investment in the lease.

i.e. UFI = GIL – NIL
13. The interest rate implicit in the lease is the rate of interest that causes
(a) the present value of the lease payments and the unguaranteed residual value
to equal the sum of;
(b) the fair value of the underlying asset and any initial direct cost of the lessor [Only for Financier
lessor].

Calculation of implicit rate:

GIL comprises of down payment and equal GIL comprises of down payment, rentals and
rentals: BPO / RV:
Annuity factor = [NIL – Down payment] ÷ Rental Assume any two discount rates of your choice
and apply following formula:
Now look for this factor in annuity table against Implicit rate = LR + [PVL / (PVL – PVH)] x (HR – LR)
relevant “n”. Implicit rate will be the rate under Here:
which this factor or closest to this factor is - LR = lower rate (say 10%)
appearing in table. - HR = higher rate (say 15%)
- PVL = “PV of GIL @ LR” – “NIL”
- PVH = “PV of GIL @ HR” – “NIL”
h
Types of lessors:
uk
For better understanding, following types of lessors can be described in case of finance lease:
Financier lessor Dealer / manufacturer lessor
A lessor who technically provides loan as it A lessor who provides asset out of its stock because
purchases asset from market for leasing e.g. it also sells such assets earning some selling profit.
hr
banks, leasing companies e.g. a car dealer who sells cars on cash as well as on
lease.
CLASSIFICATION OF LEASES
ha
1. A lessor shall classify each of its leases as either an operating lease or a finance lease. Whether lease
is a finance lease or an operating lease depends on the substance of the transaction rather than form
of the contract. Examples of situations that individually or in combination would normally lead to a
sS
lease being classified as a finance lease are:
(a) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
(b) The lessee has the option to purchase the underlying asset at a price that is expected to be
sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably
certain, at inception date, that the option will be exercised [called Bargain Purchase Option];
rd
(c) The lease term is for the major part of the economic life of the underlying asset even if title is not
transferred. [Generally it is 75% of economic life or may be considered as 2/3 of economic life];
or
ga
(d) At the inception of the lease, the present value of the lease payments amounts to at least
substantially all of the fair value of the underlying asset. [Here substantially means 90 % or more];
(e) The underlying asset is of such a specialized nature that only the lessee can use it without major
modifications.
Re
2. Indicators of situations that individually or in combination could also lead to a lease being classified
as a finance lease are:
(a) If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by
the lessee;
(b) Gains or losses from the fluctuation in the fair value of the residual value accrue to the lessee (for
example proceeds at the end of the lease); and
(c) The lessee has the ability to continue the lease for a secondary period at a rent that is substantially
lower than market rent.

OPERATING LEASE
1. A lessor shall recognize lease payments from operating leases as income on either a straight-line basis
or another systematic basis. The lessor shall apply another systematic basis if that basis is more
representative of the pattern in which benefit from the use of the underlying asset is diminished.
2. A lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount
of the underlying asset and recognize those costs as an expense over the lease term on the same basis
as the lease income.
h
3. The depreciation policy for depreciable underlying assets subject to operating leases shall be
uk
consistent with the lessor’s normal depreciation policy for similar assets. [i.e. in accordance with IAS
16 and IAS 38]
4. A lessor shall account for a modification to an operating lease as a new lease from the effective date
hr
of modification (i.e. date when both parties agree to modification). The original lease is considered
cancelled and any prepaid/accrued lease payments of the original lease shall be considered as part of
the lease payments for the new lease.
Disclosures
ha
1. A lessor shall disclose lease income for the reporting period.
sS
2. For items of PPE subject to an operating lease, a lessor shall apply the disclosure requirements of IAS
16.
3. A lessor shall disclose a maturity analysis of undiscounted lease payments to be received on an annual
basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
rd
FINANCE LEASE
Recognition and initial measurement

ga
Financier lessor Manufacturer or dealer lessor

1) At commencement date, a lessor shall 1) At commencement date, a lessor shall
recognize the lease receivable at an amount recognize following:
Re
equal to net investment in lease.
Dr. Net investment in lease [NIL] Dr. Net investment in lease [NIL]
Cr. Cash Dr. Cost of sales [Cost or NBV – PV of UGRV]
Cr. Sales [NIL – PV of UGRV]
(If a lessor provides any of its PPE on finance Cr. Inventory [Cost/NBV]
lease then NBV of PPE is credited instead of
cash and a profit/loss on disposal is recorded)

Exam note:
NIL = PV of GIL discounted at implicit rate Exam note:
OR NIL = Fair value (i.e Sale price – trade discount)
NIL = fair value of asset + IDC OR
NIL = PV of GIL discounted at higher of market
interest rate or implicit rate
2) IDCs incurred by lessor are included in the
initial measurement of NIL. When NIL is 2) IDC type expenses incurred by lessor are
determined by discounting GIL at implicit rate recognized as expense at the commencement
then IDCs are automatically in the amount of of lease.
NIL therefore no need to add them separately.
h
IDCs reduce the finance income over the lease
term.
uk
Calculation of lease rental
hr
Lease rental may be required to calculated in exam question. It will be calculated using following
equation:
NIL = Rental x annuity factor at implicit rate + PV of other items of GIL discounted at implicit rate
ha
Here: NIL = Fair value of asset + IDC (only in case of financier lessor)
Exam note:
In case of dealer/manufacturer lessor, if implicit rate and market interest rate both are available then:
• Implicit rate will be used for rental calculation, if required.
sS
• For all other calculations and accounting, higher of the both rates will be used.
Subsequent measurement
1. A lessor shall recognize finance income over the lease term, based on a pattern reflecting a constant
rd
periodic rate of return on the lessor’s NIL.
2. Finance income is calculated using a lease amortization schedule which starts from initial
measurement amount of net investment in lease.
ga
Payment Opening Balance Interest Lease payment Closing Balance

date [A] [B = A x interest %] [C] [A + B – C]
X X X X
Re
X X X X
When finance income for the period is accrued

Dr. Net investment in lease
Cr. Finance income [SOCI]
When lease payment is received

Dr. Cash
Cr. Net investment in lease

3. A lessor shall review regularly estimated unguaranteed residual values used in computing the GIL. If
there has been a reduction, the lessor shall revise the income allocation over the lease term.
Lease modification
Case I – Modification shall be accounted for as a new lease

A lessor shall account for a modification to a finance lease as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying
assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for
h
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
uk
Case II – Modification shall not be accounted for as a new lease
If the lease would have been classified as an Otherwise:
operating lease had the modification been in
hr
effect at the inception:
At the effective date of modification, a PPE is The lessor shall apply the modification
recognized with remaining balance in NIL: requirements of IFRS 9 which are as follows:
Dr. PPE (i.e. underlying asset)
Cr. Net investment in lease
ha - lessor shall recalculate net investment in lease
as PV of modified contractual cashflows that
are discounted at original implicit rate.
Onwards the lease shall be accounted for a new - Any modification gain/loss shall be recognized
sS
operating lease. in P&L
Disclosures
rd
1. A lessor shall disclose following amounts for the reporting period in a tabular format:
- Selling profit or loss
- Finance income on the net investment in lease
ga
- Income relating to variable lease payments not included in the measurement of the net
investment in lease.
2. A lessor shall disclose a maturity analysis of undiscounted lease payments to be received on an annual
Re
basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
3. A lessor shall reconcile the undiscounted lease payments to the net investment in lease. The
reconciliation shall identify the unearned finance income relating to the lease payments receivable
and any undiscounted unguaranteed residual value.

LEASE OF LAND AND BUILDING
1. When a lease includes both land and building elements, a lessor shall assess the classification of each
element as finance lease or operating lease.
2. Whenever necessary in order to classify and account for a lease of land and buildings, a lessor shall
allocate lease payments (including any lump-sum upfront payments) between the land and the
buildings elements in proportion to the relative fair values of the leasehold interests in the land
element and buildings element of the lease at the inception date.
3. If the lease payments cannot be allocated reliably between these two elements, the entire lease is
h
classified as a finance lease, unless it is clear that both elements are operating leases, in which case
the entire lease is classified as an operating lease.
uk
4. For a lease of land and buildings in which the amount for the land element is immaterial to the lease,
a lessor may treat the land and buildings as a single unit for the purpose of lease classification and
classify it as a finance lease or an operating lease. In such a case, a lessor shall regard the economic
hr
life of the buildings as the economic life of the entire underlying asset.
ha
sS
rd
ga
Re

LEASES (IFRS-16) [Lessor] – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing Rs. 200 million having useful life
of 8 years. Residual value of the machine at end of its useful life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with Cotton Candy Limited (CCL) for a non-
cancellable period of 2.5 years with effect from 1 March 2019. Under the agreement, eight instalments of Rs. 12 million
are to be paid quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL. Incremental borrowing rate of CCL
is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of FVLL to record the above transactions.
h
(15)
[Spr-20, Q-5]
uk
Question 2
Neptune Limited (NL) had established its business in December 2008 as a supplier of plant and machinery. During the year
ended December 31, 2009 the company sold two machines under lease arrangements. The details are as under:
A B
hr
Date of commencement of lease January 1, 2009 January 1, 2009
Lease term 6 years 3 years
Lease installments payable annually in advance Rs. 2,000,000 Rs. 4,000,000
(to be reduced annually by 5%)
Cost of machine
ha Rs. 6,963,448 Rs. 15,000,000
Economic life 6 years 6 years
NL sells machines on cash at cost plus 25%. It depreciates its assets under straight line method with no residual value. Fair
market annual interest rate is 15%.
sS
Required:
(a) Prepare journal entries to record the above transactions.
(b) Prepare notes to the financial statements for the year ended December 31, 2009 in accordance with the
requirements of IFRS - 16 (Leases). (19)
(Ignore taxation and comparative figures) {Spring 2010, Q # 1}
rd
Question 3
Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on 1 July 2013. In this respect, the
following information is available:
ga
Rs. in million
Cost of equipment 28.69
Amount received on 1 July 2013 3.00
Re
Four annual installments payable in arrears on 30 June, each year 7.80

Guaranteed residual value on expiry of the lease 5.00
Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
Required:
(a) Prepare accounting entries for the year ended 30 June 2014 in the books of GLL to record the transactions related
to the above lease arrangement in accordance with the requirements of International Financial Reporting
Standards. (07)
(b) Prepare a note for inclusion in GLL's financial statements for the year ended 30 June 2014, in accordance with
the requirements of International Financial Reporting Standards. (10)
{Autumn 2014, Q # 5}
NASIR ABBAS FCA

Question 4
Quartz Auto Limited (QAL) is engaged in the business of manufacturing of trucks. Since a number of the prospective
customers do not have adequate funds to purchase the vehicles against full payment, QAL provides lease financing facility
to its customers. It expects to receive a return at the rate of 15% per annum on the amount of lease finance.
On 1 July 2010, QAL sold seven trucks to Emerald Goods Transport Company (EGTC) on lease. The terms of the lease and
related information are as follows:
(i) The lease period is 4 years, extendable up to the expected useful life of the trucks i.e. 5 years.
(ii) EGTC has guaranteed a residual value of Rs. 360,000 for each truck, till the end of the fourth year. However, the
guarantee would lapse if the lease term is extended to the fifth year. EGTC will return the truck at the end of the
lease term.
(iii) Lease rentals amount to Rs. 2,715,224 per annum and are payable in arrears i.e. on 30 June.
h
(iv) The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs. 1,350,000 per truck.
(v) The expected residual value of each truck at the end of the 4th and 5th year is Rs. 150,000 and Rs. 100,000
respectively.
uk
Required:
Assuming that QAL and EGTC intend to extend the lease for a period of five years, prepare:
(a) Journal entries to record the transactions for the year ended 30 June 2011. (08)
(b) A note for inclusion in the financial statements, for the year ended 30 June 2011, in accordance with the
hr
requirements of IFRS-16 ‘Leases’. (07)
{Autumn 2011, Q # 4}
Question 5
ha
Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on the following terms:
(i) The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment of Rs. 48 million is
receivable in arrears.
sS
(ii) The useful life of machine is 6 years.
(iii) The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease instalment
in the extended period will be of Rs. 15 million, receivable in arrears. It is reasonably certain that HL
will exercise this option.
(iv) The rate implicit in the lease is 10% p.a.
rd
(v) The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million.
GLL incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete the transaction.
ga
Required:
Prepare note(s) for inclusion in GLL’s financial statements, for the year ended 30 June 2018. (09)
{Autumn 2018, Q # 6(a)}
Question 6
Square Limited (SL) is a dealer of electronic items. SL acquires refrigerators of a particular model from a manufacturer at
Re
a discount of 15% on the retail price of Rs. 300,000 per unit.
On 1 January 2018, SL sold 12 refrigerators to Cube Hotel at retail price on lease. The rate of interest implicit in the lease
was 10% per annum. The payment is to be made in three equal annual instalments payable in advance. Residual value at
the end of 3 years is nil.
The market rate of interest is 14% per annum.
Required:
Prepare journal entries in the books of SL in respect of above transaction for the year ended 31 December 2018. (07)
{Spring 2019, Q # 1(b)}
NASIR ABBAS FCA

Question 7
On 1 January 2020, Bolan Leasing Company (BLC) leased a machine to Datsun Motors Limited (DML) to manufacture
components of a new model of vehicle, on the following terms:
(i) Non-cancellable lease period is 5 years,
(ii) The agreement contains an option for DML to extend the lease for further 3 years in which case, lease rentals for
further 3 years shall be 10% less than original rentals; and
(iii) Lease rentals are payable annually in advance.
Other relevant information includes:

a) On 1 January 2020, fair value of machine was Rs. 206.10 million.
b) DML incurred initial direct cost of Rs. 4 million for the lease. 60% of initial direct cost was reimbursed to DML by BLC.
c) At inception of lease, BLC’s implicit rate on this transaction was 14%.
d) Economic life of the machine is 10 years.
h
e) Guaranteed and un-guaranteed residual value are expected at end of five years to be Rs. 8 million and Rs. 3 million
respectively while at end of eight years to be is Rs. 5 million and Rs. 2 million respectively.
f) At commencement of lease, DML was reasonably certain that the option to extend the term will be exercised.
uk
Required:
In the books of BLC, for the year ended December 31, 2020:
(a) Prepare journal entries.
hr
(b) Show extracts of SOFP and SOCI.
(c) Prepare a note on “net investment in lease”
Question 8
ha
Lessor limited leased land and building to Lessee limited. The detail of which is as follows:
- Commencement date of lease is January 1, 2019
- Lease term is for 20 years
- Lease payments are Rs. 500,000 payable at end of every year.
sS
At the inception of the lease the fair value of leasehold interest in land was Rs. 5,000,000 while the fair value of the
leasehold interest in the building was Rs. 2,240,832.
The building had been purchased for Rs. 3,000,000 and were being depreciated over its total estimated useful life of 30
years to a nil residual value. At inception of lease, the building had a remaining useful life of 22 years.
rd
Land was purchased 10 years ago for Rs. 2,200,000 and was not depreciated.
The interest rate implicit in lease is 3.293512%.

ga
After a careful assessment of all facts and circumstances, each of elements was correctly classified as follows:
- Lease over land was classified as operating lease
- Lease over building was classified as finance lease
Re
Required:
Prepare accounting entries for the years ending December 31, 2019 and 2020.
NASIR ABBAS FCA

LEASES (IFRS-16) [Lessor] – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Books of FVLL
--------- Rs. million --------
01-01-19 Machine 200.00
Cash 200.00
[Purchase of machine]
30-11-19 Cash 12.00

Lease income 12.00
[1st rental received]
h
31-12-19 Rent receivable [38.40(W-1) x 10/12 - 12] 20.00
uk
Lease income 20.00
[Accrual adjustment at year-end]
31-12-19 Depreciation [(200 - 16)/8] 23.00
hr
[Depreciation for 2019] ha
W-1 Rs. million
Total lease payments [12 x 8] 96.00
Lease income per year [96 / 2.5] 38.40
sS
Solution 2
(a)
Date Particulars Dr. Cr.
------------ Rs. '000 ----------
LEASE - A [FINANCE LEASE]
rd
01-Jan-09 Lease receivable [W-1] 8,704

Cost of sales 6,963
Sales 8,704
ga
Inventory 6,963
[Initial recognition of lease]
01-Jan-09 Bank 2,000
Lease receivable 2,000
Re
[receipt of 1st rental]

31-Dec-09 Lease receivable 1,006
Finance income 1,006
[accrual of interest income for the year]
LEASE - B [OPERATING LEASE]

01-Jan-09 Bank 4,000
Rent income 4,000
[Rent received for 2009]
31-Dec-09 Rent income [W-2] 197
Advance rent 197
[Recording unearned income]
NASIR ABBAS FCA
31-Dec-09 Depreciation [15,000 / 6] 2,500

[Depreciation charge for the year]
W–1 PV of LP = 2,000 x Annuity factor

= 8,704
Sale value / FV = 6,963.448 x (1 + 25%)

= 8,704
h
Since PV of LP is equal to FV and lease term covers whole life, therefore, lease A is a finance lease
W–2
uk
Rent as per agreement: Rs,'000’
year 1 4,000
year 2 (95%) 3,800
year 3 (95%) 3,610
hr
11,410
Income for the year 3,803
Receipt in 2009 4,000
Unearned income
ha 197
Since LP is much lower than cost and lease term covers 50% life, therefore, lease B is an operating lease.
W - 3 Lease schedule
sS
Date Open. Bal. Interest Payment Clos. Bal.
01-Jan-09 8,704 - 2,000 6,704
01-Jan-10 6,704 1,006 2,000 5,710
01-Jan-11 5,710 856 2,000 4,566
rd
01-Jan-12 4,566 685 2,000 3,251

01-Jan-13 3,251 488 2,000 1,739
01-Jan-14 1,739 261 2,000 -
ga
(b)
NOTES TO THE ACCOUNTS
1 - Net investment in lease
Re
Lease term is 6 years. Rental is receivable at start of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
Lease payments receivable:
1 year 2,000
2 years 2,000
3 years 2,000
4 years 2,000
5 years 2,000
10,000
NASIR ABBAS FCA

Reconciliation: Rs.'000’
Total lease payments receivable 10,000
Unguaranteed residual value -
Gross investment in lease 10,000
Less: Unearned finance income 2,290
Net investment in lease 7,710
2 - Operating lease
Maturity analysis:
1 year 3,800
2 years 3,610
h
7,410
uk
Solution 3
(a)
------------ Rs. '000’ ----------
hr
01-Jul-13 Lease receivable 28,690
Bank 28,690
01-Jul-13 Bank
ha
Lease receivable
3,000
3,000
[Receipt of down payment]
30-Jun-14 Bank 7,800
sS
(b)
rd

Lease term is 4 years and instalment is receivable at end of every year. Implicit rate is 14%.
ga
Maturity analysis:
Rs.'000’
Re
1 year 7,800
2 years 7,800
3 years 12,800
28,400
Reconciliation:
Rs.'000’
Unguaranteed residual value -
NASIR ABBAS FCA

W – 1 Lease schedule
01-Jul-13 28,690 - 3,000 25,690
30-Jun-14 25,690 3,597 7,800 21,487
30-Jun-15 21,487 3,008 7,800 16,695
30-Jun-16 16,695 2,337 7,800 11,232
30-Jun-17 11,232 1,568 7,800 5,000
Solution 4
(a)
h
------------ Rs. '000’ ----------
01-Jul-10 Lease receivable [1,350 x 7] 9,450
Cost of sales [900 x 7 – 348 (W-1)] 5,952
uk
Sales [9,450 – 348 (W-1)] 9,102
Inventory [900 x 7] 6,300
30-Jun-11 Bank 2,715
hr
ha
(b)
sS
Lease term is 4 years extendable upto 5 years. Rental is receivable at end of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
rd

1 year 2,715
2 years 2,715
3 years 2,715
ga
4 years 2,715
10,861
Reconciliation:
Re

Unguaranteed residual value 700
NASIR ABBAS FCA

W–1 Residual value 700

Less: GRV -
UGRV 700
PV of UGRV 348
W–2 NIL = FV = 2,715.224 x Annuity factor + 700 x Discount factor

= 9,450
W – 3 Lease schedule
30-Jun-11 9,450 1,418 2,715 8,152
h
30-Jun-12 8,152 1,223 2,715 6,660
30-Jun-13 6,660 999 2,715 4,944
uk
30-Jun-14 4,944 742 2,715 2,970
30-Jun-15 2,970 445 2,715 700
Solution 5
hr
Guava Leasing Limited
Notes to financial statements
for the year ended June 30, 2018 ha
Lease term is 3.5 years, extendable upto 5 years. Installment is receivable at end of every six months.
Implicit rate is 10%.
Maturity analysis:
sS
Lease payments receivable as follows: Rs. million
1 year 96.00
2 years 96.00
3 years 63.00
4 years 30.00
rd
285.00
Reconciliation: Rs. million

ga
Total lease payments receivable 285.00

Unguaranteed residual value 20.00
Gross investment in lease 305.00
Less: Unearned finance income 51.64
Net investment in lease 253.36
Re
W-1 Initial recognition

= Rs. 48 million x A.F. + Rs. 15 million x A.F. + Rs. 20 million x D.F.
= 319.05
W-2
Date Op. bal Interest Payment Cl. Bal
31-Dec-17 319.05 15.95 48.00 287.01
30-Jun-18 287.01 14.35 48.00 253.36
31-Dec-18 253.36 12.67 48.00 218.03
30-Jun-19 218.03 10.90 48.00 180.93
NASIR ABBAS FCA

Solution 6
----- Rs. million ----
01-01-18 Lease receivable (W-2) 3.483
Cost of sales [3.60 x 85%] 3.060
Sales [W-2] 3.483
Inventory 3.060
01-01-18 Cash (W-1) 1.316

Lease receivable 1.316
31-12-18 Lease receivable [(3.483 - 1.316) x 14%] 0.303
h
Finance income 0.303
[Finance income for 2018]
uk
W-1
Rental = [0.30m x 12] / (1 + annuity factor at 10%)
= 1.316
hr
W-2
NIL = Sales = Lease receivable = 1.316 + 1.316 x annuity factor at 14%
= 3.483
ha
Solution 7
Dr. Cr.
(a) ----------- Rs. million ----------
sS
01-01-20 Lease receivable 206.10
Bank 206.10
[Initial measurement]
01-01-20 Bank [40(W-1) - 4 x 60%] 37.60

rd
Lease receivable 37.60

[Lease rental net of lease incentive]
ga
31-12-20 Lease receivable (W-2) 23.59

[Interest income]
Re
(b)
Extracts - SOCI Rs. million
Finance income 23.59
Extracts - SOFP
Non-current assets
Lease receivable (W-2) 152.09
Current assets
Lease receivable [168.50 - 152.09 + 23.59] (W-2) 40.00
NASIR ABBAS FCA

(c)
Notes
Maturity analysis Rs. million
Lease payments are receivable as follows:
Year 1 40.00
Year 2 40.00
Year 3 40.00
Year 4 40.00
Year 5 36.00
More than 5 years [36 + 36 + 5] 77.00
273.00
h
Reconciliation
uk
Lease payments 273.00
Un-guaranteed residual value 2.00
Gross investment in lease 275.00
Unearned finance income (82.91)
hr
Net investment in lease 192.09
Workings
W-1 Rental calculation
ha
Fair value = PV of lease payments + PV of UGRV
206.10m = R + R x 4-year A.F. at 14% + 0.9 R x 3-year A.F. at 14% x 4-year D.F. + 7m x 1.14-8 - 4m x 60%
sS
Solving above equation:
R = 40m Rs. million
Hence, rentals for 1st 5
years 40.00
and rentals for extension period 36.00
rd
W-2 Lease schedule

Date Opening bal. Interest Payment Closing bal.
01-01-20 206.10 - 37.60 168.50
ga
01-01-21 168.50 23.59 40.00 152.09

01-01-22 152.09 21.29 40.00 133.38
01-01-23 133.38 18.67 40.00 112.06
01-01-24 112.06 15.69 40.00 87.74
Re
01-01-25 87.74 12.28 36.00 64.03

01-01-26 64.03 8.96 36.00 36.99
01-01-27 36.99 5.18 36.00 6.17
31-12-27 6.17 0.83 - 7.00
NASIR ABBAS FCA

Solution 8
------------ Rs. -----------
01-01-19 Lease receivable 2,240,832
Acc. dep - building [3,000,000 x 8/30] 800,000
Building 3,000,000
31-12-19 Lease receivable (W-2) 73,802

h
31-12-19 Cash 500,000
uk
Lease receivable (W-1) 154,736
Lease income (W-1) 345,264
hr
31-12-20 Lease receivable (W-2) 71,137
ha
31-12-20 Cash 500,000
Lease receivable (W-1) 154,736
Lease income (W-1) 345,264
sS
[2nd rental received]
W-1 Allocation of lease payments

Rs.
Land [500,000 x 5,000,000/7,240,832] 345,264
rd
Building [500,000 x 2,240,832/7,240,832] 154,736

ga
W-3 Lease schedule

Lease
Date Open. Bal Interest Clos. Bal
payment
31-12-19 2,240,832 73,802 (154,736) 2,159,898
Re
31-12-20 2,159,898 71,137 (154,736) 2,076,299
NASIR ABBAS FCA

Q-3 Jun-14
(a)
AAL
Extracts - SOFP
as at Dec 31, 2013 Rs. million
Non-Current assets
Net investment in lease (W-2) 5.07
Current assets
Net investment in lease [9.60 - 5.07] (W-2) 4.53
h
Extracts - SOCI
uk
for the year ending Dec 31, 2013 Rs. million
Sales (W-1) 16.64
Cost of sales [10 cars x Rs. 1.8m x 0.85] 15.30
Service revenue [Rs. 12,000 x 10 cars] 0.12
hr
Service cost 0.11
WORKINGS
ha
W-1 Initial measurement Rs. million
Lease receivable:
sS
- Down payment [300,000 x 10 cars] 3.00
- Rentals [5.68m* x 3-year A.F. at 12%] 13.64
16.64
* Separation of lease and non-lease component:

rd
Total rental [580,000 x 10 cars] 5.80

Service charges [Rs. 10,000 x 1.2 x 10 cars] 0.12
5.68
ga
W-2 Lease schedule

Date Open. Bal Interest Payment Clos. Bal
01-01-13 16.64 - 3.00 13.64
Re
31-12-13 13.64 1.64 5.68 9.60

31-12-14 9.60 1.15 5.68 5.07
IFRS 16 [Lessee] – Class notes
BOOKS OF LESSEE
Lessee
Lessee is an entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration.
IMPORTANT TERMS
Status of terms studied in books of lessor portion:

Same as studied for lessor:- Inception of lease, commencement of lease, lease term, lease
modification, GRV, IDC, implicit rate
h
Not applicable for lessee:- Types of lease, UGRV, GIL, NIL, UFI
uk
Additional/different terms for lessee:
1. Lease payments [LP] are the payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
hr
(b) variable lease payments that depend on an index or a rate;
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
and ha
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
Lease payments also include amounts expected to be payable by the lessee under residual value
guarantees.
sS
2. The lessee’s incremental borrowing rate of interest is the rate of interest that a lessee would have to
pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset
of a similar value to the right-of-use asset in a similar economic environment.
rd
3. Right-of-use asset is an asset that represents a lessee’s right to use an underlying asset for the lease
term.
4. Short term lease is a lease that, at the commencement date, has a lease term of 12 months or less. A
ga
lease that contains a purchase option is not a short-term lease.
SEPARATING COMPONENTS OF A CONTRACT

Re
For a contact that contains a lease component and one or more additional lease or non-lease components,
a lessee shall allocate the consideration in the contract to each lease component on the basis of the
relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease
components. [i.e. same concept as for allocation of transaction price to separate performance obligations
in IFRS-15]

NORMAL LEASE ACCOUNTING
Recognition and initial measurement

1. At the commencement of lease, a lessee shall recognize a right-of-use asset and a lease liability at the
present value of lease payments discounted at implicit rate. If implicit rate can not be readily
determined, the lessee shall use the lessee’s incremental borrowing rate.
Dr. Right-of-use
Cr. Lease liability
[Any lease payments made at or before the commencement date, less any lease incentives shall also
h
be included in the cost of right-of-use asset]
uk
2. Any initial direct cost incurred by the lessee shall be included in the cost of right-of-use asset.
Dr. Right-of-use asset

Cr. Cash
hr
3. PV of estimated dismantling and site restoration shall be included in the cost of right-of-use asset if
lessee has an obligation in accordance with IAS 37.
Dr. Right-of-use asset

Cr. Provision for dismantling cost
ha
4. If a lessee incurs costs relating to the construction or redesigning for use of underlying asset, the
sS
lessee shall account for those costs in accordance with other applicable standards e.g. IAS 16.
Right-of-use asset
rd
1. A lessee shall measure the right-of-use asset using cost model, revaluation model or fair value model
(i.e. IAS 40) as per its selected policy.
2. Depreciation on right-of-use asset shall be charged by lessee as follows:

ga
If underlying asset will be retained by lessee after If underlying asset will be returned by lessee:
lease:
Re
Depreciation shall be charged from the Depreciation shall be charged from the
commencement date to the end of useful life of commencement date to the earlier of:
the underlying asset. - the end of useful life of the right-of-use
asset.
- the end of lease term.

Exam tip:
Asset will be retained by lessee after lease if:
- ownership of the underlying asset will be transferred to lessee at end of lease term. OR
- If lease contains BPO.
Asset will be returned to lessor after lease if:

- If lease contains GRV. OR
- It is clearly mentioned that asset will be returned to lessor.
Lease liability
1. A lessee shall recognize interest cost over the lease term, based on a pattern reflecting a constant
h
periodic rate of interest on remaining lease liability. Interest is calculated using a lease amortization
schedule.
uk
When interest cost for the period is accrued
Dr. Interest expense
Cr. Lease liability
hr
When lease payment is made
Dr. Lease liability ha
Cr. Cash
2. Variable lease payments not included in the measurement of lease liability shall be recognized in P&L
in the period in which the event or condition that triggers those payments occurs.
sS
Re-assessment of lease liability
1. A lessee shall re-measure the lease liability and recognize the amount of remeasurement as an
adjustment to the right-of-use asset. However, if the carrying amount of the asset is reduced to zero,
then further reduction in the measurement of liability shall be recognized in P&L.
rd
2. Discount rate to be used for remeasurement of lease liability shall be as follows:

ga
Revised implicit There is a change in lease term due to change in assessment of

rate/incremental borrowing exercise of options (i.e. extension option and termination
rate shall be used if: option). In this case revised lease payments shall be calculated
on revised lease term.
OR
Re
There is a change in assessment of an option to purchase the

underlying asset. In this case revised lease payments shall reflect
the change in amounts payable under the purchase option.
Original implicit There is a change in amount expected to be payable under a

rate/incremental borrowing residual value guarantee. In this case revised lease payments
rate shall be used if: shall reflect this change in amount.
OR

There is a change in future lease payments resulting from a

change in index used to determine those payments. In this case
revised lease payments shall be determined for the remaining
lease term based on revised contractual cashflows.
Revised discount rate, There is a change in future lease payments resulting from a
reflecting the changes in change in rate (e.g. KIBOR) used to determine those payments.
interest rate, shall be used if: In this case revised lease payments shall be determined for the
h
remaining lease term based on revised contractual cashflows.
uk
Lease modification
Case I – Modification shall be accounted for as a new lease
hr
A lessee shall account for a lease modification as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying
assets; and
ha
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
sS
Case II – Modification shall not be accounted for as a new lease
1. For all modifications (except for the scope reduction in point 2 below) a lessee shall remeasure the
lease liability by discounting the revised lease payments using a revised discount rate. The revised
discount rate is determined as the interest rate implicit in the lease for the remainder of the lease
term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the
rd
effective date of the modification, if the interest rate implicit in the lease cannot be readily
determined. A corresponding adjustment shall be made to the right-of-use asset.
ga
2. Adjustment for scope reduction (e.g. reduction in right of use, reduction in lease term) will be made
by decreasing the carrying amounts of lease liability and right of use. This adjustment will be made
before adjusting any other modification. The lessee shall recognize in profit or loss any gain or loss
relating to this scope reduction as follows:
Re
Dr. Lease liability (W-1)

Cr. Right-of-use [Carrying amount of ROU asset x proportionate reduction in scope of lease]
Dr./Cr. Loss or gain on modification [balancing figure]
W-1
Carrying amount of lease liability on the date of modification X
PV of lease payments after scope reduction discounted at original rate (X)
(ignoring any other modification)
X

Covid-19 pandemic
A lessee may elect not to assess whether a rent concession occurring as a direct consequence of the
covid-19 is a lease modification, only if all of the following conditions are met:
(a) the change in lease payments results in revised consideration for the lease that is substantially the
same as, or less than, the consideration for the lease immediately preceding the change;
(b) any reduction in lease payments affects only payments originally due on or before 30 June 2021
(for example, a rent concession would meet this condition if it results in reduced lease payments
on or before 30 June 2021 and increased lease payments that extend beyond 30 June 2021); and
(c) there is no substantive change to other terms and conditions of the lease.
h
Presentation and disclosures
Students should study this portion themselves either from IFRS or ICAP study text.
uk
EXCEPTION ACCOUTING FOR LEASE
A lessee may elect not to apply normal lease accounting for:
hr
(a) Short term leases
(b) Leases for low value assets
Low value asset
A lessee shall assess the value of an underlying asset based on the value of the asset when it is new,
ha
regardless of the age of the asset being leased. The assessment of whether an underlying asset is of
low value is performed on an absolute basis regardless of whether those leases are material to the
lessee. The assessment is not affected by the size, nature or circumstances of the lessee. Examples
of low-value underlying assets can include tablet and personal computers, small items of office
sS
furniture and telephones.
Exceptional accounting:
The lessee shall recognize the lease payments associated with those leases as an expense on either a
straight-line basis over the lease term or another systematic basis. The lessee shall apply another
rd
systematic basis if that basis is more representative of the pattern of the lessee’s benefit.
SUB-LEASE
ga
A transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party,
and the lease (‘head lease’) between the head lessor and lessee remains in effect.
Classification of sublease:
Re
In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an
operating lease as follows:
(a) if the head lease is a short-term lease that the entity, as a lessee, has followed exceptional accounting,
the sublease shall be classified as an operating lease.
(b) otherwise, the sublease shall be classified by reference to the right-of-use asset arising from the head
lease, rather than by reference to the underlying asset (for example, the item of property, plant or
equipment that is the subject of the lease).

Sublease classified as finance lease

When the intermediate lessor enters into the sublease, the intermediate lessor:
(a) derecognizes the right-of-use asset relating to the head lease that it transfers to the sublessee and
recognizes the net investment in the sublease;
(b) recognizes any difference between the right-of-use asset and the net investment in the sublease in
profit or loss; and
(c) retains the lease liability relating to the head lease in its statement of financial position, which
represents the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognizes both finance income on the
sublease and interest expense on the head lease.
h
Sublease classified as operating lease
uk
When the intermediate lessor enters into the sublease, the intermediate lessor retains the lease liability
and the right-of-use asset relating to the head lease in its statement of financial position.
During the term of the sublease, the intermediate lessor:
hr
(a) recognizes a depreciation charge for the right-of-use asset and interest on the lease liability; and
(b) recognizes lease income from the sublease.
ha
sS
rd
ga
Re

LEASES (IFRS-16) [Lessee] – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing Rs. 200 million having useful life
of 8 years. Residual value of the machine at end of its useful life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with Cotton Candy Limited (CCL) for a non-
cancellable period of 2.5 years with effect from 1 March 2019. Under the agreement, eight instalments of Rs. 12 million
are to be paid quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL. Incremental borrowing rate of CCL
is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of CCL to record the above transactions.
h
(15)
[Spr-20, Q-5]
uk
Question 2
On 1 July 2010, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank. Details of the lease are as follows:
(i) Fair value of machine is Rs. 20 million. It is also equal to present value of lease payments.
hr
(ii) The lease term and useful life is 4 years and 10 years respectively.
(iii) Installment of Rs. 5.80 million is to be paid annually in advance on 1 July.
(iv) The interest rate implicit in the lease is 15.725879%.
ha
(v) At the end of lease term, MTL has an option to purchase the machine on payment of Rs. 2 million. The fair value of
the machine at the end of lease term is expected to be Rs. 3 million.
MTL depreciates the machine on the straight line method to a nil residual value.
Required:
sS
Prepare relevant extracts of the statement of financial position and related notes to the financial statements for the year
ended 30 June 2012 along with comparative figures. Ignore taxation (16)
{Autumn 2012, Q # 2}
Question 3
rd
On 1 January 2020, Dettol Limited (DL) acquired a machine on lease from Lifebuoy Leasing Limited (LLL) for 3 years. The
first annual instalment amounting to Rs. 35 million was paid on 1 January 2020 and all subsequent annual instalments are
payable on 1 January subject to increase of 10% each year.
DL incurred initial direct cost of Rs. 5 million. As an incentive to DL for entering into the lease, LLL reimbursed Rs. 2 million.
ga
LLL has incorporated an implicit rate of 11% per annum which is not known to DL.
The residual value of the machine at the end of 3 years is estimated at Rs. 30 million, out of which DL has guaranteed Rs.
20 million.
DL is also obliged to incur decommissioning cost of Rs. 4 million at the end of the lease term.
Discount rate of 12% may be assumed wherever required but not given.
Re
Required:
Prepare relevant extracts from DL’s statement of profit or loss for the year ended 31 December 2020 and statement of
financial position as on that date.
(09)
[Spr-21, Q-5]
Question 4
On 1 July 2015, ABC acquired a machine on lease on following terms:
(i) Basic contract period is 5 years, however, ABC has an option to extend it by 2 more years.
(ii) Rental of Rs. 240,000 is payable at end of every year in first 5 years. During extension period, lease rental will reduce
to Rs. 180,000 per year.
NASIR ABBAS FCA

Implicit rate was not readily determined, therefore, incremental borrowing rate of 8% was used at commencement to
account for lease. Initially ABC was uncertain about exercise of extension option.
On June 30, 2018 due to change in circumstances, ABC reassessed the possibility of exercise of extension option and
concluded it to be reasonably certain to be exercised. On that date the incremental borrowing rate was 10%.
Required:
Journal entries for the years ending June 30, 2018 and 2019.
Question 5
On 1 July 2016, XYZ acquired a machine on lease on following terms:
(i) Lease term 8 years.
(ii) Lease rental payable in advance on 1st July every year. It will be revised every two years on the basis of the increase
h
in CPI for the preceding 24 months. Rental applicable for first two years is Rs. 50,000 per year.
(iii) XYZ is also required to make a variable payment for each year of lease equal to 1% of sales generated from the
uk
machine.
account for lease. Initial direct cost paid by XYZ was Rs. 4,000. CPI on the date of commencement was 125.
hr
On July 1, 2018 i.e. start of third year of lease, CPI moved to 135. On that date the incremental borrowing rate was 10%.
XYZ made annual sales of Rs. 1,250,000 in 2018 and 2019.
Required:
Journal entries for the years ending June 30, 2018 and 2019 (excluding sales entry).
ha
Question 6
On 1 July 2017, DEF acquired a property on lease on following terms:
sS
(i) Basic contract period is 5 years.
(ii) Rental of Rs. 250,000 is payable at end of every year.
account for lease.
rd
On July 1, 2019 lessee and lessor both agreed to amend the original lease by increasing the contractual lease period by
four years. Lease rentals were also revised to Rs. 290,000 payable at end of every year over remaining lease term. On that
date the incremental borrowing rate was 10%.
Required:
ga
Question 7
On 1 July 2014, MNO acquired a 5,000 square metres of office space on lease on following terms:
Re
(i) Contract period is 10 years.

(ii) Rental of Rs. 200,000 payable at end of every year.
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend the original lease to reduce the office space by 2,500 square
metres only (i.e. 50% reduction) w.e.f. July 1, 2019. Lease payments were reduced to Rs. 120,000 per year. On that date
the incremental borrowing rate was 7%.
Required:
NASIR ABBAS FCA

Question 8
On 1 July 2014, PQR acquired a 2,000 square metres of office space on lease on following terms:
(i) Contract period is 10 years.
(ii) Rental of Rs. 100,000 payable at end of every year.
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend (w.e.f. July 1, 2019) the original lease to:
(a) include an additional 1,500 square metres of space in the same building
(b) reduce the lease term from 10 years to 8 years.
h
The annual rental for 3,500 square metres was revised to Rs. 150,000 per year. Since this increase in rental is not
consistent with the stand-alone price of additional office space, therefore, it can not be accounted for as a separate lease.
On that date the incremental borrowing rate was 7%.
uk
Required:
hr
ha
sS
rd
ga
Re
NASIR ABBAS FCA

LEASES (IFRS-16) [Lessee] – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Books of CCL
--------- Rs. million --------
01-03-19 ROU asset (W-2) 74.70
Lease liability 74.70
01-04-19 ROU asset 4.00

Cash 4.00
[Installation cost]
h
uk
[Interest expense for Q-1]
hr
[Interest expense for Q-2] ha
[Interest expense for Q-3]
sS
30-11-19 Lease liability 12.00
Cash 12.00
[1st rental paid]
31-12-19 Interest expense [2.88(W-2) x 1/3] 0.96

rd

[Interest accrual at year end]
ga
31-12-19 Depreciation [74.70/30 x 10 + 4/29 x 9] 26.14

Re
W-2 Rs. million

PV of lease payments [12 x 8 qtr-annuity factor x 2 qtr-discount factor at 4%] 74.70
W-3 Lease schedule
Open. Lease
Date Interest Clos. Bal
Bal payment
31-05-19 74.70 2.99 - 77.69
31-08-19 77.69 3.11 - 80.79
30-11-19 80.79 3.23 (12.00) 72.02
29-02-20 72.02 2.88 (12.00) 62.91
NASIR ABBAS FCA

Solution 2
Miracle Textile Limited
Balance sheet – Extracts 2012 2011
-------------- Rs.'000’ ----------
Non-Current assets
Right of use [Note - 1] 16,000 18,000
Non-Current liabilities
Lease liability [Note - 2] 6,505 10,633
Current liabilities
Lease liability [Note - 2] 5,800 5,800
Miracle Textile Limited
h
Notes - Extracts
1 - Property, plant and equipment
uk
Cost
As at July 1 20,000 -
Additions - 20,000
hr
Disposal - -
As at June 30 20,000 20,000
Depreciation
As at July 1
For the year
ha 2,000
2,000
-
2,000
Disposal - -
As at June 30 4,000 2,000
sS
NBV as at June 30 16,000 18,000
2 - Lease Liability
The Company has entered into a finance lease agreement with a bank in respect of a machine. The finance lease liability
bears interest at the rate of 15.725879% per annum. The company has the option to purchase the machine by paying
rd
an amount of Rs. 2 million at the end of the lease term. The lease rentals are payable annually in advance
2012 2011
For the year: ---------- Rs.'000’ ----------
Depreciation 2,000 2,000
ga
Finance charge 1,672 2,233

Total cash outflow for leases 5,800 5,800
Lease assets:
Re
Carrying amount 16,000 18,000

Addition to right of use - 20,000
Maturity analysis: 2012 2011

---------- Rs.'000’ ----------
Undiscounted lease payments are as follows:
1 year 5,800 5,800
2 years 7,800 5,800
3 years - 7,800
13,600 19,400
NASIR ABBAS FCA

W-1 Lease schedule

Date Open. Bal. Payment Interest Principal Clos. Bal.
01-Jul-10 20,000 5,800 - 5,800 14,200
01-Jul-11 14,200 5,800 2,233 3,567 10,633
01-Jul-12 10,633 5,800 1,672 4,128 6,505
01-Jul-13 6,505 5,800 1,023 4,777 1,728
30-Jun-14 1,728 2,000 272 1,728 0
Solution 3
h
DL
Extracts - SOFP
uk
Non-Current assets
Right of use asset (W-2.1) 72.66
hr
Provision for decommissioning (W-2.3) 3.19
Lease liability (W-2.2) 37.82
ha
Current liabilities
Lease liability (W-2.2) [68.14 + 8.18 - 37.82] 38.50
sS
Extracts - SOCI
Depreciation (W-2.1) 36.33
Interest expense [8.18(W-2.2) + 0.34(W-2.3)] 8.52
rd
WORKINGS
Lease liability:
ga
- 1st payment [35 - 2 (i.e. lease incentive)] 33.00

-1
- 2nd payment [35 x 1.1 x 1.12 ] 34.38
2 -2
- 3rd payment [35 x 1.1 x 1.12 ] 33.76
- Expected payment under RV guarantee -
Re
101.14
Initial direct cost 5.00
De-commissioning obligation [4 x 1.12-3] 2.85
ROU asset 108.98
W-2 Subsequent measurement

W-2.1 ROU asset
Cost 108.98
Depreciation [108.98/3] (36.33)
Carrying amount 72.66
NASIR ABBAS FCA

W-2.2 Lease liability

Open.
Date Bal Interest Payment Clos. Bal
01-01-20 101.14 - 33.00 68.14
01-01-21 68.14 8.18 38.50 37.82
01-01-22 37.82 4.53 42.35 -
W-2.3 Provision for dismantling

Initial 2.85
Interest [2.85 x 12%] 0.34
h
Solution 4
uk
------------ Rs. -----------
30-06-18 Depreciation [958,250(W-1)/5] 191,650
Acc. depreciation 191,650
hr
30-06-18 Finance cost (W-2) 49,480
Lease liability 49,480
ha
30-06-18 Lease liability 240,000
Cash 240,000
sS
[Lease rental paid]
30-06-18 ROU asset 246,724

Lease liability (W-3) 246,724
rd
[Re-assessment adjustment]
30-06-19 Depreciation (W-4) 157,506

ga
30-06-19 Finance cost (W-5) 67,471

Re

Cash 240,000
[Lease rental paid]

Rs.
PV of lease payments [240,000 x 5-year annuity factor at 8%] 958,250
NASIR ABBAS FCA

W-2 Lease schedule before re-assessment

Lease
payment
30-06-16 958,250 76,660 (240,000) 794,910
30-06-17 794,910 63,593 (240,000) 618,503
30-06-18 618,503 49,480 (240,000) 427,984
W-3 Re-assessment adjustment Rs.

PV of lease payments 674,708
[240,000 x 2-year AF at 10% + 180,000 x 2-year AF at 10% x 2-year DF at 10%]
Lease liability balance 427,984
h
Re-assessment adjustment 246,724
uk
W-4 Depreciation revised Rs.
NBV of ROU on 30-06-18 [958,250 x 2/5] 383,300
630,025
hr
Depreciation [630,025/4] 157,506
W-5 Lease schedule after re-assessment
Date Open. Bal Interest

ha Lease
Clos. Bal
payment
30-06-19 674,708 67,471 (240,000) 502,179
30-06-20 502,179 50,218 (240,000) 312,397
sS
30-06-21 312,397 31,240 (180,000) 163,636
30-06-22 163,636 16,364 (180,000) 0
Solution 5
------------ Rs. -----------
30-06-18 Depreciation [314,319(W-1)/8] 39,290
rd

ga
30-06-18 Finance cost (W-2) 18,492

Re
30-06-18 P&L [1,250,000 x 1%] 12,500

Cash 12,500
[Payment of 1% of sales]
01-07-18 Lease liability [50,000 x 135/125] 54,000

Cash 54,000
[Lease rental paid]
01-07-18 ROU asset 19,971

[Re-assessment adjustment]
NASIR ABBAS FCA

30-06-19 Depreciation (W-4) 42,618

30-06-19 Finance cost (W-5) 17,249

30-06-19 P&L [1,250,000 x 1%] 12,500

Cash 12,500
[Payment of 1% of sales]
h
uk
Rs.
ROU asset [260,319 + 50,000 + 4,000] 314,319
hr
W-2 Lease schedule before re-assessment
Lease
Date Open. Bal Interest
ha payment
Clos. Bal
01-07-17 260,319 20,825 (50,000) 231,144

30-06-18 231,144 18,492 - 249,636
sS
W-3 Re-assessment adjustment Rs.
PV of lease payments [54,000 + 54,000 x 5-year AF at 8%] 269,606
rd

NBV of ROU on 30-06-18 [314,319 x 6/8] 235,739
ga
255,710
Depreciation [255,710/6] 42,618
Re
W-5 Lease schedule after re-assessment

01-07-18 269,606 - (54,000) 215,606
01-07-19 215,606 17,249 (54,000) 178,855
01-07-20 178,855 14,308 (54,000) 139,163
01-07-21 139,163 11,133 (54,000) 96,296
01-07-22 96,296 7,704 (54,000) 50,000
01-07-23 50,000 4,000 (54,000) 0
NASIR ABBAS FCA

Solution 6
------------ Rs. -----------
30-06-19 Depreciation [972,413(W-1)/5] 194,483
30-06-19 Finance cost (W-2) 72,894

h
Cash 250,000
[Lease rental paid]
uk
01-07-19 ROU asset 779,018
[Modification adjustment]
hr
30-06-20 Depreciation (W-4) 194,638
ha
30-06-20 Finance cost (W-5) 141,184
sS

Cash 290,000
[Lease rental paid]
rd
ga

Rs.
Re
W-2 Lease schedule before modification

30-06-18 972,413 87,517 (250,000) 809,930
30-06-19 809,930 72,894 (250,000) 632,824
W-3 Modification adjustment Rs.

PV of revised lease payments [290,000 x 7-year AF at 10%] 1,411,841
Modification adjustment 779,018
NASIR ABBAS FCA


NBV of ROU on 30-06-19 [972,413 x 3/5] 583,448
1,362,465
Depreciation [1,362,465/7] 194,638
W-5 Lease schedule after modification

30-06-20 1,411,841 141,184 (290,000) 1,263,026
30-06-21 1,263,026 126,303 (290,000) 1,099,328
30-06-22 1,099,328 109,933 (290,000) 919,261
h
30-06-23 919,261 91,926 (290,000) 721,187
30-06-24 721,187 72,119 (290,000) 503,306
uk
30-06-25 503,306 50,331 (290,000) 263,636
30-06-26 263,636 26,364 (290,000) 0
Solution 7
hr
------------ Rs. -----------
30-06-19 Depreciation [1,283,532(W-1)/10] 128,353
ha
30-06-19 Finance cost (W-2) 80,747
sS

Cash 200,000
[Lease rental paid]
rd
01-07-19 Lease liability (W-3) 311,172

Acc. dep. [641,766 – 320,883(W-4)] 320,883
ga
Loss on modification 9,711

ROU asset [1,283,532 x 50%] 641,766
[Scope reduction adjustment]
Re
01-07-19 ROU asset 25,266

30-06-20 Depreciation (W-4) 69,230

30-06-20 Finance cost (W-5) 34,442

NASIR ABBAS FCA


Cash 120,000
[Lease rental paid]

Rs.
PV of lease payments [200,000 x 10-year annuity factor at 9%] 1,283,532

Lease
h
payment
30-06-15 1,283,532 115,518 (200,000) 1,199,049
uk
30-06-16 1,199,049 107,914 (200,000) 1,106,964
30-06-17 1,106,964 99,627 (200,000) 1,006,591
30-06-18 1,006,591 90,593 (200,000) 897,184
30-06-19 897,184 80,747 (200,000) 777,930
hr
Lease liability carrying amount 777,930
Scope reduction adjustment

ha
PV of revised lease payments for scope reduction [120,000 x 5-year AF at 9%] 466,758
311,172
Liability revised for scope reduction at original rate 466,758

sS
PV of revised lease payments for rate change [120,000 x 5-year AF at 7%] 492,024

NBV of ROU on 30-06-19 [1,283,532 x 5/10] 641,766
rd
Scope reduction [641,766 x 50%] (320,883)

320,883
ga
346,148
Depreciation [346,148/5] 69,230

Re
Lease
payment
30-06-20 492,024 34,442 (120,000) 406,465
30-06-21 406,465 28,453 (120,000) 314,918
30-06-22 314,918 22,044 (120,000) 216,962
30-06-23 216,962 15,187 (120,000) 112,150
30-06-24 112,150 7,850 (120,000) -
NASIR ABBAS FCA

Solution 8
------------ Rs. -----------
30-06-19 Depreciation [736,009(W-1)/10] 73,601
30-06-19 Finance cost (W-2) 29,504

h
Cash 100,000
[Lease rental paid]
uk
01-07-19 Lease liability (W-3) 153,935
Acc. dep [294,403 - 147,202(W-4)] 147,202
ROU asset [736,009 x 2/5] 294,403
hr
Gain on modification 6,733
[Scope reduction adjustment] ha
01-07-19 ROU asset 126,346
sS
30-06-20 Depreciation (W-4) 115,716
30-06-20 Finance cost (W-5) 27,555

rd

ga

Cash 150,000
[Lease rental paid]
Re

Rs.

30-06-15 736,009 44,161 (100,000) 680,169
30-06-16 680,169 40,810 (100,000) 620,979
30-06-17 620,979 37,259 (100,000) 558,238
30-06-18 558,238 33,494 (100,000) 491,732
30-06-19 491,732 29,504 (100,000) 421,236
NASIR ABBAS FCA


Lease liability carrying amount 421,236
PV of revised lease payments for scope reduction [100,000 x 3-year AF at 6%] 267,301
Scope reduction adjustment 153,935
Liability revised for scope reduction at original rate 267,301

PV of revised lease payments for rate change [150,000 x 3-year AF at 7%] 393,647
h
NBV of ROU on 30-06-19 [736,009 x 5/10] 368,004
Scope reduction [368,004 x 2/5] (147,202)
uk
220,803
347,149
Depreciation [347,149/3] 115,716
hr
Lease
ha payment
30-06-20 393,647 27,555 (150,000) 271,203
30-06-21 271,203 18,984 (150,000) 140,187
30-06-22 140,187 9,813 (150,000) 0
sS
rd
ga
Re
NASIR ABBAS FCA

Q-3 Jun-14
(a)
AAL
Extracts - SOFP
Non-Current assets
Net investment in lease (W-2) 5.07
Current assets
Net investment in lease [9.60 - 5.07] (W-2) 4.53
h
Extracts - SOCI
uk
Sales (W-1) 16.64
Cost of sales [10 cars x Rs. 1.8m x 0.85] 15.30
Service revenue [Rs. 12,000 x 10 cars] 0.12
hr
Service cost 0.11
WORKINGS
ha
Lease receivable:
sS
- Down payment [300,000 x 10 cars] 3.00
- Rentals [5.68m* x 3-year A.F. at 12%] 13.64
16.64
* Separation of lease and non-lease component:

rd
Total rental [580,000 x 10 cars] 5.80

Service charges [Rs. 10,000 x 1.2 x 10 cars] 0.12
5.68
ga
W-2 Lease schedule

01-01-13 16.64 - 3.00 13.64
Re
31-12-13 13.64 1.64 5.68 9.60

31-12-14 9.60 1.15 5.68 5.07
Q-4 [Dec-18] SOLUTION
Lease liability Rs. million

01-01-15 Initial recognition (W-1) 563.51
01-01-15 Lease payment (80.00)
483.51
31-12-15 Interest [483.51 x 8%] 38.68
522.19
442.19
01-01-16 Re-assessment adjustment (W-2) (131.02)
h
311.17
31-12-16 Interest [311.17 x 9%] 28.01
uk
339.18
259.18
01-01-17 Scope reduction (W-3) (118.45)
hr
01-01-17 Modification adjustment (W-3) (1.89)
138.84
31-12-17 Interest [138.84 x 10%] 13.88
152.73
ha
Right-of-use asset Rs. million
sS
01-01-15 Initial recognition [563.51(W-1) + 15] 578.51
31-12-15 Depreciation [578.51/12] (48.21)
530.30
01-01-16 Re-assessment adjustment (W-2) (131.02)
399.28
rd
31-12-16 Depreciation [399.28/6] (66.55)

332.73
01-01-17 Scope reduction [332.73 x 2/5] (133.09)
ga
01-01-17 Modification adjustment (W-3) (1.89)

197.76
31-12-17 Depreciation [197.76/3] (65.92)
131.84
Re
W-1 Initial recognition Rs. million
PV of lease payments 563.51
[80 + 80 x 6-year AF at 8% + 70 x 3-year AF at 8% x 6-year DF at 8%]
W-2 Re-assessment adjustment Rs. million

PV of revised lease payments [80 x 5-year AF at 9%] 311.17
Lease liability balance 442.19
Re-assessment adjustment (131.02)
W-3 Modification adjustment Rs. million

Carrying amount of lease liability 259.18
h
PV of revised lease payments at original rate [80 x 2-year AF at 9%] 140.73
Scope reduction 118.45
uk
PV of revised lease payments [80 x 2-year AF at 10%] 138.84
PV of revised lease payments at original rate [80 x 2-year AF at 9%] 140.73
Modification adjustment in ROU (1.89)
hr
ha
sS
rd
ga
Re
IFRS 16 [Sale and leaseback] – Class notes
If an entity (seller-lessee) transfers an asset to another entity (buyer-lessor) and leases that asset back,
this whole transaction (i.e. transfer and leaseback) is called sale and leaseback.
Case 1 – Transfer of the asset is a sale as per IFRS 15

Exam tip
If the lease is an operating lease from lessor’s perspective, then the transfer of asset is a sale
1) Terms are fair
[Sale value is equal to the fair value of the asset and lease payments are at market rates]
h
Books of Seller-Lessee
uk
De-recognition of transferred asset and recognition of lease:
Dr. Cash [Consideration received]
hr
Dr. Right-of-use asset (W-1)
Cr. Lease liability [PV of lease payments] ha
Cr. Asset derecognized [NBV]
Dr./Cr. Loss or Profit on transaction (balancing figure)
sS
W-1
NBV of transferred asset
ROU asset = PV of lease payments x Fair value of transferred asset
Subsequent measurement of lease:

rd
ROU asset and lease liability shall be measured subsequently using same guidance as already studied in
books of lessee.
ga
Books of Buyer-Lessor
The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16). Lease
shall be accounted as already studied in books of lessor.
Re

2) Above market terms
[Sale value > fair value of the asset or PV of lease payments > PV of lease payments at market rate]

h
Cr. Lease liability [PV of cashflows – Above market terms(W-1.1)]
Cr. Financial liability [Above market terms(W-1.1]
uk
hr
W-1
ROU asset = [PV of cashflows – Above market terms(W-1.1)] x
Fair value of transferred asset
W-1.1
ha
“Above market terms” shall be accounted for as additional financing. It is calculated as:
= Sale value – fair value of asset

sS
OR whichever is available
= PV of cashflows – PV of cashflows at market rate
rd
- ROU asset and lease liability shall be measured subsequently using same guidance as already studied
in books of lessee.
ga
- Financial liability shall be measured subsequently as per IFRS 9

- Contractual cashflows will be split in ratio of “lease liability” and “financial liability” initially recognized
and applied against these separate liabilities accordingly.
Re
- The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16).
- Lease shall be accounted as already studied in books of lessor.
- Above market terms (W-1.1) shall be recognized as financial asset as per IFRS 9
- Split of cashflows (as done above for lessee) shall be accounted for “lease payments” and “contractual
cashflow of financial asset” accordingly.

3) Below market terms
[Sale value < fair value of the asset or PV of lease payments < PV of lease payments at market rate]

h
Cr. Lease liability [PV of cashflows]
uk
W-1
hr
ROU asset = [PV of cashflows + Below market terms(W-1.1)] x
Fair value of transferred asset
W-1.1
ha
“Below market terms” shall be accounted for as a prepayment of lease payments. It is calculated as:
= Fair value of asset – Sale value

OR whichever is available
sS
= PV of cashflows at market rate – PV of cashflows

rd
ROU asset and lease liability shall be measured subsequently using same guidance as already studied in
books of lessee.
ga
The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16). Lease
shall be accounted as already studied in books of lessor.
Re

Case 2 – Transfer of the asset is not a sale as per IFRS 15

Exam tip
If the lease is a finance lease from lessor’s perspective, then the transfer of asset is not a sale.
- It shall continue to recognize the transferred asset as per relevant standard (e.g. IAS 16)
- It shall recognize a financial liability equal to the transfer proceeds as per IFRS 9.
h
- It shall not recognize the transferred asset.
uk
- It shall recognize a financial asset equal to the transfer proceeds as per IFRS 9.
hr
ha
sS
rd
ga
Re

LEASES (IFRS-16) [Sale and leaseback] – QUESTIONS (1)
PRACTICE QUESTIONS
Question 1
Shoaib Limited (SL) were facing financial difficulties for some period. Finance director decided to use sale and lease
back as a source of finance. SL entered into following transactions during the year:
On July 1, 2012, SL sold an equipment, having net book value of Rs. 2.25 million, to ABC Finance for Rs. 2.5 million and
leased it back for remaining life of equipment i.e. 5 years. Lease rental of Rs. 693,524 is payable on every June 30th.
SL had a machine in use having book value of Rs. 1.5 million on December 31, 2012. On that date it sold the machine
for Rs. 1.675 million (equal to the fair value) and leased it back for 3 years. This sale can be assumed to meet criteria of
h
sale under IFRS 15. Agreed lease payments are as follows:
- December 31, 2013 : Rs. 150,000
uk
- December 31, 2014 : Rs. 160,000
- December 31, 2015 : Rs. 200,000
hr
Required:
(a) Journal entries for the year ending June 30, 2013
(b) Show the relevant extracts of Income statement and Balance sheet for the year ending June 30, 2013
(Disclosures in notes are not required)
ha
Question 2
On July 1, 2019, Ess Limited sold an equipment, having net book value of Rs. 1.5 million, to XYZ Traders and leased it
back for 3 years. The fair market value at that date was Rs. 1,600,000. Implicit rate in lease was 10%.
sS
Following are the terms of sale and lease back agreement:
Sale price Annual rent (arrears)
------------ Rs.------------
Scenario I 1,600,000 130,000
Scenario II 1,700,000 140,000
rd
Scenario III 1,400,000 120,000
XYZ Traders classified this lease as operating lease and estimated the useful life to be 20 years.
ga
Required:
Journal entries for the year ending June 30, 2020 for each scenario in books of both companies.
Question 3
Re
On 1 January 2016 Maisum Limited (ML) entered into a sale and lease back agreement with Bachat Bank in respect of a
machine. The details of machine sold and leased back are as under:
Rs. in million
Carrying value 85
Sale price to the lessor 95
Fair market value 120
The terms of lease agreement are as follows:
Lease term 4 years

Annual rentals (payable in advance) Rs. 21 million
Implicit interest rate 9%
NASIR ABBAS FCA

LEASES (IFRS-16) [Sale and leaseback] – QUESTIONS (2)
The transfer of machine by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a sale.
Required:
(a) Prepare journal entry in the books of ML to record the above transaction on 1 January 2016. (07)
(b) Prepare relevant extracts from the statements of financial position and comprehensive income and related notes for
inclusion in ML’s financial statements, for the year ended 31 December 2016. (10)
{Spring 2017, Q # 4}
h
uk
hr
ha
sS
rd
ga
Re
NASIR ABBAS FCA

LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
(a)
01-Jul-12 Bank 2,500,000
Financial liability 2,500,000
[Sale proceeds]
31-Dec-12 Bank 1,675,000
Right of use (W-2) 374,964
Machine 1,500,000
Profit on disposal (balancing) 131,254
h
[Sale and recognition of lease]
uk
30-Jun-13 Depreciation [2,250 / 5] 450,000
[Depreciation charge on equipment for the year]
30-Jun-13 Finance cost [418,710 x 10% x 6/12] 20,936
hr
[Interest expense for the year]
30-Jun-13 Depreciation [374,964/3 x 6/12] 62,494
ha
[Depreciation charge on right of use for the year]
30-Jun-13 Financial liability 393,524
Interest expense (W-1) 300,000
sS
Bank 693,524
[Payment of 1st rental]
W - 1 Financial liability
rd
30-Jun-13 2,500,000 693,524 300,000 393,524 2,106,476

30-Jun-14 2,106,476 693,524 252,777 440,747 1,665,729
ga
W - 2 PV of LP
Rental Discount factor Present value
150,000 0.909 136,350
160,000 0.826 132,160
Re
200,000 0.751 150,200

418,710
Right of use = 1,500,000 x 418,710 / 1,675,000

= 374,964
W - 3 Lease liability
31-Dec-13 418,710 150,000 41,871 108,129 310,581
NASIR ABBAS FCA

(b)
INCOME STATEMENT - Extracts
Rs.
Finance charge on lease 20,936
Interest expense 300,000
Depreciation [450,000 + 62,494] 512,494
BALANC SHEET – Extracts Rs.
h
Non-Current assets
Machine [2,250,000 - 450,000] 1,800,000
uk
Right of use [374,964 - 62,494] 312,470
hr
Financial liability 1,665,729
Current liabilities
Financial liability
ha 440,747
Solution No. 2
sS
BOOKS OF LESSEE
Scenario I
------------ Rs. -----------
01-07-19 Bank 1,600,000
rd
Right-of-use (W-1) 303,085

Equipment 1,500,000
ga
30-06-20 Depreciation [303,085/3] 101,028

Re
30-06-20 Finance cost [323,291 x 10%] 32,329


Cash 130,000
[Lease rental paid]
NASIR ABBAS FCA


Rs.
ROU asset [323,291 x 1,500,000/1,600,000] 303,085
Scenario II
------------ Rs. -----------
01-07-19 Bank 1,700,000
Equipment 1,500,000
h
Financial liability (W-1) 100,000
uk
hr
30-06-20 Depreciation [232,649/3] 77,550
[Depreciation for 2020] ha
30-06-20 Finance cost [248,159 x 10%] 24,816
sS
30-06-20 Finance cost [100,000 x 10%] 10,000
rd
30-06-20 Lease liability [140,000 x 248,159/348,159] 99,789

Financial liability [140,000 x 100,000/348,159] 40,211
Cash 140,000
ga
[Lease rental paid]

Rs.
Re

Above market terms [1,700,000 - 1,600,000] 100,000
ROU asset [248,159 x 1,500,000/1,600,000] 232,649
NASIR ABBAS FCA

Scenario III
------------ Rs. -----------
01-07-19 Bank 1,400,000
Equipment 1,500,000
30-06-20 Depreciation [467,271/3] 155,757

h
uk
30-06-20 Finance cost [298,422 x 10%] 29,842
hr
Cash 120,000
[Lease rental paid]
ha
Rs.
sS
Below market terms [1,600,000 - 1,400,000] 200,000
498,422
ROU asset [498,422 x 1,500,000/1,600,000] 467,271

rd
ga
BOOKS OF LESSOR
Scenario I
------------ Rs. -----------
Re
01-07-19 Equipment 1,600,000

Cash 1,600,000
[Purchase of equipment]
30-06-20 Depreciation [1,600,000/20] 80,000

30-06-20 Cash 130,000

Lease income 130,000
[Lease income for 2020]
NASIR ABBAS FCA

Scenario II
------------ Rs. -----------
01-07-19 Equipment 1,600,000
Cash 1,700,000
30-06-20 Depreciation [1,600,000/20] 80,000

h
Interest income [100,000 x 10%] 10,000
uk
30-06-20 Cash 140,000

hr
Lease income 99,789
[Lease income for 2020] haScenario III
------------ Rs. -----------
01-07-19 Equipment 1,600,000
Lease income 200,000
sS
Cash 1,400,000
30-06-20 Depreciation [1,600,000/20] 80,000

rd

30-06-20 Cash 120,000

ga
Lease income [200,000 - 186,667(W-1)] 13,333

Advance rent 133,333
[Lease income for 2020]
Re
W-1 Rs.
Lease income [(200,000 + 120,000 x 3)/3] 186,667
Solution No. 3
(a) Dr. Cr.
Journal entry -------- Rs. in million --------
01-01-16 Right-of-use asset 70.24
Bank 95.00
Machine 85.00
NASIR ABBAS FCA

Profit on disposal (balancing) 6.08

[Recognition of sale and lease back]
01-01-16 Lease liability 21.00

Bank 21.00
[Payment of 1st rental]
W-1 Rs. (million)

Present value of lease payments [21 + 21 x annuity factor] 74.16
Excess of fair value over sale value [120 - 95] 25.00
99.16
h
Right of use asset [99.16 x 85/120] 70.24
uk
(b)
Extracts of statement of financial position
as at December 31, 2016 Rs. (million)
hr
Non current assets
PPE [70.24 x 3/4] ha 52.68
Non current liabilities

Current liabilities
sS
W-2 Date Rental Interest Principal Balance

rd
74.16
01-01-16 21.00 - 21.00 53.16
01-01-17 21.00 4.78 16.22 36.94
Extracts of statement of comprehensive income
ga
for the year ended December 31, 2016 Rs. (million)
Depreciation [70.24 / 4] 17.56

Finance cost 4.78
Re
Profit on disposal 6.08
Extracts of Notes
for the year ended December 31, 2016
2 - Property, plant and equipment Rs. (million)

Cost
Balance as at 01-01-16 -
Addition 70.24
Disposal -
Balance as at 31-12-16 70.24
NASIR ABBAS FCA

Depreciation
Balance as at 01-01-16 -
Charge for the year 17.56
Disposal -
Balance as at 31-12-16 17.56
Net book value as 31-12-16 52.68
8 - Lease liability
ML has entered into a lease agreement of a machine. Lease term is 4 years. Implicit rate is 9%.
The lease rentals are payable annually advance.
h
For the year: Rs. (million)
uk
Depreciation 17.56
Finance charge 4.78
Profit on sale and lease back 6.08
Total cash outflow for leases 21.00
hr
Lease asset:
Addition to right of use
ha 70.24
Maturity analysis:
Undiscounted lease payments are as follows
sS
1 year 21.00
2 years 21.00
3 years 21.00
63.00
rd
ga
Re
NASIR ABBAS FCA

Q-3 Dec-20
HPL
Extracts of SOFP
as at December 31, 2019
Rs. million
Non-current assets
Right-of-use asset:
- Machine [201.87(W-1) - 40.37] 161.50
- Warehouse [696.04(W-3) - 34.80] 661.24
h
Lease liabilities:
- Machine (W-2) 120.09
uk
- Warehouse (W-4) 996.67
Current liabilities
Lease liabilities:
hr
- Machine (W-2) 50.00
- Warehouse [1,060.06 + 58.30 - 996.67] 121.70
Usage fee payable - machine [(40 - 30) x 0.3]

Fuel cost payable - Truck [4 x 30%]
ha 3.00
1.20
Rent payable - Truck [10 x 3/6] 5.00
sS
HPL
Extracts of SOCI
for the year ending December 31, 2019
Rs. million
rd
Machines:
Depreciation [201.87(W-1) ÷ 5] 40.37
Interest expense(W-2) 18.22
ga
Usage fees 3.00
Trucks:
Truck rent [10 x 9/6] 15.00
Re
Fuel cost 1.20
Warehouse:
Depreciation - Owned[900 ÷ 18 x 6/12] 25.00
- ROU [696.04(W-3) ÷ 10 x 6/12] 34.80
Interest expense [116.61(W-4) x 6/12] 58.30

Profit on disposal [1,400 + 696.04 - 1,060.06 - 900] 135.98
Workings for Machine
Rs. million
PV of lease payments [50 + 50 x 4-year AF at 12%] 201.87
W-2 Lease schedule

Lease
payment
01-01-19 201.87 - 50.00 151.87
01-01-20 151.87 18.22 50.00 120.09
h
uk
Workings for warehouse

Rs. million
hr
PV of lease payments [180 x 10-year annuity factor at 11%] 1,060.06
Below market terms [1,500 - 1,400] 100.00
ha 1,160.06
ROU asset [1,160.06 x 900/1,500] 696.04
W-4 Lease schedule

sS
Lease
payment
30-06-20 1,060.06 116.61 180.00 996.67
rd
ga
Re
SCOPE
An entity shall apply this standard to all contracts with customers except the following:
(a) Lease contracts [IFRS 16]
(b) Insurance contracts [IFRS 17]
(c) Financial instruments
(d) Non-monetary exchange between entities in the same line of business to facilitate sales to customers
or potential customers.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue
h
Income arising in the course of an entity’s ordinary activities
uk
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s
hr
ordinary activities in exchange for consideration.
RECOGNITION AND MEASUREMENT ha

Five Steps model
1. Identify the contract(s) with the customer
2. Identify the separate performance obligations
3. Determine the transaction price
sS
4. Allocate transaction price
5. Recognize revenue when performance obligation is satisfied
1) Identify the contract(s) with customer

rd
1. An entity shall account for a contract with a customer only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in accordance with
other customary business practices) and are committed to perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be transferred;
ga
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash
flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange
Re
for the goods or services that will be transferred to the customer. (i.e. this assessment is based
on customer’s ability and intention to pay that amount of consideration when it is due).
[if above criteria is not met, an entity shall continue to assess whether it is subsequently met]
2. A contract does not exist if each party to the contract has the unilateral enforceable right to terminate
a wholly underperformed contract without compensating the other party.
Wholly underperformed contract
A contract is wholly underperformed if:
o the entity has not yet transferred any promised goods or services to the customer; and
o the entity has not yet received and is not yet entitled to receive any consideration.

3. If identification criteria as mentioned in point 1 above is not met, then any consideration received
from the customer shall be recognized as revenue only when either of the following events has
occurred:
(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or
substantially all, of the consideration promised by the customer has been received by the entity
and is nonrefundable; or
(b) the contract has been terminated and the consideration received from the customer is non-
refundable.
Combination of contracts
An entity shall combine two or more contracts entered into at or near the same time with the same
h
customer (or related parties of the customer) and account for the contracts as a single contract if one
or more of the following criteria are met:
(a) the contracts are negotiated as a package with a single commercial objective;
uk
(b) the amount of consideration to be paid in one contract depends on the price or performance of the
other contract; or
(c) the goods or services promised in the contracts (or some goods or services promised in each of the
contracts) are a single performance obligation.
hr
Contract modification
A contract modification is a change in the scope or price (or both) of a contract that is approved by the
ha
parties to the contract.
Case 1 – Modification is a separate contract
An entity shall account for a contract modification as a separate contract if both of the following
conditions are present:
sS
(a) the scope of the contract increases because of the addition of promised goods or services that are
distinct; and
(b) the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone
selling prices of the additional promised goods or services and appropriate adjustments to that price
to reflect the circumstances of the particular contract.
rd
Case 2 – Modification is NOT a separate contract

ga
If the remaining goods o An entity shall account for the modification as if it were a termination of
or services are distinct existing contract and the creation of a new contracts.
from those already o Total amount of consideration to be allocated to remaining performance
transferred: obligation(s) = consideration promised (including already received) by
Re
the customer that had not been recognized as revenue plus

consideration promised for modification.
If the remaining goods o An entity shall account for the modification as if it were a part of the
or services are not existing contract.
distinct o The effect of modification on transaction price and progress
measurement is recognized as an adjustment to revenue at modification
date. (i.e. cumulative catch-up basis)

2) Identify the separate performance obligations

1. Performance obligation is a promise in a contract with a customer to transfer to the customer either:
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer (e.g. gym services, bookkeeping services).
Examples of distinct goods or services
o Sale of goods (produced or purchased by entity)
o Performing an agreed upon task for customer
o Providing a service of standing ready to provide goods or services (e.g. on-call basis)
o Providing agency services
h
o Constructing, manufacturing or developing an asset on behalf of a customer
o Granting licence
uk
o Granting options to purchase additional goods or services
2. A contract with a customer generally explicitly states the goods or services that an entity promises to
transfer to a customer. However, a contract with a customer may also include promises that are
hr
implied by an entity’s customary business practices, published policies or specific statements if, at the
time of entering into the contract, those promises create a valid expectation of the customer that the
entity will transfer a good or service to the customer.
ha
3. A good or service that is promised to a customer is distinct if both of the following criteria are met:
(a) the customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (ie the good or service is capable of being
distinct).
sS
Example – where customer can benefit from the good
The fact that the entity regularly sells a good or service separately would indicate that a
customer can benefit from the good or service on its own or with other readily available
resources
rd
(b) the entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract (ie the promise to transfer the good or service is distinct within the
context of the contract).
Examples – where two or more promises are NOT separately identifiable
ga
o The entity is using the goods or services as inputs to produce or deliver the combined
output or outputs specified by the customer.
o One or more of the goods or services significantly modifies or customizes one or more of
the other goods or services promised in the contract.
Re
o The goods or services are highly interdependent or highly interrelated.
3) Determine the transaction price

1. Transaction price is the amount of consideration to which an entity expects to be entitled in exchange
for transferring promised goods or services to a customer, excluding amounts collected on behalf of
third parties (e.g. sales tax).

2. When determining the transaction price, an entity shall consider the effects of the following:
(a) Variable consideration / (b) constraining estimates of variable consideration
An amount of consideration can vary because of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, penalties or other similar items. An entity shall
estimate an amount of variable using either (whichever better predicts the amount):
• Expected value (Ʃpx) of a range of possible consideration amounts (it is used when there are
large number of possible outcomes or large number of similar contracts).
• Mostly likely amount in a range of possible consideration amounts (it is used when a contract
has only two possible outcomes).
Transaction price shall include the amount of variable consideration only to the extent that it is
h
highly probable that a significant reversal in recognized revenue will not occur. Following are the
examples of factors that could increase the likelihood of revenue reversal:
uk
o Amount of consideration is highly susceptible to factors outside entity’s influence
o Uncertainty is not expected to be resolved for a long period of time
o Entity’s experience with similar types of contracts is limited
o Entity has a practice of offering a broad range of price concessions
hr
o Contract has a large number and broad range of possible consideration amounts
At end of every year, an entity shall update the estimated transaction price and any necessary
adjustment in the amount of revenue, already recognized, shall be recognized in the period of
change.
ha
(c) Existence of a significant financing component in the contract
An entity shall adjust the promised amount of consideration for the effects of time value of money
sS
(excluding for reasons other than financing e.g. retention money). Significant financing
component may exist in following two ways:
Cash is received in advance: Cash receipt is deferred:
rd
o Cash received is recognized as a liability. o Transaction price will be the present

o Transaction price will be the future discounted value of cash consideration.
compounded value of cash received. o An asset is recognized on recognition of
o Interest expense is recognized over the revenue.
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period on liability. o Interest income is recognized over the

period on asset.
For above compounding/discounting calculations, an entity shall use the discount rate that would
be reflected in a separate financing transaction between the entity and its customer at contract
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inception. It may be the rate implicit in the transaction. Such discount rate shall not be updated
subsequently.
An entity need not make such adjustment if the gap between transfer of good or service and
payment by customer is equal to or less than one year.
(d) Non-cash consideration

An entity shall measure the non-cash consideration (or promise of non-cash consideration) at fair
value. If a customer contributes goods or services (for example, materials, equipment or labour)
to facilitate an entity’s fulfilment of the contract, the entity shall assess whether it obtains control

of those contributed goods or services. If so, the entity shall account for the contributed goods or
services as non-cash consideration received from the customer.
(e) Consideration payable to a customer

An entity shall account for consideration payable to a customer as a reduction of the transaction
price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct
good or service that the customer transfers to the entity.
If consideration payable to a customer is a payment for a distinct good or service from the
customer, then an entity shall account for the purchase of the good or service in the same way
that it accounts for other purchases from suppliers. If the amount of consideration payable to the
customer exceeds the fair value of the distinct good or service that the entity receives from the
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customer, then the entity shall account for such an excess as a reduction of the transaction price.
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4) Allocate transaction price
1. If there are more than one performance obligations in the contract, the transaction price shall be
allocated to each performance obligation on the basis of relative stand-alone selling prices.
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2. The best evidence of a stand-alone selling price is the observable price. If stand-alone selling price is
not directly observable, then following are some suitable methods for estimating the stand-alone
selling prices: ha
- Adjusted market assessment approach
- Expected cost plus a margin approach
- Residual approach [This approach can be used for a good or service only when the entity sells the
same good or service for a broad range of prices OR the entity has not yet established a price for
that good or service]
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3. If a discount is allowed to customer for purchasing a bundle of goods or services, the entity shall
allocate discount proportionately to all performance obligations unless there is an observable
evidence that entire discount relates to only one or more performance obligations.
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4. An entity shall allocate to the performance obligations in the contract, any subsequent changes in the
transaction price (e.g. change in variable consideration) on the same basis as at contract inception.
Consequently, an entity shall not reallocate the transaction price to reflect changes in stand-alone
selling prices after contract inception. Amounts allocated to a satisfied performance obligation shall
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be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price
changes.
5) Recognize revenue when performance obligation is satisfied

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1. An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by
transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or
as) the customer obtains control of that asset.
2. Following are the indicators of the transfer of control to customer:
- the entity has a present right to payment for the asset
- the customer has legal title to the asset
- the entity has transferred physical possession of the asset
- the customer has the significant risks and rewards of ownership of the asset
- the customer has accepted the asset

3. Performance obligation is satisfied as follows:

3.1 Performance obligation satisfied at a point in time:
If a performance obligation is not satisfied over time then it is satisfied at a point in time (e.g.
supply of goods).
3.2 Performance obligation satisfied over time:

An entity transfers control of a good or service over time and thus recognizes revenue over time
if any one of the following criteria is met:
o Customer simultaneously receives and consumes the benefits provided by the entity’s
performance (e.g. cleaning services)
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o The customer controls the asset as it is created or enhanced (e.g. building under
construction for customer)
o The entity’s performance does not create an asset with an alternative use to entity (e.g.
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asset has a design specifications unique to the customer) and the entity has an enforceable
right to payment for performance completed to date.
Important points regarding enforceable right:
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- The payment must at least compensate, at all times throughout the contract, the
entity for performance completed to date if contract is terminated for reasons other
than entity’s failure to perform as promised.
- This compensation comprises of costs incurred by entity plus a reasonable profit
margin.
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- Entity’s right needs not be a present unconditional right to payment.
- If customer terminates the contract without having the right to do so, the contract
might entitle the entity to continue to complete the performance obligation and
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require the customer to pay promised consideration. In this case the entity has an
enforceable right to payment.
- If entity has a customary business practice of choosing not to enforce a right to
payment, even then the entity would continue to have an enforceable right to
payment.
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- The agreed payment schedule does not necessarily indicate whether the entity has
an enforceable right to payment because such contract could also specify that
consideration received is refundable for some reasons.
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Revenue shall be recognized over time by measuring the progress towards complete
satisfaction. Following methods, provided the selected method faithfully depicts the entity’s
performance, may be used for measuring progress:
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• Output methods (e.g. survey of performance, milestones achieved, time elapsed and units
produced/delivered)
• Input methods (e.g. resources consumed, cost incurred, machine/labor hours used)
Important for input methods:
An entity shall exclude while applying input method the effects of any inputs that do not
depict the entity’s performance in transferring control of goods or services. For instance,
when using a cost-based input method an adjustment may be required for a cost incurred
that is not proportionate to the progress in satisfying the performance obligation. In
those circumstances, the best depiction of the entity’s performance may be to adjust the

input method to recognize revenue only to the extent of that cost incurred if all of the
following conditions are met:
- The good transferred is not distinct;
- The customer is expected to obtain control of the good significantly before receiving
services related to the good;
- The cost of the transferred good is significant relative to the total expected costs;
- The entity procured the transferred good from a third party and is not significantly
involved in designing and manufacturing of good.
At end of every year, an entity shall remeasure its progress using updated estimates.
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If progress cannot be measured reliably (i.e. in early stages of a contract), the entity shall
recognize revenue only to the extent of recoverable costs incurred.
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CONTRACT COSTS
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Costs of obtaining the o An entity shall recognize as an asset [i.e. “contract cost”] the incremental
contract: costs (e.g. sales commission) of obtaining a contract if it expects to
recover those costs. [Entity may recognize these incremental costs as
expense when incurred if amortization period, as discussed below in point
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1, is one year or less].
o Costs to obtain a contract that would have been incurred regardless of
whether the contract was obtained or not shall be recognized as expense
when incurred unless those costs are explicitly chargeable to customer.
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Costs to fulfill the o Costs incurred in fulfilling the contract (except for those covered under
contract: IAS 2, IAS 16 and IAS 38 which are accounted for as per aforementioned
standards accordingly) shall be recognized as an asset [i.e. “contract
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cost”] only if those costs are directly related to the contract (e.g. direct
material, direct labor, directly attributable overheads).
o General and administrative costs, costs of wasted resources which were
not reflected in price of contract and costs related to past satisfied
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performance shall be recognized as expense when incurred.
1. The “Contract cost” asset shall be amortized on a systematic basis that is consistent with the transfer
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of the goods or services to the customer (i.e. consistent with revenue recognition).
2. An entity shall recognize an impairment loss in P&L to the extent the carrying amount of the asset
exceeds “remaining consideration entity expects to receive for goods or services to which the asset
relates less directly related costs not yet recognized as expense”.

PRESENTATION
Receivable
If an entity has unconditional to an amount of consideration, it is presented as a “receivable”. A right to
consideration is unconditional if only the passage of time is required before payment of that consideration
is due even though that amount may be subject to refund in future. Such receivable is measured as per
IFRS 9.
Contract asset
If an entity has transferred goods or services before the customer pays consideration or before the
payment is due, it shall present as a “contract asset”. This asset shall be assessed for impairment in
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accordance with IFRS 9.
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Contract liability
If a customer pays consideration, or an entity has a right to an amount of consideration that is
unconditional (i.e. a receivable), before the entity transfers a good or service to the customer, the entity
shall present the contract as a “contract liability” when the payment is made or the payment is due
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(whichever is earlier). A contract liability is an entity’s obligation to transfer goods or services to a
customer for which the entity has received consideration (or an amount of consideration is due) from the
customer.
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
IFRS 15 Revenue from Contracts with Customers

Illustrative Examples – Summarized
Warranties
Warranty provides a ▪ It is generally the case when a customer does not have an option to purchase
customer with assurance a warranty separately.
that the product will ▪ It is not a separate performance obligation rather it is accounted for in
accordance with IAS 37.
function as intended:
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Warranty provides the ▪ It is the case when a customer has an option to purchase a warranty
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service to the customer in separately.
addition to the assurance ▪ It is considered as a separate performance obligation and a portion of
transaction price is allocated to that performance obligation.
of compliance as
intended:
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Factors to be considered:
o If the entity is required by law to provide a warranty, then it is not a separate performance obligation.
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o Longer warranty coverage period is more likely to be a separate performance obligation.
Example 44—Warranties
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An entity, a manufacturer, provides its customer with a warranty with the purchase of a product. The warranty
provides assurance that the product complies with agreed-upon specifications and will operate as promised for one
year from the date of purchase. The contract also provides the customer with the right to receive up to 20 hours of
training services on how to operate the product at no additional cost.
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The product and training services are each capable of being distinct because the customer can benefit from the
product on its own without the training services and can benefit from the training services together with the product
that already has been transferred by the entity. The entity regularly sells the product separately without the training
services.
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The training services and product do not significantly modify or customize each other. The product and the training
services are not highly interdependent or highly interrelated. Consequently, the entity concludes that its promise to
transfer the product and its promise to provide training services are not inputs to a combined item, and, therefore,
give rise to two separate performance obligations.
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Finally, the entity assesses the promise to provide a warranty and observes that the warranty provides the customer
with the assurance that the product will function as intended for one year. The entity, therefore, does not account
for it as a performance obligation rather it accounts for the assurance-type warranty in accordance with the
requirements in IAS 37. As a result, the entity allocates the transaction price to the two performance obligations
(the product and the training services) and recognizes revenue when (or as) those performance obligations are
satisfied.

Principal versus agent considerations
Principal: ▪ An entity is a principal if it controls the specified good or service before that
good or service is transferred to a customer.
▪ When principal satisfies a performance obligation, then it recognizes revenue
in the gross amount of consideration.
Agent: ▪ An entity is an agent if its performance obligation is to arrange for the

provision of the specified good or service by another party. It does not control
the specified good or service before that good or service is transferred to a
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customer.
▪ When agent satisfies a performance obligation, then it recognizes revenue in
the amount of any fees or commission (it may be the net amount of
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consideration that the agent retains after paying the principal the
consideration received for goods or services).
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▪ Indicators of an entity being a principal:
o The entity is primarily responsible for fulfilling the promise to provide the specified good or service.
o The entity has inventory risk before the specified good or service has been transferred to a customer.
o The entity has discretion in establishing the price for the specified good or service.
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▪ If a contract includes more than one specified good or service, an entity could be a principal for some specified
goods or services and an agent for others.
Example 45—Arranging for the provision of goods or services (entity is an agent)

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An entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the
goods directly to the customers. Under the terms of the entity’s contracts with suppliers, when a good is purchased
via the website, the entity is entitled to a commission that is equal to 10% of the sales price. The entity’s website
facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity requires
payment from customers before orders are processed and all orders are non-refundable. The entity has no further
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obligations to the customer after arranging for the products to be provided to the customer.
The website operated by the entity is a marketplace in which suppliers offer their goods and customers purchase
the goods that are offered by the suppliers. Accordingly, the entity observes that the specified goods to be provided
to customers that use the website are the goods provided by the suppliers, and no other goods or services are
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promised to customers by the entity. The entity does not control the suppliers’ inventory of goods used to fulfil the
orders placed by customers using the website.
Consequently, the entity concludes that it is an agent and its performance obligation is to arrange for the provision
of goods by the supplier. When the entity satisfies its promise to arrange for the goods to be provided by the supplier
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to the customer (which, in this example, is when goods are purchased by the customer), the entity recognizes
revenue in the amount of the commission to which it is entitled.
Example 46—Promise to provide goods or services (entity is a principal)
An entity enters into a contract with a customer for equipment with unique specifications. The entity and the
customer develop the specifications for the equipment, which the entity communicates to a supplier that the entity
contracts with to manufacture the equipment. The entity also arranges to have the supplier deliver the equipment
directly to the customer. Upon delivery of the equipment to the customer, the terms of the contract require the
entity to pay the supplier the price agreed to by the entity and the supplier for manufacturing the equipment. The
entity and the customer negotiate the selling price and the entity invoices the customer for the agreed-upon price
with 30-day payment terms. The entity’s profit is based on the difference between the sales price negotiated with

the customer and the price charged by the supplier. The contract between the entity and the customer requires the
customer to seek remedies for defects in the equipment from the supplier under the supplier’s warranty. However,
the entity is responsible for any corrections to the equipment required resulting from errors in specifications.
The entity concludes that it has promised to provide the customer with specialized equipment designed by the entity.
Although the entity has subcontracted the manufacturing of the equipment to the supplier, the entity concludes
that the design and manufacturing of the equipment are not distinct, because they are not separately identifiable
(i.e. there is a single performance obligation). The entity is responsible for the overall management of the contract
(for example, by ensuring that the manufacturing service conforms to the specifications) and, thus, provides a
significant service of integrating those items into the combined output—the specialized equipment—for which the
customer has contracted. In addition, those activities are highly interrelated. If necessary, modifications to the
specifications are identified as the equipment is manufactured, the entity is responsible for developing and
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communicating revisions to the supplier and for ensuring that any associated rework required conforms with the
revised specifications.
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Thus, the entity concludes that it is a principal in the transaction. The entity recognizes revenue in the gross amount
of consideration to which it is entitled from the customer in exchange for the specialized equipment.
Example 46A—Promise to provide goods or services (entity is a principal)
An entity enters into a contract with a customer to provide office maintenance services. The entity and the customer
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define and agree on the scope of the services and negotiate the price. The entity is responsible for ensuring that the
services are performed in accordance with the terms and conditions in the contract. The entity invoices the customer
for the agreed-upon price on a monthly basis with 10-day payment terms. The entity regularly engages third-party
service providers to provide office maintenance services to its customers. When the entity obtains a contract from
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a customer, the entity enters into a contract with one of those service providers, directing the service provider to
perform office maintenance services for the customer. The payment terms in the contracts with the service providers
are generally aligned with the payment terms in the entity’s contracts with customers. However, the entity is obliged
to pay the service provider even if the customer fails to pay.
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The customer does not have a right to direct the service provider to perform services that the entity has not agreed
to provide. Therefore, the right to office maintenance services obtained by the entity from the service provider is
not the specified good or service in its contract with the customer. The entity concludes that it controls the specified
services before they are provided to the customer. The entity obtains control of a right to office maintenance services
after entering into the contract with the customer but before those services are provided to the customer.
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Thus, the entity is a principal in the transaction and recognizes revenue in the amount of consideration to which it
is entitled from the customer in exchange for the office maintenance services.
Example 47—Promise to provide goods or services (entity is a principal)
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An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of tickets sold
directly by the airlines to the public. The entity agrees to buy a specific number of tickets and must pay for those
tickets regardless of whether it is able to resell them. The reduced rate paid by the entity for each ticket purchased
is negotiated and agreed in advance. The entity determines the prices at which the airline tickets will be sold to its
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customers. The entity sells the tickets and collects the consideration from customers when the tickets are purchased.
The entity also assists the customers in resolving complaints with the service provided by the airlines. However, each
airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for
dissatisfaction with the service.
The entity concludes that, with each ticket that it commits itself to purchase from the airline, it obtains control of a
right to fly on a specified flight (in the form of a ticket) that the entity then transfers to one of its customers.
The entity has inventory risk with respect to the ticket because the entity committed itself to obtain the ticket from
the airline before obtaining a contract with a customer to purchase the ticket. This is because the entity is obliged
to pay the airline for that right regardless of whether it is able to obtain a customer to resell the ticket to or whether

it can obtain a favourable price for the ticket. The entity also establishes the price that the customer will pay for the
specified ticket.
Thus, the entity concludes that it is a principal in the transactions with customers. The entity recognizes revenue in
the gross amount of consideration to which it is entitled in exchange for the tickets transferred to the customers.
Example 48—Arranging for the provision of goods or services (entity is an agent)
An entity sells vouchers that entitle customers to future meals at specified restaurants. The sales price of the voucher
provides the customer with a significant discount when compared with the normal selling prices of the meals (for
example, a customer pays Rs. 100 for a voucher that entitles the customer to a meal at a restaurant that would
otherwise cost Rs. 200). The entity does not purchase or commit itself to purchase vouchers in advance of the sale
of a voucher to a customer; instead, it purchases vouchers only as they are requested by the customers. The entity
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sells the vouchers through its website and the vouchers are non-refundable. The entity and the restaurants jointly
determine the prices at which the vouchers will be sold to customers. Under the terms of its contracts with the
restaurants, the entity is entitled to 30% of the voucher price when it sells the voucher. The entity also assists the
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customers in resolving complaints about the meals and has a buyer satisfaction programme. However, the
restaurant is responsible for fulfilling obligations associated with the voucher, including remedies to a customer for
dissatisfaction with the service.
A customer obtains a voucher for the restaurant that it selects. The entity does not engage the restaurants to provide
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meals to customers on the entity’s behalf. The entity concludes that it does not control the voucher (right to a meal)
at any time.
Thus, the entity concludes that it is an agent with respect to the vouchers. The entity recognizes revenue in the net
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amount of consideration to which the entity will be entitled in exchange for arranging for the restaurants to provide
vouchers to customers for the restaurants’ meals, which is the 30% commission it is entitled to upon the sale of each
voucher.
Example 48A—Entity is a principal and an agent in the same contract
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An entity sells services to assist its customers in more effectively targeting potential recruits for open job positions.
The entity performs several services itself, such as interviewing candidates and performing background checks. As
part of the contract with a customer, the customer agrees to obtain a License to access a third party’s database of
information on potential recruits. The entity arranges for this License with the third party, but the customer contracts
directly with the database provider for the License. The entity collects payment on behalf of the third-party database
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provider as part of the entity’s overall invoicing to the customer. The database provider sets the price charged to
the customer for the License, and is responsible for providing technical support and credits to which the customer
may be entitled for service down time or other technical issues.
For the purpose of this example, it is assumed that the entity concludes that its recruitment services and the
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database access License are each distinct. Accordingly, there are two specified goods or services to be provided to
the customer—access to the third party’s database and recruitment services. The entity concludes that it does not
control the access to the database before it is provided to the customer. The entity does not at any time have the
ability to direct the use of the License because the customer contracts for the License directly with the database
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provider. The entity does not control access to the provider’s database—it cannot, for example, grant access to the
database to a party other than the customer, or prevent the database provider from providing access to the
customer.
Thus, the entity concludes that it is an agent in relation to the third party’s database service. In contrast, the entity
concludes that it is the principal in relation to the recruitment services because the entity performs those services
itself and no other party is involved in providing those services to the customer.

Customer options for additional goods or services
If an entity grants a customer the option to acquire additional goods or services (e.g. sales incentive, credit points,
renewal options or other discounts), that option gives rise to a performance obligation in the contract only if the
option provides a material right to the customer that it would not receive without entering into that contract. If
the option provides a material right to the customer, the customer in effect pays the entity in advance for future
goods or services and related revenue is thus recognized when those future goods or services are transferred or
when the option expires. If the stand-alone selling price for a customer’s option to acquire additional goods or
services is not directly observable, an entity shall estimate it. That estimate shall reflect the discount that the
customer would obtain when exercising the option, adjusted for both of the following:
• any discount that the customer could receive without exercising the option; and
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• the likelihood that the option will be exercised.
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Example 49—Option that provides the customer with a material right (discount voucher)
An entity enters into a contract for the sale of Product A for Rs. 100. As part of the contract, the entity gives the customer
a 40 per cent discount voucher for any future purchases up to Rs. 100 in the next 30 days. The entity intends to offer a 10
per cent discount on all sales during the next 30 days as part of a seasonal promotion. The 10 per cent discount cannot be
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used in addition to the 40 per cent discount voucher.
Because all customers will receive a 10 per cent discount on purchases during the next 30 days, the only discount that
provides the customer with a material right is the discount that is incremental to that 10 per cent (i.e. the additional 30
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per cent discount). The entity accounts for the promise to provide the incremental discount as a performance obligation
in the contract for the sale of Product A. To estimate the stand-alone selling price of the discount voucher, the entity
estimates an 80 per cent likelihood that a customer will redeem the voucher and that a customer will, on average, purchase
Rs. 50 of additional products. Consequently, the entity’s estimated stand-alone selling price of the discount voucher is
Rs. 12 (Rs. 50 average purchase price of additional products × 30 per cent incremental discount × 80 per cent likelihood
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of exercising the option). The stand-alone selling prices of Product A and the discount voucher and the resulting allocation of
the Rs. 100 transaction price are as follows:
Performance obligation Stand-alone selling price (Rs.)

Product A 100
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Discount voucher 12
112
Performance obligation Allocated transaction price (Rs.)

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Product A 89 [100 x 100/112]

Discount voucher 11 [100 x 12/112]
100
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The entity allocates Rs. 89 to Product A and recognizes revenue for Product A when control transfers. The entity allocates
Rs. 11 to the discount voucher and recognizes revenue for the voucher when the customer redeems it for goods or services
or when it expires.
Example 50—Option that does not provide the customer with a material right (additional goods or services)
An entity in the telecommunications industry enters into a contract with a customer to provide a handset and
monthly network service for two years. The network service includes up to 1,000 call minutes and 1,500 text
messages each month for a fixed monthly fee. The contract specifies the price for any additional call minutes or texts
that the customer may choose to purchase in any month. The prices for those services are equal to their stand-alone
selling prices. The entity determines that the promises to provide the handset and network service are each separate
performance obligations.

The prices of the additional call minutes and texts reflect the stand-alone selling prices for those services. Because
the option for additional call minutes and texts does not grant the customer a material right, the entity concludes it
is not a performance obligation in the contract. Consequently, the entity does not allocate any of the transaction
price to the option for additional call minutes or texts. The entity will recognize revenue for the additional call
minutes or texts if and when the entity provides those services.
Example 51—Option that provides the customer with a material right (renewal option)
An entity enters into 100 separate contracts with customers to provide one year of maintenance services for Rs.
1,000 per contract. The terms of the contracts specify that at the end of the year, each customer has the option to
renew the maintenance contract for a second year by paying an additional Rs. 1,000. Customers who renew for a
second year are also granted the option to renew for a third year for Rs. 1,000. The entity charges significantly higher
prices for maintenance services to customers that do not sign up for the maintenance services initially (i.e. when the
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products are new). That is, the entity charges Rs. 3,000 in Year 2 and Rs. 5,000 in Year 3 for annual maintenance
services if a customer does not initially purchase the service or allows the service to lapse.
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The entity concludes that the renewal option provides a material right to the customer that it would not receive
without entering into the contract, because the price for maintenance services are significantly higher if the
customer elects to purchase the services only in Year 2 or 3. Consequently, the entity concludes that the promise to
provide the option is a performance obligation. The renewal option is for a continuation of maintenance services
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and those services are provided in accordance with the terms of the existing contract. Instead of determining the
stand-alone selling prices for the renewal options directly, the entity allocates the transaction price by determining
the consideration that it expects to receive in exchange for all the services that it expects to provide.
The entity expects 90 customers to renew at the end of Year 1 (90 per cent of contracts sold) and 81 customers to
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renew at the end of Year 2 (90 per cent of the 90 customers that renewed at the end of Year 1 will also renew at the
end of Year 2, that is 81 per cent of contracts sold).
At contract inception, the entity determines the expected consideration for each contract is Rs. 2,710 [Rs. 1,000 +
(90 per cent × Rs. 1,000) + (81 per cent × Rs. 1,000)]. The entity also determines that recognizing maintenance service
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revenue on the basis of costs incurred relative to the total expected costs depicts the transfer of services to the
customer. Estimated costs for a three-year contract are as follows:
Rs.
Year 1 600
Year 2 750
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Year 3 1,000
Accordingly, the pattern of revenue recognition expected at contract inception for each contract is as follows:
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Expected costs adjusted for likelihood of

Allocation of consideration expected
contract renewal
Rs. Rs.
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Year 1 600 (Rs. 600 × 100%) 780 [(Rs. 600 ÷ Rs. 2,085) x Rs. 2,710]
Year 2 675 (Rs. 750 × 90%) 877 [(Rs. 675 ÷ Rs. 2,085) x Rs. 2,710]
Year 3 810 (Rs. 1,000 × 81%) 1,053 [(Rs. 810 ÷ Rs. 2,085) x Rs. 2,710]
Total 2,085 2,710
Consequently, at contract inception, the entity allocates to the option to renew at the end of Year 1 Rs. 22,000 of
the consideration received to date [cash of Rs. 100,000 – maintenance service revenue to be recognized in Year 1 of
Rs. 78,000 (Rs. 780 × 100)].

Assuming there is no change in the entity’s expectations and the 90 customers renew as expected, at the end of the
first year, the entity has collected cash of Rs. 190,000 [(100 × Rs. 1,000) + (90 × Rs. 1,000)], has recognized revenue
of Rs. 78,000 (Rs. 780 × 100) and has recognized a contract liability of Rs. 112,000.
Consequently, upon renewal at the end of the first year, the entity allocates Rs. 24,300 to the option to renew at the
end of Year 2 [cumulative cash of Rs. 190,000 less cumulative revenue recognized in Year 1 and to be recognized in
Year 2 of Rs. 165,700 (Rs. 78,000 + Rs. 877 × 100)].
If the actual number of contract renewals was different than what the entity expected, the entity would update the
transaction price and the revenue recognized accordingly.
Example 52—Customer loyalty programme
An entity has a customer loyalty programme that rewards a customer with one customer loyalty point for every Rs. 10 of
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purchases. Each point is redeemable for a Rs. 1 discount on any future purchases of the entity’s products. During a
reporting period, customers purchase products for Rs. 100,000 and earn 10,000 points that are redeemable for future
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purchases. The consideration is fixed and the stand-alone selling price of the purchased products is Rs. 100,000. The entity
expects 9,500 points to be redeemed. The entity estimates a stand-alone selling price of Rs. 0.95 per point (totalling Rs.
9,500).
The points provide a material right to customers that they would not receive without entering into a contract.
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Consequently, the entity concludes that the promise to provide points to the customer is a performance obligation. The
entity allocates the transaction price (Rs. 100,000) to the product and the points on a relative stand-alone selling price basis
as follows:
Rs.
Product
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91,324 [Rs. 100,000 × (Rs. 100,000 stand-alone selling price ÷ Rs. 109,500)]
Points 8,676 [Rs. 100,000 × (Rs. 9,500 stand-alone selling price ÷ Rs. 109,500)]
Non-refundable upfront fee
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An entity may charge a customer a non-refundable upfront fee at or near inception (e.g. joining fees in health
club). It does not result in the transfer of a promised good or service to the customer. Instead the upfront fee is
an advance payment for future goods or services and therefore would be recognized as revenue when those when
those future goods or services are provided.
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An entity may charge a non-refundable fee in part as compensation for costs incurred in setting up a contract (or
other administrative tasks). If those setup activities do not satisfy a performance obligation, the entity shall
disregard those activities (and related costs) when measuring progress. That is because the costs of setup
activities do not depict the transfer of services to the customer.
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Example 53—Non-refundable upfront fee

An entity enters into a contract with a customer for one year of transaction processing services. The entity’s
contracts have standard terms that are the same for all customers. The contract requires the customer to pay an
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upfront fee to set up the customer on the entity’s systems and processes. The fee is a nominal amount and is non-
refundable. The customer can renew the contract each year without paying an additional fee.
The entity’s setup activities do not transfer a good or service to the customer and, therefore, do not give rise to a
performance obligation. The entity concludes that the renewal option does not provide a material right to the
customer that it would not receive without entering into that contract. The upfront fee is, in effect, an advance
payment for the future transaction processing services. Consequently, the entity determines the transaction price,
which includes the non-refundable upfront fee, and recognizes revenue for the transaction processing services as
those services are provided.

Licensing
A License establishes a customer’s rights to the intellectual property of an entity. Following are some examples
of such intellectual properties:
(a) software and technology;
(b) motion pictures, music and other forms of media and entertainment;
(c) franchises; and
(d) patents, trademarks and copyrights.
In addition to a promise to grant a License to a customer, an entity may also promise to transfer other goods or
services to the customer:
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If the promise to grant a An entity shall account for the License and other services as a single performance
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License is NOT distinct obligation. Examples of such Licenses are:
from other promised ▪ a License that forms a component of a tangible good and that is integral to the
goods or services: functionality of the good; and
▪ a License that the customer can benefit from only in conjunction with a related
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service (such as an online service provided by the entity that enables, by
granting a License, the customer to access content)
Determination of whether the performance obligation is satisfied over time or at
a point in time is made as per guidance studied in IFRS 15.
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If the promise to grant a An entity shall account for the License as a separate performance obligation.
License is distinct from Determination of whether the performance obligation is satisfied over time or at
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other promised goods or a point in time is made as follows:
services: (a) performance obligation is satisfied over time:
If grant of License is a right to access the intellectual property as it exists
throughout the License period. It happens when all of the following criteria is
met:
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▪ entity will undertake the activities that significantly affect the intellectual
property.
▪ the rights granted by the License directly expose the customer to any +/-
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effects of aforementioned activities (e.g. the benefit derived from a brand is

often dependent on the entity’s ongoing activities that support or maintain the
value of property).
▪ these activities do not result in the transfer of a good or service to customer as
those activities occur.
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(b) performance obligation is satisfied at a point in time

If grant of License is a right to access the intellectual property as it exists at the
point in time at which the License is granted. It happens when the intellectual
property, to which the customer has rights, has significant stand-alone
functionality and a substantial portion of the benefit of that intellectual property
is derived from that functionality. Consequently, the ability of the customer to
obtain benefit from that intellectual property would not be significantly affected
by the entity’s activities unless those activities significantly change its form or
functionality.

Types of intellectual property that often have significant stand-alone

functionality include software, biological compounds or drug formulas, and
completed media content (for example, films, television shows and music
recordings).
However, revenue cannot be recognized before the beginning of the period
during which the customer is able to use and benefit from the License. For
example, if a software License period begins before an entity provides (or
otherwise makes available) to the customer a code that enables the customer to
immediately use the software, the entity would not recognize revenue before
that code has been provided (or otherwise made available).
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Sale-based or usage-based royalties
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An entity shall recognize revenue from a sale-based or usage-based royalty promised in exchange for a License of
intellectual property only when (or as) the later of the following events occurs:
(a) the subsequent sale or usage occurs; and
(b) the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated
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has been satisfied (or partially satisfied).
Example 54—Right to use intellectual property
Using the same facts as in Case A in Example 11, the entity identifies four performance obligations in a contract:
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(a) the software License;
(b) installation services;
(c) software updates; and
(d) technical support.
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The entity observes that it does not have any contractual or implied obligations (independent of the updates and
technical support) to undertake activities that will change the functionality of the software during the License period.
The entity also observes that the software remains functional without the updates and the technical support. The
entity concludes that the software to which the License relates has significant stand-alone functionality. The entity
further concludes that the nature of the entity’s promise in transferring the License is to provide a right to use the
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entity’s intellectual property as it exists at a point in time. Consequently, the entity accounts for the License as a
performance obligation satisfied at a point in time.
Example 55—License of intellectual property
An entity enters into a contract with a customer to License (for a period of three years) intellectual property related
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to the design and production processes for a good. The contract also specifies that the customer will obtain any
updates to that intellectual property for new designs or production processes that may be developed by the entity.
The updates are integral to the customer’s ability to derive benefit from the License during the License period,
because the intellectual property is used in an industry in which technologies change rapidly. Although the benefit
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the customer can derive from the License on its own (i.e. without the updates) is limited because the updates are
integral to the customer’s ability to continue to use the intellectual property in an industry in which technologies
change rapidly, the License can be used in a way that generates some economic benefits. The entity determines that
the customer can benefit from (a) the License on its own without the updates; and (b) the updates together with
the initial License.
Because the benefit that the customer could obtain from the License over the three-year term without the updates
would be significantly limited, the entity’s promises to grant the License and to provide the expected updates are,
in effect, inputs that together fulfil a single promise to deliver a combined item to the customer. The promises within
that combined item (i.e. to grant the License and to provide when-and-if-available updates) are, therefore, not
separately identifiable and are a single performance obligation. The entity concludes that because the customer

simultaneously receives and consumes the benefits of the entity’s performance as it occurs, the performance
obligation is satisfied over time.
Example 56—Identifying a distinct License
An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10
years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore the
entity will not undertake any activities to support the drug, which is consistent with its customary business practices.
Case A—License is not distinct
In this case, no other entity can manufacture this drug because of the highly specialized nature of the manufacturing
process. As a result, the License cannot be purchased separately from the manufacturing services. The entity
determines that the customer cannot benefit from the License without the manufacturing service; therefore, the
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License and the manufacturing service are not distinct and the entity accounts for the License and the manufacturing
service as a single performance obligation.
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Case B—License is distinct
In this case, the manufacturing process used to produce the drug is not unique or specialized and several other
entities can also manufacture the drug for the customer. The entity concludes that its promises to grant the License
and to provide the manufacturing service are separately identifiable. In reaching this conclusion, the entity considers
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that the customer could separately purchase the License without significantly affecting its ability to benefit from the
License. Neither the License, nor the manufacturing service, is significantly modified or customized by the other and
the entity is not providing a significant service of integrating those items into a combined output. Thus, although the
manufacturing service necessarily depends on the License in this contract (i.e. the entity would not provide the
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manufacturing service without the customer having obtained the License), the License and the manufacturing
service do not significantly affect each other. Consequently, the entity concludes that its promises to grant the
License and to provide the manufacturing service are distinct and that there are two performance obligations.
The drug is a mature product (i.e. it has been approved, is currently being manufactured and has been sold
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commercially for the last several years). For these types of mature products, the entity’s customary business
practices are not to undertake any activities to support the drug. The drug compound has significant stand-alone
functionality (i.e. its ability to produce a drug that treats a disease or condition). Consequently, the customer obtains
a substantial portion of the benefits of the drug compound from that functionality, rather than from the entity’s
ongoing activities. The nature of the entity’s promise in transferring the License is to provide a right to use the
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entity’s intellectual property in the form and the functionality with which it exists at the point in time that it is
granted to the customer. Consequently, the entity accounts for the License as a performance obligation satisfied at
a point in time.
Example 57—Franchise rights
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An entity enters into a contract with a customer and promises to grant a franchise License that provides the customer
with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the License,
the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting
the License, the entity receives a sales-based royalty of 5% of the customer’s monthly sales. The fixed consideration
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for the equipment is Rs. 150,000 payable when the equipment is delivered.
Identifying performance obligations
The entity observes that the entity, as a franchisor, has developed a customary business practice to undertake
activities such as analyzing consumers’ changing preferences and implementing product improvements, pricing
strategies, marketing campaigns and operational efficiencies to support the franchise name. However, the entity
concludes that these activities do not directly transfer goods or services to the customer because they are part of
the entity’s promise to grant a License.
The entity determines that it has two promises to transfer goods or services: a promise to grant a License and a
promise to transfer equipment. In addition, the entity concludes that the promise to grant the License and the
promise to transfer the equipment are each distinct. The customer can benefit from the License together with the

equipment that is delivered before the opening of the franchise and the equipment can be used in the franchise or
sold for an amount other than scrap value. The entity concludes that the License and the equipment are not inputs
to a combined item (i.e. they are not fulfilling what is, in effect, a single promise to the customer). In addition, the
License and the equipment are not highly interdependent or highly interrelated because the entity would be able to
fulfil each promise (i.e. to license the franchise or to transfer the equipment) independently of the other.
Consequently, the entity has two performance obligations; the franchise license and the equipment.
Allocating the transaction price
The entity determines that the transaction price includes fixed consideration of Rs. 150,000 and variable
consideration (5% of customer sales). The stand-alone selling price of the equipment is Rs. 150,000 and the entity
regularly licenses franchises in exchange for 5% of customer sales. In addition, the entity observes that allocating Rs.
150,000 to the equipment and the sales-based royalty to the franchise License would be consistent with an allocation
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based on the entity’s relative stand-alone selling prices in similar contracts. Consequently, the entity concludes that
the variable consideration should be allocated entirely to the performance obligation to grant the franchise License.
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Application guidance: licensing
The entity assesses the nature of the entity’s promise to grant the franchise License and concludes that it is to
provide access to the entity’s intellectual property in its current form throughout the license period because:
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▪ entity will undertake the activities that significantly affect the intellectual property. In addition, the entity observes
that because part of its compensation is dependent on the success of the franchisee (as evidenced through the
sales-based royalty), the entity has a shared economic interest with the customer that indicates that the customer
will expect the entity to undertake those activities to maximize earnings.
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▪ the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities.
▪ these activities do not result in the transfer of a good or service to customer as those activities occur.
The entity concludes that the promise to transfer the License is a performance obligation satisfied over time. After
the transfer of the franchise License, the entity recognizes revenue as and when the customer’s sales occur because
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the entity concludes that this reasonably depicts the entity’s progress towards complete satisfaction of the franchise
License performance obligation.
Example 58—Access to intellectual property
An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of
its comic strips to a customer for a four-year term. There are main characters involved in each of the comic strips.
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However, newly created characters appear regularly and the images of the characters evolve over time. The
customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or parades,
within reasonable guidelines. The contract requires the customer to use the latest images of the characters. In
exchange for granting the License, the entity receives a fixed payment of Rs. 1 million in each year of the four-year
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term. The entity concludes that it has no other performance obligations other than the promise to grant a License.
That is, the additional activities associated with the License do not directly transfer a good or service to the customer
because they are part of the entity’s promise to grant a License.
The entity assesses the nature of the entity’s promise to grant the license and concludes that it is to provide access
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to the entity’s intellectual property in its current form throughout the license period because:
▪ entity will undertake the activities that significantly affect the intellectual property. This is because the entity’s
activities (i.e. development of the characters) change the form of the intellectual property.
▪ the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities
because the contract requires the customer to use the latest characters.
Consequently, the entity concludes that the nature of the entity’s promise to transfer the License is to provide the
customer with access to the entity’s intellectual property as it exists throughout the License period. The entity
accounts for the promised License as a performance obligation satisfied over time. Because the contract provides
the customer with unlimited use of the licensed characters for a fixed term, the entity determines that a time-based

method would be the most appropriate measure of progress towards complete satisfaction of the performance
obligation.
Example 59—Right to use intellectual property
An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted orchestra.
The customer, a consumer products company, has the right to use the recorded symphony in all commercials,
including television, radio and online advertisements for two years in Country A. In exchange for providing the
License, the entity receives fixed consideration of Rs. 10,000 per month. The contract does not include any other
goods or services to be provided by the entity. The contract is non-cancellable. The entity concludes that its only
performance obligation is to grant the License. The entity determines that the term of the License (two years), its
geographical scope (the customer’s right to use the recording only in Country A), and the defined permitted use for
the recording (in commercials) are all attributes of the promised License in the contract. The entity does not have
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any contractual or implied obligations to change the licensed recording. The licensed recording has significant stand-
alone functionality (i.e. the ability to be played) and, therefore, the ability of the customer to obtain the benefits of
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the recording is not substantially derived from the entity’s ongoing activities. Consequently, the entity concludes
that the nature of its promise in transferring the License is to provide the customer with a right to use the entity’s
intellectual property as it exists at the point in time that it is granted. The entity recognizes all of the revenue at the
point in time when the customer can direct the use of, and obtain substantially all of the remaining benefits from,
the licensed intellectual property. Because of the length of time between the entity’s performance (i.e. at the
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beginning of the period) and the customer’s monthly payments over two years (which are non-cancellable), the
entity must determine whether a significant financing component exists.
Example 60—Sales-based royalty for a License of intellectual property
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An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas,
has the right to show the movie in its cinemas for six weeks. Additionally, the entity has agreed to (a) provide
memorabilia from the filming to the customer for display at the customer’s cinemas before the beginning of the six-
week screening period; and (b) sponsor radio advertisements for Movie XYZ on popular radio stations in the
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customer’s geographical area throughout the six-week screening period. In exchange for providing the License and
the additional promotional goods and services, the entity will receive a portion of the operator’s ticket sales for
Movie XYZ (i.e. variable consideration in the form of a sales-based royalty). The entity concludes that the License to
show Movie XYZ is the predominant item to which the sales-based royalty relates because the entity has a
reasonable expectation that the customer would ascribe significantly more value to the License than to the related
promotional goods or services. If the License, the memorabilia and the advertising activities are separate
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performance obligations, the entity would allocate the sales-based royalty to each performance obligation.
Example 61—Access to intellectual property
An entity, a well-known sports team, licenses the use of its name and logo to a customer. The customer, an apparel
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designer, has the right to use the sports team’s name and logo on items including t-shirts, caps, mugs and towels for
one year. In exchange for providing the License, the entity will receive fixed consideration of Rs. 2 million and a
royalty of 5% of the sales price of any items using the team name or logo. The customer expects that the entity will
continue to play games and provide a competitive team. The entity concludes that its only performance obligation
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is to transfer the License. The additional activities associated with the License (i.e. continuing to play games and
provide a competitive team) do not directly transfer a good or service to the customer because they are part of the
entity’s promise to grant the License.
The entity assesses the nature of the entity’s promise to grant the license and concludes that it is to provide access
to the entity’s intellectual property in its current form throughout the license period because:
▪ entity will undertake the activities that significantly affect the intellectual property. This is because the entity’s
activities (i.e. continuing to play) support and maintain the value of the name and logo. In addition, the entity
observes that because part of its compensation is dependent on the success of the customer (as evidenced
through the sales-based royalty), the entity has a shared economic interest with the customer that indicates that
the customer will expect the entity to undertake those activities to maximize earnings.
▪ the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities.

The entity concludes that the entity’s promise to grant the License is to provide the customer with access to the
entity’s intellectual property as it exists throughout the License period. Consequently, the entity accounts for the
promised License as a performance obligation satisfied over time. The entity concludes that recognition of the Rs. 2
million fixed consideration as revenue rateably over time plus recognition of the royalty as revenue as and when the
customer’s sales of items using the team name or logo occur reasonably depicts the entity’s progress towards
complete satisfaction of the License performance obligation
Repurchase agreements
A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option (either
in the same contract or in another contract) to repurchase the asset. The repurchased asset may be the asset that
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was originally sold to the customer, an asset that is substantially the same as that asset, or another asset of which
the asset that was originally sold is a component. Repurchase agreements generally come in following forms:
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A forward or a call If an entity an obligation to repurchase (i.e. forward) or a right to repurchase (i.e.
option: call option) the asset, a customer does not obtain control of the asset.
Consequently, the entity shall account for the contract as either of the following:
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▪ a lease in accordance with IFRS 16 if the entity can or must repurchase the
asset for an amount that is LESS than the original selling price of the asset.; OR
▪ a financial liability (e.g. loan) for consideration received if the entity can or
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must repurchase the asset for an amount EQUAL to or MORE than the original
selling price of the asset. The asset shall remain recognized in books and the
difference between the consideration received for sale and consideration to be
paid for repurchase shall be recognized as interest. If option lapses
unexercised, an entity shall derecognize the liability and recognize revenue.
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A put option: ▪ If an entity has an obligation to repurchase the asset at customer’s demand at
a price LOWER than the original selling price of the asset as well as than
expected market value of the asset at the date of repurchase, the entity shall
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account for the agreement as a sale of a product with a right of return.

▪ If an entity has an obligation to repurchase the asset at customer’s demand at
a price LOWER than the original selling price of the asset but MORE than
expected market value of the asset at the date of repurchase, the entity shall
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account for the agreement as a lease in accordance with IFRS 16.

a price EQUAL to or MORE than the original selling price of the asset and MORE
than expected market value of the asset at the date of repurchase, the entity
shall account for the agreement as a financial liability as studied above for call
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option.
a price EQUAL to or MORE than the original selling price of the asset but EQUAL
to or LESS than expected market value of the asset at the date of repurchase,
the entity shall account for the agreement as a sale of a product with a right of
return.
When comparing repurchase price with the selling price, time value of money is to be considered.

Example 62—Repurchase agreements

An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 20X7 for Rs. 1 million.
Case A—Call option: financing
The contract includes a call option that gives the entity the right to repurchase the asset for Rs. 1.1 million on or before
31 December 20X7. Control of the asset does not transfer to the customer on 1 January 20X7 because the entity has a right
to repurchase the asset and therefore the customer is limited in its ability to direct the use of, and obtain substantially
all of the remaining benefits from, the asset. Consequently, the entity accounts for the transaction as a financing
arrangement, because the exercise price is more than the original selling price. Hence, the entity does not derecognize
the asset and instead recognizes the cash received as a financial liability. The entity also recognizes interest expense for the
difference between the exercise price (Rs. 1.1 million) and the cash received (Rs. 1 million), which increases the liability.
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On 31 December 20X7, the option lapses unexercised; therefore, the entity derecognizes the liability and recognizes
revenue of Rs. 1.1 million.
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Case B—Put option: lease
Instead of having a call option, the contract includes a put option that obliges the entity to repurchase the asset at
the customer’s request for Rs. 900,000 on or before 31 December 20X7. The market value is expected to be Rs.
750,000 on 31 December 20X7. The entity concludes that the customer has a significant economic incentive to
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exercise the put option because the repurchase price significantly exceeds the expected market value of the asset
at the date of repurchase. Consequently, the entity concludes that control of the asset does not transfer to the
customer, because the customer is limited in its ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset. The entity accounts for the transaction as a lease in accordance with IFRS 16
Leases.
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Consignment arrangements
When an entity delivers a product to another party (such as a dealer or a distributor) for sale to end customers,
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the entity shall evaluate whether that other party has obtained control of the product at that point in time. A
product that has been delivered to another party may be held in a consignment arrangement if that other party
has not obtained control of the product. Accordingly, an entity shall not recognize revenue upon delivery of a
product to another party if the delivered product is held on consignment.
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Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following:
(a) the product is controlled by the entity until a specified event occurs, such as the sale of the product to a
customer of the dealer or until a specified period expires;
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(b) the entity is able to require the return of the product or transfer the product to a third party (such as another
dealer); and
(c) the dealer does not have an unconditional obligation to pay for the product (although it might be required to
pay a deposit).
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Bill-and-hold arrangements
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity
retains physical possession of the product (i.e. entity provides custodial service) until it is transferred to the
customer at a point in time in the future.
The entity has satisfied its performance obligation to transfer a product when a customer obtains control of that
product. For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following
criteria must be met:
(d) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested
the arrangement);
(e) the product must be identified separately as belonging to the customer;
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(f) the product currently must be ready for physical transfer to the customer; and
(g) the entity cannot have the ability to use the product or to direct it to another customer.
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Example 63—Bill-and-hold arrangement
An entity enters into a contract with a customer on 1 January 20X8 for the sale of a machine and spare parts. The
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manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon
specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two
performance obligations that each will be satisfied at a point in time. On 31 December 20X9, the customer pays for the
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machine and spare parts, but only takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity’s warehouse because of its close proximity to
the customer’s factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the
customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse and the parts are ready
for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years and the
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entity does not have the ability to use the spare parts or direct them to another customer.
The entity identifies the promise to provide custodial services as a performance obligation because it is a service provided
to the customer and it is distinct from the machine and spare parts. Consequently, the entity accounts for three
performance obligations in the contract (the promises to provide the machine, the spare parts and the custodial services).
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The transaction price is allocated to the three performance obligations and revenue is recognized when (or as) control
transfers to the customer.
Control of the machine transfers to the customer on 31 December 20X9 when the customer takes physical possession.
The entity recognizes revenue for the spare parts on 31 December 20X9 when control transfers to the customer. The
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performance obligation to provide custodial services is satisfied over timeas the services are provided.
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IFRS 15 Revenue from Contracts with Customers

Illustrative Examples – Summarized
Identifying the contract
Example 1—Collectability of the consideration
An entity, a real estate developer, enters into a contract with a customer for the sale of a building for Rs. 1 million.
The customer intends to open a restaurant in the building. The building is located in an area where new restaurants
ace high levels of competition and the customer has little experience in the restaurant industry. The customer pays
a non-refundable deposit of Rs. 50,000 at inception of the contract and enters into a long-term financing agreement
with the entity for the remaining 95 per cent of the promised consideration.
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The financing arrangement is provided on a non-recourse basis, which means that if the customer defaults, the entity
can repossess the building, but cannot seek further compensation from the customer, even if the collateral does not
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cover the full value of the amount owed. The entity’s cost of the building is Rs. 600,000. The customer obtains control
of the building at contract inception.
The entity concludes that it is not probable that the entity will collect the consideration to which it is entitled in
exchange for the transfer of the building. Hence the contract is not identified. The entity has not received
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substantially all of the consideration and it has not terminated the contract. Consequently, the entity accounts for
the non-refundable Rs. 50,000 payment as a deposit liability.
Example 2—Consideration is not the stated price—implicit price concession
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An entity sells 1,000 units of a prescription drug to a customer for promised consideration of Rs. 1 million. This is the
entity’s first sale to a customer in a new region, which is experiencing significant economic difficulty. Thus, the entity
expects that it will not be able to collect from the customer the full amount of the promised consideration. Based
on the assessment of the facts and circumstances, the entity determines that it expects to provide a price concession
and accept a lower amount of consideration from the customer. Accordingly, the entity concludes that the
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transaction price is not Rs. 1 million and, therefore, the promised consideration is variable. The entity estimates the
variable consideration and determines that it expects to be entitled to Rs. 400,000.
The entity considers the customer’s ability and intention to pay the consideration and concludes that even though
the region is experiencing economic difficulty, it is probable that it will collect Rs. 400,000 from the customer.
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Consequently, the entity accounts for the contract with the customer in accordance with IFRS 15.
Example 3—Implicit price concession
An entity, a hospital, provides medical services to an uninsured patient in the emergency room. The entity has not
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previously provided medical services to this patient but is required by law to provide medical services to all
emergency room patients. Because of the patient’s condition upon arrival at the hospital, the entity provides the
services immediately and, therefore, before the entity can determine whether the patient is committed to perform
its obligations under the contract in exchange for the medical services provided.
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After providing services, the entity obtains additional information about the patient including a review of the services
provided, standard rates for such services and the patient’s ability and intention to pay the entity for the services
provided. During the review, the entity notes its standard rate for the services provided in the emergency room is
Rs. 10,000. The entity also reviews the patient’s information and to be consistent with its policies designates the
patient to a customer class based on the entity’s assessment of the patient’s ability and intention to pay.
The entity reviews its historical cash collections from this customer class and other relevant information about the
patient. The entity estimates the variable consideration and determines that it expects to be entitled to Rs. 1,000.
On the basis of its collection history from patients in this customer class, the entity concludes it is probable that the
entity will collect Rs. 1,000 (which is the estimate of variable consideration). Consequently, the entity accounts for
the contract with the patient in accordance with IFRS 15.

Example 4—Reassessing the criteria for identifying a contract

An entity licenses a patent to a customer in exchange for a usage-based royalty. At contract inception, the contract
meets all the criteria and the entity accounts for the contract with the customer in accordance with the requirements
in IFRS 15. Throughout the first year of the contract, the customer provides quarterly reports of usage and pays
within the agreed-upon period.
During the second year of the contract, the customer continues to use the entity’s patent, but the customer’s
financial condition declines. The customer’s current access to credit and available cash on hand are limited. The
entity continues to recognize revenue on the basis of the customer’s usage throughout the second year. The
customer pays the first quarter’s royalties but makes nominal payments for the usage of the patent in Quarters 2–
4. The entity accounts for any impairment of the existing receivable in accordance with IFRS 9 Financial Instruments.
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During the third year of the contract, the customer continues to use the entity’s patent. However, the entity learns
that the customer has lost access to credit and its major customers and thus the customer’s ability to pay significantly
deteriorates. The entity therefore concludes that it is unlikely that the customer will be able to make any further
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royalty payments for ongoing usage of the entity’s patent. As a result of this significant change in facts and
circumstances, the entity reassesses the criteria and determines that they are not met because it is no longer
probable that the entity will collect the consideration to which it will be entitled. Accordingly, the entity does not
recognize any further revenue associated with the customer’s future usage of its patent. The entity accounts for any
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impairment of the existing receivable in accordance with IFRS 9 Financial Instruments.
Contract modification
Example 5—Modification of a contract for goods ha
An entity promises to sell 120 products to a customer for Rs. 12,000 (Rs. 100 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point in time.
After the entity has transferred control of 60 products to the customer, the contract is modified to require the
delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products
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were not included in the initial contract.
Case A—Additional products for a price that reflects the stand-alone selling price
When the contract is modified, the price of the contract modification for the additional 30 products is an additional
Rs. 2,850 or Rs. 95 per product. The pricing for the additional products reflects the stand-alone selling price of the
products at the time of the contract modification and the additional products are distinct from the original products.
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The contract modification for the additional 30 products is, in effect, a new and separate contract for future products
that does not affect the accounting for the existing contract. The entity recognizes revenue of Rs. 100 per product
for the 120 products in the original contract and Rs. 95 per product for the 30 products in the new contract.
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Case B—Additional products for a price that does not reflect the stand-alone selling price
During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of
Rs. 80 per product. However, the customer discovers that the initial 60 products transferred to the customer
contained minor defects that were unique to those delivered products. The entity promises a partial credit of Rs. 15
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per product to compensate the customer for the poor quality of those products. The entity and the customer agree
to incorporate the credit of Rs. 900 (Rs. 15 credit × 60 products) into the price that the entity charges for the
additional 30 products. Consequently, the contract modification specifies that the price of the additional 30 products
is Rs. 1,500 or Rs. 50 per product. That price comprises the agreed-upon price for the additional 30 products of Rs.
2,400, or Rs. 80 per product, less the credit of Rs. 900.
At the time of modification, the entity recognizes the Rs. 900 as a reduction of the transaction price and, therefore,
as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the additional 30
products, the entity determines that the negotiated price of RS. 80 per product does not reflect the stand-alone
selling price of the additional products.

Consequently, the contract modification does not meet the conditions to be accounted for as a separate contract.
Because the remaining products to be delivered are distinct from those already transferred, the entity accounts for
the modification as a termination of the original contract and the creation of a new contract.
Consequently, the amount recognized as revenue for each of the remaining products is a blended price of Rs. 93.33
{[(Rs. 100 × 60 products not yet transferred under the original contract) + (Rs. 80 × 30 products to be transferred
under the contract modification)] ÷ 90 remaining products}.
Example 6—Change in the transaction price after a contract modification
On 1 July 20X0, an entity promises to transfer two distinct products to a customer. Product X transfers to the
customer at contract inception and Product Y transfers on 31 March 20X1. The consideration promised by the
customer includes fixed consideration of Rs. 1,000 and variable consideration that is estimated to be Rs. 200. The
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entity includes its estimate of variable consideration in the transaction price because it concludes that it is highly
probable that a significant reversal in cumulative revenue recognized will not occur when the uncertainty is resolved.
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The transaction price of Rs. 1,200 is allocated equally to the performance obligation for Product X and the
performance obligation for Product Y (because both have same stand-alone price). When Product X transfers to the
customer at contract inception, the entity recognizes revenue of Rs. 600.
On 30 November 20X0, the scope of the contract is modified to include the promise to transfer Product Z (in addition
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to the undelivered Product Y) to the customer on 30 June 20X1 and the price of the contract is increased by Rs. 300
(fixed consideration), which does not represent the stand-alone selling price of Product Z. The stand-alone selling
price of Product Z is the same as the stand-alone selling prices of Products X and Y.
The entity accounts for the modification as if it were the termination of the existing contract and the creation of a
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new contract. This is because the remaining Products Y and Z are distinct from Product X, which had transferred to
the customer before the modification. Consequently, the consideration to be allocated to the remaining
performance obligations comprises the consideration that had been allocated to the performance obligation for
Product Y and the consideration promised in the modification. The transaction price for the modified contract is Rs.
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900 and that amount is allocated equally to the performance obligation for Product Y and the performance obligation
for Product Z (i.e. Rs. 450 is allocated to each performance obligation).
After the modification but before the delivery of Products Y and Z, the entity revises its estimate of the amount of
variable consideration to which it expects to be entitled to Rs. 240. The entity concludes that the change in estimate
of the variable consideration can be included in the transaction price, because it is highly probable that a significant
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reversal in cumulative revenue recognized will not occur when the uncertainty is resolved. Therefore, the change in
the transaction price is allocated to the performance obligations for Product X and Product Y on the same basis as
at contract inception. Consequently, the entity recognizes revenue of Rs. 20 for Product X in the period in which the
change in the transaction price occurs. Because Product Y had not transferred to the customer before the contract
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modification, the change in the transaction price that is attributable to Product Y is allocated to the remaining
performance obligations at the time of the contract modification. Thus, the entity allocates the Rs. 20 increase in
the transaction price for the modified contract equally to the performance obligations for Product Y and Product Z.
Consequently, the amount of the transaction price allocated to the performance obligations for Product Y and
Product Z increases by Rs. 10 to Rs. 460 each.
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On 31 March 20X1, Product Y is transferred to the customer and the entity recognizes revenue of Rs. 460. On 30
June 20X1, Product Z is transferred to the customer and the entity recognizes revenue of Rs. 460.
Example 7—Modification of a services contract
An entity enters into a three-year contract to clean a customer’s offices on a weekly basis. The customer promises
to pay Rs. 100,000 per year. The stand-alone selling price of the services at contract inception is Rs. 100,000 per
year. The entity recognizes revenue of Rs. 100,000 per year during the first two years of providing services. At the
end of the second year, the contract is modified and the fee for the third year is reduced to Rs. 80,000. In addition,
the customer agrees to extend the contract for three additional years for consideration of Rs. 200,000 payable in
three equal annual instalments of Rs. 66,667 at the beginning of years 4, 5 and 6. After the modification, the contract
has four years remaining in exchange for total consideration of Rs. 280,000. The stand-alone selling price of the

services at the beginning of the third year is Rs. 80,000 per year, therefore, total stand-alone price of remaining
services should be Rs. 320,000 (i.e. 4 years × Rs. 80,000 per year).
At contract inception, the entity accounts for the cleaning contract as a single performance obligation because the
weekly cleaning services are a series of distinct services that are substantially the same and have the same pattern
of transfer to the customer. At the date of the modification, the entity assesses the remaining services to be provided
and concludes that they are distinct. However, the amount of remaining consideration to be paid (Rs. 280,000) does
not reflect the stand-alone selling price of the services to be provided (Rs. 320,000).
Consequently, the entity accounts for the modification as a termination of the original contract and the creation of
a new contract with consideration of Rs. 280,000 for four years of cleaning service and recognizes revenue of Rs.
70,000 per year (Rs. 280,000 ÷ 4 years) as the services are provided over the remaining four years.
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Example 8—Modification resulting in a cumulative catch-up adjustment to revenue
An entity, a construction company, enters into a contract to construct a commercial building for a customer on
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customer-owned land for promised consideration of Rs. 1 million and a bonus of Rs. 200,000 if the building is
completed within 24 months. The entity accounts for the promised bundle of goods and services as a single
performance obligation satisfied over time. At the inception of the contract, the entity expects the following:
Rs.
Transaction price 1,000,000
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Expected costs 700,000
Expected profit (30%) 300,000
At contract inception, the entity excludes the Rs. 200,000 bonus from the transaction price because it cannot
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conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will
not occur.
By the end of the first year, the entity has satisfied 60% of its performance obligation on the basis of costs incurred
to date (Rs. 420,000) relative to total expected costs (Rs. 700,000). The entity reassesses the variable consideration
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and concludes that the amount is still constrained. Consequently, the cumulative revenue and costs recognized for
the first year are as follows:
Rs.
Revenue 600,000
Costs 420,000
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Gross profit 180,000

In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor
plan of the building. As a result, the fixed consideration and expected costs increase by Rs. 150,000 and Rs. 120,000,
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respectively. Total potential consideration after the modification is Rs. 1,350,000 (Rs. 1,150,000 fixed consideration
+ Rs. 200,000 completion bonus). In addition, the allowable time for achieving the Rs. 200,000 bonus is extended by
6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of its
experience and the remaining work to be performed, which is primarily inside the building and not subject to
weather conditions, the entity concludes that it is highly probable that including the bonus in the transaction price
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will not result in a significant reversal in the amount of cumulative revenue recognized and includes the Rs. 200,000
in the transaction price. In assessing the contract modification, the entity evaluates that the remaining goods and
services to be provided using the modified contract are not distinct from the goods and services transferred on or
before the date of contract modification; that is, the contract remains a single performance obligation.
Consequently, the entity accounts for the contract modification as if it were part of the original contract and updates
its measure of progress and estimates that it has satisfied 51.2 % of its performance obligation (Rs. 420,000 actual
costs incurred ÷ CU820,000 total expected costs). The entity recognizes additional revenue of Rs. 91,200 [(51.2 %
complete × CU1,350,000 modified transaction price) – Rs. 600,000 revenue recognized to date] at the date of the
modification as a cumulative catch-up adjustment.

Example 9—Unapproved change in scope and price

An entity enters into a contract with a customer to construct a building on customer-owned land. The contract states
that the customer will provide the entity with access to the land within 30 days of contract inception. However, the
entity was not provided access until 120 days after contract inception because of storm damage to the site that
occurred after contract inception. The contract specifically identifies any delay (including force majeure) in the
entity’s access to customer-owned land as an event that entitles the entity to compensation that is equal to actual
costs incurred as a direct result of the delay. The entity is able to demonstrate that the specific direct costs were
incurred as a result of the delay in accordance with the terms of the contract and prepares a claim. The customer
initially disagreed with the entity’s claim.
The entity assesses the legal basis of the claim and determines, on the basis of the underlying contractual terms,
that it has enforceable rights. Consequently, it accounts for the claim as a contract modification. The modification
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does not result in any additional goods and services being provided to the customer. In addition, all of the remaining
goods and services after the modification are not distinct and form part of a single performance obligation.
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Consequently, the entity accounts for the modification by updating the transaction price and the measure of
progress towards complete satisfaction of the performance obligation.
Identifying performance obligations
Example 10—Goods and services are not distinct
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An entity, a contractor, enters into a contract to build a hospital for a customer. The entity is responsible for the overall
management of the project and identifies various goods and services to be provided, including engineering, site clearance,
foundation, procurement, construction of the structure, piping and wiring, installation of equipment and finishing.
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The promised goods and services are capable of being distinct because the customer can benefit from the goods and
services either on their own or together with other readily available resources. This is evidenced by the fact that the
entity, or competitors of the entity, regularly sells many of these goods and services separately to other customers.
However, the goods and services are not distinct within the context of the contract because the entity’s promise to
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transfer individual goods and services in the contract are not separately identifiable from other promises in the contract.
This is evidenced by the fact that the entity provides a significant service of integrating the goods and services (the inputs)
into the hospital (the combined output) for which the customer has contracted. Hence the goods and services are not
distinct. The entity accounts for all of the goods and services in the contract as a single performance obligation.
Example 11—Determining whether goods or services are distinct
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Case A—Distinct goods or services

An entity, a software developer, enters into a contract with a customer to transfer a software licence, perform an
installation service and provide unspecified software updates and technical support (online and telephone) for a two-year
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period. The entity sells the licence, installation service and technical support separately. The installation service is
routinely performed by other entities and does not significantly modify the software. The software remains functional
without the updates and the technical support.
The entity observes that the software is delivered before the other goods and services and remains functional without the
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updates and the technical support. Thus, the customer can benefit from each of the goods andservices either on their own
or together with the other goods and services that are readily available. In particular, the entity observes that the
installation service does not significantly modify or customise the software itself and, as such, the software and the
installation service are separate outputs promised by the entity instead of inputs used to produce a combined output. On
the basis of this assessment, the entity identifies four performance obligations in the contract for the following
goods or services:
(a) the software licence;
(b) an installation service;
(c) software updates; and
(d) technical support.

Case B—Significant customisation

The promised goods and services are the same as in Case A, except that the contract specifies that, as part of the
installation service, the software is to be substantially customised to add significant new functionality to enable the
software to interface with other customised software applications used by the customer. The customised installation service
can be provided by other entities.
The entity is using the licence and the customised installation service as inputs to produce the combined output. In
addition, the software is significantly modified and customised by the service. Thus, the software licence and the
customised installation service are not distinct.
On the basis of this assessment, the entity identifies three performance obligations in the contract for the following
goods or services:
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(a) customised installation service (that includes the software licence);
(b) software updates; and
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(c) technical support.
Case C—Promises are separately identifiable (installation)
An entity contracts with a customer to sell a piece of equipment and installation services. The equipment is
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operational without any customization or modification. The installation required is not complex and is capable of
being performed by several alternative service providers.
The entity identifies two promised goods and services in the contract:
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(a) equipment; and (b) installation.
The customer can benefit from the equipment on its own, by using it or reselling it for an amount greater than scrap
value, or together with other readily available resources (for example, installation services available from alternative
providers). The customer also can benefit from the installation services together with other resources that the
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customer will already have obtained from the entity (ie the equipment).
The entity has not promised to combine the equipment and the installation services in a way that would transform
them into a combined output. The entity’s installation services will not significantly customize or significantly modify
the equipment. The equipment and the installation services do not each significantly affect the other, they are not
highly interdependent or highly interrelated.
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On the basis of this assessment, the entity identifies two performance obligations in the contract for the following
goods or services:
(i) the equipment; and
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(ii) installation services.

Case D—Promises are separately identifiable (contractual restrictions)
Assume the same facts as in Case C, except that the customer is contractually required to use the entity’s installation
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services.
The contractual requirement to use the entity’s installation services does not change the evaluation of whether the
promised goods and services are distinct in this case. This is because the contractual requirement to use the entity’s
installation services does not change the characteristics of the goods or services themselves, nor does it change the
entity’s promises to the customer. Although the customer is required to use the entity’s installation services, the
equipment and the installation services are capable of being distinct and the entity’s promises to provide the
equipment and to provide the installation services are each separately identifiable. The entity’s analysis in this regard
is consistent with that in Case C.

Case E—Promises are separately identifiable (consumables)

An entity enters into a contract with a customer to provide a piece of off-the-shelf equipment (i.e. the equipment is
operational without any significant customization or modification) and to provide specialized consumables for use
in the equipment at predetermined intervals over the next three years. The consumables are produced only by the
entity, but are sold separately by the entity.
The entity determines that the customer can benefit from the equipment together with the readily available
consumables. The consumables are readily available, because they are regularly sold separately by the entity (i.e.
through refill orders to customers that previously purchased the equipment). Therefore, the equipment and the
consumables are each capable of being distinct.
The entity determines that the equipment and the consumables are not inputs to a combined output. In addition,
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neither the equipment nor the consumables are significantly customized or modified by the other. Lastly, the entity
concludes that the equipment and the consumables are not highly interdependent or highly interrelated because
they do not significantly affect each other.
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On the basis of this assessment, the entity identifies two performance obligations in the contract for the following
goods or services:
(a) the equipment; and
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(b) the consumables.
Example 12—Explicit and implicit promises in a contract
An entity, a manufacturer, sells a product to a distributor (i.e. its customer) who will then resell it to an end customer.
Case A—Explicit promise of service
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In the contract with the distributor, the entity promises to provide maintenance services for no additional
consideration (i.e. ‘free’) to any party (i.e. the end customer) that purchases the product from the distributor. The
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entity outsources the performance of the maintenance services to the distributor and pays the distributor an agreed-
upon amount for providing those services on the entity’s behalf. If the end customer does not use the maintenance
services, the entity is not obliged to pay the distributor.
The contract with the customer includes two promised goods or services—(a) the product and (b) the maintenance
services. The product and the maintenance services are not inputs to a combined item in the contract. The entity is
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not providing a significant integration service because the presence of the product and the services together in this
contract do not result in any additional or combined functionality. In addition, neither the product nor the services
modify or customize the other. Lastly, the product and the maintenance services are not highly interdependent or
highly interrelated because the entity would be able to fulfil each of the promises in the contract independently of
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its efforts to fulfil the other. Consequently, the entity allocates a portion of the transaction price to each of the two
performance obligations (i.e. the product and the maintenance services) in the contract.
Case B—Implicit promise of service
The entity has historically provided maintenance services for no additional consideration (i.e. ‘free’) to end
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customers that purchase the entity’s product from the distributor. The entity does not explicitly promise
maintenance services during negotiations with the distributor and the final contract between the entity and the
distributor does not specify terms or conditions for those services. However, on the basis of its customary business
practice, the entity determines at contract inception that it has made an implicit promise to provide maintenance
services as part of the negotiated exchange with the distributor. That is, the entity’s past practices of providing these
services create valid expectations of the entity’s customers (i.e. the distributor and end customers). Consequently,
the entity assesses whether the promise of maintenance services is a performance obligation. For the same reasons
as in Case A, the entity determines that the product and maintenance services are separate performance obligations.
Case C—Services are not a promised service
In the contract with the distributor, the entity does not promise to provide any maintenance services. In addition,

the entity typically does not provide maintenance services and, therefore, the entity’s customary business practices,
published policies and specific statements at the time of entering into the contract have not created an implicit
promise to provide goods or services to its customers. The entity transfers control of the product to the distributor
and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer
to provide maintenance services to any party that purchases the product from the distributor for no additional
promised consideration. The promise of maintenance is not included in the contract between the entity and the
distributor at contract inception. Consequently, the entity does not identify the promise to provide maintenance
services as a performance obligation. Instead, the obligation to provide maintenance services is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Although the maintenance services
are not a promised service in the current contract, in future contracts with customers the entity would assess
whether it has created a business practice resulting in an implied promise to provide maintenance services.
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Performance obligations satisfied over time
Example 13—Customer simultaneously receives and consumes the benefits
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An entity enters into a contract to provide monthly payroll processing services to a customer for one year. The
promised payroll processing services are accounted for as a single performance obligation. The performance
obligation is satisfied over time because the customer simultaneously receives and consumes the benefits of the entity’s
performance in processing each payroll transaction as and when each transaction is processed. The fact that another entity
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would not need to re-perform payroll processing services for the service that the entity has provided to date also
demonstrates that the customer simultaneously receives and consumes the benefits of the entity’s performance as the
entity performs. The entity recognizes revenue over time by measuring its progress towards complete satisfaction of
that performance obligation in. ha
Example 14—Assessing alternative use and right to payment
An entity enters into a contract with a customer to provide a consulting service that results in the entity providing a
professional opinion to the customer. The professional opinion relates to facts and circumstances that are specific
to the customer. If the customer were to terminate the consulting contract for reasons other than the entity’s failure
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to perform as promised, the contract requires the customer to compensate the entity for its costs incurred plus a
15% margin. The 15% margin approximates the profit margin that the entity earns from similar contracts.
If the entity were to be unable to satisfy its obligation and the customer hired another consulting firm to provide the
opinion, the other consulting firm would need to substantially re-perform the work that the entity had completed
to date, because the other consulting firm would not have the benefit of any work in progress performed by the
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entity. However, the entity’s performance obligation is a performance obligation satisfied over time because of both
of the following factors:
(a) the development of the professional opinion does not create an asset with alternative use to the entity because
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the professional opinion relates to facts and circumstances that are specific to the customer; and
(b) the entity has an enforceable right to payment for its performance completed to date for its costs plus a
reasonable margin, which approximates the profit margin in other contracts.
Example 15—Asset has no alternative use to the entity
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An entity enters into a contract with a customer, a government agency, to build a specialized satellite. The entity
builds satellites for various customers, such as governments and commercial entities. The design and construction
of each satellite differ substantially, on the basis of each customer’s needs and the type of technology that is
incorporated into the satellite.
Although the contract does not preclude the entity from directing the completed satellite to another customer, the
entity would incur significant costs to rework the design and function of the satellite to direct that asset to another
customer. Consequently, the asset has no alternative use to the entity because the customer-specific design of the
satellite limits the entity’s practical ability to readily direct the satellite to another customer.

For the entity’s performance obligation to be satisfied over time when building the satellite, IFRS 15 also requires
the entity to have an enforceable right to payment for performance completed to date. This condition is not
illustrated in this example.
Example 16—Enforceable right to payment for performance completed to date
An entity enters into a contract with a customer to build an item of equipment. The payment schedule in the contract
specifies that the customer must make an advance payment at contract inception of 10% of the contract price,
regular payments throughout the construction period (amounting to 50% of the contract price) and a final payment
of 40% of the contract price after construction is completed and the equipment has passed the prescribed
performance tests. The payments are non-refundable unless the entity fails to perform as promised. If the customer
terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The
entity has no further rights to compensation from the customer.
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Even though the payments made by the customer are non-refundable, the cumulative amount of those payments is
not expected, at all times throughout the contract, to at least correspond to the amount that would be necessary to
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compensate the entity for performance completed to date. This is because at various times during construction the
cumulative amount of consideration paid by the customer might be less than the selling price of the partially
completed item of equipment at that time. Consequently, the entity does not have a right to payment for
performance completed to date. Thus, the entity accounts for the construction of the equipment as a performance
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obligation satisfied at a point in time.
Example 17—Assessing whether a performance obligation is satisfied at a point in time or over time
An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract with the entity
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for a specified unit that is under construction. Each unit has a similar floor plan and is of a similar size, but other
attributes of the units are different (for example, the location of the unit within the complex).
Case A—Entity does not have an enforceable right to payment for performance completed to date
The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails to
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complete construction of the unit in accordance with the contract. The remainder of the contract price is payable on
completion of the contract when the customer obtains physical possession of the unit. If the customer defaults on the contract
before completion of the unit, the entity only has the right to retain the deposit.
The entity does not have an enforceable right to payment for performance completed to date because, until construction
of the unit is complete, the entity only has a right to the deposit paid by the customer. Because the entity does not have a
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right to payment for work completed to date, the entity’s performance obligation is not a performance obligation satisfied
over time. Instead, the entity accounts for the sale of the unit as a performance obligation satisfied at a point in time.
Case B—Entity has an enforceable right to payment for performance completed to date
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The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during
construction of the unit. The contract has substantive terms that preclude the entity from being able to direct the unit to
another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails
to perform as promised. If the customer defaults on its obligations by failing to make the promised progress payments as
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and when they are due, the entity would have a right to all of the consideration promised in the contract if it completes the
construction of the unit. The courts have previously upheld similar rights that entitle developers to require the customer to
perform, subject to the entity meeting its obligations under the contract.
The entity also has a right to payment for performance completed to date. This is because if the customer were to
default on its obligations, the entity would have an enforceable right to all of the consideration promised under the
contract if it continues to perform as promised. Therefore, the terms of the contract and the practices in the legal
jurisdiction indicate that there is a right to payment for performance completed to date. Consequently, the entity has a
performance obligation that it satisfies over time.
Case C—Entity has an enforceable right to payment for performance completed to date
The same facts as in Case B apply to Case C, except that in the event of a default by the customer, either the entity can

require the customer to perform as required under the contract or the entity can cancel the contract in exchange for the
asset under construction and an entitlement to a penalty of a proportion of the contract price.
Notwithstanding that the entity could cancel the contract (in which case the customer’s obligation to the entity would
be limited to transferring control of the partially completed asset to the entity and paying the penalty prescribed), the
entity has a right to payment for performance completed to date because the entity could also choose to enforce its rights to
full payment under the contract. The fact that the entity may choose to cancel the contract in the event the customer
defaults on its obligations would not affect that assessment, provided that the entity’s rights to require the customer
to continue to perform as required under the contract (ie pay the promised consideration) are enforceable.
Measuring progress towards complete satisfaction of a performance obligation
Example 18—Measuring progress when making goods or services available
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An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to any of
its health clubs. The customer has unlimited use of the health clubs and promises to pay Rs. 100 per month.
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The entity determines that its promise to the customer is to provide a service of making the health clubs available for the
customer to use as and when the customer wishes. This is because the extent to which the customer uses the health
clubs does not affect the amount of the remaining goods and services to which the customer is entitled. The entity
concludes that the customer simultaneously receives and consumes the benefits of the entity’s performance as it performs
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by making the health clubs available. Consequently, the entity’s performance obligation is satisfied over time.
The entity also determines that the customer benefits from the entity’s service of making the health clubs available
evenly throughout the year. Consequently, the entity concludes that the best measure of progress towards complete
satisfaction of the performance obligation over time is a time-based measure and it recognizes revenue on a straight-
line basis throughout the year at Rs. 100 per month.
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Example 19—Uninstalled materials
In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new elevators for
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total consideration of Rs. 5 million. The promised refurbishment service, including the installation of elevators, is a
single performance obligation satisfied over time. Total expected costs are Rs. 4 million, including Rs. 1.5 million for
the elevators. A summary of the transaction price and expected costs is as follows:
Rs.
Transaction price 5,000,000
Expected costs:
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Elevators 1,500,000
Other costs 2,500,000
Total expected costs 4,000,000
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The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction of
the performance obligation. The customer obtains control of the elevators when they are delivered to the site in
December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the elevators (Rs.
1.5 million) are significant relative to the total expected costs to completely satisfy the performance obligation (Rs.
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4 million). The entity is not involved in designing or manufacturing the elevators.

The entity concludes that including the costs to procure the elevators in the measure of progress would overstate
the extent of the entity’s performance. Consequently, the entity adjusts its measure of progress to exclude the costs
to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognizes
revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (i.e. at a zero
margin).
As of 31 December 20X2 the entity observes that:
(a) other costs incurred (excluding elevators) are Rs. 500,000; and
(b) performance is 20% complete (i.e. Rs. 500,000 ÷ Rs. 2,500,000).

Consequently, at 31 December 20X2, the entity recognizes the following:

(a) Revenue of Rs. 2,200,000
[20% × Rs. 3,500,000 (i.e. Transaction price excluding cost of elevators) + Rs. 1,500,000]
(b) Cost of goods sold of Rs. 2,000,000
[Rs. 500,000 + Rs. 1,500,000]
Variable consideration
Example 20—Penalty gives rise to variable consideration
An entity enters into a contract with a customer to build an asset for Rs. 1 million. In addition, the terms of the
contract include a penalty of Rs. 100,000 if the construction is not completed within three months of a date specified in
the contract. The entity concludes that the consideration promised in the contract includes a fixed amount of Rs. 900,000
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and a variable amount of Rs. 100,000 (arising from the penalty).
Example 21—Estimating variable consideration
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An entity enters into a contract with a customer to build a customized asset. The promise to transfer the asset is a
performance obligation that is satisfied over time. The promised consideration is Rs. 2.5 million, but that amount will be
reduced or increased depending on the timing of completion of the asset. Specifically, for each day after 31 March 20X7
that the asset is incomplete, the promised consideration is reduced by Rs. 10,000. For each day before 31 March 20X7 that
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the asset is complete, the promised consideration increases by Rs. 10,000. In addition, upon completion of the asset, a
third party will inspect the asset and assign a rating based on metrics that are defined in the contract. If the asset receives
a specified rating, the entity will be entitled to an incentive bonus of Rs. 150,000.
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In determining the transaction price, the entity prepares a separate estimate for each element of variable consideration as
follows:
(a) the entity decides to use the expected value method to estimate the variable consideration associated with the
daily penalty or incentive (i.e. Rs. 2.5 million, plus or minus Rs. 10,000 per day). This is because it is the method that
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the entity expects to better predict the amount of consideration to which it will be entitled.
(b) the entity decides to use the most likely amount to estimate the variable consideration associated with the incentive
bonus. This is because there are only two possible outcomes (Rs. 150,000 or Rs. 0) and it is the method that the entity
expects to better predict the amount of consideration to which it will be entitled.
Constraining estimates of variable consideration
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Sale with right of return

An entity transfers control of a product to a customer and also grants the customer the right to return the product
for various reasons (such as dissatisfaction with the product). To account for the transfer of products with a right
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of return (and for some services that are provided subject to a refund), an entity shall recognise all of the
following:
(a) revenue for the transferred products in the amount of consideration to which the entity expects to be entitled
(therefore, revenue would not be recognised for the products expected to be returned);
(b) a refund liability; and
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(c) an asset (and corresponding adjustment to cost of sales) for its right to recover products from customers on
settling the refund liability.
An entity’s promise to stand ready to accept a returned product during the return period shall not be accounted
for as a performance obligation in addition to the obligation to provide a refund.
An entity shall update the measurement of the refund liability at the end of each reporting period for changes in
expectations about the amount of refunds. An entity shall recognise corresponding adjustments as revenue (or
reductions of revenue).

Example 22—Right of return

An entity enters into 100 contracts with customers. Each contract includes the sale of one product for Rs. 100 (100 total
products × Rs. 100 = Rs. 10,000 total consideration). Cash is received when control of a product transfers. The entity’s
customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund.
The entity’s cost of each product is Rs. 60. Because the contract allows a customer to return the products, the consideration
received from the customer is variable. To estimate the variable consideration, entity applies expected value method and
estimates that 97 products will not be returned.
Upon transfer of control of the 100 products, the entity does not recognize revenue for the three products that it expects
to be returned. Consequently, the entity recognizes the following:
(a) revenue of Rs. 9,700 (Rs. 100 × 97 products not expected to be returned);
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(b) a refund liability of Rs. 300 (Rs. 100 refund × 3 products expected to be returned); and
(c) an asset of Rs. 180 (Rs. 60 × 3 products for its right to recover products from customers on settling the refund).
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Example 23—Price concessions
An entity enters into a contract with a customer, a distributor, on 1 December 20X7. The entity transfers 1,000
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products at contract inception for a price stated in the contract of Rs. 100 per product (total consideration is Rs.
100,000). Payment from the customer is due when the customer sells the products to the end customers. The
entity’s customer generally sells the products within 90 days of obtaining them. Control of the products transfers to
the customer on 1 December 20X7.
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On the basis of its past practices and to maintain its relationship with the customer, the entity anticipates granting
a price concession to its customer because this will enable the customer to discount the product and thereby move
the product through the distribution chain. Consequently, the consideration in the contract is variable.
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Case A—Estimate of variable consideration is not constrained
The entity has significant experience selling this and similar products. The observable data indicate that historically
the entity grants a price concession of approximately 20% of the sales price for these products. Current market
information suggests that a 20% reduction in price will be sufficient to move the products through the distribution
chain. The entity has not granted a price concession significantly greater than 20% in many years. Using the expected
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value method, the entity estimates the transaction price to be Rs. 80,000 (Rs. 80 × 1,000 products).
Despite some uncertainty resulting from factors outside its influence, based on its current market estimates, the
entity expects the price to be resolved within a short time frame. Thus, the entity concludes that it is highly probable
that a significant reversal in the cumulative amount of revenue recognized (i.e. Rs. 80,000) will not occur when the
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uncertainty is resolved (i.e. when the total amount of price concessions is determined). Consequently, the entity
recognizes Rs. 80,000 as revenue when the products are transferred on 1 December 20X7.
Case B—Estimate of variable consideration is constrained
The entity has experience selling similar products. However, the entity’s products have a high risk of obsolescence
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and the entity is experiencing high volatility in the pricing of its products. The observable data indicate that
historically the entity grants a broad range of price concessions ranging from 20%–60% of the sales price for similar
products. Current market information also suggests that a 15%–50% reduction in price may be necessary to move
the products through the distribution chain. Using the expected value method, the entity estimates that a discount
of 40% will be provided and, therefore, the estimate of the variable consideration is Rs. 60,000 (Rs. 60 × 1,000
products).
The entity observes that the amount of consideration is highly susceptible to factors outside the entity’s influence
(i.e. risk of obsolescence) and it is likely that the entity may be required to provide a broad range of price concessions
to move the products through the distribution chain. Consequently, the entity cannot include its estimate of Rs.
60,000 (i.e. a discount of 40%) in the transaction price because it cannot conclude that it is highly probable that a

significant reversal in the amount of cumulative revenue recognized will not occur. Although the entity’s historical
price concessions have ranged from 20%–60%, market information currently suggests that a price concession of
15%–50% will be necessary. Consequently, the entity concludes that it is highly probable that a significant reversal
in the cumulative amount of revenue recognized will not occur if the entity includes Rs. 50,000 in the transaction
price (Rs. 100 sales price and a 50% price concession) and therefore, recognizes revenue at that amount and
reassesses the estimates of the transaction price at each reporting date until the uncertainty is resolved.
Example 24—Volume discount incentive
An entity enters into a contract with a customer on 1 January 20X8 to sell Product A for Rs. 100 per unit. If the customer
purchases more than 1,000 units of Product A in a calendar year, the contract specifies that the price per unit is
retrospectively reduced to Rs. 90 per unit. Consequently, the consideration in the contract is variable.
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For the first quarter ended 31 March 20X8, the entity sells 75 units of Product A to the customer. The entity estimates that
the customer’s purchases will not exceed the 1,000-unit threshold required for the volume discount in the calendar
year. The entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue
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recognized (i.e. Rs. 100 per unit) will not occur when the uncertainty is resolved (i.e. when the total amount of
purchases is known). Consequently, the entity recognizes revenue of Rs. 7,500 (75 units × Rs. 100 per unit) for the quarter
ended 31 March 20X8. In the second quarter ended 30 June 20X8 the entity sells an additional 500 units of Product A to the
customer. In the light of the new fact, the entity estimates that the customer’s purchases will exceed the 1,000-unit
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threshold for the calendar year and therefore it will be required to retrospectively reduce the price per unit to Rs. 90.
Consequently, the entity recognizes revenue of Rs. 44,250 for the quarter ended 30 June 20X8. That amount is calculated
from Rs. 45,000 for the sale of 500 units (500 units × Rs. 90 per unit) less the change in transaction price of Rs. 750 (75
units × Rs. 10 price reduction) for the reduction of revenue relating to units sold for the quarter ended 31 March 20X8.
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Example 25—Management fees subject to the constraint
On 1 January 20X8, an entity enters into a contract with a client to provide asset management services for five years.
The entity receives a 2% quarterly management fee based on the client’s assets under management at the end of
each quarter. In addition, the entity receives a performance-based incentive fee of 20% of the fund’s return in excess
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of the return of an observable market index over the five-year period. Consequently, both the management fee and
the performance fee in the contract are variable consideration.
The entity accounts for the services as a single performance obligation, because it is providing a series of distinct
services that are substantially the same and have the same pattern of transfer. The entity observes that the promised
consideration is dependent on the market and thus is highly susceptible to factors outside the entity’s influence. In
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addition, the incentive fee has a large number and a broad range of possible consideration amounts. The entity also
observes that although it has experience with similar contracts, that experience is of little predictive value in
determining the future performance of the market. Therefore, at contract inception, the entity cannot conclude that
it is highly probable that a significant reversal in the cumulative amount of revenue recognized would not occur if
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the entity included its estimate of the management fee or the incentive fee in the transaction price.
At each reporting date, the entity updates its estimate of the transaction price. Consequently, at the end of each
quarter, the entity concludes that it can include in the transaction price the actual amount of the quarterly
management fee because the uncertainty is resolved. At 31 March 20X8, the client’s assets under management are
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Rs. 100 million. Therefore, the resulting quarterly management fee and the transaction price is Rs. 2 million. At the
end of each quarter, the entity allocates the quarterly management fee to the distinct services provided during the
quarter. This is because the fee relates specifically to the entity’s efforts to transfer the services for that quarter,
which are distinct from the services provided in other quarters. Consequently, the entity recognizes Rs. 2 million as
revenue for the quarter ended 31 March 20X8.
The existence of a significant financing component in the contract
Example 26—Significant financing component and right of return
An entity sells a product to a customer for Rs. 121 that is payable 24 months after delivery. The customer obtains control of
the product at contract inception. The contract permits the customer to return the product within 90 days. The product
is new and the entity has no relevant historical evidence of product returns or other available market evidence. The

cash selling price of the product is Rs. 100 and entity’s cost of the product is Rs. 80.
The entity does not recognize revenue when control of the product transfers to the customer. This is because the existence
of the right of return and the lack of relevant historical evidence means that the entity cannot conclude that it is highly
probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Consequently, revenue
is recognized after three months when the right of return lapses.
The contract includes a significant financing component which is evident from the difference between the amount of
promised consideration of Rs. 121 and the cash selling price of Rs. 100 at the date that the goods are transferred to the
customer. The following journal entries illustrate how the entity accounts for this contract:
(a) When the product is transferred to the customer:
Dr. Asset for right to recover product to be returned Rs. 80
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Cr. Inventory Rs. 80
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(b) During the three-month right of return period, no interest is recognised because no contract asset or receivable has
been recognized.
(c) When the right of return lapses (the product is not returned):
Dr. Receivable Rs. 100
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Cr. Revenue Rs. 100
Dr. Cost of sales Rs. 80 ha

Cr. Asset for product to be returned Rs. 80
Until the entity receives the cash payment from the customer, interest revenue would be recognized.
Example 27—Withheld payments on a long-term contract
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An entity enters into a contract for the construction of a building that includes scheduled milestone payments for
the performance by the entity throughout the contract term of three years. The performance obligation will be
satisfied over time and the milestone payments are scheduled to coincide with the entity’s expected performance.
The contract provides that a specified percentage of each milestone payment is to be withheld (i.e. retained) by the
customer throughout the arrangement and paid to the entity only when the building is complete. The entity
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concludes that the contract does not include a significant financing component. The milestone payments coincide
with the entity’s performance and the contract requires amounts to be retained for reasons other than the provision
of finance. The withholding of a specified percentage of each milestone payment is intended to protect the customer
from the contractor failing to adequately complete its obligations under the contract.
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Example 28—Determining the discount rate

An entity enters into a contract with a customer to sell equipment. Control of the equipment transfers to the
customer when the contract is signed. The price stated in the contract is Rs. 1 million plus a 5% contractual rate of
interest, payable in 60 monthly instalments of Rs. 18,871.
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Case A—Contractual discount rate reflects the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the entity observes
that the 5% contractual rate of interest reflects the rate that would be used in a separate financing transaction
between the entity and its customer at contract inception (i.e. the contractual rate of interest of 5% reflects the
credit characteristics of the customer).The market terms of the financing mean that the cash selling price of the
equipment is Rs. 1 million. This amount is recognized as revenue and as a loan receivable when control of the
equipment transfers to the customer. The entity accounts for the receivable in accordance with IFRS 9.

Case B—Contractual discount rate does not reflect the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the entity observes
that the 5% contractual rate of interest is significantly lower than the 12% interest rate that would be used in a
separate financing transaction between the entity and its customer at contract inception (i.e. the contractual rate
of interest of 5% does not reflect the credit characteristics of the customer). This suggests that the cash selling price
is less than Rs. 1 million.
Thus, the entity determines the transaction price by adjusting the promised amount of consideration to reflect the
contractual payments using the 12% interest rate that reflects the credit characteristics of the customer.
Consequently, the entity determines that the transaction price is Rs. 848,357 (60 monthly payments of CU18,871
discounted at 12%). The entity recognizes revenue and a loan receivable for that amount. The entity accounts for
the loan receivable in accordance with IFRS 9.
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Example 29—Advance payment and assessment of discount rate
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An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two
years (i.e. the performance obligation will be satisfied at a point in time). The contract includes two alternative
payment options: payment of Rs. 5,000 in two years when the customer obtains control of the asset or payment of Rs. 4,000
when the contract is signed. The customer elects to pay Rs. 4,000 when the contract is signed. The entity concludes
that the contract contains a significant financing component because of the length of time between when the customer
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pays for the asset and when the entity transfers the asset to the customer.
The interest rate implicit in the transaction is 11.8%. However, the entity determines that the rate that should be used in
adjusting the promised consideration is 6%, which is the entity’s incremental borrowing rate as well as the prevailing market
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interest rate. The following journal entries illustrate how the entity would account for the significant financing
component:
(a) recognize a contract liability for the Rs. 4,000 payment received at contract inception:
Dr. Cash Rs. 4,000
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Cr. Contract liability Rs. 4,000
(b) during the two years from contract inception until the transfer of the asset, the entity adjusts the promised
amount of consideration and accretes the contract liability by recognizing interest on Rs. 4,000 at 6% for two years:
Rs. 494(*)
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Dr. Interest expense

Cr. Contract liability Rs. 494
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* Rs. 494 = Rs. 4,000 x 1.06 – Rs. 4,000.
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(c) recognize revenue for the transfer of the asset:

Dr. Contract liability Rs. 4,494
Cr. Revenue Rs. 4,494
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Example 30—Advance payment

An entity, a technology product manufacturer, enters into a contract with a customer to provide global telephone
technology support and repair coverage for three years along with its technology product. The customer purchases
this support service at the time of buying the product. Consideration for the service is an additional Rs. 300.
Customers electing to buy this service must pay for it upfront (i.e. a monthly payment option is not available). The
entity charges a single upfront amount, not with the primary purpose of obtaining financing from the customer but,
instead, to maximize profitability, taking into consideration the risks associated with providing the service.
Specifically, if customers could pay monthly, they would be less likely to renew and the population of customers that
continue to use the support service in the later years may become smaller and less diverse over time (i.e. customers
that choose to renew historically are those that make greater use of the service, thereby increasing the entity’s
costs). In addition, customers tend to use services more if they pay monthly rather than making an upfront payment.

Finally, the entity would incur higher administration costs such as the costs related to administering renewals and
collection of monthly payments.
Thus, the entity determines that the payment terms were structured primarily for reasons other than the provision
of finance to the entity and concludes that there is not a significant financing component.
Non-cash consideration
Example 31—Entitlement to non-cash consideration
An entity enters into a contract with a customer to provide a weekly service for one year. In exchange for the service, the
customer promises 100 shares of its common stock per week of service (a total of 5,200 shares for the contract). The terms
in the contract require that the shares must be paid upon the successful completion of each week of service. The
entity measures its progress towards complete satisfaction of the performance obligation as each week of service is
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complete. To determine the transaction price (and the amount of revenue to be recognized), the entity measures the
fair value of 100 shares that are received upon completion of each weekly service. The entity does not reflect any
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subsequent changes in the fair value of the shares received (or receivable) in revenue.
Consideration payable to a customer
Example 32—Consideration payable to a customer
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An entity that manufactures consumer goods enters into a one-year contract to sell goods to a customer that is a large
global chain of retail stores. The customer commits to buy at least Rs. 15 million of products during the year. The contract
also requires the entity to make a non-refundable payment of Rs. 1.5 million to the customer at the inception of the
contract. The Rs. 1.5 million payment will compensate the customer for the changes it needs to make to its shelving to
accommodate the entity’s products.
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The entity concludes that the payment to the customer is not in exchange for a distinct good or service that transfers to
the entity. This is because the entity does not obtain control of any rights to the customer’s shelves. The entity concludes
that the consideration payable is accounted for as a reduction in the transaction price when the entity recognizes revenue
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for the transfer of the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the
transaction price for each good by 10% (Rs. 1.5 million ÷ Rs. 15 million). Therefore, in the first month in which the entity
transfers goods to the customer, the entity recognizes revenue of Rs. 1.8 million (Rs. 2.0 million invoiced amount less Rs. 0.2
million of consideration payable to the customer).
Allocating the transaction price to performance obligations
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Example 33—Allocation methodology

An entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100. The entity will satisfy the
performance obligations for each of the products at different points in time. The entity regularly sells Product A separately
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and therefore the stand-alone selling price is directly observable. The stand-alone selling prices of Products B and C are not
directly observable. Because the stand-alone selling prices for Products B and C are not directly observable, the entity
must estimate them. To estimate the stand-alone selling prices, the entity uses the adjusted market assessment approach for
Product B and the expected cost plus a margin approach for Product C. In making those estimates, the entity maximizes the
use of observable inputs. The entity estimates the stand-alone selling prices as follows:
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Product Stand-alone selling price (Rs.) Method

A 50 Directly observable
B 25 Adjusted market assessment approach
C 75 Expected cost plus margin approach
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The customer receives a discount for purchasing the bundle of goods because the sum of the stand-alone selling prices
(Rs. 150) exceeds the promised consideration (Rs. 100). The entity considers whether it has observable evidence about the
performance obligation to which the entire discount belongs and concludes that it does not. Consequently, the
discount is allocated proportionately across Products A, B and C.

The discount, and therefore the transaction price, is allocated as follows:

Product Allocated transaction price
Rs.
A 33 (Rs. 50 ÷ Rs. 150 × Rs. 100)
B 17 (Rs. 25 ÷ Rs. 150 × Rs. 100)
C 50 (Rs. 75 ÷ Rs. 150 × Rs. 100)
Total 100
Example 34—Allocating a discount
An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone selling prices:
A – Rs.40 B – Rs. 55 C – Rs. 45
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In addition, the entity regularly sells Products B and C together for Rs. 60.
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Case A — Allocating a discount to one or more performance obligations
The entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100. The entity will satisfy
the performance obligations for each of the products at different points in time.
The contract includes a discount of Rs. 40 on the overall transaction, which would be allocated proportionately to all
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three performance obligations when allocating the transaction price using the relative stand-alone selling price
method. However, because the entity regularly sells Products B and C together for Rs. 60 and Product A for Rs. 40, it
has evidence that the entire discount should be allocated to the promises to transfer Products B and C.
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If the entity transfers control of Products B and C at the same point in time, then the entity could, as a practical matter,
account for the transfer of those products as a single performance obligation. That is, the entity could allocate Rs. 60 of the
transaction price to the single performance obligation and recognize revenue of Rs. 60 when Products B and C
simultaneously transfer to the customer.
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If the contract requires the entity to transfer control of Products B and C at different points in time, then the allocated
amount of Rs. 60 is individually allocated to the promises to transfer Product B (stand-alone selling price of Rs. 55)
and Product C (stand-alone selling price of Rs. 45) as follows:
Product Allocated transaction price
Rs.
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B 33 [Rs. 55 x Rs. 60/Rs. 100]

C 27 [Rs. 45 x Rs. 60/Rs. 100]
Total 60
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Case B — Residual approach is appropriate

The entity enters into a contract with a customer to sell Products A, B and C as described in Case A. The contract also includes
a promise to transfer Product D. Total consideration in the contract is Rs. 130. The stand-alone selling price for Product D is
highly variable because the entity sells Product D to different customers for a broad range of amounts (Rs. 15 – Rs. 45).
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Consequently, the entity decides to estimate the stand-alone selling price of Product D using the residual approach.
Before estimating the stand-alone selling price of Product D using the residual approach, the entity determines whether
any discount should be allocated to the other performance obligations.
As in Case A, because the entity regularly sells Products B and C together for Rs. 60 and Product A for Rs. 40, it has
observable evidence that Rs. 100 should be allocated to those three products and a Rs. 40 discount should be allocated to the
promises to transfer Products B and C. Using the residual approach, the entity estimates the stand-alone selling price
of Product D to be Rs. 30 as follows:
Product Stand-alone selling price (Rs.) Method
A 40 Directly observable
B and C 60 Directly observable with discount
D 30 Residual approach

Case C — Residual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is Rs. 105 instead of Rs. 130. Consequently, the
application of the residual approach would result in a stand-alone selling price of Rs. 5 for Product D (Rs. 105 transaction
price less Rs. 100 allocated to Products A, B and C). The entity concludes that Rs. 5 would not faithfully depict the amount of
consideration for Product D. Consequently, the entity reviews its observable data, including sales and margin reports, to
estimate the stand-alone selling price of Product D using another suitable method. The entity allocates the transaction price
of Rs. 105 to Products A, B, C and D using the relative stand-alone selling prices of those products.
Example 35—Allocation of variable consideration
An entity enters into a contract with a customer for two intellectual property licences (Licences X and Y), which the
entity determines to represent two performance obligations each satisfied at a point in time. The stand-alone selling
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prices of Licences X and Y are Rs. 800 and Rs. 1,000, respectively.
Case A—Variable consideration allocated entirely to one performance obligation
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The price stated in the contract for Licence X is a fixed amount of Rs. 800 and for Licence Y the consideration is 3%
of the customer’s future sales of products that use Licence Y. For purposes of allocation, the entity estimates its
sales-based royalties (i.e. the variable consideration) to be Rs. 1,000. To allocate the transaction price, the entity
concludes that the variable consideration (i.e. the sales-based royalties) should be allocated entirely to Licence Y.
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The entity transfers Licence Y at inception of the contract and transfers Licence X one month later. Upon the transfer
of Licence Y, the entity does not recognize revenue because the consideration allocated to Licence Y is in the form
of a sales-based royalty. Therefore, the entity recognizes revenue for the sales-based royalty when those subsequent
sales occur. When Licence X is transferred, the entity recognizes as revenue the Rs. 800 allocated to Licence X.
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Case B—Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence X is a fixed amount of Rs. 300 and for Licence Y the consideration is 5%
of the customer’s future sales of products that use Licence Y. The entity’s estimate of the sales-based royalties (i.e.
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the variable consideration) is Rs. 1,500.
To allocate the transaction price, the entity concludes that even though the variable payments relate specifically to
an outcome from the performance obligation to transfer Licence Y (i.e. the customer’s subsequent sales of products
that use Licence Y), allocating the variable consideration entirely to Licence Y would be inconsistent with the principle
for allocating the transaction price. Allocating Rs. 300 to Licence X and Rs. 1,500 to Licence Y does not reflect a
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reasonable allocation of the transaction price on the basis of the stand-alone selling prices of Licences X and Y of Rs.
800 and Rs. 1,000, respectively.
The entity allocates the transaction price of Rs. 300 to Licences X and Y on the basis of relative stand-alone selling
prices of Rs. 800 and Rs. 1,000, respectively. The entity also allocates the consideration related to the sales-based
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royalty on a relative stand-alone selling price basis. However, when an entity licenses intellectual property in which
the consideration is in the form of a sales-based royalty, the entity cannot recognize revenue until the later of the
following events:
- the subsequent sales occur; or
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- the performance obligation is satisfied (or partially satisfied).

Licence Y is transferred to the customer at the inception of the contract and Licence X is transferred three months
later. When Licence Y is transferred, the entity recognizes as revenue the Rs.167 (Rs. 1,000 ÷ Rs. 1,800 × Rs. 300)
allocated to Licence Y. When Licence X is transferred, the entity recognizes as revenue the Rs. 133 (Rs. 800 ÷ Rs.
1,800 × Rs. 300) allocated to Licence X.
In the first month, the royalty due from the customer’s first month of sales is Rs. 200. Consequently, the entity
recognizes as revenue Rs. 111 (Rs. 1,000 ÷ Rs. 1,800 × Rs. 200) allocated to Licence Y (which has been transferred to
the customer and is therefore a satisfied performance obligation). The entity recognizes a contract liability for the
Rs. 89 (Rs. 800 ÷ Rs. 1,800 × Rs. 200) allocated to Licence X. This is because although the subsequent sale by the

entity’s customer has occurred, the performance obligation to which the royalty has been allocated has not been
satisfied.
Contract costs
Example 36—Incremental costs of obtaining a contract
An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a new customer. The
entity incurred the following costs to obtain the contract:
Rs.
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Commissions to sales employees 10,000
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Total costs incurred 50,000
The entity recognizes an asset for the Rs. 10,000 incremental costs of obtaining the contract arising from the
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commissions to sales employees because the entity expects to recover those costs through future fees for the consulting
services. The entity also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall
profitability of the entity and individual performance evaluations. However, the entity does not recognize an asset for the
bonuses paid to sales supervisors because the bonuses are not incremental to obtaining a contract. The amounts are
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discretionary and are based on other factors, including the profitability of the entity and the individuals’
performance. The bonuses are not directly attributable to identifiable contracts. Also the external legal fees and travel
costs would have been incurred regardless of whether the contract was obtained. Therefore, those costs are recognized
as expenses when incurred. ha
Example 37—Costs that give rise to an asset
An entity enters into a service contract to manage a customer’s information technology data centre for five years.
The contract is renewable for subsequent one-year periods. The average customer term is seven years. The entity
pays an employee a Rs. 10,000 sales commission upon the customer signing the contract. Before providing the
sS
services, the entity designs and builds a technology platform for the entity’s internal use that interfaces with the
customer’s systems. That platform is not transferred to the customer, but will be used to deliver services to the
customer.
Incremental costs of obtaining a contract
rd
The entity recognizes an asset for the Rs. 10,000 incremental costs of obtaining the contract for the sales commission
because the entity expects to recover those costs through future fees for the services to be provided. The entity
amortizes the asset over seven years, because the asset relates to the services transferred to the customer during
the contract term of five years and the entity anticipates that the contract will be renewed for two subsequent one-
ga
year periods.
Costs to fulfill a contract
The initial costs incurred to set up the technology platform are as follows:
Rs.
Re
Design services 40,000

Hardware 120,000
Software 90,000
Migration and testing of data centre 100,000
Total costs 350,000
The initial setup costs relate primarily to activities to fulfil the contract but do not transfer goods or services to the
customer. The entity accounts for the initial setup costs as follows:
(a) hardware costs—accounted for in accordance with IAS 16 Property, Plant and Equipment.
(b) software costs—accounted for in accordance with IAS 38 Intangible Assets.

(c) costs of the design, migration and testing of the data centre—assessed to determine whether an asset can be
recognized for the costs to fulfil the contract. Any resulting asset would be amortized on a systematic basis over
the seven-year period that the entity expects to provide services related to the data centre.
In addition to the initial costs to set up the technology platform, the entity also assigns two employees who are
primarily responsible for providing the service to the customer. Although the costs for these two employees are
incurred as part of providing the service to the customer, the entity concludes that the costs cannot be recognized
as an asset rather the entity recognizes the payroll expense for these two employees when incurred.
Presentation
Example 38—Contract liability and receivable
Case A — Cancellable contract
h
On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to a customer on 31 March 20X9. The
contract requires the customer to pay consideration of Rs. 1,000 in advance on 31 January 20X9. The customer pays the
uk
consideration on 1 March 20X9. The entity transfers the product on 31 March 20X9. The following journal entries illustrate
how the entity accounts for the contract:
(a) The entity receives cash of Rs. 1,000 on 1 March 20X9 (cash is received in advance of performance):
hr
Dr. Cash Rs. 1,000
(b) The entity satisfies the performance obligation on 31 March 20X9:
ha
Case B — Non-cancellable contract
sS
The same facts as in Case A apply to Case B except that the contract is non-cancellable. The following journal entries
illustrate how the entity accounts for the contract:
(a) The amount of consideration is due on 31 January 20X9 (which is when the entity recognizes a receivable because it
has an unconditional right to consideration):
rd
Dr. Receivable Rs. 1,000

(b) The entity receives the cash on 1 March 20X9:
ga
Dr. Cash Rs. 1,000

Cr. Receivable Rs. 1,000
(c) The entity satisfies the performance obligation on 31 March 20X9:
Re

If the entity issued the invoice before 31 January 20X9 (the due date of the consideration), the entity would not
present the receivable and the contract liability on a gross basis in the statement of financial position because the entity
does not yet have a right to consideration that is unconditional.
Example 39—Contract asset recognized for the entity’s performance
On 1 January 20X8, an entity enters into a contract to transfer Products A and B to a customer in exchange for Rs. 1,000. The
contract requires Product A to be delivered first and states that payment for the delivery of Product A is conditional
on the delivery of Product B. In other words, the consideration of Rs. 1,000 is due only after the entity has transferred both

Products A and B to the customer.

The entity identifies the promises to transfer Products A and B as performance obligations and allocates Rs. 400 to the
performance obligation to transfer Product A and Rs. 600 to the performance obligation to transfer Product B on the basis
of their relative stand-alone selling prices. The entity recognizes revenue for each respective performance obligation
when control of the product transfers to the customer. The entity satisfies the performance obligation to transfer
Product A:
Dr. Contract asset Rs. 400

Cr. Revenue Rs. 400
h
The entity satisfies the performance obligation to transfer Product B and to recognize the unconditional right to
consideration:
uk
Dr. Receivable Rs. 1,000
Cr. Contract asset Rs. 400
Cr. Revenue Rs. 600
hr
Example 40—Receivable recognized for the entity’s performance
An entity enters into a contract with a customer on 1 January 20X9 to transfer products to the customer for Rs. 150 per
product. If the customer purchases more than 1 million products in a calendar year, the contract indicates that the price per
unit is retrospectively reduced to Rs. 125 per product. Consideration is due when control of the products transfer to
ha
the customer. Therefore, the entity has an unconditional right to consideration (i.e. a receivable) for Rs. 150 per product until
the retrospective price reduction applies (i.e. after 1 million products are shipped).
In determining the transaction price, the entity concludes at contract inception that the customer will meet the 1 million
products threshold and therefore estimates that the transaction price is Rs. 125 per product. Consequently, upon the first
sS
shipment to the customer of 100 products the entity recognises the following:
Dr. Receivable Rs. 15,000*
Cr. Revenue Rs. 12,500**

rd
Cr. Refund liability (contract liability) Rs. 2,500

* Rs. 150 per product × 100 products.
** Rs. 125 transaction price per product × 100 products.
ga
The refund liability represents a refund of Rs. 25 per product, which is expected to be provided to the customer for the
volume-based rebate.
Re

REVENUE (IFRS-15) - SOLUTIONS (1)
SOLUTIONS
SOLUTION TO QUESTION NO. 1
h
uk
(a) Allocation of transaction price
(i)
Standalone Allocation of Allocation of
Product price Rs. 70,000 to E-2 and E-3 Rs. 90,000 to all
hr
------------------------------ Rs. ---------------------------------
E-1 30,000 30,000 27,000
[90,000 x 30/100]
E-2 30,000 26,250 23,625
ha [70,000 x 30/80] [90,000 x 26.25/100]
E-3 50,000 43,750 39,375
[70,000 x 50/80] [90,000 x 43.75/100]
110,000 100,000 90,000
sS
(ii)
Standalone Allocation of
Product price Rs. 104,000
--------------- Rs. -------------
rd
E-1 30,000 24,000

[104,000 x 30/130]
E-3 100,000 80,000
[50,000 x 2] [104,000 x 100/130]
ga
130,000 104,000
Re
NASIR ABBAS FCA

(c) Transaction price

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts to be collected on behalf of third parties.
Factors affecting determination of the transaction price:
(i) Variable consideration
(ii) Constraints on variable consideration
(iii) Existence of a significant financing components (time value of money)
(iv) Non-cash consideration
(v) Consideration payable to a customer

Trich Mir Limited
Correcting entries for the year ended 31 December 2019
h
S.No. Description Debit Credit
---- Rs. in million ----
uk
(i) Revenues 25–20.66{25×(1.1)–2} 4.34
Receivable 4.34
Receivable 20.66×10%×(3÷12) 0.52
hr
Commission expense 1.60

Amortization expense 1.6÷2×3÷12 0.20
Contract cost
ha 1.40
(ii) Cost of goods sold 15.00

Inventories 15.00
sS
Receivable (30×60%)–11 7.00

Construction revenues 7.00
(iii) Revenues 12–12×16÷(12+8) 2.40

rd
Receivable 2.40
Contract asset (12–2.4) 9.60

Receivable 9.60
ga

Re
NASIR ABBAS FCA

h
uk
hr
(i)
ha
The contract contains two distinct performance obligations i.e. selling the machine and providing the maintenance
services as:
• the customer can separately benefit from the machine without the maintenance services from GW (or GW
sells maintenance services separately) and
sS
• the machine and maintenance services are separately identifiable in the contract.
Thus GW will allocate the transaction price between the two performance obligations as follows:
Revenue related to sale of machine would be recognized at a point in time i.e. upon delivery on 1 August 2018.
While revenue related to maintenance service would be recognized over time i.e. as the services are rendered.
Till 31 December 2018, revenue would be recognized in respect of:
• Sale of machine Rs. 1,530,000
rd
• Maintenance service Rs. 112,500 (i.e Rs. 22,500 for 5 months)

Remaining amount of Rs. 157,500 would appear in liabilities as deferred revenue.
(ii) The contract contains two distinct performance obligations i.e. selling the machine and providing the maintenance
ga
services.
The contract includes a significant financing component in respect of sale of machine which is evident from the
difference between the amount of promised consideration of Rs. 1.95 million and the cash selling price of Rs. 1.7
million.
Re
Revenue related to machine would be recognized upon delivery on 1 October 2018. Revenue related to
maintenance service would be recognized as the services are rendered each month. The difference between
promised consideration and cash selling price of Rs. 250,000 would be recognized as interest revenue over two
years using the implicit rate of 7.1% [(1.95÷1.7) ½ –1].
Till 31 December 2018, revenue would be recognized in respect of:
- Sale of machine Rs. 1,700,000
- Maintenance service Rs. 75,000 i.e Rs. 25,000 for 3 months
- Interest revenue Rs. 30,175 (Rs. 1.7 million × 7.1% × 3/12)
NASIR ABBAS FCA


(i)
Dr. Cr.
Rs. Rs.
1/6/18 Cash [500 x Rs. 200] 100,000
Sales [100,000 x 95%] 95,000
Refund liability [100,000 x 5%] 5,000
(To record sale of 500 units with 5% refund liability)
1/6/18 Cost of sale 71,250

Asset for right to recover products [75,000 x 5%] 3,750
Inventory [500 x Rs. 150] 75,000
(To record cost of sale and expected return)
h
30/6/18 Refund liability 5,000
uk
Cash [Rs. 200 x 20] 4,000
Sales [Rs. 200 x 5] 1,000
(To record refund of units returned and sales)
hr
30/6/18 Cost of sales [5 x Rs. 150] 750
Inventory [20 x Rs. 150] 3,000
Asset for right to recover products 3,750
(To record return of units and cost of sale)
ha
Dr. Dr.
(ii) Rs. Rs.
1/6/18 Cash 100,000
sS
Refund liability 100,000
(To record upfront cash received for goods delivered)
1/6/18
rd
Inventory 75,000
(To record asset for right to recover products)
30/6/18 Refund liability 100,000

ga
Sales [480 x Rs. 200] 96,000

Cash [Rs. 200 x 20] 4,000
(To record refund of units returned and sales)
Re
30/6/18 Cost of sales [480 x Rs. 150] 72,000

(To record cost of sale 7 return of units and cost of sale)

Dr. Cr.
----- Rs. -----
31-12-17 Advance from customer 378,000
Revenue - mobile [15,750 (W-1) x 20] 315,000
Revenue - network usage [18,900 (W-1) x 20 x 2/12] 63,000
[To record revenue at year end]
NASIR ABBAS FCA

W -1 Allocation of transaction price

Standalone prices Rs.
Smart phone 18,000

Network usage for 1 year [1,800 x 12] 21,600
39,600
Allocation of transaction price:
Smart phone (34,650 x 18,000/39,600) 15,750
Net work usage (34,650 x 21,600/39,600) 18,900
34,650
h
(a)
Journal entries - Option 1 (Lump sum payment)
Debit Credit
uk
Date Description
Rs. Rs.
01-Jan-17 Cash 200,000
Contract liability 200,000
[Cash received]
hr
31-Dec-17 Interest expense (W-2) 13,192
Contract liability (200,000 x 6.596%) 13,192
31-Dec-17 Contract liability (W-1)
ha 110,000
Maintenance service revenue 110,000
[Revenue for 2017]
31-Dec-18 Interest expense (W-2) 6,808
sS
31-Dec-18 Contract liability 110,000
[Revenue for 2018]
rd
W-1 Annual service revenue

200,000
= [1−(1+6.596%)−2] = 110,000
6.596%
ga
W-2 Revenue Interest Principal Balance

Date -------------------- Rs. ----------------------
200,000
31-Dec-17 110,000 13,192 96,808 103,192
31-Dec-18 110,000 6,808 103,192 -
Re
Journal entries - Option 2 (Payment at end of each year )

Debit Credit
Date Description
Rs. Rs.
31-Dec-17 Cash 110,000
[Cash received for 1st year service]
31-Dec-18 Cash 110,000
[Cash received for 2nd year service]
NASIR ABBAS FCA

(b) Calculation of Selling price to be allocated to each product

Rs.
Standalone price of product C - 1 100,000
Adjusted Standalone prices of:
C - 2 [170,000/200 x 90] 76,500
C - 3 [170,000/200 x 110] 93,500
270,000
Allocation of transaction price:
C - 1 [260,000/270 x 100] 96,296
C - 2 [260,000/270 x 76.5] 73,667
C - 3 [260,000/270 x 93.5] 90,037
260,000
h
uk
The transaction price should include management’s estimate of the amount of consideration to which the entity will be
entitled for the work performed.
Probability weighted average consideration
Rs. million
hr
Contract price 20.00
Bonus:
[2m x 0.6] 1.20
[2m x 90% x 0.3] 0.54
[2m x 80% x 0.1]
ha 0.16
1.90
21.90
sS
The total transaction price is Rs. 21.90 million based on the probability-weighted estimate. DC will update its estimate at
each reporting date.

It is appropriate for UC to use the most likely amount method to estimate the variable consideration as there is a binary
rd
condition for bonus. The contract’s transaction price is therefore Rs. 275 million [Rs. 250 million + Rs. 25 million] because
it is more likely that UC will receive the bonus. This estimate should be updated each reporting date.

It is appropriate for NC to use the most likely amount method to estimate the variable consideration as there is a binary
ga
condition for penalty. The contract’s transaction price is therefore Rs. 100 million (i.e. ignoring penalty of Rs 10 million)
because it is more likely that penalty will not be deducted. This estimate should be updated each reporting date.

Re
It is appropriate for AC to use the most likely amount method to estimate the variable consideration as there is a binary
condition for bonus. The contract’s transaction price is therefore Rs. 5.5 million [Rs. 5 million + Rs. 0.5 million] because it
is highly likely that AC will receive the bonus.

Dr. Cr.
--------- Rs. --------
01-01-18 Cash [100 x Rs. 500] 50,000
Sales [92 x Rs. 500] 46,000
Refund liability [8 x Rs. 500] 4,000
[Cash received against sale]
NASIR ABBAS FCA

01-01-18 Cost of sales [92 x Rs. 300] 27,600

Asset for right to recover product [8 x Rs. 300] 2,400
Inventory [100 x Rs. 300] 30,000
[Goods delivered to customers]
(a) Dr. Cr.
--------- Rs. --------
30-01-18 Refund liability 4,000
Sales 4,000
[Refund liability expires and revenue recognized]
30-01-18 Cost of sales 2,400
h
Asset for right to recover product 2,400
[Cost of goods recognized]
uk
(b)
Cash [5 x Rs. 500] 2,500
hr
Sales [3 x Rs. 500] 1,500
[Refund made and remaining recognized as revenue]
ha
30-01-18 Cost of sales [3 x Rs. 300] 900
[Goods returned and remained recognized as cost]
sS
(c)
Sale return [2 x Rs. 500] 1,000
rd
Cash [10 x Rs. 500] 5,000

[Refund actually made]
30-01-18 Inventory [10 x Rs. 300] 3,000

ga
Cost of sales [2 x Rs. 300] 600

[Goods returned by customers]
Re

Dr. Cr.
--------- Rs. --------
Cash [130 x Rs. 5,000] 650,000
Sales [130 x Rs. 4,000] 520,000
Refund liability [130 x Rs. 1,000] 130,000
NASIR ABBAS FCA


Dr. Cr.
--------- Rs. --------
Cash [300 x Rs. 5,000] 1,500,000
Sales [300 x Rs. 3,500 – 130 x Rs. 500] 985,000
Refund liability (balancing) 515,000

Dr. Cr.
--------- Rs. --------
h
01-01-18 Receivable 785,124
Sales [W-1] 785,124
uk
[Machine sold]
01-01-18 Cost of sales 400,000

Inventory 400,000
hr
[Cost of machine recognized]
31-12-18 Receivable 78,512

ha
Interest income [785,124 x 10%] 78,512
31-12-19 Receivable 86,364

sS
Interest income [785,124 x 1.1 x 10%] 86,364
31-12-19 Cash 950,000

rd
Receivable 950,000
[Cash received]
ga
W-1
950,000
Present value of sale price = = Rs. 785,124
(1+10%)2

Re
(a) Option I Dr. Cr.

--------- Rs. --------
01-01-18 Cash 800,000
[100% advance received]
31-12-18 Interest expense [800,000 x 9%] 72,000

31-12-19 Interest expense [800,000 x 1.09 x 9%] 78,480

NASIR ABBAS FCA

31-12-19 Contract liability 950,480

Sales 950,480
[Equipment delivered and sale recognized]
(a) Option II
31-12-19 Cash 1,000,000
Sales 1,000,000
[Equipment delivered and sale recognized]
Product A Rs.
Up-front price 37,500
h
Year 1 Interest expense [37,500 x 6%] 2,250
39,750
uk
Year 2 Revenue for Product A 42,135
Product B
hr
Up-front price 112,500
119,250
Year 2
ha
Interest expense [119,250 x 6%] 7,155
126,405
133,989
sS
142,029
Year 5 Revenue for Product B 150,550
rd

Dr. Cr.
--------- Rs. --------
ga
01-01-18 Receivable 96,073

Sales [W-1] 96,073
[Equipment sold and revenue recognized]
01-01-18 Cost of sales 60,000

Re
Inventory 60,000
[Cost of equipment recognized]
31-12-18 Cash 40,000

Receivable [W-2] 28,471
Interest income [W-2] 11,529
[1st installment received]
31-12-19 Cash 40,000

[2nd installment received]
NASIR ABBAS FCA

31-12-20 Cash 40,000

[3rd installment received]
W-1
[1−(1+12%)−3 ]
Present value of installments = 40,000 x
12%
W-2
Installment Interest Principal Balance
Date -------------------- Rs. ----------------------
96,073
h
31-Dec-18 40,000 11,529 28,471 67,602
31-Dec-19 40,000 8,112 31,888 35,714
uk
31-Dec-20 40,000 4,286 35,714 0

Dr. Cr.
hr
--------- Rs. --------
01-01-18 Cash 300,000
[100% upfront fees received]
ha
31-12-18 Interest expense [W-2] 36,000
Contract liability
sS
36,000

Maintenance service income [W-1] 124,905
rd
[Revenue recognized for maintenance service]

ga


Re



NASIR ABBAS FCA

W-1 Annual service revenue

300,000
= [1−(1+12%)−3] = 124,905
12%
W-2
Revenue Interest Principal Balance
Date -------------------- Rs. ----------------------
300,000
31-Dec-18 124,905 36,000 88,905 211,095
31-Dec-19 124,905 25,331 99,573 111,522
31-Dec-20 124,905 13,383 111,522 0
h
uk
Manufacture Co should include the fair value of the materials in the transaction price because it obtains control of them.
The transaction price of the arrangement is therefore Rs. 1.5 million.

The payment made to the customer is not in exchange for a distinct good or service. Therefore, the Rs. 1m paid to the
hr
customer must be treated as a reduction in the transaction price. The total transaction price is essentially being reduced
by 5% (Rs. 1m/ Rs. 20m). Therefore, Golden Gate reduces the price allocated to each good by 5% as it is transferred. By
31 December 2018, Golden Gate should have recognised revenue of Rs. 3.8m (Rs. 4m × 95%).

ha
Mobile Co should account for the payment to Retailer consistent with other purchases of advertising services. The
payment from Mobile Co to Retailer is consideration for a distinct service provided by Retailer and reflects fair value. The
advertising is distinct because Mobile Co could have engaged a third party who is not its customer to perform similar
sS
services. The transaction price for the sale of the phones is Rs. 100,000 and is not affected by the payment made by
Retailer.

Rs.
rd
Stand-alone prices
Boat 300,000
Anchorage 50,000
ga
350,000
Transaction price 325,000
Allocation of price:
Re
Boat [325 x 300/350] 278,571

Anchorage [325 x 50/350] 46,429
325,000

Rs.
Stand-alone prices
Boiler 360,000
Services [50,000 x 1.2] 60,000
420,000
NASIR ABBAS FCA

Boiler [400 x 360/420] 342,857
Services [400 x 60/420] 57,143
400,000

Seller can use the residual approach to estimate the standalone selling price of Product C because Seller has not previously
sold or established a price for Product C. Seller has observable evidence that Products A and B sell for Rs. 25,000 and Rs.
45,000, respectively, for a total of Rs. 70,000. The residual approach results in an estimated standalone selling price of Rs.
30,000 for Product C (Rs. 100,000 total transaction price less Rs. 70,000).

Rs.
h
Adjusted Standalone prices of:
uk
A [250 x 120/260] 115,385
B [250 x 140/260] 134,615
250,000
hr
Revised stand-alone prices
A 115,385
B 134,615
C
ha 130,000
D 150,000
530,000
sS
Allocation of price
A [500 x 115.385/530] 108,853

rd
B [500 x 134.615/530] 126,996

C [500 x 130/530] 122,642
D [500 x 150/530] 141,509
500,000
ga

The only costs that qualify as incremental costs of obtaining a contract are the commissions paid to the sales agents. The
commissions are costs to obtain a contract that Telecom would not have incurred if it had not obtained the contracts.
Re
Telecom should record an asset for the costs, assuming they are recoverable.
All other costs are expensed as incurred. The sales agents’ salaries and the advertising expenses are expenses Telecom
would have incurred whether or not it obtained the customer contracts.

TechCo should recognize the set-up costs incurred at the outset of the contract as an asset since they (1) relate directly
to the contract, (2) enhance the resources of the company to perform under the contract, and relate to future
performance, and (3) are expected to be recovered.
An asset is recognized and amortized on a systematic basis consistent with the pattern of transfer of the tracking and
monitoring services to the customer.
NASIR ABBAS FCA


Application of the five-step process to TeleSouth
(i) Identify the contract with a customer. This is clear. TeleSouth has a twelve-month contract with Angelo.
(ii) Identify the separate performance obligations in the contract. In this case there are two distinct performance
obligations:
(1) The obligation to deliver a handset
(2) The obligation to provide network services for twelve months (The obligation to deliver a handset would
not be a distinct performance obligation if the handset could not be sold separately, but it is in this case
because the handsets are sold separately.)
(iii) Determine the transaction price. The transaction price is straightforward i.e. Rs. 2,400 [12 x Rs. 200]
(iv) Allocate the transaction price to the separate performance obligations in the contract. The transaction price is
allocated to each separate performance obligation in proportion to the standalone selling price at contract
inception of each performance obligation, that is the stand-alone price of the handset (Rs. 500 and the stand-
h
alone price of the network services (Rs. 175 × 12 = Rs. 2,100)
uk
Rs.
Stand-alone prices
Handset 500
Services 2,100
hr
2,600

ha
Handset [2,400 x 500/2,600] 462
Services [2,400 x 2,100/2,600] 1,938
sS
2,400
(v) Recognise revenue when (or as) the entity satisfies a performance obligation, that is when the entity transfers
a promised good or service to a customer. This applies to each of the performance obligations:
(1) When TeleSouth gives a handset to Angelo, it needs to recognize the revenue of Rs. 462.
rd
(2) When TeleSouth provides network services to Angelo, it needs to recognize the total revenue of
Rs. 1,938. It would be reasonable to recognized service revenue on monthly basis.
Journal entries
ga
Dr. Cr.
--------- Rs. --------
01-01-18 Receivable 462
Revenue 462
Re
[Revenue from sale of handset recognized]
31-01-18 Cash 200

Revenue (1,938/12) 162
Receivable (462/12) 38
[Monthly bill received and service revenue recognized]
NASIR ABBAS FCA


Extracts – SOCI Rs. million
Revenue [500 x 80/400] 2 marks 100
Costs 1 mark 80
Extracts – SOFP
Current assets
Contract asset [100 – 75] 2 marks 25
Receivable 1 mark 75

Journal entries Dr. Cr.
------- Rs. million -------
h
01-01-21 PPE 320.00
Cash 320.00
uk
[Purchase of plant]
31-12-21 Contract cost WIP 101.00

Accumulated dep - Plant [320 ÷ 20] 16.00
hr
Cash 85.00
[Construction costs incurred]
ha
31-12-21 Contract asset [154 - 120] 34.00
Receivable 120.00 -
Construction revenue [700 x 22%] 154.00
[Revenue for the year recognized]
sS
31-12-21 Cost of sales (W-1) 97.46

Contract asset WIP 97.46
[Cost of sales for the year recognized]
rd
Extracts - SOCI
Rs. million
ga
Revenue 154.00
Contract cost amortized 97.46
Extracts - SOFP
Re
Non-current assets
PPE [320 - 16] 304.00
Current assets
Contract cost WIP (W-2) 3.54
Receivable 120.00
Contract asset 34.00
NASIR ABBAS FCA

WORKINGS
W-1 Rs. million
Total estimated contract cost:
- Incurred to date (excluding dep) 85.00
- to be incurred (excluding dep) 310.00
- Plant dep [320 x 3/20] 48.00
443.00
Amortized [443 x 22%] 97.46
W-2
Cost incurred to date 101.00
h
Amortized (W-1) (97.46)
c/d balance 3.54
uk
hr
ha
sS
rd
ga
Re
NASIR ABBAS FCA

REVENUE (IFRS-15) - QUESTIONS (1)
PRACTICE QUESTIONS
QUESTION NO. 1
On 1 January 2021, Covaxin Telecom (CT) announced a new annual promotional package for its customers. The package
comprises of a mobile phone, full year unlimited on-net calls and 1,000 minutes per month on other networks. Package
price is Rs. 11,550 per quarter payable in advance on the first day of each quarter. At the end of the contract, the phone
would not be returned to CT.
On the first day of the promotional announcement, CT sold 1,000 packages. Based on the data available with CT, it is
expected that each customer would utilize 10,000 minutes of other networks with quarterly break-up as under:
Quarter ending Minutes

31-Mar-21 2,700
30-Jun-21 2,000
h
30-Sep-21 2,900
31-Dec-21 2,400
uk
The mobile phone has a retail value of Rs. 34,000, if sold separately. A monthly subscription for unlimited on-net calls is
Rs. 500 while every call on other networks is charged at Rs. 1.5 per minute, if billed separately.
Required:
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Compute the quarterly revenue to be recognised for the quarters ending 31 March 2021 and 30 June 2021. (08)
[Q-3, Spr-21]
QUESTION NO. 2
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(a) Stupa Limited (SL) sells electrical products at following standalone prices:
Products Rupees
E-1 30,000
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E-2 30,000
E-3 50,000
Required:
Calculate transaction price to be allocated to each product under each of the following independent situations:
(i) SL offered to sell one unit of each of the above products for Rs. 90,000. SL regularly sells one unit each of E-2 and
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E-3 together for Rs. 70,000. (04)

(ii) SL offered to sell one unit of E-1 and two units of E-3 for Rs. 104,000. (02)
(b) On 1 October 2018, Kushan Construction Limited (KCL) entered into a contract to construct a commercial building for
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a customer for Rs. 50 million and a bonus of Rs. 10 million if the building is completed on or before 31 December
2019.
Till 30 June 2019, KCL expected that the building will be completed within time at a total cost of Rs. 40 million.
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However, due to bad weather and time involved in regulatory approvals, the building was completed on 28 February
2020 at a total cost of Rs. 42 million of which Rs. 26 million was incurred till 30 June 2019.
Required:
Compute profit to be recognized for the years ended 30 June 2019 and 2020, if:
(i) performance obligation under the contract is satisfied over time. (04)
(ii) performance obligation under the contract is satisfied at a point in time. (01)
(c) The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction price.
Define the term ‘transaction price’ and list down the factors that may affect determination of the transaction price.
(04)
[Q-5, Autumn 2020]
NASIR ABBAS FCA

QUESTION NO. 3
Financial statements of Trich Mir Limited (TML) for the year ended 31 December 2019 are under preparation. While
reviewing revenues from contract with customers, following matters have been identified:
(i) On 1 October 2019, TML sold Machine C to Chan Limited for Rs. 25 million. As per the contract, payment would be
made after 2 years. The accountant recognised sales revenue of Rs. 25 million upon delivery on 1 October 2019.
Further, commission paid to sales employees for winning the contract of Rs. 1.6 million was capitalised and is being
amortised over 2 years period. Applicable discount rate is 10% per annum.
(ii) TML entered into a contract to manufacture a specialised machine for Dhan Limited at a price of Rs. 30 million. The
contract meets the criteria of recognition of revenue over time. At the year end, the machine was 60% complete and
it was estimated that a further cost of Rs. 10 million would be incurred. Cost of Rs. 15 million incurred till year end
has been included in closing inventory and receipts of Rs. 11 million have been credited to revenues.
(iii) TML entered into a contract to sell one unit of Machine A and Machine B for a total price of Rs. 16 million. Machine
A was delivered in December 2019 to the customer while Machine B was delivered in January 2020. The consideration
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of Rs. 16 million is due only after TML transfers both the machines to the customer. TML sells machines A and B at
standalone prices of Rs. 12 million and Rs. 8 million respectively. The accountant recognised receivable and revenue
of Rs. 12 million upon delivery of Machine A.
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Required:
Prepare correcting entries for the year ended 31 December 2019 in accordance with IFRS 15. (14)
{Spring 2020, Q # 7}
QUESTION NO. 4
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Thursday Enterprise (TE) is a supplier of product Zee and has provided you the following
information:
(a) On 1 August 2018, TE entered into a six months contract with customer Alpha for sale of Zee for Rs. 250 per unit,
under the following terms and conditions:
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• if Alpha purchases more than 5,000 units during the contract period, the price per unit would be retrospectively
reduced to Rs. 215 per unit.
• TE’s unconditional right to receive consideration would be established upon:
- completion of quality control procedures by Alpha for the first order. The procedure would take a week after
receiving the goods.
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- placement of order by Alpha for subsequent orders.
At the inception of the contract, TE concludes that Alpha’s purchases will not exceed the 5,000 units threshold for
the discount. Alpha placed the following orders:
Order date Units Delivery date Payment date

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[Transfer of control]
10-08-2018 3,000 28-08-2018 12-09-2018
25-12-2018 4,000 15-01-2019 10-01-2019
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(b) On 1 February 2019, TE entered into a six months contract with another customer Beta for sale of Zee for Rs. 250 per
unit, under the following terms and conditions:
• if the Beta purchases more than 15,000 units during the contract period, the price per unit would be
retrospectively reduced to Rs. 215 per unit.
• TE’s unconditional right to receive consideration would be established upon delivery of goods to Beta.
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At the inception of the contract, TE concludes that Beta will meet 15,000 units threshold for the discount. Beta placed
the following orders:
Order date Units Delivery date Payment date
[Transfer of control]
14-02-2019 10,000 25-02-2019 20-03-2019
01-06-2019 8,000 15-07-2019 18-07-2019
Required:
In respect of the above contracts, prepare journal entries to be recorded in the books of TE for the years ended 31
December 2018 and 2019. (Entries without date will not be awarded any marks) (15)
{Autumn 2019, Q # 8}
NASIR ABBAS FCA

QUESTION NO. 5
Guitar World (GW) normally sells Machine A13 for Rs. 1.7 million. Maintenance services for such type of machines are
provided separately at Rs. 25,000 per month. Details of two contracts for sale of Machine A13 are as follows:
(i) On 1 July 2018, GW signed a contract with Energene Limited to sell Machine A13 with one year free maintenance
services at a lumpsum payment of Rs. 1.8 million. The amount was received upon delivery of machine on 1 August
2018.
(ii) On 1 October 2018, GW sold Machine A13 to Vitalene Limited for Rs. 1.95 million. As per the contract, payment would
be made after 2 years. Maintenance services would also be provided for Rs. 25,000 per month for two years which
would be paid at the end of each month.
Required:
With reference to IFRS-15 ‘Revenue from Contracts with Customers’, explain how the above contracts should be recorded
in GW’s books for year ended 31 December 2018. (Show supporting calculations but entries are not required).
(11)
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{Spring 2019, Q # 4(b)}
QUESTION NO. 6
On 1 June 2018 Ravi Limited (RL) delivered 500 units of one of its products to Bravo Limited (BL) at Rs. 200 per unit. BL
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immediately paid the amount and obtained control upon delivery. BL is allowed to return unused units within 30 days and
receive a full refund. RL’s cost of the product is Rs. 150 per unit and it uses perpetual system for recording inventory
transactions.
On 30 June 2018, BL returned 20 units.
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Required:
Prepare necessary journal entries in the books of RL on 1 June 2018 and 30 June 2018 under each of the following
independent situations:
(i) Based upon historical data, RL estimates that 5% units will be returned on expiry of 30 days. (05)
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(ii) The product is new and RL has no relevant historical evidence of product returns or other available market evidence.
(04)
{Autumn 2018, Q # 3}
QUESTION NO. 7
On 1 October 2017, Galaxy Telecommunications (GT) entered into a contract with a bank for supplying 20 smart phones
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to the bank staff with unlimited use of mobile network for one year. The contract price per smart phone is Rs. 34,650 and
the price is payable in full within 10 days from the date of contract. At the end of the contract, the phones will not be
returned to GT.
The entire amount received as per contract was credited by GT to advance from customers account. The smart phones
were delivered on 1 November 2017.
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If sold separately, GT charges Rs. 18,000 for a smart phone and a monthly fee of Rs. 1,800 for unlimited use of mobile
network.
Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with IFRS 15 ‘Revenue from Contracts with
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Customers’. (04)
{Spring 2018, Q # 2 (b)}
QUESTION NO. 8
(a) Jupiter Limited (JL) entered into a two year contract on 1 January 2017, with a customer for the maintenance of
computer network. JL has offered the following payment options:
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Option 1: Immediate payment of Rs. 200,000.

Option 2: Payment of Rs. 110,000 at the end of each year.
The applicable discount rate is 6.596%.
Required:
Prepare journal entries to be recorded in the books of JL under each option over the period of contract. (05)
(b) Pluto Limited (PL) sells industrial chemicals at following standalone prices:
Products Rupees
(per carton)
C-1 100,000
C-2 90,000
C-3 110,000
NASIR ABBAS FCA

PL regularly sells a carton each of C-2 and C-3 together for Rs. 170,000.
Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell one carton of each product for
a total price of Rs. 260,000. (05)
{Autumn 2017, Q # 6}
QUESTION NO. 9
Decent Constructions (DC) enters into a contract with a customer to build an asset for Rs. 20 million with a performance
bonus of Rs. 2 million that will be paid based on the timing of completion. The amount of the performance bonus
decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are
similar to contracts DC has performed previously, and management believes that such experience is predictive for this
contract. DC concludes that the expected value method is most predictive in this case.
DC estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a
30% probability that it will be completed one week late, and a 10% probability that it will be completed two weeks late.
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Required
How should DC determine the transaction price?
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QUESTION NO. 10
United Constructions (UC) enters into a contract to construct a manufacturing facility for a customer. The contract price
was agreed at Rs. 250 million plus a Rs. 25 million bonus only if the facility is completed by a specified date. The contract
is expected to take three years to complete. UC has a long history of constructing similar facilities. UC will receive no
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bonus if the facility is not completed by the specified date. UC believes, based on its experience, that it is 95% likely that
the contract will be completed successfully and in advance of the target date.
Required:
How should UC determine the transaction price?
QUESTION NO. 11
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Newage Constructions (NC) enters into a contract to construct a manufacturing facility for a customer. The contract price
was agreed at Rs. 100 million and a stipulated time period of 2 years was also agreed. To ensure timely completion, a
penalty of Rs. 10 million was agreed which would be deducted from contract price if work is not completed within 2 years.
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NC believes, based on its experience, that it is 80% likely that the contract will be completed successfully and in advance
of the target date.
Required:
How should NC determine the transaction price?
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QUESTION NO. 12
Alpha Consultants (AC) entered into a 1-year contract for book keeping services with a customer. Total contract price was
agreed at Rs. 5 million. It was also agreed that AC will be entitled to an extra Rs. 500,000 if number of mistakes found in
audit are less than 10. AC has experience of providing such services and it is highly probable that mistakes will not exceed
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the acceptable limit.

Required:
How should AC determine the transaction price?
QUESTION NO. 13
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Beta Traders (BT) enters into 100 contracts with customers on January 1, 2018. Each contract includes the sale of one
product for Rs. 500. The cost to BT of each product is Rs. 300. Cash is received upfront and control of the product transfers
on delivery. Customers can return the product within 30 days to receive a full refund. BT can sell the returned products
at a profit.
BT has significant experience in estimating returns for this product. It estimates that 92 products will not be returned.
Required:
How the above transactions should be accounted for if after 30 days:
(a) no refunds are claimed
(b) 5 products are refunded
(c) 10 products are refunded
NASIR ABBAS FCA

QUESTION NO. 14
Gamma Traders (GT) enters into a 1-year contract with a customer to supply standard capacity UPS for office use. The
contract states that price per UPS will be adjusted retroactively once customer reaches certain sale volume as follows:
Cumulative annual sales (UPS) Price (Rs.)

0 – 500 5,000
501 – 800 4,000
801 and above 3,500
Based on past experience and knowledge of customer, GT estimates that sales volume for the year will be 610 UPS. At
the end of first month, customer purchased 130 UPS at a price of Rs. 5,000 per UPS.
Required:
Journal entry to record first month sale.
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QUESTION NO. 15
Using the same situation as in Question 14, at the end of 2nd month customer purchased 300 units at a price of Rs. 5,000
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per UPS. Now GT estimates that cumulative sale volume for the year will be 850 UPS.
Required:
Journal entry to record 2nd month sale.
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QUESTION NO. 16
On January 1, 2018 Gallant Limited (GL) sold a machine to a customer. Control was transferred at the time of delivery.
However customer requested for a special credit of 2 years. Therefore a special price of Rs. 950,000 was charged.
Prevailing market interest rate on that date was 10%. Financial year of GL ends every December 31st. Cost of machine to
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GL was Rs. 400,000. Cash equivalent price of machine was Rs. 750,000.
Required:
All journal entries for above transaction.
QUESTION NO. 17
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On January 1, 2018 Prudent Limited (PL) agreed to sell an equipment to a customer. The customer demanded its delivery
after 2 years. PL will manufacture the equipment at the time of delivery. PL gave two options to customer:
Option I – 100% advance payment of Rs. 800,000 at the time of agreement
Option II – Payment of Rs. 1,000,000 at the time of delivery
Prevailing market interest rate at the date of agreement was 9%.
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Required:
All journal entries for above transaction if customer opts for:
(a) Option I
(b) Option II
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(c)
QUESTION NO. 18
Honest Traders (HT) entered into a contract with a customer to deliver Product A and Product B for Rs. 150,000 payable
up-front. Product A will be delivered in two years and Product B will be delivered in five years.
HT has determined that contract contains two performance obligations; Product A and Product B. Total price of Rs.
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150,000 has been allocated, on the basis of stand-alone prices, to Product A and B at Rs. 37,500 and Rs. 112,500
respectively. HT also concludes that transaction contains significant financing component and interest rate of 6% is
appropriate.
Required:
Calculate annual interest expense till final delivery and amount of revenue recognized for each product.
QUESTION NO. 19
Finance House (FH) sold an equipment, costing Rs. 60,000, to a customer on installment sale basis on January 1, 2018.
Each installment of Rs. 40,000 will be received on every December 31 st for 3 years. Controlled was transferred on delivery.
Applicable market interest rate is 12%. FH prepares its financial statements on 31 st December every year.
Required:
NASIR ABBAS FCA

QUESTION NO. 20
Modern Engineering (ME) entered into a contract for 3-year maintenance services with a manufacturing concern. Same
service will be rendered over 3-year period. Contract required 100% upfront fees of Rs. 300,000 payable at the time of
agreement on January 1, 2018. Prevailing market interest rate for ME is 12%. ME prepares its financial statements on 31st
December every year.
Required:
QUESTION NO. 21
Manufacture Co enters into a contract with Technology Co to build a machine. Technology Co pays Manufacture Co Rs. 1
million and contributes materials to be used in the development of the machine. The materials have a fair value of Rs.
500,000. Technology Co will deliver the materials to Manufacture Co approximately three months after development of
the machine begins. Manufacture Co concludes that it obtains control of the materials upon delivery by Technology Co
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and could elect to use the materials for other projects.
Required:
How should Manufacture Co determine the transaction price?
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QUESTION NO. 22
Golden Gate enters into a contract with a major chain of retail stores. The customer commits to buy at least Rs. 20m of
products over the next 12 months. The terms of the contract require Golden Gate to make a payment of Rs. 1m to
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compensate the customer for changes that it will need to make to its retail stores to accommodate the products. By the
31 December 2018, Golden Gate has transferred products with a sales value of Rs. 4m to the customer.
Required
How much revenue should be recognised by Golden Gate in the year ended 31 December 2018?
QUESTION NO. 23
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Mobile Co sells 1,000 phones to Retailer for Rs. 100,000. The contract includes an advertising arrangement that requires
Mobile Co to pay Rs. 10,000 toward a specific advertising promotion that Retailer will provide. Retailer will provide the
advertising on strategically located billboards and in local advertisements. Mobile Co could have elected to engage a third
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party to provide similar advertising services at a cost of Rs. 10,000.
Required:
How should Mobile Co determine the transaction price?
QUESTION NO. 24
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Marine sells boats and provides mooring facilities for its customers. Marine sells the boats for Rs. 300,000 each and
provides anchorage facilities for Rs. 50,000 per year. Marine concludes that the goods and services are distinct and
accounts for them as separate performance obligations. Marine enters into a contract to sell a boat and one year of
anchorage services to a customer for Rs. 325,000.
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Required:
How should Marine allocate the transaction price of Rs. 325,000 to the performance obligations?
QUESTION NO. 25
Alpha Traders (AT) sells industrial boilers and also provides maintenance services. On January 1, 2018 AT sold a boiler
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along with one year maintenance service at a package price of Rs. 400,000 to a customer. The contract involves two
performance obligations. Boilers are normally sold at a price of Rs. 360,000 and maintenance services are sold at cost plus
20%. Estimated cost of services in this contract will be Rs. 50,000.
Required:
Allocate transaction price to the performance obligations.
QUESTION NO. 26
Seller enters into a contract with a customer to sell Products A, B, and C for a total transaction price of Rs. 100,000. Seller
regularly sells Product A for Rs. 25,000 and Product B for Rs. 45,000 on a standalone basis. Product C is a new product
that has not been sold previously, has no established price, and is not sold by competitors in the market. Products A and
B are not regularly sold together at a discounted price. Product C is delivered on March 1, and Products A and B are
delivered on April 1.
Required:
How should Seller determine the standalone selling price of Product C?
NASIR ABBAS FCA
QUESTION NO. 27
A seller sold four products A, B, C and D (all qualify for separate performance obligation) to a customer at a package price
of Rs. 500,000. It also sells such products on individual basis at following prices:
Products Stand-alone price
(Rs.)
A 120,000
B 140,000
C 130,000
D 150,000
Some customers also normally purchase products A and B at a package price of Rs. 250,000.
Required:
Allocate transaction price of Rs. 500,000 to four performance obligations.
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QUESTION NO. 28
Telecom sells wireless mobile phone and other telecom service plans from a retail store. Sales agents employed at the
store signed 120 customers to two-year service contracts in a particular month. Telecom pays its sales agents commissions
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for the sale of service contracts in addition to their salaries. Salaries paid to sales agents during the month were Rs.
120,000, and commissions paid were Rs. 24,000. The retail store also incurred Rs. 20,000 in advertising costs during the
month.
Required:
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How should Telecom account for the costs?
QUESTION NO. 29
TechCo enters into a contract with a customer to track and monitor payment activities for a five-year period. A
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prepayment is required from the customer at contract inception. TechCo incurs costs at the outset of the contract
consisting of uploading data and payment information from existing systems. The ongoing tracking and monitoring is
automated after customer set up. There are no refund rights in the contract.
Required:
How should TechCo account for the set-up costs?
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QUESTION NO. 30
On 1 January 2018, Angelo enters into a twelve-month ‘pay monthly’ contract for a mobile phone. The contract is with
TeleSouth, and terms of the plan are:
(a) Angelo receives a free handset on 1 January 2018
(b) Angelo pays a monthly fee of Rs. 200, which includes unlimited free minutes. Angelo is billed on the last day of
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the month
Customers may purchase the same handset from TeleSouth for Rs. 500 without the payment plan. They may also enter
into the payment plan without the handset, in which case the plan costs them Rs. 175 per month.
Required:
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Show how TeleSouth should recognise revenue from this plan in accordance with IFRS 15 Revenue from contracts with
customers. Your answer should also give journal entries:
(a) On 1 January 2018
(b) On 31 January 2018
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QUESTION NO. 31
Hassan Builders (HB) entered into a construction contract for construction of a building on January 1, 2017. Total contract
price was agreed at Rs. 500 million. Following information relates to the year ending December 31, 2017:
Rs. million
Contract cost incurred to date 80
Estimated further cost to complete the contract 320
Invoice issued on December 1, 2017 75
(HB has an unconditional right to receive payment against this invoice)
It has been determined that construction of building is single performance obligation and it will be satisfied over time. It
is HB’s policy to measure progress using proportion of cost incurred to date method.
Required:
Prepare extracts of statement of financial position and statement of comprehensive income for the year ending December
31, 2017.
NASIR ABBAS FCA

QUESTION NO. 32
Kamran Builders (KB) signed a contract for construction of an office building for a customer in 3 years. Total contract price
was agreed at Rs. 700 million. Construction was commenced on January 1, 2021 and following information relates the
year ended December 31, 2021:
- A plant was purchased on January 1, 2021 for Rs. 320 million. Its total useful life is estimated to be 20 years. It would
be used throughout the contract period.
- Total costs incurred during the year (excluding plant depreciation) amounted to Rs. 85 million.
- As per contract, 1st invoice was raised on December 31, 2021 for Rs. 120 million which will be received on January 31,
2022.
- At year end, additional total cost (excluding plant depreciation) to be incurred for completion of contract is estimated
at Rs. 310 million.
- Using an appropriate method, progress is estimated at 22% till year end.
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Required:
Journal entries, extracts of SOFP and SOCI for the year ending December 31, 2021.
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NASIR ABBAS FCA

QWL
Extracts - SOCI 2014 2013
------- Rs. million -------
Revenue [2014: 3,000 x 80% - 1,350] [2013: 3,000 x 45%] 1,050.00 1,350.00
Contract cost (W-1) [2014: 2,320 - 1,170] (1,150.00) (1,170.00)
Indirect cost of obtaining the contract - (7.00)
* It is assumed that work certified method faithfully depicts entity's performance
QWL
Extracts - SOFP 2016 2015
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------- Rs. million -------
Non-current assets
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Retention money receivable 120.00 67.50
[2014: 3,000 x 80% x 5%][2013: 3,000 x 45% x 5%]
Current assets
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Contract cost (W-1) 233.00 323.00
Receivable [2014: 100 x 85%][2013: 75 x 85%] 85.00 63.75
Current liabilities
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Contract liability [2014: 3,000 x 20% x 10%][2013: 3,000 x 55% x 10%] 60.00 165.00
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* In absence of detailed information, it is assumed that warranty is not a performance obligation,
therefore, it shall be accounted for as per IAS 37 once warranty period starts.
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WORKINGS
W-1 Contract cost [i.e. Contract WIP] 2014 2013
------- Rs. million -------
b/d 323.00 -
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Cost incurred [2014: 2,560 - 7 - 1,493] [2013: 1,500 - 7] 1,060.00 1,493.00

Amortized [2014: 2,900 x 80% - 1,170][2013: 2,600 x 45%] (1,150.00) (1,170.00)
c/d balance 233.00 323.00
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Note
1) Entire contract amount received in advance is assumed to be a financing arrangement.
2) To avoid complicated calculations, financing arrangement is assumed to relate to building only.
Builders and Developers 2016 2015

Extracts - SOCI ------- Rs. million -------
Revenue from sale of building (W-1) 268.82 -
Revenue from services [7.80 x 6/12] 3.90
Contract cost - sale of building [50 + 80.20 + 32.60 + 5.80] (168.60)
Contract cost - maintenance service (3.00)
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Interest expense (W-1) (11.58) (21.24)
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Builders and Developers 2016 2015
Extracts - SOFP ------- Rs. million -------
Current assets
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Contract cost WIP [50 + (168.60 - 50) x 1/1.5] - 129.07
Non-current liabilities ha
Contract liability [2016: 35.10 - 7.80] [2015: 39 - 3.90] 27.30 35.10
Current liabilities
Contract liability [2015: 257.24(W-1) + 3.90] 7.80 261.14
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WORKINGS
W-1 Transaction price allocation Rs. million
Advance received 275.00
Cash for maintenance [6m x 1.3 x 5] (39.00)
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Cash for sale of building (i.e. residual value basis) 236.00
Building
01-01-15 Advance 236.00
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31-12-15 Interest [236 x 9%] 21.24

257.24
30-06-16 Interest [257.24 x 9% x 6/12] 11.58
268.82
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Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the
period in respect of current tax and deferred tax.
CURRENT TAX
IMPORTANT TERMS
1. Accounting profit is profit or loss for a period before deducting tax expense (i.e. PBT).
2. Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules
established by the taxation authorities, upon which income taxes are payable (recoverable).
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3. Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax
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loss) for a period.
RECOGNITION
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1. Current tax for current and prior periods shall, to the extent unpaid, be recognized as a liability. If the
amount already paid in respect of current and prior periods exceeds the amount due for those
periods, the excess shall be recognized as an asset.
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2. Current tax shall be recognized as follows:
Tax arising from a transaction Current tax shall also be recognized in OCI
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or event which is recognized in
OCI (e.g. equity investment
measured at FV through OCI):
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Tax arising from a transaction Current tax shall also be recognized directly in equity.
or event which is recognized [Tax relating to share based payments is discussed in detail later]
directly in equity (e.g.
adjustment in RE as per IAS 8):
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Otherwise: Current tax shall be recognized in P&L for the period.

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MEASUREMENT
Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected
to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been
enacted or substantively enacted by the end of the reporting period.

Accounting entries for current tax:

(1) Current tax for current year [Accounted for at year end in respect of tax on tax profit for the year]
Dr. Tax expense
Cr. Tax payable
(2) Current tax for prior year [Accounted for after assessment order for any prior year is received]
Dr. Tax expense [Under estimate]
Cr. Tax payable
OR
Dr. Tax payable
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Cr. Tax expense [Over estimate]
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Calculation of current tax for current year – Format:
Rs.
Accounting profit [PBT] XXX
Add: Inadmissible expenses XXX
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Less: Exempt incomes (XXX)
Add / Less: Adjustments for items having different treatments in accounting and tax rules XXX
Less: brought forward tax losses (XXX)
Tax profit XXX
Less: brought forward unused tax credit

ha [Tax profit x applicable tax rate] XXX
(XXX)
Less: tax credit for current year (XXX)
Current tax for current year XXX
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Following assumptions are used for calculation of current tax for current year:
1. Incomes and expenses are taxable / deductible on accrual basis unless specifically mentioned otherwise.
2. Fines and penalties are not deductible for tax purposes.
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3. Tax deduction is not allowed for doubtful debts, rather, it is allowed for bad debts actually written off.
4. Tax deduction is not allowed for provision of expenses (e.g. warranty provision), however, it is allowed when
expenditure is actually incurred.
5. Tax deduction is not allowed for employee cost (under post-employment benefit) for the year, rather, it is
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allowed for benefits actually paid or contributions made (as instructed in question) during the year.
6. Any fair value gain/loss, revaluation gain/loss or impairment recognized in P&L is not allowed for tax
purposes.
7. In case of lease (books of lessee) tax deduction is not allowed for finance charge and depreciation on ROU
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asset, rather full tax deduction is allowed for lease payments.

8. Borrowing cost is capitalized in accordance with IAS 23, however, it is allowed as tax deduction when incurred.
For tax purposes, actual borrowing cost incurred (e.g. contractual coupon payment) is allowed rather than
interest cost using effective interest rate method.
9. Dismantling cost is allowed for tax purposes in full when actually incurred, therefore, finance cost on provision
of dismantling is not allowed for tax purposes.
10. Tax depreciation (also called capital allowance) is calculated on full year basis. Tax depreciation is calculated
on cost of asset for tax purposes (i.e. excluding borrowing cost capitalized and dismantling cost capitalized.)

DEFERRED TAX
IMPORTANT TERMS
1. Deferred tax liabilities [DTL] are the amounts of income taxes payable in future periods in respect of
taxable temporary differences.
2. Deferred tax assets [DTA] are the amounts of income taxes recoverable in future periods in respect
of:
(a) deductible temporary differences;
(b) the carry forward of unused tax losses; and
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(c) the carry forward of unused tax credits.
3. Temporary differences are differences between the carrying amount [CA] of an asset or liability in the
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statement of financial position and its tax base [TB]. Temporary differences may be either:
(a) taxable temporary differences [TTD], which are temporary differences that will result in taxable
amounts in determining taxable profit (tax loss) of future periods when the carrying amount of
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the asset or liability is recovered or settled; or
(b) deductible temporary differences [DTD], which are temporary differences that will result in
amounts that are deductible in determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled.
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Exam note:
Students can identify the differences as taxable or deductible with the help of following guidance:
For Assets For Liabilities
Taxable difference If CA > TB If TB > CA
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Deductible difference If TB > CA If CA > TB
4. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
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Tax base – explained
1) Tax base for assets

For assets whose economic benefits will be For assets whose economic benefits will NOT be
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taxable: taxable:
TB = amount that will be deductible for tax TB = carrying amount

purposes against future taxable economic
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benefits of the asset
Examples
(a) A machine cost 100. For tax purposes, depreciation of 30 has already been deducted in the current
and prior periods and the remaining cost will be deductible in future periods, either as depreciation
or through a deduction on disposal. Revenue generated by using the machine is taxable, any gain
on disposal of the machine will be taxable and any loss on disposal will be deductible for tax
purposes. The tax base of the machine is 70.

(b) Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a
cash basis. The tax base of the interest receivable is nil.
(c) Trade receivables have a carrying amount of 100. The related revenue has already been included in
taxable profit (tax loss). The tax base of the trade receivables is 100.
(d) Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not
taxable. In substance, the entire carrying amount of the asset is deductible against the economic
benefits. Consequently, the tax base of the dividends receivable is 100.
(e) A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax
consequences. The tax base of the loan is 100.
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2) Tax base for liabilities
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For a liability for advance revenue: For all other liabilities:
TB = carrying amount less any amount of the TB = carrying amount less any amount that will be
revenue that will not be taxable in future deductible for tax purposes in respect of that
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periods liability in future periods
Examples ha
(a) Current liabilities include accrued expenses with a carrying amount of 100. The related expense will
be deducted for tax purposes on a cash basis. The tax base of the accrued expenses is nil.
(b) Current liabilities include interest revenue received in advance, with a carrying amount of 100. The
related interest revenue was taxed on a cash basis. The tax base of the interest received in advance
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is nil.
(c) Current liabilities include accrued expenses with a carrying amount of 100. The related expense has
already been deducted for tax purposes. The tax base of the accrued expenses is 100.
(d) Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and
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penalties are not deductible for tax purposes. The tax base of the accrued fines and penalties is 100.
(e) A loan payable has a carrying amount of 100. The repayment of the loan will have no tax
consequences. The tax base of the loan is 100.
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Some items have a tax base but are not recognized as assets and liabilities in the statement of financial
position. For example, research costs are recognized as an expense in determining accounting profit in
the period in which they are incurred but may not be permitted as a deduction in determining taxable
profit (tax loss) until a later period.
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Helpful for exam

Following list of examples is helpful and time saving in exam question for students if they memorize it:
Items Carrying amount Tax base
Assets
Non depreciable land Cost/Revalued amount Cost
Owned depreciable assets As per relevant IAS Tax WDV (i.e. Cost for tax purposes
(e.g. 16/38) less accumulated tax depreciation)

Capital WIP [only borrowing Borrowing cost capitalized to Zero

cost portion] date as per IAS 23
Right of use assets As per relevant IAS (e.g. 16) Zero
Inventory As per IAS 2 Cost (if NRV write-down is not allowed
for tax purposes)
Carrying amount (if NRV write-down is
allowed for tax purposes)
Financial asset As per IFRS 9 Cost (excluding any transaction cost
which is allowed when incurred)
Prepaid expenses As per accrual concept Carrying amount (if related expense is
allowed on accrual basis)
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Zero (if related expense is allowed on
cash basis)
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Accrued income As per accrual concept Carrying amount (if related income is
taxed on accrual basis)
Zero (if related income is taxed on
cash basis)
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Receivable for any income As per accrual concept Carrying amount
exempt from tax
Any expense which has Zero ha Amount, in respect of expense
been paid and will be incurred to date, which will be
allowed for tax purposes in allowed as tax deduction in future
future periods (e.g. research periods.
cost)
Liabilities
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Lease liabilities As per IFRS 16 Zero
Defined benefit obligation As per IAS 19 Zero
Provisions (e.g. warranty) As per IAS 37 Zero
Provision for doubtful debts Best estimate Zero
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Provision/payable for any As per relevant guidance (e.g. Carrying amount

inadmissible expense IAS 37)
Convertible debt (liability As per IAS 32 Initial total amount less principal
component) repayments
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Other borrowings As per IFRS 9 Initial total amount less principal

repayments
Long outstanding liabilities As per relevant IAS Zero
taken as income by tax
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authorities
Dividend payable Declared but not yet paid Carrying amount
Accrued expenses As per accrual concept Carrying amount (if related expense is
allowed on accrual basis)
Zero (if related expense is allowed on
cash basis)
Advance income As per accrual concept Carrying amount (if related income is
taxed on accrual basis)
Zero (if related income is taxed on
cash basis)

RECOGNITION
Deferred tax liability

A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that
the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
Exam note:
An example of such exception is an asset for which transaction no or partial deduction is allowed
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for tax purposes. [ROU asset is not an exception as tax deduction is however allowed for lease
payments]
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Deferred tax asset
A deferred tax asset shall be recognized for:
(1) all deductible temporary differences, unless the deferred tax asset arises from the initial recognition
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of an asset or liability in a transaction which:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
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Exam note:
Only example of such exception is a non-taxable government grant. Whichever method for grant is
followed (i.e. deducting from asset or setting up as deferred income) a deductible difference arises
on initial recognition.
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(2) the carryforward of unused tax losses
(3) the carryforward of unused tax credits
to the extent that it is probable that future taxable profits will be available against which such deductible
differences, unused tax losses and unused tax credits can be utilized. To the extent that it is not probable
that taxable profits will be available, the deferred tax asset is not recognized. However, at end of each
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reporting period, an entity reassesses unrecognized deferred tax assets. The entity recognizes a previously
unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will
allow the deferred tax asset to be recovered.
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Deferred tax shall be recognized as follows:

Tax arising from a transaction or Deferred tax shall also be recognized in OCI
event which is recognized in OCI
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(e.g. Revaluation of PPE):
Tax arising from a transaction or Deferred tax shall also be recognized directly in equity.
event which is recognized directly
in equity (e.g. equity component of
convertible debt):
Otherwise: Deferred tax shall be recognized in P&L for the period.

MEASUREMENT
1. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have
been enacted or substantively enacted by the end of the reporting period. [If future rates are not yet
announced, then year end rates are used].
2. When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities
are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the
periods in which the temporary differences are expected to reverse.
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3. The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences
that would follow from the manner in which the entity expects, at the end of the reporting period, to
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recover or settle the carrying amount of its assets and liabilities.
4. Deferred tax assets and liabilities shall not be discounted.
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Various examples for explanation of tax consequences
Example 1
An item of property, plant and equipment has a carrying amount of 100 and a tax base of 60. A tax rate
of 20% would apply if the item were sold and a tax rate of 30% would apply to other income.
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The entity recognizes a deferred tax liability of 8 (40 at 20%) if it expects to sell the item without further
use and a deferred tax liability of 12 (40 at 30%) if it expects to retain the item and recover its carrying
amount through use.
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Example 2
An item or property, plant and equipment with a cost of 100 and a carrying amount of 80 is revalued
to 150. No equivalent adjustment is made for tax purposes. Cumulative depreciation for tax purposes
is 30 and the tax rate is 30%. If the item is sold for more than cost, the cumulative tax depreciation of
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30 will be included in taxable income but sale proceeds in excess of cost will not be taxable.
The tax base of the item is 70 and there is a taxable temporary difference of 80. If the entity expects to
recover the carrying amount by using the item, it must generate taxable income of 150, but will only be
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able to deduct depreciation of 70. On this basis, there is a deferred tax liability of 24 (80 at 30%). If the
entity expects to recover the carrying amount by selling the item immediately for proceeds of 150, the
deferred tax liability is computed as follows:
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TTD Tax% DTL

Cumulative tax depreciation 30 30% 9
Proceeds in excess of cost 50 - -
Total 80 9
Example 3
The facts are as in example 2, except that if the item is sold for more than cost, the cumulative tax
depreciation will be included in taxable income (taxed at 30%) and the sale proceeds will be taxed at
40%, after deducting an inflation‑adjusted cost of 110.

If the entity expects to recover the carrying amount by using the item, it must generate taxable income
of 150, but will only be able to deduct depreciation of 70. On this basis, the tax base is 70, there is a
taxable temporary difference of 80 and there is a deferred tax liability of 24 (80 at 30%), as in example
2.
If the entity expects to recover the carrying amount by selling the item immediately for proceeds of 150,
the entity will be able to deduct the indexed cost of 110. The net proceeds of 40 will be taxed at 40%. In
addition, the cumulative tax depreciation of 30 will be included in taxable income and taxed at 30%. On
this basis, the tax base is 80 (110 less 30), there is a taxable temporary difference of 70 and there is a
deferred tax liability of 25 (40 at 40% plus 30 at 30%).
Example 4
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An investment property has a cost of 100 and fair value of 150. It is measured using the fair value model
in IAS 40. It comprises land with a cost of 40 and fair value of 60 and a building with a cost of 60 and
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fair value of 90. The land has an unlimited useful life. Cumulative depreciation of the building for tax
purposes is 30. Unrealized changes in the fair value of the investment property do not affect taxable
profit. If the investment property is sold for more than cost, the reversal of the cumulative tax
depreciation of 30 will be included in taxable profit and taxed at an ordinary tax rate of 30%. For sales
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proceeds in excess of cost, tax law specifies tax rates of 25% for assets held for less than two years and
20% for assets held for two years or more.
Because the investment property is measured using the fair value model in IAS 40, there is a rebuttable
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presumption that the entity will recover the carrying amount of the investment property entirely
through sale. If that presumption is not rebutted, the deferred tax reflects the tax consequences of
recovering the carrying amount entirely through sale, even if the entity expects to earn rental income
from the property before sale.
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The tax base of the land if it is sold is 40 and there is a taxable temporary difference of 20 (60 – 40). The
tax base of the building if it is sold is 30 (60 – 30) and there is a taxable temporary difference of 60 (90
– 30). As a result, the total taxable temporary difference relating to the investment property is 80 (20 +
60).
The tax rate is the rate expected to apply to the period when the investment property is realized. Thus,
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the resulting deferred tax liability is computed as follows, if the entity expects to sell the property after
holding it for more than two years:
TTD Tax% DTL
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Cumulative tax depreciation 30 30% 9

Proceeds in excess of cost 50 20% 10
Total 80 19
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If the entity expects to sell the property after holding it for less than two years, the above computation
would be amended to apply a tax rate of 25%, rather than 20%, to the proceeds in excess of cost. If,
instead, the entity holds the building within a business model whose objective is to consume
substantially all of the economic benefits embodied in the building over time, rather than through sale,
this presumption would be rebutted for the building.
However, the land is not depreciable. Therefore, the presumption of recovery through sale would not be
rebutted for the land. It follows that the deferred tax liability would reflect the tax consequences of
recovering the carrying amount of the building through use and the carrying amount of the land through
sale. The tax base of the building if it is used is 30 (60 – 30) and there is a taxable temporary difference
of 60 (90 – 30), resulting in a deferred tax liability of 18 (60 at 30%).

The tax base of the land if it is sold is 40 and there is a taxable temporary difference of 20 (60 – 40),
resulting in a deferred tax liability of 4 (20 at 20%). As a result, if the presumption of recovery through
sale is rebutted for the building, the deferred tax liability relating to the investment property is 22 (18 +
4).
Example 5
The following example deals with the measurement of current and deferred tax assets and liabilities
for an entity in a jurisdiction where income taxes are payable at a higher rate on undistributed profits
(50%) with an amount being refundable when profits are distributed. The tax rate on distributed profits
is 35%. At the end of the reporting period, 31 December 20X1, the entity does not recognize a liability
for dividends proposed or declared after the reporting period. As a result, no dividends are recognized
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in the year 20X1. Taxable income for 20X1 is 100,000. The net taxable temporary difference for the year
20X1 is 40,000.
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The entity recognizes a current tax liability and a current income tax expense of 50,000. No asset is
recognized for the amount potentially recoverable as a result of future dividends. The entity also
recognizes a deferred tax liability and deferred tax expense of 20,000 (40,000 at 50%) representing the
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income taxes that the entity will pay when it recovers or settles the carrying amounts of its assets and
liabilities based on the tax rate applicable to undistributed profits.
Subsequently, on 15 March 20X2 the entity recognizes dividends of 10,000 from previous operating
profits as a liability.
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On 15 March 20X2, the entity recognizes the recovery of income taxes of 1,500 (15% of the dividends
recognized as a liability) as a current tax asset and as a reduction of current income tax expense for
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20X2.
Detailed discussion on certain items:

Business combination
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With limited exceptions, the identifiable assets acquired and liabilities assumed in a business
combination are recognized at their fair values at the acquisition date. For example, when the carrying
amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous
owner, a taxable/deductible temporary difference arises which results in a deferred tax liability/asset.
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This DTL/DTA is considered as an identifiable liability/asset at acquisition date and thus recognized. The
resulting deferred tax liability/asset affects goodwill (i.e. deducted/added in “net assets at acquisition”
in goodwill calculation).
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When inter-company URP eliminations take place in consolidated SOFP, then temporary difference
arises because no corresponding adjustment is made in tax base. As a result, deferred tax is recognized
using buyer’s tax rate.
As a result of a business combination, the probability of realizing a pre‑acquisition deferred tax asset of
the acquirer could change. An acquirer may consider it probable that it will recover its own deferred
tax asset that was not recognized before the business combination. For example, the acquirer may be
able to utilize the benefit of its unused tax losses against the future taxable profit of the acquiree.
Alternatively, as a result of the business combination it might no longer be probable that future taxable
profit will allow the deferred tax asset to be recovered. In such cases, the acquirer recognizes a change

in the deferred tax asset in the period of the business combination, but does not include it as part of
the accounting for the business combination. Therefore, the acquirer does not take it into account in
measuring the goodwill or bargain purchase gain it recognizes in the business combination.
Assets carried at fair value

IFRSs permit or require certain assets to be carried at fair value or to be revalued (e.g. IAS 16, IAS 38,
IAS 40 and IFRS 9). In some jurisdictions, the tax base of the asset is adjusted and no temporary
difference arises. In other jurisdictions, the tax base of the asset is not adjusted. The difference between
the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a
deferred tax liability or asset.
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As already discussed above, if related fair value gain/loss is recognized in OCI then its related deferred
tax is also recognized in OCI. If an entity transfers required amount from revaluation surplus to retained
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earnings, such transfer shall be a net of deferred tax amount.
For example
A building having carrying amount of Rs. 400 is revalued to Rs. 500. Ignoring tax, Rs. 30 out of this gain
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is to be credited to P&L (loss reversal) and remaining Rs. 70 is to be credited to Revaluation surplus
(OCI). Remaining useful life is 10 years. If tax rate is 20% then revaluation entries will be:
Dr. Building 100

Cr. P&L
Cr. Revaluation surplus
30
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56 [70 x 80% i.e. net of tax]
Cr. Deferred tax 14 [70 x 20%]
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Year end:
Dr. Revaluation surplus 5.60
Cr. Retained earnings 5.60
Goodwill
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If goodwill is allowed as a deduction for tax purposes, then any resulting deferred tax liability/asset shall
be recognized. However, if no reduction in goodwill is allowed as deduction for tax purposes, then
taxable temporary difference arises on initial recognition of goodwill. No deferred tax liability shall be
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recognized on such difference (neither initial nor subsequent).
Initial recognition of an asset or liability

If difference arises on initial recognition of the asset or liability:
a) in a business combination – recognize DTL/DTA and include it in goodwill working
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b) if the transaction either affects accounting or tax profit – recognize DTL/DTA

c) if the transaction neither affects accounting nor tax profit – do not recognize DTL/DTA
Convertible debt
In accordance with IAS 32, the issuer of a compound financial instrument (for example, a convertible
bond) classifies the instrument’s liability component as a liability and the equity component as equity.
In some jurisdictions, the tax base of the liability component on initial recognition is equal to the initial
carrying amount of the sum of the liability and equity components. The resulting taxable temporary
difference arises from the initial recognition of the equity component separately from the liability
component.

Consequently, an entity recognizes the resulting deferred tax liability and the deferred tax is charged
directly to the carrying amount of the equity component. Any subsequent changes in the deferred tax
liability are recognized in profit or loss as deferred tax expense (income).
Investments in subsidiaries, branches and associates and interest in joint arrangements

Temporary differences may arise when carrying amount of investment (e.g. using equity method) is
different from the tax base (i.e. cost). An entity shall recognize DTL/DTA on all such differences only if:
- investor does not control the timing of reversal of the temporary difference; and
- it is probable that temporary difference will reverse in foreseeable future.
Share-based payment transactions
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In some tax jurisdictions, an entity receives a tax deduction that relates to remuneration paid in shares,
share options or other equity instruments of the entity. The amount of that tax deduction may differ
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from the related cumulative remuneration expense, and may arise in a later accounting period.
For example, in some jurisdictions, an entity may recognize an expense for the consumption of
employee services received as consideration for share options granted as per IFRS 2, and not receive a
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tax deduction until the share options are exercised, with the measurement of the tax deduction based
on the entity’s share price at the date of exercise.
The difference between the tax base of the employee services received to date (being the amount the
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taxation authorities will permit as a deduction in future periods in respect of services rendered to date),
and the carrying amount of nil, is a deductible temporary difference that results in a deferred tax asset.
If the amount the taxation authorities will permit as a deduction in future periods is not known at the
end of the period, it shall be estimated, based on information available at the end of the period.
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Current and deferred tax should be recognized as follows:
(a) to the extent of “cumulative expense recognized x tax%” is recognized in P&L (i.e. tax on allowable
tax deduction upto the amount of expense charged as per IFRS 2)
(b) any excess amount of tax shall be recognized directly in equity.
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SIC 25 – Changes in the tax status of an entity or its shareholders

A change in the tax status of an entity (e.g. public listing of its shares) or its shareholders (e.g. controlling
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shareholder’s move to a foreign country) does not give rise to increases or decreases in amounts
recognized outside profit or loss. The current and deferred tax consequences of a change in tax status
shall be included in profit or loss for the period, unless those consequences relate to transactions and
events that result, in the same or a different period, in a direct credit or charge to the recognised amount
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of equity or in amounts recognized in other comprehensive income. Those tax consequences that relate
to changes in the recognized amount of equity, in the same or a different period (not included in profit or
loss), shall be charged or credited directly to equity. Those tax consequences that relate to amounts
recognized in other comprehensive income shall be recognized in other comprehensive income.

Calculation of deferred tax for a comprehensive exam question:

Carrying Tax Difference/ Applicable DTL/(DTA)
amount Base Loss tax %
Assets
xxxxx X X X X% X
xxxxx X X X X% X
xxxxx X X X X% X
Liabilities
xxxxx X X X X% X
xxxxx X X X X% X
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xxxxx X X X X% X
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c/f tax loss (X) X% (X)
c/f tax credit (X)
Closing DTL/(DTA) X
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Tips:
- for assets, difference = CA – TB
- for liabilities, difference = TB – CA ha
- Do not include assets/liabilities which are covered under exception, in above calculation.
Calculation of deferred tax expense for the year in a comprehensive exam question:
Deferred tax [DTL / DTA]
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b/d [Opening DTA] X b/d [Opening DTL] X
Tax on OCI (e.g. revaluation downwards) X Tax on OCI (e.g. revaluation upwards) X
Effect of tax rate change on OCI item X Effect of tax rate change on OCI item X
Tax directly credited in equity X Tax directly debited in equity X
Tax expense (– ve expense) (bal.) X Tax expense (+ ve expense) (bal.) X
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c/d [Closing DTL] X c/d [Closing DTA] X
DISCLOSURES
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5 – Deferred tax Opening -------- Recognized during the year ------- Closing
Balance Equity OCI P&L Balance
Deferred tax comprises of: ------------------------------------ Rs. million -------------------------------------
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PPE X X
Investments X X
Deferred tax asset
Defined benefit obligation (X) (X)
Share options (X) (X)
Doubtful debts (X) (X)
c/f loss (X) (X)
X X

15 – Taxation / Tax expense Rs. million

Current tax:
- For current year XXX
- For prior year* [under/(over) estimate] XXX
XXX
Deferred tax:
- Effect of tax rate change (W-1) XXX
- For prior year* XXX
- Relating to differences for the year XXX
XXX
XXX
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Relationship between accounting profit and tax expense:
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Accounting profit [PBT] XXX
Tax [PBT x Applicable tax rate] XXX
Tax for prior year [as above] XXX
Effect of tax rate change [as above] XXX
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Exempt income [Income x Applicable tax rate] (XXX)
Tax credit for current year (XXX)
Permanently inadmissible expense** [Expense x Applicable tax rate] XXX
Benefit arising from a previously unrecognized DTA (XXX)
[Expense or income x difference in tax rate]

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Effect of lower/higher tax rate for expenses / incomes (e.g. dividend) +/- XXX
XXX
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Tax recognized in:
- OCI X
- Directly in equity X
* if tax adjustment is received after assessment in respect of prior year then:

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- it is included in deferred tax if there was b/f tax loss. Such adjustment is made in b/f tax loss in
current tax working
- otherwise it is included in current tax
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** It does not include those expenses for whom deferred tax has been recognized e.g. impairment loss
W-1 Effect of tax rate change

= Opening temporary differences x change in rate%
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It is shown in above note as +/- as follows:
Rate increase Rate decrease

If b/d was a DTL + -
If b/d was a DTA - +

INCOME TAXES (IAS-12) – QUESTIONS (1)
PRACTICE QUESTIONS
Question No. 1
Given below is the statement of comprehensive income of Shakir Industries for the year ended December 31, 2008:
2008
Rs. in million
Sales 143.00
Cost of goods sold (96.60)
Gross profit 46.40
Operating expenses (28.70)
Operating profit 17.70
Other income 3.40
Profit before interest and tax 21.10
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Financial charges (5.30)
Profit before tax 15.80
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Following information is available:
(i) Operating expenses include an amount of Rs. 0.7 million paid as penalty to SECP on non-compliance of certain
requirements of the Companies Act.
(ii) During the year, the company made a provision of Rs. 2.4 million for gratuity. The actual payment on account of
gratuity to outgoing members was Rs. 1.6 million.
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(iii) Lease payments made during the year amounted to Rs. 0.65 million which include financial charges of Rs. 0.15
million. As at December 31, 2008, Lease liability stood at Rs. 1.2 million. The movement in right-of-use assets is
as follows:
Rs. in million
Opening balance – 01/01/2008
ha 2.50
Depreciation for the year (0.7)
Closing balance – 31/12/2008 1.80
(iv) The details of owned fixed assets are as follows:
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Accounting Tax
Rs. in million
Opening balance – 01/01/2008 12.50 10.20
Purchased during the year 5.30 5.30
Depreciation for the year (1.10) (1.65)
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Closing balance – 31/12/2008 16.70 13.85

(v) Capital work-in-progress as on December 31, 2008 include financial charges of Rs. 2.3 million which have been
capitalized in accordance with IAS-23 “Borrowing Costs”. However, the entire financial charges are admissible,
under the Income Tax Ordinance, 2001.
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(vi) Deferred tax liability and provision for gratuity as at January 1, 2008 was Rs. 0.55 million and Rs. 0.7 million
respectively.
(vii) As at December 31, 2008, the company had assessed brought forward tax losses of Rs. 3.5 million.
(viii) Applicable income tax rate is 35%.
Required:
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Based on the available information, compute the current and deferred tax expenses for the year ended December 31,
2008. (15)
{Spring 2009, Q # 5}
Question No. 2
Following information relates to Dynamic Limited for the year ended June 30, 2019:
(i) Property plant and equipment has a net book value at year end of Rs. 24.5 million. During the year equipment having
carrying amount of Rs. 3.5 million was sold at a loss of Rs. 0.1. Tax gain on this sale was Rs. 0.3 million. There was no
other disposal during the year. Additions during the year amount to Rs. 6 million. Tax written down value of property
plant and equipment at start of year was Rs. 19.5 million. Accounting depreciation for the year was Rs.4.75 million
whereas capital allowance for the year was Rs. 7 million.
(ii) Provision for gratuity at start of year was Rs. 8.25 million. During the year a further provision for Rs. 1.5 million was
recognized. Gratuity payments during the year amount to Rs. 5 million.
NASIR ABBAS FCA

(iii) During the year Rs. 0.45 million were spent on advertisement. As per tax rules such expenses are allowed over 3
years on straight line basis.
(iv) Bad debts written off during the year were Rs. 0.1 million whereas bad debt expense charged to profit and loss
during the year was Rs. 0.175 million. Provision for doubtful debts at start of year was Rs. 0.35 million.
(v) Profit before tax for the year amounts to Rs. 6.5 million. It includes an income of Rs. 0.05 million received during the
year which is exempt from tax.
(vi) Corporation tax rate is 35%.
Required:
Calculate current tax expense and deferred tax expense for the year ended June 30, 2019. (15)
Question No. 3
Following are the relevant extracts from the financial statements of Floor & Tiles Limited (FTL) for the year ended 31
December 2015:
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Rs. in million
Profit before tax 80
Provision for gratuity for the year 12
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Bad debt expense for the year 10
Capital gain (exempt from tax) 5
The following information is also available:
(i) Opening balances of deferred tax liability, provision for bad debts and provision for gratuity were Rs. 5.28 million,
hr
Rs. 2 million and Rs. 13 million respectively.
(ii) The cost and other details related to buildings (owned) included in property, plant and equipment are as follows:
Rs. in million
Opening balance (purchased on January 1, 2013) 350
ha
Cost of a building sold on April 30, 2015 (for Rs. 35 million) 30
Purchased on July 1, 2015 40
(iii) Accounting depreciation on buildings is calculated @ 5% per annum on straight line basis whereas tax depreciation
is calculated @ 10% on reducing balance method. Accounting depreciation of all other owned assets included in
sS
property, plant and equipment is same as tax depreciation.
(iv) On 1 January 2015, a machine was acquired on lease. Some of the relevant information is as follows:
 The lease term as well as the useful life is 5 years.
 Annual lease rentals amounting to Rs. 30 million are payable in advance.
 The interest rate implicit in the lease is 12.59%.
 This right of use would be depreciated over its useful life on straight line method.
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(v) On 1 June 2015, an amount of Rs. 1 million was paid as penalty to the provincial government due to non-compliance
of environmental laws.
(vi) The amount of gratuity paid to outgoing members was Rs. 10 million.
(vii) During the year, entertainment expenses and repair expenses amounting to Rs. 6 million and Rs. 8 million
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respectively, pertaining to year ended 31 December 2013 were disallowed. FTL has decided to file appeal only
against the decision regarding repair expenses.
(viii) Applicable tax rate is 32%.
Required:
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Prepare a note on taxation (expense) for inclusion in FTL’s financial statements for the year ended 31 December 2015
giving appropriate disclosures relating to current and deferred tax expenses including a reconciliation to explain the
relationship between tax expense and accounting profit. (17)
{Spring 2016, Q 4}
Question No. 4
Rose Limited (RL) is finalizing its financial statements for the year ended 31 December 2017. In this respect, the following
information has been gathered:
(i) Applicable tax rate is 30% except stated otherwise.
(ii) During the year RL incurred advertising cost of Rs. 15 million.
This cost is to be allowed as tax deduction over 5 years from 2017 to 2021.
(iii) Trade and other payables amounted to Rs. 40 million as on 31 December 2017 which include unearned
commission of Rs. 10 million.
Commission is taxable when it is earned by the company. Tax base of remaining trade and other payables is Rs.
25 million.
NASIR ABBAS FCA
(iv) Other receivables amounted to Rs. 17 million as on 31 December 2017 which include dividend receivable of Rs.
8 million.
Dividend income was taxable on receipt basis at 20% in 2017. However, with effect from 1 January 2018, dividend
received is exempt from tax. Tax base of remaining other receivables is Rs. 6 million.
(v) On 1 April 2017, RL invested Rs. 40 million in a fixed deposit account for one year at 10% per annum. Interest will
be received on maturity.
Interest was taxable on receipt basis at 10% in 2017. However, with effect from 1 January 2018, interest received
is taxable at 15%.
(vi) On 1 January 2016, a machine was acquired on lease for a period of 4 years at annual lease rental of Rs. 28
million, payable in advance. Interest rate implicit in the lease is 10%.
Under the tax laws, all lease related payments are allowed in the year of payment.
(vii) Details of fixed assets are as follows:
• On 1 January 2017 RL acquired a plant at a cost of Rs. 250 million. It has been depreciated on straight
h
line basis over a useful life of six years. RL is also obliged to incur decommissioning cost of Rs. 50 million
at the end of useful life of the plant. Applicable discount rate is 8%.
• On 1 July 2017 RL sold one of its four buildings for Rs. 60 million. These buildings were acquired on 1
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January 2013 at a cost of Rs. 100 million each having useful life of 30 years.
The dismantling costs will be allowed for tax purposes when paid. Tax depreciation rate for all owned fixed assets
is 10% on reducing balance method. Further, full year’s tax depreciation is allowed in year of purchase while no
depreciation is allowed in year of disposal.
hr
Required:
Compute the deferred tax liability/asset to be recognised in RL’s statement of financial position as on 31 December 2017.
(16)
(Q-6, Spr-18)
Question No. 5
ha
Orange Limited (OL) is in the process of finalizing its financial statements for the year ended 30 June 2018. The following
information has been gathered for preparing the disclosures related to taxation:
(i) Profit before tax for the year ended 30 June 2018 was Rs. 508 million.
(ii) Accounting depreciation for the year exceeds tax deprecation by Rs. 45 million.
sS
(iii) During the year, OL sold a machine whose accounting WDV exceeded tax WDV by Rs. 15 million.
(iv) OL carries trademark of Rs. 90 million having indefinite useful life which was acquired on 1 July 2015. Tax
authorities allow its amortization over 10 years on straight line basis.
(v) OL sells goods with a 1-year warranty and it is estimated that warranty expenses are 2% of annual sales. Actual
payments during the year related to warranty claims were Rs. 54 million. Of these, Rs. 38 million pertain to goods
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sold during the previous year. Sales for the year ended 30 June 2018 was Rs. 1,750 million. Under the tax laws,
these expenses are allowed on payment basis.
(vi) During the year, OL expensed out payments of Rs. 17.5 million related to restructuring of one of its business
segments. As per tax laws, these expenses are to be allowed as tax expense over a period of 5 years from 2018
ga
to 2022.
(vii) Expenses include:
• accruals of Rs. 26 million which will be allowed for tax purpose on payment basis.
• cash donations of Rs. 5 million which are not allowed as tax expense.
(viii) Other income includes:
Re
• commission receivable of Rs. 12 million.

• dividend receivable of Rs. 35 million.
Both incomes were taxable on receipt basis at 30% up to 30 June 2018. With effect from 1 July 2018 commission
income is exempt from tax whereas dividend income is taxable at 10% on receipt basis.
(ix) On 30 June 2018, OL received advance rent of Rs. 16 million. Rent income is taxable on receipt basis.
(x) Net deferred tax liability as on 1 July 2017 arose on account of:
Rs. in million
Property, plant and equipment 34.5
Trademark 5.40
Provision for warranty (14.70)
25.20
(xi) Applicable tax rate is 30% except stated otherwise.
NASIR ABBAS FCA

Required:
(a) Prepare a note on taxation for inclusion in OL's financial statements for the year ended 30 June 2018
including a reconciliation to explain the relationship between tax expense and accounting profit. (11)
(b) Compute the deferred tax liability/asset in respect of each temporary difference. (07)
(Comparative figures are not required)
{Autumn 2018, Q # 1}
Question No. 6
Following information relates to Akmal Limited for the year ended December 31, 2019:
(i) Owned property plant and equipment has a net book value of Rs. 28.5 million at December 31, 2019. Tax base of
property, plant and equipment on December 31, 2018 was Rs. 24 million. On January 1, 2019, an owned machine
was sold at fair value of Rs. 9 million (i.e. Rs. 1.8 million higher than its carrying amount). Accumulated accounting
depreciation of the machine at the time of sale was Rs. 3.6 million whereas its accumulated capital allowance at
that date was Rs. 5 million. On the same date, a similar machine was obtained on a lease for four years. Lease
h
rental was agreed at Rs. 2.019 million payable at end of every year with an effective interest rate of 10%.
Additions to owned property, plant and equipment during the year amount to Rs. 3.5 million. Accounting
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depreciation for the year on owned assets was Rs. 2.3 million whereas capital allowance for the year was Rs. 5.2
million.
(ii) During the year Rs. 3 million was incurred on research. Due to deficiency in supporting documents, only Rs. 2.4
million can be claimed as deduction for tax purposes. Such expenses are allowed on straight line basis over 3
years.
hr
(iii) Rent income (i.e. operating lease) is taxed on receipt basis. Rent income recognized during the year was Rs. 0.25
million. Unearned rent income at start and end of year was Rs. 0.1 million and Rs. 0.15 million respectively.
(iv) During the year a pending appeal in respect of tax year 2017 was settled. As a result, tax return was revised and
a tax refund of Rs. 0.3 million was approved. No adjustment in books has been made so far in this respect.
(vi)
ha
Profit before tax for the year amounts to Rs. 18.2 million.
(vii) Corporation tax rate is 35%.
Required:
Prepare “Deferred tax” and “Taxation” notes to the financial statements for the year ending December 31, 2019.
(Comparative information is not required) (22)
sS
Question No. 7
Mercury Water Limited (MWL) is a listed company and is engaged in the business of purifying and marketing of bottled
water.
MWL purchased a bottling plant on 1 July 2006 at a cost of Rs. 90 million. The plant has a useful life of ten years with no
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residual value. Depreciation is provided on straight-line method over the plant’s useful life. MWL revalues its plant at the
end of every two years.
The revalued amounts determined by Jet Valuers, an independent firm of valuers, are as follows:
(i) On 30 June 2008: Rs. 64 million
ga
(ii) On 30 June 2010: Rs. 60 million

However, there was no change in the expected useful life and residual value of the plant.
Profit before tax for the years ended 30 June 2011 and 2010 was Rs. 80 million and Rs. 60 million respectively. The tax
authorities allow tax depreciation at 20% on reducing balance method. There are no temporary or permanent differences
other than those apparent from the above information. The tax rate applicable on MWL is 40%.
Re
Required:
(a) Prepare journal entries to record the effect of revaluation and deferred tax, at the end of each year, up to 30
June 2011. (14)
(b) Prepare a note on taxation for the year ended 30 June 2011 in accordance with International Financial Reporting
Standards. (Comparative figures are required. Accounting policies are not required.) (07)
{Autumn 2011, Q # 5}
Question No. 8
Following information has been gathered for preparing the disclosures related to taxation of Lux Limited (LL) for the year
ended 31 December 2020:
(i) Accounting profit before tax for the year amounted to Rs. 1,270 million.
(ii) Accounting depreciation exceeds tax depreciation by Rs. 100 million (2019: Rs. 150 million). Accounting
depreciation also includes incremental depreciation of Rs. 40 million (2019: Rs. 60 million). As on 1 January 2019,
carrying value of property, plant and equipment exceeded their tax base by Rs. 500 million.
NASIR ABBAS FCA

(iii) Liabilities of LL as at 31 December 2020 include:

- balances of Rs. 100 million (2019: Rs. 70 million) which are outstanding for more than 3 years. As per tax laws,
liabilities outstanding for more than 3 years are added to income and are subsequently allowed as expense
on payment basis.
- unearned commission of Rs. 80 million (2019: Rs. 15 million). Commission is taxable on receipt basis.
(iv) Interest accrued as at 31 December 2020 amounted to Rs. 40 million (2019: Rs. 30 million). Interest income for
the year is Rs. 55 million. Interest income is taxable at 20% on receipt basis.
(v) Expenses include payments of donations of Rs. 50 million (2019: Rs 80 million). Donation is allowable in tax by
200% of actual amount.
(vi) LL recorded an expense of Rs. 35 million (2019: nil) to bring an inventory item to its net realizable value. This
adjustment is not allowable for tax purposes.
(vii) LL acquired 5% equity in Palmolive Limited for Rs. 425 million on 1 August 2020. The investment was classified
at fair value through other comprehensive income. As at 31 December 2020, LL recorded Rs. 65 million as gain
h
for change in fair value. As per tax laws, gain or loss on investment is taxable at the time of sale.
(viii) Applicable tax rate is 30% except stated otherwise.
Required:
uk
(a) Prepare a note on taxation for inclusion in LL’s financial statements for the year ended 31 December 2020 and
a reconciliation to explain the relationship between the tax expense and accounting profit. (09)
(b) Compute deferred tax liability/asset in respect of each temporary difference as at 31 December 2020 and 2019.
(08)
hr
[Q-8, Spr-21]
Question No. 9
Following is the draft balance sheet, before accounting for tax, of Bilal Limited as at December 31, 2019:
Non current assets: Rs.'000
Land
ha 18,000
Building 24,000
Leased vehicles 3,500
sS
65,500
Current assets:
Inventory 1,500
Trade debts 850
Prepayments and other receivables 300
rd
Cash and bank 1,100

3,750
69,250
Capital and reserves:
ga
Share capital (Rs. 10 each) 35,000

Share premium 5,000
Revaluation surplus 3,500
Re
58,385
Non current liabilities:
Provision for Gratuity 920
Deferred tax 6,465
10,035
Current liabilities:
Lease liability 510
Creditors and other liabilities 320
830
69,250
NASIR ABBAS FCA

Other information:
1) Land is carried at revaluation model. It was revalued to Rs. 18 million in 2017. Its fair value at December 31, 2019
is Rs. 18.5 million. However, no adjustment has been made for this revaluation. The revaluation surplus in balance
sheet relates to this land. Effect of rate change has not yet been accounted for.
2) Building was purchased on January 1, 2016. Total useful life of building was 20 years. Tax department allows
depreciation on building @ 10% on straight line basis.
3) Plant is depreciated on straight line basis over a life of 10 years. Plant was purchased on January 1, 2014. Tax
department allows depreciation on plant @ 25% reducing balance basis.
4) During the year Rs. 3 million were incurred on Research cost. Supporting documents relating to Rs. 0.45 million
are not available therefore will not be allowed as deduction by Tax deptt. As it allows only verifiable research
expenses on straight-line basis over three years.
5) Total lease rentals are allowed as deduction when paid. Total payments made during the year include Rs. 425,000
in respect of principal.
h
6) Gratuity expense for the year amounts to Rs. 0.35 million. Provision for gratuity balance at start of 2019 was Rs.
0.7 million.
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8) Depreciation on leased vehicles during the year is Rs. 550,000.
9) Brought forward tax loss amounts to Rs. 850,000.
10) A penalty of Rs. 60,000 was charged during the year. No deduction is available for tax purposes.
11) Profit includes an income of Rs. 40,000 which is exempt from tax.
hr
12) Profit before tax for the year is Rs. 4,200,000.
13) An expense claim has been rejected during 2019 as a result of assessment of 2015. BL will pay tax amounting to
Rs. 45,000 on this expense in 1st quarter of 2020.
14) Tax rate at end of 2018 was 30% and at end of 2019 is 35%.
Required:
ha
Prepare "Tax expense" note for the year ended December 31, 2019. (comparatives not required)
Question No. 10
sS
Following information relates to Irfan Limited (IL) as at December 31, 2018:
Carrying
Tax base
amount
---------- Rs. million --------
Building 180.00 128.00
rd
Plant & machinery 80.00 70.00

Provision for doubtful debts 9.00 -
Provision for gratuity 13.00 -
ga
Other information:
(1) Building was purchased on January 1, 2017. Its useful life was estimated at 20 years. It was revalued on January
1, 2019 to Rs. 216 million. Revaluation will not affect tax depreciation.
(2) Tax depreciation is charged on all fixed assets at 20% reducing balance basis. Accounting depreciation on plant
& machinery for 2019 amounts to Rs. 10 million.
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(3) Provision for gratuity and provision for doubtful debt as at December 31, 2019 amounts to Rs. 20 million and
Rs. 13 million respectively.
(4) Tax rate applicable to IL is 30%.
(5) Carried forward assessed tax losses as at December 31, 2018 were Rs. 20 million.
(6) Tax profit, before adjustment of brought forward losses, for the year 2019 amounts to Rs. 11 million.
Required:
Prepare note on "deferred tax" for inclusion in financial statements for the year ending December 31, 2019.
NASIR ABBAS FCA

Question No. 11
A company issued 5% convertible bonds for a nominal amount of Rs. 50,000 on January 1, 2017. On that date prevailing
market interest rates for comparable bonds without conversion option was 9%. These bonds will be redeemed at par or
converted into 5 ordinary shares per bond after 3 years. Tax rate is 30%.
Required:
Journal entries for all 3 years assuming that investors eventually chose cash redemption.
Question No. 12
A company granted 100 share options each to its 500 employees on January 1, 2016. Options involved a vesting period of
3 years. 40,000 options were eventually exercised on December 31, 2020. Tax deduction for such options was allowed for
intrinsic value on actual exercise of options.
Following detail relates to expense recognized as per IFRS 2 and intrinsic value at each year end:
h
Date Employee service expense Number of options Intrinsic value per option
(Rs.) (Rs.)
31-12-16 188,000 50,000 5
uk
31-12-17 185,000 45,000 8
31-12-18 190,000 40,000 13
31-12-19 40,000 17
31-12-20 40,000 20
hr
Tax rate is 40%.
Required:
Calculate current and deferred tax for each of 5 years.
ha
sS
rd
ga
Re
NASIR ABBAS FCA

INCOME TAXES (IAS-12) – SOLUTIONS (1)
SOLUTIONS
Solution No. 1
Shakir Industries
Current tax expense 2008

Rs. million
Accounting profit 15.80
Add:
Penalty 0.70
Gratuity expense 2.40
Finance charge on lease 0.15
Dep - ROU asset 0.70
Dep - owned assets 1.10
h
Less:
Lease rentals (0.65)
uk
Tax dep - owned assets (1.65)
Borrowing cost capitalized (2.30)
Gratuity paid (1.60)
14.65
hr
b/f losses (3.50)
Taxable profit 11.15
Current tax [11.15 x 35%] 3.90

ha
Deferred tax expense
Closing deferred tax (W-1) 1.49
Opening deferred tax (W-1) 0.55
sS
Deferred tax expense 0.94
(W-1)
CA TB Diff
---------------- Rs. million ---------------
rd
PPE 16.70 13.85 2.85

ROU asset 1.80 - 1.80
Capital WIP 2.30 - 2.30
Provision for gratuity [0.7 + 2.4 - 1.6] 1.50 - (1.50)
ga
Lease liability 1.20 - (1.20)

4.25
DTL 35% 1.49

Re
Solution No. 2
Current tax expense for the year
Rs.'000
Accounting profit 6,500
Accounting depreciation 4,750
Capital allowance (7,000)
Loss on disposal 100
Tax gain on disposal 300
Gratuity expense 1,500
Gratuity paid (5,000)
Advertisement [450 - 150] 300
NASIR ABBAS FCA
Bad debts expense 175

Bad debts written off (100)
Exempt income (50)
1,475
Current tax 35% 516
Deferred tax as at 30-06-19: CA TB Diff

---------------------- Rs.'000 -----------------
----
PPE [W-1] 24,500 15,400 9,100
Advertisement - 300 (300)
Provision for bad debts [350 + 175 - 100] 425 - (425)
h
Provision for Gratuity [8,250 + 1,500 - 5,000] 4,750 - (4,750)
3,625
uk
DTL 35% 1,269
Deferred tax as at 30-06-18: CA TB Diff

---------------------- Rs.'000 -----------------
hr
----
PPE [W-1] 26,750 19,500 7,250
Provision for bad debts 350 - (350)
Provision for Gratuity 8,250 - (8,250)
ha (1,350)
DTA 35% (473)

sS
Deferred tax expense for 2019 [1,269 + 473] 1,741
W-1 PPE CA TB
------ Rs.'000 -------
Year start balance 26,750 19,500
rd
Addition 6,000 6,000

Disposal [3,500 - 100 - 300] (3,500) (3,100)
Depreciation (4,750) (7,000)
ga
Year end balance 24,500 15,400
Solution No. 3
Notes:
No adjustment is needed for tax on repairs disallowed unless decision on appeal is finalized.
Re
Floors & Tiles Limited

Extracts from notes to the financial statements
For the year ended December 31, 2015
TAXATION
Rs. in million
Current tax:
- for current year (W-1) 26.60
- for prior year [6 x 32%] 1.92
Deferred tax (W-4) (2.28)
Tax expenses 26.24
NASIR ABBAS FCA

Reconciliation of relationship between tax expenses & accounting profit

Rs. in million
Tax on accounting profit [80 x 32%] 25.60

Tax for prior year [6 x 32%] 1.92
Tax on inadmissible expense [1 x 32%] 0.32
Tax saving on exempt capital gain [5 x 32%] (1.60)
Tax expense 26.24
{Working notes}
(W-1)
h
Calculation for current tax expense:
uk
Add: Gratuity expense 12.00
Bad debt expense 10.00
Tax gain on building [35 - 24.3] 10.70
hr
Accounting depreciation (W-2) 17.50
Lease interest [(120 - 30) x 12.59%] 11.33
Depreciation on ROU (120 (W-5) /5) 24.00
Penalty 1.00
ha
Less: Tax depreciation (W-3) (29.92)
Accounting gain on building [35 - 26.5] (8.50)
Lease rental (30.00)
sS
Gratuity paid (10.00)
Capital gain (Exempt) (5.00)
Taxable profit 83.11
rd
Current tax @ 32% 26.60

(W-2)
Remaining
Disposed Addition Total
ga
opening
----------- Rs. in million ------------
Cost 30.00 320.00 40.00
Depreciation till 01-01-15 [2 years] (3.00) (32.00) -
Re
Depreciation for the year:

[30 x 5% x 4/12] [320 x 5%] [40 x 5% x 6/12] (0.50) (16.00) (1.00) (17.50)
26.50 272.00 39.00
Disposal (26.50)
- 272.00 39.00 311.00
(W-3)
Remaining
Disposed Addition Total
opening
----------- Rs. in million ------------
Cost 30.00 320.00 40.00
Dep (2013) 10% (3.00) (32.00) -
27.00 288.00 40.00
NASIR ABBAS FCA

Dep (2014) 10% (2.70) (28.80) -

24.30 259.20 40.00
Dep (2015) 10% - (25.92) (4.00) (29.92)
24.30 233.28 36.00
Disposal (24.30)
- 233.28 36.00 269.28
It is assumed that for tax purposes, depreciation is charged on full year basis.
(W-4)
Calculation of deferred tax expense for 2015:
--------------------------- Rs in million ---------------------------
Carrying amount Tax base Difference
h
Building (W-2)(W-3) 311.00 269.28 41.72
Right of use [120 (W-5) - 24] 96.00 - 96.00
uk
Lease liability [120 (W-5) – 30 + 11.33] 101.33 - (101.33)
Provision for gratuity [13 + 12 - 10] 15.00 - (15.00)
Provision for bad debts [2 + 10] 12.00 - (12.00)
Net 9.39
hr
Deferred tax liability @ 32% 3.00
Deferred tax income (5.28 - 3) (2.28)

ha
(W-5)
PV of lease payments = 30 + 30 x annuity factor = Rs. 120 million
sS
Solution No. 4
Note
It is assumed that change in taxation for dividend and interest for 2018 was enacted or substantively enacted at
year end.
rd
Deferred tax as at December 31, 2017

CA TB Diff
----------- Rs. in million ----------
Advertising [15 x 4/5] - 12.00 (12.00)
ga
Other receivable 9.00 6.00 3.00

Dividend receivable 8.00 8.00 -
ROU asset (W-1) 48.82 - 48.82
Plant (W-2) 234.59 225.00 9.59
Building [300 x 25/30] (W-3) 250.00 177.15 72.85
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Unearned commission income 10.00 10.00 -

Trade and other payable 30.00 25.00 (5.00)
Lease liability [48.59 + 4.86](W-1) 53.45 - (53.45)
Provision for dismantling (W-2.1) 34.03 - (34.03)
29.77 [A]
Interest receivable [40 x 10% x 9/12] 3.00 - 3.00 [B]
Deferred tax liability:

[A x 30%] 8.93
[B x 15%] 0.45
9.38
NASIR ABBAS FCA

Workings (All figures in Rs. million)

W-1 Lease
Initial recognition = 28 + 28 x annuity factor of 3 years
= 97.63
ROU asset = 97.63 x 2/4
= 48.82
Lease liability
Date Rental Interest Principal Balance
97.63
01-01-16 28.00 - 28.00 69.63
01-01-17 28.00 6.96 21.04 48.59
01-01-18 28.00 4.86 23.14 25.45
h
W-2 Plant
CA TB
uk
Initial cost:
Purchase cost 250.00 250.00
Dismantling (W-2.1) 31.51 -
281.51 250.00
hr
Depreciation (46.92) (25.00)
ha 234.59 225.00
W-2.1
Initial [50 x (1 + 8%)-6] 31.51
Interest 2017 [31.51 x 8%] 2.52
34.03
sS
W-3 Tax base of building (excluding the sold one)
[300 x (1 - 10%)5 177.15
Solution No. 5
rd
(a)
Notes:
- It is assumed that restructuring relates to current year only and no provision was recognized last year
- It is assumed that change in taxation of dividend and commission is based on tax laws enacted.
ga
Orange Limited
Extracts – Notes
4 – Taxation Rs. million
Re
Current tax (W-1) 162.90

143.30
4.1 - Relationship between tax expense and accounting profit
Tax [508 x 30%] 152.40
Tax on dividend income [35 x 20%] (7.00)
Tax on exempt income [12 x 30%] (3.60)
Tax on inadmissible donation [5 x 30%] 1.50
143.30
-
NASIR ABBAS FCA

W-1 Current tax

PBT 508.00
Excess accounting depreciation 45.00
Excess tax gain on disposal 15.00
Tax amortization on trademark [90/10] (9.00)
Accounting warranty expense [W-1.1] 24.00
Tax warranty claim (54.00)
Accounting restructuring expense 17.50
Tax restructuring expense [17.5 / 5] (3.50)
Accrued expenses 26.00
Donations not allowed 5.00
Exempt commission income (12.00)
Dividend income receivable (35.00)
h
Advance rent 16.00
543.00
uk
Current tax 30% 162.90
Rs. million
W-1.1 Provision for warranty
Opening balance [14.7 / 0.3] 49.00
hr
Expense for the year [balancing] 24.00
Actual expenditure during the year (54.00)
Closing balance [1,750 x 2% - (54 - 38)] 19.00
W-2 Deferred tax expense

ha
Net closing DTL (part b) [2.1 + 3.5] 5.60
Opening DTL 25.20
Deferred tax expense (19.60)
sS
(b)
CA TB Diff DTL / (DTA)
---------------- Rs. million ----------------
PPE (W-3) 30% 55.00 16.50
Trademark [90 x 7/10] 30% 90.00 63.00 27.00 8.10
rd
Restructuring [17.5 x 4/5] 30% - 14.00 (14.00) (4.20)

Provision for warranty 30% 19.00 - (19.00) (5.70)
Accrued expense 30% 26.00 - (26.00) (7.80)
Advance rent 30% 16.00 - (16.00) (4.80)
ga
7.00 2.10
Dividend receivable 10% 35.00 - 35.00 3.50

Re
W-3 PPE difference

Rs. million
Opening balance [34.5 / 0.3] 115.00
Depreciation (45.00)
Disposal (15.00)
Solution No. 6
Notes to the financial statements Rs.'000
1 - Deferred tax
Deferred tax liability comprises of:
PPE 4,200
NASIR ABBAS FCA

Deferred tax asset

Lease (77)
Research cost (560)
Advance rent (53)
3,510
1.1 Movement in deferred tax
Opening balance 3,640
Recognized in P&L:
PPE 525
Lease (77)
Research cost (560)
Rent income (18)
h
(130)
uk
2 – Taxation
Current tax:
- for current year (W-4) 6,710
hr
- for prior year (300)
Deferred tax (W-1.1) (130)

6,280
ha
Relationship between accounting profit and tax expense:
Tax 6,370
sS
Current tax for prior year (300)
Tax on inadmissible expense [600 x 35%] 210
6,280
W - 1 Calculation of deferred tax liability 2019: CA TB Diff Tax
---------------------- Rs.'000 ---------------------
rd
PPE [W-2] 28,500 16,500 12,000 4,200

ROU [6,400 (W-3) - 1,600 (W-4)] 4,800 - 4,800 1,680
Research [2,400 x 2/3] - 1,600 (1,600) (560)
Lease [W-3] 5,021 - (5,021) (1,757)
ga
Advance rent 150 - (150) (53)

10,029 3,510
W - 1.1 Calculation of deferred tax liability 2018: CA TB Diff Tax

Re
---------------------- Rs.'000 ---------------------

PPE [W-2] 34,500 24,000 10,500 3,675
Advance rent 100 - (100) (35)
10,400 3,640
Deferred tax expense [3,510 - 3,640] (130)
W - 2 PPE CA TB
-------- Rs.'000 ---------
Year start balance 34,500 24,000
Addition 3,500 3,500
Disposal [9,000 - 1,800] [7,200 + 3,600 - 5,000] (7,200) (5,800)
NASIR ABBAS FCA
Depreciation (2,300) (5,200)

Year end balance 28,500 16,500
W - 3 Lease liability
Date Open. bal. Rental Interest Principal Clos. bal.
31-12-19 6,400 2,019 640 1,379 5,021
[2,019 x annuity factor]
W - 4 Current tax for current year

Rs.'000
Accounting depreciation 2,300
Capital allowance (5,200)
h
Depreciation on ROU [6,400 (W-3) /4] 1,600
Interest on lease (W-3) 640
uk
Lease rental (2,019)
Accounting gain on disposal (1,800)
Tax gain on disposal [9,000 - 5,800 (W-2)] 3,200
Research cost 3,000
hr
Allowable research cost [2,400 / 3] (800)
Rent income (250)
Rent received [150 + 250 - 100] 300
19,171
Current tax 35%
ha 6,710
Solution No. 7
sS
(a)
Mercury Water Limited
Journal entries
Rs.'000 Rs.'000
rd
30-Jun-07 Tax expense (W-2) 3,600

Deferred tax 3,600
(Deferred tax expense for the year)
ga
30-Jun-08 Accumulated depreciation 18,000

Plant 18,000
(Elimination on revaluation)
30-Jun-08 Revaluation loss (W-1) 8,000

Re
Plant 8,000
(Revaluation loss recorded)
30-Jun-08 Deferred tax 1,040
Tax expense (W-2) 1,040
Deferred tax 1,408
30-Jun-10 Accumulated depreciation 16,000

Plant 16,000
(Elimination on revaluation)
NASIR ABBAS FCA

30-Jun-10 Plant (W-1) 12,000

Revaluation loss (P&L) (W-3) 6,000
Revaluation surplus (W-1) 3,600
Deferred tax (W-1) 2,400
(Revaluation of plant)
Deferred tax 2,886
30-Jun-11 Revaluation surplus (W-1) 600

Retained earnings 600
(transfer of incremental depreciation)
30-Jun-11 Deferred tax 1,051
h
Tax expense (W-2) 1,051
uk
(b)
Taxation 2011 2010
Rs. '000 Rs. '000
hr
Current (W-4) 33,051 21,114
Deferred (W-3) (1,051) 2,886
32,000 24,000
ha
Reconciliation between tax expense and accounting profit
2011 2010
Rs. '000 Rs. '000
Accounting profit 80,000 60,000
sS
Tax @ 40% 32,000 24,000
Tax expense 32,000 24,000
Carrying Gross Tax on Net Tax Temp.

rd
P&L DTL
W-1 amount surplus surplus surplus base difference
---------------------------------------------------- Rs. '000 ------------------------------------------------
[A] [B] [C = A - B] [C x 40%]
1-7-06 Cost 90,000 90,000
ga
30-6-07 Dep [90/10] (9,000) - (18,000)

30-6-07 81,000 72,000 9,000 3,600
30-6-08 Dep (9,000) - (14,400)
30-6-08 72,000 57,600
Re
30-6-08 Reval. Loss (8,000) (8,000) -

30-6-08 64,000 (8,000) 57,600 6,400 2,560
30-6-09 Dep [64/8] (8,000) 1,000 - (11,520)
30-6-09 56,000 (7,000) 46,080 9,920 3,968
30-6-10 Dep (8,000) 1,000 - (9,216)
30-6-10 48,000 (W-3) (6,000) 36,864
30-6-10 Reval. Gain 12,000 6,000 6,000 2,400 3,600
30-6-10 60,000 6,000 - 3,600 36,864 23,136 9,254
30-6-11 Dep [60/6] (10,000) (1,000) - (600) (7,373)
30-6-11 50,000 5,000 - 3,000 29,491 20,509 8,204
NASIR ABBAS FCA

W-2 Op. DTL Revaluation Cl. DTL Tax expense

[1] [2] [3] [3 - 1 - 2]
--------------------- Rs. '000 -----------------------------
30-6-07 - - 3,600 3,600
30-6-08 3,600 - 2,560 (1,040)
30-6-09 2,560 - 3,968 1,408
30-6-10 3,968 2,400 9,254 2,886
30-6-11 9,254 - 8,204 (1,051)
2011 2010
W-3 Rs. '000 Rs. '000
h
Profit before tax 80,000 60,000
Accounting depreciation 10,000 8,000
uk
Tax depreciation (7,373) (9,216)
Revaluation loss reversed - (6,000)
Tax profit 82,627 52,784
Tax @ 40% 33,051 21,114
hr
Solution No. 8
(a)
Lux Limited
Notes
ha
For the year ending December 31, 2020
Taxation Rs. million
Current tax (W-1) 427.50
sS
360.50
Relationship between tax expense and accounting profit
Accounting profit 1,270.00
Tax [1,270 x 30%] 381.00
rd
Tax on extra donation [50 x 30%] (15.00)

Lower tax rate on interest [55 x 10%] (5.50)
360.50
ga
Tax recognized in OCI:

Deferred tax 19.50
-
W-1 Current tax
Re
Accounting profit 1,270.00

Excess accounting depreciation 100.00
Liability treated as income for the year [100 - 70] 30.00
Commission receipt [80 - 15] 65.00
Interest income (55.00)
Extra allowance for donation (50.00)
NRV write-down disallowed 35.00
1,395.00
Normal tax [1,395 x 30%] 418.50
Tax on interest received [45* x 20%] 9.00
427.50
* Interest received = 30 + 55 - 40 = 45
NASIR ABBAS FCA

W-2 Deferred tax

Opening balance [Part (b)] 85.50
Recognized in OCI [65 x 30%] 19.50
Recognized in P&L (balancing) (67.00)
Closing balance [Part (b)] 38.00
(b)
Deferred tax liability/(asset) as at 31-Dec-19
CA TB Diff Tax rate DTL/((DTA)
-------------------------------- Rs. million --------------------------------------
PPE (W-3) 350.00 30% 105.00
h
Interest receivable 30.00 - 30.00 20% 6.00
Long outstanding liabilities 100.00 30.00 (70.00) 30% (21.00)
uk
Unearned commission 15.00 - (15.00) 30% (4.50)
85.50
hr
Deferred tax liability/(asset) as at 31-Dec-20
CA TB Diff Tax rate DTL/((DTA)
ha
-------------------------------- Rs. million --------------------------------------
PPE (W-3) 250.00 30% 75.00
Investment [425 + 65] 490.00 425.00 65.00 30% 19.50
Inventory - 35.00 (35.00) 30% (10.50)
sS
Interest receivable 40.00 - 40.00 20% 8.00
Long outstanding liabilities 100.00 - (100.00) 30% (30.00)
Unearned commission 80.00 - (80.00) 30% (24.00)
38.00
rd
W-3 PPE Difference

(Rs. million)
Bal. as on 01-01-19 500.00
ga
Bal. as on 31-12-19 350.00
Bal. as on 31-12-20 250.00
Re
Solution No. 9
Tax expense Rs.'000
Current tax:
- for current year (W-1) 2,240
- for prior year 45
2,285
Deferred:
Effect of rate change [6,465 x 5/30 - 250 (W-2)] 827
Relating to differences during the year (605)
(W-2) 222
2,507
NASIR ABBAS FCA

Relationship between tax expense and accounting profit

Tax [4,200 x 35%] 1,470
Prior year current tax 45
Effect of rate change 827
Inadmissible expense [(450 + 60) x 35%] 179
Exempt income [40 x 35%] (14)
2,507
W-1 Current tax

Rs.'000
Profit 4,200
h
Depreciation - building [24,000 /16] 1,500
Depreciation - P&M [20,000 / 4] 5,000
Depreciation - Leased vehicle 550
uk
Tax depreciation - building [1,500 x 2] (3,000)
Tax depreciation - P&M [5,000 x 10 x 0.755 x 0.25] (2,966)
Research cost 3,000
Tax deduction for research [(3,000 - 450)/3] (850)
hr
Gratuity expense 350
Gratuity paid [920 - 700 - 350] (130)
Principal repayment (425)
Exempt income (40)
Penalty
ha 60
7,249
b/f tax loss (850)
6,399
sS
Current tax [6,399 x 35%] 2,240
W-2 Deferred tax CA TB Diff

--------------- Rs.'000 -----------------
Land [TB = 18,000 - 3,500/0.7] 18,500 13,000 5,500
rd
Building 24,000 18,000 6,000

P&M [5,000 x 10 x 0.756] 20,000 8,899 11,101
Leased vehicles 3,500 - 3,500
Research cost - 1,700 (1,700)
ga
Provision for Gratuity 920 - (920)

Lease liability 3,160 - (3,160)
Creditors and other liabilities 320 320 -
20,321
Re
DTL [20,321 x 35%] 7,112
DTL
Rs.,000 Rs.'000
b/d 6,465
OCI (rate change) 250
[3,500 x 5/70] OR [1,500 x 5/30]
OCI [500 x 0.35] 175
c/d 7,112 Tax expense (bal.) 222
7,112 7,112
NASIR ABBAS FCA

Solution No. 10
Deferred tax
Deferred tax liability comprises of:
Rs. million
Depreciation [30.48 + 4.20 (W-2)] 34.68
Deferred tax asset

Doubtful debts (3.90)
Gratuity (6.00)
c/f losses (2.70)
22.08
h
Movement in deferred tax Rs. million
Opening balance (W-1) 6.00
uk
Recognized in OCI:
PPE (W-3) 10.80
Recognized in P&L:
PPE [34.68 – 15.60 – 3.00 – 10.80] 5.28
hr
Doubtful debts (1.20)
Gratuity (2.10)
c/f losses 3.30
5.28
Closing balance
ha 22.08
W-1 Deferred tax for 2018

CA TB Diff Tax
sS
-------------------------- Rs. million --------------------------
Building 180.00 128.00 52.00 15.60
P&M 80.00 70.00 10.00 3.00
Provision for doubtful debts 9.00 - (9.00) (2.70)
Provision for gratuity 13.00 - (13.00) (3.90)
rd
c/f losses (20.00) (6.00)

20.00 6.00
W-2 Deferred tax for 2019

ga
CA TB Diff Tax
-------------------------- Rs. million --------------------------
Building (W-3) 204.00 102.40 101.60 30.48
P&M 70.00 56.00 14.00 4.20
Provision for doubtful debts 13.00 - (13.00) (3.90)
Re
Provision for gratuity 20.00 - (20.00) (6.00)

c/f losses [20 - 11] (9.00) (2.70)
73.60 22.08
CA Gross surplus Tax on surplus Net surplus

W-3
-------------------------- Rs. million --------------------------
01-01-19 Balance 180.00
01-01-19 Revaluation 36.00 36.00 10.80 25.20
216.00 36.00 25.20
31-12-19 Dep (12.00) (2.00) (1.40)
204.00 34.00 23.80
NASIR ABBAS FCA

Solution No. 11
---------- Rs. --------
01-01-17 Cash 50,000
Equity component (W-1) [5,063 x 70%] 3,544
31-12-17 Interest expense 4,044

[Interest for 2017]
h
31-12-17 Financial liability 2,500
uk
Cash 2,500
[Coupon payment]
31-12-17 Deferred tax [1,519 - 1,055] 463
hr
Tax expense 463
[Deferred tax expense for 2017]
ha
[Interest for 2018]
sS
Cash 2,500
[Coupon payment]
31-12-18 Deferred tax [1,055 - 550] 505

rd
Tax expense 505

ga

[Interest for 2019]
Re

Cash 52,500
[Coupon payment]
31-12-19 Deferred tax 550

Tax expense 550
W-1 Initial recognition Rs.

Total amount 50,000
Liability component [2,500 x 3-year AF at 9% + 50,000 x 3-year DF at 9%] (44,937)
NASIR ABBAS FCA
W-2 Subsequent measurement

CA TB Difference DTL/(DTA)
--------------------- Rs. -------------------------
01-01-17 Initial 44,937 50,000 5,063 1,519
31-12-17 Interest 4,044
31-12-17 Cash flow (2,500)
31-12-17 Balance 46,482 50,000 3,518 1,055
31-12-18 Interest 4,183
31-12-18 Cash flow (2,500)
h
31-12-18 Balance 48,165 50,000 1,835 550
31-12-19 Interest 4,335
uk
31-12-19 Cash flow (52,500)
31-12-19 Balance - - - -
Solution No. 12
hr
2016
Deferred tax:
CA TB Difference (DTA)
ha --------------------- Rs. -------------------------
Employee cost - 83,333 (83,333) (33,333)
[50,000 x Rs. 5 x 1/3]
sS
Opening DTA -
Deferred tax income charged to P&L (bal.) (33,333)
Deferred tax income charged to equity -
Deferred tax for the year (33,333)
rd
Deferred tax income is charged to P&L because future tax deduction is less than accounting expense.
ga
2017
Deferred tax:
Re
--------------------- Rs. -------------------------

Employee cost - 240,000 (240,000) (96,000)
[45,000 x Rs. 8 x 2/3]
Opening DTA (33,333)

Deferred tax for the year [96,000 - 33,333] (62,667)
Deferred tax income is charged to P&L because cumulative future tax deduction is less than
cumulative accounting expense of Rs. 373,000.
NASIR ABBAS FCA

2018
Deferred tax:
--------------------- Rs. -------------------------
Employee cost - 520,000 (520,000) (208,000)
[40,000 x Rs. 13 x 3/3]

h
uk
Deferred tax income is charged to P&L because cumulative future tax deduction is less than
cumulative accounting expense of Rs. 563,000.
2019
hr
Deferred tax:
ha --------------------- Rs. -------------------------
Employee cost - 680,000 (680,000) (272,000)
[40,000 x Rs. 17 x 3/3]
sS
Deferred tax income charged to equity [272,000 - 563,000 x 40%] (46,800)
rd
2020
Deferred tax:
ga
--------------------- Rs. -------------------------
Employee cost - - - -
Re

Deferred tax expense charged to P&L (bal.) 225,200
Deferred tax expense charged to equity 46,800
Deferred tax for the year 272,000
Current tax:
Current tax income for the year [40,000 x 20 x 40%] (320,000)
Current tax income to be recognized in P&L [563,000 x 40%] (225,200)
Current tax to be recognized in equity (bal.) (94,800)
NASIR ABBAS FCA

Q-3 Dec-15
WIL
Extracts - Notes
8 - Deferred tax 2014 Recognized 2015

PPE 180.00 - - 19.20 199.20
Exchange translation 34.80 - (22.08) - 12.72
Deferred tax asset
Share options (6.72) - - (3.84) (10.56)
h
Prov. for bad debts (14.40) - - (12.00) (26.40)
Other liab. (0.72) - - (0.96) (1.68)
uk
c/f loss (11.20) - - (1.60) (12.80)
181.76 - (22.08) 0.80 160.48
WORKINGS
hr
W-1 Deferred tax CA TB Diff (75%) DTL/(DTA)
W-1.1 year 2014 ---------------------- Rs. million -----------------------
PPE 1,800.00
ha 1,050.00 562.50 180.00
Exchange translation - - 108.75 34.80
Share options [600,000 x 140 x 1/3] - 28.00 (21.00) (6.72)
Prov. for DD 60.00 - (45.00) (14.40)
Other liab. 3.00 - (2.25) (0.72)
sS
c/f tax loss (35.00) (11.20)
568.00 181.76
CA TB Diff DTL/(DTA)
W-1.2 year 2015 ---------------------- Rs. million -----------------------
rd
PPE 1,950.00 1,120.00 622.50 199.20

Exchange translation - - 39.75 12.72
Share options [600,000 x 110 x 2/3] - 44.00 (33.00) (10.56)
Prov. for DD 110.00 - (82.50) (26.40)
ga
Other liab. 7.00 - (5.25) (1.68)

c/f tax loss (40.00) (12.80)
501.50 160.48
Re
Q-3 Dec-16
(a) ---------- Rs. million --------
01-07-14 Cash 600.00
Financial liability (W-1) 600.00
30-06-15 Interest expense 66.31

[Interest for 2015]
h
Cash 90.00
[Payment of rental]
uk
30-06-15 Depreciation [240/15] 16.00
Property 16.00
hr
30-06-15 Deferred tax (W-2) 105.69
Tax expense 105.69
[Deferred tax income for 2015]
ha
Brief explanation
Property was sold but TL has an option to repurchase (i.e. call option). Total consideration paid in
sS
form of rentals and repurchase price is higher (considering time value of money at 10%) * than the
original sale price, therefore, it will be treated as financing.
* PV of rentals and repurchase price at 10% = Rs. 610.45 million

rd
(b)
30-06-16 Interest expense 63.69
ga
[Interest for 2016]

Cash 90.00
Re
[Payment of rental]
30-06-16 Depreciation [240/15] 16.00

Property 16.00

Property [240 - 16 - 16] 208.00
Profit on disposal 342.00
[Derecognition of loan and property]
30-06-16 Tax expense 105.69
Deferred tax (W-2) 105.69
W-1 Loan schedule Rs. million

01-07-14 Initial 600.00
30-06-15 Interest [600 x 11.052%] 66.31
30-06-15 Cash flow (90.00)
30-06-15 Balance 576.31
30-06-16 Interest [576.31 x 11.052%] 63.69
h
30-06-16 Cash flow (90.00)
30-06-16 Balance 550.00
uk
W-2 Deferred tax CA TB Difference DTL/(DTA)
2015 --------------------- Rs. -------------------------
hr
Property [240 - 240/15] 224.00 - 224.00 67.20
Loan 576.31 - (576.31) (172.89)
Closing DTA (105.69)
Opening DTA [In absence of any information it is assumed to be zero] -
Deferred tax income for 2015
ha (105.69)
2016
sS
Closing DTA [Since both Property and loan are derecognized] -
Opening DTA (105.69)
Deferred tax expense for 2016 105.69
rd
ga
Re
Q-4 Jun-14
Moonlight Limited
Extracts - Notes
4 - Taxation Rs. million
Current tax:
- For current year (W-1) 230.00
- For prior year 4.20
234.20
Deferred tax (40.25)
193.95
4.1 - Relationship between tax expense and accounting profit
Tax [553 x 35%] 193.55
Tax for prior year 4.20
h
Tax on inadmissible expense [35 x 35%] 12.25
Tax on dividend income [25 x 25%] (6.25)
uk
Tax on exempt income [28 x 35%] (9.80)
193.95
-
hr
PPE 17.50 - - (28.00) (10.50)
Deferred tax asset
Provision for D.D.
PV of DBO
(31.50)
(49.00)
-
21.00
ha -
-
(12.25)
-
(43.75)
(28.00)
(63.00) 21.00 - (40.25) (82.25)
WORKINGS
sS
W-1 Current tax Rs. million
PBT [500 + 28 + 25] 553.00
Exempt capital gain (28.00)
Dividend income (25.00)
Inadmissible expense 35.00
rd
Bad debt expense [125 + 25 - 90] 60.00

Bad debt written off (25.00)
Excess accounting depreciation [(1,880 - 1,750) - (1,850 - 1,800)] 80.00
650.00
ga
Normal tax [650 x 35%] 227.50

Tax on dividend [25 x 10%] 2.50
Current tax 230.00
W-2 Deferred tax CA TB Diff DTL/(DTA)

Re
W-2.1 year 2013 ---------------------- Rs. million -----------------------

PPE 1,800.00 1,750.00 50.00 17.50
Provision for D.D. 90.00 - (90.00) (31.50)
PV of DBO 140.00 - (140.00) (49.00)
(180.00) (63.00)
W-2.2 year 2014 ---------------------- Rs. million -----------------------
PPE 1,850.00 1,880.00 (30.00) (10.50)
Provision for D.D. 125.00 - (125.00) (43.75)
PV of DBO 80.00 - (80.00) (28.00)
(235.00) (82.25)
Q-5 Jun-16
31-12-15 Depreciation (W-1) 887.74
31-12-15 Revaluation surplus (W-2) 22.31

[Transfer to retained earnings]
31-12-15 Finance cost 41.32

Provision for dismantling 41.32
[Finance cost for 2015]
h
Plant 887.74
uk
31-12-15 Revaluation surplus (W-2) 44.62

Deferred tax (W-2) 19.12
Revaluation loss [P&L] (W-1) 57.19
hr
Provision for dismantling (W-1) 206.61
Plant (W-1) 327.55
[Revaluation of plant & estimate change] ha
31-12-15 Deferred tax (W-4) 255.38
Tax expense 255.38
[Deferred tax income for 2015]
sS
W-1 NBV Surplus P&L Provision
---------------------- Rs. million ---------------------
-4
01-01-14 Cost 3,273.21 273.21 [400 x 1.1 ]
31-12-14 Dep / Interest (818.30) 27.32
rd
2,454.91 - - 300.53
31-12-14 Reval./Estimate 208.31 95.62 - 112.69
-3
[2,250 + 413.22] 2,663.22 95.62 - 413.22 [550 x 1.1 ]
31-12-15 Dep / Interest (887.74) (31.87) - 41.32
ga
1,775.48 63.75 - 454.54

31-12-15 Reval./Estimate (327.55) (63.75) (57.19) (206.61)
-2
[1,200 + 247.93] 1,447.93 - (57.19) 247.93 [300 x 1.1 ]
Re
Surplus Tax Net

---------------------- Rs. million ---------------------
01-01-14 -
31-12-14 -
- -
31-12-14 Rev. 95.62 28.69 66.94
95.62 66.94
31-12-15 Dep. (31.87) (22.31)
63.75 44.62
31-12-15 Rev. (63.75) (19.12) (44.62)
- -
W-2 Tax base of Plant Rs. million
01-01-14 Cost 3,000.00
31-12-14 Initial dep (1,500.00)
31-12-14 1,500.00
31-12-14 Normal dep (150.00)
31-12-14 1,350.00
31-12-15 Normal dep (135.00)
31-12-15 1,215.00
W-3 Deferred tax calculation

2014 CA TB Difference DTL/(DTA)
---------------------- Rs. million ---------------------
Plant 2,663.22 1,350.00 1,313.22 393.97
Provision for dismant. 413.22 - (413.22) (123.97)
h
Closing DTL 270.00
uk
2015 CA TB Difference DTL/(DTA)
---------------------- Rs. million ---------------------
Plant 1,447.93 1,215.00 232.93 69.88
Provision for dismant. 247.93 - (247.93) (74.38)
Closing DTL (4.50)
hr
W-4 Deferred tax movement
Opening ------ Recognized ---- Closing
Balance OCI P&L Balance
Plant 393.97
ha
---------------------- Rs. million ---------------------
(19.12) (304.96) 69.88
Provision for dismant. (123.97) - 49.59 (74.38)
270.00 (19.12) (255.38) (4.50)
sS
rd
ga
Re
Q-7 Jun-13
NCL
Extracts - Notes

PPE 140.00 - 14.00 (49.00) 105.00
Deferred tax asset (W-2)
Provision for D.D. / PV of DBO (17.50) - - (0.35) (17.85)
Other liab. - - - (1.05) (1.05)
h
122.50 - 14.00 (50.40) 86.10
uk
WORKINGS
W-1 Deferred tax CA TB Diff DTL/(DTA)
W-1.1 year 2011 ---------------------- Rs. million -----------------------
PPE 2,000.00 1,600.00 400.00 140.00
hr
Provision for D.D. / PV of DBO 50.00 - (50.00) (17.50)
Other liab. 8.00 8.00 - -
ha 350.00 122.50
W-1.2 year 2012 ---------------------- Rs. million -----------------------
PPE 2,700.00 2,400.00 300.00 105.00
sS
Provision for D.D. / PV of DBO [50 - 5 + 6] 51.00 - (51.00) (17.85)
Other liab. [8 - 2 - 3] 3.00 - (3.00) (1.05)
246.00 86.10
rd
ga
Re
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
CONSOLIDATION – SOFP WITH ONE SUBSIDIARY

Consolidated SOFP (or Group SOFP) is line by line addition of all values in SOFPs of Parent (P) and Subsidiary (S), subject
to certain adjustments. Following are basic eliminations / calculations / workings which are essential for a consolidation
question:
(a) GOODWILL / NEGATIVE GOODWILL
Consideration transferred for acquisition of controlling interest is mostly different from value of S’s
identifiable net assets at acquisition date. This difference is called “goodwill” (if +ve) and “negative goodwill
or bargain purchase gain” (if –ve).
IFRS 3 allows to carry NCI in Group SOFP at:

- Proportionate share of fair values of net assets of “S” OR
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- Fair value of NCI (i.e. Full goodwill method)
uk
(i) NCI valued at proportionate share (ii) NCI valued at Fair value
Consideration transferred Consideration transferred

Value of NCI Fair value of NCI
Less: S’s identifiable net assets at acquisition Less: S’s identifiable net assets at acquisition
hr
Goodwill / (negative goodwill) Goodwill / (negative goodwill)
Irrespective of valuation method of NCI:

• Goodwill is shown as a non-current asset in group SOFP
•
ha
Negative goodwill (also called a gain on a bargain purchase) is added to P’RE
(b) POST ACQUISITION PROFITS AND OTHER RESERVES OF “S”

sS
(i) P’s share in S’s post acquisition profits are ADDED to P’s RE to make it Group RE
(ii) P’s share in S’s post acquisition other reserves (e.g. revaluation reserve) are ADDED to P’s other
reserves in Group reserves
Acquisition related costs:

rd
Acquisition related transactions costs (except for the issue costs relating to debt or equity securities issued as
consideration, in which case such costs are accounted for as IAS 32 and IFRS 9) incurred by P are considered as expense
for the purpose of consolidation.
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If in question, such costs are included in cost of investment appearing in P’s SOFP, then:
DEDUCT from Investment in “Goodwill” working
DEDUCT from P’s RE as an expense in “Group RE” working
(c) NON CONTROLLING INTEREST [NCI]

Re
It is shown as a part of equity in Group SOFP and represents portion of S’s net assets that are not owned by P
(a) NCI valued at proportionate share (b) NCI valued at Fair value
NCI is valued at: NCI is valued as:

(i) Proportionate share of S’s net assets at (i) Fair value of NCI at acquisition date PLUS
acquisition date PLUS
(ii) NCI share in S’s post acquisition reserves (ii) NCI share in S’s post acquisition reserves
“S’s reserves” include revaluation reserve raised for group revaluation policy application

Following adjustments are made for consolidation of statement of financial positions:
1. IMPAIRMENT LOSS
Goodwill on acquisition is tested for impairment annually as a part of CGU. Generally whole “S” is a CGU and
therefore when it is tested for impairment, the impairment loss is allocated to goodwill and other assets of S as
per IAS 36. In questions, impairment loss of goodwill may be:
- Given OR
- Determined by impairment testing of CGU (i.e. S) as follows:
Calculations at impairment testing date: X
Recoverable amount of whole S
Less: Carrying amounts of:
Identifiable net assets of S (i.e. after making all fair value adjustments as well) X
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Full goodwill on acquisition (Note) X (X)
Total impairment loss X
uk
[This loss is now allocated as per IAS 36 i.e. first to full goodwill and then other assets]
Note:
If NCI is valued at fair value method, then Goodwill calculated at acquisition already reflects “Full
hr
goodwill”.
If NCI is valued at proportionate share method, then goodwill on acquisition represents only the portion of
goodwill attributable to P whereas recoverable amount reflects contribution of total goodwill towards
cashflows of S. Therefore, only for the purpose of calculation of impairment loss, Goodwill is grossed up by
P’s% share to find “Full goodwill”.
ha
Consolidation adjustment:
(1) Impairment loss on CGU allocated to other assets is:

sS
(i) DEDUCTED from relevant assets in Group SOFP

(ii) DEDUCTED from S’s RE in “Group RE working”
(2) Impairment loss on CGU allocated to goodwill is charged as follows:

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(a) NCI valued at proportionate share method (b) NCI valued at Fair value method
“Total allocated loss x P% share” is: Total allocated loss is:

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(i) DEDUCTED from goodwill in “Goodwill (i) DEDUCTED from goodwill in “Goodwill
Working” Working”
(ii) DEDUCTED from P’s RE in “Group RE (ii) DEDUCTED from S’s RE “Group RE working”
Working”
Re
[Note: If impairment loss of goodwill is given, then use

that given figure and no need to apply P% share]
Memorandum entry:
Dr. Group RE Dr. Group RE (P’s share)
Cr. Goodwill Dr. NCI (NCI share)
Cr. Goodwill (Total)

2. INTER COMPANY BALANCES
Examples:
- Debtor and creditor [due to inter-company trading]
- Loan (asset) and loan (liability) [due to inter-company loan]
- Inter-company current account
- P’s investment (asset) in S’s debentures (liability)
- Inter-company finance lease
Reconciliation of inter-company balances:

If balances (receivable / payable) do not agree then following may be the reasons alongwith relative
adjustment:
Reason Adjustment
h
(1.) Error Correct error accordingly in relevant books
(2.) Cash in transit Dr. Cash (i.e. ADD in cash)
uk
Cr. Receivables (i.e. DEDUCT from receivables)
(3.) Goods in transit Dr. Inventory (i.e ADD in inventory)
Cr. Payables (i.e. ADD to payables)
hr
Elimination of inter-company balance:
Since balances have now agreed, these are ELIMINATED
Memorandum entry:
Dr. Payable (Agreed / adjusted balance)
ha
Cr. Receivable
3. UNREALIZED PROFIT IN INVENTORY [URP]

sS
URP is the profit included in the amount of inventory out of inter-company sale. Inventory value may be given
in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
URP = Inventory x GP margin %
rd
OR
Inventory x GP markup / (100 + GP markup)
OR
Total profit earned in the inter-company sale x % goods held in stock
ga
P to S sale S to P sale
Re
URP is DEDUCTED from: URP is DEDUCTED from:

(i) Inventory in Group SOFP (i) Inventory in Group SOFP
(ii) P’ RE in Group RE working (ii) S' RE in Group RE working
Memorandum entry:
Dr. Group RE Dr. Group RE
Cr. Inventory Dr. NCI
Cr. Inventory
URP adjustment on goods which have been written down to NRV by buyer:
URP adjustment will be made at “URP – NRV write down already recorded”. If NRV write down is more than
URP, then no adjustment for URP is needed.

4. (a) FAIR VALUE ADJUSTMENT FOR S’s NET ASSETS
IFRS 3 requires recognition of identifiable net assets of S at their acquisition-date fair values. Therefore, certain
fair value adjustments are needed. Information about fair value adjustments at acquisition date may be available
as:
- Difference between fair values and book values is given (e.g. building was overvalued by Rs. 50,000) OR
- Both Fair values and book values of S assets and liabilities are given (i.e. net assets)
Exception to this fair value rule:

Following are the exceptions to the recognition and measurement rule discussed above:
o DTA/DTL arising from net assets of S acquired. [It shall be measured as per IAS 12]
o Liability related to S’s employee benefits arrangements. [It shall be measured as per IAS 19]
o Indemnification asset obtained on acquisition i.e. when S indemnifies P against any uncertainty. [It shall be
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measured at the same time and same basis as the indemnified item. (i.e. initial as well as subsequent)]
o ROU and lease liability of S. [Both shall be measured as per IFRS 16 rules, using the remaining lease
uk
payments, as if it were a new lease at the acquisition date]
o Equity or liability in respect of share-based payment transactions. [It shall be measured as per IFRS 2]
o Non-current asset held for sale of S. [It shall be measured as per IFRS 5]
hr
Asset/Liability still exists in books of S Asset/Liability was sold / settled after acquisition
For asset:
ha For asset:
FV adjustment (increase) is ADDED to: FV adjustment (increase) is:
(i) S’ net assets in “Goodwill working” (i) ADDED to S’s net assets in “Goodwill working”
(ii) Relevant asset’s NBV in Group SOFP (ii) DEDUCTED from S' RE in Group RE working
sS
For liability: For liability:
FV adjustment (increase) is: FV adjustment (increase) is:
(i) DEDUCTED from S’ net assets in “Goodwill (i) DEDUCTED from S’s net assets in “Goodwill
working” working”
(ii) ADDED to Relevant liability’s NBV in Group (ii) ADDED to S' RE in Group RE working
rd
SOFP
Memorandum entry:
Dr. Relevant Asset Dr. Group RE
ga
Cr. Goodwill Dr. NCI

Cr. NCI Cr. Goodwill
Cr. Relevant liability Cr. NCI
Re
Notes:
- In case of FV adjustment (decrease) to S’s net assets, above adjustments will be reversed
- If subsequently S has accounted for any such fair value adjustment in its books, then reverse it.
4. (b) EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of S in its books. This adjustment is not applicable if related
asset has been sold / realized after acquisition date.
Calculation of Extra accumulated depreciation:

= FV adjustment ÷ remaining useful life x years since acquisition
(above formula is for straight line method)

Extra Accumulated depreciation is DEDUCTED from:

(i) Relevant asset in Group SOFP
(ii) S’s RE in Group RE working
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. PPE
In case of negative adjustment to S’s net assets, above adjustments will be reversed
5. (a) PROFIT ON INTER-COMPANY SALE OF NON-CURRENT ASSET
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Profit in inter-company sale of non-current asset is unrealized unless the asset is fully depreciated by buyer.
Calculation of Profit:
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Profit = Sale value of Asset x margin %
OR
Sale value of Asset x markup / (100 + markup)
hr
Profit is DEDUCTED from: Profit is DEDUCTED from:

(i) Relevant Asset in Group SOFP (i) Relevant Asset in Group SOFP
(ii) P’ RE in Group RE working (i.e. seller) (ii) S' RE in Group RE working (i.e. seller)
ha
Memorandum entry:
Cr. Relevant asset Dr. NCI
sS
Cr. Relevant asset
5. (b) EXCESS DEPRECIATION ON INTER-COMPANY SALE OF NON-CURRENT ASSET
As asset is depreciated, a portion of seller’s profit is realized. Therefore excess depreciation on profit is
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deducted from seller’s profit on this sale OR added back to seller’s RE.
Calculation of Accumulated excess depreciation:
= Profit x depreciation % x years since sale of asset
[It is calculated using same depreciation basis as of buyer company in its books]
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Re
Excess accumulated depreciation is ADDED to: Excess accumulated depreciation is ADDED to:
Memorandum entry:
Dr. Relevant asset Dr. Relevant asset
Cr. Group RE Cr. Group RE
Cr. NCI

ALTERNATIVELY [5 (a) and (b) can be combined as follows]

5. UNREALIZED PROFIT ON INTER-COMPANY SALE OF NON CURRENT ASSET
Unrealized profit is the profit included in carrying amount of a non current asset transferred in inter-company
sale.
Calculation of Unrealized profit:
URP = NBV of Asset x margin %
OR
NBV of Asset x markup / (100 + markup)
OR
Profit on sale – excess depreciation charged by buyer to date
OR
NBV appearing in books of buyer – NBV (ignoring profit)
h
uk
URP is DEDUCTED from: URP is DEDUCTED from:

hr
Memorandum entry:
Cr. Relevant asset
ha Dr. NCI
Cr. Relevant asset
6. S’s INTANGIBLE ASSET RECOGNIZED AT ACQUISITION

sS
IFRS 3 allows to recognize some items (e.g. brand, customer relationship) as intangible asset in Group
SOFP even if its recognition was not allowed to S in accordance with IAS 38. Treat this just like a fair value
adjustment of an asset which had “zero” carrying amount in S’s books.
A contingent asset (as defined in IAS 37) shall not be recognized at the acquisition date.
rd
Fair value at acquisition date is:

(i) ADDED to Intangible assets in Group SOFP
(ii) ADDED to S’s net assets in “Goodwill working”
ga
Memorandum entry:
Dr. Intangible assets
Cr. Goodwill
Cr. NCI
Re
Accumulated amortization since acquisition is:

(i) DEDUCTED from relevant asset in Group SOFP
(ii) DEDUCTED from S’s RE in Group RE working
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. Intangible assets
[If subsequently such items were sold by S, then acquisition-date fair value is ADDED to S’s net assets in
“Goodwill working” and DEDUCTED from “S RE” in Group RE working. Moreover no adjustment for
amortization is needed.]

7. S’s CONTINGENT LIABILITY RECOGNIZED AT ACQUISITION
IFRS 3 allows the recognition of a contingent liability of S if it is a present obligation (i.e. not a possible
obligation) that arises from past events and its fair value can be reliably measured.
Initial measurement
Fair value at acquisition date is:
(i) ADDED to liabilities in Group SOFP
(ii) DEDUCTED from S’s net assets in “Goodwill working”
Memorandum entry:
Dr. Goodwill
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Dr. NCI
Cr. Liability
uk
After initial recognition and until the liability is settled, cancelled or expires, the liability shall be
measured at the higher of:
(i) the amount initially recognized
hr
(ii) the amount that would be recognized in accordance with IAS 37
If (ii) is higher, then the increase is DEDUCTED from S RE in “Group RE working”

ha
[In other words, subsequent measurement is only needed if initially recognized amount is to be
increased]
Memorandum entry:
Dr. Group RE
sS
Dr. NCI
Cr. Liability
Note – If S has subsequently accounted for this obligation in its books, then reverse the treatment done by S
rd
8. MODES OF CONSIDERATION GIVEN FOR INVESTMENT [OTHER THAN CASH]
(1) Loan note issue (or debentures, bonds etc.)

In questions, generally, it is unrecorded. Before eliminating investment for consolidation, ensure whether
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this mode of consideration has been recorded by “P” in its books
Calculation of cost of investment:

Cost of investment = no. of P’s loan notes issued x issue price
[Here: P’s notes issued = S’s shares acquired x loan note exchange ratio]
Re
Consolidation adjustment: (If still unrecorded)

(i) INCLUDE this amount in P’s investment in “Goodwill working”
(ii) SHOW this amount in “Non-current liabilities” in Group SOFP
If P has already accounted for this issue, then no adjustment required in non-current liabilities
(2) Share exchange

In questions, generally, it is unrecorded. Before eliminating investment for consolidation, ensure whether
this mode of consideration has been recorded by “P” in its books


Cost of investment = no. of P’s shares issued x market value of P’s shares at acquisition.
[Here: P’s shares issued = S’s shares acquired x share exchange ratio]
In case of consideration only in form of share exchange, if fair value of P’s shares is not reliably
measurable then fair value of S’s shares is used to find cost of investment.

(i) INCLUDE this amount in P’s investment in “Goodwill working”
(ii) ADD nominal value of shares in P’s share capital in Group SOFP
(iii) ADD excess of (i) over (ii), if any, to P’s share premium in Group SOFP
If P has already accounted for this issue, then no adjustment required in share capital and premium.
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(3) Deferred consideration
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In questions, generally, it is unrecorded.

Cost of investment = Present value of deferred consideration at acquisition date discounted at P’s cost of
hr
capital (or any other given discount rate)

(i) INCLUDE above amount in P’s investment in “Goodwill working”
(ii)
ha
SHOW present value of deferred consideration at SOFP date as liability in Group SOFP
(iii) DEDUCT excess of (ii) over (i) from P’s RE as finance cost in “Group RE working”
(4) Contingent consideration

sS

Cost of investment = Fair value of contingent consideration at acquisition date
rd

(ii) SHOW fair value of contingent consideration at SOFP date as “liability” or “equity” (as per guidance
in IAS 32) in Group SOFP
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(iii) ADD/DEDUCT any decrease/increase in fair value of contingent consideration since acquisition
date (i.e. changes resulting from events after the acquisition date) from P’s RE in “Group RE
working”
[Contingent consideration classified as equity shall not be remeasured]
Re
(5) Other assets (e.g. land)


Cost of investment = Fair value of the asset transferred at acquisition date

(ii) DERECOGNIZE the carrying amount of asset
(iii) ADD/DEDUCT any gain/loss (i.e. fair value – carrying amount) in P’s RE in “Group RE working”

[If shares were acquired from “S” instead of its former owners and the asset transferred as
consideration remains with S, then “cost of investment” includes carrying amount of that asset and no
derecognition is required.]
If P has recorded investment in S as per IFRS 9, then do not forget to reverse any fair value gain/loss recorded
9. ACQUISITION DURING THE YEAR
Only effect is on the calculation of Pre and Post acquisition reserves as follows:
Pre acq. reserves = S’s reserves at SOFP date – income for the year x n/12
(n = no. of months from acquisition to year end)
Post acq. reserves= S’s reserves at SOFP date – pre acquisition reserves
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OR
Income for the year x n/12
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10. DEFERRED TAX ADJUSTMENTS
(i) Additional Deferred tax asset/liability shall be recognized on fair value adjustments in S net assets at
acquisition date and INCLUDED in:
hr
- S net assets in goodwill working
- DTA/DTL in Group SOFP
(ii) Additional Deferred tax shall be calculated for all consolidation adjustments in P as well as S net assets
after acquisition and:
-
-
ha
CHARGED in respective RE column in Group RE working
ADDED to or DEDUCTED from DTA/DTL in Group SOFP
11. ADJUSTMENT FOR GROUP ACCOUNTING POLICIES

sS
Group member should follow uniform accounting policies. However, if S follows different accounting
policies, then adjustments are made while consolidation to convert figures from S financial position in
accordance with group policies.
(i) If inventory valuation method is changed

rd
ADD / (DEDUCT) any increase / (decrease) in inventory value due to policy change effect from:
- “Inventory” in Group SOFP
- “S post acquisition RE” in Group RE working
(ii) If Group follows revaluation model and S follows cost model
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ADD post acquisition increase in fair value of relevant assets to:

- “relevant asset” in Group SOFP [Total increase]
- “P’s revaluation surplus [P’s share of increase]
- “Share in S’s other reserves” in NCI working [NCI’s share of increase]
Re
12. OTHER ADJUSTMENTS
Inter-company Finance Eliminate:

lease “Lease liability” and “Lease receivable” with the amount of lower of both. The
difference should be closed in RE of the company with higher balance.
Inter-company Eliminate:
operating lease “ROU asset” and “Lease liability” and adjust difference of both in lessee’s RE.

[If underlying asset was property, then lessor must have been following IAS 40. But
from group point of view its PPE rather than Investment property, therefore, IAS 40
accounting shall be reversed and IAS 16 accounting shall be followed.]
Inter-company sale of In case of inter-company sale of property, if buyer rents out the property and follows
investment property fair value model for investment property, then no adjustment for URP shall be made.
Provisional amounts In 1st year of acquisition, if values are not yet finalized at year end then consolidation
will be made using provisional amounts. Next year, when provisional amounts are
revised, these adjustments shall be made retrospectively from acquisition date.
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Un-realized loss on Calculation of unrealized loss is same as studied for URP but the treatment is with
inter-company sale of inverse signs. However, if losses indicate an impairment, then no adjustment is needed
uk
goods/PPE for URL.
13. DIVIDEND PAID / PAYABLE BY “S”
hr
Types of dividends:
Pre acq. dividend: Dividend paid / payable (after acquisition) out of pre-acquisition profits
Post acq. dividend: Dividend paid / payable out of post-acquisition profits
ha
Consolidation adjustment of pre-acquisition dividend
If P has recognized it as an income, then:
(i) DEDUCT it from Investment in “Goodwill working” AND
(ii) DEDUCT if from P’s RE in “Group RE working”
sS
Consolidation adjustment of post-acquisition dividend

Adjustments are tabulated on last page of these notes using following example:
Example
S declares a dividend of Rs. 100
rd
P owns 80% shares of S

ga
Re

FORMATS AND WORKINGS

P Group
Consolidated Statement of Financial Position
As at …………………..
Rs.
NON-CURRENT ASSETS:
PPE XXX
(P’s + S’s + FV adj. at acquisition – Acc. extra dep. on FV adj. – URP on asset sale + revaluation
policy application +/- any other adjustment)
Intangible assets XXX

(P’s + S’s + NBV of Identifiable asset recognized at acquisition)
h
Goodwill (W – 1) XXX
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Investment XXX
(P’s + S’s – P’s investment in S eliminated)
CURRENT ASSETS:
hr
Inventory XXX
(P’s + S’s – URP [P to S / S to P] + Goods in transit)
Receivables
ha XXX
(P’s + S’s +/- correction of error– cash in transit – intercompany balance + any other asset recognized at acquisition)
Dividend receivables XXX

(P’s + S’s + unrecorded dividend – intercompany receivable)
sS
Cash / Bank XXX

(P’s + S’s + Cash in transit +/- correction of error)
XXX
rd
Rs.
CAPITAL AND RESERVES:
ga
Share capital XXX

(P’s + unrecorded P’s shares issued as purchase consideration)
Share premium XXX

Re
(P’s + unrecorded premium on P’s shares issued as purchase consideration)
Other reserves (W – 2) XXX
Retained earnings (W – 3) XXX
Non-controlling interest (W – 4) XXX
NON-CURRENT LIABILITIES:
Loan notes / Debentures XXX

(P’s + S’s – Intercompany balance + unrecorded P’s loan notes issued as purchase consideration)

Deferred consideration XXX

(Present value at SOFP date)
Contingent consideration XXX

(Fair value at SOFP date)
Deferred tax XXX

(P’s + S’s +/- deferred tax on consolidation adjustments)
CURRENT LIABILITIES:
Payables XXX
(P’s + S’s + goods in transit +/- correction of error – intercompany balance + contingent liab. recognized)
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Dividend payable XXX
(P’s + S’s + unrecorded dividend – intercompany payable)
uk
XXX
WORKINGS
hr
(W – 1) Goodwill
Case I – NCI is valued at Fair value Rs. Rs.

ha
Consideration transferred for ordinary shares:
Cash paid XXX
Loan notes issued XXX
sS
Share exchange XXX
Any other non-cash asset transferred XXX
Contingent consideration XXX XXX
Fair Value of NCI (Note 1) XXX
XXX
rd
Less: S’s net assets at acquisition:

S’s Capital XXX
Add: S’s Premium XXX
Add: S’s Pre-acquisition other reserves XXX
ga
Add: S’s Pre-acquisition RE XXX

Add/Less: Fair value adjustment XXX
Less: Liabilities recognized (XXX)
Add: Assets recognized at acquisition XXX
Re
(XXX)
Goodwill at acquisition XXX
Less: Accumulated impairment loss (Total) (XXX)
Carrying amount of goodwill XXX
Note 1: Fair value of NCI can be determined as follows in exam questions:
1) Fair value of NCI is given in question.
2) Share price of S at acquisition date is given then:
Fair value of NCI = no. of shares held by NCI x Share price

Case II – NCI is valued at proportionate share Rs. Rs.
Consideration transferred:
Cash paid XXX
Loan notes issued XXX
Share exchange XXX
Any other non-cash asset transferred XXX
Contingent consideration XXX XXX
Proportionate value of NCI [S’s net assets at acquisition x NCI%] XXX
XXX
Less: S’s net assets at acquisition:
S’s Capital XXX
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Add: S’s Premium XXX
Add: S’s Pre-acquisition other reserves XXX
Add: S’s Pre-acquisition RE XXX
uk
Add/Less: Fair value adjustment XXX
Less: Liabilities recognized (XXX)
Add: Assets recognized at acquisition XXX
(XXX)
hr
Less: Accumulated impairment loss (Total) (XXX)
Carrying amount of goodwill XXX
ha
(W – 2) Other reserves
Rs. Rs.
P’s other reserves XXX
sS
Add: S’s Other reserves XXX
Less: S’s other reserves at acquisition date (XXX)
XXX
Group share @ (% share in ordinary shares) XXX
XXX
rd
(W – 3) Retained earnings
Rs. Rs.
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P’s RE XXX
Less: Accumulated impairment loss of goodwill [Note 2] (XXX)
Less: URP on goods [ P to S ] (XXX)
Less: URP on asset sale [ P to S ] (XXX)
Re
Less: Finance cost on deferred consideration (XXX)

Less: change in fair value of contingent consideration (XXX)
Add / Less: correction of error XXX
Add: negative goodwill (total) XXX
Add: Unrecorded income (including dividend from S) XXX
XXX
Add: S’s RE XXX
Less: Pre-acquisition RE (XXX)
Less: Acc. Impairment loss of goodwill [Note 2] (XXX)
Less: URP on goods [ S to P ] (XXX)
Less: URP on asset sale [ S to P ] (XXX)
Less: FV adjustment of asset sold after acquisition (XXX)
Less/Add: Extra depreciation on FV adjustment (XXX)
Less: Amortization on asset recognized at acq. (XXX)

Less: change in value of contingent liab. recognized (XXX)
Less: unrecorded post acquisition dividend (XXX)
Add: unrecorded income XXX
XXX
XXX
Note 2:
NCI is valued at fair value: Impairment loss of goodwill is deducted from S RE
NCI is valued at proportionate basis: Impairment loss of goodwill is deducted from P RE
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(W – 4) Non-controlling interest
uk
Case I – NCI is valued at Fair value Rs.
Fair value of NCI at acquisition date XXX
hr
Add: Share in S’s post acquisition other reserves (W – 2) XXX
[NCI % share in ordinary shares]
Add: Share in S’s post acquisition RE (W – 3) XXX

ha
XXX
Case II – NCI is valued at proportionate share Rs.

sS
Proportionate value of NCI at acquisition date (W – 1) XXX
Add: Share in S’s post acquisition other reserves (W – 2) XXX

rd
Add: Share in S’s post acquisition RE (W – 3) XXX

XXX
ga
Re

POST AQCUISITION DIVIDEND
h
PAID NOT YET PAID [Declared before year end]
uk
1-Recorded by both 2-Recorded by both 3-Not recorded by (P) 4-Not recorded by (S) 5-Not recorded by both
Entries which have been made in separate books:
hr
P S P S P S P S P S
Cash 80 R.E. 100 D.R. 80 R.E. 100 R.E. 100 D.R. 80
Income 80 Cash 100 Income 80 D.P. 100 D.P. 100 Income 80
ha
Consolidation adjustments required – In Group SOFP:
No adjustment required. Eliminate Inter company (i). Add P’s share in S’s (i). Deduct S’s total dividend (i). Add P’s share in S’s
balance of 80 dividend to P’s RE in “Group from S’s post acquisition dividend to P’s RE in “Group
sS
RE working” profits RE working”
Dividend Payable 80
Dividend Receivable 80 Dividend Receivable 80 Group RE 80 Dividend Receivable 80
Group RE 80 NCI 20 Group RE 80
Dividend Payable 100
rd
(ii). Then eliminate inter (ii). Deduct S’s total dividend
company balance of 80 (ii). Then eliminate inter from S’s post acquisition
company balance of 80 profits
Dividend Payable 80 Group RE 80
ga
Dividend Receivable 80 Dividend Payable 80 NCI 20

Dividend Receivable 80 Dividend Payable 100
(iii). Then eliminate inter

Re
company balance of 80
Dividend Payable 80
Dividend Receivable 80

BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions (1)
PRACTICE QUESTIONS
Question No. 1
Following are the balance sheets as at June 30, 2019:

P S
---------- Rs.--------
Non-current assets
Property, plant & equipment 65,000 75,000
Investments 50,000 10,000
Current assets
Inventories 12,000 11,000
Debtors 12,000 13,000
h
Cash & bank 7,000 8,000
146,000 117,000
uk
Equity
Share capital (Rs. 10 per share) 45,000 32,000
Share premium 5,000 3,000
Other reserves 14,000 7,000
hr
Retained earnings 61,000 53,000
- - -
Current liabilities
Creditors
ha 21,000 22,000
146,000 117,000
Following further information is available:

sS
(i) P acquired 90% shares of S some years ago for Rs. 47,000 when other reserves were Rs. 3,000 and retained
earnings were Rs. 7,500.
(ii) Fair value of non-controlling interest at acquisition date was Rs. 16 per share.
(iii) At year end, goodwill is impaired by Rs. 1,000.
(iv) During the year P sold some goods to S in respect of which, Rs. 6,000 is still included in debtors. This balance does
rd
not agree with S records due to a cash in transit of Rs. 1,000.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
ga
Question No. 2

Re
P S
---------- Rs.--------
Non-current assets
Investments 40,000 -
Current assets
Debtors 12,000 10,000
Cash & bank 4,000 7,000
126,000 89,000
NASIR ABBAS FCA

P S
Equity ---------- Rs.--------
Debentures - 20,000
Current liabilities
Creditors 18,000 11,000
126,000 89,000
h
(i) P acquired 1800 shares of S some years ago for Rs. 31,000 when other reserves were Rs. 3,000 and retained
uk
(ii) At year end, goodwill is impaired by Rs. 1,000.
(iii) During the year P sold goods to S for Rs. 9,000 at a profit margin of 20%. Half of these goods are still included in
S stock.
hr
(iv) In respect of above sales, P debtors include Rs. 7,000. This balance does not agree with S records due to a
payment of Rs. 500 double recorded by S.
(v) P investments also include investment in 20% of S debentures.
Required:
ha
Question No. 3
sS
P S
---------- Rs. ----------
Non-current assets
rd
Current assets
ga
S current account 5,000 -

Debtors 11,000 10,000
Cash & bank 5,000 8,000
125,000 93,000
Equity
Re

Other reserves 13,000 -
Bank loan - 20,000
Current liabilities
Creditors 16,000 11,000
P current account - 7,000
125,000 93,000
NASIR ABBAS FCA


(i) P acquired 80% shares of S some years ago for Rs. 21,000 when retained earnings had a debit balance of
Rs.4,000.
(ii) Fair value of non controlling interest at acquisition date was Rs. 9.5 per share.
(iii) During the year S sold goods to P for Rs. 10,000. Profit included in this sale was Rs. 1,000. P still has worth Rs.
5,000 of these goods held in its inventory.
(iv) There is no intercompany balance included in debtors and creditors at year end. P provides certain management
services to S in respect of which intercompany current account is maintained. The difference in current account
balances at year end is due to an error when P recorded a receipt of Rs. 1,000 as Rs. 3,000.
Required:
h
Question No. 4
uk
P S
----------- Rs.-----------
Non-current assets
hr
Current assets
S current account
ha 8,000 -
Debtors 10,000 11,000
Cash & bank 5,000 8,000
204,000 98,000
sS
Equity
rd
- - -
Current liabilities
Creditors 16,000 18,000
ga
P current account - 5,000

204,000 98,000
(i) P acquired 3600 shares of S last year for Rs. 75,000 when other reserves were 6,000 and retained
Re

(ii) At acquisition date, fair value of land of S was Rs. 2,000 higher than its carrying amount. Fair values of
other nets assets were approximately equal to their carrying amounts.
(iii) At year end, recoverable amount attributable to goodwill is Rs. 1,200.
(iv) During the year P sold goods, costing Rs. 9,000, to S for Rs. 12,000. 40% of these goods are still held in
stock of S at year end.
(v) P provides certain management services to S in respect of which intercompany current account is
maintained. The difference in current account balances at year end is due to an invoice for such services
amounting to Rs. 3,000 sent and recorded by P but not received and recorded by S.
Required:
NASIR ABBAS FCA

Question No. 5

P S
---------- Rs.--------
Non-current assets
Investment 41,000 -
Current assets
Debtors 10,000 12,000
Cash & bank 5,000 5,000
h
158,000 97,000
Equity
uk
Other reserves - -
hr
- - -
Current liabilities
Creditors 21,000 16,000
ha
158,000 97,000
(i) P acquired 60% shares of S some years ago when retained earnings were Rs. 11,000.
sS
(ii) At acquisition date, land of S was undervalued by Rs. 2,000. This land was sold last year. Fair values of other
nets assets were approximately equal to their carrying amounts at acquisition date.
(iii) Fair value of non-controlling interest at acquisition date was Rs. 25,600.
(iv) At year end, impairment loss of goodwill is Rs. 1,600.
rd
(v) During the year S sold goods to P for Rs. 5,000 at a profit markup of 25% on credit. By year end, these goods
were not received by P and therefore not recorded in its books.
Required:
ga
Question No. 6
P S
Re
------------ Rs.----------
Non-current assets
Investment 38,000 -
Current assets
Debtors 21,000 13,000
Cash & bank 5,000 7,000
136,000 105,000
NASIR ABBAS FCA

Equity P S
---------- Rs.--------
Share premium 5,000 -
Other reserves - 5,000
Current liabilities
Creditors 14,000 17,000
136,000 105,000
h
(i) P acquired 55% shares of S on July 1, 2017 when other reserves were Rs. 2,000 and retained earnings were Rs.
18,000.
uk
(ii) At acquisition date, fair value of total net assets was Rs. 60,000. The excess of fair value was attributable to
plant and machinery. At that date, remaining life of plant and machinery was 5 years.
(iii) Fair value of non controlling interest at acquisition date was Rs. 18 per share.
hr
(v) P had been selling goods to S on credit throughout the year at a markup of 20%. Following information has been
extracted from their books:
Books of P:
Goods sold to S Rs. 35,000
Receivable from S (included in debtors)
ha Rs. 7,000
Books of S:
Goods purchased from P Rs. 32,000
sS
Payable to P (included in creditors) Rs. 8,000
Some goods were dispatched by P on June 29th. These goods were not received and therefore not recorded by
S b year end. Any remaining difference in intercompany balance, after adjusting for goods in transit, is due to
double recording by P in respect of a receipt from S.
rd
Required:
Question No. 7
ga

P S
---------- Rs.----------
Non-current assets
Re

Investment 42,500 -
Loan to S 15,000
Current assets
Debtors 11,000 18,000
Cash & bank 5,000 3,000
164,500 111,000
NASIR ABBAS FCA

P S
Equity ---------- Rs.--------
Loan from P - 12,000
Current liabilities
Creditors 21,000 15,000
164,500 111,000
h
(i) P acquired 70% shares of S on July 1, 2017 when other reserves were Rs. 2,500 and retained earnings were Rs.
uk
14,000.
(ii) At acquisition date, a building of S was overvalued by Rs. 3,000. At that date, remaining life of building was 5
years.
(iii) On July 1, 2018, S obtained a loan of Rs. 15,000 from P at an annual interest of 10%. On June 30, 2019 S made
hr
a total payment of Rs. 4,500 including interest for the year to P. However, P did not receive this payment by
year end. P has also not accrued the interest income for the year.
(iv) On January 1, 2019, P sold a machine costing Rs. 15,000 to S for Rs. 17,000. S depreciates its plant and machinery
@ 20% on straight line basis.
(v)
ha
At year end, impairment loss of goodwill is Rs. 1,100.
Required:
sS
Question No. 8
P S
---------- Rs.--------
rd
Non-current assets
ga
Current assets
Debtors 11,000 6,000
Cash & bank 5,000 2,000
172,000 88,000
Re
Equity
- - -
Current liabilities
Creditors 17,000 11,000
172,000 88,000
NASIR ABBAS FCA


(i) P acquired 2700 shares of S on January 1, 2018 for Rs. 54,000 when other reserves were Rs. 1,000 and retained
(ii) At acquisition date, fair value of an internally generated brand of S was Rs. 5,000. Useful life of this brand is
(iii) Fair value of non controlling interest at acquisition date was Rs. 5,700.
(iv) To date, consolidated goodwill is impaired by 40%.
1
(v) During the year S sold goods to P for Rs. 16,000 at a markup of 33 % on cash. By year end, P has sold only 40%
3
of these goods to its customers.
Required:
h
Question No. 9
uk
P S
---------- Rs.--------
Non-current assets
hr
Investment 16,000 -
Current assets
Debtors
ha 9,000 12,000
Cash & bank 7,000 6,000
120,000 80,000
Equity
Share capital (Rs. 10 per share)
sS
45,000 40,000
Loan notes 16,000 -
rd
Current liabilities
Creditors 9,500 11,600
120,000 80,000
ga

(i) P acquired 80% shares of S on July 1, 2018. The purchase consideration consisted of two elements: a share
exchange of three shares in P for every five acquired shares in S and the issue of Rs. 100 8% loan note for every
20 shares acquired. The share issue has not yet been recorded by P but the issue of the loan notes has been
Re
recorded. At acquisition date, shares in P had a market value of Rs. 18 each and the shares in S had a market
value of Rs. 14 each.
(ii) At acquisition date, the fair value of property of S was Rs. 4,000 below its carrying amount. This would lead to
a reduction of depreciation charge of Rs. 400 in 2019. Fair values of other nets assets were approximately equal
to their carrying amounts.
(iii) It is group’s policy to value non controlling interest at fair value.
(v) During the year S sold goods to P for Rs. 5,000 at a profit markup of 25%. By year end, half of these goods were
held in P’s stock.
(vi) Net profit for the year 2019 earned by S was Rs. .9,000. There has been no increase in other reserves from last
year.
NASIR ABBAS FCA

Required:
Question No. 10

P S
---------- Rs.--------
Non-current assets
h
Current assets
uk
Debtors 11,000 11,000
Cash & bank 5,000 4,500
167,000 97,500
Equity
hr
ha
- - -
Current liabilities
Creditors 22,000 12,000
sS
167,000 97,500

(i) P acquired 75% shares of S on January 1, 2019 for Rs. 58,000.
rd
(ii) Following were the net assets of S at June 30, 2018:

Rs.
Share capital (Rs. 10 per share) 40,000
ga
Share premium 4,000

Other reserves 3,000
(iii) At acquisition date, fair value of an internally generated brand of S was Rs. 4,500. This brand can be assumed
Re
to have indefinite useful life.

(iv) After acquisition, P sold certain raw material to S at their cost of Rs. 7,000. S processed all of this material at an
additional cost of Rs. 3,000 and sold back the finished goods to P at a markup of 25%. At year end 40% of these
goods are still included in stock of P.
Required:
NASIR ABBAS FCA

Question No. 11
P S
---------- Rs.--------
Non-current assets
Current assets
Debtors 11,000 9,000
Cash & bank 5,000 6,000
162,000 90,000
h
Equity
uk
Other reserves 12,000 -
hr
- - -
Current liabilities
Creditors 17,000 14,000
162,000 90,000
ha
(i) P acquired 80% shares of S on November 1, 2018 for Rs. 25 per share.
sS
(ii) At acquisition date, fair value of an internally generated brand of S was Rs. 6,000. Useful life of this brand is
(iii) Fair value of non controlling interest at acquisition date was Rs. 24 per share.
(iv) On January 1, 2019 S sold an owned machine to P earning a profit of Rs. 4,000. Cost of this machine was Rs.
Rs. 30,000 and at the date of sale it had been depreciated to Rs. 18,000. P is depreciating this machine at 20%
rd
on straight line basis.

(v) S earned a net profit of Rs. 21,000 for the year.
Required:
ga
Question No. 12
Re
P S
---------- Rs.--------
Non-current assets
Current assets
Debtors 11,000 12,000
Cash & bank 7,000 8,000
170,000 116,000
NASIR ABBAS FCA

Equity P S
---------- Rs.--------
- - -
Current liabilities
Creditors 14,500 12,000
Dividend payable 4,500 -
170,000 116,000
h
(i) P acquired 60% shares of S on July 1, 2018 for Rs. 15 per share when other reserves were Rs. 4,000 and retained
uk
(ii) At acquisition date, fair value of plant and machinery was Rs. 4,000 less than the carrying amount. Remaining
life of plant and machinery at that date was 5 years.
(iii) On June 30, 2019 S declared a dividend of Re. 1 per share. Neither P nor S has recorded this dividend.
hr
(iv) At year end, goodwill is impaired by Rs. 2,000.
Required:
ha
Question No. 13
P S
sS
---------- Rs.--------
Non-current assets
rd
Current assets
Debtors 10,000 8,000
Cash & bank 4,000 5,000
ga
173,000 100,000
Equity
Revaluation surplus 8,000 -
Re

- - -
Current liabilities
Creditors 14,500 9,500
173,000 100,000

(i) P acquired 70% shares of S some years ago for Rs. 50,000 when retained earnings were Rs. 10,000.
(ii) At acquisition date, fair value of non controlling interest was Rs. 14 per share.
NASIR ABBAS FCA

(iii) At acquisition date, fair value of land of S had a fair value higher than book value by Rs. 3,000. Since acquisition
this fair value has further increased by Rs. 4,000.
(iv) S follows cost model for all of its fixed assets whereas group’s policy is to carry land at revaluation model.
(v) On June 30, 2019 P and S both declared a dividend of Re. 1 per share. Neither P nor S has recorded any dividend.
(vi) At year end, goodwill is impaired by Rs. 500.
Required:
Question No. 14
The following summarized statements of financial position pertain to Alpha Limited (AL) and its subsidiary Delta Limited
(DL) as at 30 June 2014.
h
AL DL
----------- Rs. in million --------
uk
Property plant and equipment 460 200
Investment (2 million shares of DL) 340 -
Long term loan granted to DL 30 -
Current assets 595 400
hr
1,425 600
Share capital (Rs. 100 each) 600 250

Retained earnings 325 200
Long term borrowings
ha 200 72
Current liabilities 300 78
1,425 600
sS
Following relevant information is available:
(i) AL acquired investment in DL on 1 July 2013 when retained earnings of DL were Rs. 140 million and the fair value
of DL's net assets was equal to their carrying values.
(ii) Both the companies depreciate equipment at 10%, on straight line basis. On 30 June 2014, AL sold certain
equipment to DL as detailed below:
rd
Rs. in million
Cost 40
Accumulated depreciation 30
Sale proceeds 25
ga
(iii) Inter-company sales of goods are invoiced at a mark-up of 20%. The relevant details are as under:
Rs. in million
AL’s inventory includes goods purchased from DL 27
Re
DL’s inventory includes goods purchased from AL 24

Receivable from DL on June 30, 2014 as per AL’s books 19
Payable to AL on June 30, 2014 as per DL’s books 19
(iv) Long term loan was granted to DL on 1 July 2013. It is repayable after five years and carries interest at 12% per
annum, payable on 30 June and 31 December, each year.
(v) AL values non-controlling interest at the acquisition date at its fair value which was Rs. 80 million.
Required:
Prepare a consolidated statement of financial position as at 30 June 2014 in accordance with the requirements of
International Financial Reporting Standards. (15)
(Autumn 2014,Q#6)
NASIR ABBAS FCA

Question No. 15
On 1 July 2014, Galaxy Limited (GL) acquired controlling interest in Beta Limited (BL). The following information has been
extracted from the financial statements of GL and BL for the year ended 30 June 2015:
GL BL
----------- Rs. in million --------
Retained earnings – 1 July 2014 40 18
Profit for the year ended 30 June 2015 20 6
Shareholders’ equity / Net assets 160 74
Investment in BL (300,000 shares) 50 -
h
Inter-company sales (at invoice value) 25 30
Inter-company purchase remained unsold at year end 9 5
uk
Inter-company current account balances [Dr. / (Cr.)] 7 (4)
Other relevant information is as under:

(i) On the date of acquisition, fair value of BL's net assets was equal to their book value except for the following:
hr
• Fair value of a land exceeded its carrying value by Rs. 20 million.
• The value of a plant was impaired by Rs. 10 million. The impairment was also recorded by BL on 2 July
2014.
• BL measures its property, plant and equipment using cost model.
(ii)
ha
There is no change in share capital since 1 July 2014.
(iii) Inter-company sales are invoiced at cost plus 20%. The difference between the current account balances is due
to goods dispatched by GL on 30 June 2015 which were received by BL on 5 July 2015.
(iv) GL values non-controlling interest at the acquisition date at its fair value which was Rs. 35 million.
sS
(v) As at 30 June 2015, goodwill of BL was impaired by 10%.
Required:
Compute the amounts of goodwill, consolidated retained earnings and non-controlling interest as they would appear in
GL's consolidated statement of financial position as at 30 June 2015. (15)
rd
(Autumn 2015,Q#6)
Question No. 16
ga
Following information has been extracted from the financial statements of Yasir Limited (YL) and Bilal Limited (BL) for the
year ended 30 June 2016.
YL BL YL BL
Assets Equity & Liabilities
Rs. in million Rs. in million
Re
Fixed assets 250 540 Share capital (Rs. 10 each) 750 500
Accumulated depreciation (70) (70) Retained earnings 340 258
180 470 1,090 758
Investment in BL – at cost 675 - Loan from YL - 12
Loan to BL 16 - Creditors & other liabilities 75 51
Stock in trade 160 150
Other current assets 71 50
Cash and bank 63 151
1,165 821 1,165 821
NASIR ABBAS FCA

(i) On 1 July 2014, YL acquired 75% shares of BL at Rs. 18 per share. On the acquisition date, fair value of BL’s net
assets was equal to its book value except for an office building whose fair value exceeded its carrying value by
Rs. 12 million. Both companies provide depreciation on building at 5% on straight line basis.
(ii) Year-wise net profit of both companies are given below:
2016 2015
-------- Rs. in million ------
YL 219 105
BL 11 168
(iii) The following inter-company sales were made during the year ended 30 June 2016:
Sales Included in buyer’s
h
closing stock in trade Profit %
----------- Rs. in million ----------
uk
YL to BL 120 20 30% on cost
BL to YL 80 32 15% on sale
(iv) BL declared interim dividend of 12% in the year 2015 and final dividend of 20% for the year 2016.
(v) The loan was granted by YL to BL on 1 July 2014 and carries interest rate of 12% payable annually. The principal
hr
is repayable in five equal annual installments of Rs. 4 million each. On 30 June 2016, BL issued a cheque of Rs.
5.92 million which was received by YL on 2 July 2016. No interest has been accrued by YL.
(vi) YL values non-controlling interest on the date of acquisition at its fair value. BL’s share price was Rs. 15 on
acquisition date.
(vii)
ha
An impairment test has indicated that goodwill of BL was impaired by 10% on 30 June 2016. There was no
impairment during the previous year.
Required:
Prepare a consolidated statement of financial position as at 30 June 2016 in accordance with the requirements of
sS
(Autumn 2016, Q#1)
Question No. 17
The draft summarized statements of financial position of Golden Limited (GL) and its subsidiary Silver Limited (SL) as at
rd
31 December 2016 are as follows: GL SL

GL SL
------------ Rs. in million ----------
Building 1,600 500
ga
Plant & machinery 1,465 690

Investment in SL 327 -
Current assets 2,068 780
5,460 1,970
Re

Share premium 730 150
Retained earnings 3,150 210
4,860 810
Liabilities 600 1,160
5,460 1,970
(i) GL acquired 60% of the shares of SL on 1 April 2016 at following consideration:

• Issuance of 20 million ordinary shares at premium of Rs. 2 each;
• Cash amounting to Rs. 87 million, which includes consultancy charges of Rs. 10 million and legal expenses of
Rs. 5 million.
NASIR ABBAS FCA

The market value of each share of GL and SL on acquisition date was Rs. 25 and Rs. 11 respectively. At acquisition
date, retained earnings of SL were Rs. 100 million.
(ii) The following table sets out those items whose fair value on the acquisition date was different from their book
value. These values have not been incorporated in SL’s books of account.
Book value Fair value
------------ Rs. in million ----------
Building 250 170
Inventory 112 62
Provision for bad debts (15) (24)
(iii) Upon acquisition of SL, a contract for management services was also signed under which GL would provide
various management services to SL at an annual fee of Rs. 50 million from the date of acquisition. The payment
would be made in two equal instalments payable in arrears on 1 April and 1 October.
h
(iv) On 30 September 2016, GL acquired a plant from SL in exchange of a building which was currently not in use of
GL. The details of plant and building are as follows:
uk
Cost Accumulated *Exchange
depreciation price
----------------- Rs. in million ----------------
Building 240 130 120
hr
Plant 200 80 120
* Equivalent to fair value
Both companies follow cost model for subsequent measurement of property, plant and equipment and charge
depreciation on building and plant at 5% and 20% respectively on cost.
(v)
ha
SL paid an interim cash dividend of 10% on 31 July 2016.
(vi) GL values non-controlling interest at the acquisition date at its fair value.
Required:
sS
Prepare a consolidated statement of financial position as at 31 December 2016 in accordance with the requirements of
(Spring 2017, Q#5)
Question No. 18
rd
Following are the draft statement of financial position of Jasmine Limited (JL) and its subsidiary, Sunflower Limited (SL) as
on 31 December 2017:
JL SL
ga
------ Rs. in million ------

Property, plant and equipment 880 330
Intangible assets 40 50
Investment in SL 520 -
Loan to JL - 120
Re

2,080 845

Share premium 240 -
Retained earnings 720 410
Loan from SL 96 -
2,080 845
NASIR ABBAS FCA

(i) JL acquired 75% shares of SL on 1 January 2017. Cost of investment in JL’s books consists of:
• 10 million JL's ordinary shares issued at Rs. 24 per share; and
• cash payment of Rs. 280 million (including professional fee of Rs. 10 million for advice on acquisition of SL)
(ii) On acquisition date, carrying value of SL's net assets was equal to fair value except an intangible asset (brand)
whose fair value was Rs. 40 million as against carrying value of Rs. 25 million. The remaining useful life of the
brand is estimated at 5 years. The recoverable amount of the brand at 31 December 2017 was estimated at
Rs. 28 million.
(iii) JL values non-controlling interest at fair value. The market price of SL's shares was Rs. 36 at the date of
acquisition, which has increased to Rs. 40 as of 31 December 2017.
(iv) JL and SL showed a net profit of Rs. 200 million and Rs. 60 million respectively for the year ended
h
31 December 2017.
uk
(v) The loan was granted on 1 July 2017 and carries mark-up of 10% per annum. A cheque of Rs. 30 million including
interest was dispatched by JL on 31 December 2017 but was received by SL after the year end. No interest has
been accrued by SL in its financial statements.
(vi) On 1 May 2017 SL sold a machine to JL for Rs. 52 million at a gain of Rs. 12 million. However, no payment has yet
hr
been made by JL. The remaining useful life of the machine at the time of disposal was 2 years.
(vii) During the year, JL made sales of Rs. 250 million to SL at 20% above cost. 60% of these goods are included in SL’s
closing stock.
(viii)
ha
SL declared interim cash dividend of 10% in November 2017 which was paid on 2 January 2018. The dividend has
correctly been recorded by both companies.
Required:
Prepare JL's consolidated statement of financial position as at 31 December 2017. (15)
sS
(Spring 2018, Q#3)
rd
ga
Re
NASIR ABBAS FCA

BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions (1)
SOLUTIONS TO PRACTICE QUESTIONS

Solution No. 1
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non-current assets
PPE [65 + 75] 140,000
Investments [50 - 47 + 10] 13,000
Goodwill [W-1] 5,620
h
Current assets
Inventories [12 + 11] 23,000
Debtors [12 + 13 - 1 - 5] 19,000
uk
Cash and bank [7 + 8 + 1] 16,000
216,620
Equity
hr
Share
capital 45,000
Share premium 5,000
Other reserves [W-2] 17,600
Retained earnings [W-3]
ha 101,050
Non-controlling interest [W-4] 9,970
Current liabilities
Creditors [21 + 22 - 5] 38,000
sS
216,620
Workings
W-1 Goodwill Rs. Rs.
Investment 47,000
rd
Fair value of NCI [320 x 16] 5,120

Less: net assets at acq.:
Share capital 32,000
Share premium 3,000
ga

Pre-acq RE 7,500 (45,500)
Goodwill at acquisition 6,620
Re
5,620
W-2 Other reserves Rs. Rs.

P Other reserves 14,000
Add: S Other reserves 7,000
Less: Pre-acq. (3,000)
4,000
90% 3,600
17,600
NASIR ABBAS FCA

W-3 Retained earnings Rs. Rs.

P RE 61,000
Add: S RE 53,000
Less: Pre-acq (7,500)
Less: Impairment loss (1,000)
44,500
90% 40,050
101,050
W-4 NCI Rs.

FV of NCI 5,120
h
Other reserves [4 x 10%] 400
RE [44.5 x 10%] 4,450
uk
9,970
Solution No. 2
P Group
hr
as at June 30, 2019
Rs.
Non-current assets
ha
PPE [60 + 60] 120,000
Investments [40 - 31 - 4] 5,000
sS
Current assets
Inventories [10 + 12 - 0.9] 21,100
Debtors [12 + 10 - 7] 15,000
Cash and bank [4 + 7 + 0.5] 11,500
rd
174,400
Equity
Share
ga
capital 45,000
Share premium 4,500
Retained earnings [W-3] 60,650
Re

Debentures [20 - 4] 16,000
Current liabilities
Creditors [18 + 11 + 0.5 - 7] 22,500
174,400
NASIR ABBAS FCA

Workings
Investment 31,000
Value of NCI [37,600 x 25%] 9,400
Share premium 2,400
Pre-acq RE 8,200
(37,600)
h
1,800
uk
hr
3,000
75% 2,250
ha 11,250

P RE 49,500
sS
Less: URP [9 x 20% x 1/2] (900)
Add: S RE 25,600
17,400
rd
75% 13,050
60,650
ga
W-4 NCI Rs.

Value at acq. 9,400
RE [17.4 x 25%] 4,350
Re
14,500
NASIR ABBAS FCA

Solution No. 3
P Group
as at June 30, 2019
Non current assets Rs.
PPE [65 + 60] 125,000
Investments [30 - 21 + 5] 14,000
Current assets
Inventories [9 + 10 - 0.5] 18,500
Current account [5 + 2 - 7] -
Debtors [11 + 10] 21,000
Cash and bank [5 + 8 - 2] 11,000
h
189,500
Equity
uk
Share premium 4,000
hr
Bank loan 20,000
Current liabilities
Creditors [16 + 11]
ha 27,000
Current account [7 - 7] -
189,500
sS
Workings
Investment 21,000
Fair value of NCI [600 x 9.5] 5,700
rd

Share premium 3,000
Pre-acq RE (4,000) (29,000)
ga
(2,300)

P RE 52,000
Add: Negative goodwill 2,300
Re
Add: S RE 22,000
Less: Pre-acq 4,000
Less: URP [1 x 5/10] (500)
25,500
80% 20,400
74,700
W-3 NCI Rs.
Fair value 5,700
RE [25.5 x 20%] 5,100
10,800
NASIR ABBAS FCA

Solution No. 4
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [90 + 64 + 2] 156,000
Investments [80 - 75 +5] 10,000
Current assets
Inventories [11 + 10 - 1.2] 19,800
h
Current account [8 - 8] -
Debtors [10 + 11] 21,000
Cash and bank [5 + 8] 13,000
uk
221,000
Equity
hr
Share premium 5,000
Non-controlling interest [W-4]
ha 7,400
Current liabilities
Creditors [16 + 18] 34,000
Current account [5 + 3 - 8] -
sS
221,000
-
Workings
rd
Investment 75,000
Value of NCI [80,000 x 10%] 8,000
ga
Share premium 4,000

Pre-acq RE 28,000
Fair value adj. 2,000
(80,000)
Re

1,200

-
90% -
9,000
NASIR ABBAS FCA


P RE 94,000
Less: URP [3 x 40%] (1,200)
Add: S RE 25,000
Less: Management fees (3,000)
(6,000)
90% (5,400)
85,600
W-4 NCI Rs.

Value at acq. 8,000
h
RE [6 x 10%] (600)
7,400
uk
Solution No. 5
P Group
hr
as at June 30, 2019
Rs.
Non current assets
PPE [90 + 70] 160,000
Goodwill [W-1]
Current assets
ha 8,000
Inventories [12 + 10 + 5 - 1] 26,000

Debtors [10 + 12 - 5] 17,000
Cash and bank [5 + 5] 10,000
sS
221,000
Equity
rd
Share premium 6,000

Current liabilities
ga
Creditors [21 + 16 + 5 - 5] 37,000
221,000
Workings
Re

Investment 41,000
Fair value of NCI 25,600
Less: net assets at acq:
Share premium 4,000
Pre-acq RE 11,000
Fair value adj. 2,000 (57,000)
8,000
NASIR ABBAS FCA


P RE 71,000
Add: S RE 37,000
Less: Fair value adj. (2,000)
Less: URP [5 x 25/125] (1,000)
21,400
60% 12,840
83,840
W-3 NCI Rs.

Fair value 25,600
h
RE [21.4 x 40%] 8,560
34,160
uk
Solution No. 6
P Group
hr
as at June 30, 2019
Rs.
Non current assets
PPE [60 + 70 + 4 - 1.6] 132,400
Goodwill [W-1]
ha 5,160
Current assets
Inventories [12 + 15 + 3 - 0.5] 29,500
Debtors [21 + 13 + 4 - 11] 27,000
sS
Cash and bank [5 + 7 - 4] 8,000
202,060
Equity
Share premium 5,000
rd

Current liabilities
ga
Creditors [14 + 17 + 3 - 11] 23,000

202,060
Workings
Re
Investment 38,000
Pre-acq RE 18,000
FV adjustment - P&M 4,000 (60,000)
5,160
NASIR ABBAS FCA


P Other reserves
3,000
55% 1,650
1,650
P RE 63,000
Less: URP [3 x 20/120] (500)
Add: S RE 47,000
Less: Extra depreciation [4 x 2/5] (1,600)
h
25,400
uk
55% 13,970
76,470
W-4 NCI Rs.
FV of NCI 29,160
hr
Other reserves [3 x 45%] 1,350
RE [25.4 x 45%] 11,430
41,940
W-5 Intercompany Debtor / Creditor

ha Rs. Rs.
P S
Given balance 7,000 8,000
Goods in transit [35 - 32] - 3,000
sS
Wrong receipt 4,000 -
Correct balance 11,000 11,000
Solution No. 7
P Group
rd

as at June 30, 2019
Rs.
ga
Non current assets

PPE [75 + 75 - 3 + 1.2 - 2 + 0.2] 146,400
Loan to S [15 - 3 - 12] -
Re
Current assets
Inventories [16 + 15] 31,000
Debtors [11 + 18] 29,000
Cash and bank [5 + 3 + 4.5] 12,500
223,900
NASIR ABBAS FCA

Equity Rs.
Share premium 4,000
Loan from P [12 - 12] -
Current liabilities
Creditors [21 + 15] 36,000
223,900
Workings
h
Investment 42,500
uk
Value of NCI [52,000 x 70%] 15,600
Share premium 3,500
hr
Pre-acq RE 14,000
Fair value adj. (3,000)
(52,000)
Goodwill at acquisition
ha 6,100
5,000
sS
3,500
rd
70% 2,450
13,450

ga
P RE 78,500
Add: Interest income [15 x 10%] 1,500
Less: Profit on machine (2,000)
Re
Add: Excess dep. [2 x 20% x 6/12] 200

Add: S RE 39,500
Add: Extra dep. [3 x 2/5] 1,200
26,700
70% 18,690
95,790
NASIR ABBAS FCA

W-4 NCI Rs.

Value at acq. 15,600
Other reserves [3.5 x 30%] 1,050
RE [26.7 x 30%] 8,010
24,660
Solution No. 8
P Group
as at June 30, 2019
Rs.
Non current assets
h
PPE [80 + 60] 140,000
Brand [5 - 1.5] 3,500
Investments [60 - 54 + 10] 16,000
uk
Current assets
Inventories [16 + 10 - 2.4] 23,600
Debtors [11 + 6] 17,000
hr
Cash and bank [5 + 2] 7,000
210,520
Equity
Share capital
Share premium
ha 50,000
5,000
sS
Current liabilities
Creditors [17 + 11] 28,000
210,520
Workings
rd
Investment 54,000
Fair value of NCI 5,700
ga
Share premium 3,000

Pre-acq RE 15,000
Brand 5,000 (54,000)
Re

3,420
W-2 Other reserves
4,000
[2700 / 3000] 90% 3,600
15,600
NASIR ABBAS FCA


P RE 88,000
Add: S RE 39,000
Less: Amortization [5 x 1.5/5] (1,500)
Less: URP [16 x 60% x 1/4] (2,400)
17,820
90% 16,038
104,038
W-4 NCI Rs.
FV of NCI 5,700
h
RE [17.82 x 10%] 1,782
7,882
uk
Solution No. 9
P Group
as at June 30, 2019
hr
Rs.
Non current assets
PPE [80 + 57 - 4 + 0.4] 133,400
Current assets
ha
Inventories [8 + 5 - 0.5] 12,500
Debtors [9 + 12] 21,000
Cash and bank [7 + 6] 13,000
sS
185,260
Equity
Share capital [45 + 3.2 x 3/5 x Rs. 10] 64,200
Share premium [5 + 3.2 x 3/5 x Rs. 8] 20,360
rd

Loan notes 16,000
ga
Current liabilities
Creditors [9.5 + 11.6] 21,100
185,260
Re
Investment:
Shares [3200 x 3/5 x 18] 34,560
Loan notes 16,000
Share premium 4,000
FV adj. (4,000)
Pre-acq RE [23.4 - 9] 14,400 (55,400)
5,360
NASIR ABBAS FCA


-
80% -
3,000
P RE 41,500
Add: S RE 23,400
Add: Extra dep. 400
h
Less: URP [5 x 25/125 x 50%] (500)
uk
7,900
80% 6,320
47,820
hr
W-4 NCI Rs.
FV of NCI 11,200
RE [7.9 x 20%] 1,580
12,780
ha
Solution No. 10
P Group
sS
as at June 30, 2019
Rs.
Non current assets
PPE [75 + 65] 140,000
rd
Investments [60 - 58 + 8] 10,000

Brand 4,500
Current assets
Inventories [16 + 9 - 1] 24,000
ga
Debtors [11 + 11] 22,000

Cash and bank [5 + 4.5] 9,500
210,000
Re
Equity
Share premium 5,000
Current liabilities
Creditors [22 + 12] 34,000
210,000
-
Investment 58,000
Value of NCI [81,000 x 25%] 20,250
NASIR ABBAS FCA


Share premium 4,000
Pre-acq RE [20.5 + 18 x 6/12] 29,500
Brand 4,500
(81,000)
(2,750)

h
-
75% -
uk
15,000

P RE 75,000
hr
Add: Negative goodwill 2,750
Add: S RE 38,500
Less: URP [(7 + 3) x 25% x 40%] (1,000)
ha 8,000
75% 6,000
83,750
sS
W-4 NCI Rs.
RE [8 x 25%] 2,000
22,250
rd
Solution No. 11
P Group
as at June 30, 2019
ga
Rs.
Non current assets
PPE [70 + 60 - 4 + 0.4] 126,400
Re
Investment 5,000
Brand [6 - 0.8] 5,200
Current assets
Inventories [16 + 10] 26,000
Debtors [11 + 9] 20,000
Cash and bank [5 + 6] 11,000
200,000
Equity Rs.
Share premium 6,000
NASIR ABBAS FCA


Current liabilities
Creditors [17 + 14] 31,000
200,000
-
Workings
Investment [2,400 x 25] 60,000
h
Share premium 3,000
uk
Pre-acq RE [43 - 21 x 8/12] 29,000
Brand 6,000 (68,000)
6,400
hr
P RE 67,000
Add: S RE 43,000
Less: Profit on machine
ha (4,000)
Add: Excess dep. [4 x 20% x 6/12] 400
Less: Amortization [6 x 1/5 x 8/12] (800)
9,600
sS
80% 7,680
74,680
W-3 NCI Rs.

FV of NCI 14,400
rd
RE [9.6 x 20%] 1,920

16,320
Solution No. 12
P Group
ga

as at June 30, 2019
Non current assets Rs.

Re
PPE [90 + 80 - 4 + 0.8] 166,800

Investments [50 - 45 + 5] 10,000
Current assets
Inventories [12 + 11] 23,000
Debtors [11 + 12] 23,000
Cash and bank [7 + 8] 15,000
241,200
Equity Rs.
Share premium 5,000
NASIR ABBAS FCA

Current liabilities
Creditors [14.5 + 12] 26,500
Dividend payable [4.5 + 2] 6,500
241,200
Workings
Investment [3,000 x 15] 45,000
Value of NCI [66,000 x 40%] 26,400
h
Share premium 5,000
uk
Pre-acq RE 11,000
FV adj. - P&M (4,000)
(66,000)
hr
5,400
3,400
W-2 Other reserves

ha Rs. Rs.
sS
3,000
60% 1,800
16,800

rd
P RE 81,000
Add: Dividend income [3,000 x 1] 3,000
Add: S RE 42,000
ga

Less: Dividend [5,000 x 1] (5,000)
Add: Extra dep. [4 x 1/5] 800
26,800
Re
60% 16,080
98,080
NASIR ABBAS FCA

W-4 NCI Rs.

Other reserves [3 x 40%] 1,200
RE [26.8 x 40%] 10,720
38,320
Solution No. 13
P Group
as at June 30, 2019
Rs.
h
Non current assets
PPE [100 + 70 + 3 + 4] 177,000
uk
Investments 10,000
hr
Current assets
Inventories [9 + 7] 16,000
Debtors [10 + 8] 18,000
ha
232,500
Equity
sS
Share premium 6,000
Revaluation surplus [W-2] 10,800
Current liabilities
rd
Creditors [14.5 + 9.5] 24,000

Dividend payable [6 + 1.5] 7,500
ga
232,500
-
Workings
Investment 50,000
Re
Fair value of NCI [1,500 x 14] 21,000

Share premium 5,000
Pre-acq RE 10,000
FV adj. - land 3,000 (68,000)
Impairment loss (500)
2,500
NASIR ABBAS FCA

W-2 Revaluation surplus Rs.

P surplus 8,000
Add: S post acq. Surplus [4 x 70%] 2,800
10,800

P RE 84,500
Add: Dividend income [3,500 x 1] 3,500
Less: Dividend declared (6,000)
Add: S RE 35,500
Less: Dividend declared (5,000)
Less: Impairment loss (500)
h
20,000
70% 14,000
uk
96,000
W-4 NCI Rs.

FV of NCI 21,000
hr
Revaluation surplus [4 x 30%] 1,200
RE [20 x 30%] 6,000
28,200
Solution No. 14
AL group
ha
as at June 30, 2014
sS
Rs. in million
Non current assets
PPE [460 + 200 - 15] 645.00
Goodwill [W-1] 30.00
Current assets [W-2] 967.50
rd
1,642.50
Equity
Share capital 600.00
ga
Retained earnings [W-3] 350.40

Non controlling interest [W-4] 91.10
Non current liabilities [200 + 72 -30] 242.00
Current liabilities [300 + 78 - 19] 359.00
Re
1,642.50
Workings [All figures in Rs. million]
W-1 Goodwill
Investment 340.00
FV of NCI 80.00
Less: net assets
Capital 250.00
Retained earnings 140.00 (390.00)
30.00
NASIR ABBAS FCA

W-2 Current assets Rs. in million Rs. in million

AL current assets 595.00
DL current assets 400.00
Inter-company balance (19.00)
URP [(27 + 24) x 20/120] (8.50)
967.50
W-3 Retained earnings

AL RE 325.00
Less: URP on goods [24 x 20/120] (4.00)
Less: URP on equipment [25 - (40 - 30)] (15.00)
DL RE 200.00
h
Less: Pre acq. (140.00)
Less: URP [27 x 20/120] (4.50)
uk
55.50
[2 m / 2.5m shares] 80% 44.40
350.40
hr
W-4 NCI
Fair value 80.00
Share in RE [55.5 x 20%] 11.10
ha 91.10
Solution 15
sS
Galaxy Group
as at June 30, 2015
Rs. in million Rs. in million
Goodwill
Investment 50.00
rd
Fair value of NCI 35.00

Less: net assets
Capital 50.00
ga

Impairment of plant (10.00)
Fair value adj. – land 20.00 (78.00)
7.00
Re
Less: Impairment loss [10%] (0.70)

6.30
NASIR ABBAS FCA

Retained earnings Rs. Rs.

GL RE [40 + 20] 60.00
Less: URP on goods [(5 + 7 - 4) x 20/120] (1.33)
BL RE [18 + 6] 24.00
Add: Impairment of plant 10.00
Less: Impairment loss of GW (0.70)
13.80
[300 / 500 shares] 60% 8.28
66.95
h
NCI
uk
NCI share in post acq. Profits [13.8 x 40%] 5.52
40.52
hr
Solution No. 16
Notes:
- Depreciation rate of 5% must be used for remaining life of building after acquisition
ha
- Final dividend of 20% for 2016 was declared during 2017, therefore, not accounted for in 2016
Yasir Limited
sS
as at June 30, 2016
Rs.
(million)
Non current assets
rd
Fixed assets [180 + 470 + 12 - 1.2] 660.80

ga
Current assets
Stock in trade [160 + 150 - 4.62 - 4.8] 300.58
Other current assets [71 + 50] 121.00
Cash and bank [63 + 151 + 5.92] 219.92
Re
1,492.65
Equity
Non-controlling interest [W-4] 210.46
Current liabilities
Creditors [75 + 51] 126.00
1,492.65
NASIR ABBAS FCA

Workings
Rs. Rs.
W-1 Goodwill (million) (million)
Investment 675.00
Fair value of NCI [50 x 25% x 15] 187.50
Pre-acq RE [W-2] 139.00
FV adj. (building) 12.00 (651.00)
Goodwill at acquisition 211.50
Impairment loss (10%) (21.15)
h
190.35
uk
W-2 Pre acq. RE
RE as at June 30, 2016 258.00
PAT 2016 (11.00)
PAT 2015 (168.00)
hr
Dividend 2015 [500 x 12%] 60.00
139.00

YL RE
ha 340.00
Less: URP [20 x 30/130] (4.62)
Add: Interest not recorded [16 x 12%] 1.92
sS
Add: BL RE 258.00
Less: Pre-acq [W-2] (139.00)
Less: Impairment loss [W-1] (21.15)
Less: URP [32 x 15/100] (4.80)
Less: Extra dep. [12 x 5% x 2] (1.20)
rd
91.85
75% 68.89
406.19
ga
W-4 NCI
FV of NCI 187.50
Share in post acq RE [91.85 x 25%] 22.96
Re
210.46
NASIR ABBAS FCA

Solution No. 17
Notes:
- Remaining life should have been given for depreciation on fair value adjustment on building. However,
in absence of remaining life, same 5% rate has been used for extra depreciation.
- It is assumed that assets requiring fair value adjustments still exist at year end. Therefore, effect of value
adjustment has been taken to balance sheet instead of SL's retained earnings.
- It is assumed that accrual in respect of management fees receivable on April 1, 2017 has been made.
Golden Limited
h
uk
Rs. (million)
Non-current assets
Building [1,600 + 500 - 80 - 10 + 0.13 + 3] 2,013.13
Plant [1,465 + 690] 2,155.00
hr
Current assets
ha
Current assets [2,068 + 780 - 50 - 9 - 50 x 3/12] 2,776.50
7,153.63
Equity
sS
Share premium [730 + 20 x 13] 990.00
Retained earnings [W-2] 3,192.93
rd
Current liabilities
Current liabilities [600 + 1,160 - 50 x 3/12] 1,747.50
7,153.63
ga
Workings
Rs. Rs.
W-1 Goodwill (million) (million)
Investment:
Re
Cash [87 - 15] 72.00

Shares [20 x 25] 500.00 572.00
Share premium 150.00
Pre-acq RE 100.00
FV adj. (building) (80.00)
FV adj. (stock) (50.00)
FV adj. (debtors) (9.00) (561.00)
NASIR ABBAS FCA

Rs. Rs.
W-2 Retained earnings (million) (million)
GL RE 3,150.00
Less: acquisition expenses (15.00)
Less: Profit on sale of building [120 - (240 - 130)] (10.00)
Add: Excess dep. on profit [10 x 5% x 3/12] 0.13
Add: SL RE 210.00
Less: Pre-acq [W-2] (100.00)
Add: Extra dep. on FV adj. [80 x 5% x 9/12] 3.00
Less: Profit on plant [120 - (200 - 80)] -
113.00
h
60% 67.80
uk
3,192.93
W-3 NCI
FV of NCI 198.00
hr
Share in post acq RE [113 x 40%] 45.20
243.20
Solution No. 18
Jasmine Limited
ha
sS
Non current assets

PPE [880 + 330 - 8(W-3)] 1,202.00
Intangible assets [40 + 50 + 15(W-1) - 3(W-2) - 4(W-2)] 98.00
rd
Current assets
Current assets [640 + 345 + 30 - 52 - 25 - 20 x 75%] 923.00
ga
2,328.00
Equity
Re

Current liabilities
Current liabilities [324 + 235 - 52 - 20 x 75%] 492.00
2,328.00
-
NASIR ABBAS FCA

Workings
W-1 Goodwill ----- Rs. (million) ----
Investment:
Cash [280 - 10] 270.00
Shares [10 x 24] 240.00 510.00

Less: net assets acquired:
Pre-acq RE [410 - 60 + 20] 370.00
FV adj. (brand) [40 - 25] 15.00 (585.00)
h
uk
GL RE 720.00
Less: acquisition expenses (10.00)
Less: URP on goods [250 x 60% x 20/120] (25.00)
Add: SL RE 410.00
hr
Less: Pre-acq [W-2] (370.00)
Less: Extra amort. on FV adj. [15 / 5] (3.00)
Less: Impairment [(40 - 40/5) - 28] (4.00)
Add: Interest on loan [120 x 10% x 6/12] 6.00
Less: URP on machine [W-3]
ha (8.00)
31.00
75% 23.25
708.25
sS
W-3 URP on machine

Profit on machine 12.00
Excess dep. [12 x 8/24] (4.00)
8.00
rd
W-4 NCI
FV of NCI 180.00
Share in post acq RE [31 x 25%] 7.75
ga
187.75
Re
NASIR ABBAS FCA

Master question SOLUTION
Pulp Group
as at June 30, 2020
Rs.
Non current assets
PPE [125 + 120 - 8 + 3 - 1.2 - 7.6 - 7.8] 223,400
Intangible asset [12 - 4.8] 7,200
Goodwill [W-1] -
Current assets
h
Inventories [18 + 14 + 4 - 1.8 - 2] 32,200
Debtors [22 + 24 - 13] 33,000
uk
Other receivables [11 + 8 - 2.8] 16,200
Cash and bank [9 + 9] 18,000
330,000
hr
Equity
Share capital [70 + 2.8 x 2/5 x 10] 81,200
Share premium [10 + 2.8 x 2/5 x 22] ha 34,640
sS
Deferred consideration [7,650 x 1.12] 9,256
Current liabilities
rd
Contingent consideration [2,800 x 3] 8,400

Creditors [16 + 15 + 4 - 13] 22,000
Other payables [14 + 19 - 2.8] 30,200
330,000
ga
-
Workings
Re
- Cash [7 x 2,800] 19,600

- Share exchange [2,800 x 2/5 x 32] 35,840
- Deferred consideration [2,800 x 4 x 1.1-4] 7,650
- Contingent consideration [2,800 x 1.25] 3,500
- Land 10,000
Value of NCI [84,500 x 30%] 25,950
Less: net assets at acquisition:
Share premium 20,000
RE 14,000
FV adj. - Land 2,000
FV adj. - Plant 3,000
Brand 12,000
Contingent liability (7,000)
DTL [(3,000 + 12,000 - 7,000) x 25%] (2,000) (86,500)
Impairment loss [22,914(W-3.1) x 70%] (16,040)
-
W-2 Other reserves Pulp Seed
h
--------- Rs. --------
uk
Less: Pre-acq - (4,500)
2,500
Add: Share in Seed [2,500 x 70%] 1,750
10,750
hr
W-3 Retained earnings ha Pulp Seed
--------- Rs. --------
RE 74,000 58,000
Less: Finance cost [7,650 x 1.12 - 7,650] (1,606) -
sS
Less: Change in value of contingent cons. [2,800 x 1.75] (4,900) -
Add: Gain on land transfer 2,000 -
Less: Acquisition related cost [21,000 - 19,600] (1,400) -
Less: Extra dep. on FV adj. of plant [3,000 x 2/5] - (1,200)
Less: FV adj. of land - (2,000)
rd
Less: Amortization of brand [12,000 x 2/5] - (4,800)

Add: Contingent liability settled - 7,000
Less: URP on goods [(4,000 + 5,000) x 20%] [8,000 x 25%] (1,800) (2,000)
Less: URP on machine [8,000 - 8,000 x 1,900/38,000] - (7,600)
ga
Less: Impairment loss of GW (16,040) -

Less: Impairment loss of PPE (W-3.1) - (7,800)
Add: Deferred tax expense (W-5) 800 4,100
29,700
Re
Add: Share in S [29,700 x 70%] 20,790
71,844
W-3.1 Impairment loss Rs.
Carrying amount as per question:
PPE 120,000
Fair value adjustment of Plant [3,000 - 1,200] 1,800
Goodwill [16,040 ÷ 0.7] 22,914
144,714
Allocation of impairment loss:

- Goodwill 22,914
- PPE [30,714 - 22,914] 7,800
h
W-4 NCI Rs.
uk
Value of NCI (W-1) 25,950
Other reserves [2,500 x 30%] 750
RE [29,700 x 30%] 8,910
35,610
hr
W-5 Deferred tax
ha Pulp Seed
--------- Rs. --------
Adjustments in carrying amounts of net assets:
Acquisition related cost (1,400) -
Extra dep. on FV adj. of plant - (1,200)
sS
Amortization of brand - (4,800)
Contingent liability settled - 7,000
URP on goods (1,800) (2,000)
URP on machine - (7,600)
Impairment loss of PPE - (7,800)
rd
[A] (3,200) (16,400)
Tax on adjustments after acquisition [A x 25%] (800) (4,100)

Tax on acquisition (W-1) - 2,000
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Balance as per question 13,000 16,000

12,200 13,900
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Master question SOFP [Basic]
Question
Pulp Seed
-------------- Rs.--------------
Non-current assets
Investment in Seed 21,000 -
Current assets
Debtors 22,000 24,000
Other receivables 11,000 8,000
h
Cash & bank 9,000 9,000
206,000 175,000
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Pulp Seed
Equity ------------- Rs.-----------
hr
Deferred tax 13,000 16,000
Current liabilities
Creditors 16,000 15,000
Other payables 14,000 19,000
206,000 175,000
sS
(1) Pulp acquired 70% shares of Seed on July 1, 2018 when its other reserves were Rs. 4,500 and retained earnings
were Rs. 14,000. Following purchase consideration was agreed:
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• An immediate cash payment of Rs. 7 per share.

• A deferred cash payment of Rs. 4 per share payable on June 30, 2022.
• A contingent cash payment of Rs. 3 per share payable on September 30, 2020 if sale of a new product
achieves its promised benchmark till June 30, 2020. The said target was duly achieved in June 2020.
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• A share exchange of 2 shares of Pulp for every 5 shares of Seed. Market shares prices at acquisition date
were Rs. 32 (Pulp) and Rs. 26 (Seed).
• A plot of Land with fair value at acquisition date of Rs. 10,000 (carrying value was Rs. 8,000).
Pulp only recorded immediate cash payment plus commission paid to investment banker as cost of investment.
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Land transferred as consideration is still appearing in Pulp’s books. Fair value of contingent consideration at
the date of acquisition was Rs. 1.25 per share. Pulp’s cost of capital is 10%.
(2) At acquisition date, carrying amounts of all assets and liabilities of Seed were equal to fair values except
following:
----------- Rs. ----------
Land 15,000 17,000
Plant 24,000 27,000
Nasir Abbas FCA Page 1 of 2

Master question SOFP [Basic]
Remaining useful life of Plant at acquisition date was 5 years. The land was sold by Seed during 2020 for Rs.
19,500.
(3) At acquisition date there was an internally generated brand of Seed, however, its fair value could not be
estimated reliably at that date due to insufficient information. Though its remaining life was estimated to be 5
years. The financial consultant provided with reliable estimate of fair value at Rs. 12,000 on receipt of sufficient
information 4 months later.
(4) At acquisition date there was a pending court case against Seed for which no provision was recognized in its
books as outflow of economic resources was not probable. At that date fair value of the contingent liability
was determined at Rs. 7,000. In respect of this claim, on June 30, 2019 Seed recognized a provision for Rs.
9,000 as outflow of economic resources became probable. The claim was finally settled during 2020 for Rs.
h
10,000.
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(5) It is PL’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(6) There was no need for impairment test in 2019, however, recoverable amount of CGU of Seed (i.e. comprising
of PPE and Goodwill) on June 30, 2020 was Rs. 114,000.
hr
(7) The following intercompany sales were made during the year 2020:
Sales Included in buyer’s Gross

Pulp to Seed
ha ------------------- Rs. --------------
20,000 5,000 20%
Seed to Pulp 36,000 8,000 25%
sS
In respect of above intercompany sales, Seed’s books show a net balance owed to Pulp is Rs. 9,000. However,
it differs from balance as per Pulp’s books due to goods sold by Pulp for Rs. 4,000 on June 28, 2020 but were
received and recorded by Seed on July 3, 2020.
(8) On January 1, 2020 Seed sold a machine to Pulp for Rs. 38,000 at a profit of Rs. 8,000. Pulp charged depreciation
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on that machine for Rs. 1,900.
(9) During June 2020, Pulp and Seed declared ordinary dividend of 5% and 10% respectively which would be
payable in next month. Both companies have duly recorded the dividends.
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(10) Deferred tax liabilities are calculated on all temporary differences at a tax rate of 25%. Gain on sale of land is
not taxable. No tax deduction will be allowed on deferred consideration and contingent consideration.
Required:
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Prepare consolidated statement of financial position as at June 30, 2020.

BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
CONSOLIDATION – SOCI WITH ONE SUBSIDIARY

Consolidated statement of comprehensive income (or Group statement of comprehensive income) is line by line
addition of all values from “Sales” to “Total comprehensive income” of “P” and “S”, subject to certain adjustments.
BASIC PRESENTATION
After line by line addition till Total comprehensive income, “Profit after tax” and “Total comprehensive
income” is attributed to:
- Shareholders of “P”
- NCI
We have already studied consolidation adjustments in sufficient detail in “Consolidation of SOFP”. In this chapter will
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discuss the effect of those adjustments in Consolidated SOCI for the year as follows:
uk
Note – If P has recorded investment in S as per IFRS 9, then do not forget to reverse any fair value gain/loss recorded.
1. IMPAIRMENT LOSS FOR THE YEAR
hr
(1) Impairment loss for the current year attributable to other assets shall be:
- ADDED to “Admin expenses/Cost of sales”
- DEDUCTED from “S’s PAT” in NCI working
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(2) Impairment loss attributable to goodwill shall be treated as follows:
(a) NCI valued at proportionate share (b) NCI valued at Fair value
sS
Impairment loss is ADDED to “Admin Impairment loss is:
expenses” (i) ADDED to “Admin expenses”
(ii) DEDUCTED from S PAT in “NCI working”
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2. ACQUISITION RELATED COSTS
In case of first year of acquisition, acquisition related costs which were capitalized by P in its cost of
investment, shall be adjusted as follows:
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Acquisition related transactions costs (except for the issue costs relating to debt or equity
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securities issued as consideration, in which case such costs are accounted for as IAS 32 and IFRS 9)
shall ADDED to “Finance cost” OR “Admin expenses”
3. INTER COMPANY SALES
Either sales are from “P to S” or “S to P”, these transactions are adjusted in the same manner
“Sales value” is ELIMINATED from:

(i) Sales
(ii) Cost of sales (or Purchases, if breakup of Cost of sales is given)
NASIR ABBAS FCA Page 1 | 7

4. INTER COMPANY MANAGENT FEES
P or S may provide management services to other and charge certain fees. This fee is an inter-company
transaction and must be eliminated.
“Management fees” is DEDUCTED from:

(i) Other income of “P”
(ii) Admin expenses of “S”
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URP is the profit included in the amount of inventory out of inter-company sale. Inventory value may be given
in question or mentioned as a proportion of intercompany sale.
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Calculation of URP:
OR
hr
OR
URP = Total profit in the inter company sale x % goods held in stock
ha
URP is ADDED to “Cost of sales” URP is:

sS
(i) ADDED to “cost of sales”
(ii) DEDUCTED from S’s PAT in “NCI working”
In case of URP in opening stock, above adjustments will be inverse.

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6. EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of S in its books

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Calculation of Extra depreciation for the year:

= FV adjustment ÷ remaining useful life
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Extra depreciation for the year is:

(i) ADDED to “cost of sales” or “admin expenses”
(ii) DEDUCTED from S’s PAT in “NCI working”
In case of negative adjustment to S’s net assets, above adjustments will be reversed
Note – If subsequently S has accounted for any such fair value adjustment in its books, then its effect in current year
SOCI must be reversed.

7. INTER COMPANY SALE OF NON-CURRENT ASSET DURING THE YEAR
Calculation of Profit:
Profit = Sale value of asset x margin %
OR
Sale value of asset x markup / (100 + markup)
In the year of disposal:
(1) If seller recorded this sale of asset as “Sales”

- DEDUCT sale price from “Sales”
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- DEDUCT cost from “Cost of sales”
In case of S to P sale, also DEDUCT the profit on sale from S’s PAT in NCI working
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(2) If seller recorded profit on sale of asset as “Other income”
hr
Profit is DEDUCTED from “Other income” Profit is DEDUCTED from:
(i) “Other income”
(ii) S's PAT in “NCI working”
ha
8. EXCESS DEPRECIATION FOR INTER-COMPANY SALE OF DEPRECIABLE ASSET
When asset is depreciated, seller’s profit is realized, therefore, this adjustment is made in seller’s profits. It is
sS
calculated using same depreciation basis as of buyer company in its books
Calculation of Excess depreciation during the year:

= Profit x depreciation %
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Excess depreciation is DEDUCTED from Excess depreciation is:

“cost of sales” or “admin expenses” (i) DEDUCTED from “cost of sales” or “admin
expenses”
(ii) ADDED to S’s PAT in “NCI working”
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9. INTEREST ON DEBENTURES / DIVIDEND ON PREFERENCE SHARES
First ensure whether both entities have recorded the interest / dividend as per accrual concept. If not
properly recorded, then accordingly account for it.
Consolidation adjustment (After proper recording):
P’s share in the interest / dividend is DEDUCTED from:

(i) Other income
(ii) Finance cost

10. ORDINARY DIVIDEND BY “S”
First ensure whether both entities have recorded the dividend as per relevant IAS. If not properly recorded,
then accordingly account for it.
P’s share in Post-acquisition dividend is DEDUCTED from “other income”
11. NEGATIVE GOODWILL
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It is recognized as income and generally shown as a separate line item of income on Group statement of
comprehensive income ONLY in the year of acquisition.
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12. S’s INTANGIBLE ASSET RECOGNIZED AT ACQUISITION
hr
Amortization for the year, if any, is ADDED to “admin expenses” and DEDUCTED from S’s PAT in NCI
working.
13. S’s CONTINGENT LIABILITY RECOGNIZED AT ACQUISITION
ha
1) Any increase for the year in contingent liability value recognized only for consolidated SOFP, is
ADDED to “Admin expenses” and DEDUCTED from S PAT in NCI working.
sS
2) Reverse any treatment if accounted for by S in its SOCI in respect of this obligation on the
face of consolidated SOCI as well as in S PAT in NCI working.
14. DEFERRED CONSIDERATION

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Calculation for finance cost for the year:

= Present value of deferred consideration at year end – present value of deferred consideration at year start
OR
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= Present value of deferred consideration at year start x discount rate
Consolidation adjustment (if still unrecorded):

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Finance cost on deferred consideration for the year will be ADDED to the finance cost for the year in
Group SOCI.
15. CONTINGENT CONSIDERATION
Calculation for adjustment for the year:

= Fair value of contingent consideration at year end – fair value of contingent consideration at year start
Fair value change on contingent consideration for the year will be RECOGNIZED to the Admin expenses
for the year in Group SOCI.

16. TRANSFER OF NON-CASH ASSET AS PURCHASE CONSIDERATION
In first year of acquisition, profit/loss on transfer of non-cash asset shall be recognized in Group SOCI. If
the asset was depreciable then reverse any depreciation, for the period after acquisition, charged in P
books.
If sufficient data is available to prepare separate SOCI of S for post-acquisition period then use this specific
period SOCI for consolidation purposes. However generally in questions such data is not available ,therefore,
all incomes and expenses of S are assumed to occur evenly throughout the year unless any specific expense
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or income is mentioned to be exceptional and specifically relates to a particular period. In which case
following adjustments are made:
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Acquisition during the year has following effects on consolidated figures:
hr
Effect on: Adjustment:
All items of S’s SOCI Figures are time apportioned as per months since acquisition,
except specific period related items (see note below)
Intercompany eliminations
ha Intercompany transactions in post-acquisition period are
eliminated.
Extra depreciation on FV adjustment Calculated for post-acquisition period in the year
For NCI working, S’s PAT is adjusted as: [S’PAT +/- specific period related item (see note below)] x n/12
sS
–/+ specific period related item
Note:
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Generally all expenses and incomes of S are assumed to occur evenly throughout the year therefore all these items are
time apportioned according to post acquisition months. However there may be certain expenses and incomes which are
mentioned to be exceptional and they specifically relate to pre or post acquisition period.
Example:
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P acquired controlling interest in S on August 1, 2013. S’s PAT for the year is Rs. 74,000. Its other income for the year
includes Rs. 2,000 which specifically relates to December 2013. Now S’s PAT in NCI working will be as [(74,000 - 2,000) x
5/12 + 2,000 = 32,000]
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18. DEFERRED TAX
Tax effect of consolidation adjustments for the year shall be accounted in deferred tax expense for the year.
Deferred tax on P’s adjustments Deferred tax on S’s adjustments
It is INCLUDED in “Tax expense” It is:

(i) INCLUDED in “Tax expense”
(ii) CHARGED to S’s PAT in “NCI working”


P Group
Consolidated Statement of Comprehensive income
For the year ended …………………..
Rs.
Sale XXX
(P’s + S’s x n/12 – Inter-company transaction)
Cost of sales (XXX)
(P’s + S’s x n/12 – Inter-company transaction + URP on goods [P or S] + Extra depreciation
on Fair value adjustment – Excess depreciation on asset sale)
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Gross profit (Cast down) XXX
Distribution cost (XXX)
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(P’s + S’s x n/12)
Administrative expenses (XXX)
(P’s + S’s x n/12 + unrecorded expense – Inter-company transaction – Excess depreciation
on asset sale + Extra depreciation on fair value adjustment + Amortization on asset
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recognized at acquisition + total impairment loss of goodwill for the year + value increase
of contingent liability of S + fair value change in contingent consideration)
Finance cost (XXX)
(P’s + S’s x n/12 – Intercompany finance cost + finance cost on deferred consideration)
Other income
ha XXX
(P’s + S’s x n/12 – Intercompany interest / dividend – Profit [P or S] on asset sale during
the year + unrecorded income)
sS
Profit before tax (Cast down) XXX
Tax (XXX)
(P’s + S’s x n/12 + tax on consolidation adjustments)
Profit after tax (Cast down) XXX
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Revaluation gain / (loss) XXX
(P’s + S’s)
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Fair value gain / (loss) XXX

(P’s + S’s)
Total comprehensive income for the year XXX
Profit for the year attributable to:
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Shareholders of Parent XXX

Non-controlling interest (W – 1) XXX
XXX
Total comprehensive income attributable to:
Shareholders of Parent XXX
Non-controlling interest XXX
(“Answer of W – 1” + NCI % x S’s other comprehensive income)
XXX

WORKINGS
(W – 1) Non controlling interest

Rs.
S’s profit after taxation (Notes) XXX

Less: URP on goods [ S to P ] (sale during the year) (XXX)
Less: Profit on assets [ S to P ] (sale during the year) (XXX)
Less: Extra depreciation for the period on FV adjustment (XXX)
Less: Amortization for the period on asset recognized (XXX)
Less: Value change in contingent liability of S (XXX)
Less: unrecorded expense (XXX)
Less: Impairment loss for the year on other assets of CGU (XXX)
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Less: Impairment loss for the year on goodwill [If NCI is at fair value] (XXX)
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Add: unrecorded income XXX
Add: Excess dep. for the period on asset sale [S to P] XXX
XXX
NCI share @ (% share in ordinary shares) XXX
hr
Notes:
1. Intercompany eliminations have nothing to do with NCI working
2. Also see note on page no. 5
ha
“n” means number of months from acquisition date to year end, in case of acquisition during the year.
sS
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions (1)
PRACTICE QUESTIONS
Question No. 1
Following are the statements of comprehensive income for the year ending June 30, 2019:
P S
---------- Rs.--------
Sales 120,000 100,000
Cost of sales (75,000) (65,000)
Gross profit 45,000 35,000
Distribution cost (12,000) (8,000)
Admin expenses (10,000) (6,000)
Finance cost (3,000) (2,000)
h
Other income 1,500 500
Tax (7,000) (5,500)
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Profit after tax 14,500 14,000
Revaluation gain - 1,200
Total comprehensive income 14,500 15,200
hr
Following additional information is available:
(i) P acquired 70% shares of S some years ago.
(ii)
(iii)
ha
Impairment loss of goodwill for the year was Rs. 3,000.
Non-controlling interest is valued at fair value.
(iv) During the year P sold goods to S for Rs. 9,000.
Required:
sS
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 2
P S
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---------- Rs.--------
Sales 125,000 90,000
Cost of sales (82,000) (57,000)
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Finance cost (4,000) (1,000)
Other income 6,000 -
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Tax (7,500) (3,200)

Revaluation gain - -

(i) P acquired 75% shares of S some years ago.
(ii) During the year S sold goods to P for Rs. 8,200.
(iii) Since acquisition, P has been providing management services to S and charging fees for those
services. During the year P invoiced Rs. 3,500 for such services to S.
NASIR ABBAS FCA

Required:
Question No. 3
P S
---------- Rs.--------
Sales 90,000 80,000
Cost of sales (54,000) (42,000)
h
Finance cost (3,000) (1,200)
uk
Tax (6,000) (7,200)
hr
Revaluation gain 1,500 2,000

(i)
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P acquired 60% shares of S some years ago.
(ii) Impairment loss of goodwill for the year was Rs. 2,000.
(iii) Non-controlling interest is valued at fair value.
(iv) During the year S sold goods to P for Rs. 7,000 charging a margin of 20%. At year end 30% of these
sS
goods are still held in P’s inventory.
Required:
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Question No. 4
P S
---------- Rs.--------
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Sales 110,000 95,000

Cost of sales (82,000) (62,000)
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Finance cost (2,000) (1,500)

Tax (6,000) (6,050)
Revaluation gain / (loss) 1,000 (300)

(i) P acquired 90% shares of S on January 1, 2018. At acquisition date, office building of S was
undervalued by Rs. 3,000. Its remaining useful life at that date was 10 years.
NASIR ABBAS FCA

(iii) Non controlling interest is valued at proportionate share.
(iv) During the year P sold goods to S for Rs. 8,000 at a markup of 25%. One-fourth of these goods are
still held in S’s stock.
Required:
Question No. 5
P S
---------- Rs.--------
Sales 150,000 120,000
Cost of sales (96,000) (74,000)
h
uk
Finance cost (4,000) (3,000)
Other income 1,000 4,200
Tax (7,500) (7,000)
hr
Revaluation gain (500) 200
ha
(i) P acquired 85% shares of S some years ago. At acquisition date plant and machinery of S was
overvalued by Rs. 15,000. Its remaining life at that date was 10 years.
sS
(iii) Non-controlling interest is valued at fair value.
(iv) On July 1, 2018 S sold a machine to P at a profit of Rs. 2,500. Carrying amount of that machine in
S books was Rs. 35,500. P depreciated this machine on straight line basis over a life of 5 years.
Both companies include depreciation on plant and machinery in cost of sales.
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Required:
Question No. 6
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P S
---------- Rs.--------
Sales 140,000 120,000
Cost of sales (85,000) (70,000)
Re

Finance cost (5,000) (6,300)
Tax (8,500) (7,000)
Revaluation gain 200 400
NASIR ABBAS FCA


(i) P acquired 5000 shares out of a total of 8000 shares of S some years ago.
(ii) On January 1, 2019 P gave a loan of Rs. 50,000 to S. Interest on this loan is 4% per annum payable every
six months.
(iii) During the year S sold goods to P for Rs. 20,000 at a margin of 30%. One-fifth of these goods are still
included in P’s stock.
(iv) During the year S paid ordinary dividend of Re. 0.5 per share. Both companies have properly recorded
this dividend.
Required:
Question No. 7
h
P S
uk
---------- Rs.--------
Sales 100,000 90,000
Cost of sales (70,000) (58,000)
hr
Finance cost (3,000) (2,000)
Tax
ha (4,200) (6,000)
Revaluation gain 100 300
sS

(i) P acquired 80% shares of S on July 1, 2018 for Rs. 30,800.
(ii) At acquisition date fair value of total net assets of S was Rs. 40,000. Included in this value was an
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internally generated brand of S having a fair value of Rs. 5,000 and estimate life of 5 years.
(iii) During the year S paid total ordinary dividend of Rs. 400 to its shareholders.
Required:
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Question No. 8
P S
Re
---------- Rs.--------
Sales 140,000 120,000
Cost of sales (75,000) (84,000)
Finance cost (3,000) (6,000)
Tax (11,200) (3,000)
NASIR ABBAS FCA


(i) P acquired 70% shares of S on November 1, 2018.
(ii) At acquisition date fair value of delivery vans of S were higher than book value by Rs. 4,500.
Remaining life of vans at acquisition date was 3 years. Depreciation of these vans is charged in
distribution cost.
(iii) P had been selling goods to S for some years. Average sales were Rs. 1,000 per month. Out of the post-
acquisition sales, goods costing Rs. 2,000 and having sales value Rs. 3,000 were still held by S at year
end.
(iv) Profits are assumed to occur evenly throughout the year.
Required:
h
Question No. 9
uk
P S
---------- Rs.--------
Sales 150,000 120,000
Cost of sales (80,000) (72,000)
hr
Finance cost (3,000) (3,800)
Other income
ha 4,600 1,800
Tax (13,500) (9,000)
sS
- - -

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(i) P acquired 60% shares of S on September 1, 2018.

(ii) At acquisition date office building was undervalued. This fair value adjustment would result in an
increase of Rs. 400 in the depreciation for the post acquisition period of the year.
(iii) Immediately after acquisition P advanced a loan of Rs. 30,000 to S at an annual interest of 8%. Both
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companies have properly accounted for this interest.

(iv) S had been selling goods to P for some years. Average sales were Rs. 1,000 per month. Out of the post-
acquisition sales, some goods were still held by P at year end, in which profit of Rs. 900 was included.
(v) S other income includes an exceptional item of Rs. 300 which was earned in July 2018.
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(vi) All incomes and expenses, except for those mentioned in points (iii) and (v), are assumed to occur
evenly throughout the year.
Required:
NASIR ABBAS FCA

Question No. 10
The following summarized Trial Balances pertain to Rivera Limited (RL) and its subsidiary Chenab Limited (CL) for the year
RL CL
Dr. Cr. Dr. Cr.
-------------- Rs. in million -----------
Sales - 285 - 320
Cost of sales 186 - 240 -
Selling and distribution expenses 27 - 25 -
Administration expenses 17 - 15 -
Finance charges 8 - 10 -
Tax expense 19 - 12 -
Share capital (Rs. 100 each) - 350 - 200
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Retained earnings – 1 January 2014 - 50 - 36
Property, plant and equipment 190 - 263 -
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Current assets 23 - 35 -
Investment in CL (1.6 million shares) 250 - - -
Current liabilities - 35 - 44
720 720 600 600
hr
Other relevant information is as under:
(i) RL acquired the controlling interest in CL on 1 January 2014. On the acquisition date, fair value of CL's net assets
ha
was equal to its book value except for an office building whose fair value exceeded its carrying value by Rs. 18
million. The remaining useful life of the office building on the acquisition date was 15 years.
(ii) Inter-company sales are invoiced at cost plus 20%. Details of inter-company transactions for the year ended 31
December 2014 are as follows:
• RL sold goods amounting to Rs. 60 million to CL. At year-end, inventory of CL included Rs. 9.60 million
sS
in respect of such goods.
• CL sold goods amounting to Rs. 48 million to RL. At year-end, inventory of RL included Rs. 16.80 million
in respect of such goods.
(iii) There were no inter-company balances outstanding at the year-end.
(iv) RL values the non-controlling interest at its proportionate share of CL's identifiable net assets.
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(v) As at 31 December 2014, goodwill of CL was impaired by 10%.

Required:
In accordance with the requirements of International Financial Reporting Standards, prepare:
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(a) Consolidated Statement of Comprehensive Income for the year ended 31 December 2014. (11)
(b) Consolidated Statement of Financial Position as at 31 December 2014. (06)
(Ignore tax effects on the adjustments) [Spring 2015, Q#1]
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Question No. 11
The summarized trial balances of Oscar Limited (OL) and United Limited (UL) as at 31 December 2015 are as follows:
OL UL
Dr. Cr. Dr. Cr.
-------------- Rs. in million -----------
Sales - 835 - 645
Cost of sales 525 - 396 -
Operating expenses 115 - 102 -
Share capital (Rs. 10 each) - 600 - 250
Share premium - 150 - 60
NASIR ABBAS FCA

Retained earnings – 1 January 2015 - 265 - 179

Property, plant and equipment 390 - 350 -
Cost of investment 500 - - -
Stock in trade 125 - 115 -
Trade receivables 140 - 125 -
Cash and bank 105 - 103 -
1,965 1,965 1,239 1,239
(i) On 1 May 2015, OL acquired 80% shares of UL. UL has not recognized the value of brand in its books of account.
At the date of acquisition, the fair value of brand was assessed at Rs. 45 million. The remaining useful life of the
h
brand was estimated as 15 years.
(ii) OL charged Rs. 2.5 million monthly to UL for management services provided from the date of acquisition and has
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credited it to operating expenses.
(iii) On 1 October 2015, UL sold a machine to OL for Rs. 24 million. The machine had been purchased on 1 October
2013 for Rs. 26 million. On the date of purchase of machine, it was assessed as having a useful life of ten years
and that estimate has not changed. Gain on disposal was erroneously credited to sales account.
hr
(iv) Other inter-company transactions during the year 2015 were as follows:
Included in buyer’s
Sales closing stock Profit %
------------ Rs. in million ---------
OL to UL
ha 60 20 25% of cost
UL to OL 30 5 20% of sales
UL settled the inter-company balance as on 31 December 2015 by issuing a cheque of Rs. 30 million. However,
sS
the cheque was received by OL on 1 January 2016.
(v) The non-controlling interest is measured at the proportionate share of UL’s identifiable net assets.
It may be assumed that profits of both companies had accrued evenly during the year.
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Required:
Prepare consolidated statement of comprehensive income for the year ended 31 December 2015 and consolidated
statement of financial position as at 31 December 2015. (18)
[Spring 2016, Q#1]
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Question No. 12
The following balances are extracted from the records of Present Limited (PL) and Future Limited (FL) for the year ended
30 June 2017:
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PL FL
Debit Credit Debit Credit
--------------- Rs. in million ---------------
Sales 2,060 1,524
Cost of sales 1,300 846
Selling and administrative expenses 350 225
Investment income 190 50
Gain on disposal of fixed assets – net 35
Taxation 80 60
Share capital (Rs. 10 each) 3,500 2,600
Retained earnings as on 30 June 2017 1,996 704
NASIR ABBAS FCA

(i) PL acquired 65% shares of FL on 1 September 2016 against the following consideration:
▪ Cash payment of Rs. 900 million.
▪ Issuance of shares having nominal value of Rs. 1,000 million.
The fair value of each share of PL and FL on acquisition date was Rs. 16 and Rs. 12 respectively. Retained earnings
of PL and FL on the acquisition date were Rs. 1,671 million and Rs. 506.5 million respectively.
At acquisition date, fair value of FL’s net assets was equal to their book value except a brand which had not been
recognised by FL. The fair value of the brand is assessed at Rs. 90 million. PL estimates that benefit would be
obtained from the brand for the next 10 years.
(ii) The incomes and expenses of FL had accrued evenly during the year except investment income. The investment
h
income is exempt from tax and had been recognised in August 2016 and received in September 2016.
(i) On 1 January 2017 PL sold a manufacturing plant having carrying value of Rs. 42 million to FL against cash
uk
consideration of Rs. 30 million. The plant had a remaining useful life of 6 years on the date of disposal.
(ii) On 1 February 2017 FL delivered goods having sale price of Rs. 100 million to PL on ‘sale or return basis’. 40% of
these goods were returned on 1 May 2017 and the remaining were accepted by PL. 20% of the goods accepted
were included in the closing inventory of PL. FL earned a profit of 33.33% on cost.
hr
(iii) Both companies paid interim cash dividend at the rate of 5% in May 2017.
(iv) An impairment test carried out at year end has indicated that goodwill of FL has been impaired by 10%.
(v) PL measures the non-controlling interest at its fair value.
Required:
ha
(a) Prepare consolidated statement of profit or loss for the year ended 30 June 2017. (13)
(b) Compute the amounts of consolidated retained earnings and non-controlling interest as would appear in the
sS
consolidated statement of financial position as at 30 June 2017. (04)
[Autumn 2017, Q#4]
Question No. 13
The following summarized trial balances pertain to Arrow Limited (AL) and its subsidiary Box Limited (BL) for the year
rd
AL BL
Debit Credit Debit Credit
ga
--------------- Rs. in million ---------------

Sales - 5,177 - 3,996
Cost of sales 3,255 - 2,448 -
Operating expenses 713 - 636 -
Other income - 350 - 18
Re

Share capital (Rs. 10 each) - 3,720 - 1,600
Share premium - 1,430 - 322
Retained earnings as at January 1, 2018 - 2,293 - 516
Property, plant and equipment 5,418 - 1,934 -
Investments 1,600 - - -
Loan to BL’s director 10 - - -
Current assets 2,284 - 1,797 -
13,683 13,683 7,103 7,103
NASIR ABBAS FCA

(i) AL acquired 96 million shares of BL on 1 May 2018 at following consideration:
• Cash payment of Rs. 450 million
• Issuance of 40 million shares of AL at Rs. 25 each
(ii) On acquisition date, carrying values of BL's net assets were equal to fair value except the following:
• A building whose fair values and value-in-use were Rs. 390 million and Rs. 520 million respectively as against
carrying value of Rs. 480 million. The group follows cost model for subsequent measurement of property,
plant and equipment. The remaining life of building on acquisition date was 20 years. Fair value of the
building has increased to Rs. 440 million at 31 December 2018.
• A brand which had not been recognized by BL. The fair value of the brand was assessed at Rs. 162 million. It
is estimated that benefit would be obtained from the brand for the next 6 years.
(iii) AL measures the non-controlling interest at fair value. On the date of acquisition, the market price of BL's shares
h
was Rs. 14 per share.
(iv) On 1 July 2018 AL sold an equipment to BL for Rs. 250 million at a gain of Rs. 20 million. BL has charged
uk
depreciation of Rs. 12.5 million on this equipment.
(v) In each month of 2018, BL sold goods costing Rs. 40 million to AL at cost plus 20%. At year end, 75% of the goods
purchased in December were included in stock of AL.
(vi) BL's credit balance of Rs. 38 million in AL’s books does not agree with BL's books due to Rs. 7 million charged by
hr
AL for management service on 26 December 2018. Total management fee charged by AL to BL since acquisition
amounted to Rs. 16 million.
(vii) BL declared interim cash dividend of Re. 0.50 per share in December 2018. AL has correctly recorded the dividend
ha
in its books. However, BL has not yet accounted for the dividend.
(viii) The incomes and expenses of BL may be assumed to have accrued evenly during the year.
Required:
Prepare the following:
sS
• consolidated statement of profit or loss for the year ended 31 December 2018. (15)
• consolidated statement of financial position as at 31 December 2018. (10)
[Spring 2019, Q#2]
rd
ga
Re
NASIR ABBAS FCA

BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions (1)

Solution No. 1
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [120 + 100 - 9] 211,000
Cost of sales [75 + 65 - 9] (131,000)
Gross profit 80,000
Distribution cost [12 + 8] (20,000)
h
Admin expenses [10 + 6 + 3] (19,000)
Finance cost [3 + 2] (5,000)
uk
Other income [1.5 + 0.5] 2,000
Profit before tax 38,000
Tax [7 + 5.5] (12,500)
hr
Profit after tax 25,500
Revaluation gain 1,200
Total comprehensive income 26,700
ha
Profit attributable to:
Shareholders of P 22,200
sS
NCI [W-1] 3,300
25,500
TCI attributable to:
NCI [3.3 + 1.2 x 30%] 3,660
rd
26,700
W-1 NCI
ga
S PAT 14,000
11,000
Re
30.00% 3,300
Solution No. 2
P Group
Rs.
Sales [125 + 90 - 8.2] 206,800
Cost of sales [82 + 57 - 8.2] (130,800)
Gross profit 76,000
Admin expenses [12 + 14 - 3.5] (22,500)
NASIR ABBAS FCA

Rs.
Finance cost [4 + 1] (5,000)
Other income [6 - 3.5] 2,500
Tax [7.5 + 3.2] (10,700)
Profit / TCI attributable to:

NCI [5.8 x 25%] 1,450
18,300
h
Solution No. 3
uk
P Group
hr
Rs.
Sales [90 + 80 - 7] 163,000
Cost of sales [54 + 42 - 7 + 0.42] (89,420)
Gross profit 73,580
Distribution cost [8 + 9]
ha (17,000)
Admin expenses [7 + 7.8 + 2] (16,800)
Finance cost [3 + 1.2] (4,200)
sS
Other income [1 + 0.8] 1,800
Tax [6 + 7.2] (13,200)
rd
Revaluation gain [1.5 + 2] 3,500

ga

NCI [W-1] 4,472
24,180
Re

NCI [4.472 + 2 x 40%] 5,272
27,680
W-1 NCI
S PAT 13,600
Less: URP on goods [7 x 30% x 20%] (420)
11,180
40.00% 4,472
NASIR ABBAS FCA

Solution No. 4
P Group
Rs.
Sales [110 + 95 - 8] 197,000

Cost of sales [82 + 62 - 8 + 0.4] (136,400)
Gross profit 60,600
Distribution cost [6.4 + 8] (14,400)
Admin expenses [4.2 + 7.1 + 1 + 0.3] (12,600)
h
Finance cost [2 + 1.5] (3,500)
Other income [1.6 + 0.7] 2,300
uk
Tax [6 + 6.05] (12,050)
hr
Revaluation gain [1 - 0.3] 700

ha
NCI [W-1] 1,075
sS
20,350
NCI [1.075 - 0.3 x 10%] 1,045
rd
21,050
W-1 NCI
S PAT 11,050
ga
Less: Extra dep on FV adj. [3 / 10] (300)

10,750
10.00% 1,075
Re
NASIR ABBAS FCA

Solution No. 5
P Group
Rs.
Sales [150 + 120] 270,000

Cost of sales [96 + 74 - 1.5 - 0.5] (168,000)
Distribution cost [12 + 9.5] (21,500)
Admin expenses [10 + 7 + 1.2] (18,200)
h
Finance cost [4 + 3] (7,000)
Other income [1 + 4.2 - 2.5] 2,700
uk
Tax [7.5 + 7] (14,500)
hr
Revaluation loss [0.2 - 0.5] (300)

ha
NCI [W-1] 3,300
sS
43,500
NCI [3.3 + 0.2 x 15%] 3,330
rd
43,200
W-1 NCI
S PAT 23,700
ga
Less: Profit on PPE (2,500)

Add: Extra dep on FV adj. [15 / 10] 1,500
Re
Add: Excess dep on PPE sale 500

22,000
15.00% 3,300
NASIR ABBAS FCA

Solution No. 6
P Group
Rs.
Sales [140 + 120 - 20] 240,000

Cost of sales [85 + 70 - 20 +1.2] (136,200)
Admin expenses [13 + 11.4] (24,400)
h
Finance cost [5 + 6.3 - 1] (10,300)
Other income [4.5 + 1 - 1 - 2.5] 2,000
uk
Tax [8.5 + 7] (15,500)
hr
Revaluation gain [0.2 + 0.4] 600

ha
NCI [W-1] 6,038
sS
35,600
NCI [6.038 + 0.4 x 37.5%] 6,188
rd
36,200
W-1 NCI
S PAT 17,300
ga
Less: URP of goods [20 x 30% x 1/5] (1,200)

16,100
37.50% 6,038
Re
NASIR ABBAS FCA

Solution No. 7
P Group
Rs.
Sales [100 + 90] 190,000

Cost of sales [70 + 58] (128,000)
Gross profit 62,000
Distribution cost [9.5 + 9] (18,500)
Admin expenses [8 + 10 + 1] (19,000)
h
Finance cost [3 + 2] (5,000)
Other income [2 + 2.8 + 1.2 (W-2) - 0.32] 5,680
uk
Tax [4.2 + 6] (10,200)
hr
Revaluation gain [0.1 + 0.3] 400
ha
sS
NCI [W-1] 1,360
14,980
rd
NCI [1.36 + 0.3 x 20%] 1,420

15,380
W-1 NCI
ga
S PAT 7,800
Less: Amortization of brand [5 x 1/5] (1,000)
6,800
Re
20.00% 1,360
W-2 Negative goodwill
Investment 30,800
Fair value of net assets [40 x 80%] (32,000)
(1,200)
NASIR ABBAS FCA

Solution No. 8
P Group
Rs.
Sales [140 + 120 x 8/12 - 8] 212,000
Cost of sales [75 + 84 x 8/12 - 8 + 1] (124,000)
Gross profit 88,000
Distribution cost [13.5 + 9 x 8/12 + 1] (20,500)
Admin expenses [7.2 + 12 x 8/12] (15,200)
Finance cost [3 + 6 x 8/12] (7,000)
h
Other income [1.5 + 3.6 x 8/12] 3,900
uk
Tax [11.2 + 3 x 8/12] (13,200)
hr
NCI [W-1] 1,620
W-1 NCI
ha 36,000
S PAT [9.6 x 8/12] 6,400

Less: Extra dep on FV adj. [4.5 x 1/3 x 8/12] (1,000)
sS
5,400
30.00% 1,620
Solution No. 9
P Group
rd

Rs.
ga
Sales [150 + 120 x 10/12 - 10] 240,000

Cost of sales [80 + 72 x 10/12 - 10 + 0.9] (130,900)
Distribution cost [12 + 9.6 x 10/12] (20,000)
Re
Admin expenses [11 + 10.8 x 10/12 + 0.4] (20,400)

Finance cost [3 + (3.8 - 2) x 10/12 + 2 - 2] (4,500)
Other income [4.6 + (1.8 - 0.3) x 10/12 - 2] 3,850
Tax [13.5 + 9 x 10/12] (21,000)
NASIR ABBAS FCA

Profit / TCI attributable to: Rs.

NCI [W-1] 4,780
47,050
W-1 NCI
S PAT [(16.6 - 0.3 + 2) x 10/12 - 2] 13,250
Less: Extra dep on FV adj. (400)
Less: URP on goods (900)
11,950
40.00% 4,780
h
Solution No. 10
Rivera Group
uk
for the year ending December 31, 2014
Rs. in million
hr
Sales [285 + 320 - 60 - 48] 497.00
Cost of sales [186 + 240 - 60 - 48 + 2.8 (W-2) + 1.6 (W-2)] (322.40)
Gross profit 174.60
Selling and distribution expense [27 + 25]
ha
Administration expenses [17 + 15 + 1.2 (W-3) + 4.68 (W-1)]
(52.00)
(37.88)
Finance cost [8 + 10] (18.00)
sS
Tax [19 + 12] (31.00)
Profit after tax 35.72
Shareholders of RL 32.92
rd
Non-controlling interest (W-4) 2.80

35.72
Rivera Group
ga

Non current assets
PPE [190 + 263 + 18 - 1.2] 469.80
Re
Current assets [W-2] 53.60

565.52
Equity
Current liabilities [35 + 44] 79.00
565.52
NASIR ABBAS FCA


W-1 Goodwill ------------------ Rs in million ------------------
Investment 250.00
Less: net assets
Capital 200.00
Fair value adj – building 18.00
254.00
[1.6 m / 2 shares] 80% (203.20)
46.80
Less: Impairment loss [10%] (4.68)
h
42.12
uk
W-2 Current assets
RL current assets 23.00
CL current assets 35.00
URP on RL stock [16.8 x 20/120] (2.80)
hr
URP on CL stock [9.6 x 20/120] (1.60)
53.60
RL RE (W-6)
ha 78.00
Less: URP on goods [9.6 x 20/120] (1.60)
Less: Impairment loss (4.68)
CL RE (W-6) 54.00
sS
Less: Extra depreciation [18/15] (1.20)
14.00
rd
80% 11.20
82.92
Alternatively: [It is applicable on in 1st year of acquisition]
ga
RL RE at start of year 50.00

Profit attributable to shareholders of RL 32.92
82.92
Re
W - 4 NCI (SCI)
PAT (W-6) 18.00
Less: Extra depreciation [18/15] (1.20)
14.00
20% 2.80
-------------- Rs in million ----------

NASIR ABBAS FCA
W-5 NCI
NCI share in net assets acquired [254 (W-1) x 20%] 50.80
NCI share in post acq. Profits [14 (W-3) x 20%] 2.80
53.60

RL CL
Opening RE 50.00 36.00
Profit for the year:
Sales 285.00 320.00
Cost of sales (186.00) (240.00)
h
Selling and distribution (27.00) (25.00)
Admin expense (17.00) (15.00)
uk
Finance cost (8.00) (10.00)
Tax (19.00) (12.00)
28.00 18.00
hr
Closing RE 78.00 54.00
Solution No. 11
Notes:
ha
- It is assumed that inter-company sales given are for full year.
- It is assumed that depreciation on machine is included in operating expenses.
- Elimination of inter company management services is ignored as it would have a net effect of zero.
sS
Oscar Group
Non current assets Rs. in million
rd
PPE [390 + 350 - 3.2 (W-4) + 0.1 (W-4)] 736.90

Intangible asset [45 – 2 (W-5)] 43.00
Goodwill (W-1) 46.40
ga
Current assets
Stock in trade [125 + 115 - 4 - 1] 235.00
Trade receivables [140 + 125 - 30] 235.00
Cash and bank [105 + 103 + 30] 238.00
Re
1,534.30
Capital and reserves
Retained earnings (W-2) 438.92
NCI (W-3) 125.38
Current liabilities
1,534.30
Oscar Group
NASIR ABBAS FCA


Rs. in million
Sales [835 + 645 x 8/12 - 60 x 8/12 - 30 x 8/12 - 3.2(W-4)] 1,201.80
Cost of sales [525 + 396 x 8/12 - 60 x 8/12 - 30 x 8/12 + 4(W-2) + 1(W-5)] (734.00)
Gross profit 467.80
Operating expenses [115 + 102 x 8/12 + 2(W-5) - 0.1 (W-4)] (184.90)
Tax [65 + 48 x 8/12] (97.00)
h
uk
Shareholders of OL 173.92
NCI (W-4) 11.98
hr
185.90
Workings:
W - 1 Goodwill
ha ----- Rs in million -----
Investment 500.00
sS
Share premium 60.00
Retained earnings
[179 + 99 (W-2.1) – 66 (W-5)] 212.00
Brand 45.00
rd
567.00
80% (453.60)
46.40
ga
W - 2 Retained earnings
OL RE [265 + 130] 395.00
Re
Add: Share in post acq RE of UL [59.9(W-5) x 80%] 47.92

438.92
Alternatively:
OL opening RE 265.00
Add: Profit attributable to shareholders of OL 173.92
438.92
NASIR ABBAS FCA

W - 2.1 ----- Rs in million -----

OL UL
Sales 835.00 645.00
Cost of sales (525.00) (396.00)
Operating expense (115.00) (102.00)
Tax expense (65.00) (48.00)
Profit after tax 130.00 99.00
W - 3 NCI (SOFP)
Share in net assets acquired [ 567(W-1) x 20%] 113.40
h
Share in post acq. RE 11.98
uk
125.38
W-4 Sale of machine

Profit on machine [24 - 26 x 8/10] 3.20
hr
Excess depreciation [3.2/8 x 3/12] 0.10
W - 5 NCI (SCI)
ha
Post acq. PAT [99(W-2.1) x 8/12] 66.00
Less: Profit on machine (W-4) (3.20)
sS
Add: Excess depreciation (W-4) 0.10
Less: URP on goods [5 x 20%] (1.00)
Less: Amortization of brand [45/15 x 8/12] (2.00)
59.90
20% 11.98
rd
ga
Re
NASIR ABBAS FCA

Solution No. 12
Assumptions
- Dividend relates to post acquisition profits only.
- Retained earnings given are after including current year profits
- Loss on plant was only due to inter company price agreement and no impairment on plant is required
(a)
PL Group
Consolidated Income Statement
------------ Rs in million ------------
h
Sales [2,060 + 1,524 x 10/12 - 60] 3,270.00
Cost of sales [1,300 + 846 x 10/12 - 60 + 3 (W-1) + 1 (W-2)] (1,949.00)
uk
Gross profit 1,321.00
Selling and admin expenses [350 + 225 x 10/12 + 39.55 (W-3) + 7.5 (W-5)] (584.55)
Investment income [190 - 84.5 (W-4)] 105.50
Gain on disposal of fixed assets [35 + 12 (W-2)] 47.00
hr
Tax [80 + 60 x 10/12] (130.00)

ha
Shareholders of PL 661.84
NCI (W-5) 97.11
758.95
sS
(b)
Consolidated retained earnings
as at June 30, 2017
PL RE 1,996.00
Add: Loss on plant 12.00
rd
Less: Depreciation on loss (1.00)

Add: FL RE 704.00
Less: Pre acq. RE (506.50)
Less: Impairment loss (39.55)
ga
Less: URP on goods (3.00)

Less: Amortization of brand [90/10 x 10/12] (7.50)
147.45
65% 95.84
Re
2,102.84
Alternatively
PL retained earnings as at 01-07-16 [1,996 – 555 (W-6)] 1,441.00
Profit attributable to shareholders of PL 661.84
2,102.84
Non-controlling interest
as at June 30, 2017
Fair value at acq. Date [260 x 35% x Rs. 12] 1,092.00
Share in FL post RE [147.45 x 35%] 51.61
1,143.61
NASIR ABBAS FCA

WORKING
W-1 URP on goods ------------ Rs in million ------------
[100 x 60% x 20% x 33.33/133.33] 3.00
W-2 URP on plant

Loss on sale (12.00)
Depreciation on loss [12/6 x 6/12] 1.00
Note
It is assumed that loss was only due to inter-company agreed price and there was no need of impairment testing
for that plant
h
W-3 Goodwill impairment
uk
Investment:
Cash 900.00
Shares [100 x Rs. 16] 1,600.00
Fair of NCI 1,092.00
hr
Less: net assets at acquisition
Share capital 2,600.00
Brand 90.00 (3,196.50)
Goodwill at acq.
ha 395.50
Impairment loss 10% 39.55
W-4 Inter company dividend

[2,600 x 65% x 5%] 84.50
sS
W-5 NCI (I/S)

FL PAT [(443 (W-6) - 50) x 10/12] 327.50
Amortization (7.50)
rd
Impairment loss (39.55)

URP on goods (3.00)
277.45
35% 97.11
ga
W-6 PAT
PL FL
Sales 2,060.00 1,524.00
Cost of sales (1,300.00) (846.00)
Re
Selling & admin (350.00) (225.00)

Investment income 190.00 50.00
Gain on disposal 35.00 -
Tax (80.00) (60.00)
PAT 555.00 443.00
NASIR ABBAS FCA

Solution No. 13
AL Group
Consolidated balance sheet
Rs. million
Non current assets
PPE [5,418 + 1,934 - 90 + 3 - 19 (W-9)] 7,246.00
Investments [1,600 - 1,450] 150.00
Brand [162 - 18] 144.00
Loan to BL's director 10.00
Current assets [2,284 + 1,797 - 80 x 60% - 7 - 38 - 6] 3,982.00

11,532.00
h
Equity
uk
Share premium 1,430.00
Non controlling interest [W-3] 1,024.00
hr
Current liabilities [713 + 651 + 80 - 80 x 60% - 38] 1,358.00
11,532.00
-
AL Group
ha
Rs. million
Sales [5,177 + 3,996 x 8/12 - 384] 7,457.00
sS
Cost of sales [W-4] (4,509.00)
Gross profit 2,948.00
Operating expenses [W-5] (1,142.00)
Other income [W-6] 656.00
Profit before tax 2,462.00
rd
Tax [403 + 288 x 8/12] (595.00)

Profit after tax 1,867.00

ga
Shareholders of AL 1,707.00
NCI [W-7] 160.00
1,867.00
Re
W-1
Goodwill
Investment:
Cash 450.00
Shares [40 x 25] 1,000.00
Fair value of NCI [64 x 14] 896.00
Less: net assets:
Capital 1,600.00
Premium 322.00
RE [516 + 642 x 4/12] 730.00
Building [390 - 480] (90.00)
Brand 162.00 (2,724.00)
(378.00)
NASIR ABBAS FCA

------------ Rs in million ------------

PL's RE [2,293 + 1,156 (W-8)] 3,449.00
Less: URP on equipment [W-9] (19.00)
Add: negative goodwill 378.00
Add: SL's RE [516 + 642(W-8)] 1,158.00
Less: Pre-acquisition profits (730.00)
Less: Dividend [160 x 0.5] (80.00)
Less: Unrecorded management fees (7.00)
Less: URP on goods [40 x 75% x 20%] (6.00)
Add: Dep on FV adj. [90/20 x 8/12] 3.00
Less: Amortization on brand [162/6 x 8/12] (18.00)
320.00
h
60.00% 192.00
4,000.00
uk
W-3 NCI (Balance sheet)
FV of NCI 896.00
Post-acq RE [320 x 40%] 128.00
1,024.00
hr
W-4 Cost of sales
AL 3,255.00
BL [2,448 x 8/12] 1,632.00
Inter-company purchase [40 x 1.2 x 8]
ha (384.00)
URP on goods 6.00
4,509.00
sS
W-5 Operating expenses
AL 713.00
BL [636 x 8/12] 424.00
Unrecorded management fee expense 7.00
Inter-company management fee (16.00)
rd
Excess dep on equipment (1.00)

Amortization of brand 18.00
Dep on FV adj (3.00)
1,142.00
ga
W-6 Other income

AL 350.00
BL [18 x 8/12] 12.00
Inter-company management fee (16.00)
Re
Negative goodwill (W-1) 378.00

Dividend [80 x 60%] (48.00)
Profit on equipment (20.00)
656.00
W-7 NCI (Income statement)

SL's PAT [642 x 8/12(W-8)] 428.00
Less: Unrecorded management fees (7.00)
Less: URP on goods [40 x 75% x 20%] (6.00)
Add: Dep on FV adj. [90/20 x 8/12] 3.00
Less: Amortization on brand [162/6 x 8/12] (18.00)
400.00
40% 160.00
NASIR ABBAS FCA

W-8 Separate Income statement AL BL

Sales 5,177.00 3,996.00
Cost of sales (3,255.00) (2,448.00)
Operating expenses (713.00) (636.00)
Other income 350.00 18.00
Tax (403.00) (288.00)
PAT 1,156.00 642.00
W-9 URP on equipment

Profit 20.00
Excess depreciation [12.5/250 x 20] (1.00)
19.00
h
uk
hr
ha
sS
rd
ga
Re
NASIR ABBAS FCA

P Group
Consolidated Statement of changes in equity
for the year ending June 30, 2020
Attributable to shareholders of P
Non-
h
Share Other Retained controlling Total
Share capital Total
premium reserves earnings interest
uk
------------------------------------------- Rs. ------------------------------------------------
Balance as on 01-07-19 X X X X X X X
Dividend * - - (X) (X) (X) (X)
hr
Issue of shares ** X X - - X X X
Total comprehensive income for the year *** - - X X X X X
Transfers - - (X) X - - -
ha
Balance as on 30-06-20 X X X X X X X
* In retained earnings column only P's declared dividend is shown whereas in NCI column only NCI's % in S's declared dividend is shown.
*** Total comprehensive income is:

sS
** In Share capital and Share premium only those shares are shown which are issued by P during the year whereas in NCI column only NCI's% in
those shares which are issued by S during the year.
Other reserves column :- TCI attributable to shareholders of P LESS Profit attributable to shareholders of P
Retained earnings column :- Profit attributable to shareholders of P
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NCI column :- TCI attributable to NCI
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Master question SOCI & SOCIE [Basic]
Question
Pulp Seed
---------- Rs.--------
Sales 140,000 141,000
Cost of sales (80,000) (82,000)
Finance cost (4,000) (5,000)
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Tax (15,000) (18,000)
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Revaluation gain 1,800 1,500
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(1) Pulp acquired 70% shares of Seed on July 1, 2018 when its other reserves were Rs. 4,500 and retained earnings
were Rs. 14,000. Following purchase consideration was agreed:
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• An immediate cash payment of Rs. 7 per share.
• A deferred cash payment of Rs. 4 per share payable on June 30, 2022.
• A contingent cash payment of Rs. 3 per share payable on September 30, 2020 if sale of a new product
achieves its promised benchmark till June 30, 2020. The said target was duly achieved in June 2020.
• A share exchange of 2 shares of Pulp for every 5 shares of Seed. Market shares prices at acquisition date
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were Rs. 32 (Pulp) and Rs. 26 (Seed).
• A plot of Land with fair value at acquisition date of Rs. 10,000 (carrying value was Rs. 8,000).
Pulp only recorded immediate cash payment plus commission paid to investment banker as cost of investment.
Land transferred as consideration is still appearing in Pulp’s books. Fair value of contingent consideration at
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the date of acquisition was Rs. 1.25 per share. It did not change on June 30, 2019. Pulp’s cost of capital is 10%.
(2) At acquisition date, carrying amounts of all assets and liabilities of Seed were equal to fair values except
following:
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----------- Rs. ----------
Land 15,000 17,000
Plant 24,000 27,000
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Remaining useful life of Plant at acquisition date was 5 years. The land was sold by Seed during 2020 for Rs.
19,500.
(3) At acquisition date there was an internally generated brand of Seed, however, its fair value could not be
estimated reliably at that date due to insufficient information. Though its remaining life was estimated to be 5
years. The financial consultant provided with reliable estimate of fair value at Rs. 12,000 on receipt of sufficient
information 4 months later.
(4) At acquisition date there was a pending court case against Seed for which no provision was recognized in its
books as outflow of economic resources was not probable. At that date fair value of the contingent liability
was determined at Rs. 7,000. In respect of this claim, on June 30, 2019 Seed recognized a provision for Rs.

Master question SOCI & SOCIE [Basic]
9,000 as outflow of economic resources became probable. The claim was finally settled during 2020 for Rs.
10,000.
(5) It is PL’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(6) There was no need for impairment test in 2019, however, recoverable amount of CGU of Seed (i.e. comprising
of PPE and Goodwill) on June 30, 2020 was Rs. 114,000.
Sales Included in buyer’s Gross

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------------------- Rs. --------------
Pulp to Seed 20,000 5,000 20%
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Seed to Pulp 36,000 8,000 25%
In respect of above intercompany sales, Seed’s books show a net balance owed to Pulp is Rs. 9,000. However,
it differs from balance as per Pulp’s books due to goods sold by Pulp for Rs. 4,000 on June 28, 2020 but were
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received and recorded by Seed on July 3, 2020.
(8) On January 1, 2020 Seed sold a machine to Pulp for Rs. 38,000 at a profit of Rs. 8,000. Pulp charged depreciation
on that machine for Rs. 1,900. Both companies include the depreciation on plant and machinery in cost of
sales.
(9)
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During June 2020, Pulp and Seed declared ordinary dividend of 5% and 10% respectively which would be
payable in next month. Both companies have duly recorded the dividends.
sS
(10) Deferred tax liabilities are calculated on all temporary differences at a tax rate of 25%. Gain on sale of land is
not taxable. No tax deduction will be allowed on deferred consideration and contingent consideration.
Required:
Prepare consolidated statement of comprehensive income and consolidated statement of changes in equity for the
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year ending June 30, 2020.

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Solution
Pulp Group
Rs.
Sales [140 + 141 - 20 - 36] 225,000
Cost of sales (W-1) (110,000)
Admin expenses (W-2) (55,140)
Finance cost (W-3) (9,842)
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Other income (W-4) 9,200
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Tax (W-7) (27,450)
Revaluation gain [1.8 + 1.5] 3,300
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Proft attributable to: ha

- Shareholders of Pulp 7,159
- NCI (W-6) 2,610
9,769
sS
- Shareholders of Pulp 10,009
- NCI [2.61 + 1.5 x 30%] 3,060
13,069
Workings
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W-1 Cost of sales Rs.

Pulp 80,000
Seed 82,000
Intercompany sales [36,000 + 20,000] (56,000)
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URP on goods [(4,000 + 5,000) x 20% + 8,000 x 25%] 3,800

Extra depreciation on FV adjustment of Plant [3,000 x 1/5] 600
Excees depreciation on sale of plant [8,000 x 1,900/38,000] (400)
110,000
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W-2 Admin expenses

Pulp 11,000
Seed 13,000
Change in fair value of contingent consideration 4,900
Impairment loss of GW (W-5) 16,040
Impairment loss of PPE (W-5.1) 7,800
Amortization of brand [12,000 x 1/5] 2,400
55,140
W-3 Finance cost Rs.
Pulp 4,000
Seed 5,000
Finance cost on deferred cost [7,650 x 1.1 x 10%] 842
9,842
W-4 Other income

Pulp 9,000
Seed 13,000
Dividend income [40,000 x 10% x 70%] (2,800)
Profit on sale of machine (8,000)
FV adjustment (land) (2,000)
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9,200
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- Cash [7 x 2,800] 19,600
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- Land 10,000
Value of NCI [84,500 x 30%]
ha 25,950

sS
RE 14,000
Brand 12,000
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DTL [(3,000 + 12,000 - 7,000) x 25%] (2,000) (86,500)
Impairment loss [22,914(W-5.1) x 70%] (16,040)
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W-5.1 Impairment loss Rs.

Carrying amount as per question:
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PPE 120,000
Fair value adjustment of Plant [3,000 - 1,200] 1,800
Goodwill [16,040 ÷ 0.7] 22,914
144,714
Allocation of impairment loss:

- Goodwill 22,914
- PPE [30,714 - 22,914] 7,800
W-6 NCI Rs.
Seed's PAT 26,000
Less: Extra dep. on FV adj. of plant [3,000 x 1/5] (600)
Less: FV adj. of land (2,000)
Less: Amortization of brand [12,000 x 1/5] (2,400)
Less: URP on goods [8,000 x 25%] (2,000)
Less: URP on machine [8,000 - 8,000 x 1,900/38,000] (7,600)
Less: Impairment loss of PPE (W-3.1) (7,800)
(22,400)
Add: Deferred tax expense [(22,400 - 2,000) x 25%] 5,100
8,700
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30% 2,610
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W-7 Tax
Pulp 15,000
Seed 18,000
Tax on P's adjustments [URP on goods i.e. 1,800 x 25%] (450)
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Tax on S's adjustments (W-6) (5,100)
27,450
ha
sS
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Solution
Workings
- Cash [7 x 2,800] 19,600
- Land 10,000
Value of NCI [84,500 x 30%] 25,950
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RE 14,000
Brand 12,000
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DTL [(3,000 + 12,000 - 7,000) x 25%] (2,000) (86,500)
Goodwill at acquisition ha 16,040
W-2 Other reserves Pulp Seed

--------- Rs. --------
sS
1,000
Add: Share in Seed [1,000 x 70%] 700
7,900
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W-3 Retained earnings Pulp Seed

--------- Rs. --------
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RE [Closing - PAT + Dividend] 50,500 36,000

Less: Finance cost [7,650 x 1.1 - 7,650] (765) -
Add: Gain on land transfer 2,000 -
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Less: Acquisition related cost [21,000 - 19,600] (1,400) -

Less: Extra dep. on FV adj. of plant [3,000 x 1/5] - (600)
Less: Amortization of brand [12,000 x 1/5] - (2,400)
Less: Contingent liability - (2,000)
Add: Provision recognized by S - 9,000
Add: Deferred tax expense (W-4) 350 (1,000)
25,000
Add: Share in S [25,000 x 70%] 17,500
68,185
W-4 NCI Rs.
Value of NCI (W-1) 25,950
Other reserves [1,000 x 30%] 300
RE [25,000 x 30%] 7,500
33,750
W-5 Deferred tax

Pulp Seed
--------- Rs. --------
Adjustments in carrying amounts of net assets:
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Acquisition related cost (1,400) -
Extra dep. on FV adj. of plant - (600)
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Amortization of brand - (2,400)
Contingent liability settled - (2,000)
Provision reversal - 9,000
[A] (1,400) 4,000
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Tax on adjustments after acquisition [A x 25%] (350) 1,000
ha
sS
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Pulp Group
Consolidated Statement of changes in equity
for the year ending June 30, 2020
Attributable to shareholders of P Non-
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Share Share Other Retained controlling Total
Total
capital premium reserves earnings interest
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------------------------------------------- Rs. ------------------------------------------------
Balance as on 01-07-19 81,200 34,640 7,900 68,185 191,925 33,750 225,675
Dividend * - - - (3,500) (3,500) (1,200) (4,700)
Total comprensive income for the year - - 2,850 7,159 10,009 3,060 13,069
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Balance as on 30-06-20 81,200 34,640 10,750 71,844 198,434 35,610 234,044
- - - (0) -
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* Dividend in RE column = 70,000 x 5% = 3,500
Dividend in NCI column = 40,000 x 10% x 30% = 1,200
sS
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Business combination – Other issues
Business combination achieved without the transfer of consideration

An acquirer sometimes obtains control of an acquiree without transferring consideration. The acquisition method
of accounting for a business combination applies to those combinations. Such circumstances include:
(a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain
control.
(b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer
held the majority voting rights.
(c) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer transfers no
consideration in exchange for control of an acquiree and holds no equity interests in the acquiree, either on the
acquisition date or previously. Examples of business combinations achieved by contract alone include bringing
two businesses together in a stapling arrangement or forming a dual listed corporation.
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In a business combination achieved by contract alone, the acquirer shall attribute to the owners of the acquiree the
amount of the acquiree’s net assets recognized in accordance with this IFRS. In other words, the equity interests in
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the acquiree held by parties other than the acquirer are a non-controlling interest in the acquirer’s post-combination
financial statements even if the result is that all of the equity interests in the acquiree are attributed to the
non-controlling interest.
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Determining what is part of the business combination transaction
The acquirer and the acquiree may have a pre-existing relationship or other arrangement before negotiations for
the business combination began, or they may enter into an arrangement during the negotiations that is separate
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from the business combination. In either situation, the acquirer shall identify any amounts that are not part of what
the acquirer and the acquiree (or its former owners) exchanged in the business combination, ie amounts that are
not part of the exchange for the acquiree. The acquirer shall recognise as part of applying the acquisition method
only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange
sS
for the acquiree. Separate transactions shall be accounted for in accordance with the relevant IFRSs.
An entity that is a parent shall present consolidated financial statements, except:

A parent need not present consolidated financial statements if it meets all the following conditions:
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(i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners,
including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not
presenting consolidated financial statements;
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(ii) its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an
over-the-counter market, including local and regional markets);
(iii) it did not file, nor is it in the process of filing, its financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public market; and
(iv) its ultimate or any intermediate parent produces financial statements that are available for public use and
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comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in
accordance with this IFRS.
Reverse acquisitions
A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree
for accounting purposes. The entity whose equity interests are acquired (the legal acquiree) must be the acquirer
for accounting purposes for the transaction to be considered a reverse acquisition. For example, reverse acquisitions
sometimes occur when a private operating entity wants to become a public entity but does not want to register its
equity shares. To accomplish that, the private entity will arrange for a public entity to acquire its equity interests in
exchange for the equity interests of the public entity. In this example, the public entity is the legal acquirer because

it issued its equity interests, and the private entity is the legal acquiree because its equity interests were acquired.
However, in substance:
(a) the public entity as the acquiree for accounting purposes (the accounting acquiree); and
(b) the private entity as the acquirer for accounting purposes (the accounting acquirer).
Example:
Entity B, the legal subsidiary, acquires Entity A, the entity issuing equity instruments and therefore the legal
parent, in a reverse acquisition on 30 September 20X6. This example ignores the accounting for any income tax
effects. The statements of financial position of Entity A and Entity B immediately before the business combination
are:
Entity A Entity B
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Rs. Rs.
Non-current assets 1,300 3,000
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1,800 3,700
Issued equity [100 shares] [60 shares] 300 600
Retained earnings 800 1,400
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Non-current liabilities 400 1,100
ha 1,800 3,700
This example also uses the following information:

(a) On 30 September 20X6 Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All of Entity
B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 ordinary shares in exchange
sS
for all 60 ordinary shares of Entity B.
(b) The fair value of each ordinary share of Entity B at 30 September 20X6 is Rs. 40. The quoted market price of
Entity A’s ordinary shares at that date is Rs. 16.
(c) The fair values of Entity A’s identifiable assets and liabilities at 30 September 20X6 are the same as their
carrying amounts, except that the fair value of Entity A’s non-current assets at 30 September 20X6 is Rs.
1,500.
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As a result of Entity A (legal parent, accounting acquiree) issuing 150 ordinary shares, Entity B’s shareholders own
60% of the issued shares of the combined entity (i.e. 150 of 250 issued shares). The remaining 40% are owned by
Entity A’s shareholders. If the business combination had taken the form of Entity B issuing additional ordinary
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shares to Entity A’s shareholders in exchange for their ordinary shares in Entity A, Entity B would have had to issue
40 shares for the ratio of ownership interest in the combined entity to be the same. Entity B’s shareholders would
then own 60 of the 100 issued shares of Entity B—60% of the combined entity. As a result, the fair value of the
consideration effectively transferred by Entity B and the group’s interest in Entity A is Rs. 1,600 (40 shares with a
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fair value per share of Rs. 40).
The fair value of the consideration effectively transferred should be based on the most reliable measure. In this
example, the quoted price of Entity A’s shares in the principal (or most advantageous) market for the shares
provides a more reliable basis for measuring the consideration effectively transferred than the fair value of the
shares in Entity B, and the consideration is measured using the market price of Entity A’s shares—100 shares with
a fair value per share of Rs. 16.

Goodwill Rs. Rs.

Consideration effectively transferred 1,600
Net assets of Entity A:
Issued equity 300
Retained earnings 800
Fair value adjustment 200 1,300
300
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Rs.
Non-current assets [1,300 + 200 + 3,000] 4,500
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Goodwill 300
Current assets [500 + 700] 1,200
6,000
Issued equity [250 shares] [600 + 1,600] 2,200
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Non-current liabilities [400 + 1,100] 1,500

Current liabilities [300 + 600] ha 900
6,000
The amount recognised as issued equity interests in the consolidated financial statements (Rs. 2,200) is
determined by adding the issued equity of the legal subsidiary immediately before the business combination (Rs.
600) and the fair value of the consideration effectively transferred (Rs. 1,600). However, the equity structure
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appearing in the consolidated financial statements (i.e. the number and type of equity interests issued) must
reflect the equity structure of the legal parent, including the equity interests issued by the legal parent to effect
the combination.
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Replacement awards
An acquirer may exchange its share-based payment awards (i.e. replacement awards) for awards held by employees
of the acquiree. If acquirer replaces the acquiree awards, either all or a portion of the market-based measure (i.e.
the amount determined as per IFRS 2) of the acquirer’s replacement awards shall be included in measuring the
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consideration transferred in the business combination.
Steps:
1. Calculate market-based measures of both acquirer’s awards and acquiree’s awards.
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2. Now calculate the amount to be included in consideration transferred (i.e. pre-combination service) as follows:
𝑣𝑒𝑠𝑡𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑒𝑑

= Market based-measure of acquiree award x
ℎ𝑖𝑔ℎ𝑒𝑟 𝑜𝑓 𝑡ℎ𝑒 𝑡𝑜𝑡𝑎𝑙 𝑣𝑒𝑠𝑡𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑟 𝑡ℎ𝑒 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑣𝑒𝑠𝑡𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
3. Now calculate the amount of remuneration cost of post-combination service as follows:
= Market-based measure of acquirer award – amount calculated in step 2

Example 1
Acquiree awards – Vesting period completed before the business combination
Replacement awards – Additional employee services are not required after the acquisition date
Discussion
AC issues replacement awards of Rs. 110 (market-based measure) at the acquisition date for TC awards of Rs. 100
(market-based measure) at the acquisition date. No post-combination services are required for the replacement
awards and TC’s employees had rendered all of the required service for the acquiree awards as of the acquisition
date.
The amount attributable to pre-combination service is the market-based measure of TC’s awards (Rs. 100) at the
acquisition date; that amount is included in the consideration transferred in the business combination. The amount
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attributable to post-combination service is Rs. 10, which is the difference between the total value of the replacement
awards (Rs. 110) and the portion attributable to pre-combination service (Rs. 100). Because no post-combination
service is required for the replacement awards, AC immediately recognizes Rs. 10 as remuneration cost in its post-
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combination financial statements.
Example 2
Acquiree awards – Vesting period completed before the business combination
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Replacement awards – Additional employee services are required after the acquisition date
Discussion
AC exchanges replacement awards that require one year of post-combination service for share-based payment
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awards of TC, for which employees had completed the vesting period before the business combination. The market-
based measure of both awards is Rs. 100 at the acquisition date. When originally granted, TC’s awards had a vesting
period of four years. As of the acquisition date, the TC employees holding unexercised awards had rendered a total
of seven years of service since the grant date.
Even though TC employees had already rendered all of the service, AC attributes a portion of the replacement award
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to post-combination remuneration cost in accordance with paragraph B59 of IFRS 3, because the replacement
awards require one year of post-combination service. The total vesting period is five years—the vesting period for
the original acquiree award completed before the acquisition date (four years) plus the vesting period for the
replacement award (one year).
The portion attributable to pre-combination services equals the market-based measure of the acquiree award (Rs.
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100) multiplied by the ratio of the pre-combination vesting period (four years) to the total vesting period (five years).
Thus, Rs. 80 (Rs. 100 × 4/5 years) is attributed to the pre-combination vesting period and therefore included in the
consideration transferred in the business combination. The remaining Rs. 20 is attributed to the post-combination
vesting period and is therefore recognized as remuneration cost in AC’s post-combination financial statements in
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Example 3
Acquiree awards – Vesting period not completed before the business combination
Replacement awards – Additional employee services are required after the acquisition date
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Discussion
AC exchanges replacement awards that require one year of post-combination service for share-based payment
awards of TC, for which employees had not yet rendered all of the service as of the acquisition date. The market-
based measure of both awards is Rs. 100 at the acquisition date. When originally granted, the awards of TC had a
vesting period of four years. As of the acquisition date, the TC employees had rendered two years’ service, and they
would have been required to render two additional years of service after the acquisition date for their awards to
vest. Accordingly, only a portion of the TC awards is attributable to pre-combination service.
The replacement awards require only one year of post-combination service. Because employees have already
rendered two years of service, the total vesting period is three years. The portion attributable to pre-combination
services equals the market-based measure of the acquiree award (Rs. 100) multiplied by the ratio of the pre-

combination vesting period (two years) to the greater of the total vesting period (three years) or the original vesting
period of TC’s award (four years). Thus, Rs. 50 (Rs. 100 × 2/4 years) is attributable to pre-combination service and
therefore included in the consideration transferred for the acquiree.
The remaining Rs. 50 is attributable to post-combination service and therefore recognised as remuneration cost in
AC’s post-combination financial statements.
Example 4
Acquiree awards – Vesting period not completed before the business combination
Replacement awards – Additional employee services are not required after the acquisition date
Discussion
Assume the same facts as in Example 3 above, except that AC exchanges replacement awards that require no post-
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combination service for share-based payment awards of TC for which employees had not yet rendered all of the
service as of the acquisition date. The terms of the replaced TC awards did not eliminate any remaining vesting
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period upon a change in control. (If the TC awards had included a provision that eliminated any remaining vesting
period upon a change in control, the guidance in Example 1 would apply.) The market-based measure of both awards
is Rs. 100. Because employees have already rendered two years of service and the replacement awards do not
require any post-combination service, the total vesting period is two years.
The portion of the market-based measure of the replacement awards attributable to pre-combination services
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equals the market-based measure of the acquiree award (Rs. 100) multiplied by the ratio of the pre-combination
vesting period (two years) to the greater of the total vesting period (two years) or the original vesting period of TC’s
award (four years). Thus, Rs. 50 (Rs. 100 × 2/4 years) is attributable to pre-combination service and therefore
included in the consideration transferred for the acquiree. The remaining Rs. 50 is attributable to post-combination
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service. Because no post-combination service is required to vest in the replacement award, AC recognises the entire
Rs. 50 immediately as remuneration cost in the post-combination financial statements.
Exemptions from applying equity method:

sS
An entity need not apply the equity method to its investment in an associate or a joint venture if the entity is a
parent that is exempt from preparing consolidated financial statements by the scope exception in paragraph 4(a) of
IFRS 10 OR if all the following apply:
(a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners,
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including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not
applying the equity method.
(b) The entity’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange
or an over-the-counter market, including local and regional markets).
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(c) The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or
other regulatory organisation, for the purpose of issuing any class of instruments in a public market.
(d) The ultimate or any intermediate parent of the entity produces financial statements available for public use that
comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in
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Investment in separate financial statements:

When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint
ventures and associates either:
(a) at cost;
(b) in accordance with IFRS 9; or
(c) using the equity method as described in IAS 28.

Goodwill ----- Rs. million -----

- Cash 2,000.00
- Replacement reward 140.00
Fair value of net assets [3,618 - (1,888 - 60 + 17)] 1,773.00
Development cost 153.00
Contingent liability (25.00)
DTL (W-1) (85.90) (1,815.10)
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Deferred tax to be recognized in consolidated financial statements 31-12-16:
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CA TB Difference Tax rate DTL/(DTA)
------------------ Rs. million ---------------- Rs. million
Recognized as acquisition (W-1) 85.90
Additional deferred tax in post acquisition phase:
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PAL's stock [80 x 80%] 64.00 80.00 (16.00) 35.0% (5.60)
LG's stock [140 x 85%] 119.00 140.00 (21.00) 25.0% (5.25)
Investment in NAL: ha
- Difference to be realized through dividend [9(W-2) x 60%] 5.40 12.5% 0.68
- Difference to be realized through capital gain [9 x 40%] 3.60 17.5% 0.63
Increase in share options [150 - 90] - 60.00 (60.00) 25.0% (15.00)
61.36
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W-1 DTL at acquisition: FV CA Difference Tax rate DTL/(DTA)

------------------ Rs. million ---------------- Rs. million
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PPE 1,532.00 1,259.00 273.00 35% 95.55

Investments 490.00 367.00 123.00 35% 43.05
Development cost 153.00 - 153.00 35% 53.55
DBO* 17.00 17.00 - 35% -
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Contingent liability 25.00 - (25.00) 35% (8.75)

c/f tax losses - - (300.00) 25% (75.00)
Intrinsic value of share options** - - (90.00) 25% (22.50)
85.90
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* Employee cost is an exception to measurement rules of IFRS 3 which is not measured at fair value.
** PAL might have reversed its deferred tax as its share options are replaced by LG's share options, hence
LG is now accounting for deferred tax asset for the replacement awards
W-2 Taxable difference on Investment in NAL

Rs. million
Carrying amount [165 + (50 - 20) x 30%] 174.00
Tax base 165.00
9.00
COMPLEX GROUPS – Class notes
TYPES OF COMPLEX GROUPS

1. Vertical group
Here a subsidiary [S] of the parent [P] holds controlling interest in another entity (often called sub-
subsidiary [SS]). As a result P controls S as well as SS.
Example:
holds 70% shares
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S
holds 60% shares
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SS
2. Mixed group [i.e. D-shaped group]

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In addition to S shareholding in SS, P also has a direct holding in SS (which is less than 50%). In this case it
is not necessary that S must hold controlling interest in SS rather P controls SS if combined share of P and
sS
S in SS forms a controlling interest (i.e. more than 50%) even if S holds less than 50% in SS.
P P
rd
holds 70% shares holds 70% shares
S holds 20% shares S holds 25% shares

ga
holds 60% shares holds 40% shares
SS SS
Re
Hence P must consolidate all subsidiaries and sub-subsidiaries.
If “A” has a subsidiary then it is not considered as a sub-subsidiary for the group
ACQUISITION DATE FOR SUB-SUBSIDIARIES

Acquisition date for SS is the date when P obtains control over SS. For example, acquisition date will be the
later of:
(i) When P acquires shares of S; and
(ii) When S acquires shares of SS

EFFECTIVE SHAREHOLDING %
For calculation of Group and NCI shares in equity items of SS, the effective shareholding % are used. It is
explained with the help of following example:
Example
P holds 60% in S and 10% in SS whereas S holds 80% in SS. Effective shareholding % are calculated as follows:
%
P’s direct holding in SS 10
P’s indirect holding through S [60% x 80%] 48
Effective Group shareholding % 58
Effective NCI% [i.e. 100 – Effective group shareholding] 42
h
Effective shareholding % are used only for calculation and are NOT used for determining the “control” e.g.
effective group shareholding % in SS may be less than 50%.
uk
GOODWILL IN SS
Goodwill on SS is calculated on acquisition date using following working and added with goodwill in S and
hr
presented as total goodwill on SOFP.
Rs.
P’s prior direct investment in SS (Note) XXX
ha
Investment through S [S’s investment in SS x P’s % in S] XXX
Value of NCI [i.e. Value of effective NCI] XXX
Less: SS’s net assets at acquisition (XXX)
sS
Less: Impairment loss (XXX)
Carrying amount of Goodwill XXX
Note – In case of P’s prior direct investment in SS, this investment will be included at its fair value on date of
acquisition of SS in above working. Any resulting change is recognized in P’s profits.
rd
GROUP STATEMENT OF FINANCIAL POSITION

ga
1. Since P controls S and SS both, therefore, assets and liabilities of SS are fully consolidated following same
techniques and adjustments/eliminations as studied for S.
2. In Group other reserves and Group retained earnings workings, effective group shareholding % is applied
to post acquisition other reserves and retained earnings of SS.
Re
3. NCI is calculated as follows and total NCI is reported on SOFP:
NCI in S NCI in SS
Value of NCI at acquisition XXX XXX
Add: Other reserves XXX XXX
[Other reserves x NCI%] [Other reserves x effective NCI%]
Add: Retained earnings XXX XXX
[Retained earnings x NCI%] [Retained earnings x effective NCI%]
Less. Investment in SS (XXX) -
[S’s investment in SS x NCI%]
XXX XXX

GROUP STATEMENT OF COMPREHENSIVE INCOME

1. Since P controls S and SS both, therefore, incomes and expenses of SS are fully consolidated following
same techniques and adjustments/eliminations as studied for S. Here inter-company transactions to be
eliminated will also include transactions between S and SS.
2. In NCI workings, NCIs for both S (using normal NCI%) and SS (using effective NCI%) are calculated and
added together to show total NCI on face of SOCI. While calculating NCI for S, deduct “dividend income”
received from SS from S’s PAT.
GROUP STATEMENT OF CHANGES IN EQUITY
h
Dividend in NCI column shall be the amount relating to legal NCI instead of effective NCI.
uk
Sub associate/JV
A group’s share in an associate or a joint venture is the aggregate of the holdings in that associate or joint
hr
venture by the parent and its subsidiaries (i.e. there is no need for any effective shareholding as used for SS).
The holdings of the group’s other associates or joint ventures are ignored for this purpose.
When an associate or a joint venture has subsidiaries, associates or joint ventures, the profit or loss, other
comprehensive income and net assets taken into account in applying the equity method are those
ha
recognised in the associate’s or joint venture’s financial statements (including the associate’s or joint
venture’s share of the profit or loss, other comprehensive income and net assets of its associates and joint
ventures), after any adjustments necessary to give effect to uniform accounting policies.
sS
rd
ga
Re

Master question SOLUTION
Pure Group
as at June 30, 2020
Rs.
Non current assets
PPE [58.75 + 53 + 100 + 2 + 4 - 0.6 - 1] 216,150
Current assets
Inventories [18 + 14 + 10 - 1.4 - 1.5 - 0.6] 38,500
Debtors [22 + 24 + 18 - 5 - 3] 56,000
h
Cash and bank [9 + 9 + 9] 27,000
344,450
uk
Equity
hr
Current liabilities
Creditors [14 + 19 + 18 - 5 - 3]
ha 43,000
344,450
-
sS
Pure Group
Rs.
Sales [140 + 141 + 120 - 40 - 30 - 10] 321,000
rd

Distribution cost [12 + 10 + 8] (30,000)
Admin expenses [11 + 13 + 9 + 2.5 + 0.2] (35,700)
ga
Finance cost [4 + 5 + 3] (12,000)

Other income (W-6) 24,300
Tax [10 + 9 + 8] (27,000)
Re

Revaluation gain [1.8 + 1.5 + 1] 4,300

- Shareholders of Pure 64,962
- NCI (W-7) 19,638
84,600
- Shareholders of Pure 68,542
- NCI [19.638 + 1.5 x 20% + 1 x 42%] 20,358
88,900
Workings
Sure Cure
W-1 Goodwill ---------- Rs. -----------
- Direct [Cure: 350 x 20] 64,000 7,000
- Indirect [Cure: 44,000 x 80%] - 35,200
Value of NCI [74,000 x 20%] [65,000 x 42%(W-1.1)] 14,800 27,300
h
Share capital 40,000 35,000
uk
RE 10,000 11,000
FV adj. - Building 2,000 -
hr
FV adj. - Plant - 4,000
74,000 65,000
Goodwill at acquisition ha 4,800 4,500
Impairment loss (1,000) (1,500)
3,800 3,000 6,800
W-1.1 Effective holding in Cure

sS
Effective holding of Cure = 10% + 60% x 80% = 58.00%
Effective holding of NCI [1 - 0.58] = 42.00%

rd
W-2 Other reserves Pure Sure Cure

---------------- Rs. --------------
ga
Other reserves 9,000 7,000 8,000

Less: Pre-acq - (2,000) (3,000)
5,000 5,000
Re
Add: Share in Sure [5,000 x 80%] 4,000
Add: Share in Cure [5,000 x 58%] 2,900

15,900
W-3 Retained earnings Pure Sure Cure
---------------- Rs. --------------
RE 74,000 58,000 64,000
Less: Pre-acq - (10,000) (11,000)
Add: Gain on earlier direct investment [7,000 - 5,250] 1,750
Less: Extra dep. on FV adj. of building [2,000 x 3/10] - (600) -
Less: Extra dep. on FV adj. of plant [4,000 x 2/8] - - (1,000)
Less: Impairment loss of GW [1,000 + 1,500] (2,500) - -
Less: URP on goods [7,000 x 20%] [6,000 x 25%] [4,000 x 15%] (1,400) (1,500) (600)
45,900 51,400
Add: Share in Sure [45,900 x 80%] 36,720
Add: Share in Cure [51,400 x 58%] 29,812
h
138,382
uk
W-4 NCI [SOFP] Sure Cure
-------- Rs. --------
Value at acquisition (W-1) 14,800 27,300
Other reserves [5,000 x 20%] [5,000 x 42%] 1,000 2,100
hr
RE [45,900 x 20%] [51,400 x 42%] 9,180 21,588
Investment in Cure [44,000 x 20%] (8,800) -
ha 16,180 50,988 67,168
W-5 Cost of sales Rs.

Pure 80,000
Sure 82,000
sS
Cure 70,000
Intercompany sale [40,000 + 30,000 + 10,000] (80,000)
URP on goods [1,400 + 1,500 + 600] 3,500
Extra depreciation on FV adjustment of Plant [4,000 x 1/8] 500
156,000
rd
W-6 Other income Rs.

Pure 9,000
ga
Sure 13,000
Cure 12,000
Dividend from Sure [40,000 x 80% x 15%] (4,800)
Dividend from Cure [35,000 x 20% x 10% + 35,000 x 20% x 60%] (4,900)
24,300
Re
Sure Cure
W-7 NCI [SOCI] -------- Rs. --------
PAT 35,000 34,000
Less: Dividend [35,000 x 20% x 60%] (4,200) -
Less: URP on goods (1,500) (600)
Less: Extra depreciation [2,000/10][4,000/8] (200) (500)
29,100 32,900
20% 42%
5,820 13,818 19,638
Master question – complex group [SOFP & SOCI]
Question
Following are the financial statements of group companies for the year ended June 30, 2020:
Statement of financial position

Pure Sure Cure
Non-current assets ----------------- Rs. ------------------
Property, plant and equipment 58,750 53,000 100,000
Investment in Sure (at cost) 64,000 - -
Investment in Cure (at cost) 5,250 44,000 -
Current assets
Inventory 18,000 14,000 10,000
Debtors 22,000 24,000 18,000
h
Cash & bank 9,000 9,000 9,000
177,000 144,000 137,000
uk
Equity
Share capital (Rs. 10 each) 70,000 40,000 35,000
Share premium 10,000 20,000 12,000
hr
Other reserves 9,000 7,000 8,000
Retained earnings 74,000 58,000 64,000
Current liabilities
Creditors 14,000 19,000 18,000
ha 177,000 144,000 137,000
Statement of comprehensive income

Pure Sure Cure
sS
----------------- Rs. ------------------
Sales 140,000 141,000 120,000
Cost of sales (80,000) (82,000) (70,000)
Gross profit 60,000 59,000 50,000
Distribution cost (12,000) (10,000) (8,000)
Admin expenses (11,000) (13,000) (9,000)
rd
Finance cost (4,000) (5,000) (3,000)

Other income 9,000 13,000 12,000
Profit before tax 42,000 44,000 42,000
Tax
ga
(10,000) (9,000) (8,000)

Profit after tax 32,000 35,000 34,000
Revaluation gain 1,800 1,500 1,000
Total comprehensive income 33,800 36,500 35,000
Re

(1) Pure acquired 80% shares of Sure on July 1, 2017 when its other reserves were Rs. 2,000 and retained earnings
were Rs. 10,000. At that date the fair values of net assets of Sure were equal to the carrying amounts except
for a building which was undervalued by Rs. 2,000. Its remaining life was 10 years.
Pure also acquired 10% shares of Cure on the same date when its other reserves were Rs. 1,000 and retained
(2) On July 1, 2018 Sure acquired 60% shares of Cure when its other reserves were Rs. 3,000 and retained earnings
were Rs. 11,000. At that date, carrying amounts of all assets and liabilities of Sure were equal to fair values

Master question – complex group [SOFP & SOCI]
except for a plant whose fair value was higher than carrying amount by Rs. 4,000. Its remaining life was 8 years.
Fair value of Cure’s shares on that date was Rs. 20 per share.
(3) During 2020 companies paid following dividends:

Pure 10%
Sure 15%
Cure 20%
(4) It is Pure’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(5) There was no need for impairment test in 2019, however, on June 30, 2020 goodwill in Sure was impaired by
Rs. 1,000 and goodwill in Cure was impaired by Rs. 1,500.
h
uk
Included in Included in Gross
Sales receivables buyer’s closing Profit %
stock
-------------------------- Rs. -------------------------------
hr
Pure to Sure 40,000 5,000 7,000 20%
Sure to Pure 30,000 - 6,000 25%
Cure to Sure 10,000 ha 3,000 4,000 15%
Required:
Prepare consolidated statement of financial position and consolidated statement of comprehensive income for the
year ended June 30, 2020.
sS
rd
ga
Re

DL Group
Rs. million
Non current assets
PPE [10,000 + 6,100 + 5,400] 21,500.00
Current assets
Current assets [6,325 + 7,100 + 3,100] 16,525.00
h
38,377.50
uk
Equity
Equity component (W-2.1) 12.01
hr
Non-controlling interest [W-3] 3,882.50
Non-current liabilities [6,000 + 3,000 + 1,000 - 250(W-2.1) + 241.55(W-2.1)] 9,991.55
Current liabilities
Current liabilities [3,500 + 3,210 + 1,400] 8,110.00
sS
38,377.50
-
Workings
GL SL
W-1 Goodwill ----- Rs. million -----
rd
- Direct [SL: 9 x 200] 7,500.00 1,800.00
- Indirect [SL: 2,800 x 75%(W-1.1)] - 2,100.00
Value of NCI [9,530 x 25%] [6,010 x 35%(W-1.2)] 2,382.50 2,103.50
ga

Share capital 7,000.00 3,000.00
RE 2,500.00 3,010.00
FV adj. - Land 30.00 -
Re
9,530.00 6,010.00
Goodwill at acquisition 352.50 (6.50)
W-1.1 % holding in GL
52.50m shares / 70m shares = 75.00%
W-1.2 Effective holding in SL
Effective holding of SL = 9/30 + 14/30 x 75% = 65.00%
Effective holding of NCI [1 - 0.65] = 35.00%
W-2 Retained earnings DL GL SL

------------------ Rs. million ----------------
RE 7,500.00 2,790.00 3,100.00
Less: Pre-acq - (2,500.00) (3,010.00)
Add: Negative goodwill (W-1) 6.50 - -
h
Less: Loss on investment in SL [2,175 - 1,800] (375.00) - -
Less: Fair value adjustment (land) - (30.00) -
uk
Less: Additional finance cost on TFC [28.56 - 25] (W-2.1) (3.56) - -
260.00 90.00
Add: Share in GL [260 x 75%] 195.00
hr
Add: Share in SL [90 x 65%(W-1.2)] 58.50
ha 7,381.44
W-2.1 Convertible debt

Rs. million
Liability component:
sS
- Coupon [250 x 10% x 3-year annuity factor at 12%] 60.05
- Redemption [250 x 3-year discount factor at 12%] 177.95
237.99
Total fair value of compound instrument 250.00
Equity component 12.01
rd
Initial liability 237.99

Interest expense [237.99 x 12%] 28.56
Cashflow [250 x 10%] (25.00)
ga

Re
W-3 NCI GL SL
--------- Rs. million --------
Value at acquisition (W-1) 2,382.50 2,103.50
RE [GL: 260 x 25%] [SL: 90 x 35%(W-1.1)] 65.00 31.50
Share in investment in CL [2,800 x 25%] (700.00) -
1,747.50 2,135.00 3,882.50
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
CONSOLIDATION – SOFP WITH ONE ASSOCIATE

Equity method is applied for investment in associate in consolidated statement of financial position (or Group statement
of financial position). Under this method “Investment in associate” is shown at investor’s share in net assets of
associate. Following are various adjustments to be made for application of equity method in consolidated balance
sheet:
1. POST ACQUISITION PROFITS AND OTHER RESERVES OF “A”
P’s shares in A’s post-acquisition retained earnings and post-acquisition other reserves are:
(i) ADDED to P’s RE in “Group RE working” and P’s other reserves in “Group other reserves working”
respectively.
(ii) both ADDED to “Investment in associate”
(Also include the adjustment for uniform accounting policies, if required. E.g. the If A does not follow
revaluation model BUT group follows it, then for consolidation purpose you will have to make
h
revaluation adjustments.)
uk
Memorandum entry:
Dr. Investment in A
Cr. Group RE (Group’s share in A’s post acquisition profits)
Cr. Group other reserves (Group’s share in A’s post acquisition other reserves)
hr
Note:
In case of losses, “investment in A” will not be taken below zero.
ha
2. IMPAIRMENT OF INVESTMENT IN ASSOCIATE
In questions, impairment loss of investment in associate may be:
- Given OR
- Determined by deducting “recoverable amount” from “carrying amount” of investment
sS
Total accumulated impairment loss is DEDUCTED from:

(i) P’s RE in Group RE working
(ii) “Investment in A”
rd
Memorandum entry:
Dr. Group RE
Cr. Investment in A
ga
3. INTER COMPANY BALANCES
No elimination:
Since there is no consolidation of receivables and payables of A, therefore, there is no need to eliminate any
Re
intercompany balance
Inventory value may be given in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
OR
OR
URP = Total profit earned in the inter-company sale x % goods held in stock

P to A sale A to P sale
P’s share of URP is DEDUCTED from: P’s share of URP is DEDUCTED from:
(i) “Investment in A” working (i) Inventory in Group SOFP
(ii) P’ RE in Group RE working (ii) P’ RE in Group RE working
Memorandum entry:
Cr. Investment in A Cr. Inventory
h
5. (a) FAIR VALUE ADJUSTMENT FOR A’s NET ASSETS
Information about fair value adjustments at acquisition date may be given as follows:
uk
- Difference between fair values and book values is given (e.g. building was overvalued by Rs. 50,000) OR
- Both Fair values and book values of A’s assets and liabilities are given (i.e. net assets)
hr
No adjustment for fair values is accounted for in Group SOFP as no consolidation of assets is being made.
However, these are considered for calculation of goodwill and adjustment of “extra depreciation”.
5. (b) EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS

ha
It is calculated using same depreciation basis as of A in its books
Calculation of Extra accumulated depreciation:

= FV adjustment ÷ remaining useful life x years since acquisition
sS
Extra Accumulated depreciation is DEDUCTED from A’s RE in “Group RE working”
rd
Memorandum entry:
Dr. Group RE
Cr. Investment in A
ga
In case of negative adjustment to A’s net assets, above adjustments will be reversed
6. UNREALIZED PROFIT ON SALE OF NON-CURRENT ASSET DURING THE YEAR
Unrealized profit is the profit included in carrying amount of a non-current asset sold in an inter-company
Re
transaction.
Calculation of URP:
URP = NBV of asset x margin %
OR
NBV of asset x markup / (100 + GP markup)
OR
URP = Profit on sale – excess depreciation charged by buyer

P’s% share of URP is DEDUCTED from: P’s% share of URP is DEDUCTED from:
(i) Investment in A (i) Relevant asset in Group SOFP
(ii) P’s RE in Group RE working (ii) P’s RE in Group RE working
Memorandum entry:
Cr. Investment in A Cr. PPE
h
Do calculate goodwill just like it is done in case of subsidiary where NCI is valued on proportionate basis. If the
uk
answer is positive then leave it there but if answer is negative then make following adjustment:
Negative goodwill is ADDED to:
hr
(i) P’s RE in Group RE working
(ii) Investment in A
Memorandum entry:
Dr. Investment in A
ha
Cr. Group RE
8. OTHER INVESTMENT BY “P” IN “A”

sS
Group may have other long term investments such as:

- Investment in preference shares / debentures of A
- Loan to A
Such investments are also considered as and included in “Investment in associates”
rd
ga
Only effect is on the calculation of Pre and Post acquisition reserves as follows:
Pre acq. reserves = A’s reserves at balance sheet date – income for the year x n/12
(n = no. of months from acquisition to year end)
Re
Post acq. reserves= A’s reserves at balance sheet date – pre acquisition reserves
OR
Income for the year x n/12

CONSOLIDATION – SOCI WITH ONE ASSOCIATE

Equity method is applied for investment in associate in consolidated statement of comprehensive income (or Group
statement of comprehensive income). Under this method, two line items, namely “Share of profit from associate” and
“share of other comprehensive income from associate” are included in consolidated statement of comprehensive
income. Following are various adjustments to be made for application of equity method in consolidated statement of
comprehensive income:
1. IMPAIRMENT OF INVESTMENT IN ASSOCIATE
In questions, impairment loss for the year on investment in associate may be:
- Given OR
- Determined by deducting “recoverable amount of current year” from “recoverable amount of previous year”
of investment.
h
uk
Impairment loss for the year is DEDUCTED from share of profit from associate in “Share of profit from associate
working” (W – 1)
2. INTER COMPANY SALES / INTER COMPANY MANAGEMENT SERVICES / INTET COMPANY INTEREST
hr
No elimination:
Since there is no consolidation of incomes and expenses of A, therefore, there is no need to eliminate any
intercompany transaction.

ha
Inventory value may be given in question or mentioned as a proportion of intercompany sale.
sS
Calculation of URP:
OR
OR
Total profit earned in the inter-company sale x % goods held in stock
rd
ga
P’s % share of URP is ADDED to “Cost of sales” P’s % share of URP is DEDUCTED in “Share of profit from
associate” working (W – 1)
Re
4. EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of A in its books
Calculation of Extra depreciation for the year:

= FV adjustment ÷ remaining useful life
Extra depreciation for the year is DEDUCTED from A’s PAT in “Share of profit from associate working”
In case of negative adjustment to A’s net assets, above adjustments will be reversed

5. UNREALIZED PROFIT ON SALE OF NON-CURRENT ASSET
Following adjustment is required only in case of sale of non-current asset during the current year:
Calculation of URP:
URP = NBV of asset x margin %
OR
NBV of asset x markup / (100 + GP markup)
OR
URP = Profit on sale – excess depreciation charged by buyer
h
uk
P’s % share of URP is DEDUCTED from “Other P’s % share of URP is DEDUCTED in “Share of profit from
income” associate” working
[If P accounted for this sale as a “sale of goods”,
hr
then adjustment number 3 will be followed]
ha
Adjustment for negative goodwill is only made in 1st year of purchase of investment in A.
Negative goodwill is ADDED to “share of profits from associate working”
sS
7. ORDINARY DIVIDEND BY “A”

rd
P’s share in A’s dividend recorded by P is DEDUCTED from P’s other income as share in total profit of associate is
separately included as a separate line item.
ga
A’s PAT in “share of profit from associate working” is time apportioned as per number of months after
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acquisition.


P Group
Consolidated Statement of Financial Position
As at …………………..
Rs.
NON-CURRENT ASSETS:
PPE XXX
[Same as studied earlier – P’s % share x URP on PPE (A to P)]
Intangible assets XXX

(Same as studied earlier)
h
Goodwill XXX
uk
Investment XXX
hr
Investment in associates (W – 1) XXX
CURRENT ASSETS:
Inventory
ha XXX
(Same as studied earlier – P’s% share x URP (A to P))
Receivables XXX
sS
Dividend receivables XXX

Cash / Bank XXX

rd

XXX
ga
Rs.
CAPITAL AND RESERVES:
Share capital XXX

Re
Share premium XXX

Other reserves XXX
Retained earnings (W – 2) XXX
Non-controlling interest XXX
NON-CURRENT LIABILITIES:
Loan notes / Debentures XXX


Contingent consideration XXX

Deferred tax XXX

CURRENT LIABILITIES: Rs.
Payables XXX
h
Dividend payable XXX
uk
XXX
hr
WORKINGS
(W – 1) Investment in associates
ha Rs.
Investment in associate [Calculated same as for S] XXX

Add: Share of profits from A [(b) from (W – 2)] XXX
Add: Share in A’s post-acquisition other reserves (e.g. Revaluation) XXX
sS
Less: P’s % share x URP on goods or PPE [ P to A ] (XXX)
XXX
(W – 2) Retained earnings
Rs. Rs.
rd
Parent’s RE XXX
------ same adjustments as studied earlier ----- |
|
XXX
ga
Add: S’s RE XXX

------ same adjustments as studied earlier ----- |
|
XXX
Re
Add: A’s RE XXX

Less: Pre-acquisition RE (XXX)
Less: Extra depreciation on fair value adjustment (XXX)
[a] XXX
Share in A’s post RE [a x P’s % share] XXX
Add: Negative goodwill XXX
Less: Impairment loss on A (XXX)
Share of profit from A [b] XXX
Less: P’s% share x URP on goods or PPE [P to A] [A to P] (XXX)
XXX


P Group
Consolidated Statement of Comprehensive income
For the year ended …………………..
Rs.
Sale XXX
Cost of sales (XXX)
[Same as studied earlier + P’s % share x URP on goods (P to A)]
Gross profit (Cast down) XXX
Distribution cost (XXX)
h
Administrative expenses (XXX)
uk
Finance cost (XXX)
Other income XXX
hr
(Same as studied earlier – P’s% share x URP on PPE (P to A) – Dividend from A)
Share of profit from associate (W – 1) XXX
Profit before tax (Cast down) XXX
Tax
ha (XXX)
Profit after tax (Cast down) XXX
sS
Revaluation gain / (loss) XXX
(P’s + S’s post acquisition gain/loss)
Fair value gain / (loss) XXX
rd
(P’s + S’s post acquisition gain/loss)

Share of other comprehensive income from associate XXX
(P’s% x A’s post acq. other comprehensive income)
ga
Total comprehensive income for the year XXX
Profit for the year attributable to:

- Shareholders of Parent XXX
- Non-controlling interest XXX
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XXX
Total comprehensive income attributable to:
- Shareholders of Parent XXX
- Non-controlling interest XXX
XXX

(W – 1) Share of profit from associates

Rs. Rs.
A’s Profit after taxation X n/12 XXX
Less: Extra depreciation for the year on fair value adjustment (XXX)
[a] XXX
Share in A’s PAT [a x Ps’% share] XXX
Add: Negative goodwill XXX
Less: URP on goods or PPE x P’s% share [A to P] (XXX)
Less: Impairment loss for the year (XXX)
XXX
h
uk
hr
ha
sS
rd
ga
Re

BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions (1)
PRACTICE QUESTIONS
Question No. 1
P S
---------- Rs.--------
Non-current assets
Investment in Alpha 11,000 -
Current assets
h
Debtors 15,000 13,000
Cash & bank 1,500 1,000
uk
109,500 68,000
Equity
Retained earnings – at July 1, 2018 20,000 18,000
hr
– for the year ended June 30, 2019 18,000 8,000
8% Loan notes 5,000 -
Current liabilities
Creditors 16,500 22,000
ha
109,500 68,000
(i) On April 1, 2019 P acquired 75% shares of S by means of a share exchange of two shares in P for every three
sS
shares of S acquired. On that date, further consideration was also issued to the shareholders of S in the form of
four Rs. 100 8% loan notes for every 100 shares acquired in S. None of the purchase consideration, nor the
outstanding interest on these loan notes at June 30, 2019, has yet been recorded by P. At the date of acquisition,
the share price of P and S is Rs. 30 and Rs. 22 respectively.
(ii) At the date of acquisition, the fair values of S’s assets were equal to their carrying amounts. However, S operates
rd
a mine which requires to be decommissioned in five years’ time. No provision has been made for these
decommissioning costs by S. The present value (discounted at 8%) of the decommissioning is estimated at Rs.
4,000 and will be paid five years from the date of acquisition (i.e. the end of the mine’s life).
ga
(iii) It is group’s policy to value non-controlling interest at fair value.

(iv) The inventory of S includes goods bought from P for Rs. 2,100. P applies a consistent mark-up on cost of 40%
when arriving at its selling prices. On June 28, 2019, P dispatched goods to S with a selling price of Rs. 700. These
were not received by S until after the year end and so have not been included in the above inventory at June
30, 2019.
Re
At June 30, 2019, P’s records showed a receivable due from S of Rs. 5,000, this differed to the equivalent payable
in S’s records due to the goods in transit.
(v) The investment in Alpha represents 30% of its voting share capital acquired on July 1, 2018 and P uses equity
accounting to account for this investment. Alpha’s profit for the year ended June 30, 2019 was Rs. 6,000 and
Alpha paid total dividends during the year ended June 30, 2019 of Rs. 2,000. P has recorded its share of the
dividend received from Alpha in investment income (and cash).
(vi) All profits and losses accrued evenly throughout the year.
(vii) At June 30, 2019, investment in Alpha is impaired by Rs. 200.
Required:
NASIR ABBAS FCA

Question No. 2
P S A
---------------------- Rs.--------------------
Non-current assets
Property, plant & equipment 80,000 50,000 40,000
Intangible assets 8,000 - -
Investments:
- in S 43,200 - -
- in A 10,000 - -
- other 5,000 - 2,000
Current assets
Inventories 12,000 8,000 10,000
h
Debtors 9,000 11,000 5,000
Cash & bank 4,000 6,000 4,000
uk
171,200 75,000 61,000
Equity
Share capital (Rs. 10 per share) 70,000 20,000 10,000
Retained earnings – at July 1, 2018 36,000 19,000 21,000
hr
– for the year ended June 30, 2019 18,000 12,000 9,000
Loan notes 25,000 15,000 5,000
Current liabilities
Creditors 22,200 9,000 16,000
ha 171,200 75,000 61,000
(i) On July 1, 2018 P acquired 1,600 shares of S in consideration of a cash payment of Rs. 27 per share. At the date
of acquisition, the share price of S was Rs. 25 per share.
sS
(ii) At the date of acquisition, the fair values of S’s property, plant and equipment were equal to their carrying
amounts except for a plant which had a fair value of Rs. 4,000 above its carrying amount. At that date, the plant
had a remaining life of four years. S uses straight-line depreciation for plant assuming a nil residual value.
Also at the date of acquisition, P valued S’s customer relationships as a customer base intangible asset at fair
rd
value of Rs. 3,000. S has not accounted for this asset. Trading relationships with S’s customers last on average
for six years.
(iv) Following information is relevant to inter-company transactions and balances:
ga
P’s records: S A
Purchases from Rs. 40,000 Rs. 12,000
Year-end payable to Rs. 4,000 Rs. 3,000
Re
Year-end stock held out inter-company purchase Rs. 7,000 Rs. 6,000
Profit margin earned by seller 20% 25%
(v) The investment in A represents 25% of its voting share capital purchased on January 1, 2019. P uses equity
accounting to account for this investment.
(vii) At June 30, consolidated goodwill has been impaired by Rs. 1,200 and investment in A has been impaired by Rs.
200.
(viiI)P’s other investments are equity investments measured at fair value through profit and loss. At June 30, 2019
fair value of these investments has moved to Rs. 6,000 but no entry has been made in books by P.
Required:
NASIR ABBAS FCA

Question No. 3
P S A
---------------------- Rs.--------------------
Non-current assets
Property, plant & equipment 40,000 25,000 22,000
Investments 40,000 - -
Current assets
Inventories 10,000 8,000 5,000
Debtors 7,000 2,000 3,000
Cash & bank 2,000 4,000 1,000
99,000 39,000 31,000
h
Equity
Share capital (Rs. 10 per share) 20,000 10,000 8,000
uk
Share premium 10,000 - -
Retained earnings – at July 1, 2018 26,000 8,000 7,000
– for the year ended June 30, 2019 18,000 6,000 3,000
hr
Loan notes 15,000 - 5,000
Current liabilities
Creditors 10,000 15,000 8,000
99,000 39,000 31,000
ha
(i) On July 1, 2018 P acquired 75% shares of S in a share exchange of two shares in P for every three shares acquired
in S. At the date of acquisition, the market prices of P’s and S’s shares were Rs. 30 and Rs. 18 respectively.
(ii) At the date of acquisition, the fair values of S’s property, plant and equipment were equal to their carrying
sS
amounts except for a plant which had a fair value of Rs. 2,000 below its carrying amount. As a result, the
differential amount of depreciation would be Rs. 100 per year.
Also at the date of acquisition, S had a software costing Rs. 500 in its statement of financial position. P’s directors
believed the software to have no recoverable value at the date of acquisition and S wrote it off shortly after its
acquisition.
rd

(iv) On January 1, 2019 P acquired 40% of the equity shares of A paying a cash of Rs. 17 per share and issuing at par
one Rs. 100 loan note for every 20 shares acquired in A. The consideration has been correctly accounted for by
P.
ga
(v) Following information is relevant to inter-company transactions and balances:

P’s records: S A
Sales to Rs. 20,000 Rs. 10,000
Re
Year-end receivable from Rs. 2,000 Rs. 1,000

Year-end stock out of inter-company sale held with Rs. 3,000 Rs. 2,000
Profit margin earned by P 30% 25%
(vii) At June 30, consolidated goodwill has been impaired by 20%.
Required:
NASIR ABBAS FCA

Question No. 4
Following are the summarized statements of financial position of Pistachio Limited (PL), Mint Limited (ML) and Jalapeno
Limited (JL) as on 31 December 2019:
PL ML JL
------------------ Rs. million ---------------
Property, plant & equipment 850 750 500
Investment in ML at cost 900 - -
Investment in JL at cost 170 - -
Inventories 300 340 200
Debtors 240 200 150
Cash & bank 60 170 50
2,520 1,460 900
h
Share capital (Rs. 10 per share) 1,400 700 400
Share premium - 100 -
uk
Retained earnings 780 480 340
Liabilities 340 180 160
2,520 1,460 900
hr
(i) Details of PL's investments are as follows:
Retained
Date of investment Holding % Investee earnings of
investee
01-Jan-19 25%
ha JL
(Rs. million)
200
01-Apr-19 80% ML 360
(ii) The following considerations relating to acquisition of ML’s shares are still unrecorded:
▪ Transfer of PL's freehold land having carrying value and fair value of Rs. 88 million and Rs. 108 million
sS
respectively.
▪ Cash of Rs. 115 million would be paid in February 2020 if ML's net profit for the year 2019 would increase
by 20% as compared to last year. Fair value of this consideration on acquisition date was estimated at Rs.
70 million. At year-end, the said target has been achieved by ML.
(iii) On the date of investment, the fair values of each share of ML and JL were Rs. 18 and Rs. 16 respectively.
rd
(iv) At the date of acquisition of ML, carrying values of ML’s net assets were equal to fair value except for inventory
which was carried at Rs. 130 million and had a fair value of Rs. 180 million. 20% of this inventory is still included
in ML's inventory as at 31 December 2019.
(v) On 1 July 2019, ML sold a machine to PL for Rs. 55 million at a gain of Rs. 10 million. The remaining useful life
ga
of the machine at the time of disposal was 5 years.

(vi) JL paid 10% dividend for the half year ended 30 June 2019. PL recorded this as other income.
(vii) During the year, PL made sales of Rs. 72 million to JL at 20% above cost. 60% of these goods were sold by JL
during the year.
(viii) As at 31 December 2019, PL has receivable of Rs. 8 million from JL.
Re
(ix) An impairment test carried out at year-end has indicated that goodwill of ML has been impaired by 10%.
(x) PL measures non-controlling interest at the acquisition date at its fair value.
(xi) PL’s discount rate is 14%.
Required:
Prepare PL’s consolidated statement of financial position as at 31 December 2019 in accordance with the requirements
of IFRSs. (18)
[Q-6 Spr-20]
NASIR ABBAS FCA

Question No. 5
P S
---------- Rs.--------
Sales 180,000 150,000
Cost of sales (120,000) (80,000)
Finance cost (2,000) (3,000)
h
Tax (15,000) (18,000)
uk
Revaluation (loss)/gain on land (2,200) 3,000
hr
(i) On January 1, 2019, P acquired 1,800 of S’s 3,000 Rs. 10 equity shares. The acquisition was achieved through
a share exchange of one share in P for every three shares in S. At that date the stock market prices of P’s and
S’s shares were Rs. 42 and Rs. 22 per share respectively. Additionally, P also paid Rs. 10 cash for each share
ha
acquired. The retained earnings of S brought forward at July 1, 2018 were Rs. 21,000.
(ii) A fair value exercise conducted on January 1, 2019 concluded that the carrying amounts of S’s net assets
were equal to their fair values with the following exceptions:
– the fair value of S’s land was Rs. 2,000 in excess of its carrying amount
sS
– an item of plant had a fair value of Rs. 3,000 in excess of its carrying amount. The plant had a remaining
life of two years at the date of acquisition. Plant depreciation is charged to cost of sales.
– P placed a value of Rs. 2,000 on S’s good trading relationships with its customers. P expected, on average,
a customer relationship to last for a further five years. Amortisation of intangible assets is charged to
administrative expenses.
rd
(iii) P’s group policy is to revalue land to market value at the end of each accounting period. Prior to its
acquisition, S’s land had been valued at historical cost, but it has adopted the group policy since its
acquisition. In addition to the fair value increase in S’s land of Rs. (see note (ii)), it had increased by a further
Rs. 1,000 since the acquisition.
ga
(iv) On July 1, 2018, P acquired 30% of V’s equity shares. V’s profit after tax and other comprehensive income for
the year ended June 30, 2019 were Rs. 10,000 and Rs. 2,000 respectively. During June 2019 V paid a dividend
of Rs. 6,000. P uses equity accounting in its consolidated financial statements for its investment in V. At June
30, 2019, the investment in V is impaired by Rs. 900.
Re
(v) After the acquisition P sold goods to S for Rs. 20,000. S had one fifth of these goods still in inventory at June
30, 2019. In June 2019 P sold goods to V for Rs. 15,000, all of which were still in inventory at June 30, 2019.
All sales to S and V had a mark-up on cost of 25%.
(vi) It is P’s policy to value non-controlling interest at the date of acquisition at its fair value.
(vii) Net profits are deemed to accrue evenly over the year.
Required:
(a) Calculate the consolidated goodwill as at January 1, 2019.
(b) Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
NASIR ABBAS FCA

Question No. 6
Following are the statements of comprehensive income for the year ending September 30, 2019:
P S
---------- Rs.--------
Sales 90,000 80,000
Cost of sales (50,000) (60,000)
Finance cost (500) (800)
Tax (7,000) (4,000)
h
uk
Equity as at October 1, 2018:
Share capital (Rs. 10 each) 40,000 20,000
hr
(i) On January 1, 2019, P acquired 90% of the equity share capital of S in a share exchange in which P issued two
new shares for every three shares it acquired in S. Additionally, P paid cash of Rs. 8 per share acquired. At
that date the stock market prices of P’s and S’s shares were Rs. 30 and Rs. 26 per share respectively.
(ii)
ha
At the date of acquisition, the carrying amounts of S’s net assets were equal to their fair values with the
following exceptions:
– an item of plant had a fair value of Rs. 3,000 in excess of its carrying amount. The plant had a remaining
life of three years at the date of acquisition. Plant depreciation is charged to cost of sales.
sS
– S had a contingent liability which P estimated to have a fair value of Rs. 500. This has not changed as at
September 30, 2019.
(iii) Although S has been profitable since its acquisition by P, the market for S’s products has been badly hit in
recent months and P has calculated that goodwill has been impaired by Rs. 2,000 as at September 30, 2019.
rd
(iv) P’s other income is the dividend received from its investment in a 40% owned associate M, which it has held
for several years. Net profit of M for the year ending September 30, 2019 amounts to Rs. 10,000.
(v) P purchased goods throughout the year 2019 from S and M amounting to Rs. 18,000 and Rs. 12,000
respectively. 30% of the goods purchased from S and half of the goods purchased from M were still held in
ga
inventory of P at September 30, 2019. S earned 25% margin and M earned 20% margin on their respective
sales.
(vi) It is P’s policy to value non-controlling interest at the date of acquisition at its fair value.
Required:
Re
(a) Calculate the consolidated goodwill as at January 1, 2019.

(b) Prepare consolidated statement of comprehensive income for the year ending September 30, 2019.
NASIR ABBAS FCA

Question No. 7
The following balances are extracted from the records of Golden Limited (GL), Silver Limited (SL) and Bronze Limited (BL)
for the year ended 30 June 2019:
GL SL BL
----------------- Rs. in million ------------
Sales 2,500 2,050 1,000
Cost of sales 1,550 1,150 590
Operating expenses 810 520 288
Other income 350 180 50
Finance cost 90 60 35
Surplus arising on revaluation of property, plant and 60 - 20
equipment during the year
Investment in SL – at cost 1,400 - -
h
Investment in BL – at cost 2,500 - -
Retained earnings as at June 30, 2019 8,000 3,500 2,200
uk
(i) Details of GL’s investments are as follows:
Share capital Retained earnings
hr
Date of investment Holding % Investee (Rs. 10 each) of investee
of investee
----------- Rs. in million ---------
1 Jan 17 35% BL 5,000 1,800
1 Jul 18 70%
ha SL 6,000 3,000
(ii) Cost of investment in SL includes professional fee of Rs. 20 million incurred on acquisition of SL.
(iii) The following considerations relating to acquisition of SL's shares are still unrecorded:
sS
• Issuance of 175 million ordinary shares of GL.
• Cash payment of Rs. 1,000 million after three years.
On the date of investment, the market price of shares of GL and SL were Rs. 20 and Rs. 17 respectively. Applicable
discount rate is 12%.
rd
(iv) At the date of acquisition of SL, carrying values of its net assets were equal to fair value except the following:
• an internally developed software by SL which had a fair value of Rs. 150 million. The cost of Rs. 120 million
incurred by SL on development had been expensed out by SL since the software did not meet the criteria for
capitalization during development. At acquisition date, the software had a remaining useful life of 5 years.
ga
• a contingent liability of Rs. 90 million as disclosed in financial statements of SL which had an estimated fair
value of Rs. 60 million. Subsequent to acquisition, the liability has been recognised by SL in its books at Rs.
40 million.
Re
(v) Following inter-company sales at cost plus 15% were made during the year ended 30 June 2019:
Sales Included in buyer’s
closing stock
-------------- Rs. in million -------------
SL to GL 506 138
GL to BL 161 69
(vi) On 1 January 2019, GL granted loans of Rs. 150 million and Rs. 130 million to SL and BL respectively, at interest
rate of 12% per annum.
(vii) GL and BL follow revaluation model whereas SL follows cost model for subsequent measurement of property,
plant and equipment. If SL had adopted the revaluation model, SL would have recorded revaluation surplus of
Rs. 35 million for the year ended 30 June 2019.
NASIR ABBAS FCA

(viii) GL measures non-controlling interest at the acquisition date at its fair value.
Required:
(a) Prepare GL’s consolidated ‘statement of profit or loss and other comprehensive income’ for the year ended 30
June 2019. (17)
(b) Compute the amount of investment in associate as would appear in GL’s consolidated statement of financial
position as at 30 June 2019. (03)
{Autumn 2019, Q#6}
Question No. 8
The following amounts are extracted from the records of Manzil Limited (ML), Himmat Limited (HL) and Koshish Limited
(KL) for the year ended 31 December 2019:
ML HL KL
-------------- Rs. in million -------------
Sales 800 315 132
h
Cost of sales (540) (180) (97)
Operating expenses (114) (60) (6)
Other income 41 - 8
uk
Finance cost (20) (12) (5)
Retained earnings as at December 31, 2019 3,600 322 200
hr
(i) Details of ML’s investments are as follows:
Date of Share capital of

investment Holding % Investee investee
ha (Rs. 10 each)
01-Aug-15 25% KL Rs. 400 million
01-May-19 60% HL Rs. 600 million
(ii) Consideration for acquisition of HL’s shares comprises of:

sS
• transfer of ML’s building having carrying value and fair value of Rs. 150 million and Rs. 226 million respectively
at acquisition date. The disposal of building has been recorded at carrying value.
• issuance of 16 million ordinary shares of ML after one month of acquisition. The market price of ML’s shares
at the date of acquisition was Rs. 30 each. However, the market price increased to Rs. 32 when shares were
issued.
rd
(iii) At the date of acquisition of HL, carrying value of its net assets was equal to fair value except the following:
• A manufacturing plant whose fair value exceeded its carrying value by Rs. 60 million. The remaining useful life
of the plant on the acquisition date was 8 years.
• A contingent asset of Rs. 50 million as disclosed in HL's financial statements which had an estimated fair value
ga
of Rs. 15 million. At year-end, this contingent asset is disclosed in HL's financial statements at Rs. 46 million.
(iv) Impairment test carried out at year-end has indicated that goodwill of HL has been impaired by 10%.
(v) On 15 August 2019, HL and KL paid 5% dividend for the half year ended 30 June 2019. ML recorded its share as
other income.
(vi) On 30 June 2019, KL sold a machine having carrying value of Rs. 60 million to ML for Rs. 68 million. The remaining
Re
useful life of the machine at the time of disposal was 5 years.

(vii) On 15 November 2019, HL and KL purchased 600,000 and 400,000 ordinary shares of Jazba Limited (JL) respectively
at price of Rs. 150 each plus 2% transaction cost. HL and KL classified the investment as financial asset at fair value
through other comprehensive income. These investments have not been re-measured at year-end. Market price
of JL’s share was Rs. 138 at year-end. Total share capital of JL consists of 20 million shares.
(viii) ML measures non-controlling interest at the proportionate share of acquiree’s identifiable net assets.
Required:
Prepare ML’s consolidated statement of profit or loss and other comprehensive income for the year ended 31 December
2019. (19)
[Q-5, Aut-20]
NASIR ABBAS FCA

BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions (1)

Solution No. 1
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [70 + 35 + 4 - 0.2 (W-3)] 108,800
Investment in Alpha [W-2] 12,000
h
Current assets
Inventories [12 + 19 + 0.7 - 0.8 (W-3)] 30,900
uk
Debtors [15 + 13 - 5] 23,000
Cash and bank [1.5 + 1] 2,500
180,200
hr
Equity
Share capital [50 + 1.5 x 2/3 x Rs. 10] 60,000
Share premium [1.5 x 2/3 x Rs. 20] 20,000
Non-controlling interest [W-4]
ha 11,430

Loan notes [5 + 6] 11,000
Provision for dismantling [4 + 0.08 (W-3)] 4,080
sS
Current liabilities
Accrued interest (W-3) 120
Creditors [16.5 + 22 + 0.7 - 5] 34,200
180,200
rd
-
Workings
Investment:
ga
Shares [1,500 x 2/3 x Rs. 30] 30,000

Loan notes [1,500 x 4/100 x Rs. 100] 6,000
Fair value of NCI [500 x Rs. 22] 11,000
Re

RE [18 + 8 x 9/12] 24,000
FV adj. - Mine 4,000
FV adj. - dismantling prov. (4,000) (44,000)
3,000
W-2 Investment in Alpha Rs. Rs.

Investment at cost 11,000
Share in profits (W-5) 1,000
12,000
NASIR ABBAS FCA


P RE [20 + 18] 38,000
Less: Interest [6 x 8% x 3/12] (120)
Less: URP [(2.1 + 0.7) x 40/140] (800)
Add: S RE 26,000
Less: Extra dep [4/5 x 3/12] (200)
Less: Interest [4 x 8% x 3/12] (80)
1,720
75% 1,290
Add: Share in Alpha (W-5) 1,000
39,370
h
W-4 NCI
FV of NCI 11,000
uk
RE [1.72 x 25%] 430
11,430
W-5 Share in Alpha
hr
Post acquisition profits 6,000
Dividend (2,000)
4,000
Share of P 1,200
Less: Impairment loss
ha (200)
1,000
Solution No. 2
sS
P Group
as at June 30, 2019
Rs.
Non current assets
rd
PPE [80 + 50 + 4 - 1] 133,000

Intangibles [8 + 3 - 0.5] 10,500
Investment in A [W-2] 10,925
ga
Other equity investment 6,000
Current assets
Inventories [12 + 8 – 1.4 – 0.375] 18,225
Re
Debtors [9 + 11 - 4] 16,000
Cash and bank [4 + 6] 10,000
210,650
Equity
Non current liabilities Rs. Rs.

Loan notes [25 + 15] 40,000
Current liabilities
Creditors [22.2 + 9 - 4] 27,200
210,650
NASIR ABBAS FCA

Workings Rs. Rs.

W-1 Goodwill
Investment [1,600 x Rs. 27] 43,200
RE 19,000
FV adj. - customer relationship 3,000 (46,000)
7,200
6,000
h
W-2 Investment in A
Investment at cost 10,000
uk
Share in profits (W-5) 925
10,925
hr
P RE [36 + 18] 54,000
Add: fair value gain [6 - 5] 1,000
Less: URP on A to P sale [ 6 x 25% x 25%] (375)
Add: S post RE 12,000
Less: Extra dep [4/4]
ha (1,000)
Less: Amort. [3/6] (500)
Less: Impairment loss of GW (1,200)
Less: URP [7 x 20%] (1,400)
sS
7,900
80% 6,320
Add: Share in A (W-5) 925
61,870
rd
W-4 NCI
FV of NCI 10,000
RE [7.9 x 20%] 1,580
11,580
ga
W-5 Share in A
Year end RE 30,000
Pre-acquisition RE [21 + 9 x 6/12] (25,500)
Re
4,500
Share of P 25% 1,125
925
NASIR ABBAS FCA

Solution No. 3
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [40 + 25 - 2 + 0.1] 63,100
Investment in A [W-2] 7,440
Other investment [40 - 15 - 7.04] 17,960
Current assets
Inventories [10 + 8 - 0.9] 17,100
h
Debtors [7 + 2 - 2] 7,000
uk
121,800
Equity
hr
Premium 10,000
Non-controlling interest [W-4] ha 5,950

Loan notes 15,000
Current liabilities
sS
Creditors [10 + 15 - 2] 23,000
121,800
-
Workings
W-1 Goodwill Rs.
rd
Investment [750 x 2/3 x Rs. 30] 15,000

ga
RE 8,000
FV adj. - Plant (2,000)
Software writen off (500) (15,500)
4,000
Re
3,200
W-2 Investment in A
Investment at cost:
Cash [320 x Rs. 17] 5,440
Loan notes [320 x 1/20 x Rs. 100] 1,600
7,040
URP on P to A sale [2 x 25% x 40%] (200)
Share in profits (W-3) 600
7,440
NASIR ABBAS FCA


P RE [26 + 18] 44,000
Less: URP on P to S sale [3 x 30%] (900)
Less: URP on P to A sale [2 x 25% x 40%] (200)
Add: S post RE 6,000
Add: Extra dep 100
Add: software written off 500
Less: Impairment loss of GW (800)
5,800
75% 4,350
Add: Share in A [3 x 6/12 x 40%] 600
h
47,850
uk
W-4 NCI
FV of NCI 4,500
RE [5.8 x 25%] 1,450
hr
5,950
Solution No. 4
ha
PL Group
Consolidated balance sheet
sS
Rs. million
Non current assets
rd
PPE [850 + 750 - 88 - 9(W-2)] 1,503.00

Investment in associates (W-4) 203.80
ga
Current assets
Inventories [300 + 340 + 50 x 20%] 650.00
Trade receivables [240 + 200] 440.00
Cash & bank [60 + 170] 230.00
Re
3,134.80
Equity
Current liabilities:
Contingent consideration 115.00
Other liabilities [340 + 180] 520.00
3,134.80
-
NASIR ABBAS FCA

W-1 Goodwill
Investment:
Cash 900.00
Freehold 108.00
Contingent consideration 70.00
Fair value of NCI [14 x 18] 252.00
Less: net assets:
Capital 700.00
Premium 100.00
RE 360.00
FV adj. (inventory) 50.00 (1,210.00)
h
120.00
Less: impairment loss (12.00)
uk
108.00

PL's RE 780.00
hr
Add: Gain on transfer of land [108 - 88] 20.00
Less: Increase in contingent consideration [115 - 70] (45.00)
Add: ML's RE 480.00
Less: Pre-acquisition profits
ha (360.00)
Less: Impairment loss of GW (W-1) (12.00)
Less: FV adj. (inventory sold) [50 x 80%] (40.00)
Less: URP on machine [10 - 10/5 x 6/12] (9.00)
sS
59.00
80.00% 47.20
Add: Share in JL's RE [(340 - 200) x 25%] 35.00
Less: URP on goods [72 x 20/120 x 40% x 25%] (1.20)
836.00
rd
W-3 NCI
FV of NCI 252.00
ga
Post-acq RE [59 x 20%] 11.80

263.80
W-4 Investment in JL
Re
Investment as per books 170.00

Share in JL's RE (W-2) 35.00
URP on goods (W-2) (1.20)
203.80
NASIR ABBAS FCA

Solution No. 5
(a)
Goodwill Rs. Rs.
Investment:
Shares [1,800 x 1/3 x Rs. 42] 25,200
Cash [1,800 x Rs. 10] 18,000
Fair value of NCI [1,200 x Rs. 22] 26,400
RE [21 + 15 x 6/12] 28,500
FV adj. – land 2,000
h
FV adj. – plant 3,000
Customer relationship 2,000 (65,500)
uk
4,100
(b)
hr
P Group
Rs.
ha
Sales [180 + 150 x 6/12 - 20] 235,000
Gross profit 92,550
sS
Distribution cost [18 + 20 x 6/12] (28,000)
Admin expenses [12 + 16 x 6/12 + 2/5 x 6/12] (20,200)
Finance cost [2 + 3 x 6/12] (3,500)
Other income [5 + 2 x 6/12 - 6 x 30%] 4,200
Share of profit from associate (W-2) 2,100
rd

Tax [15 + 18 x 6/12] (24,000)
ga
Revaluation gain [-2.2 + 1] (1,200)

share of OCI from associate [2 x 30%] 600

Re
NCI [W-3] 2,620
23,150
NCI [2.62 + 1 x 40%] 3,020
22,550
W-1 Cost of sales

P's cost of sales 120,000
S's cost of sales [80 x 6/12] 40,000
Inter company purchase (20,000)
NASIR ABBAS FCA
Extra depreciation [3/2 x 6/12] 750

URP on sales to S [20 x 25/125 x 1/5] 800
URP on sales to A [15 x 25/125 x 30%] 900
142,450
W-2 Share of profit from V

V PAT 10,000
Share in PAT 3,000
2,100
W-3 NCI
h
S PAT [15 x 6/12] 7,500
Less: Extra depreciation (750)
Less: Amort. of customer relationship (200)
uk
6,550
40.00% 2,620
Solution No. 6
hr
(a) Goodwill Rs. Rs.
Investment:
Shares [1,800 x 2/3 x Rs. 30] 36,000
Cash [1,800 x Rs. 8]
ha 14,400
sS
RE [22 + 6.8 x 3/12] 23,700
FV adj. - plant 3,000
Contingent liability (500) (46,200)
9,400
(b) P Group
rd

for the year ended September 30, 2019
Sales [90 + 80 x 9/12 - 18 x 9/12] 136,500
ga
Gross profit 52,900

Distribution cost [9 + 4 x 9/12] (12,000)
Admin expenses [11 + 6 x 9/12 + 2] (17,500)
Finance cost [0.5 + 0.8 x 9/12] (1,100)
Re
Other income [1.6 x 9/12] 1,200

Share of profit from associate (W-2) 3,520
Tax [7 + 4 x 9/12] (10,000)
Profit/TCI attributable to:
NCI [W-3] 100
17,020
W-1 Cost of sales
P's cost of sales 50,000
S's cost of sales [60 x 9/12] 45,000
Inter company purchase [18 x 9/12] (13,500)
NASIR ABBAS FCA
Extra depreciation [3/3 x 9/12] 750

URP on S to P sales [18 x 25% x 30%] 1,350
83,600
W-2 Share of profit from M
M PAT 10,000
Less: URP on A to P sales [12 x 50% x 20%] (1,200)
8,800
Share in PAT 40.00% 3,520
W-3 NCI Rs.

S PAT [6.8 x 9/12] 5,100
Less: Extra depreciation (750)
h
Less: URP on goods (1,350)
uk
1,000
10.00% 100
hr
Solution No. 7
(a)
ha
- Inter-company interest income and interest expense have been accrued by all companies in their books.
- Surplus arising on revaluation relates to current year only and thus shown in OCI for the year.
GL Group
Consolidated Statement of comprehensive income
sS
for the year ended June 30, 2019 Rs. million
Sales [2,500 + 2,050 - 506] 4,044.00
Cost of Sales [1,550 + 1,150 - 506 + 18(W-1) + 3.15(part b)] (2,215.15)
Gross Profit 1,828.85
Operating expenses [810 + 520 + 20 + 30(W-1) - 40] (1,340.00)
rd
Other income [350 + 180 + 438.22 (W-2) - 9(W-3)] 959.22

Finance cost [90 + 60 + 711.78(W-2) x 12% - 9(W-3)] (226.41)
Share of profit from Associate (W-4) 47.95
Profit for the year 1,269.61
ga
Other Comprehensive income:

Revaluation gain [60 + 35] 95.00
Share of OCI from Associate [20 x 35%] 7.00
Total Comprehensive income 1,371.61
Re
Profit Attributable to :
Group 1,122.01
NCI (W-1) 147.60
1,269.61
Total Comprehensive income attributable to :
Group 1,213.51
NCI [147.60 + 35 x 30%] 158.10
1,371.61
NASIR ABBAS FCA

Workings (all figures in million rupees)

(W-1) NCI Share
SL Profit [2,050 - 1,150 - 520 + 180 - 60] 500.00
Extra Amortization [150/5] (30.00)
URP- Stock [138 x 15/115] (18.00)
Reversal of liability 40.00
492.00
30% 147.60
(W-2) Goodwill Calculation
Investment:
Cash [1,400 - 20] 1,380.00
Deferred payment [1,000 x 1.12-3] 711.78
h
Shares [175 x 20] 3,500.00
Fair value of NCI [6,000/10 x 30% x 17] 3,060.00
8,651.78
uk
Software 150.00
Contingent Liability (60.00)
RE 3,000.00 (9,090.00)
hr
Goodwill/(bargain purchase gain) (438.22)
(W-3)
ha
Inter company interest = 150 x 12% x 6/12 = 9.00
sS
(W-4)
Profit for the year of BL
Sales 1,000.00
Cost of Sales (590.00)
rd
Other income 50.00

Finance Cost (35.00)
137.00
35% 47.95
ga
(b)
Investment in Associate as on 30th June 2019:
Rs. million
Cost 2,500.00
Re
Post acquisition RE [(2,200 - 1,800) x 35%] 140.00

URP on goods [69 x 15/115 x 35%] (3.15)
Share in revaluation surplus [20 x 35%] 7.00
2,643.85
NASIR ABBAS FCA

Solution No. 8
HL's dividend relate to 1st half of 2019 which consist of both pre and post acquisition periods. But we
can not distinguish between both, therefore, it is not deducted from investment in GW working.
ML Group
Consolidated Statement of comprehensive income
for the year ended December 31, 2019 Rs. million
Sales [800 + 315 x 8/12] 1,010.00
Cost of Sales [540 + 180 x 8/12 + 5(W-1)] (665.00)
Gross Profit 345.00
Operating expenses [114 + 60 x 8/12 + 12.4(W-2)] (166.40)
Other income (W-3) 94.00
h
Finance cost [20 + 12 x 8/12] (28.00)
Share of profit from Associate (W-4) 6.20
uk
Profit for the year 250.80
Other Comprehensive income:
Fair value loss on equity investment (W-5) (9.00)
Share of OCI from Associate (W-5) (1.50)
hr
Total Comprehensive income 240.30
Profit Attributable to :
Shareholders of ML 236.00
NCI (W-1)
ha 14.80
250.80
Total Comprehensive income attributable to :
Shareholders of ML 229.10
sS
NCI [14.80 - 9 x 40%] 11.20
240.30
Workings (all figures in million rupees)

rd
(W-1) NCI Share

HL Profit [(315 - 180 - 60 - 12) x 8/12] 42.00
Extra depreciation [60/8 x 8/12] (5.00)
37.00
ga
40% 14.80
(W-2) Goodwill Calculation
Investment:
Building transferred 226.00
Re
Shares [16 x 30] 480.00

706.00
FV adj. - Plant 60.00
RE [322 - 42(W-1) + 30*] 310.00
970.00
60% (582.00)
Impairment loss [124 x 10%] 12.40
* Dividend = 600 x 5% = 30
NASIR ABBAS FCA

(W-3)
ML's other income 41.00
Building transferred as consideration [226 - 150] 76.00
Dividend from HL [30 x 60%] (18.00)
Dividend from KL [400 x 5% x 25%] (5.00)
94.00
(W-4)
Profit for the year of KL
Sales 132.00
Cost of Sales (97.00)
h
Other income 8.00
Finance Cost (5.00)
uk
URP on machine [8 - 8/5 x 6/12] (7.20)
24.80
25% 6.20
hr
(W-5)
Fair value loss of HL [(150 x 1.02 - 138) x 0.6] 9.00
ha
Share in Fair value loss of KL [(150 x 1.02 - 138) x 0.4 x 25%] 1.50
sS
rd
ga
Re
NASIR ABBAS FCA

IFRS 11 – Joint Arrangements – Class notes
Joint arrangement
An arrangement of which two or more parties have joint control. A joint arrangement has following
characteristics:
(a) The parties are bound by a contractual arrangement
(b) The contractual arrangement gives two or more of those parties joint control of the arrangement.
A joint arrangement is either a:
(i) Joint Operation
(ii) Joint Venture
Joint operation Joint venture
h
It is a joint arrangement whereby the parties that It is a joint arrangement whereby the parties that
have joint control of the arrangement have rights have joint control of the arrangement have rights
uk
to the assets, and obligations for the liabilities, to the net assets of the arrangement.
relating to the arrangement.
hr
A party to a joint operation that has joint control A party to a joint venture that has a joint control
of that operation is called a Joint Operator of that venture is called a Joint Venturer
ha
A joint arrangement that is not structured through A joint arrangement in which the assets and
a separate vehicle is a joint operation. liabilities relating to the arrangement are held in a
separate vehicle can either be a joint operation or
a joint venture.
sS
rd
ga
Re

Joint control
The contractually agreed sharing of control of an arrangement, which exists only when decisions about
the relevant activities require the unanimous consent of the parties sharing control.
In a joint arrangement, no single party controls the arrangement on its own. A party with joint control
of an arrangement can prevent any of the other parties from controlling the arrangement. An
arrangement can be a joint arrangement even though not all of its parties have joint control of the
arrangement.
h
Separate vehicle
A separately identifiable financial structure, including separate legal entities or entities recognized by
uk
statute, regardless of whether those entities have a legal personality.
hr
ha
sS
rd
ga
Re

h
uk
hr
ha
FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT
sS
Joint Operations
A joint operator shall recognize in relation to its interest in a joint operation:

(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the joint operation;
rd
(d) its share of the revenue from the sale of the output by the joint operation; and
(e) its expenses, including its share of any expenses incurred jointly.
[It is done by eliminating the investment appearing in the books of Joint operator]
ga
Example – Accounting for a joint operation

On 1 January 20X7, X and Y entered into a joint operation to purchase and operate an oil pipeline. Both
entities contributed equally to the purchase cost of Rs.20 million and this was financed by a joint loan of
Rs.20,000,000.
Re
Contract terms
Y carries out all maintenance work on the pipeline but maintenance expenses are shared between X and
Y in the ratio 40%: 60%.
Both entities use the pipeline for their own operations and share any income from third parties 50%: 50%.
Sales to third parties are invoiced by Y.
The full interest on the loan is initially paid by X but the expense is to be shared equally.
During the year ended 31 December 20X7

Y carried out maintenance at a cost of Rs. 1,200,000.
Income from third parties was Rs. 900,000, all paid to Y.

Interest of Rs. 1,500,000 was paid for the year on 31 December by X.

Required
Show the relevant figures that would be recognized in the financial statements of X and Y for the year to
31 December 20X7.
h
uk
hr
ha
sS
rd
ga
Re

When an entity acquires an interest in joint operation, it shall apply, to the extent of its share (as studied
above) all the principles on business combinations accounting in IFRS 3. It is summarized as follows:
- Fair values of identifiable assets and liabilities (other than exceptions as per IFRS 3) will be used for
accounting for its share.
- Recognize DTA/DTL that arise from initial recognition of assets or liabilities.
- Goodwill will be calculated and accounted for by comparing consideration transferred and net assets
acquired.
- Recognize acquisition related costs as expense.
- All intercompany eliminations are made proportionately.
This guidance is applicable to acquisition of both the initial interest and additional interests in joint
h
operations. However, in case of additional interest, the previously held interests are not remeasured.
uk
Joint Ventures
A joint venturer shall recognize its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with IAS 28 Investments in Associates and Joint
hr
Ventures unless the entity is exempted from applying the equity method as specified in that standard.
A party that participates in, but does not have joint control of, a joint venture shall account for its interest
in the arrangement in accordance with IFRS 9 Financial Instruments, unless it has significant influence over
ha
the joint venture, in which case it shall account for it in accordance with IAS 28
sS
Separate financial statements
Above guidance in respect of Joint operations and Joint ventures shall also be followed in separate
financial statements of a joint operator or joint venturer.
rd
ga
Re

Solution [Q-1 Jun-10] Question should be changed as follows:
- Delete point (v) as it is obsolete treatment. As a result ICAP solution is irrelevant.
PL Group
Rs. million
Non current assets
PPE [120 + 40 + 3 -1] 162.00
Investment in JCEL (W-3) 37.60
Current assets
h
Stock in trade [20 + 17 - 0.4] 36.60
Trade and other receivables [25 + 5] 30.00
uk
Cash and bank [3 + 1] 4.00
281.20
Equity
Share capital 50.00
hr

Long term loan [75 + 12]
ha 87.00
Current liabilities
sS
281.20
PL Group -
rd
Rs. million
Sales [1,267 + 276 - 10] 1,533.00
Cost of sales (W-5) (1,081.80)
ga
Gross profit 451.20

Selling expenses [174 + 68] (242.00)
Administrative expenses [88 + 30 + 1] (119.00)
Other income 10.00
Re
Financial charges [12 + 4] (16.00)

Share of profit from JV [(18 -2) x 50%] 8.00
Tax [26 + 5] (31.00)
Profit for the year 61.20

- Shareholders of PL 60.20
- NCI (W-4) 1.00
61.20
Workings
Consideration transferred 35.00
Value of NCI [30 x 20%] 6.00
Share capital 15.00
RE [18 - 8] 10.00
FV adj. - Equipment [15 - 12] 3.00
FV adj. - Inventory [12 - 10] 2.00 (30.00)
h
W-2 Retained earnings PL SL JCEL
uk
------------------ Rs. million ----------------
RE 78.00 18.00 28.00
Less: Pre-acq - (10.00) -
Less: Extra dep. on FV adj. of Equipment [3/3] - (1.00) -
hr
Less: FV adj. - Inventory - (2.00) -
Less: Policy adjustment - inventory [16 - 14] - - (2.00)
Less: URP on goods [2 x 25/125] ha (0.40) - -
5.00 26.00
Add: Share in SL [5 x 80%] 4.00
Add: Share in JCEL [26 x 50%] 13.00

sS
Share in URP of goods [4 x 25/125 x 50%] (0.40)
12.60
94.20
W-3 Investment in JCEL Rs. million

rd
Investment 25.00
RE (W-2) 12.60
37.60
ga
W-4 NCI Rs. million

Value at acquisition (W-1) 6.00
RE [5 x 20%] 1.00
Re
7.00
W-5 Cost of sales Rs. million

PL 928.00
SL 161.00
Intercompany sale (10.00)
FV adjustment - inventory 2.00
URP on goods [0.4 + 0.4] 0.80
1,081.80
RL Group
Rs. million
Non current assets
PPE [7,450 + 3,000 - 300 + 70 + 180 - 24] 10,376.00
Investment in YL (W-5) 1,128.00
Current assets
h
Current assets [650 + 500 - 15 - 37.50] 1,097.50
12,976.99
uk
Equity
Share premium 1,100.00
hr
Bank loan [1,700 + 800 + 182.87(W-1.1)]
ha 2,682.87
Deferred tax [244.75 + 145.42](W-4) 390.17
sS
Current liabilities
Current liabilities [950 + 355 + 40] 1,345.00
12,976.99
-
Workings
rd

- Cash 1,300.00
- Land 450.00
ga
- Bank loan (W-1.1) 179.89

Value of NCI [1,943 x 20%] 388.60
Re

RE 750.00
FV adj. - Land 70.00
FV adj. - Building 180.00
Contingent liability (40.00)
DTL [(180 - 40) x 30%] (42.00) (1,943.00)
W-1.1 Bank loan Rs. million
Value at 01-01-18:
Interest [Rs. 24m x 5-year annuity factor at 15%] 80.45
Redemption [Rs. 200m x 5-year discount factor at 15%] 99.44
Initial recognition 179.89
Interest expense [179.89 x 15%] 26.98
Cashflow (24.00)
W-2 Retained earnings RL TL YL

------------------ Rs. million ----------------
h
RE 2,300.00 1,200.00 380.00
Less: Pre-acq - (750.00) -
uk
Less: Finance cost on loan [26.98 - 24.00] (2.98) -
Add: Gain on land transfer [450 - 300] 150.00 -
Less: Extra dep. on FV adj. of Building [180 / 7.5] - (24.00)
Less: URP on goods [100 x 15%] [150 x 25%] (15.00) (37.50)
hr
Add: Deferred tax expense (W-4) 5.25 16.58
405.08 380.00
Add: Share in TL [405.08 x 80%] ha 324.06
Add: Share in YL [380 x 60%] 228.00
2,989.33
sS
W-3 NCI Rs. million

RE [405.08 x 20%] 81.02
rd
469.62
W-4 Deferred tax

RL TL
ga
--------- Rs. million --------

Tax on adjustments:
Finance cost [2.98 x 25%] (0.75) -
Extra dep. on FV adj. of building [24 x 30%] - (7.20)
Re
URP on goods [15 x 30%] [37.50 x 25%] (4.50) (9.38)

(5.25) (16.58)
Tax on acquisition (W-1) - 42.00
Balance as per question 250.00 120.00
244.75 145.42
W-5 Investment in YL Rs. million

Investment 900.00
RE (W-2) 228.00
1,128.00
STEP ACQUISITION [SOFP & SOCI] – Class notes
SITUATIONS
1. Equity investment to S
2. A/JV to S
3. Further investment in S
Subsequent purchase of shares under each of the above situation is discussed in detail as follows:
1) Equity investment to Subsidiary

1st investment was accounted for as an investment (as per IFRS 9). Control is obtained on 2nd investment,
therefore, acquisition date is the date of 2nd investment. Treatment after 2nd investment is discussed separately
for SOFP and SOCI.
h
STATEMENT OF FINANCIAL POSITION
uk
(i) Full consolidation of assets and liabilities will be made at year end.
(ii) Goodwill working:
Fair value of 1st investment at acquisition date X
hr
Additional investment X
Value of NCI X
Less: Net assets of S at acquisition date (X)
Goodwill at acquisition X
Less: Impairment loss
ha (X)
Goodwill carrying amount X
(iii) “Other reserves” working will be made as studied earlier.
sS
(iv) “Retained earnings” working will be made as studied earlier except that a gain/(loss) on derecognition of
earlier investment is recognized in P’s column calculated as follows:

Less: Carrying amount of 1st investment (X)
rd
Gain / (loss) X
Note – If entity has classified earlier investment at “fair value through OCI” then this gain/(loss) is
recognized in Other reserves. However, it may still be included in RE, giving a note that cumulative gain/loss
ga
recognized can be transferred to RE on de-recognition as per IFRS 9.
(v) NCI working will be made as studied earlier.

Re
STATEMENT OF COMPREHENSIVE INCOME
SOCI is better understood if we assume 2nd investment made during the current year (i.e. control achieved
during the current year).
(i) Time proportionate consolidation of incomes and expenses will be made for the year.
(ii) Profit on de-recognition of earlier investment is recognized in “Other income” (if classified as FV through
P&L) or “Other comprehensive income (if classified as FV through OCI).
(iii) NCI working is made on time proportionate basis as studied earlier in basic consolidation.

2) A/JV to Subsidiary
1st investment was accounted for as per equity method. Control is obtained on 2nd investment, therefore,
acquisition date is the date of 2nd investment. Treatment after 2nd investment is discussed separately for SOFP
and SOCI.
(ii) Goodwill working:

Additional investment X
Value of NCI X
h
Less: Net assets of S at acquisition date (X)
Goodwill at acquisition X
uk
Less: Impairment loss (X)
Goodwill carrying amount X
(iii) In “Other reserves” working, S other reserves will be split into:
1) Other reserves between 1st investment and 2nd investment [it will be considered as share from
hr
Associate/JV and old% will be applied].
2) Other reserves after 2nd investment [it will be considered as share from S and new% will be applied]
ha
(iv) In “Retained earnings” working, S RE will be split into:
1) RE between 1st investment and 2nd investment [it will be considered as share from Associate/JV and
old% will be applied].
2) RE after 2nd investment [it will be considered as share from S and new% will be applied]
sS
Moreover a gain/(loss) on derecognition of earlier investment is recognized in P’s column calculated as

follows:
Less: Cost of 1st investment X
rd
Share in Other reserves [as per (iii) (1) above] X

Share in RE [as per (iv) (1) above] X
(X)
ga
Gain/(loss) X
Exam note:
Above formula is given only for knowledge and consistency with SOCI, however, in exam question this gain
can be simply “fair value – cost of investment” for SOFP questions
Re
(v) NCI working will be made as studied earlier in basic consolidation.

SOCI is better understood if we assume 2nd investment made during the current year (i.e. control obtained
during the current year).
(i) Time proportionate consolidation of incomes and expenses will be made for the year.
(ii) “Share of profit/OCI from associate/JV” shall be calculated on S’s PAT/OCI between year start and 2nd
investment date.
(iii) Profit on de-recognition of earlier investment is recognized in “Other income”.
(iv) NCI working is made on time proportionate basis as studied earlier in basic consolidation.

2) Further investment in Subsidiary

Control was obtained in 1st investment, therefore, acquisition date is the date of 1st investment. 2nd investment
is just considered as a transaction within equity. Treatment after 2nd investment is discussed separately for
SOFP and SOCI.
(ii) Goodwill is calculated at the date of 1st investment and it is not recalculated on 2nd investment.
(iii) In “Other reserves” working, S other reserves will be split into:
h
1) Other reserves between 1st investment and 2nd investment [old% will be applied to this portion].
2) Other reserves after 2nd investment [new% will be applied to this portion.]
uk
(iv) In “Retained earnings” working, S RE will be split into:
1) RE between 1st investment and 2nd investment [old% will be applied to this portion].
2) RE after 2nd investment [new% will be applied to this portion]
hr
(v) An adjustment in equity is calculated as follows:
Decrease in NCI:
- In Value of NCI at acquisition [Value at acquisition x decrease%/old NCI%] X
ha
- In Other reserves [(iii) (1) above x decrease%] X
- In RE [(iv) (1) above x decrease%] X X
Consideration paid for 2nd investment (X)
Adjustment in equity [+/-] X
sS
This adjustment shall be made in P column in “Other reserves” or “Retained earnings”. [IFRS 10 has just
mentioned the word “equity” and not specified the account. However, some books use “other reserves”
while some use “Retained earnings”].
rd
(vi) NCI working will be made as follows:
Value at acquisition [Value at acquisition x new NCI%/old NCI%] X

Other reserves [Total post after 1st investment x new NCI%] X
ga
Retained earnings [Total post after 1st investment x new NCI%] X

X
Re
SOCI is better understood if we assume subsequent acquisition during the current year.
(i) Full consolidation of incomes and expenses will be made for the year.
(ii) NCI working is made on time proportionate basis in following two components:
S’s PAT [from year start to 2nd investment date x old NCI %] X
S’s PAT [from 2nd investment date to year end x new NCI %] X
X

Master question SOFP [Step acquisition]
Question
Following statements of financial positions relate to Peru and Solid as at June 30, 2020:
Peru Solid
--------------- Rs. ----------
PPE 87,000 89,000
Investments (at cost) 60,000 10,000
Current assets 20,000 25,000
167,000 124,000
Shar capital (Rs. 10 each) 70,000 40,000
h
Current liabilities 14,000 19,000
uk
167,000 124,000
Peru made investments in Solid twice; fist on July 1, 2015 and second on July 1, 2017. Following
information relates to Solid on these dates:
hr
01-07-15 01-07-17
Market price of Solid’s shares Rs. 14 Rs. 16
Other reserves Rs. 1,500
ha Rs. 4,500
Retained earnings Rs. 3,200 Rs. 8,000
At June 30, 2020 impairment review shows that goodwill is impaired by 10%. It is Peru’s policy to follow
full goodwill method.
sS
Required:
Prepare group SOFP as at June 30, 2020 under each of the following situations:
(a) Peru acquired 10% shares on July 1, 2015 at market price and 70% shares on July 1, 2017 at a price of
Rs. 17 per share.
rd
(b) Peru acquired 25% shares on July 1, 2015 at market price and 55% shares on July 1, 2017 at a price of
Rs. 17 per share.
(c) Peru acquired 70% shares on July 1, 2015 at a price of Rs. 15 per share and 10% shares on July 1, 2017
at market price.
ga
Re

Master question SOCI [Step acquisition]
Question
Following statements of comprehensive income relate to Blue and Green for the year June 30, 2020:
Blue Green
--------------- Rs. ----------
Sales 140,000 120,000
Cost of sales (105,000) (90,000)
Operating expenses (14,000) (12,000)
h
Tax (8,000) (9,000)
uk
Blue made investments in Green twice; fist on July 1, 2018 and second on October 1, 2019. Following
information relates to Green on these dates:
01-07-18 01-10-19
hr
Market price of Green’s shares Rs. 25 Rs. 30
Fair value adjustment on building Rs. 4,800 Rs. 4,400
Remaining useful life of building 4 years
ha 2.75 years
Share capital (Rs. 10 each) Rs. 40,000 Rs. 40,000
Green earned profit after tax of Rs. 12,000 in the year 2019. During the year 2020, Green sold goods for
Rs. 1,000 every month to Blue. Out of intercompany sale, unrealized profit included in Blue’s stock at June
sS
30, 2020 amounts to Rs. 500.
Required:
Prepare group SOCI for the year ended June 30, 2020 under each of the following situations:
(a) Blue acquired 10% shares on July 1, 2018 at market price and 70% shares on October 1, 2019 at a
rd
price of Rs. 32 per share.

(b) Blue acquired 30% shares on July 1, 2018 at market price and 50% shares on October 1, 2019 at a
price of Rs. 32 per share.
(c) Blue acquired 70% shares on July 1, 2018 at a price of Rs. 27 per share and 10% shares on October 1,
ga
2019 at market price.

Re

OGL Group
as at March 31, 2011
Rs. million
Non current assets
PPE [700 + 200 + 25] 925.00
Current assets
Current assets [350 + 150 - 1.25 - 15] 483.75
1,429.75
Equity
h
uk
Non-current liabilities [150 + 40] 190.00
Current liabilities
hr
Current liabilities [182 + 130 - 15] 297.00
1,429.75
Workings ha -
Consideration transferred 108.00
Fair value of earlier investment 28.00
sS
RE 60.00
FV adj. - Land 25.00 (185.00)
rd
W-2 Retained earnings OGL RGL

--------- Rs. million --------
ga
RE 550.00 80.00
Less: Pre-acq - (60.00)
Less: Professional fees for acquisition (4.00) -
Add: Cummulative fair value gain transferred to RE 3.00
Add: Profit on earlier investment [28 - 23] 5.00 -
Re
Less: URP on goods [5 x 25%] - (1.25)

18.75
Add: Share in RGL [18.75 x 55%] 10.31

564.31
W-3 NCI Rs. million

RE [18.75 x 45%] 8.44
78.44

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IAS 36 – Class notes

This standard shall not apply to:

IDENTIFYING AN ASSET THAT MAY BE IMPAIRED

2. The recoverable amount of an asset or a cash‑generating unit is the higher of:

Nasir Abbas FCA Page 1 | 10

Timing of impairment testing:

External sources of information

Internal sources of information

Dividend from a subsidiary, joint venture or associate

MEASURING RECOVERABLE AMOUNT

Nasir Abbas FCA Page 2 | 10

2. Estimating the value in use of an asset involves the following steps:

Future cash flows

Nasir Abbas FCA Page 3 | 10

3. Estimates of future cash flows shall include:

4. To avoid double‑counting, estimates of future cash flows do not include:

(b) improving or enhancing the asset’s performance.

expenditure to get the asset ready for use or sale.

6. Estimates of future cash flows shall not include:

(b) income tax receipts or payments.

spot exchange rate at the date of the value in use calculation.

Nasir Abbas FCA Page 4 | 10

RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS

Impairment loss = Carrying amount – Recoverable amount

Accounting for impairment loss:

Dr. Impairment loss (P&L) ha Dr. Revaluation surplus

CASH GENERATING UNITS [CGU]

Identifying the CGU to which asset belongs

Nasir Abbas FCA Page 5 | 10

1. Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be

Recoverable amount and carrying amount of CGU

Nasir Abbas FCA Page 6 | 10

Testing cash‑generating units with goodwill for impairment

Timing of impairment tests

Nasir Abbas FCA Page 7 | 10

2. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of

separately then recoverable amounts of individual CGUs are added.

Impairment loss for a CGU

Nasir Abbas FCA Page 8 | 10

Indications of impairment loss reversal

External sources of information

Internal sources of information

Nasir Abbas FCA Page 9 | 10

Reversal an impairment loss for an individual asset

Upper limit for reversal for individual asset

Accounting for impairment loss reversal:

If asset is carried at cost model If asset is carried at revaluation model

Reversing an impairment loss for a CGU

of an asset above the lowest of:

Nasir Abbas FCA Page 10 | 10

Applicable discount rate is 9%.

{FAR II Autumn 2018, Q # 6(b)}

NASIR ABBAS FCA

Furniture and fixtures 120

(iii) Goodwill allocated to this CGU amounts to Rs. 50 million.

Net disposal proceeds at end of year 210

Carrying amounts of assets in a CGU as on June 30, 2020 are as follows:

NASIR ABBAS FCA

Following information is available for the purpose of impairment testing:

Book value Fair value less cost to sell

2017 2018 2019

(v) Pre-tax discount rate of BBL is 9%.

{Spring 2017, Q#3}