Advanced Financial Reporting

Suggested
Roll No.

Maximum Marks - 100

Total No. of Questions - 6

Total No. of Printed Pages - 7

Time Allowed - 3 Hours

Attempt all questions. Working notes should form part of the answers.
1.

Marks

L Ltd. has two divisions X and Y. The respective shares of the divisions on various
assets and liabilities in the company's balance sheet as on 31st Ashadh, 2072 are as
below:
(Rs. in lakh)
Particulars
Division
Total
X
Y
Fixed Assets:
Cost
13,000
6,800
Less: Depreciation
4,500
3,200
Written down value
8,500
3,600
12,100
Investments
2,300
Current Assets
7,000
8,600
Less: Current Liabilities
3,700
4,200
Net Current Assets
3,300
4,400
7,700
22,100
Financed by:
Loan Funds
8,000
Own Funds:
Equity share capital - Shares of Rs.
10 each
6,000
Reserves and Surplus
8,100
22,100
Division Y has been invariably suffering losses. The company sold this division
along with its assets and liabilities to a newly formed company, Z Ltd., which was
incorporated with an authorized capital of Rs. 16,000 lakh divided into shares of Rs.
10 each. Z Ltd. allotted to L Ltd.'s shareholders its two fully paid equity shares of
Rs. 10 each at par for every fully paid equity shares of Rs. 10 each held in L Ltd. as
discharge of consideration for the division taken over.
Z Ltd. recorded in its book the fixed assets at Rs. 5,600 lakh, current assets at
Rs. 6,400 lakh and liabilities at the same value at which they appeared in the books
of L Ltd.
On 1st Shrawan 2072, L Ltd. sold all its investment for Rs. 2,700 lakh and redeemed
debentures liability of Rs. 3,000 lakh at par, which was included in loan funds. The
cash transactions are being recorded in the bank account pertaining to X division.
Required:
a) Show journal entries in the books of L Ltd.
b) Prepare L Ltd.'s balance sheet immediately after the demerger
c) Prepare initial balance sheet of Z Ltd.

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Answer
i)

Journal Entries in the books of Ltd

a)

Bank account (current assets)

To Investments
To Profit and loss account (Reserve & Surplus)
(Being sales of investments at a profit of 400 lakhs)

Dr.

2,300
400

b) Debentures account (Loan funds)

To Bank account (Current assets)
(Being redemption of debentures at par)

Dr.

c)

Dr.
Dr.
Dr.

Current liabilities account

Provision for depreciation account
Reserves and surplus
To Fixed assets account
To Current assets account
(Being assets and liabilities pertaining to Y division
taken out of the books and the difference is adjusted
reserve & surplus on transfer of the division to
Z limited)

Dr.
2,700

(Rs. In lakh)
Cr.

3,000
3,000

4,200
3,200
8,000
6,800
8,600

from

Note:
1)

2)

Since this is the case of demerger and Z Ltd. is directly paying to the shareholders' of L
Ltd., these is no need to pass entries for transactions relating to purchase consideration.
Since PC is directly paid to shareholders of L Ltd. the difference in the value of assets
and liabilities to Y division is adjusted from the balance of reserve and surplus account.

ii)

L Ltd. Balance Sheet (After Demerger)

as on 01-04-2072
(Rs. In lakh)
Fixed Assets
Gross block

13,000

Less: Depreciation
Net current assets
Current assets (W.N. 3)

4,500

Less: Current liabilities

3,700

8,500

6,700
3,000
11,500

Financed by:
Shareholders' Funds
Equity Share Capital

6,000

Reserve and surplus (W.N. 1)

500

Loan Funds (W.N. 2)

6,500
5,000
11,500

iii)

Initial Balance Sheet of Z Ltd.

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as on 01-04-2072
(Rs. In lakh)
5,600
4,200

Fixed Assets
Goodwill (W.N. 4)
Net current assets
Current assets

6,400

Less: Current liabilities

4,200

2,200
12,000

Financed by:
Shareholders' Funds (Authorised share capital Rs. 16,000)
Equity Share Capital (issued for acquisition of business)

12,000
12,000

Working Notes:
1
Reserves and surplus of L limited
Balance as on 31stAshadh 2072

(Rs. In lakh)
8,100

Add: Profit on sale of investments

400
8,500

Less: Adjustment for difference on demerger

8,000

Balance shown in balance sheet after demerger

2

500

Loan funds of L Ltd.

Balance as on 31stAshadh 2072

8,000

Less : Debenture redeemed

3,000

Balance shown in balance sheet after demerger

5,000

Current assets of L Ltd.

Balance as on 31st Ashadh 2072

7,000

Add: Cash received from sale of investments

2,700
9,700

Less: Cash paid for redemption of debentures

3,000

Balance shown in balance sheet after demerger

6,700

Calculation of goodwill for Z Ltd.

Purchase consideration (6,000 X 2)
Less: Assets sold
Fixed assets

12,000
5,600

Current assets

6,400
12,000

Less: Current liabilities

4,200

Goodwill

7,800
4,200

2.
a)

On May 11, 2015 Nepal Handicraft Export Company sold goods to M/s Warner
Brother Inc. of USA for an invoice of US$ 80,000 when the spot market rate was
Rs. 102.60 per US$. Payment was to be received after three months on August
11,

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2015. To mitigate the risk of loss(4)from decline in the exchange rate on the
date of receipt of payment, Nepal Handicraft Export Company immediately
acquired a forward contract to sell on August 11, 2015 US$ 80,000 @ Rs. 102.46.
The company closed its books of account on July 16, 2015 when the spot rate was
Rs. 100.28 per US$. On August 11, 2015 the date of receipt of money by the
company, the spot rate was Rs. 99.12 per US$.
Required:

Pass journal entries in the books of Nepal Handicraft Export Company to record
the effect of all the above transactions.
b)

ABC Pvt. Ltd. is a tile manufacturing company operating since last five years.
During the fiscal year 2071/72, the company started an expansion project with a
total budget of Rs. 30 million. The project was started on Kartik 01, 2071 and is
expected to be completed in next two years. The abridged balance sheets of the
company as on Ashadh end 2071 and Ashadh end 2072 were as follows:
Amount (Rs.)
S. No. Particulars
Ashadh end 2071 Ashadh end 2072
1
Paid-up Capital
20,000,000
20,000,000
2
Reserve and Surplus
5,000,000
6,000,000
3
Borrowings
a.
Term Loan II
3,000,000
b.
Term Loan I
7,500,000
6,500,000
c.
Overdraft Loan
3,000,000
5,500,000
Total Capital & Liabilities
35,500,000
41,000,000
4
Fixed Assets:
a.
Plant & Machineries
11,500,000
10,450,000
b.
Land & Buildings
13,500,000
12,500,000
c.
Construction in progress
10,500,000
5
Working Capital
10,500,000
7,550,000
Total Assets
35,500,000
41,000,000
Following additional information is provided:
i)

All the borrowings are made from a commercial bank. Term Loan II was
borrowed specifically for the expansion project whereas Term Loan I was
borrowed during the establishment of the entity for purchase of land, plant &
machineries and construction of building.
ii) The first installment of the Term Loan II amounting to Rs. 2 million was
disbursed by the bank (for payment of mobilization advance to contractor) on
Shrawan 01, 2071 which was deposited in overdraft account. Due to
technical problem, the advance was disbursed to the contractor on Kartik 01,
2071 when the project got started.
iii) Disbursement of subsequent installment was delayed by the bank and the
company has used Rs. 2.50 million from approved overdraft limit from
Baishakh 01, 2072 for payment related to expansion project.
iv) All the loan account bears an annual interest rate of 10 percent.

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Interest expenses on Term(5)Loan I, Term Loan II and overdraft account

for the fiscal year 2071/72 amounts to Rs. 700,000, Rs. 300,000 and Rs.
300,000 respectively.
vi) During the process of sanction of Term Loan II limit, the bank has levied a
service charge amounting to Rs. 200,000.
v)

Required:

Calculate the amount of borrowing cost eligible for capitalization under the
expansion project of the company for the fiscal year 2071/72.
c)

During the fiscal year 2071/72, XYZ Bank Ltd. incurred following cost for set
up of its Information and Technology Department:
Particulars
Amount (Rs)
Computer Server
1,000,000
50 set of Personal Computer (PC)
2,000,000
Microsoft Office 2007 for server and PC operation
500,000
Pumori Plus IV for operation of banking transactions
1,500,000
Additional payment to supplier of Pumori software for
customization
400,000
Payment to Pumori software provider for training of
staff of Bank
200,000
Software for Inventory and Fixed Assets Management
200,000
Required:

Which of the above cost incurred should be capitalized under tangible and
intangible assets? Whether any cost incurred should be charged to revenue?
Answer
a)

Journal Entries in the books of Nepal Handicraft Export Company

2015
May 11

Rs.
M/s Warner Brother's A/c

Dr.

Rs.

82,08,000

To, Sales A/c

82,08,000

(Credit sales made to M/s Warner Brother of USA

for US$ 80,000 recorded at spot market rate of Rs.
102.60 per US$)
Forward (Rs) Contract Receivable A/c

Dr.

81,96,800

Deferred Discount Account

Dr.

11,200

To, Forward ($) Contract Payable

82,08,000

(Forward contract acquired to sell on August 11,

2015 US$ 80,000@ Rs. 102.46)
July 16

Exchange Loss A/c

Dr.

1,85,600

To, M/s Warner Brothers

1,85,600

(Record of exchange loss @ Rs. 2.32 per $ due to

market rate becoming Rs. 100.28 per US$ rather
than Rs. 102.60 per US$)
Forward ($) Contract Payable
To, Exchange Gain A/c
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Dr.

1,85,600
1,85,600
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(6)
(Decrease in liability on forward contract due to
fall in exchange rate)
Discount A/c

8,213

Dr.

To, Deferred Discount A/c

8,213

(Record of proportionate discount expenses for 66

days out of 90 days)
August
11

Bank A/c

Dr.

Exchange Loss A/c

79,29,600
92,800

To, Warner Brother

80,22,400

(Receipt of $ 80,000 from M/s Warner Brother,

USA @ Rs. 99.12 per US$; exchange loss being
Rs. 92,800)
Forward ($) Contract Payable Account

Dr.

80,22,400

To, Exchange Gain Account

92,800

To, Bank A/c

79,29,600

(Settlement of forward contract by payment of

$80,000)
Bank A/c

Dr.

81,96,800

To, Forward (Rs,) Receivable A/c

81,96,800

(Receipt of cash in settlement of forward contract

receivable)
Discount A/c

Dr.

2,987

To, Deferred Discount A/c

2,987

(Recording of discount expenses for 24 days :

11200 x 24 days/90 days)
b)

Para 5 of NAS 8 on Borrowing Cost states that borrowing cost may include:
a. Interest on bank overdrafts and short-term and long-term borrowings;
b.Amortization of ancillary costs incurred in connection with the arrangement of
borrowings;
Para 11 of above NAS further states that borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset shall be capitalized as part
of the cost of that asset.
Further para 15 of above NAS states that to the extent that funds are borrowed specifically
for the purpose of obtaining aqualifying asset, the amount of borrowing costs eligible for
capitalisation on thatasset shall be determined as the actual borrowing costs incurred on
that borrowingduring the period less any investment income on the temporary investment
ofthose borrowings.
Based on the above provision of NAS 8, the borrowing cost of ABC Pvt. Ltd. for the fiscal
year 2071/72 on the expansion project is calculated as follows:
Particulars
Amount (Rs.) Amount (Rs.)
Interest on Term Loan II for the fiscal year 2071/72
300,000
Less: interest saved on overdraft account by
50,000
250,000
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depositing Rs. 2 million for the first quarter i.e.
Shrawan 01, 2071 to Aswin end 2071
(2,000,000*10%*3/12)
Add: Interest on overdraft loan of Rs. 2.50 million
for last quarter i.e. Baisakh 01, 2072 to Ashadh end
2072 (2,500,000*10%*3/12)
Add: Amortization of service charge of Rs. 200,000
over
the
proposed
construction
period
(200,000*9/24)
Financial Cost eligible for capitalization under the
expansion project during the fiscal year 2071/72

62,500

75,000

387,500

c) Para 5 of NAS 27 on Intangible Assets states thatin determining whether an asset that
incorporates both intangible and tangible elements shall be treated under NAS 06
Property, Plant and Equipment or as an intangible asset under this Standard, an entity uses
judgement to assess which element is more significant. For example, computer software
for a computer-controlled machine tool that cannot operate without that specific software
is an integral part of the related hardware and it is treated as property, plant and
equipment. The same applies to the operating system of a computer. When the software is
not an integral part of the related hardware, computer software is treated as an intangible
asset.
Para 70 of NAS 27 further states that expenditure incurred on training activities should be
charged to expenses when it is incurred.
In light with the provision of above NAS, the various cost incurred by XYZ Bank Ltd. for
establishment of Information & Technology Department should be accounted as follows:
i) Amount to be capitalized under tangible assets viz. Computer and Accessories (or
some other suitable account head) under the provision of NAS 06:
Particulars
Cost of Computer Server
Cost of 50 set of Personal Computer
Microsoft Office 2007 for server and PC operation
Total

Amount (Rs.)
1,000,000
2,000,000
500,000
3,500,000

ii) Amount to be capitalized under Intangible Assets under the provision of NAS 27:
Particulars
Amount (Rs.)
Pumori Plus IV for operation of banking transactions
1,500,000
Additional payment to supplier of Pumori software for customization
400,000
Software for Inventory & Fixed Assets Management
200,000
Total
2,100,000
iii) Under the provision of Para 70 of NAS 27, the amount paid to the provider of pumori software
for training of staff of the bank should be charged to revenue during the fiscal year 2071/72.

3.
a) Superior Bank Ltd. supplied the following information:
Net Profit: Rs. 40 Crores for Year 2070/71 and Rs. 60 Crores for Year 2071/72
No. of shares outstanding prior to Right issue: 20,000,000 shares
Right issue: One new share for each four outstanding, i.e. 5,000,000 shares
Right issue price: Rs. 200
Last date to exercise right: 30/6/2071
Fair rate of a equity share immediately prior to exercise of right on 30/6/2071:
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Rs. 250

(8)

Required:

Compute the basic earnings per share for the years 2070/71 and 2071/72.
b) The application of NAS 37 relating to provision, contingent liabilities and
contingent assets means that prudence is no longer important in the balance sheet
and that profits are highly volatile. Discuss this statement.

c) Hamro Commercial Bank has a criterion that it will give loan to companies that
have an economic value added greater than zero for the past three fiscal years on
average. The bank is considering lending money to a small company that has the
economic value characteristics as shown below:
i) Average operating income after tax equals Rs. 2,500,000 per year for the last
three years.
ii) The average total assets of company over the past three years equals
Rs. 7,500,000.
iii) The weighted average cost of capital appropriate for the company equals 10%
per annum which is applicable to all the three years.
iv) The companys average current liabilities over the past three years equals
Rs. 1,500,000.
Required:

Does that company meet the banks criterion for a positive economic value
added?
Answer
a) Computation of Basic Earnings PerShare
(As per paragraph 9 of NAS 26 on Earnings per shares)
Particulars

Year ended as on
32/3/2071 31/3/2072

EPS for the year 2070/71 as originally reported

=
Net Profit of the year attributable to equity shareholders
Weighted average number of equity shares outstanding during
the year
= (Rs. 400,000,000/20,000,000)
Rs. 20.00
EPS for the year 2070/71 restated for right issue
= [Rs. 400,000,000/{20,000,000 X 1.04(as per working note no. Rs. 19.23
2)}]
EPS for the year 2071/72 including effects of right issue
=
Rs. 600,000,000
(20,000,000 X 1.04 X 3/12) + (25,000,000 X 9/12)
=
Rs. 600,000,000
23,950,000

Rs. 25.05
(approx)

Working Notes:
1.

Computation of theoretical ex-rights fair value per share

Fair value of all outstanding shares immediately prior to exercise of right + Total
amount received from exercise
Number of shares outstanding prior to exercise + Number of shares issued in the
exercise

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= (Rs. 250 X 20,000,000 shares) + (Rs. 200 X 5,000,000 shares)
20,000,000 shares + 5,000,000 shares
=

Rs. 6,000,000,000

= Rs. 240

25,000,000 shares
2.

Computation of adjustment factors

=

Fair value per share prior to exercise of right

Theoretical ex-right value per share (as per Working Note no. 1)

Rs. 250

= 1.04 (approx.)

Rs. 240
b) Role of prudence and profit levels
It is overstating the matter to imply that the concept of prudence is no longer important in
the balance sheet and that the income statement is going to become much more volatile all
of a sudden.
NAS 37 seeks to outlaw so-called 'big bath' provisions, and, of lesser importance
provisions which are larger than the company actually needs in order to meet its
obligations. An example of this is provision for re-structuring. These will be made later
than is presently the case with some companies, and the provisions will be for a smaller
amount. This is because provisions will only be allowed for obligations at the balance
sheet date.
The NAS also attempts to put an end to smoothing of results where this represents a
distortion. For example, before NAS 37 it was permissible to provide in advance for such
items as future repairs. Now the costs will have to be charged to the income statement in
the year in which they are incurred, that is when the work is actually carried out.
However, it could be argued that some aspects of NAS 37 will make profits more, not less,
consistent. 'Big bath' provisions for re-structuring gave rise to big one-off hits against
earnings. By contrast NAS 37 forces such charges to be made in smaller, more frequent
chunks, with the result that earnings appear more stable than they did previously. In this
way expenditure is matched more satisfactorily against revenue.
One effect of NAS 37 on the balance sheet is to make it not so much less prudent as rather
different from previously. Provisions for abandonment or decommissioning costs used to
be built up over a facility's working life. Now the obligation to restore the site must be
recorded in full (although discounted) when the damage is done, as this is when it is
incurred. Usually the debit increases the cost of the asset, so the effect on the income
statement is broadly neutral over the asset's life. The effect on net assets in the balance
sheet is also mainly neutral, but gross assets and liabilities are increased significantly.
c)

EVA (Economic Value Added)

= Net Operating Profit after Tax (NOPAT) Cost of Capital Employed (COCE)
EVA of the given company is calculated as follows:
Particulars

Amount (Rs.)

NOPAT

2,500,000

Less: Cost of capital (Working Note 2)

Economic Value Added

600,000
1,900,000

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Decision: The company qualifies for(10)the loan because the economic value added is
greater than zero.
Working Note 1: Computation of Capital Employed
Particulars
Average Total Assets
Less: Average Current Liabilities
Average Capital Employed

Amount (Rs.)
7,500,000
1,500,000
6,000,000

Working Note 2: Computation of Cost of Capital

Cost of Capital = Capital Employed * Weighted average cost of capital
=6,000,000 * 10% = Rs. 600,000
4.
a) Consider the following information of a company for the financial year 2071/72:
Raw material has been purchased at Rs. 375 per Kg. Price of raw material is on
the decline. The finished goods being manufactured with the raw material is also
being sold at below cost. The stock of raw material is of 15,000 Kg. and the
replacement cost of raw material is Rs. 300 per Kg.
Cost of finished goods per Kg. is as under:
Particulars
Material cost
Direct labour cost
Direct variable production overhead

Rs.
375
60
30

Fixed production overhead for the year for a normal capacity of 100,000 Kg. of
production is Rs. 3,000,000. At the end, there were 3,000 Kg. of finished goods in
the stock. Net realizable value of finished goods is Rs. 420 per Kg.
Required:
Find out the value of the inventories as on 31st Ashadh, 2072.

b) The balance sheet of Shree Ram Ltd. for the year ended on Ashadh end 2070,
2071 and 2072 are as follows:
(Amount in Rs. '000)
Liabilities:
2069/70
2070/71
2071/72
64,000 Shares of 100 each, fully paid
6,400
6,400
6,400
General Reserve
4,800
5,600
6,400
Profit and Loss Account
560
640
960
Creditors
2,400
3,200
4,000
Total
14,160
15,840
17,760
Assets:
Goodwill
4,000
3,200
2,400
Fixed Assets (net)
5,600
6,400
6,400
Stock
4,000
4,800
5,600
Debtors
80
640
1,760
Bank Balance
480
800
1,600
Total
14,160
15,840
17,760
Additional information:
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i) Actual value (market value) of(11)the assets were as under for the respective
years:
Fixed Assets (net) (Rs. '000)
7,200
8,000
8,800
Stock (Rs. '000)
4,800
5,600
6,400
ii) Net profit for the respective years (actual- after written off depreciation,
goodwill, tax provision and transfer to general reserves and including opening
balances)
(Rs. '000)
1,680
2,480
3,280
iii) Capital employed in the business, at market value, at the beginning of the
2069/70 was Rs. 14.640 million, which included the cost of goodwill. The
normal annual return on average capital employed, in the line of business
engaged by company, is 12.50%.
iv) The balance of the general reserves at the beginning of the year 2069/70 was
Rs. 4.00 million.
v) The goodwill shown on 2068/69 year end was purchased at the year end for
Rs. 4.00 million on which date the balance in the Profit and Loss Account was
Rs. 480,000.
vi) Goodwill is to be valued at 5 years' purchase of super profit (simple average
method).
Required:

Find out the total value of the business of the company as on year ended 2071/72.
c) At the end of the financial year ending on Ashadh end 2071, a company finds that
there are twenty law suits outstanding which have not been settled till the date of
approval of accounts by the board of directors. The possible outcome as estimated
by the board is as follows:
Probability
Loss (Rs.) / Case
In respect of five cases (win)
100%

Next ten cases (win)

60%

Lose (low damages)

30%
360,000
Lose (high damages)
10%
600,000
Remaining five cases
Win
50%

Lose (low damages)

30%
300,000
Lose (high damages)
20%
630,000
Outcome of each case is to be taken as a separate entity.
Required:

Ascertain the amount of contingent loss and state the accounting treatment in
respect thereof.
Answer
a) AS per NAS 04, Inventories shall be measured at the lower of cost and net realisable
value. The cost of inventories shall comprise all costs of purchase, costs of conversion
andother costs incurred in bringing the inventories to their present location andcondition.
Material and other supplies held for use in the production of inventories are not written
down the cost if the finished products in which they will be incorporated are expected to
be sold at or above cost. However, when there has been a decline in the price of material
and it is estimated that the cost of the finished product will exceed net realizable value,
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the materials were written down to net(12)realisable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net realisable
value.
Cost per kg of finished goods can be computed as follows:
Rs.
375
60
30
30
495

Material cost
Direct labour cost
Direct variable production overhead
Fixed production overhead [Rs. 3,000,000/100,000]
Cost of Finished Goods per Unit
NRV of finished goods = Rs. 420 per kg.
Value of finished goods inventory = Cost of finished goods or NRV which is less.
Thus, value of 3,000 kg of finished goods held as inventory at the
year-end will be = Rs. 1,260,000.
Since cost of finished goods exceed its NRV, raw materials will be valued at replacement
cost.
Value of raw materials held as inventory = 15,000 kg x Rs. 300 = Rs. 4,500,000.
b) Calculation of the Average Capital Employed of Shree Ram Ltd.
Particulars
Goodwill
Fixed Assets (Net)
Stock
Debtors
Bank
Less, Creditors
Closing Capital Employed
Opening Capital (14,640-4,000)
Average Capital Employed
Average of three years

2069/70
7,200
4,800
80
480
(2,400)
10,160
10,640
10,400

(Amount in 000)
2070/71
8,000
5,600
640
800
(3,200)
11,840
10,160
11,000

2071/72
8,800
6,400
1,760
1,600
(4,000)
14,560
11,840
13,200
11,533.33

Calculation of the Future Maintainable Profit:

Particulars
Net Profit
Less, Opening balances
Add, Goodwill amortization
Add, Transfer to general reserves
Add, Closing stock revaluation
Less, Opening stock Revaluation
Adjusted Profit
Future Maintainable Profit (Sum of
Adjusted profit /3

2069/70
1,680
(480)
800
800
2,800

(Amount in 000)
2070/71
2071/72
2,480
3,280
(560)
(640)
800
800
800
800
800
800
(800)
(800)
3,520
4,240
3,520

Hence, Goodwill = [Future maintainable Profit (Average Capital Employed Normal rate of
return)] Numbers of years purchased
= [3,520-(11,533.3312.50%)]5
= 10,391.67
Calculation of Intrinsic Value,

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Intrinsic Value = Closing Capital Employed +Goodwill
No of shares
= Rs. (14,560 + 10,391.67)/ 64,000
= Rs. 0.38986 Thousands per share.
= 64,0000.38986
Hence, Value of Business

c)

= Rs. 24,951.67 Thousands.

According to NAS 12 Provisions, Contingent Liabilities and Contingent Assets,

contingent liability should be disclosed in the financial statements if following conditions
are satisfied :
(i) A possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity; or
(ii) There is a present obligation arising out of past events but not recognized because:
a) It is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation.
b) The amount of the obligation cannot be measured with sufficient reliability.
In this case, the probability of winning of first five cases is 100% and hence, question of
providing for contingent loss does not arise. The probability of winning of next ten cases
is 60% and for remaining five cases is 50%. As per NAS 12, we make a provision if the
loss is probable. As the loss does not appear to be probable and the possibility of an
outflow of resources embodying economic benefits is not remote rather there is
reasonable possibility of loss, therefore disclosure by way of note should be made. For
the purpose of the disclosure of contingent liability by way of note, amount may be
calculated as under:
Expected loss in next ten cases = 30% of Rs. 360,000 + 10% of Rs. 600,000 = Rs.
108,000 + Rs. 60,000 = Rs. 168,000
Expected loss in remaining five cases = 30% of Rs. 300,000 + 20% of Rs. 630,000 = Rs.
90,000 + Rs. 126,000 = Rs. 216,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic.
Therefore, the better approach will be to disclose the overall expected loss of Rs.
2,760,000 (Rs. 168,00010 + Rs. 216,000 5) as contingent liability.

5.
a) X Ltd. sold JCB machine having WDV of Rs. 50 lakh to Y Ltd for Rs. 60 lakh and
the same JCB was leased back by Y Ltd. to X Ltd. The lease is operating lease.
Required:

Comment according to relevant Nepal Accounting Standard, if

i) Sale price of Rs. 60 lakh is equal to fair value.
ii) Fair value is Rs. 50 lakh and sale price is Rs. 45 lakh.
iii) Fair value is Rs. 55 lakh and sale price is Rs. 62 lakh.
iv) Fair value is Rs. 45 lakh and sale price is Rs. 48 lakh.
b) M/s United Liquors has been engaged in the business of sale of imported liquors
in various bands for the last 15 years and is an extremely cash rich entity. In FY
2070/71, the management of the entity decided to venture into new areas of
business of identifying and acquiring properties such as old bungalows, heritage
buildings and the like at prime locations to let out them on lease to willing parties
after carrying out renovation and refurbishment of the same. The new business
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was commenced as separate(14)division of the entity in FY 2071/72,

during which it managed to identify 19 such properties of which 17 were acquired
and 9 of them were given on lease. Being the initial year of operation and also
since some of the lease arrangements were entered into at the end of the year, the
income from leasing was only a small amount. After the acquisition of the
properties as aforesaid, very attractive offers for sale of 14 of them were received.
United Liquors, after negotiation, accepted 12 of the offers and sold those 12
properties making large profits in the bargain. The accountant of the entity has
accounted the acquisition and disposal of properties as 'Purchases' and 'Sales' in
the profit and loss account of the 'Property Division' and treated the lease income
as part of the other income of the entity. The contention of the accountant was that
since a majority of the properties were disposed off within a short span of time,
the properties are to be considered as stock in trade only. Further, since the lease
income was insignificant, it does not become the main source of income and
hence considered as part of other income.
Required:

Examine the correctness of the contentions of the accountant considering the

relevant Nepal Accounting Standards.
c) A company brought investments at a cost of Rs. 600,000 on Ashwin 01, 2071
when the price index stood at 300. On Ashadh end 2072, the index had moved to
320 and the market price of the investments was Rs. 610,000.
Required:

(2+2=4)

i) Explain, in brief, about Current Purchasing Power (CPP) Method.

ii) On CPP basis, what is the loss or profit on the investments for the fiscal year
2071/72?
d) S Ltd. imported a machine on 01/01/2066 for USD 240,000 on deferred payment
basis. The exchange rate of USD 1 was Rs. 100.97 on that date. Payment shall be
made in six equal annual installments at the end of every financial year
commencing from Ashadh end 2066. Applicable exchange rates of One USD to
Rupees are:
Ashadh
end 2066
Rs. 91.04

Ashadh
end 2067
Rs. 83.69

Ashadh
end 2068
Rs. 82.04

Ashadh
end 2069
Rs. 85.28

Ashadh
end 2070
Rs. 102.88

Ashadh
end 2071
Rs. 106.20

Required:

Determine the carrying amount of liability and exchange differences at the end of
each financial year.
Answer
a)

According to NAS 15 (old) para 62, 63 and 64, following will be the treatment in the
given situations:
(i) When sales price of Rs. 60 lakh is equal to fair value, X Ltd. should immediately
recognize the profit of Rs. 10 lakh (i.e. 60 - 50) in its books.
(ii) When fair value of leased JCB machine is Rs. 50 lakh & sales price is Rs. 45 lakh,
then loss of Rs. 5 lakh (50 - 45) to be immediately recognized by X Ltd. in its
books provided loss is not compensated by future lease payments.
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(15)
(iii)When fair value is Rs. 55 lakhs
& sales price is Rs. 62 lakh, profit of Rs. 5
lakh (55 - 50) to be immediately recognized by X Ltd. in its books and balance
profit of Rs. 7 lakh (62-55) is to be amortised/deferred over lease period.
(iv) Whenfair value is Rs. 45 lakh& sales price is Rs. 48 lakh, then the loss of Rs. 5
lakh (50-45) to be immediately recognized by X Ltd. in its books and profit of Rs.
3 lakh (48-45) should be amortised/deferred over lease period.
b)

As per para 6 of NAS 04 "Inventories", Inventories are assets that are (a) held for sale
in the ordinary course of business; (b) in the process of production for such sale; or (c)
in the form of materials or supplies to be consumed in the production process orin the
rendering of services. The properties acquired by United liquors should not be
construed as stock in trade in spite of the fact that they are being sold within a short
span of time.
As per the definition of Plant, properties and equipments (fixed assets) in para 6 of
NAS 06, Property, plant and equipment are tangible items that: (a) are held for use in
the production or supply of goods or services, for rental to others, or for administrative
purposes; and (b) are expected to be used during more than one period. Fixed assets
are not held for sale in the normal course of business. In the given question the
acquisition of the heritage properties is done by an entity with intention to provide the
service of leasing of such properties. Hence the intention of the entity was to use such
property for generation of revenue by leasing out such properties. The sale of 12
properties cannot be considered as part of normal business operations of the entity.
Hence the treatment of the properties as "Stock-in-trade' is incorrect as the properties
are to be considered only as fixed assets. The purchase and sale in sort span of time to
make huge profit will require disclosure as per NAS 02. The lease income from these
properties will be considered as main business income and cannot be considered as
part of other income. Such income will be disclosed under the head Revenue from
operation.
Thus the contentions of the accountant regarding accounting the acquisition and sale
of these properties as sale and purchase, treating them as stock in trade. The treatment
of these assets shall be made as per NAS 19 "Investment Properly"

c)
i) Under CPP method any established and approved general price index is used to
convert the values of various items in the balance-sheet and the profit and loss
account. The main argument is that a change in the price level reflects change in the
value of the money. This change is denoted by a general price index. In Nepal, we may
take a general price index like the Wholesale Price Index of the Nepal Rastra Bank
which would show the changes in the value of the money in the past years.
ii) Profit/Loss of given investment under CPP Method is calculated as follows:
Particulars

Rs.

The Cost of investment on CPP basis on Ashadh end 2072

Rs. 600,000 x 320/300

640,000

Market Value of investment

610,000

Loss for the fiscal year 2071/72

d)

30,000

Calculation of Carrying Amounts of Liability:

Financial year
ending
Ashadh end 2066
Ashadh end 2067

Amount due
(USD)
200,000
160,000

Closing rate
91.04
83.69
CNY

Carrying amount
(Rs.)
18,208,000
13,390,400
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(16)
Ashadh end 2068
Ashadh end 2069
Ashadh end 2070
Ashadh end 2071

120,000
80,000
40,000
Nil

82.04
85.28
102.88
106.20

9,844,800
6,822,400
4,115,200
Nil

Calculation of Exchange Differences:

Financial year ending

Exchange differences due to

settlement (Rs.)

Exchange differences due to

reporting (Rs.)

Ashadh end 2066

40,000 (100.97 91.04) = 200,000 (100.97 91.04 =

397,200 Gain
1,986,000 Gain

Ashadh end 2067

40,000 (91.04 83.69) = 160,000 (91.04 83.69) =

294,000 Gain
1,176,000 Gain

Ashadh end 2068

40,000 (83.69 82.04) = 120,000 (83.69 82.04) =

66,000 Gain
198,000 Gain

Ashadh end 2069

40,000 (82.04 85.28) = 80,000 (82.04 85.28) =

(129,600) Loss
(259,200) Loss

Ashadh end 2070

40,000 (85.28 102.88) = 40,000 (85.28 102.88) =

(704,000) Loss
(704,000) Loss

Ashadh end 2071

40,000 (102.88 106.20) =

(132,800) Loss

Nil

6. Write short notes/ answer to the following:

a)
b)
c)
d)

(44=16)

Annuity and life income fund

Presenting discontinued operations as per NAS.
Statement of changes in equity.
State, with reason, whether A Ltd. is an associate of B Ltd. in the following
situation:
A Ltd. has a share capital of 100,000 shares of Rs. 100 each. B Ltd. acquired 10%
shares in A Ltd. on 1st Shrawan 2070. It also acquired all the 2,000, 10%
convertible debentures of Rs. 1,000 each of A Ltd. These debentures will be
converted into equity shares of A Ltd. at par after 3 years.

Answer
a) The annuity and life income funds account for resources that are given to a non-profit

organization provided that the organization agrees to make periodic payment to a stated
person. In case of annuity funds the agreement stipulates that periodic payments are
made to a certain person for a specified amount for a specified period of time. Life
income funds distribute their income to the individuals as long as they live. When the
beneficiary dies, the funds become the property of the organization and are used as
specified in the gift agreement.
Annuity funds pay a fixed amount periodically whereas life income fund payments vary
with the amount of income earned.
b) A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity. In other words, a component of an entity will have been a cash-generating unit or
a group of cash-generating units while being held for use. A discontinued operation is a
component of an entity that either has been disposed of, or is classified as held for sale,
and
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(a)

represents a separate major(17)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.

An entity shall disclose:

(a)

a single amount on the face of the income statement 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;
(ii) the related income tax expense as required by paragraph 78(h) of NAS 09;
(iii) the 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; and
(iv) the related income tax expense as required by paragraph 78(h) of NAS 09.
The analysis may be presented in the notes or on the face of the income statement.
If it is presented on the face of the income statement it shall be presented in a
section identified as relating to discontinued operations, i.e. separately from
continuing operations.

c)

d)

As per NAS 01, Entity shall present a Statement of Changes in equity between two
balance sheet dates. The Statement of changes in Equity shows Profit and loss for the
period, each class of equity capital, share premium, capital transactions with owners and
distributions to owners, changes in each reserve.
Changes in an entity's equity between two balance sheet dates reflect the increase or
decrease in its net assets or wealth during the period, under the particular measurement
principles adopted and disclosed in the financial statements. Except for changes
resulting from transactions with shareholders, such as capital contributions and
dividends, the overall change in equity represents the total gains and losses generated by
the entities activities during the period.
According to the provisions of the Nepal Accounting Standard- 25 , Investment in
Associates; an associate is an entity, including an unincorporated entity such as a
partnership, over which the investor has significant influence and that is neither a
subsidiary nor an interest in a joint venture. Further significant influence has been
explained as holding 20% or more voting right directly or indirectly via subsidiaries. In
the given case currently B Ltd. holds 10% voting right and its voting right will be
increased to 25% after the conversion of debentures. The convertible debentures are the
potential equity share and will be only exercised at future date. At current, B Ltd. holds
only 10% effective voting right and hence A Ltd. is not an associate of B Ltd.

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