ICAP
Practice Kit
Advanced accounting
and financial reporting
First edition published by
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C
Contents
Page
Question and Answers Index v
Section A Questions 1
Section B Answers 161
I
Index to questions and answers
Question Answer
page page
CHAPTER 1 REGULATORY FRAMEWORK
1.1 GENERAL PURPOSE FINANCIAL
1 161
STATEMENTS
CHAPTER 2 ACCOUNTING AND REPORTING CONCEPTS
2.1 DEFINITIONS 2 163
2.2 CONCEPTUAL FRAMEWORK 2 164
2.3 CARRIE 2 166
CHAPTER 3 PRESENTATION OF FINANCIAL STATEMENTS
3.1 CLIFTON PHARMA LIMITED 3 167
3.2 BSZ LIMITED 4 169
3.3 YASIR INDUSTRIES LIMITED 6 172
3.4 FIGS PAKISTAN LIMITED 7 175
3.5 FAZAL LIMITED 9 178
3.6 BABER LIMITED 9 179
3.7 GOLDEN LIMITED 10 179
3.8 METAL LIMITED 10 180
3.9 ENGINA 11 181
3.10 SHAZAD INDUSTRIES LTD 12 183
3.11 AZ 12 184
3.12 J-MART LIMITED 13 187
3.13 QALLAT INDUSTRIES LIMITED 14 188
3.14 SKYLINE LIMITED 15 189
3.15 WALNUT LIMITED 15 190
Question Answer
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CHAPTER 4 IAS 8: ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS
4.1 WONDER LIMITED 17 191
4.2 DUNCAN 17 193
4.3 MOHANI MANUFACTURING LIMITED 18 193
CHAPTER 5 IFRS 15: REVENUE FROM CONTRACT WITH
CUSTOMER
5.1 PARVEZ LIMITED 20 195
5.2 SACHAL LIMITED 20 196
5.3 BRILLIANT LIMITED 21 197
5.4 WAQAS LIMITED 21 199
5.5 ANABELLE 22 201
5.6 REAL CONSTRUCTION COMPANY LTD 23 202
5.7 GLADSTONE LTD 24 205
5.8 SILVER CONSTRUCTION LIMITED 24 207
5.9 XYZ LTD 25 209
5.10 ABC LTD 26 209
5.11 DX LTD 26 210
5.12 PL LTD 26 210
5.13 FX LTD 27 211
CHAPTER 6 IAS 16: PROPERTY, PLANT AND EQUIPMENT
6.1 FAM 28 212
6.2 GUJRAT CONSTRUCTION LIMITED 29 213
CHAPTER 7 NON-CURRENT ASSETS: SUNDRY STANDARDS
7.1 SPIN INDUSTRIES LIMITED 30 216
7.2 QURESHI STEEL LIMITED 30 217
7.3 IMRAN LIMITED 31 218
7.4 KATIE 32 219
7.5 ALNUS LTD AND BUTEA LIMITED 33 221
7.6 VICTORIA 33 222
CHAPTER 8 IAS 38: INTANGIBLE ASSETS
8.1 BROOKLYN 35 224
8.2 RAISIN INTERNATIONAL 35 225
8.3 OXTAIL LIMITED 36 226
8.4 SKY LIMITED 37 228
8.5 COMFORT SHOES LIMITED 38 229
Question Answer
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CHAPTER 9 IAS 36: IMPAIRMENT OF ASSETS
9.1 CHARLOTTE 39 230
9.2 ABA LIMITED 39 232
9.3 HUSSAIN ASSOCIATES LTD 40 234
9.4 IMPS 41 235
CHAPTER 10 IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
10.1 SAUL 43 237
10.2 SHAHID HOLDINGS 44 238
10.3 PRIMA 45 240
CHAPTER 11 IFRS 16: LEASES
11.1 X LTD 47 243
11.2 PROGRESS LIMITED 47 244
11.3 MIRACLE TEXTILE LIMITED 47 245
11.4 ACACIA LTD 48 246
11.5 SHOAIB LEASING LIMITED 48 248
11.6 FLOW 49 250
11.7 PINUS LIMITED 49 250
11.8 LODHI TEXTILE MILLS LIMITED 50 251
11.9 AUTO CONSTRUCTION PAKISTAN
50 252
LIMITED
CHAPTER 12 IAS 37: PROVISIONS CONTINGENT LIABILITIES AND
CONTINGENT ASSETS
12.1 ROWSLEY 51 254
12.2 MULTAN PETROCHEM LTD 52 255
12.3 VIOLET POWER LIMITED 53 256
CHAPTER 13 IAS 19: EMPLOYEE BENEFITS FLOWS
13.1 LABURNUM LIMITED 54 258
13.2 JABEL LIMITED 54 258
13.3 KAGHZI LIMITED 55 259
13.4 LASURA LTD 55 259
13.5 UNIVERSAL SOLUTIONS 55 260
13.6 DHA INTERIORS LTD 56 261
CHAPTER 14 IFRS 2: SHARE BASED PAYMENTS
14.1 TOSHACK LTD 58 264
14.2 IFRS 2 58 264
14.3 SAVAGE LTD 59 266
14.4 YORATH LTD 59 267
Question Answer
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14.5 QUALTECH LTD 59 267
14.6 BRIDGE LTD 60 268
14.7 CAPSTAN LTD 60 268
14.8 NEWTOWN LTD 61 269
14.9 SINDH TRANSIT LTD 61 270
CHAPTER 15 IFRS 9: FINANCIAL INSTRUMENTS: RECOGNITION
AND MEASUREMENT
15.1 AJI PANCA LTD 62 271
15.2 PASSILA LTD 62 272
15.3 FINANCIAL INSTRUMENTS 63 273
15.4 ESPANOLA LTD 63 275
15.5 SANDIA PL 64 275
15.6 GEO ALLOYS LTD 64 276
15.7 CASCABEL LTD 65 277
15.8 FAIR VALUE HEDGE ACCOUNTING 65 278
15.9 CASH FLOW HEDGE ACCOUNTING 66 279
15.10 WATERS LTD 66 280
15.11 ARIF INDUSTRIES LIMITED 67 282
15.12 QASMI INVESTMENT LIMITED 68 284
CHAPTER 16 IFRS 7: FINANCIAL INSTRUMENTS: PRESENTATION
AND DISCLOSURE
16.1 SERRANO LIMITED 69 286
16.2 POBLANO LIMITED 69 286
16.3 PIQUIN LTD 70 287
16.4 AJI LTD 70 288
16.5 CHILTEPIN LTD 71 289
16.6 HABENERO LTD 71 290
CHAPTER 17 IFRS 13: FAIR VALUE MEASUREMENT
There are no specific questions in this area.
CHAPTER 18 IAS 12: INCOME TAXES
18.1 SHAKIR INDUSTRIES 72 291
18.2 DWAYNE LTD (PART 1) 73 292
18.3 DWAYNE LTD (PART 2) 74 292
18.4 COHORT 74 293
18.5 MODEL TOWN GROUP 75 295
CHAPTER 19 BUSINESS COMBINATIONS AND CONSOLIDATION
19.1 HELLO 78 297
Question Answer
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19.2 HASAN LIMITED 79 298
19.3 FLAMSTEED AND HALLEY LTD 81 301
19.4 BRADLEY LTD 82 302
19.5 X LTD 83 304
19.6 KHAN LIMITED 84 306
CHAPTER 20 CONSOLIDATED ACCOUNTS: STATEMENTS OF
PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
20.1 MILLARD LTD 86 309
20.2 SHERLOCK LIMITED 87 311
20.3 FAISAL LIMITED 89 314
20.4 GOLDEN LIMITED 90 319
CHAPTER 21 IAS 28: ASSOCIATES AND JOINT VENTURES
21.1 JOINT ARRANGEMENTS 92 321
21.2 HELIUM 92 321
21.3 HAMACHI LTD 92 323
21.4 HIDE 94 325
21.5 HARK, SPARK AND ARK 94 326
21.6 P, S AND A 96 329
21.7 H LTD GROUP 97 331
CHAPTER 22 IFRS 3: BUSINESS COMBINATIONS ACHIEVED IN
STAGES
22.1 STEP ACQUISITION 99 333
22.2 A LTD 99 333
22.3 X LTD GROUP 101 336
22.4 PLAIN LTD 102 338
22.5 MANGO LTD 104 342
CHAPTER 23 COMPLEX GROUPS
23.1 PARVEZ LTD 106 345
23.2 HASAN, RIAZ AND SIDDIQ 107 349
CHAPTER 24 DISPOSAL OF SUBSIDIARIES
24.1 PATCHE LTD 109 353
24.2 DISPOSAL 110 356
24.3 PART DISPOSAL 110 356
24.4 THE A GROUP 111 357
24.5 BARTLETT 112 359
CHAPTER 25 OTHER GROUP STANDARDS
There are no specific questions in this area. The topic is covered as parts of
other questions.
Question Answer
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CHAPTER 26 IAS 21: FOREIGN CURRENCY
26.1 DND LIMITED 113 361
26.2 STARLIGHT LIMITED 113 361
26.3 PERCEPT LTD 114 362
26.4 ORLANDO 115 363
26.5 MANCASTER AND STOCKPOT 116 364
26.6 A, B AND C 118 367
26.7 OMEGA LIMITED 119 370
26.8 PARENT COMPANY LIMITED 120 371
CHAPTER 27 IAS 7: STATEMENTS OF CASH FLOWS
27.1 EVERNEW LTD 122 374
27.2 BELLA 123 376
27.3 BISHOP GROUP 125 377
27.4 THE GRAPE GROUP 127 380
CHAPTER 28 IAS 33: EARNINGS PER SHARE
28.1 AIRCON LTD 130 382
28.2 CACHET LTD 131 384
28.3 MARY 132 385
28.4 MANDY 132 385
28.5 AAZ LIMITED 132 387
28.6 ABC LIMITED 133 388
28.7 ALPHA LIMITED 134 391
CHAPTER 29 ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS
29.1 ALPHA LIMITED AND OMEGA LIMITED 135 393
29.2 COOK LIMITED 136 394
29.3 FITZROY LIMITED 137 395
29.4 TRAVELWELL LTD 138 398
29.5 SACHAL LIMITED 140 400
29.6 OPAL INDUSTRIES LIMITED 141 402
CHAPTER 30 SUNDRY STANDARDS AND INTERPRETATIONS
29.1 GUJRANWALA FOODS LIMITED 143 405
29.2 WAH AGRIPROD LTD 144 406
29.3 HELIOS GROUP 145 408
29.4 FASHION BLUE ENTERPRISES 146 410
29.5 KHAN LIMITED 147 411
29.6 AFRIDI 148 412
Question Answer
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CHAPTER 31 IFRS 1: FIRST TIME ADOPTION OF IFRS
31.1 IFRS 1 149 413
CHAPTER 32 SPECIALISED FINANCIAL STATEMENTS
32.1 IFRS FOR SMES 150 415
32.2 AKMAL GENERAL INSURANCE LIMITED 150 416
32.3 MAHFOOZ GENERAL INSURANCE
151 417
LIMITED
32.4 DEE GENERAL INSURANCE LIMITED 152 418
32.5 BANK LATEEF BANK LIMITED 152 418
32.6 SECURED BANK LIMITED 153 419
32.7 AL-AMIN BANK LIMITED 153 420
32.8 BLUE-CHIP ASSET MANAGEMENT
154 420
LIMITED
32.9 A-ONE ASSET MANAGEMENT FUND
154 421
LIMITED
32.10 IAS 26 155 421
32.11 SOGO LIMITED 155 422
CHAPTER 33 INTERNATIONAL PUBLIC SECTOR ACCOUNTING
STANDARDS
There are no specific questions in this area.
CHAPTER 34 IAS 29: FINANCIAL REPORTING IN HYPERINFLATION
ECONOMIES
There are no specific questions in this area.
CHAPTER 35 ISLAMIC ACCOUNTING STANDARDS
There are no specific questions in this area.
CHAPTER 36 ETHICAL ISSUES IN FINANCIAL REPORTING
36.1 ETHICAL ISSUES 157 424
36.2 SINDH INDUSTRIES LTD 157 425
36.3 SOHAIB AND OMAR 159 428
36.4 ABBAS AND BASHIR 159 428
SECTION
A
Questions
CHAPTER 1 REGULATORY FRAMEWORK
2.1 DEFINITIONS
A statement of financial position is a snapshot of a business at a point in time. It
shows the assets that an entity owns and the liabilities that it owes. This is all that
is required to convey a businesss performance, position and adaptability.
As income generated and expenses incurred by a business are already reflected
within the assets and liabilities shown in the statement of financial position, a
statement of profit or loss is a superfluous statement.
Required
Briefly appraise the validity of the above statement, defining the words
underlined.
2.3 CARRIE
Carrie starts in business on 1 January Year 1. Carries sole shareholder contributed
capital of $1,000. Carrie purchased one item of inventory for $1,000 and sold that
inventory for cash of $1,400. At the end of Year 1 the replacement cost of the same
item of inventory is $1,100. General inflation during the year was 7%.
Required
Calculate the profit for the year and set out a summary statement of financial
position as of 31 December Year 1 under the following capital maintenance
concepts.
(a) Physical capital maintenance
(b) Financial capital maintenance
(i) Historical cost accounting
(ii) Constant purchasing power accounting
Additional Information:
(i) The first revaluation of freehold land was carried out in 2012 and
resulted in a surplus of Rs. 120 million. The valuation was carried out
under market value basis by an independent valuer, Mr. Dee, Chartered
Civil Engineer of M/s SSS Consultants (Pvt.) Ltd., Islamabad.
(ii) The details relating to additions, disposal and depreciation/amortization of
fixed assets, during the year 2016 are given below:
The company uses the straight line method for charging depreciation
and amortization. The building is depreciated at a rate of 5%
whereas 10% is charged on machines, furniture and fixtures and
computer software.
Construction on third floor of the building commenced on March 1,
2016 and is expected to be completed on September 30, 2016. The
cost incurred during the year i.e. Rs. 20 million was capitalised on
June 30, 2016.
Furniture and fixtures worth Rs. 8 million were purchased on April 1,
2016.
A machine was sold on February 29, 2016 to NJ Enterprise at a price
of Rs. 13 million. At the time of disposal, the cost and written down
value of the machine was Rs. 15 million and Rs. 10 million
respectively.
(iii) 50% of the accounts receivable were secured and considered good.
10% of the unsecured accounts receivable were considered doubtful. Bad
debts expenses for the year amounted to Rs. 1.0 million. An amount of Rs.
1.4 million was written off during the year.
(iv) All advances given to suppliers are considered good and include an
amount of Rs. 4.0 million paid for goods which will be supplied on
December 31, 2017.
(v) Cash at banks in saving accounts carry interest / mark-up ranging from
3% to 7% per annum.
(vi) The authorised share capital of the company is Rs. 500 million.
Required
Prepare the statement of financial position as at June 30, 2016 along with the
relevant notes showing all possible disclosures as required under the
International Accounting Standards and the Companies Ordinance, 1984.
(Comparative figures and the note on accounting policies are not required.)
(vii) The carrying value of YILs net assets as on June 30, 2016 exceeds their
tax base by Rs. 30 million. The income tax rate applicable to the company is
30%.
(viii) On July 1, 2015, the leasehold property having a useful life of 40 years was
revalued at Rs. 238 million. No adjustment in this regard has been made in
the books.
(ix) Depreciation of leasehold property is charged using the straight line
method. 50% of depreciation is allocated to manufacturing, 30% to
administration and 20% to selling and distribution.
Required
In accordance with the requirements of the Companies Ordinance, 1984 and
International Accounting Standards, prepare the:
(a) statement of financial position as of June 30, 2016.
(b) statement of profit or loss and other comprehensive income for the year
ended June 30, 2016.
(Comparative figures and notes to the financial statements are not
required.)
Debit Credit
Rs.in million
Donations 34
Workers Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
Financial charges on short term borrowings 133
Exchange loss 22
Financial charges on lease 11
Additional information:
(i) The position of inventories as at 31 December 2016 was as follows:
Rs. m
Raw material 2,125
Work in process 125
Finished goods (manufactured) 1,153
Finished goods (imported) 66
(ii) The basis of allocation of various expenses among cost of sales,
distribution costs and administrative expenses are as follows:
Cost of Distribution Administrative
sales costs expenses
% % %
Salaries, wages and benefits 55 30 15
Depreciation and amortization 70 20 10
Stationery and office expenses 25 40 35
Repairs and maintenance / Utilities 85 5 10
(iii) Salaries, wages and benefits include contributions to provident fund
(defined contribution plan) and gratuity fund (defined benefit plan)
amounting to Rs. 54 million and Rs. 44 million respectively.
(iv) Auditors remuneration includes taxation services and out-of-pocket
expenses amounting to Rs. 4 million and Rs. 1 million respectively.
(v) Donations include Rs. 5 million given to Dates Cancer Foundation (DCF).
One of the companys directors, Mr. Peanut is a trustee of DCF.
(vi) The tax charge for the current year after making all related adjustments is
estimated at Rs. 1,440 million. Taxable temporary differences of Rs. 3,120
originated in the year million, over the last year. The applicable income tax
rate is 35%.
(vii) 274 million ordinary shares were outstanding as on 31 December 2016.
(viii) There is no other comprehensive income for the year.
Required
Prepare the statement of profit or loss and other comprehensive income for the
year ended 31 December 2016 along with the relevant notes showing required
disclosures as per the Companies Ordinance, 1984 and International Financial
Reporting Standards. Comparatives are not required.
3.9 ENGINA
Engina, a foreign company has approached a partner in your firm to assist in
obtaining local stock exchange listing (or stock market registration) for the
company. Engina is registered in a country where transactions between related
parties are considered to be normal but where such transactions are not
disclosed. The directors of Engina are reluctant to disclose the nature of their
related party transactions as they feel that although they are a normal feature of
business in their part of the world, it could cause significant problems politically
and culturally to disclose such transactions.
The partner in your firm has requested a list of all transactions with parties
connected with the company and the directors of Engina have produced the
following summary:
(a) Every month, Engina sells Rs. 50,000 of goods per month to Mr Satay, the
financial director. The financial director has set up a small retailing business
for his son and the goods are purchased at cost price for him. The annual
turnover of Engina is Rs. 300 million. Additionally, Mr Satay has purchased
his company car from the company for Rs. 45,000 (market value Rs.
80,000). The director, Mr Satay, earns a salary of Rs. 500,000 a year, and
has a personal fortune of many millions of pounds.
(b) A hotel property had been sold to a brother of Mr Soy, the Managing
Director of Engina, for Rs. 4 million (net of selling cost of Rs.0.2 million).
The market value of the property was Rs. 4.3 million but prices have been
falling rapidly. The carrying value of the hotel was Rs. 5 million and its value
in use was Rs. 3.6 million. There was an over-supply of hotel
accommodation due to government subsidies in an attempt to encourage
hotel development and the tourist industry.
(c) Mr Satay owns several companies and the structure of the group is outlined
below. Engina earns 60% of its profits from transactions with Car and 40%
of its profits from transactions with Wheel. All of the above companies are
incorporated in the same country.
Required
Write a report to the directors of Engina setting out the reasons why it is important
to disclose related party transactions and the nature of any disclosure required for
the above transactions under IAS 24 Related Party Disclosures.
3.11 AZ
(a) For enterprises that are engaged in different businesses with differing risks
and opportunities, the usefulness of financial information concerning these
enterprises is greatly enhanced if it is supplemented by information on
individual business segments.
Required
(i) Explain why the information content of financial statements is
improved by the inclusion of segmental data on individual business
segments.
(ii) Discuss how IFRS 8 requires that segments be analysed. (10 marks)
(b) AZ, a public limited company, operates in the global marketplace.
(i) The major revenue-earning asset is a fleet of aircraft which are
registered locally and its other main source of revenue comes from
the sale of holidays. The directors are unsure as to how to identify
business segments.
(ii) The company also owns a small aircraft manufacturing plant which
supplies aircraft to its domestic airline and to third parties. The
preferred method for determining transfer prices for these aircraft
between the group companies is market price, but where the aircraft
is of a specialised nature with no equivalent market price, the
companies negotiate a price for the aircraft.
(iii) The company has incurred an exceptional loss on the sale of several
aircraft to a foreign government. This loss occurred on a fixed price
contract signed several years ago for the sale of second hand aircraft
and resulted from the fluctuation of exchange rates between the two
countries.
(iv) During the year, the company decided to discontinue its holiday
business as a result of competition in the sector. This plan had been
approved by the board of directors and announced in the press.
(v) The company owns 40% of the ordinary shares of Eurocat, an
unquoted company which specialises in the manufacture of aircraft
engines and has operations in China and Russia. The investment is
accounted for by the equity method and it is proposed to exclude the
companys results from segment assets and revenue.
Required
Discuss the implications of each of the above points for the determination of
the segmental information required to be prepared and disclosed under
IFRS 8 Operating Segments and other relevant International Accounting
Standards.
Warehouse A Warehouse B
Effective date of agreement July 1, 2011 January 1, 2014
Lease period 10 years 8 years
Rental amount per month Rs. 450,000 Rs. 300,000
On account of serious operating difficulties, QIL vacated both the
warehouses on January 1, 2016 and moved to a warehouse situated
close to its factory. On the same day QIL sub-let Warehouse A at Rs.
250,000 per month for the remaining lease period. Warehouse B was
sub-let on March 1, 2016 for Rs. 350,000 per month for the remaining lease
period.
(iii) On July 18, 2016, QIL was sued by an employee claiming damages for Rs.
6 million on account of an injury caused to him due to alleged violation of
safety regulations on the part of the company, while he was working on the
machine on June 15, 2016. Before filing the suit, he contacted the
management on June 29, 2016 and asked for compensation of Rs. 4 million
which was turned down by the management. The lawyer of the company
anticipates that the court may award compensation ranging between Rs.
1.5 million to Rs. 3 million. However, in his view the most probable amount
is Rs. 2 million.
(iv) On November 1, 2015 a new law was introduced requiring all factories to
install specialised safety equipment within four months. The Equipment
costing Rs. 5.0 million was ordered on December 15, 2015 against 100%
advance payment but the supplier delayed installation to July 31, 2016. On
August 5, 2016 the company received a notice from the authorities levying
a penalty of Rs.0.4 million i.e. Rs.0.1 million for each month during which
the violation continued. QIL has lodged a claim for recovery of the penalty
from the supplier of the equipment.
Required
Describe how each of the above issues should be dealt with in the financial
statements for the year ended June 30, 2016. Support your answer in the light of
relevant International Accounting Standards and quantify the effect where
possible.
Rs. m
1.95
(iii) On 16 January 2017, LED TV sets valuing Rs. 3 million were stolen from
a warehouse. These sets were included in WLs inventory as at 31
December 2016.
(iv) WL owns 9,000 shares of a listed company whose price as on 31
December 2016 was Rs. 22 per share. During February 2017, the share
price declined significantly after the government announced a new
legislation which would adversely affect the companys operations. No
provision in this regard has been made in the draft financial statements.
(v) On 31 January 2017, a customer announced voluntary liquidation. On 31
December 2016, this customer owed Rs. 1.5 million.
(vi) On 15 February 2017, WL announced final dividend for the year ended 31
December 2016 comprising 20% cash dividend and 10% bonus shares, for
its ordinary shareholders.
Required
Describe how each of the above transactions should be accounted for in the
financial statements of Walnut Limited for the year ended 31 December 2016.
Support your answer in the light of relevant International Financial Reporting
Standards.
4.2 DUNCAN
Duncan Company has previously written off any expenditure on borrowing costs
in the period in which it was incurred.
The company has appointed new auditors this year. They have expressed the
view that the previous recognition of borrowing costs in the statement of profit or
loss was in error. The company has decided to correct the error retrospectively in
accordance with IAS 8.
The financial statements for 2015 and the 2016 draft financial statements, both
reflecting the old policy, show the following.
Statement of changes in equity (extract)
2015 2016
Retained Retained
earnings earnings
Rs.000 Rs.000
Opening balance 22,500 23,950
Profit after tax for the period 3,200 4,712
Dividends paid (1,750) (2,500)
Closing balance 23,950 26,162
Borrowing costs written off were Rs. 500,000 in 2015 and Rs. 600,000 in 2016.
The directors have calculated that borrowing costs, net of depreciation which
should have been included in property, plant and equipment had the correct
policy been applied, are as follows.
Rs.000
At 30 December 2014 400
At 31 December 2015 450
At 31 December 2016 180
Had the correct policy been in force depreciation of Rs. 450,000 would have been
charged in 2015 and Rs. 870,000 in 2016.
Required
Show how the change in accounting policy must be reflected in the statement of
changes in equity for the year ended 31 December 2016. Work to the nearest
Rs.000.
(ii) In 2015, the company purchased a plant for Rs. 100 million. Depreciation
on plant was recorded at Rs. 25 million instead of Rs. 10 million. This error
was discovered after the publication of financial statements for the year
ended December 31, 2015. The error is considered to be material.
Required
Produce an extract showing the movement in retained earnings, as would
appear in the statement of changes in equity for the year ended December 31,
2016.
Laminators 200,000
Plastic cards 12 5
BL does not sell printing machine without laminator. However, in order to get this
order BL went against its policy. There is another supplier of imported card
printing machine of almost similar specification. This supplier sells the machine at
Rs.750,000.
In most recent customers surveys printing machine of BL has been given 7 out
of 10 points as against 9 out of 10 given to competitors imported machine. There
is no supplier of laminator in the market.
Required
Identify performance obligations and allocate the transaction price to the
identified performance obligations.
At the end of seventh month ACL and WL agreed to modify the contract by
adding construction of an additional water reservoir at a price of Rs.2.5 million,
which will supply drinking water to a sister concern of ACL. The additional cost is
estimated as Rs.1.8 million by WL. At the end of seventh month WL incurred 4.2
million on the project.
At the end of tenth month ACL and WL agreed to modify the contract by
increasing the size of water reservoir that was included in the original design of
the project. ACL and WL agreed to an additional consideration of Rs.1 million, for
which WL will incur an additional cost of Rs.1 million. At the end of seventh month
WL incurred Rs. 7.2 million on the plant project and Rs. 0.72 million on additional
reservoir.
At the end of sixteenth month ACL and WL agreed to modify the contract by
adding pumping and piping facility from plant to the manufacturing unit of ACL for
a consideration of Rs.3 million. This facility was part of the project, but at the
inception this contract was awarded to another contractor, which was terminated
by ACL. The cost to be incurred by WL was estimated as Rs.2.8 million. At the
end of sixteenth month WL incurred Rs.11.7 million on the plant project and
Rs.1.35 million on additional reservoir.
Required
Advise how these transactions should be recognized in the books of Waqas
Limited.
5.5 ANABELLE
On 31 March Year 5 Anabelle had four construction contracts in progress. Details
are set out below.
All contracts are expected to take more than 12 months to complete. Contract A
was completed during the year. Contract C commenced on 1 May Year 4.
Contract D commenced on 1 January Year 5. It is not considered possible on 31
March Year 5 to assess the outcome of Contract D with any certainty.
Anabelle recognises revenue in respect of construction contracts on the
percentage of completion basis, based on the proportion of total costs incurred to
date.
Required
Show how the above would be included or disclosed in the financial statements of
Annabelle for the year ended 31 March Year 5. Work to the nearest Rs.000.
Rs. million
Profit to date 38
The following information has been extracted from the accounting records as at
31 March 2016:
Rs. million
Rectification costs 17
Real Construction Company Ltd. had received progress payments of 90% of the
work certified as at 29 February 2016. The Company surveyor estimated that the
value of the further work to be completed during March 2016 would be Rs. 20
million.
At 31 March 2016, the estimated cost of the uncompleted contract was put at Rs.
45 million.
The rectification costs were the costs incurred in widening the pedestrian access
roads to the bridge. This was as a result of an error by companys architect when
he made his initial drawings.
The Company calculates the percentage of completion of its contracts as the
proportion of value earned to date compared to the contract price.
All estimates can be taken as reliable.
Required
(a) Briefly explain the principles underlying each of the two methods of
recognising revenue and describe the circumstances in which their uses
are appropriate.
(b) Prepare extract of the financial statements for the contract for the year
ended 31 March 2016.
Required
Show how the above would be disclosed in the statement of profit or loss and
statement of financial position of Gladstone Ltd for each of the four years ended
31 December 2016.
Note Work to the nearest Rs.000.
CONTRACTS
I II III IV V VI
Rupees in million
Billing up to June 30, 2016 200 110 280 235 205 1,200
Contract cost incurred up to June 30, 2016 248 68 186 246 185 1,175
Required
Compute the revenue recognized under original and modified contract for the
year ended?
5.11 DX LTD
DX Ltd owns and operates radio stations. The main revenue stream is
advertising revenue. Contracts are signed with various businesses for the sale of
airtime. The account executives obtain these contracts and are compensated
through a 5% commission on the total contract price for each new contract
signed.
Executive B has obtained a new two-year advertising contract with Company.
Total contract costs related to this contract are as follows:
Legal fees contract drafting = Rs.10,000
Commission paid to the account executive = Rs.7,500
Meals and entertainment incurred during the sales process Rs. 1,750
Creative Directors time salary allocation of Creative Director to develop on-air ad
= Rs.1,500
Actors amounts paid to external actors to record the on-air ad = Rs.750
Total Costs = Rs.21,500
Required
Discuss whether to capitalize or expense out each cost component?
5.12 PL LTD
PL Ltd sells a Rs.100 gift card to a customer, with no expiry date. The entity
maintains statistics on its gift card sales and redemptions and has noted that
historically only 80% of gift cards are redeemed and 20% are unexercised.
The entity believes this historical information has appropriate predictive value and
estimates that 20% of the value of the gift cards will not be redeemed. In addition,
the entity applies the guidance on constraining variable consideration and
determines it is highly probable a significant revenue reversal will not occur once
these breakage amounts are recorded in revenue (i.e., using an appropriate
pattern of recognition). Therefore, it is appropriate to recognize these amounts as
breakage in revenue.
Required:
The amount by which the gift cards to be recorded?
5.13 FX LTD
A customer enters into a contract with a heavy duty machine manufacturer for the
purchase of a tractor for Rs.10 million. All pieces of equipment sold by the
manufacturer come with a one-year standard warranty that specifies the
equipment will comply with the agreed-upon specifications and will operate as
promised for a one-year period from the date of purchase.
In signing this contract, the customer also requested to purchase an additional
Rs.200,000 two-year warranty commencing after the expiry of the standard one
year warranty.
Required:
Explain how would you treat the warranty?
6.1 FAM
Fam had the following tangible fixed assets at 31 December 2015.
Cost Depreciation NBV
Rs.000 Rs.000 Rs.000
Land 500 500
Buildings 400 80 320
Plant and machinery 1,613 458 1,155
Fixtures and fittings 390 140 250
Assets under construction 91 91
2,994 678 2,316
In the year ended 31 December 2016 the following transactions occur.
(1) Further costs of Rs. 53,000 are incurred on buildings being constructed by
the company. A building costing Rs. 100,000 is completed during the year.
(2) A deposit of Rs. 20,000 is paid for a new computer system which is
undelivered at the year end.
(3) Additions to plant are Rs. 154,000.
(4) Additions to fixtures, excluding the deposit on the new computer system,
are Rs. 40,000.
(5) The following assets are sold.
Cost Depreciation Proceeds
brought forward
Rs.000 Rs.000 Rs.000
Plant 277 195 86
Fixtures 41 31 2
(6) Land and buildings were revalued at 1 January 2016 to Rs. 1,500,000, of
which land is worth Rs. 900,000. The revaluation was performed by
Jackson & Co, Chartered Surveyors, on the basis of existing use value on
the open market.
(7) The useful economic life of the buildings is unchanged. The buildings were
purchased ten years before the revaluation.
(8) Depreciation is provided on all assets in use at the year-end at the following
rates.
Buildings 2% per annum straight line
Plant 20% per annum straight line
Fixtures 25% per annum reducing balance
Required
Show the disclosure under IAS 16 in relation to fixed assets in the notes to the
published accounts for the year ended 31 December 2016.
In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1,
2015 for obtaining a permit allowing the construction of the building.
The project was financed through the following sources:
(i) On August 1, 2015 a medium term loan of Rs. 25 million was obtained
specifically for the construction of the building. The loan carried mark up of
12% per annum payable semi-annually. A commitment fee @ 0.5% of the
amount of loan was charged by the bank.
Surplus funds were invested in savings account @ 8% per annum. On
February 1, 2016 SIL paid the six monthly interest plus Rs. 5 million towards
the principal.
(ii) Existing running finance facilities of SIL
Running finance facility of Rs. 28 million from Bank A carrying mark
up of 13% payable annually. The average outstanding balance
during the period of construction was Rs. 25 million.
Running finance facility of Rs. 25 million from Bank B. The mark up
accrued during the period of construction was Rs. 3 million and the
average running finance balance during that period was Rs. 20
million.
Required
Calculate the amount of borrowing costs to be capitalised on June 30, 2016 in
accordance with the requirements of International Accounting Standards.
(Borrowing cost calculations should be based on number of months).
(ii) 5% retention money would also be deducted from the progress bills.
Retention money will be refunded one year after completion of the factory
building.
(iii) Progress bills will be raised on last day of each quarter and settled on 15th of
the next month.
The under mentioned progress bills were received and settled by QSL as per the
agreement:
On April 30, 2016 an invoice of Rs. 1.5 million was raised by the contractor for
damages sustained at the site, on account of rains. After negotiations, QSL
finally agreed to make additional payment of Rs. 1.0 million to compensate the
contractor. The amount was paid on May 15, 2016. It is expected that 75% of the
payment would be recovered from the insurance company.
The cost of the project has been financed through the following sources:
(i) Issue of right shares amounting to Rs. 15 million, on September 1, 2015.
The company has been following a policy of paying dividend of 20% for the
past many years.
(ii) Bank loan of Rs. 25 million obtained on December 1, 2015. The loan carries
a markup of 13% per annum. The principal is repayable in 5 half yearly
equal instalments of Rs. 5 million each along with the interest, commencing
from May 31, 2016. Loan processing charges of Rs.0.5 million were
deducted by the bank at the time of disbursement of loan. Surplus funds,
when available, were invested in short term deposits at 8% per annum.
(iii) Cash withdrawals from the existing running finance facility provided by
a bank. Average running finance balance for the year was Rs. 60 million.
Markup charged by the bank for the year was Rs. 9 million.
Required
Compute cost of capital work in progress for the factory building as of June 30,
2016 in accordance with the requirements of relevant IFRSs.
(Borrowing costs calculations should be based on number of months) (18 marks)
(ii) Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on
March 1, 2016. (This loan was outstanding for 306 days in the year).
(iii) On August 1, 2016, Rs. 10 million were borrowed from the bank. Interest
thereon, is payable at the rate of 11%. (This loan was outstanding for 153
days in the year).
Investment income on temporary investment of the borrowings amounted to
Rs.0.5 million.
The details of bills submitted by the contractor, during the year are as follows:
Particulars Date of payment Rs.
st
On completion of 1 phase March 1, 2016 20,000,000
nd
On completion of 2 phase April 1, 2016 18,000,000
rd
On completion of 3 phase October 1, 2016 16,000,000
th
On completion of 4 phase Payment not yet made 17,000,000
On June 1, 2016, the Building Control Authority issued instructions for stoppage
of work on account of certain discrepancies in the completion plan. The company
filed a petition in the Court and the matter was decided in the companys favour
on July 31, 2016. Work recommenced after a delay of 61 days.
The following periods may be relevant:
Period Days
March 1 to December 31 306
April 1 to December 31 275
August 1 to December 31 153
October 1 to December 31 92
Required
a) Assuming that the loans were taken specifically for the project, calculate
the amount of borrowing costs that s h o u l d be capitalised i n t h e
p e r i o d e n d i n g December 31, 2016 in accordance with the requirements
of IAS 23 Borrowing Costs.
b) Assuming that the loans constituted general finance, calculate the amount
of borrowing costs that s h o u l d be capitalised i n t h e p e r i o d e n d i n g
December 31, 2016 in accordance with the requirements of IAS 23
Borrowing Costs.
7.4 KATIE
During the year ended 30 June Year 2, Katie received three grants, the details of
which are set out below.
(1) On 1 September, a grant of Rs. 40,000 from local government. This grant
was in respect of training costs of Rs. 70,000 which Katie had incurred.
(2) On 1 November Katie bought a machine for Rs. 350,000. A grant of Rs.
100,000 was received from central government in respect of this purchase.
The machine, which has a residual value of Rs. 50,000, is depreciated on a
straight-line basis over its useful life of five years.
(3) On 1 June a grant of Rs. 100,000 from local government. This grant was in
respect of relocation costs that Katie had incurred moving part of its
business from outside the local area. The grant is repayable in full unless
Katie recruits ten employees locally by the end of Year 2. Katie is finding it
difficult to recruit as the local skill base does not match the needs of this
part of the business.
Required
Show how the above transactions should be reflected in the financial statements
of Katie for the year ended 30 June Year 2. Where any accounting standards
allow a choice you should show all possible options.
7.6 VICTORIA
Victoria owns several properties and has a year end of 31 December. Wherever
possible, Victoria carries investment properties under the fair value model.
Property 1 was acquired on 1 January Year 1. It had a cost of Rs. 1 million,
comprising Rs. 500,000 for land and Rs. 500,000 for buildings. The buildings
have a useful life of 40 years. Victoria uses this property as its head office.
Property 2 was acquired many years ago for Rs. 1.5 million for its investment
potential. On 31 December Year 7 it had a fair value of Rs. 2.3 million. By 31
December Year 8 its fair value had risen to Rs. 2.7 million. This property has a
useful life of 40 years.
Property 3 was acquired on 30 June Year 2 for Rs. 2 million for its investment
potential. The directors believe that the fair value of this property was Rs. 3
million on 31 December Year 7 and Rs. 3.5 million on 31 December Year 8.
However, due to the specialised nature of this property, these figures cannot be
corroborated. This property has a useful life of 50 years.
Required
(a) For each of the above properties briefly state how it would be treated in the
financial statements of Victoria for the year ended 31 December Year 8,
identifying any impact on profit or loss.
(b) Produce an analysis of property, plant and equipment for Victoria for the
year ended 31 December Year 8, showing each of the above properties
separately.
8.1 BROOKLYN
Brooklyn is a bio-technology company performing research for pharmaceutical
companies. The finance director has contacted your financial consulting company
to arrange a meeting to discuss issues relevant to the preparation of the financial
statements for the year to 30th June 2016. Your initial telephone conversation
has provided the necessary background information.
1 On 1st August 2015 Brooklyn began investigating a new bio-process. On 1st
September 2016, the new process was widely supported by the scientific
community and the feasibility project was approved. A grant was then
obtained relating to future work. Several pharmaceutical companies have
expressed an interest in buying the know how when the project completes
in June 2017. The nominal ledger account set up for the project shows that
the expenditure incurred between 1st August 2015 and 30th June 2016 was
Rs. 300,000 per month.
2 In August 2016, an employee lodged a legal claim against the company for
damage to his health as a result of working for the company for the two
years through to 31st March 2015 when he had to retire due to ill health. He
has argued that his health deteriorated as a result of the stress from his
position in the organisation. Brooklyn has denied the claim and has
appointed an employment lawyer to assist with contesting the case. The
lawyer has advised that there is a 25% chance that the claim will be
rejected, 50% chance that the damages will be Rs. 600,000 and 25%
chance of Rs. 1 million. The company has an insurance policy that will pay
10% of any damages to the company. The lawyer has said that the case
could take until 30th June 2019 to resolve. The present value of the
estimated damages discounted at 8% is Rs. 476,280 and Rs. 793,800
respectively.
3 Brooklyn owns several buildings, which include an administrative office in
the centre of London. The company has revalued these on a regular basis
every five years and the next valuation is due on 30th June 2018. Property
prices have increased since the last review and particularly for the London
premises. The cost of engaging a professionally qualified valuer is very
expensive and so to reduce costs the finance director is proposing that the
property manager, who is a professionally qualified valuer, should value the
London property and that the increase in value should be included in the
financial statements. The finance director is of the opinion that the property
prices may fall next year.
Required
Prepare notes for your meeting with the finance director which explain and justify
the accounting treatment of these issues, preparing calculations where
appropriate and identifying matters on which your require further information.
Rs. m
Research work 4.50
Development work 9.00
Training of production staff 0.50
Cost of trial run 0.80
Total costs 14.80
9.1 CHARLOTTE
Charlotte Ltd is a company with a 31 December year-end.
The following is relevant to three tangible non-current assets held by Charlotte.
Machine 1
This was purchased on 1 January Year 1 for Rs. 420,000. It had an estimated
residual value of Rs. 50,000 and a useful life of ten years and was being
depreciated on a straight-line basis.
On 1 January Year 6 Charlotte revalued this machine to Rs. 275,000 and
reassessed its total useful life as fifteen years with no residual value.
On 1 January Year 7 an impairment review showed machine 1s recoverable
amount to be Rs. 100,000 and its remaining useful life to be five years.
Machine 2
This was purchased on 1 January Year 1 for Rs. 500,000. It had an estimated
residual value of Rs. 60,000 and a useful life of ten years and was being
depreciated on a straight-line basis.
On 1 January Year 7 this machine was classified as held for sale, at which time
its fair value was estimated at Rs. 200,000 and costs to sell at Rs. 5,000. On 31
March Year 7 the machine was sold for Rs. 210,000.
Machine 3
This was purchased on 1 January Year 1 for Rs. 600,000. In Year 1 depreciation
of Rs. 30,000 was charged. On 1 January Year 2 this machine was revalued to
Rs. 800,000 and its remaining useful life assessed as eight years.
On 1 January Year 7 this machine was classified as held for sale, at which time,
its fair value was estimated at Rs. 550,000 and costs to sell at Rs. 5,000.
On 31 March Year 7 the machine was sold for Rs. 550,000.
Tax is at the rate of 30%.
Required
Show the effect of the above on profit or loss and revaluation reserve of Charlotte
in Year 7.
Land Buildings
Rs. Rs.
Head office cost 1 April 2013 500,000 1,200,000
revalued 1 October 2015 700,000 1,350,000
Training premises cost 1 April 2013 300,000 900,000
revalued 1 October 2015 350,000 600,000
The fall in the value of the training premises is due mainly to damage done by the
use of heavy equipment during training. The surveyors have also reported that
the expected life of the training property in its current use will only be a further 10
years from the date of valuation. The estimated life of the head office remained
unaltered.
Note: Aba Limited treats its land and its buildings as separate assets.
Depreciation is based on the straight-line method from the date of purchase or
subsequent revaluation.
Required
Prepare extracts of the financial statements of Aba Limited in respect of the
above properties for the year to 31 March 2016.
contamination of the spa water supply in April 2016 has led to unexpected
losses in the last six months. The carrying amounts of Sparkle Limiteds
assets at 30 September 2016 are:
Rs.000
Brand (Sparkle Spring see below) 7,000
Land containing spa 12,000
Purifying and bottling plant 8,000
Inventories 5,000
32,000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of
Sparkle Spring, but because of the contamination it has re-branded its
bottled water as Refresh. After a large advertising campaign, sales are
now starting to recover and are approaching previous levels. The value of
the brand in the balance sheet is the depreciated amount of the original
brand name of Sparkle Spring.
The directors have acknowledged that Rs. 1.5 million will have to be spent
in the first three months of the next accounting period to upgrade the
purifying and bottling plant.
Inventories contain some old Sparkle Spring bottled water at a cost of Rs.
2 million; the remaining inventories are labelled with the new brand
Refresh. Samples of all the bottled water have been tested by the health
authority and have been passed as fit to sell. The old bottled water will have
to be relabelled at a cost of Rs. 250,000, but is then expected to be sold at
the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that
the value in use of Sparkle Limited at 30 September 2016, calculated
according to the guidance in IAS 36, is Rs. 20 million. There is no reliable
estimate of the fair value less costs to sell of Sparkle Limited.
Required
Calculate the amounts at which the assets of Sparkle Limited should
appear in the consolidated statement of financial position of Hussain
Associates Ltd at 30 September 2016. Your answer should explain how you
arrived at your figures.
9.4 IMPS
A division of IMPS has the following non-current assets, which are stated at their
carrying values at 31 December Year 4:
Rs. m Rs. m
Goodwill 70
10.1 SAUL
Saul operates its business through a number of divisions. It has a year end of 31
December. Set out below are extracts from the draft financial statements of Saul
for the year ended 31 December Year 1.
Statement of profit or loss for the year ended 31 December Year 1
Rs.000
Revenue 3,900
Cost of sales (2,500)
Gross profit 1,400
Distribution costs (300)
Administrative expenses (800)
Profit before tax 300
Income tax expense (90)
Profit for the period 210
Statement of financial position at 31 December Year 1
Assets Rs.000 Rs.000
Non-current assets
Property, plant and equipment 1,900
Intangible assets 40
1,940
Current assets
Inventories 350
Trade and other receivables 190
Cash 90
630
Total assets 2,570
Equity and liabilities Rs.000 Rs.000
Equity
Share capital 600
Retained earnings 1,700
2,300
Current liabilities
Trade and other payables 195
Current tax payable 75
270
Total equity and liabilities 2,570
On 30 November Year 1 Saul made the decision to close Division A, which is
located in a different part of the country and covers a separate major line of
business. This decision was immediately announced to the press and to the
workforce and, by the end of Year 1, a buyer had been found.
The directors of Saul have calculated the following.
15% of the entitys income and expenses for the year was attributable to Division
A.
10.3 PRIMA
Prima is a listed company with a year end of 31 December. It operates two
businesses, the first is the rental of luxury yachts and the second is a chain of
luxury holiday villas in Europe. The directors have requested your advice on the
following matters.
Holiday villas
Primas policy is to carry the holiday villas at their re-valued amount, which,
based on the most recent valuation in 20X0, was Rs. 20m (historical cost was Rs.
10m). Prima is unsure how frequently a revaluation of such properties is required
and so has instructed a surveyor to provide an up-to-date valuation as at 31
December Year 4. This valuation has provided the following information:
Rs. million
Replacement cost 17
Value in use 28
Open market value 25
One of the villas has received very few bookings over the past two years and so a
decision was reached to exclude it from the Year 5 brochure. It is currently up for
sale. The villa has a carrying value of Rs. 1.25m. Its value in use is only
Rs.0.85m and its expected market value is Rs. 1m, before expected agents and
solicitors fees of Rs. 50,000. The directors are unsure as to the accounting
treatment of this villa. A number of potential buyers have expressed an interest in
the property, and it is hoped that a deal will be negotiated in the first few months
of Year 5.
Primas accounting policy is to not charge depreciation on the villas. Its
justification is that the villas are maintained to a high standard and have useful
lives of at least 50 years.
Head Office
Over the past two years, Prima has built its own head office. Construction began
on 1 October Year 2 and finished on 1 June Year 4, although minor modifications
meant that the company did not relocate until 1 September Year 4.
The site cost Rs. 1m and the costs of construction were a further Rs. 8m. Prima
took out a two year loan of Rs. 5m on 1 October Year 2, at an interest rate of 9%
per annum, to help fund the work. In order to encourage businesses to operate in
areas of high unemployment, the government offered a Rs. 1.5m grant towards
the cost of construction. The terms of settlement were that payment would only
be made upon completion of the building once a government inspection had
taken place. This inspection had not taken place by the year end, but Prima is
confident that the grant will be received shortly after the year end.
The company intends to use the head office for the next 50 years and, as for the
villas, does not intend to depreciate the land or buildings.
Yachts
Prima has spent the past year designing a new range of luxury yachts. Work was
completed on 1 April Year 4 at a cost of Rs. 20m. During the construction, the
economy took a downturn and the company now believes that the market value
of the yachts is only Rs. 17m, although the value in use is estimated to be Rs.
18m. The engines of the yachts have a three year life, the interior has a two year
life, and the remainder should have a life of 15 years. The engine cost is believed
to represent 15% of the total cost of manufacture and the interior approximately
25%.
Required
Explain the accounting issues relating to the villas, head office and yachts,
referring to relevant IFRS guidance. Where possible, numerical information
relating to the 31 December Year 4 financial statements should be provided.
11.1 X LTD
X Ltd is considering acquiring a machine. It has two options; cash purchase at a
cost of Rs. 11,420,000 or a lease.
The terms of the lease are as follows:
(i) The lease period is for four years from 1 January 2016 with an annual
rental of Rs. 4,000,000 payable on 31 December each year.
(ii) The lessee is required to pay all repairs, maintenance and other incidental
costs.
(iii) The interest rate implicit in the lease is 15% p.a.
Note:
Estimated useful economic life span of the machine is four years.
Required
(a) Prepare a schedule of the allocation of the finance charges in the books of
X Limited for the entire lease period.
(b) Prepare an extract of the Statement of Financial Position of X Limited for
the year ended 31 December 2016.
(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
Prepare relevant extracts of the statement of financial position and related notes
to the financial statements for the year ended 30 June 2016 along with
comparative figures. Ignore taxation
Required
(a) Prepare the journal entries for the years ending June 30, 2017, 2018 and
2019 in the books of lessor. Ignore tax.
(b) Produce extracts from the statement of financial position including
relevant notes as at June 30, 2017 to show how the transactions carried
out in 2017 would be reflected in the financial statements of the lessor.
(Disclosure of accounting policy is not required.)
11.6 FLOW
Flow prepares financial statements on 31 March each year. On 1 April Year 4,
Flow sold a freehold property to another company, River, for Rs. 850,000 and
then leased it back under a ten year operating arrangement. Flow had purchased
the property exactly ten years previously for Rs. 500,000 and had charged total
depreciation of Rs. 60,000 on the property up to the date of disposal.
Details of the sale and leaseback arrangement are as follows:
Proceeds from sale Rs. 850,000
Fair value at date of disposal Rs. 550,000
Operating lease rentals (payable in arrears) Rs. 100,000
Normal market rental Rs. 50,000
Required
Explain and illustrate how Flow should reflect in its financial statements:
x The sale of the property to River on 1 April Year 4
x The payment of the first rental to River on 31 March Year 5.
12.1 ROWSLEY
Rowsley is a diverse group with many subsidiaries. The group is proud of its
reputation as a caring organisation and has adopted various ethical policies
towards its employees and the wider community in which it operates. As part of
its Annual Report, the group publishes details of its environmental policies, which
include setting performance targets for activities such as recycling, controlling
emissions of noxious substances and limiting use of non-renewable resources.
The finance director is reviewing the accounting treatment of various items prior
to finalising the accounts for the year ended 31 March 20X4. All items are
material in the context of the accounts as a whole. The accounts are due to be
approved by the directors on 30 June 20X4.
Closure of factory
On 15 February 20X4, the board of Rowsley decided to close down a large
factory in Derbytown. The board is trying to draw up a plan to manage the effects
of the reorganisation, and it is envisaged that production will be transferred to
other factories. The factory will be closed on 31 August 20X4, but at 31 March
20X4 this decision had not yet been announced to the employees or to any other
interested parties. Costs of the reorganisation have been estimated at Rs. 45
million
Relocation of subsidiary
During December 20X3, one of the subsidiary companies moved from Buckington
to Sundertown in order to take advantage of government development grants. Its
main premises in Buckington are held under an operating lease, which runs until
31 March 20X9. Annual rentals under the lease are Rs. 10 million. The company
is unable to cancel the lease, but it has let some of the premises to a charitable
organisation at a nominal rent. The company is attempting to rent the remainder
of the premises at a commercial rent, but the directors have been advised that
the chances of achieving this are less than 50%.
Legal claim
During the year to 31 March 20X4, a customer started legal proceedings against
the group, claiming that one of the food products that it manufactures had caused
several members of his family to become seriously ill. The groups lawyers have
advised that this action will probably not succeed.
Environmental impact of overseas subsidiary
The group has an overseas subsidiary that is involved in mining precious metals.
These activities cause significant damage to the environment, including
deforestation. The company expects to abandon the mine in eight years time.
The mine is situated in a country where there is no environmental legislation
obliging companies to rectify environmental damage and it is very unlikely that
any such legislation will be enacted within the next eight years. It has been
estimated that the cost of cleaning the site and re-planting the trees will be Rs. 25
million if the re-planting was successful at the first attempt, but it will probably be
necessary to make a further attempt, which will increase the cost by a further Rs.
5 million.
Required
Explain how each of the items above should be treated in the consolidated
financial statements for the year ended 31 March 20X4
Pension Plan 1
The terms of the plan are as follows:
(i) employees contribute 6% of their salaries to the plan
(ii) DHA Interiors Ltd 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.
(iv) This plan was closed to new entrants from 31 October 2015, but which was
open to future service accrual for the employees already in the scheme.
The following details relate to the plan in the year to 31 October 2016:
Rs. m
Present value of obligation at 1 November 2015 200
Present value of obligation at 31 October 2016 240
Fair value of plan assets at 1 November 2015 190
Fair value of plan assets at 31 October 2016 225
Current service cost 20
Pension benefits paid 19
Total contributions paid to the scheme for year to 31 October 2016 17
14.2 IFRS 2
(a) IFRS 2 requires an entity to recognise share-based payment transactions in
its financial statements. These include transactions with the employees or
other parties where they are to be settled in cash, other assets or equity
instruments of the entity.
The IFRS identifies three types of share-based payment transaction and
sets out the measurement principles and specific requirements for each.
Required
(i) Suggest why there was a need for a standard in this area.
(ii) Identify and briefly explain the three types of share based payments
recognised by IFRS 2.
(b) A client of your firm, a listed company with a 31 December year end,
contacts you for advice on a proposed share option scheme for its
employees.
On 1 January Year 5, the client granted 100 options to each of its 500
employees. The grant is conditional upon the employee working for the
client over the next three years. At the grant date, it is estimated that the
fair value of each option is Rs. 15.
Calculate the expense in profit or loss for each year of the vesting period:
(i) assuming that the clients expectations throughout the vesting period
are that all options will vest; and alternatively
(ii) assuming that the clients best estimates of the proportion of options
that will vest are as follows:
Estimate at 31 December Year 5 85%
Estimate at 31 December Year 6 88%
With 44,300 options actually vesting at 31 December Year 7.
2015: 25 employees left and another 40 were expected to leave over the
next two years.
2016: A further 15 employees left and another 20 were expected to leave
the following year.
Required
(i) Calculate the charge to Qualtech Ltds statement of profit or loss for
the year ended 31 December 2016 in respect of the share options
and prepare the journal entry to record this.
(ii) Explain how the recognition and measurement of a share-based
payment would differ if it was to be settled in cash rather than in
equity, in accordance with IFRS 2 Share-based Payments.
(d) Determine the nominal interest payable on the debentures for the year
ended 31 December 2016.
(e) State arguments for or against each of the suggested alternatives for
reporting the debentures liability on the statement of financial position as at
31 December 2016.
GEO Alloys Ltds main business risk is the price of raw materials. As a
manufacturer of jewellery, its profits can be significantly affected by the price of
precious metals. Therefore, in order to minimise the risk of future price increases
adversely affecting its future profits, GEO Alloys Ltd entered into a forward
contract on 1 May 2016, at nil cost, to purchase 100,000 units of metal A at Rs.
10,500 per unit on 1 August 2016.
At 30 June 2016, the forward rate for purchasing 100,000 units of metal A was
Rs. 10,100 per unit. GEO Alloys Ltd adopts hedge accounting where permitted by
IAS 39 Financial instruments: recognition and measurement.
Required
(b) Explain how this forward contract should be accounted for by GEO Alloys
Ltd in its financial statements for the year ended 30 June 2016, in
accordance with IAS 39 Financial instruments: recognition and
measurement.
7 On 24 December Waters sold 10,000 shares 'short' in Wright Ltd for Rs.
3.60 each, hoping that the share price would fall so that it could clear its
position by buying the shares in January 2017 at a lower price.
On 31 December 2016, the values are as follows:
1 Rs. 100 nominal units of 7% treasury stock 2022 are trading at Rs. 98.07
per unit at 31 December 2016. The gross redemption yield at that date is
7.3%.
2 The futures rate for a Prif contract with a delivery date of 30 April 2017 is
PR1.99/Rs. 1.
3 The shares in Gilmour are now trading at Rs. 5.20 Rs. 5.25 per share,
having an average of Rs. 5.05 during the year. Disposal costs would be 2%
of the sale proceeds.
4 Amounts receivable from Mason remain outstanding at the reporting date.
The imputed interest rate for current sales is 12%.
5 The 8.5% treasury stock 2018 is now trading at Rs. 101.50 per unit and the
gross redemption yield is currently quoted at 7.48%.
6 The loan notes are now worth Rs. 25,500 due to the market being more
confident that the interest will be paid in full and on time.
7 Shares in Wright Ltd are now trading at Rs. 3.30 each.
Required
Explain and calculate the impact of the above transactions on the financial
statements of Waters Ltd for the year ended 31 December 2016.
(b) Prepare an amortisation table showing the amortised cost and interest
income over the life of the loan after taking account of any necessary
impairment loss to the loan asset.
Following on from the facts in part (a) and ignoring those on part (b), suppose
that on June 30, 2017 AIL decided to defer the expansion plan by one year. The
bank agreed to extend the holding period accordingly and pay 20% interest in
year 5 but reduced the repurchase price by 2%.
Required
(c) Prepare an amortisation table showing the amortised cost and interest
income over the life of the loan after taking account of any necessary
adjustment to the carrying amount of the loan asset.
(b) (i) Explain how the bonds will be subsequently measured, in accordance
with IAS 39 Financial Instruments: Recognition and Measurement,
and prepare the journal entry to record the subsequent measurement
of the bonds in the financial statements of Aji Ltd for the year to 31
December 2016.
(ii) Prepare extracts that illustrate how the bonds will be presented in the
statement of financial position of Aji Ltd as at 31 December 2016.
(vi) Deferred tax liability and provision for gratuity as at January 1, 2016 was
Rs.0.55 million and Rs.0.7 million respectively.
(vii) Applicable income tax rate is 35%.
Required
Based on the available information, compute the current and deferred tax
expenses for the year ended December 31, 2016.
Liabilities
Long-term debt 20,500 21,000
Trade payables 9,500 9,500
Defined benefit liability 1,000
Deferred tax liability
(31st December 2014) 13,500
(i) Dwayne revalues its land and buildings on an annual basis. It has no
investment properties. The fair value of land and buildings was Rs. 60
million at 31st December 2015.The 2015 revaluation has not yet been
accounted for in Dwaynes financial statements. The pre-tax revaluation
surplus as at 31st December 2014 stood at Rs. 24m.
(ii) The balance on the investments line relates to a portfolio of equity holdings.
Some of these are categorised as fair value through profit or loss and the
balance as available-for-sale. The fair value loss on AFS investments was
Rs. 1m during 2015. This loss is considered to be temporary in nature. The
entire portfolio of equity holdings was acquired during 2015.
(iii) Tax relief on the defined benefit expense is given on a cash basis.
(iv) Dividend income is not taxed in the jurisdiction in which Dwayne operates.
(v) Dwayne borrowed Rs. 21m just before the year end and incurred
transaction costs of 500k. Transaction costs are allowable in full in the year
in which a loan is raised.
(vi) The tax rate changed from 30% to 28% in the current year.
Required
(a) Prepare a schedule of temporary differences and resultant deferred tax for
Dwayne.
(b) Prepare a note showing the movement on the consolidated deferred tax
balance for the year ending 31st December 2015.
(c) Prepare a journal showing the movement on the deferred taxation account
showing the entries due to rate changes and temporary differences arising
during the period.
18.4 COHORT
Cohort is a private limited company and has two 100% owned subsidiaries,
Legion and Air, both themselves private limited companies. Cohort acquired Air
on 1 January 20X2 for Rs. 5 million when the fair value of the net assets was Rs.
4 million, and the tax base of the net assets was Rs. 3.5 million. The acquisition
of Air and Legion was part of a business strategy whereby Cohort would build up
the value of the group over a three-year period and then list its share capital on
the Stock Exchange.
(a) The following details relate to the acquisition of Air, which manufactures
electronic goods:
(i) Part of the purchase price has been allocated to intangible assets
because it relates to the acquisition of a database of key customers of
Air. The recognition and measurement criteria for an intangible asset
under IFRS 3 Business Combinations and IAS 38 Intangible Assets
do not appear to have been met but the directors feel that the
intangible asset of Rs. 500,000 will be allowed for tax purposes and
have computed the tax provision accordingly. However, the tax
authorities could possibly challenge this opinion.
(ii) Air has sold goods worth Rs. 3 million to Cohort since acquisition and
made a profit of Rs. 1 million on the transaction. The inventory of
Rs.000
Trade receivables 7,000
Other receivables 4,600
Cash and cash equivalents 6,700
18,300
(i) The financial assets are investments in equity. Model Town has made an
irrevocable election to recognise gains and losses on these assets in other
comprehensive income. However, they are shown in the above statement
of financial position at their cost on 1 July 2015. The market value of the
assets is Rs. 10.5 million on 30 June 2016. Taxation is payable on the sale
of the assets.
(ii) The stated interest rate for the long term borrowing is 8 per cent. The loan
of Rs. 10 million represents a convertible bond which has a liability
component of Rs. 9.6 million and an equity component of Rs.0.4 million.
The bond was issued on 30 June 2016.
(iii) The tax bases of the assets and liabilities are the same as their carrying
amounts in the statement of financial position at 30 June 2016 except for
the following:
(a) Rs.000
Property, plant, and equipment 2,400
Trade receivables 7,500
Other receivables 5,000
Employee benefits 5,000
(b) Other intangible assets were development costs which were all
allowed for tax purposes when the cost was incurred in 2015.
Required
Calculate the provision for deferred tax at 30 June 2016 after any necessary
adjustments to the financial statements showing how the provision for deferred
taxation would be dealt with in the financial statements.
(Assume that any adjustments do not affect current tax. You should briefly
discuss the adjustments required to calculate the provision for deferred tax).
19.1 HELLO
On 1 January 2015, Hello acquired 60% of the ordinary share capital of Solong
for Rs. 110,000. At that date Solong had a retained earnings balance of Rs.
60,000.
The following statements of financial position have been prepared as at 31
December 2016.
Hello Solong
Rs. Rs.
Assets
Non-current assets
Property, plant and equipment 225,000 175,000
Investments in Solong 110,000
The fair value of Solongs net assets at the date of acquisition was determined to
be Rs. 170,000.
The difference between the book value and the fair value of the new assets at the
date of acquisition was due to an item of plant which had a useful life of 10 years
from the date of acquisition.
Required
Prepare the consolidated statement of financial position of Hello and its
subsidiary as at 31 December 2016.
(b) Explain any THREE sources of external information which an entity may
consider in assessing whether there is any indication that an asset may be
impaired.
(c) Prepare an extract of consolidated Statement of Financial position of
Flamsteed Ltd for the year ended 30 June 2016, showing the assets side
only.
Current Liabilities
Trade payables 440 188
4,600 1,812
Bliss Ltd owes Bradley Ltd Rs. 50million for goods purchased during the year.
Inventory of Bliss Ltd includes goods bought from Bradley Ltd at the price that
includes a profit to Bradley Ltd of Rs. 24million.
The management of Bradley Ltd wants the financial statements to be
consolidated using the acquisition method and wishes to know whether there is
goodwill on acquisition of Bliss Ltd and the amount involved.
Required
Prepare the consolidated statement of financial position as at 31 December 2016.
19.5 X LTD
The statements of financial position for X Ltd and Y Ltd as at 31 December 2016
are provided below:
X Ltd Y Ltd
ASSETS Rs.000 Rs.000
Non-current assets
Property, plant and equipment 12,000 4,000
Available for sale investment (note 1) 4,000 -
Current assets 16,000 4,000
Inventories 2,200 800
Receivables 3,400 900
Cash and cash equivalents 800 300
6,400 2,000
Total assets 22,400 6,000
EQUITY AND LIABILITIES Equity
Share capital (Rs. 1 equity shares) 10,000 1,000
Retained earnings 7,500 4,000
Other reserves 200 -
Total equity 17,700 5,000
Non-current liabilities
Long term borrowings 2,700 -
Current liabilities 2,000 1,000
Total liabilities 4,700 1,000
Total equity and liabilities 22,400 6,000
Additional information:
1. X Ltd acquired a 75% investment in Y Ltd on 1 May 2016 for Rs. 3,800,000.
The investment has been classified as available-for-sale in the books of X
Ltd. The gain on its subsequent measurement as at 31 December 2016 has
been recorded within other reserves in X Ltds individual financial
statements. At the date of acquisition Y Ltd had retained earnings of Rs.
3,200,000.
2. It is the group policy to value non-controlling interest at fair value at the date
of acquisition. The fair value of the non-controlling interest at 1 May 2016
was Rs. 1,600,000.
3. As at 1 May 2016 the fair value of the net assets acquired was the same as
the book value with the following exceptions:
The fair value of property, plant and equipment was Rs. 800,000 higher
than the book value. These assets were assessed to have an estimated
useful life of 16 years from the date of acquisition. A full years depreciation
is charged in the year of acquisition and none in the year of sale.
The fair value of inventories was estimated to be Rs. 200,000 higher than
the book value. All of these inventories were sold by 31 December 2016.
On acquisition X Ltd identified an intangible asset that Y Ltd developed
internally but which met the recognition criteria of IAS 38 Intangible Assets.
This intangible asset is expected to generate economic benefit from the
date of acquisition until 31 December 2017 and was valued at Rs. 150,000
at the date of acquisition.
A contingent liability, which had a fair value of Rs. 210,000 at the date of
acquisition, had a fair value of Rs. 84,000 at 31 December 2016.
4. An impairment review was conducted at 31 December 2016 and it was
decided that the goodwill on the acquisition of Y Ltd was impaired by 20%.
5. X Ltd sold goods to Y Ltd for Rs. 300,000. Half of these goods remained in
inventories at 31 December 2016. X Ltd makes 20% margin on all sales.
6. No dividends were paid by either entity in the year ended 31 December
2016.
Required
Prepare the consolidated statement of financial position as at 31 December 2016
for the X Ltd Group.
KL GL
Dr Cr Dr Cr
Rs. m Rs. m Rs. m Rs. m
Investment in preference shares of GL 400 - - -
Loan to GL at 15% rate of interest 2,000 - - -
Investment in KL's TFCs - - 1,500 -
(purchased at par value)
Profit before tax, interest and dividend - 2,865 - 1,550
Dividend income - 273 - -
Interest income - 300 - 210
Dividend receivable 249 - - -
Current assets 1,069 - 1,316 -
Interest on TFCs 315 - - -
Interest on loan from KL - - 300 -
Taxation 650 - 474 -
Preference dividend - - 120 -
Ordinary dividend interim 750 - 300 -
27,183 27,183 29,010 29,010
Following relevant information is available:
(i) At the date of acquisition, the fair value of buildings, included in property,
plant and equipment of GL was assessed at Rs. 1,000 million above its
carrying value. All other identifiable assets and liabilities were considered
to be fairly valued. GL provides for depreciation on buildings at 10% per
annum on the straight line basis.
(ii) GL purchased the TFCs in KL on January 1, 2016.
(iii) The non-controlling interests are measured at their proportionate share of
the GLs identifiable net assets.
(iv) There is no impairment in the value of goodwill since its acquisition.
(v) There are no components of other comprehensive income.
Required
Prepare the following in accordance with the requirements of International
Financial Reporting Standards:
(a) Consolidated statement of financial position as at December 31, 2016.
(b) Consolidated statement of comprehensive income for the year ended
December 31, 2016.
(c) Consolidated statement of retained earnings for the year ended December
31, 2016.
Note:
Ignore deferred tax and corresponding figures.
Notes to the above statements are not required. However, show workings
wherever it is necessary.
Additional information:
(1) Included in the revenue of Fillmore Limited is Rs. 12.5million in respect of
sales to Millard Ltd, giving Fillmore Limited a profit of 25% on cost. These
are sales of components that Fillmore Limited has been supplying to Millard
Ltd on a regular basis for a number of years. The amounts included in the
inventories of Millard Ltd in respect of goods purchased from Fillmore
Limited at the beginning and end of the year were as follows:
Inventories of components in Millard Ltds books
Date Rs.000
31/12/2016 2,000
31/12/2015 1,500
(2) Some years ago, Millard Ltd bought 50 million ordinary shares in Fillmore
Limited at a cost of Rs. 67million. On the same date, Millard Ltd bought
25% of the debentures of Fillmore Limited at par.
Included in Amount
Sales buyers closing receivable/payable Gross profit
inventories at year end % on sales
Rs. in million
FL to AIL 2,400 900 - 20
SL to AIL 1,800 600 800 10
AIL to FL 3,600 1,200 - 30
Dividend
Date of declaration Date of payment %
FL Nov 25, 2016 Jan 5, 2017 20
AIL Oct 15, 2016 Nov 20, 2016 10
Required
Prepare the consolidated statement of financial position and the
consolidated statement of profit and loss of FL and its subsidiaries for the
year ended December 31, 2016. Ignore tax and corresponding figures.
(b) A joint operator is expected to recognise and account for certain elements
in relation to the joint operations. State FIVE elements to be recognised.
(c) State TWO characteristics of a joint arrangement.
21.2 HELIUM
The draft statements of financial position as at 31 December 2016 of three
companies are set out below.
Helium Sulphur Arsenic
Rs.000 Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment 400 100 160
Investments:
- shares in Sulphur (60%) 75
- shares in Arsenic (30%) 30
21.4 HIDE
Hide holds 80% of the ordinary share capital of Seek (acquired on 1 February
2016) and 30% of the ordinary share capital of Arrive (acquired on 1 July 2015).
Hide had no other investments.
The draft statements of profit or loss for the year ended 30 June 2016, are set out
below.
Hide Seek Arrive
Rs.000 Rs.000 Rs.000
Revenue 12,614 6,160 8,640
Operating expenses (11,318) (5,524) (7,614)
Dividends receivable 150
1,446 636 1,026
Income tax (621) (275) (432)
Profit after taxation 825 361 594
Included in the inventory of Seek at 30 June 2016 was Rs. 50,000 for goods
purchased from Hide in May 2016 which the latter company had invoiced at cost
plus 25%. These were the only goods sold by Hide to Seek but it did make sales
of Rs. 180,000 to Arrive during the year. None of these goods remained in
Arrives inventory at the year end.
Required
Prepare a consolidated statement of profit or loss for Hide for the year ended 30
June 2016.
None of these transactions has yet been recorded in the summary statements of
financial position that are shown below.
The summarised draft statements of financial position of the three companies at
31 March 2016 are as follows.
Statement of financial position Hark Spark Ark
Rs. Rs. Rs.
million million million
Assets
Non-current assets
Property, plant and equipment 60.0 31.0 16.0
Other equity investments 0.8 nil nil
60.8 31.0 16.0
Current assets 18.2 8.0 9.0
Total assets 79.0 39.0 25.0
Equity and liabilities
Equity shares of Rs. 1 each 16.0 5.0 6.0
Share premium 2.0 4.0 4.0
Retained earnings: at 1 April 2015 36.0 16.0 8.0
- for year ended 31 March 2016 8.0 3.0 2.0
62.0 28.0 20.0
Non-current liabilities
6% loan notes 10.0 - -
7% loan notes - 6.0 3.0
Current liabilities 7.0 5.0 2.0
Total equity and liabilities 79.0 39.0 25.0
The following information is relevant:
(1) Hark has chosen to value the non-controlling interest in Spark using the fair
value method permitted by IFRS 3 (revised). The fair value of the non-
controlling interests at the acquisition date is estimated to be the market
value of the shares before the acquisition.
(2) At the date of acquisition of Spark, the fair values of its assets were equal
to their carrying amounts.
(3) The cost of capital of Hark is 10% per year.
(4) During the year ended 31 March 2016, Spark sold goods to Hark for Rs. 3.6
million, at a mark-up of 50% on cost. Hark had 75% of these goods in its
inventory at 31 March 2016.
(5) There were no intra-group receivables and payables at 31 March 2016.
(6) On 1 April 2015, Hark sold a group of machines to Spark at their agreed fair
value of Rs. 3 million. At the time of the sale, the carrying amount of the
machines was Rs. 2 million. The estimated remaining useful life of the plant
at the date of the sale was four years. Plant and machinery is depreciated
to a residual value of nil using straight-line depreciation and at 1 April 2015
the machines had an estimated remaining life of five years.
(7) Other equity investments are included in the summary statement of
financial position of Hark at their fair value on 1April 2015. Their fair value
at 31 March 2016 is Rs.0.65 million.
(8) Impairment tests were carried out on 31 March 2016. These show that
there is no impairment of the value of the investment in Ark or in the
consolidated goodwill.
(9) No dividends were paid during the year by any of the three companies.
Required
Prepare the consolidated statement of financial position for Hark as at 31 March
2016.
21.6 P, S AND A
The statements of financial position of three entities P, S and A are shown below,
as at 31 December Year 5. However, the statement of financial position of P
records its investment in Entity A incorrectly.
P S A
Rs. Rs. Rs.
Non-current assets
Property, plant and equipment 450,000 240,000 460,000
Investment in S at cost 320,000 - -
Investment in A at cost 140,000 - -
910,000 240,000 460,000
Current assets
Inventory 70,000 90,000 70,000
Current account with P - 60,000 -
Current account with A 20,000 - -
Other current assets 110,000 130,000 40,000
Total assets 1,110,000 520,000 570,000
Equity and reserves
Equity shares of Rs. 1 100,000 200,000 100,000
Share premium 160,000 80,000 120,000
Accumulated profits 650,000 140,000 250,000
910,000 420,000 470,000
Long-term liabilities 40,000 20,000 30,000
Current liabilities
Current account with P - - 20,000
Current account with S 60,000 - -
Other current liabilities 100,000 80,000 50,000
1,110,000 520,000 570,000
Additional information
P bought 150,000 shares in S several years ago when the fair value of the net
assets of S was Rs. 340,000.
P bought 30,000 shares in A several years ago when As accumulated profits
were Rs. 150,000.
There has been no change in the issued share capital or share premium of either
S or A since P acquired its shares in them.
There has been impairment of Rs. 20,000 in the goodwill relating to the
investment in S, but no impairment in the value of the investment in A.
At 31 December Year 5, A holds inventory purchased during the year from P
which is valued at Rs. 16,000 and P holds inventory purchased from S which is
valued at Rs. 40,000. Sales from P to A and from S to P are priced at a mark-up
of one-third on cost.
None of the entities has paid a dividend during the year.
P uses the partial goodwill method to account for goodwill and no goodwill is
attributed to the non-controlling interests in S.
Required
Prepare the consolidated statement of financial position of the P group as at 31
December Year 5.
22.2 A LTD
The statements of financial position for A Ltd and B Ltd as at 30 September 2016
are provided below:
A Ltd B Ltd
Rs.000 Rs.000
ASSETS
Non-current assets
Property, plant and equipment 22,000 5,000
Available for sale investment (note 1) 4,000 -
Current assets 26,000 5,000
Inventories 6,200 800
Receivables 6,600 1,900
Cash and cash equivalents 1,200 300
14,000 3,000
Total assets 40,000 8,000
EQUITY AND LIABILITIES Equity
Share capital (Rs. 1 equity shares) 20,000 1,000
Retained earnings 7,500 5,000
A Ltd B Ltd
Rs.000 Rs.000
Other components of equity 500
Total equity 28,000 6,000
Non-current liabilities
5% Bonds 2019 (note 2) 3,900 -
Current liabilities 8,100 2,000
Total liabilities 12,000 2,000
Total equity and liabilities 40,000 8,000
Additional information:
1. A Ltd acquired a 15% investment in B Ltd on 1 May 2010 for Rs. 600,000.
The investment was classified as available for sale and the gains earned on
it have been recorded within other reserves in A Ltds individual financial
statements. The fair value of the 15% investment at 1 April 2016 was Rs.
800,000.
On 1 April 2016, A Ltd acquired an additional 60% of the equity share
capital of B Ltd at a cost of Rs. 2,900,000. In its own financial statements, A
Ltd has kept its investment in B Ltd as an available for sale asset recorded
at its fair value of Rs. 4,000,000 as at 30 September 2016.
2. A Ltd issued 4 million Rs. 1 5% redeemable bonds on 1 October 2011 at
par. The associated costs of issue were Rs. 100,000 and the net proceeds
of Rs. 3.9 million have been recorded within non-current liabilities. The
bonds are redeemable at Rs. 4.5 million on 30 September 2019 and the
effective interest rate associated with them is approximately 8.5%. The
interest on the bonds is payable annually in arrears and the amount due
has been paid in the year to 30 September 2016 and charged to the
statement of profit or loss.
3. An impairment review was conducted at the year end and it was decided
that the goodwill on the acquisition of B Ltd was impaired by 10%.
4. It is the group policy to value non-controlling interest at fair value at the date
of acquisition. The fair value of the non-controlling interest at 1 April 2016
was Rs. 1.25 million.
5. The profit for the year of B Ltd was Rs. 3 million, and profits are assumed to
accrue evenly throughout the year.
6. B Ltd sold goods to A Ltd for Rs. 400,000. Half of these goods remained in
inventories at 30 September 2016. B Ltd makes 20% margin on all sales.
7. No dividends were paid by either entity in the year to 30 September 2016.
Required
(a) Explain how the investment in B Ltd should be accounted for in the
consolidated financial statements of A Ltd, following the acquisition of the
additional 60% shareholding.
(b) Prepare the consolidated statement of financial position as at 30
September 2016 for the A Ltd Group.
Required
(a) Prepare for the X Ltd Group for the year ended 31 December 2016:
(i) a consolidated statement of profit or loss and other comprehensive
income; and
(ii) a consolidated statement of changes in equity.
X Ltd purchased a further 10% of the ordinary share capital of Y Ltd on 1 January
2017 for Rs. 120,000.
Required
(b) (i) Explain how the acquisition of this additional investment will be
accounted for in the consolidated financial statements of the X Ltd
group for the year to 31 December 2017.
(ii) Calculate the debit or credit that will be made to the consolidated
retained reserves of the X Ltd group for the year to 31 December
2017 in respect of this additional 10% share purchase.
X Ltd purchased a further 20% of the ordinary share capital of Z Ltd on 1 January
2017.
Required
(c) Explain how the acquisition of the additional investment in Z Ltd will be
accounted for in the consolidated financial statements of the X Ltd group for
the year to 31 December 2017.
Statements of profit or loss for Parvez Ltd, Saad Ltd and Vazir Ltd for the year
ended 31 December 2016 are as follows:
Parvez Ltd Saad Ltd Vazir Ltd
Rs. 000 Rs. 000 Rs. 000
Revenues 45,600 24,700 22,800
Cost of sales (18,050) (5,463) (5,320)
Gross profit 27,550 19,237 17,480
Distribution costs (3,325) (2,137) (1,900)
Administrative expenses (3,475) (950) (1,900)
Operating profit 20,750 16,150 13,680
Interest paid (325)
Profit before tax 20,425 16,150 13,680
Tax (8,300) (5,390) (4,241)
Profit after tax 12,125 10,760 9,439
The following information is available relating to Parvez Ltd, Saad Ltd and Vazir
Ltd:
(1) On 1 January 2010 Parvez Ltd acquired 2,700,000 Rs. 1 ordinary shares in
Saad Ltd for Rs. 6,650,000 at which date there was a credit balance of
retained earnings of Saad Ltd of Rs. 1,425,000. No shares have been
issued by Saad Ltd since Parvez Ltd acquired its interest.
(2) On 1 January 2010 Saad Ltd acquired 1,600,000 Rs. 1 ordinary shares in
Vazir Ltd for Rs. 3,800,000 at which date there was a credit balance of
retained earnings of Vazir Ltd of Rs. 950,000. No shares have been issued
by Vazir Ltd since Saad Ltd acquired its interest.
(3) During 2016, Vazir Ltd had made inter-company sales to Saad Ltd of Rs.
480,000 making a profit of 25% on cost and Rs. 75,000 of these goods
were in inventory at 31 December 2016.
(4) During 2016, Saad Ltd had made inter-company sales to Parvez Ltd of Rs.
1
260,000 making a profit of 33 3 % on cost and Rs. 60,000 of these goods
were in inventory at 31 December 2016.
(5) On 1 November 2016 Parvez Ltd sold warehouse equipment to Saad Ltd
for Rs. 240,000 from inventory. Saad Ltd has included this equipment in its
non-current assets. The equipment had been purchased on credit by
Parvez Ltd for Rs. 200,000 in October 2016 and this amount is included in
its current liabilities as at 31 December 2016.
(6) Saad Ltd charges depreciation on its warehouse equipment at 20% on cost.
It is company policy to charge a full years depreciation in the year of
acquisition to be included in the cost of sales.
Required
(a) Prepare a consolidated statement of profit or loss for the Parvez Ltd Group
for the year ended 31 December 2016.
(b) Prepare statement of financial position as at that date.
The summarised balances extracted from the accounting records of Hasan (H)
Ltd, Riaz (R) Ltd and Siddiq (S) Ltd at 31 December 2016 are given below:
H Ltd R Ltd S Ltd
Rs. Rs. Rs.
Property, plant and equipment 1,102,500 271,950 122,550
Investments at cost
75% holding in shares of Riaz Ltd 367,500
40% holding in shares of Siddiq Ltd 49,000
20% holding in shares of Siddiq Ltd 24,500
Inventories 526,610 163,290 85,700
Receivables 241,920 129,680 29,750
Cash and bank balances 88,200 4,725 8,105
2,375,730 594,145 246,105
Further information:
(1) Hasan Ltd purchased its interest in Riaz Ltd and Siddiq Ltd in December
2013 at which date Siddiq Ltd had accumulated losses of Rs. 35,000, and
Riaz Ltd had accumulated profits of Rs. 35,000.
(2) On 30 December 2016 Hasan Ltd despatched and invoiced goods for Rs.
12,500 to Riaz Ltd which were not recorded by the latter until 3 January
2017. A mark-up of 25% is added by Hasan Ltd to arrive at selling price.
Riaz Ltd already had goods in inventories which had been invoiced to them
by Hasan Ltd at Rs. 10,400.
(3) Siddiq Ltd had accumulated losses of Rs. 52,500 when Riaz Ltd purchased
35,000 shares in 2012.
(4) Hasan Ltd received a remittance of Rs. 8,000 on 2 January 2017 which had
been sent by Riaz Ltd on 29 December 2016.
(5) Included in Hasans receivables was a balance of Rs. 25,500 owed by Riaz
Ltd.
(6) Neither Riaz Ltd nor Siddiq Ltd had any other reserves when their shares
were purchased by Hasan Ltd and Riaz Ltd.
(7) Payables of Riaz Ltd included an amount of Rs. 5,000 due to Hasan Ltd.
Required
Prepare the consolidated statement of financial position of Hasan Ltd and its
subsidiaries at 31 December 2016.
Assume that the gain as calculated in the parents separate financial statement
will be subject to companies income tax at a rate of 30%, and that profit and
other comprehensive income accrue evenly throughout the year.
Patche Ltd. group policy is to measure non-controlling interest at fair value at the
date of acquisition.
The fair value of the non-controlling interest in Somers Ltd. was Rs. 135million at
the date of acquisition.
Required
Prepare the following
(a) Statement of profit or loss and comprehensive income and statement of
changes in equity of Patche Ltd for the year ended 30 June 2016.
(b) Consolidated statement of profit or loss and comprehensive income of
Patche Ltd. for the same period.
(c) Consolidated statement of financial position as at 30 June 2016.
24.2 DISPOSAL
At 31 December Year 1, Hoo owned 90% of the shares in Spool. At this date the
carrying amount of the net assets of Spool in the consolidated financial
statements of the Hoo Group was Rs. 800 million. None of the assets of Spool
are re-valued.
On 1 January Year 2, Hoo sold 80% of the equity of Spool for Rs. 960 million in
cash.
The remaining shares in Spool held by Hoo are estimated to have a fair value of
Rs. 100 million.
Required
Explain how the disposal of the shares in Spool should be accounted for in the
consolidated financial statements of the Hoo Group.
(vi) The A Group uses the partial goodwill method of accounting for
acquisitions and no goodwill is attributed to non-controlling interests. There
has been no impairment of goodwill.
Required
Prepare As consolidated statement of profit or loss and show the movement on
consolidated equity reserves for the year to 31 December Year 4 and a
consolidated statement of financial position as at that date.
No entries have been made in Bartlett Ltds statement of profit or loss relating to
the sale of Lymon Ltd. Lymons net assets were Rs. 140,000 at the 1st January
2016.
Goodwill arising on the acquisition of Lymon Ltd was Rs. 25,400.
Required
Prepare the consolidated statement of profit or loss for Bartlett Ltd for the year
ended 31 December 2016.
After installation and test run January 31, 2017 US$ 30,000
The contract went through in accordance with the schedule and the company made all
the payments on time. The following exchange rates are available:
Required
Prepare journals to show how the above contract should be accounted for under
IAS 21.
Starlight Limited
QR000
Turnover 344,880
Cost of sales (249,710)
Gross profit 95,170
Expenses (29,490)
Profit before tax 65,680
Taxation (17,325)
Profit after tax 48,355
Interim dividend (16,300)
Retained profit for the year 32,055
Extract of statement of financial position at 31 December, 2016
QR000
Share capital 20,250
Revenue reserve 103,200
Liabilities 34,480
Note
Exchange rate (QR to one rupee)
December 31, 2014 30
December 31, 2015 31
December 31, 2016 33
Average rate for 2016 32
Required
(a) Prepare the translated profit and loss account of Starlight Limited.
(b) Calculate the goodwill on consolidation and the non-controlling interest that
would appear in the consolidated statement of profit or loss.
Yen (000)
Assets:
Non-current assets 9,500
Financial assets 1,250
10,750
Current assets 8,250
Total assets 19,000
Required
(a) Translate the statement of financial position of Trint Ltd. as at 31 December
2016
(b) Calculate the goodwill arising on acquisition of Trint and any gain/loss
arising on retranslation of the goodwill as at 31 December 2016
(c) Calculate the exchange difference arising from the translation of Trint Ltds
net assets.
26.4 ORLANDO
Orlando is an entity whose functional currency is the US dollar. It prepares its
financial statements to 30 June each year. The following transactions take place
on 21 May Year 4 when the spot exchange rate was $1 = 0.8.
Goods were sold to Koln, a customer in Germany, for 96,000.
A specialised piece of machinery was bought from Frankfurt, a German supplier.
The invoice for the machinery is for 1,000,000.
The company receives 96,000 from Koln on 12 June Year 4.
At 31 June Year 4 it still owns the machinery purchased from Frankfurt. No
depreciation has been charged on the asset for the current period to 30 June
Year 4.
The liability for the machine is settled on 31 July Year 4.
Relevant $/ exchange rates are:
12 June Year 4 $1 = 0.9
30 June Year 4 $1 = 0.7
31 July Year 4 $1 = 0.8
Required
26.6 A, B AND C
Extracts from the financial statements of A, its subsidiary, B and its associate, C
for the year to 30 September 2016 are presented below:
Summarised statement of profit or loss and A B C
other comprehensive income
Rs.000 A$000 Rs.000
Revenue 4,600 2,200 1,600
Cost of sales and operating expenses (3,700) (1,600) (1,100)
Profit before tax 900 600 500
Income tax (200) (150) (100)
Profit for the year 700 450 400
Other comprehensive income:
Revaluation of property, plant and equipment 200 120 70
Total other comprehensive income 200 120 70
Total comprehensive income 900 570 470
Additional information
1. The functional currency of both A and C is the Rs. and the functional
currency of B is the A$.
2. A acquired 80% of B on 1 October 2013 for Rs. 5,200,000 when the
reserves of B were A$1,800,000. The investment is held at cost in the
individual financial statements of A.
3. A acquired 40% of C on 1 October 2011 for Rs. 900,000 when the reserves
of C were Rs. 700,000. The investment is held at cost in the individual
financial statements of A.
4. No impairment to either investment has occurred to date.
5. The group policy is to value the non-controlling interest at fair value at the
date of acquisition. The fair value of the non-controlling interest of B at 1
October 2013 was A$600,000.
6. Relevant exchange rates are as follows:
iii. No further shares have been issued by LS and FS since their acquisitions,
except for the bonus issue as mentioned above.
iv. An impairment test carried out on 30 June 2014 revealed that goodwill of
FS is impaired by CU 10 million.
v. PCL values non-controlling interest on the date of acquisition at fair value.
vi. The exchange rates in terms of Rs. per CU, were as follows:
Rs. 15.00 Rs. 16.80 Rs. 16.90 Rs. 17.30 Rs. 17.00
Required:
In accordance with the requirements of the International Financial Reporting
Standards, prepare:
Current liabilities
Trade creditors 108,000 93,600
Taxation 46,800 39,240
Bank overdraft 43,200 36,000
Net current assets 198,000 168,840
Total equity and liabilities 764,280 676,800
Required
Prepare the Evernew Ltd group consolidated cash flow statement for the
year ended 31 December, 2016.
27.2 BELLA
The financial statements of Bella include the following:
Statements of financial position as at 31 March Year 6
Year 6 Year 5
Rs.000 Rs.000 Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment 12,900 8,000
Intangible assets 800 300
13,700 8,300
Current assets
Inventories 280 100
Trade and other receivables 1,290 1,350
Cash 55 45
1,625 1,495
Year 6 Year 5
Rs.000 Rs.000 Rs.000 Rs.000
Total assets 15,325 9,795
Equity and liabilities
Capital and reserves
Issued capital (Rs. 1 ordinary 1,900 1,100
shares)
Share premium 95 30
Accumulated profits 11,407 7,540
13,402 8,670
Non-current liabilities
Long-term loans 600 500
600 500
Current liabilities
Bank overdraft (repayable on 313 -
demand)
Trade and other payables 430 275
Interest payable 40 25
Current tax payable 540 325
1,323 625
Total equity and liabilities 15,325 9,795
Statement of profit or loss for the year ended 31 March Year 6 (extract).
Rs.000
Operating profit 4,677
Interest payable (60)
Profit before tax 4,617
Tax expense (400)
Profit for the period 4,217
The following occurred during the year.
(1) Dividends of Rs. 350,000 were paid.
(2) New plant was purchased for Rs. 6 million.
(3) Old plant which had a net book value of Rs. 800,000 was sold for Rs.
700,000.
(4) Shares were issued for cash during the period.
Required
Prepare a statement of cash flows for the year ended 31 March Year 6 using the
indirect method.
Notes
(1) Property, plant and equipment
Year 4 Year 3
Rs.000 Rs.000
Cost
At 1 April 20,598 19,416
Additions 1,875 2,022
Disposals (429) (840)
At 31 March 22,044 20,598
Depreciation
At 1 April 7,608 6,984
Charge for year 1,176 936
Disposals (255) (312)
At 31 March 8,529 7,608
Net book value 13,515 12,990
28.3 MARY
On 1 January Year 5, Mary had 5 million ordinary shares in issue. The following
transactions in shares took place during the next year.
1 February A 1 for 5 bonus issue
1 April A 1 for 2 rights issue at Rs. 1 per share. The market price of the
shares prior to the rights issue was Rs. 4.
1 June An issue at full market price of 800,000 shares.
In Year 5 Mary made a profit before tax of Rs. 3,362,000. It paid ordinary
dividends of Rs. 1,200,000 and preference dividends of Rs. 800,000. Tax was
Rs. 600,500. The reported EPS for Year 4 was Rs.0.32.
Required
Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative
purposes.
28.4 MANDY
Mandy has had 5 million shares in issue for many years. Earnings for the year
ended 31 December Year 4 were Rs. 2,579,000. Earnings for the year ended 31
December Year 3 were Rs. 1,979,000. Tax is at the rate of 30%.
Outstanding share options on 500,000 shares have also existed for a number of
years. These can be exercised at a future date at a price of Rs. 3 per share. The
average market price of shares in Year 3 was Rs. 4 and in Year 4 was Rs. 5.
On 1 April Year 3 Mandy issued Rs. 1,000,000 convertible 7% bonds. These are
convertible into ordinary shares at the following rates.
On 31 December Year 6 30 shares for every Rs. 100 of bonds
On 31 December Year 7 25 shares for every Rs. 100 of bonds
On 31 December Year 8 20 shares for every Rs. 100 of bonds
Required
Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3.
The company has issued options carrying the right to acquire 1.5 million
ordinary shares of the company on or after December 31, 2016 at a strike
price of Rs. 9.90 per share. During the year 2016, the average market price
of the shares was Rs. 11 per share.
The company is subject to income tax at the rate of 30%.
Required
(a) Compute basic and diluted earnings per share.
(b) Prepare a note for inclusion in the companys financial statements for
the year ended December 31, 2016 in accordance with the requirements
of International Accounting Standards.
Required:
Extracts from the consolidated profit and loss account of Alpha Limited (including
earnings per share) for the year ended 31 December 2013 in accordance with the
International Financial Reporting Standards.
(Note: Comparative figures and information for notes to the financial statements
are not required)
Represented by:
Non-current assets at cost 660 520
Less: Depreciation 200 160
460 360
Current assets:
Inventory 280 172
Receivables 310 300
Cash 30 32
620 504
Current liabilities:
Taxation 40 30
Creditors 180 344
Bank overdraft - 42
Dividends 20 24
240 440
Net Current assets 380 64
840 424
Required
(a) Compute the following ratios for each of the companies:
(i) Current ratio
(ii) Acid test
(iii) Creditors ratio
(iv) Collection period or Receivables Ratio
(iv) Earnings per share
(b) Carry out comparative analysis of the companies based on the computed
ratios in (a) above.
2016 2015
Rs.m Rs.m Rs.m Rs.m
Net current assets 1,270 178
5,734 2,058
Loans (3,200) (200)
2,534 1,858
Required
(a) Calculate ratios for Travelwell Ltd for the year ended 30 September 2016
equivalent to those shown above for the year to 30 September 2015. Show
your workings.
(b) Assess the financial performance and financial position of Travelwell Ltd for
the year ended 30 September 2016, in comparison with the previous year
referring to the comments in the report of the Chief Executive Officer and
you should also assess the effect of the purchase of the net assets of
Rondel Ltd.
Required
(a) Draft a report to the board of directors, on behalf of the CFO, analyzing
the financial performance of Waris Limited by evaluating each category of
ratios in comparison with the industry.
(b) List any four types of additional information which would have helped you
in a better analysis.
The farms non- current assets for the year ended 31 January 2017 were as
follows:
Rs.
Farms irrigation at cost 800,000
Farms implement and equipment 400,000
Additional Information:
(i) Farms irrigation costs are to be written off over 10 years
(ii) Farms implement and equipment were purchased on 31 April 2016 and
these are to be depreciated at 20% per annum.
Required
(a) Prepare Gujranwala Foods Limiteds gross output and statement of profit or
loss for the year ended 31 January 2017.
(b) In accordance with IAS 41 on Agriculture, you are required to define the
following terms:
(i) Biological assets
(ii) Biological transformation
(iii) Harvest
(v) On 20 November 2016, Wah Agriprod Ltds share price stood at Rs. 2.20
per share. On this date, a dividend that was calculated to give a dividend
yield of 5% was paid by the company. The dividend paid was included as
part of administrative expenses figure shown in the trial balance.
(vi) The inventory on Wah Agriprod Ltds premises at 31 December 2016, after
stock taking was valued at cost of Rs. 106million and a provision for income
tax for the year then ended of Rs. 86.75million is required.
(vii) During the year, the company issued ten million shares at a premium of
20%. The conversion rate for the loan note is Rs. 100 loan notes for three
ordinary shares. The current market price per share is Rs. 2.54.
Required
(a) Prepare the statement of profit or loss and other comprehensive income for
the year ended 31 December 2016.
(b) Prepare the statement of changes in equity for the same period.
(c) Explain the term financial assets and state the FOUR classes of financial
assets identified in IAS 39 and how each is measured.
(d) What are biological assets? State any THREE conditions to be met before
a biological asset or agricultural produce can be recognised in the books of
accounts.
Current assets:
Inventories 160,000 150,000
Trade & other receivables 120,000 280,000
Cash and cash equivalent 20,000 50,000
Total assets 1,700,000 930,000
Equity and liabilities:
Ordinary share capital 160,000 120,000
Share premium 40,000 20,000
Reserves 590,000 500,000
Additional information:
Immediately after acquisition, the following agricultural products were procured
and included in property, plant and equipment and inventories of Sol Ltd as at 31
December 2016:
(i) Included in property, plant and equipment of Sol Ltd are: Rs.000
Dairy livestock immature 40,000
Dairy livestock mature 50,000
(v) List of inventory at a shop situated in Sialkot had been under cast by Rs.
90,000.
(vi) On December 25, 2017 goods costing Rs. 310,000 were sold on credit to
Skims Industries for Rs. 500,000. The goods were shipped on December
28, 2017 and were received by the customer on January 2, 2018.
(vii) Goods costing Rs. 2,500,000 had been returned to Ali Garments on
December 30, 2017. A credit note was received from the supplier on
January 5, 2018 and entered in the books in January 2018. No payment
had been made for the goods prior to their return.
(viii) Goods sold to a customer Mr. Saleem were recorded in inventory ledger
account at the sale price of Rs. 780,000. The goods were sold at cost plus
30%.
Required
(a) Reconcile the ledger balance with the physical record to determine the
shortage (if any).
(b) Determine the value of inventory that should be recorded in the statements
of financial position.
(c) Prepare the adjusting entries that should be recorded in the books of
Fashion Blue Enterprises, in December 2017.
sold for Rs. 7,000 and has been taken in inventory at its net realizable
value.
(vii) An inspection of the inventory count sheets prepared on July 14, 2017
showed that a page total of Rs. 5,000 had been carried to the summary as
Rs. 6,000. In addition, the total of another page had been undercast by Rs.
200.
(viii) Included in the physical count were goods costing Rs. 2,200 which were
held on behalf of a supplier.
Required
Determine the amount of inventory required to be disclosed in the financial
statements as at June 30, 2017.
30.6 AFRIDI
Afridi does not keep perpetual records of inventory. At the end of each quarter,
the value of inventory is determined through physical inventory. However, the
record of inventory taken on 31 March 2017 was destroyed in an accident and
Afridi has extracted the following information for the purpose of inventory
valuation:
(i) Invoices entered in the purchase day book, during the quarter, totalled Rs.
138,560 of which Rs. 28,000 related to the goods received on or before 31
December 2016. Invoices entered in April 2017 relating to goods received
in March 2017 amount to Rs. 37,000.
(ii) Sales invoiced to customers amounted to Rs. 151,073 of which Rs. 38,240
related to goods dispatched on or before 31 December 2016. Goods
dispatched to customers before 31 March 2017 but invoiced in April 2017
amounted to Rs. 25,421.
(iii) Credit notes of Rs. 12,800 had been issued to customers in respect of
goods returned during the period.
(iv) Purchases included Rs. 2,200 spent on acquisition of a ceiling fan for the
shop.
(v) A sale invoice of Rs. 5,760 had been recorded twice in the sales day book.
(vi) Goods having sale value of Rs. 2,100 were given by way of charity.
(vii) Afridi normally sells goods at a margin of 20% on cost. However, he had
allowed a special discount of 10% on goods costing Rs. 6,000 which were
sold on 15 February 2017.
(viii) On 31 December 2016, the inventory was valued at Rs. 140,525. However,
while reviewing these inventory sheets on 31 March 2017 the following
discrepancies were found:
(a) A page total of Rs. 15,059 had been carried to the summary as Rs.
25,059.
(b) 1,000 items costing Rs. 10 each had been valued at Rs. 0.50 each.
Required
Calculate the amount of inventory in hand as on 31 March 2017.
31.1 IFRS 1
A company which has always prepared its Financial Statements to 31 December
each year, prepared its first IFRS Financial Statements for the year ended 31
December 2016. These statements show comparative figures for the year ended
31 December 2015.
Required
(a) Identify the first IFRS reporting period and state the date of transition to
IFRS.
(b) Present the procedures which must be followed in order to prepare the
financial statements for the year ended 31 December 2016.
(c) Identify the reconciliations which the company must include in its financial
statements for the year ended 31 December 2016.
(d) State the contents of a typical statement of changes in equity.
Rupees in thousand
Rupees in thousand
Balances as of
December 31, 2016
Prepaid reinsurance
premium ceded 741,934 93,702 311 122,866
Rupees in thousand
Balances as of
December 31, 2015
Unearned premium
reserve 844,425 159,844 1,191,933 133,424
Prepaid reinsurance
premium ceded 726,800 59,098 - 114,190
During the year the movement in the specific provision was as under:
Rs. in
million
Opening balance 3,320
Charge for the year 802
Reversals (90)
Amounts written off (50)
Exchange rate adjustment 18
Total 4,000
In addition to the above specific provisions, it is the banks policy to make
additional general provision based on the judgment of the bank. The opening
balance for general provision was Rs. 65 million. During the year, the bank made
provisions of Rs. 25 million and Rs. 15 million against consumer and agriculture
advances respectively.
Required
Prepare relevant notes on non-performing advances and provisions for
inclusion in the financial statements of Al-Amin Bank Limited giving appropriate
disclosure in accordance with the guidelines issued by the State Bank of
Pakistan.
Rs. in
million
Net assets at the beginning of the year (900 million units) 27,000
100 million units issued during the year 3,500
95 million units redeemed during the year 3,277
32.10 IAS 26
IAS 26: Accounting and Reporting by Retirement Benefit Plans and IAS 19:
Employee Benefits deal with employee benefits but there are differences between
the two standards.
(a) Highlight the main differences between IAS 26 and IAS 19.
(b) What is a Defined Benefit Plan?
(c) What is a Defined Contribution Plan?
(d) Explain the meaning of the actuarial present value of promised retirement
benefit.
Debit Credit
Amounts in Rupees
Investment PEACE Company Limited 587,169
Investment - NIT Units 16,911,510
Due to outgoing members 4,301,017
Accrued expenses 3,822
Withholding tax payable 61,251
Members Fund 142,472,122
Profit on investments 23,389,251
Dividend income 2,696,399
Contribution for the year 10,623,106
Transferred / paid to outgoing members 12,432,973
Bank charges 3,342
Audit fee 10,000
Liabilities no more payable 3,450,000
186,996,968 186,996,968
Following are the details of investments and income thereon:
Balance as During the year 2016
at Profit / Profit /
Principal
July 01, Addition interest interest
realized
2015 accrued realized
Government
Securities
Defence Savings 21,376,80 (1,600,00 (5,456,00
-
Certificate 87,812,855 9 0) 0)
Unlisted Securities
and deposits
Term Finance (12,873,0 (1,893,72
19,943,656 5,000,000 1,655,223
Certificates 68) 2)
(5,300,00
Term Deposits 11,584,631 - 357,219 (227,792)
0)
Listed Securities
SUN Limited 8,220,957 9,373,936 - - -
PEACE Limited 587,169 - - - -
NIT Units 16,911,510 - - - -
The following gains/(losses) on restatement of investments at their fair values,
have not been accounted for:
Rupees
SUN Limited (784,518)
PEACE Limited 317,728
NIT Units 4,026,551
Required
Prepare the following in accordance with the requirements of International
Accounting Standards:
(a) Statement of net assets available for benefits along with the note on
investments.
(b) Statement of changes in net assets available for benefits.
During the year ended 31 December 2016 Sindh Industries entered into the
following transactions.
(1) Just before the year end Sindh Industries signed a contract to deliver
consultancy services for a period of 2 years at a fee of Rs. 500,000 per
annum. The full amount of this fee has been paid in advance and is non-
refundable.
(2) Sindh Industries has constructed a new factory. The construction has been
financed from the pool of existing borrowings. Land at a cost of Rs. 1.8
million was acquired on 1 February 2016 and construction began on 1 June
2016. Construction was completed on 30 September 2016 at an additional
cost of Rs. 2.7 million. Although the factory was usable from that date, full
production did not commence until 1 December 2016. Throughout the year
the companys average borrowings were as follows:
Annual
interest
Amount rate
Rs. %
Bank overdraft 1,000,000 9.75
Bank loan 1,750,000 10
Debenture 2,500,000 8
An amount of Rs. 450,000 has been included in property, plant and
equipment in respect of borrowing costs relating to the construction of the
factory. The useful life of the factory has been estimated at 20 years. No
depreciation has been charged for the year. The reason for this is that the
factory has only been in use for one month and that the depreciation charge
would be immaterial.
(3) A blast furnace with a carrying amount at 1 January 2016 of Rs. 3.5 million
has been depreciated in the draft financial statements on the basis of a
remaining life of 20 years. In December 2016 the directors carried out a
review of the useful lives of various significant items of plant and
machinery, including the blast furnace and came to the conclusion that the
useful life of the furnace was 20 years at 31 December 2016. The
reasoning behind this judgement was that the lining of the furnace had
been replaced in the last week of December 20X6 at a cost of Rs. 1.4
million. Provided that the lining is replaced every five years, the life of the
furnace can be extended accordingly. You have found a report,
commissioned by the previous finance director and prepared by a firm of
asset valuation specialists, which assesses the remaining useful life of the
main structure of the furnace at 1 January 2016 at 15 years and the lining
of the furnace at 5 years. You have also found evidence that the managing
director has seen this report.
Jafar has had a conversation with the managing director who told him, We
need to make the figures look as good as possible so I hope youre not
going to start being difficult. The consultancy fee is non-refundable so
theres no reason why we cant include it in full. I think we should look at our
depreciation policies. Were writing off our assets over far too short a
period. As you know, were planning to go for a stock market listing in the
near future and being prudent and playing safe wont help us do that. It
wont help your future with this company either.
Required
(a) Explain the required IFRS accounting treatment of these issues, preparing
relevant calculations where appropriate.
(b) Prepare a revised draft of the statement of profit or loss extract for the year
ended 31 December 2016 and the statement of financial position at that
date.
(c) Discuss the ethical issues arising from your review of the draft financial
statements and the actions that you should consider.
BigShop Limited also uses the consulting services of Insight Ltd. Both Bashir and
Abbas have worked on consulting projects commissioned by BigShop Limited,
and are likely to do so again in the future.
Abbas is the only chartered accountant on his team (in fact, Insight Ltd employs
few other chartered accountants) and is concerned that there may be a potential
conflict of interest between his work on Nourish Limited and BigShop Limited
projects. He is not sure whether such conflicts are covered by the ICAP's ethical
guidance.
Required
Advise Abbas about his concerns over the potential conflict of interest arising
from his work for Nourish Limited and BigShop Limited, referring where
appropriate to the ICAP's Code of Ethics, and explain any action he should take.
SECTION
B
Answers
CHAPTER 1 REGULATORY FRAMEWORK
2.1 DEFINITIONS
An asset is:
a resource controlled by the entity
as a result of past events
from which economic benefits are expected to flow to the entity.
A liability is:
a present obligation of the entity
arising from past events
the settlement of which is expected to result in an outflow of economic
benefits.
Income includes both revenue and gains.
Revenue is income arising in the course of the ordinary activities of the entity
such as sales revenue and income from investments.
Gains include, for example, the gain on disposal of a non-current asset. They
might arise in the normal course of business activities. They might be realised or
unrealised. Unrealised gains occur whenever an asset is revalued upwards, such
as the upward revaluation of marketable securities.
Expenses include:
expenses arising in the normal course of activities, such as the cost of
sales and other operating costs, including depreciation of non-current
assets.
losses, including, for example, the loss on disposal of a non-current asset,
and losses arising from damage due to fire or flooding.
Appraisal of statement of financial position as all that is required
The statement of financial position does show the position of a business at a
point in time (like a snapshot), but by itself is insufficient to give a comprehensive
view of performance and/or adaptability.
The IASB Framework states that information on financial performance is provided
by the statement of profit or loss and other comprehensive income. This is
because the statement of financial position fails to give any account of
transactions leading up to the statement of position.
It is the statement of profit or loss and other comprehensive income and the
SOCIE that show the performance of a business in a given period and reconcile
the opening and closing statements of financial position.
Information on financial adaptability is given primarily by the statement of cash
flows. This is because financial adaptability is the ability to take effective action to
alter the amount and timing of cash flows. Some information comes from the
statement of financial position (e.g. the note about future finance lease
commitments) but the statement of financial position is by no means all that is
required.
2.3 CARRIE
(a) Physical (b) Financial capital maintenance
capital
maintenance
(i) Historical (ii) Constant
cost purchasing
accounting power
Profit for the year accounting
Rs. Rs. Rs.
Sales 1,400 1,400 1,400
Cost of sales (1,000) (1,000) (1,000)
Inflation adjustment
- Specific
(1,100 1,000) (100) - -
- General
(1,000 u 7%) - - (70)
Profit 300 400 330
Balance sheet as at
31 December Year 1
Cash at bank 1,400 1,400 1,400
Share capital
(1,000 + 100)
(1,000 + 70) 1,100* 1,000 1,070*
Reserves 300 400 330
1,400 1,400 1,400
Tutorial note
Share capital at the year end is restated under the physical capital maintenance
concept for an increase in specific price changes and under CPP accounting for
general price changes. This is the other side of the entry to the inflation
adjustments in the statement of profit or loss
Workings
(1) Cost of sales Rs.in 000
As given in the trial balance 134,000
Depreciation of plant and equipment: 20% u (197,000 30,000
47,000)
Depreciation of leased vehicles: 24,000/4 years 6,000
Amortisation of leasehold property: 250,000/25 years 10,000
180,000
(2) Vehicle rentals and finance lease. Operating expenses Rs.in 000
Rental costs given in the trial balance 8,600
Relating to finance lease (7,000)
Balance: relating to operating lease operating expense 1,600
Other operating expenses (trial balance in question) 35,000
Total operating expenses 36,600
(4) Taxation
Rs.in 000
Deferred tax liability b/f 20,000
Deferred tax: debit in the statement of profit or loss 3,000
Deferred tax liability c/f (92,000 u 25%) 23,000
Current assets
Stocks in trade 90
Accounts receivable 3 57
Advances, deposits, prepayments and other
receivables 4 45
Cash at banks 5 29
221
809
Rs.in
million
EQUITY AND LIABILITIES
Share capital and reserves
Authorized share capital
50,000,000 shares of Rs. 10 each 500
Non-current liabilities
Deferred taxation 40
Current liabilities
Short term loan 85
Account and other payables 6 82
Provision for taxation 17
184
809
Rs.in
Notes million
1. Property, plant and equipment
Operating assets 556
Capital work in progress building 20
576
Accumulated
depreciation
As of July 01 2010 - 19.5 22.5 5.9 47.9
For the year - 6.5 18.1
(105 85) + 10% 9.5
15 8/12)
(105 19) + 10% 2.1
8 3/12)
Disposals - - (5.0) - (5.0)
As at June 30
27.0 8.0 61.0
2016 - 26.0
Carrying amount 375.0 104.0 58.0 19.0 556.0
Depreciation rate - 5% 10% 10%
1.2 Revaluation
During the year 2012, the first revaluation of freehold land was carried out. The
valuation was carried out under market value basis by an independent valuer, Mr.
Dee, Chartered Civil Engineer of M/s SSS Consultants (Pvt.) Ltd., Islamabad. It
resulted in a surplus of Rs. 120 million over book values which was credited to
surplus on revaluation of fixed assets. Had there been no revaluation, the value of
freehold land would be Rs. 255 million.
Note 2016
Rs.in
million
2. Intangible Assets
Cost of computer software/license 10.0
Accumulated Amortization as of July 1, 2010 1.0
Amortization for the year 1.0
Accumulated Amortization as of June 30, 2016 2.0
3 - Accounts Receivable
Considered good
- Secured 30
- Unsecured 27
57
Considered doubtful 3
60
Less: Provision for bad debts 3.1 3
57
Note 2016
Rs.in
million
4 - Advances, Deposits, Prepayments and Other Receivables
Advances
- suppliers - considered good 12
- staffs 6
18
Deposits 11
Prepayments 4
Sales tax receivable 12
45
5 - Cash at banks
Cash at banks - current accounts 7
saving accounts 5.1 22
29
5.1: It carries interest / mark-up ranging from 3% to 7% per annum.
6 - Accounts and other payables
Accounts payable 75
Accrued liabilities 7
82
Rs.in million
Carrying amount at the 30 June (as per trial
balance)(230.00 40.25) 189.75
Add back depreciation incorrectly charged (see
above) 5.75
Carrying amount of property at the start of the year 195.5
Dr Cr
Cost of sales (50%) 3.5
Administrative expenses (30%) 2.1
Distribution costs (20%) 1.4
Accumulated depreciation 7.00
2.1 Salaries, wages and benefits include Rs. 30 million (54 55%) and Rs. 24
million (44 55%) in respect of defined contribution plan and defined
benefit plan respectively.
3.1 Salaries, wages and benefits include Rs. 16 million (54 30%) and Rs. 13
million (4430%) in respect of defined contribution plan and defined benefit
plan respectively.
Rs.in
4 Administrative expenses million
Salaries, wages and benefits (2,367 15%) 4.1 355
Utilities (734 10%) 73
Depreciation and amortization (1,287 10%) 129
Stationery and office expenses (230 35%) 80
Repairs and maintenance (315 10%) 31
Legal and professional charges 71
Auditor's remuneration 4.2 13
752
4.1 Salaries, wages and benefits include Rs. 8 million (54 15%) and Rs. 7
million (4415%) in respect of defined contribution plan and defined benefit
plan respectively.
4.2 Auditor's remuneration Rs.in
million
Audit fees 8
Taxation services 4
Out of pocket expenses 1
13
5 Other operating expenses
Donation 5.1 34
Worker's Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
399
5.1 Donations
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF).
One of the companys directors, Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in
which a director or his spouse had any interest at any time during the year.
6 Other operating income Rs.in
million
Income from financial assets
Dividend income 12
Return on savings account 2
Income from non-financial assets
Scrap sales 16
30
7 Finance costs
Finance charges on short term borrowings 133
Exchange loss 22
Finance charges on lease 11
166
8 Taxation
Current - for the year 1,440
Deferred (3,120 35%) 1,092
2,532
Balances
Advances
At beginning 1,400,00
of the year 0
Repaid during
300,000
the year
At the end of 1,100,00
the year 0
(i) Sales discount represents a special discount which is not usually allowed to
other customers.
(ii) All transactions with related parties have been carried out on commercial
terms and conditions.
Platinum Limited is the parent company which holds majority shares of the
company.
20.1 Sales to related parties have been made at 20% mark-up as against
GL's policy to sell at a markup of 30%.
20.2 Administrative services are provided by the parent company free of cost
as per the agreement. Market value of these services is Rs. 350,000.
20.3 In respect of sale of property, a buyer is required to bear all costs
incurred on transfer. But in this case the company has reimbursed the
costs to SL
20.4 The interest free loan has been granted to the executive director as per
the terms of employment.
No management fee was charged during the year ended 30 June 2012. Except
for this, all transactions have been carried out on arms length basis, as
approved by the board of directors of the company.
2 No management fee was charged for the year ended 30 June 2012. Except
3. for this, all transactions have been carried out on arms length basis, as
1 approved by the board of directors of the company.
23. The contract has been awarded to Iron Builders and Developers in which
1 one of the directors of the parent company is a partner.
23. No management fee was charged for the year ended 30 June 2012.
2 Except for this, all transactions have been carried out on arms length
basis, as approved by the board of directors of the company.
3.9 ENGINA
Report to: The Board of Directors of Engina
From: XXXXXXXX
Date:
Subject: Related party transactions
Related party transactions
This report addresses the disclosure requirements of IAS 24 Related Party
Disclosures with regard to Engina. IAS 24 requires that all entities, listed or
otherwise, provide disclosure of such transactions as they may affect the
assessments made by users of an entitys operations, risks and opportunities.
It is understood that Engina is reluctant to disclose related party transactions
because they are believed to be both politically and culturally sensitive, however
the following advice must be followed in order to secure a listing/stock exchange
registration.
IAS 24: Scope and purpose
IAS 24 does not provide any exclusion from its scope, and so disclosure must be
made. Related party transactions are a normal feature of business, but an entitys
ability to succeed in business is often affected by the strength of its relationship
with other entities and individuals. The results of the entity may be affected if
these relationships were to be terminated. For example, the ability of an entity to
trade in a particular country may only be possible because of the presence of its
subsidiary in that local market. Similarly, prices and terms of trade may be
preferential because of the strength of the relationship. Therefore IAS 24 requires
knowledge of these transactions to be provided to the reader of the financial
statements.
The results of an entity may be affected even if the related party transactions do
not occur. A parent may cease trading with a business partner upon acquisition
of a subsidiary that can supply similar products.
As the property was sold at Rs. 100,000 less than this impaired value,
disclosure of this fact should be made, together with any other information
relevant to the reader, such as the reason for the sale in light of the
expected decline in prices in the future.
(c) Mr Satay
Mr Satay has investments in 100% of the equity of Car and 80% of the
equity of Wheel. In turn, Wheel owns 100% of Engina. Engina and Wheel
are related because of their parent-subsidiary relationship. In addition,
because all three entities are under the common control of Mr Satay, IAS
24 also considers Engina and Car to be related. Therefore, the transactions
between Engina and both Wheel and Car are related party transactions.
The transactions will need to be disclosed in the individual financial
statements of all three entities. In the group accounts, all intra-group
transactions are cancelled on consolidation, and so disclosure need not be
made at this level.
Further disclosure requirements of directors interests in the equity of
Engina may be necessary under local Companies Acts requirements and
Stock Exchange rules.
3.11 AZ
(a) (i) Usefulness of segmental data
Many entities carry out several classes of business and operate in a
number of countries across the world. Each of these businesses and
geographical segments carries with it different opportunities for
growth, different rates of profit and varying degrees of risk. Some
business segments may be strongly influenced by the health of the
economy whereas other segments may be unaffected by recession.
One country may be experiencing growth; another country may be
less stable because of political events. Awareness of these cultural
and environmental differences is important to investors in order to
allow them to fully understand the performance and position of the
entity over the past, its prospects for the future and the risks that it
faces.
IFRS 8 requires that segmental information should be provided to
enable investors to understand the impact that the different segments
of a business may have on the business as a whole. If the user of
financial statements is only provided with figures for the entity as a
whole, this might hide the risks and problems or profits and
(iii) SL should not recognise the contingent gain until it is realised. However, if
recovery of damages is probable and material to the financial statements,
SL should disclose the following facts in the financial statements:
(iv) SL should make a provision of the expected amount i.e. Rs. 1.2 million
(Rs. 1.0 million x 60% + Rs. 1.5 million x 40%) because
4.2 DUNCAN
Statement of changes in equity (extract) for the year ended December 31,
2016
Retained Retained
earnings earnings
2016 2015
Rs.000 Rs.000
Opening balance as reported 23,950 22,500
Change in accounting policy (W2) 450 400
Re-stated balance 24,400 22,900
Profit after tax for the period (W1) 4,442 3,250
Dividends paid (2,500) (1,750)
Closing balance 26,342 24,400
Workings
(1) Revised profit
2016 2015
Rs.000 Rs.000
Per question 4,712 3,200
Add back: Expenditure for the year 600 500
Minus: Depreciation (870) (450)
Revised profit 4,442 3,250
(2) Prior period adjustment
The prior period adjustment is the reinstatement of the Rs. 400,000 asset
on 1 January 2015 and the Rs. 450,000 asset at 1 January 2016. On 31
December 2016 the closing balance above of Rs. 26,342,000 can be
reconciled as the original Rs. 26,162,000 plus the reinstatement of the
remaining asset of Rs. 180,000.
W1: Profit for the year ended December 31, 2015 (as
Rs.in million
restated)
Profit as previously reported 21.00
Incorrect recording of depreciation (Rs. 25 million Rs. 10
million) 15.00
W2: Adjusted profit for year ended June 30, 2016 Rs.in million
Profit as per draft financial statements 15.00
Adjustment in Opening Inventory
FIFO 42.30
Weighted average (44.50)
(2.20)
Adjustment in Closing Inventory
FIFO (58.40)
Weighted average 54.40
(4.00)
Adjusted profit 8.80
Although the software is distinct from printing machine, but both are highly
dependable to each other and inter-related. In the context of this contract, these
are providing a combined output to PL. Therefore, software is not a separate
performance obligation.
The total transaction price as per the contract is Rs.9.2 million.
On the basis of available information the stand-alone prices of each item will be
estimated using the following approaches:
Plastic card printing machines and its software:
In the absence of observable stand-alone price, we may use adjusted market
assessment approach. The competitors machine is sold at Rs.750,000 which is
similar (not identical) to BLs machine. As per given information, we may use
customers rating for adjustment of competitors price that worked out as follows:
Rupees
Competitors price 750,000
Adjusted price of BL machine (7/9*750,000) 583,000
Total price (15*583,000) 8,745,000
Laminators:
There is neither observable stand-alone price nor any comparable competitors
product available in the market in which BL operates. In this case, we may use
expected cost plus a margin approach. The estimated stand-alone price is
worked out as follows:
Rupees
Expected cost to BL 200,000
Margin estimated (800,000 - 600,000)/600,000 = 33% 66,000
266,000
Total price (8*266,000) 2,128,000
Plastic cards:
Observable stand-alone price is available
Total price (100,000*12) 1,200,000
The contract of additional reservoir will be treated as separate contract and its
revenue will be recognized separate from original contract. The revenue from this
contract will be recognized over time, as construction of reservoir will be done on
the land of ACL and control of asset will be transferred progressively and will
create right of payment for WL.
At this stage the revenue from RO plant project will be recognized as follows:
Percentage of work completed
(4.2/12.0*100) 35%
Revenue to be recognized
(35%*20) Rs.7.0 million
Allocation of new contract price on the basis of cost plus margin approach
Total estimated cost of new modified contract (13.0+2.8) 15.8m
Less: Already incurred cost 11.7m
Cost to be incurred 4.1m
Allocation
RO plant project (1.3/4.1*5.1) 1.62m
Pumping and piping facility (2.8/4.1*5.1) 3.48m
5.5 ANABELLE
Included in statement of profit or loss
Rs.000
Revenue (860 + 619 + 387 + 120) (W3) 1,986
Costs (balancing figure) (1,732)
Profit (170 + 129 45) (W3) 254
Included in statement of financial position
Rs.000
Current assets
Due from customers on contracts (29 + 20) (W4) 49
Non-current liabilities
Due to customers on contracts (W4) 290
Workings
(1) Total profit expected on the contracts
Contract
A B C D
Rs.000 Rs.000 Rs.000 Rs.000
Contract price 1,850 750 960 800
Minus costs to date (1,490) (590) (405) (120)
Estimated future costs - (25) (600) (480)
Total expected profit/(foreseeable loss) 360 135 (45) 200
Profit:
Contract
A B C D
Rs.000 Rs.000 Rs.000 Rs.000
Cumulative to year end 360 129 (45) nil
(135 (W1) x 95.9% (W2)) (W1) (Take
whole of
loss)
Minus taken to statement of
profit or loss in previous years (190) - - -
This year (balancing figure) 170 129 (45) -
Rs. m
Revenue (W3) 70
Rs.m
Expected Profit 60
Note that rectification costs are not taken into account at this stage
because they are expensed in the period in which they are incurred
rather than spread across duration of the contract
(100180)
Work certified to 29 February 2016 = 200
90
220
Rs.m
Revenue 70
Loss (11)
Workings
(1) Percentage completion
2013 2014 2015 2016
Rs.000 Rs.000 Rs.000 Rs.000
Costs to date 2,750
2,750+3,000 5,750
5,750+4,200 9,950
9,950+1,150 11,100
Estimated future costs 7,750 7,750 1,550
Estimated total costs 10,500 13,500 11,500 11,100
Tutorial note:
If revenue is recognised on a cost based percentage of completion, the
costs recognised will normally be those incurred in the period.
The company recognised profit of Rs. 393 in 2013 but by the end of 2014 it
must recognise a loss of Rs. 1,500. Therefore, the total loss recognised in
2014 needs to be Rs. 1,893 in order to reach the overall loss of Rs. 1,500.
This is done by recognising an extra cost above and beyond what would
normally be recognised.
In year 3 the situation has changed. With hindsight the company
recognised too much expense previously. So instead of recognising the
costs incurred in the period it recognises that amount less the extra cost
previously recognised.
(4) Disclosure workings
2013 2014 2015 2016
Contract costs incurred 2,750 5,750 9,950 11,100
Profits /losses 393 (1500) 433 1,400
3,143 4,250 10,383 12,500
Billings (3,000) (5,000) (11,000) (12,500)
LIABILITIES
Due to customers 21.76
Working Schedule
I II III IV V VI Total
Rupees in million
Contract price 300 375 280 400 270 1,200 2,825.00
Incentive
payments - - - 40 - - 40.00
Total
contract
price (A) 300 375 280 440 270 1,200 2,865.00
Contract cost
incurred to
date (B) 248 68 186 246 185 1,175 2,108.00
Estimated
further costs 67 221 - 164 15 - 467.00
Total
estimated
costs to
complete (C) 315 289 186 410 200 1,175 2,575.00
Completion %
B/C x 100 (D) 78.73% 23.53% 100% 60% 92.50% 100%
Revenue to
be recognized
AxD (E) 236.19 88.24 280.00 264.00 249.75 1,200 2,318.18
Expected
losses from
contracts (A-C) (15.00) - - - - - (15.00)
Amount
recoverable
from customer (E) *233.00 88.24 280.00 264.00 249.75 1,200
Progress
billings 200.00 110.00 280.00 235.00 205.00 1,200
Due from
customers 33.00 - - 29.00 44.75 - 106.75
Due to
customers - (21.76) - - - (21.76)
* Cost to be recognized expected losses = 248 15 = 233
Adjustment
XYZ Ltd. Original Modified
Required
Contract value 25,000,000 30,000,000 -
Costs incurred to date 9,000,000 9,000,000 -
Total expected cost 20,000,000 24,500,000 -
% Estimate completed 45% 37% -
Gross Margin % 20% 18% -
Revenue recognized 11,250,000 11,020,408 (229,592)
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 account 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}.
5.11 DX LTD
The legal fees and commission will be considered an incremental cost of
obtaining a contract because these costs were only incurred as a result of
obtaining the contract. The company expects to recover these costs through the
future advertising revenue that will be earned under the contract. Had the
contract not been obtained, these costs would not have been incurred. If the legal
fees had been incurred prior to obtaining the contract, they would not be
capitalized.
The meals and entertainment costs are not eligible to be capitalized because
they would have been incurred regardless of whether the contract had been
obtained.
The costs related to the Directors time and the costs associated with hiring
actors are direct labour costs associated with providing the advertising services
and are considered to be costs directly related to the contract and are not
covered by any other standard. These costs also meet the required criteria for
capitalization, because they:
5.12 PL LTD
Initially, PL Ltd will record a contract liability for the Rs.100 gift card. The entity
will also have to account for the 20% breakage. However, since this amount
cannot be recognized upfront, it will initially remain as part of the Rs.100 liability.
As the customer exercises its rights by redeeming the card, a proportionate
amount of breakage can be recognized. In year one, the customer makes one
purchase of Rs.50 using the gift card. Therefore, when this purchase is made,
rather than recognizing Rs.50 of revenue, Rs.62.50 of revenue will be recognized
to incorporate expected breakage (i.e., Rs.50 *(100/80)).
5.13 FX LTD
There are two warranties in this contract:
1. assurance-type warranty for first year after purchase
2. service-type warranty for two years after expiry of the initial standard
warranty.
Given that the customer has the option of purchasing the additional warranty
separately, this is a service-type warranty and is accounted for as a separate
performance obligation. Deferred revenue of Rs.200,000 is recognized (as
opposed to revenue being recorded) until the performance obligation is satisfied.
The assurance-type warranty is accounted for in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
6.1 FAM
Accounting policies
(a) Property, plant and equipment is stated at historical cost less depreciation,
or at valuation.
(b) Depreciation is provided on all assets, except land, and is calculated to
write down the cost or valuation over the estimated useful life of the asset.
The principal rates are as follows.
Buildings 2% pa straight line
Plant and machinery 20% pa straight line
Fixtures and fittings 25% pa reducing balance
movements
Fixtures, fittings,
in the course of
Payments on
construction
machinery
Plant and
Total
Cost/valuation Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Cost at 1 January 900 1,613 390 91 2,994
2016
Revaluation 600 600
adjustment
Additions 154 40 73 (W1) 267
Reclassifications 100 (100)
Disposals (277) (41) (318)
As at 31 December
2016 1,600 1,490 389 64 3,543
Depreciation
At 1 January 2016 80 458 140 678
Revaluation (80) (80)
adjustment
Provisions for year 17 298 70 385
(W2)
Disposals (195) (31) (226)
At 31 December 2016 17 561 179 757
Written down value 1,583 929 210 64 2,786
Land and buildings have been revalued during the year by Messrs Jackson
& Co on the basis of an existing use value on the open market.
Rs.000
600
(2) Depreciation on buildings 40 + (100 u 2%) 17
2% straight line depreciation is equivalent to a 50 year life.
The buildings are ten years old at valuation and therefore
have 40 years remaining.
Depreciation on plant (1,613 + 154 277) u 20% 298
Depreciation on fixtures (390 + 40 41 140 + 31) u 25% 70
Assets
Office
under
Total
n
Cost or valuation Rs Rs Rs Rs Rs
At 1 January
2016 1,500,000 1,276,500 356,400 - 3,132,900
Additions 135,000 36,500 29,200 200,700
Classified as held
for sale (50,000) (50,000)
constructio
equipment
machinery
Plant and
Land and
buildings
Assets
Office
under
Total
n
Disposals (104,000) (104,000)
At 31 December
2016 1,500,000 1,257,500 392,900 29,200 3,179,600
Depreciation
At 1 January
2016 315,000 879,300 210,400 1,404,700
Held for sale
(W3) (40,500) (40,500)
Disposals (W4) (65,000) (65,000)
Impairment
losses (W1 and
W3) 101,875 9,250 111,125
Charge for year
(W2) 13,175 320,917 74,930 409,022
At 31 December
2016 430,050 1,103,967 285,330 1,819,347
Carrying amount
At 31 December
2016 1,069,950 153,533 107,570 29,200 1,360,253
At 1 January
2016 1,185,000 397,200 146,000 1,728,200
Workings
(W1) Impaired workshop
Rs.
Valuation on 31 December 2013 210,000
Depreciation to 31 December 2015 (210,000 48 u 2) (8,750)
Depreciation to 31 December 2016 (210,000 48) (4,375)
Carrying amount at 31 December 2016 196,875
Recoverable amount (100,000 5,000) (95,000)
Impairment 101,875
(W2) Depreciation charges for year
Land and buildings
Rs.
Impaired workshop (W1) 4,375
Other ((1,500,000 850,000 210,000 (W1)) 50) 8,800
13,175
W1
Rate Borrowing
Outstanding Outstanding
of cost to be
amount Months outstanding month up to
interes capitalised
completion
Rs. t Rs.
Specific loan
Utilised till first
repayment 25,000,000 1-Sep-15 31-Jan-16 5 12% 1,250,000
Utilised after
the first
repayment 20,000,000 1-Feb-16 31-May-16 4 12% 800,000
2,050,000
General
Borrowings (W4)
Utilised after
specific loan
exhausted on
nd
2 payment to
contractor 12.08
(W3) 8,125,000 1-Dec-15 31-May-16 6 % 490,750
Principal
payment of 12.08
specific loan* 5,000,000 1-Feb-16 31-May-16 4 % 201,333
rd
3 payment to 12.08
contractor 12,000,000 1-Feb-16 31-May-16 4 % 483,200
rd
4 payment to 1-Jun-16 12.08
contractor 9,000,000 31-May-16 0 % -
1,175,283
*Note: Para 10 of IAS 23 says that the borrowing costs that should be capitalised
are those which "would have been avoided" if the expenditure had not been
made. The repayment of the loan on the specific borrowing has been made out
of general borrowing. In effect, another specific amount of Rs. 5,000,000 has
been borrowed to fund the project out of general borrowing. This is somewhat
confusing but, in substance borrowing of Rs. 5,000,000 was repaid and replaced
by a specific loan of Rs. 5,000,000 at 12.08%.
25,000,000
Weighted average
amount of loan Interest Rs.
Rs.
From Bank A 25,000,000 Rs. 25,000,000 13% 9/12 = 2,437,500
From Bank B 20,000,000 3,000,000
45,000,000 5,437,500
01-07-15 Advanced
payment 10,000 10,000 10,000 12.00 1,500
15-10-15 1st
progress
bill 30,000 25,500 15,000 10,500 8.50 1,116
15-01-16 2nd
progress
bill 20,000 17,000 17,000 - - -
15-04-16 3rd
progress
bill 10,000 8,500 7,500 1,000 2.50 31
31-05-16 Loan
interest 1,625 1,625 1.00 20
31-05-16 Loan
instalment 5,000 5,000 1.00 63
15,000 *24,500 28,125 2,730
Notes to the financial statements for the year ended 30 June Year 2
(extracts)
Property, plant and equipment Rs.
Cost (350,000 100,000) 250,000
Accumulated depreciation ((250,000 50,000) 5 u 8/12) (26,667)
Carrying amount 223,333
Included in statement of profit or loss for the year ended 30 June Year 2
Rs.
Depreciation charge 26,667
Training costs (70,000 40,000) 30,000
Option 2 Show grants separately from related expenditure
Statement of financial position as at 30 June Year 2 (extracts)
Rs.
Non-current assets
Property, plant and equipment 310,000
Current liabilities
Other current liabilities 186,667
Notes to the financial statements for the year ended 30 June Year 2
(extracts)
Rs.
Property, plant and equipment
Cost 350,000
Accumulated depreciation ((350,000 50,000) 5 u 8/12) (40,000)
Carrying amount 310,000
Other current liabilities
Deferred income relating to government grants 86,667
(100,000 - (100,000 5 u 8/12))
Government grant repayable 100,000
186,667
Included in statement of profit or loss for the year ended 30 June Year 2
Rs.
Depreciation charge 40,000
Training costs 70,000
Government grant received (40,000)
Release of deferred government grant (13,333)
Tutorial note
The Rs. 100,000 grant in (3) has conditions attached to it. In such a situation, IAS
20 states that grants should not be recognised until there is reasonable
assurance that the entity will comply with any conditions attaching to the grant.
Since Katie is struggling to recruit, and there is only one month left for
recruitment to meet these conditions, then it does not seem that there is
reasonable assurance. Hence the grant should not be recognised as such, but
should be held in current liabilities, pending repayment.
7.6 VICTORIA
(a) Treatment in the financial statements for the year ended 31 December Year
8 (IAS16)
Property 1
This is used by Victoria as its head office and therefore cannot be treated
as an investment property. It will be stated at cost minus accumulated
depreciation in the statement of financial position. The depreciation for the
year will be charged in the statement of profit or loss.
Property 2
This is held for its investment potential and should be treated as an
investment property. It will be carried at fair value, Victorias policy of choice
for investment properties. It will be revalued to fair value at each year end
and any resultant gain or loss taken to the statement of profit or loss (Rs.
400,000 gain in Year 8).
Property 3
This is held for its investment potential and should be treated as an
investment property. However, since its fair value cannot be arrived at
reliably it will be held at cost minus accumulated depreciation in the
Workings
(1) Depreciation on Property 1
Rs.
Brought forward (500,000 40 u 7) 87,500
Year 8 (500,000 40) 12,500
(2) Depreciation on Property 3
Rs.
Brought forward (2,000,000 50 u 5.5) 220,000
Year 8 (2,000,000 50) 40,000
8.1 BROOKLYN
1 Development expenditure
IAS 38 on intangibles requires that research and development be
considered separately:
research which must be expensed as incurred
development which must be capitalised where certain criteria are
met.
It must first be clarified how much of the Rs. 3 million incurred to date (10
months at Rs. 300,000) is simply research and how much is development.
The development element will only be capitalised where the IAS 38 criteria
are met. The criteria are listed below together with the extent to which they
appear to be met.
The project must be believed to be technically feasible. This appears
to be so as the feasibility has been acknowledged.
There must be an intention to complete and use/sell the intangible.
Completion is scheduled for June 2017
The entity must be able to use or sell the intangible. Interest has been
expressed in purchasing the knowhow on completion
It must be considered that the asset will generate probable future
benefits. Confirmation is required from Brooklyn as to the extent of
interest shown by the pharmaceutical companies and whether this is
of a sufficient level to generate orders and to cover the deferred
costs.
Availability of adequate financial and technical resources must exist
to complete the project. The financial position of Brooklyn must be
investigated. A grant is being obtained to fund further work and the
terms of the grant, together with any conditions, must be discussed
further.
Able to identify and measure the expenditure incurred. A separate
nominal ledger account has been set up to track the expenditure.
If all of the above criteria are met, then the development element of the Rs.
3m incurred to date must be capitalised as an intangible asset.
Amortisation will not begin until commercial production commences.
2 Provision
Although the claim was made after the reporting period, IAS 10 considers
this to be an adjusting event after the reporting period. The employment of
the individual dates back to 20X2 and so the lawsuit constitutes a current
obligation for the payment of damages as a result of this past event (the
employment).
The amount and the timing are not precisely known but the likelihood of
payment of damages by Brooklyn is probable and so a provision should be
made for the estimated amount of the liability, as advised by the lawyer.
Disclosure, rather than provision, would only be appropriate if the expected
settlement was possible or remote, and the lawyers view is that a payment
is more likely than not.
9.1 CHARLOTTE
Effect on Year 7 profit or loss
Rs.
Impairment loss
Machine 1 (W1) 122,300
Machine 2 (W2) 41,000
163,300
Depreciation charge
Machine 1: (100,000 5) 20,000
Gain on disposal
Machine 2: (W2) 10,000
Machine 3: (210,000 - 195,000 (W2)) 245,000
255,000
Workings
(1) Machine 1
Rs.
Cost on 1 January Year 1 420,000
Depreciation to 1 January Year 6
5 years u ((420,000 50,000)/10 years)) (185,000)
Carrying amount on 1 January Year 6 235,000
Revalued to: 275,000
Revaluation gain before tax 40,000
In the year to 31 December Year 6 (on 1 January), the asset is revalued
upwards by Rs. 40,000. Of this, Rs. 28,000 is taken to the revaluation
reserve and Rs. 12,000 (Rs. 40,000 u 30%) to deferred tax as a liability.
Dr (Rs.) Cr (Rs.)
Property, plant and equipment 145,000
Accumulated depreciation 185,000
Net effect on non-current assets 40,000
Revaluation surplus 28,000
Deferred tax liability 12,000
The total useful life of the asset was assessed as 15 years on 1 January
Year 6. The asset has already been owned for 5 years and depreciation in
year 6 is based on the remaining useful life of 10 years.
The company must also recognise incremental depreciation in accordance
with section 235 of the Companies Ordinance 1984. An amount equal to
the incremental depreciation net of deferred taxation must be transferred to
retained earnings through the statement of changes in equity.
Dr (Rs.) Cr (Rs.)
Depreciation charge for the year
(275,000/10 years) 27,500
Accumulated depreciation 27,500
Revaluation surplus
(Rs. 28,000/10 years) 2,800
Retained earnings 2,800
Impairment loss:
Rs.
Carrying amount on 1 January Year 6 275,000
Depreciation to 1 January Year 7 (275,000 (15 5)) (27,500)
Carrying amount at 1 January Year 7 247,500
Recoverable amount (100,000)
Impairment loss 147,500
On 31 March Year 7 the machine is sold for Rs. 210,000 giving a gain on
sale as follows:
Rs.
Proceeds 210,000
Selling costs (assumed to be as forecast) (5,000)
205,000
Carrying amount (195,000)
10,000
(3) Machine 3
Rs.
1 January Year 1 Cost 600,000
Depreciation to 1 January Year 2 (30,000)
Carrying amount on 1 January Year 2 570,000
Revalued to 800,000
Taken to revaluation reserve/deferred tax 230,000
The revaluation would have been accounted for as follows at 1 January
Year 2
Dr (Rs.) Cr (Rs.)
Property, plant and equipment 200,000
Accumulated depreciation 30,000
Net effect on non-current assets 230,000
Revaluation surplus 161,000
Deferred tax liability 69,000
Depreciation and incremental depreciation would have been recognised in
Year 2 to Year 6 inclusive as follows:
Dr (Rs.) Cr (Rs.)
Depreciation charge for the year
(800,000/8 years) 100,000
Accumulated depreciation 100,000
Revaluation surplus
(Rs. 161,000/8 years) 20,125
Retained earnings 20,125
This would result in balances for machine 3 and the revaluation surplus in
respect of machine 3 as follows:
Revaluation
Machine 3 surplus
Rs. Rs.
Carrying amount on1 January Year 2 800,000 230,000
Depreciation (5 years) (500,000)
Incremental depreciation (5 years) (100,625)
Balance at 1 January Year 7 300,000 129,375
There are a number of issues relating to the carrying amount of the assets
of Sparkle Limited that have to be considered. It appears the value of the
brand is based on the original purchase of the Sparkle Spring brand. The
company no longer uses this brand name; it has been renamed Refresh.
Thus it would appear the purchased brand of Sparkle Spring is now
worthless. Sparkle Limited cannot transfer the value of the old brand to the
new brand, because this would be the recognition of an internally
developed intangible asset and the brand of Refresh does not appear to
meet the recognition criteria in IAS 38. Thus prior to the allocation of the
impairment loss the value of the brand should be written off as it no longer
exists.
The inventories are valued at cost and contain Rs. 2 million worth of old
bottled water (Sparkle Spring) that can be sold, but will have to be
relabelled at a cost of Rs. 250,000. However, as the expected selling price
of these bottles will be Rs. 3 million (Rs. 2 million u 150%), their net
realisable value is Rs. 2,750,000. Thus it is correct to carry them at cost i.e.
they are not impaired. The future expenditure on the plant is a matter for
the following years financial statements.
Applying this, the revised carrying amount of the net assets of Sparkle
Limiteds cash-generating unit (CGU) would be Rs. 25 million (Rs. 32
million Rs. 7 million re the brand). The CGU has a recoverable amount of
Rs. 20 million, thus there is an impairment loss of Rs. 5 million. This would
be applied first to goodwill (of which there is none) then to the remaining
assets pro rata. However under IAS2 the inventories should not be reduced
as their net realisable value is in excess of their cost. This would give
revised carrying amounts at 30 September 2016 of:
Rs.000
Brand nil
Land containing spa: 12,000 [(12,000/20,000) u 5,000] 9,000
Purifying and bottling plant:
8,000 [(8,000/20,000) u 5,000] 6,000
Inventories 5,000
20,000
9.4 IMPS
(a) Impairment loss
Rs. m
Carrying value 500
Recoverable amount (385)
Impairment loss 115
Recoverable amount is value in use (Working 1) as this is higher than the
fair value less costs of disposal (Working 2).
Workings
(1) Value in use:
Forecast cash flows discounted at 12%:
Rs. m
Year 1 (185 0.893) 165.2
Year 2 (160 0.797) 127.5
Year 3 (130 0.712) 92.6
Total 385.3
(2) The fair value less costs of disposal:
Rs. m
Goodwill 0
Freehold 270
Freehold land and buildings 50
320
10.1 SAUL
Statement of profit or loss for the year ended 31 December Year 1
Rs.000
Continuing operations
Revenue 3,315
Cost of sales (2,125)
Gross profit 1,190
Distribution costs (255)
Administrative expenses (680)
Profit before tax 255
Income tax expense (90)
Profit for the period from continuing operations 165
Discontinued operations
Loss for the period from discontinued operations (W) (15)
Profit for the period 150
Statement of financial position as at 31 December Year 1
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment (1,900 510) 1,390
Intangible assets 40
1,430
Current assets
Inventories 350
Trade and other receivables 190
Cash 90
630
2,060
Non-current assets classified as held for sale 450
Total assets 2,510
Equity and liabilities
Equity
Share capital 600
Retained earnings (1,700 60) 1,640
2,240
Current liabilities
Trade and other payables (195 10) 185
Current tax payable 75
Liabilities classified as held for sale 10
270
Total equity and liabilities 2,510
Tutorial note
Division A is classified as discontinued in Year 1 because, although it has not
been sold during the period it meets the IFRS 5 criteria for classification as held
for sale.
Working: Discontinued operation
Continuing Discontinued
operations operations Total
Rs.000 Rs.000 Rs.000
Revenue 3,315 585 3,900
Cost of sales (2,125) (375) (2,500)
Gross profit 1,190 210 1,400
Distribution costs (255) (45) (300)
Administrative expenses (680) (120) (800)
Impairment loss (510 450) - (60) (60)
Profit before tax 255 (15) 240
Income tax expense (90) - (90)
Profit/(loss) for the period 165 (15) 150
10.3 PRIMA
Holiday villas
IAS 16 allows property, plant and equipment to be re-valued or left at historical
cost. Revaluation should be based on the fair value (the open market value in an
arms length transaction). Revaluation is not required every year, but must be
conducted when it is believed that the fair value differs materially from the
carrying value.
The method of accounting for the villa that is to be sold is covered by IFRS 5
which requires that where, at the end of a reporting period, an asset is held for
sale it should be reclassified, re-measured and no longer depreciated. An asset
is only classified as held for sale where the following conditions are all met:
The asset is available for sale in its present condition.
The sale is believed to be highly probable:
Appropriate level of management is committed to the sale;
x There is an active programme underway to find a buyer;
x The asset is marketed at a realistic price.
x Completion of sale expected within 12 months of classification.
From the limited information provided it appears that these conditions have been
met and therefore, under the rules of IFRS 5, the villa should be re-measured to
the lower of its carrying value and its fair value minus costs to sell.
Therefore, the villas should be valued at 31 December Year 4 as follows:
Fair Carrying
value value
Rs. Rs.
All villas 25.00 20.00
Property held for sale (1.00) (1.25)
Properties to be retained 24.00 18.75
The villas to be retained should be re-valued to Rs. 24m, resulting in an increase
in the revaluation reserve of Rs. 5.25m (24-18.75).
The villa to be sold should be written down from its carrying value to its fair value
minus costs to sell of Rs.0.95m (Rs. 1m 50,000). This impairment of Rs.
300,000 (1.25m 0.95m) will be charged against the revaluation reserve for this
asset. If there is insufficient revaluation reserve, then the write down must be
charged to profit or loss.
The villa held for sale must be re-classified from Non-current assets to Current
assets as a separate line item.
Depreciation should not be charged when an asset has been classified as held
for sale. However, the other villas should be depreciated. IAS 16 states that
expenditure on repairs and maintenance does not remove the need to depreciate
an asset. The villas have a finite useful life and therefore must be depreciated. If
the residual value of these assets is greater than the carrying value then the
depreciation charge will be zero. It is not acceptable therefore to have a policy of
non-depreciation on such assets, and a prior year adjustment should be made to
correct the error if the error is material.
Head office
The head office should be recorded under property, plant and equipment at cost.
IAS 23 (revised 2009) requires that borrowing costs should be capitalised as part
of the cost of an asset if they are directly attributable to the acquisition,
construction or production of a qualifying asset. A qualifying asset is an asset
that necessarily takes a long period of time to get ready for its intended use or
sale.
In this situation the company is therefore required to capitalise the borrowing
costs as part of the asset cost. Capitalisation must cease when the asset is
substantially complete. Construction finished on 31 May Year 4 and, although
minor modifications continued for a further three months, the standard states that
minor modifications indicate that the asset is substantially complete.
Cost at 30 June Year 4: Rs.000 Rs.000
Land 1,000
Building: Construction cost 8,000
Interest 9% 5million (20/12) years
(1 October Year 2 to 1 June Year 4) 750
8,750
Total 9,750
Prima is to receive a government grant. IAS 20 requires that the grant be
recognised when there is reasonable assurance that the entity will meet any
conditions and receive the grant. As the grant has not been received, a
receivable will be recorded under current assets. The credit can be treated in one
of two ways:
Option 1: Record as deferred income and release to profit or loss over the useful
life of the asset
Option 2: Deduct the grant from the carrying amount of the asset.
If the second option is taken, the asset will be carried at Rs. 8.25m rather than at
Rs. 9.75m. The effect on profit or loss will be the same in both cases.
Land should not normally be depreciated, because land has an indefinite useful
life in most situations. However, as buildings have a limited useful life, a residual
value must be allocated to the building and the depreciable amount must then be
written off over the 50 year useful life. Depreciation will be charged in Year 4 for
the four months from 1 September to 31 December.
The estimates of residual value and useful life must be revised each year and the
depreciation amended prospectively.
Yachts
It is important to note that the yachts are held for rental purposes, so they are
non-current assets, not inventory.
The yachts cost Rs. 20m to build, but the recoverable amount on completion
(higher of value in use and net selling price) is only Rs. 18m, and so the assets
must be initially recognised at their recoverable amount. The impairment write
down of Rs. 2m will be charged to profit or loss in Year 4 in accordance with IAS
36.
11.1 X LTD
(b)
A B C D E
Period Opening Fin. Charge Rentals Closing
Balance at 15% of B Balance
(B (D - C)
Rs.000 Rs.000 Rs.000 Rs.000
2016 11,420 1,713 4,000 9,133
2017 9,133 1,370 4,000 6,503
2018 6,503 975 4,000 3,478
2019 3,478 522 4,000
4,580 16,000
(c)
Statement of Financial Position (Extract) as at 31 December 2016
Rs.000
Non-Current assets
(Rs. 11,420,000 Rs. 2,855,00) 8,565
Non-Current Liabilities
(Obligation under finance lease) 6,503
Current Liabilities
Obligation under finance lease
(Rs. 9,133,000 Rs. 6,503,000) 2,630
Dr Cr
Rs. Rs.
2018
Dec. 31 Fine Rentals Limited 714,506
lease interest 85,494
Bank 800,000
Apportionment of annual
installment for the year between
Principal repayment and interest
11.3 MIRACLETEXTILELIMITED
Miracle Textile Limited
Statement of financial position (extracts) a at 30 June 2016
Note 2016 2015
ASSETS Rs. Rs.
Non-current assets
Property, plant and equipment 4 16,000,000 18,000,000
LIABILITIES
Non-current liabilities
Obligation under lease 9 6,505,219 10,633,074
Current liabilities
Current portion of obligation 9 4,127,856 3,566,925
9.1 The Company has entered into a 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
an amount of Rs. 2 million at the end of the lease term. The lease rentals are
payable in annual instalments ending in June 2016. There are no financial
restrictions in the lease agreement.
W1: Lease Schedule
Payment Opening Principal Interest @ Closing
Instalment
date principal repayment 15.725879% principal
01-Jul-14 20,000,000 5,800,000 5,800,000 - 14,200,000
01-Jul-15 14,200,000 5,800,000 3,566,925 2,233,075 10,633,075
01-Jul-16 10,633,075 5,800,000 4,127,856 1,672,144 6,505,219
01-Jul-17 6,505,219 5,800,000 4,776,997 1,023,003 1,728,222
30-Jun-18 1,728,222 2,000,000 1,728,222 271,778 -
20,000,000 5,200,000
Statement of cash flows for the year ended 31 March 2016 (extracts)
Cash flows from financing activities
Payment of lease liabilities (78,250)
Notes to the financial statements (extracts)
(1) Analysis of lease liabilities
Gross basis
Rs.
lease liabilities include the following:
Gross payments due within
One year 78,250
Two to five years (2 78,250) 156,500
234,750
Less: Finance charges allocated to future periods
((78,250 4) 272,850 19,460) (20,690)
214,060
11.5 SHOAIBLEASINGLIMITED
(a) Entries in the books of Lessor
Current Assets
Current portion of net Investment in leases 663,360
10 Net investment in leases
11.6 FLOW
Sale and operating leaseback
The nature of the leaseback arrangement affects the treatment of the sale
proceeds. As the arrangement is an operating leaseback, it means that Flow
permanently transfers the risks and rewards in the asset when it makes the sale.
Therefore, on the sale, Flow will de-recognise the asset and the leaseback
payments will be charged as rentals to profit or loss.
If the sale is made at fair value, then the profit on disposal is recognised in profit
or loss immediately. However, the transaction here is significantly above fair
value resulting in an abnormally high profit which is then compensated by higher
operating leaseback rentals. In this situation, IAS 17 requires the excess of
proceeds over fair value (the abnormal profit) to be deferred and amortised over
the period during which the asset is expected to be used. This will serve to offset
and normalise the high future rental charges.
On this basis, the accounting treatment becomes:
Dr Cr
Rs. Rs.
Sale of property
Cash 850,000
Non-current assets 440,000
Profit or loss 110,000
normal profit (550,000 440,000)
Deferred income (liability)
abnormal profit (850,000 550,000) 300,000
Payment of rental
Cash 100,000
Profit or loss rental 100,000
Profit or loss amortised deferred income
(300,000/10 years) 30,000
Deferred income 30,000
11.8 LODHITEXTILEMILLSLIMITED
Particulars Debit Credit
Generator A
(i) Cash / Bank 6,000,000
Accumulated depreciation Generator 2,500,000
Loss on sale/ Impairment loss (this should be
deferred as well just like income) *1,500,000
Property, plant and equipment - Generator 10,000,000
*(This amount comprises of impairment loss
amounted to Rs. 1 million and loss on disposal
amounted to Rs.0.5 million.)
(ii) Assets subject to lease - Generator 6,000,000
Liabilities against assets subject to lease 6,000,000
Generator B
(i) Cash / Bank 6,000,000
Accumulated depreciation Generator 6,000,000
Property, plant and equipment - Generator 12,000,000
(ii) Assets subject to lease - Generator 6,000,000
Liabilities against assets subject to finance
lease 6,000,000
(iii) Impairment loss 1,000,000
Accumulated impairment (ASFL)
Generator 1,000,000
Generator C
(i) Cash / Bank 8,000,000
Accumulated depreciation Generator 3,000,000
Property, plant and equipment - Generator 10,000,000
Deferred income OR Surplus on
revaluation of fixed assets 1,000,000
(ii) Assets subject to lease - Generator 8,000,000
Liabilities against assets subject to finance
lease 8,000,000
Rs. in
'000
30,429
PV of
Future
lease lease
finance
payments liability
cost
2016
Rs. in '000
The lease payments have been discounted at interest rate of 12.506% per
annum to arrive at the present value.
Later than
Not later
one year and
than Total
not later than
one year
five years
Rs. in '000
For the construction machinery the company has entered into an operating
lease agreement on July 1, 2016 for 3 years at a half yearly rent of Rs. 5
million, payable in advance with 5% annual increase.
12.1 ROWSLEY
Introduction
All four scenarios relate to the rules of IAS 37 Provisions, contingent liabilities
and contingent assets. In each scenario, the key issue is whether or not a
provision should be recognised.
Under IAS 37, a provision should only be recognised when three conditions are
met:
there is a present obligation as a result of a past event; and
it is probable that a transfer of economic benefits will be required to settle
the obligation; and
a reliable estimate can be made of the amount of the obligation.
Factory closure
As the factory closure changes the way in which the business is conducted (it
involves the relocation of business activities from one part of the country to
another) it appears to fall within the IAS 37 definition of a restructuring.
The key issue here is whether the group has an obligation at the end of the
reporting period to incur expenditure in connection with the restructuring. There is
clearly no legal obligation, but there may be a constructive obligation. IAS 37
states that a constructive obligation only exists if the group has created valid
expectations in other parties such as employees, customers and suppliers that
the restructuring will actually be carried out. As the group is still in the process of
drawing up a formal plan for the restructuring and no announcements have been
made to any of the parties affected, there cannot be an obligation to restructure.
A board decision alone is not sufficient. Therefore no provision should be made.
If the group starts to implement the restructuring or makes announcements to
those affected after the end of the reporting period but before the accounts are
approved by the directors it may be necessary to disclose the details in the
financial statements as a non-adjusting post event after the reporting period in
accordance with IAS 10. This will be the case if the restructuring is of such
importance that non-disclosure would affect the ability of the users of the financial
statements to reach a proper understanding of the groups financial position.
Operating lease
The lease contract appears to be an onerous contract as defined by IAS 37 as
the unavoidable costs of meeting the obligations under it exceed the economic
benefits expected to be received from it.
Because the enterprise has signed the lease contract there is a clear legal
obligation and the enterprise will have to transfer economic benefits (pay the
lease rentals) in settlement. Therefore, the group should recognise a provision for
the net present value of the remaining lease payments.
In principle, a corresponding asset may be recognised in relation to the future
rentals expected to be received, if these receipts are virtually certain. The current
arrangement with the charity generates only nominal rental income and so the
asset is unlikely to be material enough to warrant recognition. The chances of
renting the premises at a commercial rent are less than 50% and so no further
potential rent receivable may be taken into account as the outcome is not virtually
certain and so recognition would not be prudent.
The financial statements should disclose the carrying amount of the onerous
lease provision at the end of the reporting period, a description of the nature of
the obligation and the expected timing of the lease payments. Disclosure should
also be made of the contingent assets where the amount of any expected rentals
receivable from sub-letting are material and the likelihood is believed probable.
Legal proceedings
It is unlikely that the group has a present obligation to compensate the customer;
therefore no provision should be recognised. However, there is a contingent
liability. Unless the possibility of a transfer of economic benefits is remote, the
financial statements should disclose a brief description of the nature of the
contingent liability, an estimate of its financial effect and an indication of the
uncertainties relating to the amount or timing of any outflow.
Environmental damage
It is clear that there is no legal obligation to rectify the damage. However, through
its published policies, the group has created expectations on the part of those
affected that it will take action to do so. There is, therefore, a constructive
obligation to rectify the damage and a transfer of economic benefits is probable.
The group must recognise a provision for the best estimate of the cost. As the
most likely outcome is that more than one attempt at re-planting will be needed,
the full amount of Rs. 30 million should be provided. The expenditure will take
place sometime in the future, and so the provision should be discounted at a pre-
tax rate that reflects current market assessments of the time value of money and
the risks specific to the liability.
The financial statements should disclose the carrying amount at the end of the
reporting period, a description of the nature of the obligation and the expected
timing of the expenditure. The financial statements should also give an indication
of the uncertainties about the amount and timing of the expenditure.
Rs. in
million
Decommissioning liability on June 30, 2016 (1,021 /
(1+0.06)19) 337
Working 1 FV of assets PV of
liabilities
Rs.000 Rs.000
Opening balance 2,200 2,400
Service cost 500
Interest cost (8% x Rs. 2,400,000) 192
Expected return (8% x Rs. 2,200,000) 176
Contributions paid in 300
Paid to retired members (450) (450)
2,226 2,642
Actuarial gain on plan assets 74
Actuarial loss on plan liabilities 58
Closing balance 2,300 2,700
(ii) Journal
Dr Cr
P&L
Interest cost 10
Current service cost 100
110
OCI 130
Cash 140
Defined benefit net liability 100
Workings
Company
Pension fund position
Statement
of financial
Liabilities Assets position
Rs. Rs. Rs.
Opening balance 1 January Year 4 (1,200) 1,000 (200)
Interest cost (5%) (60) 50 (10)
Current service cost (100) (100)
Contributions to the pension fund 140 140
Benefits paid out 95 (95)
Amounts recorded by company (1,265) 1,095 (170)
Actuarial difference (balance) (135) 5 (130)
Closing balance 31 Dec Year 4 (1,400) 1,100 (300)
A defined benefit plan is any plan other than a defined contribution plan. It
is the residual category. An employers obligation under a defined benefit
plan is to provide the agreed amount of benefits to current and former
employees. The differentiating factor between defined benefit and defined
contribution schemes is in determining where the risks lie. If an employer
cannot demonstrate that all actuarial and investment risk has been shifted
to another party and that its obligations are limited to contributions made
during the period, then the plan is a defined benefit plan. Any benefit
formula that is not solely based on the amount of contributions, or that
includes a guarantee from the entity or a specified return, means that
elements of risk remain with the employer and must be accounted for as a
defined benefit plan.
For defined contribution plans, the cost recognised in the period is the
contribution payable in exchange for service rendered by employees during
the period. Accounting for a defined contribution plan is straightforward
because the employers obligation for each period is determined by the
amount to be contributed for that period. Often, contributions are a
percentage of employee salary in the period as its base. No actuarial
assumptions are required to measure the obligation or the expense.
The employer should account for the contribution payable at the end of
each period based on employee services rendered during that period,
reduced by any payments made during the period. If the employer has
made payments in excess of those required, the excess is a prepaid
expense to the extent that the excess will lead to a reduction in future
contributions or a cash refund.
For defined benefit plans, the amount recognised in the statement of
financial position is the present value of the defined benefit obligation (that
is, the present value of expected future payments required to settle the
obligation resulting from employee service in the current and prior periods),
as reduced by the fair value of plan assets at the reporting date. If the
balance is an asset, the amount recognised may be limited under IAS 19
Pension Plan 1 is a defined benefit plan as the employer has the
investment risk as the company is guaranteeing a pension based on the
service lives of the employees in the scheme. The employers liability is not
limited to the amount of the contributions. There is a risk that if the
investment returns fall short the employer will have to make good the
shortfall in the scheme. Pension Plan 2 is a defined contribution scheme
because the employers liability is limited to the contributions paid.
(b) Accounting for the two plans
Pension Plan 1
The accounting for the defined benefit plan results in a liability of Rs. 20.5
million as at 31 October 2016, an expense in the statement of profit or loss
of Rs. 20.5 million and a charge in other comprehensive income of Rs. 1.5
million for the year (see Appendix 1).
Pension Plan 2
The company does not recognise any assets or liabilities for the defined
contribution scheme but charges the contributions payable for the period
(Rs. 10 million) to operating profit. The contributions paid by the employees
will be part of the wages and salaries cost and when paid will reduce cash.
Appendix 1
The accounting for the defined benefit plan is as follows:
31 October 2016 1 November 2015
Rs. m Rs. m
Present value of obligation 240 200
Fair value of plan assets (225) (190)
Liability recognised 15 10
Expense in Statement of profit or loss year ended 31 October 2016:
Rs. m
Current service cost 20.0
Net interest expense 0.5
Expense 205
Analysis of amount in statement of other comprehensive income (OCI):
Rs. m
Actuarial loss on obligation (w2) 29
Actuarial gain on plan assets (w2) (275)
Actuarial loss on obligation (net) 15
Working 1
Movement in net liability in statement of financial position at
31 October 2016:
Rs. m
Opening liability 10.0
Expense 205
Contributions (17.0)
Actuarial loss 1.5
Closing liability 15.0
Working 2 Change in present value of the obligation and fair value
of plan assets
Fair
value of
PV of plan Net
obligation assets liability
Rs.000 Rs.000 Rs.000
At start of year (200.0) 190.0 (10.0)
Interest expense (5% 200) (10.0) (10.0)
Interest earned (5% 270) 9.5 9.5
Net interest (0.5)
Current service cost (20.0) (20.0)
Contributions paid 17.0 17.0
Benefits paid out (given) 19.0 (19.0) 0
Expected year end position (211.0) 197.5 (13.5)
Remeasurement (balancing figure) (29.0) 27.5 (1.5)
Actual year end position (240.0) 225.0 (15.0)
14.2 IFRS 2
(a) (i) The need for accounting standard regulation
Share options are often granted to employees at an exercise price
that is higher than the market price of the shares. Therefore, the
options have no intrinsic value to the company and, prior to the issue
of IFRS 2, these transactions were not generally recognised until
such time as the shares were issued. This approach could be seen as
resulting in a distortion of reported results between accounting
periods and leaving liabilities unrecorded.
In addition, the subject of accounting for share-based payments
contains a number of other contentious issues, notably relating to the
measurement principles to be applied in recognising the transactions.
If employees agree to stay until their options vest, the organisation
must recognise the service they will provide in return, but how should
this be valued?
IFRS 2 was therefore issued in February 2004 to provide
comprehensive guidance on these matters.
(ii) The three types of share based payments
These can be summarised as follows:
Category Features
Equity-settled share- The entity pays for goods or services by
based payment issuing equity instruments in the form of
transactions shares or share options.
Cash-settled share- The entity incurs a liability for goods or
based payment services and the settlement amount is
transactions based on the price (or value) of the
entitys shares or other equity
instruments.
Category Features
Share based payments Transactions where an entity acquires
with cash alternatives goods or receives services and either
the entity or the supplier can choose
payment to be a cash amount based on
the price (or value) of the entitys
shares or other equity instruments, or
equity instruments of the entity.
(b) (i) Assuming all options vest
31 December Year 5 Profit and Equity
loss
Expected outcome
(at grant date value)
500 employees 100 options 750,000
Rs. 15 fair value
3 years to vest 1/3
Year 1 charge 250,000
Balance carried forward 250,000
Profit Equity
or loss
31 December Year 6 Rs.
Expected outcome (at grant date
value)
88% 500 100 Rs. 15 660,000
2/3
440,000
Minus expense previously recognised (212,500)
Year 2 charge 227,500
Balance carried forward 440,000
(ii) If a share-based payment was settled in equity rather than cash the
implications would be:
Recognition:
There would be a credit to other reserves within equity in the statement of
financial position, rather than a liability. However the debit would still be to
staff costs.
Measurement:
The amount would be initially and subsequently measured using the fair
value of the rights at the grant date rather than re-measured at each year
end.
Debit Credit
P&L account fair value loss on inventory 100,000
Inventory 100,000
Being fair value loss on inventory, attributable to the risk being hedged
Debit Credit
P&L account further fair value loss on inventory 50,000
Inventory 50,000
Being fair value loss on inventory, attributable to the risk being hedged
Debit Credit
Bank 1,150,000
P&L account 1,150,000
Debit Credit
Bank 142,000
Forward contract 142,000
Debit Credit
P&L account cost of sales 850,000
Inventory 850,000
Debit Credit
Bank 40,000
Forward contract 40,000
Contract closed with payment from the FX dealer of 400,000 * (0.70-0.80) = Rs.
40,000
Debit Credit
Property, Plant and Equipment 320,000
Bank 320,000
Being initial recognition of purchase price of machine: 400,000 * 0.80 = Rs.
320,000
Debit Credit
Equity cash flow hedge reserve 40,000
Property, Plant and Equipment 40,000
Being transfer of deferred gains/losses on closure of a cash flow hedge
The machine will therefore be recorded at 320,000 40,000 = Rs. 280,000
Alternative:
Waters Ltd could choose to recognise finance income in the statement of
profit or loss at 6.3% u 208,200 u 4/12 = Rs. 4,372.
The financial asset will then have a carrying amount of Rs. 212,572
(208,200 + 4,372) prior to remeasuring to the fair value. The market value
of the stocks at the reporting date is Rs. 196,140 and the revaluation loss of
Rs. 16,432 will be recognised in profit or loss.
Notice that the overall profit impact is the same in each case as *4,372 +
(16,432) = 12,060.
2 Futures Prif contract
The derivative will be classified as at fair value through profit or loss.
Initial transaction costs cannot be included as part of the carrying amount
and therefore the fee of Rs. 750 will be immediately charged to profit or
loss.
At the reporting date the contract is valued at the fair value of PR1.99/Rs. 1
so the loss is Rs. 1,269 to be included in profit or loss and as a liability on
the statement of financial position
3 Investment in Gilmour Ltd
This would normally be classified as at fair value (with gains and losses
recognised in profit or loss).
On initial recognition it would be valued at fair value which would be the
cost of Rs. 1,212,500. The directly attributable transaction costs (Rs.
35,000) would be expensed to profit or loss.
At the reporting date the shares will be valued at fair value (Rs. 5.20 per
share) ignoring selling costs = Rs. 1,300,000.
The revaluation gain of Rs. 87,500 will be recognised in profit or loss.
Alternative:
Waters Ltd could have made an irrevocable election at initial recognition to
recognise gains and losses in other comprehensive income. If this election
had been made the shares would have been measured on initial
recognition at the cost of Rs. 1,212,500 plus directly attributable transaction
costs Rs. 35,000 = Rs. 1,247,500.
At the reporting date the shares would then have been be valued at fair
value with the revaluation gain of Rs. 52,500 recognised in other
comprehensive income.
4 Amount receivable from Mason
On recording the sale, the revenue needs to be discounted at the imputed
rate of interest of 11%. Revenue recognised on 1 July is therefore Rs.
450,450 (500,000 y 1.11).
The receivable on the statement of financial position will include the
accrued interest element of Rs. 24,775 (Rs. 450,450 x 0.11 x 6/12) and so
will be Rs. 475,225 (Rs. 450,450 + Rs. 24,775) in total. The accrued
interest of Rs. 24,775 will be recognised as finance income.
The receivable would not be adjusted for any change in interest rates.
Debit Credit
Date Description
Rs. in million
Financial W.1
31-Dec-2012
assets(12% TFCs) (88.5316.426%) 14.54
Impairment reversal
(P&L) 10.31
W.1 Impairment
Effective interest
Cash flow Cash flow
@ Amortised cost
dates (Interest @ 12%)
16.426%
--------------------------------Rs. in million--------------------------------
(10095%)
01-Jan-2009 95.00
Working 1
Opening Finance cost at Interest paid 7% Closing balance
balance 9% Rs.000 Rs.000
Rs.000 Rs.000
5,609 505 (420) 5,694
Tutorial note:
The total finance cost for the year ended 31 December 2016 is Rs.
505K, however the interest paid of Rs. 420K has already been
recorded so only the difference of Rs. 85K is recognised.
(a) The preference shares will be classified as a liability despite being called
shares. IAS 32 requires us to consider the substance of the instrument in
order to determine whether it should be classified as debt or equity. In this
case the 5% dividend payable on the shares is cumulative which will
eventually result in an outflow of economic benefit for Habenero Ltd and
hence represents an obligation. It therefore meets the definition of a
liability. Once the principal amount is classed as a liability, it follows then
that any payment associated with this instrument (in this case the 5%
dividend) will be presented as a finance cost and be charged in arriving at
profit for the year.
The ordinary shares have no inherent obligation as they will not be repaid,
nor do they provide any fixed return to the shareholder. Indeed ordinary
shares contain only a residual interest in the profits of the entity (i.e.: after
all obligations have been settled) and hence will be classified as equity.
The associated dividend, when paid, will be presented in the statement of
changes in equity as a reduction in retained earnings.
(b) (i) Initial recognition of the HFT investment is at cost and transaction
costs are charged to the statement of profit or loss:
Dr HFT Investment Rs. 1,400,000
Cr Bank Rs. 1,400,000
Being recognition of investment (where Rs. 1,400,000 = Rs. 2.80 x
500,000 shares)
Dr Statement of profit or loss Rs. 7,000
Cr Bank Rs. 7,000
Being write off of transaction costs (where Rs. 7,000 = Rs. 1,400,000
x 0.5%), with the costs taken to profit or loss rather than included as
part of the initial investment (because of being classified as HFT).
(ii) Subsequent measurement is at fair value with the gain or loss taken
to profit or loss:
Dr HFT Investment Rs. 310,000
Cr Statement of profit or loss Rs. 310,000
Being the gain on HFT investment (where Rs. 310,000 = Rs.(3.42
2.80) x 500,000 shares), with the gain being recognised in profit for
the year.
Rs.in
million
Deferred tax liability (Opening) 0.55
Deferred tax expense for the year (balancing figure) 0.94
Deferred tax liability as at December 31, 2016 (Rs. 4.25 million x
35%) 1.49
Plant 56 25 31
Inventory 152 144 8
Retirement (100) (100)
benefit
239
@28% 67
(b) 25,547
Deferred
taxation
liability
Rs. 000
(c) Balance B/F 13,500
2
Due to change in rate (13,500 /30) (900)
28
13,500 x /30 12,600
To OCI (28% x 13,500) 3,780
To statement of profit or loss (as a balancing figure) 9,100
Due to introduction of a new subsidiary 67
25,547
(d) Goodwill
Rs. 000
Cost 750
Less share of net assets
80% x (778 67) (569)
Goodwill arising 181
18.4 COHORT
Note for presentation to partner
Subject: Deferred Taxation
The calculation and presentation of deferred tax is considered by IAS 12 Income
taxes. A company is required to provide deferred tax on all material temporary
differences using the full provision method. Temporary differences arise because
there is a difference in timing between transactions being reflected in the financial
statements and the item being taxed.
In light of the recent acquisitions of Legion and Air, deferred tax must be
considered for the group accounts. Additional tax issues arise at the group level
that will not have been reflected in the individual entitys accounts and these
points are outlined below.
Once the temporary differences have been identified, deferred tax must be
provided at the tax rate expected to be effective at the date when the tax is
settled. Given this rate is not known when the differences arise, a provision is
made using the rates enacted at that time and the estimate is then confirmed as
tax changes arise.
Air
(a) The acquisition of air mid-year gives rise to a number of issues:
(1) Intangible asset
There is some concern that the acquisition of the database of key
customers may not be allowed for tax purposes but it has
nevertheless been included in the tax calculation on the assumption
that a deduction will be allowed by the tax authorities. If this deduction
is not allowed, then an additional tax payment will need to be made to
the authorities, hence it would be prudent to recognise a liability for
this amount (probably classified as current taxation, rather than
deferred taxation).
(2) Inter-company sales
When goods are sold between group members, the profits made are
seen as unrealised in the group accounts until the items are sold
outside of the group. However, the tax authorities tax the individual
entities, not the group, and so the profit will be subject to tax at the
time of the inter-company sale. The unrealised profit represents the
temporary difference on which deferred tax must be provided. The
goods were sold at a margin of 33%. Goods sold for Rs. 1.8m
remain in inventory at the year end, and hence the unrealised profit,
and therefore temporary difference, is Rs.0.6m.
(3) Unremitted profits
Un-remitted earnings represent a temporary difference in the group
accounts. This is because the tax base is the cost of the investment,
yet in the consolidated accounts, this cost is uplifted by the post-
acquisition un-remitted profits. IAS 12 requires a provision to be made
on this timing difference unless the parent controls the timing of the
reversal and it is probable that the difference will not reverse for the
foreseeable future. The payment of dividends is under the control of
Cohort, but we understand that the intention is to realise these un-
remitted earnings through future dividends and hence a provision
must be made.
(b) Legion
The acquisition of Legion at the start of the year brings further deferred tax
issues in the group accounts as outlined below.
(1) Fair value through the profit or loss investments
The fair value adjustment has been reflected in the financial
statements, yet the gain is not taxed until the investments are sold.
Hence the fair value adjustment of Rs. 4m gives rise to a temporary
difference upon which deferred tax must be provided. As the gain has
been taken to profit or loss rather than other comprehensive income
or reserves, the deferred tax must also be expensed to profit or loss.
(2) General allowance
The allowance against the loan portfolio has reduced the carrying
value of the loans but the tax relief is not available until the loan is
written off, and hence a temporary difference is created on the
provision. As the tax relief will reduce future tax charges, the
temporary difference of Rs. 2m gives rise to a deferred tax asset. The
temporary difference is accounted for even though there is no
expectation that the difference will reverse in the immediate future.
However, a deferred tax asset can only be reflected to the extent that
it is probable that there will be future taxable profits against which the
temporary difference can be relieved.
(3) Unrelieved tax losses
When Legion was acquired, it had unused tax losses brought forward
which could, in principle, give rise to a deferred tax asset. However, it
can only be recognised to the extent that it is believed that the loss
can be recovered. Given your belief that there will not be sufficient
future profits, the deferred tax can only be partially recognised. If the
fortunes of Legion change in the future, the deferred tax asset should
then be recognised, leading to a compensating amendment to
goodwill.
(i) The financial assets should be valued at fair value with the increase going
to OCI (Rs. 1.5 million).
(ii) The bond should be split into its equity and liability elements as per IAS 32.
(iii) As the development costs have been allowed for tax already, it will have a
tax base of zero. Goodwill is measured as a residual and, therefore, the
impact is not measured under IAS 12.
(iv) The accrual for compensation will not be allowed until a later period and,
therefore, will reduce the tax base relating to trade and other payables.
19.1 HELLO
Consolidated statement of financial position as at 31 December 2016
Rs.
Assets
Non-current assets
Property, plant and equipment (225 + 175 + 10 2) 408,000
Goodwill (W3) 8,000
WORKINGS
(1) Group structure
Hello
60%
Solong
(2) Net assets of Solong Inc
Reporting Date of Post-
date acquisition acquisition
Rs. Rs.
Share capital 100,000 100,000
Retained earnings
Per the question 90,000
Less: Fair value adjustment
for depreciation (2/10 10,000) (2,000)
88,000 60,000
Fair value adjustment 10,000 10,000
198,000 170,000
6,420
Non-controlling interest (W5) 350
Rs.000 Rs.000
Government grants (230 + 40) 270
Current liabilities
Trade payables (475 + 472) 947
Operating overdraft 27
Income tax liability (228 + 174) 402
1,376
Workings
(W1) Property, plant and equipment
Rs.000
Balance from question Hasan Limited 2,120
Balance from question Shakeel Limited 1,990
Fair value adjustment on acquisition (see below) (120)
Over-depreciation re fair value adjustment year to 31 March 2016 30
4,020
A fair value of the leasehold based on the present value of the future
rentals (receivable in advance) would be the next (non-discounted)
payment of the rental plus the final three years as an annuity at 10%:
Rs.000
PV of rental receipts: Rs. 80,000 + (Rs. 80,000 u 2.50) 280
Carrying value on acquisition is (400)
(W2) Inventories
Rs.000
Amounts given in the question (719 + 560) 1,279
Unrealised profit in inventories (25 u 25/125) (5)
1,274
Rs.000
Parent company share of post-acquisition loss (90%) (360)
Hasan Limited reserves at 31 March 2016 2,900
Goodwill impairment (120)
(W4) Goodwill
Rs.000
At acquisition date
Shares of Shakeel Limited 1,500
Share premium of Shakeel Limited 500
Retained earnings of Shakeel Limited 2,200
Fair value adjustments:
Leasehold (W1) (120)
Software (W1) (180)
3,900
Current assets
Inventory (714 +504 24) 1,194
Trade receivables (1,050 + 252 50) 1,252
Cash/Bank (316 + 60) 376 2,822
5,278
Ordinary shares of Rs. 1 each 3,000.0
Retained earnings (Working 3) 1,323.2
Non-controlling Int. (Working 4) 376.8
4,700
Current liabilities
Trade payables (440 + 188 - 50) 578
5,278
Workings:
Rs.
million
1. Calculation of goodwill:
Fair value of consideration 1,320
Plus fair value of NCI at acquisition 330
Less net acquisition fair value of
Assets acquired & liability:
Share capital 1,200
Retained Earning 190
Fair value adj at acquisition 140 (1,530)
Goodwill 120
2. Group structure
960 million
u 100
1,200 million 80%
3. Retained earnings:
As per question 1,160 424
Adjustment (unrealised profit) (24)
Pre-acquisition retained earnings (190)
234
Group share of post-acquisition retained
earnings:
(80% x 234) 187.2
1,323.2
4. Non-controlling interest: Rs.
million
Fair value of NCI at acquisition 330.0
Plus NCIs share of post-acquisition
retained earnings (20% x 234) 46.8
376.8
Alternative workings:
19.5 X LTD
Consolidated statement of financial position as at 31 December 2016
for the X Ltd Group
All workings in Rs.000
ASSETS Rs.000
Non-current assets
Property, plant and equipment (12,000 + 4,000 + 750(W1)) 16,750
Goodwill (W2) 208
Intangible asset (W1) 90
17,048
Current assets
Inventories (2,200 + 800 -30 (W3)) 2,970
Receivables (3,400 + 900) 4,300
Cash and cash equivalents (800 + 300) 1,100
8,370
Total assets 25,418
17,285
EQUITY AND LIABILITIES
Equity
Share capital 6,800
General reserve (W5) 1,975
Retained earnings 3,844
12,619
Non-controlling interest (W8) 2,420
Total equity 15,039
Non-current liabilities
14% Term finance certificates (2,250-1,500) 750
Current liabilities
Accounts payable (445 + 190) 635
Dividend payable (W3) 861
17,285
Attributable to:
Equity holders of parent Balancing 2,894
Non-controlling interest (W-7) 192
3,086
Workings:
1 Revenue: Rs.000
Millard 312,500
Fillmore 125,000
437,500
Less: inter-company group sales 12,500
425,000
7 Non-controlling interest:
Rs.000 Rs.000
Profit after tax 24,500
Less: Preference dividend (4,375) 4,375
20,125 x 20% 4,025
8,400
Non-Controlling Interest share of unrealized profit 20% x Rs. 100 (20)
8,380
20.2 SHERLOCK
Sherlock Ltd: Consolidated statement of profit or loss and other comprehensive
income for the year ended 31 December 2016.
Rs. m
Revenue 538.0
Cost of sales (383.0)
Gross profit 155.0
Other income 29.0
Administrative costs (30.0)
Other expenses (72.6)
Operating profit 81.4
Finance costs (10.0)
Finance income 15.0
Profit before tax 86.4
Income tax expense (31.0)
Profit for the year 55.4
Other comprehensive income
Revaluation surplus 7.8
Remeasurement 2.0
Loss on cash flow hedge (3.0)
6.8
Total comprehensive income for year 62.2
Profit attributable to:
Rs. m
Owners of the parent (balancing figure) 43.8
Non-controlling interest (W1a) 11.6
55.4
Total comprehensive income attributable to:
Rs. m
Owners of the parent (balancing figure) 51.8
Non-controlling interest (W1a) 10.4
62.2
Workings
W1 Balances for inclusion in the consolidated statement of profit or loss and
other comprehensive income
Sherlock Mycroft Katie Ltd Adjustment Total
Ltd Ltd (6/12)
Rs. m Rs. m Rs. m Rs. m Rs. m
Revenue 400 115 35 (12) W3 538
Cost of sales (312) (65) (18) 12 W3 (383)
Gross profit
Other income 21 7 1 29
Administrative costs (15) (9) (6) (30)
Other expenses (35) (19) (4)
Goodwill impairment (3)
W4 Pension scheme
Amounts charged to profit or loss: Rs. m
Interest (10% of (Rs. 50m Rs,48m)) 0.2
Current service cost 4.0
Past service cost 3.0
7.2
Amount charged to OCI
Remeasurement 2.0
W5 Revaluation of plant
Rs. m
Original cost (1 January 2015) 12.0
Depreciation in year ended 31 December 2015 (1.2)
Carrying amount before revaluation at 31 December 2015 10.8
Revaluation recognised in year ended 31 December 2015 2.2
Value at 31 December 2015 13.0
Depreciation in year ended 31 December 2016 (9) (1.4)
Carrying amount before revaluation at 31 December 2016 11.6
Fall in value to be recognised 4.6
Value at 31 December 2016 7.0
Dr Cr
Rs. m Rs. m
Plant 4.6
Statement of profit or loss 2.4
Other comprehensive income 2.2
W6 Share Katie Ltd expense
Rs. m
Balance recognised in year ended 31 December 2015
8,000 Katie Ltds u Rs. 100 u 4 directors u 1/4 0.8
Faisal Limited
Consolidated statement of profit or loss
for the year ended 31 December 2016
Rs. in million
Sales (W4) 100,100.00
Cost of sales (W4) (80,991.00)
Gross profit 19,109.00
Operating expenses (3,600 + 2,100 + 5,400) (11,100.00)
8,009.00
Gain on sale of non-current assets (540 54) 486.00
Dividend income (1,080 (80% u 600)) 600.00
Profit for the year 9,095.00
Attributable to:
Ordinary shareholders of parent 8,599.75
Non-controlling interest (W9) 495.25
9,095.00
Accumulated
Consolidated balances PP and E depreciation
Rs. millions Rs. millions
FL 22,500 5,760
SL 3,480 420
AIL 5,940 1,260
Adjustments for inter-company
transfer 6 51
31,926 7,491
(W6) Goodwill
SL AIL
Rs. millions Rs. millions
Cost of investment 9,000 10,500
NCI at acquisition
25% u 12,000 (W5) 3,000
20% u 11,400 (W5) 2,280
12,000 12,780
Net assets acquired (12,000) (11,400)
1,380
SL AIL
Rs. millions Rs. millions
Total (1,480 900) 580.00
Unrealised profit adjustments
on inter-company sale of inventory (W2) (87.00)
on inter-company sale of non-current asset (W1) 2.25
495.25
Rs. in
W3: Impairment in the value of investment in associates million
21.2 Helium
Consolidated statement of financial position as at 31 December 2016
Rs.000
Assets
Non-current assets
Property, plant and equipment 500
Interest in associate (W6) 51
Goodwill 15
Current assets 605
Total assets 1,171
Equity and liabilities
Capital and reserves
Share capital 100
Retained earnings (W5) 737
837
Non-controlling interest 84
Long-term liabilities 250
Total equity and liabilities 1,171
Workings
(1) Group structure
Helium
30%
60%
Arsenic
Sulphur
(W2) Goodwill
Rs.000
Cost of investment (Rs. 3 u 1,200 u 90%) 3,240
Net assets acquired (90% u 2,300) (W1) 2,070
Goodwill 1,170
Less impairment (468)
702
(W3) Unrealised profit in inventory
((2/3 65,000) 30/130) 30% = Rs. 3,000
Parent sells to associate, therefore reduce group retained earnings
and Investment in associate
21.4 HIDE
Hide
Consolidated statement of profit or loss for the year ended 30 June 2016
Rs.000
Revenue 15,131
Cost of sales and expenses (13,580)
Operating profit before tax 1,551
Tax (736)
Profit after tax 815
Share of profit of associate (30% of 594) 178
Profit for the year 993
Hide
30%
80%
Arrive
Seek
Workings
1 Property, plant and equipment (PPE)
Rs.000 Rs.000
Hark 60,000
Spark 31,000
Profit on transfer of machines (3 million 2 million) 1,000
Less: Depreciation on this amount in accounts of Spark
(1,000/5 years) (200)
Unrealised profit in machines (800)
PPE in consolidated statement of financial position 90,200
2 Deferred consideration
The present value of the deferred consideration at 1 April 2015 is Rs. 6.05
million u 1/(1.10)2 = Rs. 5 million.
During the year to 31 March 2016 there is a finance charge of 10% (= Rs.
500,000) on this amount, reducing the parents share of the consolidated
profit.
The deferred consideration at 31 March 2016 is Rs. 5 million + Rs. 500,000
= Rs. 5,500,000. This is payable in just over 12 months and is included in
the consolidated statement of financial position as a non-current liability.
3 Share issues
The share issues to acquire the shares in Spark and Ark are not recorded
in the summary statement of financial position of Hark (as stated in the
question).
Share Share
Total capital premium
To acquire the shares in Spark Rs.000 Rs.000 Rs.000
Hark shares issued: (4 million at Rs.
9) 36,000 4,000 32,000
To acquire the shares in Ark
Hark shares issued: (1 million at Rs. 9) 9,000 1,000 8,000
Increase in share capital and share
premium of Hark 5,000 40,000
In summary statement of financial
position 16,000 2,000
In consolidated statement of financial
position 21,000 42,000
4 Goodwill
Hark has acquired 4 million/5 million = 80% of the shares of Spark.
At 1 April 2015 the fair value of the net assets of Spark was (share capital
plus reserves) = Rs.(5 + 4 + 16) million = Rs. 25 million
Rs.000
Purchase consideration paid by the parent company
Issue of 4 million shares at Rs. 9 36,000
Deferred consideration 5,000
41,000
Rs.000
Fair value of NCI at acquisition date (1 million shares u Rs. 7) 7,000
NCI share of net assets at this date (20% u Rs. 25 million) 5,000
Purchased goodwill attributable to NCI 2,000
There has been no impairment of goodwill during the year.
Rs.000
Purchased goodwill attributable to parent 21,000
Goodwill attributable to NCI 2,000
Total goodwill in consolidated statement of financial position 23,000
Alternatively, total goodwill could be calculated as follows:
Rs.000
Purchase consideration paid by the parent company 41,000
(see above)
Fair value of NCI at acquisition date 7,000
48,000
Net assets of the subsidiary at the acquisition date 25,000
(at fair value)
Total goodwill (parent and NCI) 23,000
5 Current assets
The cost of the goods sold by Spark to Hark was Rs. 3,600,000 u 100/150
= Rs. 2,400,000 and the profit was Rs. 1,200,000.
Since 75% of these goods are in closing inventory, the unrealised profit on
intra-group sales is 75% u Rs. 1,200,000 = Rs. 900,000. Current assets in
the consolidated statement of financial position (inventory) should be
reduced by this amount.
The question states that the transaction costs of the acquisition of Spark
have not yet been recorded. These costs reduce the consolidated profit,
and also (presumably) reduce the current assets of Hark.
Current assets on consolidation Rs.000
Hark 18,200
Spark 8,000
Less: unrealised profit in closing inventory (900)
Less: expenses of acquisition of Spark (1,000)
Current assets in consolidated statement of financial position 24,300
7 Non-controlling interests
Rs.000
Share of net assets of Spark at 31 March 2016 (20% u Rs. 28 5,600
million)
Goodwill attributable to NCI (working 4) 2,000
7,600
NCI share of unrealised profit in inventory (20% u Rs. 900,000) (180)
NCI at 31 March 2016: fair value method 7,420
8 Consolidated retained earnings
Rs.000 Rs.000
Hark retained earnings (36,000 + 8,000) 44,000
Spark
Profit for year ended 31 March 2016 3,000
Unrealised profit in closing inventory (900)
2,100
Parent company share (80%) 1,680
Share of post-acquisition retained profits of Ark 500
(25% u Rs. 2 million)
Costs of acquisition of Spark (expensed) (1,000)
Additional finance costs: deferred consideration (500)
Unrealised profit in machines (working 1) (800)
Loss on other (800 650) (150)
Consolidated retained earnings at 31 March 2016 43,730
21.6 P, S AND A
P Group
Consolidated statement of financial position as at 31 December Year 5
Assets
Non-current assets Rs.
Property, plant and equipment (450,000 + 240,000) 690,000
Goodwill (W3) 45,000
Investment in associates (W5) 168,800
903,800
Current assets
Inventory (70,000 + 90,000 10,000) 150,000
Other current assets (20,000 + 110,000 + 130,000) 260,000
Total assets 1,313,800
Equity and liabilities
Equity
Share capital 100,000
Share premium 160,000
Consolidated accumulated profits (W6) 711,300
Attributable to equity holders of the parent 971,300
Non-controlling interest in S (W4) 102,500
Total equity 1,073,800
Long-term liabilities (40,000 + 20,000) 60,000
Current liabilities (100,000 + 80,000) 180,000
Total equity and liabilities 1,313,800
Workings
P owns 75% of the equity of S and 30% of the equity of A. Therefore S is a
subsidiary and A is an associate.
W1: Net assets summary
Calculate the net assets of S and A at the acquisition date and at the end of the
reporting period.
At this stage, make any fair value adjustments and eliminate the unrealised profit
in inventory.
At date of At date of Post-
Net assets of S consolidation acquisition acquisition
Rs. Rs. Rs.
Equity shares 200,000 200,000 -
Share premium 80,000 80,000 -
Accumulated profits (per question) 140,000 60,000 80,000
410,000 340,000
The total gain/profit recognised for the year from the investment in AS is
therefore Rs. 10 million + Rs. 5 million = Rs. 15 million.
22.2 A LTD
(a) Treatment of B Ltd
IFRS 3 Business combinations requires goodwill on acquisition to be
calculated at the date control is gained. The second acquisition gives A Ltd
a 75% holding and therefore control over B Ltd. The simple investment of
15% will be derecognised and the 75% holding will be fully consolidated as
a subsidiary in the group financial statements. The goodwill will be
calculated as the cost of the 60% acquired in the year plus the fair value of
the previously held interest of 15%, compared with the fair value of the net
assets at the date of acquisition (1 April 2016).
Non-current liabilities
5% Bonds 2015 (Working 5) 4,032
Current liabilities (8,100+2,000) 10,100
Total liabilities 14,132
Total equity and liabilities 44,365
Working 5 Bonds
amortised cost Rs.000 Rs.000 Rs.000 Rs.000
Opening Effective Interest paid Value at 30
value rate 8.5% 5% x Rs. 4m September
To 30 September 2016 3,900 332 (200) 4,032
The difference of Rs. 132,000 must be added to the value of the bond
liability and deducted from
A Ltds retained earnings.
Working 6 Other reserves and AFS investment
IFRS 3 requires that the 15% simple investment be derecognised and on
derecognition any gain/loss would be considered realised. The gain of Rs.
200,000 (FV of Rs. 800,000 at date of derecognition less the investment
cost of Rs. 600,000) represents the group gain and will be included in the
consolidated reserves.
The balance on other reserves again relates to the treatment of the
investment in the parents own accounts and the gains on the AFS
investment (B Ltd) and not relevant for the group accounts as the B Ltd
has been fully consolidated.
Rs.000
Revenue (1,200 + 290) 1,490
Cost of sales (810 + 110 + 4 (W1)) (924)
Gross profit 566
Operating expenses (100 + 40 + 9 (W2)) (149)
417
Investment income
(50 intra group dividend 40 (80% x 50)) 10
Finance costs (45 + 10) (55)
Share of associates profit (40% x 30) 12
Profit before tax 384
Income tax expense (80 + 30) (110)
Profit for the year 274
Other comprehensive income
Revaluation of property, net of tax (60 + 20) 80
Share of associates OCI (40% x 10) 4
Other comprehensive income for the year, net of tax 84
Total comprehensive income 358
Workings
Rs. m
Carrying value of net assets at 1 April 2013 325
Share capital plus share premium (260)
Therefore retained earnings at 1 April 2013 65
(W2) Gain or loss on acquiring control of Stripes
1 April 2015 Rs. m Rs. m
Fair value of initial investment in Stripes at 1 April 2015 150
Initial cost of investment 120
Share of retained earnings 1 April 2013 1 April 2015 33
(= 30% u (175 65) see W1
Carrying value of investment in associate 153
Loss recognised on gaining control of Stripes (3)
This loss has not yet been recognised in the individual financial statements
of Plain; it must therefore be included in the calculation of group reserves
(see Working 8).
Or Rs. m
Share of net assets (25% 324) 81
Fair value adjustment (25% 16) 4
Goodwill [60 (200 25%)] 10
95
(W6) Held to maturity investment
Rs. m
Amortised cost
Cost 54
Less: Discount (20/5) (4)
50
Tutorial note: It is not correct to recognise interest on a straight line basis. It
is used here as a simplification. IAS 39 requires the recognition of interest
using the effective rate.
(W7) Pension
Rs. m
Scheme assets
Cash 250
Expected return 26
Actuarial gain (bal fig) 26
Fair value of scheme assets 302
Scheme liabilities
Current service cost 276
Interest cost 41
Present value of obligation 317
(a) Parvez Ltd: Consolidated statement of profit or loss for the year
ended 31 December 2016
Rs. 000
Revenue (W4) 92,360.0
Attributable to:
Ordinary shareholders of parent 28,580.8
Non-controlling interest (W9) 3,713.2
32,294.0
27,068 4,425
21,898 2,950
(W6) Goodwill
2,667.5 1,296.0
Total 3,963.5
2,327.5 6,131.4
Total 8,458.9
Unrealised profit (W2) (5.7)
8,453.2
56,641.3
3,713.2
Non-controlling
Hasans interest interest (balance)
In Siddiq Ltd
(40% + (75% u 20%)) 55% 45%
(W2) Individual company adjustments: Transaction before the year-end not yet
accounted for
Books of Riaz
Purchase of inventory from Hasan Dr Cr
Closing inventory 12,500
Payable (to Hasan) 12,500
Books of Hasan
Cash received from Riaz Dr Cr
Cash 8,000
Receivable (from Hasan) 8,000
There is no double entry for the NCI as all sales were from the parent.
(W4) Consolidated inventories
Rs.
Hasan 526,610
Riaz (163,290 + 12,500 (W2) 175,790
Vazir 85,700
Unrealised profit (W3) (4,580)
783,520
3,312
5,691
Equity attributable to owners of the parent
Share capital 1,500.0
Reserves (W4) 1,432.5
2,932.5
Non-controlling interest (W6) 472.5
3,405
Current liabilities:
Trade payables (885 + 513) 1,398
Income tax payables (240 + 180 + 90 (W1)) 510
Provisions (285 + 93) 378
2,286
5,691
Workings:
1. Gain on disposal of shares in parents separate financial
statement:-
Rs.m
Fair value of consideration received 480
Less: Original cost of shares (765 x 20%/85%) (180)
Parent gain 300
Less tax on parents gain (30%) (90)
210
2. Non-controlling interest (NCI)
Profit for the year: Rs.m
9
Pre-disposal periods = /12 x 120m x 15% = 13.5
3
Post-disposal periods = /12 x 120m x 35% = 10.5 24
Other comprehensive income
Pre-disposal periods = 9/12 x 30m x 15% = 3.375
3
Post-disposal periods = /12 x 30m x 35% = 2.625 6
30
3. Goodwill
Rs.m
Consideration transferred (285 + 480) 765
Non-Controlling interest at fair value 135
Less:
Fair value of identifiable net assets
at acquisition:
Share capital 600
Pre-acquisition reserve 60 (660)
240
4. Consolidated reserves
Rs.m
All of Patche
Per question at year-end 930.00
Adj. to equity on disposal (W5) 217.50
Tax on parent gain (W1) (90.00)
1,057.50
Groups share of post-acquisition reserve of Somers:
85% (412.5 (see below) x 85%) 350.63
65% (37.5 (see below) x 65%) 24.37
1,432.50
6 Non-controlling interest
Rs.m
NCI @ acquisition 135.00
NCI share of post-acquisition reserve:
Somers (412.5 x 15%) 61.88
Somers (37.5 x 35%) 13.12
Increase in NCI (W5) (214.5 + 48) 262.50
472.50
24.2 DISPOSAL
Rs. Rs.
million million
Consideration from sale of shares 960
Fair value of retained shares in Spool 100
1,060
Net assets of Spool at carrying value 800
Minus: non-controlling interest de-recognised (10% u 800) (80)
720
Gain on sale of shares 340
None of the assets of Spool have been re-valued, therefore there is no balance
on a revaluation reserve; therefore none of this gain should be transferred
directly to retained earnings and not reported in profit or loss.
There is no information to suggest that a reclassification adjustment is required to
reclassify income previously reported as other comprehensive income as profit or
loss.
The total gain of Rs. 340 million on disposal of the shares should therefore be
recognised in profit or loss for the period.
Hoo will recognise an investment in Spool in its statement of financial position in
accordance with the requirements of IAS 39. On initial recognition, this
investment should be valued at Rs. 100 million.
P NCI
Rs. m Rs. m
Change in interest in S - 80 + 80
The shares were sold for Rs. 94 million adding to the assets in Ps statement of
financial position. The transaction should therefore be accounted for in equity as
follows:
Debit: Cash Rs. 94 million
Credit: NCI Rs. 80 million
Credit: Reserves attributable to P (= gain = balance) Rs. 14 million
Rs. Rs.
million million
Post-acquisition profit attributable to S (see above) 200
Less: Impairment of goodwill (8)
Recognised profit 192
Attributable to equity owners of P
1 January 30 June (80% u 200 u 6/12) 80
1 July 31 December (70% u 200 u 6/12) 70
Goodwill impairment (8)
Attributable to NCI 142
1 January 30 June (20% u 200 u 6/12) 20
1 July 31 December (30% u 200 u 6/12) 30
50
192
Attributable to:
Equity owners of A (1,061 + 80% u 190) 1,213
Non-controlling interest: 20% 190 38
1,251
Workings
(1) Movement on consolidated reserves attributable to owners of parent
A B C Group
Rs.000 Rs.000 Rs.000 Rs.000
At 31 December Year 3 (W5) 3,300 272 612 4,184
Profit for year attributable to A 1,213
Dividends paid by A (50)
At 31 December Year 4 5,347
(2) Disposal of shares in C, with loss of control
Gain to parent Rs.000 Rs.000
Net assets of C at date of disposal: de-recognised 1,400
Purchased goodwill in C de-recognised
(see working 3) 472
1,872
Minus: Non-controlling interest de-recognised
(10% u 1,400) (140)
Assets attributable to A de-recognised 1,732
Fair value of investment retained 44
Sale proceeds 1,925
1,969
Total gain on disposal of shares 237
Since there has been no revaluation of non-current assets and there is no
information about any reclassification adjustments that might be required, it
is assumed that this entire gain should be included in profit or loss for the
year.
Workings
(1) Profit on disposal of Lymon
Recognise: Rs.
Proceeds 212,000
Derecognise:
Net assets of subsidiary
Net assets at January 2016 140,000
Profit to 1 July 2016 (6/12 x 20,600) 10,300
150,300
Non-controlling interest (20%) (30,060)
(120,240)
Unimpaired goodwill (25,400)
Profit on disposal 66,360
(2) Non-controlling interests
In Lymon Inc 20% x (6/12 x Rs. 20,600) 2,060
In Zeigler Inc 35% x (6/12 x Rs. 53,700) 9,398
11,458
Rs.000
Parents share of the exchange gain (70% of 448.5) 314.0
Non-controlling interest share of the exchange gain (30% x 448.5) 134.5
448.5
26.4 ORLANDO
(a) Year to June Year 4
The revenue and the receivable for the sale of 96,000 should be
translated at the spot rate of 0.8 = $120,000
The capital expenditure of 1m should also be translated at the spot rate of
0.8:
Debit Property, plant and equipment $1,250,000
Credit: Payables $1,250,000.
The receipt on 12 June relating to the receivable is translated at the rate at
that date of 0.9. This generates cash of $106,667 to settle a receivable of
$120,000. Hence an exchange loss of $13,333 is recognised in profit or
loss.
The non-current asset is not re-translated at the year end, but the
outstanding payable (a monetary item) must be re-stated to the year end
exchange rate of 0.7. This gives a year-end payable balance of $1,428,571.
This has increased from the initial $1,250,000; therefore an exchange loss
of $178,571 will be recognised in profit or loss.
Part B
(a) Translation: Statement of financial position of Stockpot at 31 March
Year 4
EU000 Rate $000
Property, plant and equipment 30,000 2.2 13,636
Inventories 18,000 2.2 8,182
Trade receivables 15,000 2.2 6,819
Trade payables (10,400) 2.2 (4,727)
Bank overdraft (7,600) 2.2 (3,455)
Non-current liabilities (20,000) 2.2 (9,091)
25,000 11,364
Issued capital 15,000 3.0 5,000
Pre-acquisition reserves 5,000 3.0 1,667
20,000 6,667
Post-acquisition reserves 5,000 balancing figure 4,697
25,000 11,364
Mancaster Group: Consolidated statement of financial position at
31 March Year 4
$000 $000
Non-current assets
Goodwill (see workings) 682
Property, plant and equipment (20,000 + 13,636) 33,636
Current assets:
Inventories (10,000 + 8,182) 18,182
Trade receivables (10,000 + 6,819) 16,819
35,001
69,319
$000
Capital and reserves:
Issued capital 9,000
Accumulated profits (see workings) 16,205
25,205
Non-controlling interest (see workings) 2,841
28,046
Non-current liabilities:
Loans (10,000 + 9,091) 19,091
Current liabilities:
Bank overdraft (6,100 + 3,455) 9,555
Trade payables (7,900+4,727) 12,627
22,182
69,319
26.6 A, B AND C
A group: Summarised consolidated statement of profit or loss and other
comprehensive income for the year ended 30 September 2016
Rs.000
Revenue (4,600 +3,385(W1)) 7,985
Costs and expenses (3,700+2,462(W1)) (6,162)
Share of associates profit (W3) 160
Profit before tax 1,983
Income tax expense (200+231(W1)) (431)
Profit for the year 1,552
W8 Reserves A B
Rs.000 Rs.000
As per SOFP 12,100 5,143
(4,200.0
Net assets on acquisition date (280.00) 15.00 0)
Post-acquisition retained earnings as at
30 June 2014 including OCI item of
exchange gain 120.00 2,720.00
Exchange gain to be classified to OCI W-2 (813.20)
Post-acquisition retained earnings as at
30 June 2014 1,906.80
Workings
(W1) Profit on disposal of subsidiary:
The entire 80% shareholding was sold.
Rs.000
Net asset of subsidiary sold (shown in the question) 43,200
Sales proceeds 39,600
Less Net asset sold x 80% = (80% x Rs. 43,200) 34,560
Profit on disposal of subsidiary 5,040
(W2) Movement in Working Capital
31/12/16 Add Less Bal. Cash flow
Rs.000 disposal 31/12/15 statement
Rs.000 Rs.000 Rs.000
Inventory 180,000 14,400 165,600 28,800
Receivables 151,200 18,000 136,800 32,400
Trade creditors (108,000) (10,800) (93,600) (25,200)
(W3) Income Tax Paid
Taxation
Rs.000 Rs.000
Tax on disposal 2,160 Balance b/f 39,240
Cash/Bank 37,080 Tax for the year P & L 46,800
Balance c/f 46,800
86,040 86,040
(W4) Non-current assets
Non-current assets
Rs.000 Rs.000
Balance b/f 360,000 Disposal 28,800
Cash/Bank 111,240 Depreciation (P & L) 72,720
Balance c/f 369,720
471,240 471,240
W5 Cash flow from sale of Pastit Limited
Rs.000
As per question 39,600
Add Bank overdraft of Pastit Limited on disposal 1,440
41,040
(W6) Movement on debenture
Rs.000
Balance b/f at 01/01/2015 90,000
Disposal of subsidiary (3,600)
Cash paid (bal. figure) (18,000)
Balance c/f at 31/12/2016 68,400
27.2 BELLA
Workings
(1) Property, plant and equipment (PPE)
Rs.000 Rs.000
PPE at net book value (NBV) at end of year 12,900
PPE at NBV at beginning of year 8,000
Disposals during the year at NBV (800)
(7,200)
5,700
Depreciation charge for the year (balancing figure) 300
PPE acquired during the year 6,000
(2) Share capital and premium
Share Share Total
capital premium
Rs.000 Rs.000 Rs.000
At end of year 1,900 95 1,995
At beginning of year 1,100 30 (1,130)
Cash receipts from share issue 865
(3) Interest payable
Rs.000
Accrued interest at beginning of year 25
Interest charge in profit and loss 60
85
Accrued interest at end of year (40)
Interest payments in the year 45
(4) Current tax payable
Rs.000
Tax payable at beginning of year 325
Tax charge in profit and loss 400
725
Tax payable at end of year (540)
Tax payments in the year 185
(a)
Statement of cash flows for year ended 31 December 20X2
Rs.000 Rs.000
Cash flows from operating activities (Note 1) 2,282
Interest paid (120 + 205) (325)
Dividends received 90
Taxation paid (W2) (117)
Net cash flows from operating activities 1,930
(2)
Tax
Rs.000 Rs.000
Tax paid 117 B/fwd current tax 167
C/fwd current tax 700 B/fwd deferred tax 400
C/fwd deferred tax 550 Statement of profit or 800
loss
1,367 1,367
(3) Non-current assets
Rs.
Opening NBV 7,520
Depreciation (1,200)
Disposals at NBV (720)
New finance leases 700
Exchange rate gains 424
Purchase for cash 4,996
Closing NBV 11,720
(4)
Obligations under finance leases
Rs.000 Rs.000
Cash paid 355 Balance b/f < 1 year 50
Balance c/f < 1 year 110 Balance b/f > 1 year 250
Balance c/f > 1 year 740 Finance charge in profit or loss 205
Non current asset additions 700
1,205 1,205
The payment of Rs. 355,000 is split as Rs. 205,000 interest and Rs.
150,000 capital as payments are made in arrears and hence the year end
payment pays off the years finance cost.
(b) The statement of profit or loss and statement of financial position are based
on the accruals concept whereas the statement of cash flows is based on
the cash concept. Cash is the 'life blood' of the company and is therefore
critical to an entitys survival. Without cash to pay suppliers, the work force
and other payables, the company will cease to operate, irrespective of how
profitable it is.
Shareholders need to know that a company is viable and has the resources
to continue, and perhaps expand, operations. Suppliers need to know they
will be paid and customers need to know the company is in a position to
continue operations.
Profit may be significantly affected by the choice of accounting policies
made by a company. This means it is more subjective than cash and more
open to manipulation. However, the statement of cash flows itself may be
subject to window dressing, for example by delaying payment of suppliers
until after year end. The auditor needs to be involved in this respect to
ensure the shareholders and other users receive meaningful information.
1,854
2016 = Rs. = Rs. 1.01
1,818
1,584 6.06
2015 = x = Rs. 1.69
900 6.30
Workings
1. Calculation of theoretical ex-rights price
1 share at Rs. 6.30 each 6.30
2 rights issue for every 1 at Rs. 5.94 11.88
3 shares for 18.18
Price per share = = Rs. 6.06
(b) Report
To: Mr Hamad
From: Management Accountant
Date: 15 April 2016
Subject: Evaluating the changes in EPS of Aircon Ltd
The key factors which has led to changes in the EPS of Aircon Ltd. are as
follows:
Revenue and profitability. Revenue increased by Rs. 2,700 million (18%)
last year, but the gross profit and net profit ratios have not increased
proportionately.
The gross profit percentage fell from 40% to 37% in 2016, while the net
profit percentage remained constant at 10%.
Factors responsible for the decline might be due to the inability of the entity
to maintain good profit margin coupled with the failure to also maintain
good control over operating expenses.
The more funds realised from the rights issue did not lead to any significant
increase in return on capital employed which fell from 43% (2,880/6,606) in
2015 to 25% (3,240/12,780) in 2016.
Capital employed: raising over Rs. 5,760 million of new finance was
largely used to acquire intangible assets.
It is hoped that this asset will start generating substantial returns in the near
future.
EPS has therefore fallen from Rs. 1.69 in 2015 to Rs. 1.01 in 2016.
Signed
Management Accountant
APPENDIX TO THE REPORT
The ratios that are relevant to discussion and evaluation of changes in EPS
of Aircon Ltd are those that relate to profitability and return on capital
employed.
The effect of the rights issue should also be considered in the discussion in
relation to how the funds raised through the shares were employed.
TABLE OF RATIOS
(i) Change in revenue 18,000 15,300
= x 100 = 18% Increase
18,000
2016 2015
EPS
PAT - Pref Div 69,000 - 1,380
= =.
No. of shares
22,
28.3 MARY
Rs.
2 existing shares have a cum rights value of (2 u Rs. 4) 8
1 new share is issued for 1
3 new shares have a theoretical value of 9
Theoretical ex-rights prices = Rs. 9/3 = Rs. 3
Weighted
Number Time Bonus Rights average
Date of shares factor fraction fraction number of
shares
1 January Brought
forward 5,000,000 1/12 6/5 4/3 666,667
1 February Bonus issue
(1 for 5) 1,000,000
6,000,000 2/12 4/3 1,333,333
1 April Rights issue
(1 for 2) 3,000,000
9,000,000 2/12 1,500,000
1 June Issue at full
market price
800,000
31 December Carried 9,800,000
forward 7/12 5,716,667
9,216,667
28.4 MANDY
Adjusted total earnings
Rs. Rs.
Reported earnings 2,579,000 1,979,000
Add back interest saved
(1,000,000 u 7%) 70,000
(1,000,000 u 7% u 9/12) 52,500
Minus tax at 30% (21,000) (15,750)
49,000 36,750
Adjusted total earnings 2,628,000 2,015,750
Number of shares
Year 4 Number of
shares
1 January Brought forward 5,000,000
Dilutions:
Share options (W) 200,000
Convertible shares (1,000,000 100 u 30) 300,000
31 December 5,500,000
Year 3 Weighted
average
Number of Time number
Date shares factor of shares
1 January Brought forward 5,000,000
Share options: dilution (W) 125,000
5,125,000 3/12 1,281,250
1 April Convertibles: dilution 300,000
5,425,000 9/12 4,068,750
5,350,000
Diluted EPS
Year 4 = 2,628,000/5,500,000 = Rs.0.48 or 48 paisa
Year 3 = 2,015,750/5,350,000 = Rs.0.38 or 38 paisa
Working
Cash receivable on exercise of all the options = 500,000 Rs. 3 = Rs. 1,500,000
Year 4
Number of shares this would buy at full market price in Year 4 = Rs. 1,500,000/5
= 300,000 shares
Shares
Options 500,000
Minus number of shares at fair value (300,000)
Net dilution 200,000
Year 3
Number of shares this would buy at full market price in Year 3 = Rs. 1,500,000/4
= 375,000 shares
Shares
Options 500,000
Minus number of shares at fair value (375,000)
Net dilution 125,000
Increase in Earnings
Increase
no. of per
in Rank
ordinary incremental
earnings
shares shares
Rs. Rs.
Convertible Debentures
Increase in earnings
(Rs. 7.5m x 70%) 5,250,000 1.75 3
Increase in shares 3,000,000
Convertible Preference
Shares
Increase in earnings
2,450,000 0.61 2
Increase in shares 4,000,000
Options
Increase in earnings -
Increase in shares - 1
(1.5m x 1.1 / 11) 150,000
Convertible preference
shares (Rank 2) 2,450,000 4,000,000
127,830,000 89,370,000 1.430 Dilutive
Convertible debentures
(Rank 3) 5,250,000 3,000,000
Anti-
133,080,000 92,370,000 1.44 Dilutive
*Rs. 127,830,000 Rs. 2,450,000 = Rs. 125,380,000
b) AAZ Limited
Notes to the financial statements for the year ended December 31,
2016
Diluted
Profit after taxation (Rupees) 127,833,000
Bonus Weighted
Number of Time average
Date fractions
shares factor number of
(W3) shares
1 April 2015 to 30 June u 6/5
2015 10,000,000 3/12 u1.00833 3,024,990
1 July
Conversion of
cumulative prefs at a
premium of Rs. 2 per
share
(500,000 u 10/12) 416,667
u 6/5 u
1 July to 30 September 10,416,667 3/12 1.00833 3,151,031
1 October
Rights issue 1,200,000
30 September to 31
December 11,616,667 3/12 u 6/5 3,485,000
1 January
Bonus issue (20%) 2,323,333
1 January to 31 March 13,940,000 3/12 3,485,000
Weighted average 13,146,021
Rs.
Actual cum rights price per share 12.5000
Theoretical ex-right value per share (144,013/11,617) 12.3967
Adjusting factor 1.00833
Number Earnings
of shares (Rs.) EPS (Rs.)
Basic EPS 13,146,021 8,600,000 0.65
Dilution:
Non-cumulative prefs in issue for
the year (W4)at a premium of Rs. 2
per share (for the whole year)
2,000,000 u 10/12 u 12/12 1,666,667
Add back dividend paid to non-
cumulative prefs in issue at the
year-end 2,400,000
(v) Omega Limiteds EPS is better than that of Alpha Limited by 0.14
(0.24 0.10). Omega Limiteds shareholders will be happier than
those of Alpha Limited.
Profit and loss accounts for the year ended 31 December 2016
Note Rs.000
Turnover (W5) 12,925
8750 100
? Total assets = x
70 1
= Rs. 12,500
Current assets = Rs. 12,500 8,750 = Rs. 3,750
3750 100
? Current liabilities = x = Rs. 1,500
2 .5 1
Cash 0 .2 Cash
(W3) Cash ratio = = =
CL 1 1500
? Cash = Rs. 300
(W4) Receivables = (3,750 1,800 300) = Rs. 1,650
Debtorsx365
(W5) Average collection period =
Sales
1650x365
46.596 =
Sales
1650x 365
Sales = = Rs. 12,925
46.576
27.06x12140
Trade creditors = = Rs. 900
365
600
(W11) Ordinary shares = = Rs. 5,100
0.1176
Totalcash flow
(W12) Cash flow ratio =
Totaldebts
2585 972
i.e. 0.6711 =
Totaldebts
3557
Total debts = = 5,300
0.6711
2016 2015
year. This means that the year-end net assets of Rondel Ltds business that
have been incorporated in the Travelwell Ltd statement of financial position
can be estimated as follows:
Rs.000
Net assets at acquisition (balancing figure) 118,000
Goodwill 12,000
Cost of the acquisition (given) 130,000
Plus post-acquisition increase in net assets:
Pre tax profit for the year (given) 29,000
Taxation (@25%) (7,250)
21,750
Net assets at 30 September 2016 151,750
This suggests that the ROCE from Rondel Ltds business was 19.1% (=
29
/151.75). The high ROCE from Rondel Ltds business will explain the rise on
ROCE for the company s a whole.
Profitability
As indicated earlier, gross profit would have fallen in 2016 but for the gross
profit contributed by the net assets of Rondel Ltd and the gross profit from
the original business of Travelwell Ltd was lower in 2016 than in 2015
(9.5% compared with 16.7%).
There would also have been a loss of Rs. 5 million before tax except for the
profit of Rs. 29 million contributed by Rondel Ltds business.
It is likely however that the finance costs of Rs. 9.75 million in the current
year, resulting from the issue of the loan notes, were due to a need to
borrow to acquire the assets of Rondel Ltd. If so, it would be more
appropriate to assess the profit before tax from Rondel Ltds business as
Rs. 19.25 million (= Rs. 29 million Rs. 9.75 million finance charge) and
the profit before tax from Travelwell Ltds other business as Rs. 4.75 million
(= Rs. 5 million loss + Rs. 9.75 million).
Using these adjusted figures, this suggests that the profit before tax/sales ratio for
Travelwell Ltds other business was 2.3% (= 4.75/(300 90), which is much
worse than the previous year.
Net asset turnover
Net asset turnover fell in 2016 to 1.1 times compared with 1.5 times in
2015. The net asset turnover from the business of Rondel Ltd was only
0.59 times (= Rs. 90 million/Rs. 151.75 million), which means that the
acquisition of the net assets of Rondel Ltd contributed significantly to the
fall.
Financial position
The change in the financial position of Travelwell Ltd can be assessed by
looking at the gearing ratio and working capital ratios.
Gearing
At 30 September 2015, Travelwell Ltd had no gearing. Gearing was 47.4%
one year later. This is due to the issue of the loan notes, presumably to
Profitability Ratios
The gross profit ratio is near to the highest while the operating profit is
near to the lowest as compared to similar companies. It indicates that
key issue which is affecting WLs profitability is its lack of control over
operating expenses. The positive aspect of this situation is that we may
be able to improve the profitability just by controlling the operating
expenses without being required to make significant changes in the
current operations of WL.
WLs working capital ratios specially the current ratio indicates that the
companys liquidity position is in line with the industry average. Hence,
it seems that the companys working capital is being appropriately
managed although there may be some room for improvement.
The inventory turnover is among the lowest in the industry which shows
that sound inventory management policies are in place.
Fictitious sales.
Gearing Ratios
The debt equity ratio is on the higher side but can be restructured after
acquisition. However, the interest cover is only 1.3. It is among the
lowest in the industry and is indicative of a high degree of risk as the
profits are barely able to cover the interest charges. Even a slight
decline in the profitability of the company may have highly adverse
impact on the companys bottom line.
Investor Ratios
payouts is not relevant to our bid decision. However, low dividend may
also be on account of liquidity problems and we should consider this
aspect.
Conclusion
(b) Following additional information could have been useful for a better
analysis of the situation:
As OIL is preparing its first separate financial statements for the year ended 30
June 2014, there is a change in accounting policy as investments in AL, an
associate company, would be treated in 2014 at cost as against the previous
basis of equity accounting. Accordingly, comparative figures would be restated to
incorporate this change in accounting policy.
Rs. in million
- 975,000 GL 195.00 -
The company holds 65% and 30% and 10% ownership interest in GL, AL
and BL respectively.
W-1: OIL profit for the year after taking effect of investee companies:
2013
2014
(Revised)
Rs. in million
AL - Associated company:
(8030%16%) 3.84 -
(7010%18%) 1.26
(7.7-8) OR (11.2-8)-(7.7-
Investment impairment 11.2) (0.30) -
1,454.80 1,251.60
Less expenses:
Casual labour 16
Regular workers 24
Land preparation 64
Hire of tractors 48
Depreciation: irrigation 80
Depreciation: farms equipment 60
(292)
1,403
Workings:
12
Casual labour /15 x Rs. 20,000 = Rs. 16,000
12
Regular workers /15 x Rs. 30,000 = Rs. 24,000
12
Land preparation /15 x Rs. 80,000 = Rs. 64,000
12
Hire of tractors /15x Rs. 60,000 = Rs. 48,000
Depreciation:
00,000
Irrigation cost
Farm equipment 20% x 400,000 x 9/12 = Rs. 80,000
(b) (i) Biological assets are living plants and animals.
(ii) Biological transformation relates to the process of growth and
degeneration that can cause changes of a quantitative or qualitative
nature in a biological asset.
(iii) Harvest is the detachment of produce from a biological asset or
cessation of a biological assets life process.
(b) Statement of changes in equity for the year ended 31 December 2016
Revaluat
Share Share ion Retained
capital premium surplus earnings Total
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Balance as 105,000 6,400 - 55,600 167,000
at 1/1/2016
Issue of 10,000 2,000 - - 12,000
shares
Profit for the - - - 174,498 174,498
year
Fair value - - 12,333 - 12,333
gain
Realised - - (237) 237 -
during the
year
Dividend - - - (25,300) (25,300)
paid
Balance 115,000 8,400 12,096 205,035 340,531
31/12/2016
Non-current Liabilities
Loan notes (600,000 + 170,000) 770,000
Current liabilities
Trade payables (310,000 + 120,000) 430,000 1,200,000
Total equity and liabilities 2,350,000
Workings (W)
(1) Group Structure
Helios Ltd
70%
NCI = 30%
Sol Ltd
No adjustment required for goods costing Rs. 310,000 sold on credit to Skims
Industries Ltd.
The value of inventory that should be recorded in the Statements of financial
position is Rs. 71,690 thousand
30.6 AFRIDI
Statement showing the amount of physical inventory as on March 31, 2017
Rs.
Inventory as on December 31, 2017 (W1) 140,025
Add: Purchases for the quarter (W2) 145,360
285,385
Less: Adjusted Cost of sales (W3) (100,345)
100
Less: goods given in charity ( /120 of Rs. 2,100) (1,750)
Physical inventory balance as on March 31, 2017 183,290
Working - 1
Inventory as on December 31, 2016
Inventory as valued previously 140,525
Add: Cost of 1,000 items recorded at Re. 0.50 per item instead of Rs.
10 per item. 9,500
150,025
Less: error in carry forward of a page total (10,000)
Actual inventory as on December 31, 2016 140,025
Working - 2
Purchases for the quarter ended March 31, 2017
Total of invoices from Jan. 01 to Mar. 31, 2017 as per purchased day
book 138,560
Add: Goods purchased before march 31, 2017 but recorded in April
2017 37,000
Less : Invoices pertaining to Goods received before December 31, 2017 (28,000)
Less : Purchase of ceiling fan (2,200)
145,360
Working - 3
Cost of sales for the quarter
Total of sales invoices raised from January 01 to March 31, 2017 151,073
Add: Goods dispatched before March 31, 2017 but invoiced in April
2017 25,421
Less: Goods dispatched before December 31, 2016 but invoiced during
the quarter ended March 31, 2017 (38,240)
Less: sales return during the quarter (12,800)
Less: Sale invoice recorded twice (5,760)
Net sales 119,694
Add: Discount allowed (6,000 1.20 = 7,200 10%) 720
Sales before discount 120,414
Less: gross margin of 20% on cost (120,414*20/120) (20,069)
100,345
31.1 IFRS 1
(a) The first IFRS reporting period was the year ended 31 December 2016, and
the date of Transition to IFRS was 1 January 2015.
Any gains and losses arising from this exercise should be recognised
immediately in retained earnings as at January 2016
(iii) Since IAS 1 requires that at least one year of comparative prior period
financial information be presented, the opening Statement of
Financial Position will be 1 January 2015, if not earlier.
(iv) Preparation of full IFRS Financial Statements for the year ended 31
December 2016, which should include:
x three statements of financial position
x two statements of comprehensive income
x two separate statements of profit or loss (if presented)
x two statements of cash flows
x two statements of changes in equity
x related notes, including comparative information
(c) The reconciliation which the company must include in its financial
statements for the year ended 31 December 2102, to explain how the
transition from previous GAAP to IFRS affect the reported financial position,
financial performance and cash flows are as follows:
(vi) Appropriate explanations if the entity has elected to apply any of the
specific recognition and measurement exemptions permitted under
IFRS 1, for example, if the entity used fair values as deemed cost.
Profit or loss
Rupees in million
Reinsuranc
recoveries revenue
Outstanding recoveries in
Total claims paid
Claims expenses
claims respect of
Class outstanding
claims
Opening
Opening
Closing
Closing
2016
Direct and
facultative
Fire and
property
damage 900 600 500 800 600 500 350 450 350
Marine,
aviation &
transport 450 400 450 500 300 300 400 400 100
Motor 1,150 900 750 1,000 850 700 550 700 300
Accident
and health 250 300 150 100 160 150 80 90 10
Total 2,750 2,200 1,850 2,400 1,910 1,650 1,380 1,640 760
Treaty
Proportional 13 10 12 15 - - - - 15
Net commission
from reinsurers
Commissions
Underwriting
management
underwriting
Commission
commissions
expense
expense
expense
Other
Class
Net
Opening
Closing
Direct and
(Rs. in million)
Facultative
Fire and
property 321.41 148.79 160.43 309.77 165.28 475.07 270.44 204.61
damage
Marine,
aviation and 126.87 11.31 5.68 132.50 139.96 272.46 5.70 266.76
transport
Motor 215.00 128.50 114.23 229.27 499.93 729.20 12.72 716.48
Miscellaneous 90.94 38.59 35.17 94.36 172.70 267.06 82.40 184.66
1,372.
754.22 327.19 315.51 765.90 977.87 1,743.77 371.26
51
Treaty
Proportional 0.30 - - 0.30 0.13 0. 43 - 0.43
1,372.
Grand total 754.52 327.19 315.51 766.20 978.00 1,744.20 371.26
94
8.3 These are short term lendings to various financial institutions and are
secured against government securities shown in note 8.4 below. These
carry mark up at rates ranging from 9.5% to 13.2 % (2015:8% to 10.5 %)
and will mature on various dates, latest by October 2016.
2016 2015
9.1 Particulars of provision for diminution in value of
Rs. in million
investments
Opening balance 39 28
Charge for the year 17 12
Impairment / (reversals) (6) 2
Amounts written off (5) (3)
6 11
Closing balance 45 39
Working
Sold Redeemed
No. of Units 765,900 717,480
Rupees in 000
Par value of units @ Rs. 100 76,590 71,748
Sale proceed / redemption value 85,015 77,488
Element of (income) / loss (8,425) 5,740
Net element (2,685)
32.10 IAS 26
(a) The differences between 1AS 26 - Accounting and Reporting by Retirement
Benefit Plan and IAS 19 - Employee Benefits are:
(i) IAS 26 addresses the financial reporting considerations for the benefit
plan itself as the reporting entity while IAS 19 deals with employers
accounting for the cost of such benefits as they are earned by the
employees
(ii) These standards are thus somewhat related, but there will not be any
direct inter-relationship between the amounts reported in benefit plan
financial statements and amounts reported under IAS 19 by
employers.
(iii) IAS 26 differs from IAS 19, Employee Benefits, in allowing a choice of
measurement based either on current salary levels or projected
salary levels. IAS 19 requires an actuarial valuation to be based on
the latter, whereas IAS 26 requires valuation based on present value
of promised retirement benefits.
HELD TO MATURITY
Government Securities
Defense Saving Certificates 87,812,855 - 21,376,809 - (1,600,000) (5,456,000) 102,133,664
Unlisted Securities and
Deposits
-
Term Finance Certificates 19,943,656 5,000,000 1,655,223 (12,873,068) (1,893,722) 11,832,089
423
Term Deposit 6,414,058
-
119,341,142 5,000,000 23,389,251 (19,773,068) (7,577,514) 120,379,811
AVAILABLE FOR SALE
Listed Securities
the asset becomes available for use, from 1 October 2016 in this case.
Depreciation of Rs. 35,000 ((Rs. 2.7 million, plus (Rs. 135,000 2.7/4.5)
20) 3/12) should be recognised in profit or loss for the year ended 31
December 2016 and the carrying amount of the asset reduced by the same
amount to Rs. 4.6 million.
Useful life of the blast furnace
Depreciation of the blast furnace has been based on an estimated useful
life of 20 years. This is at variance with a report by a qualified expert. The
asset valuation specialist treats the furnace as being made up of two
components, the main structure and the lining, which must be replaced at
regular five yearly intervals over the life of the asset. This is the approach
required by IAS 16. The uncertainties inherent in business mean that many
items in financial statements cannot be measured with certainty, but
estimates should always be made using the most up to date and reliable
information. Where estimates have been prepared by professionals with
relevant qualifications, then it is nearly always most appropriate to use
those estimates. Therefore in accordance with the valuers report the main
structure of the furnace should be depreciated over 15 years from 1
January 2016 and the lining should be depreciated over five years from that
date.
The reassessment of the estimated lives of assets is a change in
accounting estimate, rather than a change in accounting policy (IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors).
Changes in accounting estimate should be dealt with on a prospective
basis. This is achieved by including the effect of the change in profit or loss
in current and future periods. The additional depreciation should be
calculated as:
Rs.000
420
IAS 8 requires the disclosure of the nature and amount of the effect of the
change in the estimate of useful lives on the profit for the year.
(b) Revised financial statements
Statement of profit or loss extract for the year ended 31 December 2016
Borrowing Blast
Draft Revenue costs furnace Revised
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Profit before tax 2,500 (1,000) (315)+ (35) (245) 905