FINANCIAL & CORPORATE REPORTING

Time allowed - 3 hours

Total marks - 100
{N.B: The figures in the margin indicate full marks. Questions must be answered in English. Examiner will
take account of the quality of language and of the way in which the answers are presented. Different parts, if
any, of the same question must be answered in one place in order of sequence.}
Marks
1. (a) You are the Chief Financial Officer of Royal Bengal Tiger Ltd. Royal Bengal Tiger Ltd. has
subsidiaries located in a number of different countries. Royal Bengal Tiger Ltd. has a strategy
of growth by acquisition and regularly evaluates potential acquisition targets from different
countries and financial reporting regimes. Royal Bengal Tiger Ltd regularly seeks to raise
capital on a number of different markets to fund new acquisitions. All subsidiaries currently
prepare financial statements using applicable local accounting standards. The consolidated
financial statements have been prepared using local accounting standards that apply in Royal
Bengal Tiger Ltd’s jurisdiction up to and including the year ended 31 December 2014. Local
regulations allow financial statements to be prepared either using local accounting standards or
International Financial Reporting Standards (IFRS). The directors are giving serious
consideration to using IFRS from the year ending 31 December 2015 onwards. One of the
directors is unsure of the wisdom of this proposal and has identified a number of issues about
which he is uncertain.
Issue (i)
Changing from using local standards to using international standards is bound to have short-
term cost implications. Ineed to be convinced that the benefits of a change justify these costs.
Please describe three ways we would benefit from a move to IFRS.
Issue (ii)
I’m unclear about the practicalities of adopting IFRS in the year ending 31December 2015. I’ve
heard that we need to start with the opening IFRS statement of financial position. I’m unclear
what this means and for what date it is prepared. Please explain the process for me, including
any additional disclosures we need to make in the first set of financial statements prepared
under IFRS.
Required:
Prepare a response to the two issues raised by the director. 12
(b) XYZ Ltd. is a manufacturer and trader of consumer products. Its accounting year ends 30 June
each year.
The auditors of XYZ Ltd. are finalizing their audits of the 2014-2015 accounts and hope to
meet the proposed deadline of 30 September 2015 when the financial statements are expected
to be authorized for issue.
The following list was prepared by the audit senior on the job for the attention of the audit
manager. Assume you are the audit manager.
Required:
Discuss whether the following post balance sheet events should be classified as `adjusting’ or
`non-adjusting’ events and suggest appropriate accounting treatments. (Note: Assuming all the
above matters are material in relation to the company’s accounts, and ignore tax effects.)
(i) On 10 July 2015, the company’s factory was destroyed by fire caused by sabotage. The
factory was not insured sufficiently and the loss suffered from the fire was estimated to be
Tk.500,000; 2
(ii) The company acquired 1,000,000 shares of DEF Ltd. at a cost of Tk.2,500,000 in 2013-
2014. (DEF Ltd.’s share capital consists of 10,000,000 ordinary shares of Tk.1 each). On
30 June 2015, a provision for diminution in investment of Tk.500,000 was made in respect
of these shares. The provision took into account the impairment in value of the investment.
These shares were sold on 20 August 2015, resulting in a loss of Tk.100,000. The loss of
Tk.100,000 reflects further deterioration in share prices after 30 June 2015; 2

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 (iii) During the first week of September 2015, the company held a `sales’ to clear the old stocks
of 2015 Summer goods and 2015 Eid-ul-Fitre goods, where all the goods were sold at 40%
of cost. In early June 2015, the company purchased Tk.1,000,000 of Summer goods and
Tk.1,000,000 of Eid-ul-Fitre goods (for the Eid-ul-Fitre in August 2015), and as at 30 June
2015 Tk.100,000 of Summer goods and all the Tk.1,000,000 of Eid-ul-Fitre goods were in
the store. These goods were carried at cost and no provision has been made as at 30 June
2015; and 4
(iv) In mid-September 2015, manufacturing defects were discovered in product X100 and
product Y200. Product X100 was manufactured and sold since January 2014 and product
Y200 was one of its new products manufactured and sold in the third quarter of 2015. (As
both the products are made to order, the amount of stock is immaterial). The company was
advised by its lawyers that it was highly probable that the company will have to pay
damages of Tk.500,000 for product X100 and Tk.100,000 for product Y200. 4

2. (a) Meghna acquired 600,000 of the 1,000,000 shares in Padma, the only subsidiary on July 01,
2014. The statement of profit or loss and other comprehensive income of both companies at
December 31, 2014 are as follows:

Income Statement
For the year ended December 31, 2014
Meghna Padma
Tk.`000 Tk.`000
Revenue 86,000 52,000
Cost of goods sold (56,000) (36,000)
Gross profit 30,000 16,000
Other income - dividend from Padma 4,000 -
Distribution expenses (4,000) (1,600)
Administrative expenses (8,000) (4,400)
Interest expense (1,000) (600)
Profit before tax 21,000 9,400
Income tax expense (2,800) (1,800)
Profit after tax 18,200 7,600
Other comprehensive income:
Gain on property revaluation [Note (1)] - 4,000
Investment in equity instrument 400 -
Total comprehensive income 18,600 11,600
Additional information:
(1) At the date of acquisition the fair values of Padma’s assets were equal to their carrying
amounts with the exception of a building which had a fair value Tk. 2 million in excess of
its carrying amount and remaining useful life of 20 years. Building depreciation is charged
to administrative expenses. The building was revalued again at December 31, 2014 and its
fair value had increased by an additional amount of Tk. 2 million.
(2) Sales from Meghna to Padma were Tk. 12 million during the post-acquisition period.
Meghna marks up all sales by 20% on cost.
(3) Despite the property revaluation, Meghna has concluded that goodwill in Padma has been
impaired by Tk. 1 million
(4) It is Meghna’s policy to value the non-controlling interest at full fair value.
(5) Income and expenses can be assumed to have arisen evenly throughout the year.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income for the year 15
ended at December 2014.

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 (b) Jamuna limited operates many of its activities overseas. The directors have asked for advice on
the correct accounting treatment of the following aspect of Jamuna’s overseas operation.
Jamuna’s functional currency is the US dollar.
On 1 May 2014, Jamuna purchased 70% of a multi-national group whose functional currency was
the dinar. The purchase consideration was US$200 million. At acquisition, the net assets at cost
were 1,000 million dinars. The fair values of the net assets were 1,100 million dinars and the fair
value of the non-controlling interest was 250 million dinars. Jamuna uses the full goodwill
method.
Jamuna wishes to know how to deal with goodwill arising on the above acquisition in the group
financial statements for the year ended 30 April 2015. 5

3. (a) Calculate the carrying amounts of the assets in (i) and (ii) below at 31 March 2015
after applying any impairment losses as per requirement of BAS 36 Impairment
of Assets.

(i) Chin Hung Pharma Ltd. acquired an item of plant at a cost of TK. 800,000 on 1 April 2013
that is used to produce and package pharmaceutical pills. The plant had an estimated residual
value of TK. 50,000 and an estimated life of five years, neither of which has changed. Chin
Hung Pharma Ltd. uses straight-line depreciation. On 31 March 2015, Chin Hung Pharma Ltd.
was informed by a major customer (who buys products produced by the plant) that it would no
longer be placing orders with Chin Hung Pharma Ltd. Even before this information was known,
Chin Hung Pharma Ltd. had been having difficulty finding work for this plant. It now estimates
that net cash inflows earned from the plant for the next three years will be:
TK. ’000
year ended: 31 March 2016 220
31 March 2017 180
31 March 2018 170
On 31 March 2018, the plant is still expected to be sold for its estimated realisable value.
Chin Hung Pharma Ltd. has confirmed that there is no market in which to sell the plant at 31
March 2015. Chin Hung Pharma Ltd’s cost of capital is 10% and the following values should
be used:
value of TK. 1 at: Tk.
end of year 1 0·91
end of year 2 0·83
end of year 3 0·75 5
(ii) Chin Hung Pharma Ltd. owned a 100% subsidiary, RIFF, that is treated as a cash generating
unit. On 31 March 2015, there was an industrial accident (a gas explosion) that caused damage
to some of RIFF’s plant. The assets of RIFF immediately before the accident were:
Tk.’000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
Total 12,000

As a result of the accident, the recoverable amount of RIFF is TK.6·7 million. The explosion
destroyed (to the point of no further use) an item of plant that had a carrying amount of TK.
500,000. RIFF has an open offer from a competitor of TK.1 million for its patent. The
receivables and cash are already stated at their fair values less costs to sell (net realisable
values). 8
(b) (i) ABC Ltd. was incorporated in 2011 with a paid-up capital of 5,000,000 ordinary shares of
Tk.1.00 each. Its accounting year-end is 31 December each year.

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 On 1 October 2013, ABC Ltd. issued Tk.1,000,000 convertible loan stocks (CLS). The
CLS carry a gross interest rate of 10% and are convertible into ordinary shares at a rate of 1
ordinary share for Tk.1 of loan stock, commencing 1 January 2015.
ABC Ltd.’s after-tax profits were Tk.1,000,000 for each of the years ended 31 December
2013 and 2014. Assume a statutory tax rate of 30%.
Required:
Calculate the EPS figures that need to be presented in the financial statements for the year
2014 as per the relevant BAS. 7
(ii) Navana Ltd. sold goods, which had a cost of Tk.90,000, to a wholesaler for Tk.105,000 on
July 01, 2014. Navana has an option to repurchase the goods from the Wholesaler at any
time within the next two years. The repurchase will be Tk.105,000 plus interest at 12% per
annum from the date of sale to the date of repurchase. It is expected that Navana will
repurchase the goods.
Required:
Describe how Navana should treat above the events in its financial statements in the year to
March 31, 2015. 4
st
(iii) An intangible assets with an estimated life of nine years was acquired by P Ltd. on 1
January 2013 for Tk.11,250. It was revalued to Tk.13,600 on 31st December 2013 and a
revaluation surplus of Tk.3,600 was correctly recognized on that date. At 31 st December
2014 the asset was revalued at Tk.8,000.
Required:
State the accounting treatments required in 2014 financial statements. 4
(iv) ABC Ltd. is a computer manufacturer. It adopted a 30 June accounting year-end.
On 1 July 2013, the company uses its excess cash to buy a factory for investment purposes.
The factory is rented out to another manufacturer. The factory costs Tk.50,000,000, and is
expected to have a useful life of 50 years with no salvage value. The market value of the
building is Tk.55,000,000 as at 30 June 2014 and Tk.48,000,000 as at 30 June, 2015. The
company has a policy of applying the straight line method of depreciation in the case of
fixed assets, as may be applicable.
Required:
Pass journal entries to show how the factory should be recognized and measured under the
relevant BAS? 6

4. Heavy Goods Ltd. carries on business as a manufacturer of tractors. In 2014 the company was
looking for acquisitions and carrying out investigations into a number of possible targets. One of
these was a competitor, Modern Tractors Ltd.
The company’s acquisition strategy was to acquire companies that were vulnerable to a takeover
and in which there was an opportunity to improve asset management and profitability.
The CFO of Heavy Goods Ltd. has instructed his assistant to calculate ratios from the financial
statements of Modern Tractors Ltd. for the past three years and to prepare a report based on these
ratios and the industry average ratios that have been provided by the trade association. The ratios
prepared by the assistant accountant and the industry averages for 2014 are set out below:

Industry
average
2012 2013 2014 2014
Sales growth % 30.00 40.00 9.52 8.25
Sales/total assets 1.83 20.5 1.60 2.43
Sales/net fixed assets 2.94 3.59 2.74 16.85
Sales/working capital (21.43) (140.00) 38.33 10.81

Sales/debtors 37.50 70.00 92.00 16.00

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 Industry
average
2012 2013 2014 2014
Gross profits/sales % 18.67 22.62 19.57 23.92
Profit before tax/sales % 8.00 17.62 11.74 4.06
Profit before interest/interest 6.45 26.57 14.50 4.95

Profit after tax/total assets % 9.76 27.80 13.24 8.97

Profit after tax/equity % 57.14 75.00 39.58 28.90
Net fixed assets/total assets % 62.20 57.07 58.54 19.12
Net fixed assets/equity 3.64 1.54 1.75 0.58

Equity/total assets % 18.29 37.07 33.45 32.96

Total liabilities/total assets % 81.71 62.93 66.55 69.00
Total liabilities/equity 4.47 1.70 1.99 2.40
Long-term debt/total assets % 36.59 18.54 29.27 19.00

Current liabilities/total assets % 45.12 44.39 37.28 50.00

Current assets/current liabilities 0.84 0.97 1.11 1.63
(Current assets-stock)/current liabilities 0.43 0.54 0.72 0.58

Stock/total assets % 17.07 18.54 14.63 41.90

Cost of sales/stock 8.71 8.55 8.81 4.29
Cost of sales/creditors 6.10 6.25 6.17 12.87

Debtors/total assets % 4.88 2.93 1.70 18.40

Cash/total assets % 15.85 21.46 25.08 9.60
Total assets = Fixed assets at net book value + current assets
Net fixed assets = Fixed assets at net book value.

Required:
(a) Assuming the role of the CFO, draft a brief report to be submitted to the managing director based on
the ratios of Modern Tractors Ltd. for 2012-14 and the industry averages for 2014. 14
(b) Draft a brief memo to management explaining:
(i) in general terms why the comparison of the 2014 ratios with the ratios of previous years
and other companies might be misleading; and 3
(ii) how specific ratios might be affected and the possible implications for the evaluation of the
report. 5

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