Certificate in Accounting and Finance Stage Examination
The Institute of 4 September 2023
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Financial Accounting and Reporting-II
Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.
Section A
Q.1 The following balances have been extracted from the statement of financial position of
Uchhali Limited (UL) as on 31 December 2022:
2022 2021
---- Rs. in million ----
Investment property 420 -
Inventories 840 780
Interest receivable 65 80
Accumulated losses 460 390
Accrued expenses 232 250
Additional information:
(i) UL has only one investment property, which was purchased during 2022 at a cost of
Rs. 450 million. The fair value of the property as on 31 December 2022 amounted to
Rs. 610 million. UL follows cost model for accounting purposes.
Under tax laws, capital gain on investment property is taxable at the time of sale,
while depreciation is not allowed.
(ii) Inventories imported during the year 2022 amounted to Rs. 660 million, of which
40% remained unsold as on 31 December 2022. Payment of imported inventories
resulted in a foreign exchange loss of Rs. 100 million.
Under tax laws, the foreign exchange loss is considered as the part of cost of
inventories.
(iii) Interest income for the year 2022 amounted to Rs. 120 million, of which
Rs. 65 million was receivable as on 31 December 2022.
Under tax laws, interest income was taxable on an accrual basis in 2021. However,
with effect from 1 January 2022, interest is taxable on a receipt basis.
(iv) Accrued expenses include payables for penalties of Rs. 42 million
(2021: Rs. 6 million). During the year, UL also paid penalties of Rs. 56 million.
Under tax laws, penalties are not deductible; however, other expenses are allowed on
payment basis.
(v) UL has unused tax losses amounting to Rs. 550 million as on 31 December 2022.
(vi) It is expected that, after three years, sufficient taxable profits will be earned to utilise
the benefit of unused losses and deductible temporary differences.
(vii) The applicable tax rates are as follows:
*2023 and onwards 2022 and before
Interest income 20% 15%
All other incomes 30% 25%
*Enacted before 31 December 2022
Required:
Compute the deferred tax liability or asset that should be recognized in UL‘s statement of
financial position as on 31 December 2022. (10)
Financial Accounting and Reporting-II Page 2 of 7
Q.2 Drigh Limited (DL), a listed company, has seven components. The following information is
available about the components:
Revenues
Profit/(loss) Total assets
Components External Inter-segment Total
--------------------------------- Rs. in million ---------------------------------
A 2,600 200 2,800 (300) 700
B - 600 600 (45) 135
C 1,600 - 1,600 (580) 150
D 1,550 113 1,663 475 613
E 575 - 575 58 162
F 500 75 575 60 300
G 125 - 125 13 150
6,950 988 7,938 (319) 2,210
Additional information:
(i) Operating results of all the above components are reviewed by DL’s CEO. He is of the
view that all components need to be presented separately in the DL’s financial
statements as per IFRS 8.
(ii) Components A and G exhibit similar long-term financial performance because they
have similar economic characteristics while other components do not have similar
economic characteristics.
(iii) Component F earns revenues that are only incidental to the activities of DL and
supports components C and D.
Required:
Keeping in view the CEO’s point of view, discuss how the above components should be
presented in the note of ‘Operating Segments’ in accordance with IFRS 8.
(Preparation of note is not required) (08)
Q.3 The following information pertains to three independent contracts:
(i) Alpha entered into a contract with Beta to provide administrative support services to
Beta for a period of one year. These services encompass data entry, scheduling
departmental meetings and tasks, and so on, to help Beta focus on its core operations.
Alpha is not entitled to any amount if the one year period is not completed.
(ii) Gamma is developing a residential society comprising identical villas. Delta entered
into contract with Gamma to buy one of the villas. The control of the villa will be
transferred to Delta once the entire society is complete.
The contract specifically mentions that no customized modification will be made
during the construction by Gamma. Delta is required to make payments in proportion
to the work done. In case of termination by Delta, Gamma is liable to return the
amount paid by Delta once the villa is sold to another party.
(iii) Eta entered into a contract with Theta to develop a software for Theta. The software
will be designed specifically to meet Theta's operational needs and will not be usable
for any other customer. The contract states that Theta will pay 50% of the total contract
price upfront and the remaining 50% upon completion of work. Theta does not have
the right to terminate the contract unless Eta fails to perform.
Required:
Analyze whether the revenue should be recognized over time in each of the above contracts
in accordance with IFRS 15. (08)
Financial Accounting and Reporting-II Page 3 of 7
Q.4 You have been working as an accountant at Satpara Limited (SL), a listed company. SL is
considering to grant interest free long term loans to few directors for the purpose of building
houses, which will be recovered in instalments from salaries over five years. Further, a
Pakistan-based related party has also requested a long term loan from SL for business
expansion, with repayment expected after three years. You have pointed out that providing
such loans would require additional disclosures as per Fourth schedule to the
Companies Act, 2017. CFO has asked you to prepare an illustrative note disclosing the
above, which would be included in the upcoming annual financial statements of SL if these
loans are granted.
Required:
Prepare the note as required by the CFO. (06)
(You may assume necessary details or numbers)
Q.5 On 1 January 2022, Namal Leasing Limited (NLL) leased a manufacturing plant to Haleji
Limited (HL). Details are as follows:
(i) The non-cancellable lease term is five years during which annual instalment of
Rs. 60 million is payable by HL in arrears.
(ii) The interest rate implicit in the lease is 16% per annum.
(iii) NLL incurred an initial direct cost of Rs. 4 million for arranging the lease.
(iv) The estimated residual value of the plant at the end of the lease is Rs. 125 million, of
which Rs. 90 million has been guaranteed by HL.
The following information is also available:
(i) NLL’s profit before tax for the year after all adjustments was Rs. 350 million.
(ii) Applicable tax rate is 30%
(iii) Tax authorities treat each lease as an operating lease.
Required:
Prepare the relevant extracts from NLL’s statement of profit or loss for the year ended
31 December 2022, and the statement of financial position as on that date. (08)
Q.6 Select the most appropriate answer(s) from the options available for each of the following
Multiple Choice Questions.
(i) Which of the following statements is/are correct?
(I) All public interest companies must follow the requirements of the Fourth
schedule to the Companies Act, 2017.
(II) IAS 1 requires entities to show an analysis of expenses based on both nature as
well as functions within the entity.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)
(ii) Siri Limited (SL) purchased 1 million ordinary shares of another company at the fair
value of Rs. 23 per share. SL also incurred transaction cost of Rs. 0.5 million. SL
considers this investment as a strategic equity investment and not held for trading.
Which of the following statements is/are correct in this regard?
(I) On initial recognition, the investment can be recognised at Rs. 23 million or
Rs. 23.5 million depending on classification.
(II) On subsequent measurement, the investment must be carried at fair value only.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)
Financial Accounting and Reporting-II Page 4 of 7
(iii) On 1 July 2022, a company issued 5% debentures with a par value of Rs. 15 million
for Rs. 20 million, incurring issue costs of Rs. 0.5 million. The debentures are
redeemable at a premium, giving them an effective interest rate of 8% per annum.
What expense should be recorded in relation to the debentures for the year ended
30 June 2023?
(a) Rs. 2,400,000 (b) Rs. 1,600,000 (c) Rs. 975,000 (d) Rs. 1,560,000 (01)
(iv) Which of the following statements is/are correct?
(I) In case of sale of goods by parent to associate, the unrealised profit is eliminated
in full.
(II) In case of sale of goods by associate to parent, amount payable to associate
would be presented in the consolidated statement of financial position.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)
(v) Which of the following statements is/are correct?
(I) Acceptance of a significant gift would result in familiarity threat to fundamental
principles.
(II) Commercial pressure from outside the employing organization would result in
self-review threat to fundamental principles.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)
(vi) A Pakistan based company purchased a piece of land in Saudi Arabia for
SAR 10 million on 1 August 2022. Details of payments on various dates are as follows:
Date Amount Exchange rate
1 May 2022 SAR 3 million 1 SAR = Rs. 65
1 August 2022 SAR 5 million 1 SAR = Rs. 74
1 October 2022 SAR 2 million 1 SAR = Rs. 78
At what amount, should this piece of land be recognised?
(a) Rs. 713 million (b) Rs. 721 million
(c) Rs. 740 million (d) Rs. 780 million (01)
(vii) Which of the following statements is correct in the light of IAS 21?
(a) ‘Investment in debt securities’ is a monetary item while ‘Refund liability’ is a
non-monetary item
(b) ‘Advance from customers’ is a monetary item while ‘Biological assets’ is a
non-monetary item
(c) ‘Deferred government grant’ is a monetary item while ‘Deferred tax asset’ is a
non-monetary item
(d) ‘Lease liability’ is a monetary item while ‘Right-of-use asset’ is a non-monetary
item (01)
(viii) Ansoo Limited (AL) owns a property that has been rented to its subsidiary which uses
it as sales office. How should the above property be classified by AL in separate and
consolidated financial statements?
Separate Consolidated
(a) Property, plant and equipment Property, plant and equipment
(b) Investment property Property, plant and equipment
(c) Property, plant and equipment Investment property
(d) Investment property Investment property (01)
Financial Accounting and Reporting-II Page 5 of 7
(ix) Asghar Limited (AL) is currently negotiating the acquisition of Basker Limited (BL).
Mr. Karim ACA, besides being CFO of AL, is part of the team negotiating the
acquisition of BL. After becoming aware of the potential acquisition, Karim
purchased 2 million shares of BL in the name of his son.
Which TWO of the following fundamental principles of ICAP’s code of ethics is
Mr. Karim is in breach of?
(a) Confidentiality (b) Objectivity
(c) Professional behaviour (d) Professional competence (01)
(x) Which TWO of the following assets require the application of IAS 41?
(a) Animals kept by zoo for earning ticket revenue
(b) Parrots kept by a restaurant to attract more customers
(c) Birds kept for sale by a pet shop
(d) Hens kept by a poultry farm (01)
Section B
Q.7 For the purpose of this question, assume that the date today is 1 September 2023.
Jahlar Cosmetics Limited (JCL) is currently in the process of finalising its financial
statements for the year ended 30 June 2023.
In May 2023, JCL was on the verge of launching an innovative line of beauty products.
However, the launch was cancelled due to alarming reports that employees involved in
internal testing of the new cosmetics experienced adverse skin reactions, ranging from minor
irritations to serious allergic responses. The situation worsened as news of these reactions
spread through media outlets, highlighting potential risks, damaging JCL's reputation, and
causing public doubt.
As a result of the above, JCL has incurred a net loss for the first time. Additionally, JCL has
encountered the following matters:
(i) In July 2023, affected employees filed a lawsuit against JCL for damages. Legal
advisors anticipate that these suits could result in potential liability of Rs. 120 million.
However, due to legal complexities, the actual payout remains uncertain. The legal
advisors estimate a 70% likelihood of incurring the full liability and a 30% likelihood
of incurring only half the amount.
(ii) In June 2023, the JCL’s board of directors approved a detailed restructuring plan
involving the reduction of operations in two cities due to high cost and low
profitability. The plan was announced and communicated to the employees in the same
month. The implementation of this plan will span over a six-months period, resulting
in employee redundancies, lease termination charges, and retraining cost amounting
to Rs. 150 million, Rs. 24 million and Rs. 18 million, respectively. Further, an expected
disposal of assets is projected to generate a gain of Rs. 18 million.
(iii) As of 30 June 2023, JCL was in breach of one of the loan covenants related to revenue
target, which would have led to the entire long term loan becoming payable
immediately. However, JCL contacted the banks and obtained a waiver from them for
compliance with the given covenant on 26 July 2023.
(iv) JCL plans to raise finance from the issuance of bonds in October 2023. Due to the
challenges, it is estimated that the bond issuance will yield Rs. 100 million less than
the original estimates. Further, the interest rates would need to be increased by 2% per
annum to make the issue possible. This additional interest would result in an annual
loss of Rs. 14 million, which has a present value of Rs. 70 million.
Required:
Discuss the effect of the above matters on JCL’s financial statements for the year ended
30 June 2023. (13)
Financial Accounting and Reporting-II Page 6 of 7
Q.8 Following balances have been extracted from the records of Baghsar Limited (BL), Rawal
Limited (RL), and Tarbela Limited (TL) for the year ended 30 June 2023:
BL RL TL
-------- Rs. in million --------
Sales 3,900 2,480 1,900
Cost of sales 1,980 1,660 810
Operating expenses 500 620 415
Other income 420 100 90
Finance cost 150 60 95
Revaluation surplus arising during the year 120 300 90
Additional information:
(i) Details of BL’s investments are as follows:
Share capital Retained
Revaluation
Date of (Rs. 10 each) earnings of
Holding% Investee surplus
investment of investee investee
-------------- Rs. in million --------------
1 Oct 2022 75% RL 6,000 (1,650) 450
1 Jul 2022 30% TL 1,000 1,400 270
(ii) BL acquired the shareholding in RL at the following consideration:
Immediate cash payment of Rs. 2,600 million. This amount was recorded as
investment in BL’s books, and includes Rs. 120 million incurred as a valuation
fee.
Further cash payments of Rs. 2 per share and Rs. 1.5 per share to be paid on
30 September 2024 and 30 September 2025, respectively. This has not been
recorded in BL’s books.
(iii) At the date of acquisition, carrying values of RL’s net assets were equal to their fair
values, with the following exceptions:
The brand, an intangible asset, had a carrying value of Rs. 160 million and a fair
value of Rs. 256 million. The remaining useful life of the brand on acquisition date
is estimated at four years. The recoverable amount of the brand as on
30 June 2023 was estimated at Rs. 178 million.
A building with a carrying value of Rs. 900 million had a fair value of
Rs. 1,200 million. The building is depreciated using a 5% straight-line method.
RL revalued the building to its fair value on 2 October 2022 in its books.
(iv) The fair value of RL’s share was Rs. 8.5 per share on the acquisition date.
(v) Subsequent to the acquisition date, BL sold goods to RL at a sale price of
Rs. 500 million, generating a profit of Rs. 160 million. 80% of these goods were sold
by RL to its customers at a profit of Rs. 150 million before 30 June 2023.
(vi) BL acquired the shareholding in TL by transferring BL's land having a carrying value
of Rs. 690 million and a fair value of Rs. 932 million on that date. The investment in
TL was recorded at the carrying value of land.
(vii) TL paid a dividend of Rs. 5 per share on 1 June 2023. BL recorded the dividend as
other income.
(viii) BL measures non-controlling interest at the acquisition date at its fair value.
(ix) Income and expenses of all companies accrued evenly during the year unless stated
otherwise.
(x) A discount rate of 17% per annum may be used wherever required.
Required:
Prepare BL’s consolidated statement of profit or loss and other comprehensive income for
the year ended 30 June 2023. (18)
Financial Accounting and Reporting-II Page 7 of 7
Q.9 The following information pertains to the intangible assets of Hadero Limited (HL):
(i) On 1 May 2022, HL acquired an eight year license at a cost of Rs. 174 million. HL
plans to use the license for six years. Licenses are traded in an active market. As on
31 December 2022, the fair value of a new license valid for eight years is
Rs. 192 million, while older licenses sell at a fair value of new license value less
Rs. 2 million for each month the license has already been used.
(ii) On 1 July 2022, HL acquired operation management software at a cost of
Rs. 410 million. HL also incurred a cost of Rs. 20 million for consulting charges to
select and evaluate the appropriate software in alignment with HL’s needs.
HL expects that indefinite life can be achieved if HL incurs future expenditures to
enhance its performance standards by integrating ‘artificial intelligence’ into this
software. Without such expenditures, the software is projected to become
technologically obsolete in five years.
After the acquisition of the new software, the existing software would henceforth serve
limited purposes. The existing software was acquired for Rs. 240 million, and as on
31 December 2021, Rs. 126 million had been amortized, based on a useful life of
ten years.
On 31 December 2022, HL has estimated the value in use of the existing software to
be Rs. 58 million. This valuation has been computed using cash flows projected over
the revised remaining useful life of two years.
(iii) During the year 2022, it was discovered that the entire cost of Rs. 1,050 million
incurred on ‘product development’ has been recorded as intangible asset without
considering the following pertinent facts:
The product development was commenced on 1 August 2021. Up till the launch
date of 1 October 2022, the following directly attributable costs were incurred:
Rs. in million
Staff salary 150
Equipment (having useful life of five years) 420
Consumables 160
Consultant fee 320
Total 1,050
The recognition criteria for capitalization of internally generated intangible assets
was met on 1 February 2022. All costs have been incurred evenly during the
period except the equipment which was purchased specifically for this product
development on 1 September 2021. The useful life of the developed product is
estimated at eight years.
(iv) HL uses the revaluation model for the subsequent measurement of its intangible assets,
wherever possible, and accounts for revaluation using the net replacement value
method. Depreciation and amortisation are charged using the straight line basis.
Required:
Prepare the notes on ‘Intangible assets’ and ‘Correction of error’ for inclusion in HL’s
financial statements for the year ended 31 December 2022, in accordance with the
requirements of IFRSs. (19)
(THE END)
