Final Examinations
Module E
The Institute of 10 December 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Advanced Accounting and Financial Reporting
Q.1 The following information has been extracted from draft financial statements of RY Limited
(RYL) and its investee companies, DT Limited (DTL) and GN Limited (GNL) for the year
ended 30 June 2015:
RYL DTL GNL
------ Rs. in million ------ G$ in million
Sales 6,000 4,800 52
Cost of sales (3,200) (3,950) (32)
Gross profit 2,800 850 20
Operating costs (855) (595) (9)
Profit from operations 1,945 255 11
Investment income 1,400 26 6
Finance cost (233) (84) (2)
Profit before taxation 3,112 197 15
Income tax (568) (41) (3)
Profit after taxation 2,544 156 12
Ordinary share capital (Rs./G$ 10 each) 1,800 350 5
Retained earnings
At 1 July 2014 2,451 459 27
Profit for the year 2,544 156 12
Dividend paid* (300) (120) (8)
Shareholders’ equity 6,495 845 36
* Final dividend for the year ended 30 June 2014 paid in August 2014
Additional information:
(i) RYL bought 26.25 million shares in DTL on 1 October 2012 for Rs. 1,200 million
when DTL’s retained earnings were Rs. 240 million. At acquisition date the fair value
of DTL's net assets was equal to their carrying amount. There have been no changes
in the share capital since acquisition. The fair value of non-controlling interest on
acquisition was Rs. 340 million. Prior to 1 July 2014 impairments amounting to
Rs. 250 million had been recorded in DTL’s goodwill.
(ii) On 1 January 2015, RYL sold 15.75 million shares in DTL for Rs. 1,950 million. The
fair value of RYL's remaining shares on this date was Rs. 1,300 million.
(iii) On 1 October 2014 RYL bought 400,000 shares in GNL, a company located overseas,
for G$ 50 million. Professional fees relating to the acquisition were Rs. 100 million
and these have been added to the cost of investment. At 1 October 2014, the fair value
of GNL’s net assets was equal to their carrying amount except a building whose fair
value exceeded the carrying amount by G$ 8 million. The building had a remaining
useful life of 8 years at the date of acquisition. The market price of GNL’s shares on
acquisition date was G$ 120.
(iv) Investment income appearing in RYL’s separate profit and loss statement includes
profit on sale of DTL’s shares and dividend received from DTL.
(v) RYL values its non-controlling interest on acquisition at fair value.
Advanced Accounting and Financial Reporting Page 2 of 5
(vi) The exchange rates per G$ were as follows:
1 October 2014 Rs. 76
30 June 2015 Rs. 79
Average for October 2014 to June 2015 Rs. 78
It may be assumed that profits of all companies had accrued evenly during the year.
Required:
In accordance with the requirement of International Financial Reporting Standards, prepare
consolidated statement of comprehensive income of RYL for the year ended 30 June 2015.
(Ignore taxation) (23)
Q.2 Beta Foods Limited (BFL) is in process of finalizing its consolidated financial statements for
the year ended 30 June 2015. Following information pertains to BFL’s intangible assets.
(i) Value of intangible assets as at 30 June 2013:
Goodwill Patents
Rs. in million
Cost 1,500 400
Accumulated amortization / impairment 300 160
(ii) On 1 July 2013, BFL acquired the entire shareholdings of Gamma Enterprises (GE)
for Rs. 5,400 million. The value of patents, development expenditure and other net
assets of GE on the date of acquisition was Rs. 2,100 million, Rs. 48 million and Rs.
1,430 million respectively.
The break-up of development expenditure was as follows:
Products Rs. in million
A – 214 25
B – 917 23
Total 48
(iii) Research and development expenditure during the year ended 30 June 2014 and 2015
was as follows:
Research Development
Year Product Name
------ Rs. in million ------
A – 214* - 8
2014
B – 917 10 45
2015 B – 917 - 50
*because of certain reasons the management had decided to abandon this project in May 2014.
(iv) Trial production of B-917 commenced in March 2015. Net cost of trial production up
to 30 June 2015 amounted to Rs. 22 million.
(v) Patents are amortized over their remaining useful life of 10 years on straight line
method.
(vi) Recoverable amounts of assets having indefinite life, determined as a result of
impairment testing, were as follows:
2015 2014
------ Rs. in million ------
Goodwill 2,800 2,550
Product B-917 160 65
Required:
Prepare a note on intangible assets, for inclusion in BFL’s consolidated financial statements
for the year ended 30 June 2015 in accordance with the requirements of International
Financial Reporting Standards. (16)
Advanced Accounting and Financial Reporting Page 3 of 5
Q.3 Financial statements of Waseem Industries Limited (WIL) for the year ended 30 June 2015
are in the process of finalization. In this respect, the following information has been
gathered from WIL’s accounting and tax records:
(i) 2015 2014
Rs. in million
Property, plant and equipment – Accounting WDV 1,950 1,800
Property, plant and equipment – Tax WDV 1,120 1,050
Provision for bad debts 110 60
Unused tax losses carried forward 40 35
Exchange translation reserve 53 145
Liabilities older than 3 years, disallowed in previous years 7 3
(ii) On 1 July 2013, WIL granted 600,000 share options to its Managing Director under
the terms of his employment, vesting three years later on 30 June 2016. The value of
each option measured at the grant date was Rs. 300 and the intrinsic value of each
share option was Rs. 140 at 30 June 2014 and Rs. 110 at 30 June 2015. According to
the tax law, intrinsic value of the option on the exercise date is an admissible expense.
(iii) A building costing Rs. 200 million was purchased on 1 July 2011 with an expected
useful life of 10 years. It was revalued at Rs. 230 million on 1 July 2013.
(iv) 25% of WIL's income and expenses for both years fall under the Final Tax Regime
(FTR) and this trend is expected to continue in future also.
(v) Applicable tax rate is 32%.
Required:
Prepare a note related to deferred tax liability /asset along with the reconciliation that may
be included in WIL's financial statements for the year ended 30 June 2015, in accordance
with the International Financial Reporting Standards and the Companies Ordinance, 1984,
as applicable. (Comparative figures are not required) (15)
Q.4 You have significant investment in XYZ Limited. Your brokerage house has provided you
with a report which is based on the financial statements of XYZ Limited for the year ended
30 June 2015. You have reviewed the report and the financial statements and obtained the
following information:
(i) Deferred tax assets
The company has recognized substantial amount of deferred tax asset in respect of
carried forward losses, which will expire in next three years. The losses were incurred
during the last five years and in current year it made a small profit before tax due to
non-operating gains.
(ii) Convertible preference shares
Convertible preference shares have been disclosed as a liability.
(iii) Unrealised gains and losses
The company uses fair value method for investments held as “Available for sale” and
“Held for trading” and unrealised gains and losses on such investments are recorded
in other comprehensive income.
You have also received information that the company has revised its pension scheme
significantly, subsequent to the issuance of the above financial statements. However there is
no information as regards the actuarial valuation subsequent to the revision.
Required:
Assume that the report has been prepared without considering the possible impact of the
adjustments required because of the above information, if any. Discuss how this could affect
the evaluation carried out by the brokerage house in terms of liquidity, solvency and
profitability ratios and business valuation of XYZ Limited. (15)
Advanced Accounting and Financial Reporting Page 4 of 5
Q.5 (a) (i) Briefly explain the term “biological asset” and state when a biological asset is
recognised in the financial statements under the International Financial
Reporting Standards. (03)
(ii) The Dairy Company (TDC) owns three farms and has a stock of 3,200 cows.
During the year ended 30 June 2015, 300 animals were born, all of which
survived and were still owned by TDC at year-end. Of those, 225 are infants
whereas 75 are nine month old having market values of Rs. 26,000 and Rs.
53,000 per animal respectively. The incidental costs are 2% of the transaction
price.
Required:
In accordance with the requirements of the International Financial Reporting
Standards, discuss how the gain in respect of the new born cows should be
recognized in TDC’s financial statements for the year ended 30 June 2015.
(Show all necessary computations) (03)
(b) On 30 June 2014, ABC Limited classified an item of property, plant and equipment as
being held for sale when its carrying amount was Rs. 240 million, its fair value was
Rs. 225 million and the estimated costs to sell were Rs. 5 million. The asset had been
purchased for a cost of Rs. 300 million on 1 July 2012, and then had a 10 year useful
life.
ABC failed to sell the asset and therefore on 30 June 2015 it decided to reverse the
original decision and use it in the business. At 30 June 2015, the asset had a fair value
of Rs. 230 million and estimated costs to sell amounted to Rs. 5 million. ABC
estimated that annual cash flows from the asset would be Rs. 50 million per annum for
the remaining useful life of the asset.
ABC uses its weighted average cost of capital i.e. 12% as discount rate.
Required:
In accordance with the requirements of the International Financial Reporting
Standards, discuss how the asset should be accounted for in ABC’s financial
statements for the years ended 30 June 2014 and 2015. (06)
Q.6 Asia Sports Limited (ASL) signed a contract on 1 May 2015 to buy high speed machines to
cater to the growing demand of its products. The machines costed USD 6 million and the
amount was paid on 1 August 2015.
ASL hedged the foreign exchange risk by entering into a 3-month forward contract with a
bank to buy USD 6 million on 1 August 2015.
The spot and forward rates per USD were as follows:
Forward rates (for delivery
Dates Spot rates
on 1 August 2015)
1 May 2015 Rs. 103.20 Rs. 103.63
30 June 2015 Rs. 105.38 Rs. 105.50
1 August 2015 Rs. 106.00 Rs. 106.00
ASL’s financial year ends on 30 June.
Required:
Show all necessary accounting entries relating to these transactions on the following dates,
in accordance with the requirements of the International Financial Reporting Standards on
the assumption that conditions for hedge accounting are met:
(i) 1 May 2015 (ii) 30 June 2015 (iii) 1 August 2015 (09)
Advanced Accounting and Financial Reporting Page 5 of 5
Q.7 Following amounts have been extracted from the trial balance of Noble Bank Limited for
the year ended 31 December 20X5:
20X5 20X4
-------- Rupees in ‘000 --------
Cash in hand – PKR 11,395,278 14,981,446
Cash in hand – USD 2,543,750 2,417,554
Cash in hand – EUR 1,090,179 1,036,095
Current account with SBP – PKR 8,817,802 33,095,825
Current account with SBP – USD 5,641,943 5,270,462
Deposit account with SBP – USD 16,947,158 15,728,111
Current account with NBP – PKR 22,360,829 16,220,092
National Prize Bonds 5,210,150 4,532,830
Current account with Central Bank of UAE – AED 25,713,299 20,139,442
Current account with Bank of England – GBP 17,142,200 13,426,295
Deposit account with Central Bank of UAE – AED 3,245,208 1,903,748
Deposit account with Bank of England – GBP 2,163,472 1,269,165
Other information:
(i) The foreign currency current and deposit accounts include remunerative accounts of
Rs. 37,118.596 million (20X4: Rs. 34,282.789 million).
(ii) The current accounts with SBP are maintained to meet the cash reserve requirement
of the SBP.
(iii) Foreign currency deposit account with SBP is maintained for special reserve
requirement of SBP as well as USD settlement account maintained with the SBP. This
account carries nil return.
(iv) Balances held with the Central Banks of respective countries are in accordance with
the requirements of the local statutory / regulatory requirements. Since the bank
operates in different countries, these balances earn mark-up at different rates as given
by the Central Banks of respective countries.
Required:
Prepare a note on ‘Cash and balances with treasury banks’ for inclusion in financial
statements of Noble Bank Limited for the year ended 31 December 20X5, in accordance
with the laws applicable in Pakistan. (10)
(THE END)
