ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
Ans.1 Taimur Holding Limited
Consolidated statement of financial position
As at 31 December 2015
Rs. in million
Non-current Assets
Property, plant & equipment (481 + 735 + 16 – 46 – 60) 1,126.00
Goodwill [25.39 (W-1) – 9.39 (W-2)] 16.00
Investments (W-3) 610.61
Long term receivable [22 – 1.64 (W-4)] 20.36
Total non-current assets 1,772.97
Current Assets
Disposal group held for sale [60 + 25 – 20 (W -5)] 65.00
Other current assets (2,142 + 1,636 – 25) 3,753.00
Total assets 5,590.97
Share capital & Reserves
Share capital 1,120.00
Retained earnings (W-6) 1,081.53
Other reserves (W-7) 156.52
Non-controlling interest (W-8) 247.92
Non-current liabilities (263 + 248) 511.00
Current liabilities
Current liabilities associated with disposal group 10.00
Other current liabilities (1,514 + 954 – 10 + 6) 2,464.00
Total equity and liabilities 5,590.97
Workings:
W-1: Goodwill on acquisition of ZFL Rs. in million
Consideration given and fair value of NCI:
Cash 100.00
Deferred consideration [100 ÷ 82.64
Issuance of shares (28.5 × 11.5) 327.75
Fair value of land 54.00
Fair value of non-controlling interest (24 × 16.5) 396.00
960.39
Less: Fair value of net assets acquired
Share capital 600
Retained earnings 299
Other reserves 26
Contingent liability (6)
Increase in FV of land 16
935
Goodwill 25.39
W-2 : Impairment of goodwill Rs. in million
Net assets at year end - Given 1,179.00
Contingent liability (6.00)
Increase in fair value of ZFL’s investment 5.00
Increase in fair value of land 16.00
Goodwill 25.39
1,219.39
Recoverable amount as given 1,210.00
Impairment loss (9.39)
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
W-3: Investments Rs. in million
THL (1420 – 564.39 – 260) 595.61
ZFL 10.00
Increase in fair value of ZFL’s investment 5.00
610.61
W-4: Long term receivable Rs. in million
Carrying value 22.00
Present value of future cash flows (8 × 2.5449) (20.36)
Impairment to be recognized 1.64
W-5: Disposal group Rs. in million
Net assets of disposal group (60 + 25 – 10) 75
Less: Estimated fair value less cost to sell (55)
Impairment loss 20
W-6: Retained earnings Rs. in million
THL (given) 1,066.00
Transfer of land wrongly credited in P & L (46.00)
Impairment of goodwill (9.39 × 0.6) (5.63)
Impairment of long term receivables (W-4) (1.64)
Impairment loss on disposal group (W-5) (20.00)
Increase in fair value of ZFL's investment [(15 – 10) × 0.6] 3.00
Post acquisition reserves (ZFL) [(442 – 299) × 0.6] 85.80
1,081.53
W-7: Other reserves Rs. in million
THL (given) 102.00
ZFL – post acquisition [(137 – 26) × 0.6] 66.60
Adjustment to parent’s equity on acquisition of additional 20% of ZFL [(260 – 247.92 (W-8)] (12.08)
156.52
W-8 : Non-controlling interest Rs. in million
Fair value at acquisition (24 × 16.5) 396.00
Post acquisition of retained earnings [(442 – 299) × 0.4] 57.20
Post acquisition of other reserves [(137 – 26) × 0.4] 44.40
Increase in fair value of ZFL investment [(15 – 10) × 40%] 2.00
Impairment of goodwill (9.39 × 0.4) (3.76)
NCI as at 31-12-15 before acquisition of further shares 495.84
Less: 20% portion sold (495.84 ÷ 2) 247.92
Balance as at 31-12-15 247.92
Ans.2 EXTRACT OF STATEMENT OF FINANCIAL POSITION
Other assets 2015 2014
Rs. in million
Net defined benefit asset (2015: 491 – 482, 2014: 449 – 438) 9 11
EXTRACT OF STATEMENT OF COMPREHENSIVE INCOME
Profit & Loss account
Operating expenses 48 15
Other comprehensive income
Re-measurement gain on defined benefit plan (2015:21 – 12), (2014:84 –
50) 9 34
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
EXTRACT OF NOTES TO THE FINANCIAL STATEMENTS
34 - Staff Retirement benefits
Reconciliation - present value of obligations 2015 2014
Rs. in million
Opening balances 438 380
Interest cost (2015: 438 × 9%, 2014: 380 × 8%) 39 30
Current service cost 19 15
Past service cost 30 -
Benefits paid (23) (16)
Settlement - (21)
Actuarial (gain) /loss on obligation (21) 50
Closing balances 482 438
Reconciliation - fair value of plan assets
Opening balances 449 351
Interest income (2015: 449 × 9%, 2014: 351 × 8%) 40 28
Contributions 37 21
Benefits paid (23) (16)
Settlement - (19)
Actuarial gain / (loss) on plan assets (12) 84
Closing balances 491 449
Amount recognized in the profit and loss account
Current service cost 19 15
Past service cost 30 -
Interest cost 39 30
Less: interest income on plan assets (40) (28)
Gain on settlement - (2)
48 15
Key actuarial assumptions used are as follows:
Discount factor 9% 8%
Average remaining life 10 years 10 years
Based on the actuarial advice, the amount of expected contribution to the defined benefit scheme for the
year 2016 will be Rs. 23 million.
2015 2014
Rs. in million % Rs. in million %
Plan assets comprised of:
Debt 319 65% 296 66%
Mutual fund 74 15% 45 10%
Equity 49 10% 63 14%
Bank deposits 49 10% 45 10%
491 449
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
Ans.3 United Front (Private) Limited
Statement of financial position (Extract)
As on 31 December 2015
Rs. in ‘000
Property, plant and equipment - under finance lease
Machine – A [ 78,000 – (78,000 ÷ 5)] 62,400
Long term liabilities
Liabilities against assets subject to finance lease (W-2) 45,870
Deferred gain – net (W-1) 400
Current liabilities
Current maturity – Liabilities against assets subject to finance lease (W-2) 12,717
Statement of comprehensive income (Extract)
For the year ended 31 December 2015
Rs. in ‘000
Net gain / losses on sale of fixed assets (W-1) 5,200
Interest expense (W-2) 6,669
Operating lease rentals 4,000
Depreciation expense 15,600
Notes to the Financial statements
For the year ended 31 December 2015
Present value of
Minimum lease Finance charges
minimum lease
payment
payment
Not later than one year 18,283 5,566 12,717
Later than one year but not later than
five years 54,848 8,979 45,869
Later than five years - - -
73,131 14,545 58,586
Operating lease commitments
Later than one
Not later than Later than five
year but not later
one year years
than five years
Future minimum lease payments 4,000 4,000 -
Workings
W-1: Gain / loss on disposal
Machine A Machine B Total
Lease type Finance lease Operating lease
------------------- Rs. in ‘000 -------------------
Gain recognized in 2015 600 4,600 5,200
[3,000 (W-1.1) ÷ 5] (W-1.2)
Gain/(loss) to be deferred 2,400 (2,000) 400
(3,000 - 600) (44,000 – 41,000) ÷ 3 × 2
W-1.1: Rs. in ‘000
Sale proceeds 78,000
Less: Carrying value (150,000 – 75,000) 75,000
3,000
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
W-1.2: Rs. in ‘000
Fair market value 44,000
Less: Carrying value (48,000 – 9,600) 38,400
Total gain 5,600
Less: Amortization of deferred loss [(44,000 – 41,000) ÷3 ] 1,000
4,600
W-2: Lease amortization schedule
Finance expense
Instalment amount Principal Closing balance
@ 9.5%
-------------------------- Rs. in ‘000 --------------------------
*1
70,200
2015 18,283 6,669 11,614 58,586
2016 18,283 5,566 12,717 45,870
2017 18,283 4,358 13,925 31,945
2018 18,283 3,035 15,248 16,697
2019 18,283 1,586 16,696 -
*1
78,000 × 90% = 70,200
Ans.4 Big Asset Allocation Fund
Statement of movement in Unit Holders' Fund
For the year ended 31 December 2015
2015
Rs in million
Net assets at the beginning of the year 1,550.00
Issue of 33 million units 1,375.00
Redemption of 29 million units (1,160.00)
215.00
Net element of income and capital gain included in prices of items issued less those in
units redeemed
- Transferred to income statement (46.00)
- Transferred to distribution statement (5.00)
(51.00)
Net element of income and capital gain included in prices of items issued less those in
units redeemed transferred to distribution statement 5.00
Net unrealized appreciation of re-measurement of investments classified as available for
sale (200-150-60) (10.00)
Capital gains on sale of investment 48.00
Net unrealized appreciation on re-measurement of investment classified as financial
assets at fair value through profit & Loss Account 4.00
Other net income for the year 17.00
59.00
Final distribution for the year ended 31 December 201 at Rs. 0.5 per unit (0.5 × 41) (20.50)
Net assets at the end of the year 1,757.50
Net asset value at the beginning of the year (1550 ÷ 41) 37.80
Net asset value at the end of the year 39.06
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
Units in million
Opening units 41.00
Add: Issued units 33.00
Less: Redeemed units (29.00)
Closing units 45.00
Ans.5 Debit Credit
Date Description
Rs. in million
31-Dec-15 Depreciation expense (2,663 ÷ 3) 887.74
Accumulated depreciation 887.74
(To record depreciation expense for 2015)
31-Dec-15 Revaluation surplus (W-4) 22.35
Deferred tax liability (W-4) 9.58
Retained earnings 31.93
(Transfer revaluation surplus to retained earnings to the extent of
incremental depreciation)
31-Dec-15 Finance cost (W-1) 41.32
Provision for decommission cost 41.32
(To record finance charge on unwinding of discount)
31-Dec-15 Accumulated depreciation 887.74
Plant & Machinery 887.74
31-Dec-15 Provision for decommission cost (W-1) 206.61
Revaluation surplus (W-4) 44.70
Deferred tax liability (W-4) 19.15
Impairment loss 57.09
Plant & machinery (W-2) 327.55
(To record decrease in decommissioning liability and fair value of
plant and machinery)
31-Dec-15 Deferred tax liability (274.50 - 19.16) 255.34
Deferred tax expense/income 255.34
(To record deferred tax income for 2015)
W-1: Provision for decommission cost
Amount of Discount Liability Finance
Date Increase in provision
liability factor balance charges
1-Jan-14 400 0.6830 273.00 - -
31-Dec-14 400 0.7513 300.53 27.53 -
31-Dec-14 550 0.7513 413.22 - 112.70
31-Dec-15 550 0.8264 454.55 41.32 -
31-Dec-15 300 0.8264 247.93 - (206.61)
W-2: Computation of revaluation surplus / Impairment loss
Dec-14 Dec-15
Cost / Revalued amount 3,273.00 2,663.22
Less: Depreciation (818.25) (887.74)
Carrying amount 2,454.75 1,775.48
Revalued amount 2,250.00 1,200.00
Provision for decommissioning 413.22 247.93
Total revalued amount 2,663.22 1,447.93
Revaluation surplus 208.47 (327.55)
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
W-3: Deferred tax calculation
Deferred tax
Date Description Carrying amount Tax base Temp. diff.
@ 30%
1-Jan-14 Plant & Machinery 3,273.00 3,000
Provision for decommission liability 273.00 -
3000.00 3,000 - -
31-Dec-14 Plant & Machinery 2,663.22 1,350
3,273 – 818.25*1 + 208.47*2 3,000 – 1,650*1
Provision for decommission liability 413.22 -
273+27.53*3+112.70*4
2,250.00 1,350 900 270
31-Dec-15 Plant & Machinery 1,447.93 1,215
2,663.22-887.74*1 – 327.55*5 1,350 – 135
Provision for decommission liability 247.93 -
413.22+41.32 *3– 206.61*4
1,200.00 1,215 (15) (4.5)
Net charge / (reversal) (274.50)
*1
Depreciation , *2 Revaluation surplus, *3 Finance cost, *4 Increase/decrease in provision, *5 Impairment
W-4: Movement in Revaluation surplus
Gross Net Amount Deferred tax
Amount amount
31-Dec-14 Revaluation of plant & machinery 208.47 145.93 62.54
31-Dec-14 Increase in decommissioning liability (112.70) (78.89) (33.81)
95.78 67.04 28.73
31-Dec-15 Transfer to retained earnings (31.93) (22.35) (9.58)
63.85 44.70 19.16
31-Dec-15 Decrease in decommissioning liability 206.61 144.63 61.98
270.46 189.32 81.14
31-Dec-15 Decrease in fair value of plant and machinery (270.46) (189.32) (81.14)
- - -
Ans.6 (a) Commentary on relative operating performance
The gross profit margin of FL is less than that of SL. However, the net profit margin is
higher which indicates higher operating expenses and higher interest expenses in SL.
FL has relatively more money invested in working capital than SL. This is evident from:
A higher debtors’ collection period which is indicative of too lenient credit policies.
A lower trade creditors’ payment period which indicates that full benefit of suppliers’
credit is not being obtained.
A higher stock turnover period which indicates that high level of stock are being
maintained. However, SL stock looks very low in the context of a manufacturing
concern.
Commentary on relative financial performance
Liquidity
The current and quick ratios of both companies look healthy. Further, Quick ratio of SL
indicates a very high cash balance. This seems to imply a very healthy liquidity position.
However, keeping in view the high amount of long term debt, keeping such high cash does
not seem justifiable.
Short-term liquidity may be more of an issue for FL, given its higher working capital ratios.
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2016
Gearing
SL has a higher gearing ratio than FL and, probably as a consequence of this, a lower
interest cover.
It seems that FL is a risk averse company and could have increased its profitability as well as
decreased its weighted average cost of capital by increasing its gearing. In this regard, the
policy being followed by SL seems more appropriate.
Return on capital employed (ROCE)
FL’s ROCE is significantly lower than that of SL. The revaluation of FL’s freehold land may
have been a factor as it must have resulted in an uplift of asset values.
(b) Further information needed with reasons
Industry averages – it would help to assess the performance of the companies in
comparison with the general trend prevailing in the industry.
Historical comparatives – Comparatives for the same period in the previous year would
help to provide a benchmark for each company.
Dividend policy – the effect of dividend policy also needs to be considered as this could
affect a number of ratios.
Cash flow information to establish whether FL may have short-term liquidity problems
from high working capital ratios.
(The End)
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