Professional Documents
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ICAP
Practice Kit
Advanced accounting
and financial reporting
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C
Advanced accounting and financial reporting
Contents
Page
I
Advanced accounting and financial reporting
Question Answer
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CHAPTER 1 – REGULATORY FRAMEWORK
1.1 GENERAL PURPOSE FINANCIAL
1 137
STATEMENTS
CHAPTER 2 – ACCOUNTING AND REPORTING CONCEPTS
2.1 DEFINITIONS 2 139
2.2 CONCEPTUAL FRAMEWORK 2 140
2.3 CARRIE 2 141
CHAPTER 3 – PRESENTATION OF FINANCIAL STATEMENTS
3.1 CLIFTON PHARMA LIMITED 3 142
3.2 BSZ LIMITED 4 144
3.3 YASIR INDUSTRIES LIMITED 6 147
3.4 FIGS PAKISTAN LIMITED 7 151
3.5 FAZAL LIMITED 8 154
3.6 BABER LIMITED 9 155
3.7 GOLDEN LIMITED 9 155
3.8 METAL LIMITED 10 156
3.9 ENGINA 10 157
3.10 SHAZAD INDUSTRIES LTD 11 159
3.11 AZ 11 160
3.12 J-MART LIMITED 12 162
3.13 QALLAT INDUSTRIES LIMITED 13 163
3.14 SKYLINE LIMITED 13 163
3.15 WALNUT LIMITED 14 164
Question Answer
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Question Answer
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CHAPTER 11 – IFRS 16: LEASES
11.1 X LTD 35 202
11.2 PROGRESS LIMITED 35 202
11.3 MIRACLE TEXTILE LIMITED 35 204
11.4 ACACIA LTD 36 205
11.5 SHOAIB LEASING LIMITED 36 206
11.6 AKBAR LIMITED 36 208
11.7 ALI LIMITED 37 208
11.8 MOAZZAM TEXTILE MILLS LIMITED 37 209
11.9 MODIFICATION THAT DECREASES THE
SCOPE OF THE LEASE (IFRS 16, 38 211
ILLUSTRATIVE EXAMPLE 17)
11.10 MODIFICATION THAT BOTH
INCREASES AND DECREASES THE
38 212
SCOPE OF THE LEASE (IFRS 16,
ILLUSTRATIVE EXAMPLE 18)
11.11 SUBLEASE CLASSIFIED AS A FINANCE
LEASE (IFRS 16, ILLUSTRATIVE 38 213
EXAMPLE 20)
11.12 SUBLEASE CLASSIFIED AS AN
OPERATING LEASE (IFRS 16, 38 213
ILLUSTRATIVE EXAMPLE 21)
CHAPTER 12 – IAS 37: PROVISIONS CONTINGENT LIABILITIES AND
CONTINGENT ASSETS
12.1 ROWSLEY 39 214
12.2 MULTAN PETROCHEM LTD 40 215
12.3 VIOLET POWER LIMITED 40 216
CHAPTER 13 – IAS 19: EMPLOYEE BENEFITS FLOWS
13.1 LABURNUM LIMITED 42 217
13.2 JABEL LIMITED 42 217
13.3 KAGHZI LIMITED 42 218
13.4 LASURA LTD 43 218
13.5 UNIVERSAL SOLUTIONS 43 219
13.6 DHA INTERIORS LTD 44 220
CHAPTER 14 – IFRS 2: SHARE BASED PAYMENTS
14.1 TOSHACK LTD 45 223
14.2 IFRS 2 45 223
14.3 SAVAGE LTD 45 225
14.4 YORATH LTD 46 225
14.5 QUALTECH LTD 46 228
Question Answer
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14.6 BRIDGE LTD 46 228
14.7 CAPSTAN LTD 47 227
14.8 NEWTOWN LTD 47 227
14.9 SINDH TRANSIT LTD 47 228
CHAPTER 15 – IFRS 9: FINANCIAL INSTRUMENTS: RECOGNITION
AND MEASUREMENT
15.1 AJI PANCA LTD 49 229
15.2 PASSILA LTD 49 230
15.3 FINANCIAL INSTRUMENTS 50 230
15.4 ESPANOLA LTD 50 232
15.5 SANDIA LTD 51 233
15.6 GEO ALLOYS LTD 51 233
15.7 CASCABEL LTD 51 234
15.8 FAIR VALUE HEDGE ACCOUNTING 52 234
15.9 CASH FLOW HEDGE ACCOUNTING 52 236
15.10 WATERS LTD 52 237
15.11 ARIF INDUSTRIES LIMITED 53 239
15.12 QASMI INVESTMENT LIMITED 54 240
CHAPTER 16 – IFRS 7: FINANCIAL INSTRUMENTS: PRESENTATION
AND DISCLOSURE
16.1 SERRANO LIMITED 55 242
16.2 POBLANO LIMITED 55 243
16.3 PIQUIN LTD 55 243
16.4 AJI LTD 56 244
16.5 CHILTEPIN LTD 56 245
16.6 HABENERO LTD 56 246
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 57 247
18.2 DWAYNE LTD (PART 1) 58 248
18.3 DWAYNE LTD (PART 2) 58 248
18.4 COHORT 59 249
18.5 MODEL TOWN GROUP 60 250
CHAPTER 19 – BUSINESS COMBINATIONS AND CONSOLIDATION
19.1 HELLO 62 252
19.2 HASAN LIMITED 62 253
Question Answer
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19.3 FLAMSTEED LTD AND HALLEY LTD 64 256
19.4 BRADLEY LTD 65 257
19.5 X LTD 66 259
19.6 KHAN LIMITED 67 261
CHAPTER 20 – CONSOLIDATED ACCOUNTS: STATEMENTS OF
PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
20.1 MILLARD LTD 69 264
20.2 SHERLOCK LIMITED 70 266
20.3 FAISAL LIMITED 71 269
20.4 GOLDEN LIMITED 73 273
CHAPTER 21 – IAS 28: ASSOCIATES AND JOINT VENTURES
21.1 JOINT ARRANGEMENTS 75 275
21.2 HELIUM 75 275
21.3 HAMACHI LTD 75 277
21.4 HIDE 77 279
21.5 HARK, SPARK AND ARK 77 280
21.6 P, S AND A 78 283
21.7 H LTD GROUP 79 285
CHAPTER 22 – IFRS 3: BUSINESS COMBINATIONS ACHIEVED IN
STAGES
22.1 STEP ACQUISITION 81 286
22.2 A LTD 81 286
22.3 X LTD GROUP 82 289
22.4 PLAIN LTD 84 291
22.5 MANGO LTD 85 294
CHAPTER 23 – COMPLEX GROUPS
23.1 PARVEZ LTD 87 297
23.2 HASAN, RIAZ AND SIDDIQ 88 300
CHAPTER 24 – DISPOSAL OF SUBSIDIARIES
24.1 PATCHE LTD 90 304
24.2 DISPOSAL 91 306
24.3 PART DISPOSAL 91 307
24.4 THE A GROUP 91 307
24.5 BARTLETT LTD 92 309
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 93 311
26.2 STARLIGHT LIMITED 93 311
26.3 PERCEPT LTD 94 312
26.4 ORLANDO 95 313
26.5 MANCASTER AND STOCKPOT 95 313
26.6 A, B AND C 97 316
26.7 OMEGA LIMITED 98 319
26.8 PARENT COMPANY LIMITED 99 320
CHAPTER 27 – IAS 7: STATEMENTS OF CASH FLOWS
27.1 EVERNEW LTD 101 323
27.2 BELLA 102 325
27.3 BISHOP GROUP 103 326
27.4 THE GRAPE GROUP 105 329
CHAPTER 28 – IAS 33: EARNINGS PER SHARE
28.1 AIRCON LTD 108 331
28.2 CACHET LTD 109 333
28.3 MARY 109 333
28.4 MANDY 110 334
28.5 AAZ LIMITED 110 336
28.6 ABC LIMITED 111 337
28.7 ALPHA LIMITED 111 339
CHAPTER 29 – ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS
29.1 ALPHA LIMITED AND OMEGA LIMITED 113 341
29.2 COOK LIMITED 114 342
29.3 FITZROY LIMITED 115 343
29.4 TRAVELWELL LTD 116 346
29.5 SACHAL LIMITED 118 348
29.6 OPAL INDUSTRIES LIMITED 118 349
CHAPTER 30 – SUNDRY STANDARDS AND INTERPRETATIONS
30.1 GUJRANWALA FOODS LIMITED 120 351
30.2 WAH AGRIPROD LTD 121 352
30.3 HELIOS GROUP 122 354
30.4 FASHION BLUE ENTERPRISES 123 355
30.5 KHAN LIMITED 124 356
30.6 AFRIDI 124 357
Question Answer
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CHAPTER 31 – IFRS 1: FIRST TIME ADOPTION OF IFRS
31.1 IFRS 1 126 359
CHAPTER 32 – SPECIALISED FINANCIAL STATEMENTS
32.1 IFRS FOR SMES 127 361
32.2 AKMAL GENERAL INSURANCE LIMITED 127 362
32.3 MAHFOOZ GENERAL INSURANCE
128 363
LIMITED
32.4 DEE GENERAL INSURANCE LIMITED 128 364
32.5 BANK LATEEF BANK LIMITED 129 364
32.6 SECURED BANK LIMITED 129 365
32.7 AL-AMIN BANK LIMITED 130 366
32.8 BLUE-CHIP ASSET MANAGEMENT
130 366
LIMITED
32.9 A-ONE ASSET MANAGEMENT FUND
131 367
LIMITED
32.10 IAS 26 131 367
32.11 SOGO LIMITED 131 368
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 133 370
36.2 SINDH INDUSTRIES LTD 133 370
36.3 SOHAIB AND OMAR 134 373
36.4 ABBAS AND BASHIR 135 374
A
Advanced accounting and financial reporting
SECTION
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
business’s 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. Carrie’s sole shareholder contributed capital of
Rs.1,000. Carrie purchased one item of inventory for Rs.1,000 and sold that inventory for cash of
Rs.1,400. At the end of Year 1 the replacement cost of the same item of inventory is Rs.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
(4) The leasehold property has a 25-year life and is amortised at a straight-line rate. On 30
September 2016 the leasehold property was revalued to Rs. 220 million and the
directors wish to incorporate this revaluation in the financial statements.
(5) The provision for income tax for the year ended 30 September 2016 has been estimated at
Rs. 18 million. At 30 September 2016 there are taxable temporary differences of Rs. 92
million. The rate of income tax on profits is 25%.
Required
(a) Prepare a statement of profit or loss for Clifton Pharma Limited for the year to 30
September 2016
(b) Prepare a statement of financial position for Clifton Pharma Limited as at 30 September
2016
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 Act, 2017.
(Comparative figures and the note on accounting policies are not required.)
Additional Information:
(i) Sales include an amount of Rs. 27 million, made to a customer under sale or return
agreement. The sale has been made at cost plus 20% and the expiry date for the return of
these goods is July 31, 2016.
(ii) The value of inventories at June 30, 2016 was Rs. 42 million.
(iii) A fraud of Rs. 30 million was discovered in October 2015. A senior employee of the
company, who left in June 2015, had embezzled the funds from YIL’s bank account. The
chances of recovery are remote. The amount is presently appearing in the suspense
account.
(iv) On January 1, 2016 YIL issued debenture certificates which are repayable in 2021.
Interest is paid on these at 12% per annum.
(v) Financial charges comprise bank charges and bank commission.
(vi) The provision for current taxation for the year ended June 30, 2016 after making all the
above adjustments is estimated at Rs. 16.5 million.
(vii) The carrying value of YIL’s 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 Act, 2017 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.)
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:
(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) Auditor’s 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
company’s 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 Act, 2017 and International Financial Reporting Standards. Comparatives are not
required.
(v) The company awarded a contract for supply of two machines amounting to Rs. 7 million
per machine to an associated company.
(vi) In 2014, an advance of Rs. 2 million was given to the Chief Executive of the
company. During the year 2016, he repaid Rs.0.3 million. The balance outstanding as on
December 31, 2016 was Rs. 1,100,000.
Required
Prepare a note for inclusion in the company’s financial statements in accordance with the
requirement of IAS 24: Related Party Disclosures.
Required
Prepare a note on related party transactions for inclusion in GL’s financial statements for the year
ended December 31, 2016 showing disclosures as required under IAS - 24 (Related Party
Disclosures).
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.
Product Location
Subsidiary 1 Textiles Karachi
Subsidiary 2 Car products Lahore
Subsidiary 3 Fashion garments Peshawar
Subsidiary 4 Furniture items Multan
The directors have purchased these subsidiaries in order to diversify their product base but do
not have any knowledge of the information required in the financial statements regarding these
subsidiaries other than the statutory requirements.
Required
(a) Explain to the directors the purpose of segmental reporting of financial information.
(b) Explain to the directors the criteria which should be used to identify the separate reportable
segments. (You should illustrate your answer by reference to the above information)
(c) Critically evaluate IFRS 8, Operating segments, setting out any problems with the
standard.
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.
Warehouse A Warehouse B
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.
(iii) SL has filed a claim against one of its vendors for supplying defective goods. SL’s legal
consultant is confident that damages of Rs. 1 million would be paid to SL. The supplier has
already reimbursed the actual cost of the defective goods.
(iv) A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third
party. SL’s legal consultant is of the opinion that an unfavourable outcome is most likely.
On the basis of past experience he has advised that there is 60% probability that the
amount of damages would be Rs. 1 million and 40% likelihood that the amount would be
Rs. 1.5 million.
Required
Advise SL about the amount of provision that should be incorporated and the disclosures that are
required to be made in the financial statements for the year ended December 31, 2016.
Rs. m
Redundancy costs 1.50
Staff training 0.15
Future operating loss 0.80
Less: Profit on sale of remaining mobile phones (0.50)
1.95
(iii) On 16 January 2017, LED TV sets valuing Rs. 3 million were stolen from a warehouse.
These sets were included in WL’s 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 company’s
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.
2016 2015
Rs. m Rs. m
Property, plant and equipment 189 130
Retained earnings 166 108
Deferred tax liability 45 27
2016 2015
Rs. m Rs. m
Profit before taxation 90 120
Taxation 32 42
Profit after taxation 58 78
Following additional information has not been taken into account in the preparation of the above
financial statements:
(i) Cost of repairs amounting to Rs. 20 million was erroneously debited to the machinery
account on 1 October 2014. The estimated useful life of the machine is 10 years.
(ii) On 1 July 2015, WL reviewed the estimated useful life of its plant and revised it from 5
years to 8 years. The plant was purchased on 1 July 2014 at a cost of Rs. 70 million.
Depreciation is provided under the straight line method. Applicable tax rate is 30%.
Required
Prepare relevant extracts (including comparative figures) for the year ended 30 June 2016
related to the following:
(a) Statement of financial position
(b) Statement of profit or loss
(c) Statement of changes in equity
(d) Correction of error note
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.
2015 2016
Retained earnings Retained 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.
A lump sum price of Rs.9.2 million for the total contract has been agreed between BL and school
network.
Cost and list prices of the goods are:
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.
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.
The company’s financial statements include the following balances for property, plant and
equipment for the year ended 31 December 2015:
Cost/valuation Accumulated depreciation
Rs. Rs.
Land and buildings 1,500,000 315,000
Plant and machinery 1,276,500 879,300
Office equipment 356,400 210,400
Additional information
(1) Land is included in the above at a valuation of Rs. 850,000.
(2) Items of property, plant and equipment are depreciated on a straight-line basis as follows:
Buildings – over 50 years
Plant and machinery – at a rate of 25% per annum on cost
Office equipment – at a rate of 20% per annum on cost
Land is not depreciated.
(2) On 30 June 2016 GCL purchased plant at a cost of Rs. 135,000 and office equipment for
Rs. 36,500. On 30 September 2016 it sold, for a profit, machinery which had cost Rs.
104,000 on 1 January 2014 and was classified as held for sale on 30 June 2016. For the
first time GCL utilised spare capacity in its workshops and started to self-construct a
specialised turning machine for its own use. This machine was almost complete by 31
December 2016. Costs incurred on the machine to 31 December 2016 amounted to Rs.
29,200.
(3) During December 2016 GCL's the foundations of one of the company's warehouses were
found to be insufficient to support some of the machinery that had been housed there,
although this machinery had subsequently been moved to another site. This workshop had
cost Rs. 150,000 on 1 January 2012 and had been revalued to Rs. 210,000 on 31
December 2013. It is now estimated that its fair value is only Rs. 100,000 and that costs to
sell would be Rs. 5,000. Its value in use has been estimated at Rs. 90,000.
(4) On 1 November 2016 the directors decided to sell an item of machinery. At that date a
buyer had been identified and contracts were on the point of being exchanged, at an
agreed price of Rs. 11,000. Selling costs were expected to be Rs. 1,500. This machine
had cost Rs. 50,000 on 1 May 2014.
Required
Prepare the note showing the movements on property, plant and equipment, including
accumulated depreciation, which would be included in the financial statements of GCL 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).
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)
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 company’s 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.
construction work was completed on 30 June 2017, and this was funded out of Butea Ltd’s
existing loan finance.
The following loan finance was in place during the year:
Rs. 1.8 million of loan finance paying 5% pa interest
Rs. 1.2 million of loan finance paying 8.5% pa interest
Neither loan was taken out to finance a specific purpose or building. The total cost of construction
work was Rs. 800,000 and the directors capitalised Rs. 51,000 of finance costs (being nine
months of interest on construction costs of Rs. 800,000 at 8.5% pa).
Required
Explain the correct IFRS accounting treatment for the above transactions and explain how
Butea’s transaction would be reflected in the consolidated financial statements.
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.
st st
1 On 1 August 2015 Brooklyn began investigating a new bio-process. On 1 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
st th
that the expenditure incurred between 1 August 2015 and 30 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
st
health as a result of working for the company for the two years through to 31 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
th
that the case could take until 30 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
th
valuation is due on 30 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.
(ii) The right to manufacture a well-established product under a patent for a period of
five years was purchased on 1 March 2016 for Rs. 17 million. The patent has an
expected remaining useful life of 10 years. RI has the option to renew the patent for
a further period of five years for a sum of Rs. 12 million.
(iii) RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the
month of June 2016. The life of the brand is expected to be 10 years. Currently,
there is no active market for this brand. However, RI is planning to launch an
aggressive marketing campaign in February 2017.
(iv) In September 2015, RI developed a new production process and capitalised it as an
intangible asset at Rs. 7 million. The new process is expected to have an indefinite
useful life. During 2016, RI incurred further development expenditure of Rs. 3
million on the new process which meets the recognition criteria for capitalization of
an intangible asset.
Required
In the light of International Financial Reporting Standards, explain how each of the above
transaction should be accounted for in the financial statements of Raisin International
for the year ended 31 December 2016.
The new manufacturing process was available for use on 1 July 2016. It was believed that the
new process would be of benefit for the next four years after which it would be replaced.
Although operation of the new manufacturing process during its first six months went well, a
breakthrough in the development of improved technology by a competitor led to an impairment
review being carried out by Oxtail Ltd. At 31 December 2016 the fair value (less costs to sell) of
the technical know-how was assessed as being Rs. 152,000 compared with the present value of
the estimated future cash flows expected to be generated by the technology of Rs. 157,000.
Required
(a) Explain the required IFRS accounting treatment of the two issues above, preparing all
relevant calculations.
(b) Prepare an extract from Oxtail Ltd's statement of financial position as at 31 December
2016 and a summary of the related costs that would be recognised in profit or loss for the
year ended 31 December 2016 in respect of intangible assets.
future, would reduce by 30%. As a result the management was of the view that as of
December 31, 2015 the carrying value of the trademark had reduced to 90%.
(iv) Due to continuous inflation and flooding of markets with very low priced shoes, it was
decided in December 2016 that use of the trademark would be discontinued with effect
from January 1, 2018.
Required
(a) Explain how the above transactions should have been accounted for in the years 2010 to
2011 according to International Financial Reporting Standards (IFRSs).
(b) Prepare a note to the financial statements for the year ended December 31, 2016 in
accordance with the requirements of IFRSs. Show comparative figures.
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 1’s 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.
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.
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
Required
Redraft the above financial statements to meet the provisions of IFRS 5:Non-current assets held
for sale and discontinued operations. Work to the nearest Rs.000.
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
Prima’s 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 solicitor’s 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.
Prima’s 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.
Required
Prepare the accounting entries that should be recorded by the company on August 15, 2016 in
respect of the above transactions.
Note: Cost of making sale is negligible. Ignore tax and deferred tax implications, if any.
11.9 MODIFICATION THAT DECREASES THE SCOPE OF THE LEASE (IFRS 16,
ILLUSTRATIVE EXAMPLE 17)
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease
payments are CU 50,000 payable at the end of each year. The interest rate implicit in the lease
cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is
6 per cent per annum. At the beginning of Year 6, Lessee and Lessor agree to amend the
original lease to reduce the space to only 2,500 square metres of the original space starting from
the end of the first quarter of Year 6. The annual fixed lease payments (from Year 6 to Year 10)
are CU30,000. Lessee’s incremental borrowing rate at the beginning of Year 6 is 5 per cent per
annum.
Required
How the lessee should reflect in its books of accounts:
a) Right-of-use retained b) Lease liability
11.10 MODIFICATION THAT BOTH INCREASES AND DECREASES THE SCOPE OF THE LEASE
(IFRS 16, ILLUSTRATIVE EXAMPLE 18)
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease
payments are CU100,000 payable at the end of each year. The interest rate implicit in the lease
cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is
6 per cent per annum. At the beginning of Year 6, Lessee and Lessor agree to amend the
original lease to;
a) include an additional 1,500 square metres of space in the same building starting from the
beginning of Year 6 and
b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500
square metres is CU150,000 payable at the end of each year (from Year 6 to Year 8).
Lessee’s incremental borrowing rate at the beginning of Year 6 is 7 per cent per annum.
Required
How the lessee should account for;
a) Pre-modification right-of-use and lease liability
b) At the effective date of modification
c) Decrease in the lease term
d) Increase in the leased space
11.11 SUBLEASE CLASSIFIED AS A FINANCE LEASE (IFRS 16, ILLUSTRATIVE EXAMPLE 20)
Head lease—An intermediate lessor enters into a five-year lease for 5,000 square metres of
office space (the head lease) with Entity A (the head lessor).
Sublease—At the beginning of Year 3, the intermediate lessor subleases the 5,000 square
metres of office space for the remaining three years of the head lease to a sublessee.
Required
How this transaction is accounted for in the books of intermediate lessor.
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 group’s 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
At 31 December 2016 the fair value of the pension plan assets is Rs. 2,100,000 and the present
value of the pension plan liabilities is Rs. 2,400,000. In accordance with the amendment to IAS
19 Employee Benefits, Kaghzi Limited recognises actuarial gains and losses within other
comprehensive income in the period in which they occur.
Required
Calculate the actuarial gains or losses on pension plan assets and liabilities that will be included
in Kaghzi Limited’s other comprehensive income for the year ended 31 December 2016. (Round
all figures to the nearest Rs.000).
Required
(i) Show the figures that would appear on the face of the statement of financial
performance as at 31 December Year 3 and Year 4.
(ii) Construct a journal to explain the movement on the defined benefit net asset (or net
liability) during the year ended 31 December Year 4
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 client’s expectations throughout the vesting period are that all
options will vest; and alternatively
(ii) assuming that the client’s 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.
Required
Discuss the accounting treatment to be adopted for the share options and calculate the amount
to be recognised in the statement of profit or loss in respect of these options for the year ended
30 September 2016. Prepare appropriate accounting entries.
20 employees left in the year to 31 December 2015 and at that date another 65 were expected to
leave over the next three years. 23 employees left in the year to 31 December 2016 and at that
date another 44 were expected to leave over the next two years.
Required
(i) Calculate the charge to Bridge Ltd’s 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 why, in accordance with IFRS 2 Share-based Payment, share options, such as
those granted by Bridge Ltd, generate a charge to the statement of profit or loss despite no
cash transaction having occurred.
The rights are exercisable in the two-month period from 1 January 2019 and will be settled in
cash. The fair value of each share appreciation right was Rs. 120 at 31 December 2015 and Rs.
140 at 31 December 2016.
The actual and expected future staff movements as at 31 December 2015 and 31 December
2016 are provided below.
2015: 15 left and another 55 were expected to leave over the next three years.
2016: a further 22 left and another 36 were expected to leave over the next two years.
Required
(a) Prepare, in accordance with IFRS 2 Share-based Payment, the accounting entries
required in the financial statements of Sindh Transit Ltd for the year to 31 December 2016
in respect of the two financial instruments identified above.
(b) Explain the main principle of recognition set out by IFRS 2 Share-based Payment for share
based payments AND why the treatment of the two financial instruments identified above
will differ in the statement of financial position.
(b) Determine the amount and explain the nature of the differences between the face value
and the market value of the debentures on 1 July, 2016.
(c) Distinguish between nominal and effective rate of interest.
(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.
(b) Assume now that the instrument described above was designated as a hedging instrument
in a cash flow hedge, and that the hedge was 100% effective.
Explain how the gain or loss on the instrument for the year ended 31 August 2016 should
now be recorded and why different treatment is necessary.
Relevant information
Tin inventory Forward
(Rs.) contract (Rs.)
Carrying amount of inventory at 30 Sept 2015, at
1,000,000 N/A
the lower of cost and NRV
Fair values at 30 Sept 2015 1,300,000 NIL
Fair values at 31 Dec 2015 1,200,000 95,000
Fair values at 31 March 2016, when the tin is sold
1,150,000 142,000
and the contract is closed
Required
(a) Prepare journals for the year ended 31 December 2015
(b) Prepare the journals that are necessary at 31 March 2016
2 Waters buys and sells goods in Constantia, a country whose currency is the Prif (PR). On
3 December Waters enters into a futures contract to sell PR500,000 on 30 April 2017 at an
agreed price of PR1.98/Rs. 1. This contract is not part of a designated hedge. The cost of
entering into the contract was Rs. 750.
3 On 5 February Waters acquired 250,000 ordinary shares in Gilmour Ltd at Rs. 4.85 per
share incurring Rs. 35,000 attributable transaction costs.
4 On 1 July Waters sells goods to Mason for Rs. 500,000 on interest free credit payable 30
June 2017. The imputed rate of interest is 11%.
5 On 30 April Waters acquired 1,000 Rs. 100 nominal units of 8.5% treasury stock 2018 at
Rs. 107.10 per unit. The gross redemption yield is 5.9%. Waters intends to hold the
investment to maturity. Interest is paid annually in arrears.
6 On 26 December Waters purchased Rs. 25,000 of quoted company loan notes. This asset
has been designated as being held for short-term trading purposes.
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.
Following on from the facts in part (a), suppose that on June 30, 2017 AIL realized that the bank
was in financial difficulties. Further investigation led the company to believe that it would only
receive 75% of the expected future cash flows (both mark-up and capital).
(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) The directors of Piquin Ltd want to avoid increasing the gearing of the entity. They plan to
issue 5 million 6% cumulative redeemable Rs. 1 preference shares in 2017.
Required
Explain how the preference shares would be classified in accordance with IAS 32 Financial
Instruments: Presentation, AND the impact that this issue will have on the gearing of
Piquin Ltd.
Accounting Tax
Rs. m Rs. m
Opening balance – 01/01/2016 12.50 10.20
Purchased during the year 5.3 5.3
Depreciation for the year (1.10) (1.65)
Closing balance – 31/12/2016 16.70 13.85
(v) Capital work-in-progress as on December 31, 2016 include financial charges of Rs. 2.3
million which have been capitalised in accordance with IAS-23 “Borrowing Costs”.
However, the entire financial charges are admissible, under the Income Tax Ordinance,
2002.
(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
st
Deferred tax liability (31 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 Dwayne’s 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.
Required
(a) Prepare a schedule of temporary differences and resultant deferred tax for Larry from the
point of view of the group.
(b) Combine the deferred tax figures to obtain the group deferred tax balance.
(c) Prepare a note showing the movement on the consolidated deferred tax balance for the
year ending 31st December 2015.
(d) Calculate the goodwill arising on acquisition of Larry.
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 these goods recorded in
Cohort’s statement of financial position at the year ending 31May 20X2 was Rs. 1.8
million.
(iii) The retained earnings of Air at acquisition were Rs. 2 million. The directors of
Cohort have decided that, during the three years leading up to the date that they
intend to list the shares of the company, they will realise earnings through future
dividend payments from the subsidiary amounting to Rs. 500,000 per year. Tax is
payable on any remittance of dividends and no dividends have been declared for the
current year.
(b) Legion was acquired on 1 June 20X1 and is a company which undertakes various projects
ranging from debt factoring to investing in property and commodities. The following details
relate to Legion for the year ending 31 May 20X2:
(i) Legion has a portfolio of readily marketable government securities which are held as
current assets. These investments are stated at market value in the statement of
financial position with any gain or loss taken to profit or loss. These gains and losses
are taxed when the investments are sold. Currently the accumulated unrealised
gains are Rs. 4 million.
(ii) Legion has calculated that it requires a general allowance of Rs. 2 million against its
total loan portfolio. Tax relief is available when the specific loan is written off.
Management feel that this part of the business will expand and thus the amount of
the general provision will increase.
(iii) When Cohort acquired Legion it had unused tax losses brought forward. At 1 June
20X1, it appeared that Legion would have sufficient taxable profit to realise the
deferred tax asset created by these losses but subsequent events have proven that
the future taxable profit will not be sufficient to realise all of the unused tax loss.
Impairment of goodwill is not allowed as a deduction in determining taxable profit.
Required
Write a note suitable for presentation to the partner of an accounting firm setting out the
deferred tax implications of the above information for the Cohort Group of companies.
(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.
(c) Trade and other payables include an accrual for compensation to be paid to
employees. This amounts to Rs. 1 million and is allowed for taxation when paid.
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
(iv) On 31 March 2016 Shakeel Limited remitted to Hasan Limited a cash payment of Rs.
55,000. This was not received by Hasan Limited until early April. It was made up of an
annual repayment of the 10% loan note of Rs. 40,000 (the interest had already been paid)
and Rs. 15,000 of the current account balance.
(v) The accounting policy of Hasan Limited for non-controlling interests (NCI) in a subsidiary is
to value NCI at a proportionate share of the net assets.
(v) An impairment test at 31 March 2016 on the consolidated goodwill concluded that it should
be written down by Rs. 120,000. No other assets were impaired.
Required
Prepare the consolidated statement of financial position of Hasan Limited as at
31 March 2016.
(v) At 30 June 2016, Halley had invoiced Flamsteed Ltd for goods to the value of Rs.
4,000,000 and Flamsteed Ltd had sent payment in full but this had not been received by
Halley Ltd.
(vi) There is no impairment of goodwill.
(vii) It is the group’s policy to value non-controlling interest at full fair value.
(viii) At the acquisition date, the non-controlling interest was valued at Rs. 18,000,000.
Required
(a) Define Impairment loss in accordance with IAS 36 on Impairment of Assets.
(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 Ltd’s 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 year’s 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.
At the date of Millard Ltd’s investment in Fillmore Limited, the statement of financial
position of Fillmore limited showed:
Rs.’000
Ordinary share capital 62,500
Preference share capital 43,750
Profit and loss account 12,500
118,750
The goodwill acquired by Millard Ltd in Fillmore Limited had been written off fully in December
2016 as a result of impairment losses.
Required
Prepare the consolidated profit and loss account of Millard Ltd for the year. Assume that
investment income is dealt with by Millard Ltd on an accrual basis.
The following information is relevant to the preparation of the group statement of profit or loss and other
comprehensive income:
1. On 1 January 2015, Sherlock Ltd acquired 60% of the equity interests of Mycroft Ltd. The
purchase consideration comprised cash of Rs. 80 million.
The fair value of the identifiable net assets acquired was Rs. 110 million at that date. The
excess of the fair value of the identifiable net assets at acquisition is due to non-
depreciable land.
Sherlock Ltd measures the non-controlling interest at acquisition at its fair value. The fair
value of the non-controlling interest (NCI) in Mycroft Ltd was Rs. 45 million on 1 January
2015.
Goodwill has been impairment tested annually and as at 31 December 2016 had reduced
in value by 20%. At 31 December 2016, goodwill was estimated to have a value of Rs. 2
million above its original value.
2. Sherlock Ltd acquired 60% of Katie Ltd on 30 June 2016. There has been no impairment
of goodwill since the date of acquisition.
3. Sherlock Ltd sold inventory to Mycroft Ltd for Rs. 12 million making a loss of Rs. 2 million
on the transaction. The sale was at fair value and Mycroft Ltd still holds half of the
inventory at the year end.
FL SL AIL
Rs. in million
Accumulated depreciation 5,760 420 1,260
Ordinary share capital (Rs. 10 each) 30,000 12,000 6,000
Retained earnings – opening 33,780 - 5,400
Sales 57,600 16,500 33,800
Accounts payable 2,760 1,980 1,440
Gain on sale of non-current assets 540 - -
Dividend income 1,080 - -
131,520 30,900 47,900
Following additional information is available:
(i) SL was incorporated on February 1, 2016. 75% of the shares were acquired by FL at par
value on the same date.
(ii) FL acquired 80% of AIL on January 1, 2016
(iii) The following inter-company sales were made during the year 2016:
Included in Amount
Sales buyer’s closing receivable/payable Gross profit %
inventories at year enzd 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
(iv) The gain on sale of non-current assets includes a sale of an item of property, plant and
machinery by FL to SL. This transaction occurred on July 1, 2016. SL. Details of the
transaction are as follows:
Rs. in million
Sales value 144
Less: Cost of plant and machineries 150
Accumulated depreciation (60)
Carrying amount at date of sale 90
Gain on sale of plant 54
The plant and machinery was purchased originally by FL on July 1, 2014, and was being
depreciated on the straight line method over a period of five years. SL computed
depreciation thereon using the same method based on the remaining useful life as at the
date of the transfer.
(v) FL billed Rs. 100 million to each subsidiary for management services provided during
the year 2016 and credited it to operating expenses. The invoices were paid on December
15, 2016.
(iv) Details of cash dividend are as follows:
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.
The remaining life of machine on acquisition was 5 years. The fair values of the assets have
not been accounted for in YL’s financial statements.
(B) 6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of
acquisition, the reserves of BL stood at Rs. 40 million.
The summarized statements of profit or loss of the three companies for the year ended
June 30, 2016 are as follows:
GL YL BL
Rupees in million
Sales 875 350 200
Cost of sales (567) (206) (244)
Gross profit / (loss) 308 144 (44)
Selling expenses (33) (11) (15)
Administrative expenses (63) (40) (16)
Interest expenses (30) (22) (15)
Other income 65 - -
Profit/(loss) before tax 247 71 (90)
Income tax (73) (15) 8
Profit/(loss) for the period 174 56 (82)
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 Arrive’s inventory at the year end.
Required
Prepare a consolidated statement of profit or loss for Hide for the year ended 30 June 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
––––––––– ––––––––– –––––––––
P S A
Rs. Rs. Rs.
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 A’s 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
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 Ltd’s 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.
The following information is relevant to the preparation of the group financial statements:
1. On 1 December 2013, Mango Ltd acquired 30% of the ordinary shares of Plum Ltd for a
cash consideration of Rs. 600 million. The fair value of Plum Ltd’s identifiable net assets
was Rs. 1,840 million at this date. The 30% holding gave Mango Ltd significant influence
over Plum Ltd and Mango Ltd accounted for the investment as an associate up to 1
December 2015. Mango Ltd’s share of Plum Ltd’s undistributed profit amounted to Rs. 90
million and its share of a revaluation gain amounted to Rs. 10 million.
On 1 December 2015, Mango Ltd acquired a further 40% of the ordinary shares of Plum
Ltd for a cash consideration of Rs. 975 million and gained control of the company. The
cash consideration has been added to the equity accounted balance for Plum Ltd at 1
December 2015 to give the carrying amount at 30 November 2016.
At 1 December 2015, the fair value of the equity interest in Plum Ltd held by Mango Ltd
before the business combination was Rs. 705 million.
At 1 December 2015, the fair value of Plum Ltd’s identifiable net assets was Rs. 2,250
million.
The retained earnings and other components of equity of Plum Ltd at 1 December 2015
were Rs. 900 million and Rs. 70 million respectively. It is group policy to measure the non-
controlling interest at fair value. The fair value of the non-controlling interest of 30% was
assessed as Rs. 620 million
2. At the time of the business combination with Plum Ltd, Mango Ltd has included in the fair
value of Plum Ltd’s identifiable net assets, an unrecognised contingent liability of Rs. 6
million in respect of a warranty claim in progress against Plum Ltd. In March 2016, there
was a revision of the estimate of the liability to Rs. 5 million. The amount has met the
criteria to be recognised as a provision in current liabilities in the financial statements of
Plum Ltd and the revision of the estimate is deemed to be a measurement period
adjustment.
3. The fair value of Plum Ltd’s identifiable net assets (Rs. 2,250 million) included an amount
of Rs. 200 million being the estimate of the fair value of buildings with the remainder
relating to non-depreciable land.
Mango Ltd had commissioned an independent valuation of the buildings of Plum Ltd which
was not complete at 1 December 2015 and therefore not considered in the fair value of the
identifiable net assets at the acquisition date. The valuations were received on 1 April 2016
and resulted in a decrease of Rs. 40 million in the fair value of property, plant and
equipment at the date of acquisition. The buildings have a remaining useful life of 20 years
at 1 December 2015. Buildings are depreciated on the straight-line basis and it is group
policy to leave revaluation gains on disposal in equity.
The decrease in the fair value of the buildings does not affect the fair value of the non-
controlling interest at acquisition and has not been entered into the financial statements of
Plum Ltd.
All goodwill arising on acquisitions has been impairment tested with no impairment being
required.
Required
Prepare the group consolidated statement of financial position of Mango Ltd as at 30
November 2016.
Statements of profit or loss for Parvez Ltd, Saad Ltd and Vazir Ltd for the year ended 31
December 2016 are as follows:
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. 260,000
1
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 year’s 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:
Investments at cost
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 Hasan’s 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.
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.
Additional information:
(i) A acquired 80% of the ordinary share capital of B on 1 January Year 0 when the reserves
of B were Rs. 420,000.
(ii) A acquired 90% of the ordinary share capital of C on 1January Year 1 when the reserves
of C were Rs. 320,000.
(iii) On 1 January Year 4, A disposed of 350,000 shares in C for Rs. 1,925,000. This
transaction has not yet been accounted for by A. The remaining investment in shares of C
at this date had a fair value of Rs. 44,000.
(iv) There were no changes in the issued share capital of the subsidiaries since acquisition by
A.
(v) None of the companies re-value any of their non-current assets.
(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 A’s 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.
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
(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.
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 Ltd’s 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
Show the effect on profit or loss of these transactions for:
(a) the year to 30 June Year 4
(b) the year to 30 June Year 5
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:
Required
Prepare the consolidated statement of profit or loss and other comprehensive income for the A
Group for the year ended 30 September 2016 and the consolidated statement of financial
position as at that date.
PCL LS FS
Rs. in million CU in million
Assets
Property, plant and equipment 4,200 3,500 250
Investments in LS and FS 6,500 - -
Current assets 3,500 4,000 450
14,200 7,500 700
Equity and liabilities
Share capital (Rs. 10/CU 10
each 6,000 1,800 120
Retained earnings 3,500 900 280
Current liabilities 4,700 4,800
14,200 7,500 700
Profit after tax for the year ended
30 June 2014 700 400 30
Final dividend for the year ended
30 June 2013: 12% - 15%
Cash (paid on 1 January 2014) 10% 20% -
700 400 30
i.
At the acquisition
No. of date
Investment
Company shares Cost Fair
date Retained
value of
acquired
earnings *
NCI
---- in million ----
LS 1-Jan-2012 120 Rs. 2,000 Rs. 250 Rs. 540
FS 1-Jul-2012 9 CU 300 CU 160 CU 90
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
vii. The break-up of exchange reserve in the consolidated financial statements for the year
ended 30 June 2013 is as follows:
Required:
In accordance with the requirements of the International Financial Reporting Standards, prepare:
(a) Consolidated statement of financial position as at 30 June 2014; and
(b) Consolidated statement of other comprehensive income for the year ended 30 June
2014. (Ignore taxation)
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
(c) The following additional information is relevant:
(i) Depreciation for the year in the consolidated profit and loss account was Rs.
72,720,000. Non-current assets were not disposed by the group except those made
during disposal of the investment in the shares of Pastit Limited.
(ii) Evernew Ltd sold its investment in Pastit Limited in July 2016. The entire 80%
shareholding in the subsidiary was sold for Rs. 39.6million. Information about the
disposal is as follows:
Rs.’000 Rs.’000
Inventories 14,400
Receivables 18,000
Non-current assets 28,800
Trade creditors (10,800)
Taxation (2,160)
Bank overdraft (1,440)
Debenture stock (3,600) (18,000)
43,200
Non-controlling interest (8,640)
34,560
The investment was acquired many years ago for Rs. 13.68million when the net assets of
Pastit Limited were Rs. 14.4million. Goodwill had been fully written off before due to
impairment.
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
Total assets 15,325 9,795
Equity and liabilities
Capital and reserves
Issued capital (Rs. 1 ordinary shares) 1,900 1,100
Share premium 95 30
Accumulated profits 11,407 7,540
13,402 8,670
Non-current liabilities
Long-term loans 600 500
600 500
Year 6 Year 5
Rs.000 Rs.000 Rs.000 Rs.000
Current liabilities
Bank overdraft (repayable on demand) 313 -
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.
Required
(a) Prepare the group statement of cash flows of Bishop in accordance with IAS 7 together
with any required notes for the year ended 31 December 20X2.
(b) Explain why external users of financial statements benefit from receiving a statement of
cash flows.
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.
Rs. in ‘000
Consolidated profit for the year (including non-controlling interest) 15,000
Profit attributable to non-controlling interest 2,000
Dividend paid during the year to ordinary shareholders 4,000
Dividend paid on 10% Cumulative preference shares for the year 2015 2,000
Dividend paid on 10% Cumulative preference shares for the year 2016 2,000
Dividend declared on 12% Non-cumulative preference shares for the year
2016 2,400
(i) The company had 10 million ordinary shares at March 31, 2015.
(ii) The cumulative preference shares were issued at the time of inception of the company.
(iii) The 12% non-cumulative preference shares are convertible into ordinary shares, on or
before December 31, 2017 at a premium of Rs. 2 per share. The conversion rights are not
adjusted for subsequent bonus issues.
(iv) 0.50 million non-cumulative preference shares were converted into ordinary shares on July
1, 2015.
(v) The dividend declared on the non-cumulative preference shares, as referred above, was
paid in April 2016.
(vi) 1.20 million right shares of Rs. 10 each were issued at a premium of Rs. 1.50 per share on
October 1, 2015. The market price on the date of issue was Rs. 12.50 per share.
(vii) 20% bonus shares were issued on January 1, 2016.
(viii) Due to insufficient profit no dividend was declared during the year ended March 31,
2015.
(ix) The average market price for the year ended March 31, 2016 was Rs. 15 per share.
Required
Compute the basic and diluted earnings per share and prepare a note for inclusion in the
consolidated financial statements for the year ended March 31, 2016.
AL ZL
----- Rs. in '000 -----
Balance as at 1 January 2013:
Share capital (Rs. 100 each) 80,000 35,000
12% Convertible bonds (Rs. 100 each) 30,000 -
Profit for the year ended 31 December 2013 (after tax) 60,000 25,000
(ii) Cost and fair value information of ZL’s investment property is as under:
31-Dec-2013 31-Dec-2012
-------- Rs. in '000 --------
Cost 65,000 60,000
Fair value 67,000 59,000
ZL uses cost model while the group policy is to use the fair value model to account
for investment property.
(iii) AL operates a defined benefit gratuity scheme for its employees. The actuary’s
report has been received after the preparation of draft financial statements and
provides the following information pertaining to the year ended 31 December 2013:
Rs. in '000
Actuarial losses 150
Current service costs 8,000
Net interest income 3,000
(iv) On 1 August 2013, under employees’ share option scheme, 60,000 shares were
issued by AL to its employees at Rs. 150 per share against the average market
price of Rs. 250 per share.
(v) Dividend details are as under:
AL ZL
2013 (Interim) 2012 (Final) 2013 (Interim) 2012 (Final)
Cash 18% 10% 12% 15%
Bonus shares - 20% - 16%
At the time of payment of dividend, income tax at 10% was deducted by AL and ZL.
(vi) Applicable tax rate for business income is 35%.
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)
The Directors of Cook Limited appointed a new sales manager towards the end of 2016. This
manager devised a plan to increase sales and profit by means of a reduction in selling price and
extended credit terms to customers.
This involved considerable investment in new machinery early in 2016 to meet the increased
sales. All sales are on credit.
Required
(a) Explain whether the performance for the year ended 31 December 2016 and the financial
position at the date have improved as a result of the new policies adopted by the company.
You should support your answer with appropriate profitability and liquidity ratios.
(b) Calculate the amount of cash which would be released if the company could impose a
collection period of 45 days.
Non-current liabilities
7.5% loan notes 130,000 nil
Current liabilities
Trade payables 28,000 15,000
Bank overdraft 2,000 nil
Current tax payable 6,000 3,000
36,000 18,000
Total equity and liabilities 310,000 159,000
The following are extracts from the report of the Chief Executive Officer.
“Highlights of the performance of Travelwell Ltd for the year ended 30 September 2016 are:
(1) an increase of 43% in sales revenue
(2) an increase in the gross profit margin from 16.7% to 20%
(3) a 100% increase in profit for the year.
In response to the improvement in financial performance the board of directors paid a dividend of
Rs. 15m in September 2016, an increase of 25% on the previous year.”
The following information is also available.
On 1 October 2015, Travelwell Ltd purchased 100% of the net assets of Rondel Ltd for Rs. 130
million. Rondel Ltd was previously a privately-owned business entity. The contribution of this
purchase to the financial results of Travelwell Ltd for the year to 30 September 2016 was as
follows:
Rs.000
Revenue 90,000
Cost of sales (50,000)
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.
Gearing ratios
Debt equity ratio 55 : 45 60 : 40 40 : 60 50 : 50
Investors ratios
Earnings per share Re. 0.9 Rs. 1.8 Re. 0.75 Rs. 1.2
Dividend per share Re. 0.2 Re. 0.9 Re. 0.25 Re. 0.6
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.
Profit/(loss) for the year ended Final cash dividend for year ended
Company 2014 2013
Rs. in million 2014 2013
AL 30 28 20% 16%
BL (10) 14 - 18%
GL 55 50 30% 15%
BL is a listed company and fair value of its shares as at 30 June 2014 was Rs. 110 per share
(2013: Rs. 160). OIL classifies investment in BL as available for sale.
AL and GL are private companies and market value of their shares is not available.
GL is the first subsidiary of OIL, since its incorporation. Following information pertains to OIL:
2013 2012
Rs. in million
Share capital (Rs. 100 each) 2,875 2,500
Profit for the year 1,260 1,100
Closing retained earnings balance 850 465
Final dividend - cash 25% 20%
- bonus issue - 15%
OIL’s profit for the year ended 30 June 2014 prior to taking effects of the transactions of its
investee companies was Rs. 1,450 million and it has announced a final cash dividend of 30%.
Required:
Prepare following for inclusion in the first separate financial statements of OIL for the year ended
30 June 2014 as required by the International Financial Reporting Standards.
(a) Movement in retained earnings for inclusion in the statement of changes in equity; and
(b) Note on investments.
(Show comparative figures and ignore taxation)
The farm expenses for the period 1 February 2016 to 30 April 2017 are as follows:
Rs.
Casual labour 20,000
Regular workers 30,000
Land preparation and clearing costs 80,000
Hire of tractors 60,000
The farm’s non- current assets for the year ended 31 January 2017 were as follows:
Rs.
Farm’s irrigation at cost 800,000
Farm’s implement and equipment 400,000
Additional Information:
(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
Non-current liabilities:
Loan notes 600,000 170,000
Current liabilities
Trade & other payables 310,000 120,000
Total equity & liabilities 1,700,000 930,000
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
Required
(a) Prepare the consolidated statement of financial position for Helios Ltd group as at 31
December 2016 as expected for an agricultural business.
(b) State how to measure agricultural products harvested by an entity in line with the
requirements of IAS 41 on Agriculture.
(c) Prepare the adjusting entries that should be recorded in the books of Fashion Blue
Enterprises, in December 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
(ii) The outstanding balance of unearned premium reserve and prepaid reinsurance
premium ceded were as follows:
Rupees in thousand
Balances as of
December 31, 2016
Unearned premium
reserve 844,425 159,844 1,191,933 133,424
(iii) Premium received under the treaty arrangements (proportional) amounted to Rs. 167,108
thousand. The outstanding balance of unearned premiums reserve relating to treaty
arrangement as of December 31, 2016 was Rs. 56,128 thousand (2015: Rs. 61,303
thousand).
Required
Prepare the statement of premiums for the year ended December 31, 2016. Ignore the
corresponding figures.
2016 2015
Rupees in million
Market treasury bills 366 309
Pakistan investment bonds 69 61
Government of Pakistan bonds (USD/Euro) 26 30
Investments in associates 9 8
Fully paid-up ordinary shares – listed 6 5
Fully paid-up ordinary shares – unlisted 2 3
Corporate debt instruments – listed 19 30
Corporate debt instruments – unlisted 260 210
Investments of mutual funds 32 28
Overseas government securities 60 52
Other investments 19 29
In addition to the above specific provisions, it is the bank’s 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
Investments classified as ‘at fair value through profit or loss - held for
trading’
- Fair value at year end 2,500
- Carrying value at year end 2,200
Final distribution for the year ended March 31, 2016 of Rs. 5.00 per unit (2015: Rs. 4.00 per
unit) was announced on April 16, 2016.
Required
Prepare a statement of movement in unit holders' fund for the year ended March 31, 2016.
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.
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 company’s 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 you’re not going to start being difficult. The
consultancy fee is non-refundable so there’s no reason why we can’t include it in full. I
think we should look at our depreciation policies. We’re writing off our assets over far too
short a period. As you know, we’re planning to go for a stock market listing in the near
future and being prudent and playing safe won’t help us do that. It won’t 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.
However, the Gethsemene statements have not yet been filed, and the documents provided to
Sohaib by Omar are stamped 'Draft: strictly private and confidential'. Omar recently completed a
work placement at Gethsemene. When Sohaib asks him for further information, Omar replied “I
obtained these financial statements quite legitimately, and in any case, I am sure they will
become filed very soon. Anyway you are only a student member and I am not paying you so
what is the fuss'.
Required
Advise Sohaib about the ethical issues arising in respect of his work for Omar, referring, where
appropriate, to the ICAP's Code of Ethics, and explaining any action he should take.
B
Advanced accounting and financial reporting
SECTION
Answers
CHAPTER 1 – REGULATORY FRAMEWORK
(ix) Others
Saving of time and money
Promotion of Regional trade
Easier accounting and auditing practices
(c) Arguments for and against financial reporting standards
Arguments for:
(i) They guide preparers and users of financial statements
(ii) Their use enhances objectivity and comparability of financial statement which would
in turn engender reliability
(iii) Their use helps to curtail or significantly narrow the divergence in the principles
adopted by preparers of financial statements.
(iv) Standards improve the uniformity of treatment of transactions in the financial
statements among companies thereby increasing the credibility and comparability of
financial statement.
(v) Standards compel organisations to disclose information which they may not want to
disclose had the standards not been in existence.
(vi) Standards reduce the number of choices in the methods used to prepare financial
statement thereby reducing the risk of creative accounting.
(vii) Foreign companies which are targets for takeovers or mergers can be more easily
evaluated.
Arguments against:
(i) The cost of setting up and maintaining a standard-setting apparatus is quite
significant and not all countries can afford it.
(ii) The standards cannot address all issues or transactions. There are some which are
unique and so rare/unusual that global standards are not and cannot be available for
them.
(iii) Low level of details or explanations.
2.1 DEFINITIONS
An asset is:
a resource controlled by the entity
as a result of past events
from which future 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 e.g. sales, fees, interest, dividend, royalty and rent.
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’.
‘Statement of profit or loss is a superfluous statement’
Although income (revenue and gains) and expenses (and losses) would be reflected in an
increase/decrease in the assets and liabilities in the statement of financial position, the volume
and type of income generated would give a better indication of company performance. It is the
statement of profit or loss and other comprehensive income that provides such detailed
information; without it the performance of the business cannot be properly evaluated.
(iii) Customers
The customers are interested in information relating to the entity’s continued
existence, especially for those that depend on the entity to meet their daily needs.
(iv) Employees
The employees are concerned with their job security and the company’s ability to be
profitable, in order to guarantee the payment of their salaries in the future.
(v) Government and their agencies
Government and their agencies are interested in information relating to taxes,
regulations, resource allocation and evaluation of government policies on
businesses.
2.3 CARRIE
(a) (b)
Physical 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 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
(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 25%) 23,000
The annual depreciation charges for plant and equipment and the leased vehicles are
shown in workings (1)
Cost or Accumulated Carrying
valuation depreciation amount
Rs.in ’000 Rs.in ’000 Rs.in ’000
Leasehold property 220,000 0 220,000
Plant and equipment 197,000 77,000 120,000
(non-leased)
Leased vehicles 24,000 6,000 18,000
441,000 83,000 358,000
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
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
8
15 × /12)
(105 × 19) + 10% × 2.1
3
8 × /12)
Disposals - - (5.0) - (5.0)
As at June 30 2016 - 26.0 27.0 8.0 61.0
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
Carrying value as at June 30, 2016 8.0
Amortization rate 10%
3 - Accounts Receivable
Considered good
- Secured 30
- Unsecured 27
57
Considered doubtful 3
60
Less: Provision for bad debts 3.1 3
57
3.1 - Provision for bad debts
Balance as at July 1, 2010 3.4
Provision made during the year 1.0
Amount written off during the year (1.4)
Balance as at June 30, 2016 3.0
4 - Advances, Deposits, Prepayments and Other Receivables
Advances
- suppliers - considered good 12
- staffs 6
18
Deposits 11
Prepayments 4
Sales tax receivable 12
45
Note 2016
Rs.in
million
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
Non-current liabilities
Redeemable preference shares 40.00
Debentures 80.00
Deferred taxation (W 10) 9.00
129.00
Current liabilities
Trade payables 30.40
Accrued expenses (W3) 25.00
Taxation 16.50
Bank overdraft 13.25
85.15
Total equity and liabilities 462.50
(b) Statement of profit or loss and other comprehensive income for the year
ended June 30, 2016
Rs.in
million
Sales revenue (W5) 445.40
Cost of sales (W7) (250.72)
Gross profit 194.68
Distribution costs (W8) (20.05)
Administrative expenses (W8) (40.38)
Financial charges (W9) (9.10)
125.15
Loss due to fraud (30.00)
Profit before tax 95.15
Income tax expense (W10) (19.50)
Profit for the year 75.65
Workings
(W1) Leasehold property
Annual depreciation before the revaluation (230 ÷ 40 years) = Rs. 5.75 million per
annum.
Depreciation this year has been charged incorrectly on cost (whereas it should have
been on the revalued amount).
This year’s charge must be added back
Rs.in
million
Dr Cr
Accumulated depreciation 5.75
Cost of sales (50%) 2.88
Administrative expenses (30%) 1.72
Distribution costs (20%) 1.15
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
Rs. In
million
Dr Cr
Cost of sales (50%) 3.5
Administrative expenses (30%) 2.1
Distribution costs (20%) 1.4
Accumulated depreciation 7.00
46,327
Imported goods
Gross sales 1,078
Sales tax (53)
1,025
Sales discounts (2,594)
44,758
2 Cost of sales
Rs.in
million
Raw material consumed (1,751 + 22,603 - 2,125) 22,229
Stores and spares consumed 180
Salaries, wages and benefits (2,367 × 55%) 2.1 1,302
Utilities (734 × 85%) 624
Depreciation and amortizations (1,287 × 70%) 901
Stationery and office expenses (230 × 25%) 58
Repairs and maintenance (315 × 85%) 268
25,562
Opening work in process 73
Closing work in process (125)
25,510
Opening finished goods (manufactured) 1,210
Closing finished goods (manufactured) (1,153)
25,567
Finished goods (imported)
Opening stock 44
Purchases 658
702
Closing stock (66)
636
26,203
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
(44×30%) 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
(44×15%) in respect of defined contribution plan and defined benefit plan
respectively.
Rs.in
million
7 Finance costs
Short term borrowings 133
Exchange loss 22
Lease 11
166
8 Taxation
Current - for the year 1,440
Deferred (3,120 × 35%) 1,092
2,532
Balances
Advances
At beginning of the 1,400,00
year 0
Repaid during the year 300,000
At the end of the year 1,100,00
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 arm’s length basis, as approved by the board of
directors of the company.
23.1 No management fee was charged for the year ended 30 June 2012. Except for this, all
transactions have been carried out on arm’s length basis, as approved by the board of
directors of the company.
23.1 The contract has been awarded to Iron Builders and Developers in which one of the
directors of the parent company is a partner.
23.2 No management fee was charged for the year ended 30 June 2012. Except for this, all
transactions have been carried out on arm’s length basis, as approved by the board of
directors of the company.
Related parties comprise of Metal Limited (parent company) and its subsidiaries. However,
there was no related party transaction during the year.
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 entity’s 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 entity’s 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.
Disclosure must be given irrespective of whether the transactions took place at an arm’s length
value, as such transactions may still be lost if the relationship is terminated. Hence the
knowledge of such transactions provides valuable information to investors and regulators.
Disclosure requirements
IAS 24 requires that, at a minimum, the following disclosures must be given:
The amount of the transaction
The amount of any outstanding balance and the terms, conditions and guarantees
attached
Allowance for any irrecoverable debts or amounts written off in the period
Disclosure that transactions were at an arm’s length value can only be given if this
information can be substantiated.
Disclosures relevant to Engina
The following outlines the related party disclosure requirements for the three transactions you
have specifically requested comment on. It is your responsibility to bring any further related party
transactions to our attention in order that they can also be incorporated into your financial
statement disclosures.
(a) Sale of goods to directors
The sale of goods and a company car to Mr Satay both constitute related party
transactions, due to Mr Satay’s position as a director of Engina. IAS 24 requires disclosure
of all related party transactions with key management personnel. However, accounting
standards only apply to material transactions. An item is considered material where
knowledge of that transaction might influence the decisions of a user of the financial
statements. Materiality is not just a matter of size, as small transactions with a director may
still be of relevance to an investor if the transaction is material to the director, despite not
being material to the entity.
In the situation described, the transactions amount to Rs. 600,000 of sales and the sale of
a company car for Rs. 45,000 (market value Rs. 80,000). In terms of value these
transactions appear not to be material to Engina and neither do they appear to be material
in value to Mr Satay. However, given the sensitive nature of transactions with directors,
and especially senior directors like Mr Satay, the transactions should be disclosed in the
financial statements in accordance with good corporate governance practice.
Significant contracts with directors, such as these with Mr Satay, may also require
disclosure by the local Stock Exchange.
(b) Hotel property
The sale of the hotel to the brother of Mr Soy, constitutes a related party transaction
because of Mr Soy’s status as Managing Director. The property seems to have been sold
at below market price and IAS 24 requires disclosure of any information surrounding a
transaction which will allow the reader to understand its impact on the financial statements.
The hotel had a carrying value of Rs. 5m, but given the fall in market values it should have
been written down to its recoverable amount in accordance with IAS 36 Impairment.
Recoverable amount is measured at the higher of value in use (Rs. 3.6m) and fair value
minus costs of sale (Rs. 4.3 - 0.2m). Hence the property should have been recorded in the
statement of financial position at Rs. 4.1m.
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 director’s interests in the equity of Engina may be
necessary under local Companies Acts requirements and Stock Exchange rules.
If such analyses become routine then they would be reportable under IFRS 8, but that
would be very difficult to check and audit.
There are problems in the measurement of segmental performance if the segments trade
with each other. Disclosure of details of inter-segment pricing policy is often considered to
be detrimental to the good of a company. There is little guidance on the policy for transfer
pricing.
Different internal reporting structures could lead to inconsistent and incompatible
segmental reports, even from companies in the same industry.
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
opportunities of the underlying business segments. The disaggregated financial
information provided by segmental reporting allows for analytical review on a
segment by segment basis which will provide greater understanding of the entity’s
position and performance and allow a better assessment of its future.
(ii) Analysing segments
IFRS 8 defines an operating segment as a component of an entity that engages in
business activities from which it may earn revenues and incur expenses, whose
operating results are reviewed regularly by the chief operating decision maker in the
entity and for which discrete financial information is available.
Not every part of a business is necessarily an operating segment or part of an
operating segment. Head office is an example, since head office does not usually
earn revenues. Generally an operating segment has a segment manager who is
directly accountable to and maintains regular contact with the chief operating
decision-maker, to discuss the performance of the segment.
IFRS 8 requires that entities should report information about each operating
segment that is identified and that exceeds certain quantitative thresholds for size of
revenue, operating profit or loss or assets. Financial information about operating
segments with similar characteristics can be aggregated.
IFRS 8 sets out the information about each reportable operating segment that
should be disclosed, including total assets, profit or loss, revenue from external
customers, revenue from sales to other segments, interest income and expense,
depreciation, material items of income or expense and tax. The amount reported for
each item should be the same measure that is reported for the segment to the chief
operating decision maker of the entity.
IFRS8 applies to quoted companies only.
The further withdrawal of Rs. 6.0 million is a non-adjusting event as it occurred after year
end. However, if the events are considered material the following disclosures should be
made:
Nature of the event
The gross amount of contingency
The amount recovered subsequently
SL should not recognise the contingent gain until it is realised. However, if recovery of
(iii)
damages is probable and material to the financial statements, SL should disclose the
following facts in the financial statements:
Brief description of the nature of the contingent asset
An estimate of the financial effect.
SL should make a provision of the expected amount i.e. Rs. 1.2 million (Rs. 1.0 million x
(iv)
60% + Rs. 1.5 million x 40%) because
it is a present obligation as a result of past event;
it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligations; and
a reliable estimate can be made of the amount.
In addition, SL should disclose the following in the notes to the financial statements:
Brief nature of the contingent liability
The amount of contingency
An indication of the uncertainties relating to the amount or timing of any outflow.
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
–––––– ––––––
W1: Profit for the year ended December 31, 2015 (as restated) Rs.in million
Profit as previously reported 21.00
Incorrect recording of depreciation (Rs. 25 million – Rs. 10 million) 15.00
39.70
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)
Allocation of Rs.9.2 million (transaction price) will be based on relative stand-alone prices, as the
difference of Rs.2.873 million between stand-alone price and transaction price is not specific to
any performance obligation.
Rupees
Plastic card printing machines and its software 6,663,961
(9,200,000*8,745,000/12,073,000)
Laminators 1,621,602
(9,200,000*2,128,000/12,073,000)
Plastic cards 914, 437
(9,200,000*1,200,000/12,073,000)
Total 9,200,000
The reduced price is reasonable due to less administrative resources is to be applied for
additional work.
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
At the end of tenth month:
Increasing the size of reservoir will increase the scope of the contract, but it cannot be
considered as a distinct work already agreed. Increased contract price also does not reflect WL’s
stand-alone price of similar work because it is equal to the cost of work. Therefore, WL should
account for this modification as part of single performance obligation that is partially satisfied on
the date of modification. A cumulative catch-up adjustment will be done, which is worked out as
follows:
Difference between the two amounts of cumulative revenue will be the adjustment to the revenue
account.
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
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
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
Rs.000
600
(2) Depreciation on buildings 40 + (100 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.
Assets
Office
under
Total
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)
Disposals – (104,000) – – (104,000)
At 31 December
2016 1,500,000 1,257,500 392,900 29,200 3,179,600
construction
equipment
machinery
Plant and
buildings
Land and
Assets
Office
under
Total
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 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
Plant and machinery
Rs.
Depreciation on assets held for whole year
((1,276,500-50,000-104,000) × 25%) 280,625
Depreciation on asset disposed of (104,000 × 25% × 6/12) 13,000
Depreciation on additions (135,000 × 25% × 6/12) 16,875
Depreciation on asset classified as held for sale but not sold
(W3) 10,417
320,917
Office equipment
Rs.
Held for whole year (356,400 × 20%) 71,280
Additions (36,500 × 20% × 6/12) 3,650
74,930
W1
Borrowing
Outstanding Outstanding
Rate of cost to be
amount Months outstanding month up to
interest capitalised
completion
Rs. 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
(W3) 8,125,000 1-Dec-15 31-May-16 6 12.08% 490,750
Principal
payment of
specific loan* 5,000,000 1-Feb-16 31-May-16 4 12.08% 201,333
3rd payment to 12.08%
contractor 12,000,000 1-Feb-16 31-May-16 4 483,200
4rd payment to 1-Jun-16 12.08%
contractor 9,000,000 31-May-16 0 -
1,175,283
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
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 8/12) (26,667)
––––––––
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
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 8/12) (40,000)
––––––––
Carrying amount 310,000
––––––––
Other current liabilities
Deferred income relating to government grants 86,667
(100,000 - (100,000 ÷ 5 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.
For Alnus Ltd, therefore, the two methods will result in the following presentation in the statement
of financial position and statement of profit or loss:
Statement of financial position
Method 1 Method 2
Rs. Rs.
Asset (400 – 200) 400,000 200,000
less depreciation ((400/200)/4yrs × 9/12) (75,000) (37,500)
325,000 162,500
Liabilities
Current – deferred income (12/48 × 200) 50,000 –
Non-current – deferred income (27/48 × 200) 112,500 –
162,500 –
Statement of profit or loss
Depreciation (75,000) (37,500)
Deferred income (9/48 × 200) 37,500
The net effect on income and net assets will be the same under either method: grant income is
matched with the use of the asset. The grant recognised in the year is Rs. 37,500 (Rs. 200,000/4
years × 9/12
Capitalised borrowing costs
Under IAS 23 Borrowing Costs certain borrowing costs form part of the cost of a qualifying asset.
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended
use or sale. This includes property, plant and equipment provided it is not ready for use. The
development of the holiday park is therefore a qualifying asset, as it was in disrepair and not in
use.
Borrowing costs are defined as interest and other costs that an entity incurs in connection with
the borrowing of funds. Only borrowing costs that are directly attributable to the acquisition,
construction or production of the qualifying asset should be capitalised – which are those
borrowing costs that would have been avoided if the expenditure on the qualifying asset had not
been made. If the construction is financed out of the general borrowing of the entity, then:
The borrowing costs capitalised should be calculated by reference to the weighted average
cost of the borrowings.
The weighted average calculation should exclude borrowings to finance a specific purpose
or building. In the case of Butea Ltd, although there are two loans, neither is for a specific
purpose, and so the weighted average cost of the loans should be used to determine the
borrowing cost rate for capitalisation purposes.
The correct calculation of the weighted average borrowing rate is therefore:
((Rs. 1.8m × 5%) + (Rs. 1.2m × 8.5%))/Rs. 3m = 6.4%
Capitalisation of borrowing costs should commence when the entity meets all three of the
following conditions:
1. It incurs expenditures for the asset (1 January 2017).
2. It incurs borrowing costs (already being incurred).
3. It undertakes activities that are necessary to prepare the asset for its intended use or sale.
Such activities include obtaining planning permission. (1 November 2016) January 2017 is the
date at which the last of the three conditions was met, so the period for capitalisation is six
months (1 January to 30 June 2017) rather than nine months.
The amount to be capitalised is therefore: Rs. 800,000 × 6.4% × 6/12 = Rs. 25,600, and an
adjustment to correct finance costs capitalised in error is needed of Rs. 25,400 (51,000 –
25,600).
As this is a correction in the financial statements of Butea Ltd, the Alnus Ltd group will need to
apportion this between the group (80%) and NCI (20%), so that group profit will fall by Rs. 20,320
(25,400 × 80%) and NCI by Rs. 5,080 (25,400 × 20%).
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, Victoria’s 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 statement of financial position. The depreciation for the
year will be an expense in the statement of profit or loss.
This situation provides the exception to the rule whereby all investment properties must be
held under either the fair value model, or the cost model.
(b) Analysis of property, plant and equipment for the year ended 31 December Year 8
Other land Investment Investment
and buildings property held property held
(W1) at fair value at cost (W2) Total
Rs. Rs. Rs. Rs.
Cost/valuation
On 1 January Year 8 1,000,000 2,300,000 2,000,000 5,300,000
Revaluation - 400,000 - 400,000
––––––––– ––––––––– ––––––––– –––––––––
On 31 December Year 8 1,000,000 2,700,000 2,000,000 5,700,000
––––––––– ––––––––– ––––––––– –––––––––
Accumulated depreciation
On 1 January Year 8 87,500 - 220,000 307,500
Charge for the year (W1) 12,500 - 40,000 52,500
––––––––– ––––––––– ––––––––– –––––––––
On 31 December Year 8 100,000 - 260,000 360,000
––––––––– ––––––––– ––––––––– –––––––––
Carrying amount
On 31 December Year 7 912,500 2,300,000 1,780,000 4,992,500
––––––––– ––––––––– ––––––––– –––––––––
On 31 December Year 8 900,000 2,700,000 1,740,000 5,340,000
––––––––– ––––––––– ––––––––– –––––––––
Tutorial note
In practice, with a more complex property, plant and equipment table the investment
properties would be included within the land and buildings column with the required
disclosures being given separately in a note to the table.
Workings
(1) Depreciation on Property 1
Rs.
Brought forward (500,000 ÷ 40 7) 87,500
Year 8 (500,000 ÷ 40) 12,500
(2) Depreciation on Property 3
Rs.
Brought forward (2,000,000 ÷ 50 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 lawyer’s
view is that a payment is more likely than not.
It is not appropriate to calculate an expected value where there is only one event, instead
a provision should be made for the most likely outcome. The lawyer has various views on
the possible, but the most likely payout is Rs. 500,000 as this has a 50% probability. As
settlement of the provision is not anticipated until 2019, the provision should be discounted
back at 8% to give a liability of Rs. 476,280.
Provided that the payment from the insurance company is virtually certain, this should be
shown as an asset, also at its discounted value of Rs. 47,628, being 10% of the provision.
In both cases the discounting should be unwound over the coming three years through
profit or loss.
3 Revaluation
IAS 16 on Property, Plant and Equipment does not impose a frequency for updating
revaluations. It simply requires a revaluation where it is believed that the fair value of the
asset has materially changed. Hence, if in the past there have been material differences
between the carrying amount and fair value at the 5 yearly review then Brooklyn should
consider having more frequent valuations following on from this year’s valuation.
Revaluations should be regular and not timed simply when property prices are at a peak. It
is not acceptable for Brooklyn to defer its next revaluation while values are low. If property
prices do fall in 2017, then it may be necessary to perform an impairment test in
accordance with IAS 36 Impairment of assets.
If it is believed that an asset value has moved materially, then all assets in that class must
be revalued. Hence it is not sufficient for Brooklyn to just revalue the London property.
IAS 16 does not require the valuation to be performed by an external party, and so the use
of the property manager to conduct the valuations is acceptable. Notes to the financial
statements will disclose that he is not independent of the company.
its intention to complete the intangible asset and use or sell it.
its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic benefits.
Among other things, the entity can demonstrate the existence of a market for
the output of the intangible asset or the intangible asset itself or, if it is to be
used internally, the usefulness of the intangible asset.
its ability to measure reliably the expenditure attributable to the intangible asset
during its development.
(b) (i) Since the product met all the criteria for the development of the product, it should
be recognised as an intangible in the statement of financial position (SOFP) of the
company. However, RI should capitalise only the development work (i.e. Rs. 9
million) as intangible asset. IAS-38 does not allow capitalization of cost relating to
the research work, training of staff and cost of trial run.
Since the product has a useful life of 7 years, the amortization expense amounting
to Rs.0.32 million (Rs. 9 million × 3/12 ÷ 7 years) should be recorded in the
statement of profit or loss and other comprehensive income (SOCI).
(ii) This purchasing of right to manufacture should be recognised as an intangible in
the SOFP because:
it is for an established product which would generate future economic benefits.
cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortised over its useful life. The
useful life will be shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years.
The amortization to be recorded in SOCI is Rs. 2.83 million (Rs. 17 million × 10/12
÷ 5).
(iii) The acquired brand should be recognised as an intangible in the SOFP because
acquisition price is a reliable measure of its value. The amortization to be recorded
in SOCI is Rs.0.12 million (Rs. 2 million ÷ 10 years x 7/12).
(iv) The carrying value of the intangible asset should be increased to Rs. 10 million in
the SOFP. Since there is an indefinite useful life of the intangible assets, it should
not be amortised. Instead, RI should test the intangible asset for impairment by
comparing its recoverable amount with its carrying amount. Impairment testing
should be done at least annually
The costs which should be capitalised are those which can be directly attributed to
creating, producing or preparing the asset for its intended use. Therefore the
purchase cost of Rs. 180,000, legal costs of Rs. 4,000, supervisors’ time of Rs.
3,200 and testing costs of Rs. 4,800 (a total of Rs. 192,000) can all be capitalised.
The costs of staff training of Rs. 13,000 (see above) must be expensed as incurred.
Once an intangible asset has been recognised, it should be carried under the cost
model or the revaluation model. Oxtail Ltd use the cost model so this intangible will
be carried at cost less any accumulated amortisation and any accumulated
impairment losses.
An intangible asset with a finite useful life should be amortised over its expected
useful life. The know-how of Rs. 192,000 should therefore be amortised over the
four year 'life' of the new manufacturing process. Amortisation for the six months to
31 December 2016, will therefore be calculated as Rs. 24,000 (Rs. 192,000/4 x
6/12). This gives the know-how a carrying amount at the point that an impairment is
identified of Rs. 168,000 (Rs. 192,000 – Rs. 24,000).
According to IAS 36: Impairment of Assets, if there is an indication of impairment,
the asset’s carrying amount of Rs. 168,000 should be compared to its recoverable
amount. If the recoverable amount is lower than the carrying amount then an
impairment loss should be recognised in the statement of profit or loss for the
period.
The recoverable amount of an asset is defined by IAS 36 as the higher of the
asset’s fair value less costs to sell (here Rs. 152,000) and its value in use (here Rs.
157,000). So the recoverable amount of the know-how is Rs. 157,000 and the Rs.
168,000 should be written down to that amount – ie by Rs. 11,000 (Rs. 168,000 –
Rs. 157,000). The Rs. 11,000 should be recognised as an expense in profit or loss
for the current year.
(b) Summary of costs included in profit or loss for the year ended 31 December 2016
Rs.
Amortisation (see a) 24,000
Impairment of know-how (see a) 11,000
Research costs 70,000
Promotional advertising costs 15,000
Staff training costs 13,000
Statement of financial position as at 31 December 2016 (extract)
Rs.
Non-current assets:
Intangible assets (120,000 – 15,000 + 157,000 (OF)) 262,000
(iii) (a) Cost of purchase of servers plus cost of their operating software should be
capitalized as tangible assets in line with the requirements of IAS 16 and
depreciated according to their expected useful economic life.
(b) Cost of purchase of software licenses other than operating software should be
capitalized as intangible assets because economic benefit is accruing to the
company.
(iv) Cost of maintenance of websites is a recurring expenditure and should be expensed out.
(v) IAS-38 does not allow the capitalization of training costs. Therefore, these must be
expensed.
(vi) Cost of advertising should be expensed as and when incurred.
2016 2015
Rupees in ‘000
Cost January 1 4,500 5,000
For the year - impairment - (500)
December 31 4,500 4,500
Amortization January 1 - -
For the year 2,250 -
December 31 2,250 -
Carrying amount December 31 2,250 4,500
% / useful life 50% / 2
years -
1.1 The amortisation expense for the year has been allocated to cost of sales.
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 ((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
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’ Act, 2017. 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
In the year to 31 December Year 7, the impairment loss is Rs. 147,500. Of this, Rs. 40,000
reverses the gain in the previous year. The revaluation reserve is reduced by Rs. 25,200
(Rs. 28,000 – Rs. 2,800). The remaining impairment loss of Rs. 122,300 is written off as a
loss in Year 7.
Also in the year to 31 December Year 7 the asset would be depreciated based on the
estimate of its remaining useful life of 5 years giving a charge of Rs. 20,000 (Rs. 100,000/
5 years).
(2) Machine 2
Rs.
Cost on 1 January Year 1 500,000
Depreciation to 1 January Year 7
6 years ((500,000 – 60,000)/10 years)) (264,000)
Carrying amount on 1 January Year 7 236,000
Fair value minus cost to sell (200,000 – 5,000) (195,000)
Impairment loss 41,000
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
On 31 March Year 7 the machine is sold for Rs. 550,000 giving a gain on sale as follows:
Rs.
Proceeds 550,000
Selling costs (assumed to be as forecast) (5,000)
545,000
Carrying amount (300,000)
245,000
The balance on the revalution reserve is transferred to retained earnings on the disposal of
the asset.
Dr (Rs.) Cr (Rs.)
Revaluation surplus 129,375
Retained earnings 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
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
year’s financial statements.
Applying this, the revised carrying amount of the net assets of Sparkle Limited’s 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) 5,000] 9,000
Purifying and bottling plant:
8,000 – [(8,000/20,000) 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
Rs. m
Goodwill 0
Freehold 270
Freehold land and buildings 50
320
Because the land and buildings have been re-valued, the impairment is treated as a
revaluation decrease until the carrying amount of the asset reaches its depreciated
historical cost. The revaluation reserve relating to the asset is Rs. 65 million and so is
adequate to cover the full impairment of Rs. 33m. The impairment must be separately
disclosed and the notes to the accounts must specify by class of asset the impairment
recognised directly to equity.
The impairment loss on the goodwill and plant (Rs. 82 million) must be recognised in profit
or loss for the year. The notes to the accounts must specify the line item in which the
impairment loss has been included.
Where the impairment write-down is material, information must also be provided as to the
events and circumstances that led to the loss, the nature of the assets affected, the
segment to which the asset belongs, that recoverable amount was based on value in use
and the discount rate used to calculate this.
Workings
Loss on the various non-current assets
After the impairment loss has been recognised on the goodwill there is still 115 - 70 = 45
loss to be allocated to the other noncurrent assets, on a pro-rata basis.
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
–––––– –––– ––––––
(b) The timing of the board meeting and consequent actions and notifications is within the
accounting period ended 31 October 2016. The notification of staff, suppliers and the press
seems to indicate that the sale will be highly probable and the directors are committed to a
plan to sell the assets and are actively locating a buyer. From the financial and other
information given in the question it appears that the travel agencies’ operations and cash
flows can be clearly distinguished from its other operations. The assets of the travel
agencies appear to meet the definition of non-current assets held for sale; however the
main difficulty is whether their sale and closure also represent a discontinued operation.
The main issue is with the wording of ‘a separate major line of business’ in part (i) of the
above definition of a discontinued operation. The company is still operating in the holiday
business, but only through Internet selling. The selling of holidays through the Internet
compared with through high-street travel agencies requires very different assets, staff
knowledge and training and has a different cost structure. It could therefore be argued that
although the company is still selling holidays the travel agencies do represent a separate
line of business. If this is the case, it seems the announced closure of the travel agencies
appears to meet the definition of a discontinued operation.
(c) Shahid Holdings statement of profit or loss year ended 31 October:
2016 2015
Rs.’000 Rs.’000
Continuing operations
Revenue 25,000 22,000
Cost of sales (19,500) (17,000)
Gross profit 5,500 5,000
Operating expenses (1,100) (500)
Profit/(loss) from continuing operations 4,400 4,500
Discontinued operations
Profit/(loss) from discontinued operations (4,000) 1,500
Profit for the period 400 6,000
Analysis of discontinued operations
Revenue 14,000 18,000
Cost of sales (16,500) (15,000)
Gross profit/(loss) (2,500) 3,000
Operating expenses (1,500) (1,500)
Profit/(loss) from discontinued operations (4,000) 1,500
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 arm’s 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;
There is an active programme underway to find a buyer;
The asset is marketed at a realistic price.
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.
Recove
Cost rable
amount
Rs. m Rs. m
Engines (15%) 3 2.7
Interior (25%) 5 4.5
Remainder (60%) 12 10.8
20 18
IAS 16 requires that each part of the asset that has a cost that is significant in relation to the total
cost must be depreciated separately. Therefore, in the first year the depreciation charge will be
as follows:
Rs. m
Engines Rs. 2.7m × 1/3 × 9/12 = 0.675
Interior Rs. 4.5m × 1/2 × 9/12 = 1.688
Remainder Rs. 10.8m × 1/5 × 9/12 = 1.620
Charge to profit or loss in Year 4 3.983
11.1 X LTD
(a)
A B C D E
Period Opening Fin. Charge Rentals Closing Balance
Balance at 15% of B (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
──── ────
(b)
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 lease) 6,503
Current Liabilities
Obligation under lease
(Rs.9,133,000 – Rs.6,503,000) 2,630
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 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 15.73% 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
Rs.
Non-current assets
Non-current liabilities
Current liabilities
Statement of cash flows for the year ended 31 March 2016 (extracts)
a) Right-of-use retained by AL
Financing
Since the consideration (Rs.850,000) exceeds the fair value (Rs.550,000) of the machine,
the agreement contains a financing transaction.
AL initially recognises a right-of-use asset as the proportion of the carrying amount that
reflects the right of use retained. The proportion is calculated by dividing the present value
of the lease payment by fair value
=> 440,000 CV ÷ 550,000 FV × 314,457 (W-1) = Rs.251,565
W-1
Fair value of Rs.614,456 less the part of the lease payments that is just a repayment of the
financing granted to the seller-lessee (Rs.300,000) = Rs.314,456
Dr. Cr.
Rs. Rs.
Operating income 1,440,000
Financial liability 1,440,000
Generator B
Financing transaction
Since the consideration received (Rs.6,000,000) exceeds the fair value (Rs.5,000,000) of the
power generator, the agreement contains a financing transaction.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,500,000x[1-(1+4.5%)^-5}/4.5%
PV = Rs.6,584,965
Right-of-use
ROU = CV/FV*PV
ROU => 7,000,000/10,000,000*6,584,965 = Rs.4,609,475
Gain on sale
Gain (refer W2) = Rs.1,024,510
W2
Consideration received 10,000,000
Less: PV of lease liability 6,584,965
Less: Carrying value of machine transferred
Total carrying value 7,000,000
Less: Right-of-use asset (4,609,475) 2,309,525
Gain = Rs.1,024,510
Particulars Debit Credit
Rs. Rs.
Cash / Bank 10,000,000
Right-of-use 4,609,475
Generator – Carrying value 7,000,000
Lease Liability 6,584,965
Gain on sale 1,024,510
11.9 MODIFICATION THAT DECREASES THE SCOPE OF THE LEASE (IFRS 16,
ILLUSTRATIVE EXAMPLE 17)
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the
lease liability based on:
(a) a five-year remaining lease term,
(b) annual payments of CU30,000 and
(c) Lessee’s incremental borrowing rate of 5 per cent per annum. This equals CU129,884.
Lessee determines the proportionate decrease in the carrying amount of the right-of-use asset
on the basis of the remaining right-of-use asset (ie 2,500 square metres corresponding to 50
per cent of the original right-of-use asset).
50 per cent of the pre-modification right-of-use asset (CU184,002) is CU92,001. Fifty per cent
of the pre-modification lease liability (CU210,618) is CU105,309. Consequently, Lessee
reduces the carrying amount of the right-of-use asset by CU92,001 and the carrying amount of
the lease liability by CU105,309.
Lessee recognises the difference between the decrease in the lease liability and the decrease
in the right-of-use asset (CU105,309 – CU92,001 = CU13,308) as a gain in profit or loss at the
effective date of the modification (at the beginning of Year 6).
Lessee recognises the difference between the remaining lease liability of CU105,309 and the
modified lease liability of CU129,884 (which equals CU24,575) as an adjustment to the right-
of-use asset reflecting the change in the consideration paid for the lease and the revised
discount rate.
11.10 MODIFICATION THAT BOTH INCREASES AND DECREASES THE SCOPE OF THE LEASE
(IFRS 16, ILLUSTRATIVE EXAMPLE 18)
a) The consideration for the increase in scope of 1,500 square metres of space is not
commensurate with the stand-alone price for that increase adjusted to reflect the
circumstances of the contract. Consequently, Lessee does not account for the increase in
scope that adds the right to use an additional 1,500 square metres of space as a separate
lease.
The pre-modification right-of-use asset and the pre-modification lease liability in relation to
the lease are as follows.
Lease liability Right-of-use asset
Beginning 6% Lease Ending Beginning Deprecia- Ending
balance interest payment balance balance tion balance
expense charge
Year CU CU CU CU CU CU CU
1 736,009 44,160 (100,000) 680,169 736,009 (73,601) 662,408
2 680,169 40,810 (100,000) 620,979 662,408 (73,601) 588,807
3 620,979 37,259 (100,000) 558,238 588,807 (73,601) 515,206
4 558,238 33,494 (100,000) 491,732 515,206 (73,601) 441,605
5 491,732 29,504 (100,000) 421,236 441,605 (73,601) 368,004
6 421,236 368,004
b) At the effective date of the modification (at the beginning of Year 6), Lessee remeasures
the lease liability on the basis of: (a) a three-year remaining lease term, (b) annual
payments of CU150,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per
annum. The modified liability equals CU393,647, of which (a) CU131,216 relates to the
increase of CU50,000 in the annual lease payments from Year 6 to Year 8 and (b)
CU262,431 relates to the remaining three annual lease payments of CU100,000 from Year
6 to Year 8.
c) Decrease in the lease term
At the effective date of the modification (at the beginning of Year 6), the pre-modification
right-of-use asset is CU368,004. Lessee determines the proportionate decrease in the
carrying amount of the right-of-use asset based on the remaining right-of-use asset for the
original 2,000 square metres of office space (ie a remaining three-year lease term rather
than the original five-year lease term). The remaining right-of-use asset for the original
2,000 square metres of office space is CU220,802 (ie CU368,004 ÷ 5 × 3 years).
At the effective date of the modification (at the beginning of Year 6), the pre-modification
lease liability is CU421,236. The remaining lease liability for the original 2,000 square
metres of office space is CU267,301 (ie present value of three annual lease payments of
CU100,000, discounted at the original discount rate of 6 per cent per annum).
Consequently, Lessee reduces the carrying amount of the right-of-use asset by
CU147,202 (CU368,004 – CU220,802), and the carrying amount of the lease liability by
CU153,935 (CU421,236 – CU267,301). Lessee recognises the difference between the
decrease in the lease liability and the decrease in the right-of-use asset (CU153,935 –
CU147,202 = CU6,733) as a gain in profit or loss at the effective date of the modification
(at the beginning of Year 6).
Lease liability CU153,935
Right-of-use asset CU147,202
Gain CU6,733
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the
effect of the remeasurement of the remaining lease liability reflecting the revised discount
rate of 7 per cent per annum, which is CU4,870 (CU267,301 – CU262,431), as an
adjustment to the right-of-use asset.
The modified right-of-use asset and the modified lease liability in relation to the modified
lease are as follows.
Lease liability Right-of-use asset
Beginning 7% Lease Ending Beginning Deprecia- Ending
balance interest payment balance balance tion balance
expense charge
Year CU CU CU CU CU CU CU
6 393,647 27,556 (150,000) 271,203 347,148 (115,716) 231,432
7 271,203 18,984 (150,000) 140,187 231,432 (115,716) 115,716
8 140,187 9,813 (150,000) - 115,716 (115,716) -
11.11 SUBLEASE CLASSIFIED AS A FINANCE LEASE (IFRS 16, ILLUSTRATIVE EXAMPLE 20)
The intermediate lessor classifies the sublease by reference to the right-of-use asset arising
from the head lease. The intermediate lessor classifies the sublease as a finance lease,
having considered the requirements in paragraphs 61–66 of IFRS 16.
When the intermediate lessor enters into the sublease, the intermediate lessor:
i. derecognises the right-of-use asset relating to the head lease that it transfers to the
sublessee and recognises the net investment in the sublease;
ii. recognises any difference between the right-of-use asset and the net investment in the
sublease in profit or loss; and
iii. retains the lease liability relating to the head lease in its statement of financial position, which
represents the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognises both finance income on
the sublease and interest expense on the head lease.
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 group’s 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.
Contingent liability
Following the explosion at the oil extraction plant a number of employees have made
claims against the company for undue stress. Based on lawyers’ advice the company do
not believe that it is probable that a court case against the company will be brought. If such
a case was to be heard the estimated payout in total is Rs. 20,000.
Workings
Personal injury claims: 8 × 150,000 = 1,200,000
Onerous lease: (80,000 – 15,000) – 6,000 = 59,000
(b) Summary of amounts included in income statement for year ended 31 December
2016
Operating costs: Rs.
Movement in provision 394,000
Consultancy fees 12,000
Depreciation on oil refinery environmental damage (1,300,000 ÷ 52,000
25yrs)
Borrowing costs
Unwinding of the discount 110,400
Other operating income:
Insurance reimbursement 400,000
Within other comprehensive income there will be an actuarial loss on plan assets of Rs. 64,000
and an actuarial loss on plan liabilities of Rs. 22,000.
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
Year 3 Year 4
(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
Liabilities Assets financial
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)
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 employer’s 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 employer’s 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
employer’s 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 20·5
–––––
Analysis of amount in statement of other comprehensive income (OCI):
Rs. m
Actuarial loss on obligation (w2) 29
Actuarial gain on plan assets (w2) (27·5)
–––––
Actuarial loss on obligation (net) 1·5
–––––
Working 1
Movement in net liability in statement of financial position at
31 October 2016:
Rs. m
Opening liability 10.0
Expense 20·5
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
PV of 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-based The entity pays for goods or services by issuing
payment transactions equity instruments in the form of shares or share
options.
Cash-settled share-based The entity incurs a liability for goods or services
payment transactions and the settlement amount is based on the price
(or value) of the entity’s shares or other equity
instruments.
Share based payments with Transactions where an entity acquires goods or
cash alternatives 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 entity’s shares
or other equity instruments, or equity instruments
of the entity.
31 December Year 6
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
31 December Year 7
Actual outcome (at grant date value)
44,300 × Rs. 15 664,500
Minus expense previously recognised (440,000)
Year 3 charge 224,500
Balance at the end 664,500
The amount chargeable to the statement of profit or loss is based on the fair value of the
share options at the grant date. This is not subsequently remeasured as these share
options represent an equity-settled share-based payment. The equivalent cost will be
updated each year for those employees that are still eligible or expected to be eligible at
the year end to ensure that the amount charged reflects the amount that is expected to
vest.
(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.
Financial assets
A financial asset must be measured at amortised cost if both of the following conditions are
met:
the asset is held within a business model whose objective is to hold assets in order
to collect contractual cash flows; and
the contractual terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount
outstanding.
Any asset which is not measured at amortised cost must be measured at fair value. Any
fair value movement on these financial assets is reported in profit or loss.
In addition an entity is allowed to designate a financial asset that otherwise meets the
amortised cost criteria as FVTPL if it meets certain conditions. Furthermore an entity is
allowed to make an irrevocable decision on initial recognition of equity that any fair value
difference on that equity be recognised in OCI rather than P&L
Financial liabilities
A financial liability must be measured at amortised cost with specific exceptions including:
Derivatives that are liabilities at the reporting date; and
Financial liabilities that might arise when a financial asset is transferred but this
transfer does not satisfy the derecognition criteria. .
A company is allowed to designate a financial liability as measured at fair value through
profit or loss. This designation can only be made if:
it eliminates or significantly reduces a measurement or recognition inconsistency; or
this would allow the company to reflect a documented risk management strategy.
Any such designation is irrevocable.
(b) (i) 3% Bond
The bond must initially be recorded at its purchase price of Rs. 250,000. The bond
seems to satisfy the amortised cost criteria. The company seem to operate a
business model whose objective is to hold financial assets in order to collect
contractual cash flows and it seems that the cash it will collect will be solely payment
of interest and principle. The market value is not relevant.
Interest will be credited to profit or loss using the effective interest rate, resulting in
finance income of Rs. 24,250 (9.7% × 250,000). The effective rate reflects the total
return received by the investor over the duration of the bond – being the coupon +
Rs. 50,000 premium on redemption. The coupon recorded in the statement of cash
flows is Rs. 9,000 (3% × 300,000).
The difference between the effective interest and the actual coupon is added to the
investment to give an amortised cost at the end of Year 3 of Rs. 265,250 (250,000 +
24,250 – 9,000).
However this contract is specifically intended to mitigate the risk of future adverse cash
flows as a result of potential increases in raw material prices. This contract is therefore
being used as a cash flow hedge (because it’s being used to fix the price of material to be
acquired in the future on 1 August). In such circumstances IAS 39 has some special hedge
accounting rules. Hedge accounting allows the gains or losses on a derivative contract
being used in a cash flow hedge to be taken to reserves until the cash flow it is designed to
hedge against is recognised in the financial statements. In this case, the gains or losses
will be held in reserves until the year ended 30 June 2017 which is the year in which the
cash flow is actually incurred, and then released to the profit or loss.
In this case, a loss on the derivative of Rs. 40,000,000 (100,000 x Rs.(10,500 10,100))
will be included in reserves at 30 June 2016.
Debit Credit
Forward contract asset 95,000
P&L account – fair value gain 95,000
Being mark-to-market for the derivative
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
Forward contract asset (142000 – 95000) 47,000
P&L account – fair value gain 47,000
Being mark-to-market for the derivative
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
Being sales proceeds
Debit Credit
Bank 142,000
Forward contract 142,000
Being forward contract closed out for cash
Debit Credit
P&L account – cost of sales 850,000
Inventory 850,000
Being inventory carrying value now derecognised upon sale
Debit/(Credit)
Cash Derivative Inventory P&L
Inventory brought forward 1,000,000
December:
Change in fair value (FV)
of forward 95,000 (95,000)
Change in FV of inventory (100,000) 100,000
March:
Change in FV of forward 47,000 (47,000)
Change in FV of inventory (50,000) 50,000
Revenue 1,150,000 (1,150,000)
Close out derivative 142,000 (142,000)
Cost of sale (850,000) 850,000
TOTALS 1,292,000 NIL NIL 292,000
31 Dec 28 Feb
The cash flow under the contract will be
400,000 * 0.7 = Rs. 280,000 Rs. 280,000
The cash flow available in the market is
400,000 * 0.75 = Rs. 300,000
The cash flow available in the market is
400,000 * 0.80 = Rs. 320,000
Therefore the fair value of the derivative (an asset) is Rs. 20,000 Rs. 40,000
Debit Credit
Forward contract 20,000
Equity – cash flow hedge reserve 20,000
Being fair value change, deferred to equity as an effective cash flow hedge
Debit Credit
Forward contract 20,000
Equity – cash flow hedge reserve 20,000
Being fair value change January and February 2016
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
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 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.
5 Investment in 8.5% treasury stock 2018
This would be classified as to be subsequently measured at amortised cost.
On initial recognition, it will be recorded at fair value, the cost of Rs. 107,100.
Finance income will be credited to profit or loss using the gross redemption yield of 5.9%.
Interest recognised in profit or loss will be Rs. 4,213 (Rs. 107,100 5.9% 8/12).
The investment in the statement of financial position at 31 December 2016 will be at Rs.
107,100 plus Rs. 4,213 = Rs. 111,313. (No interest will have been received to date as it is
paid annually in arrears).
The market value is not reflected in the statement of financial position at 31 December
2016 but it would be disclosed in accordance with IFRS 7.
6 Investment in loan notes
The investment has been classified as held for trading so it is accounted for as a financial
asset at fair value through profit or loss.
On acquisition it will be recorded at its cost of Rs. 25,000.
At the reporting date the notes will be revalued to their fair value of Rs. 25,500 with the
Rs. 500 uplift being recognised in profit or loss
7 Selling shares short
On initial recognition, the journal would be:
Rs. Rs.
Dr Cash (10,000 Rs. 3.60) 36,000
At the reporting date the financial liability must be revalued to its fair value of Rs. 33,000:
Rs. Rs.
Dr Financial liability 3,000
Cr Statement of profit or loss 3,000
Rs.000 Rs.000
Year 1 interest 600 0.91 546
Year 2 interest 600 0.83 498
Year 3 interest 600 0.75 450
Year 4 interest and capital 10,600 0.68 7,208
––––––
Total value of debt component 8,702
Proceeds of the issue 10,000
––––––
Equity component (residual amount) 1,298
––––––
8,972,000
The equity will not be remeasured, however the liability element will be subsequently
remeasured at amortised cost using the effective interest rate of 7%. The total finance cost
for the year ended 31 December 2016 is Rs. 642,600 (7% x 9,180,000). The coupon rate
of interest of 5% has already been charged to profit or loss in the year so a further Rs.
142,600 should be recorded:
Dr Finance costs Rs. 142,600
Cr Non-current liability Rs. 142,600
(b) Preference shares
The substance of the instrument is a debt instrument. IAS 32 requires that any instrument
that contains an obligation to transfer economic benefit be classified as a liability. The
cumulative nature of the returns on the preference shares means that the outflow of benefit
is inevitable. The preference shares would then be classified as debt and would in fact
increase the gearing of the entity.
Working 1
Liability element Rs.000
PV of the principal (at 9% after 4 years) = (Rs. 6m x 0.708) 4,248
PV of interest of 7% on Rs. 6m for 4 years = (Rs. 6m x 0.07 x 3.24) 1,361
Total value of liability element 5,609
Working 2
Equity element Rs.000
Total proceeds raised on issue 6,000
Total value of liability element (5,609)
Value attributable to equity 391
(b) (i) In accordance with IAS 39, the liability element will be subsequently measured at
amortised cost using the effective interest rate (which in this case is the interest rate
used to discount the principal to PV, ie 9%). The equity element is not subsequently
re-measured.
The interest of Rs. 420,000 (7% x Rs. 6m) has already been paid and recorded. The
additional finance cost is recorded as:
Rs.000 Rs.000
Dr Finance costs (W1) 85
Cr Liability element of bonds 85
Working 1
Opening balance Finance cost at 9% Interest paid 7% Closing balance
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.
The liability will then be accounted for in accordance with IAS 39, i.e. at amortised cost using the
effective interest rate of 7%.
The interest paid of Rs. 200,000 has already been posted, so the additional Rs. 61,058 is
recorded as:
Dr Finance costs Rs. 61,058
Cr Liability Rs. 61,058
(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
Deferred
taxation
liability
Rs. 000
B
(c) Balance /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 entity’s 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 33⅓%. 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.
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
2
depreciation ( /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 2.50) 280
Carrying value on acquisition is (400)
–––––––––––––
The depreciation of the leasehold in Shakeel Limited’s accounts would be Rs. 100,000 per
annum. However in the consolidated accounts it should be Rs. 70,000 (Rs. 280,000/4).
This would require a reduction in depreciation of Rs. 30,000 in the consolidated accounts
for the next four years.
Software:
Shakeel Consolidated Difference
Limited’s figures
accounts
Rs.000 Rs.000
Capitalised amount 2,400 2,400
Depreciation to
31 March 2015 (300) 8 year life (480) 5 year life
––––– –––––
Value at date of 180 fair
acquisition 2,100 1,920 value adjustment
Depreciation to 180 additional
31 March 2016 (300) (480) amortisation
––––– –––––
Carrying value
31 March 2016 1,800 1,440
––––– –––––
(W2) Inventories
Rs.000
Amounts given in the question (719 + 560) 1,279
Unrealised profit in inventories (25 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
–––––––––––––
Workings
(i) Goodwill
Rs.‘000 Rs.‘000
Consideration transferred 77,468
Fair value of NCI 18,000
Net Asset acquired as represented by: 95,468
Ordinary share capital 50,000
Revaluation surplus on acquisition 10,000
Retained earnings on acquisition 12,000
Intangible assets (brand name) 10,000 (82,000)
13,468
Note
st st
The deferred consideration has been discounted at 7% for 2 years (1 July 2015 – 1 July
2017).
Rs. million
2. Group structure
960 million
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 NCI’s 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
Workings
1. Fair value adjustments
At acquisition
Movement 31 Dec 2016
date
Rs.000 Rs.000 Rs.000
PPE 800 (50) 750
Inventories 200 (200) -
Intangible assets 150 (60) 90
Liabilities (210) 126 (84)
──── ──── ────
940 (184) 756
──── ──── ────
2. Goodwill
Rs.000 Rs.000
Consideration transferred 3,800
NCI at fair value 1,600
────
5,400
Net assets at fair value:
Share capital 1,000
Retained earnings 3,200
Fair value adjustments 940
────
(5,140)
────
Goodwill on acquisition 260
20% impairment (52)
────
Goodwill at 31 December 2016 208
────
3. Unrealised profit on inventories
Sales of Rs. 300k x 20% x 50% left in inventories at y/e = Rs. 30,000
4. Retained earnings
Rs.000 Rs.000
As per SOFP 7,500 4,000
Pre-acquisition reserves (3,200)
Adjustments arising from movement in
FV adjustments (184)
────
616
────
Group share 75% 462
Unrealised profit on inventory transfer (30)
Goodwill impairment (75% x 52)(W2) (39)
────
Consolidated reserves 7,893
────
5. Non-controlling interests
Rs.000
NCI at acquisition (at fair value) 1,600
25% x post-acquisition retained earnings Rs. 616,000 (W4) 154
Goodwill impairment (25% x 52)(W2) (13)
─────
1,741
─────
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
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 Katie Ltd
Mycroft Ltd Adjustment Total
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 W2 (3)
Pension cost W4 (7.2)
Revaluation W5 (2.4)
Share Katie Ltd W6 (2.0) (72.6)
Operating profit
W3 Inter-company trading
The inter-company trading amounts must be eliminated (ie sales and purchases).
There is no adjustment in respect of the loss. The question states that the sale is at fair value.
Therefore the loss is realised. Only unrealised amounts are adjusted on consolidation.
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 Rs. 100 4 directors 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% 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
(W2) Unrealised profit adjustments: Inter-company trading
FL to SL to AIL to Total
AIL AIL FL
Sales 2,400 1,800 3,600 7,800
(W6) Goodwill
SL AIL
Rs. millions Rs. millions
Cost of investment 9,000 10,500
NCI at acquisition
25% 12,000 (W5) 3,000
20% 11,400 (W5) 2,280
12,000 12,780
Net assets acquired (12,000) (11,400)
1,380
Rs. in
W3: Impairment in the value of investment in associates million
Cash paid (6 x 12) 72.00
Less: Post-acquisition losses:
Reserves on acquisition 40
Reserves at June 30, 2016 (108-82) 26
(14)
% holding 40% (5.60)
Elimination of unrealized gain to the extent of GL's share
(Rs. 11.5 x 0.15 / 1.15 x 40%) (0.60)
65.80
Fair value as per impairment testing 40.00
Impairment losses 25.80
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
H e liu m
30%
60%
A r s e n ic
S u lp h u r
Cost of investment 75
Share of net assets acquired
(60% 100 (W2)) (60)
——
15
——
(4) Non-controlling interest
Rs.000
(W2) Goodwill
Rs.000
Cost of investment (Rs. 3 1,200 90%) 3,240
Net assets acquired (90% 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
———
H id e
30%
80%
A r r iv e
Seek
2 Deferred consideration
The present value of the deferred consideration at 1 April 2015 is Rs. 6.05 million
2
1/(1.10) = 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 parent’s 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 Rs. 7) 7,000
NCI share of net assets at this date (20% 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. 3,600,000 100/150 = 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% 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
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
Rs.
Non-controlling interest at acquisition (25% 340,000 (W1)) 85,000
Share of post-acquisition profits (25% 80,000 (W1)) 20,000
Unrealised profit (W2) (2,500)
102,500
Rs.
Investment at cost 140,000
P’s share of post-acquisition accumulated profits 30,000
(30% (250,000 – 150,000)
Unrealised profit (W2) (1,200)
168,800
Rs.
Accumulated profits of P 650,000
P’s share of post-acquisition profits of S
(75% × Rs. 70,000 (W2)) 60,000
Unrealised profit (sale by S to P (W3)) (7,500)
P’s share of post-acquisition accumulated profits (W5) 30,000
Unrealised profit (W2) (1,200)
Impairment of goodwill (20,000)
Consolidated accumulated profits 711,300
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).
(b) Consolidated statement of financial position for the A Ltd Group as at 31 September
2016.
A Ltd
ASSETS Rs.000
Non-current assets
Property, plant and equipment (22,000+5,000) 27,000
Goodwill (W orking 1) 405
27,405
Current assets
Inventories (6,200+800– 40 (Working 2)) 6,960
Receivables (6,600+1,900) 8,500
Cash and cash equivalents (1,200+300) 1,500
16,960
Total assets 44,365
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
1,460
The difference of Rs. 132,000 must be added to the value of the bond liability and
deducted from
A Ltd’s 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
parent’s 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 associate’s 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 associate’s OCI (40% x 10) 4
Other comprehensive income for the year, net of tax 84
Total comprehensive income 358
Workings
(W2) Goodwill
Rs.000 Rs.000
Consideration transferred 620
NCI at fair value 180
800
Net assets acquired:
Share capital 200
Retained earnings 420
Fair value adjustment 60 (680)
120
Impairment 2015 (25%) (30)
90
Impairment 2016 (10% of carrying value) (9)
PFY TCI
Rs.000 Rs.000
Profit for year/TCI of Y Ltd 100 120
Less impairment of goodwill in the year (W2) (9) (9)
Less depreciation on FV adjustment for the year
(W1) (4) (4)
87 107
20% NCI share 17 21
Rs.000
Parent’s equity at 1 January 2016 as per SOCIE 1,700
Plus share of post-acquisition retained reserves of Y Ltd to 142
1 January 2016 (80% x 178 (W1))
Plus share of post-acquisition retained reserves of Z Ltd to
1 January 2016 (40% x(500-435))
26
Equity attributable to parent at 1 January 2016 1,868
Rs.000
At acquisition 180
Plus share of post-acquisition retained reserves to 1 January
2016 (20% x 178 (W1)) 36
Equity attributable to NCI at 1 January 2016 216
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% (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).
Goodwill in statement of financial position: There has been impairment of Rs. 15 million in
goodwill. This is apportioned between the interests of the equity owners of Plain and NCI
in the ratio 80:20.
Impairment of goodwill attributable to parent = Rs. 15m 80% = Rs. 12 million
Impairment of goodwill attributable to NCI = Rs. 15m 20% = Rs. 3 million.
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
Workings
(W1a) Net assets in subsidiary at acquisition – before measurement period
adjustments
At end of reporting At
period acquisition
Rs. m Rs. m
Share capital 1,020 1,020
Retained earnings 980 900
Other components of equity 80 70
1,990
The total fair value adjustment of Rs. 260 million above is taken as a balancing
figure as is the fair value adjustment that relates to property.
The amount in respect of the contingent liability and an amount within the property
adjustments is subsequently found to be incorrect. This information came to light in
the measurement period. Therefore, they retrospectively adjust th e carrying amount
of goodwill. In this case the easier approach is to calculate goodwill using the
corrected figures.
(W1b) Net assets in subsidiary at acquisition – after measurement period
adjustments
At At acquisition
consolidation
Rs. m Rs. m
Share capital 1,020 1,020
Retained earnings 980 900
Reduction of depreciation recognised on the
buildings
(Rs. 40/20 years) 2
Adjustment re recognition of the provision 5
987 900
Other components of equity 80 70
1,067 1,990
Fair value adjustments:
Contingent liability (6 – 1) (5) (5)
Property (266 – 40) 226 226
Fair value of net assets 2,308 2,211
The contingent liability has evolved into a provision by the date of consolidation.
This means that it is recognised as a liability and the amount has been exp ensed in
the subsidiary’s own financial statements. The adjustment made above (Dr Fair
value adjustment and Cr Retained earnings) is made because the expense which
has been recognised by the subsidiary since the date of acquisition relates to an
amount that has already been recognised in the consolidation workings at
acquisition.
(W2) Goodwill
Rs. m
Cost of investment 975
Fair value of initial holding 705
Fair value of NCI at date of acquisition 620
2,300
Net assets acquired (W1b) (2,211)
89
(W3) Non-controlling interest
Rs. m
Fair value of NCI at date of acquisition 620.0
NCI’s share of post-acquisition growth in:
Retained earnings (30% of (987 – 900)) 26.1
Other components in equity (30% of (80 – 70)) 3.0
649.1
(W4) Retained earnings
Rs. m
Mango Ltd’s balance as per the question 3,340.0
fair value adjustment re initial holding (705 – 700) 5.0
Share of post-acquisition growth (70% of (987 – 900)) 60.9
3,405.9
(W5) Other components of equity
Rs. m
Mango Ltd’s balance as per the question 250.0
Share of post-acquisition growth (70% of (80 – 70)) 7.0
257.0
(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
Non-controlling
interest
Hasan’s interest (balance)
In Riaz Ltd 75% 25%
In Siddiq Ltd (40% + (75% 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
The inter-company balances can be reconciled as follows after these adjustments
have been processed:
Hasan’s Riaz’s
financial financial
statements statements
Receivable Payable
Given in the question
Receivable from Riaz (note 5 in the
question) 25,500
Payable to Hasan (note 7 in the question) 5,000
Cash from Riaz (8,000)
Purchase from Hasan 12,500
17,500 17,500
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
(ii) Statement of changes in equity for the year ended 30 June 2016
Share Retained Total
capital earning
Rs.’m Rs.’m Rs.’m
Balance b/f (opening Balance) 1,500 660 2,160
Profit for the year - 480 480
Balance c/d 1,500 1,140 2,640
(b) Consolidated statement of profit or loss and other comprehensive incomes for the
year ended 30 June 2016
Rs.’m
Profit before tax (390 + 180) 570
Income tax expenses (120 + 60) (180)
Profit for the year 390
Other comprehensive income (60 + 30) 90
Total comprehensive income 480
Attributable to
Non-controlling interest (W2) 30
Members of the parent (480 – 30) 450
480
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% 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.
The disposal of 10% of the shares in S leaves P with a controlling interest; therefore the disposal
of the shares should be accounted for as an equity transaction between owners of the group. No
gain or loss is recognised in the consolidated financial statements of P.
It is assumed that the profits of S for the year were Rs. 200 million (all retained; therefore Rs. 900
million - Rs. 700 million). At 30 June it is assumed that profits for the year to date were Rs. 100
million (= Rs. 200 million 6/12); therefore the net assets of S at this date were Rs. 800 million.
P NCI
Rs. m Rs. m
Before the share sale (80% 800) 640 (20%) 160
After the share sale (70%) 560 (30%) 240
Change in interest in S - 80 + 80
The shares were sold for Rs. 94 million adding to the assets in P’s 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. million Rs. 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% 200 6/12) 80
1 July – 31 December (70% 200 6/12) 70
Goodwill impairment (8)
Attributable to NCI 142
1 January – 30 June (20% 200 6/12) 20
1 July – 31 December (30% 200 6/12) 30
50
192
Attributable to:
Equity owners of A (1,061 + 80% 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% 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.
Total
Rs.
Revenue (1,926,500 + 396,200 + 260,800) 2,583,500
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
Rs.’000
Parent’s 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.
$000 $000
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
(b) Translation: Statement of profit or loss of Stockpot for year ended 31 March Year 4
EU000 Rate $000
Revenue 60,000 2.3 26,087
Cost of sales (30,000) 2.3 (13,043)
Gross profit 30,000 13,044
Operating expenses (16,000) 2.3 (6,957)
Operating profit 14,000 6,087
Interest payable (2,000) 2.3 (870)
Profit before tax 12,000 5,217
Tax (4,200) 2.3 (1,826)
Profit after tax 7,800 3,391
The statement of profit or loss has been translated at the average rate as an
approximation to the actual (historical) rate. The closing rate is not allowed under IAS 21.
Mancaster Group: Consolidated statement of profit or loss for the year ended 31
March Year 4
$000
Revenue (50,000 + 26,087) 76,087
Cost of sales (25,000 + 13,043) (38,043)
Gross profit 38,044
Operating expenses (15,000 + 6,957) (21,957)
Operating profit 16,087
Interest payable (1,000 + 870) (1,870)
Profit before tax 14,217
Tax (3,600 + 1,826) (5,426)
Profit after tax 8,791
Attributable to
Equity holders of the parent 7,943
Non-controlling interest (25% × 3,391) – see translation 848
8,791
Workings
(1) Goodwill at date of acquisition
$000 Rate EU000
Cost of investment 5,500 3 16,500
Minus: Share of net assets acquired:
Share capital (translated at 3.0) 5,000
Accumulated profits (translated at 3.0) 1,667
6,667
Group share (75%) 5,000 3 (15,000)
Goodwill 500 1,500
Re-stated to closing rate: (1,500/2.2) 682
Translation gain on goodwill – to group
reserves 182
(2) Consolidated accumulated profits
$000
Mancaster: 12,500
Stockpot: group share of post-acquisition profits (75% ×
4,697) – see translation of statement of financial position
3,523
Translation gain on goodwill 182
16,205
(3) Non-controlling interest
$000
Non-controlling share of net assets at 31 March Year 4 :
(25% × 11,364) – see translation of Stockpot statement of
financial position 2,841
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 associate’s profit (W3) 160
Profit before tax 1,983
Income tax expense (200+231(W1)) (431)
Profit for the year 1,552
Rs.000
Profit for year attributable to: 1,414
Equity holders of the parent
Non-controlling interest (W5) 138
1,552
Total comprehensive income attributable to:
Equity holders of the parent 2,432
Non-controlling interest (W5) 336
2,768
Consolidated statement of financial position for the A group as at 30 September 2016
Rs.000
Assets
Non-current assets
Property, plant and equipment (7,000 + 6,349 (W1)) 13,349
Goodwill (W2) 635
Investment in associate (W6) 1,220
15,204
Rate @ avge
W1 Translation of B
A$000 rate Rs.000
Statement of profit or loss and other
comprehensive income
Revenue 2,200 Rs./A$0.65 3,385
Cost of sales and expenses (1,600) Rs./A$0.65 (2,462)
Profit before tax 600 923
Income tax (150) Rs./A$0.65 (231)
Profit for year 450 692
Other comprehensive income:
Revaluation gains on PPE Total OCI 120 Rs./A$0.65 185
120 185
Total comprehensive income 570 877
Statement of financial position
Non-current assets
Property, plant and equipment 4000 @CR A$0.63 6349
Rate @ avge
W1 Translation of B
A$000 rate Rs.000
Current assets 2,000 @CR A$0.63 3,175
Total assets 6,000 9,524
Share capital 1000 @HR A$0.50 2000
Pre-acquisition reserves 1800 @HR A$0.50 3600
Post-acquisition reserves 1,700 Bal fig 1,543
Total equity 4,500 7143
Current liabilities 1,500 @CR A$0.63 2,381
Equity and liabilities 6,000 9524
W8 Reserves A B
Rs.000 Rs.000
As per SOFP 12,100 5,143
Rs.’000 Rs.’000
Profit before taxation 138,960
Adjustment for non-cash items:
Depreciation charges 72,720
Profit on disposal of subsidiary (W.1) (5,040)
Interest expenses (payable) 10,080
Operating profit before working
Capital changes 216,720
Changes in working capital
Increase in inventory (W2) (28,800)
Increase in Receivables (W2) (32,400)
Increase in Creditors (W2) 25,200
(36,000)
Cash generated from operations 180,720
Income tax paid (W.3) (37,080)
Net cash flow from operating activities 143,640
Cash flow from investing activities:
Purchases of non-current assets (W4) (111,240)
Sales of Pastit Limited (W5) 41,040
Net cash used in investing activities (70,200)
Cash flow from financing activities:
Redemption of 10% debenture (W6) (18,000)
Dividend paid to non-controlling interest (W7) (3,600)
Interest paid (10,080)
Net cash used in financing activities (31,680)
Net increase in cash & cash equivalent 41,760
Cash & cash equivalent b/f (14,400 – 36,000) (21,600)
Cash & cash equivalent c/f 20,160
Cash & cash equivalent c/f is represented by:
Cash in hand 63,360
Bank overdraft (43,200)
20,160
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
Rs.’000 Rs.’000
Disposal 8,640 B/d 41,400
Dividend paid to NCI 3,600 P&L 7,200
B/d 36,360
48,600 48,600
27.2 BELLA
Statement of cash flows for the year ended 31 March Year 6
Rs.000 Rs.000
Cash flows from operating activities
Profit before taxation 4,617
Adjustments for:
Depreciation (Working 1) 300
Loss on disposal of non-current asset (800 – 700) 100
Interest expense 60
––––––––
5,077
Increase in inventories (280 – 100) (180)
Decrease in trade and other receivables (1,350 – 1,290) 60
Increase in trade payables (430 – 275) 155
––––––––
Cash generated from operations 5,112
Interest paid (Working 3) (45)
Income taxes paid (Working 4) (185)
––––––––
Net cash from operating activities 4,882
Cash flows from investing activities
Purchase of property, plant and equipment (6,000)
Proceeds from the sale of property, plant and equipment 700
Purchase of intangible assets (800 – 300) (500)
––––––––
Net cash used in investing activities (5,800)
Cash flows from financing activities
Proceeds from the issue of share capital (Working 2) 865
Issue of long-term loan (600 – 500) 100
Dividends paid (350)
––––––––
Net cash inflow from financing activities 615
––––––
Net decrease in cash and cash equivalents (303)
Cash and cash equivalents at the beginning of the period 45
––––––
Cash and cash equivalents at the end of the period (55 – 313) (258)
––––––
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
(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 loss 800
1,367 1,367
Rs.
Depreciation (1,200)
(4)
Rs.000 Rs.000
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
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 year’s 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 entity’s 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.
The statement of cash flows gives additional information not provided by the other financial
statements.
Rs.000
Cash flows from operating activities
Net profit before taxation 9,550
Adjustments for:
Depreciation (Note 1) 1,176
Loss on sale of assets 18
Income from associate (139)
Interest expense 552
Operating profit before working capital changes 11,157
Increase in inventories (1,127 – 139) (988)
Increase in receivables (273 – 85) (188)
Increase in payables (203 – 68) 135
Cash generated from operations 10,116
Interest paid (552)
Income taxes paid (W3) (2,400)
Net cash from operating activities 7,164
Workings
(1) Proceeds from sale of property, plant and equipment
Rs.000
Cost of assets sold 429
Accumulated depreciation (255)
Loss on sale (18)
Proceeds 156
Interest in associate
Rs.000 Rs.000
Balance b/d 1,920 Dividends received from 93
associates
Share of associates' profit 139 Balance c/d 1,966
after tax
2,059 2,059
(3) Taxation
Taxation
Rs.000 Rs.000
Cash paid 2,400 Balance b/d 2,400
Balance c/d 2,950 Statement of profit or loss 2,950
5,350 5,350
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
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
(ii) Costs of sales/revenue 11 ,340 6 ,120
= 63% = 40%
18 ,000 15 ,300
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 Rs. 4) 8
1 new share is issued for 1
––
3 new shares have a theoretical value of 9
––
Weighted
average
Number Time Bonus Rights
number of
of shares factor fraction fraction
Date 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
–––––––––
800,000
–––––––––
9,216,667
––––––––––
28.4 MANDY
Adjusted total earnings
Rs. Rs.
49,000 36,750
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 30) 300,000
––––––––––
31 December 5,500,000
––––––––––
Year 3 Weighted
average
Number of Time number of
Date shares factor 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 per
Increase in no. of
incremental Rank
earnings ordinary
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
Because diluted earnings per share is increased when taking the convertible
preference shares into account (from Rs. 1.430 to Rs. 1.44), the convertible
debentures are anti-dilutive and are ignored in the calculation of diluted
earnings per share.
Bonus Weighted
Number of Time average
Date fractions
shares factor number of
(W3) shares
1 April 2015 to 30 June 6/5
2015 10,000,000 × 3/12 1.00833 3,024,990
1 July
Conversion of cumulative
prefs at a premium of Rs.
2 per share
(500,000 10/12) 416,667
6/5
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 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 of Earnings
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 10/12 12/12 1,666,667
Add back dividend paid to non-
cumulative prefs in issue at the year-
end 2,400,000
1,166
Receivables collection period 365 76 days
5,600
1,166
= 365 75.99 days 76 days
5,600
Imposition of 45 days
x x
45 days = 365
5,600 1
365x
45 days =
5,600
365x = 252,000
252,000
x=
365
x = Rs. 690m
Amount of cash to be released will be
= (Rs. 1,166 – Rs. 690)m = Rs. 476m
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
3750 100
Current liabilities = x = Rs. 1,500
2 .5 1
Cash 0 .2 Cash
(W3) Cash ratio = = =
CL 1 1500
Debtorsx 365
(W5) Average collection period =
Sales
1650 x 365
46.596 =
Sales
1650 x 365
Sales = = Rs. 12,925
46 . 576
= Rs. 2,585
27 . 06 x 12140
Trade creditors = = Rs. 900
365
600
(W11) Ordinary shares = = Rs. 5,100
0 . 1176
2585 972
i.e. 0.6711 =
Totaldebts
3557
Total debts = = 5,300
0 . 6711
29
This suggests that the ROCE from Rondel Ltd’s business was 19.1% ( /151.75). The high
ROCE from Rondel Ltd’s 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 Ltd’s 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
Ltd’s business as Rs. 19.25 million (= Rs. 29 million – Rs. 9.75 million finance charge) and
the profit before tax from Travelwell Ltd’s other business as Rs. 4.75 million (= Rs. 5 million
loss + Rs. 9.75 million).
profit before tax
Using these adjusted figures, this suggests that the /sales ratio for Travelwell Ltd’s
4.75
other business was 2.3% (= /(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 contribute towards financing the
acquisition of Rondel Ltd’s not assets. Higher gearing creates greater financial risk, in the
sense that any fall in profits before interest will have a much greater proportional effect on
earnings per share.
Liquidity
The current ratio has fallen from 3.0 times to 1.3 times. The fall is attributable largely to the
change from having a bank balance of Rs. 28 million at 30 September 2015 to a bank
overdraft of Rs. 2 million one year later. This net cash outflow of Rs. 30 million is exactly
equal to the cash used to acquire the net assets of Rondel Ltd (= Rs. 130 million cost
minus loan notes issued Rs. 100 million). The fall in liquidity is therefore possibly not a
matter of concern.
Working capital
There has been an increase in the inventory turnover period from 35 to 44 days, but this is
largely offset by the increase in the trade creditors payment period from 31 to 44 days
(since the values of inventory and trade payables in the statement of financial position are
roughly equal). There has been a slight increase in the average collection period by trade
receivables. On balance, the change in working capital has not affected the financial
position of the company significantly.
Dividends
The company paid a dividend for the year of Rs. 15 million, up from Rs. 12 million the
previous year (Rs. 15 million
100
/125). Since profit after tax is Rs. 18 million, dividend
cover is just 1.20 times, which is quite low, and retained profits are only Rs. 3 million. It
might therefore be argued that the 25% increase in dividends was perhaps excessive.
Conclusion
The acquisition of the net assets of Rondel Ltd appears to have contributed very
favourably to the financial performance of Travelwell Ltd. However the contribution from
Rondel Ltd’s assets should not hide the fact that there has been some deterioration in the
performance of Travelwell Ltd’s other business. This is a problem that management need
to consider.
Investor Ratios
Earnings per share is on the lower side. However, it can be improved by improving
profits as discussed while comparing performance ratios. WL’s dividend payout is the
lowest (22.2%) in terms of percentage among other similar companies. Generally,
past history of dividend 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
The company’s performance indicates a mixed trend. However, it may be concluded
that below average performance, (wherever applicable) can be improved by revisiting
the situation and bringing about necessary changes in the policies.
(b) Following additional information could have been useful for a better analysis of the
situation:
(i) Any recent audited or management accounts.
(ii) Comparison of accounting policies following by the companies in the same
industry and the possible impact thereof on the above ratios.
(iii) Expected growth in future earnings
(iv) Alternative investment opportunities
(v) Effect of synergy
(vi) WL’s market reputation;
(vii) Quality of human resource within the company;
(viii) Research and development activities
(ix) Legal framework and industry risks
The figures given in the question suggest that company had the funds in addition to
sale proceeds to pay for cost associated with PIB investment. Therefore, Present
Value has been taken as Rs. 104,641,483 (Rs. 100,000,000 + Rs. 4,641,483).
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
Profit for the year 1,450.00 1,260.00
AL - Associated company:
Reversal of previously booked profit (28×30%) - (8.40)
Dividend for the year ended 30 June 2013
(80×30%×16%) 3.84 -
BL - Available for sale:
Dividend for the year ended 30 June 2013
(70×10%×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
9
Farm equipment 20% x 400,000 x /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 asset’s life process.
Working Notes:
Rs.
Revenue
(i) Rs. 855,000 – Rs. 3,600 value of returnable goods = 851,400
(ii) Cost of sales:
Opening inventory 85,075
Purchases 503,600
Depreciation of plant and equipment
(0.15 of Rs. 98,800 – Rs. 28,800) 10,500
Amortization of leased property
(Rs. 3,833 + Rs. 4/208 of Rs. 99,000) 5,237
Closing inventory
(Rs. 106,000 + 0.8 of Rs. 3,600) (note iv) (108,880)
495,532
(iii) Admin expenses .
Per the question 104,400
Less dividend = Rs. 115,00 x 2 x Rs. 2.2 x Rs.0.05 (25,300)
79,100
(b) Statement of changes in equity for the year ended 31 December 2016
Revaluati
Share Share on Retained
capital premium surplus earnings Total
Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000
Balance as at 105,000 6,400 - 55,600 167,000
1/1/2016
Issue of 10,000 2,000 - - 12,000
shares
Profit for the - - - 174,498 174,498
year
Fair value gain - - 12,333 - 12,333
Realised - - (237) 237 -
during the
year
Dividend paid - - - (25,300) (25,300)
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)
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.
(b) The procedures which must be followed in order to prepare the Financial
Statements for the year ended 31 December 2016, are as follows:
(i) Choice of accounting policies to be included as part of notes to the Financial
Statements
(ii) Preparation of the opening IFRS Statements of Financial Position by applying the
following rules, except in cases where IFRS grants exemptions and /or prohibits
retrospective application:
Recognise all assets and liabilities required by IFRS
Not recognise assets and liabilities not permitted by IFRS
Reclassify all assets and liabilities and equity in accordance with IFRS
Measure all assets and liabilities in accordance with IFRS
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:
three statements of financial position
two statements of comprehensive income
two separate statements of profit or loss (if presented)
two statements of cash flows
two statements of changes in equity
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:
(i) Reconciliation of equity reported under previous GAAP to equity under IFRS both
(a) at the date of the opening IFRS Statement of Financial Position and (b) the end
of the last annual period reported under the previous GAAP.
(ii) Reconciliation of Total Comprehensive Income under IFRS for the last annual period
reported under the previous GAAP to Total Comprehensive Income under IFRS for
the same period.
(iii) Explanation of material adjustments that were made, in adopting IFRS for the first
time, to the Statement of Financial Position, Statement of profit or loss and
Statement of Cash Flows.
(iv) If errors in previous GAAP financial statements were discovered in the course of
transaction to IFRS, those must be separately disclosed.
(v) If the entity recognised or reversed any impairment losses in preparing its opening
IFRS Statement of Financial Position, these must be disclosed.
(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.
Rupees in million
Reinsurance
and the
Net claims
Reinsurance and other
expense
Outstanding recoveries in
recoveries received
recoveries revenue
Claims expenses
Total claims paid
claims respect of
outstanding
Class
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
Deferred
Net commission
from reinsurers
Commissions
management
Underwriting
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
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.
(b) Defined Benefit Plan (DBP)
Defined benefit plans are retirement benefit plans under which amounts to be paid as
retirement benefits are determined by reference to a formula usually based on employees’
earnings and/or years of service.
(c) Defined Contribution Plan (DCP)
Defined contribution plans are retirement benefit plans under which amounts to be paid as
retirement benefits are determined by contributions to a fund together with investment
earnings thereon.
(d) Actuarial present value of promised retirement benefits: This is the present value of the
expected payments by a retirement benefit plan to existing and past employees
attributable to the service already rendered.
HELD TO MATURITY
Government Securities
369
Term Finance Certificates 19,943,656 5,000,000 1,655,223 (12,873,068) (1,893,722) 11,832,089
Listed Securities
The credit for the amount received should be recognised as a liability. This represents the
obligation that the company has to provide the service over the next two years.
The fact that the customer cannot cancel the contract is not relevant to the recognition of
revenue. If Sindh Industries failed to provide the service they would be sued for restitution.
Therefore the revenue can only be recognised as the service is provided.
New factory
Borrowing costs directly attributable to construction of an asset which necessarily takes a
substantial period to get ready for its intended use should be capitalised as part of the cost
of that asset under IAS 23 Borrowing Costs. IAS 23 states that the capitalisation of
borrowing costs should commence when three conditions are all met for the first time:
borrowing costs are being incurred, expenditure is being incurred and activities to prepare
the asset are being undertaken. Although borrowing costs were incurred throughout the
year and expenditure was incurred from 1 February 2016 (the date the land was
purchased), construction only started on 1 June 2016. Therefore this is the date on which
capitalisation commences.
Capitalisation ceases when substantially all of the activities required to make the asset
ready for use/sale have been completed, that is on 30 September 2016. (The actual date
on which the factory was brought into use is irrelevant.) Therefore the period of
capitalisation should be four months.
Where construction is financed from general borrowings, the calculation of the amount to
be capitalised should be based on the weighted average cost of borrowings. This is:
(Rs. 1,000,000 × 9.75%) + (Rs. 1,750,000 × 10%) + (Rs. 2,500,000 × 8%)/ (Rs. 1,000,000
+ Rs. 1,750,000 + Rs. 2,500,000) = 9%
Therefore the amount capitalised should be 9% × Rs. 4.5 million (land Rs. 1.8 million plus
construction costs Rs. 2.7 million) × 4/12 = Rs. 135,000. The total cost of the factory
should be measured at Rs. 4,635,000 (Rs. 1.8 million plus Rs. 2.7 million, plus Rs.
135,000). The amount that has been recognised in the statement of financial position
should be reduced by Rs. 315,000 (Rs. 450,000 – Rs. 135,000). Finance costs recognised
in profit or loss should be increased by Rs. 315,000.
Land should not be depreciated because it has an indefinite life. Under IAS 16 Property,
Plant and Equipment depreciation charges should start when 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 valuer’s 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
Revised depreciation: main structure 140
((Rs. 3.5m – Rs. 1.4m)/15 years)
lining (Rs. 1.4m/5 years) 280
420
Current depreciation (Rs. 3.5m/20 years) (175)
Additional depreciation 245
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
It seems almost certain that the previous finance director resigned as a result of pressure
from the managing director (and possibly from other members of the Board) to present the
financial statements in a favourable light. The directors intend to seek a stock market
listing in the near future. Therefore they have clear motives for manipulating the profit
figure and also (perhaps) for making controversial decisions before the financial
statements come under much greater scrutiny as a result of the listing. The job title of
financial controller is also significant. It suggests that the role has been downgraded and
that the person holding it has less authority than the rest of the Board.
Possible courses of action:
Discuss with the managing director the financial reporting standards that apply to
the transactions and explain the implications of non-compliance. If the managing
director is himself a member of a professional body then it might be worth pointing
out to him that he himself is bound by an ethical code.
Advise him that as a Chartered Accountant you are bound by the ICAP code of
ethics, and that you would not be prepared to compromise your views of the figures
he has prepared for career advancement.
Consider speaking to the other directors (or audit committee if there is one) and
seeking their support.
If all of these actions produce a negative response then it would be appropriate to
consult the ICAP ethical handbook and/or the Institute.
If all else fails then consider seeking alternative employment.