Afr Past Papers Upto June 2014

7/24/2019 Afr Past Papers Upto June 2014

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Advanced Accounting and Financial Reporting

Final Examination 3 June 2014Summer 2014 100 marks - 3 hoursModule E Additional reading time - 15 minutes

Q.1 Following are the draft balance sheets (summarized) of Delta Limited (DL), a listedcompany, and its subsidiaries, Gamma Limited (GL) and Sigma Limited (SL) as at31 December 2013:

DL GL SL

--------- Rupees in million ---------

Non-current assets 10,000 6,100 5,400

Investment (at cost) 9,675 2,800 -

Current assets 6,325 7,100 3,10026,000 16,000 8,500

Share capital (Rs. 100 each) 9,000 7,000 3,000

Retained earnings 7,500 2,790 3,100

Non-current liabilities 6,000 3,000 1,000

Current liabilities 3,500 3,210 1,400

26,000 16,000 8,500

The following information is also available:

(i) Investments:

Investment

by

Investment

date

No. of shares

(in million)

Cost

(Rs. in million)

Retained earnings

on acquisition

(Rs. in million)DL in GL 1-Jan-2008 52.50 7,500 2,500

DL in SL 1-Jul-2009 9.00 2,175 1,400

GL in SL 1-Jul-2013 14.00 2,800 3,010

On 1 July 2013, the fair value of SLs shares was Rs. 200 per share.

(ii) On the date of acquisition by DL, the fair value of GLs net assets was equal to theirbook value, except a piece of land whose fair value was Rs. 150 million as against itscost of Rs. 120 million. The said land was sold for Rs. 170 million in 2013.

(iii) On 1 January 2013, DL issued 2.5 million 10% convertible term-finance certificates(TFCs) of Rs. 100 each. The TFCs are redeemable on 31 December 2015 at par. EachTFC is convertible into one ordinary share at the option of the certificate holder atany time prior to maturity. On the date of issue, the prevailing market interest rate forsimilar debt without conversion option was 12% per annum. The TFCs are appearingin the draft financial statements at their par value.

Interest payable annually on 31 December each year has been paid and accounted forin the financial statements.

(iv) The companies settled their inter-company balances on 31 December 2013. However,a cheque of Rs. 20 million received from SL on 31 December 2013 was credited toDL's bank account on 5 January 2014.

(v) DL values non-controlling interest at its proportionate share of the fair value of thesubsidiaries' identifiable net assets.

Required:Prepare a consolidated statement of financial position as at 31 December 2013 inaccordance with the requirements of the International Financial Reporting Standards. (20)


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Q.2 Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired20,000 ordinary shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai basedcompany at a cost of AED 240,000 which was equivalent to Rs. 6,000,000. The face valueof the shares is AED 10 each. OL intends to hold the shares to avail benefits of regulardividends and capital gains.

On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares inHL in exchange for every four shares held in AWL.

Other relevant information is as under:

AWL HL

Final dividend received on 31 March 2013:

Cash 15% -

Bonus shares 10% -

Final cash dividend received on 10 April 2014 - 20%

Fair value per share as at: 31 December 2012 AED 13.00 -

1 June 2013 AED 14.00 AED 18.00

31 December 2013 - AED 19.50

Exchange rates on various dates were as follows:

31-Dec-2012 31-Mar-2013 1-Jun-2013 31-Dec-2013 10-Apr-2014

1 AED Rs. 25.00 Rs. 26.50 Rs. 28.00 Rs. 28.70 Rs. 28.20

Required:Determine the amounts (duly classified under appropriate heads) that would be included inOLs statement of comprehensive income for the year ended 31 December 2013 in respectof the above investment. (08)

Q.3 (a) In December 2012, Arabian Automotives Limited (AAL) had launched a campaignto offer Hybrid Technology cars under a finance lease arrangement.

On 1 January 2013, AAL provided 10 cars to a customer. Details of the lease of eachcar are as under:

Rs. 300,000 were paid on delivery of the car.

Three equal annual installments of Rs. 580,000 each are payable in arrears.

Periodic servicing of the car will be free of charge for the entire lease period. Theestimated cost of servicing a car is Rs. 10,000 per year. AAL provides suchservices at cost plus 20%.

Actual servicing cost incurred for the year ended 31 December 2013 amountedto Rs. 11,000

Implicit rate of return is 12% which is equivalent to market rate of interest.

Ex-factory price fixed by the manufacturer is Rs. 1,800,000. AAL gets 15% discounton the ex-factory price from the manufacturer. (10)

(b) On 1 January 2013, Elegant Generators Limited (EGL) sold a heavy duty generatorto Rivera Limited (RL) for Rs. 6,000,000 on the following terms and conditions.

10% of sales price was paid on delivery of the generator.

Remaining amount was payable on 31 December 2013. Interest charge on theamount unpaid was agreed at 6% per annum.

The market interest rate is 12% per annum.

In December 2013, RL conveyed its inability to pay the amount due on 31 December2013 and requested EGL to recover the amount in installments. After negotiations,EGL agreed to receive four half yearly installments of Rs. 1,600,000 each,commencing from 30 June 2014. (06)

Required:Compute the impact of the above transactions on various items forming part of profit andloss account and statement of financial position of AAL and EGL, for the year ended31 December 2013 in accordance with International Financial Reporting Standards.(Notes to the financial statements are not required)


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Q.4 Following information pertaining to Moon Light Limited (MLL) is available for computingtax charge/liability for inclusion in the financial statements for the year ended31 December 2013.

Rs. in million

Profit before dividend and capital gains 500

Dividend income 25

Capital gains (exempt from tax) 28Permanent add-backs under the tax laws 35

Actuarial gains for the year on defined benefits plans(Balance as at 31 December 2012 amounted to Rs. 140 million) 60

Other relevant information is as under:(i) MLLs tax assessment for the year ended 31 December 2011 was finalized in May

2013 raising an additional tax liability of Rs. 4.2 million. The assessment was notcontested and the liability was paid by MLL.

(ii) Following details are available in respect of provision for doubtful debts:

Balance as at 31 December 2012 amounted to Rs. 90 million

Write offs against provision amounted to Rs. 25 million Balance as at 31 December 2013 amounted to Rs. 125 million

(iii) Property, plant and equipment:

2013 2012

Rs. in millionAccounting WDV 1,850 1,800

Tax WDV 1,880 1,750

(iv) Applicable tax rates for 2012 and 2013 are 35% and 10% for business and dividendincome respectively for both years.

Required:Prepare notes on taxation for inclusion in the financial statements of MLL for the yearended 31 December 2013, in accordance with the International Financial ReportingStandards. (16)

Q.5 Peoples Bank Limited (PBL) operates in Pakistan. Following information pertains toadvances to customers and related provisions for the year ended 31 December 2013:

(i) Information relating to non-performing advances is as under:

Classification of non-performing

advances

As at 31 December 2013

Balance

Forced sales value

of collaterals

Provision to be

maintained at-----Rupees in million----- %

Loss 4,500 1,300 100

Doubtful 1,400 800 50

Sub-standard 1,200 400 25

Other assets especially mentioned 150 20 -

(ii) For the year ended 31 December 2013, PBL has: made a provision of Rs. 370 million including general provision of Rs. 55

million.

written off a sum of Rs. 160 million against the specific provision.(iii) General provision balance as at 31 December 2013 amounted to Rs. 225 million.

Required:Prepare relevant notes on non-performing advances and provisions thereagainst forinclusion in the financial statements of PBL for the year ended 31 December 2013 inaccordance with the guidelines issued by the State Bank of Pakistan. (10)


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Q.6 Alpha Limited (AL), a listed company, acquired 80% equity in Zee Limited (ZL) on1 July 2010. The following information has been extracted from their draft financialstatements:

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

Following information is also available:

(i) The bonds were issued at par on 1 January 2011 and are convertible at any timebefore the redemption date of 31 December 2015, at the rate of five ordinary sharesfor every four bonds.

(ii) Cost and fair value information of ZLs 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 accountfor investment property.

(iii) AL operates a defined benefit gratuity scheme for its employees. The actuarys reporthas been received after the preparation of draft financial statements and provides the

following information pertaining to the year ended 31 December 2013:

Rs. in '000Actuarial 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 issuedby AL to its employees at Rs. 150 per share against the average market price ofRs. 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 earningsper share) for the year ended 31 December 2013 in accordance with the InternationalFinancial Reporting Standards.(Note: Comparative figures and information for notes to the financial statements are not required) (15)


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Q.7 Fine Woods Limited (FWL) markets quality wood furniture through its sales offices locatedin major cities of Pakistan. In March 2012, the management of FWL decided to introduceonline sales through its website. The expenses incurred in this regard during the year ended31 December 2012 were as follows:

Feasibility was prepared by a consulting firm for upgrading the existing website to

facilitate online sales, at a cost of Rs. 3.5 million. Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million

respectively.

Website was upgraded by FWLs IT team. The directly attributable costs amounted toRs. 5 million.

Online payment system was developed by external experts at a cost of Rs. 3 million.

IT personnel were trained to deal with security issues relating to online transactions at acost of Rs. 1.5 million.

In the financial statements for the year ended 31 December, 2012 the above expenses wereclassified as capital work in progress.

In January 2013, after successful testing of online sales, FWL launched a campaign foronline sales and incurred an expenditure of Rs. 2.5 million in this respect.

In view of the increase in online sales, in September 2013, the management decided to closetwo of its sales offices and announced their closure effective 1 January 2014. Followinginformation is available in respect of the two offices:

Office A: Carrying value of property, plant and equipment as at 31 December 2013 amounted to

Rs. 50 million.

Negotiations with a party for sale of the office are at an advance stage and it is expectedthat all the formalities will be finalised by the end of June 2014. Sale price of property,

plant and equipment net of expenses is estimated at Rs. 60 million.

Office B: Carrying value of property, plant and equipment as at 31 December 2013 amounted to

Rs. 65 million.

As advised by a property consultant, FWL is carrying out modifications of the officepremises to get a better price. The cost of modifications is estimated at Rs. 15 million toFWL and is expected to be completed in six months. Sale price net of expenses aftermodifications is estimated at Rs. 95 million.

Required:Discuss the accounting treatment in respect of the above, in the financial statements of

FWL for the year ended 31 December 2013 in accordance with the requirements ofInternational Financial Reporting Standards. (15)

(THE END)


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Final Examination 3 December 2013Winter 2013 100 marks - 3 hoursModule E Additional reading time - 15 minutes

Q.1 On 1 October 2012, Alpha Industries Limited (AIL) held 15% and 35% equity in Beta(Private) Limited (BPL) and Delta (Private) Limited (DPL) respectively. The followingbalances pertain to the three companies, as on the above date.

AIL BPL DPL

Rs. in million

Share capital (Rs. 100 each) 100 60 50

Retained earnings 35 30 15

Other comprehensive income - fair value reserve related to BPL 6 - -

Total equity 141 90 65

Non-current investments BPL*1(Cost Rs. 18 million) 20 - -

Non-current investments DPL*2(Cost Rs. 40 million) 43 - -

*1recorded as available for sale*2 recorded as investment in associate

On 1 April 2013, AIL acquired a further 55% equity in BPL when:

the fair value of the net assets of BPL was Rs. 100 million which was equal to their

carrying value; and the fair value of the 15% equity already held in BPL was Rs. 25 million.

The purchase consideration comprised of 150,000 shares in AIL which were issued on thedate of acquisition at their market value of Rs. 160 per share and Rs. 42 million payable incash on 31 March 2014. AIL uses discount rate of 12% for determining the present value ofits future assets and liabilities.

Other relevant details are as follows:

(i) For the year ended 30 September 2013 the profits after tax of AIL, BPL and DPLwere Rs. 58 million, Rs. 40 million and Rs. 30 million respectively.

(ii) AIL values non-controlling interest at the acquisition date at its fair value which wasRs. 32 million.

(iii) AIL sold goods at Rs. 65 million to BPL on 1 July 2013. The sales were invoiced at30% above cost. 20% of these goods remained unsold as on 30 September 2013.

(iv) DPLs sales to AIL amounted to Rs. 70 million. DPL earns a profit of 20% of salesvalue. On 30 September 2013, inventory of AIL included Rs. 20 million in respect ofsuch goods.

(v) For the year ended 30 September 2012 AIL, BPL and DPL paid final cash dividendof 15%, 20%, and 12% respectively.

Required:(a) Compute the amount of goodwill, retained earnings and investment in associate as

they would appear in the consolidatedstatement of financial position of AIL as at 30September 2013, in accordance with IFRS. (Ignore taxation) (18)(b) Describe how the investment in BPL and DPL may be accounted for and also

compute the amount of the investments as it would appear in the separatestatementof financial position of AIL as at 30 September 2013, in accordance with IFRS. (04)


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Q.2 Mega Super Stores (MSS) introduced a customer loyalty scheme on 1 August 2013 whichwas based on the following conditions: Customers were granted 500 points with each purchase of Rs. 5,000 or above.

These points could be exchanged for goods supplied by MSS within two months fromthe date the points were granted.

For every 500 points, goods having a retail price of Rs. 200 were to be given.

However, the scheme was discontinued from 1 October 2013. During the period covered bythe scheme, the customers were granted 1.5 million points out of which 0.5 million pointswere redeemed. At year end, a study was carried out and it was established thatapproximately 30% of the points granted would lapse unutilised. Actual results showed thatfinally 470,000 points lapsed unutilised.

MSS sells goods at a margin of 40%. No entries in respect of grant of points have beenrecorded so far.

Required:Prepare accounting entries to record the above transactions in accordance with IFRS. (08)

Q.3 The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 areunder finalisation and the following matters are under consideration:

(i) BLs plant was commissioned and became operational on 1 April 2008 at a cost ofRs. 130 million. At the time of commissioning its useful life and present value ofdecommissioning liability was estimated at 20 years and Rs. 19 million respectively.BLs discount rate is 10%.

There has been no change in the above estimates till 30 September 2013 except for thedecommissioning liability whose present value as at 1 April 2013 was estimated atRs. 25 million. (06)

(ii)

On 1 October 2011, BL acquired 160,000 12% debentures of Rs. 100 each, forRs. 15.5 million and classified them as ' held to maturity'.

On 30 September 2013, in view of financing requirements for a new project, BL isuncertain about holding the debentures till redemption. Therefore, it has decided toreclassify the debentures as 'available for sale'.

Other relevant information is as follows:

The debentures carry a fixed interest rate of 12%, payable annually in arrears.

The effective rate of interest is 14.09%.

The debentures are redeemable at Rs. 105 on 30 September 2015.

The market value per debenture as of 30 September 2012 and 2013 was Rs. 102and Rs. 104 respectively. (06)

(iii) On 1 April 2013, BL shifted to a newly acquired building in the city centre. Thevacated building was leased as follows:

Date of commencement of the lease 1 April 2013

Lease period 3 years

Six semi-annual installments payable in advance(to be increased by 5% annually)

Rs. 3 million

On 1 April 2013, the carrying value and fair value of the vacated building was Rs. 55million and Rs. 70 million respectively. As at 30 September 2013 the fair value of thevacated building was reduced to Rs. 66 million. BL uses fair value model to accountfor investment properties. (06)

Required:For each of the above matters, compute the related amounts as they would appear in thestatements of financial position and comprehensive income of Bravo Limited for the yearended 30 September 2013 in accordance with IFRS. (Ignore corresponding figures)


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Q.4 Global Air Limited (GAL) owns 100% equity in Moon (Private) Limited (MPL). On1 July 2013, GAL decided to dispose of 90% equity in MPL. It is expected that the sale willbe finalised by 30 June 2014 at an estimated sale price of Rs. 140 million with an estimatedcost to sell of Rs. 3.5 million. Relevant information pertaining to MPL is as under:

(i) Assets and liabilities as of 30 June 2013:

Rs. in millionNon-current assets 195.00

Current assets 50.00

Liabilities 90.00

(ii) It is estimated that MPL's trade debtors amounting to Rs. 6 million will not berecovered; whereas provisions included in the liabilities amounting to Rs. 8 millionare no more required.

(iii) MPL's net loss after tax for the nine months period ended 30 June 2013 wasRs. 30 million.

(iv) During the period 1 July 2013 to 30 September 2013, liabilities amounting to Rs. 26

million were paid and current assets of Rs. 18 million were recovered.

Goodwill of MPL as per the consolidated statement of financial position of GAL as at 30September 2012 amounted to Rs. 15 million.

GAL had incurred expenses amounting to Rs. 1.5 million, for disposal of the equity upto 30September 2013.

Required:Prepare relevant extracts from the consolidated statements of financial position andcomprehensive income of GAL for the year ended 30 September 2013, in accordance withIFRS. (12)

Q.5 Following is the extract of Trial Balance of Zee Bank Limited for the year ended 30 June2013:

Rs. in million

Cash in hand - Local currency 10,000

- Foreign currency 2,000

National Prize Bonds 100

Rupee current account with SBP 30,000

Rupee current account with NBP 8,000

Foreign currency current account with SBP 3,000Foreign currency deposit account with SBP 10,000

Deposit account with central bank of UAE 12,000

Current account with central bank of South Africa 9,800

Current account with Muslim Commercial Bank Ltd. 700

Deposit account with Barclays Bank, London 25,000

Current account with Citibank, New York 4,000

Balances with treasury banks and other banks include remunerative accounts amounting toRs. 10.8 million and Rs. 27.5 million respectively.

Required:To the extent the information is available, prepare notes on Cash and balances withtreasury banks and Balances with other banks for inclusion in financial statements of ZeeBank Limited for the year ended 30 June 2013, in accordance with the laws applicable inPakistan. (10)


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Q.6 New Horizon (Private) Limited (NHPL) is engaged in the distribution and supply ofpharmaceutical products. The following information has been extracted from NHPLs draftfinancial statements for the year ended 30 September 2013:

Statement of comprehensive income for the year ended 30 September 2013

2013 2012---------Rs. in million---------

Sales revenue 720.00 234.00

Cost of sales (534.00) (190.00)

Gross profit 186.00 44.00

Operating expenses (120.00) (45.00)

Operating profit/(loss) 66.00 (1.00)

Finance charges (35.00) (5.00)

Profit / (loss) before tax 31.00 (6.00)

Taxation (12.00) 1.30

Net profit / (loss) 19.00 (4.70)

Statement of financial position as at 30 September 2013

2013 2012 2013 2012

Rs. in million Rs. in million

Share capital 300.00 300.00 Property, plant & equipment 555.00 361.50

Retained earnings 65.00 46.00 Intangible assets 32.00 17.50

365.00 346.00 587.00 379.00

Long term loans 198.00 40.00

Current liabilities Current assets

Trade payables 96.00 25.00 Inventories 30.00 18.00

Other payables 5.50 1.00 Trade receivables 48.00 12.00

Borrowings 10.50 4.00 Cash and bank balances 10.00 7.00112.00 30.00 88.00 37.00

675.00 416.00 675.00 416.00

Following further information is available:

(i) On June 2012, NHPL acquired exclusive distribution rights of a range of life savingdrugs from a Malaysian company for 12 years at a cost of Rs. 18 million. NHPL hascapitalized the cost of rights and it is to be amortized over the period of distributionrights.

(ii) In October 2012, NHPL launched a country-wide sales promotion campaign tointroduce the Malaysian drugs. The cost of the advertisement campaign was Rs.

25million. As the benefits of the campaign are long term, NHPL has decided toamortize the costs over a period of 5 years.

(iii) The prices offered by the Malaysian company are quite low as compared to prices ofsimilar quality drugs in Pakistan. Since this matter was publicized vigorously in theadvertisement campaign, the Malaysian drugs were able to capture the market.

(iv) In 2013, the sales of drugs imported from Malaysia accounted for 70% of thecompany's revenue. The level of credit sales has remained constant at 40% of totalsales.

(v) NHPL is also negotiating the acquisition of distribution rights of the products of

another foreign company.

Required:Comment on the financial and operating performance of NHPL for the year ended 30September 2013, supported by relevant accounting ratios. (14)


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Q.7 Dynamic Steel Limited (DSL) signed an agreement on 1 June 2013 for import of equipmentfor SK 50 million. According to the agreement, the plant was delivered on 1 November2013 and invoice thereof was paid on 1 December 2013.

In order to hedge the commitment to pay SK 50 million, on 1 June 2013, DSL entered intoa forward contract to buy the required SK on 1 December 2013 at a fixed exchange rate of

SK 1=Rupees 15. Exchange rates on various dates are as follows:

1-Jun-2013 30-Sep-2013 1-Nov-2013 1-Dec-2013

SK 1

Spot rate Rs. 14.50 12.00 11.15 10.00

Forward rate Rs. 15.00 12.39 11.35 -

It is DSL's policy to adjust any gain or loss arising on forward contracts to the carryingvalue of the imported goods. DSLs accounting year end is 30 September.

Required:Prepare accounting entries relating to the above transactions, on each of the above dates, inaccordance with the requirement of IFRS. (16)

(THE END)


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Q.1 Qudsia Limited (QL) has investments in two companies as detailed below:

Manto Limited (ML) On 1 January 2010, QL acquired 40 million ordinary shares in ML, when its retained

earnings were Rs. 150 million. The fair value of MLs net assets on the acquisition date was equal to their carrying

amounts.

Hali Limited (HL) On 30 November 2012, QL acquired 16 million ordinary shares in HL, when its retained

earnings stood at Rs. 224 million.

The purchase consideration was made up of:

- Rs. 190 million in cash, paid on acquisition; and

- 4 million shares in QL. At the date of acquisition, QLs shares were being traded atRs. 15 per share but the price had risen to Rs. 16 per share by the time the shares wereissued on 1 January 2013.

The fair value of the net assets of HL on the date of acquisition by QL was equal to theircarrying amounts, except a building whose fair value exceeded its carrying amount byRs. 28 million. The building had a remaining useful life of seven years on30 November 2012.

The draft summarised statements of financial position of the three companies on31 December 2012 are shown below:

QL ML HL

---------Rs. in million---------

Assets

Property, plant and equipment 5,000 550 500

Investment in ML 630 - -

Investment in HL 190 - -

Current assets 5,480 400 350

11,300 950 850Equity and liabilities

Ordinary share capital (Rs.10 each) 6,000 500 400

Retained earnings 2,900 100 240

Current liabilities 2,400 350 210

11,300 950 850

The following additional information is available:

(i) QL considers ML as a cash-generating unit (CGU). As on 31 December 2012, therecoverable amount of the CGU was estimated at Rs. 700 million.

(ii) QL values the non-controlling interest at its proportionate share of the fair value of thesubsidiarys net identifiable assets.

(iii)

On 1 October 2012, ML sold a machine to QL for Rs. 24 million. The machine hadbeen purchased on 1 October 2010 for Rs. 26 million. The machine was originallyassessed as having a useful life of ten years and that estimate has not changed.

(iv) In December 2012, QL sold goods to HL at cost plus 30%. The amount invoiced wasRs. 52 million. These goods remained unsold at year end and the invoiced amount wasalso paid subsequent to the year end.

fb.com/gcaofficial


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Required:Prepare a consolidated statement of financial position for QL as on 31 December 2012 inaccordance with the requirements of International Financial Reporting Standards. (20)

Q.2 Healthcare Limited (HCL) manufactures a large variety of nutrition products. In addition to

its branded products, HCL produces a special food supplement for export to ChildcareCentre (CCC) in the Middle East. Under the terms of the contract, HCL is liable to pay acompensation of Rs. 6 million per month to CCC, if HCL is unable to supply thesupplement.

On 15 March 2013, a product of HCL was found to be contaminated. On receiving thecomplaint, the Health Department sealed the factory premises and initiated legalproceedings against the company.

As per the legal advice, it is highly probable that the case would be decided against HCL. Itis expected that the decision would be announced in September 2013. The maximum finepayable under the law is Rs. 15 million. However, the legal adviser is of the opinion that theamount of the penalty would be Rs. 9 million approximately.

HCL has investigated the incident and the findings as reported on 5 April 2013 are as under:

The contamination was caused due to the use of an ingredient supplied by FoodChemical Enterprises (FCE) which was close to the date of expiry. However, only oneproduct was affected and various laboratory tests have confirmed that the contaminationis not health hazardous.

Production batches of the contaminated product were identified. The cost ofcontaminated inventory in hand on 15 March 2013 was Rs. 70 million. The cost ofunsold inventory recalled from the customers amounted to Rs. 132 million. HCL earns amargin of 25% on all of its products.

Due to closure of the factory, HCL would not be able to supply the supplement to CCCfor three months.

Cost of disposal of the contaminated inventory is estimated at Rs. 0.5 million.

On 6 April 2013, HCL lodged a claim for damages of Rs. 211.5 million against FCE for thecost of contaminated inventory, cost of disposal thereof and the amount of the penalty thatHCL is likely to incur. However, no response has been received from FCE so far and HCL isconsidering to file a suit for recovery of the amount.

Required:Explain the accounting treatment and the disclosure requirements in respect of the above inHCLs financial statements for the year ended 31 March 2013 in accordance with theInternational Financial Reporting Standards. (13)

Q.3 The following information pertaining to Krishna Limited (KL) has been extracted from itsfinancial statements for the year ended 31 December 2012.

(i) Total comprehensive income for the year:

Rs. in 000Profit from continuing operations - net of tax 200,000

Profit from discontinued operations - net of tax 10,000

Fair value gain on investments available for sale - net of tax 16,000

Total comprehensive income 226,000

(ii) Share capital as on 1 January 2012: 8,000,000 Ordinary shares of Rs. 10 each.

500,000 Convertible preference shares of Rs. 100 each entitled to a cumulativedividend at 12%. Each share is convertible into two ordinary shares and thedividend is paid on 28 February, every year.


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(iii) 20% bonus shares being the final dividend for the year ended 31 December 2011 wereissued on 31 March 2012.

(iv)

On 30 April 2012, holders of 80% convertible preference shares converted their sharesinto ordinary shares.

(v) On 1 July 2012, KL issued 20% right shares to its ordinary shareholders at Rs. 70 pershare. The market price prevailing on the exercise date was Rs. 80 per share.

(vi) On 1 August 2011, KL granted 2,500 share options to each of its twenty technicalmanagers. The managers would become eligible to exercise these options oncompletion of further five years of service with KL. By 31 December 2012, twomanagers had already left and it is expected that a further six managers would leaveKL before five years. As of 31 December 2012 estimated fair value of each shareoption was Rs. 40.

Required:Prepare a note relating to basic and diluted earnings per share for inclusion in KLs financialstatements for the year ended 31 December 2012, in accordance with International FinancialReporting Standards. (15)

Q.4 Ashfaq General Insurance Limited (AGIL) is engaged in general insurance business. Thefollowing information is available for the year ended 31 December 2012:

2012

Rs. in 000

(i) Information extracted from statement of cash flows:Profit received on bank deposits 4,000

Profit / interest received on investments

held for trading 28,000

held to maturity 9,000

available for sale 16,000Dividend received from investments


available for sale 5,000

Proceeds from disposal of investments


available for sale 43,000

(ii) Information extracted from profit and loss account:

Loss on sale of investments held for trading 12,000

Unrealized loss on revaluation of investments held for trading 1,000

Provision for impairment in the value of investments available for sale 2,000

Amortisation of premium on investments available for sale 3,000

Gain on sale of investments available for sale 15,000

Investment related expenses 7,000

(iii) Information extracted from statement of financial position:

1-1-2012 31-12-2012Accrued profit/interest on: --------Rs. in 000--------

- Term deposits 2,000 1,500

- Investments - held for trading 11,400 13,000

- Investments - held to maturity 600 1,800

- Investments - available for sale 2,700 3,000

Required:Prepare the statement of investment income for inclusion in AGILs financial statements forthe year ended 31 December 2012. (10)


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Q.5 On 1 January 2009 Qasmi Investment Limited (QIL) purchased 1 million 12% TermFinance Certificates (TFCs) issued by Taj Super Stores (TSS), which operates a chain of fiveSuper Stores. The terms of the issue are as under:

The TFCs have a face value of Rs. 100 each and were issued at a discount of 5%. Theseare redeemable at a premium of 20% after five years.

Interest on the TFCs is payable annually in arrears on 31 December each year.

Effective interest rate calculated on the above basis is 16.426% per annum.

Due to a property dispute, TSS had to temporarily discontinue operations of two stores in2010. Consequently, TSS was unable to pay interest due on 31 December 2010 and31 December 2011.

At the time of finalization of accounts for the year ended 31 December 2010, QIL was quitehopeful of recovery of the interest and therefore, no impairment was recorded. However, in2011, after a thorough review of the whole situation, QILs management concluded that itwould be able to recover the face value of the TFCs along with the premium on the due date

i.e. 31 December 2013, but the interest for the years 2010 to 2013 would not be received.Accordingly, QIL recorded impairment in the value of the TFCs on 31 December 2011.

In 2012, TSS reached an out of court settlement of the property dispute and the storesbecame operational. Subsequently, QIL and TSS agreed upon a revised payment scheduleaccording to which the present value of the agreed future cash flows on 31 December 2012 isestimated at Rs. 115 million.

Required:Prepare journal entries in the books of QIL for the years ended 31 December 2011 and 2012.Show all the relevant computations. (14)

Q.6 Chughtai Limited (CL) has 75% share holdings in John Limited (JL) which is registered andoperates in a foreign country. JL's functional currency is RAM. The following informationhas been extracted from JL's statement of changes in equity for the year ended31 December 2012:

Subscribed andpaid-up capital

Unappropriatedprofit

---------RAMs in million---------

Balance as on 1 January 2012 50 85

Final dividend for the year ended 31 December 2011

- Cash dividend at 10% - (5)

- Bonus shares at 20% 10 (10)

Profit after tax for the year ended 31 December 2012 - 40Balance as on 31 December 2012 60 110


(i) CL's profit after tax for the year ended 31 December 2012 amounted to Rs. 700 millionwhich includes a cash dividend of Rs. 41 million received from JL.

(ii) On acquisition, JLs goodwill amounted to RAMs 30 million. However, animpairment test carried out as at 31 December 2012 revealed that the goodwill hasbeen impaired by RAMs 6 million.

(iii) CL values the non-controlling interest on acquisition at fair value.(iv) JL has not issued any ordinary shares after acquisition by CL, except for the bonus

issue as mentioned above.(v) The following exchange rates are relevant to the financial statements:

31-Dec-2011 31-Dec-2012 Average for 2012

------------------Rs. to 1 RAM------------------

10.00 11.00 10.20


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Required:Prepare the relevant extracts from the consolidated statement of comprehensive income ofCL for the year ended 31 December 2012 in accordance with the requirements ofInternational Financial Reporting Standards. (16)

Q.7 Financial statements of Niazi Company Limited (NCL) for the year ended31 December 2012 are in the process of finalisation. In this respect, the followinginformation has been gathered from the companys accounting and tax records.

(i) Property, plant and equipment (PPE)

31-12-2012 31-12-2011

--------Rs. in million--------

Accounting WDV (at revalued amount) 2,700 2,000

Tax WDV 2,400 1,600

Details of the revaluation are as under:

Revaluation of freehold land and buildings on 31 December 2005 resulted in a

revaluation surplus of Rs. 15 million and Rs. 20 million respectively. Plant and machinery costing Rs. 150 million was commissioned on 1 January 2010

with an expected useful life of 10 years. It was revalued at Rs. 145 million on31 December 2012.

(ii) Provision for retirement benefits and doubtful debts

Rs. in millionBalance on 31 December 2011 50

Write offs during the year 5

Provision for the year, net of payments of Rs. 3 million 6

(iii)

Liabilities outstanding for more than three yearsNCLs tax assessment for the year ended 31 December 2010 was finalized on30 April 2012 in which liabilities outstanding for more than three years and amountingto Rs. 8 million were added back to income.

A sum of Rs. 2 million included in the above liabilities was paid while a liability ofRs. 3 million was written back by NCL in 2012.

(iv) Applicable tax rate is 35%.

Required:Prepare a note related to deferred tax liability/asset for inclusion in NCLs financial

statements for the year ended 31 December 2012, in accordance with the InternationalFinancial Reporting Standards. (12)

(THE END)


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The Institute of Chartered Accountants of Pakistan


Final Examination 4 December 2012Winter 2012 100 marks - 3 hoursModule E Additional reading time - 15 minutes

Q.1 Following are the extracts from the draft financial statements of three companies for the yearended 30 June 2012:

INCOME STATEMENTS

Tiger Limited

(TL)

Panther Limited

(PL)

Leopard Limited

(LL)

-------------------Rs. in million-------------------

Revenue 6,760 568 426

Cost of sales (4,370) (416) (218)

Gross profit 2,390 152 208Operating expenses (1,270) (54) (132)

Profit from operations 1,120 98 76

Investment income 730 - 10

Profit before taxation 1,850 98 86

Income tax expense (400) (20) (17)

Profit for the year 1,450 78 69

STATEMENTS OF CHANGES IN EQUITY

Ordinary share capital

of Rs. 10 eachRetained earnings

TL PL LL TL PL LL

---------------------------Rs. in million--------------------------

As on 1 July 2011 10,000 800 600 2,380 270 70Final dividend for the yearended 30 June 2011 - - - (1,000) - (60)

Profit for the year - - - 1,450 78 69

As on 30 June 2012 10,000 800 600 2,830 348 79

The following information is also available:(i) Several years ago, TL acquired 64 million shares in PL for Rs. 1,000 million when PLs

retained earnings were Rs. 55 million. Up to 30 June 2011, cumulative impairmentlosses of Rs. 50 million had been recognized in the consolidated financial statements, inrespect of goodwill.

On 31 December 2011, TL disposed off its entire holding in PL for Rs. 1,300 million.

(ii) On 1 July 2011, 42 million shares of LL were acquired by TL for Rs. 550 million. Animpairment review at 30 June 2012 indicated that goodwill recognized on acquisitionhas been impaired by Rs. 7 million.

(iii) During the year, LL sold goods costing Rs. 50 million to TL at a mark-up of 20% oncost. 40% of these goods remained unsold on 30 June 2012.

(iv) Investment income appearing in TLs separate income statement includes profit on saleof PLs shares and dividend received from LL.

(v) TL values the non-controlling interest at its proportionate share of the fair value of thesubsidiarys identifiable net assets.

It may be assumed that profits of all companies had accrued evenly during the year.

Required:Prepare TLs consolidated income statement and consolidated statement of changes in equityfor the year ended 30 June 2012 in accordance with the requirements of InternationalFinancial Reporting Standards. (Ignore deferred tax implications) (23)

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AdvancedAccountingandFinancialReporting Page2 of5

Q.2 The following information pertains to Crow Textile Mills Limited (CTML) for the year ended30 June 2012:

(a) Stocks include 4,000 maunds of cotton which was purchased on 1 April 2012 at a cost of Rs.6,200 per maund. In order to protect against the impact of adverse fluctuations in the price ofcotton, on the price of its products, CTML entered into a six months futures contract on the

same day to deliver 4,000 maunds of cotton at a price of Rs. 6,300 per maund.

At year end i.e. 30 June 2012, the market price of cotton (spot) was Rs. 5,500 per maund andthe futures price for September delivery was Rs. 5,550 per maund.

All necessary conditions for hedge accounting have been complied with. (05)

(b) On 1 July 2011, 2 million convertible debentures of Rs. 100 each were issued. Each debentureis convertible into 25 ordinary shares of Rs. 10 each on 30 June 2014. Interest is payableannually in arrears @ 8% per annum. On the date of issue, market interest rate for similardebt without conversion option was 11% per annum. However, on account of expenditure ofRs. 4 million, incurred on issuance of shares, the effective interest rate increased to 11.81%. (08)

Required:Prepare Journal entries for the year ended 30 June 2012 to record the above transactions.(Show all necessary calculations)

Q.3 In order to pursue expansion of its business, Parrot Limited (PL) has made the followinginvestments during the year ended 30 June 2012:

(a) On 1 July 2011, PL acquired 20% shares of Goose Limited (GL), a listed company, whenGLs retained earnings stood at Rs. 250 million and the fair value of its net assets wasRs. 350 million. The purchase consideration was two million ordinary shares of PL whose

market value on the date of purchase was Rs. 33 per share. PL is in a position to exercisesignificant influence in finalizing the financial and operational policies of GL.

The summarized statement of financial position of GL at 30 June 2012 was as follows:

Rs. in million

Share capital (Rs. 10 each) 100

Retained earnings 280

380

Net assets 380

Recoverable amount of GLs net assets at 30 June 2012 was Rs. 370 million. (06)

(b) Costs incurred for development and promotion of a brand are enumerated below:

Rupees

(i) Research on size of potential market 800,000

(ii) Products designing 1,500,000

(iii) Labour costs in refinement of products 950,000

(iv) Development work undertaken to finalize the product design 11,000,000

(v) Cost of upgrading the machine 18,000,000

(vi) Staff training costs 600,000

(vii) Advertisement costs 3,400,000 (06)

Required:Discuss how the above investments/costs would be accounted for in the consolidated financialstatement for the year ended 30 June 2012.

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Q.4 Primate Mart Limited (PML) operates a network of several retail stores throughout thecountry. In order to retain its market share and achieve growth in revenue, PML has extendedsubstantial credit facilities to its major customers. Consequently, PMLs bank borrowingshave increased substantially over the past few years. PML has recently requested its bank forfurther increase in its borrowing facilities.

The bank is concerned about the increase in the quantum of loans extended to PML and hasappointed you to analyse the financial performance of PML for the last three years. Theinformation available in respect of the company is as follows:

(i) Statement of financial position

2012 2011 2010

-------------- Rs. in million --------------

Property, plant and equipment 322 290 278

Stock-in-trade 620 540 440

Trade debts 443 385 344

Cash 15 12 12

1,400 1,227 1,074

Share capital 90 90 90

Retained earnings 282 288 291

372 378 381

Long term loans from bank 420 355 212

Short term running finance 320 200 200

Trade creditors 280 284 277

Tax payable 8 10 4

1,400 1,227 1,074

(ii) Income statement

2012 2011 2010

-------------- Rs. in million --------------

Sales Cash 1,050 940 790

Credit 450 380 320

Total sales 1,500 1,320 1,110

Cost of sales (996) (864) (723)

Gross profit 504 456 387

Other operating costs (384) (341) (288)

Profit from operations 120 115 99

Financial charges (102) (79) (57)

Profit before taxation 18 36 42

Taxation (6) (12) (14)

Profit for the year 12 24 28

Depreciation for the year 33 36 42

Proposed dividend 10% 20% 20%

(iii) The present borrowing limit sanctioned to PML is Rs. 750 million.

Required:Prepare a report for the bank containing an analysis of the financial performance of thecompany for the period covered by the financial statements. Your report should focus on the

particular concern of the bank regarding the rapidly increasing level of lending exposure toPML and suggest matters which the bank may discuss with the PMLs management.(Assume your name is Bashir Ahmed) (15)


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Q.5 Lion Engineering Limited (LEL) operates an approved pension scheme (defined benefit plan) forall its permanent employees who have completed one years service. The details for the year ended30 June 2012 relating to the pension scheme are as follows:

Rs. in million

Present value of pension scheme obligation at 30 June 2011 100

Fair value of schemes assets at 30 June 2011 70Unrecognized actuarial loss at 30 June 2011 20

Current service cost 29

Contribution made during the year 30

Benefits paid during the year 45

Present value of pension scheme obligation at 30 June 2012 110

Fair value of schemes assets at 30 June 2012 80

Additional information:

(i) With effect from 1 July 2011, LEL had amended the scheme whereby the employeespension entitlement had been increased. The benefits would become vested after three years.According to actuarial valuation the present value of the cost of additional benefits at1 July 2011 was Rs. 15 million.

(ii) The discount rate and expected rate of return on the plan assets on 30 June 2012 were asfollows:

Discount rate 13%

Expected rate of return on plan assets 10%

(iii) LEL was required to pay Rs. 40 million to the scheme, during the year ended 30 June 2012.Because of cash flow constraints, LEL was able to contribute Rs. 30 million only.

(iv) Average remaining working lives of employees is 10 years.(v) LEL uses the corridor approach to recognize actuarial gains and losses.(vi) Last actuarial valuation was made on 30 June 2012 using the Projected Unit Credit Method.

Required:

Prepare the relevant extracts from the statement of financial position and the related notes to thefinancial statements for the year ended 30 June 2012. Show all necessary workings.(Accounting policy note is not required. Deferred tax may be ignored) (18)

Q.6 Eagle Bank Limited (EBL) is listed on all the stock exchanges in Pakistan. At the year end, the totalborrowings of the bank amounted to Rs. 29,761 million, which included borrowings outsidePakistan amounting to Rs. 11,712 million. Details of borrowings at the year-end were as follows:

(i) All local borrowings are in Pak Rupees.

(ii) Inter-bank call money borrowings amounted to Rs. 3,600 million. These borrowings wereunsecured and carried mark-up ranging between 8.7% and 12.1% per annum.

(iii) EBL operates in several countries where it maintains nostro accounts. The overdrawn nostroaccounts amounted to Rs. 456 million. Mark-up on overdrawn nostro accounts was chargedby the foreign banks at the rates prevailing in the respective countries.

(iv) Outstanding loans from the State Bank of Pakistan (SBP) under the Export RefinanceScheme amounted to Rs. 14,182 million. These loans carried mark-up ranging between9.7% and 11% per annum and were secured by EBLs cash and other securities held by SBP.

(v) The borrowings under repurchase agreements amounted to Rs. 11,523 million and carriedmark-up ranging between 6.3% and 12.5% per annum. These borrowings are secured againstgovernment securities amounting to Rs. 24,802 million and are repayable latest byApril 2013.

Required:Prepare note on Borrowings for inclusion in the Financial Statements of Eagle Bank Limited withappropriate disclosures in accordance with the State Bank of Pakistan guidelines. (10)


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Q.7 Quail Pakistan Limited (QPL), a listed company, is reviewing the following transactions whichhave not yet been accounted for in the financial statements for the year ended 30 June 2012:

(a) On 1 July 2011, QPL announced a bonus of Rs. 30 million to its employees if they achievedthe annual budgeted targets by 30 June 2012. The bonus would be paid in the followingmanner:

25% of the bonus would be paid in cash on 31 December 2012 to all employeesirrespective of whether they are still working for QPL or not.

The balance 75% will be given in share options, to those employees who are in QPLsemployment on 31 December 2012. The exercise date and number of options will be fixedby the management on the same day.

The budgeted targets were achieved. The management expects that 5% employees wouldleave between 30 June 2012 and 31 December 2012. (04)

(b) On 30 June 2012, a plant having a list price of Rs. 50 million was purchased. QPL hasallowed the following options to the supplier, in respect of payment thereagainst:

To receive cash equivalent to price of 1.5 million shares of the company after 3 months; or To receive 1.7 million shares of the company after 6 months.

QPL estimates that price of its shares would be Rs. 35 per share after three months andRs. 40 per share after six months. (05)

Required:Discuss how the above share-based transactions should be accounted for in QPLs financialstatements for the year ended 30 June 2012. Show necessary calculations.(Journal entries are not required)

(THE END)


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Q.1 The following summarised statements of financial position pertain to Bee Limited and its investeecompanies as at 31 December 2011:

Bee Limited Cee Limited Tee Limited

--------------Rs. in million------------

ASSETS

Non-current assets

Property, plant and equipment 75,600 2,800 800Investment in Cee Limited at cost 3,900 - -

Investment in Tee Limited at cost 300 - -

Current assets

Stock in trade 24,100 1,700 700

Trade and other receivables 16,400 2,900 820

Cash and bank 800 700 -

121,100 8,100 2,320

EQUITY AND LIABILITIES

Equity

Ordinary share capital (Rs.10 each) 44,300 2,800 1,000

Retained earnings 15,800 1,200 900

Long term loan 36,400 - -

Current liabilities

Trade and other payables 24,600 4,100 300

Bank overdraft - - 120

121,100 8,100 2,320

The following information is also available:(i) Bee holds 252 million shares of Cee which were acquired in 2005 when the retained earnings

of Cee stood at Rs. 350 million. At the date of acquisition, the fair values of Cees net assets

were the same as their carrying amounts with the exception of a legal claim having a fairvalue of Rs. 7 million which had been disclosed in the financial statements as a contingentliability. The claim was settled on 30 November 2011, for the same amount.

(ii) Bee acquired 80% share capital of Tee several years ago for Rs. 1,200 million when Teesretained earnings stood at Rs. 100 million. On 1 October 2011, Bee sold 75% of its holding inTee for Rs. 2,000 million. On the date of disposal, the fair value of remaining holding wasRs. 650 million.

(iii) During the year, Cee sold goods to Bee at cost plus 25%. The amount invoiced during theyear amounted to Rs. 32 million. 40% of these goods were held by Bee at year end. Bee haspaid Rs. 20 million against the invoiced amount, upto 31 December 2011.

(iv) At year end, an impairment review indicated that 10% of Cees goodwill is required to bewritten off.

(v) During the year ended 31 December 2011, Cee and Tee earned profits after tax of Rs. 250million and Rs. 200 million respectively. It may be assumed that the profits had accruedevenly throughout the year.

(vi) Bee follows a policy of valuing the non-controlling interest at its proportionate share of thefair value of the subsidiarys identifiable net assets.


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RequiredPrepare the consolidated statement of financial position of Bee Limited as at 31 December 2011 inaccordance with the requirements of International Financial Reporting Standards. (24 marks)

Note:

Ignore tax and comparative figures.

Notes to the consolidated statement of financial position are not required.

Show workings wherever necessary.

Q.2 Dee General Insurance Limited is a listed company. The following information relates to the yearended 31 December 2011:

Direct and facultative Treaty

Fire and

property

damage

Marine,

aviation

and transport

MotorMiscellan-

eous

Proport-

ional

----------------------------Rs. in million----------------------------

Commissions:

Paid / payable 321.41 126.87 215.00 90.94 0.30Deferred: opening 148.79 11.31 128.50 38.59 -

Deferred: closing 160.43 5.68 114.23 35.17 -

Receipts from reinsurers 270.44 5.70 12.72 82.40 -

Net premium earned 907.75 768.70 2,745.64 948.48 0.70

During the year, management expenses (other than commission) amounted to Rs. 978 million.These expenses are allocated on the basis of net premium earned.

Required:Prepare a statement of expenses for inclusion in the financial statements for the year ended 31December 2011. (Ignore comparative figures) (10 marks)

Q.3 The following information relates to Que Limited (QL) for the year ended 31 December 2011:

(i) Issued share capital on 1 January 2011 consisted of 80 million ordinary shares of Rs. 10each.

(ii) Profit after tax amounted to Rs. 130 million. It includes a loss after tax from a discontinuedoperation, amounting to Rs. 40 million.

(iii) On 30 September 2011, QL issued 20% right shares at a price of Rs. 11 per share. The marketvalue of the shares immediately before the right issue was Rs. 12.50 per share.

(iv) There are 25,000 share options in existence. Each option allows the holder to acquire 120shares at a strike price of Rs. 10 per share. The options have already vested and will expireon 30 June 2013. The average market price of ordinary shares in 2011 was Rs. 12 per share.

(v) QL had issued debentures in 2008 which are convertible into 6 million ordinary shares. Thedebentures shall be redeemed on 31 December 2012. The conversion option is exercisableduring the last six months prior to redemption. The interest on debentures for the year 2011amounted to Rs. 11 million.

(vi) Preference shares issued in 2009 are convertible (at the option of the preference shareholders)into 4 million ordinary shares on 31 December 2013. The dividend paid on preference sharesduring 2011 amounted to Rs. 5.75 million.

(vii) The company is subject to income tax at the rate of 35%.

Required:

Prepare extracts from the financial statements of Que Limited for the year ended 31 December2011 showing all necessary disclosures related to earnings per share. (Ignore comparative figures)

(17 marks)


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Q.4 Zee Power Limited (ZPL) has been facing short term liquidity issues during the financial yearended on 31 December 2011. As a result, the following transactions were undertaken:

(i) On 27 December 2011, ZPL sold its investment in listed Term Finance Certificates (TFCs) toVee Investment Company Limited with an agreement to buy them back in 10 days. Relevantdetails are as follows:

Rupees

Sale price 10,150,000

Buy back price 10,183,337

Value in ZPLs books as on 27 December 2011 10,144,332

Market price as on 31 December 2011 10,163,125

ZPL intends to hold these TFCs till maturity.

(ii) On 1 January 2009, ZPL had obtained a bank loan of Rs. 100 million at 10% per annum.The interest was payable annually on 31 December and principal amount was repayable in

five equal annual installments commencing from 31 December 2009. On 1 January 2011, thebank agreed to facilitate ZPL as follows:

Balance amount of the principal would be paid at the end of the loans term i.e. on 31December 2013.

With effect from 1 January 2011, interest would be paid at the rate of 10.5% per annum.

The market rate for similar debt is 10%.

(iii) On 1 July 2011, ZPL sold its plant and machinery to Kay Leasing Limited, a related party,for Rs. 90 million and leased it back for five years at semi-annual rentals amounting toRs. 9.66 million, payable in arrears on June 30 and December 31. The carrying amount ofplant and machinery on the date of sale was Rs. 80 million and its fair value was Rs. 60

million.

The lease qualifies as an operating lease and the rentals are based on fair market rate.

Required:Prepare journal entries to record the above transactions in the books of Zee Power Limited.

(18 marks)

Q.5 (a) Specify the criteria for identification of operating segments, in accordance with theInternational Financial Reporting Standards. (03 marks)

(b) Jay Limited is an integrated manufacturing company with five operating segments.Following information pertains to the year ended 31 March 2012:

Operating

segments

Internal

revenue

External

revenue

Total

revenue

Profit /

(loss)Assets Liabilities

-----------------------Rs. in million-----------------------

A 38 705 743 194 200 130

B - 82 82 (22) 44 40

C - 300 300 81 206 125

D 35 - 35 10 75 60

E 38 90 128 (63) 50 25

Total 111 1,177 1,288 200 575 380

Required:In respect of each operating segment explain whether it is a reportable segment. (09 marks)


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Q.6 Gee Investment Company Limited (GICL) acquires properties and develops them for diversifiedpurposes, i.e. resale, leasing and its own use. GICL applies the fair value model for investmentproperties and cost model for property, plant and equipment.

The details of the buildings owned are as follows:

PropertyDate of

acquisition

Useful

life

(years)

CostResidual

value

Fair value as on 31 December

2011 2010

-------------------Rs. in million-----------------

A 1 August 2006 20 130 14 100 150

B 1 January 2009 15 240 24 240 210

C 1 July 2009 10 160 20 150 120

D 1 July 2008 10 10 1 Not available

E 1 August 2011 20 48 4 51 -

The following information is also available:

Property A GICL had been trying to sell this property for the last two years. However, due to

weak market, the directors finally decided to lease it with effect from 1 October 2011when its fair value was Rs. 120 million.

Property B The possession of this property was acquired from the tenants on 30 June 2010 whenthe company shifted its head office from Property C to Property B. The fair value onthe above date was Rs. 195 million.

Property C When the head office was shifted from this property, it was leased to a subsidiary atmarket rate. On the date of lease, the fair value was equal to its carrying amount.

Property D This property is situated outside the main city and its fair value cannot bedetermined. It was rented to a government organization soon after the acquisition.

Property E This property is an office building comprising of three floors. After acquisition, twofloors were rented out. On 1 November 2011, GICL established a branch office onthe third floor.

Details of costs incurred on acquisition are as follows:

Rs. in millionPurchase price 42.50

Agents commission 0.50

Registration fees and taxes 2.00

Administrative costs allocated 3.00

48.00

Required:(a) Prepare a note on investment property, for inclusion in GICLs separate financial statements

for the year ended 31 December 2011. (Ignore comparative figures) (16 marks)(b) Explain how Property C would be accounted for in the consolidated financial statements for

the year ended 31 December 2011. (03 marks)

(THE END)


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Final Examination 10 December 2011

Winter 2011 100 marks - 3 hoursModule E Additional reading time - 15 minutes

Q.1 Hi-Tech Pakistan Limited (HPL) is a public limited company and deals in medical equipments. On 1October 2009 HPL had introduced a Robotic Surgery System for the first time in Pakistan.

In November 2009, HPL had launched a country wide sales promotion campaign to introduce thesystem in various hospitals at a cost of Rs. 16 million whereas expenditure on training of thetechnical staff amounted to Rs. 12 million.

On 1 April 2010 HPL signed a lease agreement with Comforts Hospital for sale and 3-yearmaintenance of the system. The terms of the agreement are as under:

Lease period 3 yearsInitial payment on signing of the agreement Rs. 20 million

6 half yearly installments commencing 30 September 2010 Rs. 25 million

Implicit rate of interest per annum 15.192%

Cost of the system is Rs. 100 million whereas maintenance cost of the system for the three years wasestimated at Rs. 8.4 million. To cash customers, the system is sold at a mark-up of 25% on cost. HPLexpects a gross margin of 30% on such maintenance contracts, whereas actual costs incurred on themaintenance, during the year ended 30 September 2011 amounted to Rs. 2.5 million (2010: Rs. 1.7million).

The hospital was unable to pay the installment due on 31 March 2011 due to solvency problems.

After intense negotiations, HPL and the hospital agreed to a restructuring arrangement, whereby thehospital would settle its obligation by paying 4 half yearly installments of Rs. 32 million each,commencing from 30 September 2011.

Required:Compute the impact of the above transactions on various items forming part of the statements ofcomprehensive income and financial position of Hi-Tech Pakistan Limited for the year ended 30September 2011 in accordance with International Financial Reporting Standards. Give comparativefigures. (Notes to the financial statements are not required.) (16 marks)

Q.2 Global Investment Limited (GIL) is listed in Pakistan. During the year ended 30 September 2011,

GIL entered into the following contracts with a UAE based company:

(i) On 28 September 2011 GIL committed to buy certain financial assets on 3 October 2011 forAED 20,000. The fair value of these assets on balance sheet date and settlement date was AED21,000 and AED 21,500 respectively.

(ii) On 29 September 2011 GIL agreed to sell certain financial assets on 4 October 2011 having acarrying value of AED 34,000 (Rs. 809,200) for AED 35,000. The fair value of these assets onthe balance sheet date and settlement date was AED 35,200 and AED 34,800 respectively.

The above types of financial assets are classified by GIL as held for trading. Exchange rates on therelevant dates were as under:

Date 1 AED = Rs.

28 September 2011 24.0029 September 2011 23.00

30 September 2011 23.50

03 October 2011 25.00

04 October 2011 26.00


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Required:Prepare accounting entries to record the above transactions on the relevant dates in accordance withInternational Financial Reporting Standards, using:(a) Trade date accounting (b) Settlement date accounting (16 marks)

Q.3 Alpha Pakistan Limited (APL) is a listed company and has 60% holding in Bravo Limited (BL). Thecompany is in the process of preparation of its consolidated financial statements for the year ended30 September 2011. Following are the extracts from the information that has been gathered so far:

Consolidated Statement of Comprehensive Income (Draft)

2011

Rs. in million

Sales 65,000

Cost of products sold (59,110)

Other operating income 2,000

Operating expenses (3,000)

Financial expenses (890)

Income tax expense (1,200)

Profit for the year 2,800

Profit attributable to

Owners of the holding company 2,500

Non-controlling interest 300

2,800

Consolidated Statement of Financial Position (Draft)

2011 2010 2011 2010

Rs. in million Rs. in million

Equity and liabilities Assets

Share capital (Rs. 10 each) 550 500 Property, plant and equipment 1,100 900

Retained earnings 5,950 3,600 Goodwill 15 15

Non-controlling interest 235 120 Long term receivables 24 29Long term loans 440 145 Stock in trade 6,760 4,280

Deferred tax 210 10 Trade debts 7,534 5,421

Trade and other payables 4,688 3,970 Other receivables 900 725

Accrued financial expenses 35 30 Cash and bank balances 2,645 2,980

Provision for taxation 200 25

Short term borrowings 6,670 5,950

18,978 14,350 18,978 14,350

Following additional information is available:(i) During the year, BL sold goods amounting to Rs. 140 million to APL at a margin of 25% of

cost. 40% of the above amount remained unpaid and 30% of the goods remained unsold as on

30 September 2011. No adjustments in this regard have been made in the above statements.(ii) Depreciation charge for the year was Rs. 75 million and Rs. 15 million for APL and BL

respectively.(iii) During the year APL acquired property, plant and equipment amounting to Rs. 250 million

against a long term loan.(iv) The amount of long term receivables represents present value of interest free loans to

employees. The gross value of the loans is Rs. 27 million (2010: Rs. 33 million).(v) Operating expenses include bad debt expenses amounting to Rs. 44 million. During the year,

trade debtors amounting to Rs. 30 million were written off.(vi) Trade and other payables include APLs unclaimed dividend amounting to Rs. 8 million (2010:

Rs. 10 million). At APLs Board meeting held on 30 November 2011, final cash dividend of Rs.3.0 per share has been proposed (2010: Final cash dividend of Rs 2.0 per share and 10% bonus

shares).

Required:Prepare a consolidated statement of cash flows including all relevant notes for Alpha PakistanLimited for the year ended 30 September 2011 using the direct method in accordance withInternational Financial Reporting Standards. (Ignore corresponding figures.) (23 marks)


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Q.4 On 1 October 2009 Sky Limited (SL) acquired 25% holding (2.5 million ordinary shares) in MarsLimited (ML) for Rs. 900 million. On the date of acquisition, MLs equity was as follows:

Rs. in million

Ordinary share capital (Rs. 100 each) 1,000

Share premium 150

Retained earnings 2,89812% cumulative preference share capital 200

On the above date, fair value of a building owned by ML exceeded its carrying value by Rs. 12million and its estimated useful life was 15 years. Fair values of all other assets and liabilities of MLwere equal to their carrying values.

Following additional information is available:(i) MLs profit after tax for the year ended 30 September 2011 was Rs. 250 million (2010: Rs. 240

million). Dividend received from ML amounted to Rs. 30 million (2010: nil).(ii) Cost of goods purchased from SL and included in MLs closing inventory was Rs. 10 million

(2010: Rs. 16 million). SL makes a profit of 20% on all sales.(iii) Applicable tax rate is 35% and 10% for business and dividend income respectively.

On 1 January 2011, SL acquired 70% holding (7 million ordinary shares) in Jupiter Limited (JL) forRs. 1,400 million. SL has been following a policy to account for investments in associates usingequity basis of accounting. Since SL is now required to prepare consolidated financial statements, itneeds to change its accounting policy for investments in associates, for the purpose of preparation of

its separate financial statements, to comply with the requirements of International FinancialReporting Standards.

Required:Prepare the following notes (relevant portion only) for incorporation in the separate financialstatements of Sky Limited for the year ended 30 September 2011:(a) Change in accounting policy

(b) Investments(Show all the necessary disclosures and comparative figures in respect of the above, in accordance with

International Financial Reporting Standards.) (22 marks)

Q.5 XL (Private) Limited is a long established company and provides a range of services to businessorganizations for development of their human resources. Most of its staff consists of qualified andexperienced professionals.

The company plans to expand its business by establishing a research division. In this respect, XL isevaluating a proposal for raising finance by issuing ordinary shares. To estimate value of its shares,XL has identified a listed company, PL Limited, which is engaged in similar business.

Financial statistics and other information as of 30 September 2011, for XL and PL, are given below:

XL Limited PL Limited

--- Rs. in million ---

Ordinary share capital as at 1 October 2010 (Rs. 10 each) 400 1,000

10% cumulative preference shares as at 1 October 2010 (Rs. 10 each) 120 -

Right shares issued on 1 April 2011 (Rs. 10 each) - 100

Total comprehensive income 292 600

Dividend paid 168 500

PL issued right shares on 1 April 2011 at Rs. 25 per share. The prevailing market price per share onthe date of issue and on 30 September 2011 was Rs. 35 and Rs. 40 respectively.

PLs total comprehensive income includes unrealized gain of Rs. 15 million on investments availablefor sale.

Annual rate of growth in earnings and dividends for XL and PL is estimated at 5% and 4.5%respectively. The cost of equity of companies having similar businesses is estimated at 15% perannum.


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Required:(a) Compute the value of XLs shares as on 30 September 2011 based on:

(i) P/E ratio(ii) Dividend yield

(b) Identify any two weaknesses of each of the above valuation methods. (13 marks)

Q.6 Al-Amin Bank Limited is listed on all the stock exchanges in Pakistan. At year end, the totaladvances amounted to Rs 75,000 million which include non-performing advances of Rs. 5,000million. The break-up of the non-performing advances and the provisions there-against is as under:

Other assets

especially

mentioned

Sub-

StandardDoubtful Loss Total

----- Rs. in million -----

Advances 100 660 840 3,400 5,000

Provisions required and held 5 120 530 3,345 4,000

The sub-standard category includes advances of Rs. 260 million pertaining to overseas operations ofthe bank. The required provision of Rs. 50 million has been made against such advances.

During the year the movement in the specific provision was as under:

Rs. in million

Opening balance 3,320

Charge for the year 802

Reversals (90)

Amounts written off (50)

Exchange rate adjustment 18

Total 4,000

In addition to the above specific provisions, it is the banks policy to make additional generalprovision based on the judgment of the bank. Opening balance for general provision was Rs. 65million. During the year, the bank made provisions of Rs. 25 million and Rs. 15 million againstconsumer and agriculture advances respectively.

Required:Prepare relevant notes on non-performing advances and provisions for inclusion in the financialstatements of Al-Amin Bank Limited giving appropriate disclosure in accordance with the guidelinesissued by the State Bank of Pakistan. (10 marks)

(THE END)


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Final ExaminationsReading time 15 minutes

June 7, 2011

Summer 2011 Module E 100 marks 3 hours

Q.1 The draft statements of financial position of Oceana Global Limited (OGL), and its subsidiaryRivera Global Limited (RGL) as of March 31, 2011 are as follows:

OGL RGL

Rs. in million

Assets

Property, plant and equipment 700 200

Intangible assets 4 -Investment in RGL (opening balance) 23 -

Investment in RGL (acquired during the year) 108 -

Current assets 350 150

1,185 350

Equity and Liabilities

Share capital (Ordinary shares of Rs. 100 each) 300 100

Retained earnings 550 80

Fair value reserve 3 -

853 180

Non-current liabilities 150 40

Current liabilities 182 1301,185 350

The details of OGLs investments in RGL are as under:

Acquisition date

Face value of

shares acquired

Purchase

consideration

Rs. in million

July 1, 2009 10 20

October 1, 2010 45 108

Other information relevant to the preparation of the consolidated financial statements is as under:

(i) On October 1, 2010 the fair value of RGLs assets was equal to their carrying value except fornon-depreciable land which had a fair value of Rs. 35 million as against the carrying value ofRs. 10 million.

(ii) On October 1, 2010 the fair value of RGLs shares that were acquired by OGL on July 1,2009 amounted to Rs. 28 million.

(iii) RGLs retained earnings on October 1, 2010 amounted to Rs. 60 million.(iv) Intangible assets represent amount paid to a consultant for rendering professional services for

the acquisition of 45% equity in RGL.(v) During February 2011 RGL sold goods costing Rs. 25 million to OGL at a price of Rs 30

million. 25% of these goods were included in OGLs closing inventory and 50% of theamount was payable by OGL, as of March 31, 2011.

(vi) OGL follows a policy of valuing non-controlling interest at its fair value. The fair value ofnon-controlling interest in RGL, on the acquisition date, amounted to Rs. 70 million.

Required:Prepare a consolidated statement of financial position for Oceana Global Limited as of March 31,2011 in accordance with International Financial Reporting Standards. (16 marks)


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Advanced AccountingandFinancialReporting Page2 of4

Q.2 Following are the extracts from draft statement of comprehensive income of Kahkashan Limited(KL) for the year ended March 31, 2011:

Rs. in million

Net sales 800

Cost of sales (640)

Selling and distribution expenses (32)Administrative expenses (15)

Finance costs (10)

Other operating income 13

Profit before tax 116

The following issues need to be resolved, to finalize the accounts:

(i) On April 1, 2010 the company had issued 0.5 million 12% Term Finance Certificates (TFCs)of Rs. 100 each. The principal amount of Rs. 50 million is included in non-current liabilities.Interest is payable annually in arrears. On the date of issue, the prevailing interest rate forsimilar debts without conversion option was 14% per annum. TFCs would mature on March

31, 2014 but are convertible into eight ordinary shares of Rs. 10 each, at the option of thecertificate holders, at any time prior to maturity. Interest was paid on March 31, 2011 andcharged to finance cost.

(ii) KL entered into a sale and leaseback arrangement on October 1, 2010 for one of its plantshaving remaining useful life of 5 years with a nil residual value. Relevant information is asunder:

Rs. in million

Carrying value of the plant as of October 1, 2010 43

Selling price 53

Installments payable semi-annually, in advance, for a period of 5 years 7

Income of Rs. 10 million has been recognized on disposal of the plant and is included in otheroperating income. Interest rate implicit in the lease is 13.597%.

(iii) On April 1, 2010 KL acquired 25% holding in SL Limited by purchasing 50,000 ordinaryshares for Rs 6 million. In March 2011 a dividend of Rs. 20 per share was received by KL andcredited to other operating income. SLs profit and other comprehensive income, net of tax,for the year ended March 31, 2011 was Rs. 10 million and Rs. 2 million respectively.

(iv) On April 1, 2006 KL had acquired a plant at a cost of Rs. 30 million. The useful life of theplant was estimated at 15 years and it is being depreciated under the straight line method. OnOctober 1, 2010 the plant suffered physical damage but is still working. A valuation wascarried out to determine the impairment loss. The following information is available from thevaluers report received on April 5, 2011:

Value in use Rs. 16 millionSelling price, net of costs to sell Rs. 12 million

Estimated remaining useful life as of October 1, 2010 5 years

Depreciation for the year ended March 31, 2011 has been accounted for without consideringthe impact of the valuers report.

(v) Tax assessment for the accounting year ended March 31, 2010 was finalized in February 2011in which liabilities outstanding for more than three years amounting to Rs. 6 million wereadded to income. 30% of these liabilities have already been paid during the year ended March31, 2011. Tax effect of these transactions has not been accounted for.

(vi) Applicable tax rate for business income and dividend income is 35% and 10% respectively.The amount of tax depreciation is the same as accounting depreciation, except for any

difference arising out of information provided in Para (iv).

Required:Prepare a statement of comprehensive income for the year ended March 31, 2011 in accordancewith International Financial Reporting Standards. (25 marks)


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Q.3 Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity fromgarbage collected by the civic agencies. WML had signed an agreement with the government forallotment of a plot of land, free of cost, for 10 years. However, WML has agreed to restore the site,at the end of the agreement.


(i) Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost wouldamount to Rs. 10 million.

(ii) It is the policy of the company to measure its plant and machinery using the revaluationmodel.

(iii) When the plant commenced its operations i.e. on April 1, 2005 the prevailing market baseddiscount rate was 10%.

(iv) On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.(v) On March 31, 2009 prevailing market based discount rate had increased to 12%.(vi) On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million.(vii) Useful life of the plant is 10 years and WML follows straight line method of depreciation.(viii) Appropriate adjustments have been recorded in the prior years i.e. up to March 31, 2010.

Required:Prepare accounting entries for the year ended March 31, 2011 based on the above information, in

accordance with International Financial Reporting Standards. (Ignore taxation.) (17 marks)

Q.4 Extracts from statement of comprehensive income of Rahat Limited (RL) for the year ended March31, 2011 are as under:

2011 2010

Rs. in 000

Profit after taxation 150,000 110,000Exchange gain on foreign operations, net of tax 10,000 8,000

Total comprehensive income 160,000 118,000

Following further information is available:

(i) As of April 1, 2010 share capital of the company consisted of:

5 million ordinary shares of Rs. 10 each. 0.2 million convertible 15% cumulative preference shares of Rs. 100 each.

(ii) Each preference share is convertible into 7 ordinary shares at the option of the shareholders.10,000 preference shares were converted into ordinary shares on July 1, 2010.

(iii) On September 10, 2010 a right issue of one million ordinary shares had been announced at anexercise price of Rs. 12 per share. By October 1, 2010 which was the last date to exercise theright, all the shares had been subscribed and paid. The market price of an ordinary share onSeptember 10 and October 1, 2010 was Rs. 15.50 and Rs. 15 respectively.

(iv) On April 30, 2011 the Board of Directors had declared a final cash dividend of 20%(2010:18%) for the year ended March 31, 2011.

(v) There was no movement in share capital during the previous year.

Required:Prepare a note related to earnings per share, for inclusion in the companys financial statements forthe year ended March 31, 2011 in accordance with International Financial Reporting Standards.Show comparative figures. (16 marks)


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Q.5 Galaxy Textiles Limited (GTL) operates a funded gratuity scheme for all its employees.Contributions to the scheme are made on the basis of annual actuarial valuation. The followingrelevant information has been extracted from the actuarial report pertaining to the year endedMarch 31, 2011.

Rs. in million

Present value of defined benefit obligations as of: April 1, 2010 133

March 31, 2011 166

Fair value of plan assets as of:

April 1, 2010 114

March 31, 2011 120

Net cumulative unrecognized losses as of April 1, 2010 19

Benefits paid by the plan to the employees 6

Current service cost 15

Interest cost 16

Expected return on plan assets 14

Actuarial gains and losses are recognized using the corridor method, over the expected averageremaining working lives of the employees. As of March 31, 2011 the expected average remainingworking lives of the employees was 18 years.

Required:Prepare a note on retirement benefits for presentation in the financial statements for the year endedMarch 31, 2011 in accordance with International Financial Reporting Standards. (14 marks)

Q.6 Following information has been extracted from the records of A-One Asset Management FundLimited for the year ended March 31, 2011.

Rs. in millionNet 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 available for sale

Fair value at year end 1,800

Carrying value at year end 1,200

Net unrealized appreciation in fair value of investmentsat the beginning of the year 480

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

Element of income and capital gains included in prices ofunits issued/redeemed and transferred to income statement 173

Capital gains 400

Other net income for the year 3,000

Final distribution for the year ended March 31, 2011 of Rs. 5.00 per unit (2010: Rs. 4.00 per unit)was announced on April 16, 2011.

Required:Prepare a statement of movement in unit holders' fund for the year ended March 31, 2011.

(12 marks)

(THE END)


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Final Examinations Winter 2010 December 7, 2010Module E 100 marks - 3 hours

Q.1 Rainbow Textiles Limited (RTL) is a public limited company and owns 70% holding in FabricsDesign Limited (FDL).

FDL is located in a foreign country and its functional currency is FC. RTL acquired FDL on July1, 2009 for FC 12 million when FDL's share capital and retained earnings were FC 5 million andFC 3 million respectively. On the acquisition date, fair value of FDL's net assets was FC 11 million.The fair value of all the assets except leasehold land and buildings was equal to their carrying

amounts. The remaining lease period of the land and useful life of the buildings at the date ofacquisition was 20 years. RTL and FDL use straight line method of depreciation.

The following balances were extracted from the Statement of Comprehensive Income of RTL andFDL for the year ended June 30, 2010:

Statement of Comprehensive Income

RTL FDL

Rs. in million FC in million

Sales revenue 1,000 25

Cost of sales (450) (15)

Gross profit 550 10Selling and administrative expenses (250) (5)

Financial expenses (25) (1)

Profit before taxation 275 4

Taxation (100) (1)

Profit after taxation 175 3

The following additional information is also available:

(i) On April 10, 2010 RTL sold goods for Rs. 30 million to FDL at a margin of 20% of sellingprice. Full payment was made by FDL on May 1, 2010. No exchange gain or loss was

recorded on the transaction. Goods valuing FC 1.0 million were still in closing inventory ofFDL as of June 30, 2010.

(ii) An impairment test was carried out on June 30, 2010 which indicated that the goodwill hasbeen impaired by 25%.

(iii) RTL follows a policy of valuing the non-controlling interest at its proportionate share of fairvalue of the subsidiaries identifiable net assets.

(iv) FDL has not issued any shares after the acquisition.(v) Exchange rates relevant to the preparation of the financial statements are as follows:

1 FC = Rs. 1 FC = Rs.

30-Jun-2009 / 1-Jul-2009 22.00 30-Jun-2010 23.

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