ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

Ans.1

Tiger Limited Consolidated Income Statement For the year ended 30 June 2012
2012 Rs. in million

Revenue [6,760 + 426 (50 1.2)] Cost of sales [4,370 + 218 (50 1.2) + (50 40% 20% ) Gross profit Operating expenses (1,270+ 132 +7) Profit from operations Investment income (W-1) Profit before taxation Income tax expense (400 + 17) Profit for the year from the continuing operations Profit for the year from the discontinued operations (W-2)] Attributable to: Equity attributable to owners of the parent (balancing) Non-controlling interest (W-3)

7,126 (4,532) 2,594 (1,409) 1,185 398 1,583 (417) 1,166 186 1,352 1,342 10 1,352

Tiger Limited Consolidated Statement of Changes in Equity For the year ended 30 June 2012
Attributable to equity shareholders of Tiger Limited Non Controlling Interest Share Retained Total Capital Earnings ----------------------Rs. in million----------------------Balance as on 1 July 2012 10,000 2,502 12,502 214 (W-4) (270 + 800) 20% Dividend paid for the year 2012 (1,000) (1,000) Profit for the year Purchase of subsidiary Disposal of a subsidiary Balance as on 30 June 2012 10,000 1,342 (153) (W-5) 2,691 1,342 (153) 12,691 10 (W-3) 201 (600 + 70) 30% (222) (W-6) 203

Total

12,716 (1,000) 1,352 201 (375) 12,894

W-1: Investment income Investment income of TL Less: Profit on disposal of PL (1,300 - 1,000) Less: Share of LL's ordinary dividend (60 70%) Add: Investment income of LL W-2: Profit from discontinued operations Profit for the year (Rs. 78 6 12) Add: Profit on disposal of PL (W-2.1)

Rs. in million 730 (300) (42) 10 398 Rs. in million 39 147 186

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ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

W-2.1 : Profit on disposal of interest in Panther Limited Net assets as on 30 June 2011 (800 + 270) Add: Profit up to 31 Dec 2011 (Rs. 78 6 12) Carrying value of net assets at disposal Add: Goodwill (W-2.2) Total assets disposed off Less: Attributable to non-controlling interest (1,109 x 20%) Less: Sale proceeds Profit on disposal W-2.2 : Goodwill of Panther Limited Cost of investment Less: Net assets acquired [(800 + 55) 80%] Goodwill on the date of acquisition Less: Impairment to date of disposal W-3: Profit for the year - non-controlling interest PL (Rs. 78 6 12 20%) LL (Rs. 69 30%) Less: Dividend received by NCI of LL (60 30%) Less: Unrealized profit in inventories (50 40% 20% 30%) W-4: Consolidated retained earnings as on 01 July 2011 TL Post acquisition profit of PL [80% (270 - 55)] Goodwill impairment to date of disposal - PL W-5: Disposal of Subsidiary Post acquisition profit up to prior years [80% (270 - 55)] Profit of the year (Rs. 78 6 12 80%) Goodwill impairment to date of disposal W-6: Total share of NCI in PL Post acquisition profits up to prior years ((270 + 800) x 20%) Profit of the year (W-3)

1,070 39 1,109 266 1,375 (222) 1,153 1,300 147 1,000 (684) 316 (50) 266 8 21 (18) (1) 10 2,380 172 (50) 2,502 172 31 (50) 153 214 8
222

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ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

Ans.2

(a)

Date 01-04-12

Description Inventory / stock (4,000 Rs. 6,200) Bank / Creditor (Record the purchase of stock)

Dr. Cr. ----------Rupees---------24,800,000 24,800,000

Note: The futures contract has a zero value at the date it is entered into, so no entry is made in the financial statements. 30-06-12 Financial asset (4,000 750) Profit and loss a/c (hedging gain) Inventory / stock (4,000 Rs. 700) (Record the net hedging gain on the price movement of inventory and futures) Cash (200 4) Debentures (W-1) Equity (W-1) (Record the proceed from issuance of debentures in accordance with IAS-32) Interest expense (181.63 11.81%) Debentures (balancing) Cash (Rs. 200 8%) (Recognize the interest expense for the year) 3,000,000 200,000 2,800,000

(b)

01-07-11

196,000,000 181,630,000 14,370,000

30-06-12

21,450,000 5,450,000 16,000,000

W-1: Determination of Equity and Liability Components Discount the cash flows at 11% Present value of interest at the end of: 30-Jun-12 (Rs. 200 million 8%) [1 (1+0.11)] 30-Jun-13 (Rs. 200 million 8%) [1 (1+0.11)2] 30-Jun-14 (Rs. 200 million 8%) [1 (1+0.11)3] 30-Jun-14 Present value of principal [Rs. 200 million (1 (1+0.11)3] Total liability component Total equity element (balancing) Proceed of issue Allocate issue costs Proceeds Issue cost Liability Equity Total Rs. in million 185.34 14.66 200.00 (3.71) (0.29) (4.00) 181.63 14.37 196.00 Rs. in million 14.41 12.99 11.70 146.24 185.34 14.66 200.00

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ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

Ans.3

(a)

The investment in GL should be treated as investment in associates because QPL not only holds 20% of its investment but also exercises significant influence over GL. Investments in associates are accounted for at cost plus post acquisition change in net assets. (equity method) Since the fair value of GLs net assets on acquisition date is higher than its costs (i.e. fair value of the shares in QPL exchanged for the shares of GL), initially the investment would be recorded at fair value and the excess being the bargain gain would be recognized in the income statement (as income) . The carrying value of investment and the recoverable amount as at 30 June 2012 would be as follows: Rs. in million Cost of investment at acquisition (fair value) 70 Post acquisition share in profit (280 250) 20% 6 Carrying value at 30 June 2012 76 Recoverable amount (370 20%) 74

Since the recoverable amount is less than the carrying amount, the investment at 30 June 2012 should be shown at recoverable amount i.e. Rs. 74 million. A provision for impairment in the value of investment amounting to Rs. 2 million would be recognized in the income statement. (b) The invested amount in Brand should be accounted for as follows:
Expense Property, Intangible Income plant and assets Statement equipment ---------------------Rupees--------------------(a) 800,000 (b) 1,500,000 (b) 950,000 (b) 11,000,000 (c) 18,000,000 (a) 600,000 (a) 3,400,000 4,800,000 13,450,000 18,000,000

Research on size of potential market Product designing Labour costs in refinement of products Development work undertaken to finalize the product design Cost of upgrading machine Staff training costs Advertisement costs

(a)

-38 does not allow capitalization of research cost, staff training costs and advertisement costs as these are not directly attributable costs. Therefore these expenditures should be expensed out.
(b)

Development expenditure is capitalized when CTML demonstrates all the following: The technical feasibility of completing the intangible asset so that it will be available for use or sale. CTMLs intention to complete the intangible asset and use or sell it. CTMLs ability to use or sell the intangible asset. That the intangible asset will generate probable future economic benefits. The availability of adequate technical, financial and other resources to complete the development and to use or sell it. CTMLs ability to measure reliably the expenditure attributable to the intangible asset during its development.
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

Assuming that all these criteria are met, the cost of development should comprise directly attributable costs necessary to create the asset and to make it capable of operating in the manner intended by management. The cost of upgrading the machines is tangible asset and should be regarded as property, plant and equipment. Ans.4 To: From: Subject: Date: 1 The bankers of Primate Mart Limited (PML) Bashir Ahmed, Consultant Financial performance 2010-12 December 2012

Introduction In accordance with your instructions, I set out below a review of PMLs financial performance over the last three years. The main focus of this report is on the reasons for the increase in the quantum of bank borrowing by PML and to consider how the bank can safeguard its interest in the given situation. Relevant workings and accounting ratios are included in the attached appendix. Bank lending The main reason for the steep increase in bank lending is that the entity has not been generating sufficient cash from its operating activities over the past three years. During the year ended 30 June 2012 and 2011, the cash generated from operating activities (i.e. Rs. 11 million and Rs. 17 million respectively) has not been sufficient to cover interest payments. Despite the above, PML is continuing to pay dividends. Such dividend and the income tax is also being funded through bank borrowings. As at 30 June 2012, total bank borrowing amounted to Rs. 740 million out of a total facility of Rs. 750 million. Still, the companys BOD has approved 10% cash dividend which would amount to Rs. 9 million. Consequently, debt equity ratio has increased from 52% in 2010 to 69% in 2012. Any increase in borrowing would further deteriorate the ratio.

Operating review Revenue has been rising steadily over the period and operating profit as a percentage of sales has been more or less steady. The slight decline in operating profit is mainly on account of increase in other operating costs. Increase in financial charges has had a significant effect on the net profit of the company which has decreased from 2.5% of sales in 2010 to 0.8% of sales in 2012, despite the fact that sales has increased by 35% in two years. Moreover, there has been a large increase in trade receivables as well as stocks. Although the number of days sales in trade debts has fallen steadily over the period, the trade debts at the end of June 2012 still represent nearly a years credit sales. This is excessive and seems to imply a poor or highly liberal credit control policy. The increase in stocks and trade debts have used up most of the cash generated through operating activities leading to the present pressure on bank borrowings.
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

Matters for discussion The bank should discuss the following issues with the PMLs management. The need to undertake an urgent review of credit terms being offered by PML to its customers in order to reduce the levels of trade receivables. The need to reduce stock levels which seems excessive (representing over seven months sales). The need to postpone dividend declaration till the companys cash position improves sufficiently. The need to review operating costs and introduce measures to control them as far as possible. While discussing the above, a comparison with the industry practices especially in respect of levels of trade debts and stock may be emphasised. Appendix
2012 2011 2010 ----------------Rs. in million----------------

Cash generated from operations Profit before interest Depreciation Increase in stock-in-trade Increase in trade debts Increase in trade creditors

120 33 (80) (58) (4) 11

67%
740 (740 + 372)

115 36 (100) (41) 7 17

59%
555 (555 + 378)

Gearing (Debt Equity Ratio) Bank loans (Equity + Bank loans) 100 52%
412 (412 + 381)

Profit margin % Profit before interest Sales 100 8.0%

120 1,500 100

8.7%
115 1,320 100

8.9%
99 1,110 100

Interest cover Profit before interest Interest 1.18 times

120 102

1.46 times
115 79

1.74 times
99 57

Net profit as % of sales Net profit Sales 100 0.8%

12 1,500 100

1.8%
24 1,320 100

2.5%
28 1,110 100

Stock turnover Cost of sales Stock in trade 1.61 times

996 620

1.60 times
864 540

1.64 times
723 440

Trade debtors turnover in days Trade debts Credit sales 365 359 days
443 450 365

370 days
385 380 365

392 days
344 320 365

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ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

Ans.5

Lion Engineering Limited Statement of financial position For the year ended 30 June 2012 2012 Rs. in million CURRENT LIABILITIES Staff retirement benefits
20 20.1

21

STAFF RETIREMENT BENEFITS Defined benefit scheme The company operates a funded pension scheme for all its permanent employees. Contributions are made to the scheme based on actuarial recommendations. The last actuarial valuations were carried out at 30 June 2012 by using the Projected Unit Credit method. Amount recognized in the statement of financial position Present value of defined benefit plan Less: Fair value of plant assets Unrecognized actuarial gains (W-2) Unrecognized past service costs (15 3 x 2) Liability in the statement of financial position 2012 Rs. in million 110 80 30 1 (10) 21 100 13 29 15 (2) (45) 110

20.1.1

20.1.2

Movement in the present value of the defined benefit obligation Obligation at the beginning of the year Interest cost (Rs. 100m x 13%) Current service cost Past service cost Actuarial gains (balancing) Benefits paid Obligation at the end of the year Movement in the fair value of plan assets Fair value at the beginning of the year Expected return on plan assets (Rs. 70 10%) Contribution to the fund Actuarial gains (balancing) Benefits paid Fair value at the end of the year Amount recognized in comprehensive income Current service costs Interest expense (Rs. 100 13%) Expected return on plan assets (Rs. 70 10%) Recognized actuarial loss (W-1) Past service costs recognized (15/3) Pension fund expense Principal actuarial assumptions used were as follows: Discount rate Expected return on plan assets

20.1.3

70 7 30 18 (45) 80 29 13 (7) 1 5 41

20.1.4

20.1.5

13% 10%
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ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

2012 Rs. in million

W-1:

Actuarial loss to be recognized

Balance at the beginning of the year Less: Corridor: greater of 10% of PV of obligations at the beginning of the year (100 10%) 10% of the plan assets at the beginning of the year (70 10%)

20

10 10

Actuarial loss to be recognized in the current year =

= Rs. 1 million

Total gain or loss to be recognized i. e. Rs. 10 million Average remaining working life i. e. 10 years

W-2:

Unrecognized actuarial loss Balance at the beginning of the year Actuarial gain on assets (Note 20.1.3) Actuarial gain on obligation (Note 20.1.2) Recognized due to corridor

(20) 18 2 1 1

Ans.6

Eagle Bank Limited Notes to the financial statements For the year ended 30 June 2012 14 BORROWINGS In Pakistan Outside Pakistan Note
2012 Rs. in million

18,049 11,712 29,761 18,049 11,712 29,761

14.1

Particulars of Borrowings In local currency In foreign currency Details of borrowings Secured

14.2

Borrowings from State Bank of Pakistan under export refinance scheme

Repurchase agreement borrowings Unsecured Interbank call money borrowings Overdrawn nostro accounts

14.3 14.4

14,182 11,523 25,705 3,600 456 4,056 29,761

14.5 14.6

14.3

Borrowings from State Bank of Pakistan (SBP) under Export Refinance Scheme are secured by the bank's cash and security collateral held by SBP. These carry mark-up ranging between 9.7% and 11%. These carry mark-up ranging between 6.3% and 12.5% per annum and are secured against government securities of carrying value of Rs. 24,802 million. These are repayable by April 2013.
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14.4

ADVANCED ACCOUNITNG & FINANCIAL REPORTING Suggested Answers Final Examination - Winter 2012

14.5 14.6

These carry mark-up rates ranging between 8.7% and 12.1% per annum. Since, the bank operates in different countries, these carry varied mark- up rates as given by the external banks of respective countries. 25% of the bonus is to be paid in cash, so a liability of Rs. 7.5 million (30 25%) must be accrued. The remaining amount of bonus is to be paid in share options. The services must be recognized when they are received. Therefore, 12 months of the 18 months service period up to the grant date must be recognized. Hence, Rs. 14.25 million [(30 75% 95%) 12 18] would be provided upto 30 June, 2012.

Ans.7

(a)

(b)

In the given situation, the purchase of plant involves a share-based payment in which the counterparty has a choice of settlement, either in shares or in cash. Such transactions are treated as cash-settled to the extent that the entity has incurred a liability i.e. Rs. 50 million. If the value of the liability based on share price, at the time of transaction, is less than the fair value of the plant i.e. less than Rs. 50 million, the transaction would give rise to a compound financial instrument, with a debt and an equity element. The fair value of the equity element would be the difference between fair value of the plant and the fair value of the debt element of the instrument. However, if the value of the liability based on share price at the time of transaction is more than the fair value of the plant i.e. more than Rs. 50 million, the difference shall be recognized as an expense.
(The End)

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