Certified Finance and Accounting Professional Stage Examinations

The Institute of 5 December 2016

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 On 1 July 2012 Alpha Limited (AL) and Beta Limited (BL) entered into an agreement to set
up two Separate Vehicles (SVs) to manufacture and distribute their products. Each company
has 50% share in both SVs. The following are the extracts from draft statements of financial
position and comprehensive income of AL and the SVs for the year ended 30 June 2016.

Statements of financial position

AL SV-1 SV-2 AL SV-1 SV-2
Rs. in million Rs. in million
Property, plant and equipment 2,650 750 365 Capital 2,000 400 200
Investment in SVs - at cost 443 - - Accumulated profit 1,193 55 305
Stock in hand 695 250 140 10% bank loan 500 320 -
Other assets 570 180 80 Current liabilities 665 405 80
4,358 1,180 585 4,358 1,180 585

Statement of comprehensive income

AL SV-1 SV-2
-------- Rs. in million --------
Sales 4,250 650 1,000
Less: Cost of sales (2,993) (480) (750)
Gross profit 1,257 170 250
Less: Expenses (657) (145) (200)
Net profit 600 25 50

Additional information:
(i) SV-1 is classified as joint operation whereas SV-2 is classified as joint venture.
(ii) On 1 July 2015, AL acquired 60% of BL’s ownership in SV-1 at Rs. 140 million. AL
also incurred acquisition related costs amounting to Rs. 3 million which were
capitalized.
(iii) The details of transactions made during the year 2016 between AL and the SVs and
their subsequent status are given below:

Amount receivable/
Included in buyer’s
Sales (payable) in the Profit % on
closing inventories
books of AL sales
--------------- Rs. in million ---------------
AL to SV-1 350 220 320 10
AL to SV-2 250 110 70 20
SV-1 to AL 190 150 (150) 30
SV-2 to AL 60 38 (20) 15

(iv) AL follows the equity method for recording its investment in joint venture whereas
investment in joint operations is recorded in accordance with IFRS-11.

Required:
In accordance with the requirements of International Financial Reporting Standards,
prepare AL’s separate statements of financial position and comprehensive income for the
year ended 30 June 2016. (21)
 Advanced Accounting and Financial Reporting Page 2 of 5

Q.2 On 1 July 2013, GYO Movers Limited (GML) acquired a business engaged in providing
transportation service and recognized goodwill of Rs. 10 million. The business operates
three different bus routes namely Green, Yellow and Orange. The business had been
running exceptionally well. However, during the year ended 30 June 2016 entrance of new
competitors has affected its performance.

GML considers each route as a separate Cash-Generating Unit (CGU). As on 30 June 2016,
following information is available in respect of each CGU:

Green Yellow Orange

Number of buses* 80 50 40
Expected remaining useful life (in years) 20 15 10
------------ Rs. in million ------------
Carrying amount of buses 225 150 95
Other assets - carrying value 400 350 100
- fair value Not available
Fair values less cost to sell of the CGU 500 450 250
Expected net cash flows per annum 70 60 50
*Assume that all buses are of same make and model.

Carrying amount of corporate assets used interchangeably by all segments are as follows:

Carrying amount Fair value

Particulars
------------ Rs. in millions ------------
Head office building 100 Not available
Computer network 55 46
Equipment 45 60

For impairment testing of each CGU, following quotations were obtained from three
different showrooms located in different cities.

Showroom-1 Showroom-2 Showroom-3

Particulars
---------------- Rs. in million ----------------
Average sale price for each bus 2.52 2.62 2.50
Estimated transaction cost for disposal of each bus 0.05 0.20 0.10

Pre-tax discount rate of GML is 12%.

Required:
Prepare relevant extracts from the statement of financial position as at 30 June 2016 in
accordance with International Financial Reporting Standards. (18)

Q.3 On 1 July 2014 Track Limited (TL) sold its property to Strong Bank Limited (SBL) for
Rs. 600 million. The net carrying amount and market value of the property on 1 July 2014
were Rs. 240 million and Rs. 800 million respectively. The remaining useful economic life of
the property was 15 years. Under the terms of agreement, TL continues to occupy the
property and is also responsible for its maintenance. As consideration of occupation rights,
TL pays rent of Rs. 90 million per annum, payable in arrears.
TL has the option to repurchase the property on 30 June 2016 at Rs. 550 million. TL
charges depreciation on straight-line basis.

TL’s cost of equity is 10% whereas incremental borrowing rate is 11.052% per annum.
Applicable income tax rate is 30%.

Required:
(a) Prepare accounting entries to record the above transaction for the year ended
30 June 2015 and give brief explanation of the accounting treatment worked out by
you with reference to the relevant International Financial Reporting Standards. (11)
(b) Prepare accounting entries to record the transactions for the year ended 30 June 2016
if TL does not exercise the option to repurchase the property on 30 June 2016. (06)
 Advanced Accounting and Financial Reporting Page 3 of 5

Q.4 The financial statements of XYZ Limited for the year ended 30 June 2016 are in the final
stage of preparation and the following matters are under consideration:
(a) On 1 July 2013, XYZ offered 5000 share options each to its 10 marketing managers
and 10 back office managers. The offer is conditional upon completion of three years’
service from the date the offer was given. It was estimated at the time of offer that two
managers from each department would leave the company before the completion of
3 years. The fair market value of the company’s shares on 1 July 2013 was
Rs. 50 per share.

Other conditions and information are as follows:

(i) Conditions specific to marketing managers:

Marketing manager can exercise the offer if the profit of the company
increases by 10% per annum on average over the next three years.

The offer can be exercised at Rs. 18 per share at the completion of vesting
period.
Profit for the first two years increased by 12% and 10% respectively. However,
profit for the third year has increased by 3% only.
(ii) Conditions specific to back office managers:

Back office managers can exercise the offer if share price of the company
increases by 10% per annum on average over the next three years.

The offer can be exercised at Rs. 23 per share at the completion of vesting
period.

On 1 July 2013, fair value of these share options was Rs. 30 per option taking
into account the estimated probability that the necessary share price growth
would be achieved.
On 1 January 2016, the share price declined. Considering the decline, XYZ
modified the share option scheme for back office managers by reducing the
exercise price to Rs. 10 per share. The fair value of the option immediately before
and after the reduction in exercise price was Rs. 5 and Rs. 14 respectively.
(iii) Upto 30 June 2015, there was no change in estimate regarding number of
managers leaving the company. However, during the year ended 30 June 2016,
three managers left the company i.e. two from marketing and one from back
office. (10)

(b) On 1 July 2013, XYZ purchased 1 million five year bonds issued by Ali Manufactures
Limited (AML) at a premium of Rs. 5 per bond with the intention to hold them till
maturity i.e. 30 June 2018. The bonds will be redeemed at their face value i.e.
Rs. 100 per bond. The transaction costs associated with the acquisition of the bonds
were Rs. 1.5 million. The coupon interest rate is 6% per annum while the effective
interest yield at the time of purchase was 4.5186%.
Due to certain financial and liquidity issues, AML restructured the payment plan with
effect from 30 June 2016, after due consultation with bondholders. Under the revised
plan the maturity date was extended by one year. Further, the coupon rate was
increased to 6.25% for 2017 and 2018 and 6.5% for 2019.
The management of XYZ is of the view that due to restructuring the credit risk on the
loan has increased significantly. As a result, it estimates lifetime expected credit losses
of Rs. 5 million on the investment. (08)

Required:
In accordance with the requirement of International Financial Reporting Standards, describe
the accounting treatment in respect of the above transactions in the financial statements of
XYZ Limited for the year ended 30 June 2016.
 Advanced Accounting and Financial Reporting Page 4 of 5

Q.5 Following are the extracts from consolidated financial statements of Musa Limited (ML) for
the year ended 30 June 2016:

Consolidated statement of financial position as on 30 June 2016

2016 2015
------ Rs. in million ------
Assets
Goodwill 1,750 1,922
Investment in associates 4,100 3,528
Inventory 5,488 5,398
Trade and other receivables 4,659 4,107
Dividend receivable from associates 590 700
Other current assets 1,500 1,300
Cash and bank 4,500 3,710

Equity and liabilities

Non-controlling interest (NCI) 1,499 1,721
Trade and other payables 18,050 17,034
Dividend payable - NCI 454 252

Consolidated statement of comprehensive income for the year ended 30 June 2016
Rs. in million
Loss on disposal of subsidiary (7)
Income from associates 1,150
Profit attributable to:
– Parent shareholders 8,233
– Non-controlling interest 1,018

Following information is also available:

(i) During the year, ML acquired 60% shareholding in Esquire Limited (EL), for
Rs. 200 million. As consideration, ML issued 1 million shares at a market price of
Rs. 150 each. The balance was paid in cash. The value of EL’s net assets on the date of
acquisition was Rs. 320 million as shown below:
Rs. in million
Property, plant and equipment 222
Inventory 100
Receivables 50
Bank overdraft (16)
Trade and other payables (36)
320

(ii) During the year, ML sold entire 90% shareholding in Yonus Limited (YL) and
realized cash proceeds of Rs. 800 million. This subsidiary had been acquired several
years ago for Rs. 560 million. At acquisition, the fair value of YL's net assets was
Rs. 550 million. On the date of disposal, the carrying value of YL’s net assets was
Rs. 860 million as follows:
Rs. in million
Property, plant and equipment 725
Inventory 165
Cash and bank 50
Trade and other payables (80)
860

Up to the date of disposal, 50% of YL’s goodwill had been impaired.

(iii) ML measures its non-controlling interest at the proportionate share of its subsidiaries’
net identifiable assets.
 Advanced Accounting and Financial Reporting Page 5 of 5

Required:
Determine the amounts to be shown in each of the following heads of accounts in the
consolidated cash flow statement for the year ended 30 June 2016.
(a) Impairment of goodwill to be reported as non-cash item (03)
(b) Dividend paid to non-controlling interest (04)
(c) Dividend received from associates (2.5)
(d) Net cash flow due to acquisition of subsidiary (1.5)
(e) Net cash flows arising on disposal of subsidiary (1.5)
(f) Changes in working capital (3.5)

Q.6 Following information has been extracted from the records of Pak Bank Limited (PBL) for
the year ended 30 June 2016:

Rs. in
Description Other relevant information
million
Investments in:
Market Treasury Bills (T-Bills)
- Held for trading 14,893 10% have been given as collateral
- Available for sale 244,013
- Held to maturity 14,812
Pakistan Investment Bonds (PIBs)
- Available for sale 62,422 20% have been given as collateral
- Held to maturity 55,030
Ordinary shares of listed companies
- Held for trading 18,191
- Available for sale 6,685
Ordinary shares of unlisted companies
- Pak Securities (Pvt.) Limited 2,287 100% owned by PBL
- Pak Fund Limited 3,430 51% owned by PBL
- Pak Trade Services (Pvt.) Limited 4,072 25% owned by PBL
- Other unlisted companies 271
Certificates of Investment – Held to maturity 3,024
Provision for diminution in value of investments (307)
Surplus/(deficit) on revaluation of investments:
- Held for trading (9,108) 15% belong to T-Bills given as collateral
- Available for sale 7,916 20% belong to PIBs given as collateral

Required:
Prepare a note on ‘Investment by type’ for inclusion in the financial statements of Pak Bank
Limited for the year ended 30 June 2016, in accordance with the laws applicable in
Pakistan. (10)

(THE END)