Final Examinations

Module E
4 June 2015
3 hours 100 marks
Additional reading time 15 minutes

The Institute of
Chartered Accountants
of Pakistan

Advanced Accounting and Financial Reporting

Q.1

Consolidated financial statements of Malik Group of Companies (MGC) for the year ended
31 December 2014 are presented below:
Consolidated statement of financial position as on 31 December 2014
Equity
Ordinary shares (Rs.10 each)
Retained earnings
Other reserves *
Non-controlling interest
Non-current liabilities
Loans from banks
Deferred tax
Current liabilities
Trade and other payables
Income tax
Accrued interest

2014
2013
Rs. in million
15,000
15,000
17,550
10,850
7,500
5,250
40,050
31,100
3,100
3,200
5,000
1,500

3,000
1,050

8,000
3,875
125
61,650

7,250
3,525
75
49,200

Non-current assets
Goodwill
Property, plant and equipment
Investment in associate

Current assets
Inventories
Trade and other receivables
Cash and bank

2014
2013
Rs. in million
19,300
18,500
25,450
16,250
6,200
5,400
50,950
40,150

4,700
3,900
2,100

4,350
3,300
1,400

61,650

49,200

* include revaluation reserve

Consolidated statement of comprehensive income for the year ended 31 December 2014
Revenue
Operating expenses
Profit from operations
Gain on disposal of subsidiary
Finance cost
Income from associates
Profit before taxation
Income tax expense
Profit for the year
Other comprehensive income for the year
Re-measurement of post-employment benefits
Other comprehensive income from associates
Total comprehensive income
Profit attributable to:
Parent shareholders
Non-controlling interest

Total comprehensive income attributable to:

Parent shareholders
Non-controlling interest

Rs. in million
20,900
(11,550)
9,350
1,000
(350)
1,150
11,150
(2,250)
8,900
2,000
500
11,400

7,950
950
8,900

10,200
1,200
11,400

Advanced Accounting and Financial Reporting

Page 2 of 5

Additional information:
(i)

During the year, MGC acquired 80% holding in Gomel Limited (GL) against a cash
consideration of Rs. 15,000 million. On the date of acquisition, the non-controlling
interests holding was measured at its fair value of Rs. 3,400 million. The fair value of
net assets of GL at acquisition comprised of the following:
Property, plant and equipment
Inventory
Trade and other receivables
Cash and bank
Loans from banks
Trade and other payables
Income tax

(ii)

Rs. in million
12,800
1,500
2,400
800
(400)
(1,800)
(400)
14,900

During the year, MGC also disposed of its 60% shareholdings in Stone Limited (SL)
and realised cash proceeds of Rs. 8,500 million. This subsidiary had been acquired
several years ago for Rs. 6,000 million. At acquisition, the fair value of SLs net assets
and non-controlling interest was Rs. 7,300 million and Rs. 3,200 million respectively.
On the date of disposal, the net assets of SL had a carrying value in the consolidated
statement of financial position as follows:
Property, plant and equipment
Inventory
Trade and other receivables
Cash and bank
Loans from banks
Trade and other payables

Rs. in million
7,250
1,650
1,500
500
(300)
(800)
9,800

(iii)

Property, plant and equipment:

Depreciation charge for the year is Rs. 3,850 million.
A plant having carrying value of Rs. 2,500 million was sold for
Rs. 2,750 million. Gain on disposal has been credited to operating expenses.
On the basis of a professional valuation report, increase of Rs. 2,000 million has
been recognized in the value of property, plant and equipment.

(iv)

During the year, Rs. 1,250 million was paid as final dividend to ordinary
shareholders.

Required:
Prepare consolidated statement of cash flow of MGC for the year ended 31 December 2014,
using the indirect method.
Q.2

(22)

The financial statements of Integrity Steel Limited (ISL) for the year ended 31 March 2015
are in the final stage of their preparation and the following matters are under consideration:
(a)

On 1 April 2014, ISL entered into a contract with Invest Bank. Under the contract, ISL
deposited an amount of USD 5 million, at an interest of 2.5% per annum with a
maturity date of 31 March 2017. Interest will be received on maturity along with the
principal. Further, an additional 2% interest per annum would be payable by Invest
Bank in the event the value of USD increases by 5% or more. The contract is in line
with ISLs policy of making low risk investments in foreign as well as local currencies.
Required:
Explain how the above investment should be measured in ISLs books of account at
31 March 2015.

(05)

Advanced Accounting and Financial Reporting

(b)

Page 3 of 5

On 1 October 2014, ISL shifted its corporate head office to a three story building. The
fair value of building on the shifting date and as on 31 March 2014 was Rs. 325 million
and Rs. 310 million respectively.
This building was acquired five years ago at a cost of Rs. 240 million. Immediately
thereafter it was leased out to a subsidiary. Its remaining useful life is 10 years.
Depreciation on ISLs buildings is charged on straight line basis over their useful lives.
Required:
Prepare journal entries to record the above transaction.

(c)

On 1 April 2014, ISL disposed of its power generation system to Komal Limited (KL)
for a consideration of Rs. 135 million. At the same time, ISL entered into a long-term
agreement with KL whereby the assets were leased back under a 10-year operating
lease. At the time of sale, the fair value and the carrying value of the assets were
Rs. 160 million. The lease rentals are Rs. 22 million per annum. The market value of
lease rentals of such type of assets is Rs. 24 million
Required:
Prepare journal entries to record the above transactions for the year ended
31 March 2015.

Q.3

(a)

(04)

(04)

Tanzeem Limited (TL) operates a defined benefit pension plan for its employees. The
following details relate to the plan:
Discount rate for plan obligation
Expected return on plan assets
Present value of obligation at year-end
Fair value of plan assets at year-end
Current service cost
Benefits paid during the year
Contribution made during the year

2014
2013
9%
8%
10%
9%
----- Rs. in million ----2,040
2,300
1,784
2,150
125
143
99
110
105
118

Additional information:

Present value of pension obligation and fair value of plan assets as on

1 January 2013 were Rs. 2,050 million and Rs. 1,995 million respectively.
During the year 2013, TL amended the scheme whereby the benefits available
under the plan had been increased. It resulted in an increase in the present value
of the defined benefit pension obligation by Rs. 5 million and Rs. 8 million on
account of vested and non-vested benefits respectively. The period to vest is
4 years.
On 31 December 2014, TL sold a business segment to Sachai Limited (SL).
Accordingly, TL transferred the relevant component of its pension fund to SL.
The present value of the defined benefit pension obligation transferred was
Rs. 280 million and the fair value of plan assets transferred was Rs. 240 million.
TL also made a cash payment of Rs. 20 million to SL in respect of the plan.
Average remaining working lives of employees is 10 years.

Required:
(i) Prepare relevant extracts to be reflected in the statement of financial position,
statement of comprehensive income and notes to the financial statements for the
year ended 31 December 2014 in accordance with International Financial
Reporting Standards. (Show comparative figures)
(ii) Prepare entries to record the pension obligation:
on sale of business segment to SL
at the year-end.

(11)

(03)

Advanced Accounting and Financial Reporting

(b)

Page 4 of 5

On 1 January 2015, Mr. Talented was appointed as the President of Meharban Bank
Limited (MBL). According to the terms of the employment contract, MBL granted
Mr. Talented the right to receive either 100,000 shares of the bank or a cash payment
equivalent to the value of 80,000 shares. This grant is conditional to completion of
3 years of service with the bank and can be exercised within 1 year of vesting date. If he
chooses the share alternative he would have to hold the shares for a period of two years
after the vesting date.
The par value of MBLs shares is Rs. 10 each. At the grant date, MBLs share price was
Rs. 145 per share. The share prices on 31 December 2015, 2016, 2017 and 2018 are
estimated at Rs. 150, Rs. 156, Rs. 165 and Rs. 175 respectively. Dividends are not
expected to be announced during the next three years.
After taking into account the effects of the post-vesting transfer restrictions, MBL
estimates that the fair value of the share alternative on the date of appointment of
Mr. Talented was Rs. 135 per share.
Required:
Suggest journal entries to record the above transactions in the books of MBL for the
years ending 31 December 2015, 2016, 2017 and 2018 if Mr. Talented chooses the
share alternative in July 2018.

Q.4

(a)

(11)

Millat General Insurance Limited is a listed company. The following information for
the year ended 31 December 2014 has been extracted from the records:

Premium written
Unearned premium reserve - opening
Unearned premium reserve - closing
Reinsurance ceded
Prepaid reinsurance premium ceded - opening
Prepaid reinsurance premium ceded - closing
Net claims
Commission expenses

Fire &
Motor
Misc.
property
insurance
insurance
damage
------------ Rs. in 000 -----------286,000
154,000
89,000
42,900
20,020
14,240
51,480
18,480
11,570
228,800
15,400
53,400
34,320
2,002
8,544
41,184
1,848
6,942
38,803
95,000
28,029
27,742
15,554
9,167

Additional information:
(i)

The reinsurers allowed commission on fire & property damage and miscellaneous
insurance at the rate of 15% of the ceded amount of reinsurance.
(ii) Other direct management expenses amounting to Rs. 45 million have been
charged to revenue account of different classes of insurance in proportion to their
net premium earned.
(iii) Other operating expenses and other income for the year are Rs. 28 million and
Rs. 17 million respectively.

(b)

Required:
Prepare an extract of profit and loss account for the year ended 31 December 2014, in
accordance with the requirements of Insurance Ordinance, 2000.

(08)

Briefly explain the 1/24th method of determining the unearned premium reserve.

(02)

Advanced Accounting and Financial Reporting

Q.5

Page 5 of 5

Gohar Limited (GL), a listed company, is engaged in chemicals, soda ash, polyester, paints
and pharma businesses. Results of each business segment for the year ended 31 March 2015
are as follows:
Business
segments
Chemicals
Soda Ash
Polyester
Paints
Pharma

Gross
Operating
Assets
Liabilities
profit
expenses
------------------------- Rs. in million ------------------------1,790
1,101
63
637
442
216
117
57
444
355
227
48
23
115
94
247
26
16
127
108
252
31
12
132
98

Sales

Inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million and
Rs. 10 million respectively at a contribution margin of 30%.
Operating expenses include GLs head office expenses amounting to Rs. 75 million which
have not been allocated to any segment. Furthermore, assets and liabilities amounting to
Rs. 150 million and Rs. 27 million have not been reported in the assets and liabilities of any
segment.
Required:
In accordance with the requirements of International Financial Reporting Standards:
(a) determine the reportable segments of Gohar Limited; and
(b) show how these reportable segments and the necessary reconciliation would be
disclosed in GLs financial statements for the year ended 31 March 2015.
Q.6

(07)
(08)

The following information has been extracted from draft statement of financial position of
Ittehad Industries Limited (IIL), as on 31 December 2014:

Share capital (Rs.10 each)

Share premium
Accumulated profit
11.5% Term finance certificates (TFCs)

2014
2013
---- Rs. in million ---1,800
1,200
380
230
3,756
3,556
250
-

The following information is also available:

(i)
(ii)
(iii)
(iv)

(v)
(vi)

The profit after tax earned by IIL during the year ended 31 December 2014 amounted
to Rs. 225 million.
On 1 April 2014, IIL issued 25% right shares to its existing shareholders at Rs. 15 per
share. Market value of the shares prior to the issue of right shares was Rs. 25 per share.
20% bonus shares for the year ended 31 December 2013 were issued on 1 May 2014.
The right shares issued on 1 April 2014 were also entitled for the bonus.
On 31 December 2014, 5 million shares were not yet vested under the employee share
option scheme. The exercise price of the option was Rs. 12 per share and average
market price per share during 2014 was Rs. 15 per share. The amount to be recognized
in relation to employee share option in profit and loss account over future accounting
periods up to vesting date is Rs. 10 million.
On 1 July 2014, IIL issued TFCs which are convertible into 20 million ordinary shares
on 31 December 2018.
IIL is subject to income tax at the rate of 35%.

Required:
Prepare relevant extracts to be reflected in the financial statements of Ittehad Industries
Limited for the year ended 31 December 2014 showing all necessary disclosures relating to
earnings per share. (Comparative figures are not required)
(THE END)

(15)