Final Examinations

Module E
The Institute of 9 June 2016
Chartered Accountants 3 hours 100 marks
of Pakistan Additional reading time 15 minutes

Advanced Accounting and Financial Reporting

Q.1 The draft statements of financial position of Taimur Holding Limited (THL) and its
subsidiary Zafar Foods Limited (ZFL) as at 31 December 2015 are as follows:
THL ZFL
Rs. in million
Assets
Property, plant and equipment 481 735
Investments (including investment in ZFL) 1,420 10
Long term receivable 22 -
Current assets 2,142 1,636
4,065 2,381
Equity and liabilities
Share capital (Rs. 10 each) 1,120 600
Retained earnings 1,066 442
Other reserves 102 137
Non-current liabilities 263 248
Current liabilities 1,514 954
4,065 2,381
The following further information is available:
(i) On 1 January 2015, THL acquired 60% shares of ZFL at following consideration:

Payment of cash of Rs. 200 million. Rs. 100 million were paid at the date of
acquisition and the balance amount is payable on 31 December 2016.

Issuance of 28.5 million of THLs shares. On the date of purchase, the market
price of shares of THL and ZFL were Rs. 11.50 and Rs. 16.50 respectively.

Transfer of one of THLs freehold lands having carrying value and fair value of
Rs. 46 million and Rs. 54 million respectively on the date of transfer.
At the date of acquisition, retained earnings and other reserves were Rs. 299 million
and Rs. 26 million respectively whereas the fair values of the net assets were the same
as their carrying amount except a piece of freehold land whose fair value was assessed
at Rs. 16 million above its carrying amount. Further, a contingent liability of
Rs. 18 million was disclosed in the financial statements of ZFL on acquisition date.
THL's legal adviser had at that time estimated that ZFL would be liable to pay Rs. 6
million to settle the claim.
An error had been made in recording transaction related to transfer of land due to
which the land is still appearing in THLs books whereas profit and loss account had
been credited by Rs. 54 million.
(ii) On 31 December 2015, a further 20% shares were acquired in ZFL for a cash
consideration of Rs. 260 million which was paid immediately.
(iii) The fair value of investment appearing in ZFLs financial statements as at 31
December 2015 was Rs. 15 million. These investments are recorded at their fair value.
(iv) Long term receivable represents a ten-year 9% loan given to CEO as per the terms of
his employment. The loan receivable is recorded at amortized cost. The board of
directors in their meeting held in December 2015 has approved a restructuring of the
loan. Accordingly, the CEO is now required to pay Rs. 8 million per annum for three
years. The first such payment is to be made on 31 December 2016. Current market
interest rate and original effective interest rate were 10% and 8.7% respectively.
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(v) THL intends to dispose of one of its business segments. All criteria for classification of
business segment as held for sale were met at year end on which date the carrying
amount of the assets and liabilities of the business segment were as follows:
Rs. in million
Property, plant and equipment 60
Current assets 25
Current liabilities 10
It is estimated that fair value less costs to sell of the business segment is Rs. 55 million.
No adjustments have been made in the financial statements in this regard.
(vi) THL values non-controlling interest at its fair value.
(vii) Before acquisition of further shares as mentioned in para (ii), an impairment test was
carried out on 31 December 2015 for the impairment of goodwill. The test indicated
that recoverable amount of ZFL was Rs. 1,210 million.
(viii) THL's cost of capital is 10%.

Required:
Prepare a consolidated statement of financial position for the THL Group for the year ended
31 December 2015 (28)

Q.2 Mehran Industries Limited (MIL) operates a funded gratuity scheme for all employees. The
following relevant information has been extracted from the actuarial reports/records for the
year ended 31 December 2015:
2015 2014
Discount rate 9% 8%
Rs. in million
Present value of defined benefit obligations 482 438
Fair value of plan assets 491 449
Current service cost 19 15
Contributions paid during the year 37 21
Benefits paid during the year 23 16
Additional information:
(i) Present value of defined benefit obligations and fair value of plan assets as on
1 January 2014 were Rs. 380 million and Rs. 351 million respectively.
(ii) On 28 December 2014, MIL sold one of its divisions and transferred the relevant
portion of defined benefit plan to the buyer. The present value of defined benefit
obligation and plan assets transferred was Rs. 21 million and Rs. 19 million
respectively.
(iii) On 1 January 2015, MIL changed the terms of the scheme for employees who had
completed 4 years of service. As a result, present value of defined benefit obligation
increased by Rs. 30 million. 40% of increased obligations related to employees who
have already completed 4 years of service whereas remaining increase pertained to
employees who have provided an average of 2 years of service.
(iv) Based on the advice received from the actuary, the contribution for the year 2016 will
be Rs. 23 million.
(v) The plan assets comprise of 65% debt securities (2014: 66%), 15% mutual fund units
(2014: 10%), 10% equity (2014: 14%) and the balance in bank deposits.
(vi) The average remaining working lives of employees are 10 years.

Required:
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 2015 in accordance with International Financial Reporting Standards.
(Show comparative figures) (11)
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Q.3 United Front (Private) Limited (UFPL) is a company engaged in manufacturing and
marketing of automotive components for auto assemblers in Pakistan. On 1 January 2015
the company entered into two sale and leaseback agreements with Sun Leasing Limited.
The details of machines sold and leased back under the two agreements are as under:
Machine-A Machine-B
Date of purchase 1-Jan-10 1-Jan-13
Cost (Rs. in million) 150 48
Useful life (in years) 10 10
Sale price to the lessor (Rs. in million) 78 41
Fair market value (Rs. in million) 80 44
The terms of lease agreements are as follows:

Machine-A Machine-B
Lease term 5 years 3 years
Annual rentals (Rs. in million) 18.283 4
Installment due in arrears in advance
Down payment 10% Nil

The market interest rate is 9.5% per annum while the market rates of rentals for machines
similar to Machine-A and Machine-B are Rs. 19 million and Rs. 7 million per annum
respectively.

Required:
Prepare the relevant extracts from the statements of financial position and comprehensive
income and the related notes to the UFPLs financial statements for the year ended
31 December 2015, in accordance with the International Financial Reporting Standards. (18)

Q.4 Big Asset Allocation Fund (the Fund) is an open ended mutual fund and is listed on
Pakistan Stock Exchange. The net asset value of the Fund as on 1 January 2015 was
Rs. 1,550 million comprising of 41 million units. The par value of each unit is Rs. 10.

Following information has been extracted from the records of the Fund for the year ended
31 December 2015.
Rs. in million
33 million units issued during the year 1,375
29 million units redeemed during the year 1,160

Net element of income and capital gain included in prices

of units issued less those in units redeemed

Transferred to income statement 46

Transferred to distribution statement 5

Capital gains on sale of investments 48

Investments classified as Available for sale

Fair value at year-end 200

Carrying value at year-end 150

Net unrealized appreciation in fair value of
investments at the beginning of the year 60

Investments classified as Held for trading

Fair value at year-end 96

Carrying value at year-end 92

Other net income for the year 17

Final distribution for the year ended 31 December 2015 of Rs. 1 per unit (2014: Rs. 0.5 per
unit announced on 8 January 2015) was announced on 6 January 2016.
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Required:
Prepare a statement of movement in unit holders' fund for the year ended
31 December 2015. (10)

Q.5 On 1 January 2014, Zalay Limited (ZL) acquired a plant for Rs 3,000 million. ZL has a legal
obligation to dismantle the plant at the end of its four years useful life.
On the date of acquisition it was estimated that the cost of dismantling would amount to
Rs. 400 million.
ZL uses the revaluation model for subsequent measurement of its property, plant and
equipment and accounts for revaluation on the net replacement method. Depreciation is
provided on straight line basis.
The details of revaluation carried out by the Professional Valuer and the revision in the
estimated cost of dismantling as at 31 December 2014 and 2015 are as follows:
2015 2014
Rs. in million
Revalued amount of plant and machinery * 1,200 2,250
Revised estimate of decommissioning cost 300 550
*excluding decommissioning cost
Tax and discount rates applicable to ZL are 30% and 10% respectively. The tax authorities
allow initial and normal depreciation at the rate of 50% and 10% respectively under the
reducing balance method.

Required:
Prepare journal entries to record the above transactions for the year ended 31 December
2015, in accordance with International Financial Reporting Standards. (20)

Q.6 Following are the extracts from the latest annual reports of Farhad Limited (FL) and Sajjad
Limited (SL) which are engaged in similar type of manufacturing business:
FL SL
Gross profit margin 28% 36%
Net profit margin 13% 10%
Current ratio 2.4:1 2.9:1
Quick ratio 1.4:1 2.5:1
Trade debtors collection period 58 days 50 days
Trade creditors payment period 35 days 48 days
Stock turnover 50 days 30 days
Long term debt as a percentage of equity 60% 100%
Interest cover 4 times 2.5 times
Return on capital employed 6% 13%
Both companies record their fixed assets at cost less accumulated depreciation and
impairment losses. However, FL has revalued its freehold land during the year and
incorporated the result thereof in its latest financial statements.

Required:
(a) Comment on the relative operating and financial performance of Farhad Limited and
Sajjad Limited from the above information. (08)
(b) Identify with reasons what further information you would find useful for the purpose
of your comments in (a) above. (05)

(THE END)