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Financial accounting
and reporting II
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C
Contents
Page
I
Index to questions and answers
Question Answer
page page
2.1 LARRY 2 86
2.3 BARRY 4 89
Question Answer
page page
Question Answer
page page
Question Answer
page page
SECTION
A
Questions
2.1 LARRY
The trial balance of Larry at 31 December 2015 is as follows.
Rupees in million
Dr Cr
Administration charges 342
Bank account 89
Cash 2
Payables’ ledger 86
Accumulated amortisation on patents at 31 December 2015 5
Accumulated depreciation at 31 December 2015 918
Receivables’ ledger 189
Distribution expenses 175
Property, plant and equipment at cost 2,830
Interest received 20
Issued share capital 400
Loan 18
Patents at cost 26
Accumulated profits 1,562
Purchases 2,542
Sales 3,304
Inventories at 31 December 2014 118
6,313 6,313
Required
Prepare an statement of profit or loss (analysing expenses by function) for the year ended 31
December 2015 and a statement of financial position as at that date.
2,633 2,633
Required
Prepare an statement of profit or loss (analysing expenses by nature for the year ended 31
December 2015 and a statement of financial position as at that date.
2.3 BARRY
Barry has prepared the following draft financial statements for your review
Statement of profit or loss for year to 31st August 2015
Rs. in ‘000
Sales revenue 30,000
Raw materials consumed (9,500)
Manufacturing overheads (5,000)
Increase in inventories of work in progress and finished goods 1,400
Staff costs (4,700)
Distribution costs (900)
Depreciation (4,250)
Interest expense (350)
6,700
Additional information
1 Income tax of Rs. 2.1 million has yet to be provided for on profits for the current year. An
unpaid under-provision for the previous year’s liability of Rs. 400,000 has been identified on
5th September 2015 and has not been reflected in the draft accounts.
2 There have been no additions to, or disposals of, non-current assets in the year but the assets
under construction have been completed in the year at an additional cost of Rs. 50,000.
These related to plant and machinery.
The cost and accumulated depreciation of non-current assets as at 1st September 2014 were
as follows:
Cost Depreciation
Rs. in ‘000 Rs. in ‘000
Freehold land and buildings 19,000 3,000
(land element Rs. 10 million)
Plant and machinery 20,100 4,000
Fixtures and fittings 10,000 3,700
Assets under construction 400 -
3 There was a revaluation of land and buildings during the year, creating the revaluation surplus
of Rs. 5 million (land element Rs. 1 million). The effect on depreciation has been to increase
the buildings charge by Rs. 300,000. Barry adopts a policy of transferring the revaluation
surplus included in equity to retained earnings as it is realised.
4 Staff costs comprise 70% factory staff, 20% general office staff and 10% goods delivery staff
5 An analysis of depreciation charge shows the following:
Rs. in ‘000
Buildings (50% production, 50% administration) 1,000
Plant and machinery 2,550
Fixtures and fittings (30% production, 70% administration) 700
Required
Prepare the following information in a form suitable for publication for Barry’s financial statements for
the year ended 31st August 2015.
Statement of profit or loss
Statement of financial position
Reconciliation of opening and closing property, plant and equipment
Rs. in ‘000
Dr Cr
Administrative expenses 210
Share capital 600
Receivables 470
Bank overdraft 80
Income tax (overprovision in 2014) 25
Provision 180
Distribution costs 420
Non-current investments 560
Investment income 75
Plant and machinery
At cost 750
Accumulated depreciation (at 31 March 2015) 220
Retained earnings (at 1 April 2014) 180
Purchases 960
Inventory (at 1 April 2014) 140
Trade payables 260
Sales revenue 2,010
Interim dividend paid 120
3,630 3,630
Additional information
(1) Inventory at 31 March 2015 was valued at Rs. 150,000.
(2) The income tax charge based on the profits on ordinary activities is estimated to be Rs.
74,000.
(3) The provision is to be increased by Rs. 16,000.
(4) There were no purchases or disposals of fixed assets during the year.
Required
Prepare the company’s statement of profit or loss for the year to 31 March 2015 and a statement of
financial position as at that date in accordance with IAS 1.
Rs. in ‘000
Dr Cr
Cost of sales 134,000
Operating expenses 35,000
Loan interest paid (see note (1)) 1,500
Rental of vehicles (see note (2)) 8,600
Revenue 338,300
Investment income 2,000
Leasehold property at cost (see note (4)) 250,000
Plant and equipment at cost 197,000
Accumulated depreciation at 1 October 2014:
- leasehold property 40,000
- plant and equipment 47,000
Investments 92,400
Share capital 280,000
Share premium 20,000
Retained earnings at 1 October 2014 19,300
Loan notes (see note (1)) 50,000
Deferred tax balance at 1 October 2014 (see note (5)) 20,000
Inventory at 30 September 2015 23,700
Trade receivables 76,400
Trade payables 14,100
Bank 12,100
830,700 830,700
(3) Other plant and equipment is depreciated at 20% per year by the reducing balance method.
All depreciation of property, plant and equipment should be charged to cost of sales.
(4) The leasehold property has a 25-year life and is amortised at a straight-line rate. On 30
September 2015 the leasehold property was re-valued to Rs. 220 million and the directors
wish to incorporate this re-valuation in the financial statements.
(5) The provision for income tax for the year ended 30 September 2015 has been estimated at
Rs. 18 million. At 30 September 2015 there are taxable temporary differences of Rs. 92
million. The rate of income tax on profits is 25%.
Required
(a) Prepare an statement of profit or loss for Clifton Pharma Limited for the year to 30 September
2015
(b) Prepare a statement of financial position (balance sheet) for Clifton Pharma Limited as at 30
September 2015
Rs. in ‘000
Dr Cr
Leasehold property – at valuation 1 October 2014 (note (i)) 50,000
Plant and equipment – at cost (note (i)) 76,600
Plant and equipment – accumulated depreciation at 1 October 2014 24,600
Capitalised development expenditure – at 1 October 2014 (note (ii)) 20,000
Development expenditure – accumulated amortisation at 1 October 2014 6,000
Closing inventory at 30 September 2015 20,000
Trade receivables 43,100
Bank 1,300
Trade payables and provisions (note (iii)) 23,800
Revenue (note (i)) 300,000
Cost of sales 204,000
Distribution costs 14,500
Administrative expenses (note (iii)) 22,200
Interest on bank borrowings 1,000
Equity dividend paid 6,000
Research and development costs (note (ii)) 8,600
Share capital 70,000
Retained earnings at 1 October 2014 24,500
Deferred tax (note (v)) 5,800
Revaluation surplus (Leasehold property) 10,000
466,000 466,000
Required
(a) Prepare the statement of profit or loss for the year ended 30 September 2015
(b) Prepare the statement of financial position as at 30 September 2015.
Note: notes to the financial statements are not required.
Additional Information
(i) The first revaluation of freehold land was carried out in 2013 and resulted in a surplus of
Rs. 120 million. The valuation was carried out under market value basis by an independent
valuer, Mr. Dee, Chartered Civil Engineer of M/s SSS Consultants (Pvt.) Ltd., Islamabad.
(ii) The details relating to additions, disposal and depreciation/amortization of fixed assets,
during the year 2017 are given below:
The company uses the straight line method for charging depreciation and amortization.
The building is depreciated at a rate of 5% whereas 10% is charged on machines,
furniture and fixtures and computer software.
Construction on third floor of the building commenced on March 1, 2017 and is
expected to be completed on September 30, 2017. The cost incurred during the year
i.e. Rs. 20 million was capitalised on June 30, 2017.
Furniture and fixtures worth Rs. 8 million were purchased on April 1, 2017.
A machine was sold on February 28, 2017 to NJ Enterprise at a price of Rs. 13 million.
At the time of disposal, the cost and written down value of the machine was Rs. 15
million and Rs. 10 million respectively.
(iii) 50% of the accounts receivable were secured and considered good. 10% of the
unsecured accounts receivable were considered doubtful. Bad debts expenses for the year
amounted to Rs. 1.0 million. An amount of Rs. 1.4 million was written off during the year.
(iv) All advances given to suppliers are considered good and include an amount of Rs. 4.0
million paid for goods which will be supplied on December 31, 2018.
(v) Cash at banks in saving accounts carry interest / mark-up ranging from 3% to 7% per
annum.
(vi) The authorised share capital of the company is Rs. 500 million.
Required
Prepare the statement of financial position as at June 30, 2017 along with the relevant notes
showing all possible disclosures as required under the International Accounting Standards and
the Companies Act, 2017.
(Comparative figures and the note on accounting policies are not required.)
Dr Cr
Rs. in million
Ordinary share capital (Rs. 10 each) - 120.00
Retained earnings - 10.20
Sales - 472.40
Purchases 175.70 -
Production labour 61.00
Manufacturing overheads 39.00
Inventories (July 1, 2016) 38.90
Administrative expenses 40.00 -
Distribution expenses 19.80 -
Financial charges 0.30 -
Dr Cr
Rs. in million
Cash and bank - 13.25
Trade creditors - 30.40
Accrued expenses - 16.20
10% redeemable preference shares - 40.00
Debentures - 80.00
Deferred tax (July 1, 2016) - 6.00
Suspense account 30.00 -
Leasehold property - at cost 230.00 -
Machines – at cost 168.60 -
Software – at cost 20.00 -
Acc. depreciation – Leasehold property (June 30, 2017) - 40.25
Acc. depreciation – Machines (June 30, 2017) - 48.60
Acc. amortization – Software (June 30, 2017) - 12.00
Trade receivables 66.00 -
889.30 889.30
Additional Information
(i) Sales include an amount of Rs. 27 million, made to a customer under sale or return
agreement. The sale has been made at cost plus 20% and the expiry date for the return of
these goods is July 31, 2017.
(ii) The value of inventories at June 30, 2017 was Rs. 42 million.
(iii) A fraud of Rs. 30 million was discovered in October 2016. A senior employee of the company
who left in June 2016, had embezzled the funds from YIL’s bank account. The chances of
recovery are remote. The amount is presently appearing in the suspense account.
(iv) On January 1, 2017 YIL issued debenture certificates which are repayable in 2022. Interest is
paid on these at 12% per annum.
(v) Financial charges comprise bank charges and bank commission.
(vi) The provision for current taxation for the year ended June 30, 2017 after making all the above
adjustments is estimated at Rs. 16.5 million.
(vii) The carrying value of YIL’s net assets as on June 30, 2017 exceeds their tax base by Rs. 30
million. The income tax rate applicable to the company is 30%.
(viii) On July 1, 2016, the leasehold property having a useful life of 40 years was revalued at Rs.
238 million. No adjustment in this regard has been made in the books.
(ix) Depreciation of leasehold property is charged using the straight line method. 50% of
depreciation is allocated to manufacturing, 30% to administration and 20% to selling and
distribution.
Required
In accordance with the requirements of the Companies Act, 2017 and International Accounting
Standards, prepare the:
(a) statement of financial position as of June 30, 2017.
(b) statement of profit or loss for the year ended June 30, 2017.
(Comparative figures and notes to the financial statements are not required.)
Additional information
(i) Sales last year (year ended 30 June 2016) included goods invoiced at Rs 10 million which
were sent to a customer on June 25, 2016 under a sale or return agreement, at cost plus
20%. The goods were returned on August 25, 2016. No correction has been made for the
return.
(ii) The export licence has been obtained for exporting a new product and is effective for five
years up to December 31, 2021. However, the exports commenced from July 1, 2017.
(iii) Closing inventories are valued at Rs. 30 million.
(iv) Details of property, plant and equipment are as follows:
Plant and
Land Buildings equipment
Rs in ‘000
Cost as at June 30, 2016 20,000 36,000 30,000
Fully depreciated amounts included in cost 3,000
Estimated useful life at the date of purchase 20 years 10 years
The company uses straight line method for charging depreciation. Depreciation is allocated
to manufacturing, distribution and administrative costs at 75%, 15% and 10% respectively.
(v) Rs. 6 million of the long term borrowings is of current maturity (i.e. will be repaid within 12
months).
(vi) During the year Rs. 5 million was paid in full and final settlement of income tax liability
against which a provision of Rs. 7.0 million had been made in the previous year. Current
year’s taxable income exceeds accounting income by Rs. 5 million of which 0.8 million are
permanent differences. Applicable tax rate for the company is 35%.
(vii) On July 30, 2017 the board of directors proposed a final dividend at 15% for the year ended
June 30, 2017 (2016: at 20%)
Required
In accordance with the requirements of the Companies Act, 2017 and International Financial
Reporting Standards, prepare:
(a) The statement of financial position as of June 30, 2017
(b) The statement of profit or loss for the year ended June 30, 2017
(c) The statement of changes in equity for the year ended June 30, 2017.
(Comparative figures and notes to the financial statements are not required)
Rs. in million
Debit Credit
Land and buildings - at cost 2,600 -
Plants – at cost 2,104 -
Trade receivables 702 -
Stock in trade at December 31, 2017 758 -
Cash and bank 354 -
Cost of sales 1,784 -
Selling expenses 220 -
Administrative expenses 250 -
Financial charges 210 -
Accumulated depreciation as on January 1, 2017 – Buildings - 400
Accumulated depreciation as on January 1, 2017 – Plants - 670
Ordinary shares of Rs. 10 each fully paid - 1,200
Retained earnings as at January 1, 2017 - 510
12% Long term loan - 1,600
Provision for gratuity - 8
Deferred tax on January 1, 2017 - 22
Trade payables - 544
Right subscription received - 420
Revenue - 3,608
8,982 8,982
Additional Information
(i) The land and buildings were acquired on January 1, 2013. The cost of land was Rs. 600
million. On January 1, 2017 a professional valuation firm valued the buildings at Rs. 1,840
million with no change in the value of land. The estimated life at acquisition was 20 years
and the remaining life has not changed as a result of the valuation. 60% of depreciation on
buildings is allocated to manufacturing, 25% to selling and 15% to administration.
(ii) Plant is depreciated at 20% per annum using the reducing balance method.
(iii) On March 31, 2017 MPL made a bonus issue of one share for every six held. The issue
has not been recorded in the books of account.
(iv) Right shares were issued on September 1, 2017 at Rs. 12 per share.
(v) The interest on long term loan is payable on the first day of July and January. No accrual has
been made for the interest payable on January 1, 2015.
(vi) MPL operates an unfunded gratuity scheme for all its eligible employees. The provision
required as on December 31, 2017 is estimated at Rs. 23 million. Rs. 3 million were paid
during the year and debited to the provision for gratuity account. Cost of gratuity is allocated
to production, selling and administration expenses in the ratio of 60%: 20% : 20%.
(vii) The tax charge for the current year after making all related adjustments is estimated at Rs. 37
million. The timing differences related to taxation are estimated to increase by Rs. 80 million,
over the last year. The applicable income tax rate is 35%.
Required
In accordance with the requirements of Companies Act, 2017 and International Financial
Reporting Standards, prepare the following:
(a) Statement of Financial Position as of December 31, 2017.
(b) Statement of profit or loss for the year ended December 31, 2017.
(Comparative figures and notes to the financial statements are not required)
Debit Credit
Rs. in million
Sales - Manufactured goods 56,528
Sales - Imported goods 1,078
Scrap sales 16
Dividend income 12
Return on savings account 2
Sales tax - Imported goods 53
Sales tax - Manufactured goods 10,201
Sales discount 2,594
Raw material stock as on 1 January 2017 1,751
Work in process as on 1 January 2017 73
Finished goods (manufactured) as on 1 January 2017 1,210
Finished goods (imported) as on 1 January 2017 44
Debit Credit
Rs. in million
Purchases - Raw material 22,603
Purchases - Imported goods 658
Stores and spares consumed 180
Salaries, wages and benefits 2,367
Utilities 734
Depreciation and amortization 1,287
Stationery and office expenses 230
Repairs and maintenance 315
Advertisement and sales promotion 4,040
Outward freight and handling 1,279
Legal and professional charges 71
Auditor's remuneration 13
Donations 34
Workers Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
Financial charges on short term borrowings 133
Exchange loss 22
Financial charges on lease 11
Additional information
(i) The position of inventories as at 31 December 2017 was as follows:
Rs. m
Raw material 2,125
Work in process 125
Finished goods (manufactured) 1,153
Finished goods (imported) 66
(ii) The basis of allocation of various expenses among cost of sales, distribution costs and
administrative expenses are as follows:
(iii) Salaries, wages and benefits include contributions to provident fund (defined contribution
plan) and gratuity fund (defined benefit plan) amounting to Rs. 54 million and Rs. 44 million
respectively.
(iv) Auditor’s remuneration includes taxation services and out-of-pocket expenses amounting to
Rs. 4 million and Rs. 1 million respectively.
(v) Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of the
company’s directors, Mr. Peanut is a trustee of DCF.
(vi) The tax charge for the current year after making all related adjustments is estimated at Rs.
1,440 million. Taxable temporary differences of Rs. 3,120 originated in the year million, over
the last year. The applicable income tax rate is 35%.
(vii) 274 million ordinary shares were outstanding as on 31 December 2017.
(viii) There is no other comprehensive income for the year.
Required
Prepare the statement of profit or loss for the year ended 31 December 2017 along with the relevant
notes showing required disclosures as per the Companies Act, 2017 and International Financial
Reporting Standards. Comparatives are not required.
3.1 KLEA
The statement of financial position and statement of profit or loss for Klea for the year to 31st March
2015 are provided below.
Statement of financial position as at 31st March 2015
2015 2014
Rs. in ‘000
Assets
Non-current assets
Intangible assets 300 200
Property, plant and equipment 3,450 1,600
Financial assets 400 200
4,150 2,000
Current assets
Inventory 3,200 2,000
Trade receivables 2,400 2,000
Cash and cash equivalents 32 580
5,632 4,580
Total assets 9,782 6,580
Equity and liabilities
Equity
Issued share capital 3,000 2,000
Share premium account 838 560
Retained earnings 910 354
Total equity 4,748 2,914
Revaluation surplus 1,000 -
Non-current liabilities
Interest-bearing loans and liabilities 1,600 2,000
Current liabilities
Bank overdraft 414 -
Trade payables 1,600 1,266
Taxation 420 400
2,434 1,666
Total liabilities 4,034 3,666
Total equity and liabilities 9,782 6,580
Statement of profit or loss for the year ended 31st March 2015
Rs. in ‘000
Revenue 10,000
Other income 100
Change in inventory of finished goods and WIP 1,300
Raw materials and consumables used 4,000
Employee benefits costs 3,000
Depreciation and amortisation expense 800
Other expenses 1,724
Additional information
(i) Non-current assets Rs. in ‘000
2015 2014
Cost Deprec’n Cost Deprec’n
Intangible assets 700 400 400 200
Property, plant and equipment 5,000 1,550 3,000 1,400
(ii) At 1 April 2014 land was revalued from Rs. 1million to Rs. 2 million.
(iii) During the year, plant and machinery costing Rs. 600,000 and depreciated by Rs. 500,000
was sold for Rs. 150,000.
(iv) The interest bearing loans relate to debentures which were issued at their nominal value. Rs.
400,000 of these debentures were redeemed at par during the year.
(v) Ordinary shares were issued for cash during the year.
(vi) Rs. 100,000 of current asset investments held as cash equivalents were sold during the year
for Rs. 94,000.
(vii) Dividends paid in the year were Rs. 200,000 relating to the 2014 proposed dividend and a Rs.
200,000 interim dividend for 2015.
Required
Prepare a statement of cash flows for Klea for the year ended 31 March 2015 in accordance with
IAS 7 using the indirect method.
Required
Prepare a cash flow statement for the year ended 31 December 2015, together with notes as
required by IAS 7.
3.3 FALLEN
Fallen has prepared the following rough draft accounts for the year ended 31 December 2015.
Statement of profit or loss
Rs. in ‘000
Revenue 11,563
Cost of sales (5,502)
———
Gross profit 6,061
Distribution costs (402)
Administration expenses (882)
Interest payable (152)
———
Operating profit before tax 4,625
Taxation (35%) including deferred tax (1,531)
———
Profit after tax 3,094
Dividends (700)
———
Retained profit 2,394
———
31 December
2015 2014
Rs. in ‘000 Rs. in ‘000
Share capital 2,280 1,800
Share premium 2,112 1,800
Profit and loss account 9,108 6,714
Deferred taxation 202 138
Long-term loan (10%) 1,240 1,800
Provision for deferred repairs 1,202 1,016
Payables 1,026 702
Overdraft 222 –
Taxation
Corporation tax 1,730 2,038
Proposed dividends 390 234
——— ———
19,512 16,242
——— ———
The following data is relevant.
(1) The 10% long-term loan were redeemed at par.
(2) Plant and equipment with a written down value of Rs. 276,000 was sold for Rs. 168,000. New
plant was purchased for Rs. 2,500,000.
(3) Leasehold premises costing Rs. 1,300,000 were acquired during the year.
(4) The investments are highly liquid securities held for the short term.
Required
Prepare the cash flow statement and supporting notes in accordance with IAS 7 for Fallen Inc for
2015.
On 1 October 2014 Bin Qasim Motors Limited recorded an increase in the value of its land of
Rs. 150,000.
During the year an item of plant that had cost Rs. 500,000 and had accumulated depreciation
of Rs. 244,000 was sold at a loss (included in cost of sales) of Rs. 86,000 on its carrying
value.
(ii) Deferred income
Bin Qasim Motors Limited sells servicing contracts on certain types of machinery. Payments
are received in advance for a service which Bin Qasim Motors Limited must provide over a
number of following years. Income that relates to these contracts is deferred and recognised
in P&L as the period of service passes.
A credit of Rs. 125,000 for the current year’s recognition of deferred income has been
included revenue in this period.
(iii) Share capital and loan stocks
The increase in the share capital during the year was due to the following events:
(1) On 1 January 2015 there was a bonus issue (out of the revaluation surplus) of one
bonus share for every 10 shares held.
(2) On 1 April 2015 the 10% convertible loan stock holders exercised their right to convert
to ordinary shares. The terms of conversion were 25 ordinary shares of Rs. 1 each for
each Rs. 100 of 10% convertible loan stock.
(3) The remaining increase in the ordinary shares was due to a stock market placement of
shares for cash on 12 August 2015.
(iv) Provision for negligence claim
In June 2015 Bin Qasim Motors Limited made an out of court settlement of a negligence claim
brought about by a former employee. The dispute had been in progress for two years and Bin
Qasim Motors Limited had made provisions for the potential liability in each of the two
previous years. The unprovided amount of the claim at the time of settlement was Rs. 30,000
and this was charged to operating expenses.
Required
Prepare a statement of cash flows for Bin Qasim Motors Limited for the year to 30 September 2015
in accordance with IAS 7 Statement of Cash Flows.
Rs. in million
Sales revenue 3,820
Cost of sales (note 1) (2,620)
Gross profit for period 1,200
Operating expenses (note 1) (280)
920
Interest – Loan note (30)
Profit before tax 890
Taxation (270)
Net profit for the period 620
Required
(a) A statement of cash flows for Ittehad Manufacturing Ltd for the year to 30 September 2015
prepared in accordance with IAS 7 Statement of Cash Flows
(b) Comment briefly on the financial position of Ittehad Manufacturing Ltd as portrayed by the
information in your statement of cash flows.
Current assets
Stocks-in-trade 55 48
Trade debts 51 38
Advances, prepayments and other
receivables 37 40
Cash and bank balances 11 20
Total current assets 154 146
TOTAL ASSETS 504 459
2015 2014
Rs. in million Rs. in million
EQUITY AND LIABILITIES
Shareholders' equity
Share capital 150 125
Share premium 55 80
Unappropriated profit 85 50
290 255
Non-current liabilities
Long term finances - Secured 94 118
Deferred liability - Gratuity (unfunded) 16 12
110 130
Current liabilities
Current portion of long term finances 25 22
Short term finances 13 6
Trade and other payables 66 46
104 74
TOTAL EQUITY AND LIABILITIES 504 459
(iii) Advances, prepayments and other receivables include advance tax of Rs. 10 million (2014:
Rs. 7 million).
(iv) In 2015, the company paid Rs. 6 million on account of gratuity.
(v) Accrued mark-up on long term finances amounting to Rs. 7 million (2014: Rs. 9 million) is
included in trade and other payables. Financial charges included in the profit and loss account
are Rs. 16 million (2014 : Rs. 14 million).
(vi) Income tax expense for the year 2015 amounted to Rs. 19 million (2014: Rs. 13 million).
Required
Prepare a cash flow statement in accordance with the requirements of IAS 7 Cash Flow Statement”
using the indirect method.
Required
Prepare a statement of cash flow for the year ended December 31, 2015 in accordance with the
requirements of International Accounting Standards. Show all necessary workings.
2015 2014
Rs. 000 Rs. 000
Issued, subscribed and paid up capital 25,000 20,000
Unappropriated profit 20,900 22,000
45,900 42,000
Surplus on revaluation of property, plant & equipment 7,000 8,000
Non-current liabilities
Staff gratuity 1,400 1,190
Deferred tax liability- net 590 -
1,990 1,190
Trade and other payables 4,200 6,250
59,090 57,440
2015 2014
Rs. 000 Rs. 000
Deferred tax asset- net - 350
Long term deposits and prepayments 400 300
42,000 37,290
Current Assets
Tax refundable 950 800
Other current assets 15,700 12,125
Cash and bank balances 440 7,225
17,090 20,150
59,090 57,440
Statement of comprehensive Income for the year ended December 31, 2015
2015
Rs. 000
Sales 146,700
Cost of sales (127,500)
Gross profit 19,200
Rs. in million
2015 2014 2015 2014
Non current assets Share capital and
reserves
Property, plant and 633 410 Share capital 494 440
equipment (Rs. 10 each)
Long term investments 130 100 Share premium 8 -
763 510 Retained earnings 133 110
Current assets 635 550
Stock-in-trade 97 68 Non current
liabilities
Trade debts 133 57 Long term loans 330 110
Other receivables 100 120 Gratuity payable 55 50
Cash at bank 31 39 Deferred taxation 15 21
361 284 400 181
Current liabilities
Trade and other 73 56
payables
Tax payable - net 12 5
Dividend payable 4 2
89 63
1,124 794 1,124 794
Additional information:
(i) During the year, the company recognised a provision for impairment in respect of one of its
plant, amounting to Rs. 11 million. Total depreciation for the year amounted to Rs. 50 million.
(ii) It is the policy of the company to maintain a provision for doubtful debts at 5% of trade
debts. During the year, trade debts amounting to Rs. 6 million (2014: Rs. 2 million) were
written off.
(iii) Trade and other payables include accrued financial charges amounting to Rs. 7 million
(2014: Rs. 3 million).
(iv) On 15 July 2015, MEL’s board of directors proposed a final dividend of 10% for the year
ended 30 June 2015 (2014: 5% cash dividend and 5% bonus declared on 20 July 2014).
(v) Other income comprises of the following:
Rs. m
Dividend income 30
Gain on sale of vehicles (carrying value of Rs. 5 million) 2
Gain on sale of investments (carrying value of Rs. 10 million) 3
35
Required
Prepare the statement of cash flows for Marvel Engineering Limited for the year ended 30 June
2015.
4.1 HALL
Statements of financial position at 31 December 2015
Hall Stand
Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment 35,000 20,000
Investment in Stand 12,000 –
On 1 January 2013 Hall acquired 75% of Stand for Rs. 12,000,000. At that date the balance on
Stand’s retained earnings was Rs. 8,000,000.
Required
Prepare the consolidated statement of financial position of Hall as at 31 December 2015.
4.2 HASSLE
Statements of financial position at 31 December 2015
Hassle Strife
Rs. Rs.
Investment in Strife 60,000 –
Sundry assets 247,500 226,600
———– —–——
307,500 226,600
———– ——–—
Share capital 120,000 50,000
Retained earnings 87,500 70,000
Liabilities 100,000 106,600
———– ——–—
307,500 226,600
———– ——–—
Hassle bought 80% of Strife when the balance on Strife’s retained profit was Rs. 50,000.
Required
Prepare the consolidated statement of financial position at 31 December 2015.
4.3 HYMN
The following are the summarised statements of financial position of a group of companies as at 31
December 2015.
Hymn Psalm
Rs. Rs.
Assets
Non-current assets
Property, plant and equipment 105,000 65,000
Investment 85,000
Current assets 220,000 55,000
———– ———–
410,000 120,000
———– ———–
Equity and liabilities
Equity
Share capital 100,000 50,000
Retained earnings 155,000 49,000
———– ———–
255,000 99,000
Current liabilities 155,000 21,000
———– ———–
410,000 120,000
———– ———–
Hymn purchased 80% of Psalm’s shares on 1 January 2015 when there was a credit balance on
that company’s retained earnings of Rs. 20,000.
Required
Prepare the Hymn group consolidated statement of financial position as at 31 December 2015.
4.4 HANG
On 31 December 2012, Hang acquired 60% of Swing for Rs. 140,000. At that date Swing had a
retained earnings balance of Rs. 50,000 and a share premium account balance of Rs. 49,000.
The following statements of financial position have been prepared as at 31 December 2015.
Hang Swing
Rs. Rs.
Assets
Non-current assets
Property, plant and equipment 240,000 180,000
Investment in Swing 140,000
Current assets 250,000 196,000
———– ———–
630,000 376,000
———– ———–
4.5 HASH
Statements of financial position at 31 December 2015
Hash Stash
Rs. 000 Rs. 000
Investment in Stash (80%) 100,000 –
Sundry assets 207,500 226,600
———– —–——
307,500 226,600
———– ——–—
Required
Prepare the consolidated statement of financial position at 31 December 2015.
5.1 HAIL
The following are the draft statements of financial position of Hail and its subsidiary Snow as at
31 December 2015.
Hail Snow
Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment 161,000 85,000
Investments 68,000
Current assets
Cash 7,700 25,200
Trade receivables 92,500 45,800
Snow current account 15,000 -
Inventory 56,200 36,200
———– ——–—
400,400 192,200
———– ——–—
Equity and liabilities
Shareholders’ equity
Share capital 100,000 50,000
Retained earnings 185,400 41,200
Share premium - 5,000
Capital reserve - 20,000
———– ——–—
285,400 116,200
Current liabilities 115,000 68,000
Hail current account - 8,000
———– ——–—
400,400 192,200
———– ——–—
Notes
(1) Snow has 50,000 shares in issues. Hail acquired 45,000 of these on 1 January 2012 for a
cost of Rs. 65,000,000 when the balances on Snow’s reserves were
Rs. 000
Share premium account 5,000
Capital reserve –
Retained earnings 10,000
(2) Hail declared a dividend of Rs. 3,000,000 before the year end and Snow declared one of Rs.
2,000,000. These transactions have not been accounted for.
(3) The current account difference is due to cash in transit.
Required
Prepare the consolidated statement of financial position as at 31 December 2015 of Hail.
5.2 HAIRY
The summarised statements of financial position of Hairy and Spider as at 31 December 2015 were
as follows.
Hairy Spider
Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment 120,000 60,000
Investments 55,000 –
Current assets
Cash 11,000 4,000
Investments – 3,000
Trade receivables 72,600 19,100
Current account – Hairy – 3,200
Inventory 17,000 11,000
———– ———–
275,600 100,300
———– ———–
Equity and liabilities
Share capital 100,000 60,000
Share premium 20,000 –
Capital reserve 23,000 16,000
Retained earnings 91,900 7,300
Trade payables 38,000 17,000
Current account – Spider 2,700 –
———– ———–
275,600 100,300
———– ———–
Required
Prepare the consolidated statement of financial position of Hairy and its subsidiary Spider as at 31
December 2015.
5.3 HARD
On 31 December 2011, Hard acquired 60% of the ordinary share capital of Soft for Rs. 110 million.
At that date Soft had a retained earnings balance of Rs. 50 million and a share premium account
balance of Rs. 10 million.
The following statements of financial position have been prepared as at 31 December 2015.
Hard Soft
Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment 225,000 175,000
Investments in Soft 110,000
During the year to 31 December 2015 Hard sold a tangible asset to Soft for Rs. 50 million. The asset
was originally purchased in the year to 31 December 2012 at a cost of Rs. 100 million and had a
useful economic life of five years.
Soft’s depreciation policy is 25% per annum based on cost. Both companies charge a full year’s
depreciation in the year of acquisition and none in the year of disposal.
Required
Prepare the consolidated statement of financial position of Hard and its subsidiary as at 31
December 2015.
5.4 HALE
On 1 July 2012 Hale acquired 128,000 of Sowen’s 160,000 shares. The following statements of
financial position have been prepared as at 31 December 2015.
Hale Sowen
Rs. 000 Rs. 000
Hale Sowen
Rs. 000 Rs. 000
Required
Prepare the consolidated statement of financial position of Hale as at 31 December 2015.
5.5 HELLO
On 1 January 2012, Hello acquired 60% of the ordinary share capital of Solong for Rs. 110,000. At
that date Solong had a retained earnings balance of Rs. 60,000.
The following statements of financial position have been prepared as at 31 December 2015.
Hello Solong
Rs. Rs.
Assets
Non-current assets
Property, plant and equipment 225,000 175,000
Investments in Solong 110,000
The fair value of Solong’s net assets at the date of acquisition was determined to be Rs. 170,000.
The difference between the book value and the fair value of the new assets at the date of acquisition
was due to an item of plant which had a useful life of 10 years from the date of acquisition.
Required
Prepare the consolidated statement of financial position of Hello and its subsidiary as at 31
December 2015.
Hasan Shakeel
Limited Limited
Rs. 000 Rs. 000
Non-current liabilities
10% Loan note from Hasan Limited – 160
Government grant 230 40
230 200
Current liabilities
Trade payables 475 472
Hasan Limited current account – 60
Income taxes payable 228 174
Operating overdraft – 27
703 733
Total equity and liabilities 7,833 4,888
The following information is relevant:
(i) Included in Shakeel Limited’s property at the date of acquisition was a leasehold property
recorded at its depreciated historical cost of Rs. 400,000. The leasehold had been sub-let for
its remaining life of only four years at an annual rental of Rs. 80,000 payable in advance on 1
April each year. The directors of Hasan Limited are of the opinion that the fair value of this
leasehold is best reflected by the present value of its future cash flows. An appropriate cost of
capital for the group is 10% per annum.
The present value of a Rs. 1 annuity received at the end of each year where interest rates are
10% can be taken as:
3 year annuity Rs. 2.50
4 year annuity Rs. 3.20
(ii) The software of Shakeel Limited represents the depreciated cost of the development of an
integrated business accounting package. It was completed at a capitalised cost of Rs.
2,400,000 and went on sale on 1 April 2013. Shakeel Limited’s directors are depreciating the
software on a straight-line basis over an eight-year life (i.e. Rs. 300,000 per annum).
However, the directors of Hasan Limited are of the opinion that a five-year life would be more
appropriate as sales of business software rarely exceed this period.
(iii) The inventory of Hasan Limited on 31 March 2015 contains goods at a transfer price of Rs.
25,000 that were supplied by Shakeel Limited who had marked them up with a profit of 25%
on cost. Unrealised profits are adjusted for against the profit of the company that made them.
(iv) On 31 March 2015 Shakeel Limited remitted to Hasan Limited a cash payment of Rs. 55,000.
This was not received by Hasan Limited until early April. It was made up of an annual
repayment of the 10% loan note of Rs. 40,000 (the interest had already been paid) and Rs.
15,000 of the current account balance.
(v) The accounting policy of Hasan Limited for non-controlling interests (NCI) in a subsidiary is to
value NCI at a proportionate share of the net assets.
(v) An impairment test at 31 March 2015 on the consolidated goodwill concluded that it should be
written down by Rs. 120,000. No other assets were impaired.
Required
Prepare the consolidated statement of financial position of Hasan Limited as at
31 March 2015.
6.1 HARRY
The following are the statements of profit or loss for the year ended 31 December 2015 of Harry and
its subsidiary Sally.
Harry Sally
Rs. 000 Rs. 000
Revenue 1,120 390
Cost of sales (610) (220)
Gross profit 510 170
Distribution costs (50) (40)
Administration costs (55) (45)
Operating profit 405 85
Investment income 20 4
Finance costs (18) (4)
Profit before tax 407 85
Income tax expense (140) (25)
Required
Prepare a consolidated statement of profit or loss and a working showing the movement on
consolidated retained profit for the year ended 31 December 2015.
6.2 HORNY
Statements of profit or loss for the year ended 31 December 2015.
Horny Smooth
Rs. 000 Rs. 000
Revenue 304,900 195,300
Cost of sales (144,200) (98,550)
Gross profit 160,700 96,750
Operating costs (76,450) (52,100)
Operating profit 84,250 44,650
Investment income 10,500 2,600
Profit before tax 94,750 47,250
Income tax expense(42,900) (16,500)
Profit for the year 51,850 30,750
Statement of changes in equity (extracts) for the year ended 31 December 2015.
Horny Smooth
Rs. 000 Rs. 000
Retained earnings brought forward 80,200 31,000
Profit for the year 51,850 30,750
Proposed ordinary dividend (20,000) -
112,050 61,750
The following information is also available.
(1) Horny acquired 75% of the share capital of Smooth on 31 August 2015.
(2) Negative goodwill of Rs. 3.8 million arose on the acquisition.
(3) Profits of both companies are deemed to accrue evenly over the year except for the
investment income of Smooth all of which was received in November 2015.
(4) Horny has bought goods from Smooth throughout the year at Rs. 2 million per month. At the
year-end Horny does not hold any inventory purchased from Smooth.
Required
Prepare the consolidated statement of profit or loss and a working showing the movement on
consolidated retained profit for the year ended 31 December 2015.
6.3 HERON
Statements of financial position as at 30 June 2015
Heron Stork
Assets Rs. 000 Rs. 000
Non-current assets
Property, plant and equipment 31,000 15,000
Investment in Stork ( 1,000 ordinary shares) 1,000
32,000 15,000
Current assets 23,000 11,000
55,000 26,000
Heron acquired its shares in Stork when the balance on the retained earnings was Rs. 000nil.
Statements of profit or loss for the year ended 30 June 2015
Heron Stork
Rs. 000 Rs. 000
Revenue 30,000 25,000
Cost of sales (9,000) (10,000)
Statement of changes in equity for the year ended 30 June 2015 (extract)
6.4 HANKS
Statements of financial position as at 31 December 2015
Hanks Streep Scott
Rs. 000 Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment 32,000 25,000 20,000
Investments 33,500 – –
———– ——— ———
65,500 25,000 20,000
Current assets
Cash at bank and in hand 9,500 2,000 4,000
Trade receivables 20,000 8,000 17,000
Inventory 30,000 18,000 18,000
———– ——— ———
125,000 53,000 59,000
———– ——— ———
Equity and liabilities
Share capital 40,000 10,000 15,000
Share premium account 6,500 – –
Retained earnings 55,000 37,000 27,000
———– ——— ———
101,500 47,000 42,000
Current liabilities 23,500 6,000 17,000
———– ——— ———
125,000 53,000 59,000
Statements of profit or loss for the year ended 31 December 2015
Hanks Streep Scott
Rs. 000 Rs. 000 Rs. 000
Revenue 125,000 117,000 82,000
Cost of sales (65,000) (64,000) (42,000)
———– ———– ———
Gross profit 60,000 53,000 40,000
Distribution costs (21,000) (14,000) (16,000)
Administrative expenses (14,000) (8,000) (7,000)
———– ———– ———
Profit before taxation 25,000 31,000 17,000
Income tax expense (10,000) (9,000) (5,000)
———– ———– ———
Profit after tax 15,000 22,000 12,000
Required
Prepare the consolidated statement of profit or loss and consolidated statement of changes in equity
for the year ended 31 December 2015 and the consolidated statement of financial position at that
date.
7.1 ROONEY
(a) Rooney has recently finished building a new item of plant for its own use. The item is a press
for use in the manufacture of industrial diamonds. Rooney commenced construction of the
asset on 1st April 2013 and completed it on 1st April 2015.
1st January 2013, Rooney took out a loan to finance the construction of the asset. Interest is
charged on the loan at the rate of 5% per annum. The annual interest must be paid in four
equal instalments at the end of each quarter. Rooney capitalises interest on manufactured
assets in accordance with the rules in IAS 23 Borrowing costs.
The costs (excluding finance costs) of manufacturing the asset were Rs. 28 million.
Required
State the IAS 23 rules on the capitalisation of borrowing costs, calculate the cost of the asset
on initial recognition and explain the amount of borrowing cost capitalised.
(b) The press comprises two significant parts, the hydraulic system and the ‘frame’. The hydraulic
system has a three year life and the ‘frame’ has an eight year life. Rooney depreciates plant
on a straight line basis. The cost of the hydraulic system is 30% of the total cost of
manufacture.
Rooney uses the IAS 16 revaluation model in accounting for diamond presses and revalues
these assets on an annual basis.
Revaluation surpluses or deficits are apportioned between the hydraulic system and the
‘frame’ on the basis of their year end book values before the revaluation.
Required
Explain the IAS 16 rules on accounting for significant parts of property, plant and equipment
and show the accounting treatment of the diamond press in the financial statements for the
financial years ending:
(i) 31st March 2016 (assume that the press has a fair value of Rs. 21 million)
(ii) 31st March 2017 (assume that the press has a fair value of Rs. 19.6 million).
7.2 EHTISHAM
The following information relates to the financial statements of Ehtisham for the year to 31 March
2015.
The head office of Ehtisham was acquired on 1 April 2012 for Rs. 1million. Ehtisham intend to
occupy the building for 25 years. On 31 March 2014 it was revalued to Rs. 1.15 million. On 31 March
2015, a surplus of vacant commercial property in the area had led to a fall in property prices and the
fair value was now only Rs. 0.8 million.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
7.3 CARLY
The following is an extract from the financial statements of Carly on 31 December 2014.
Property, plant and equipment
Land and Plant and
buildings equipment Computers Total
Rs. Rs. Rs. Rs.
Cost
On 31 December 2014 1,500,000 340,500 617,800 2,458,300
Accumulated depreciation
On 31 December 2014 600,000 125,900 505,800 1,231,700
Carrying amount
On 31 December 2014 900,000 214,600 112,000 1,226,600
Accounting policies
Depreciation
Depreciation is provided at the following rates.
On land and buildings 2% per annum straight line on buildings only
On plant and equipment 25% reducing balance
On computers 33.33% per annum straight line
During 2015 the following transactions took place.
(1) On 31 December the land and buildings were revalued to Rs. 1,750,000. Of this amount, Rs.
650,000 related to the land (which had originally cost Rs. 500,000). The remaining useful life
of the buildings was assessed as 40 years.
(2) A machine which had cost Rs. 80,000 and had accumulated depreciation of Rs. 57,000 at the
start of the year was sold for Rs. 25,000 in the first week of the year.
(3) A new machine was purchased on 31 March 2015. The following costs were incurred:
Rs.
Purchase price, before discount, inclusive of reclaimable sales tax of Rs.3,000 20,000
Discount 1,000
Delivery costs 500
Installation costs 750
Interest on loan taken out to finance the purchase 300
(4) On 1 January it was decided to change the method of providing depreciation on computer
equipment from the existing method to 40% reducing balance.
Required
Produce the analysis of property, plant and equipment as it would appear in the financial statements
of Carly for the year ended 31 December 2015.
Required
Explain the effects of these changes on the depreciation for the year to 31 December 2015.
7.5 FAM
Fam had the following tangible fixed assets at 31 December 2014.
(6) Land and buildings were revalued at 1 January 2015 to Rs. 1,500,000, of which land is worth
Rs. 900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors,
on the basis of existing use value on the open market.
(7) The useful economic life of the buildings is unchanged. The buildings were purchased ten
years before the revaluation.
(8) Depreciation is provided on all assets in use at the year end at the following rates.
Buildings 2% per annum straight line
Plant 20% per annum straight line
Fixtures 25% per annum reducing balance
Required
Show the disclosure under IAS 16 in relation to fixed assets in the notes to the published accounts
for the year ended 31 December 2015.
Required
Compute the depreciation expenses and other adjustments (if any) required to be made in
the financial statements of the company for the year ended June 30, 2015 under each of the
following assumptions:
(i) the review of useful life and residual value was carried out on June 30, 2015;
(ii) the review of useful life and residual value was carried out on June 30, 2014 but in the
financial statements for the year then ended the depreciation expense was erroneously
recorded on the previous basis.
(b) Discuss the requirements of International Accounting Standard(s) in respect of
estimation and revision of useful life of an item of property, plant and equipment.
Required
Prepare the journal entries to record the above transactions from the date of acquisition of the
building to the year ended June 30, 2015.
(Ignore deferred tax)
Required
Prepare accounting entries for the year ended June 30, 2015. Give all the necessary calculations.
(Ignore taxation)
Land Buildings
Rs. Rs.
Head office – cost 1 April 2013 500,000 1,200,000
– revalued 1 October 2015 700,000 1,350,000
Training premises – cost 1 April 2013 300,000 900,000
– revalued 1 October 2015 350,000 600,000
The fall in the value of the training premises is due mainly to damage done by the use of heavy
equipment during training. The surveyors have also reported that the expected life of the training
property in its current use will only be a further 10 years from the date of valuation. The estimated
life of the head office remained unaltered.
Note: Aba Limited treats its land and its buildings as separate assets. Depreciation is based on the
straight-line method from the date of purchase or subsequent revaluation.
Required
Prepare extracts of the financial statements of Aba Limited in respect of the above properties for the
year to 31 March 2016.
Required
Prepare extracts from the statement of financial position and statement of profit or loss of
Hussain Associates Ltd in respect of the plant for the year ended 30 September 2016. Your
answer should explain how you arrived at your figures.
(b) On 1 April 2015 Hussain Associates Ltd acquired 100% of the share capital of Sparkle
Limited, whose only activity is the extraction and sale of spa water. Sparkle Limited had been
profitable since its acquisition, but bad publicity resulting from several consumers becoming ill
due to a contamination of the spa water supply in April 2016 has led to unexpected losses in
the last six months. The carrying amounts of Sparkle Limited’s assets at 30 September 2016
are:
Rs.000
Brand (Sparkle Spring – see below) 7,000
Land containing spa 12,000
Purifying and bottling plant 8,000
Inventories 5,000
32,000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of ‘Sparkle Spring’, but
because of the contamination it has re-branded its bottled water as ‘Refresh’. After a large
advertising campaign, sales are now starting to recover and are approaching previous levels.
The value of the brand in the balance sheet is the depreciated amount of the original brand
name of ‘Sparkle Spring’.
The directors have acknowledged that Rs.1.5 million will have to be spent in the first three
months of the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old ‘Sparkle Spring’ bottled water at a cost of Rs.2 million; the
remaining inventories are labelled with the new brand ‘Refresh’. Samples of all the bottled
water have been tested by the health authority and have been passed as fit to sell. The old
bottled water will have to be relabelled at a cost of Rs.250,000, but is then expected to be sold
at the normal selling price of (normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use
of Sparkle Limited at 30 September 2016, calculated according to the guidance in IAS 36, is
Rs.20 million. There is no reliable estimate of the fair value less costs to sell of Sparkle
Limited.
Required
Calculate the amounts at which the assets of Sparkle Limited should appear in the
consolidated statement of financial position of Hussain Associates Ltd at 30 September 2016.
Your answer should explain how you arrived at your figures.
8.3 IMPS
A division of IMPS has the following non-current assets, which are stated at their carrying values
at 31 December Year 4:
Rs.m Rs.m
Goodwill 70
Because these assets are used to produce a specific product, it is possible to identify the cash
flows arising from their use. The management of IMPS believes that the value of these assets
may have become impaired, because a major competitor has developed a superior version of the
same product and, as a result, sales are expected to fall.
The following additional information is relevant:
Forecast cash inflows arising from the use of the assets are as follows:
(i) The directors are of the opinion that the market would expect a pre-tax return of 12% on an
investment in an entity that manufactures a product of this type.
(ii) The land and buildings are carried at valuation. The surplus relating to the revaluation of
the land and buildings that remains in the revaluation reserve at 31 December Year 4 is
Rs.65 million. All other non-current assets are carried at historical cost.
(iii) The goodwill does not have a market value. It is estimated that the land and buildings
could be sold for Rs.270 million and the plant and machinery could be sold for Rs.50
million, net of direct selling costs.
Required
(a) Calculate the impairment loss that will be recognised in the accounts of IMPS.
(b) Explain how this loss will be treated in the financial statements for the year ended 31
December Year 4.
9.1 FAZAL
The following information relates to the financial statements of Fazal for the year to 31 March 2015.
The IT division has begun a training course for all managers in a new programming language at a
cost of Rs. 200,000. The consultants running the training course have quantified the present value of
the training benefits over the next two years to be Rs. 400,000. The project cost has been included
in the statement of financial position as a current asset. The accounting policy note identifies that the
costs will be written off over the next two years to match the benefits.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
9.2 HENRY
During 2015 Henry has the following research and development projects in progress.
Project A was completed at the end of 2014. Development expenditure brought forward at the
beginning of 2015 was Rs. 412,500 on this project. Savings in production costs arising from this
project are first expected to arise in 2015. In 2015 savings are expected to be Rs. 100,000, followed
by savings of Rs. 300,000 in 2016 and Rs. 200,000 in 2017.
Project B commenced on 1 April 2015. Costs incurred during the year were Rs. 56,000. In addition
to these costs a machine was purchased on 1 April 2015 for Rs. 30,000 for use on the project. This
machine has a useful life of five years. At the end of 2015 there were still some uncertainties
surrounding the completion of the project.
Project C had been started in 2014. In 2014 the costs relating to this project of Rs. 36,700 had been
written off, as at the end of 2014 there were still some uncertainties surrounding the completion of
the project. Those uncertainties have now been resolved and a further Rs. 45,000 costs incurred
during the year.
Required
Show how the above would appear in the financial statements (including notes to the financial
statements) of Henry as of 31 December 2015.
9.3 TOBY
Toby entered into the following transactions during the year ended 31 December 2015. The directors
of Toby wish to capitalise all assets wherever possible.
(1) On 1 January Toby acquired the net assets of George for Rs. 105,000. The assets acquired
had the following book and fair values.
(2) On 1 April Toby acquired a brand from a competitor for Rs. 50,000. The directors of Toby
have assessed the useful life of the brand as five years.
(3) During the year Toby spent Rs. 40,000 on developing a new brand name. The development
was completed on 30 June. The useful life of this brand has been assessed as eight years.
(4) The directors of Toby believe that there is total goodwill of Rs. 2 million within Toby and that
this has an indefinite useful life.
Required
Prepare the note to the financial statements for intangible assets as at 31 December 2015.
9.4 BROOKLYN
Brooklyn is a bio-technology company performing research for pharmaceutical companies. The
finance director has contacted your financial consulting company to arrange a meeting to discuss
issues relevant to the preparation of the financial statements for the year to 30th June 2015. Your
initial telephone conversation has provided the necessary background information.
1 On 1st August 2014 Brooklyn began investigating a new bio-process. On 1st September 2015,
the new process was widely supported by the scientific community and the feasibility project
was approved. A grant was then obtained relating to future work. Several pharmaceutical
companies have expressed an interest in buying the ‘know how’ when the project completes
in June 2016. The nominal ledger account set up for the project shows that the expenditure
incurred between 1st August 2014 and 30th June 2015 was Rs. 300,000 per month.
2 In August 2015, an employee lodged a legal claim against the company for damage to his
health as a result of working for the company for the two years through to 31st March 2014
when he had to retire due to ill health. He has argued that his health deteriorated as a result of
the stress from his position in the organisation. Brooklyn has denied the claim and has
appointed an employment lawyer to assist with contesting the case. The lawyer has advised
that there is a 25% chance that the claim will be rejected, 50% chance that the damages will
be Rs. 600,000 and 25% chance of Rs. 1 million. The company has an insurance policy that
will pay 10% of any damages to the company. The lawyer has said that the case could take
until 30th June 2018 to resolve. The present value of the estimated damages discounted at 8%
is Rs. 476,280 and Rs. 793,800 respectively.
3 Brooklyn owns several buildings, which include an administrative office in the centre of
London. The company has revalued these on a regular basis every five years and the next
valuation is due on 30th June 2017. Property prices have increased since the last review and
particularly for the London premises. The cost of engaging a professionally qualified valuer is
very expensive and so to reduce costs the finance director is proposing that the property
manager, who is a professionally qualified valuer, should value the London property and that
the increase in value should be included in the financial statements. The finance director is of
the opinion that the property prices may fall next year.
Required
Prepare notes for your meeting with the finance director which explain and justify the accounting
treatment of these issues, preparing calculations where appropriate and identifying matters on which
your require further information.
Fair value of net assets (other than intangible assets) of Momin Limited 1,100,000,000
Momin Limited has an established line of products under the brand name of “Badar”. On behalf
of Zouq Inc., a firm of specialists has valued the brand name at Rs. 100 million with an estimated
useful life of 10 years at January 1, 2014. It is expected that the benefits will be spread equally over
the brand’s useful life.
An impairment test of goodwill and brand was carried out on December 31, 2014 which
indicated an impairment of Rs. 50 million in the value of goodwill.
An impairment test carried out on December 31, 2015 indicated a decrease of Rs. 13.5 million in
the carrying value of the brand.
Required:
(a) What are the requirements of International Accounting Standards relating to amortization of
intangible assets having finite life?
(b) Prepare the ledger accounts for goodwill and the brand, showing initial recognition and all
subsequent adjustments.
The draft financial statements (before correction of error) show that retained earnings as at
December 31, 2015 was Rs. 1,950 million (2014: Rs. 1,785 million).
Required
In accordance with the requirements of International Financial Reporting Standards, prepare
relevant extracts of the Statement of Financial Position along with the note on intangible assets
after incorporating the required corrections.
(Ignore tax)
Rs. m
Research work 4.50
Development work 9.00
Training of production staff 0.50
Cost of trial run 0.80
Total costs 14.80
(ii) The right to manufacture a well-established product under a patent for a period of five
years was purchased on 1 March 2015 for Rs. 17 million. The patent has an expected
remaining useful life of 10 years. RI has the option to renew the patent for a further
period of five years for a sum of Rs. 12 million.
(iii) RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the month of
June 2015. The life of the brand is expected to be 10 years. Currently, there is no
active market for this brand. However, RI is planning to launch an aggressive marketing
campaign in February 2016.
(iv) In September 2014, RI developed a new production process and capitalised it as an
intangible asset at Rs. 7 million. The new process is expected to have an indefinite
useful life. During 2015, RI incurred further development expenditure of Rs. 3 million
on the new process which meets the recognition criteria for capitalization of an
intangible asset.
Required
In the light of International Financial Reporting Standards, explain how each of the above transaction
should be accounted for in the financial statements of Raisin International for the year ended 31
December 2015.
10.1 X LTD
X Ltd is considering acquiring a machine. It has two options; cash purchase at a cost of
Rs.11,420,000 or a lease.
The terms of the lease are as follows:
(i) The lease period is for four years from 1 January 2016 with an annual rental of
Rs.4,000,000 payable on 31 December each year.
(ii) The lessee is required to pay all repairs, maintenance and other incidental costs.
(iii) The interest rate implicit in the lease is 15% p.a.
Note:
Estimated useful economic life span of the machine is four years.
Required
(a) Prepare a schedule of the allocation of the finance charges in the books of X Limited for
the entire lease period.
(b) Prepare an extract of the Statement of Financial Position of X Limited as on 31 December
2016.
Required
(a) Compute the interest element and the capital portion of the annual repayments; and
(b) Show the journal entries that will record the transaction resulting from the lease
agreement.
Required
Prepare relevant extracts of the statement of financial position and related notes to the financial
statements for the year ended 30 June 2016 along with comparative figures. Ignore taxation.
Required
(a) Prepare the journal entries for the years ending June 30, 2017, 2018 and 2019 in the
books of lessor. Ignore tax.
(b) Produce extracts from the statement of financial position including relevant notes as at
June 30, 2017 to show how the transactions carried out in 2017 would be reflected in
the financial statements of the lessor.
(Disclosure of accounting policy is not required.)
Lease rentals (payable at the end of each year) is Rs.100,000 and interest rate implicit in
the lease is 10% p.a
Required
How AL should reflect in its books of accounts:
a) Right-of-use retained by AL
b) Gain / loss on rights transferred
Required
Explain how the above transaction should be accounted for, with all relevant calculations, in the
financial statements for the year ended 31 March 2016.
Carrying Amount of
Cost Fair Value Value in Use
Value Financing
Required
Prepare the accounting entries that should be recorded by the company on August 15, 2016 in
respect of the above transactions.
Note: Cost of making sale is negligible. Ignore tax and deferred tax implications, if any.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
11.2 GEORGINA
Georgina Company is preparing its financial statements for the year ended 30 September 2015. The
following matters are all outstanding at the year end.
(1) Georgina is facing litigation for damages from a customer for the supply of faulty goods on 1
September 2015. The claim, which is for Rs. 500,000, was received on 15 October 2015.
Georgina’s legal advisors consider that Georgina is liable and that it is likely that this claim will
succeed. On 25 October 2015 Georgina sent a counter-claim to its suppliers for Rs. 400,000.
Georgina’s legal advisors are unsure whether or not this claim will succeed.
(2) Georgina’s sales director, who was dismissed on 15 September, has lodged a claim for Rs.
100,000 for unfair dismissal. Georgina’s legal advisors believe that there is no case to answer
and therefore think it is unlikely that this claim will succeed.
(3) Although Georgina has no legal obligation to do so, it has habitually operated a policy of
allowing customers to return goods within 28 days, even where those goods are not faulty.
Georgina estimates that such returns usually amount to 1% of sales. Sales in September
2015 were Rs. 400,000. By the end of October 2015, prior to the drafting of the financial
statements, goods sold in September for Rs. 3,500 had been returned.
(4) On 15 September 2015 Georgina announced in the press that it is to close one of its divisions
in January 2016. A detailed closure plan is in place and the costs of closure are reliably
estimated at Rs. 300,000, including Rs. 50,000 for staff relocation.
Required
State, with reasons, how the above should be treated in Georgina’s financial statements for the year
ended 30 September 2015.
(a) At 31 December 2014 trade receivables included a figure of Rs. 250,000 in respect of
Nedengy Inc. On 8 March 2015, when the current debt was Rs. 200,000, Nedengy Inc went
into receivership. Recent correspondence with the receiver indicates that no dividend will be
paid to unsecured creditors.
(b) On 15 March 2015 Earley Inc sold its former head office building, Whitley Wood, for Rs. 2.7
million. At the year end the building was unoccupied and carried at a value of Rs. 3.1 million.
(c) Inventories at the year-end included Rs. 650,000 of a new electric tricycle, the Opasney. In
January 2015 the European Union declared the tricycle to be unsafe and prohibited it from
sale. An alternative market, in Bongolia, is being investigated, although the current price is
expected to be cost less 30%.
(d) Stingy Inc, a subsidiary in Outer Sonning, was nationalised in February 2015. The Outer
Sonning authorities have refused to pay any compensation. The net assets of Stingy Inc have
been valued at Rs. 200,000 at the year end.
(e) Freak floods caused Rs. 150,000 damage to the Southcote branch of Earley Inc in January
2015. The branch was fully insured.
(f) On 1 April 2015 Earley Inc announced a 1 for 1 rights issue aiming to raise Rs. 15 million.
Required
Explain how you would respond to the matters listed above.
(a) At the year end there was a debit balance in the books of a company for Rs. 15,000,
representing an estimate of the amount receivable from an insurance company for an
accident claim. In February 2016, before the directors had agreed the final draft of the
published accounts, correspondence with lawyers indicated that Rs. 18,600 might be payable
on certain conditions.
(b) A company has an item of equipment which cost Rs. 400,000 in 2012 and was expected to
last for ten years. At the beginning of the 2015 financial year the book value was Rs. 280,000.
It is now thought that the company will soon cease to make the product for which the
equipment was specifically purchased. Its recoverable amount is only Rs. 80,000 at 31
December 2015.
(c) On 30 November a company entered into a legal action defending a claim for supplying faulty
machinery. The company’s solicitors advise that there is a 20% probability that the claim will
succeed. The amount of the claim is Rs. 500,000.
(d) An item has been produced at a manufacturing cost of Rs. 1,800 against a customer’s order
at an agreed price of Rs. 2,300. The item was in inventory at the year-end awaiting delivery
instructions. In January 2016 the customer was declared bankrupt and the most reasonable
course of action seems to be to make a modification to the unit, costing approximately Rs.
300, which is expected to make it marketable with other customers at a price of about Rs.
1,900.
(e) At 31 December a company has a total potential liability of Rs. 1,000,400 for warranty work on
contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30%
may be incurred but that the remaining 60% is highly unlikely to be incurred.
Required
For each of the above situations outline the accounting treatment you would recommend and give
the reasoning of principles involved. The accounting treatment should refer to entries in the books
and/or the year-end financial statements as appropriate.
Required
Describe how each of the above issue should be dealt with in the financial statements for the year
ended June 30, 2010. Support your point of view in the light of relevant International
Accounting Standards.
Required
Discuss how Akber Chemicals (Pvt.) Limited would deal with the above situations in its financial
statements for the year ended June 30, 2015. Explain your point of view with reference to the
guidance contained in the International Financial Reporting Standards.
Warehouse A Warehouse B
Effective date of agreement July 1, 2010 January 1, 2013
Lease period 10 years 8 years
Rental amount per month Rs. 450,000 Rs. 300,000
On account of serious operating difficulties, QIL vacated both the warehouses on January 1,
2015 and moved to a warehouse situated close to its factory. On the same day QIL sub-
let Warehouse A at Rs. 250,000 per month for the remaining lease period. Warehouse B
was sub-let on March 1, 2015 for Rs. 350,000 per month for the remaining lease period.
(iii) On July 18, 2015, QIL was sued by an employee claiming damages for Rs. 6 million on
account of an injury caused to him due to alleged violation of safety regulations on the part of
the company, while he was working on the machine on June 15, 2015. Before filing the suit,
he contacted the management on June 29, 2015 and asked for compensation of Rs. 4 million
which was turned down by the management. The lawyer of the company anticipates that the
court may award compensation ranging between Rs. 1.5 million to Rs. 3 million. However, in
his view the most probable amount is Rs. 2 million.
(iv) On November 1, 2014 a new law was introduced requiring all factories to install specialised
safety equipment within four months. The Equipment costing Rs. 5.0 million was ordered on
December 15, 2014 against 100% advance payment but the supplier delayed installation to
July 31, 2015. On August 5, 2015 the company received a notice from the authorities levying
a penalty of Rs. 0.4 million i.e. Rs. 0.1 million for each month during which the violation
continued. QIL has lodged a claim for recovery of the penalty from the supplier of the
equipment.
Required
Describe how each of the above issues should be dealt with in the financial statements for the year
ended June 30, 2015. Support your answer in the light of relevant International Accounting
Standards and quantify the effect where possible.
(iv) A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third party.
SL’s legal consultant is of the opinion that an unfavourable outcome is most likely. On the
basis of past experience he has advised that there is 60% probability that the amount of
damages would be Rs. 1 million and 40% likelihood that the amount would be Rs. 1.5 million.
Required
Advise SL about the amount of provision that should be incorporated and the disclosures that are
required to be made in the financial statements for the year ended December 31, 2015.
(iii) On 16 January 2016, LED TV sets valuing Rs. 3 million were stolen from a warehouse.
These sets were included in WL’s inventory as at 31 December 2015.
(iv) WL owns 9,000 shares of a listed company whose price as on 31 December 2015 was Rs. 22
per share. During February 2016, the share price declined significantly after the government
announced a new legislation which would adversely affect the company’s operations. No
provision in this regard has been made in the draft financial statements.
(v) On 31 January 2016, a customer announced voluntary liquidation. On 31 December 2015, this
customer owed Rs. 1.5 million.
(vi) On 15 February 2016, WL announced final dividend for the year ended 31 December 2015
comprising 20% cash dividend and 10% bonus shares, for its ordinary shareholders.
Required
Describe how each of the above transactions should be accounted for in the financial statements
of Walnut Limited for the year ended 31 December 2015. Support your answer in the light of
relevant International Financial Reporting Standards.
(ii) On July 5, 2015 one of ATL’s corporate customers declared bankruptcy. The liquidator
announced on August 25, 2015 that 20% of the debt would be paid on liquidation.
(iii) A new product introduced by a competitor on August 1, 2015 had caused a significant
decline in the market demand of one of ATL’s major products. As a result, ATL is considering
a reduction in price and a cut in production.
(iv) On August 18, 2015 the government announced a retrospective increase in the tax rate
applicable to the company.
(v) The directors of ATL declared a dividend of Rs. 3 per share on August 28, 2015.
Required
State how the above events should be treated in ATL’s financial statements for the year ended
June 30, 2015. You may assume that all the above events are material to the company.
2015 2014
Rs. m Rs. m
Property, plant and equipment 189 130
Retained earnings 166 108
Deferred tax liability 45 27
2015 2014
Rs. m Rs. m
Profit before taxation 90 120
Taxation 32 42
Profit after taxation 58 78
Following additional information has not been taken into account in the preparation of the
above financial statements:
(i) Cost of repairs amounting to Rs. 20 million was erroneously debited to the machinery
account on 1 October 2013. The estimated useful life of the machine is 10 years.
(ii) On 1 July 2014, WL reviewed the estimated useful life of its plant and revised it from 5
years to 8 years. The plant was purchased on 1 July 2013 at a cost of Rs. 70 million.
Depreciation is provided under the straight line method. Applicable tax rate is 30%.
Required
Prepare relevant extracts (including comparative figures) for the year ended 30 June 2015 related to
the following:
(a) Statement of financial position
(b) Statement of profit or loss
(c) Statement of changes in equity
(d) Correction of error note
12.2 DUNCAN
Duncan Company has previously written off any expenditure on borrowing costs in the period in
which it was incurred.
The company has appointed new auditors this year. They have expressed the view that the previous
recognition of borrowing costs in the statement of profit or loss was in error. The company has
decided to correct the error retrospectively in accordance with IAS 8.
The financial statements for 2014 and the 2015 draft financial statements, both reflecting the old
policy, show the following.
2014 2015
Retained earnings Retained
earnings
Rs. 000 Rs. 000
Opening balance 22,500 23,950
Profit after tax for the period 3,200 4,712
Dividends paid (1,750) (2,500)
––––––– –––––––
Closing balance 23,950 26,162
Borrowing costs written off were Rs. 500,000 in 2014 and Rs. 600,000 in 2015.
The directors have calculated that borrowing costs, net of depreciation which should have been
included in property, plant and equipment had the correct policy been applied, are as follows.
Rs. 000
At 30 December 2013 400
At 31 December 2014 450
At 31 December 2015 180
Had the correct policy been in force depreciation of Rs. 450,000 would have been charged in 2014
and Rs. 870,000 in 2015.
Required
Show how the change in accounting policy must be reflected in the statement of changes in equity
for the year ended 31 December 2015. Work to the nearest Rs. 000.
Required
Produce an extract showing the movement in retained earnings, as would appear in the
statement of changes in equity for the year ended December 31, 2015.
13.1 FRANCESCA
On 30 June 2014 Francesca Company had a credit balance on its deferred tax account of Rs.
1,340,600 all in respect of the difference between depreciation and capital allowances.
During the year ended 30 June 2015 the following transactions took place.
(1) Rs. 45 million was charged against profit in respect of depreciation. The tax computation
showed capital allowances of Rs. 50 million.
(2) Interest receivable of Rs. 50,000 was reflected in profit for the period. However, only Rs.
45,000 of interest was actually received during the year. Interest is not taxed until it is
received.
(3) Interest payable of Rs. 32,000 was treated as an expense for the period. However, only Rs.
28,000 of interest was actually paid during the year. Interest is not an allowable expense for
tax purposes until it is paid.
(4) During the year Francesca incurred development costs of Rs. 500,600, which it has
capitalised. Development costs are an allowable expense for tax purposes in the period in
which they are paid.
(5) Land and buildings with a net book value of Rs. 4,900,500 were revalued to Rs. 6 million.
The tax rate is 30%. Francesca has a right of offset between its deferred tax liabilities and its
deferred tax assets.
Required
Calculate the deferred tax liability on 30 June 2015. Show where the increase or decrease in the
liability in the year would be charged or credited.
Plant 48,000
Motor vehicles 12,000
During the period:
Accounting depreciation 11,000
Tax depreciation 15,000
Tax is chargeable at a rate of 30%.
Required
(a) Calculate the corporate income tax liability for the year ended 31st December 2015.
(b) Calculate the deferred tax balance that is required in the statement of financial position as at
31st December 2015.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the
deferred tax charge for the year ended 31st December 2015
(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense
for the year ended 31st December 2015.
Required
(a) Calculate the corporate income tax liability for the year ended 31st December 2016.
(b) Calculate the deferred tax balance that is required in the statement of financial position as at
31st December 2016.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the
deferred tax charge for the year ended 31st December 2016
(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense
for the year ended 31st December 2016.
(e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax
expense for year ended 31st December 2016.
Required
(a) Calculate the corporate income tax liability for the year ended 31st December 2017.
(b) Calculate the deferred tax balance that is required in the statement of financial position as at
31st December 2017.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the
deferred tax charge for the year ended 31st December 2017
(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense
for the year ended 31st December 2017.
(e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax
expense for year ended 31st December 2017.
Required
(a) Calculate the corporate income tax liability for the year ended 31st December 2017.
(b) Calculate the deferred tax balance that is required in the statement of financial position as at
31st December 2017.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the
deferred tax charge for the year ended 31st December 2017
(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense
for the year ended 31st December 2017.
(e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax
expense for year ended 31st December 2017.
Required
For each year:
(a) Calculate the corporate income tax liability for the year.
(b) Calculate the deferred tax balance that is required in the statement of financial position as at
the year end.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the
deferred tax charge for the year.
(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense.
(e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax
expense.
Rs. m
Opening balance – 01/01/2015 2.50
Depreciation for the year (0.7)
Closing balance – 31/12/2015 1.80
(iv) The details of owned fixed assets are as follows:
Accounting Tax
Rs. m Rs. m
Opening balance – 01/01/2015 12.50 10.20
Purchased during the year 5.3 5.3
Depreciation for the year (1.1) (1.65)
Closing balance – 31/12/2015 16.70 13.85
(v) Capital work-in-progress as on December 31, 2015 include financial charges of Rs. 2.3
million which have been capitalised in accordance with IAS-23 “Borrowing Costs”. However,
the entire financial charges are admissible, under the Income Tax Ordinance, 2001.
(vi) Deferred tax liability and provision for gratuity as at January 1, 2015 was Rs. 0.55 million
and Rs. 0.7 million respectively.
(vii) Applicable income tax rate is 35%.
Required
Based on the available information, compute the current and deferred tax expenses for the year
ended December 31, 2015.
Required
(a) Prepare journal entries in the books of Mars Limited for the year ended June 30, 2015 to
record the above transactions including tax and deferred tax.
(b) Prepare a note to the financial statements related to disclosure of finance lease liability, in
accordance with the requirements of IFRS.
(Ignore comparative figures.)
Required
(a) Prepare journal entries in respect of taxation, for the year ended December 31, 2015.
(b) Prepare a reconciliation to explain the relationship between tax expense and accounting profit
as is required to be disclosed under IAS 12 Income Taxes.
(iii) In 2014, GI accrued certain expenses amounting to Rs. 2 million which were disallowed by
the tax authorities. However, these expenses are expected to be allowed on the basis of
payment in 2015.
(iv) GI earned interest on Special Investment Bonds amounting to Rs. 1.0 million and Rs. 1.25
million in the years 2014 and 2015 respectively. This income is exempt from tax.
(v) GI operates an unfunded gratuity scheme. The provision during the years 2014 and 2015
amounted to Rs. 1.7 million and Rs. 2.2 million respectively. No payment has so far been
made on account of gratuity.
(vi) The applicable tax rate is 35%.
Required
Prepare a note on taxation for inclusion in the company’s financial statements for the year ended
December 31, 2015 giving appropriate disclosures relating to current and deferred tax expenses
including a reconciliation to explain the relationship between tax expense and accounting profit.
Required
Prepare a note on taxation for inclusion in AL’s financial statements for the year ended 31
December 2015 giving appropriate disclosures relating to current and deferred tax expenses
including comparative figures for 2014 and a reconciliation to explain the relationship between 2015
tax expense and 2015 accounting profit.
2016 2015
Rs.’m Rs.’m
Revenue 18,000 15,300
Cost of sales (11,340) (9,180)
Gross profit 6,660 6,120
Operating expenses (3,420) (3,240)
Operating profit 3,240 2,880
Interest payable (540) (576)
Profit before tax 2,700 2,304
Taxation (846) (720)
Profit after tax 1,854 1,584
2016 2015
Rs.’m Rs.’m Rs.’m Rs.’m
Current Liabilities
Trade Payables 3,060 2,160
Taxation 900 756
Bank Overdraft 1,080 1,260
5,040 4,176
14,220 7,182
15% Loan Note 3,600 3,600
17,820 10,782
Required
(a) Compute EPS for the year and the comparative figures that will be included in the
published financial statements of Aircon Ltd for the year ended 31 March 2016.
(b) Using the extracts you have been provided with, write a report to Mr Hamad identifying the
key factors which led to the change in the EPS of Aircon Ltd since the year ended 31
March 2016.
(c) Comment on the relevance of the EPS statistics to shareholders.
Required
Calculate the amount of borrowing costs to be capitalised on June 30, 2015 in accordance with the
requirements of International Accounting Standards. (Borrowing cost calculations should be
based on number of months).
The construction work was suspended from 1 February 2015 to 28 February 2015. The suspension
was caused due to delay in shipment of essential components for the installation of the plant.
Required
Calculate the amount of borrowing costs that may be capitalised during the years ended 30 June
2014 and 2015 in accordance with the requirements of International Financial Reporting Standards.
On June 1, 2015, the Building Control Authority issued instructions for stoppage of work on account
of certain discrepancies in the completion plan. The company filed a petition in the Court and the
matter was decided in the company’s favour on July 31, 2015. Work recommenced after a delay
of 61 days.
The following periods may be relevant:
Period Days
March 1 to December 31 306
April 1 to December 31 275
August 1 to December 31 153
October 1 to December 31 92
Required
a) Assuming that the loans were taken specifically for the project, calculate the amount of
borrowing costs that s h o u l d be capitalised i n t h e p e r i o d e n d i n g December 31, 2015
in accordance with the requirements of IAS 23 Borrowing Costs.
b) Assuming that the loans constituted general finance, calculate the amount of borrowing
costs that s h o u l d be capitalised i n t h e p e r i o d e n d i n g December 31, 2015 in
accordance with the requirements of IAS 23 Borrowing Costs.
On April 30, 2015 an invoice of Rs. 1.5 million was raised by the contractor for damages sustained at
the site, on account of rains. After negotiations, QSL finally agreed to make additional payment of
Rs. 1.0 million to compensate the contractor. The amount was paid on May 15, 2015. It is expected
that 75% of the payment would be recovered from the insurance company.
The cost of the project has been financed through the following sources:
(i) Issue of right shares amounting to Rs. 15 million, on September 1, 2014. The company has
been following a policy of paying dividend of 20% for the past many years.
(ii) Bank loan of Rs. 25 million obtained on December 1, 2014. The loan carries a markup of 13%
per annum. The principal is repayable in 5 half yearly equal instalments of Rs. 5 million each
along with the interest, commencing from May 31, 2015. Loan processing charges of Rs. 0.5
million were deducted by the bank at the time of disbursement of loan. Surplus funds, when
available, were invested in short term deposits at 8% per annum.
(iii) Cash withdrawals from the existing running finance facility provided by a bank. Average
running finance balance for the year was Rs. 60 million. Markup charged by the bank for the
year was Rs. 9 million.
Required
Compute cost of capital work in progress for the factory building as of June 30, 2015 in
accordance with the requirements of relevant IFRSs.
(Borrowing costs calculations should be based on number of months)
Required
Explain the ethical issues inherent in the above conversation and what Waheed should do about
them.
Rs. 000
Profit before tax 2,500
Rs. 000
Property, plant and equipment 12,000
Current assets 3,500
Total assets 15,500
During the year ended 31 December 2015 Sindh Industries entered into the following transactions.
(1) Just before the year end Sindh Industries signed a contract to deliver consultancy services for
a period of 2 years at a fee of Rs. 500,000 per annum. The full amount of this fee has been
paid in advance and is non-refundable.
(2) Sindh Industries has constructed a new factory. The construction has been financed from the
pool of existing borrowings. Land at a cost of Rs. 1.8 million was acquired on 1 February 2015
and construction began on 1 June 2015. Construction was completed on 30 September 2015
at an additional cost of Rs. 2.7 million. Although the factory was usable from that date, full
production did not commence until 1 December 2015. Throughout the year the company’s
average borrowings were as follows:
Annual
interest
Amount rate
Rs. %
Bank overdraft 1,000,000 9.75
Bank loan 1,750,000 10
Debenture 2,500,000 8
An amount of Rs. 450,000 has been included in property, plant and equipment in respect of
borrowing costs relating to the construction of the factory. The useful life of the factory has
been estimated at 20 years. No depreciation has been charged for the year. The reason for
this is that the factory has only been in use for one month and that the depreciation charge
would be immaterial.
(3) A blast furnace with a carrying amount at 1 January 2015 of Rs. 3.5 million has been
depreciated in the draft financial statements on the basis of a remaining life of 20 years. In
December 2015 the directors carried out a review of the useful lives of various significant
items of plant and machinery, including the blast furnace and came to the conclusion that the
useful life of the furnace was 20 years at 31 December 2015. The reasoning behind this
judgement was that the lining of the furnace had been replaced in the last week of December
20X6 at a cost of Rs. 1.4 million. Provided that the lining is replaced every five years, the life
of the furnace can be extended accordingly. You have found a report, commissioned by the
previous finance director and prepared by a firm of asset valuation specialists, which
assesses the remaining useful life of the main structure of the furnace at 1 January 2015 at 15
years and the lining of the furnace at 5 years. You have also found evidence that the
managing director has seen this report.
Jafar has had a conversation with the managing director who told him, “We need to make the
figures look as good as possible so I hope you’re not going to start being difficult. The
consultancy fee is non-refundable so there’s no reason why we can’t include it in full. I think
we should look at our depreciation policies. We’re writing off our assets over far too short a
period. As you know, we’re planning to go for a stock market listing in the near future and
being prudent and playing safe won’t help us do that. It won’t help your future with this
company either.”
Required
(a) Explain the required IFRS accounting treatment of these issues, preparing relevant
calculations where appropriate.
(b) Prepare a revised draft of the statement of profit or loss extract for the year ended
31 December 2015 and the statement of financial position at that date.
(c) Discuss the ethical issues arising from your review of the draft financial statements and the
actions that you should consider.
SECTION
B
Answers
2.1 LARRY
Statement of profit or loss
For the year ended 31 December 2015
Rs. in
million
Revenue 3,304
Cost of sales (2,542 + 118 – 127) (2,533)
Gross profit 771
Other income 20
Distribution costs (175)
Administrative expenses (342)
Profit before tax 274
Income tax expense (75)
Profit for the period 199
Statement of financial position
As at 31 December 2015
Assets Rs. in
million
Non-current assets
Property, plant and equipment (2,830 – 918) 1,912
Intangible assets (26 – 5) 21
1,933
Current assets
Inventories 127
Trade and other receivables 189
Cash (89 +2) 91
407
Total assets 2,340
Equity and liabilities
Equity
Share capital 400
Retained earnings (1,562 + 199) 1,761
2,161
Non-current liabilities
Long-term borrowings (18 x 2/3) 12
Current liabilities
Trade and other payables 86
Current portion of long-term borrowing (18 ÷ 3) 6
Current tax payable 75
167
Total equity and liabilities 2,340
Workings
(1) Property, plant and equipment
Rs. in
million
Cost brought forward
Leasehold 300
Computers 50
Revaluation 60
Cost carried forward 410
Accumulated depreciation brought forward (60 + 20) 80
Revaluation (60)
Charge for the year
Leasehold (360 ÷ 30) 12
Computers (50 ÷ 5) 10
Accumulated depreciation carried forward 42
Carrying amount carried forward 368
(2) Intangible assets
Rs. in
million
Cost 60
Amortisation (60 ÷ 3) (20)
Carried forward 40
(3) Allocation of costs
Amounts in Rs. million
Change in Depreciati Other
Staff costs
inventories on etc expenses
Work-in-progress (140 – 125) (15)
Staff costs 260
Finished goods (180 – 155) (25)
Consultancy fees 44
Directors’ salaries 360
Doubtful receivables (420 u 5%) 21
Sundry 294
Amortisation of patent (W2) 20
Depreciation (12 + 10) (W1) 22
(40) 620 42 359
2.3 BARRY
Barry
Statement of profit or loss
For the year ended 31st August 2015
Rs. in
million
Revenue 30,000
Cost of sales (W1) (19,650)
Gross profit 10,350
Distribution costs (W1) (1,370)
Administrative expenses (W1) (1,930)
Profit from operations 7,050
Finance costs (350)
Profit before tax 6,700
Tax (W2) (2,500)
Profit after tax 4,200
Barry
Statement of financial position
As at 31st August 2015
Rs. in
million
ASSETS
Non-current assets
Property, plant and equipment 39,600
Current assets
Inventory 4,600
Trade and other receivables (7,400 + 200) 7,600
Cash and cash equivalents 700
12,900
Total assets 52,500
EQUITY AND LIABILITIES
Capital and reserves
Equity shares 21,000
Share premium 2,000
Accumulated profits (W3) 11,800
Total equity 34,800
Revaluation reserve (W4) 4,700
Non current liabilities
Borrowings 5,200
Current liabilities
Trade and other payables 5,300
Taxation (2,100 + 400) 2,500
7,800
Total equity and liabilities 52,500
Sales 2,010
Operating costs (140 + 960 – 150 + 420 + 210 + 16) (1,596)
————
Operating profit before interest 414
Income from investments 75
————
Profit before taxation 489
Income tax (49)
————
440
————
Statement of financial position
As at 31 March 2015
Assets
Non-current assets
Tangible assets 530
Investments 560
————
1,090
Current assets
Inventory 150
Receivables 470
————
620
————
1,710
————
Assets
Non-current assets (w (ii))
Property, plant and equipment (43,000 + 38,400) 81,400
Development costs 14,800
96,200
Current assets
Inventory 20,000
Trade receivables 43,100
63,100
Total assets 159,300
Equity and liabilities:
Equity
Share capital 70,000
Retained earnings (w (iii)) 41,600
117,100
Revaluation reserve (w (iii)) 5,500
Non-current liabilities
Deferred tax 6,000
Current liabilities
Trade payables (23,800 – 400 + 100 – re legal action) 23,500
Bank overdraft 1,300
Current tax payable 11,400
36,200
Total equity and liabilities 159,300
Note: As it is considered that the outcome of the legal action against Sarhad Sugar Limited is
unlikely to succeed (only a 20% chance) it is inappropriate to provide for any damages. The
potential damages are an example of a contingent liability which should be disclosed (at Rs.2
million) as a note to the financial statements. The unrecoverable legal costs are a liability (the
start of the legal action is a past event) and should be provided for in full.
Workings (figures in brackets in Rs.000)
(i) Cost of sales: Rs. in ‘000
Per trial balance 204,000
Depreciation (w (iii)) – leasehold property 2,500
– plant and equipment 9,600
Loss on disposal of plant (4,000 – 2,500) 1,500
Amortisation of development costs (w (iii)) 4,000
Research and development expensed (1,400 + 2,400 (w (iii)) 3,800
––––––––
225,400
Current liabilities
Short term loan 85
Account and other payables 6 82
Provision for taxation 17
184
809
Rs. in
Notes million
1. Property, plant and equipment
Operating assets 556
Capital work in progress – building 20
576
Freehold
land Building Machines Fixtures Total
Accumulated depreciation
As of July 01 2016 - 19.5 22.5 5.9 47.9
For the year - 6.5 18.1
8
(105 × 85) + 10% × 15 × /12) 9.5
3
(105 × 19) + 10% × 8 × /12) 2.1
Disposals - - (5.0) - (5.0)
As at June 30 2017 - 26.0 27.0 8.0 61.0
Carrying amount 375.0 104.0 58.0 19.0 556.0
Depreciation rate - 5% 10% 10%
1.2 Revaluation
During the year 2013, the first revaluation of freehold land was carried out. The valuation
was carried out under market value basis by an independent valuer, Mr. Dee, Chartered
Civil Engineer of M/s SSS Consultants (Pvt.) Ltd., Islamabad. It resulted in a surplus of Rs.
120 million over book values which was credited to surplus on revaluation of fixed assets.
Had there been no revaluation, the value of freehold land would be Rs. 255 million.
1.3 Disposal of machine
Rs. in
million
Proceeds 13.0
Cost 15.0
Accumulated depreciation (5.0)
Carrying amount (10.0)
Profit on disposal 3.0
Note 2017
Rs. in
million
2. Intangible Assets
Cost of computer software/license 10.0
Accumulated Amortization as of July 1, 2016 1.0
Amortization for the year 1.0
Accumulated Amortization as of June 30, 2016 2.0
Carrying value as at June 30, 2017 8.0
Amortization rate 10%
3. Accounts Receivable
Considered good
- Secured 30
- Unsecured 27
57
Considered doubtful 3
60
Less: Provision for bad debts 3.1 3
57
Rs. in
Assets million
Non-current assets
Property, plant and equipment (W2)
351.00
Intangible assets (20 – 12)
8.00
359.00
Current assets
Inventories (W6)
64.50
Trade receivables (W5)
39.00
103.50
462.50
Equity and Liabilities
Equity
Issued, subscribed and paid up capital
120.00
Retained earnings (W4)
87.10
207.10
Revaluation surplus 41.25
Non-current liabilities
Redeemable preference shares
40.00
Debentures
80.00
Deferred taxation (W 10)
9.00
129.00
Current liabilities
Trade payables
30.40
Accrued expenses (W3)
25.00
Taxation
16.50
Bank overdraft
13.25
85.15
Total equity and liabilities 462.50
Statement of profit or loss for the year ended June 30, 2017
Rs. in
million
Sales revenue (W5) 445.40
Cost of sales (W7) (250.72)
Gross profit 194.68
Distribution costs (W8) (20.05)
Administrative expenses (W8) (40.38)
Financial charges (W9) (9.10)
125.15
Loss due to fraud (30.00)
Profit before tax 95.15
Income tax expense (W10) (19.50)
Profit for the year 75.65
Workings
(W1) Leasehold property
Annual depreciation before the revaluation (230 ÷ 40 years) = Rs. 5.75 million per annum.
Depreciation this year has been charged incorrectly on cost (whereas it should have been
on the revalued amount).
This year’s charge must be added back
Dr Cr
Accumulated depreciation 5.75
Cost of sales (50%) 2.88
Administrative expenses (30%) 1.72
Distribution costs (20%) 1.15
Rs. in
million
Carrying amount at the 30 June (as per trial balance)(230.00 – 40.25) 189.75
Add back depreciation incorrectly charged (see above) 5.75
Carrying amount of property at the start of the year 195.5
Rs. in
Revaluation surplus million
Revalued amount of leasehold property 238.00
Less: WDV of leasehold property at revaluation 195.50
Revaluation surplus arising in the year 42.50
Transfer to retained earnings in respect of incremental depreciation (Rs. 7
million – Rs. 5.75 million) (1.25)
41.25
Shaheen Limited
Statement of changes in equity 2017
As of June 30, 2017 Rs.000
Issued,
Retained
subscribed & paid
earnings
up capital
Balance July 1, 2016 60,000 32,000*
Correction of prior year error (10,000 u 20/120) (1,667)
Balance July 1, 2016 (restated) 60,000 30,333
Comprehensive income for the year 17,039
Dividend for the year ended June 30, 2016
(60,000*0.20) (12,000)
Balance June 30, 2017 60,000 35,372
*Retained earnings as at 01-07-11 = 20,000+ (20% of 60,000)=32,000
Workings
W1 Depreciation for the year
On building (36,000/20) 1,800
On plant and equipment (30,000 3,000)/10 2,700
Total 4,500
Selling and
Cost of Administrative
distribution
W2 Costs sales costs
costs
Opening inventory 23,000
Costs as per Trial balance 100,000 35,000 30,000
Closing inventory (30,000)
Depreciation (75%, 15%, and 10% of Rs.
4,500) 3,375 675 450
Adjustment for goods sent on sale or return,
erroneously booked as sales last year now
returned during the year. (10,000/1.2) 8,333
Amortization of export license (6,000/5*0.5) 600
104,708 36,275 30,450
W3:Taxation
Profit before tax 23,567
Disallowances and add backs 5,000
Taxable income 28,567
Current For the year (28,567*0.35) 9,998
For prior years (7,000 5,000) (2,000)
Deferred For the year (5,000 800)*0.35 (1,470)
6,528
2 Cost of sales
Raw material consumed (1,751 + 22,603 - 2,125) 22,229
Stores and spares consumed 180
Salaries, wages and benefits (2,367 × 55%) 2.1 1,302
Utilities (734 × 85%) 624
Depreciation and amortizations (1.287 × 70%) 901
Stationery and office expenses (230 × 25%) 58
Repairs and maintenance (315 × 85%) 268
25,562
Opening work in process 73
Closing work in process (125)
25,510
Opening finished goods (manufactured) 1,210
Closing finished goods (manufactured) (1,153)
25,567
Finished goods (imported)
Opening stock 44
Purchases 658
702
Closing stock (66)
636
26,203
2.1 Salaries, wages and benefits include Rs. 30 million (54 × 55%) and Rs. 24 million (44 × 55%)
in respect of defined contribution plan and defined benefit plan respectively.
Rs. in
3 Distribution costs million
Advertisement and sales promotion 4,040
Outward freight and handling 1,279
Salaries, wages and benefits (2,367 × 30%) 3.2 710
Utilities (734 × 5%) 37
Depreciation and amortization (1,287 × 20%) 257
Stationery and office expenses (230 × 40%) 92
Repairs and maintenance (315 × 5%) 16
6,431
3.1 Salaries, wages and benefits include Rs. 16 million (54 × 30%) and Rs. 13 million (44×30%) in
respect of defined contribution plan and defined benefit plan respectively.
Rs. in
4 Administrative expenses million
Salaries, wages and benefits (2,367 × 15%) 4.1 355
Utilities (734 × 10%) 73
Depreciation and amortization (1,287 × 10%) 129
Stationery and office expenses (230 × 35%) 80
Repairs and maintenance (315 × 10%) 31
Legal and professional charges 71
Auditor's remuneration 4.2 13
752
4.1 Salaries, wages and benefits include Rs. 8 million (54 × 15%) and Rs. 7 million (44×15%) in
respect of defined contribution plan and defined benefit plan respectively.
Rs. in
4.2 Auditor's remuneration million
Audit fees 8
Taxation services 4
Out of pocket expenses 1
13
5 Other operating expenses
Donation 5.1 34
Worker's Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
399
5.1 Donations
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of the
company’s directors, Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in which a director or
his spouse had any interest at any time during the year.
Rs. in
6 Other operating income million
Income from financial assets
Dividend income 12
Return on savings account 2
Income from non-financial assets
Scrap sales 16
30
7 Finance costs
Finance charges on short term borrowings 133
Exchange loss 22
Finance charges on lease 11
166
Rs. in
million
8 Taxation
Current - for the year 1,440
Deferred (3,120 × 35%) 1,092
2,532
3.1 KLEA
Statement of cash flows for the year ended 31st March 2015
Rs. in ‘000
Cash flows from operating activities
Profit before taxation 1,606
Adjustments for:
Depreciation (W4) 800
Finance income (50)
Interest expense 320
––––––
2,676
Increase in trade receivables (400)
Increase in inventories (1,200)
Increase in trade payables 334
––––––
Cash generated from operations 1,410
Interest paid (320)
Income taxes paid (W1) (630)
––––––
Net cash from operating activities 460
Cash flows from investing activities
Purchase of intangible assets (W2) (300)
Purchase of property, plant and equipment (W3) (1,600)
Proceeds from sale of equipment 150
Purchase of long-term investments (200)
Finance income received 50
––––––
Net cash used in investing activities (1,900)
(Note: Alternative classifications of the cash flows in accordance with IAS 7 should receive full credit
– i.e. interest and dividends received as investing activities or operating cash flows, interest and
dividends paid as financing or operating cash flows.)
Notes
(1) Analysis of cash and cash equivalents Rs. in ‘000
2015 2014
Cash on hand and balances with bank 32 580
Bank overdraft (414) -
–––– ––––
Cash and cash equivalents (382) 580
–––– ––––
Rs.000 Rs.000
Balance b/d 120,000 Disposals account 8,000
Additions 39,000 Balance c/d 151,000
———— ————
159,000 159,000
———— ————
Rs.000 Rs.000
Balance b/d 24,000 Disposals account 5,000
Additions 10,000 Balance c/d 29,000
——— ———
34,000 34,000
——— ———
Rs.000 Rs.000
Disposals account 6,000 Balance b/d 45,000
Balance c/d 54,000 Charge for year 15,000
——— ———
60,000 60,000
——— ———
Rs.000 Rs.000
Disposals account 2,000 Balance b/d 13,000
Balance c/d 15,000 Charge for year 4,000
——— ———
17,000 17,000
——— ———
Rs.000 Rs.000
Plant cost 8,000 Plant depreciation 6,000
Fittings cost 5,000 Fittings depreciation 2,000
Cash proceeds
Plant 3,000
Fittings 1,000
Depreciation underprovided
(bal fig) 1,000
——— ———
13,000 13,000
——— ———
Rs.000 Rs.000
Cash paid (bal fig) 10,500 Balance b/f – corporation tax 21,500
Balance c/f – corporation tax 33,000 I&E account – corporation tax 22,000
——— ———
43,500 43,500
——— ———
(7) Net profit before tax
Note As profit before tax is required, reconstruct the statement of profit or loss up to this
figure.
Rs. in ‘000
Profit before tax 64,000
Taxation – Corporation tax (22,000)
———
42,000
Dividends (15,000)
———
Retained profit for year 27,000
Balance b/f 14,000
———
Balance c/f 41,000
(8) Cash and cash equivalents as shown in the statement of financial position
Cash and cash equivalents consist of cash on hand and balances with banks.
Rs. in ‘000
2015 2014 Change
in
year
Cash at bank 11,400 200 11,200
Bank overdraft – (14,000) 14,000
——— ——— ———
11,400 (13,800) 25,200
3.3 FALLEN
Statement of cash flows for the year ended 31 December 2015
Cash flows from operating activities Rs. in ‘000
Net profit before tax 4,625
Adjustments for:
Depreciation, (W1-3) 1,472
Interest payable 152
———
Operating profit 6,249
Increase in deferred repairs provision 186
Increase in inventories (894)
Increase in receivables (594)
Increase in payables 324
———
Cash generated from operations 5,271
Interest paid (152)
Tax paid (W5) (1,775)
———
Net cash from operating activities 3,344
(3) Disposals
(4) Dividends
(5) Taxation
(9) Analysis of the balances of cash and cash equivalents as shown in the statement of
financial position
Cash and cash equivalents consist of cash on hand and balances with banks.
Rs. in ‘000
2015 2014 Change in
year
Cash at bank and in hand – 576 (576)
Bank overdrafts (222) – (222)
—— —— ——
(222) 576 (798)
Workings
(W1) Non-current assets
Rs.000
Land and buildings – cost/valuation
Balance b/f 1,800
Revaluation surplus 150
Balance c/f (2,000)
Difference cash purchase (50)
Plant – cost
Balance b/f 1,220
Disposal (500)
Balance c/f (1,568)
Difference cash purchase (848)
The plant had a carrying value of Rs.256,000 at the date of its disposal (500 cost – 244
depreciation). As there was a loss on sale of Rs.86,000 (given in question), the sale proceeds
must have been Rs.170,000 (i.e. 256 – 86).
Rs.000
Tax provision b/f (367)
Deferred tax b/f (400)
Statement of profit or loss tax charge (520)
Tax provision c/f 480
Deferred tax c/f 439
Difference cash paid (368)
Workings
Rs.m
Opening balance 100
Amount capitalised 500
Closing balance (470)
Amortisation: balancing figure 130
Disposal of plant:
Disposal at net book value (see above) 70
Loss on sale (given in the question) (50)
Difference = Sale proceeds 20
(b) The cash flows generated from operations were Rs.685 million and are more than enough to
pay the interest costs and taxation, but these cash flows are not as large as the equivalent
profit figure. For most companies the operating cash flows are higher than the profit before
interest and tax due to the effects of depreciation/amortisation charges (which are not cash
flows). In the case of Ittehad Manufacturing Ltd the depreciation/amortisation effect has been
more than offset by a much higher investment in working capital of Rs.645 million. Inventory
has increased by over 50% and accounts receivable by 45%. This may be an indication of
expanding activity, but it could also be an indication of poor inventory management policy and
poor credit control, or even the presence of some obsolete inventory or unprovided bad
accounts receivable.
A cause of concern is the size of the dividends, which seem high at Rs.320 million. This is a
very high distribution ratio, and it seems odd that the company is returning such large
amounts to shareholders at the same time as they are raising finance. Rs.450 million has
been received from the issue of new shares and Rs.200 million from a further issue of loan
notes.
The company has invested considerably in new plant (Rs.250 million) and even more so in
development expenditure (Rs.500 million). If management has properly applied the
capitalisation criteria in IAS 38 Intangible Assets, then this indicates that they expect good
future returns from the investment in new products or processes. The net investment in non-
current assets is Rs.680 million which closely correlates to the proceeds from financing of
Rs.650 million. In general it is acceptable to finance increases in the capacity of non-current
assets by raising additional finance, however operating cash flows should finance
replacement of consumed non-current assets.
Rs. in
million
CASH FLOW FROM OPERATING ACTIVITIES
Net profit before tax 191.40
Adjustments for:
Depreciation 27.70
WORKING 3
Bad debts expense for the year
Closing balance (28.5 ÷ 0.95) - 28.5 1.50
Less: Opening balance (24.7 ÷ 0.95) - 24.7 (1.30)
Add: Bad debts written off 1.00
Bad debts expense for the year 1.20
WORKING 4
Increase in trade debts
Closing balance (28.5 ÷ 0.95) 30.00
Less: Opening balance (24.7 / 0.95) (26.00)
Add: Bad debts written off 1.00
5.00
WORKING 5
Issue of share capital
Closing balance of paid up capital 396.00
Closing balance of share premium 45.00
Less:
Tutorial note:
The original ICAP answer did not simply adjust for the movement in trade debts but added back the
write off for bad debts (Rs. 6 million) and movement in the doubtful debt provision (Rs. 4 million) and
then adjusted for the movement in trade debt before these write offs (Rs. 86 million).
As the trade debt contains the credit for the write off and the profit for the year contains the debit it is
easier to leave the expense in and adjust for the net movement.
4.1 HALL
Consolidated statement of financial position as at 31 December 2015
Rs.000
Assets
Non-current assets
Property, plant and equipment (35,000 + 20,000) 55,000
Goodwill 3,000
————
58,000
Current assets (16,000 + 14,000) 30,000
————
88,000
————
Equity and liabilities
Capital and reserves
Share capital 10,000
Retained earnings (W5) 16,000
————
26,000
Hall
75%
Stand
4.2 HASSLE
Consolidated statement of financial position as at 31 December 2015
Rs.
Sundry net assets (207,500 + 226,600) 474,100
————
474,100
————
Equity capital 120,000
Retained earnings (W5) 123,500
————
243,500
Non-controlling interests (W4) 24,000
Sundry liabilities (100,000 + 106,600) 206,600
————
474,100
————
WORKINGS
(1) Group structure
Hassle
80%
Strife
4.3 HYMN
Consolidated statement of financial position as at 31 December 2015
Assets Rs.
Non-current assets
Property, plant and equipment 170,000
Goodwill 29,000
Current assets 275,000
————
474,000
————
Equity and liabilities
Shareholders’ equity
Share capital 100,000
Retained earnings (W5) 178,200
———–
278,200
Non-controlling interest (W4) 19,800
Current liabilities 176,000
————
474,000
————
WORKINGS
(1) Group structure
Hymn
80%
Psalm
4.4 HANG
Consolidated statement of financial position as at 31 December 2015
Assets Rs.
Non-current assets
Property, plant and equipment (240 + 180) 420,000
Goodwill 26,600
Current assets (250 + 196) 446,000
————–
892,600
————–
60%
Swing
4.5 HASH
Consolidated statement of financial position as at 31 December 2015
Rs.000
Sundry net assets (207,500 + 226,600) 434,100
Goodwill (W2) 8,800
————
442,900
————
WORKINGS
(1) Group structure
Hash
80%
Stash
5.1 HAIL
Consolidated statement of financial position as at 31 December 2015
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment 246,000
Investments (68,000 – 65,000) 3,000
Goodwill (W3) 6,500
Current assets
Cash at bank and in hand 39,900
Trade receivables 138,300
Inventories 92,400
———–
526,100
———–
Equity and liabilities
Capital and reserves
Share capital 100,000
Capital reserve (W6) 18,000
Retained earnings (W5) 210,480
———–
328,480
Non-controlling interest (W4) 11,420
Current liabilities
Trade payables 183,000
Proposed dividend – parent company 3,000
– non controlling interest 200
———– 3,200
———–
526,100
———–
WORKINGS
(1) Group structure
Hail
90%
Snow
5.2 HAIRY
Consolidated statement of financial position as at 31 December 2015 Rs.000
Assets
Non-current assets
Property, plant and equipment 180,000
Current assets
Cash at bank and in hand 15,500
Investments 3,000
Receivables 91,700
Inventory (17,000 + 11,000 – 800) 27,200
———–
317,400
———–
80%
Spider
5.3 HARD
Consolidated statement of financial position as at 31 December 2015
Assets Rs.000
Non-current assets
Property, plant and equipment (225 + 175 – 17.5 (W6)) 382,500
Goodwill (W3) 14,000
Current assets (271 + 157) 428,000
———–
824,500
———–
Equity and liabilities
Shareholders’ equity
Share capital 100,000
Share premium account 15,000
Retained earnings (W5) 260,500
———–
375,500
Non-controlling interest (W4) 76,000
Current liabilities 373,000
———–
824,500
———–
WORKINGS
(1) Group structure
Hard
60%
Soft
5.4 HALE
(a) Consolidated statement of financial position as at 31 December 2015
Rs.000
Assets
Non-current assets
Property, plant and equipment
(152,000 + 129,600 + 28,000 (W2)) 309,600
Goodwill (W3) 61,400
Current assets
Bank (41,000 + 8,000) 49,000
Receivables (104,000 + 84,000) 188,000
Inventory (112,000 + 74,400 – 3,200 (W6)) 183,200
————–
791,200
————–
Equity and liabilities
Capital and reserves
Share capital 100,000
Retained earnings (W5) 555,200
————–
655,200
Non-controlling interest (W3) 60,000
Current liabilities (52,000 + 24,000) 76,000
————–
791,200
————–
WORKINGS
(1) Group structure
Hale
128
160
= 80% ord
Sowen
5.5 HELLO
Consolidated statement of financial position as at 31 December 2015
Assets Rs.
Non-current assets
Property, plant and equipment (225 + 175 + 10 – 2) 408,000
Goodwill (W3) 8,000
Current assets (271 + 157) 428,000
———–
844,000
———–
Equity and liabilities
Shareholders’ equity
Called up share capital 100,000
Retained earnings (W5) 291,800
———–
391,800
Non-controlling interest (W4) 79,200
Current liabilities 373,000
———–
844,000
———–
WORKINGS
(1) Group structure
Hello
60%
Solong
Hello 275,000
Solong (60% u (88,000 – 60,000 (W2)) 16,800
———–
291,800
———–
6,420
Non-controlling interest (W5) 350
Non-current liabilities
Government grants (230 + 40) 270
Current liabilities
Trade payables (475 + 472) 947
Operating overdraft 27
Income tax liability (228 + 174) 402
–––––––––––––
1,376
–––––––––––––
Workings
(W1) Property, plant and equipment
Rs.000
Balance from question – Hasan Limited 2,120
Balance from question – Shakeel Limited 1,990
Fair value adjustment on acquisition (see below) (120)
Over-depreciation re fair value adjustment year to 31 March 2015 30
–––––––––––––
4,020
–––––––––––––
A fair value of the leasehold based on the present value of the future rentals (receivable in
advance) would be the next (non-discounted) payment of the rental plus the final three
years as an annuity at 10%:
Rs.000
PV of rental receipts: Rs.80,000 + (Rs.80,000 u 2.50) 280
Carrying value on acquisition is (400)
–––––––––––––
Fair value reduction of leasehold (120)
–––––––––––––
The depreciation of the leasehold in Shakeel Limited’s accounts would be Rs.100,000 per
annum. However in the consolidated accounts it should be Rs.70,000 (Rs.280,000/4).
This would require a reduction in depreciation of Rs.30,000 in the consolidated accounts
for the next four years.
Software:
Rs.000
Amounts given in the question (719 + 560) 1,279
Unrealised profit in inventories (25 u 25/125) (5)
–––––––––––––
1,274
–––––––––––––
Rs.000
Retained profits of Shakeel Limited, 31 March 2015 1,955
Adjustments:
Excess charge for leasehold depreciation 30
Insufficient charge for Software amortisation (180)
Unrealised profit in inventory (W2) (5)
–––––––––––––
(W4) Goodwill
Rs.000
At acquisition date
Shares of Shakeel Limited 1,500
Share premium of Shakeel Limited 500
Retained earnings of Shakeel Limited 2,200
Fair value adjustments:
Leasehold (W1) (120)
Software (W1) (180)
–––––––––––––
3,900
–––––––––––––
Rs.000
Fair value adjustments:
Leasehold (120)
Software (180)
–––––––––––––
Rs.000
Shakeel Limited’s current account with Hasan Limited per question 75
Deduct cash in transit regarding this balance (15)
–––––––––––––
Rs.000
Investment in Hasan Limited’s books 200
Deduct repayment in transit (40)
–––––––––––––
Revenue 1,410
Cost of sales (733)
——–
Gross profit 677
Distribution costs (90)
Administrative expenses (100)
——–
Operating profit 487
Investment income 9
Finance costs (22)
——–
Profit before tax 474
Income tax expense (165)
——–
Profit after tax 309
Non-controlling interest (W3) (15)
——–
Profit 294
——–
Movement on consolidated retained earnings for the
year ended 31 December 2015
Retained earnings at 1 January 2014 (W4) 127
Retained earnings for the year 294
Dividends (50)
——–
Retained earnings at 31 December 2015 (W5) 371
——–
WORKINGS
(1) Group structure
Harry
75%
Sally
Revenue 362,000
Cost of sales (169,050)
———–
Gross profit 192,950
Operating costs (93,817)
———–
Operating profit 99,133
Horny
Smooth
(2) Consolidation schedule
Horny Smooth Adj Consol
4
12
Rs.000 Rs.000 Rs.000 Rs.000
Revenue 304,900 65,100 (8,000) 362,000
Cost of sales (144,200) (32,850) 8,000 (169,050)
Horny 112,050
Simpson (11,983 – 2,996) 8,987
Negative goodwill 3,800
———
124,837
———
6.3 HERON
Consolidated statement of financial position as at 30 June 2015
Rs.000
Assets
Non-current assets
Property, plant and equipment (31,000 + 15,000) 46,000
Current assets (23,000 + 11,000) 34,000
———
80,000
Equity and liabilities
Shareholders’ equity
Share capital 10,000
Share premium account 5,000
2
Retained earnings (20,000 + ( u 18,500)) 32,333
3
———
47,333
1
Non-controlling interest (3 u 20,000) 6,667
Profit for the financial year attributable to the members of Heron Inc 17,333
———
Retained earnings carried forward 32,333
———
6.4 HANKS
Consolidated statement of financial position as at 31 December 2015
Assets Rs.000 Rs.000
Non-current assets
Property, plant and equipment
(32,000 + 25,000 + 20,000 + 6,000) 83,000
Goodwill 4,500
———–
87,500
Current assets
Cash at bank and in hand (9,500 + 2,000 + 4,000) 15,500
Receivables (20,000 + 8,000 + 17,000) 45,000
Inventory (30,000 + 18,000 + 18,000 – 2,100) 63,900
———–
124,400
———–
Total assets 211,900
Equity and liabilities
Share capital 40,000
Share premium account 6,500
Retained earnings (W5) 88,300
———–
134,800
Non-controlling interest (W4) 28,100
Current liabilities
Trade payables (23,500 + 6,000 + 17,000) 46,500
Proposed dividends – to minority shareholders (2,500 – 2,000) 500
– to Hanks’s shareholders 2,000
———– 49,000
———–
Total equity and liabilities 211,900
Consolidated statement of profit or loss for the
year ended 31 December 2015
Rs.000
80% 60%
Streep Scott
Scott
7.1 ROONEY
(a) Borrowing costs
IAS 23 should be applied in accounting for borrowing costs.
Borrowing costs are recognised as an expense in the period in which they are incurred unless
they are capitalised in accordance with IAS 23 which says that borrowing costs that are
directly attributable to the acquisition, construction or production of a qualifying asset can be
capitalised as part of the cost of that asset.
A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
Borrowing costs that are directly attributable to acquisition, construction or production
are taken to mean those borrowing costs that would have been avoided if the
expenditure on the qualifying asset had not been made.
When an enterprise borrows specifically for the purpose of funding an asset, the identification
of the borrowing costs presents no problem as the amount capitalised is the actual borrowing
costs net of any income earned on the temporary investment of those borrowings.
If funds are borrowed, generally, the amount of borrowing costs eligible for capitalisation is
determined by applying a capitalisation rate to the expenditures on that asset calculated as
the weighted average of the borrowing costs applicable to general borrowings.
IAS 23 also contains rules on commencement of capitalisation, suspension of capitalisation
and cessation of capitalisation.
The carrying value of the assets should be written down by a factor of 21,000/24,375.
This gives a carrying value for the hydraulic system (in Rs.000) of 5,169 and for the
‘frame’ 15,831.
The hydraulic plant should be depreciated over two more years and the ‘frame’ over 7
more years.
(ii) 31st March 2017
7.2 EHTISHAM
IAS 16 permits assets to be carried at cost or revaluation. Where the latter is chosen, the asset must
be stated at its fair value.
The original depreciation was Rs. 40,000 (Rs. 1,000,000/25 years) per annum.
On 31st March 2014 the asset is two years old. Its carrying value before revaluation was therefore
Rs.1million less accumulated depreciation of Rs.80,000 (2/25 × Rs. 1 million).
Rs.
Cost/valuation 1,000,000
Accumulated depreciation (80,000)
Net book value 920,000
In order to effect the revaluation, the cost is uplifted to fair value of Rs.1.15m, the accumulated
depreciation is eliminated, and the uplift to the net book value is credited to a revaluation surplus
account.
Debit Credit
Cost/valuation 150,000
Accumulated depreciation 80,000
Revaluation surplus 230,000
The asset is depreciated over its remaining useful economic life of 23 years giving a charge of Rs.
50,000 (Rs. 1,150,000/23 years) per annum in the year to 31st March 2015.
Debit Credit
Statement of profit or loss 50,000
Accumulated depreciation 50,000
Rs.
Cost/valuation 1,150,000
Accumulated depreciation (50,000)
Net book value 1,100,000
Debit Credit
Revaluation surplus 10,000
Accumulated profits 10,000
By the 31st March 2015, the balance remaining on the revaluation reserve will be Rs.220,000.
Rs.
Surplus recognised at 31 March 2014 230,000
Transfer to accumulated profits (10,000)
Net book value 220,000
The fall in property values at the year-end. The asset must be revalued downwards to Rs.0.8million,
a write-down of Rs.300,000.
Rs.220,000 of this is charged against the revaluation reserve relating to this asset, and the
remaining Rs.80,000 must be charged against profits.
The reduction of the carrying amount of the asset is achieved by removing the accumulated
depreciation and adjusting the asset account by the balance.
Debit Credit
Revaluation surplus 220,000
Statement of profit or loss 80,000
Asset at valuation 350,000
Accumulated depreciation 50,000
This balance is depreciated over the remaining useful life of the asset (22 years).
7.3 CARLY
Financial statements for the year ended 31 December 2015 (extract)
Property, plant and equipment
Rs.
Purchase price (20,000 – 3,000 – 1,000) 16,000
Delivery costs 500
Installation costs 750
Interest on loan taken out to finance the purchase 300
–––––––
17,550
–––––––
7.5 FAM
Accounting policies
(a) Property, plant and equipment is stated at historical cost less depreciation, or at valuation.
(b) Depreciation is provided on all assets, except land, and is calculated to write down the cost or
valuation over the estimated useful life of the asset.
The principal rates are as follows.
Buildings 2% pa straight line
Plant and machinery 20% pa straight line
Fixtures and fittings 25% pa reducing balance
Depreciation
At 1 January 2015 80 458 140 – 678
Revaluation adjustment (80) – – – (80)
Provisions for year (W2) 17 298 70 – 385
Disposals – (195) (31) – (226)
—— —— —— —— ——
At 31 December 2015 17 561 179 – 757
—— —— —— —— ——
Net book value
At 31 December 2015 1,583 929 210 64 2,786
——— ——— —— —— ———
At 31 December 2014 820 1,155 250 91 2,316
——— ——— —— —— ———
Land and buildings have been revalued during the year by Messrs Jackson & Co on the basis
of an existing use value on the open market.
Depreciation charged in the financial statement for the year ended June
30, 2014 Rs. 1,400,000
(b) According to IAS-16, the following factors should be considered when estimating the useful
life of a depreciable asset:
(iii) Obsolescence
Once the useful life of a depreciable asset is determined, it shall be reviewed at least at each
financial year-end.
If expectations vary from the previous estimates, then change should be adjusted for current
and future periods in accordance with the requirements of IAS 8.
Debit Credit
Date Particulars
Rs.000 Rs.000
30.06.2014 Depreciation 9,444
Accumulated depreciation – Building 9,444
(Record depreciation for the year 2014)
Working: Rs. 170,000 ÷ 18 = Rs. 9,444
01.07.2014 Accumulated depreciation – Building 9,444
Building 9,444
(Reversal of prior year depreciation)
01.07.2014 Building 19,444
Revaluation income 9,444
Surplus on revaluation of fixed assets (balancing) 10,000
(Reversal of prior year impairment)
Working:
Revaluation income = Rs. 10,000 – [ Rs. 10,000 –
Rs. 9,444] = Rs. 9,444
Building: [Rs. 170,000 – Rs. 9,444] – Rs. 180,000
=Rs. 19,444
30.06.2015 Depreciation 10,588
Accumulated depreciation – Building 10,588
(Record depreciation for the year 2015)
Working: Rs. 180,000 ÷ 17 = Rs. 10,588
30.06.2015 Surplus on revaluation of fixed assets 588
Retained earnings 588
(Reverse the excess depreciation)
Working: Rs. 10,000 ÷ 17 = Rs. 588
Debit Credit
Rs.000 Rs.000
30.06.2015 Impairment loss W1 5,296
Property, plant and equipment 5,296
(Impairment of plant due to break down)
30.06.2015 Revaluation surplus 5,296
Impairment loss W1 5,296
(Impairment loss adjusted against revaluation)
48,600
Accumulated depreciation
(1-1-2006 to 30-6-2010) {(48,600-2,000)/15*4.5} (13,980)
WDV as on 30-6-2010 34,620
Revaluation surplus (45,000-34,620) 10,380
Revalued amount as of July 1, 2010 45,000
Accumulated depreciation
(1-7-2010 to 30-6-2015) {(45,000-2,000)/10.5*5) (20,476)
WDV as on 30-6-2015 24,523
Since impairment loss is less than the revaluation surplus on impairment date, the full amount
of impairment would be adjusted against the revaluation surplus.
8.3 IMPS
(a) Impairment loss
Rs.m
Carrying value 500
Recoverable amount (385)
Impairment loss 115
Recoverable amount is value in use (Working 1) as this is higher than the fair value less costs of
disposal (Working 2).
Workings
(1) Value in use:
Forecast cash flows discounted at 12%:
Rs.m
Year 1 (185 × 0.893) 165.2
Year 2 (160 × 0.797) 127.5
Year 3 (130 × 0.712) 92.6
Total 385.3
(2) The fair value less costs of disposal:
Rs.m
Goodwill 0
Freehold 270
Freehold land and buildings 50
320
Because the land and buildings have been re-valued, the impairment is treated as a
revaluation decrease until the carrying amount of the asset reaches its depreciated historical
cost. The revaluation reserve relating to the asset is Rs.65 million and so is adequate to cover
the full impairment of Rs.33m. The impairment must be separately disclosed and the notes to
the accounts must specify by class of asset the impairment recognised directly to equity.
The impairment loss on the goodwill and plant (Rs.82 million) must be recognised in profit or
loss for the year. The notes to the accounts must specify the line item in which the impairment
loss has been included.
Where the impairment write-down is material, information must also be provided as to the
events and circumstances that led to the loss, the nature of the assets affected, the segment
to which the asset belongs, that recoverable amount was based on value in use and the
discount rate used to calculate this.
Workings
Loss on the various non-current assets
After the impairment loss has been recognised on the goodwill there is still 115 - 70 = 45 loss
to be allocated to the other noncurrent assets, on a pro-rata basis.
320
Loss on land and buildings: x 45 33
320 110
110
Loss on plant and machinery: x 45 12
320 110
9.2 HENRY
Property, plant and equipment
Plant and machinery
Cost Rs.
On 1 January 2015 X
Additions 30,000
–––––––
On 31 December 2015 X
–––––––
Accumulated depreciation
On 1 January 2015 X
Charge for the year (30,000 u 9/12 ÷ 5) 4,500
–––––––
On 31 December 2015 X
–––––––
Carrying amount
On 31 December 2014 X
–––––––
On 31 December 2015 25,500
–––––––
Intangible assets
Accumulated amortisation
On 1 January 2015 -
Charge for the year (W) 68,750
––––––––
On 31 December 2015 68,750
––––––––
Carrying amount
On 31 December 2014 412,500
––––––––
On 31 December 2015 388,750
––––––––
Working
Amortisation charge (Project A)
Rs.
Total savings (100,000 + 300,000 + 200,000) 600,000
2015 amortisation charge (100,000/600,000 u 412,500) 68,750
Tutorial notes
The costs in respect of Project B cannot be capitalised as there are uncertainties surrounding the
successful outcome of the project – but the machine bought may be capitalised in accordance with
IAS16.
The 2015 costs in respect of Project C can be capitalised as the uncertainties have now been
resolved. However, the 2014 costs cannot be reinstated.
9.3 TOBY
Intangible assets
Goodwill Patents Brands Total
Rs. Rs. Rs. Rs.
Cost
On 1 January 2015 - - - -
Additions (W1) 10,000 20,000 50,000 80,000
––––––– ––––––– ––––––– –––––––
On 31 December 2015 10,000 20,000 50,000 80,000
––––––– ––––––– ––––––– –––––––
Accumulated amortisation/impairment
On 1 January 2015 - - - -
Written off/amortised during the year
(W1 and W2) 3,000 2,500 7,500 13,000
––––––– ––––––– ––––––– –––––––
On 31 December 2015 3,000 2,500 7,500 13,000
––––––– ––––––– ––––––– –––––––
Carrying amount
On 31 December Year 0 - - - -
––––––– ––––––– ––––––– –––––––
On 31 December 2015 7,000 17,500 42,500 67,000
––––––– ––––––– ––––––– –––––––
Workings
(1) Goodwill on acquisition of George
Rs.
Cost of acquisition 105,000
Minus fair value of net assets acquired (100,000 – 5,000) (95,000)
––––––––
Goodwill 10,000
Recoverable value (7,000)
––––––––
Impairment write off 3,000
––––––––
(2) Amortisation of patent
20,000 ÷ 8 = Rs.2,500
9.4 BROOKLYN
1 Development expenditure
IAS 38 on intangibles requires that research and development be considered separately:
research – which must be expensed as incurred
development – which must be capitalised where certain criteria are met.
It must first be clarified how much of the Rs.3 million incurred to date (10 months at
Rs.300,000) is simply research and how much is development. The development element will
only be capitalised where the IAS 38 criteria are met. The criteria are listed below together
with the extent to which they appear to be met.
The project must be believed to be technically feasible. This appears to be so as the
feasibility has been acknowledged.
There must be an intention to complete and use/sell the intangible. Completion is
scheduled for June 2016
The entity must be able to use or sell the intangible. Interest has been expressed in
purchasing the knoWhow on completion
It must be considered that the asset will generate probable future benefits. Confirmation
is required from Brooklyn as to the extent of interest shown by the pharmaceutical
companies and whether this is of a sufficient level to generate orders and to cover the
deferred costs.
Availability of adequate financial and technical resources must exist to complete the
project. The financial position of Brooklyn must be investigated. A grant is being
obtained to fund further work and the terms of the grant, together with any conditions,
must be discussed further.
Able to identify and measure the expenditure incurred. A separate nominal ledger
account has been set up to track the expenditure.
If all of the above criteria are met, then the development element of the Rs.3m incurred to
date must be capitalised as an intangible asset. Amortisation will not begin until commercial
production commences.
2 Provision
Although the claim was made after the reporting period, IAS 10 considers this to be an
adjusting event after the reporting period. The employment of the individual dates back to
20X2 and so the lawsuit constitutes a current obligation for the payment of damages as a
result of this past event (the employment).
The amount and the timing are not precisely known but the likelihood of payment of damages
by Brooklyn is probable and so a provision should be made for the estimated amount of the
liability, as advised by the lawyer. Disclosure, rather than provision, would only be appropriate
if the expected settlement was possible or remote, and the lawyer’s view is that a payment is
more likely than not.
It is not appropriate to calculate an expected value where there is only one event, instead a
provision should be made for the most likely outcome. The lawyer has various views on the
possible payout, but the most likely payout is Rs.500,000 as this has a 50% probability. As
settlement of the provision is not anticipated until 2018, the provision should be discounted
back at 8% to give a liability of Rs.476,280.
Provided that the payment from the insurance company is virtually certain, this should be
shown as an asset, also at its discounted value of Rs.47,628, being 10% of the provision.
In both cases the discounting should be unwound over the coming three years through profit
or loss.
3 Revaluation
IAS 16 on Property, Plant and Equipment does not impose a frequency for updating
revaluations. It simply requires a revaluation where it is believed that the fair value of the
asset has materially changed. Hence, if in the past there have been material differences
between the carrying amount and fair value at the 5 yearly review then Brooklyn should
consider having more frequent valuations following on from this year’s valuation.
Revaluations should be regular and not timed simply when property prices are at a peak. It is
not acceptable for Brooklyn to defer its next revaluation while values are low. If property prices
do fall in 2016, then it may be necessary to perform an impairment test in accordance with
IAS 36 Impairment of assets.
If it is believed that an asset value has moved materially, then all assets in that class must be
revalued. Hence it is not sufficient for Brooklyn to just revalue the London property.
IAS 16 does not require the valuation to be performed by an external party, and so the use of
the property manager to conduct the valuations is acceptable. Notes to the financial
statements will disclose that he is not independent of the company.
270,000,000 270,000,000
220,000,000 220,000,000
Brand Account
Rupees Rupees
01.01.2014 Brand
recognised 100,000,000 31.12.2014 Amortization 10,000,000
100,000,000 100,000,000
its intention to complete the intangible asset and use or sell it.
its ability to use or sell the intangible asset.
how the intangible asset will generate probable future economic benefits. Among
other things, the entity can demonstrate the existence of a market for the output
of the intangible asset or the intangible asset itself or, if it is to be used internally,
the usefulness of the intangible asset.
10.1 X Ltd
(a)
A B C D E
Period Opening Fin. Charge Rentals Closing Balance
Balance at 15% of B
(B – (D - C)
Rs.’000 Rs.’000 Rs.’000 Rs.’000
2016 11,420 1,713 4,000 9,133
2017 9,133 1,370 4,000 6,503
2018 6,503 975 4,000 3,478
2019 3,478 522 4,000
4,580 16,000
(b)
Statement of Financial Position (Extract) as at 31 December 2016
Rs.’000
Non-Current assets (Rs.11,420,000 – Rs.2,855,00) 8,565
Non-Current Liabilities (Obligation under lease) 6,503
Current Liabilities Obligation under lease
(Rs.9,133,000 – Rs.6,503,000) 2,630
11,420,000
Note: Annual Depreciation = = Rs.2,855,000
4
Dr Cr
Rs. Rs.
2016
Jan. 3 Right of use - Plant and machinery 3,200,000
Fine Rentals Limited 3,200,000
Initial recognition of machine
Jan. 3 Fine Rentals Limited 1,280,000
Bank 1,280,000
Payment of initial deposit under lease
Dec. 31 Fine Rentals Limited 569,600
Interest expense 230,400
Bank 800,000
Apportionment of annual installment
between Principal repayment and
interest
Dec. 31 Profit and Loss Account 230,400
Interest Expense 230,400
Write-off of FL interest expense to
Profit and loss account
2017
Dec. 31 Fine Rentals Ltd 637,952
Interest expense 162,048
Bank 800,000
Apportionment of annual installment
for the year between Principal
repayment and interest
Dec. 31 Profit and Loss Account 162,048
Interest Expense 162,048
Write-off of FL interest expense to
Profit and loss account
2018
Dec. 31 Fine Rentals Limited 714,506
Interest expense 85,494
Bank 800,000
Apportionment of annual installment
for the year between Principal
repayment and interest
Dec. 31 Profit and Loss Account 85,494
Interest Expense 85,494
Write-off of FL interest expense to
Profit and loss account
10.3 MiracleTextileLimited
Miracle Textile Limited
Statement of financial position (extracts) as at 30 June 2016
Note 2016 2015
ASSETS Rs. Rs.
Non-current assets
Right of use - Machinery 4 16,000,000 18,000,000
LIABILITIES
Non-current liabilities
Obligation under lease 9 6,505,219 10,633,074
Current liabilities
Current portion of obligation 9 4,127,856 3,566,925
9.1 The Company has entered into a lease agreement with a bank in respect of a machine.
The lease liability bears interest at the rate of 15.725879% per annum. The company
has the option to purchase the machine by paying an amount of Rs.2 million at the end
of the lease term. The lease rentals are payable in annual instalments ending in June
2016. There are no financial restrictions in the lease agreement.
Rs.
Lease liabilities include the following:
Amounts due within
One year 78,250
Two to five years 135,810
214,060
WORKING:
Lease of plant
Year to 31 Interest @
March B/f Payment Capital 10% C/f
Rs. Rs. Rs. Rs. Rs.
2016 272,850 (78,250) 194,600 19,460 214,060
2017 214,060 (78,250) 135,810
Dr. Cr.
Rs. Rs.
Interest expense 115,200
Financial liability 244,800
Operating Expense 360,000
Generator A
The ratio between the carrying value (Rs.7,500,000) and fair value (Rs.6,000,000) will determine
the value of right-of-use as against PV of lease payments.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,000,000x[1-(1+4.5%)^-5}/4.5%
PV = Rs.4,389,977
Right-of-use
ROU = CV/FV*PV
ROU => 7,500,000/6,000,000*4,389,977 = Rs.5,487,471
Loss on sale
Loss (refer working) = Rs.402,506
Working
Consideration received 6,000,000
Less: PV of lease liability (4,389,977)
Less: Carrying value of machine transferred
Total carrying value 7,500,000
Less: Right-of-use asset (5,487,471) (2,012,529)
Loss on sale = 402,506
Generator B
Financing transaction
Since the consideration received (Rs.6,000,000) exceeds the fair value (Rs.5,000,000) of the
power generator, the agreement contains a financing transaction.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,000,000x[1-(1+4.5%)^-5}/4.5%
= Rs.4,389,977
Less: Financing = Rs.1,000,000
PV = Rs.3,389,977
Right-of-use
ROU = CV/FV*PV
ROU = 6,000,000/5,000,000*3,389,977
ROU = Rs.4,067,972
Loss on sale
Loss (refer W1) = Rs.322,005
W1
Consideration received 6,000,000
Less:
PV of lease liability (3,389,977)
Financing (1,000,000)
1,610,023
Less: Carrying value of machine transferred
Total carrying value 6,000,000
Less: Right-of-use asset (4,067,972) 1,932,028
Loss = Rs.322,005
Particulars Debit Credit
Rs. Rs.
Cash / Bank 6,000,000
Right-of-use 4,067,972
Loss 322,005
Generator – Carrying value 6,000,000
Lease Liability 4,389,977
Generator C
The ratio between the carrying value (Rs.7,000,000) and fair value (Rs.10,000,000) will
determine the value of right-of-use as against PV of lease payments.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,500,000x[1-(1+4.5%)^-5}/4.5%
PV = Rs.6,584,965
Right-of-use
ROU = CV/FV*PV
ROU => 7,000,000/10,000,000*6,584,965 = Rs.4,609,475
Gain on sale
Gain (refer W2) = Rs.1,024,510
W2
Consideration received 10,000,000
Less: PV of lease liability 6,584,965
Less: Carrying value of machine transferred
Total carrying value 7,000,000
Less: Right-of-use asset (4,609,475) 2,309,525
Gain = Rs.1,024,510
11.1 BADAR
Decommissioning costs
IAS 37 Provisions, Contingent Liabilities and Contingent Assets only permits a provision to be made
if three conditions are met:
(i) The company has a present obligation, either legally or constructively, as a result of a past
event;
(ii) Probable outflow of resources is required to settle the obligation; and
(iii) A reliable estimate is available.
Although there is no legal requirement to restore the site, the company has established a
constructive obligation by setting a valid expectation in the market, due to its published policies and
past practice, from which it cannot realistically withdraw.
It therefore appears probable that Badar will have to pay money to improve the site and so a
provision should be created for the expected amount. As the expected payment of Rs.100,000 will
not be settled for three years, the provision should be discounted and entered at its net present
value of Rs.75,131 (Rs.100,000/(1.1)3). Over the three years, the discounting should be unwound
and charged to profit or loss as finance costs, resulting in a provision of Rs.100,000 by the end of
the third year.
The cost of the construction work has been correctly capitalised. The cost of the future
decommissioning work should be added to this asset so that the total costs of the site can be
matched to the revenue from the copper over the period of mining. This will result in an asset of
Rs.575,131 which should be depreciated over the three year life in line with anticipated revenues.
11.2 GEORGINA
(1) Litigation for damages
Under IAS37, a provision should only be recognised when:
an entity has a present obligation as a result of a past event
it is probable that an outflow of economic benefits will be required to settle the
obligation
a reliable estimate can be made of the amount of the obligation.
Applying this to the facts given:
Georgina’s legal advisors have confirmed that there is a legal obligation. This arose
from the past event of the sale, on 1 September 2015 (i.e. before the year end).
Probable is defined as ‘more likely than not’. The legal advisors have confirmed that it is
likely that the claim will succeed.
A reliable estimate of Rs.500,000 has been made.
Therefore a provision of Rs.500,000 should be made.
Counter-claim
IAS37 requires that such a reimbursement should only be recognised where receipt is
‘virtually certain’. Since the legal advisors are unsure whether this claim will succeed no asset
should be recognised in respect of this claim.
(3) Returns
Applying the IAS37 conditions in (1) to the facts given:
Although there is no legal obligation, a constructive obligation arises from Georgina’s
past actions. Georgina has created an expectation in its customers that such refunds
will be given.
As at the year end, based on past experience, an outflow of economic benefits is
probable.
A reliable estimate can be made. This could be 1% × 400,000 but since the returns are
now all in the actual figure of Rs.3,500 can be used.
Therefore a provision of Rs.3,500 should be made.
IAS 36 Impairment of assets and IAS 16 Property, Plant and Equipment require that the
carrying amount of property, plant and equipment should be reviewed periodically in order to
assess whether the recoverable amount has fallen below the carrying amount. Where it has,
the property, plant and equipment should be written down to the recoverable amount, either
through the statement of profit or loss as an expense, or though other comprehensive income
to revaluation reserve in shareholder’s equity, but only to the extent that the balance on the
revaluation reserve relates to a previous revaluation surplus on the same asset.
(c) IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable
value. Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale.
Unless Earley was making a significant margin on the tricycles, it is likely that the reduction in
selling price of 30% will necessitate a write- down to net realisable value, especially
considering the transportation costs to Iraq which must be included. If the Iraqi option is
unlikely to proceed, it may be necessary to write the tricycles down to scrap value.
(d) Under IAS 10, the nationalisation is likely to be regarded as a non-adjusting event that merely
requires disclosure in the financial statements. IAS 27 Consolidated Financial Statements
and Accounting for Investments in Subsidiaries, requires that an investment in a enterprise
should be accounted for as an investment (under IAS 39: Financial Instruments: Recognition
and Measurement) from the date that it ceases to fall within the definition of a subsidiary and
does not become an associate. It seems here that Earley has neither control nor significant
influence, nor even an investment as the assets have been in fact, expropriated. The loss of
the investment should be accounted for in the year in which it occurred, but disclosed in the
current year.
If the loss of the subsidiary results in Earley no longer being a going concern, then the event
becomes an adjusting event.
(e) & Both of the events described are non-adjusting event which should be disclosed, but not
(f) adjusted for in the current year financial statements.
(d) IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable
value. Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale.
In this case, cost is Rs.1,800 and net realisable value is Rs.1,600
(e) The company should set up a provision for Rs.100,040, ie should accrue for the 10% probable
liability. It should disclose the possible liability under contingent liabilities. The disclosure is as
noted in (c) except that the financial effect is Rs.300,120 (30% u Rs.1,000,400). The balance
should be ignored as it is a remote contingent liability.
Tutorial note
In (c) above it is not appropriate to provide for 20%receivableRs.500,000, ie Rs.100,000. This would
only be appropriate where the event is recurring many times over.
In (e) it is appropriate to use the percentages provided, as warranty work is provided for.
Non-adjusting events:
Non-adjusting events are indicative of conditions that arose subsequent to the reporting date.
Examples of non-adjusting events might be:
(i) Losses of non-current assets or inventories as a result of a catastrophe such as fire
or flood
(ii) Closing a significant part of the trading activities if this was not begun before the year
end
(iii) The value of an investment falls between the reporting date and the accounts are
authorised
(iv) Announcement of dividend after year end.
(b) (i) The conditions attached to the sale give rise to a constructive obligation on the
reporting date.
A provision for the sales return should be recognised for 5% of June 2015 sales. The
related cost should also be reversed.
(ii) Since the law suit was already in progress at year-end and the amount of
compensation can also be estimated, it is an adjusting event.
A provision of Rs. 400,000 should be made.
(iii) There is no obligating event at the year end either for the costs of fitting the smoke
detectors or for fines under the legislation.
No provision should be recognised in this regard.
(iv) The obligating event is the communication of decision to the customers and
employees, which gives rise to a constructive obligation from that date, because it
creates a valid expectation that the division will be closed.
Since no communication has yet been made, no provision is required in this regard.
(v) The obligating event is the signing of the lease contract, which gives rise to a legal
obligation.
A provision is required for the unavoidable rent payments.
(vi) Since the declaration was announced after year-end, there is no past event and no
obligation at year-end and is therefore non-adjusting event.
Details of the dividend declaration must, however, be disclosed.
(iv) SL should make a provision of the expected amount i.e. Rs. 1.2 million (Rs. 1.0 million x 60%
+ Rs. 1.5 million x 40%) because
it is a present obligation as a result of past event;
it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligations; and
a reliable estimate can be made of the amount.
In addition, SL should disclose the following in the notes to the financial statements:
Brief nature of the contingent liability
The amount of contingency
An indication of the uncertainties relating to the amount or timing of any outflow.
Wonder Limited
Extracts from the Statement of profit or loss for the year ended 30 June 2015
Profit before taxation 98.00 101.50
Taxation (34.40) (36.45)
Profit after taxation 63.60 65.05
PBT : Year 2015 : 90 + (20 × 10% ) + [(56/4) - (56/7)] PBT : Year 2014 : 120 - 18.5 (Note X)
Tax : Year 2015: 32 + [(6+2) × 30%] Tax : Year 2014 : 42 - 5.55 (Note X)
Wonder Limited
Extracts of statement of changes in equity for the year ended 30 June 2015
Retained
earnings
Rs.m
Balance as on 1 July 2013 (108-78) 30.00
Profit for the year ended 30 June 2014 (78 - 12.95 (Note X))- restated 65.05
Balance as at 30 June 2014 - restated 95.05
Profit for the year ended 30 June 2015 63.60
Balance as at 30-June 2015 158.65
Wonder Limited
Notes to the financial statements
For the year ended 31 December 2015
X Correction of error
During the year ended 30 June 2013, the repair works was erroneously debited to
machinery account. The effect of this error is as follows:
2014
Rs.m
Effect on the statement of profit or loss
(Increase) / decrease in expenses or losses
Repairs and maintenance (20.00)
Depreciation (20 × 10% × 9 ÷ 12) 1.50
Tax expenses (30% × (20-1.5)) 5.55
Decrease in profit for the year (12.95)
12.2 DUNCAN
Statement of changes in equity (extract)
Retained Retained
earnings earnings
2015 2014
Rs.000 Rs.000
Opening balance as reported 23,950 22,500
Change in accounting policy (W2) 450 400
––––––– –––––––
Re-stated balance 24,400 22,900
Profit after tax for the period (W1) 4,442 3,250
Dividends paid (2,500) (1,750)
––––––– –––––––
Closing balance 26,342 24,400
––––––– –––––––
Workings
W1: Profit for the year ended December 31, 2014 (as restated) Rs. in million
Profit as previously reported 21.00
Incorrect recording of depreciation (Rs. 25 million – Rs. 10 million) 15.00
13.1 FRANCESCA
Rs. Rs.
Opening liability 1,340,600
Capital allowances during the year 50,000,000
Depreciation charged during the year (45,000,000)
–––––––––––
5,000,000 u 30% 1,500,000
–––––––––––
Interest receivable in statement of profit or loss 50,000
Interest received in tax computation (45,000)
–––––––––––
Receivable in statement of financial position
5,000 u 30% 1,500
–––––––––––
Interest payable in statement of profit or loss 32,000
Interest paid in tax computation (28,000)
–––––––––––
Payable in balance sheet 4,000 u 30% (1,200)
–––––––––––
Revaluation 6,000,000
Carrying value (4,900,500)
–––––––––––
Revaluation surplus 1,099,500 x 30% 329,850
––––––––––– ––––––––––
Closing liability 3,320,930
––––––––––
Rs.
Charged to the revaluation reserve 329,850
Charged in the statement of profit or loss (balancing figure) 1,650,480
––––––––––
Total movement on the provision of (3,320,930 – 1,340,600) 1,980,330
––––––––––
d) Tax expense
Current tax 14.48 13.63
Deferred tax: -
Due to origination and reversal of temporary differences in the
period (3.38)
Due to change in rate (5.47) (5.93)
Tax expense 5.63 7.7
e) Tax reconciliation
Accounting profit 40.0 30.0
Tax rate 30% 35%
12.0 10.5
Tax effect of untaxed gain:
30% u 10.0 (3.0)
35% u 8.0 (2.8)
Decrease in opening deferred tax balances due to change in rate
(with rounding adjustment) (3.37)
Tax expense 5.63 7.7
Rs. in
million
Deferred tax liability (Opening) 0.55
Deferred tax expense for the year (balancing figure) 0.94
Deferred tax liability as at December 31, 2015 (Rs. 4.25 million x 35%) 1.49
Finance charge accrual for the year ended June 30, 2015
Working: (Rs. 1,600,000 480,000) u 13.701% = Rs. 153,451)
W1 Tax computation
Rs.
Accounting profit before tax 4,900,000
Add: Depreciation on leased assets 400,000
Add: Finance charges 153,451
Less: Lease payment (480,000)
Taxable profit 4,973,451
Tax @ 30% 1,492,035
The minimum lease payment has been discounted at an interest rate of 13.701% to arrive
at their present value. Rentals are paid in annual instalments.
Rs.m Rs.m
Tax liability for the year (52.446 × 35%) 18.356
Tax liability for prior periods (0.100 × 35%) 0.035
18.391
Deferred taxation
Accounting depreciation 10.000
Tax depreciation (7.000) 3.000
1,854
2016 = Rs. = Rs.1.01
1,818
1,584 6 .06
2015 = x = Rs.1.69
900 6 .30
Workings
1. Calculation of theoretical ex-rights price
1 share at Rs.6.30 each 6.30
2 rights issue for every 1 at Rs.5.94 11.88
3 shares for 18.18
ଵ଼Ǥଵ଼
Price per share = = Rs.6.06
ଷ
18,000 15,300
(i) Change in revenue = x 100 = 18% Increase
18,000
2016 2015
11,340 6,120
(ii) Costs of sales/revenue = 63% = 40%
18,000 15,300
6,600 6,120
(iii) Gross profit % = 37% = 40%
18,000 15,300
1,854
(iv) Net profit % = 10%
18,000 = 10%
3,420 3,420
(v) Operating expenses % = 19% = 22%
18,000 15,300
540 576
(vi) Interest payable/sales = 3% = 4%
18,000 15,300
846 720
(vii) Taxation/sales = 5% = 5%
18,000 15,300
3,240 2,880
(viii) Capital employed =25% = 43%
9,180 3,600 3,006 3,600
18,000 15,300
(ix) Assets/turnover = 1.41 = 2.32
12,780 6,606
W1
Outstanding
Outstanding Rate of Borrowing
Months outstanding month up to
amount (Rs.) interest cost (Rs.)
completion
Specific loan
Utilised till first
repayment 25,000,000 1-Sep-14 31-Jan-15 5 12% 1,250,000
Utilised after the first
repayment 20,000,000 1-Feb-15 31-May-15 4 12% 800,000
2,050,000
General Borrowings (W4)
Utilised after specific
loan exhausted on 2nd
payment to contractor
(W3) 8,125,000 1-Dec-14 31-May-15 6 12.08% 490,750
Principal payment of 12.08%
specific loan 5,000,000 1-Feb-15 31-May-15 4 201,333
rd
3 payment to 12.08%
contractor 12,000,000 1-Feb-15 31-May-15 4 483,200
rd
4 payment to 1-Jun-15 12.08%
contractor 9,000,000 31-May-15 0 -
1,175,283
Outstanding
(Rs.) @ 13%
outstanding
Suspension
capitalised
Borrowing
cost to be
amount
months
month
(Rs.)
Net
O/s amount
Available Used to reduce Invested in saving Total
up to
Funds running finance (14%) account @ 8% Income
completion
Amount Income Amount Income
Rs. (70m -
25m - 0.7m) 44,300,000 2 10,000,000 233,333 34,300,000 457,333 690,666
Rs.(44.3 -
5m - 4.55m) 34,750,000 5 10,000,000 583,335 24,750,000 825,000 1,408,335
Investment income – 2015 2,099,001
Borrowing cost to be
capitalised (Rs.) @
Net outstanding
No. of months
outstanding
Suspension
14%
months
Description Amount
Total 2,284,076
Workings
W1: Average borrowings Rs.m
13% bank loan outstanding for 10 months
(Rs. 32 million x 306/365 days) 26,827,397
11% bank loan outstanding for 5 months
(Rs. 10 million x 153/365 days) 4,191,781
Average outstanding for the year 31,019,178
W2: Borrowing costs incurred (or from part a)
13% bank loan outstanding for 10 months
(Rs. 32 million x 306/365 x 13%) 3,487,562
11% bank loan outstanding for 5 months
(Rs. 10 million x 153/365 x 11%) 461,096
Borrowing costs 3,948,658
W3: Weighted average rate
Borrowing costs
/ Average outstanding for the year = 3,948,658 (W2)/31,019,178 (W1) = 12.73%
15.4 QURESHI STEEL LIMITED
Capital work in progress – Factory building Rs.000
Progress invoices received from the contractor (30,000+20,000+10,000+15,000) 75,000.00
(Rain damages paid would be chargeable to profit and loss account/ insurance
claim)
01-07-14 Advanced
payment 10,000 10,000 10,000 12.00 1,500
st
15-10-14 1
progress
bill 30,000 25,500 15,000 10,500 8.50 1,116
nd
15-01-15 2
progress
bill 20,000 17,000 17,000 - - -
rd
15-04-15 3
progress
bill 10,000 8,500 7,500 1,000 2.50 31
31-05-15 Loan
interest 1,625 1,625 1.00 20
31-05-15 Loan
instalment 5,000 5,000 1.00 63
15,000 *24,500 29,125 2,730
The credit for the amount received should be recognised as a liability. This represents the
obligation that the company has to provide the service over the next two years.
The fact that the customer cannot cancel the contract is not relevant to the recognition of
revenue. If Sindh Industries failed to provide the service they would be sued for restitution.
Therefore the revenue can only be recognised as the service is provided.
New factory
Borrowing costs directly attributable to construction of an asset which necessarily takes a
substantial period to get ready for its intended use should be capitalised as part of the cost of
that asset under IAS 23 Borrowing Costs. IAS 23 states that the capitalisation of borrowing
costs should commence when three conditions are all met for the first time: borrowing costs
are being incurred, expenditure is being incurred and activities to prepare the asset are being
undertaken. Although borrowing costs were incurred throughout the year and expenditure was
incurred from 1 February 2015 (the date the land was purchased), construction only started
on 1 June 2015. Therefore this is the date on which capitalisation commences.
Capitalisation ceases when substantially all of the activities required to make the asset ready
for use/sale have been completed, that is on 30 September 2015. (The actual date on which
the factory was brought into use is irrelevant.) Therefore the period of capitalisation should be
four months.
Where construction is financed from general borrowings, the calculation of the amount to be
capitalised should be based on the weighted average cost of borrowings. This is:
(Rs.1,000,000 × 9.75%) + (Rs.1,750,000 × 10%) + (Rs.2,500,000 × 8%)/ (Rs.1,000,000 +
Rs.1,750,000 + Rs.2,500,000) = 9%
Therefore the amount capitalised should be 9% × Rs.4.5 million (land Rs.1.8 million plus
construction costs Rs.2.7 million) × 4/12 = Rs.135,000. The total cost of the factory should be
measured at Rs.4,635,000 (Rs.1.8 million plus Rs.2.7 million, plus Rs.135,000). The amount
that has been recognised in the statement of financial position should be reduced by
Rs.315,000 (Rs.450,000 – Rs.135,000). Finance costs recognised in profit or loss should be
increased by Rs.315,000.
Land should not be depreciated because it has an indefinite life. Under IAS 16 Property, Plant
and Equipment depreciation charges should start when the asset becomes available for use,
from 1 October 2015 in this case.
Depreciation of Rs.35,000 ((Rs.2.7 million, plus (Rs.135,000 × 2.7/4.5) ÷ 20) × 3/12) should
be recognised in profit or loss for the year ended 31 December 2015 and the carrying amount
of the asset reduced by the same amount to Rs.4.6 million.
Useful life of the blast furnace
Depreciation of the blast furnace has been based on an estimated useful life of 20 years. This
is at variance with a report by a qualified expert. The asset valuation specialist treats the
furnace as being made up of two components, the main structure and the lining, which must
be replaced at regular five yearly intervals over the life of the asset. This is the approach
required by IAS 16. The uncertainties inherent in business mean that many items in financial
statements cannot be measured with certainty, but estimates should always be made using
the most up to date and reliable information. Where estimates have been prepared by
professionals with relevant qualifications, then it is nearly always most appropriate to use
those estimates. Therefore in accordance with the valuer’s report the main structure of the
furnace should be depreciated over 15 years from 1 January 2015 and the lining should be
depreciated over five years from that date.
The reassessment of the estimated lives of assets is a change in accounting estimate, rather
than a change in accounting policy (IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors). Changes in accounting estimate should be dealt with on a prospective
basis. This is achieved by including the effect of the change in profit or loss in current and
future periods. The additional depreciation should be calculated as:
Rs.000
Revised depreciation: main structure 140
((Rs.3.5m – Rs.1.4m)/15 years)
lining (Rs.1.4m/5 years) 280
420
Current depreciation (Rs.3.5m/20 years) (175)
Additional depreciation 245
IAS 8 requires the disclosure of the nature and amount of the effect of the change in the
estimate of useful lives on the profit for the year.
Borrowing Blast
Draft Revenue costs furnace Revised
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Profit before tax 2,500 (1,000) (315)+ (35) (245) 905
Borrowing Blast
Draft Revenue costs furnace Revised
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Non-current assets
Property, plant and equipment 12,000 (315) + (35) (245) 11,405
Current assets 3,500 3,500
Total assets 15,500 14,905
It seems almost certain that the previous finance director resigned as a result of pressure from
the managing director (and possibly from other members of the Board) to present the financial
statements in a favourable light. The directors intend to seek a stock market listing in the near
future. Therefore they have clear motives for manipulating the profit figure and also (perhaps)
for making controversial decisions before the financial statements come under much greater
scrutiny as a result of the listing. The job title of financial controller is also significant. It
suggests that the role has been downgraded and that the person holding it has less authority
than the rest of the Board.
Possible courses of action:
Discuss with the managing director the financial reporting standards that apply to the
transactions and explain the implications of non-compliance. If the managing director is
himself a member of a professional body then it might be worth pointing out to him that
he himself is bound by an ethical code.
Advise him that as a Chartered Accountant you are bound by the ICAP code of ethics,
and that you would not be prepared to compromise your views of the figures he has
prepared for career advancement.
Consider speaking to the other directors (or audit committee if there is one) and
seeking their support.
If all of these actions produce a negative response then it would be appropriate to
consult the ICAP ethical handbook and/or the Institute.
If all else fails then consider seeking alternative employment.