ADVANCED ACCOUNITNG & FINANCIAL REPORTING

Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

A.1 (a) (i) Impairment of CGU under IAS 36:

Fair value
Carrying Goodwill Impairment Impairment Total
Description less cost to
value impairment Round 1 *1 Round 2 *2 impairment
sell
------------------------------ Rs. in million ----------------------------
Building 22.00 21.70 *0.30 - 0.30
Machinery 15.00 16.00 *- - -
Equipment 19.00 3.86 4.38 8.24
License 20.00 18.00 *2.00 - 2.00
Investment property 22.00 22.00 *- - -
Investment property 8.00 1.62 1.84 3.46
Goodwill 3.00 3.00 - - 3.00
Inventory at NRV 8.00 8.00 *- - -
Carrying value 117.00 3.00 7.78 6.22 17.00
Recoverable amount (100.00)
Impairment required 17.00
Charged to profit or loss (17–0.30) 16.70
*1
Allocation of impairment loss in the ratio of 14(17-3) ÷ 69(22+19+20+8)
*2
Allocation of impairment loss in the ratio of 6.22(14-7.78) ÷ 27
*Restricted to fair value less cost to sell

(a) (ii) Impairment of Disposal group under IFRS 5:

Goodwill Impairment of
Description Carrying value
impairment scoped in assets*3
-------------------- Rs. in million --------------------
Building 22.00 4.98
Machinery 15.00 3.39
Equipment 19.00 4.30
License 20.00 4.52
Investment property 22.00 **-
Investment property 8.00 1.81
Goodwill 3.00 3.00 -
Inventory at NRV 8.00 **-
Carrying value 117.00 3.00 19.00
Fair value less cost to sell (95.00)
Impairment required 22.00
Charged to profit or loss 22.00
*3
Allocation of impairment loss in the ratio of 19(22-3) ÷ 84(22+15+19+20+8)
**No impairment is allocated due to scope out assets

(b) Principal market

Market A is the principal market because it has highest market share
Most advantageous market
Market C is the most advantageous market because it has highest exit price - net of
transportation cost and transaction cost of Rs. 28,200 per unit(W-1)
W-1 : Net proceeds to determine most advantageous market
Market A Market B Market C
Exit price (Rs. per unit) 29,500 30,500 29,600
Transport cost (Rs. per unit) (800) (1,000) (400)
Transaction cost (Rs. per unit) (700) (1,500) (1,000)
Net proceeds 28,000 28,000 28,200
Fair value of the asset in:
- Principal market (29,500 - 800) Rs. 28,700
- Most advantageous market (29,600 - 400) Rs. 29,200

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

A.2 Shakir Limited

Consolidated Statement of Financial Position
As on 30 June 2017
Rs. in million
Assets:
Property, plant & equipment (W-1) 28,233.0
Investment in ML (W-5) 1,980.0
Stock-in-trade [2,414 + 1,750 – 4(W-7)] 4,160.0
Trade & other receivables [2,200+1,800+120(W-8) ] 4,120.0
Cash and bank (1,600 + 1,900) 3,500.0
41,993.0
Equity & Liabilities
Share capital 20,000.0
Group reserves (W-2) 10,031.4
Non controlling interest (16,229 (W-7) × 40%) 6,491.6
Trade and other payables [4,400 + 1,070] 5,470.0
41,993.0

W-1: Property plant & Equipment: Rs. in million

SL 16,500.0
BL 11,000.0
Power generation plant [620 – 62 (620÷10)] 558.0
Fair value adjustment [200 – 25 (200 × 2 ÷ 16)] 175.0
28,233.0

W-2 : Group reserves

SL’s retained earnings 6,189.0
SL’s Share premium 1000.0
Impairment of ML’s goodwill [800 (W-4) × 20%] (160.0)
Post acquisition profit of ML
 Till last year [{5,600 – 4,500}(W-3) × 80%] 880.0
 For the year [700 × 60%] 420.0
Equity adjustment on sale of 20% shares of ML [1,188 – (5,600 (W-3) × 20%)] 68.0
Gain on further 35% disposal (W-5) 486.0
Reversal of gain on disposal of ML (W-6) (1,089.0)
Post acquisition profit – BL [3,429(W-7) × 60%] 2,057.4
Bargain purchase 180.0
10,031.4

W- 3: Net Assets of ML At reporting At 1 July 2016 At acquisition

------------------ Rs. in million ------------------
Share capital 2,200.0 2,200.0 2,200.0
Share Premium 900.0 900.0 900.0
Retained Earnings 3,200.0 2,500.0 1,400.0
6,300.0 5,600.0 4,500.0

W-4: Computation of Goodwill on acquisition of ML Rs. in million

Cash consideration 4,400.0
Less: Net assets acquired [4,500(W-3)×80%] (3,600.0)
Goodwill 800.0

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
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Certified Finance and Accounting Professional Examination – Winter 2017

W-5: Gain on part disposal of ML with losing control

Rs. in million
Consideration received 2,926.0
Fair value of residual investment [220×25%×36] 1,980.0
Net assets derecognized [6,300(W-3)×60%] 3,780.0
Goodwill derecognized (800–160) 640.0
Net assets sold (4,420.0)
Gain on disposal 486.0

W-6: Gain on sale of ML's shares in SL's books

20% disposal [1,188 – (4,400 × 20÷80)] 88.0
35% disposal [2,926 – (4,400 × 35÷80)] 1,001.0
1,089.0

W-7: Net assets of BL

At reporting At acquisition
--------- Rs. in million ---------
Share capital 10,000.0 10,000.0
Retained earnings 6,000.0 (Bal.) 2,600.0
Increase in fair value of building 175.0 200.0
(200×14÷16)
Share of profit from joint operation (W-8) 58.0 -
Unrealized profit of BL in SL's closing stock [44–(50×80%)] (4.0) -
16,229.0 12,800.0
(7,500+180)÷0.6

Post acquisition profit 3,429.0

W-8: Joint operation

Receivable from Joint operator (1100–670–130 ) × 40% 120.0
Depreciation expense (62.0)
BL’s share of profit of joint operation 58.0

A.3 (a) (i) IFRS for SMEs does not allow capitalization of borrowing cost. So capitalizing
interest cost of Rs. 0.3 million should be reversed and charged to profit and loss
account. Consequently, carrying amount of the building i.e. Rs. 3 million does not
exceed the recoverable amount of Rs. 3.1 million and therefore no impairment is
required.

(ii) IFRS for SMEs requires that investment properties must be measured subsequently at
fair value, (unless fair value cannot be measured reliably without undue cost or effort)
and PPE must be measured subsequently using the cost model. Based on this,
treatment of both shops should be as follows:

 Shop A should be classified as property, plant and equipment. Since revaluation

model is not allowed, revaluation surplus of Rs. 1.125 million [6 – (5×0.975)]
related to this shop should be reversed.

 Shop B should be classified as investment property. Therefore fair value model is

appropriate as being followed by the company. However, depreciation should
not be computed under revaluation model of investment property so depreciation
expense of Rs. 0.1 million (4×5%×50%) and incorrect revaluation of Rs. 1.1
million [5 – (4×97.5%)] should be reversed and increase in fair value of Rs. 1
million should be credited to profit or loss account.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
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(b) Karachi Bank Limited

Statement of financial position
As on 31 December 2016

Assets: Rs. in million

Cash and balances with treasury banks (9,100+14,500+700+2,300+68) 26,668
Balances with other banks (412+311+1,400) 2,123
Lending to financial institutions (650+6,100) 6,750
Investments – net (24,500+1,200+1,800–222) 27,278
Advances – net (114,200+4,900+679-6,678) 113,101
Operating fixed assets 24,700
Other assets (21,450+3189) 24,639
225,259

A.4 LSL
General Journal
Debit Credit
Date Particulars
Rs. in million
1-Jan-2016 Debentures (W-1) 9.63
Equity (W-3) 1.43
Cash (0.1×107) 10.70
Debt settlement gain (Balancing) 0.36

31-Dec-2016 Finance cost (W-1) 6.06

Cash (W-1) 5.40
Debentures (Balancing) 0.66

W-1: Movement of liability Rs. in million

Initial amount (W-2) 95.57
Finance cost accrued 2015 (95.57 × 7%) 6.69
Finance cost paid 2015 (100 × 6%) (6.00)
Liability at the end of 2015 96.26
10% redeemed (96.26 × 10%) (9.63)
Liability after redemption 86.63
Finance cost accrued 2016 (86.63 × 7%) 6.06
Finance cost paid 2016 (90 × 6%) (5.40)
Liability at the end 2016 87.29

W-2: Liability component (1 January 2015)

PV at 7% of
 interest payments for 2015-2019 (100 × 6% × 4.1001) 24.60
 principal payment at end of 2019 (50 × 0.7130) 35.65
 interest payments for 2020 (50 × 6% × 0.6663) 2.00
 principal payment at end of 2020 ((50 × 0.6663) 33.32
Liability component 95.57

W-3: Equity component repurchased

Total payment (0.1 × 107) 10.70
Fair value of liability repurchased [92.69 (W-4) × 10%] (9.27)
1.43

W-4: Fair value of liability component (1 January 2016)

PV at 8% of
 interest payments for 2016-2019 ((100 × 6% × 3.3121) 19.87
 principal payment at end of 2019 (50 × 0.7350) 36.75
 interest payments for 2020 (50 × 6% × 0.6806) 2.04
 principal payment at end of 2020 (50 × 0.6806) 34.03
92.69

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2017

A.5 (a) Impact on

Net Total Total
profit assets liabilities
----------- Rs. in million -----------
As per question 125.00 1,420.00 925.00

(i) NRV adjustment (W-1) (8.40) (8.40)

Onerous contract of product B (8000 × 200) (1.60) 1.60

(ii) Govt. grant (W-2) 9.24 (9.24)

Finance cost[(40.76 × 11%) – (50 × 6%)] (1.48) 1.48

(iii) Reversal of disposal (20.00) 80.00 100.00

Depreciation (80 ÷ 10) × 6/12 (4.00) (4.00)
Finance cost 100 × 11%*× 6/12 (5.50) 5.50
*√( )

(iv) Revaluation of plant (W-3) 8.35

Increase in provision (W-3) 7.94
Revised Amounts 93.26 1,495.95 1,032.28

W-1: NRV adjustment Product A Product B

Total
Committed Normal Committed
---------------- Rs. in million ----------------
Cost 30.00 20.00 30.00
(28.8) (18.80) (24.00)
NRV 3,000×(9,800-200) 2,000×(9,700-300) 20,000×(1,300-100)
1.20 1.20 6.00 8.40

W-2: Government grant

Rs. in million
Total proceeds 50.00
PV at market interest rate of 11% [(50 × 6% × 3.6959) + (50 × 0.5934)] (40.76)
Component of Government grant 9.24

W-3: Revaluation of plant

Rs. in million
Net Revalued amount 112.00
PV of revised dismantling cost (40 × 0.7938) 31.75
Gross revalued amount 143.75
Carrying amount as on 30 June 2017 (135.40)
Increase in value of plant 8.35
Increase in dismantling cost 10÷(1.08)3 (7.94)
Revaluation surplus balance 3.15
(4.79)
Revaluation surplus 3.56

(b) In the given situation, Faraz may face following threats:

(i) Self-interest threat
Self-interest threat occurs as Faraz has been told by the CEO that he would be
promoted to CFO.

(ii) Intimidation threat

Faraz may quit this job if he would not confirm the draft financial statement as
per CEO’s instructions.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
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Certified Finance and Accounting Professional Examination – Winter 2017

Available safeguards:
Where it is not possible to reduce the threats to an acceptable level, Faraz:
(i) should refuse to remain associated with information which is or may be
misleading
(ii) should consider to consult with superiors such as audit committee or those
charged with governance or with a relevant professional body.
(iii) seek legal advice or may resign.

A.6 (a) Patel Limited

Statement of financial position
As on 30 June 2017

Assets Rs. in million

Non current assets
Net investment in lease (W-2) 51.32
Right of use asset (W-4) 98.10

Current assets
Current portion of net investment in lease [21– 7.17 (W-2)] 13.83

Non current liabilities

Lease liabilities [32.50 (W-1) + 86.77 (W-3)] 119.27

Current liabilities
Lease liabilities [13.83 (18 – 4.17)(W-1) + 37.57 (50 – 12.43) (W-3)] 51.40

Patel Limited
Statement of profit or loss
For the year ended 30 June 2017
Rs. in million
Gain on sub-lease (W-6) 18.73
Depreciation (W-4) 32.70
Finance charges [5.31(W-1) + 15.85 (W-3)] 21.16
Finance income (W-2) 8.54
Loss on decrease in lease term of building (W-5) 8.40

W-1: Amortization schedule of lease – plant

Interest Instalment Principal o/s
Date
-------------------- Rs. in million --------------------
1-Jul-15 *1
70.66
30-Jun-16 6.36 18.00 59.02
30-Jun-17 5.31 18.00 46.34
30-Jun-18 4.17 18.00 32.50
*1
{ ( ) } + [1× (1.09) 5 ]

W-2: Amortization schedule of sub lease – plant

Interest Instalment Principal o/s
Date
-------------------- Rs. in million --------------------
30-Jun-16 *2
77.61
30-Jun-17 8.54 21.00 65.15
30-Jun-18 7.17 21.00 51.32
*2
{ ( ) }

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
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Certified Finance and Accounting Professional Examination – Winter 2017

W -3 : Amortization schedule of lease - Building (After modification)

Interest Instalment Principal o/s
Date
-------------------- Rs. in million --------------------
1-Jul-16 158.49
30-Jun-17 15.85 50 124.34
30-Jun-18 12.43 50 86.77

W-4 : Computation of right of use (ROU) asset (after modification)

Rs. in million
ROU assets – 1 July 2014 [50 × 4.9676 [{1– (1.12)-8÷0.12}] 248.38
Depreciation for two years (248.38 ÷ 8 × 2) (62.10)
ROU (before modification) – 1 July 2016 186.28
ROU derecognized due to reduction in lease term (186.29 ÷ 6 × 2) (62.10)
124.18
Increase in ROU due to decrease in borrowing rate
 PV of liability for remaining 4 years at 10% (50 × 3.1699) 158.49
 PV of liability for remaining 4 years at 12% (50 × 3.0373) (151.87)
6.62
ROU after modification – 1 July 2016 130.80
Depreciation for the year – 2016-17 (130.80 ÷ 4) 32.70
98.10

W-5 : Computation of loss on decrease in lease term of building

Decrease in lease liability [205.57(50 × 4.1114) – 151.87(W-4)] 53.70
ROU derecognized (186.29 ÷ 6 × 2) (62.10)
Loss on decrease in lease term (8.40)

W-6 : Gain on sub lease

Net investment in sub lease [{1– (1.11)-5÷0.11}]× 21 77.61
Carrying value of ROU derecognized (70.66 ÷ 6 × 5) (58.88)
Gain on sub lease 18.73

(b) Amount to be charged to the profit or loss in respect of the share option scheme is as
follows:
1,000 Note-1 × (500 × 85%) Note-2 × 38 Note-3 × (1÷5) Note-4 = 3,230,000

Note-1: Vesting conditions, other than market conditions, shall be taken into
account by adjusting the number of equity instruments included in the
measurement of the transaction amount. Average sales would be Rs. 312.55
million (W-1) over five years which is more than the minimum average
sales of Rs. 300 million.
Note-2: Service condition shall be taken into account by adjusting the number of
equity instruments included in the measurement of the transaction amount.
In respect of service condition, management estimates that 15% of the
employees would leave the organization over the vesting period of five years so
provision would be made for 85% of employees i.e. 425 (500 × 85%)
Note-3: Only market condition shall be taken into account when estimating the fair
value of the share options at the measurement date. Subsequent changes in
the probability of meeting the condition have no impact and are ignored.
Note-4: The expense will be spread over the vesting period of 5 years.

In light of above, Rs. 3.23 million should be debited to P & L account and credited to
equity account.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
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Certified Finance and Accounting Professional Examination – Winter 2017

W1: Average sales:

Year Sales
2017 210.00
2018 252.00
2019 302.40
2020 362.88
2021 435.46
Average 312.55

(The End)

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