FIN711 SOLUTION FILE

1: What is the objective of IAS 33? Explain that to which entities IAS 33 is applicable
Solution:
Objective of IAS 33:
International Accounting Standard IAS 33 provides complete guidelines regarding calculation
and presentation of Earning per share EPS.
IAS 33 apply to entities whose securities are publicly traded or that are in the process of issuing
securities to the public. [IAS 33.2] Other entities that choose to present EPS information must
also comply with IAS 33. [IAS 33.3]
If both parent and consolidated statements are presented in a single report, EPS is required only
for the consolidated statements. [IAS 33.4]
Only listed companies need to present EPS, where as non listed companies choose to present
EPS in its financial statements and it must be done with accordance of IAS 33
2: Machinery is leased to ABC Company for whole of its useful life. Company is not the legal
owner of the machinery but it is recognized as an asset in its balance sheet since ABC Company
has control over economic benefits of the machinery that would be taken by using the machinery.
Explain with reason that whether it is an application of substance over form or not?
Income statement of the XYZ Company reported sales of Rs.50 million when it had sales of
Rs.45 million. Explain with reason that whether financial information presented by company has
faithful representation or not.
Solution
Substance over form:
It is the principle that transactions and other events are accounted for and presented in
accordance with their economic substance (economic reality) and not merely their legal form.
It is the principle that transaction and other events are accounted for and presented in accordance
with their economic reality and not merely their legal form.
This is a case of substance over form because although legally the asset does not belong to ABC
Company but practically it is under control of company and its economic benefits are also being
drawn by company.
Faithful representation:

Information must represent faithfully the transaction it purports to represent in order to be

reliable.
As the sales are not presented accurately they have lost their reliability and this has impact on
the decision of its stakeholders. So it constitutes a case of unfaithful representation.
3: Answer the following questions under IAS 37.
1: What are the types of provision that is created for reduction in assets?
2: Describe the conditions to be met for recognition of provision
Solution:
1: What are the types of provision that is created for reduction in assets?

Provision against receivables.

Provision against the expiry of economic benefits of fixed assets.

2: Describe the conditions to be met for recognition of provision

A provision is a liability of uncertain timing or amount. For a provision following points must be
kept in mind:

Present obligation
Arising from the past event
Probable outflow of resources in future
Amount can be estimated reliably.

If all these above conditions are not fulfilled, no provision shall be recognized.

4: Answer the following questions under IAS 08:

1: What is the objective of IAS 8? What are the conditions to be met when an entity will change
its accounting policy? (1+2)
2: Mention 2 items, the effect of which is included in prior period error. (2)
Solution
1: Objective of IAS 8 is following:

Accounting policies

Changes in accounting estimates and errors

An entity shall change an accounting policy only if the changes:

1. Is required by standard or an interpretation.
2. Result in the financial statements providing reliable and relevant information.
2: Following are the items:
a) Mathematical mistakes;
b) Mistakes in applying accounting policies;
c) Oversights; or
d) Misinterpretations of facts; and
e) Fraud

5: You are required to answer the following under IAS 27: (2+5+3)
1. Define Control.
2. Describe various situations in which Control is supposed to exist.
3. Mention at least 3 benefits of establishment of group of companies.
Solution
1: Define Control.
According to IAS 27 control is the power to manage the financial and operating policies of an
entity to obtain benefits from its activities.
2. Describe various situations in which Control is supposed to exist.
According to IAS 27 control exists when any of the following situation comes:
When the parent company:
1. Has owned more than 50% of the voting rights of subsidiary company (Each ordinary share
capital has one voting right)
2. Has power over more than 50% of the voting rights of subsidiary company by virtue of
agreement with other share-holders of it.

3. Has power to govern the financial and operating policies of subsidiary company by statute or
under an agreement.
4. Has power to appoint or remove a majority of the directors of subsidiary company.
5. Has power to cast the majority of votes at meetings of the board of directors of subsidiary
company.

3. Mention at least 3 benefits of establishment of group of companies.

Following are the 3 benefits of establishment of group of companies:
a) Benefit of synergy
b) Benefit of better management of resources
c) Benefit of to avoid competitive business environment

6: Define borrowing cost with 3 examples. Recognition of benchmark treatment & allowed
alternate treatment

1: Borrowing costs Definition

Borrowing costs is the financial costs incurred by an enterprise in connection with the borrowing
of funds,
Examples:

Interest,
Amortization of discounts or premiums arising on the issue of debt securities,
Loan fees,
Gains and losses on foreign currency differences related to borrowed funds and regarded
as an adjustment to interest costs.

2: Recognition of benchmark treatment & allowed alternate treatment

1) Benchmark Treatment:
Recognition:
Under the benchmark treatment borrowing costs are recognized as an expense in the period in
which they are incurred regardless of how the borrowings are applied.

Disclosure:
The financial statements shall disclose the accounting policy adopted for borrowing costs (e.g.
Interest, markup, profit and other charges on borrowings are charged to income).
2) Allowed Alternate Treatment:
Recognition:
Borrowing costs shall be recognized as an expense in the period in which they are incurred,
except to the extent that borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset shall be capitalized as part of the cost of that
asset.

7: Identify adjustable & non adjustable events