Certified Finance and Accounting Professional Stage Examination

The Institute of 4 June 2018

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Advanced Accounting and Financial Reporting

Q.1 Elephant Limited (EL) is in process of finalizing its financial statements for the year ended
31 December 2017. The following information has been gathered for preparing the
disclosures relating to taxation:
(i) Profit before tax for the year after making all necessary adjustments was
Rs. 103 million.
(ii) Expenses include:

donations of Rs. 12 million not allowable for tax purposes.

accruals of Rs. 30 million which will be allowed in tax on payment basis.
(iii) Other income includes government grant of Rs. 10 million and dividend of
Rs. 4 million.
Government grant is not taxable while dividend income is subject to tax rate of 10%.
(iv) Accounting depreciation for the year exceeds tax depreciation by Rs. 20 million.
(v) On 31 December 2017 buildings were revalued for the first time resulting in a surplus
of Rs. 60 million. Revaluation does not affect taxable profits.
(vi) On 1 January 2017 EL granted 5,000 share options each to 12 senior executives,
conditional upon the executives remaining in EL’s employment until
31 December 2018. The exercise price is Rs. 20 per share. On grant date, EL
estimated the fair value of the share options at Rs. 180 per option.
As on 31 December 2017 it was estimated that 2 employees would leave EL before
31 December 2018. Fair value of each share as on 31 December 2017 was Rs. 150.
As per tax laws, intrinsic value of the share option on the exercise date is an
admissible expense.
(vii) On 1 January 2017 EL had issued 1.5 million 10% convertible Term Finance
Certificates (TFCs) of Rs. 100 each. Interest is payable annually on 31 December
whereas the principal is to be paid at the end of 2020. Two TFCs are convertible into
one ordinary share at any time prior to maturity. On the date of issue, the prevailing
interest rate for similar debt without conversion option was 12% per annum.
The tax authorities do not allow any deduction for the imputed discount on the
liability component of the convertible TFCs.
(viii) Net deferred tax liability as on 1 January 2017 arose on account of:
Rs. in million
Property, plant and equipment (Rs. 95 million × 35%) 33.25
Unused tax losses (Rs. 85 million × 35%) (29.75)
Deferred tax liability – net 3.50
(ix) The tax rate for 2017 is 30% while it was 35% in 2016 and prior periods.

Required:
Prepare notes on taxation and deferred tax liability/asset for inclusion in EL’s financial
statements for the year ended 31 December 2017, in accordance with the IFRSs. (17)
 Advanced Accounting and Financial Reporting Page 2 of 6

Q.2 The draft statements of financial position of Ant Limited (AL), Bee Limited (BL) and
Fly Limited (FL) as at 31 December 2017 are as follows:
AL BL FL
------------ Rs. in million ------------
Assets
Property, plant and equipment 3,510 2,835 2,200
Investment property 130 45 -
Investment in BL at cost 3,540 - -
Investment in FL at cost - 2,400 -
Current assets 2,120 1,420 2,800
Total assets 9,300 6,700 5,000

Equity and liabilities

Share capital (Rs. 10 each) 5,500 4,000 2,500
Retained earnings 2,000 1,314 1,000
Gratuity 25 - -
Current liabilities 1,775 1,386 1,500
Total equity and liabilities 9,300 6,700 5,000

Other information:
(i) Details of investments are as follows:
Cost of Retained earnings
Date of
Investor % holding Investee investment of investee
investment
------ Rs. in million ------
1-Jan-2015 AL 65% BL 3,100 520
1-Apr-2017 AL 10% BL 440 815
30-Jun-2017 BL 60% FL 2,400 1,150
(ii) On acquisition date of BL, fair value of its net assets was equal to their carrying value
except a plant whose fair value was Rs. 120 million whereas its carrying amount was
Rs. 140 million. Value in use and remaining useful life of the plant were
Rs. 150 million and 10 years respectively at that date.
(iii) At the date of acquisition of FL, fair value of its net assets recorded in the books was
equal to their carrying value. Further, a contingent liability of Rs. 70 million was
disclosed in the financial statements of FL. AL's legal adviser had at that time
estimated that this claim would be settled at Rs. 50 million. However, it was actually
settled on 15 February 2018 at Rs. 40 million. Date of authorisation of FL's financial
statements was 10 February 2018 and the claim was disclosed as contingent liability
in FL's financial statements.
(iv) On 1 July 2017 AL sold its office building having carrying value of Rs. 43 million to
BL at its fair value of Rs. 50 million. The building had a remaining useful life of
5 years on the date of disposal. On the same date, BL rented out the building to
Monkey Limited for one year.
AL group follows fair value model for investment property whereas BL uses cost
model for investment property. Fair value of the building on 31 December 2017 was
Rs. 58 million.
(v) On 31 December 2017 FL’s recoverable amount was estimated at Rs. 3,700 million.
(vi) AL group follows a policy of valuing the non-controlling interest at its proportionate
share of the fair value of the subsidiary's identifiable net assets.
(vii) The following information relates to AL's gratuity scheme for the year ended
31 December 2017:
Rs. in million
Contribution paid 70
Benefits paid 55
Current service cost 85
Re-measurement gain 10
 Advanced Accounting and Financial Reporting Page 3 of 6

During the year, payments made by AL were charged to profit or loss account. No
further adjustments have been made.

Discount rate and fair value of plan assets at 1 January 2017 were 12% per annum
and Rs. 320 million respectively.

Required:
Prepare AL's consolidated statement of financial position as on 31 December 2017 in
accordance with the requirements of IFRSs. (25)

Q.3 Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for
the year ended 31 December 2017. Following transactions were carried out during the year.

(i) Foreign currency transactions:

KL purchased an investment property in United States for USD 2.6 million. 10%
advance payment was made on 1 May 2017 and 70% payment was made on
1 July 2017 on transfer of title and possession of the property. The remaining amount
was paid on 1 August 2017.

On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million
for one year and received full amount in advance on the same date.

KL uses fair value model for its investment property. On 31 December 2017, an
independent valuer determined that fair value of the property was USD 2.5 million.

Following spot exchange rates are available:

Date 1-May-2017 1-Jul-2017 1-Aug-2017 1-Sept-2017 31-Dec-2017
USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs. 116

Following average exchange rates are also available:

Period 2017 Jul to Dec 2017 Sep to Dec 2017
USD 1 Rs. 105 Rs. 111 Rs. 113 (06)

(ii) Equity investments:

On 1 May 2017 KL acquired following equity investments:
Purchase price Transaction cost Total
-------------------- Rs. in million --------------------
Investment A 100 2 102
Investment B 150 3 153

Investment A was designated as measured at fair value through profit or loss whereas
investment B was irrevocably elected at initial recognition as measured at fair value
through other comprehensive income.

In October 2017, KL earned dividend of Rs. 12 million and Rs. 9 million on

investment A and B respectively.

20% of investment A and 30% of investment B were sold for Rs. 23 million and
Rs. 50 million respectively in November 2017. Transaction cost was paid at 2%.

As on 31 December 2017, fair values of the remaining investments are given below:
Fair Transaction cost Net
value on disposal amount
------------- Rs. in million -------------
Investment A 105 2.1 102.9
Investment B 130 2.6 127.4 (07)
 Advanced Accounting and Financial Reporting Page 4 of 6

Required:
Prepare the extracts relevant to the above transactions from KL’s statements of financial
position and comprehensive income for the year ended 31 December 2017, in accordance
with the IFRSs. (Comparative figures and notes to the financial statements are not required)

Q.4 Draft consolidated financial statements of Hawks Limited (HL) for the year ended
31 December 2017 show the following amounts:
Rs. in million
Total assets 2,500
Total liabilities 1,610
Total comprehensive income 659
During the process of finalisation, following matters have been noted:
(i) HL signed a contract with one of its customers, Rhino Limited (RL). Under the terms
of the contract, HL is required to:

produce a series of 5 television advertisements. Each completed advertisement
has to be approved by an independent agency for a minimum 3-star rating. After
approval, copy of the advertisement would be provided to RL who can then use
it for other campaigns. HL has no enforceable right to payment against any
under production advertisement.

arrange airtime of 120 minutes for broadcasting of each advertisement. The
primary responsibility for broadcasting of these advertisements lies with HL.
HL is entitled to Rs. 80 million for the whole contract and bonus of Rs. 2 million for
each advertisement if a 5-star rating is attained.
HL considers all advertisements as equal units. The expected cost of producing each
advertisement and its broadcasting is Rs. 5 million and Rs. 9 million respectively. HL
expects to earn mark-up of 30% and 20% respectively on similar services to other
clients. Historically, advertisements produced by HL have received the minimum
3-star rating but 5-star rating is received occasionally.
As at 31 December 2017:

production of 3 advertisements has been completed. Two of them have received
5-star rating whereas one has received 3-star rating. HL expects that at least one of
the remaining advertisements would get 5-star ratings.

broadcasting of first two advertisements has been completed whereas 70% time of
the third advertisement has been broadcasted. Bookings have been made for the
broadcasting of remaining time of third advertisement and entire time of fourth
advertisement.

details of the actual cost incurred on this project are as follows:
Production cost Broadcasting cost
Advertisement
----------- Rs. in million -----------
1 4.7 8.5
2 5.6 9.2
3 4.8 8.9
4 3.1* 9.0
* in process
All the above costs have been paid and charged to profit or loss account. HL had
received Rs. 40 million from RL by 31 December 2017 which has been credited to
advance from customers account. (08)
(ii) On 31 December 2017 HL disposed of 2.2 million shares of Snake Limited (SL) for
Rs. 290 million. HL had acquired 3 million shares of SL at fair value on
1 January 2015. SL’s paid-up capital consists of 10 million shares. Due to recurring
losses made by SL, HL had booked impairment of Rs. 90 million against this
investment on 31 December 2016.
 Advanced Accounting and Financial Reporting Page 5 of 6

Fair value per share and retained earnings of SL at respective dates were as follows:
Fair value Retained earnings
Date
Rs. per share Rs. in million
1 January 2015 200 1,700
31 December 2016 118 1,200
31 December 2017 128 1,350

Disposal proceeds have been credited to profit or loss account. No other adjustment
has been made during the year ended 31 December 2017. (05)

Required:
Determine the revised amounts of total assets, total liabilities and total comprehensive
income after incorporating impact of the above adjustments, if any.

Q.5 Following information is available from the records of Leopard Income Fund (an open
ended mutual fund) for the year ended 30 June 20X8:
(i) Undistributed income as at 1 July 20X7 comprised of realised and unrealised income
of Rs. 97 million and Rs. 7 million respectively.
(ii) Total net assets at 1 July 20X7 amounted to Rs. 9,752 million.
(iii) Allocation of net income for the year is as follows:
Rs. in million
Total comprehensive income 214
Income already paid on units redeemed (50)
164
(iv) Accounting income available for distribution relating to capital gains and other than
capital gains amounts to Rs. 3 million and Rs. 161 million respectively.
(v) Distribution during the year amounted to Rs. 150 million.
(vi) Details of issuance and redemption of units during the year are as follows:
Issuance Redemption
Units in million 388 441
----- Rs. in million -----
Capital value 7,372 (8,382)
Element of income /(loss) 70 (64)*
7,442 (8,446)
*including Rs. 50 million of income already paid on units redeemed

(vii) Unrealized loss included in undistributed income as at 30 June 20X8 amounted to

Rs. 4 million.

Required:
Prepare a statement of movement in unit holders’ fund for the year ended 30 June 20X8.
(Ignore disclosure of comparative figures and net assets value per unit) (10)

Q.6 During the year ended 31 December 2017, following transactions were made by
Zebra Limited (ZL):
(i) On 1 October 2017 ZL purchased a piece of land from Cow Limited (CL) having fair
value of Rs. 230 million. According to the agreement, CL has the option to receive:

75,000 shares of ZL to be issued on 30 April 2018; or

Cash equivalent to the value of 70,000 ZL’s shares to be paid on 28 February 2018.

The actual/estimated fair values of ZL’s share at various dates were as follows:
Date 1-Oct-2017 31-Dec-2017 28-Feb-2018 30-Apr-2018
Fair value per share Rs. 3,000 Rs. 2,900 Rs. 3,300 Rs. 3,400 (04)
 Advanced Accounting and Financial Reporting Page 6 of 6

(ii) On 1 April 2017 ZL acquired a licence for operating a TV channel for Rs. 86.3 million
out of which Rs. 50 million was paid immediately. The balance amount is payable on
1 April 2019. A mega social media and print media campaign was launched to
promote the channel at a cost of Rs. 10 million. The transmission of the channel
started on 1 August 2017.

The license is valid for 5 years but is renewable every five years at a cost of
Rs. 35 million. Since the renewal cost is significant, the management intends to renew
the license only once and sell it at the end of 8 years.

In the absence of any active market, the management has estimated that residual
value of the license would be Rs. 15 million and Rs. 20 million at the end of 5 years
and 8 years respectively.

Applicable discount rate is 10% p.a. (05)

Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year
ended 31 December 2017.

Q.7 Following information pertains to Tiger Limited (TL):

Quarter ended Half year ended

31-Dec-2017 31-Dec-2017
Profit after tax (Rs. in million) 140 239
Average market price per share (Rs.) 330 360

Ordinary shares

20 million shares of Rs. 100 each were outstanding as at 1 July 2017.

4 million shares were issued on 1 August 2017 at market price of Rs. 355 per share.

Convertible bonds

On 1 November 2016 TL issued 0.8 million 7% convertible bonds at par value of
Rs. 1,000 each. Each bond is convertible into 3 ordinary shares at any time prior to
maturity date of 31 October 2019. On inception the liability component was calculated
as Rs. 760 million. On the date of issue, the prevailing interest rate for similar debt
without conversion option was 9% per annum.

50% of these bonds were converted into ordinary shares on 1 November 2017.

Warrants
On 1 January 2016, TL issued share warrants giving the holders right to buy 6 million
ordinary shares at Rs. 340 per share. The warrants are exercisable within a period of 2 years.

Applicable tax rate is 30%.

Required:
Compute basic and diluted earnings per share to be disclosed in statement of profit or loss
for the following periods:
(a) Quarter ended 31 December 2017 (06)
(b) Half year ended 31 December 2017 (07)
(Show all relevant workings)

(THE END)