Advanced Accounting and Financial Reporting

Final Examination
Summer 2014
Module E
Q.1

3 June 2014
100 marks - 3 hours
Additional reading time - 15 minutes

Following are the draft balance sheets (summarized) of Delta Limited (DL), a listed
company, and its subsidiaries, Gamma Limited (GL) and Sigma Limited (SL) as at
31 December 2013:
Non-current assets
Investment (at cost)
Current assets

DL
GL
SL
--------- Rupees in million --------10,000
6,100
5,400
9,675
2,800
6,325
7,100
3,100
26,000
16,000
8,500

Share capital (Rs. 100 each)

Retained earnings
Non-current liabilities
Current liabilities

9,000
7,500
6,000
3,500
26,000

7,000
2,790
3,000
3,210
16,000

3,000
3,100
1,000
1,400
8,500

The following information is also available:

(i)
Investments:
Investment
by
DL in GL
DL in SL
GL in SL

Investment
date

No. of shares
(in million)

Cost
(Rs. in million)

1-Jan-2008
1-Jul-2009
1-Jul-2013

52.50
9.00
14.00

7,500
2,175
2,800

Retained earnings
on acquisition
(Rs. in million)
2,500
1,400
3,010

On 1 July 2013, the fair value of SLs shares was Rs. 200 per share.
(ii)

On the date of acquisition by DL, the fair value of GLs net assets was equal to their
book value, except a piece of land whose fair value was Rs. 150 million as against its
cost of Rs. 120 million. The said land was sold for Rs. 170 million in 2013.

(iii)

On 1 January 2013, DL issued 2.5 million 10% convertible term-finance certificates

(TFCs) of Rs. 100 each. The TFCs are redeemable on 31 December 2015 at par. Each
TFC is convertible into one ordinary share at the option of the certificate holder at
any time prior to maturity. On the date of issue, the prevailing market interest rate for
similar debt without conversion option was 12% per annum. The TFCs are appearing
in the draft financial statements at their par value.
Interest payable annually on 31 December each year has been paid and accounted for
in the financial statements.

(iv)

The companies settled their inter-company balances on 31 December 2013. However,

a cheque of Rs. 20 million received from SL on 31 December 2013 was credited to
DL's bank account on 5 January 2014.

(v)

DL values non-controlling interest at its proportionate share of the fair value of the
subsidiaries' identifiable net assets.

Required:
Prepare a consolidated statement of financial position as at 31 December 2013 in
accordance with the requirements of the International Financial Reporting Standards.

(20)

Advanced Accounting and Financial Reporting

Q.2

Page 2 of 5

Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired
20,000 ordinary shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based
company at a cost of AED 240,000 which was equivalent to Rs. 6,000,000. The face value
of the shares is AED 10 each. OL intends to hold the shares to avail benefits of regular
dividends and capital gains.
On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares in
HL in exchange for every four shares held in AWL.
Other relevant information is as under:
AWL
Final dividend received on 31 March 2013:
Cash
Bonus shares
Final cash dividend received on 10 April 2014
Fair value per share as at: 31 December 2012
1 June 2013
31 December 2013

15%
10%
AED 13.00
AED 14.00
-

HL
20%
AED 18.00
AED 19.50

Exchange rates on various dates were as follows:

1 AED

31-Dec-2012
Rs. 25.00

31-Mar-2013
Rs. 26.50

1-Jun-2013
Rs. 28.00

31-Dec-2013
Rs. 28.70

10-Apr-2014
Rs. 28.20

Required:
Determine the amounts (duly classified under appropriate heads) that would be included in
OLs statement of comprehensive income for the year ended 31 December 2013 in respect
of the above investment.
Q.3

(a)

(08)

In December 2012, Arabian Automotives Limited (AAL) had launched a campaign

to offer Hybrid Technology cars under a finance lease arrangement.
On 1 January 2013, AAL provided 10 cars to a customer. Details of the lease of each
car are as under:

Rs. 300,000 were paid on delivery of the car.

Three equal annual installments of Rs. 580,000 each are payable in arrears.

Periodic servicing of the car will be free of charge for the entire lease period. The
estimated cost of servicing a car is Rs. 10,000 per year. AAL provides such
services at cost plus 20%.

Actual servicing cost incurred for the year ended 31 December 2013 amounted
to Rs. 11,000

Implicit rate of return is 12% which is equivalent to market rate of interest.
Ex-factory price fixed by the manufacturer is Rs. 1,800,000. AAL gets 15% discount
on the ex-factory price from the manufacturer.

(b)

(10)

On 1 January 2013, Elegant Generators Limited (EGL) sold a heavy duty generator
to Rivera Limited (RL) for Rs. 6,000,000 on the following terms and conditions.

10% of sales price was paid on delivery of the generator.

Remaining amount was payable on 31 December 2013. Interest charge on the
amount unpaid was agreed at 6% per annum.
The market interest rate is 12% per annum.

In December 2013, RL conveyed its inability to pay the amount due on 31 December
2013 and requested EGL to recover the amount in installments. After negotiations,
EGL agreed to receive four half yearly installments of Rs. 1,600,000 each,
commencing from 30 June 2014.
Required:
Compute the impact of the above transactions on various items forming part of profit and
loss account and statement of financial position of AAL and EGL, for the year ended
31 December 2013 in accordance with International Financial Reporting Standards.
(Notes to the financial statements are not required)

(06)

Advanced Accounting and Financial Reporting

Q.4

Page 3 of 5

Following information pertaining to Moon Light Limited (MLL) is available for computing
tax charge/liability for inclusion in the financial statements for the year ended
31 December 2013.
Rs. in million
Profit before dividend and capital gains
500
Dividend income
25
Capital gains (exempt from tax)
28
Permanent add-backs under the tax laws
35
Actuarial gains for the year on defined benefits plans
(Balance as at 31 December 2012 amounted to Rs. 140 million)
60
Other relevant information is as under:
(i)
MLLs tax assessment for the year ended 31 December 2011 was finalized in May
2013 raising an additional tax liability of Rs. 4.2 million. The assessment was not
contested and the liability was paid by MLL.
(ii)

Following details are available in respect of provision for doubtful debts:

Balance as at 31 December 2012 amounted to Rs. 90 million

Write offs against provision amounted to Rs. 25 million

Balance as at 31 December 2013 amounted to Rs. 125 million

(iii)

Property, plant and equipment:

Accounting WDV
Tax WDV
(iv)

2013
2012
Rs. in million
1,850
1,800
1,880
1,750

Applicable tax rates for 2012 and 2013 are 35% and 10% for business and dividend
income respectively for both years.

Required:
Prepare notes on taxation for inclusion in the financial statements of MLL for the year
ended 31 December 2013, in accordance with the International Financial Reporting
Standards.
Q.5

(16)

Peoples Bank Limited (PBL) operates in Pakistan. Following information pertains to

advances to customers and related provisions for the year ended 31 December 2013:
(i)

Information relating to non-performing advances is as under:

Classification of non-performing
advances
Loss
Doubtful
Sub-standard
Other assets especially mentioned

(ii)

(iii)

As at 31 December 2013
Forced sales value Provision to be
Balance
maintained at
of collaterals
-----Rupees in million----%
4,500
1,300
100
1,400
800
50
1,200
400
25
150
20
-

For the year ended 31 December 2013, PBL has:

made a provision of Rs. 370 million including general provision of Rs. 55
million.


written off a sum of Rs. 160 million against the specific provision.
General provision balance as at 31 December 2013 amounted to Rs. 225 million.

Required:
Prepare relevant notes on non-performing advances and provisions thereagainst for
inclusion in the financial statements of PBL for the year ended 31 December 2013 in
accordance with the guidelines issued by the State Bank of Pakistan.

(10)

Advanced Accounting and Financial Reporting

Q.6

Page 4 of 5

Alpha Limited (AL), a listed company, acquired 80% equity in Zee Limited (ZL) on
1 July 2010. The following information has been extracted from their draft financial
statements:
AL
ZL
----- Rs. in '000 ----Balance as at 1 January 2013:
Share capital (Rs. 100 each)
12% Convertible bonds (Rs. 100 each)
Profit for the year ended 31 December 2013 (after tax)

80,000
30,000
60,000

35,000
25,000

Following information is also available:

(i)

The bonds were issued at par on 1 January 2011 and are convertible at any time
before the redemption date of 31 December 2015, at the rate of five ordinary shares
for every four bonds.

(ii)

Cost and fair value information of ZLs investment property is as under:

Cost
Fair value

31-Dec-2013
31-Dec-2012
-------- Rs. in '000 -------65,000
60,000
67,000
59,000

ZL uses cost model while the group policy is to use the fair value model to account
for investment property.
(iii)

AL operates a defined benefit gratuity scheme for its employees. The actuarys report
has been received after the preparation of draft financial statements and provides the
following information pertaining to the year ended 31 December 2013:

Actuarial losses
Current service costs
Net interest income

Rs. in '000
150
8,000
3,000

(iv)

On 1 August 2013, under employees share option scheme, 60,000 shares were issued
by AL to its employees at Rs. 150 per share against the average market price of
Rs. 250 per share.

(v)

Dividend details are as under:

Cash
Bonus shares

AL
2013 (Interim) 2012 (Final)
18%
10%
20%

ZL
2013 (Interim) 2012 (Final)
12%
15%
16%

At the time of payment of dividend, income tax at 10% was deducted by AL and ZL.
(vi)

Applicable tax rate for business income is 35%.

Required:
Extracts from the consolidated profit and loss account of Alpha Limited (including earnings
per share) for the year ended 31 December 2013 in accordance with the International
Financial Reporting Standards.
(Note: Comparative figures and information for notes to the financial statements are not required)

(15)

Advanced Accounting and Financial Reporting

Q.7

Page 5 of 5

Fine Woods Limited (FWL) markets quality wood furniture through its sales offices located
in major cities of Pakistan. In March 2012, the management of FWL decided to introduce
online sales through its website. The expenses incurred in this regard during the year ended
31 December 2012 were as follows:

Feasibility was prepared by a consulting firm for upgrading the existing website to
facilitate online sales, at a cost of Rs. 3.5 million.

Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million
respectively.

Website was upgraded by FWLs IT team. The directly attributable costs amounted to
Rs. 5 million.

Online payment system was developed by external experts at a cost of Rs. 3 million.

IT personnel were trained to deal with security issues relating to online transactions at a
cost of Rs. 1.5 million.
In the financial statements for the year ended 31 December, 2012 the above expenses were
classified as capital work in progress.
In January 2013, after successful testing of online sales, FWL launched a campaign for
online sales and incurred an expenditure of Rs. 2.5 million in this respect.
In view of the increase in online sales, in September 2013, the management decided to close
two of its sales offices and announced their closure effective 1 January 2014. Following
information is available in respect of the two offices:
Office A:

Carrying value of property, plant and equipment as at 31 December 2013 amounted to
Rs. 50 million.

Negotiations with a party for sale of the office are at an advance stage and it is expected
that all the formalities will be finalised by the end of June 2014. Sale price of property,
plant and equipment net of expenses is estimated at Rs. 60 million.
Office B:

Carrying value of property, plant and equipment as at 31 December 2013 amounted to
Rs. 65 million.

As advised by a property consultant, FWL is carrying out modifications of the office
premises to get a better price. The cost of modifications is estimated at Rs. 15 million to
FWL and is expected to be completed in six months. Sale price net of expenses after
modifications is estimated at Rs. 95 million.
Required:
Discuss the accounting treatment in respect of the above, in the financial statements of
FWL for the year ended 31 December 2013 in accordance with the requirements of
International Financial Reporting Standards.
(THE END)

(15)

Advanced Accounting and Financial Reporting

Final Examination
Winter 2013
Module E
Q.1

3 December 2013
100 marks - 3 hours
Additional reading time - 15 minutes

On 1 October 2012, Alpha Industries Limited (AIL) held 15% and 35% equity in Beta
(Private) Limited (BPL) and Delta (Private) Limited (DPL) respectively. The following
balances pertain to the three companies, as on the above date.

Share capital (Rs. 100 each)

Retained earnings
Other comprehensive income - fair value reserve related to BPL
Total equity
Non-current investments BPL*1 (Cost Rs. 18 million)
Non-current investments DPL*2 (Cost Rs. 40 million)
*1 recorded as available for sale
*2 recorded as investment in associate

AIL BPL DPL

Rs. in million
100
60
50
35
30
15
6
141
90
65
20
43

On 1 April 2013, AIL acquired a further 55% equity in BPL when:

the fair value of the net assets of BPL was Rs. 100 million which was equal to their
carrying value; and


the fair value of the 15% equity already held in BPL was Rs. 25 million.
The purchase consideration comprised of 150,000 shares in AIL which were issued on the
date of acquisition at their market value of Rs. 160 per share and Rs. 42 million payable in
cash on 31 March 2014. AIL uses discount rate of 12% for determining the present value of
its future assets and liabilities.
Other relevant details are as follows:
(i)
For the year ended 30 September 2013 the profits after tax of AIL, BPL and DPL
were Rs. 58 million, Rs. 40 million and Rs. 30 million respectively.
(ii) AIL values non-controlling interest at the acquisition date at its fair value which was
Rs. 32 million.
(iii) AIL sold goods at Rs. 65 million to BPL on 1 July 2013. The sales were invoiced at
30% above cost. 20% of these goods remained unsold as on 30 September 2013.
(iv) DPLs sales to AIL amounted to Rs. 70 million. DPL earns a profit of 20% of sales
value. On 30 September 2013, inventory of AIL included Rs. 20 million in respect of
such goods.
(v)
For the year ended 30 September 2012 AIL, BPL and DPL paid final cash dividend
of 15%, 20%, and 12% respectively.
Required:
(a) Compute the amount of goodwill, retained earnings and investment in associate as
they would appear in the consolidated statement of financial position of AIL as at 30
September 2013, in accordance with IFRS. (Ignore taxation)
(18)
(b) Describe how the investment in BPL and DPL may be accounted for and also
compute the amount of the investments as it would appear in the separate statement
of financial position of AIL as at 30 September 2013, in accordance with IFRS.
(04)

Advanced Accounting and Financial Reporting

Q.2

Page 2 of 5

Mega Super Stores (MSS) introduced a customer loyalty scheme on 1 August 2013 which
was based on the following conditions:


Customers were granted 500 points with each purchase of Rs. 5,000 or above.


These points could be exchanged for goods supplied by MSS within two months from
the date the points were granted.


For every 500 points, goods having a retail price of Rs. 200 were to be given.
However, the scheme was discontinued from 1 October 2013. During the period covered by
the scheme, the customers were granted 1.5 million points out of which 0.5 million points
were redeemed. At year end, a study was carried out and it was established that
approximately 30% of the points granted would lapse unutilised. Actual results showed that
finally 470,000 points lapsed unutilised.
MSS sells goods at a margin of 40%. No entries in respect of grant of points have been
recorded so far.
Required:
Prepare accounting entries to record the above transactions in accordance with IFRS.

Q.3

(08)

The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 are
under finalisation and the following matters are under consideration:
(i)

BLs plant was commissioned and became operational on 1 April 2008 at a cost of
Rs. 130 million. At the time of commissioning its useful life and present value of
decommissioning liability was estimated at 20 years and Rs. 19 million respectively.
BLs discount rate is 10%.
There has been no change in the above estimates till 30 September 2013 except for the
decommissioning liability whose present value as at 1 April 2013 was estimated at
Rs. 25 million.
(06)

(ii)

On 1 October 2011, BL acquired 160,000 12% debentures of Rs. 100 each, for
Rs. 15.5 million and classified them as ' held to maturity'.
On 30 September 2013, in view of financing requirements for a new project, BL is
uncertain about holding the debentures till redemption. Therefore, it has decided to
reclassify the debentures as 'available for sale'.
Other relevant information is as follows:

The debentures carry a fixed interest rate of 12%, payable annually in arrears.

The effective rate of interest is 14.09%.

The debentures are redeemable at Rs. 105 on 30 September 2015.

The market value per debenture as of 30 September 2012 and 2013 was Rs. 102
and Rs. 104 respectively.

(iii)

(06)

On 1 April 2013, BL shifted to a newly acquired building in the city centre. The
vacated building was leased as follows:
Date of commencement of the lease
Lease period
Six semi-annual installments payable in advance
(to be increased by 5% annually)

1 April 2013
3 years
Rs. 3 million

On 1 April 2013, the carrying value and fair value of the vacated building was Rs. 55
million and Rs. 70 million respectively. As at 30 September 2013 the fair value of the
vacated building was reduced to Rs. 66 million. BL uses fair value model to account
for investment properties.
(06)
Required:
For each of the above matters, compute the related amounts as they would appear in the
statements of financial position and comprehensive income of Bravo Limited for the year
ended 30 September 2013 in accordance with IFRS. (Ignore corresponding figures)

Advanced Accounting and Financial Reporting

Q.4

Page 3 of 5

Global Air Limited (GAL) owns 100% equity in Moon (Private) Limited (MPL). On
1 July 2013, GAL decided to dispose of 90% equity in MPL. It is expected that the sale will
be finalised by 30 June 2014 at an estimated sale price of Rs. 140 million with an estimated
cost to sell of Rs. 3.5 million. Relevant information pertaining to MPL is as under:
(i)

Assets and liabilities as of 30 June 2013:

Non-current assets
Current assets
Liabilities

(ii)

(iii)
(iv)

Rs. in million
195.00
50.00
90.00

It is estimated that MPL's trade debtors amounting to Rs. 6 million will not be
recovered; whereas provisions included in the liabilities amounting to Rs. 8 million
are no more required.
MPL's net loss after tax for the nine months period ended 30 June 2013 was
Rs. 30 million.
During the period 1 July 2013 to 30 September 2013, liabilities amounting to Rs. 26
million were paid and current assets of Rs. 18 million were recovered.

Goodwill of MPL as per the consolidated statement of financial position of GAL as at 30

September 2012 amounted to Rs. 15 million.
GAL had incurred expenses amounting to Rs. 1.5 million, for disposal of the equity upto 30
September 2013.
Required:
Prepare relevant extracts from the consolidated statements of financial position and
comprehensive income of GAL for the year ended 30 September 2013, in accordance with
IFRS.
(12)

Q.5

Following is the extract of Trial Balance of Zee Bank Limited for the year ended 30 June
2013:

Cash in hand - Local currency

- Foreign currency
National Prize Bonds
Rupee current account with SBP
Rupee current account with NBP
Foreign currency current account with SBP
Foreign currency deposit account with SBP
Deposit account with central bank of UAE
Current account with central bank of South Africa
Current account with Muslim Commercial Bank Ltd.
Deposit account with Barclays Bank, London
Current account with Citibank, New York

Rs. in million
10,000
2,000
100
30,000
8,000
3,000
10,000
12,000
9,800
700
25,000
4,000

Balances with treasury banks and other banks include remunerative accounts amounting to
Rs. 10.8 million and Rs. 27.5 million respectively.
Required:
To the extent the information is available, prepare notes on Cash and balances with
treasury banks and Balances with other banks for inclusion in financial statements of Zee
Bank Limited for the year ended 30 June 2013, in accordance with the laws applicable in
Pakistan.
(10)

Advanced Accounting and Financial Reporting

Q.6

Page 4 of 5

New Horizon (Private) Limited (NHPL) is engaged in the distribution and supply of
pharmaceutical products. The following information has been extracted from NHPLs draft
financial statements for the year ended 30 September 2013:
Statement of comprehensive income for the year ended 30 September 2013

Sales revenue
Cost of sales
Gross profit
Operating expenses
Operating profit/(loss)
Finance charges
Profit / (loss) before tax
Taxation
Net profit / (loss)

2013
2012
---------Rs. in million--------720.00
234.00
(534.00)
(190.00)
186.00
44.00
(120.00)
(45.00)
66.00
(1.00)
(35.00)
(5.00)
31.00
(6.00)
(12.00)
1.30
19.00
(4.70)

Statement of financial position as at 30 September 2013

Share capital
Retained earnings
Long term loans
Current liabilities
Trade payables
Other payables
Borrowings

2013
2012
Rs. in million
300.00
300.00
65.00
46.00
365.00
346.00
198.00
40.00
96.00
5.50
10.50
112.00
675.00

25.00
1.00
4.00
30.00
416.00

Property, plant & equipment

Intangible assets

Current assets
Inventories
Trade receivables
Cash and bank balances

2013
2012
Rs. in million
555.00 361.50
32.00
17.50
587.00 379.00

30.00
48.00
10.00
88.00
675.00

18.00
12.00
7.00
37.00
416.00

Following further information is available:

(i)
On June 2012, NHPL acquired exclusive distribution rights of a range of life saving
drugs from a Malaysian company for 12 years at a cost of Rs. 18 million. NHPL has
capitalized the cost of rights and it is to be amortized over the period of distribution
rights.
(ii)

In October 2012, NHPL launched a country-wide sales promotion campaign to

introduce the Malaysian drugs. The cost of the advertisement campaign was Rs.
25million. As the benefits of the campaign are long term, NHPL has decided to
amortize the costs over a period of 5 years.

(iii)

The prices offered by the Malaysian company are quite low as compared to prices of
similar quality drugs in Pakistan. Since this matter was publicized vigorously in the
advertisement campaign, the Malaysian drugs were able to capture the market.

(iv)

In 2013, the sales of drugs imported from Malaysia accounted for 70% of the
company's revenue. The level of credit sales has remained constant at 40% of total
sales.

(v)

NHPL is also negotiating the acquisition of distribution rights of the products of

another foreign company.

Required:
Comment on the financial and operating performance of NHPL for the year ended 30
September 2013, supported by relevant accounting ratios.
(14)

Advanced Accounting and Financial Reporting

Q.7

Page 5 of 5

Dynamic Steel Limited (DSL) signed an agreement on 1 June 2013 for import of equipment
for SK 50 million. According to the agreement, the plant was delivered on 1 November
2013 and invoice thereof was paid on 1 December 2013.
In order to hedge the commitment to pay SK 50 million, on 1 June 2013, DSL entered into
a forward contract to buy the required SK on 1 December 2013 at a fixed exchange rate of
SK 1=Rupees 15. Exchange rates on various dates are as follows:
1-Jun-2013
Spot rate
Forward rate

Rs.
Rs.

14.50
15.00

30-Sep-2013 1-Nov-2013
SK 1
12.00
11.15
12.39
11.35

1-Dec-2013
10.00
-

It is DSL's policy to adjust any gain or loss arising on forward contracts to the carrying
value of the imported goods. DSLs accounting year end is 30 September.
Required:
Prepare accounting entries relating to the above transactions, on each of the above dates, in
accordance with the requirement of IFRS.
(THE END)

(16)

fb.com/gcaofficial

Advanced Accounting and Financial Reporting

Final Examination
Summer 2013
Module E
Q.1

4 June 2013
100 marks - 3 hours
Additional reading time - 15 minutes

Qudsia Limited (QL) has investments in two companies as detailed below:

Manto Limited (ML)

On 1 January 2010, QL acquired 40 million ordinary shares in ML, when its retained
earnings were Rs. 150 million.

The fair value of MLs net assets on the acquisition date was equal to their carrying
amounts.
Hali Limited (HL)

On 30 November 2012, QL acquired 16 million ordinary shares in HL, when its retained
earnings stood at Rs. 224 million.

The purchase consideration was made up of:
- Rs. 190 million in cash, paid on acquisition; and
- 4 million shares in QL. At the date of acquisition, QLs shares were being traded at
Rs. 15 per share but the price had risen to Rs. 16 per share by the time the shares were
issued on 1 January 2013.

The fair value of the net assets of HL on the date of acquisition by QL was equal to their
carrying amounts, except a building whose fair value exceeded its carrying amount by
Rs. 28 million. The building had a remaining useful life of seven years on
30 November 2012.
The draft summarised statements of financial position of the three companies on
31 December 2012 are shown below:
QL
ML
HL
---------Rs. in million--------Assets
Property, plant and equipment
Investment in ML
Investment in HL
Current assets
Equity and liabilities
Ordinary share capital (Rs.10 each)
Retained earnings
Current liabilities

5,000
630
190
5,480
11,300

550
400
950

500
350
850

6,000
2,900
2,400
11,300

500
100
350
950

400
240
210
850

The following additional information is available:

(i)
QL considers ML as a cash-generating unit (CGU). As on 31 December 2012, the
recoverable amount of the CGU was estimated at Rs. 700 million.
(ii) QL values the non-controlling interest at its proportionate share of the fair value of the
subsidiarys net identifiable assets.
(iii) On 1 October 2012, ML sold a machine to QL for Rs. 24 million. The machine had
been purchased on 1 October 2010 for Rs. 26 million. The machine was originally
assessed as having a useful life of ten years and that estimate has not changed.
(iv) In December 2012, QL sold goods to HL at cost plus 30%. The amount invoiced was
Rs. 52 million. These goods remained unsold at year end and the invoiced amount was
also paid subsequent to the year end.

Advanced Accounting and Financial Reporting

Page 2 of 5

Required:
Prepare a consolidated statement of financial position for QL as on 31 December 2012 in
accordance with the requirements of International Financial Reporting Standards.

Q.2

(20)

Healthcare Limited (HCL) manufactures a large variety of nutrition products. In addition to

its branded products, HCL produces a special food supplement for export to Childcare
Centre (CCC) in the Middle East. Under the terms of the contract, HCL is liable to pay a
compensation of Rs. 6 million per month to CCC, if HCL is unable to supply the
supplement.
On 15 March 2013, a product of HCL was found to be contaminated. On receiving the
complaint, the Health Department sealed the factory premises and initiated legal
proceedings against the company.
As per the legal advice, it is highly probable that the case would be decided against HCL. It
is expected that the decision would be announced in September 2013. The maximum fine
payable under the law is Rs. 15 million. However, the legal adviser is of the opinion that the
amount of the penalty would be Rs. 9 million approximately.
HCL has investigated the incident and the findings as reported on 5 April 2013 are as under:

The contamination was caused due to the use of an ingredient supplied by Food
Chemical Enterprises (FCE) which was close to the date of expiry. However, only one
product was affected and various laboratory tests have confirmed that the contamination
is not health hazardous.

Production batches of the contaminated product were identified. The cost of
contaminated inventory in hand on 15 March 2013 was Rs. 70 million. The cost of
unsold inventory recalled from the customers amounted to Rs. 132 million. HCL earns a
margin of 25% on all of its products.

Due to closure of the factory, HCL would not be able to supply the supplement to CCC
for three months.

Cost of disposal of the contaminated inventory is estimated at Rs. 0.5 million.
On 6 April 2013, HCL lodged a claim for damages of Rs. 211.5 million against FCE for the
cost of contaminated inventory, cost of disposal thereof and the amount of the penalty that
HCL is likely to incur. However, no response has been received from FCE so far and HCL is
considering to file a suit for recovery of the amount.
Required:
Explain the accounting treatment and the disclosure requirements in respect of the above in
HCLs financial statements for the year ended 31 March 2013 in accordance with the
International Financial Reporting Standards.

Q.3

The following information pertaining to Krishna Limited (KL) has been extracted from its
financial statements for the year ended 31 December 2012.
(i)

Total comprehensive income for the year:

Profit from continuing operations - net of tax
Profit from discontinued operations - net of tax
Fair value gain on investments available for sale - net of tax
Total comprehensive income

(ii)

Rs. in 000
200,000
10,000
16,000
226,000

Share capital as on 1 January 2012:

8,000,000 Ordinary shares of Rs. 10 each.

500,000 Convertible preference shares of Rs. 100 each entitled to a cumulative
dividend at 12%. Each share is convertible into two ordinary shares and the
dividend is paid on 28 February, every year.

(13)

Advanced Accounting and Financial Reporting

Page 3 of 5

(iii) 20% bonus shares being the final dividend for the year ended 31 December 2011 were
issued on 31 March 2012.
(iv) On 30 April 2012, holders of 80% convertible preference shares converted their shares
into ordinary shares.
(v) On 1 July 2012, KL issued 20% right shares to its ordinary shareholders at Rs. 70 per
share. The market price prevailing on the exercise date was Rs. 80 per share.
(vi) On 1 August 2011, KL granted 2,500 share options to each of its twenty technical
managers. The managers would become eligible to exercise these options on
completion of further five years of service with KL. By 31 December 2012, two
managers had already left and it is expected that a further six managers would leave
KL before five years. As of 31 December 2012 estimated fair value of each share
option was Rs. 40.
Required:
Prepare a note relating to basic and diluted earnings per share for inclusion in KLs financial
statements for the year ended 31 December 2012, in accordance with International Financial
Reporting Standards.

Q.4

(15)

Ashfaq General Insurance Limited (AGIL) is engaged in general insurance business. The
following information is available for the year ended 31 December 2012:
2012
Rs. in 000
(i)

(ii)

Information extracted from statement of cash flows:

Profit received on bank deposits
Profit / interest received on investments
held for trading
held to maturity
available for sale
Dividend received from investments
held for trading
available for sale
Proceeds from disposal of investments
held for trading
available for sale
Information extracted from profit and loss account:
Loss on sale of investments held for trading
Unrealized loss on revaluation of investments held for trading
Provision for impairment in the value of investments available for sale
Amortisation of premium on investments available for sale
Gain on sale of investments available for sale
Investment related expenses

4,000
28,000
9,000
16,000
6,000
5,000
39,000
43,000

12,000
1,000
2,000
3,000
15,000
7,000

(iii) Information extracted from statement of financial position:

1-1-2012
31-12-2012
Accrued profit/interest on:
--------Rs. in 000-------- Term deposits
2,000
1,500
- Investments - held for trading
11,400
13,000
- Investments - held to maturity
600
1,800
- Investments - available for sale
2,700
3,000
Required:
Prepare the statement of investment income for inclusion in AGILs financial statements for
the year ended 31 December 2012.
(10)

Advanced Accounting and Financial Reporting

Q.5

Page 4 of 5

On 1 January 2009 Qasmi Investment Limited (QIL) purchased 1 million 12% Term
Finance Certificates (TFCs) issued by Taj Super Stores (TSS), which operates a chain of five
Super Stores. The terms of the issue are as under:

The TFCs have a face value of Rs. 100 each and were issued at a discount of 5%. These
are redeemable at a premium of 20% after five years.
Interest on the TFCs is payable annually in arrears on 31 December each year.

Effective interest rate calculated on the above basis is 16.426% per annum.
Due to a property dispute, TSS had to temporarily discontinue operations of two stores in
2010. Consequently, TSS was unable to pay interest due on 31 December 2010 and
31 December 2011.
At the time of finalization of accounts for the year ended 31 December 2010, QIL was quite
hopeful of recovery of the interest and therefore, no impairment was recorded. However, in
2011, after a thorough review of the whole situation, QILs management concluded that it
would be able to recover the face value of the TFCs along with the premium on the due date
i.e. 31 December 2013, but the interest for the years 2010 to 2013 would not be received.
Accordingly, QIL recorded impairment in the value of the TFCs on 31 December 2011.
In 2012, TSS reached an out of court settlement of the property dispute and the stores
became operational. Subsequently, QIL and TSS agreed upon a revised payment schedule
according to which the present value of the agreed future cash flows on 31 December 2012 is
estimated at Rs. 115 million.
Required:
Prepare journal entries in the books of QIL for the years ended 31 December 2011 and 2012.
Show all the relevant computations.
Q.6

Chughtai Limited (CL) has 75% share holdings in John Limited (JL) which is registered and
operates in a foreign country. JL's functional currency is RAM. The following information
has been extracted from JL's statement of changes in equity for the year ended
31 December 2012:
Subscribed and Unappropriated
paid-up capital
profit
---------RAMs in million--------Balance as on 1 January 2012
50
85
Final dividend for the year ended 31 December 2011
- Cash dividend at 10%
(5)
- Bonus shares at 20%
10
(10)
Profit after tax for the year ended 31 December 2012
40
Balance as on 31 December 2012
60
110
Other relevant information is as under:
(i)
CL's profit after tax for the year ended 31 December 2012 amounted to Rs. 700 million
which includes a cash dividend of Rs. 41 million received from JL.
(ii) On acquisition, JLs goodwill amounted to RAMs 30 million. However, an
impairment test carried out as at 31 December 2012 revealed that the goodwill has
been impaired by RAMs 6 million.
(iii) CL values the non-controlling interest on acquisition at fair value.
(iv) JL has not issued any ordinary shares after acquisition by CL, except for the bonus
issue as mentioned above.
(v) The following exchange rates are relevant to the financial statements:
31-Dec-2011
31-Dec-2012
Average for 2012
------------------Rs. to 1 RAM-----------------10.00
11.00
10.20

(14)

Advanced Accounting and Financial Reporting

Page 5 of 5

Required:
Prepare the relevant extracts from the consolidated statement of comprehensive income of
CL for the year ended 31 December 2012 in accordance with the requirements of
International Financial Reporting Standards.

Q.7

(16)

Financial statements of Niazi Company Limited (NCL) for the year ended
31 December 2012 are in the process of finalisation. In this respect, the following
information has been gathered from the companys accounting and tax records.
(i)

Property, plant and equipment (PPE)

Accounting WDV (at revalued amount)

Tax WDV

31-12-2012
31-12-2011
--------Rs. in million-------2,700
2,000
2,400
1,600

Details of the revaluation are as under:

Revaluation of freehold land and buildings on 31 December 2005 resulted in a
revaluation surplus of Rs. 15 million and Rs. 20 million respectively.

Plant and machinery costing Rs. 150 million was commissioned on 1 January 2010
with an expected useful life of 10 years. It was revalued at Rs. 145 million on
31 December 2012.
(ii)

Provision for retirement benefits and doubtful debts

Balance on 31 December 2011
Write offs during the year
Provision for the year, net of payments of Rs. 3 million

Rs. in million
50
5
6

(iii) Liabilities outstanding for more than three years

NCLs tax assessment for the year ended 31 December 2010 was finalized on
30 April 2012 in which liabilities outstanding for more than three years and amounting
to Rs. 8 million were added back to income.
A sum of Rs. 2 million included in the above liabilities was paid while a liability of
Rs. 3 million was written back by NCL in 2012.
(iv)

Applicable tax rate is 35%.

Required:
Prepare a note related to deferred tax liability/asset for inclusion in NCLs financial
statements for the year ended 31 December 2012, in accordance with the International
Financial Reporting Standards.
(THE END)

(12)

fb.com/gcaofficial

The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examination
Winter 2012
Module E
Q.1

4 December 2012
100 marks - 3 hours
Additional reading time - 15 minutes

Following are the extracts from the draft financial statements of three companies for the year
ended 30 June 2012:

Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Investment income
Profit before taxation
Income tax expense
Profit for the year

INCOME STATEMENTS
Tiger Limited
Panther Limited
Leopard Limited
(TL)
(PL)
(LL)
-------------------Rs. in million------------------6,760
568
426
(4,370)
(416)
(218)
2,390
152
208
(1,270)
(54)
(132)
1,120
98
76
730
10
1,850
98
86
(400)
(20)
(17)
1,450
78
69

STATEMENTS OF CHANGES IN EQUITY

Ordinary share capital
Retained earnings
of Rs. 10 each
TL
PL
LL
TL
PL
LL
---------------------------Rs. in million-------------------------As on 1 July 2011
10,000
800
600
2,380
270
70
Final dividend for the year
ended 30 June 2011
(1,000)
(60)
Profit for the year
1,450
78
69
As on 30 June 2012
10,000
800
600
2,830
348
79

The following information is also available:

(i)
Several years ago, TL acquired 64 million shares in PL for Rs. 1,000 million when PLs
retained earnings were Rs. 55 million. Up to 30 June 2011, cumulative impairment
losses of Rs. 50 million had been recognized in the consolidated financial statements, in
respect of goodwill.
On 31 December 2011, TL disposed off its entire holding in PL for Rs. 1,300 million.
(ii)
(iii)
(iv)
(v)

On 1 July 2011, 42 million shares of LL were acquired by TL for Rs. 550 million. An
impairment review at 30 June 2012 indicated that goodwill recognized on acquisition
has been impaired by Rs. 7 million.
During the year, LL sold goods costing Rs. 50 million to TL at a mark-up of 20% on
cost. 40% of these goods remained unsold on 30 June 2012.
Investment income appearing in TLs separate income statement includes profit on sale
of PLs shares and dividend received from LL.
TL values the non-controlling interest at its proportionate share of the fair value of the
subsidiarys identifiable net assets.

It may be assumed that profits of all companies had accrued evenly during the year.
Required:
Prepare TLs consolidated income statement and consolidated statement of changes in equity
for the year ended 30 June 2012 in accordance with the requirements of International
Financial Reporting Standards. (Ignore deferred tax implications)
(23)

fb.com/gcaofficial
AdvancedAccountingandFinancialReporting

Q.2

Page2 of5

The following information pertains to Crow Textile Mills Limited (CTML) for the year ended
30 June 2012:
(a)

Stocks include 4,000 maunds of cotton which was purchased on 1 April 2012 at a cost of Rs.
6,200 per maund. In order to protect against the impact of adverse fluctuations in the price of
cotton, on the price of its products, CTML entered into a six months futures contract on the
same day to deliver 4,000 maunds of cotton at a price of Rs. 6,300 per maund.
At year end i.e. 30 June 2012, the market price of cotton (spot) was Rs. 5,500 per maund and
the futures price for September delivery was Rs. 5,550 per maund.
All necessary conditions for hedge accounting have been complied with.

(b)

(05)

On 1 July 2011, 2 million convertible debentures of Rs. 100 each were issued. Each debenture
is convertible into 25 ordinary shares of Rs. 10 each on 30 June 2014. Interest is payable
annually in arrears @ 8% per annum. On the date of issue, market interest rate for similar
debt without conversion option was 11% per annum. However, on account of expenditure of
Rs. 4 million, incurred on issuance of shares, the effective interest rate increased to 11.81%.
(08)

Required:
Prepare Journal entries for the year ended 30 June 2012 to record the above transactions.
(Show all necessary calculations)
Q.3

In order to pursue expansion of its business, Parrot Limited (PL) has made the following
investments during the year ended 30 June 2012:
(a)

On 1 July 2011, PL acquired 20% shares of Goose Limited (GL), a listed company, when
GLs retained earnings stood at Rs. 250 million and the fair value of its net assets was
Rs. 350 million. The purchase consideration was two million ordinary shares of PL whose
market value on the date of purchase was Rs. 33 per share. PL is in a position to exercise
significant influence in finalizing the financial and operational policies of GL.
The summarized statement of financial position of GL at 30 June 2012 was as follows:
Share capital (Rs. 10 each)
Retained earnings
Net assets

Rs. in million
100
280
380
380

Recoverable amount of GLs net assets at 30 June 2012 was Rs. 370 million.
(b)

(06)

Costs incurred for development and promotion of a brand are enumerated below:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Research on size of potential market

Products designing
Labour costs in refinement of products
Development work undertaken to finalize the product design
Cost of upgrading the machine
Staff training costs
Advertisement costs

Rupees
800,000
1,500,000
950,000
11,000,000
18,000,000
600,000
3,400,000

Required:
Discuss how the above investments/costs would be accounted for in the consolidated financial
statement for the year ended 30 June 2012.

(06)

AdvancedAccountingandFinancialReporting

Q.4

Page3 of5

Primate Mart Limited (PML) operates a network of several retail stores throughout the
country. In order to retain its market share and achieve growth in revenue, PML has extended
substantial credit facilities to its major customers. Consequently, PMLs bank borrowings
have increased substantially over the past few years. PML has recently requested its bank for
further increase in its borrowing facilities.
The bank is concerned about the increase in the quantum of loans extended to PML and has
appointed you to analyse the financial performance of PML for the last three years. The
information available in respect of the company is as follows:
(i)

Statement of financial position

Property, plant and equipment

Stock-in-trade
Trade debts
Cash
Share capital
Retained earnings
Long term loans from bank
Short term running finance
Trade creditors
Tax payable

(ii)

2012
2011
2010
-------------- Rs. in million -------------322
290
278
620
540
440
443
385
344
15
12
12
1,400
1,227
1,074
90
282
372
420
320
280
8
1,400

90
288
378
355
200
284
10
1,227

90
291
381
212
200
277
4
1,074

Income statement
Sales

Cash
Credit
Total sales
Cost of sales
Gross profit
Other operating costs
Profit from operations
Financial charges
Profit before taxation
Taxation
Profit for the year
Depreciation for the year
Proposed dividend

2012
2011
2010
-------------- Rs. in million -------------1,050
940
790
450
380
320
1,500
1,320
1,110
(996)
(864)
(723)
504
456
387
(384)
(341)
(288)
120
115
99
(102)
(79)
(57)
18
36
42
(6)
(12)
(14)
12
24
28
33
10%

36
20%

42
20%

(iii) The present borrowing limit sanctioned to PML is Rs. 750 million.
Required:
Prepare a report for the bank containing an analysis of the financial performance of the
company for the period covered by the financial statements. Your report should focus on the
particular concern of the bank regarding the rapidly increasing level of lending exposure to
PML and suggest matters which the bank may discuss with the PMLs management.
(Assume your name is Bashir Ahmed)
(15)

AdvancedAccountingandFinancialReporting

Q.5

Page4 of5

Lion Engineering Limited (LEL) operates an approved pension scheme (defined benefit plan) for
all its permanent employees who have completed one years service. The details for the year ended
30 June 2012 relating to the pension scheme are as follows:
Present value of pension scheme obligation at 30 June 2011
Fair value of schemes assets at 30 June 2011
Unrecognized actuarial loss at 30 June 2011
Current service cost
Contribution made during the year
Benefits paid during the year
Present value of pension scheme obligation at 30 June 2012
Fair value of schemes assets at 30 June 2012

Rs. in million
100
70
20
29
30
45
110
80

Additional information:
(i) With effect from 1 July 2011, LEL had amended the scheme whereby the employees
pension entitlement had been increased. The benefits would become vested after three years.
According to actuarial valuation the present value of the cost of additional benefits at
1 July 2011 was Rs. 15 million.
(ii) The discount rate and expected rate of return on the plan assets on 30 June 2012 were as
follows:
Discount rate
13%
Expected rate of return on plan assets
10%
(iii) LEL was required to pay Rs. 40 million to the scheme, during the year ended 30 June 2012.
Because of cash flow constraints, LEL was able to contribute Rs. 30 million only.
(iv) Average remaining working lives of employees is 10 years.
(v) LEL uses the corridor approach to recognize actuarial gains and losses.
(vi) Last actuarial valuation was made on 30 June 2012 using the Projected Unit Credit Method.
Required:
Prepare the relevant extracts from the statement of financial position and the related notes to the
financial statements for the year ended 30 June 2012. Show all necessary workings.
(Accounting policy note is not required. Deferred tax may be ignored)
(18)
Q.6

Eagle Bank Limited (EBL) is listed on all the stock exchanges in Pakistan. At the year end, the total
borrowings of the bank amounted to Rs. 29,761 million, which included borrowings outside
Pakistan amounting to Rs. 11,712 million. Details of borrowings at the year-end were as follows:
(i)
(ii)

All local borrowings are in Pak Rupees.

Inter-bank call money borrowings amounted to Rs. 3,600 million. These borrowings were
unsecured and carried mark-up ranging between 8.7% and 12.1% per annum.
(iii) EBL operates in several countries where it maintains nostro accounts. The overdrawn nostro
accounts amounted to Rs. 456 million. Mark-up on overdrawn nostro accounts was charged
by the foreign banks at the rates prevailing in the respective countries.
(iv) Outstanding loans from the State Bank of Pakistan (SBP) under the Export Refinance
Scheme amounted to Rs. 14,182 million. These loans carried mark-up ranging between
9.7% and 11% per annum and were secured by EBLs cash and other securities held by SBP.
(v) The borrowings under repurchase agreements amounted to Rs. 11,523 million and carried
mark-up ranging between 6.3% and 12.5% per annum. These borrowings are secured against
government securities amounting to Rs. 24,802 million and are repayable latest by
April 2013.
Required:
Prepare note on Borrowings for inclusion in the Financial Statements of Eagle Bank Limited with
appropriate disclosures in accordance with the State Bank of Pakistan guidelines.
(10)

AdvancedAccountingandFinancialReporting

Q.7

Page5 of5

Quail Pakistan Limited (QPL), a listed company, is reviewing the following transactions which
have not yet been accounted for in the financial statements for the year ended 30 June 2012:
(a)

On 1 July 2011, QPL announced a bonus of Rs. 30 million to its employees if they achieved
the annual budgeted targets by 30 June 2012. The bonus would be paid in the following
manner:
25% of the bonus would be paid in cash on 31 December 2012 to all employees
irrespective of whether they are still working for QPL or not.
The balance 75% will be given in share options, to those employees who are in QPLs
employment on 31 December 2012. The exercise date and number of options will be fixed
by the management on the same day.
The budgeted targets were achieved. The management expects that 5% employees would
leave between 30 June 2012 and 31 December 2012.
(04)

(b)

On 30 June 2012, a plant having a list price of Rs. 50 million was purchased. QPL has
allowed the following options to the supplier, in respect of payment thereagainst:
To receive cash equivalent to price of 1.5 million shares of the company after 3 months; or
To receive 1.7 million shares of the company after 6 months.
QPL estimates that price of its shares would be Rs. 35 per share after three months and
Rs. 40 per share after six months.
(05)

Required:
Discuss how the above share-based transactions should be accounted for in QPLs financial
statements for the year ended 30 June 2012. Show necessary calculations.
(Journal entries are not required)
(THE END)

The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examination
Summer 2012
Module E
Q.1

5 June 2012
100 marks - 3 hours
Additional reading time - 15 minutes

The following summarised statements of financial position pertain to Bee Limited and its investee
companies as at 31 December 2011:
Bee Limited
Cee Limited
Tee Limited
--------------Rs. in million-----------ASSETS
Non-current assets
Property, plant and equipment
Investment in Cee Limited at cost
Investment in Tee Limited at cost
Current assets
Stock in trade
Trade and other receivables
Cash and bank

EQUITY AND LIABILITIES

Equity
Ordinary share capital (Rs.10 each)
Retained earnings
Long term loan
Current liabilities
Trade and other payables
Bank overdraft

75,600
3,900
300

2,800
-

800
-

24,100
16,400
800
121,100

1,700
2,900
700
8,100

700
820
2,320

44,300
15,800

2,800
1,200

1,000
900

36,400

24,600
121,100

4,100
8,100

300
120
2,320

The following information is also available:

(i)
Bee holds 252 million shares of Cee which were acquired in 2005 when the retained earnings
of Cee stood at Rs. 350 million. At the date of acquisition, the fair values of Cees net assets
were the same as their carrying amounts with the exception of a legal claim having a fair
value of Rs. 7 million which had been disclosed in the financial statements as a contingent
liability. The claim was settled on 30 November 2011, for the same amount.
(ii) Bee acquired 80% share capital of Tee several years ago for Rs. 1,200 million when Tees
retained earnings stood at Rs. 100 million. On 1 October 2011, Bee sold 75% of its holding in
Tee for Rs. 2,000 million. On the date of disposal, the fair value of remaining holding was
Rs. 650 million.
(iii) During the year, Cee sold goods to Bee at cost plus 25%. The amount invoiced during the
year amounted to Rs. 32 million. 40% of these goods were held by Bee at year end. Bee has
paid Rs. 20 million against the invoiced amount, upto 31 December 2011.
(iv) At year end, an impairment review indicated that 10% of Cees goodwill is required to be
written off.
(v)
During the year ended 31 December 2011, Cee and Tee earned profits after tax of Rs. 250
million and Rs. 200 million respectively. It may be assumed that the profits had accrued
evenly throughout the year.
(vi) Bee follows a policy of valuing the non-controlling interest at its proportionate share of the
fair value of the subsidiarys identifiable net assets.

Advanced Accounting and Financial Reporting

Page 2 of 4

Required
Prepare the consolidated statement of financial position of Bee Limited as at 31 December 2011 in
accordance with the requirements of International Financial Reporting Standards.
(24 marks)
Note:

Ignore tax and comparative figures.

Notes to the consolidated statement of financial position are not required.

Show workings wherever necessary.
Q.2

Dee General Insurance Limited is a listed company. The following information relates to the year
ended 31 December 2011:
Direct and facultative
Treaty
Fire and
Marine,
MiscellanProportproperty
aviation
Motor
eous
ional
damage
and transport
----------------------------Rs. in million---------------------------Commissions:
Paid / payable
Deferred: opening
Deferred: closing
Receipts from reinsurers

321.41
148.79
160.43
270.44

126.87
11.31
5.68
5.70

215.00
128.50
114.23
12.72

90.94
38.59
35.17
82.40

0.30
-

Net premium earned

907.75

768.70

2,745.64

948.48

0.70

During the year, management expenses (other than commission) amounted to Rs. 978 million.
These expenses are allocated on the basis of net premium earned.
Required:
Prepare a statement of expenses for inclusion in the financial statements for the year ended 31
December 2011. (Ignore comparative figures)
(10 marks)

Q.3

The following information relates to Que Limited (QL) for the year ended 31 December 2011:
(i)

Issued share capital on 1 January 2011 consisted of 80 million ordinary shares of Rs. 10
each.
(ii) Profit after tax amounted to Rs. 130 million. It includes a loss after tax from a discontinued
operation, amounting to Rs. 40 million.
(iii) On 30 September 2011, QL issued 20% right shares at a price of Rs. 11 per share. The market
value of the shares immediately before the right issue was Rs. 12.50 per share.
(iv) There are 25,000 share options in existence. Each option allows the holder to acquire 120
shares at a strike price of Rs. 10 per share. The options have already vested and will expire
on 30 June 2013. The average market price of ordinary shares in 2011 was Rs. 12 per share.
(v)
QL had issued debentures in 2008 which are convertible into 6 million ordinary shares. The
debentures shall be redeemed on 31 December 2012. The conversion option is exercisable
during the last six months prior to redemption. The interest on debentures for the year 2011
amounted to Rs. 11 million.
(vi) Preference shares issued in 2009 are convertible (at the option of the preference shareholders)
into 4 million ordinary shares on 31 December 2013. The dividend paid on preference shares
during 2011 amounted to Rs. 5.75 million.
(vii) The company is subject to income tax at the rate of 35%.
Required:
Prepare extracts from the financial statements of Que Limited for the year ended 31 December
2011 showing all necessary disclosures related to earnings per share. (Ignore comparative figures)
(17 marks)

Advanced Accounting and Financial Reporting

Q.4

Page 3 of 4

Zee Power Limited (ZPL) has been facing short term liquidity issues during the financial year
ended on 31 December 2011. As a result, the following transactions were undertaken:
(i)

On 27 December 2011, ZPL sold its investment in listed Term Finance Certificates (TFCs) to
Vee Investment Company Limited with an agreement to buy them back in 10 days. Relevant
details are as follows:

Sale price
Buy back price
Value in ZPLs books as on 27 December 2011
Market price as on 31 December 2011

Rupees
10,150,000
10,183,337
10,144,332
10,163,125

ZPL intends to hold these TFCs till maturity.

(ii)

On 1 January 2009, ZPL had obtained a bank loan of Rs. 100 million at 10% per annum.
The interest was payable annually on 31 December and principal amount was repayable in
five equal annual installments commencing from 31 December 2009. On 1 January 2011, the
bank agreed to facilitate ZPL as follows:

Balance amount of the principal would be paid at the end of the loans term i.e. on 31
December 2013.

With effect from 1 January 2011, interest would be paid at the rate of 10.5% per annum.
The market rate for similar debt is 10%.

(iii)

On 1 July 2011, ZPL sold its plant and machinery to Kay Leasing Limited, a related party,
for Rs. 90 million and leased it back for five years at semi-annual rentals amounting to
Rs. 9.66 million, payable in arrears on June 30 and December 31. The carrying amount of
plant and machinery on the date of sale was Rs. 80 million and its fair value was Rs. 60
million.
The lease qualifies as an operating lease and the rentals are based on fair market rate.

Required:
Prepare journal entries to record the above transactions in the books of Zee Power Limited.
(18 marks)

Q.5

(a)

Specify the criteria for identification of operating segments, in accordance with the
International Financial Reporting Standards.
(03 marks)

(b)

Jay Limited is an integrated manufacturing company with five operating segments.

Following information pertains to the year ended 31 March 2012:
Operating
segments
A
B
C
D
E
Total

Internal
revenue
38
35
38
111

External
Total
Profit /
Assets
Liabilities
revenue
revenue
(loss)
-----------------------Rs. in million----------------------705
743
194
200
130
82
82
(22)
44
40
300
300
81
206
125
35
10
75
60
90
128
(63)
50
25
1,177
1,288
200
575
380

Required:
In respect of each operating segment explain whether it is a reportable segment.

(09 marks)

Advanced Accounting and Financial Reporting

Q.6

Page 4 of 4

Gee Investment Company Limited (GICL) acquires properties and develops them for diversified
purposes, i.e. resale, leasing and its own use. GICL applies the fair value model for investment
properties and cost model for property, plant and equipment.
The details of the buildings owned are as follows:
Property
A
B
C
D
E

Date of
acquisition
1 August 2006
1 January 2009
1 July 2009
1 July 2008
1 August 2011

Useful
life
(years)
20
15
10
10
20

Fair value as on 31 December

Residual
value
2011
2010
-------------------Rs. in million----------------130
14
100
150
240
24
240
210
160
20
150
120
10
1
Not available
48
4
51
-

Cost

The following information is also available:

Property A

GICL had been trying to sell this property for the last two years. However, due to
weak market, the directors finally decided to lease it with effect from 1 October 2011
when its fair value was Rs. 120 million.

Property B

The possession of this property was acquired from the tenants on 30 June 2010 when
the company shifted its head office from Property C to Property B. The fair value on
the above date was Rs. 195 million.

Property C

When the head office was shifted from this property, it was leased to a subsidiary at
market rate. On the date of lease, the fair value was equal to its carrying amount.

Property D

This property is situated outside the main city and its fair value cannot be
determined. It was rented to a government organization soon after the acquisition.

Property E

This property is an office building comprising of three floors. After acquisition, two
floors were rented out. On 1 November 2011, GICL established a branch office on
the third floor.
Details of costs incurred on acquisition are as follows:
Purchase price
Agents commission
Registration fees and taxes
Administrative costs allocated

Rs. in million
42.50
0.50
2.00
3.00
48.00

Required:
(a)
Prepare a note on investment property, for inclusion in GICLs separate financial statements
for the year ended 31 December 2011. (Ignore comparative figures)
(16 marks)
(b)
Explain how Property C would be accounted for in the consolidated financial statements for
the year ended 31 December 2011.
(03 marks)
(THE END)

The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examination
Winter 2011
Module E
Q.1

10 December 2011
100 marks - 3 hours
Additional reading time - 15 minutes

Hi-Tech Pakistan Limited (HPL) is a public limited company and deals in medical equipments. On 1
October 2009 HPL had introduced a Robotic Surgery System for the first time in Pakistan.
In November 2009, HPL had launched a country wide sales promotion campaign to introduce the
system in various hospitals at a cost of Rs. 16 million whereas expenditure on training of the
technical staff amounted to Rs. 12 million.
On 1 April 2010 HPL signed a lease agreement with Comforts Hospital for sale and 3-year
maintenance of the system. The terms of the agreement are as under:
Lease period
Initial payment on signing of the agreement
6 half yearly installments commencing 30 September 2010
Implicit rate of interest per annum

3 years
Rs. 20 million
Rs. 25 million
15.192%

Cost of the system is Rs. 100 million whereas maintenance cost of the system for the three years was
estimated at Rs. 8.4 million. To cash customers, the system is sold at a mark-up of 25% on cost. HPL
expects a gross margin of 30% on such maintenance contracts, whereas actual costs incurred on the
maintenance, during the year ended 30 September 2011 amounted to Rs. 2.5 million (2010: Rs. 1.7
million).
The hospital was unable to pay the installment due on 31 March 2011 due to solvency problems.
After intense negotiations, HPL and the hospital agreed to a restructuring arrangement, whereby the
hospital would settle its obligation by paying 4 half yearly installments of Rs. 32 million each,
commencing from 30 September 2011.
Required:
Compute the impact of the above transactions on various items forming part of the statements of
comprehensive income and financial position of Hi-Tech Pakistan Limited for the year ended 30
September 2011 in accordance with International Financial Reporting Standards. Give comparative
figures. (Notes to the financial statements are not required.)
(16 marks)
Q.2

Global Investment Limited (GIL) is listed in Pakistan. During the year ended 30 September 2011,
GIL entered into the following contracts with a UAE based company:
(i)

(ii)

On 28 September 2011 GIL committed to buy certain financial assets on 3 October 2011 for
AED 20,000. The fair value of these assets on balance sheet date and settlement date was AED
21,000 and AED 21,500 respectively.
On 29 September 2011 GIL agreed to sell certain financial assets on 4 October 2011 having a
carrying value of AED 34,000 (Rs. 809,200) for AED 35,000. The fair value of these assets on
the balance sheet date and settlement date was AED 35,200 and AED 34,800 respectively.

The above types of financial assets are classified by GIL as held for trading. Exchange rates on the
relevant dates were as under:
Date
1 AED = Rs.
28 September 2011
24.00
29 September 2011
23.00
30 September 2011
23.50
03 October 2011
25.00
04 October 2011
26.00

Advanced Accounting and Financial Reporting

Page 2 of 4

Required:
Prepare accounting entries to record the above transactions on the relevant dates in accordance with
International Financial Reporting Standards, using:
(a) Trade date accounting
(b) Settlement date accounting
(16 marks)
Q.3

Alpha Pakistan Limited (APL) is a listed company and has 60% holding in Bravo Limited (BL). The
company is in the process of preparation of its consolidated financial statements for the year ended
30 September 2011. Following are the extracts from the information that has been gathered so far:
Consolidated Statement of Comprehensive Income (Draft)
2011
Rs. in million
Sales
65,000
Cost of products sold
(59,110)
Other operating income
2,000
Operating expenses
(3,000)
Financial expenses
(890)
Income tax expense
(1,200)
2,800
Profit for the year
Profit attributable to

Owners of the holding company
2,500

Non-controlling interest
300
2,800
Consolidated Statement of Financial Position (Draft)
2011
2010
Rs. in million
Equity and liabilities
Assets
Share capital (Rs. 10 each)
550
500 Property, plant and equipment
Retained earnings
5,950
3,600 Goodwill
Non-controlling interest
235
120 Long term receivables
Long term loans
440
145 Stock in trade
Deferred tax
210
10 Trade debts
Trade and other payables
4,688
3,970 Other receivables
Accrued financial expenses
35
30 Cash and bank balances
Provision for taxation
200
25
Short term borrowings
6,670
5,950
18,978
14,350

2011
2010
Rs. in million
1,100
15
24
6,760
7,534
900
2,645

900
15
29
4,280
5,421
725
2,980

18,978 14,350

Following additional information is available:

(i) During the year, BL sold goods amounting to Rs. 140 million to APL at a margin of 25% of
cost. 40% of the above amount remained unpaid and 30% of the goods remained unsold as on
30 September 2011. No adjustments in this regard have been made in the above statements.
(ii) Depreciation charge for the year was Rs. 75 million and Rs. 15 million for APL and BL
respectively.
(iii) During the year APL acquired property, plant and equipment amounting to Rs. 250 million
against a long term loan.
(iv) The amount of long term receivables represents present value of interest free loans to
employees. The gross value of the loans is Rs. 27 million (2010: Rs. 33 million).
(v) Operating expenses include bad debt expenses amounting to Rs. 44 million. During the year,
trade debtors amounting to Rs. 30 million were written off.
(vi) Trade and other payables include APLs unclaimed dividend amounting to Rs. 8 million (2010:
Rs. 10 million). At APLs Board meeting held on 30 November 2011, final cash dividend of Rs.
3.0 per share has been proposed (2010: Final cash dividend of Rs 2.0 per share and 10% bonus
shares).
Required:
Prepare a consolidated statement of cash flows including all relevant notes for Alpha Pakistan
Limited for the year ended 30 September 2011 using the direct method in accordance with
International Financial Reporting Standards. (Ignore corresponding figures.)
(23 marks)

Advanced Accounting and Financial Reporting

Q.4

Page 3 of 4

On 1 October 2009 Sky Limited (SL) acquired 25% holding (2.5 million ordinary shares) in Mars
Limited (ML) for Rs. 900 million. On the date of acquisition, MLs equity was as follows:
Ordinary share capital (Rs. 100 each)
Share premium
Retained earnings
12% cumulative preference share capital

Rs. in million
1,000
150
2,898
200

On the above date, fair value of a building owned by ML exceeded its carrying value by Rs. 12
million and its estimated useful life was 15 years. Fair values of all other assets and liabilities of ML
were equal to their carrying values.
Following additional information is available:
(i) MLs profit after tax for the year ended 30 September 2011 was Rs. 250 million (2010: Rs. 240
million). Dividend received from ML amounted to Rs. 30 million (2010: nil).
(ii) Cost of goods purchased from SL and included in MLs closing inventory was Rs. 10 million
(2010: Rs. 16 million). SL makes a profit of 20% on all sales.
(iii) Applicable tax rate is 35% and 10% for business and dividend income respectively.
On 1 January 2011, SL acquired 70% holding (7 million ordinary shares) in Jupiter Limited (JL) for
Rs. 1,400 million. SL has been following a policy to account for investments in associates using
equity basis of accounting. Since SL is now required to prepare consolidated financial statements, it
needs to change its accounting policy for investments in associates, for the purpose of preparation of
its separate financial statements, to comply with the requirements of International Financial
Reporting Standards.
Required:
Prepare the following notes (relevant portion only) for incorporation in the separate financial
statements of Sky Limited for the year ended 30 September 2011:
(a) Change in accounting policy
(b) Investments
(Show all the necessary disclosures and comparative figures in respect of the above, in accordance with
International Financial Reporting Standards.)
(22 marks)
Q.5

XL (Private) Limited is a long established company and provides a range of services to business
organizations for development of their human resources. Most of its staff consists of qualified and
experienced professionals.
The company plans to expand its business by establishing a research division. In this respect, XL is
evaluating a proposal for raising finance by issuing ordinary shares. To estimate value of its shares,
XL has identified a listed company, PL Limited, which is engaged in similar business.
Financial statistics and other information as of 30 September 2011, for XL and PL, are given below:

Ordinary share capital as at 1 October 2010 (Rs. 10 each)

10% cumulative preference shares as at 1 October 2010 (Rs. 10 each)
Right shares issued on 1 April 2011 (Rs. 10 each)
Total comprehensive income
Dividend paid

XL Limited PL Limited
--- Rs. in million --400
1,000
120
100
292
600
168
500

PL issued right shares on 1 April 2011 at Rs. 25 per share. The prevailing market price per share on
the date of issue and on 30 September 2011 was Rs. 35 and Rs. 40 respectively.
PLs total comprehensive income includes unrealized gain of Rs. 15 million on investments available
for sale.
Annual rate of growth in earnings and dividends for XL and PL is estimated at 5% and 4.5%
respectively. The cost of equity of companies having similar businesses is estimated at 15% per
annum.

Advanced Accounting and Financial Reporting

Page 4 of 4

Required:
(a) Compute the value of XLs shares as on 30 September 2011 based on:
(i) P/E ratio
(ii) Dividend yield
(13 marks)

(b) Identify any two weaknesses of each of the above valuation methods.
Q.6

Al-Amin Bank Limited is listed on all the stock exchanges in Pakistan. At year end, the total
advances amounted to Rs 75,000 million which include non-performing advances of Rs. 5,000
million. The break-up of the non-performing advances and the provisions there-against is as under:
Other assets
especially
mentioned
Advances
Provisions required and held

100
5

SubStandard

Doubtful

Loss

Total

----- Rs. in million ----660

840
3,400
120
530
3,345

5,000
4,000

The sub-standard category includes advances of Rs. 260 million pertaining to overseas operations of
the bank. The required provision of Rs. 50 million has been made against such advances.
During the year the movement in the specific provision was as under:
Opening balance
Charge for the year
Reversals
Amounts written off
Exchange rate adjustment
Total

Rs. in million
3,320
802
(90)
(50)
18
4,000

In addition to the above specific provisions, it is the banks policy to make additional general
provision based on the judgment of the bank. Opening balance for general provision was Rs. 65
million. During the year, the bank made provisions of Rs. 25 million and Rs. 15 million against
consumer and agriculture advances respectively.
Required:
Prepare relevant notes on non-performing advances and provisions for inclusion in the financial
statements of Al-Amin Bank Limited giving appropriate disclosure in accordance with the guidelines
issued by the State Bank of Pakistan.
(10 marks)
(THE END)

The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examinations
Summer 2011 Module E

Q.1

June 7, 2011
100 marks 3 hours

Reading time 15 minutes

The draft statements of financial position of Oceana Global Limited (OGL), and its subsidiary
Rivera Global Limited (RGL) as of March 31, 2011 are as follows:
OGL
RGL
Rs. in million
Assets
Property, plant and equipment
Intangible assets
Investment in RGL (opening balance)
Investment in RGL (acquired during the year)
Current assets
Equity and Liabilities
Share capital (Ordinary shares of Rs. 100 each)
Retained earnings
Fair value reserve
Non-current liabilities
Current liabilities

700
4
23
108
350
1,185
300
550
3
853
150
182
1,185

200
150
350
100
80
180
40
130
350

The details of OGLs investments in RGL are as under:

Acquisition date
July 1, 2009
October 1, 2010

Face value of
Purchase
shares acquired
consideration
Rs. in million
10
20
45
108

Other information relevant to the preparation of the consolidated financial statements is as under:
(i)
(ii)
(iii)
(iv)
(v)
(vi)

On October 1, 2010 the fair value of RGLs assets was equal to their carrying value except for
non-depreciable land which had a fair value of Rs. 35 million as against the carrying value of
Rs. 10 million.
On October 1, 2010 the fair value of RGLs shares that were acquired by OGL on July 1,
2009 amounted to Rs. 28 million.
RGLs retained earnings on October 1, 2010 amounted to Rs. 60 million.
Intangible assets represent amount paid to a consultant for rendering professional services for
the acquisition of 45% equity in RGL.
During February 2011 RGL sold goods costing Rs. 25 million to OGL at a price of Rs 30
million. 25% of these goods were included in OGLs closing inventory and 50% of the
amount was payable by OGL, as of March 31, 2011.
OGL follows a policy of valuing non-controlling interest at its fair value. The fair value of
non-controlling interest in RGL, on the acquisition date, amounted to Rs. 70 million.

Required:
Prepare a consolidated statement of financial position for Oceana Global Limited as of March 31,
2011 in accordance with International Financial Reporting Standards.
(16 marks)

Advanced AccountingandFinancialReporting

Q.2

Page2 of4

Following are the extracts from draft statement of comprehensive income of Kahkashan Limited
(KL) for the year ended March 31, 2011:
Net sales
Cost of sales
Selling and distribution expenses
Administrative expenses
Finance costs
Other operating income
Profit before tax

Rs. in million
800
(640)
(32)
(15)
(10)
13
116

The following issues need to be resolved, to finalize the accounts:

(i)

(ii)

On April 1, 2010 the company had issued 0.5 million 12% Term Finance Certificates (TFCs)
of Rs. 100 each. The principal amount of Rs. 50 million is included in non-current liabilities.
Interest is payable annually in arrears. On the date of issue, the prevailing interest rate for
similar debts without conversion option was 14% per annum. TFCs would mature on March
31, 2014 but are convertible into eight ordinary shares of Rs. 10 each, at the option of the
certificate holders, at any time prior to maturity. Interest was paid on March 31, 2011 and
charged to finance cost.
KL entered into a sale and leaseback arrangement on October 1, 2010 for one of its plants
having remaining useful life of 5 years with a nil residual value. Relevant information is as
under:
Carrying value of the plant as of October 1, 2010
Selling price
Installments payable semi-annually, in advance, for a period of 5 years

Rs. in million
43
53
7

Income of Rs. 10 million has been recognized on disposal of the plant and is included in other
operating income. Interest rate implicit in the lease is 13.597%.
(iii) On April 1, 2010 KL acquired 25% holding in SL Limited by purchasing 50,000 ordinary
shares for Rs 6 million. In March 2011 a dividend of Rs. 20 per share was received by KL and
credited to other operating income. SLs profit and other comprehensive income, net of tax,
for the year ended March 31, 2011 was Rs. 10 million and Rs. 2 million respectively.
(iv) On April 1, 2006 KL had acquired a plant at a cost of Rs. 30 million. The useful life of the
plant was estimated at 15 years and it is being depreciated under the straight line method. On
October 1, 2010 the plant suffered physical damage but is still working. A valuation was
carried out to determine the impairment loss. The following information is available from the
valuers report received on April 5, 2011:
Value in use
Selling price, net of costs to sell
Estimated remaining useful life as of October 1, 2010

Rs. 16 million
Rs. 12 million
5 years

Depreciation for the year ended March 31, 2011 has been accounted for without considering
the impact of the valuers report.
(v) Tax assessment for the accounting year ended March 31, 2010 was finalized in February 2011
in which liabilities outstanding for more than three years amounting to Rs. 6 million were
added to income. 30% of these liabilities have already been paid during the year ended March
31, 2011. Tax effect of these transactions has not been accounted for.
(vi) Applicable tax rate for business income and dividend income is 35% and 10% respectively.
The amount of tax depreciation is the same as accounting depreciation, except for any
difference arising out of information provided in Para (iv).
Required:
Prepare a statement of comprehensive income for the year ended March 31, 2011 in accordance
with International Financial Reporting Standards.
(25 marks)

Advanced AccountingandFinancialReporting

Q.3

Page3 of4

Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity from
garbage collected by the civic agencies. WML had signed an agreement with the government for
allotment of a plot of land, free of cost, for 10 years. However, WML has agreed to restore the site,
at the end of the agreement.
Other relevant information is as under:
(i)

Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost would
amount to Rs. 10 million.
(ii) It is the policy of the company to measure its plant and machinery using the revaluation
model.
(iii) When the plant commenced its operations i.e. on April 1, 2005 the prevailing market based
discount rate was 10%.
(iv) On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.
(v)
On March 31, 2009 prevailing market based discount rate had increased to 12%.
(vi) On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million.
(vii) Useful life of the plant is 10 years and WML follows straight line method of depreciation.
(viii) Appropriate adjustments have been recorded in the prior years i.e. up to March 31, 2010.

Required:
Prepare accounting entries for the year ended March 31, 2011 based on the above information, in
accordance with International Financial Reporting Standards. (Ignore taxation.)
(17 marks)
Q.4

Extracts from statement of comprehensive income of Rahat Limited (RL) for the year ended March
31, 2011 are as under:

Profit after taxation

Exchange gain on foreign operations, net of tax
Total comprehensive income

2011
2010
Rs. in 000
150,000
110,000
10,000
8,000
160,000
118,000

Following further information is available:

(i)

As of April 1, 2010 share capital of the company consisted of:

5 million ordinary shares of Rs. 10 each.
0.2 million convertible 15% cumulative preference shares of Rs. 100 each.

(ii)

Each preference share is convertible into 7 ordinary shares at the option of the shareholders.
10,000 preference shares were converted into ordinary shares on July 1, 2010.
(iii) On September 10, 2010 a right issue of one million ordinary shares had been announced at an
exercise price of Rs. 12 per share. By October 1, 2010 which was the last date to exercise the
right, all the shares had been subscribed and paid. The market price of an ordinary share on
September 10 and October 1, 2010 was Rs. 15.50 and Rs. 15 respectively.
(iv) On April 30, 2011 the Board of Directors had declared a final cash dividend of 20%
(2010:18%) for the year ended March 31, 2011.
(v) There was no movement in share capital during the previous year.
Required:
Prepare a note related to earnings per share, for inclusion in the companys financial statements for
the year ended March 31, 2011 in accordance with International Financial Reporting Standards.
Show comparative figures.
(16 marks)

Advanced AccountingandFinancialReporting

Q.5

Page4 of4

Galaxy Textiles Limited (GTL) operates a funded gratuity scheme for all its employees.
Contributions to the scheme are made on the basis of annual actuarial valuation. The following
relevant information has been extracted from the actuarial report pertaining to the year ended
March 31, 2011.
Present value of defined benefit obligations as of:
April 1, 2010
March 31, 2011
Fair value of plan assets as of:
April 1, 2010
March 31, 2011
Net cumulative unrecognized losses as of April 1, 2010
Benefits paid by the plan to the employees
Current service cost
Interest cost
Expected return on plan assets

Rs. in million
133
166
114
120
19
6
15
16
14

Actuarial gains and losses are recognized using the corridor method, over the expected average
remaining working lives of the employees. As of March 31, 2011 the expected average remaining
working lives of the employees was 18 years.
Required:
Prepare a note on retirement benefits for presentation in the financial statements for the year ended
March 31, 2011 in accordance with International Financial Reporting Standards.
(14 marks)
Q.6

Following information has been extracted from the records of A-One Asset Management Fund
Limited for the year ended March 31, 2011.
Net assets at the beginning of the year (900 million units)
100 million units issued during the year
95 million units redeemed during the year
Investments classified as available for sale
Fair value at year end
Carrying value at year end
Net unrealized appreciation in fair value of investments
at the beginning of the year
Investments classified as at fair value through profit or loss held for trading
Fair value at year end
Carrying value at year end
Element of income and capital gains included in prices of
units issued/redeemed and transferred to income statement
Capital gains
Other net income for the year

Rs. in million
27,000
3,500
3,277
1,800
1,200
480
2,500
2,200
173
400
3,000

Final distribution for the year ended March 31, 2011 of Rs. 5.00 per unit (2010: Rs. 4.00 per unit)
was announced on April 16, 2011.
Required:
Prepare a statement of movement in unit holders' fund for the year ended March 31, 2011.
(12 marks)
(THE END)

The Institute of Chartered Accountants of Pakistan

Advanced Accounting and Financial Reporting

Final Examinations Winter 2010
Module E

Q.1

December 7, 2010
100 marks - 3 hours

Rainbow Textiles Limited (RTL) is a public limited company and owns 70% holding in Fabrics
Design Limited (FDL).
FDL is located in a foreign country and its functional currency is FC. RTL acquired FDL on July
1, 2009 for FC 12 million when FDL's share capital and retained earnings were FC 5 million and
FC 3 million respectively. On the acquisition date, fair value of FDL's net assets was FC 11 million.
The fair value of all the assets except leasehold land and buildings was equal to their carrying
amounts. The remaining lease period of the land and useful life of the buildings at the date of
acquisition was 20 years. RTL and FDL use straight line method of depreciation.
The following balances were extracted from the Statement of Comprehensive Income of RTL and
FDL for the year ended June 30, 2010:
Statement of Comprehensive Income
RTL
Rs. in million
1,000
(450)
550
(250)
(25)
275
(100)
175

Sales revenue
Cost of sales
Gross profit
Selling and administrative expenses
Financial expenses
Profit before taxation
Taxation
Profit after taxation

FDL
FC in million
25
(15)
10
(5)
(1)
4
(1)
3

The following additional information is also available:

(i)

(ii)
(iii)
(iv)
(v)

On April 10, 2010 RTL sold goods for Rs. 30 million to FDL at a margin of 20% of selling
price. Full payment was made by FDL on May 1, 2010. No exchange gain or loss was
recorded on the transaction. Goods valuing FC 1.0 million were still in closing inventory of
FDL as of June 30, 2010.
An impairment test was carried out on June 30, 2010 which indicated that the goodwill has
been impaired by 25%.
RTL follows a policy of valuing the non-controlling interest at its proportionate share of fair
value of the subsidiaries identifiable net assets.
FDL has not issued any shares after the acquisition.
Exchange rates relevant to the preparation of the financial statements are as follows:
30-Jun-2009 / 1-Jul-2009
10-Apr-2010
1-May-2010

1 FC = Rs.
22.00
22.50
23.00

30-Jun-2010
Average rate for the year

1 FC = Rs.
23.50
22.75

Required:
Prepare the Consolidated Statement of Comprehensive Income of Rainbow Textiles Limited for the
year ended June 30, 2010.
(23 marks)

AdvancedAccountingandFinancialReporting

Q.2

Page2of5

Modern Construction Limited (MCL) was established on July 1, 2008. It had entered into two
different contracts up to June 30, 2010 and their progress is as under:
Contract A
Contract B
1-1-2009
1-9-2009
25%
80%
20%
5%
--------- Rupees in million --------800
400
180
420
125
500
100
270
140
-

Contract start date

Work certified and billed upto June 30, 2009
Work certified and billed upto June 30, 2010
Work completed but not certified upto June 30, 2010
Contract price
Costs incurred upto June 30, 2009
Costs incurred during the year ended June 30, 2010
Estimated costs to complete on June 30, 2009
Estimated costs to complete on June 30, 2010
Unpaid bills (gross) as on June 30, 2010

Other relevant information is as under:

(i)
The company recognizes contract revenue and expenses using % of completion method.
(ii) 10% of contract price had been paid as advance on signing of each contract and is adjustable
from the progress payments.
(iii) A progress bill is raised on the basis of work % certified by the consultant. All customers
deduct 5% retention money from the progress bills.
(iv) Contract costs incurred during the year do not include:
Retainership fee amounting to Rs. 2 million paid to the consultant for technical assistance
on contracts A and B. 30% of the consultants time was used on contract A and 70% on
contract B.
Research cost for improving work quality and cost efficiency amounting to Rs. 1.9 million.
(v) The company is required to rectify all the defects during warranty period of one year. It is
estimated that rectification costs to be incurred during warranty period would be 5% of the
contract price.
Required:
Prepare appropriate extracts to be reflected in the Statement of Financial Position, Income
Statement and relevant notes to the accounts for the year ended June 30, 2010 in accordance with
IAS 11 (Construction Contracts).
(20 marks)
Q.3

Mahfooz General Insurance Limited (MGIL) is a listed company. The information pertaining to
the business underwritten inside Pakistan for the year ended June 30, 2010 is as under:
Direct and facultative
Treaty
Fire &
Marine,
Accident &
Motor
Proportional
property
aviation &
health
damage
transport
------------------------------------ Rupees in million -----------------------------------Claims:
Total claims paid
Outstanding - Opening
Outstanding - Closing

900
600
500

450
400
450

1,150
900
750

250
300
150

13
10
12

Reinsurance and other recoveries:

Total received
600
Outstanding - Opening
500
Outstanding - Closing
350

300
300
400

850
700
550

160
150
80

Required:
Prepare a statement of claims for the year ended June 30, 2010 in accordance with the Insurance
Ordinance, 2000. Ignore the comparative figures.
(12 marks)

AdvancedAccountingandFinancialReporting

Q.4

Page3of5

The following balances were extracted from the Consolidated Income Statement and Consolidated
Statement of Financial Position of Karachi Group Limited (KGL) for the year ended June 30, 2010.
Consolidated Income Statement

Operating profit
Share of profit in associates
Financial expenses
Profit before taxation
Taxation
Profit for the year
Profit attributable to
Owners of the parent
Non-controlling interest

2010
Rs. in million
189
5
(14)
180
(65)
115
100
15
115

Consolidated Statement of Financial Position

2010
EQUITY AND LIABILITIES
Equity
Share capital
Retained earnings
Non-controlling interest
Non-current liabilities
Long term Loans

200
320
520
28
548
125

Current liabilities
Current maturity of long term loans
Trade creditors and other payables
Accrued financial expenses
Taxation

(i)

20
262
8
60
350
1,023

2009

Rs. in million
2010

ASSETS
Non-current assets
200 Property, plant and equipment
250 Investment in associates
450 Intangible assets
10
460
Current assets
120 Inventories
Trade debtors and other receivables
Short term deposits
Cash and bank balances
287
5
50
342
922

2009

510
12
30
552

500
10
25
535

261
180
10
20
471

200
162
25
387

1,023

922

One of KGLs three subsidiaries, Auto Engineering Works Limited was acquired on July 1,
2009 by purchase of 80% shareholdings for Rs. 30 million. Fair value of the assets and
liabilities at the time of acquisition were as follows:
Property, plant and equipment
Inventories
Trade debtors and other receivables
Cash and bank balances
Trade creditors and other payables

Rs. in million
20.50
10.00
8.00
6.00
(17.00)
27.50

It is KGLs policy to value the non-controlling interest at its proportionate share of fair value
of the subsidiaries' net assets.
(ii)

Book value of intangible assets on July 1, 2009 included trademarks of Rs. 6.0 million. There
was 50% impairment in the value of trademarks during the year ended June 30, 2010.

AdvancedAccountingandFinancialReporting

(iii)

Page4of5

The following information pertaining to property, plant and equipment is available:

Total depreciation charge for the year was Rs. 70.0 million.
A machine costing Rs. 10.0 million and having book value of Rs. 6.5 million was traded-in
with another machine having a fair market value of Rs. 7.0 million with an additional cash
payment of Rs. 1.0 million.
Fully depreciated assets costing Rs. 10.0 million were scrapped during the year.
Proceeds of a long term loan amounting to Rs. 5.0 million were specifically used for
purchase of property, plant and equipment.

(iv)

On August 5, 2010 the board of directors proposed a final dividend at 20% for the year ended
June 30, 2010 (2009: 15% dividend declared on August 10, 2009).

Required:
Prepare a Consolidated Statement of Cash Flows under the indirect method, for the year ended
June 30, 2010, including notes thereto as required by IAS 7 (Statement Of Cash Flows). (25 marks)
Q.5

Following are the extracts from the latest annual published accounts of the two companies which
are engaged in similar types of businesses.
Statement of Financial Position
AB Limited
XY Limited
Rupees in million
275
390
125
45
130
50
10
6
540
491

Property, plant and equipment

Inventories
Account receivables
Cash and bank balances

Share capital (Shares of Rs. 10 each)

Retained earnings
Long term liabilities
Current liabilities (other than bank overdraft)
Bank overdraft

210
190
60
80
540

215
90
105
60
21
491

Sales
Cost of sales
Gross profit
Operating and other expenses
Financial expenses
Profit before taxation
Taxation
Profit after taxation

900
(500)
400
(135)
(6)
259
(100)
159

825
(530)
295
(150)
(10)
135
(55)
80

Share market price at year end

140

50

Income Statement for the year

Required:
(a) Comment on the strategic outlook of the management of the above companies based on their
debt equity ratio and liquidity position.
(b) Based on the price earnings ratio comment on the attractiveness of the two companies, from
the investors point of view.
(10 marks)

AdvancedAccountingandFinancialReporting

Q.6

Page5of5

Engineering Works Limited (EWL) is in the process of finalising its Financial Statements for the
year ended June 30, 2010. The issue as detailed below is being deliberated upon by the CFO.
It is the policy of EWL to pay annual bonus of Rs. 10,000 each to all of its 600 workers, after two
months of closure of the financial year. On June 1, 2010 the management announced a scheme
whereby each worker was given the option to purchase 1,000 shares of EWL on a payment of Rs. 8
per share, in lieu of cash bonus for the year ended June 30, 2010. The face value of the companys
shares is Rs. 10 each. The last date to exercise the option was fixed at July 31, 2010. Other related
information is as follows:

60% employees exercised the option by June 30, 2010.

By July 31, 2010 further 20% employees had accepted this option.
The workers who exercise the option are required to retain the shares up to June 30, 2012 before
being eligible to sell them.
The shares were issued on September 1, 2010.
The market price and fair value of the shares at various dates were as under:
Market price per share
Fair value per share (after taking effect of post
vesting transfer restriction)

Rs.

30-Jun-10
32

31-Jul-10
37

01-Sep-10
42

Rs.

30

34

40

Required:
Prepare journal entries for the above transactions and adjustments during the years June 30, 2010
and 2011.
(10 marks)
(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations

Summer 2010

June 8, 2010

ADVANCED ACCOUNTING AND FINANCIAL REPORTING

(MARKS 100)
(3 hours)
Q.1 The following information has been extracted from statements of financial position and the
comprehensive income of Parent Limited (PL), Subsidiary Limited (SL) and Jointly
Controlled Entity Limited (JCEL) for the year ended December 31, 2009.
Statement of financial position
PL
SL
JCEL
Rupees in million
Assets
Non-current assets
Property, plant and equipment
120
40
74
Investment in SL at cost
35
Investment in JCEL at cost
25
Current assets
Stocks in trade
Trade and other receivables
Cash and bank

20
25
3
228

17
5
1
63

16
8
2
100

Equity
Ordinary share capital (Rs. 10 each)
Retained earnings

50
78

15
18

50
28

Long term loans

75

12

25
228

18
63

Equity and Liabilities

Current liabilities

22
100

Statement of comprehensive income

PL
SL
JCEL
Rupees in million
Sales
1,267
276
654
Cost of sales
(928)
(161)
(469)
Gross profit
339
115
185
Selling expenses
(174)
(68)
(100)
Administrative expenses
(88)
(30)
(57)
Other income
10
Financial charges
(12)
(4)
Taxation
(26)
(5)
(10)
Net profit
49
8
18
Following additional information is available:
(i)

PL owns 80% equity of SL which was acquired on January 1, 2009. JCEL is a jointly
controlled entity in which 50% equity is held by PL since inception.

(2)
(ii)

On the date of acquisition, the book values of all the assets of SL were approximately
equal to their fair values except for the following:

Equipment
Inventory

Fair value Book value

Rs. in million
15
12
12
10

The remaining useful life of the above equipment on the date of acquisition was 3
years. The entire inventory acquired prior to acquisition was sold during 2009.
(iii) JCEL measures inventory using the weighted average method whereas PL uses first in
first out (FIFO) method. On December 31, 2008 the cost of JCELs inventory using
either methods was approximately the same. However, on December 31, 2009 the
value of its inventory using the FIFO method was Rs. 14 million.
(iv) PL sells goods at cost plus 25%. During 2009 invoices raised by PL against sales made
to SL and JCEL amounted to Rs. 10 million and Rs. 20 million respectively. Out of
these, inventories worth Rs. 2 million and Rs. 4 million were held by SL and JCEL
respectively as on December 31, 2009.
(v) PL uses proportionate consolidation method for recognizing its interest in JCEL.
(vi) There is no impairment in the value of goodwill.
(vii) It is the policy of PL to value the non-controlling interest at its proportionate share of
the fair value of the subsidiarys identifiable net assets.
Required:
Prepare the consolidated statements of financial position and comprehensive income of PL
for the year ended December 31, 2009 in accordance with the International Financial
Reporting Standards. (Ignore deferred tax implications)
(30)
Q.2 The following information pertains to ABC Limited, in respect of year ended March 31,
2010.

Consolidated profit for the year (including minority interest)

Profit attriutable to minority interest
Dividend paid during the year to ordinary shareholders
Dividend paid on 10% Cumulative Preference shares for the year 2009
Dividend paid on 10% Cumulative Preference shares for the year 2010
Dividend declared on 12% Non Cumulative Preference shares for the year 2010

Rs. in 000
15,000
2,000
4,000
2,000
2,000
2,400

(i)

The dividend declared on the non-cumulative preference shares, as referred above,

was paid in April 2010.
(ii) The cumulative preference shares were issued at the time of inception of the company.
(iii) The company had 10 million ordinary shares at March 31, 2009.
(iv) The 12% non-cumulative preference shares are convertible into ordinary shares, on or
before December 31, 2011 at a premium of Rs. 2 per share. 0.50 million non
cumulative preference shares were converted into ordinary shares on July 1, 2009.
(v) 1.20 million right shares of Rs. 10 each were issued at a premium of Rs. 1.50 per share
on October 1, 2009. The market price on the date of issue was Rs. 12.50 per share.
(vi) 20% bonus shares were issued on January 1, 2010.
(vii) Due to insufficient profit no dividend was declared during the year ended March 31,
2009.
(viii) The average market price for the year ended March 31, 2010 was Rs. 15 per share.

Required:
Compute basic and diluted earnings per share and prepare a note for inclusion in the
consolidated financial statements for the year ended March 31, 2010.
(17)

(3)
Q.3 Auto Construction Pakistan Limited (ACPL) is engaged in the business of renting of
construction machinery. On March 15, 2009 ACPL negotiated and finalised an agreement for
purchase of used machinery from Malaysia. The price on FOB basis was agreed at US$ 0.4
million. The machinery was loaded on the ship on April 1, 2009 and arrived at the company
premises on May 31, 2009. According to the agreement a down payment of 10% was made
on the date of loading. The remaining amount was paid on June 30, 2009. The US$
conversion rates on April 1, May 31 and June 30 were Rs. 80.90, Rs. 81.60 and Rs. 82.70
respectively. A cost of Rs. 4 million was incurred on freight, taxes and other charges.
Economic life of the machinery is 10 years.
On July 1, 2009, ACPL sold the machinery to Smart Investment Limited for Rs. 40 million
and leased it back under the following arrangement:
(i) Lease term of 5 years commencing from July 1, 2009.
(ii) 10 half yearly instalments of Rs. 5.50 million each payable in arrears.
(iii) Interest rate implicit in the lease at 12.506%
On July 1, 2009 ACPL rented the machinery to a customer for three years at a half yearly
rent of Rs. 5 million each, payable in advance with 5% annual increase.
Required:
Prepare notes to the financial statements for the year ended December 31, 2009 in
accordance with the requirement of IAS 17 (Leases).
(13)
Q.4 Secured Bank Limited (SBL) is listed on all the Stock Exchanges in Pakistan. The cost of
various types of Investments held by the bank as of December 31, 2009 are as follows:

Market treasury bills

Pakistan investment bonds
Government of Pakistan bonds (USD/Euro)
Investments in associates
Fully paid-up ordinary shares listed
Fully paid-up ordinary shares unlisted
Corporate debt instruments listed
Corporate debt instruments unlisted
Investments of mutual funds
Overseas government securities
Other investments

2009
2008
Rupees in million
366
309
69
61
26
30
9
8
6
5
2
3
19
30
260
210
32
28
60
52
19
29

Provision for diminution / impairment in the value of investments as at January 1, 2008

amounted to Rs. 28 million. Other information relevant to the provision is as under:
Impairment (reversal) / loss for the year
Charge for the year
Amounts written off during the year

(6)
17
5

2
12
3

Required:
Prepare a note on investments by segments for inclusion in SBLs financial statements for
the year ended December 31, 2009 giving appropriate disclosures in accordance with the
guidelines issued by the State Bank of Pakistan.
(12)

(4)
Q.5 The following is a summarised trial balance of Sun Enterprises Limited for the year ended
December 31, 2009:
Debit
Credit
Rupees in 000
Ordinary shares of Rs.10 each
50,000
Retained earnings as at January 1, 2009
15,600
Property, plant and equipment at cost
81,000
Accumulated depreciation
17,000
Note receivable
8,000
Trade receivables
16,070
Inventory as of December 31, 2009
12,400
Cash and bank
2,000
Trade payables
16,700
Income tax payable
2,400
Deferred tax liability
3,300
Provision for environmental cost
500
Sales revenue
133,300
Cost of sales
85,000
Environmental costs
500
Operating expenses
16,000
Financial charges
1,000
Tax expense
11,830
Dividends paid on equity shares
5,000
238,800
238,800
On reviewing the financial statements, the audit committee is of the view that the
requirements of the Companies Ordinance 1984 and International Financial Reporting
Standards (IFRSs) have not been fully complied. It has asked you to look into the undermentioned items:
(i)

Note Receivable: The note receivable dated January 1, 2009 represents the amount due
from a major customer of the company. Its due date is December 31, 2011. No interest
is being charged on the note in view of the large amount of business undertaken by the
customer. Normal commercial rate for such type of unsecured financing is 12%.

(ii) Inventory/cost of sales: Inventory valuation method has been changed during the
current year, from weighted average to FIFO. The value of inventory at December 31,
2009 applying weighted average method would have been Rs. 12 million. Value of
opening inventory under the weighted average method was Rs. 8.2 million whereas its
value under the FIFO method would have been Rs. 9 million.
Cost of sales includes an amount of Rs. 3 million which was spent on repair of
uninsured property which was damaged in an earthquake.
(iii) Environmental costs: It is estimated that cost of restoring the site of mines would
amount to Rs. 5 million. The estimate is based on expected prices prevailing at the end
of useful life of the mines which is 10 years. 1/10th of the cost has been provided in the
current year. The rate of inflation over the next 10 years is estimated at 10%.
(iv) Taxation: On account of certain disallowances, the amount of tax paid by the company
in 2009 in respect of tax year 2008 exceeded the amount provided in the accounts by
Rs. 0.20 million which was debited to Deferred Tax Payable account. The company
does not intend to file an appeal against these disallowances. Current years taxable
income exceeds the accounting income by Rs. 3 million of which Rs. 2.50 million are
temporary timing differences. Tax rate applicable to the company is 35%.
Required:
Prepare a Profit and Loss Account for the year ended December 31, 2009 in accordance with
IFRSs. (Ignore comparative figures)
(16)

(5)
Q.6 In 2001, the management of Comfort Shoes Limited planned to acquire an international
trademark to boost its sales and enter into the international market. In this respect, the
management carried out a market survey and analysed the information obtained to initiate the
process. The relevant information is as follows:
(i)

The cost incurred on the survey and related activities during the year 2001 amounted to
Rs. 1 million.
(ii) An agreement was finalised and the company acquired the trademark effective January
1, 2002. According to the agreement Rs. 5 million were paid on signing of the
agreement and Comfort Shoes was required to pay 1% of sale proceeds of the related
products on yearly basis. The analysis carried out at that time indicated that the
trademark would have an indefinite useful life.
(iii) The company has developed many new models under this trademark and successfully
marketed them in the country as well as in international markets. However, in 2008 the
company faced unexpected competition and had to discontinue the exports. It was
estimated that due to discontinuation of exports, net cash inflows for the foreseeable
future, would reduce by 30%. As a result the management was of the view that as of
December 31, 2008 the carrying value of the trademark had reduced to 90%.
(iv) Due to continuous inflation and flooding of markets with very low priced shoes, it was
decided in December 2009 that use of the trademark would be discontinued with effect
from January 1, 2011.

Required:
(a) Explain how the above transactions should have been accounted for in the years 2001 to
2007 according to International Financial Reporting Standards (IFRSs).
(b) Prepare a note to the financial statements for the year ended December 31, 2009 in
accordance with the requirements of IFRSs. Show comparative figures.
(12)
(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2009

December 8, 2009

ADVANCED ACCOUNTING AND FINANCIAL REPORTING

Q.1

(MARKS 100)
(3 hours)

The statements of financial position of Habib Limited (HL), Faraz Limited (FL) and Momin
Limited (ML) as at June 30, 2009 are as follows:
HL
Assets
Non-current assets
Property, plant and equipment
Investments in FL - at cost
Investments in ML - at cost
Current assets
Stocks in trade
Trade and other receivables
Cash and bank
Total assets
Equity and liabilities
Equity
Ordinary share capital (Rs. 10 each)
Retained earnings
Non-current liabilities
12% debentures
Current liabilities
Short term loan
Trade and other payables
Total equity and liabilities

FL
ML
Rupees in million

978
520
300
1,798

595
-

380
-

595

380

210
122
20
352
2,150

105
116
38
259
854

125
128
37
290
670

800
784
1,584

360
354
714

100
450
550

270

124
172
296
2,150

140
140
854

120
120
670

Following additional information is also available:

(i)
HL acquired 60% shares of FL on January 1, 2003 for Rs. 400 million when the
retained earnings of FL stood at Rs. 250 million. On January 1, 2006, a further 20%
shares in FL were acquired for Rs. 120 million. FLs retained earnings on the date of
second acquisition were Rs. 400 million.
(ii) 70% shares of ML were acquired by HL for Rs. 300 million, on July 1, 2006 when
MLs retained earnings stood at Rs. 260 million. On December 31, 2008, HL disposed
off its entire holding in ML for Rs. 500 million. The disposal of shares has not yet
been recorded in HLs financial statements.
(iii) On January 1, 2009, FL purchased a machine for Rs. 20 million and immediately sold
it to HL for Rs. 24 million. However, no payment has yet been made by HL. The
estimated useful life of the machine is 4 years and HL charges depreciation on the
straight line method.

(2)
(iv)

During the year, HL sold finished goods to FL at cost plus 20%. The amount invoiced
during the year amounted to Rs. 75 million. 60% of these goods had been sold by FL
till June 30, 2009.
(v) During the year ended June 30, 2009, FL and ML earned profits of Rs. 10 million and
Rs. 50 million respectively. The profits had accrued evenly, throughout the year.
(vi) An impairment review at year end indicated that 15% of the goodwill recognised on
acquisition of FL, is required to be written off.
(vii) HL values the non-controlling interest at its proportionate share of the fair value of the
subsidiarys identifiable net assets.
Required:
Prepare the consolidated statement of financial position of HL as at June 30, 2009 in
accordance with the requirements of International Financial Reporting Standards. (Ignore
current and deferred tax implications.)
(25)
Q.2

Being the financial consultant of Insha Chemicals Limited (ICL), a listed company, you have
been approached to advise on certain accounting issues. Accordingly, you are required to
explain how the following transactions should be disclosed in ICLs financial statements for
the year ended June 30, 2009 in accordance with International Financial Reporting
Standards:
(a)

In a board meeting held on January 1, 2009, the board of directors showed concern
over the poor results of one of the companys cash generating unit, Lahore Division
(LD). It was principally decided in the meeting that this division should be
discontinued.
ICLs CEO announced the closure of LD in a press conference held on February 15,
2009. He also informed that negotiations to sell the entire division are in progress and
the sale is expected to be finalized within few months.
On June 14, 2009, the CEO reported to the board of directors that negotiations with
Bashir Limited are proceeding well and the disposal of LD is expected to materialise
before July 31, 2009. However, it is estimated that the assets would be sold at 95% of
their fair value.
(08)

(b)

ICL operates a factory in an underdeveloped rural area. Most of the employees in the
factory have been hired locally. On observing the positive effects of the project, the
government had approved a grant of Rs. 100 million for ICL, on February 1, 2009 for
development of a similar factory in another underdeveloped area. However, it had been
agreed that disbursement would be made in three phases. The relevant details are as
follows:
Amount
Comments
Rs. in million
Before commencement
10
No condition is attached to this phase of the
of the construction
grant and it was received on March 1, 2009.
During the construction
40
Total cost of construction is estimated at Rs.
of factory
200 million. The construction was 30%
complete, as of June 30, 2009. The estimated
life of the property, plant and equipment is 15
years and it would be depreciated on the
straight line basis.
When the factory
50
It has been agreed that 400 local persons would
becomes operational
be employed. The amount will be given in five
equal annual installments. If employment drops
below 400 at any time in any of the five
subsequent years, no amount would be paid in
that year.
Phases

(09)

(3)
Q.3

Rahman Limited (RL) is a listed company engaged in the manufacture of leather goods. Its
financial year ends on June 30. In a meeting held on July 1, 2009 its Board of Directors
acknowledged the outstanding performance of the companys Chief Operating Officer
(COO) and in recognition thereof, decided to allow him either of the following options:
Option I
Option II

Receive a cash payment equal to the current value of 64,000 shares of RL.
Receive 80,000 shares of RL.

However, the above offer was subject to certain conditions. These conditions and other
relevant information are as follows:
(i)

The right is conditional upon completion of three years service from the date the right
was granted and the decision to select the option shall also be exercised on the
completion of the said period.
(ii) The share price of RL on July 1, 2009 is Rs. 125 per share. It is estimated that the share
price at the end of year 2010, 2011 and 2012 will be Rs. 130, Rs. 138 and Rs. 150
respectively.
(iii) If the COO chooses option II, he shall have to retain the shares for two years i.e. up to
June 30, 2014 before being eligible to sell them. However, the fair value of the shares
after taking into account the effects of the post vesting transfer restrictions is estimated
at Rs. 110 per share.
(iv) RL does not expect to pay any dividend during the next three years.
Required:
Prepare the journal entries:
(a) to record the above transactions in the books of Rahman Limited for the year ending
June 30, 2010, 2011 and 2012.
(b) to record the settlement of right on June 30, 2012 under:
Option I
Option II.
(15)
Q.4

Sachal Limited (SL) is planning to acquire 100% shareholdings in Waris Limited (WL).
Before submission of financial proposal, SL is carrying out an analysis of WLs financial
and operating performance. The CFO of SL has gathered the following information which is
based on the financial statements for the year ended December 31, 2008:
Description
Operating Performance Ratios
Gross profit
Operating profit
Return on shareholders equity
Working Capital Ratios
Current ratio
Inventory turnover days
Receivables collection
Gearing Ratios
Debt equity ratio
Interest cover
Investors Ratios
Earnings per share
Dividend per share

WLs
Ratios

High

29%
11%
9%

30%
15%
13%

20%
10%
7%

25%
13%
10%

1.54 : 1
83 days
93 days

2:1
114 days
95 days

1:1
81 days
60 days

1.5 : 1
91 days
74 days

55 : 45
1.3 times

60 : 40
3 times

40 : 60
1.2 times

50 : 50
2 times

Re. 0.9
Re. 0.2

Rs. 1.8
Re. 0.9

Re. 0.75
Re. 0.25

Rs. 1.2
Re. 0.6

Industry Ratios
Low
Average

Required:
(a) Draft a report to the board of directors, on behalf of the CFO, analyzing the financial
performance of Waris Limited by evaluating each category of ratios in comparison with
the industry. (Do not write your name or any identification in the report)
(12)
(b) List any four types of additional information which would have helped you in a better
analysis.
(04)

(4)
Q.5

Lateef Bank Limited (LBL) is listed on Karachi and Lahore Stock Exchanges and has 150
branches including 10 overseas branches. The LBLs lending to financial institutions as of
September 30, 2009 comprised of the following:
(i) Call money lending at year end amounted to Rs. 850 million (2008: Rs. 1,200 million).
The markup on these unsecured lendings ranged between 15% to 17% (2008: 10% to
12%) and they matured on various dates, in October 2009.
(ii) Short term lending on account of repurchase agreement (reverse repo) amounted to Rs.
2,100 million (2008: Rs. 2,850 million). These carried markup ranging from 9.5% to
13.2% (2008: 8% to 10.5%) and matured on various dates, in October 2009. These
were secured against Market Treasury Bills of Rs. 1,650 million (2008: Rs. 1,850
million) and Pakistan Investment Bonds of Rs. 450 million (2008: Rs. 1,000 million).
The market value of these securities held as collateral, on September 30, 2009,
amounted to Rs. 2,250 million (2008: Rs. 2,930 million).
The above amounts include lendings in foreign currencies amounting to Rs. 110 million
(2008: Rs. 150 million).
Required:
Prepare a note on Lendings to Financial Institutions for inclusion in LBLs financial
statements for the year ended September 30, 2009 giving appropriate disclosures in
accordance with the guidelines issued by State Bank of Pakistan.
(12)

Q.6

Arif Industries Limited (AIL) owns and operates a textile mill with spinning and weaving
units. Due to recurring losses, AIL disposed of the weaving unit for an amount of Rs. 100
million on July 1, 2007 and invested the proceeds in Pakistan Investment Bonds (PIBs).
Details of investment in PIBs are as follows:
(i) The PIBs were purchased through a commercial bank at face value. The bank initially
charged premium and investment handling charges of Rs. 4,641,483. At the time of
purchase, AIL had envisaged to liquidate the investment after four years and utilize the
realized amount for expansion of its spinning business. The bank had agreed to
repurchase the PIBs on June 30, 2011, at their face value.
(ii) The markup on PIBs is 15% for the initial two years and 20% for the remaining three
years. The effective yield on investment at the time of purchase was 15.50%.
However, due to economic turmoil in the European and American markets, the existing
spinning unit is working below its rated capacity. Therefore, on June 30, 2009 AIL decided
to defer the expansion plan by one year. The bank agreed to extend the holding period
accordingly but reduced the repurchase price by 2%.
Required:
Compute the amount of interest income (including the effect of revision of holding period, if
any) to be recognized in the financial years ended(ing) 2009, 2010, 2011 and 2012.
(15)
(THE END)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations

Summer 2009

June 2, 2009

ADVANCED ACCOUNTING AND FINANCIAL REPORTING

Q.1

(MARKS 100)
(3 hours)

On January 1, 2002, Khan Limited (KL) acquired 375 million ordinary shares and 40
million preference shares in Gul Limited (GL) whose general reserve and retained
earnings on the date of acquisition, stood at Rs. 200 million and Rs. 1,000 million
respectively.
The following balances were extracted from the records of KL and its subsidiary on
December 31, 2008:

Ordinary share capital (Rs. 10 each)

12% Preference share capital (Rs. 10 each)
General reserve
Retained earnings
Loan from KL at 15% rate of interest
14% Term Finance Certificates (TFCs) (Rs. 100 each)
Accounts payable
Dividend payable preference shares
Dividend payable ordinary shares
Property, plant and equipment - at cost
Property, plant and equipment - acc. depreciation
Investment in ordinary shares of GL
Investment in preference shares of GL
Loan to GL at 15% rate of interest
Investment in KL's TFCs (purchased at par value)
Profit before tax, interest and dividend
Dividend income
Interest income
Dividend receivable
Current assets
Interest on TFCs
Interest on loan from KL
Taxation
Preference dividend
Ordinary dividend interim

KL
GL
Debit Credit Debit Credit
-------Rupees in million------6,800
5,000
1,000
1,750
500
2,000
1,200
2,000
2,250
445
190
60
750
300
16,250
25,000
9,750
17,000
5,500
400
2,000
1,500
2,865
1,550
273
300
210
249
1,069
1,316
315
300
650
474
120
750
300
27,183 27,183 29,010 29,010

Following relevant information is available:

(i)
At the date of acquisition, the fair value of buildings, included in property, plant and
equipment of GL was assessed at Rs. 1,000 million above its carrying value. All
other identifiable assets and liabilities were considered to be fairly valued. GL
provides for depreciation on buildings at 10% per annum on the straight line basis.
(ii) GL purchased the TFCs in KL on January 1, 2008.
(iii) The non-controlling interests are measured at their proportionate share of the GLs
identifiable net assets.
(iv) There is no impairment in the value of goodwill since its acquisition.

(2)
(v)

There are no components of other comprehensive income.

Required:
Prepare the following in accordance with the requirements of International Financial
Reporting Standards:
(a) Consolidated statement of financial position as at December 31, 2008.
(b) Consolidated statement of comprehensive income for the year ended December 31,
2008.
(c) Consolidated statement of retained earnings for the year ended December 31, 2008.
Note:
Ignore deferred tax and corresponding figures.
Notes to the above statements are not required. However, show workings wherever it
is necessary.

Q.2

(26)

During the year ended December 31, 2008, a Pakistani Sugar Company (PSC) was facing
severe problems in meeting its foreign currency obligations especially in view of the steep
increase in the foreign exchange rates. In October 2008, PSC commenced negotiations
with the foreign lenders for restructuring of loans.
Following is a summary of the foreign exchange liabilities of the company as of December
31, 2008 prior to making adjustments on restructuring:

Loan amount (US$)

Remaining number of installments including
due on December 31, 2008
Interest / markup rate

SBD
350,000

Lenders
JICA
500,000

AFI
270,000

5
2.50%

4
3.00%

3
2.00%

The loans are repayable in equal annual installments. All the above liabilities are
appearing in PSCs books at the exchange rate of US$ 1 = Rs. 65 which was the rate at the
beginning of the year. The exchange rate as at the end of the year is US$ 1 = Rs. 80.
Agreements with SBD and AFI were finalized and signed before year-end, however, the
agreement with JICA was finalized in January 2009 but before finalization of the financial
statements. Following is the information in respect of rescheduling agreements.

Revised value of loan amount (US$)

Revised present value as per original effective
interest rate (US$)
Revised present value as per market interest
rate for similar instruments (fair value) (US$)
First installment due on

SBD
370,000

Lenders
JICA
525,000

AFI
280,000

390,000

535,000

250,000

400,000
31-Dec-10

510,000
31-Dec-11

220,000
31-Dec-12

Required:
(a) Prepare accounting entries in the books of PSC to record the
(i) effect of exchange differences.
(ii) effect of rescheduling, if any.
(b)

In respect of each of the above loans, identify the amounts to be reported as current
portion of the loan in the financial statements, as at December 31, 2008.

(11)

(3)
Q.3

Jamshed Limited has recently hired your services for the position of Accountant. The
following summarized trial balance for the year ended December 31, 2008 along with the
CFOs comments, has been provided to you:

Share capital
Retained earnings (1/1/2008)
Obligation under finance leases
Accounts payable
Owned fixed assets net
Leased fixed assets net
Deferred tax asset (1/1/ 2008)
Stock in trade
Accounts receivable
Provision for bad debts
Advance tax paid

Debit
Credit
----- Rupees ----75,000,000
54,134,997
15,436,900
4,100,000
110,187,500
17,152,115
750,000
31,400,250
13,075,000
653,750
11,999,247

Cash and bank

Sales
Cost of sales excluding depreciation
Depreciation expense owned assets

122,106,875
9,385,542

Depreciation expense leased assets

Donations

1,815,212
562,500

Financial charges

2,237,500

Other expenses

6,150,000

CFOs Comments

Including tax of Rs. 51,250

deducted on dividend
received.

1,025,000
177,633,594
Tax depreciation for the
year is Rs. 8,501,758.

Dividend income

512,500

Gain on sale of machines

375,000
327,846,741

Not allowable for tax

purposes.
Includes Rs. 1,750,222
relating to obligations under
finance lease.
Includes bad debt expenses
of Rs. 853,750.
Taxable under Final Tax
Regime.
Carrying amount at disposal
was Rs. 650,000.

327,846,741

Following relevant information is also available:

(i)
(ii)

Bad debts written off during the year amounted to Rs. 200,000.
There was no addition or deletion in the leased assets. The principal repayment
towards obligation under finance lease was Rs. 2,061,359.
(iii) The tax written down value of owned fixed assets as of December 31, 2007 was
Rs. 96,550,000.
(iv) During the year, the company purchased fixed assets amounting to Rs. 7,500,000.
(v)
The tax written down value of machines sold was Rs. 450,000. There was no other
disposal of property, plant and equipment in the year 2008.
(vi) On account of an apparent mistake in the return relating to year ended December
31, 2007, a revised return was filed and the taxable income was reduced by
Rs. 1,800,000.
(vii) Up to the year ended December 31, 2007, the companys assessed brought forward
losses amounted to Rs. 14,251,700.
(viii) Applicable tax rate is 35%.
Required
Prepare a note to the statement of comprehensive income for the year ended December 31,
2008, giving appropriate disclosure related to current and deferred tax expenses.

(23)

(4)
Q.4

On January 1, 2008, Misbah Holding Limited, dealing in textile goods, acquired 90%
ownership interest in Salman Limited (SL), a ginning company, against cash payment of
Rs. 450 million. At that date, SLs net identifiable assets had a book value of Rs. 350
million and fair value of Rs. 400 million.
It is the policy of the company to measure the non-controlling interest at their
proportionate share of SLs net identifiable assets.
During the year ended December 31, 2008, SL incurred a net loss of Rs. 150 million. The
impairment testing exercise carried out at the end of the year, by a firm of consultants,
showed that the recoverable amount of SLs business is Rs. 200 million. However, the
Board of Directors is inclined to take a second opinion as they estimate that the
recoverable amount is Rs. 390 million.
Required:
Based on each of the two valuations, compute the amounts to be reported in the
consolidated statement of financial position as of December 31, 2008 in respect of:
Goodwill;
Net identifiable assets, and
Non-controlling interest.

Q.5

(15)

Akmal General Insurance Limited (AGIL) is engaged in general insurance business. The
following information is available for the year ended December 31, 2008:
(i)

During the year, AGIL earned direct and facultative premiums of Rs. 5,586,382
thousand against which it incurred reinsurance expense amounting to Rs. 2,076,499
thousand. Details of premium earned and reinsurance expenses are as follows:

Premiums
Reinsurance expense

(ii)

Fire &
Marine,
Motor
Misc.
Property
Aviation
Damage
&Transport
------------------Rupees in thousand-----------------1,905,027
883,942
2,495,120
302,293
1,520,962
300,605
4,671
250,261

The outstanding balance of unearned premium reserve and prepaid reinsurance

premium ceded were as follows:
Fire &
Marine,
Property Aviation &
Motor
Misc.
Damage Transport
----------------Rupees in thousand-------------Balances as of December 31, 2008
Unearned premium reserve
Prepaid reinsurance premium ceded

1,014,552
741,934

174,780
93,702

1,053,094
311

152,911
122,866

Balances as of December 31, 2007

Unearned premium reserve
Prepaid reinsurance premium ceded

844,425
726,800

159,844
59,098

1,191,933
-

133,424
114,190

(iii) Premium received under the treaty arrangements (proportional) amounted to Rs.
167,108 thousand. The outstanding balance of unearned premiums reserve relating
to treaty arrangement as of December 31, 2008 was Rs. 56,128 thousand (2007: Rs.
61,303 thousand).
Required:
Prepare the statement of premiums for the year ended December 31, 2008. Ignore the
corresponding figures.

(10)

(5)
Q.6

The following information relates to Afridi Industries Limited (AIL) for the year ended
December 31, 2008:
(i)
(ii)

(iii)
(iv)

(v)

The share capital of the company as on January 1, 2008 was Rs. 400 million of
Rs. 10 each.
On March 1, 2008, AIL entered into a financing arrangement with a local bank.
Under the arrangement, all the current and long-term debts of AIL, other than trade
payables, were paid by the bank. In lieu thereof, AIL issued 4 million Convertible
Term Finance Certificates (TFCs) having a face value of Rs. 100, to the bank. These
TFCs are redeemable in five years and carry mark up at the rate of 8% per annum.
The bank has been allowed the option to convert these TFCs on the date of
redemption, in the ratio of 10 TFCs to 35 ordinary shares.
On April 1, 2008, AIL issued 30% right shares to its existing shareholders at a price
which did not contain any bonus element.
During the year, AIL earned profit before tax amounting to Rs. 120 million. This
profit includes a loss before tax from a discontinued operation, amounting to Rs. 20
million.
The applicable tax rate is 35%.

Required:
Prepare extracts from the financial statements of Afridi Industries Limited for the year
ended December 31, 2008 showing all necessary disclosures related to earnings per share
and diluted earnings per share.
(Ignore corresponding figures)
(THE END)

(15)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2008

December 2, 2008

ADVANCED ACCOUNTING AND FINANCIAL REPORTING

Q.1

(MARKS 100)
(3 hours)

Golden Limited (GL) is a listed company and has held shares in two companies, Yellow
Limited (YL) and Black Limited (BL), since July 1, 2006. The details of acquisition of
shares in these companies are as follows:
(A)

GL acquired 18 million shares in YL at par, when YLs reserves were Rs. 24

million. The acquisition was made by issuing four shares in GL for every five shares
in YL. The market price of GLs shares at July 1, 2006 was Rs. 20 per share. A fair
value exercise was carried out for YLs assets and liabilities at the time of its
acquisition with the following results:

Land
Machines
Investments

Book Value
Fair Value
Rupees in million
170
192
25
45
3
6

The remaining life of machine on acquisition was 5 years. The fair values of the
assets have not been accounted for in YLs financial statements.
(B)

6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of
acquisition, the reserves of BL stood at Rs. 40 million.

The summarized income statement of the three companies for the year ended June 30,
2008 are as follows:
GL
Sales
Cost of sales
Gross profit / (loss)
Selling expenses
Administrative expenses
Interest expenses
Other income
Profit/(loss) before tax
Income tax
Profit/(loss) for the period

YL
Rupees in million
875
350
(567)
(206)
308
144
(33)
(11)
(63)
(40)
(30)
(22)
65
247
71
(73)
(15)
174
56

BL
200
(244)
(44)
(15)
(16)
(15)
(90)
8
(82)

The following relevant information is available:

(i)

The share capital and reserves as at July 1, 2007 were as follows:

Ordinary share capital of Rs. 10 each

Reserves

GL
YL
BL
Rupees in million
600
200
150
652
213
108

(2)
The share capital of all companies have remained unchanged since their
incorporation.
(ii) During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were
made at a mark up of 25% on cost. 30% of these goods were still in the inventories
of YL at June 30, 2008.
(iii) GL manufactures a component used by BL. During the year, GL sold these
components amounting to Rs. 20 million to BL. Transfers are made at cost plus
15%. BL held Rs. 11.5 million of these components in inventories at June 30, 2008.
(iv) All assets are depreciated on straight line method.
(v) Other income includes dividend received from YL on April 15, 2008.
(vi) During the year, YL paid 20% cash dividend to its ordinary shareholders.
(vii) An impairment test was carried out on June 30, 2008 for the goodwill of YL and
investments in BL, appearing in the consolidated financial statements. The test
indicated that:

goodwill of YL was impaired by 20%;

due to recent losses, the fair value of investment in BL has been reduced to
Rs.40 million.

No such impairment was required in previous years.

Required:
Prepare, in a format suitable for inclusion in the annual report, a consolidated income
statement for the year ended June 30, 2008.
Q.2

(22)

Silver Construction Limited (SCL) was incorporated on July 1, 2007 with a share capital of
Rs. 500 million. It is involved in the construction of bridges, dams, pipelines, roads etc.
During the year ended June 30, 2008, the company commenced work on six contracts,
details of which are as follows:
CONTRACTS
I
II
III
IV
V
VI
---------- Rupees in million ---------Total contract price
300
375 280
400
270 1,200
Billing up to June 30, 2008
200
110 280
235
205 1,200
Contract cost incurred up to June 30, 2008
248
68 186
246
185 1,175
Estimated further cost to complete
67
221
164
15
Following additional information is available:
(i)

(ii)

As per terms of Contract IV, the company will receive an additional Rs.40 million if
the construction is completed within a period of twelve months from the
commencement of the contract. The management feels that there is a 90% probability
that it will be able to meet the target.
An amount of Rs. 16 million was incurred on Contract II on account of a change in
design. The company has discussed it with the customer who has informed SCL that
the amount is on the higher side and needs to be revised.

Required:
(a) Make relevant calculations and prepare appropriate extracts to be reflected in the
Balance Sheet and Income Statement for the year ended June 30, 2008.
(b) Justify your accounting treatment in respect of the additional information provided
above.
Q.3

Red Limited has carried out the following transactions during the year ended June 30,
2008.
(a)

On July 1, 2007, the company has received a loan of Rs. 100 million from Green
Limited a related party which is due for repayment after three years and does not
carry any interest. The market interest rate for similar loans is 15% per annum. Red
Limited is subject to taxation at the rate of 35%.

(19)

(3)
(b)

On August 1, 2007, the company granted 200,000 employees stock options at Rs. 5,
when the market price was Rs. 13 per share. 95% of the options were exercised
between March 1, 2008 and April 30, 2008. The remaining options lapsed. The share
capital of the company is divided into shares of Rs. 10 each.

(c)

The company holds 500,000 shares of Green Limited (GL), a listed company, which
were purchased many years ago at Rs. 10 per share. The transaction cost on purchase
was Rs. 120,000. The shares were classified as available for sale. On May 31, 2008,
the fair value of GLs shares was Rs. 20 per share. On the same day, GL was
acquired by Orange Limited (OL), a listed company. As a result, Red Limited
received 200,000 shares of OL which had a market value of Rs. 65 per share, on that
date.

Required:
Prepare journal entries to record the above transactions including the effect of deferred tax
thereon, if any, in the books of Red Limited, for the year ended June 30, 2008.
Q.4

(21)

Blue-chip Asset Management Limited is in the process of finalizing the financial

statements of one of its open ended mutual fund. Following information is available from
the Funds records;
Net assets - opening balance
Net income for the year
765,900 units issued during the year against
717,480 units redeemed during the year against

Rs. in 000
350,050
65,325
85,015
77,488

The par value of each unit is Rs. 100.

Required:
Prepare the statement of movement in unit holders Fund for the year ended June 30, 2008.
Q.5

(10)

Violet Power Limited is running a coal based power project in Pakistan. The Company has
built its plant in an area which contains large reserves of coal. The company has signed a
20 years agreement for sale of power to the Government. The period of the agreement
covers a significant portion of the useful life of the plant. The company is liable to restore
the site by dismantling and removing the plant and associated facilities on the expiry of the
agreement.
Following relevant information is available:
(i)

The plant commenced its production on July 1, 2007. It is the policy of the company
to measure the related assets using the cost model;
(ii) Initial cost of plant was Rs. 6,570 million including erection, installation and
borrowing costs but does not include any decommissioning cost;
(iii) Residual value of the plant is estimated at Rs. 320 million;
(iv) Initial estimate of amount required for dismantling of plant, at the time of installation
of plant was Rs. 780 million. However, such estimate was reviewed as of June 30,
2008 and was revised to Rs. 1,021 million;
(v) The Company follows straight line method of depreciation; and
(vi) Real risk-free interest rate prevailing in the market was 8% per annum when initial
estimates of decommissioning costs were made. However, at the end of the year such
rate has dropped to 6% per annum.
Required:
Work out the carrying value of plant and decommissioning liability as of June 30, 2008.

(08)

(4)
Q.6

You are working as a Financial Analyst in Brown Venture Capital Limited. Your company
has received an offer for equity investment in a large group of companies. While reviewing
the consolidated financial statements of the group and detailed offer documents, you have
noted the following significant judgments, estimates and assumptions used in preparation
of the consolidated financial statements, which may have an impact on the independent
evaluation of the affairs and operations of the group.
Operating Lease Commitments
The Group has entered into commercial property leases as a Lessee. The Group has
determined, based on an evaluation of the terms and conditions of the arrangements, that it
does not acquire all the significant risks and rewards of ownership of these properties and
so accounts for the contracts as operating leases.
Convertible Preference Shares
The Group has determined, based on an evaluation of the significant terms and conditions
of the issue, that these securities fall under the category of liability rather than equity, and
have been disclosed and accounted for accordingly.
Pension and Other Post Employment Benefits
The cost of defined benefit pension plans and other post employment benefits is
determined using actuarial valuations. The actuarial valuation involves making
assumptions about discount rates, expected rates of return on assets, future salary
increases, mortality rates and future pension increases. Due to the long term nature of these
plans, such estimates are subject to significant uncertainty.
Impairment of Non-Financial Assets
All non-financial assets including goodwill and other intangibles are assessed for
impairment at each reporting date and at any other time when there are indications of
impairment. When value in use calculations are undertaken, management has to estimate
the expected future cash flows from the asset or cash-generating unit and choose a suitable
discount rate in order to calculate the present value of such cash flows.
Useful Lives of Property, Plant And Equipment
The Group has invested significant amounts in acquisition of items of property, plant and
equipment (PPE). Generally, the Group follows a prudent practice and estimates the useful
economic lives of such assets to the enterprise on a minimum side.
Provision for Decommissioning
The activities of the Group normally give rise to obligations for site restoration. In
determining the amount of the provision, assumptions and estimates are required in respect
of discount rates and the expected cost of dismantling and removing the plants from the
site.
Required:
You have assessed that the managements judgments, estimates and assumptions may turn
out to be incorrect. What will be the impact of any error in managements estimates and
assumptions, on the following:

Liquidity, profitability and gearing ratios of the group;

Business valuation of the group.

Give brief explanations to justify your conclusions.

(THE END)

(20)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations

Summer 2008

June 3, 2008

ADVANCED ACCOUNTING & FINANCIAL REPORTING

Q.1

(Marks 100)
(3 hours)

Following is the summarised trial balance of Faisal Limited (FL) and its subsidiaries,
Saqib Limited (SL) and Ayaz Industries Limited (AIL) for the year ended December 31,
2007:

Cash and bank balances

Accounts receivable
Stocks in trade closing
Investment in subsidiaries at cost
SL
AIL
Other investments
Property, plant and equipment
Cost of sales
Operating expenses
Accumulated depreciation
Ordinary share capital (Rs. 10 each)
Retained earnings opening
Sales
Accounts payable
Gain on sale of fixed assets
Dividend income

FL
SL
AIL
----------------Rs. in million---------------4,920
660
2,700
6,240
2,460
6,580
14,460
4,200
5,680
9,000
10,500
11,100
22,500
49,200
3,600
(5,760)
(30,000)
(33,780)
(57,600)
(2,760)
(540)
(1,080)

3,480
18,000
2,100
(420)
(12,000)
(16,500)
(1,980)
-

5,940
21,000
5,400
(1,260)
(6,000)
(4,800)
(33,800)
(1,440)
-

Following additional information is also available:

(i)
(ii)
(iii)

On January 1, 2007, FL acquired 480 million shares of AIL from its major
shareholder for Rs. 10,500 million.
SL was incorporated on February 1, 2007. 75% of the shares were acquired by FL
at par value on the same date.
The following inter company sales were made during the year 2007:
Included in
Amount
Gross
buyers closing receivable/payable
profit %
stocks in trade
at year end
on sales
---------------------Rs. in million--------------------2,400
900
20
1,800
600
800
10
3,600
1,200
30
Sales

FL to AIL
SL to AIL
AIL to FL

FL and its subsidiaries value stock in trade at the lower of cost or net realisable
value. While valuing FLs stock in trade, the stock purchased from AIL has been
written down by Rs. 100 million.

(2)
(iv)

(v)

(iv)

On July 1, 2007, FL sold certain plants and machineries to SL. Details of the
transaction are as follows:
Rs. in million
Sales value
144
Less: Cost of plant and machineries
150
Accumulated depreciation
(60)
Net book value
90
Gain on sale of plant
54
The plants and machineries were purchased on January 1, 2005, and were being
depreciated on straight line method over a period of five years. SL computed
depreciation thereon using the same method based on the remaining useful life.
FL billed Rs. 100 million to each subsidiary for management services provided
during the year 2007 and credited it to operating expenses. The invoices were paid
on December 15, 2007.
Details of cash dividend are as follows:

FL
AIL

Dividend
Date of declaration
Date of payment
Nov 25, 2007
Jan 5, 2008
Oct 15, 2007
Nov 20, 2007

%
20
10

Required:
Prepare consolidated balance sheet and profit and loss account of FL and its subsidiaries
for the year ended December 31, 2007. Ignore tax and corresponding figures.
Q.2

(27)

DND Limited is a listed company, having its operations within Pakistan. During the year
ended December 31, 2007, the company contracted to purchase plants and machineries
from a US Company. The terms and conditions thereof , are given below:
(i)
(ii)

Total cost of contract = US$ 100,000.

Payment to be made in accordance with the following schedule:
Payment Dates
Amount Payable
On signing the contract
July 01, 2007
US$ 20,000
On shipment*
September 30, 2007
US$ 50,000
After installation and test run
January 31, 2008
US$ 30,000
*(risk and rewards of ownership are transferred on shipment)

The contract went through in accordance with the schedule and the company made all the
payments on time. The following exchange rates are available:
Dates
July 1, 2007
September 30, 2007
December 31, 2007
January 31, 2008

Exchange Rates
US$ 1 = Rs. 60.50
US$ 1 = Rs. 61.00
US$ 1 = Rs. 61.20
US$ 1 = Rs. 61.50

Required:
(a) Under each of the following options, prepare the necessary accounting entries on the
relevant dates including year-end adjustments:
Option 1: All payments were treated as advance payments and accounted for as
financial instrument.
Option 2: All payments were treated as progressive payments.
(b) Which of the above options would you recommend if the transaction is covered
under an irrevocable letter of credit? Give reasons for your recommendation.

(16)

(3)
Q.3

CNC Limited, an oil and gas exploration company is operating in Pakistan for last many
years. Presently, the company is managing five joint venture projects. Summary of the
companys ownership in the joint ventures as at December 31, 2007 is as follows:
Joint Venture Name
CNCs Ownership

JV-11
30%

JV-17
60%

JV-18
40%

JV-20
45%

JV-22
40%

CNC uses proportionate consolidation method of accounting. During the year 2007, it
sold certain assets to joint ventures, details of which are as follows:
(i)

Vehicles having carrying value of Rs. 3 million were sold to JV-11 on April 1, 2007
at their fair value of Rs. 2 million.
(ii) On May 1, 2007, certain items of plant and machinery having book value of Rs. 60
million were sold to JV-18 for Rs. 80 million, being the fair value of the assets.

Required:
(a) Prepare necessary journal entries:
(i) in the books of CNC Limited.
(ii) to record adjustments (if any) which will be required for the purpose of
consolidation.
(b) Explain the rationale for the gain or loss recorded by you in Part (a) according to the
relevant International Accounting Standards.
Q.4

(12)

The profit after tax earned by AAZ Limited during the year ended December 31, 2007
amounted to Rs. 127.83 million. The weighted average number of shares outstanding
during the year were 85.22 million.
Details of potential ordinary shares as at December 31, 2007 are as follows:

The company had issued debentures which are convertible into 3 million ordinary
shares. The debenture holders can exercise the option on December 31, 2009. If the
debentures are not converted into ordinary shares they shall be redeemed on
December 31, 2009. The interest on debentures for the year 2007 amounted to
Rs. 7.5 million.
Preference shares issued in 2004 are convertible into 4 million ordinary shares at the
option of the preference shareholders. The conversion option is exercisable on
December 31, 2010. The dividend paid on preference shares during the year 2007
amounted to Rs. 2.45 million.
The company has issued options carrying the right to acquire 1.5 million ordinary
shares of the company on or after December 31, 2007 at a strike price of Rs. 9.90 per
share. During the year 2007, the average market price of the shares was Rs. 11 per
share.

The company is subject to income tax at the rate of 30%.

Required:
(a)
Compute basic and diluted earnings per share.
(b)
Prepare a note for inclusion in the companys financial statements for the year
ended December 31, 2007 in accordance with the requirements of International
Accounting Standards.

Q.5

SOGO Limited operates an approved funded gratuity scheme for all its employees.
Benefits under the scheme become vested after 5 years of service. No benefit is payable
to an employee if he leaves before 5 years of service. A total of 752 employees were
eligible for the benefits under the fund as of December 31, 2007.

(18)

(4)
Following is the trial balance of the Fund as of June 30, 2007:
Debit
Credit
Amounts in Rupees
17,930,120
1,147,150
102,133,664
11,832,089
6,414,058
17,594,893
587,169
16,911,510
4,301,017
3,822
61,251
142,472,122
23,389,251
2,696,399
10,623,106
12,432,973
3,342
10,000
3,450,000
186,996,968 186,996,968

Cash at bank - current account

Receivable from SOGO Limited
Defence Savings Certificate
Term Finance Certificates
Term Deposits
Investment SUN Limited
Investment PEACE Company Limited
Investment - NIT Units
Due to outgoing members
Accrued expenses
Withholding tax payable
Members Fund
Profit on investments
Dividend income
Contribution for the year
Transferred / paid to outgoing members
Bank charges
Audit fee
Liabilities no more payable

Following are the details of investments and income thereon:

Balance
as at
Addition
July 01, 2006
Government Securities
Defence Savings Certificate
Unlisted Securities and deposits
Term Finance Certificates
Term Deposits
Listed Securities
SUN Limited
PEACE Limited
NIT Units

87,812,855

During the year 2007

Profit /
Principal
interest
realized
accrued

Profit /
interest
realized

21,376,809 (1,600,000) (5,456,000)

19,943,656
11,584,631

5,000,000 1,655,223 (12,873,068) (1,893,722)

357,219 (5,300,000)
(227,792)

8,220,957
587,169
16,911,510

9,373,936
-

The following gains/(losses) on restatement of investments at their fair values, have not
been accounted for:

SUN Limited
PEACE Limited
NIT Units

Rupees
(784,518)
317,728
4,026,551

Required:
Prepare the following in accordance with the requirements of International Accounting
Standards:
(a) Statement of Net Assets Available for Benefits alongwith the note on investments.
(b) Statement of changes in Net Assets Available for Benefits.

(15)

(5)
Q.6

During the year 2007, SKY Limited developed two inter-linked websites in house. One
of them is for external users and provides information about the companys products,
operations and financials. It can also be used for electronic order processing and
accepting payments through credit cards. The second website is for internal use like
intra-net, providing and sharing companys policies, customer details, employees
information, etc.
Both the websites were launched on September 30, 2007 and are now fully operational.
The company has received a few online orders which it believes will increase over time.
On the other hand, use of internal website has resulted in minor reduction in costs of
communication and certain other administrative costs. The management is optimistic that
its utility will increase significantly. However, it is not in a position to estimate the
amount of economic inflows that this website can generate.
During the year ended December 31, 2007, the company incurred the following
expenditure in the development of websites:
(i)

An amount of Rs. 0.3 million was incurred on undertaking a feasibility study and
defining hardware/software specifications for the websites.
(ii) Rs. 4 million were incurred on the development of internal website while an
expenditure of Rs. 11 million has been made on development of external website.
The expenditure on external website includes an amount of Rs. 6 million paid for
linking it with the credit card clearing facilities and installation of security tools.
(iii) The company acquired two dedicated servers and one backup server costing Rs. 3
million in total. Operating software for the server was acquired for Rs. 2.0 million
whereas software related to data processing and front-end development costed
Rs. 3 million. The management is of the view that these costs would not have been
incurred if the website project had not been initiated.
(iv) With effect from October 1, 2007 the company has signed a one year contract for
website maintenance at a cost of Rs. 2.0 million.
(v) Two IT personnel were trained to operate the websites, at a cost of Rs. 0.2 million.
(vi) Rs. 0.4 million were incurred on the promotion of its external website. The
company believes that this advertising will boost the companys online sales.
Required:
Comment on the accounting treatment of each of the above mentioned costs in the light
of relevant International Accounting Standards.
(THE END)

(12)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2007

December 04, 2007

ADVANCED ACCOUNTING & FINANCIAL REPORTING

Q.1

(MARKS 100)
(3 hours)

Ghalib Limited manufactures three products X, Y and Z. The management of the

company considers plants relating to each product as a separate Cash-Generating Unit
(CGU). The company has three Corporate Assets viz. a building, PABX system and a
computer network. On June 30, 2007, the assets were valued as under:
Carrying
Amount*
Rupees
Cash-Generating Units excluding Corporate Assets
Plant 1 for Product X
Plant 2 for Product Y
Plant 3 for Product Z
Corporate Assets
Building
PABX system
Computer network

2,500,000
5,000,000
10,000,000
17,500,000

Recoverable
Amount
Rupees
1,200,000
7,000,000
6,400,000
14,600,000

2,800,000
1,400,000
2,100,000
6,300,000
23,800,000

* Before impairment

Based on a study carried out by the company which involved consideration of various
factors, the management was able to determine that the building and the PABX system
can be allocated to plant 1,2 and 3 in the ratio of 2 : 3 : 5. However, the management
was unable to determine a reasonable and consistent basis for allocating the cost of
computer network.
Required:
Calculate the carrying amount of each CGU and Corporate Asset for reporting on the
balance sheet as at June 30, 2007 in accordance with IAS-36 Impairment of Assets.
Q.2

(18)

Taqi Limited has obtained a fleet of Trucks and Busses under a three years lease contract
from Faraz Leasing Company Limited. Total cost of assets is Rs. 75 million and the
expected economic life is considered to be 15 years. Lease rentals of Rs. 12 million per
annum shall be paid at the end of each year. The market rate of return is 10%.
It has been agreed that Taqi Limited will return the assets at the end of the lease term.
According to the terms of the contract, Taqi Limited is required to deposit cash
equivalent to 20% of the total cost of the fleet before taking delivery of assets. The
deposit does not carry any return and will be refunded in full at the end of the lease term.
Required:
(a) Comment on the accounting treatment of the above arrangement, from the lessees
point of view.
(b) Prepare accounting entries in the books of the lessee at the inception of lease and at
the end of each year.

(14)

(2)
Q.3

Following is the consolidated balance sheet of Iqbal Limited as at June 30, 2007:
2007
2006
Rupees in million
ASSETS
Non-Current Assets
Tangible fixed assets
Goodwill
Current Assets
Cash and bank
Investments
Trade receivables
Inventory
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Ordinary shares of Rs. 10 each
8% preference shares of Rs. 10 each
Share premium
Revaluation reserves
Accumulated profits
Minority Interest

Liability against assets subject to finance lease

Deferred tax
Current Liabilities
Running finance
Trade payables
Income tax payable
Dividends payable
TOTAL EQUITY AND LIABILITIES

2,142
343
2,485

1,927
305
2,232

808
982
1,128
1,850
4,768
7,253

700
560
1,168
1,715
4,143
6,375

505
600
55
140
2,670
3,970
238
4,208

450
600
2,480
3,530
200
3,730

300

420

75

55

940
950
600
180
2,670
7,253

900
720
450
100
2,170
6,375

Following further information has been extracted from the records:

(i)
(ii)

(iii)
(iv)

(v)

Iqbal Limited has two subsidiaries i.e. Faiz Limited and Badar Limited.
The factory buildings of Faiz Limited and Badar Limited were revalued during the
year and the surplus arising on the revaluation was credited to a revaluation reserve
account.
Certain plant and machineries belonging to Faiz Limited, acquired under finance
lease arrangement, were capitalized at Rs. 50 million.
On September 30, 2006, equipment costing Rs. 55 million carried in the books of
Iqbal Limited at Rs. 35 million as at June 30, 2006 was completely destroyed by
fire. Insurance proceed of Rs. 40 million was received on November 17, 2006.
There were no other disposal of tangible fixed assets in any of the three companies.
Total depreciation in the consolidated profit and loss account amounted to Rs. 314
million which included depreciation on leased assets amounting to Rs. 38 million.

(3)
(vi)

80% of the paid-up capital of Faiz Limited was acquired during the year for Rs. 110
million. The payment was made by issuing 5.5 million ordinary shares of Rs. 10
each at 100% premium. The net assets of Faiz Limited at the date of acquisition
were as follows:
Rs. in million
Tangible fixed assets
60
Inventories
20
Trade receivables
25
Cash
10
Trade payables
(25)
90

(vii) Provision made during the year, for current and deferred tax amounted to Rs. 200
million and Rs. 20 million respectively.
(viii) Profit allocated to minority shareholders amounted to Rs. 35 million.
(ix) The details relating to dividend paid by Iqbal Limited for the year are as follows:
Declared on
Paid on
Amount

2007
June 15, 2007
August 31, 2007
Rs. 180 million

2006
June 15, 2006
August 31, 2006
Rs. 100 million

Required:
Prepare the consolidated cash flow statement for the year ended June 30, 2007. Show
necessary workings.
Q.4

Mr. Hali, a stock investor, wants to invest in ordinary and/or preference shares of Ibrahim
Limited, a company listed on all stock exchanges of Pakistan. He has contacted you to
study the following financial information of Ibrahim Limited:
Profit and Loss Account for the Year Ended June 30, 2007
Profit before tax
Less: Income tax @ 35%
Profit after tax
Less: Preference dividend
Retained profits attributable to ordinary shareholders

Rs. in million
2,400
(840)
1,560
(200)
1,360

Balance Sheet as at June 30, 2007

Rs. in million
ASSETS
Fixed assets
Current assets
EQUITY AND LIABILITIES
1,000,000,000 ordinary shares of Rs. 10 each
10% preference shares of Rs. 10 each
Accumulated profit
Total equity
Long term loans from commercial banks
Current liabilities

23,000
12,400
35,400
10,000
2,000
12,000
3,400
15,400
9,800
10,200
35,400

(20)

(4)
Additional Information:
(i) At the balance sheet date, the market values of the ordinary and preference shares
of Ibrahim Limited were Rs. 15 per share and Rs. 11 per share respectively.
(ii) The board of directors announced 10% cash dividend for the year ended June 30,
2007.
(iii) The pre-tax profits for the next year are forecasted to be 5% higher as compared to
the current year.
(iv) The fair value of fixed assets as at June 30, 2007 is estimated at Rs. 26,000 million.
Required:
(a) Analyze the significant financial features which should be considered before any
decision is taken by Mr. Hali to invest in Ibrahim Limiteds ordinary and / or
preference shares.
(b) List any four types of information which may help you in a better analysis.
Q.5

(15)

Momin Life Insurance Company Ltd. is engaged in individual life insurance business.
The company has established a statutory fund i.e. Investment Linked Business Fund, to
meet the requirement of the Insurance Ordinance, 2000. The following information is
available for the year ended October 31, 2007:
(i)

The outstanding Balance of Investment Linked Business Fund as on November 1,

2006 amounted to Rs. 286,780 thousand which represents the following:

Retained earning on other than participating business

Policyholders' liabilities
(ii)
(iii)
(iv)

(v)
(vi)

Rs. in 000
78,719
208,061

The company received dividend amounting to Rs. 52,700 thousand and interest on
government securities amounting to Rs. 65,000 thousand.
Rs. 183,450 thousand was received as premium against which an amount of Rs.
11,500 thousand was paid to re-insurance companies.
Claims amounting to Rs. 173,500 thousand were paid during the year. The
company was able to recover Rs. 17,900 thousand from its re-insurance
arrangements.
During the year, the company paid Rs. 54,200 thousand on account of
management expenses.
The company has not incorporated the following adjustments in its record:

Claims admitted but not paid by the company

Management expenses due
Accrued interest
Premium outstanding

Rs. in 000
9,300
2,000
19,300
12,000

(vii) The liabilities of policyholders as at October 31, 2007 were Rs. 249,673 thousand.
(viii) The Board of Directors has approved the transfer of Rs. 10,450 thousand to
Shareholders Fund.

Q.6

Required:
Prepare the revenue account for the year ended October 31, 2007. Ignore the comparative
figures.

(15)

Describe how users of financial statements benefit from information relating to

discontinuing operations; and briefly explain the main disclosures in respect of
discontinuing operations.

(05)

(5)
Q.7

Mohani Fertilizer Company Limited, a listed company, operates a funded gratuity

scheme for its employees. Following relevant information has been extracted from the
actuarial reports:

Present value of defined benefit obligations

Fair value of plan assets
Current service cost for the year
Contributions paid during the year
Benefits paid during the year
Net cumulative unrecognized gains
Expected return on plan assets
Discount rate for plan liabilities

June 30, 2007

Rs. in million
900
750
25
15
17
8%
10%

June 30, 2006

Rs. in million
600
570
22
14
15
90
8%
10%

The expected remaining working lives of the employees as at June 30, 2007 were 20
years.
Required:
(a) Compute the amounts which need to be reported in the Balance Sheet and the
Profit and Loss Account of Mohani Fertilizer Company Limited for the year ended
June 30, 2007.
(b) Prepare the movement schedule of net cumulative unrecognized gains / (losses) for
the year ended June 30, 2007.
(THE END)

(13)

fb.com/gcaofficial
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Final Examinations

Summer 2007

June 5, 2007

ADVANCED ACCOUNTING & FINANCIAL REPORTING

Q.1

(MARKS 100)
(3 hours)

Murree Food Limited, a public company, was sued by an employee claiming damages for
Rs 4,000,000 on account of an injury caused to him as a result of alleged negligence on
the part of the company while he was working on the machine on December 18, 2006.
Before filing the suit on January 18, 2007, he contacted the management of the company
on December 28, 2006 and asked for compensation of Rs 2,500,000 which was denied.
The legal advisor of the company fears that the company may lose the suit and the court
may award compensation which may range from Rs 400,000 to Rs 2,000,000. However,
in his view the most probable amount is estimated at Rs 800,000.
Required:
(a) Describe the accounting treatment in respect of the above in the financial
statements of Murree Food Limited for the year ended December 31, 2006. Explain
your viewpoint with reasons based on relevant International Accounting Standards.
(b) Draft a suitable note for presenting the information in the financial statements.
(10)

Q.2

Gilgit Company Limited holds 800,000 shares of a listed company namely Hunza Foods
Limited, which were purchased for Rs 84,400,000 as a long-term investment. On
January 15, 2007, Hunza Foods Limited announced the issuance of one right share for
every 5 shares held by the shareholders of the company. Face value of the shares is
Rs 100 per share. On the date of book closure, market value of the share (cum right) was
Rs 106 per share. The initial quoted price of the right was Rs 4 per right.
Required:
Suggest the necessary journal entries in the books of Gilgit Company Limited in case of
each of the following options:

Q.3

Option # 1

If the rights are not exercised but are sold at Rs 6 per right.

Option # 2

If the rights are not exercised and are allowed to expire.

Option # 3

If the following transaction take place:

200,000 shares are sold at cum right price for Rs 23,000,000;
The right to purchase 120,000 additional shares at Rs 100 per share is
exercised. Immediately after the book closure, the shares were quoted
at Rs 103 per share (ex-right); and
100,000 shares originally held are sold at Rs 107 per share, after the
exercise of the rights.

Skardu Limited is preparing its consolidated financial statements for the year ended
December 31, 2006. During the year 2006, it acquired shares in three companies. The
details are given hereunder:

(16)

(2)
(a)

Balakot Limited
43% shares were acquired on May 1, 2006. Balakot Limited is a major supplier of
Skardu Limited. Skardu Limited also has a written agreement with Mr. Saleem who
owns 30% of the share capital of Balakot Limited. According to the agreement,
Mr. Saleem will always vote in the same way as Skardu Limited. Skardu Limited
has also made a substantial loan to Balakot Limited after acquisition of its shares,
which is repayable on demand. Balakot Limited is currently not in a position to
repay the loan.

(b)

Mangora Textile (Pvt.) Limited

The whole of the share capital was acquired on April 1, 2006. The directors of
Skardu Limited have displayed their clear intentions to sell the subsidiary within a
year. At the date of acquisition, the estimated fair value of assets was Rs 54 million
and the fair value of the liabilities was Rs 16 million. At year-end, the estimated fair
value of assets is Rs 52 million and the fair value of the liabilities is Rs 15 million.

(c)

Mansehra Limited
47% of the voting shares of Mansehra Limited were acquired on June 1, 2006. Rest
of the shares are owned by two financial institutions i.e. A (20%) and B (33%).
Each financial institution has nominated three directors on the board whereas four
directors are nominated by Skardu Limited. The effective power to set Mansehras
operating policies lies with the four directors appointed by Skardu Limited.
However, according to the articles of association of Mansehra Limited, any change
in the capital structure requires that all the ten directors must vote in favor of the
proposal.

Required:
Discuss how these investments should be treated in the consolidated financial statements
of Skardu Limited for year ended December 31, 2006.

Q.4

(08)

One of your clients has contacted you to calculate earnings per share in accordance with
the requirements of International Accounting Standards and has provided you the
following information:
(i)

At the beginning of the year 2006 the companys share capital was Rs 50 million
consisting of 5,000,000 ordinary shares of Rs 10 each. Ten percent bonus shares
were issued on April 1, 2006. Market price of ordinary shares at the beginning of
the year was Rs 33 per share. On June 30, 2006 the price was Rs 38 per share and
at the end of the year, the price was Rs 36 per share.

(ii) Profit attributable to ordinary shareholders of the company for the year 2006 is
Rs 20 million.
(iii) The company had issued convertible Term Finance Certificates (TFCs) of
Rs 120 million carrying markup at the rate of 13 percent per annum. The certificate
holders have the option to convert TFCs into ordinary shares in the ratio of
25 ordinary shares for each TFC of Rs 1,000.
(iv) The company is subject to income tax at the rate of 35%.
Required:
Calculate the basic and diluted earnings per share for the year 2006 in each of the
following situations:
(a)
(b)

if none of the TFC holders opt to convert TFCs into ordinary shares;
if a TFC holders who owns 40% of the total TFCs exercises his right of conversion
on the first day of July 1, 2006.
(15)

(3)

Q.5

Swat Limited is in the business of manufacturing and selling of biscuits. It sells biscuits
through its authorized partners appointed in all major cities of Pakistan.
The company accounts for taxation and deferred taxation in accordance with the
provisions of IAS 12. The relevant information relating to accounting year ended
December 31, 2006 is summarized hereunder:

Accounting income before tax

Accounting WDV of fixed assets as at December 31, 2006
Tax WDV of fixed assets as at December 31, 2006
Dividend income (subject to final tax at 5%)
Capital gain (exempt from tax)
Turnover for the year
Total turnover tax paid during the last three years
Liabilities older than 3 years, disallowed in previous years.
Provision for gratuity as at December 31, 2006
Provision for Gratuity for the year (net of payments)
Donations to unapproved institutions
Effect of prior years assessments finalized during the current year
Accounting depreciation for the year
Tax depreciation for the year
Fixed assets additions during the year

Rupees
in 000
797,000
565,500
243,000
35,000
135,000
3,165,500
65,000
65,000
138,500
33,000
5,000
6,400
103,000
85,000
123,000

All the liabilities are less than three years old except for those disclosed in the above
table. No payment was made in respect of liabilities disallowed earlier.
Only one fixed asset (a vehicle) was disposed off during the year 2006 against
Rs 1,000,000. Its accounting WDV was Rs 700,000 while tax WDV was Rs 465,000. No
disposal of fixed assets took place in the year 2005.
All expenses (except donations and timing differences) are considered to be allowable for
tax purpose. Applicable tax rate is 35%.
During last three years, the company was in a loss and was paying turnover tax which is
adjustable in future under the provisions of the Income Tax Ordinance, 2001, within a
period of five years. The company had always believed that such tax credit will be
utilized in the near future.
Required:
(a) Compute the amount of deferred tax required to be reported in the balance sheets
for the years 2006 and 2005.
(b) Prepare a note to the Profit and Loss Account for the year 2006, giving appropriate
disclosures related to tax expenses.
Q.6

Ayubia Limited is a public company engaged in the supply of locally assembled

machinery used in the textile industry. The management of the company feels that the
companys sales performance will be much improved if it provides in-house after sales
services to its customers as well as prompt delivery of spare parts. For this purpose, on
May 1, 2007 the management of the company decided to acquire 100% holding in the
following companies:

Kalam (Pvt.) Limited, an importer of spare parts used in textile machinery; and
Ziarat (Pvt.) Limited, which provides repair and maintenance services related to
textile machinery.

(18)

(4)
It has been agreed that the consideration for the acquisition will be ascertained by
applying the agreed price earning ratios on the estimated profits for the year ending
June 30, 2007. The price earning ratio for Kalam (Pvt.) Limited and Ziarat (Pvt.)
Limited has been agreed at 15 and 10 respectively. The shares in Ayubia Limited will be
issued to shareholders of both the companies on October 01, 2007 at a premium of
Rs 3 per share.
The following relevant information is available:

Ayubia
Limited
Issued Share Capital: Ordinary Shares of
Rs 10 each
Estimated profits before taxation
- for the year ending June 30, 2007
- for the year ending June 30, 2008
Estimated net assets as on June 30, 2008

Rupees in million
Kalam
Ziarat
(Pvt.)
(Pvt.)
Limited
Limited

*1,600

150

60

*690
*780
*4,890

30
35
250

12
18
70

*excluding the effect of acquisition transactions

Ayubia Limited anticipates that on May 01, 2008, it will provide a loan amounting to
Rs 30 million to Kalam (Pvt.) Limited and Rs 15 million to Ziarat (Pvt.) Limited for
restructuring and renovation of operations and working facilities. The loans will be
repaid in March 2010 and will carry a simple mark up at the rate of 13% per annum
which will be payable on quarterly basis. It also estimates that this acquisition will result
in increase in its administration expenses by Rs 2,500,000 per annum.
It is also expected that following interim dividends will be paid on June 30, 2008:
Ayubia Limited
Kalam (Pvt.) Limited
Ziarat (Pvt.) Limited

15.0%
12.5%
8.0%

Tax rate applicable to business income of all the companies is 35% whereas dividends
are taxed at 10%.
Required:
Prepare projected balance sheet and projected profit and loss account of Ayubia Limited
relating to the year ending June 30, 2008.
Q.7

Naran Bank Limited is a listed banking company which has 107 branches all over
Pakistan and 2 overseas branches. Total advances by the bank at the end of the year 2006
amounted to Rs 75,350 million (2005: Rs 65,440 million). These include
Rs 3,655 million (2005: Rs 2,373 million) placed under non performing status in
accordance with the Prudential Regulations issued by State Bank of Pakistan. Details of
classified advances and the provisions thereagainst are as follows:
Rupees in million
Classified
Provision
Category of Classification
Advances
Required / Made
2006
2005
2006
2005
Other Assets Especially Mentioned
3
2
Substandard
107
70
22
46
Doubtful
103
67
47
53
Loss
3,442
2,234
2,607
1,312
An additional provision of Rs 64 million was made during the year pursuant to the State
Bank of Pakistans advice. The Loss category includes advances of Rs 25 million
(2005: Rs 23 million) relating to overseas operations of the bank. The required provision
of Rs 8 million (2005: Rs 7 million) has been made against such advances.

(18)

fb.com/gcaofficial
(5)
The movement in the provisions was as follows:

Opening balance
Charge for the year (net of reversal)
Amounts written off during the year

2006
1,411
1,331
(2)
2,740

Rupees in million
2005
944
467
1,411

In addition to the above, the bank has made the following provisions:
(i)

During the year a general provision of Rs 121 million (2005: Rs 107 million) was
made against consumer financing in accordance with the requirements of the
Prudential Regulations (1.5% of secured financing and 5% of unsecured financing).
However, no amount had been written off. The opening balance of provision
against consumer financing as on January 1, 2006 amounted to Rs 242 million.

(ii)

It is the banks policy to make a general provision in addition to the amount

determined under Prudential Regulations. Such provision is based on the judgment
of the bank. The general provision as on January 1, 2006 was Rs 765 million.
However, there was a net reversal of provision for the year 2006 amounting to
Rs 47 million. In 2005, a net provision of Rs 65 million was made.

Required:
Prepare appropriate notes to the financial statements for the years 2005 and 2006 giving
disclosures related to provisions made by the bank in accordance with the guidelines
issued by State Bank of Pakistan.
(THE END)

(15)

fb.com/gcaofficial
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Final Examinations Winter 2006
December 5, 2006

ADVANCED ACCOUNTING & FINANCIAL REPORTING

(MARKS 100)
(3 hours)

Module E
Q.1

GIF Holdings Limited (GIF) held 75% shares of JPG Limited (JPG) and 30% shares of
BMP Limited (BMP). Their summarized balance sheets as at June 30, 2005 are as
follows:
GIF
JPG
BMP
-------Rupees in million ------Investments at cost in:
JPG Limited
450
BMP Limited
250
Other Net assets
1,690
1,000
800
2,390
1,000
800
Share capital (Rs.10 per share)
Accumulated profits

100
2,290
2,390

100
900
1,000

50
750
800

Following additional information is also available:

(a) GIF acquired the shares of JPG many years ago when the reserves of JPG were Rs.
500 million. The reserves of BMP were Rs. 650 million when GIF bought its 30%
holding on July 01, 2004.
(b) The following transactions have taken place from July 01, 2005 to June 30, 2006:
On January 01, 2006, GIF acquired a further 2,500,000 shares in BMP for
Rs. 705 million.
On April 01, 2006 GIF sold its entire interest in JPG for Rs. 1.1 billion in
cash. Tax arising on this transaction was Rs. 83 million.
The draft results of the individual companies in the period since July 01, 2005
are as follows:

Turnover
Profit before tax
Tax
Profit after tax

GIF
JPG
For the year ended
June 30, 2006
Rs. in million
4,000
5,400
400
320
(140)
(112)
260
208

BMP
For the six months ended
Dec. 31, 2005 June 30, 2006
Rs. in million
2,500
3,000
300
340
(105)
(119)
195
221

(c) While preparing the results for the year ended June 30, 2006, GIF have not given
effect to the disposal of its holding in JPG.
(d) Directors of GIF have indicated that costs of Rs. 70 million incurred and charged by
BMP in its draft results for the six-months ended June 30, 2006 had been incurred
prior to its acquisition by GIF, whereas they were recorded after January 1, 2006.

(2)
(e) BMP has now decided to write off a debtor balance of Rs. 40 million of which
Rs. 30 million had been outstanding since December 31, 2005. For the purpose of
consolidation, Rs. 30 million will be considered to have been written off prior to
January 1, 2006.
(f) GIF is a regular supplier to BMP, and makes a pre-tax profit of 20% on sales. Sales
by GIF to BMP in the six-months ended June 30, 2006 were Rs. 800 million.
Goods invoiced at Rs. 450 million were still in BMPs stock as at June 30, 2006.
(g) Goods invoiced by GIF to BMP in June 2006 at Rs.150 million were not reflected
in BMPs accounts as at June 30, 2006 as they had not been delivered to BMP till
then.
(h) The management of GIF tested the goodwill amount by comparing it with its
recoverable amount and decided to reduce its value by 2.5% at June 30, 2006.
(i) Applicable tax rate is 35%. Ignore deferred tax.
Required:
Prepare the consolidated profit and loss account of GIF Holdings Limited for the year
ended June 30, 2006 and the consolidated balance sheet as at June 30, 2006.

Q.2

(22)

PDF Steel Manufacturing Company Ltd. purchased a building for its proposed research
and development laboratory at a cost of Rs. 75.8 million. The building was placed in
service on July 10, 2005. The estimated useful life of the building for depreciation
purpose is 20 years. The company uses straight-line method for calculating depreciation
and there is no estimated net salvage value.
The laboratory has been designed to carry out research on various projects and will also
help the company in the production of a highly technical tool which has a wide use in
the manufacturing of ammunition. A summary of the number of projects and the cost
incurred on research and development for the year ended June 30, 2006 are as follows:

Completed projects with long

term benefits
Abandoned projects or
projects that benefit the
current period only
Projects in process results
indeterminate
Total

No. of
projects

Salaries and
employee
benefits

*Other directly
attributable
expenses

Training of
staff

15

5,400,000

3,000,000

1,000,000

10

3,900,000

900,000

300,000

5
30

2,400,000
11,700,000

720,000
4,620,000

320,000
1,620,000

* excluding depreciation

In view of the importance of some of the projects, the Government of Pakistan (GoP)
provided the company a team of experts to support the research and development
activities of the company. This team of experts worked on five projects which were
successfully completed and have long term benefits to the company. It was worked out
that had the company hired such team of experts, it would have cost them Rs. 7.5
million.
On the recommendation of the research and development team, the company acquired a
patent for manufacturing rights at a cost of Rs. 5.89 million. The patent was acquired on
October 01, 2005, and has an economic life of 10 years.
Required:
How the above items relating to research and development activities would be reported
on the companys financial statements. Show all necessary disclosures including the
accounting policy. Assume that long term benefits mean 10 years on the average.

(12)

(3)
Q.3

RTF Sugar Mills Ltd. has been incurring losses since last many years. The statutory
audit of the company since 2004 has not yet been finalized. You have recently been
appointed as Chief Accountant of the company and have been assigned the
responsibility of finalizing the accounts for the years 2004, 2005 and 2006. As a first
step, you have reviewed the draft accounts for the year 2004 which were prepared on
August 1, 2004. You have also ascertained the following information about certain
subsequent events that may have an impact on the financial statements for the year
ended June 30, 2004:
(a)

The Board of directors approved sale of a loss making segment of the company in
December 2004, which was sold in April 2005 at a profit of Rs. 123 million. The
profit has been computed on the basis of book value of assets as of April 2005;

(b)

Benefits to employees under the gratuity scheme were reduced by the

management on March 30, 2005 with retrospective effect which has resulted in 50
percent decrease in the liability for gratuity (projected benefit obligation). The
original liability as of June 30, 2004 was estimated at Rs. 73 million;

(c)

The government has increased the income tax rate by 5 percent in July 2006,
which if taken into account, will result in an increase in deferred tax liability by
Rs. 135 million;

(d)

The company has issued a guarantee of Rs. 350 million against debts of one of its
associates on September 15, 2004;

(e)

A long-term financing arrangement was rescheduled on March 31, 2005. The

current maturity of the said arrangement was Rs. 180 million as of June 30, 2004
out of which Rs. 30 million were paid before such rescheduling. After
rescheduling the first payment becomes due in 2011;

(f)

Certain inventories of a specific service line could not be sold till February 2006
when these were disposed off at a loss of Rs. 83 million. No other evidence is
available regarding their net realizable value.

Required:
Consider each of the above event separately and explain briefly whether it:

Q.4

needs to be accounted for;

needs to be disclosed; or
does not effect the financial statements for the year 2004.

XLS Limited is a listed company and engaged in the assembling of electrical

appliances. During the year, the company changed its accounting policies in respect of
the following:
1.

2.

It has started to capitalize the borrowing costs directly attributable to the

qualifying assets. Upto June 30, 2005, the company recognized the borrowing
costs as an expense in the year in which they were incurred.
Provision for bad debts shall be provided at 3% instead of 2%.

The management feels that change of above policies will reflect a fair view of the
companys financial position to the shareholders.

(14)

(4)
Extracts from the financial statements of the company before incorporation of above
changes are given below:
2006
2005
Rs. in million
Gross profit
486
410
General and administration expenses
(231)
(225)
Selling and distribution expense
(110)
(98)
Financial charges
(32)
(31)
Profit before tax
113
56
Income taxes
(30)
(14)
Profit after tax
83
42
Retained earnings opening
452
410
Retained earnings closing
535
452
Following additional information is also available:
1.

Details of borrowing costs expensed out in current and prior periods which are
directly attributable to the qualifying assets are as follows:
Year
June 30, 2006
June 30, 2005
June 30, 2004 and before

2.

Amount
Rs. in million
16
12
8

The change in the rate of provision for bad debts has been made on the
recommendation of Recovery Department. The company has not yet made the
provision as of June 30, 2006. The details of accounts receivables are as follows:
Accounts receivable as at June 30, 2005
Accounts receivable as at June 30, 2006

Rs. 100 million

Rs. 123 million

Provision as at June 30, 2004 was Rs. 1.6 million.

3.

Income tax rate was 25% for both years.

Required:
(a) Present the above changes in the Profit and Loss Account and Statement of
Changes in Equity in accordance with the requirements of IAS-8 Accounting
Policies, Changes in Accounting Estimates and Errors.
(b) Draft an accounting policy about the borrowing costs for disclosure in the
financial statements.
Q.5

DOC Industries is engaged in manufacturing and export of cotton and linen bed sheets
to USA and Middle East. The company operates an approved funded gratuity scheme
for all eligible employees. The last actuarial valuation of the scheme was carried out
using the Projected Unit Credit Method. Following are the extracts of relevant
information from the actuarial report for valuation carried out in line with IAS 19, as
of June 30, 2006:
Rupees
Present value of projected benefit obligations June 30, 2005
1,930,650
Current service cost for the year
350,200
Interest cost for the year
135,650
Gratuity paid by the fund to the retiring employees
165,200
Actuarial loss on obligations, during the year
650,300
Expected return on plan assets
275,350
Contribution paid by the company to the fund during the year
425,000
Fair value of plan assets June 30, 2005
1,420,350
Actuarial gain on plan assets during the year
135,000

(17)

fb.com/gcaofficial
(5)
Following information is also available:
1. Additional gratuity amounting to Rs. 55,500 was paid to a retiring employee as
ex-gratia by the company which is included in both, the payments made by the
company to the fund, as well as, the payments made by the fund to the retiring
employees;
2. During the year, the management introduced a change in the plan, which has
resulted in increase in benefits. Past service cost, amounting to Rs. 273,000 against
such plan changes has not been separately disclosed in the actuarial report. When
the actuary was consulted again in this respect, he responded that such effect is
included in the actuarial loss for the year. He further informed that 70% of such
benefit is vested. It is expected that non-vested benefit will become vested over a
period of 4 years.
3. Average remaining service life of the employees was 23 years, as of June 30, 2005.
4. Discount rate of 10%, rate of return on plan assets of 10% and expected rate of
increase of salaries of 12% have been used for valuation purposes.
5. Net unrecognized actuarial loss, as at June 30, 2005 was Rs. 350,450.
6. 40% of cost of gratuity is chargeable to administrative expenses and 60% to cost of
goods sold.
7. The company follows the corridor approach for accounting of net actuarial gains
and losses.
Required:
Prepare all necessary disclosures to be incorporated in the financial statements including
accounting policy, in respect of the defined benefit gratuity scheme. Show all necessary
workings.
Q.6

(20)

TMP Trust Fund is an open ended mutual fund, listed on Lahore Stock Exchange. Units
are offered for public subscription on a continuous basis and can be redeemed by
surrendering them to the fund.
Following financial information is available for the year ended June 30, 2006:
1.

2.

3.
4.

5.
6.
7.

8.
9.

During the year, the fund received amounts of Rs. 210,290,408 (2005: Rs.
152,870,421) against issuance of 1,546,253 units (2005: 1,377,211 units). The
issued units include bonus units issued to unit holders.
1,434,644 units (2005: 1,213,560 units) were redeemed during the year against
which an amount of Rs. 194,394,262 (2005: Rs. 133,491,600) was paid / payable
by the fund.
Undistributed income brought forward from previous year is Rs. 5,638,924.
It is the policy of the fund to recognize the distribution of cash dividend and
bonus in the year in which it is declared. The fund has announced at the year end,
bonus units of 15% (2005: 10%) and 10% cash dividend (2005: Nil).
No cash dividend or bonus has been distributed prior to June 30, 2005.
Net income of the fund is Rs. 15,532,600 (2005: Rs. 8,511,744).
The element of income and capital gains included in prices of units sold less those
in units redeemed representing accrued income and realized capital gains,
amounted to Rs. 1,536,360 (2005: Rs. 965,458). This amount was transferred to
profit and loss account.
The value of net assets at the beginning of the year was Rs. 39,674,912.
550,215 units of Rs. 100 each are outstanding as at June 30, 2006.

Required:
Prepare the following statements of TMP Trust Fund for the year ended June 30, 2006
and 2005:
(i)
Distribution Statement
(ii)
Statement of movement in unit holders funds.
(THE END)

(15)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

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Final Examinations

Summer 2006

June 06, 2006

ADVANCED ACCOUNTING & FINANCIAL REPORTING

Q.1

(MARKS 100)
(3 hours)

Millennium Enterprises Limited (MEL) has 80% shareholding in Century Petroleum

Limited (CPL) which it had acquired on April 1, 2003. On April 1, 2005, it acquired
whole of A Limiteds equal (50%) share in the joint venture A Limited had with B
Limited in a pipeline project. The operations of the project are jointly controlled.
The purchase was made at book value.
The balance sheets of the above entities as at March 31, 2006 are given hereunder:
MEL
Non-current assets
Property, plant and equipment
Investment
Current assets
Inventory
Accounts receivable
Bank
Total assets
Equity and liabilities
Capital and reserves
Ordinary shares of Rs.10 each
Reserves
Accumulated profits
Current liabilities
Accounts payable
Taxation
Overdraft
Total equity and liabilities

Joint
Venture
Rupees in thousand
CPL

416,250
160,000
576,250

153,600
12,800
166,400

63,000
--63,000

41,440
35,150
6,660
83,250
659,500

20,480
12,160
-32,640
199,040

21,000
11,200
9,800
42,000
105,000

185,000

64,000

35,000

405,680
590,680

76,800
140,800

52,500
87,500

48,100
20,720
-68,820
659,500

43,200
11,200
3,840
58,240
199,040

14,000
3,500
-17,500
105,000

The following information is relevant:

(i)

CPL was acquired at a cost of Rs.120 million. Its accumulated profits at that
date were Rs. 28 million.
At the date of acquisition, i.e. April 1, 2003, CPL owned an item of plant that
had a fair value of Rs.20.0 million in excess of its book value. The plant had a
remaining useful life of five years. All plant and equipment is depreciated on
the straight-line basis.

(2)

(ii)

(iii)
(iv)
(v)

The fair value of CPLs remaining net assets and all of the Joint Ventures net
assets were equal to their book values at the relevant dates of acquisition.
On October 1, 2005 MEL purchased some equipment from the Joint Venture
for a consideration of Rs.7.0 million. It was sold at a mark up of 25% on cost.
The equipment is in use by MEL and is included in property plant and
equipment and being depreciated over a four-year life.
During the year ended March 31, 2006, the books of account of the Joint
Venture showed a profit of Rs.15.0 million.
The share of profit for the year in CPL and the Joint Venture has not yet been
recorded in the books of MEL.
All inter company current account balances were settled prior to the year-end.

Required:
Prepare the consolidated balance sheet of MEL as at March 31, 2006.

Q.2

(20)

Mughals Limited, a firm of civil contractors, specialize in construction of highways.

They entered into a contract with the National Highway Authority (NHA) in the
year 2003 for construction of National Highway covering 1500 kilometers and
having 6 lanes. However, it was agreed that work shall commence on February 1,
2004. The agreed price was Rs.3.6 billion. The company closes its accounts on May
31.
On February 1, 2005 the NHA requested the company for extending the highway by
adding two further lanes. NHA was of the view that the price of this extension shall
be in the same proportion i.e. Rs. 1.2 billion, as there has been no significant
increase in costs since the signing of the contract in 2003. However Mughals
Limited refused to accept this price. Their board of directors was of the view that
their company was in a position to sign another contract if they forego the offer by
NHA. After extensive negotiations, the price of the extended work was agreed at Rs.
1.6 billion. It was also agreed that the work on additional lanes will be carried out
simultaneously and will be completed on November 30, 2006.
The following data is available in respect of the above contract:
As at May 31
2004
2005
2006
Original Contract
Rupees in million
Progressive billing to date
800
2,500
3,400
Amount received to date
600
2,400
3,240
Mobilization advance (included in the above)
180
180
180
Actual cost to date
600
2,000
2,680
Value of work certified by NHA
300
2,000
3,300
Profit (latest estimate)
600
900
720
Additional Work
Progressive billing to date
Amount received to date
Mobilization advance (included in the above)
Actual cost to date
Value of work certified by NHA
Profit (latest estimate)

-------

200
80
80
100
-700

1,100
800
80
580
1,000
600

(3)
There is a clause in the agreement that NHA will pay an early completion bonus of
Rs.5.0 million per week. However in case of delay it will levy a penalty of Rs.10.0
million for each week the completion is delayed. In case of the original agreement
the company has always been confident that the contract will be completed two
weeks ahead of time and was actually completed accordingly. In case of additional
work the chances of delay at year-end were considered as:
Delay of two weeks
Delay of three weeks
Delay of four weeks

2005
Possible
Remote
--

2006
Probable
Possible
Remote

Required:
(a)
Discuss whether the contract for additional work shall be treated as a
separate contract or a part of the original contract, according to IAS-11
(Construction Contracts)
(04)
(b)

Q.3

Prepare extracts of the Income Statement and Balance Sheet of Mughals

Limited for the years to May 31, 2005 and 2006 in respect of the above
contract along with necessary disclosures regarding treatment of bonus and
penalty as discussed above.
(16)

Following are some of the balances which have been extracted from the trial
balance of EZ General Insurance Company Limited for the year ended December
31, 2005:

Premium receivable
Accrued income
Prepayments
Premium received in advance
Amounts due to other insurers/re-insurers
Accrued expenses
Other creditors and accruals
Retained earnings
Other revenue reserves
Premiums written during the year
Unearned premium reserve opening
Reinsurance expense (after adjusting prepayments)
Claims paid
Outstanding claims opening
Reinsurance recoveries against claims (after all adjustments)
Commissions paid
Unpaid commissions opening
Commissions from re-insurers
Management expenses
General and administration expenses
Investment income
Rental income
Other income

Rs. in 000
Dr.
Cr.
17,000
300
2,400
3,523
3,891
765
7,631
4,630
8,300
74,471
27,700
27,058
43,706
4,354
14,751
7,549
4,360
11,919
6,986
6,678
6,521
124
2,891

(4)
Further breakdown of some of the above figures is as follows:

Premiums written during the year

Unearned premium reserve opening
Reinsurance expense (after adjusting prepayments)
Claims paid
Outstanding claims opening
Reinsurance recoveries against claims
(after all adjustments)
Commissions paid
Unpaid commissions opening
Commissions from re-insurers

Fire
27,386
11,200
11,567
18,567
1,254
7,894
2,854
1,750
5,405

Rs. in 000
Marine Motor Misc.
15,645 21,568 9,872
1,200 10,500 4,800
6,781
4,587 4,123
4,567 16,897 3,675
875
1,567
658
1,852
1,857
510
2,975

3,423
1,785
1,700
1,587

1,582
1,053
400
1,952

Following additional information is available:

(i)
The unearned premium reserve as at December 31, 2005 calculated in
accordance with the rules shall be as under:
Rs. in 000
Fire
12,300
Marine
890
Motor
11,300
Miscellaneous
4,650
(ii)

Provision for unpaid claims and claims incurred but not reported at the date
of balance sheet are estimated as under:
Rs. in 000
Fire
1,680
Marine
610
Motor
1,800
Miscellaneous
450

(iii)

Commission due to agents, as on December 31, 2005 was as follows:

Rs. in 000
Fire
1,560
Marine
820
Motor
1,850
Miscellaneous
580

(iv)

Management expenses represent those expenses which are attributable to

underwriting business. These are to be allocated to various classes of
business on the basis of premium earned during the year.

(v)

Expenses not allocable to underwriting business are charged as general and

administrative expense.

(vi)

For the purpose of tax provision, rate of tax is to be assumed at 35%.

Required:
Draw up the Profit and Loss Account of EZ General Insurance Company Limited
for the year 2005. Notes to the accounts are not required, however appropriate
workings should be prepared.

(14)

(5)
Q.4

Durable Electronics Limited is a manufacturing concern specializing in the

manufacturing and marketing of home appliances. The trading results for the year
ended December 31, 2005 are as follows:

Profit before taxation

Income Tax
Profit after taxation

Rupees in million
60
12
48

The details of movement in the share capital of the company during the year are as
follows:
-

As on January 1, 2005, 10 million ordinary shares of Rs. 10 each were

outstanding having a market value of Rs. 350 million.

The board of directors of the company announced an issue of right share in the
proportion of 1 for 5 at Rs. 40 per share. The entitlement date of right shares was
April 30, 2005. The market price of the shares immediately before the
entitlement date was Rs. 40 per share.

The company announced 20% bonus shares for its shareholders on June 1, 2005.
The shareholders were informed that the share transfer books of the company
will remain closed from July 1 to July 10, both days inclusive. Transfers
received up to June 30, 2005 will be considered in time for entitlement of bonus
shares. However, right shares issued in the month of April 2005 will not be
entitled for the bonus shares. The ex-bonus market value per share was Rs. 32.

A further right issue was made in the proportion of 1 for 4 on October 31, 2005
at a premium of Rs. 15 per share. The market value of the shares before the right
entitlement, was Rs. 33 per share.

Required:
Calculate the basic and diluted earnings per share for the year ended December 31,
2005 in accordance with IAS 33 (Earnings per share).

Q.5

You are the Chief Accountant of Rubab Enterprises Limited which is engaged in
manufacturing iron and steel products. The company was set up in August 1998 and
started commercial production in November 1998. The accounting year-end of the
company is June 30.
While analyzing the companys books of accounts for the year ended June 30, 2005,
you came across the following balances:

Provision for taxation (Gross)

Deferred tax liability

Rs.
2,410,000
4,700,000

The assessments of the past four years although completed by the taxation officer
but are still open due to appeals. The provision for taxation consists of the
following:

(14)

(6)
Accounting
year
2002
2003
2004
2005

Accounting
Income
1,000,000
1,400,000
1,700,000
2,200,000

Assessed
Income
1,800,000
1,900,000
2,100,000
-

Tax Rate
45%
40%
40%
35%

Provision for
Taxation
810,000
760,000
840,000
2,410,000

The deferred taxation is on account of the following:

Dr / (Cr)
Depreciation
Leasing
Penalties and fines paid by the company
Provisions for gratuity
Provisions for bad debt

(4,000,000)
(2,000,000)
100,000
1,000 ,000
200,000
( 4,700,000)

The following information is also available:

(a)

The accounting depreciation for the year ended June 30, 2005 amounted to
Rs.20.50 million whereas tax depreciation as calculated by one of your subordinates amounted to Rs. 15.50 million.

(b)

The company operates an unfunded gratuity scheme. Gratuity of Rs.100,000

each was paid to two of the employees who had resigned during the year. The
total provision required at year-end amounted to Rs. 3.5 million.

(c)

Leased assets consisted of two machines only. In the accounting records of

the company; one of the lease has been treated as operating lease. The
machine under financial lease arrangement was sold during the year at a
profit of Rs.400,000. The lease was cancelled with the consent of the leasing
company.

(d)

The company paid Rs. 1,000,000 on account of certain expenses. Your tax
advisor has informed you that only 60% of this will be allowed for tax
purposes and that too, over a period of five years (including the current year).

(e)

Receivables of Rs.40,000 which were written off in the year 2002 were
recovered during the year. The same had not been allowed by the tax
authorities in the year in which they were written off.

During the year, the following decisions were made by various tax appellate
authorities:
(a)

While assessing the income for the year ended June 30, 2002 the value of
closing stock had been increased by the taxation authorities by Rs. 4.0 million.
Consequential effect on opening stock of next year had however been allowed.
During the current year, add-back was declared invalid by the appellate
authority.

(7)
(b)

An expense incurred in the year 2003, amounting to Rs.0.5 million, which was
disallowed then, was declared as allowable over a period of four years.
Although the company had filed an appeal, it was of the view that the same
would not be allowed, hence it has ignored it for the purpose of calculating
deferred tax till last year.

Required:
(a) Among the transactions discussed above, identify those which give rise to
permanent timing differences.
(b)

Calculate the following:

i). Provision for taxation current
ii). Provision for taxation prior years
iii). Deferred tax current
iv). Deferred tax prior years
v). Deferred tax liability

Q.6

(02)

(18)

XYZ Limited is a subsidiary of MAG International Limited. It has been listed on the
Karachi Stock Exchange for the past forty years.
Required:

Q.7

Draft a Statement of Compliance for inclusion in the financial statements of XYZ

Limited.

(06)

Explain the concept of Embedded Derivative as discussed in International

Accounting Standards 39 (Financial Instrument: Recognition and Measurement).

(06)

(THE END)