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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 and Liabilities Equity Ordinary share capital (Rs. 10 each) Retained earnings Long term loans Current liabilities 50 78 75 25 228 15 18 12 18 63 22 100 50 28

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: Fair value Book value Rs. in million 15 12 12 10

Equipment Inventory

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

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 (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: 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

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

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)

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