Final Examination

Module E
2 December 2014
3 hours 100 marks
Additional reading time 15 minutes

The Institute of
Chartered Accountants
of Pakistan

Advanced Accounting and Financial Reporting

Q.1

Parent Company Limited (PCL) is a listed company and owns 80% and 75% equity in LS
Limited and FS Limited respectively. FS is registered and operates in a foreign country and
its functional currency is CU. Summarised statements of financial position as at 30 June
2014 and other information relating to the group companies are as under:
PCL

LS

Rs. in million
Assets
Property, plant and equipment
Investments in LS and FS
Current assets
Equity and liabilities
Share capital (Rs. 10/CU 10 each)
Retained earnings
Current liabilities

Profit after tax for the year ended 30 June 2014

Final dividend for the year ended 30 June 2013:

Cash
(paid on 1 January 2014)

Bonus shares (issued on 15 December 2013)

FS
CU in
million

4,200
6,500
3,500
14,200

3,500
4,000
7,500

250

6,000
3,500
4,700
14,200

1,800
900
4,800
7,500

120
280
300
700

700

400

30

12%
10%

20%

15%
-

450
700

The following information is also available:

(i)

At the acquisition date

No. of
Fair value of
shares
Cost
Retained
Company
*
acquired
earnings
NCI
----------------------- in million ----------------------LS
1-Jan-2012
120
Rs. 2,000
Rs. 250
Rs. 540
FS
1-Jul-2012
9
CU 300
CU 160
CU 90
*
NCI stands for Non controlling interest
Investment
date

(ii)

On the date of acquisition, fair value of the net assets of LS and FS were equal to their
book value. However, a contingent liability of Rs. 25 million was disclosed in the
financial statements of LS. PCL's legal adviser had at that time estimated that LS
would be liable to pay Rs. 6 million to settle the claim and it was finally settled at the
same amount in May 2014.
(iii) No further shares have been issued by LS and FS since their acquisitions, except for
the bonus issue as mentioned above.
(iv) An impairment test carried out on 30 June 2014 revealed that goodwill of FS is
impaired by CU 10 million.
(v) PCL values non-controlling interest on the date of acquisition at fair value.
(vi) The exchange rates in terms of Rs. per CU, were as follows:
1-Jul-2012

30-Jun-2013

1-Jan-2014

30-Jun-2014

Rs. 15.00

Rs. 16.80

Rs. 16.90

Rs. 17.30

Average for
2013-14
Rs. 17.00

Advanced Accounting and Financial Reporting

Page 2 of 5

(vii) The break-up of exchange reserve in the consolidated financial statements for the year
ended 30 June 2013 is as follows:
Relating to goodwill
Relating to translation of foreign operations

Rs. 148.50 million

Rs. 463.05 million

Required:
In accordance with the requirements of the International Financial Reporting Standards,
prepare:
(a) Consolidated statement of financial position as at 30 June 2014; and
(17)
(b) Consolidated statement of other comprehensive income for the year ended 30 June
2014. (Ignore taxation)
(08)
Q.2

Sky Link Limited (SLL) was incorporated as a public limited company on 1 July 2013. On 1
August 2013, SLL acquired an operating license from the telecommunication authority for a
mobile phone network for Rs. 50 million for twenty years. For obtaining the license, SLL
paid a professional fee of Rs. 6 million and incurred other indirect cost amounting to Rs. 4
million. SLLs financial year ends on 30 June each year.
SLL signed an agreement with a media house for carrying out a marketing campaign at a
cost of Rs. 25 million for the period up to 30 September 2014. The media house billed Rs. 20
million for the activities carried out upto 30 June 2014.
The network was completed on 31 December 2013 at a cost of Rs. 1,350 million. SLL
commenced commercial operations on 1 January 2014 by announcing a normal call rate of
Rs. 2.00 per minute and introducing a package comprising of free mobile phone and 1200
free minutes per month.
The package requires payment of Rs. 3,000 per month payable in advance under a 12 month
contract. On expiry of the contract, ownership of the mobile phone would be transferred to
the subscriber. Subsequently, the subscriber would be allowed 1000 minutes for Rs. 1,250
per month. In either case, calls in addition to the free minutes are chargeable at Rs. 1.50 per
minute.
The cost of a mobile phone is Rs. 12,000 and such mobile phone is usually available in the
market at Rs. 15,000.
According to the business plan, SLL expected to sign 80,000 subscribers and earn net profit
of Rs. 30 million by the end of 30 June 2014. However, only 50,000 subscribers were signed
upto 30 June 2014. Average unexpired term of 50,000 contracts is 8 months. A further
20,000 subscribers were signed in July and August 2014. During the period upto 30 June
2014, SLL incurred a loss of Rs. 15 million. However, during the months of July and
August 2014 it earned a marginal profit of Rs. 5 million.
In a recent development, a foreign company intending to enter into Pakistan telecom market
has offered SLL a sum equivalent to Rs. 45 million for the operating license and to buy net
assets at their carrying value.
SLLs financing cost is 12% per annum.
Required:
In accordance with the requirements of the International Financial Reporting Standards,
discuss the accounting treatment for the year ended 30 June 2014 in respect of the following:
(a) Initial recognition and subsequent measurement of operating license
(b) Marketing campaign cost
(c) Revenue recognition
(d) Amount of revenue to be recognised in respect of the annual package, for the period
ended 30 June 2014.

(09)
(01)
(07)
(03)

Advanced Accounting and Financial Reporting

Q.3

Page 3 of 5

Quality Works Limited (QWL) undertakes construction contracts. The following

information pertains to one of its contracts under progress as at 30 June 2014.
(i)

Price of the contract is agreed at Rs. 3,000 million and cost to complete the contract is
estimated at Rs. 2,400 million. Construction work was started on 1 July 2012 and is
planned to complete on 31 December 2014. Progress of the contract is summarised as
under:

Accumulated actual costs

Revised estimated cost to complete the contract
Unpaid gross bills as at 30 June 2014
Work certified and billed
(ii)
(iii)
(iv)

(v)

As at
As at
30 June 2014 30 June 2013
Rs. in million
2,560
1,500
2,900
2,600
100
75
80%

45%

QWL recognises contract revenue and cost under percentage of completion method.
Actual cost includes cost of preparation of quotation amounting to Rs. 7 million.
Payment terms as agreed with the client are as under:

Payment of 10% of contract price on signing of the contract, adjustable from the
monthly progress billings.

Deduction of 5% retention money from the monthly progress billings. The
amount is refundable at the end of the warranty period i.e. one year after
completion of the contract.
QWL is required to rectify defects, if any, during the warranty period. Cost of
rectification is estimated at 5% of the contract price.

Required:
In light of the International Financial Reporting Standards, prepare relevant extracts from
the following:
(a) Statement of financial position as at 30 June 2014.
(08)
(b) Statement of comprehensive income for the year ended 30 June 2014.
(07)
(Show comparative figures and ignore taxation)
Q.4

Sigma Limited (SL) operates an approved and funded gratuity plan for its management staff
who have completed the minimum qualifying period of three years service. The plan is
administered by the trustees nominated under the trust deed. Trial balance of the fund as at
30 June 2014 is as under:
Debit
Credit
Rs. in '000
Balance with bank
500
Receivable from SL
800
Investment in shares available for sale as at 1 July 2013
8,265
Defense saving certificates (DSCs), including accrued interest
14,235
Opening balance of members' fund
18,287
Amounts payable to outgoing members
150
Accrued expenses
15
Profit from DSCs
1,698
Dividend from investment available for sale
1,380
Contribution for the year
3,000
Gratuity paid/payable to outgoing members
700
Audit fee
23
Bank charges
7
24,530
24,530
The investments as shown above costed Rs. 8,450,000. The market value of these
investments as at 30 June 2014 amounted to Rs. 8,720,000.

Advanced Accounting and Financial Reporting

Page 4 of 5

Required:
For the year ended 30 June 2014, prepare the following in accordance with the requirements
of International Financial Reporting Standards.
(a)
(b)

Q.5

Statement of net assets available for benefits; and

Statement of changes in net assets available for benefits.

(05)
(04)

Opal Industries Limited (OIL) is a listed company. As at 30 June 2014 OIL has various
investments as detailed under:

Company

Investment
date

Equity
held

AL
BL
GL

1-Jul-2012
31-Dec-2011
1-Jan-2014

30%
10%
65%

At the acquisition date

Cost
Share capital
Retained
(Rs. 100 each)
earnings
--------------- Rs. in million --------------50
80
60
8
70
40
195
150
95

Information pertaining to profit and dividend of the investee companies is as follows:

Company
AL
BL
GL

Profit/(loss) for the year ended

2014
2013
----------- Rs. in million ----------30
28
(10)
14
55
50

Final cash dividend for year ended

2014

2013

20%
30%

16%
18%
15%

BL is a listed company and fair value of its shares as at 30 June 2014 was Rs. 110 per share
(2013: Rs. 160). OIL classifies investment in BL as available for sale.
AL and GL are private companies and market value of their shares is not available.
GL is the first subsidiary of OIL, since its incorporation. Following information pertains to
OIL:

Share capital (Rs. 100 each)

Profit for the year
Closing retained earnings balance
Final dividend - cash
- bonus issue

2013
2012
Rs. in million
2,875
2,500
1,260
1,100
850
465
25%
20%
15%

OILs profit for the year ended 30 June 2014 prior to taking effects of the transactions of its
investee companies was Rs. 1,450 million and it has announced a final cash dividend of
30%.
Required:
Prepare following for inclusion in the first separate financial statements of OIL for the year
ended 30 June 2014 as required by the International Financial Reporting Standards.
(a) Movement in retained earnings for inclusion in the statement of changes in equity; and
(b) Note on investments.
(Show comparative figures and ignore taxation)

(06)
(10)

Advanced Accounting and Financial Reporting

Q.6

Page 5 of 5

The following information has been extracted from the financial statements of Zeta Limited
(ZL) for the year ended 30 June 2014:
(i)

Statement of financial position:

Assets
Property, plant & equipment
Long-term receivables
Deferred tax
Inventories
Trade and other receivables
Cash and bank

2014
2013
Rs. in million
3,814 3,460
15
31
28
35
780
729
178
8

138
10

4,823

4,403

Equity and liabilities

Share capital (Rs. 10 each)
Retained earnings
Long-term borrowings
Current maturity of long term
borrowings
Trade and other payables
Tax payable
Short-term borrowings

2014
2013
Rs. in million
2,921 2,540
900
833
630
680
50
150
32
140
4,823

70
120
25
135
4,403

(ii) Profit after tax for the year amounted to Rs. 702 million. Applicable tax rate was 34%.
(iii) For the year provision in respect of doubtful debts and obsolete inventories amounted
to Rs. 14 million and Rs. 6 million respectively.
(iv) Finance expenses net of unwinding of interest for the year amounted to Rs. 110
million. There was no finance expense payable at the beginning and end of the year.
(v) Additions to fixed assets amounted to Rs. 694 million.
(vi) Long-term receivables represent present value of interest free loans to employees. The
gross value of the receivables is Rs. 20 million (2013: Rs. 40 million).
(vii) For the year ended 30 June 2014, final cash dividend of 25% (2013: Cash dividend at
10% and bonus shares at 15%) was approved.
Required:
(a) Prepare ZL's cash flow statement for the year ended 30 June 2014, using the indirect
method in accordance with the International Financial Reporting Standards.
(08)
(b) Comment on the cash flows from operating, investing and financing activities of ZL
and give suitable recommendations as regards:

Financing policies
Dividend policy
Inventory and receivable management
(THE END)

(07)