Financial Accounting and Reporting-II

Suggested Solution
Certificate in Accounting and Finance – Spring 2024

A.1 Heavenly Limited

General Journal
Debit Credit
Description
----- Rs. in '000 -----
(i) Other investments 90×180 16,200
Investment in associate 16,200

Investment in associate 90×50×30% 1,350

Dividend income 1,350

Share of associate’s profit (P&L) 24,000×20%×8÷12 3,200

Investment in associate 3,200

Other investments 24,300(90×270)–16,200 8,100

Fair value adj. (P&L) 8,100

(ii) Equity (Capital and Share Premium) 1,300×40 52,000

Financial liability 52,000

Financial liability 20×40 800

Transaction cost (P&L) 800

Interest expense (P&L) (52,000–800)×16%×9÷12 6,144

Financial liability 6,144

A.2 (a) Auditors' Remuneration 2023 2022

Nida & Co. Kapil & Co. Ali & Co.
--------------------- Rs. in '000 ---------------------
Fee for statutory audit 25,000 25,000 18,500
Out of pocket expenses 2,000 1,800 1,500
Fee for taxation services - 10,000 -
27,000 36,800 20,000

(b) Shariah complaint companies and the companies listed on Islamic index shall disclose:
(i) Loans/advances obtained as per Islamic mode;
(ii) Shariah compliant bank deposits/bank balances;
(iii) Profit earned from shariah compliant bank deposits/bank balances;
(iv) Revenue earned from a shariah compliant business segment;
(v) Gain/loss or dividend earned from shariah compliant investments;
(vi) Exchange gain earned from actual currency;
(vii) Mark up paid on Islamic mode of financing;
(viii) Relationship with shariah compliant banks; and
(ix) Profits earned or interest paid on any conventional loan or advance.

Page 1 of 6
 Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Spring 2024

A.3 A contract is a lease if the contract conveys the right to control the use of an identified asset
for a period of time in exchange for consideration.

In light of this lease definition, the evaluation of whether each of the additional terms would
affect the classification of the contract as lease is as follows:

Term (i)
Inclusion of this term would not affect the classification of the contract as a lease as AL will
be paying consideration for the use of asset though the consideration will be variable.

Term (ii)
Inclusion of this term would exclude the contract as lease as it would restrict the lessee’s right
to direct how and for what purpose the machine can be used as machine would also be used
by others as well.

Term (iii)
Inclusion of this term would not affect the classification of contract as lease as the AL will have
the right to use the asset for a period of time though variable.

Term (iv)
Inclusion of this term may exclude the contract as lease depending upon whether the
substitution right of CL is substantial.

A supplier’s right to substitute an asset is substantive only if both of the following conditions
exist:
 Supplier has practical ability to substitute; and
 Supplier would benefit economically if it substituted the asset (i.e. benefits exceed
expected costs).

A.4 Irresistible Limited

Notes to the financial statements for the year ended 31 December 2023

Product
1. Intangible assets: Web site
development
------ Rs. in million ------
Opening carrying value - -
Addition through development (W-1) 114.0 (W-2) 24.0
Amortization (1.6) (3.0)
(114÷6÷12) (24÷4×6÷12)
Closing carrying value 112.4 21.0

Cost 114.0 24.0

Accumulated amortization (1.6) (3.0)
Closing carrying value 112.4 21.0

Basis of measurement Cost Cost

Useful life (in years) 6 4
Amortization method Straight line Straight line

Page 2 of 6
 Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Spring 2024

W-1: Product development Rs. in million

Staff salary 60×6÷10 36.0
Depreciation on equipment 120÷5×6÷12 12.0
Consumables 70×6÷10 42.0
Consultant fee 28×6÷7 24.0
114.0

W-2: Web site cost

Creating and uploading new content on the web site 13.0
Developing code and installing developed applications on the webserver 8.0
Registration of domain names 3.0
24.0

A.5 Exquisite Limited

General journal
Debit Credit
Date Description
---- Rs. in '000 ----
(i) 31-Oct-23 Financial assets – Alpha shares 600
Revenue 5×120 600

30-Nov-23 Financial assets – Alpha shares 550

Revenue 5×110 550

31-Dec-23 Fair value adjustment (P&L) 70

Financial asset – Alpha shares 10×108–(600+550) 70

(ii) 1-Nov-23 Consideration paid to customer / Adv. to customer 2,000

Cash / Bank 2,000

15-Dec-23 Receivable – Beta 6,000

Consideration paid to customer /
Adv. to customer 2×6÷20 600
Revenue Bal. fig. 5,400

31-Dec-23 Cash / Bank 6,000

Receivable – Beta 6,000

A.6 (i) (b) Rs. 3.21 million

(ii) (c) consolidated financial statements only
(iii) (b) Self-review threat
(iv) (d) None of the two
(v) (d) Nil
(vi) (b) Capital work in progress
(vii) (d) Either IAS 16 or IAS 38 depending on which element is significant
(viii) (b) An item of furniture costing Rs. 30,000 leased for 24 months
(c) A new motor vehicle with a cost of Rs. 1,500,000 leased for 12 months
(ix) (a) The currency that mainly influences sales prices for goods and of the country whose
competitive forces and regulations mainly determine the sales prices of its goods
(d) The currency that mainly influences labour, material and other costs

Page 3 of 6
 Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Spring 2024

A.7 (a) Handsome Limited

Notes to the financial statements for the year ended 31 December 2023
Taxation: Rs. in million
Current tax:
 For the year (W-1) 30.4
 Prior year (32+16)×30% 14.4
44.8
Deferred tax 54.3(b)+12 66.3
111.1

Reconciliation between tax expense and accounting profit

Profit before tax 466.0
Tax @ 30% 139.8
Effect of exempt interest income 45(60–15)×30% (13.5)
Effect of reduced rate on dividend 28×20% (5.6)
Effect of disallowed fine 24×30% 7.2
Effect of tax loss on which deferred tax was not recognized
104(284–180)×30% (31.2)
Prior year tax 14.4
111.1

W-1: Current tax Rs. in million

Profit before tax 466.0
Extra tax depreciation (116.0)
Impairment loss 50.0
Extra tax WDV of the disposed machine (35.0)
Exempt interest income (60.0)
NRV adjustment on stores and spares 19.0
Dividend income at different rate (28.0)
Fines disallowed 24.0
Restructuring cost allowed over 5 years 70.0
Amortisation of restructuring cost 70÷5 (14.0)
Taxable profit 376.0
Adjustment of tax loss (284.0)
92.0
Current tax @ 30% 27.6
Tax on dividend income @10% 28×10% 2.8
30.4

(b) Deferred tax liability / (assets) as at 31 December 2023:

Carrying DTL /(A)
Tax base Difference
value @ 30%
------------------ Rs. in million ------------------
Property, plant & equipment 90.0 (151) 241.0 72.3
[140(42/30%)–50] (0–116–35)
Interest receivable 15.0 - 15.0 4.5
Stores and spares 180.0 199.0 (19.0) (5.7)
Restructuring cost - 56.0 (56.0) (16.8)
(70–14)
54.3

Page 4 of 6
 Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Spring 2024

A.8 Winsome Limited

Consolidated statement of financial position
As on 31 December 2023
Rs. in million
Property, plant & equipment 1,900+900+58(646(W-2))18(W-2) 2,840
Goodwill 32032(W-3) 288
Investment in associate (W-5) 301
Other investments 2,0001,148(288+200+660)290+48 610
Other assets 690+70035 1,355
5,394

Share capital 2,500

Consolidated retained earnings (W-3) 993
Non-controlling interest (W-4) 416
Liabilities 1,270+220+30(W-3)35 1,485
5,394

W-1: Fair value of NCI on acquisition of WL (Goodwill) Rs. in million

Cash consideration 288
Deferred consideration 288×1.22 200
Land at fair value 660
1,148
Fair value of NCI (Bal.) 368
Fair value of net assets on acquisition 1,132+64 (1,196)
Goodwill 320

W-2: Net assets of SL at reporting date

Share capital 750
Share premium 120
Retained earnings 510
Fair value adjustment for equipment 646(64÷8×9÷12) 58
URP on disposal of machine 20×4.5÷5 (18)
1,420

W-3: Consolidated retained earnings

WL 820
Post-acquisition of SL (1,4201,196)×75% 168
Impairment of goodwill 32(320×10%)×75% (24)
Fair value adjustment 48
Unwinding of interest on deferred consideration 200×20%×9÷12 (30)
Share in post - acquisition CL (W-5) 33
Impairment of investment in CL (W-5) (22)
993

W-4: Non-controlling interest

At acquisition (W-1) 368
Post-acquisition of SL (1,4201,196)×25% 56
Impairment of goodwill 32(320×10%)×25% (8)
416

Page 5 of 6
 Financial Accounting and Reporting-II
Suggested Solution
Certificate in Accounting and Finance – Spring 2024

W-5: Investment in associate Rs. in million

At cost 290
Share of post-acquisition profits:
Share of total comprehensive income for 2022 80×30%×6÷12 12
Share of total comprehensive income for 2023 130×30% 39
Final dividend for 2022 500×12%×30% (18)
33
Impairment (22)
301

A.9 (i) As there is no present obligation to renew the patent, the renewal cost should not be
provided for under IAS 37. The cost of the intangible asset should be restricted to the
initial Rs. 96 million paid on acquisition. The useful life of license should be restricted to
the original five years as the renewal cost of Rs. 35 million is significant which should be
considered separate intangible asset at the time of renewal.

(ii) No provision should be made under IAS 37 for engine replacement as there is no present
obligation of GL to replace the engines. Imposition of ban of diesel engines is an
indication that such vehicles have impaired. In the current condition, the vehicles can
only be sold but cannot be used. So the fair value less cost to sell of the vehicles should
be assessed at year end and the impairment loss should be recognized as at
31 December 2023.

(iii) IAS 37 deals with the provisions, which are liabilities of uncertain timing or amount.
NRV adjustment result in adjustment to the carrying amounts of the asset (i.e. inventory)
and is not addressed in IAS 37. Since the estimated selling price is lower than cost of the
inventory item so NRV adjustment in respect of inventory at year end should be made.
The change in estimated selling price during 2024 should be considered an adjusting
event and the adjustment should be based on Rs. 65 million (50+15). So, an adjustment
of Rs. 35 million should be made which should be charged to profit or loss and deducted
from carrying amount of inventory.

(iv) Provision should be made under IAS 37 as it is a liability of uncertain timing. GL has a
present obligation as a result of a past event i.e. dismissal of employees. Presenting new
evidence during February 2024 should be considered as adjusting event and the provision
should be based on correspondence of 29 February 2024. It is probable that an outflow
of resources would be required as the court may order payment of compensation. A
reliable estimate can be made which has been estimated by the legal advisor as
Rs. 3 million for each employee. The provision should include the further 3 claims as the
obligating event i.e., dismissal had occurred in 2023. GL should make a provision for
Rs. 39 million (13×3).

(The End)

Page 6 of 6