ADVANCED ACCOUNTING & FINANCIAL REPORTING

Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.1 (a) Total Profit

Total assets
liabilities for the year
--------------- Rs. in million ---------------
Given 410.0 145.0 65.0

Project specific
Revenues 76.0 76.0
Operating cost (41.0) 6.0 (47.0)
Depreciation 100÷8 (12.5) (12.5)
22.5 6.0 16.5
Financing
Issuance of convertible bonds (W-1) 105.0 76.2
Transaction cost 5×76.2÷105 (5.0) (3.6)
Interest (76.2–3.6)×16.3% 11.8 (11.8)
100.0 84.4 (11.8)

Revised amounts 532.5 235.4 69.7

W-1: Liability component of convertible bond @ 15% @ 16.3%

------- Rs. in million -------
PV of interest on 30 June 2026 15.1 14.7
PV of interest on 30 June 2028 11.4 10.9
PV of principal repayment at the end of 5 years 49.7 47.0
PV of liability component 76.2 72.6

(b) Total Total Profit for the

assets liabilities year
--------------- Rs. in million ---------------
Given 410.0 145.0 65.0

Project specific
Revenues 76.0 76.0
Operating cost (41.0) 6.0 (47.0)
Depreciation 100÷8 (12.5) (12.5)
22.5 6.0 16.5
Financing
Cash received 100.0
ROU 120÷150×[65.2+50(150–100)] 92.2
Building (120.0)
Lease liability 13×5.0188 65.2
Gain (150–120)×(150–65.2–50)÷150 7.0
Interest expense 65.2×15% 9.8 (9.8)
Payment of 1st instalment (13.0) (13.0)
Dep. on ROU 92.2÷10 (9.2) (9.2)
Reversal of dep. on building 120÷20 6.0 6.0
56.0 62.0 (6.0)
Revised amounts 488.5 213.0 75.5

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.2 AL’s Consolidated statement of profit or loss and other comprehensive income
For the year ended 31 December 2023

Rs. in million
Revenue 1,485 + 770(924×10÷12) + 616(5.5×8÷12×168) 2,871.0
Cost of sales 700 + 440(528×10÷12) + 280(2.5×8÷12×168) + 49(70×70%) (1,469.0)
Gross profit 1,402.0
Administrative expenses (W-1) (813.3)
Finance cost (W-2) (137.0)
Other income (Reversal of contingent consideration) 80.0
Net profit 531.7
Other comprehensive income:
Foreign currency translation differences (W-6) (145.3)
Total comprehensive income 386.4

W-1: Administrative expenses Rs. in million

AL 320.0
BL 156×10÷12 130.0
CL 1.8×8÷12×168 201.6
Acquisition cost of BL 15.0
Remuneration expense of share option 117–72 45.0
Amortization of intangible of CL 1.8×1÷8×8÷12×168 25.2
Impairment of goodwill:
- BL 170.7(W-3)×20% 34.1
- CL 1.293(W-5)×20%×164 42.4
813.3

W-2: Finance cost

AL 58.0
BL 72×10÷12 60.0
Extra interest on BL’s loan 47.6(408.2×14%×10÷12) – 37.5(450×10%×10÷12) 10.1
Deferred considerations:
- Unwinding of interest 251(2,693×14%×8÷12) ×164 41.2
- Re-translation gain 2,693×12(176–164) (32.3)
8.9
137.0

W-3: Goodwill - BL
Cash paid 700–15 685.0
Contingent consideration 80.0
Share options 72.0
837.0
Non-controlling interest at proportionate 951.8(W-4)×30% 285.5
Fair value of net assets (W-4) (951.8)
170.7

W-4: Fair value net assets of BL at acquisition

Carrying amount 840.0
Adjustment for inventory 70.0
Adjustment for bank loan 450 – 408.2(450×10%×2.3216+450×1.14–3) 41.8
951.8

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

W-5: Goodwill – CL F$ in '000

Cash payment 7,000
Deferred consideration 3,500×1.14–2 2,693
9,693
Non-controlling interest at fair value 2,200
Fair value of net assets:
Carrying amount (8,800)
Fair value adjustment for intangible (1,800)
(10,600)
1,293

W-6: Foreign currency translation - CL F$ in '000 Rate Rs. in million

Opening net assets 10,600 176 1,865.6
Profit for 8 months
- Given 1,200×8÷12 800
- Amortization 1,800×1÷8×8÷12 (150)
650 168 109.2
11,250 1,974.8
Closing net assets at closing rate 11,250 164 1,845.0
Loss on retranslation on net assets 129.8
Loss on retranslation of goodwill
1,293(W-5)×12(176–164) 15.5
145.3

A.3 Saucer Insurance Limited (SIL)

Notes to the Financial Statements
For the year ended 31 December 2023

Net Insurance Premium / Contribution Revenue Rs. in million

Gross premium / contribution

Regular premium / contribution individual policies

First year 5,579
Second year renewal 5,379
Subsequent year renewal 13,169

Single premium / contribution individual policies 542

Group policies with cash values 19

Group policies without cash values 3,715–19 3,696
Provision for experience refund (159)

Total gross premium / contribution 28,225

Less: Reinsurance premium / contribution ceded

On individual life first year business 41
On individual life second year business 33
On individual life renewal business 172
On group policies 606
Less: Experience refund from reinsurers (85)
Total reinsurance premium / contribution ceded 767

Net premium / contribution 27,458

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.4 (a) Masher Limited (ML)

General Journal
Debit Credit
Date Description
----- Rs. in '000 -----
15 Apr Receivable 500×400 200,000
Revenue 500×90%×400 180,000
Contract/Refund liability 500×10%×400 20,000

1 Jun Contract/Refund liability 20×400 8,000

Receivable 8,000

5 Jun Cash (500–20)×400 192,000

Receivable 192,000

15 Jul Contract/Refund liability (500×10%–20–12)×400 7,200

Revenue 7,200

1 Aug Revenue 7,500

Contract/Refund liability 7,500

15 Nov Receivable 500×400–(12×400)–1,000 194,200

Contract/Refund liability Bal. fig. 7,700
Revenue 500×375–1,000 186,500
(500×400+400×325+7,500)/(500+400)=375

(b) Impairment loss charged to profit or loss

Rs. in million
Net assets including goodwill 341.0
Goodwill allocated to other CGUs (28.0)
313.0
Unrecognised goodwill due to NCI at proportionate 36×25/75 12.0
Adjusted carrying amount 325.0
Recoverable amount (255.0)
Impairment loss 70.0
Loss allocated to goodwill but not recognised (12.0)
Loss charged to revaluation surplus (2.0)
Impairment loss charged to profit or loss 56.0

W-1: Allocation of impairment to identifiable assets

Carrying Impairment allocation Carrying
Description value Goodwill Round 1* Round 2** value
-------------------------- Rs. in million --------------------------
Goodwill 64.0 36.0 28.0
Building 77.0 2.0 - 75.0
Machinery 52.0 5.1 2.0 44.9
Equipment 67.0 6.6 2.5 57.9
Investment property 28.0 2.8 1.0 24.2
Pension assets 15.0 - - 15.0
Inventory at NRV 38.0 - - 38.0
Carrying value 341.0 36.0 16.5 5.5 283.0
* Allocation of 22(58–36) in proportion of carrying amount. Loss on building restricted to fair
value less cost to sell.
**Allocation of remaining loss of building in proportion of carrying amount.
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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.5 (a) (i) As per IAS 34, if an entity presents items of profit or loss in a separate statement,
it presents interim condensed information from that statement. Since JL presents
both statements separately in annual financial statements, so this suggestion does
not comply with IAS 34 and a separate statement of profit or loss should be
presented in the quarterly financial statement.

(ii) As per IAS 34, an entity shall apply the definition and recognition criteria for an
intangible asset in the same way in an interim period as it applies the same in an
annual period. So, this suggestion complies with IAS 34 and recognizing
development cost as assets in an interim statement of financial position in the hope
that the recognition criteria will be met later in the financial year is not justified.

(iii) As per IAS 34, related party transactions are included in the list of events and
transactions for which disclosures would be required, if they are significant. As
mentioned in the email that the transactions with the related parties during the
quarter were significant, so this suggestion does not comply with IAS 34 and the
disclosure should not be removed from the interim financial statements.

(iv) As per IAS 34, revenues that are received seasonally within a financial year shall
not be anticipated as of an interim date if anticipation would not be appropriate at
the end of the entity’s financial year. So, this suggestion does not comply with IAS
34 and any anticipation of sales would not be appropriate.

Matching principle will not be violated as the cost of excess units produced in first
quarter will not be expensed in the first quarter, rather it will be part of the
inventories. However, IAS 34 requires that explanatory comments about the
seasonality of the operations should be added.

(v) As per IAS 34, variable lease payments based on sales can be an example of a legal
or constructive obligation that is recognised as a liability. If a lease provides for
variable payments based on the lessee achieving a certain level of annual sales, an
obligation can arise if the required level of sales is expected to be achieved during
the year and the entity, therefore, has no realistic alternative but to make the future
lease payment. So, this suggestion complies with IAS 34 and JL should accrue the
variable lease payment based on the annual sales target despite the fact that sales
target has not been met during the quarter.

(b) Fundamental principles:

In the given circumstance, I might be in breach of the following fundamental principles
of ICAP’s Code of Ethics for Chartered Accountants (CA), if I accept all the suggestions
of the CEO:

(i) Integrity:
As a CA I should be straightforward and honest in all professional and business
relationships. Presenting the financial statements after intentionally manipulating
them on the CEO’s advice to achieve desired results would raise doubts over my
integrity.

(ii) Objectivity:
As a CA, I should not allow bias, conflict of interest or undue influence of others
to override my professional or business judgements. Accepting all the suggestion
of the CEO could mean that I have allowed bias in my judgement or have accepted
undue influence of the CEO. I might accept all the suggestion of the CEO to remain
in his good books for getting job related benefits like bonus, promotion and award,
which constitute a conflict of interest.

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

(iii) Professional behavior:

A professional accountant should comply with relevant laws and regulations and
should avoid any action or conduct which discredits the profession. So, accepting
CEOs suggestions knowing that some of them do not comply with IAS 34 would
be a breach of professional behavior.

Action points:
I should apply one or more of the following safeguards:
(i) Discuss the matter with the CEO. Acknowledge and appreciate the correct
suggestions given by him.
(ii) For the wrong suggestions, persuade him for the correct accounting treatment. The
CEO might not be from an accounting background and hence would be lacking
knowledge of the accounting standards. He might appreciate if correct accounting
treatment is explained to him with references from the standards.
(iii) If he refuses to accept the correct treatments then I should consider informing the
appropriate authorities such the audit committee or the Board of Directors.
(iv) Inform the regulatory authorities like Pakistan Stock Exchange and SECP.
(v) Refuse to apply the incorrect accounting treatments and disassociate myself with
the misleading information.
(vi) Resign from the job.

A.6 Kettle Limited

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

Tax expense: Rs. in million

Current tax (W-4) 59.9
Deferred tax 9.7
69.6

Reconciliation between tax expense and accounting profit:

Profit before tax 262.0
Tax at 30% 78.6
Effect of lower rate on dividend income 90×(30%–20%) (9.0)
Tax expense for the year 69.6

Movement in deferred tax liability/(asset):

Recognized in
Opening OCI P&L (Bal.) Closing
Charge/(Credit) Charge/(Credit)
------------------------- Rs. in million -------------------------
Arising in respect of:
Pension liability (12.0) 15.6 7.5 11.1
40×30% (38+32–18)×30% 37×30%
Bond - 19.5 (14.6) 4.9
(20+45)×30% [(W-2)216.4–200]×30%
Joint venture - 3.6 9.6 13.2
30×60%×20% [(W-3)(516–450)×20%
Other taxable differences 22.5 - 7.2 29.7
75×30% 99×30%
10.5 38.7 9.7 58.9

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

W-1: Net plan liability Obligation Assets Net

--------------- Rs. in million ---------------
Opening balance 320.0 280.0 40.0
Current service cost 63.0 63.0
Interest at 15% 48.0 42.0 6.0
Contribution to the fund - 94.0 (94.0)
Pensions paid (33.0) (33.0) -
Actuarial gain on obligation (38.0) (38.0)
Return on assets over 15% (74–42) - 32.0 (32.0)
Closing balance 360.0 415.0 (55.0)
Effect of asset ceiling adjustment Bal. fig 18.0
Closing net asset (lower of 55 and 37) (37.0)

W-2: Bond Rs. in million

Purchase price 200.0
Interest income 21.3(200×16%×8÷12) + 5.1[(200–30+21.3)×16%×2÷12] 26.4
Interest received 250×12% (30.0)
Fair value gain 20.0
Carrying value at year end 216.4

W-3: Joint venture Rs. in million

Cost of joint venture 750×60% 450.0
Share of total comprehensive income 180×60% 108.0
KL’s share in net assets (before dividend) 558.0
Dividend received by KL (42.0)
Carrying value at year end 516.0

W-4: Current tax Rs. in million

Profit before tax 262.0
Contribution paid to pension fund (94.0)
Pension expense 63+6 (W-1) 69.0
Interest received 30.0
Interest income (W-2) (26.4)
Impairment loss on bonds 45.0
Share of profit in joint venture (180–30)×60% (90.0)
Increase in other taxable differences 99–75 (24.0)
Taxable income 171.6
Tax @ 30% 171.60×30% 51.5
Tax @ 20% on dividend 42×20% 8.4
Current tax expense 59.9

(The End)

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