THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2009

June 2, 2009

ADVANCED ACCOUNTING AND FINANCIAL REPORTING (MARKS 100)

(3 hours)

Q.1 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:

KL GL
Debit Credit Debit Credit
-------Rupees in million-------
Ordinary share capital (Rs. 10 each) - 6,800 - 5,000
12% Preference share capital (Rs. 10 each) - - - 1,000
General reserve - 1,750 - 500
Retained earnings - 2,000 - 1,200
Loan from KL at 15% rate of interest - - - 2,000
14% Term Finance Certificates (TFCs) (Rs. 100 each) - 2,250 - -
Accounts payable - 445 - 190
Dividend payable – preference shares - - - 60
Dividend payable – ordinary shares - 750 - 300
Property, plant and equipment - at cost 16,250 - 25,000 -
Property, plant and equipment - acc. depreciation - 9,750 - 17,000
Investment in ordinary shares of GL 5,500 - - -
Investment in preference shares of GL 400 - - -
Loan to GL at 15% rate of interest 2,000 - - -
Investment in KL's TFCs (purchased at par value) - - 1,500 -
Profit before tax, interest and dividend - 2,865 - 1,550
Dividend income - 273 - -
Interest income - 300 - 210
Dividend receivable 249 - - -
Current assets 1,069 - 1,316 -
Interest on TFCs 315 - - -
Interest on loan from KL - - 300 -
Taxation 650 - 474 -
Preference dividend - - 120 -
Ordinary dividend – interim 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 GL’s
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. (26)
Note:
ƒ Ignore deferred tax and corresponding figures.
ƒ Notes to the above statements are not required. However, show workings wherever it
is necessary.

Q.2 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:

Lenders
SBD JICA AFI
Loan amount (US$) 350,000 500,000 270,000
Remaining number of installments including
due on December 31, 2008 5 4 3
Interest / markup rate 2.50% 3.00% 2.00%

The loans are repayable in equal annual installments. All the above liabilities are
appearing in PSC’s 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.

Lenders
SBD JICA AFI
Revised value of loan amount (US$) 370,000 525,000 280,000
Revised present value as per original effective
interest rate (US$) 390,000 535,000 250,000
Revised present value as per market interest
rate for similar instruments (fair value) (US$) 400,000 510,000 220,000
First installment due on 31-Dec-10 31-Dec-11 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
CFO’s comments, has been provided to you:

Debit Credit
CFO’s Comments
----- Rupees -----
Share capital 75,000,000
Retained earnings (1/1/2008) 54,134,997
Obligation under finance leases 15,436,900
Accounts payable 4,100,000
Owned fixed assets – net 110,187,500
Leased fixed assets – net 17,152,115
Deferred tax asset (1/1/ 2008) 750,000
Stock in trade 31,400,250
Accounts receivable 13,075,000
Provision for bad debts 653,750
Advance tax paid 11,999,247 Including tax of Rs. 51,250
deducted on dividend
received.
Cash and bank 1,025,000
Sales 177,633,594
Cost of sales excluding depreciation 122,106,875
Depreciation expense – owned assets 9,385,542 Tax depreciation for the
year is Rs. 8,501,758.
Depreciation expense – leased assets 1,815,212
Donations 562,500 Not allowable for tax
purposes.
Financial charges 2,237,500 Includes Rs. 1,750,222
relating to obligations under
finance lease.
Other expenses 6,150,000 Includes bad debt expenses
of Rs. 853,750.
Dividend income 512,500 Taxable under Final Tax
Regime.
Gain on sale of machines 375,000 Carrying amount at disposal
was Rs. 650,000.
327,846,741 327,846,741

Following relevant information is also available:

(i) Bad debts written off during the year amounted to Rs. 200,000.
(ii) 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 company’s 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, SL’s 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 SL’s 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 SL’s 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:
ƒ Goodwill;
ƒ Net identifiable assets, and
ƒ Non-controlling interest. (15)

Q.5 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:

Fire & Marine,

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

(ii) 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 1,014,552 174,780 1,053,094 152,911
Prepaid reinsurance premium ceded 741,934 93,702 311 122,866

Balances as of December 31, 2007

Unearned premium reserve 844,425 159,844 1,191,933 133,424
Prepaid reinsurance premium ceded 726,800 59,098 - 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) The share capital of the company as on January 1, 2008 was Rs. 400 million of
Rs. 10 each.
(ii) 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.
(iii) On April 1, 2008, AIL issued 30% right shares to its existing shareholders at a price
which did not contain any bonus element.
(iv) 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.
(v) 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. (15)
(Ignore corresponding figures)

(THE END)