2 ADVANCED FINANCIAL ACCOUNTING & @ I C MA CORPORATE REPORTING [S11] ab Pakistan STRATEGIC LEVEL FALL 2019 EXAMINATIONS Monday, the 17th February 2020 jeading Time: 15 Minutes Time! 03 Hours (Attempt all questions, (il) Wite your Roll No. in the space provided above, (ii) Answers must be neat, relevant and brief. tis not necessary to maintain the sequence, (iv) Use of non-programmable scientitic calculators of any model is allowed, (¥) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. (vi) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram/ chart, where appropriate, (vi) DO NOT write your Name, Reg, No. or Roll No., or any irrelevant information inside the answer script (vii) Question Paper must be returned to invigilator before leaving the examination hall DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT Marks 5 Home Products Limited manufactures many products for the use of households in Pakistan and abroad. For one of its products, it uses aluminium as raw material. In September 2018, the company expected that it would require 100 metric tons of aluminium in February 2019. In order to avoid the risk of decrease in profit margin due to any increase in the price of the metal in February 2019, the company entered into a futures contract on September 10, 2018 for the purchase of 100 tons of aluminium in February 2019 at a price of Rs. 251,000 per metric ton, which was the same as the spot price of aluminium at September 10, 2018. On December 31, 2018, the spot price of aluminium for delivery in February 2019 was Rs. 266,000 per metric ton, which remained unchanged til the end of February 2019. Home Products Limited prepares its financial statements at December 31 Question No. 4 Proposed Time : 27 Min. | Total Marks : Required: Prepare the journal entries at the following dates for the above transactions 15 {a) September 10, 2018: at the inception of futures contract. (b) December 31, 2018: at the reporting date of the company. (c) February 28, 2019: at the date of purchase of aluminium for Rs. 266,000 per metric ton and settlement of the futures contract. (a) July 15, 2019: at the date of sale of finished goods for Rs. 100 million. The cost of the finished goods inventory was Rs.85 million, which also included the cost of the aluminium [as mentioned in part (c) above] used in the finished goods. Question No. 2 Proposed Time : 56 Min, | Total Marks : 31 {a) IAS 28, Investments in Associates and Joint Ventures, suggests that holding of 20-50% voting shares in an investee may indicate the presence of significant influence, but it also states that a holding of this size does not necessarily mean that such influence exists. You are required to define the term ‘significant influence’ and mention different ways in which it can be evidenced. 06 (b) On May 01, 2019, Pervez Limited purchased 75% equity shares in Shabbir Limited. In addition, Pervez Limited also holds an investment of 30% of the equity shares in Arif Limited, which was acquired five years ago. AFACR Fall 2019 10f5 PTOMarks The summarized statements of profit or loss of the three companies for the year ended December 31, 2019 are as given below: ‘Summarized Statements of Profit or Loss For the year ended December 31, 2019 Rs. ‘000° Pervez Shabbir Arif Limited Limited _Limited Sales - net 180,000 93,600 | | 96,000 Cost of sales (112,800), |_(61,200)| |_(72,000) Gross profit 67,200 32,400 24,000 Selling and distribution expenses (4,780) (2,160)] | (2,400) General and administrative expenses (8,360) (3,780)| | (4,200) Other operating charges (12,890) (5,920)| |_(6,040) (26,030) (1,860) (12,640) Other income 2,150 1,080 640 Operating profit 43,320 21,600 12,000 Finance costs (N-4) (2,400) (1,080) Profit before tax 40,920 20,520 12,000 Taxation (12,480) (4,320) __ (4,800) Profit for the year 28,440 16,200 7,200 Ad NN-4 The fair values of the net assets of Shabbir Limited at the date of acquisition were equal to their carrying amounts with the exception of the following items: jonal Information: Rs. ‘000° Asset Fair Values in Excess of Carrying Values Building 4,920 Plant 2,880 Land 1,500 The increased fair value of the building resulted in additional depreciation of Rs. 288,000 in the post-acquisition period to December 31, 2019. The plant had a remaining useful life of six years at the date of acquisition of Shabbir Limited. The company uses straight-line method for such assets. The building is used for administrative purpose only. N-2 In the post-acquisition period, Pervez Limited sold goods to Shabbir Limited at a selling price of Rs. 12 million. Pervez Limited earned a profit of 25% on the cost of these goods. Till December 31, 2019, Shabbir Limited was able to sell goods amounting to Rs. 8.4 million from these purchases. Arif Limited also sold goods to Pervez Limited for Rs. 6.4 million during the year, which had cost Rs. 5.1 million to Arif Limited. Half of these goods were still unsold at year end. N-3 The goodwill of Shabbir Limited had impaired by Rs. 2.4 milion up to December 31, 2019, which is to be charged to administrative expenses. The value of the investment in Arif Limited had also impaired by Rs. 850,000 from the date of investment to the reporting date, Out of which, the impairment of Rs.625,000 pertained to the period before January 01, 2019. N-4 Pervez Limited settled purchase consideration by issuing ordinary shares to Shabbir Limited, which gave neither control nor significant influence in Pervez Limited to Shabbir Limited. In addition, an amount of cash was to be paid to Shabbir Limited after two years from the date of investment in the subsidiary, the present value of which was Rs. 43.20 million at the date of acquisition. Pervez Limited's cost of capital is 10% per annum. Finance cost of the parent company does not include finance cost on deferred consideration. AFACR-Fal 2019 20f5N-5 Alll tems mentioned in the statements of profit or loss are assumed to accrue evenly over the year. 'N-6 Itis the group's policy to value the non-controlling interest (NCI) at full fair value. Required: Prepare Consolidated Statement of Profit or Loss of Pervez Group for the year ended December 31, 2019. Question No. 3 Proposed Time : 50 Min. | Total Marks : 28 Best Limited is a public limited company which has controlling interest in two other public limited companies, Better Limited and Good Limited. The draft statements of financial position of these entities as at December 31, 2019 are given below: ‘Statements of Financial Position As at December 31, 2019 Rs. in million Best Better Good Limited Limited _Limited ASSETS Non-current Assets Property, plant and equipment 4,840 1,500 1,550 Investment in subsidiaries Better Limited 3,650 - - Good Limited - 1,600 - Intangible assets 990 150 175 9,480 3,250 1,725 Current Assets Stores, spares and loose tools, 761 408 213 Stock-in-trade 1,710 938 490 Trade debts 1,625 864 450 Taxation - net 150 70 35 Cash and bank balances 229 120 62 4,475 2,400 1,250 Total Assets 13,955 5,650 2,975 EQUITY AND LIABILITIES Share Capital and Reserves Authorized share capital (Rs. 10 each) 5,000 3,000 4,500 Issued, subscribed and paid-up capital 4,600 2,000 1,000 Reserves 4,840 2,395 820 9,440 4,395 7,820 Non-current Liabilities Long-term loans 7,850 425 134 Deferred tax liability — net 625 190 331 2,475 615 465 Current Liabilities Trade and other payables 1.713 566 664 Current portion of long-term loans 327 74 26 2,040 640 690 Total Equity and Liabilities 13,955 5,650 2,975 AFACR Fall 2019 30f5 Marks 25 PTOMarks Additional Information: () On January 01, 2018, Best Limited acquired 130 million ordinary shares of Better Limited for a cash purchase consideration of Rs. 3,650 million. On that date, the fair value of the identifiable net assets acquired was Rs. 4,175 million and the fair value of land was in excess of its book value. On the same date, retained eamings of Better Limited were Rs. 1,730 million. At acquisition, the fair value of the non-controlling interest (NCI) in Better Limited was Rs. 1,475 million. (i) On January 01, 2019, Better Limited acquired 80 million ordinary shares of Good Limited for a cash purchase consideration of Rs. 1,600 milion. On that date, the fair value of the identifiable net assets of Good Limited was Rs. 1,810 million and retained eamings were Rs. 630 milion. The excess in fair value was attributed to a piece of land. On January 01, 2019, the fair values of non-controlling interests were as under: + 20% holding - Rs. 360 million + 35% holding - Rs. 540 million + 48% holding - Rs. 878 million Itis group's policy to measure the NCI at fair value at the date of acquisition (iii) According to an impairment test conducted at December 31, 2019, there was no impairment in the assets of Better Limited. However, the recoverable amount of Good Limited at December 31, 2019 was determined as Rs. 3,020 milion. The impairment of assets was attributed to the poor performance of the intangible assets. In addition, while determining the recoverable amounts, liabilities of the entities were ignored since they related to the financing of operations. (iv) During the current year, Best Limited developed a new product. On this product, a total cost of Rs. 130 million was incurred from purchasing of patent to the marketing of the product. All of the above costs were charged to the intangible assets of Best Limited. However, it was determined later on that the costs of Rs. 45 million did not meet the recognition criteria as intangible assets under IAS 38, Intangible Assets. Require Prepare Consolidated Statement of Financial Position for Best Limited as at December 31, 2019, 28 Question No. 4 Proposed Time: 29 Min. | Total Marks : 16 Following are the incomplete financial statements of Akram Motors Limited: Akram Motors Limited ‘Statements of Financial Position As at December 31, ‘000° 2019 2018 ASSETS Non-current Assets Property, plant and equipment 3,696,000 3,164,000 Current Assets Stock-in-trade 2 4,376,000 Trade debts ? 760,000 Cash and bank balances 360,000 300,000 Total current assets 2 2,436,000 Total Assets 2 5,600,000 AFACR Fall 2019 40f5Marks Rs. 000" 2019 2018 EQUITY AND LIABILITIES Share Capital and Reserves Authorized share capital 300,000,000 (2018: 300,000,000) ordinary shares of Rs. 10 each 3,000,000 _3,000,000 Issued, subscribed and paid up capital 7,920,000] [ 1,920,000 Share premium 480,000 480,000 ‘Accumulated profit 320,000 300,000 Total equity 2,720,000 2,700,000 Non-current Liabilities Long-term finances — secured 2 2,240,000 Current Liabilities Trade and other payables 2 680,000 Total Equity and Liabilities 5,600,000 Akram Motors Limited Statement of Profit or Loss For the year ended December 31, 2019 Rs. 000" Sales — net 8,800,000 Cost of goods sold 2 Gross profit ? Distribution and selling expenses 520,000 Administrative expenses 812,000 Operating profit ? Finance cost 2 Profit before taxation ? Taxation 448,000 Net profit for the year 2 Additional Information: + Allsales were on credit + For the year ended December 31, 2019, following information is available: Trade debt tumover 10 times Net profit margin 14.5% Returns on assets 22% Current ratio 3.0 Inventory turnover 48 times Require ‘Work out the missing figures in the above financial statements of Akram Motors Limited. 16 Question No. 5 Proposed Time : 18 Min. | Total Marks 0 Intemational Financial Reporting Standards (IFRS) are used in many countries across the world whereas Generally Accepted Accounting Principles (GAAP) are in use in the United States. For the professionals involved in accounting profession or managing their own businesses, it is imperative for them to understand the variations between these two accounting methods. You are required to briefly describe any five differences that exist between IFRS and US GAAP. 10 THE END AFACR Fall 2019 5 ofS