CFAP1 - Practice Kit 1

PRACTICE KIT
CFAP 1: ADVANCED ACCOUNTING AND FINANCIAL REPORTING
CONTENT
INSTRUCTOR’S PROFILE ............................................................................................. 17
CHAPTER 01: IAS 16 – PROPERTY, PLANT & EQUIPMENT ..................................... 18
Questions:................................................................................................................................................................... 18
1. Binkie Co (Upward and Downward Revaluations) ............................................................................ 18
2. Carly (Disclosure of Property, Plant & Equipment) ............................................................................ 18
3. Abid Limited (PPE disclosure with Revaluations) .............................................................................. 19
4. Sundry Question ...................................................................................................................................... 19
5. Blochberger (Cost on Initial Acquisition) ............................................................................................. 20
6. Gasnature (Overhauling costs & Subsequent Events) ........................................................................ 20
7. Kayte (Residual Value & Significant Parts) .......................................................................................... 20
8. Change in Fair Value under Revaluation Model ................................................................................. 21
Answers: ..................................................................................................................................................................... 22
1. Binkie Co (Upward and Downward Revaluations) ............................................................................ 22
2. Carly (Disclosure of Property, Plant & Equipment) ............................................................................ 23
3. Abid Limited (PPE disclosure with Revaluations) .............................................................................. 24
4. Sundry Question ...................................................................................................................................... 25
5. Blochberger (Cost on Initial Acquisition)e ........................................................................................... 25
6. Gasnature (Overhauling costs & Subsequent Events) ........................................................................ 26
7. Kayte (Residual Value & Significant Parts) .......................................................................................... 26
8. Change in Fair Value under Revaluation Model ................................................................................. 27
CHAPTER 02: IAS 38 – INTANGIBLE ASSETS ........................................................... 29

Questions:................................................................................................................................................................... 29
1. Titanium (Copyright) .............................................................................................................................. 29
2. Lewis (Intangible asset acquired in Business Combination) .............................................................. 29
3. Diversified Group (Computer Based Exam & Loyalty Card Scheme) ............................................. 29
4. Lambda (Production Process & Brand Name) ..................................................................................... 30
5. Henry (Development Projects) ............................................................................................................... 30
6. ZL (TV License) ........................................................................................................................................ 31
7. Sky Link Limited (Initial Recognition & Subsequent Measurement of Operating License) .......... 31
8. Parrot Limited (Cost Categories) ........................................................................................................... 32
9. Comfort Shoes Limited ((Trademark) ................................................................................................... 32
10. Piperazine (Revaluation of Intangible Assets) ..................................................................................... 33
11. Fine Woods Limited (Website Cost) ...................................................................................................... 33
12. Fiji Limited (Websites Costs) .................................................................................................................. 34
Answers: ..................................................................................................................................................................... 35
From the desk of Hassnain R. Badami, ACA

TSB Education-Premium Accountancy Courses P a g e 2 of 358
PRACTICE KIT
1. Titanium (Copyright) .............................................................................................................................. 35

2. Lewis (Intangible asset acquired in Business Combination) .............................................................. 35
3. Diversified Group (Computer Based Exam & Loyalty Card Scheme) ............................................. 35
4. Lambda (Production Process & Brand Name) ..................................................................................... 36
5. Henry (Development Projects) ............................................................................................................... 36
6. ZL (TV License) ........................................................................................................................................ 37
7. Sky Link Limited (Initial Recognition & Subsequent Measurement of Operating License) .......... 37
8. Parrot Limited (Cost Categories) ........................................................................................................... 38
9. Comfort Shoes Limited ((Trademark) ................................................................................................... 39
10. Piperazine (Revaluation of Intangible Assets) ..................................................................................... 40
11. Fine Woods Limited (Website Cost) ...................................................................................................... 40
12. Fiji Limited (Websites Costs) .................................................................................................................. 41
CHAPTER 03: IAS 40 – INVESTMENT PROPERTY ..................................................... 42

Questions:................................................................................................................................................................... 42
1. Investment property (Owner occupied property intends to shift to IAS 40)................................... 42
2. ABC (Owner occupied to Investment property) ................................................................................. 42
3. Blackcutt (Ancillary services along with Investment property) ........................................................ 42
4. Installation of new equipment – 1 ......................................................................................................... 44
5. Installation of new equipment 2 ............................................................................................................ 44
6. Replacement property ............................................................................................................................. 44
7. Foreign investment Ltd. (Changes in Fair value of Investment Property) ...................................... 45
8. Gee Investment Company limited (Multiple Transfers between Investment property) ............... 45
9. Victoria (PV of Properties) ...................................................................................................................... 46
10. Disposal of Investment Property ........................................................................................................... 46
11. Change of Use ........................................................................................................................................... 46
Answers: ..................................................................................................................................................................... 47
1. Investment property (Owner occupied property intends to shift to IAS 40)................................... 47
2. ABC (Owner occupied to Investment property) ................................................................................. 47
3. Blackcutt (Ancillary services along with Investment property) ........................................................ 47
4. Installation of new equipment – 1 ......................................................................................................... 48
5. Installation of new equipment 2 ............................................................................................................ 48
6. Replacement property ............................................................................................................................. 48
7. Foreign investment Ltd. (Changes in Fair value of Investment Property) ...................................... 49
8. Gee Investment Company limited (Multiple Transfers between Investment property) ............... 49
9. Victoria (PV of Properties) ...................................................................................................................... 50
10. Disposal of Investment Property ........................................................................................................... 50
11. Change of Use ........................................................................................................................................... 51

PRACTICE KIT
CHAPTER 04: IAS 36 – IMPAIRMENT OF ASSETS..................................................... 52

Questions:................................................................................................................................................................... 52
1. Entity Q ..................................................................................................................................................... 52
2. Sunshine Limited (Impairment & Machines) ....................................................................................... 52
3. Uturn (CGUs and impairment reversals) ............................................................................................. 52
4. Shiplake (Basic Impairment) .................................................................................................................. 53
5. Satchell Group (Impairment of CGU Two levels of test).................................................................... 53
6. Canto (Impairment & VIU of CGU) ...................................................................................................... 54
7. Cash generating units .............................................................................................................................. 54
8. Stewart (Allocation of impairment loss) ............................................................................................... 55
9. Charlotte (Impairment & Held for Sales Concepts) ............................................................................ 55
10. ABA Limited (Impairment & Revaluation) .......................................................................................... 56
11. Hussain Associates Ltd (Impairment of Asset).................................................................................... 56
12. IMPS (Impairment Loss) ......................................................................................................................... 57
13. Ghalib Limited manufactures (Impairment loss of CGUs & Corporate Assets) ............................. 58
14. Company (Allocation of Impairment Loss) .......................................................................................... 59
15. Khyber Ltd. (Impairment of CGU) ........................................................................................................ 59
16. GYO Movers Limited (Impairment of CGU) ....................................................................................... 60
Answers: ..................................................................................................................................................................... 61
1. Entity Q ..................................................................................................................................................... 61
2. Sunshine Limited (Impairment & Machines) ....................................................................................... 61
3. Uturn (CGUs and impairment reversals) ............................................................................................. 61
4. Shiplake (Basic Impairment) .................................................................................................................. 61
5. Satchell Group (Impairment of CGU Two levels of test).................................................................... 62
6. Canto (Impairment & VIU of CGU) ...................................................................................................... 63
7. Cash generating units .............................................................................................................................. 63
8. Stewart (Allocation of impairment loss) ............................................................................................... 64
9. Charlotte (Impairment & Held for Sales Concepts) ............................................................................ 65
10. ABA Limited (Impairment & Revaluation) .......................................................................................... 68
11. Hussain Associates Ltd (Impairment of Asset).................................................................................... 69
12. IMPS (Impairment Loss) ......................................................................................................................... 70
13. Ghalib Limited manufactures (Impairment loss of CGUs & Corporate Assets) ............................. 71
14. Company (Allocation of Impairment Loss) .......................................................................................... 72
15. Khyber Ltd. (Impairment of CGU) ........................................................................................................ 72
16. GYO Movers Limited (Impairment of CGU) ....................................................................................... 74
CHAPTER 05: IFRIC 01 – CHANGES IN EXISTING DECOMMISSIONING,

RESTORATION AND SIMILAR LIABILITIES ................................................................ 76

PRACTICE KIT
Questions:................................................................................................................................................................... 76
1. Violet Power Limited (CV of Decommissioning Liability) ................................................................ 76
2. Waste Management Limited (Accounting Entries) ............................................................................. 76
Answers: ..................................................................................................................................................................... 78
1. Violet Power Limited (CV of Decommissioning Liability) ................................................................ 78
2. Waste Management Limited (Accounting Entries) ............................................................................. 78
CHAPTER 06: IFRS 08 – SEGMENT REPORTING ...................................................... 80

Questions:................................................................................................................................................................... 80
1. Gohar Limited (Reportable Segments & Reco) .................................................................................... 80
2. Endeavour (Identifying reportable segments) ..................................................................................... 80
3. E-Games (Online Business & Reportable Segments) .......................................................................... 82
4. MNC (Identifying reportable segments)............................................................................................... 82
5. Jay Limited (Identify Reportable Segments) ........................................................................................ 83
6. Segments (Identify Reportable Segments) ............................................................................................ 83
7. ABC Corp. (Disclosure) ........................................................................................................................... 84
8. FashionX Corporation (Disclosure) ....................................................................................................... 84
Answers: ..................................................................................................................................................................... 86
1. Gohar Limited (Reportable Segments & Reco) .................................................................................... 86
2. Endeavour (Identifying reportable segments) ..................................................................................... 87
3. E-Games (Online Business & Reportable Segments) .......................................................................... 88
4. MNC (Identifying reportable segments)............................................................................................... 90
5. Jay Limited (Identify Reportable Segments) ........................................................................................ 90
6. Segments (Identify Reportable Segments) ............................................................................................ 91
7. ABC Corp. (Disclosure) ........................................................................................................................... 92
8. FashionX Corporation (Disclosure) ....................................................................................................... 92
CHAPTER 07: IAS 41 – AGRICULTURE ..................................................................... 94

Questions:................................................................................................................................................................... 94
1. Herd (Changes in fair value) .................................................................................................................. 94
2. Arapawanui (Animals) ............................................................................................................................ 94
3. Tepev ......................................................................................................................................................... 94
4. Monkey ...................................................................................................................................................... 95
5. Cows .......................................................................................................................................................... 95
6. GoodWine ................................................................................................................................................. 95
7. Lucky Dairy (Mixed Scenario) ............................................................................................................... 95
8. The Dairy Company ................................................................................................................................ 97
Answers: ..................................................................................................................................................................... 98
1. Herd (Changes in fair value) .................................................................................................................. 98

PRACTICE KIT
2. Arapawanui (Animals) ............................................................................................................................ 98

3. Tepev ......................................................................................................................................................... 98
4. Monkey ...................................................................................................................................................... 98
5. Cows .......................................................................................................................................................... 99
6. GoodWine ................................................................................................................................................. 99
7. The Dairy Company ................................................................................................................................ 99
8. The Dairy Company .............................................................................................................................. 102
CHAPTER 08: IAS 10 & 37 – EVENTS AFTER THE REPORTING PERIOD, PROVISION
AND CONTINGENCIES .............................................................................................. 103
Questions:................................................................................................................................................................. 103
1. Trailer (Restructuring) ........................................................................................................................... 103
2. Delta (IAS 37 and IAS 10)...................................................................................................................... 103
3. Environmental provisions .................................................................................................................... 103
4. Gasnature (Drilling & Impairment) ..................................................................................................... 104
5. Lockfine (Restructuring) ....................................................................................................................... 104
6. Royan (Dismantling Provision of Oil Platform) ................................................................................ 105
7. Qallat Industries Limited (Mixed Scenario) ....................................................................................... 105
8. Walnut Limited (Mixed Scenario) ....................................................................................................... 106
Answers: ................................................................................................................................................................... 108
1. Trailer (Restructuring) ........................................................................................................................... 108
2. Delta (IAS 37 and IAS 10)...................................................................................................................... 108
3. Environmental provisions .................................................................................................................... 108
4. Gasnature (Drilling & Impairment) ..................................................................................................... 109
5. Lockfine (Restructuring) ....................................................................................................................... 109
6. Royan (Dismantling Provision of Oil Platform) ................................................................................ 110
7. Qallat Industries Limited (Mixed Scenario) ....................................................................................... 111
8. Walnut Limited (Mixed Scenario) ....................................................................................................... 112
CHAPTER 09: SIC 32 - INTANGIBLE ASSETS - WEB SITE COSTS .......................... 113
Questions:................................................................................................................................................................. 113
1. Fine Woods Limited .............................................................................................................................. 113
2. Fiji Limited .............................................................................................................................................. 113
3. Sky limited .............................................................................................................................................. 114
Answers: ................................................................................................................................................................... 115
1. Fine Woods Limited .............................................................................................................................. 115
2. Fiji Limited .............................................................................................................................................. 115
3. Sky limited .............................................................................................................................................. 116
CHAPTER 10: IFRS 02 - SHARE BASED PAYMENTS ............................................... 117

PRACTICE KIT
Questions:................................................................................................................................................................. 117
1. Equity settled share-based (Basic) ....................................................................................................... 117
2. Equity-settled share-based (Basic) ....................................................................................................... 117
3. Market based conditions (Basic) .......................................................................................................... 117
4. Blueberry (Variable no. of Options Based on Performance Condition) ......................................... 118
5. Beginner (Two cases: Exercised Option vs Lapsed) .......................................................................... 118
6. Modifications .......................................................................................................................................... 119
7. Cancellations and settlements .............................................................................................................. 119
8. Cash-settled share-based payment transactions ................................................................................ 119
9. Growler (Cash Settled Basis) ................................................................................................................ 120
10. Third-party transactions - Direct method ........................................................................................... 120
11. Sally (Non market based vesting conditions) .................................................................................... 120
12. Jeremy (Market and non-market vesting condition) ......................................................................... 121
13. Company B (Market and non-market performance conditions) ..................................................... 121
14. Cancellation ............................................................................................................................................ 121
15. Cash-settled share-based payment transaction ................................................................................. 122
16. Choice of settlement .............................................................................................................................. 122
17. Krumpet Plc ............................................................................................................................................ 122
18. Deferred tax implications of share-based payment........................................................................... 123
19. Leigh (Settlement choice against purchase of PPE) ........................................................................... 123
20. Sindh Transit Ltd ................................................................................................................................... 123
21. Rahman Limited (SBP with Option) .................................................................................................... 124
22. Engineering Works Limited (Bonus & SBP) ....................................................................................... 124
23. Quail Pakistan Limited (Bonus & SBP + Supplier Payment & SBP) ............................................... 125
24. Mr. Talented (SBP with Option)........................................................................................................... 125
25. XYZ Limited (Comprehensive Question) ........................................................................................... 125
26. Ravi Limited (MC & NMC) .................................................................................................................. 126
27. Zebra Limited (SBP with Options) ...................................................................................................... 127
28. Cotolla Limited (MC + SC) ................................................................................................................... 127
29. Grant of shares, with a cash alternative subsequently added ......................................................... 127
30. Share-based payment with vesting and non-vesting conditions when the counterparty can
choose whether the non-vesting condition is met ........................................................................................ 129
31. Grant of share options that is accounted for by applying the intrinsic value method ................. 129
32. Employee share purchase plan ............................................................................................................ 130
33. Entity 1 ..................................................................................................................................................... 130
34. Entity 2 ..................................................................................................................................................... 130
35. Entity 3 ..................................................................................................................................................... 131
36. Entity 4 ..................................................................................................................................................... 131

PRACTICE KIT
37. Share-based payment transactions in which a parent grants rights to its equity instruments to
the employees of its subsidiary ...................................................................................................................... 132
Answers: ................................................................................................................................................................... 133
1. Equity settled share-based (Basic) ....................................................................................................... 133
2. Equity-settled share-based (Basic) ....................................................................................................... 133
3. A.3. Market based conditions (Basic) .................................................................................................. 134
4. Blueberry (Variable no. of Options Based on Performance Condition) ......................................... 134
5. Beginner (Two cases: Exercised Option vs Lapsed) .......................................................................... 135
6. Modifications .......................................................................................................................................... 135
7. Cancellations and settlements .............................................................................................................. 136
8. Cash-settled share-based payment transactions ................................................................................ 136
9. Growler (Cash Settled Basis) ................................................................................................................ 136
10. Third-party transactions - Direct method ........................................................................................... 137
11. Sally (Non market based vesting conditions) .................................................................................... 137
12. Jeremy (Market and non-market vesting condition) ......................................................................... 137
13. Company B (Market and non-market performance conditions) ..................................................... 137
14. Cancellation ............................................................................................................................................ 138
15. Cash-settled share-based payment transaction ................................................................................. 138
16. Choice of settlement .............................................................................................................................. 139
17. Krumpet Plc ............................................................................................................................................ 139
18. Deferred tax implications of share-based payment........................................................................... 140
19. Leigh (Settlement choice against purchase of PPE) ........................................................................... 141
20. Sindh Transit Ltd ................................................................................................................................... 141
21. Rahman Limited (SBP with Option) .................................................................................................... 142
22. Engineering Works Limited (Bonus & SBP) ....................................................................................... 143
23. Quail Pakistan Limited (Bonus & SBP + Supplier Payment & SBP) ............................................... 143
24. Mr. Talented (SBP with Option)........................................................................................................... 144
25. XYZ Limited (Comprehensive Question) ........................................................................................... 145
26. Ravi Limited (MC & NMC) .................................................................................................................. 146
27. Zebra Limited (SBP with Options) ...................................................................................................... 146
28. Cotolla Limited (MC + SC) ................................................................................................................... 147
29. Grant of shares, with a cash alternative subsequently added ......................................................... 148
30. Share-based payment with vesting and non-vesting conditions when the counterparty can
choose whether the non-vesting condition is met ........................................................................................ 148
31. Grant of share options that is accounted for by applying the intrinsic value method ................. 149
32. Employee share purchase plan ............................................................................................................ 149
33. Entity 1 ..................................................................................................................................................... 150
34. Entity 2 ..................................................................................................................................................... 150

PRACTICE KIT
35. Entity 3 ..................................................................................................................................................... 151

36. Entity 4 ..................................................................................................................................................... 152
37. Share-based payment transactions in which a parent grants rights to its equity instruments to
the employees of its subsidiary ...................................................................................................................... 152
CHAPTER 11: BASIC CONSOLIDATION AND CHANGES IN GROUP STRUCTURES . 153

Questions:................................................................................................................................................................. 153
1. Hasan Limited (Basic Adj) .................................................................................................................... 153
2. Golden Limited (Basic Adj) .................................................................................................................. 154
3. Yasir Limited and Bilal Limited (Basic Adj) ....................................................................................... 156
4. Jasmine Limited...................................................................................................................................... 157
5. Anima Plc (Consolidation technique) ................................................................................................. 158
6. Preston Plc (Consolidation technique) ................................................................................................ 159
7. Bath Ltd (Control in stages – previous holding a simple investment) ........................................... 160
8. Good (Control in stages – no previous significant influence) .......................................................... 161
9. Santander (Acquisitions that do not result in a change of control) ................................................. 161
10. Express (Part disposal subsidiary to subsidiary) ............................................................................... 161
11. Streatham (All types of disposal) ......................................................................................................... 162
12. Golden Limited (SOPL & Impairment in Associate) ......................................................................... 163
13. Step Acquisition (Associate to Subsidiary) ......................................................................................... 164
14. Shakir Limited (Disposal + JO) ............................................................................................................ 165
15. Taimur Holding Limited (Disposal group + C2C Investment Increase + Purchase Consideration)
166
16. Alpha Industries Limited (Step Acquisition) ..................................................................................... 167
17. Qudsia Limited (Investment in Associate + PPE IGT) ...................................................................... 168
18. Tiger Limited (SOCI, SOCIE, Disposal, Discontinued Operation) .................................................. 169
19. Bee Limited (Acquisition + Part Disposal) ......................................................................................... 170
20. Oceana Global Limited (Step Acquisition + IGT) .............................................................................. 171
21. Habib Limited (Step Acquisition + Full Disposal + IGT) ................................................................. 172
Answers: ................................................................................................................................................................... 174
1. Hasan Limited (Basic Adj) .................................................................................................................... 174
2. Golden Limited (Basic Adj) .................................................................................................................. 176
3. Yasir Limited and Bilal Limited (Basic Adj) ....................................................................................... 178
4. Jasmine Limited...................................................................................................................................... 180
5. Anima Plc (Consolidation technique) ................................................................................................. 181
6. Preston Plc (Consolidation technique) ................................................................................................ 184
7. Bath Ltd (Control in stages – previous holding a simple investment) ........................................... 186
8. Good (Control in stages – no previous significant influence) .......................................................... 186
9. Santander (Acquisitions that do not result in a change of control) ................................................. 187

PRACTICE KIT
10. Express (Part disposal subsidiary to subsidiary) ............................................................................... 187

11. Streatham (All types of disposal) ......................................................................................................... 187
12. Golden Limited (SOPL & Impairment in Associate) ......................................................................... 191
13. Step Acquisition (Associate to Subsidiary) ......................................................................................... 192
14. Shakir Limited (Disposal + JO) ............................................................................................................ 193
15. Taimur Holding Limited (Disposal group + C2C Investment Increase + Purchase Consideration)
195
16. Alpha Industries Limited (Step Acquisition) ..................................................................................... 198
17. Qudsia Limited (Investment in Associate + PPE IGT) ...................................................................... 199
18. Tiger Limited (SOCI, SOCIE, Disposal, Discontinued Operation) .................................................. 200
19. Bee Limited (Acquisition + Part Disposal) ......................................................................................... 202
20. Oceana Global Limited (Step Acquisition + IGT) .............................................................................. 205
21. Habib Limited (Step Acquisition + Full Disposal + IGT) ................................................................. 206
CHAPTER 12: IFRS 05 – NON-CURRENT ASSETS HELD FOR SALE AND

DISCONTINUED OPERATIONS ................................................................................. 208
Questions:................................................................................................................................................................. 208
1. Single Asset Case ................................................................................................................................... 208
2. Havanna (Sale of Business Decision) .................................................................................................. 208
3. Saul (Sale of Business Decisions) ......................................................................................................... 208
4. Shahid Holdings (Analysis of Discontinued Operations) ................................................................ 209
5. Prima (Disposal & Accounting Treatment) ........................................................................................ 210
6. Kids Limited (HFS + Discontinued Operations) ............................................................................... 211
7. Insha chemicals Limited (Disclosure) ................................................................................................. 211
8. Global Air Limited (Disposal of Subsidiary) ...................................................................................... 212
9. Lexus Limited (Disposal Group & Presentations) ............................................................................. 212
10. Khyber Ltd (Disposal of CGU + IFRS-5) ............................................................................................. 213
11. ABC Limited (Disposal of Asset) ......................................................................................................... 213
Answers: ................................................................................................................................................................... 214
1. Single Asset Case ................................................................................................................................... 214
2. Havanna (Sale of Business Decision) .................................................................................................. 214
3. Saul (Sale of Business Decisions) ......................................................................................................... 214
4. Shahid Holdings (Analysis of Discontinued Operations) ................................................................ 216
5. Prima (Disposal & Accounting Treatment) ........................................................................................ 216
6. Kids Limited (HFS + Discontinued Operations) ............................................................................... 217
7. Insha chemicals Limited (Disclosure) ................................................................................................. 217
8. Global Air Limited (Disposal of Subsidiary) ...................................................................................... 218
9. Lexus Limited (Disposal Group & Presentations) ............................................................................. 219
10. Khyber Ltd (Disposal of CGU + IFRS-5) ............................................................................................. 219

PRACTICE KIT
11. ABC Limited (Disposal of Asset) ......................................................................................................... 220
CHAPTER 13: CONSOLIDATION COMPLEX GROUP STRUCTURES ........................ 221

Questions:................................................................................................................................................................. 221
1. Parvez Ltd (SOCI + Basic Adj) ............................................................................................................. 221
2. Hasan, Riaz and Siddiq (SOFP + Basic Adj) ....................................................................................... 222
3. Ant Limited (Consolidation + IAS-40, IAS-16, IAS-19)..................................................................... 223
4. Delta Limited (TFC Adj) ....................................................................................................................... 224
5. Bahamas Limited (SOFP + JV + Step Acquisition (Indirect Control) + Lease Adj)....................... 225
Answers: ................................................................................................................................................................... 226
1. Parvez Ltd (SOCI + Basic Adj) ............................................................................................................. 226
2. Hasan, Riaz and Siddiq (SOFP + Basic Adj) ....................................................................................... 229
3. Ant Limited (Consolidation + IAS-40, IAS-16, IAS-19)..................................................................... 233
4. Delta Limited (TFC Adj) ....................................................................................................................... 235
5. Bahamas Limited (SOFP + JV + Step Acquisition (Indirect Control) + Lease Adj)....................... 237
CHAPTER 14: CONSOLIDATION JOINT ARRANGEMENTS ...................................... 240

Questions:................................................................................................................................................................. 240
1. ABM Mining (Joint Arrangement) ....................................................................................................... 240
2. Alpha Limited (JA with Intragroup Transagtions) ........................................................................... 240
Answers: ................................................................................................................................................................... 242
1. ABM Mining (Joint Arrangement) ....................................................................................................... 242
2. Alpha Limited (JA with Intragroup Transagtions) ........................................................................... 242
CHAPTER 15: IFRS 16 – LEASES ............................................................................. 244

Questions:................................................................................................................................................................. 244
1. Guava Leasing Limited (Basic Lessee) ................................................................................................ 244
2. CarSeat (Basic Lease Component) ....................................................................................................... 244
3. Lassie plc (Basic Lessee) ........................................................................................................................ 244
4. Heggie (Basic Lessee) ............................................................................................................................ 245
5. Gandalf (Basic Lessor) ........................................................................................................................... 245
6. Fradin (Sale and Lease Back) ................................................................................................................ 245
7. Progress Ltd. (Basic) .............................................................................................................................. 246
8. Miracle Textile Limited (Basic Lessee Accounting) ........................................................................... 246
9. Acacia Ltd ............................................................................................................................................... 246
10. Shoaib Leasing Limited (Basic Lessor Accounting) .......................................................................... 247
11. Akbar Ltd. (Sale & Lease Back) ............................................................................................................ 247
12. Ali Limited (Sale & Lease Back) ........................................................................................................... 247
13. Moazzam Textile Mills Limited (Sale & Lease Back) ........................................................................ 248
14. Patel Limited (Sub-lease & Modification) ........................................................................................... 248

PRACTICE KIT
15. LorryCars (Lessors: Classification of leases - IFRS Box) ................................................................... 248

16. Belinda I (Lessors: land and building elements in the lease – IFRS Box) ....................................... 249
17. Belinda II (Accounting for finance lease by the lessor – IFRS Box) ................................................. 249
18. CarProd (Manufacturer / dealer lessors and finance lease – IFRS Box) ........................................ 249
19. Lessor Co. (Accounting for operating lease by the lessor – IFRS Box) ........................................... 249
20. Relia (Sale and leaseback – IFRS Box) ................................................................................................. 250
Answers: ................................................................................................................................................................... 251
1. Guava Leasing Limited (Basic Lessee) ................................................................................................ 251
2. CarSeat (Basic Lease Component) ....................................................................................................... 251
3. Lassie plc (Basic Lessee) ........................................................................................................................ 252
4. Heggie (Basic Lessee) ............................................................................................................................ 252
5. Gandalf (Basic Lessor) ........................................................................................................................... 253
6. Fradin (Sales & Lease Back) .................................................................................................................. 253
7. Progress Ltd. (Basic) .............................................................................................................................. 254
8. Miracle Textile Limited (Basic Lessee Accounting) ........................................................................... 255
9. Acacia Ltd ............................................................................................................................................... 257
10. Shoaib Leasing Limited (Basic Lessor Accounting) .......................................................................... 258
11. Akbar Ltd. (Sale & Lease Back) ............................................................................................................ 259
12. Ali Limited (Sale & Lease Back) ........................................................................................................... 260
13. Moazzam Textile Mills Limited (Sale & Lease Back) ........................................................................ 261
14. Patel Limited (Sub-lease & Modification) ........................................................................................... 263
15. LorryCars (Lessors: Classification of leases - IFRS Box) ................................................................... 265
16. Belinda I (Lessors: land and building elements in the lease – IFRS Box) ....................................... 266
17. Belinda II (Accounting for finance lease by the lessor – IFRS Box) ................................................. 267
18. CarProd (Manufacturer / dealer lessors and finance lease – IFRS Box) ........................................ 269
19. Lessor Co. (Accounting for operating lease by the lessor – IFRS Box) ........................................... 270
20. Relia (Sale and leaseback – IFRS Box) ................................................................................................. 271
CHAPTER 16: IAS 33 – EARNING PER SHARE ........................................................ 273

Questions:................................................................................................................................................................. 273
1. Weighted average number of ordinary shares .................................................................................. 273
2. Partly paid shares................................................................................................................................... 273
3. Bonus issue ............................................................................................................................................. 273
4. Share consolidation ................................................................................................................................ 273
5. Special dividend and share consolidation .......................................................................................... 274
6. Rights issue ............................................................................................................................................. 274
7. Cash and rights issue ............................................................................................................................. 274
8. Dennison Co – (Increasing rate preference shares) ........................................................................... 274

PRACTICE KIT
9. Cumulative convertible preference shares ......................................................................................... 275

10. Repurchase of preference shares .......................................................................................................... 275
11. Participating equity instruments ......................................................................................................... 275
12. Convertible loan stock 1 ........................................................................................................................ 275
13. Test of dilution ....................................................................................................................................... 276
15. Diluted earnings per share ................................................................................................................... 276
16. Contingently issuable shares ................................................................................................................ 278
17. Cumulative targets ................................................................................................................................ 278
19. Whiting (EPS with CO/DCO) .............................................................................................................. 278
20. Citric (EPS + Compound Instrument) ................................................................................................. 279
21. Cachet Ltd (Multiple Scenarios – Bonus, Rights Issue) .................................................................... 280
22. Mary (Multiple Scenarios – Bonus, Rights Issue) .............................................................................. 280
23. Mandy (Diluted EPS) ............................................................................................................................. 280
24. AAZ Limited (Diluted EPS) .................................................................................................................. 281
25. ABC Limited (Disclosure Note of EPS) ............................................................................................... 281
26. Sajjad Limited (EPS + Classes of Preference Shares) ......................................................................... 282
27. Tiger Limited (Potential Ordinary Shares – EPS Diluted) ................................................................ 283
28. Afridi Industries Limited (Disclosure + EPS) .................................................................................... 283
29. Rahat Limited (Disclosure + EPS) ........................................................................................................ 284
30. Earnings Per Share ................................................................................................................................. 284
31. Market Searchers Limited (Disclosure + EPS) ................................................................................... 285
32. Que Limited (Disclosure + EPS) .......................................................................................................... 285
33. Krishna Limited (Disclosure + EPS) .................................................................................................... 286
34. Ittehad Industries Limited (Disclosure + EPS) ................................................................................... 286
35. Company G – (Diluted EPS – Convertible bonds)............................................................................. 287
36. Company H – (Diluted EPS – New issue of convertibles in the year) ............................................ 287
37. Order of dilution .................................................................................................................................... 287
38. Company M – (Contingently issuable shares) ................................................................................... 288
39. Company N – (Diluted EPS – Conversion right exercised in the year) .......................................... 288
40. IE7 – CIS (Contingently issuable shares) ............................................................................................ 288
41. Alpha Limited (EPS + Consolidation) ................................................................................................. 289
Answers: ................................................................................................................................................................... 290
1. Weighted average number of ordinary shares .................................................................................. 290
2. Partly paid shares................................................................................................................................... 290
3. Bonus issue ............................................................................................................................................. 290

PRACTICE KIT
4. Share consolidation ................................................................................................................................ 291

5. Special dividend and share consolidation .......................................................................................... 291
6. Rights issue ............................................................................................................................................. 292
7. Cash and rights issue ............................................................................................................................. 292
8. Increasing rate preference shares ......................................................................................................... 293
9. Cumulative convertible preference shares ......................................................................................... 293
10. Repurchase of preference shares .......................................................................................................... 294
11. Participating equity instruments ......................................................................................................... 294
13. Test of dilution ....................................................................................................................................... 295
15. Diluted earnings per share ................................................................................................................... 296
17. Cumulative targets ................................................................................................................................ 297
19. Whiting (EPS with CO/DCO) .............................................................................................................. 298
20. Citric (EPS + Compound Instrument) ................................................................................................. 298
21. Cachet Ltd (Multiple Scenarios – Bonus, Rights Issue) .................................................................... 299
22. MARY (Multiple Scenarios – Bonus, Rights Issue) ........................................................................... 299
23. Mandy (Diluted EPS) ............................................................................................................................. 300
24. AAZ Limited (Diluted EPS) .................................................................................................................. 301
25. ABC Limited (Disclosure Note of EPS) ............................................................................................... 303
26. Sajjad Limited (EPS + Classes of Preference Shares) ......................................................................... 305
27. Tiger Limited (Potential Ordinary Shares – EPS Diluted) ................................................................ 305
28. Afridi Industries Limited (Disclosure + EPS) .................................................................................... 307
29. Rahat Limited (Disclosure + EPS) ........................................................................................................ 308
30. Earnings Per Share ................................................................................................................................. 309
31. Market Searchers Limited (EPS Computation) .................................................................................. 310
32. Que Limited (Disclosure + EPS) .......................................................................................................... 311
33. Krishna Limited (Disclosure + EPS) .................................................................................................... 313
34. Ittehad Industries Limited (Disclosure + EPS) ................................................................................... 314
35. Company G – (Diluted EPS – Convertible bonds)............................................................................. 316
36. Company H – (Diluted EPS – New issue of convertibles in the year) ............................................ 316
37. Order of dilution .................................................................................................................................... 317
38. Company M – (Contingently issuable shares) ................................................................................... 318
39. Company N – (Diluted EPS – Conversion right exercised in the year) .......................................... 318
40. IE7 – CIS (Contingently issuable shares) ............................................................................................ 319

PRACTICE KIT
41. Alpha Limited (EPS + Consolidation) ................................................................................................. 319
CHAPTER 17: IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS ......... 321
Questions:................................................................................................................................................................. 321
1. ECL (Performance Obligation) ............................................................................................................. 321
2. Associated Solutions Ltd (Calculation of Revenue & Contract Cost) ............................................. 321
3. Rendering of services (Contract Revenue) ......................................................................................... 321
4. Service contract ...................................................................................................................................... 322
5. Frizco Construction plc (Contract Revenue) ...................................................................................... 322
6. Repurchase agreement .......................................................................................................................... 322
7. Caravans Deluxe (Five Step Process) .................................................................................................. 322
8. Bags Galore Ltd (Change in Selling Price) .......................................................................................... 324
9. Tree (Conceptual Basis of Revenue – 5 Step Model) ......................................................................... 324
10. Clavering (Sale of Hotel Complex + Discount Vouchers) ................................................................ 325
11. Alexandra (IFRS + IAS-8)...................................................................................................................... 325
12. Verge (Financing Component) ............................................................................................................. 326
13. Carsoon (Variable Element) .................................................................................................................. 326
14. Clarence (PO Overtime or Intime) ....................................................................................................... 327
15. Sachal Limited (PO) ............................................................................................................................... 327
16. Brilliant Limited (PO) ............................................................................................................................ 327
17. Waqas Limited (PO + Modification) ................................................................................................... 328
18. Hawks Limited (Comprehensive Question) ...................................................................................... 329
19. Telecom contract – IFRS Box (5 Step Model) ...................................................................................... 330
20. My PC – IFRS Box (Modification) ........................................................................................................ 330
21. Books Corp. – IFRS Box (Variable consideration with contingency) .............................................. 330
22. Voyage ltd. – IFRS Box (Significant financing component and right of return) ............................ 331
23. Jack & Partner – IFRS Box (Allocating variable consideration + licenses) ..................................... 331
24. AB Construct – IFRS Box (Revenue over time vs. at the point of time (real estate)) .................... 331
25. Books Corp. – IFRS Box (Variable consideration with contingency) .............................................. 332
Answers: ................................................................................................................................................................... 333
1. ECL (Performance Obligation) ............................................................................................................. 333
2. Associated Solutions Ltd (Calculation of Revenue & Contract Cost) ............................................. 333
3. Rendering of services (Contract Revenue) ......................................................................................... 334
4. Service contract ...................................................................................................................................... 334
5. Frizco Construction plc (Contract Revenue) ...................................................................................... 334
6. Repurchase agreement .......................................................................................................................... 334
7. Caravans Deluxe (Five Step Process) .................................................................................................. 335
8. Bags Galore Ltd (Change in Selling Price) .......................................................................................... 335

PRACTICE KIT
9. Tree (Conceptual Basis of Revenue – 5 Step Model) ......................................................................... 336

10. Clavering (Sale of Hotel Complex + Discount Vouchers) ................................................................ 337
11. Alexandra (IFRS + IAS-8)...................................................................................................................... 338
12. Verge (Financing Component) ............................................................................................................. 339
13. Carsoon (Variable Element) .................................................................................................................. 340
14. Clarence (PO Overtime or Intime) ....................................................................................................... 341
15. Sachal Limited (PO) ............................................................................................................................... 341
16. Brilliant Limited (PO) ............................................................................................................................ 342
17. Waqas Limited (PO + Modification) ................................................................................................... 344
18. Hawks Limited (Comprehensive Question) ...................................................................................... 346
19. Telecom contract – IFRS Box (5 Step Model) ...................................................................................... 347
20. My PC – IFRS Box (Modification) ........................................................................................................ 348
21. Books Corp. – IFRS Box (Variable consideration with contingency ............................................... 350
22. Voyage ltd. – IFRS Box (Significant financing component and right of return) ............................ 351
23. Jack & Partner – IFRS Box (Allocating variable consideration + licenses) ..................................... 353
24. AB Construct – IFRS Box (Revenue over time vs. at the point of time (real estate)) .................... 355
25. Books Corp. – IFRS Box (Variable considerReation with contingency) ......................................... 356

PRACTICE KIT
INSTRUCTOR’S PROFILE
Hasnain R. Badami is a qualified Chartered Accountant with
cumulative experience of 11+ years in the profession. He also holds
a master’s degree in Philosophy - with critical thinking as his area
of research interest. His particularly versatile academic background
from humanities and business is what makes his classrooms a
thoroughly intriguing experience.
Hasnain believes in learning through experience and stories. His

real life stories come from his equally diverse experience working
in large local and multinational organizations, as well as from
training professionals, teachers, and students. More specifically, he
has worked with Ernst & Young (Karachi, Dubai and Jeddah
offices) and also with Internal Audit function at Engro Polymer
before he finally quit Engro to pursue his passion for learning and
development work. Presently, he is the co-founder and Director of
Ingenium Business solutions that is working in leadership, finance,
and digital learning space.
Hasnain is a senior faculty member at KnS Institute of Business

Studies with 7+ years teaching experience of Advanced Auditing to
CA final students. He has taught more than 2400 students with proud 1000+ CA qualified alumni. He uses
Socratic style of teaching and inquiry by not only focusing on the “what’s” and “how’s” of the subject matter
but, more importantly, on the ‘whys’ of it. He also served as an MBA visiting faculty member at a business
school in Karachi.
At corporate level, his core areas of training expertise are Thinking Skills (critical, creative, and collaborative
thinking), Corporate Ethics, Leadership skills, Business Acumen, and Internal Auditing. Notably, he has
trained professionals from Engro Corporation, Engro Fertilizer, Engro Foods, Bayer Crop Science, Bank Al
Falah, NIB Bank, Bank Al Habib Limited, Khaadi, Bayer Pakistan, Soneri Bank, Byco, Jubilee Insurance, Linde
Pakistan, EFU General Insurance, HUBCO, PPL, Aisha Steel, IBA, Aisha Steel Limited, KPMG, FINCA
Microfinance Bank, NIFT, Telenor Bank, K-Electric, SSGC, Ernst & Young, United Bank Limited, Habib Bank
Limited, Getz Pharma, Fauji Fertilizer, Atlas Honda, Lucky Cement, TCS Pvt. Limited etc.
Besides working with corporates and students, Hasnain devotes a substantial portion of his time
volunteering for empowerment of teachers. He is also on board of EDLAB Pakistan, a non-profit that works
on equipping teachers with 21st century pedagogical skills. Hasnain is also an elected member of the
prestigious Southern Regional Committee of Institute of Chartered Accountants of Pakistan (ICAP) that is
responsible to oversee CA members’ Continued Professional Development (CPD) and Student’s affairs.

PRACTICE KIT
CHAPTER 01: IAS 16 – PROPERTY, PLANT & EQUIPMENT
CHAPTER 01:
IAS 16 – PROPERTY, PLANT & EQUIPMENT
Questions:
[ICAEW Corporate Reporting]
1. Binkie Co (Upward and Downward Revaluations)
Binkie Co has an item of land carried in its books at £13,000. Two years ago, a slump in land values led the
company to reduce the carrying amount from £15,000. This was recorded as an expense. There has been a
surge in land prices in the current year, however, and the land is now worth £20,000.
In the example given above assume that the original cost was £15,000, revalued upwards to £20,000 two years
ago. The value has now fallen to £13,000.
Crinkle Co bought an asset for £10,000 at the beginning of 20X6. It had a useful life of five years. On 1 January
20X8 the asset was revalued to £12,000. The expected useful life has remained unchanged (i.e., three years
remain).
Requirements
a) Account for the revaluation in the current year
b) Account for the decrease in value
c) Account for the revaluation and state the treatment for depreciation from 20X8 onwards
[ICAP - CAF 5 Question Bank]

2. Carly (Disclosure of Property, Plant & Equipment)
The following is an extract from the financial statements of Carly on 31 December 2014.
Property, plant and equipment
Land and Plant and Computers Totals

buildings equipment
Cost
On 31 December 2014 1,500,000 340,500 617,800 2,458,300
Accumulated depreciation
On 31 December 2014 600,000 125,900 505,800 1,231,700
Carrying amount
On 31 December 2014 900,000 214,600 112,000 1,226,600
Accounting policies
Depreciation
Depreciation is provided at the following rates.
On land and buildings Over 50 years on straight line basis on
buildings only
On plant and equipment 25% reducing balance
On computers 33.33% per annum straight line
During 2015 the following transactions took place.

1) On 31 December the land and buildings were revalued to Rs. 1,750,000. Of this amount, Rs. 650,000 related
to the land (which had originally cost Rs. 500,000). The remaining useful life of the buildings was assessed
as 40 years.
2) A machine which had cost Rs. 80,000 and had accumulated depreciation of Rs. 57,000 at the start of the year
was sold for Rs. 25,000 in the first week of the year.

PRACTICE KIT
3) A new machine was purchased on 30 April 2015. The following costs were incurred:
Rs.
Purchase price, before discount, inclusive of reclaimable sales tax of Rs.3,000 20,000
Trade Discount 1,000
Delivery costs 500
Installation costs 750
Interest on loan taken out to finance the purchase 300
4) On 1 January it was decided to change the method of providing depreciation on computer equipment
from the existing method to 40% reducing balance.
Required
Produce the analysis of property, plant and equipment as it would appear in the financial statements of Carly
for the year ended 31 December 2015.

3. Abid Limited (PPE disclosure with Revaluations)
Abid Limited (AL) uses the revaluation model for subsequent measurement of its property, plant and
equipment and has a policy of revaluing its assets on an annual basis using the net replacement value
method.
The following information pertains to AL’s buildings:

1) Four buildings were acquired in same vicinity on 1 January 2012 at a cost of Rs. 300 million. The useful life
of the buildings on the date of acquisition was 20 years.
2) AL depreciates buildings on the straight-line basis over their useful life.
3) The results of revaluations carried out during the last three years by Premier Valuation Service, an
independent firm of valuers, are as follows:
Revaluation date Fair value
Rs. in million
1 January 2013 323
1 January 2014 252
1 January 2015 272
4) On 30 June 2015, one of the buildings was sold for Rs. 80 million.
Required
Prepare a note on “Property, plant and equipment” (including comparative figures) for inclusion in AL’s
financial statements for the year ended 31 December 2015 in accordance with International Financial Reporting
Standards. (Ignore taxation)

4. Sundry Question
1) When the asset should be derecognized from the balance sheet? What is the accounting treatment for gain
or loss on disposal for revaluation model?
2) What is the disclosure requirement of asset carried at revalued amount?

PRACTICE KIT
[ACCA - SBR BPP Practice Kit Q. 27(d)]

5. Blochberger (Cost on Initial Acquisition)
On 1 September 20X7, Blochberger purchased a new machine for use in its factory.
The directors have capitalized the purchase price but are unsure how to treat the following related costs.
$400,000 was spent on testing whether the machine was functioning properly. During the testing period
(September–October 20X7), samples were produced and sold for a total of $75,000. $300,000 was also spent on
training existing employees how to operate the new machine. The machine is being used to manufacture a
new product, Product C and $1 million was spent of advertising this new product. Testing was completed and
commercial production of Product C commenced on 31 October 20X7.
Required
Advise Blochberger on how the above transactions should be dealt with in its financial statements for the year
ended 31 December 20X7.
[ACCA - SBR Sep/Dec 15, amended (c)]

6. Gasnature (Overhauling costs & Subsequent Events)
Additionally, Gasnature is finalizing its financial statements for the year ended 31 August 20X5 and has the
following issues.
(i) Gasnature purchased a major refinery on 1 January 20X5 and the directors estimate that a major overhaul
is required every two years. The costs of the overhaul are approximately $5 million which comprises $3
million for parts and equipment and $2 million for labour. The directors proposed to accrue the cost of the
overhaul over the two years of operations up to that date and create a provision for the expenditure.
(ii) From October 20X4, Gasnature had undertaken exploratory drilling to find gas and up to 31 August 20X5
costs of $5 million had been incurred. At 31 August 20X5, the results to date indicated that it was probable
that there were sufficient economic benefits to carry on drilling and there were no indicators of impairment.
During September 20X5, additional drilling costs of $2 million were incurred and there was significant
evidence that no commercial deposits existed and the drilling was abandoned.
Required
Discuss, with reference to International Financial Reporting Standards, how Gasnature should account for the
above agreement and contract, and the issues raised by the directors
[ACCA-SBR 12/14 amended (b)]

7. Kayte (Residual Value & Significant Parts)
Kayte's vessels constitute a material part of its total assets. The economic life of the vessels is estimated to be
30 years, but the useful life of some of the vessels is only 10 years because Kayte's policy is to sell these vessels
when they are 10 years old. Kayte estimated the residual value of these vessels at sale to be half of acquisition
cost and this value was assumed to be constant during their useful life. Kayte argued that the estimates of
residual value used were conservative in view of an immature market with a high degree of uncertainty and
presented documentation which indicated some vessels were being sold for a price considerably above
carrying amount. Broker valuations of the residual value were considerably higher than those used by Kayte.
Kayte argued against broker valuations on the grounds that it would result in greater volatility in reporting.
Kayte keeps some of the vessels for the whole 30 years and these vessels are required to undergo an engine
overhaul in dry dock every 10 years to restore their service potential, hence the reason why some of the vessels
are sold. The residual value of the vessels kept for 30 years is based upon the steel value of the vessel at the
end of its economic life. At the time of purchase, the service potential which will be required to be restored by
the engine overhaul is measured based on the cost as if it had been performed at the time of the purchase of
the vessel. Normally, engines last for the 30-year total life if overhauled every 10 years. Additionally, one type
of vessel was having its funnels replaced after 15 years, but the funnels had not been depreciated separately.

PRACTICE KIT
Required
Discuss the accounting treatment of the above transactions in the financial statements of Kayte.
[ICAP Past Paper]

8. Change in Fair Value under Revaluation Model
French Power Limited (FPL) uses the revaluation model for subsequent measurement of its property plant
and equipment and has a policy of revaluing its assets on an annual basis using the net replacement value
method.
The following information relates to FPL's plant:

1) The plant was purchased on 1 July 2009 at a cost of Rs. 360 million.
2) It is being depreciated on straight line basis, over 10 years
3) the detail of previous revaluations carried out by the independent valuers are as follow.
Revaluation date Fair value
Rupees in million
1-July-2010 400
1-July-2011 280
1-July-2012 290
4) FPL transfers the maximum possible amount from the revaluation surplus to retained earnings on an
annual basis.
5) There is no change in the useful life of the plant.
Required:
Prepare journal entries to record the above transactions from the date of acquisition of the plant to the year
ended 30 June 2013. (Ignore deferred tax)

PRACTICE KIT
Answers:
1. Binkie Co (Upward and Downward Revaluations)
a) The double entry is:
Asset value (SOFP) £7,000
Profit or loss £2,000
Revaluation surplus £5,000

(OCI)
The case is similar for a decrease in value on revaluation. Any decrease should be recognized as an
expense, except where it offsets a previous increase taken as a revaluation surplus in other
comprehensive income. Any decrease greater than the previous upwards increase in value must be
recorded as an expense in profit or loss.
b) The double entry is:

Revaluation surplus (OCI) £5,000
Profit or loss £2,000
Asset value (SOFP) £7,000
There is a further complication when a revalued asset is being depreciated. An upward revaluation
means that the depreciation charge will increase. Normally, a revaluation surplus is only realized
when the asset is sold, but when it is being depreciated, part of that surplus is being realized as the
asset is used. The amount of the surplus realized is the difference between depreciation charged on
the revalued amount and the (lower) depreciation which would have been charged on the asset's
original cost. This amount can be transferred to retained (i.e., realized) earnings but not through
profit or loss.
c) On 1 January 20X8 the carrying value of the assets is £10,000 – (2 x £10,000 ÷ 5) = £6,000
For revaluation:
Asset value (SOFP) (10,000 – 4,000) £6,000
Revaluation surplus (OCI) £6,000
The depreciation for the next three years will be £12,000 ÷ 3 = £4,000 compared to depreciation on
cost of 10,000 ÷ 5 = 2,000. Each year the extra 2,000 is treated as realized and transferred to retained
earnings:
Revaluation surplus £2,000
Retained earning £2,000
This is a movement within reserves, not an item in profit or loss.

PRACTICE KIT
2. Carly (Disclosure of Property, Plant & Equipment)

Financial statements for the year ended 31 December 2015 (extract)
Land Plant and Computer Total
building machinery equipment
Cost/valuation
At 1 January 2015 1,500,000 340,500 617,800 2,458,300
Cancelation (620,000) (620,000)
Revaluation 870,000 - - 870,000
Additions (W2) - 17,250 - 17,150
Disposals - (80,000) - (80,000)
–––––––––– –––––––– –––––––– ––––––––––
At 31 December 2015 1,750,000 277,750 617,800 2,645,550
–––––––––– –––––––– –––––––– ––––––––––
At 1 January 2015 600,000 125,900 505,800 1,231,700
Charge for the year (W1) 20,000 50,775 44,800 115575
Cancelation (620,000) - - (620,000)
Disposals - (57,000) - (57,000)
–––––––––– –––––––– –––––––– ––––––––––
At 31 December 2015 Nil 119675 550,600 670275
–––––––––– –––––––– –––––––– ––––––––––
Carrying amount
At 31 December 2014 900,000 214,600 112,000 1,226,600
–––––––––– –––––––– –––––––– ––––––––––
At 31 December 2015 1,750,000 158075 67,200 1,975,275
–––––––––– –––––––– –––––––– ––––––––––
Workings:
1) Depreciation charges
Buildings = (1,500,000 – 500,000) / 50 years = 20,000.
Plant and machinery:
1) Depreciation charges Rs.
Buildings = (1,500,000 – 500,000) / 50 years = 20,000.
Plant and machinery:
New machine (17,250 x 25% x8/12) 2875
Existing plant (((340,500 – 80,000) – (125,900 – 57,000)) 25%) 47,900
50775
2) Cost of new machine
Purchase price (20,000 – 3,000 – 1,000) 16,000
Delivery costs 500
Installation costs 750
17,250

PRACTICE KIT
3. Abid Limited (PPE disclosure with Revaluations)

Abid Limited
2015 2014
- Property, plant and equipment
--------- Rs. in million ---------
Gross carrying amount 252 323
Accumulated depreciation and (14) (17)
impairment losses (323÷19)
Net carrying amount 238 306
Additions - -
Revaluation (expense)/Income (P/L) 17[272- {300-(300÷20x3)}] (18) (306-252-36)
Revaluation surplus 17 (272-238-17) (36) [{323-(300-15)}-
increase/(decrease) (OCI) (38÷19)]
Depreciation (14) (14)
[(204÷17) +(68÷17×6÷12)] (252÷18)
Disposal (66) [68 - (68÷17×6÷12)] -
192 238
Gross carrying amount 204 252

Accumulated depreciation and (12) (14)
impairment losses
Net carrying amount 192 238
Useful life 20 years 20 years
The last revaluation was performed on 1 January 2015 by M/s Premier Valuation Services, an
independent firm of valuers. Revaluations are performed annually.
2015 2014
--------- Rs. in million ---------
Carrying value had the cost model been used 180 255
instead [225 – (225÷20×4)] [300 – (300÷20×3)]
Details of property, plant and equipment disposed of during the year

Cost /
Revalued Accumulated Carrying Sale Mode of Particulars of
amount depreciation amount proceeds disposal buyers
---------------------- Rs. in million ----------------------
Building 68 2 66 80 Not mentioned Not mentioned

PRACTICE KIT
4. Sundry Question
1) Property, Plant and Equipment should be derecognized (removed from PPE) either;
i) on disposal (sold or exchanged etc. by cash for asset given up) or
ii) when it is withdrawn from use and no future economic benefits are expected from the asset (in
other words, it is effectively scrapped).
A gain or loss on disposal is recognized as the difference between the disposal proceeds (gross
proceeds received minus cost of making sale) and the carrying value of the asset (using the cost or
revaluation model) at the date of disposal. This net gain is included in the income statement. The sales
proceeds should not be recognized as revenue.
Where assets are measured using the revaluation model, any remaining balance in the revaluation
reserve relating to the asset disposed of is transferred directly to retained earnings. No recycling of
this balance into the income statement is permitted.
2) General disclosures
The financial statements shall disclose, for each class of property, plant and equipment:
a) the measurement bases used for determining the gross carrying amount;
b) the depreciation methods used;
c) the useful lives or the depreciation rates used;
d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period; and
e) a reconciliation of the carrying amount at the beginning and end of the period showing increases
or decreases resulting from revaluations from comparing its revalued amount to the book value
and recognize in other comprehensive income and accumulated in equity under the heading of
revaluation surplus. However, the revaluation increase shall be recognized in profit or loss to the
extent that it reverses a revaluation decrease of the same asset previously recognized in profit or
loss.
Specific disclosures
If items of property, plant and equipment are stated at revalued amounts, the following shall be
disclosed:
1. the effective date of the revaluation;
2. whether an independent valuer was involved;
3. for each revalued class of property, plant and equipment, the carrying amount that would have
been recognized had the assets been carried under the cost model; and
4. the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.
5. Blochberger (Cost on Initial Acquisition)e

IAS 16 Property, Plant and Equipment requires capitalization of any costs directly attributable to
bringing the asset to the location and condition necessary for it to be capable of operating in the
manner intended by management. Testing of the machine to ensure that it is functioning properly is
required before the machine can be used in commercial production. Therefore, under IAS 16,
Blochberger should capitalize $325,000 being the $400,000 costs of testing the asset's functionality less
the net proceeds of $75,000 from selling items produced while bringing the asset to its required
location and condition.
However, the training costs of $300,000 must be expensed in profit or loss as they are not considered
a direct cost. Equally the $1 million advertising costs of the new product (Product C) manufactured
by the new machine must also be treated as an expense. IAS 16 specifically prohibits capitalization of
the costs of introducing a new product or service.
Under IAS 16, depreciation should begin when the asset is available for use i.e. when it is in the
location and condition necessary for it to be capable of operating in the manner intended by

PRACTICE KIT
management. Therefore, depreciation on the new machine should begin on 31 October 20X7 when the
functionality testing is completed and commercial production begins.
6. Gasnature (Overhauling costs & Subsequent Events)

(i) It is not acceptable to accrue the costs of the overhaul. The entity does not have a constructive
obligation to undertake the overhaul. Under IFRS, costs related to major inspection and overhaul
are recognized as part of the carrying amount of property, plant and equipment if they meet the
asset recognition criteria in IAS 16 Property, Plant and Equipment. The major overhaul component
will then be depreciated on a straight-line basis over its useful life (i.e. over the period to the next
overhaul) and any remaining carrying amount will be derecognized when the next overhaul is
performed. Costs of the day-to-day servicing of the asset (i.e. routine maintenance) are expensed as
incurred. Therefore, the cost of the overhaul should have been identified as a separate component
of the refinery at initial recognition and depreciated over a period of two years. This will result in
the same amount of expense being recognized in profit or loss over the same period as the proposal
to create a provision.
(ii) Since there were no indicators of impairment at the period end, all costs incurred up to 31 August
20X5 amounting to $5 million should remain capitalized by the entity in the financial statements for
the year ended on that date. However, if material, disclosure should be provided in the financial
statements of the additional activity during the subsequent period which determined the
exploratory drilling was unsuccessful. This represents a non-adjusting event as defined by IAS 10
Events After the Reporting Period as an event which is indicative of a condition which arose after
the end of the reporting period. The asset of $5 million and additional drilling costs of $2 million
incurred subsequently would be expensed in the following year's financial statements.
7. Kayte (Residual Value & Significant Parts)

Vessels sold at ten years old:
Kayte's estimate of the residual life of these vessels is based on acquisition cost. This is unacceptable
under IAS 16 Property, Plant and Equipment. IAS 16 defines residual value as: 'The estimated amount
that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition expected at the end of its useful life.'
(para. 6).
IAS 16 requires that property, plant and equipment must be depreciated so that its depreciable amount
is allocated on a systematic basis over its useful life. Depreciable amount is the cost of an asset less its
residual value. IAS 16 stipulates that the residual value must be reviewed at least each financial year-
end and, if expectations differ from previous estimates, any change is accounted for prospectively as
a change in estimate under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Kayte's model implies that the residual value of the vessels remains constant through the vessels'
useful life. However, the residual value should be adjusted, particularly as the date of sale approaches
and the residual value approaches proceeds of disposal less costs of disposal at the end of the asset's
useful life.
Following IAS 16, if the residual value is greater than an asset's carrying amount, the depreciation
charge is zero until such time as the residual value subsequently decreases to an amount below the
asset's carrying amount. The residual value should be the value at the reporting date as if the vessel
were already of the age and condition expected at the end of its useful life. Depreciable amount is
affected by an increase in the residual value of an asset because of past events, but not by expectation
of changes in future events, other than the expected effects of wear and tear.
The useful life of the vessels (10 years) is shorter than the total life (30 years) so it is the residual value
at the end of the 10-year useful life that must be established.

PRACTICE KIT
Vessels kept for 30 years:

Kayte correctly uses a residual value for these vessels based upon the scrap value of steel. The
depreciable amount of the vessels is therefore the cost less the scrap value of steel, and the vessels
should be depreciated over the 30-year period.
The engine is a significant part of the asset and should be depreciated separately over its useful life of
10 years until the date of the next overhaul. The cost of the overhaul should be capitalized (a necessary
overhaul is not considered a day-to-day servicing cost) and any carrying amount relating to the engine
before overhaul should be derecognized. Generally, however the depreciation of the original amount
capitalized in respect of the engine will be calculated to have a carrying amount of nil when the
overhaul is undertaken.
Funnels
The funnels should be identified as significant parts of the asset and depreciated across their useful
lives of 15 years. As this has not occurred, it will be necessary to determine what the carrying amount
would have been had the funnels been initially separately identified. The initial cost of the funnels can
be determined by reference to replacement cost, and the associated depreciation charge determined
using the rate for the vessel (over 30 years). There will therefore be a significant carrying amount to
be written off at the time the replacement funnels are capitalized.
8. Change in Fair Value under Revaluation Model

Date Particular Debit Credit
--------Rs. In ‘000’-------
1-Jul-09 Plant 360,000
Bank 360,000
(record purchase of plant)
30-Jun-10 Depreciation 36,000

Accumulated depreciation – plant 36,000
(record depreciation for the year 2009-10)
Working Rs. 360,000 + 10 = Rs. 36,000
1 Jul-10 Accumulated depreciation – plant 36,000

Plant 36,000
(reversal prior year depreciation)
1-Jul-10 Plant 76,000

Surplus on revaluation of fixed assets 76,000
(Increase in the plant value through revaluation)
Working: Rs. 400,000 – Rs. 324,000 = Rs. 76,000

Working Rs. 400,000 ÷9 = Rs. 44,444
30-Jun-11 Surplus on revaluation of fixed assets 8,444

Retained earnings 8,444
(transfer of revaluation surplus to retained earnings by
incremental depreciation amount)
Working: Rs. 76,000 ÷ 9 = 8,444
1-Jul-11 Accumulated depreciation – plant 44,444

Plant 44,444

PRACTICE KIT
(reversal of prior year depreciation)
1-Jul-11 Surplus on revaluation of fixed assets 67, 556

Revaluation expense / P & L account (balancing) 8,000
Plant 75,556
(decrease in the plant value from revaluation)
Working
Surplus on rev. = 76,000 – 8,444 = Rs. 67,556
Plant [400,000 – 44,444] – 280,000 = Rs. 75,556

Working: Rs. 280,000 ÷ 8 = Rs. 35,000
1-Jul-12 Accumulated depreciation – plant 35,000

Plant 35,000
(reversal of prior year depreciation)
1-Jul-12 Plant 45,000

Revaluation income / P & L account 7,000
Surplus on revaluation of fixed assets (balancing) 38,000
(reversal of prior year impairment on increase in the plant
value through revaluation)
Working:
Rev. income = 8,000 – [8,000 ÷ 8] = Rs. 7,000
Plant: 390,000 – [280,000 - 35,000] = 45,000

Working: Rs. 290,000 ÷ 7 = Rs. 41,429
30-Jun-13 Surplus on revaluation of fixed assets 5,429

(transfer of revaluation surplus to retained earnings by
incremental depreciation account)
Working: Rs. 38,000 ÷7 = Rs. 5, 429

PRACTICE KIT
CHAPTER 02: IAS 38 – INTANGIBLE ASSETS
CHAPTER 02:
IAS 38 – INTANGIBLE ASSETS
Questions:
1. Titanium (Copyright)
On 1 January 20X7 The Titanium Company acquired the copyright to four similar magazines, each with
a remaining legal copyright period for 10 years. At the end of the legal copyright period, other
publishing companies will be allowed to tender for the copyright renewal rights.
At 31 December 20X7 the following information was available in respect of the assets:
Remaining period over which
Publication Copyright cost at publication is expected to Value in active market at
name 1 January 20X7 generate cash flows at 1 January 31 December 20X7
20X7
Dominoes £900,000 6 years £700,000
Billiards £1,200,000 16 years £1,150,000
Skittles £1,700,000 8 years Unknown
Darts £1,400,000 Indefinite £2,100,000
Titanium uses the revaluation model as its accounting policy in relation to intangible assets.
Requirement
What is the total charge to profit or loss for the year ended 31 December 20X7 in respect of these
intangible assets as per IAS 38, Intangible Assets?

2. Lewis (Intangible asset acquired in Business Combination)
The following issues have arisen in relation to business combinations undertaken by the Lewis
Company.
(a) Lewis acquired the trademark of a type of wine when it acquired 80% of the ordinary share capital
of The Calcium Company on 1 April 20X7. This wine is produced from a vineyard that is exclusively
used by Calcium.
(b) When Lewis bought a football club on 1 May 20X7, it acquired the registration of a group of football
players.
(c) Lewis acquired a 75% share in the Stilt Company during 20X7. At the acquisition date Stilt was
researching a new pharmaceutical product which is expected to produce future economic benefits.
The cost of these assets can be measured reliably.
Requirement
Indicate which if the above items should or should not be recognized as assets separable from goodwill
in Lewis’s statement of financial position at 31 December 20X7, according to IAS 38, Intangible Assets.

3. Diversified Group (Computer Based Exam & Loyalty Card Scheme)
The following issues have arisen within a diversified group of businesses.
(a) The Thrasher Company has signed a three-year contract with a team of experts to write questions
for a computer-based examination on International Financial Reporting Standards. The contract
states that the experts cannot work on similar projects for rival entities. Thrasher incurred costs of

PRACTICE KIT
£5,000 in training the experts to use the software, and believes that the product developed by the
team will be market leader.
(b) The Curium Company has a loyalty card scheme for customers. Every customer purchase is recorded
in such a way that Curium is able to create a profile of spending amounts and habits of customers,
and uses this to target them with special offers and discounts to encourage repeat business. The
database has cost of £60,000 to create and Curium has been approached by another company wishing
to buy the contents of the database.
Requirement
Which of the above items should be classified as intangible assets as per IAS 38, Intangible Assets?
[ACCA-SBR BPP]
4. Lambda (Production Process & Brand Name)
Lambda is a listed entity that prepares consolidated financial statements. Lambda measures assets using
the revaluation model wherever this is possible under IFRS. During its financial year ended 31 March
20X9 Lambda entered into the following transactions:
(a) On 1 October 20X7 Lambda began a project to investigate a more efficient production process.
Expenses relating to the project of $2m were charged in the statement of profit or loss and other
comprehensive income in the year ended 31 March 20X8. Further costs of $1.5m were incurred in the
three-month period to 30 June 20X8. On that date it became apparent that the project was technically
feasible and commercially viable. Further expenditure of $3m was incurred in the six-month period
from 1 July 20X8 to 31 December 20X8. The new process, which began on 1 January 20X9, was
expected to generate cost savings of at least $600,000 per annum over the 10-year period commencing
1 January 20X9.
(b) On 1 April 20X8 Lambda acquired a new subsidiary, Omicron. The directors of Lambda carried out
a fair value exercise as required by IFRS 3 Business Combinations and concluded that the brand
name of Omicron had a fair value of $10m and would be likely to generate economic benefits for a
ten-year period from 1 April 20X8. They further concluded that the expertise of the employees of
Omicron contributed $5m to the overall value of Omicron. The estimated average remaining service
lives of the Omicron employees was eight years from 1 April 20X8.
Required
Explain how Lambda should treat the above transactions in its consolidated financial statements for the
year to 31 March 20X9. (You are not required to discuss the goodwill arising on acquisition of Omicron.)
[ICAP-CAF 7 Question Bank]

5. Henry (Development Projects)
During 2015 Henry has the following research and development projects in progress.
Project A was completed at the end of 2014. Development expenditure brought forward at the
beginning of 2015 was Rs. 412,500 on this project. Savings in production costs arising from this project
are first expected to arise in 2015. In 2015 savings are expected to be Rs. 100,000, followed by savings of
Rs. 300,000 in 2016 and Rs. 200,000 in 2017.
Project B commenced on 1 April 2015. Costs incurred during the year were Rs. 56,000. In addition to
these costs a machine was purchased on 1 April 2015 for Rs. 30,000 for use on the project. This machine
has a useful life of five years. At the end of 2015 there were still some uncertainties surrounding the
completion of the project.
Project C had been started in 2014. In 2014 the costs relating to this project of Rs. 36,700 had been written
off, as at the end of 2014 there were still some uncertainties surrounding the completion of the project.
Those uncertainties have now been resolved and a further Rs. 45,000 costs incurred during the year.
Required

PRACTICE KIT
Show how the above would appear in the financial statements (including notes to the financial
statements) of Henry as of 31 December 2015.
[ICAP - June 2018 Q.6 (ii)]

6. ZL (TV License)
On 1 April 2017 ZL acquired a license for operating a TV channel for Rs. 86.3 million out of which Rs.
50 million was paid immediately. The balance amount is payable on 1 April 2019. A mega social media
and print media campaign was launched to promote the channel at a cost of Rs. 10 million. The
transmission of the channel started on 1 August 2017.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since the
renewal cost is significant, the management intends to renew the license only once and sell it at the end
of 8 years.
In the absence of any active market, the management has estimated that residual value of the license
would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended 31
December 2017.
[ICAP - Dec 2014 Q.2 (a) (b)]

7. Sky Link Limited (Initial Recognition & Subsequent Measurement of Operating
License)
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. SLL's 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.
SLL's financing cost is 12% per annum.

PRACTICE KIT
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
[ICAP - Dec 2012 Q.3 (b)]

8. Parrot Limited (Cost Categories)
In order to pursue expansion of its business, Parrot Limited (PL) has made the following investments
during the year ended 30 June 2012:
Costs incurred for development and promotion of a brand are enumerated below:
1) Research on size of potential market 800,000
2) Products designing 1,500,000
3) Labour costs in refinement of products 950,000
4) Development work undertaken to finalize the product design 11,000,000
5) Cost of upgrading the machine 18,000,000
6) Staff training costs 600,000
7) Advertisement costs 3,400,000
Required:
Discuss how the above investments/costs would be accounted for in the consolidated financial
statement for the year ended 30 June 2012.
[ICAP - June 2010 Q.6]

9. Comfort Shoes Limited ((Trademark)
In 2001, the management of Comfort Shoes Limited planned to acquire an international trademark to
boost its sales and enter into the international market. In this respect, the management carried out a
market survey and analyzed the information obtained to initiate the process. The relevant information
is as follows:
1) The cost incurred on the survey and related activities during the year 2001 amounted to Rs. 1 million.
2) An agreement was finalized and the company acquired the trademark effective January 1. 2002.
According to the agreement Rs. 5 million were paid on signing of the agreement and Comfort Shoes
was required to pay 1 % of sale proceeds of the related products on yearly basis. The analysis carried
out at that time indicated that the trademark would have an indefinite useful life.
3) The company has developed many new models under this trademark and successfully marketed
them in the country as well as in international markets. However, in 2008 the company faced
unexpected competition and had to discontinue the exports. It was estimated that due to
discontinuation of exports, net cash inflows for the foreseeable future, would reduce by 30%. As a
result the management was of the view that as of December 31. 2008 the carrying value of the
trademark had reduced to 90%.
4) Due to continuous inflation and flooding of markets with very low priced shoes, it was decided in
December 2009 that use of the trademark would be discontinued with effect from January 1. 2011.
Required:
(a) Explain how the above transactions should have been accounted for in the years 2001 to 2009
according to International Financial Reporting Standards (IFRSs).
(b) Prepare a note to the financial statements for the year ended December 31. 2009 in accordance with
the requirements of IFRSs. Show comparative figures.

PRACTICE KIT
10. Piperazine (Revaluation of Intangible Assets)

The Piperazine Company’s financial reporting year ends on 31 December. It has adopted the revaluation
model for intangible assets and revalues them on a regular three-year cycle. For intangibles with a finite
life Piperazine transfers the relevant amount from revaluation reserve to retained earnings each year.
During 20X4 Piperazine incurred £70,000 on the process of preparing an application for licenses for 15
taxis to operate in a holiday resort where, in order to prevent excessive traffic pollution, the licensing
authority only allowed a small number of taxis to operate. The outcome of its application was uncertain
up to 30 November 20X4 when the local authority accepted its application. In December 20X4 Piperazine
incurred a total cost of £9,000 in registering its licenses. The licenses were for a period of nine years from
1 January 20X5. The licenses are freely transferable and an active market in them exists. The fair value
of the licenses at 31 December 20X4 was £9,450 per taxi and Piperazine carried them at fair value in its
statement of financial position at 31 December 20X4.
At 31 December 20X7, Piperazine undertook its regular revaluation. On that date the licensing authority
announced that it would triple the number of licenses offered to taxi operators and there were
transactions in the active market for licenses with six years to run at £4,500.
Requirement
Determine the following amounts in respect of the revaluation reserve in respect of these taxi licenses
in Piperazine’s financial statements according to IAS 38, Intangible Assets.
(a) The balance at 31 December 20X4
(b) The balance at 31 December 20X7 before the regular revaluation
(c) The balance at 31 December 20X7 after the regular revaluation
[ICAP - Summer 2014 Q.7]

11. Fine Woods Limited (Website Cost)
Fine Woods Limited (FWL) markers quality wood fumiture through its sales offices located in major
cities of Pakistan. In March 2012, the management of FWL decided to introduce online sales through its
website. The expenses incuned in this regard during the year ended 31 December 2012 were as follows:
• Feasibility was prepared by a consulting firm for upgrading the existing website to facilitate online
sales, at a cost of Rs. 3.5 million.
• Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million respectively.
• Website was upgraded by FWL's IT team. The directly anriburable costs amounted to Rs. 5 million.
• Online payment system was developed by external experts at a cost of Rs. 3 million.
• IT personnel were trained to deal with security issues relating to on.line transactions at a cost of Rs.
1.5 million.
In the financial statements for the year ended 31 December, 2012 the above expenses were classified as
capital work in progress.
In January 2013, after successful testing of online sales, FWL launched a campaign for online sales and
incurred an expenditure of Rs. 2.5 million in this respect.
Required:
Discuss the accounting treatment in respect of the above, in the financial statements of FWL for the year
ended 31 December 2013 in accordance with the requirements of International Financial Reporting
Standards.

PRACTICE KIT
[ICAP - Summer 2019 Q.2 (i)]

12. Fiji Limited (Websites Costs)
Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The following
transactions/events have occurred during 2018.
On 1 October 2018, FL launched its own website for online sale of its products. The website’s content is
also used to advertise and promote FL’s products. The website was developed internally and met the
criteria for recognition as an intangible asset. Directly attributable costs incurred for the website are as
follows:
Rs. in million
Planning of the website 2.5
Web servers 10.5
Operating system of web servers 5.5
Developing code for the website application and its installation on web servers 6.0
Designing the appearance of web pages 3.5
Content development 12.5
Post launch operating cost 2.8
Currently, all the above costs are included in ‘intangible assets under development’.
(08)
Required:
Discuss how the above transactions/events should be dealt with in FL’s books for the year ended 31
December 2018. (Show all calculations wherever possible. Also mention any additional information
needed to account for the above transactions/events)

PRACTICE KIT
Answers:
1. Titanium (Copyright)
The Dominoes publication has a useful life of six years, and so should be amortized over this period.
At the year end the carrying amount of £750,000, (900,000*5/6), exceeds the active market value, so an
impairment of £50,000 impairment charge)
The Billiards publication is initially amortized over the period of 10 years to the end of the copyright
arrangement, as there is no uncertainty that the company can publish the magazine after this date. This
gives a charge of £120,000.
The Skittles publication is amortized over the period it is expected to generate cash flows of eight years,
giving a charge of £212,500.
The Darts publication has an indefinite period over which it is expected to generate cash flows. Under
normal circumstances it would be automatically subject to an annual impairment review. However,
because the copyright arrangement does have a finite period, amortization should take place over 10
years, and so a charge of £140,000 is required.
The total charge is £672,500.
2. Lewis (Intangible asset acquired in Business Combination)

(a) Recognized
(b) Recognized
(c) Recognized
(a) The vineyard trademark is not separable because it could only be sold with the vineyard itself. But
under IAS 38.36, the combination of the vineyard and the trademark should be recognized.
(b) The footballers’ registrations represent a legal right which meets the identifiability criterion in IAS
38.12.
(c) The research project should be treated as a separate asset, as on a business combination it meets the
definition of an asset and is identifiable (IAS 38.34).
3. Diversified Group (Computer Based Exam & Loyalty Card Scheme)

(a) Not an intangible
(b) An intangible
(a) The training costs would not satisfy the definition of an intangible asset. This is because Thrasher
has insufficient control over the expected future benefits of the team of experts (IAS 38.15).
(b) The database would be classified as an intangible asset because the willingness of another party to
buy the contents provides evidence of a potential exchange transaction for the relationship with
customers and that the asset is separable (IAS 38.16).

PRACTICE KIT
4. Lambda (Production Process & Brand Name)

(a) Costs are capitalized from 30 June 20X8 onwards (when commercial feasibility and technical viability
were demonstrated). Hence the $3.5m incurred before this point is expensed.
The $3m incurred from 1 July to 31 December 20X8 is capitalized. Amortization is charged over the
ten-year useful life, giving an annual charge of $300,000.
Amortization is charged from when the process begins to be exploited commercially; here this is 1
January 20X9. Amortization charged in the year-ended 20X9 is $300,000  3/12 = $75,000.
The carrying amount is thus:

Cost 3,000,000
Amortization (75,000)
Carrying amount 2,925,000
(b) The brand name is capitalized at its fair value of $10m. It is amortized over its useful life of 10
years, resulting in an expense of $1m. The carrying amount at the year-end is thus $9m.
In accordance with IAS 38, no asset may be recognized in respect of the employees' expertise, as
Lambda/Omicron does not exercise 'control' over them – they could leave their jobs. The amount
will be recognized as part of any goodwill on acquisition of Omicron.
5. Henry (Development Projects)

Plant and machinery
On 1 January 2015 Additions X
On 31 December 2015 30,000
X
On 1 January 2015 X
Charge for the year (30,000 9/12 ÷ 5) 4,500
On 31 December 2015 X
Carrying amount
On 31 December 2014 X
On 31 December 2015 25,500
Intangible assets
Internally generated research and development expenditure
Cost
On 1 January 2015 412,500
Additions 45,000
On 31 December 2015 457,500
Accumulated amortization
On 1 January 2015
Charge for the year (W) 68,750
On 31 December 2015 68,750
Carrying amount
On 31 December 2014 412,500
On 31 December 2015 388,750

PRACTICE KIT
Working:
Amortization charge (Project A)
Rs.
Total savings (100,000 + 300,000 + 200,000) 600,000
2015 amortization charge (100,000/600,000 x 412,500) 68,750
Tutorial notes
The costs in respect of Project B cannot be capitalized as there are uncertainties surrounding the
successful outcome of the project – but the machine bought may be capitalized in accordance with
IAS16.
The 2015 costs in respect of Project C can be capitalized as the uncertainties have now been resolved.
However, the 2014 costs cannot be reinstated.
6. ZL (TV License)
Since a part of the payment for the license has been deferred beyond normal credit terms so the license
will be initially recognized at cash price equivalent of Rs. 80 million i.e. Rs. 50 million plus Rs. 30 million
(i.e. present value of Rs. 36.3 million discounted at 10% for 2 years.)
The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be included in the
cost of the license and will be charged to Profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the original 5
years only.
The residual value of the license will be assumed to be zero since there is no active market for the license
and there is no commitment by 3rd party to purchase the license at the end of useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated from 1 April 2017
when the license was available for use:
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with increasing
the liability of payable for license with same amount.
7. Sky Link Limited (Initial Recognition & Subsequent Measurement of Operating

License)
Accounting treatment in the financial statements for the year ended 30 June 2014 Treatment in
accordance with the requirements of the international financial reporting standards for the matters
pertaining to the financial statements for the year ended 30 June 2014 is discussed as under:
(a) Operating license - measurement and recognized
The operating license shall be measured initially at cost of Rs. 50 million plus Rs. 6 million of other
directly attributable cost for preparing the asset for its intended use.
For subsequent measurement, IAS allows either the cost or revaluation model. However, revaluation
model can only be used when an active market of the intangible asset exists.
In this case, the operating license shall be carried at cost less accumulated amortizations. However,
carrying value should be reviewed annually to identify any impairment.
The license has finite useful life of twenty years. The cost should therefore be amortized on a
systematic basis over its useful life. Amortization shall begin when the asset is available for use.
In this case, the license was acquired on 1 August 2013 but it is operative from 1 January 2014.
Therefore, amortization should commence from I January 2014 and it would amount to Rs. 1.43
million (56-;-I 9.583x6-;-J2) for the period from I January to 30 June 2014.

PRACTICE KIT
Operating license - Impairment

Significant lower number of subscribers and loss of Rs. 15 million during the first six months as
against the budgeted profit of Rs. 30 million are indicators for review of impairment.
The license itself does not generate cash flow independently of the other assets. Therefore, SLL
would be treated as a cash generating unit (CGU).
To determine impairment, recoverable amount is to be worked out by analyzing value in use (VIU)
and market value of operating license and tangible assets.
The loss for the first six months seems to be mainly because of significant marketing campaign cost
as excluding this cost loss for the first six months would be reduced to Rs. 10 million (30- 20). Earning
profit of Rs. 5 million during the months of July and August 2014 and signing of further 20,000
customers are indicative of improving operating results. Therefore, VIU of CGU is expected to
exceed the carrying value of the net assets.
In view of the above, it may be concluded that there is no impairment of CGU.
(b) Cost incurred on launching of marketing campaign:
Cost incurred for launching of marketing campaign to introduce the network and sales promotion
of package offered should be expensed out when incurred, therefore, invoices totaling to Rs. 20
million should be charged to cost for the year ended 30 June 2014.
8. Parrot Limited (Cost Categories)

The invested amount in Brand should be accounted for as follows:
Expense Intangible Property,
income assets plant and
statement equipment
Research on size of potential market (a) 800,000
Produce designing (b)1,500,000
Labour costs in refinement of products (b)50,000
Development work undertaken to finalize the Product (b)11,000,000
design·
Cost of upgrading_ machine (c)18,000,000
Staff training. costs- (a)600,000
Advertisement costs (a)3,400,000
4,800,000 13,450,000 18,000,000

(a) 38 does not allow capitalization of research cost, staff training costs and advertisement costs as these
are not directly attributable costs. Therefore these expenditures should be expensed out.
(b) Development expenditure is capitalized when CTML demonstrates all the following:
• The technical feasibility of completing the intangible asset so that it will be available for use or
sale.
• CTML's intention to complete the intangible asset and use or sell it.
• CTML's ability to use or sell the intangible asset.
• That the intangible asset will generate probable future economic benefits.
• The availability of adequate technical, financial and other resources to complete the development
and to use or sell it.
• CTML's ability to measure reliably the expenditure attributable to the intangible asset during its
development.
Assuming that all these criteria are met, the cost of development should comprise directly attributable
costs necessary to create the asset and to make it capable of operating in the manner intended by
management. The cost of upgrading the machines is tangible asset and should be regarded as property,
plant and equipment.

PRACTICE KIT
9. Comfort Shoes Limited ((Trademark)

a) In accordance with the IAS transactions related to the trademark as given in the question should be
accounted for as explained below:
1) As the costs and benefits of the trade mark cannot be measured reliably, and it was not even
decided at that time to buy the trademark. The cost of Rs. 1 million incurred in 200l to carry out
market survey should have been expensed out in the year 200 l.
2) In 2002, the rights to use the trademark for the company's products have been obtained and costs
and benefits of the trademark were measured reliably. Therefore, initially the trademark should
have been accounted for as an intangible asset at a cost of Rs. 5 million.
At that time the trademark was estimated to have indefinite useful life as there was an expectation that
it will contribute to net cash inflows indefinitely. Therefore, the trademark should not have been
amortized.
However, the trademark should have been tested for impairment and the cost should have been
reduced (if required).
Trademark fee payable at 1 % of annual sales should have been treated as a periodical cost and charged
to expense in the year of sales.
b) Comfort Shoes Limited
Notes to the Financial Statements
For the year ended December 31, 2008
1 Intangible Assets – Trademark
2009 2008
Rs. in million Rs. in million
Cost January 1 4,500 5,000
For the year impairment - (500)
December 31 4,500 4,500
Amortization January 1 - -
For the year 2,250 -
December 31 2,250 -
Net book value December 31 2,250 4,500
% / useful life 50% / 2 years -
The amortization expense for the year has been allocated to cost of sales.

PRACTICE KIT
10. Piperazine (Revaluation of Intangible Assets)

(a) £132,750
(b) £88,500
(c) £61,500
(a) Under IAS 38.21 the £70,000 spent in 20X4 in applying for the licenses must be recognized in profit
or loss, because the generation of future economic benefits is not yet probable. The £9,000 incurred
in December 20X4 in registering the licenses is treated as the cost of the licenses because the economic
benefits are then probable. The carrying amount of the licenses under the revaluation model at 31
December 20X4 is £141,750 (£9,450*15), so the balance on the revaluation reserve is the £132,750 uplift
(IAS 38.75 & 85).
(b) After three years the accumulated amortization based on the revalued amount is £47,250
(£141,750*3/9), whereas the accumulated amortization based on the cost would have been £3,000
(£9,000*3/9). So, £44,250 will have been transferred from the revaluation reserve to retained earnings
(IAS 38.87). The remaining balance before the regular revaluation is £88,500 (£132,750 - £44,250).
(c) The carrying amount of the licenses immediately before the revaluation is £94,500 (£141,750 -
£47,250). The revalued carrying amount is £ 67,500 (£4,500*15). The deficit of £27,000 is recognized
in the revaluation reserve, reducing the balance to £61,500 (IAS 38.86).
11. Fine Woods Limited (Website Cost)

Upgrading of website and introduction of online sales (IAS 38 and SIC 32):
In accordance with IAS 38, accounting treatment of the costs incurred to introduce online sales through
its website by FWL is as under:
Costs incurred in 2012 and classified as capital work in progress:
1) Costs incurred in respect of feasibility and training of IT personnel should be expensed out when
incurred.
As these costs were incorrectly recognized in 2012 as capital work in progress, therefore, in 2013,
these should be treated as prior period errors in accordance with IAS 8.42. The correction shall be
made retrospectively by restating the comparative amounts for 2012 in respect of:
• Capital work in progress
• Retained earnings
• Relevant expenses
2) Cost of hardware and its operating software should be capitalized in January 2013 as tangible asset
in line with the requirements of IAS 16 and depreciated over their estimated useful economic life.
3) Directly attributable costs of IT staff and experts hired externally for development of online payment
system shall be recognized as an intangible asset in January 2013 as the following required conditions
are met by FWL:
• It is probable that the expected future economic benefits that are attributable to the asset will flow
to FWL; and
• The cost of the asset can be measured reliably.
Costs incurred in 2013:
Cost incurred on online sales campaign should be expensed out when incurred.

PRACTICE KIT
12. Fiji Limited (Websites Costs)

Each cost would be transferred from ‘intangible assets under development’ and would be treated as:
Planning of the website an expense
Web servers a tangible asset as per IAS 16 and depreciates over their useful life.
Operating system of web an intangible asset and made part of the cost of servers as it is integral
servers part of the servers.
Developing code for the an intangible asset and made part of the cost of the website.
website application and its
installation on web servers
Designing the appearance an intangible asset and made part of the cost of the website.
of web pages / Graphical
design development
Content development as an expense to the extent that content is developed to advertise and
promote FL’s products. Remaining cost would be capitalised as an
intangible asset and made part of the cost of the website.
Post launch operating cost an expense when incurred unless it meet recognition criteria of IAS 38
Additional information needed:
▪ Life of server and website, data for calculating depreciation and amortization, method of
depreciation and amortization.
▪ Amount of content development attributable to advertisement
▪ Any post launch cost that meets criteria for recognition as intangible asset

PRACTICE KIT
CHAPTER 03: IAS 40 – INVESTMENT PROPERTY
CHAPTER 03:
IAS 40 – INVESTMENT PROPERTY
Questions:
[ACCA-SBR Kaplan]
1. Investment property (Owner occupied property intends to shift to IAS 40)
Lavender owns a property, which it rents out to some of its employees. The property was purchased
for $30 million on 1 January 20X2 and had a useful life of 30 years at that date. On 1 January 20X7 it had
a market value of $50 million and its remaining useful life remained unchanged. Management wish to
measure properties at fair value where this is allowed by accounting standards.
Required
How should the property be treated in the financial statements of Lavender for the year ended 31
December 20X7.
[ACCA-SBR Kaplan]
2. ABC (Owner occupied to Investment property)
ABC owns a building that it used as its head office. On 1 January 20X1, the building, which was
measured under the cost model, had a carrying amount of $500,000. On this date, when the fair value
of the building was $600,000, ABC vacated the premises. However, the directors decided to keep the
building in order to rent it out to tenants and to potentially benefit from increases in property prices.
ABC measures investment properties at fair value. On 31 December 20X1, the property has a fair value
of $625,000.
Required
Discuss the accounting treatment of the building in the financial statements of ABC for the year ended
31 December 20X1.
[ACCA P2 12/12, amended (a)]

3. Blackcutt (Ancillary services along with Investment property)
Blackcutt is a local government organization whose financial statements are prepared using
International Financial Reporting Standards.
Blackcutt wishes to create a credible investment property portfolio with a view to determining if any
property may be considered surplus to the functional objectives and requirements of the local
government organization. The following portfolio of property is owned by Blackcutt.
Blackcutt owns several plots of land. Some of the land is owned by Blackcutt for capital appreciation
and this may be sold at any time in the future. Other plots of land have no current purpose as Blackcutt
has not determined whether it will use the land to provide services such as those provided by national
parks or for short-term sale in the ordinary course of operations.
The local government organization supplements its income by buying and selling property. The
housing department regularly sells part of its housing inventory in the ordinary course of its operations
as a result of changing demographics. Part of the inventory, which is not held for sale, is to provide
housing to low-income employees at below market rental. The rent paid by employees covers the cost
of maintenance of the property.
Required
Discuss how the above events should be accounted for in the financial statements of Blackcutt.

PRACTICE KIT

PRACTICE KIT

4. Installation of new equipment – 1
An entity owns the freehold of an office building which was acquired on 31 December 20X0 for £17
million, £2 million of which was attributable to the land. The freehold is an investment property
measured under the cost model with the building’s useful life estimated at 30 years. The building was
fully equipped with an air-conditioning system £1.2 million, which has an estimated useful life of 10
years. As no more reliable information was available, it used this cost as an indication of the cost of the
old system.
Requirement
How replacement of the air-conditioning should be accounted for?

5. Installation of new equipment 2
An entity with a 31 December year end owns an office building which is recognized as an investment
property. The life system is an integral part of the office building. The entity uses the fair value for
measurement of investment properties.
The lift system was purchased on 1 January 20X0 for the £400,000 and is being depreciated at 12.5% per
annum on cost. It’s carrying amount has been accepted as a reasonable value at which to include it
within a fair value of the office building as a whole.
Early in December 20X5 a professional valuer determined the fair value of the office building, including
the lift system, to be 3 million. The lift system failed on 28 December 20X5 and was immediately replaced
on 31 December 20X5 with a new system costing £600,000.
Requirement
How should the lift system be recognized?

6. Replacement property
An entity with a 31 December year end owns an investment property which it measures using the fair
value model. At 31 December 20X4, the property’s carrying amount is £4 million. On 30 June 20X5, an
explosion close to the property causes major damage to the property. In July 20X5, the entity makes a
number of insurance claims as a result, one of which is for the rebuilding cost, estimated at £3.7 million.
Although the property is repairable, the entity decides to sell it in its present state and buy a replacement
property. This decision is made on 30 September 20X5, on which date the damaged property meets the
criteria for classification as held for sale. Its fair value on that date 30 September 20X5 is £350,000 and
the costs to sell are £35,000. The fair value does not change between 30 September 20X5 and 31 December
20X5. The sale is completed in the middle of 20X6 for £375,000, with selling cost of £40,000.
The entity’s insurers contest the claim relating to the building on the basis of an exclusion clause. The
entity disagrees with the insurers’ interpretation and in February 20X6 initiates legal proceedings.
Negotiations are protracted and it is not until the end of 20X7 that the insurers agree to settle for £3.9
million.
Requirement
How should entity recognize these transactions?

PRACTICE KIT
[ICAP - Summer 2003]

7. Foreign investment Ltd. (Changes in Fair value of Investment Property)
Foreign investment Ltd. owns a building which is given on rent. The historical cost in the financial
statement for the year ending December 31, 2000 is included in the fixed assets at Rs.30 million. The fair
value of the plaza on Jan 01, 2001 was Rs.300 million and on December 31, 2001 Rs.302 million.
Show the working by adopting fair value model under IAS 40. Indicate how these transactions would
be disclosed in the financial statements for the year ending Dec 31, 2001.

8. Gee Investment Company limited (Multiple Transfers between Investment
property)
Gee Investment Company limited (GICL) acquires properties and develops them for diversified
purpose. i.e. resale, leasing and its own use. GILC applies the fair value model for investment properties
and cost model for property, plant equipment. The details of the buildings owned are as follows:
Property Date of Useful life Cost Residual Fair value as on 31 December
acquisition (years) value
2011 2010
Rs. in million
A 1 August 2006 20 130 14 100 150
B 1 January 2009 15 240 24 240 10
C 1 July 2009 10 160 20 150 120
D 1 July 2008 10 10 1 Not available
E 1 August 2011 20 48 4 51 -
The following information is also available:

Property A GICL had been trying to sell this property for the last two years. However, due to weak
market, the directors finally decided to lease it with effect from 1 October 2011 when its
fair value was Rs. 120 million.
Property B The posession of this property was acquired from the tenants on 30 June 2010 when the
company shifted its head office from property C to property B. the fair value on the above
date was Rs. 195 million.
Property C when the head office was shifted from this property, it was leased to a subsidiary at market
rate. On the date of lease, the fair value was equal to it’s carrying amount.
Property D This property is situated outside the main city and its fair value cannot be determined. It
was rented to a government organization soon after the acquisition.
Property E this property is an office building comprising of three floors. After acquisition, two floors
were rented out. On 1 November 2011, GICL established a branch office on the third floor.
Details of cost incurred on acquisition are as follows:

Rs. in million
Purchase price 42.50
Agent’s commission 0.50
Registration fees and taxes 2.00
Administrative costs allocated 3.00
48.0
Required:
(a) Prepare a note on investment property, for inclusion in GICL’s separate financial statements for the
year ended 31 December 2011. (Ignore comparative figures).

PRACTICE KIT
(b) Explain how property C would be accounted for in the consolidated financial statements for the year
ended 31 December 2011.

9. Victoria (PV of Properties)
Victoria owns several properties and has a year end of 31 December. Wherever possible, Victoria carries
investment properties under the fair value model.
Property 1 was acquired on 1 January Year 1. It had a cost of Rs. 1 million, comprising Rs. 500,000 for
land and Rs. 500,000 for buildings. The buildings have a useful life of 40 years. Victoria uses this
property as its head office.
Property 2 was acquired many years ago for Rs. 1.5 million for its investment potential. On 31 December
Year 7 it had a fair value of Rs. 2.3 million. By 31 December Year 8 its fair value had risen to Rs. 2.7
million. This property has a useful life of 40 years.
Property 3 was acquired on 30 June Year 2 for Rs. 2 million for its investment potential. The directors
believe that the fair value of this property was Rs. 3 million on 31 December Year 7 and Rs. 3.5 million
on 31 December Year 8. However, due to the specialized nature of this property, these figures cannot
be corroborated. This property has a useful life of 50 years.
Required
For each of the above properties briefly state how it would be treated in the financial statements of
Victoria for the year ended 31 December Year 8, identifying any impact on profit or loss.

10. Disposal of Investment Property
An entity purchased an investment property on 1 January 20X3, for a cost of £5.5 million. The Property
has a useful life of 50 years, with no residual value and at 31 December 20X5 had a fair value of £6.2
million. On 1 January 20X6 the property was sold for net proceeds of £6 million. Requirement Calculate
the profit or loss on disposal under both the cost and fair value model.

11. Change of Use
An entity with a 31 December year end purchased an office building, with a useful life of 50 years, for
£5.5 million. On 1 January 20X1. The amount attributable to the land was negligible. The entity used the
building as its head office for five years until 31 December 20X5 when the entity moved its head office
to larger premises. The building was reclassified as an investment property and leased out under a five-
year lease.
Owing to a change in circumstances the entity took possession of the building five years later on 31
December 20Y0, to use it as its head office once more. At that date the remaining useful life of the
building was confirmed as 40 years.
The fair value of the head office was as follows.

• At 31 December 20X5 £6 million
• At 31 December 20Y0 £7.5 million
Requirements
How should the changes of use he reflected in the financial statements on the assumption that:
a) The entity uses the cost model for investment properties?
b) The entity uses the fair value model for investment properties?

PRACTICE KIT
Answers:
1. Investment property (Owner occupied property intends to shift to IAS 40)
Property that is rented out to employees is deemed to be owner occupied and therefore cannot be
classified as investment property.
Management wish to measure the property at fair value, so Lavender adopts the fair value model in
IAS 16 Property, Plant and Equipment, depreciating the asset over its useful life and recognizing the
revaluation gain in other comprehensive income.
Before the revaluation, the building had a carrying amount of $25m ($30m × 25/30). The building would
have been revalued to $50m on 1 January 20X7, with a gain of $25m ($50m – $25m) recognized in other
comprehensive income.
The building would then be depreciated over its remaining useful life of 25 years (30 – 5), giving a
depreciation charge of $2m ($50m/25) in the year ended 31 December 20X7. The carrying amount of the
asset as at 31 December 20X7 is $48m ($50m – $2m).
2. ABC (Owner occupied to Investment property)

When the building was owner-occupied, it was an item of property plant and equipment. From 1
January 20X1, the property was held to earn rental income and for capital appreciation so it should be
reclassified as investment property.
Per IAS 40, if owner occupied property becomes investment property that will be carried at fair value,
then a revaluation needs to occur under IAS 16 at the date of the change in use.
The building must be revalued from $500,000 to $600,000 under IAS 16. This means that the gain of
$100,000 ($600,000 – $500,000) will be recorded in other comprehensive income and held in a revaluation
reserve within equity.
Investment properties measured at fair value must be revalued each year end, with the gain or loss
recorded in profit or loss. At year end, the building will therefore be revalued to $625,000 with a gain of
$25,000 ($625,000 – $600,000) recorded in profit or loss.
Investment properties held at fair value are not depreciated.
3. Blackcutt (Ancillary services along with Investment property)

IAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to earn
rentals or for capital appreciation or both. Examples of investment property given in the standard
include, but are not limited to:
(i) Land held for long-term capital appreciation
(ii) Land held for undetermined future use
Assets which IAS 40 states are not investment property, and which are therefore not covered by the
standard include:
(i) Property held for use in the production or supply of goods or services or for administrative purposes
(ii) Property held for sale in the ordinary course of business or in the process of construction of
development for such sale

PRACTICE KIT
Owner-occupied property, property being constructed on behalf of third parties and property leased to
a third party under a finance lease are also specifically excluded by the IAS 40 definition. (Note that
finance leases still exist for lessors, though not for lessees.)
If the entity provides ancillary services to the occupants of a property held by the entity, the
appropriateness of classification as investment property is determined by the significance of the services
provided. If those services are a relatively insignificant component of the arrangement as a whole (for
instance, the building owner supplies security and maintenance services to the lessees), then the entity
may treat the property as investment property. Where the services provided are more significant (such
as in the case of an owner-managed hotel), the property should be classified as owner-occupied.
Applying IAS 40 to Blackcutt's properties, the land owned for capital appreciation and which may be
sold any time in the future will qualify as investment property. Likewise, the land whose use has not
yet been determined is also covered by the IAS 40 definition of investment property: as it has no current
purpose it is deemed to be held for capital appreciation.
Investment property should be recognized as an asset where it is probable that the future economic
benefits associated with the property will flow to the entity and the value can be measured reliably. IAS
40 permits an entity to choose between the cost model and the fair value model. Where the fair value
model applies, the property is valued in accordance with IFRS 13 Fair Value Measurement. Gains or
losses arising from changes in the fair value of investment property are recognized in profit or loss for
the year.
The houses routinely bought and sold by Blackcutt in the ordinary course of its operations will not
qualify as investment property, but will be treated under IAS 2 Inventories. The part of the housing
inventory not held for sale but used to provide housing to low-income employees does not qualify as
investment property either. The properties are not held for capital appreciation, and because the rent is
below market rate and only covers the maintenance costs, they cannot be said to be held for rentals. The
rental income is incidental to the purposes for which the property is held, which is to provide housing
services. As with the example of the owner-managed hotel above, the services are significant, and the
property should be classified as owner occupied. Further indication that it is owner occupied is
provided by the fact that it is rented out to employees of the organization. It will be accounted for under
IAS 16 Property, Plant and Equipment.
4. Installation of new equipment – 1

£1 million is derecognized being the depreciated cost of the replaced system:
£1.2 million x (25/30 years)
£1.2 million is capitalized as the cost of the new system and will be depreciated over its estimated useful
life of 10 years.
5. Installation of new equipment 2

The carrying amount of the failed system should be derecognized:
Carrying amount is £100,000 (£400,000 less six years’ depreciation at 12.5%)
The replacement system should be recognized:

Total carrying amount of the office building is £3,500,000 (£3m - £100,000 + £600,000)
6. Replacement property
The entity recognizes these transactions and events as follows.
20X5
The property Continues to be measured under the fair value mod& on classification as held for sale on
30 September. An impairment of £3.65 million is recognized (f4 million less £350,000). At 31 December
the property is presented as held for sale within current assets at £350,000.

PRACTICE KIT
20X6
The replacement property is recognized at a cost of £3.8 million and a loss on disposal is recognized of
£15,000 being (proceeds of (375,000 less selling costs of £40,000 less carrying amount of property of
£350,000).
20X7
The insurance proceeds of £3.9 million are recognized in profit or loss. Note: The requirement to
measure an asset 'held for sale' and the sower of carrying amount and fair value less costs to sell does
not apply to investment properties measured at fair value (IFRS 5.5). IAS 40.37 states that costs to sell
should not be deducted from fair value.
7. Foreign investment Ltd. (Changes in Fair value of Investment Property)

Fair value gain
Re-classification from cost model to Investment Revaluation charged to profit or
fair value model property surplus loss account
Investment property Rs. (m) Rs. (m)
At historic cost 01-01-2001 30.00 -- --
Revaluation surplus IAS 40 (300-30) 270.00 270.00 --
Fair value at 31-12-2001 2.00 -- 2.00
Total 302.00 270.00 2.00
8. Gee Investment Company limited (Multiple Transfers between Investment

property)
2011
Property Carried at Carried at fair Total
cost value
Rupees
D, C Cost /fair value as on 1 January 10.00 120.00 130.00

2011
Accumulated depreciation*1 (2.25) -- (2.25)
Balance as on 1 January 2011 7.75 120.00 127.75
E Additions during the year*2 30.00 30.00
A Transferred from inventory 120.00 120.00
D Depreciation*3 (0.90) (0.90)

Fair for value adjustment (W-I) 14.00 14.00
Cost/fair value as on 31 December 10.00 284.00 294.00

Accumulated depreciation (3.15) -- (3.15)
Balance as on 31 December 2011 6.85 284.00 290.85
*1: (Rs. 10m – Rs. 1m)/10 * 2.5

*2: (48 - 3) * 2/3
*3: (Rs. 10m – Rs. 1m)/10
6.1: Property B

PRACTICE KIT
Since property B was transferred to property plant and equipment on 30 June 2010, it will not be
considered as
investment property.
6.2: Property D
This property rented out to tenants is situated outside the main city and therefore fair value is not
determinable.
The building is being depreciated over a period of 10 years on straight line method.
W-1: Fair Value Adjustment Rs. in million

Property A (120 - 100) (20.00)
Property C (150 - 120) 30.00
Property E (51 * 2/3) – 30 4.00
14.00
9. Victoria (PV of Properties)
Treatment in the financial statements for the year ended 31 December Year 8 (IAS16)
Property 1
This is used by Victoria as its head office and therefore cannot be treated as an investment property. It
will be stated at cost minus accumulated depreciation in the statement of financial position. The
depreciation for the year will be charged in the statement of profit or loss.
Property 2
This is held for its investment potential and should be treated as an investment property. It will be
carried at fair value, Victoria’s policy of choice for investment properties. It will be revalued to fair value
at each year end and any resultant gain or loss taken to the statement of profit or loss (Rs. 400,000 gain
in Year 8).
Property 3
This is held for its investment potential and should be treated as an investment property. However,
since its fair value cannot be arrived at reliably it will be held at cost minus accumulated depreciation
in the statement of financial position. The depreciation for the year will be an expense in the statement
of profit or loss.
This situation provides the exception to the rule whereby all investment properties must be held under
either the fair value model, or the cost model.
10. Disposal of Investment Property

The cost model £m
The proceeds 6.00
Carrying amount £5,500,000 X 47/50 (5.17)
Profit on sale 0.83
The fair value model £m

Net proceeds 6.0
Fair value (6.2)
Loss on sale (0.2)

PRACTICE KIT
11. Change of Use

The changes of use will be reflected in the financial statements based on whether the entity uses cost or
fair value model for investment properties as follows.
a) The cost model of investment properties
At 31 December 20X5, the building has a carrying amount of
£5.5m x 45/50 years = £4.95 million in accordance with IAS 16.
On 1 January 20X6 the property will be recognized as an investment property at its IAS 16 carrying
amount of £4.95 million and will continue to be depreciated over its remaining 45-years life.
At 31 December 20Y0, the building has carrying amount of
£4.95m x 40/45 years = £4.4 million in accordance with IAS 40
On 1 January 20Y1 the property will be recognized as property, plant and equipment at its IAS 40
carrying amount of £4.4 million and will continue to be depreciated over its remaining 40 years life.
b) The fair value model for investment properties

At 31 December 20X5, the building has a carrying amount of £4.95 million in accordance with IAS
16 (as set out above)
On 1 January 20X6, the property will be recognized as an investment property however, the property
should be revalued to fair value at 31 December 20X5, and any change in value should be recognized
in accordance with IAS 16.
The property will therefore be recognized at a carrying amount of £6 million and the difference of
11.05 million should be recognized as a revaluation surplus (other comprehensive income).
During the period between 1 January 20X6 and 31 December 20Y0 the building is measured at fair
value with any gain or loss recognized directly in profit or loss. At the end of 20Y0 the cumulative
gain is £1.5 million.
At 31 December MVO, the building has a carrying amount of £7.5 million being its fair value and
this is the amount that should be recognized as it’s carrying amount under IAS 16. The carrying
amount will be depreciated over the building's remaining 40-year useful life.

PRACTICE KIT
CHAPTER 04: IAS 36 – IMPAIRMENT OF ASSETS
CHAPTER 04:
IAS 36 – IMPAIRMENT OF ASSETS
Questions:
[ICAP - Study text]
1. Entity Q
On 1 January Year 1 Entity Q purchased for Rs. 240,000 a machine with an estimated useful life of 20
years and an estimated zero residual value. Depreciation is on a straight-line basis.
On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be Rs. 100,000
and its remaining useful life to be 10 years.
Required:
a) The carrying amount of the machine on 31 December Year 3 (immediately before the impairment).
b) The impairment loss recognised in the year to 31 December Year 4.
c) The depreciation charge in the year to 31 December Year 4.
[ICAP CAF-7 Question Bank]

2. Sunshine Limited (Impairment & Machines)
On 1 July 2016, Sunshine Limited (SL) acquired four licenses namely A, B, C and D for a period of 10
years. The following information is available in respect of these licenses:
1)
A B C D
Cost (Rs. in millions) 200 230 90 60
Expected useful life 12 years indefinite 6 years 12 years
Active market value at 30 June 2017 No active

170 300 65 market
(Rs. in millions)
Renewal cost (Rs. in millions) 65 85 2 1
2) The renewal would allow SL to use the machines for another five years.
3) SL uses the revaluation model for subsequent measurement of its assets.
4) An independent valuer has estimated the value of machine ‘D’ at Rs. 130 million.
Required:
Determine the amounts that should be recognised in respect of the machines in the statement of financial
position and statement of profit or loss for the year ended 30 June 2017.
[ACCA SBR - KAPLAN]

3. Uturn (CGUs and impairment reversals)
On 31 December 20X2, an impairment review was conducted on a cash generating unit and the results
were as follows:
Asset Carrying amount Impairment Carrying amount
pre-impairment post-impairment
$000 $000 $000
Goodwill 100 (100) Nil
Property, plant and equipment 300 (120) 180
400 (220) 180
The property, plant and equipment was originally purchased for $400,000 on 1 January 20X1 and was
attributed a useful economic life of 8 years.

PRACTICE KIT
At 31 December 20X3, the circumstances which caused the original impairment have reversed and are
no longer applicable. The recoverable amount of the cash generating unit is now $420,000.
Required:
Explain, with supporting computations, the impact of the impairment reversal on the financial
statements for the year ended 31 December 20X3.
[ACCA SBR - BPP]

4. Shiplake (Basic Impairment)
Shiplake is preparing its financial statements for the year ended 31 March 20X2. Shiplake has
undertaken an impairment review which has identified an issue with an item of earth-moving plant,
which is hired out to companies on short-term contracts. The plant's carrying amount is $400,000. The
estimated selling price of the plant is only $250,000, with associated selling expenses of $5,000. A recent
review of its value in use based on forecast future cash flows was estimated at $500,000. Since this review
was undertaken there has been a dramatic increase in interest rates that has significantly increased the
cost of capital used by Shiplake to discount the future cash flows of the plant.
Required
What is the lowest amount to which asset could be carried at?
[ACCA SBR - BPP]

5. Satchell Group (Impairment of CGU Two levels of test)
The Satchell Group is made up of two cash-generating units (as a result of a combination of various past
100% acquisitions), plus a head office, which was not allocated to any given cash-generating unit as it
supports both divisions.
Due to falling sales as a result of an economic crisis, an impairment test was conducted at the year end.
The consolidated statement of financial position showed the following net assets at that date.
Division Division B Head Unallocated Total
A office goodwill
$m $m $m $m $m
Property, plant and equipment 780 620 90 - 1,490
Goodwill 60 30 - 10 100
Net current assets 180 110 20 - 310
The recoverable amounts (including net current assets) at the year-end were as follows:
£m
Division A 1,000
Division B 720
Group as a whole 1,825 (including head office PPE at fair value less costs of disposal of $85m)
The recoverable amounts of the two divisions were based on value in use. The fair value less costs of
disposal of any individual item was substantially below this.
No impairment losses had previously been necessary
Required
Discuss, with suitable computations showing the allocation of any impairment losses, the accounting
treatment of the impairment test. Use the proforma below to help you with your answer.

PRACTICE KIT
[ACCA SBR - BPP Practice Kit]

6. Canto (Impairment & VIU of CGU)
Canto Co is a company which manufactures industrial machinery and has a year end of 28 February
20X7. The directors of Canto require advice on the following issue:
(a) Canto acquired a cash-generating unit (CGU) several years ago but, at 28 February 20X7, the
directors of Canto were concerned that the value of the CGU had declined because of a reduction in
sales due to new competitors entering the market. At 28 February 20X7, the carrying amounts of the
assets in the CGU before any impairment testing were:
$m
Goodwill 3
Property, plant and equipment 10
Other assets 19
Total 32
The fair values of the property, plant and equipment and the other assets at 28 February 20X7 were $10
million and $17 million respectively and their costs to sell were $100,000 and $300,000 respectively.
The CGU's cash flow forecasts for the next five years are as follows:
Date year ended Pre-tax cash flow Post-tax cash flow
$m $m
28 February 20X8 8 5
28 February 20X9 7 5
28 February 20Y0 5 3
28 February 20Y1 3 1.5
28 February 20Y2 13 10
The pre-tax discount rate for the CGU is 8% and the post-tax discount rate is 6%. Canto has no plans to
expand the capacity of the CGU and believes that a reorganisation would bring cost savings but, as yet,
no plan has been approved.
The directors of Canto need advice as to whether the CGU's value is impaired. The following extract
from a table of present value factors has been provided.
Year Discount rate 6% Discount rate 8%
1 0.9434 0.9259
2 0.8900 0.8573
3 0.8396 0.7938
4 0.7921 0.7350
5 0.7473 0.6806
Required
Advise the directors of Canto on how the above transactions should be dealt with in its financial
statements with reference to relevant International Financial Reporting Standards.

7. Cash generating units
Discuss whether the following items would be cash-generating units in their own right, or part of larger
cash-generating unit.
a) A pizza oven in a pizza restaurant.
b) A branch of a pizza restaurant in Warsaw.
c) A monorail that takes fee paying visitors to a theme park from its car park.
d) A monorail that transports fee paying commuters from a suburban part of town to the centre of
town.

PRACTICE KIT
The internal large telephone network of a country's railway system, although its use is currently not
permitted to anybody other than railway workers.

8. Stewart (Allocation of impairment loss)
Peter acquired 60% of Stewart on 1 January 20X1 for £450 million recognising net assets of £600 million,
a non-controlling interest (valued as a proportion of total net assets) of £240 million and goodwill of £90
million. Stewart consists of a single cash-generating unit. Due to adverse publicity, the recoverable
amount of Stewart had fallen by 31 December 20X1. The depreciated value of the net assets at that date
was £550 million (excluding goodwill). No impairment losses have yet been recognised relating to the
goodwill.
Requirement
Show the allocation of impairment losses:
a) If the recoverable amount was £510 million at 31st December 20X1.
b) If the recoverable amount was £570 million at 31 st December 20X1.
[ICAP CFAP-01 Practice Kit]

9. Charlotte (Impairment & Held for Sales Concepts)
Charlotte Ltd is a company with a 31 December year-end.
The following is relevant to three tangible non-current assets held by Charlotte.
Machine 1:
This was purchased on 1 January Year 1 for Rs. 420,000. It had an estimated residual value of Rs. 50,000
and a useful life of ten years and was being depreciated on a straight-line basis.
On 1 January Year 6 Charlotte revalued this machine to Rs. 275,000 and reassessed its total useful life as
fifteen years with no residual value.
On 1 January Year 7 an impairment review showed machine 1’s recoverable amount to be Rs. 100,000
and its remaining useful life to be five years.
Machine 2:
This was purchased on 1 January Year 1 for Rs. 500,000. It had an estimated residual value of Rs. 60,000
and a useful life of ten years and was being depreciated on a straight-line basis.
On 1 January Year 7 this machine was classified as held for sale, at which time its fair value was
estimated at Rs. 200,000 and costs to sell at Rs. 5,000. On 31 March Year 7 the machine was sold for Rs.
210,000.
Machine 3:
This was purchased on 1 January Year 1 for Rs. 600,000. In Year 1 depreciation of Rs. 30,000 was charged.
On 1 January Year 2 this machine was revalued to Rs. 800,000 and its remaining useful life assessed as
eight years.
On 1 January Year 7 this machine was classified as held for sale, at which time, its fair value was
estimated at Rs. 550,000 and costs to sell at Rs. 5,000.
On 31 March Year 7 the machine was sold for Rs. 550,000.
Tax is at the rate of 30%.
Required
Show the effect of the above on profit or loss and revaluation reserve of Charlotte in Year 7.

PRACTICE KIT

10. ABA Limited (Impairment & Revaluation)
Aba Limited conducts its activities from two properties, a head office in the city centre and a property
in the countryside where staff training is conducted. Both properties were acquired on 1 April 2013 and
had estimated lives of 25 years with no residual value. The company has a policy of carrying its land
and buildings at current values. However, until recently property prices had not changed for some
years. On 1 October 2015 the properties were revalued by a firm of surveyors. Details of this and the
original costs are:
Land Buildings
Rs. Rs.
Head office – cost 1 April 2013 500,000 1,200,000
– revalued 1 October 2015 700,000 1,350,000
Training premises – cost 1 April 2013 300,000 900,000
– revalued 1 October 2015 350,000 600,000
The fall in the value of the training premises is due mainly to damage done by the use of heavy
equipment during training. The surveyors have also reported that the expected life of the training
property in its current use will only be a further 10 years from the date of valuation. The estimated life
of the head office remained unaltered.
Note: Aba Limited treats its land and its buildings as separate assets. Depreciation is based on the
straight-line method from the date of purchase or subsequent revaluation.
Required
Prepare extracts of the financial statements of Aba Limited in respect of the above properties for the
year to 31 March 2016.

11. Hussain Associates Ltd (Impairment of Asset)
The assistant financial controller of the Hussain Associates Ltd group has identified the matters below
which she believes may indicate impairment of one or more assets:
(a) Hussain Associates Ltd owns and operates an item of plant that cost Rs. 640,000 and had
accumulated depreciation of Rs. 400,000 at 1 October 2015. It is being depreciated at 12½% on cost.
On 1 April 2016 (exactly half way through the year) the plant was damaged when a factory vehicle
collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant,
but it still operates, albeit at a reduced capacity. It is also expected that as a result of the damage the
remaining life of the plant from the date of the damage will be only two years.
Based on its reduced capacity, the estimated present value of the plant in use is Rs. 150,000. The plant
has a current disposal value of Rs. 20,000 (which will be nil in two years’ time), but Hussain
Associates Ltd has been offered a trade-in value of Rs. 180,000 against a replacement machine which
has a cost of Rs. 1 million (there would be no disposal costs for the replaced plant). Hussain
Associates Ltd is reluctant to replace the plant as it is worried about the long-term demand for the
product produced by the plant.
The trade-in value is only available if the plant is replaced.
Required
Prepare extracts from the statement of financial position and statement of profit or loss of Hussain
Associates Ltd in respect of the plant for the year ended 30 September 2016.Your answer should
explain how you arrived at your figures.

PRACTICE KIT
(b) On 1 April 2015 Hussain Associates Ltd acquired 100% of the share capital of Sparkle Limited, whose
only activity is the extraction and sale of spa water. Sparkle Limited had been profitable since its
acquisition, but bad publicity resulting from several consumers becoming ill due to a contamination
of the spa water supply in April 2016 has led to unexpected losses in the last six months. The carrying
amounts of Sparkle Limited’s assets at 30 September 2016 are:
Rs.000
Brand (Sparkle Spring – see below) 7,000
Land containing spa 12,000
Purifying and bottling plant 8,000
Inventories 5,000
32,000
The source of the contamination was found and it has now ceased.
The company originally sold the bottled water under the brand name of ‘Sparkle Spring’, but because
of the contamination it has re-branded its bottled water as ‘Refresh’. After a large advertising
campaign, sales are now starting to recover and are approaching previous levels. The value of the
brand in the balance sheet is the depreciated amount of the original brand name of ‘Sparkle Spring’.
The directors have acknowledged that Rs.1.5 million will have to be spent in the first three months
of the next accounting period to upgrade the purifying and bottling plant.
Inventories contain some old ‘Sparkle Spring’ bottled water at a cost of Rs. 2 million; the remaining
inventories are labelled with the new brand ‘Refresh’. Samples of all the bottl ed water have been
tested by the health authority and have been passed as fit to sell. The old bottled water will have to
be relabelled at a cost of Rs. 250,000, but is then expected to be sold at the normal selling price of
(normal) cost plus 50%.
Based on the estimated future cash flows, the directors have estimated that the value in use of Sparkle
Limited at 30 September 2016, calculated according to the guidance in IAS 36, is Rs. 20 million. There
is no reliable estimate of the fair value less costs to sell of Sparkle Limited.
Required
Calculate the amounts at which the assets of Sparkle Limited should appear in the consolidated
statement of financial position of Hussain Associates Ltd at 30 September 2016. Your answer should
explain how you arrived at your figures.

12. IMPS (Impairment Loss)
A division of IMPS has the following non-current assets, which are stated at their carrying values at 31
December Year 4:
Rs. (m) Rs. (m)
Goodwill 70
Property, plant and equipment:

Land and buildings 320
Plant and machinery 110
430
500
Because these assets are used to produce a specific product, it is possible to identify the cash flows
arising from their use. The management of IMPS believes that the value of these assets may have become
impaired, because a major competitor has developed a superior version of the same product and, as a
result, sales are expected to fall.
The following additional information is relevant:

PRACTICE KIT
Forecast cash inflows arising from the use of the assets are as follows:
Year ended 31 December:
Rs. m
Year 5 185
Year 6 160
Year 7 130
1) The directors are of the opinion that the market would expect a pre-tax return of 12% on an
investment in an entity that manufactures a product of this type.
2) The land and buildings are carried at valuation. The surplus relating to the revaluation of the land
and buildings that remains in the revaluation reserve at 31 December Year 4 is Rs. 65 million. All
other non-current assets are carried at historical cost.
3) The goodwill does not have a market value. It is estimated that the land and buildings could be sold
for Rs. 270 million and the plant and machinery could be sold for Rs. 50million, net of direct selling
costs.
Required
a) Calculate the impairment loss that will be recognised in the accounts of IMPS.
b) Explain how this loss will be treated in the financial statements for the year ended 31 December Year
4.
[ICAP - Winter 2007]

13. Ghalib Limited manufactures (Impairment loss of CGUs & Corporate Assets)
Ghalib Limited manufactures three products X, Y and Z. the management of the company consider
plants relating to each product as a separate Cash-Generating Unit (CGU). The company has three
Corporate Assets viz. a building, PABX system and a computer network. On June 30, 2007, the assets
were valued as under:
Carrying amount* Recoverable amount*
Rupees Rupees
Cash-Generating Units excluding Corporate Assets
Plant 1 – for Product X 2,500,000 1,200,000
Plant 2 – for Product Y 5,000,000 7,000,000
Plant 3 – for Product Z 10,000,000 6,400,000
17,500,000 14,600,000
Corporate Assets
Building 2,800,000
PABX system 1,400,000
computer network 2,100,000
6,300,000
23,800,000
Before impairment
Based on a study carried out by the company which involved consideration of various factors, the
management was able to determine that the building and the PABX system can be allocate to plant 1,2 and 3
in the ratio of
2: 3: 5. However, the management was unable to determine a reasonable and consistent basis for allocating the
cost of computer network.
Required:
Calculate the carrying amount of each CGU and corporate Asset for reporting on the balance sheet as at June
30, 2007 in accordance with IAS -36 ‘Impairment of Asset’.

PRACTICE KIT
[Practice Question]
14. Company (Allocation of Impairment Loss)
The Company’s some of the products have been banned by European Union which enforced it to apply
impairment test on its business.
The company has a whole is one cash generating unit. The carrying value of its asset is as under.
Name of asset Carrying Comments
value
Rs. (million)
Land 120 The revaluation surplus available is Rs. 12 million
Building 50 Carried under cost model but value in sale is Rs. 35
million
Plant and 35 Carried under cost model
machinery
Furniture and 10 Carried under cost model
fixture
Inventory 25 Net realizable value is Rs. 22 million
Receivable 18 The provision for doubtful debts is Rs. 2 million
258
The value in use is taken at Rs. 210 million and value in sale is not available
Required:
Allocated the impairment loss to different assets of the cash generating unit?

15. Khyber Ltd. (Impairment of CGU)
The following details relate to a cash generating unit (CGU) of Khyber ltd. (KL) as a June 30, 2017:
Carrying value Fair value less cost to sale
Rs. (m) Rs. (m)
Building (revaluation model) * 22 21.70
Machinery (cost model) 15 16.00
Equipment (cost model) 19 Not measurable
License (cost model) 20 18.00
Investment property (fair value model) 22 22.00
Investment property ((cost model) 8 Not measurable
Goodwill 9 Not measurable
Inventory at NRV 8 8
* Balance of surplus on revaluation of building as on June 30, 2017 amounted to Rs. 3 million.
Value in use and fair value less cost to sell of the CGU at June 30, 2017 were Rs. 100 million and Rs. 95
million respectively.
Required:
Compute the amount of impairment loss and allocate it to individual assets. Also calculate the amount
to be charged to profit or loss account for the year ended June 30, 2017 under each of the following
independent situations:
1. There has been a significant decline in budgeted net cash flows of the CGU.
2. KL decides to dispose of the CGU as a group in a single transaction and classified it as 'Held for
sale'. Carrying value of all individual assets have been re-measured in accordance with the
applicable IFRSs.

PRACTICE KIT

16. GYO Movers Limited (Impairment of CGU)
On July 01, 2013 GYO Movers Limited (GML) acquired a business engaged in providing transport
services and recognized goodwill of Rs. 10 million. The business operates three different bus routes
namely Green, Yellow and Orange. The business had been running exceptionally well. However, during
the year ended June 30, 2016 entrance of new competitors has affected its performance.
GML consider each route as a separate CGU. As on June 30, 2016, following information is available in
respect of each CGU.
Green Yellow Orange

Number of busses* 80 50 40
Expected remaining useful life (in years) 20 15 10
Rs. (m) Rs. (m) Rs. (m)
Carrying amount busses 225 150 95
Other assets – carrying value 400 350 100
- Fair value N/A N/A N/A
Fair value less cost to sell of the CGU 500 450 250
Expected net cash flows per annum. 70 60 50
Assume that all busses are same make and model
Carrying amount of corporate assets used interchangeably by all segments are as follows:
Particulars Carrying amount Fair value
Rs. (m) Rs. (m)
Head office 100 N/A
Computer network 55 46
Equipment 45 60
For impairment testing of each CGU following quotations were obtained from three different
showrooms located in different cities.
Particulars Showrooms – 1 Showrooms – 2 Showrooms – 3

Rs. (m) Rs. (m) Rs. (m)
Average sale price for each bus 2.52 2.62 2.50
Estimate cost for disposal each 0.05 0.20 0.10
bus
Per-tax discount rate of GML is 12%.
Required:
Prepare relevant extracts from the statement of financial position as at June 30, 2016 in the accordance
with international financial reporting standards (IFRSs).

PRACTICE KIT
Answers:
1. Entity Q
On 31 December Year 3 the machine was stated at the following amount:
a) Carrying amount of the machine on 31 December Year 3
Rs
Cost 240,000
Accumulated depreciation (3 × (240,000 ÷ 20 years)) (36,000)
Carrying amount 204,000
b) Impairment loss at the beginning of Year 4 of Rs. 104,000 (Rs. 204,000 – Rs.100,000). This is charged
to profit or loss.
c) Depreciation charge in Year 4 of Rs. 10,000 (= Rs. 100,000 ÷ 10). The depreciation charge is based on
the recoverable amount of the asset
2. Sunshine Limited (Impairment & Machines)

For the year ended 30 June 2017
Rs. in million
Amount to be recognised in SOFP
Machines (170+300+65+55) 590
Revaluation surplus (W-1) 93
Amount to be recognised in SOPL

Depreciation (W-1) 63
Impairment (W-1) 20
W-1: A B C D Total
-------------------------- Rs. in million --------------------------
Cost of machine 200 230 90 60 580
Depreciation for the year (20) (23) (15) (5) (63)
(200÷10) (230÷10) (90÷6) (60÷12)
Cost less depreciation 180 207 75 55 517
Active market value 170 300 65 No active
market
Impairment (10) - (10) (20)
Revaluation surplus - 93 - - 93
3. Uturn (CGUs and impairment reversals)

The goodwill impairment cannot be reversed.
The impairment of the PPE can be reversed. However, this is limited to the carrying value of the asset
had no impairment loss been previously recognised.
The carrying amount of the PPE as at 31 December 20X3 is $150,000 ($180,000 × 5/6).
If the PPE had not been impaired, then its value at 31 December 20X3 would have been $250,000
($400,000 × 5/8).
Therefore, the carrying amount of the PPE can be increased from $150,000 to $250,000. This will give
rise to a gain of $100,000 in profit or loss.
4. Shiplake (Basic Impairment)

On the basis of the original estimates, Shiplake's earth-moving plant was not impaired, the value in use
of $500,000 being greater than it’s carrying amount. However due to the 'dramatic' increase in interest
rates causing Shiplake's cost of capital, and therefore the discount rate, to increase, the value in use of

PRACTICE KIT
the plant will fall. There is insufficient information to be able to quantify this fall. If the new discounted
value is above the carrying amount $400,000 there is still no impairment. If it is between $245,000 and
$400,000, this will be the recoverable amount of the plant and it should be written down to this value.
As the plant can be sold for $250,000 less selling costs of $5,000, $245,000 is the lowest amount that the
plant should be written down to even if its revised value in use is below this figure.
5. Satchell Group (Impairment of CGU Two levels of test)

Where there are multiple cash-generating units, IAS 36 requires two levels of tests to be performed to
ensure that all impairment losses are identified and fairly allocated. First Divisions A and B are tested
individually for impairment. In this instance, both are impaired and the impairment losses are allocated
first to any goodwill allocated to that unit and secondly to other non-current assets (within the scope of
IAS 36) on a pro-rata basis. This results in an impairment of the goodwill of both divisions and an
impairment of the property, plant and equipment in Division B only.
A second test is then performed over the whole business including unallocated goodwill and
unallocated corporate assets (the head office) to identify if those items which are not a cash generating
unit in their own right (and therefore cannot be tested individually) have been impaired.
The additional impairment loss of $15m (W2) is allocated first against the unallocated goodwill of $10m,
eliminating it, and then to the unallocated head office assets reducing them to $85m. Divisions A and B
have already been tested for impairment so no further impairment loss is allocated to them or their
goodwill as that would result in reporting them at below their recoverable amount.
Carrying amounts after impairment test
Division Division B Head Unallocated Total
A office goodwill
$m $m $m $m $m
PPE [780/(620 - 10) / 780 610 85 - 1,475
(90 - 5)]
Goodwill [(60 - 20) / (30-30) / 40 0 - 0 40
(10-10)]
Net current assets 180 110 20 - 310
1,000 720 105 0 1,825
Workings
1. Test of individual CGUs
Division A Division B
$m $m
Carrying amount 1,020 760
Recoverable amount (1,000) (720)
Impairment loss 20 40
Allocated to:
Goodwill 20 30
Other assets in the scope of IAS 36 - 10
20 40
2. Test of group of CGUs
$m
Revised carrying amount (1,000 + 720 + 110 + 10) 1,840
Recoverable amount (1,825)
Impairment loss 15
Allocated to:
Unallocated goodwill 10

PRACTICE KIT
Other unallocated assets 5

15
6. Canto (Impairment & VIU of CGU)

IAS 36 Impairment of Assets requires that assets be carried at no more than their carrying amount.
Therefore, entities should test all assets within the scope of the Standard if indicators of impairment
exist. If the recoverable amount (which is the higher of fair value less costs of disposal and value in use)
is more than carrying amount, the asset is not impaired. It further says that in measuring value in use,
the discount rate used should be the pre-tax rate which reflects current market assessments of the time
value of money and the risks specific to the asset. The discount rate should not reflect risks for which
future cash flows have been adjusted and should equal the rate of return which investors would require
if they were to choose an investment which would generate cash flows equivalent to those expected
from the asset. Therefore pre-tax cash flows and pre-tax discount rates should be used to calculate value
in use.
Date year ended Pre-tax cash flow Discounted cash flows

$m $m at 8%
28 February 20X8 8 7.41
28 February 20X9 7 6.00
29 February 20Y0 5 3.97
28 February 20Y1 3 2.21
28 February 20Y2 13 8.85
Total 28.44
The CGU is impaired by the amount by which the carrying amount of the cash-generating unit exceeds
its recoverable amount.
Recoverable amount
The fair value less costs to sell ($26.6 million) is lower than the value in use ($28.44 million). The
recoverable amount is therefore $28.44 million.
Impairment
The carrying amount is $32 million and therefore the impairment is $3.56 million.
Allocating impairment losses

Canto will allocate the impairment loss first to the goodwill and then to other assets of the unit pro rata
on the basis of the carrying amount of each asset in the cash-generating unit. When allocating the
impairment loss, the carrying amount of an asset cannot be reduced below its fair value less costs to
sell.
Consequently, the entity will allocate $3 million to goodwill and then allocate $0.1 million on a pro rata
basis to PPE (to reduce it to its fair value less costs to sell of $9.9 million) and other assets ($0.46 million
to the other assets). This would mean that the carrying amounts would be $9.9 million and $18.54 million
respectively.
7. Cash generating units

The key issue is whether the cash-generating unit produces cash flows which are independent of other
assets or not.
The CGUs which appear to have cash flows independent of the other assets (and can therefore be subject
to reliable assessment of their recoverable value) are:
(b) a branch of a pizza restaurant in Warsaw; and
(d) a commuter monorail.

PRACTICE KIT
(a) and (c) are not generators of independent cash flows and are therefore too small to be CGUs in their
own right. In the case of (c) the CGU is the theme park as one entity.
Additionally (e) is a CGU in its own right as there is an external active market for its services, even
though these are not openly available (IAS 36.71).
8. Stewart (Allocation of impairment loss)

(a) (b)
£m £m
Recognised goodwill 90 90
Notional goodwill (£90m x 40/60) 60 60
Carrying amount of net assets 550 550

700 700
Recoverable amount 510 570
Impairment loss 190 130
Allocation of impairment loss:

£m £m
Recognised goodwill 90 90
Notional goodwill 60 40
Other assets pro rata 40 -
190 130
Carrying value after impairment:
£m £m
Goodwill (90 – (150x60%))/ (90-(130x60%)) - 12
Other net assets (550-40) 510 550

510 562

PRACTICE KIT
9. Charlotte (Impairment & Held for Sales Concepts)
Effect on Year 7 profit or loss

Rs.
Impairment loss
Machine 1 (W1) 122,300
Machine 2 (W2) 41,000
163,300
Depreciation charge
Machine 1: (100,000 ÷ 5) 20,000
Gain on disposal
Machine 2: (W2) 10,000
Machine 3: (210,000 - 195,000 (W2)) 245,000
255,000
Workings
(1) Machine 1
Rs.
Cost on 1 January Year 1 420,000
Depreciation to 1 January Year 6
(5 years x (420,000 – 50,000)/10 years)) (185,000)
Carrying amount on 1 January Year 6 235,000
Revalued to: 275,000
Revaluation gain before tax 40,000
In the year to 31 December Year 6 (on 1 January), the asset is revalued upwards by Rs. 40,000. Of this,
Rs. 28,000 is taken to the revaluation reserve and Rs. 12,000 (Rs. 40,000 x 30%) to deferred tax as a
liability.
Dr (Rs.) Cr (Rs.)
Property, plant and equipment 145,000
Accumulated depreciation 185,000
Net effect on non-current assets 40,000

Revaluation surplus 28,000
Deferred tax liability 12,000
The total useful life of the asset was assessed as 15 years on 1 January Year 6. The asset has already been
owned for 5 years and depreciation in year 6 is based on the remaining useful life of 10 years.
The company must also recognise incremental depreciation in accordance with section 235 of the
Companies’ Act, 2017. An amount equal to the incremental depreciation net of deferred taxation must
be transferred to retained earnings through the statement of changes in equity.

PRACTICE KIT
Dr (Rs.) Cr (Rs.)
Depreciation charge for the year
(275,000/10 years) 27,500
Revaluation surplus
(Rs. 28,000/10 years) 2,800
Impairment loss:
Rs.
Depreciation to 1 January Year 7 (275,000 ÷ (15 – 5)) (27,500)
Carrying amount at 1 January Year 7 247,500
Impairment loss 147,500
In the year to 31 December Year 7, the impairment loss is Rs. 147,500. Of this, Rs. 40,000 reverses the
gain in the previous year. The revaluation reserve is reduced by Rs. 25,200 (Rs. 28,000 – Rs. 2,800). The
remaining impairment loss of Rs. 122,300 is written off as a loss in Year 7.
Also in the year to 31 December Year 7 the asset would be depreciated based on the estimate of its
remaining useful life of 5 years giving a charge of Rs. 20,000 (Rs. 100,000/ 5 years).
(2) Machine 2
Rs.000
Cost on 1 January Year 1 500,000
Depreciation to 1 January Year 7
6 years x ((500,000 – 60,000)/10 years)) (264,000)
Fair value minus cost to sell (200,000 – 5,000) (195,000)
Impairment loss 41,000
On 31 March Year 7 the machine is sold for Rs. 210,000 giving a gain on sale as follows:
Proceeds 210,000
Selling costs (assumed to be as forecast) (5,000)
205,000
Carrying amount (195,000)
10,000
(3) Machine 3
Rs.
1 January Year 1 Cost 600,000
Depreciation to 1 January Year 2 (30,000)
Revalued to 800,000
Taken to revaluation reserve/deferred tax 230,000

PRACTICE KIT
The revaluation would have been accounted for as follows at 1 January Year 2
Dr (Rs.) Cr (Rs.)
Property, plant and equipment 200,000
Net effect on non-current assets 230,000
Deferred tax liability 69,000
Depreciation and incremental depreciation would have been recognised in Year 2 to Year 6 inclusive as
follows:
Dr (Rs.) Cr (Rs.)
Depreciation charge for the year (800,000/8 years)

100,000
100,000
Revaluation surplus
(Rs. 161,000/8 years)
Retained earnings
20,125
20,125
This would result in balances for machine 3 and the revaluation surplus in respect of machine 3 as
follows:
Rs. Rs.
Carrying amount on1 January Year 2 800,000 230,000
Depreciation (5 years) (500,000)
Incremental depreciation (5 years) (100,625)
Balance at 1 January Year 7 300,000 129,375
Fair value on classification as held for sale 550,000

Costs to sell (5,000)
Fair value less costs to sell 545,000
Value at lower of carrying amount and fair value less costs to sell: 300,000
On 31 March Year 7 the machine is sold for Rs. 550,000 giving a gain on sale as follows:
Rs.000
Proceeds 550,000
Selling costs (assumed to be as forecast) (5,000)
545,000
Carrying amount (300,000)
245,000
The balance on the revalution reserve is transferred to retained earnings on the disposal of the asset.
Dr (Rs.) Cr (Rs.)

PRACTICE KIT
10. ABA Limited (Impairment & Revaluation)

Statement of profit or loss (extracts) – year to 31 March 2016
Note: workings in brackets are in Rs.000 Rs. Rs.
Depreciation: head office – 6 months to 1 October 2015
(1,200/25 x 6/12) 24,000
– 6 months to 31 March 2016

(1,350/22.5 (W1) x 6/12) 30,000
––––––– 54,000
–––––––
Depreciation: training premises
– 6 months to 1 October 2016
(900/25 x 6/12) 18,000
– 6 months to 31 March 2016
(600/10 x 6/12) 30,000
––––––––
48,000
––––––––
Impairment loss (W2) 210,000
––––––––
258,000
––––––––
Statement of financial position (extracts) as at Rs. Rs.

31 March 2016
Non-current assets
Land and buildings – head office (700 + 1,350 – 30) 2,020,000
– training premises (350 + 600 – 30) 920,000
––––––––
2,940,000
––––––––
Revaluation reserve
Head office land (700 – 500) 200,000
Building (1,350 – 1,080 (W1)) 270,000
Training premises land (350 – 300) 50,000
––––––––
520,000
Transfer to realised profit (270/22.5 (W1) x 6/12

re depreciation of buildings) (6,000)
––––––––
514,000
––––––––
Workings
(W1) The date of the revaluation is two and a half years after acquisition. This means the remaining
life of the head office would be 22.5 years. The carrying value of the head office building at
the date of revaluation is Rs. 1,080,000 i.e. its cost less two and a half years at Rs. 48,000 per
annum (Rs. 1,200,000 – Rs. 120,000).
(W2) Impairment loss: the carrying value of training premises at date of revaluation is Rs. 810,000
i.e. its cost less two and a half years at Rs. 36,000 per annum (Rs. 900,000 – Rs. 90,000). It is

PRACTICE KIT
revalued down to Rs. 600,000 giving a loss of Rs. 210,000. As the land and the buildings are
treated as separate assets the gain on the land cannot be used to offset the loss on the
buildings.
11. Hussain Associates Ltd (Impairment of Asset)

(a) Impairment of plant
The plant had a carrying amount of Rs. 240,000 on 1 October 2015. The accident that may have caused
impairment occurred on 1 April 2016 and an impairment test would be done at this date. The
depreciation on the plant from 1 October 2015 to 1 April 2016 would be Rs. 40,000 (640,000 x 12.5%
x 6/12) giving a carrying amount of Rs. 200,000 at the date of impairment. An impairment test
requires the plant’s carrying amount to be compared with its recoverable amount. The recoverable
amount of the plant is the higher of its value in use of Rs. 150,000 or its fair value less costs to sell. If
Hussain Associates Ltd trades in the plant it would receive Rs. 180,000 by way of a part exchange,
but this is conditional on buying new plant which Hussain Associates Ltd. is reluctant to do. A more
realistic amount of the fair value of the plant is its current disposal value of only Rs. 20,000. Thus the
recoverable amount would be its value in use of Rs. 150,000 giving an impairment loss of Rs. 50,000
(Rs. 200,000 – Rs. 150,000).
The remaining effect on income would be that a depreciation charge for the last six months of the
year would be required. As the damage has reduced the remaining life to only two years (from the
date of the impairment) the remaining depreciation would be Rs. 37,500 Rs. 150,000/ 2 years x
6/12).Thus extracts from the financial statements for the year ended 30 September 2016 would be:
Non-current assets Rs.
Plant (150,000 – 37,500) 112,500
Statement of profit or loss

Plant depreciation (40,000 + 37,500) 77,500
Plant impairment loss 50,000
(b) Purchase of Sparkle
There are a number of issues relating to the carrying amount of the assets of Sparkle Limited that
have to be considered. It appears the value of the brand is based on the original purchase of the
‘Sparkle Spring’ brand. The company no longer uses this brand name; it has been renamed ‘Refresh’.
Thus it would appear the purchased brand of ‘Sparkle Spring’ is now worthless. Sparkle Limited
cannot transfer the value of the old brand to the new brand, because this would be the recognition
of an internally developed intangible asset and the brand of ‘Refresh’ does not appear to meet the
recognition criteria in IAS 38. Thus prior to the allocation of the impairment loss the value of the
brand should be written off as it no longer exists.
The inventories are valued at cost and contain Rs. 2 million worth of old bottled water (Sparkle
Spring) that can be sold, but will have to be relabelled at a cost of Rs. 250,000. However, as the
expected selling price of these bottles will be Rs. 3 million (Rs. 2 million x 150%), their net realisable
value is Rs. 2,750,000. Thus it is correct to carry them at cost i.e. they are not impaired. The future
expenditure on the plant is a matter for the following year’s financial statements.
Applying this, the revised carrying amount of the net assets of Sparkle Limited’s cashgenerating
Unit (CGU) would be Rs. 25 million (Rs. 32 million – Rs. 7 million re the brand). The CGU has a
recoverable amount of Rs. 20 million, thus there is an impairment loss of Rs. 5 million. This would
be applied first to goodwill (of which there is none) then to the remaining assets pro rata. However
under IAS2 the inventories should not be reduced as their net realisable value is in excess of their
cost. This would give revised carrying amounts at 30 September 2016 of:
Rs.000
Brand nil
Land containing spa: 12,000 – [(12,000/20,000) x 5,000] 9,000
Purifying and bottling plant:
8,000 – [(8,000/20,000) x 5,000] 6,000

PRACTICE KIT
5,000
Inventories 20,000
12. IMPS (Impairment Loss)

(a) Impairment loss
Rs. m
Carrying value 500
Recoverable amount (385)
Impairment loss 115
Recoverable amount is value in use (Working 1) as this is higher than the fair value less costs of
disposal (Working 2).
Workings
(1) Value in use:
Forecast cash flows discounted at 12%:
Rs. m
Year 1 (185 × 0.893) 165.2

Year 2 (160 × 0.797) 127.5
Year 3 (130 × 0.712) 92.6
Total 385.3
(2) The fair value less costs of disposal:

Rs.m
Goodwill 0
Freehold land & buildings 270
Plant & Machinery 50
320
(b) Treatment of impairment loss

IAS 36 requires the impairment loss to be allocated to the various non-current assets in the following
order: firstly, goodwill, secondly, to other assets, either pro-rata or on another more appropriate
basis.
Before impairment Impairment After
loss (W1) impairment
Rs. m Rs. m Rs. m
Goodwill 70 (70) -
Land and buildings 320 (33) 287
Plant and machinery 110 (12) 98
500 (115) 385
Because the land and buildings have been re-valued, the impairment is treated as a revaluation
decrease until the carrying amount of the asset reaches its depreciated historical cost. The revaluation
reserve relating to the asset is Rs. 65 million and so is adequate to cover the full impairment of Rs.
33m. The impairment must be separately disclosed and the notes to the accounts must specify by class
of asset the impairment recognised directly to equity.
The impairment loss on the goodwill and plant (Rs. 82 million) must be recognised in profit or loss for
the year. The notes to the accounts must specify the line item in which the impairment loss has been
included.
Where the impairment write-down is material, information must also be provided as to the events
and circumstances that led to the loss, the nature of the assets affected, the segment to which the asset
belongs, that recoverable amount was based on value in use and the discount rate used to calculate
this.

PRACTICE KIT
Workings
Loss on the various non-current assets
After the impairment loss has been recognised on the goodwill there is still 115 - 70 = 45 loss to be
allocated to the other noncurrent assets, on a pro-rata basis.
Loss on land and buildings:
320
× 45 = 33
320+110
Loss on plant and machinery:
110
× 45 = 12
320+110
13. Ghalib Limited manufactures (Impairment loss of CGUs & Corporate Assets)
Impairment test Rs.
Products X
Plant 1 2,500,000
Share of building 2,800,000x2/10 560,000
Share of PABX 1,400,000x2/10 280,000
Carrying value 3,340,000
Recoverable value 1,200,000
Impairment loss 2,140,000
Allocated as follows: -
Plant (2,500,000x2,140,000)/3,340,000 1,601,800
Building (560,000x2,140,000)/3,340,000 358,800
PABX system (280,000x2,140,000)/3,340,000 179,400
2,140,000
Product Y
Plant 2 5,000,000
Share of building 2,280,000x3/10 840,000
Share of PABX 1,400,000x3/10 420,000
6,260,000
Recoverable 7,000,000
Impairment loss --
Product Z
Plant 10,000,000
Share of building 2,800,000x5/10 1,400,000
Share of PABX 1,400,000x5/10 700,000
Carrying value 12,100,000
Recoverable value 6,400,000
Impairment loss 5,700,000
Allocated as follows: -
Plant (10,000,000x5,700,000)/12,100,000 4,710,744
Building (1,400,000x5,700 ,000)/12,100,000 659,504
PABX system (700,000x5,700,000)/12,100,000 329,752
5,700,000

PRACTICE KIT
14. Company (Allocation of Impairment Loss)

Carrying Measurement Revised Share of Revised
Assets value under other carrying impairment carrying
IFRS value loss value
Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Land 120 120 120/215x43=24 96
Building 50 50 50/215x43=10 40
Plant and machinery 35 35 35/215x43=7 28
Furniture and fixture 10 10 10/215x43=2 8
Inventory 25 (3) 22 -- 22
Receivables 18 (2) 16 -- 16
258 (5) 253 (43) 210
Recoverable value 210
Impairment loss 43
Note: The impairment loss on land up to revaluation surplus will be charged to other
comprehensive income and excess loss (exceeding 12) will be charge to profit or loss account.
The impairment loss on all other assets will be charged to profit or loss account.
15. Khyber Ltd. (Impairment of CGU)

(a) (i) Impairment of CGU under IAS 36
Fair
Description Carrying value Goodwill Impairment Impairment Total
value less cost impairment round 1*1 round 2*2 impairment
to sell
-----------------------------------Rs. in millions-----------------------------------
Building 22.00 21.70 *0.30 -- 0.30
Machinery 15.00 16.00 *-- -- --
Equipment 19.00 3.86 4.38 8.24
License 20.00 18.00 *2.00 -- 2.00
Investment property 22.00 22.00 *-- -- --
Investment property 8.00 1.62 1.84 3.46
Goodwill 3.00 3.00 -- -- 3.00
Inventory at NRV 8.00 8.00 . *-- -- --
Carrying value 117.00 3.00 7.78 6.22 17.00
Recoverable amount (100.00)
Impairment 17.00
required
Charged to profit or
loss (17-0.30) 16.70
*1 Allocation of impairment loss in the ratio of 14(17-3) ÷ 69(22+19+20+8)
*2 Allocation of impairment loss in the ratio of 6.22(14-7.78) ÷ 27
Restricted to fair value less cost to sell

PRACTICE KIT
(a) (ii) Impairment of Disposal group under IFRS 5:

Description Carrying Goodwill Impairment of
value impairment scoped in assets
Rs. (m) Rs. (m) Rs. (m)
Building 22.00 4.98
Machinery 15.00 3.39
Equipment 19.00 4.30
License 20.00 4.52
Investment property 22.00 **--
Investment property 8.00 1.81
Goodwill 3.00 3.00 --
Inventory at NRV 8.00 **--
Carrying value 117.00 3.00 19.00
Impairment required 22.00
Charged to profit or loss (17-0.30) 22.00
*3 Allocation of impairment loss in the ratio of 19(22-3) ÷ 84(22+15+19+20+8)

**No impair7ment is allocated due to scope out assets

PRACTICE KIT
16. GYO Movers Limited (Impairment of CGU)
Extracts from statement of financial position
As on 30 June 2016
Fixed assets Rs. (m)

Property, plant and equipment (W-1) 1,186.55
Description Green Yellow Orange Corporate Assets

Busses Other Busses Other Busses Other Goodwill HO Computer Equipment Total
assets assets assets building network
Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Carrying amount 225.00 400.00 150.00 350.00 95.00 100.00 10.00 100.00 55.00 45.00 1,530.00
Round 1: Allocation of impairment
loss (W-2)
First allocation to goodwill (10.00) (10.00)
Second, allocation the impairment to (27.40) *1(104.20) (26.50) *2(91.18) -- -- -- * 3(26.05) (9.00) -- (284.33)
all other assets proportionately, 333.44
(343.44-10) to all other assets
proportionately subject to limiting to
FV
Fair value 197.60 123.50 98.80 46.00 60.00
(80x2.47) (50x2.47) (40x2.47)
Carrying value after first round of 197.60 295.80 12.50 258.82 95.00 100.00 -- 73.95 46.00 45.00 1,235.67
impairment
Round 2: allocation of remaining -- *2(23.12) *5(20.22) -- *6(5.78) -- -- --
impairment 49.12
Carrying value after impairment 197.60 272.68 123.50 238.60 95.00 100.00 -- 68.17 46.00 45.00 1,186.55

PRACTICE KIT
*1[400/ (225+400+150+350+100+55)]x333.44
*2[350/0(225+400+150+350+100+55)]x333.44
*3[(100/ (225+400+150+350+100+55+)]x333.44
*4[295.80/ (295.80+258.83+73.95)]x49.12
*5[258.83/ (295.80+258.83+75.95)]x49.12
*6[73.95/ (295.80+258.83+73.95)]x49.12
W – 2 Determination of impairment loss
Green Yellow Orange Total

Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Carrying value of buses 225.00 150.00 95.00
Carrying value of the other assets 400.00 350.00 100.00
Carrying value of each CGU 625.00 500.00 195.00 1,320.00
Useful life (in years) years 20 15 10
Weighting based on useful life 2 1.5 1
Carrying amount after weighting (A x B) 1,250 750 195 2195.00
Pro-rata allocation of total corporate
assets and goodwill i.e. 10+(100+55+45) 119.59 71.75 18.66 210.00
= 210
Carrying amount after allocation 744.59 571.75 213.66 1,530.00
Less: recoverable value (W – 3) 522.90 450.00 282.50
Impairment loss 221.69 121.75 343.44
W – 3 Determination of recoverable value

Green Yellow Orange
Rs. (m) Rs. (m) Rs. (m)
Net cash flow 70.00 60.00 50.00
Annuity factor 7.47 6.81 5.65
Value in use of each CGU (i) 522.90 408.60 282.50
Fair value less cost to sell (ii) 500.00 450.00 250.00
Recoverable value [higher of (i) and (ii) 522.390 450.00 282.50

PRACTICE KIT
RESTORATION AND SIMILAR LIABILITIES
CHAPTER 05:
IFRIC 01 – CHANGES IN EXISTING DECOMMISSIONING,
Questions:
[Winter 2008]
1. Violet Power Limited (CV of Decommissioning Liability)
Violet Power Limited is running a coal-based power project in Pakistan. The Company has built its plant
in an
area which contains large reserves of coal. The company has signed a 20 years agreement for sale of
power to the Government. The period of the agreement covers a significant portion of the useful life of
the plant. The company is liable to restore the site by dismantling and removing the plant and associated
facilities on the expiry of the agreement.
Following relevant information is available:

• The plant commenced its production on July 01, 2007. It is the policy of the company to measure the
related assets using the cost model;
• Initial cost of plant was Rs. 6,570 million including erection. installation and borrowing costs but do
not include any decommissioning cost;
• Residual value of the plant is estimated at Rs. 320 million;
• Initial estimate of amount required for dismantling of plant. At the time of installation of plant was
Rs. 780 million. However, such estimate was reviewed as of June 30, 2008 and was revised to Rs.
1,021 million;
• The Company follows straight line method of depreciation; and
• Real risk-free interest rate prevailing in the market was 8% per annum when initial estimates of
decommissioning costs were made. However, at the end of the year such rate has dropped to 6% per
annum.
Required:
Work out the carrying value of plant and decommissioning liability as of June 30. 2008.
[Summer 2011]
2. Waste Management Limited (Accounting Entries)
Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity from
garbage collected by the civic agencies. WML had signed an agreement with the government for
allotment of a plot of land, free of cost, for 10 years. However, WML has agreed to restore the site, at the
end of the agreement.
Other relevant information is as under:

• Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost would amount
to Rs. 10 million.
• It is the policy of the company to measure its plant and machinery using the revaluation model.
• When the plant commenced its operations i.e. on April 1, 2005 the prevailing market-based discount
rate was 10%.
• On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.
• On March 31, 2009 prevailing market-based discount rate had increased to 12%.
• On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million.
• Useful life of the plant is 10 years and WML follows straight line method of depreciation.
• Appropriate adjustments have been recorded in the prior year’s i.e. up to March 31, 2010.
Required:

PRACTICE KIT
Prepare accounting entries for the year ended March 31, 2011 based on the above information, in
accordance with International Financial Reporting Standards. (Ignore taxation.) (17 marks)

PRACTICE KIT
Answers:
1. Violet Power Limited (CV of Decommissioning Liability)
Assets carrying value as at June 30, 2008 (Asset) Rs. in million
Cost (Given) 6,570
Decommissioning liability on July 01 2007 (780 / (l+0.08) 20) 167
Depreciation for the year (Working 1) )321(
Adjustment for revision in provision for decommissioning cost (Working 2) 157
6,573
Decommissioning liability on June 30, 2008 (1,021 / (1 +0.06) 19) 337

Working 1: Depreciation for the year (P&L)
Cost 6,570
Decommissioning liability on July 01 2007 167
Residual value )320(
6,417
Depreciation (6,417 / 20) 321
Working 2: Increase in decommissioning liability during the year ended June 30,
2008
Decommissioning liability on June 30, 2008 337
Less: Decommissioning liability on July 1, 2007 )167(
Less: Unwinding of interest for the year (167 x 8%) )13(
157
2. Waste Management Limited (Accounting Entries)

Date Particulars Debit Credit
Rs. in million
31-03-11 PL account (depreciation expense) 70,000/8 8.750
Accumulated depreciation 8.750
PL account (Under writing of discount) 0.681
Site restoration liability (Unwinding of discount) 0.681
Revaluation surplus incremental depreciation) 0.461
Retained earnings (incremental depreciation) 0.461
PL account (excess of increase in site restoration cost over
revaluation balance) 2.542-1.843 0.699
Revaluation surplus (increase in site restoration cost) 1.843
Site restoration liability (increase in site restoration cost) 2.542
12.434 12.434

PRACTICE KIT
Working Site restoration Revaluation

liability surplus
01-04-05 PV of site restoration cost of Rs. 10 million at 10%

discount rate 10/(1.1)10 3.855
31-03-06 Unwinding at 10% 0.386
31-03-07 Unwinding at 10% 0.424
31-03-07 Carrying value of the plant (80+3.855) *8/10 67.084
31-03-07 Revalued amount of the plant 70,000 2.916
31-03-08 Under writing at 10 % / Incremental dep. 0.467 (0.365)
(2.916/8)
31-03-09 Under writing at 10 % / Incremental dep. 0.513 (0.365)
5.645 2.186
31-03-09 Increase/ (decrease) in liability/ revaluation 5.066-5.645
surp1us on. revision of discount rate to 12% (0.579) 0.579
31-03-09 PV of site restoration cost of Rs. 10 million at 12% 10/ (1.12)6 5.066 2.765
discount rate
31-03-10 Unwinding at 12% / Incremental dep. (2.765/6) 0.608 (0.461)
31-03-11 Unwinding at 12% / Incremental dep. 0.681 (0.461)
6.355 1.843
31-03-11 Increase / (decrease in liability relating to site 8.897-6.355
restoration cost 2.542 (1.843)
31-03-11 PV of site restoration cost of Rs. 14 million at 12% 14/ (1.12)4
discount rate 8.897 --

PRACTICE KIT
CHAPTER 06: IFRS 08 – SEGMENT REPORTING
CHAPTER 06:
IFRS 08 – SEGMENT REPORTING
Questions:
[ICAP past paper]
1. Gohar Limited (Reportable Segments & Reco)
Gohar Limited (GL), a listed company, is engaged in chemicals, soda ash, polyester, paints and pharma
businesses. Results of each business segment for the year ended 31 March 2015 are as follows:
Sales Gross Operating Assets Liabilities
Business segments profit expenses
------------------------- Rs. in million -------------------------
Chemicals 1,790 1,101 63 637 442
Soda Ash 216 117 57 444 355
Polyester 227 48 23 115 94
Paints 247 26 16 127 108
Pharma 252 31 12 132 98
Inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million and Rs. 10 million
respectively at a contribution margin of 30%.
Operating expenses include GL’s head office expenses amounting to Rs. 75 million which have not
been allocated to any segment. Furthermore, assets and liabilities amounting to Rs. 150 million and
Rs. 27 million have not been reported in the assets and liabilities of any segment.
Required:
In accordance with the requirements of International Financial Reporting Standards:
(a) determine the reportable segments of Gohar Limited; and
(b) show how these reportable segments and the necessary reconciliation would be disclosed in GL’s
financial statements for the year ended 31 March 2015.
[ACCA SBR – BPP]

2. Endeavour (Identifying reportable segments)
Endeavour, a public limited company, trades in six business areas which are reported separately in its
internal accounts provided to the chief operating decision maker. The operating segments have
historically been Chemicals, Pharmaceuticals wholesale, Pharmaceuticals retail, Cosmetics, Hair care
and Body care. Each operating segment constituted a 100% owned sub-group except for the Chemicals
market which is made up of two sub-groups. The results of these segments for the year ended 31
December 20X5 before taking account of the information below are as follows.
Operating segment information as at 31 December 20X5 before the sale of the body care operations

PRACTICE KIT
There were no significant intragroup balances in the segment assets and liabilities. All companies were
originally set up by the Endeavour Group. Endeavour decided to sell off its Body care operations and
the sale was completed on 31 December 20X5. On the same date the group acquired another group in
the Hair care area. The fair values of the assets and liabilities of the new Hair care group were $32
million and $13 million respectively. The purpose of the purchase was to expand the group's presence
by entering the Chinese market, with a subsidiary providing lower cost products for the mass retail
markets. Until then, Hair care products had been 'high end' products sold mainly wholesale to
hairdressing chains. The directors plan to report the new purchase as part of the Hair care segment.
Required
Discuss which of the operating segments of Endeavour constitute a 'reportable' operating segment
under IFRS 8 Operating Segments for the year ended 31 December 20X5.
[ACCA SBR – BPP]

Q.3. JH (Disclosures Example)
The core principle of IFRS 8 Operating Segments is to 'disclose information to enable users of its
financial statements to evaluate the nature and financial effects of the business activities in which it
engages and the economic environment in which it operates'.
For a publicly traded company which is required to prepare a segment report, the key users of this
report are likely to be existing and potential investors (in debt and equity instruments).
Below is an example of a segment report for JH, one of the world's leading suppliers in fast-moving
consumer goods:
JH's segment report for the year ended 31 march 20X3 (extracts)
Information about reportable segment profit or loss, assets and liabilities
Personal
Food Home Care All others Total
Care
$m $m $m $m $m
Revenue from external
190 100 60 10 360
customers
Intersegment revenues - - - 2 2
Interest revenue 20 16 9 - 45
Interest expanse 16 14 8 - 38
Depreciation and
7 5 6 - 18
amortization
Reportable segment
15 3 4 1 23
profit
Other material non-
cash items
Impairment of assets - 10 - - 10
Reportable segment
80 20 40 5 145
assets
Expenditure on non-
9 4 5 - 18
current assets
Reportable liabilities 60 15 35 3 113

PRACTICE KIT
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities

Total for Elimination
Unallocated
reportable Other of inter- Group
amounts
segments segment
$m $m $m $m $m
Revenue 325 10 (2) - 360
Profit or loss 22 1 (0.5) (5) 17.5
Assets 140 5 (2) 8 151
Liabilities 110 3 (2) 20 131
Required
Discuss the usefulness of the disclosure requirements of IFRS 8 for investors, illustrating your answer
where applicable with JH's segment report.
Professional marks will be awarded for clarity and quality of presentation.
[ACCA SBR - Kaplan]

3. E-Games (Online Business & Reportable Segments)
E-Games is a UK based company that sells computer games and hardware. Sales are made through
the E-Games website as well as through high street stores. The products sold online and in the stores
are the same. E-Games sells new releases for $40 in its stores, but for $30 online.
Internal reports used by the chief operating decision maker show the results of the online business
separately from the stores. However, they will be aggregated together for disclosure in the financial
statements.
Required
Should the online business and the high street stores be aggregated into a single segment in the
operating segments disclosure?
[ACCA SBR - Kaplan]

4. MNC (Identifying reportable segments)
The management of a company have identified operating segments based on geographical location.
Information for these segments is provided below:
Segment Total External Internal Profit/(loss) Assets
revenue revenue revenue
$000 $000 $000 $000 $000
Europe 260 140 120 98 3,400
Middle East 78 33 45 (26) 345
Asia 150 150 -- 47 995
North America 330 195 135 121 3,800
Central America 85 40 45 (15) 580
South America 97 54 43 12 880
1,000 612 388 237 10,000
Required:
According to IFRS 8, which segments must be reported?
[ACCA SBR – BPP Practice Kit]

Q.6. Casino
Casino has three distinct business segments. Management has calculated the net assets, revenue and
profit before common costs, which are to be allocated to these segments. However, they are unsure as
to how they should allocate certain common costs and whether they can exercise judgement in the
allocation process. They wish to allocate head office management expenses; pension expense; the cost
of managing properties and interest and related interest-bearing assets. They also are uncertain as to

PRACTICE KIT
whether the allocation of costs has to conform to the accounting policies used in the financial
statements.
Required
Advise the management of Casino on the points raised in the above paragraph.

Q.7. Verge
In its annual financial statements for the year ended 31 March 20X3, Verge, a public limited company,
had identified the following operating segments.
(i) Segment 1 local train operations
(ii) Segment 2 inter-city train operations
(iii) Segment 3 railway constructions
The company disclosed two reportable segments. Segments 1 and 2 were aggregated into a single
reportable operating segment. Operating segments 1 and 2 have been aggregated on the basis of their
similar business characteristics, and the nature of their products and services. In the local train market,
it is the local transport authority which awards the contract and pays Verge for its services. In the local
train market, contracts are awarded following a competitive tender process, and the ticket prices paid
by passengers are set by and paid to the transport authority. In the inter-city train market, ticket prices
are set by Verge and the passengers pay Verge for the service provided.
[ICAP Past Paper]

5. Jay Limited (Identify Reportable Segments)
Jay Limited is an integrated manufacturing company with five operating segments. Following
information pertains to the year ended 31 March 2012:
Operating Internal External Total
segment revenue revenue revenue Profit / loss Assets Liabilities
------------------------------------Rs. in million------------------------------------
A 38 705 743 194 200 130
B - 82 82 (22) 44 40
C - 300 300 81 206 125
D 35 - 35 10 75 60
E 38 90 128 (63) 50 25
Total 111 1,177 1,288 299 575 380
Required:
In respect of each operating segment explain whether it is a reportable segment.
[Practice Question – IFRS Box]

6. Segments (Identify Reportable Segments)
Based on the information below, identify which segments are reportable operating segments in line with
IFRS 8.
Assume that all segments meet the definition of operating segment and focus on assessment of
quantitative thresholds. All amounts are in CU.
Segment Revenues Profit (+)/Loss (-) Assets

Segment I. 250,000 75,000 180,000
Segment II. 280,000 70,000 420,000
Segment III. 200,000 -75,000 400,000
Segment IV. 1,300,000 655,000 300,000
Segment V. 700,000 -300,000 600,000
Segment VI. 300,000 -150,000 170,000
Combined 3,030,000 275,000 2,070,000
Total for the entity: 3,500,000 300,000 2,400,000

PRACTICE KIT
Combined profit: 800,000

Combined loss: -525,000
Segment IV. sells semi-finished goods to all other segments and to external customers, too. The
segment's revenue from the sale to all other segments totaled CU 300,000.

7. ABC Corp. (Disclosure)
ABC Corp. builds new apartments for the clients and has one subsidiary, DEF. DEF provides
renovation services to its clients. Both ABC and DEF operate in the head office located in ABC's
premises. Board of Directors revises monthly results of both companies and makes appropriate
decisions.
Based on the information below, prepare the numerical segment reporting disclosures for ABC Group
in the consolidated financial statements in line with IFRS 8.
Notes:
- DEF sold services amounting to CU 100 000 to ABC.
- ABC sold all goods and services to external customers.
- ABC's profit includes dividend received from its subsidiary DEF amounting to CU 5 000.
- ABC provided a loan to DEF and ABC's profit thus includes interest received from DEF
amounting to CU 2 000. DEF's profit includes the interest expense of CU 2 000 related to the same
transaction.
Information about divisions submitted to Board of Directors:
Description ABC DEF Head office
Revenue from sales 2,000,000 1,450,000 0
Profit (-loss) before tax 780,000 480,000 -74,000
Income tax expense -280,000 -102,000 15,000
Profit (-loss) after tax 500,000 378,000 -59,000
Information taken from consolidated statement of profit or loss of ABC Group:

Description ABC Group
Revenue from sales 3,350,000
Profit (-loss) before tax 1,181,000
Income tax expense -367,000
Profit (-loss) after tax 814,000

8. FashionX Corporation (Disclosure)
FashionX Corporation has three subsidiaries: Dress, Shirt and Promo. The business is conducted as
follows:
- FashionX provides management and admin services. It is located in the UK.
- Dress manufactures dresses, Shirt manufactures Shirts. Both of them are located in India.
- Promo, located in the UK, is responsible for advertising and distribution of Dress's and Shirt's
products. Its revenues are fully generated from the sale of the goods from Dress and Shirt. 60% of
these goods is sold to the customers in the USA and 40% to the customers in the UK.
- 30% of Dress's revenue and 20% of Shirt's revenue is from sales to local external customers. The
rest is from sales to Promo, at 30% markup.
- Promo's unsold inventories purchased from Dress and Shirt amounted to CU 130 000 at the
reporting date.
- FashionX provided a loan to Dress amounting to CU 500 000. The interest paid during 20X2
amounts to CU 10 000.
- Chief Operating Officer reviews monthly reports related to manufacturing and distribution.
The extracts from financial statements as of 31 December 20X2 are stated below.
Prepare disclosures related to segment reporting at 31 December 20X2.

PRACTICE KIT
Ignore deferred tax. All amounts are in CU.

Extract from the statements of financial position at 31 December 20X2:
Description FashionX Dress Shirt Promo Consolidated
Property, plant and
120,000 850,000 700,000 150,000 1,820,000
equipment
Goodwill 24,000 24,000
Inventories 550,000 400,000 130,000 1,050,000
Other assets 600,000 300,000 250,000 650,000
Total assets 744,000 1,700,000 1,350,000 280,000 3,544,000
Other liabilities -400,000 -900,000 -750,000 -220,000 -2,270,000
Intragroup loans -500,000 0
Total liabilities -400,000 -1,400,000 -750,000 -220,000 -2,270,000
Information taken from consolidated statement of profit or loss of ABC Group:
Description FashionX Dress Shirt Promo Consolidated
Revenue 2,500,000 1,800,000 4,200,000 5,310,000
Profit before tax -320,000 850,000 670,000 305,000 1,475,000
Income tax
65,000 -175,000 -140,000 -55,000 -305,000
expense
Profit after tax -255,000 675,000 530,000 250,000 1,170,000
Depreciation -12,000 -80,000 -68,000 -15,000 -175,000
Interest paid - -10,000 - - -
Interest received 10,000 - - - -

PRACTICE KIT
Answers:
1. Gohar Limited (Reportable Segments & Reco)
(a)Determination of reportable segments
chemical Soda-Ash Polyester Paint Parma Total

························ Rs. in million··························
Sales 1,790 216 227 247 252 2,732
Less: Inter-segment sales (38) (38)
Sales to external customers 1,752 216 227 247 252 2,694
Gross profit 1,101 117 48 26 31 1,323

Operating expense (63) (57) (23) (16) (12) (171)
Profit before tax 1,038 60 25 10 19 1,152
Assets 637 444 115 127 132 1,455
Criteria for reporting segment Reporting segment External sales of

Identification identified identifying segment
1. 10% of sales i.e. Rs. 273.2 million Chemicals 65.03%
2. 10% of sales i.e. Rs. 273.2 million - -
3. 10% of sales i.e. Rs. 273.2 million Soda Ash 8.02%
73.05%
Further segment needs to be identified as reportable segment's external sale is less than 75%
4. Further segment needs to be identified as Pharma 9.22%
reportable segment's external sale is less than
75%
82.27%
(b) Disclosure in the financial statements of Gohar Limited

34 - OPERATING SEGMENT RESULTS
Chemical Soda-Ash Pharma Other Total
························ Rs. in million··························
Revenue from external customers 1,752 216 252 474 2,694
Inter segment revenue 38
Revenue from reportable segment 1,790 216 252 2,258
Other material information
Operating expenses 63 57 12 39 171
Segment profit before tax 1,038 60 19 35 1,152
Segment assets 637 444 132 242 1,455
Segment liabilities 442 355 98 202 1,097

PRACTICE KIT
34.1 - Reconciliation of reportable segment revenues, _profit or loss, assets and liabilities
Reportable other Than Elimination Other Ghor
Segment Reportable of inter- Adjustment Limited’s
Total Segment Segment Total
Total Transaction
························ Rs. in million··························
Revenues 2,258 474 (38) - 2,694
Operating expenses 132 39 - 75 2,46
Segment profit before tax 1,117 35 (11) (75) 1,066
Segment assets 1,213 242 - 150 1,605
Segment liabilities 895 202 - 27 1,124
The reconciling items represents amounts related to corporate headquarter which are not included
in segment information.
2. Endeavour (Identifying reportable segments)

At 31 December 20X5 four of the six operating segments are reportable operating segments:
• The Chemicals (which comprises the two sub-groups of Europe and the rest of the world) and
Pharmaceuticals wholesale segments meet the definition on all size criteria.
• The Hair care segment is separately reported due to its profitability being greater than 10% of total
segments in profit (4/29).
• The Body care segment also meets the size criteria (both revenue and profits exceed the size criteria)
and requires disclosure under IFRS 8 despite being disposed of during the period. Also note that the
fact that it does not make a majority of its sales externally does not prevent separate disclosure under
IFRS 8. The sale of the operations may meet the criteria to be reported as a discontinued operation
under IFRS 5 which will require additional disclosures.
Reporting the above four operating segments accounts for 84% of external revenue being reported;
hence the requirement to report at least 75% of external revenue has been satisfied.
The Pharmaceuticals retail segment represents 9.2% of revenue; the loss is 6.9% of the 'control number'
of – in this case – operating segments in profit (2/29) and 8.9% of total assets (30/336) (before the
addition of the new Hair care operations/sale of the Body care segment, and 9.6% (30/(336 – 54 + 32 =
314)) after). Consequently, it is not separately reportable. Although it falls below the 10% thresholds it
can still be reported as a separate operating segment if management believe that information about the
segment would be useful to users of the financial statements. Otherwise it would be disclosed in an 'All
other segments' column.
The Cosmetics segment represents 6.3% of revenue, 6.9% of operating segments in profit (2/29) and
5.4% (18/336) of total assets (before the addition of the new Hair care operations/sale of the Body care
segment, and 5.7% (18/(336 – 54 + 32 = 314)) after). It can also be reported separately if management
believe the information would be useful to users. Otherwise it would also be disclosed in an 'All other
segments' column.
After the sale of the Body care segment, the new Chinese business increases the size of the Hair care
segment which still remains reportable. However, the business itself represents 10.2% of revised total
operating segment assets (32/(336 – 54 + 32 = 314)), and may justify separate reporting as a different
operating segment if management considers that the nature of its product type (mass market rather than
'high end') and distribution (retail versus wholesale) differ sufficiently from the 'traditional' Hair care
products the group manufactures.

PRACTICE KIT
3. E-Games (Online Business & Reportable Segments)

A segment report can be useful in providing information to investors to assist them in decision-
making (to buy or sell shares). However, there are some limitations to its usefulness. The benefits and
limitations, using JH's segment report as an illustration, are outlined below.
Benefits
Risk and return:
Large publicly traded entities typically offer many different types of products or services to their
customer, each of which results in very different types of risks and returns. In the case of JH, the three
main markets are food, personal care and home care. For example, as food has a short shelf-life,
inventory obsolescence is going to be a much more significant risk than for personal care and home
care products.
Informed investment decision:
If an investor were only able to view the full financial statements of JH, they would not be able to
make an assessment of how the different parts of the business are performing and so could not make
a fully informed investment decision. For example, they would not know that personal care products
are making a profit margin of under half that of food (3% versus 7.8%).
Assess management strategy and different prospects of each segment:
Disaggregation into operating segments allows investors to use the segment report to:
• Assess management's strategy and effectiveness – for example, whether the most profitable
product accounts for the largest proportion of sales, (in JH, food has the highest margin at 7.8%
and accounts for more than half of sales, demonstrating sound management judgement);
• Assess the different rates of profitability, opportunities for growth, future prospects and degrees
of risk of each different business activity. For example, whether the segment has recently invested
in assets for future growth (in JH, all three segments have invested in assets in the year and,
overall, home care has the highest asset to revenue ratio, either implying a more capital-intensive
manufacturing process or the greatest potential for future growth and perhaps newer, more
efficient assets).
Limitations
Comparability with other entities:
Segments are determined under IFRS 8 on the basis of internal reporting to the chief operating decision
maker. JH's three segments are food, personal care and home care. However, JH's competitors are
unlikely to structure their business or report to the board in exactly the same way as JH. This could
make the investment decision very difficult due to the lack of comparability of reportable segments
between entities.
Unallocated amounts:
Where it is not possible to allocate an expense, asset or liability to a specific segment, the amounts are
reported as unallocated in the reconciliation of reportable segments to the entity's full financial
statements.
Here JH has $5m of unallocated expenses. If these were allocated to specific segments, they could turn
personal care or home care's reported profit into a loss or reduce food's profit by a third.
Therefore, comparison of the different segments without taking into account these unallocated items
would be misleading.
Equally 15% of JH's group liabilities are unallocated. If these had been allocated to a specific segment,
they would more than double personal care's liabilities and significantly increase the other two
segments' liabilities. There is a danger that users believe that the total reported segment liabilities
show the complete liabilities of the JH group.
Therefore, where these unallocated amounts are significant, the figures by segment could be
misleading and could result in an ill-informed investment decision.

PRACTICE KIT
Reconciliations:
IFRS 8 Operating Segments only requires reconciliation of segment revenues, profit or loss, assets and
liabilities (and for any material items separately disclosed) to the total entity's figures.
Therefore, it is not possible to see all the reasons for the differences in the statement of profit or loss
and other comprehensive income and statement of financial position between the reported segment
figures and the total entity figures.
In JH's case, it is not possible to see any unallocated expenses, interest or depreciation. Therefore
investors are not presented with the full picture.
Allocation between segments:
Management judgement is required in allocating income, expenses, assets and liabilities to the
different segments. In some instances, such as interest revenue and interest expense where treasury
and financing decisions are likely to be made centrally rather than by division, it could be very difficult
to allocate these items. Equally, central expenses, assets and liabilities (such as those relating to head
office) could be hard to allocate. This leaves scope for errors, manipulation and bias.
In JH's case, both interest revenue and interest expense are individually greater than total segment
profit so incorrect allocation could mislead an investor into making an ill-informed decision.
Intersegment items:
The cancellation of intersegment revenue, assets and liabilities is clearly shown in the reconciliation
of the segment revenue, profit or loss, assets and liabilities to the total entity's. However, it is not
possible to see the cancellation of intersegment expenses or interest.
This could confuse investors as they cannot see the full impact of intersegment cancellations on the
group accounts. For example, in JH's segment report, the cancellation of $2m intersegment revenue is
clearly shown but the corresponding cancellation of intersegment expense is not disclosed.
Understandability:
The disclosure requirements of IFRS 8 Operating Segments are quite onerous as illustrated by the level
of detail in JH's segment report. There is a danger of 'information overload', overwhelming the
investor with the end result of the segment report being ignored altogether.
Disclosure requirements:
The nature and quantify of information required to be disclosed by IFRS 8 depends on the content of
internal management reports reviewed by the chief operating decision maker. This will vary from
company to company, making it hard for an investor to compare the performance of different entities.
In the case of JH, a significant amount of information is reported internally and therefore disclosed.
However, IFRS 8 only requires as a minimum for an entity to report a measure of profit or loss for
each reportable segment. If this were the only disclosure, it would be very hard to make an investment
decision.
Reportable segments:
IFRS 8 only requires segments to be reported on separately if they meet certain criteria (at least 10%
of revenue; or at least 10% of the higher of the combined reported profit or loss; or at least 10% of
assets). As long as at least 75% of external revenue is reported on, the remaining segments may be
aggregated.
Here, JH has combined the segments that have not met the 10% threshold into 'All others' which is not
helpful to investors as they will not know which products or services are included in this category.

PRACTICE KIT
4. MNC (Identifying reportable segments)

IFRS 8 says that two or more operating segments may be aggregated into a single segment if they have
similar economic characteristics and the segments are similar in the following respects:
• The nature of products or services.
• The types of customer.
• Distribution methods.
The standard says that segments with similar economic characteristics would have similar long-term
gross margins.
The E-Games stores and online business sell the same types of product, and there are likely to be no
major differences in the types of customer (individual consumers). Therefore, in these respects, the
segments are similar.
However, customers will collect their goods from the stores, but E-Games will deliver the products
sold online. This means that distribution methods are different.
Moreover, there are different sales prices between the stores and the online business, giving rise to
significant differences in gross margin. This suggests dissimilarity in terms of economic
characteristics.
This means that it might be more appropriate to disclose these two segments separately.
Note:
There is no ‘right’ or ‘wrong’ answer here. There are numerous retailers who do not disclose their
online operations as a separate segment. However, the International Accounting Standards Board
notes in its postimplementation review of IFRS 8 that many companies are overaggregating
segments. For exam purposes, it is important to state the relevant recognition criteria and then to
apply these to the information given in the question.
5. Jay Limited (Identify Reportable Segments)

The 10% tests
Segment 10% total 10% results test 10% assets (W3) Report?
revenue (W1) (W2)
Europe Y Y Y Y
Middle East N N N N
Asia Y Y N Y
North America Y Y Y Y
Central America N N N N
South America N N N N
Based on the 10% tests, Europe, Asia and North America are reportable. However, we must check
whether they comprise at least 75% of the company's external revenue.
The 75% test
External revenue
$000
Europe 140
Asia 150
North America 195
Total 485
The external revenue of reportable segments is 79% ($485,000/ $612,000) of total external revenue. The
75% test is met and no other segments need to be reported.

PRACTICE KIT
Conclusion
The reportable segments are Europe, Asia and North America.
(W1) 10% of total sales
10% × $1m = $100,000.
All segments whose total sales exceed $100,000 are reportable.
(W2) 10% of results
10% of profit making segments:
10% × ($98,000 + $47,000 + $121,000 + $12,000) = $27,800
10% of loss making segments:
10% × ($26,000 + $15,000) = $4,100
Therefore, all segments which make a profit or a loss of greater than $27,800 are reportable.
(W3) 10% of total assets
10% × $10m = $1m.
All segments whose assets exceed $1m are reportable.
6. Segments (Identify Reportable Segments)

Allocation of common costs under IFRS 8 Operating Segments
If segment reporting is to fulfil a useful function, costs need to be appropriately assigned to segments.
Centrally incurred expenses and central assets can be significant, and the basis chosen by an entity to
allocate such costs can therefore have a significant impact on the financial statements. In the case of
Casino, head office management expenses, pension expenses, the cost of managing properties and
interest and related interest-bearing assets could be material amounts, whose misallocation could
mislead users.
IFRS 8 Operating Segments does not prescribe a basis on which to allocate common costs, but it does
require that that basis should be reasonable. For example, it would not be reasonable to allocate the
head office management expenses to the most profitable business segment to disguise a potential loss
elsewhere. Nor would it be reasonable to allocate the pension expense to a segment with no
pensionable employees.
A reasonable basis on which to allocate common costs for Casino might be as follows:
(i) Head office management costs. These could be allocated on the basis of revenue or net assets.
Any allocation might be criticised as arbitrary – it is not necessarily the case that a segment with
a higher revenue requires more administration from head office – but this is a fairer basis than
most.
(ii) Pension expense. A reasonable allocation might be on the basis of the number of employees or
salary expense of each segment.
(iii) Costs of managing properties. These could be allocated on the basis of the value of the properties
used by each business segment, or the type and age of the properties (older properties requiring
more attention than newer ones).
(iv) Interest and interest-bearing assets. These need not be allocated to the same segment – the interest
receivable could be allocated to the profit or loss of one segment and the related interest-bearing
asset to the assets and liabilities of another. IFRS 8 calls this asymmetrical allocation.
The amounts reported under IFRS 8 may differ from those reported in the consolidated financial
statements because IFRS 8 requires the information to be presented on the same basis as it is reported
internally, even if the accounting policies are not the same as those of the consolidated financial
statements. For example, segment information may be reported on a cash basis rather than an accruals
basis or different accounting policies may be adopted in the segment report when allocating centrally
incurred costs if necessary for a better understanding of the reported segment information.
IFRS 8 requires reconciliations between the segments' reported amounts and those in the consolidated
financial statements. Entities must disclose the nature of such differences, and of the basis of
accounting for transactions between reportable segments.

PRACTICE KIT
7. ABC Corp. (Disclosure)

Operating segments
IFRS 8 Operating Segments requires operating segments as defined in the standard to be reported
separately if they exceed at least one of certain qualitative thresholds. Two or more operating
segments below the thresholds may be aggregated to produce a reportable segment if the segments
have similar economic characteristics, and the segments are similar in a majority of the following
aggregation criteria:
(i) The nature of the products and services
(ii) The nature of the production process
(iii) The type or class of customer for their products or services
(iv) The methods used to distribute their products or provide their services
(v) If applicable, the nature of the regulatory environment
Verge has aggregated segments 1 and 2, but this aggregation may not be permissible under IFRS 8.
While the products and services are similar, the customers for those products and services are
different. Therefore the fourth aggregation criteria has not been met.
In the local market, the decision to award the contract is in the hands of the local authority, which also
sets prices and pays for the services. The company is not exposed to passenger revenue risk, since a
contract is awarded by competitive tender. It could be argued that the local authority is the major
customer in the local market.
In the local market, the decision to award the contract is in the hands of the local authority, which also
sets prices and pays for the services. The company is not exposed to passenger revenue risk, since a
contract is awarded by competitive tender. It could be argued that the local authority is the major
customer in the local market.
It is possible that the fifth criteria, regulatory environment, is not met, since the local authority is
imposing a different set of rules to that which applies in the inter-city market.
In conclusion, the two segments have different economic characteristics and so should be reported as
separate segments rather than aggregated.
8. FashionX Corporation (Disclosure)

1. An operating segment is a component of an entity:
- That engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same
entity);
- Whose operating results are regularly reviewed by the entity's chief operating decision maker to
make decisions about resources to be allocated to the
- segment and assess the performance; and
- For which discrete financial information is available.
2. As Jay Limited has both profit and loss making segments, the result of those in profit and those in
loss must be totaled to see which is the greater:
Profits (194+81+10) 285
Losses (22+630 (85)
200
So the 10% of profit or loss test must be applied by reference to Rs. 285 million.
Reportable
Segment Explanation
(Yes / No)
A Yes Because it generates more than 10% revenue.
Because it fails to meet any of the criteria specified in
B No
IFRS-8
C Yes Because it generates more than 10% of revenue.
D Yes Because it has more than 10% of assets.

PRACTICE KIT
E Yes Because its losses are more than 10% of absolute profit.
Check the 75% test is satisfied: (705+300+90)/1,177 = 93%

PRACTICE KIT
CHAPTER 07: IAS 07 – AGRICULTURE
CHAPTER 07:
IAS 41 – AGRICULTURE
Questions:
1. Herd (Changes in fair value)
A herd of five four-year old animals was held on 1 January 20X3. On 1 July 20X3, a 4.5-year old animal
was purchased. The fair values less estimated costs to sell were as follows.
4-year-old animal at 1 January 20X3 £200
4.5-year-old animal at 1 July 20X3 £212
5-year-old animal at 31 December 20X3 £230
Requirement
Show the reconciliation of the changes in fair value.

2. Arapawanui (Animals)
The Arapawanui Company keeps a flock of sheep on its land, selling the milk outputs. The day after
its production, the milk is collected on behalf of the purchasers and revenue from its sale is recognised.
On 30 June 20X7 300 animals were born, all of which survived and were still owned by Arapawanui
at 31 December 20X7. 10,000 litres of milk were produced in the year to 31 December 20X7.
The following market data is available in respect of the sheep.
At 30 June 20X7 At 31 December 20X7
Type of animal Fair value per animal Fair value per animal
£ £
Newborn 22 23
6 months old 25 26
The animal fair values are based on transactions prices in the local markets. Auctioneers' commission
is 1.5% of the transaction price and the government sales levy is 0.5% of that price.
The production cost, including overheads, of the milk was £0.08 per litre and the fair values were £0.13
per litre throughout 20X7 and £0.14 per litre throughout 20X8. Costs to sell were estimated at 4%.
Requirement
What gain should be recognised in respect of the newborn sheep and the milk in Arapawanui's
financial statements for the year to 31 December 20X7, according to IAS 41, Agriculture?

3. Tepev
The Tepev Company bought a flock of 400 sheep on 1 December 20X7. The cost of each sheep was £80,
which represented fair value at that date. Auctioneers' fees on sale are 5% of fair value, and the cost
of transporting each sheep to market is £4.00. An agricultural levy of £2.00 is payable on each sheep
sold.
At 31 December 20X7 all of the sheep are still held and fair value has increased to £90 per sheep. No
other costs have changed. Tepev has a contract to sell the sheep on 31 March 20X8 for £100 each.
Requirement
What is the carrying amount of the flock in the statement of financial position at 31 December 20X7,
according to IAS 41, Agriculture?

PRACTICE KIT

4. Monkey
The Monkey Company has the following information in relation to a cattle herd in the year ended 31
December 20X7.
£'000
Cost of herd acquired on 1 January 20X7 (which equates to fair value) 1,800
Auctioneers' sales fees 2% of sale price
Loan obtained at 8% to finance acquisition of herd 1,500
Fair value of herd at 31 December 20X7 2,500
Transport cost to market 35
Government transfer fee on sales – no fee on purchases 50
Requirement
What is the loss arising on initial recognition of the herd as biological assets and the gain arising on
its subsequent remeasurement under IAS 41, Agriculture, in the year ended 31 December 20X7?
[ACCA SBR Kaplan]

5. Cows
On 1 January 20X1, a farmer had a herd of 100 cows, all of which were 2 years old. At this date, the
fair value less point of sale costs of the herd was $10,000. On 1 July 20X1, the farmer purchased 20
cows (each two and half years old) for $60 each.
As at 31 December 20X1, three year old cows sell at market for $90 each.
Market auctioneers have charged a sales levy of 2% for many years.
Required:
Discuss the accounting treatment of the above in the financial statements for the year ended 31
December 20X1.
[ACCA SBR Kaplan]

6. GoodWine
GoodWine is a company that grows and harvests grapes. Grape vines, which produce a new harvest
of grapes each year, are typically replaced every 30 years. Harvested grapes are sold to wine
producers. With regards to property, plant and equipment, GoodWine accounts for land using the
revaluation model and all other classes of assets using the cost model.
On 30 June 20X1, its grape vines had a carrying amount of $300,000 and a remaining useful life of 20
years. The grapes on the vines, which are generally harvested in August each year, had a fair value of
$500,000. The land used for growing the grape vines had a fair value of $2m.
On 30 June 20X2, grapes with a fair value of $100,000 were harvested early due to unusual weather
conditions. The grapes left on the grape vines had a fair value of $520,000. The land had a fair value
of $2.1m.
All selling costs are negligible and should be ignored.
Required:
Discuss the accounting treatment of the above in the financial statements of GoodWine for the year
ended 30 June 20X2.
[ACCA SBR BPP Practice Kit]

7. Lucky Dairy (Mixed Scenario)
The Lucky Dairy, a public limited company, produces milk for supply to various customers. It is
responsible for producing 25% of the country's milk consumption. The company owns 150 farms and

PRACTICE KIT
has 70,000 cows and 35,000 heifers which are being raised to produce milk in the future. The farms
produce 2.5 million kilograms of milk per annum and normally hold an inventory of 50,000 kilograms
of milk (Extracts from the draft accounts to 31 May 20X2).
The herds comprise at 31 May 20X2:

70,000 – 3-year old cows (all purchased on or before 1 June 20X1)
25,000 – heifers (average age 1½ years old – purchased 1 December 20X1)
10,000 – heifers (average age 2 years – purchased 1 June 20X1)
There were no animals born or sold in the year. The per unit values less estimated point of sale costs
were as follows.
$
2-year old animal at 1 June 20X1 50
1-year old animal at 1 June 20X1 and 1 December 20X1 40
3-year old animal at 31 May 20X2 60
1½-year old animal at 31 May 20X2 46
The company has had a difficult year in financial and operating terms. The cows had contracted a
disease at the beginning of the financial year which had been passed on in the food chain to a small
number of consumers. The publicity surrounding this event had caused a drop in the consumption of
milk and as a result the dairy was holding 500,000 kilograms of milk in storage.
The government had stated, on 1 April 20X2 that it was prepared to compensate farmers for the drop
in the price and consumption of milk. An official government letter was received on 6 June 20X2,
stating that $1.5 million will be paid to Lucky on 1 August 20X2. Additionally on 1 May 20X2, Lucky
had received a letter from its lawyer saying that legal proceedings had been started against the
company by the persons affected by the disease. The company's lawyers have advised them that they
feel that it is probable that they will be found liable and that the costs involved may reach $2 million.
The lawyers, however, feel that the company may receive additional compensation from a
government fund if certain quality control procedures had been carried out by the company.
However, the lawyers will only state that the compensation payment is 'possible'.
The company's activities are controlled in three geographical locations, Dale, Shire and Ham. The only
region affected by the disease was Dale and the government has decided that it is to restrict the milk
production of that region significantly. Lucky estimates that the discounted future cash income from
the present herds of cattle in the region amounts to $1.2 million, taking into account the government
restriction order. Lucky was not sure that the fair value of the cows in the region could be measured
reliably at the date of purchase because of the problems with the diseased cattle. The cows in this
region amounted to 20,000 in number and the heifers 10,000 in number. All of the animals were
purchased on 1 June 20X1. Lucky has had an offer of $1 million for all of the animals in the Dale region
(net of point of sale costs) and $2 million for the sale of the farms in the region.
However, there was a minority of directors who opposed the planned sale and it was decided to defer
the public announcement of sale pending the outcome of the possible receipt of the government
compensation. The board had decided that the potential sale plan was highly confidential but a
national newspaper had published an article saying that the sale may occur and that there would be
many people who would lose their employment. The board approved the planned sale of Dale farms
on 31 May 20X2.
The directors of Lucky have approached your firm for professional advice on the above matters.
Required

PRACTICE KIT
Advise the directors on how the biological assets and produce of Lucky should be accounted for under
IAS 41 Agriculture and discuss the implications for the published financial statements of the above
events.
Note. Candidates should produce a table which shows the changes in value of the cattle for the year
to 31 May 20X2 due to price change and physical change excluding the Dale region, and the value of
the herd of the Dale region as at 31 May 20X2. Ignore the effects of taxation. Heifers are young female
cows, whilst "cattle" refers to both cows and heifers.
[ICAP Dec 2015 Q. 5(a)]

8. The Dairy Company
The Dairy Company (TDC) owns three farms and has a stock of 3,200 cows. During the year ended 30
June 2015, 300 animals were born, all of which survived and were still owned by TDC at year-end. Of
those, 225 are infants whereas 75 are nine month old having market values of Rs. 26,000 and Rs. 53,000
per animal respectively. The incidental costs are 2% of the transaction price.
Required:
In accordance with the requirements of the International Financial Reporting Standards, discuss how
the gain in respect of the new born cows should be recognized in TDC's financial statements for the year
ended 30 June 2015.

PRACTICE KIT
Answers:
1. Herd (Changes in fair value)
The movement in the fair value less estimated costs to sell of the herd can be reconciled as follows.
At 1 January 20X3 (5 x £200) 1,000
Purchased 212
Change in fair value (the balancing figure) 168
At 31 December 20X3 (6 x £230) 1,380
The entity is encouraged to disclose separately the amount of the change in fair value less estimated
costs to sell arising from physical changes and price changes.
If it is not possible to measure biological assets reliably and they are instead recognised at their cost
less depreciation and impairment an explanation should be provided of why it was not possible to
establish fair value. A full reconciliation of movements in the net cost should be presented with an
explanation of the depreciation rate and method used.
2. Arapawanui (Animals)
The newborn sheep are biological assets and should be measured at fair value less costs to sell, both
on initial recognition and at each reporting date (IAS 41.12). The gains on initial recognition and from
a change in this value should be recognised in profit or loss (IAS 41.26). As the animals are six months
old at the year end, the total gain in the year (being the initial gain based on a newborn fair value of
£22 plus the year-end change in value by £4 to £26) is £7,644 (300 x £26 x (100% – 1.5% – 0.5%)).
The milk is agricultural produce and should be recognised initially under IAS 41 at fair value less costs
to sell (IAS 41.13). (At this point it is taken into inventories and dealt with under IAS 2.) The gain on
initial recognition should be recognised in profit or loss (IAS 41.28). The gain is £1,248 (10,000 litres x
£0.13 x (100% – 4)).
Total gain is £8,892.
3. Tepev
£33,400
Biological assets should be measured at fair value less costs to sell (IAS 41.12). Costs to sell include
sales commission and regulatory levies but exclude transport to market (IAS 41.14). Transport costs
are in fact deducted from market value in order to reach fair value. In this question fair value of £90
is provided; it is assumed that this is calculated as a market value of £94 less the quoted transport costs
of £4. Contracts to sell agricultural assets at a future date should be ignored (IAS 41.16).
The statement of financial position carrying amount per sheep is:
Fair value 90.00
Costs to sell (£90 x 5%) + £2.00 (6.50)
Value per sheep 83.50
For the flock of 400 sheep, the amount is £33,400.
4. Monkey
£5,700
Biological assets should be measured at fair value less costs to sell, both on initial recognition and at
each reporting date (IAS 41.12). Costs to sell include sale commission and regulatory levies but exclude
transport to market (IAS 41.14). Transport costs are in fact deducted from market value in order to
reach fair value. Contracts to sell agricultural assets at a future date should be ignored (IAS 41.16).
FV at reporting date (£107 – commission (£107 x 5%) – levy £2.00) 99.65
Initial FV per sheep (£95 – commission (£95 x 5%) – levy £2.00) (88.25)
Gain per sheep 11.40
There is, therefore, a gain on the flock of 500 sheep of £5,700.

PRACTICE KIT
5. Cows
Cows are biological assets and should be initially recognised at fair value less costs to sell.
The cows purchased in the year should be initially recognised at $1,176 ((20 × $60) × 98%). This will
give rise to an immediate loss of $24 ((20 × $60) – $1,176) in the statement of profit or loss.
At year end, the whole herd should be revalued to fair value less costs to sell. Any gain or loss will be
recorded in the statement of profit or loss.
The herd of cows will be held at $10,584 ((120 × $90) × 98%) on the statement of financial position.
This will give rise to a further loss of $592 (W1) in the statement of profit or loss.
(W1) Loss on revaluation
$
Value at 1 January 20X1 10,000
New purchase 1,176
Loss (bal. fig) (592)
Value at 31 December 20X1 10,584
6. GoodWine
Land is accounted for in accordance with IAS 16 Property, Plant and Equipment. If the revaluation
model is chosen, then gains in the fair value of the land should be reported in other comprehensive
income.
At 30 June 20X2, the land should be revalued to $2.1m and a gain of $100,000 ($2.1m – $2.0m) should
be reported in other comprehensive income and held within a revaluation reserve in equity.
The grape vines are used to produce agricultural produce over many periods. This means that they
are bearer plants and are therefore also accounted for under IAS 16. Except for land, GoodWine uses
the cost model for property, plant and equipment. Therefore, depreciation of $15,000 ($300,000/20
years) will be charged to profit or loss in the year and the grape vines will have a carrying amount of
$285,000 ($300,000 – $15,000) at 30 June 20X2.
The grapes growing on the vines are biological assets. They should be revalued at the year end to fair
value less costs to sell with any gain or loss reported in profit or loss. GoodWine's biological assets
should therefore be revalued to $520,000. A gain of $20,000 ($520,000 – $500,000) should be reported
in profit or loss.
The grapes are agricultural produce and should initially be recognised at fair value less costs to sell.
Any gain or loss on initial recognition is reported in profit or loss. The harvested grapes should be
initially recognised at $100,000 with a gain of $100,000 reported in profit or loss. The harvested grapes
are now accounted for under IAS 2 Inventories and will have a deemed cost of $100,000.

The dairy herd
The dairy herd is a biological asset as defined by IAS 41 Agriculture. IAS 41 states that a biological
asset should be measured at fair value less estimated point of sale costs unless its fair value cannot be
measured reliably. Gains and losses arising from a change in fair value should be included in profit
or loss for the period.
In this case, fair value is based on market price and point of sale costs are the costs of transporting the
cattle to the market. Cattle in the Ham and Shire regions is valued on this basis.
IAS 41 encourages companies to analyse the change in fair value between the movement due to
physical changes and the movement due to price changes (see the table below). It also encourages

PRACTICE KIT
companies to provide a quantified description of each group of biological assets. Therefore the value
of the cows and the value of the heifers should be disclosed separately in the statement of financial
position.
Valuing the dairy herd for the Dale Region is less straightforward as its fair value cannot be measured
reliably at the date of purchase. In this situation IAS 41 requires the herd to be valued at cost less any
impairment losses. The standard also requires companies to provide an explanation of why fair value
cannot be measured reliably and the range of estimates within which fair value is likely to fall.
Valuation of cattle, excluding Dale region

Coes Heifers Total
$’000 $’000 $’000
Fair value of herd at 1 June 20x1 (50,000 x
2,500 - 2,500
50)
Purchase 1 December 20x1 (25,000 x 40) - 1,000 1,000
Purchase in fair value less estimated
point of sale cost due to price change: 250 50 300
(50,000 x (55 – 50)/25,000 x (42 – 40)
Purchase in fair value less estimated
point of sale cost due to physical change: 250 100 350
(50,000 x (60 – 55)/25,000 x (46 – 42)
Fair value less estimated point of sale
costs at 31 May 20x2 (50,000 x 60/25,000 3,000 1,150 4,150
x 46)
Valuation of cattle in Dale Region

$’000
Cost at 1 June 20x1
Cows (20,000 x 50) 1,000
Heifers (10,000 x 40) 400
1,400
Less impairment loss (200)
1,200
Note. The herd is impaired because its recoverable amount is $1.2 million. This is the higher of fair
value less costs to sell of $1 million (the amount that the Lucky Dairy has been offered) and value in
use of $1.2 million (discounted value of the milk to be produced).
$'000
Estimated fair value at 31 May 20X2 (for disclosure only):
Cows (20,000  60) 1,200
Heifers (10,000  55) 550
1,750
Milk
The milk is agricultural produce as defined by IAS 41 and should normally be measured at fair value
less estimated point of sale costs at the time of milking. In this case the company is holding ten times
the amount of inventory that it would normally hold and it is probable that much of this milk is unfit
for consumption. The company should estimate the amount of milk that will not be sold and write
down the inventory accordingly. The write down should be disclosed separately in the income
statement as required by IAS 1 Presentation of Financial Statements.
Government grant
Under IAS 41, the government grant should be recognised as income when it becomes receivable. As
it was only on 6 June 20X2 that the company received official confirmation of the amount to be paid,

PRACTICE KIT
the income should not be recognised in the current year. The amount may be sufficiently material to
justify disclosure as a non-adjusting event after the balance sheet date.
Legal proceedings and additional compensation

The lawyers have indicated that the company will probably be found liable for passing on the disease
to consumers. There is a present obligation as the result of a past obligating event and therefore a
provision for $2 million should be recognised, as required by IAS 37 Provisions, Contingent Liabilities
and Contingent Assets.
IAS 37 states that reimbursement should only be recognised when it is virtually certain to be received.
It is only possible that the company will receive compensation for the legal costs and therefore this
cannot be recognised. However, the compensation should be disclosed as a contingent asset in the
financial statements.
Planned sale of Dale farms

The Board of Directors has approved the planned closure, but there has not yet been a public
announcement. Despite the fact that a local newspaper has published an article on the possible sale,
the company has not created a valid expectation that the sale will take place and in fact it is not certain
that the sale will occur. Therefore, there is no 'constructive obligation' and under IAS 37 no provision
should be made for redundancy or any other costs connected with the planned sale.
Under IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations Dale must be treated
as a continuing operation for the year ended 31 May 20X2 as the sale has not taken place. As
management are not yet fully committed to the sale neither the operation as a whole nor any of the
separate assets of Dale can be classified as 'held for sale'.

PRACTICE KIT

• The new born cows are biological assets and should be measured at fair value less costs to sell, both
on initial recognition and at each reporting period.
• The gains on initial recognition and the gains from change in this value should be recognized in
profit or loss for the period in which it arises. The total gains to be recognized in the year ended 30
June 2015 is as follows:
Rupees
New born [26,000 x 225 x (100%-2%)) 5,733,000
9 month old [53,000 x 75 x (100% - 2%)) 3,895,500
9,628,500

PRACTICE KIT
CHAPTER 08: IAS 10 & 37 – EVENT AFTER THE REPORTING PERIOD,
PROVISION AND CONTINGENCIES
CHAPTER 08:
IAS 10 & 37 – EVENTS AFTER THE REPORTING PERIOD,
Questions:
[ACCA SBR BPP]
1. Trailer (Restructuring)
Trailer, a public limited company, operates in the manufacturing sector. During the year ended 31
May 20X5, Trailer announced two major restructuring plans. The first plan is to reduce its capacity by
the closure of some of its smaller factories, which have already been identified. This will lead to the
redundancy of 500 employees, who have all individually been selected and communicated with. The
costs of this plan are $9 million in redundancy costs, $4 million in retraining costs and $5 million in
lease termination costs. The second plan is to re-organise the finance and information technology
department over a one-year period but it does not commence for two years. The plan results in 20%
of finance staff losing their jobs during the restructuring. The costs of this plan are $10 million in
redundancy costs, $6 million in retraining costs and $7 million in equipment lease termination costs.
Required
Discuss the treatment of each of the above restructuring plans in the financial statements of Trailer for
the year ended 31 May 20X5.
[ACCA SBR BPP]

2. Delta (IAS 37 and IAS 10)
Delta is an entity that prepares financial statements to 31 March each year. During the year ended 31
March 20X2 the following events occurred:
(a) At 31 March 20X2, Delta was engaged in a legal dispute with a customer who alleged that Delta
had supplied faulty products that caused the customer actual financial loss. The directors of Delta
consider that the customer has a 75% chance of succeeding in this action and that the likely
outcome should the customer succeed is that the customer would be awarded damages of $1m.
The directors of Delta further believe that the fault in the products was caused by the supply of
defective components by one of Delta's suppliers. Delta has initiated legal action against the
supplier and considers there is a 70% chance Delta will receive damages of $800,000 from the
supplier. Ignore discounting.
(b) On 10 April 20X2, a water leak at one of Delta's warehouses damaged a consignment of inventory.
This inventory had been manufactured prior to 31 March 20X2 at a total cost of $800,000. The net
realisable value of the inventory prior to the damage was estimated at $960,000. Because of the
damage Delta was required to spend a further $150,000 on repairing and re-packaging the
inventory. The inventory was sold on 15 May 20X2 for proceeds of $900,000. Any adjustment in
respect of this event would be regarded by Delta as material.
Required
Discuss how these events would be reported in the financial statements of Delta for the year ended 31
March 20X2.
[ACCA SBR Kaplan]

3. Environmental provisions
An entity has a policy of only carrying out work to rectify damage caused to the environment when it
is required to do so by local law. For several years the entity has been operating an overseas oil rig

PRACTICE KIT
which causes environmental damage. The country in which the oil rig is located has not had legislation
in place that required this damage to be rectified.
A new government has recently been elected in the country. At the reporting date, it is virtually certain
that legislation will be enacted that will require damage rectification. This legislation will have
retrospective effect.
Required:
Explain whether a provision should be recognised

4. Gasnature (Drilling & Impairment)
Gasnature is finalising its financial statements for the year ended 31 August 20X5 and has the
following issue.
From October 20X4, Gasnature had undertaken exploratory drilling to find gas and up to 31 August
20X5 costs of $5 million had been incurred. At 31 August 20X5, the results to date indicated that it was
probable that there were sufficient economic benefits to carry on drilling and there were no indicators
of impairment. During September 20X5, additional drilling costs of $2 million were incurred and there
was significant evidence that no commercial deposits existed and the drilling was abandoned.
(5 marks)
Required
Discuss, with reference to International Financial Reporting Standards, how Gasnature should
account for the above agreement and contract, and the issues raised by the directors.

5. Lockfine (Restructuring)
Lockfine, a public limited company, operates in the fishing industry and has recently made the
transition to International Financial Reporting Standards (IFRS). Lockfine's reporting date is 30 April
20X9.
The Lockfine board has agreed two restructuring projects during the year to 30 April 20X9:
• Plan A involves selling 50% of its off-shore fleet in one year's time. Additionally, the plan is to make
40% of its seamen redundant. Lockfine will carry out further analysis before deciding which of its
fleets and related employees will be affected. In previous announcements to the public, Lockfine
has suggested that it may restructure the off-shore fleet in the future.
• Plan B involves the reorganisation of the headquarters in 18 months' time, and includes the
redundancy of 20% of the headquarters' workforce. The company has made announcements before
the year end but there was a three month consultation period which ended just after the year end,
whereby Lockfine was negotiating with employee representatives. Thus individual employees had
not been notified by the year end.
Lockfine proposes recognising a provision in respect of Plan A but not Plan B.
Required
Discuss the principles and practices to be used by Lockfine in accounting for the above valuation and
recognition issues.

PRACTICE KIT
6. Royan (Dismantling Provision of Oil Platform)
Explain the guidance in IAS 37 Provisions, Contingent Liabilities and Contingent Assets as regards the
recognition and measurement of provisions and discuss any shortcomings of the standard.
Royan, a public limited company, extracts oil and has a present obligation to dismantle an oil platform
at the end of the platform's life, which is ten years. Royan cannot cancel this obligation or transfer it.
Royan intends to carry out the dismantling work itself and estimates the cost of the work to be $150
million in ten years' time. The present value of the work is $105 million.
A market exists for the dismantling of an oil platform and Royan could hire a third-party contractor to
carry out the work. The entity feels that if no risk or probability adjustment were needed then the cost
of the external contractor would be $180 million in ten years' time. The present value of this cost is $129
million. If risk and probability are taken into account, then there is a probability of 40% that the present
value will be $129 million and 60% probability that it would be $140 million, and there is a risk that the
costs may increase by $5 million.
Required
Describe the accounting treatment of the above events under IAS 37.
[ICAP CAF - 7 Question Bank]

7. Qallat Industries Limited (Mixed Scenario)
The following information pertains to Qallat Industries Limited (QIL) for its financial year ended June
30, 2015:
1) QIL sells all its products on one-year warranty which covers all types of defects. Previous history
indicates that 2% of the products contain major defects whereas 10% have minor defects. It is
estimated that if major defects were detected in all the products sold, repair cost of Rs. 150 million
would result. If minor defects were detected in all products sold, repair cost of Rs. 70 million
would result. Total sales for the year are amounted to Rs. 830 million.
2) QIL has two large warehouses, A and B. These were acquired under non-cancellable lease
agreements. Details are as follows:
Warehouse A Warehouse B
Effective date of agreement July 1, 2010 January 1, 2013
Lease period 10 years 8 years
Rental amount per month Rs. 450,000 Rs. 300,000
On account of serious operating difficulties, QIL vacated both the warehouses on January 1, 2015
and moved to a warehouse situated close to its factory. On the same day QIL sublet Warehouse
A at Rs. 250,000 per month for the remaining lease period. Warehouse B was sub-let on March 1,
2015 for Rs. 350,000 per month for the remaining lease period.
3) On July 18, 2015, QIL was sued by an employee claiming damages for Rs. 6 million on account of
an injury caused to him due to alleged violation of safety regulations on the part of the company,
while he was working on the machine on June 15, 2015. Before filing the suit, he contacted the
management on June 29, 2015 and asked for compensation of Rs. 4 million which was turned
down by the management. The lawyer of the company anticipates that the court may award
compensation ranging between Rs. 1.5 million to Rs. 3 million. However, in his view the most
probable amount is Rs. 2 million.
4) On November 1, 2014 a new law was introduced requiring all factories to install specialized safety
equipment within four months. The Equipment costing Rs. 5.0 million was ordered on December
15, 2014 against 100% advance payment but the supplier delayed installation to July 31, 2015. On
August 5, 2015 the company received a notice from the authorities levying a penalty of Rs. 0.4

PRACTICE KIT
million i.e. Rs. 0.1 million for each month during which the violation continued. QIL has lodged
a claim for recovery of the penalty from the supplier of the equipment.
Required
Describe how each of the above issues should be dealt with in the financial statements for the year
ended June 30, 2015. Support your answer in the light of relevant International Accounting Standards
and quantify the effect where possible.
[ICAP CAF - 7 Question Bank]

8. Walnut Limited (Mixed Scenario)
Walnut Limited (WL) is engaged in the business of import and distribution of electronic appliances.
The following events took place subsequent to the reporting period i.e. 31 December 2015:
1) On 15 January 2016, one of WL’s competitors announced launching of an upgraded version of
DVD players. WL’s inventories include a large stock of existing version of DVD players which are
valued at Rs. 15 million. Because of the introduction of the upgraded version, the net realizable
value of the existing version in WL’s inventory at 31 December 2015 has reduced to Rs. 12.5
million.
2) On 20 December 2015, the board of directors decided to close down the division which imports
and sells mobile sets. This decision was made public on 29 December 2015.However, the business
was actually closed on 29 February 2016.
Net costs incurred in connection with the closure of this division were as follows:
Rs.
Redundancy costs 1.50
Staff training 0.15
Operating loss from 1 July 2015 to closure of division 0.80
Less: Profit on sale of remaining mobile sets (0.50)
1.95
3) On 16 January 2016, LED TV sets valuing Rs. 3 million were stolen from a warehouse.
These sets were included in WL’s inventory as at 31 December 2015.
4) WL owns 9,000 shares of a listed company whose price as on 31 December 2015 was Rs. 22 per
share. During February 2016, the share price declined significantly after the government
announced a new legislation which would adversely affect the company’s operations. No
provision in this regard has been made in the draft financial statements.
5) On 31 January 2016, a customer announced voluntary liquidation. On 31 December 2015, this

customer owed Rs. 1.5 million.
6) On 15 February 2016, WL announced final dividend for the year ended 31 December 2015
comprising 20% cash dividend and 10% bonus shares, for its ordinary shareholders.
Required
Describe how each of the above transactions should be accounted for in the financial statements of
Walnut Limited for the year ended 31 December 2015. Support your answer in the light of relevant

PRACTICE KIT

PRACTICE KIT
Answers:
1. Trailer (Restructuring)
Plan 1:
A provision for restructuring should be recognised in respect of the closure of the factories in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The plan has been
communicated to the relevant employees (those who will be made redundant) and factories have
already been identified. A provision should only be recognised for directly attributable costs that will
not benefit ongoing activities of the entity. Thus, a provision should be recognised for the redundancy
costs and the lease termination costs, but none for the retraining costs:
$m
Redundancy costs 9
Retraining -
Lease termination costs 5
Liability 14
DEBIT Profit or loss (retained earnings) $14m

CREDIT Current liabilities $14m
Plan 2:
No provision should be recognised for the reorganisation of the finance and IT department. Since the
reorganisation is not due to start for two years, the plan may change, and so a valid expectation that
management is committed to the plan has not been raised. As regards any provision for redundancy,
individuals have not been identified and communicated with, and so no provision should be made at
31 May 20X3 for redundancy costs.
2. Delta (IAS 37 and IAS 10)

(a) Under the principles of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision
should be made for the probable damages payable to the customer.
The amount provided should be the amount Delta would rationally pay to settle the obligation at the
end of the reporting period. Ignoring discounting, this is $1m. This amount should be credited to
liabilities and debited to profit or loss.
Under the principles of IAS 37 the potential amount receivable from the supplier is a contingent asset.
Contingent assets should not be recognised but should be disclosed where there is a probable future
receipt of economic benefits – this is the case for the $800,000 potentially receivable from the supplier.
(b) The event causing the damage to the inventory occurred after the end of the reporting period.
Under the principles of IAS 10 Events after the Reporting Period this is a non-adjusting event as it
does not affect conditions at the end of the reporting period.
Non-adjusting events are not recognised in the financial statements, but are disclosed where their
effect is material.
3. Environmental provisions
For this situation, ask two questions.
(a) Is there a present obligation as the result of a past event?
(b) Is an outflow of economic benefits probable as a result?
A provision should be recognised if the answer to both questions is yes. In the absence of information
to the contrary, it is assumed that any future costs can be estimated reliably.

PRACTICE KIT
(a) Present obligation? Yes. Because the new legislation with retrospective effect is virtually certain
to be enacted, the damage caused by the oil rig is the past event that gives rise to a present
obligation.
Outflow of economic benefits probable? Yes.
Conclusion – Recognise a provision.
4. Gasnature (Drilling & Impairment)

Since there were no indicators of impairment at the period end, all costs incurred up to 31 August
20X5 amounting to $5 million should remain capitalised by the entity in the financial statements for
the year ended on that date. However, if material, disclosure should be provided in the financial
statements of the additional activity during the subsequent period which determined the exploratory
drilling was unsuccessful. This represents a non-adjusting event as defined by IAS 10 Events after the
Reporting Period as an event which is indicative of a condition which arose after the end of the
reporting period. The asset of $5 million and additional drilling costs of $2 million incurred
subsequently would be expensed in the following year's financial statements.
5. Lockfine (Restructuring)
Restructuring plans
IAS 37 criteria:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains specific requirements
relating to restructuring provisions. The general recognition criteria apply and IAS 37 also states that
a provision should be recognised if an entity has a constructive obligation to carry out a restructuring.
A constructive obligation exists where management has a detailed formal plan for the restructuring,
identifying as a minimum:
(i) The business or part of the business being restructured
(ii) The principal locations affected by the restructuring
(iii) The location, function and approximate number of employees who will be compensated for the
termination of their employment
(iv) The date of implementation of the plan
(v) The expenditure that will be undertaken
In addition, the plan must have raised a valid expectation in those affected that the entity will carry
out the restructuring. To give rise to such an expectation and, therefore, a constructive obligation, the
implementation must be planned to take place as soon as possible, and the timeframe must be such as
to make changes to the plan unlikely.
Plan A:
Lockfine proposes recognising a provision in respect of the plan to sell 50% of its off-shore fleet in a
year's time and to make 40% of the seamen redundant. However, although the plan has been
communicated to the public, the above criteria are not met. The plan is insufficiently detailed, and
various aspects are not finalised. The figure of 40% is tentative as yet, the fleets and employees affected
have not been identified, and a decision has not been made on whether the off-shore fleet will be
restructured in the future. Some of these issues await further analysis.
The proposal does not, therefore, meet the IAS 37 criteria for a detailed formal plan and an
announcement of the plan to those affected by it. Lockfine cannot be said to be committed to this
restructuring and so a provision should not be recognised.
Plan B:
Lockfine has not proposed recognising a provision for the plan to reorganise its headquarters and
make 20% of the headquarters' workforce redundant. However, it is likely that this treatment is
incorrect, because the plan appears to meet the IAS 37 criteria above:
(i) The locations and employees affected have been identified.

PRACTICE KIT
(ii) An announcement has been made and employee representatives notified – it is not necessary to
notify individual employees as their representatives have been told.
(iii) The conclusion of the three month consultation period indicates that the above announcement is
sufficiently detailed to give rise to a valid expectation that the restructuring will take place,
particularly if the discussions have been about the terms of the redundancy.
It will be necessary to consider the above negotiations – provided these are about details such as the
terms of redundancy rather than about changing the plan, then the IAS 37 criteria have been met.
Accordingly, a provision needs to be recognised.
6. Royan (Dismantling Provision of Oil Platform)

Guidance in IAS 37
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, provisions must be recognised
in the following circumstances.
(i) There is a legal or constructive obligation to transfer benefits as a result of past events.
(ii) It is probable that an outflow of economic resources will be required to settle the obligation.
(iii) The obligation can be measured reliably.
IAS 37 considers an outflow to be probable if the event is more likely than not to occur.
If the company can avoid expenditure by its future action, no provision should be recognised. A legal
or constructive obligation is one created by an obligating event. Constructive obligations arise when
an entity is committed to certain expenditures because of a pattern of behaviour which the public
would expect to continue.
IAS 37 states that the amount recognised should be the best estimate of the expenditure required to
settle the obligation at the end of the reporting period. The estimate should take the various possible
outcomes into account and should be the amount that an entity would rationally pay to settle the
obligation at the reporting date or to transfer it to a third party. Where there is a large population of
items, for example in the case of warranties, the provision will be made at a probability weighted
expected value, taking into account the risks and uncertainties surrounding the underlying events.
Where there is a single obligation, the individual most likely outcome may be the best estimate of the
liability.
The amount of the provision should be discounted to present value if the time value of money is
material using a risk adjusted rate. If some or all of the expenditure is expected to be reimbursed by a
third party, the reimbursement should be recognised as a separate asset, but only if it is virtually
certain that the reimbursement will be received.
Shortcomings of IAS 37:
IAS 37 is generally consistent with the Conceptual Framework. However there are some issues with
IAS 37 that have led to it being criticised:
(i) IAS 37 requires recognition of a liability only if it is probable, that is more than 50% likely, that
the obligation will result in an outflow of resources from the entity. This is inconsistent with other
standards, for example IFRS 3 Business Combinations and IFRS 9 Financial Instruments which
do not apply the probability criterion to liabilities. In addition, probability is not part of the
Conceptual Framework definition of a liability. The definition of a liability is expected to change
when the revised version of the Conceptual Framework is issued in 2018 and this is likely to have
implications for IAS 37.
(ii) There is inconsistency with US GAAP as regards how they treat the cost of restructuring a
business. US GAAP requires entities to recognise a liability for individual costs of restructuring
only when the entity has incurred that particular cost, while IAS 37 requires recognition of the
total costs of restructuring when the entity announces or starts to implement a restructuring plan.
(iii) The measurement rules in IAS 37 are vague and unclear. In particular, 'best estimate' could mean
a number of things: the most likely outcome, the weighted average of all possible outcomes or

PRACTICE KIT
even the minimum/maximum amount in a range of possible outcomes. IAS 37 does not clarify
which costs need to be included in the measurement of a liability, and in practice different entities
include different costs. It is also unclear if 'settle' means 'cancel', 'transfer' or 'fulfil' the obligation.
IAS 37 also requires provisions to be discounted to present value but gives no guidance on
nonperformance risk that is the entity's own credit risk. Non-performance risk can have a lead to
a significant reduction in non-current liabilities.
Treatment under IAS 37:

The IAS 37 criteria for recognising a provision have been met as there is a present obligation to
dismantle the oil platform, of which the present value has been measured at $105m. Because Royan
cannot operate the oil without incurring an obligation to pay dismantling costs at the end of ten years,
the expenditure also enables it to acquire economic benefits (income from the oil extracted). Therefore,
Royan should recognise an asset of $105m (added to the 'oil platform' in property, plant and
equipment) and this should be depreciated over the life of the oil platform, which is ten years. In
addition, there will be an adjustment charged in profit or loss each year to the present value of the
obligation for the unwinding of the discount.
7. Qallat Industries Limited (Mixed Scenario)

1) Provision must be made for estimated future claims by customers for goods already sold.
The expected value i.e. Rs. 10 million ([Rs. 150m x 2%] + [Rs. 70m x 10%]) is the best estimate of the
provision.
2) Warehouse A: It is an onerous contract as the warehouse has been sublet at a loss of Rs.200,000 per
month. QIT should therefore create a provision for the onerous contract that arises on vacating the
warehouse. This is calculated as the excess of unavoidable costs of the contract over the economic
benefits to be received from it. Therefore, QIL should immediately provide for the amount of Rs.
13.2 million. [5.5 years x 12 month x Rs. 200,000] in its financial statements i.e. for the year ended
June 30, 2015.
Warehouse B: It is not an onerous contract because the warehouse has been sublet at profit.
Hence this would require no adjustment.
3) A provision is to be made by QIL against a contingent liability as:
(a) There is a present obligation (legal or constructive) as a result of a past event; i.e. accident
occurred on June 15, 2015.
(b) It is probable that outflow of resources will be required to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
The amount of provision shall be Rs. 2.0 million i.e. the most probable amount as determined by
the lawyer.
4) A provision of Rs. 0.4 million is required in relation to penalty for March 1 to June 30, 2015 because
at the reporting date there is a present obligation in respect of a past event.
The reimbursement of penalty amount from the vendor shall be recognised when and only when
it is virtually certain that reimbursement will be received if the entity settles the obligation. The
reimbursement should be treated as a separate asset in the statement of financial position.
However, in profit and loss statement, the expense relating to a provision may be netted off with
the amount recognised as recoverable, if any.

PRACTICE KIT
8. Walnut Limited (Mixed Scenario)
1) This is an adjusting post reporting event as it provides evidence of conditions that existed at the
end of the reporting period. The reasons for the competitor’s price reduction will not have arisen
overnight, but will normally have occurred over a period of time, may be due to superior
investment in technology.
An inventory write down of Rs. 2.5 million should be recognised and the amount included as
inventory on the Statement of Financial Position reduced to Rs. 12.5 million.
2) The provision should be recognised because the obligating event is the communication of event to
the public which creates a valid expectation that the division will be closed.
However, the provision should only be recognised to the extent of redundancy costs.
IAS prohibits the recognition of future operating losses, staff training and profits on sale of assets.
3) This is a non-adjusting event because the burglary and theft of consumable stores occurred after
reporting date. However, if the event is material, it should be disclosed in the financial statements
unless the loss is recoverable from the insurance company.
4) The drop in value of investment in shares is a non-adjusting event. Since the legislation was
announced after the reporting date, the event is not a past event. However, if the amount is
material, it should be disclosed in the financial statements.
5) This is an adjusting event as it provides evidence of conditions that existed at the end of the
reporting period. The insolvency of a debtor and the inability to pay usually builds up over a period
of time and it can therefore be assumed that it was facing financial difficulty at year-end.
A bad debts expense of Rs. 1.5 million should be recognised in SOCI.
6) It is a non-adjusting event because the declaration was announced after the year-end and there was
no obligation at year end. Details of the bonus shares declaration must, however, be disclosed.

PRACTICE KIT
CHAPTER 09: SIC 32 – INTANGIBLE ASSETS – WEB SITE COSTS
CHAPTER 09:
SIC 32 - INTANGIBLE ASSETS - WEB SITE COSTS
Questions:
1. Fine Woods Limited
Fine Woods Limited (FWL) markers quality wood fumiture through its sales offices located in major cities of
Pakistan. In March 2012, the management of FWL decided to introduce online sales through its website. The
expenses incuned in this regard during the year ended 31 December 2012 were as follows:
• Feasibility was prepared by a consulting firm for upgrading the existing website to facilitate online sales,
at a cost of Rs. 3.5 million.
• Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million respectively.
• Website was upgraded by FWL's IT team. The directly anriburable costs amounted to Rs. 5 million.
• Online payment system was developed by external experts at a cost of Rs. 3 million.
• IT personnel were trained to deal with security issues relating to on.line transactions at a cost of Rs. 1.5
million.
In the financial statements for the year ended 31 December, 2012 the above expenses were classified as capital
work in progress.
In January 2013, after successful testing of online sales, FWL launched a campaign for online sales and incurred
an expenditure of Rs. 2.5 million in this respect.
Required:
Discuss the accounting treatment in respect of the above, in the financial statements of FWL for the year ended
31 December 2013 in accordance with the requirements of International Financial Reporting Standards.
[ICAP - Summer 2019 Q.2 (i)]

2. Fiji Limited
Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The following
transactions/events have occurred during 2018.
On 1 October 2018, FL launched its own website for online sale of its products. The website’s content is also
used to advertise and promote FL’s products. The website was developed internally and met the criteria for
recognition as an intangible asset. Directly attributable costs incurred for the website are as follows:
Rs. in million
Planning of the website 2.5
Web servers 10.5
Operating system of web servers 5.5
Developing code for the website application and its installation on web servers 6.0
Designing the appearance of web pages 3.5
Content development 12.5
Post launch operating cost 2.8
Currently, all the above costs are included in ‘intangible assets under development’.
Required:
Discuss how the above transactions/events should be dealt with in FL’s books for the year ended 31 December
2018. (Show all calculations wherever possible. Also mention any additional information needed to account
for the above transactions/events)

PRACTICE KIT

3. Sky limited
During the year 2007, Sky limited developed two inter-linked website in house. One of them is for external
users and providers information about the company’s products, operation and financials. It can also be used
for electronic order processing and accepting payment through credit cards. The second website is for internal
use like intra-net providing and sharing company’s policies, customer details, employees’ information, etc.
Both the websites were launched on September 30, 2007 and are now fully operational. The company has
received a few online orders which it believes will increase overtime. On the other hand, use of internal website
has resulted in minor reduction in cost of communication certain other administrative costs. The management
is optimistic that its utility will increase significantly. However, it is not in a position to estimate the Amount
of economic inflows that this website can generate.
During the year ended December 31, 2007, the company incurred the following expenditure in the
development of website:
(i) An amount of Rs. 0.3 million was incurred on undertaking a feasibility study and defining
hardware/software specification for the websites.
(ii) Rs. 4 million were incurred on the development of internal websites while an expenditure of Rs.11
million has been made on development of external website. The expenditure on external websites
includes an amount of Rs. 6 million paid for linking it with the credit card clearing facilities an
installation of security tools.
(iii) The company acquired two dedicated servers and one backup severs costing Rs. 3 million in total.
Operating software for the sever was acquired for Rs.2.0 million paid whereas software related to data
processing and front–end development costed incurred if the website project had not been initiated.
(iv) With effect from October 1, 2007 the company has signed a one year contract for website maintenance
at a cost of Rs.2.0 million.
(v) Two IT personnel were trained to Operate the website, at a cost of Rs. 0.2 million.
(vi) Rs.0.4 million were incurred on the promotion of its external websites. The company believes that this
advertising will boost the company’s online sales.
Required:
Comment on the accounting treatment of each of the above mentioned costs in the light of relevant
International Accounting Standards.

PRACTICE KIT
Answers:
1. Fine Woods Limited

Upgrading of website and introduction of online sales (IAS 38 and SIC 32):
In accordance with IAS 38, accounting treatment of the costs incurred to introduce online sales through its
website by FWL is as under:
Costs incurred in 2012 and classified as capital work in progress:

1) Costs incurred in respect of feasibility and training of IT personnel should be expensed out when incurred.
As these costs were incorrectly recognized in 2012 as capital work in progress, therefore, in 2013, these
should be treated as prior period errors in accordance with IAS 8.42. The correction shall be made
retrospectively by restating the comparative amounts for 2012 in respect of:
• Capital work in progress
• Retained earnings
• Relevant expenses
2) Cost of hardware and its operating software should be capitalized in January 2013 as tangible asset in line
with the requirements of IAS 16 and depreciated over their estimated useful economic life.
3) Directly attributable costs of IT staff and experts hired externally for development of online payment
system shall be recognized as an intangible asset in January 2013 as the following required conditions are
met by FWL:
• It is probable that the expected future economic benefits that are attributable to the asset will flow to
FWL; and
• The cost of the asset can be measured reliably.
Costs incurred in 2013:

Cost incurred on online sales campaign should be expensed out when incurred.
2. Fiji Limited
Each cost would be transferred from ‘intangible assets under development’ and would be treated as:
Planning of the website an expense
Web servers a tangible asset as per IAS 16 and depreciates over their useful life.
Operating system of web an intangible asset and made part of the cost of servers as it is integral part of
servers the servers.
Developing code for the an intangible asset and made part of the cost of the website.
website application and its
installation on web servers
Designing the appearance an intangible asset and made part of the cost of the website.
of web pages / Graphical
design development
Content development as an expense to the extent that content is developed to advertise and promote
FL’s products. Remaining cost would be capitalised as an intangible asset and
made part of the cost of the website.
Post launch operating cost an expense when incurred unless it meet recognition criteria of IAS 38

PRACTICE KIT
Additional information needed:

▪ Life of server and website, data for calculating depreciation and amortization, method of depreciation and
amortization.
▪ Amount of content development attributable to advertisement
▪ Any post launch cost that meets criteria for recognition as intangible asset
3. Sky limited
(i) (a) Cost incurred on development of internal websites should be charged off because the benefits
(if any) cannot be estimated reliably.
(ii) (b) Cost of External Website
- Cost incurred on development of external websites including the cost of linking it to credit
card facilities should be capitalized because it can be established that external revenue is
generated directly with the use of such websites through external orders.
- However, a reasonable estimated of future revenues should be made for impairment testing.
(iii) (a) Cost purchase of sever plus cost of their operating software should be capitalized as tangible
assets in line with the requirements of IAS 16 and depreciated according to their expected useful
economic life.
(b) Cost of purchase of software licenses other than operating software should be capitalized as
intangible assets because economics benefits is accruing to the company.
(iv) Cost of maintenance of websites is a recurring expenditure and should be expensed out.
(v) IAS-38 does not allow capitalizing the training cost. Therefore, these should be expensed out.
(vi) Cost of advertising should be expensed out, as when incurred.

PRACTICE KIT
CHAPTER 10: IFRS 02 – SHARE BASED PAYMENTS
CHAPTER 10:
IFRS 02 - SHARE BASED PAYMENTS
Questions:
[ICAP Study Text]
1. Equity settled share-based (Basic)
X Limited is a company with a 31 December year end.
On 1 January Year 1 X Limited grants 100 options to each of its 500 employees.
Each grant is conditional upon the employee working for X Limited over the next three years.
At the grant date X Limited estimates that the fair value of each option is Rs.15.
Required:
Calculate the income statement charge for the year ended:
1. 31 December Year 1 if at that date, X Limited expects 85% of employees to be with the company at the end
of the vesting period.
2. 31 December Year 2 if at that date, X Limited expects 88% of employees to be with the company at the end
of the vesting period.
3. 31 December Year 3 if at that date 44,300 share options vest.
[ACCA SBR - Kaplan]

2. Equity-settled share-based (Basic)
An entity has a reporting date of 31 December.
On 1 January 20X1 it grants 100 share options to each of its 500 employees. Each grant is conditional upon the
employee working for the entity until 31 December 20X3. At the grant date the fair value of each share option
is $15.
During 20X1, 20 employees leave and the entity estimates that a total of 20% of the 500 employees will leave
during the three-year period.
During 20X2, a further 20 employees leave and the entity now estimates that only 15% of the original 500
employees will leave during the three-year period.
During 20X3, a further 10 employees leave.
Required:
Calculate the remuneration expense that will be recognised in each of the three years of the share-based
payment scheme.
[ACCA SBR - Kaplan]

3. Market based conditions (Basic)
On 1 January 20X1, 100 employees were given 50 share options each. These will vest if the employees still
work for the entity on 31 December 20X2 and if the share price on that date is more than $5.
On 1 January 20X1, the fair value of the options was $1. The share price on 31 December 20X1 was $3 and it
was considered unlikely that the share price would rise to $5 by 31 December 20X2. Ten employees left during
the year ended 31 December 20X1 and a further ten are expected to leave in the following year.
Required:
How should the above transaction be accounted for in the year ended 31 December 20X1?

PRACTICE KIT
[ACCA SBR - Kaplan]

4. Blueberry (Variable no. of Options Based on Performance Condition)
On 1 January 20X4 an entity, Blueberry, granted share options to each of its 200 employees, subject to a three-
year vesting period, provided that the volume of sales increases by a minimum of 5% per annum throughout
the vesting period. A maximum of 300 share options per employee will vest, dependent upon the increase in
the volume of sales throughout each year of the vesting period as follows:
• If the volume of sales increases by an average of between 5% and 10% per year, each eligible employee will
receive 100 share options.
• If the volume of sales increases by an average of between 10% and 15% per year, each eligible employee
will receive 200 share options.
• If the volume of sales increases by an average of over 15% per year, each eligible employee will receive 300
share options.
At the grant date, Blueberry estimated that the fair value of each option was $10 and that the increase in the
volume of sales each year would be between 10% and 15%. It was also estimated that a total of 22% of
employees would leave prior to the end of the vesting period. At each reporting date within the vesting period,
the situation was as follows:
Expected sales
Further leavers Average annual
Reporting Employees Annual increase volume increase
expected prior increase in sales
date leaving in year in sales volume over remaining
to vesting date volume to date
vesting period
31 Dec x4 8 18 14% 14% 14%
31 Dec x5 6 4 18% 16% 16%
31 Dec x6 2 - 16% - 16%
Required:
Calculate the impact of the above share-based payment scheme on Blueberry's financial statements in each
reporting period.
[ACCA SBR - Kaplan]

5. Beginner (Two cases: Exercised Option vs Lapsed)
Beginner offered directors an option scheme conditional on a three-year period of service. The number of
options granted to each of the 10 directors at the inception of the scheme was 1 million. The options were
exercisable shortly after the end of the third year. Upon exercise of the share options, those directors eligible
would be required to pay $2 for each share of $1 nominal value.
The fair value of the options and the estimates of the number of options expected to vest at various points in
time were as follows:
Year Rights expected to vest Fair value of the option
Start of Year One 8m 0.30
End of Year One 7m 0.33
End of Year Two 8m 0.37
At the end of year three, 9 million rights actually vested.

Required:
(a) Show how the option scheme will affect the financial statements for each of the three years of the vesting
period.
(b) Show the accounting treatment at the vesting date for each of the following situations:
(i) The fair value of a share was $5 and all eligible directors exercised their share options immediately.
(ii) The fair value of a share was $1.50 and all eligible directors allowed their share options to lapse.

PRACTICE KIT
[ACCA SBR - Kaplan]

6. Modifications
An entity grants 100 share options to each of its 500 employees, provided that they remain in service over the
next three years. The fair value of each option is $20.
During year one, 50 employees leave. The entity estimates that a further 60 employees will leave during years
two and three.
At the end of year one the entity reprices its share options because the share price has fallen. The other vesting
conditions remain unchanged. At the date of repricing, the fair value of each of the original share options
granted (before taking the repricing into account) was $10. The fair value of each repriced share option is $15.
During year two, a further 30 employees leave. The entity estimates that a further 30 employees will leave
during year three.
During year three, a further 30 employees leave.
equired:
Calculate the amounts to be recognised in the financial statements for each of the three years of the scheme.
[ACCA SBR - Kaplan]

7. Cancellations and settlements
An entity introduced an equity-settled share-based payment scheme on 1 January 20X0 for its 5 directors.
Under the terms of the scheme, the entity will grant 1,000 options to each director if they remain in
employment for the next three years. All five directors are expected to stay for the full three years. The fair
value of each option at the grant date was $8.
On 30 June 20X1, the entity decided to base its share-based payment schemes on profit targets instead. It
therefore cancelled the existing scheme. On 30 June 20X1, it paid compensation of $10 per option to each of
the 5 directors. The fair value of the options at 30 June 20X1 was $9.
Required:
Explain, with calculations, how the cancellation and settlement of the share-based payment scheme should be
accounted for in the year ended 31 December 20X1.
[ACCA SBR - Kaplan]

8. Cash-settled share-based payment transactions
An entity has a reporting date of 31 December.
On 1 January 20X1 the entity grants 100 share appreciation rights (SARs) to each of its 300 employees, on the
condition that they continue to work for the entity until 31 December 20X3.
During 20X1, 20 employees leave. The entity estimates that a further 40 will leave during 20X2 and 20X3.
During 20X2, 10 employees leave. The entity estimates that a further 20 will leave during 20X3.
During 20X3, 10 employees leave.
The fair value of a SAR at each reporting date is shown below:
$
20X1 10.00
20X2 12.00
20X3 15.00
Required:
Calculate the expense for each of the three years of the scheme, and the liability to be recognised in the
statement of financial position as at 31 December for each of the three years.

PRACTICE KIT
[ACCA SBR - Kaplan]

9. Growler (Cash Settled Basis)
On 1 January 20X4 Growler granted 200 share appreciation rights (SARs) to each of its 500 employees on the
condition that they continue to work for the entity for two years. At 1 January 20X4, the entity expects that 25
of those employees will leave each year.
During 20X4, 20 employees leave Growler. The entity expects that the same number will leave in the second
year.
During 20X5, 24 employees leave.
The SARs vest on 31 December 20X5 and can be exercised during 20X6 and 20X7. On 31 December 20X6, 257
of the eligible employees exercised their SARs in full. The remaining eligible employees exercised their SARs
in full on 31 December 20X7.
The fair value and intrinsic value of each SAR was as follows:
Reporting date FV per SAR Intrinsic value per SAR
31 December 20X4 $5
31 December 20X5 $7
31 December 20X6 $8 $7
31 December 20X7 $10 $10
Required:
(a) Calculate the amount to be recognised as a remuneration expense in the statement of profit or loss, together
with the liability to be recognised in the statement of financial position, for each of the two years to the
vesting date.
(b) Calculate the amount to be recognised as a remuneration expense and reported as a liability in the financial
statements for each of the two years ended 31 December 20X6 and 20X7.

10. Third-party transactions - Direct method
Entity A has been paying Entity B, a corporate finance consultancy, in cash at the rate of Rs. 600 per hour for
advice. Entity B is proposing to increase its fees by 5% per annum. Entity A is experiencing cash flow pressures,
so it has persuaded Entity B to accept payment in the form of shares with effect from 1 July 20X5. The initial
arrangement is for two years with Entity A agreeing to issue 6,000 of its shares to Entity B every six months in
exchange for Entity B providing 300 hours of advice evenly over the six-month period.
Requirement
What is the expense in profit or loss and the corresponding increase in equity?

11. Sally (Non market based vesting conditions)
On 1 January 20X4, an entity granted options over 10,000 of its shares to Sally, one of its senior employees.
One of the conditions of the share option scheme was that Sally must work for the entity for three years. Sally
continued to be employed by the entity during 20X4, 20X5 and 20X6.
A second condition for vesting is that the costs for which Sally is responsible should reduce by 10% per annum
compound over the three-year period. At the date of grant, the fair value of each share option was estimated
at £21.
At 31 December 20X4 Sally's costs had reduced by 15% and therefore it was estimated that the performance
condition would be achieved.
Due to a particularly tough year of trading for the year ended 31 December 20X5 Sally had only reduced costs
by 3% and it was thought at that time that she would not meet the cost reduction target by 31 December 20X6.
At 31 December 20X6, the end of the performance period, Sally did meet the overall cost reduction target of
10% per annum compound.

PRACTICE KIT
Requirement
How should the transaction be recognised?

12. Jeremy (Market and non-market vesting condition)
On 1 January 20X4, an entity granted options over 10,000 of its shares to Jeremy, one of its senior employees.
One of the conditions of the share option scheme was that Jeremy must, for the entity for three years. Jeremy
continued to be employed by the entity during 20X4, 20X5 and 20X6. A second condition for vesting is that
the share price increases at 25% per annum compound over the three-year period. At the date of grant the fair
value of each share option was estimated at £18 taking into account the estimated probability that the
necessary share price growth would be achieved at 25%.
During the year ended 31 December 20X4 the share price rose by 30% and by 26% per annum compound over
the two years to 31 December 20X5. For the three years to 31 December 20X6 the increase was 24% per annum
compound.
Requirement
How should the transaction be recognised?

13. Company B (Market and non-market performance conditions)
Company B issued 100 share options to certain employees that will vest once revenues reach £1 billion and its
share price equals £50. The employee will have to be employed with Company B at the time share options vest
in order to receive the options. The share had a fair value the grant date and will expire in 10 years.
Requirement
How should the expense be recorded under each of the following different scenarios?
a) All options vest.
b) Revenues have reached £1 billion, all employees are still employed and the share price is £49.
c) The share price has reached £50, all employees are still employed but revenues have not yet reached £1
billion.
d) Revenues have reached £1 billion, the share price has reached £50 and half the employees who received
options left the company before the vesting date.

14. Cancellation
An entity granted 2,000 share options at an exercise price of £18 to each of its 25 key management personnel
on 1 January 20X4. The options only vest if the managers are still employed by the entity on 31 December
20X6. The fair value of the options was estimated at £33 and the entity estimated that the options would vest
with 23 managers. This estimate was confirmed on 31 December 20X4.
In 20X5 the entity decided to base all incentive schemes around the achievement of performance targets and
to abolish the existing scheme for which the only vesting condition was being employed over a particular
period. The scheme was cancelled on 30 June 20X5 when the fair value of the options was £60 and the market
price of the entity's shares was £70. Compensation was paid to the 24 managers in employment at that date,
at the rate of £63 per option.
Requirement
How should the entity recognise the cancellation?

PRACTICE KIT

15. Cash-settled share-based payment transaction
On 1 January 20X1, an entity grants 100 cash SARs to each of its 500 employees, on condition that the
employees continue to work for the entity until 31 December 20X3.
During 20X1 35 employees leave. The entity estimates that a further 60 will leave during 20X2 and 20X3.
During 20X2 40 employees leave and the entity estimates that a further 25 will leave 20X3. 9
During 20X3 22 employees leave.
At 31 December 20X3 150 employees exercise their SARs. Another 140 employees exercise their SARs at 31
December 20X4 and the remaining 113 employees exercise their SARs at the end of 20X5.
The fair values of the SARs for each year in which a liability exists are shown below, together, the intrinsic
values at the dates of exercise.
Fair Value Intrinsic Value
£ £
20X1 14.40
20X2 15.50
20X3 18.20 15.00
20X4 21.40 20.00
20X5 25.00
Requirement
Calculate the amount to be recognised in profit or loss for each of the five years ended 31 December 20X5
and the liability to be recognised in the statement of financial position at 31 December for each of the five
years.

16. Choice of settlement
On 1 January 20X4, an entity grants an employee a right under which she can, if she is still employed on 31
December 20X6, elect to receive either 8,000 shares or cash to the value, of that date, of 7,000 shares.
The market price of the entity's shares is £21 at the date of grant, £27 at the end of 20X4, £33 at the end of 20X5
and £42 at the end of 20X6, at which time the employee elects to receive the shares. The entity estimates the
fair value of the share route to be £19.
Requirement
Show the accounting treatment.

17. Krumpet Plc
Set out below is the summarised statement of financial position of Krumpet plc at 30 June 20X5.
£’000
Net assets 520
Equity
Called up share capital £1 ordinary shares 300
Share premium account 60
Retained earnings 160
520
On 1 July 20X5 Krumpet plc purchased and cancelled 50,000 of its ordinary shares at £1.50 each.
The shares were originally issued at a premium of 20p. The redemption was partly financed by the issue at
par of 5,000 new shares of £1 each.
Requirement

PRACTICE KIT
Prepare the summarised statement of financial position of Krumpet plc at 1 July 20X5 immediately after the
above transactions have been effected.
[ACCA SBR BPP]

18. Deferred tax implications of share-based payment
On 1 June 20X5, Farrow grants 16,000 share options to one of its employees. At the grant date, the fair value
of each option is $4. The share options vest 2 years later on 1 June 20X7.
Tax allowances arise when the options are exercised and the tax allowance is based on the option's intrinsic
value at the exercise date. The intrinsic value of the share options is $2.25 at 31 May 20X6 and $4.50 at 31 May
20X7 on which date the options are exercised.
Assume a tax rate of 30%.
Required
Show the deferred tax accounting treatment of the above transaction at 31 May 20X6, 31 May 20X7 (before
exercise), and on exercise.

19. Leigh (Settlement choice against purchase of PPE)
On 31 May 20X7, Leigh purchased property, plant and equipment for $4 million. The supplier has agreed to
accept payment for the property, plant and equipment either in cash or in shares. The supplier can either
choose 1.5 million shares of Leigh to be issued in six months' time or to receive a cash payment in three months'
time equivalent to the market value of 1.3 million shares. It is estimated that the share price will be $3.50 in
three months' time and $4 in six months' time.
Additionally, at 31 May 20X7, one of the directors recently appointed to the board has been granted the right
to choose either 50,000 shares of Leigh or receive a cash payment equal to the current value of 40,000 shares at
the settlement date. This right has been granted because of the performance of the director during the year
and is unconditional at 31 May 20X7. The settlement date is 1 July 20X8 and the company estimates the fair
value of the share alternative is $2.50 per share at 31 May 20X7. The share price of Leigh at 31 May 20X7 is $3
per share, and if the director chooses the share alternative, they must be kept for a period of four years.
Required
Discuss with suitable computations how the above share-based transactions should be accounted for in the
financial statements of Leigh for the year ended 31 May 20X7.
[ICAP CFAP - 01 Practice Kit]

20. Sindh Transit Ltd
Sindh Transit Ltd granted share options to all of its 400 employees on 1 January 2015. Each employee will
receive 1,000 share options provided they continue to be employed by Sindh
Transit Ltd for four years from the grant date. The fair value of an option at the grant date was Rs. 220.
On the same date Sindh Transit Ltd granted 500 share appreciation rights to each of its employees. To be
eligible, employees again have to be employed by Sindh Transit Ltd for four years from the grant date.
The rights are exercisable in the two-month period from 1 January 2019 and will be settled in cash. The fair
value of each share appreciation right was Rs. 120 at 31 December 2015 and Rs.140 at 31 December 2016.
The actual and expected future staff movements as at 31 December 2015 and 31 December 2016 are provided
below.
2015: 15 left and another 55 were expected to leave over the next three years.
2016: a further 22 left and another 36 were expected to leave over the next two years.
Required

PRACTICE KIT
1) Prepare, in accordance with IFRS 2 Share-based Payment, the accounting entries required in the financial
statements of Sindh Transit Ltd for the year to 31 December 2016 in respect of the two financial instruments
identified above.
2) Explain the main principle of recognition set out by IFRS 2 Share-based Payment for share based payments
AND why the treatment of the two financial instruments identified above will differ in the statement of
financial position.

21. Rahman Limited (SBP with Option)
Rahman Limited (RL) is a listed company engaged in the manufacture of leather goods. Its financial year ends
on June 30. In a meeting held on July 1. 2009 its Board of Directors acknowledged the outstanding performance
of the company’s Chief Operating Officer (COO) and in recognition thereof, decided to allow him either of the
following options:
Option I Receive a cash payment equal to the current value of 64.000 shares of RL.
Option II Receive 80,000 shares of RL.
However, the above offer was subject to certain conditions. These conditions and other relevant information
are as follows:
(i) The right is conditional upon completion of three years service from the date the right was granted and
the decision to select the option shall also be exercised on the completion of the said period.
(ii) The share price of RL on July 1. 2009 is Rs. 125 per share. It is estimated that the share price at the end
of year 2010. 2011 and 2012 will be Rs. 130. Rs. 138 and Rs. 150 respectively.
(iii) If the COO chooses option II, he shall have to retain the shares for two years i.e. up to June 30. 2014
before being eligible to sell them. However, the fair value of the shares after taking into account the
effects of the post vesting transfer restrictions is estimated at Rs. 110 per share.
(iv) RL does not expect to pay any dividend during the next three years.
Required:
Prepare the journal entries:
a) To record the above transactions in the books of Rahman Limited for the year ending June 30. 2010. 2011
and 2012.
b) To record the settlement of right on June 30. 2012 under:
• Option I
• Option II.

22. Engineering Works Limited (Bonus & SBP)
Engineering Works Limited (EWL) is in the process of finalizing its Financial Statements for the year ended
June 30, 2010. The issue as detailed below is being deliberated upon by the CFO.
It is the policy of EWL to pay annual bonus of Rs. 10,000 each to all of its 600 workers, after two months of
closure of the financial year. On June 1, 2010 the management announced a scheme whereby each worker was
given the option to purchase 1,000 shares of EWL on a payment of Rs. 8 per share, in lieu of cash bonus for the
year ended June 30, 2010. The face value of the company's shares is Rs. 10 each.
The last date to exercise the option was fixed at July 31, 2010. Other related information is as follows:
• 60% employees exercised the option by June 30, 2010.
• By July 31, 2010 further 20% employees had accepted this option.
• The workers who exercise the option are required to retain the shares up to June 30, 2012 before being
eligible to sell them.
• The shares were issued on September 1, 2010.
• The market price and fair value of the shares at various dates were as under:
30-June-10 31-Jul-10 01-Sep-10
Market price Rs. 32 37 42

PRACTICE KIT
Fair value per share (after taking effect of post vesting

transfer transaction) Rs. 30 34 40
Required:
Prepare journal entries for the above transactions and adjustments during the years June 30, 2010 and 2011.
23. Quail Pakistan Limited (Bonus & SBP + Supplier Payment & SBP)
Quail Pakistan Limited (QPL), a listed company, is reviewing the following transactions which have not yet
been accounted for in the financial statements for the year ended 30 June 2012:
(a) On 1 July 2011, QPL announced a bonus of Rs. 30 million to its employees if they achieved the annual
budgeted targets by 30 June 2012.
The bonus would be paid in the following manner:
• 25% of the bonus would be paid in cash on 31 December 2012 to all employees irrespective of whether
they are still working for QPL or not.
• The balance 75% will be given in share options, to those employees who are in QPL's employment on
31 December 2012. The exercise date and number of options will be fixed by the management on the
same day.
The budgeted targets were achieved. The management expects that 5% employees would leave between
30 June 2012 and 31 December 2012.
(b) On 30 June 2012, a plant having a list price of Rs. 50 million was purchased. QPL has allowed the following
options to the supplier, in respect of payment there against:
• To receive cash equivalent to price of 1.5 million shares of the company after 3 months; or
• To receive 1. 7 million shares of the company after 6 months.
QPL estimates that price of its shares would be Rs. 35 per share after three months and Rs. 40 per share
after six months.
Required:
Discuss how the above share-based transactions should be accounted for in QPL's financial statements for the
year ended 30 June 2012. Show necessary calculations. (Journal entries are not required)

24. Mr. Talented (SBP with Option)
On 1 January 2015, Mr. Talented was appointed as the President of Meharban Bank Limited (MBL). According
to the terms of the employment contract, MBL granted Mr. Talented the right to receive either 100,000 shares
of the bank or a cash payment equivalent to the value of 80,000 shares. This grant is conditional to completion
of 3 years of service with the bank and can be exercised within 1 year of vesting date. If he chooses the share
alternative, he would have to hold the shares for a period of two years after the vesting date.
The par value of MBLs’ shares is Rs. 10 each. At the grant date, MBL’s share price was Rs. 145 per share. The
share prices on 31 December 2015, 2016, 2017 and 2018 are estimated at Rs. 150, Rs. 156, Rs. 165 and Rs. 175
respectively. Dividends are not expected to be announced during the next three years.
After taking into account the effects of the post-vesting transfer restrictions, MBL estimates that the fair value
of the share alternative on the date of appointment of Mr. Talented was Rs. 135 per share.
Required:
Suggest journal entries to record the above transactions in the books of MBL for the years ending 31 December
2015, 2016, 2017 and 2018 if Mr. Talented chooses the share alternative in July 2018.

25. XYZ Limited (Comprehensive Question)
The financial statements of XYZ Limited for the year ended 30 June 2016 are in the final stage of preparation
and the following matters are under consideration:

PRACTICE KIT
On 1 July 2013, XYZ offered 5000 share options each to its 10 marketing managers and 10 back office managers.
The offer is conditional upon completion of three years’ service from the date the offer was given. It was
estimated at the time of offer that two managers from each department would leave the company before the
completion of 3 years. The fair market value of the company’s shares on 1 July 2013 was Rs. 50 per share.
Other conditions and information are as follows:
(i) Conditions specific to marketing managers:
• Marketing manager can exercise the offer if the profit of the company increases by 10% per annum
on average over the next three years.
• The offer can be exercised at Rs. 18 per share at the completion of vesting period.
Profit for the first two years increased by 12% and 10% respectively. However, profit for the third year has
increased by 3% only.
(ii) Conditions specific to back office managers:
• Back office managers can exercise the offer if share price of the company increases by 10% per annum
on average over the next three years.
• The offer can be exercised at Rs. 23 per share at the completion of vesting period.
• On 1 July 2013, fair value of these share options was Rs. 30 per option taking into account the
estimated probability that the necessary share price growth would be achieved.
On 1 January 2016, the share price declined. Considering the decline, XYZ modified the share option scheme
for back office managers by reducing the exercise price to Rs. 10 per share. The fair value of the option
immediately before and after the reduction in exercise price was Rs. 5 and Rs. 14 respectively.
(iii) Upto 30 June 2015, there was no change in estimate regarding number of managers leaving the
company. However, during the year ended 30 June 2016, three managers left the company i.e. two from
marketing and one from back office.
Required:
In accordance with the requirement of International Financial Reporting Standards, describe the accounting
treatment in respect of the above transactions in the financial statements of XYZ Limited for the year ended 30
June 2016.

26. Ravi Limited (MC & NMC)
On 1 July 2016 Ravi Limited (RL) offered 1000 share options to each of its 500 employees. The offer is
conditional upon completion of five years’ service from the date the offer was given. The award of options
would depend on attainment of the following additional conditions:
Condition 1: Average sales for the next five years is Rs. 300 million or more.
Condition 2: At the end of the 5th year, share price of the company exceeds Rs. 200 per share.
Market values of the options at grant date were estimated as under:
Rupees
Without talking into account any of the two conditions 50
Taking in to account only condition 1 44
Taking in to account only condition 2 38
Taking in to account both the condition 36
Following information is available at year end:

(i) Sales for the year ended 30 June 2017 was Rs. 210 million however it was estimated that sales would
increase by 20% each year.
(ii) The share price was Rs. 160 per share.
(iii) It was estimated that 15% of the employees would leave the company before completion of five years.
Required:
Discuss how this transaction should be recorded in RL’s books of accounts for the year ended 30 June 2017.

PRACTICE KIT
27. Zebra Limited (SBP with Options)

During the year ended 31 December 2017, following transactions were made by Zebra Limited (ZL):
1. On 1 October 2017 ZL purchased a piece of land from Cow Limited (CL) having fair value of Rs. 230 million.
According to the agreement, CL has the option to receive:
• 75,000 shares of ZL to be issued on 30 April 2018; or
• Cash equivalent to the value of 70,000 ZL’s shares to be paid on 28 February 2018.
The actual/estimated fair values of ZL’s share at various dates were as follows:
Date 1-Oct-17 31-Dec-17 28-Feb-18 30-Apr-18
FV per share (Rs.) 3,000 2,900 3,300 3,400
Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended 31 December
2017.

28. Cotolla Limited (MC + SC)
On 1 January 2014, Corolla Limited (CL) granted share options to each of its 50 executives to purchase CL’s
shares at Rs. 1,000 per share. In this respect following information is available:
1. The share options will vest and become exercisable upon completion of 3 years provided that:
• The executives remain in service till the vesting date.
• CL’s share price increases to Rs. 1,500 per share.
2. Each executive will receive 4,000 share options if average annual gross profit during the vesting period is
atleast Rs. 900 million. However, if the average gross profit exceeds Rs. 1,000 million each executive would
be entitled to 6,000 share options.
3. On 1 January 2016, CL extended the vesting period to 31 December 2017 and reduced the exercise price to
Rs. 900 per share. On 1 January 2016, fair value of each share option was Rs. 580 for the original share
option granted (i.e. before taking into account the re-pricing) and Rs. 710 for re-priced share option.
Following further information is also available:

31 December
1-Jan-2014 2014 2015 2016 2017
Executives in employment 50 47 44 43 42
Executives expected to leave during
remaining vesting period 12 8 4 2 --
Gross profit for the year (Rs. in million) N/A 940 820 1,270 1,200
Fair value of each share 1,400 1,450 1,550 1,480 1,650
Fair value of each option 600 650 580 650 750
At each year-end, CL estimated that gross profit for the future years would approximately be the same as of
current year.
Required:
Calculate the amounts recorded in respect of share options in CL’s financial statements for the years ended 31
December 2014, 2015, 2016 and 2017 and explain the basis of your calculations.
[IFRS IG Example 9]
29. Grant of shares, with a cash alternative subsequently added
At the beginning of year 1, the entity grants 10,000 shares with a fair value of CU33 per share to a senior
executive, conditional upon the completion of three years’ service. [ie this vesting condition is a service
condition—service conditions are not market conditions] By the end of year 2, the share price has dropped to
CU25 per share. At that date, the entity adds a cash alternative to the grant, whereby the executive can choose
whether to receive 10,000 shares or cash equal to the value of 10,000 shares on vesting date. The share price is
CU22 on vesting date.

PRACTICE KIT

PRACTICE KIT
[IFRS IG Example 9A]

30. Share-based payment with vesting and non-vesting conditions when the
counterparty can choose whether the non-vesting condition is met
An entity grants an employee the opportunity to participate in a plan in which the employee obtains share
options if he agrees to save 25 per cent of his monthly salary of CU400 for a three-year period. The monthly
payments are made by deduction from the employee’s salary. The employee may use the accumulated savings
to exercise his options at the end of three years, or take a refund of his contributions at any point during the
three-year period. The estimated annual expense for the share-based payment arrangement is CU120.
After 18 months, the employee stops paying contributions to the plan and takes a refund of contributions paid
to date of CU1,800.
[IFRS IG Example 10]

31. Grant of share options that is accounted for by applying the intrinsic value method
At the beginning of year 1, an entity grants 1,000 share options to 50 employees. The share options will vest at
the end of year 3, provided the employees remain in service until then. [ie this vesting condition is a non-
market performance condition] The share options have a life of 10 years. The exercise price is CU60 and the
entity’s share price is also CU60 at the date of grant.
At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options
granted.
At the end of year 1, three employees have ceased employment and the entity estimates that a further seven
employees will leave during years 2 and 3. Hence, the entity estimates that 80 per cent of the share options
will vest.
Two employees leave during year 2, and the entity revises its estimate of the number of share options that it
expects will vest to 86 per cent.
Two employees leave during year 3. Hence, 43,000 share options vested at the end of year 3.
The entity’s share price during years 1–10, and the number of share options exercised during years 4–10, are
set out below. Share options that were exercised during a particular year were all exercised at the end of that
year.
Year Share price at year-end Number of share options exercised at year-end

1 63 0
2 65 0
3 75 0
4 88 6,000
5 100 8,000
6 90 5,000
7 96 9,000
8 105 8,000
9 108 5,000
10 115 2,000

PRACTICE KIT

32. Employee share purchase plan
An entity offers all its 1,000 employees the opportunity to participate in an employee share purchase plan. The
employees have two weeks to decide whether to accept the offer. Under the terms of the plan, the employees
are entitled to purchase a maximum of 100 shares each. The purchase price will be 20 per cent less than the
market price of the entity’s shares at the date the offer is accepted, and the purchase price must be paid
immediately upon acceptance of the offer. All shares purchased must be held in trust for the employees, and
cannot be sold for five years. The employee is not permitted to withdraw from the plan during that period.
For example, if the employee ceases employment during the five-year period, the shares must nevertheless
remain in the plan until the end of the five-year period. Any dividends paid during the five-year period will
be held in trust for the employees until the end of the five-year period.
In total, 800 employees accept the offer and each employee purchases, on average, 80 shares, ie the employees
purchase a total of 64,000 shares. The weighted-average market price of the shares at the purchase date is CU30
per share, and the weighted-average purchase price is CU24 per share.

33. Entity 1
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the
employees remain in its employ for the next three years. [i.e., a cash-settled share-based payment]
During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years 2 and 3.
During year 2, 40 employees leave and the entity estimates that a further 25 will leave during year 3. During
year 3, 22 employees leave. At the end of year 3, 150 employees exercise their SARs, another 140 employees
exercise their SARs at the end of year 4 and the remaining 113 employees exercise their SARs at the end of
year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown
below. At the end of year 3, all SARs held by the remaining employees vest. The intrinsic values of the SARs
at the date of exercise (which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below.
Year Fair value Intrinsic value

1 CU14.40
2 CU15.50
3 CU18.20 CU15.00
4 CU21.40 CU20.00
5 CU25.00
[IFRS IG Example 12A]

34. Entity 2
An entity grants 100 cash-settled share appreciation rights (SARs) to each of its 500 employees on the condition
that the employees remain in its employ for the next three years [ie a cash-settled share-based payment] and
the entity reaches a revenue target (CU1 billion in sales) by the end of Year 3. The entity expects all employees
to remain in its employ.
For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalisation as
part of the cost of an asset.
At the end of Year 1, the entity expects that the revenue target will not be achieved by the end of Year 3. During
Year 2, the entity’s revenue increased significantly and it expects that it will continue to grow. Consequently,
at the end of Year 2, the entity expects that the revenue target will be achieved by the end of Year 3.

PRACTICE KIT
At the end of Year 3, the revenue target is achieved and 150 employees exercise their SARs. Another 150
employees exercise their SARs at the end of Year 4 and the remaining 200 employees exercise their SARs at
the end of Year 5.
Using an option pricing model, the entity estimates the fair value of the SARs, ignoring the revenue target
performance condition and the employment-service condition, at the end of each year until all of the cash-
settled share-based payments are settled. At the end of Year 3, all of the SARs vest. The following table shows
the estimated fair value of the SARs at the end of each year and the intrinsic values of the SARs at the date of
exercise (which equals the cash paid out).
Year Fair value of one SAR Intrinsic value of one SAR

1 CU14.40 --
2 CU15.50 --
3 CU18.20 CU15.00
4 CU21.40 CU20.00
5 CU25.00 CU25.00
[IFRS IG Example 12C]

35. Entity 3
On 1 January 20X1, an entity grants 100 share appreciation rights (SARs) that will be settled in cash to each of
100 employees on the condition that employees will remain employed for the next four years. [ie a cash-settled
share-based payment]
On 31 December 20X1 the entity estimates that the fair value of each SAR is CU10 and consequently, the total
fair value of the cash-settled award is CU100,000. On 31 December 20X2 the estimated fair value of each SAR
is CU12 and consequently, the total fair value of the cash-settled award is CU120,000.
On 31 December 20X2 the entity cancels the SARs and, in their place, grants 100 share options to each employee
on the condition that each employee remains in its employ for the next two years. Therefore the original
vesting period is not changed. On this date the fair value of each share option is CU13.20 and consequently,
the total fair value of the new grant is CU132,000. All of the employees are expected to and ultimately do
provide the required service.
For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalisation as
part of the cost of an asset.

36. Entity 4
An entity grants to an employee the right to choose either 1,000 phantom shares, ie a right to a cash payment
equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three
years’ service. If the employee chooses the share alternative, the shares must be held for three years after
vesting date.
At grant date, the entity’s share price is CU50 per share. At the end of years 1, 2 and 3, the share price is
CU52, CU55 and CU60 respectively. The entity does not expect to pay dividends in the next three years.
After taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the
grant date fair value of the share alternative is CU48 per share.
At the end of year 3, the employee chooses:

Scenario 1: The cash alternative
Scenario 2: The equity alternative

PRACTICE KIT

37. Share-based payment transactions in which a parent grants rights to its equity
instruments to the employees of its subsidiary
A parent grants 200 share options to each of 100 employees of its subsidiary, conditional upon the completion
of two years’ service with the subsidiary. The fair value of the share options on grant date is CU30 each. At
grant date, the subsidiary estimates that 80 per cent of the employees will complete the two-year service
period. This estimate does not change during the vesting period. At the end of the vesting period, 81
employees complete the required two years of service. The parent does not require the subsidiary to pay for
the shares needed to settle the grant of share options.

PRACTICE KIT
Answers:
1. Equity settled share-based (Basic)
December Year 1
Rs. Equity
Expected outcome (at grant date value) 500 x 85% x 100 x Rs.15 637,000
x1/3
Year 1 Charge 212,500
Accumulated in equity 212,500
December Year 2
Rs.
Expected outcome (at grant date value) 500 x 88% x 100 x Rs.15 660,000
x2/3
440,000
Less expense previously recognized (212,500)
Year 2 charge 227,500
31 December Year 3
Rs.
Actual outcome (at grant date value) 44,300 x Rs.15 664,000
Less previously recognized (440,000)
Year 3 charge 224,000
2. Equity-settled share-based (Basic)

The total expense recognised is based on the fair value of the share options granted at the grant date (1 January
20X1). The entity recognises the remuneration expense as the employees’ services are received during the
three-year vesting period.
Year ended 31 December 20X1

At 31 December 20X1, the entity must estimate the number of options expected to vest by predicting how
many employees will remain in employment until the vesting date. It believes that 80% of the employees will
stay for the full three years and therefore calculates an expense based on this assumption:
(500 employees × 80%) × 100 options × $15 FV × 1/3 = $200,000
Therefore, an expense is recognised for $200,000 together with a corresponding increase in equity.

The estimate of the number of employees staying for the full three years is revised at each year end. At 31
December 20X2, it is estimated that 85% of the 500 employees will stay for the full three years. The calculation
of the share based payment expense is therefore as follows:
$
(500 employees × 85%) × 100 options × $15 FV × 2/3 425,000
Less previously recognised expense (200,000)
Expense in year ended 31 December 20X2 225,000
Equity will be increased by $225,000 to $425,000 ($200,000 + $225,000).

A total of 50 (20 + 20 + 10) employees left during the vesting period. The expense recognised in the final year
of the scheme is as follows:

PRACTICE KIT
$
(500 – 50 employees) × 100 options × $15 FV × 3/3 675,000
Less previously recognised expense (425,000)
Expense in year ended 31 December 20X3 250,000
The financial statements will include the following amounts:

Statement of profit or loss 20X1 20X2 20X3
$ $ $
Staff costs 200,000 225,000 250,000
Statement of financial position 20X1 20X2 20X3

$ $ $
Other components of equity 200,000 425,000 675,000
3. A.3. Market based conditions (Basic)

The expense recognised is based on the fair value of the options at the grant date. This should be spread over
the vesting period.
There are two types of conditions attached to the share based payment scheme:
• A service condition (employees must complete a minimum service period)
• A market based performance condition (the share price must be $5 at 31 December 20X2).
Although it looks unlikely that the share price target will be hit, this condition has already been factored into
the fair value of the options at the grant date. Therefore, this condition can be ignored when determining the
charge to the statement of profit or loss.
The expense to be recognised should therefore be based on how many employees are expected to satisfy the
service condition only. The calculation is as follows:
(100 employees – 10 – 10) × 50 options × $1 FV × 1/2 = $2,000.
The entry to recognise this is:

Dr Profit or loss $2,000
Cr Equity $2,000
Rep. date Calculation of equity Equity Expense Note

$000 $000
31/12/X4 (174 × 200 × $10) × 1/3 116 116 1
31/12/X5 (182 × 300 × $10) × 2/3 364 248 2
31/12/X6 (184 × 300 × $10) × 3/3 552 188 3
4. Blueberry (Variable no. of Options Based on Performance Condition)

Notes:
(1) At 31/12/X4 a total of 26 employees (8 + 18) are expected to leave by the vesting date meaning that 174
are expected to remain. Blueberry estimates that average annual growth in sales volume will be 14%.
Consequently, it is estimated that eligible employees would each receive 200 share options at the vesting
date.
(2) At 31/12/X5, a total of 18 employees (8 + 6 + 4) are expected to leave by the vesting date meaning that
182 are expected to remain. Blueberry estimates that the average growth in sales volume will be 16%.
Consequently, it is estimated that eligible employees will each receive 300 share options at the vesting
date.
(3) At 31/12/X6, it is known that total of 16 employees (8 + 6 + 2) have left at some point during the vesting
period, leaving 184 eligible employees. As average annual growth in sales volume over the vesting
period was 16%, eligible employees are entitled to 300 share options each.

PRACTICE KIT
5. Beginner (Two cases: Exercised Option vs Lapsed)

(a) Year Equity Expense
$000 $000
Year 1 (7m × $0.3 × 1/3) 700 700
Year 2 (8m × $0.3 × 2/3) 1,600 900
Year 3 (9m × $0.3) 2,700 1,100
Note: Equity-settled share-based payments are measured using the fair value of the instrument at the
grant date (the start of year one).
(b)
(i) All eligible directors exercised their options:
The entity will post the following entry:
Dr Cash (9m × $2) $18.0m
Dr Equity reserve $2.7m
Cr Share capital (9m × $1) $9.0m
Cr Share premium (bal. fig.) $11.7m
(ii) No options are exercised
The amount recognised in equity ($2.7m) remains. The entity can choose to transfer this to retained
earnings.
6. Modifications
The repricing means that the total fair value of the arrangement has increased and this will benefit the
employees. This in turn means that the entity must account for an increased remuneration expense. The
increased cost is based upon the difference in the fair value of the option, immediately before and after the
repricing. Under the original arrangement, the fair value of the option at the date of repricing was $10, which
increased to $15 following the repricing of the options, for each share estimated to vest. The additional cost is
recognised over the remainder of the vesting period (years two and three).
The amounts recognised in the financial statements for each of the three years are as follows:
Equity Expense
$ $
Year one original
(500 – 50 – 60) × 100 × $20 × 1/3 260,000 260,000
Year two original

(500 – 50 – 30 – 30) × 100 × $20 × 2/3 520,000 260,000
Incremental
(500 – 50 – 30 – 30) × 100 × $5 × ½ 97,500 97,500
617,500 357,500
Year three original
(500 – 50 – 30 – 30) × 100 × $20 780,000 260,000
Incremental
(500 – 50 – 30 – 30) × 100 × $5 195,000 97,500
975,000 357,500

PRACTICE KIT
7. Cancellations and settlements

The share option scheme has been cancelled. This means that all the expense not yet charged through profit
or loss must now be recognised in the year ended 31 December 20X1:
$
Total expense 40,000
(5 directors × 1,000 options × $8)
Less expense recognised in year ended 31 December 20X0 (13,333)
(5 directors × 1,000 options × $8 × 1/3)
Expense to be recognised 26,667
To recognise the remaining expense, the following entry must be posted:

Dr Profit or loss $26,667
Cr Equity $26,667
Any payment made in compensation for the cancellation that is up to the fair value of the options is recognised
as a deduction to equity. Any payment in excess of the fair value is recognised as an expense.
The compensation paid to the director for each option exceeded the fair value by $1 ($10 – $9). Therefore, an
expense of $1 per option should be recognised in profit or loss.
The following accounting entry is required:

Dr Equity (5 directors × 1,000 options × $9) $45,000
Dr Profit or loss (5 directors × 1,000 options × $1) $5,000
Cr Cash (5 directors × 1,000 options × $10) $50,000
8. Cash-settled share-based payment transactions

Year Liability at year-end Expense for year
$000 $000
20X1 ((300 – 20 – 40) × 100 × $10 × 1/3) 80 80
20X2 ((300 – 20 – 10 – 20) × 100 × $12 × 2/3) 200 120
20X3 ((300 – 20 – 10 – 10) × 100 × $15) 390 190
Note that the fair value of the liability is remeasured at each reporting date. This is then spread over the vesting
period.
9. Growler (Cash Settled Basis)

a) The liability is remeasured at each reporting date, based upon the current information available relating to
known and expected leavers, together with the fair value of the SAR at each date. The remuneration
expense recognised is the movement in the liability from one reporting date to the next as summarised
below:
Rep. date Workings Liability (SFP) Expense (P/L)
$ $
31/12/X4 (500 – 20 – 20) × 200 × $5 × ½ 230,000 230,000
31/12/X5 (500 – 20 – 24) × 200 × $7 × 2/2 638,400 408,400
b) The number of employees eligible for a cash payment is 456 (500 – 20 – 24). Of these, 257 exercise their
SARs at 31/12/X6 and the remaining 199 exercise their SARs at 31/12/X7.
The liability is measured at each reporting date, based upon the current information available at that date,
together with the fair value of each SAR at that date. Any SARs exercised are reflected at their intrinsic value
at the date of exercise.

PRACTICE KIT
Year ended 31/12/X6

$
Liability b/fwd 638,400
Cash payment (257 × 200 × $7) (359,800)
Profit or loss (bal. fig) 39,800
Liability c/fwd (199 × 200 × $8) 318,400
Year ended 31/12/X7

$
Liability b/fwd 318,400
Cash payment (199 × 200 × $10) (398,000)
Profit or loss (bal. fig) 79,600
Liability c/fwd Nil
10. Third-party transactions - Direct method

The services received and the shares issued by Entity A have measured in relation to services received. For the
first year, the hourly rate will be measured at that originally proposed by Entity B, 105% of Rs600. Entity B
plans to increase that by another 5% for the second year.
The expense in profit or toss and the increase in equity associated with these arrangements will be:
Rs.
July – December 20X5 300 x Rs.630 189,000
January – December 20X6 (300 x Rs.630) + (300 x Rs.630 x 1.05) 387,450
January – June 20X7 300 x Rs.630 x 1.05 198,450
11. Sally (Non market based vesting conditions)

The cost reduction target is a non-market performance condition which is taken into account in estimating
whether the options will vest. The expense recognised in profit or loss in each of the three years is:
Cumulative Charge in the year
£ £
20X4 (10,000 x £21)/3 years 70,000 70,000
20X5 Assumed performance would not be achieved 0 (70,000)
20X6 10,000 x £21 210,000 210,000
12. Jeremy (Market and non-market vesting condition)

Jeremy satisfied the service requirement but the share price growth condition was not met. The share price
growth is a market condition and is taken into account in estimating the fair value of the options at grant date.
No adjustment should be made if there are changes from that estimated in relation to the market condition.
There is no write-back of expenses previously charged, even though the shares do not vest.
The expense recognised in profit or loss in each of the 3 years is one-third of 10,000 x £18 = £60,000.
13. Company B (Market and non-market performance conditions)

The total expense recorded over the expected vesting period would be as follows:
a) All options vest: 100 options x £20 = £2,000 total expense
b) All vesting conditions are met, except the market-based performance condition: 100 options x £20 = £2,000
total expense
c) All vesting conditions are met, except the non-market based performance condition: nil expense

PRACTICE KIT
d) All vesting conditions are met, except half of the employees who received options left the company before
the vesting date: 50 options x £20 = £1,000 total expense.
Paragraph 21 of 1FRS 2 states that the grant date fair value of the share-based payment with market-based
performance conditions that has met all its other vesting conditions should be recognised, irrespective of
whether that market condition is achieved. The company determines the grant date fair value of the share-
based payment excluding the non-market based performance factor, but including the market-based
performance factor.
14. Cancellation
The original cost to the entity for the share option scheme was:
2,000 shares x 23 managers x £33 = £1,518,000
This was being recognised at the rate of £506,000 in each of the three years.
At 30 June 20X5 the entity should recognise a cost based on the amount of options it had vested on that date.
The total cost is:
2,000 x 24 managers x £33 = £1,584,000
After deducting the amount recognised in 20X4, the 20X5 charge to profit or loss is £1,078,000. The
compensation paid is:
2,000 x 24 x £63 = £3,024,000
Of this, the amount attributable to the fair value of the options cancelled is:
2,000 x 24 x £60 (the fair value of the option, not of the underlying share) £2,880,000.
This is deducted from equity as a share buyback. The remaining £144,000 (£3,024,000 less £2,880,000) is charged
to profit or loss.
15. Cash-settled share-based payment transaction

For the three years to the vesting date of 31 December 20X3 the expense is based on the entity’s estimate of the
number of SARs that will actually vest (as for an equity-settled transaction). However, the fair value of the
liability is remeasured at each year end.
The intrinsic value of the SARs at the date of exercise is the amount of cash actually paid.
Liability at year end £ Expense for the year
£ £
20X1 Expected to vest (500 - 95): 194,400 194,400
405 x 100 x £14.40 x 1/3
20X2 Expected to vest (500 - 10): 413,333 218,933

400 x 100 x £15.50 x 2/3
20X3 Exercised: 225,000

150 x 100 x £15.00
Not yet exercised (500 – 97 – 150):

253 x 100 x £18.20
460,460 47,127
20X4 Exercised:
140 x 100 x £20.00
Not yet exercised (253 - 140):

113 x 100 x £21.40
272,127
280,000

PRACTICE KIT
(218,640)
61,360
20X5 Exercised: Nil 282,500
113 x 100 x £25.00 (241,820) 40,680
787,500
16. Choice of settlement

This arrangement results in a compound financial instrument.
The fair value of the cash route is:
7,000 x £21 = £147,000
The fair value of the share route is:

8,000 x £19 = £152,000
The fair value of the equity component is therefore:

£5,000 (£152, 000 less £147,000)
The share-based payment is recognised as follows:

Liabilities Equity Expense
£ £ £
20X4 1/3 x 7,000 x £27 63,000 63,000
£5,000 x 1/3
1,667 1,667
20X5 2/3 x 7,000 x £33 154,000 91,000
£5,000 x 1/3
1,667 1,667
20X6 7,000 x £42 294,000 140,000
£5,000 x 1/3
1,667 1,667
As the employee elects to receive shares rather than cash, £294,000 is transferred from liabilities to equity at
the end of 20X6. The balance on equity is £299,000.
17. Krumpet Plc

£ £
Cost of redemption (50,000 x £1.50) 75,000
Premium on redemption (50,000 x 50p) 25,000

No premium arises on the new issue
Distributable profits
Retained earnings before redemption
Premium on redemption (25,000 – 5000 charged to share premium (20,000)
account)
140,000
Remainder of redemption costs 50,000
(5,000)
Remainder out of distributable profits (45,000)
Balance on retained earnings 95,000
Statement of financial position of Krumpet plc as at 1 July 20X5

£’000
Net assets (520 – 75 + 5) 450
Capital and reserves

Ordinary share (300 – 50 + 5) 255

PRACTICE KIT
Share premium: 60,000 less 5,000 55

(10,000 allowable, being premium on original issue of 50,000 x 20p, restricted to
proceeds of new issue of 5,000)
Capital redemption reserve 45
355
Retained earnings (W) 95
450
18. Deferred tax implications of share-based payment
To determine where to record the deferred tax, we must first compare the cumulative accounting expense with
the cumulative tax deduction for each year. Where the tax deduction is greater than the accounting expense
recognised, the excess is taken directly to equity.

PRACTICE KIT
19. Leigh (Settlement choice against purchase of PPE)

Under IFRS 2, the purchase of property, plant and equipment would be treated as a sharebased payment in
which the counterparty has a choice of settlement, in shares or in cash. Such transactions are treated as cash-
settled to the extent that the entity has incurred a liability. It is treated as the issue of a compound financial
instrument, with a debt and an equity element.
Similar to IAS 32 Financial Instruments: Presentation, IFRS 2 requires the determination of the liability element
and the equity element. The fair value of the equity element is the fair value of the goods or services (in this
case the property) less the fair value of the debt element of the instrument. The fair value of the property is
$4m (per question). The share price of $3.50 is the expected share price in three months' time (assuming cash
settlement). The fair value of the liability component at 31 May 20X7 is its present value: 1.3 million  $3 =
$3.9m.
The journal entries are:

DEBIT Property, plant and equipment $4m
CREDIT Liability $3.9m
CREDIT Equity $0.1m
In three months' time, the debt component is remeasured to its fair value. Assuming the estimate of the future
share price was correct at $3.50, the liability at that date will be 1.3 million  $3.5 = $4.55m. An adjustment
must be made as follows:
DEBIT Expense (4.55 – 3.9) $0.65m
CREDIT Liability $0.65m
Choice of share or cash settlement

The share-based payment to the new director, which offers a choice of cash or share settlement, is also treated
as the issue of a compound instrument. In this case, the fair value of the services is determined by the fair
value of the equity instruments given. The fair value of the equity alternative is $2.50  50,000 = $125,000. The
cash alternative is valued at 40,000  $3 = $120,000. The difference between these two values – $5,000 – is
deemed to be the fair value of the equity component. At the settlement date, the liability element would be
measured at fair value and the method of settlement chosen by the director would determine the final
accounting treatment.
At 31 May 20X7, the accounting entries would be:

DEBIT Profit or loss – directors' remuneration $125,000
CREDIT Liability $120,000
CREDIT Equity $5,000
In effect, the director surrenders the right to $120,000 cash in order to obtain equity worth $125,000.
20. Sindh Transit Ltd

(a) Accounting entries
Accounting entries for year ended 31 December 2016:
Share options
Dr Staff costs (statement of profit or loss) (W1) Rs. 17,820,000
Cr Equity Rs. 17,820,000
Share appreciation rights (SARs)
Dr Staff costs (statement of profit or loss) (W2) Rs. 6,495,000
Cr Liabilities (non-current) Rs. 6,495,000
Working 1: Options
Total expected expense (at end of 2016)
1,000 options x Rs. 220 x 327 (400 – 15 – 22 – 36) Rs. 71,940,000

PRACTICE KIT
Fraction of vesting period by the year end 2/4

Expense recognised by the year end Rs. 35,970,000
1,000 options x Rs. 220 x 330 (400 – 15 – 55) Rs. 72,600,000
Expense recognised by the last year end Rs. 18,150,000
To be recognised in 2016 Rs. 17,820,000
Working 2: SARs
500 SARs x Rs. 140 x 327 (400 – 15 – 22 – 36) Rs. 22,890,000
Liability to be recognised by the year end Rs. 11,445,000
Less opening liability:
500 SARs x Rs. 120 x 330 (400 – 15 – 55) Rs. 19,800,000
Liability recognised by the end of 2015 Rs. 4,950,000
To be recognised in 2016 Rs. 6,495,000
(b) In accordance with IFRS 2, the share options and the share appreciation rights are recognised as an
expense in the statement of profit or loss as they are awarded in return for employee service.
The treatment of each of above stated however is different in the statement of financial position. The
share appreciation rights will result in a future outflow of cash and therefore represent an obligation
and are presented as a liability. The liability should reflect the most reliable measurement at each
balance sheet date and so the total amount payable that is estimated at each year-end date is estimated
using the updated fair values.
The options represent an equity-settled share-based payment and do not meet the definition of
obligation, and so instead the entry is to equity. The equity element is measured initially and
subsequently at the fair value at the grant date.
21. Rahman Limited (SBP with Option)

(a)
Date Description Debit Credit 1
6/30/2010 Salaries expense 3,039,999
Liability (Rs. 130 x 64,000 / 3) 2,773,333
Equity (Rs. 0.8m (W – 1) / 3 266,666
Liability (Rs. 64,000 x 138 2/3) – Rs. 3,114,667
2,773,333 266,667
Equity (Rs. 0.8m / 3)
Liability [(Rs. 64,000 x 150) – Rs. 2,773,333 3,712,000
–
Rs. 3,114,667] 266,667
Equity (Rs. 0.8 / 3)
(b)
Date Description Debit Credit 1
6/30/2012 If cash alternative is chosen 9,600,000
Liability (64,000 x 150) OR (2,773,333 + 3,114,667 +
3,712,000)
Cash 9,600,000
If share alternative is chosen

PRACTICE KIT
6/30/2012 Liability (80,000 shares) 2,773,333 + 3,114,667 + 9,600,000

3,712,000) 9,600,000
Equity
W-1: identifying the equity component Rupees

The fair value of shares alternative 8,800,000
(80,000 x 110)
The fair value of debt instrument 8,000,000
(64.000 x 125)
Fair value of the equity component in the compound instrument 800,000
22. Engineering Works Limited (Bonus & SBP)

Date Particular Debit Credit 1
Rupees
30-Jun-2010 Bonus expenses {600 x 1,000 x (30-8)} 13,200,000
Employee shares options outstanding 7,920,000
(600 x 1,000 x 0.6 x 22)
Provision for bonus (600 X 1,000 x 0.4 x 22) 5,280,000
(To record acceptance of 60% share options and
bonus provision.)
31-Jul-2010 Provision for bonus (600 X 1,000 X 0.2 X 22) 2,640,000
(To record acceptance of further 20% share
option)
31-Jul-2010 Bonus expense (600 x 1,000 x 0.8 x 4) 1,920,000
(To record increase in fair market value per share
form Rs. 30 to Rs. 34)
31-Jul-2010 Provision for bonus
(600 x 1,000 x 0.2 x 22) -(600 x 0.2 x 10,000) 1,440,000
Bonus expense 1,440,000
Adjustment of bonus provision for 20% workers
not opted for the share option.)
01-Sep-2010 Provision for bonus (600 X 0.2 X 10,000) 1,200,000
Bank 1,200,000
(Cash payment of bonus)
01-Sep-2010 Bank (600 x 0.8 x 1,000 x 8) 3,840,000
Employees share options outstanding (600 x 1,000
x 0.8 x 26) 12,480,000
Share capital (1,000 x 600 x 80% x 10) 4,800,000
Share premium {600x80%x1,000x (34-10)} 11,520,000
(Issue of 480,000 shares of Rs. 10 each at a
premium of Rs. 24 per share, in exercise of share
option)
23. Quail Pakistan Limited (Bonus & SBP + Supplier Payment & SBP)
(a) 25% of the bonus is to be paid in cash, so a liability of Rs. 7 .5 million (30 x 25%) must be accrued. The
remaining amount of bonus is to be paid in share options. The services must be recognized when they
are received. Therefore, 12 months of the 18 months service period up to the grant date must be
recognized.
Hence, Rs. 14.25 million [(30 x 75% x 95%) x 12/18] would be provided upto 30 June, 2012.

PRACTICE KIT
(b) In the given situation, the purchase of plant involves a share-based payment in which the counterparty
has a choice of settlement, either in shares or in cash. Such transactions are treated as cash-settled to
the extent that the entity has incurred a liability i.e. Rs. 50 million.
If the value of the liability based on share price. at the time of transaction. is less than the fair value of
the plant i.e. less than Rs. 50 million. the transaction would give rise to a compound financial
instrument, with a debt and an equity element. The fair value of the equity element would be the
difference between fair value of the plant and the fair value of the debt element of the instrument.
24. Mr. Talented (SBP with Option)

However. if the value of the liability based on share price at the time of transaction is more than the fair value
of the plant i.e. more than Rs. 50 million, the difference shall be recognized as an expense.

PRACTICE KIT
A.24. Entries in the case of equity alternative:

Date Debit Credit
----------Rupees ----------
31-Dec-15 Profit & loss account 4,633,333
Liability (W-1) 4,000,000
Equity (W-2) 633,333
31-Dec-16 Profit & loss account 4,953,333
Equity (W-2) 633,333
3 l-Dec-17 Profit & loss account 5,513,333
Equity (W-2) 633,333
1-Jul-18 Liability (W-1) 13,200,000
Equity (W-2) 1,900,000
Retained earnings (balancing) 2,400,000
Share capital (100,000x10) 1,000,000
Share premium 16,500,000
W 1 liability component Rupees

Liability to be recognized at 31-12-15 [(80,000 x Rs. 150)/ 3) 4,000,000
Liability to be recognized at 31-12-16 [(80,000 x Rs. 156x2)/3]-4,000,000 4,320,000
Liability to be recognized at 31-12-17 [(80,000 x Rs. 165)/3)-4,000,000-4,320,000)] 4,880,000
13,200,000
W 2 equity component Rupees

Fair value of equity alternative on grant date (100,000x135) 13,500,000
Fair value of cash alternative on grant date (80,000x145) 11,600,000
Equity component 1,900,000
Charged to profit or loss account (1,900,000/3) 633,333
25. XYZ Limited (Comprehensive Question)

(a) Treatment of share options issued to Marketing Managers
Since options granted to back office managers are granted under non-market condition, any
subsequent change in the non-market condition from previous estimates should be taken in to account
in estimating the expense to be recognized.
Since XYZ is not able to achieve the average 10% profit during the three years, the expenses booked
till the previous year should be reversed i.e. Rs. 853,333 [(8× (50-18) ×5000×2÷3]
Treatment of share options issued to Back Office Managers
Since options granted to back office managers are based on market conditions under which the
probability of meeting the condition was taken into account in fair value of share option at the grant
date, any subsequent changes in the probability of meeting the condition has no effect on the expense
recognition.
Furthermore, when a modification occurs during the vesting period, the incremental fair value of the
option is recognized over the period from the modification date until the date when equity
instruments vest.
By considering the above, XYZ should record the following expenses at 30 June 2016 and taking the
credit effect to the equity:
• In order to record modification impact, the incremental fair value of the option should be
recognized as expense i.e. Rs. 405,000 [(14-5) ×5,000×9]
• When options are settled, XYZ should recognize the following expense:

PRACTICE KIT
Rupees
Expense to be recorded at settlement date (9×30×5,000) 1,350,000
Expense already recorded till last year (8×30×5,000×2÷3) (800,000)
550,000
26. Ravi Limited (MC & NMC)

Amount to be charged to the profit or loss in respect of the share option scheme is as follows:
1,000(𝑛𝑜𝑡𝑒𝑠) × (500 × 85%)(𝑛𝑜𝑡𝑒𝑠 2) × 38 (𝑛𝑜𝑡𝑒𝑠 3) × (1/5)(𝑛𝑜𝑡𝑒𝑠 4) = 3,230,000
Note: 1 Vesting conditions, other than market conditions, shall be taken into account by
adjusting the number of equity instruments included in the measurement of the
transaction amount. Average sales would be Rs. 312.55 million (W-1) over five years
which is more than the minimum average sales of Rs. 300 million.
Note: 2 Service condition shall be taken into account by adjusting the number of equity
instruments included in the measurement of the transaction amount. In respect of service
condition, management estimates that 15% of the employees would leave the
organization over the vesting period of five years so provision would be made for 85%
of employees i.e. 425 (500 × 85%)
Note: 3 Only market condition shall be taken into account when estimating the fair value of the
share options at the measurement date. Subsequent changes in the probability of
meeting the condition have no impact and are ignored.
Note: 4 The expense will be spread over the vesting period of 5 years.
(W1) In light of above, Rs. 3.23 million should be debited to P & L account and credited to equity account.
Year Sales
2017 210.00
2018 252.00
2019 302.40
2020 362.88
2021 435.40
Average 312.5
27. Zebra Limited (SBP with Options)

Since ZL has granted the supplier the right to choose whether the share-based transaction is settled in cash or
by issuing equity instruments, the entity has granted a compound financial instrument.
Since the fair value of land is available so the Land will be recorded at Rs. 230 million and corresponding effect
will be taken to liability to the extent of Rs. 210 million (fair value of the debt component on 1 October 2017
i.e. 70,000 shares × 3,000 per share) and remaining Rs. 20 million to the equity.
On 31 December 2017 the liability will be premeasured in accordance with the prevailing fair value of HL’s
share to Rs. 203 million (i.e. 70,000 × 2,900) and the resulting decrease of Rs. 7 million will be credited to Profit
and loss account.

PRACTICE KIT
28. Cotolla Limited (MC + SC)

(a) Amounts recorded in respect of share options in CL’s financial statements:
Year No. Of No. of Fair value Period Equity Expense
executives share per option balance at for the
options Rs. year end year
Rs in (m) Rs in (m)
2014 39 x 4,000 x 600 x 1/3 = 31.20 31.20
(47-8)
2015 40 x -- x 600 x 2/3 = -- (31.20)
(44-4)
2016 43 x 6,000 x 600 x 3/3 = 154.80 154.80
41 x 6,000 x 130 x 1/2 = 15.99 15.99
(43-2) (710-580)
170.79 170.79
2017 43 x 6,000 x 600 x 3/3 = 154.80 --
42 x 6,000 x 130 x 2/2 = 32.76 16.77
(710-580)
187.56 16.77
Explanation of basis of calculation

Service condition/No. of executives:
Service condition shall be taken into account by adjusting the number of share options based on expected
number of executives that would remain in service till the vesting date at each year end.
Performance condition/No. of share options:

Performance condition other than market condition shall be taken into account by adjusting the number of
equity instruments included in the measurement of the transaction amount at each year end. In this respect,
number of options are based on expected average annual gross profit during the vesting period as worked-
out below:
Year end Average gross profit for vesting period No. of options
Rs. in million
2014 (940 x 3) /3 = 940 4,000
2015 (940 + 820 x 2) /3 = 860 Nil
2016 (940 + 820 + 1,270) /3 = 1,010 6,000
2017 (940 + 820 + 1,270 + 1,200) /4 = 1,058 6,000
Market condition/Fair value per option:

Market conditions are only taken into account when estimating the fair value of the share options at the
measurement date.
CL should recognize an expense irrespective of whether market conditions are satisfied at year end provided
all other vesting conditions are satisfied.
Vesting period:
The expense is spread over the vesting period. At the grant date the vesting period was three years which was
subsequently revised to four years on 1 January 2016.
Modification: (Extension of vesting period and repricing of option)
1) Irrespective of any modification, CL is required to recognize, as a minimum, three-year services received,
measured at the grant date fair value of the equity instrument. So, for 2016 expense will be recorded for 43
executives who have served the original vesting period of 3 years at fair value of the options measured at
grant date.
2) Modification of the vesting conditions in a manner that is not beneficial (increase in vesting period) would
not be taken into account.

PRACTICE KIT
3) However, repricing of the option is beneficial for executives. Therefore, increase in fair value of share
option by Rs. 130 (710–580) at the modification date would be expensed out over the period between the
modification date and the expected vesting date.
29. Grant of shares, with a cash alternative subsequently added
Application of requirements
Paragraph 27 of the IFRS requires, irrespective of any modifications to the terms and conditions on which the
equity instruments were granted, or a cancellation or settlement of that grant of equity instruments, the entity
to recognise, as a minimum, the services received measured at the grant date fair value of the equity
instruments granted, unless those equity instruments do not vest because of failure to satisfy a vesting
condition (other than a market condition) that was specified at grant date. Therefore, the entity recognises the
services received over the three-year period, based on the grant date fair value of the shares.
Furthermore, the addition of the cash alternative at the end of year 2 creates an obligation to settle in cash. In
accordance with the requirements for cash-settled share-based payment transactions (paragraphs 30–33 of the
IFRS), the entity recognises the liability to settle in cash at the modification date, based on the fair value of the
shares at the modification date and the extent to which the specified services have been received. Furthermore,
the entity remeasures the fair value of the liability at the end of each reporting period and at the date of
settlement, with any changes in fair value recognised in profit or loss for the period.
Therefore, the entity recognises the following amounts:

Year Calculation Expense Equity Liability
CU CU CU
1 Remuneration expense for year: 10,000 shares × CU33
× 1/3 110,000 110,000
2 Remuneration expense for year: (10,000 shares × CU33
× 2/3) – CU110,000 110,000 110,000
Reclassify equity to liabilities: 10,000 shares × CU25 ×
2/3 (166,667) 166,667
3 Remuneration expense for year: (10,000 shares × CU33
× 3/3) – CU220,000 110,000(a) 26,667 83,333
Adjust liability to closing fair value: (CU166,667 +
CU83,333) – (CU22 × 10,000 shares) (30,000) (30,000)
Total 300,000 80,000 220,000
Allocated between liabilities and equity, to bring in the final third of the liability based on the fair value of
the shares as at the date of the modification.
30. Share-based payment with vesting and non-vesting conditions when the
counterparty can choose whether the non-vesting condition is met
There are three components to this plan: paid salary, salary deduction paid to the savings plan and share-
based payment. The entity recognises an expense in respect of each component and a corresponding increase
in liability or equity as appropriate. The requirement to pay contributions to the plan is a non-vesting
condition, which the employee chooses not to meet in the second year. Therefore, in accordance with
paragraphs 28(b) and 28A of the IFRS, the repayment of contributions is treated as an extinguishment of the
liability and the cessation of contributions in year 2 is treated as a cancellation.
YEAR 1 Expense Cash Liability Equity

CU CU CU CU
Paid salary 3,600
(75% × 400 × 12) (3,600)
Salary deduction paid to the savings plan 1,200
(25% × 400 × 12) (1,200)

PRACTICE KIT
Share-based payment 120 (120)

Total 4,920 (3,600) (1,200) (120)
YEAR 2 Expense Cash Liability Equity

CU CU CU CU
(75% × 400 × 6 +
100% × 400 × 6) (4,200)
Salary deduction paid to the savings plan 600
(25% × 400 × 6) (600)
Refund of contributions to the employee (1,800) 1,800
Share-based payment (acceleration of 240
remaining expense) (120 × 3 – 120) (240)
Total 5,040 (6,000) 1,200 (240)
31. Grant of share options that is accounted for by applying the intrinsic value
method
In accordance with paragraph 24 of the IFRS, the entity recognises the following amounts in years 1–10.
Year Calculation Expense for Cumulative
period expense
CU CU
1 50,000 options × 80% × (CU63 – CU60) × 1/3 years 40,000 40,000
2 50,000 options × 86% × (CU65 – CU60) × 2/3 years – CU40,000 103,333 143,333
3 43,000 options × (CU75 – CU60) – CU143,333 501,667 645,000
4 37,000 outstanding options × (CU88 – CU75) + 6,000 exercised
options × (CU88 – CU75) 559,000 1,204,000
options × (CU100 – CU88) 444,000 1,648,000
options × (CU90 – CU100) (290,000) 1,358,000
options × (CU96 – CU90) 144,000 1,502,000
options × (CU105 – CU96) 135,000 1,637,000
options × (CU108 – CU105) 21,000 1,658,000
10 2,000 exercised options × (CU115 – CU108) 14,000 1,672,000
32. Employee share purchase plan

For transactions with employees, IFRS 2 requires the transaction amount to be measured by reference to the
fair value of the equity instruments granted (IFRS 2, paragraph 11). To apply this requirement, it is necessary
first to determine the type of equity instrument granted to the employees. Although the plan is described as
an employee share purchase plan (ESPP), some ESPPs include option features and are therefore, in effect, share
option plans. For example, an ESPP might include a ‘look-back feature’, whereby the employee is able to
purchase shares at a discount, and choose whether the discount is applied to the entity’s share price at the date
of grant or its share price at the date of purchase. Or an ESPP might specify the purchase price, and then allow
the employees a significant period of time to decide whether to participate in the plan. Another example of an
option feature is an ESPP that permits the participating employees to cancel their participation before or at the
end of a specified period and obtain a refund of amounts previously paid into the plan.

PRACTICE KIT
However, in this example, the plan includes no option features. The discount is applied to the share price at
the purchase date, and the employees are not permitted to withdraw from the plan.
Another factor to consider is the effect of post-vesting transfer restrictions, if any. Paragraph B3 of IFRS 2 states
that, if shares are subject to restrictions on transfer after vesting date, that factor should be taken into account
when estimating the fair value of those shares, but only to the extent that the post-vesting restrictions affect
the price that a knowledgeable, willing market participant would pay for that share. For example, if the shares
are actively traded in a deep and liquid market, post-vesting transfer restrictions may have little, if any, effect
on the price that a knowledgeable, willing market participant would pay for those shares.
In this example, the shares are vested when purchased, but cannot be sold for five years after the date of
purchase. Therefore, the entity should consider the valuation effect of the five-year post-vesting transfer
restriction. This entails using a valuation technique to estimate what the price of the restricted share would
have been on the purchase date in an arm’s length transaction between knowledgeable, willing parties.
Suppose that, in this example, the entity estimates that the fair value of each restricted share is CU28. In this
case, the fair value of the equity instruments granted is CU4 per share (being the fair value of the restricted
share of CU28 less the purchase price of CU24). Because 64,000 shares were purchased, the total fair value of
the equity instruments granted is CU256,000.
In this example, there is no vesting period. Therefore, in accordance with paragraph 14 of IFRS 2, the entity
should recognise an expense of CU256,000 immediately.
However, in some cases, the expense relating to an ESPP might not be material. IAS 8 Accounting Policies,
Changes in Accounting Policies and Errors states that the accounting policies in IFRSs need not be applied
when the effect of applying them is immaterial (IAS 8, paragraph 8). IAS 8 also states that an omission or
misstatement of an item is material if it could, individually or collectively, influence the economic decisions
that users make on the basis of the financial statements. Materiality depends on the size and nature of the
omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a
combination of both, could be the determining factor (IAS 8, paragraph 5). Therefore, in this example, the
entity should consider whether the expense of CU256,000 is material.
33. Entity 1
Year Calculation Expense Liability
CU CU
1 (500 – 95) employees × 100 SARs × CU14.40 × 1/3 194,400 194,400
2 (500 – 100) employees × 100 SARs × CU15.50 × 2/3 –
CU194,400 218,933 413,333
3 (500 – 97 – 150) employees × 100 SARs × CU18.20 – 47,127 460,460
CU413,333 + 150 employees × 100 SARs × CU15.00 225,000
Total 272,127
4 (253 – 140) employees × 100 SARs × CU21.40 – CU460,460 (218,640) 241,820
+ 140 employees × 100 SARs × CU20.00 280,000
Total 61,360
5 CU0 – CU241,820 + 113 employees × 100 SARs × CU25.00 (241,820)
282,500
Total 40,680
Total 787,500
34. Entity 2
Number of employees expected to Best estimate of whether the
satisfy the service condition revenue target will be met

PRACTICE KIT
Year 1 500 No
Year 2 500 Yes
Year 3 500 Yes
Year Calculation Expense Liability

CU CU
1 SARs are not expected to vest: no expense is recognised -- --
2 SARs are expected to vest: 500 employees × 100 SARs ×
CU15.50 × 2/3 516,667 516,667
3 (500 – 150) employees × 100 SARs × CU18.20 x 3/3 – 120,333 637,000
Total 345,333
4 (350 – 150) employees × 100 SARs × CU21.40 – (209,000) 428,000
Total 91,000
5 (200 – 200) employees × 100 SARs × CU25.00 – (428,000) --
Total 72,000
Total 1,025,000
35. Entity 3
At the modification date (31 December 20X2), the entity applies paragraph B44A. Accordingly:
(a) from the date of the modification, the share options are measured by reference to their modification-date
fair value and, at the modification date, the share options are recognised in equity to the extent to which
the employees have rendered services;
(b) the liability for the SARs is derecognised at the modification date; and
(c) the difference between the carrying amount of the liability derecognised and the equity amount recognised
at the modification date is recognised immediately in profit or loss.
At the modification date (31 December 20X2), the entity compares the fair value of the equity-settled
replacement award for services provided through to the modification date (CU132,000 × 2 /4 = CU66,000)
with the fair value of the cash-settled original award for those services (CU120,000 × 2 /4 = CU60,000). The
difference (CU6,000) is recognised immediately in profit or loss at the date of the modification.
The remainder of the equity-settled share-based payment (measured at its modification-date fair value) is
recognised in profit or loss over the remaining two-year vesting period from the date of the modification.
Dr Expense Cumulative Cr. Cr.
expense Equity Liability
Year Calculation CU CU CU CU
1 100 employees ×100 SARs x CU10 × 1/4
25,000 -- -- 25,000
2 Remeasurement before the modification 100
employees x 100 SARs × CU12.00 × 2/4 –
25,000 35,000 60,000 -- 35,000
Derecognition of the liability, recognition of
the modification-date fair value amount in
equity and recognition of the effect of
settlement for CU6,000 (100 employees x
100 share options × CU13.20 × 2/4) – (100
employees × 100 SARs × CU12.00 × 2/4) 6,000 66,000 66,000 (60,000)
3 100 employees × 100 share options ×
CU13.20 × 3/4 – CU66,000 33,000 99,000 33,000 --

PRACTICE KIT
4 100 employees x 100 share options ×

CU13.20 × 4/4 – CU99,000 33,000 132,000 33,000 --
Total 132,000 --
36. Entity 4
The fair value of the equity alternative is CU57,600 (1,200 shares × CU48). The fair value of the cash alternative
is CU50,000 (1,000 phantom shares × CU50). Therefore, the fair value of the equity component of the
compound instrument is CU7,600 (CU57,600 – CU50,000).
The entity recognises the following amounts:

Year Expense Equity Liability
CU CU CU
1 Liability component: (1,000 × CU52 × 1/3) 17,333 17,333
Equity component: (CU7,600 × 1/3) 2,533 2,533
2 Liability component: (1,000 × CU55 × 2/3) – CU17,333 19,333 19,333
Equity component: (CU7,600 × 1/3) 2,533 2,533
3 Liability component: (1,000 × CU60) – CU36,666 23,334 23,334
Equity component: (CU7,600 × 1/3 2,534 2,534
End Scenario 1: cash of CU60,000 paid
Year
3 Scenario 1 totals 67,600 7,600 0
Scenario 2: 1,200 shares issued 60,000 (60,000)
Scenario 2 totals 67,600 67,600 0
37. Share-based payment transactions in which a parent grants rights to its equity
instruments to the employees of its subsidiary
As required by paragraph B53 of the IFRS, over the two-year vesting period, the subsidiary measures the
services received from the employees in accordance with the requirements applicable to equity-settled share-
based payment transactions. Thus, the subsidiary measures the services received from the employees on the
basis of the fair value of the share options at grant date. An increase in equity is recognised as a contribution
from the parent in the separate or individual financial statements of the subsidiary.
The journal entries recorded by the subsidiary for each of the two years are as follows:
Year 1
Dr Remuneration expense (200 × 100 × CU30 × 0.8/2) CU240,000
Cr Equity (Contribution from the parent) CU240,000
Year 2
Dr Remuneration expense (200 × 100 × CU30 × 0.81 – CU246,000
240,000)
Cr Equity (Contribution from the parent) CU246,000

PRACTICE KIT
CHAPTER 11: BASIC CONSOLIDATION AND CHANGES IN GROUP STRUCTURES
CHAPTER 11:
BASIC CONSOLIDATION AND CHANGES IN GROUP
STRUCTURES
Questions:
1. Hasan Limited (Basic Adj)
On 1 April 2014, Hasan Limited acquired 90% of the equity shares in Shakeel Limited. On the same day Hasan
Limited accepted a 10% loan note from Shakeel Limited for Rs. 200,000 which was repayable at Rs. 40,000 per
annum (on 31 March each year) over the next five years. Shakeel Limited’s retained earnings at the date of
acquisition were Rs. 2,200,000.
Statements of financial position as at 31 March 2015
Hasan Shakeel
Limited Limited
Rs. 000 Rs. 000
Non-current assets
Property, plant and equipment 2,120 1,990
Intangible – software – 1,800
Investments – equity in Shakeel Limited 4,110 –
Investments – 10% loan note Shakeel 200 –
Limited
Investments – others 65 210
6,495 4,000
Current assets
Inventories 719 560
Trade receivables 524 328
Shakeel Limited current account 75 –
Cash 20
1,338 888
Total assets 7,833 4,888
Equity and liabilities
Equity shares of Rs. 1 each 2,000 1,500
Share premium 2,000 500
Retained earnings 2,900 1,955
6,900 3,955
Non-current liabilities
10% Loan note from Hasan Limited – 160
Government grant 230 40
230 200
Current liabilities
Trade payables 475 472
Hasan Limited current account – 60
Income taxes payable 228 174
Operating overdraft – 27
703 733

PRACTICE KIT
Total equity and liabilities 7,833 4,888
The following information is relevant:

1) Included in Shakeel Limited’s property at the date of acquisition was a leasehold property recorded at its
depreciated historical cost of Rs. 400,000. The leasehold had been sub-let for its remaining life of only four
years at an annual rental of Rs. 80,000 payable in advance on 1 April each year. The directors of Hasan
Limited are of the opinion that the fair value of this leasehold is best reflected by the present value of its
future cash flows. An appropriate cost of capital for the group is 10% per annum.
The present value of a Rs. 1 annuity received at the end of each year where interest rates are 10% can be taken
as:
3 year annuity Rs. 2.50
4 year annuity Rs. 3.20
2) The software of Shakeel Limited represents the depreciated cost of the development of an integrated
business accounting package. It was completed at a capitalized cost of Rs. 2,400,000 and went on sale on 1
April 2013. Shakeel Limited’s directors are depreciating the software on a straight-line basis over an eight-
year life (i.e. Rs. 300,000 per annum).
However, the directors of Hasan Limited are of the opinion that a five-year life would be more appropriate as
sales of business software rarely exceed this period.
3) The inventory of Hasan Limited on 31 March 2015 contains goods at a transfer price of Rs.25,000 that were
supplied by Shakeel Limited who had marked them up with a profit of 25% on cost. Unrealized profits are
adjusted for against the profit of the company that made them.
4) On 31 March 2015 Shakeel Limited remitted to Hasan Limited a cash payment of Rs. 55,000. This was not
received by Hasan Limited until early April. It was made up of an annual repayment of the 10% loan note
of Rs. 40,000 (the interest had already been paid) and Rs.15,000 of the current account balance.
5) The accounting policy of Hasan Limited for non-controlling interests (NCI) in a subsidiary is to value NCI
at a proportionate share of the net assets.
6) An impairment test at 31 March 2015 on the consolidated goodwill concluded that it should be written
down by Rs. 120,000. No other assets were impaired.
Required
Prepare the consolidated statement of financial position of Hasan Limited as at 31 March 2015.
[ICAP – Winter 2008]

2. Golden Limited (Basic Adj)
The draft summarized statements of financial position of Golden Limited (GL) and its subsidiary Silver
Limited (SL) as at 31 December 2016 are as follows:
GL SL
---------- Rs. in million ----------
Building 1,600 500
Plant & machinery 1,465 690
Investment in SL 327 -
Current assets 2,068 780
5,460 1,970
Share capital (Rs. 10 each) 980 450

Share premium 730 150

PRACTICE KIT
Retained earnings 3,150 210

4,860 810
Liabilities 600 1,160
5,460 1,970
1) GL acquired 60% of the shares of SL on 1 April 2016 at following consideration:

• Issuance of 20 million ordinary shares at premium of Rs. 2 each;
• Cash amounting to Rs. 87 million, which includes consultancy charges of Rs. 10 million and legal
expenses of Rs. 5 million.
The market value of each share of GL and SL on acquisition date was Rs. 25 and Rs. 11 respectively. At
acquisition date, retained earnings of SL were Rs. 100 million.
2) The following table sets out those items whose fair value on the acquisition date was different from their
book value. These values have not been incorporated in SL’s books of account.
Book value Fair value

---------Rs. in million---------
Building 250 170
Inventory 112 62
Provision for bad debts (15) (24)
3) Upon acquisition of SL, a contract for management services was also signed under which GL would
provide various management services to SL at an annual fee of Rs. 50 million from the date of acquisition.
The payment would be made in two equal instalments payable in arrears on 1 April and 1 October.
4) On 30 September 2016, GL acquired a plant from SL in exchange of a building which was currently not in
use of GL. The details of plant and building are as follows:
Accumulated
Cost *Exchange price
depreciation
------------------- Rs. in million ------------------------
Building 240 130 120
Plant 200 80 120
* Equivalent to fair value
Both companies follow cost model for subsequent measurement of property, plant and equipment and
charge depreciation on building and plant at 5% and 20% respectively on cost.
5) SL paid an interim cash dividend of 10% on 31 July 2016.

6) GL values non-controlling interest at the acquisition date at its fair value.
Required
Prepare a consolidated statement of financial position as at 31 December 2016 in accordance with the
requirements of International Financial Reporting Standards.

PRACTICE KIT

3. Yasir Limited and Bilal Limited (Basic Adj)
Following information has been extracted from the financial statements of Yasir Limited (YL) and Bilal
Limited (BL) for the year ended 30 June 2016.
YL BL YL BL
Assets Equity & Liabilities
Fixed assets 250 540 Share capital (Rs. 10 each) 750 500
Accumulated depreciation (70) (70) Retained earnings 340 258
180 470 1,090 758
Investment in BL – at cost 675 - Loan from YL - 12
Loan to BL 16 - Creditors & other liabilities 75 51
Stock in trade 160 150
Other current assets 71 50
Cash and bank 63 151
1,165 821 1,165 821
Additional information:
1) On 1 July 2014, YL acquired 75% shares of BL at Rs. 18 per share. On the acquisition date, fair value of BL’s
net assets was equal to its book value except for an office building whose fair value exceeded its carrying
value by Rs. 12 million. Both companies provide depreciation on building at 5% on straight line basis.
2) Year-wise net profit of both companies are given below:
2016 2015
-------- Rs. in million --------
YL 219 105
BL 11 168
3) The following inter-company sales were made during the year ended 30 June 2016:
Included in buyer’s
Sales Profit %
closing stock in trade
------------ Rs. in million ------------
YL to BL 120 20 30% on cost
BL to YL 80 32 15% on sale
4) BL declared interim dividend of 12% in the year 2015 and final dividend of 20% for the year 2016.
5) The loan was granted by YL to BL on 1 July 2014 and carries interest rate of 12% payable annually. The
principal is repayable in five equal annual instalments of Rs. 4 million each. On 30 June 2016, BL issued a
cheque of Rs. 5.92 million which was received by YL on 2 July 2016. No interest has been accrued by YL.
6) YL values non-controlling interest on the date of acquisition at its fair value. BL’s share price was Rs. 15 on
acquisition date.
7) An impairment test has indicated that goodwill of BL was impaired by 10% on 30 June 2016.
There was no impairment during the previous year.
Required:
Prepare a consolidated statement of financial position as at 30 June 2016 in accordance with the requirements
of International Financial Reporting Standards.

PRACTICE KIT
4. Jasmine Limited
Following are the draft statement of financial position of Jasmine Limited (JL) and its subsidiary, Sunflower
Limited (SL) as on 31 December 2017:
JL SL
------ Rs. in million ------
Property, plant and equipment 880 330
Intangible assets 40 50
Investment in SL 520 -
Loan to JL - 120
Current assets 640 345
2,080 845
Share capital (Rs. 10 each) 700 200
Share premium 240 -
Retained earnings 720 410
Loan from SL 96 -
Current liabilities 324 235
2,080 845
1) JL acquired 75% shares of SL on 1 January 2017. Cost of investment in JL’s books consists of:
• 10 million JL's ordinary shares issued at Rs. 24 per share; and
• cash payment of Rs. 280 million (including professional fee of Rs. 10 million for advice on acquisition
of SL)
2) On acquisition date, carrying value of SL's net assets was equal to fair value except an intangible asset
(brand) whose fair value was Rs. 40 million as against carrying value of Rs. 25 million. The remaining
useful life of the brand is estimated at 5 years. The recoverable amount of the brand at 31 December 2017
was estimated at Rs. 28 million.
3) JL values non-controlling interest at fair value. The market price of SL's shares was Rs. 36 at the date of
acquisition, which has increased to Rs. 40 as of 31 December 2017.
4) JL and SL showed a net profit of Rs. 200 million and Rs. 60 million respectively for the year ended 31
December 2017.
5) The loan was granted on 1 July 2017 and carries mark-up of 10% per annum. A cheque of Rs. 30 million
including interest was dispatched by JL on 31 December 2017 but was received by SL after the year end.
No interest has been accrued by SL in its financial statements.
6) On 1 May 2017 SL sold a machine to JL for Rs. 52 million at a gain of Rs. 12 million. However, no payment
has yet been made by JL. The remaining useful life of the machine at the time of disposal was 2 years.
7) During the year, JL made sales of Rs. 250 million to SL at 20% above cost. 60% of these goods are included
in SL’s closing stock.
8) SL declared interim cash dividend of 10% in November 2017 which was paid on 2 January 2018. The
dividend has correctly been recorded by both companies.
Required:
Prepare JL's consolidated statement of financial position as at 31 December 2017.

PRACTICE KIT

5. Anima Plc (Consolidation technique)
At 1 July 20X8 Anima plc had investments in two companies: Orient Ltd and Oxendale Ltd. On 1 April 20X9
Anima plc purchased 85% of the ordinary share capital of Carnforth Ltd for £3 million.
Extracts from the draft individual financial statements of the four companies for the year ended 30 June 20X9
are shown below:
Statements of profit or loss
Carnforth Oxendale
Anima plc Orient Ltd
Ltd Ltd
£ £ £ £
Revenue 1,410,500 870,300 640,000 760,090
Cost of sales (850,000) (470,300) (219,500) (345,000)
Gross profit 560,500 400,000 420,500 415,090
Operating expenses (103,200) (136,000) (95,120) (124,080)
Profit before taxation 457,300 264,000 325,380 291,010
Income tax expense (137,100) (79,200) (97,540) (86,400)
Profit for the year 320,200 184,800 227,840 204,610
Statements of financial position (extracts) at year end
Anima Oxendale
Orient Ltd Carnforth Ltd
plc Ltd
£ £ £ £
Equity
Ordinary share capital 4,000,000 3,500,000 2,000,000 3,000,000
(£1 shares)
Retained earnings 1,560,000 580,000 605,000 340,000
5,560,000 4,080,000 2,605,000 3,340,000
(a) A number of years ago Anima plc acquired 2.1 million of Orient Ltd's ordinary shares and 900,000 of
Oxendale Ltd's ordinary shares. Balances on retained earnings at the date of acquisition were £195,000 for
Orient Ltd and £130,000 for Oxendale Ltd. The non-controlling interest and goodwill arising on the
acquisition of Orient Ltd were both calculated using the fair value method; the fair value of the non-
controlling interest at acquisition was £1,520,000.
(b) At the date of acquisition the fair values of Carnforth Ltd's assets and liabilities were the same as their
carrying amounts except for its head office (land and buildings) which had a fair value of £320,000 in excess
of its carrying amount. The split of the value of land to buildings is 50:50 and the buildings had a remaining
life of 40 years at 1 April 20X9. Carnforth Ltd's profits accrued evenly over the current year. The non-
controlling interest and goodwill arising on the acquisition of Carnforth Ltd were both calculated using the
proportionate method.
(c) During the year Anima plc sold goods to Orient Ltd and Oxendale Ltd at a mark-up of 15%. Anima plc
recorded sales of £149,500 and £207,000 to Orient Ltd and Oxendale Ltd respectively during the year. At
the year-end inventory count Orient Ltd was found still to be holding half these goods and Oxendale Ltd
still held one-third.
(d) Anima plc has undertaken annual impairment reviews in respect of all its investments and at 30 June 20X9
an impairment loss of £10,000 had been identified in respect of Oxendale Ltd.
Requirement
Prepare the consolidated statement of profit or loss of Anima plc for the year ended 30 June 20X9 and an
extract from the consolidated statement of financial position as at the same date showing all figures that would
appear as part of equity.

PRACTICE KIT

6. Preston Plc (Consolidation technique)
Preston plc has investments in two companies, Longridge Ltd and Chipping Ltd. The draft
summarized statements of financial position of the three companies at 31 March 20X4 are shown
below:
Preston Longridge Chipping
plc Ltd Ltd
Assets £ £ £
Non-current assets
Property, plant and equipment 660,700 635,300 261,600
Intangibles 101,300 72,000 –
Investments 350,000 – –
1,112,000 707,300 261,600
Current assets
Inventories 235,400 195,900 65,700
Trade and other receivables 174,900 78,800 56,600
Cash and cash equivalents 23,700 11,900 3,400
434,000 286,600 125,700
Total assets 1,546,000 993,900 387,300
Equity
Ordinary share capital (£1 shares) 100,000 500,000 200,000
Revaluation surplus 125,000 – –
Retained earnings 1,084,800 312,100 12,000
1,309,800 812,100 212,000
Current liabilities
Trade and other payables 151,200 101,800 137,400
Taxation 85,000 80,000 37,900
236,200 181,800 175,300
Total equity and liabilities 1,546,000 993,900 387,300
(a) Preston plc acquired 75% of Longridge Ltd's ordinary shares on 1 April 20X2 for total cash consideration
of £691,000. £250,000 was payable on the acquisition date and the remaining £441,000 two years later, on 1
April 20X4. The directors of Preston plc were unsure how to treat the deferred consideration and have
ignored it when preparing the draft financial statements above.
On the date of acquisition Longridge Ltd's retained earnings were £206,700. The non-controlling interest and
goodwill arising on the acquisition of Longridge Ltd were both calculated using the proportionate method.
(b) The intangible asset in Longridge Ltd's statement of financial position relates to goodwill which arose on
the acquisition of an unincorporated business, immediately before Preston plc purchasing its shares in
Longridge Ltd. Cumulative impairments of £18,000 in relation to this goodwill had been recognized by
Longridge Ltd as at 31 March 20X4.
The fair values of the remaining assets, liabilities and contingent liabilities of Longridge Ltd at the date of its
acquisition by Preston plc were equal to their carrying amounts, with the exception of a building purchased
on 1 April 20X0, which had a fair value on the date of acquisition of £120,000. This building is being depreciated
by Longridge Ltd on a straight-line basis over 50 years and is included in the above statement of financial
position at a carrying amount of £92,000.
(c) Immediately after its acquisition by Preston plc, Longridge Ltd sold a machine to Preston plc. The machine
had been purchased by Longridge Ltd on 1 April 20X0 for £10,000 and was sold to Preston plc for £15,000.
The machine was originally assessed as having a total useful life of five years and that estimate has never
changed.

PRACTICE KIT
(d) Chipping Ltd is a joint venture, set up by Preston plc and a fellow venturer on 30 June 20X2. Preston plc
paid cash of £100,000 for its 40% share of Chipping Ltd.
(e) During the current year Preston plc sold goods to Longridge Ltd for £12,000 and to Chipping Ltd for
£15,000, earning a 20% gross margin on both sales. All these goods were still in the purchasing companies'
inventories at the year end.
(f) At 31 March 20X4 Preston plc's trade receivables included £50,000 due from Longridge Ltd. However,
Longridge Ltd's trade payables included only £40,000 due to Preston plc.
The difference was due to cash in transit.
(g) At 31 March 20X4 impairment losses of £25,000 and £10,000 respectively in respect of goodwill arising on
the acquisition of Longridge Ltd and the carrying amount of Chipping Ltd need to be recognized in the
consolidated financial statements. In the next financial year, Preston plc decided to invest in a third
company, Sawley Ltd. On
1 December 20X4 Preston plc acquired 80% of Sawley Ltd's ordinary shares for £385,000. On the date of
acquisition Sawley Ltd's equity comprised share capital of £320,000 and retained earnings of £112,300. Preston
plc chose to measure the non-controlling interest at the acquisition date at the non-controlling interest's share
of Sawley Ltd's net assets. Goodwill arising on the acquisition of Sawley Ltd has been correctly calculated at
£39,160 and will be recognized in the consolidated statement of financial position as at 31 March 20X5.
An appropriate discount rate is 5% p.a.
Requirements
a) Prepare the consolidated statement of financial position of Preston plc as at 31 March 20X4.
b) Set out the journal entries that will be required on consolidation to recognize the goodwill arising on the
acquisition of Sawley Ltd in the consolidated statement of financial position of Preston plc as at 31 March
20X5.

7. Bath Ltd (Control in stages – previous holding a simple investment)
Bath Ltd has 1 million shares in issue. Bristol plc acquired 50,000 shares in Bath Ltd on 1 January 20X6 for
£100,000. These shares were classified as a financial asset at fair value through other comprehensive income
and on 31 December 20X8 their carrying amount was £230,000 and increases in fair value of £130,000 had been
recognized in other comprehensive income and were held in equity. On 1 June 20X9 when the fair value of
Bath Ltd's net assets was £4 million, Bristol plc acquired another 650,000 shares in Bath Ltd for £3.9 million.
On 1 June 20X9 the fair value of the 50,000 shares already held was £250,000.
Requirement
Show the journal entry required in respect of the 50,000 shareholding on 1 June 20X9 and calculate the goodwill
acquired in the business combination on that date assuming that goodwill is valued using the proportion of
net assets method.
£'000 £'000
DEBIT Investment in Bath Ltd (250,000 – 230,000) 20
DEBIT Other comprehensive income and equity reserve 130
CREDIT Profit or loss 150
To recognize the gain on the deemed disposal of the shareholding in Bath Ltd existing immediately before
control being obtained.
Calculation of goodwill in respect of 70% (5% + 65%) holding in Bath Ltd:
£'000
Consideration transferred 3,900
Non-controlling interest (30% x £4m) 1,200
Acquisition-date fair value of previously held equity 250

PRACTICE KIT
5,350
Net assets acquired (4,000)
Goodwill 1,350

8. Good (Control in stages – no previous significant influence)
Good, whose year end is 30 June 20X9 has a subsidiary, Will, which it acquired in stages. The details of the
acquisition are as follows.
Holding Retained Purchase
Date of acquisition acquired earnings consideration
at acquisition
% $m $m
1 July 20X7 20 270 120
1 July 20X8 60 450 480
The share capital of Will has remained unchanged since its incorporation at $300m. The fair values of the net
assets of Will were the same as their carrying amounts at the date of the acquisition. Good did not have
significant influence over Will at any time before gaining control of Will. The group policy is to measure non-
controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets.
Required
(a) Calculate the goodwill on the acquisition of Will that will appear in the consolidated statement of
financial position at 30 June 20X9.
(b) Calculate the profit on the derecognition of any previously held investment in Will to be reported in
group profit or loss for the year ended 30 June 20X9.

9. Santander (Acquisitions that do not result in a change of control)
On 1 June 20X6, Santander acquired 70% of the equity of Madrid in exchange for £760,000 cash and 100,000
Santander shares. At this date the fair value of the identifiable net assets of Madrid was £850,000 and the
market value of Santander shares was £2.50.
On 31 December 20X8, Santander acquired a further 10% of the equity of Madrid at a cost of £105,000. On this
date the identifiable net assets of Madrid were £970,000.
Santander measures the non-controlling interest using the proportion of net assets method.
Requirement
(a) What goodwill is recorded in the consolidated statement of financial position at 31 December 20X8,
assuming that there is no impairment?
(b) What journal adjustment is required on the acquisition of the further 10% of shares?

10. Express (Part disposal subsidiary to subsidiary)
Express acquired 90% of Billings in 20X2 when Billings had retained earnings of £250,000. Goodwill was
calculated as £45,000 using the proportion of net assets method to value the non-controlling interest. Goodwill
has been impaired by £5,000 since acquisition.
At 31 December 20X8 the abbreviated statements of financial position of the two entities were as follows:

PRACTICE KIT
Express Billings
£'000 £'000
Non-current assets 2,300 430
Investments 360 --
Current assets 1,750 220
4,410 650
Share capital 1,000 100

Retained earnings b/f 1,190 304
Profit for the year 120 36
Liabilities 2,100 210
4,410 650
Express disposed of a 10% holding in Billings on 31 August 20X8 for £70,000; this has not yet been recorded
in Express's individual accounts.
Requirement
Prepare the consolidated statement of financial position as at 31 December 20X8.

11. Streatham (All types of disposal)
Streatham Co bought 80% of the share capital of Balham Co for £324,000 on 1 October 20X5. At that date
Balham Co's retained earnings balance stood at £180,000. The statements of financial position at 30 September
20X8 and the summarized statements of profit or loss for the year to that date are given below:
Streatham Co Balham Co
£'000 £'000
Non-current assets 360 270
Investment in Balham Co 324 --
1,054 640
Equity
Ordinary shares 540 180
Reserves 414 360
Current liabilities 100 100
1,054 640
Profit before tax 153 126

Tax (45) (36)
Profit for the year 108 90
No entries have been made in the accounts for any of the following transactions.
Assume that profits accrue evenly throughout the year.
It is the group's policy to value the non-controlling interests at its proportionate share of the fair value of the
subsidiary's identifiable net assets.
Ignore tax on the disposal.
Requirements
Prepare the consolidated statement of financial position and statement of profit or loss at 30 September 20X8
in each of the following circumstances. (Assume no impairment of goodwill.)
(a) Streatham Co sells its entire holding in Balham Co for £650,000 on 30 September 20X8.
(b) Streatham Co sells one-quarter of its holding in Balham Co for £160,000 on 30 September 20X8.

PRACTICE KIT
In the following circumstances you are required to calculate the gain on disposal, group retained earnings and
carrying value of the retained investment at 30 September 20X8.
(c) Streatham Co sells one-half of its holding in Balham Co for £340,000 on 30 June 20X8, and the remaining
holding (fair value £250,000) is to be dealt with as an associate.
(d) Streatham Co sells one-half of its holding in Balham Co for £340,000 on 30 June 20X8, and the remaining
holding (fair value £250,000) is to be dealt with as a financial asset at fair value through other
comprehensive income.
[ICAP CFAP – 01 Practice Kit]

12. Golden Limited (SOPL & Impairment in Associate)
Golden Limited (GL) is a listed company and has held shares in two companies, Yellow Limited (YL) and
Black Limited (BL), since July 1, 2014. The details of acquisition of shares in these companies are as follows:
(a) GL acquired 18 million shares in YL at par, when YL’s reserves were Rs. 24 million. The acquisition was
made by issuing four shares in GL for every five shares in YL. The market price of GL’s shares at July 1,
2014 was Rs. 20 per share. A fair value exercise was carried out for YL’s assets and liabilities at the time of
its acquisition with the following results:
Book Value Fair Value
Rupees in million
Land 170 192
Machines 25 45
Investments 3 6
The remaining life of machine on acquisition was 5 years. The fair values of the assets have not been accounted
for in YL’s financial statements.
(b) 6 million shares in BL were acquired for Rs. 12 per share in cash. At the date of acquisition, the reserves of
BL stood at Rs. 40 million.
The summarized statements of profit or loss of the three companies for the year ended June 30, 2016 are as
follows:
GL YL BL
Rupees in million
Sales 875 350 200
Cost of sales (567) (206) (244)
Gross profit / (loss) 308 144 (44)
Selling expenses (33) (11) (15)
Administrative expenses (63) (40) (16)
Interest expenses (30) (22) (15)
Other income 65 - -
Profit/(loss) before tax 247 71 (90)
Income tax (73) (15) 8
Profit/(loss) for the period 174 56 (82)
The following relevant information is available:
1) The share capital and reserves as at July 1, 2015 were as follows:
GL YL BL
Rupees in million
Ordinary share capital of Rs. 10 each 600 200 150
Reserves 652 213 108

PRACTICE KIT
The share capitals of all companies have remained unchanged since their incorporation.
2) During the year, GL sold goods amounting to Rs. 40 million to YL. The sales were made at a mark-up of
25% on cost. 30% of these goods were still in the inventories of YL at June 30, 2016.
3) GL manufactures a component used by BL. During the year, GL sold these components amounting to Rs.
20 million to BL. Transfers are made at cost plus 15%. BL held Rs.11.5 million of these components in
inventories at June 30, 2016.
4) All assets are depreciated on straight line method.
5) Other income includes dividend received from YL on April 15, 2016.
6) During the year, YL paid 20% cash dividend to its ordinary shareholders.
7) An impairment test was carried out on June 30, 2016 for the goodwill of YL and investments in BL,
appearing in the consolidated financial statements. The test indicated that:
- goodwill of YL was impaired by 20%;
- due to recent losses, the fair value of investment in BL has been reduced to Rs. 40 million.
No such impairment was required in previous years.
Required
Prepare, in a format suitable for inclusion in the annual report, a consolidated statement of profit or loss for
the year ended June 30, 2016.
[ICAP CFAP – 01 Practice Kit]

13. Step Acquisition (Associate to Subsidiary)
On 1 January Year 1, H purchased 25% of the equity of AS for Rs. 80 million. H then acquired additional 40%
of the equity of AS for Rs. 160 million on 30 June Year 1. At this date it was estimated that the fair value of the
original 25% shareholding in AS was Rs. 95 million.
During the year S did not issue any new shares or make any distribution to its shareholders.
The carrying value of the net assets of AS were as follows:

Rs. Million
At 1 January Year 1 260
At 30 June Year 1 300
H measures non-controlling interest at acquisition at fair value. This was estimated to be Rs.120m.
The financial year of H ends on 30 June.
Required
For the consolidated financial statements of H for the year to 30 June Year 1, state:
1) the total gain or profit attributable to the investment in AS for the year
2) total amount of goodwill arising with the acquisition
3) the amount of goodwill attributable to the NCI.

PRACTICE KIT
[ICAP Winter 2017 Q.2]

14. Shakir Limited (Disposal + JO)
The draft statements of financial position of Shakir Limited (SL), Mashkoor Limited (ML) and Baqir Limited
(BL) as at 30 June 2017 are as follows:
Particulars SL ML BL
Assets: ----------- Rs. in million -----------
Property, plant & equipment 16,500 5,600 11,000
Investment in ML – at cost 1,375 -- --
Investment in BL – at cost 7,500 -- --
Investment in joint operation – at cost -- -- 620
Stock-in-trade 2,414 1,460 1,750
Trade and other receivables 2,200 2,060 1,800
Cash and bank 1,600 800 1,900
31,589 9,920 17,070
Equity and liabilities:
Share capital (Rs. 10 per share) 20,000 2,200 10,000
Share premium 1,000 900 --
Retained earnings 6,189 3,200 6,000
Trade and other payables 4,400 3,620 1,070
31,589 9,920 17,070
(i) On 1 July 2014 SL acquired 80% shares of ML when ML’s retained earnings were Rs. 1,400 million, at a
cash consideration of Rs. 4,400 million. On acquisition date, fair value of net assets was equal to their
carrying value. 20% of the goodwill has been impaired till 30 June 2016.
(ii) Following information in respect of ML is available for the year ended 30 June 2017:
• On 1 July 2016 SL disposed of 20% holding in ML (leaving 60% with SL) for Rs. 1,188 million when
ML’s share price was Rs. 26 per share.
• On 30 June 2017 SL further disposed of 35% holding in ML (leaving 25% with SL) for Rs. 2,926 million
when ML’s share price was Rs. 36 per share.
• On both disposals, SL credited investment in ML with related cost and took the difference to profit
or loss account.
• ML made a net profit of Rs. 700 million during the year. No dividend was declared during the year.
• SL’s receivables include Rs. 200 million due from ML
(iii) On 1 July 2015 SL acquired 60% holding in BL which resulted in bargain purchase of Rs. 180 million.
On acquisition date, fair value of BL’s net assets was equal to their carrying value except a building
whose fair value was Rs. 200 million higher than its carrying value. Its remaining life at the date of
acquisition was 16 years.
(iv) SL’s closing stock includes goods sold by BL at 20% margin. These were invoiced at Rs. 50 million but
are included in SL’s stock at NRV of Rs. 44 million.
(v) BL has 40% share in a joint operation, a power generation unit. The following information relates to
activities of the joint operation for the year ended 30 June 2017:
• The unit was constructed at a cost of Rs. 1,550 million and commenced its operation from 1 July 2016.
It has a useful life of 10 years.
• Revenue from generation of electricity was Rs. 1,100 million. Power generation cost and operating
expenses paid amounted to Rs. 670 million and Rs. 130 million respectively.
All revenues and expenses of the operation have been settled during the year. However, entries in respect of
revenues/costs have not been made in the books of BL because they have been received/paid by the other
joint operator. SL and the other joint operator have agreed to settle the outstanding balance after year end.

PRACTICE KIT
(vi) SL follows a policy of valuing the non-controlling interest at its proportionate share of the fair value of
the subsidiary’s identifiable net assets.
(vii) No further shares have been issued by ML and BL since their acquisition by SL.
Required:
Prepare SL’s consolidated statement of financial position as on 30 June 2017 in accordance with the
[ICAP Summer 2016 Q.1]

15. Taimur Holding Limited (Disposal group + C2C Investment Increase + Purchase
Consideration)
The draft statements of financial position of Taimur Holding Limited (THL) and its subsidiary Zafar Foods
Limited (ZFL) as at 31 December 2015 are as follows:
THL ZFL
Rs. in million
Assets
Investments (including investment in ZFL) 1,420 10
Long term receivable 22 --
Current assets 2,142 1,636
4,065 2,381
Share capital (Rs. 10 each) 1,120 600
Retained earnings 1,066 442
Other reserves 102 137
Non-current liabilities 263 248
Current liabilities 1,514 954
4,065 2,381
The following further information is available:

(i) On 1 January 2015, THL acquired 60% shares of ZFL at following consideration:
▪ Payment of cash of Rs. 200 million. Rs. 100 million were paid at the date of acquisition and the
balance amount is payable on 31 December 2016.
▪ Issuance of 28.5 million of THL's shares. On the date of purchase, the market price of shares of THL
and ZFL were Rs. 11.50 and Rs. 16.50 respectively.
▪ Transfer of one of THL's freehold lands having carrying value and fair value of Rs. 46 million and
Rs. 54 million respectively on the date of transfer.
At the date of acquisition, retained earnings and other reserves were Rs. 299 million and Rs. 26 million
respectively whereas the fair values of the net assets were the same as their carrying amount except a piece of
freehold land whose fair value was assessed at Rs. 16 million above its carrying amount. Further, a contingent
liability of Rs. 18 million was disclosed in the financial statements of ZFL on acquisition date. THL's legal
adviser had at that time estimated that ZFL would be liable to pay Rs. 6 million to settle the claim.
An error had been made in recording transaction related to transfer of land due to which the land is still
appearing in THL's books whereas profit and loss account had been credited by Rs. 54 million.
(ii) On 31 December 2015, a further 20% shares were acquired in ZFL for a cash consideration of Rs. 260
million which was paid immediately.
(iii) The fair value of investment appearing in ZFL's financial statements as at 31 December 2015 was Rs. 15
million. These investments are recorded at their fair value.
(iv) Long term receivable represents a ten-year 9% loan given to CEO as per the terms of his employment.
The loan receivable is recorded at amortized cost. The board of directors in their meeting held in

PRACTICE KIT
December 2015 has approved a restructuring of the loan. Accordingly, the CEO is now required to pay
Rs. 8 million per annum for three years. The first such payment is to be made on 31 December 2016.
Current market interest rate and original effective interest rate were 10% and 8. 7% respectively.
(v) THL intends to dispose of one of its business segments. All criteria for classification of business segment
as 'held for sale' were met at year end on which date the carrying amount of the assets and liabilities of
the business segment were as follows:
Rs. in million
Property, plant and equipment 60
Current assets 25
Current liabilities 10
(vi) THL values non-controlling interest at its fair value.

(vii) Before acquisition of further shares as mentioned in para (ii), an impairment test was carried out on 31
December 2015 for the impairment of goodwill. The test indicated that recoverable amount of ZFL was
Rs. 1,210 million.
(viii) THL's cost of capital is 10%.
Required:
Prepare a consolidated statement of financial position for the THL Group for the year ended 31 December 2015

16. Alpha Industries Limited (Step Acquisition)
On October 2012, Alpha Industries Limited (AIL) held 15% and 35% equity in Beta (Private) Limited (BPL)
and Delta (Private) Limited (DPL) respectively. The following balances pertain to the three companies, as on
the above date.
AIL BPL DPL
Rs. in million
Share capital (Rs. 100 each) 100 60 50
Retained earnings 35 30 15
Other comprehensive income – fair value reserve related to BPL 6 -- --
Total equity 141 90 65
Non-current investments – BPL *1 (Cost Rs. 18 million) 20 -- --

Non-current investments – DPL *2 (Cost Rs. 40 million) 43 -- --
*1 recorded as available for sale
*2 recorded as investment in associate
On 1 April 2013, AIL acquired a further 55% equity in BPL when:

▪ the fair value of the net assets of BPL was Rs. 100 million which was equal to their carrying value; and
▪ the fair value of the 15% equity already held in BPL was Rs. 25 million.
The purchase consideration comprised of 150,000 shares in AIL which were issued on the date of acquisition
at their market value of Rs. 160 per share and Rs. 42 million payable in cash on 31 March 2014. AIL uses
discount rate of 12% for determining the present value of its future assets and liabilities.
Other relevant details are as follows:

(i) For the year ended 30 September 2013 the profits after tax of AIL, BPL and DPL were Rs. 58 million, Rs.
40 million and Rs. 30 million respectively.
(ii) AIL values non-controlling interest at the acquisition date at its fair value which was Rs. 32 million.
(iii) AIL sold goods at Rs. 65 million to BPL on 1 July 2013. The sales were invoiced at 30% above cost. 20%
of these goods remained unsold as on 30 September 2013.

PRACTICE KIT
(iv) DPL's sales to AIL amounted to Rs. 70 million. DPL earns a profit of 20% of sales value. On 30 September
2013, inventory of AIL included Rs. 20 million in respect of such goods.
(v) For the year ended 30 September 2012 AIL, BPL and DPL paid final cash dividend of 15%, 20%, and
12% respectively.
Required:
a) Compute the amount of goodwill, retained earnings and investment in associate as they would appear
in the consolidated statement of financial position of AIL as at 30 September 2013, in accordance with
IFRS. (Ignore taxation)
b) Describe how the investment in BPL and DPL may be accounted for and also compute the amount of
the investments as it would appear in the separate statement of financial position of AIL as at 30
September 2013, in accordance with IFRS.

17. Qudsia Limited (Investment in Associate + PPE IGT)
Qudsia Limited (QL) has investments in two companies as detailed below:
Manto Limited (ML)

▪ On 1 January 2010, QL acquired 40 million ordinary shares in ML, when its retained earnings were Rs. 150
million.
▪ The fair value of ML's net assets on the acquisition date was equal to their carrying amounts.
Hali Limited (HL)

▪ On 30 November 2012, QL acquired 16 million ordinary shares in HL, when its retained earnings stood at
Rs. 224 million.
▪ The purchase consideration was made up of:
- Rs. 190 million in cash, paid on acquisition; and
- 4 million shares in QL. At the date of acquisition, QL's shares were being traded at Rs. 15 per share but
the price had risen to Rs. 16 per share by the time the shares were issued on 1 January 2013.
▪ The fair value of the net assets of HL on the date of acquisition by QL was equal to their carrying amounts,
except a building whose fair value exceeded its carrying amount by Rs. 28 million. The building had a
remaining useful life of seven years on 30 November 2012.
The draft summarized statements of financial position of the three companies on 31 December 2012 are shown
below:
QL ML HL
---------Rs. in million---------
Assets
Property, plant and equipment 5,000 550 500
Investment in ML 630 -- --
Investment in HL 190 -- --
Current assets 5,480 400 350
11,300 950 850
Ordinary share capital (Rs. 10 each) 6,000 500 400
Retained earnings 2,900 100 240
Current liabilities 2,400 350 210
11,300 950 850
The following additional information is available:

(i) QL considers ML as a cash-generating unit (CGU). As on 31 December 2012, the recoverable amount of
the CGU was estimated at Rs. 700 million.
(ii) QL values the non-controlling interest at its proportionate share of the fair value of the subsidiary's net
identifiable assets.

PRACTICE KIT
(iii) On 1 October 2012, ML sold a machine to QL for Rs. 24 million. The machine had been purchased on 1
October 2010 for Rs. 26 million. The machine was originally assessed as having a useful life of ten years
and that estimate has not changed.
(iv) In December 2012, QL sold goods to HL at cost plus 30%. The amount invoiced was Rs. 52 million. These
goods remained unsold at year end and the invoiced amount was also paid subsequent to the year end.
Required:
Prepare a consolidated statement of financial position for QL as on 31 December 2012 in accordance with the
requirements of lnternational Financial Reporting Standards.

18. Tiger Limited (SOCI, SOCIE, Disposal, Discontinued Operation)
Following are the extracts from the draft financial statements of three companies for the year ended 30 June
2012:
INCOME STATEMENT
Tiger Limited Panther Limited Leopard Limited
(TL) (PL) (LL)
------------------Rs. in million-------------------
Revenue 6,760 568 426
Cost of sales (4,370) (416) (218)
Gross profit 2,390 152 208
Operating expenses (1,270) (54) (132)
Profit from operations 1,120 98 76
Investment income 730 -- 10
Profit before taxation 1,850 98 86
Income tax expense (400) (20) (17)
Profit for the year 1,450 78 69
STATEMENTS OF CHANGES IN EQUITY

Ordinary share capital
of Rs. 10 each Retained earnings
TL PL LL TL PL LL
---------------------------Rs. in million---------------------
----
As on 1 July 2011 10,000 800 600 2,380 270 70
Final dividend for the year ended 30 June -- -- -- (1,000) -- (60)
2011
Profit for the year -- -- -- 1,450 78 69
As on 30 June 2012 10,000 800 600 2,830 348 79

(i) Several years ago, TL acquired 64 million shares in PL for Rs. 1 ,000 million when PL's retained earnings
were Rs. 55 million. Up to 30 June 2011, cumulative impairment losses of Rs. 50 million had been
recognized in the consolidated financial statements, in respect of goodwill. On 31 December 2011, TL
disposed off its entire holding in PL for Rs. 1,300 million.
(ii) On 1 July 2011, 42 million shares of LL were acquired by TL for Rs. 550 million. An impairment review
at 30 June 2012 indicated that goodwill recognized on acquisition has been impaired by Rs. 7 million.
(iii) During the year, LL sold goods costing Rs. 50 million to TL at a mark-up of 20% on cost. 40% of these
goods remained unsold on 30 June 2012.
(iv) Investment income appearing in TL's separate income statement includes profit on sale of PL's shares
and dividend received from LL.

PRACTICE KIT
(v) TL values the non-controlling interest at its proportionate share of the fair value of the subsidiary's
identifiable net assets.
It may be assumed that profits of all companies had accrued evenly during the year.
Required:
Prepare TL's consolidated income statement and consolidated statement of changes in equity for the year
ended 30 June 2012 in accordance with the requirements of International Financial Reporting Standards.
(Ignore deferred tax implications)

19. Bee Limited (Acquisition + Part Disposal)
The following summarized statements of financial position pertain to Bee Limited and its investee companies
as at 31 December 2011:
Bee Limited Cee Limited Tee Limited
Rupees in million
ASSETS
Non-current assets
Property. plant and equipment 75,600 2,800 800
Investment in Cee Limited- at cost 3,900 - -
Investment in Tee Limited - at cost 300 - -
Current Assets
Stock in trade 24,100 1,700 700
Trade and other receivables 16,400 2,900 820
Cash and bank 800 700 -
121,100 8,100 2,320
EQUITY AND LIABILITIES

Equity
Ordinary share capital (Rs.10 each) 44,300 2,800 1,000
Retained earnings 15,800 1,200 900
Long term loan 36,400 - -
Current liabilities
Trade and other payables 24,600 4,100 300
Bank overdraft 120
121,100 8,100 2,320

1) Bee holds 252 million shares of Cee which were acquired in 2005 when the retained earnings of Cee
stood at Rs. 350 million. At the date of acquisition, the fair values of Cee's net assets were the same as
their carrying amounts with the exception of a legal claim having a fair value of Rs. 7 million which had
been disclosed in the financial statements as a contingent liability. The claim was settled on 30
November 2011, for the same amount.
2) Bee acquired 80% share capital of Tee several years ago for Rs. 1,200 million when Tee's retained
earnings stood at Rs. 100 million. On 1 October 2011, Bee sold 75% of its holding in Tee for Rs. 2,000
million. On the date of disposal, the fair value of remaining holding was Rs. 650 million.
3) During the year, Cee sold goods to Bee at cost plus 25%. The amount invoiced during the year amounted
to Rs. 32 million. 40% of these goods were held by Bee at year end. Bee has paid Rs. 20 million against
the invoiced amount, up to 31 December 2011.
4) At year end, an impairment review indicated that 10% of Cee's goodwill is required to be written off.
5) During the year ended 31 December 2011, Cee and Tee earned profits after tax of Rs. 250 million and
Rs. 200 million respectively. It may be assumed that the profits had accrued evenly throughout the year.

PRACTICE KIT
6) Bee follows a policy of valuing the non-controlling interest at its proportionate share of the fair value of
the subsidiary's identifiable net assets.
Required
Prepare the consolidated statement of financial position of Bee Limited as at 31 December 2011 in accordance
with the requirements of international Financial Reporting Standards.
Note:
• Ignore tax and comparative figures.
• Notes to the consolidated statement of 'financial position are not required.
• Show workings wherever necessary,

20. Oceana Global Limited (Step Acquisition + IGT)
The draft statements of financial position of Oceana Global Limited (OGL), and its subsidiary Rivera Global
Limited (RGL) as of March 31, 2011 are as follows:
OGL RGL
Rs. in million
Assets
Intangible assets 4 -
Investment in RGL (opening balance) 23 -
Investment in RGL (acquired during the year) 108 -
1,185 350
Equity and Liabilities
Share capital (Ordinary shares of Rs. 100 each) 300 100
Fair value reserve 3 -
853 180
Non-current liabilities 150 40
current liabilities 182 130
1,185 350
The details of OGL's investments in RGL are as under:

Face value of share Purchase consideration
Acquisition date acquired
Rs. In Million
July 1, 2009 10 20
October 1, 2010 45 108
Other information relevant to the preparation of the consolidated financial statements is as under:
1) On October 1, 2010 the fair value of RGL's assets was equal to their carrying value except for non-
depreciable land which had a fair value of Rs. 35 million as against the carrying value of Rs. 10
million.
2) On October 1, 2010 the fair value of RGL's shares that were acquired by OGL on July 1, 2009
amounted to Rs. 28 million.
3) RGL's retained earnings on October 1, 2010 amounted to Rs. 60 million.
4) Intangible assets represent amount paid to a consultant for rendering professional services for the
acquisition of 45% equity in RGL.
5) During February 2011, RGL sold goods costing Rs. 25 million to OGL at a price of Rs 30 million. 25%
of these goods were included in OGL's closing inventory and 50% of the amount was payable by OGL,
as of March 31, 2011.

PRACTICE KIT
6) OGL follows a policy of valuing non-controlling interest at its fair value. The fair value of non-
controlling interest in RGL, on the acquisition date, amounted to Rs. 70 million.
Required:
Prepare a consolidated statement of financial position for Oceana Global Limited as of March 31,
2011 in accordance with International Financial Reporting Standards.

21. Habib Limited (Step Acquisition + Full Disposal + IGT)
The statements of financial position of Habib Limited (HL). Faraz Limited (FL) and Momin Limited (ML) as
at June 30. 2009 are as follows:
HL FL ML
Rupees in million
Non-current assets 978 595 380
Property. plant and equipment 520 - -
Investments in FL - at cost 300 - -
Investments in ML - at cost
1,798 595 380
Current assets
Stocks in trade 210 105 125
Trade and other receivables 122 116 128
Cash and bank 20 38 37
352 259 290
Total assets 2,150 854 670

Equity
Ordinary share capital (Rs. 10 each) 800 360 100
Retained earnings 784 354 450
1,584 714 550
12% debentures 270 - -
Current liabilities
Short term loan 124 - -
Trade and other payables 172 140 120
296 140 120
Total equity and liabilities 2,150 854 670
Following additional information is also available:

1) HL acquired 60% shares of FL on January 1, 2003 for Rs. 400 million when the retained earnings of FL
stood at Rs. 250 million. On January 1, 2006, a further 20% shares in FL were acquired for Rs. 120 million.
FL’s retained earnings on the date of second acquisition were Rs. 400 million.
2) 70% shares of ML were acquired by HL for Rs. 300 million, on July 1, 2006 when ML’s retained earnings
stood at Rs. 260 million. On December 31, 2008, HL disposed off its entire holding in ML for Rs. 500
million. The disposal of shares has not yet been recorded in HL’s financial statements.
3) On January 1, 2009, FL purchased a machine for Rs. 20 million and immediately sold it to HL for Rs. 24
million. However, no payment has yet been made by HL. The estimated useful life of the machine is 4
years and HL charges depreciation on the straight line method.
4) During the year, HL sold finished goods to FL at cost plus 20%. The amount invoiced during the year
amounted to Rs. 75 million, 60% of these goods had been sold by FL till June 30. 2009.
5) During the year ended June 30. 2009. FL and ML earned profits of Rs. 10 million and Rs. 50 million
respectively. The profits had accrued evenly throughout the year.

PRACTICE KIT
6) An impairment review at year end indicated that 15% of the goodwill recognized on acquisition of FL
is required to be written off.
7) HL values the non-controlling interest at its proportionate share of the fair value of the subsidiary's
identifiable net assets.
Required:
Prepare the consolidated statement of financial position of HL as at June 30, 2009 in accordance with the
requirements of International Financial Reporting Standards. (Ignore current and deferred tax implications.)

PRACTICE KIT
Answers:
1. Hasan Limited (Basic Adj)

Hasan Limited
Consolidated statement of financial position as at 31 March 2015
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment (W1) 4,020
Goodwill (W4) 480
Software (W1) 1,440
Investments (65 + 210) 275 6,215
Current assets
Inventories (W2) 1,274
Trade receivables (524 + 328) 852
Cash and bank (20 + 55 cash in transit) 75
2,201
Total assets 8,416

Equity capital 2,000
Reserves
Share premium 2,000
Retained earnings (W3) 2,420
4,420
6,420
Non-controlling interest (W5) 350
Government grants (230 + 40) 270
Current liabilities
Trade payables (475 + 472) 947
Operating overdraft 27
Income tax liability (228 + 174) 402
1,376
Total equity and liabilities 8,416
Workings:
(W1) Property, plant and equipment
Rs.000
Balance from question – Hasan Limited 2,120
Balance from question – Shakeel Limited 1,990
Fair value adjustment on acquisition (see below) (120)
Over-depreciation re fair value adjustment year to 31 March 2015 30
4,020
A fair value of the leasehold based on the present value of the future rentals (receivable in advance)
would be the next (non-discounted) payment of the rental plus the final three years as an annuity at
10%:
Rs.000
PV of rental receipts: Rs.80,000 + (Rs.80,000 x 2.50) 280
Carrying value on acquisition is (400)
Fair value reduction of leasehold (120)

PRACTICE KIT
The depreciation of the leasehold in Shakeel Limited’s accounts would be Rs.100,000 per annum.
However, in the consolidated accounts it should be Rs.70,000 (Rs.280,000/4). This would require a
reduction in depreciation of Rs.30,000 in the consolidated accounts for the next four years.
Software:
Shakeel Consolidated
Limited’s figures
Difference
Accounts
Rs.000 Rs.000
Capitalized amount 2,400 2,400
Depreciation to 8 year
31 March 2014 (300) life (480) 5 year life
Value at date of acquisition 180 fair
2,100 1,920 value
adjustment
Depreciation to
31 March 2015 (300) (480) 180 additional
Amortization
Carrying value
31 March 2015 1,800 1,440
(W2) Inventories
Rs.000
Amounts given in the question (719 + 560) 1,279
Unrealized profit in inventories (25 x 25/125) (5)
1,274
(W3) Retained earnings
Rs.000
Retained profits of Shakeel Limited, 31 March 2015 1,955
Adjustments:
Excess charge for leasehold depreciation 30
Insufficient charge for Software amortization (180)
Unrealized profit in inventory (W2) (5)
Adjusted retained profits at 31 March 2015 1,800
Retained earnings of Shakeel Limited at 1 April 2014 2,200
Shakeel Limited: loss for the year (post-acquisition loss) (400)
Parent company share of post-acquisition loss (90%) (360)
Hasan Limited reserves at 31 March 2015 2,900
Goodwill impairment (120)
Consolidated retained profits at 31 March 2015 2420
(W4) Goodwill
Rs.000
At acquisition date
Shares of Shakeel Limited 1,500
Share premium of Shakeel Limited 500
Retained earnings of Shakeel Limited 2,200
Fair value adjustments:
Leasehold (W1) (120)
Software (W1) (180)
3,900
Acquired by Hasan Limited (90%) 3,510

PRACTICE KIT
Cost of investment 4,110

Goodwill at acquisition 600
Impairment 120
Goodwill at 31 March 2015 480
(W5) Non-controlling interests

Rs.000
Share capital of Shakeel Limited 1,500
Share premium of Shakeel Limited 500
Adjusted retained earnings of Shakeel Limited, 31 March 2015 (W3) 1,800
Fair value adjustments:
Leasehold (120)
Software (180)
Total net assets at 31 March 2015 3,500
Non-controlling interests (10%) 350
(W6) Elimination of current accounts:

Rs.000
Shakeel Limited’s current account with Hasan Limited per question 75
Deduct cash in transit regarding this balance (15)
Adjusted figure to cancel 60
(W7) Elimination of intra-group loan:

Rs.000
Investment in Hasan Limited’s books 200
Deduct repayment in transit (40)
Non-current liability in Shakeel Limited’s books 160
2. Golden Limited (Basic Adj)

Consolidated statement of financial position as on 31 December 2016
Rs. in million
Non-current Assets
Building (W-2) 2,011.50
Plant & machinery (W-2) 2,151.00
Current Assets
Current assets [2068+780–(112–62)–(24–15)–(50/12×3)] 2,776.50
6,939.00
Equity & liabilities
Share capital 980.00
Share premium 730.00
Consolidated retained earnings (W- 4) 3,239.90
Non-controlling interest (W-5) 241.60

Liabilities [600+1160–(50×3/12)] 1,747.50
6,939.00

PRACTICE KIT
W-1: Computation of goodwill

Issuance of shares (20×12) 240
Cash payment (87–15) 72
Total consideration paid 312
Add: FV of NCI (45 × 0.4 × 11) 198
Total consideration and FV of NCI 510
Less: FV of net assets acquired (W-3) (561)
Bargain purchase/Negative goodwill - charged to P & L (51)
W-2: Property, plant & equipment Building Plant & Machinery

2,155.00
GL & SL (1,600+500) (1,465+690)
Decrease in fair value of building (80.00) -
Reversal of gain on exchange [120–(240–130)] (10.00) -
Increase in depreciation on reversal of (1.50) (4.00)

exchange transaction (120×5%×3/12) (200–120) ×20%×3/12)
Reversal of depreciation on fair value

3.00 -
adjustment (80×5%×9/12)
2,011.50 2,151.00
W-3: Net Asset of SL on year end and on acquisition date 31-Dec-16 At acquisition
-------- Rs. in million --------
Share capital 450 450
Decrease in fair value of building (250–170) (80) (80)
Decrease in fair value of inventory (112–62) (50) (50)
Increase in provision for bad debts (24–15) (9) (9)
Reversal of depreciation on fair value adjustment
(80×5%×9/12) 3 -
674 561
Post-acquisition profit 113
W-4: Consolidated retained earnings Rs. in million

GL 3,150.00
Wrongly capitalization of acquisition related cost (15.00)

PRACTICE KIT
Parent's share in SL's post acquisition profit (113(W-3) ×60%) 67.80

Reversal of gain on exchange [120–(240–130)] (10.00)
Increase in depreciation on building due to reversal of exchange transaction
(120×5%×3/12) (1.50)
Increase in depreciation on plant & machinery on reversal of exchange
transaction [(200–120)×20%×3/12×60%] (2.40)
Negative goodwill on acquisition of SL (W-1) 51.00
3,239.90
W-5: Non-controlling interest

Fair value at acquisition (45×40%×11) 198.00
NCI's share in SL's post acquisition profit (113(W-3) ×40%) 45.20
Increase in depreciation on plant & machinery on reversal of exchange
transaction [(200–120)×20%×3/12×40%] (1.60)
241.60
3. Yasir Limited and Bilal Limited (Basic Adj)

Yasir Limited
Consolidated Statement of financial position as at 30 June 2016
Non-current Assets Rs. in million
Fixed assets [180 + 470 + (12 × 0.9)] 660.80
Goodwill (W-1) 190.35
851.15
Current assets
Stock in trade [160 + 150 – 4.8(Working: 32×0.15) – 4.6(Working: 20÷1.3×0.3)] 300.60
Other current assets (71 + 50) 121.00
Cash and bank (63 + 151 + 5.92) 219.92
641.52
Total assets 1,492.67
Share capital & Reserves

Retained earnings (W-3) 406.20
Non-controlling interest (W-4) 210.47
1,366.67
Liabilities
Creditors and other liabilities (75 + 51) 126.00
Total equity & liabilities 1,492.67
W-1: Computation of Goodwill and its impairment

Cash consideration (50 × 0.75 × 18) 675.00
Fair value of NCI (50 × 0.25 × 15) 187.50

PRACTICE KIT
862.50
Less: Net assets (W-2) (651.00)
Goodwill on acquisition date 211.50
Less: Impairment (10%) (21.15)
190.35
W-2: Net Asset of BL on year end and on acquisition date

30-Jun-16 At acquisition
-------- Rs. in million ---------
Share capital 500.00 500.00
Retained earnings 258.00 *139.00
Increase in fair value of building 12.00 12.00
Depreciation adjustment – building (12 x 5% x 2) (1.20)
Intercompany sales (32 x 0.15) (4.80)
764.00 651.00
Post-acquisition profit (764-651) * [258 – 168 – 11 + 60 (500 x
113.00
12%)]
W-3: Consolidated retained earnings

Rs. in million
YL as at June 30, 2016 (given) 340.00
Interest income/expense on loan (16 × 0.12) 1.92
Intercompany sales (20 ÷ 1.3 × 0.3) (4.62)
Parent’s share in BL’s post acquisition profit [113(W-2)×75%] 84.75
Impairment of goodwill (21.15 × 75%) (15.85)
406.20
W-4: Non-controlling interest

Fair value at acquisition (50 × 0.25 × 15) 187.50
NCI’s share in BL’s post acquisition profit [113 (W-2) × 25%] 28.25
Impairment of goodwill (21.15 × 25%) (5.28)
210.47

PRACTICE KIT
4. Jasmine Limited
Consolidated statement of financial position
As on 31 December 2017
Rs. in million
Property, plant and equipment [880+330–8{12–(12÷2×8÷12)}] 1,202.00
Intangible asset (W-1) 203.00
Current assets (640+345+30–25 (150×20÷120)–15(20×75%)–52) 923.00
2,328.00
Share capital (Rs. 10 each) 700.00
Share premium 240.00
Consolidated retained earnings (W-4) 708.25
Non-Controlling Interest (W-5) 187.75
1,836.00
Current liabilities (324+235–15(20×75%)–52) 492.00
2,328.00
W-1: Intangible asset
JL 40.00
SL 50.00
Goodwill (W-S) 105.00
Increase in FV of brand – not of amortization [15 - 3 (15 ÷5)] 12.00
Impairment of brand [(40 ÷ 5 x 4) – 28] 203.00
W-2: Computation of goodwill Rs. in million

Cash consideration (280 – 10) 270.00
Issuance of shares (10 × 24) 240.00
Fair value of NCI (20 × 25% × 36) 180.00
690.00
Fair value of net assets (W-3) (585.00)
Goodwill 105.00
W-3: Net assets of SL At acquisition At reporting

date date
-------- Rs. in million --------
Share capital 200.00 200.00
Retained earnings 370.00 410.00
(410 – 60 + 20)
Increase in fair value of brand (40 – 25) 15.00 15.00
Amortization of brand due to fair value adjustment (3.00)
(15÷5)

PRACTICE KIT
Impairment of brand (4.00)

Interest income (120 × 10% × 6 ÷ 12) 6.00
Unrealized gain on sale of machine (8.00)
585.00 616.00
Post-acquisition 31.00
W-4: Consolidated retained earnings Rs. in million

JL 720.00
Post-acquisition of SL [31 (W – 3) × 75%] 23.25
Charge off consulting fee (10.00)
Unrealized profit on closing stock (150 ÷ 120% x 20%) (25)
708.25
W-5: Non-controlling interest Rs. in million

At acquisition 180.00
Post-acquisition of SL [31(W-3) × 25%] 7.75
187.75
5. Anima Plc (Consolidation technique)

Consolidated statement of profit or loss for the year ended 30 June
20X9
£
Revenue (W2) 2,291,300
Cost of sales (W2) (1,238,125)
Gross profit 1,053,175
Operating expenses (W2) (263,980)
Profit from operations 789,195
Share of profits of associate (W6) 51,383
Profit before tax 840,578
Income tax expense (W2) (240,685)
Profit for the year 599,893
£
Profit attributable to:
Owners of Anima plc (Bal) 517,579
Non-controlling interest (W5) 82,314
599,893
Consolidated statement of financial position (extract)
Equity attributable to owners of Anima plc £

Ordinary share capital 4,000,000
Retained earnings (W7) 1,879,116
5,879,116

PRACTICE KIT
Non-controlling interest (W8) 2,112,600

Total equity 7,991,716
WORKINGS
(1) Group structure
(2) Consolidation schedule

Anima Orient Carnforth Adjustments Total
3/12
Revenue 1,410,500 870,300 160,000 (149,500) 2,291,300
Cost of sales
Per question (850,000) (470,300) (54,875) 149,500 (1,238,125)
PURP (W4) (9,750)
PURP (W4) (2,700)
Operating expenses
Per question (103,200) (136,000) (23,780) (263,980)
Fair value adj (dep) (W3) (1,000)
Tax (137,100) (79,200) (24,385) (240,685)
PAT 307,750 184,800 55,960 548,510
(3) Fair value adjustment

Additional fair value £320,000
Buildings £320,000 x 50% = £160,000
Additional depreciation charge in year £160,000 / 40 years x 3/12 months = £1,000
(4) Unrealized profit

Oxendale Orient %
207,000 149,500 115
(180,000) (130,000) (100)
27,000 19,500 15
Orient – £19,500 x ½ = £9,750

Oxendale – £27,000 x 1/3 = £9,000
Anima share of Oxendale PURP – £9,000 x 30% = £2,700

PRACTICE KIT
(5) Non-controlling interest

Orient Ltd (40% x £184,800 (W2)) = £73,920
Carnforth Ltd (15% x £55,960 (W2)) = £8,394
Non-controlling interest = £73,920 + £8,394 =
£82,314
(6) Share of profits of associate
£
Profit for the year 204,610
Anima share 30% 61,383
Less impairment for year (10,000)
51,383
(7) Consolidated retained earnings £
Anima plc – c/fwd. 1,560,000

Less PURP with Orient (W4) (9,750)
Less PURP with Oxendale (W4) (2,700)
Orient Ltd (60% x (580 – 195)) 231,000
Carnforth Ltd (85% x 55,960) (W2) 47,566
Oxendale Ltd ((30% x (340 – 130)) – 10 (impairment)) 53,000
1,879,116
(8) Non-controlling interest – SFP

£ £
Orient Ltd
FV of NCI at acquisition date 1,520,000
Share of post-acquisition reserves ((580 – 195) x 40%) 154,000
1,674,000
Carnforth Ltd
Net assets per question 2,605,000
Fair value adjustment (increase) 320,000
Less extra depreciation on FV adj (1,000)
2,924,000
NCI – 2,924,000 x 15% 438,600
2,112,600

PRACTICE KIT
6. Preston Plc (Consolidation technique)

(a) Consolidated statement of financial position as at 31 March 20X4
Assets £ £
Non-current assets

(660,700 + 635,300 + 24,000 – 1,000 (W1) – 3,000 (W7)) 1,316,000
Intangibles (101,300 + 144,475 (W2)) 245,775
Investment in joint venture (W6) 93,600
1,655,375
Current assets
Inventories (235,400 + 195,900 – 2,400 (W5)) 428,900
Trade and other receivables (174,900 + 78,800 –
50,000) 203,700
Cash and cash equivalents (23,700 + 11,900 + 45,600
10,000) 678,200
Total assets 2,333,575
Equity attributable to owners of Preston plc
Ordinary share capital 100,000
Retained earnings (W4) 1,099,550
1,324,550
Total equity 1,514,575
Current liabilities
Trade and other payables (151,200 + 101,800 – 40,000) 213,000
Taxation (85,000 + 80,000) 165,000
Deferred consideration 441,000
819,000
Total equity and liabilities 2,333,575
Workings
(1) Net assets – Longridge Ltd
Year end Acquisition Post acq
£ £ £
Share capital 500,000
Retained earnings
Per Q 312,100 206,700
Less intangible (72,000 + 18,000) (72,000) (90,000)
Fair value adj re PPE (120,000 – (92,000 x 24,000 24,000
48/46))
Dep thereon (24,000 x 2/48) (1,000) –
PPE PURP (W7) (3,000) –
760,100 640,700 119,400
(2) Goodwill – Longridge Ltd

£
Consideration transferred (250,000 + (441,000 – 41,000 (W4))) 650,000
Non-controlling interest at acquisition (640,700 (W1) x 25%) 160,175

PRACTICE KIT
810,175
Net assets at acquisition (W1) (640,700)
169,475
Impairment to date (25,000)
144,475
(3) Non-controlling interest – Longridge Ltd

£
Non-controlling interest at acquisition (W2) 160,175
Share of post-acquisition reserves (119,400 (W1) 25%) 29,850
190,025
(4) Retained earnings

£
Preston plc
Unwinding of discount on deferred consideration: 1,084,800
Two years (441,000 – (441,000 / 1.052)) (41,000)
Less PURP (Longridge Ltd) (W5) (2,400)
Longridge Ltd (119,400 (W1) x 75%) 89,550
Chipping Ltd (W6) 3,600
Less impairments to date (25,000 + 10,000) (35,000)
1,099,550
(5) Inventory PURPs

Chipping Ltd Longridge
Ltd
% £ £
SP 100 15,000 12,000
Cost (80) (12,000) (9,600)
GP 20 3,000 2,400
(6) Investment in joint venture – Chipping Ltd £ £

Cost 100,000
Add post-acquisition profits
Less PURP (W5) 12,000
(3,000)
9,000
X 40% 3,600
103,600
Less impairment to date (10,000)
93,600
(7) PPE PURP – Longridge Ltd £

Asset now in Preston plc's books at 15,000 x 1/3 5,000
Asset would have been in Longridge Ltd's books at 10,000 x 1/5 (2,000)
3,000
(b) Goodwill journal entries

£ £

PRACTICE KIT
DEBIT Intangibles – goodwill 39,160

DEBIT Share capital 320,000
DEBIT Retained earnings 112,300
CREDIT Investments 385,000
CREDIT Non-controlling interest (320,000 + 112,300) x 20% 86,460
7. Bath Ltd (Control in stages – previous holding a simple investment)

Journal entry
£'000 £'000
DEBIT Investment in Bath Ltd (250,000 – 230,000) 20
DEBIT Other comprehensive income and equity reserve 130
CREDIT Profit or loss 150
To recognize the gain on the deemed disposal of the shareholding in Bath Ltd existing immediately
before control being obtained.
Calculation of goodwill in respect of 70% (5% + 65%) holding in Bath Ltd:

£'000
Consideration transferred 3,900
Non-controlling interest (30% x £4m) 1,200
Acquisition-date fair value of previously held equity 250
5,350
Net assets acquired (4,000)
Goodwill 1,350
8. Good (Control in stages – no previous significant influence)

(a) Goodwill (at date control obtained)
$m $m
Consideration transferred 480
NCI (20% x 750) 150
Fair value of previously held equity interest ($480m x 20/60) 160
Fair value of identifiable assets acquired and liabilities
assumed
Share capital
Retained earnings
300
450
(750)
40
(b) Profit on derecognition of investment
$m
Fair value at date control obtained (see part (a)) 160
Cost (120)
40

PRACTICE KIT
9. Santander (Acquisitions that do not result in a change of control)

(a) The goodwill included in the statement of financial position at 31 December 20X8 is that
goodwill calculated on the initial acquisition in June 20X6:
£'000
Consideration (£760,000 + (100,000  £2.50)) 1,010
Non-controlling interest (30%  £850,000) 255
1,265
Net assets of acquiree (850)
Goodwill 415
(b) The adjustment required is based on the change in the non-controlling interest at the acquisition
date:
£
NCI on 31 December 20X8 based on old interest (30%  £970,000) 291,000
NCI on 31 December 20X8 based on new interest (20%  £970,000) 194,000
Adjustment required 97,000
Therefore:
DEBIT Non-controlling interest 97,000
DEBIT Shareholders' equity (bal fig) 8,000
CREDIT Cash 105,000
10. Express (Part disposal subsidiary to subsidiary)

£ £
Proceeds 350,000
Less amounts recognized before disposal
Net assets of Westville (£100,000 + £215,000 + (1/2  £24,000) – 317,000
£10,000)
Goodwill (£280,000 + £67,000) – (£100,000 + £188,000) 59,000
NCI at disposal
Share of net assets (20%  £317,000) (63,400)
Goodwill on acquisition (£67,000 – (20%  £288,000)) (9,400)
(303,200)
Profit on disposal 46,800
11. Streatham (All types of disposal)

(a) Complete disposal at year end (80% to 0%)
Consolidated statement of financial position as it 30 September 20x8
Streatham Balham Adjustment 1 Adjustment 2 Disposal Consolidated
€‘000 €‘000 €‘000 €‘000 €‘000 €‘000
Non-current
Assets 360 270 (270) 360
Investment 324 (324)
Goodwill 36 (36)
Current (370)
Assets 370 370 650 1,020
1380
Share 540

PRACTICE KIT
Capital 540 180 (180) 740

Reverse 414 360 (180) (36) 182 -
NCL 72 36 (108)
Current
liabilities 100 100 (100) 100
1,380
Consolidated statement of profit or loss for the year ended 30 September 20x8
Adjustment
Streatham Balham Adjustment 1 Disposal Consolidated
2
€‘000 €‘000 €‘000 €‘000 €‘000 €‘000
Profit before
Tax 153 126 279
profit on
Disposal 182 182
Tax (45) (36) (81)
108 90 380
Owners of
parent 108 90 (18) 182 362
NCL 18 18
380
WORKING €‘000
(1) Goodwill 324
Consideration transferred 72
NCL:20%x(180+180) 396
(360)
Net assets (180+180) 36
Consideration Adjustment journal €‘000 €‘000

DEBIT goodwill 36
DEBIT share capital 180
DEBIT reverse 180
CREDIT investment 324
CREDIT non-controlling-interest 72
To recognize the acquisition and related goodwill and non-controlling interest
(2) Allocate profits between acquisition date and disposal date to NCI
€
Post-acquisition profits (360 – 180) 180,000
NCI share (20%) 36,000
Of these, €18,000(90,000x20%) relate to the current year.
Consolidation adjustment journal (SOFP) €’000 €’000

DEBIT Reserves 36
CREDIT Non-controlling interest 36
To allocate the NCI share of post-acquisition profits.
In addition, 20% of the profits of Balham Co arising in the year are allocated to the NCI:
Consolidation adjustment journal (SPL) €’000 €’000
DEBIT Profits attributable to owners of parent 18

PRACTICE KIT
CREDIT Non-controlling interest in profit 18

To allocate the NCI share of post-acquisition profits in the current year.
(3) Profit on disposal of Balham Co

€’000 €’000
Fair value of consideration received 650
Less: net assets at disposal 540
Goodwill 36
NCI (540 x 20%) (108)
(468)
182
Consolidation adjustment journal (SPL) €’000 €’000

DEBIT Cash 650
CREDIT NCI 108
DEBIT Disposal date liabilities of Balham 100
CREDIT Goodwill 36
CREDIT Disposal date current assets of Balham 370
CREDIT Disposal date non-current assets of
270
Balham
CREDIT Reserves 182
To recognize the group gain on disposal of Balham Co.
(b) Partial disposal: subsidiary to associate (80% to 40%)

Consolidated statement of financial position as at 30 September 20x8
Adjustment Adjustment
Streatham Balham 1 2 Disposal Consolidated
(part(a)) (part(a))
€‘000 €‘000 €‘000 €‘000 €‘000 €‘000
Non-current assets 360 270 630
Investment 324 (324)
Goodwill 36 36
Current assets 370 370 160 900
1,566
Share capital 540 180 (180) 540
Reserves 414 360 (180) (36) 52 610
NCI 72 36 108 216
Current liabilities 100 100 200
1,566
Consolidated statement of profit or loss for the year ended 30 September 20x8
Adjustment Adjustment
Streatham Balham 1 2 Disposal Consolidated
(part(a)) (part(a))
€‘000 €‘000 €‘000 €‘000 €‘000 €‘000
Profit before tax 153 126 279
Profit on disposal -
Tax (45) (36) (81)
108 90 198
Owners of parent 108 90 (18) 180

PRACTICE KIT
NCI 18 18
198
Working: Disposal
Adjustment is made to equity as control is not lost. €’000
NCI before disposal 80% (360 + 180) 432
NCI after disposal 60% (360 +180) (324)
Required adjustment 108
Consolidation adjustment journal (SOFP) €’000 €’000

DEBIT Current assets (cash) 160
CREDIT NCI 108
CREDIT Reserves 52
(c) Partial dsposal: subsidiary to associate (80% to 40%)

(1) Profit on disposal €’000 €’000
Fiar value of consideration recevied 340
Fair value of 40% investment retianed 250
Less: Net assets when control lost
517.5
(540 – (90 x 3/12))
Goodwill (part (a)) 36
NCI (517.5 x 20%) (103.5)
(450)
140
(2) Group reserves
Balham
Streatham
Balham 40%
reserves
€’000 reserve
€’000
€’000
At date of disposal 414
Group profit on disposal (W1) 140
Balham: share of post-acquisition
Earnings (157.5 x 80%) 126
Balham: share of post-acquisition
Earnings (22.5 x 40%) 9
689
At date of disposal (360 – (90 x 3/12))/per question 337.5 360.0
Retained earnings at acquisition/ on disposal (180.0) (337.5)
157.5 22.5
(3) Investment in associate

€’000
Fair balue at date control lost (new ‘cost’) 250
Share of post-acquisition reseves (90 x 3/12 x 40%) 9
259
(d) Partial disposal: subsidiary to financial asset (80% to 40%)
(1) Profit on disposal – as in part ( c )
(2) Group reserves

€’000
Streatham Co’s reserves 414
Group profit on disposal (W1) 140
Balham: share of post-acquisition reserves (157.5 (see below) x 80%) 126
680

PRACTICE KIT
Balham
€’000
At date of disposal (360 – (90 x 3/12)) 337.5
Reserves at acquisition (180)
157.5
(3) Retained investment – at €250,000 fair value
12. Golden Limited (SOPL & Impairment in Associate)

Golden Limited
Consolidated statement of profit or loss for the year ended June 30, 2016
Rs. in million
Sales (875 + 350 - 40) 1,185.00
Cost of sales (567 + 206 - 33.6 (W1)) (739.40)
Gross profit 445.60
Selling expenses (33 + 11) (44.00)
Administrative expenses (63 + 40) (103.00)
Interest expenses (30 + 22) (52.00)
Other income (65 - 36) [20 x Rs. 2 x 90%) 29.00
Impairment losses
Goodwill (W2) (9.18)
Investment in associates (W3) (25.80)
Share of loss from associates [(Rs. 82 x 40%)+0.6] (33.40)
Profit before tax 207.22
Income tax expense (73 + 15) (88.00)
Profit for the year 119.22
Attributable to:
Ordinary shareholders of parent 114.26
Non-controlling interest (W4) 4.96
119.22
W1: Adjustment in cost of sales Rs. in million

Intra-group purchases (40.00)
Additional depreciation on machines 4.00
Unrealized profit in inventories 2.40
(33.60)
W-2: Goodwill Rs. in Rs. in million

million
Shares issued (18 x 4/5 x Rs. 20) 288.00
Less: Net assets acquired:
Share capital 200
Pre-acquisition reserves 24
Fair value adjustment (22 + 20 + 3) 45
269
90% 242.10
Goodwill 45.90
20% Impairment in goodwill 9.18

PRACTICE KIT
W3: Impairment in the value of investment in associates Rs. in Rs. in million

million
Cash paid (6 x 12) 72.00
Less: Post-acquisition losses:
Reserves on acquisition 40
Reserves at June 30, 2016 (108-82) 26
(14)
% holding 40% (5.60)
Elimination of unrealized gain to the extent of GL's share
(Rs. 11.5 x 0.15 / 1.15 x 40%) (0.60)
65.80
Fair value as per impairment testing 40.00
Impairment losses 25.80
W4: Non-controlling interests
Profit of YL 56.00
Less: Additional depreciation (4.00)
Unrealized profit in inventories (2.40)
49.60
Non-controlling interest % 10%
4.96
13. Step Acquisition (Associate to Subsidiary)

1) Total gain or profit attributable to the investment in AS
The profits of AS since the investment was acquired (all retained) are Rs. 40 million (= Rs. 300m
– Rs. 260m). During this period, H held 25% of the equity of AS and it is assumed that AS is an
associate. Profits attributable to H for the year are therefore Rs. 10 million (= 25% x Rs. 40
million).
Description Rs.in million

Initial investment in associate at cost 80
Share of post-investment retained profits 10
90
Fair value of investment at 30 Jun 95
Gain recognized when step acquisition occurs 5
The total gain/profit recognized for the year from the investment in AS is therefore Rs. 10
million + Rs. 5 million = Rs. 15 million.
2) Total goodwill on acquisition

Rs. in million
Fair value of shares that gave control (40%) 160
Fair value of previous investment (25%) 95
255
Fair value of NCI at acquisition 120
375
Net assets of AS at 30 June 300
Total goodwill 75
3) Goodwill attributable to NCI

Rs. in million

PRACTICE KIT
Value of investment in AS (35% x 300) 105

Goodwill attributable to NCI (balancing figure) 15
Total NCI 120
14. Shakir Limited (Disposal + JO)

Consolidated Statement of Financial Position
As on 30 June 2017
Rs. in million
Assets:
Property, plant & equipment (W- 28,233.0
1)
Investment in ML (W- 1,980.0
5)
Stock-in-trade [2,414 + 1,750 – 4(W- 4,160.0
7)]
Trade & other receivables [2,200+1,800+120(W-8) 4,120.0
]
Cash and bank (1,600 + 3,500.0
1,900)
41,993.0
Equity & Liabilities
Share capital 20,000.0
Group reserves (W- 10,031.4
2)
Non-controlling interest (16,229 (W-7) × 6,491.6
40%)
Trade and other payables [4,400 + 5,470.0
1,070]
41,993.0
W-1: Property plant & Equipment: Rs. in million

SL 16,500.0
BL 11,000.0
Power generation plant [620 – 62 558.0
(620÷10)]
Fair value adjustment [200 – 25 (200 × 2 ÷ 175.0
16)]
28,233.0
W-2 : Group reserves

SL’s retained earnings 6,189.0
SL’s Share premium 1000.0
Impairment of ML’s goodwill [800 (W-4) × (160.0)
20%]
Post-acquisition profit of ML
▪ Till last year [{5,600 – 4,500}(W-3) × 880.0
80%]
▪ For the year [700 × 420.0
60%]
Equity adjustment on sale of 20% shares of ML [1,188 – (5,600 (W-3) × 68.0
20%)]

PRACTICE KIT
Gain on further 35% disposal 486.0

(W-5)
Reversal of gain on disposal of ML (1,089.0)
(W-6)
Post-acquisition profit – BL [3,429(W-7) × 2,057.4
60%]
Bargain purchase 180.0
10,031.4
W- 3: Net Assets of ML At reporting At 1 July At acquisition

30.6.2017 2016
------------------ Rs. in million ------------------
Share capital 2,200.0 2,200.0 2,200.0
Share Premium 900.0 900.0 900.0
Retained Earnings 3,200.0 2,500.0 1,400.0
6,300.0 5,600.0 4,500.0
W-4: Computation of Goodwill on acquisition of ML Rs. in million

Cash consideration 4,400.0
Less: Net assets acquired (3,600.0)
[4,500(W-3)×80%]
Goodwill 800.0
W-5: Gain on part disposal of ML with losing control Rs. in million

Consideration received 2,926.0
Fair value of residual investment [220×25%×36] 1,980.0
Net assets derecognized [6,300(W-3)×60%] 3,780.0
Goodwill derecognized (800–160) 640.0
Net assets sold (4,420.0)
Gain on disposal 486.0
W-6: Gain on sale of ML's shares in SL's books

20% disposal [1,188 – (4,400 × 20÷80)] 88.0
35% disposal [2,926 – (4,400 × 35÷80)] 1,001.0
1,089.0
W-7: Net assets of BL At reporting At acquisition

--------- Rs. in million ---------
Share capital 10,000.0 10,000.0
Retained earnings 6,000.0 (Bal.) 2,600.0
Increase in fair value of building 175.0 200.0
(200×14÷16)
Share of profit from joint operation 58.0 --
(W-8)
Unrealized profit of BL in SL's closing stock [44– (4.0) --
(50×80%)]
16,229.0 12,800.0
(7,500+180)÷0.6

PRACTICE KIT
Post-acquisition profit 3,429.0
W-8: Joint operation

Receivable from Joint operator (1100–670–130 ) × 120.0
40%
Depreciation expense (62.0)
BL’s share of profit of joint operation 58.0
15. Taimur Holding Limited (Disposal group + C2C Investment Increase + Purchase
Consideration)
As at 31 December 2015
Non-current Assets Rs. in million
Property plant & equipment (481 + 735 + 16 - 46 - 1,126.00
60)
Goodwill [25.39 (W-1) - 9.39 (W- 16.00
2)]
Investments 610.61
(W-3)
Long term receivable [22- 1.64 (W- 20.36
4)]
Total non-current assets 1,772.97
Current Assets
Disposal group held for sale (60 + 25 - 20 (W - 65.00
5))
Other current assets (2,142 + 1,636 - 3,753.00
25)
Share capital & Reserves

Retained earnings 1,081.53
(W-6)
Other reserves 156.52
(W-7)
Non-controlling interest 247.92

(W-8)
Non-current liabilities (263 + 511.00

248)
Current liabilities
Current liabilities associated with disposal group 10.00
Other current liabilities 514 + 954 - 10 2 464.00
+ 6)
Total equity and liabilities 5,590.97

PRACTICE KIT
Workings:
W-1 : Goodwill on acquisition of ZFL Rs. in million
Consideration given and fair value of NCI:
Cash 100.00
Deferred consideration [100 / (1.10)2] 82.64
Issuance of shares (28.5 x 11.5) 327.75
Fair value of land 54.00
Fair value of non-controlling interest (24 x 16.5) 396.00
960.39
Less: Fair value of net assets acquired
Share capital 600
Retained earnings 299
Other reserves 26
Contingent liability (6)
Increase in FV of land 16
935
Goodwill 25.39
W-2 : Impairment of goodwill Rs. in million

Net assets at year end – Given 1,179.00
Contingent liability (6.00)
Increase in fair value of ZFL's investment 5.00
Increase in fair value of land 16.00
Goodwill 25.39
1,219.39
Recoverable amount as given 1,210.00
Impairment loss (9.39)
W-3: Investments Rs. in million

THL (1420 - 564.39- 595.61
260)
ZFL 10.00
Increase in fair value of ZFL 's investment 5.00
610.61
W-4: Long term receivable Rs. in million

Carrying value 22.00
Present value of future cash flows (8 x (20.36)
2.5449)
Impairment to be recognized 1.64
W-5: Disposal group Rs. in million

Net assets of disposal group (60 + 25 - 75
10)
Less: Estimated fair value less cost to sell (55)
Impairment loss 20
W-6: Retained earnings Rs. in million

THL (given) 1,066.00

PRACTICE KIT
Transfer of land wrongly credited in P & L (46.00)

Impairment of goodwill (9.39 x (5.63)
0.6)
Impairment of Iong term receivables (1.64)
(W-4)
Impairment loss on disposal group (20.00)
(W-5)
Increase in fair value of ZFL's investment [(15 - 10) x 3.00
0.6]
Post acquisition reserves (ZFL) [(442 - 299) x 85.80
0.6)]
1,081.53
W- 7: Other reserves Rs. in million

THL (given) 102.00
ZFL - post acquisition (137 - 26) x 0.6 66.60
Adjustment to parent's equity on acquisition of additional
20% of ZFL [(260- 247.92 (12.08)
(W-8)]
156.52

Fair value at acquisition (24 x 16.5) 396.00
Post acquisition of retained earnings [(442 - 299) x 0.4] 57.20
Post acquisition of other reserves [(137 - 26) x 0.4] 44.40
Increase in fair value of ZFL investment [(15 - 10) x 40%) 2.00
Impairment of goodwill (9.39 x 0.4) (3.76)
NCI as at 31-12-15 before acquisition of further shares 495.84
Less: 20% portion sold (495.84 / 40 x 20) 247.92
Balance as at 31-12-15 247.92

PRACTICE KIT
16. Alpha Industries Limited (Step Acquisition)

(a) Alpha Industries Limited
Extracts of consolidated statement of financial position as of 30 September 2013
1 Goodwill Rs. in
million
Purchase consideration
- AIL shares (150,000 x 160) 24.00
- Cash payable on 31 March 2014 (42/1.12) 37.50
- Acquisition date fair value of 15% holding 25.00
86.50
NCI at fair value at the acquisition date 32.00
Net assets acquired (100.00)
18.50
2 Consolidated retained earnings
Profit - AIL:
AIL - Retained earnings balance at 30 September 2012 35.00
AIL - profit for the year 58.00
Dividend paid by AIL for the year ended 30 Sept. 2012 (100*15%) (15.00)
Profit on deemed disposal of 15% equity in BPL (25-20) 5.00
Other comprehensive income transferred to retained earnings 6.00
Finance cost on deferred cash consideration [37.5-(1.12)0.5-37.5] (2.19)
Unearned profit on inter-co. stock held by BPL [(65*20%)/1.3*0.3] (3.00)
83.81
Post-acquisition profit from the subsidiary (BPL) Apr-Sept 2013:
Profit for the year ended 30-9-2013 40.00
Net assets as of 1-4-2013 100.00
Dividend paid for the year ended 30-9-2012 (60*20%) 12.00
Net assets as of 30-9-2012 (90.00)
Pre-acquisition profit (October 2012 - March 2013) 22.00
Post acquisition profit share [(40-22) x70%] 18.00 12.60
Profit from the associate – DPL
Profit for the year ended 30 September 2013 (30x35%) 10.50
Unearned profit on inter-co. stock purchased from DPL (20x0.2x35%) (1.40) 9.10
105.51
3 Investment in associate - DPL
Carrying value as of 30-9-2012 43.00
Dividend received from DPL for the year ended 30-9-2012 (50x12%)x35% (2.10)
Share of profit for the year ended 30-9-2013 (10.5-1.4) 9.10
50.00
(b) Separate statement of financial position as at 30 September 2013

According to IAS 27, when an entity prepares separate financial statements, it shall account for investments
in subsidiaries, joint ventures and associates either:
o at cost, or
o at fair value in accordance with IFRS 9.
The entity shall apply same accounting for each category of investments.
Since fair value as of 30 September 2013 for the investments in BPL and DPL is not available, these
investments can be valued at cost as under:
Investments at cost Rs. in million
- Beta (Private) Limited - subsidiary 18+(0.150x 79.50
160)+(42/1.12)
- Delta (Private) Limited – associate 40.00
119.50

PRACTICE KIT
17. Qudsia Limited (Investment in Associate + PPE IGT)

ASSETS Rs. in million
Non-current assets
Property, plant and equipment 5,546.90
W.1
Goodwill W.2 [110-(37.5 x 80.00
80%)]
Investment in associates 251.47
W.3
5,878.37
Current assets (5,480 + 5,880.00
400)
11,758.37
Equity attributable to owners of QL
Ordinary shares capital 6,000.00
Shares to be issued (purchase consideration payable) 60.00
(4x15)
Retained earnings W 2,828.99
.4
8,888.99
Non-controlling interest [(500+100- 119.38
3.1)x20%]
9,008.37
Current liabilities (2,400 + 2,750.00
350)
11,758.37
W .1 Property, plant and equipment

QL and ML (5,000 + 5,550.00
550)
Unrealized gain on purchase of the machine from ML
- Unrealized gain as on 01-10-2012 [24 – (26/10 x (3.2)
8)]
- Realized gain for 1-10-2012 to 31-12-2012 [3.2 x 3/12 x 0.1
1/8]
Unrealized gain on 31-12-2012 (3.10)
5,546.90
W .2 Goodwill in ML and its impairment

Goodwill at the date of acquisition [630 - (80% x (500 + 110.00
150)]
Goodwill impairment
Carrying value of ML's net assets on 31-12-2012 (950- 600.00
350)
Gross-up of goodwill in ML (CGU) (110 / 137.50
80%)
737.50
Estimated recoverable amount of ML on 31-12-2012 (700.00)
Total impairment 37.50

PRACTICE KIT
W .3 Investment in associates (HL)

Cost of investment [190 + (4 x 250.00
15)]
HL's post acquisition profits [(240 - 224) x 6.40
40%]
Additional depreciation on fair value of HL's building exceeding its carrying
amount [(28/7x 1/12) x (0.13)
40%]
Unrealized profit on inventories sold to HL [(52 x 30/130) x (4.80)
40%]
251.47
W.4 Retained earnings QL
QL balance of retained earnings 2,900.00
Subsidiary ML:
ML post acquisition loss [(100-150) x (40.00)
0.8]
ML goodwill impairment W.2 (37 .5 x (30.00)
80%)
Unrealized gain on purchase of the machine from ML W.1 (3.1 x (2.48)
80%)
Associate HL:
HL post acquisition profit 6.40
W.3
QL's share of additional depreciation on fair value
of HL's building exceeding its carrying amount (0.13)
W.3
Unrealized profit on inventories sold to HL (4.80)
W.3
2,828.99
18. Tiger Limited (SOCI, SOCIE, Disposal, Discontinued Operation)

Consolidated Income Statement
2012
Rs. in millions
Revenue [6,760 + 426- (50 x 7,126
1.2)]
Cost of sales [4,370 + 218-(50 x 1.2) + (50 x 40% x (4,532)
20%)
Gross Profit 2,594
Operating expenses (1,270+ 132 (1,409)
+7)
Profit from operations 1,185
Investment income 398
(W.1)
Profit before taxation 1,583
Income tax expense ( 400 + 1 7) (417)
Profit for the year from the continuing operations 1,166
Profit for the year from the discontinued operations 186
1,352
Attributable to:
Equity attributable to owners of the parent (balancing) 1,342

PRACTICE KIT
Non-controlling interest (W- 10

3)
1,352
Tiger Limited
Consolidated Statement of Changes in Equity
Attributable to equity shareholders of
Tiger Limited Non-Controlling Total
Share Retained Interest
Capital Earnings Total
---------------------------------Rs. in million---------------------------------
Balance as on 1 July 2012 10,000 2,502 12,502 214 12,716
(W4) (270+800)x20%
Dividend paid for the year 2012 -- (1,000) (1,000) (1,000)
Profit for the year -- 1,342 1,342 10 1,352

(W3)
Purchase of subsidiary -- -- -- 201 201
(600+70)x30%
Disposal of a subsidiary -- (153) (153) (222) (375)
(W5) (W6)
Balance as on 30 June 2012 10,000 2,691 12,691 203 12,894
W-1: Investment income Rs. in million

Investment income of TL 730
Less: Profit on disposal of PL (1,300 - (300)
1,000)
Less: Share of LL's ordinary dividend (60 x (42)
70%)
Add: Investment income of LL 10
398
W-2: Profit from discontinued operations Rs. in million

Profit for the year (Rs. 78 x 39
6/12)
Add: Profit on disposal of PL (W- 147
2.1)
186
W-2.1 : Profit on disposal of interest in Panther Limited Rs. in million

Net assets as on 30 June 2011 1,070
(800+270)
Add: Profit up to 31 Dec.2011 (Rs. 78 x 39
6/12)
Carrying value of net assets at disposal 1,109
Add: Goodwill (W- 266
2.2)
Total assets disposed off 1,375
Less: Attributable to non-controlling interest (1,109 x (222)
20%)
1,153
Less: Sale proceeds 1,300

PRACTICE KIT
Profit on disposal 147
W-2.2 : Goodwill of Panther Limited Rs. in million

Cost of investment 1,000
Less: Net assets acquired [(800+ 55) x (684)
80%]
Goodwill on the date of acquisition 316
Less: Impairment to date of disposal (50)
266
W-3: Profit for the year - non-controlling interest Rs. in million

PL (Rs. 78 x 6/12 x 8
20%)
LL (Rs. 69 x 21
30%)
Less: Dividend received by NCI of LL (60 x (18)
30%)
Less: Unrealized profit in inventories (50 x 40% x 20% x (1)
30%)
10
W-4: Consolidated retained earnings as on 01 July 2011 Rs. in million

TL 2,380
Post-acquisition profit of PL [80% x (270 - 172
55)]
Goodwill impairment to date of disposal - PL (50)
2,502
W-5: Disposal of Subsidiary Rs. in million

Post acquisition profit up to prior years [80% x (270 - 172
55)]
Profit of the year (Rs. 78 x 6/12 x 31
80%)
Goodwill impairment to date of disposal (50)
153
W-6: Total share of NCI in PL Rs. in million

Post acquisition profits up to prior years [(270 + 800) 214
x20%]
Profit of the year 8
(W3)
222
19. Bee Limited (Acquisition + Part Disposal)

Bee Limited
As at 31 December 2011
ASSETS Workings Rs. in

million
Non-current assets
Property, plant and equipment (75,600 + 2,800) 78,400.00

PRACTICE KIT
Investment in associates (650 + 10 (W-3)) 660.00

Goodwill 1 964.80
Current assets
Stocks in trade (24,100+1,700) - 2.56) 25,797.44
Trade debts [(16,400 + 2 900) - 12)1 19 288.00
Cash and bank (800+700) 1,500.00
126,610.24

Equity attributable to parent
Ordinary share capital (Rs.10 each) 44,300.00
Retained earnings 3 16 822.50
61,122.50
Non-controlling interest [(2800+ 1200) x 10% - 10% of 2.56) 399.74
61,522.24
Long term loan 36,400.00
Current liabilities
Trade and other payables [(24,600 + 4, 100) - 12] 28 688.00
WORKINGS
Working 1: Goodwill Cee Tee
Rs. In million
Consideration transferred 9,900.00 1,200.00
Cash (Tee: Rs. 300 ÷ 0.25) 7.00
Contingent liability (at fair value) 3,907.00 1,200.00
Less: Net assets acquired

Cee (90% x (2800 + 350) (2,835.00)
Tee (80% x (1,000 + 100) (880.00)
Goodwill at acquisition 1,072.00 320.00
Less: Impairment in the value of goodwill Adjusted on
disposal of 75% investment in Tee (W-2) (107.20) (320.00)
964.80 -
Working 2: Group share on disposal of shares of Tee

Consideration received 2,000.00
Fair value of 25% investment retained 650.00
Less: Share of carrying value when control lost
Net assets (80% x (1,900 - (Rs. 200 x 3/12)) (1,480.00)
Goodwill written off(W-1) (320.00)
850.00
Working 3: Consolidated Retained earnings Rs. in

million
Bee 15,800.00
Reversal of Gain on sale of investment in Tee
(recorded in parent's book) (2 000 - [I 200x75%) (1,100.00)

PRACTICE KIT
Group profit on disposal (W -2) 850.00

Cee ([1,200-350 x 90%) 765.00
Tee ([900-100 x 80%) 640.00
Less: Profit after control lost (200 x 3/12 x 80%)) (40.00)
OR (900-100-(200x 25%)) x 80% 600.00
Add: Profit from associates (Rs. 200 x 3/12 x 20%) 10.00
Add: Payment of contingent liability 7.00
Less: Goodwill impairment (W.1) (107.20)
Less: Unrealized profit in stock (32 x 40% x 25/125) X 90% (2.30)
16,822.50

PRACTICE KIT
20. Oceana Global Limited (Step Acquisition + IGT)

Oceana Global Limited
As of March 31, 2011
2011
Rs. in
million
Assets
Non-current assets
Property, plant and equipment {700+200+(35 -10)} 925.00
Goodwill W-1 21.00
946.00
Current assets (350+ 150 -1.25-15) 483.75
1,429.75

Retained earnings W-2 564.31
864.31
Non-controlling interest W-3 78.44
942.75
Non-current liabilities (150+40) 190.00
Current liabilities (182+ 130 -15) 297.00
1,429.75
W-1 Goodwill
Fair value of 10% equity interest as of October 1, 2010 28.00
Purchase consideration for further acquisition of 45% equity 108.00
Fair value of non-controlling interest 70.00
Total purchase consideration 206.00
IGL identifiable net assets on acquisition date of Oct. 1, 2010 (185.00)
(100+60+35-10)
21.00
W-2 Retained earnings - OGL

Balance as of 31-3-2011 550.00
Cost incurred during the year for acquisition of 45% equity in RGL (4.00)
Fair value reserve - transferred to PL on deemed disposal of 10%
equity in RGL 3.00
Increase in fair value of 10% equity as of October 1, 2010 (28-23) 5.00
Post-acquisition profit share in RGL (80 - 60 - 1.25) x 55% 10.31
564.31
W-3 Non-controlling interest in RGL
Fair value of NCI as of October 1, 2010 70.00
NCI share in post-acquisition profit (80 - 60 -1.25) x 45% 8.44
78.44
W-4 Unrealized profit on inter company stock in hand (30 - 25) x 25% 1.25

PRACTICE KIT
21. Habib Limited (Step Acquisition + Full Disposal + IGT)

Habib Limited
As at June 30. 2009
Working Rupees
in
million
Assets
Non-current assets
Property. plant and equipment (978 + 595 - 4 + 0.5) 1.569.50
Goodwill 1 28.90
Current assets
Stocks in trade (210 + 105 - 5) 310.00
Trade and other receivables (122 + 116 - 24) 214.00
Cash and bank (20 + 38 +500) 558.00

Equity
Ordinary Share capital (Rs. l O each) 800.00
Retained earnings 4 1.056.40
1.856.40
Non-controlling interest 5 142.00
1.998.40
12% debentures 270.00
Current liabilities
Short term loan 124.00
Trade and other payables (172 + 140 - 24) 288.00
412.00
Working 1 - Goodwill
HL
Purchase consideration 400.00
Net assets acquired
Share capital (360 x 60%) 216.00
Pre-acquisition retained earnings (250 x 60%) 150.00
366.00
34.00
Less: Impairment of goodwill (Rs. 34m x 15%) (5.10)
28.90
Working 2: Step Adjustment (FL's additional acquisition)
[Para 41 & 42 of IFRS-3)
Non-controlling interest before additional acquisition
(Rs. 360m + Rs. 400m) x 40% 304.00
Non-controlling interest after additional acquisition
(Rs. 360m + Rs. 400m) x 20% (152.00)
Reduction in NCI 152.00
Fair value of consideration paid (120.00)
Gain to retained earnings 32.00

PRACTICE KIT
Working 3: Gain on disposal of ML Rs. in

million
Sale proceeds
Net assets prior to disposal 500
Net assets at June 30. 2009 550.00
Less: Profit from Jan 1. 09 to Jun 30. 09 (Rs. 50/2) (25.00)
Net assets at December 31. 2008 525.00
Add: Goodwill (Working 3.1) 48.00
Less: Non-controlling interest (Rs. 525m x 30%) (157.50)
415.50
84.50
Working 3.1 - Goodwill of ML
Purchase consideration 300.00
Net assets acquired

Share capital (100 x 70%) 70.00
Retained earnings (260 x 70%) 182.00
252.00
48.00
Working 4: Retained Earnings

HL's retained earnings (given) 784.00
Impairment of FL's goodwill (5.10)
Post-acquisition reserve of FL
(400 - 250) x 60% 90.00
(354 - 400) x 80% (36.80)
Step adjustment (Working 2) 32.00
Gain on disposal of ML 84.50
Post-acquisition profit of ML ([Rs. 425m - Rs. 260m] x 70%) 115.50
Unrealized gain in inventory (5.00)
Unrealized gain in sale of machine (4m x 80%) (3.20)
Reversal of excess depreciation (4 ÷ 4 * 6 /12) 0.50
1,056.40
Working 5: Non-Controlling Interest

Share in FL's net asset at June 30. 09 (Rs. 714 x 20%) 142.80
Unrealized gain in sale of machine (4m x 20%) (0.80)
142.00

PRACTICE KIT
CHAPTER 12: IFRS 05 – NON-CURRENT ASSETS HELD FOR SALE
AND DISCONTINUED OPERATIONS
CHAPTER 12:
IFRS 05 – NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
Questions:
[ACCA-SBR BPP]
1. Single Asset Case
An item of property, plant and equipment measured under the revaluation model has a revalued carrying
amount of $76m at 1 January 20X1 and a remaining useful life of 20 years (and a zero-residual value). On 1
July 20X1 the asset met the criteria to be classified as held for sale. Its fair value was $80m and costs to sell
were $1m on that date.
Required:
Discuss about the treatment of above-mentioned case with all relevant calculations.
[ACCA-SBR Practice Kit]

2. Havanna (Sale of Business Decision)
You are the newly appointed financial controller of Havanna and have been asked to give advice to the board
of directors on the following transactions it entered into in the year ended 30 November 20X3.
In May 20X3, Havanna decided to sell one of its regional business divisions through a mixed asset and share
deal. The decision to sell the division at a price of $40 million was made public in November 20X3 and gained
shareholder approval in December 20X3. It was decided that the payment of any agreed sale price could be
deferred until 30 November 20X5. It is estimated that the cost of allowing the deferred payment is $0.5 million
and that legal and other professional fees associated with the disposal will be around $1 million. The business
division was identified correctly as 'held for sale' and was presented as a disposal group in the statement of
financial position as at 30 November 20X3. At the initial classification of the division as held for sale, its net
carrying amount was $90 million. In writing down the disposal group's carrying amount, Havanna accounted
for an impairment loss of $30 million which represented the difference between the carrying amount and value
of the assets measured in accordance with applicable International Financial Reporting Standards (IFRS).
Required
Advise the directors how to account for the disposal group in the financial statements for the year ended 30
November 20X3.
[ICAP-AAFR Practice Kit]

3. Saul (Sale of Business Decisions)
Saul operates its business through a number of divisions. It has a year end of 31 December. Set out below are
extracts from the draft financial statements of Saul for the year ended 31 December Year 1.
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER YEAR 1
Rs.’000’
Revenue 3,900
Cost of sales (2,500)
Gross profit 1,400
Distribution costs (300)
Administrative expenses (800)
Profit before tax 300
Income tax expense (90)
Profit for the period 210

PRACTICE KIT
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER YEAR 1

Assets Rs.000 Rs.000
Non-current assets:
Property, plant & equipment 1,900
Intangible assets 40 1,940
Current assets:
Inventories 350
Trade receivables 190
Cash 90 630
Total assets 2,570

Equity
Share capital 600
Retained earning 1,700 2,300
Current liabilities
Trade and other payables 195
Current tax payable 75 270
On 30 November Year 1 Saul made the decision to close Division A, which is located in a different part of the
country and covers a separate major line of business. This decision was immediately announced to the press
and to the workforce and, by the end of Year 1, a buyer had been found.
The directors of Saul have calculated the following.

- 15% of the entity’s income and expenses for the year was attributable to Division A.
- No tax is attributable to Division A.
- Property, plant and equipment of Rs. 510,000 and payables of Rs. 10,000 in the above statement of financial
position relate to Division A. The fair value minus costs to sell of the property, plant and equipment is Rs.
450,000.
Required:
Redraft the above financial statements to meet the provisions of IFRS 5: Non-current assets held for sale and
discontinued operations. Work to the nearest Rs.000

4. Shahid Holdings (Analysis of Discontinued Operations)
Shahid Holdings is in the process of preparing its financial statements for the year ended 31 October 2016. The
company’s main activity is in the travel industry mainly selling package holidays (flights and accommodation)
to the general public through the Internet and retail travel agencies. During the current year the number of
holidays sold by travel agencies declined dramatically and the directors decided at a board meeting on 15
October 2016 to cease marketing holidays through its chain of travel agents and sell off the related high-street
premises. Immediately after the meeting the travel agencies’ staff and suppliers were notified of the situation
and an announcement was made in the press. The directors wish to show the travel agencies’ results as a
discontinued operation in the financial statements to 31 October 2016. Due to the declining business of the
travel agents, on 1 August 2016 (three months before the year-end) Shahid Holdings expanded its Internet
operations to offer car hire facilities to purchasers of its Internet holidays.
The following are Shahid Holding’s summarized statement of profit or loss results–years ended:

PRACTICE KIT
31 October 2016 31 October 2015

Internet Travel agencies Car hire Total Total
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Revenue 23,000 14,000 2,000 39,000 40,000
Cost of Sales (18,000) (16,500) (1,500) (36,000) (32,000)
Gross Profit 5,000 (2,500) 500 3,000 8,000
Operating (1,000) (1,500) (100) (2,600) (2,000)

expenses
Profit/loss 4,000 (4,000) 400 400 6,000
before tax
The results for the travel agencies for the year ended 31 October 2015 were: revenue Rs.18 million, cost of sales
Rs. 15 million and operating expenses of Rs. 1·5 million.
Required:
Assuming the closure of the travel agencies is a discontinued operation, prepare the (summarized) statement
of profit or loss of Shahid Holdings for the year ended 31 October 2016 together with its comparatives.
Note: Shahid Holdings discloses the analysis of its discontinued operations on the face of its statement of profit
or loss.

5. Prima (Disposal & Accounting Treatment)
Prima is a listed company with a year end of 31 December. It operates two businesses, the first is the rental of
luxury yachts and the second is a chain of luxury holiday villas in Europe. The directors have requested your
advice on the following matters.
Holiday villas
Prima’s policy is to carry the holiday villas at their re-valued amount, which, based on the most recent
valuation in 20X0, was Rs. 20m (historical cost was Rs. 10m). Prima is unsure how frequently a revaluation of
such properties is required and so has instructed a surveyor to provide an up-to-date valuation as at 31
December Year 4. This valuation has provided the following information:
Rs. Million
Replacement cost 17
Value in use 28
Market Value 25
One of the villas has received very few bookings over the past two years and so a decision was reached to
exclude it from the Year 5 brochure. It is currently up for sale. The villa has a carrying value of Rs. 1.25m. Its
value in use is only Rs.0.85m and its expected market value is Rs. 1m, before expected agents and solicitor’s
fees of Rs. 50,000. The directors are unsure as to the accounting treatment of this villa. A number of potential
buyers have expressed an interest in the property, and it is hoped that a deal will be negotiated in the first few
months of Year 5. Prima’s accounting policy is to not charge depreciation on the villas. Its justification is that
the villas are maintained to a high standard and have useful lives of at least 50 years.
Required
Explain the accounting issues relating to the villas, referring to relevant IFRS guidance. Where possible,
numerical information relating to the 31 December Year 4 financial statements should be provided.

PRACTICE KIT
[ICAP-Winter 2003]
6. Kids Limited (HFS + Discontinued Operations)
The board of directors of Kids Limited decided to dispose of one off their segment “Boss”. On 10th may 2002,
when the assets and liabilities of “Boss” were Rs. 5,250,000 and Rs. 750,000 respectively, the approval and
announcement of disposal was made. The net recoverable amount of the assets was determined as Rs.
4,250,000.
On March 31, 2003, when the carrying amount of net assets was Rs. 3,500,000 kids limited signed a legally
binding contract to sell “Boss”. The sale is expected to be completed by July 31, 2003 there coverable amount
of the net assets on March 31, 2003 was Rs. 3,000,000. The process requires incurrence of additional cost of Rs.
1,500,000 payables by July 31, 2003. The operations of “Boss” continued throughout 2002- 2003.
Other data of kids Limited includes:

2002 – 2003 2001 – 2002
Rs. Rs.
Revenue 7,000,000 7,000,000
Operating expenses 4,500,000 4,600,000
Interest expenses 1,250,000 750,000
Boss’s financial data included in the above was:

2002 – 2003 2001 – 2002
Rs. Rs.
Revenue 2,000,000 2,500,000
Operating expenses 1,500,000 1,350,000
Interest expenses 250,000 250,000
To corporate tax rate is 35%
Required:
The income statement for kids Limited for the year ended June 30, 2003 and 2002, in the light of IFRS 5 – Non-
current asset held for sale and discontinued operation.
[ICAP-Winter 2009]
7. Insha chemicals Limited (Disclosure)
Being the financial consultant of Insha chemicals Limited (ICL), a listed company, you have been approached
to advise on certain accounting issues.
Accordingly, you are required to explain how the following transaction should be disclosed in ICL’s financial
statement for the year ended June 30, 2009 in accordance with international financial reporting standard:
In a board meeting held on January 1, 2009, the board of directors showed concern over the poor results of one
the company’s cash generating unit, Lahore Division (LD). It was principally decided in the meeting that the
division should be discontinued.
ICL’S CEO announced the closure of LD in a press conference held on February 15, 2009. He also informed
that negotiations to sell the entire division are in progress and the sale is expected to finalize within few
months.
On June 14, 2009, the CEO reported to the board of directors that negotiations with Bashir Limited are
proceeding well and the disposal of LD is expected to materialize before July 31, 2009. However, it is estimated
that the assets would be sold at 95% of their fair value.

PRACTICE KIT
[ICAP-Winter 2013]
8. Global Air Limited (Disposal of Subsidiary)
Global Air Limited (GAL) owns 100% equity in Moon (Private) Limited (MPL). On 1 July 2013, GAL decided
to dispose of 90% equity in MPL. It is expected that the sale will be finalized by 30 June 2014 at an estimated
sale price of Rs. 140 million with an estimated cost to sell of Rs. 3.5 million. Relevant information pertaining
to MPL is as under:
1. Assets and liabilities as of 30 June 2013.

Rs. in million
Non-current assets 195.00
Current assets 50.00
Liabilities 90.00
2. It is estimated that MPL’s trade debtors amounting to Rs. 6 million will not be recovered; whereas
provisions included in the liabilities amounting to Rs. 8 million are no more required.
3. MPL’s net loss after tax for the nine months’ period ended 30 June 2013 was Rs. 30 million.
4. During the period 1 July 2013 to 30 September 2013, liabilities amounting to Rs. 26 million were
paid and current assets of Rs. 18 million were recovered.
Goodwill of MPL as per the consolidated statement of financial position of GAL as at 30 September 2012
amounted to Rs. 15 million.
GAL had incurred expenses amounting to Rs. 1.5 million, for disposal of the equity up to 30 September 2013.
Required:
Prepare relevant extracts from the consolidated statements of financial position and comprehensive income of
GAL for the year ended 30 September 2013, in accordance with IFRS.

9. Lexus Limited (Disposal Group & Presentations)
Following information pertains to divisions A, B and C of Lexus Limited (LL):
• Division A was classified as held for sale in 2016 but ceased to classify as held for sale in 2017.
• Division B was classified as held for sale in 2016 and sold during 2017.
• Division C was classified as held for sale at the start of 2017 and sold during 2017.
• All the three divisions are/were major lines of business of LL.
Based on the above information, a recently appointed accountant suggested the following
classification/presentation of these divisions in LL’s financial statements for the year ended 31 December 2017
(2016 shown as comparative):
Statement of financial Statement of comprehensive
position income
2017 2016 2017 2016
Division A *Normal *Normal Continuing Discontinued
Operation Operation
Division B Not appearing Held for sale Discontinued Continuing
operation Operation
`Division C Not appearing Held for sale Discontinued Continuing
operation operation
*Not classified as held for sale
Required:
Prepare the revised table showing the correct classification/presentation of the divisions in LL’s financial
statements for the year ended 31 December 2017.

PRACTICE KIT
10. Khyber Ltd (Disposal of CGU + IFRS-5)
The following details relate to a cash generating unit (CGU) of Khyber Ltd (KL) as at 30 June 2017:
Carrying Fair value less
Value cost to sell
----------- Rs. in million -----------
Building (revaluation model)* 22 21.7
Machinery (cost model) 15 16
Equipment (cost model) 19 Not measurable
License (cost model) 20 18
Investment property (fair value model) 22 22
Investment property (cost model) 8 Not measurable
Goodwill 3 Not measurable
Inventory at NRV 8 8
*Balance of surplus on revaluation of building as on 30 June 2017 amounted to Rs. 3 million
Value in use and fair value less cost to sell of the CGU at 30 June 2017 were Rs. 100 million and Rs. 95 million
respectively.
Required:
Compute the amount of impairment and allocate it to individual assets. Also calculate the amount to be
charged to profit or loss account for the year ended 30 June 2017 under each of the following independent
situations:
i. There has been a significant decline in budgeted net cash flows of the CGU.
ii. KL decided to dispose of the CGU as a group in a single transaction and classified it as ‘Held for sale’.
Carrying value of all individual assets have been remeasured in accordance with the applicable IFRSs.

11. ABC Limited (Disposal of Asset)
On 30 June 2014, ABC Limited classified an item of property, plant and equipment as being held for sale when
its carrying amount was Rs. 240 million, its fair value was Rs. 225 million and the estimated costs to sell were
Rs. 5 million. The asset had been purchased for a cost of Rs. 300 million on 1 July 2012, and then had a 10 year
useful life.
ABC failed to sell the asset and therefore on 30 June 2015 it decided to reverse the original decision and use it
in the business. At 30 June 2015, the asset had a fair value of Rs. 230 million and estimated costs to sell
amounted to Rs. 5 million. ABC estimated that annual cash flows from the asset would be Rs. 50 million per
annum for the remaining useful life of the asset.
ABC uses its weighted average cost of capital i.e. 12% as discount rate.
Required:
In accordance with the requirements of the International Financial Reporting Standards, discuss how the asset
should be accounted for in ABC's financial statements for the years ended 30 June 2014 and 2015.

PRACTICE KIT
Answers:
1. Single Asset Case

The asset is depreciated to 1 July 20X1 reducing its carrying amount by $1.9m ($76m/ 20 years × 6/12) to
$74.1m. The asset is revalued (under IAS 16) to $80m on that date and a gain of $5.9m ($80m – $74.1m) is
recognized in other comprehensive income.
On classification as held for sale, the asset is remeasured to fair value less costs to sell of $79m ($80m – $1m)
as this is lower than its carrying amount ($80m). The loss of $1m is recognized in profit or loss.
The asset is no longer depreciated and is presented as a separate line item 'Non-current assets held for sale' at
$79m within current assets.
2. Havanna (Sale of Business Decision)

Sale of division
Impairment loss
The division to be sold meets the criteria in IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations to be classified as held for sale, and has been classified as a disposal group under IFRS 5.
A disposal group that is held for sale should be measured at the lower of its carrying amount and fair value
less costs to sell. Immediately before classification of a disposal group as held for sale, the entity must
recognize impairment in accordance with applicable IFRS. Any impairment loss is generally recognized in
profit or loss, but if the asset has been measured at a revalued amount under IAS 16 Property, Plant and
Equipment or IAS 38 Intangible Assets, the impairment will be treated as a revaluation decrease.
Once the disposal group has been classified as held for sale, any further impairment loss will be based on the
difference between the adjusted carrying amounts and the fair value less cost to sell. The impairment loss (if
any) will be recognized in profit or loss. For assets carried at fair value prior to initial classification, the
requirement to deduct costs to sell from fair value will result in an immediate charge to profit or loss.
Havanna has calculated the impairment as $30m, being the difference between the carrying amount at initial
classification and the value of the assets measured in accordance with IFRS. However, applying the treatment
described above:
Step 1 Calculate carrying amount under applicable IFRS: $90m – $30m = $60m
Step 2 Classified as held for sale. Measure at the lower of the adjusted carrying amount under applicable
IFRS ($60m) and fair value less costs to sell of $38.5m ($40m expected sales prices less expected costs of $1.5m).
Therefore, an additional impairment loss of $21.5m is required to write down the carrying amount of $60m to
the fair value less costs to sell of $38.5m.
3. Saul (Sale of Business Decisions)

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER YEAR 1
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment (1,900 – 510) 1,390
Intangible assets 40 1,430
Current assets
Inventories 350
Trade and other receivables 190
Cash 90 630
2,060
Non-current assets classified as held for sale 450
Total assets 2,510

PRACTICE KIT

Equity
Share capital 600
Retained earnings (1,700 – 60) 1,640 2,240
Current liabilities
Trade and other payables (195 – 10) 185
Current tax payable 75
Liabilities classified as held for sale 10 270
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER YEAR 1

Rs.000
Continuing operations
Revenue 3,315
Cost of sales (2,125)
Gross profit 1,190

Distribution cost (255)
Administrative expenses (680)
Profit before tax 255

Income tax expense (90)
Profit for the period from continuing operations 165
Discontinued operations
Loss for the period from discontinued operations (W) (15)
Profit for the period 150
Tutorial note
Division A is classified as discontinued in Year 1 because, although it has not been sold during the period it
meets the IFRS 5 criteria for classification as ‘held for sale’.
WORKING: DISCONTINUED OPERATION

Continuing Discontinued Total
operations operations
Rs.000 Rs.000 Rs.000
Revenue 3,315 585 3,900
Cost of sales (2,125) (375) (2,500)
Gross profit 1,190 210 1,400

Distribution costs (255) (45) (300)
Administrative expenses (680) (120) (800)
Impairment loss (510 – 450) - (60) (60)
Profit before tax 255 (15) 240

Income tax expense (90 - (90)
Profit/(loss) for the period 165 (15) 150

PRACTICE KIT
4. Shahid Holdings (Analysis of Discontinued Operations)
SHAHID HOLDINGS STATEMENT OF PROFIT OR LOSS YEAR ENDED 31 OCTOBER:
2016 2015
Rs.’000 Rs.’000
Continuing operations
Revenue 25,000 22,000
Cost of sales (19,500) (17,000)
Gross profit 5,500 5,000

Operating expenses (1,100) (500)
Profit/(loss) from continuing operations 4,400 4,500

Discontinued operations
Profit/(loss) from discontinued operations (4,000) 1,500
Profit for the period 400 6,000

Analysis of discontinued operations
Revenue 14,000 18,000
Cost of sales (16,500) (15,000)
Gross profit/(loss) (2,500) 3,000
Operating expenses (1,500) (1,500)
Profit/(loss) from discontinued operations (4,000) 1,500
5. Prima (Disposal & Accounting Treatment)

HOLIDAY VILLAS
IAS 16 allows property, plant and equipment to be re-valued or left at historical cost. Revaluation should be
based on the fair value (the open market value in an arm’s length transaction). Revaluation is not required
every year, but must be conducted when it is believed that the fair value differs materially from the carrying
value.
The method of accounting for the villa that is to be sold is covered by IFRS 5 which requires that where, at the
end of a reporting period, an asset is held for sale it should be reclassified, re-measured and no longer
depreciated. An asset is only classified as held for sale where the following conditions are all met:
i. The asset is available for sale in its present condition.
ii. The sale is believed to be highly probable:
iii. Appropriate level of management is committed to the sale.
• There is an active program underway to find a buyer;
• The asset is marketed at a realistic price.
• Completion of sale expected within 12 months of classification.
From the limited information provided it appears that these conditions have been met and therefore, under
the rules of IFRS 5, the villa should be re-measured to the lower of its carrying value and its fair value minus
costs to sell. Therefore, the villas should be valued at 31 December Year 4 as follows:
Fair value Carrying value
All villas 25.00 20.00
Property held for sale (1.00) (1.25)
Properties to be retained 24.00 18.75
The villas to be retained should be re-valued to Rs. 24m, resulting in an increase in the revaluation reserve of
Rs. 5.25m (24-18.75).

PRACTICE KIT
The villa to be sold should be written down from its carrying value to its fair value minus costs to sell of
Rs.0.95m (Rs. 1m – 50,000). This impairment of Rs. 300,000 (1.25m – 0.95m) will be charged against the
revaluation reserve for this asset. If there is insufficient revaluation reserve, then the write down must be
charged to profit or loss. The villa held for sale must be re-classified from ‘Non-current assets’ to ‘Current
assets’ as a separate line item.
Depreciation should not be charged when an asset has been classified as held for sale. However, the other
villas should be depreciated. IAS 16 states that expenditure on repairs and maintenance does not remove the
need to depreciate an asset. The villas have a finite useful life and therefore must be depreciated. If the residual
value of these assets is greater than the carrying value then the depreciation charge will be zero. It is not
acceptable therefore to have a policy of non-depreciation on such assets, and a prior year adjustment should
be made to correct the error if the error is material.
6. Kids Limited (HFS + Discontinued Operations)

Statement of comprehensive income
For the year ended June 30, 2003
2003 2002
Rs. Rs.
Revenue 5,000,000 4,500,000
Operating Expenses (3,000,000) (3,250,000)
Operating Profit 2,000,000 1,250,000
Interest Expenses (1,000,000) (500,000)
Profit Before Tax 1,000,000 750,000
Tax Expense (350,000) (262,500)
Profit After Tax-Continuing Operations 650,000 487,500
Profit After Tax-Discontinuing Operations (W-1) (1,137,500) 422,500
Loss / After Tax (487,500) 910,000
W-1:
Profit after tax from discontinuing operation
Revenue 2,000,000 2,500,000
Operation expenses (1,500,000) (1,350,000)
Operating profit 500,000 1,150,000
Interest Expenses (250,000) (250,000)
Impairment Loss on Re-Measurement (2,000,000) (250,000)
(Loss)/Profit before Tax (1,750,000) 650,000
Tax saving/ (Expense) 612,500 (227,500)
Profit After Tax-Discontinuing Operations (1,137,500) 422,500
W-2: Impairment Loss

Carrying Value of Not Assets (5,250,000 – 750,000) 3,500,000 4,500,000
Fair Value Less Selling Expenses 2003 (3,000,000 – 1,500,000) 1,500,000 4,250,000
Impairment Loss 2,000,000 250,000
7. Insha chemicals Limited (Disclosure)

ICL should classify LD as a disposal group because LD’s carrying amount is to be recovered through a sale
transaction rather than continuing use.
This is an adjusting event because the following conditions specified in the IFRS-5 have been met prior to year-
end
1. The disposal group is available for sale in its present conditions. (No changes/alternations are intended to
be made in the assets prior to the sale).

PRACTICE KIT
2. The sale is highly probable on account of management’s intention, negotiation, price is reasonable in
relation to its fair value, sale is expected within one year and no change on plan is expected.
Consequently, LD should be recorded as “held for sale” in ICL’s financial statements and the related
disclosures should be as follows:
1. A single amount in the statement of comprehensive income comprising the total of
• The post profit or loss discontinued operation and
• The post-tax gain or loss recognized on the measurement to fair value less costs to sell.
2. An analysis of the single amount referred to in (1) above, into:
• The revenue, expenses and pre-tax profit or loss of discontinued operations;
• The gain or loss recognized on the measurement to fair value less costs to sell.
• The related income tax expense bifurcating the tax relating to:
o The profit or loss from ordinary activities this continued operation for the profit, together with the
corresponding amounts for each prior period presented;
o Gain or loss on discontinuance;
3. Net cash fellows attributable to the operating, investing and financing activities of the discontinued
operations.
Additional disclosure
ICL shall disclose the following information in the notes in the period in which the disposal group has been
classified as held for sale:
(a) Description of the disposal group;
(b) Description of the facts and circumstances leading to the expected disposal, and the expected manner and
timing of that disposal.
8. Global Air Limited (Disposal of Subsidiary)

Extract of consolidated
As 30 September
2013
Rs. In million
Current assets
Assets directly associated with the subsidiary classified 209.70
as held for sale (IFRS-5) W-1

Retained earnings W-1 153.70
Current liabilities
Liabilities directly associated with subsidiary classified 56.00
as held for sale (IFRS-5) W-1
Global Air Group Limited

Extract of consolidated statement of comprehensive income
As at 30 September
Loss from operations of the subsidiary held for sale (30+18.3) 48.30

PRACTICE KIT
W-1 Equity balances and impairment
Description Balance as Adjustments Adjusted Impairment Transactions As at 30-
at 30-6- as at 30-6-2013 equity as at allocation Jul-Sep 2013 9-2013
2013 30-6-2013
Good will 15.00 -- 15.00 (15.00) --
Non-current 195.00 195.00 (3.30) 191.70
Assets
Current assets 50.00 (6.00) 44.00 (26.00) 18.00
209.70
Liabilities (90.00) 8.00 (82.00) (26.00) (56.00)
Net equity 170.00 2.00 172.00 (18.30) -- 153.70
Net equity @90% (172 x 90%) 154.80
Sales price net of cost to sell (140-3.50) 136.50
Impairment 18.30
9. Lexus Limited (Disposal Group & Presentations)

Correct classification/presentation of the divisions is as under:
Statement of financial Statement of comprehensive income
position
2017 2016 2017 2016
Division A Normal Held for sale Continuing Continuing
operation operation
Division B Not appearing Held for sale Discontinued Discontinued

operation operation
Division C Not appearing Normal Discontinued Discontinued
operation operation
10. Khyber Ltd (Disposal of CGU + IFRS-5)

(a) (i) Impairment of CGU under IAS 36:
Description Carrying Fair Goodwill Impairment Impairment Total
value value impairment Round 1 *1 Round 2 *2 impairment
less cost
to sell
------------------------------ Rs. in million ----------------------------
Building 22.00 21.70 *0.30 - 0.30
Machinery 15.00 16.00 *- - -
Equipment 19.00 3.86 4.38 8.24
License 20.00 18.00 *2.00 - 2.00
Investment property 22.00 22.00 *- - -
Investment property 8.00 1.62 1.84 3.46
Goodwill 3.00 3.00 - - 3.00
Inventory at NRV 8.00 8.00 *- - -
Carrying value 117.00 3.00 7.78 6.22 17.00
Charged to profit or loss

(17–0.30) 16.70
*1Allocation of impairment loss in the ratio of 14(17-3) ÷ 69(22+19+20+8)

PRACTICE KIT
*2Allocation of impairment loss in the ratio of 6.22(14-7.78) ÷ 27
*Restricted to fair value less cost to sell
(a) (ii) Impairment of Disposal group under IFRS 5:

Description Carrying value Goodwill Impairment of
Impairment scoped in
assets*3
-------------------- Rs. in million --------------------
Building 22.00 4.98
Machinery 15.00 3.39
Equipment 19.00 4.30
License 20.00 4.52
Investment property 22.00 **-
Investment property 8.00 1.81
Goodwill 3.00 3.00 -
Inventory at NRV 8.00 **-
Carrying value 117.00 3.00 19.00
Fair value less cost to sell (95.00)
Charged to profit or loss 22.00
*3Allocation of impairment loss in the ratio of 19(22-3) ÷ 84(22+15+19+20+8)

**No impairment is allocated due to scope out assets
11. ABC Limited (Disposal of Asset)

At 30 June 2014, when the asset was classified as held for sale, the asset would have to be carried at the lower
of carrying amount (i.e. Rs. 240 million), and fair value less costs to sell of Rs. 220 million (Rs. 225 million - Rs.
5 million). Therefore, the asset has fallen in value from Rs. 240 million to Rs. 220 million, giving a charge to
profits of Rs. 20 million.
On 30 June 2015, the value of the asset was as follows:
• Recoverable amount is the higher of fair value i.e. Rs 225 million and value in use i.e. Rs 228 million.
• The asset should be recorded at lower of carrying value i.e, Rs 210 and recoverable amount i.e. Rs 228
million.
• Therefore the asset should be recorded at Rs 210 million as at 30 June 2015.
Rs in million
Carrying value (300-90) 210
Fair value (230-5) 225
Value in use (50 x 4.5638) 228

PRACTICE KIT
CHAPTER 13: CONSOLIDATION COMPLEX GROUP STRUCTURES
CHAPTER 13:
CONSOLIDATION COMPLEX GROUP STRUCTURES
Questions:
[ICAP CFAP -01 Practice Kit]
1. Parvez Ltd (SOCI + Basic Adj)

Statements of profit or loss for Parvez Ltd, Saad Ltd and Vazir Ltd for the year ended 31 December 2016 are
as follows:
Parvez Ltd Saad Ltd Vazir Ltd

Rs. 000 Rs. 000 Rs. 000
Revenues 45,600 24,700 22,800
Cost of sales (18,050) (5,463) (5,320)
Gross profit 27,550 19,237 17,480
Distribution costs (3,325) (2,137) (1,900)
Administrative expenses (3,475) (950) (1,900)
Operating profit 20,750 16,150 13,680
Interest paid (325) - -
Profit before tax 20,425 16,150 13,680
Tax (8,300) (5,390) (4,241)
Profit after tax 12,125 10,760 9,439
Statements of financial position as at 31 December 2016 are as follows:
Parvez Ltd Saad Ltd Vazir Ltd

Rs. 000 Rs. 000 Rs. 000
Investments
Shares in Saad Ltd 6,650 - -
Shares in Vazir Ltd - 3,800 -
Current assets 1,568 9,025 8,883
43,701 37,098 21,946
Ordinary Rs. 1 shares 8,000 3,000 2,000
30,638 27,075 21,898
Current liabilities 13,063 10,023 48
43,701 37,098 21,946
The following information is available relating to Parvez Ltd, Saad Ltd and Vazir Ltd:
(1) On 1 January 2010 Parvez Ltd acquired 2,700,000 Rs. 1 ordinary shares in Saad Ltd for Rs. 6,650,000 at
which date there was a credit balance of retained earnings of Saad Ltd of Rs. 1,425,000. No shares have
been issued by Saad Ltd since Parvez Ltd acquired its interest.
(2) On 1 January 2010 Saad Ltd acquired 1,600,000 Rs. 1 ordinary shares in Vazir Ltd for Rs. 3,800,000 at
which date there was a credit balance of retained earnings of Vazir Ltd of Rs. 950,000. No shares have
been issued by Vazir Ltd since Saad Ltd acquired its interest.
(3) During 2016, Vazir Ltd had made inter-company sales to Saad Ltd of Rs. 480,000 making a profit of 25%
on cost and Rs. 75,000 of these goods were in inventory at 31 December 2016.
(4) During 2016, Saad Ltd had made inter-company sales to Parvez Ltd of Rs. 260,000 making a profit of 33
1 3 % on cost and Rs. 60,000 of these goods were in inventory at 31 December 2016.

PRACTICE KIT
(5) On 1 November 2016 Parvez Ltd sold warehouse equipment to Saad Ltd for Rs. 240,000 from inventory.
Saad Ltd has included this equipment in its non-current assets. The equipment had been purchased on
credit by Parvez Ltd for Rs. 200,000 in October 2016 and this amount is included in its current liabilities
as at 31 December 2016.
(6) Saad Ltd charges depreciation on its warehouse equipment at 20% on cost. It is company policy to
charge a full year’s depreciation in the year of acquisition to be included in the cost of sales.
Required
(a) Prepare a consolidated statement of profit or loss for the Parvez Ltd Group for the year ended 31
December 2016.
(b) Prepare statement of financial position as at that date.
[ICAP CFAP -01 Practice Kit]
2. Hasan, Riaz and Siddiq (SOFP + Basic Adj)

The summarised balances extracted from the accounting records of Hasan (H) Ltd, Riaz (R) Ltd and Siddiq (S)
Ltd at 31 December 2016 are given below:
H Ltd R Ltd S Ltd

Rs. Rs. Rs.
Property, plant and equipment 1,102,500 271,950 122,550
Investments at cost
- 75% holding in shares of Riaz Ltd 367,500 - -
- 40% holding in shares of Siddiq Ltd 49,000 - -
- 20% holding in shares of Siddiq Ltd - 24,500 -
Inventories 526,610 163,290 85,700
Receivables 241,920 129,680 29,750
Cash and bank balances 88,200 4,725 8,105
2,375,730 594,145 246,105
Share capital 1,750,000 420,000 175,000

Other reserves 350,000 70,000 -
Accumulated profits/(losses) 180,250 17,500 (17,500)
Payables 95,480 86,645 88,605
2,375,730 594,145 246,105
Further information:
(1) Hasan Ltd purchased its interest in Riaz Ltd and Siddiq Ltd in December 2013 at which date Siddiq Ltd
had accumulated losses of Rs. 35,000, and Riaz Ltd had accumulated profits of Rs. 35,000.
(2) On 30 December 2016 Hasan Ltd despatched and invoiced goods for Rs. 12,500 to Riaz Ltd which were
not recorded by the latter until 3 January 2017. A mark-up of 25% is added by Hasan Ltd to arrive at
selling price. Riaz Ltd already had goods in inventories which had been invoiced to them by Hasan Ltd
at Rs. 10,400.
(3) Siddiq Ltd had accumulated losses of Rs. 52,500 when Riaz Ltd purchased 35,000 shares in 2012.
(4) Hasan Ltd received a remittance of Rs. 8,000 on 2 January 2017 which had been sent by Riaz Ltd on 29
December 2016.
(5) Included in Hasan’s receivables was a balance of Rs. 25,500 owed by Riaz Ltd.
(6) Neither Riaz Ltd nor Siddiq Ltd had any other reserves when their shares were purchased by Hasan
Ltd and Riaz Ltd.
(7) Payables of Riaz Ltd included an amount of Rs. 5,000 due to Hasan Ltd.
Required
Prepare the consolidated statement of financial position of Hasan Ltd and its subsidiaries at 31 December 2016.

PRACTICE KIT
[ICAP SUMMER 2018 Q.2]

3. Ant Limited (Consolidation + IAS-40, IAS-16, IAS-19)
The draft statements of financial position of Ant Limited (AL), Bee Limited (BL) and Fly Limited (FL) as at 31
December 2017 are as follows:
AL BL FL
------------ Rs. in million ------------
Assets
Investment property 130 45 -
-
Investment in BL at cost 3,540 2,400 -
Investment in FL at cost - 1,420 -
Total assets 9,300 6,700 5,000

Share capital (Rs. 10 each) 5,500 4,000 2,500
-
Gratuity 25 1,386 -
Current liabilities 1,775 1,500
Total equity and liabilities 9,300 6,700 5,000
Other information:
1) Details of investments are as follows:
Date of Investor % holding Investee Cost of Retained earnings

Investment investment of investee
1-Jan-2015 AL 65% BL 3,100 520
1-Apr-2017 AL 10% BL 440 815
30-Jun-2017 BL 60% FL 2,400 1,150
2) On acquisition date of BL, fair value of its net assets was equal to their carrying value except a plant whose
fair value was Rs. 120 million whereas its carrying amount was Rs. 140 million. Value in use and remaining
useful life of the plant were Rs. 150 million and 10 years respectively at that date.
3) At the date of acquisition of FL, fair value of its net assets recorded in the books was equal to their carrying
value. Further, a contingent liability of Rs. 70 million was disclosed in the financial statements of FL. AL's
legal adviser had at that time estimated that this claim would be settled at Rs. 50 million. However, it was
actually settled on 15 February 2018 at Rs. 40 million. Date of authorization of FL's financial statements was
10 February 2018 and the claim was disclosed as contingent liability in FL's financial statements.
4) On 1 July 2017 AL sold its office building having carrying value of Rs. 43 million to BL at its fair value of
Rs. 50 million. The building had a remaining useful life of 5 years on the date of disposal. On the same date,
BL rented out the building to Monkey Limited for one year.
AL group follows fair value model for investment property whereas BL uses cost model for investment
property. Fair value of the building on 31 December 2017 was Rs. 58 million.
5) On 31 December 2017 FL’s recoverable amount was estimated at Rs. 3,700 million.
6) AL group follows a policy of valuing the non-controlling interest at its proportionate share of the fair value
of the subsidiary's identifiable net assets.
The following information relates to AL's gratuity scheme for the year ended 31 December 2017:
Rs. in million
Contribution paid 70
Benefits paid 55
Current service cost 85
Re-measurement gain 10

PRACTICE KIT
During the year, payments made by AL were charged to profit or loss account. No further adjustments have
been made.
Discount rate and fair value of plan assets at 1 January 2017 were 12% per annum and Rs. 320 million
respectively.
Required:
Prepare AL's consolidated statement of financial position as on 31 December 2017 in accordance with the
requirements of IFRSs.
[ICAP SUMMER 2014 Q.1]

4. Delta Limited (TFC Adj)
Following are the draft balance sheets (summarized) of Delta Limited (DL), a listed company, and its
subsidiaries, Gamma Limited (GL) and Sigma Limited (SL) as at 31 December 2013:
DL GL SL
------------ Rs. in million ------------
Non-Current assets 10,000 6,100 5,400
Investment at (cost) 9,675 2,800 -
7,100
26,000 16,000 85,000
3,000
Non-current liabilities 6,000 3,210 1,000
Current liabilities 3,500 1,400
26,000 16,000 85,000

1) Investments:
Investment by Investment date No. of share in Cost Retained earnings
million (Rs. In million) on acquisition
(Rs. In million)
DL in GL 1-Jan-2008 52.50 7 500 2,500
DL in SL 1-Jul-2009 9.00 2,1758 1,400
GL in SL 1-Jul-2013 14.00 28,000 3,010
On 1 July 2013, the fair value of SL's shares was Rs. 200 per share.
2) On the date of acquisition by DL, the fair value of GL's net assets was equal to their book value, except a
piece of land whose fair value was Rs. 150 million as against its cost of Rs. 120 million. The said land was
sold for Rs. 170 million in 2013.
3) On 1 January 2013, DL issued 2.5 million 10% convertible term-finance certificates (TFCs) of Rs. 100 each.
The TFCs are redeemable on 31 December 2015 at par. Each TFC is convertible into one ordinary share at
the option of the certificate holder at any time prior to maturity. On the date of issue, the prevailing market
interest rate for similar debt without conversion option was 12% per annum. The TFCs are appearing in
the draft financial statements at their par value.
Interest payable annually on 31 December each year has been paid and accounted for in the financial
statements.
4) The companies settled their inter-company balances on 31 December 2013. However, a cheque of Rs. 20
million received from SL on 31 December 2013 was credited to DL's bank account on 5 January 2014.
5) DL values non-controlling interest at its proportionate share of the fair value of the subsidiaries' identifiable
net assets.
Required:

PRACTICE KIT
Prepare a consolidated statement of financial position as at 31 December 2013 in accordance with the
requirements of the International Financial Reporting Standards.

5. Bahamas Limited (SOFP + JV + Step Acquisition (Indirect Control) + Lease Adj)
The draft statements of financial position of Bahamas Limited (BL), Ohama Limited (OL) and Czech Limited
(CL) as at 31 December 2018 are as follows:
BL OL CL
------------ Rs. in million ------------
Goodwill 170 -- --
Investment in OL at cost 5,400 -- --
Investment in CL at cost 1,220 912 --
Investment in Persian Limited at cost 360 -- --
Current assets 17,480 4,800 2,800
Total assets 50,000 20,000 10,700

Share premium 8,000 2,000 1,100
Surplus on revaluation 5,500 1,200 --
Liabilities 12,000 8,800 6,400
Total equity and liabilities 50,000 20,000 10,700
Other information:
(i) On 1 January 2015, BL acquired 75% shares of OL Limited which resulted in goodwill of Rs. 450 million.
On acquisition date, fair value of net assets of OL was equal to their carrying value except a building
whose fair value was higher than its carrying value by Rs. 300 million. The building’s remaining useful
life at the date of acquisition was 20 years.
(ii) Immediately after acquisition, OL adopted revaluation model for all items of property, plant and
equipment to make the policy uniform with BL.
(iii) On 1 January 2017, BL acquired 35% shares of CL when CL had retained earnings of Rs. 700 million.
(iv) On 1 January 2018, OL acquired 24% shares of CL at fair value when retained earnings of OL and CL
were Rs. 2,500 million and Rs. 1,200 million respectively.
(v) On 1 March 2017, BL entered into an agreement with Romania Limited to set up Persian Limited (PL),
a joint arrangement. BL has 60% rights to the net assets of PL. As at 31 December 2018, PL’s net assets
comprised of fixed assets, current assets and liabilities of Rs. 800 million, Rs. 400 million and Rs. 220
million respectively.
(vi) PL’s current assets at 31 December 2018 include goods costing Rs. 50 million which were purchased
from BL. Total sales by BL to PL in 2018 amounted to Rs. 420 million which were invoiced at cost plus
25%.
(vii) On 1 January 2018, OL acquired a machine on lease from BL for a non-cancellable period of 3 years at
Rs. 400 million per annum payable in arrears. The carrying value and remaining life of the machine in
BL’s books on that date was Rs. 3,500 million and 10 years respectively. The lease has been appropriately
accounted for in the above statements of financial position. Applicable discount rate is 10%.
(viii) BL group follows a policy of valuing non-controlling interest at its proportionate share of the fair value
of the subsidiary’s identifiable net assets.
Required:
Prepare BL's consolidated statement of financial position as at 31 December 2018 in accordance with the
requirements of IFRS.

PRACTICE KIT
Answers:
1. Parvez Ltd (SOCI + Basic Adj)
(a) Parvez Ltd: Consolidated statement of profit or loss for the year ended 31 December 2016
Rs. 000
Revenue (W-4) 92,360.0
Cost of sales (W-4) (28,123.0)

Gross profit 64,237.0
Distribution costs (3,325 + 2,137 + 1,900) (7,362.0)
Administrative expenses (3,475 + 950 + 1,900) (6,325.0)
Operating profit 50,550.0
Interest paid (325.0)
Profit before tax 50,225.0
Tax (17,931.0)
Profit after tax 32,294.0
Attributable to:
Ordinary shareholders of parent 28,580.8
Non-controlling interest (W-9) 3,713.2
32,294.0
(b) Parvez Ltd: Consolidated statement of financial position as at 31 December 2016
Rs. 000
Goodwill (W8) 3,963.5
(35,483 + 24,273 + 13,063) 72,819.0
Current assets (W3) 19,446.0
96,228.5
Retained earnings (W8) 56,641.3
Non-controlling interest (W7) 8,453.2
Current liabilities (13,063 + 10,023 + 48) 23,134.0
96,228.5
(W1) Group structure
Parvez Parvez
90% 90% x 80% = 72%
90%
NCI in S = 10% Saad
80%
Vazir
Vazir
NCI in V = 28%

PRACTICE KIT
(W2) Unrealised profit adjustments: Inter-company trading

Vazir to Saad to Total
Saad Parvez
Sales 480,000 260,000 740,000
Inventory held 75,000 60,000

Unrealised profit adjustment x 25/125 x 33.3/133.3
Unrealised profit 15,000 15,000 30,000
NCI’s share (based on selling

company’s NCI)
10% x 15 1,500
28% x 15 4,200
Double entry in consolidated financial statements Dr Cr

Cost of sales (closing inventory) 30,000
Closing inventory in statement of financial position 30,000
NCI in the statement of financial position 5,700

NCI in the statement of comprehensive income 5,700
Impact on consolidated retained earnings (30 – 5.7) 24,300
(W3) Consolidated current assets
Rs. 000
Parvez 1,568
Saad 9,025
Vazir 8,883
Unrealised profit (W2) (30)
19,446
(W4) Consolidated sales and cost of sales
Sales Cost of sales

Rs. 000 Rs. 000
Parvez 45,600 18,050
Saad 24,700 5,463
Vazir 22,800 5,320
Inter-company sales (740) (740)
Unrealised profit 30
92,360 28,123
(W5) Net assets summary
Saad Ltd At date of At date of Acquisition Post-acquisition

Consolidation
Rs. 000 Rs. 000
Share capital 3,000 3,000
27,068 4,425

PRACTICE KIT
Vazir Ltd At date of At date of Acquisition Post-acquisition

Consolidation
Rs. 000 Rs. 000
Retained earnings 19,898 950 18,948
21,898 2,950
(W6) Goodwill
In Saad Ltd In Vazir Ltd

Rs. 000 Rs. 000
Cost 6,650.0
90% × 3,800 3,420.0
NCI at acquisition
10% × 4,425 (W5) 442.5
28% × 2,950 (W5) 826.0
7,092.5 4,426.0
Net assets at acquisition (4,425.0) (2,950.0)
2,667.5 1,296.0
Total 3,963.5
(W7) Non-controlling interest (statement of financial position)

In Saad Ltd In Vazir Ltd
Rs. 000 Rs. 000
NCI at acquisition
Saad Ltd: 10% × 4,425 (W5) 442.5
Vazir Ltd: 28% × 2,950 (W5) 826.0
NCI’s share of post-acquisition profits
10% × 22,650 (W5)
28% × 18,948 (W5) 2,265.0
NCI in Saad Ltd ’s share of net assets of Vazir Ltd 5,305.4
10% × 3,800
(380.0)
2,327.5 6,131.4
Total 8,458.9
Unrealised profit (W2) (5.7)
8,453.2
(W8) Consolidated retained earnings carried forward
Rs. 000
All of Parvez Ltd
Per the question
Share of Saad Ltd 22,638.0
90% 22,650 (W5)
Share of Vazir Ltd 20,385.0
72% × 18,948 (W5)
Unrealised profit (W2) 13,642.6
(24.3)
56,641.3

PRACTICE KIT
(W9) Non-controlling interest (statement of profit or loss)
Saad Ltd Vazir Ltd

Rs. 000 Rs. 000
Profit after tax 10,760 9,439
10% 28%
Non-controlling interest 1,076 2,642.9
Total (1,076 + 2,642.9) 3,718.9

Unrealised profit (W2) (5.7)
3,713.2
2. Hasan, Riaz and Siddiq (SOFP + Basic Adj)

Hasan Limited: Consolidated statement of financial position as at 31 December 2016
Rs.
Goodwill (W6) 26,250
Property, plant and equipment (1,102,500 + 271,950 + 122,550) 1,497,000
Inventories (W4) 783,520

Receivables (241,920 x 8,000 W2) + 129,680 + 29,750 – 17,500 W2) 375,850
Cash and bank balances ((88,200 + 8,000 W2) + 4,725 + 8,105) 109,030
2,791,650
Share capital 1,750,000
Retained earnings (W8) 181,795
Other reserves (W9) 402,500
Payables (95,480 + (86,645 + 12,500 W2) + 88,605 – 17,500 W2) 265,730
2,791,650
(W1) Group structure
Non-controlling
Hasan’s
interest
interest
(balance)
In Riaz Ltd 75% 25%
In Siddiq Ltd (40% + (75% x 20%)) 55% 45%

PRACTICE KIT
(W2) Individual company adjustments: Transaction before the year-end not yet accounted for
Books of Riaz
Purchase of inventory from Hasan Dr Cr
Closing inventory 12,500
Payable (to Hasan) 12,500
Books of Hasan
Cash received from Riaz Dr Cr
Cash 8,000
Receivable (from Hasan) 8,000
The inter-company balances can be reconciled as follows after these adjustments have been
processed:
Hasan’s Riaz’s
financial financial
statements statements
Receivable Payable
Given in the question
Receivable from Riaz (note 5 in the question) 25,500
Payable to Hasan (note 7 in the question) 5,000
Cash from Riaz (8,000)
Purchase from Hasan 12,500
17,500 17,500
These balances must be cancelled out on consolidation as follows:
Dr Cr
Consolidated payables 17,500
Consolidated receivables 17,500
(W3) Unrealised profit adjustments: Inter-company trading

Inventories held by Riaz purchased from Hasan
Rs.
Purchased 30 December 12,500
Purchased previously 10,400
Purchased previously 22,900
Mark up adjustment x 25/125
Unrealised profit 4,580
Double entry in consolidated financial statements
Dr Cr
Cost of sales (closing inventory) 4,580
Closing inventory in statement of financial 4,580
Position
There is no double entry for the NCI as all sales were from the parent.

PRACTICE KIT
(W4) Consolidated inventories
Rs.
Hasan 526,610
Riaz (163,290 + 12,500 (W2) 175,790
Vazir 85,700
Unrealised profit (W3) (4,580)
783,520
(W5) Net assets summary
At date of At date of Post-

Riaz Ltd consolidation acquisition acquisition
Rs. Rs.
Accumulated profits 17,500 35,000 (17,500)
Other reserves 70,000 nil 70,000
437,500 455,000
At date of At date of Post-acquisition

Siddiq Ltd consolidation acquisition
Rs. Rs.
Accumulated losses (17,500) (35,000) 17,500
157,500 140,000
Goodwill
In Riaz In Siddiq
Ltd Ltd
Rs. Rs.
Cost 367,500 49,000
75% × 24,500 18,375
67,375
NCI at acquisition
25% × 455,000 W5 113,750
45% × 140,000 W5 63,000
481,250 130,375
Net assets at acquisition (455,000) (140,000)
26,250 (9,625)
The balance for Siddiq is a gain on a bargain purchase.

PRACTICE KIT
(W7) Non-controlling interest (statement of financial position)

Rs. Rs.
NCI at acquisition
25% × 455,000 W5 113,750
45% × 140,000 W5 63,000
NCI’s share of post-acquisition profits
25% × (17,500) (W5) (4,375)
45% × 17,500 (W5) 7,875
NCI’s share of other reserves
25% × 70,000 (W5) 17,500
NCI in Riaz Ltd ’s share of net assets of
Siddiq Ltd
25% × 24,500 (6,125)
120,750 70,875
Total 191,625
(W8) Consolidated retained earnings carried forward

All of Hasan Ltd Rs.
Per the question 180,250
Unrealised profit (W2) (4,580)
175,670
Share of Riaz Ltd
75% × (17,500) (W5) (13,125)
Share of Siddiq Ltd
55% × 17,500 (W5) 9,625
Gain on bargain purchase (W6) 9,625
181,795
(W9) Consolidated other reserves
Rs.
All of Hasan Ltd
Per the question 350,000
Share of Riaz Ltd
75% × 70,000 (W5) 52,500
402,500

PRACTICE KIT
3. Ant Limited (Consolidation + IAS-40, IAS-16, IAS-19)

Rs. in million
Property, plant and equipment [3,510+2,835+ 2,200– (20 – 6(W-1))] 8,531.00
Goodwill [175 (W-2) + 108 (W-4)] 283.00
Investment property (130 + 45 + 5(W-1)+ 8(W-1)) 188.00
Current assets (2,120 + 1,420 + 2,800) 6,340.00
Total Assets 15,342.00
Group reserves (W-5) 2,476.75
NCI (W-7) 2,631.25
Gratuity [25 + 8 (W-9)] 33.00
Current liabilities (1,775 + 1,386+ 1,500+ 40(W-3)) 4,701.00
Acquisition 1-Apr-17 Reporting

date date
------------ Rs. in million ------------
Assets
Share capital 4,000.00 4,000.00 4,000.00
Retained earnings 520.00 815.00 1,314.00
Decrease in FV of machine (20.00) (20.00) (20.00)
Depreciation expense (20×10%×2.25), (20×10%×3) - 4.50 6.00
Adjustment for uniform accounting policy [58-45] - - 13.00
4,500.00 4,799.50 5,313.00
Post-acquisition profit 299.50 513.50
W-2: Goodwill – BL Rs. in million

Cost 3,100
Net assets (4,500 (W-1) × 65%) (2,925)
175
W-3: Net Assets – FL Acquisition date 1-Apr-17

---------- Rs. in million ----------
Retained earnings 1,150 1,000

PRACTICE KIT
Contingent liability (50) (40)

3,600 3,460
Post-acquisition loss (140)
Rs. in million
Cost (2,400×75%) 1,800
Net assets [3,600 × 45% (60%×75%)] (1,620)
On acquisition 180
Impairment (W-8) (72)
On reporting date 108
W-5: Group reserves Rs. in million

AL 2,000.00
Post-acquisition - BL (Up to Mar 2017) - [(299.5 (W-1) × 65%) 194.68
(Apr to Dec 2017) (513.5 (W-1) × 75%)] 385.12
Post-acquisition - FL (140 (W-3) × 45%) (63.00)
Equity adjustment on further holding of 10% (W-6) 39.95
Gratuity expense (W-9) (8.00)
Impairment of goodwill of FL (W-8) (72.00)
2,476.75
W-6: Equity adjustment on further holding of 10% Rs. in million

Net assets acquired (4,799.5 (W-1) × 10%) 479.95
Cost (440.00)
Increase in equity 39.95
W-7: NCI Rs. in million

Acquisition - BL (4,500 × 35%) 1,575.00
Post-acquisition (Up to Mar 2017) - BL [(299.5 (W-1) × 35%) 104.82
(Apr to Dec 2017) (513.5 (W-1) × 25%)] 128.38
10% further acquisition (4,799.5 (W-1) × 10%) (479.95)
Acquisition - FL (3,600 × 55%) 1,980.00
Post-acquisition - FL (140 (W-3) × 55%) (77.00)
Indirect holding (2,400 × 25%) (600.00)
2,631.25
W-8: Impairment of Goodwill – FL Rs. in million

Grossing up of goodwill (180/0.45) 400
Net assets on 31 December 2017 (W-3) 3,460
3,860
Notional write off 160

PRACTICE KIT
Impairment to be recorded (160 × 45%) 72
W-9: Gratuity scheme Rs. in million

Charge for the year (P&L and OCI)
Current service cost 85
Interest cost (25×12%) 3
Re-measurement gain (10)
78
Already charged to P&L
Contribution paid (70)
Net increase 8
4. Delta Limited (TFC Adj)

Consolidated statement of financial position as at 31 December 2013
Rs. in million
ASSETS
Non-current assets
Property, plant and equipment (10,000 + 6,100+5,400) 21,500.00
Goodwill 352.50
21,852.50

PRACTICE KIT
Current assets (6,325 + 7,100 + 3,100) 16,525.00

38 377,50
Equity attributable to owners of DL:
Ordinary share capital 90,000.00
Retained earnings W.3 7,381.50
Equity component of convertible TFCs W.5 12.01
16,393.45
Non-controlling interest W.4 3,882.50
20,275.95
Non-current liabilities W.6 9,991.55
Current liabilities (3,500+3,210+1,400) 8,110.00
38,377.50:
W-1
Equity% held by DL: GL SL

Direct investment by DL (52.5170), (9/30) 75% 30%
Indirect investment by DL 75% x (14/30) 35%
75% 65%
W-2
Goodwill GL SL
Cost of investment:
Direct investment in GL 7,500.00
Direct investment in SL at fair value 1,800.00
Indirect investment in SL 75% x 2,800 2,100.00
7,500.00 3,900.00
Acquisition of equity:
Share ca ital. 65% x 3,000 (5,250.00) (1 ,950.00)
Pre-acquisition profit 65% x 3,010 (1,875.00) (1,956.50)
FV of GL's land in excess of book value 75% x (150 -120) (22.50)
Goodwill / Gain from bargain purchase 352.50 (6.50)
W-3
Retained earnings as at 31-12-2013

DL - Balance 31-12-2013 7,500.00
GL - Post acquisition profit (2, 790-2500)x75% 217.50
Excess of FV of GL's land over its book value on
acquisition included in post-acquisition profit 75% x (150-120) (22.50)
SL – post acquisition profit (3,100-3,010) x 65% 58.50
Decrease in FV of share on derecognition 1,800-2,175 (375.00)
Additional interest on TFCs at effective rate W.6 (28.56-25.00) (3.50)
Gain from bargain purchase of SL W.2 6.50
7,381.44

PRACTICE KIT
W-4
Non-controlling interest
GL - Total net assets of GL (7,000+2, 790) 9,790.00
Investment by GL in SL (2,800.00)
Net investment 6 990.00
Non-controlling interest 6,990x25% 1,747.50
SL (3,000+3,100) x 35%. 2,135.00
3,882.50
W-5
Equity component of convertible TFC’s

Proceeds from issuance of the TFCs 250.00
Present value on 1-1-2013 for
Interest Payable on 31-12-2013 {250X 10%}X{l.12^-1 22.32
Interest payable on 31-12-2014 (250x 10%)x(l.12)^-2 19.93
Interest payable on 31-12-2015 (250x10%)x(l .12)^-3 17.79
Principal payable on 31-12-2015 250x(l .12)^-3 177.95
Liability component 237.99

Equity component (250-237.99) 12.01
` W-6
Non-current liabilities including convertible TFCs (6,000+3,000+l,000) 10,000
issued (12.00)
component of convertible TFCs issued 237.99 x 12% 28.56
Effective interest at 12% (250x10%) (25.00)
Interest paid at 10%
9,991.56
5. Bahamas Limited (SOFP + JV + Step Acquisition (Indirect Control) + Lease Adj)

Rs. in million
Assets:
Property, plant and equipment (25,370+14,288+7,900)−(W-2) 46,895
663
Goodwill 170+(450+(W-4) 779
159)
Investment in joint venture PL (W- 582
5)
Current assets 25,080
17,480+4,800+2,800
73,336
Share capital 15,000
Share premium 8,000
Surplus on revaluation 5,500+[(W.2) 6,175
900×0.75]
Group retained earnings 13,054
(W-6)

PRACTICE KIT
Non-controlling interest 4,601

(W-7)
Liabilities 26,506
(12,000+8,800+6,400)−(W-2) 694
73,336
W-1: OL - Net assets at acquisition date Rs. in million

Investment at cost 5,400
Goodwill (450)
75% net assets 4,950
Total net assets 6,600
4,950÷0.75
W-2: OL - Net assets At acquisition As at 31-12- Post-

date 2018 acquisition
-------------- Rs. in million --------------
Share capital 5,000 5,000 --
Share premium 2,000 2,000 --
Revaluation surplus -- 1,200 1,200
Fair value adjustment 300 -- (300)
300 1,200 900
Retained earnings (Bal.) (700) 3,000 3,700
Reversal of lease liability [400×{1– 694 694
(1.1)-2}÷0.1]
Reversal of ROU [400×{1-(1.1)- (663) (663)
3}÷0.1×2÷3]
(700) 3,031 3,731

Net assets (W-1)6,600 11,231 4,631
W-3: CL - Net assets At acquisition As at 31-12- Post-

1-1-2018 2018 acquisition
-------------- Rs. in million --------------
Share capital 1,200 1,200 --
Share premium 1,100 1,100 --
Retained earnings 1,200 2,000 800
Net assets 3,500 4,300 800
W-4: CL – Goodwill Rs. in million

Equity % of BL in CL 53%
35%+(75%×24%)
Direct investment at fair value 1,330
912÷0.24×0.35
Indirect investment 684
912×0.75
Investment at cost 2,014
912÷0.24×0.53
NCI at 47% (W- 1,645
3)3,500×0.47
Net Assets (3,500)
159

PRACTICE KIT
W-5: Investment in Joint venture - PL (Using equity method) Rs. in million

Investment at cost 360
Share of profit from PL 228
[800+400−220]−(360÷0.6)]×0.6
588
(800+400−220) ×0.6
Unrealized profit on BL’s sales lying in PL’s stock (6)
(50÷125×25)×0.6
582
W-6: Group retained earnings Rs. in million

BL’s retained earnings 9,500
Fair value of investment in CL exceeded its cost (W-4)1,330−1,220 110
OL post acquisition profit (W-2)3,731×0.75 2,798
CL post acquisition profit (W-3)800×0.53 424
Share of profit from PL (W-5) 228
Unrealized profit on BL’s sales lying in PL’s stock (W-5) (6)
13,054

OL – acquisition (W-2)6,600×0.25 1,650
OL - post acquisition (W-2)4,631×0.25 1,158
2,808
CL – acquisition (W-3)3,500×0.47 1,645
CL - post acquisition (W-3)800×0.47 376
2,021
Indirect holding in CL (912×0.25) (228)
4,601

PRACTICE KIT
CHAPTER 14: CONSOLIDATION JOINT ARRANGEMENTS
CHAPTER 14:
CONSOLIDATION JOINT ARRANGEMENTS
Questions:
[ACCA SBR BPP]
1. ABM Mining (Joint Arrangement)
ABM Mining entered into an arrangement with another entity, Delta Extractive Industries, and the national
Government to extract coal from a surface mine. Under the terms of the agreement, each of the two entities is
entitled to 40% of the income from selling the coal with the remainder allocated to the government. Machinery
is purchased by each investor as necessary and all costs (including depreciation in the case of the machinery
which remains the property of each entity) are shared in the same proportions as the income. Coal inventories
on hand at any point in time belong to the three parties in the same proportions. All decisions must be made
unanimously by the three parties.
During the first accounting period where the arrangement existed, 460,000 tons of coal were extracted by ABM
and sold at an average market price of $120 per ton. 540,000 tons were extracted and sold by Delta at an average
price of $118 per ton. All coal extracted was sold before the year end. The price of coal at the year end was
$124 per ton.
Required:
Discuss, with suitable computations, the accounting treatment of the above arrangement in ABM Mining's
financial statements during the first accounting period.

2. Alpha Limited (JA with Intragroup Transagtions)
On 1 July 2012 Alpha Limited (AL) and Beta Limited (BL) entered into an agreement to set up two Separate
Vehicles (SVs) to manufacture and distribute their products. Each company has 50% share in both SVs. The
following are the extracts from draft statements of financial position and comprehensive income of AL and
the SVs for the year ended 30 June 2016.
Statements of financial position

SV- SV-
AL SV-1 AL SV-1
2 2
Rs. In million Rs. In million
Property, plant and 2,650 750 365
Capital 2,000 400 200
equipment
Accumulated profit 1,193 55 305
Investment in SVs - at cost 443 - -
10% bank loan 500 320 -
Stock in hand 695 250 140
Current liabilities 665 405 80
Other assets 570 180 80
4,358 1,180 585 4,358 1,180 585

AL SV-1 SV-2
Rs. In million
Sales 4,250 650 1,000
Less: Cost of sales (2,993) (480) (750)
Gross profit 1,257 170 250
Less: Expenses (657) (145) (200)
Net profit 600 25 50

PRACTICE KIT
1. SV-1 is classified as joint operation whereas SV-2 is classified as joint venture.
2. On 1 July 2015, AL acquired 60% of BL’s ownership in SV-1 at Rs. 140 million. AL also incurred acquisition
related costs amounting to Rs. 3 million which were capitalized.
3. The details of transactions made during the year 2016 between AL and the SVs and their subsequent status
are given below:
Amount
Sales Included in buyer’s closing receivable/(payable) Profit % on sales
inventories in the books of AL
--------------- Rs. in million ---------------
AL to SV-1 350 220 320 10
AL to SV-2 250 110 70 20
SV-1 to AL 190 150 (150) 30
SV-2 to AL 60 38 (20) 15
4. AL follows the equity method for recording its investment in joint venture whereas investment in joint
operations is recorded in accordance with IFRS-11.
Required:
In accordance with the requirements of International Financial Reporting Standards, prepare AL’s separate
statements of financial position and comprehensive income for the year ended 30 June 2016.

PRACTICE KIT
Answers:
1. ABM Mining (Joint Arrangement)
The relationship between the three parties qualifies as a joint arrangement as decisions have to be made
unanimously. It appears that each party has direct rights to the assets of the arrangement, illustrated by the
ownership of coal inventories. Similarly, each party has obligations for the liabilities as all costs are shared in
the same proportions as the income. Consequently, the arrangement should be accounted for as a joint
operation.
Total revenue earned by the operation in the period is $118.92m ((460,000  $120) + (540,000  $118)). ABM's
share of this revenue recognised in its own financial statements is 40%, ie $47,568,000. The remainder of the
revenue ABM collects of $7,632,000 ((460,000  $120) – $47,568,000) is recognised as a liability (in the joint
operation account), representing amounts owed to the national government.
ABM will record the machinery it purchased in full in its own financial statements. 40% of the depreciation
will be charged to cost of sales and the remainder recognised as a receivable balance (in the joint operation
account). The same treatment will apply to other joint costs incurred by ABM. ABM is also required to
recognise a 40% share of costs incurred by the other operators and a corresponding liability (in the joint
operation account).
2. Alpha Limited (JA with Intragroup Transagtions)

Alpha Limited
Statement of financial position
As on 30 June 2016
Rs. in million
Property, plant and equipment [2,650+(750×0.8)] 3,250.00
Goodwill (W-1) 11.00
Stock in hand [695+(250×0.8) – 56.45(W-2)] 838.55
Other assets [570 + (180 × 0.8) – (320 × 0.8) – (150 × 0.8)] 338.00
Investment in SV-2 (200+305)× 0.5- 11(W-2) OR 443-200 - 140+ [305×50%]-3 - 241.50
11(W-2)
4,679.05
Capital 2,000.00
Accumulated profit (W3) 1,310.05
10% bank loan [500 + (320 × 0.8)] 756.00
Current liabilities [665 + (405 × 0.8) – (320 × 0.8) – (150 × 0.8)] 613.00
4,679.05
Alpha Limited
Rs. in million
Sales [4250 + (650×0.8) –502(W-2)] 4,268.00
Less: Cost of sales [2,993 + (480 × 0.8) – 437.4(W-2)] (2,939.60)
Gross profit 1,328.40
Less: Expenses [657 + (145×0.8) + 3] (776.00)
Add: Share of profit in SV-2 [(50 × 0.5) – 2.85(W-2)] 22.15
Net profit 574.55

PRACTICE KIT
W-1: Computation of goodwill on further investment in SV-1

Rs. in million
Consideration paid (excluding acquisition related costs) 140.00
Less: Further share of BL acquired [400 + (55 – 25)] × [50% × 60%] 129.00
Goodwill 11.00
W-2: Adjustments to be made due to intercompany transactions
Sales Cost of Investment Share of Cost of sales

sales in SV-2 profit from Adjustment
associate
------------------------------ Rs. in million ------------------------------
Joint venture
AL to SV-2 (110 × 0.2 × 0.5) - 11.00 (11.00)
SV-2 to AL (38 × 0.15 × 0.5) - - (2.85) (2.85)
Joint Operator
AL to SV-1 (350.00) (350.00) (17.60)
17.60 (220×0.10×0.8)
SV-1 to AL (152.00) (152.00) (36.00)
(190×0.8) 36.00 (150×0.3×0.8)
(502.00) (437.40) (11.00) (2.85) (56.45)
W3 Accumulated Profit
Parent Reserves:
Parent Reserves opening (1,193-600) 593.00
Post-acquisition income from SV1 (55-25)*0.5 15.00
Post-acquisition share of profit from SV2 (305 – 50)*0.5 127.50
Current year income 574.55
1,310.05

PRACTICE KIT
CHAPTER 15: IFRS 16 – LEASES
CHAPTER 15:
IFRS 16 – LEASES
Questions:
[CAF 7 Question Bank]
1. Guava Leasing Limited (Basic Lessee)
Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on the
following terms:
1) The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment of Rs. 48 million is
receivable in arrears.
2) The lease contains an option to extend the lease term by 1.5 years. Each semi annual lease instalment in the
extended period will be of Rs. 15 million, receivable in arrears. It is reasonably certain that HL will exercise
this option.
3) The rate implicit in the lease is 10% per annum.
4) The useful life of machinery is 6 years.
5) The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million.
GLL incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete the
transaction.
Required:
Prepare note(s) for inclusion in GLL’s financial statements, for the year ended 30 June 2018.
[ACCA SBR BPP]

2. CarSeat (Basic Lease Component)
Under the terms of the agreement, CarSeat licenses its know-how to ManuFac royalty-free to allow it to
construct a machine capable of manufacturing the car seats to CarSeat's specifications. Ownership of the know-
how remains with CarSeat and the machine has an economic life of four years.
CarSeat pays an amount per car seat produced to ManuFac; however, the agreement states that a minimum
payment will be guaranteed each year to allow ManuFac to recover the cost of its investment in the machinery.
The agreement states that the machinery cannot be used to make seats for other customers of ManuFac and
that CarSeat can purchase the machinery at any time (at a price equivalent to the minimum guaranteed
payments not yet paid).
Required
How should CarSeat account for this arrangement?
[ACCA SBR BPP]

3. Lassie plc (Basic Lessee)
Lassie plc leased an item of equipment on the following terms:
Commencement date 1 January 20X1
Lease term 5 years
Annual lease payments (commencing $200,000 (rising annually by CPI as
1 January 20X1) at 31 December)
Interest rate implicit in the lease 6.2%
The present value of lease payments not paid at 1 January 20X1 was $690,000. The price to purchase the asset
outright would have been $1,200,000.

PRACTICE KIT
Inflation measured by the Consumer Price Index (CPI) for the year ending 31 December 20X1 was 2%. As a
result the lease payments commencing 1 January 20X2 rose to $204,000. The present value of lease payments
for the remaining 4 years of the lease becomes approximately $747,300 using the original discount rate of 6.2%.
Required
Discuss how Lassie plc should account for the lease and remeasurement in the year ended 31 December 20X1.
[ACCA SBR BPP]

4. Heggie (Basic Lessee)
On 1 January 20X1, Heggie leased a machine under a five year lease. The useful life of the asset to Heggie was
four years and there is no residual value.
The annual lease payments are $6 million payable in arrears each year on 31 December. The present value of
the lease payments was $24 million using the interest rate implicit in the lease of approximately 8% per annum.
At the end of the lease term legal title remains with the lessor. Heggie incurred $0.4 million of direct costs of
setting up the lease.
The directors have not leased an asset before and are unsure how to account for it and whether there are any
deferred tax implications.
The company can claim a tax deduction for the annual lease payments and lease set-up costs. Assume a tax
rate of 20%.
Required
Discuss, with suitable computations, the accounting treatment of the above transaction in Heggie's financial
statements for the year ended 31 December 20X1. Work to the nearest $0.1 million.
[ACCA SBR BPP]

5. Gandalf (Basic Lessor)
Gandalf (lessor) enters into a 3 year leasing arrangement commencing on 1 January 20X3. Under the terms of
the lease, the lessee commits to pay $80,000 per annum commencing on 31 December 20X3.
A residual guarantee clause requires the lessee to pay $40,000 (or $40,000 less the asset's residual value, if
lower) at the end of the lease term if the lessor is unable to sell the asset for more than $40,000.
The lessor expects to sell the asset based on current expectations for $50,000 at the end of the lease.
The interest rate implicit in the lease is 9.2%. The present value of lease payments receivable by the lessor
discounted at this rate is $232,502.
Required
Show the net investment in the lease from 1 January 20X3 to 31 December 20X5 and explain what happens to
the residual value guarantee on 31 December 20X5.
[ACCA SBR BPP]

6. Fradin (Sale and Lease Back)
Fradin, an international hotel chain, is currently finalising its financial statements for the year ended 30 June
20X8 and is unsure how to account for the following transaction.
On 1 July 20X7, it sold one of its hotels to a third party institution and is leasing it back under a 10 year lease.
The sale price is $57 million and the fair value of the asset is $60 million.
The lease payment is $2.8 million per annum in arrears commencing on 30 June 20X8 (below market rate for
this kind of lease). The present value of lease payments is $20 million and the implicit interest rate in the lease
is 6.6%. The purchaser can cancel the lease agreement and take full control of the hotel with 6 months' notice.
The hotel had a remaining economic life of 30 years at 1 July 20X7 and a carrying amount (under the cost
model) of $48 million.
Required:
Discuss how the above transaction should be dealt with in the financial statements of Fradin for the year ended
30 June 20X8. Work to the nearest $0.1 million.

PRACTICE KIT
[ICAP CFAP 01 Practice Kit]

7. Progress Ltd. (Basic)
Progress Ltd. acquired a machine from Fine Rentals Ltd. on January 3, 2016 under a lease agreement
extending over three years.
The agreement required them to make an initial deposit of Rs. 1,280,000 to be followed by three annual
payments of Rs. 800,000 on 31 December each year starting from 2016.
The cash price of the machinery was Rs. 3,200,000 and Fine Rentals Ltd. added 12% interest which was duly
communicated to Progress Ltd.
The annuity method is used to allocate interest.
Required
a) Compute the interest element and the capital portion of the annual repayments; and
b) Show the journal entries that will record the transaction resulting from the lease agreement.

8. Miracle Textile Limited (Basic Lessee Accounting)
On 1 July 2014, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank.
Details of the lease are as follows:

1) Cost of machine is Rs. 20 million.
2) The lease term and useful life is 4 years and 10 years respectively.
3) Instalment of Rs. 5.80 million is to be paid annually in advance on 1 July.
4) The interest rate implicit in the lease is 15.725879%.
5) At the end of lease term, MTL has an option to purchase the machine on payment of Rs. 2 million. The
fair value of the machine at the end of lease term is expected to be Rs. 3 million.
MTL depreciates the machine on the straight line method to a nil residual value.
Required
Prepare relevant extracts of the statement of financial position and related notes to the financial statements
for the year ended 30 June 2016 along with comparative figures. Ignore taxation.

9. Acacia Ltd
On 1 April 2015 Acacia Ltd entered into the following lease agreements. The terms of each lease are as follows:
1) Plant with a fair value of Rs. 275,000 was leased under an agreement which requires Acacia Ltd to make
annual payments of Rs. 78,250 on 1 April each year, commencing on 1 April 2015, for four years. After the
four years Acacia Ltd has the option to continue to lease the plant at a nominal rent for a further three years
and is likely to do so as the asset has an estimated useful life of six years. The present value of the lease
payments is Rs.272,850. Acacia Ltd is responsible for insuring and maintaining the plant during the period
of the lease.
2) Office equipment with a fair value of Rs. 24,000 was leased under a non-cancellable agreement which
requires Acacia Ltd to make annual payments of Rs. 6,000 on 1 April each year, commencing on 1 April
2015, for three years. The lessor remains responsible for insuring and maintaining the equipment during
the period of the lease. The equipment has an estimated useful life of ten years. The present value of the
lease payments is Rs.16,415.
Acacia Ltd allocates finance charges on an actuarial basis. The interest rate implicit in both of the leases is 10%.
Required: Prepare all relevant extracts from Acacia Ltd's financial statements for the year ended 31 March
2016 in respect of the above leases. The only notes to the financial statements required are those in respect of
lease liabilities or commitments.

PRACTICE KIT

10. Shoaib Leasing Limited (Basic Lessor Accounting)
Shoaib Leasing Limited (the lessor) has entered into a three year agreement with Sarfaraz Limited (the
lessee) to lease a machine with an expected useful life of 4 years. The cost of machine is Rs. 2,100,000.
The following information relating to lease transaction is available:

1) Date of commencement of lease is July 1, 2016.
2) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease term, the value of the
machine will be Rs. 300,000.
3) Lease instalments of Rs. 860,000 are payable annually, in arrears, on June 30.
4) The implicit interest rate is 12.9972%.
Required
a) Prepare the journal entries for the years ending June 30, 2017, 2018 and 2019 in the books of lessor. Ignore
tax.
b) Produce extracts from the statement of financial position including relevant notes as at June 30, 2017 to
show how the transactions carried out in 2017 would be reflected in the financial statements of the lessor.
(Disclosure of accounting policy is not required.)

11. Akbar Ltd. (Sale & Lease Back)
Akbar Ltd. (AL) prepares financial statements on 31 March each year. On 1 April Year 4, AL sold a machine
to another company, Shahwez Ltd. (SL), for Rs.850,000 and then leased it back under a ten year arrangement.
AL had purchased the machine exactly ten years previously for Rs.500,000 and had charged total
depreciation of Rs.60,000 on the machine up to the date of disposal. Assume that the transfer of machine by
the seller-lessee satisfies the requirements of IFRS 15.
Details of the sale and leaseback arrangement are as follows:

- Consideration received from SL Rs.850,000
- Fair value at date of disposal Rs.550,000
- Lease rentals (payable at the end of each year) is Rs.100,000 and interest rate implicit in the lease is 10%
p.a
Required
How AL should reflect in its books of accounts:
a) Right-of-use retained by AL
b) Gain / loss on rights transferred

12. Ali Limited (Sale & Lease Back)
Ali Limited entered into a sale and leaseback arrangement with a bank on 1 April 2015. The arrangement
involved the sale at fair value of plant and machinery to the bank for Rs.1,440,000.
This amount has been credited to Ali Limited’s operating income. The carrying amount of the plant and
machinery was Rs.840,000 and its remaining useful life was five years at 1 April 2015.
No depreciation has been charged in respect of this plant and machinery for the year ended 31 March 2016.
Under the terms of the lease, Ali Limited is to pay five annual payments at 31 March each year, of Rs.360,000
(in arrears). The first payment has been made and has been debited to operating costs. The interest rate implicit
in the lease is 8%. The transfer of asset does not satisfy the requirements of IFRS 15.
Required
Explain how the above transaction should be accounted for, with all relevant calculations, in the financial
statements for the year ended 31 March 2016.

PRACTICE KIT

13. Moazzam Textile Mills Limited (Sale & Lease Back)
Moazzam Textile Mills Limited (MTML) is facing severe financial difficulties. To improve the cash flows, the
management has decided to sell and lease back three power generators of the company under three different
sale and lease back arrangements which were signed on August 15, 2016. At the same time, MTML enters into
a contract with the buyer-lessor for the right to use the generators for 5 years, with annual payments of
Rs.1,000,000 each for Generator A and Generator B and Rs.1,500,000 for Generator C, payable at the end of
each year. The interest rate implicit in the lease is 4.5%, The related information as on August 15, 2016 is given
below:
Cost Carrying Fair Value Value in Amount
Value Use of Financing
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Generator A 10,000 7,500 6,000 6,500 6,000
Generator B 12,000 6,000 5,000 5,000 6,000
Generator C 10,000 7,000 10,000 12,000 10,000
Required
Prepare the accounting entries that should be recorded by the company on August 15, 2016 in respect of the
above transactions.
Note: Cost of making sale is negligible. Ignore tax and deferred tax implications, if any.
[ICAP Past paper – Winter 2017]
14. Patel Limited (Sub-lease & Modification)

a) Following are the details of lease related transactions of Patel Limited (PL):
On 1 July 2015 PL acquired a plant for lease term of 5 years at Rs. 18 million per annum, payable in arrears.
Fair value and useful life of this plant as on 1 July 2015 were Rs. 60 million and 6 years respectively. Bargain
purchase option at the end of lease term would be exercisable at Rs. 1 million. On July 2015 PL’s incremental
borrowing rate was 9% per annum.
After one year, PL sub-let this plant for Rs. 21 million per annum, payable in arrears for lease term of 5
years. Implicit rate of this transaction was 11% per annum.
b) On 1 July 2014, PL acquired a building for its head office for lease term of 8 years at Rs. 50 million per
annum, payable in arrears.
However, after the board’s decision of constructing own head office building, PL negotiated with the lessor
and the lease contract was amended on July 2016 by reducing the original lease term from 8 to 6 years with
same annual payments.
Incremental borrowing rates on 1 July 2014 and 1 July 2016 were 12% and 10% per annum respectively.
Required:
Prepare the extracts relevant to the above transactions from PL’s statements of financial position and profit or
loss for the year ended 30 June 2017, in accordance with the International Financial Reporting Standards.
(Comparatives figures and notes to the financial statements are not required)
15. LorryCars (Lessors: Classification of leases - IFRS Box)

LorryCars, the leasing company, plans to enter into a lease contract with Lessie and there are 2 options of how
the lease contract can be structured:
General information:
1. Lorry would be leased for 4 years under the non-cancellable lease that starts 1 January 20X1.
2. Rentals are paid annually on 31 December starting year 20X1.
3. In these rentals, the insurance fee of 300 CU is included.
4. At the end of lease, lorry would have market value of 12 400 CU.
5. Normal economic life of lorry is 6 years.

PRACTICE KIT
6. LorryCars sells this type of lorries for 35 000 CU when paid cash.
7. LorryCar's incremental borrowing rate is 3% (and it is close to the rate implicit in the lease).
Option 1: Lessie would pay annual rentals amounting to 6 800 CU. At the end of the lease term, Lessie has an
option to buy lorry for its market value or lease it for additional 2 years with the same rental fees.
Option 2: Lessie would pay annual rentals amounting to 9 500 CU. At the end of the lease term, Lessie has an
option to buy lorry either for 200 CU, or lease it for another 2 years with rental fee of 100 CU per annum.
Advise LorryCars on correct classification of above presented leases.
16. Belinda I (Lessors: land and building elements in the lease – IFRS Box)
On 1 January 20X1, Belinda enters into a lease contract as a lessor to lease a specialized production hall with
land. The lease contract has the following characteristics:
1. The lease term is 40 years (= remaining economic life of the hall). At the end, the hall has no residual value.
2. No ownership to the hall or land is transferred to the lessee after the end of the lease term.
3. Annual rentals are paid on 31 December each year amounting to 43 750 CU.
4. Belinda's incremental borrowing rate is 3,1%.
5. At the end of 20X0, the fair value of the hall and land was 800 000 CU and 200 000 CU respectively.
Advise Belinda how to classify the lease.
17. Belinda II (Accounting for finance lease by the lessor – IFRS Box)
On 1 January 20X1 Belinda entered into a finance lease of used stamping machine as a lessor. The fair value
of the machine was CU 500 000 and its carrying amount in Belinda's financial statements was CU 470 000.
Belinda incurred additional costs of CU 3 000 for arranging the lease contract. Remaining economic life of the
stamping machine is 6 years. Lease term is 5 years, annual lease payments are CU 110 000 payable 31
December each year. Belinda expects that at the end on the lease term, the machine can be sold for CU 50 000
and the lessee agrees to protect Belinda from the first CU 20 000 of loss for a sale at a price below the estimated
residual value (i.e. CU 50 000).
Belinda classifies the lease as finance.
How would this transaction appear in Belinda's financial statements at 31 December 20X1?
18. CarProd (Manufacturer / dealer lessors and finance lease – IFRS Box)
In January 20X1, CarProd, manufacturer of cars, offered the following finance lease related to the newest
model of car produced:
1. The newest model of car has fair value equal to its selling price, that is CU 30 000. Cost of manufacture is
CU 27 000.
2. The lease is non-cancellable for 4 years, with annual installments of CU 8 500 paid in arrears.
3. At the end of the lease term, the ownership of the car automatically passes to the client at no additional
cost.
CarProd incurred further cost of CU 1 000 related to negotiating contract. How would this transaction appear
in the financial statements of CarProd at 31 December 20X1?
19. Lessor Co. (Accounting for operating lease by the lessor – IFRS Box)
On 1 January 20X1, Lessor Co. made a following offer for operating lease to one of its biggest clients:
1. Lease relates to machinery in total fair value of CU 1 000 000.
2. Lease is non-cancellable for 6 years, whereas machines have an economic life of 10 years.
3. Annual rentals of CU 170 000 are payable in arrears on 31 December each year.
Lessor paid CU 50 000 of commission to an agent for mediating the lease.
How would this transaction appear in the financial statements of Lessor Co. at 31 December 20X1?

PRACTICE KIT
20. Relia (Sale and leaseback – IFRS Box)

On 1 January 20X1, Relia sells an administrative building to FinanceMaster for CU 600 000 and at the same
time, Relia leases the same building back for 15 years for an annual payment of CU 50 000 due 31 December
each year. Additional info:
– the fair value of the building at the time of the sale is CU 500 000,
– the carrying amount of the building in Relia's books right before the sale is CU 480 000,
– the transaction meets the definition of a sale under IFRS 15,
– the interest rate implicit in the lease is 4% p.a.
– FinanceMaster classifies the lease as operating
How should Relia and FinanceMaster account for the transaction?

PRACTICE KIT
Answers:
1. Guava Leasing Limited (Basic Lessee)
Guava Limited
Notes to the financial statements
Rs. in million
Net investment in lease:
Lease payments receivables [(48×5)+(15×3)] 285.00
Residual value of machinery 20.00
Gross investment in lease 305.00
Unearned lease income (Bal.) (51.65)
Net investment in lease (W-1) 253.36
Current portion of net investment in lease (Bal.) (72.43)
(W-1) 180.92
Maturity analysis - contractual undiscounted cash flows
Less than one year (48×2) 96.00
One to two years (48×2) 96.00
Two to three years (48+15) 63.00
Three to four years [(15×2)+20] 50.00
305.00
W-1: Amortization Schedule

Installment Interest Closing
Date --------------------- Rs. in million ---------------------
1-Jul-17 319.06
31-Dec-17 48.00 (15.95) (287.01)
30-Jun-18 48.00 (14.35) (253.36)
31-Dec-18 48.00 (12.67) (218.03)
30-Jun-19 48.00 (10.90) (180.92)
W-2: Net investment in lease on 1 July 2017

Rs. in million
PV of Rs. 48 million over 7 installment [48×5.7865{(1–1.05–7)÷0.05}] 277.75
PV of Rs. 15 million over 3 installment [15×{(1–1.05–3)÷0.05}×1.05–7] 29.03
PV of Rs. 20 million of UGRV [20×1.10–5] 12.28

319.06
2. CarSeat (Basic Lease Component)

The agreement is a contract containing a lease component (for the use of the machinery, the 'identified asset'
in the contract) and a non-lease component (the purchase of inventories).
CarSeat will obtain substantially all of the economic benefits from the use of the machinery over the period of
the agreement as it will be able to sell on all the car seat output for its own cash flow benefit, and has the right
to direct its use, as it cannot be used to make seats for other customers.
The payments that CarSeat makes will need to be split into amounts covering the purchase of car seat
inventories, and amounts which represent lease payments for use of the machine. The allocation will be based

PRACTICE KIT
on relative stand-alone prices for hiring the machine and buying the inventories (or for a similar machine and
inventories).
3. Lassie plc (Basic Lessee)

On the commencement date, Lassie plc recognises a lease liability of $690,000 for the present value of lease
payments not paid at the 1 January 20X1 commencement date.
A right-of-use asset of $890,000 is recognised comprising the amount initially recognised as the lease liability
$690,000 plus $200,000 payment made on the commencement date.
The right-of-use asset is depreciated over 5 years. Its carrying amount at 31 December 20X1 (before adjustment
for reassessment of the lease liability is $712,000 ($890,000 – ($890,000/5 years)).
The carrying amount of the lease liability at the end of the first year (before reassessment of the lease liability)
is (Working) $732,780. On that date, the future lease payments are revised by 2%. The lease liability is therefore
revised to $747,300.
The difference of $14,520 adjusts the carrying amount of the right-of-use asset, increasing it to $726,520. This
will be depreciated over the remaining useful life of the asset of 4 years from 20X2.
Working: Lease liability

$m
b/d at 1 January 20X1 690,000
Interest (690,000 x 6.2%) 42,780
c/d at 31 December 20X1 (before remeasurement) 732,780
Remeasurement 14,520
c/d at 31 December 20X1 747,300
4. Heggie (Basic Lessee)

Lease accounting
A right-of-use asset of $24.4m should be recognised in Heggie's financial statements. This comprises the $24m
present value of lease payments not paid at the 1 January 20X1 commencement date plus the 'initial direct
costs' incurred in setting up the lease of $0.4m.
The asset should be depreciated from the commencement date (1 January 20X1) to the earlier of the end of the
asset's useful life (4 years) and the end of the lease term (5 years) unless the legal title reverts to the lessee at
the end of the lease term. Here, as the legal title remains with the lessor, the asset should be depreciated over
4 years, giving an annual depreciation charge of $6.1m ($24.4m/4 years) and a carrying amount of $18.3m at
31 December 20X1.
A lease liability should initially be recognised on 1 January 20X1 at the present value of lease payments not
paid at the commencement date. This amounts to $24m. An annual finance cost of 8% of the carrying amount
should be recognised in profit or loss and added to the liability. The first lease instalment on 31 December
20X1 is then deducted from the liability, giving a carrying amount of (Working) $19.9m at 31 December 20X1.
Deferred tax
The carrying amount in the financial statements will be the net of the right-of-use asset and lease liability.
As tax relief is granted on a cash basis, ie when lease payments and set-up costs are paid, the tax base is zero,
giving rise to a temporary difference.
This results in a deferred tax asset and additional credit to tax in profit or loss of $0.3m (see below).
The tax deduction is based on the lease rental and set-up costs which is lower than the combined depreciation
expense and finance cost. The future tax saving of $0.3m on the additional accounting deduction is recognised
now in order to apply the accruals concept.

PRACTICE KIT
Computation
$m $m
Carrying amount:
Right-of-use asset ($24.4m – ($24.4m/4 years)) 18.3
Lease liability (W1) (19.9)
(1.6)
Tax base 0.0
Temporary difference (1.6)
Deferred tax asset (20%) 0.3
5. Gandalf (Basic Lessor)

$
Present value of lease payments receivable by the lessor 232,502
Present value of unguaranteed residual value (50,000 – 40,000 = 10,000 × 1/1.0923) 7,679
240,181
The net investment in the lease (lease receivable) is as follows:

20X3 20X4 20X5
$ $ $
1 January b/d 240,181 182,278 119,048
Interest at 9.2% (interest income in P/L) 22,097 16,770 10,952
Lease instalments (80,000) (80,000) (80,000)
31 December c/d 182,278 119,048 50,000
On 31 December 20X5, the remaining $50,000 will be realised by selling the asset for $50,000 or above, or selling
it for less than $50,000 and claiming up to $40,000 from the lessee under the residual value guarantee.
An allowance for impairment losses is recognised in accordance with the IFRS 9 principles, either applying
the three stage approach or by recognising an allowance for lifetime expected credit losses from initial
recognition (as an accounting policy choice for lease receivables).
6. Fradin (Sales & Lease Back)

In substance, this transaction is a sale. A performance obligation is satisfied (IFRS 15) as control of the hotel is
transferred as the significant risks and rewards of ownership have passed to the purchaser, who can cancel
the lease agreement and take full control of the hotel with six months' notice. Additionally, the lease is only
for 10 years of the hotel's remaining economic life of 30 years. However, Fradin does retain an interest in the
hotel, as it does expect to continue to operate it for the next 10 years. Fradin was the legal owner and is now
the lessee.
As a sale has occurred, the carrying amount of the hotel asset of $48 million must be derecognised. Per IFRS
16, a right-of-use asset should then be recognised at the proportion of the previous carrying amount that relates
to the right of use retained. This amounts to $16 million ($48m carrying amount × $20m present value of lease
payments/$60m fair value).
As the fair value of $60 million is in excess of the proceeds of $57 million, IFRS 16 requires the excess of $3
million ($60m – $57m) to be treated as a prepayment of the lease rentals. Therefore, the $3 million prepayment
must be added to the right-of-use asset (like a payment made at/before lease commencement date), bringing
the right-of-use asset to $19 million ($16m + $3m).
A lease liability must also be recorded at the present value of lease payments of $20 million.
A gain on sale is recognised in relation to the rights transferred to the buyer-lessor.
The total gain would be $12 million ($60m fair value – $48m carrying amount). The portion recognised as a
gain relating to the rights transferred is $8 million ($12m gain × ($60m – $20m)/$60m portion of fair value
transferred).

PRACTICE KIT
As fair value ($60m) exceeds

On 1 July 20X7, the double entry to record the sale is: sale proceeds ($57m), excess
is a prepayment of lease
rentals
DR Cash $57m
DR Right-of-use asset ($48m × $20m/$60m = $16m + $3m prepayment) $19m
CR Hotel asset Proportion of carrying amount re rights retained
$48m
CR Lease liability $20m
CR Gain on sale (P/L) (balancing figure or ($60m – $48m) × ($60m – $20m)/$60m) $8m
Interest on the lease liability is then accrued for the year: Proportion of profit re
rights sold
DR Finance costs (W) $1.3m
DR Lease liability $1.3m
The lease payment on 30 June 20X8 reduces the lease liability by $2.8m:
DR Lease liability $2.8m

DR Cash $2.8m
The carrying amount of the lease liability at 30 June 20X8 is therefore $18.5 million (see Working below).
The proportion of the carrying amount of the hotel asset relating to the right of use retained of $19 million
(including the $3 million lease prepayment) remains as a right-of-use asset in the statement of financial
position and is depreciated over the lease term:
DR P/L ($19m/10 years) $1.9m

DR Right-of-use asset $1.9m
This results in a net credit to profit or loss for the year ended 30 June 20X8 of $4.8 million ($8m – $1.3m –
$1.9m).
Working: Lease liability for the year ending 30 June 20X8

$m
b/d at 1 July 20X7 20
Interest (20 × 6.6%) 1.3
Lease payment (2.8)
c/d at 30 June 20X8 18.5
7. Progress Ltd. (Basic)

(a) Annuity method
Year 1 Year 2 Year 3
Rs. Rs. Rs.
Cash flow 3,200,000 - -
Outstanding - 1,920,000 1,350,400
Capital repayment 1,280,000 569,600 637,952
Balance 1,920,000 1,350,400 712,448
Interest @ 12% of balance 230,400 162,048 85,494
Capital repayment 569,600 637,952 714,506
800,000 800,000 800,000

PRACTICE KIT
Jan. 3 Right of use - Plant and machinery 3,200,000

Fine Rentals Limited 3,200,000
Initial recognition of machine
Jan. 3 Fine Rentals Limited 1,280,000

Bank 1,280,000
Payment of initial deposit under lease
Fine Rentals Limited 569,600

Interest expense 230,400
Dec. 31 Bank 800,000
Apportionment of annual installment between Principal
repayment and interest
2017
Dec. 31 Profit and Loss Account 230,400
Interest Expense 230,400
Write-off of FL interest expense to Profit and loss account

2018
Dec. 31 Fine Rentals Limited 714,506 85,494
Interest expense
Bank 800,000
Apportionment of annual installment for the year
between Principal repayment and interest

8. Miracle Textile Limited (Basic Lessee Accounting)

Miracle Textile Limited
Statement of financial position (extracts) as at 30 June 2016
Note 2016 2015

ASSETS Rs. Rs.
Non-current assets
Right of use - Machinery 4 16,000,000 18,000,000
LIABILITIES
Obligation under lease
9 6,505,219 10,633,074
Current liabilities
Current portion of obligation
9 4,127,856 3,566,925

PRACTICE KIT
Miracle Textile Limited

Notes to the financial statements (extracts) for the year ended 30 June 2016
4- Property, plant and equipment
2016 2015
Right of Use Assets
Cost
Opening balance 20,000,000 -
Addition during the year - 20,000,000
20,000,000 20,000,000
Opening balance (2,000,000) -
Depreciation for the year (2,000,000) (2,000,000)
(4,000,000) (2,000,000)
Balance as at 30 June 16,000,000 18,000,000
9 – Obligations under lease (W1)
30-Jun-15 30-Jun-16
Financial Financial
charges Lease charges for
Lease Present Present
for future payment future
payment Value Value
periods periods
Rs. Rs. Rs. Rs. Rs. Rs.
Not later
than
one year 5,800,000 - 5,800,000 5,800,000 - 5,800,000
Later than
one year but
not later than
five years 7,800,000 1,294,781 6,505,219 13,600,000 2,966,925 10,633,075
Later
than five - - - - - -
years
13,600,000 1,294,781 12,305,219 19,400,000 2,966,925 16,433,075
9.1 The Company has entered into a lease agreement with a bank in respect of a machine.The lease liability
bears interest at the rate of 15.725879% per annum. The company has the option to purchase the
machine by paying an amount of Rs.2 million at the end of the lease term. The lease rentals are payable
in annual instalments ending in June 2016. There are no financial restrictions in the lease agreement.
W1: Lease Schedule

Payment date Opening Principal Interest @ Closing
principal Instalment repayment 15.73% principal
01-Jul-14 20,000,000 5,800,000 5,800,000 - 14,200,000
01-Jul-15 14,200,000 5,800,000 3,566,925 2,233,075 10,633,075
01-Jul-16 10,633,075 5,800,000 4,127,856 1,672,144 6,505,219

PRACTICE KIT
01-Jul-17 6,505,219 5,800,000 4,776,997 1,023,003 1,728,222
30-Jun-18 1,728,222 2,000,000 1,728,222 271,778 -

20,000,000 5,200,000
9. Acacia Ltd
Relevant extracts
Statements of profit or loss for the year ended 31 March 2016 (extracts)
Rs.
Depreciation (272,850 ÷ 6) 45,475
Lease payments 6,000*
Finance costs (W) 19,460
* Considering low value item as described in
IFRS16
Statement of financial position as at 31 March 2016 (extracts)

Rs.
Non-current assets
Right of use(272,850 – 45,475) 227,375
Lease liabilities (Note 1) 135,810
Current liabilities
Lease liabilities (Note 1) 78,250
Statement of cash flows for the year ended 31 March 2016 (extracts)
Rs.
Cash flows from financing activities
Payment of lease liabilities (78,250)
Notes to the financial statements (extracts)

(1) Analysis of lease liabilities
Gross basis
Rs.
Lease liabilities include the following:
Gross payments due within
One year 78,250
Two to five years (2 × 78,250) 156,500
234,750
Less: Finance charges allocated to future periods
((78,250 × 4) – 272,850 – 19,460) (20,690)
214,060
(Alternatively) Net basis
Rs.
Lease liabilities include the following:
Amounts due within
One year 78,250
Two to five years 135,810
214,060

PRACTICE KIT
WORKING:
Lease of plant
Year to 31 March B/f Payment Capital Interest @ 10% C/f
Rs. Rs. Rs. Rs. Rs.
2016 272,850 (78,250) 194,600 19,460 214,060
2017 214,060 (78,250) 135,810
10. Shoaib Leasing Limited (Basic Lessor Accounting)

(a) Entries in the books of Lessor
Date Particulars Dr. Cr.
1-Jul-16 Lease payments receivable (W1) 2,680,000
Machine 2,100,000
Unearned finance income (W1) 580,000

30-Jun-17 Bank 860,000
Lease payments receivable 860,000

30-Jun-17 Unearned finance income 272,941
Finance income (W2) 272,941

30-Jun-18 Bank 860,000


30-Jun-19 Bank 960,000
W1: Total finance income Rs.

Total future lease payments (Rs.860,000 x 3) 2,580,000
Add: Purchase bargain option 100,000
Gross investment in finance lease 2,680,000
Less: Cost of assets 2,100,000
Total finance income 580,000
W2: Amortization schedule

Principal Principal
Date Instalment Interest Principal
Opening Closing
Rs.
30-Jun-17 2,100,000 860,000 272,941 587,059 1,512,941
30-Jun-18 1,512,941 860,000 196,640 663,360 849,581
30-Jun-19 849,581 960,000 110,419 849,581 nil

PRACTICE KIT
580,000 2,100,000
(b) Shoaib Leasing Limited

Extracts from the statement of financial position as at June 30, 2017
Note 2017
Rs.
Non-current Assets
Net investment in leases 10 849,578
Current Assets
Current portion of net Investment in leases 663,360
10 Net investment in leases
Lease payments receivables 10.1 1,720,000
Add: Residual value of leased assets (part of LP)
100,000
Gross Investments in leases 1,820,000
Less: Unearned lease income (307,062)
Net investment in leases 10.2 1,512,938
Less: Current portion of net investment in leases (663,360)
(663,360)
Less than one year 860,000

More than one year and less than 5 years 960,000
1,820,000
10.2 Net investment in leases
Less than one year 663,360
More than one year and less than 5 years 849,578
1,512,938
11. Akbar Ltd. (Sale & Lease Back)

a) Right-of-use retained by AL
Financing
Since the consideration (Rs.850,000) exceeds the fair value (Rs.550,000) of the machine, the agreement
contains a financing transaction.
AL initially recognises a right-of-use asset as the proportion of the carrying amount that reflects the right
of use retained. The proportion is calculated by dividing the present value of the lease payment by fair
value
=> 440,000 CV ÷ 550,000 FV × 314,457 (W-1) = Rs.251,565
W-1
Fair value of Rs.614,456 less the part of the lease payments that is just a repayment of the financing
granted to the seller-lessee (Rs.300,000) = Rs.314,456
b) Gain / loss on rights transferred

PRACTICE KIT
Gain (refer below) = Rs.47,109
Consideration received 850,000

Less: Financial liability
Financing 300,000
PV of lease liability 314,456
(A) 235,544
Less: Carrying value of machine transferred
Total carrying value 440,000
Less: Right-of-use asset 251,565
(B) 188,435
Gain on rights transferred (A-B) 47,109
Accounting Entry by Akbar Ltd.

Dr. Cr.
Rs. Rs.
Cash 850,000
Right-of-use asset 251,565
Machine 440,000
Financial liability 614,456
Gain on rights transferred to lessor 47,109
12. Ali Limited (Sale & Lease Back)

Since transfer of an asset does not satisfy the requirements of IFRS 15 therefore Ali Ltd. Treats the
transaction as a financing arrangement.
The sale proceeds have been incorrectly credited to operating income, and the operating costs have been
incorrectly debited with the lease payment. Both amounts should be reversed.
Therefore, Ali Ltd. is required to adjust its books by passing the following accounting entries:
Dr. Cr.
Rs. Rs.
Operating income 1,440,000
Financial liability 1,440,000
Operating expense of Rs.360,000 booked erroneously is rectified by reversing it and debiting:

• Interest expense of Rs.115,200 (i-e. Rs.1,440,000 x 8%)
• Financial liability of Rs.244,800 (i-e. principal portion)
Rs.360,000
The accounting entry would be:

Dr. Cr.
Rs. Rs.
Interest expense 115,200
Financial liability 244,800
Operating Expense 360,000

PRACTICE KIT
The remaining liability of Rs.1,195,200 should be shown as Rs.931,200 non-current and Rs.264,000 as current.
13. Moazzam Textile Mills Limited (Sale & Lease Back)

Generator A
The ratio between the carrying value (Rs.7,500,000) and fair value (Rs.6,000,000) will determine the value of
right-of-use as against PV of lease payments.
Lease liability
The PV of lease payments is computed by the following formula:
PV = R[1-(1+i)^-n]/i
R = Yearly payment; i = rate per annum; n = number of years
PV = 1,000,000x[1-(1+4.5%)^-5}/4.5%
PV = Rs.4,389,977
Right-of-use
ROU = CV/FV*PV
ROU => 7,500,000/6,000,000*4,389,977 = Rs.5,487,471
Loss on sale
Loss (refer working) = Rs.402,506
Working
Consideration received 6,000,000
Less: PV of lease liability (4,389,977)

Total carrying value 7,500,000
Less: Right-of-use asset (5,487,471) (2,012,529)
Loss on sale = 402,506
Particulars Debit Credit

Rs. Rs.
Cash / Bank 6,000,000
Right-of-use 5,487,471
Loss on sale 402,506
Generator – Carrying value 7,500,000
Lease Liability 4,389,977
Generator B
Financing transaction
Since the consideration received (Rs.6,000,000) exceeds the fair value (Rs.5,000,000) of the power generator,
the agreement contains a financing transaction.
Sale and lease back

Lease liability
PV = R[1-(1+i)^-n]/i

PRACTICE KIT
PV = 1,000,000x[1-(1+4.5%)^-5}/4.5%
= Rs.4,389,977
Less: Financing = Rs.1,000,000
PV = Rs.3,389,977
Right-of-use
ROU = CV/FV*PV
ROU = 6,000,000/5,000,000*3,389,977
ROU = Rs.4,067,972
Loss on sale
Loss (refer W1) = Rs.322,005
W1
Less:
PV of lease liability (3,389,977)
Financing (1,000,000)
1,610,023

Less: Right-of-use asset (4,067,972) 1,932,028
Loss = Rs.322,005

Rs. Rs.
Cash / Bank 6,000,000
Loss 322,005
Generator C
Lease liability
PV = R[1-(1+i)^-n]/i
PV = 1,500,000x[1-(1+4.5%)^-5}/4.5%
PV = Rs.6,584,965
Right-of-use
ROU = CV/FV*PV
ROU => 7,000,000/10,000,000*6,584,965 = Rs.4,609,475
Gain on sale
Gain (refer W2) = Rs.1,024,510
W2

PRACTICE KIT
Less: PV of lease liability 6,584,965

Less: Right-of-use asset (4,609,475) 2,309,525
Gain = Rs.1,024,510

Rs. Rs.
Cash / Bank 10,000,000
Gain on sale 1,024,510
14. Patel Limited (Sub-lease & Modification)

Patel Limited
As on 30 June 2017
Assets Rs. in million
Non-current assets
Net investment in lease (W-2) 51.32

Right of use asset (W-4) 98.10
Current assets
Current portion of net investment in lease [21– 7.17 (W-2)] 13.83
Lease liabilities [32.50 (W-1) + 86.77 (W-3)] 119.27
Current liabilities
Lease liabilities [13.83 (18 – 4.17)(W-1) + 37.57 (50 – 12.43) (W-3)] 51.40
Patel Limited
Statement of profit or loss
Assets Rs. in million
Gain on sub-lease (W-6) 18.73

Depreciation (W-4) 32.70
Finance charges [5.31(W-1) + 15.85 (W-3)] 21.16
Finance income (W-2) 8.54
Loss on decrease in lease term of building (W-5) 8.40
W-1: Amortization schedule of lease – plant

Interest Instalment Principal o/s
Date
-------------------------- Rs. in million --------------------------
1-Jul-15 *170.66
30-Jun-16 6.36 18.00 59.02
30-Jun-17 5.31 18.00 46.34

PRACTICE KIT
30-Jun-18 4.17 18.00 32.50

*1[{1 - (1.09)-5 ÷ 0.09} X 18] – [1 x (1.09) -5]
W-2: Amortization schedule of sub lease - plant

Date
-------------------------- Rs. in million --------------------------
30-Jun-16 *277.61
30-Jun-17 8.54 21.00 65.15
30-Jun-18 7.17 21.00 51.32
*2[{1 - (l.ll) -5÷ 0.11} x 21]
W -3 : Amortization schedule of lease - Building (After modification)

Date
-------------------- Rs. in million --------------------
1-Jul-16 158.49
30-Jun-17 15.85 50 124.34
30-Jun-18 12.43 50 86.77
W-4 : Computation of right of use (ROU) asset (after modification)

Rs. in million
ROU assets – 1 July 2014 [50 × 4.9676 [{1– (1.12)-8÷0.12}] 248.38
Depreciation for two years (248.38 ÷ 8 × 2) (62.10)
ROU (before modification) – 1 July 2016 ROU derecognized due to 186.28
reduction in lease term (186.29 ÷ 6 × 2) (62.10)
124.18
Increase in ROU due to decrease in borrowing rate
• PV of liability for remaining 4 years at 10% (50 × 3.1699) 158.49
• PV of liability for remaining 4 years at 12% (50 × 3.0373) (151.87)
6.62
ROU after modification – 1 July 2016 130.80
Depreciation for the year – 2016-17 (130.80 ÷ 4) 32.70
98.10
W-5 : Computation of loss on decrease in lease term of building
Decrease in lease liability [205.57(50 × 4.1114) – 151.87(W-4)] 53.70
ROU derecognized (186.29 ÷ 6 × 2) (62.10)
Loss on decrease in lease term (8.40)
W-6 : Gain on sub lease
Net investment in sub lease [{1– (1.11)-5÷0.11}]× 21 77.61
Carrying value of ROU derecognized (70.66 ÷ 6 × 5) (58.88)
Gain on sub lease 18.73

PRACTICE KIT
15. LorryCars (Lessors: Classification of leases - IFRS Box)

1. Present value of the lease payments
Option 1 Option 2
Present value
Discount factor Present value
Year Cash flow Cash flow (cash
1/(1+0,03)^year (cash flow*DF)
flow*DF)
1 0.971 6,500.00 6,310.68 9,200.00 8,932.04
2 0.943 6,500.00 6,126.87 9,200.00 8,671.88
3 0.915 6,500.00 5,948.42 9,200.00 8,419.30
4 0.888 6,500.00 5,775.17 9,400.00 8,351.78
Total 24,161.14 34,375.00
FV at inception: 35,000.00 35,000.00
%: 69.03% 98.21%
2. Assessment of leases
Option 1 Option 2
Transfer of ownership at the end of lease term no no
Option to purchase asset for price < fair value no yes
Lease term = major part of economic life no yes
Present value of LP close to fair value no yes
Leased asset - specialized nature no no
Losses from cancellation borne by lessee ? ?
Gains / losses from fluctuations to the lessee ? ?
Option to continue rent for rental under market no yes
Operating Finance

PRACTICE KIT
16. Belinda I (Lessors: land and building elements in the lease – IFRS Box)
1. Assessment of leases
operating lease (indefinite life, no ownership

Land transferred)
Building needs to be assessed separately
2. Assessment of building element
2.1 Rentals related to building element

Fair value of buildings: 800,000 A
Total fair value (800 000 + 200 000): 1,000,000 B
Percentage of building element: 80% A/B
Total rentals:
Rentals related to building element
35,000
(80%*43 750)
2.2 Present value of the lease payments

N. of payments: 40
Formula used:
Amount of 1 payment at the end of each year: 35,000
=PV(3,1%;40;35 000; 0))
Present value: 796,097
Percentage of present value / fair value
99.51%
(796 097 / 800 000)
2.3 Assessment of buildings' lease

Transfer of ownership at the end of lease term no
Option to purchase asset for price < fair value no
Lease term = major part of economic life yes
Present value of LP close to fair value yes
Leased asset - specialized nature yes
Losses from cancellation borne by lessee ?
Gains / losses from fluctuations to the lessee ?
Option to continue rent for rental under market no
Finance lease

PRACTICE KIT
17. Belinda II (Accounting for finance lease by the lessor – IFRS Box)
1. Initial recognition
1.1 Asset - net investment in the lease
Fair value of stamping machine: 500,000
Initial direct costs: 3,000
Net investment in the lease (500 000 + 3 000) 503,000
1.2 Journal entry
Recognition of net investment in the lease:
Debit Assets - net investment in the lease 503,000
Credit PPE - Stamping machine -470,000
Credit Cash - paid for expenses -3,000
Credit gain on sale of PPE -30,000
0
2. Subsequent measurement
2.1 Interest rate implicit in the lease:
Year Cash flow Note:

- FV of an underlying asset at the -
0 -503,000 Cash flows commencement: 500,000
1 110,000 include: - lessor's initial direct costs: -3,000
2 110,000 - 5x annual lease payments: 550,000
- guaranteed residual value WITHIN the lease
3 110,000 payments: 20,000
4 110,000 - unguaranteed residual value 30,000
5 160,000
5.84% Interest rate implicit in the lease,
Formula used: =IRR(C37:C42)
2.2 Allocation of the lease payments
Lease Lease
Lease Decrease in
Year receivable Interest receivable
payment lease receivable
b/f c/f
1 503,000 110,000 29,386 80,614 422,386
2 422,386 110,000 24,676 85,324 337,062
3 337,062 110,000 19,691 90,309 246,753
4 246,753 110,000 14,416 95,584 151,169
5 151,169 110,000 8,831 101,169 50,000
2.3 Journal entry

Annual payment in the 1st year:
Debit Cash 110,000
Credit P/L - Finance income -29,386
Credit Net investment in the lease -80,614
0
3. Disclosures
Gross investment in the lease:

PRACTICE KIT
due not later than 1 year 110,000

due later than 1 year but not later than 2 years 110,000
due later than 2 years but not later than 3 years 110,000
due later than 4 years but not later than 5 years 0
due later than 5 years 0
Total 460,000
less unearned finance income -67,614
Present value of the lease payments: 392,386
Add unguaranteed residual value: 30,000
Net investment in the lease: 422,386
Check:
Net investment in the lease at the commencement date: 503,000
Less the decrease in the first lease
payment: -80,614
Net investment in the lease @31-Dec-
20X1: 422,386

PRACTICE KIT
18. CarProd (Manufacturer / dealer lessors and finance lease – IFRS Box)
1. Initial recognition
1.1 Asset - net investment in the lease
Fair value of new model: 30,000
1.2 Accounting treatment

Recognition of net investment in the lease / sale of asset:
Debit Assets - net investment in the lease 30,000

Credit Inventory - new model of car -27,000
Credit Cash - paid for expenses -1,000
Credit Profit on sale (30 000 - 27 000 - 1 000) -2,000
0
2. Subsequent measurement
2.1 Allocation of minimum lease payments
Lease Decrease in Lease

Lease
Year receivable Interest lease receivable
payment
b/f receivable c/f
0 n/a -30,000 30,000
1 30,000 8,500 1,560 6,940 23,060
2 23,060 8,500 1,200 7,300 15,760
3 15,760 8,500 820 7,680 8,080
4 8,080 8,500 420 8,080 0
5.20%
Interest rate implicit in the lease,

Formula used: =IRR(D32:D36)
2.2 Journal entries

Annual payment in the 1st year:
Debit Cash 8,500

Credit Finance income -1,560
Credit Net investment in the lease -6,940
0

PRACTICE KIT
3. Disclosures
Lease payments to be received:

Total 25,500
less unearned finance income -2,440
Present value of the lease payments: 23,060
Add unguaranteed residual value: 0
Check:
Net investment in the lease at the commencement date: 30,000
Less the decrease in the first lease
payment: -6,940
Net investment in the lease @31-Dec-
20X1: 23,060
19. Lessor Co. (Accounting for operating lease by the lessor – IFRS Box)
1. Journal entries
1.1 Asset related entries:

Recognition of assets at commencement:
Debit PPE – machinery 1,000,000
Credit Cash -1,000,000
0
Initial direct costs:

Debit PPE – machinery 50,000
Credit Cash -50,000
0
Depreciation charge of PPE for 20X1 (w/o initial direct costs)

Debit Depreciation expenses (1 000 000 / 10) 100,000
Credit PPE - cummulated depreciation -100,000
0
Depreciation charge of PPE for 20X1 (initial direct costs)

Debit Depreciation expenses (50 000 / 6) 8,333
Credit PPE - cummulated depreciation -8,333
0
1.2 Rentals related entries:

Cash received on 31 December 20X1:
Debit Cash 170,000
Credit Rental income -170,000
0
2. Disclosures
Lease payments to be received:

PRACTICE KIT

Total 850,000
20. Relia (Sale and leaseback – IFRS Box)

1. Relia = seller = lessee
Selling price 600,000

Fair value 500,000
Difference 100,000 => additional financing to be repaid in the lease payments
Present value of the lease payments:

N. of payments: 15
Amount of 1 payment at the end of each year: 50,000
Discount rate: 4%
Present value: 555,919
thereof:
"Loan" (financing): 100,000
Lease - payments for ROU asset 455,919
ROU asset = proportion of the previous carrying amount of the building that relates to the ROU retained
Carrying amount of the building: 480,000

Fair value of the building: 500,000 => total rights
Discounted lease payments: 455,919 => the rights transferred
ROU asset: 437,683
Gain related to the rights transferred to FinanceMaster:
FV of the building: 500,000

Carrying amount: 480,000
Gain on sale: 20,000
thereof:
related to ROU retained by the seller: 18,237
related to rights transferred to the buyer: 1,763

PRACTICE KIT
Journal entries:
At the commencement:
Debit Cash 600,000

Debit ROU asset 437,683
Credit PPE - building -480,000
Credit Financial Liability -555,919
Credit Gain on the rights -1,763
transferred 0
After the commencement:
Debit P/L Depreciation of ROU asset 29,179 over 15 years

Credit ROU asset (accum. dep.) -29,179
0
Debit P/L Interest expense 22,237

Debit Financial liability 27,763
Credit Cash -50,000
0
2. FinanceMaster = buyer = lessor
At the commencement:
Debit PPE - Building 500,000
Debit Financial asset (loan) 100,000
Credit Cash -600,000
0
Annual lease payment:

thereof:
for the ROU asset transferred: 41,006
for the repayment of a loan: 8,994
Debit Cash 50,000

Credit P/L - Lease income -41,006
Credit P/L - Interest income -4,000
Credit Financial asset (loan) -4,994
0

PRACTICE KIT
CHAPTER 16: IAS 33 – EARNING PER SHARE
CHAPTER 16:
IAS 33 – EARNING PER SHARE
Questions:
1. Weighted average number of ordinary shares
The following information is provided for an entity.
Shares Treasury Shares
issued shares outstanding
1 January 20X1 Balance at beginning of year 2,000 300 1,700
31 May 20X1 Issue of new shares for cash 800 – 2,500
1 December 20X1 Purchase of treasury shares for cash – 250 2,250
31 December 20X1 Balance at year end 2,800 550 2,250
Requirement
Calculate the weighted average number of shares in issue during the year.

2. Partly paid shares
At 1 January 20X5, an entity had 900 ordinary shares in issue. It issued 600 new shares at 1 September 20X5,
at a subscription price of £4 per share. At the date of issue each shareholder paid £2. The balance of £2 per
share will be paid during 20X6. Each part-paid share will be entitled to dividends in proportion to the
percentage of the issue price paid up on the share.
The entity has a year end of 31 December.
Requirement
Calculate the weighted average number of shares for the year ended 31 December 20X5.

3. Bonus issue
The following information is given for an entity.
Profit attributable to ordinary equity holders for y/e 30 September 20X6 £300
Profit attributable to ordinary equity holders for y/e 30 September 20X7 £900
Ordinary shares outstanding until 30 September 20X7 200
Bonus issue 1 October 20X7 two ordinary shares for each ordinary
share outstanding at 30 September 20X7
Requirement
Calculate the basic earnings per share for 20X6 and 20X7.

4. Share consolidation
At the start of its financial year ended 31 December 20X5, an entity had 10 million ordinary shares in issue. On
30 April 20X5 it issued three million shares in consideration for the acquisition of a majority holding in another
entity. On 31 August 20X5 it went through a share reconstruction by consolidating the shares in issue, on the
basis of one new share for two old shares.
Requirement
Calculate the weighted number of shares in issue for the year to 31 December 20X5.

PRACTICE KIT

5. Special dividend and share consolidation
A company has issued 20,000 shares with a nominal value of 20p each. At the beginning of 20X7 it considers
whether to launch a share repurchase of 2,000 shares at the current market price of £2 per share, or pay a
special dividend of 20p per share to be followed by a share consolidation of 9 new shares for 10 old shares.
The profit after tax for 20X6 and 20X7 is expected to be £4,000 for each year. Interest rates stand at 5% and the
company tax rate is 20%.
Requirement
Calculate the basic EPS for the two alternatives.

6. Rights issue
The following information is provided for an entity which is making a rights issue.
20X4 20X5 20X6
Profit attributable to ordinary equity holders of the parent £1,100 £1,500 £1,800
entity
Shares outstanding before rights issue: 500 shares
Rights issue: One new share for each five outstanding shares (100 new shares total)
Exercise price: £5.00
Date of rights issue: 1 January 20X5
Last date to exercise rights: 1 March 20X5
Market price of one ordinary share immediately before exercise on 1 March 20X5: £11.00
Reporting date 31 December
Requirement
Calculate the theoretical ex-rights value per share and the basic EPS for each of the years 20X4, 20X5 and 20X6.

7. Cash and rights issue
An entity had 14 million ordinary shares in issue on 1 January 20X4 and 20X5. In its financial year ended 31
December 20X5 it issued further shares, as follows:
• On 1 April 20X5, 4 million shares in consideration for the majority holding in another entity.
• On 1 July 20X5 a rights issue of 1 for 6 at £15 when the market price of the existing shares was £20. There
were 18 million shares in issue at this date, another 3 million shares were therefore issued.
A profit of £17 million attributable to the ordinary equity holders was reported for 20X5 and £14 million for
20X4.
Requirement
Calculate the earnings per share for 20X5 and restate the comparative for 20X4.

8. Dennison Co – (Increasing rate preference shares)
Dennison Co issued issued non-convertible, non-redeemable class A cumulative preference shares of £100 par
value on 1 January 20X1. The class A preference shares are entitled to a cumulative annual dividend of £7 per
share starting in 20X4.
At the time of issue, the market rate dividend yield on the class A preference shares was 7% a year. Thus,
Dennison Co could have expected to receive proceeds of approximately £100 per class A preference share if
the dividend rate of £7 per share had been in effect at the date of issue.
There was, however, to be no dividend paid for the first three years after issue. In consideration of these
dividend payment terms, the class A preference shares were issued at £81.63 per share ie, at a discount of

PRACTICE KIT
£18.37 per share. The issue price can be calculated by taking the present value of £100, discounted at 7% over
a three-year period.
Requirement
Calculate the imputed dividends attributable to preference shares that need to be deducted from earnings to
determine the profit or loss attributable to ordinary equity holders.

9. Cumulative convertible preference shares
An entity issued £100,000 2% cumulative convertible preference shares in 20X4 and the shares were due to be
converted in the current year, 20X6.
The convertible shares were converted at the beginning of 20X6 and no dividend was accrued in respect of the
year, although the previous year's dividend was paid immediately before conversion. The terms of conversion
were also amended and the revised terms entitled the preference shareholders to a total additional 100
ordinary shares on conversion with a fair value of £300.
Requirement
If the profit attributable to ordinary equity holders for the year is £150,000 what adjustments need to be made
for the purpose of calculating EPS in 20X6?

10. Repurchase of preference shares
An entity has issued £100,000 8% non-redeemable non-cumulative preference shares. Half way through the
year, the entity repurchased half of the preference shares at a discount of £1,000. No dividends were paid on
these shares in respect of the amounts repurchased or outstanding at the end of the year.
Requirement
If the profit attributable to ordinary equity holders for the year is £150,000, what adjustments should be made
for the purpose of calculating EPS?

11. Participating equity instruments
The following information is provided for an entity.
Profit attributable to equity holders of the parent entity £100,000
Ordinary shares outstanding 10,000
Non-convertible preference shares 6,000
Non-cumulative annual dividend on preference shares
(before any dividend is paid on ordinary shares) £5.50 per share
After ordinary shares have been paid at a dividend of £2.10 per share, the preference shares participate in any
additional dividends on a 20:80 ratio with ordinary shares.
Dividends on preference shares paid £33,000 (£5.50 per share 6,000 shares)
Dividends on ordinary shares paid £21,000 (£2.10 per share X 10,000 shares)
Requirement
Calculate the earnings attributable to ordinary shares.

12. Convertible loan stock 1
On 1 January 20X5 entity A had in issue:
• 24 million ordinary shares of £1 nominal value each; and
• £8 million of 8% convertible loan stock. These were issued on 1 January 20X5 and are convertible at any
time from 1 January 20X8. The conversion terms are one ordinary share for each £2 nominal of loan stock.

PRACTICE KIT
The split accounting required for compound financial instruments per IAS 32 resulted in a liability element
for the loan stock of £7 million and an effective interest rate of 10%.
After charging income tax at 20%, the entity reported profit attributable to the ordinary equity holders of £15
million for its year ended 31 December 20X5.
Requirement
Calculate the basic and diluted earnings per share for 20X5.

13. Test of dilution
The issued share capital of Entity A at 31 December 20X5 was 2,000,000 ordinary shares of £1 each. On 1
January 20X6, Entity A issued £1,500,000 of 7% convertible loan stock for cash at par. (Ignore the requirement
to split the value of a compound financial instrument.) Each £100 nominal of the loan stock may be converted
into 140 ordinary shares at any time after 1 January 20X9.
The profit before interest and taxation for the year ended 31 December 20X6 amounted to £1,050,000 and arose
exclusively from continuing operations. The rate of tax is 30%.
Requirement
Test whether the potential shares are dilutive.

On 1 January 20X5 Entity A had in issue:
a) 20 million ordinary shares;
b) £11 million of 6.5% convertible loan stock, convertible at any time from 1 January 20X7. The conversion
terms are one ordinary share for each £2 nominal of loan stock, the 1 January carrying amount of the
liability component is £10 million and the effective interest rate is 9%;
c) £9 million of 6.75% convertible loan stock, convertible at any time from 1 January 20X8. The conversion
liability component is £8 million and the effective interest rate is 8%; and
d) £12.6 million of 9% convertible loan stock, convertible at any time from 1 January 20X9. The conversion
liability component is £12 million and the effective interest rate is 12%.
The entity reported profit attributable to the ordinary equity holders of £4 million for its year ended 31
December 20X5.
Requirement
Ignoring taxes, calculate the diluted earnings per share.

15. Diluted earnings per share
At 31 December 20X6, the issued share capital of Entity A consisted of 3,000,000 ordinary shares of 20p each.
Entity A has granted options that give holders the right to subscribe for ordinary shares between 20X8 and
20X9 at 50p each. Options outstanding at 31 December 20X7 were 600,000. There were no grants, exercises or
lapses of options during the year. The profit after tax attributable to ordinary equity holders for the year ended
31 December 20X7 amounted to £900,000 arising from continuing operations. The average market price of one
ordinary share during year 20X7 was £1.50.
Requirement
Calculate the diluted earnings per share for 20X7.

PRACTICE KIT

PRACTICE KIT

16. Contingently issuable shares
The profit attributable to the ordinary equity holders of an entity for the year ended 31 December 20X5 was
£20 million and the weighted average number of its ordinary shares in issue was 16 million. Basic earnings
per share was therefore £1.25.
Under an agreement relating to a business combination, two million additional shares were to be issued if the
share price on 30 June 20X6 was £8 or above. On 31 December 20X5 the share price was £9. Assuming the end
of the reporting period was the end of the contingency period, the condition would have been met.
Requirement
Determine the diluted EPS.

17. Cumulative targets
A manufacturer has in issue 3,000,000 ordinary shares at 1 January 20X7. It agreed to issue 500,000 shares to
its staff if factory output averages 100,000 units per annum over the period from 1 January 20X7 to 31
December 20X9. The shares are to be issued on 1 January 20Y0.
Results for the three periods are:
Units produced Profits
20X7 120,000 £780,000
20X8 99,000 £655,000
20X9 105,000 £745,000
Requirement
What are basic and diluted EPS in each of the years 20X7–20X9?

The profit attributable to the ordinary equity holders of an entity for the year ended 31 December 20X5 was
£200 million and the number of its ordinary shares in issue at 1 January 20X5 was 80 million.
Under an agreement relating to a business combination, 12 million additional shares were to be issued each
time the entity's products were ranked in the top three places in a consumer satisfaction survey conducted by
a well-known magazine. A maximum of 36 million shares was issuable under this agreement and the products
appeared in the top three places in surveys dated 28 February and 30 September 20X5.
There were no other issues of ordinary shares.
Requirement
Determine the basic and diluted EPS.

19. Whiting (EPS with CO/DCO)
The Whiting Company has the following financial statement extracts in the year ended 31 December 20X7.
Profit after tax £
Continuing operations 1,600,000
Discontinued operations (400,000)
Total attributable to ordinary equity holders 1,200,000
Ordinary shares of £1 9,600,000

PRACTICE KIT
On 1 January 20X7, Whiting issued £1.2 million of 7% redeemable convertible bonds, interest being payable
annually in arrears on 31 December. The split accounting required of compound financial instruments resulted
in the following classification.
£
Equity component 100,000
Liability component 1,100,000
1,200,000
The effective interest rate on the liability component is 10%. The bonds are convertible on specified dates in
the future at the rate of one ordinary share for every £2 bond.
The tax regime under which Whiting operates gives relief for the whole of the charge based on the effective
interest rate and applies a tax rate of 20%.
Requirement
Based upon the profit from continuing operations attributable to ordinary equity holders, what amount, if
any, for diluted earnings per share should be presented by Whiting in its financial statements for the year
ended 31 December 20X7 according to IAS 33, Earnings per Share?

20. Citric (EPS + Compound Instrument)
The following information relates to The Citric Company for the year ended 31 December 20X7.
£'000
£100,000
Profit after tax
1,000,000
Ordinary shares of £1
There are warrants outstanding in respect of 1.7 million new shares in Citric at a subscription price of £18.00.
Citric's share price was £22.00 on 1 January 20X7, £24.00 on 30 June 20X7, £30.00 on 31 December 20X7 and
averaged £25.00 over the year.
On 1 January 20X7 Citric issued £2 million of 6% redeemable convertible bonds, interest being payable
annually in arrears on 31 December. The split accounting required of compound financial instruments resulted
in a liability component of £1.75 million and effective interest rate of 7%. The bonds are convertible on specified
dates many years into the future at the rate of two ordinary shares for every £5 bonds.
The tax regime under which Citric operates gives relief for the whole of the effective interest rate charge on
the bonds and applies a tax rate of 25%.
Requirement
Determine the following amounts in respect of Citric's diluted earnings per share for the year ending 31
December 20X7 according to IAS 33, Earnings per Share:
a) The number of shares to be treated as issued for no consideration (ie, 'free' shares) on the subscription of
the warrants
b) The earnings per incremental share on conversion of the bonds, expressed in pence (to one decimal place)
c) The diluted earnings per share, expressed in pence (to one decimal place)

PRACTICE KIT

21. Cachet Ltd (Multiple Scenarios – Bonus, Rights Issue)
The statement of profit or loss for the year ended 31 December 2016 relates to Cachet Ltd.
Rs. Rs.
Profit Before 121,900
Tax Less: Taxation 52,900
69,000
Less: Transfer to general reserve 5,750
Dividends:
Preference shares 1,380
Ordinary shares 2,070
(9,200)
Retained profit 59,800
1 January 2016, the issued share capital of Cachet Ltd was 23,000 6% preference shares of Rs. 1 each and 20,700
ordinary shares of Rs. 1 each.
Required
Calculate the basic and diluted earnings per share for the year ended 31 December, 2016 under the following
circumstances:
1) No change in the issued share capital.
2) The company made a bonus issue of one ordinary share for every four shares in issue at 30 September,
2016.
3) The company made a rights issue of shares on 1 October 2016 in the proportion of 1 for every 5 shares held
at a price of Rs. 1.20. The middle market price for the shares on the last day of quotation cum rights was
Rs. 1.80 per share.

22. Mary (Multiple Scenarios – Bonus, Rights Issue)
On 1 January Year 5, Mary had 5 million ordinary shares in issue. The following transactions in shares took
place during the next year.
- 1 February A 1 for 5 bonus issue
- 1 April A 1 for 2 rights issue at Rs. 1 per share. The market price of the shares prior to the rights issue was
Rs. 4.
- 1 June An issue at full market price of 800,000 shares.
In Year 5 Mary made a profit before tax of Rs. 3,362,000. It paid ordinary dividends of Rs. 1,200,000 and
preference dividends of Rs. 800,000. Tax was Rs. 600,500. The reported EPS for Year 4 was Rs.0.32.
Required
Calculate the EPS for Year 5, and the adjusted EPS for Year 4 for comparative purposes.

23. Mandy (Diluted EPS)
Mandy has had 5 million shares in issue for many years. Earnings for the year ended 31 December Year 4 were
Rs. 2,579,000. Earnings for the year ended 31 December Year 3 were Rs. 1,979,000. Tax is at the rate of 30%.
Outstanding share options on 500,000 shares have also existed for a number of years. These can be exercised
at a future date at a price of Rs. 3 per share. The average market price of shares in Year 3 was Rs. 4 and in Year
4 was Rs. 5.
On 1 April Year 3 Mandy issued Rs. 1,000,000 convertible 7% bonds. These are convertible into ordinary shares
at the following rates.
- On 31 December Year 6 30 shares for every Rs. 100 of bonds

PRACTICE KIT

Required
Calculate the diluted EPS for Year 4 and the comparative diluted EPS for Year 3.

24. AAZ Limited (Diluted EPS)
The profit after tax earned by AAZ Limited during the year ended December 31, 2016 amounted to Rs. 127.83
million. The weighted average number of shares outstanding during the year were 85.22 million.
Details of potential ordinary shares as at December 31, 2016 are as follows:
• The company had issued debentures which are convertible into 3 million ordinary shares. The debenture
holders can exercise the option on December 31, 2018. If the debentures are not converted into ordinary
shares they shall be redeemed on December 31, 2018. The interest on debentures for the year 2016 amounted
to Rs. 7.5 million.
• Preference shares issued in 2013 are convertible into 4 million ordinary shares at the option of the
preference shareholders. The conversion option is exercisable on December 31, 2020. The dividend paid on
preference shares during the year 2016 amounted to Rs. 2.45 million.
• The company has issued options carrying the right to acquire 1.5 million ordinary shares of the company
on or after December 31, 2016 at a strike price of Rs. 9.90 per share. During the year 2016, the average
market price of the shares was Rs. 11 per share.
The company is subject to income tax at the rate of 30%.
Required
a) Compute basic and diluted earnings per share.
b) Prepare a note for inclusion in the company’s financial statements for the year ended December 31, 2016 in
accordance with the requirements of International Accounting Standards.

25. ABC Limited (Disclosure Note of EPS)
The following information pertains to ABC Limited, in respect of year ended March 31, 2016.
Rs. in ‘000
Consolidated profit for the year (including non-controlling interest) 15,000
Profit attributable to non-controlling interest 2,000
Dividend paid during the year to ordinary shareholders 4,000
Dividend paid on 10% Cumulative preference shares for the year 2015 2,000
Dividend paid on 10% Cumulative preference shares for the year 2016 2,000
Dividend declared on 12% Non-cumulative preference shares for the year 2016 2,400
1) The company had 10 million ordinary shares at March 31, 2015.
2) The cumulative preference shares were issued at the time of inception of the company.
3) The 12% non-cumulative preference shares are convertible into ordinary shares, on or before December 31,
2017 at a premium of Rs. 2 per share. The conversion rights are not adjusted for subsequent bonus issues.
0.50 million non-cumulative preference shares were converted into ordinary shares on July 1, 2015.
4) The dividend declared on the non-cumulative preference shares, as referred above, was paid in April 2016.
5) 1.20 million right shares of Rs. 10 each were issued at a premium of Rs. 1.50 per share on October 1, 2015.
The market price on the date of issue was Rs. 12.50 per share.
6) 20% bonus shares were issued on January 1, 2016.
7) Due to insufficient profit no dividend was declared during the year ended March 31, 2015.
8) The average market price for the year ended March 31, 2016 was Rs. 15 per share.
Required
Compute the basic and diluted earnings per share and prepare a note for inclusion in the consolidated financial
statements for the year ended March 31, 2016.

PRACTICE KIT
[ICAP – Summer 2017]

26. Sajjad Limited (EPS + Classes of Preference Shares)
(a) Following information pertains to Sajjad Limited (SL) for the year ended 31 December 2016:
1) The share capital of SL comprises of:
Rs. in million
Ordinary share capital (Rs. 100 each) 1,000
9% Class A preference shares (Rs. 100 each) 200
6% Class B preference shares (Rs. 100 each) 300
2) Class A preference shares which were issued on 1 January 2014 are cumulative, nonconvertible and
non-redeemable. These shares were issued at Rs. 77.22 per share i.e. at a discount of Rs. 22.78 per share.
These shareholders are entitled to annual dividend of 9% with effect from 1 January 2017. At the time
of issue, the market dividend yield on such type of preference shares was 9% per annum.
3) Class B preference shares which were issued on 1 January 2016 are noncumulative, non-convertible
and non-redeemable. The payment of dividend of these shares was made on 29 December 2016. These
shareholders are also entitled to participate in any remaining profits after adjusting dividend to
ordinary and preference shareholders. Such remaining profits are allocated between the Class B
shareholders and the ordinary shareholders in such a manner that the profit per share of ordinary
shareholders is twice the profit per share of Class B shareholders.
4) SL earned profit after tax of Rs. 150 million during the year ended 31 December 2016 and paid interim
dividend of Rs. 2.50 per share to ordinary shareholders.
Required:
Compute basic earnings per share for the ordinary shareholders for the year ended 31 December 2016.

PRACTICE KIT

27. Tiger Limited (Potential Ordinary Shares – EPS Diluted)
Following information pertains to Tiger Limited (TL):
Quarter ended 31- Half year ended 31-
Dec-2017 Dec-2017
Profit after tax (Rs. in million) 140 239
Average market price per share (Rs.) 330 360
Ordinary shares
• 20 million shares of Rs. 100 each were outstanding as at 1 July 2017.
• 4 million shares were issued on 1 August 2017 at market price of Rs. 355 per share.
Convertible bonds
• On 1 November 2016 TL issued 0.8 million 7% convertible bonds at par value of Rs. 1,000 each. Each bond
is convertible into 3 ordinary shares at any time prior to maturity date of 31 October 2019. On inception the
liability component was calculated as Rs. 760 million. On the date of issue, the prevailing interest rate for
similar debt without conversion option was 9% per annum.
• 50% of these bonds were converted into ordinary shares on 1 November 2017.
Warrants
On 1 January 2016, TL issued share warrants giving the holders right to buy 6 million ordinary shares at Rs.
340 per share. The warrants are exercisable within a period of 2 years.
Applicable tax rate is 30%.
Required:
Compute basic and diluted earnings per share to be disclosed in statement of profit or loss for the following
periods:
a) Quarter ended 31 December 2017
b) Half year ended 31 December 2017
(Show all relevant workings)

28. Afridi Industries Limited (Disclosure + EPS)
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.
(Ignore corresponding figures)

PRACTICE KIT

29. Rahat Limited (Disclosure + EPS)
Extracts from statement of comprehensive income of Rahat Limited (RL) for the year ended March 31, 2011
are as under:
2011 2010
Rs. in '000
Profit after taxation 150,000 110,000
Exchange gain on foreign operations, net of tax 10,000 8,000
Total comprehensive income 160,000 118,000
Following further information is available:
(i) As of April 1, 2010 share capital of the company consisted of:
o 5 million ordinary shares of Rs. 10 each.
o 0.2 million convertible 15% cumulative preference shares of Rs. 100 each.
(ii) Each preference share is convertible into 7 ordinary shares at the option of the shareholders. 10,000
preference shares were converted into ordinary shares on July 1, 2010.
(iii) On September 10, 2010 a right issue of one million ordinary shares had been announced at an exercise
price of Rs. 12 per share. By October 1, 2010 which was the last date to exercise the right, all the shares
had been subscribed and paid. The market price of an ordinary share on September 10 and October 1,
2010 was Rs. 15.50 and Rs. 15 respectively.
(iv) On April 30, 2011 the Board of Directors had declared a final cash dividend of 20% (2010: 18%) forthe
year ended March 31, 2011.
(v) There was no movement in share capital during the previous year.
Required:
Prepare a note related to earnings per share, for inclusion in the company's financial statements for the year
ended March 31, 2011 in accordance with International Financial Reporting Standards. Show comparative
figures.

30. Earnings Per Share
One of your clients has contacted you to calculate earnings per share in accordance with the requirements of
International Accounting Standards and has provided you the following information:
(i) At the beginning of the year 2006 the company’s share capital was Rs. 50 million consisting of 5,000,000
ordinary shares of Rs. 10 each. Ten percent bonus shares were issued on April 1, 2006. Market price of
ordinary shares at the beginning of the year was Rs. 33 per share. On June 30, 2006 the price was Rs. 38
per share and at the end of the year, the price was Rs. 36 per share.
(ii) Profit attributable to ordinary shareholders of the company for the year 2006 is Rs 20 million.
(iii) The company had issued convertible Term Finance Certificates (TFCs) of Rs 120 million carrying
markup at the rate of 13 percent per annum. The certificate holders have the option to convert TFCs into
ordinary shares in the ratio of 25 ordinary shares for each TFC of Rs. 1,000.
(iv) The company is subject to income tax at the rate of 35%.
Required:
Calculate the basic and diluted earnings per share for the year 2006 in each of the following situations:
(a) If none of the TFC holders opt to convert TFCs into ordinary shares;
(b) If a TFC holder who owns 40% of the total TFCs exercises his right of conversion on the first day of July 1,
2006.

PRACTICE KIT

31. Market Searchers Limited (Disclosure + EPS)
Market Searchers Limited (MS) had 5.0 million ordinary shares at the beginning of the year 2002. In the
month of February 2003, it announced a right issue of one new share for each five shares issued at the
exercise price of Rs.5.00 per share with the last date of exercise of right being March 1, 2003. Fair value of one
ordinary share prior to exercise on march 1, 2003 was Rs. 11.
Moreover, it issued 500,000 convertible bonds on January 1, 2004. Each block of 10 bonds is convertible into 3
ordinary shares. Interest expense for the year 2004 relating to the liability component of the convertible bond
is Rs. 10.0 million.
Current and deferred tax relating to that interest expense is Rs. 4.0 million. Interest expense includes Rs.1.0
million being the amortization of discount arising on initial recognition of the liability component as per IAS
32.
Net profits for the year ended on December 31 of each year are as follows:
- 2002 – Rs. 1,100 million
- 2003 – Rs. 1,500 million
- 2004 – Rs. 1,800 million
Required
(a) Compute earnings per share for the years 2002, 2003 and 2004 as per IAS 33.
(b) Discuss whether or not the financial instruments or other contracts that may be settled by payment of
financial assets or issuance of ordinary shares of the reporting enterprise, at the option of the issuer or the
holder are deemed to be potential ordinary shares under IAS 33.

32. Que Limited (Disclosure + EPS)
The following information relates to Que Limited (QL) for the year ended 31 December 2011:
(i) Issued share capital on 1 January 2011 consisted of 80 million ordinary shares of Rs. 10 each.
(ii) Profit after tax amounted to Rs. 130 million. It includes a loss after tax from a discontinued operation,
amounting to Rs. 40 million.
(iii) On 30 September 2011, QL issued 20% right shares at a price of Rs. 11 per share. The market value of
the shares immediately before the right issue was Rs. 12.50 per share.
(iv) There are 25,000 share options in existence. Each option allows the holder to acquire 120 shares at a
strike price of Rs. 10 per share. The options have already vested and will expire on 30 June 2013. The
average market price of ordinary shares in 2011 was Rs. 12 per share.
(v) QL had issued debentures in 2008 which are convertible into 6 million ordinary shares. The debentures
shall be redeemed on 31 December 2012. The conversion option is exercisable during the last six months
prior to redemption. The interest on debentures for the year 2011 amounted to Rs. 11 million.
(vi) Preference shares issued in 2009 are convertible (at the option of the preference shareholders) into 4
million ordinary shares on 31 December 2013. The dividend paid on preference shares during 2011
amounted to Rs. 5. 75 million.
(vii) The company is subject to income tax at the rate of 35%.
Required:
Prepare extracts from the financial statements of Que Limited for the year ended 31 December 2011 showing
all necessary disclosures related to earnings per share. (Ignore comparative figures)

PRACTICE KIT

33. Krishna Limited (Disclosure + EPS)
The following information pertaining to Krishna Limited (KL) has been extracted from its financial
statements for the year ended 31 December 2012.
(i) Total comprehensive income for the year:
Rs in’000
Profit from continuing operations - net of tax 200,000
Profit from discontinued operations - net of tax 10,000
Fair value gain on investments available for sale - net of tax 16,000
Total comprehensive income 226,000
(ii) Share capital as on 1 January 2012:
• 8,000,000 Ordinary shares of Rs. 10 each.
• 500,000 Convertible preference shares of Rs. 100 each entitled to a cumulative dividend at 12%. Each
share is convertible into two ordinary shares and the dividend is paid on 28 February, every year.
(iii) 20% bonus shares being the final dividend for the year ended 31 December 2011 were issued on 31
March 2012.
(iv) On 30 April 2012, holders of 80% convertible preference shares converted their shares into ordinary
shares.
(v) On 1 July 2012, KL issued 20% right shares to its ordinary shareholders at Rs. 70 per share. The market
price prevailing on the exercise date was Rs. 80 per share.
(vi) On 1 August 2011, KL granted 2,500 share options to each of its twenty technical managers. The
managers would become eligible to exercise these options on completion of further five years of service
with KL. By 31 December 2012, two managers had already left and it is expected that a further six
managers would leave KL before five years. As of 31 December 2012 estimated fair value of each share
option was Rs. 40.
Required:
Prepare a note relating to basic and diluted earnings per share for inclusion in KL's financial statements for
the year ended 31 December 2012, in accordance with International Financial Reporting Standards.

34. Ittehad Industries Limited (Disclosure + EPS)
The following information has been extracted from draft statement of financial position of Ittehad Industries
Limited (IIL), as on 31 December 2014:
2014 2013
Rs in millions
Share capital (Rs.10 each) 1,800 1,200
Accumulated profit 3,756 3,556
11.5% Term finance certificates (TFCs) 250 -
(i) The profit after tax earned by IIL during the year ended 31 December 2014 amounted to Rs. 225 million.
(ii) On 1 April 2014, IIL issued 25% right shares to its existing shareholders at Rs. 15 per share. Market value
of the shares prior to the issue of right shares was Rs. 25 per share.
(iii) 20% bonus shares for the year ended 31 December 2013 were issued on 1 May 2014. The right shares
issued on 1 April 2014 were also entitled for the bonus.
(iv) On 31 December 2014, 5 million shares were nor yet vested under the employee share option scheme.
The exercise price of the option was Rs. 12 per share and average market price per share during 2014
was Rs. 15 per share. The amount to be recognized in relation to employee share option in profit and
loss account over future accounting periods up to vesting date is Rs. 10 million.

PRACTICE KIT
(v) On 1 July 2014, IIL issued TFCs which are convertible into 20 million ordinary shares on 31 December
2018.
(vi) IIL is subject to income tax at the rate of 35%.
Required:
Prepare relevant extracts to be reflected in the financial statements of Ittehad Industries Limited for the year
ended 31 December 2014 showing all necessary disclosures relating to earnings per share.
(Comparative figures are not required)
35. Company G – (Diluted EPS – Convertible bonds)

Company G has 12,000,000 ordinary shares and Rs. 4,000,000 5% convertible bonds in issue.
As at 31 December Year 2, there have been no new issues of shares or bonds for several years.
The bonds are convertible into ordinary shares in Year 3 or Year 4, at the following rates:
• At 30 shares for every Rs. 100 of bonds if converted at 31 December Year 3
• At 25 shares for every Rs. 100 of bonds if converted at 31 December Year 4
Total earnings for the year to 31 December Year 2 were Rs. 36,000,000.
Tax is payable at a rate of 30% on profits.
Required:
Calculate basic EPS and diluted EPS for Year 2.
36. Company H – (Diluted EPS – New issue of convertibles in the year)

Company H has 10,000,000 ordinary shares in issue.
There has been no new issue of shares for several years. However, the company issued Rs. 2,000,000 of
convertible 6% bonds on 1 April Year 5.
These are convertible into ordinary shares at the following rates:

On 31 March Year 10 25 shares for every Rs. 100 of bonds
On 31 March Year 11 20 shares for every Rs. 100 of bonds

In the financial year to 31 December Year 5 total earnings were Rs. 40,870,000.
Required:
Calculate basic EPS and diluted EPS for Year 5.
37. Order of dilution

The following information relates to Company L for the year ended 31 December Year 5.
Number of ordinary shares in issue 5,000,000

Reported earnings in the year Rs. 15,000,000
Average market price of shares during the year Rs. 80
Potential ordinary shares:
Options 600,000 options, with an exercise price of Rs. 60
4% convertible bond: Rs. 5,000,000 Each bond is convertible in Year 10 into ordinary
shares at the rate of 40 new shares for every Rs. 100
of
bonds
100,000 7% convertible preference shares of Rs. 10 Each preference share is convertible in Year 9 into
each ordinary shares at the rate of 1 ordinary share for
every 20 preference shares

PRACTICE KIT
Tax rate = 30%
Required:
Calculate Diluted EPS for the year to 31 December Year 5.
38. Company M – (Contingently issuable shares)

Company M has 12,000,000 ordinary shares in issue.
As at 31 December Year 2, there have been no new issues of shares or bonds for several years.
Company M acquired a new business during Year 1. As part of the purchase agreement Company M would
issue a further 1,000,000 shares to the vendor on 30 June Year 3 if the share price was Rs. 500 at that date.
The share price was Rs. 600 on 31 December Year 2.
Earnings for the year to 31 December Year 2 were Rs. 100,000,000.
39. Company N – (Diluted EPS – Conversion right exercised in the year)

Company N has 10,000,000 ordinary shares and Rs. 2,000,000 of convertible 6% bonds in issue at the start of
the year.
The conversion right was exercised on 1 April resulting in the issue 500,000 new shares.
In the financial year to 31 December total earnings were Rs. 40,870,000.
Required:
Calculate basic EPS and diluted EPS.
40. IE7 – CIS (Contingently issuable shares)

Reference: IAS 33, paragraphs 19, 24, 36, 37, 41–43 and 52
Ordinary shares outstanding during 20X1 1,000,000 (there were no options, warrants or convertible
instruments outstanding during the period)
An agreement related to a recent business combination provides for the issue of additional ordinary
shares based on the following conditions:
5,000 additional ordinary shares for each
new retail site opened during 20X1
1,000 additional ordinary shares for each
CU1,000 of consolidated profit in excess of
CU2,000,000 for the year
ended 31 December 20X1
Retail sites opened during the year: one on 1 May 20X1

one on 1 September 20X1
Consolidated year-to-date profit

attributable
to ordinary equity holders of the parent CU1,100,000 as of 31 March 20X1
entity: CU2,300,000 as of 30 June 20X1
CU1,900,000 as of 30 September 20X1
(including a CU450,000 loss from a
discontinued operation)
CU2,900,000 as of 31 December 20X1
Required:
Calculate Basic EPS and Diluted EPS for the period 20x1.
[ICAP Summer 2014 Q6]

PRACTICE KIT
41. Alpha Limited (EPS + Consolidation)

Alpha Limited (AL), a listed company, acquired 80% equity in Zee Limited (ZL) on 1 July 2010. The following
information has been extracted from their draft financial statements:
AL ZL
----- Rs. in '000 -----
Balance as at 1 January 2013:
Share capital (Rs. 100 each) 80,000 35,000
12% Convertible bonds (Rs. 100 each) 30,000 --
Profit for the year ended 31 December 2013 (after tax) 60,000 25,000
Following information is also available:

(i) The bonds were issued at par on 1 January 2011 and are convertible at any time before the redemption
date of 31 December 2015, at the rate of five ordinary shares for every four bonds.
(ii) Cost and fair value information of ZL's investment property is as under:
31-Dec-2013 31-Dec-2012
-------- Rs. in '000 --------
Cost 65,000 60,000
Fair value 67,000 59,000
ZL uses cost model while the group policy is to use the fair value model to account for investment property.
(iii) AL operates a defined benefit gratuity scheme for its employees. The actuary's report has been received
after the preparation of draft financial statements and provides the following information pertaining to
the year ended 31 December 2013:
Rs. in '000
Actuarial losses 150
Current service costs 8,000
Net interest income 3,000
(iv) On 1 August 2013, under employees' share option scheme, 60,000 shares were issued by AL to its
employees at Rs. 150 per share against the average market price of Rs. 250 per share.
(v) Dividend details are as under:
AL ZL
2013 (Interim) 2012 (Final) 2013 (Interim) 2012 (Final)
Cash 18% 10% 12% 15%
Bonus shares -- 20% -- 16%
(vi) Applicable tax rate for business income is 35%.
Required:
Extracts from the consolidated profit and loss account of Alpha Limited (including earnings per share) for the
year ended 31 December 2013 in accordance with the International Financial Reporting Standards.
(Note: Comparative figures and information for notes to the financial statements are not required)

PRACTICE KIT
Answers:
1. Weighted average number of ordinary shares

The calculation can be performed on a cumulative basis:
Weighted average
1 Jan X1 – 30 May X1 1,700 x 5/12 708
Share issue 800
31 May X1 – 30 Nov X1 2,500 x 6/12 1,250
Share purchase (250)
1 Dec X1 – 31 Dec X1 2,250 x 1/12 188
2,146
Or alternatively each issue or recall treated separately:
Weighted average
1 Jan X1 – 31 Dec X1 1,700 x 12/12 1,700
31 May X1 – 31 Dec X1 800 x 7/12 467
1 Dec X1 – 31 Dec X1 (250) x 1/12 (21)
2,146
2. Partly paid shares

The new shares issued should be included in the calculation of the weighted average number of shares in
proportion to the percentage of the issue price received from the shareholding during the period.
Shares Fraction Weighted average
issued of period shares
1 January 20X5 – 31 August 20X5 900 8/12 600
Issue of new shares for cash, part paid (2/4 x 600) 300
1 September 20X5 – 31 December 20X5 1,200 4/12 400
Weighted average number of shares 1,000
3. Bonus issue
The bonus issue arose in the period after the reporting date. It should be treated as if the bonus issue arose
during 20X7, and EPS calculated accordingly:
Additional shares issued 200 X 2 = 400

£900
= £1.50
(200+400)
Basic EPS 20X6

£300
= £0.50
(200+400)

PRACTICE KIT
4. Share consolidation
The three million new shares issued at the time of the acquisition should be weighted from the date of issue,
but the consolidation should be related back to the start of the financial year (and to the start of any previous
years presented as comparative figures).
The calculation of the weighted number of shares in issue is as follows:
Number Weighting Adjusted
number
At 1 January 20X5 10,000,000
Effect of consolidation is to halve the number of shares
(since one new share was issued for every two old shares held) (5,000,000)
5,000,000 12/12 5,000,000
30 April 20X5 issue 3,000,000
Effect of consolidation is to halve the number of shares (1,500,000)
1,500,000 8/12 1,000,000
Weighted average shares in issue 6,000,000
5. Special dividend and share consolidation

a) Share repurchase at fair value
20X7 20X6
£ £
Profit for the year 4,000 4,000
Loss of interest as cash
paid out £4,000 x 0.05 x 0.80* (160)
Earnings 3,840 4,000
Number of shares outstanding 18,000 20,000
Earnings per share 21.33p 20.00p
b) Special dividend followed by share consolidation

20X7 20X6
£ £
Profit for the year 4,000 4,000
Loss of interest on cash paid out as dividend
£4,000 x 0.05 x 0.80* (160)
Earnings 3,840 4,000
The effect of share consolidation is to leave the total nominal value of outstanding shares the same,
but to reduce the number of shares from 20,000 to 18,000, and raising the market price of a share from
£2 to £2.22.
20X7 20X6
Number of shares 18,000 20,000
Earnings per share 21.33p 20.00p
No adjustment to prior year's EPS is made for the share consolidation.

* 0.80 = (1 – tax rate)

PRACTICE KIT
6. Rights issue
Calculation of theoretical ex-rights value per share
No. Price Total
Pre-rights issue holding 5 £11 £55
Rights share 1 £5 £5
6 £60
Therefore TERP = £60/6 = £10

(The TERP may also be calculated on the basis of all shares in issue i.e., £6,000/600 shares.)
Calculation of adjustment factor
Fair value per share before exercise of rights £11
Adjustment factor = = = 1.10
Theoretical ex-rights value per share £10
Calculation of basic earnings per share 20X4
20X4 basic EPS as originally £1,100 £2.20
=
reported: 500 shares
20X4 basic EPS restated for
rights issue in 20X5 accounts: £1,100 £2.00
=
(500 shares) x (adjustment factor)
Alternatively the restated EPS may be calculated by applying the reciprocal of the adjustment factor
to the basic EPS as originally reported:
£2.20 x 10/11 = £2.00
20X5
Weighted average number of shares:
1 January – 28 February 500 x 11/10 x 2/12 92
Rights issue 100
1 March – 31 December 600 x 10/12 500
592
Basic EPS including effects of rights issue: £1,500 £2.53
=
592 𝑠ℎ𝑎𝑟𝑒𝑠
20X6
Basic EPS: £1,800 £3.00
600 𝑠ℎ𝑎𝑟𝑒𝑠
7. Cash and rights issue

As the shares issued on the acquisition were issued at full fair value, a time apportionment adjustment over
the period they are in issue is required.
The rights issue shares require a time apportionment adjustment and an adjustment for the bonus element in
the rights. The latter adjustment should be applied to the shares issued on 1 April as well as to those issued
earlier.
To adjust for the bonus element the theoretical ex-rights fair value per share is required:
Computation of theoretical ex-rights price (TERP):
No. Price Total
Pre-rights issue holding 6 £20 £120
Rights share 1 £15 £15
7 £135
Therefore TERP = £135/7 = £19.29
The adjustment factor is therefore £20/£19.29

20X4 and earlier EPS figures would be adjusted by dividing the corresponding earnings figure by 1.037.

PRACTICE KIT
The weighted number of shares in issue in 20X5 is calculated as:
Number Weighting Adjusted number

1 January to 31 March 14,000,000 x 20/19.29 3/12 3,628,823
Issue 1 April 4,000,000
1 April to 30 June 18,000,000 x 20/19.29 3/12 4,665,630
Rights issue 1 July 3,000,000
1 July to 31 December 21,000,000 6/12 10,500,000
20X5 EPS:
£17m/18,794,453 shares = £0.90

20X4 restatement – original EPS: £14m ÷ 14m shares = £1.00
£1.00 X 19.29/20.00 = £0.96
8. Increasing rate preference shares

Because the shares are classified as equity, the original issue discount is amortised to retained earnings using
the effective interest method and treated as a preference dividend for earnings per share purposes. To calculate
basic earnings per share, the following imputed dividend per class A preference share is deducted to
determine the profit or loss attributable to ordinary equity holders of the parent entity.
Year Carrying amount of class A Imputed Carrying amount of class A Dividend

preference shares 1 Dividend preference shares 31 Paid
January December
£ £ £ £
20X1 81.63 5.71 87.34 -
20X2 87.34 6.12 93.46 -
20X3 93.46 6.54 100.00 -
Thereafter: 100.00 7.00 107.00 (7.00)
9. Cumulative convertible preference shares

The excess of the fair value of additional ordinary shares issued on conversion of the convertible preference
shares over fair values of the ordinary shares to which they would have been entitled under the original
conversion terms is deducted from profit as it is an additional return to the convertible preference
shareholders.
£
Profits attributable to the ordinary equity holders 150,000
Fair value of additional ordinary shares issued on conversion of convertible
preference shares (300)
149,700
There is no adjustment in respect of the preference shares as no dividend accrual was made in respect of the
year. The payment of the previous year's cumulative dividend is ignored for EPS purposes as it will have been
adjusted for in the prior year.

PRACTICE KIT
10. Repurchase of preference shares
£
Profit for the year attributed to ordinary equity holders 150,000
Plus discount on repurchasing of preference shares 1,000
151,000
The discount on repurchase of the preference shares has been credited to equity and it must therefore be
adjusted against profit.
Had there been a premium payable on repurchase, the loss on repurchase would have been subtracted from
profit.
No accrual for the dividend on the 8% preference shares is required as these are non-cumulative. Had a
dividend been paid for the year it would have been deducted from profit for the purpose of calculating basic
EPS as the shares are treated as equity and the dividend would have been charged to equity in the financial
statements.
11. Participating equity instruments

Basic earnings per share is calculated as follows.
£ £
Profit attributable to equity holders of the parent entity 100,000
Less dividends paid:
Preference
Ordinary
33,000
21,000
54,000
Undistributed earnings 46,000
Allocation of undistributed earnings

Let A be the allocation of undistributed earnings per ordinary share and B the allocation per preference share.
That is:
(A x 10,000) + (B x 6,000) = £46,000
As B's entitlement is one quarter that of A's, we can eliminate B from the equation as follows:
(A x 10,000) + (1/4 x A x 6,000) = £46,000
10,000A + 1,500A = £46,000
11,500A = £46,000
A = £46,000/11,500
A = £4.00
Therefore B = £1.00
Basic per share amounts
Per preference share Per ordinary share
Distributed earnings £5.50 £2.10
Undistributed earnings £1.00 £4.00
Totals £6.50 £6.10

PRACTICE KIT

Basic EPS
£15m/24m shares = £0.63
Diluted EPS
To calculate the diluted earnings per share we need to consider the impact on both earnings and
number of shares.
Impact on earnings: On conversion, after tax earnings attributed to ordinary
shareholders should be increased by the reduction in the interest
charge payable to loan holders.
Taking tax into account, the interest saved will be:
£7m x 0.1 x (1 – 0.2) = £0.56m
Therefore diluted earnings = £15m + £0.56m = £15.56m
Impact on number of On conversion, the number of ordinary shares will increase by
shares: £8m/2 = 4 million shares, raising the number of ordinary shares
after conversion to 28 million ordinary shares.
Therefore DEPS = £15.56m/28 million shares = £0.56
13. Test of dilution

Basic EPS
20X6
£
Trading results
Profit before interest and tax 1,050,000
Interest on 7% convertible loan stock (105,000)
Profit before tax 945,000
Taxation (283,500)
Profit after tax 661,500
Number of shares outstanding 2,000,000
Basic EPS (£661,500/2,000,000 shares) £0.33
Testing for dilutive impact

Increase in earnings = interest saved (£1,500,000 x 7% x (1 – 30%)) £73,500
Increase in number of shares (£1,500,000/£100 x 140) 2,100,000
EPS (£73,500/2,100,000) 3.5p
This is less than basic EPS and therefore the convertible loan stock is dilutive.

PRACTICE KIT

The incremental earnings per share for each type of potential ordinary shares is shown below.
Increase in Increase in Earnings per

earnings number of additional
(interest shares share
saved)
£ £
£11 million of 6.5% convertible loan stock
£10m x 9% convertible loan stock 900,000
1 ordinary share for £2 nominal of loan stock 5,500,000 0.16
£9 million of 6.75% convertible loan stock
£8m x 8% convertible loan stock 640,000
£12.6 million of 9% convertible loan stock
£12m x 12% convertible loan stock 1,440,000
The earnings per share can be calculated adjusting both the earnings and the number of shares for each type
of potential shares, and the results are shown below. Each issue of potential ordinary shares is added to the
calculation at a time, taking the most dilutive factor first.
Number Earnings
Earnings of per
shares share
£ £
Shares already in issue 4,000,000 20,000,000 0.20
Including 6.75% convertible loan stock 4,640,000 24,500,000 0.189
Including 6.5% convertible loan stock 5,540,000 30,000,000 0.185
Including 9% convertible loan stock 6,980,000 32,100,000 0.217
15. Diluted earnings per share
20X7
£
Trading results
Profit after tax 900,000
Number of shares outstanding 3,000,000
Basic EPS £0.30
Number of shares under option
Issued at full market price (600,000 x 50p)/£1.50 200,000
Issued at nil consideration 600,000 – 200,000 400,000
Total number of shares under option 600,000
Number of equity shares for basic EPS 3,000,000
Number of dilutive shares under option 400,000
Adjusted number of shares 3,400,000
Diluted EPS (£900,000/3,400,000) £0.26

PRACTICE KIT

As the two million additional shares do not result in additional resources for the entity, they are brought into
the diluted earnings per share calculation from the start of the 20X5 reporting period. The diluted earnings
per share is therefore:
Diluted earnings per share = £20m /(16m + 2m) = £1.11
17. Cumulative targets

The cumulative target of 3 years x 100,000 units is not met in 20X7 and 20X8, therefore no dilution is accounted
for.
In 20X9, the cumulative target is met as is the average target, therefore a diluted EPS is disclosed:
Basic EPS Diluted EPS
20X7 £780,000 £0.26 Not relevant
=
3,000,000 𝑠ℎ𝑎𝑟𝑒𝑠
20X8 £655,000 £0.22 Not relevant
=
3,000,000 𝑠ℎ𝑎𝑟𝑒𝑠
20X9 £745,000 £0.25 £745,000 £0.21
=
3,000,000 𝑠ℎ𝑎𝑟𝑒𝑠 3,500,000 𝑠ℎ𝑎𝑟𝑒𝑠

Basic earnings per share
The 24 million additional shares are weighted by the period they have been in issue:
Issued Weighting Adjusted
number
1 January 20X5 – 28 February 80,000,000 2/12 13,333,333
Issued 28 February 12,000,000
1 March – 30 Sept 92,000,000 7/12 53,666,667
Issued 30 September 12,000,000
30 September – 31 December 104,000,000 3/12 26,000,000
Basic earnings per share = £200m/93m = £2.15
Diluted earnings per share
As the 24 million additional shares do not result in any additional resources for the entity, the diluted
calculation assumes all the new shares were issued at the start of the year (see section 2.4).
Diluted earnings per share = £200m / (80m + 12m + 12m) = £1.92

PRACTICE KIT
19. Whiting (EPS with CO/DCO)

12.6 pence
Basic EPS Based on continuing operations £1,600,000 16.7 p
=
9,600,000
Incremental Increment to profits after conversion of bonds:
EPS £1,100,000 x 10% x (1 – 20%) = £88,000
Increase to number of shares:
£1,200,000/£2 = 600,000
Therefore: £88,000 14.7 p

=
600,000
Diluted EPS Based on continuing operations 16.6 p
£(1,600,000 + 88,000)
9,600,000 + 600,000 𝑠ℎ𝑎𝑟𝑒𝑠
The shares issuable on conversion of the bonds are potentially dilutive, but IAS 33.41 only requires them to be
taken into account if they dilute the basic EPS figure based on continuing operations.
20. Citric (EPS + Compound Instrument)

a) 476,000
b) 11.5 pence
c) 6.78 pence
(a) Shares issued at average market price (1,700,000 x £18)/£25 = 1,224,000
Shares issued at nil consideration (1,700,000 – 1,224,000) 476,000
(b) Incremental profits (£1,750,000 x 7% x (1 – 25%)) £91,875
Increase in number of shares (£2,000,000/£5 x 2) 800,000
Therefore incremental EPS (£91,875/800,000 shares) 11.5p
(c)
Profits Number of shares EPS
Basic EPS £100,000 1,000,000 10p
Add in options £100,000 1,476,000 6.78p
The warrants (treated as issued for nil consideration) are more dilutive than the bonds, so are dealt with first
under IAS 33.44. As the 11.5 pence earnings per incremental share on conversion of the bonds is antidilutive,
under IAS 33.36 the conversion is left out of the calculation of diluted EPS.

PRACTICE KIT
21. Cachet Ltd (Multiple Scenarios – Bonus, Rights Issue)
BASIC EPS DILUTED EPS

1) No change in share capital 69,000 − 1,380
𝑃𝐴𝑇 − 𝑃𝑟𝑒 𝐷𝑖𝑣 100 20,700
= ×
𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
=3.27 N/A
2) Bonus issue on 30 Sept. 2016:
No. of shares before bonus issue 20,700
Bonus (1 for 4) 5,175
No. of shares after bonus issue 25,875
𝑃𝐴𝑇 − 𝑃𝑟𝑒 𝐷𝑖𝑣 100 69,000 − 1,380
= ×
𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 25,875
=2.61 N/A
3) Rights issue on 1 Oct. 2016

Before rights issue 5 shares 1.80 20,700 9.00 37,260
Rights issue (1 for 5) 1 share 1.20 4,140 1.20 4,968
After rights issue 6 shares 3.00 24, 840 10.20 42,228
Theoretical ex-right price (Rs. 10.20/6) 1.70 1.70
Bonus element of issue increases shares to 20,000 x 1.8/1.7 = 21,176

Full price element of issue increases shares to
20,700 x 6/5 = 24,840
Weighted average number of shares in issue
21,176 x 9/12 15,882
24,840 x 3/12 6,210
22,092
EPS
=
𝑃𝐴𝑇−𝑃𝑟𝑒𝑓 𝐷𝑖𝑣
× 100 69,000 − 1,380
𝑁𝑜. 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 = 3.06/𝑠ℎ𝑎𝑟𝑒
22,092
22. MARY (Multiple Scenarios – Bonus, Rights Issue)
Rs.
2 existing shares have a cum rights value of (2 Rs. 4) 8
1 new share is issued for 1
1 new share is issued for 9
Theoretical ex-rights prices = Rs. 9/3 = Rs. 3

PRACTICE KIT
Number Time Bonus Rights Weighted average
Date of shares factor fraction Fraction number of shares
1 January Brought 5,000,000 1/12 6/5 4/3 666,667
Forward
1 February Bonus issue 1,000,000
(1 for 5)
6,000,000 2/12 4/3
1,333,333
1 April Rights issue 3,000,000
(1 for 2)
9,000,000 `2/12 1,500,000
1 June Issue at full
market price
800,000
31 December Carried 9,800,000

forward 7/12 5,716,667
9,216,667
Earnings for Year 5 are (3,362,000 – 600,500 – 800,000) Rs. 1,961,500
EPS Year 5 = 1,961,500/9,216,667 = Rs.0.21 or 21 paisa
EPS Year 4 (adjusted) = Rs.0.32 × 3/4 × 5/6 = Rs.0.20 or 20 paisa
23. Mandy (Diluted EPS)

Adjusted total earnings
Year 4 Year 3
Rs. Rs.
Reported earnings 2,579,000 1,979,000
Add back interest saved
Year 4 (1,000,000 x 7%) – Year 5 (1,000,000 x 7% x 70,000 52,500
9/12)
Minus tax at 30% (21,000) (15,750)
49,000 36,750
Adjusted total earnings 2,628,000 2,015,750
Number of shares
Year 4 Number of Shares
Brought forward 5,000,000
1 January Dilutions:
Share options (W) 200,000
Convertible shares (1,000,000 ÷ 100 x 30) 300,000
31 December 5,500,000
Year 3 Number of Time Factor Weighted average

Shares number of shares
Date
1 January Brought forward Share 5,000,000
options: dilution (W) 125,000
5,125,000 3/12 1,281,250
1 April Convertibles: dilution 300,000
5,425,000 9/12 4,068,750
5,350,000

PRACTICE KIT
Diluted EPS
Year 4 = 2,628,000/5,500,000 = Rs.0.48 or 48 paisa
Year 3 = 2,015,750/5,350,000 = Rs.0.38 or 38 paisa
Working
Cash receivable on exercise of all the options = 500,000 × Rs. 3 = Rs. 1,500,000
Year 4
Number of shares this would buy at full market price in Year 4 = Rs. 1,500,000/5 = 300,000 shares
Shares
Options 500,000
Minus number of shares at fair value (300,000)
Net dilution 200,000
Year 3
Number of shares this would buy at full market price in Year 3 = Rs. 1,500,000/4 = 375,000 shares
Shares
Options 500,000
Minus number of shares at fair value (375,000)
Net dilution 125,000
24. AAZ Limited (Diluted EPS)
a) Step 1: Ranking in order of dilution

Increase in Increase in No. Earnings per
earnings of ordinary incremental Rank
shares shares
Rs. Rs.
Convertible Debentures
Increase in earnings (Rs. 7.5m x 70%) 5,250,000
Increase in shares 3,000,000 1.75 3
Convertible Preference Shares
Increase in earnings 2,450,000
4,000,000 0.61 2
Increase in shares
Options
Increase in earnings -
Increase in shares (1.5m x 1.1 / 11) 150,000 - 1

PRACTICE KIT
Step 2: Testing for dilutive effect

Profit from operations
attributable to
ordinary Ordinary
shareholders Shares EPS Effect
Rs. Rs.
Basic Earnings per share *125,380,000 85,220,000 1.471 -
Options (Rank 1) - 150,000
125,380,000 85,370,000 1.469 Dilutive
Convertible preference shares

(Rank 2) 2,450,000 4,000,000
127,830,000 89,370,000 1.430 Dilutive
Convertible debentures (Rank 3) 5,250,000 3,000,000
Anti-
133,080,000 92,370,000 1.44 Dilutive
*Rs. 127,830,000 – Rs. 2,450,000 = Rs. 125,380,000
b) AAZ Limited
Notes to the financial statements for the year ended December 31, 2016
2016
Basic alternative to ordinary share holders
Profit (Rupees) 125,383,000
Weighted average number of ordinary shares outstanding during the 85,220,000
year
Earnings per share - basic (Rupees) 1.47
Diluted
Profit after taxation (Rupees) 127,833,000
Weighted average number of ordinary shares, options and convertible
preference shares outstanding during the year 89,370,000
Earnings per share - diluted (Rupees) 1.430
Because diluted earnings per share is increased when taking the convertible preference shares into account
(from Rs. 1.430 to Rs. 1.44), the convertible debentures are anti-dilutive and are ignored in the calculation of
diluted earnings per share.

PRACTICE KIT
25. ABC Limited (Disclosure Note of EPS)

Notes to consolidated financial statements for the year ended March 31, 2016
Rs. in '000
2016
Earnings per share basic
Profit after tax and non-controlling interest (15,000-2,000) 13,000
Dividend paid during the year to ordinary shareholders
(Rs. 4,000) -
10% Cumulative preference dividend for 2015 (Rs. 2,000) -
10% Cumulative preference dividend for 2016 (2,000)
Dividend declared on 12% non-cumulative preference shares for 2016 (2,400)
Profit available for distribution to ordinary share holders 8,600
Profit available for distribution to ordinary share holders 8,600
Effect of dividend declared on 12% non-cumulative preference shares 2,400
convertible into ordinary shares on or before December 31, 2017
11,000
Weighted average number of ordinary shares W1 13,146
12% Non-cumulative preference shares convertible to ordinary
shares 1,771
on or before December 31, 2017 W3 0.74
Weighted average number of ordinary shares - diluted
Antidiluted earning per share 14,917
W1: Weighted average ordinary shares outstanding for "Basic EPS"

Bonus Weighted
Date Number of Time factor fractions (W3) average
shares number of
shares
1 April 2015 to 30 June 2015 10,000,000 × 3/12 x6/5x1.00833 3,024,990
1 July
Conversion of cumulative prefs at a
premium of Rs. 2 per share
(500,000 x 10/12) 416,667
1 July to 30 September 10,416,667 × 3/12 x6/5x1.00833 3,151,031
1 October
Rights issue 1,200,000
30 September to 31 December 11,616,667 × 3/12 x6/5 3,485,000
1 January
Bonus issue (20%) 2,323,333
1 January to 31 March 13,940,000 × 3/12 3,485,000
Weighted average 13,146,021

PRACTICE KIT
W2: Calculation of bonus adjustment factor

No. of @ Rs. Rs. in '000
shares
Bonus element with right issue
Outstanding shares before the exercise of rights at fair
value 10,417 12.50 130,213
Rights issued at a premium of Rs. 1.5 1,200 11.50 13,800
11,617 144,013
Rs.
Actual cum rights price per share 12.5000
Theoretical ex-right value per share (144,013/11,617) 12.3967
Adjusting factor 1.00833
Bonus issued on January 01, 2016 (20%)
Adjusting factor (6 shares for 5 shares) 1.2
W3: Diluted EPS
Number of Earnings EPS (Rs.)
shares (Rs.)
Basic EPS 13,146,021 8,600,000 0.65
Dilution:
Non-cumulative prefs in issue for the year (W4)at a
premium of Rs. 2 per share (for the whole year)
2,000,000 x 10/12 x 12/12 1,666,667
Add back dividend paid to non-cumulative 2,400,000
prefs in issue at the year-end
Non-cumulative prefs actually converted in the year
(for the part of the year before conversion)
(500,000 x 10/12) x 3/12
i.e. 416,667 x 3/12 104,167
1,770,834
Adjusted figures 14,916,855 11,000,000 0.74
Diluted EPS: Rs. 11,000,000/14.917 million = Rs.0.74 per share

The non-cumulative preference shares are anti-dilutive
W4: Non-cumulative prefs in issue at the year-end
This can be found from the information about the dividend.
Rs. 2,400,000 is 12% of the nominal value of the shares.
Therefore, the nominal value is Rs. 20,000,000 (Rs. 2,400,000/0.12).
Therefore the number of shares (at Rs. 10 per share) is 2,000,000

PRACTICE KIT
26. Sajjad Limited (EPS + Classes of Preference Shares)

Rs. in million
Less: Dividend
Class A Preference shareholders (9÷1.09×2) 16.51
Class B Preference shareholders (300×6%) 18.00
Profit attributable to class B preference shareholders [90.49(W-
1)×3÷(20+3)(W-2)] 11.80
46.31
Profit available for ordinary shareholders 103.69
Earnings per share (103.16÷10) 10.37
W-1 Undistributed earnings Rs. in million

Profit after tax 150.00
Less: Imputed dividend (16.51)
Dividend to class B preference shares (18.00)
Dividend to ordinary shareholders (25.00)
Undistributed earnings 90.49
W-2: Determination of ratio for distribution of undistributed earnings between ordinary and class B
preference shareholders
No. of outstanding
shares (in million) Weight Product
Ordinary shareholder 10 2 20
Class B preference shareholder 3 1 3
23
27. Tiger Limited (Potential Ordinary Shares – EPS Diluted)

a) Tiger Limited
EPS for quarter ended 31 December 2017
Numerator Denominator EPS Effect
Rs. in million Shares in million Rs. / share
Basic EPS 140.00 24.80 (W-1) 5.65
Warrant - - No effect
140.00 24.80 5.65
Bonds 8.05 1.60 5.03
(W-3) 0.8(2.4 ×1/3)+0.8(1.2×2/3)
OR 1.2+0.4(1.2÷3)
148.05 26.4 5.61 Dilutive
Rs. per share

Basic EPS 5.65
Diluted EPS 5.61

PRACTICE KIT
b) EPS for half year ended 31 December 2017

Numerator Denominator EPS Effect
Rs. in million Shares in million Rs. / share
Basic EPS 239.00 23.73 (W-2) 10.07
Warrant - 0.333
[6-(340÷360×6)]
239.00 24.06 9.93 Dilutive
Bonds 20.02 2.00 10.01
(W-3) 1.6(2.4 ×4/6)+0.4(1.2×2/6)
OR 1.2+0.8(1.2×4÷6)
259.02 26.067 9.94 Anti-dilutive
Rs. per share

Basic EPS 10.07
Diluted EPS 9.93
W-1: Weighted average shares for quarter ended 31 December 2017
Date Shares Period Total Alternate
1-Oct (20+4) 24 1÷3 8.00 24
1-Nov (0.8×3×50%) 1.20 0.8
25.2 2÷3 16.80 (1.2×2÷3)
24.80 24.80
W-2: Weighted average shares for half year ended 31 December 2017
Date Shares Period Total Alternate
1-Jul 20 1÷6 3.33 20.00
1-Aug 4 3.33
24 3÷6 12.00 (4×5÷6)
1-Nov 1.20 0.4
25.20 2÷6 8.40 (1.2×2÷6)
23.73 23.73
W-3: Interest on Bonds for half year (net of tax):

First quarter Rs. in million
July to Sep [(760 × (9%×3/12×70%)] 11.97
Second quarter
Oct [(760 × (9%×1/12×70%)] 3.99
Nov to Dec [386.20(W-4) × (9%×2/12×70%) 4.06
8.05
20.02
W-4: Carrying value of bonds after conversion

Rs. in million
Initial recognition 760.00
Interest for the year (760×9%) 68.40
Interest paid (800×7%) (56.00)
772.40
Conversion (772.40×50%) (386.20)
386.20

PRACTICE KIT
28. Afridi Industries Limited (Disclosure + EPS)

Afridi Industries Limited
Extracts from the Statement of Comprehensive Income
Rupees in million
Profit before tax 120.0
Tax @ 35% (42.0)
78.0
Other comprehensive income -
Total comprehensive income 78
Earnings per share

Basic
Continued operations (91 [W-1] / 49 [W-2]) 1.86
Discontinued operations ((13) [W-1] / 49 [W-2]) (0.27)
1.59
Diluted
Continued operations (108.33 [W-1] / 60.67 [W-2]) 1.78
Discontinued operations ((13) [W-1] / 60.67 [W-2]) (0.21)
1.57
Afridi Industries Limited

Extracts from the Notes to the Financial Statements

Profit attributable to ordinary shareholders (Rs. in millions) 78.00
Weighted average number of ordinary shares (numbers in millions) (W-2) (W-1) 49.00
Diluted earnings per share Rs. In million

Profit attributable to ordinary shareholders 78.00
After tax effect on finance cost on convertible TFCs (4x100x8 / 65%) x 10/12 17.33
Profit after tax attributable to ordinary shareholders (diluted) 95.33
Numbers in million
Weighted average number of ordinary shares (W-2) 49.00
Effect on convertible TFCs on number of shares (W-2) 11.67
Weighted average number of ordinary shares 60.67

PRACTICE KIT
Workings
W-1: Basic and diluted earnings
Continued Discounted Total

-----Rupees in million-----
Profit before tax 140.00 (20.00) 120
Tax (49.00) 7.00 (42)
Profit attributable to ordinary shareholders
91.00 (13.00) 78
– basic earnings
Finance cost on convertible TFCs (4x100x 8%
17.33 - 17.33
x 65%) x 10/12
Profit attributable to ordinary shareholders
108.33 (13.00) 95.33
– diluted earnings
W.2: No of ordinary shares outstanding for basic and diluted EPS computation
Numbers in million
Ordinary share outstanding as of Jan 1, 2008 40.00
Right issued during the year (40 x 30%) x 9/12 9.00
No of ordinary shares outstanding for basic earnings per share 49.00
10 TFCs Convertible into 35 ordinary share (4,000,000 x 35/10) x 10/12 11.67
No of ordinary shares outstanding for diluted earnings per share 60.67
29. Rahat Limited (Disclosure + EPS)

Notes to and forming part of the financial statements
For the year ended March 31, 2011
2011 2010
Rs. / Shares in ‘000’
1 Earnings per share:
1.1 Basic earnings per share

Divided on 15% convertible preference shares (19,000*15%) /
(2,850) (3,000)
(20,000*15%)
Profit attributable to ordinary shareholders 147,150 107,000
Restated
Weighted average number of ordinary shares in issue W1 5,638.28 5,170.36
Basic earnings per share Rs. 26.10 20.69
1.2 Diluted earnings per share

Weighted average number of shares in issue W1 5,638.28 5,170.36
Conversion of 10,000 cumulative preference shares on July 1,
17.50 -
2010 (10*7)/12*3
Adjustment for potential ordinary shares on conversion of
1,330.00 1,400.00
15% cumulative preference shares (190*7) / (200*7)
Restated
Weighted average number of shares for diluted earnings 6,985.78 6,570.36
Diluted earnings per share Rs. 21.47 16.74
1.3 During the year the company has issued 1 million right ordinary shares at Rs. 12 per share against the
prevailing market price of Rs. 15 per share. This has resulted in restatement of basic and diluted
earnings per share for the year ended March 31, 2010.

PRACTICE KIT
W-1 Weighted average ordinary shares outstanding for ‘Basic EPS’

2011 2010 (Restated)
Actual Bonus Weighted Actual Bonus Weighted
Date of
Description No. of Time factor average No. of factor average
issue
shares (W-2) shares shares (W-2) shares
01-04-
Balance 10 5,000 3/12 1.034072 1,292.59 5,000 1.304072 5,170.36
Conversion of
10,000 cumulative 01-07-
preference shares 10 70
5,070 3/12 1.034072 1,310.69
01-10-
Right issue 10 1,000
6,070 6/12 - 3,035.00
Weighted average
shares 5,638.28 5,170.36
W-2 Calculation of theoretical ex-right value per share and bonus adjustment factor:
5,070 15.0 76,050
value
Exercise of rights issued at Rs. 12 per share 1,000 12.0 12,000
6,070 88,050
Theoretical ex-right value per share 88,050/6,070 14.50576
Bonus adjustment factor 15/14.50576 1.034072
30. Earnings Per Share
No TFCs converted to Ordinary shares

Basic earnings per share (B.EPS)
Profit attributable to ordinary shareholders Rs. 20,000,000
No. of shares
5,000,000 x 3/12 x 11/10 + 5,500,000 x 9/12
1,375,000 + 4,125,000 5,500,000
(20,000,000/5,375,000) 3.63 Rs. /share
Dilutive earnings per share (D.EPS)
Earnings used for basic EPS 20,000,000
Net of tax interest saved on conversion of TFC’s
[120,000,000 x 13% (1-0.35)] 10,140,000
30,140,000
No. of shares
Used for basic EPS 5,500,000
Assumed to be issued on conversion of TFC’s
[120,000,000 x 25/100] 3,000,000
8,500,000
(30,140,000/8,500,000) 3.54 Rs. /share
40% TFC’s converted into ordinary shares
Basic Earnings per share (B.EPS)
Profit attributable to ordinary shareholders Rs. 20,000,000
Interest saved on conversion of TFC’s
(120,000,000 x 0.4 x 13% (1-.35)) 4,056,000 24,056,000
No. of shares
5,000,000 x 3/12 x 11/10 + 5,500,000 x 3/12 + 6,700,000 x 6/12 6,100,000
(24,056,000/6,100,000) 3.94 Rs. /share

PRACTICE KIT

Earnings used for basic EPS 24,056,000
Net of tax interest saved on conversion of TFC’s
[72,000,000 x 13% (1-0.35)] 6,084,000
30,140,000
No. of shares
Used for basic EPS 6,100,000
Assumed to be issued on conversion of TFC’s
[72,000,000 x 25/1000] 1,800,000
7,900,000
3.81 Rs. /share
31. Market Searchers Limited (EPS Computation)
2002
Basic Earnings per share (B.EPS) Millions
Profit attributable to ordinary shareholders Rs. 1,100
No. of shares 5
Rs. 220 /share
Dilutive earnings per share (D.EPS) Rs. 220 /share
2003 2002
Basic Earnings per share (B.EPS) Millions Millions
Profit attributable to ordinary shareholders Rs. 1,500 Rs. 1,100
No. of shares
[5x2/12x11/10 + 6x10/12] (2003) 5.92 5.5
[5x11/10] (2002)
253.40 Rs. /share 200 Rs. /share
Theoretical ex-right price (TERP) (60/6)=10

5 shares market value =5x11=55
1 share exercise price =1x5=5
Total 6 60
Dilutive earnings per share (D.EPS) 253.40 Rs. /share 200 Rs. /share
2004 2003
Millions Millions
Basic Earnings per share (B.EPS) Rs. 1,800 Rs. 1,500
Profit attributable to ordinary shareholders 6 5.92
No. of shares Rs. 300 /share Rs. 253.40 /share

Earnings used for basic EPS 1,806 Rs. 1,500
No. of shares 7.5 5.92
Rs. 240.80 /share Rs. 253.40
Earnings used for basic EPS 1,800
Interest saved net of tax (10-4) 6
1,806
Used for basic EPS 6
Assumed to be issued on Convertible
(0.5x3) 1.5
7.5

PRACTICE KIT
32. Que Limited (Disclosure + EPS)

Extract from the Statement of Comprehensive Income
For the year ended 31 December 2011
2011
Earnings per share
Basic
Continued operations [(124,250,000 + 40,000,000) / 85,224,000)] 1.93
Discontinued operations [(40,000,000) / 85,224,000] (0.47)
1.46
Diluted
Continued operations [(131,400,000 + 40,000,000) / 91,724,000)] 1.87
Discontinued operations [(40,000,000) / 91,724,000] (0.44)
1.43
Que Industries Limited

Extract from notes to the Financial Statements
17- Earnings per share 2011
Basic Diluted
Rs. in millions
Total comprehensive income attributable to ordinary shareholders
Note 17.1, 124.25 131.40
17.2
Weighted average number of ordinary shares outstanding during the
year 85,224,000 91,724,000
Note
17.3
17.1 - Reconciliation of profit for the year to Basic earnings 2011

Rs. in millions
Less: Preference dividend (5.75)
Basic earnings 124.25
17.2 - Reconciliation of basic earnings to diluted earnings

Basic earnings 124.25
Add: Interest on convertible debentures 7.15
Diluted earnings 131.40
17.3 - Reconciliation of basic number of shares to diluted number of shares

Basic number of shares 85,224,000
Options 500,000
Convertible debentures 6,000,000
Preference shares (Not adjusted being anti-dilutive) --
Diluted number of shares 91,724,000

PRACTICE KIT
WORKINGS
W-1 : Weighted average number of shares
Description Date of issue Actual no. of shares Time Bonus factor W / Avg. shares
Balance 1-Jan-11 80,000,000 ¾ 1.0204 61,224,000
Right issue 30-Sep-11 16,000,000 - - -
96,000,000 ¼ 1.0000 24,000,000
85,224,000
W-1.1 : Calculation of theoretical ex-right price

Shares Quantity Market Rate Value
Outstanding shares before the exercise of rights
at fair value 80,000,000 12.5 1,000,000,000
Exercise of right issued 16,000,000 11.00 176,000,000
96,000,000 1,176,000,000
Theoretical ex-right price per share (Rs. 1,176,000,000 / 96,000,000) 12.25

Bonus adjustment factor (12.50 / 12.25) 1.0204
W -2 : Ranking of dilutive instruments

Description Increase in Increase in no. of Earnings per Rank
earnings ordinary shares incremental share
Convertible - debentures 7,150,000 6,000,000 1.19 2
(11,000,000 x 65%)
Options- bonus element -- 500,000 -- 1
(25,000 x 120 x 2/12)
Preference shares 5,750,000 4,000,000 1.44 3
W -3 : Testing for dilutive effect

Profit attributable to
ordinary shareholders Ordinary shares EPS Effect
Basic earnings per share 124,250,000 85,224,000 1.4579
Options - 500,000
124,250,000 85,724,000 1.4494 Dilutive
Convertible debentures 7,150,000 6,000,000
131,400,000 91,724,000 1.4326 Dilutive
Preference shares 5,750,000 4,000,000
137,150,000 95,724,000 1.4328 Anti-Dilutive

PRACTICE KIT
33. Krishna Limited (Disclosure + EPS)

Notes to the Financial Statements
1. Earnings per share 2012

From From
continuing discontinued Total
operations operations
Rupees in ‘000’
1.1. Basic earnings per share
Profit after taxation for the year 200,000 10,000
Dividend to convertible preference shares for the
year ended 21 December 2012 (1,200) -
(500,000x100x20%x12%)
Profit attributable to ordinary shareholders 198,800 10,000
No. of shares in ‘000’

Weighted avg. no. of ordinary shares in issue W-1 11,278 11,278
Rs. 17.63 0.89 18.52
1.2. Diluted earnings per share Rupees in ‘000’

Profit after taxation for the year 200,000 10,000
No. of shares in ‘000

Weighted avg. no. of ordinary shares in issue W-1 11,278 11,278
Adjustment for:
- Conversion of preference shares W-2 467 467
- Employee options (20-2-6) x 2,500 30 30
11,775 11,775
Diluted earnings per share Rs. 16.99 0.85 17.84
W-1 Weighted no. of ordinary shares

Weighted
No. of shares Fraction of Adjustment
Description Date average
outstanding period factor (W-2)
shares
No. of shares in ‘000’
Balance 01-01-12 8,000
20% bonus issue (8,000x20%) 31-03-12 1,600
9,600 4/12 1.0213 3,268
Preference shares converted
into ordinary shares 30-04-12 800
(500x80%x2)
10,400 2/12 1.0213 1,770
20% Right issue (10,400x20%) 01-07-12 2,080
12,480 6/12 6,240
11,278

PRACTICE KIT
W-2 Adjustment factor for Right issue

Value per
No. of shares Rs. ‘000’
share
Shares prior to right issue at FV prevailing on
80.00 10,400 832,000
the exercise date
20% right shares issued at exercise price 70.00 2,080 145,600
Theoretical ex-right value 977,600/12,480 78.33 12,480 977,600
Adjustment factor 80/78.33 1.0213
W-3 Assumed conversion of preference shares

Weighted
No. of shares Fraction of
Description Date average
outstanding period
shares
Preference shares converted into ordinary
30-04-12 800.00 4/12 267
shares (500x80%x2)
Remaining convertible preference shares
200.00 1 200
(500x20%x2)
467
34. Ittehad Industries Limited (Disclosure + EPS)

Extract from the statement of comprehensive income
Note 2014
Rs. in
million
Profit for the year 225
Basic Earnings per share 17 1.28

Diluted Earnings per share 17 1.26
Ittehad Industries Limited

Extract from notes to the Financial Statements
2014
Earnings per share Note
Basic Diluted
Total comprehensive income attributable to
17.1 225.00 234.34
ordinary shareholders (Rs. in million)
Weighted average number of ordinary shares

outstanding during the year 17.2 175.11 186.11
(In million number of shares)
Reconciliation of profit for the year to Basic earnings and diluted

Rs. in million
earnings
Profit for the year i.e. basic earnings 225.00
Add: Interest on term finance certificates (W-2) 9.34
Diluted earnings 234.34

PRACTICE KIT
Shares in
Reconciliation of basic number of shares to diluted number of shares
million
Basic number of shares (W-1) 175.11
Options under ESS (5x3/15) 1.00
Convertible term finance certificates (20x6/12) 10.00
Diluted number of shares 186.11
Workings:
W-1 Weighted average number of shares
Description No. of shares Weightage Right bonus W/Avg.
issue / factor (W- shares
outstanding 1.1)
Outstanding at start of the year 120 ¼ 1.0870 32.61
Right issue 150 ¾ - 112.50
Bonus issue 30 1 30.00
175.11
W-1.1 Determination of right shares bonus factor

Shares Value Rs. in
Rate
Quantity million
120 25.00 3,000
value
Issuance of right shares at a premium of Rs. 5 per
30 15.00 450
share
150 3,450
Theoretical ex-right price per share (Rs. 3,450 / 150) 23.00

Bonus adjustment factor (25/23) 1.0870
W-2 Ranking of dilutive instruments

Increase in
Earnings per
Increase in no. of
Description incremental Rank
earnings ordinary
share
shares
Rs. in million In million Rs.
Vested options under ESS (5m –
- 1 - 1
(5mx12)/15)
Term finance certificates
9.34 10.00 0.934 2
(250*11.5%*65%*6/12)
W-3 Testing for dilutive effect
Profit
attributable Ordinary
EPS Effect
to ordinary shares
shareholders
Rs. in million In million Rs.
Basic earnings per share 225.00 175.11 1.285
Vested options under ESS - 1.00
225.00 176.11 1.2776 Dilutive
Term finance certificates 9.34 10.00
234.34 186.11 1.2591 Dilutive

PRACTICE KIT
35. Company G – (Diluted EPS – Convertible bonds)

The basic EPS and diluted EPS for Year 2 are calculated as follows:
Basic EPS:
Year to 31 December Year 2: Rs. 36,000,000/12 million = Rs. 3 per share
Diluted EPS:
Number of Earnings
Shares (Rs.) EPS (Rs.)
Basic EPS figures 12,000,000 36,000,000 3
Dilution:
Number of shares
1,200,000
4,000,000 x 30/100
Add back interest:
200,000
5% x Rs. 4,000,000
Less tax at 30% (60,000)
Diluted EPS: Rs. 36,140,000/13,200,000 = Rs. 2.74 per share
Note: The number of potential shares is calculated using the conversion rate of 30 shares for every Rs. 100 of
bonds, because this conversion rate produces more new shares than the other conversion rate, 25 shares for
every Rs. 100 of bonds. (IAS 33 provides for use of most dilutive option when multiple conversion options are
available).
36. Company H – (Diluted EPS – New issue of convertibles in the year)

The Year 5 basic EPS and diluted EPS are calculated as follows:
Basic EPS:
Year 5 = Rs. 40,870,000/10,000,000 = Rs. 4.087 per share
Diluted EPS:
Number of Earnings EPS
shares (Rs.) (Rs.)
Basic EPS figures
10,000,000 40,870,000 4.087
Dilution:
Number of shares
2 million x 25/100 x 9/12 375,000
Add back interest:

6% x Rs. 2,000,000 x 9/12 90,000
Less tax at 30% (27,000)

PRACTICE KIT
37. Order of dilution

Diluted EPS for the year to 31 December Year 5 can be calculated as follows.
If all the options are exercised, the cash received will be 600,000 × Rs. 60 = Rs. 36,000,000. This would purchase
450,000 shares (Rs. 36,000,000/Rs. 80) at the average market price in Year 5.
The dilutive increase in the number of shares would therefore be (600,000 – 450,000) = 150,000.
Increase Increase in Earnings per

in number of incremental
earnings. shares share Ranking
Rs.
Options 0 150,000 0.00 1st
Convertible bonds
4% × Rs. 5,000,000 200,000
less tax 30% (60,000)
140,000
Rs. 5,000,000 x 40/100 2,000,000
140,000 2,000,000 0.07 2nd
Preference shares
7% × Rs. 1,000,000 70,000
100,000 x 1/20 5,000
(7% × Rs. 1,000,000) 70,000 5,000 14.0 3rd
Diluted EPS is calculated as follows (taking these three dilutive potential ordinary shares in order of their
ranking):
Number of
Earnings EPS
Shares
As reported, basic EPS 15,000,000 5,000,000 3.000
Options 0 150,000
Diluted EPS, options only 15,000,000 5,150,000 2.913 Dilutive
Convertible bonds 140,000 2,000,000

Diluted EPS, options and
15,140,000 7,150,000 2.12 Dilutive
convertible bonds
Convertible preference
70,000 5,000
Shares
Diluted EPS, options and Not
15,210,000 7,155,000 2.13
all convertibles dilutive
The convertible preference shares are not dilutive, and the reported diluted EPS should be Rs. 2.12 (and not
Rs. 2.13).

PRACTICE KIT
38. Company M – (Contingently issuable shares)

Basic EPS:
31 December Year 2: Rs. 100,000,000/12,000,000 = Rs. 8.33 per share
Diluted EPS:
Number of Earnings
EPS (Rs.)
Shares (Rs.)
Basic EPS figures 12,000,000 100,000,000 8.33
Dilution:
Number of shares 1,000,000
39. Company N – (Diluted EPS – Conversion right exercised in the year)

The basic EPS and diluted EPS are calculated as follows:
Basic EPS
Number of
Shares
At start of the year 10,000,000
Conversion:
Number of shares
375,000
500,000 x 9/12
Weighted average 10,375,000
Basic EPS: Rs. 40,870,000/10,375,000 = Rs. 3.94 per share
Diluted EPS
Number of Earnings EPS
shares (Rs.) (Rs.)
Basic EPS figures 10,375,000 40,870,000 3.94
Dilution:
Number of shares up to the date of conversion
125,000
500,000 x 3/12
Add back interest up to the date of conversion
30,000
6% x Rs. 2,000,000 x 3/12
Less tax at 30% (9,000)

PRACTICE KIT
40. IE7 – CIS (Contingently issuable shares)

Second Third Fourth
First quarter Full year
quarter quarter quarter
Numerator (CU) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Denominator:
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retail site contingency – 3,333(a) 6,667(b) 10,000 5,000(c)
Earnings contingency(d) - - - - -
Total shares 1,000,000 1,003,333 1,006,667 1,010,000 1,005,000
Basic earnings per share (CU) 1.10 1.20 (0.40) 0.99 2.89
a) 5,000 shares × 2/3

b) 5,000 shares + (5,000 shares × 1/3)
c) (5,000 shares × 8/) + (5,000 shares × 4/)
d) The earnings contingency has no effect on basic earnings per share because it is not certain that the
condition is satisfied until the end of the contingency period. The effect is negligible for the fourth-quarter
and full-year calculations because it is not certain that the condition is met until the last day of the period.

Second Third Fourth
First quarter Full year
quarter quarter quarter
Numerator (CU) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Denominator:
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retail site contingency – 5,000 10,000 10,000 10,000
Earnings contingency -(a) 300,000(b) -(c) 900,000(d) 900,000(d)
Total shares 1,000,000 1,305,000 1,010,000 1,910,000 1,910,000
Basic earnings per share (CU) 1.10 0.92 (0.40)(e) 0.52 1.52
a) Company A does not have year-to-date profit exceeding CU2,000,000 at 31 March 20X1. The Standard
does not permit projecting future earnings levels and including the related contingent shares.
b) [(CU2,300,000 – CU2,000,000) ÷ 1,000] × 1,000 shares = 300,000 shares.
c) Year-to-date profit is less than CU2,000,000.
d) [(CU2,900,000 – CU2,000,000) ÷ 1,000] × 1,000 shares = 900,000 shares.
e) Because the loss during the third quarter is attributable to a loss from a discontinued operation, the
antidilution rules do not apply. The control number (ie profit or loss from, continuing operations
attributable to the equity holders of the parent entity) is positive. Accordingly, the effect of potential
ordinary shares is included in the calculation of diluted earnings per share.
41. Alpha Limited (EPS + Consolidation)

Extracts from consolidated profit and loss account for the year ended 31 December 2013
Rs in 000
Profit for the year W.1 [(49.462.16+26.950)] 76,412.12
Profit attributable to
▪ Owners of Alpha Limited 76,412.12-5,390 71,022.12
▪ Non-controlling interest 26.950*20% 5,390

PRACTICE KIT
76,142.12
Earnings per share: Rupees

▪ Basic W.2 72.10
▪ Diluted W.2 53.39
W-1 Profit for the year AL ZL

(Rs. in ‘000)
Profit after tax 60,000.00 25,000.00
Cash dividend received from ZL (net of tax)
▪ Final dividend for 2012 (3,780.00)
(35,000*15%*80%)*90%
▪ Interim dividend for 2013 (3,507.84)
▪ (35,000*1.16*12%*80%)*90%
FV gain on ZL's investment property (40.35)
(67,000-{59,000+5,000))*65%. 1,950
Cost of defined benefit Gratuity Scheme (19.120)
(8,000-3,000)*65% (3,250.00)
49,462.16 26,950
W-2 Basic / diluted EPS: Weighted Basic / Diluted Basic/

average shares earnings Diluted
(Rs. in ’000) (Rs. in ’000) EPS
(Rs.)
Weighted average No. of shares:
1-Jan-2013 Balance 80,000/100 800
1-Jan-2013 Bonus issue at 20% (8,000*20%) 160
960
1-Aug-2013 Shares issued under employees'
share option scheme (60*5/12) 25
(960+60) x 5/12
Basic earnings per share (EPS) 985 71,022 72.10
Shares from assumed conversions:
1-Aug-2013 Convertible 12% bonds
(5 shares for 4 bonds) (30,000/100*5/ 4),
(30,000*0.12*0.65) 375 2,340
1-Aug-2013 Shares for no consideration issued under
employees' share option
(250-150) /250*60*7/12) 14 --
Diluted earnings per share (EPS) 1,374 73,362 53.39

PRACTICE KIT
CHAPTER 17: IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS
CHAPTER 17:
IFRS 15 – REVENUE FROM CONTRACTS WITH
CUSTOMERS
Questions:
[ICAP CAF 5 Question Bank]
1. ECL (Performance Obligation)
1) ECL has entered into a contract with Kashif Builders for construction of a residential project, including
supply of construction material, architectural services, engineering and site clearance. ECL and its
competitors provide such services separately also.
2) Solutions Limited, a software developer, entered into a two year contract with a customer to provide
software license including future software updates and post implementation support services. The
software license would remain functional even if the updates and post implementation support services
are discontinued.
Required:
(a) In view of the requirements of IFRS 15 ‘Revenue from Contracts with Customers’, discuss whether goods
and services provided in each of the above contracts represent a single performance obligation.
(b) Define the term ‘performance obligation’ and state the criteria which should be met if goods or services
promised to a customer are to be considered as distinct.
[ICAEW Study Manual]

2. Associated Solutions Ltd (Calculation of Revenue & Contract Cost)
Associated Solutions Ltd is building a bespoke software system for an insurance company. The contract
started on 1 January 20X7 with an estimated completion date of 31 December 20X9. The contract price is £2
million. As at 31 December 20X7:
a) costs incurred amounted to £800,000;
b) half the work on the contract was completed;
c) certificates of work completed have been issued by the insurance company, to the value of £1,000,000;
and
d) it is estimated with reasonable certainty that further costs to completion will be £800,000.
Required:
What is the contract profit in 20X7, and what entries would be made for the contract at 31 December 20X7?

3. Rendering of services (Contract Revenue)
A £210,000 fixed-price contract is entered into for the provision of services. At the end of 20X7, the first
accounting period, the contract is thought to be 33% complete and costs of £45,000 have been incurred in
performing that 33% of the work. Requirements
Calculate the revenue to be recognised in 20X7 on the alternative assumptions that:

a) the costs to complete are reliably estimated at £90,000; and
b) the costs to complete cannot be reliably estimated, and it is thought that £40,000 of the costs incurred
are recoverable from the customer.

PRACTICE KIT
4. Service contract
An entity entered into a contract for the provision of services over a two-year period. The total contract price
was £150,000 and the entity initially expected to earn a profit of £20,000 on the contract. In the first year,
costs of £60,000 were incurred and 50% of the work was completed. The contract did not progress as
expected and management was not sure of the ultimate outcome but believed that the costs incurred to date
would be recovered from the customer.
Required:
What revenue should be recognised for the first year of the contract?

5. Frizco Construction plc (Contract Revenue)
During the year ended 31 July 20X9, Frizco Construction plc (Frizco) began the construction of a leisure centre
on behalf of a local authority. The agreed contract price was £70 million. However plc (Frizco) began the
construction of a this will be reduced by £6 million if Frizco completes the centre a month or more behind
schedule. During the year ended 31 July 20X9, costs incurred amounted to £18.6 million, including £1,000,000
material that could not be used in the project as it was of the incorrect grade to meet regulations. The total cost
of the project (excluding the £1,000,000 in wasted material) is estimated to be £44 million. Work certified at the
year-end was £24.5 million.
The construction is currently progressing in accordance with the agreed schedule.
Required:
a) What amount of revenue is recognised in profit or loss in the year ended 31 July 20X9 if an output
method is used to assess progress?
b) What amount of revenue is recognised in profit or loss in the year ended 31 July 20X9 if an input method
is used to assess progress?

6. Repurchase agreement
An entity sold an investment property to a financial institution for £4 million when the fair value of the
property was £5 million. Further investigation uncovered an agreement whereby the entity could repurchase
the property after one year for £4.32 million.
Required:
How should this transaction be accounted for?

7. Caravans Deluxe (Five Step Process)
Caravans Deluxe is a retailer of caravans, dormer vans and mobile homes, with a year end of 30 June. It is
having trouble selling one model the £30,000 Mini-Lux, and so is offering incentives for customers who buy
this model before 31 May 20X7.
a) Customers buying this model before 31 May 20X7 will receive a period of interest free credit, provided
they pay a non-refundable deposit of £3,000, an instalment of £15,000 on 1 August 20X7 and the balance of
£12,000 on 1 August 20X9.
b) Equipment for the caravan, normally worth £1,500, is included free in the price of the caravan.
On 1 May 20X7, a customer agrees to buy a Mini-Lux caravan, paying the deposit of £3,000. Delivery is
arranged for 1 August 20X7.
As the sale has now been made, the sales director of Caravans Deluxe wishes to recognise the full sale price
of the caravan, £30,000, in the accounts for the year ended 30 June 20X7.
Required:
Show how the IFRS 15 five-step plan is applied to this sale. Assume a 10% discount rate. Show the journal
entries for this treatment.

PRACTICE KIT

PRACTICE KIT

8. Bags Galore Ltd (Change in Selling Price)
Bags Galore Ltd operates a number of high-end handbag outlets. On 28 January 20X9, it sells 50 identical
bags to different customers for £850 each. The bags cost £400 each. The customers have 28 days in which
they can return purchases in exchange for a full refund and, based on past experience, Bags Galore Ltd
expects a returns level of 6%. Bags Galore Ltd.’s 'Fabulous February' sale starts on 1 February and the selling
price of the bags will be reduced to 50% of the original price from that date.
Required:
a) How should Bags Galore account for the sale of the bags?
b) How would the accounting treatment change if the selling price of the bags was to be reduced to 40%
of the original price in the Fabulous February sale?

9. Tree (Conceptual Basis of Revenue – 5 Step Model)
You are the accountant of Tree, a listed limited liability company that prepares consolidated financial
statements. Your Managing Director, who is not an accountant, has recently attended seminar at which key
financial reporting issues were discussed. She remembers being told the following.
• Financial statements of an entity should reflect the substance of its transactions.

• Revenue from the contracts with customers should only be recogsnised when certain conditions have been
satisfied. Transfer of legal title to the goods is not necessarily sufficient for an entity to recognise revenue
from their 'sale'.
The year-end of Tree is 31 August. In the year to 31 August 20X1, the company entered into the following
transactions
Transaction 1
On 1 March 20X1, Tree sold a property to a bank for £5 million. The market value of the property at the date
of the sale was £10 million. Tree continues to occupy the property rent-free. Tree has the option to buy the
property back from the bank at the end of every month from 31 March 20X1 until 28 February 20X6. Tree has
not yet exercised this option. The repurchase price will be £5 million plus £50,000 for every complete month
that has elapsed from the date of sale to the date of repurchase. The bank cannot require Tree to repurchase
the property and the facility lapses after 28 February 20X6. The directors of Tree expect property prices to rise
at around 5% each year for the foreseeable future.
Transaction 2
On 1 September 20X0, Tree sold one of its branches to Vehicle for £8 million. The net assets of the branch in
the financial statements of Tree immediately before the sale were £7 million. Vehicle is a subsidiary of a bank
and was specifically incorporated to carry out the purchase - it has no other business operations. Vehicle
received the £8 million to finance this project from its parent in the form of a loan.
Tree continues to control the operations of the branch and receives an annual operating fee from Vehicle. The
annual fee is the operating profit of the branch for the 12 months to the previous 31 August less the interest
payable on the loan taken out by Vehicle for the 12 months to the previous 31 August. If this amount is
negative, then Tree must pay the negative amount to Vehicle.
Any payments to or by Tree must be made by 30 September following the end of the relevant period. In the
year to 31 August 20X1, the branch made an operating profit of £2,000,000. Interest payable by Vehicle on the
loan for this period was £800,000.
Required:
a) Explain the conditions that need to be satisfied before revenue can be recognised. You IFRS 15 should
support your answer with reference to
b) Explain how the transactions described above will be dealt with in the consolidated financial statements
(statement of financial position and statement of profit or loss and other comprehensive income) of Tree
for the year ended 31 August 20X1 accordance with IFRS 15.

PRACTICE KIT

10. Clavering (Sale of Hotel Complex + Discount Vouchers)
Clavering Leisure Co owns and operates a number of hotels. The company is preparing its financial statements
for the year ended 31 May 20X3, and has come across the following issues.
a) One of the hotels owned by Clavering Leisure is a complex which includes a theme park and a casino as
well as a hotel. The theme park, casino and hotel were sold in the year ended 31 May 20X3 to Manningtree
Co, a public limited company, for £200 million but the sale agreement stated that Clavering Leisure would
continue to operate and manage the three businesses for their remaining useful life of 15 years. The residual
interest in the business reverts back to Clavering Leisure after the 15-year period. Clavering Leisure would
receive 75% of the net profit of the businesses as operator fees, and Manningtree would receive the
remaining 25%. Clavering Leisure has guaranteed to Manningtree that the net minimum profit paid to
Manningtree would not be less than £15 million per year.
b) Clavering Leisure has recently started issuing vouchers to customers when they stay in its hotels. The
vouchers entitle the customers to a £30 discount on a subsequent room booking within three months of
their stay. Historical experience has shown that only one in five vouchers are redeemed by the customer.
At the company's year end of 31 May 20X3, it is estimated that there are vouchers worth £20 million which
are eligible for discount. The income from room sales for the year is £300 million and Clavering Leisure is
unsure how to report the income from room sales in the financial statements.
Required:
Advise Clavering Leisure on how the above accounting issues should be dealt with in its financial
statements in accordance with IFRS 15, Revenue from Contracts with Customers.
11. Alexandra (IFRS + IAS-8)

Alexandra, a public limited company, designs and manages business solutions and infrastructures.
Alexandra enters into contracts with both customers and suppliers. The supplier solves system problems and
provides new releases and updates for software. Alexandra provides maintenance services for its customers.
In previous years, Alexandra recognised revenue and related costs on software maintenance contracts when
the customer was invoiced, which was at the beginning of the contract period. Contracts typically run for two
years.
During 20X0, Alexandra had acquired Xavier Co, which recognised revenue, derived from a similar type of
maintenance contract as Alexandra, on a straight-line basis over the term of the contract. Alexandra considered
both its own and the policy of Xavier Co to comply with the requirements of IFRS 15 Revenue from Contracts
with Customers but it decided to adopt the practice of Xavier Co for itself and the group. Alexandra concluded
that the two recognition methods did not, in substance, represent two different accounting policies and did
not, therefore, consider adoption of the new practice to be a change in policy.
In the year to 30 April 20X1, Alexandra recognised revenue (and the related costs) on a straight-line basis over
the contract term, treating this as a change in an accounting estimate. As a result, revenue and cost of sales
were adjusted, reducing the year's profits by some $6 million.
Required
Explain, with reference to the principles of relevant IFRSs, the appropriate accounting treatment for the above
issue in Alexandra's financial statements for the year ended 30 April 20X1.

PRACTICE KIT
12. Verge (Financing Component)

Verge entered into a contract with a government body on 1 April 20X1 to undertake maintenance services on
a new railway line. The total revenue from the contract is $5 million over a three-year period. The contract
states that $1 million will be paid at the commencement of the contract but although invoices will be
subsequently sent at the end of each year, the government authority will only settle the subsequent amounts
owing when the contract is completed. The invoices sent by Verge to date (including $1 million above) were
as follows:
Year ended 31 March 20X2 $2.8 million

Year ended 31 March 20X3 $1.2 million
The balance will be invoiced on 31 March 20X4. Verge has only accounted for the initial payment in the
financial statements to 31 March 20X2 as no subsequent amounts are to be paid until 31 March 20X4. The
amounts of the invoices reflect the work undertaken in the period. Verge wishes to know how to account for
the revenue on the contract in the financial statements to date.
The interest rate that would be used in a separate financing transaction between Verge and the government
agency is 6%. This reflects the credit characteristics of the government agency. (6 marks)

13. Carsoon (Variable Element)
Carsoon constructs retail vehicle outlets and enters into contracts with customers to construct buildings on
their land. The contracts have standard terms, which include penalties payable by Carsoon if the contract is
delayed, or payable by the customer, if Carsoon cannot gain access to the construction site.
Due to poor weather, one of the projects was delayed. As a result, Carsoon faced additional costs and
contractual penalties. As Carsoon could not gain access to the construction site, the directors decided to make
a counter-claim against the customer for the penalties and additional costs which Carsoon faced. Carsoon felt
that because a counter claim had been made against the customer, the additional costs and penalties should
not be included in contract costs but shown as a contingent liability. Carsoon has assessed the legal basis of
the claim and feels it has enforceable rights.
In the year ended 28 February 20X7, Carsoon incurred general and administrative costs of $10 million, and
costs relating to wasted materials of $5 million.
Additionally, during the year, Carsoon agreed to construct a storage facility on the same customer's land for
$7 million at a cost of $5 million. The parties agreed to modify the contract to include the construction of the
storage facility, which was completed during the current financial year. All of the additional costs relating to
the above were capitalised as assets in the financial statements.
The directors of Carsoon wish to know how to account for the penalties, counter claim and additional costs in
accordance with IFRS 15 Revenue from Contracts with Customers.
Required
Advise Carsoon on how the above transaction should be dealt with in its financial statements with reference
to relevant International Financial Reporting Standards.

PRACTICE KIT
[ACCA SBR Kaplan]
14. Clarence (PO Overtime or Intime)

On 31 December 20X1, Clarence delivered the January edition of a magazine (with a total sales value of
$100,000) to a supermarket chain. Legal title remains with Clarence until the supermarket sells a magazine to
the end consumer. The supermarket will start selling the magazines to its customers on 1 January 20X2. Any
magazines that remain unsold by the supermarket on 31 January 20X2 are returned to Clarence.
The supermarket will be invoiced by Clarence in February 20X2 based on the difference between the number
of issues they received and the number of issues that they return.
Required:
Should Clarence recognise revenue from the above transaction in the year ended 31 December 20X1?

15. Sachal Limited (PO)
(a) Sells standard computer software package meant for small and medium-sized restaurant management.
This software package is sold:
• at price of Rs. 1.5 million payable before delivery,
• with thirty days trial time, and
• without any maintenance support after trial time
As per practice, it takes around six months for the customers to use the package independent of any support
from SL. Practically, SL has to provide on-site support service for at least six months to almost all customers
free-of-cost. However, in case of customer’s request for support beyond six months, SL provides services
under a formal paid service contract.
(b) Provides maintenance and support for the above standard software package at a price of Rs. 0.3 million
per annum.
(c) Provides designing and development of customized software to customers. Payment is made monthly
by customers on the basis of chargeable hours of developers of SL. First year maintenance service is
provided free-of-cost. Subsequent maintenance service is provided at the rate of 10% of the total contract
price. Thereafter, for next three years maintenance service is provided at 5% of the contract price per
annum.
Required
Explain the considerations to be taken into account in determining accounting for revenue by Sachal Limited.

16. Brilliant Limited (PO)
Brilliant Limited (BL) manufactures and sells plastic card printing machines with laminators. A machine-
specific card printing software is provided as a must part of the printing machine. BL also sells plastic cards
imported from Thailand. BL agreed to supply the following to, Proud Learners (PL), a country-wide school
network:
• 15 Card printing machines – Available in ready stock
• 8 Laminators – Would require 30 days to deliver
• 100,000 Plastic cards – Available in ready stock
A lump sum price of Rs.9.2 million for the total contract has been agreed between BL and school network.
Cost and list prices of the goods are:
Item Price (Rs.) Cost (Rs.)
Card printing machines 800,000 400,000
Laminators 200,000
Plastic cards 12 5

PRACTICE KIT
BL does not sell printing machine without laminator. However, in order to get this order BL went against its
policy. There is another supplier of imported card printing machine of almost similar specification. This
supplier sells the machine at Rs.750,000.
In most recent customers’ surveys printing machine of BL has been given 7 out of 10 points as against 9 out of
10 given to competitors’ imported machine. There is no supplier of laminator in the market.
Required
Identify performance obligations and allocate the transaction price to the identified performance obligations.

17. Waqas Limited (PO + Modification)
Waqas Limited (WL) enters into a contract of construction of a reverse osmosis plant for the manufacturing
unit of Ali Chemical Limited (ACL) for Rs.20 million, for which WL estimated cost is Rs.12 million. This
included supply and installation of plant and related construction work. The project is to be completed within
18 months. WL measures performance on the basis of cost incurred.
At the end of seventh month ACL and WL agreed to modify the contract by adding construction of an
additional water reservoir at a price of Rs.2.5 million, which will supply drinking water to a sister concern of
ACL. The additional cost is estimated as Rs.1.8 million by WL. At the end of seventh month WL incurred 4.2
million on the project.
At the end of tenth month ACL and WL agreed to modify the contract by increasing the size of water reservoir
that was included in the original design of the project. ACL and WL agreed to an additional consideration of
Rs.1 million, for which WL will incur an additional cost of Rs.1 million.
At the end of seventh month WL incurred Rs. 7.2 million on the plant project and Rs. 0.72 million on additional
reservoir.
At the end of sixteenth month ACL and WL agreed to modify the contract by adding pumping and piping
facility from plant to the manufacturing unit of ACL for a consideration of Rs.3 million. This facility was part
of the project, but at the inception this contract was awarded to another contractor, which was terminated by
ACL. The cost to be incurred by WL was estimated as Rs.2.8 million. At the end of sixteenth month WL
incurred Rs.11.7 million on the plant project and Rs.1.35 million on additional reservoir.
Required
Advise how these transactions should be recognized in the books of Waqas Limited.

PRACTICE KIT

18. Hawks Limited (Comprehensive Question)
Draft consolidated financial statements of Hawks Limited (HL) for the year ended 31 December 2017 show
the following amounts:
Rs. in million
Total assets 2,500
Total liabilities 1,610
Total comprehensive income 659
During the process of finalisation, following matters have been noted:

1) HL signed a contract with one of its customers, Rhino Limited (RL). Under the terms of the contract, HL
is required to:
• produce a series of 5 television advertisements. Each completed advertisement has to be approved by
an independent agency for a minimum 3-star rating. After approval, copy of the advertisement would
be provided to RL who can then use it for other campaigns. HL has no enforceable right to payment
against any under production advertisement.
• arrange airtime of 120 minutes for broadcasting of each advertisement. The primary responsibility for
broadcasting of these advertisements lies with HL.
HL is entitled to Rs. 80 million for the whole contract and bonus of Rs. 2 million for each advertisement if a
5-star rating is attained.
HL considers all advertisements as equal units. The expected cost of producing each advertisement and its
broadcasting is Rs. 5 million and Rs. 9 million respectively. HL expects to earn mark-up of 30% and 20%
respectively on similar services to other clients. Historically, advertisements produced by HL have received
the minimum 3-star rating but 5-star rating is received occasionally.
As at 31 December 2017:
• production of 3 advertisements has been completed. Two of them have received 5-star rating whereas
one has received 3-star rating. HL expects that at least one of the remaining advertisements would get 5-
star ratings.
• broadcasting of first two advertisements has been completed whereas 70% time of the third
advertisement has been broadcasted. Bookings have been made for the broadcasting of remaining time of
third advertisement and entire time of fourth advertisement.
• details of the actual cost incurred on this project are as follows:
Production cost Broadcasting cost
Advertisement
----------- Rs. in million -----------
1 4.7 8.5
2 5.6 9.2
3 4.8 8.9
4 3.1* 9.0
* in process
All the above costs have been paid and charged to profit or loss account. HL had received Rs. 40 million
from RL by 31 December 2017 which has been credited to advance from customers account.
Required:
Determine the revised amounts of total assets, total liabilities and total comprehensive income after
incorporating impact of the above adjustments, if any.

PRACTICE KIT
19. Telecom contract – IFRS Box (5 Step Model)

Telecom operator, XYZ Corp. entered into a contract with Tommy on 1 July 20X1. In line with the contract,
Tommy subscribes for XYZ's monthly plan for 12 months and in return, Tommy receives free handset from
XYZ Corp. Tommy will pay a monthly fee of CU 100. Tommy gets the handset immediately after contract
signature.
XYZ sells the same handsets for CU 300 and the same monthly plans for CU 80/month without handset.
How should XYZ recognize revenues from the contract with Tommy in 20X1 under IFRS 15?
20. My PC – IFRS Box (Modification)

My PC, computer manufacturer, enters into contract with New University to deliver 300 computers for total
price of CU 600 000 (CU 2 000 per computer).
Due to necessary preparation works, New University agrees to deliver computers in 3 separate deliveries
during the forthcoming 3 months (100 computers in each delivery). New University takes control over the
computers at delivery.
After the first delivery is made, New University and My PC amend the contract. My PC will supply 200
additional computers (500 in total).
How should My PC account for the revenue from this contract if:
Scenario 1: The price for additional 200 computers was agreed at CU 388 000, being CU 1 940 per computer.
My PC provided a volume discount of 3% for additional delivery which reflects the normal volume discounts
provided in similar contracts with other customers.
As of 31 December, 20X1, My PC delivered 400 computers (300 as agreed initially and 100 under the contract
amendment).
How shall My PC account for the contract modification under IFRS 15?
Advise how My PC recognizes revenue in 20X1 if:

Scenario 2: The price for additional 200 computers was agreed at CU 268 000, being CU 1 340 per computer.
The price for additional computers was reduced significantly due to the following:
- My PC provided a discount of 30% for additional delivery because it hopes for the future cooperation with
New University (nothing even discussed yet). As a result, initial price for additional products was set at
CU 1 400 per computer.
- After initial delivery, New University discovered minor defects on 50 computers and as a result, My PC
agreed to provide partial credit of CU 240 per computer. This credit is incorporated into the new agreed
price for additional 200 computers (resulting price of (1 400*200-240*50)/200 = 1 340/computer).
Note: contract amendment was made after the first delivery.
As of 31 December 20X1, My PC delivered 400 computers (300 as agreed initially and 100 under the contract
amendment).
21. Books Corp. – IFRS Box (Variable consideration with contingency)

Books Corp. is a company providing centralized accounting services for corporations. It enters into a 3-year
contract with client A. The contract states:
- Books will maintain all bookkeeping and document processing activities for client A, including preparing
annual financial statements, monthly reports and tax returns. Books prepare monthly reports and annual
financial statements only in conjunction with bookkeeping and data processing performed by Books' team.
- The annual fee is CU 272 000 per year, consisting of: CU 250 000 per year for up to 50 000 accounting entries,
CU 1000 per month for monthly reports and CU 10 000 per year for annual financial statements and tax
return. Books is entitled to CU 5 per accounting entry in excess of 50 000 entries per year.
- Books is entitled to an annual bonus payment of CU 12 000 if the average processing time of 1 batch of
1000 documents is less than 1 week in the particular year.

PRACTICE KIT
Careful analysis of client's A activities and past accounting records show that in the first year, n. of accounting
entries is assumed at 48 000, in the second year at 50 000 and in the third year at 53 000.
Based on past work records and delivery times BigBooks Corp. assumes that the probability of processing
time of 1 000 documents in less than 1 week is 30%.
Identify individual performance obligations in the contract and determine the transaction price.
22. Voyage ltd. – IFRS Box (Significant financing component and right of return)
Voyage ltd. intends to buy 30 trucks from Autocar, local car dealer. However, due to cash shortage, Voyage is
not able to pay immediately after planned delivery, therefore Autocar agrees that Voyage pays a half of total
price at delivery and the second half after 1 year. Voyage and Autocar agree on the right of return within 90
days of delivery.
1 month later, Voyage sends an e-mail to Autocar with acceptance of all conditions. 2 weeks after that e-mail,
Autocar calls Voyage that 30 trucks are ready, Voyage takes trucks and pays the 1st half of total price.
Price per 1 truck is CU 32 000. However, Autocar agrees to receive one half now and the second half in 1 year
only if Voyage accepts increased purchase price of CU 33 000 per truck. The Autocar's cost of 1 truck is CU
28000. What should Autocar recognize in its financial statements and when?
23. Jack & Partner – IFRS Box (Allocating variable consideration + licenses)
Jack & Partner want to produce and distribute clothing with the famous animated characters created by Mikel.
Mikel enters into a contract with Jack & Partner for 2 intellectual property licenses:
- License 1: to use trademark "Mikel" in a www domain owned by Jack & Partner in order to promote and
sell clothing with Mikel's brand;
- License 2: to use animated Mikel's characters on clothing.
Both licenses will be transferred to Jack & Partner immediately after contract is signed by both parties. The
consideration for License 1 is fixed, set at CU 3 000.
The consideration for License 2 is 10% of future sales of clothing with Mikel's animated characters. Based on
budgets, Mikel estimates total consideration for License 2 at CU 50 000.
How and when shall Mikel recognize revenue from the contract with Jack & Partner, if:
1) Mikel sold these licenses separately in the past to a similar customer for CU 3 000 (License 1) and CU 50,000
(License 2).
2) Mikel sold these licenses separately in the past to a similar customer for CU 10 000 (License 1) and CU
40,000 (License 2).
In the year 1, total revenues from the sales of Mikel-branded clothing generated by Jack & Partner amount to
CU 100,000.
24. AB Construct – IFRS Box (Revenue over time vs. at the point of time (real estate))
AB Construct, property developer, builds a residential complex consisting of 50 apartments. Apartments have
a similar size and proportions - however, they can be customized to clients’ needs.
AB Construct enters into 2 contracts with 2 different clients (A and B). Both clients want to buy almost identical
apartments and agree with total price of CU 100 000 per apartment. The payment schedule is as follows:
- Upon the signature of a contract, clients pay deposit of CU 10 000 each.
- Milestone: 1 year prior planned completion, AB Construct will deliver progress reports to clients and clients
need to pay CU 50 000 each.
- Completion: Upon the completion of the construction, the legal ownership to apartments is transferred to
clients and they pay the remaining amount of CU 40 000 each.
Assumed period of construction is 2 years from the date of contract. AB Construct has the right to retain the
payments from any client in the situation when that client defaults on the contract before its completion.
The contracts with clients A and B are NOT identical. Further contractual terms specify that:
- No other specific terms in the contract with client A.
- The contract with client B specifies that AB Construct cannot transfer or direct the apartment to another
client and in return, the client B cannot terminate the contract. If the client B defaults on the contract before

PRACTICE KIT
its completion, AB Construct has the right for all contractual price if AB Construct decides to complete the
contract.
Total assumed cost of construction is CU 80 000, thereof CU 35 000 in the first year of construction and CU 45
000 in the second year of construction.
When and how shall AB Construct recognize revenue from contract A and contract B?
25. Books Corp. – IFRS Box (Variable consideration with contingency)

Books Corp. (see example 5) is a company providing centralized accounting services for corporations. It enters
into a 3-year contract with client A to provide all bookkeeping and data processing activities for the period of
3 years.
Before providing the services, Books incurs the following expenses:
- commission to a sales representative for arranging the contract: CU 5 000
- fee to a lawyer for drafting and finalizing sales contract: CU 3 500
- investment into additional 10 computers dedicated to contract with client A: CU 4 000
- customization of existing accounting software to Book's needs, preparing new chart of accounts and data
flows, testing: CU 13 000
- payroll expenses of 3 employees dedicated to contract A for 3 years: CU 30 000.
How should Books recognize these expenses in its financial statements?

PRACTICE KIT
Answers:
1. ECL (Performance Obligation)
(a) Performance obligation
Performance obligation is a promise in a contract with a customer to transfer to the customer either:
• a good or service (or a bundle of goods or services) that is distinct; or
• a series of distinct goods or services that are substantially the same and that have the same pattern
of transfer to the customer.
A good or service is distinct if both of the following criteria are met:

• the customer can benefit from the good or service either on its own or together with other resources
that are readily available to the customer; and
• the entity’s promise to transfer the good or service is separately identifiable from other promises in
the contract.
(b)
1) The different services being performed under the contract are separately identifiable but the
customer cannot benefit from a services separately from the other.
Based on this, ECL should account for services in the contract as a single performance obligation.
2) Transfer of software license, software updates and support services are distinct. However, the
software license is delivered before the other services and remains functional without updates and
technical support. Further, the customer can benefit from each of the services either on their own or
together with other services that are readily available. Thus, the entity’s promise to transfer the good
or service is separately identifiable from other promises in the contract.
Based on the above, the contract should not be accounted for as a single performance obligation.
2. Associated Solutions Ltd (Calculation of Revenue & Contract Cost)

This is a contract in which the performance obligation is satisfied over time. The entity is carrying out the work
for the benefit of the customer rather than creating an asset for its own use and in this case, it has an enforceable
right to payment for work completed to date. We can see this from the fact that certificates of work completed
have been issued.
IFRS 15 states that the amount of payment that the entity is entitled to corresponds to the amount of
performance completed to date (i.e., goods and/or services transferred). This approximates to the costs
incurred in satisfying the performance obligation plus a reasonable profit margin.
In this case, the contract is certified as 50% complete, measuring progress under the output method. At 31
December 20X7, the entity will recognise revenue of £1,000,000 and cost of sales of £800,000, leaving profit of
£200,000. The contract asset will be the costs to date plus the profit - that is £1,000,000. We are not told that
any of this amount has yet been invoiced, so none of this amount is classified as receivables.

PRACTICE KIT
3. Rendering of services (Contract Revenue)

a) Costs to complete are £90,000
This is a contract with performance obligations satisfied over time and 33% of the performance has
been completed to date.
Revenue can be recognised on the output basis by the percentage of completion method, so 33% of
£210,000 = £69,300.
Note: The project is profitable overall (total revenue £210,000, total costs £135,000), so no provision for
a contract loss need be made.
b) Costs to complete cannot be estimated reliably

As the outcome of the overall contract cannot be estimated reliably, revenue is recognised to the extent
of the costs incurred which are recoverable ie, £40,000. The current period therefore recognises the
contract loss to date of £5,000.
4. Service contract
Contract revenue £60,000
Explanation
If the outcome of a services transaction cannot be estimated reliably, revenue should only be recognised to
the extent that expenses incurred are recoverable from the customer.
5. Frizco Construction plc (Contract Revenue)
The transaction price is £70 million. £64 million is fixed consideration and £6 million is variable consideration.
The transaction price is £70 million as the project is currently expected to be completed on time and therefore
the single most likely outcome is the receipt of £70 million.
(a) Output method

Using the output method, the project is 35% complete:
Work certified/ Transaction price = 24,500 ÷ 70,000= 35%
Therefore 35% x £70m = £24.5 million is recognised as revenue in the year.
(b) Input method

Using the input method, the project is 40% complete:
Costs incurred to date/Total expected costs = (18,600 - 1,000) ÷ 44,000 = 40%
Therefore 40% x £74m = £28 million is recognised as revenue in the year.
Note that the £1 million wasted material is not relevant to the assessment of progress, however it must be
recognised in profit or loss as a wastage expense.
6. Repurchase agreement
The entity has a right to repurchase the property - a call option. The repurchase price is above the original
selling price, so this is, in effect, a financing arrangement.
The sale of the property at 20% below fair value is sufficient to cast doubt on whether a real sale has been
made. Also, the repurchase price is below fair value at the date of sale and represents a return to the financial
institution of 8% ((£4.32m - £4m) as a percentage of £4 million) on the amount paid out.
The substance of the arrangement appears to be that the financial institution has entity a one-year loan secured
on the property, charging interest at 8%.
The transaction should be accounted for by:
• continuing to recognise the property as an asset;

PRACTICE KIT
• crediting the £4 million received to a liability account;

• recognising £0.32 million as a finance cost in profit or loss and crediting it to the liability account; and
• derecognising the liability when the £4.32 million cash is paid out.
7. Caravans Deluxe (Five Step Process)

The Sales Director wishes to recognise the sale as early as possible. However, IFRS 15, Revenue from Contracts
with Customers, revenue from the sale should only be recognise the performance obligations in the contract
have been satisfied.
Performance obligations in the contract

The contract contains a promise to deliver the caravan and a promise to deliver additional goods free of charge.
These are distinct promises and therefore the contract contains two performance obligations.
Transaction price
The transaction price is made up of three elements. A significant financing component must be considered
where consideration is received more than 12 months before or after the date on which revenue is recognised
(being the delivery date, 1 August 20X7). Therefore, the payment on 1 August 20X9 must be discounted to
present value at 1 August 20X7.
£
Deposit 3,000
Payment on 1.8.X7 (the delivery date) 15,000
Payment on 1.8.X9 (£12,000/1.12) 27,917
Allocation to performance obligations

The transaction price is allocated based on standalone selling prices:
Caravan 30,000/31,500 x £27,917 = £26,588
Free equipment 1,500/31,500 x £27,917 = £1,329
Recognition of revenue
The two performance obligations are satisfied simultaneously on 1 August 20X7, and therefore all revenue is
recognised on this date. Journal entries are as follows:
1 May 20X7
The receipt of cash in the form of the £3,000 deposit is recognised on receipt as a contract liability (deferred
income) in the statement of financial position by:
DEBIT Bank £3,000

CREDIT Contract liability (deferred income) £3,000
1 August 20X7
Revenue is recognised together with payment of the first £15,000. The contract liability is transferred to be
revenue:
DEBIT Bank £15,000

DEBIT Contract liability £3,000
DEBIT Receivable £9,917
CREDIT Revenue £27,917
Note: This question is rather fiddly, so do not worry too much if you didn't get all of it right. Read through
our solution carefully, going back to first principles where required.
8. Bags Galore Ltd (Change in Selling Price)

(a)
• Bags Galore Ltd expects 3 bags (6% x 50) to be returned.

PRACTICE KIT
• Therefore, on 28 January 20X9 revenue is recognised in relation to 47 bags, giving a total of £39,950 (47
x £850).
• A refund liability of £2,550 (3 x £850) is recognised. The cost of 47 bags of £18,800 (47 x £400) is
transferred to cost of sales. The remaining 3 bags are recognised as an asset (the right to recover the
bags) at cost of £1,200 (3 x £400). The 'right to recover' asset is measured at the original cost of the bags
that are expected to be returned because, even in the 'Fabulous February' sale, they are capable of being
sold for £425 (50% x £850) ie, more than cost.
The required accounting entries are:

DEBIT Bank (50 x £850) £42,500
CREDIT Revenue £39,950
CREDIT Refund liability £2,550
To recognise the sale of bags and expectation that 6% will be returned.

DEBIT Asset (right to recover inventory) £1,200
CREDIT Cost of sales (47 x £400) £18,800
CREDIT Asset (inventory) £20,000
To recognise the transfer of items of inventory that are not expected to be returned to become cost of sales and
that are expected to be returned to become assets (the right to recover the 3 bags).
(b) If the selling price of the bags were reduced to £340 (40% x £850):
• The revenue and refund liability would be recorded as before.
• The retained asset would be measured at £1,020 (3 x £340), so resulting in a write down of the carrying
amount of inventory in profit or loss.
9. Tree (Conceptual Basis of Revenue – 5 Step Model)

(a) IFRS 15, Revenue from Contracts with Customers states the following (IFRS 15.35):
Revenue is recognised when (or as) a performance obligation is satisfied. The entity satisfies a
performance obligation by transferring control of a promised good or service to the customer. A
performance obligation can be satisfied at a point in time, such as when goods are delivered to the
customer, or over time. An obligation satisfied over time will meet one of the following criteria:
• The customer simultaneously receives and consumes the benefits as the performance takes place.
• The entity's performance creates or enhances an asset that the customer controls as the asset is
created or enhanced.
• The entity's performance does not create an asset with an alternative use to the entity and the entity
has an enforceable right to payment for performance completed to date.
The amount of revenue recognised is the amount allocated to that performance obligation. An entity
must be able to reasonably measure the outcome of a performance obligation before the related revenue
can be recognised. In some circumstances, such as in the early stages of a contract, it may not be possible
to reasonably measure the outcome of a performance obligation, but the entity expects to recover the
costs incurred. In these circumstances, revenue is recognised only to the extent of costs incurred.
(b) Transaction 1
Tree has the option to repurchase the property but cannot be required to do so. This in a call option in
which the repurchase price is equal to or above the original selling price, so it should be accounted for
as a financing arrangement.
Tree has not transferred control of the property to the bank as it still has the right to this option, so no
performance obligation has been satisfied that could justify the recognition of revenue.
The transaction is essentially a loan secured on the property, rather than an outright sale. The £50,000
payable for each month that the bank holds the property is interest on the loan.
The property remains in the consolidated statement of financial position at its cost or market value
(depending on the accounting policy adopted by Tree). The loan of £5 million and accrued interest of

PRACTICE KIT
f300,000 (6 x 50,000) are reported under non-current liabilities. Interest of £300,000 is recognised in
consolidated profit or loss.
Transaction 2
The key issue is whether Tree has transferred control of the branch.
Tree continues to control the operations of the branch and the amount that it receives from Vehicle is
the operating profit of the branch less the interest payable on the loan. Tree also suffers the effect of any
operating losses made by the branch. Therefore, the position is essentially the same as before the 'sale'
and Tree has not satisfied any performance obligation in return for the consideration of £8 million.
Although Vehicle is not a subsidiary of Tree as defined by IFRS 10, Consolidated Financial Statements,
it is a special purpose entity (quasi-subsidiary). It gives rise to benefits for Tree that are in substance no
different from those that would arise if it were a subsidiary. Its assets, liabilities, income and expenses
must be included in the consolidated financial statements.
The assets and liabilities of Vehicle are included in the consolidated statement of financial position at £7
million (their original value to the group). The loan of £8 million is recognised as a non-current liability.
The profit on disposal of £1 million and the operating fee of £1,200,000 are cancelled as intra-group
transactions. The operating profit of £2 million is included in consolidated profit or loss, as is the loan
interest of £800,000.
10. Clavering (Sale of Hotel Complex + Discount Vouchers)

(a) Sale of hotel complex
The issue here is one of revenue recognition, and the accounting treatment is governed by IFRS-15,
Revenue from Contracts with Customers. Step (5) of the standard’s revenue recognition process requires
that revenue is recognised when (or as) a performance obligation is satisfied. The entity satisfies a
performance obligation by transferring control of a promised good or service to the customer. A
performance obligation can be satisfied at a point in time, such as when goods are delivered to the
customer, or over time. In the case of the hotel transfer, the issue is that of a performance obligation
satisfied at a point in time. One of the indicators of control is that significant risks and rewards of
ownership have been transferred to the customer.
It can be argued in some cases where property is sold that the seller, by continuing to be involved, has
not satisfied the performance obligation by transferring control, partly because the seller has not
transferred the risks and rewards of ownership. In such cases, the sale is not genuine, but is often in
substance a financing arrangement. IFRS 15 requires that the substance of a transaction is determined
by looking at the transaction as a whole. If two or more transactions are linked, they should be treated
as one transaction to better reflect the commercial substance.
Clavering Leisure continues to operate and manage the hotel complex, receiving the bulk (75%) of the
profits, and the residual interest reverts back to Clavering Leisure; effectively, Clavering Leisure retains
control by retaining the risks and rewards of ownership. Manningtree does not bear substantial risk: its
minimum annual income is guaranteed at £15 million. The sale should not be recognised. In substance
it is a financing transaction. The proceeds should be treated as a loan, and the payment of profits as
interest.
(b) Discount vouchers

The treatment of the vouchers is governed by IFRS 15, Revenue from Contracts with Customers. The
principles of the standard require the following:
• The voucher should be accounted for as a separate component of the sale.
• The promise to provide the discount is a performance obligation.
• The entity must estimate the stand-alone selling price of the discount voucher in accordance with
paragraph 642 of IFRS 15. That estimate must reflect the discount that the customer would obtain
when exercising the option, adjusted for both of the following:
• Any discount that the customer could receive without exercising the option.
• The likelihood that the option will be exercised.
The vouchers are issued as part of the sale of the room and redeemable against future bookings. The
substance of the transaction is that the customer is purchasing both a room and a voucher.

PRACTICE KIT
Vouchers worth £20 million are eligible for discount as at 31 May 20X3. However, based on past
experience, it is likely that only one in five vouchers will be redeemed, that is vouchers worth £4 million.
Room sales are £300 million, so effectively, the company has made sales worth £ (300m + 4m) = £304
million in exchange for £300 million. The stand-alone price would give a total of £300 million for the
rooms and £4 million for the vouchers.
To allocate the transaction price, following step (4) of IFRS 15's five-step process for revenue
recognition, the proceeds need to be split proportionally pro rata the stand-alone prices, that is the
discount of £4 million needs to be allocated between the room sales and the vouchers, as follows:
Room sales: 300/304 x £300m = £296.1m
Voucher (balance) = £3.9m
The £3.9m million attributable to the vouchers is only recognised when the performance obligations are
fulfilled, that is when the vouchers are redeemed.
11. Alexandra (IFRS + IAS-8)

There are two aspects to consider:
i. What is the correct way to recognise the revenue from the maintenance contracts?
ii. What adjustments does Alexandra need to make, having changed its method of recognition?
Correct IFRS 15 treatment

IFRS 15 Revenue from Contracts with Customers has a five-stage process for recognising revenue:
i. Identify the contract with the customer.
ii. Identify the separate performance obligations.
iii. Determine the transaction price.
iv. Allocate the transaction price to the performance obligations.
v. Recognise revenue when (or as) a performance obligation is satisfied
Step (ii) would classify the performance obligations in Alexandra's contracts with customers as the promise to
transfer maintenance services to its customers.
Step (v) of the IFRS 15 process requires the entity to recognise revenue when or as a performance obligation is
satisfied. IFRS 15 would treat the maintenance services as a performance obligation satisfied over time because
the customer simultaneously receives and consumes the benefits as the performance takes place. Therefore,
IFRS 15 requires Alexandra to recognise revenue over time by measuring the progress towards complete
satisfaction of that performance obligation. This means that revenue should be recognised as the services are
provided (step (v)).
IFRS 15 mentions various methods of measuring progress including output and input methods. In the case of
the maintenance contracts, the best measure of progress towards complete satisfaction of the performance
obligation over time is a time-based measure and Alexandra should recognise revenue on a straight-line basis
over the specified period.
Accordingly, the new treatment, and the one used to date by Xavier Co, is the correct accounting treatment
under IFRS 15, and the previous treatment, of recognising the revenue on invoicing at the beginning of the
contract, was incorrect.
Adjustments under IAS 8

The accounting treatment previously used by Alexandra was incorrect because it did not comply with IFRS
15 Revenue from Contracts with Customers. Consequently, the change to the new, correct policy is the
correction of an error rather than a change of accounting policy.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors states that changes in accounting
estimates result from changes in circumstances, new information or more experience, which is not the case
here. This is a prior period error, which must be corrected retrospectively. This involves restating the opening
balances for that period so that the financial statements are presented as if the error had never occurred.

PRACTICE KIT
In the opening balance of retained earnings, the maintenance contract income that was recognised in full in
the year ended 30 April 20X0 must be split between the revenue due for that year (on an IFRS 15 basis as
described above) and that which should be deferred to subsequence periods. There will be less revenue
recognised in the prior year, resulting in a net debit to opening retained earnings.
In the year ended 30 April 20X1, the correct accounting policy has been applied. Since the maintenance
contracts typically run for two years, it is likely that most of the income deferred from the prior year relating
to this period will also be recognised in the current period. The effect of this for the year ended 30 April 20X1
is that the reduction in profits of $6m will be mitigated by the recognition of income deferred from last year.
12. Verge (Financing Component)

The applicable standards here are IFRS 15 Revenue from Contracts with Customers and IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.
Recognition of revenue from the maintenance contract
IFRS 15 states that the entity must determine the transaction price (Step (iii) of the IFRS 15 five-step process
for revenue recognition). The transaction price is the amount of consideration a company expects to be entitled
to from the customer in exchange for transferring goods or services and must take account of the time value
of money, if material.
Under IFRS 15, an entity must adjust the promised amount of consideration for the effects of the time value of
money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly)
provides the customer or the entity with a significant benefit of financing the transfer of goods or services to
the customer. In those circumstances, the contract contains a significant financing component. A significant
financing component may exist regardless of whether the promise of financing is explicitly stated in the
contract or implied by the payment terms agreed to by the parties to the contract.
Where the inflow of cash or cash equivalents is deferred, the amount of the inflow must be discounted because
the fair value is less than the nominal amount. In effect, this is partly a financing transaction, with Verge
providing interest-free credit to the government body. IFRS 15 requires the use of the discount rate which
would be reflected in a separate financing transaction between the entity (Verge) and its customer (the
government agency). This rate has been provided in the question as 6%. This 6% must be used to calculate the
discounted amount, and the difference between this and the cash eventually received recognised as interest
income.
IFRS 15 revenue recognition process (Step (v)) would treat this as a performance obligation satisfied over time
because the customer simultaneously receives and consumes the benefits as the performance takes place.
Verge must therefore recognise revenue from the contract as the services are provided, that is as work is
performed throughout the contract's life, and not as the cash is received. The invoices sent by Verge reflect the
work performed in each year, but the amounts must be discounted in order to report the revenue at fair value.
The exception is the $1 million paid at the beginning of the contract. This is paid in advance and therefore not
discounted, but it is invoiced and recognised in the year ended 31 March 20X2. The remainder of the amount
invoiced in the year ended 31 March 20X2 ($2.8m – $1m = $1.8m) is discounted at 6% for two years.
In the year ended 31 March 20X3, the invoiced amount of $1.2m will be discounted at 6% for only one year.
There will also be interest income of $96,000, which is the unwinding of the discount in 20X2.
Recognised in y/e 31 March 20X2
$m
Initial payment (not discounted) 1.0
Remainder invoiced at 31 March 20X2: 1.6
1.8 x 1 / 1.062
Revenue recognized 2.6

PRACTICE KIT
Recognised in y/e 31 March 20X3

Revenue: $1.2m x 1 / 1.06 = $1.13m
Unwinding of the discount on revenue recognised in 20X2 $1.6m × 6% = $96,000
Correction of prior period error
The accounting treatment previously used by Verge was incorrect because it did not comply with IFRS 15
Revenue from contracts with customers. Consequently, the change to the new, correct policy is the correction
of an error rather than a change of accounting policy.
Prior period errors, under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, result from
failure to use or misuse of information that:
i. Was available when financial information for the period(s) in question was available for issue; and
ii. Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
IAS 8 includes the effects of mistakes in applying accounting policies, mathematical mistakes and oversights.
Only including $1m of revenue in the financial statements for the year ended 31 March 20X2 is clearly a
mistake on the part of Verge. As a prior period error, it must be corrected retrospectively. This involves
restating the comparative figures in the financial statements for 20X3 (ie, the 20X2 figures) and restating the
opening balances for 20X3 so that the financial statements are presented as if the error had never occurred.
13. Carsoon (Variable Element)

IFRS 15 Revenue from Contracts with Customers specifies how to account for costs incurred in fulfilling a
contract which are not in the scope of another standard. Costs to fulfil a contract which is accounted for under
IFRS 15 are divided into those which give rise to an asset and those which are expensed as incurred. Entities
will recognise an asset when costs incurred to fulfil a contract meet certain criteria, one of which is that the
costs are expected to be recovered.
For costs to meet the 'expected to be recovered' criterion, they need to be either explicitly reimbursable under
the contract or reflected through the pricing of the contract and recoverable through the margin.
The penalty and additional costs attributable to the contract should be considered when they occur and
Carsoon should have included them in the total costs of the contract in the period in which they had been
notified.
As regards the counter claim for compensation, Carsoon accounts for the claim as a contract modification in
accordance with IFRS 15. The modification does not result in any additional goods and services being provided
to the customer. In addition, all of the remaining goods and services after the modification are not distinct and
form part of a single performance obligation. Consequently, Carsoon should account for the modification by
updating the transaction price and the measure of progress towards complete satisfaction of the performance
obligation. However, on the basis of information available, it is possible to consider that the counter claim had
not reached an advanced stage, so that claims submitted to the client should not be included in total revenues.
When the contract is modified for the construction of the storage facility, an additional $7 million is added to
the consideration which Carsoon will receive. The additional $7 million reflects the stand-alone selling price
of the contract modification. The construction of the separate storage facility is a distinct performance
obligation and the contract modification for the additional storage facility is accounted for as a new contract
which does not affect the accounting for the existing contract. Therefore the contract is a performance
obligation which has been satisfied as assets are only recognised in relation to satisfying future performance
obligations. General and administrative costs cannot be capitalised unless these costs are specifically
chargeable to the customer under the contract. Similarly, wasted material costs are expensed where they are
not chargeable to the customer. Therefore a total expense of $15 million will be charged to profit or loss and
not shown as assets.

PRACTICE KIT
14. Clarence (PO Overtime or Intime)

The performance obligation is not satisfied over time because the supermarket does not simultaneously receive
and benefit from the asset. Clarence therefore satisfies the performance obligation at a point in time and will
recognise revenue when it transfers control over the assets to the supermarket.
The fact that the supermarket has physical possession of the magazines at 31 December 20X1 is an indicator
that control has passed. Also, Clarence will invoice the supermarket for any issues that are stolen and so the
supermarket does bear some of the risks of ownership.
However, as at 31 December 20X1, legal title of the magazines has not passed to the supermarket. Moreover,
Clarence has no right to receive payment until the supermarket sells the magazines to the end consumer.
Finally, Clarence will be sent any unsold issues and so bears significant risks of ownership (such as the risk of
obsolescence).
All things considered, it would seem that control of the magazines has not passed from Clarence to the
supermarket chain. Therefore, Clarence should not recognise revenue from this contract in its financial
statements for the year ended 31 December 20X1.
15. Sachal Limited (PO)

International Financial Reporting Standard (IFRS 15) provides that the revenue is recognized:
(a) when the performance obligation is satisfied by the entity by transferring a promised good or service (ie
an asset) to the customer; and
(b) the asset is transferred when the customer obtains the control of that asset.
Based on this principle, the following is the considerations to be taken into account in determining
accounting for revenue:
a) Restaurant management software
There exists a contract for sale of Restaurant management software between SL and customers containing
confirmation of respective right and obligation, payment term, commercial substance and price is
collected in advance.
There are two performance obligations, namely:

• Explicit: delivery of software and
• Implicit: six month on-site support
As per contract, the transaction price is Rs.1.5 million for both performance obligations.
Based on stand-alone selling price approach, software will be priced as Rs.1.35 million (i-e. 1.50 m – 0.15)
and six month on-site support services will be priced as Rs.0.15 million (i-e. 0.30 million x 6/12).
PL will recognize revenue from sale of software upon delivery if SL can objectively conclude that the
software meets the requirements of the customer. The term of full payment of transaction price in advance
is a reasonable evidence of clarity of specification between SL and customer. The agreed thirty days trial
time will be considered as a formality of the contract.
PL will recognize revenue from on-site support services over six months period on straight-line basis.
b) Maintenance support for the standard software package

Such service is provided under a written contract that contains confirmation of respective right and
obligation, payment term, commercial substance. SL will assess the collectability of the price if not
received in advance.
The performance obligation is to provide maintenance and support services.

The price of the service is Rs.0.30 million for one year term.

PRACTICE KIT
Since there is only one performance obligation, the question of allocation of transaction price does not
arise.
PL will recognize revenue over one year period on straight-line basis, as in this case input method is
appropriate. The pattern of resources consumed by SL is evenly spread over the period of contract.
c) Customized software
Such service is provided under a written contract that contains confirmation of respective right and
obligation, payment term, commercial substance. SL will assess the collectability of the price.
The performance obligations are:

• Designing and development of customized software, and
• Maintenance and support services of the said software
The price of the service will be determined on the basis of terms of contract.
The price will be allocated between the two performance obligations. Price of maintenance services for
the first year is included in the total contract price. The allocated price would be 10% of the contract
price, which is the stand-alone price of the said services.
Satisfaction of performance obligation:
Revenue from design and development - PL will recognize revenue from design and development
over time, because the software at every stage is expected to be customer specific and would have no
alternative use for SL. The terms of payment at different stages of project also confirms that SL would
have an enforceable right to receive payment if the contract is terminated before completion. In this
case output method would be appropriate, as the resources applied on different stages vary.
Therefore, the amount of recognized revenue would correspond to the development stage of the
software at the end of reporting period.
Revenue from Maintenance and support services - PL will recognize revenue over one year period on
straight-line basis, as in this case, input method is appropriate. The pattern of resources consumed by
SL is evenly spread over the period of contract.
16. Brilliant Limited (PO)

Identification of performance obligations
There are three performance obligations:

1) Transfer of 15 Plastic card printing machines and its software
2) Transfer of 8 Laminators
3) Transfer of 100,000 plastic cards
Although the software is distinct from printing machine, but both are highly dependable to each other and
inter-related. In the context of this contract, these are providing a combined output to PL. Therefore,
software is not a separate performance obligation.
The total transaction price as per the contract is Rs.9.2 million. On the basis of available information the
stand-alone prices of each item will be estimated using the following approaches:
Plastic card printing machines and its software:
In the absence of observable stand-alone price, we may use ‘adjusted market assessment’ approach. The
competitor’s machine is sold at Rs.750,000 which is similar (not identical) to BL’s machine. As per given
information, we may use customers’ rating for adjustment of competitor’s price that worked out as follows:

PRACTICE KIT
Rupees
Competitors’ price 750,000
Adjusted price of BL machine (7/9*750,000) 583,000
Total price (15*583,000) 8,745,000
Laminators:
There is neither observable stand-alone price nor any comparable competitors’ product available in the
market in which BL operates. In this case, we may use ‘expected cost plus a margin approach’. The estimated
stand-alone price is worked out as follows:
Rupees
Expected cost to BL 200,000
Margin estimated (800,000 - 600,000)/600,000 = 33% 66,000
266,000
Total price (8*266,000) Plastic 2,128,000
cards:
Observable stand-alone price is available
Total price (100,000*12)
1,200,000
Total of stand-alone prices is:

8,745,000
Plastic card printing machines and its software
Laminators 2,128,000
Plastic cards 1,200,000
Total 12,073,000
Allocation of Rs.9.2 million (transaction price) will be based on relative stand-alone prices, as the difference
of Rs.2.873 million between stand-alone price and transaction price is not specific to any performance
obligation.
Plastic card printing machines and its software 6,663,961

(9,200,000*8,745,000/12,073,000)
Laminators 1,621,602
(9,200,000*2,128,000/12,073,000)
Plastic cards 914, 437
(9,200,000*1,200,000/12,073,000)
---------------
Total 9,200,000

PRACTICE KIT
17. Waqas Limited (PO + Modification)

The following is the available data of the original project:
Transaction price Rs.20 million
Cost of the project Rs.12 million
At the signing of the contract only one performance obligation is identified. Therefore, the question of
allocation the transaction price of Rs.20 million would not arise.
The revenue would be recognized over time because the installation and construction will be done on the
land of ACL and control of asset will be transferred progressively and will create right of payment for WL.
Amount of revenue recognized would correspond to the progress of the project. The progress will be
measured using input method, that is, cost incurred plus margin.
At the end of seventh month:

Additional Reservoir:
a) is distinct from original RO plant project
b) increased the price of the contract by Rs.2.5 million which reflected WL’s stand-alone price of similar
construction work. The following working explains it further:
Cost estimated Rs.1.8 million

Usual margin (8/12*100=67%) Rs.1.2 million
Normal price Rs.3.0 million
Agreed consideration Rs.2.5 million
The reduced price is reasonable due to less administrative resources is to be applied for additional work.
The contract of additional reservoir will be treated as separate contract and its revenue will be recognized
separate from original contract. The revenue from this contract will be recognized over time, as construction
of reservoir will be done on the land of ACL and control of asset will be transferred progressively and will
create right of payment for WL.
At this stage the revenue from RO plant project will be recognized as follows: Percentage of work completed
(4.2/12.0*100) 35%
Revenue to be recognized (35%*20) Rs.7.0 million
At the end of tenth month:

Increasing the size of reservoir will increase the scope of the contract, but it cannot be considered as a
distinct work already agreed. Increased contract price also does not reflect WL’s stand-alone price of similar
work because it is equal to the cost of work. Therefore, WL should account for this modification as part of
single performance obligation that is partially satisfied on the date of modification. A cumulative catch-up
adjustment will be done, which is worked out as follows:
Original contract Modified
Contract price 20.0 21.0
Total contract cost 12.0 13.0
Cost incurred so far 7.2 7.2
% of completion 60% 55%
Cumulative Revenue recognition 12.0 11.55
Difference between the two amounts of cumulative revenue will be the adjustment to the revenue account.
Revenue from additional reservoir

% of completion (0.72/1.8 * 100) 40%

PRACTICE KIT
Revenue to be recognized (40% * 2.5) Rs.1.0 million
At the end of sixteenth month:

Additional work of pumping and piping facility increased the scope of the contract. It is also distinct from the
RO plant project. However, the increased price of the contract does not reflect
WL’s stand-alone price of similar work because it provides nominal margin to WL. Therefore, this contract
cannot be accounted for as separate contract. This contract will terminate the existing contract and create a
new contract. There will be two performance obligations (a) Transfer of RO plant; and (b) transfer of pumping
and piping facility.
The price of new contract is worked out as follows:

% of completion of existing contract (11.70/13.0*100) 90%
Rupees
Revenue recognized (21.0 * 90%) 18.9m
Remaining promised consideration (21.0 – 18.9) Consideration 2.1m
of modification 3.0m
New contract price 5.1m
Allocation of new contract price on the basis of cost plus

margin approach
Total estimated cost of new modified contract (13.0+2.8) 15.8m

Less: Already incurred cost 11.7m
-----------
Cost to be incurred 4.1m
Allocation
RO plant project (1.3/4.1*5.1) 1.62m
Pumping and piping facility (2.8/4.1*5.1) 3.48m
The revenue will be recognized over time.
Revenue from additional reservoir
% of completion (1.35/1.8 * 100) 75%
Revenue to be recognized (75% * Rs. 2.5m) 1.875m

PRACTICE KIT
18. Hawks Limited (Comprehensive Question)

Total
Total
Total assets comprehensive
liabilities
income
--------------- Rs. in million ---------------
Given 2,500.00 1,610.00 659.00
(i) Revenue
Revenue to be booked (W-1) 9.00 (40.00) 49.00
Contract cost (W-2.1) 14.77 14.77
23.77 (40.00) 63.77
Revised amounts 2,523.77 1,570.00 722.77
W-1: Revenue to be recognized

Bonus for Total revenue to
Revenue to be booked higher be booked
rating
----------------------- Rs. in million -----------------------
Advertisement (at point of [3×6.01(W-2)] 18.03 4.00 22.03
time)
Broadcasting (over the time) [(2.7×9.99(W-2)] 26.97 26.97
49.00
Standalone Revenue per

price (Rs. in Contract price unit (Rs. in
million) Proportion (Rs. in million)
million)
Advertisement (5×1.3×5)32.5 37.57% 30.06 OR 6.01
Broadcasting (9×1.2×5)54.0 62.43% 49.94 9.99
86.5 100% 80.00
W-2.1: Contract cost

Advertisement Broadcasting Total
------------------------------ Rs. in million ------------------------------
Total 18.20 35.60 53.80
Charged to P & L (15.10) (23.93) (39.03)
(8.5+9.2)+(8.9×0.7)
3.1 11.67 14.77
[9+(8.9×0.3)]

PRACTICE KIT
19. Telecom contract – IFRS Box (5 Step Model)

Step 1: Identify the contract with a customer
= written contract between Tommy and XYZ Corp.
Step 2: Identify the performance obligations

PO #1: Network services (monthly plan)
PO #2: Handset
Step 3: Determine the transaction price

Monthly fee: 100
Months of subscription: 12
Total transaction price: 1,200
Step 4: Allocate the transaction price to the performance obligations

Performance obligations Stand-alone Allocated Revenue Billing
selling price transaction price
Network services 960 914.29 => =>100 /
76.20/month month
Handset 300 285.71 286 0
Total 1,260 1,200
Step 5: Recognize revenue when (or as) an entity satisfies a performance obligation
PO #1: Network services (monthly plan) => Over time, as monthly network services are provided
PO #2: Handset => At the point of time, when handset is delivered to Tommy
Journal entries:
Revenue from handset:
Debit Contract assets 286 => Contract asset = entity’s right to consideration in
Credit Revenues from sales of exchange for goods or services that the entity has
-286
goods) transferred to a customer when that right is
conditioned on something other than the passage of
0
time (for example, the entity’s future performance).
Invoice - month 1:
Debit Trade receivables 100
Credit Contract assets -24 (1/12 of a contract asset)
Credit Revenues from services -76
0
Total revenue in 20X1:

Revenue from handset 286
Revenue from network services (6 months) 457
Total: 743

PRACTICE KIT
20. My PC – IFRS Box (Modification)

1.1 Assessing the type of contract modification
1.2 Amount of revenue

Revenue from the original contract
(contract #1):
Products delivered until 31 December
300
20X1
Originally agreed price: 2,000 CU/computer
Total revenue from contract #1: 600,000 CU
Revenue from the additional contract

(contract #2):
Products delivered until 31 December Debit Contract assets
100 794,000
20X1
Credit Revenues
Agreed price: 1,940 CU/computer -794,000
from sales of goods
194,000 CU 0
Total revenue in 20X1 from contracts #1

794,000 CU
and #2:
2.1 Assessing the type of contract modification

PRACTICE KIT
2.2 Contract modification - type II

a) Revenue from the original contract -
before modification:
Products delivered before contract
100
modification
Originally agreed price: 2,000 CU/computer
Total revenue from contract #1: 200,000 CU
b) Reduction of revenue for initial 50

computers ("catch-up")
N. of products with minor defects (initial
50
delivery)
Reduction of price per computer 240 CU/computer
Total adjustment of revenue for initial
200,000 CU
delivery
Debit Contract
188,000
assets
Credit Revenues
Total revenue before contract modification 188,000 -188,000
from sales of goods
0
2.2 Contract modification - type III

a) Total n. of products after modification:
Products from original contract not yet
200
delivered before modification
Products agreed in modification 200
Total n. of products to be delivered after
400
modification
b) Total consideration to allocate

Consideration from original contract not
400,000
yet recognized
Consideration from contract modification 280,000 without the credit for defective products
Total 680,000
c) Total revenue after modification until 31

December 20X1:
Allocated price per 1 computer 1,700 (b/a)
N. of computers delivered after
modification until 31/12/20X1
from original contract (300-100) 200
Debit Contract
from modification 100 510,000
assets
Credit Revenues
Total n. of computers 300 -510,000
from sales of goods
0
Total revenue after modification until 31
510,000
December 20X1:
Total revenue in 20X4 698,000

PRACTICE KIT
21. Books Corp. – IFRS Box (Variable consideration with contingency

1. Step #1 - Identify the contract with customer
This is clear here - it is a written contract between the Books Corp. and client A.
2. Step #2 - Identify individual performance obligations

Contract consists of several deliveries:
• processing the documents Even if client A can benefit from processed documents and accounting
and accounting records records, in fact, no monthly reports and annual financial statements
• preparing monthly reports can be prepared without them.
• preparting annual financial
statements and tax returns. As a result, these performance obligations cannot be separated, and
they are not distinct
The contract is to be treated as 1 single performance obligation

(combination of all 3 activities).
!! Here, you assess 2 criteria for a performance obligation being distinct - product level and entity level
(refer to Chapter 3 of IFRS 15 course).
It can happen that Books may prepare monthly reports based on data processed by the client, and in
this case, these PO will be distinct. Look to specific circumstances and make judgement.
3. Step #3 - Determine the transaction price

3.1 Fee for accounting records:
Year 1 - 48 000 entries 250,000
Year 2 - 50 000 entries 250,000
Year 3 - 53 000 entries (250 000+5*3 000) 265,000
Total - fee for accounting records: 765,000
3.2 Fee for monthly reports / annual financial statements Constraint limits the amount of revenue
Monthly reports - Year 1-3 36,000 as Books can recognize only 0 or
Annual financial statements - Year 1-3 30,000
Total - fee for monthly reports / annual fin. 12 000 per year (nothing in between).
66,000
statements
Therefore, based on 30% probability,
Books limits the bonus to zero until it
3.3 Performance bonus 0 or 12 000 becomes highly probable that the
Total performance bonus (3*12 000) 36,000 average processing times fall below 1
Probability of processing 1 000 docs under 1 week, and Books will be entitled to
30%
week bonus.
Expected value of variable consideration 10,800
After the effect of constraint 0
Total transaction price 831,000

PRACTICE KIT
How would the transaction price change if the contract states that Books is entitled to an annual bonus
amounting to CU 0-12 000 and its precise amount depends on number of times when the batch processing
time for 1 000 docs fell below 1 week during the year?
3.3 Performance bonus - variable amount 0 -12 000 Here, the constraint does not limit the
Total performance bonus (3*12 000) 36,000 amount of bonus as Books can get
Probability of processing 1 000 docs under 1 week 30% anything from 0 to 12 000 based on real
Expected value of variable consideration 10,800 performance in individual weeks.
After the effect of constraint 10,800
In case 1, with 30% probability, it was
highly probable that Books will not
achieve overall annual target of average
time below 1 week.
But in case 2, it is 30% probable that

Books will achieve individual average
times below 1 week during some
individual weeks of the year.
22. Voyage ltd. – IFRS Box (Significant financing component and right of return)
On the contract date:
No revenue is recognized.
On the delivery date:

No revenue is recognized, as there's a right of return and there's no historical evidence based on which
Autocar can conclude that it's highly probable that significant reversal of revenue will not occur.
Note: if there would have been such an evidence, revenue could have been recognized.
Journal entries:
#1 Receipt from Voyage (30*33 000/2) 495,000
Debit Cash 495,000

Credit Refund liability -495,000
0
#2 Delivery of trucks at cost (30*28 000) 840,000
Debit Asset - right to recover products 840,000

Credit Inventories -840,000
0
After 90 days from delivery, when the right of return lapses:
Significant financing component calculation:

Cash selling price (30*32 000) of 1/2 960,000
Agreed selling price (30*33 000) 990,000 there is a significant financing component

PRACTICE KIT
Calculating internal rate of return:

Cash out (in form of trucks at ORIGINAL selling
-960,000
price)
Cash in 495,000 Let’s assume this reflects the rate at
Net cash out in the beginning of transaction -465,000 separate financing transaction.
Net cash in at the end of transaction 495,000
Internal rate of return: 6.45% If not, then it would be necessary to
adjust the selling price.
Journal entries:
#1 Revenue from sale of trucks
Debit Refund liability 495,000

Difference between cash selling price and
Debit Receivable 465,000
Credit Revenue from sale of trucks -960,000 the amount already received
0
#2 Cost of sales
Debit Cost of sales 840,000

Credit Asset - right to recover the products -840,000
0
Careful with the interest here! You need to recognize it over remaining 9 months, as the receivable (asset)
was recognized after right of return lapses.
Therefore, it is necessary to calculate monthly IRR for the period of remaining 9 monhts (if you recognize
interest on monthly basis).
(we use the effective interest method under IFRS 9 here):
Time CF Interest revenue Receivable c/f
Recognition of revenue -465,000 465,000
Cash in - month 1 0 3,241 468,241
Cash in - month 2 0 3,264 471,506
Cash in - month 3 0 3,287 474,792
Cash in - month 4 0 3,310 478,102
Cash in - month 5 0 3,333 481,435
Cash in - month 6 0 3,356 484,791
Cash in - month 7 0 3,379 488,170
Cash in - month 8 0 3,403 491,573
Cash in - month 9 495,000 3,427 0
Monthly rate of interest for remaining 9 months: 0.70%

PRACTICE KIT
23. Jack & Partner – IFRS Box (Allocating variable consideration + licenses)
1. Scenario 1: stand-alone prices are CU 3 000/License 1 and CU 50 000/License 2
1.1 Assessment of allocating variable consideration
Here, Mikel's estimate of the sales-based fees approximates stand-alone selling price of License 2; and
similarly, consideration for License 1
approximates stand-alone selling price of License 1.
As a result, variable consideration based on sales can be allocated fully to one performance obligation -
License 2.
1.2 Allocation of variable consideration

License 1: 3,000
License 2: 50,000
Total 53,000
1.3 Revenue - year 1:

Revenue for transfer of License 1 - after contract signature:
Debit Contract Asset 3,000
Credit Revenue from sale of license 1 -3,000
0
Revenue for transfer of License 2 in the year 1:
Total sales of Mikel-branded clothing: 100,000

Sales-based royalties (10%) 10,000

0
Note: Mikel can recognize revenue from sales-based royalty only when a subsequent sale occurs (para B63 of
IFRS 15).
In this case, it relates only to License 2, as the full revenue for license 1 is fixed.
2. Scenario 2: stand-alone prices are CU 10 000/License 1 and CU 40 000/License 2

2.1 Assessment of allocating variable consideration
Here, Mikel's estimate of the sales-based fees does NOT approximate stand-alone selling prices for both
Licenses.
As a result, the conditions for allocating variable consideration to one performance obligations in IFRS 15
(85) are NOT met.
Therefore, Mikel allocates the transaction prices based on the relative stand-alone prices.
2.2 Allocation of a consideration

Allocated transaction prices
Stand-alone
Consideration 1 Consideration 2
selling prices
(fixed) (variable)
License 1: 10,000 600 10,000
License 2: 40,000 2,400 40,000
Total 50,000 3,000 50,000

PRACTICE KIT
2.3 Revenue - year 1:

Revenue for transfer of License 1 - after contract signature (fixed part):
Debit Contract Asset 600
Credit Revenue from sale of license 1 -600
0
Revenue for transfer of License 2 - after contract signature (fixed part)

0
Revenue for transfer of License 1 - year 1 (variable part):

Debit Contract Asset 2,000 (CU 10 000/CU 50 000 * sales of CU 100 000 * 10%
Credit Revenue from sale of license 1 -2,000 royalty)
0
Revenue for transfer of License 2 - year 1 (variable part):

Debit Contract Asset 8,000 (CU 40 000/CU 50 000 * sales of CU 100 000 * 10%
Credit Revenue from sale of license 2 -8,000 royalty)
0
Note: Mikel can recognize revenue from sales-based royalty only when a subsequent sale occurs (para B63 of
IFRS 15).
In this case, it relates to both licenses, as the part of variable consideration is allocated to License 1 too.
Also please note that in this particular example, amounts of total revenues in individual point of times are the
same.
However, amounts of revenues per licenses is different from scenario 1 and the it would have a significant
impact when
the licenses are not transferred at the same time.

PRACTICE KIT
24. AB Construct – IFRS Box (Revenue over time vs. at the point of time (real estate))
1. Contract A
1.1 Assessment
The third criterion for recognizing revenue over time is NOT met, for the following reasons:
1) An apartment can be easily sold / transferred to another client in the case of default.
2) AB Construct has NO enforceable right to payment for performance up to date (keeps only the progress
payments - these might not be sufficient)
AB construct must recognize revenue from the contract A at the point of time.
1.2 Revenue recognition
Year 1
No revenue is recognized.
Year 2 - at delivery of apartment to a client

AB Construct will recognize revenue of CU 100 000 (full amount) at the point of delivery.
1.3 Journal entries

Upon the signature of contract - deposit received from client A
Debit Cash 10,000
Credit Contract Liability -10,000
0
Milestone 1 - progress payment received from client A

Debit Cash 50,000
0
Completion - final payment received from client A

Debit Cash 40,000
0
Delivery of apartment to the client A

Debit Contract Liability 100,000
Credit Revenue -100,000
0
2. Contract B
2.1 Assessment
The third criterion for recognizing revenue over time IS met, due to following reasons:
1) AB Construct cannot direct the apartment for the alternative use (the contract with client B does not permit
the transfer).
2) AB Construct has the enforceable right to payment for performance completed to date.
AB Construct recognizes revenue from the contract B over time.

PRACTICE KIT
2.2 Revenue recognition

Year 1
Revenue is recognized with reference to the progress towards completion.
In this case, it is appropriate to measure progress towards completion by the input method.
Year Costs Progress Revenue

1 35,000 43.75% 43,750
2 45,000 56.25% 56,250
Total 80,000 100.00% 100,000
2.3 Journal entries

Upon the signature of contract - deposit received from client B
Debit Cash 10,000
0
Milestone 1 - progress payment received from client B

Debit Cash 50,000
0
Year 1 - revenue recognized from contract B

Credit Revenue from Contract B -43,750
0
Completion - final payment received from client B

Debit Cash 40,000
0
Delivery of apartment to the client B + revenue in the year 2

Credit venue -56,250
0
25. Books Corp. – IFRS Box (Variable considerReation with contingency)

1. Costs to obtain the contract with client A
Commission to sales representative: 5,000
Legal fees (drafting & finalizing the contract) 3,500
Total 8,500
These costs need to be capitalized and amortized over period of 3 years as Books expects to recover them
through future fees for the services provided.
Journal entries:
Debit Asset – Costs for contract A 8,500
Credit Cash / Bank account -8,500
0
Amortization:
Based on revenue recognized for the contract.
Revenue Percentage Amortization

PRACTICE KIT
Year 1: 272,000 32.73% 2,782

Year 2: 272,000 32.73% 2,782
Year 3: 287,000 34.54% 2,936
Total 831,000 100.00% 8,500
Year 1:
Debit P/L - amortization of costs for contract A 2,782
Credit Asset - costs for contract A -2,782
0
2. Costs to fulfill the contract with client A => in line with IAS 16 (account as for PPE and
depreciate on a systematic basis)
Investment into additional 10 computers: 4,000
Customization of SW, data flow, testing 13,000 Debit Asset - costs for contract A 13,000
=> costs do relate directly to the contract A Credit Cash / bank account -13,000
=> costs do generate/enhance resources 0
=> costs are expected to be recovered
Books need to capitalize these costs and amortize them similarly as costs above
Based on revenue recognized for the contract.

Revenue Percentage Amortization
Year 1: 272,000 32.73% 4,255
Year 2: 272,000 32.73% 4,255
Year 3: 287,000 34.54% 4,490
Total 831,000 100.00% 13,000
Year 1:
Debit P/L - amortization of costs for contract A 4,255
Credit Asset - costs for contract A -4,255
0
Payroll expenses 30,000

=> costs do relate directly to the contract A
=> however, these costs do NOT generate/enhance resources
These costs are expensed in P/L when incurred.


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PRACTICE KIT

CFAP 1: ADVANCED ACCOUNTING AND FINANCIAL REPORTING

CHAPTER 02: IAS 38 – INTANGIBLE ASSETS ........................................................... 29

From the desk of Hassnain R. Badami, ACA

1. Titanium (Copyright) .............................................................................................................................. 35

CHAPTER 03: IAS 40 – INVESTMENT PROPERTY ..................................................... 42

From the desk of Hassnain R. Badami, ACA

CHAPTER 04: IAS 36 – IMPAIRMENT OF ASSETS..................................................... 52

CHAPTER 05: IFRIC 01 – CHANGES IN EXISTING DECOMMISSIONING,

From the desk of Hassnain R. Badami, ACA

CHAPTER 06: IFRS 08 – SEGMENT REPORTING ...................................................... 80

CHAPTER 07: IAS 41 – AGRICULTURE ..................................................................... 94

From the desk of Hassnain R. Badami, ACA

2. Arapawanui (Animals) ............................................................................................................................ 98

CHAPTER 10: IFRS 02 - SHARE BASED PAYMENTS ............................................... 117

From the desk of Hassnain R. Badami, ACA

From the desk of Hassnain R. Badami, ACA

From the desk of Hassnain R. Badami, ACA

35. Entity 3 ..................................................................................................................................................... 151

CHAPTER 11: BASIC CONSOLIDATION AND CHANGES IN GROUP STRUCTURES . 153

From the desk of Hassnain R. Badami, ACA

10. Express (Part disposal subsidiary to subsidiary) ............................................................................... 187

CHAPTER 12: IFRS 05 – NON-CURRENT ASSETS HELD FOR SALE AND

From the desk of Hassnain R. Badami, ACA

11. ABC Limited (Disposal of Asset) ......................................................................................................... 220

CHAPTER 13: CONSOLIDATION COMPLEX GROUP STRUCTURES ........................ 221

CHAPTER 14: CONSOLIDATION JOINT ARRANGEMENTS ...................................... 240

CHAPTER 15: IFRS 16 – LEASES ............................................................................. 244

From the desk of Hassnain R. Badami, ACA

15. LorryCars (Lessors: Classification of leases - IFRS Box) ................................................................... 248

CHAPTER 16: IAS 33 – EARNING PER SHARE ........................................................ 273

From the desk of Hassnain R. Badami, ACA

9. Cumulative convertible preference shares ......................................................................................... 275

From the desk of Hassnain R. Badami, ACA

4. Share consolidation ................................................................................................................................ 291

From the desk of Hassnain R. Badami, ACA

41. Alpha Limited (EPS + Consolidation) ................................................................................................. 319

From the desk of Hassnain R. Badami, ACA

9. Tree (Conceptual Basis of Revenue – 5 Step Model) ......................................................................... 336

From the desk of Hassnain R. Badami, ACA

Hasnain believes in learning through experience and stories. His

Hasnain is a senior faculty member at KnS Institute of Business

From the desk of Hassnain R. Badami, ACA

[ICAP - CAF 5 Question Bank]

Land and Plant and Computers Totals

During 2015 the following transactions took place.

From the desk of Hassnain R. Badami, ACA

[ICAP - CAF 5 Question Bank]

The following information pertains to AL’s buildings:

[ICAP - CAF 5 Question Bank]

From the desk of Hassnain R. Badami, ACA

[ACCA - SBR BPP Practice Kit Q. 27(d)]

[ACCA - SBR Sep/Dec 15, amended (c)]

[ACCA-SBR 12/14 amended (b)]

From the desk of Hassnain R. Badami, ACA

[ICAP Past Paper]

The following information relates to FPL's plant:

From the desk of Hassnain R. Badami, ACA

Profit or loss £2,000