Final Examinations

Module E
4 June 2015
3 hours – 100 marks
The Institute of

Additional reading time – 15 minutes

Chartered Accountants
of Pakistan

Advanced Accounting and Financial Reporting

Q.1 Consolidated financial statements of Malik Group of Companies (MGC) for the year ended
31 December 2014 are presented below:

Consolidated statement of financial position as on 31 December 2014

2014 2013 2014 2013
Equity Rs. in million Non-current assets Rs. in million
Ordinary shares (Rs.10 each) 15,000 15,000 Goodwill 19,300 18,500
Retained earnings 17,550 10,850 Property, plant and equipment 25,450 16,250
Other reserves * 7,500 5,250 Investment in associate 6,200 5,400
40,050 31,100 50,950 40,150
Non-controlling interest 3,100 3,200

Non-current liabilities Current assets

Loans from banks 5,000 3,000 Inventories 4,700 4,350
Deferred tax 1,500 1,050 Trade and other receivables 3,900 3,300
Cash and bank 2,100 1,400
Current liabilities
Trade and other payables 8,000 7,250
Income tax 3,875 3,525
Accrued interest 125 75
61,650 49,200 61,650 49,200
* include revaluation reserve

Consolidated statement of comprehensive income for the year ended 31 December 2014
Rs. in million
Revenue 20,900
Operating expenses (11,550)
Profit from operations 9,350
Gain on disposal of subsidiary 1,000
Finance cost (350)
Income from associates 1,150
Profit before taxation 11,150
Income tax expense (2,250)
Profit for the year 8,900
Other comprehensive income for the year
Re-measurement of post-employment benefits 2,000
Other comprehensive income from associates 500
Total comprehensive income 11,400

Profit attributable to:

 Parent shareholders 7,950
 Non-controlling interest 950
8,900

Total comprehensive income attributable to:

 Parent shareholders 10,200
 Non-controlling interest 1,200
11,400
 Advanced Accounting and Financial Reporting Page 2 of 5

Additional information:
(i) During the year, MGC acquired 80% holding in Gomel Limited (GL) against a cash

interest’s holding was measured at its fair value of Rs. 3,400 million. The fair value of
consideration of Rs. 15,000 million. On the date of acquisition, the non-controlling

net assets of GL at acquisition comprised of the following:

Rs. in million
Property, plant and equipment 12,800
Inventory 1,500
Trade and other receivables 2,400
Cash and bank 800
Loans from banks (400)
Trade and other payables (1,800)
Income tax (400)
14,900

(ii) During the year, MGC also disposed of its 60% shareholdings in Stone Limited (SL)

several years ago for Rs. 6,000 million. At acquisition, the fair value of SL’s net assets
and realised cash proceeds of Rs. 8,500 million. This subsidiary had been acquired

and non-controlling interest was Rs. 7,300 million and Rs. 3,200 million respectively.
On the date of disposal, the net assets of SL had a carrying value in the consolidated
statement of financial position as follows:

Rs. in million
Property, plant and equipment 7,250
Inventory 1,650
Trade and other receivables 1,500
Cash and bank 500
Loans from banks (300)
Trade and other payables (800)
9,800

(iii) Property, plant and equipment:

 Depreciation charge for the year is Rs. 3,850 million.
 A plant having carrying value of Rs. 2,500 million was sold for
Rs. 2,750 million. Gain on disposal has been credited to operating expenses.
 On the basis of a professional valuation report, increase of Rs. 2,000 million has
been recognized in the value of property, plant and equipment.

(iv) During the year, Rs. 1,250 million was paid as final dividend to ordinary
shareholders.

Required:
Prepare consolidated statement of cash flow of MGC for the year ended 31 December 2014,
using the indirect method. (22)

Q.2 The financial statements of Integrity Steel Limited (ISL) for the year ended 31 March 2015
are in the final stage of their preparation and the following matters are under consideration:

(a) On 1 April 2014, ISL entered into a contract with Invest Bank. Under the contract, ISL
deposited an amount of USD 5 million, at an interest of 2.5% per annum with a
maturity date of 31 March 2017. Interest will be received on maturity along with the
principal. Further, an additional 2% interest per annum would be payable by Invest

with ISL’s policy of making low risk investments in foreign as well as local currencies.
Bank in the event the value of USD increases by 5% or more. The contract is in line

Explain how the above investment should be measured in ISL’s books of account at
Required:

31 March 2015. (05)

 Advanced Accounting and Financial Reporting Page 3 of 5

(b) On 1 October 2014, ISL shifted its corporate head office to a three storey building. The
fair value of building on the shifting date and as on 31 March 2014 was Rs. 325 million
and Rs. 310 million respectively.

This building was acquired five years ago at a cost of Rs. 240 million. Immediately

Depreciation on ISL’s buildings is charged on straight line basis over their useful lives.
thereafter it was leased out to a subsidiary. Its remaining useful life is 10 years.

Required:
Prepare journal entries to record the above transaction. (04)

(c) On 1 April 2014, ISL disposed of its power generation system to Komal Limited (KL)
for a consideration of Rs. 135 million. At the same time, ISL entered into a long-term
agreement with KL whereby the assets were leased back under a 10-year operating
lease. At the time of sale, the fair value and the carrying value of the assets were
Rs. 160 million. The lease rentals are Rs. 22 million per annum. The market value of
lease rentals of such type of assets is Rs. 24 million

Required:
Prepare journal entries to record the above transactions for the year ended
31 March 2015. (04)

Q.3 (a) Tanzeem Limited (TL) operates a defined benefit pension plan for its employees. The
following details relate to the plan:

2014 2013
Discount rate for plan obligation 9% 8%
Expected return on plan assets 10% 9%
----- Rs. in million -----
Present value of obligation at year-end 2,040 2,300
Fair value of plan assets at year-end 1,784 2,150
Current service cost 125 143
Benefits paid during the year 99 110
Contribution made during the year 105 118

Additional information:
 Present value of pension obligation and fair value of plan assets as on
1 January 2013 were Rs. 2,050 million and Rs. 1,995 million respectively.
 During the year 2013, TL amended the scheme whereby the benefits available
under the plan had been increased. It resulted in an increase in the present value
of the defined benefit pension obligation by Rs. 5 million and Rs. 8 million on
account of vested and non-vested benefits respectively. The period to vest is
4 years.
 On 31 December 2014, TL sold a business segment to Sachai Limited (SL).
Accordingly, TL transferred the relevant component of its pension fund to SL.
The present value of the defined benefit pension obligation transferred was
Rs. 280 million and the fair value of plan assets transferred was Rs. 240 million.
TL also made a cash payment of Rs. 20 million to SL in respect of the plan.
 Average remaining working lives of employees is 10 years.

Required:
(i) Prepare relevant extracts to be reflected in the statement of financial position,
statement of comprehensive income and notes to the financial statements for the
year ended 31 December 2014 in accordance with International Financial
Reporting Standards. (Show comparative figures) (11)

 on sale of business segment to SL

(ii) Prepare entries to record the pension obligation:

 at the year-end. (03)

 Advanced Accounting and Financial Reporting Page 4 of 5

(b) 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 MBL’s 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. (11)

Q.4 (a) Millat General Insurance Limited is a listed company. The following information for
the year ended 31 December 2014 has been extracted from the records:

Fire &
Motor Misc.
property
insurance insurance
damage
------------ Rs. in ‘000 ------------
Premium written 286,000 154,000 89,000
Unearned premium reserve - opening 42,900 20,020 14,240
Unearned premium reserve - closing 51,480 18,480 11,570
Reinsurance ceded 228,800 15,400 53,400
Prepaid reinsurance premium ceded - opening 34,320 2,002 8,544
Prepaid reinsurance premium ceded - closing 41,184 1,848 6,942
Net claims 38,803 95,000 28,029
Commission expenses 27,742 15,554 9,167

Additional information:
(i) The reinsurers allowed commission on fire & property damage and miscellaneous
insurance at the rate of 15% of the ceded amount of reinsurance.
(ii) Other direct management expenses amounting to Rs. 45 million have been
charged to revenue account of different classes of insurance in proportion to their
net premium earned.
(iii) Other operating expenses and other income for the year are Rs. 28 million and
Rs. 17 million respectively.

Required:
Prepare an extract of profit and loss account for the year ended 31 December 2014, in
accordance with the requirements of Insurance Ordinance, 2000. (08)

(b) Briefly explain the 1/24th method of determining the unearned premium reserve. (02)
 Advanced Accounting and Financial Reporting Page 5 of 5

Q.5 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:

Gross Operating
Business Sales Assets Liabilities
profit expenses
segments
------------------------- 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 (07)

disclosed in GL’s financial statements for the year ended 31 March 2015.
(b) show how these reportable segments and the necessary reconciliation would be
(08)

Q.6 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 million ----
Share capital (Rs.10 each) 1,800 1,200
Share premium 380 230
Accumulated profit 3,756 3,556
11.5% Term finance certificates (TFCs) 250 -

The following information is also available:

(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 not 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.
(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) (15)

(THE END)