Suggested Answer Paper Group I

Paper 1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
1. AK Ltd., operates in Nepal and has investments in two other companies. The draft
statements of financial position of all three companies as at 31st Ashadh 2076 are as
follows:

Rs. In million
Assets: AK Ltd. BK Ltd. TK Ltd.
Non – current assets
Property plant and equipment 1,440 1,100 1,300
Investments in subsidiaries
BK Ltd. 1,250
TK Ltd. 310 1,270
Financial assets 320 21 141
Total non-current assets 3,320 2,391 1,441
Current assets 895 681 150
Total assets 4,215 3,072 1,591
Equity and liabilities:
Share capital 1,750 1,210 800
Retained earnings 1,240 930 350
Other components of equity 125 80 95
Total equity 3,115 2,220 1,245
Non-current liabilities 985 765 150
Current liabilities 115 87 196
Total liabilities 1,100 852 346
Total equity and liabilities 4,215 3,072 1,591
Additional Information:
a) On 1st Shrawan 2074, AK Ltd. acquired 14% of the equity interest of TK Ltd. for a cash
consideration of Rs. 260 million and BK Ltd. acquired 70% of the equity interest of TK
Ltd. for a cash consideration of Rs. 1,270 million. At 1st Shrawan 2074, the identifiable
net assets of TK Ltd. had a fair value of Rs. 990 million, retained earnings were Rs.
190 million and other components of equity were Rs. 52 million. At 1st Shrawan 2075,
the identifiable net assets of TK Ltd. had a fair value of Rs. 1,150 million, retained
earnings were Rs. 240 million and other components of equity were Rs. 70 million. The
excess in fair value is due to revaluation of non-depreciable land which has not been
accounted for and not changed till the reporting date. The fair value of the 14% holding
of AK Ltd. in TK Ltd., which was classified as fair value through profit or loss, was Rs.
280 million at 32nd Ashad 2075 and Rs. 310 million at 31st Ashadh 2076. However, the
fair value of BK Ltd’s interest in TK Ltd. had not changed since acquisition.
b) On 1st Shrawan 2075, AK Ltd. acquired 60% of the equity interests of BK Ltd. The cost
of investment comprised cash consideration of Rs. 1,250 million. On 1st Shrawan 2075,
the fair value of the identifiable net assets acquired was Rs. 1,950 million and retained
earnings of BK Ltd. were Rs. 650 million and other component of equity were Rs. 55
million. The excess in fair value is due to revaluation of non-depreciable land which
has not been accounted for and not changed till the reporting date. It is the group’s

© The Institute of Chartered Accountants of Nepal 4

Suggested Answer Paper Group I

policy to measure the non-controlling interest at acquisition at its proportionate share

of the fair value of the subsidiary’s net assets.
c) Goodwill of BK Ltd. and TK Ltd. were tested for impairment at 31st Ashadh 2076 and
found that there was no impairment relating to TK Ltd. However, the goodwill of BK
Ltd. was fully impaired by the reporting date.
d) On 1st Shrawan 2074, AK Ltd. acquired office accommodation at a cost of Rs. 90 million
with a 30 year estimated useful life. During the year, the property market in the area
slumped and the fair value of the accommodation fell to Rs. 75 million at 32nd Ashadh
2075 and this was reflected in the financial statements. However, the market
unexpectedly recovered quickly due to the announcement of major government
investment in the area’s transport infrastructure. On 31st Ashadh 2076, the professional
valuer advised AK Ltd. that the office accommodation should now be valued at Rs. 105
million. AK Ltd. has charged depreciation for the year but has not taken into account
of the upward valuation of the office accommodation. AK Ltd. uses the revaluation
model and records any valuation change when advised to do so.
e) AK Ltd. has announced two major restructuring plans during the year. The first plan
is to reduce its capacity by 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 to. The costs of this plan are Rs. 9 million
in redundancy costs, Rs. 5 million in retraining costs and Rs. 5 million in lease
termination costs. The second plan is to re-organize the finance and information
technology department over a one-year period but it does not commence until two
years’ time. The plan will result in 20% of finance staff losing their jobs during the
restructuring. The costs of this plan are Rs. 10 million in redundancy costs, Rs. 6
million in retraining costs and Rs. 7 million in equipment lease termination costs. There
are no entries made in the financial statements for the above plans.
f) The following information relates to the group pension plan of AK Ltd.:
Rs. In million
1st Shrawan 31st Ashadh
2075 2076

Fair value of plan assets 28 29

Actuarial value of defined benefit obligation 30 35
The contributions for the period received by the fund were Rs. 2 million and the
employee benefits paid in the year amounted to Rs. 3 million. The discount rate to be
used in any calculation is 5%. The current service cost for the period based on
actuarial calculations is Rs. 1 million. The above figures have not been taken into
account for the year ended 31st Ashadh 2076 except for the contributions paid which
have been entered in cash and the defined benefit obligation.
Required: (20 marks)
Prepare the group consolidated statement of financial position of AK Ltd. as at 31st
Ashadh 2076 with the notes of any of the issues dealt in the question.
Answer:
AK Ltd.
Consolidated statement of financial position

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Suggested Answer Paper Group I

as at 31 Ashadh 2076
Assets: Rs. Million
Non-current assets:
Property, plant and equipment [1,440 + 1,100 + 1,300 + 35 + 40 (W.N 2) +
32.6 (W.N 6)] 3,947.6
Goodwill (W3) 398
Financial assets (320 + 21 + 141) 482
4,827.6
Current assets (895 + 681 + 150) 1,726
Total assets 6,553.6
Equity and liabilities
Share Capital 1,750
Retained earnings (W5) 1,356.1
Other components of equity (W5) 170.1
3,276.2
Non-controlling interest (W4) 959.4
Total Equity 4,235.6
Total non-current liabilities [985 + 765 + 150 + 6 (W.N 8)] 1,906
Current liabilities [115 + 87 + 196 + 14 (W.N 7)] 412
Total liabilities 2,318
Total Equity and Liabilities 6,553.6
Workings:

W-1: Group structure

The group effective interest in TK Ltd is:
Direct interest 14%
Indirect interest or effective interest (60% X 70%) 42%
Group effective interest 56%
The NCI interest in TK Ltd. is therefore (100% - 56%) 44%
100%
Consolidation of BK Ltd.
Group 60%
NCI (100% - 60%) 40%
100%
The acquisition date of TK Ltd. is 1st Shrawan 2075 as this is when AK Ltd. gains control
over BK Ltd. and therefore indirect control over TK Ltd.

W-2: Net assets

Rs. In million
Post-
BK Ltd Acquisition date Reporting date
Acquisition
Share capital 1,210 1,210 -
Other components 55 80 25
Retained earnings 650 930 280

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Suggested Answer Paper Group I

Fair value adjustment – Land

(balancing figure) 35 35 -
1,950 2,255 305
TK Ltd
Share capital 800 800 -
Other components 70 95 25
Retained earnings 240 350 110
Fair value adjustment – Land
(balancing figure) 40 40 -
1,150 1,285 135
Therefore, the post-acquisition profits of BK Ltd. is Rs. 305 million (Rs. 2,255 – Rs. 1,950)
and that of TK Ltd. is Rs. 135 million (Rs. 1,285 – 1,150).
W-3: Goodwill
The cost of TK Ltd. has three elements: the cost of the direct holding, the cost of the indirect
holding and the indirect holding adjustments.
BK Ltd.
Rs. Million
Fair value of consideration 1,250
NCI at acquisition (40% X Rs. 1,950) 780
Fair value of identifiable net assets acquired (W2) (1,950)
Goodwill at acquisition 80
Impairment 2075/76 (80)
Goodwill at reporting date (fully
impaired -

Alternative:
BK Ltd.
Rs. Million
Fair value of consideration 1,250
Group share of Fair value of identifiable net assets acquired (60% X 1,950) (1,170)
Goodwill at acquisition 80
Impairment (80)
Goodwill at reporting date -

TK Ltd.
Rs. Million

Fair value of consideration:

Direct holding (Fair value at date control obtained) 280
Indirect holding 1,270
indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI at acquisition (44% X Rs. 1,150 million) 506
Less fair value of identifiable net assets (W2) (1,150)

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Suggested Answer Paper Group I

Goodwill at reporting date 398

AK investment in TK Ltd. was held at Rs. 310 million at the reporting date. Therefore, the
fair value increase of Rs. 30 million (Rs. 310 – Rs. 280) that has arisen since the date that
control was achieved must be removed from the consolidated statements. Retained
earnings must also be reduced by Rs. 30 million.

Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
1,042
Less Group's share of fair value of identifiable net assets (56% X1,150) (644)
Goodwill at reporting date 398
Alternative:
TK Ltd.
Rs. Million
Fair value of purchase consideration:
Direct holding 280
Indirect holding (60% X 1,270) 762
NCI at acquisition (44% X Rs. 1,150) 506
Less fair value of identifiable net assets (W2) (1,150)
Goodwill at reporting date 398

W-4: Non-controlling interest

Rs. Million
NCI in BK Ltd. at acquisition (40% X Rs. 1,950) 780
Add: NCI % of post-acquisition net assets (40% X (Rs. 2,255 million -
Rs. 1,950 million)) 122
Indirect holding adjustment (40% X Rs. 1,270 million) (508)
NCI in TK Ltd. at acquisition 506
NCI in post-acquisition net assets (44% X (Rs. 1,285 - Rs.
1,150) 59.4
959.4
Alternative:
Rs. Million
NCI in BK Ltd's net assets at reporting date (40% X Rs. 2,255) 902
NCI in TK Ltd's net assets at reporting date (44% X Rs. 1,285) 565.4
NCI's share of investment in BK (40% X Rs.
1,270) (508)
959.4

W - 5: Retained earnings
Rs. Million

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Suggested Answer Paper Group I

AK Ltd 1,240
BK Ltd.: 60% X (Rs. 930 million - Rs. 650 million
(W2)) 168
TK Ltd: 56% X (Rs. 350 million - Rs. 240 million
(W2)) 61.6
Gain on TK Ltd's investment (W3) (30)
Impairment of goodwill (W3) (80)
Reversal of impairment loss (W6) 11.6
Restructuring provision (W7) (14)
Pension plan (W8) (1.1)
1,356.10

Other components of equity

Rs. Million
AK Ltd. 125
BK Ltd.: 60% X (Rs. 80 million - Rs. 55 million (W2)) 15
TK Ltd: 56% X (Rs. 95 million - Rs. 70 million (W2)) 14
Revaluation gain (W6) 21
Pension plan re-measurement (W8) (4.9)
170.1
W - 6: The office
Rs. Million
Cost of office building (1.4.2074) 90
Depreciation (90/30 years) (2074/75) (3)
Carrying amount(32.03.2075) 87
Revaluation loss - Profit or loss (balancing figure) (12)
Fair value at 32nd Ashadh 2075 75
Depreciation (75/29 years) (2075/76) (2.6)
Carrying amount (31.03.2076) 72.4
Revaluation surplus – OCI (balancing figure) 32.6
Fair value at 31st Ashadh 2076 105
If no revaluation reserve exists for an item of PPE then a downwards revaluation is
recognized in the statement of profit or loss.
Some of this reversal can be recognized in profit or loss, but this is capped at the amount
needed to increase the asset to the value it would have been had no impairment occurred.
If no impairment had occurred, the asset would have been held at Rs. 84 million (Rs. 90
million – (2 X Rs. 3)). Therefore, the gain recorded in profit or loss is Rs 11.6 million (Rs.
84 million – 72.4 million). The remainder of the gain is recognized in other comprehensive
income.
The entries will be:

Dr property, plant and equipment Rs. 32.6 million

Cr profit or loss Rs. 11.6 million
Cr other comprehensive income Rs. 21 million

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Suggested Answer Paper Group I

W – 7: provision for restructuring

Only those costs that result directly from and are necessarily entailed by a restructuring
may be included in a restructuring provision. This includes costs such as employee
redundancy costs or lease termination costs. Expenses that relate to ongoing activities, such
as relocation and retraining, are excluded.
With regard to the service reduction, a provision should be recognized for the redundancy
and lease termination costs of Rs. 14 million. The sites and details of the redundancy costs
have been identified.
In contrast, AK Ltd. should not recognize a provision for the finance and IT department’s
re-organisation. The re-organisation is not due to start for two years. Stakeholders outside
are unlikely to have a valid expectation that management is committed to the re-
organisation as the time frame allows significant opportunities for management to change
the details of the plan or even to decide not to proceed with it. In addition, the degree of
identification of the staff to lose their jobs is not sufficiently detailed to support the
recognizing of a redundancy provision.
W-8: pension plan
In order to calculate the re-measurement component, reconcile the opening and closing net
pension deficit. The re-measurement component is accounted for in other comprehensive
income.
The liability recognized in the financial statements will be Rs. 6 million (that is, Rs. 35
million – Rs. 29 million)

Rs. Million
Net obligation at 1st Shrawan 2075 (Rs. 30 million - Rs. 28
million) 2
Net interest component (Rs. 2 million X 5%) 0.1
Contributions (2)
Service cost component 1
Re-measurement loss (balancing figure) (4.9)
Net obligation at 31st Ashadh 2076 (35 - 29) 6
The service cost component and net interest component will be charged to profit or loss
(Rs. 1.1 million) and the re-measurement loss to Other Comprehensive Income (Rs. 4.9
million). There will be no adjustment for the contributions, which have already been taken
into account.
2.
a) DD Ltd. availed a lease. The terms of the lease are as under:
i) Lease period is 3 years, in the beginning of the year 2075/76, for equipment costing
Rs. 1,000,000 and has an expected useful life of 5 years.
ii) The fair market value is also Rs. 1,000,000.
iii) The property reverts back to the lessor on termination of the lease.

© The Institute of Chartered Accountants of Nepal 10

Paper-1: Advanced Financial Reporting

Attempt all questions. Working notes should form part of the answers.
Use separate answer book for each question.

1. The statements of financial position of Jagat Co. and its investee companies, Phagat Co. and
Sangat Co. at 31 Ashadh, 2077 are as below:
Statements of Financial Position as at 31 Ashadh, 2077
Jagat Co. Phagat Co. Sangat Co.
Assets (Rs.’000) (Rs.’000) (Rs.’000)
Non- current assets
Freehold property 1,950 1,250 500
Plant and machinery 795 375 285
Investments 1,500 - -
4,245 1,625 785
Current assets
Inventory 575 300 265
Trade receivables 330 290 370
Cash 50 120 20
955 710 655
Total assets 5,200 2,335 1,440
Equity and liabilities
Equity
Share capital of Re.1/share 2,000 1,000 750
Retained earnings 1,460 885 390
3,460 1,885 1,140
Non-current liabilities
12% loan stock 500 100 -
Current liabilities
Trade payables 680 350 300
Bank overdraft 560 - -
1,240 350 300
Total equity and liabilities 5,200 2,335 1,440
Additional information:
i) Jagat Co., acquired 600,000 ordinary shares in Phagat Co., on 01 Shrawan, 2071 for Rs.
1,000,000 when the retained earnings of Phagat Co., were Rs. 200,000.
ii) At the date of acquisition of Phagat Co., the fair value of its freehold property was
considered to be Rs. 400,000 greater than its value in Phagat Co.’s statement of financial
position. Phagat Co., had acquired the property in Shrawan, 2071 and the buildings
element (comprising 50% of the total value) is depreciated on cost over 40 years.
iii) Jagat Co., acquired 225,000 ordinary shares in Sangat Co. on 01 Shrawan, 2075 for Rs.
500,000 when the retained earnings of Sangat Co. were Rs.150,000.
iv) Phagat Co., manufactures a component used by both Jagat Co., and Sangat Co.
Transfers are made by Phagat Co., at cost plus 25%. Jagat Co. held Rs. 100,000
inventory of these components at 31 Ashadh, 2077. In the same period Jagat Co., sold
 goods to Sangat Co., of which Sangat Co., had Rs. 80,000 in inventory at 31 Ashadh,
2077. Jagat Co., had marked these goods up by 25%.
v) The goodwill in Phagat Co. is impaired and should be fully written off. An impairment
loss of Rs. 92,000 is to be recognised on the investment in Sangat Co.
vi) Non-controlling interest is valued at full fair value. Phagat Co. shares were trading at
Rs. 1.60 just prior to the acquisition by Jagat Co.
Required: 20 marks
Prepare, in a format suitable for inclusion in the annual report of the Jagat Co. Group, the
consolidated statement of financial position at 31 Ashadh, 2077.
Answer:
Jagat Co. Group
Consolidated statement of financial position
As at 31 Ashadh, 2077
Assets (Rs.in ’000)
Non-current assets
Freehold property (W.N.2) 3,570.00
Plant and machinery (795+375) 1,170.00
Investment in associate (W.N.7) 475.20
5,215.20
Current assets
Inventory (W.N.3) 855.00
Receivables (330 + 290) 620.00
Cash (50 +120) 170.00
1,645.00
Total assets 6,860.20

Equity and liabilities

Equity
Share capital 2,000.00
Retained earnings (W.N.8) 1,792.20
3,792.20
Non-controlling interest (W.N.9) 878.00
4,670.20
Non-current liabilities
12% loan stock (500+100) 600.00
Current liabilities (680 +560+350) 1,590.00
Total equity and liabilities 6,860.20
Working Notes:
(1) Group structure
1.4.2071 (6 years ago)
Jagat Co. acquires 60% of Phagat Co.
1.4.2075 (2 years ago)
Jagat Co. acquires 30% of Sangat Co.
(2) Freehold Property

Rs. in’000
 Jagat Co. 1950
Phagat Co. 1250
Fair value adjustment 400
Additional depreciation [(400×50%)÷40]×6 years (2071 Shrawan - (30)
2077 Ashadh)
3570
(3) Inventory
Rs. in’000
Jagat Co. 575
Phagat Co. 300
Unrealized Profit (100× 25/125) (W.N.4) (20)
855
(4) Unrealized Profit
Rs. in ’000
On sales by Phagat Co. to Jagat Co. (Parent Co) 100×25/125 20.0
On sales by Jagat Co. to Sangat Co. (Associate) 80×25/125×30% 4.8
(5) Fair Value adjustment
Difference at Difference
acquisition now
Rs. in’000 Rs. in’000
Property 400 400
Additional depreciation: 200 × 6/40 - (30)
400 370
Therefore charge Rs. 30,000 to retained earnings
(6) Goodwill
Rs. in’000 Rs. in’000
Phagat Co.
Consideration transferred 1,000
Non-Controlling interest (400 × Rs. 1.60) 640
Net assets acquired
Share capital 1,000
Retained earnings 200
Fair value adjustment 400
(1,600)
Goodwill at acquisition 40
Impairment loss (40)
0
(7) Investment in Associates
Rs. in ’000
Cost of investment 500.00
Share of post-acquisition profit (390 – 150) × 30% 72.00
Less: Unrealized Profit (80×25/125)×30% (4.80)
Less: impairment loss (92.00)
475.20
(8) Retained earnings
Jagat Co. Phagat Co. Sangat Co.
Rs. in ’000 Rs. in ’000 Rs. in’000
Retained earnings given 1,460.0 885.0 390.0
 Adjustments
Unrealised profit (W.N.4) (4.8) (20.0)
Fair value adjustments (W.N.5) (30.0)
(Depn.)
Impairment loss (Phagat Co) (40.0)
795.0 390.0
Less pre –acquisition reserves (200.0) (150.0)
1,455.20 595.0 240.0
Phagat Co.: 60% ×595 357.00
Sangat Co.: 30% × 240 72.00
Impairment loss (Sangat Co) (92.00)
1,792.20
(9) Non – controlling interest at reporting date
Rs. in ’000
NCI at acquisition (W.N.6) 640.00
Share of post –acquisition retained earnings (595 × 40%) 238.00
878.00
2.
a) KK Ltd. runs a departmental store which awards 10 points for every purchase of Rs. 500
which can be discounted by the customers for further shopping with the same company.
Each point is redeemable on any future purchases of KK Ltd.’s products within 3 years.
Value of each point is Rs. 0.50. During the accounting year 2076/77, KK Ltd. awarded
10,000,000 points to various customers of which 1,800,000 points remained undiscounted
(to be redeemed till 31 Ashadh, 2079). The management expects only 80% of the
remaining will be discounted in future.
KK Ltd. has approached you with the following queries and has asked to state the
accounting treatment (Journal Entries) under the applicable NAS for these award points:
(i) How should the recognition be done for the sale of goods worth Rs. 1,000,000 on
a particular day?
(ii) How should the redemption transaction be recorded in the year 2076/77? The
company has requested you to present the sale of goods and redemption as
independent transaction. Total sales of the company is Rs. 500,000,000.
(iii) How much of the revenue for undiscounted points should be deferred at the year-
end (2076/77) because of the estimation that only 80% of the outstanding points
will be redeemed?
(iv) In the next year 2077/78, 60% of the outstanding points were discounted Balance
40% of the outstanding points of 2076/77 still remained outstanding. How much
of the deferred revenue should the company recognize in the year 2077/78 and
what will be the amount of balance deferred revenue?
(v) How much revenue will the company recognize in the year 2078/79, if 300,000
points are redeemed in the year 2078/79?
Required: Give answer to the queries of KK Ltd. with proper workings. 10 marks
b) R Co. is in the process of preparing its financial statements for the year ended 31 Ashadh
2077. The following matters are pending relating to deferred taxation. R’s current
income tax rate is 25%. However, this rate will be changed to 20%, with effect from 1
Shrawan 2077, as enacted by the new tax legislation.
i) Investment property acquired on 1 Shrawan 2075 for Rs. 26 million has been valued
for Rs. 32 million on 31 Ashadh 2077. The valuation does not affect the taxable profit.
R measures investment properties at fair value. R depreciates this property over 15
Paper 1: Advanced Financial Reporting
Attempt all questions. Working notes should form part of the answers.
1. The following statements of financial position are as at 31st Ashadh, 2078:
Rs. in Million

Harisiddhi Siddartha Araniko

Ltd. Ltd. Ltd.

Assets

Tangible non-current assets 1,280 440 280

Investment in Siddartha Ltd. 400 - -
Investment in Araniko Ltd. 60 - -
Current assets 544 190 130
Total assets 2,284 630 410
Equity and liabilities
Share capital 950 260 230
Revaluation reserve 90 - -
Retained earnings 390 210 94
Total equity 1,430 470 324
Non-current liabilities 640 30 16
Current liabilities 214 130 70
Total equity and liabilities 2,284 630 410

Harisiddhi Ltd. acquired the following shareholdings in Siddartha Ltd. and Araniko Ltd.:
Rs. in Million
Date of Holding Fair value Purchase
acquisition acquired of net assets consideration
Siddartha Ltd. 1st Shrawan, 2075 10% 325 30
st
1 Shrawan, 2077 70% 460 370
Araniko Ltd. 1st Shrawan, 2077 25% 200 60

The following information are relevant:

i) At 1st Shrawan, 2075, the carrying value of the net assets of Siddartha Ltd. was the same as
their fair value, Rs. 325 million.
ii) The estimated fair value of the initial investment in 10% shares of Siddartha Ltd. was Rs. 40
million at 31st Ashadh, 2077.
iii) Harisiddhi Ltd. wishes to use the full fair value method of accounting for the acquisition of
Siddartha Ltd. At 1st Shrawan, 2077 the estimated value of the non-controlling interests was
Rs. 95 million.
iv) The difference between the carrying amount of Siddartha Ltd.’s net assets and their fair value
at the date of acquisition was due to land valued at cost which, on 1st Shrawan, 2077, had a
fair value of Rs. 25 million in excess of its carrying value. There has been no subsequent
significant change in that value.
v) At 1st Shrawan, 2076 the fair value of Araniko Ltd.’s land was Rs. 16 million in excess of its
carrying value. There has been no subsequent significant change in that value.
Page 4 of 79
 vi) Goodwill arising on acquisition is tested for impairment at each year end. The recoverable
amount of goodwill in Siddartha Ltd. at 31st Ashadh, 2078 was Rs. 30 million.
vii) There has been no impairment of the investment in Araniko Ltd.
viii) During the year, the Directors of Harisiddhi Ltd. decided to form a defined benefit pension
scheme for its employees. The company contributed cash to it of Rs. 250 million but the only
accounting entry for this has been made to include it in receivables at 31st Ashadh, 2078.
At 31st Ashadh, 2078 the following details relate to the pension scheme:
Rs. in million

Present value of obligation 317

Fair value of plan assets 302
Required:
Prepare the consolidated statement of financial position of the Harisiddhi Ltd. group as at 31st
Ashadh, 2078. 20 marks

Answer
Harisiddhi Ltd. group

Consolidated statement of financial position

as at 31st Ashadh, 2078
Particulars Rs.in million
Assets
Tangible non-current assets (WN 4) 1,745
Intangible non-current assets (WN 3) 30
Investment in associate (WN 5) 95
Current assets (544 + 190 - 250) 484
2,354
Equity and liabilities
Share capital 950
Revaluation reserve 90
Retained earnings (WN 7) 186
1,226
Non-controlling interest (WN 8) 99
1,325
Non-current liabilities (640 + 30) 670
Current liabilities (214 + 130) 344
Pension liability (WN 6) 15
2,354

Page 5 of 79
Workings:
WN 1) Net assets summaries
Siddartha Ltd.:
Rs. in million
At Reporting At Acquisition Post-Acquisition
st st
On 31 Ashad, 2078 On 1 Shrawan,2077
Share capital 260 260 -
Retained earnings 210 175 (460-260-25) 35 (210-175)
FV adjustment 25 25 -
FV (given) 495 460 35
(given)
Araniko Ltd.:

Rs.in Million
At Reporting At Acquisition Post-Acquisition
On 31 Ashad, 2078 On 1 Shrawan, 2077
Share capital 230 230 -
Retained earnings 94 (46) (200-230-16) 140 (94+46)
FV adjustment 16 16 -
FV 340 200 140
(given)

WN 2) Gain or loss on acquiring control of Siddartha Ltd. on 1st shrawan, 2077:

Rs. in million
Fair value of initial investment in Siddartha Ltd. at 1 Shrawan, 2077 40
Initial cost of investment (30)
Gain to be recognised on gaining control of Siddartha Ltd. 10
This gain has not yet been recognised in the individual financial statements of Harisiddhi Ltd;
it must therefore be included in the calculation of group reserves. (See WN 8).
WN 3) Goodwill in Siddartha Ltd. at acquisition
Particulars Rs. in million
Consideration transferred to achieve control 370
Fair value of initial investment at acquisition 40
Non-controlling interest at acquisition (at fair value) 95
505

Page 6 of 79
 Fair value of net assets acquired 460
Total goodwill at acquisition date (505-460) 45
Impairment (balancing figure) (15)
Goodwill at date of consolidation (given) 30
The goodwill impairment of Rs.15 million is apportioned between the interests of the equity
owners of Harisiddhi Ltd and NCI in the ratio 80:20.
Impairment of goodwill attributable to parent = Rs. 15m × 80% = Rs. 12m
Impairment of goodwill attributable to NCI = Rs. 15m × 20% = Rs. 3m.
WN 4) Tangible non-current assets

Particulars Rs. in million

Harisiddhi Ltd. 1,280
Siddartha Ltd. 440
Fair value adjustment 25
1,745

WN 5) Investment in associate – Araniko Ltd.

Particulars Rs. in million

Cost 60
Group share of post-acquisition profit (140 × 25%) 35
95

Alternatively,
Particulars Rs. in million
Group share of Fair value of Associate at reporting date (25% x 340) 85
Goodwill in associate (60 – 50) (Consideration share of FV of Net assets) 10
95

WN 6) Pension liability
The amount paid to set the pension must be removed from receivables, and the net pension
liability must be recognised in the statement of financial position.
The entry to achieve this is as follows:
Rs. in million
Particulars Dr Cr
Retained earnings (balancing figure) 265
Receivables 250
Pension scheme liability (317 – 302) 15
Page 7 of 79
WN 7) Consolidated retained earnings

Particulars Rs. in million

Harisiddhi Ltd (given) 390
Siddartha Ltd post-acquisition retained earnings (35×80%) 28
Gain on acquiring control (WN 2) 10
Goodwill impairment attributable to parent (WN 3) (15×80%) (12)
Share of post-acquisition profits of associate (WN 5) (140×25%) 35
Pension adjustment (WN 6) (265)
186

WN 8) Non-controlling interest in Siddartha Ltd.

Rs. in million
FV at date of acquisition 95
NCI share of post-acquisition retained earnings (35 × 20%) 7
Goodwill impairment (WN 3) (15 × 20%) (3)
99
Alternatively

Rs. in million
Book value (20% × 470) 94
Fair value adjustment (20% × 25) 5
Goodwill (3 – impairment 3) (W3) [95 – (20% x 460) – 3] 0
99
2.
a) P Ltd. issued 50,000 Compulsory Cumulative Convertible Preference Shares (CCCPS) as on
st
1 Shrawan, 2077 @ Rs. 180 each. The rate of dividend is 10% payable at the end of every
year. The preference shares are convertible into 12,500 equity shares (Face value Rs.10
each) of the company at the end of 5th year from the date of allotment. When the
CCCPS are issued, the prevailing market interest rate for similar debt without conversion
option is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the total proceeds. Effective
interest rate is 15.86%.
Required: (3+7=10 marks)
i. Compute liability and equity component of the CCCPS.
ii. Pass journal entries for entire term of arrangement i.e. from the issue of preference
shares till their conversion into equity shares, keeping in view the provisions of
relevant Accounting Standards.

Page 8 of 79
Paper 1: Advanced Financial Reporting
Attempt all questions. Working notes should form part of the answers.
1. Following are the draft statements of financial position of H Company, S Company and P
Company as at Ashadh end 2078:
Statement of Financial Position as at Ashadh end 2078

H Company S Company P Company

Rs. '000 Rs. '000 Rs. '000
Assets
Non-current Assets
Property, plant and equipment 22,520 14,180 12,140
Investment in:
S Company 5,880 - -
P Company 1,980 6,000 -
30,380 20,180 12,140
Current Assets 18,420 12,880 9,280
Total Assets 48,800 33,060 21,420
Equity and Liabilities
Equity
Equity shares of Rs. 0.50 each 9,280 7,660 7,260
Other components of equity 4,240 3,420 3,040
Retained Earnings 6,900 1,500 2,400
Total Equity 20,420 12,580 12,700
Liabilities
Non-current Liabilities 18,260 12,700 6,880
Current Liabilities 10,120 7,780 1,840
Total Liabilities 28,380 20,480 8,720
Total Equity and Liabilities 48,800 33,060 21,420
You are a group financial controller of H Company. The finance director of S Company has told
you that the company has been given a contract to construct a dry port at a price of Rs. 40,000,000.
The construction is expected to take 24 months starting on 1 st Bhadra 2078. He further said that
the company is, however, experiencing a decline in its profitability which might adversely affect
its chance to secure a loan required to fund the construction. He has thus, suggested to recognize
income expected from construction in the company’s financial statements for the year to Ashadh
end 2078 though he is not sure of issues this might raise.
The following information is relevant in the preparation of group accounts:
i. H acquired 90% equity shares of S and 20% equity shares of P on 1st Shrawan 2074 for a cash

Page 4 of 70
 consideration of Rs. 8,820,000 and Rs. 1,980,000 respectively. On the date of acquisition, the
fair value of S's identifiable net assets stood at Rs. 9,500,000 while its other components of
equity and retained earnings were Rs. 1,220,000 and Rs. 500,000 respectively. The excess in
fair value relates to non-depreciable land. The fair value of non-controlling interest on 1st
Shrawan 2074 was Rs. 980,000. H's 20% holding in P did not give rise to significant influence.
ii. S acquired 60% equity shares of P on 1st Shrawan 2075 for a cash consideration of Rs.
6,000,000. The fair value of identifiable net assets of P stood at Rs. 9,720,000. On the same
date, other components of equity and retained earnings were Rs. 1,640,000 and 1,000,000
respectively. Other components of equity and retained earnings had been Rs. 1,240,000 and
Rs. 600,000 respectively on 1st Shrawan 2074. Any difference between the fair value and
carrying amounts of the identifiable net assets relate to an item of plant which had a remaining
useful economic life of 4 years on 1st Shrawan 2074 and 3 years on 1st Shrawan 2075. The fair
values on non-controlling interests (26%) and 20% shareholding in P as at 1st Shrawan 2075
were Rs. 2,580,000 and Rs. 2,100,000 respectively.
iii. On Ashadh end 2078, H disposed off 30% equity holding in S for cash consideration of Rs.
3,800,000. This left H’s equity interests in S at 60%. This transaction was correctly recorded
in H’s individual books.
iv. S and P have not issued any additional shares since acquisition by H. Further, fair value
adjustments referred to in (a) and (b) above have not been incorporated in the above
statements of financial position.
v. Goodwill in S has been impaired by Rs. 100,000 as at Ashadh end 2078. However, goodwill
in P has not been impaired since its acquisition.
vi. It is the group policy to value non-controlling interests at fair value at the date of acquisition.
Required: (2+16+2=20 marks)
a) Calculate profit on disposal of 30% equity interests in S for inclusion in separate financial
statements of H group for the year to Ashadh end 2078.
b) Prepare the consolidated statement of financial position of H group as at Ashadh end 2078.
c) Comment on the treatment of contract revenue as suggested by finance director of S.
Answer
a) Calculation of profit on disposal of 30% equity interest in S:
Rs. '000
Consideration received 3,800
Share of cost of investment disposed off
(30/90)% X 8,820 (2,940)
Profit 860

b) H Company Group
Consolidated Statement of Financial Position as at Ashadh end 2078
Rs. '000
Assets

Page 5 of 70
 Non-Current assets
Property, plant and equipment (WN1) 48,960
Goodwill (WN2) 560
49,520
Current Asset (18,420 + 12,880 + 9,280) 40,580
Total Assets 90,100

Equity and Liabilities

Equity
Equity shares of Rs. 0.50 each 9,280
Other components of equity (WN3) 4,836
Retained Earnings (WN5) 8,140
22,256
Non - Controlling interests (WN6) 10,264
Total Equity 32,520
Liabilities
Non-current liabilities (18,260+12,700+6,880) 37,840
Current liabilities (10,120 + 7,780 + 1,840) 19,740
Total Liabilities 57,580
Total Equity and Liabilities 90,100
c) S is required to prepare its financial statements in accordance with applicable Nepal Financial
Reporting Standards and other generally accepted standards. Recognising income from the
construction contract in the financial statements for the year to Ashadh end 2078 would be against
the principles contained in NFRS 15, Revenue from Contracts with Customers which requires
revenue to be recognised as control is passed, either over time or at a point in time. This has not
happened as construction works have not even commenced and hence the income from construction
not recognized in the financial statements for the year to Ashadh end 2078.
Working Notes:
WN
1) PPE
Rs. '000
Given amounts:
H 22,520
S 14,180
P 12,140
Adjustments:
FV gain on acquisition of:
Page 6 of 70
 S [9,500 - (7,660 + 1,220 + 500)] 120
P [9,720 - (7,260 + 1,640 +1000)] (180)
Accumulated FV depreciation:
P [180/60 X 60] 180
PPE to report 48,960

WN
2) Goodwill on acquisition of:
S Company:
Rs. '000
Cost of acquisition 8,820
NCI at acquisition 980
FV of identifiable NA at acquisition (9,500)
Goodwill at acquisition 300
Impairment losses to date (100)
Goodwill to report 200
P Company:
Rs. '000
Cost of acquisition
Direct (FV of 20% shareholding as on 1/4/2075) 2,100
Share of direct subsidiary's cost (90% X 6,000) 5,400
NCI at acquisition [26% holding] 2,580
FV of identifiable NA at acquisition (9,720)
Goodwill at acquisition 360
Impairment losses to date -
Goodwill to report 360
Total Goodwill to report 560

WN
3) Other Components of Equity (OCE)
Rs. '000
H Company 4,240
Share of post-acquisition OCE of:
S 90% [3,420 - 1,220] 1,980
P 74% [3,040 - 1,640] 1,036

Page 7 of 70
 Net adjustment in Equity on reducing holding in S:
Disposal Proceeds 3,800
Net assets at transferred to NCI in:
S [WN4] (3,870)
P [WN4] ([2,350) [2,420] 596
OCE 4,836

WN
4) Net Assets transferred to NCI on reducing holding in :
Rs. '000
S Company:
Net assets at Ashadh end 2078 12,580
FV gains at acquisition 120
Goodwill at acquisition less impaired amount 200
Net assets at Ashadh end 2078 attributable to S 12,900
Net assets attributable to increase in NCI in S = 12,900 X 30% 3,870

P Company:
Net assets at Ashadh end 2078 12,700
FV losses at acquisition (180)
Accumulated FV depreciation 180
Goodwill at acquisition less impaired amount 360
Net assets at Ashadh end 2078 13,060
Net assets attributable to increase in NCI = 13,060 X 18% 2,350

WN
5) Retained Earnings:
Rs. '000
H Company 6,900
Share of post-acquisition OCE of:
S 90% [1,500 - 500) 900
P 74% [2,400 - 1,000) 1,036
Accumulated FV depreciation (P Company) (180 X 74%) 134
Reversal of gain on disposal of holding in S reported in separate
FS of H [see part (a) above] (860)
Goodwill impairment losses - S (90% X 100) (90)

Page 8 of 70
 Gain on re-measurement of earlier holding in P on gaining
control [2,100 - 1,980] 120
Retained Earnings 8,140

WN
6) Non-Controlling Interest [NCI]
Rs. '000
S Company:

At acquisition 980
Post-acquisition changes
Retained earnings 10% [1,500 - 500] 100
OCE 10% [3,420 - 1,220] 220
Goodwill losses 10% X 100 (10)
H's share of S Company's cost of investment in P 10% X 6,000 (600)
Increase in NCI on H reducing holding in S [see above] 3,870
NCI in S company 4,560

P Company:

At acquisition 2,580
Post-acquisition changes
Retained earnings 26% [2,400 - 1,000] 364
OCE 26% [3,040 - 1,640] 364
Accumulated FV depreciation 26% X 180 46
Increase in NCI in P on H reducing holding in S [see above] 2,350
NCI in P company 5,704
Total NCI 10,264
2.
a) H Ltd. has the following assets and liabilities as at 31st Ashadh, 2076 prepared in accordance
with previous GAAP:
Particulars Notes Amount (Rs.) Amount (Rs.)
Property, plant and equipment i 13,450,000
Investments in S Ltd. ii 4,800,000
Current assets 6,049000
Total assets 24,299,000
Page 9 of 70
 Paper 1: Advanced Financial Reporting
1. Statements of financial position as at 31st Asadh 2078 of L, N and M Limited companies are as
follows:
Assets: L N M
Rs. Million Rs. million Rs. million
Non-Current Assets
Property plant and equipment 1,800.00 1,375.00 1,625.00
Investment properties 750.00 500.00 250.00
Investments in subsidiaries:
N Ltd. 1,562.50
M Ltd. 387.50 1,587.50
Financial assets 400.00 26.25 176.25
4,900.00 3,488.75 2,051.25
Current Assets 1,118.75 851.25 187.50
Total Assets 6,018.75 4,340.00 2,238.75

Equity and Liabilities:

Equity
Share capital 2,187.50 1,512.50 1,000.00
Retained earnings 1,550.00 1,162.50 437.50
Other components of equity 156.25 100.00 118.75
Total equity 3,893.75 2,775.00 1,556.25
Liabilities
Non-current liabilities 1,231.25 956.25 187.50
Current liabilities 893.75 608.75 495.00
Total liabilities 2,125.00 1,565.00 682.50
Total Equity and Liabilities 6,018.75 4,340.00 2,238.75

Further information:
(i) On 1st Shrawan 2076, L acquired 14% of the equity interest of M for a cash
consideration of Rs. 325 million and N acquired 70% of the equity interest of M for a cash
consideration of Rs. 1,587.5 million. At 1st Shrawan 2076, the identifiable net assets of M had a
fair value of Rs. 1,237.5 million, retained earnings were Rs. 237.5 million and other components
of equity were Rs. 65 million.
(ii) On 1st Shrawan 2077, L acquired 60% of the equity interests of N. The cost of
investment comprised cash of Rs. 1,562.5 million. On 1st Shrawan 2077, the fair value of the
identifiable net assets acquired was Rs. 2,437.5 million and retained earnings of N were Rs.
812.5 million and other component of equity were Rs. 68.75 million. The excess in fair value is
due to non-depreciable land. It is the group‘s policy to measure the non-controlling interest on
acquisition at its proportionate share of the fair value of the subsidiary‘s net assets.
At 1st Shrawan 2077, the identifiable net assets of M had a fair value of Rs. 1,437.5
million, retained earnings were Rs. 300 million and other components of equity were Rs. 87.5
million. The excess in fair value is due to non-depreciable land. The fair value of the 14%
Page 4 of 83
holding of L in M, which was classified as fair value through profit or loss, was Rs. 350
million at 31st Asadh 2077 and Rs. 387.5 million at 31st Asadh 2078. However, the fair value of
N‘s interest in M had not changed since acquisition.
(iii) Goodwill of N and M were tested for impairment at 31st Asadh 2078 and found that
there was no impairment relating to M. However, the goodwill of N was fully impaired by the
reporting date.
(iv) On 1st Shrawan 2076, L acquired office accommodation at a cost of Rs. 112.5 million
with a 30- year estimated useful life. During the year, the property market in the area slumped
and the fair value of accommodation fell to Rs. 93.75 million at 31st Asadh 2077 and this was
reflected in the financial statements. However, the market unexpectedly recovered quickly due
to the announcement of major government investment in the area‘s infrastructure.
On 31st Asadh 2078, the valuer advised L that the offices should now be valued at Rs. 131.25
million. L has charged depreciation for the year but has not taken account of the upward
valuation of the offices. L uses the revaluation model and records any valuation change when
advised to do so.
(v) L announced two major restructuring plans during the year. The first plan was to reduce
its capacity by the closure of some of its smaller factories, which had already been identified.
This would lead to the redundancy of 500 employees, who had been individually selected and
communicated to. The costs of this plan were Rs. 11.25 million in redundancy costs, Rs. 6.25
million in retraining costs and 6.25 million in lease equipment termination costs. The second
plan is to re-organize the finance and information technology department over a one- year
period but it does not commence until two years‘ time. The plan will result in 20% of finance
staff losing their jobs during the restructuring. The costs of this plan are Rs. 12.5 million in
redundancy costs, Rs. 7.5 million in retraining costs and Rs. 8.75 million in equipment lease
termination costs. There are no entries made in the financial statements for the above plans.
(vi) The following information relates to the group pension plan of L:
1st Shrawan 2077 31st Asadh 2078
Rs. million Rs. million
Fair value of plan assets 35 36.25
Actuarial value of defined benefit obligation 37.5 43.75
(vii) Contributions for the period received by the fund were Rs. 2.5 million and the employee
benefits paid in the year amounted to Rs. 3.75 million. The discount rate to be used in any
calculation is 5%. The current service cost for the period based on actuarial calculations is Rs.
1.25 million. The above figures had not been taken into account for the year ended 31st Asadh
2078 except for the contributions paid which were entered in cash and the defined benefit
obligation.
Required: 20
Prepare L Ltd. Group consolidated statement of financial position as at 31st Asadh 2078.
Answer
1) L. Ltd. Group Consolidated statement of financial position as at 31st Asadh 2078
Assets: Rs. million
Non-current assets:
Property, plant and equipment (1,800 + 1,375 + 1,625 + 43.75 + 50 + 40.75) 4,934.50
Investment properties (750 +500 +250) 1,500.00
Goodwill (W3) 497.50
Page 5 of 83
 Financial assets (400 + 26.25 + 176.25) 602.50
7,534.50
Current assets(1,118.75 + 851.25 + 187.50) 2,157.50
Total assets 9,692.00
Equity and liabilities
Share capital 2,187.50
Retained earnings (W5) 1,695.13
Other components of equity (W5) 212.62
Total equity attributable to shareholders of parent 4,095.25
Non-controlling interest (W4) 1,199.25
Total equity 5,294.50
Total non-current liabilities (1,231.25 + 956.25 + 187.50 + 7.50 -defined 2,382.50
benefit liability
Current liabilities (893.75 + 608.75 + 495 + 17.50 – provision for 2,015.00
restructuring )
Total liabilities 4,397.50
Total equity and liabilities 9,692.00
Workings:
(W1) Group structure
The group effective interest in M Ltd is:

Direct interest 14%

Indirect interest or effective interest (60% x 70%) 42%
Group effective interest 56%
The NCI interest in M Ltd. is therefore (100% -56%) 44%
100%
Consolidation of N Ltd.
Group 60%
NCI (100% - 60%) 40%
100%
The acquisition date for M Ltd. by L Ltd. is 1st Shrawan 2077, hence the day when L Ltd.
gained control over N Ltd.; and therefore indirect control over M Ltd.
(W2) Net assets
N Ltd. Acquisition Reporting Post-
Date Date Acquisition
(Rs. million) (Rs. million) (Rs. million)

Share capital 1,512.50 1,512.50 -

Page 6 of 83
 Other components of equity 68.75 100.00 31.25
Retained earnings 812.50 1,162.50 350.00
Fair value adjustment – Land (remaining 43.75 43.75 -
figure)
2,437.50 2,818.75 381.25
M Ltd.
Share capital 1,000.00 1,000.00 -
Other components 87.50 118.75 31.25
Retained earnings 300.00 437.50 137.50
Fair value adjustment – Land (remaining 50.00 50.00 -
figure)
1,437.50 1,606.25 168.75
Therefore, the post-acquisition profits of N Ltd. is Rs. 381.25 million (Rs. 2,818.75
– Rs. 2,437.50) and that of M Ltd. is Rs. 168.75 million (Rs. 1,606.25 – Rs. 1,437.50).

(W3) Goodwill
The cost of M Ltd. has three elements: the cost of the direct holding, the cost of the
indirectholding and the indirect holding adjustments.
N Ltd.
Rs. million
Fair value of consideration 1,562.50
NCI at acquisition (40% x Rs. 2,437.50) 975.00
Fair value of identifiable net assets acquired (W2) (2,437.50)
Goodwill at acquisition 100
Impairment (100)
Goodwill at reporting date -
M Ltd.
Rs. million
Fair value of consideration:
Direct holding (Fair value at date control obtained) 350.00
Indirect holding 1,587.50
Indirect holding adjustment (40% x Rs. 1,587.50 million) (635.00)
NCI at acquisition (44% x Rs. 1,437.50 million) 632.50
Less fair value of identifiable net assets (W2) (1,437.50)
Goodwill at reporting date 497.50
M Ltd. (Alternatively)
Rs. million

Page 7 of 83
 Fair value of purchase consideration:
Direct holding 350.00
Indirect holding (60% x 1,587.50) 952.50
NCI at acquisition (44% x 1,437.50) 632.50
Less fair value of identifiable net assets (W2) (1,437.50)

Goodwill at reporting date 497.50

L‘s investment in M was held at Rs. 387.50 million at the reporting date. Therefore, the fair
value increase of Rs. 37.50 (Rs. 387.50 – Rs. 350 million) that has arisen since the date
control was achieved must be removed from the consolidated statements. Retained
earnings must also be reduced by Rs. 37.50 million.

(W4) Non-controlling interest

Rs. million
NCI in N Ltd. at acquisition (40% x Rs. 2,437.5) 975.00
Add: NCI % of post –acquisition net assets (40% x (Rs. 2,818.75 152.50
million – Rs. 2,437.5 million)
Indirect holding adjustment (40% x Rs. 1,587.5 million) (635.00)
NCI in M Ltd. at acquisition 632.50
NCI in post-acquisition net assets (44% x (Rs. 1,606.25 – Rs. 1,437.50) 74.25
1,199.25
Alternative:
Rs. million
NCI in N Ltd.‘s net assets at reporting date (40% x Rs. 2,818.75) 1,127.50
NCI in M Ltd.‘s net assets at reporting date (44% x Rs. 1,606.25) 706.75
NCI‘s share of investment in N (40% x Rs. 1,587.50) (635.00)
1,199.25

(W5) Retained earnings

Rs. million
L Ltd. 1,550.00
N Ltd: 60% x (Rs. 1,162.5 million – Rs. 812.5 million (W2)) 210.00
M Ltd: 56% x (Rs. 437.5 million – Rs. 300 million )(W2)) 77.00
Gain on M Ltd.‘s investment (W3) (37.50)
Impairment of goodwill (W3) (100)
Reversal of impairment loss (W6) 14.50
Restructuring provision (W7) (17.50)
Pension plan (W8) (1.37)
1,695.13

Page 8 of 83
 Other components of equity
Rs. million
L Ltd. 156.25
N Ltd.: 60% x (Rs. 100 million – Rs. 68.75 million) (W2) 18.75
M Ltd.: 56% x (Rs. 118.75 million – Rs. 87.50 million) (W2) 17.50
Revaluation gain (W6) 26.25
Pension plan re-measurement (W8) (6.13)
212.62

(W6) Office Building

Rs. million
Cost of office building 112.5
Depreciation (112.5/30years) (3.75)
Carrying amount 108.75
Revaluation loss – Profit or Loss (15)
Fair value at 31 Asadh 2077 93.75
Depreciation (93.75/29years) (3.25)
90.50
Revaluation surplus - OCI 40.75
Fair value at 31 Asadh 2078 131.25
If no revaluation reserve exists for an item of PPE then a downward revaluation is
recognized in the statement of profit or loss. Some of this reversal can be recognized in
profit or loss, but this is capped at the amount needed to increase the asset to the value it
would have been had no impairment occurred. If no impairment had occurred, the asset
would have been held at Rs. 105 million (Rs. 112.5 million – (2 x Rs. 3.75)). Therefore, the
gain recorded in profit or loss is Rs. 14.5 million (Rs. 105 million – Rs. 90.5 million). The
remainder of the gain is recognized in other comprehensive income.
The entries will be:
Dr property, plant and equipment Rs. 40.75 million
Cr profit or loss Rs. 14.50 million
Cr other comprehensive income Rs. 26.25 million
(W7) Provision for Restructuring
Only those costs that result directly from and are necessarily occasioned by a restructuring
may be included in a restructuring provision. This includes costs such as employee
redundancy costs or lease termination costs. Expenses that relate to ongoing activities, such
as relocation and retraining, are excluded.
With regard to the service reduction, a provision should be recognized for the redundancy
and lease termination costs of Rs. 17.5 million (Rs. 10 million + Rs. 7.5 million). The sites
and details of the redundancy costs have been identified.

Page 9 of 83
 In contrast, L Ltd. should not recognize a provision for the finance and IT department‘s re-
organization. The re-organization is not due to start for two years. Stakeholders outside are
unlikely to have a valid expectation that management is committed to the re-organization as
the time frame allows significant opportunities for management to change the details of the
plan or even to decide not to proceed with it. In addition, the degree of identification of the
staff to lose their jobs is not sufficiently detailed to support the recognizing of a redundancy
provision.
(W8) pension plan
In order to calculate the re-measurement component, reconcile the opening and closing net
pension deficit. The re-measurement component is accounted for in other comprehensive
income.
The liability recognized in the financial statements will be Rs. 7.5 million (that is, Rs. 43.75
million- Rs. 36.25 million)
Rs. million
Net obligation at 1st Shrawan 2077 (Rs. 37.5 million – Rs. 35 million) 2.50
Net interest component (Rs. 2.5 million x 5%) 0.125
Contributions (2.50)
Service cost component 1.25
Re-measurement loss (remaining figure) (6.125)
Net obligation at 31st Asadh 2078 (43.75 - 36.25) 7.50
The service cost component and net interest component will be charged to profit or loss
(Rs. 1.375 million) and the re-measurement loss to Other Comprehensive Income (Rs.
6.125 million). There will be no adjustment for the contributions, which have already been
taken into account.

2.
a) Ashish started a new company Nepsoft Pvt. Ltd. with Star Ltd. wherein investment of
55% is done by Star Ltd. and rest by Ashish. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary
of Star Ltd. with two directors, and Ashish eventually becomes one of the directors of
company. A consultant was hired and he charged Rs. 30,000 for the incorporation of
company and to do other necessary statuary registration which is to be charged as an
expense in the books after incorporation. The company, Nepsoft Pvt. Ltd. was
st
incorporated on 1 Shrawan 2077.
The financials of Star Ltd. are prepared as per NFRS.

The draft financials of Nepsoft Pvt. Ltd. are as follows:

Statement of Profit and Loss for the year ending 31st Asadh 2078
Particulars Amount (Rs.)
Revenue from operations 1,000,000
Other Income 100,000
Total Revenue (a) 1,100,000
Expenses:
Page 10 of 83