AAFR

Advanced Accounting & Financial Reporting
Volume 1 Book
Sir Ahmed Raza Mir, FCA
INDEX
1. IAS 36 – Impairment of Assets
2. IFRIC 1
3. IFRS-9 Financial Instruments
4. Consolidation
5. IFRS-2 Share based payments
6. IFRS-16 Leases
7. IAS 40 Investment Property

Advanced Accounting and Reporting Page 1
Topic=IAS 36 “Impairment of Assets”
Ahmed Raza Mir, FCA
Question 1 [Basic Impairment calculation]

Balance sheet of ABC limited was showing a plant at a balance of Rs 16 million on 1 Jan 2015. Remaining
life of the plant is expected to be 8 years. Residual Value of the asset at the end of its useful life is estimated
to be Rs 2.5 million.
At 31 December 2016 I was known to the company that the asset is physically damaged and will not be able
to produce at 100% capacity. The company evaluated the asset for impairment and found out the following
values:
 Value in Use Rs 9 million

 Fair Value Rs 8.75 Million
 Cost to Sell Rs 570,000
Required
Calculate the impairment loss (if any) and prepare profit and loss extracts.
Question 2
ABC Limited owns an asset having the following details:
1. Carrying Amount Rs 6,000,000
2. Fair Value measures

 Offer price by company Rs 5,000,000
 Average of bid and offer Rs 4,250,000
 Replacement Value Rs 8,000,000
3. Cost to sell includes the following:

 Transportation cost Rs 150,000
 Brokerage to external brokers (today) Rs 200,000
 Brokerage to external brokers (1 Yr Time) Rs 110,000
 Apportionment of staff salary working on disposal Rs 15,000
 Incremental staff cost for disposal execution Rs 16,000
 Stamp Duty Rs 10,000
 Capital Value Tax Rs 40,000
 Registration of ownership charges Rs 16,000
 Retraining Cost of staff Rs 15,000
4. Value in use of the asset is determined to be Rs 4,000,000

Required
Calculate impairment loss (if any) assuming a discount rate of 10% is appropriate in the above scenario.
Ahmed Raza Mir, FCA
Question 3 [detailed calculation of value in use]

Shumael Limited is about to test one of its major plants for impairment on account of different indicators.
Following are the details:
Carrying amount at 31 December 2011 Rs 6,450,000
Remaining life on 31 December 2012 5 Years
The plant could be sold for Rs 3.2 Million after incurring the following costs:
1. Brokerage Rs 150,000
2. Transfer Taxes
a. On signing of contract Rs 40,000
b. In 12 months’ time Rs 70,000
If the asset is put to use for the remainder of its life the following cash flows would result:
1. Sales for the next year (2013) shall be 9,000 units which will be reduced by 5% for the remainder
of the useful life of the plant
2. Selling price for the 2013 shall be Rs 500 per unit and will increase by 4% per annum to a
maximum of Rs 550 per unit.
3. Cost per unit includes:
Particulars Cost / Unit Details
Direct Material N Rs 70 Generally purchased from market
Direct Material P Rs 50 Purchased from a subsidiary. Its fair
market value is Rs 65 per unit
Direct Labour Rs 60 Skilled labour hired on casual basis
Variable Overheads Rs 40 Mainly power and allied costs
4. Fixed production costs for 2013 would be Rs 1,750,000. This amount includes depreciation of this
plant
5. Operating and all other costs per annum are as under. The following costs include finance cost that
will be paid on the loan obtained for the acquisition of this asset which is still outstanding to some
extent. The cash Flows also contain Income Taxes worked out as a share reasonably allocated to the
asset considering its income generated by it and other factors:
Year Amount (Rs) Finance cost Income Tax

share
1 680,000 238,000 170,000
2 780,000 210,000 190,000
3 760,000 194,000 195,000
4 845,000 166,175 211,250
5 800,000 125,825 200,000
6. All costs other than operating costs shall increase by 6% p.a.
7. Discount rate applicable to the company and in specific to the equipment under consideration is
10% (pre-tax)
Required
Calculate impairment at 31 December 2012 (if any)
Ahmed Raza Mir, FCA
Question 4
ARM Limited is evaluating an Asset for impairment at 31 December 2001. The following information is
extracted from the company budgets and other sources:
Annual net inflows
Year Inflows
1 458,000
2 370,000
3 890,000
4 940,000
5 740,000
These net inflows include the following:
1. Year 3 includes an outflow for overhauling Rs 100,000 which would have a positive impact on cash
flow forecasts from year 3 and onwards.
2. Inflows expected (net) from overhauling:
Year Net Inflows

3 490,000
4 540,000
5 389,000
3. Net inflows include interest paid in the following years:
Year Interest paid

1 23,000
2 24,500
5 30,000
4. Inflows include receipts from a receivable and payments for a payable which are already
recognised in the last year. Receivable amounts to Rs 10,870 and payable Rs 6,720.
Required
Calculate the value in use for the above asset
Question 5 – future restructuring
At the end of 2000, entity K tests a plant for impairment. The plant is a cash-generating unit. The plant’s
assets are carried at depreciated historical cost. The plant has a carrying amount of Rs 3,000 and a
remaining useful life of 10 years.
The plant’s recoverable amount (i.e. higher of value in use and fair value less costs of disposal) is
determined on the basis of a value in use calculation. Value in use is calculated using a pre-ta0 discount rate
of 14 per cent.
Management approved budgets reflect that:

Ahmed Raza Mir, FCA
1. at the end of 2003, the plant will be restructured at an estimated cost of Rs 100. Since K is not yet
committed to the restructuring, a provision has not been recognized for the future restructuring costs.
2. there will be future benefits from this restructuring in the form of reduced future cash outflows.
3. At the end of 2002, K becomes committed to the restructuring. The costs are still estimated to be Rs
100 and a provision is recognized accordingly. The plant’s estimated future cash flows reflected in the
most recent management approved budgets and a current discount rate is the same as at the end of
2000.
4. Future cash flows:
Year Cash Flows 1 Cash Flows 2

2001 300
2002 280
2003 420 420
2004 520 570
2005 350 380
2006 420 450
2007 480 510
2008 480 510
2009 460 480
2010 400 410
 Cash Flows set 1 represents estimates at 31 December 2000; These Cash flows do not include
restructuring outflows and inflows as a result
 Cash Flows set 2 represents estimates at 31 December 2002
Required
Carrying amount at the end of 2000, 2001, 2002 and 2003
Question 6 – future overhauling

At the end of 2000, entity F tests a machine for impairment. The machine is a cash-generating unit. It is
carried at depreciated historical cost and its carrying amount is Rs 150,000. It has an estimated remaining
useful life of 10 years.
The machine’s recoverable amount (i.e. higher of value in use and fair value less costs of disposal) is
determined on the basis of a value in use calculation. Value in use is calculated using a pre-ta0 discount rate
of 14 per cent.
Management approved budgets reflect:

1. estimated costs necessary to maintain the level of economic benefit expected to arise from the
machine in its current condition; and that in 2004, costs of Rs 25,000 will be incurred to enhance
the machine’s performance by increasing its productive capacity.
2. At the end of 2004, costs to enhance the machine’s performance are incurred. The machine’s
estimated future cash flows reflected in the most recent management approved budgets are given
below and a current discount rate is the same as at the end of 2000.
3. Future cash Flows

Year Cash Flows 1 Cash Flows 2
2001 22,165 -
2002 21,450 -
Ahmed Raza Mir, FCA
2003 20,550 -
2004 24,725 -
2005 25,325 30,321
2006 24,825 32,750
2007 24,123 31,721
2008 25,533 31,950
2009 24,234 33,100
2010 22,850 27,999
 Cash Flows set 1 represents estimates at 31 December 2000 and do not include future overhauling
outflows and inflows as a result
 Cash Flows set 2 represents estimates at 31 December 2004
Required
Carrying amount at the end of 2000, 2001, 2002, 2003 and 2004
Question 7
A CGU has the following assets:
Particulars Carrying Amount

Plant 3,500
Vehicles 1,500
Goodwill 1,000
Trade Receivables 1,250
Inventory 750
Factory Building 5,000
Recoverable amount of the CGU is assessed to be Rs 10,000.
Required
Calculate Impairment (if any) and allocate it to the components of CGU
Question 8
Mushtaq Limited has two cash generating units producing cash independently of each other. One of theses
units has shown indications of impairment. The constituents of the CGU are as under:
Particulars Carrying FV-CTS

Amount
Building Rs 125,000 Rs 100,000
Furniture and Fixtures Rs 45,000 Not identifiable
Vehicles Rs 60,000 Rs 30,000
Apportioned Goodwill Rs 40,000 Not Applicable
Stock in trade Rs 20,000 NRV of 60% stock is Rs 14,000. Remaining 40%
stock has an NRV of Rs 2,000
Account Receivables Rs 42,000 Provision for bad debts at reporting date Rs 4,000
The recoverable amount of the whole cash generating unit is Rs 215,000.
Required
Ahmed Raza Mir, FCA
Allocate impairment (if any) to the eligible assets of the unit

Question 9
A Company produces a product which passes through 3 machines. The output of machine A passes through
Machine B and then Machine C to become the only saleable product of the company. Intermediate output of
any machine is not saleable in the market.
Carrying amounts of the entire cash generating unit is as under:
Machine A Rs 13,000
Machine B Rs 29,250
Machine C Rs 22,750
Goodwill Rs 7,220
The recoverable amount of the CGU is assessed to be Rs 62,250. However, at the reporting date the fair
value less cost to sell of the Machine A is assessed to be Rs 12,500. The management could neither
determine the fair value less cost to sell or value in use of any other individual asset of the CGU.
Required
Calculate the impairment (if any) and allocate it to the components of cash generating unit.
Question 10 (Goodwill allocable)

On 31 December 2001, Entity T acquires 100% of voting rights in Entity M for Rs 10,000. Entity M has
manufacturing plants in three countries. The data below relates to the end of 2001:
CGUs Allocation of purchase Fair Value of identified Allocated Goodwill

price Assets
Activities in Country A Rs 3,000 Rs 2,000 Rs 1,000
Activities in Country B Rs 2,000 Rs 1,500 Rs 500
Activities in Country C Rs 5,000 Rs 3,500 Rs 1,500
Total Rs 10,000 Rs 7,000 Rs 3,000
Goodwill on acquisition is allocated to the three cash generating units.
Just after acquisition a new government is elected in Country A. It passed legislation that significantly
restricts exports of the main product produced by Entity T and its subsidiaries (ie Group T). As a result,
and for the foreseeable future, Group T’s production in Country A will be cut by 40 per cent. The significant
export restriction and the resulting production decrease require Group T to estimate the recoverable
amount of Country A’s cash-generating unit. Management estimates cash flow forecasts for Country A
operations and determines the cash-generating unit’s recoverable amount to be Rs 1,360.
Required
Calculate the impairment loss (if any) and allocate it to relevant assts of the CGU
Question 11
On 31 December 2001, Entity T acquires 100% of voting rights in Entity M for Rs 10,000. Entity M has
manufacturing plants in three countries. The data below relates to the end of 2001:
Ahmed Raza Mir, FCA
CGUs FV of identified assets

Activities in Country A Rs 2,000
Activities in Country B Rs 1,500
Activities in Country C Rs 3,500
Total Rs 7,000
Goodwill on acquisition can not be allocated to the three cash generating units on a reasonable basis.
Just after acquisition a new government is elected in Country A. It passed legislation that significantly
operations and determines the cash-generating unit’s recoverable amount to be Rs 1,360.
Moreover, the recoverable amount of all CGUs (including goodwill) is estimated to be Rs 8,500.
Required
Question 12
At 31 December 2012, the carrying amount of 3 manufacturing plants of the Entity T located in three
different countries and a head office is as under:
CGUs Carrying Amount

Head Office Rs 4,000
Total Rs 14,000
Each manufacturing plant is producing a different product which are sold in different countries. All the
units are separately considered as cash generating units. Whereas, the head office is used for the
administration purpose for all CGUs. All CGUS are considered to take equal benefits from the head office.
Just before the year end a new government is elected in Country A. It passed legislation that significantly
restricts exports of the main product produced by Entity T and its subsidiaries (i.e. Group T). As a result,
operations and determines the cash-generating unit’s recoverable amount (including Corporate asset) to
be Rs 2,500.
Required
Calculate the impairment loss (if any) and allocate it to relevant assets of the CGU
Question 13
At 31 December 2012, the carrying amount of 3 manufacturing plants of the Entity T located in three
different countries and a head office is as under:
Ahmed Raza Mir, FCA
CGUs Carrying Amount

Head Office Rs 4,000
Total Rs 14,000
Each manufacturing plant is producing a different product which are sold in different countries. All the
units are separately considered as cash generating units. Whereas, the head office is used for the
administration purpose for all CGUs. The company is unable to allocate the carrying amount of corporate
asset on a systematic basis.
Just before the year end a new government is elected in Country A. It passed legislation that significantly
operations and determines the cash-generating unit’s recoverable amount (excluding Corporate asset) to
be Rs 2,000.
The recoverable amount of all CGUs including corporate asset is Rs 11,000.
Required
Question 14
Entity M has three cash-generating units: A, B and C. The carrying amounts of those units do not include
goodwill. There are adverse changes in the technological environment in which M operates. Therefore, M
conducts impairment tests of each of its cash-generating units. At the end of 20X0, the carrying amounts of
A, B and C are Rs 100, Rs 150 and Rs 200 respectively.
The operations are conducted from a headquarters. The carrying amount of the headquarters is Rs 200: a
headquarters building of Rs 150 and a research center of Rs 50. The relative carrying amounts of the cash-
generating units are a reasonable indication of the proportion of the headquarters building devoted to each
cash-generating unit. The carrying amount of the research center cannot be allocated on a reasonable basis
to the individual cash-generating units.
The remaining estimated useful life of cash-generating unit A is 10 years. The remaining useful lives of B, C
and the headquarters are 20 years. The headquarters is depreciated on a straight-line basis.
The recoverable amount (i.e. higher of value in use and fair value less costs of disposal) of each cash-
generating unit is based on its value in use. Value in use is calculated using a pre-tax discount rate of 15 per
cent.
Value in use:
Particulars Value in use
CGU A 199
CGU B 164
Ahmed Raza Mir, FCA
CGU C 271
Company M 720
Required
Calculate and allocate impairment (if any)
Question 15
Ghalib Limited manufactures three products X, Y and Z. The management of the company considers 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:
Particulars (CGU excl Corp Carrying Amount Recoverable Amount

Assets)
Plant 1 for product X Rs 2,500,000 Rs 1,200,000
Plant 2 for product Y Rs 5,000,000 Rs 7,000,000
Plant 3 for product Z Rs 10,000,000 Rs 6,400,000
Details of corporate Assets:
Corporate Assets Carrying Amount

Building Rs 2,800,000
PABX System Rs 1,400,000
Computer Network Rs 2,100,000
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 allocated to plants 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 Assets’. (18 Marks)
Question 16
The reporting entity has 3 cash-generating units (toothpaste, wire brushes and rubber tyre production
lines) and 3 corporate assets (a building, phone system and a computer platform). The building and phone
system support all cash-generating units while the computer platform supports the toothpaste and wire-
brush units only. The following are measurements as at 31 December 20X5:
Particulars (CGU excl Corp Carrying Amount Recoverable Amount

Assets)
Toothpaste unit Rs 1,000,000 Rs 600,000
Wire-brush unit Rs 2,000,000 Rs 1,500,000
Rubber tyre unit Rs 4,000,000 Rs 3,200,000
Details of corporate Assets:

Ahmed Raza Mir, FCA
Corporate Assets Carrying Amount

Building Rs 700,000
Phone System Rs 350,000
Computer platform Rs 1,050,000
Required
Calculate the amount of impairment to be allocated to the entity’s assets, assuming that:
a. The corporate assets can be allocated to the relevant cash-generating units. The appropriate
method of allocation is based on the carrying amount of the cash-generating unit’s individual assets
as a percentage of cash-generating unit’s total assets excluding corporate assets to be allocated
b. The corporate assets cannot be allocated to the relevant cash generating units.
Question 17 (past paper Winter 2019 Q1)

Krona Limited (KL) produces various nutrition products through its three production facilities located at
Karachi, Lahore and Peshawar. Each facility is considered as a separate cash-generating unit (CGU).
In May 2019, several contamination cases of KL's products were reported on social media as well as on TV
channels. The adverse publicity badly affected all the products and consequently their sales were reduced
significantly. Therefore, KL conducted impairment test of all CGUs as on 30 June 2019, though KL does not
have any intention to sell any CGU in near future.
Following information was made available on 30 June 2019: Assets of CGUs:
Particulars Karachi Lahore Peshawar

------------Rs In Millions------
Carrying Amount b4 impairment 160 100 125
Value in Use 155 115 164
Fair Value less CTS 152 110 169
Remaining useful life

Average in years 10 8 6
Corporate Assets:
Particulars Carrying amount Remaining average

before impairment useful life
Head office Assets 84 15
Product Development Centre 26 5
The operations are conducted from the head office. Product development centre supports Karachi and
Lahore facilities only.
Required:
Compute carrying amounts of each CGU and corporate asset after incorporating impairment losses under
the following independent situations:
Ahmed Raza Mir, FCA
1. The relative carrying amounts of CGUs are reasonable indication of the proportion of the corporate
assets devoted to each CGU.
2. The carrying amounts of the corporate assets cannot be allocated on a reasonable basis to the
individual CGUs.
Question 18
Peter acquired 60% of Stewart on 1.1.20X1 for £450m recognizing net assets of £600m, a noncontrolling
interest (valued as a proportion of total net assets) of £240m and goodwill of £90m. Stewart consists of a
single cash-generating unit.
Due to adverse publicity, the recoverable amount of Stewart had fallen by 31.12.20X1. The depreciated
value of the net assets at that date was £550m (excluding goodwill). No impairment losses have yet been
recognised relating to the goodwill.
Requirement
Show the allocation of the impairment losses:
1. If the recoverable amount was £510m at 31.12.20X1
2. If the recoverable amount was £570m at 31.12.20X1
Ahmed Raza Mir, FCA
Question 19
Parent acquires an 80 per cent ownership interest in Subsidiary for Rs 2,100 on 1 January 20X3. At that
date, Subsidiary’s net identifiable assets have a fair value of Rs 1,500. Parent chooses to measure the non-
controlling interests as the proportionate interest of Subsidiary’s net identifiable assets.
The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are
largely independent of the cash inflows from other assets or groups of assets. Therefore, Subsidiary is a
cash-generating unit. Because other cash-generating units of Parent are expected to benefit from the
synergies of the combination, the goodwill of Rs 500 related to those synergies has been allocated to other
cash-generating units within Parent. Because the cash-generating unit comprising Subsidiary includes
goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there
is an indication that it may be impaired
At the end of 20X3, Parent determines that the recoverable amount of cash-generating unit Subsidiary is Rs
1,000. The carrying amount of the net assets of Subsidiary, excluding goodwill, is Rs 1,350
Required
Journalize the impairment loss (if any)
Question 20
Parent acquires an 80 per cent ownership interest in Subsidiary for Rs 2,100 on 1 January 20X3. At that
date, Subsidiary’s net identifiable assets have a fair value of Rs 1,500. Parent chooses to measure the non-
controlling interests at fair value, which is Rs 350.
The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are
largely independent of the cash inflows from other assets or groups of assets. Therefore, Subsidiary is a
cash-generating unit. Because other cash-generating units of Parent are expected to benefit from the
synergies of the combination, the goodwill of Rs 500 related to those synergies has been allocated to other
cash-generating units within Parent.
At the end of 20X3, Parent determines that the recoverable amount of cash-generating unit Subsidiary is Rs
1,650. The carrying amount of the net assets of Subsidiary, excluding goodwill, is Rs 1,350
Required
Journalize the impairment loss (if any)
Question 21 (Summer 2009 Q4)

On January 1, 2008, Misbah Holding Limited, dealing in textile goods, acquired 90% ownership interest in
Salman Limited (SL), a ginning company, against cash payment of Rs. 450 million. At that date, SL’s net
identifiable assets had a book value of Rs. 350 million and fair value of Rs. 400 million.
It is the policy of the company to measure the non-controlling interest at their proportionate share of SL’s
net identifiable assets. During the year ended December 31, 2008, SL incurred a net loss of Rs. 150 million.
The impairment testing exercise carried out at the end of the year, by a firm of consultants, showed that the
recoverable amount of SL’s business is Rs. 200 million. However, the Board of Directors is inclined to take a
second opinion as they estimate that the recoverable amount is Rs. 390 million.
Required:
Based on each of the two valuations, compute the amounts to be reported in the consolidated statement of
financial position as of December 31, 2008 in respect of:
1. Goodwill;
Ahmed Raza Mir, FCA
2. Net identifiable assets, and

3. Non-controlling interest
Question 22
Following are the three cash generating units and two corporate assets held by Shaheen Limited:
Particulars A B C
------------Rs In Millions------
Carrying Amount b4 impairment 200 125 160
Recoverable amount 190 145 215
Remaining useful life

Average in years 8 10 6
Corporate Assets:
Particulars Carrying amount Remaining average

before impairment useful life
Head office Building 105 12
Research Centre 32.5 5.5
The operations are conducted from the head office. Research Centre supports A and B only.
Required:
Compute carrying amounts of each CGU and corporate asset after incorporating impairment losses under
the following independent situations:
1. The relative carrying amounts of CGUs are reasonable indication of the proportion of the corporate
assets devoted to each CGU.
2. The carrying amounts of the corporate assets cannot be allocated on a reasonable basis to the
individual CGUs.
Question 23
X Ltd owns a machine with a remaining useful life of three years. The carrying amount of the machine is
R90 000 on 31 December 20X2. On this date there is an indication that the machine may be impaired. It is
expected that the machine will generate net cash inflows of R30 000 per annum over its remaining useful
life. The fair value less costs of disposal cannot be determined. A fair discount rate is 10% per annum.
Cash flows estimate and discount rate estimate did not change over the year.
Required
Calculate impairment and its reversal if any in next year

Ahmed Raza Mir, FCA
Question24 – [AAFR Past Paper, Summer 2011, Q2(iv), 5 marks]

On April 1, 2006 Kahkashan Limited had acquired a plant at a cost of Rs. 30 million. The useful life of the
plant was estimated at 15 years and it is being depreciated under the straight-line method. On October 1,
2010 the plant suffered physical damage but is still working. A valuation was carried out to determine the
impairment loss. The following information is available from the valuer’s report received on April 5, 2011:
Value in use Rs. 16 million

Selling price, net of costs to sell Rs. 12 million
Estimated remaining useful life as of October 1, 2010 5 years
Depreciation for the year ended March 31, 2011 has been accounted for without considering the impact of
the valuer’s report.
Required:
Prepare a relevant extract of statement of comprehensive income for the year ended March 31, 2011 in
accordance with International Financial Reporting Standards.
Question25 [Reversal of Impairment]

The Cowbird Company operates in the television industry. It acquired a licence to operate in a particular
region for 20 years at a cost of £10 million on 31 December 20X3. Cowbird’s policy was to amortise the fee
paid for the licence on a straight-line basis.
By 31 December 20X5 it had become apparent that Cowbird had overpaid for the licence and, measuring
recoverable amount by reference to value in use, it recognised an impairment charge of £4.05 million,
leaving a carrying amount of £4.95 million.
At 31 December 20X7 the market place had improved, such that the conditions giving rise to the original
impairment no longer existed. The recoverable amount of the licence by reference to value in use was now
£11 million.
Requirement
What should be the carrying amount of the licence in the statement of financial position of Cowbird at 31
December 20X7, according to IAS 36 Impairment of Assets?
Question 26 [December 2012, Q3(a)]:

On 1 July 2011, PL acquired 20% shares of Goose Limited (GL), a listed company, when GL’s retained earnings
stood at Rs. 250 million and the fair value of its net assets was Rs. 350 million. The purchase consideration
was two million ordinary shares of PL whose market value on the date of purchase was Rs. 33 per share. PL
is in a position to exercise significant influence in finalizing the financial and operational policies of GL.
The summarized statement of financial position of GL at 30 June 2012 was as follows:
Rs. in million
Share capital (Rs. 10 each) 100
Retained earnings 280
380
Net assets 380

Ahmed Raza Mir, FCA
Recoverable amount of GL’s net assets at 30 June 2012 was Rs. 370 million.
Question 27 [December 2015, Q2]

Beta Foods Limited (BFL) is in process of finalizing its consolidated financial statements for the year ended
30 June 2015. Following information pertains to BFL’s intangible assets.
(i) Value of intangible assets as at 30 June 2013:
Goodwill Patents
Rs. in million
Cost 1,500 400
Accumulated amortization / impairment 300 160
(ii) On 1 July 2013, BFL acquired the entire shareholdings of Gamma Enterprises (GE) for Rs. 5,400
million. The value of patents, development expenditure and other net assets of GE on the date of
acquisition was Rs. 2,100 million, Rs. 48 million and Rs. 1,430 million respectively.
The break-up of development expenditure was as follows:
Products Rs. in million

A – 214 25
B – 917 23
Total 48
(iii) Research and development expenditure during the year ended 30 June 2014 and 2015 was as
follows:
Research Development
Year Product Name
Rs. in million
A – 214* --- 08
2014
B – 917 10 45
2015 B – 917 --- 50
*because of certain reasons the management had decided to abandon this project in May 2014.
(iv) Trial production of B-917 commenced in March 2015. Net cost of trial production up to 30 June 2015
amounted to Rs. 22 million.
(v) Patents are amortized over their remaining useful life of 10 years on straight line method.
(vi) Recoverable amounts of assets having indefinite life, determined as a result of impairment testing,
were as follows:
2015 2014
Rs. in million
Goodwill 2,800 2,550
Product B – 917 160 65
Required:
Prepare a note on intangible assets, for inclusion in BFL’s consolidated financial statements for the year
ended 30 June 2015 in accordance with the requirements of International Financial Reporting Standards.
Ahmed Raza Mir, FCA
Question 28 [December 2016, Q2]

On 1 July 2013, GYO Movers Limited (GML) acquired a business engaged in providing transportation service
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 30
June 2016 entrance of new competitors has affected its performance.
GML considers each route as a separate Cash-Generating Unit (CGU). As on 30 June 2016, following
information is available in respect of each CGU:
Green Yellow Orange

Number of buses* 80 50 40
Expected remaining useful life (in years) 20 15 10
-------------------- Rs. in million --------------------
Carrying amount of buses 225 150 95
Other assets - carrying value 400 350 100
- fair value Not Available
Fair values less cost to sell of the CGU 500 450 250
Expected net cash flows per annum 70 60 50
*Assume that all buses are of same make and model.
Carrying amount of corporate assets used interchangeably by all segments are as follows:
Carrying amount Fair value

Particulars
---------- Rs. in million ----------
Head office building 100 Not available
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.
Showroom-1 Showroom-2 Showroom-3

Particulars
---------- Rs. in million ----------
Average sale price for each bus 2.52 2.62 2.50
Estimated transaction cost for disposal of each bus 0.05 0.20 0.10
Pre-tax discount rate of GML is 12%.
Required:
Prepare relevant extracts from the statement of financial position as at 30 June 2016 in accordance with
International Financial Reporting Standards.
Ahmed Raza Mir, FCA
Question 29 [December 2017, Q1(a)(i)]

The following details relate to a cash generating unit (CGU) of Khyber Ltd. (KL) as at 30 June 2017:
Carrying value Fair value less cost to

sell
---------- Rs. in million ----------
Building (revaluation model)* 22 21.7
Machinery (cost model) 15 16
Equipment (cost model) 19 No measureable
License (cost model) 20 18
Investment property (fair value model) 22 22
Investment property (cost model) 8 Not measureable
Goodwill 3 Not measureable
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. There has been a significant decline in
budgeted net cash flows of the CGU.
IFRIC 1
Ahmed Raza Mir
Background of the issue
Many entities have obligations to dismantle, remove and restore items of property, plant and equipment and in
this Interpretation such obligations are referred to as decommissioning, restoration and similar liabilities’.
Initial Estimate of Dismantling cost

Under IAS 16 Property, Plant and Equipment, the cost of an item of property, plant and equipment includes the
initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the
obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item
during a particular period
Subsequent measurement
IAS 37 Provisions, Contingent Liabilities and Contingent Assets contain requirements on how to measure
decommissioning, restoration and similar liabilities. This Interpretation provides guidance on how to account for
the effect of subsequent changes in the measurement of existing decommissioning, restoration and similar
liabilities.
Motivators of Changes in Dismantling Cost

Changes in the measurement of an existing decommissioning, restoration and similar liability may result from
1. changes in the estimated timing (Like life of the asset)
Ahmed Raza Mir, ACA (ARTT Business School)
2. amount of the outflow of resources embodying economic benefits required to settle the obligation (Estimated
amount) or
3. a change in the discount rate
Assets Measured under Cost Model
1. Increase in liability
Increase in Liability is added to the carrying amount of the related asset.
2. Decrease in liability
Decrease in the liability is deducted from the carrying of the related asset
a. Upper Bound
If the adjustment results in an addition to the cost of an asset, the entity considers whether this is an indication
that the new carrying amount of the asset may not be fully recoverable. If there is such an indication, the entity
tests the asset for impairment by estimating its recoverable amount, and accounts for any impairment loss, in
accordance with IAS 36 Impairment of Assets.
b. Flooring
The amount deducted from the cost of the asset cannot exceed its carrying amount. If a decrease in the liability
exceeds the carrying amount of the asset, the excess is recognized immediately in profit or loss
Depreciation
Ahmed Raza Mir, ACA
IFRIC 1
Ahmed Raza Mir
The adjusted depreciable amount of the asset is depreciated over its useful life.
Asset Carried at Fair Value
1. Increase in Provision
An increase in the liability reduces the revaluation surplus within equity in respect of that asset
2. Decrease in Provision
A decrease in the liability increases the revaluation surplus within equity in respect of that asset
a. Capping
In the event the provision is increased, revaluation surplus is reduced to the maximum of its carrying amount, and
excess increase in recorded in profit and loss account.
b. Flooring
In the event that a decrease in the liability exceeds the carrying amount that would have been recognized had the
asset been carried under the cost model, the excess is recognized immediately in profit or loss
Post useful life carriage of provision

Once the related asset has reached the end of its useful life, all subsequent changes in the liability are recognised
in profit or loss as they occur. This applies under both the cost model and the revaluation model.
Unwinding of Discount
 The periodic unwinding of discount is recognised in profit or loss as a finance cost as it occurs
 Capitalization under IAS 23 Borrowing Costs is not permitted.
Ahmed Raza Mir, ACA

IFRIC 1
Ahmed Raza Mir
Question 1 – (SUMMER 2011 Q3)
Question 2 – (WINTER 2008 Q2)
Ahmed Raza Mir, ACA

IFRIC 1
Ahmed Raza Mir
Question 3
As at 30 June 2017, dismantling cost relating to a plant has increased from initial estimate of Rs. 30 million to Rs.
40 million. Further, fair value of the plant on that date was assessed at Rs. 112 million (net of dismantling cost).
No accounting entries have been made in respect of increase in dismantling liability and revaluation of the plant.
The plant had a useful life of 5 years when it was purchased on 1 July 2015. The carrying value of plant and
related revaluation surplus included in the financial statements are Rs. 135.4 million (after depreciation for the
year ended 30 June 2017) and Rs. 3.15 million (after transferring incremental depreciation for the year ended 30
June 2017) respectively.
Applicable discount rate is 8% per annum.
Question 4 (SUMMER 2016 – Q5)

On 1 January 2014, Zalay Limited (ZL) acquired a plant for Rs 3,000 million. ZL has a legal obligation to dismantle
the plant at the end of its four years’ useful life. On the date of acquisition, it was estimated that the cost of
dismantling would amount to Rs. 400 million.
ZL uses the revaluation model for subsequent measurement of its property, plant and equipment and accounts
for revaluation on the net replacement method. Depreciation is provided on straight line basis. The details of
revaluation carried out by the Professional Valuer and the revision in the estimated cost of dismantling as at 31
December 2014 and 2015 are as follows:
2015 2014
Particulars Rupees in Million
Fair Value of Machine net of Dismantling cost 1,200 2,250
Revised estimate of Dismantling cost 300 550
Applicable discount rate is 10%
Required
Prepare journal entries to record the above transactions for the year ended 31 December 2015, in accordance
with International Financial Reporting Standards.
Ahmed Raza Mir, ACA

IFRIC 1
Ahmed Raza Mir
Question 5 (Winter 2013 – Q3(i))
The financial statements of Bravo Limited (BL) for the year ended September 2013 are under finalization and the
following matter is under consideration:
(i) BL’s plant was commissioned and became operational on 1 April 2008 at a cost of Rs. 130 million. At the
time of commissioning its useful life and present value of decommissioning liability was estimated at 20
years and Rs. 19 million respectively.
(ii) BL’s discount rate is 10%
(iii) There has been no change in the above estimate till 30 September 2013 except for the decommissioning
liability whose present value as at 1 April 2013 was estimated at Rs. 25 million.
Required
For the above matter, compute the related amount as that would appear in the statements of financial position
and comprehensive income of Bravo Limited for the year ended 30 September 2013 in accordance with IFRS.
(Ignore corresponding figures).
Ahmed Raza Mir, ACA

IFRIC 1
Ahmed Raza Mir
Question 1
ABC limited bought an Asset on 1 Jan 2008. details are as under:
Cost of plant 580,000

Installation cost 120,000
Dismantling cost 207,360
Life of the asset 4 years
Interest rate 20%
At the beginning of 2010 the company re-estimated the cost of dissenting to be

Rs 230,400. Life of the asset and rate of interest remained unchanged
Required
Journalize the change in estimate
Question 2
same question but the estimate is now Rs 172,800.
Question 3
Carrying amount of plant at 1 Jan 2014 24,000

Carrying amount of dismantling cost 120,000
Estimate of dismantling liability reduced to Rs 86,000 (present value)
required
Journalize the above transaction
Question 4
Carrying amount of plant at 1 Jan 2014 100,000
Carrying amount of dismantling cost 56,000
Estimate of dismantling liability increased to Rs 78,000 (present value)

The recoverable amount of the asset at the same date was Rs 112,00
required
Ahmed Raza Mir, ACA
IFRIC 1
Ahmed Raza Mir
Question 5
Carrying amount of asset 145,000

Revaluation surplus 21,000
PV of dismantling cost 52,000
Dismantling cost estimates changed. Its new present value is now Rs

45,000
required
Question 6


85,000
required
Question 7


42,000
required
Ahmed Raza Mir, ACA

IFRIC 1
Ahmed Raza Mir
General Understanding
Ahmed Raza Mir, ACA

Advanced Accounting and Financial Reporting
Topic= IFRS-9 Financial Instruments
Ahmed Raza Mir, FCA
1
Ahmed Raza Mir, FCA
Basic Accounting for Financial Assets
Question 1 (Equity – At Fair Value through OCI and P/L)

ARM Company Limited acquired 95,000 shares of “Golden Arrow” Limited on 1 April 2012 at Rs 43.5 per
share. Transaction costs were 2% of the fair value. Investments are remeasured to fair value at the end
of every quarter.
Fair values at the end of following quarters were:

Date Fair Value Transaction cost Net
30 June 2012 38.87 2% 38.0926
30 September 2012 50.00 2.5% 48.75
31 December 2012 54 2% 52.92
31 March 2013 52 3% 50.44
The investee company distributed dividend in the following manner:

Date Nature Cash / Bonus %
17 July 2012 Interim Cash 10%
12 Jan 2013 Final Bonus 20%
12 Jan 2013 Final Cash 15%
The company disposed of 40% of its holding on 10 November 2012 for Rs 46 per share. The company
incurred transaction cost of 2% on the trade. Entire holding was disposed of
Required
Journal Entries for all the reportable events for 2012 and 2013
Question 2 [Exchange treated as disposal]

ABC Acquires acquired a small number of shares in DEF for their fair value of Rs 100,000; the shares are
quoted on an exchanges and ABC classified them at Fair Value through OCI. One year later, their fair
value has risen to Rs 110,000.
The following year GHI, a large competitor, acquires DEF for an offer that values ABC’s shareholding at
Rs 150,000. The consideration is satisfied by ABC receiving new equity shares in GHI.
Required
How should the acquisition of shares in GHI is to be accounted for
2
Ahmed Raza Mir, FCA
Question 3 [Acquisition, Disposal and remeasurement] - SUMMER 2018 Q3(ii)

On 1 May 2017 KL acquired following equity investments:
Purchase Price Transaction Cost Total
------------------------------ Rs in Million-----------------------
Investment A 100 2 102
Investment B 150 3 153
Investment A was designated as measured at fair value through profit or loss whereas investment B was
irrevocably elected at initial recognition as measured at fair value through other comprehensive income.
In October 2017, KL earned dividend of Rs. 12 million and Rs. 9 million on investment A and B
respectively.
20% of investment A and 30% of investment B were sold for Rs. 23 million and Rs. 50 million respectively
in November 2017. Transaction cost was paid at 2%.
As on 31 December 2017, fair values of the remaining investments are given below:
Fair Value Tr Cost on disp Net amount

------------------------------ Rs in Million-----------------------
Investment A 105 2.1 102.9
Investment B 130 2.6 127.4
Required
Prepare the extracts relevant to the above transactions from KL’s statements of financial position and
comprehensive income for the year ended 31 December 2017, in accordance with the IFRSs
Question 5 [Investment in Bonds – at amortized cost]

XLB is an investment management company. XLB acquired a 12% bond at its fair value of Rs 524,000
(including a premium of Rs 24,000) on 1 Jan 2012. The acquisition was subject to a transaction cost of
2.7% of face value. Remaining term of the bond was 5 years. Irr of the bond was 10.0205%.
The bond was classified as investments at amortized cost.
Required
Journal entries for the entire term
Question 6 [Investment in Bonds – at fair value through OCI]

The same bond is classified at “FV through OCI”. Fair Values of the bond at the end of every year is as
under:
Date Fair Value
31 December 2012 Rs 520,000
31 December 2013 Rs 516,000
31 December 2014 Rs 523,000
31 December 2015 Rs 510,000
3
Ahmed Raza Mir, FCA
Required
Journal entries for the whole term
Question 7 [Investments – all classes]

Akmal Limited acquired a bond for Rs 302,000 (Including a premium of Rs 20,000 and a transaction cost
of Rs 2,000). Remaining term of the bond is three years. Coupon rate of the bond is 10%.
Amortized Cost Classification

If the bond is classified at amortized cost the effective rate of return for the bond holders will be
7.0057%.
At Fair Value through OCI

The fair values of the bond at year 1 and 2 is Rs 299,000 and 283,400. The bond will be redeemed at par
at maturity.
At Fair Value through P/L

The effective rate of the bond at acquisition date is 7.265%. The fair values (given above) will result in
the revised effective rate of 6.824% and 8.680%.
Required
Journal entries for all classifications
Question 8
On 1 January 2004 an entity subscribed for a Rs 20,000 5% bond, interest being payable annually in
arrears. The bond was issued at a discount of 5% and was redeemed at a premium of 5% on 31
December 2006. The effective interest rate of the financial instrument was calculated as 8.49%. As a
result, in changes in general interest rates, the fair value of the bond was Rs 19,400 at 31 December
2004 and Rs 20,400 at 31 December 2005.
Required
Calculate the amounts to be recognised in the entity’s financial statements for each of the three years
ended 31 December 2006 if:
1. The asset was classified at Amortized cost
2. The asset was classified at Fair Value through OCI
3. The asset was classified at Fair Value through P/L
4
Ahmed Raza Mir, FCA
Question 9 [zero coupon bonds – all classes of investments]

Mushtaq Limited acquired a Treasury Bill (Zero Coupon) having a face value of Rs 3,000,000 at a
discount of Rs 900,000 on 1 Jan 2011. Purchase price paid along with the transaction cost of Rs 5,000.
The T.Bills have a 3 years maturity. Market interest rate at the end of Year 1 and Year 2 were reported to
be 10% and 15% respectively.
Required
Journal Entries for all reportable events, assuming that
1. The bond is classified at Amortized Cost
2. The bond is classified at Fair Value through OCI
3. The bond is classified at Fair Value through P/L
Question10
An entity purchased zero coupon bonds of ABC Ltd of 800,000 at a discount of 4% on 1 Jan 2001. The
transaction cost paid by the entity is 1.5% of the purchase price. The bond will be redeemable after 3
years at a premium of 4%. The market rate at the time of purchase is 10%. The fair value at the end of
Year 1 and Year 2 is 806,000 and 812,000.
Required
Journal Entries for all reportable events, assuming that
1. The bond is classified at Fair Value through OCI
2. The bond is classified at Fair Value through P/L
Question 11 [transaction cost defined]

An entity purchased 10,000 shares of a company which is quoted at Rs 1.98 – 2.00 and pays a
commission of Rs 0.03 per share. At the end of first year of holding the market value was reported to be
Rs 2.18 – 2.20 and it would cost Rs 0.06 per share to disposed it.
Required
Journalize the transaction for first year assuming that the financial asst is classified as
1. At Amortized Cost
2. At Fair Value through OCI
3. At Fair Value through P/L
Question 12 [transaction costs defined and revaluation]

Purchased 25,000 shares in EG Co in 2001 for Rs 2.00 each as Investments at Fair Value through OCI.
Transaction costs on purchase or sale are 1% of the purchase/sale price. The share price on 31
December 2001 was quoted at Rs 2.25 – Rs 2.28. Greentree sold the shares on 20 December 2002 for Rs
2.62 each
Required
Show the accounting treatment of the above transaction.
5
Ahmed Raza Mir, FCA
Question 13 [zero coupon bond – Financial Issued)

Laxman raises finance by issuing zero coupon bonds at par on the first day of the current accounting
period with a nominal value of Rs 10,000. The bonds will be redeemed after two years at a premium of
Rs 1,449. The effective rate of interest is 7%.
Required
Explain and illustrate how the loan is accounted for in the financial statements of Laxman.
Question 14 [Loan notes – Amortized Cost for issuer]

Broad raises finance by issuing Rs 20,000 6% four-year loan notes on the first day of the current
accounting period. The loan notes are issued at a discount of 10%, and will be redeemed after four years
at a premium of Rs 1,015. The effective rate of interest is 12%. The issue costs were Rs 1,000.
Required
Explain and illustrate how the loan is accounted for in the financial statements of Broad.
Question 15 [Financial Liabilities carried at Fair Value]

On 1 January 2011 Swann issued three year 5% Rs 30,000 loans notes at nominal value when the
effective rate of interest is also 5%. The loan notes will be redeemed at par. The liability is classified at
FVTPL. At the end of the first accounting period market interest rates have risen to 6%.
Required
Explain and illustrate how the loan is accounted for in the financial statements of Swann in the year
ended 31 December 2011.
Question 16 [Financial liabilities carried at amortized cost]

On 1 January 2007 The Macmanus Company issued a three-year Rs 10 million bond at par. It has not
been classified as a financial liability at fair value through profit or loss.
The bond is redeemable on 1 January 2010 at a premium of 10%. The nominal interest rate is 6%,
payable on 31 December each year. The issue costs associated with the bond are Rs 300,000. The
effective interest rate is 10.226%.
Requirement
What is the carrying amount of this liability in Macmanus’ financial statements for the year ending 31
December 2007 in accordance with IFRS 9.
6
Ahmed Raza Mir, FCA
Own Credit risk in financial liabilities at (FVPL)
Question 17 [Financial liabilities – Own credit risk]

Coatmin provides loans to customers and funds the loans by selling bonds in the market. The liability is
designated as at fair value through profit or loss. The bonds have a fair value increase of Rs 50 million in
the year to 30 November 2014 of which Rs 5 million relates to the reduction in Coatmin’s
creditworthiness. The directors of Coatmin would like advice on how to account for this movement.

On 1 January 2006, an entity issues a five-year bond with a par value of Rs 200,000, and an annual fixed
coupon rate of 7%. The coupon rate reflects the market KIBOR rate and the credit spread associated
with the bond at the time of the issue. At the time of the issue KIBOR was 5% implying a credit spread of
2%.
On 31 December 2006, the value of the bond has decreased as the KIBOR has increased to 5.25%. The
yield to maturity for the bond has now risen to 7.50%. The credit spread has now increased to 2.25%
implying deterioration in the credit quality of the bond.
Required
Journalize the change in the value of the liability

AMY Limited issued a three-year loan note with a face value of Rs 5 million at a fixed rate of 12% on 1st
Jan 2010. KIBOR at the date of issue was 10% (premium of credit risk is 2%. The liability is designated as
at fair value through profit and loss.
At 31 December 2010 KIBOR moved to 8% whereas the credit spread increased to 3% due to
deteriorating in the credit rating of the company.
Required
Journal entries for the year ended 31 December 2010

Javaidan Limited issued a three-year loan note with a face value of Rs 4 million at a fixed rate of 9% on
1st Jan 2011. KIBOR at the date of issue was 6% (premium of credit risk is 3%. The liability is designated
as at fair value through profit and loss.
At 31 December 2011 KIBOR moved to 5% whereas the credit spread reduced to 2.5 % due to
improvement in the credit rating of the company.
Required
7
Ahmed Raza Mir, FCA
IAS 21 – Accounting for Exchange Differences

Key dates
Dates involved with foreign currency transactions are very important because exchange rates differ from day-to-
day. The following dates are significant when recording the foreign currency transaction:
1. Transaction date –
This is when a loan is raised/made or an item is purchased or sold;
2. Settlement date –
This is when cash changes hands in settlement of the transaction (e.g. the creditor is paid or payment is received
from the debtor); and
3. Reporting date –
This normally refers to the financial year-end of the local entity (or could refer to any other date upon which
financial information is to be reported).
The transaction is recognized on transaction date, which is the date on which the definition and recognition
criteria (per the Conceptual Framework) are met.
If an order is placed before the risks and rewards are transferred, then the order date is separate from the
transaction date. Since we are normally not interested in the events before transaction date, the order date is
normally irrelevant.
Transfer of risk and rewards (Transaction date)
1. Free on Board (F.O.B.) –

Risks and rewards transfer when goods are delivered over the ship’s rail at the port of shipment;
2. Cost, Insurance and Freight (C.I.F.) –
The seller arranges and pays for the carriage and insurance costs of shipping the goods so some might
think the risks and rewards remain with the seller until the goods reach the destination port. However,
the buyer is the beneficiary of the insurance and the seller has completed their primary duties from the
date that the goods are loaded onto the ship. Therefore, risks and rewards transfer when the goods are
delivered over the ship’s rail at the port of shipment;
3. Delivery at terminal (D.A.T.) –
Risks and rewards transfer when goods are unloaded at the named destination terminal; and
4. Delivered Duty Paid (D.D.P.) –
Risks and rewards transfer when goods arrive at the named destination port or other place and import
clearances have been obtained.
Settlement date
The settlement date is the date on which:
 a foreign creditor is fully or partially paid; or
 full or partial payment is received from a foreign debtor.
8
Ahmed Raza Mir, FCA
Recognition and measurement
Particulars Monetary Items Non-Monetary Items

Initial Recognition Spot rate of Transaction date Spot rate of Transaction date
Subsequent For Balances: - At spot rates Not re measured again for foreign currency
measurement of the reporting date movements, unless subsequent measurement is
affected by changes in FC rates (for e.g.
For Transactions: - At average revaluation in FC and calculating recoverable
rate for the period the amounts in FC)
amount belongs to
Exchange To Profit and Loss Account To the same account in which the gain / loss on
differences the asset is presented (for E.g. to revaluation
surplus if PPE is revalued and to P/L if the
investment property is revalued)
Examples  Trade Receivables  Property Plant and equipment
 Trade Payables  Intangibles
 Invest in Debt Securities  Inventories
 Cash and bank  Investment in equity
 Lease Liability  Biological Assets
 Tax Payable  Share capital
Question 21
Bambu Limited acquired inventory on 1 Jan 2010 worth 12,500 USD. The payment was made on 24 April
2010. The inventory was sold on 16 May 2010 for 20,200 USD. The amount was collected on 20 August
2010. The company prepares financial statements on every quarter end. Exchange rates observed at
different dates are as under:
Date 1 Jan 31 Mar 24 Apr 16 May 30 Jun 20 Aug

Rs / 1 USD 80 82 85 86 88 91
Required
Prepare journals to show how the above transactions should be accounted for under IAS 21.
Question 22
White Cliffs Co. whose yearend is 31 December, buys some goods from Rinke SA of France on 30
September. The invoice value is $40,000 and is due to settlement in equal installments on 30 November
and 31 January. The exchange rate moved as follows:
Date Exchange rate ($/Rs.)

30 September 1.60
30 November 1.80
9
Ahmed Raza Mir, FCA
31 December 1.90
31 January 1.85
Requirement: State the accounting entries in the books of White Cliffs Co.
Question 23
Jamal Limited purchased inventory worth 6,000 USD on 1 Jan 2010. The payment for the purchases was
settled on 28 February 2010. On 31 March (quarter end reporting date) the inventory was tested for
impairment (lower of cost / NRV). Following are the estimates with appropriate assumptions:
1. The inventory will be sold in Pakistan and its estimated NRV is Rs 460,000
2. The Inventory will be sold in US branch of the company and its NRV is 5,400 USD
Exchange rates on:

a. 1 Jan 2010 Rs 80 / USD
b. 28 Feb 2010 Rs 86 / USD
c. 31 Mar 2010 Rs 89 / USD
Required
Journal entries to record all reportable events
Question 24
Sharan Kumar Limited purchased inventory Costing Rs 200,000 on 1 Jul 2010. The payment was made on
31 Aug 2010. On 30 Sept (reporting date). The inventory NRV estimates with appropriate assumptions
are:
1. The Inventory will be sold in US branch of the company and its NRV is 2,800 USD
2. The inventory will be sold in Pakistan and its estimated NRV is Rs 205,000
Exchange rates on
a. 1 Jul 2010 Rs 62.5 / USD
b. 31 Aug 2010 Rs 66 / USD
c. 30 Sept 2010 Rs 70 / USD
Required
Question 25
Jalbani Limited acquired a plant costing 70,000 USD on 1 April 2012 with a useful life of 5 years. The
asset was subjected to an impairment review on 31 December 2013. Following are the results:
1. Asset is used in US and its Recoverable amount is 38,000 USD

2. Asset is used in Pakistan and its recoverable amount is Rs 2.05 million
Exchange rates on
10
Ahmed Raza Mir, FCA
a. 1 Apr 2012 Rs 50 / USD

b. 31 Dec 2012 Rs 57 / USD
c. 31 Dec 2013 Rs 61 / USD
Required
Question 26
Yellow Limited acquired a plant costing Rs 5,000,000 on 1 Jan 2013 with a useful life of 10 years. The
asset was subjected to an impairment review on 31 December 2014. Following are the results:
1. Asset is used in US and its Recoverable amount is 46,000 USD

2. Asset is used in Pakistan and its recoverable amount is Rs 3.8 million
Exchange rates on
a. 1 Jan 2013 Rs 80 / USD
b. 31 Dec 2013 Rs 83 / USD
c. 31 Dec 2014 Rs 90 / USD
Required
IFRIC 22: Foreign Currency Transactions and Advance Considerations
When an entity pays or receive considerations in advance in a foreign currency, it generally recognizes a
non-monetary asset or liability (before the recognition of the related asset, expense or income).
The related asset, expense or income (or part of it) is the amount recognized applying relevant
standards, which results in the derecognition of the non-monetary asset or non-monetary liability
arising from the advance consideration.
In this respect, the exchange rate on the date on which an entity initially recognizes the non-monetary
asset or liability arising from the payment or receipt of advance consideration, would be used for initial
recognition of the related asset, expense or income (or part of it).
If there are multiple payments or receipts in advance, the entity shall use the exchange rate on the date
of each payment or receipt of advance consideration.
11
Ahmed Raza Mir, FCA
Question 27
Escobar Limited is considering to acquire an asset (PPE) with a useful life of 6 years. The consideration
for the asset shall be paid in the following manner:
Pay Date Amount Remarks

1 Jan 2016 25,000 GBP Advance payment for the asset
31 May 2016 140,000 GBP Payment on the delivery of asset
31 July 2016 30,000 GBP 2 months after the receipt of machine
The machine was ready for use a month after the receipt of machine. The following costs were incurred
on the machine in Pakistan after receiving it:
1. Installation cost Rs 560,000
2. Test run Cost – net Rs 120,000
Residual Value of the machine is expected to be Rs 250,000 at the end of its useful life.
Exchange rates observed are as under:

1. 1 Jan 2016 Rs 125 / GBP
2. 31 May 2016 Rs 128 / GBP
3. 30 June 2016 Rs 131 / GBP (Half yearly reporting date)
4. 31 July 2016 Rs 132.5 / GBP
Required
Question 28
DND Limited is a listed company, having its operations within Pakistan. During the year ended December
31, 2016, the company contracted to purchase plants and machineries from a US Company. The terms
and conditions thereof , are given below:
1. Total cost of contract = US$ 100,000.

2. Payment to be made in accordance with the following schedule:
Pay Date Amount Remarks

1 Jul 2016 20,000 USD On contract signing
30 Sept 2016 50,000 USD On Shipment
31 Jan 2017 30,000 USD After test run and Installation
Risk and rewards of ownership are transferred on shipment. The contract went through in accordance
with the schedule and the company made all the payments on time. The following exchange rates are
available:
12
Ahmed Raza Mir, FCA
1. 1 July 2016 Rs 60.5 / USD

2. 30 Sept 2016 Rs 61.0 / USD
3. 31 Dec 2016 Rs 61.2 / USD
4. 31 Jan 2017 Rs 61.5 / USD
Required
Prepare journals to show how the above contract should be accounted for under IAS 21.
Question 29 – Summer 2018 Q3 (i)

Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements
for the year ended 31 December 2017.
KL purchased an investment property in United States for USD 2.6 million. 10% advance
payment was made on 1 May 2017 and 70% payment was made on 1 July 2017 on
transfer of title and possession of the property. The remaining amount was paid on 1
August 2017.
On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for
one year and received full amount in advance on the same date.
KL uses fair value model for its investment property. On 31 December 2017, an
independent valuer determined that fair value of the property was USD 2.5 million.
Following spot exchange rates are available:

Date 1 May 17 1 Jul 17 1 Aug 17 1 Sept 17 31 Dec 17
Rs / 1 USD 100 105 108 110 116
Following average exchange rates are also available:

Period 2017 Jul to Dec 17 Sep to Dec 17
Rs / 1 USD 105 111 113
Required
Prepare Journal Entries and the extracts relevant to the above transaction from KL’s
statements of financial position and comprehensive income for the year ended 31
December 2017, in accordance with the IFRSs.
13
Ahmed Raza Mir, FCA
Question 30
Orlando is an entity whose functional currency is the US dollar. It prepares its financial statements to 30
June each year. The following transactions take place on 21 May Year 4 when the spot exchange rate
was $1 = €0.8.
1. Goods were sold to Koln, a customer in Germany, for €96,000.

2. A specialized piece of machinery was bought from Frankfurt, a German supplier. The invoice for
the machinery is for €1,000,000.
3. The company receives €96,000 from Koln on 12 June Year 4.
4. At 30 June Year 4 it still owns the machinery purchased from Frankfurt. No depreciation has
been charged on the asset for the current period to 30 June Year 4. Useful life of the PPE is 5
years. Depreciation is charged for the full month of purchases.
5. The liability for the machine is settled on 31 July Year 4.
Relevant $/€ exchange rates are:
12 June Year 4 $1 = €0.9

30 June Year 4 $1 = €0.7
31 July Year 4 $1 = €0.8
Required
Show the effect on profit or loss of these transactions for:
(a) the year to 30 June Year 4
(b) the year to 30 June Year 5
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Ahmed Raza Mir, FCA
Foreign Loans
Another possible transaction in FC is the granting of loans to foreign entities or the receipt of a loan (in a
foreign currency) from a foreign lender.
Interest receivable (on loans made) or interest payable (on loans received) must be calculated based on
the outstanding foreign currency amount and then translated into the local currency at the average rate
over the period that the interest was earned or incurred.
Steps
The easiest way to do this correctly is:
 calculate the loan amortization table in the foreign currency;
 journalize all receipts and payments at the spot rate;
 journalize the interest at the average rate; and
 calculate the value of the balance payable / receivable at spot rate at year end, and
 recognizing the difference between this value and the carrying amount of the loan as a foreign
exchange gain or loss.
Question 31
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Ahmed Raza Mir, FCA
Question 32
Revalued Assets
When a gain or loss on a non-monetary item is recognized in other comprehensive income, any
exchange component of that gain or loss shall be recognized in other comprehensive income. For
example: IAS 16 requires gains and losses arising on a revaluation of property, plant and equipment to
be recognized in other comprehensive income.
When such an asset is measured in a foreign currency, IAS 21 requires the revalued amount to be
translated at the date the value is determined.
Conversely, when a gain or loss is recognized in profit or loss, any exchange component of that gain or
loss shall be recognized in profit or loss. For example: IAS 40 requires fair value adjustments on
investment property carried under the fair value model to be recognized in profit or loss. When such an
asset is measured in a foreign currency, IAS 21 requires the revalued amount to be translated at the
date the value is determined.
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Ahmed Raza Mir, FCA
Question 33
Entity A, having British pounds as its functional currency, acquired a piece of land was acquired
on 1 June 20X4 in Mauritania (local currency Mauritania Lira).
Entity’s A management follows the revaluation model in IAS 16 and measures its land and build
ings at revalued amounts (based on periodic valuations as necessary but not less
frequent than every three years).
It has been revalued on 31 December 20X4 and 31 December 20X5 respectively as follows.
Mauritania Lira Date Exchange rate

Cost at acquisition 200,000 1 June 20X4 Lira 1 = £ 1.30
Fair Value 250,000 31 December 20X4 Lira 1 = £ 1.00
Fair value 260,000 31 December 20X5 Lira 1 = £ 1.20
Required: journalize the above.
Question 34
Poland Limited acquired 2,000 shares of BCL (US based company) for 8 USD per share on 1 Jan
2010. The company classified the investments as “At fair value through OCI”. Market value per
share increased to 10.5 USD per share on 30 June 2010 and 12.25 USD per share on 31
December 2010.
Exchange rates observed:

1. 1 Jan 2010 Rs 80 per USD
2. 30 Jun 2010 Rs 84 per USD
3. 31 Dec 2010 Rs 92 per USD
Required
Journal entries.
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Ahmed Raza Mir, FCA
Question 35
Foreign Currency Investments
Question 36
On 1 January 20X5, an entity whose functional currency is the pound sterling purchased a US
dollar denominated equity instrument at its fair value of $500,000. The entity classifies the
instrument as FVOCI. The exchange rate at acquisition date was $1.90/£. The exchange rate and
the fair value of the instrument denominated in US dollar at different reporting dates are given
below.
Exchange Rate($/£) Equity Instrument

Value($)
31 December 20X5 1.80 480,000
31 December 20X6 1.60 450,000
Requirement:
What is the fair value of as at 1 January 20X5, 31 December 20X5 and 31 December 20X6?
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Ahmed Raza Mir, FCA
Question 37
Entity A, whose functional currency is the pound sterling, acquired on 30 September 20X4 a
dollar-denominated financial instruments. (Entity A’s accounting year end is 31 December).
a) Listed equity instruments for $10 million, classified as FVOCI.

At 31 December 20X4, the fair value of the listed investment has increased to $14.4 million.
Exchange rates are as follows:
 30 September 20X4 $1: £1
 31 December 20X4 $1.20: £ 1
Required:
Journalize the above.
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Ahmed Raza Mir, FCA
Trade and Settlement Date Accounting
Question 38 [trade and settlement date accounting – purchase)

Madrid Limited acquired shares in IBM Limited (denominated in USD). The company prepares its
financial statements in Rs. Details of Investment and its fair value from transaction date to settlement
date is as under:
Fair Value (USD) Rs per USD

Trade Date 25,000 95
Reposting date 26,500 104
Settlement date 27,200 106
Required
Journalize the acquisition of the above transactions using
1. Trade Date Accounting
2. Settlement Date Accounting
Question 39 [trade and settlement date accounting]

Khan Limited Acquired 400 shares of R. Orton Limited at a total cost of 40,000 USD on 14 Feb 2016. The
company reports to shareholders at the end of every quarter. Financial statements are denominated in
Rs. Rs to USD parity at the acquisition date was Rs 60 / USD.
Khan Limited disposed of the investment at 28 March 2016 at a price of 42,000 USD. Details of fair
values and Rs to USD parity during the trade date and settlement date is as under:
Fair Value (USD) Rs per USD

Trade Date (28 March) 42,000 70
Reposting date (31 March) 43,500 75
Settlement date (2 April) 45,000 78
Required
Journalize the acquisition and disposal of the above transactions using

An entity entered into a contractual commitment on 27 December 2004 to purchase a financial asset for
Rs 1,000. On 31 December 2004, the entity’s reporting date, the fair value was Rs 1,005. The transaction
was settled on 5 January 2005 when the fair value was Rs 1,007. The entity has classified the asset as at
fair value through profit or loss.
Requirement
How should the transactions be accounted for under trade date accounting and settlement date
accounting?
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Ahmed Raza Mir, FCA
Question 41 [trade and settlement date accounting – sale)

An entity acquired an asset on 1 January 2004 for Rs 1,000. On 27 December 20X4, it entered into a
contract to sell the asset for Rs 1,100. On 31 December 2004, the entity’s reporting date, the fair value
of the asset was Rs 1,104. The transaction was settled on 5 January 20X5. The entity classified the asset
as at Fair Value through OCI.
Required
How should the transactions be accounted for under trade date accounting and settlement date
accounting?

Winter 2011 Q2 (16marks)
Global Investment Limited (GIL) is listed in Pakistan. During the year ended 30 September 2011, GIL
entered into the following contracts with a UAE based company:
1. On 28 September 2011 GIL committed to buy certain financial assets on 3 October 2011 for AED
20,000. The fair value of these assets on balance sheet date and settlement date was AED 21,000
and AED 21,500 respectively.
2. On 29 September 2011 GIL agreed to sell certain financial assets on 4 October 2011 having a
carrying value of AED 34,000 (Rs. 809,200) for AED 35,000. The fair value of these assets on the
balance sheet date and settlement date was AED 35,200 and AED 34,800 respectively.
The above types of financial assets are classified by GIL as held for trading. Exchange rates on the
relevant dates were as under:
Date 1 AED = Rs
28 September 2011 24.00
29 September 2011 23.00
30 September 2011 23.50
03 October 2011 25.00
04 October 2011 26.00
Required:
Prepare accounting entries to record the above transactions on the relevant dates in accordance with
International Financial Reporting Standards, using:
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Ahmed Raza Mir, FCA
Question 43 [Foreign Currency transactions]

Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired 20,000 ordinary
shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based company at a cost of AED 240,000
which was equivalent to Rs. 6,000,000. The face value of the shares is AED 10 each. OL intends to hold
the shares to avail benefits of regular dividends and capital gains.
On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares in HL in exchange for
every four shares held in AWL.
Other relevant information is as under:
AWL HL
Final Dividend received on 31 March 2013
Cash 15% -
Bonus 10% -
Final Cash Dividend received on 10 April 2014 - 20%
Fair Value per share as at
31 December 2012 13.00 AED -
1 June 2013 14.00 AED 18.00 AED
31 December 2013 - 19.50 AED
Exchange rates on various dates were as follows:
31 Dec 2012 31 Mar 2013 1 June 2013 31 Dec 2013 10 Apr 2014
1 AED Rs 25.00 Rs 26.50 Rs 28.00 Rs 28.70 Rs 28.20
Required:
Determine the amounts (duly classified under appropriate heads) that would be included in OL’s
statement of comprehensive income for the year ended 31 December 2013 in respect of the above
investment.
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Ahmed Raza Mir, FCA
Convertible Bonds
Question 44 [convertible at the option of investor]
Bond proceeds (face Value) Rs 500,000
Market rate 15%
Coupon rate 10%
Term (years) 3
Convertible into 25 ordinary shares at maturity
Required
Accounting for three years
Question 45 [convertible at the option of investor]

An entity issues 2,000 convertible bonds at the start of the year 1. The bonds have a three-year term,
and are issued at par with a face value of Rs 1,000 per bond, giving total proceeds of Rs 2,000,000.
Interest is payable annually in arrears at nominal annual interest rate at 6%. Each bond is convertible at
any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market
interest rate for similar debt without conversion options is 9%.
Required
Accounting for three years
Question 46 [compulsorily convertible bonds]

Proceeds from bond 7,500,000
Market rate 25%
Coupon rate 20%
Term (years) 3
Compulsory conversion into 50,000 shares at the end of the term.
Required
Accounting for three years.
Question 47 [transaction cost on issuance of convertible bonds]

Proceeds from bond 680,000
Transaction cost 20,400
Market rate 15%
Coupon rate 10%
Term (years) 3
(IRR hint 16.297%)
Required
Accounting for three years.
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Ahmed Raza Mir, FCA
Question 48 [issue cost on convertible bonds]

On 1 July 2011, 2 million convertible debentures of Rs 100 each were issued. Each debenture is
convertible into 25 ordinary shares of Rs 10 each on 30 June 2014. Interest is payable annually in arrears
@ 8% per annum. On the date of issue, market interest rate for similar debt without conversion option
was 11% per annum. However, on account of expenditure of Rs 4 million, incurred on issuance of
shares, the effective interest rate increased to 11.81%.
Required
Accounting for 2011 and 2012 years
Question 49 [issue cost on convertible bonds]

Aron issued one million convertible bonds on 1 June 2006. The bonds had a term of 3 years and were
issued with a total fair value of Rs.100 million which is also the par value. Interest is paid annually in
arrears at a rate of 6% per annum and bonds, without the conversion option, attracted an interest rate
of 9% per annum on 1 June 2006. The incurred issue cost of Rs 1 million. If the investor did not convert
to shares they would have been redeemed at par. At maturity all of the bonds were converted into 25
million ordinary shares of Rs 1 of Aron. No bonds could be converted before the date. The directors are
uncertain how the bonds should have been accounted for up to the date of the conversion on 31 May
2009 and have been told that the impact of the issue costs is to increase the effective interest rate to
9.388%.
Required
Accounting for the reportable events.
Question 50 [Deferred tax on convertible bonds]

On April 1, 2010 the company had issued 0.5 million 12% Term finance certificates (TFCs) of Rs. 100
each. The principal amount of Rs. 50 million is included in Non-current liabilities. Interest is payable
annually in arrears. On the date of issue, the prevailing interest rate for similar debts without conversion
option was 14% per annum. TFCs would mature on March 31, 2014 but are convertible into 8 ordinary
shares of Rs. 10 each, at the option of the certificate holders, at any time prior to maturity. Interest was
paid on March 31, 2011 and charged to finance cost.
Tax rate 35%
Required
Accounting for first 2 years.
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Ahmed Raza Mir, FCA
Question 51 [Repurchase of convertible bonds]

On 1 January 2000, Entity A issued 10% convertible debentures with a face value of Rs 1,000 maturing
on 31 December 2009. The debenture is convertible into ordinary shares of Entity A at a conversion
price of Rs 25 per share. Interest is payable half-yearly in cash. At the date of issue, Entity A could have
issued non-convertible debt with a ten-year term bearing a coupon interest rate of 11%.
On 1 January 2005, the convertible debenture has a fair value of Rs. 1,700.
Entity A makes a tender offer to the holder of the debenture to repurchase the debenture for Rs. 1,700,
which the holder accepts. At the date of repurchase, Entity A could have issued non-convertible debt
with a five-year term bearing a coupon interest rate of 8%.
Required
Accounting for repurchase.
Question 52 [repurchase of convertible bonds]

The bonds have a three-year term, and are issued at par with a face value of Rs. 1000 per bond, giving
total proceeds of Rs. 2,000,000. Interest is payable annually in arrears at a nominal annual interest rate
of 6%. This interest rate is market-related for similar for similar convertible instruments. Each bond is
convertible at the choice of the holder (i.e. noncompulsory) at any time up to maturity into 250 ordinary
shares. When the bonds are issued, the prevailing market interest rate for similar debt without
conversion options is 9% per annum.
Assume that the bonds are convertible into ordinary shares of the entity at the option of the holder. At
the start of year 2, the entity makes an offer to the holder to repurchase the bonds as its fair value of Rs.
2.2 million. At the date of repurchase the entity could have issued non-convertible debt with a two-year
term bearing interest at 7%.
Required
Accounting for repurchase.
Question 53 [Early conversion of convertible bonds]

The facts and figures are same as Q52
Additional data
At the start of year 2, in order to induce the bondholders to convert the bonds promptly, the entity
offers the bondholders 280 ordinary shares per bond. The fair value of the entity’s shares on this date is
Rs 255 per share.
Required
Accounting for the reportable event.
Question 54 [Early conversion of convertible bonds]

On 1 January 2000, Entity A issued 10% convertible debentures with a face value of Rs. 1,000 with the
same terms as described in Q51. On 1 January 2001, to induce the holder to convert the convertible
debenture promptly, Entity A reduces the conversion price to Rs 20 if the debenture is converted before
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Ahmed Raza Mir, FCA
1 March 2001 (i.e. within 60 days). Assume the market price of Entity A’s ordinary shares on the date the
terms are amended is Rs 40 per share.
Required
Accounting for the reportable events.
Question 55 [Repurchase of convertible bonds]

An entity issues a face value CU1,000 note which has a maturity date of four years from date of issue.
The note pays a 10% annual coupon and, on maturity, the holder has an option either to receive cash of
CU1,000 or 10,000 of the issuer’s shares. Market interest rate for a loan note without a conversion
feature would have been 12% at the date of issue. At the end of Year 2, the issuer offers the holder to
get its note redeemed for CU 1,100 which the holder accepts. The market interest rate for a note
without conversion feature at the end of year 2 is 9%.
Required
Question 56 [Early conversion of Convertible Bonds]

An entity issues a face value Rs 10,000 note which has a maturity date of four years from date of issue.
The note pays a 10% annual coupon and, on maturity, the holder has an option either to receive cash of
Rs 10,000 or 1,000 of the issuer’s shares at a par value of Rs 10 per share. Market interest rate for a loan
note without a conversion feature would have been 12% at the date of issue.
At the end of Year 2, the entity is struggling to pay interest and will not be able to redeem note for cash
so it offers an additional 50 shares to the holder to encourage early conversion which the holder
accepts.
At the time of the offer of the early conversion the share price is Rs 25 per share.
Required
Question 57 [Partial repurchase and transaction cost on redemption of convertible bonds]

ABC Limited issued convertible bonds with the following credentials on 1 January 2015:
Face and Fair value of the bonds at inception Rs 2,000,000 (20,000 bonds)
Coupon rate 12%
Market Rate 15%
Term 5 years
50% of the principal will be redeemed in year 4 and 50% in year 5.
At the end of 1st year the company offered 40% bond holders to get their bonds redeemed at a premium
of Rs 12 per bond. Transaction cost on redemption was Rs 2 per bond.
Market rate at the end of 1st year is 14%
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Ahmed Raza Mir, FCA
Required
Journalize the repurchase of the bond
Question 58 [Partial repurchase and transaction cost on redemption of convertible bonds]

Winter 2017 Q4 (12)
Lahore Steel Limited (LSL) issued 1 million six-year debentures on 1 January 2015 at par value of Rs. 100
each at a fixed rate of 6% per annum. Interest payable at the end of each year whereas the principal is
to be repaid in two equal instalments at the end of 2019 and 2020.
Debentures were issued with an option to convert 10 debentures into 4 ordinary shares of LSL till the
date of first principal redemption. The liability was not designated as measured at fair value through
profit or loss on initial recognition.
The market interest rate for non-convertible debentures issued by entities having similar credit risk and
loan tenor is 1-Year KIBOR + 2% per annum. On 1 January 2016 LSL repurchased 100,000 debentures at a
premium of Rs. 5 per debenture. Transaction cost of Rs. 2 per debenture was incurred on this
redemption. The market interest rates and market values of LSL’s shares are given below:
Date 1-year Kibor MV per share

1 January 2015 5% Rs 200
1 January 2016 6% Rs 250
Required:
Prepare journal entries in the books of LSL for the year ended 31 December 2016.
Question 59 (fixed number of shares)
Summer 2011 Q2(i) (6marks)
Required:
Prepare Journal entries for the year ended 31 March 2011.
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Ahmed Raza Mir, FCA
Question 60 – Winter 2012 Q2(b)
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Ahmed Raza Mir, FCA
Modification of Financial Liabilities

If a new loan is agreed between a borrower and a lender, or the two parties agree revised terms for an
existing loan, the accounting depends on whether:
1. the original liability should be derecognized and a new liability recognized, or

2. whether the original liability should be treated as modified.
1. NEW liability (Extinguishment Accounting)
New liability should be recognized if the new terms are substantially different from the old terms. The
terms are substantially different if the present value of the cash flows under the new terms, including
any fees payable/receivable, discounted at the original effective interest rate, is 10% or more different
from the present value of the remaining cash flows under the original terms. There is said to be an
‘extinguishment’ of the old liability.
Accounting Steps
1. Find the fair value of the new Liability using current market rate at the date of modification of
terms.
2. Show the outflow / inflow of any fee paid and received as an adjustment to old liability
3. Derecognize the old liability and book the new one.
4. Book income / loss on extinguishment as:
“Old Liability – new Liability at FV
2. Adjustment to Liability (Modification Accounting)
An adjustment should be made in the internal rate of return only the new terms are not substantially
different from the old terms (the 10% threshold). There is said to be a ‘Modification’ of the old liability.
Accounting Steps
1. Adjust the balance of liability by the amount of fee paid (less) or received (add)
2. Find the revised present value of cash flows using old internal rate or return.
3. Recognize gain / loss as the difference between Carrying amount and PV of revised CFs at
original rate of return
Question 61
Zamin Limited is facing severe financial crises and in dire need of operating liquidity in order to operate
the least. The company issued some loan notes a few years back to Mujahid Limited. Terms of the loan
notes are as under:
Carrying amount of loan Rs 2 Million
Coupon rate 15%
Internal rate of return 15%
Tenure left 5 years
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Ahmed Raza Mir, FCA
The loan was rescheduled on the following terms after successful negotiations:
A fee of Rs 100,000 is to be paid by the borrower for the revision of the terms. The borrower would not
pay any interest during the next 5 years and will pay a lump sum amount of RS 3.5 million at the end of 5
years (end of loan term).
Required
 Journalize all the transactions of modification
 Prepare a schedule showing the interest expense to be booked in future in accordance with the
revised schedule.
Question 62
All the facts and figures above are same except:
The borrower would not pay any interest during the next 5 years and will pay a lump sum amount of RS
2.9 million at the end of 5 years (end of loan term). The market interest rates are 12% p.a. on the date of
modification
Required
1. Journalize all the transactions of modification
2. Prepare a schedule showing the interest expense to be booked in future in accordance with the
revised schedule.
Question 63
Loan Issued Rs 600,000
Issue cost incurred Rs 25,000
Market rate at the issuance date 14.5%
Term of the loan 6 years
Internal rate of return 15.61941%
After two years:

Term left 4 years
Rate 8% / 4%
Redemption Value Rs 750,000 / 700,000
Market rate 16%
Fee paid Rs 40,000
Question 64
ABC Limited has a loan note issued a few years back and is due for redemption in 4 years’ time. Coupon
rate and IRR of the loan is 10%. Face value and carrying amount of the loan is 1,000
The lender of the loan has approached the company to modify the loan as under:
1. Term of the loan is to be increased by 1 year
2. Coupon rate is to be reduced to 8%
3. Rs 50 to be paid by the lender to ABC for restructuring
Market interest rate at the date of modification was 12%.
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Ahmed Raza Mir, FCA
Required
Journalize the above transactions
Question 65
Jamali Limited issued a bond with the following credentials.
Face Value Rs 2,000,000

Coupon rate 12%
Effective rate 15.95035%
At the end of the first year of loan tenure, the found itself in some financial difficulty and initiated a
negotiation with the bond holders to modify the terms of the loan. A fee of Rs 50,000 is to be paid by
the borrower for the revision of the terms. The borrower would not pay any interest during the next 3
years and will a lump sum amount due at the end of the term. Market rate at the date of modification is
observed to be 14%.
Required
Journal entries for the modification
Question 66
ABC Limited issued 900 bonds of face value of Rs 1,000 on Jan 1, 2012. The company incurred issue costs
of Rs 50,000. The term of the loan was 5 years and the market rate and coupon rate were 16%. The IRR
of the loan is 17.76718%.
2 years later the company renegotiated with the lenders and agreed over the following terms:
Particulars Case 1 Case 2

New coupon rate 8% 4%
Redemption Value Rs 1,080,000 1,020,000
Fee paid 10,000 40,000
Market rate at the end of 2nd year was 14%.
Required
Journal entries for the modification for both cases
Question 67
Muskaan Limited issued 13.2% Bonds having a face value of Rs 13.5 million on 1 Jan 2011. The bonds will
mature in 6 years’ time at a total redemption price of Rs 16.2 million. Effective rate of the bonds was
determined to be 15.45845%.
On 1 Jan 2012 the entered into a negotiation to extinguish partial liability and restructure the remaining
loan. Details are as under:
1. Extinguishment of Loan
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Ahmed Raza Mir, FCA
Liability to be extinguished 55% of the liability

Issuance of shares to extinguish liability Rs 8.5 million
2. Modification of loan
Part of the loan to be modified 45% of the liability
Fair Value of Shares issued as a fee for restructuring Rs 0.5 million
The company will not pay any interest for the remainder of the term and only a sum of Rs 12.6 million
will be paid at the end of the term. Market rate pertaining to the borrower at the date of modification is
15%.
Required
Journalize modification of the loan
Question 68
Details of a bond issued by Salim Hussain Limited are as under:
Face Value of the bond Rs 25 million

Coupon rate 12% per anum
Redemption price Rs 30 Million
Date of issue 1 January 2001
Effective rate of interest 13.08150%
On 1 January 2006 the company entered into a negotiation to payoff partial loan through issuing shares
of the company and modify the remaining part of the loan.
The company and the lender agreed on the following terms:

1. Extinguishment of Loan
Liability to be extinguished 60% of the liability
Issuance of shares to extinguish liability Rs 16.6 million
2. Modification of loan
Part of the loan to be modified 40% of the liability
Fair Value of Shares issued as a fee for restructuring Rs 0.4 million
The company will not pay any interest for the remainder of the term and only a sum of Rs 24 million will
be paid at the end of the term. Market rate pertaining to the borrower at the date of modification is
13%.
Required
Journalize modification of the loan
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Ahmed Raza Mir, FCA
Question 69 – Summer 2009 Q2 (11)

During the year ended December 31, 2008, a Pakistani Sugar Company (PSC) was facing severe problems
in meeting its foreign currency obligations especially in view of the steep increase in the foreign
exchange rates. In October 2008, PSC commenced negotiations with the foreign lenders for
restructuring of loans.
Following is a summary of the foreign exchange liabilities of the company as of December 31, 2008 prior
to making adjustments on restructuring:
Lenders
SBD JICA AFI
Loan Amount (USDs) 350,000 500,000 270,000
Remaining installments including due on 31 Dec 2008 5 4 3
Interest rate 2.5% 3.00% 2.00%
The loans are repayable in equal annual installments. All the above liabilities are appearing in PSC’s
books at the exchange rate of US$ 1 = Rs. 65 which was the rate at the beginning of the year. The
exchange rate as at the end of the year is US$ 1 = Rs. 80.
Agreements with SBD and AFI were finalized and signed before year-end, however, the agreement with
JICA was finalized in January 2009 but before finalization of the financial statements. Following is the
information in respect of rescheduling agreements.
Lenders
SBD JICA AFI
Revised PV of CF using original rate (USDs) 390,000 535,000 250,000
Revised PV of CF using market rate (USDs) 400,000 510,000 220,000
First installment due on 31 Dec 10 31 Dec 11 31 Dec 12
Required:
1. Prepare accounting entries in the books of PSC to record the
a. effect of exchange differences
b. effect of rescheduling, if any.
2. In respect of each of the above loans, identify the amounts to be reported as current portion of the
loan in the financial statements, as at December 31, 2008.
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Ahmed Raza Mir, FCA
Question 70 – Modification of Financial Asset – Winter 2009 Q6

Arif Industries Limited (AIL) owns and operates a textile mill with spinning and weaving units. Due to
recurring losses, AIL disposed of the weaving unit for an amount of Rs. 100 million on July 1, 2007 and
invested the proceeds in Pakistan Investment Bonds (PIBs).
Details of investment in PIBs are as follows:
1. The PIBs were purchased through a commercial bank at face value. The bank initially charged
premium and investment handling charges of Rs. 4,641,483. At the time of purchase, AIL had
envisaged to liquidate the investment after four years and utilize the realized amount for expansion
of its spinning business. The bank had agreed to repurchase the PIBs on June 30, 2011, at their face
value.
2. The markup on PIBs is 15% for the initial two years and 20% for the remaining three years. The
effective yield on investment at the time of purchase was 15.50%. However, due to economic
turmoil in the European and American markets, the existing spinning unit is working below its rated
capacity. Therefore, on June 30, 2009 AIL decided to defer the expansion plan by one year. The bank
agreed to extend the holding period accordingly but reduced the repurchase price by 2%.
Required
Compute the amount of interest income (including the effect of revision of holding period, if any) to be
recognized in the financial years ended(ing) 2009, 2010, 2011 and 2012.
Question 71 – Summer 2012 Q4 (ii)
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Ahmed Raza Mir, FCA
IMPAIRMENT of FINANCIAL ASSETS

Summary in comparison
Under IFRS 9 recognition of impairment no longer depending on a reporting entity reporting first
identifying a credit loss event. This is a major change from the previous Standard, IAS 39.
IFRS 9 instead uses more forward-looking information to recognize expected credit losses for all debt-
type financial assets that are not measured at fair value through profit or loss.
Approaches to Impairment
There are two approaches to impairment
 Simplified Approach
 General / detailed approach
12 month Expected Credit Losses

The portion of lifetime expected credit losses that represent the expected credit losses that result from
default events on a financial instrument that are possible within the 12 months after the reporting
date
Impairment Requirement
1. At initial recognition
Expected 12 months’ credit losses are recognized unless the asset is credit impaired
2. Subsequent measurement and adjustments

The expected credit loss associated with the financial asset is then reviewed at each subsequent
reporting date.
The amount of expected credit loss recognized as a loss allowance depends on the extent of credit
deterioration since initial recognition.
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Ahmed Raza Mir, FCA
i. No significant deterioration
If there is no significant increase in credit risk the loss allowance for that asset is re-measured to the
12-month expected credit loss as at that date.
ii. Significant deterioration

If there is a significant increase in credit risk the loss allowance for that asset is re-measured to the
lifetime expected credit losses as at that date. This does not mean that the financial asset is
impaired.
He entity still hopes to collect amounts due but the possibility of a loss event has increased
iii. Credit Impairment

If there is credit impairment, the financial asset is written down to its estimated recoverable
amount. The entity accepts that not all contractual cash flows will be collected and the asset is
impaired.
Summary
Assets covered under impairment model
Asset Class Impairment Simplified General
testing method Method
1 Account Receivable – Significant F.C. Yes Optional Optional
2 Account Receivable - Insignificant F.C. Yes Compulsory N/A
3 Contract Assets - Significant F.C. Yes Optional Optional

4 Contract Assets - Insignificant F.C. Yes Compulsory N/A
5 Lease Receivables Yes Optional Optional
6 Financial Assets carried at Amortized Cost Yes N/A Compulsory
7 F.A at FV through OCI – Equity No N/A N/A

8 F.A at FV through OCI – Debt Yes N/A Compulsory
9 F.A at FV through P/L – Equity No N/A N/A

10 F.A at FV through P/L – Debt No N/A N/A
Loss allowance for financial assets carried at amortized cost.
 Movement on the loss allowance is recognized in profit or loss.

 The loss allowance balance is netted against the financial asset to which it relates on the face of
the statement of financial position.
 The netting this is just for presentation only; the loss allowance does not reduce the carrying
amount of the financial asset.
 Interest is charged on face and not on net amount
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Ahmed Raza Mir, FCA
Journal Entries for the recognition of Impairment Loss
Question 72
1 January 20X1
X Limited has purchased a bond for Rs. 1,000,000. The bond pays interest at 5% and is to be redeemed
at par in 5 years’ time. 12 month expected credit loss = Rs. 25,000.
31 December 20X1
Interest is collected at its due date. There is no significant change in credit risk. 12 month expected
credit loss = Rs. 30,000.
Required
Show the double entries on initial recognition and at 31 December necessary to account for the bond
and the loss allowance
Loss allowance for financial assets at fair value through OCI

 Movement on the loss allowance is recognized in profit or loss.
 The loss allowance balance is not netted against the financial asset to which it relates as this is
carried at fair value.
 The loss allowance is recognized in other comprehensive income.
Question 73
1 January 20X1
X Limited has purchased a bond for Rs. 1,000,000.
The bond pays interest at 5% and is to be redeemed at par in 5 years’ time. 12 month expected credit
loss = Rs. 25,000. X limited often holds bonds until the redemption date, but will sell prior to maturity if
investments with higher returns become available.
31 December 20X1
Interest is collected at its due date. There is no significant change in credit risk. The fair value of the
bond is Rs. 940,000. 12 month expected credit loss = Rs. 30,000.
Required
Show the double entries on initial recognition and at 31 December necessary to account for the bond
and the loss allowance.
Credit Impairment
Discount the cash shortfalls at original effective rate
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Ahmed Raza Mir, FCA
Question 74
Company X invests in a bond. The bond has an issue value of Rs. 1 million and pays a coupon rate of 5%
interest for two years, then 7% interest for two years (this known as a stepped bond).
Interest is paid annually on the anniversary of the bond issue. The bond will be redeemed at par after
four years. The effective rate for this bond is 5.942%.
At the end of the second year it becomes apparent that the issuer has financial difficulties and it is
estimated that Company X will only receive 60 paisa in the rupee of the future cash flows.
Required
Journalize all reportable events
Application of a full model
Question 75
A Company has acquired a bond with a coupon rate of 5% at Par. Face value of the bond is Rs 1,000. The
chances of survival at every year end along with LGD estimates and at the initial recognition is as under:
Year CSP LGD Exposure
1 99.17% 60% Rs 1,050
2 98.02% 60% Rs 1,050
3 96.56% 60% Rs 1,050
4 94.81% 60% Rs 1,050
5 92.77% 60% Rs 1,050
Assuming the asset is not credit impaired at the inception and eligible for the recognition of 12-month
credit losses.
Required
Calculate the 12-month credit losses and journalise the above transaction
Question 76
Same question above. 1-year latter the chances of default at every year end along with LGD estimates
are as under:
Year CSP LGD Exposure
1 98.02% 60% Rs 1,050
2 95.76% 60% Rs 1,050
3 93.24% 60% Rs 1,050
4 90.48% 60% Rs 1,050
Assuming the credit risk did not increase significantly.
Required
Journalise the above change
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Ahmed Raza Mir, FCA
Question 77
Same question above. Now assume that the credit risk is considered to have increased significantly.
Required
Journalise the above change.
Question 78
X Limited has total trade receivables of Rs. 20,000,000. The trade receivables do not have a significant
financing component. The loss allowance recognized at the end of the previous year was Rs. 50,000.
X Limited has constructed the following provision matrix to calculate expected lifetime losses of trade
receivables:
Past Due Default Rate % of Receivables

Now 0.3% 60%
Upto 30 days 1.6% 25%
From 31 to 60 Days 3.6% 5%
61 to 90 Days 6.6% 8%
More than 90 days 10.60% 2%
Required:
Calculate the lifetime expected credit loss, show the necessary double entry to record the loss and state
the amounts to be recognized in the statement of financial position.
Question 79
JKLM Limited has total trade receivables that do not have a significant financing component. X Limited
has constructed the following provision matrix to calculate expected lifetime losses of trade receivables:
Past Due Default Rate Gross CA (Rs Million)
Now 0.5% 10.1
Upto 30 days 1.5% 4.3
From 31 to 60 Days 6.1 % 1.6
More than 60 days 16.5% 1.0
The loss allowance recognized at the end of the previous year was Rs. 0.2.
Required:
Calculate the lifetime expected credit loss, show the necessary
double entry to record the loss and state the amounts to be recognized in the statement of financial
position.
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Ahmed Raza Mir, FCA
Question 80 – Summer 2014 Q3(b)

On 1 January 2013, Elegant Generators Limited (EGL) sold a heavy-duty generator to Rivera Limited (RL)
for Rs. 6,000,000 on the following terms and conditions.
1. 10% of sales price was paid on delivery of the generator.

2. Remaining amount was payable on 31 December 2013. Interest charge on the amount unpaid was
agreed at 6% per annum.
3. The market interest rate is 12% per annum.
In December 2013, RL conveyed its inability to pay the amount due on 31 December 2013 and requested
EGL to recover the amount in installments. After negotiations, EGL agreed to receive four half yearly
installments of Rs. 1,600,000 each, commencing from 30 June 2014.
Required:
Compute the impact of the above transactions on various items forming part of profit and loss account
and statement of financial position of AAL and EGL, for the year ended 31 December 2013 in accordance
with International Financial Reporting Standards. (Notes to the financial statements are not required)
Question 81 – Winter 2016 Q4(b)

On 1 July 2013, XYZ purchased 1 million five year bonds issued by Ali Manufactures Limited (AML) at a
premium of Rs. 5 per bond with the intention to hold them till maturity i.e. 30 June 2018. The bonds will
be redeemed at their face value i.e. Rs. 100 per bond. The transaction costs associated with the
acquisition of the bonds were Rs. 1.5 million. The coupon interest rate is 6% per annum while the
effective interest yield at the time of purchase was 4.5186%.
Due to certain financial and liquidity issues, AML restructured the payment plan with effect from 30
June 2016, after due consultation with bondholders. Under the revised plan the maturity date was
extended by one year. Further, the coupon rate was increased to 6.25% for 2017 and 2018 and 6.5% for
2019.
The management of XYZ is of the view that due to restructuring the credit risk on the loan has increased
significantly. As a result, it estimates lifetime expected credit losses of Rs. 5 million on the investment.
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.
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Question 82 – Summer 2013 Q5

On 1 January 2009 Qasmi Investment Limited (QIL) purchased 1 million 12% Term Finance Certificates
(TFCs) issued by Taj Super Stores (TSS), which operates a chain of five Super Stores. The terms of the
issue are as under:
 The TFCs have a face value of Rs. 100 each and were issued at a discount of 5%. These are
redeemable at a premium of 20% after five years.
 Interest on the TFCs is payable annually in arrears on 31 December each year.
Effective interest rate calculated on the above basis is 16.426% per annum. Due to a property dispute,
TSS had to temporarily discontinue operations of two stores in 2010. Consequently, TSS was unable to
pay interest due on 31 December 2010 and 31 December 2011.
At the time of finalization of accounts for the year ended 31 December 2010, QIL was quite hopeful of
recovery of the interest and therefore, no impairment was recorded. However, in 2011, after a thorough
review of the whole situation, QIL’s management concluded that it would be able to recover the face
value of the TFCs along with the premium on the due date i.e. 31 December 2013, but the interest for
the years 2010 to 2013 would not be received.
Accordingly, QIL recorded impairment in the value of the TFCs on 31 December 2011. In 2012, TSS
reached an out of court settlement of the property dispute and the stores became operational.
Subsequently, QIL and TSS agreed upon a revised payment schedule according to which the present
value of the agreed future cash flows on 31 December 2012 is estimated at Rs. 115 million.
Required:
Prepare journal entries in the books of QIL for the years ended 31 December 2011 and 2012. Show all
the relevant computations.
Question 83 – Summer 2017 Q2(b)

On 15 October 2016, Rashid Industries Limited (RIL) made the following investments:
Investee No. of Shares % holding in Investee Cost of Investment

Karim Limited (KL) 155,000 4% Rs 20 Million
Bashir Limited (BL) 135,000 2% Rs 65 Million
Cost of investment includes transaction costs
Investment in KL was made with no intention to sell the shares while investment in BL was made with
the intention to sell the shares before 31 December 2016.
The board of directors in its meeting held on 30 November 2016 decided that since the future prospects
of BL are quite attractive, its shares should be held till 30 June 2018. The market rate on 30 November
2016 was Rs. 621.
On 31 December 2016, RIL decided to record an impairment loss of Rs. 5 million against investment in
KL. The market price of shares of KL and BL as on 31 December 2016 was Rs. 80 and Rs. 600 respectively.
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Ahmed Raza Mir, FCA
RIL’s broker normally charges transaction costs of 0.2%.
Required:
Explain the accounting treatment of above transactions in accordance with International Financial
Reporting Standards.
Question 84
On 1 December 2003, Artwright, purchased Rs 10 Million of bonds at par. These bonds had been issued
by Winston, an entity operating in the video games industry. The bonds were due to be redeemed at a
premium on 30 November 2006, with Artwright also receiving 5% interest annually in arrears. The
effective rate of interest on the bonds was 15%. Artwright often holds bonds until the redemption date,
but will sell prior to maturity if investments with higher returns become available. Winston’s bonds were
deemed to have a low credit risk at inception.
On 30 November 2004, Artwright received the interest due in the bonds. However, there were wider
concerns about the economic performance and financial stability of the video game industry. As a result,
there has been a fall in the fair value of bonds issued by Winston and similar companies. The fair value
of the Artwright’s investment at 30 November 2004 was s 9 Million. Nonetheless, based on Winston’s
strong working capital management and market optimism about the entity’s forthcoming products, the
bonds were still deemed to have a low credit risk. The financial controller of Artwright calculated the
following expected credit losses for the Winston bonds as at 30 November 2004:
12 Month Expected Credit Losses Rs 0.2 Million

Lifetime Expected Credit Losses Rs 0.4 Million
Required
Discus how the investment in bonds of Winston should be accounted for in the year ended 30
November 2004
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Ahmed Raza Mir, FCA
Question 85
G Limited is a investment bank whose year ends on 31 October 2013. On 1st November 2012, it acquired
a portfolio of financial assets that were debts securities. These were made of four-year loans and were
initially recognized at their nominal value of Rs 100,000 (which is also the fair value of the bonds). They
were classified at amortized cost. Each loan has a coupon rate as well as effective rate of 8%.
On 31 October 2013, no actual defaults had occurred. However, information emerged that the sector in
which the borrowers operate is experiencing tough economic conditions. The directors of the company
therefore felt that the risk of default over the remaining loan period had increased substantially. After
considering a range of possible outcomes, and weighting these for probabilities, the overall rate of
return from the portfolio is expected to be approximately 2% of the nominal value per annum for each
of the next three years.
Required
Explain how the above will be accounted for at 31 October 2013. (8marks)
Question 86
Wader a public limited company has a year end of 31 may 2007, The following information is relevant:
Wader’s receivable are short term and do not contain a significant financing component. Using historical
observed default rates, updated for changes in forward-looking estimates, Wader estimates the
following default rates for its trade receivables that are outstanding as at 31 may 2007.
Not Overdue 1-30 days 31-60 days 61+ days overdue

overdue overdue
Default Rate 0.5% 1.5% 6.1% 16.5%
The trade receivables of Wader as at 31 May 2007 are as follows:
Gross Carrying Amount($m)

Not Overdue 10.1
1-30 days overdue 4.3
31-60 days overdue 1.6
61+ days overdue 1.0
Wader has recognized a loss allowance of $0.2 million in respect of its trade receivables.
Required: Discuss, with suitable calculations, the accounting treatments of the above items in the
financial statements for the year ended 31 May 2007. (Note: a discount rate of 5% should be used
where necessary).
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Question 88 – Winter 2020 Q2
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Ahmed Raza Mir, FCA
ACCOUNTING FOR DERIVATIVES
Question 89 [Forward Contract]

On October 1, 2009, the Lie Dharma Futures Company purchases 100 February 1, 2010, soybean futures
contracts. The quoted market prices at the date of purchases is Rs 5.80 a bushel; each contract covers
5,000 bushels. The initial margin deposit is Rs 240,000. At the end of Year 1, the quoted market price of
the soybean contract is Rs 5.60 a bushel.
On February 1, 2010, when the quoted market price is Rs 5.30 a bushel, LDC purchased 500,000 bushels
of soybean from market and the contract was closed out at February 2010.
Required
Journal Entries to record the above transactions
Question 90
Babar Limited holds inventory of unprocessed copper (80,000 KGS). Cost of inventory is 1.52 million.
On 1 June 2019 when the Fair value of the inventory was observed to be Rs. 24/ unit.
The company is expecting a fall in the price of inventory in the next three months. The company entered
into a forward contract to sell the entire inventory for Rs 24.75 per unit.
Movement and spot and future prices are as under.
Particulars 1 June 30 June 31 July 31 august

Spot Rs.24 Rs.22 RS21 Rs 19.5
Forward rates Rs. 24.75 Rs. 22.5 Rs. 21.3 Rs.19.5
Required:
Journal entries assuming that:
1. Transaction is settled in delivery and
2. Transaction is settled in cash and disposal of inventory at spot.
Question 91 [Forward Contract]

Brit Ltd has a 30 June year end. On 1 June 2015, Brit Ltd sells goods to ASU Inc. for $100,000 on three
months’ credit i.e., for settlement on 1 September 2015. On 1 June 2015 Brit Ltd also enters into a
forward contract to sell $100,000 on 1 September 2015 at a forward rate of USD1: PKR 93.
On 1st September ASU international paid brit in full and the contract is closed by cash settlement.
PKR to USD exchange rates are as follows:

Date Spot (PKR / USD) Forward (PKR / USD)
1 June 2015 90 93
30 June 2015 87 89
1 September 2015 85 85
Required
Journal Entries to record the above transactions
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Ahmed Raza Mir, FCA
Question 92 (Forward Contract)
On 1st January 2005, a company entered into a foreign currency transaction by taking a loan of US
$100,000 at interest rate of 6% per annum. The amount of loan is to repaid on 31st December 2005.
On 1st January 2005, the company entered into a forward exchange contract for the transactions to
mitigate the risk associated with change in exchange rates. The exchange rate (Rs, per US$) are below
Date Spot rate Forward Rate (1 year) Forward rate (6 month)

1 January 2005 Rs. 45/$ Rs.48/$ -
30 June 2005 Rs.47/$ - Rs.51/$
31 December 2005 Rs.52/$ -
Required: Journalize the above transaction
Question 93 [Call Option]

Hale enters into a call option contract on May 1, 2010 with Baird Investment Co., which gives Hale the
option to purchase 500 Laredo stock at Rs 100 per share. The option expires at 31 July 2010. Premium
paid by the company Rs 4 per option.
On 30 June 2010, the price of Laredo shares has increased to Rs 120 per share. The fair value of the
option was 21.5 per option.
On 15 July 2010 Hale Limited has to purchase 500 shares of Laredo. Determine whether hale limited
should exercise the option. Fair Value per share is 115 and fair value of the option Rs 15.7 per option
Required
Question 94 [Put Option]

On December 31st 20X0 Entity Theta purchases put options over 100,000 shares in Omega which expire
on December 31st 20X2. The exercise price of the option is Rs 2, the market price on December 31st
20X0, and the premium paid is Rs 11,100.
The value of the shares in Omega and the put options is shown in the table below. The value of the put
option increases as the stock price decreases.
31 Dec 2000 30 June 2001 31 Dec 2001

Price per share 2 1.9 1.85
Value of put Option 11,100 13,500 15,000
30 June is the year end of the company.

Required
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Ahmed Raza Mir, FCA
Rights Shares
Question 95
Multan Sultan Limited is an Investor in PSL Limited the company holds 100 shares in PSL. Price per share
in the market is Rs 60. PSL limited is considering to issue right shares in the ratio of 1 for four held.
Exercise price of the rights shall be Rs 40 per right share.
Required
Journalize the right adjustment assuming that the stock market will adjust the market price for rights.
Question 96
On 1 June 2009, Khan Limited acquired 450,000 shares in Javaidan Glue Limited. The cost of acquisition
per share is Rs 84. The shares were classified as at Fair Value through OCI.
Javaidan Limited announced a right issue as 1 for four shares held. Details of the issue and key dates are
as under:
Key dates with respect to rights are as under:
Announcement date July 21, 2009

Book closure 12 August 2009
Right letters dissemination 10 September 2009
Exercise of rights 11 November 2009
One share for every four held, with an exercise price of Rs 70. Fair Values of the shares at different date
are as under:
Dates Fair Value per Fair value of

share (Rs) right letters (Rs)
June 30, 2009 90 NA
July 31, 2009 97 NA
August 12, 2009 105 NA
August 31, 2009 104 NA
10 September 2009 106 39
September 30, 2009 105 42
11 November 2009 113 NA
November 30, 2009 114 NA
December 31, 2009 118 NA
The company sold 70% of its investments on 31 December 2009. Movement should be assumed to be at
FIFO method
Required:
Journalize all the transactions in 2009. Remeasure at all relevant dates
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Ahmed Raza Mir, FCA
Question 97
On 1 March 2014, Gilgit company limited purchased 200,000 shares of a listed company name Hunza
foods limited for Rs, 5,600,000 as a long term investment. On 5 April 2014, Hunza foods Limited
announced the issuance of one right share for every 4 shares held by the shareholders of the company
at exercise price of Rs. 18. Par value of the shares is Rs.10 per share. Market values of shares and letter
of right on relevant dates are as follows:
Event Date Market Value of Market value of letter

shares of right
Purchase of 200,000 shares 1 – March - 14 28 -
Announcement Date – (cum right) 5 – April -14 31 -
Book closure – (cum right) 26 – April -14 34 -
Letter of right issued 15 – May – 14 36 14
Year end 30 – June – 14 37 16
Exercise date 15 – July - 14 41 -
Required: Prepare the necessary journal entries in the books of Gilgit Company limited
Question 98
On 1 March 2014, Hudaid company limited purchased 350,000 shares of a listed company name Bark
limited for Rs, 12,250,000 as a long term investment. On 5 April 2014, Bark Limited announced the
issuance of one right share for every 4 shares held by the shareholders of the company at exercise price
of Rs. 20. Par value of the shares is Rs.10 per share. Market values of shares and letter of right on
relevant dates are as follows:
Event Date Market Value of Market value of letter

shares of right
Purchase of 350,000 shares 1 – March - 14 35 -
Announcement Date – (cum right) 5 – April -14 37 -
Book closure – (cum right) 26 – April -14 38 -
Letter of right issued 15 – May – 14 35 -
Year end 30 – June – 14 36 16
Exercise date 15 – July - 14 41 -
Required: Prepare the necessary journal entries in the books of Hudaid Company limited
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Ahmed Raza Mir, FCA
Question 99 – Interest Rate Swap
Entity A issued Rs, 100 million of 5-year receivable rate debt on 1 January 2000.
The variable rate of the debt is KIBOR plus spread of 200 basis points. Initial KIBOR is 5 percent.
The debt pays interest on an accrual basis and the rate of interest reset on annual basis on 31
December. On 1 January 2000, Entity X entered into a five year pay fixed and received KIBOR
interest rate swap with the notional amount of Rs. 100 million. The interest rate swap is on the
market at inception and has fair value of zero. The terms of the interest rate SWAP are as
follows:
Notional Amount Rs. 100 million

Entity A pays 5.5%
Entity A receives KIBOR
Payment and Receipt date Anually on 31st December
Variable Reset Annually on 31st December
The KIBOR and fair value of Interest Rate SWAP are as follows:
Date KIBOR Fair Value of Interest Rate SWAP

1 January 2000 5% -
31 December 2000 6.57% Rs. 4,068,000
31 December 2001 7.7% Rs. 5,793,000
31 December 2002 6.79% Rs. 2,303,000
31 December 2003 5.76% Rs. 241,000
Required: Journalize the above
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Ahmed Raza Mir, FCA
Hedge Accounting
Question 100
ABC Limited acquired 10,000 units of product A for resales in the ordinary course of
business. Cost of the inventory was Rs 1.2 million. On 31 March 2016 the company
wishes to hedge the position that the company already have gained from expected
future decline in the prices of the product A.
Spot price on 31 March (per unit) Rs 145.
Future price for 30 June settlement is Rs 148.
Track of ready and future prices over the next three months are as under:
31 Mar 30 Apr 31 May ,30 Jun

Spot 145 135 128 121
Future 148 137 129 121
Required
Accounting for the above hedge assuming
1 Derivative account (not hedge accounting) is in operation
2 Hedge Accounting is adopted by the company
Question 101
Masood Limited acquired 50,000 units of a product as inventory for Rs 105 per unit
on 1 Feb 2012. The market for the product increased a lot thereafter and reached Rs
140 at the end of March 2012. The company assessed the reaming shelf life of
the product is almost three months further and wishes to hedge the position through
futures contracts. The company entered into June futures (with settlement date
falling on 30 June) to hedge the position. Price of the same on 31 March 2012 was
reported in the market to be Rs 145
Track of ready and future prices over the next three months are as under:

Spot 140 146 152 160
Future 145 150 154 160
Required
Accounting for the above hedge assuming
1 Derivative account (not hedge accounting) is in operation
2 Hedge Accounting is adopted by the company
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Ahmed Raza Mir, FCA
Question 102
Question 103
Question 104
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Ahmed Raza Mir, FCA
Cash Flow Hedge

Question 105
Track record of future and ready markets of 20,000 Kgs of copper acquire by the
company a month earlier (28 Feb 2017) at a cost of Rs 50 per unit:

Spot 62 58 52 51
Future 65 60 53 51
Journalize the hedge accounting using fair value hedge and cash flow hedge
Question 106
Question 107
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Ahmed Raza Mir, FCA
Question 108
Question 109 – Winter 2012 Q2(a)
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Ahmed Raza Mir, FCA
Question 110
Required: Journalize the above transactions
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Ahmed Raza Mir, FCA
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Ahmed Raza Mir, FCA
Question 114
Akmal Limited undertaken an agreement to acquire A machine from a US supplier on 1 Jan 2016. The
machine is to be delivered on 31 July and will cost the company 80,000 USD.
The company reports its financial results at the end of every quarter.
Akmal Limited was concerned for the expected increase in the prices for USD in terms of Rs. Lately the
USD proved to be very volatile. The company therefore undertook a forward cover on 1 Jan 2016.
The tracking of spot and forward rates are as under:
1 Jan 16 31 Mar 16 30 Jun 16 31 Jul 16

Spot 120 132 143 150
Forward 126 134 145 150
The company closed out the forward contract and paid the liability for the machine.
Required
Prepare journal entries for the above scenario assuming that the company is following hedge
accounting and all conditions are met for the same on the date of entering forward contract.
Question 115
On 1 April 2001 a company acquired a debenture at face value (also fair value) of Rs 5 million. The
debenture is redeemable at Rs 5 million on 31 March 2006. Interest is receivable quarterly in arrears at a
fixed interest rate of 7%, which includes an adjustment for the credit risk of the company of 2%.
On the same date, the company decides to hedge itself against changes in the fair value of the
Debenture as a result of changes in the Karachi Inter-bank Agreed Rate (KIBOR). Consequently, on 1
April 2001 the company enters into an interest rate swap agreement, in terms of which it will pay 5%
fixed interest and receive KIBOR. The variable leg of the swap is pre-fixed, postpaid (i.e. the interest rate
that is used to calculate the variable leg of the swap for the period 1 April to 30 June is based on the
KIBOR on 1 April). On 1 April 2001 KIBOR was 4.562%. The company has a 30 June year-end.
On 30 June 2001 the fair value of the swap was Rs 80,592 favorable (after settlement). The fair value of
the debenture, adjusted only for changes in KIBOR, was Rs 4,919,533, but the full fair value of the
debenture amounted to Rs 4,815,300. Assume that all hedging requirements have been met. The
hedged item is the interest rate risk component of the debenture and credit risk is therefore not
hedged.
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Ahmed Raza Mir, FCA
Question 116
On 1 July 2000 Zet Ltd placed an order for the acquisition of inventory to the value of Rs 100 000. This
order may not be cancelled. On the same date Zet Ltd entered into a six-month forward exchange
contract (FEC) to buy Rs 100 000. The inventory was shipped free on board on 31 August 2000. The
creditor is payable on 31 December 2000 and the year-end is 31 July 2000. The hedge meets all the
hedging criteria and the designated hedged risks are changes in the fair value of the firm commitment
and the resulting creditor as a result of changes in foreign exchange rates. Assume that 40% of the
inventory was sold during the year ended 31 July 2001.
The following exchange rates apply:
Date Spot Forward

1 July 2000 7.85 8.00
31 July 2000 7.90 8.06
31 August 2000 7.93 8.10
31 December 2000 8.05 8.05
Question 117
On 1 May 2001 a company purchased inventory for Rs 100 000 from a foreign supplier. The creditor is
payable on 31 July 2001. On 1 May 2001 the company took out a three-month FEC at a rate of Rs 1 = Rs
6.87. The company has a 30 June year-end. The company designates the FEC as a hedging instrument for
changes in the foreign currency risk component of the cash flows of the payment of the foreign creditor.
The following exchange rates are applicable:
Date Spot Forward

1 May 2001 6.80 6.87
30 Jun 2001 6.88 6.96
31 July 2001 7.25 7.25
Question 118
On 1 January 20X0 a company purchased a variable rate debenture at face value (also fair value) of Rs
100,000. The debenture is redeemable on 31 December 20X4 at face value. The variable rate on the
debenture is KIBOR plus a 2% credit risk adjustment. Interest is payable on an annual basis and the
interest rate on the debenture is pre-fixed, post-paid (i.e. the interest rate for the period 1 January to 31
December is based on the KIBOR on 1 January).
On 1 January 20X0, the company entered into a receive-fixed 5.5%, pay-KIBOR interest rate swap with a
notional amount of Rs 100 000. Settlements on the swap are made on 31 December annually. The
interest rate on the variable leg of the swap is also pre-fixed, post-paid.
The swap is designated as a cash flow hedge of the interest rate risk component of the forecasted
interest receipts on the KIBOR element of the debenture. The interest rate swap is on market at
inception and has an initial fair value of zero. All hedge criteria have been complied with. The
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Ahmed Raza Mir, FCA
recognition of the cash flow hedge reserve is not limited when comparing cumulative gains or losses on
the hedging instrument and hedged item. Only the interest rate risk component is hedged while credit
risk remains unhedged. The fair value of the swap (including accrued amounts, i.e. before settlement)
and the KIBOR rates are as follows on various dates:
Date KIBOR FV of SWAP

1 Jan 2001 5% Nil
31 December 2001 4.25% Rs 3,200 (Asset)
The fair value of the debenture is Rs 99,000 on 31 December 20X0.
Required
Journalize the above transactions.
Question 119
The terms of the interest rate SWAP are as follows:
Notional Amount US $ 100 million

Trade Date 01/01/X0
Start Date 01/01/X0
Maturity Date 31/12/X4
Entity X pays 5.5%
Entity X receives LIBOR
Pay and Receives date Annually on the debt-payment dates
Variable Reset Annually on 31 december
Initial LIBOR 5%
First pay/receive date 31/12/X0
Last pay/receive date 31/12/X4
59
Ahmed Raza Mir, FCA
The interest rate SWAP is expected to be highly effective because the principal terms and conditions of
the debt and SWAP match
Date LIBOR Fair Value of Interest Rate SWAP .

1 January 2000 5% -
31 December 2000 6.57% Rs. 4,068,000
31 December 2001 7.7% Rs. 5,793,000
31 December 2002 6.79% Rs. 2,303,000
31 December 2003 5.76% Rs. 241,000
Required: Journalize the above
Question 120
60
Ahmed Raza Mir, FCA
61
Ahmed Raza Mir, FCA
Derecognition of Financial Assets

Question 121
A holds a portfolio of AAA-rated fixed-rate corporate Eurobonds classified at fair value through OCI,
which all mature in approximately five years’ time. The bonds are traded in a highly liquid market.
Interest rates have fallen since entity A bought the bonds; as a result, the value of the bonds, originally
bought for RS 100 million, has increased to RS 111 million.
Entity A assigns to Entity B rights to 90% of the principal payments on the bonds for a cash payment of RS
70 million. A will continue to receive all interest payments on the whole portfolio and 10% of the principal
payments. When the bonds mature in five years’ time, A will pass on to B 90% of the principal amount
that is repaid. B bears the credit risk on any defaults of its newly acquired 90% of the principal amount.
Additional information:
• Fair value of portfolio at date of transfer – Rs 111 million

• Fair value of interest only strip at date of transfer – Rs 33 million
• Amount of gain previously recognized in equity – Rs 11 million
Required
Journalize the reportable events
Question 122
Bond face value 5,000,000

Redemable in 5 years time
Coupon rate 10%
Current market rate 8.00%
80% of the pricipal is sold to Khan Limited for Rs 2.8 million
Required
Journalise the disposal and reclasification of gains
62
Ahmed Raza Mir, FCA
Question 123
Bank E enters into an agreement with bank F to sell a debt security classified as held to maturity. The
security is traded in an active market. At the same time, E agrees to repurchase the security from F at a
specified fixed price on a fixed date. F pays E RS 1 million for the debt security, and E agrees to repurchase
the security in six months’ time for RS 1.03 million. F can sell or repledge the debt security under this
agreement. The 0.03 million is a lender's return – that is, current six-month interest rates are 3%.
 Fair value of debt security at date of transfer – RS 1 million
 Carrying value at date of transfer – RS 0.95 million
Required
Question 124
Carrying Amount 424,000
Fair Value 460,000
Internal rate of return 18%
Coup rate 15%
FV index to face value 115.0%
Repo rate 14.5%
Repo for 2 years
Repo price 603,072

The bond is classified as HTM
One coupon is taken by the Counter party
Question 125 – Summer 2012 Q4(i)
63
Ahmed Raza Mir, FCA
Question 126
Entity G enters into an agreement to assign its portfolio of RS 20 million trade receivables without recourse
to Factor H. The receivables have 60-day terms and are subject to normal warranties on the existence of
the receivables. H pays G RS 19 million in cash for the receivables. There is no obligation on G to make
good any shortfall on the receivables to H due to either default or late payment, and G receives no
compensation from H for faster than expected payments or lower than expected levels of default. G
continues to service the receivables; the debtors have not been notified that their receivables have been
transferred.
 Fair value of portfolio of trade receivables on date of transfer – RS 19 million

 Carrying value of portfolio of trade receivables on date of transfer – RS 20million
 The receivables were classified at amortized cost
Required
Question 127
Entity J enters into an agreement to assign its portfolio of Rs 20 million trade receivables with recourse to
factor K. The receivables have 90-day terms and are subject to normal warranties on the existence of the
receivables. K agrees to pay J an initial amount of Rs16 million in cash for the rights to the cash flows from
the receivables. Once the receivables have been repaid, K will pay a further sum to J calculated as the
balance of Rs 4 million less interest on the Rs 16 million initial payment until the date debtors pay and less
any defaults (defined as any debts that remain unpaid after 90 days). J continues to service the
receivables; the debtors have not been notified that their receivables have been transferred.
 Fair value of portfolio of trade receivables on date of transfer – Rs19.5 million
 Carrying value of portfolio of trade receivables on date of transfer – Rs 20 million
 The receivables were classified at amortized cost
Subsequent Events
Assume that Rs19 million pay in 90 days and the other Rs 1 million remains outstanding after 90 days.
Interest is charged by the factor at 10%.
Required
Question 128
Entity C holds a 0.1% shareholding in a construction company it bought one
year ago for Rs 58 million and that is classified at fair value through OCI. C enters into
an agreement with bank D in which, in exchange for a cash payment of Rs 65
million, C agrees to sell those shares to D. The shares are sold subject to a call
64
Ahmed Raza Mir, FCA
option that allows C to repurchase the shares for Rs 70 million, at any time during
the next three years. The shares are quoted in an active market.
 Fair value of shares at date of transfer – Rs 68 million
 Amount of gain previously recognized in equity – Rs 10 million
 Fair value of call option on date of transfer – Rs 3 million (only time value, no intrinsic value and
neither deeply in nor deeply out of the money)
Required
Question 129 – Winter 2008 Q2(c)
Required: Prepare journal entries for Red Limited for the year ended June30, 2008.
Question 130
Zed Limited bought an equity investment for Rs. 40 million plus associated transaction cost of Rupees 1
million at the reporting date the fair value of the shares had risen to Rupees 60 million shortly after the
reporting date the shares were sold for 70 million.
Required: Journalize the above transactions.
 The investment was classified at FVTPL

 The investment was classified at FVTOCI
Question 131
On 1st January 2001 ABC provide loan to DEF amounting to rupees 500,000 with maturity date on 31st
December 2007.DEF pays annual interest of 30000 on 31 December each year in arrears. ABC Limited
recognizes the loan as a financial asset at amortized cost.
On 1st January 2004 ABC unconditionally sells the right to receive remaining four interest payment to
the Bee bank for the fair value of four future payments amounting to Rs. 108,897. The fair value of 4
future payments was calculated based on the current market interest rate that would be available to the
borrower of 4%.
65
Ahmed Raza Mir, FCA
Required: Journalize the entries
Question 132
Company A has sold its trade receivable of 35 million to a factoring company for 33 million. Under the
terms of factoring arrangement this is the only money that Company A will receive regardless of when
or even if the customer settled the debt that is the factoring arrangement is said to be without recourse.
However, Company A continue to service the receivables, as the debtors have not been informed that
the receivables have been transferred.
Question 133
Company A has sold its trade receivables for 35 million to a Factoring company and receive in initial
amount of 30 million. The receivables have 90 days’ terms. Under the terms of factoring arrangement if
the debtor settles on time, factoring company will pay further sum of five million to Company A less
interest on initial amount of 30 million @ 10% and any default (i.e. debtors not settling their account
within 90 days.)
After 90 days, 90% of the debtor pays on time whereas 10% are still outstanding.
Required generalize the above transaction
Question 134
ABC sells 100,000 of its accounts receivable to a factor and receives an 80% advance immediately. The
factor charges of fee of 8000 for the service. The debts are factored without recourse and a balancing
payment of 12000 will be paid by the factor 30 days after the receivable are factored.
Required: Journalese the above transaction
Question 135
ABC sells 100,000 of its accounts receivable to a factor and receives an 80% advance immediately. The
factor charges of fee of 8000 for the service. The debts are factored with recourse and a further advance
of 12% will be received by the seller if the customers pay on time.
66
Ahmed Raza Mir, FCA
Question 136
Food company big food producer has a portfolio of trade receivables to retail chains and decides to sell
a part of its portfolio to the factoring company. Carrying amount of sold portfolio is 5,000,000, fair value
of portfolio is 5,050,000 and the cash received from factoring company for the portfolio is 4,990,000
The related contract says:
 4,970,000 represents the payment for the receivables.

 20,000 presents the payment for the guarantee. According to the guarantee food company
agrees to refund the credit losses from portfolio up to 500 000 to the factoring company.
Required: Prepare journal entries for Food Co.
Question 137
An entity sold an equity investment classified as FVTOCI to a counterparty for 840. The entity had
previously recognized a gain of 100 in other comprehensive income in respect of this investment. On the
same date it entered into a 60 days’ contract to repurchase the equity investment from the
counterparty for 855 less any equity distribution received by the counterparty during the 60 days’
period.
Question 138
ABC Co holds a government bond of 1,000 issued on 1st January 2001 paying interest of 20 twice a year
and redeemable on 31st December 2005 at par. ABC Co account for this bound at amortized cost. On
1st Jan 2014, ABC enters into the following Repo transaction with the Bee bank:
 The bond is sold for 900 which is the FV of bond at the time of transactions.
 ABC will purchase the same bond back on 1 January 2005 for 930.
 Bee Bank will receive bonds coupon payments (interest) on 30 June 2004 and 31 December
2004 (as it is a legal owner).
How should this transaction be reflected in the financial statements of ABC?
67
Consolidation
Question 1
ARTT BUSINESS SCHOOL | FROM THE DESK OF SIR AHMED RAZA MIR, FCA 1
Consolidation
Question 2
Consolidation
Question 3
Consolidation
Question 4 – June 2013 Q1 (Consolidation with IAS 36 – grossing up goodwill for impairment)
Consolidation
Question 5 – ACCA Practice Q
Consolidation
Consolidation
Solution of Emerald PLC
Consolidation
Consolidation
Question 6
Consolidation
Question 7
Consolidation
Question 8
Question 9
Consolidation
Question 10
Question 11
Consolidation
Question 12
Consolidation
Question 13 – June 2012 Q1
Consolidation
Question 14
Consolidation
Question 15 – ACCA Advanced Consolidation
Consolidation
Consolidation
Question 16 – June 2016 Q1 (Consolidated SOFP – consideration + IFRS 9 parents’ books

adjustments)
Consolidation
Consolidation
Question 17 – ACCA
Consolidation
Consolidation
Question 18
Consolidation
Question 19
Consolidation
Question 20
Consolidation
Question 21 – ACCA
Consolidation
Consolidation
Question 22 – June 2018 Q2 – (Direct and Indirect Subsidiary)
Consolidation
Consolidation
Question 23 – December 2008 Q1
Consolidation
Consolidation
Question 24 – December 2012 Q1
Consolidation
Question 25 ACCA P2 Past paper
Consolidation
Consolidation
Question 26 – ICAEW Past Paper – June 2010
Consolidation
Consolidation
Question 27
Consolidation
Question 28
Consolidation
Consolidation
Question 29
Consolidation
Consolidation
Question 30 – Dec 2014 Q1 (Consolidated Balance Sheet – Foreign subsidiary + working of

transaction reserves)
Consolidation
Consolidation
Question 31 – ACCA P2 June 2003
Consolidation
Consolidation
Question 32
Consolidation
Consolidation
Question 33
Consolidation
Consolidation
Question 34
Consolidation
Consolidation
Question 35
Consolidation
Consolidation
Question 36
Consolidation
Consolidation
Question 37
Consolidation
Consolidation
Consolidation
Question 38
Consolidation
Consolidation
Consolidation
Question 39
Consolidation
Consolidation
Question 40
Consolidation
Consolidation
Question 41 – June 2013 (SOCI of Foreign Subsidiary)
Consolidation
Question 42 – Q1 December 2013 (Calculation of Goodwill and investment in Associate)
Consolidation
Question 43 – Q4 December 2013 (Consolidation with IFRS 5 – Expected disposal of subsidiary)
Consolidation
Question 44 June 2014 Q1 (Complex group + Convertible bonds + Further acquisition + negative
goodwill)
Consolidation
Question 45 - December 2014 Q5 (Accounting for investments in separate financial statements)
Consolidation
Question 46 June 2015 Q1 (Consolidated Cash flows – Acquisition + disposal of subsidiaries)
Consolidation
Consolidation
Question 47 December 2015 Q1 (Consolidated Profit N Loss – One local subsidiary + One foreign)
Consolidation
Consolidation
Question 48 - December 2016 Q1 (Accounting for joint operations and joint venture in separate books)
Consolidation
Question 49 December 2016 Q5 (Consolidated Cash flows – Specific Cash flows)
Consolidation
Consolidation
Question 50 – June 2017 Q1 Foreign Currency SOFP
Consolidation
Question 51 – June 2017 Q3 (Computation of Goodwill and Deferred Taxation)
Consolidation
Consolidation
Question 52 – December 2017 Q2 (Joint Operation)
Consolidation
Consolidation
Question 53 – December 2018 Q5 Consolidated SOCF
Consolidation
Consolidation
Consolidation
Consolidation
Question 55 – December 2019 Q4 (Deferred Taxation adjustment)
Consolidation
Consolidation
Question 56 - December 2020 Q4 Foreign Currency Consolidation
Consolidation
Consolidation
Consolidation
Advanced Accounting and Financial Reporting Page 1
IFRS 2 Share Based Payments
Ahmed Raza Mir, FCA
Theme of the standard
Share-based payment occurs when an entity purchases goods or services from another party
such as a supplier or employee and rather than paying directly in cash, settles the amount
owing in shares, share options or future cash amounts linked to the value of shares.
Key points
1. Suppliers and Employees

2. Shares, share options and Cash amount linked to the prices of shares
A
Types of share based “SBPTs” according to settlement
FC
Equity-settled share-based payment transactions
The entity receives goods or services in exchange for equity instruments of the entity (including
shares or share options)
ir,
M
Cash-settled share-based payment transactions
a
Ahmed Raza Mir, FCA (ARTT Business School)
az
The entity receives goods or services in exchange for amounts of cash that are based on the
price (or value) of the entity’s shares or other equity instruments of the entity.
R
Transactions with a choice of settlement

ed
The entity receives goods or services and either the entity or the supplier has a choice as to
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whether the entity settles the transaction in cash (or other assets) or by issuing equity
instruments.
A
Case in point
IFRS 2 was amended in June 2009 to address situations in those parts of the world where, for
public policy or other reasons, companies give their shares or rights to shares to individuals,
organizations or groups that have not provided goods or services to the company. An
example is the issue of shares to a charitable organization for less than fair value, where the
benefits are more intangible than usual goods or services.
From the desk of Ahmed Raza Mir, FCA

Ahmed Raza Mir, FCA
Transactions out of the scope of standard
The following are outside the scope of IFRS 2:
1. Transactions with employees and others in their capacity as a holder of equity instruments
of the entity (for example, where an employee receives additional shares in a rights issue to
all shareholders)
2. The issue of equity instruments in exchange for control of another entity in a business
combination
A
FC
3. Contracts to buy or sell non-financial items that may be settled net in shares or rights to
shares are outside the scope of IFRS 2 and are addressed by IAS 32 Financial Instruments:
Presentation and IAS 39 Financial Instruments: Recognition and Measurement
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Key terms used in the standard
Grant date:
 It is the date at which the entity and other party agree to the share-based payment
arrangement.
 At this date the entity agrees to pay cash, other assets or equity instruments to the other
party, provided that specified vesting conditions, if any, are met.
 If the agreement is subject to shareholder approval, then the approval date becomes the
grant date.
A
Vesting conditions:
FC
These are the conditions that must be satisfied by the other party to become entitled to receive
ir,
the share-based payment.
Vesting period:
M
The period during which the vesting conditions are to be satisfied
a
az
Vesting date:
R
The date on which all vesting conditions have been met and the employee / third party
becomes entitled to the share-based payment.
ed
Case in point
hm
Arrangement with no vesting conditions

A
This is the case where vesting conditions are met immediately or there are no vesting
conditions (and therefore there is no vesting period), the grant date and vesting date are the
same.
Vesting Conditions
IFRS 2 recognizes two types of vesting conditions:
Non-market based vesting conditions
These are conditions other than those relating to the market value of the entity’s shares. There
are further two sub classes of Non Market Conditions:

Ahmed Raza Mir, FCA
a. Service Condition
The employee completing a minimum period of service (also referred to as a service

condition)
b. Performance Condition
 Achievement of minimum sales or earnings target
 Achievement of a specific increase in profit or earnings per share
 Successful completion of a flotation
 Completion of a particular project
A
FC
Market based vesting conditions
Market-based performance or vesting conditions are conditions linked to the market price of
ir,
the shares in some way. Examples include vesting dependent on achieving:
M
 A minimum increase in the share price of the entity
 A minimum increase in shareholder return
a
 A specified target share price relative to an index of market prices

az
R
Case in point
ed
Contributory conditions
hm
The definition of vesting conditions is restricted to service conditions and performance

conditions, and excludes other features such as a requirement for employees to make regular
contributions into a savings scheme.
A

Ahmed Raza Mir, FCA
Equity Settled transactions
General Case:
Expense / Asset (Debit)
Equity (Credit)
Equity credited shall be a separate reserve. However, it is not forbidden to credit Retained
earnings directly instead of creating a separate reserve.
A
Measurement of Expense / Asset
FC
Fair value will depend upon who the transaction is with:
 There is a presumption that the fair value of goods / services received from a third party can
ir,
be measured reliably. M
 It is not normally possible to measure services received when the shares or share options
form part of the remuneration package of employees.
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Periodic Consideration while recognizing share based payment expense
Immediate vesting
Where the instruments granted vest immediately, i.e. the recipient party becomes entitled to
them immediately, then the transaction is accounted for in full on the grant date.
Vesting period exists

Where entitlement to the instruments granted is conditional on vesting conditions, and these
are to be met over a specified vesting period, the expense is spread over the vesting period.
A
FC
Accounting for transactions with third parties (not employees)
 Measured at the fair value of goods / services received
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 Measured at the fair value of shares when FV of goods/services are not reliable
M
 Recorded when the goods /\ services are received
a
Question 1
az
Entity A has been paying Entity B, a corporate finance consultancy, in cash at the rate of Rs. 600
R
per hour for advance. 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
ed
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
hm
providing 300 hours of advice evenly over the 6-month period.
Required:
A
What is the expense in profit or loss and the corresponding increase in equity?
Transaction with employees
 Measured at the fair value of equity instruments granted at grant date

 Spread over the vesting period (often a specified period of employment)

Ahmed Raza Mir, FCA
Question 2 (Immediate Vesting)
An entity issues 10 share options to each of its employees on 1 July 20X5. The share options
vest immediately and there is a two-year period over which the employees may exercise the
share options. Employees are entitled to exercise the options regardless of whether or not they
remain in the entity's employment during the period of exercise. The fair value of the share
options is Rs. 10 on grant date and there are 1,500 employees in the entity's employment at 1
July 20X5.
Required:
How should the transaction be accounted for?
A
Incorporating Non-market based vesting conditions in the Model
FC
These conditions are taken into account when determining the expense which must be taken to
profit or loss in each year of the vesting period.
Length of Vesting period

ir,
M
These conditions affect the vesting period length. Vesting period is adjusted at every reporting
a
date in the light of new information

az
Number of instruments to be vested

R
Only the number of shares or share options expected to vest will be accounted for and at each
ed
period end (including interim periods), the number expected to vest should be revised as
necessary.
hm
True up the expense by adjusting vested instruments

A
On the vesting date, the entity should revise the estimate to equal the number of shares or
share options that do actually vest.
Service Condition
Where the vesting condition is only to remain employee of the company, the vesting period is
set at the inception. The length is not increased as a result of modification (not allowed) while
reduction is length due to modification is possible (All to be read in modification accounting).

Ahmed Raza Mir, FCA
Only the number of shares or share options expected to vest will be accounted for and at each
period end (including interim periods), the number expected to vest should be revised as
necessary.
On the vesting date, the entity should revise the estimate to equal the number of shares or
share options that do actually vest.
A
Key Points
FC
 Expense is recognized based on the best estimate of the number of shares / shares
options that will eventually be vested (i.e. if 100 employees left out of 500 and 50 more
will leave than the expense should be based on 350 employees not 400)
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 Fair Value of the grant date shall be locked for expense recognition. Subsequent to grant
M
date changes in fair value will not be recognized
 After the meeting the vesting conditions all expense related to employees that met the
a
condition is recognized. If any employee forfeits its right to shares / shares option than it
az
shall be routed through equity (no expense shall be reversed because the entity has
R
already taken the benefits of services from employees)

ed
Question 3
hm
Polka Limited has an employee base of 1,800. The company is introducing a share reward scheme
whereby each employee will be given 500 shares of the company if they stay employed for three years
A
from the 1 Jan 2016. Fair value per share on 1 Jan 2016 (Grant date = Agreement date) is Rs 60.
Expected and actual departure of employees over the three-year period:
Year Employees Further Total

left expected
01 Jan 2016 0 100 100
31 Dec 2016 50 70 120
31 Dec 2017 110 30 140
31 Dec 2018 150 0 150
Track of fair values per share over three-year period:

Ahmed Raza Mir, FCA
Date Fair Value

1 Jan 2016 60
31 Dec 2016 70
31 Dec 2016 75
31 Dec 2016 78
Required
Journal entries for recording the remuneration expense for all three years.
Question 4
On 1 January 2011 an entity grants 100 share options to each of its 400 employees. Each grant is
A
conditional upon the employee working for the entity until 31 December 2013. The fair value of each
share option at the grant date is Rs 20.
FC
During 2011 20 employees leave and the entity estimates that a total of 20% of the employees will
leave during the three-year period.
ir,
During 2012 a further 25 employees leave and the entity now estimates that 25% of its employees will
leave during the three-year period.
M
During 2013 a further 10 employees leave.
Requirement
a
Calculate the remuneration expense that will be recognized in respect of the share-based payment
az
transaction for each of the three years ended 31 December 2013.

R
Question 5
ed
An entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the
employee working for the entity over the next three years. The entity estimates that the fair value of
hm
each share option is Rs 15.

During year 1, 20 employees leave. The entity revises its estimate of total employee departures over the
three-year period from 20 per cent (100 employees) to 15 per cent (75 employees).
A
During year 2, a further 22 employees leave. The entity revises its estimate of total employee
departures over the three-year period from 15 per cent to 12 per cent (60 employees).
During year 3, a further 15 employees leave. Hence, a total of 57 employees forfeited their rights to the
share options during the three-year period, and a total of 44,300 share options (443 employees × 100
options per employee) vested at the end of year 3.
Required
Expense over entire period.

Ahmed Raza Mir, FCA
Question 6
On 1 January 20X3 an entity grants 500 share options to its 400 employees. The only condition attached
to the grant is that the employees should continue to work with the entity until 31 December 20X6. 10
employees leave during the year, and it is expecting that a further 10 will leave each year.
The market price of each option was Rs. 10 at 1 January 20X3 and Rs. 12 at 31 December 20X3.
Required:
Show how this transaction will be reflected in the financial statement for the year ended 31 December
20X3.
A
Non Market Performance Condition
FC
Key points
These conditions are taken into account when determining the expense which must be taken to profit
ir,
or loss in each year of the vesting period.
M
These conditions affect the vesting period length. Vesting period is adjusted at every reporting date in
a
the light of new information

az
R

Only the number of shares or share options expected to vest will be accounted for and at each period
ed
end (including interim periods), the number expected to vest should be revised as necessary.
hm

On the vesting date, the entity should revise the estimate to equal the number of shares or share
options that do actually vest.
A

Ahmed Raza Mir, FCA
Question 7
Mesuri Limited, in its BOD meeting decided to launch an employee award in order to motivate the sales
staff to put forth good efforts to increase sales. With a 1,000 employee base, each employee is
committed to be awarded 600 shares if the cumulative sales over the 5 years’ period crosses Rs 1 Billion
Fair Value per share at the grant (Agreement) date is Rs 20. Fair values at the end of subsequent 4 years
were observed to be 15, 24, 28 and 26. Other relevant details are as under:
Year Emp Left Further left Total left Target Status Exp Vest, Prd
GD - 80 80 Will be met 3 yrs
1 30 60 90 Will be met 3 yrs
A
2 70 15 85 Will not be met NA
3 100 10 110 Will be met
FC
5 yrs
4 105 - 105 Target met 4 yrs
ir,
Required
Expense over entire period M
a
Question 8
az
On 1 January 2014 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
R
for three years. Sally continued to be employed by the entity during 2014, 2015 and 2016.
A second condition for vesting is that the costs for which Sally is responsible should reduce by 10% per
ed
annum compound over the three-year period. At the date of grant, the fair value of each share option
was estimated at Rs 21.
hm
At 31 December 2014 Sally's costs had reduced by 15% and therefore it was estimated that the
performance condition would be achieved.
A
Due to a particularly tough year of trading for the year ended 31 December 2015 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 2016.
At 31 December 2016, the end of the performance period, Sally did meet the overall cost reduction
target of 10% per annum compound.
Requirement
How should the transaction be recognized?

Ahmed Raza Mir, FCA
Variable Vesting Date

Where the vesting date is variable depending upon non-market based vesting conditions, the
calculation of the amount expensed in profit or loss must be based upon the best estimate of
when vesting will occur.
Question 9 – (Variable Vesting Date)

At the beginning of Year 1, Kingsley grants 100 shares each to 500 employees, conditional upon the
employees remaining in the entity's employ during the vesting period. The shares will vest at the end of
Year 1 if the entity's earnings increase by more than 18%; at the end of Year 2 if the entity's earnings
increase by more than an average of 13% per year over the two-year period; and at the end of Year 3 if
A
the entity's earnings increase by more than an average of 10% per year over the three-year period.
FC
The shares have a fair value of Rs 30 per share at the start of Year 1, which equals the share price at
grant date. No dividends are expected to be paid over the year period.
ir,
By the end of Year 1, the entity's earnings have increased by 14%, and 30 employees have left. The
M
entity expects that earnings will continue to increase at a similar rate in Year 2, and therefore expects
a
that the shares will vest at the end of Year 2. The entity expects, on the basis of a weighted average
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probability, that a further 30 employees will leave during Year 2, and therefore expects that 440
employees will vest in 100 shares at the end of Year 2.
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By the end of Year 2, the entity's earnings have increased by only 10% and therefore the shares do not
ed
vest at the end of Year 2. 28 employees have left during the year. The entity expects that a further 25
employees will leave during Year 3, and that the entity's earnings will increase by more than 6%,
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thereby achieving the average of 10% per year.

A
By the end of Year 3, 23 employees have left and the entity's earnings had increased by 8%, resulting in
an average increase of 10.64% per year. Therefore 419 employees received 100 shares at the end of
Year 3.
Requirement
Show the expense and equity figures which will appear in the financial statements in each of the three
years.

Ahmed Raza Mir, FCA
Question 10 – Variable # of Equity Instruments

At the beginning of year 1, Entity A grants share options to each of its100 employees working in the
sales department. The share options will vest at the end of year 3, provided that the employees remain
in the entity’s employ, and provided that the volume of sales of a particular product increases by at
least an average of 5 per cent per year. If the volume of sales of the product increases by an average of
between 5 per cent and 10 per cent per year, each employee will receive 100 share options. If the
volume of sales increases by an average of between 10 per cent and 15 per cent each year, each
employee will receive 200 share options. If the volume of sales increases by an average of 15 per cent
or more, each employee will receive 300 share options.
Grant Date
A
On grant date, Entity A estimates that the share options have a fair value of CU20 per option. Entity A
FC
also estimates that the volume of sales of the product will increase by an average of between 10 per
cent and 15 per cent per year, and therefore expects that, for each employee who remains in service
until the end of year 3, 200 share options will vest. The entity also estimates, on the basis of a weighted
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average probability, that 20 per cent of employees will leave before the end of year 3.
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At Year 1 end
By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees
a
will leave by the end of year 3. Hence, the entity expects that 80 employees will remain in service for
az
the three-year period. Product sales have increased by 12 per cent and the entity expects this rate of
increase to continue over the next 2 years.
R
At year 2 end
By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity now
ed
expects only three more employees will leave during year 3, and therefore expects a total of 15
employees will have left during the three-year period, and hence 85 employees are expected to remain.
hm
Product sales have increased by 18 per cent, resulting in an average of 15 per cent over the two years to
date. The entity now expects that sales will average 15 per cent or more over the three-year period, and
A
hence expects each sales employee to receive 300 share options at the end of year 3.
At Year 3 end
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the
three-year period, and 86 employees remain. The entity’s sales have increased by an average of 16 per
cent over the three years. Therefore, each of the 86 employees receives 300 share options.

Ahmed Raza Mir, FCA
Market Conditions
 These conditions are taken into account when calculating the fair value of the equity
instruments at the grant date.
 They are not taken into account when estimating the number of shares or share options likely to
vest at each period end.
 The length of the vesting period estimated at the grant date will not be increased subsequently
when the estimates are changed. However, the reduction of the length is taken into account
when subsequently estimates are changed (Different firms have different suggested treatments)
 If the shares or share options do not vest, any amount recognized in the financial statements will
A
remain.
FC
Question 11
Mushfiq Limited has introduced a share-based award for its key management employees which are 100
ir,
in number. Target for the employees is to grow the share price to a certain level (Market Condition).
M
Fair value per share at the grand date is Rs 22. Fair value per share after incorporating the chances of
success and failure of achieving the market condition is Rs 18 per share. Other relevant details are as
a
under:
az
Year Emp Left Further lft Total lft Target Status Exp Vest, Prd
R
GD - 16 16 Will be met 4 years

1 8 10 18 Will be met 5 Years
ed
2 16 6 22 Will not be met NA

3 20 3 23 Will be met 5 yrs
hm
4 25 2 27 Trgt met / Not met

Required
Expense over entire period
A
Question 12 – (Vesting Conditions not met) – Multiple Conditions

On 1 January 2014 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 work for the entity
for three years. Jeremy continued to be employed by the entity during 2014, 2015 and 2016. 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 Rs 18 taking into
account the estimated probability that the necessary share price growth would be achieved at 25%.
During the year ended 31 December 2014 the share price rose by 30% and by 26% per annum
compound over the two years to 31 December 2015. For the three years to 31 December 20X6 the
increase was 24% per annum compound.

Ahmed Raza Mir, FCA
Requirement
How should the transaction be recognised?
Question 13 – (Vesting Conditions not met)

X Limited is a company with a 31 December year end. X Limited grants 10,000 share options to each of
its 10 directors on condition that they remain with the company over a 3-year vesting period and that
share price increases by 10% per annum over that period.
At the grant date the fair value of each share option (taking account of the probability of achieving the
share price increase) is Rs. 40.
Early in year 1, X Limited's profitability was adversely affected by a fall in world oil price making it
extremely unlikely that the share price condition will be met. This has no impact on the recognition of
A
the expense which proceeds as follows:
FC
31 December Year 1: 9 directors are expected to be with the company at the end of the vesting period.
31 December Year 2: 9 directors are expected to be with the company at the end of the vesting period.
31 December Year 3: 8 directors are still employed by the company. The share price condition is not
ir,
met.
Required:
M
a
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Question 14 – (Actual VP>Expected VP)

At the beginning of year 1, an entity grants 10,000 share options with a ten-year life to each of ten
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senior executives. The share options will vest and become exercisable immediately if and when the
entity’s share price increases from CU50 to CU70, [i.e. this vesting condition is a market condition in
ed
which the length of the vesting period varies] provided that the executive remains in service until the
share price target is achieved. [i.e. this vesting condition is a service condition—service conditions are
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not market conditions]

A
The entity applies a binomial option pricing model, which takes into account the possibility that the
share price target will be achieved during the ten-year life of the options, and the possibility that the
target will not be achieved. The entity estimates that the fair value of the share options at grant date is
CU25 per option. From the option pricing model, the entity determines that the mode of the
distribution of possible vesting dates is five years. In other words, of all the possible outcomes, the most
likely outcome of the market condition is that the share price target will be achieved at the end of year
5. Therefore, the entity estimates that the expected vesting period is five years. The entity also
estimates that two executives will have left by the end of year 5, and therefore expects that 80,000
share options (10,000 share options × 8 executives) will vest at the end of year 5.

Ahmed Raza Mir, FCA
Throughout years 1–4, the entity continues to estimate that a total of two executives will leave by the
end of year 5. However, in total three executives leave, one in each of years 3, 4 and 5. The share price
target is achieved at the end of year 6. Another executive leaves during year 6, before the share price
target is achieved.
Required:
Question 15
X Limited is a company with a 31 December year end.
1 January Year 1: X Limited grants 10,000 shares to each of its 10 directors on condition that they
remain with the company in the vesting period and subject to the following performance condition.
A
The shares vest when the share price increases by 50% above its value at the grant date. It is estimated
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that this will occur in 4 years after the grant date. At the grant date X Limited estimates that the fair
value of each share is Rs. 50. X Limited estimates that all 10 directors will remain with the firm.
Required:
ir,
M
Question 16 – Multiple Vesting Conditions
Shams Limited has appointed Faisal as the new CEO of the company. While deciding his remuneration
a
the company offered 1,000,000 shares of the company if the following conditions are met:
az
EPS to increase to a certain level

Market price of the share to increase to a certain level Fair value per share at the grant date:
R
ed
Fair market Value Rs 210

Fair value adjusted for market condition Rs 180
hm
Fair value adjusted for non-market condition Rs 190

Fair value adjusted for market and non-market condition Rs 155
A
Other information:
Year VP for Mkt VP for non Mkt
Cond (Years Cond (Years)
Grant Date 3 4
1 5 5
2 5 5
3 4 5
4 5 5
5 6 6

Ahmed Raza Mir, FCA
KPMG View
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
PWC View
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 17 (Multiple Conditions) – Market and non market performance
A
FC
ir,
M
Awards issued during the year
a
az
Where the grant date arises mid-year, the calculation of the amount charged to profit or loss
must be pro-rated to reflect that fact.
R
Question 18
ed
hm
A

Ahmed Raza Mir, FCA
Question 19
Company issues a 1,000 shares options subject to the employee remaining in service until the share
price achieves the target price of Rs.60 at any time within the next 5 years. If the target price is not
achieved by the end of year 5, the employee is not entitled to share based payment. The company
estimates FV of the share option to be Rs.45 at the grant date and that the market condition will be met
at the end of year3.
Requirement: Show how the proposed transaction will be reflected in the FS if:
 Market condition is not achieved at the end of year 3 but still may be met in future.
A
 Market condition is achieved at the end of year 2.
FC
Question 20
At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the
ir,
executive remaining in the entity's employ until the end of year 3. The exercise price is CU40. However, the exercise
price drops to CU30 if the entity's earnings increase by at least an average of 10% per year over the three-year
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period.
On grant date, the entity estimates that the fair value of the share options, with an exercise price of CU30, is CU16
a
per option. If the exercise price is CU40, the entity estimates that the share options have a fair value of CU12 per
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option.
During year 1, the entity's earnings increased by 12%, and the entity expects that earnings will continue to increase
at this rate over the next two years. The entity therefore expects that the earnings target will be achieved, and
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hence the share options will have an exercise price of CU30.

During year 2, the entity's earnings increased by 13%, and the entity continues to expect that the earnings target
ed
will be achieved.
During year 3, the entity's earnings increased by only 3%, and therefore the earnings target was not achieved. The
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executive completes three years' service, and therefore satisfies the service condition. Because the earnings target
was not achieved, the 10,000 vested share options have an exercise price of CU40.
Required:
A
Show the expense and equity figures which will appear in the financial statement in each of the three years.

Ahmed Raza Mir, FCA
Question 21 – Winter 2019 Q2(a)(i)
A
FC
ir,
M
a
az
R
ed
Question 22
hm
 Grant Date 1 jan 2015

 No of shares options 50,000
A
 Vesting Conditions:
Condition 1 – To achieve share price of Rs.70/share
Condition 2 – To achieve earnings/share of RS.15
Following information is available:
Date Expected Year Expected Year FV of Share FV of Share FV of Share

to achieve to achieve options taking options taking options taking
target share target EPS account for account for account for
price condition 1 condition 2 both
conditions
1 jan 2015 2017 2018 12 13 10
Ahmed Raza Mir, FCA
31 Dec 2015 2019 2019 13 12 11

31 dec 2016 2017 2020 14 16 12
31 dec 2017 2018 2019 13 12 10
Requirement: How should the transaction be recognized if:
 Both the conditions are met by the end of 2018

 Condition 1 is only met by the end of 2018
 Condition 2 is only met by the end of 2018.
Question 23 – Winter 2017 Q6 b
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 24
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. 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 year 2 and 3. Hence, the entity estimates that 80% of the share options
will vest.
Two employees leave during year 2, and the entity revises its estimate of the number of share options
A
that it expects will vest of 86%. Two employees leave during year 3. Hence, 43,000 share options vested
at the end of year 3.
FC
The entity's share price during years 1-10, and the number of share options exercise 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

ir, Number of share
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options exercised at
year end
a
1 63 -
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2 65 -
3 75 -
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4 88 6,000
5 100 8,000
ed
6 90 5,000
7 96 9,000
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8 105 8,000
9 108 5,000
10 115 2,000
A
Required:
Show the expense and equity figures which will appear in the financial statement.

Ahmed Raza Mir, FCA
Cash-Settled transactions
Cash-settled share-based payment transactions are transactions where the amount of cash paid
for goods and services is based on the value of an entity’s equity instruments.
Examples of this type of transaction include:
Share appreciation rights (SARs)
The employees become entitled to a future cash payment (rather than an equity instrument),
based on the increase in the entity’s share price from a specified level over a specified period of
A
time; or
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Phantom Shares
ir,
An entity might grant to its employees a right to receive a future cash payment by granting to
them a right to shares that are redeemable.
M
Journal Hit
a
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Expense (Dr)
R
Liability (Cr)
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Valuation “Hey it’s a head ache here”
The goods or services acquired and the liability incurred are measured at the fair value of the
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liability.
A
Unlike equity settled transactions (where the grant date fair value of the equity instrument is
fixed), the entity should re-measure the fair value of the liability at each reporting date and at
the date of settlement. Any changes in fair value are recognized in profit or loss for the period.
Best method to tackle
1. Re-measure the liability for the outstanding the instruments and book the difference of
opening liability and closing liability as the P/L charge (can be either an expense or an
income)
2. Payment which the entity makes against the exercise shall be charged at intrinsic value to
P/L.

Ahmed Raza Mir, FCA
3. Remember for re-measurement of the liability we use fair values of the instruments whereas
for the payment of exercised / called instruments we shall use intrinsic value.
Question 25 – ICAEW Corporate Reporting
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 26
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 27
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 28
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 29
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Option rests with counter party
Where the counterparty or recipient, rather than the issuing entity has the right to choose the
form settlement will take, IFRS 2 regards the transaction as a compound financial instrument to
which split accounting must be applied.
This means that the entity has issued an instrument with a debt component in so far as the
recipient may demand cash and an equity component to the extent that the recipient may
demand settlement in equity instruments.
A
FC
ir,
M
a
az
R
ed
IFRS 2 requires that the value of the debt component is established first. The equity component
is then measured as the residual between that amount and the value of the instrument as a
whole.
hm
In this respect IFRS 2 applies similar principles to IAS 32 where the value of the debt
components is established first. However, the method used to value the constituent parts of the
A
compound instrument in IFRS 2 differs from that of IAS 32.
Direct Measurement
For transactions in which the fair value of goods or services is measured directly (that is
normally where the recipient is not an employee of the company), the fair value of the equity
component is measured as the difference between the fair value of the goods or services
required and the fair value of the debt component.
Ahmed Raza Mir, FCA
Indirect Measurement
For other transactions including those with employees where the fair value of the goods or
services is measured indirectly by reference to the fair value of the equity instruments granted,
the fair value of the compound instrument is estimated as a whole.
The debt and equity components must then be valued separately. Normally transactions are
structured in such a way that the fair value of each alternative settlement is the same.
Direct Measurement
A
Question 30
FC
Company ABC acquired a building having a fair value of Rs 1,400,000 million on Jan 1, 2008. The
ir,
payment for the acquisition can be made in either of the following modes in 15 days:
M
Ordinary shares 80,000 shares
Cash equal to the value of 80,000 shares
a
az
Fair value on the grant date per share was:

R
a. Rs 15 per share
ed
b. Rs 11 per share
c. Rs 20 per share
hm
Settlement option rests with Counter party

A
Question 31
Company ABC acquired a vehicle from Jammers Limited having a fair value of Rs 500,000 on Jan
1, 2003. The payment for the acquisition will be made in either of the following modes in 1 year
(ignore the time value factor accruing due to deferred credit terms):

Fair values at different dates:

Ahmed Raza Mir, FCA
Date Fair Value
Jan 1, 2003 (grant date) Rs 12 per share
Jun 30, 2003 (year-end) Rs 15 per share
Dec 31, 2003 (Settlement date) Rs 13 per share
A
FC
Account for the above transaction as ultimately:
a. Settled in cash
ir,
b. Settled in Equity M
Question 32
a
Company XYZ acquired a piece of land from Crammers Limited having a fair value of Rs 800,000
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on Jan 1, 2006. The payment for the acquisition will be made in either of the following modes in
R
1 year (ignore the time value factor accruing due to deferred credit terms):
ed

hm

A
Date Fair Value

Jun 30, 2006 (year-end) Rs 22 per share
a. Settled in cash
b. Settled in Equity
Ahmed Raza Mir, FCA
Question 33
ARM Limited obtained consultancy services from dreamers Limited having a fair value of Rs
1,200,000 on Jan 1, 2009. The payment for the acquisition will be made in either of the
following modes in 1 year (ignore the time value factor accruing due to deferred credit terms):

A
FC
Date Fair Value
Jun 30, 2009 (year-end)
ir,
Rs 23 per share
M
a
az

R

ed
a. Settled in cash
hm
b. Settled in Equity
A

Ahmed Raza Mir, FCA
Question 34
A
FC
ir,
M
Requirement: Journalize the above transaction.
a
az
Question 35
R
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, on
ed
that date, of 7,000 shares.

hm
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.
A
Requirement
Show the accounting treatment.

Ahmed Raza Mir, FCA
Question 36 – June 2015 Q3(b)
A
FC
ir,
M
a
az
R
ed
Question 37 – June 2018 Q6(i)

hm
A

Ahmed Raza Mir, FCA
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 40 – Entity has a choice of settlement – No present obligation
Question
At grant date At grant date

Equity FV 1,200 Equity FV 1,200
Cash FV 1,000 Cash FV 1,000
Picked at Equity Settled Picked at Equity Settled
Expense 1,200 Expense 1,200
A
Equity 1,200 Equity 1,200
FC
At Settlement date At Settlement date
Equity FV 1,400 Equity FV 1,550
ir,
Liability FV 1,500 M Liability FV 1,500
Solution Solution
a
az
Settled in E quity Settled in E quity

R
No Entry
Expense 50
ed
Equity 50
Settled in Cash
hm
Settled in Cash
Expense 100
A
Equity 1,400 Equity 1,500

Cash 1,500 Cash 1,500

Ahmed Raza Mir, FCA
Question 41
A
FC
ir,
M
Required: Journalize the above treating as cash settled and equity settled.
a
az
Question 42 – June 2019 Q2(iii) – Fiji Limited

R
ed
hm
A

Ahmed Raza Mir, FCA
Key paras from standard

Counterparty has the right
A
FC
ir,
Entity has the right
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Modification of Terms
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 43 – Repricing
A
FC
Question 44 - Repricing
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 45 – Different Vesting period for extra reward
A
FC
ir,
M
a
az
Question 46 – Relaxation of MC
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 47 – Additional Shares
A
FC
Question 48 – Reducing service period
ir,
M
a
az
R
Question 49
ed
hm
A

Ahmed Raza Mir, FCA
Question 50 – Relaxation of NMC
A
Question 51
FC
ir,
M
a
az
R
Question 52 - grant of share options that is subsequently modified

ed
hm
A
Required: Journalize the above.

Ahmed Raza Mir, FCA
Question 53
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
A
FC
ir,
M
a
az
R
ed
hm
A
Required: describe the accounting treatment in respect of the above transactions in the
FS of XYZ limited for the year ended 30 June 2016.

Ahmed Raza Mir, FCA
A
FC
ir,
M
a
az
R
ed
hm
A

Ahmed Raza Mir, FCA
Question 56 – Change of classification from cash settled to equity settled
In january year 1, Company M grants 100 SARs to its CFO, subject to a four year service
condition. The grant date fair value of a SAR is 1; the total grant date FV is 100. The share price
at the end of year 1 is unchanged.
At the end of year , the original grant has a fair value of 120. M cancels the grant and in its place
100 share options at a FV of the new grant is 132 instead of 120, resulting in an incremental FV
of 12.
Required: Journalize.
A
FC
Question 57 - Change of classification from equity settled to cash settled
On 1 January Year1 , Company K grants 1,000 share options to its CEO, subject to a four-year
ir,
service condition. The grant date FV of a share option is 8 and the total grant date FV is 8000.
M
At the end of Year 2, K adds a cash alternative to the arrangement, under which the employees
can choose a cash payment that equals the FV of the share options. The FV of a share option at
a
the date of modification is 4.8. Accordingly the total FV of the liability is 4800.
az
Required: How should the modification be recognized?

R
Question 58
ed
hm
A

Ahmed Raza Mir, FCA
Cancelation Accounting
Question 59 – Cancellation by Employee(explicit)
A
Question 60 – Cancellation by employee(implicit)
FC
ir,
M
a
az
R
Question 61 – Cancellation by employer

ed
hm
A

Ahmed Raza Mir, FCA
Question 62
Question 63
A
An entity granted 2,000 share options at an exercise price of Rs. 18 to each of its 25 key management
FC
personnel on 1 January 20X1. 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 Rs. 33 and the entity estimated that the
options would vest with 23 managers. This estimates were confirmed on 31 December 20X4.
ir,
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
M
particular period. The scheme was cancelled on 30 June 20X5 when the fair value of the options was Rs.
60 and the market price of the entity's shares was Rs. 70. Compensation was paid to the 24 managers in
a
employment at that date at the rate of Rs. 63 per option.

az
Required:
How should the entity recognize the cancellation?
R
Question 64 – Cancellation with replacement award

ed
hm
A
Question 65
What should be the accounting treatment if R doesn’t treat it as a replacement
Question 66 – Capitalization of SBPR
A company awarded 500 shares each to its 100 key management persons on the service
conditions for 3 years. The grant date FV is 28 per share.

Ahmed Raza Mir, FCA
Year Fair Value Expected Departures

Grant Date 28 10
1 32 10
2 34 8
3 41 7 - actual
Required: Journalize the above transactions assuming is it is equity settled and cash settled
respectively.
Question 66 Classification
A
FC
ir,
M
a
az
R
Question 67
ed
hm
A
Question 68

Ahmed Raza Mir, FCA
Question 69
Application of Intrinsic Value

Question 70
A
Employee base 1,800
FC
Shares per person 100
Vesting Condition 3 years’ service
Exercise price of the option Rs 125 per instrument
ir,
M
Date Expected shares to FV of shares (upon
be vested which options issued)
a
Grant Date 75% 140

az
Year 1 80% 148

Year 2 85% 147
R
Year 3 1,500(Employees) 150

ed
Question 71
hm
Employee base 1,600

A

Sales to reach 1 billion in 3 years
Date Expected shares to FV of shares (upon which Expected time to

be vested options issued) fulfill NMC
Grant Date 85% 100 4 years
Year 1 82.5% 110 5 years
Year 2 90% 112 4 years
Year 3 1,470(Employees) 118 Met

Ahmed Raza Mir, FCA
Question 72
Employee base 1,200

Assets turnover ratio to reach 4:1
Date Expected shares to FV of shares (upon which Expected time to
A
be vested options issued) fulfill NMC
FC
Grant Date 75% 60 4 years
ir,
Year 3 1,010 employees M 90 Not Met
Question 73 – Winter 2008 Q3b

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Topic = IFRS 16- Leases
Ahmed Raza Mir, FCA
Question 1
Jumani Limited leased an asset on the following terms
1. Lease term shall be 4 years
2. Interest rate applicable to the lessee is 9% p.a
3. Annual rentals Rs 140,000 at the end of every year
4. Down payment at the commencement of the lease is 80,000
5. After the lease term the asset shall be returned to the leasing company
Required
Accounting entries and disclosures in the book of lessee
Question 2
Jumaira Limited leased an asset on the following terms:

1. The company made a token as pre commencement payment on the date of agreement (31 Oct
2016) Rs 50,000
2. The Lease commenced on 1 Jan 2017 with a down payment made by Jumaira Limited Rs
120,000
3. Annual rentals at the end of every year will be Rs 200,000
4. Interest rate applicable to the lease is 12% per annuum
5. The lease term is a non-cancelable period of 4 years from the date of commencement
6. Residual value at the end of the lease term is expected to be Rs 100,000. The lessee has not
guaranteed any of it.
7. At the commencement of the lease the lessee has paid initial direct cost of Rs 40,000
8. The company is given a laptop having a fair value of Rs 30,000 as an incentive at the
commencement of the lease. Useful life of the laptop is 4 years with an estimated residual
value at the end of useful life Rs 4,800.
9. Installation cost incurred on the asset Rs 150,000 at the commencement date. Installation was
a very small process and the asset was ready to be used on 1 Jan 2017.
10. The asset will be needed to be dismantled at the end of the lease term at a cost expected to be
Rs 250,000.
Required
Question 3
Kolachi Limited purchased an equipment under lease mode from Khuram Limited on 1 Jan 2015. Lease
terms and conditions agreed were as under:
1. Lease term (non-Cancelable) is decided to be 5 years
Ahmed Raza Mir, FCA
2. Lease shall commence from 1 Jan 2015 (at agreement date)

3. Interest rate is not determinable from the contract so the lessee shall be using incremental
borrowing rate of 10% p.a.
4. Annual rental at the beginning of every year is Rs 250,000
5. Down payment made by the company to lessor amounted to Rs 40,500
6. Non of the guaranteed residual value is guaranteed by the lessee
7. Initial direct cost paid by Kolachi Limited amounted to Rs 16,000
8. The lessee has been given 200 ink cartages which will be consumed in 2 months. Fair value of
these cartages is Rs 5,000.
Required
Reassessment
Question 4 [increase / reduction in lease term – option to extend the lease term]
Following are the terms of a lease agreement commenced on 1 July 2015:
1. Lease term 5 years
2. Interest rate 16%
3. Annual rentals Rs 200,000
The lease- term can be extended to 7 years if the lessee agrees to it at the end of the lease
term. The rentals for the new term shall be 10% lower.
Required
Accounting entries if the lessee:
• Initially decides to keep the lease term to 5 years and at the end of the 2nd year reassess it to 7
years.
• Initially decides to keep the lease term to 7 years and at the end of the 2nd year reassess it to be 5
years.
Interest rate on the date of reassessment date was reported to be 15% p.a.
Question 5 [advanced – Increase in lease term]
Xalim Limited leased an asset from Musharaf Limited on the following terms.
Annual rentals Rs 160,000

Lease term 5 years (extendable for a further of two years)
Down Payment Rs 125,000
Other Information:
Ahmed Raza Mir, FCA
1. Interest rate implicit in the lease agreement was 12%.

2. Initial direct cost paid by lessee Rs 20,650.
3. The asset has a residual value of Rs 250,000 at the end of lease term, none of which is guaranteed
by the lessee.
4. If the term of the lease is extended the rentals for extended period would be Rs 130,000 p.a.
5. The asset is expected to be dismantle at the end of the lease term at an expected cost of Rs
140,000.
6. Appropriate discount rate for the dismantling liability is 12%.
Reassessment of lease term
1. Xalim Limited initially assessed the lease term to be 5 years but after two years in to the contract
the company reassessed the term and now wishes to utilize the full term.
2. Residual value at the end of revised lease term would be Rs 25,000 which is not guaranteed by the
lessee.
3. Interest rate on the date of reassessment was observed to be 11% which is same for the
dismantling liability.
4. Deferring the dismantling would cause the cost of dismantling to increase by Rs 20,000.
Required
Journal reassessment of lease liability and associated dismantling liability.
Question 6 [Reduction in lease term – reassessment]

On 1 July 2011, Sonu limited acquired an asset on the following terms from Titu Limited:
1. The lease term shall be a non-cancellable period of 6 years. The term can be extendable upto 9
years at the discretion of the lessee which he can decide at the end of the original lease term
2. Annual rentals are paid at the end of every year. For non cancellable period the rentals are Rs
125,000 p.a. and for the secondary term it shall be Rs 115,000 per anum.
3. Down payment at the time of commencement of lease was Rs 100,000
4. Initial direct cost paid by the lessee and lessor at the start of the lease
• Sonu Limited Rs 12,500
• Titu Limited Rs 40,000
5. Interest rate applicable in the lease is 15% p.a
6. Lessee if of the view that the asset shall be used for the whole term of 9 years as there is a strong
economic incentive in using the asset beyond 6 years.
7. The asset is expected to be dismantle at the end of the lease term (9 years) at an expected cost of
Rs 80,000
At 30 June 2013 Sonu Linited reassessed the lease term to be 6 years as the company thinks that much
better options are available in the market to replace the asset
Ahmed Raza Mir, FCA
1. The interest rate on the date of reassessment was 16% (incremental borrowing rate of lessee)
2. Disentailing cost is expected to increase by 15,000 if the term of the agreement is reduced.
Required
Journal entries for reassessment
Question 7 [rentals depending upon inflation index – reassessment]
On January 1, 2001, entity A leases a property for a lease term of 8 years. The lease payments for first
three years have been agreed at Rs 150 per year. The lease payment will be reset on 1 Jan 2004 and
after every three year thereafter. The lease payments will be adjusted on the basis of previous three
years RPI (retail price index).
At 1 January the RPI is 100 and the IRR is 5%.
RPI on the following dates are as under:
Date RPI Interest rate

Jan 2002 103 5%
Jan 2003 107 5.5%
Jan 2004 108 6%
Jan 2007 113 4%
Required
Journal entries for reassessment
Question 8 [option to acquire leased asset at the end of the term – Reassessment]
Ghalib Limited leased an asset from Meer Limited on the following terms:
1. Down payment at the commencement of the lease is Rs 250,000.

2. Annual rentals payable at the start of every year is Rs 400,000.
3. Lease term (non-cancellable period) is 5 years.
4. Applicable interest rates 10% to the lease agreement.
5. Total useful life of the asset is 8 years considering the workload of the lessee.
6. The lessee can acquire the asset at the end of lease term at Rs 500,000.
The company initially thought that the asset will be returned after 5 years. After the completion of 2nd
year the company is expecting to retain the asset purely on financial grounds. The revised rate is
12%.
Required
Journalize the reassessment of the lease
Ahmed Raza Mir, FCA
Question 9 [option to purchase the asset at the end of

lease term – reassessment]
Usman Limited leased an asset from Ali Limited on the following terms:
1. Annual lease rentals payable at the end of the year Rs 250,000
2. Applicable interest rate in the lease is 16%
3. Lease term is 5 years non-cancellable and non-extendable
Usman Limited is a Joint venture of two entities and is starting business in Zob. Government of
Pakistan has licensed the company to operate subject to a condition to operate for at least eight years.
If the company leaves the business before this then it has to pay penalties and has to dismantle the
asset. If the company operates for 8 years government will bear the dismantling cost of the asset.
Usman Limited is given an option to purchase the asset at the end of lease term for Rs 400,000. The
useful life of the asset is 8 years.
The company expects the purchase option to be exercised at the end of the lease term.
Two years later the company changed its business model and is not expected to reduce the business to
5 years. Estimate of dismantling liability Rs 65,000.
Required
Journalize the reassessment of the lease
Question 10 [changes in estimate of G. Residual Value for lessee – reassessment]
ABC Limited leased an asset from Jamal Leasing on the following terms:
1. Down payment at the commencement of the lease Rs 180,000
2. Annual lease rentals Rs 250,000 payable at the end of the lease term
3. Lease term is 5 years (not extendable)
4. Applicable interest rate in the lease is 16%
5. The asset shall be returned at the end of the lease term to the leasing company and the leasing
company has required the lessee to guarantee the residual value to be atleaset Rs 400,000.
The lessee guaranteed the entire residual value. At the inception of lease the lessee expected not to
pay anything under the lease residual value guarantee.
At the end of second year the lessee reassesses the residual value which is expected at the end of the
lease term to be Rs 340,000 (means that the lessee would have to pay the difference) Interest rate on
the date of reassessment was observed to be 15%.
Required
Journalize the reassessment of residual value
Ahmed Raza Mir, FCA
Question 11
The lease on Q Ltd’s factory building expired on 31 December 2010 and it had to find new premises
from 1 January 2011. Q Ltd will lease a new factory building from R Ltd for a period of ten years,
starting on 1 January 2011. The annual lease instalment, payable in arrears on 31 December of each
year, amounts to Rs 8 million.
At the end of the lease term, Q Ltd has guaranteed a residual value of Rs 75 million for the factory
building. On 1 January 2011, Q Ltd expects that it will have to make a payment of Rs 25 million under
the residual value guarantee (the expected fair value of the factory building at the end of the lease
term is thus Rs 50 million).
Q Ltd does not have sufficient information to determine the interest rate implicit in the lease and uses
its incremental borrowing rate of 12% per annum to discount the lease payments.
Based on the contract, the commencement date of the lease is 1 January 2011. The company
depreciates the right-of-use asset using the straight-line method of depreciation and the expected
economic life of the factory building was 25 years.
On 1 January 2012, Q Ltd reassesses its lease payments and determines that it now expects to pay the
lessor only Rs 20 million under the residual value guarantee, due to an increase in property prices
during the year.
Required
Journal entries for reassessment of the residual value.
Ahmed Raza Mir, FCA
Question 12 [modification of lease – increase in lease term]

Mustafeez Limited is leasing an asset from Jahlam Limited. Terms and conditions under the lease are as
under:
1. Lease term is 5 years and is non-cancellable
2. Interest rate applicable to the lessee at the time of entering lease is 16%
3. Annual rentals payable at the end of the year amount to Rs 100,000
4. Down Payment paid at the commencement of the contract is Rs 250,000.
The company, after using the asset for 2 years requested the lessor to extend the lease term to 6 years
in total (4 years from now). Interest rate on modification date was observed at 15%.
Required
Journalize the modification of the lease contract
Question 13 [modification of lease agreement – Increase in lease term]

Khan Limited leased an Assets on the following terms:
1. Lease term shall be non-cancellable period of 4 years from the date of commencement of the lease
(1 Jan 2012).
2. Annual rentals shall be Rs 300,000 per year. First rental due at the end of the year.
3. Interest rate applicable to Khan Limited is 9%.
4. The lease shall commence with a down payment of Rs 450,000.
On 1 Jan 2013 Khan Limited renegotiated the lease term to be 6 years. Rentals were reduced to Rs
200,000 per annum with a lumpsum payment of Rs 160,000 to be paid by the company at the end of
the lease term (new term).
On the date of modification, the interest has increased by 1% as compared commencement date of the
lease.
Required
Journalize the modification in the lease contract
Question 14 [Reduction in the lease term – lease modification]
On 1 July 2013 Musa Limited leased an asset on the following terms from Khan Limited:
1. Annual rentals at the end of the year are set to be Rs 80,000
2. Interest rate implicit in the lease is 10% whereas the incremental borrowing rate of the lessee is
9%
3. Lease term is set to be 6 years, thereafter the leased asset shall be returned to the lessor.
Ahmed Raza Mir, FCA
On 1 July 2014, the board of directors of lessee, decided to renegotiate the term with the lessor to
reduce it to four years (in total). The rentals are increased by 10% for the remainder term. Interest rate
of the date of modification was 9%.
Required
Journalise the modification of lease agreement
Question 15 [Reduction in lease term - Modification of lease]
Erum Limited is engaged in the manufacturing of empty cans for food processing industry. The
company leased an equipment on 1 July 2016 on the following terms.
1. Annual rentals to be paid at the end of each year (30 June) amounts to Rs 245,000
2. Lease term (non-cancellable period) is 6 years
3. Down payment of Rs 100,000 is paid at the beginning of the lease
4. The asset shall be returned to the lessor at the end of the lease term
5. Expected residual value at the end of the lease term is 300,000. None of it is guaranteed by the
lessee
6. Interest rate at the inception of the lease was 16%
On 1 July 2017, the board of directors of Erum Limited, the company renegotiated the term with the
lessor to reduce it to four years. The rentals are increased by 12% for the remainder term. Interest rate
of the date of modification was 14%.
Question 16 [Reduction in assets tally – Modification of lease]
Kamran Limited leased an asset from Lamosh Limited on 1 December 2012 (agreement date). The
terms of the contract are as under:
1. The lease will cover 4 Equipment but the contract will be one.
2. Combined annual rentals at the end of the year would be Rs 400,000
3. At commencement of the lease (1 Jan 2013) a down payment Rs 600,000 would be paid.
4. Interest rate implicit in the lease is 6%
Two years latter the company negotiated with the lessor to return one asset. The terms of the
remaining lease are now as under:
1. Annual rentals shall be reduced by 16%
2. Interest rate are raised to 7% in the market.
Required
Journal entries for modification
Question 17 [Increase in assets tally – Modification of lease]
Ahmed Raza Mir, FCA
Following terms were agreed on Novemebr 12, 2014 between Zahid Leasing and Muslim Limited:
Particulars Details
Commencement of lease 1 Jan 2015
Assets covered 5 floors of 20 story building
Annual rentals Rs 1.4 million for each floor
Interest rate 14% p.a.
Down payment Rs 250,000 per floor.
Lease term 5 years
Muslim Limited insisted Zahid leasing to add one more floor on Jan 1, 2016. The deal was agreed on
the following terms:
Particulars Details
Rental Rs 1.5 million
4 years from the date of commencement
Lease Term of lease of this asset
Interest rate 13% p.a
Down Payment Rs. 0
Required
Journalize the modification of lease under the following assumptions
1. The rental quoted in the new floor lease is equal to the fair market rentals.
2. The rental quoted in the new floor lease is less than the fair market rentals.
Question 18 [Reduction in lease term – Modification of lease]

Fawad limited leased 6 generators of 150 kva from Nasir Limited. Details of the agreement are as
under:
Annual rentals Rs 40,000 per generator (in arears)

Interest rates 10% p.a.
Lease Commencement 1 Jan 2015
Down Payment Rs 60,000 per generator
Lease Term 5 Years
On 1 Jan 2017 Fawad Limited and Nasir Limited mutualy agreed to reduce the asst tally to 4
assets with the following new terms:
Annual rentals Rs 46,000 per remaining generator
Interest rates 12% (Changed since the original lease agreement date)
Required
Journal entries for modification of lease agreement
Ahmed Raza Mir, FCA
Question 19 [reduction in asset base – Modification of lease]

Khalid Limited leased 5 generators from Nahid Leasing on a lease term of 5 years.
Particulars Details
Fair Value per generator Rs 5,000,000
Interest rate 16%
Lease commenced on 1 Jan 2015
Down Payment per asset Rs 600,000
Rentals per asset Rs 800,000
At the first year of its operation Nahid Limited assessed that the target activity level which it had
thought will be reached in near future, therefore, the company is considering to reduce the scope of
the lease and return one such generator. The companies agreed to reduce the scope on the condition
that the lease rentals will be increase by 12%. Interest rate on the date of modification is 15%.
Required
Journalize the modification of the lease agreement.
Question 20 [Modification of lease – Adjustments to rentals]
Baku Limited leased an asset from Budapest limited on the following terms:
1. Annual rentals at the end of every year Rs 100,000

2. Lease term is set to be 5 years
Two years latter the company renegotiated the rentals considering the fact that better substitute of
the leased assets are available in the market at substantially low rentals. Lessor agreed to reduce the
rentals to Rs 80,000.
Interest rate at the date of modification was observed to be 5.5% p.a.
Required
Journalize the modification of lease agreement

Ahmed Raza Mir, FCA
Complex Modifications
Question 21 (Reduction of asset base in future)
ABC Limited leased 5 floors of a building on the following terms:

2. Commencement of the lease shall be from 1 Jan 2016
3. Lease Rentals for all five floors shall be Rs 100,000 in total
4. Interest rate appliable to the lessee is 5% p.a.
On 1 Jan 2018 the lease agreement was modified to include the following clauses:
1. Lease of one floor will be terminated on 31 December 2018.

2. Lease term of remaining floors shall be the same.
3. Rentals for 4 floors shall be Rs 84,000 per annum from now on.
4. Interest rate on 1 Jan 2018 is 6% for lessee.
Required
Journal entries for modification of lease contract
Question 22 (Reduction in Asset base in future and extension of lease term)



6. Lease of remaining floors shall be increased by 2 years.
7. Rentals for 4 floors shall be Rs 80,000 per annum
Required
Question 23 (reduction in LT and increase in asset base)


1. Lease term shall be reduced by 1 year.

2. One more floor is to be added to the lease agreement with a rental of Rs 15,000 which is not
equal to the market rental
Ahmed Raza Mir, FCA
3. Rentals for previous lease shall not be changed

Required
Question 24 (Reduction of asset base in future and Reduction of LT)



6. Lease of remaining floors shall be reduced to 2 years.
7. Rentals for previous lease shall not be changed
Required
Journal entries for modification of lease contract.
Ahmed Raza Mir, FCA
Question 25 [Accounting for lessor]

Khuzaima Limited is leasing company, leasing industrial printers. The company undergone the
following lease agreement at the start of 2015 with the following terms:
1. Fair Value of the asset given on lease was Rs 600,000

2. Initial direct cost paid by lessor for the lease is Rs 20,000
3. Lease term is set to be 5 years. The term is not extendable and the asset will be returned at the
end of the lease term by the lessee.
4. Expected Residual value of the asset at the end of the lease term is Rs 80,000. 70% of the
residual value is guaranteed by the lessee and independent 3rd parties. 20% of the residual
value is guaranteed by the parent company of the lessor. Remaining residual value is
unguaranteed.
5. Interest rate to be recovered by the lessor from the lease is 6%
Required
Accounting entries and disclosures by lessor for the first year of lease.
Question 26 [Accounting by Manufacturer / Dealer Lessor]

Sumair Limited is a dealer of Honda Limited, dealing in cars. The company sells cars on cash and on
lease as well. One such asset was given on lease at the inception of 2016 on the following terms.
1. Interest rate applied to lease arrangement is 10%
2. Lease term is set to be 5 years. The term is non-cancellable and the asset will be returned to the
lessor at the end of the lease term.
3. Residual value of the asset at the end of the lease term is expected to be Rs 50,000 which is
100% guaranteed by the lessee.
4. Annual rental shall be received at the end of every year.
Other information
1. Cost of the asset (purchase price from manufacturer was Rs 800,000).
2. The company generally charge a gross profit mark up of 20% on cost.
3. Sumair Limited paid Rs 16,000 commission to a broker who helped the company strike the deal.
Required
Accounting for first year for lessor along with disclosures
Question 27 [Accounting by MDL – Treatment of Residual value – Guaranteed and Unguaranteed]

Following are the details of a lease entered into by ABC Limited:
1. Fair value of the asset is Rs 540,000
2. Interest rate applicable to the lease is 10%
3. Lease term is 5 years
4. Expected residual value of the asset at the end of the year is Rs 90,800.
5. Annual rentals are paid at the end of every year
Ahmed Raza Mir, FCA
Required
Accounting for lessor for the first year of lease assuming that
1. Lessor is a normal lessor and residual value is guaranteed
2. Lessor is a normal lessor and residual value is notguaranteed
3. Lessor is a Manufacturer / Dealer lessor and residual value is guaranteed
4. Lessor is a Manufacturer / Dealer lessor and residual value is notguaranteed
Question 28 [Accounting by MDL – GRV and UGRV]

Usman Limited is a furniture manufacturer. The company leased a furniture set on the following terms:
1. Annual rentals will be paid at the end of every year.
2. Interest rate applicable to the lease is 8% which is fair market rate considering the risk profile of
the lessee.
3. Lease term shall be 5 years which is not extendable or cancellable
4. Residual value expected from the asset at the end of the lease is Rs 60,000
Other information
1. Cost of manufacturing the asset is Rs 825,000
2. Gross profit is set to be 20% on cost
Required
Accounting for first year for lessor along with disclosures assuming:
1. Residual value of the asset at the end of the lease is guaranteed
2. Residual Value of the asset is not guaranteed
Question 29 [Artificially Low interest rates – Accounting by MDL]

Hussain Limited is a manufacturer of automatic washing machines. The company entered into a lease
on 1 Jan 2018 on the following terms:
1. Annual Rentals at the end of every year would be Rs 170,000
2. Interest rate quoted in the contract is 7% whereas the market rate that would have been
applicable to the lessee is 16% p.a.
3. Lease term is 6 years which neither extendable nor cancellable
4. The company keeps a margin of 10% of the fair value of the asset
Required
Journal entries for the first year of lease
Question 30 [Artificially low interest rates – Accounting by MDL]

ABC Limited is a manufacturer of industrial equipment. The company leased an asset at the start of the
current year. Details are as under:
1. Cost of the asset Rs 400,000
2. Annual Rentals Rs 167,190 to be paid at the end of every year
3. Interest rates quoted in the contract was 5% whereas the market rate for the same contact was
20% p.a.
Ahmed Raza Mir, FCA
4. Lease term is 5 years

5. The asset will have no residual value at the end of the lease term.
The company used the quoted in interest rates in the contract for the recognition of sales and interest
income.
Required
Journal entries for the correction of accounting done so far.
MODIFICATION OF LEASE AGREEMENT
Question 31 [New asset added – Modification of lease]

Following are the details extracted from the lease agreement between Kojak and Lollipop Limited
executed on 1 July 2018:

2. Rentals are set to ensure recovery of fair value of Rs 600,000.
3. No residual value is expected at the end of the lease term
4. Asset will be returned to the lessor at the end of lease term
5. Internal rate of return to be recovered from the lease is 14%
On 1 July 2019 the lessee requested Kojak Limited to add one more asset to the leased assets tally for
the remainder of the lease term. Agreed terms are as under:
1. Fair Value of the asset added is Rs 180,000

2. Internal rate of return at modification date 12%
3. Residual value of the new asset added at the end of the lease term is Rs 16,500.
The rentals were increased by Rs 55,810 per alum for the old lease to incorporate the new asset.
Required
Journalize modification of lease by (lessor)
Question 32 [New asset added – Modification of lease]

Following are the details of an industrial cutting machine given on the lease to Mustang Limited:
Fair Value of Asset Rs 780,000

Term 6 years
Residual Value Rs Nil
The lessor and lessee added one more asset to the lease tally after 2 year of the original lease
agreement. The terms were as under:
Ahmed Raza Mir, FCA
Fair Value of the asset Rs 250,000

Internal rate applicable at modif date 15.00%
Residual Value Rs 40,000
Term 4 years
The rentals were increased by Rs 68,000 per annum for the old lease to incorporate the new asset.
Required
Journalize modification
Question 33 [Reduction in Asset base – Modification of lease]

ABC Limited leased an asset costing Rs 400,000 on a 6 years lease to Sacha Limited. Useful and
economic life of the asset was also 6 years. Interest rate implicit in the lease is 15%.
Two years later, the lease agreement was modified to reduce the scope of the asset to 60%. The
rentals were reduced inline by 36%.
Required
Question 34 [Reduction in lease term – Modification of lease]

Details of a lease is as under:
Particulars Details
Rentals Rs 145,000
Term 6 years
The lease term was changed to 5 years (total) two years later. Lease rentals were increased by Rs
5,000. market rate at the date of modification is 13%. Revised residual value at the end of revised lease
term Rs 120,000
Required
Question 35 [increase in lease term – modification of lease]

ABC Limited leased an asset to M Limited:
Particulars Details
Rentals Rs 70,000
Term 4 years
Ahmed Raza Mir, FCA
The lease term was increased to 5 years (total) two years later. Lease rentals were reduced by Rs
2,000. market rate at the date of modification is 13%. Revised residual value at the end of revised lease
term Rs 10,000
Required
Question 36 [effects on classification]

Following details pertain to asset lease by Mushtaq Leasing Limited:
1. Fair Value of the asset Rs 800,000

2. Internal rate of return 12%
3. Term of the lease 8 Years
4. Economic Life of the asset 10 years
5. Residual Value (unguaranteed) Rs 50,000
A year later, both the parties to the lease agreed to reduce the lease term to five years in total without
adjusting the rentals and other aspects.
Required
Journal entries for the modification of lease
Ahmed Raza Mir, FCA
Question 37 [sale and lease back – sale at fair value]

Faisal Limited has an asset that the company is considering to use in a sale and leaseback transaction
to generate operating liquidity for the operations to run smoothly. Details of the asset and sale and
leaseback transaction is as under:
1. Carrying amount of the asset at 1 March 2016 (transaction date of sale and leaseback) reported
to Rs 500,000
2. Fair value of the said asset on 1 March 2016 was observed to be Rs 680,000
3. Sales proceeds from the transaction were equal to the fair value of the asset.
5. Interest rate implicit in the lease agreement was 10%
6. Annual rentals of lease term payable at the end of every year was determined to be Rs 100,000
Required
Journalize the sale and leaseback transaction
Question 38 [sale and lease back – sale at fair value]

A company sold a machine for Rs.1.5 million which is also fair value and leased it back under a five-year
lease. The asset has a carrying value of Rs.1 million. The lease payments made by the lessee is Rs.
200,000 p.apaid at the end of the year. The interest rate implicit in the lease is 5% p.a. Assume that the
transfer of machine by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a
sale
Required
Question 39 [Sale and Lease Back – at price above fair value – IFRS 9]
Johnny Limited sold an asset to Ghalib Limited on 1 Jan 2012. Details of the transaction are as under:
1. Carrying amount of the asset at the date of disposal was Rs 500,000

2. Fair value of the asset on disposal date was observed to be Rs 680,000
3. On the request of Johnny Limited Ghalib Limited acquired the asset at Rs 730,000 (paying Rs
50,000 more than the fair value)
Johnny Limited also entered into a lease agreement simultaneously with Ghalib Limited to leaseback
the same asset on the following terms:
1. Annual rentals payable at the end of every year are Rs 133,157

2. Lease term was agreed to be 5 years
3. Lease payments are worked out at a 12% rate of interest per annum
Ahmed Raza Mir, FCA
Required
On 1 January 20X4, Relia sells an Administrative Building to Finance Master for Rs 600,000 and at the
same time, Relia leases the same building back for 10 years against an annual payment of Rs 50,000
due at the end of every year.
Other relevant information is as under:
1. Fair value of the building at the time of sale is Rs 500,000

2. Carrying amount of the building in Relia’s books right now before sale is Rs 480,000
3. Transaction meets the definition of sales under IFRS 15
Required
Journalize the sale and lease back transaction
Bholu Limited sold and leased back the following asset:
1. Carrying amount of the asset Rs 800,000

2. Sales proceeds Rs 850,000
3. Fair Value of the asset Rs 700,000
4. Rentals per annuum in arears Rs 200,000
5. Applicable interest rates 20%
6. Lease term agreed 4 years
Required
Question 42 [Sale and leaseback – Sale at price less than fair value – Advance Rentals]
Atlas Limited sells its manufacturing equipment at a price of Rs 5.5 million to Hybrid Leasing Limited.
The fair value and carrying amount of the asset is Rs 6 million and Rs 3 million respectively. The seller
leased back the asset for a period of 10 years in exchange for an annual rental of Rs 400,000 payable at
the end of every year. The seller’s incremental borrowing rate is 6%. Assume that the conditions for
sale is completed as per IFRS 15.
Required
Ahmed Raza Mir, FCA
Question 43 [sales and lease back – transaction is not a sale – right to buy back]
A company sold a machine for Rs.1.5 million which is also fair value and leased it back under a five-year
lease. The asset has a carrying value of Rs.1 million. The lease payments made by the lessee is Rs.
337,844 p.a paid at the end of the year. The buyer-lessor interest rate implicit in the lease is 5% p.a. The
machine has a remaining economic life of 6 years.
The lessor determines that the machine is of such a specialize nature that only the lessee can use it
without major modification. Lessee has the right to purchase the machine at Rs. 50,000 at the end of
the lease term. Initial direct costs are ignored.
Required
journalize the transactions identified from above scenario
Question 44 [Sale and Lease back – exception]

A company sold the furniture for Rs. 200,000 and leased it back under a ten months lease at
Rs. 4,000 per month The asset had a carrying value of Rs. 160,000 and fair value of Rs.
200,000.
Required
journalize the above mentioned transactions
Sublease
Question 45
Abdali limited leased an asset from Mustafa Limited on the following terms:
Lease term shall be 12 months
Monthly rentals shall be
Rs 14,000 per month for first quarter
Rs 19,000 per month for second quarter
Rs 21,000 per month for Third quarter
Rs 25,000 per month for fourth quarter
The lease commences from 1 August 2016.
Abdali limited sub leased the asset with the consent of Mustafa Limited to Harmain Limited on
the following terms.
Monthly rentals 29,000
Term 8 months
Commencement of lease 1 October 2016
Abdali limited has classified the head lease as an operating lease by virtue of exception
available to short term lease.
Required
Extracts from Statement of Financial positions at 31 December 2016
Ahmed Raza Mir, FCA
Question 46
Malakand Limited leased an Asset from Kalam Limited on the following terms:
Lease term shall be 7 years from 1 Jan 2014 Interest rate applicable to the lease shall be 12%.
Lease rentals shall be Rs 200,000 per annum to be paid at the end of every year. There are no
options to
purchase or to extend the lease term available
One-year latter Malakand Limited entered into a sub-lease (1 Jan 2015). Following terms were
agreed:
Lease term was set to be 3 years
Interest rate applicable to the lease was 11%
Annual rentals Rs 240,000 per year payable in arrears.
Required
Journal entries of sub lease for 2015
Question 47
Assuming that in the above question the lease term for the sub lease was 6
years.
Required
Question 48
Head Sub
Lease rentals 24,000 30,000
Commencement date "Jan 2014 "Jan 2015
Lease term 6 Years 5 Years
The head lease was classified as operating lease due to the fact that the underlying asset was of
low value.
On the date of sub lease the interest rates applicable to
Head Lease 9.00%
Sub Lease 10.00%
Required
Ahmed Raza Mir, FCA
Question 49 (Q3, June 2016)
United Front (Private) Limited (UFPL) is a company engaged in manufacturing and marketing of
automotive components for auto assemblers in Pakistan. On 1 January 2015 the company
entered into two sale and leaseback agreements with Sun Leasing Limited. The details of
machines sold and leased back under the two agreements are as under:
Machine – A Machine – B
Date of purchase 1-Jan-10 1-Jan-13
Cost (Rs. in million) 150 48
Useful life (in years) 10 10
Sale price to the lessor (Rs. in million) 78 41
Fair market value (Rs. in million) 80 44
The terms of lease agreements are as follows:
Machine – A Machine – B
Lease term 5 years 3 years
Annual rentals (Rs. in million) 18.283 4
Instalment due In arrears In advance
Down payment 10% Nil
The market interest rate is 9.5% per annum while the market rates of rentals for machines
similar to Machine-A and Machine-B are Rs. 19 million and Rs. 7 million per annum respectively.
Required
Prepare the relevant extracts from the statements of financial position and comprehensive
income and the related notes to the UFPL’s financial statements for the year ended 31
December 2015, in accordance with the International Financial Reporting Standards. (18)
Ahmed Raza Mir, FCA
Question 50 (Q6a, December 2017)
Following are the details of lease related transactions of Patel Limited (PL):
(i) 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 1 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.
(ii) 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 1 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. (Comparative figures and notes to the financial statements are not
required).
Ahmed Raza Mir, FCA
Question 51 (Q4, December 2018)
On 1 January 2015, Datsun Motors Limited (DML) acquired a machine on lease through Bolan
Leasing Company (BLC) to manufacture components of a new model of vehicle, on the following
terms:
(i) Non-cancellable lease period is 7 years.

(ii) The agreement contains an option for DML to extend the lease for further 3 years in which
case the legal title of the machine will be transferred to DML at the end of 10 years.
(iii) Lease installments are payable annually in advance as under:
 First seven instalments at Rs. 80 million each.
 Three instalments at Rs. 70 million each for the optional period.
DML also incurred initial direct cost of Rs. 15 million for the lease. DML’s incremental borrowing
rate on 1 January 2015 was 8% per annum. Useful life of the machine is 12 years.
On commencement of the lease, DML was reasonably certain that the option to extend the term
will be exercised.
However, after first year of production of the new model, DML assessed that the model is not
popular in the market. Therefore, in 2016, DML concluded that it is not reasonably certain that
DML would exercise the option to extend the lease for three years. DML’s incremental borrowing
rate on 1 January 2016 was 9% per annum.
After another disappointing year of the new model, DML negotiated with BLC and the lease
contract was amended on 1 January 2017 by reducing the original lease term from 7 years to 5
years with the same annual payments. DML’s incremental borrowing rate on 1 January 2017
was 10% per annum.
Required
Determine the amounts of “Right of use asset” and “Lease liability” as at 31 December 2015,
2016 and 2017 and reconcile the opening and closing balances of each year.
Ahmed Raza Mir, FCA
Question 52 (Q2(v), June 2019)
Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The following
transaction / event has been occurred during 2018:
On 1 January 2018, FL acquired a building on lease for a non-cancellable period of 6 years.

Lease contains rent free period of 2 years and 4 annual rentals of Rs. 60 million each are
payable starting from the end of 3rd year. Applicable discount rate is 12%. Nothing has been
recorded in the FL’s books in this respect.
Required:
Discuss how the above transaction / event 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 transaction / event).
Question 53 (Q3, December 2020)
Health Pharma Limited (HPL) entered into the following arrangements during 2019:
(i) On 1 January 2019, HPL acquired a capsule manufacturing machine from Hi-Tech
Industries Limited for a lease term of 5 years with installments payable annually in
advance. The useful life of the machine was estimated at 6 years.
HPL paid the 1st instalment of Rs. 50 million on 1 January 2019. However, subsequent
lease payments are subject to increase/decrease in line with consumer price index (CPI).
At lease inception, HPL estimated that CPI will increase by 10% annually. However, CPI
increased by 14% in 2019 and consequently Rs. 57 million was paid on 1 January 2020
as 2nd instalment. At 31 December 2019, HPL estimated that the annual increase in CPI
will continue to be 14% in future years.
HPL is also required to pay a usage fee of Rs. 0.3 per capsule produced in excess of 30
million capsules per annum from the machine. At lease inception, HPL planned to
produce 40 million capsules each year during the lease term. During 2019, HPL produced
40 million capsules and accordingly an amount of Rs. 3 million was also paid along with
2nd instalment.
(ii) On 1 April 2019, HPL entered into a contract with Auto Limited (AL) for the use of 8
Refrigerated Trucks for a period of 3 years at semi-annual payment of Rs. 10 million
payable in arrears. AL is also required to provide two drivers along with each truck. The
amount of Rs. 10 million can be allocated to the trucks’ rental and drivers’ cost in the ratio
of 70:30 respectively.
All costs pertaining to running and maintenance of trucks, would be paid by AL. However,
HPL is required to reimburse 30% of the fuel cost to AL. Fuel cost for 2019 was Rs. 4
million. HPL paid its share of fuel cost in 2020.
HPL uses these trucks for transportation of inventory all over the country. In order to save
fuel and time, AL often replaces a similar truck at the required location from one of AL’s
nearby office. AL is also required to provide a substitute in case of accident and
maintenance work
Ahmed Raza Mir, FCA
(iii) On 1 July 2019, HPL sold its warehouse building to Macro Finance Limited (MFL) for cash
of Rs. 1,400 million. Immediately before the transaction, the building was carried at Rs.
900 million and had remaining useful life of 18 years. At the same time, HPL entered into
a contract with MFL for the right to use the warehouse building for 10 years, with annual
payment of Rs. 180 million payable in arrears. Fair value of the building at the date of sale
was Rs. 1,500 million. The rate of interest implicit in the lease is 11% per annum.
The terms and conditions of the transaction are such that the transfer of the building by
HPL satisfies the requirements for determining when a performance obligation is satisfied
in IFRS 15.
HPL’s incremental borrowing rate is 12% per annum.
Required
Prepare the extracts relevant to the above transactions from HPL’s statement of financial
position and statement of profit or loss for the year ended 31 December 2019 in accordance with
the IFRS. (Comparative figures and notes to the financial statements are not required).
IAS 40 – AAFR
Investment Property
Investment Property
1. Purpose
To be classified as investment property, the property must be held with the intention of
a) Rental Income
b) Capital Appreciation
2. Properties classified as IP also include

a. land held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business.
b. land held for a currently undetermined future use. (If an entity has not determined that
it will use the land as owner-occupied property or for short-term sale in the ordinary
course of business, the land is regarded as held for capital appreciation.
c. a building owned by the entity (or a right-of-use asset relating to a building held by the
entity) and leased out under one or more operating leases.
d. a building that is vacant but is held to be leased out under one or more operating leases.
e. property that is being constructed or developed for future use as investment property.
3. Properties which can’t be classified as IP
Recognition
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Measurement
Example:
ABC Limited, on 1 Jan 2017, acquired a property with the intention of rental income and capital
appreciation in long term. The payment for the asset was done in the following manner:
Installment Date Amount
First 1 Jan 2017 150,000
2nd 31 Dec 2017 230,000
rd
3 31 Dec 2018 300,000
Applicable discount rate for the company is 10%.

The following expenses were incurred in connection with the acquisition and other matters:
1. Commission paid to an agent who helped the company in purchasing the asset equal to
2.5% of the considering for the property.
2. Legal, notary and documentation vetting charges amounted to Rs 10,000
3. Property taxes paid Rs 14,560 on the transfer of property. This includes Rs 3,400 annual
tax which is paid in advance for every year
4. Advanced income tax Rs 4,000 and Sales tax worth Rs 3,000 were paid at the acquisition
stage. Advance Income tax is adjustable against future tax liability whereas sales tax is
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
adjustable from the sales tax that will be collected from the rental income from the
clients.
5. Some parts of the property were replaced in order to make it ready for use amounted
to Rs 4,000. The parts that were drawn out were disposed off for Rs 1,500
The following costs were incurred after the acquisition of the property up to the year end
1. Three months after the purchase, the property was slightly damaged which needed a
corrective cost of Rs 12,000.
2. The property was made available for rent and the company incurred a cost of Rs 8,000
throughout the year on startup and on different marketing stunts
3. Annual maintenance cost for the property amounted to Rs 120,000 whereas the rental
income amounted to Rs 100,000 for the year
4. Some relocation costs paid by the company on behalf of some tenets in connection with
the property amounted to Rs 20,750. The average period covered in the rental
agreements is 10 years.
The company uses fair value model for the valuation of investment properties. Fair Value at
the end of first year of operations amounted to Rs 600,000. Useful life of the property is
considered to be 18 years.
Required
1. Calculate the cost of the property at which initial recognition would take place
2. Prepare profit and Loss for the year ended 31 December 2017
3. Comment on the suggestion by one of the director of the company to capitalize all
operating losses that will be encountered initially until the company starts earning profits
from operations
1. IP Acquired in Exchange of non-monitory assets

Value the IP on the basis of
 Fair value of assets given up
 Fair value of investment property acquired (if its Fair value is more reliable and clearly
evident)
 Carrying amount of asset given up if
 Neither fair values are given or
 The exchange has no commercial substance
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Question 2
Mustard Limited has completed the construction its new office building at a cost of Rs 600
million. The company has now undergone an agreement whereby it will surrender its old
Head office building to Humayoun Limited and in-turn will get a 4 story building which shall
be used for rental incomes:
Details of the office surrendered:

Carrying amount of the Old HO Building Rs 500 Million
Useful remaining life on 1 October 2016 18 years
The company is following revaluation policy and revalues the assets every two years. Current
balance of revaluation surplus is Rs 100 Million.
Other Information:
Fair value of the Old head office building at 1 Oct 2016 Rs 520 Million
Fair Value of Investment property to be obtained (1 Oct) Rs 825 Million
Cash paid under the agreement Rs 300 Million
The company immediately let the building obtained from Humayoun Limited on Rent and
obtained advance rent of Rs 150 million for full year. Fair Value of the investment property at
the end of the year was reported to be 1,050 Million
Required
Journal Entries and extracts from Profit and loss statement.
Question 3
Funsuk Wangro Limited is exchanging the following assets against an investment property on
1 May 2017:
Asset Carrying Fair Value Remarks

Amount
Inventory Rs 300,000 Rs 370,000 NRV at the date of Exchange is Rs 360,000
Machinery Rs 210,000 Rs 350,000 Revaluation surplus against this asset Rs 30,000
Small Plant Rs 80,000 Rs 55,000 Value in use is Rs 90,000
Cash Rs 375,000 Rs 375,000
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
The fair value of the investment property at
Date Fair Value
1 May 2017 Rs 1,200,000
31 December 2017 Rs 1,360,000
Rentals received on 1 July for 10 months Rs 140,000

Rates paid upto 31 December 2017 Rs 13,500
Required
Profit and Loss extracts and journal entries
Question 4
Assets Surrendered Asset Obtained
Machinery Rs 470,000 (Fair Value Rs 1. Investment property (Fair Value Rs
780,000) 600,000)
2. Cash Received Rs 100,000
Case 1: Fair Value of the asset given up is more reliable
Case 2 Fair value of the asset obtained is more reliable
Subsequent Expenditures to be capitalized or expensed out

1. Capitalize if the cost is
 expected to accrue future economic benefits for the company
 reliably measureable
2. Expense out if pertains to repairs and maintenance and day-to-day servicing
3. On occasions some significant parts of the property needs replacement (eg damaged walls). In
this case:
 The replaced part is derecognized
 Replacement part is recognized as IP.
Question 5
During the current year Flow Ltd spent the following amounts on its shopping complex (an IP)
and other IPs:
 Rs 5,000 on building parking bays for the tenants of a shopping complex. The tenants agreed
to pay Rs 500 extra each month for the new parking bays.
 Rs 2,000 on rates on the shopping complex
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
 The roof of the shopping complex was damaged in a hail storm and Flower Ltd had to pay Rs
25,000 to replace it. A section of the roof, with a carrying amount of Rs 10,000, was scrapped.
I. Subsequent measurement
a. Fair value
 Carried at fair value.
 Revalued at every period end
 Gains or losses on re-measurement is charged to Profit and Loss
 Not depreciated
 Not tested for impairment
b. Cost
 Carried at Historical carrying amount.

 Depreciated over useful life
 tested for impairment if an indicator(s) exist
 Disclosure of Fair Value
All investment properties shall be valued using same model (cost or fair value)
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Some Special Cases
2. Under Construction property

If fair value model is chosen and the fair value is identifiable during the construction the
property shall be valued at fair value.
If the fair value model is chosen and the fair value is not identifiable during the construction the
property but is assumed to be available when the property is completed, than the property shall
be valued at cost till completion.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Question 6
Company A has started a project to construct two buildings this year. The project shall be
completed in two years time. One of the buildings shall be used as the head office of the
company (building 1) and the other shall be used to generate current income in the form of
rentals. The company has the policy of valuing its investment properties at fair value. Cost
incurred to date on both properties:
Building 1 Rs 150 million (including Rs 2.25 million paid as a penalty for non
compliance of certain provisions of “construction regulations” while developing the same

property.
Building 2 Rs 250 million
Further estimated cost to complete the project is:
Required:
Value of both properties on which they are to be recognized in the financial statements on
the assumption that the company can reliably measure the fair value of both buildings in
this very state. Their respective fair values are Rs 190 million and Rs 330 million.
3. Joint Use property

It sometimes happens that land and buildings are partly owner-occupied and partly leased out
(joint use properties). These two components may need to be recognized separately:
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
 The owner-occupied component as property, plant and equipment; and
 The leased out component as investment property.
We would have an:
 Investment portion if a portion of the property is used to earn capital appreciation and/ or
rental income (an investment property); and
 An owner-occupied portion if a portion of the property is used in the production or supply of
goods or services and/ or for administration purposes (an owner-occupied property).
Whether to recognize each portion separately is determined as follows:

 If each portion can be sold or leased out separately (under a finance lease), then each portion
is recognized separately (one as an investment property and the other as an owner-occupied
property);
 If each portion cannot be sold or leased out separately, then the entire property is recognized
as an investment property if the owner-occupied portion is insignificant in relation to the
whole property (otherwise the entire property is recognized as property, plant and
equipment).
Judgment is required to determine whether a property qualifies as investment property. An entity

must thus develop criteria so that it can exercise its judgment consistently.
Question 7
How should Tee Ltd account for the following property in its financial statements:
1. Tee Ltd owns two freestanding buildings on two separate sites in Karachi. The first building
is used by Tee Ltd for administration purposes and the second building is leased out to
Runodamill Ltd.
2. Tee Ltd owns a building in Lahore, which it uses for administration purposes. The top floor
of the 20-storey building is leased to Unpleasant Ltd under operating lease terms.
3. Tee Limited owns a 20-storey building in Sialkot. It leases out 19 floors (each operating lease
is along with the option to purchase the specific floor) and uses the top floor for the
administration of the building.
4. The company owns a 10 story building, 6 floors are used as head office and the rest is given
on operating lease
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
4. Ancillary Services
 If such services are significant in relation to the property, than the property can’t be
classified as IP. This is because the entity is exposed to significant cash flow variations.
 In case the services are insignificant to the arrangement than the property can be classified
as IP.
 The investor should be seen as a passive investor rather than an active one
 Where difficulty arises in determining whether the services are significant or insignificant
the company should develop its own criteria and should disclose the same in F.S. where it
encounters such situation.
Question 8
Jawad Company Limited owns the following properties:
1. An office building which it leases out to another company under an operating lease. The
company provides security services to the lessee who occupy this building.
2. Hotel ABC which it has leased (operating) to Khalid Limited. The lease agreement is along
with a professional hotel management contract which provides for a fee equal to 1% of
the profits generated by the hotel.
3. Hotel DEF which it has leased (operating) to Nadim Limited. The lease agreement is along
with a professional hotel management contract which provides for a fee equal to 25% of
the profits generated by the hotel.
Required:
How should Jawad Limited account for each of its properties?
5. Intra group leasing arrangement and classification issues

 If one group entity leases a property (operating) to another member the lessor shall
classify the property as IP.
 The lessee shall not capitalize the asset unless the property meets the definition of IP in
that case the company may classify the property as IP and capitalize the same.
 In group financial statements the property is classified as PPE because the group is treated
as a single entity and the property is deemed to be owner occupied property.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Example
Big Limited leases a building from Small Limited, a subsidiary of Big Limited, under an operating
lease. The following applies:
• Small Limited purchased the building for Rs 20 million on 1 January 2005.
• Small Limited’s accounting policy for Investment Property is the fair value model.
• The fair value as at 31 December 2005 was Rs 20 million.
• The useful life of the building is expected to be 20 years.
• Big Limited does not revalue property, plant and equipment.
• Big Limited uses the fair value model to value its Investment Property.
• Big Limited uses the building for its administration department.
Required:
Explain how the building should be accounted for in the financial statements of:
A. Small Limited’s company financial statements.
B. Big Limited’s company financial statements.
C. Big Limited’s group financial statements.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Switching the model (Change in Policy)
“Very remote - Either not allowed or not possible”
From Fair Value to Cost
1. Due to failure of identification of Fair values

It is not possible to change to cost model on the basis that the fair value is not determinable
subsequently. In this case the property shall be valued at last known fair value until the fair
values become identifiable subsequently.
2. Voluntary change (under IAS 8)

Highly unlikely such change (from fair value to cost) shall be possible because IAS 8 permits
voluntary change when the change results in a more reliable and relevant information. As per
general understanding fair value in any case is more reliable than cost information.
From Cost to Fair Value
1. Voluntary change (under IAS 8)

 IAS 8 permits voluntary change when the change results in a more reliable and relevant
information. A company can change the measurement policy for a property (from Cost to
Fair value) if for the asset, at the time of recognition, fair values could have been identified
on continuous basis but yet the company opted for cost model.
 Gains / loss on measurement at fair value shall be accounted for as per IAS 8.
2. Due to subsequent identification of Fair Values

It is not possible to switch from cost to fair value model on the basis that the fair values
which were not identifiable at the acquisition of the property have now become identifiable.
The property shall be kept at cost and shall continue to be depreciated.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Reclassifications
Into Investment Property
a) When the owner occupied party ceases to be occupied by the owners it is immediately
classified as IP.
b) When a property that is held for sale in the ordinary course of business is rented out in
operating lease. The property is immediately transferred from inventories to IP.
Out of Investment Property
a) When development of an IP commences with a view to resale in the ordinary course of
business. (First the decision should be taken to resale the property and then development
should be started for that purpose. Only decision / intention will not suffice the criteria for
reclassification)
b) When the IP becomes owner occupied (occupation starts).
Example
“Dreams unlimited” Limited was in the process of constructing a building for rental income when,
due to financial difficulties, it could not complete the construction thereof. It has the following
options:
 Sell the building as is, (DUL does, on occasion, sell buildings);
 Hold the building ‘as is’ for capital appreciation; or
 Borrow from the bank and complete the building, then use it as their head office
Required:
Explain how Pillow Limited should account for the building under the three options above.
Change in Use
1. From Investment Property to Owner-Occupied Property
If IP is measured at Fair Value
1. Revalue the property in IAS 40 and change all the gains / loss on re-measurement to income
statement.
2. Derecognize the property as IP and recognize the property under IAS 16.
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
3. Initial recognition of property in IAS 16 is done at fair value on the date of recognition.
4. The assets can be kept at the same carrying amount in IAS 16 and depreciated to its useful
life or it may be revalued in IAS 16 subsequent to recognition and depreciated accordingly.
If IP is measured at Cost
The transfer shall take place at carrying amount and all other steps shall be same
2. From Investment Property to Inventory
If IP is measured at Fair Value

1. Revalue the property in IAS 40 and change all the gains / loss on re-measurement to income
statement.
2. Derecognize the property as IP and recognize the property under IAS 2 as inventories.
3. Initial recognition of property in IAS 2 is done at fair value on the date if recognition. Fair
value at the transfer date shall be deemed to be the cost for the purposes of IAS 2.
4. The assets is than carried as per the measurement criteria of IAS 2 (i.e. Lower of Carrying
amount or NRV)
If IP is measured at Cost
The transfer shall take place at carrying amount and all other steps shall be same.
3. From Owner-Occupied Property to Investment Property
If the IP is to carried at Fair Value
1. The property classified in IAS 16 (no matter whether the company is following cost or
revaluation model) will revalue the property and charge the revaluation gain or loss
according to IAS 16.
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
“No Gain / Loss on initial recognition to be booked in P/L”
2. Derecognize the property as PPE and recognize the property as IP under IAS 40.
3. Initial recognition of property in IAS 40 is done at fair value on the date if recognition.
4. All subsequent gains or losses on re-measurement of IP under IAS 40 shall be charged to P/L.
If the IP to be kept at Cost
The transfer shall take place at carrying amount and all other steps shall be same.
4. From Inventory to Investment Property
General Rule
1. Whether the company wants IP to be carried at Fair value or cost the transfer shall be made
at the carrying amount.
2. Derecognize the property as Inventory and recognize the property as IP under IAS 40.
3. Initial recognition of Investment property in IAS 40 is done at the carrying amount on the
date of recognition.
All subsequent gains or losses on re-measurement of IP under IAS 40 shall be charged to P/L.
Question 9 [PPE to IP]
Following data pertains to Kashif Limited:

1. PPE carrying amount on 1 Jan 2018 is Rs 600,000
2. Remaining useful life of the asset is 10 years
3. On 1st July the property was vacated in order to lease it against rental income
4. On 1 September the company leased out the asset and start obtaining a rental of Rs 5,000
per month
5. On 1st July the fair value of the property was Rs 750,000, at the 1 September Rs 770,000
and at the yearend Rs 789,000
6. Other operating costs amounted to Rs 8,750 incurred after the asset was rented out
7. The company uses
a. Fair value model for investment property
b. Cost model for investment property
8. The company uses cost model for the property plant and equipment
Required
Extracts of Profit and Loss Account and journal entries for both the cases referred above
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
Question 10 [Inventory to IP]
Akmal Limited sells properties and lease them for rentals income. The company had a
property costing Rs 400,000 on 1 Jan 2017. The company trying to sell the property for the
last two years could not succeed. The company decided on 1 Jan 2017 to lease the property
on rent. The company started to find a lessee to lease the entire property. The company
found a suitable lessee and leased the property on rent on 15 April 2017.
The Company values investment property at fair value. The following fair values of the
property were observed on the following dates:
Date Fair Value

1 Jan 2017 Rs 450,000
15 March 2017 Rs 480,000
31 December 2017 Rs 496,000
The useful life of the property at the start of lease agreement was 10 years and expected
residual value of the property at the end of the useful life is Rs 50,000.
Required
1. Journal entries
2. Journal entries if the company values investment property at cost
Question 11 [IP to PPE]
Samandar Khan limited is a leasing company and it leases properties on rent. Details of one
such property is as under:
1. Property Number R75
2. Average rental income per month Rs 70,000
3. Fair Value at:
a. 1 Jan 2018 Rs 6.5 million
b. 1 March 2018 Rs 7.1 million
c. 1 July 2018 Rs 7.28 million
The company estimates the useful life of the property to be 10 years on 1 Jan 2018.
The company decided to move its head office in this building. Details are as under:
1. Board approval 10 January 2018
2. Vacating the building 1 March 2018
3. Occupation of the building 1 July 2018
The company uses fair value model for investment properties and cost model for property
plant and equipment.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Due to early termination of the lease agreement the company has to pay a penalty of Rs
50,000.
Required
Journal entries
Question 12 [IP to Inventory]
Slaman limited runs a business of building and then selling properties to high net worth
individuals. Some properties are rented out on long term contracts.
Property at Clifton is used for rentals income the last several. The company has decided to sell
the same in short term. Following dates are important (events that took place in 2018):
1. Date of board decision 20 January 2018

2. Date the property is vacated 15 March 2018
3. Date the company started development 30 April 2018
4. Date the property is sold out at FV 21 November 2018
Details of the fair values and expected cost to sell is as under:

Date Fair Value Selling Cost
20 January 2018 Rs 6 Million 5%
15 March 2018 Rs 6.25 Million 4%
30 April 2018 Rs 6.8 Million 6%
21 November 2018 Rs 7.1 Million 5%
Required
Journal entries for all reportable events
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Past Paper Questions
Question 13 [June 2015 (transfer to investment property)]
Question 14 [December 2013 (IP given on operating lease + FV adjustment)]

Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Question 15 [June 2012 (Note on IP – reclassification on investment property)]
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Question 16 [Reclassification on investment property]
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Extra Practice Questions
Question 1:
You are the financial accountant of Cobra Limited, a construction company. It constructs buildings
for resale, for leasing and for private use. Cobra Limited applies the fair value model to its
investment properties and the cost model to its property, plant and equipment.
During 20X7, management made the following decisions regarding four of its properties:
Umhlanga head-office building:

On 1 July 20X7, Cobra Limited directors passed a resolution to move its head office from
Umhlanga to its Sandton property. The old head office building in Umhlanga was leased to a
tenant under an operating lease. The lease commenced on 1 October 20X7. The original cost was
C3,600,000 (acquired on 1 October 20X5). Its total useful life was 10 years and its residual value
was nil. Its fair values were as follows:
 1 July 20X7: C3,200,000
 1 October 20X7: the fair value was considered equal to its carrying amount
 31 December 20X7: C3,330,000.
Kirstenbosch building:
This building had been constructed by Cobra Limited for sale in the ordinary course of business
(having cost C720,000 to construct). However, despite having been on the market for 2 years, it
remained unsold. As a result, a decision was made, on 1 January 20X7, to take the property off
the market and let it out under an operating lease. A suitable tenant was only found during
February, and the operating lease commenced on 1 March 20X7. Its fair values were as follows:
C
01 March 20X7 900,000
31 December 20X7 1,350,000
Pretoria building:
The construction of this building was completed on 1 January 20X4 at a cost of C4,500,000 and
was immediately leased to tenants. Its total estimated useful life is 10 years and residual value is
nil. Despite being leased to tenants, the fair value of this building had not previously been ‘reliably
measurable on a continuing basis’. However, fair values are now considered possible and the
accountant is adamant that the asset should either be measured under the fair value model or
that the depreciation on the building should be measured using an estimated residual value of
C1,800,000 (previously the residual value was nil). The estimated useful life has remained
unchanged. The fair value on 31 December 20X7 was C4,800,000.
Sandton building:
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Cobra Limited owned a property in Sandton that it had leased to ‘problem tenants’ for years. On
1 July 20X7 Cobra Limited made the decision to evict the tenants and relocate its head office to
this property. The eviction notice was effective from 1 October 20X7, on which date the head-
office was officially installed into this property. On this day, the remaining useful life was 5 years
and the residual value was C450,000. The fair values of the Sandton building were as follows:
C
31 December 20X6 2,700,000
01 October 20X7 3,600,000
 Rentals earned from the investment properties totalled C1,800,000.
 Rates paid totalled C900,000.
 All leases were operating leases.
Required:
Disclose the investment property note and the profit before tax note in Cobra Limited’s financial
statements for the year ended 31 December 20X7. Ignore tax and comparatives.
Question 2:
Jake Limited owns a double-storey house in Jacobsdal that it had used as the offices of one of its
satellite branches ever since the house had been purchased. The house had been purchased on
1 January 20X4 for C2,000,000, on which date its total useful life was estimated to be 20 years
and its residual value was estimated to be nil.
The branch in Jacobsdal was battling and, as a result, Jake Limited moved its Jacobsdal branch to
another area nearby and decided instead to rent the house out to college students.
Jake Limited moved out of the house and tenants moved into the house on 30 June 20X5. The
estimated remaining useful life and residual value remained unchanged.
The carrying amount of the house on 30 June 20X5 was considered to be a reasonable estimate
of its fair value. The fair value of the house was C800,000 on 31 December 20X4 and C2,200,000
on 31 December 20X5.
Jake Limited uses the cost model to measure owner-occupied property and the fair value model
to measure investment property.
Required:
a) Journalise the entries relating to the house in Jake Limited’s general journal for the year ended
31 December 20X5. Ignore tax.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
b) Had Jake Limited decided not to lease its house to college students but decided instead to
lease it to one of its subsidiary companies under an operating lease, explain how the house
would be measured in:
 Jake Limited’s separate financial statements; and
 Jake Limited’s group financial statements.
Question 3:
Mountain Properties Limited is a property development company. You have been approached by
the newly-appointed financial accountant, Mr. Peak, for advice on IAS 40 Investment property.
Mr. Peak has provided you with the following list of issues relating to the investment properties
that had occurred during the year:
Issue 1
On 31 July 20X7, a massive landslide damaged the property on which the company’s head office
was situated. Its head-office was immediately relocated to the Himalaya property. The Himalaya
property was previously let to tenants under an operating lease. The fair value of the Himalaya
property was as follows:
C
31 December 20X6 21,420,000

31 July 20X7 21,840,000
As at 31 July 20X7:
 the land element of the property is C5,040,000; and
 the property had an estimated remaining useful life of 20 years.
Issue 2
On 30 November 20X7, Mountain decided that two investment properties should be sold:
Andes Property Fuji Property
Fair Value: 31 December 20X6 C12,600,000 C16,800,000
Fair Value: 31 November 20X7 C11,760,000 C17,220,000
The Andes Property is to be sold after redevelopment (the redevelopment commenced on 30
November 20X7). The Fuji Property is to be sold without redevelopment.
Issue 3
During 20X7, two new investment properties were bought for a total of C71,400,000. Legal and
transfer fees amounted to an additional C1,680,000.
Additional information
 The company uses the cost model for property, plant and equipment and the fair value model
for investment properties. All properties measured under the cost model are depreciated on
the straight-line basis over the asset’s useful life.
 The combined fair value of the investment properties is as follows:
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
C
31 December 20X6 420,000,000
31 December 20X7 525,000,000
Required:
a) Explain how issues 1, 2 and 3 should be accounted for in the financial statements of Mountain
Properties Limited for the year ended 31 December 20X7.
b) Calculate the fair value adjustment in respect of investment properties to be recognised in
profit or loss for the year ended 31 December 20X7.
Question 4:
Cloudy Limited has its head-office building located in Gabon Street in Marrakesh. It also owned a
building nearby in Kalahari Avenue that it rented to Wealthy Limited, a reliable and reputable
tenant.
Cloudy Limited uses the fair value model to measure its investment properties and the cost model
to measure its property, plant and equipment.
On 30 September 20X8, a volcanic eruption destroyed the building in Kalahari Avenue. In order
to retain Wealthy Limited as a tenant, Cloudy Limited offered to lease 70% of its head office
building square-meterage to them as a ‘replacement’ under an operating lease. The operating

lease commenced with immediate effect, on 1 October 20X8.
Details relating to the head-office building in Gabon Street are as follows:
 The Gabon Street building was purchased on 1 April 20X8 and was depreciated at 10% per
annum to an estimated residual value of nil.
 Fair values were determined on 30 September 20X8 and 31 March 20X9.
 The cost and fair value details are as follows:
Cost price: 01 April 20X8 C2,820,000
Fair value: 30 September 20X8 C3,760,000
Fair value: 31 March 20X9 C3,854,000
 It is not possible for the 70% portion of the building to be separately sold or leased out to a
third party under a finance lease.
Required:
Prepare a memorandum to the financial director of Cloudy Limited explaining how the building
in Gabon Street should be recognised and measured in the financial statements for the year
ended 31 March 20X9. Suggested journals should be included in your letter.
Use a single account to record movements in the head office’s carrying amount. Ignore tax.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Question 5:
Part A:
Sun Limited owns a building, The Poplar, being a high-rise building in the centre of Durban’s
central business district.
 Sun Limited purchased this building on 31 July 20X4 for C500,000 cash.
 This building is leased out to corporate clients.
 The building, when purchased, was determined to have a useful life of ten years and a nil
residual value.
 Sun Limited accounts for all investment property using the fair value model.
The fair values of the building are as follows:
C
31 December 20X4 600,000
31 December 20X5 ?
31 December 20X6 750,000
 This building is held within a business model the objective of which is to recover substantially
all the carrying amount over time rather than through sale thereof.
 There was a deferred tax credit balance of C75,000 on 31 December 20X5 that related purely
to the temporary differences arising from this investment property.
 Deferred tax is provided at the normal company tax rate on all temporary differences relating
to investment property.
 The tax authorities allow a deduction of 5% per annum on the cost of the building (not
apportioned for part of a year).
 The current income tax rate is 30%. Taxable capital gains are calculated by the tax authorities
at 80% of the capital gain and are taxed at 30%. The base cost equalled the original cost price.
Required:
Prepare the journals to account for The Poplar in Sun Limited’s accounting records for the years
ended 31 December 20X4, 20X5 and 20X6.
Part B:
Day Limited owns The Palms, a building situated on the Durban beachfront.
 Day Limited purchased this building on 2 January 20X5 for C200,000 cash.
 The building, when purchased, was determined to have a useful life of ten years and a nil
residual value.
 There are no tenants in the building at present and Day Limited identified that the building
would be a prime investment as the area around The Palms was being extensively developed.
Expectations are that, once this development is complete, this property will attract a very high
price, at which time the current intention is that it would then be sold. The property does not
meet the definition of either inventory or non-current assets held for sale.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
 Day Limited accounts for all investment property using the fair value model.
 The fair values of the building were as follows:
31 December 20X5: C250,000
31 December 20X6: C400,000
 Deferred tax is provided at the normal company tax rate on temporary differences relating to
investment property at fair values below cost.
 The tax authorities allow a deduction of 5% per annum on the cost of the building (not
apportioned for part of a year).
 The current income tax rate is 30%. Taxable capital gains are calculated by the tax authorities
at 80% of the capital gain and are taxed at 30%. The base cost equalled the original cost price.
Required:
Prepare the journals to account for The Palms in Day Limited’s accounting records for both the
years ended 31 December 20X5 and 31 December 20X6.
Question 6:
Snowden Limited is a furniture manufacturer in Hillcrest. On 27 August 20X5, management
decided to move the manufacturing facility into much larger leased premises. The old
manufacturing facility, a freehold property consisting of land and buildings, will now be leased
out to an unrelated party under a non-cancellable ten-year operating lease. The operating lease
commenced on 1 September 20X5.
The freehold property had been purchased on 1 January 20X0 for C13,520,000, of which
C3,120,000 related to land. On acquisition date, it was estimated that its total useful life was 25
years and that its residual value was nil. It has been depreciated on the straight-line basis.
The freehold property was revalued for the first time on 31 December 20X3 resulting in:
 an upward revaluation of land, increasing its carrying amount by C1,300,000;
 an impairment of C2,340,000 to the factory building.
The carrying amounts of the land and buildings at 31 December 20X4 were as follows:
 the carrying amount of the land was C4,420,000 and
 the carrying amount of the buildings was C6,091,428.
Further revaluations were performed on 1 September 20X5 (the commencement date of the
operating lease) and 31 December 20X5 (the financial year-end). Details of the fair values of each
of the land and building elements of the freehold property on these dates are as follows:
1 September 20X5 31 December 20X5
(C’000) (C’000)
Land 5,200 5,434
Building 9,750 10,270
14,950 15,704
 Land and buildings that are classified as property, plant and equipment are measured under
the revaluation model, using the net replacement cost basis.
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
 Investment properties are measured under the fair value model.
Required:
Prepare the journal entries to record all the matters relating to the freehold factory land and
buildings for the year ended 31 December 20X5.
Question 7:
Owlface Limited owns two buildings:
 a head office building located in Johannesburg; and
 another office building located in Pretoria.
The office building located in Johannesburg is used as Owlface Limited’s head office. A minor
earthquake, on 30 June 20X5, destroyed this building. The building in Johannesburg was
purchased on 1 January 20X5 for C1,200,000. The building has a total useful life of 10 years and
a residual value of nil.
The property in Pretoria was leased under an operating lease to a tenant, Spider Limited. After
the earthquake, Owlface Limited urgently needed new premises for its head office. Since Spider
Limited was always late in paying their lease rentals, Owlface Limited decided to evict them and
move its head office to this building in Pretoria. This eviction and relocation was effective from
30 June 20X5.
 The building in Pretoria was purchased on 1 January 20X5 for C500,000.

 On 30 June 20X5, the fair value of the building in Pretoria was C950,000.
 There was no change in fair value at 31 December 20X5.
 The total useful life was estimated to be 10 years from date of purchase and the residual value
was estimated to be nil.
Owlface Limited uses:
 The cost model to measure its property, plant and equipment; and
 The fair value model for its investment properties.
Required:
a) Journalise the above transactions in the books of Owlface Limited for the year ended 31
December 20X5. Ignore tax.
b) Define ‘investment property’ and ‘owner-occupied property’.
c) Define fair value and explain how it is calculated.
Question 8:
Tromp Limited is an investment company that purchases buildings and holds them for a number
of purposes, such as resale, leasing and its own use.
On 1 January 20X4, Tromp Limited purchased an old building, Tromp Towers, for C300,000.
Conveyancer’s fees amounted to C20,000.
 This building is situated in an isolated part of Durban (South Africa) and there is no
development anywhere nearby. At the time of purchase, there had been no property
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
transactions in this area for many years and the possibility of leasing the building to tenants
was remote.
 During November 20X4, development began of a new industrial park in the area. As a result,
the building was able to be leased to tenants involved in the development of the industrial
park. Due to the influx of people into the area, the directors decided to paint one side of the
building with the corporate logo of Tromp Limited.
 This building has never had an air-conditioning system. After numerous complaints from
tenants about not being able to tolerate the Durban heat, Tromp Limited decided to upgrade
the building by installing a ducted air-conditioning system on 1 December 20X4.
The cost of installation included the following:
 Adjustments to the structure of the building C30,000
 Painting C50,000
 Air-conditioning system C200,000
 Installation costs C50,000
The ducted air-conditioning system has a 10 year life and a nil residual value.
 As a result of the new industrial park, there was suddenly a demand for properties in the area.
As a result, the fair value of Tromp Towers was able to be determined on 31 December 20X4
at C420,000. Tromp Limited would like to measure this investment property at fair value now
that fair values have become available.

 The building has a 10 year useful life and an estimated residual value of C50,000.
Tromp Limited also holds other investment property, which is measured under the fair value
model. The fair value of this other investment property is as follows:
 1 January 20X4 C1,000,000
 31 December 20X4 C1,250,000
Required:
a) Journalise the entries that would arise from the above information for the year-ended 31
December 20X4.
b) Prepare the accounting policy for investment property and the investment property note for
the year-ended 31 December 20X4.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Solution 1:
COBRA LIMITED
EXTRACT FROM NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED 31 DECEMBER 20X7
20X7
3. Profit before tax C
Profit before tax is stated after:
Income:
Income from investment properties:
- Rental income earned from investment properties (given) 1,800,000
Expenses:
Investment property expenses:
- Properties earning rentals (rates) (given) 900,000
- Depreciation on investment property (calculation a) 450,000
- Depreciation on property, plant and equipment (calculation b) 427,500
Calculations:
(4,500,000 – 0) / 10 years  1 year
a Pretoria building 450,000
b New Sandton head office (3,600,000 – 450,000) / 5  3 / 12 157,500

Old Umhlanga head office (3,600,000 – 0) / 10  9 / 12 270,000
427,500
27. Investment property Carried at Carried at Total

depreciated fair value
cost
C C C
Carrying amount: 1 January 20X7 3,150,000 2,700,000 5,850,000
 Cost Given 4,500,000
 Accum. depreciation (4,500,000 – 0) / 10  3 (1,350,000)
Transferred from inventory 720,000

Kirstenbosch property: transferred at cost (given)
Transfer on date of change in use: commencement
date of lease (1/3/20X7)
Transferred from property, plant and equipment 2,880,000

Umhlanga property: transfer at FV.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Transfer on date of change in use: when ceased to be
owner- occupied and commencement date of lease
(1/10/20X7)
We are told FV = CA
CA = 3,600K – (3,600K – 0) / 10  2 years
Transferred to property, plant and equipment (3,600,000)

Sandton property: transferred out at its CA, which is
its FV
Transfer on date of change in use: when became
owner-occupied (1/10/20X7)
Depreciation (450,000)
Pretoria property: because the FV could not be
ascertained, this property is forced to be measured
under cost model
(4,500,000 – 0) / 10  1
Fair value adjustment – Balancing or (W1) 1,980,000

Carrying amount: 31 December 20X7 (W2) 2,700,000 4,680,000 7,380,000
 Cost Given 4,500,000
 Accum. depreciation (4,500,000 – 0) / 10  4 (1,800,000)
Workings:
W1: Fair value adjustment C
Kirstenbosch (FV at date transferred into IP: 900,000 – CA of 630,000

building inventories: 720,000) + (FV at reporting date:
1,350,000 – FV at date transferred into IP: 900,000)
Sandton building FV at date transferred out of IP: 3,600,000 – Prior 900,000
FV, on last reporting date: 2,700,000
Umhlanga building FV at reporting date: 3,330,000 – Prior FV, on date it 450,000
was transferred into IP: 2,880,000
1,980,000
W2: Carrying amount of investment properties measured at fair value C
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Kirstenbosch Given 1,350,000
building
Umhlanga building Given 3,330,000
4,680,000
Explanation for your interest:
Kirstenbosch building: Change in use

 This was inventory because it was constructed for the purpose of sale in the ordinary course
of business. IAS 40.9(a) and IAS 40.5
 This is now investment property since it is being held for rental income instead. IAS 40.5
 There is evidence of a change in use on commencement of the operating lease on 1 March
20X7. Prior to 1 March 20X7, the building would have still been classified as inventory, even
though the intention had changed to hold the property to earn rental income (a change in
intention is not considered to be evidence of a change in use and thus we only account for the
change in use when the operating lease commences, which was 1 March 20X7).
 Since the accounting policy is to measure investment properties under the fair value model,
this property must be remeasured to fair value.
Pretoria building: Fair value not measurable when acquired but is now measurable
 This is investment property because it is held for rental income. IAS 40.5
 On initial acquisition, the fair value was not considered reliably measurable on a continuing
basis and the refore it initially had to be measured under the cost model (despite the
accounting policy for all other investment property being the fair value model). It was,
however, under construction which meant that, had fair values become measurable on or
before date of completion of construction, the fair value model would have had to be used.
However, fair values only became available after the date of completion, with the result that
the cost model has to be used until disposal.
 IAS 40.53 makes it very clear that, not only must the cost model continue to apply to the date
of disposal (even if fair values are subsequently available), the investment property must be
depreciated using a nil residual value.
Umhlanga building: Change in use

 This building was property, plant and equipment (owner-occupied IAS 40.5).
 It then became investment property (leased to a tenant under an operating lease, and thus it
was held to earn rental income). IAS 40.5
 The transfer occurs on 1 October 20X7, since this is the date on which there is evidence of a
change in use (commencement of the operating lease). Thus, the property remains property,
plant and equipment until 1 October 20X7 and is depreciated for 9 months.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Sandton building: Change in use
 This building was investment property (leased to tenant under an operating lease, and thus it
was held to earn rental income). IAS 40.5
 It then became property, plant and equipment when it became used as the company head
office (owner-occupied). IAS 40.5
 The transfer occurred on 1 October 20X7, as this is the date on which there is evidence of a
change in use–the commencement of owner-occupation was on 1 October 20X7.
 A change in management intention (as evidenced by the board resolution) does not provide
evidence of a change in use.
Solution 2:
a) House
Debit Credit
30 June 20X5
Depreciation (P/L: expense) (2,000,000 – 0) / 20 years  50,000
6/12
House: accumulated depreciation (PPE) 50,000

Depreciation on owner-occupied office block to date of
change in use
House: accum. depr. (PPE) O/bal (2,000,000 – 0) / 20 years x 150,000

1 yr + 20X5 depr: 50,000 (above)
House: cost (PPE) Given 2,000,000
House (invest Property) 1,850,000
Transfer from property, plant and equipment to investment
property on date of change in use
31 December 20X5
House (Investment Property) (2,200,000 – 1,850,000) 350,000
Fair value adjustment to investment property (P/L: 350,000
income)
Investment property re-measured to fair value at year-end
b) Leasing to a subsidiary within a group
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Since Jake Limited would not be occupying the property but holding it to earn rental income
under an operating lease, it should be accounted for as investment property in Jake Limited’s
separate financial statements.
However, because the group of companies owns a property that is occupied by a subsidiary within
the group, it is classified as owner-occupied from the group perspective and should therefore be
measured according to the principles laid out in IAS 16: Property, Plant and Equipment when
preparing Jake Limited’s group financial statements.
Solution 3:
a) Explanations
Issue 1: Himalaya Property becomes owner-occupied property
The property ceases to be an investment property on 31 July 20X7: this is because there is
evidence of a change in use in that the Himalaya property becomes utilised as the head office
from this date, thus meeting the definition of an owner-occupied property (and thus, from this
date, it fails to meet the definition of investment property).
Since the property is still classified as investment property until 31 July 20X7, the property should
be remeasured to its fair value on 31 July 20X7 under IAS 40 Investment property and the resultant
increase in value between 31 December 20X6 and 31 July 20X7 of C420 000 (C21 840 000 - C21
420 000) should be recognised as a fair value gain in profit or loss.
The property will then be transferred to property, plant and equipment (land and buildings) at its
fair value on 31 July 20X7 (C21 840 000). From this date onwards, the property is classified as
property, plant and equipment and will thus be accounted for in terms of IAS 16 Property, plant
and equipment. The fair value on 31 July 20X7 will be assumed to be the cost for purposes of IAS
16. In terms of IAS 16, depreciation will be charged on the building element (land is not
depreciated) over the final 5 months of the year as follows:
Depreciation = (Total cost: C21 840 000 – Cost of land element: C5 040 000 – Residual value:
nil)/20 years x 5/12 = C350 000
Issue 2: Andes and Fuji properties to be sold
Andes property
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
The commencement of development with a view to sale is sufficient evidence of a change in use.
This redevelopment began on 30 November 20X7 and thus this property remains classified as
investment property until this date.
Thereafter, the Andes property should be transferred to inventory and accounted for in terms of
IAS 2 Inventory instead.
Thus, the property is first remeasured to its fair value of C11 760 000 on 30 November 20X7 with
the resultant decrease in fair value of C840 000 (FV at 31/12/20X6: C12 600 000 – FV at
30/11/20X7: C11 760 000) recognised as a fair value loss in profit or loss.
The property is then transferred out of investment property into inventory at its fair value on the
date of change in use of C11 760 000, where this amount becomes the cost for purposes of IAS 2
Inventory.
Fuji property
Although the Fuji property is also to be sold, this property does not require re-development in
order to sell it. This means that there is no evidence of a change in use (the decision to sell the
property is a change in intention, which, in isolation, is not sufficient for the property to be
reclassified) and thus, the property remains classified as an investment property until it is sold.
No further adjustment is necessary as value at 31 December is included in the total for investment
properties at that date. In other words, this property will simply be remeasured to its fair value
at 31 December 20X7 along with all other investment properties on this date (and the change in
fair value will be recognised as a fair value gain or loss in profit or loss).
Issue 3: New investment properties
These should be recognised as investment properties at their total cost of C73 080 000 (i.e.
purchase price plus acquisition costs). They should be remeasured to their fair values at 31
December 20X7 with any difference between the fair value at 31 December 20X7 and the
acquisition costs during the year being
recognised as a fair value gain or loss in profit or loss.
b) Calculation of the FV adjustment
Answer:
The fair value adjustment relating to investment properties that will be recognised in profit or
loss (and presented in the statement of comprehensive income) during the year-ended 31
December 20X7 is a fair value gain of C65 520 000.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
WORKINGS:
INVESTMENT PROPERTIES (ASSET)

Description C Description C
Balance (given) 420,000,000 PPE (Issue 1) 21,840,000
Fair value gain 420,000 Fair value loss 840,000
(Income)(Issue 1) (Expense)(Issue 2)
Bank (Issue 3) 73,080,000 Inventory (Issue 2) 11,760,000
Fair value gain (balancing) 65,940,000 Balance c/d (given) 525,000,000
559,440,000 559,440,000
Balance b/d (given) 525,000,000
FAIR VALUE GAIN / LOSS ADJUSTMENTS (INCOME / EXPENSE)

Description C Description C
Investment properties (Issue 840,000 Investment properties (Issue 420,000
2) 2)
P/L (balancing) 65,520,000 Investment properties (all 65,940,000
other properties (see acc.

above)
66,360,000 66,360,000
Solution 4:
MEMORANDUM
To: Cloudy Limited financial director

From: A Student
Date: Today’s date
Re: Treatment of Gabon Street Property
Your head office building in Gabon Street was previously 100% owner-occupied. This meant that
it was previously classified as property, plant and equipment (IAS 16).
Since 70% of this building is now leased out under an operating lease whilst 30% is owner-
occupied, this property is now a joint-use property.
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Had the two portions been separable (i.e. were it possible to sell the 70% separately from the
remaining 30% or were it possible to lease this 70% separately from the 30% under a finance
lease), it would have meant that each portion would have had to be classified separately (i.e. 70%
classified as an investment property and 30% as property, plant and equipment).
However, since you have indicated that this property is not separable, IAS 40 requires that you
establish whether the portion used as an investment property is the most significant portion or
not.
The entire property must be classified as:

 investment property if the owner-occupied portion is insignificant; or
 property, plant and equipment if the owner-occupied portion is significant. See IAS 40.10
Professional judgement is required in determining what constitutes a significant portion and your
company will need to establish its own criteria such that this judgment can be applied consistently
(these criteria would then need to be disclosed). See IAS 40.14
My opinion is that the 30% owner-occupied portion is an insignificant portion of the property (i.e.
the 70% investment portion being significant), in which case the entire property would need to
be reclassified as an investment property. If, however, you believe that the 30% portion that is
owner-occupied is still a significant portion of the property, then the entire property would
remain classified as property, plant and equipment because it must be classified as investment
property ‘only if an insignificant portion is held for use in the production or supply of goods or
services or for administrative purposes’. IAS 40.10 The property is therefore classified as property,
plant and equipment if the significant portion is used as owner-occupied or if there is no
insignificant portion.
Assuming that 70% is a significant portion, (i.e. that the property must now be reclassified as an
investment property), then there has effectively been a change in use: from owner-occupied (IAS
16 Property, plant and equipment) to a property held to earn rental income (IAS 40 Investment
property). The property must therefore be transferred from property, plant and equipment to
investment property when there is clear evidence of the change in use (in this case, this would
be the commencement date of the lease of the 70% to the tenant).
Since your company’s accounting policy is to measure its investment property under the fair value
model, the following must be processed before transferring the property from the property, plant
and equipment accounts to the investment property accounts:
 The property must be depreciated to the date of transfer,
 The property must then be revalued to fair value (even though your property was previously
measured using the cost model) with any increase in the carrying amount to be recognised in
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
other comprehensive income, unless it reversed a previous impairment loss, in which case it
would be recognised in profit or loss (any resultant revaluation surplus may only be
transferred to retained earnings on disposal of the property); and
 The property must then be checked for impairment.
 All these measurement adjustments must be accounted for in terms of IAS 16 Property, plant
and equipment. IAS 40.61
 Thereafter, the property is transferred to investment property and measured under the fair
value model in terms of IAS 40 Investment property (since your company policy is to apply the
fair value).
I have taken the liberty of including the journals relating to the building:
Debit Credit
1 April 20X8
PPE: Office building: carrying amount 2,820,000
Bank / liability 2,820,000
Purchase of head-office building (owner-occupied)
30 September 20X8
(2,820,000 – 0)  10%  6 /
Depreciation expense 141,000

12 months
PPE: Office building: carrying amount 141,000
Depreciation to date of change in use

Revaluation surplus (OCI: I) 1,081,000
Revaluation of head office to fair value on date of change in
use
[FV: 3,760,000 – CA: (2,820,000 – 141,000)]
IP: Office building: fair value 3,760,000

Transfer head office building from PPE to IP on date of change
in use
31 March 20X9
IP: Office building: fair value 94,000
Fair value gain on investment property (P/L: I) 94,000
Measurement of investment property to fair value at year-end
(Latest FV: 3,854,000 – Prior FV: 3,760,000)
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Solution 5:
Part A:
Debit Credit
31 July 20X4
Investment property: Popular 500,000
Bank 500,000
Recording the acquisition of investment property: The Popular
31 December 20X4
Investment property: Popular 600,000 – 500,000 100,000
Fair value gain on investment property (I) 100,000
Fair value adjustment to investment property: The Popular
Tax expense (E) W1 37,500

Deferred tax (L) 37,500
Deferred tax adjustment relating to FV adj. on Popular
31 December 20X5
Investment property: Popular 700,000 (W1: note 1) – 100,000

600,000
Fair value adjustment to investment property: Popular

31 December 20X6
Investment property: Popular 750,000 – 700,000 (W1: 50,000
note 1)
Fair value adjustment to investment property

WORKINGS:
W1: Deferred tax calculation

Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
CA TB TD DT
Balance: 1/1/20X4 0 0 0 0
Purchase: 31/7/20X4 500,000 500,000 0 0
FVA/ W&T 100,000 (25,000) (125,000) (37,500) Cr DT; Dr TE
Balance: 31/12/20X4 600,000 475,000 (125,000) (37,500) Liability
FVA/ W&T 100,000 (25,000) (125,000) (37,500) Cr DT; Dr TE
Balance: 31/12/20X5 (1) 450,000 (250,000) (75,000) Liability
700,000
FVA/ W&T 50,000 (25,000) (75,000) (22,500) Cr DT; Dr TE
Balance: 31/12/20X6 750,000 425,000 (325,000) (97,500) Liability
(1) Carrying amount of the Poplar investment property at 31/12/20X5 is calculated as:
Deferred tax balance: 75,000 / 30% + tax base: 450,000 = 700,000
Notice:
Since the intention is to keep the property (we are told that the business objective is to recover
the carrying amount over time rather than through the sale thereof), the deferred tax effect
resulting from increases in the carrying amount to fair values that exceed cost is measured at 30%
(not by applying the 80% capital gains inclusion rate x 30%).
Part B:
Debit Credit
02 January 20X5
Investment property: Palms 200,000
Bank 200,000
Purchase of property: The Palms – classified as investment
property since it is held for undetermined use IAS 40.8(b). It is not
a non-current asset held for sale (the criteria were not met –
this is given in the question) and it is not inventory since,
although it is under construction and may be sold in the future,
it has not been acquired exclusively with a view to subsequent
development and resale and is thus not currently intended for
sale in the ordinary course of business. IAS 40.9(a)
31 December 20X5
Investment property: Palms (250,000 – 200,000) 50,000
Fair value gain on investment property (income) 50,000
Fair value adjustment to investment property: The Palms

Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
Deferred tax adjustment relating to FV adjustment The Palms
31 December 20X6
Investment property: Palms (400,000 – 250,000) 150,000
Fair value adjustment to investment property

Deferred tax adjustment relating to FV adjustment The Palms
WORKINGS:
W1: Deferred tax calculation
Investment property: Carrying Tax base Temporary Deferred
intention to sell amount difference taxation
Balance: 1 Jan 20X5 0 0 0 0
Purchase: 2 Jan 20X5 200,000 200,000 0 0
Movement (3) 50,000 (10,000) (60,000) (3) Cr DT; Dr TE
(15,000)
Balance: 31 Dec 20X5 (1) 190,000 (60,000) (2) Liability
250,000 (15,000)
Movement (3) (10,000) (160,000) (3) Cr DT; Dr TE
150,000 (39,000)
Balance: 31 Dec 20X6 (1) 180,000 (220,000) (4) Liability
400,000 (54,000)
(1) Fair value was given

(2) Deferred tax balance: 31 December 20X5
Fair value 250,000
Capital gain (250,000 – 200,000)  80%  30% 12,000
Base cost 200,000
Recoupment (200,000 – 190,000) x 30% 3,000
Tax base 190,000
15,000
(3) Balancing
(4) Deferred tax balance: 31 December 20X6
Fair value 400,000
Capital gain (400,000 – 200,000)  80%  30% 48,000
Base cost 200,000
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
Recoupment (200,000 – 180,000) x 30% 6,000
Tax base 180,000
54,000
Solution 6:
Debit Credit
01 September 20X5
Depreciation – buildings (P/L: E) (6,091,428 – 0)/(25 – 5) 8/12 203,048
PPE: Building: acc. depr. (-A) Or: W4 203,048
Being depreciation on factory buildings to date it was vacated
and no longer PPE
PPE: Buildings: acc. depr. (-A) 20X4 depr: (6,091,428 507,620

– 0)/(25– 5)1+
PPE: Building: fair value (A) 20X5 depr: 203,048 507,620
Or: W4: 20X4: 304,572+20X5:
203,048
NRVM: Set-off of accumulated depreciation against the cost

account prior to the revaluation (i.e. this would be the
depreciation that had accumulated since the last revaluation on
31/12/20X3, thus the depreciation in 20X4 and 20X5)
PPE: Buildings: fair value (A) 9,750,000– 3,861,620

(6,091,428–203,048)
Impairment reversal (P/L: I) W1 or W4 2,154,287
Revaluation surplus (OCI: I) FV:9,750,000– 1,707,333
HCA(W2):8,042,667
Or: W4
Revaluation of buildings to fair value
PPE: Land: fair value (A) FV: 5,200,000 – CA: 4,420,000 780,000
Revaluation surplus (OCI: I) 780,000
Revaluation of land to fair value
IP: Land & buildings fair value (A) Land:5,200,000+Buildings: 14,950,000

9,750,000
PPE: Land: fair value (A) 5,200,000
PPE: Buildings: fair value (A) 9,750,000
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Reclassification of property: transfer from PPE to investment
property following evidence of a change in use
31 December 20X5
IP: Land & buildings: fair value (A) 15,704,000 – 14,950,000 754,000
Fair value gain (P/L: I) Or: W4 754,000
Remeasurement of property to fair value at reporting date – now
that it is investment property, the fair value gain is recognized in
P/L (not as a revaluation surplus in OCI)
WORKINGS:
C
W1 Building: Impairment loss reversed at 31/08/20X5 2,154,287
Fair value, limited to historical carrying FV of building: 9,750,000,000 8,042,667
amount: at 31/08/20X5 limited to HCA of building:
8,042,667 (W2)
Less actual carrying amount: W3 (5,888,380)
31/08/20X5
W2 Building: Historical carrying amount ay 31/08/20X5 8,042,667

Cost: 01/01/20X0 Given 10,400,000
Accumulated depreciation: to (10,400,000 – 0) / 300 months x 68 (2,357,333)
31/08/20X5 months Or: (10,400,000 – 0) / 25
yrs x 4,667 years*
*: 4 years + 8/12 months = 4,667
years
W3 Building: Actual carrying amount at 31/08/20X5 5,888,380

Carrying amount: 31 December 20X4 Given 6,091,428
Accumulated depreciation: to (6,091,428 – 0) / (25 – 5)  8/12 (203,048)
31/08/20X5
W4 Property overview (alternative working)

The following working shows the entire life-cycle of the property from the time it was purchased
(01 January 20X0) to the end of the current reporting period (31 December 20X5). The question
gave us
the carrying amount at 31 December 20X4 and thus the information in the working below that
shows the movement in the property accounts prior to this date (shaded in grey) would not be
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
required. However, this information has been presented for the sake of completeness (and your
‘peace of mind’).
Land Building Total

Cost Land: given 3,120,000 10,400,000 13,520,000
Building: 13,520,000 –
3,120,000
Acc depr: 20X0 – 20X3 Land would not be 0 (1,664,000) (1,664,000)
depreciated
Building: (10,400,000– 0) /
25  4yrs
3,120,000 8,736,000 11,856,000
Revaluation surplus Given 1,300,000 0 1,300,000
Impairment Given 0 (2,340,000) (2,340,000)
CA: 31/12/20X3 Fair value (balancing) 4,420,000 6,396,000 10,816,000
Depr: 20X4 Land would not be 0 (304,572) (304,572)
depreciated
Building: (6,396,000–0)/
(25–4) 1yr
CA: 31/12/20X4 Given 4,420,000 6,091,428 10,511,428

Depr: to 31/08/20X5 Land would not be 0 (203,048) (203,048)
depreciated
Building: (6,396,000–0)/(25–
4)8/12
4,420,000 5,888,380 10,308,380
Impairment reversed Balancing: 8,042,667 – 0 2,154,287 2,154,287
5,888,380
HCA: 31/08/20X5 Building: Cost: 10,400,000 – 4,420,000 8,042,667 12,462,667
AD: (10,400,000 – 0) / 25 
5,667 yrs
Revaluation surplus Balancing: 780,000 1,707,333 2,487,333
Land: 5,200,000 – 4,420,000
Building: 9,750,000 –
8,042,667
Fair value: Given 5,200,000 9,750,000 14,950,000
31/08/20X5
Fair value gain Balancing: 234,000 520,000 754,000
Land: 5,434,000 – 5,200,000
Building: 10,270,000 –
9,750,000
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
Fair value: Given 5,434,000 10,270,000 15,704,000
31/12/20X5
Solution 7:
a) Journals
Debit Credit
01 January 20X5
PPE: Johannesburg building: cost 1,200,000
Bank / liability 1,200,000
Purchase of Johannesburg building (owner-occupied)
IP: Pretoria building: cost 500,000

Bank / liability 500,000
Purchase of Pretoria building (leased to a tenant)
30 June 20X5
(1,200,000 / 10  6 / 12 months)
Depreciation (E) 60,000

PPE: Johannesburg building: accum. depr. and 60,000
impairment losses
Depreciation of building (PPE) to date of destruction
Impairment (E) (1,200,000 – 60,000) 1,140,000

PPE: Johannesburg building: accum. depr. and 1,140,000
impairment losses
Write-off after earthquake
PPE: Johannesburg building: accum. depr. and impairment 1,200,000

losses
PPE: Johannesburg building: cost 1,200,000
Derecognition of Johannesburg building after the earthquake
destroyed it
IP: Pretoria building: cost (950,000 – 500,000) 450,000

Fair value adjustment to investment property (P/L: I) 450,000
Remeasurement of investment property prior to change in use
PPE: Pretoria building: cost 950,000

IP: Pretoria building 950,000
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
Transfer from investment property to property, plant and
equipment
31 December 20X5
Depreciation (E) (950,000 / 9.5  6 / 12 months) 50,000
PPE: Pretoria building: accumulated depr and 50,000
impairment losses
Depreciation to year-end Pretoria building (PPE)
b)
Investment property is defined as land or buildings (or both) that are held (by the owner or the
lessee as a right-of-use asset) to earn rentals or for capital appreciation. IAS 40.5
Investment properties do not include land or buildings that are:

 held for use in production or supply of goods or services;
 held for resale as trading stock;
 held for administrative purposes.
Owner-occupied property is defined as land or buildings held for use in the supply of goods
and services or for administration use IAS 40.5, which could include:
 property being developed;
 administration buildings;
 employees’ housing; and
 factory buildings.
c)
Fair value is the price that would be received to sell the property in an orderly transaction
between market participants at measurement date IAS 40.5
The fair value is calculated taking into account the:

 rental incomes from current leases; and
 other assumptions that market participants would use when pricing the investment property
under current market conditions. See IAS 40.40
IAS 40 recommends, but does not require, that this fair value be measured by an independent
and suitably qualified valuator. See IAS 40.32
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Solution 8:
a) Journals
Debit Credit
01 January 20X4
Investment property: cost (300,000 + 20,000) 320,000
Bank 320,000
Purchase price plus conveyancer’s fees (which are necessarily
incurred in order to bring the building into use)
30 November 20X4
Advertising expense 50,000
Bank 50,000
Painting expensed (does not increase the future economic
benefits embodied in the asset)
01 December 20X4
Investment property: cost (200,000 + 30,000 + 50,000) 280,000
Bank 280,000
Capitalisation of the air-conditioning system
31 December 20X4
Depreciation [(320,000 – 0) / 10 + (280,000 – 0) / 109m  1m] 34,569
Investment property: accumulated depreciation 34,569
Depreciation of investment property – see notes 1 and 2
31 December 20X4
Investment property: fair value (1,250,000 – 1,000,000) 250,000
Fair value gain on investment property 250,000
Fair value adjustment on other investment property – see note
3
Note 1:
Although the air-conditioning system has an estimated useful life of 10 years (i.e. longer than the
remaining useful life of the building), it is not considered a significant part because it is integral
to the building. This means that it must be depreciated over the remaining useful life of the
building. At the time of installation, there were 9 years and 1 month left (9  12 months + 1 month
= 109 months).
Note 2:
Ahmed Raza Mir, FCA
IAS 40 – AAFR
Investment Property
Although the directors estimate the residual value of the building to be C50 000, where the cost
model is required to be used in terms of IAS 40.53, the residual value must also be nil.
Note 3:
This fair value adjustment relates to other investment property (not Tromp Towers).
Although the fair value of Tromp Towers was available at 31 December 20X4, Tromp Towers could
not be remeasured to fair value. This is because there was clear evidence at the date of acquisition
that the market for comparable properties was inactive (no recent transactions in the area) and
an alternative reliable measurement of fair value through, for example, a discounted cash flow
projection was also not available (as the property was neither saleable nor able to be leased). IAS
40.53
. As a result, Tromp Towers needs to continue to be measured under the cost model until
disposal.
b) Disclosure
TROMP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X4 (EXTRACTS)
2. Accounting policies
2.5 Investment property
The entity uses the fair value model where fair values for the properties are available. In situations
where fair values are not available, the entity carries those specific properties on the cost model.
Depreciation on these properties is provided over 10 years using a straight-line basis.
25. Investment property

20X4
At cost At fair value Total
C C C
Balance: 1 January 20X4 0 1,000,000 1,000,000
Cost / fair value 0
Accumulated depreciation (0)
Additions 320,000 0
Improvements 280,000 0
Fair value adjustments 0 250,000
Depreciation (39,569) 0
Ahmed Raza Mir, FCA

IAS 40 – AAFR
Investment Property
Balance: 31 December 20X4 560,431 1,250,000 1,810,431
Cost / fair value 600,000
Accumulated depreciation (39,569)
With respect to the building carried at cost, the following details are provided:
 The building is situated in Durban, South Africa.
 The fair value of the building cannot be determined because the building is not situated near
any other buildings and no reliable market valuation can be performed.
 The estimated range of fair values is CXXX to CYYY.
Please note:
 When originally purchased, the fair value of Tromp Towers could not be reliably determined.
As a result, this investment property could only be accounted for using the cost model. See IAS
40.53
 Tromp Limited was, however, allowed to measure all its other investment properties using
the fair value model. See IAS 40.53
 At the end of the current year, the fair value of Tromp Towers became reliably determinable
for the first time. This particular property must, however, continue to be measured using the
cost model until disposal date despite its fair value now being reliably determinable. The
residual value must be zero. See IAS 40.53
 The additional details provided in respect of the building carried on the cost model are
required disclosure. See IAS 40.78
Ahmed Raza Mir, FCA

AAFR

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Advanced Accounting & Financial Reporting

3. IFRS-9 Financial Instruments

5. IFRS-2 Share based payments

7. IAS 40 Investment Property

Question 1 [Basic Impairment calculation]

 Value in Use Rs 9 million

2. Fair Value measures

3. Cost to sell includes the following:

4. Value in use of the asset is determined to be Rs 4,000,000

Question 3 [detailed calculation of value in use]

Year Amount (Rs) Finance cost Income Tax

Annual net inflows

These net inflows include the following:

2. Inflows expected (net) from overhauling:

Year Net Inflows

3. Net inflows include interest paid in the following years:

Year Interest paid

Question 5 – future restructuring

Management approved budgets reflect that:

Year Cash Flows 1 Cash Flows 2

Question 6 – future overhauling

Management approved budgets reflect:

3. Future cash Flows

Particulars Carrying Amount

Particulars Carrying FV-CTS

The recoverable amount of the whole cash generating unit is Rs 215,000.

Allocate impairment (if any) to the eligible assets of the unit

Carrying amounts of the entire cash generating unit is as under:

Question 10 (Goodwill allocable)

CGUs Allocation of purchase Fair Value of identified Allocated Goodwill

Goodwill on acquisition is allocated to the three cash generating units.

CGUs FV of identified assets

CGUs Carrying Amount

CGUs Carrying Amount

The recoverable amount of all CGUs including corporate asset is Rs 11,000.

Particulars (CGU excl Corp Carrying Amount Recoverable Amount

Details of corporate Assets:

Corporate Assets Carrying Amount

Particulars (CGU excl Corp Carrying Amount Recoverable Amount

Details of corporate Assets:

Corporate Assets Carrying Amount

Question 17 (past paper Winter 2019 Q1)

Following information was made available on 30 June 2019: Assets of CGUs:

Particulars Karachi Lahore Peshawar

Remaining useful life

Particulars Carrying amount Remaining average

Question 21 (Summer 2009 Q4)

2. Net identifiable assets, and

Remaining useful life

Particulars Carrying amount Remaining average

Calculate impairment and its reversal if any in next year

Question24 – [AAFR Past Paper, Summer 2011, Q2(iv), 5 marks]

Value in use Rs. 16 million

Question25 [Reversal of Impairment]

Question 26 [December 2012, Q3(a)]:

The summarized statement of financial position of GL at 30 June 2012 was as follows:

Net assets 380

Question 27 [December 2015, Q2]

(i) Value of intangible assets as at 30 June 2013:

The break-up of development expenditure was as follows:

Products Rs. in million

Question 28 [December 2016, Q2]

Green Yellow Orange