ADVANCED ACCOUNTING & FINANCIAL REPORTING

Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.1 Krona Limited

(a) (i) Calculation of impairment:
Karachi Lahore Peshawar Total
Average useful life – years (A) 10 8 6

--------------- Rs. in million ---------------

Carrying amount before impairment (B) 160.00 100.00 125.00
Weighting based carrying amount A×B = (C) 1,600.00 800.00 750.00 3,150.00
Allocation of corporate assets:
- Head office 84/3,150×C 42.67 21.33 20.00 84.00
- Product development center* 26/(1,600+800) ×C 17.33 8.67 - 26.00
D 60.00 30.00 20.00
Carrying amount including corporate assets B+D 220.00 130.00 145.00
Recoverable amount (155.00) (115.00) (169.00)
Impairment loss 65.00 15.00 - 80.00
*Allocation based on carrying amount is also correct.
Carrying amount after impairment:
CGU Corporate
Total
Karachi Lahore Peshawar Head office Product dev.
--------------------------------- Rs. in million ---------------------------------
Carrying value 160.00 100.00 125.00 84.00 26.00 495.00
Impairment:
- Karachi (47.27) - - (12.61) (5.12) (65.00)
65/220×42.6
65/220×160 7 65/220×17.33
- Lahore - (11.54) - (2.46) (1.00) (15.00)
15/130×21.3
15/130×100 3 15/130×8.67
112.73 88.46 125.00 68.93 19.88 415.00

(a) (ii) Calculation of impairment:

1st test: CGUs without corporate assets Karachi Lahore Peshawar
---------- Rs. in million ----------
Carrying amount before impairment 160.00 100.00 125.00
Recoverable amount (155.00) (115.00) (169.00)
Impairment loss 5.00 - -

2nd test: Karachi, Lahore & Product development Rs. in million

Carrying amount: Karachi & Lahore (after 1st test) 160+100–5 255.00
Product development 26.00
Carrying amount (after 1st test) 281.00
Recoverable amount 155+115 (270.00)
Impairment loss 11.00

3rd test: All CGUs with all corporate assets

Carrying amount: Karachi, Lahore & Product dev. (after 2nd test) 281–11 270.00
Peshawar 125.00
Head office 84.00
Carrying amount (after 2nd test) 479.00
Recoverable amount 155+115+169 (439.00)
Impairment loss 40.00

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

Carrying amount after impairment:

CGU Corporate
Total
Karachi Lahore Peshawar Head office Product dev.
--------------------------------- Rs. in million ---------------------------------
Carrying value 160.00 100.00 125.00 84.00 26.00 495.00
1st test (5.00) - - - - (5.00)
155.00 100.00 125.00 84.00 26.00 490.00
2nd test (6.07) (3.91) - - (1.02) (11.00)
11/281×155 11/281×100 11/281×26.00
148.93 96.09 125.00 84.00 24.98 479.00
3rd test (12.44) (8.02) (10.44) (7.01) (2.09) (40.00)
40/479×148.93 40/479×96.09 40/479×125.00 40/479×84 40/479×24.98
136.49 88.07 114.56 76.99 22.89 439.00

ALTERNATE

Carrying amount after impairment:

CGU Corporate
Total
Karachi Lahore Peshawar Head office Product dev.
--------------------------------- Rs. in million ---------------------------------
Carrying value 160.00 100.00 125.00 84.00 26.00 495.00
1st test (5.00) - - - - (5.00)
155.00 100.00 125.00 84.00 26.00 490.00
2nd test - - (11.00) (11.00)
155.00 100.00 125.00 84.00 15.00 479.00
3rd test (33.94) (6.06) (40.00)
40/99×84 40/99×15
155.00 100.00 125.00 50.06 8.94 439.00

Rs. in million
(b) Total impairment loss under (a)(i) 65+15 80.00
Total impairment loss under (a)(ii) 5+11+40 56.00
Difference 24.00

In (a)(ii) above, due to non-availability of reasonable basis for allocation of corporate

assets, impairment has been assessed on overall basis. This results in lesser loss in this
situation.

Peshawar CGU is not impaired and its recoverable amount is more that the carrying value
by Rs. 24 million. So on overall impairment assessment, the excess of Rs. 24
million resulted in lesser impairment loss.

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.2 Dirham Limited

(a) Effect of corrections/issues:
Total Total Profit Profit
Other
assets liabilities for 2018 for 2017
-------------------- Rs. in million --------------------
Balances as given 2,977.00 785.00 198.00 311.00
(i) Share options
(5.25)
Expense for 2016: (120,000×175×1÷4) 5.25
Expense for 2017: [(120,000×175×2÷4) – 5.25] (5.25) 5.25
Expense for 2018: [(120,000×150×3÷4)–5.25–5.25] (3.00) 3.00
(3.00) (5.25) 13.5
Equity
(5.25)
Op RE
(ii) Plant and decommissioning cost
Depreciation on plant (150÷6) (25.00) (25.00)
Decommissioning cost revision [40×( 1.11)5 –
40] 27.40 (3.40) (24.00)
Unwinding of interest [(40.00+27.40)×11%] 7.40 (7.40)
(25.00) 34.80 (35.80) (24.00)
Rev. Sur.
(iii) Investment in debenture
Gain on initial recognition [2.5×(105–103)] 5.00 5.00
Transaction cost 1.50 1.50
Fair value adjustment [2.5×(109–105.6)] 8.50 8.50
Impairment (6.00) 6.00
15.00 0.50 14.50
OCI
(iv) Pension scheme
Increase in pension expense [45.00+(85×10%)–40] 13.50 (13.50)
Re-measurement gain (18.00) 18.00
(4.50) (13.50) 18.00
OCI
2,967.00 815.30 146.20 305.75 16.75

(b) Statement of changes in equity for the year ended 31 December 2018
Share Retained Fair value Share
Rev. surplus
capital earnings reserve options
----------------------- Rs. in million -----------------------
Balance as at 31-12-2016, as previously reported 700.00 702.00 172.00 - -
Correction of prior year’s error (5.25) 5.25
Balance as at 31-12-2016: Restated 700.00 696.75 172.00 - 5.25
Equity-settled share based payment: Restated 5.25
Total comprehensive income for 2017:
- Profit for the year: Restated 305.75
- Other comprehensive income 109.00 -
(281‒172)
Balance as at 31-12-2017: Restated 700.00 1,002.50 281.00 - 10.50
Equity-settled share based payment 3.00
Total comprehensive income for 2018:
- Profit for the year 146.20
- Other comprehensive income 18.00 (24.00) 14.50
Balance as at 31 December 2018 700.00 1,166.70 257.00 14.50 13.50

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.3 Eight key differences between requirements of IFRS for SMEs and full IFRS:

IFRS for SMEs Full IFRS

Financial statement presentation
1. Permits to present a combined statement of Do not permit such combined statement of
income and retained earnings. income and retained earnings.

2. Does not require segment information. Require segment information for certain
entities.

3. Does not require earnings per share to be Require certain entities to present earnings
disclosed. per share.

Intangible assets
4. The intangible assets with indeterminable Require intangible assets with indefinite life to
useful life are considered to have ten years of be carried at cost less impairment loss, if any
useful life. and such assets are not depreciated.

5. The development and research expenditures Require development costs which meet the
are always recorded as an expense. specified condition to be capitalized as an
asset.

Investment property
6. Investment property whose fair value can be Allow an accounting policy choice of either fair
measure reliably without undue cost or effort value through profit or loss or a cost model
shall be measured at fair value at each (with some limited exceptions).
reporting date.

Borrowing costs
7. All borrowing costs shall be recognised as an Require borrowing costs directly attributable
expense in profit or loss. to a qualifying asset to be capitalized.

Business combination
8. The goodwill is measured at cost less The goodwill acquired in a business
accumulated amortisation and any combination is only subject to impairment
accumulated impairment losses. testing at least annually and is not amortised.

There are also other valid differences.

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
Suggested Answers
Certified Finance and Accounting Professional Examination – Winter 2019

A.4 Ruble Limited

Consolidated statement of financial position as on 31 December 2018
Rs. in million
Assets:
Property, plant and equipment (7,450+3,000)–300+250–24(W-2) 10,376.00
Goodwill (W-1) 375.60
Investment in joint venture - YL (W-7) 1,128.00
Current assets (650+500)–37.5 (W-2)–15 (W-4) 1,097.50
12,977.10
Equity and liabilities:
Share capital 4,000.00
Share premium 1,100.00
Group retained earnings (W-4) 2,989.31
Non-controlling interest (W-5) 469.62
Long-term loan (1,700+800)+183 (W-6) 2,683.00
Deferred tax (W-3) 390.17
Current liabilities (950+355) +40* 1,345.00
12,977.10
*May be shown separately or within non-current liabilities

W-1: Goodwill Rs. in million

Cash payment 1,300.00
Land at fair value 450 450.00
Loan at fair value 99(200×1.15–5)+ 81(200×12%×3.35216) 180.00
Cost of investment 1,930.00
Non-controlling interest on acquisition (W-2) 1,943×0.2 388.60
Net assets at acquisition (W-2) (1,943.00)
Goodwill 375.60

W-2: TL' net assets Acquisition date Reporting date

------- Rs. in million -------
Share capital 800.00 800.00
Share premium 225.00 225.00
Retained earnings 750.00 1,200.00
Fair value adjustment of building 250.00 250.00
Additional depreciation on building [(250–70)÷7.5] - (24.00)
Recognition of contingent liability (40.00) (40.00)
Unrealised profit on TL’s sale lying in RL’s stock [150×0.25] - (37.50)
Deferred tax liability (W-3) 42–16.58 (42.00) (25.42)
1,943.00 2,348.08

W-3: Deferred tax liability/(asset): Rs. in million

RL’s and TL’s balance as given 250+120 370.00
Interest on bank loan (3×0.25) (0.75)
Unrealised profit on RL’s sale lying in TL’s stock (15×0.3) (4.50)

Related to TL – at acquisition date:

Fair value adjustment of building excl. land (250–70)×0.3 54.00
Recognition of contingent liability (40×0.3) (12.00)
42.00
Related to TL – Reporting date adjustments:
Additional depreciation on FV adjustment (W-2) (24×0.3) (7.20)
Unrealised profit on TL’s sale lying in RL’s stock (W-2) (37.5×0.25) (9.38)
(16.58)
390.17

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
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Certified Finance and Accounting Professional Examination – Winter 2019

W-4: Group retained earnings: Rs. in million

RL's retained earnings 2,300.00
Gain on transfer of land 450–300 150.00
TL's post acquisition profit (W-2) (2,348.08–1,943.00)×0.8 324.06
Additional interest on bank loan (W-6) 27–24 (3.00)
Related deferred tax (W-3) 0.75
(2.25)
Profit from joint venture 380×0.6 228.00
Unrealized profit on RL’s sale lying in TL’s stock (100×0.15) (15.00)
Related deferred tax (W-3) 4.50
(10.50)
2,989.31

W-5: Non-controlling interest Rs. in million

On TL's acquisition (W-1) 388.60
Post-acquisition profit of TL (W-2) (2,348.08–1,943.00)×0.2 81.02
469.62

W-6: Bank loan Rs. in million

On acquisition (W-1) 180.00
Interest cost 180×15% 27.00
Interest paid 200×12% (24.00)
Closing balance 183.00

W-7: Investment in joint venture - (using equity method) Rs. in million

Investment at cost 900.00
Share of profit from YL (W-4) 228.00
1,128.00

A.5 (a) As per para 35 of IFRS 15, an entity should recognize revenue ‘over time’ if one of the
following criteria is met:

(i) the client/customer simultaneously receive and consumes the benefits provided
by the entity’s performance as the entity performs.
(ii) the entity’s performance creates or enhances an asset that the customer controls
as the asset is created or enhanced.
(iii) the entity’s performance does not create an asset with an alternative use and the
entity has an enforceable right to payment for performance completed to date.

If performance obligation is not satisfied over time, an entity satisfies the performance
obligation at a point in time.

EXTERNAL AUDIT:
Performance of Audit services by LCCA does not meet the criteria (i) or (ii) above.

The first part of criteria (iii) is met for all audit services as partially completed audit by
LCCA does not create an asset with an alternative use.

Therefore, LCCA should recognize revenue:

 at a ‘point in time’ where LCCA’s enforceable right to payment is established only
after signing of audit report.
In these cases, revenue for audit services should only be recognized when the
control of services has been transferred i.e. when audit report has been signed and
delivered to the client.
 ‘over time’ where LCCA has enforceable right to payment for work done to date.

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 ADVANCED ACCOUNTING & FINANCIAL REPORTING
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Certified Finance and Accounting Professional Examination – Winter 2019

An appropriate method for measuring progress and recognizing partial revenue for the
audits in progress at the year-end could be input method (for example: hours utilized/
cost incurred/resources consumed) or output method (for example: milestones
achieved).

INTERNAL AUDIT SERVICES:

As the work is performed in complete coordination with client and any identified issues
are immediately brought to the knowledge of the client, it can be concluded that the
client simultaneously receives and consumes the benefits provided by the LCCA’s
performance. Therefore, LCCA should recognize the revenues ‘over time’.

The revenue would be recognized over time even when LCCA does not have any
enforceable right to payment for the 4 month (July to October) of work completed as at
year.

An appropriate method could be output method where revenue is recognized on the

basis of output method (For example: milestones achieved / audits completed) or input
method (for example: hours utilized/ cost incurred/resources consumed).

(b) SECONDMENT:
Revenue should be recognized by LCCA as:
 Gross amount if working as a principal
 Net amount if working as an agent

LCCA would be a principal if it controls the specified goods or services before that good
or service is transferred to a customer.

Indicators of transfer of control are:

 Entity is primarily responsible for fulfilling the promise.
 Entity has inventory risk.
 Entity has discretion in establishing the price.

In respect of employees seconded to local client, LCCA does not obtain control as:
 LCCA is not primarily responsible for fulfilling the promise.
 LCCA does not have inventory risk as LCCA does not have the ability to direct the
use of those employees to other assignments. Or Employees are specifically hired
for the client.
 LCCA does not have discretion in establishing the price.

So LCCA is acting as an agent and should recognize revenue on “Net basis”.

In respect of employees seconded to network firms, LCCA has control over its existing
employees as:
 It can direct such employees to other assignment,
 It has inventory risk because it has to bear the cost of employees if not used at any
assignment, and
 It has price discretion.

So LCCA is acting as a principal and should recognize gross amount from network firms
as revenue. The cost of employees would be recognized as cost of fulfilling the contract.

(The End)

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