Multiple IFRSs Question 2

QUESTION 2: IAS 23, IFRS 16, IAS 12 (CAF7 A17)

Emotional Limited (EL) is preparing its financial statements for the year ended 30 June 2017.
Following are the details of additions to property, plant and equipment made during the year:

Addition 1: Construction of tanks and pipelines

Summary of cost incurred on tanks and pipelines is as follows:
Description Rs. in million Date of payments
Advance to contractor 200 1 August 2016
Construction permit fee 100 1 August 2016
Suppliers of construction material 600 1 September 2016
1st bill of contractor 500 1 January 2017
2nd bill of contractor 200 1 March 2017
Last bill of contractor 200 1 May 2017

In order to finance the project, EL obtained a 3 year loan of Rs. 1,200 million at the rate of 12%
per annum on 1 August 2016. The principal is payable in three equal annual instalments along
with interest, from 1 August 2017. The surplus funds available from the loan were invested in a
saving account at 8% per annum.

The remaining cost was financed through cash withdrawals from EL’s existing running finance
facilities. Details of these facilities are as follows:
Running finance
Name of
Balance as on Average Mark up %
bank Limit
30 June 2017 balance
Bank Q 500 450 400 12.5
Bank W 700 650 300 14.0

The tanks and pipelines were put into operation upon completion on 1 April 2017.

Addition 2: Acquisition of machinery on lease

On 1 January 2017 EL acquired machinery having fair value of Rs. 185 million, on lease for a non-
cancellable period of four years. Rentals of Rs. 54 million are to be paid annually in advance on 1
January. EL’s incremental borrowing rate is 13.7%. EL also paid initial direct cost of Rs. 10 million
in respect of the machinery.

The following information is also available:

(i) During the year ended 30 June 2017, EL made a profit before tax of Rs. 500 million, after
incorporating the effects of above transactions.
(ii) EL charges depreciation at the rate of 10% on tanks and pipelines.
(iii) EL’s tax rate is 30%. Tax authorities allow depreciation at the rate of 20% on tanks and
pipelines. Full year’s tax depreciation is allowed in the year of addition.
(iv) As per tax laws:
 all lease related payments are allowed in the year of payment; and
 borrowing costs are allowed when incurred.
 investment income is taxable when earned.
(v) There are no temporary differences in current and previous years other than those evident
from the information provided above.

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Multiple IFRSs Question 2

Required:
Prepare relevant extracts from EL’s statement of financial position as on 30 June 2017. Notes to
the financial statements are not required. Borrowing costs are to be calculated on the basis of
number of months. (18)

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Multiple IFRSs Question 2

ANSWER 2: IAS 23, IFRS 16, IAS 12 (CAF7 A17)

Emotional Limited
Extracts from Statement of Financial Position
As on 30 June 2017
Rs. in m
Property, plant and equipment
Tanks and pipelines W1 1,843.49
Right of use asset 180 W2 + 10 direct cost – 23.75 depreciation of six months 166.25

Non-current liabilities
Lease liability W2 89.26
Bank loan 1,200 – 400 current portion 800
Deferred tax liability W4 130.53

Current liabilities
Running finance 450+ 650 1,100
Bank loan 400
Lease liability W2 36.74
Accrued interest on lease 8.63
Accrued interest on bank loan 1200 x 12% x 11/12 132
Current tax payable W3 19.47

W1 PPE and Borrowing costs to be capitalized Rs m

Payment to contractors 1,800

Interest on specific borrowings W1A 96

Temporary investment income W1B (14)
Interest on general borrowings W1C 8.76
90.76
1,890.76
Depreciation 1890.76 x 10% x 3/12 (47.27)
1,843.49

W1A - Interest on specific borrowings

From To Loan outstanding Period Rate Rs. m
01-08-16 31-03-17 1,200 8/12 12% 96
Total 96
W1B - Temporary Investment income
From To Total Savings Period Rate Rs. m
01 Aug 16 31 Aug 16 900 1/12 8% 6
01 Sep 16 31 Dec 16 300 4/12 8% 8
Total 14
W1C - Interest on General borrowings
From To Expenditure on QA Period Rate Rs.
01 Jan 17 28 Feb 17 200 2/12 13.14% 4.38
1 Mar 17 31 Mar 17 400 1/12 13.14% 4.38
Total 8.76

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Multiple IFRSs Question 2

[𝟒𝟎𝟎 × 𝟏𝟐. 𝟓%] + [𝟑𝟎𝟎 × 𝟏𝟒%]

𝑪𝒂𝒑𝒊𝒕𝒂𝒍𝒊𝒔𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 = = 𝟏𝟑. 𝟏𝟒%
𝟒𝟎𝟎 + 𝟑𝟎𝟎

From To Description Exp Cum Specific Temp Inv. General

Rs. m
Advance 200 200 1,200
01 Aug 16 31 Aug 16
Permit fee 100 300 1,200 900 -
01 Sep 16 31 Dec 16 Materials 600 900 1,200 300 -
01 Jan 17 28 Feb 17 1st bill 500 1,400 1,200 - 200
1 Mar 17 31 Mar 17 2nd bill 200 1,600 1,200 - 400

W2 Lease
Interest 13.7% Principal PV of lease
Year end installment
------- Rs in million -------
[[{1- 1+0.137)^-3 /0.137]}+1 x 54m] 180
1 Jan 17 54 54 126
1 Jan 18 54 17.26 36.74 89.26

W3 Computation of current tax Rs m

Profit before tax 500
Add: Accounting depreciation Pipelines 47.27
Less: Tax depreciation Pipelines 1800 x 20% (360)

Less: Borrowing cost capitalised (90.76)

Add: Accounting depreciation – Machinery 23.75

Add: finance cost lease 8.63
Less: Lease rental (54)
Less: Direct cost on leased machinery (10)
Taxable profit 64.89

Taxation expense 64.89 x 30% 19.47

W4 Deferred tax CA TB TD
----- Rs. in millions -----
Tanks and pipelines 1,843.49 1,440 403.49
Machinery (leased) 166.25 - 166.25
Lease liability 126 - (126)
Accrued interest on lease 8.63 - (8.63)
435.11

Deferred tax expense / liability 30% 130.53

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