Certified Finance and Accounting Professional Stage Examination
The Institute of 5 December 2022
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Advanced Accounting and Financial Reporting
Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.
Q.1 (a) On 1 July 2021, Rugby Limited (RL) entered into a joint arrangement with Volleyball
Limited to set up an industrial unit, Tennis Limited (TL) with paid-up capital of
Rs. 50 million. RL has 60% share in the equity and operations of TL. The following
information relates to activities of TL for the year ended 30 June 2022:
On 1 August 2021, TL obtained long term loan of Rs. 30 million from a
commercial bank to finance an industrial unit which was constructed at a cost of
Rs. 80 million. The unit commenced its operation from 1 October 2021 and has
useful life of ten years.
During the year, TL earned revenues of Rs. 60 million out of which Rs. 12 million
was outstanding at year-end. TL also paid operating cost of Rs. 26 million.
TL’s finance cost of Rs. 4 million was paid by RL which TL has agreed to settle
after the year-end.
Required:
Discuss how the above information would be dealt with in RL’s consolidated financial
statements for the year ended 30 June 2022 if TL is treated as:
(i) Joint operation (05)
(ii) Joint venture (03)
(Also calculate the amounts to be included in RL’s consolidated financial statements)
(b) You have recently joined as Finance Manager of Soccer Limited (SL), a football
manufacturer. Being one of the sponsors for the upcoming world cup in Qatar, SL’s
delegation has been invited to watch few matches of the world cup in the stadium.
You have been informed that the statutory audit of SL for the year ended 30 June 2022
is in final stage and the auditor has recommended certain material adjustments in the
financial statements before issuing an unmodified audit report. In a meeting with CFO,
who is a chartered accountant, you have been informed about the disappointment of
the SL’s directors due to selected audit adjustments which slide SL’s profit below the
target. Therefore, CFO has asked you to take up the matter with the audit engagement
partner regarding the selected adjustments and also asked you to invite the audit partner
to the trip to Qatar with SL’s delegation.
Required:
Briefly explain how CFO may be in breach of the fundamental principles of ICAP’s
Code of Ethics for Chartered Accountants. Also state the potential threats that you may
face in the above circumstances and how you should respond. (08)
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Q.2 Draft financial statements of Archery Limited (AL) for the year ended 31 December 2021
show the following amounts before incorporating the outstanding issues and taxation:
Rs. in million
Total assets 1,300
Total liabilities 450
Profit before tax 250
Other comprehensive income -
Details of outstanding issues:
(i) AL operates a funded pension plan for its employees. During the year ended
31 December 2021, no entries have been made in the books of AL in respect of the
pension except for contribution paid to the fund debited to pension liability.
Following relevant information has been extracted from the actuarial report for the year
ended 31 December 2021:
Rs. in million
Fair value of plan assets on 1 January 2021 250
Present value of defined benefit obligations on 1 January 2021 350
Current service cost 73
Contribution paid to the fund 62
Pension paid by the fund 53
Actuarial gains 34
Actual return on plan assets during the year 44
Yield on high quality corporate bonds (per annum) 14%
Under the tax laws, only contribution paid to the fund is allowed as an expense.
(ii) No entries have been made in the AL’s books in the years 2020 and 2021 in respect of
share appreciation rights (SARs) scheme for employees announced on 1 January 2020.
On 1 January 2020, AL granted 100,000 cash-settled SARs to each of its 50 employees
on the conditions that they will remain in AL’s employment for 3 years and AL achieves
an average annual growth rate of 20% in revenue during the three years ending
31 December 2022.
Relevant details on various dates are as follows:
1 Jan 20 31 Dec 20 31 Dec 21
Fair value of each SAR (Rs. per share) 16 21 25
Intrinsic value of each SAR (Rs. per share) 11 15 20
AL’s expectation to meet growth target Yes No Yes
No. of employees already left till date - 2 6
Further no. of employees expected to leave 8 7 5
Under tax laws, payments against SARs are admissible as an expense.
(iii) Investment in bonds of Wrestling Limited was accounted for as a financial asset
‘subsequently measured at fair value through profit or loss’ instead of accounting for the
financial asset as ‘subsequently measured at fair value through other comprehensive
income’.
On 1 January 2021, AL purchased 4 million bonds (having face value of Rs. 50 each)
at Rs. 150 million maturing on 31 December 2025. Transaction cost of Rs. 3 million
was also incurred on purchase of bonds. Coupon rate on bonds is 8% per annum payable
annually on 31 December while effective rate of interest is 15% per annum. At initial
recognition, AL determined that bonds were not credit impaired.
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On 31 December 2021, AL received the interest however, due to deteriorating credit
rating of the bonds, AL determined that there had been a significant increase in credit
risk since the acquisition of the bonds.
Following information regarding the 4 million bonds at various dates is also available:
Expected credit losses Fair value in
Date Life time 12 months quoted market
--------------- Rs. in million ---------------
1 January 2021 5 2 150
31 December 2021 15 7 136
Under tax laws, impairment and fair value adjustments do not affect taxable profits
while interest income is taxable at coupon rate. Further, transaction cost is allowed to
be capitalised in the cost of investment.
Required:
(a) Determine the revised amounts of total assets, total liabilities, profit before tax and other
comprehensive income after incorporating the effects of the above outstanding issues.
(Ignore taxation) (14)
(b) Prepare relevant notes on taxation and deferred tax liability / asset for inclusion in AL’s
financial statements for the year ended 31 December 2021. (Assume tax rate of 30%) (11)
Q.3 Following are the details of few transactions of Badminton Limited (BL):
(i) On 1 January 2020, BL acquired a building on lease for a non-cancellable period of
4 years at Rs. 45 million per annum, payable in arrears. The agreement contains an
option for BL to extend the lease for further 3 years at Rs. 45 million per annum payable
in arrears. On 1 January 2020, BL’s incremental borrowing rate was 15% per annum
and BL was not reasonably certain that the option to extend the term will be exercised.
However, on 1 January 2021, BL was reasonably certain that the option to extend the
term will be exercised due to increasing rentals in the markets. BL’s incremental
borrowing rate was 14% per annum on that date.
On 1 July 2021, BL sub-leased this building for a lease term of five and half years at
Rs. 24 million payable semi-annually in advance. (09)
(ii) On 1 September 2020, BL entered into a contract for the purchase of a manufacturing
plant at a cost of USD 1.5 million. On the same date, BL entered into a forward contract
with a bank for the purchase of USD 1.5 million at a fixed rate in order to hedge the
cash flows relating to purchase of the plant. The forward contract would be settled after
seven months i.e. 1 April 2021 when the payment needs to be made against the plant.
Relevant exchange rates per USD are as follows:
1-Sep-2020 31-Dec-2020 1-Apr-2021
Spot rate Rs. 167 Rs. 177 Rs. 190
Forward contract
Rs. 183 Rs. 187 NA
(settlement date 1 April 2021)
You may assume that all IFRS 9 conditions for the application of cash flow hedge
accounting have been met.
At 31 December 2021, the plant was still in installation phase and a cost of
Rs. 24 million has been incurred on the installation. (08)
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(iii) On 1 January 2020, BL issued 4 million six-year convertible debentures at par value of
Rs. 100 each at a fixed rate of 13% per annum. Interest is payable at the end of each
year whereas the principal is to be repaid in lump sum at the end of 2025.
Debentures were issued with an option to convert 10 debentures into 3 ordinary shares
of BL till the date of redemption. On initial recognition, the liability was not designated
as subsequently measured at fair value through profit or loss. The market interest rate
for non-convertible debentures issued by entities having similar credit risk and tenure is
15% per annum.
On 1 January 2021, BL repurchased 1 million debentures at Rs. 112 per debenture.
The market interest rates and market values of BL’s shares are given below:
Interest rate Market value
Date
per annum per share (Rs.)
1 January 2020 15% 260
1 January 2021 14% 290 (08)
Required:
Prepare the extracts (including comparative figures) relevant to the above transactions from
BL's statement of financial position and statement of profit or loss and other comprehensive
income for the year ended 31 December 2021 in accordance with the IFRSs.
(Notes to the financial statements and bifurcation of current and non-current in statement of
financial position are not required.)
Q.4 Following are the draft statements of financial position of Hockey Limited (HL), Golf
Limited (GL) and Cricket Limited (CL) as at 30 June 2022:
HL GL CL
------ Rs. in million ------ C$ in million
Assets
Property, plant and equipment 6,065 3,130 330
Investment in GL 890 - -
Investment in CL 2,400 - -
Investment in a joint venture - 650 -
Current assets 2,870 2,875 170
12,225 6,655 500
Equity and liabilities
Share capital (Rs./C$ 10 each) 3,000 2,000 150
Retained earnings 6,500 3,280 235
Net pension liability 650 280 -
Other liabilities 2,075 1,095 115
12,225 6,655 500
Additional information:
(i) On 1 July 2021, HL acquired 60% shareholdings in GL. The purchase consideration
was one debenture (having par value of Rs. 50) issued by HL for every two shares held
in GL. The fair value of each share of GL was Rs. 24 on that date.
These debentures would be redeemed after 6 years at par value. The debentures carry
an interest of 14% per annum though market interest rate for similar debentures was
12% per annum. The issuance of debenture is not yet recorded in HL’s books. Annual
interest paid on 30 June 2022 was charged to profit or loss.
(ii) On acquisition date, GL’s retained earnings were Rs. 2,580 million and the fair value
of GL’s net assets was equal to their carrying value except the following:
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Investment in joint venture had a carrying value of Rs. 510 million using equity
method and fair value of Rs. 680 million. The fair value of investment in the joint
venture as on 30 June 2022 was estimated at Rs. 840 million.
Land carried in GL’s book at its cost of Rs. 240 million. The land is held by GL
for the purpose of building a residential complex, however, HL intends to build a
factory on this land. Fair value of land based on its use as residential complex and
factory is estimated at Rs. 450 million and Rs. 390 million respectively.
Net pension liability of Rs. 220 million was appearing in GL’s books. It was
estimated that the full settlement of this liability would require net amount of
Rs. 290 million on acquisition date.
(iii) On 1 January 2022, further 15% shareholdings in GL were acquired for Rs. 890 million
paid in cash. GL’s retained earnings on that date were Rs. 2,860 million.
(iv) On 1 July 2020, HL acquired 80% shareholdings in CL (a foreign company) at a
consideration of C$ 240 million.
On acquisition date, CL’s retained earnings were C$ 180 million. On the same date, fair
value of CL’s net assets was equal to their carrying value except for an office building
whose fair value was higher than its carrying value by C$ 10 million with remaining
useful life of five years.
(v) On 1 July 2021, HL disposed off 50% shareholdings (leaving 30% with HL) in CL
against cash consideration of C$ 215 million which was credited to ‘Retained earnings’
upon receipt. However, HL still retains significant influence in CL. On the date of
disposal, the fair value of CL’s share and CL’s retained earnings were C$ 25 per share
and C$ 210 million respectively.
(vi) The exchange rates per C$ are as follows:
30 June 2021/ Average rate for year
1 July 2020 30 June 2022
1 July 2021 2020-21 2021-22
Rs. 10 Rs. 12 Rs. 14 Rs. 11 Rs. 13
(vi) HL values non-controlling interest on the acquisition date at its proportionate share of
the fair value of the subsidiary’s identifiable net assets.
Required:
Prepare HL’s consolidated statement of financial position as at 30 June 2022 in accordance
with the requirements of IFRSs. (25)
Q.5 (a) A newly hired accountant has prepared the following statement of profit or loss of Polo
General Insurance Limited for the year ended 31 December 2021 and has submitted it
for your review.
Rs. in '000
Gross written premium 165,000
Insurance claims and acquisition expenses (63,600)
Net reinsurance expense (46,550)
Management expenses (20,250)
Gross profit 34,600
Investment and other income 24,850
Other expenses (3,750)
Profit before tax 55,700
Income tax expense (21,185)
Profit after tax 34,515
Required:
Prepare list of errors and omissions in the above statement. (05)
(Note: There are no casting errors. Redrafting of the statement is not required)
(b) Briefly discuss how musta’jir (lessee) accounts for profit or loss arising on sale of an
asset in a “sales and leaseback transactions” under IFAS 2 Ijarah? (04)
(THE END)
