ADVANCED ACCOUNITNG & FINANCIAL REPORTING

Suggested Answers
Final Examination – Summer 2015

Ans.1 MALIK GROUP OF COMPANIES

Consolidated statement of cash flows
For the year ended 31 December 2014
Cash flow from operating activities Workings Rs. in million
Profit before tax 11,150
Adjustments for:
Finance cost 350
Gain on sale of subsidiary (1,000)
Income from associate (1,150)
Depreciation 3,850
Goodwill impairment 1 800
Gain on disposal of PPE (Rs. 2,750m – Rs. 2,500m) (250)
Working capital changes
Increase in inventory 2 (500)
Decrease in receivables 2 300
Decrease in payables 2 (250)
Cash generated from operations 13,300
Finance cost paid (Rs. 75m + Rs. 350m – Rs. 125m) (300)
Income tax paid 3 (1,850)
Net cash generated from operations 11,150

Cash flow from investing activities

Acquisition of property, plant and equipment 4 (8,000)
Acquisition of a subsidiary (Rs. 15,000m – Rs. 800m) (14,200)
Proceed from disposal of property, plant and equipment 2,750
Proceed from disposal of a subsidiary (Rs. 8,500m – Rs. 500 million) 8,000
Dividend received from associate 5 850
(10,600)
Cash flow from financing activities
Increase in long term loan (Rs. 3,000m + Rs. 400m – Rs. 300 – Rs. 5,000m) 1,900
Dividends paid to parent shareholders (1,250)
Dividends paid to non-controlling interest 6 (500)
150
Increase in cash and cash equivalents 700
Opening cash and cash equivalents 1,400
Closing cash and cash equivalents 2,100

WORKINGS
W1: Goodwill impairment
Goodwill as on 1 January 2014 18,500
Add: Goodwill of subsidiary acquired during the year 1.1 3,500
Less: Goodwill of subsidiary disposed of during the year 1.1 (1,900)
Less: Goodwill as on 31 December 2014 (19,300)
Impairment (balancing figure) 800

W-1.1: Goodwill of acquired/disposed of subsidiaries Gomel Stone

Cost of investment 15,000 6,000
NCI holding at fair value 3,400 3,200
FV of subsidiary net assets at acquisition (14,900) (7,300)
Goodwill at acquisition 3,500 1,900

W-2 : Working capital changes

Inventory Receivables Payables
Opening balance as on 1 January 2014 4,350 3,300 7,250
Add: Transferred in on acquisition of subsidiary 1,500 2,400 1,800
Less: Transferred out on disposal of subsidiary (1,650) (1,500) (800)
4,200 4,200 8,250
Less: Closing balance as on 31 December 2014 (4,700) (3,900) (8,000)
Working capital changes (500) 300 250

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

W-3 : Income taxes paid

Current and deferred tax as on 1 January 2014 (Rs. 3,525m + Rs. 1,050m) 4,575
Add: Transferred in on acquisition of subsidiary 400
Add: Tax for the year 2,250
Less: Current and deferred tax as on 31 December 2014 (Rs. 3,875m + Rs. 1,500m) (5,375)
Income taxes paid during the year 1,850

W-4: Acquisition of property, plant and equipment

Balance as on 1 January 2014 16,250
Add: Transferred in on acquisition of subsidiary 12,800
Less: Transferred out on disposal of subsidiary (7,250)
Less: Depreciation charge for the year (3,850)
Add: Increase in surplus of revaluation of PPE 2,000
Less: Disposal of plant (2,500)
Less: Balance as on 31 December 2014 (25,450)
Acquisition of property, plant and equipment (8,000)

W-5: Dividend from associate

Balance as on 1 January 2014 5,400
Add: Income from associate (Rs. 1,150m + Rs. 500m) 1,650
Less: Balance as on 31 December 2014 (6,200)
Dividend received 850

W-6: Dividend to NCI

Balance as on 1 January 2014 3,200
Add: Total comprehensive income of the year 1,200
Add: Acquisition of Gomel Limited 3,400
Less: Disposal of Stone Limited (9,800 × 40% + [3,200 – (7,300 × 40%)] (4,200)
Less: Balance as on 31 December 2014 (3,100)
500

Ans.2 (a)  The deposit is considered a financial asset.

 As per IFRS-9, a financial asset is classified as measured at either amortised cost
or fair value.
 ISL should measure this investment at amortized costs because:
– It appears that the asset is held within ISL business model where the
objective is to hold assets in order to collect contractual cash flows.
– The contractual terms of the financial asset give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal
outstanding.
 The additional 2% interest is an example of an embedded derivative.
 As the host contract is a financial asset, the derivative is not separated out for the
purposes of accounting and the entire hybrid contract is accounted for together.

(b) Date Description Debit Credit

10/1/2014 Property, plant and equipment 325
Profit and loss account (325- 310) 15
Investment property 310
(Dercognize investment property and record related
gain to income statement)

3/31/2015 Depreciation (325 x 6/12 ÷ 10) 16.25

Accumulated depreciation 16.25
(Record depreciation)

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

(c) 4/1/2014 Bank 135

Deferred loss (2×10) 20
Profit and loss account (balancing) 5
Property, plant and equipment 160
(Record sale of power generation plant on sale and
lease back)

3/31/2015 Lease rental 24

Deferred loss (20/10) 2
Bank 22
(Record lease rental along with deferred loss reversal in
accordance with para 61 of IAS-17)

Ans.3 (a) (i) Financial statement extracts

EXTRACT OF STATEMENT OF FINANCIAL POSITION

2014 2013
Deferred liabilities Rs. in million
Net defined benefit liability 256 150

EXTRACT OF STATEMENT OF COMPREHENSIVE INCOME

Profit and loss account

Operating expenses 118 160

Other comprehensive income

Re-measurement loss on defined pension plan (113) (53)

EXTRACT OF NOTES TO THE FINANCIAL STATEMENTS

28 - Staff Retirement Benefits

28.1 - Changes in the present value of the pension obligations

2014 2013
Rs. in million
Present value obligations at the beginning of the year 2,300 2,050
Interest at 9%, 8% 207 164
Current service cost 125 143
Past service cost - 13
Benefits paid (99) (110)
Settlement (Note 28.2.1) (280) -
Re-measurement (gain) / losses charged to other
comprehensive income (balancing) (213) 40
2,040 2,300

28.2 - Changes in fair value of plan assets

Fair value of plan asset at beginning of the year 2,150 1,995

Interest at 9%, 8% 194 160
Benefits paid (99) (110)
Contribution paid 105 118
Settlement (Note 28.2.1) (240) -
Re-measurement losses charged to other comprehensive
income (balancing) (326) (13)
20X8 c/f 1,784 2,150

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

28.2.1 During 2014, the company sells one of its business segments and transfers the
relevant part of the pension plan to the purchaser. This is a settlement. The
overall gain on settlement is calculated as follows:

2014
Rs. in million
Present value of obligation settled 280
Fair value of plan assets transferred on settlement (240)
Cash transferred on settlement (20)
Gain on settlement 20
28.3 - Amounts recognized in the profit and loss account
2015 2014
Rs. in million
Current service cost 125 143
Past service cost - 13
Interest cost 207 164
Less: Intesest income on plan assets (194) (160)
Gain on settlement (20) -
118 160

(ii) Journal entries to record the present obligations

Debit Credit
Description
Rs. in million
PV of pension obligation 280
Plan assets 240
Bank 20
Gain on settlement 20
(Record gain on settlement)

Pension expense 138

Other comprehensive income 113
Cash 105
PV of pension obligations 146
(To record pension expense and its related liability)

(b) Entries in the case of equity alternative

Dr. Cr.
Date Description
------------ Rupees ------------
31-Dec-15 Profit & loss account 4,633,333
Liability (W-1) 4,000,000
Equity (W-2) 633,333
31-Dec-16 Profit & loss account 4,953,333
Liability (W-1) 4,320,000
Equity (W-2) 633,333
31-Dec-17 Profit & loss account 5,513,333
Liability (W-1) 4,880,000
Equity (W-2) 633,333
1-Jul-18 Liability (W-1) 13,200,000
Equity (W-2) 1,900,000
Retained earnings (balancing) 2,400,000
Share capital (100,000 × 10) 1,000,000
Share premium (100,000 × *165) 16,500,000

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

Liability component Rupees

Liability to be recognized at 31-12-2015 [(80,000 × Rs. 150) ÷ 3] 4,000,000
Liability to be recognized at 31-12-2016 [(80,000 × Rs. 156 × 2 ÷ 3) – 4,000,000] 4,320,000
Liability to be recognized at 31-12-2017 [(80,000 × Rs. 165) – 4,000,000 – 4,320,000] 4,880,000
13,200,000

Equity component Rupees

Fair value of equity alternative on grant date (100,000 × Rs. 135) 13,500,000
Fair value of cash alternative on grant date (80,000 × Rs. 145) 11,600,000
Equity component 1,900,000

Charged to Profit & Loss account each year 633,333

Ans.4 (a) MILLAT GENERAL INSURANCE

Profit and loss account for the year ended 31 December 2014
Fire and
Motor Misc. 2014
Working property
insurance insurance Total
damage
--------------------- Rs. in '000 ---------------------
Revenue account
Net premium revenue 1 55,484 139,986 36,668 232,138
Net claims (38,803) (95,000) (28,029) (161,832)
Management expenses (10,756) (27,136) (7,108) (45,000)
Net commission 2 5,548 (15,554) (917) (10,923)
Underwriting result 11,473 2,296 614 14,383
Other operating expenses (28,000)
Other income 17,000
Profit before tax 3,383

W-1: Net premium revenue

Fire and
Motor Misc. 2014
property
insurance insurance Total
damage
--------------------- Rs. in '000 ---------------------
Premium written 286,000 154,000 89,000 529,000
Add: Unearned premium reserve - opening 42,900 20,020 14,240 77,160
Less: Unearned premium reserve - closing (51,480) (18,480) (11,570) (81,530)
Premium earned 277,420 155,540 91,670 524,630
Reinsurance ceded 228,800 15,400 53,400 297,600
Add: Prepaid insurance premium - opening 34,320 2,002 8,544 44,866
Less: Prepaid insurance premium - closing (41,184) (1,848) (6,942) (49,974)
Reinsurance expenses 221,936 15,554 55,002 292,492
Net premium revenue 55,484 139,986 36,668 232,138

W-2: Net commission

Commission from insurers 33,290 - 8,250 41,540
Less: Commission expense (27,742) (15,554) (9,167) (52,463)
Net commission 5,548 (15,554) (917) (10,923)

(b) If the 1/24th method is used for earned premium, the underlying assumption is that all
premiums booked during a particular month can be approximated by an annual
policy that incepts during the middle of the month. Thus premium is spread across
the months in which it is booked and the rest 12 months. This can be illustrated as
follows:

Month 1 2 3 …. 11 12 13
Spread 1/24 1/12 1/12 …. 1/12 1/12 1/24

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

Ans.5 (a) Determination of reportable segments

Chemicals Soda Ash Polyester Paint Pharma Total

-------------------------- Rs. in million --------------------------
Sales 1,790 216 227 247 252 2,732
Less: Inter-segment sales (38) - - - - (38)
Sales to external customers 1,752 216 227 247 252 2,694

Gross profit 1,101 117 48 26 31 1,323

Operating expenses (63) (57) (23) (16) (12) (171)
Profit before tax 1,038 60 25 10 19 1,152

Assets 637 444 115 127 132 1,455

Criteria for reporting segment Reporting segment External sales of

identification identified identifying segment
1. 10% of sales i.e. Rs. 273.2 million Chemicals 65.03%
2. 10% of PBT i.e. Rs. 115.2 million - -
3. 10% of assets i.e. Rs. 145.5 million Soda Ash 8.02%
73.05%

Further segment needs to be identified as reportable segment’s external sale is less than 75%

4. Highest in term of sales and % of assets

Pharma 9.22%
amount remaining segments
82.27%

(b) Disclosure in the financial statements of Gohar Limited

34 - OPERATING SEGMENT RESULTS

Chemicals Soda Ash Pharma Others Total
------------------------ Rs. in million ------------------------
Revenue from external customers 1,752 216 252 474 2,694
Inter segment revenue 38 - - - 38
Revenue from reportable segment 1,790 216 252 2,258

Other material information

Operating expenses 63 57 12 39 171
Segment profit before tax 1,038 60 19 35 1,152
Segment assets 637 444 132 242 1,455
Segment liabilities 442 355 98 202 1,097

34.1 - Reconciliation of reportable segment revenues, profit or loss, assets and liabilities
Other than Elimination
Reportable Gohar
reportable of inter- Other
segment Limited's
segment segment adjustments
total total
total transactions
------------------------------ Rs. in million ------------------------------
Revenues 2,258 474 (38) - 2,694
Operating expenses 132 39 - 75 246
Segment profit before tax 1,117 35 (11) (75) 1,066
Segment assets 1,213 242 - 150 1,605
Segment liabilities 895 202 - 27 1,124

The reconciling items represents amounts related to corporate headquarter which are not
included in segment information.

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

Ans.6 Ittehad Industries Limited

Extract from the statement of comprehensive income
For the year ended 31 December 2014
2014
Note Rs. in million

Profit for the year 225

Earnings per share

Basic 17 1.28
Diluted 17 1.26

Ittehad Industries Limited

Extract from notes to the Financial Statements
For the year ended 31 December 2014

2014
Earnings per share Note
Basic Diluted
Total comprehensive income attributable to ordinary
shareholders (Rs. In million) 17.1 225.00 234.34

Weighted average number of ordinary shares outstanding

during the year (In million number of shares) 17.2 175.11 186.11

Reconciliation of profit for the year to Basic earnings and diluted earnings Rs. in million
Profit for the year i.e. basic earnings 225.00
Add: Interest on term finance certificates (W-2) 9.34
Diluted earnings 234.34

Reconciliation of basic number of shares to diluted number of shares Shares in million

Basic number of shares (W-1) 175.11
Options under ESS 1.00
Convertible term finance certificates 10.00
Diluted number of shares 186.11

WORKINGS

W-1: Weighted average number of shares

No. of shares
Right bonus
Description issue/ Weightage W/Avg shares
factor (W-1.1)
outstanding
Outstanding at start of the year 120 1/4 1.0870 32.61
Right issue 150 3/4 - 112.50
Bonus issue 30 1 30.00
175.11

W-1.1: Determination of right shares bonus factor

Shares Value
Rate
Quantity Rs. in million
Outstanding shares before the exercise of rights at fair value 120 25.00 3,000
Issuance of right shares at a premium of Rs. 5 per share 30 15.00 450
150 3,450

Theoretical ex-right price per share (Rs. 3,450 ÷ 150) 23.00

Bonus adjustment factor (25 ÷ 23) 1.0870

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 ADVANCED ACCOUNITNG & FINANCIAL REPORTING
Suggested Answers
Final Examination – Summer 2015

W-2: Ranking of dilutive instruments

Increase in no. Earnings per
Increase in
Description of ordinary incremental Rank
earnings
shares share
Rs. in million in million Rs.
Vested options under ESS (5m - [(5m x 12)/15) - 1 - 1
Term finance certificates (250*11.5%*65%*6/12) 9.34 10.00 0.934 2

W-3: Testing for dilutive effect

Profit
attribuatable Ordinary
EPS Effect
to ordinary shares
shareholders
Rs. in million in million Rs.
Basic earnings per share 225.00 175.11
Vested options under ESS - 1.00
225.00 176.11 1.2776 Dilutive
Term finance certificates 9.34 10.00
234.34 186.11 1.2591 Dilutive

(The End)

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