STUDY NOTES & MCQs

FOR

FINANCIAL ACCOUNTING &

CORPORATE REPORTING

ICMAP Managerial Level - II

“Spring 2022 Session”

Faculty:
M. Umar Munir
FCMA (Gold Medalist), MS Finance
Financial Accounting & Corporate Reporting ICMA Pakistan

SYLLABUS AT A GLANCE
PART A: Regulatory and Conceptual Framework 05%
1. The conceptual and Regulatory Framework of Financial Reporting

PART B: Single Company Financial Accounts 85%

Asset/Liability Standards:
1. IAS 2 Inventories
2. IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Non-Current Standards:
3. IAS 16 Property, Plant and Equipment
4. IAS 23 Borrowing Costs
5. IAS 20 Accounting for Government Grants & Disclosure of Government Assistance
6. IAS 38 Intangible Assets
7. IAS 40 Investment Property
8. IAS 36 Impairment of Assets
9. IFRS 16 Leases

Revenue Standards:
10. IFRS 15 Revenue from Contracts with Customers

Disclosure Standards:
11. IAS 24 Related Party Disclosures
12. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
13. IFRS 8 Operating Segments
14. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
15. IAS 10 Events After the Reporting Period
16. IAS 1 Presentation of Financial Statements
17. IAS 7 Statement of Cash Flows

Group Accounts
18. IFRS 3 Business Combinations.
19. IFRS 10 Consolidated Financial Statements

Group Accounts
20. IFRS 09 Financial Instruments.
21. IFRS 2 Share-based Payment.

PART C: Accounting for Taxation 10%

22. IAS 12 Income Taxes

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

 Study Scheme 2018

MANAGERIAL LEVEL-2
M4 – FINANCIAL ACCOUNTING & CORPORATE REPORTING
INTRODUCTION  Elucidate operating segments;
This course is designed to focus on preparing,  Understand non-current assets held for sale and
analysing financial statements and developing reports discontinued operations;
thereon, for management decisions. The students are  Identify the events after the reporting period;
expected to use knowledge and understanding of  Comprehend provisions, contingent liabilities
more advanced financial accounting, for preparing and contingent assets;
and interpreting financial statements in context of  Elucidate property, plant and equipment;
practice.  Deal with government grants;
 Understand borrowing cost;
OBJECTIVE
 Identify and comprehend intangible assets and
To provide the students with an in-depth knowledge
impairment of assets;
of financial reporting enabling them to:
 Record research and development expenditure
 analyse and interpret financial statements and
cost;
prepare financial reports, and
 Apply accounting treatment of goodwill and its
 Submit recommendations to the management for
impairment;
taking decision.
 Perform adequate accounting treatment of
LEARNING OUTCOMES leases;
On completion of this course, students will be able to:  Prepare and interpret statement of cash flows;
 Comprehend the structure and objectives of  Prepare and present the financial statements
regulatory framework and setting of according to international Accounting Standards
international financial reporting standards; (IAS) and International Reporting Standards
 Understand the meaning of conceptual (IFRS);
framework and GAAP;  Identify accounting treatment of inventories and
 Realize the ways in which IFRS can interact with WIP;
local regulatory frameworks:  Learn accounting treatment for financial
 Explicate the elements and qualitative instruments;
characteristics of financial statements;  Apply the accounting rules for current and
 Implement accounting policies changes in deferred taxation, including calculation of
accounting estimates and errors; deferred tax.
 Learn the revenue recognition;  ystems audit, control and security practices;
 Explicate related party disclosure;
INDICATIVE GRID
PART SYLLABUS CONTENT AREA WEIGHTAGE
REGULATORY AND CONCEPTUAL FRAMEWORK
A 1 The regulatory framework 5%
2 The Conceptual Framework
SINGLE COMPANY FINANCIAL ACCOUNTS
3 IAS 1 (Revised) Presentation of Financial statements
4 Reporting Financial Performance
5 Other Reporting
6 Accounting for non-current assets
B 7 Intangible non-current assets 85%
8 Impairment of Assets
9 Leases
10 Statements of Cash Flows
11 IAS 2 Inventories and Short term WIP
12 Share Based Transactions and Financial instruments
ACCOUNTING FOR TAXATION
C 10%
13 IAS 12: Income taxes
TOTAL 100%
Note: The weightage shown against each section indicates, study time required for the topics in that section. This
weightage does not necessarily specify the number of marks to be allocated to that section in the examination.
DETAILED CONTENTS
PART – A  The IASB’s Conceptual Framework
REGULATORY AND CONCEPTUAL FRAMEWORK  Qualitative Characteristics of Financial
Statements
1. The regulatory framework
 The elements of Financial Statements
 The International Accounting Standard
Board (IASB) PART - B
 Setting of International Financial Reporting SINGLE COMPANY FINANCIAL ACCOUNTS
Standards
3. IAS 1 (Revised) Presentation of Financial
2. The Conceptual Framework statements
 Conceptual Framework and GAAP  General Features

1
 Study Scheme 2018
 Structure and Detail Contents o Prepare and present simple
 Preparation of Financial Statements consolidated statements of financial
position and simple consolidated
4. Reporting Financial Performance statement of comprehensive income
 IFRS 5: Non-Current Assets held for Sale and involving a single subsidiary
discontinued operations.
o Scope and definitions : 8. Impairment of Assets
o Conditions of IFRs 5:  IAS 36 Impairment of Assets
o Transfer from IAS 16 to IFRS 5  Cash Generating Units
 IAS 8 Accounting Policies, Changes in  Goodwill and the Impairment of Assets
Accounting Estimates and Errors  Accounting treatment of an Impairment
 IFRS 8 Operating Segments. Loss.
 IFRS 15 Revenue from Contracts with  Reversal of impairment losses.
Customers.
o Five steps of Revenue Recognition. 9. Leases
o Construction contacts.  Characteristics of Leases
 IAS 24 Related Part Disclosures  IFRS 16 Lease
 Operating leases
5. Other Reporting  Finance leases
 IAS 10 Events after the Reporting Period
 IAS 37 Provisions, Contingent Liabilities 10. Statements of Cash Flows
and Contingent Assets  IAS 7 Statement of Cash Flow
 Preparing a Statement of Cash Flow
6. Accounting for non-current assets  Interpretation of Statements of Cash Flows
 IAS 16 Property, Plant and Equipment
o Scope and definitions 11. IAS 2 Inventories
o Cost of NCA:  Definitions
o Cost model.  Measurement of Inventories
o Disposal of NCA  Inventory Valuation Method
o Exchange of NCA.  Net Realizable Value
o Revaluation model.  Recognition as an Expense
o Different movements in Revaluation.  Disclosures
o Excess depreciation. 12. Share based Transactions and Financial
o Disposal of Revalued Assets. instruments
 IAS 20 Accounting for Government Grants  Definitions
and Disclosure of Government Assistance.  Types of Transaction
o Scope and definitions :  Equity-Settled Share-Based Payment
o Government grants and assistance : Transactions Disclosures.
o Revenue grant:  Financial Assets and Financial Liabilities:
o Treated as income o Scope and definitions of financial
o Deducted from respective expense assets and financial liabilities:
o Capital grants: o Financial liabilities (Short term, Long
o Treated as deferred income and term, Convertible loan notes)
deducted from Non-current assets IAS o Indicate for the following categories of
23 Borrowing Costs financial instruments how they should
 IAS 40 Investment Properties. be measured and how any gains and
o Scope and definitions : losses from subsequent measurement
o Investment properties. should be treated in the financial
o Transfer from IAS 16 to IAS 40 statements:
7. Intangible non-current assets i . A m o r t i z ed c o s t
 IAS 38 Intangible Assets. i i . Fa i r va l u e thr o ug h o the r
o Internally and externally generated comprehensive in c om e
intangibles. (including where an irrevocable
o Infinite and indefinite intangible election has been made for
 Research & Development Cost e q u i t y i n s t r u m en t s t h a t a r e n o t
 IFRS 3 Business Combinations h e l d f o r t r a d in g )
o Describe the concept of a group as a iii. Fair value through profit or loss
single economic unit PART - C
o Define subsidiary, parent and control ACCOUNTING FOR TAXATION
by identifying simple examples
o Describe situations when control is 13. IAS 12 Income taxes
presumed to exist  Current Tax
o Identify and describe the  Deferred Tax
circumstances in which an entity is  Taxation in Company Accounts
required to prepare and present  Presentation and Disclosure of Taxation
consolidated financial statements
Recommended Books:
CORE READINGS
Title Author Publisher
Gripping: IFRS Pakistan Edition Cathryune Sowden-Service ICAP / Lexis Nexis
Intermediate Accounting Donald E. Kieso / Jerry J. Weygandt & Terry D. Warfield John Willey & Sons.
IFRSs/IASs IASB IFRS Foundation
2
 INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN
EXAMINATION DEPARTMENT

PATTERN & STRUCTURE OF QUESTION PAPER

STUDY SCHEME-2018 W.E.F., SEPTEMBER 2018

COMPUTER BASED EXAMINATIONS [CBE]

MANAGERIAL LEVEL-2 [ML2]
[M4] Financial Accounting & Corporate Reporting

Syllabus Composition
of Time
Weightage Marks Allocated
Part/ Section Allowed
% Questions

M u l t i p l e C h o i c e Q u e s t i o n s (MCQs)

Theoretical: 10-15 of 2 Marks each

A–C 100 20-30
Numerical: 10-15 of 3-5 Marks each

Total Marks of MCQs = 60-80 Total

Time:
Descriptive Questions 03 Hours

A–C 100 5-15 5-15 of 3-5 Marks each

100 – Total Marks = 100

NOTE:
(1) The weightage % shown against each section/ part does not necessarily specify the number or marks
to be allocated to that section in the examination.
(2) Composition of MCQs and Descriptive Questions: Number of questions/ their respective marks
may be varied as per the requirements of the question paper.
(3) Descriptive Questions may include definitions, concepts, principles, cases/ scenarios, analysis,
interpretation, reports, application of laws/ standards, etc.
(4) There will be no Extra Reading Time allowed in the paper.
Subject: [M4] Financial Accounting & Corporate Reporting Level: Managerial Level-2

Time Allowed: 03 Hours Maximum Marks: 100

MULTIPLE CHOICE QUESTIONS (MCQS):

1. Government grants related to assets, including non-monetary grants at fair value, shall be presented
in _______.

A statement of cash flows

B statement of profit or loss

C statement of financial position

D statement of changes in equity

2. As per IFRS 16 ‘Leases’, which of the following information a lessee shall disclose for the reporting
period?

A Interest expense on lease liabilities

B Depreciation charge for right-of-use assets by class of underlying assets

C Income from sub-leasing right-of-use assets

D All of the above

3. Raana Limited acquired office equipment worth Rs. 780,000 on January 01, 2018. The useful life of
equipment is estimated to be 6 years and the residual value is expected to be Rs. 150,000. The
company uses diminishing balance method of depreciation at the rate of 15% per annum. The
amount of depreciation of the office equipment for the year ended December 31, 2019 is _______.

A Rs. 117,000

B Rs. 99,450

C Rs. 94,500

D Rs. 80,325

FACR-MP – CBE [SS-2018] 1 of 3 PTO

[Note: The questions made available through this Model Paper reflects the pattern of questions to be
tested in exams. However, their numbers will vary as per the Question Paper Pattern and
Structure (QPPS) and respective weightage of the subject.]
4. Leena Limited imported raw materials from Africa worth Rs.2,000,000. The company paid Rs.80,000
as import duties, Rs.500,000 for transportation of the materials from Africa and Rs.60,000 as port
handling charges for loading the materials at Africa. Marketing expenses were Rs.75,000 and the
general administrative overheads amounted to Rs.80,000. The value of inventories as per IAS 2 –
‘Inventories’ is ___________.

A Rs.2,795,000

B Rs.2,640,000

C Rs. 2,000,000

D Rs. 2,715,000

5. A company enters into a contract to build a factory for one of its customers. The agreed price of the
project is Rs. 2 million with a specified completion date of December 31, 2019. However, the contract
also provided that the company will receive an additional incentive of Rs. 300,000, if the factory is
completed by November 30, 2019. The company estimated that there is a 30% probability of building
the factory by November 30, 2019 and 70% in December 2019. The expected value of transaction
price for the contract is ____________.

A Rs. 2,030,000

B Rs. 2,090,000

C Rs. 2,600,000

D Rs. 1,400,000

DESCRIPTIVE QUESTIONS:
6. Kashan Limited bought an equipment amounted to Rs. 3,750,000 on January 1, 2017. It had a useful
life of five years. On January 1, 2019 the asset was revalued to Rs. 4,500,000. The expected useful
life of the asset remained unchanged. In such scenario calculate the amount of revaluation surplus
for the equipment.

Solve/ Type Your Answer Here

FACR-MP – CBE [SS-2018] 2 of 3

[Note: The questions made available through this Model Paper reflects the pattern of questions to be
tested in exams. However, their numbers will vary as per the Question Paper Pattern and
Structure (QPPS) and respective weightage of the subject.]
7. Classify the following items as financial assets, financial liabilities or none of them:
1 Cash and Bank
2 Patent and trade mark
3 Trade payables
4 Warranty payables
5 Government notes receivables
6 Dividend payables
7 Deferred tax
8 Prepaid expenses

Solve/ Type Your Answer Here

8. Conceptual framework defines the interrelated elements that most directly relate to measuring the
performance and financial status of a business enterprise. Enlist and explain those elements.

Solve/ Type Your Answer Here

FACR-MP – CBE [SS-2018] 3 of 3 PTO

[Note: The questions made available through this Model Paper reflects the pattern of questions to be
tested in exams. However, their numbers will vary as per the Question Paper Pattern and
Structure (QPPS) and respective weightage of the subject.]
 FACR - ICMAP MANAGERIAL LEVEL - II
SYLLABUS AND PAST PAPER ANALYSIS
NEW SYLLABUS
2019 2019 2019 2019 2018 2018
S# SYLLABUS CONTENT AREA
Fall Winter Spring Summer Fall Winter
19-Feb-20 18-Nov-19 19-Aug-19 29-Apr-19 19-Feb-19 09-Nov-18

1 IAS 12 Income Taxes 6 (13) 2a (10) 6b (10) 6a (10) 4cd (10)

2 IAS 16 Property, Plant and Equipment 2b (06) 4a (05)

3 (20)
3 Final Accounts 3 (24) 4 (25) 2 (25) 2 (18)
5b (7)
4 Statement of Cash Flows 5a (15) 5 (20) 3 (20) 3cd (13) 3 (22) 2a (17)

5 IAS 37 Provisions & Contingencies 4a (10) 6ab (07)

6 IAS 40 Investment Property 4b (06)

7 Conceptual and Regulatory Framework 4c (04) 6a (05) 6b (05) 4a (05)

8 Misc. Standards (IFRS 03 / 09 / 02) 6 (10) 3ab (08)

9 IFRS 8 Operating Segments 2a (07)

10 IAS 10 Events After the Reporting Period 2b (08) 6cd (07)

11 IAS 36 Impairment of Assets 5a (06) 5c (05)

12 IAS 2 Inventories 5bc (09)

13 IAS 8 Accounting Policies 4bc (06)

14 IAS 38 Intangible Assets 2b (7) 5a (08)

15 10. IFRS 15 Revenue 4b (5) 5b (10)

16 IAS 23 Borrowing Costs 2a (13) 4b (05)

17 IFRS 5 NCA Held for Sale 4a (10) 5ab (11)

18 Correction of Errors 3a (10)

DISCLAIMER:
This is just an analysis of past exam papers conducted by the Institute. It does
not mean to identify what is important and what is not. Moreover, it does not
specify any trend in question frequency to be tested.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

 Basic Accounting Revision MCQs

BASIS ACCOUNTING – REVISION MCQS

1. The financial position of the business on a given date is reported on the
a. Income Statement
b. Balance Sheet
c. Statement of Changes In Owner's Equity
d. Statement of Cash Flows

2. The net profit or loss for a particular period of time is reported on the
a. Income Statement
b. Balance Sheet
c. Trial Balance
d. Statement of Changes In Owner's Equity

3. The investment of cash into the business results in a/an

a. increase in cash and a decrease in capital
b. increase in cash and an increase in capital
c. decrease in cash and an increase in capital
d. increase in fees earned and an increase in capital

4. The purchase of supplies for cash will result in a/an

a. increase in cash and a decrease in capital
b. increase in cash and an increase in supplies
c. increase in supplies and a decrease in cash
d. increase in equipment and an increase in capital

5. Services rendered for cash will result in a/an

a. increase in cash and a decrease in capital
b. increase in cash and an increase in fees earned
c. decrease in cash and an increase in fees earned
d. increase in fees earned and an decrease in capital

6. Cash is received from a client for office rental space.

a. cash increases and rental fees earned decreases
b. cash increases and rental fees earned increases
c. cash decreases and capital increases
d. cash decreases and withdrawals increases

7. Keeping the records of the business separate from the personal records of the owner of
the business is said to be adherence to which accounting principle or concept?
a. Continuing-concern concept
b. Business entity principle
c. Realization principle
d. Objectivity principle

8. Which of the following is a formal written promise to pay a definite sum of money on
demand or at a fixed or determinable future date?
a. Account payable
b. Account receivable
c. Note payable
d. Prepaid insurance policy

9. Peter Atli decided to pay himself a salary of Rs.3,000 per month for the work he performs
for his business, a single proprietorship. Each time a cheque is recorded for Rs.3,000,
which account should be increased?
a. Salaries Expense
b. Capital
c. Peter Atli, Withdrawals
d. Owner Salary Expense

Page 1 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

10. The personal telephone bill of Junior Sample was paid by issuing a cheque from the
business chequing account. No business calls had been made from Junior's personal
phone. What account must be charged for this transaction?
a. Junior, Capital
b. Cash
c. Junior, Withdrawals
d. Telephone Expense

11. Which of the following accounts is NOT a liability?

a. Accounts Payable
b. Accounts Receivable
c. Salaries Payable
d. Notes Payable

12. Assets total Rs.50,000 and Liabilities total Rs.10,000. The equity of the business must total
a. Rs.4,000
b. Rs.40,000
c. Rs.400
d. Rs.40

13. The resulting amount when total liabilities are subtracted from total assets is known as
a. owner's equity or net assets
b. net income or net loss
c. total expenses
d. total revenue

14. A broad rule adopted by the accounting profession as a guide in measuring, recording,
and reporting the financial affairs and activities of a business is known as
a. an accounting concept
b. an accounting principle
c. the basic accounting equation
d. objectivity principle

15. Using a sales invoice as the basis for recording a sale of merchandise is an example of
using which accounting principle or concept for recording transactions?
a. Recognition principle
b. Objectivity principle
c. Realization principle
d. Continuing-concern concept

16. Which of the following statements is true?

a. a salary paid to a partner is an expense to the partnership
b. a salary paid to a proprietor is an expense to the proprietorship
c. a salary paid to a shareholder is an expense of the corporation
d. the business entity principle does not apply to corporations

17. Keith Manich deposited Rs.5,000 in a bank account he established for a pet store that he is
going to own and operate as KM's Pets. Recording the deposit will
a. increase an asset, increase a liability
b. decrease an asset, decrease a liability
c. increase an asset, increase owner's equity
d. decrease an asset, decrease owner's equity

Page 2 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

18. Better-Cars Selection, a used car dealer, has total assets and liabilities of Rs.50,000 and
Rs.18,000, respectively. The firm constructed a shelter for its automobiles by promising to
pay the building contractor, upon completion of the building, Rs.500 per month for twenty-
four months. Upon completion, owner's equity will:
a. increase by Rs.12,000
b. remain unchanged
c. decrease by Rs.12,000
d. increase by Rs.500, each month

19. The owner of a computer services business was able to acquire a new computer, valued at
Rs.5,000, by establishing an account with the computer vendor, Com Pewters Unlimited.
There was no down payment. Recording the transaction will
a. increase an asset, increase a liability
b. decrease an asset, decrease a liability
c. increase an asset, increase owner's equity
d. decrease an asset, decrease owner's equity

20. A sole proprietor recorded the payment of an account payable to an office supplies store.
Recording the transaction will
a. increase an asset, increase a liability
b. decrease an asset, decrease a liability
c. increase an asset, increase owner's equity
d. decrease an asset, decrease owner's equity

21. If during the accounting period the assets increased by Rs.5,000, and the owner's equity
increased by Rs.1,000, then the liabilities must have
a. increased by Rs.6,000
b. increased by Rs.4,000
c. decreased by Rs.4,000
d. decreased by Rs.6,000

22. If during the accounting period the assets increased by Rs.7,000, and the owner's equity
decreased by Rs.3,000, then the liabilities must have
a. increased by Rs.10,000
b. increased by Rs.4,000
c. decreased by Rs.4,000
d. decreased by Rs.10,000

23. One of the local fast-food outlets hired a first-year accounting student to oversee the cash-
collection procedures. When the firm pays the student her weekly wage, the transaction
will
a. increase an asset, increase a liability
b. decrease an asset, decrease a liability
c. increase an asset, increase owner's equity
d. decrease an asset, decrease owner's equity

24. The proprietor of a restaurant purchased a three-year insurance policy. Recording the
purchase of the policy requires
a. an asset to be debited, a liability to be credited
b. a liability to be debited, an asset to be credited
c. one asset to be debited, another asset to be credited
d. withdrawals to be debited, an asset to be credited

25. A business purchased equipment by issuing a one-year note payable. The entire amount
of the note is due at the end of one year. Recording the transaction requires
a. an asset to be debited, a liability to be credited
b. a liability to be debited, an asset to be credited
c. an asset to be debited, capital to be credited
d. withdrawals to be debited, an asset to be credited

Page 3 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

26. Olivia, the proprietor, deposited Rs.40,000 in the company's bank account. She got the
money from selling all of her General Motors common stock. Recording the transaction on
the company books will require
a. an asset to be debited, a liability to be credited
b. a liability to be debited, an asset to be credited
c. an asset to be debited, capital to be credited
d. withdrawals to be debited, an asset to be credited

27. Solar Mow, makers and sellers of solar powered lawn mowers, paid the rent for the month
of January on January 1. Recording the transaction requires
a. an asset to be debited, a liability to be credited
b. a liability to be debited, an asset to be credited
c. an expense to be debited, an asset to be credited
d. an asset to be debited, a revenue to be credited

28. Solar Mow, makers and sellers of solar powered lawn mowers, determined that its chief
executive officer should attend a workshop on solar energy to be held on the beach at
Waikiki, Honolulu. The workshop cost Rs.2,000, including air fare, meals, and lodging. The
firm charged the cost of the trip with a local travel agency. Recording the transaction
requires
a. an asset to be debited, a liability to be credited
b. a liability to be debited, an asset to be credited
c. an expense to be debited, a liability to be credited
d. an asset to be debited, revenue to be credited

29. Peter Atli received Rs.5,000 for some excavation work to be done when the weather
permits. Peter figures it will be at least three weeks before he can start the job. Recording
the transaction requires
a. an asset to be debited, a liability to be credited
b. a liability to be debited, an asset to be credited
c. withdrawal to be debited, an asset to be credited
d. an asset to be debited, revenue to be credited

30. Which of the following statements is not true?

a. Journalizing errors should be erased and a correct entry made
b. Asset accounts are increased by debit entries
c. Debit entries are entries involving the left-hand side of an account
d. Journalizing precedes posting

31. The personal telephone bill of Junior Sample was paid by issuing a cheque from the
business chequing account. No business calls had been made from Junior's personal
phone. What account must be debited for this transaction?
a. Junior, Capital
b. Cash
c. Junior, Withdrawals
d. Telephone Expense

32. An account entitled Unearned Fees would be classified as a/an

a. asset account
b. liability account
c. revenue account
d. expense account

33. At the end of the fiscal year, an adjusting entry was made for accrued salaries of Rs.500.
The salaries for one week, Rs.1,250, were paid on the first Friday of the new fiscal period.
The entry to record paying the salaries expense for the week would be a
a. Sal. Exp., dr., Rs.750; Salaries Payable, dr., Rs.500; Cash, cr., Rs.1,250
b. Sal. Exp., dr., Rs.500; Salaries Payable, dr., Rs.750; Cash, cr., Rs.1,250
c. Salaries Exp., dr., Rs.1,250; Cash, cr., Rs.1,250
d. Salaries Exp., dr., Rs.1,250; Salaries Payable, cr., Rs.1,250

Page 4 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

34. The ________________ is the length of time into which the life of a business is divided for
the purpose of preparing periodic financial statements.
a. natural business year
b. calendar year
c. accounting period
d. interim period

35. The notion that the life of a business is divisible into equal time periods of equal length is
known as the
a. continuing concern principle
b. time-period principle
c. business entity principle
d. recognition principle

36. The adjusting process is based on two accounting principles. The two accounting
principles are
a. realization and recognition
b. revenue recognition and matching
c. cost and business entity
d. continuing-concern and realization

37. At the beginning of the year, a business had a two-year, Rs.1,200 insurance policy on its
office equipment. On July 1, it purchased a three-year, Rs.1,800 policy on a newly
constructed building. The December 31, year-end, adjusting entry would be
a. Insurance Expense, debit, Rs.3,000; Prepaid Insurance, credit, Rs.3,000
b. Insurance Expense, debit, Rs.1,200; Prepaid Insurance, credit, Rs.1,200
c. Insurance Expense, debit, Rs.1,000; Prepaid Insurance, credit, Rs.1,000
d. Insurance Expense, debit, Rs.900; Prepaid Insurance, credit, Rs.900

38. At the beginning of the year, a business had a two-year, Rs.1,200 insurance policy on its
office equipment. On July 1 it purchased a three-year, Rs.1,800 policy on a newly
constructed building. A December 31, year-end, adjusting entry was made for the policy on
the building but not for the policy on the office equipment. As a consequence of the
oversight
a. expenses are understated and assets are overstated
b. expenses are overstated and assets are understated
c. expenses are understated and assets are understated
d. expenses are overstated and assets are overstated

39. At the end of the accounting period, the business had Rs.450 of office supplies on hand,
which was a 50% increase over the beginning balance. If the business purchased Rs.1,200
of office supplies during the year, then Rs._____ of office supplies were used during the
year.
a. Rs.975
b. Rs.1,050
c. Rs.1,650
d. Rs.1,425

40. A tenant rented space in our companies office building on September 1 at Rs.450 per
month, paying six months' rent in advance. The bookkeeper recognized a current liability
of Rs.2,700. The December 31, year-end adjusting entry would be
a. Unearned Rent, dr., Rs.1,800; Rent Revenue, cr., Rs.1,800
b. Unearned Rent, dr., Rs.1,350; Rent Revenue, cr., Rs.1,350
c. Rent Revenue, dr., Rs.900; Unearned Rent, cr., Rs.900
d. Cash, dr., Rs.2,700; Rent Rev., cr., Rs.1,800; Unearned Rent, cr., Rs.900

Page 5 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

41. A tenant rented space in an office building on October 1 at Rs.450 per month, paying six
months' rent in advance. The bookkeeper recorded the October entry with a debit to Cash
and a credit to Rent Revenue. The December 31, year-end adjusting entry would be
a. Unearned Rent, dr., Rs.1,800; Rent Revenue, cr., Rs.1,800
b. Unearned Rent, dr., Rs.1,350; Rent Revenue, cr., Rs.1,350
c. Rent Revenue, dr., Rs.1,350; Unearned Rent, cr., Rs.1,350
d. Cash, dr., Rs.2,700; Rent Rev. cr., Rs.1,350; Unearned Rent, cr., Rs.1,350

42. A tenant rented space in an office building on October 1, at Rs.450 per month, paying six
months' rent in advance. The bookkeeper recognized a current liability upon receipt of the
Rs.2,700. No year-end adjustment was recorded. As a consequence of overlooking the
required adjustment,
a. revenue was overstated and liabilities were understated
b. revenue was understated and liabilities were understated
c. revenue was overstated and liabilities were overstated
d. revenue was understated and liabilities were overstated

43. Dee Preciated rented an office space to Core Poration for three months at Rs.500 per
month, payable at the end of the third month, January 31. No year-end adjusting entry was
recorded on December 31. As a consequence of this oversight,
a. assets were overstated and revenue was overstated
b. assets were overstated and revenue was understated
c. assets were understated and revenue was overstated
d. assets were understated and revenue was understated

44. You have agreed to keep the accounting records for a business that has agreed to pay you
Rs.800 per month, beginning December 16. You use the accrual basis of accounting and
recorded adjusting entries on December 31. When you receive the Rs.800 on January 16,
you will record the following entry
a. Cash, dr., Rs.800; Acc. Rec., cr., Rs.400; Fees Earned, credit, Rs.400
b. Cash, dr., Rs.400; Acc. Rec., cr., Rs.400
c. Cash, dr., Rs.800; Fees Earned, cr., Rs.800
d. Acc. Rec., dr., Rs.800; Cash, cr., Rs.400; Fees Earned, cr., Rs.400

45. Which of the following accounts is not a temporary account?

a. Income Summary
b. Rental Revenue
c. Capital
d. Withdrawals

46. The subtotals of the Income Statement columns of the work sheet are Rs.3,500 and
Rs.4,900, respectively. If the subtotal of the Balance Sheet Debit column is Rs.9,600, then
the subtotal of the Balance Sheet Credit column should be
a. Rs.1,400
b. Rs.11,000
c. Rs.8,200
d. Rs.6,800

47. The subtotals of the Income Statement columns of the work sheet are Rs.6,200 and
Rs.4,900, respectively. If the subtotal of the Balance Sheet Debit column is Rs.19,000, then
the subtotal of the Balance Sheet Credit column should be
a. Rs.20,300
b. Rs.1,300
c. Rs.17,700
d. Rs.14,400

Page 6 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

48. Revenue and expense accounts at the beginning and end of the accounting period should
have
a. a balance of zero
b. balances of cumulative amounts of activity during the period
c. a net balance (credits minus debits) equal to the capital account
d. a net balance equal to assets minus liabilities

49. Which is true about an adjusting entry?

a. only a permanent account is adjusted
b. only a temporary account is adjusted
c. a permanent account and a temporary account is adjusted
d. it is required to satisfy the realization principle only

50. After the closing procedure is complete, which of the documents proves the equality of
debits and credits?
a. Income Statement
b. Account form balance sheet
c. Post-Closing Trial Balance
d. Work Sheet

51. At the end of the fiscal year, an adjusting entry was made for accrued salaries of Rs.500.
On the first day of the new year the adjusting entry was reversed. The salaries for one
week, Rs.1,250, were paid on the first Friday. The entry to record paying the salaries
expense for the week would be a
a. Sal. Exp., dr., Rs.750; Salaries Payable, dr., Rs.500; Cash, cr., Rs.1,250
b. Sal. Exp., dr., Rs.500; Salaries Payable, dr., Rs.750; Cash, cr., Rs.1,250
c. Salaries Exp., dr., Rs.1,250; Cash, cr., Rs.1,250
d. Salaries Exp., dr., Rs.1,250; Salaries Payable, cr., Rs.1,250

52. Optional entries that transfer the balances in balance sheet accounts which arose as a
result of certain adjusting entries to income statement accounts is the definition for which
term below?
a. adjusting entries
b. reversing entries
c. closing entries
d. declarations of cash dividends

53. The last account listed on the post-closing trial balance for a corporation is the
a. Capital account
b. Withdrawals account
c. Retained Earnings account
d. Common Stock account

54. The last account listed on the post-closing trial balance for a single proprietorship
business is the
a. Capital account
b. Withdrawals account
c. Retained Earnings account
d. Common Stock account

55. Gross profit from sales is the difference between

a. net sales and operating expenses
b. net sales and the cost of goods sold
c. net sales and the cost of goods sold plus all the expenses
d. gross sales less the sales discounts and sales returns and allowances

Page 7 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

56. The buyer received an invoice from the seller for merchandise with a list price of Rs.400
and credit terms of 2/10, n/60. The number 10 in the credit terms is the
a. credit period
b. cash discount allowed for early payment of the invoice
c. discount period
d. trade discount

57. The records for Uptown Pet Shop showed the following:
Sales Rs.75,000 Beginning merchandise inventory Rs.10,000
Purchases 45,000 Cost of goods sold 50,000
The ending merchandise inventory must have been
a. Rs.5,000
b. Rs.15,000
c. Rs.25,000
d. Rs.40,000

58. Under the periodic inventory system, the Purchases account is used to record
a. only cash purchases of merchandise inventory
b. purchases of any asset on account or note payable
c. only purchases of merchandise inventory on account
d. purchases of merchandise inventory for cash or on account

59. The Sun Set Shade Company purchased three pieces of office equipment for a total price
of Rs.2,100. One piece of equipment costing Rs.800 was damaged on delivery and was
returned to the vendor. The invoice has not been paid. The proper journal entry for the
return is
a. Merchandise Inventory, debit, Rs.800; Accounts Payable, credit, Rs.800
b. Acc. Payable, debit, Rs.800; Merchandise Inventory, credit, Rs.800
c. Accounts Payable, debit Rs.800; Office Equipment, credit, Rs.800
d. Accounts Payable, debit Rs.2,100; Purchases, credit, Rs.2,100

60. Company records disclose the following:

Sales Rs.95,000 Beginning merchandise inventory Rs.10,000
Purchases 45,000 Gross profit from sales 50,000
Transportation-In 500 Purchases discounts 1,000
The ending merchandise inventory (periodic)
a. must be Rs.5,000
b. must be Rs.6,000
c. must be Rs.9,500
d. must be Rs.10,000

61. Which of the following is used to determine the cost of goods available for sale (periodic
inventory)?
a. beginning merchandise inventory + purchases + ending merchandise inventory
b. ending merchandise inventory + purchases - freight charges
c. beginning merchandise inventory + purchases - freight charges
d. beginning merchandise inventory + purchases - purchases discount + freight charges

62. Under a perpetual inventory system merchandise is purchased on account. The correct
journal entry for this purchase will be a
a. debit to Purchases and a credit to Cash
b. debit to Merchandise Inventory and a credit to Accounts Payable
c. debit to Merchandise Inventory and a credit to Cash
d. debit to Purchases Returns and a credit to Cost of Goods Sold

63. Under a perpetual inventory system part of the merchandise purchased on account at an
earlier time is now being returned. None of the goods have been paid for. The correct
journal entry for this return will be a

Page 8 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

a. debit to Cash and a credit to Purchases

b. debit to Merchandise Inventory and a credit to Accounts Payable
c. debit to Accounts Payable and a credit to Merchandise Inventory
d. debit to Purchases Returns and a credit to Cost of Goods Sold

64. Under a perpetual inventory system supplies are purchased for cash. The correct journal
entry for this purchase will be a
a. debit to Purchases and a credit to Cash
b. debit to Merchandise Inventory and a credit to Cash
c. debit to Supplies and credit Cost of Goods Sold
d. debit to Supplies and a credit to Cash

65. An item of merchandise was sold with an invoice price of Rs.400 and credit terms of 2/10,
n/30. The entry to record the sale would include a credit to Sales of
a. Rs.400.00
b. Rs.396.00
c. Rs.408.00
d. Rs.392.00

66. An item of merchandise was sold for Rs.800 cash by a business using the perpetual
inventory system. The product sold cost the business Rs.600. After the sale entry has
been recorded, a second entry will
a. debit Cash and credit Sales for Rs.800
b. debit Sales and credit Merchandise Inventory for Rs.600
c. debit Cost of Goods Sold and credit Merchandise Inventory Rs.600
d. debit Merchandise Inventory and credit Cost of Goods Sold Rs.800

67. Under the periodic inventory system, which of the following is a correct closing entry?
a. Income Summary, debit; Sales, credit
b. Income Summary, credit; Sales Returns and Allowances, debit
c. Income Summary, debit; Merchandise Inventory (beginning), credit
d. Purchases, debit; Income Summary, credit

68. When ____________________________, the cost of goods sold will be the same as the cost
of purchases.
a. there is no beginning merchandise inventory (first year of business)
b. there is no ending merchandise inventory
c. purchases are equal to net sales
d. the beginning and ending merchandise inventory values are the same

69. An item of merchandise with a list price of Rs.100 was purchased with a trade discount of
40% and credit terms of 2/10, n/30. If the vendor is paid within the discount period, the
journal entry to record the payment would be
a. Purchases, dr., Rs.100.00; Purchase Discounts, cr., Rs.42.00; Cash, cr., Rs.58.00
b. Accounts Payable, dr., Rs.60.00; Purchase Discounts, cr., Rs.1.20; Cash, cr., Rs.58.80
c. Accounts Payable, dr., Rs.100.00; Purchase Discounts, cr., Rs.42.00; Cash, cr., Rs.58.00
d. Accounts Payable, dr., Rs.40.00; Purchase Discounts, cr., Rs..80; Cash, cr., Rs.39.20

70. If gross sales is Rs.40,000, sales returns and allowances Rs.1,000, sales discounts Rs.400,
and delivery expenses Rs.100, the net sales of the business will total
a. Rs.38,500
b. Rs.38,600
c. Rs.40,000
d. Rs.39,000

The End

Page 9 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

 Basic Accounting Revision MCQs

ANSWERS:

1 b 21 b 41 c 61 d
2 a 22 a 42 d 62 b
3 b 23 d 43 d 63 c
4 c 24 c 44 a 64 d
5 b 25 a 45 c 65 a
6 b 26 c 46 c 66 c
7 b 27 c 47 a 67 c
8 c 28 c 48 a 68 d
9 c 29 a 49 c 69 b
10 c 30 a 50 c 70 b
11 b 31 c 51 c
12 b 32 b 52 b
13 a 33 a 53 c
14 b 34 c 54 a
15 b 35 b 55 b
16 c 36 b 56 c
17 c 37 d 57 a
18 b 38 a 58 d
19 a 39 b 59 c
20 b 40 a 60 c

Page 10 of 10 Faculty: Muhammad Umar Munir, FCMA, MS

FACR – ICMAP ML2 (S-22) Page 1 of 143

Contents
ACCOUNTING – THE BASICS..................................................................................................................... 2
REGULATORY FRAMEWORK .................................................................................................................. 11
CONCEPTUAL FRAMEWORK ................................................................................................................... 15
IAS 01 – PRESENTATION OF FINANCIAL STATEMENTS ...................................................................... 22
IAS 02 – INVENTORIES ............................................................................................................................. 25
IAS 16 – PROPERTY, PLANT AND EQUIPMENT ..................................................................................... 29
IAS 23 – BORROWING COSTS ................................................................................................................. 38
IAS 20 – GOVERNMENT GRANTS ........................................................................................................... 40
IAS 40 – INVESTMENT PROPERTY ......................................................................................................... 42
IAS 38 – INTANGIBLE ASSETS ................................................................................................................. 44
IAS 36 – IMPAIRMENT OF ASSETS ......................................................................................................... 49
IAS 37 – PROVISIONS & CONTINGENCIES ............................................................................................ 53
IAS 10 – EVENTS AFTER THE REPORTING PERIOD ............................................................................ 58
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS ............................................................ 61
IFRS 16 – LEASES ..................................................................................................................................... 72
IAS 12 – INCOME TAXES .......................................................................................................................... 81
IFRS 05 – NON-CURRENT ASSETS HFS AND DISCONTINUED OPERATIONS................................... 91
IAS 08 – ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATES & ERRORS .................. 94
IAS 24 – RELATED PARTY DISCLOSURES ............................................................................................. 98
IFRS 2 – SHARE-BASED PAYMENT ....................................................................................................... 100
IFRS – 08 OPERATING SEGMENTS ...................................................................................................... 103
FINANCIAL INSTRUMENTS .................................................................................................................... 105
IAS 07 – STATEMENT OF CASH FLOWS............................................................................................... 112
CONSOLIDATED STATEMENT OF FINANCIAL POSITION................................................................... 123
CONSOLIDATED STATEMENT OF PROFIT OR LOSS ......................................................................... 139

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 2 of 143

ACCOUNTING – THE BASICS

BUSINESS – DEFINED:
An integrated set of activities and resources (assets) that is capable of being conducted and managed
for the purpose of providing goods or services to customers, generating investment income (such as
dividends or interest) or generating other income from ordinary activities.

TYPES OF BUSINESS:
Service: They provide professional skskills,
ills, expertise, advice, and other similar products.
Examples of service businesses are: salons, repair shops, schools, banks, accounting
firms, and law firms.
Trading / This type of business purchases goods for the purpose of re
re-sale
sale without
witho significantly
Merchandising: changing its forms. Examples are: grocery stores, convenience stores, distributors,
and other resellers.
Manufacturing: A manufacturing business combines raw materials, labor, and factory overhead (other
expenses) in its production proces
process.s. The manufactured goods will then be sold to
customers. Examples are: cement factories, sugar mills, textile factories, beverage
companies etc.

FORMS OF BUSINESS OWNERSHIP:

Sole- A sole proprietorship is a business owned by only one pers person.
on. It is easy to set-up
set and
proprietorship: is the least costly among all forms of ownership. The owner faces unlimited liability.
Partnership: A partnership is a business owned by two or more persons who contribute resources
into the entity. The partners divide the pro
profits
fits of the business among themselves as per
agreement. Liability of partners is also unlimited.
Company: A corporation is a business organization that has a separate legal personality from its
owners – management is separate from owners. Owners are calle called d “shareholder” and
managers are called “directors”. There is a concept of “Agency”. Ownership in a stock
corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the
company's operati
operations.
ons. The board of directors, an elected group from the stockholders,
controls the activities of the corporation.

ACCOUNTING – DEFINED:
Accounting is an information system that identifies, records and communicates information about a
business to users for making resource allocation decisions. Following are examples of some business
decisions:

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 3 of 143

USERS OF ACCOUNTING INFORMATION

INFORMATION:
The information is reported to a variety of different types of interested parties. In one way or another,
these users of accountingng information tend to be concerned about their own interests in the entity and
therefore use the financial information according to its informational needs.
1. External Users:
Lenders, consumers, external auditors, government, taxation authorities, shareholders
sharehold etc.
2. Internal Users:
Managers, employees, internal auditors, directors etc.

TYPES OF ACCOUNTING:

TYPICAL ORGANIZATION STRUCTURE:

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 4 of 143

ACCOUNTING CYCLE:

BASIC ACCOUNTING EQUATION:

RULES FOR DEBIT AND CREDIT:

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 5 of 143

EXERCISE # 01: ADJUSTMENT CATEGORIES

EXERCISE # 00: DEFERRALS

On Oct 01 2019, Alpha engineering Ltd paid Rs.24,000 as an insurance premium to Beta Insurance Ltd
against purchase of one-year fire insurance policy related to its power plant. Both companies' financial
year ends on December 31.
Required:
Illustrate the concept of deferral adjustments in two companies above and explain the effects of financial
performance and position.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 6 of 143

EXERCISE # 02: ACCRUALS

Alpha Trading Ltd has used electricity of Rs.20,000 supplied by Beta Electric Ltd during the month of
December 2019. Bill is usually received and paid on 5th of the following month. Both companies' financial
year ends on December 31.

Required:
Illustrate the concept of accruals adjustments in two companies above and explain the effects of financial
performance and position.
[Answer: DIY]

ARTICULATION OF FINANCIAL STATEMENTS:

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 7 of 143

EXERCISE # 03: ARTICULATION

EXERCISE # 04: ADJUSTMENTS

Ocean Dog, Inc., operates a small fishing boat that takes tourists at several island resorts on fishing
excursions. The company adjusts its accounts at the end of each month. Selected account balances
appearing on the March 31 adjusted trial balance are as follows:
Prepaid Rent ................................................................................. Rs. 9,000
Unexpired Insurance ...................................................................... 1,200
Boat ............................................................................................... 60,000
Accumulated Depreciation: Boat .................................................... Rs.8,000
Unearned Passenger Revenue ...................................................... 940
Other Data:
1. The boat is being depreciated over a 5-year estimated useful life, with no residual value.
2. The unearned passenger revenue represents tickets good for future rides sold to a resort hotel for
Rs.20 per ticket on March 1. During March, 40 of the tickets were used.
3. Five months’ rent had been prepaid on March 1.
4. The unexpired insurance is a 12-month fire insurance policy purchased on February 1.
Required:
a. Determine the following:
1. The age of the boat in months.
2. How many Rs.20 tickets for future rides were sold to the resort hotel on March 1.
3. The monthly rent expense.
4. The original cost of the 12-month fire insurance policy.
b. Prepare the adjusting entries that were made on March 31.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 8 of 143

EXERCISE # 05: ERROR DETECTION AND CORRECTION

The following trial balance for Williams Corporation does not balance. You have conducted an extensive
review to help Laura Williams find the nature of the problem. Below the trial balance is information about
six errors you have discovered. Use this additional information to prepare a corrected trial balance.
Account Titles Debit Credit Debit Credit
Cash 123,432
Accounts Receivables 76,409
Land 688,004
Accounts Payable 32,611
Loan Payable 76,400
Share Capital 340,000
Retained Earnings 456,332
Revenues 879,998
Wages Expense 575,988
Rent Expense 112,654
Interest Expense 4,654
Dividends 9,000
Supplies Expense
TOTAL 326,149 3,049,333
1) All accounts have normal balances, but two amounts are in wrong columns!
2) Services provided on account for Rs.1,500 was debited to Accounts Payable and credited to
Revenues.
3) Supplies Expense of Rs.104,300 was completely omitted from the trial balance.
4) The amount recorded for Revenues was transposed. It should have been Rs.789,998.
5) A Rs.5,000 shareholder investment was debited to Cash and credited to Dividends.
6) An interest payment of Rs.1,000 was debited to Loan Payable for Rs.100 and credited to Cash for
Rs.1,000.

EXERCISE # 06: CLASSIFIED STATEMENT OF FINANCIAL POSITION

Liz Ross Corporation prepares a classified statement of financial position that includes the following
traditional sections:

a) Current Assets b) Other Assets

c) Long-term Investments d) Current Liabilities
e) Property, Plant & Equipment f) Long-term Liabilities
g) Intangibles h) Stockholders' Equity

In which section of the classified balance sheet would the following accounts appear?
1) Note Payable (due in 3 months) 2) Retained Earnings (ending)
3) Accumulated Depreciation 4) Rent Expense
5) Investment in Government Bonds 6) Unearned Revenues
7) Accounts Receivable 8) Income Summary
9) Accounts Payable 10) Equipment
11) Long-term Receivable From Employee 12) Revenues
13) Dividends 14) Prepaid Rent
15) Share Capital 16) Finance Cost
17) Patent 18) Retained Earnings (beginning)
19) Supplies 20) Loan Payable (due in 5 years)

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 9 of 143

EXERCISE # 07: EQUITY

Magee Corporation provided the following summary balance sheet information:
Dec. 31, 2001 Dec. 31, 2002
Total assets 1,500,000 2,300,000
Total liabilities 700,000 1,400,000
Compute net income for the year ending December 31, 20X2, under each of the following independent
scenarios:
(a) Magee paid no dividends, and no additional capital was raised via share issuances.
(b) Magee paid Rs.100,000 in dividends, and no additional capital was raised via share issuances.
(c) Magee paid no dividends, but raised Rs.250,000 via issuances of additional shares of stock.
(d) Magee paid Rs.100,000 in dividends, and raised Rs.250,000 via issuances of additional shares of
stock.

EXERCISE # 08: IDENTIFYING ADJUSTMENTS MADE

Following are the unadjusted and adjusted trial balances:
Unadjusted Adjusted
Accounts Titles
Debit Credit Debit Credit
Cash 35,200 35,200
Accounts Receivable 29,120 34,120
Unexpired Insurance 1,200 600
Prepaid Rent 5,400 3,600
Office Supplies 680 380
Equipment 60,000 60,000
Accumulated Depreciation-Equipment 49,000 50,000
Accounts Payable 900 900
Notes Payable 5,000 5,000
Interest Payable 200 250
Salaries Payable 2,100
Income Tax Payable 1,570 2,170
Unearned revenue 6,800 3,800
Capital Stock 25,000 25,000
Retained Earnings 30,000 30,000
Fees Earned 91,530 99,530
Advertising Expense 1,500 1,500
Insurance Expense 6,600 7,200
Rent Expense 19,800 21,600
Office supplies expense 1,200 1,500
Repairs expense 4,800 4,800
Depreciation expense 11,000 12,000
Salaries expense 26,300 28,400
Interest Expense 200 250
Income taxes expense 7,000 7,600
Total 210,000 210,000 218,750 218,750

Required:
Identify what adjusting entries were made.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 10 of 143

EXERCISE # 09: NOMINAL VS. REAL ACCOUNTS

Some of the following accounts are real (permanent) accounts, and some are nominal (temporary)
accounts. Identify each account as real or nominal.
 Share Capital  Deferred Revenues  Revenues
 Income Summary  Accumulated Depreciation  Equipment
 Salaries expense  Prepaid Rent  Accounts Payable
 Interest Payable  Dividends  Retained Earnings
 Supplies  Loan Payable  Rent Expense

EXERCISE # 10: MISSING AMOUNTS

EXERCISE # 11: ADJUSTMENTS

Required:
Identify what adjusting entries were made.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 11 of 143

REGULATORY FRAMEWORK
Need of Regulatory Framework:
A regulatory framework exists to ensure that the accounting standards are prepared to meet the needs of
users of accounting information.

Standard Setting Bodies Regulatory Authorities

 Private sector, self-regulated organizations.  Country specific government entities like
 Board members are experienced accountants, Securities and Exchange Commission of
auditors, analysts and academics. Pakistan.
 Examples are:  Authority to enforce financial reporting
o International Accounting Standards Board regulations.
(IASB)  Can over-rule private sector standard setting
o Financial Accounting Standards Board bodies and establish standards in their
(FASB) jurisdictions.
 Set standards but don’t have the authority to  Regulate capital markets in general as their
enforce. larger mandate.

Brief Historical Perspective - Harmonization of Accounting Regulations:

In June 1973, developed nations formed IASC (International Accounting Standard Committee) and given
it the task of harmonization of accounting regulation in order to facilitate cross-border investment. This
decision was made because accounting regulations of one country were materially different than that of
being following in another country; therefore, investors face a lot of difficulties in making resource
allocation decision.

IASC had two subordinated bodies:

1. SAC – Standard Advisory Council.
2. SIC – Standards Interpretation Committee.
This structure remained till year 2001 and issues 41 IAS (International Accounting Standard) and 32
Interpretations (for detailed explanations of an issue).

In 2001, with the joining of US, IASC was renamed as IASCF (International Accounting Standard
Committee Foundation) and today, this body is called IFRS Foundation and formed a body called IASB
(International Accounting Standards Board) which is responsible for developing IFRS. The subordinated
bodies of IASC have are now subordinated to IASB. In the initial structural meetings, IASB has decided to
adopt all previously issued IASs and Interpretations as it is. Consequently, further standards will be called
as IFRS and Interpretations will be called IFRICs.

In Short, collectively IFRS = IFRSs + IFRICs + IASs + SICs

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 12 of 143

With the process of refinements, IASs and SICs will be converted into IFRSs and IFRICs.

Note: Visit [Link] for more information.

Why IFRS:
Financial information is the lifeblood of financial markets. Cross-border transactions are increasing day
by day – increasing the need for efficient and effective information management. International investors
need financial information they can trust in making informed capital resource allocation decisions. IFRS
(International Financial Reporting Standards) provide the global language of financial reporting. Since
all decision making is relative (inter/intra), people need comparable information. Over 100 countries
require their corporations to use IFRS when reporting their financial position and performance. Investors
around the world trust IFRS because they bring three key benefits to the world economy:

1. Transparency 2. Accountability 3. Efficiency

By providing high quality and By helping to reduce the By having single trusted global
comparable information. This information gap between standards. It lowers the
helps investors make more insiders and the outsiders. information processing and
informed decisions. This helps owners to hold reporting costs.
company to account.
Contributing global economy by giving trust, growth and long-term financial stability.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 13 of 143

What is IFRS? – Principles or Framework Bases Regulations

It is a single set of high quality, understandable and enforceable global accounting standards developed
and maintained by IASB – International Accounting Standards Board.

Role of IASB:
The objectives of IASB as set out in its Constitution are as under:
a) Developing: To formulate and publish in the public interest a single set of high quality,
understandable and enforceable global accounting standards that require high quality, transparent
and comparable information in financial statement and other financial reporting to help participants in
the various capital markets of the world & other users of the information to make economic decisions.
b) Monitoring: To promote the use and rigorous application of those standards.
c) Coordinating: To work actively with national standard-setters to bring about convergence of national
accounting standards & IFRSs to high quality like Companies Act 2017, SBP Prudential Regulations.

Scope of IFRS:
1. IFRSs are applicable on material and essential financial information.
2. IFRSs are prospective in nature, unless otherwise specially mentioned as retrospective.
3. IFRS will only be applicable and enforceable if and only if local regulatory bodies adopt it and become
part of local laws. For example, section 225 of Companies Act, 2017 states that “The Companies that
intend to make unreserved compliance with IFRS issued by IASB for financial statements, will be
allowed to do so.”

NOTE:
• The regulatory framework for financial reporting of Pakistan is enforced by Companies Act 2017 and
SECP regulations. IFRS will become part of this framework upon adoption. Moreover, in case of
contradictions between local laws and IFRSs, local laws would prevail. For example, the companies
th th
have to follow the requirements of 4 /5 schedules of CA17 instead of IAS 01.
• Third Schedule of Companies Act 2017 outlines the applicable Accounting framework depending
upon the nature of company.

Standard setting process:

Possible results of in research proposal for an issue:
1. Issue is already covered in an existing IFRS and clarified – no need for new standard.
2. Interim solution is provided by issuing IFRIC until the issue is covered in a comprehensive
development phase.
3. Issue is new & relevant; there is a need to amend an existing standard of issue entirely new IFRS.

Refer “IFRS Tutorial Videos” in shared folder.

Additional documents accompanying IFRS:

a. Bases of conclusion – comments in favor.
b. Dissenting opinions – comments against.
c. Illustrative examples.
d. Implementation / application guidelines.
Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance
FACR – ICMAP ML2 (S-22) Page 14 of 143

NOTE: Originally IFRS are published in English language but may be translated in other languages.

COMPONENTS OF IFRS:
1 2 3 4 5 6

Scope Recognition De-recognition Presentation &

Definitions Measurement
(Applicability) Criteria criteria Disclosures

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 15 of 143

CONCEPTUAL FRAMEWORK
EXAMPLE: ESTIMATES IN FINANCIAL REPORTING
To facilitate comparisons across companies (cross sectional analysis) and overtime for a single company
(time series analysis), it is important that accounting methods are comparable and consistently applied.
However, accounting standards must be flexible enough to recognize that differences exist in the
underlying economics between businesses.

Suppose two companies buy the same model of machinery to be used in their respective businesses.
The machine is expected to last for several years. Financial reporting standards typically require that both
companies account for this equipment by initially recording the cost of the machinery as an asset. Without
such a standard, the companies could report the purchase of the equipment differently. For example, one
company might record the purchase as an asset and the other might record the purchase as an expense.
An accounting standard ensures that both companies should record the transaction in a similar manner.

Accounting standards typically require the cost of the machine to be apportioned over the estimated
useful life of an asset as an expense called depreciation. Because the two companies may be operating
the machinery differently, financial reporting standards must retain some flexibility. One company might
operate the machinery only a few days per week, whereas the other company operates the equipment
continuously throughout the week. Given the difference in usage, it would not be appropriate to require
the two companies to report an identical amount of depreciation expense each period. Financial reporting
standards must allow for some discretion such that management can match their financial reporting
choices to the underlying economics of their business while ensuring that similar transactions are
recorded in a similar manner between companies.

Financial statements of two companies with identical transactions in the fiscal year, prepared in
accordance with the same set of financial reporting standards,
are most likely to be:

a) identical.
b) consistent.
c) comparable.
[Answer: “c”]

OBJECTIVE OF FINANCIAL REPORTING:

The objective of general-purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders, and other creditors in making decisions
about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of credit.

INTRODUCTION:
The IASB Framework provides the underlying rules, conventions and definitions that underpin the
preparation of all financial statements prepared under International Financial Reporting Standards (IFRS).
• Ensures standards developed within a conceptual framework. (consistent basis)
• Provide guidance on areas where no standard exists.
• Aids process to improve existing standards.
• Ensures financial statements contain information that is useful to users.
• Helps prevent creative accounting / fraudulent financial reporting.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 16 of 143

OBJECTIVE OF FRAMEWORK:
It is a theoretical set of principles which provides the basis for the preparation of IFRS. It helps different
stakeholders as per their requirements as under:

1. IASB:
a. Developing new IFRSs.
b. Reviewing / improving existing IFRSs.

2. National Accounting Bodies:

Developing national standards and pronouncements.

3. Preparers of Financial Statements:

a. Applying existing IFRSs.
b. Guiding about accounting treatments which have not addressed by any IFRS.

4. Auditors:
Helping auditors form an opinion on the following matters:
a. True / Fair View.
b. Free from Material Misstatement.
c. Compliance of IFRSs.

Disclaimer: This is NOT an IFRS. In case of conflict with any IFRS, the IFRS would prevail.

CHAPTER 01: OBJECTIVE OF GENERAL-PURPOSE FINANCIAL REPORTING:

The objective of financial reporting is to provide financial information that is useful to users in making
decisions relating to providing resources to the entity – investment and financing decisions.

To provide Information about the following:

• Economic resources and claims (assets & liabilities i.e. financial position);
• Efficiency and effectiveness of management. (revenues & expenses i.e. financial performance)
• The changes in economic resources and claims. (SOCIE)
• Past cash flows are to assess management’s ability to generate future cash flows.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 17 of 143

CHAPTER 02: QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

CONCEPT OF MATERIALITY:
Information is material if omitting, misstating or obscuring it (not clearly expressed or easily understood)
affects the judgment by the user.
- Nature: Covid-19, Relationship of parent and subsidiary.
Size: Monetary impact and classification.

EXERCISE # 01: MATERIALITY OF SIZE

A reporting entity reports revenue of Rs.120 million for the year-ended 31 December 2013, pre-tax profit
of Rs.17 million and net assets of Rs.230 million. The auditors have discovered that there has been an
understatement arising on the year-end accruals amounting to Rs.120.

Required:
Is this understatement material?
[Answer: DIY]

EXERCISE # 02: MATERIALITY OF NATURE

During the year, a reporting entity made a loan to a director of Rs.25,000 which was still outstanding at
the yearend and for which no disclosure has been made in the financial statements on the basis that the
directors consider this amount to be immaterial to the financial statements due to its size.

Required:
Is this omission material?
[Answer: DIY]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 18 of 143

CHAPTER 03: FINANCIAL STATEMENTS &REPORTING ENTITY:

Complete Set of Financial Statements:

FINANCIAL REPORTING ASSUMPTIONS:

Financial statements are always prepared for a specified period of time, or the reporting [Link],
the financial statements are prepared on following two assumptions:

1. Going concern:
It is assumed that the entity has neither (a) the intention nor (b) the need to liquidate or curtail
materially the scale of its operations; if such an intention or need exists, the financial statements may
have to be prepared on a different basis and, if so, the basis used is disclosed in notes.

Examples when entity CANNOT be regarded as going concern:

• An inability by the entity to pay dividends to shareholders.
• Major losses or cash flow difficulties that have arisen since the reporting date.
• Adverse key financial ratios i.e. ROI, D/E, TIE, GPM etc.
• Indications of withdrawal of financial support from the bank or other financial institutions.
• Negative operating cash flows.
• Major debt repayments falling due which the entity will not be able to meet.
• Pending legal or regulatory proceedings against the reporting entity that may result in claims that
are unlikely to be satisfied.

2. Accrual:
Accrual basis relate to recognition of revenues and expenses:
a) Revenues are reported on the income statement when they are earned. When the revenues are
earned but cash is not received, the asset accounts receivable will be recorded.
b) Expenses are reported on the income statement when they are incurred and matched-up with
the revenues being reported, or when a cost has no future benefit that can be measured. When
an expense occurs and cash has not yet been paid, a liability account will also be recorded

REPORTING ENTITY:
Reporting entity is an entity who must or chooses to prepare the financial statements. It can be:
• A single entity – for example, one company;
• A portion of an entity – for example, a division of one company;
• More than one entities – for example, a parent and its subsidiaries reporting as a group.

As a result, we have a few types of financial statements:

• Consolidated: a parent and subsidiaries report as a single reporting entity;
• Unconsolidated / separate: e.g. a parent alone provides reports, or

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 19 of 143

CHAPTEER 04: DEFINITIONS OF ELEMENTS OF FINANCIAL STATEMENTS

Asset: Liability: Equity:

• Resource a) Present Equity is the
The ability to provide Currently liable. residual interest
benefits. in the assets of
b) Obligation the entity after
• Controlled No rescue except deducting all its
- Right to obtain. payment (legal / liabilities.
- Right to restrain. constructive)
FINANCIAL “Also called Net
POSITION c) Past events: Assets.”
• Past events:
Event has already been Event has already been
happened. happened.

• Probable Inflow d) Probable Outflow

More than 50% More than 50%
Current and non-current distinction need to be made.
This is due to the application of going concern assumption.

Revenue: Expense:
Increases in assets, or decreases in Decreases in assets, or increases in
liabilities, that result in increases in liabilities, that result in decreases in
equity, other than those relating to equity, other than those relating to
contributions from holders of equity distributions to holders of equity
FINANCIAL
claims. (Share Premium is NOT claims. (Dividend / drawings is NOT
PERFORMANCE
revenue). It includes revenues & an expense). It includes expenses &
gains. losses.
The price for goods sold and services The costs of goods and services used
rendered during a given accounting up in the process of earning revenue.
period.

SHARE PREMIUM: (U/S 81 CA-17)

o If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the
aggregate amount or the value of the premiums on those shares must be transferred to an account,
called “the share premium account”.
o Where, on issuing shares, a company has transferred a sum to the share premium account, it may
use that sum to write off—
 the preliminary expenses of the company;
 the expenses of, or the commission paid or discount allowed on, any issue of shares of the
company; and
 in providing for the premium payable on the redemption of any redeemable preference shares of
the company.
o The company may also use the share premium account to issue bonus shares to its members.

BALANCE SHEET APPROACH:

IFRSs are developed on balance sheet / statement of financial position approach. Revenues and
expenses are just relative terms and transferred eventually to equity, the residual. This is why recognition
/ de-recognition and measurement criteria are only defined for assets and liabilities.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 20 of 143

CURRENT VS. NON-CURRENT:

Current Asset:
- Held for trading / sale. [even non-current if classified as HFS is current, as per IFRS 05]
- Expected to be realized within 12 months of the reporting period.
- Expected to be realized within normal operating cycle of the business.
- Cash and cash equivalent [investment in debt having maturity less than 3 months and has no
restriction]
The assets that are not current are classified as “Non-Current”.

Current Liabilities
- Held for trading.
- Expected to be settled within 12 months of the reporting period.
- The entity doesn’t have the unconditional right on the reporting date to defer the settlement beyond
12 months from reporting date. [Rescheduling of loan that is due within 12 months to 5 years].
All other liabilities are classified as “Non-Current”.

CHAPTER 05: RECOGNITON AND DE-RECOGNITION CRITERIA:

RECOGNITION (Addition in F/S) DE-RECOGNITION (Removal from F/S)

Two criteria: Asset: Liability:
a) Probability of future economic benefits. When the entity loses When the entity no
(inflow for assets / outflow for liabilities) control to attain economic longer has a present
b) Reliability of measurement. benefits. obligation.

CHAPTER 06: MEASUREMENT BASES: “Determining the value”

Measurement is process of determining the monetary amounts of the elements of financial statements.
S# BASIS ASSETS LIABILITIES
1. Historical The fair value of the consideration given There are two types of liabilities:
cost (cash, equity instrument, other asset  With consideration
etc) to acquire an asset at the time of Fair value of the consideration like
transaction. creditors.
 Without consideration
Value determined like penalty,
income taxes etc.
2. Current cost Replacement cost i.e. value of the asset Current settlement value i.e. the amount
with same specs can be obtained. to be paid today.

3. Fair Value Fair value is the price that would be received to sell an asset or paid to transfer a
(Exit price) liability in an orderly transaction between market participants at the measurement
date.
4. Realizable Fair value less cost to sell. Total consideration to be paid on
value agreed time period.

5. Present Discounted value of net cash inflows. Discounted value of net cash outflows.
value

CHAPTER 07: PRESENTATION AND DISCLOSURE:

The main aim of presentation and disclosures is to provide an effective communication tool in the
financial statements. Effective communication of information in the financial statements requires:
• Focus on objectives and principles of presentation and disclosure, not on the rules;
• Group similar items and separate dissimilar items;
• Aggregate information.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 21 of 143

NET ASSETS:

CHAPTER 08: CONCEPT OF CAPITAL AND CAPITAL MAINTENANCE

The Framework explains two concepts of capital:
1. Financial capital: – synonymous with the net assets or equity of the entity.
Under the financial maintenance concept, the profit is earned only when the amount of net assets at
the end of the period is greater than the amount of net assets in the beginning, after excluding
contributions from and distributions to equity holders.

2. Physical capital: –
This is the productive capacity of the entity based on, for example, units of output per day. Here the
profit is earned if physical productive capacity increases during the period, after excluding the
movements with equity holders.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 22 of 143

IAS 01 – PRESENTATION OF FINANCIAL STATEMENTS

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 23 of 143

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 24 of 143

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 25 of 143

IAS 02 – INVENTORIES
Objective: The objective of this Standard is to prescribe the accounting treatment for inventories. A
primary issue in accounting for inventories is the amount of cost to be recognised as an
asset and carried forward until the related revenues are recognised. This Standard
provides guidance on the determination of cost and its subsequent recognition as an
expense, including any write-down to net realisable value. It also provides guidance on
the cost formulas that are used to assign costs to inventories.

Scope: This Standard applies to all inventories, except:

a) Financial instruments (IFRS 9 Financial Instruments); and
a) Work in progress under long-term constructions contracts – IFRS 15.
b) Biological assets related to agricultural activity and agricultural produce at the point of
harvest (IAS 41 Agriculture).

Definitions:  Inventories are assets:

(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or
in the rendering of services.
“Purpose of holding defines the treatment of item: same item can be inventory or PP&E.”

 Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale.

 Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (IFRS 13 Fair Value Measurement.)

INITIAL RECOGNITION:
Inventory is initially measured at “cost”. Capitalized cost is the sum of the following:
a) Purchase Price / list price net of trade discounts and rebates. (Trade discount is allowed at the time
of transaction and cash discount (settlement) discount is allowed at the time of payment.)
b) Cost of conversion. (e.g. direct labor, direct expenses and FOH based on normal capacity)
c) Other – desired location and condition for sale (e.g. freight-in, borrowing costs as per IAS 23 and
non-refundable taxes, insurance in-transit)

Following items are excluded:

• Abnormal loss. • Selling, marketing and administrative expenses.
• Post production storage expenses. • Settlement discounts.
• Refundable taxes. • Fire insurance.

EXERCISE # 01: COST OF INVENTORIES

J Ltd incurred the following costs in relation to inventories during 2019:
Raw material Rs.56,000, Direct Labor Rs.40,000, Cost of wasted material Rs.6,000, transportation cost
of raw material to factory Rs.10,000, transportation cost of factory to showroom Rs.1,000, transportation
cost of showroom to customer premises Rs.2,000.
Required:
Calculate the cost of inventories to be capitalized.
[Answer: Rs.106,000/-]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 26 of 143

EXERCISE # 02: COST OF INVENTORIES

Mario has incurred the following costs in relation to a unit of inventory:
Raw materials cost 1.50, Import duties 0.40, Direct labour 0.50, Subcontracted labour costs 0.80,
Recoverable sales tax 0.20, Storage costs 0.05, Production overheads (per unit) 0.25, There was a
problem with the first batch of items produced, so abnormal wastage costs of Rs.0.10 per unit have also
been incurred by Mario.
Required:
At what cost should Mario value this inventory in its financial statements?
[Answer: Rs.3.45 per unit]

SUBSEQUENT MEASUREMENT:
Due to the application of prudence concept, inventory is valued as LOWER of (a) cost and (b) NRV.

NOTES:
• Inventories are usually written down to net realizable value item by item.
• Re-assess at the end of each reporting period.
• Reversal of write-down is possible.

CIRCUMSTANCES WHEN NRV COULD BE LOWER THAN COST:

EXERCISE # 03: COST VS. NRV

On 31 December 2015, a company has partly-completed inventory with a cost to date of Rs.26,300. It is
expected that further costs of Rs.8,900 will be incurred in order to complete the inventory. It will then be
sold for Rs.47,500. Selling costs will be Rs.2,000.
Required:
Calculate the cost and the net realisable value of this inventory at 31 December 2015.
[Answer: NRV Rs.36,600]

EXERCISE # 04: COST VS. NRV

At the end of an accounting period, the cost of a company's inventory is Rs.450,000. This includes
damaged items with a cost of Rs.25,000 which are expected to be sold for only Rs.10,000 (less selling
expenses of 5%). All other items of inventory have a net realisable value which exceeds cost.
Required:
Calculate the amount of inventory that is to be reported at the end of financial period.
[Answer: Rs.434,500]

EXERCISE # 05: COST VS. NRV

On 30 September 20X4 Razor’s closing inventory was counted and valued at its cost of Rs.1 million. This
included some items of inventory which had cost Rs.210,000 and had been damaged in a flood on 15
September 20X4. These are not expected to achieve their normal selling price which is calculated to
achieve a gross profit margin of 30%. The sale of these goods will be handled by an agent who sells them
at 80% of the normal selling price and charges Razor a commission of 25%.
Required:
At what value will the closing inventory of Razor be reported in its statement of financial position as at 30
September 20X4?
[Answer: Rs.970,000]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 27 of 143

EXERCISE # 06: COST OF INVENTORY TO BE REPORTED

ABC Co. has the following items in inventory:
1) Goods purchased for resale at a cost of Rs.40,000. The recent downturn in the economy has meant
that these goods will now sell for Rs.42,000 with costs to sell of Rs.2,500.
2) Materials purchased at a cost of Rs.30,000 per tonne which will be sold at a profit. The manufacturer
of the materials has just announced that from now on they will sell these materials to you at a lower
price of Rs.28,000 per tonne.
3) Plant constructed for a specific customer at a cost of Rs.50,000 and an agreed price to the customer
of Rs.60,000. New health and safety requirements mean that the plant will need to be modified at a
cost to ABC Co. of Rs.4,000 before it can be delivered to the customer.
Required:
At what value should each of the above be included in the inventory of ABC Co.
[Answer:1) Rs.39,500, 2) Rs.30,000, 3) Rs.50,000]

COST FORMULAS:
Interchangeable Goods Non-Interchangeable Goods
FIFO or Weighted Average (LIFO is not allowed) Specific Identification Methods

EXERCISE # 07: INVENTORY LOSSES WRITE DOWN

Component A1 was carried at a cost of Rs.8,000 but its NRV was estimated to be Rs.7,300.
Required:
Record the write down of the losses under each case separately:
a) Perpetual inventory system is used.
b) Periodic inventory system is used.
[Answer: DIY]

EXERCISE # 08: COMPREGENSIVE PRACTICE

Kidz Party & Co. (KPC) manufactures and sells toys. Following information is available regarding four of
its inventory items as on 31 December 2017:

Normal
Cost per selling
Items Units
unit (Rs.) price per
unit (Rs.)
Toy cars 10,000 1,250 1,200
Doll houses 5,000 1,800 2,700
Stuffed toys 1,850 1,200 1,900
Minion costumes 870 1,500 2,500

Following information is also available:

a) A sales order for 3,000 toy cars @ Rs. 1,100 per unit is in hand. The remaining units can be sold at
normal selling price after incurring selling cost of Rs. 150 per unit.
b) Doll houses include 1,000 defective units with no scrap value. 20% of the remaining doll houses are
damaged and can be sold at 50% of cost.
c) Stuffed toys costing Rs. 420,000 were accidentally damaged and are beyond repair. KPC plans to
sell these toys as scrap. Proceeds from such sale are estimated at Rs. 175,000 and the sale would
require transportation cost of Rs. 6,300.
d) All minion costumes have manufacturing faults and can be sold in present condition at Rs. 1,350 per
unit. However, 60% of the units can be rectified at a cost of Rs. 200 per unit after which they can be
sold at Rs. 1,600 per unit.

Required:
Calculate the amount at which above inventory items should be carried as on 31 December 2017 in
accordance with IAS 2 – Inventories.
[Answer: Toy Cars Rs.10,650,000, Doll houses Rs.6,480,000, stuffed toys Rs.1,968,700 and Minion costumes Rs.1,200,600]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 28 of 143

CONSISTENCY IN APPLICATION:
IAS 2 provides that an entity should use the same cost formula for all inventories having similar nature
and use to the entity.

RECOGNITION AS AN EXPENSE:
• When inventories are sold, the carrying amount of those inventories shall be recognized as an
expense in the period in which the related revenue is recognized.
• The amount of any write-down of inventories to net realizable value and all losses of inventories shall
be recognized as an expense in the period the write-down or loss occurs.
• The amount of any reversal of any write-down of inventories, arising from an increase in net
realizable value, shall be recognized as a reduction in the amount of inventories recognized as an
expense in the period in which the reversal occurs.

DISCLOSURES:
The financial statements shall disclose:
a) the accounting policies adopted in measuring inventories, including the cost formula used;
b) the total carrying amount of inventories and the carrying amount in classifications appropriate to the
entity;
c) the carrying amount of inventories carried at fair value less costs to sell;
d) the amount of inventories recognized as an expense during the period;
e) the amount of any write-down of inventories recognised as an expense in the period.
f) the amount of any reversal of any write-down that is recognized as a reduction in the amount of
inventories recognised as expense in the period.
g) the circumstances or events that led to the reversal of a write-down of inventories.
h) the carrying amount of inventories pledged as security for liabilities.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 29 of 143

IAS 16 – PROPERTY, PLANT AND EQUIPMENT

Objective: The objective of this Standard is to prescribe the accounting treatment for property, plant
and equipment so that users of the financial statements can discern information about an
entity’s investment in its property, plant and equipment and the changes in such
investment. The principal issues in accounting for property, plant and equipment are the
recognition of the assets, the determination of their carrying amounts and the depreciation
charges and impairment losses to be recognised in relation to them.

Scope: This Standard shall be applied in accounting for property, plant and equipment except
when another Standard requires or permits a different accounting treatment.

This Standard does NOT apply to:

(a) property, plant and equipment classified as held for sale in accordance with IFRS 5
Non-current Assets Held for Sale and Discontinued Operations.
(b) biological assets related to agricultural activity other than bearer plants (IAS 41
Agriculture). This Standard applies to bearer plants but it does not apply to the
produce on bearer plants.
(c) the recognition and measurement of exploration and evaluation assets (IFRS 6
Exploration for and Evaluation of Mineral Resources).
(d) mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.

Definitions:  A bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.

 Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.

 Cost is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction or,
where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other IFRSs, e.g. IFRS 2 Share-based
Payment.

 Depreciable amount is the cost of an asset, or other amount substituted for cost,
less its residual value.

 Depreciation is the systematic allocation of the depreciable amount of an asset over

its useful life.

 Entity-specific value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its useful life or
expects to incur when settling a liability.

 Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (IFRS 13 Fair Value Measurement)

 An impairment loss is the amount by which the carrying amount of an asset exceeds
its recoverable amount.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 30 of 143

 Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
(b) are expected to be used during more than one period.

 Recoverable amount is the higher of an asset’s fair value less costs to sell and its
value in use.

 The residual value of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if
the asset were already of the age and in the condition expected at the end of its
useful life.

 Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or
(a) the number of production or similar units expected to be obtained from the asset
by an entity.

RECOGNITION: (WHEN AND WHY TO RECORD)

An item of PP&E is recognized when the following two conditions are met:
a) The future economic benefits associated with the asset will flow to the entity; (probability) and
b) The cost of the asset can be reliably measured.(reliability)

INITIAL RECOGNITION:
The cost of an item of PP&E at the initial recognition consists of three components:
1. Purchase Price Invoice price, import duties & non-refundable taxes. Trade / bulk discounts and
rebates are deducted. Settlement / cash discounts are not deducted.
2. Directly Any costs directly attributable to bringing the asset to the location and
attributable Costs condition necessary for it to be capable of operating in a manner intended by
management. E.g. Cost of employee benefits for construction, site preparation,
initial delivery / freight-in, installation and assembly, professional fees, and
borrowing costs (IAS-23), test runs (if inevitable).

Following items are ignored (these are expensed as incurred):

Admin & general o/h, initial operating loss, training staff, abnormal waste,
startup costs / opening costs.
3. Removal / If obligatory, the initial estimate (present value) of the costs of dismantling
restoration / and removing the item and restoring the site on which it is located as per (IAS-
Dismantling / 37). The discount on this liability would then be unwound over the period until
Decomissioning the dismantling costs are paid – increasing the liability and with charges made
costs to P&L.

EXERCISE # 01: COMPONENTS OF COST

An entity started construction on a building for its use on 1 April 20X7 and incurred the following costs: All
figures in thousands. Purchase price of land 250,000, Stamp duty 5,000, Legal fees 10,000, Site
preparation and clearance 18,000, Materials 100,000, Labour (period 1 April 20X7 to 1 July 20X8)
150,000, Architect’s fees 20,000, General overheads 30,000.
The following information is also relevant:
1. Material costs were greater than anticipated. On investigation, it was found that materials costing
Rs.10 million had been spoiled and therefore wasted and a further Rs.15 million was incurred on
materialsas a result of faulty design work.
2. As a result of these problems, work on the building ceased for a fortnight during October 20X7 and it
is estimated that approximately Rs.9 million of the labour costs relate to this period.
3. The building was completed on 1 July 20X8 and occupied on 1September 20X8.
Required:
Calculate the cost of the building to be capitalized.
[Answer:Rs.519m]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 31 of 143

EXERCISE # 02: COMPONENTS OF COST

On 1 March 2019, Yucca Co acquired a machine from Plant Co under the following terms:

List price of machine82,000, Import duty 1,500, Delivery fees 2,050, Electrical installation costs9,500,
Pre-production testing4,900, Purchase of a five-year maintenance contract with Plant7,000.
In addition to the above information Yucca Co was granted a trade discount of 10% on the initial list price
of the asset and a settlement discount of 5% if payment for the machine was received within one month
of purchase. Yucca Co paid for the plant on 25 March 2019.

Required:
How should the above information be accounted for in the financial statements?
[Answer: Cost Rs.91,750/-]

EXERCISE # 03: DISMANTLING / DECOMMISSIONING COST & UNWINDING

An oil extraction site is built at a cost of Rs.500,000 for 3 years. The expected cost to dismantle and
restore the site is Rs.40,000.

Required:
1. Assuming the interest rate of 8%, calculate the following
a) Amount to be capitalized as PP&E.
b) Annual depreciation charge and
c) Yearly unwinding of finance cost for three year.
2. Prepare journal entries for all three years.
[Answer: 1. (a) Rs.531,753, (b) Rs.177,251 (c) 2,540, 2,743 and 2,963 respectively.]

EXERCISE # 04: DISMANTLING / DECOMMISSIONING – HOMEWORK

On 1 July 2014, Experimenter opened a chemical reprocessing plant. The plant was due to be active for
five years until 30 June 2019, when it would be decommissioned. At 1 July 2014, the costs of
decommissioning the plant were estimated to be Rs.4 million in 5 years’ time. Experimenter considers
that a discount rate of 12% is appropriate for the calculation of a present value.

Required:
What is the total charge to the statement of profit or loss in respect of the decommissioning for the year
ended 30 June 2015?
[Answer: 725,760 ]

EXERCISE # 05: COMPONENTS OF COST – CASE EXAMPLE (HOMEWORK)

On 1 October 2016, Omega began the construction of a new factory. Costs relating to the factory,
incurred in the year ended 30 September 2017, are as follows (figures in thousands):

Purchase of the land 10,000, Costs of dismantling existing structures on the site 500, Purchase of
materials to construct the factory 6,000, Employment costs (Note 1) 1,800, Production overheads directly
related to the construction (Note 2) 1,200, Allocated general administrative overheads 600, Architects’
and consultants’ fees directly related to the construction 400, Costs of relocating staff who are to work at
the new factory 300, Costs relating to the formal opening of the factory 200, Interest on loan to partly
finance the construction of the factory (Note 3) 1,200.

Note 1: The factory was constructed in the eight months ended 31 May 2017. It was brought into use on
30 June 2017. The employment costs are for the nine months to 30 June 2017.

Note 2: The production overheads were incurred in the eight months ended 31 May 2017. They included
an abnormal cost of Rs.200,000, caused by the need to rectify damage resulting from a gas leak.

Note 3: Omega received the loan of Rs.12m on 1 October 2016. The loan carries a rate of interest of
10% per annum.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 32 of 143

Note 4: The factory has an expected useful economic life of 20 years. At that time the factory will be
demolished and the site returned to its original condition. This is a legal obligation that arose on signing
the contract to purchase the land. The expected costs of fulfilling this obligation are Rs.2m. An
appropriate annual discount rate is 8%.

Required:
Compute the cost at initial recognition of the factory.
[Answer: Cost of Asset is Rs.20,729,000/-]

DEFERRED PAYMENT ARRANGEMENT:

The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date.
If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and
the total payment is recognised as interest over the period of credit unless such interest is capitalized in
accordance with IAS 23.

EXERCISE # DEFERRED PAYMENT

K Ltd acquired an equipment at Rs.75,000 on two years’ credit. Applicable discount rate is 9%.

Required:
Record the acquisition and ultimate payment after two years.
[Answer: Rs.63,126, Interest Year 01 Rs.5,681 Year 02 Rs.6,193. Payment will be made Rs.75,000]

SUBSEQUENT EXPENDITURE

DEPRECIATION & CHANGES IN ESTIMATES

a) Depreciation is the systematic allocation of depreciable amount of an asset over its useful life.
b) Depreciation method reflects the pattern in which future economic benefits are expected to be
consumed. (Straight-line, Diminishing Balance Method, and Activity Based Method).
c) Depreciation starts when the assets are available for use till the asset is either classified as held for
sale (IFRS-5) or derecognized.
d) Depreciation is charged to profit or loss, unless it is included in the carrying amount of another asset.
e) The residual value, the useful life and the depreciation method of an asset are reviewed annually at
reporting date.
f) Each part of an asset with cost that is significant in relation to total cost of asset is depreciated
separately.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 33 of 143

g) Useful life and asset’s residual value (input to depreciable amount) shall be reviewed at least at the
end of each financial year. If there is a change in the expectations comparing to previous estimates,
then change shall be accounted for as a change in an accounting estimate in line with IAS 8 (no
restatement of previous periods).

EXERCISE # 06: (DEPRECIATION)

Sultan Ltd acquired an item of plant on 1 Jan 2011 for Rs.200,000. The asset is estimated to have a
useful life of 3 years with Rs.20,000 scrap value.

Required:
Prepare the extracts of the financial statements for the year ended 31 March 2013 under each case
separately:
a) Depreciation is charged using Straight-Line (SLN) method.
b) Depreciation is charged using reducing balance method.
[Answer: DIY]

Important Formula for rate under WDV / reducing balance method:

Formula to
Learn: = 1− × 100

Where n = life of the asset.

EXERCISE # 07: COMPONENT DEPRECIATION (PRACTICE)

A company purchased a property with an overall cost of Rs.100m on 1 April 2011. The property elements
are made up as follows:
Land and Buildings (Land element Rs.20m) Rs.65m, fixtures Rs.24m and lifts Rs.11m. Building, fixtures
and lifts have useful lives of 50 years, 10 years and 20 years respectively.

Required:
Calculate the annual depreciation charge for the property for the year ended 31 March 2012.
[Answer: Total property depreciation Rs.3,850/-]

EXERCISE # 08: CHANGE IN USEFUL LIFE

An asset was purchased for Rs.100,000 on 1 January 2015 having 5 years’ useful life with no salvage
value. Straight-line method is used to charge depreciation. The annual review of asset lives is undertaken
and for this particular asset, the remaining useful life as at 1 January 2017 is eight years.
Required:
What is the depreciation charge for the year ended 31 December 2017?
[Answer:Rs.7,500]

EXERCISE # 09: CHANGE IN RESIDUAL VALUE

A machine was purchased on 1 April 2011 for Rs.120,000. It was estimated that the asset had a residual
value of Rs.20,000 and a useful life of 10 years at this date. On 1 April 2013 (two years later) the residual
value was reassessed as being only Rs.15,000 and the useful life remaining was considered to be only
five years.

Required:
How should the asset be accounted for in the years ending 31 March 2012/2013/2014?
[Answer: Depreciation expense: 10,000, 10,000 and 17,000 respectively]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 34 of 143

EXCHANGES

EXERCISE # 10: EXCHANGE TRANSACTION

Recently, SkyBeings reviewed all of its PPE and decided to sell 30 high lifts. One of SkyBeings
competitors, Aviacs, offered 20 luggage belts + Rs.20,000 for 30 high lifts to SkyBeings. Following
information is available:

High lift - carrying amount each 4,000

High lift - market value for similar used asset each 3,700
Luggage belt - carrying amount each 5,600
Luggage belt - market value for similar used belt each 4,550

Required:
How would these newly acquired assets appear in financial statements of SkyBeings and Aviacs?
[Answer: For SkyBeings loss on disposal Rs.9,000 on high lifts and for Aviacs loss on disposal on luggage belts Rs.21,000 ]

REVALUATIONS
If the asset is carried under the revaluation model, the following must be applied:
a) Revaluations must subsequently be made with sufficient regularity to ensure that the carrying amount
does not differ materially from the fair value at each reporting date.
b) When an item of property, plant and equipment is revalued, the entire class of assets to which the
item belongs must be revalued.

Tip! Practically, land and building are carried at revaluation model while other assets are at cost model.

Revaluation Accounting:
Revalued assets are depreciated the same way as under the cost model. Depreciation is charged on the
revalued amount and over its remaining useful life.

Accounting for revaluation has the following two steps:

1. First, whenever the asset is to be revalues, carrying amount must be updated at that date.
2. Second, related accumulated account is closed and asset is reported at its book value:

First Time Revaluation:

a) Upward:
Debit Asset
Credit Surplus on Revaluation

b) Downward:
Debit P&L
Credit Asset

Subsequent Revaluation:
a) Upward:
Debit Asset
Credit Surplus on Revaluation or P&L
* in case of previous downward, reversal of any loss charged.
b) Downward:
Debit P&L or Surplus on Revaluation*
Credit Asset
* in case of previous upward, first loss is charged to surplus and remaining, if any, is charged in P&L.

TIP! Revaluation surplus is a capital reserve and is not permitted to be distributed to the shareholders.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 35 of 143

Realization of Revaluation Surplus:

When an asset is revalued upward, subsequent depreciation is charged on the higher amount. This will
increase the depreciation charge and reduce distributable profits for the shareholders. In order to
compensate this reduction, IAS 16 permits (but doesn’t require) to transfer (i.e. realize) this revaluation
surplus by the amount of incremental depreciation. This transfer will be made directly in SOCIE through
the following entry:

Debit Surplus on revaluation

Credit Retained Earnings

Moreover, the entity could wait till the asset is derecognized before it realizes this surplus – this is pure a
policy matter and up to the discretion of management.

EXERCISE # 11: REVALUATION ACCOUNTING

A company purchased a building on 1 April 2011 for Rs.100,000. The asset had a useful life at that date
of 40 years. On 1 April 2013 the company revalued the building to its current fair value.

Required:
Record the revaluation under each case separately:
a) Fair value is Rs.120,000.
b) Fair Value is Rs.80,000.
[Answer: a) Surplus on revaluation Rs.25,000/-, b) Loss charged to P&L Rs.15,000]

EXERCISE # 12: DOWNWARD REVALUATION

The carrying amount of Zen Co’s property at the end of the year amounted to Rs.108,000. On this date
the property was revalued and was deemed to have a fair value of Rs.95,000. The balance on the
revaluation surplus relating to the original gain of the property was Rs.10,000.

Required:
What is the double entry to record the revaluation?
[Answer: Loss on revaluation Rs.13,000/-]

EXERCISE # 13: REVALUATION ACCOUNTING

Prepare journal entries in each independent case:
a) An item of land carried in books at Rs.13,000. Two years ago a slump in land values led the company
to reduce the carrying value from Rs.15,000. This was taken as an expense in profit or loss. There
has been a surge in land prices in the current year, however, and the land is now worth Rs.20,000.
b) The original cost of land was Rs.15,000, revalued upwards to Rs.20,000 two years ago. The value
has now fallen to Rs.13,000.
[Answer: DIY]

EXERCISE # 14: INCREMENTAL / EXCESS DEPRECIATION

A company revalued its property on 1 April 2011 to Rs.20m (Rs.8m for the land). The property originally
cost Rs.10m (Rs.2m for the land) 10 years ago. The original useful life of 40 years is unchanged. The
company’s policy is to make a transfer to realized profits in respect of excess depreciation.

Required:
How will the property be accounted for in the year ended 31 March 2012?
[Answer: Incremental Depreciation Rs.200,000/-]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 36 of 143

EXERCISE # 15: COMPREHENSIVE PRACTICE

On 01 July 2012, an asset was purchase costing Rs.50,000 having useful life of 8 years having no scrap
value. Method of depreciation is SLN. The asset was revalued as follows:

a) On 30 June 2013 Rs.49,000

b) On 30 June 2014 Rs.36,000
c) On 30 June 2016 Rs.45,000

There is no change in useful life of the asset. The company policy is to transfer revaluation surplus to
retained earnings on account of extra depreciation.

Required:
Journalize the above transactions for all three years.
[Answer: 30-06-13 Surplus 5,250, 30-06-14 loss charged to P&L Rs.1,500, 30-06-16 Surplus 21,000]

3. DISPOSALS
• An item of PP&E is removed from the statement of financial position on disposal or when withdrawn
from use and no future economic benefits are expected from its disposal.
• The gain or loss on disposal is the difference between the proceeds and the carrying amount and is
recognized in profit or loss. Any remaining surplus on the revaluation reserve is now considered to be
a ‘realized’ gain and therefore should be transferred to retained earnings.

The profit or loss on disposal of a revalued non-current asset should be calculated as the difference
between the net sale proceeds and the carrying amount.
There are two steps to disposing of a revalued asset:
1. It should be accounted for in the statement of profit or loss of the period in which the disposal occurs.
2. Any balance on the revaluation surplus relating to this asset should now be transferred to retained
earnings.

EXERCISE # 16: DISPOSAL

Derek purchased a property costing Rs.750,000 on 1 January 2014 with a useful economic life of 10
years. It has no residual value. At 31December 2014 the property was valued at Rs.810,000 resulting in a
gain on revaluation being recorded in other comprehensive income of Rs.135,000. There was no change
to its useful life. Derek does not make a transfer to realized profits in respect of excess depreciation on
revalued assets. On 31 December 2016 the property was sold for Rs.900,000.

Required:
Record the disposal for the year ended 31 December 2016?
[Answer: Gain on disposal Rs.270,000, Surplus transferred to R/E Rs.135,000]

EXERCISE # 17: DE-RECOGNITION

An asset that originally cost Rs.16,000 and had accumulated depreciation on it of Rs.8,000 was disposed
of during the year for Rs.5,000 cash.

Required:
Prepare financial statements extract.
[Answer: Loss on disposal Rs.3,000 ]

EXERCISE # 18: DISPOSAL – PRACTICE:

An entity purchased property for Rs.6 million on 1 July 2013. The land element of the purchase was Rs.1
million. The expected life of the building was 50 years and its residual value nil. On 30 June 2015 the
property was revalued to Rs.7 million, of which the land element was Rs.1.24 million. On 30 June 2017,
the property was sold for Rs.6.8 million.
Required:
What is the gain on disposal of the property that would be reported in the statement of profit or loss for
the year to 30 June 2017?
[Answer: Gain on disposal Rs.40,000/-]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 37 of 143

CHANGES IN EXISTING DECOMMISSIONING & SITE RESTORATION COSTS (IFRIC-1)

When determining present value of dismantling costs, certain estimates are used e.g. useful life, amount
of site restoration and discount rate. Both IAS 16 and IAS 36 are silent if any of these estimates is
changed. The accounting treatment for change in estimate on site restoration depends on subsequent
measurement model:

COST MODEL:
• Increase or decrease in provision is adjusted to the cost of asset.
• In case of provision increase, increase in asset is subject to impairment review to ensure that new
carrying value should not exceed its recoverable amount.
• In case of provision decrease, the decrease in asset cannot be below its carrying value. Difference, if
any, is recorded in P&L.

REVALUATION MODEL:
In this model, asset is already reported as fair value; therefore, any increase or decrease in provision is
adjusted to the revaluation surplus.
Provision is INCREASED (Surplus to decrease) Provision is DECREASED (Surplus to Increase)
 If no surplus available, entire amount is  In case any deficit was charged to P&L due to
charged to P&L. downward revaluation, the deficit to be
 If surplus is not sufficient, the difference is reversed up to the limit (carrying value would
charged to P&L. have been) and any further excess is recorded
The balance of surplus should also be adjusted for to Surplus.
any transfer in retained earnings on account of  In case no deficit charged earlier, the entire
incremental depreciation. amount is recorded in Surplus.

EXERCISE # 19: IFRIC 01 – CHANGES IN SITE RESTORATION ESTIMATE (ICAP PAST PAPER)
Violet Power Limited is running a coal based power project in Pakistan. The Company has built its plant in
an area which contains large reserves of coal. The company has signed a 20 years agreement for sale of
power to the Government. The period of the agreement covers a significant portion of the useful life of the
plant. The company is liable to restore the site by dismantling and removing the plant and associated
facilities on the expiry of the agreement.
Following relevant information is available:
a) The plant commenced its production on July 1, 2007. It is the policy of the company to measure the
related assets using the cost model;
b) Initial cost of plant was Rs. 6,570 million including erection, installation and borrowing costs but does
not include any decommissioning cost;
c) Residual value of the plant is estimated at Rs. 320 million;
d) Initial estimate of amount required for dismantling of plant, at the time of installation of plant was Rs.
780 million. However, such estimate was reviewed as of June 30, 2008 and was revised to Rs. 1,021
million;
e) The Company follows straight line method of depreciation; and
f) Real risk-free interest rate prevailing in the market was 8% per annum when initial estimates of
decommissioning costs were made. However, at the end of the year such rate has dropped to 6% per
annum.

Required:
Work out the carrying value of plant and decommissioning liability as of June 30, 2008.
[Answer: Asset Rs.6,573, Provision Rs.337]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 38 of 143

IAS 23 – BORROWING COSTS

Objective: Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset form part of the cost of that asset. Other borrowing costs are
recognised as an expense.

Scope: An entity shall apply this Standard in accounting for borrowing costs.

The Standard does not deal with the actual or imputed cost of equity, including preferred
capital not classified as a liability.

An entity is not required to apply the Standard to borrowing costs directly attributable to
the acquisition, construction or production of:
(a) a qualifying asset measured at fair value, for example a biological asset within the
scope of IAS 41 Agriculture; or
(b) inventories that are manufactured, or otherwise produced, in large quantities on a
repetitive basis.

Definitions:  Borrowing costs are interest and other costs that an entity incurs in connection with
the borrowing of funds.

 A qualifying asset is an asset that necessarily takes a substantial period of time to

get ready for its intended use or sale. Depending on the circumstances, any of the
following may be qualifying assets:
(a) inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible assets
(e) investment properties
(f) bearer plants.
Financial assets, and inventories that are manufactured, or otherwise produced, over a
short period of time, are not qualifying assets. Assets that are ready for their intended use
or sale when acquired are not qualifying assets.

BASIC CRITERIA:
Borrowing costs on a qualifying asset must be capitalized over the period of construction because it is a
directly attributable item, as per IAS-16.

Capitalization is commenced: (ALL)

 Expenditure on the asset commences and
 Borrowing costs are being incurred and
 Activities necessary to prepare the asset (for use or sale) are in progress.

Capitalization is suspended:
When there is no active construction. (due to any reason e.g. strikes / lockouts etc.), excluding temporary
unavoidable delays.

Capitalization is ceased / ended:

• Substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are
complete.
• If construction of remaining parts continues, cessation is done proportional basis.

Capitalization Rate:
Specific borrowings: Actual Rate of Interest minus any income on temporary investment. (for period)
General borrowings: Weighted Average Rate of Interest or Capitalization Rate (for period)
Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance
FACR – ICMAP ML2 (S-22) Page 39 of 143

EXERCISE # 01: SPECIFIC BORROWINGS:

On 01 May 2011, DEF took a loan of Rs.1,000,000 from a bank at the annual interest rate of 5%. The
purpose of this loan was exclusively to finance a construction of a production hall.
The construction started on 01 June 2011. DEF temporarily invested Rs.800,000 borrowed money during
the months of June and July 2011 at the rate of 2% p.a.
Required:
What borrowing cost can be capitalized till 31 Dec 2011 as per IAS 23?
[Answer: Rs.26,500/-]

EXERCISE # 02: GENERAL BORROWINGS

Sultan Ltd has the following debt outstanding as at 31 December 2018:
8% Bank Loan 130,000
5.5% Debentures 50,000
Co used Rs.60,000 for the construction of the machinery on 1 Feb 2018 and Rs.25,000 on 1 Sep 2018.
Required:
What borrowing cost should be capitalized for the new machinery?
[Answer: Rs.4,630/-]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 40 of 143

IAS 20 – GOVERNMENT GRANTS

DEFINITIONS:
Government refers to government, government agencies and similar bodies whether local, national or
international.

Government assistance is action by government designed to provide an economic benefit specific to

an entity or range of entities qualifying under certain criteria. Government assistance for the purpose of
this Standard does NOT include benefits provided only indirectly through action affecting general trading
conditions, such as the provision of infrastructure in development areas or the imposition of trading
constraints on competitors. (Treatment: Disclosed only)

Government grants (subsidies / subventions, premiums) are assistance by government in the form of
transfers of resources to an entity in return for past or future compliance with certain conditions relating to
the operating activities of the entity. They exclude those forms of government assistance which cannot
reasonably have a value placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity. (Treatment: Accounted for)

RECOGNITION CRITERIA:
1. The entity will comply with any conditions attached to the grant. (Reliability)
2. The entity will actually receive the grant. (Probability)
Recognition should be made on accrual basis – systematic basis.

TYPES OF GOVERNMENT GRANTS:

1) Grants related to assets are government grants whose primary condition is that an entity qualifying
for them should purchase, construct or otherwise acquire long-term assets. Subsidiary conditions
may also be attached restricting the type or location of the assets or the periods during which they are
to be acquired or held. For example: grant to install new power generation plant, grant to construct a
new factory in rural area.
2) Grants related to income are government grants other than those related to assets. For example,
grant to conduct football league for next three years, grant to maintain specified labor turnover rate.

In case, where grant is treated as deferred income, the liability must be split into current and non-current.

TIP! Never ever credit the receipt of any grant directly in equity. This approach is NOT permitted in IFRS.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 41 of 143

Treatment of Revenue Grants – further points:

The income stream associated with the grant should be recognized in the P&L in a way and pattern that
matches with the costs it was intended to compensate. It could be presented in P&L in any of the
following ways:

Separate line item Deduction from related expenses

Supporters of this method claim that it is It is argued that with this method, the expenses
inappropriate to net income and expense items, might well not have been incurred by the entity if
and that separation of the grant from the expense the grant had not been available, and presentation
facilitates comparison with other expenses not of the expense without offsetting the grant may
affected by a grant. therefore, be misleading.

REPAYMENT OF GRANTS:
In some cases, grants may need to be repaid if the conditions of the grant are breached. If there is an
obligation to repay the grant and the repayment is probable, then it should be provided for in accordance
with the requirements of IAS 37.
• If the deferred income method for capital grants has been used, then the remaining grant would be
repaid to the government. Any amounts released to profit or loss may also need to be reversed,
depending on the level of repayment required.
• If the netting-off method for capital grants has been used, then the cost of the asset must be
increased to recognize the full cost of the asset without the grant. A liability will be set up for the grant
repayment. Cumulative effect of low depreciation is charged to current P&L.

EXERCISE # 01: REVENUE GRANT:

An entity is given Rs.300,000 on 1 January 2001 to keep staff employed within a deprived area. The
entity must not make redundancies for the next three years, or the grant will need to be repaid. By 31
December, 2001, no redundancies have taken place and none are planned. Total staff costs charged to
P&L for the year is Rs.1,200,000.

Required:
Show possible treatments of the grant as on December 31, 2001.
[Answer: Rs.100,000 will be shown either as other income or deduced from related expenses.]

EXERCISE # 02: CAPITAL GRANT

An entity opens a new factory and receives a government grant o fRs.15,000 in respect of capital
equipment costing Rs.100,000. It depreciates all plant and machinery at 20% pa straight-line.

Required:
Show the statement of profit or loss and statement of financial position extracts in respect of the grant in
the first year under both methods.
[Answer: Net Basis: Depreciation Rs.17,000 and CV Rs.68,000, Gross Basis: Depreciation Rs.20,000, Realization of DI Rs.30,000,
Current DI 3,000 and Non-Current DI Rs.9,000]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 42 of 143

IAS 40 – INVESTMENT PROPERTY

Objective: The objective of this Standard is to prescribe the accounting treatment for investment
property and related disclosure requirements.

Scope: This Standard shall be applied in the recognition, measurement and disclosure of
investment property.

Definitions:  Carrying amount is the amount at which an asset is recognised in the statement of
financial position.

 Cost is the amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or construction or,
where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based
Payment.

 Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (See IFRS 13 Fair Value Measurement).

 Investment property is property (land or a building—or part of a building— or both)

held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for
capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative
purposes; or
(b) sale in the ordinary course of business.

 Owner-occupied property is property held (by the owner or by the lessee as a

right-of-use asset) for use in the production or supply of goods or services or for
administrative purposes.

Examples for IP:

This standard provides the following examples land and buildings that should be classified as investment
property:
 Land held for long term capital appreciation.
 Land held for currently undetermined future use.
 Building leased out under an operating lease arrangement.
 Vacant buildings held to be leased out under operating lease.
 Property being constructed for future use as investment property.

Examples for NON-IP:

 Owner occupied property used for Production or supply of goods and services or administration.
(Covered in IAS-16)
 Property occupied by employees irrespective of whether they pay rent or otherwise.
 Owner occupied property awaiting disposal. (Covered in IFRS-05)
 Held for sale in ordinary course of business or in the process of construction or development for such
sale. (Covered in IAS-02)
 Property leased out under finance lease arrangement. (Covered in IFRS-16)
 Property being constructed or developed on behalf of third parties. (Covered in IFRS-15)

PROPERTY WITH DUAL USES:

There could be a situation where a building can be accounted for in two different ways. If an entity
occupies a premises but rents out certain floors to other companies, then the part occupied will be
classed as PP&E as per IAS 16, with the floors rented out classed as investment property per IAS 40.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 43 of 143

If a building is rented by a subsidiary of the entity, then the building will be classed as an investment
property in the individual accounts, but will be classed as property, plant and equipment per IAS 16 in the
consolidated financial statements.

MEASUREMENT:
Initial Subsequent:
Fair value model: Cost model:
Investment properties should • The investment properties are • Continue to carry on costs
initially be measured at cost revalued to fair value at each same as per IAS-16.
i.e. purchase price plus directly reporting date. • The properties are
attributable costs. • Gains or losses on revaluation depreciated like any other
are recognised directly asset.
through P&L. • When fair value model is
• The properties are NOT impractical to apply.
depreciated.

IAS-40 encourages consistent application of adopted method to overall IP portfolio (not to specific
class). However, discourages change of method from fair value to cost model as it is highly unlikely that it
would result in fair presentation. As per IAS-08, voluntary change in accounting policy should be made
only when it being more reliable financial information and presentation.

TRANSFERS / MIGRATION:
Transfers into and out of investment property should only be made when supported by a change of use of
the property.

FROM IAS 16 TO IAS 40 FROM IAS 40 TO IAS 16

Fair Value Model Cost Model: Fair Value Model Cost Model:
The asset must first The asset is transferred Revalue the property first The asset is
be revalued per IAS into investment properties per IAS 40 (taking the transferred into
16 (creating a at the current carrying gain or loss to the property, plant and
revaluation surplus in amount and continues to statement of profit or equipment at the
equity) and then be depreciated. loss) and then transfer to current carrying
transferred into property, plant and amount and continues
investment property at equipment at fair value. to be depreciated.
fair value.

EXERCISE # 01: SUBSEQUENT MEASUREMENT

Celine, a manufacturing entity, purchases a property for Rs.1 million on 1 January 2011 for its investment
potential. The land element of the cost is believed to be Rs.400,000, and the buildings element is
expected to have a useful life of 50 years. At 31 December 2011, local property indices suggest that the
fair value of the property has risen to Rs.1.1 million (Land Rs.480,000).
Required:
Prepare financial statements extracts as at 31 December 2011 if Celine adopts:
a) Cost model. b) Fair value model.
[Answer: a) Depreciation Rs.12,000, b) Gain Rs.100,000]

EXERCISE # 02: TRANSFER

Kyle Co purchased an investment property some year ago and carries it under the fair value model. At 1
January 2011, the property had a fair value in Kyle Co's financial statements of Rs.12 million. On 1 July
2011 Kyle Co decided to move into the property and use it for its own business. At this date the asset had
a fair value of Rs.14 million and a remaining useful life of 14 years.
Required:
What amount should be recorded in Kyle Co's statement of profit or loss for the year ended 31 Dec 2011?
[Answer: 2m gain and 0.5m depreciation expense]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 44 of 143

IAS 38 – INTANGIBLE ASSETS

Objective: The objective of this Standard is to prescribe the accounting treatment for intangible
assets that are not dealt with specifically in another Standard. This Standard requires an
entity to recognise an intangible asset if, and only if, specified criteria are met. The
Standard also specifies how to measure the carrying amount of intangible assets and
requires specified disclosures about intangible assets.

Scope: This Standard shall be applied in accounting for intangible assets, except:
(a) intangible assets that are within the scope of another Standard [Goodwill IFRS 03];
(b) financial assets, as defined in IAS 32 Financial Instruments: Presentation;
(c) the recognition and measurement of exploration and evaluation assets (IFRS 6
Exploration for and Evaluation of Mineral Resources); and
(d) expenditure on the development and extraction of minerals, oil, natural gas and
similar non-regenerative resources.

Definitions:  Amortisation is the systematic allocation of the depreciable amount of an intangible

asset over its useful life.

 An asset is a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.

 Carrying amount is the amount at which an asset is recognised in the statement of

financial position after deducting any accumulated amortisation and accumulated
impairment losses thereon.

 Cost is the amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or construction,
or, when applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based
Payment.

 Depreciable amount is the cost of an asset, or other amount substituted for cost,
less its residual value.

 Development is the application of research findings or other knowledge to a plan or

design for the production of new or substantially improved materials, devices,
products, processes, systems or services before the start of commercial production or
use.

 Entity-specific value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its useful life or
expects to incur when settling a liability.

 Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (IFRS 13 Fair Value Measurement.)

 An impairment loss is the amount by which the carrying amount of an asset exceeds
its recoverable amount.

 An intangible asset is an identifiable non-monetary asset without physical substance.

 Monetary assets are money held and assets to be received in fixed or determinable
amounts of money.
Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance
FACR – ICMAP ML2 (S-22) Page 45 of 143

 Research is original and planned investigation undertaken with the prospect of

gaining new scientific or technical knowledge and understanding.

 The residual value of an intangible asset is the estimated amount that an entity
would currently obtain from disposal of the asset, after deducting the estimated costs
of disposal, if the asset were already of the age and in the condition expected at the
end of its useful life.

 Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or
(a) (b) the number of production or similar units expected to be obtained from the
asset by an entity.

EXAMPLES OF INTANGIBLES:
 Licenses to trade and quotas  Intellectual Property (patents, copyrights)
 Brand names / trade marks  Internet websites & Software
 Customer lists  Movies & artistic work etc.

The definition of intangible requires the explanation of the following important concepts:

a) Identifiable:
An asset is identifiable in one of the following two cases:
• Separable – can be separated from entity and sold, transferred, licensed, rented or exchanged,
regardless of the management’s intent.
• Arises from contractual or other legal rights for example license or franchise arrangements,
irrespective of being separable or transferable.

b) Non-Monetary:
Intangible assets are non-monetary i.e. they are not converted into known amount of cash. Due this
definition, accounts receivables and debt instruments have been excluded from intangibles even
though they lack physical substance.

c) Asset:
An asset is a resource having the following characteristics:
• Control denotes power to obtain economic benefits and at the same time restrain others to use
and obtain such economic benefits.
• Generates future economic benefits increase in revenue and / or cost reduction.

Following are not intangible assets due to lack of control, even though they are highly valuable.
a) Training / skill development costs. b) Customer relationship / loyalty.
c) Market share. d) Employees’ expertise.
e) High managerial expertise.

d) Without physical substance:

The asset cannot be determined by 5 senses.

RECOGNITION:
Following two criteria must be met:
1. Meet the definition of an intangible asset.
2. Probable expected future economic benefits will flow to the entity; and
3. Cost can reliably be measured.

MEASUREMENT AT INITIAL RECOGNITION:

Initial measurement has to be at cost. Following could possibly be the acquisition scenarios of an
intangible asset:

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 46 of 143

1. Separate Acquisition:
The cost should consist of (a) purchase price and (b) all directly attributable costs. Costs incurred
after the asset is available for use are expensed out e.g. training, relocation of staff, advertising and
promotion general operating and admin expenses.

2. Government Grant:
Intangible assets received by way of government grant may initially be recognized at (a) fair value or
(b) nominal amount being the amount paid for the allocated resource. It is a policy matter and should
be applied on consistent basis on all intangible assets acquired in a similar way.

3. Internal Generation:
Internally generated intangibles often don’t meet all or anyone of the recognition criteria i.e.
probability of inflow of benefits and reliability of cost measurement.

To deal with these issues and to make sure that the conditions for recognition are met, IAS-38 sets
out comprehensive recognition rules designed specifically for internally generated intangibles.

1. First, the standard requires the companies to establish that their intangible asset generation
activities are at sufficiently advance stage and are both technically and commercially viable to
confirm the probability of future benefits. This is achieved by splitting the activities into (a)
research and (b) development phases, with different accounting treatment.

R = RESEARCH D = DEVELOPMENT
Research is original and planned investigation Development is the application of research
undertaken to gain new scientific or technical findings or other knowledge to a plan or design
knowledge or understanding. Examples are for the production of new or substantially
studies to identify causes of cancer, methods improved materials, devices, products,
to improve a business operation etc. All processes, systems or services before the
expenses are charged to P&L on the ground of start of commercial production or use.
non-reliability of inflow of economic benefits. Examples are:
Examples are:  The design, construction and testing of
 Activities aimed at obtaining new chosen alternative materials, processes or
knowledge. systems.
 The search for applications of research  The design, construction and testing of
findings or other knowledge. pre-production prototypes and models.
 The search for product or process  The design of tools, jigs, molds and dies
alternatives. involving new technology.
 The formulation and design of possible
new or improved product or process
alternatives.

Expenditures on development phase can only be capitalized IF AND ONLY IF ALL of the
following conditions are met:
a. Separately identifiable project. (Sell / use)
b. Expenditures clearly itemized: material, labor, and overhead.
c. Commercially viable. (Market research acceptability? / regulatory approvals)
d. Technically feasible and environmentally acceptable. (Will the new idea work?)
e. Overall profit expected. (All costs must be covered by forecasted revenues).
f. Resources (financial & other) must be adequate to complete development phase.

2. Secondly, the standard provides rigid guidelines for the components of cost of internally
generated intangible assets.

Internally generated assets:

IAS-38 specifically excludes internally generated intangibles assets to recognize like Brands,
Mastheads, Publishing titles and customers’ list due to the fact that cost to generate these assets

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 47 of 143

cannot be separately distinguishable from general cost of operating the business. However, they
could be recognized if they are acquired in separate acquisition.

Internally generated goodwill:

Goodwill is the difference between the value of the business as a whole and the fair values of the
separable assets. The existence of the goodwill is typically associated with market reputation and
quality of service, technical expertise, possession of favorable contracts, customer loyalty etc.
IAS-38 prohibits recognizing Goodwill on the grounds of non-identifiablity and objectivity.

However, purchased goodwill (under business combination, dealt with IFRS-03)

4. Part of Business Combination: (IFRS-03)

In that case usually a total price is paid to acquire a whole unit. In this special scenario, fair value of
each item acquired is determined. In this case, many of the assets are recognized which may have
generated internally for example, trademarks and long term contracts with key customers.

SUBSEUENT MEASUREMENT:
Same as IAS-16, IAS-38 also allows choice between cost and revaluation models subsequent to initial
recognition with same principles but we charge amortization instead of depreciation.

Amortization:
Calculation of amortization consists of estimating the following:

1) Useful life:
a. Finite useful life:
Naturally amortized over useful life or number of expected production units.
b. Indefinite Useful life: (Not Infinite)
Not amortized just compulsory annual impairment review as per IAS-36.

2) Amortization method:
Amortization method should reflect benefit pattern. If pattern cannot be determined, that straight line
method is used. (SLN is a normal method).

3) Residual value
IAS-38 requires using ZERO residual value of intangibles assets with finite useful life except in the
following cases:
- Third party is committed to purchase the asset.
- Active market exists where reliable estimate can be obtained.

EXERCISE # 01: INITIAL COST

Ateeq Ltd acquires new technology that will significantly reduce its energy costs for manufacturing. Costs
incurred include:
Cost of new technology 1,500,000, Trade discount provided 200,000, Training course for staff in new
technology 70,000, Initial testing of new technology 20,000, Losses incurred while other parts of plant
shutdown during testing and training 30,000
Required:
Calculate the total amount to be capitalized in respect of acquired technology.
[Answer:Rs.1,320,000]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 48 of 143

EXERCISE # 02: ACCOUNTING TREATMENT i.e. CAPITALIZED or EXPENSED

What is the treatment of each of the following costs incurred?
1. Rs.120,000 spent on developing a prototype and testing a new type of propulsion system. The project
needs further work on it as the system is currently not viable.
2. A payment of Rs.50,000 to a local university’s engineering faculty to research new environmentally
friendly building techniques.
3. Rs.35,000 developing an electric bicycle. This is near completion and the product will be launched
soon. As this project is first of its kind it is expected to make a loss.
4. Rs.65,000 developing a special type of new packaging for a new energy-efficient light bulb. The
packaging is expected to reduce M’s distribution costs by Rs.35,000 a year.
5. Rs.100,000 spent on the initial design work of a new product – it is anticipated that this design will be
taken forward over the next two year period to be developed and tested with a view to production in
three years' time.
6. Rs.500,000 spent on the testing of a new production system which has been designed internally and
which will be in operation during the following accounting year. This new system should reduce the
costs of production by 20%.
7. A brand name relating to a specific range of chocolate bars, purchased for Rs.200,000. By the year
end, a brand specialist had valued this at Rs.250,000.
8. Rs.500,000 spent on developing a new line of confectionery, including Rs.150,000 spent on
researching the product before management gave approval to fully fund the project.
9. Training costs for staff to use a new manufacturing process. The total training costs amounted to
Rs.100,000 and staff is expected to remain for an average of 5 years.
[Answer: Expensed: 1, 2, 3,5 ,8=150k, 9 Capitalized 4, 6, 7, 8=Rs.350k]

EXERCISE # 03: R&D

GSK is a large pharmaceutical business involved in the research and development of viable new drugs. It
commenced initial investigation into the viability of a new drug on 1 February 2015 at a cost of Rs.40,000
per month. On 1 August 2015 GSK were able to demonstrate the commercial viability of the new drug
and intend to sell it on the open market once fully complete. Costs subsequent to 1 August 2015
remained at Rs.40,000 per month. At 31 December 2015, GSK’s reporting date, the drug was not yet
complete but it is believed that by mid-2016 the drug will be available for sale. The finance director is
confident of the success of the drug’s sales that he wishes to revalue the intangible at the reporting date,
using a discounted future cash flow model to establish the fair value.

Required:
Explain the treatment of the above costs in GSK’s financial statements for the year-ended 31 Dec 2015.
[Answer: Research Rs.240,000 (40,000 X 6), Development Rs.200,000 (40,000 X 5), since there is no active market, we cannot
report it on fair value; therefore, it is reported at cost; however, it is indicated by evidence that there is no impairment]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 49 of 143

IAS 36 – IMPAIRMENT OF ASSETS

Objective: The objective of this Standard is to prescribe the procedures that an entity applies to
ensure that its assets are carried at no more than their recoverable amount. An asset is
carried at more than its recoverable amount if its carrying amount exceeds the amount to
be recovered through use or sale of the asset. If this is the case, the asset is described as
impaired and the Standard requires the entity to recognise an impairment loss. The
Standard also specifies when an entity should reverse an impairment loss and prescribes
disclosures.

Scope: This Standard shall be applied in accounting for the impairment of all assets, other than:
(a) inventories (IAS 2 Inventories);
(b) contract assets and assets arising from costs to obtain or fulfill a contract that are
recognised in accordance with IFRS 15 Revenue from Contracts with Customers;
(c) deferred tax assets (IAS 12 Income Taxes);
(d) assets arising from employee benefits (IAS 19 Employee Benefits);
(e) financial assets that are within the scope of IFRS 9 Financial Instruments;
(f) investment property that is measured at fair value (IAS 40 Investment Property);
(g) biological assets related to agricultural activity within the scope of IAS 41 Agriculture
that are measured at fair value less costs to sell;
(h) contracts within the scope of IFRS 17 Insurance Contracts that are assets; and
(i) non-current assets (or disposal groups) classified as held for sale in accordance with
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Definitions:  Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon.
 A cash-generating unit is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets or
groups of assets.
 Corporate assets are assets other than goodwill that contribute to the future cash
flows of both the cash-generating unit under review and other cash-generating units.
 Costs of disposal are incremental costs directly attributable to the disposal of an
asset or cash-generating unit, excluding finance costs and income tax expense.
 Depreciable amount is the cost of an asset, or other amount substituted for cost in
the financial statements, less its residual value.
 Depreciation (Amortisation) is the systematic allocation of the depreciable amount
of an asset over its useful life
 Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (IFRS 13 Fair Value Measurement.)
 An impairment loss is the amount by which the carrying amount of an asset or a
cash-generating unit exceeds its recoverable amount
 The recoverable amount of an asset or a cash-generating unit is the higher of its fair
value less costs of disposal and its value in use.
 Useful life is either:
(a) the period of time over which an asset is expected to be used by the entity; or
(b) the number of production or similar units expected to be obtained from the asset
by the entity.
 Value in use is the present value of the future cash flows expected to be derived from
an asset or cash-generating unit.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 50 of 143

IDENTIFICATION OF ASSET FOR IMAPIRMENT:

• As & When: Whether there is any indication that an asset might be impaired.
• Annual: (irrespective of any indication)
 Intangible asset with an indefinite useful life (such as trademarks) [IAS 38]
 Intangible asset not yet available for use. [IAS 38]
 Goodwill acquired in a business combination. [IFRS 03]

INDICATIONS OF IMPAIRMENT?
External:

• Asset’s value has declined well below than expectations.

• Adverse PESTEL environment.
• Materially increase in market interest rates
• Net assets of the entity are higher than its market capitalization.

Internal:
• Obsolescence or physical damage of an asset.
• Adverse effect on the entity related to the use of an asset e.g. an asset becoming idle.
• Economic performance of an asset is, or will be, worse than expected.
• Loss of key personnel.
• Negative net cash outflow from operating activities.

RECOVERABLE AMOUNT:
Recoverable amount is the higher of the following:
a) Value in Sale: An asset’s (or cash-generating unit’s) fair value less costs of disposal.
b) Value in Use: The present value of the future net cash inflows using pretax rate.

NOTE: If any of the above is greater than CV, no need to calculate other – no evidence of impairment.
Also financing and taxation cash flows are ignored.

CASH GENERATING UNIT:

A cash generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows that
are largely independent of the cash inflows from other assets or groups of assets.

RECORDING IMPAIRMENT LOSS:

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 51 of 143

NOTE: Future depreciation / amortization will be as per the amount left after impairment.

CGU – IMPAIRMENT:
The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit in the
following order:
1. Specific assets. (that has lost its value)
2. Goodwill.
3. Remaining assets. (on pro-rata basis at relative carrying values, but not below its NRV)

REVERSAL OF IMPAIRMENT LOSS:

The reversal is immediately recognized in P&L.

Caution:
• Reversal should not exceed impairment loss.
• Reversal should not lead to an asset being carried above its depreciated historical cost.

EXERCISE # 01
An entity owns a property which was revalued to Rs.500,000 on 31 March 2013 with a revaluation gain of
Rs.200,000 being recognized as other comprehensive income and recorded in the revaluation surplus. At
31 March 2015 the property had a carrying amount of Rs.460,000 but the recoverable amount of the
property was estimated at only Rs.200,000.

Required:
Prepare journal entry to record impairment loss, if any.

EXERCISE # 02
A machine was acquired on 1 January 2005 at a cost of Rs.50,000 and has a useful economic life of ten
years. At 31 December 2009 an impairment review was performed. The fair value of the machine is
Rs.26,000 and the selling costs are Rs.2,000. The expected future cash flows are Rs.5,000 per annum
for the next five years. The current cost of capital is 10%.

Required:
Calculate impairment loss.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 52 of 143

EXERCISE # 03
A building was bought on 1 January 2001 at a cost of Rs.1,000,000 and has a useful life of 20 years. The
company uses the revaluation model for its land and buildings, and on the 31 December 2005 the fair
value of the building was Rs.1,125,000. The company opts to transfer any excess depreciation on the
revalued amount to retained earnings. On the 31 December 2007 a fall in the market value of property led
to an impairment review on the building, which revealed the recoverable value of the building to be
Rs.600,000.

Required:
Journal entry to record impairment loss, if any.

EXERCISE # 04
A cash-generating unit has these net assets: figures in million)
Goodwill 10
Property 20
PP&E 30
The recoverable amount has been determined as Rs.45 million.

Required:
Allocate the impairment loss to the net assets of the entity.

EXERCISE # 05
The assets at the reporting date of Sharon were as follows: (all figures in Rs.’000)
Goodwill 2,400, Buildings 6,000, Plant and equipment 5,200, Other intangibles 2,000, and Receivables
and cash 1,400.
On the reporting date a fire within one of Sharon’s buildings led to an impairment review being carried
out. The recoverable amount of the business was determined to be Rs.9.8 million. The fire destroyed
some plant and equipment with a carrying value of Rs.1.2 million and there was no option but to scrap it.
The other intangibles consist of a license to operate Sharon’s plant and equipment. Following the
scrapping of some of the plant and equipment a competitor offered to purchase the patent for Rs.1.5
million. The receivable and cash are both stated at their realizable value and do not require impairment.

Required:
Prepare journal entries to record impairment and prepare financial statement extracts.
[Answer: Total impairment loss Rs.7.2m and allocated as: goodwill 2.4m, building 3.1m, PP&E 1.2m, other intangibles 0.5m and
receivables and cash nil. Hint: Prepare columnar solution.]

EXERCISE # 06: REVERSAL:

On Jan 01, 2012, A Ltd acquired an asset costing Rs.100,000 having useful life of 10 years. At the end of
st nd
1 year recoverable amount is 81,000 and 2 year RA = 84,000.

Required:
nd
Calculate the reversal if impairment in 2 year.
[Answer: Rs.8,000]

EXERCISE # 07: REVERSAL:

On Jan 01, 2019, A Ltd acquired an asset costing Rs.100,000 having useful life of 10 years. The
recoverable amounts are as under:

Dec 31, 2019: Rs.72,000

Dec 31, 2020: Rs.95,000

Required:
Calculate the reversal as on Dec 31, 2020.
[Answer: Rs.16,000]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 53 of 143

IAS 37 – PROVISIONS & CONTINGENCIES

Objective: The objective of this Standard is to ensure that appropriate recognition criteria and
measurement bases are applied to provisions, contingent liabilities and contingent assets
and that sufficient information is disclosed in the notes to enable users to understand their
nature, timing and amount.

Scope: This Standard shall be applied by all entities in accounting for provisions, contingent
liabilities and contingent assets, except:
(a) those resulting from executory contracts, except where the contract is onerous; and
(b) those covered by another Standard.

Definitions:  A provision is a liability of uncertain timing or amount.

 A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits.

 An obligating event is an event that creates a legal or constructive obligation that

results in an entity having no realistic alternative to settling that obligation.

 A legal obligation is an obligation that derives from:

(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.

 A constructive obligation is an obligation that derives from an entity’s actions

where:
(a) by an established pattern of past practice, published policies or a sufficiently
specific current statement, the entity has indicated to other parties that it will
accept certain responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of those other
parties that it will discharge those responsibilities.

 A contingent liability is:

(a) a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; or
(j) the amount of the obligation cannot be measured with sufficient reliability.

 A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.

 An onerous contract is a contract in which the unavoidable costs of meeting the

obligations under the contract exceed the economic benefits expected to be received
under it.

 A restructuring is a program that is planned and controlled by management, and

materially changes either:
(a) the scope of a business undertaken by an entity; or
(b) the manner in which that business is conducted.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 54 of 143

CONTINUUM OF EVENTS’ LIKELIHOOD:

Virtually
Certain Probable Possible Remote Impossible
Certain

100% 90% - 99% 51% - 89% 20% - 49% 1% - 19% 0%

PROVISION:
A provision is a liability of uncertain timing or amount or both i.e. we are not 100% sure when the liability
is due and what expenditure is required to settle it.

Provisions are required to be made under the following circumstances:

• Legal case (litigation) that expected to result in payment of penalties.
• Entities selling goods might get back the products for doing some repair. (Warranty)
• Environmental cleanup.
• Restoration / dismantling [IAS 16]
• Post-employment benefits.
• Income tax.

Obligation / Liability:
Liability is a present obligation from past obligating events that result in outflow of resources. Past events
create two types of obligations: legal and constructive.
a. Legal – contractual, legislation or operation of law.
b. Constructive – established pattern of past practice and/or published policies creating valid
expectation on the part of other party that couldn’t be avoided without affecting business operation or
relations.
The accounting treatment is same for provisions created under both the above.

Recognition Criteria:
As per IAS-37, provision should be recognized when all criteria are met: (PPR)
a) Present obligation as a result of past events (obligating event) – legal or constructive. In order to
ascertain whether there is a present obligation, an entity asks a question: “whether it can be avoided
by future actions?”, if not, provision is made.
b) Probable outflow > 50%, otherwise, just disclosure of contingent liability is required.
c) Reliably estimate.

INITIAL MEASUREMENT:
With respect to measurement of the provision amount, we can classify events into two types:
a) Recurring – these events occur normally after some time and therefore historical information is
available. As a result, probabilities could be assigned. For example, warranty. Therefore
measurement is made on the basis of expected values.
b) One-off events – Provision is made using best estimate or most likely amount as per professional
advice. If time period is significant, present value is also found. (e.g. dismantling costs – IAS 16)

SUBSEQUENT TREATMENT:
• Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current
best estimate or expected values. If it is no longer probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision shall be reversed. For
example, in case of provisions (bad debts, income taxes, and warranty), provision amount is re-
assessed at each reporting date to reflect increases and decreases. (increase in provision is expense
while decrease is reversal of expense).
• Where discounting is used, the carrying amount of a provision increases in each period to reflect the
passage of time – unwinding. This increase is recognized as borrowing cost / finance cost.

NOTE: A provision shall be used only for expenditures for which the provision was originally recognized.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 55 of 143

SPECIFIC SCNARIOS FOR PROVISIONS:

1. Provision for dismantling cost, if obligatory:
This provision created as the present value is added to the cost of asset and subsequently unwound
as per IAS 16.

2. Onerous contracts:
An onerous contract is whereby the cost of fulfilling the contract exceeds the benefits received from
the contract (e.g. non-cancellable operating lease). A provision is recognized at the lower of:
a. Present value of continuing under the contract, and
b. Present value of exiting the contract i.e. penalties.

3. Restructuring Provisions:
Restructuring is a plan of management to change the scope of business or a manner of conducting a
business.
 Sale or closure of a line of business.
 Ceasing activities in a geographical location
 Relocating activities
 Re-organization (management or focus of operations)

A provision is recognized if there is a detailed formal plan and the plan has been announced.
Provision is created for directly attributable costs. (Costs of ongoing operations are ignored).

CONTINGENCIES:

Contingent liabilities:
• A contingent liability is a possible obligation arising from past events whose existence will only be
confirmed by the occurrence of uncertain future events not wholly within the entity's control. For
example, guarantee.
• A contingent liability could also include an obligation arising from past events which is not
recognized because it is not probable that a transfer of economic benefits will be required, OR
because the amount of the obligation cannot be measured with sufficient reliability.

Contingent assets:
A contingent asset is a possible asset arising from past events whose existence will only be confirmed by
future events not wholly within the entities control. Contingent assets may require disclosure but should
not be recognized in the accounts. Both contingent liabilities and assets are disclosed in financial
statements.

EXERCISE # 01
Excellent Inc. is an oil entity that is exploring oil off the shores of Excessoil Islands. It has employed oil
exploration experts from around the globe. Despite all efforts, there is a major oil spill that has grabbed
the attention of the media. Environmentalists are protesting and the entity has engaged lawyers to advise
it about legal repercussions. In the past, other oil entities have had to settle with the environmentalists,
paying huge amounts in out-of-court settlements. The legal counsel of Excellent Inc. has advised it that
there is no law that would require it to pay anything for the oil spill; the parliament of Excessoil Islands is
currently considering such legislation, but that legislation would probably take another year to be finalized
as of the date of the oil spill. However, in its television advertisements and promotional brochures,
Excellent Inc. often has clearly stated that it is very conscious of its responsibilities toward the
environment and will make good any losses that may result from its exploration. This policy has been
widely publicized, and the chief executive officer has acknowledged this policy in official meetings when
members of the public raised questions to him on this issue.
Required:
Does the above give rise to an obligating event that requires Excellent Inc. to make a provision for the
cost of making good the oil spill?
[Answer: Provision is required – constructive obligation]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 56 of 143

EXERCISE # 02
Amazon Inc. has been sued for following three alleged infringements of law:

Lawsuit 1:
Unauthorized use of a trademark; the claim is for Rs.100 million. The chances of this lawsuit are remote.

Lawsuit 2:
Nonpayment of end-of-service severance pay to 5,000 employees who were terminated without Amazon
Inc. giving any reason; the class action lawsuit is claiming Rs.3 million. It is probable that Amazon Inc.
would have to pay the displaced employees, but the best estimate of the amount that would be payable if
the plaintiff succeeds against the entity is Rs.2 million.

Lawsuit 3:
Unlawful environmental damage for dumping waste in the river near its factory; environmentalists are
claiming unspecified damages as cleanup costs. There is no current law that would compel the entity to
pay for such damages. There may be a case for constructive obligation, but the amount of damages
cannot be estimated with any reliability.

Required:
What should be the provision that Amazon Inc. should recognize or the contingent liability that itshould
disclose in each of the lawsuits, based on the assessments of its legal counsel?
[Answer: a) Do nothing, b) Provision for Rs.2m, c) Contingent liability]

EXERCISE # 03 RE-STRUCTURING:
The board of directors of ABC Inc. at their meeting held on December 15, 20X1, decided to close down
the entity’s international branches and shift its international operations and consolidate them with its
domestic operations. A detailed formal plan for winding up the international operations was also
formalized and agreed by the board of directors in that meeting. Letters were sent out to customers,
suppliers, and workers soon thereafter. Meetings were called to discuss the features of the formal plan to
wind up international operations, and representatives of all interested parties were presenting those
meetings.

Required:
Do the actions of the board of directors create a constructive obligation that needs a provision for
restructuring?
[Answer: Yes – detailed formal plan communicated that has created a valid expectation]

EXERCISE # 04 ONEROUS CONTRACTS

Daiva has a contract to buy 900 meters of cloth each month for Rs.7 per meter. From each 3 meter of
cloth she can make a dress which she can sell for Rs.30. She also incurs labor costs of Rs.4 per dress.
Alternatively, she can sell the cloth immediately for Rs.6.25 per meter.

If she decides to cancel the cloth purchase contract without notice she must pay a cancellation penalty of
Rs.700, for each of the next two months.

In December 2009 the market price of dresses fell to Rs.22. She is considering ceasing production since
she believes that the market will not improve. There is 2 months’ notice stated in the contract in case of
breach of a contract.

Required:
What will appear in respect of the contract in Daiva’s financial statements for year ending31 Dec , 2009.
[Answer: Provision of Rs.1,350]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 57 of 143

EXERCISE # 05
An entity sells goods with a warranty covering customers for the cost of repairs of any defects that are
discovered within the first two months after purchase. Past experience suggests that 88% of the goods
sold will have no defects, 7% will have minor defects and 5% will have major defects. If minor defects
were detected in all products sold, the cost of repairs would be Rs.24,000. If major defects were detected
in all products sold, the costwould be Rs.200,000.

Required:
What amount of provision should be made?
[Answer: The expected value of the cost of repairs is Rs.11,680 [(7% × 24,000) + (5% × 200,000)].

DECISION TREE:

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 58 of 143

IAS 10 – EVENTS AFTER THE REPORTING PERIOD

Objective: The objective of this Standard is to prescribe:
a) when an entity should adjust its financial statements for events after the reporting
period; and
b) the disclosures that an entity should give about the date when the financial
statements were authorised for issue and about events after the reporting period.

The Standard also requires that an entity should not prepare its financial statements on a
going concern basis if events after the reporting period indicate that the going concern
assumption is not appropriate.
Scope: This Standard shall be applied in the accounting for, and disclosure of, events after the
reporting period.

Definitions: Events after the reporting period are those events, favourable an un-favourable, that
occur between the end of the reporting period and the date when the financial statements
are authorised for issue. Two types of events can be identified:
a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period).

Objective:
IAS 10 sets the rules when an entity should adjust its financial statements for events after the reporting
period together with the necessary disclosures.

Event after the reporting period is favorable or unfavorable event that occurs between:
a) The end of the reporting period and
b) The date that the financial statements are authorized for issue.

Date of Authorization:
It is the date on which directors of the company approves and sign-off the accounts for issuance to
members. In this regard, requirements u/s 232 of Companies Act, 2017 are as under:

“Approval and authentication of Financial Statements:- The financial statements, including

consolidated financial statement, if any, must be approved by the board of the company and signed on
behalf of the board by the chief executive and at least one director of the company, and in case of a listed
company also by the chief financial officer:
Provided that when the chief executive is for the time being not available in Pakistan, then the financial
statements may be signed by at least two directors”

ADJUSTING EVENTS:
Adjusting event is the event that arose after the end of the reporting period, but provides further
evidence of conditions that existed at the end of the reporting period, irrespective whether they were
known or not.

Examples:
1. The receipt of information after the reporting period indicating that an asset was impaired at the end
of the reporting period, or that the amount of a previously recognised impairment loss for that asset
needs to be adjusted.
a. The bankruptcy of a customer that usually confirms that the customer was credit-impaired at the
end of the reporting period.
b. The sale of inventories after the reporting period may give evidence about their net realizable
value at the end of the reporting period.
2. The discovery of fraud or errors that show that the financial statements are incorrect.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 59 of 143

3. Court case outstanding at year end settled after reporting period, resulting loss and confirming that
entity had a present obligation at the reporting date.
4. The determination of the amount of profit-sharing or bonus payments. (performance related pay)
5. Going concern assumption being doubtful is in any case adjusting event even tough conditions were
not existed at the reporting date.
6. The determination of the cost of assets purchased, or the proceeds from assets sold, before the end
of the reporting period.

Accounting treatment:
Financial statements should be adjusted for adjusting events.

NON-ADJUSTING EVENTS:
Non-adjusting event is an event after the reporting period that indicates conditions arising after the end
of the reporting period.
Examples:
1. The destruction by a fire / natural disaster.
2. Decline in fair value of investments.
3. Entity declares dividends (approval by shareholders) to holders of equity instruments after reporting
date. (Adjusting event will be considered when declared before reporting date). Proposed
(recommended) dividend by directors before reporting date is never recorded / adjusted.
4. A major business combination.
5. Announcing a plan to discontinue an operation.
6. Major purchases of assets.
7. Classification of assets under IFRS 5. (Held for Sales and Discontinued operations)
8. Disposals of major non-current assets.
9. Expropriation of major assets by government.
10. Announcing, or commencing the implementation of, a major restructuring plan as per IAS 37.
11. Major ordinary share transactions (“stock splits”, or “rights issue”) and potential ordinary share
transactions.
12. Abnormally large changes in asset prices or foreign exchange rates.
13. Changes in tax rates or tax laws enacted or announced.
14. Entering into significant commitments / contracts or contingent liabilities
15. Commencing major litigation arising solely out of events that occurred after the reporting period.

Accounting treatment:
Do not adjust financial statements for non-adjusting events. The following disclosure shall be made, if
material:
a) The nature of the event, and
b) An estimate of its financial effect or a statement that such an estimate cannot be made.

EXERCISE # 01: DATE OF AUTHORIZATION FOR ISSUANCE

The management of an entity completes draft financial statements for the year to 31 December 20X1 on
28 February 20X2. On 18 March 20X2, the board of directors reviews the financial statements and
authorizes them for issue. The entity announces its profit and selected other financial information on 19
March 20X2. The financial statements are made available to shareholders and others on 1 April 20X2.
The shareholders approve the financial statements at their annual meeting on 15 May 20X2 and the
approved financial statements are then filed with a regulatory body on 17 May 20X2.
Required:
Identify the date of authorization for issue.
[Answer: The financial statements are authorized for issue on 18 March 20X2 (date of board authorization for issue).]

EXERCISE # 02: DATE OF AUTHORIZATION FOR ISSUANCE

On 18 March 20X2, the management of an entity authorizes financial statements for issue to its
supervisory board. The supervisory board is made up solely of non-executives and may include
representatives of employees and other outside interests. The supervisory board approves the financial
statements on 26 March 20X2. The financial statements are made available to shareholders and others
on 1 April 20X2. The shareholders approve the financial statements at their annual meeting on 15 May

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 60 of 143

20X2 and the financial statements are then filed with a regulatory body on 17 May 20X2.
Required:
Identify the date of authorization for issue. [Answer: The financial statements are authorised for issue on 18 March 20X2
(date of management authorization for issue to the supervisory board).]

EXERCISE # 03: LAWSUIT

ABC has been sued for the damages caused, but just before the year-end the lawyers believe that the
change of losing the case is remote and thus no provision has been created. On 15 February, the court
approved Rs.1m damages against ABC.

Required:
How should this event be recognized in the financial statements under each of the following cases:
a) If financial statements are authorized for issue before 15 Feb.
b) If financial statements are authorized for issue after 15 Feb.
[Answer: DIY]

EXERCISE # 04: APPLICATION

Shortly after the reporting date a major credit customer of an entity went into liquidation because of heavy
trading losses and it is expected that little or none of the Rs.12,500 debt will be recoverable. Rs.10,000 of
the debt relates to sales made prior to the year-end and Rs.2,500 relates to sales made in the first two
days of the new financial year. In the 20X1 financial statements the whole debt has been written off, but
one of the directors has pointed out that, as the liquidation is an event after the reporting date, the debt
should not in fact be written off but disclosure should be made by note to this year’s financial statements,
and the debt written off in the 20X2 financial statements.
Required:
Comment, as per IFRS guidelines, on the decision made by director.
[Answer: Rs.10,000 loss is an adjusting event, and must be accounted for. Remaining 2,500 will be accounted for in
next period with appropriate disclosures]

EXERCISE # 05: EARP

Which of the following material events after the reporting date and before the financial statements are
approved are adjusting events?
1. A valuation of property providing evidence of impairment in value at the reporting date.
2. Sale of inventory held at the reporting date for less than cost.
3. Discovery of fraud or error affecting the financial statements.
4. The insolvency of a customer with a debt owing at the reporting date which is still outstanding.
[Answer: All]

EXERCISE # 06: EARP

The following events took place between the 31 December 2017 reporting date and the date the financial
statements were authorised for issue.
a) The company makes an issue of 100,000 shares which raises Rs.200,000 shortly after the Statement
of Financial Position date.
b) A legal action had been brought against the company for breach of contract prior to the year end. The
outcome was decided shortly after the Statement of Financial Position date, and as a result the
company will have to pay costs and damages totaling Rs.80,000. No provision has currently been
made for this event.
c) Inventory included in the accounts at the year end at cost Rs.25,000 was subsequently sold for
Rs.15,000.
d) A building in use at the Statement of Financial Position date and valued at Rs.500,000 was
completely destroyed by fire. Unfortunately, only half of the value was covered by insurance
Required:
Which of the above events are adjusting events in the financial statements?
[Answer: b & c]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 61 of 143

IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Objective:
The basic objective of IFRS-15 is to establish principles for reporting to users of financial statements
about nature, timing and uncertainty of revenues and cash flows arising from the contracts with
customers.

Superseded Regulations:
The following standards will no longer apply following the implementation of IFRS-15:
1. IAS-11 Construction Contracts
2. IAS-18 Revenue

5 STEP MODEL

IMPORTANT CONCEPTS:
Contract Asset:
Performance obligation is satisfied but billing is pending; invoicing is not possible. For example, handset
is delivered but billing will be done at the end of each month.

Contract Liability:
Amount has been received but performance obligation is not satisfied (customer acceptance is not
received)

Contract Receivable:
It is recognized due to the following two reasons:
a) Contract asset is converted into receivable i.e. billing right is established after performance obligation
is satisfied.
b) When right to receive payment is immediately established after performance obligation is satisfied.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 62 of 143

EXERCISE # 01 APPLYING 5-STEP MODEL

Telecom operator, ABC Corp. entered into a contract with Johnny on 1 July 20X1. In line with the
contract, Johnny subscribes for ABC's monthly plan for 12 months and in return, Johnny receives free
handset from ABC Corp. Johnny will pay a monthly fee of Rs.100. Johnny gets the handset immediately
after contract signature. ABC sells the same handsets for Rs.300 and the same monthly plans for
Rs.80/month without handset.
Required:
How should ABC recognize revenues from the contract with Johnny in 20X1 under IFRS 15? And
Prepare journal entries.

STEP 01 – IDENTIFY THE CONTRACT WITH CONTRACT: (Validity is identified)

A contract is an agreement between 2 parties that creates enforceable rights and obligations. The
contract is said to be exist when ALL of the following conditions are met at the inception of the
arrangement:

• The contract is approved by all parties

• The rights and payment terms can be identified
• The contract has commercial substance
• It is probable that revenue will be collected

COMBINATION OF CONTRACTS:
If the entity into two or more contracts at the same time (even with different customers), for the purpose of
revenue recognition, the contract should be combined into one if the meet ANY of the following
conditions:
a) The contracts are negotiated as a package with a single commercial objective.
b) The amount of consideration to be paid in one contract depends on the price / performance of the
other contract.
c) Goods and services constitute a single performance obligation.

MODIFICATON OF CONTRACTS:
A contract modification is a change in scope and/or price. In this case, the reporting entity has to assess
whether the modification constitutes a new contract of whether it should be accounted for as part of
existing contract.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 63 of 143

EXERCISE # 02: CONTRACT MODIFICATION

Salty enters into a contract to supply 1,000 products to Sweet for Rs.60 each. The products are
transferred over an eight month period, and control passes on delivery. After Salty has transferred 700
products the contract is modified to require an additional 200 products to be transferred (i.e. 1,200 in
total). The price for the additional 200 products is Rs.57, which is the standalone selling price at the date
of the contract modification. By the reporting date, Salty has transferred 900 products in total to Sweet.

Required:
(a) Discuss, with calculations, how much revenue should be recognised in relation to the above by the
reporting date.
(b) Discuss, with calculations, how much revenue should be recognised in relation to the above by the
reporting date if the contract specified a price of Rs.40 for the additional 200 products. Assume the
normal standalone selling price at the modification date is Rs.57.
[Answer: a) Rs.54,000 (900 x 60), additional 200 are separate contract
b) Rs.52,400, Rs.42,000 for 700 original, and remaining (300 + 200) will be as new contract Rs.10,400 (52 x 200) ]
The new price of Rs.52 will be calculated as (300 @ 60) + (200 @ 40) divided by 500.

STEP 02 – IDENTIFY THE PERFORMANCE OBLIGATIONS (What vendor undertakes to deliver)

Performance obligations are promise to transfer distinct goods or services to a customer. They could be
individual (goods) or in series (lectures, utilities, internet, hospitalization etc). This is very important step
because revenue is recognized for each performance obligation separately – control is transferred to
customer. It means if the contract has multiple promises, it is critical to identify whether these are distinct
or not. This is because revenue recognition is related with distinct PO, not at contract level. If some
performance obligations are not distinct, bundling is required.

Some contracts contain more than one performance obligation. For example:
a) An entity may enter into a contract with a customer to sell a car, which includes one year’s free
servicing and maintenance.
b) An entity might enter into a contract with a customer to provide 5 training sessions along with a free
training material on the first day of the course.

Performance obligations can either be implicit or explicit:

 Implicit – Vendor has a reputation that one month free service is given. (implied)
 Explicit – Specifically defined.

Criteria of distinct: (Both must satisfy to become distinct)

- Customer Specific
Customer can benefit from good/service either on his own or in conjunction with other readily
available resources.

- Vendor Specific
Separately identifiable from other goods/services in the contract like:
o Entity is NOT using good/service as an input to produce or deliver combined output. Raw
material and labor; customization plus software license.
o The good/ service does NOT significantly modify or customize another good/service.
o The good/ service is not highly dependent with other goods/services in the contract. One cannot
be used without the other one.

EXERCISE # 03 DISTINCT PERFORMANCE OBLIGATION

A Ltd agrees on following performance obligations with customers:
1. Provision of software license.
2. Customization as per requirements.
3. Updates regularly.
4. Free maintenance.
Whether all these promises are distinct?
[Answer: 1& 2 will be bundled while 3 and 4 are distinct.]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 64 of 143

EXERCISE # 04: DISTINCT PERFORMANCE OBLIGATIONS?

Consider the following independent cases:

a) ECL has entered into a contract with Kashif Builders for construction of a residential project, including
supply of construction material, architectural services, engineering and site clearance. ECL and its
competitors provide such services separately also.

b) eSolutions Limited, a software developer, entered into a two year contract with a customer to provide
software license including future software updates and post implementation support services. The
software license would remain functional even if the updates and post implementation support
services are discontinued.

Required:
Evaluate each contract and identify the nature of performance obligations (single / distinct)
[Answer: a) Single b) distinct]

Principal vs. Agent Relationship:

It is very important for an entity, whether it is acting as a principal or an agent (capacity). Principal will
recognize total gross revenue but agent will recognize the revenue to the extent of commission income.

The conditions for acting as a principal:

• Primary responsibility for fulfilling the contract.
• Inventory or obsolescence risk.
• Establishing prices.
• Risk of bad debts.

EXERCISE # 05: AGENCY RELATIONSHIP

Rosemary Co's revenue includes Rs.2 million for goods it sold acting as an agent for Elaine.
Rosemary Co earned a commission of 20% on these sales and remitted the difference of Rs.1.6
million (included in cost of sales) to Elaine.

Required:
How should the agency sale be treated in Rosemary's statement of profit or loss?
[Answer: Revenue and cost of sales to be reduced by 1.6m]

STEP 03 – DETERMINE THE TRANSACTION PRICE: (Normally at contract level)

Transaction price is the amount of consideration (at contract level) that an entity expects to be entitled to
in respect of performance obligations. This amount excludes the amount collected on behalf of other
party’s e.g. sales tax or principal’s payment. The following factors must be considered when determining
the transaction price:

1) Variable consideration and its constraints

2) Significant financing components
3) Non-cash consideration
4) Consideration payable to a customer

1. Variable consideration and its constraints

The amount of consideration may vary due to the presence of discounts, rebates, refunds,
concessions, incentives, litigation outcome, bonuses, penalties or contingent event (timely completion
bonus), performance based amounts. IFRS 15 lays down following two methods to determine the
amount of variable consideration:
a) Expected Value method / probability adjusted – probability weighted amounts from range of
possible consideration outcomes.
b) Most likely (probable) amount – in case of two available options, most likely is selected. For
example, whether the entity receives performance bonus or not?

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 65 of 143

EXERCISE # 06: MOST LIKELY METHOD:

On December 27, 2019, A construction company entered into a contract to build a bridge. The company
is entitled to a bonus of Rs.1m if construction is completed within three months. The chief engineer has
established that it is 80% probable that the construction is completed within three months.

Required:
Calculate the amount of bonus element of the consideration.
[Answer: 1m using most likely method, since only two possible outcomes]

2. Financing components (time value of money)

When there is significant time difference, financing component is present.. There could be two
situations:

EXERCISE # 07: FINANCING COMPONENT

AK Ltd contracted to provide equipment on 01 Jan 2018 at a price of Rs.2m. the delivery will be done on
the same date but the payment is due after 2 years. The prevailing interest rate is 10%.

Required:
a) Determine the financing component and calculate the revenue to be recognized.
b) Explain the treatment of receivable subsequent to initial recognition.
[Answer: Financing component Rs.347,107]

EXERCISE # 08: FINANCING COMPONENT

Luckers Co. sells a car to a customer for Rs.10,000, offering interest-free credit for a three-year period.
The car is delivered to the customer immediately. The annual market rate of interest on the provision of
consumer credit to similar customers is 5%.
Required:
What is the transaction price and discuss the recognition process?
[Answer:Rs.8,638; financing component of Rs.1,362 is recognized over 3 years]
3. Non cash consideration
Payment from customer could be in the form of goods, services or some other non-cash form. When
the entity receives or expect to receive non-cash consideration, the fair value of goods received must
be taken into account when determining the transaction price. In case, fair value of goods received is
not reliably measured or not available, the fair value of goods delivered is treated as revenue.

4. Consideration payable to the customer.

Sometimes, an amount is payable to customer in a contract e.g. space rent or advance discount. In
this case, the treatment depends upon the following conditions:
o For distinct goods / services: (Rack rent): It is treated as advance rent / asset and it is amortized
over the period of revenue.
o Not for distinct goods / services: (Admin function): This is a sort of advance discount and treated
as reduction in contract revenue.

EXERCISE # 09: CONSIDERATION PAYABLE TO CUSTOMER

Golden Gate Co enters into a contract with a major chain of retail stores. The customer commits to buy at
least Rs.20m of products over the next 12 months. The terms of the contract require Golden Gate Co to
make a payment of Rs.1m to compensate the customer for changes that it will need to make to its retail
stores to accommodate the products. By 31 December 20X1, Golden Gate Co has transferred products
with a sales value of Rs.4m to the customer.

Required:
How much revenue should be recognised by Golden Gate Co in the year ended 31 December 20X1?
[Answer: Rs.1m is treated as reduction from revenue, since no distinct goods. Total revenue will be reduced by 5% (1/20)]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 66 of 143

STEP 04 – ALLOCATE THE TRSNACTION PRICE TO PERFORMANCE OBLIGATION

In case there is only one performance obligation, the allocation is straightforward. In cases of multiple
distinct performance obligations, the allocation is done on relative stand-alone selling price basis. This is
done because the bundle price is less than the sum of all standalone prices.

What is stand-alone selling price?

The standalone selling price is the price at which the product is delivered separately to a customer. This
could be determined in number of ways:
• Established prices; the company sells products separately as well.
• Cost plus technique.
• Residual approach.
• Market adjusted approach.
Note: Combination of all techniques could also be used.

EXERCISE # 10: ALLOCATION

A machine along with one year technical support is contacted to sell at Rs.10,000. The standalone price
of machine is Rs.9,000. However, the company doesn’t provide technical support to customers
separately. The cost of providing service is Rs.2,000 and the company usually marks up the other
services @ 50%.

Required:
Allocate the transaction price to the performance obligations.
[Answer: Rs.7,500 to machine and Rs.2,500 to one year service]

EXERCISE # 11: ALLOCATION

Richer Co. sells home entertainment systems including a two-year repair and maintenance package for
Rs.10,000. The price of a home entertainment system without the repair and maintenance contract is
Rs.9,000 and the price to renew a two-year maintenance package is Rs.2,000.

Required:
Ignoring time value of money, how is the Rs.10,000 contract price allocated to the separate performance
obligations?
[Answer: System Rs.8,182 + Repair Rs.1,818]

EXERCISE # 12: ALLOCATION – COST PLUS APPROACH

Shred Co sells a machine and one year’s free technical support for Rs.100,000. It usually sells the
machine for Rs.95,000 but does not sell technical support for this machine as a stand-alone product.
Other support services offered by Shred Co attract a mark-up of 50%. It is expected that the technical
support will cost Shred Co Rs.20,000.

Required:
How should the transaction price be allocated between the machine and the technical support?
[Answer: Rs.76,000 to machine and Rs.24,000 to technical support]

EXERCISE # 13: ALLOCATION

Pluto Limited (PL) sells industrial chemicals at following standalone prices:

Products prices per carton:

Alpha 100,000
Bravo 90,000
Charlie 110,000
PL regularly sells a carton each of Bravo and Charlie together for Rs.170,000.

Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell one carton of each
product for a total price of Rs. 260,000.
[Answer: Alpha Rs.96,296, Bravo Rs.73,667, Charlie Rs.90,037]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 67 of 143

STEP 05 – REVENUE RECOGNITION

An entity recognizes revenue when performance obligation is satisfied – delivery of promised goods or
service (when the customer assumes the control). The transfer of control needs to be correctly assessed.
The recognition of revenue for distinct performance obligation should account for the following:
Performance Obligation
Satisfied over Satisfied at a
time point in time
The above distinction is important as the revenue recognition follows the pattern of transferring control.

PERFORMANCE AT A SINGLE POINT IN TIME:

The revenue is to be recognized at the same time. IFRS 15 lists the indicators of transfer of control:
 The entity has a present right to payment for the asset.
 The customer has legal title to the asset.
 The entity has transferred physical possession to the asset.
 The customer has the significant risks and rewards of ownership of the asset.
 The customer has accepted the asset.

PERFORMANCE OVER TIME:

Revenue should be recognized by measuring progress / stage of completion basis using either input or
output methods. (Once selected should be applied consistently). If any one of the following conditions is
met, the revenue is recognized over time:
a) Costumer consumes the product at the time of transfer. Utilities, cleaning services, hospitalization
services.
b) Goods and services are delivered at customer premises as per his requirements and acceptance is
given accordingly.
c) Construction of goods is specialized and only customer can use it and you have legally enforceable
right to recover the payment in case of default. (no alternative use)
Note: If any condition is not met, revenue is recognized at a point in time.

Determining Stage of Completion:

ℎ = × 100
!
Input method recognizes revenue on the basis of
entity’s efforts of inputs to satisfy the performance
obligations like resources consumed, labor hours,
costs incurred, time elapsed or machine hours used.
(Total Estimated Cost = Cost to date + Estimated
future cost) In this method % of completion is multiplied to total
contract revenue and total contract cost to calculate
to date values. Balancing figure will be profit to date.

# $ %
" ℎ = × 100
& '
Output method relates to the value received by
customer relative to the remaining benefits like
surveys of performance, appraisals of results,
This method certifies revenues. milestone reached, time elapsed, or units produced /
delivered.

In this method, % of completion is multiplied by total

revenue and total estimated profit to calculate to date
values. Balancing figure is cost to date.
The selection of different methods may distort the revenue and, therefore, needs consistent application.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 68 of 143

EXERCISE # 14: INPUT VS. OUTPUT METHODS OF MEASURING PERFORMANCE

A construction company contracts to build a bridge for a customer. The contract started on Jan 2015 and
its performance is satisfied over time. Overall contract price is Rs.6m; however, by the end of 2015, the
customer agrees that the milestone achieved correspond to Rs.2m. The company has already incurred
Rs.3m and further expects to incur Rs.2m to complete the construction.
Required:
Determine the revenue to be recognized under both input and output methods.
[Answer: Output Rs.2m, Input Rs.3.6m]

EXERCISE # 15: RECOGNITION OF REVENEUE

Telephonica sells mobile phones, selling them for “free” when a customer signs up for a 12 month
contract. The contract costs the customer Rs.45 per month. Vodaphone sells mobile phones without a
monthly contract, selling the handset for Rs.480. Call and data charges are Rs.20 per month. Ignore
discounting and the time value of money.
Required:
Explain how the revenue should be recognised in Telephonica’s financial statements.
[Answer: Handset Rs.360 and Rs.180 for data]

EXERCISE # 16: RECOGNITION OF REVENEUE

LiverTech is a computer business that primarily sells computer hardware. As well as selling computers, it
also supplies and installs the software to its customers and provides a technical support package over
two years. The business commonly sells the supply and installation, and technical support in a combined
goods and services contract.
The combined goods and services contract sells for Rs.1,600, but if sold separately the supply and
installation is sold for Rs.1,500 and the technical support for Rs.500.

Required:
If LiverTech sold a combined contract on 1 July 20X7, demonstrate how the transaction would be
presented in the financial statements for the year ended 31 December 20X7.
[Answer: Contract Revenue Rs.1,300, Contract Liability Rs.300 out of which 100 is non-current]

LONG TERM CONTRUCTION CONTRACTS:

Contract Revenue:
• the initial amount of revenue agreed in the contract
• Variations in contract work and claims, to the extent that is probable and measurable.
• Incentive payments (additional payments made to the contractor if performance standards are met or
exceeded) when probable and measurable.

NOTE:
Contract revenue is reduced by the amount of any penalties arising from delays caused by the contractor
in the completion of the contract.

Contract Costs:
• Directly attributable costs i.e.
o site labour costs, including site supervision
o costs of materials used in construction
o depreciation of plant and equipment used on the contract
o costs of moving plant, equipment and materials to and from the contract site
o costs of hiring plant and equipment
o costs of design and technical assistance that is directly related to the contract
o the estimated costs of rectification and guarantee work, including expected warranty costs
o claims from third parties.

• Allocated costs i.e.

o Insurance
o General overheads
o Overall technical advice and services.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 69 of 143

CONTRACT ACCOUNTS – 4 STEP APPROACH:

Step 1 – Calculate overall profit or loss

Overall P/L = Contract price – (Cost to date + Estimated costs to complete)

In case of profit, it is recognized as per “stage of completion”; however, in case of loss, it is immediately
booked in total.

Step 2 – Determining the progress of a contract (stage of completion)

Using either input or output methods.
Step 3 – Statement of profit or loss (if profitable)
Revenue (Total price × progress %) X
Less revenue recognised in previous years X
Net revenue this year X
Cost of sales (Total costs × progress %) (X)
Less cost of sales recognised in previous years (X)
Net costs this year (X)
Profit X

For example, if a contract is worth Rs.10 million and it is 90% satisfied by the end of year 2, and was 50%
satisfied by the end of year 1, then Rs.9 million has been earned to date, of which Rs.5 million would
have been recognised in year 1. This means that Rs.4 million would be recognised as revenue in year 2.

Step 4 – Statement or financial position

At the year end, there will either be a contract asset or liability, recorded in current assets or current
liabilities. This will be calculated as shown below:
Costs incurred to date X
Profits / (losses) so far X / (X)
Cash Received (X)
Assets / (Liabilities) X / (X)

IMPORTANT POINTS:
As alternatives to the term 'contract asset', IFRS 15 also allows the terms receivable and work-in-
progress to be used.
• If revenue exceeds cash received, this could be included within trade receivables.
Receivable = Billed – Received
• If costs to date exceed cost of sales, this could be included within inventory, as work-in-progress.
WIP = Cost to date – Cost of Sales

• If the cash received exceeds the revenue recognised to date, there will be a contract liability
(effectively deferring the income).
• If a contract is loss-making, there will be a provision recorded to recognise the full loss under the
onerous contract, as per IAS 37.
• If project outcomes cannot be determined, revenue can only be recognized equal to the actual cost
incurred to date.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 70 of 143

EXERCISE # 17: BASIC – CONSTRUCTION CONTRACTS (OK)

Dream Land Ltd has a construction contract in process at December 31, 2020. The construction started
on 01 Jan 2020 and will take around 5 years to complete. Following are the details:

Total contract price Rs.444,000, cost incurred to date Rs.200,000, estimated further cost to complete
Rs.138,000, cash received to date Rs.205,000 and value of work certified 253,080.
The company used output method to determine progress and recognize revenue.

Required:
Prepare the financial statements extracts at 31 December 2020.

[Answer: Total profit [Link].106,000, % 57%, Profit Rs.60,420, Contract Asset Rs.55,420]

SPECIAL ISSUES RELATED TO REVENUE RECOGNITION:

IFRS -15 discusses following special issues related to revenue recognition:

Consignment inventory:
This can raise the issue of consignment inventory, where one party legally owns the inventory but
another party keeps the inventory on its premises. The key issue relates to which party has the majority of
indicators of control.

EXERCISE # 18: CONSIGNMENT INVENTORY

On 1 January 20X6 Gillingham, a manufacturer, entered into an agreement to provide Canterbury, a
retailer, with machines for resale.
The terms of the agreement were as follows.
1. Canterbury pays a fixed rental per month for each machine that it holds.
2. Canterbury pays the cost of insuring and maintaining the machines.
3. Canterbury can display the machines in its showrooms and use them as demonstration models.
4. When a machine is sold to a customer, Canterbury pays Gillingham the factory price at the time the
machine was originally delivered.
5. All machines remaining unsold six months after their original delivery must be purchased by
Canterbury at the factory price at the time of delivery.
6. Gillingham can require Canterbury to return the machines at any time within the six-month period. In
practice, this right has never been exercised.
7. Canterbury can return unsold machines to Gillingham at any time during the six-month period, without
penalty. In practice, this has never happened.
At 31 December 20X6 the agreement is still in force and Canterbury holds several machines which were
delivered less than six months earlier.

Required:
How should these machines be treated in the accounts of Canterbury for the year ended 31 Dec 2016?
[Answer: The machines are assets of Canterbury and should be included in its statement of financial position. Therefore,
Gillingham can recognise revenue when the machines are dispatched to Canterbury.]

Repurchase agreements
A repurchase agreement is where an entity sells an asset but retains a right to repurchase the asset. This
is often not recognised as a sale, but as a secured loan against the asset. Indications that this should not
be recognised as a sale may include:
• Sale is below fair value
• Option to repurchase is below the expected fair value
• Entity continues to use the asset
• Entity continues to hold the majority of risks and rewards associated with ownership of the asset
• Sale is to a bank or financing company

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 71 of 143

EXERCISE # 19 SALE AND REPURCHASE

Xavier sells its head office, which cost Rs.10 million, to Yorrick, a bank, for Rs.10 million on 1 January
20X2. Xavier has the option to repurchase the property on 31 December 20X5, four years later, at Rs.12
million. Xavier will continue to use the property as normal throughout the period and so is responsible for
its maintenance and insurance. The head office was valued at transfer on 1 January 20X2 at Rs.18
million and is expected to rise in value throughout the four-year period.

Required:
Giving reasons, show how Xavier should record the above during the first year following transfer.

[Answer: Xavier should continue to recognise the head office as an asset in the statement of financial position. This is a secured
loan with effective interest of Rs.2 million (Rs.12 million – Rs.10 million) over the four-year period.]

Bill-and-hold arrangements
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the
entity retains physical possession of the product until it is transferred to the customer at a point of time in
the future. For this to be recognised within revenue, the customer must have obtained control of the
product, despite it physically remaining with the entity.

There may be a fee for custodial services, where the entity recognises a fee for holding the goods on
behalf of the customer. This performance obligation would be satisfied over time, so any revenue would
be recognised on this basis.

For a bill-and-hold arrangement to exist:

• The customer must have requested the arrangement
• The product must be identified as belonging to the customer
• The product must be ready for physical transfer to the customer
• The entity cannot have the ability to use the product or sell it to someone else.

EXERCISE # 20 BILL & HOLD

On 31 December 20X1, Clarence sells a machine plus spare parts to Edgar for Rs.500,000. The value of
the machine was Rs.480,000, with the value of the spare parts being Rs.20,000. Clarence delivered the
machine on 31 December, but was asked to hold the spare parts by Edgar, due to Clarence's warehouse
being in close proximity to Edgar's factory. Clarence expects to hold the spare parts for 2-4 years.

The parts are kept separately in the warehouse, cannot be used or sold by Clarence, and are ready for
immediate shipment at Edgar's request. Clarence agreed to the transaction as it decided that holding
costs would be insignificant.

Required:
Discuss the accounting treatment as per IFRS.

[Answer: The performance obligations to provide the machine and the spare parts appear to be met on 31 December 20X1, so the
full Rs.500,000 revenue can be recognised.]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 72 of 143

IFRS 16 – LEASES
LEASE – Defined:
Lease is a contract that conveys the right to use an identified asset (underlying asset) for a period of
time (lease term) in exchange of consideration.

 The entity that obtains the right is referred as “Lessee”. (The user of asset). The lessee will account
for “lease as right of use” with some exceptions. There if no classification of lease with respect to
lessee.
 The provider of that right is known as “Lessor”. (The legal owner of the asset). The lessor will
account for lease as either “operating” and “finance” lease.
 Periodic payments to lessor are called “lease rentals” that could either be “in advance (start)” or “in
arrears (end)”.

FORMS OF LEASE CONTRACTS:

There could be two forms for lease contracts:
a) At the end of lease term, the asset is transferred in the lessee’s name through bargain purchase
option (BPO) or without any consideration.
b) The lessee has to revert back the asset to lessor at the end of lease term, usually lessor gets a
guarantee from lessor of “residual value”. (GRV)

SUBSTANCE OVER FORM:

The principle of substance over form requires lessee to recognize the asset “right of use” because the
lessee controls the asset. Problem of “off-balance sheet financing” is overcome.

WHETHER THE CONTRACT CONTAINS A LEASE OR NOT?

The identified asset can either be “implicit” or “explicit”.

EXERCISE # 01: IDENTIFYING LEASE

For each of the following scenarios explain if the contract is a lease or if it contains a lease.

1. Peach needs to transport its goods to customers in Europe using rail freight. The company enters into
a contract with a rail freight carrier for the use of 10 rail cars of a particular type for five years.

[Answer: The identified asset is the specific rail cars in the contract to which the supplier does not have substantive substitution
rights (unless for repairs or maintenance). The customer has exclusive use ofthe rail cars so has the right to all the economic
benefits. The contract therefore contains a lease of the rail cars.]

2. Peach needs to transport its goods to customers in Europe using rail freight. The company enters into
a contract with a rail freight carrier that requires the carrier to transport a specified quantity of goods

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 73 of 143

by using a specified type of rail car in accordance with a stated timetable for five years.

[Answer: There is no identified asset as the supplier can use any rail car as long as it meets the specific type as designated in the
contract, which means that the supplier has substantive substitution rights. As the supplier can choose which rail car to use out of a
fleet then they have substantially all of the economic benefit of the rail car and hence there is no lease within the contract.]

3. Coffee Bean enters into a contract with an airport operator to use some space in the airport to sell its
goods from portable kiosks for a three-year period. Coffee Bean owns the portable kiosks. The
contract stipulates the amount of space and states that the space may be located at any one of
several departure areas within the airport. The airport operator can change the location of the space
allocated to Coffee Bean at any time during the period of use, and the costs that the airport operator
would incur to do this would be minimal. There are many areas in the airport that are suitable for the
portable kiosks.

[Answer: No, because there is no identified asset and lessee has no control to direct the use of the asset.]

KEY TERMS:
Inception date The date at which lessor and lessee agree on major terms and conditions of the
contract like identified asset, lease term, rentals etc. It could be earlier of the period of
signing the contract or principal consensus.
Commencement The date on which a lessor makes an underlying asset available for use by a lessee
date i.e. when right of use is transferred to lessee. This is the date from which both lessor
and lessee start accounting.
Lease term: The non-cancellable period for which a lessee has the right to use an underlying
asset (only lessor can cancel), together with both:
(a) Periods covered by an option to extend the lease if the lessee is reasonably
certain at inception date to exercise that option; and
• The asset is principal customized asset for the lessee.
• The lessee has made signification leasehold improvements in the asset.
• The rental in extension period is very attractive (materially lower).
(b) Periods covered by an option to terminate the lease if the lessee is reasonably
certain at inception date not to exercise that option. The reason could be heavy
penalty for cancellation along with above reasons.
The above conditions in (a) and (b) must be re-assessed in each reporting date.
Fixed payments The lease payments which are fixed or substantially fixed. (Based on some variable
but very uncertain to change). It is always part of lease payments.
Lease Payments made by a lessee to a lessor relating to the right to use an underlying
payments asset during the lease term, comprising the following:

In case, asset is transferred in the name of lessee at the end of lease term:
(a) Fixed payments (including in-substance fixed payments ), less any lease
incentives (free rent, any expense borne by lessor etc);
(b) Variable lease payments that depend on an index or interest rate; (Variable
payments based on usage and any other factor (contingent rent) are treated as
and when occur by both parties [expense and income])
(c) the exercise price of a purchase option (BPO) if the lessee is reasonably certain
to exercise that option; and
(d) Payments of penalties for terminating the lease (cancellation penalty), if the lease
term reflects the lessee exercising an option to terminate the lease.

In case asset is revert back to lessor, following provisions are also applicable:
1) For the lessee, lease payments also include guaranteed residual value (by lessee
or party related to lessee) and bargain purchase option will not be applicable.

2) For the lessor, lease payments also include guaranteed residual value (by lessee
rd
or party related to lessee) or any other 3 party unrelated to the lessor.
Finance lease A lease that transfers substantially all the risks and rewards incidental to ownership of

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 74 of 143

an underlying asset.
Operating lease A lease that does not transfer substantially all the risks and rewards incidental to
ownership of an underlying asset. (all leases except for finance lease)
Gross The sum of:
Investment in (a) The lease payments receivable by a lessor under a finance lease; and
lease (lessor) (b) Any unguaranteed residual value accruing to the lessor, if revert back.
Net investment The gross investment in the lease discounted at the interest rate implicit in the lease.
in lease (lessor)
Unearned The difference between:
finance income (a) The gross investment in the lease; and
(lessor) (b) The net investment in the lease.
This income is earned in future.
Interest rate The rate of interest that equates (IRR) the present value of
implicit in the a) Gross Investment in lease
lease b) Fair value plus IDC by lessor (initial direct cost)
- IDC of manufacturer and dealer lessor is immediately expensed.
- IDC of financial institution lessor becomes part of net investment lease.
Lessee’s The rate of interest that a lessee would have to pay to borrow over a similar term, and
incremental with a similar security, the funds necessary to obtain an asset of a similar value to the
borrowing rate right-of-use asset in a similar economic environment.
Residual value The guaranteed residual value (GRV ) is the residual value of a leased asset that is
Guarantee guaranteed by the lessee or by a financially capable third party not related to the
lessor and included in the minimum lease payments to be made by the lessee.
Unguaranteed Unguaranteed residual value of a leased asset is the amount by which the residual
residual value value of the asset exceeds its guaranteed residual value.

SEPARATING LEASE FROM NON-LEASE:

In case components are identifiable, the standard asks with respect to whom:
a) Lessee
With respect to lessee, s/he has two options:
• Practical expedient – option to treat total as lease.
• Separate on the basis of stand-alone selling prices.
b) Lessor
There is no option for lessor to treat total as lease component. The lessor must breakdown into lease
and non lease components on the basis of stand-alone selling prices.

EXERCISE # 02: SPLITTING LEASE AND NON-LEASE COMPONENTS

Pear enters into a contract for the use of an item of machinery and its annual maintenance for a
combined total of Rs.100,000 per annum, payable at the end of the lease period. The rental of the
machinery without any maintenance is Rs.95,000 per annum, whilst a stand-alone maintenance contract
is Rs.10,000 per annum.

Required:
Split the annual rental between the lease and non-lease components.
[Answer: Lease Component Rs.90,476/-, Non-lease component Rs.9,524/-]

EXERCISE # 03 PREPARATION OF LEASE AMORTIZATION SCHEDULE

Contract A: Contract B:
Lease term: 3 years Lease term: 5 years
Lease rental: 75,000 pa Lease Rentals: 30,000 pa
Discount Rate: 9% Discount Rate: 11%
Required:
Prepare lease amortization schedule under each of the following cases for both contracts:
a) Lease rentals are payable at the end of the year. (in arrear)
b) Lease rentals are payable at the start of the year. (in due / advance)
c) Seprate the portions of current non-current liabilities under each case above.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 75 of 143

ACCOUNTING BY LESSEE

EXEMPTIONS TO “RIGHT OF USE” ACCOUNTING:

a) Short term lease (12 months or less) with no purchase option available at the end.
b) Where underlying asset is of very low value (immaterial items). (Judgmental basis – no monetary
threshold provided by IFRS-16. However, examples were given i.e. desktops or laptops, mobile
phones or small furniture).

The accounting for low value or short-term leases is done through expensing the rental through profit or
loss on a straight-line basis.

Rent Expense Dr, Rent Payable Cr using total value divided by lease term.

EXERCISE # 04: EXEMPTIONS TO ROU – SHORT TERM

A Ltd acquired an equipment on 3 months lease. Monthly rentals are Rs.10,000, Rs.12,000 and
Rs.15,000 respectively.

Required:
Prepare journal entries for 3 months period.
[Answer: Rs.12,333/- per month expense]

EXERCISE # 05: EXEMPTIONS TO ROU – LOW VALUE

Banana leases out a machine to Mango under a four-year lease and Mango elects to apply the low-value
exemption. The terms of the lease are that the annual lease rentals are Rs.2,000 payable in arrears. As
an incentive, Banana grants Mango a rent-free period in the first year.

Required:
Explain how Mango would account for the lease in the financial statements.
[Answer:1,500 per year for 4 years in P&L]

ROU ACCOUNTING:

Initial Measurement
The lessee recognizes the following at the inception of the lease agreement for all leases:
1. Lease liability / obligation
2. Right-of-use asset.

RIGHT OF USE (ASSET) LEASE OBLIGATION (LIABILITY)

Lease liability + advance rental + initial direct costs Present value of unpaid future cash flows of lease
incurred by the lessee + provision of dismantling – payments, discounted at the rate implicit in the
incentives allowed by lessor lease.* This include present value of rentals plus
present value of BRO or GRV, whichever
applicable.
* In case, this rate is not available, the lessee would use incremental borrowing rate.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 76 of 143

EXERCISE # 06: BASIC ROU ACCOUNTING

Lessee enters into a 10-year lease of a floor of a building, with an option to extend for five years. Lease
payments are Rs.50,000 per year during the initial term and Rs.55,000 per year during the optional
period, all payable at the beginning of each year. To obtain the lease, Lessee incurs initial direct costs of
Rs.20,000, of which Rs.15,000 relates to a payment to a former tenant occupying that floor of the building
and Rs.5,000 relates to a commission paid to the real estate agent that arranged the lease. As an
incentive to Lessee for entering into the lease, Lessor agrees to reimburse to Lessee the real estate
commission of Rs.5,000 and Lessee’s leasehold improvements of Rs.7,000.

At the commencement date, Lessee concludes that it is not reasonably certain to exercise the option to
extend the lease and, therefore, determines that the lease term is 10 years.

The interest rate implicit in the lease is not readily determinable. Lessee’s incremental borrowing rate is 5
per cent per annum, which reflects the fixed rate at which Lessee could borrow an amount similar to the
value of the right-of-use asset, in the same currency, for a 10-year term, and with similar collateral.

Required:
Record the lease agreement at initial recognition.
[Answer: ROU Rs.420,391 = (Unpaid lease Obligation 355,391 (405,391 - PMT Rs.50,000) + IDC Rs.20,000 – Incentive Rs.5,000]

Subsequent Measurement:
RIGHT OF USE (ASSET) LEASE OBLIGATION (LIABILITY)
Right of Use is measured through IAS 16 Lease payments are apportioned into the (a)
subsequently, depending on the class of asset Finance cost and (b) repayment of lease obligation.
already held, ensuring same accounting policy. Normally, a lease amortization schedule is
Depreciation Charge Period: prepared. “Amortized cost” method.
a) If the lease transfers the title to the lessee at
the end of term and lessee is reasonably Opening Balance + Interest Charge – Lease
certain as well, the Right of Use is depreciated Payment Made = Closing Balance
over the useful life of the asset.
b) In case otherwise, the Right of Use asset is The interest is charged on the outstanding liability
depreciated over the shorter of the lease term at the end of year. The interest is charged to P&L.
and useful life.

At inception:
Right of Use Debit
Lease liability Credit
Cash Credit (for initial direct cost)
Provision Credit (for dismantling costs)
(To record lease contract)

During lease term:

Depreciation expense Debit
Right of Use/Acc. Dep Credit
(To record depreciation expense)

Finance Cost Debit

Lease liability Credit
(To record finance cost)

Lease liability Debit

Cash Credit
(To record payment of lease rental)

At the close:
There can be one of the following situations:
1) Revert Back

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 77 of 143

Lease liability Dr Right of Use Cr (Cr Bank if required)

2) Ownership Transfer
o PPE (Owned asset) Dr and ROU Cr (with carrying value)
o Lease obligation Dr and Bank Cr (with BPO Price).

Presentation in Financial Statements:

a) Statement of Financial Position:
 Right of use – net of depreciation.
 Lease obligation – Splitting lease obligation into current and non-current
b) Statement of Profit or Loss:
 Depreciation.
 Interest charge – front loaded expense recognition.

EXERCISE # 07: BASIC EXAMPLE – PRACTICE

Amir Ltd (the lessee) entered into a lease contract of a highly specialized electric generator. The annual
rentals have been decided to be Rs.18,000. The lease term is agreed at 3 years with 1 year extendable.
Amir Ltd is reasonable assured that the extension period is availed. Interest rate implicit in the lease is
currently not available to the company; however, Amir Ltd has contacted his bank and identified his
incremental borrowing rate at 12%. Amir Ltd also incurred initial direct cost of Rs.8,000.

Required:
a) Prepare journal entry at initial recognition of lease as per IFRS-16 under each case separately:
i. Rentals are payable in arrears i.e. at the end of each year.
ii. Rentals are payable in advance i.e. at the start of each year.
b) Prepare financial statements extracts for first year.
[Answer: DIY]

EXERCISE # 08 COMPREHENSIVE
On 1 January 2001, Dynamic entered into a two-year lease for a lorry. The contract contains an option to
extend the lease term for a further year. Dynamic believes that it is reasonably certain to exercise this
option. Lorries have a useful economic life of ten years. Lease payments are Rs.10,000 per year for the
initial term and Rs.15,000 per year for the option period. All payments are due at the end of the year. To
obtain the lease, Dynamic incurs initial direct costs of Rs.3,000. The interest rate within the lease is not
readily determinable. Dynamic’s incremental rate of borrowing is 5%.

Required:
1. Calculate the initial carrying amount of the lease liability and the right-of-use asset and provide the
double entries needed to record these amounts in Dynamic's financial records.
2. Prepare extracts from Dynamic's financial statements in respect of the lease agreement for the year
ended 31 December 2001.
[Answer: Right of use Rs.34,552, lease liability Rs.31,552, annual depreciation Rs.11,517, finance cost Rs.1,578]

Lease Modification:
The important consideration in that whether there is a separate lease or otherwise.
In case there is not a separate lease, lease scope is change – altering right of use and lease obligations
accordingly. Any difference is charged into profit or loss.

EXERCISE # 09 LEASE MODIFICATION

Sonex Ltd has entered into a lease contract that requires payment of Rs.150,000 per year in advance for
5 years. At the start of year 2, lease rentals are increased by 3%. Implicit rate of interest in lease is 5%.

Required:
1. Calculate the increase in lease obligation that would be required to be made on revision.
2. Prepare journal entry to record the revision.
[Answer:Increase in ROU & lease obligation Rs.16,755/-]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 78 of 143

SALE & LEASE BACK

Under sale and lease back arrangement, the original owner of the asset transfers the asset to another
party and simultaneously leases back – retaining the “right of use” in the same manner as before. In this
special arrangement, the seller becomes the lessee and the buyer becomes the lessor.

The key issue is that whether the transfer of the asset to other party constitutes sale in accordance with
IFRS – 15. Following are some indications of transfer of control:

1. Seller has payment right to payment for that asset.

2. Buyer has the legal title to the asset.
3. Seller has transferred the physical possession of the asset.
4. Buyer has significant risks and rewards of ownership of the asset.
5. The buyer has accepted the asset.

Arrangement qualifies
Sale and Leaseback as
conditions for sale as per Yes
per IFRS 16
IFRS-15

No

Financing Arrangement as
per IFRS 09

IF TRANSFER IS NOT A SALE IF TRANSFER IS A SALE

Seller • Continue to recognise the asset • De-recognise the asset
• Recognise a financial liability (= • Recognise the sale at fair value
proceeds) • Recognise lease liability (PV of lease rentals)
• Recognise a right-of-use asset, as a proportion
This is in substance “secured financing” of the previous carrying value of underlying
arrangement, as per IFRS 09. Bank Dr asset i.e. right retained*.
and Loan Cr. • Gain/loss on rights transferred to the buyer**.
Buyer • Does not recognise the asset. • Recognise purchase of the asset
• Recognise a financial asset (= • Apply lessor accounting
proceeds)
+, % -+
∗ & )ℎ %* = × 0 ),
. , %/
∗∗ 1 2 ) 3 = 41 − )ℎ 5× 1

If transfer is sale, the gain is calculated by the difference with carrying value and fair value (not actual
sales proceeds). Moreover, the seller cannot books its total gain or loss, since he is getting back or
retaining part of the right of use.

Accounting:
Cash Debit (with the amount of sales proceeds i.e. fair value)
Right of use Debit (Calculated with above formula)
Asset Credit (Carrying value)
Lease Liability Credit (Present value of lease payments)
Gain Credit (This could be calculated or β)

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 79 of 143

EXERCISE # 10 SALE AND LEASE BACK

Fareed Ltd has an item of PP&E in the books with carrying value of Rs.7.2m with remaining useful life of
12 years. The asset has been sold to a financial institution on its current fair value of Rs.10m. The asset
is simultaneously leased back in return of 3 annual payments of 2.3m payable in arrears. This transaction
is qualified as sale under IFRS – 15. Applicable discount rate is 10%.

Required:
a) Calculate the value of right retained by the lessee i.e. the seller and gain / loss to be recognized.
b) Record the transactions into book of accounts.
[Answer: Right of use Rs.4,118,227, gain Rs.1,198,467]

EXERCISE # 11 SALE AND LEASE BACK

Carrying Value just before the sale Rs.1,200,000 with remaining useful life of 8 years, Fair Value and
sales proceeds Rs.3,000,000, Interest Rate10%, Lease Term (years) 5, Annual Rentals in arrears
Rs.500,000. Transfer is treated as sales as per IFRS – 15.

Required:
a) Calculate the value of right retained by the lessee i.e. the seller and gain / loss to be recognized.
b) Record the transactions into book of accounts.
[Answer:Right of use Rs.758,157, gain Rs.662,764]

ACCOUNTING BY LESSOR
The first step is to classify lessor into the following:

a) Manufacturer / dealer:
Owned asset is leased.

b) Financial institution:
Make payment to supplier of asset on behalf of lessee.

The next issue if to classify lease into operating and finance lease:

a) Finance Lease: Significant risks and rewards transferred to lessee.

b) Operating Lease: Other than Finance Lease.

CONDITIONS FOR FINANCE LEASE: (ANY)

1) Ownership is transferred to lessee at end of the lease term
2) Option to purchase asset (BPO) and reasonably certain option will be exercised. (BPO is very
lucrative or lessee cannot operate without the asset)
3) Lease term represents the major part of assets economic life. (Usually >75% in practice US GAAP).
4) PV of minimum lease payments represents substantially all of the asset’s fair value (usually 90% or
more in practice US GAAP)
5) Leased asset is specialized / customized in nature. (there is no user of asset except lessee).

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 80 of 143

ACCOUNITNG OPERATING LEASE:

Under operating lease, lessor accounts for asset as per either IAS 16 or IAS 40. Income receipts
(including adjustable advances) are recognised as income through profit or loss on a straight-line basis.
Refundable advance is treated as financial liability and dealt as per IFRS-09.

IDC (initial direct cost) incurred by lessor with respect to operating lease becomes part of cost of asset
and depreciated as separate component over the lease term.

EXERCISE # 12: OPERATING LEASE

Oroc hires out industrial plant on long-term operating leases. On1 January 20X1, it entered into a seven-
year lease on a mobile crane. The terms of the lease are Rs.175,000 payable on 1 January 20X1,
followed by six rentals of Rs.70,000 payable on 1 January 20X2 – [Link] crane will be returned to
Oroc on 31 December 20X7. The crane originally cost Rs.880,000 and has a 25-year useful life with no
residual value.

Required:
Discuss the accounting treatment of the above in the year ended31 December 20X1.
[Answer:Rs.85,000 rental income per year is recognized]

EXERCISE # 13: OL – RENTAL DUE ACCOUNT

Akif Ltd has provided an asset for 3 years period. The lease is classified as operating lease as per IFRS
16. Annual rentals are Rs.100,000, 150,000 and 200,000 respectively for three years.

Required:
Prepare rental due account for entire contact period.
[Answer: Rentals income Rs.150,000 pa]

FINANCE LEASE:
This is a long-term leasing arrangement. For example, bank leases a plane to an airline for 40 years. The
control of the asset passes to the lessee during the term of the lease. Therefore, this is a form of lending
arrangement.

Establishing implicit rate in the lease:

It is the IRR of the following cash flows:
a) MLPs and unguaranteed residual values (inflows for lessor)
b) Fair value and initial direct costs (outflows for lessor)

Initial Accounting:
This depends on type of lessor:
Manufacturer / dealer lessor Financial institution lessor
Derecognize asset (recording sale and cost of sale) The concept of interest rate implicit in the lease
and record a lease receivable (@ net investment in relates to financial institution lessor. IDC paid by
the lease), resulting gain / loss. Lessor will lessor becomes part of lease receivable.
compare his rate of interest with market rate and
use the higher one for determining NIL. Entries:
Lease receivable Dr and Bank Cr at NIL i.e. Fair
Entries: Value plus IDC.
1. Lease receivable Dr and Sales Cr @ NIL.
2. Cost of sales Dr and Inventory Cr.
3. Any IDC paid by lessor is treated as expense.

Subsequent Accounting:
a) Record finance lease receipts as a reduction in the receivable.
b) Record interest income on the receivable.

Opening Balance + Interest Income – Lease Rentals Collected = Closing Balance

NOTE: Lease receivable is to be allocated between current and non-current into SFP.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 81 of 143

Subsequent measurement entries:

Debit Bank
Credit Lease Receivable (with the number of periodic rentals)

Debit Lease receivable

Credit Finance income (P/L)

Note: UGRV estimate for lessor is re-assessed at each reporting date. Any change is adjusted in LR and
P&L accordingly.

End of lease term:

a) BPO:
Bank Dr and Lease Receivable Cr

b) Asset Revert Back:

Asset Dr with (GRV + UGRV) and LR Cr (in case more guarantee, payment is received)

EXERCISE # 14: BASIC EXAMPLE

Cherry leases out an item of property, plant and equipment under a 5-year finance lease. The lease
commenced on 1 January 2015 and the rate implicit in the lease is 4%. The annual lease rentals of 5,000
are paid at the start of the lease period. Cherry estimates that the unguaranteed residual value of the
PPE is Rs.400. The asset has a carrying value of 24,000.

Required:
1. Calculate Cherry’s net investment in the lease. [Answer: NIL Rs.23,478]
2. Record the lease transaction at initial recognition. [Answer: Loss on disposal Rs.522]
3. Prepare lease amortization schedule.

IAS 12 – INCOME TAXES

Objective: The objective of this Standard is to prescribe the accounting treatment for income taxes.
The principal issue in accounting for income taxes is how to account for the current and
future tax consequences of:
(a) the future recovery (settlement) of the carrying amount of assets(liabilities) that are
recognised in an entity’s statement of financial position; and
(b) (b) transactions and other events of the current period that are recognised in an
entity’s financial statements.

It is inherent in the recognition of an asset or liability that the reporting entity expects to
recover or settle the carrying amount of that asset or liability. If it is probable that recovery
or settlement of that carrying amount will make future tax payments larger (smaller) than
they would be if such recovery or settlement were to have no tax consequences, this
Standard requires an entity to recognise a deferred tax liability (deferred tax asset), with
certain limited exceptions.

This Standard requires an entity to account for the tax consequences of transactions and
other events in the same way that it accounts for the transactions and other events
themselves. Thus, for transactions and other events recognised in profit or loss, any
related tax effects are also recognised in profit or loss. For transactions and other events
recognised outside profit or loss (either in other comprehensive income or directly in
equity), any related tax effects are also recognised outside profit or loss (either in other
comprehensive income or directly in equity, respectively). Similarly, the recognition of
deferred tax assets and liabilities in a business combination affects the amount of goodwill
arising in that business combination or the amount of the bargain purchase gain
recognised. [IFRS 03]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 82 of 143

This Standard also deals with the recognition of deferred tax assets arising from unused
tax losses or unused tax credits, the presentation of income taxes in the financial
statements and the disclosure of information relating to income taxes.

Scope: This Standard shall be applied in accounting for income taxes.

Definitions:  Accounting profit is profit or loss for a period before deducting tax expense.

 Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance
with the rules established by the taxation authorities, upon which income taxes are
payable (recoverable).

 Tax expense (tax income) is the aggregate amount included in the determination of
profit or loss for the period in respect of current tax and deferred tax.

 Current tax is the amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.

 Deferred tax liabilities are the amounts of income taxes payable in future periods in
respect of taxable temporary differences.

 Deferred tax assets are the amounts of income taxes recoverable in future periods in
respect of:
(a) deductible temporary differences;
(b) the carry-forward of unused tax losses; and
(c) the carry-forward of unused tax credits.

 Temporary differences are differences between the carrying amount of an asset or

liability in the statement of financial position and its tax base. Temporary differences
may be either:
(a) taxable temporary differences, which are temporary differences that will result in
taxable amounts in determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled; or
(b) deductible temporary differences, which are temporary differences that will result
in amounts that are deductible in determining taxable profit (tax loss) of future
periods when the carrying amount of the asset or liability is recovered or settled.

 The tax base of an asset or liability is the amount attributed to that asset or liability for
tax purposes.

Components of Total Income Tax Expense:

As per IAS 12, there are two components of income tax expense: (a) current and (b) deferred tax.

a) Current tax (Past / present)(the amount of tax payable/recoverable in respect of the taxable
profit/loss for a period). It has further two components:
i. Current tax, current year
ii. Current tax, prior years i.e. under / under provision related to prior period.

b) Deferred tax (Future)(an accounting adjustment aimed to match the tax effects of transactions to the
relevant accounting period).

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 83 of 143

EXERCISE # 01: ACCOUNTING PROFIT TO TAXABLE PROFIT

Nior Ltd is engaged in production and sale of plastic bottles of various types. The company has installed
seceral production and power machineries in its facility located near Sahiwaal. The company reported
profit before tax of Rs.550,000 for the year ended December 31, 2020. The company has to calculate and
recognize current tax payable as per tax rules currently application. In this context, following information
has been gathered:
a) The company charged accounting depreciation of Rs.45,000; but the related tax depreciation
allowable in the current year is Rs.33,000.
b) The company increased the provision of bad debts by Rs.2,700 in the current year and written off
accounts for customers of Rs.3,600. As per tax rules, actual write off of accounts is permissible
deduction for taxation purpose.
c) The company paid a penalty to food authority of Rs.1,750 for violating hygiene standards. The
accountant booked the amount as expense in the current year.
d) The company took advanced payments from distributors of Rs.10,400. As per tax rules, tax is
chargeable on collection. The company was unable to ship any products to distributors against the
sum received till the year end.
e) The company has made various investments in short term securities from which dividend of Rs.500 is
due but not received. The accountant booked the accrual; however, as per the tax rules tax is
chargeable on collections only.
f) On 31 December 2020, the company paid advance rent of Rs.3,300 (1,100 per month) to the factory
premises’ landlord. This prepayment was duly recognized in the books. Tax rules state that tax
deduction would be allowed on payment basis.
g) The applicable tax rate is 30%.
h) There is a credit balance in the provision for taxation accounts with respect to last year assessment of
Rs.350.
Required:
1. Compute the taxable profits and current tax. [Answer: Taxable profits Rs.569,450, CT Rs.170,835]
2. Record the current tax provision as on 31 December 2020. [Answer: Provision required 170,485]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 84 of 143

EXERCISE # 02: ACCOUNTING PROFIT VS. TAXABLE PROFITS (ICMAP FALL 2019 Q # 6)

[Answer: Taxable profits: 61,600,000]

EXERCISE # 03: CURRENT TAX

Provision for income tax for the year ended Dec 31, 2019 is Rs.120,000. Taxable income for the year
ended Dec 31, 2020 is Rs.450,000 with applicable tax rate is 30%.

Required:
a) Prepare the journal entry to record tax expense on Dec 31, 2019.
b) Prepare the journal entry to record tax expense on Dec 31, 2020 under each case separately:
a. Actual payment for year 2019 is Rs.120,000.
b. Actual payment for year 2019 is Rs.135,000.
c. Actual payment for year 2019 is Rs.115,000.

EXERCISE # 04: CURRENT TAX (ICMAP FALL 2018 Q#4 D)

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 85 of 143

TAX BASE:
a) Tax Base of an Asset:
The economic benefits of assets will be realized in terms of usage, sale or conversion into cash. IAS-
12 assumes that the carrying value of assets represents the future economic benefits. Distinction to
be made in assets:
 Future economic benefits are taxable e.g. non-current assets, inventory etc. tax-base equals to
the deduction available against the economic benefits. Normally, cost is allowed as deduction.
 Future economic benefits are non-taxable e.g. accounts receivable, tax base equals carrying
value.

EXAMPLES:
1. A machine cost Rs.100. For tax purposes, depreciation of Rs.30 has already been deducted in
the current and prior periods and the remaining cost will be deductible in future periods, either as
depreciation or through a deduction on disposal. Revenue generated by using the machine is
taxable, any gain on disposal of the machine will be taxable and any loss on disposal will be
deductible for tax purposes. [The tax base of the machine is Rs,70 because this amount is available as deduction
against future benefits of either sale proceeds or revenue]
2. A machine cost Rs. 1,000. The tax depreciation of Rs. 500 has already been used for
determination of tax but accounting depreciation of Rs.300 has been charged on the asset. [The
tax base of the machine is Rs,500]
3. Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a
cash basis. [The tax base of the interest receivable is nil because nothing will be allowed as deduction from entire
amount]
4. Trade receivables have a carrying amount of 100. The related revenue has already been included
in taxable profit (tax loss). [The tax base of the trade receivables is 100 because future benefits are non-taxable]
5. A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax
consequences. [The tax base of the loan is 100.]
6. Dividends receivable from a subsidiary have a carrying amount of [Link] dividends are not
taxable. In substance, the entire carrying amount of the asset is deductible against the economic
benefits. [The tax base of the dividend receivable is 100]

b) Tax Base of a Liability:

The distinction is to be made:
 Impure liability like advance income
o Taxed on accrual basis: tax base equals carrying value
o Taxed on cash basis: tax base = carrying value less amount not-taxable.
 Pure liability like all others.
o Payment of which will be allowed as expense: Tax base equals carrying value less
deduction available. (it means the part of carrying value which is not available)
o Payment of which will NOT be allowed as expense: Tax base equals carrying value.

EXAMPLES:
1. Current liabilities include accrued expenses with a carrying amount of 100. The related expense
will be deducted for tax purposes on a cash basis. [The tax base of the accrued expenses is nil.]
2. Current liabilities include interest revenue received in advance, with a carrying amount of 100.
The related interest revenue was taxed on a cash basis. [The tax base of the interest received is nil.]
3. Current liabilities include accrued expenses with a carrying amount of 100. The related expense
has already been deducted for tax purposes. [The tax base of the accrued expenses is 100.]
4. Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and
penalties are not deductible for tax purposes. [The tax base of the accrued fines and penalties is 100.]
5. A loan payable has a carrying amount of 100. The repayment of the loan will have no tax
consequences. [The tax base of the loan is 100.]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 86 of 143

For Assets For Assets

Carrying Amount > Tax Base Carrying Amount < Tax Base

For Liability For Liability

Carrying Amount < Tax Base Carrying Amount > Tax Base

EXERCISE # 05A: CURRENT AND DEFERRED TAX – ACCRUED REVENUE TAXED ON CASH
AD Ltd is incorporated on Jan 01, 2019. The company has profit before tax for 2019 and 2020 is
Rs.5,000. Interest revenue of Rs.800 recognized on accrual basis in 2019 will be taxable on cash basis
on 2020. Applicable corporate tax rate is 30%.

Required:
Prepare profit or loss extract showing current and deferred tax, including necessary journal entries.

EXERCISE # 05B: CURRENT AND DEFERRED TAX – ACCRUED EXPENSE TAXED ON CASH
Faran Ltd was incorporated in year on Jan 01, 2018. The company has profit before tax for 2018 and
2019 is Rs.8,000. An accrued expense of Rs.1,400 was recorded in 2018 and paid in 2019. Tax
authorities allow deduction of expenses on cash basis. Applicable corporate tax rate is 30%.

Required:
Prepare profit or loss extract showing current and deferred tax, including necessary journal entries.

EXERCISE # 05C: CURRENT AND DEFERRED TAX – ADVANCE INCOME TAX ON CASH
Qasim Ltd was incorporated in year on Jan 01, 2018. The company has profit before tax for 2018 and
2019 is Rs.9,000. An advance income of Rs.2,000 recognized in 2018 is taxed on receipt basis.

Required:
Prepare profit or loss extract showing current and deferred tax, including necessary journal entries.

EXERCISE # 05D: CURRENT AND DEFERRED TAX – PREPAYMENT TAX ON CASH

Usman Ltd was incorporated in year on Jan 01, 2018. The company has profit before tax for 2018 and
2019 is Rs.12,000. A prepayment of Rs.3,500 made in 2018 has been allowed as tax deduction in 2018.
Required:
Prepare profit or loss extract showing current and deferred tax, including necessary journal entries.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 87 of 143

EXERCISE # 05E: CURRENT AND DEFERRED TAX – BASIC RELATIONS COMPREHENSIVE

Arif Ltd was incorporated in Jan 01, 2019. The company reported profit before tax Rs.35,000 for both
years. Applicable tax rate is 30%. The following items are relevant for taxation matters:
a) Income received in advance of Rs.4,000 in 2019 was taxed in 2019. The income was realized in year
2020.
b) Dividend receivable was recorded in 2019 of Rs.1,500. The related income will be taxed on cash
basis in 2020.
c) The company booked warranty provision of Rs.3,000 in 2019; the related claims was awarded to
customers in 2020. Actual claims are allowable.
d) The company paid advance rent of Rs.7,000 for the year 2020 on last day of 2019. The related rent
expense has been allowed as tax deduction on cash basis.

Required:
Prepare profit or loss extract showing current and deferred tax.

EXERCISE # 05F: DEFERRED TAX CONCEPT (BASIC)

On Jan 01, 2001, A Ltd acquired an equipment costing Rs.15,000 having useful life of 3 years with nil
residual value. Tax depreciation allowances for all three years is 50%, 30% and 20% respectively. Profit
before income tax for all three years is Rs.60,000. Applicable tax rate is 30%. Company has 4,000
outstanding ordinary shares in issue.
Required:
Compute EPS with and without incorporating deferred tax.
[Answer: DIY]

EXERCISE # 06: DEFRRED TAX COMPREHENSIVE PROBLEM *

Becky purchased a boat on 1 January 2012 for Rs.4 million. It was estimated that the boat had a useful
economic life of 5 years but according to the tax authority had a 50% tax allowance in its first year and
20% reducing balance thereafter. Becky made an accounting profit of Rs.3m for the year. This is
expected to continue for the coming years as well. Income tax rate 30%

Required:
Prepare income statement of all five years showing related current and deferred taxes.
[Answer: Net income 900,000, Movement in DT: 1st +360,000, 2nd -120,000, 3rd -144,000, 4th -163,200k, 5th +67,200 ]

EXERCISE # 07: DEFRRED TAX COMPREHENSIVE PROBLEM *

Horse purchased an item of plant for Rs.5,000,000 on 1 October 2011. It had an estimated life of eight
years and an estimated residual value of Rs.800,000. The plant is depreciated on a straight-line basis.
The tax authorities do not allow depreciation as a deductible expense. Instead a tax allowance of 40% of
the cost of this type of asset can be claimed against income tax in the year of purchase and 20% per
annum (on a reducing balance basis) of its tax base thereafter. The rate of income tax can be taken as
30% and the current tax estimate for the year 2014 is Rs.2m. The deferred tax provision at the end of
2012 was Rs.443,000.
Required:
In respect of the above item of plant, calculate the deferred tax charge/credit in Horse’s Statement of
Profit or Loss for the year to 30 September 2014 and the deferred tax balance in the Statement of
Financial Position at 30 September 2013 and 2014.
[Answer: ITE f/y/e 30 Sep 2014 Rs.1,986,500, DTL 2013 Rs.465,000 and 2014 Rs.451,500]

EXERCISE # 08 DEFERRED TAX

At the year-end ABC Co. has non-current assets that have a carrying amount ofRs.2,000,000 but a tax
base of Rs.1,400,[Link] is currently a deferred tax liability carried forward of Rs.250,000 and the tax
rate is30%.Current tax for the year has been estimated as Rs.500,000.
Required:
Show the treatment for deferred tax in the period and the effect this has on the financial statements.
[Answer: Total tax expense for the year is Rs.430,000 = 500,000 – 70,000]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 88 of 143

EXERCISE # 09 MOVEMENT IN DEFERRED TAX

Osborne buys an asset for Rs.150,000 at the start of the financial year. The asset has an estimated life of
6 years and an estimated residual value of Rs.30,000. Capital allowances are available at a rate of 25%
reducing balance and the tax rate is 20%.
Required:
Calculate the deferred tax asset/liability to appear in the statement of financial position for the next three
years and the debit/credit charged to the tax expense in the statement of profit or loss for the same
period.
[Answer: Movement in DTL in year 1, 2, and 3 are 3,500, 1,625 and 219]

EXERCISE # 10: ICMAP SUMMER 2019 (Q6 A)

EXERCISE # 11: INCOME TAX EXPENSE (CT & DT)

ATLAS’ deferred tax credit balance b/d from last year stands at Rs.6.2m. It estimates that an income tax
provision of Rs.27.2m is required for the current year ended 31.3.2013 and that the liability to deferred tax
is Rs.9.4m. The movement on deferred tax should be taken to profit or loss. The balance on current tax in
the trial balance (Rs.1.2m credit) represents the under/over provision of the tax liability for the year ended
31.3.2012.
Required:
How much should be charged to the Statement of Profit or Loss in respect of tax for the current year, and
how should these items be presented in the Statement of Financial Position?
[Answer: Tax expense Rs.29.2m]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 89 of 143

EXERCISE # 12: CV & TB (ICMAP WINTER 2019 Q#2 A)

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 90 of 143

IMPORTANT EXPLANATION ON RATIONALE OF DEFERRED TAX:

There are tax rules which allow companies to defer the payment of tax on the full accounting profit. One
of the main reasons for deferral is the availability of capital allowances in tax computations which are
different from the related depreciation charge in financial statements. The result is differences between
profits as computed for tax purposes, and profits as stated in financial statements, known as ‘temporary’
or ‘timing’ differences. The deferral period may be for several years, but the obligation to pay tax
eventually cannot be escaped. This long-term liability cannot be ignored, but must be brought into the
accounts in the year the liability arises.

In the case of Non-current Assets, deferred tax usually arises as a result of the company receiving capital
allowances which depreciate the asset at a faster rate for tax purposes than the rate of depreciation
charged in the financial statements.

An explanation of the origins of why deferred tax is provided for lies in understanding that accounting
profit (as reported in a company’s financial statements) differs from the profit figure used by the tax
authorities to calculate a company’s income tax liability for a given period. If deferred tax were ignored
then a company’s tax charge for a particular period may bear very little resemblance to the reported profit.
For example if a company makes a large profit in a particular period, but, perhaps because of high levels
of capital expenditure, it is entitled to claim large tax allowances for that period, this would reduce the
amount of tax it had to pay. The result of this would be that the company reported a large profit, but very
little, if any, tax charge. This situation is usually ‘reversed’ in subsequent periods such that tax charges
appear to be much higher than the reported profit would suggest that they should be.

Many commentators feel that such a reporting system is misleading in that the profit after tax, which is
used for calculating the company’s earnings per share, may bear very little resemblance to the pre-tax
profit. This can mean that a government’s fiscal policy may distort a company’s profit after tax trends.
Providing for deferred tax goes some way towards relieving this anomaly, but it can never be entirely
corrected due to items that may be included in the income statement, but will never be allowed for tax
purposes (referred to as permanent differences in some jurisdictions). Where tax depreciation is different
from the related accounting depreciation charges this leads to the tax base of an asset being different to
its carrying value on the Statement of Financial Position (these differences are called temporary
differences) and a provision for deferred tax is made. This ‘Statement of Financial Position liability’
approach is the general principle on which IAS 12 bases the calculation of deferred tax. The effect of this
is that it usually brings the total tax charge (i.e. the provision for the current year’s income tax plus the
deferred tax) in proportion to the profit reported to shareholders.
Reference: LSBF ACCA F7 Handouts

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 91 of 143

IFRS 05 – NON-CURRENT ASSETS HFS AND DISCONTINUED

OPERATIONS
Objective:
To set out the requirements for classification, measurement and presentation of non-current assets held
for sale and identification and presentation of discontinued operations.

Important Terms:
 Non-Current Assets: All assets that are not current are non-current assets.
An asset is “current” when any of the following four conditions are met:
1. Expected to be realized, consumed or sold in normal operating cycle.
2. Held primarily for the purpose of trading.
3. Expected to be realized within 12 months of the reporting date.
4. Cash & cash equivalent. (Physical cash + Checking Accounts + Highly liquid Marketable Securities
with very short-term maturity + money market funds)

 Disposal Group: It is a group of assets and liabilities disposed-off in a single transaction. E.g.
subsidiary.

NON-CURRENT ASSETS HELD FOR SALE:

An NCA or Disposal group will be called as “Held for sale” when its carrying amount is recovered
principally through sale transaction, rather than through continuing use. Two conditions must be fulfilled in
order to classify as asset as held for sale:

1. Available for immediate sale in present condition.

2. Sale is highly probable which is evident by ALL of the following:
a. Management is committed to sell. (with required shareholders’ approval)
b. Active plan to identify / locate the buyer has been initiated.
c. Asset is priced in active market to a reasonable fair value.
d. Sale is to be made within one year from the date of classification. (extended for factors beyond
entity’s control with sufficient evidence of management commitment)
e. Highly unlikely that the plan will be withdrawn or significantly changed.

EXERCISE # 01: HELD FOR SALE CLASSIFICATION

A company intends to sell its headquarter building and has initiated actions to locate the buyer. Assume
the following possible scenarios:
a) The company intends to vacate the building once the buyer is identified. The time necessary to
vacate the building is usual and customary for sale of such assets.
b) The company intends to use the building until construction of a new headquarter is finished.

Required:
Identify whether the headquarter building could be classified as HFS as per IFRS 05.
[Answer: a) Yes, b) No]

EXERCISE # 02: HELD FOR SALE CLASSIFICATION

Archie Co. committed itself at the beginning of the financial year to selling a property that is being under-
utilized following the economic downturn. As a result of the economic downturn, the property was not sold
by the end of the year. The asset was actively marketed but there were no reasonable offers to purchase
the asset. Archie is hoping that the economic downturn will change in the future and therefore has not
reduced the price of the asset.

Required:
Can Archie Co. classify the property as available for sale under IFRS 5?
[Answer: “No” because due to downturn, price offered is not reasonable.]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 92 of 143

Measurement:
A non-current asset or disposal group classified as held for sale should be measured at lower of:
a) Carrying amount.
b) Fair value less cost to sell.
It implies that immediately before the classification of as “held for sale” carrying amount must be updated
as per applicable standard – usual accounting policies are applied up until the HFS criteria are met. Once
a non-current asset is classified as held for sale, it will no longer be depreciated or amortized. (cost to
sell excludes finance and taxation costs)

If CV is higher than FVLCTS, the write down in the value is required in P&L.

Presentation:
Assets classified as HFS should be presented separately in SFP in current sections. (Assets / Liabilities)

CHANGE IN PLAN: (Held of use again)

In case the asset is to be re-classified again as held for use, the carrying value on the date as per IFRS
05 would not survive. In this situation, the asset would be recognized at the LOWER of the following:
a) Recoverable amount i.e. higher of VIU and VIS (same as per IAS 36)
b) Carrying value would have been if the asset had not been classified as HFS.
This would be treated as “change in accounting estimate”.

EXERCISE # 03 – HFS MEASUREMENT

On Jan 01, 2015, Jack Ltd acquired a machine costing Rs.10m with a useful life of 10 years having nil
residual value. On 30 Jun 2017, the company decided to sell the machine. The machine is short in supply
therefore, the management is confident that it would be sold quickly. Its current market price is observed
in the market to be Rs.9m. In addition, it would cost Rs.200,000 to dismantle the machine and make it
available to transport to buyer.

Required:
a) Assuming that the machine meets all criteria to be classified as held for sale, calculate the amount at
which the machine would be measured upon classification as held for sale.
b) Assuming the fair value is Rs.7m instead of Rs.9m, what would be treatment?
[Answer: a)The machine is classified as HFS in SFP @ Rs.7.5m, b) Loss of Rs.0.7m is charged into P&L and HFS is @ Rs.6.8m]

EXERCISE # 04 – HFS MEASUREMENT

On 1 January 2012 Casino bought an item of plant for Rs.200,000. It has an expected useful life of 10
years but will realize nothing on final disposal. On 31 December 2014, after three years of using the
asset, it was decided to sell the plant.
A plan was put in place and instructions given to locate a buyer. The plant is in great demand so Casino
is confident that the machine will be sold promptly. Its current market value is Rs.130,000. As the item of
plant is of a considerable size dismantling costs to make it available for sale will be incurred of Rs.1,000.
Required:
Show how the asset should be presented in the Statement of Financial Position as at 31 December 2014.
[Answer: Current Assets: Assets Held for Sale Rs.129,000]

DISCONTINUED OPERATIONS:
Both existing and potential investors are concerned not only about the current performance of the entity
but they should also be in a position to predict future performance – which is entirely based on continuing
operations. Therefore, separate disclosure of the results from discontinued operations enhances
predictive value of financial information - fulfilling overall objective of Financial Reporting.

Component of an Entity:
Operations and cash flows clearly distinguishable from the rest of the entity with regard to operations and
financial reporting – the group of activity that can be separated from the entity with regard to (a)
independent operations like subsidiary (CGU) and (b) separable financial reporting.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 93 of 143

Discontinued operations:
It a component of an entity that has (during the year) either (a) has been disposed or (b) classified as held
for sale. It must meet any of the following conditions:
a) Represent separate major line of business / geographical area of operations.
b) Part of single coordinated plan to dispose-off separate major line of business / geographical area of
operations.
c) Subsidiary acquired exclusively for resale.

DISCLOSURE: (Separate disclosure enhances predictive value of financial information)

IFRS 05 requires separate disclosure of post-tax profit or loss from discontinued operations including P/L
recognized while measuring disposal group to FVLCTS. Specific disclosures in notes include the
following:
a) Revenues, expenses and pre-tax profit / loss from discontinued operations.
b) Gain or loss recognized on measurement to fair value less cost to sell of disposal group constituting
discontinued operations.
c) Income tax expenses of each component.

EXERCISE # 05 – DISCONTINUED OPERATIONS

Identify the discontinued operations under each of the following:
a) Management is considering to sell loss-making division next year.
b) The company’s branch in Lahore was sold during the year due to the decision to close its operations
from Lahore’s market.
c) Company holds redundant equipment which is offered at a reasonable price and management
expects to complete sale shortly.
[Answer:“b”]

EXERCISE # 06 – DISCONTINUED OPERATIONS

Angola’s car manufacturing operation has been making substantial losses. Following a meeting of the
board of directors, it was decided to close down the car manufacturing operation on 31 March 2016. The
company’s reporting date is 31 December and the car manufacturing operation is treated as a separate
operating segment.
Required:
Explain how the decision to close the car manufacturing operation should be treated in Angola’s financial
statements for the years ending 31 December 2015 and 2016.
[Answer: 2015: SOLD? = NO, HFS = NO Therefore, not disclosed as DO,
2016: SOLD? = NO, HFS = YES Therefore, disclosed as DO]

EXERCISE # 07: – DISCONTINUED OPERATIONS (PRESENTATION)

Umair Ltd produced cards and sold roses. However, half way through the year ended 31 March 2019, the
rose business was closed and the assets sold off, incurring losses on the disposal of non-current assets
of Rs.76,000 and redundancy costs of Rs.37,000. The directors re-organized the continuing business at a
cost of Rs.98,000.

Cards Roses
Revenues 650,000 320,000
Cost of Sales 320,000 150,000
Selling Expenses 60,000 90,000
Administrative Expenses 120,000 110,000
Finance Cost 17,000 -
Income Taxes 31,000 -

Required:
Draft the statement of profit or loss for the year ended 31 March 2019.
[Answer: Profit from continued Rs.4,000, loss from discontinued Rs.143,000, net loss Rs.139,000]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 94 of 143

IAS 08 – ACCOUNTING POLICIES, CHANGE IN ACCOUNTING

ESTIMATES & ERRORS
Objective: The objective of this Standard is to prescribe the criteria for selecting and changing
accounting policies, together with the accounting treatment and disclosure of changes in
accounting policies, changes in accounting estimates and corrections of errors. The
Standard is intended to enhance the relevance and reliability of an entity’s financial
statements, and the comparability of those financial statements over time and with the
financial statements of other entities.

Scope: This Standard shall be applied in selecting and applying accounting policies, and
accounting for changes in accounting policies, changes in accounting estimates and
corrections of prior period errors.

Definitions:  Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.

 A change in accounting estimate is an adjustment of the carrying amount of an

asset or a liability, or the amount of the periodic consumption of an asset, that results
from the assessment of the present status of, and expected future benefits and
obligations associated with, assets and liabilities. Changes in accounting estimates
result from new information or new developments and, accordingly, are not
corrections of errors.

 Material Omissions or misstatements of items are material if they could,

individually or collectively, influence the economic decisions that users make on the
basis of the financial statements. Materiality depends on the size and nature of the
omission or misstatement judged in the surrounding circumstances. The size or
nature of the item, or a combination of both, could be the determining factor.

 Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of,
reliable information that:
(a) was available when financial statements for those periods were authorised for
issue; and
(b) could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.

 Retrospective application is applying a new accounting policy to transactions, other

events and conditions as if that policy had always been applied.

 Retrospective restatement is correcting the recognition, measurement and

disclosure of amounts of elements of financial statements as if a prior period error had
never occurred.

 Impracticable Applying a requirement is impracticable when the entity cannot apply it

after making every reasonable effort to do so. For a particular prior period, it is
impracticable to apply a change in an accounting policy retrospectively or to make a
retrospective restatement to correct an error if:
(a) the effects of the retrospective application or retrospective restatement are not
determinable;
(b) the retrospective application or retrospective restatement requires assumptions
about what management’s intent would have been in that period; or

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 95 of 143

(c) the retrospective application or retrospective restatement requires significant

estimates of amounts and it is impossible to distinguish objectively information
about those estimates that:
i. provides evidence of circumstances that existed on the date(s) as at
which those amounts are to be recognised, measured or disclosed; and
ii. would have been available when the financial statements for that prior
period were authorised for issue from other information.

 Prospective application of a change in accounting policy and of recognising the

effect of a change in an accounting estimate, respectively, are:
a) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed; and
b) recognising the effect of the change in the accounting estimate in the current and
future periods affected by the change.

Objective:
This standard deals with the following three areas:
a) Accounting policies – section, application and changes.
b) Accounting estimates – changes only.
c) Prior period errors.

ACCOUNTING POLCIES:- “RULES”

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.

Accounting policy consists of three things:

1. Recognition base. (What conditions must be satisfied to recognize an item in financial statements)
2. Measurement base (How to calculate the value)
3. Presentation base. (How to present them on the face of financial statements)

Selection of appropriate accounting policy:

 IFRS Available: If specific standard / interpretation exists, just apply it as it is. For example, IAS-16
for Tangible Non-Current Assets and IAS 02 for Inventories.
 IFRS NOT Available: If no specific standard / interpretation, management need to apply professional
judgment keeping in view guidelines presented in (a) Conceptual Framework (b) Similar Standards.
Following guidelines are notes:
o Relevant to the economic decision-making needs of users; and
o Represent faithfully the financial position, financial
o Performance and cash flows of the entity;
o Reflect the economic substance of transactions, other events and conditions, and not merely
the legal form;
o Are neutral, i.e. free from bias;
o Are prudent; and
o Are complete in all material respects.
Note: Accounting policies should be selected and applied consistently for similar transactions.

Changes of accounting policies:

Entities should apply accounting policies consistently. However, change can be made under any of the
following two circumstances:
1. Mandatory: When it is required by another IFRS. This will be the case when new IFRS is issued its
application is mandatory.
2. Voluntary: When new accounting policy provides better, more reliable and relevant information.
Changes must be made “Retrospectively”. Adjusting brought forward figures and comparatives. And
disclose the following:
- Nature of change.
- Reason for change (mandatory / voluntary)
- Financial effect of change for each line item.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 96 of 143

Examples:
 Basis of preparation of financial statements.
 Change of methods of inventory valuation. (FIFO to Weighted Average)
 Basis of measurement of assets: change from cost model to revaluation model.
 Change of presentations of depreciations from cost of sales to administrative expenses.
ACCOUNTING ESTIMATES:- “JUDGEMENTS”
Many of the items cannot be measured with precision, but can only be estimated based on best available
evidence. Estimates contain inherent uncertainties and are subject to revision in case new information is
made available.

Change in accounting estimate:

 A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or
the amount of the periodic consumption of an asset that results from the assessment of the present
status of, and expected future benefits and obligations associated with, assets and liabilities.

 Changes in accounting estimates result from new information or new developments and, accordingly,
are not corrections of errors.

Change is accounting estimate is required due to the following:

 New information is made available in allocating carrying value of assets.
 Uncertainties inherent in business activities.

Typical examples of changes in accounting estimates are:

• Bad debt provisions.
• Inventory obsolescence.
• Fair values of financial assets and liabilities. (IFRS-09)
• Depreciation methods, rates, residual values and useful lives of assets. (IAS-16)
• Provisions (warranty repairs, income tax, pension benefits)

Changes must be made “Prospectively” i.e. current and future periods.

TIP! When there is difficulty in determining whether the change is of “policy” or “estimate”, it is treated as
that of change in estimate.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 97 of 143

CHANGE IN ACCOUNTING POLICY OR ESTIMATE

a) An entity has previously charged interest incurred in connection with the construction of tangible non-
current assets to the statement of profit or loss. Following the revision of IAS 23 Borrowing Costs, and
in accordance with the revised requirements of that standard, it now capitalizes this interest.
b) An entity has previously depreciated vehicles using the reducing balance method at 40% pa. It now
uses the straight-line method over a period of five years.
c) An entity has previously shown certain overheads within cost of sales. It now shows those overheads
within administrative expenses.
d) An entity has previously measured inventory at weighted average cost. It now measures inventory
using the first in first out (FIFO) method.

Required:
Identify which are accounting policies and accounting estimates.
[Answer: a, c & d=policy, b=estimate]

ERRORS:
Prior-period errors are some omissions from or misstatements in the financial statements as a result of
ignoring or misusing the information that was available or could be reasonably obtained when preparing
these financial statements. It includes the following:
a) Errors in applying accounting policies.
b) Oversights.
c) Fraud.

According to IAS 8, the amount of correction of an error that relates to prior periods should be reported by
adjusting the opening balance of retained earnings.

Important Distinction:
Retrospective application is applying a new Retrospective restatement is correcting the
accounting policy to transactions, other events and recognition, measurement and disclosure of
conditions as if that policy had always been amounts of elements of financial statements as if a
applied. prior period error had never occurred.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 98 of 143

IAS 24 – RELATED PARTY DISCLOSURES

Objective:
The objective of this Standard is to ensure that an entity’s financial statements contain the disclosures
necessary to draw attention to the possibility that its financial position and profit or loss may have been
affected by the existence of related parties and by transactions and outstanding balances, including
commitments, with such parties.

Related Party:
A person or a close member of that person’s family is related to a reporting entity if that person:
a) Existence of control or joint control – parent and subsidiaries / entities having common parent / joint
venture.
b) Significant influence – company and its associates.
c) Key Management Personnel – member of the key management personnel of the reporting entity or of
a parent of the reporting entity.

An entity is related to a reporting entity if any of the following applies:

• The entity and the reporting entity are member of the same group.
• One entity is an associate or joint venture of the other entity (or a group).
• Both entities are joint ventures of the same third party.
• One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
• The entity is a post-employment benefit plan for the benefit or employees of either the reporting entity
or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring
employers are also related to the reporting entity.
• The entity, or any member of a group of which it is a part, provides key management personnel
services to the reporting entity or to the parent of the reporting entity.

Important Definitions:
a. Key management personnel: Those persons having authority and responsibility for panning,
directing, and controlling the activities of the entity, directly or indirectly, including all directors
(executive and non-executive).
b. Close family member Includes (but is not limited to) Children and Dependents, Spouse/Partner,
Children and Dependents of Spouse/Partner. Need to assess the level of influence on a case-by-case
basis.

DISCLOSURES:
1. Relationships between parents and subsidiaries:
o Name of a parent of an entity,
o The ultimate controlling party,
o Next most senior parent that produces financial statements for public use (if neither of 2
above do so).
This must be disclosed even if there are no related party transactions.

2. Management compensation, both total and by the categories:

o Short-term employee benefits,
o Post-employment benefits,
o Other long-term benefits,
o Termination benefits,
o Share-based payment benefits

3. Related party transactions

These represent any transfer of resources, services or obligations between related parties regardless

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 99 of 143

of whether a price is charged.

An entity should disclose:
o Nature of the relationship and
o Information about transactions and outstanding balances
The disclosures are presented separately for each category of related parties and include:
o Amount of transactions;
o Amount of outstanding balances, together with:
 their terms and conditions (are they secured? What consideration is to be provided in
settlement?), and
 guarantees.
o Provisions for doubtful debts related to the amount of open balances; and
o The expense during the period for bad or doubtful debts due from related parties.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 100 of 143

IFRS 2 – SHARE-BASED PAYMENT

OBJECTIVE:
The objective of IFRS 2 Share-based payment is to specify the financial reporting by an entity when it
undertakes a share-based payment transaction.
IFRS 2 requires an entity to reflect the effect of share-based payment transactions (including share
options to employees) in its profit or loss and statement of financial position.

TYPES OF SHARE BASED PAYMENTS:

1. Equity Settled Share Based Payment Transactions: Share Options

Entity receives goods or services as consideration for equity instruments of the entity.
2. Cash Settled Share Based Payment Transactions: Share Appreciation Rights (SARs)
The entity acquires goods of services by incurring liabilities to the supplier. The amount of cash paid
is based on share price.

BASIC TERMINOLOGIES:

Grant date:
At this date, terms of scheme, number of employees, years and options per employee were decided.

Vesting date, period and conditions:

It is the date when an employee is entitled to a share-based payment. The duration between these two
dates is called “vesting period”. Vesting conditions are conditions that must be met in order to qualify for a
share-based payment.

Exercise date:
It is the date at which the employee actually receives the share-based payment.
Share based payment transaction is to be recognized at fair value:
- Equity settled: FV at the reporting date and unchanged subsequently.
- Cash settled: FV at each reporting date and updated accordingly.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 101 of 143

ACCOUNTING FOR EQUITY SETTLED SBP

If the fair value of goods/services is known then this should be used in order to value the option, if the fair
value of the goods/services is not known then the fair value of the option at the grant date should be used
to value the options.

The fair value should be taken to profit or loss over the vesting period on a straight-line basis, based on
the number of options expected to be exercised. The corresponding credit entry will be recorded in equity
reserves.

EXERCISE # 01 EQUITY SETTLED: EMPLOYEES UNCHANGED

Brie granted 10,000 equity settled share-based payments to each of its 20 directors on 1 January 2015.
The options vest on 31 December 2017. It is anticipated that none of the directors will leave over the
three-year period. The fair value of the option is as follows:

01 Jan 2015: 12.00, 31 Dec 2015: 13.50, 31 Dec 2016: 13.80, 31 Dec 2017: 14.20
Required:
Prepare the extracts to be shown in the statement of profit or loss and the statement of financial position
for each of the three years ended 31 December 2015 to 31 December 2017.
[Answer: Expense 800,000 each year]

EXERCISE # 02 EQUITY SETTLED: EMPLOYEES CHANGED

On 1 January 2014, Edam granted 20,000 share options to each of its ten directors. The condition
attached to the share option scheme is that the directors must remain an employee of Edam for three
years. The fair value of each equity settled share-based payment at the grant date was Rs.60. At 31
December 2014, it was estimated that four directors would leave before the end of the three years. At 31
December 2015, due to a downturn in the economy, it was estimated that one director would leave before
the end of the three years.

Required:
Prepare the extracts to be shown in the statement of profit or loss and the statement of financial position
for the year ended 31 December 2014 and 31 December 2015.
[Answer: Expense: 2014 = 2.4m, 2015 = 4.8m]

EXERCISE # 03: ICMAP PAST PAPER (WINTER 2019 Q.06)

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 102 of 143

ACCOUNTING FOR CASH SETTLED SBP

There are two important issues:
1. A liability is to be recorded.
2. Fair value of SBP is updated at each reporting date.

If the fair value of goods/services is known then this should be used in order to value the option, if the fair
value of the goods/services is not known then the fair value of the option should be reassessed at each
reporting date and this value should be used to value the options.

The fair value should be taken to profit or loss over the vesting period based on the number of options
expected to be exercised. However, as there will be a cash payment, the credit entry is recorded as a
liability.

EXERCISE # 04 CASH SETTLED: EMPLOYEES UNCHANGED

Gouda granted 10,000 cash settled share-based payments to its 20 directors on 1 January 2015. The
options vest on 31 December 2017. It is anticipated that none of the directors will leave over the three-
year period. The fair value of the option is as follows:
01 January 2015 12.00
31 December 2015 13.50
31 December 2016 13.80
31 December 2017 14.20

Required:
Prepare the extracts to be shown in the statement of profit or loss and the statement of financial position
for each of the three years ended 31 December 2015 to 31 December 2017.
[Answer: P&L 2015 = 900,000, 2016 = 940,000 and 2017 = 1,000,000]

EXERCISE # 05 CASH SETTLED: EMPLOYEES CHANGED

On 1 January 2014, Cheddar granted 20,000 share appreciation rights (SARs) to each of its ten directors.
The conditions attached to the cash settled share-based payment scheme is that the directors must
remain an employee of Cheddar for three years. The fair value of each cash settled share-based payment
at the 31 December 2014 was Rs.80 and at 31 December 2015 was Rs.75.

At 31 December 2014, it was estimated that four directors would leave before the end of the three years.
At 31 December 2015, due to a downturn in the economy, it was estimated that two directors would leave
before the end of the three years.

Required:
Prepare the extracts to be shown in the statement of profit or loss and the statement of financial position
for the year ended 31 December 2014 and 31 December 2015.
[Answer: Expense: 2014 = 3.2m, 2015 = 4.8m]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 103 of 143

IFRS – 08 OPERATING SEGMENTS

Many entities have diversified and / or multinational operations. Geographic segments they operate are
different in profitability, structure, risk and future prospects. Consequently, segmental information is more
relevant than consolidated information for users of financial statements in assessing risks and returns.

SCOPE:
IFRS 8 applies to the annual and interim financial statements of an entity. It applies to the separate or
individual financial statements of an entity and to the consolidated financial statements of a group with a
parent:
• Whose debt or equity instruments are traded in a public market (listed companies); or
• That files, or is in the process of filing, its financial statements with a securities commission or other
regulatory organization for the purpose of issuing any class of instruments in a public market.

A parent company need to prepare segments on the basis of consolidated financial statements only –
segments’ reports based on separate financial statement are not required. (avoids duplication)

Core Principle:
An entity is required to disclose information to enable users of its financial statements to evaluate the
nature and financial effects of the business activities in which it engages and the economic environments
in which it operates.

OPERATING SEGMENT:
An operating segment is a component of an entity:(ALL)
a) That engages in business activities from which it may earn revenues and incur expenses.
b) Whose operating results are regularly reviewed by the entity’s chief operating decision maker
(CODM) to make decisions about resources to be allocated to the segment and assess its
performance.
c) For which discrete financial information is available.
Generally, head office is not a segment because it doesn’t earn revenue – management / administration.

Definition of CODM: The CODM is the individual or group of individuals who is/are responsible for
strategic decision making regarding the entity. That is, the CODM allocates resources and assess the
performance of the operating segments.

Reportable segment:
Information is required to be disclosed separately about an operating segment that meets ANY of the
following quantitative thresholds:
1) Revenue: Its reported revenue, including both sales to external customers and intersegment sales or
transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating
segments
2) Profit: The absolute amount of its reported profit or loss is 10 percent or more of the greater, in
absolute amount, of:
o The combined reported profit of all operating segments that did not report a loss; and
o The combined reported loss of all operating segments that reported a loss.
3) Assets: Its assets are 10 per cent or more of the combined assets of all operating segments.

NOTE:
If the total external revenue reported by operating segments constitutes less than 75% of the total
external revenue, additional operating segments shall be identified as reportable segments until at least
75% of the entity’s revenue is included in reportable segments. This may require relaxation in 10%
threshold criteria, based on professional judgment.

Aggregation criteria:
Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance
FACR – ICMAP ML2 (S-22) Page 104 of 143

Two or more operating segments may be aggregated if thesegments are similar economic characteristic
in each of the following respects:
 The nature of the products and services.
 The nature of the production processes.
 The type or class of customer for their products and services.
 The methods used to distribute their products or provide their services.
 The nature of the regulatory environment.

DISCLOSURES:
 Explanation on how reporting segments are identified.
 Aggregation criteria opted, if any.
 Product or service of each of the segments from which revenue of the segment is earned.
 External, internal and total sales of the segment.
 Expenses of the segments.
 Profit / loss of each segment.
 Assets of the segment.
 Reconciliation between total external sales of the segment and total external sales of the company.
 Reconciliation between total profit / loss reported under segments & total organizational profit / loss.
 Reconciliation between total assets of the segments and total asset of the organization.
 Geographic performance and position report.
 An entity provides information about the extent of its reliance on its major customers. If revenues from
transactions with a single external customer amount to 10% or more of an entity’s revenues, the
entity discloses that fact.

EXERCISE:
Following is the information provided for each segment identified by A Ltd:
Revenues Profit /
Segment Assets Liabilities
Internal External (Loss)
East 38 705 194 200 130
West - 82 (22) 44 40
North - 300 81 206 125
South 35 - 10 75 60
Central 38 90 (63) 50 25
Required:
In respect of each reporting segment explain whether it is a reportable segment, support your decision by
the application of all quantitative thresholds defined in IFRS-08.
[Answer:all except West are reportable operating segments]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 105 of 143

FINANCIAL INSTRUMENTS
Standards Covering Financial Instruments:
S# Name of Standard Brief Explanation
1 IAS 32 – Financial Instruments: • Definition of Financial Instruments.
Presentation • Classification into financial assets & financial
liabilities.
• Presentation of financial instruments in financial
statements i.e. SFP and SPLOCI.
2 IFRS 07 – Financial Prescribes the extent of information related to financial
Instruments: Disclosures instruments that companies are required to disclose in
the notes to the financial statements.
3 IFRS 09 – Financial Classification of financial assets and financial liabilities
Instruments into categories. It deals with the principles under which
financial assets and financial liabilities are to be (a)
recognized, (b) measured initially and subsequently, and
(c) de-recognition.

FINANCIAL INSTRUMENT:
A financial instrument is any contract that gives rise to both
a) a financial asset of one entity and
b) a financial liability or equity instrument of another entity.
There are two parties to the contract (a) issuer and (b) holder.

For example:
a) Bond is reported as asset in the books of holder but it is reported as liability in the books of issuer.
b) Share is reported as asset in the books of holder but it is reported as equity in the books of issuer.
c) Sale of goods on credit is reported as asset (accounts receivable) in the books of seller but liability
(accounts payable) in the books of purchaser.

FINANCIAL ASSET: (Inclusive definition)

As per IAS 32, Financial Assets are:
a) Cash
b) Equity instruments of another entity. (ordinary share, irredeemable preference shares)
c) Contractual right
i. To receive cash or other financial asset (e.g. demand deposits, trade receivables, debt securities
etc). Prepayments are not financial assets because these are rights to utilize services.
ii. To exchange financial asset or financial liabilities under potentially favorable terms (e.g. options
in the money: holder / buyer of “call” or “put”).

FINANCIAL LIABILITY: (Inclusive definition)

As per IAS 32, Financial Liability is any contractual obligation to:
a) Deliver cash or other financial asset (e.g. trade payables, bonds payable, redeemable preference
shares)
b) Exchange financial asset or financial liabilities under potentially unfavorable terms (e.g. options out of
money: writer / seller of “call” or “put”).

EQUITY:
An equity instrument is any contract that evidences residual interest in assets after deducting all its
liabilities i.e. ordinary shares. The entity has no obligation to pay cash (a) currently, (b) in future or (c) on
happening or not happening of uncertain future event, except liquidation.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 106 of 143

PREFERENCE SHARES: (Substance over form)

Preference shares contain claims on residual interest (equity) and at the same time also contains
guaranteed return (debt). The classification of preference shares depends upon the remaining features.
Typically, if preference shares are redeemable, they are classified as financial liability for issuer and if not
they ought to be treated as equity. This has also implications on the accounting treatment of dividend.
 If preference shares are treated as equity, dividend paid represents the direct charge against the
equity.
 If preference shares are classified as debt, then the payment of distribution is recognized as expense
in the profit or loss.

DERIVATIVE:
A financial instrument or other contract within the scope of this Standard with all three of the following
characteristics:
(a) its value changes in response to the change in a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other
variable, provided in the case of a non-financial variable that the variable is not specific to a party to
the contract (sometimes called the ‘underlying’).
(b) it requires no initial net investment or an initial net investment that is smaller than would be required
for other types of contracts that would be expected to have a similar response to changes in market
factors.
(c) it is settled at a future date.

EXERCISE # 01: IDENTITFY FINANCIAL INSTRUMENTS

Consider the following position statement of ABC Bank Ltd:

Assets Equities
Cash 10 Deposits 80
Bonds 20 Share Capital 20
Mortgage loans 40
Shares 15
Property, Plant and Equipment 15
100 100
Required:
Identify financial assets, financial liabilities and equity instruments.
[Answer: DIY]

EXERCISE # 02 IDENTIFICATION OF FINANCIAL ASSET / FINANCIAL LIABILITY

Identify financial asset or financial liability from the following:
1. Cash 2. Bank Balance 3. Gold
4. Trade Receivable 5. Inventories 6. Government note receivable
7. Loan receivable 8. Prepaid Expense 9. Equipment
10. Patent 11. Warranty Provision 12. Income Tax Payable
13. Deferred Tax 14. Loan Payable 15. Dividend Payable
Liability
16. Lease Obligation 17. Written call option 18. Purchased put option.
[Answer: FA: 1,2,4,6,7,18 FL: 14,15,16,17]

COMPOUND FINANCIAL INSTRUMENTS:

If a convertible instrument is issued, the economic substance is a combination of equity and liability and is
accounted for using split equity accounting. The liability element is calculated by discounting back the
maximum possible amount of cash that will be repaid assuming that the conversion doesn’t take place.
The discount rate to be used is that of the interest rate on similar debt without and conversion option. The

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 107 of 143

equity element is the difference between the proceeds on issue and the initial liability element. The
liability element is subsequently measured at amortised cost, using the interest rate on similar debt
without the conversion option as the effective rate. The equity element is not subsequently changed.

EXERCISE # 03: SPLIT ACCOUNTING – COMPOUND FINANCIAL INSTRUMENTS

Alice issued one million 4% convertible debentures at the start of the accounting year at par
value of Rs.100 million. The rate of interest on similar debt without the conversion option is 6%.
Required:
Explain how Alice should account for the convertible debenture in its financial statements for
each of the three years.
[Answer: Equity component Rs.5,346,024]

EXERCISE # 04: SPLIT ACCOUNTING – COMPOUND FINANCIAL INSTRUMENTS

An entity has just issued 3,000, 5% convertible bonds of Rs.100 each having maturity period of
2 years. Each bond is convertible into 5 ordinary shares. The market rate of interest without
conversion option is 8%.

Required:
Apply split accounting and prepare amortization table .
[Answer: Equity component Rs.16,049]

EXERCISE # 05: CONVERTIBLE BONDS

On 1 January 20X0 Dunston Co issued Rs.20 million of convertible loan stock, redeemable in
three years' time for Rs.22 million or convertible into 500,000 ordinary Rs.1 shares. Dunston
Co’s treasury department has calculated that the present value of the cash flows, discounted at
the interest rate on similar debt without the conversion option is Rs.19,001,600.

What amounts should be shown in the statement of financial position for the debt at the date of
issue?
a) Debt element Rs.19,001,600 and equity element Rs.998,400
b) Debt element Rs.998,400 and equity element Rs.19,001,600
c) Debt element Rs.20,000,000 and equity element Rs.500,000
d) Debt element Rs.22,000,000 and equity element 0
[Answer: “a”]

Offsetting financial assets/financial liabilities

In common with all IFRS Standards rules on offsetting, a financial asset and a financial liability may only
be offset in very limited circumstances. The net amount may only be presented in the statement of
financial position when the entity:
• has a legally enforceable right to set off the amounts, and
• intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 108 of 143

EXERCISE # 06: CLASSIFICATION OF FINANCIAL INSTRUMENTS

Classify the following instruments:

1) Investment in marketable bond: Tamara acquires a bond. The bond is listed and matures
in 18 months. Management has purchased the bond because it expects the price to
increase in the short-term. It intends to sell the bond whenever it believes the price has
peaked, but definitely within the next 30 days.
2) Investment in equity shares: Tamara acquires 5% of the equity shares in Go, a start-up
business in the Netherlands, which it believes has good prospects. She expects Go to be
listed within 2 years and hopes to make a substantial return on its investment over 3-5
years.
3) Investment in debt security: Tamara has invested surplus cash in a bond denominated in
Euros. The maturity of the bond is 3 years and management intends to hold the bond to
maturity, when it will use the proceeds for a planned acquisition in Germany.
4) Fixed interest debt: Tamara issues a 10m fixed-interest note with a three-year term.
5) Trade Receivable: Tamara has sold goods to a customer, which is invoiced in Singapore
Dollars. The Customer is expected to pay for the goods in 30 days
6) Short position in securities: Tamara hears a rumor that the share price of Black Dog will
fall within the next 3 days. She borrows Black Dog shares from a broker for 5 days and
immediately sells them in the market. On day 5, she intends to buy shares at a lower price in
the market and return them to the broker.

[Answer: 1= FA FVTP&L, 2= FA FVTOCI, 3= FA Amortized Cost, 4= FL Amortized Cost, 5= FA Amortized Cost, 6= FL FVTP&L]

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 109 of 143

EXERCISE # 07: BUSINESS MODEL TEST

Assess the business models under each scenario:

a) Raiser sells goods to customers on credit and typically gives up to 30 days for making a full
payment.
b) Raiser holds bonds to collects their contractual cash flows, but sometimes, Raiser sells
bonds in urgent cash shortage before their maturity.
c) BeeBank provides mortgages to its clients and sells the mortgages to SPE. SPE pays for
mortgages with the cash from investors and collects contractual cash flows from mortgages.
BeeBank consolidates SPE.
d) SPE purchases mortgages from BeeBank and collects payments of principal and interest
from mortgagors.
[Answer: a) Hold & collect, b) Hold & collect, if sale is infrequent c) Not met at entity level but met at group level, d=Hold & collect]

EXERCISE # 08: SPPI TEST

Apply the SPPI test on the following instruments:
a) Bond with defined maturity date that pays annual coupon at fixed rate. The principal is also
paid along with the last coupon payment at maturity. Furthermore, principal and coupon are
denominated in the same currency. (Vanilla debt instrument or bullet structure cash flows).
b) An FRN with defined maturity that pays annual coupon at KIBOR + 200 bps. The principal is
also paid along with the last coupon payment at maturity. Furthermore, principal and coupon
are denominated in the same currency.
c) Bond that allows conversion into fixed number of shares in the issuing entity along with the
fixed rate of interest and defined maturity date.
d) Fixed rate bond that pays interest tied with financial performance of the issuer e.g. EPS.
[Answer: a) SPPI passed b) SPPI passed, c) SPPI failed, d) SPPI failed]

EXERCISE # 09 FINANCIAL ASSETS CLASSIFICATIONS

Norman has the following financial assets during the financial year:

1. Norman bought 100,000 shares in a listed entity on 1 November 2015. Each share cost
Rs.5 to purchase and a fee of Rs.0.25 per share was paid as commission to a broker. The
fair value of each share at 31 December 2015 was Rs.3.50.

2. Norman bought 200,000 shares in a listed entity on 1 March 2015 for Rs.500,000, incurring
transaction costs of Rs.40,000. Norman acquired the shares as part of a long-term strategy
to realize the gains in the future. The fair value of the shares was Rs.620,000 at 31
December. The shares were subsequently sold for Rs.650,000 on 31 January 2016.

3. Norman bought 10,000 debentures at a 2% discount on the par value of Rs.100. The
debentures are redeemable in four years’ time at a premium of 5%. The coupon rate
attached to the debentures is 4%. The effective rate of interest on the debenture is 5.73%.

Required:
Explain how each of the above financial assets will be accounted for in the financial statements
both initially and subsequently. Journal entries in each case are required.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 110 of 143

EXERCISE # 10: EQUITY INVESTMENTS

A Ltd invested in 10,000 shares in of X Ltd on Jan 01, 2020 at Rs.5.3 per share. The transaction
cost incurred is Rs.1,500. The market value per share at Dec 31, 2020 is Rs.5.45 per share.

Required:
Perform initial and subsequent measurement under each case separately:
a) FVTP&L
b) FVTOCI
[Answer: DIY]

EXERCISE # 11: DEBT INSTRUMENTS CLASSIFICATION

On 1 January 20X1, Tokyo bought a Rs.100,000 5% bond for Rs.95,000, incurring acquisition
costs of Rs.2,000. Interest is received annually in arrears. The bond will be redeemed at a
premium of Rs.5,960 over nominal value on 31 December 20X3. The effective rate of interest is
8%. The fair value of the bond was as follows:

31 December 20X1 Rs.110,000

31 December 20X2 Rs.104,000

Required:
Explain, with calculations, how the bond will have been accounted for over all relevant years if:
a) Tokyo planned to hold the bond until the redemption date.
b) Tokyo may sell the bond if the possibility of an investment with a higher return arises.
c) Tokyo planned to trade the bond in the short-term, selling it for its fair value on 1 January
20X2.
[Answer:]
Part a) Amortized Cost
Year Opening Interest Payment Closing
1 97,000 7,760 -5,000 99,760
2 99,760 7,981 -5,000 102,741
3 102,741 8,219 -5,000 105,960
Part b) FVTOCI
Year Opening Interest Payment Closing FV G/L
1 97,000 7,760 -5,000 99,760 110,000 10,240
2 110,000 7,981 -5,000 112,981 104,000 -8,981
3 104,000 8,219 -5,000 107,219 105,960 -1,259
Part c)
Investment will be classified as FVTPL. Transaction cost is expensed.
1st year, profit will be 15,000 and sold at the start of year 2

EXERCISE # 12: CLASSIFICATION

1. Sharp Co has 5% Rs.1 redeemable preference shares in issue which will be redeemed in 5
years’ time. How should the preference share capital and preference dividend be presented
in the financial statements of Sharp Co?
a) Preference capital as equity & preference dividend in the statement of changes in equity
b) Preference capital as equity and preference dividend in the statement of profit or loss
c) Preference capital as a liability & preference dividend in the statement of changes in
equity.
d) Preference share capital as a liability and preference dividend in the statement of profit
or loss

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 111 of 143

2. McTagg purchased 1 million shares in Bauer Co, a listed company, for Rs.4 million on 1
January 20X7. By the year end, 31 December 20X7, the fair value of a Bauer Co share had
moved to Rs.4.80. If McTagg were to dispose of the shares, broker fees of Rs.50,000 would
be incurred. What is the correct treatment for shares at year end?

a) Hold shares in investments at Rs.4.75 million, with Rs.750k gain being taken to the
statement of profit or loss
b) Hold shares in investments at Rs.4.8 million, with Rs.800k gain being taken to the
statement of profit or loss
c) Hold shares in investments at Rs.4.8 million, with Rs.800k gain shown in the statement
of changes in equity
d) Hold shares in investments at Rs.4.75 million, with Rs.750k gain shown in the statement
of changes in equity

3. In order to hold a debt instrument at amortised cost, which TWO of the following tests must
be applied?
a) Fair value test
b) Contractual cash flow characteristics test
c) Investment appraisal test
d) Business model test
[Answer:1=d, 2=b, 3=b & d]

EXERCISE # 13: FINANCIAL LIABILITIES

A company issues 5% loan notes at their nominal value of Rs.20,000 with an effective rate of
5%. The loan notes are repayable at par after 4 years.

Required:
a) What amount will be recorded as a financial liability when the loan notes are issued?
b) What amounts will be shown in the statement of profit or loss and statement of financial
position for years 1–4?
[Answer: Rs.1,000 per year interest expense because coupon and effective rate are same]
Year Opening Interest Payment Closing
1 20,000 1,000 -1,000 20,000
2 20,000 1,000 -1,000 20,000
3 20,000 1,000 -1,000 20,000
4 20,000 1,000 -21,000 0

EXERCISE # 14: FINANCIAL LIABILITIES

A company issues 0% loan notes at their nominal value of Rs.40,000. The loan notes are
repayable at a premium of Rs.11,800 after 3 years. The effective rate of interest is 9%.

Required:
a) What amount will be recorded as a financial liability when the loan notes are issued?
b) What amounts will be shown in the statement of profit or loss and statement of financial
position for years 1–3?

[Answer:]
Year Opening Interest Payment Closing
1 40,000 3,600 0 43,600
2 43,600 3,924 0 47,524
3 47,524 4,276 -51,800 0

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 112 of 143

IAS 07 – STATEMENT OF CASH FLOWS

Objective: Information about the cash flows of an entity is useful in providing users of financial
statements with a basis to assess the ability of the entity to generate cash and cash
equivalents and the needs of the entity to utilise those cash flows. The economic
decisions that are taken by users require an evaluation of the ability of an entity to
generate cash and cash equivalents and the timing and certainty of their generation.

The objective of this Standard is to require the provision of information about the historical
changes in cash and cash equivalents of an entity by means of a statement of cash flows
which classifies cash flows during the period from operating, investing and financing
activities.

Scope: An entity shall prepare a statement of cash flows in accordance with the requirements of
this Standard and shall present it as an integral part of its financial statements for each
period for which financial statements are presented.

Definitions:  Cash comprises cash on hand and demand deposits.

 Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk of
changes in value.

 Cash flows are inflows and outflows of cash and cash equivalents.

 Operating activities are the principal revenue-producing activities of the entity and
other activities that are not investing or financing activities.

 Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.

 Financing activities are activities that result in changes in the size and composition
of the contributed equity and borrowings of the entity.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 113 of 143

Indirect Method:
ABC Ltd
Statement of Cash Flows
For the period Ended Dec 31, 2019
OPERATING ACTIVITIES:
Profit before taxes XXX
Adjustments:
Add! Depreciation Expense / Amortization Expense / Impairment XXX
Add! Interest Expense XXX
Add! Loss on disposal of non-current asset XXX
Less! Gain on disposal of non-current asset (XXX)
Working Capital Changes: (Excluding accruals of interest and taxes)
Less! Increase in Current Asset (XXX)
Add! Decrease in Current Asset XXX
Less! Decrease in Current Liability (XXX)
Add! Increase in Current Liability XXX
Cash Flow from Operations XXX
Less! Income taxes paid (XXX)
Less! Interest paid (XXX)
Cash Flow From Operating Activities (A) XXX
INVESTING ACTIVITIES:
Sale of non-current Asset / investment XXX
Purchase of non-current Asset / investment (XXX)
Cash Flow From Investing Activities (B) XXX
FINANCING ACTIVITIES:
Issue of shares for cash XXX
Issue of bonds / debentures XXX
Bank Loan XXX
Payment of Bonds / Retirement of bonds / redemption of bonds (XXX)
Purchase of treasury stock (purchase of own shares) (XXX)
Payment of dividend (XXX)
Cash Flow From Financing Activities (C) XXX
Net Cash Flows from all activities (A + B + C) XXX
Opening Cash & Cash Equivalents XXX
Closing Cash & Cash Equivalents XXX
Direct Method:
ABC Ltd
Statement of Cash Flows
For the period Ended Dec 31, 2019
OPERATING ACTIVITIES:
Cash collection from
customers XXX
Cash payment to suppliers (XXX)
Cash payment for operating expenses (XXX)
Cash flows from operations XXX
Less! Interest paid (XXX)
Less! Income tax paid (XXX)
Cash flows from operating activities (A) XXX

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 114 of 143

QUESTION # 01

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 115 of 143

QUESTION # 02

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 116 of 143

QUESTION # 03

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 117 of 143

QUESTION # 04

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 118 of 143

QUESTION # 05

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 119 of 143

QUESTION # 06

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 120 of 143

QUESTION # 07

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 121 of 143

QUESTION # 08
Statement of Financial Position: 2017 2016
Cash 821,000 580,000
Accounts receivable 375,000 350,000
Inventory 850,000 880,000
Prepaid insurance 30,000 38,000
Building and equipment 3,512,000 3,400,000
Accumulated depreciation -1,940,000 -1,800,000
Total Assets 3,648,000 3,448,000
Accounts payable 450,000 500,000
Salaries payable 100,000 120,000
Dividends payable 65,000 50,000
Interest payable 25,000 15,000
Unearned revenues 200,000 180,000
Income taxes payable 40,000 25,000
Bank loan payable 1,400,000 1,100,000
Common shares 90,000 50,000
Retained earnings 1,278,000 1,408,000
Total Equities 3,648,000 3,448,000

Statement of Profit or Loss:

Sales 1,500,000
Cost of goods sold 580,000
Gross profit 920,000
Operating expenses 680,000
Operating income 240,000
Interest expense 85,000
Income before taxes 155,000
Income taxes 35,000
Net income 120,000

Additional Information:
1. Operating expenses are composed of: Depreciation Rs.200,000; Salaries Rs.420,000; Gain on Sale
of Equipment Rs.15,000; other operating expenses Rs.75,000.
2. Prepaid insurance is related to the other operating expenses.
3. Equipment was purchased during the year for Rs.200,000 cash.
4. Equipment was sold for cash during the year.
5. Dividends were declared and paid during the year.
6. Unearned revenues are collected from customers.
7. Paid off Rs.100,000 of bank loan and signed a new loan for additional cash."
Required:
Prepare a cash flow statement using both direct and indirect methods.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 122 of 143

TREATMENT OF BAD DEBTS IN CASH FLOW

EXERCISE: 01 COLLECTION FROM CUSTOMERS
The Alpha company prepares its statement of cash flows using direct method. It requests you to calculate
cash received from customers during the year 2016. For this purpose, the following information has been
extracted from the trial balance of the company.

Accounts receivable on December 31, 2015: Rs.62,000

Accounts receivable on December 31, 2016: Rs.70,000
Allowance for doubtful accounts on December 31, 2015: Rs.2,100
Allowance for doubtful accounts on December 31, 2016: Rs.3,200
Sales for the year 2015: Rs.155,300
Sales for the year 2016: Rs.126,500
The company sells goods on credit. For the year 2016, bad debts expenses were Rs.7,500 and accounts
amounting to Rs.6,400 were written-off.
Required: Compute cash received from customers to be reported in the statement of cash flows for the
year 2016 using statement and T account approaches.
[Answer:Rs.112,100]

EXERCISE: 02 COLLECTION FROM CUSTOMERS

The following information belongs to Western company:
Accounts receivable on December 31, 2015: Rs.90,000
Accounts receivable on December 31, 2016: Rs.75,000
Allowance for doubtful accounts on December 31, 2015: Rs.3,550
Allowance for doubtful accounts on December 31, 2016: Rs.4,100
Sales for the year 2015: Rs.225,300
Sales for the year 2016: Rs.346,500
The bad debts expense was Rs.7,800 and write-offs totaled to Rs.7,250 during the year 2016. All sales
are made on credit.
Required:
Compute total amount of cash received from customers by Western company during the year2016 using
both statement and T account forms.
[Answer:Rs.354,250]

EXERCISE: 03 COLLECTION FROM CUSTOMERS

Statement of Profit or loss: Balances:
Sales 22,000 2015 2016
Sales Discounts 500 Accounts Receivable 5,000 6,500
Sales returns 1,500 Allowance for doubtful debts 1,000 1,250
Net Sales 20,000
Cost of sales 10,500 Calculate collection from customers.
Gross Profit 9,500 [Answer: Rs.18,200]
Expenses:
Wages 700
Office expenses 300
Bad debt expenses 550
Advertising expenses 210 1,760
Profit before tax 7,740
Income Tax expense 2,322
Net Income 5,418

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 123 of 143

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

EXERCISE # 01

On 31st December 20X1 P purchased the entire share capital of S for

Rs.40,000. The individual statements of financial positions of P and S at
that date were as follows:

P S
Non-current assets 120,000 40,000
Investment in S at cost 40,000 -
Current assets 40,000 10,000
Total Assets 200,000 50,000
Ordinary share capital (Re.1 shares) 100,000 30,000
Retained earnings 50,000 10,000
Current liabilities 50,000 10,000
Total equity and liabilities 200,000 50,000

Required: Prepare consolidated statement of financial position as at

December 31, 20X1?
Answers: Goodwill NCI GRE SFP Total
0 0 50,000 210,000

EXERCISE # 02

On 1 January 2013 Hall acquired 75% of Stand for Rs.12,000 At that date
the balance on Stand’s retained earnings was Rs.8,000.
Statements of financial position at 31 December 2015
Hall Stand
Non-current assets 35,000 20,000
Investment in Stand 12,000 -
Current assets 16,000 14,000
Total Assets 63,000 34,000
Ordinary share capital (Re.1 shares) 10,000 4,000
Retained earnings 13,000 12,000
8% Debentures 20,000 9,000
Current liabilities 20,000 9,000
Total equity and liabilities 63,000 34,000

Required: Prepare the consolidated statement of financial position of Hall

as at 31 December 2015.

Answers: Goodwill NCI GRE SFP Total

3,000 4,000 16,000 88,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 124 of 143

EXERCISE # 03

P acquired all the shares in S on 30 June 20X4 when the retained

earnings of S amounted to Rs.15,000.

P S
Non-current assets 50,000 40,000
Investment in S at cost 70,000 -
Current assets 30,000 40,000
Total Assets 150,000 80,000
Ordinary share capital (Re.1 shares) 100,000 50,000
Retained earnings 30,000 20,000
Current liabilities 20,000 10,000
Total equity and liabilities 150,000 80,000

Required: Prepare consolidated statement of financial position as at

December 31, 20X4?
Answers: Goodwill NCI GRE SFP Total
5,000 0 35,000 165,000

EXERCISE # 04

Summarised Statements of Financial Position as at 31 December 2014

James Neil
Non-current assets 1,000 500
Investment 600 0
Current assets 800 600
Total Assets 2,400 1,100
Ordinary share capital (Re.1 shares) 500 200
Retained earnings 800 400
Current liabilities 1,100 500
Total equity and liabilities 2,400 1,100
James purchased 80% of Neil for Rs.600 two years ago when Neil’s
retained earnings showed a balance of Rs.100 and the fair value of its
shares stood at Rs.3 each. Goodwill arising on acquisition of Neil suffered
no impairment to date.
Required: Prepare the Consolidated Statement of Financial Position for the
James Group as at 31 December 2014 assuming NCI is measured at FV.

Answers: Goodwill NCI GRE SFP Total

420 180 1,040 3,320

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 125 of 143

EXERCISE # 05
Poole paid Rs.700,000 for a 75% interest in Stour on 30 June 2012, when
the fair value of Stour's shares were Rs.2.40 each. Since the date of
acquisition Stour has made accumulated profits of Rs.120,000. At 31
December 2014, the summarised Statements of Financial Position of both
companies are:

Poole Stour
Non-current assets 900,000 500,000
Investment 700,000 -
Current Stour 200,000 -
Current assets 350,000 400,000
Total Assets 2,150,000 900,000
Ordinary share capital (Re.1 shares) 600,000 300,000
Share Premium 200,000 100,000
Retained earnings 1,100,000 200,000
Current Poole 200,000
Current liabilities 250,000 100,000
Total equity and liabilities 2,150,000 900,000

Required: Prepare the Consolidated Statement of Financial Position for the

Poole group as at 31 December 2014, assuming impairment of goodwill to
that date is Rs.60,000 and that no shares were issued by Stour since
acquisition.

Answers: Goodwill NCI GRE SFP Total

340,000 195,000 1,145,000 2,490,000

EXERCISE # 06

The following statements of financial position have been prepared at 31

December 2008.

Dickens Jones
Non-current assets 85,000 18,000
Investment in S at cost 60,000 -
Current assets 160,000 84,000
Total Assets 305,000 102,000
Ordinary share capital (Re.1 shares) 65,000 20,000
Share premium 35,000 10,000
Retained earnings 70,000 25,000
Current liabilities 135,000 47,000
Total equity and liabilities 305,000 102,000
Dickens acquired 16,000 ordinary Re.1 shares in Jones on 1 January 2008,
when Jones’ retained earnings stood at Rs.20,000 and its share premium
was Rs.10,000. On this date, the fair value of the 20% non-controlling
shareholding in Jones was Rs.12,[Link] Dickens Group uses the fair
value method to value the noncontrolling interest.

Required: Prepare the consolidated statement of financial position of

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 126 of 143

Dickens as at 31 December 2008.

Answers: Goodwill NCI GRE SFP Total
22,500 13,500 74,000 369,500

EXERCISE # 07

The statements of financial position of P and S as at 30 June 20X8 are

given below:

P S
Non-current assets 15,000 9,500
Investment 5,000
Current assets 7,500 5,000
Total Assets 27,500 14,500
Ordinary share capital (Re.1 shares) 6,000 5,000
Share Premium 4,000
Retained earnings 12,500 7,200
Non-current liabilities 1,000 500
Current liabilities 4,000 1,800
Total equity and liabilities 27,500 14,500
a) P acquired 60% of S on 1 July 20X7 when the retained earnings of S
were Rs.5,800. P paid Rs.5,000 in cash. P also issued 2 Rs.1 shares for
every 5 acquired in S and agreed to pay a further Rs.2,000 in 3 years' time.
The market value of P’s shares at 1 July 20X7 was Rs.1.80. P has only
recorded the cash paid in respect of the investment in S. Current interest
rates are 6%.
b) The P group uses the fair value method to value the non-controlling
interest. At the date of acquisition the fair value of the NCI was Rs.5,750.

Required: Prepare the consolidated statement of financial position of P

group as at 30 June 20X8.

Answers: Goodwill NCI GRE SFP Total

3,789 6,310 13,239 40,789

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 127 of 143

EXERCISE # 08

Draft statements of financial position for Plant and Shrub on 31 March

20X7 are as follows.

Plant Shrub
Non-current assets 100,000 140,000
Investment 180,000
Inventory 30,000 35,000
Trade Receivables 20,000 10,000
Cash 10,000 5,000
Total Assets 340,000 190,000
Ordinary share capital (Re.1 shares) 200,000 100,000
Share Premium 10,000 30,000
Retained earnings 40,000 20,000
Non-Current liabilities 65,000
Current liabilities 25,000 40,000
Total equity and liabilities 340,000 190,000
Plant bought 80,000 shares in Shrub in 20X1 when Shrub’s reserves
included a share premium of Rs.30,000 and retained earnings of Rs.5,000.
Plant's records show Rs.6,000 owing to Shrub, but Shrub's records show
Rs.8,000 owed by Plant. The difference is explained as cash in transit. No
impairment of goodwill has occurred to date. Plant uses the proportion of net
assets method to value the non-controlling interest.

Required: Prepare Plant’s consolidated statement of financial position as at

31 March 20X7.

Answers: Goodwill NCI GRE SFP Total

72,000 30,000 52,000 416,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 128 of 143

EXERCISE # 09
Health (H) bought 90% of the equity share capital of Safety (S), two years
ago on 1 January 2002 when the retained earnings of Safety stood at
Rs.5,000. Statements of financial position at the year end of 31
December2003 are as follows.

Health Safety
PP&E 100,000 30,000
Investment in Safety 34,000
Inventory 90,000 20,000
Receivables 110,000 25,000
Bank 10,000 5,000
Total Assets 344,000 80,000
Share capital 15,000 5,000
Retained earnings 159,000 31,000
Non-current liabilities 120,000 28,000
Current liabilities 50,000 16,000
Total equity and liabilities 344,000 80,000
Safety transferred goods to Health at a transfer price of Rs.18,000 at a mark-
up of 50%. Two-thirds of these goods remained in inventory at the year end.
The current account in Health and Safety stood at Rs.22,000 on that day.
Goodwill has suffered an impairment of Rs.10,000. Health uses the fair value
method to value the non-controlling interest. The fair value of the non-
controlling interest at acquisition was Rs.4,000.

Required: Prepare the consolidated statement of financial position at 31

December 2003.

Answers: Goodwill NCI GRE SFP Total

18,000 5,200 169,800 382,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 129 of 143

EXERCISE # 10
Paul has owned 80% of the share capital of Saul since Saul’s incorporation
on 1 January 2012, when the fair value of Saul’s shares were Rs.1 each. On
31 December 2014 the summarised Statements of Financial Position of both
companies are:

Paul Saul
Non-current assets 300,000 100,000
Investment 80,000 -
Current assets 100,000 80,000
Total Assets 480,000 180,000
Ordinary share capital (Re.1 shares) 200,000 100,000
Retained earnings 230,000 60,000
Current liabilities 50,000 20,000
Total equity and liabilities 480,000 180,000

Required: Prepare the Consolidated Statement of Financial Position for the

Paul group as at 31 December 2014, assuming goodwill is not impaired.

Answers: Goodwill NCI GRE SFP Total

0 32,000 278,000 580,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 130 of 143

EXERCISE # 11

The summarised statements of financial position of Hairy and Spider as at 31

December 2015 were as follows.

Hairy Spider
Non-current assets 120,000,000 60,000,000
Investments 55,000,000 3,000,000
Cash 11,000,000 4,000,000
Trade Receivables 72,600,000 19,100,000
Current Account - Hairy - 3,200,000
Inventory 17,000,000 11,000,000
Total Assets 275,600,000 100,300,000
Ordinary share capital (Re.1 shares) 100,000,000 60,000,000
Retained earnings 91,900,000 7,300,000
Share premium 20,000,000 -
Capital reserve 23,000,000 16,000,000
Current Account - Spider 2,700,000 -
Current liabilities 38,000,000 17,000,000
Total equity and liabilities 275,600,000 100,300,000

a) On 31 December 2012, Hairy acquired 48,000 shares in Spider for Rs.

55,000,000 cash. Spider has 60,000 shares in total.
b) The inventory of Hairy includes Rs.4,000,000 goods from Spider invoiced to
Hairy at cost plus 25%.
c) The difference on the current account balances is due to cash in transit.
d) The balance on Spider’s retained earnings was Rs. 2,300,000 at the date of
acquisition. There has been no movement in the balance on Spider’s capital
reserve since the date of acquisition.
Required: Prepare the consolidated statement of financial position of Hairy and
its subsidiary Spider as at 31 December 2015.
Answers: Goodwill NCI GRE SFP Total
0 16,500,000 102,900,000 317,400,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 131 of 143

EXERCISE # 12

On 1 July 2012 Hale acquired 128,000 of Sowen’s 160,000 shares. The

following statements of financial position have been prepared as at 31
December 2015.

Hale Sowen
Non-current assets 152,000 129,600
Investment 203,000 -
Inventory 112,000 74,400
Receivables 104,000 84,000
Bank Balances 41,000 8,000
Total Assets 612,000 296,000
Ordinary share capital (Re.1 shares) 100,000 160,000
Retained earnings 460,000 112,000
Current liabilities 52,000 24,000
Total equity and liabilities 612,000 296,000
The following information is available.
1) At 1 July 2012 Sowen had a debit balance of Rs.11,000 on retained
earnings.
2) Property, plant and equipment of Sowen included land at a cost of
Rs.72,000. This land had a fair value of Rs.100,000 at the date of acquisition.
3) The inventory of Sowen includes goods purchased from Hale for
Rs.16,000. Hale invoiced those goods at cost plus 25%.

Required: Prepare the consolidated statement of financial position of Hale as

at 31 December 2015.

Answers: Goodwill NCI GRE SFP Total

61,400 60,000 555,200 791,200

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 132 of 143

EXERCISE # 13

On 31 December 2011, Hard acquired 60% of the ordinary share capital of

Soft for Rs.110,000. At that date Soft had a retained earnings balance of
Rs.50,000 and a share premium account balance of Rs.10,000 The following
statements of financial position have been prepared as at 31 December 2015.
Hard Soft
Non-current assets 225,000 175,000
Investment in Soft at cost 110,000 -
Current assets 271,000 157,000
Total Assets 606,000 332,000
Ordinary share capital (Re.1 shares) 100,000 100,000
Retained earnings 260,000 80,000
Share Premium 15,000 10,000
Current liabilities 231,000 142,000
Total equity and liabilities 606,000 332,000
During the year to 31 December 2015 Hard sold a tangible asset to Soft for Rs.
50,000. The asset was originally purchased in the year to 31 December 2012
at a cost of Rs.100,000 and had a useful economic life of five years.
Soft’s depreciation policy is 25% per annum based on cost. Both companies
charge a full year’s depreciation in the year of acquisition and none in the year
of disposal.

Required: Prepare the consolidated statement of financial position of Hard

and its subsidiary as at 31 December 2015.

Answers: Goodwill NCI GRE SFP Total

14,000 77,000 269,500 834,500

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 133 of 143

EXERCISE # 14

On 1 January 2012, Hello acquired 60% of the ordinary share capital of

Solong for Rs. 110,000. At that date Solong had a retained earnings balance
of Rs. 60,000. The following statements of financial position have been
prepared as at 31 December 2015.
Hello Solong
Non-current assets 225,000 175,000
Investment 110,000 -
Current assets 271,000 157,000
Total Assets 606,000 332,000
Ordinary share capital (Re.1 shares) 100,000 100,000
Retained earnings 275,000 90,000
Current liabilities 231,000 142,000
Total equity and liabilities 606,000 332,000

The fair value of Solong’s net assets at the date of acquisition was
determined to be Rs. 170,000. The difference between the book value and
the fair value of the new assets at the date of acquisition was due to an item
of plant which had a useful life of 10 years from the date of acquisition.

Required: Prepare the consolidated statement of financial position of Hello

and its subsidiary as at 31 December 2015.

Answers: Goodwill NCI GRE SFP Total

8,000 78,400 290,600 842,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 134 of 143

EXERCISE # 15

Summarised Statements of Financial Position as at 31 March 2014

Jenny Becky
Non-current assets 10,000 5,000
Investment 5,000
Inventory 8,000 3,000
Accounts Receivables 6,000 2,000
Bank 5,500 1,000
Total Assets 34,500 11,000
Ordinary share capital (Re.1 shares) 14,000 3,000
Share Premium 2,000 1,000
Retained earnings 14,000 5,500
Current liabilities 4,500 1,500
Total equity and liabilities 34,500 11,000
a) Jenny purchased 75% of Becky three years ago, when the reserves of
Becky were Rs.1,000. At the time some of Becky’s tangibles had a book
value of Rs.1,000 and a market value of Rs.2,000. The assets have a
remaining useful life of five years.
b) On 31 March 2014 Jenny sent a cheque to Becky to clear an outstanding
liability of Rs.500. Becky did not receive the cheque until 6 April 2014. There
are no other transactions between the two group companies.
c) Jenny has a policy of valuing non-controlling interests at fair value at the
date of acquisition. For this purpose the share price of Becky at this date
should be used. The market price of each Becky share was Rs.2.50
d) Goodwill on acquisition has been impaired by Rs.125.

Required: Prepare the Consolidated Statement of Financial Position for the

Jenny group as at 31 March 2014.

Answers: Goodwill NCI GRE SFP Total

750 2,819 16,831 41,650

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 135 of 143

EXERCISE # 16

Peppermint acquired 80% of the share capital of Spearmint two years ago,
when the reserves of Spearmint stood at Rs.125,000. Peppermint paid initial
cash consideration of Rs.1 million. Additionally Peppermint issued 200,000
shares with a nominal value of Rs.1 and a market value at the acquisition date
of Rs.1.80. It was also agreed that Peppermint would pay a further Rs.500,000
in three years’ time. Current interest rates are 10% pa. The appropriate discount
factor for Rs.1 receivable three years from now is 0.75. The shares and
deferred consideration have not yet been recorded. Below are the statements of
financial position of Peppermint and Spearmint as at 31 December 20X4:

Peppermint Spearmint
Non-current assets 5,500,000 1,500,000
Investment 1,000,000 -
Inventory 550,000 100,000
Receivables 400,000 200,000
Cash 200,000 50,000
Total Assets 7,650,000 1,850,000
Ordinary share capital (Re.1 shares) 2,000,000 500,000
Retained earnings 1,400,000 300,000
Non-Current liabilities 3,000,000 400,000
Current liabilities 1,250,000 650,000
Total equity and liabilities 7,650,000 1,850,000
a) At acquisition the fair values of Spearmint’s plant exceeded its book value by
Rs.200,000. The plant had a remaining useful life of five years at this date.
b) For many years Spearmint has been selling some of its products under the
brand name of ‘Mintfresh’. At the date of acquisition, the directors of Peppermint
valued this brand at 250,000 with a remaining life of 10 years. The brand is not
included in Spearmint’s statement of financial position.
c) The consolidated goodwill has been impaired by Rs.258,000.
d) The Peppermint Group values the non-controlling interest using the fair value
method. At the date of acquisition, the fair value of the 20% non-controlling
interest was Rs.380,000.

Required: Prepare the consolidated statement of financial position as at 31

December 2004.

Answers: Goodwill NCI GRE SFP Total

782,657 337,400 1,192,034 9,602,657

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 136 of 143

EXERCISE # 17

Statements of financial position of P and S as at 30 June 2008 are given

below:

P S
Land 4,500 2,500
Plant & equipment 2,400 1,750
Investments 8,000
Inventory 3,200 900
Receivables 1,400 650
Bank 600 150
Total Assets 20,100 5,950
Ordinary share capital 50 paisa 5,000 1,000
Retained earnings 8,300 3,150
8% loan stock 4,000 500
Current liabilities 2,800 1,300
Total equity and liabilities 20,100 5,950
a) P acquired 75% of S on 1 July 2005 when the balance on S’s retained
earnings was Rs.1,150. P paid Rs.3,500 for its investment in the share
capital of S. At the same time, P invested in 60% of S’ 8% loan stock.
b) At the reporting date P’s payables included an amount due to S of
Rs.400. This did not agree to the corresponding amount in S's financial
statements of Rs.500. The difference is explained as cash in transit.
3) At the date of acquisition it was determined that S’s land, carried at cost
of Rs.2,500 had a fair value of Rs.3,750. S’s plant was determined to have
a fair value of Rs.500 in excess of its carrying amount and had a remaining
life of 5 years at this time. These values had not been recorded by S.
4) The P group uses the fair value method to value the non-controlling
interest. For this purpose the subsidiary share price at the date of
acquisition should be used. The subsidiary share price at acquisition was
Rs.2.20 per share.
5) Goodwill has become impaired by Rs.100.

Required: Prepare the consolidated statement of financial position of the P

group as at 30 June 2008.

Answers: Goodwill NCI GRE SFP Total

600 1,500 9,500 23,900

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 137 of 143

EXERCISE # 18

On 1 May 20X7 Karl bought 60% of Susan paying Rs.76,000 cash. The
summarised statements of financial position for the two entities as at 30
November 20X7 are:

Karl Susan
Non-current assets 138,000 115,000
Investment 98,000
Inventory 15,000 17,000
Receivables 19,000 20,000
Cash 2,000
Total Assets 272,000 152,000
Ordinary share capital (Re.1 shares) 50,000 40,000
Retained earnings 189,000 69,000
Non-current liabilities 8% loan 20,000
Current liabilities 33,000 23,000
Total equity and liabilities 272,000 152,000
a) The inventory of Karl includes Rs.8,000 of goods purchased for cash from
Susan at cost plus 25%.
b) On 1 June 20X7 Karl transferred an item of plant to Susan for Rs.15,000.
Its carrying amount at that date was Rs.10,000, and its remaining useful life
was 5 years.
c) Karl values the non-controlling interest using the fair value method. At the
date of acquisition the fair value of the 40% NCI was Rs.50,000.
d) An impairment loss of Rs.1,000 is to be charged against goodwill at the
year-end.
e) Susan earned a profit of Rs.9,000 in the year ended 30 November 20X7.
f) The loan note in Susan's books represents monies borrowed from Karl on
30 November 20X7.
g) Included in Karl's receivables is Rs.4,000 relating to inventory sold to
Susan during the year. Susan raised a cheque for Rs.2,500 and sent it to Karl
on 29 November 20X7. Karl did not receive this cheque until 4 December
20X7.

Required: Prepare the consolidated statement of financial position as at 30

November 20X7.

Answers: Goodwill NCI GRE SFP Total

21,250 51,260 185,890 341,650

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 138 of 143

EXERCISE # 19

Following are summarized statements as on December 31, 2021:

P S
Non-current assets 550,000 250,000
Investments 320,000 -
Current Account S 2,500 -
Current assets 350,000 302,000
Total Assets 1,222,500 552,000
Ordinary share capital (Rs.10) 270,000 120,000
Retained earnings 402,500 200,000
Current Account P - 2,000
Current liabilities 550,000 230,000
Total equity and liabilities 1,222,500 552,000
Other Information:
a) Two years ago, P bought 80% of the equity shares in S by paying
immediate
cash of Rs.300,000. P also undertakes to pay Rs.80,000 after 5 years.
The effect of deferred consideration is not incorporated in cost of investment.
Applicable discount rate is 9%. Retained earnings of S were Rs.60,000
at the date of acquisition.
b) At the date of acquisition, fair value non-current assets were Rs.25,000
more
than their carrying values. These assets have useful life of 5 years.
c) The difference in current account is due to cash in-transit.
d) It is group policy to measure Non-controlling interest at fair value method.
The fair value of per share acquired at the date of acquisition is Rs.26.5.
e) 15% of the goodwill is impaired so far.
f) During the year, S sold to P goods of Rs.80,000. Normally, selling price
is fixed at cost plus 25%. Unsold stock is 40%.

Required: Prepare consolidated statement of financial position.

Answers: Goodwill NCI GRE SFP Total
179,005 82,002 466,328 1,660,105

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 139 of 143

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

EXERCISE # 01
Highmore acquired 75% of the ordinary shares of Slowmore on that company’s
incorporation on June 01, 2004. The summarized statements of comprehensive
income of the two companies for the year ending May 31, 2009 are set out below:
Highmore Slowmore
Sales revenue 75,000 38,000
Cost of sales -30,000 -20,000
Gross profit 45,000 18,000
Administrative expenses -14,000 -8,000
Profit before tax 31,000 10,000
Taxation -10,000 -2,000
Profit after tax 21,000 8,000

Required:
Prepare consolidated statement of profit or loss for the year.
Answers Group Share NCI Share Total
27,000 2,000 29,000

EXERCISE # 02
Highmore acquired 80% of the ordinary shares of Slowmore on 1 October 2009. The
summarized statements of comprehensive income of the two companies for the year
ending 31 December 2009 are set out below. The incomes and expenses have
accrued evenly during the year.
Highmore Slowmore
Sales revenue 75,000 60,000
Cost of sales -30,000 -36,000
Gross profit 45,000 24,000
Administrative expenses -14,000 -8,000
Profit before tax 31,000 16,000
Taxation -10,000 -4,000
Profit after tax 21,000 12,000

Required:
Prepare consolidated statement of profit or loss for the year.
Answers Group Share NCI Share Total
23,400 600 24,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 140 of 143

EXERCISE # 03
P acquired 80% of the share capital of S on that company’s incorporation in 2008.
The respective Statements of Profit or Loss of the two companies for the year ended
31 December 2009 are as follows:
P S
Sales revenue 52,000 24,000
Cost of sales -12,000 -10,000
Gross profit 40,000 14,000
Expenses -8,000 -4,000
Profit before tax 32,000 10,000
Taxation -12,000 -3,000
Profit after tax 20,000 7,000
Retained profit brough forward 80,000 20,000

Required:
Prepare consolidated statement of profit or loss for the year.
Answers Group Share NCI Share Total
25,600 1,400 27,000

EXERCISE # 04
P acquired 60% of S on 1 January 2008, at which date the retained earnings of S
were $8,000. The respective Statements of Profit or Loss of the two companies for
the year ended 31 December 2010 are as follows:
P S
Sales revenue 85,000 31,000
Cost of sales -21,000 -12,000
Gross profit 64,000 19,000
Expenses -12,000 -7,000
Profit before tax 52,000 12,000
Taxation -16,000 -4,000
Profit after tax 36,000 8,000
Retained profit brough forward 120,000 17,000
Required:
Prepare consolidated statement of profit or loss for the year.
Answers Group Share NCI Share Total
40,800 3,200 44,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 141 of 143

EXERCISE # 05
Highmore acquired 100% of the ordinary shares of Slowmore some year ago. The
Statements of Comprehensive Income for year ending May 31, 2009 are given
hereunder: -
Highmore Slowmore
Operating Profit 450 200
Dividend income from (Slowmore) 50 0
Profit before tax 500 200
Taxation -150 -80
Profit after tax 350 120

Required:
Required: Prepare consolidated statement of comprehensive income for the year
ended May 31, 2009?
Answers Group Share NCI Share Total
420 0 420

EXERCISE # 06
Highmore has owned 100% of Slowmore for a number of years. The income
statements of the individual companies are shown below. When Highmore acquired
the shares of Slowmore, Slowmore’s retained earnings were Rs.4,000.
Highmore Slowmore
Sales revenue 400,000 280,000
Cost of sales -270,000 -190,000
Gross profit 130,000 90,000
Expenses -50,000 -25,000
Profit before tax 80,000 65,000
Taxation -17,000 -11,000
Profit after tax 63,000 54,000
Opening retained earnings 11,000 7,000
Dividends 40,000 30,000

Other information:
1. Highmore has not accounted for Slowmore’s dividend.
2. Higmore sold goods costing Rs.10,000 to Slowmore for Rs.15,000.
3. At the statement of financial statement date 31 December 2009 20% of goods
remained un-sold
by Slowmore.
4. Goodwill has impaired by Rs.2,000 during the current year.
5. Impairment of Good will prior to the year ending 31 December 2009 totaled
Rs.10,000.

Required:
Prepare consolidated statement of profit or loss for the year.
Answers Group Share NCI Share Total
114,000 0 114,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 142 of 143

EXERCISE # 07
Keswick Co acquired 80% of the share capital of Derwent Co on 1 June 20X5. The
summarised draft statements of profit or loss for Keswick Co and Derwent Co for the
year ended 31 May 20X6 are shown below:
Keswick Derwent
Sales revenue 8,400 3,200
Cost of sales -4,600 -1,700
Gross
profit 3,800 1,500
Administrative expenses -2,200 -960
Profit before tax 1,600 540
Taxation -600 -140
Profit after tax 1,000 400

Required:
Prepare the Keswick group consolidated statement of profit or loss for the year
ended 31 May 20X6.
Answers Group Share NCI Share Total
1,320 80 1,400

EXERCISE # 08
Statements of profit or loss for the year-ended 31 December 20X5

Vader Maul
Sales revenue 1,645,000 1,280,000
Cost of sales -1,205,000 -990,000
Gross profit 440,000 290,000
Distribution costs -100,000 -70,000
Administrative expenses -90,000 -50,000
Profit before tax and interest 250,000 170,000
Finance Cost -55,000 -30,000
Investment income 10,000
Profit before tax 205,000 140,000
Taxation -35,000 -28,000
Profit after tax 170,000 112,000
a) On 1 July 20X5, Vader acquired 80% of the equity shares of Maul. It is the group
policy to measure the non-controlling interest at acquisition at fair value.
b) Maul declared a dividend during the year of $10,000.
c) An impairment review at the reporting date revealed the goodwill in Maul to be
impaired by $20,000
d) Assume that the profits accrue evenly.

Required:
Prepare a consolidated statement of profit or loss for the Vader group for the year-
ended 31 December 20X5
Answers Group Share NCI Share Total
190,800 7,200 198,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-22) Page 143 of 143

EXERCISE # 09
Statement of profit or loss for the year ended 31 December 20X5

Rs.000
Gray Nick
Sales revenue 120,000 90,000
Cost of sales -70,000 -40,000
Gross
profit 50,000 50,000
Distribution costs -15,000 -20,000
Administrative expenses -5,000 -15,000
Profit before tax and interest 30,000 15,000
Finance
Cost -2,000 -500
Investment income 0 0
Profit before tax 28,000 14,500
Taxation -6,000 -3,000
Profit after tax 22,000 11,500
a) Gary acquired 80% of Nick on 1 January 20X5. Goodwill on acquisition has been
impaired by $1m during the year and should be charged to operating expenses. Full
goodwill method
b) During the year Nick sold $10m goods to Gary at a mark-up of 25% on cost. One
quarter of those goods are in inventory at the year end.

Required:
Prepare a consolidated statement of profit or loss for the Vader group for the year-
ended 31 December 20X5
Answers Group Share NCI Share Total
30,000 2,000 32,000

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

 TABLE OF CONTENTS
S# TOPIC P#
1 Basics 1
2 Double Entry Accounting 27
3 Accruals and Prepayments 37
4 Basic Financial Statements 84
5 Frameworks 10
6 Frameworks 21
7 IAS 2 Inventories 74
8 IAS 37 Provisions 231
9 IAS 16 Property, Plant and Equipment (Part 01) 48
10 IAS 16 Property, Plant and Equipment (Part 02) 61
11 IAS 23 Borrowing Costs 120
12 IAS 20 Accounting for Government Grants 120
13 IAS 38 Intangible Assets 205
14 IAS 40 Investment Property 120
15 IAS 36 Impairment of Assets 132
16 IFRS 16 Leases 221
17 IFRS 15 Revenue from Contracts with Customers 144
18 IFRS 8 Operating Segments 231
19 IAS 8 Accounting Policies 186
20 IAS 10 Events After the Reporting Period 231
21 IAS 1 Presentation of Financial Statements 97
22 IAS 7 Statement of Cash Flows 107
23 Consolidated SFP 01 157
24 Consolidated SFP 02 167
25 Consolidated SPL 176
26 IFRS 09 Financial Instruments. 213
27 IAS 12 Income Taxes 194
 1

Certificate in Accounting and Finance

CHAPTER
Introduction to accounting

1
Introduction to business
and accounting

Contents
1 Types of business
2 Introduction to financial accounting
3 The needs of users
4 Business transactions
5 Objective based questions and answers

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

 2
Chapter 1: Introduction to business and accounting

5 OBJECTIVE BASED QUESTIONS

01. Which of the following statements is correct?
(a) The directors of a company are liable for any losses of the company.
(b) A sole trader business is owned by shareholders and operated by the proprietor.
(c) Partners are liable for losses in a partnership equally regardless of their profit-sharing ratio.
(d) A company is run by directors on behalf of its members.

02. Which of the following best explains why employees are interested in the financial statements of their
employer?
(a) To compare the business with its competitors in order to decide whether to seek employment
with one of those competitors.
(b) To assess the effect of the business on the local economy, community and environment.
(c) To assess whether the business will continue into the foreseeable future.
(d) To assess the profitability of the business in order to decide whether to invest in it.

03. Which of the following user groups require the most detailed financial information?
(a) The management
(b) Investors and potential investors
(c) Government agencies
(d) Employees

04. Which of the following statements are true?

1. Accounting can be described as the recording and summarizing of transactions
2. Financial accounting describes the production of a statement of financial position and
Statement of Profit or Loss for internal use
(a) 1 only
(b) 2 only
(c) 1 and 2 both
(d) Neither 1 nor 2

05. The main aim of financial accounting is to:

(a) Record all transactions in the books of account.
(b) Provide management with detailed analyses of costs.
(c) Present the financial results to the organization by mean of recognized statements.
(d) Calculate profit.

06. The capital of a business would change as a result of:

(a) A supplier being paid by cheque
(b) Raw material being purchased on credit
(c) Non-current assets being purchased on credit
(d) Wages being paid in cash

© Emile Woolf International 17 The Institute of Chartered Accountants of Pakistan

 3
Introduction to accounting

07. Which of the following explains why lenders are interested in financial statements of a business?
(a) Lenders need information about financial stability of business
(b) Lenders need information about profitability of business
(c) Lenders want to assess the employer’s capacity to pay interest and repay loan on time
(d) All of the above

08. Which of the following is not a user of financial statements as per IASB framework?
(a) Investor
(b) Lender
(c) Government
(d) Manager

09. Who is responsible to prepare financial statements in a company?

(a) Shareholders
(b) Managers
(c) Directors
(d) All of the above

10. Who is responsible to prepare financial statements of a partnership?

(a) Partner
(b) There may be no obligation to prepare financial statements of a partnership (other than for
tax purpose)
(c) Manager
(d) Accountant

11. Liability of a partner towards unpaid debts of partnership is?

(a) Limited
(b) Primary
(c) Unlimited
(d) None

12. Which of the following business entity is a “legal person” in the eye of law?
(a) Sole trader
(b) Company
(c) Partnership
(d) All of the above

13. Which of the following is not a feature of partnership business?

(a) There must be an association of two or more persons
(b) Liability of partners towards unpaid debts of partnership is unlimited

© Emile Woolf International 18 The Institute of Chartered Accountants of Pakistan

 4
Chapter 1: Introduction to business and accounting

(c) Partners can make drawings

(d) Profits of the business belong to one partner only

14. Assets of the business belong to owners;

Which of the following business does not possess this characteristic?
(a) Sole trader
(b) Partnership
(c) Company
(d) Service organization

15. Which of the following is characteristic of a limited liability company?

(a) A company is legal owner of business assets
(b) A company is taxed separate from its owners
(c) A company is liable for its own debts
(d) All of the above

16. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2
What is the amount of capital expenditure incurred during the year?
Rs. ___________

17. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2
What is the amount of revenue expenditure incurred during the year?
Rs. ___________

18. A business has incurred following information for the year ended 31 December 2018:
Rs. million
Cost of building – Opening 15.5
Cost of machinery – Opening 10.2
Extension in building – during the year 1.5
Repairs to building – during the year 0.5
Overhaul to machinery that increased production capacity 1.2
What is the cost of building after incorporating the above costs?
Rs. ___________

© Emile Woolf International 19 The Institute of Chartered Accountants of Pakistan

 5
Introduction to accounting

19. A business has incurred following information for the year ended 31 December 2018:
Rs. million
Cost of building – Opening 15.5
Cost of machinery – Opening 10.2
Extension in building – during the year 1.5
Repairs to building – during the year 0.5
Overhaul to machinery that increased production capacity 1.2
What is the cost of machinery after incorporating the above costs?
Rs. __________

20. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2
Profit for the year before incorporating the above adjustments is Rs. 5.6 million.
What will be the profit for year after charging the above repairs?
Rs. ___________

21. A company is owned by;

(a) Directors
(b) Managers
(c) Shareholders
(d) Employees

22. Which of the following is not a business transaction?

(a) Incurring interest on a business loan
(b) Hiring a new employee
(c) Purchasing office supplies
(d) Receiving fees for services

23. The goods which are purchased for the purpose of resale are called
(a) Inventory
(b) Purchases
(c) Merchandise
(d) Traded goods

© Emile Woolf International 20 The Institute of Chartered Accountants of Pakistan

 6
Chapter 1: Introduction to business and accounting

24. Cash invested in the business by the owner is called

(a) Current asset
(b) Non-current asset
(c) Liabilities
(d) Capital

25. Cash or goods taken away by the proprietor is called

(a) Drawings
(b) Sales
(c) Charity
(d) Expense

26. Which of the following is an element of the statement of financial position?

(a) Income
(b) Expense
(c) Gains
(d) Liabilities

27. Which from the following is not a current asset?

(a) Equipment
(b) Inventory
(c) Cash
(d) Trade receivables

28. Which from the following is not a non-current asset?

(a) Intangibles
(b) Property
(c) Inventory
(d) Equipment

29. Which one of the following not an external user of financial statements?
(a) Lender
(b) Investor
(c) Customer
(d) Management

30. Which one of the following not an internal user of financial statements?
(a) Employees
(b) Management
(c) Supplier
(d) Executive Director

© Emile Woolf International 21 The Institute of Chartered Accountants of Pakistan

 7
Introduction to accounting

31. Expenditures which provide benefit in future period are called:

(a) Revenue expenditure
(b) Outstanding expenditure
(c) Current expenditure
(d) Capital expenditure

32. Which one is a capital transaction?

(a) Purchase of goods
(b) Payment of wages
(c) Sale of goods
(d) Purchase of machinery

33. Financial statements are prepared mainly for:

(a) Directors
(b) Shareholders
(c) Employees
(d) Managers

© Emile Woolf International 22 The Institute of Chartered Accountants of Pakistan

 8
Chapter 1: Introduction to business and accounting

5 OBJECTIVE BASED ANSWERS

01. (d)

02. (c)

03. (b)

04. (a)

05. (c)

06. (d)

07. (c)

08. (d)

09. (c)

10. (b)

11. (b)

12. (b)

13. (d)

14. (c)

15. (d)

16. Rs. 2.7 million = Rs. 1.5+1.2 = Rs. 2.7

17. Rs. 0.5 million Repairs to building

18. Rs. 17 million = Rs. 15.5 + 1.5 = 17

19. Rs. 11.4 million = Rs. 10.2 +1.2 = Rs. 11.4 million

20. Rs. 5.1 million Profit = Rs. 5.6 – 0.5 = Rs. 5.1

21. (c)

22. (b)

23. (a)

24. (d)

25. (a)

26. (d)

27. (a)

28. (c)

© Emile Woolf International 23 The Institute of Chartered Accountants of Pakistan

 9
Introduction to accounting

29. (d)

30. (c)

31. (d)

32. (d)

33. (b)

© Emile Woolf International 24 The Institute of Chartered Accountants of Pakistan

 10

Certificate in Accounting and Finance

CHAPTER
Introduction to accounting

2
Financial Reporting

Contents
1 The Conceptual Framework for Financial Reporting
2 Accounting concepts
3 Enhanced Qualitative characteristics of useful financial
information
4 The Elements of financial statements
5 Objective based questions and answers

© Emile Woolf International 25 The Institute of Chartered Accountants of Pakistan

 11
Introduction to accounting

5 OBJECTIVE BASED QUESTIONS

01. Identify whether the following statements are true or false and give brief reasons to support your
conclusion:
(i) The concept of separate entity is not applicable to a partnership.
(ii) Closing inventory does not appear in the pre-closing trial balance but appears in the post-
closing trial balance.
(iii) The concept of going concern supposes that the life of business entity will be more than 15
years.
(iv) When the allowance for bad debts is based on age analysis, the opening balance of allowance
for doubtful debts is not taken into consideration.
(v) Net realizable value of inventories is equal to selling price.
(vi) The ‘prudence’ concept allows a business to build substantially higher reserves/ allowances
than are actually required.

02. Fill in the blanks with appropriate word(s) to complete the following sentences. Do not write the whole
sentence.
(i) A bank overdraft is indicated by a ________ balance in the bank statement.
(ii) Cheques issued but not presented, cause the bank statement balance to be ________than the
cash book balance.
(iii) The withdrawal of inventory by the owner for his own use should appear in the trading account
as a deduction from ________.
(iv) The balance of purchase ledger control account represents ________.
(v) If closing inventory is undervalued, then net profit would be ________.
(vi) The basic accounting equation is given by the formula:
Equity + Long term liabilities = _________+ Current assets – Current liabilities.
(vii) Economic resources owned by a business are called its ________.
(viii) According to the ________ concept, the business is regarded as separate from the personal
affairs of its owners.

03. Under the Conceptual Framework for Financial Reporting, which of the following is the ‘threshold
quality’ of useful information?

(a) Relevance

(b) Reliability

(c) Materiality

(d) Understandability

04. According to The Conceptual Framework for Financial Reporting, which of the following is the
underlying assumption of a set of financial statements?

(a) Going Concern

(b) Prudence

(c) Accruals

(d) Comparability

© Emile Woolf International 50 The Institute of Chartered Accountants of Pakistan

 12
Chapter 2: Financial Reporting

05. The Board's Framework identifies qualitative characteristics.

(i) Relevance
(ii) Comparability
(iii) Verifiability
(iv) Understand ability
(v) Faithful representation.

Which of the above are not listed as enhancing characteristics?

(a) (i), (iv) and (v)

(b) (ii), (iii) and (iv)

(c) (ii) and (iii)

(d) (i) and (v)

06. Which of the following gives the best description of the objectives of financial statements as set out by
the IASB’s Conceptual Framework for Financial Reporting?

(a) To fairly present the financial position and performance of an entity.

(b) To fairly present the financial position, performance and changes in financial position of an
entity.

(c) To provide information about the financial position and performance of an entity that is useful
to a wide range of users in making economic decisions.

(d) To provide information about the financial position, performance and changes in financial
position of an entity that is useful to a wide range of users in making economic decisions.

07. The IASB’s Conceptual Framework for Financial Reporting defines a liability as:

(a) an amount owed to another entity

(b) a present obligation arising as a result of past events, the settlement of which is expected to
result in an outflow of economic benefits

(c) expenditure that has been incurred but not yet charged to the statement of profit or loss

(d) an obligation that may arise in the future

08. The IASB’s Conceptual Framework for Financial Reporting identifies qualitative characteristics of
financial statements.
Which TWO of the following characteristics are NOT fundamental qualitative characteristics according
to the IASB’s The Conceptual Framework for Financial Reporting?

(a) Relevance

(b) Reliability

(c) Faithful representation

(d) Comparability

© Emile Woolf International 51 The Institute of Chartered Accountants of Pakistan

 13
Introduction to accounting

09. The IASB’s Conceptual Framework for Financial Reporting defines an asset as:

(a) A resource controlled by an entity which is capable of generating independent cash flows.

(b) A resource controlled by an entity as a result of past events, from which future economic
benefits are expected.

(c) A resource owned by an entity as a result of past events, from which future economic benefits
are expected.

(d) A resource capable of generating income for the entity.

10. Which of the following criteria need to be satisfied in order for an element to be recognised within the
financial statements?
(i) It meets the definition of an element of the financial statements.
(ii) It is probable that future economic benefits will flow to or from the entity.
(iii) It is certain that future economic benefits will flow to or from the entity.
(iv) The item has a cost or value.
(v) The item has a cost or value that can be reliably measured.

(a) (i), (ii) and (v)

(b) (i), (iii) and (v)

(c) (i), (ii) and (iv)

(d) (i), (iii) and (iv)

11. Which description defines information that is relevant to users of financial information?

(a) Information that is free from error, bias and is a faithful representation of events

(b) Information that has been prudently prepared

(c) Information that is comparable from one period to the next

(d) Information that influences the decisions of users

12. Identify the accounting principle / concept undedicated by the following statement: “Fixed assets are
stated at cost less accumulated depreciation”

(a) Prudence
(b) Consistency
(c) Materiality
(d) Historical cost

13. Identify the accounting principle / concept undedicated by the following statement: “Items of capital
nature, costing less than Rs. 1,000 are charged to cost.

(a) Prudence

(b) Consistency

(c) Materiality

(d) Historical cost

© Emile Woolf International 52 The Institute of Chartered Accountants of Pakistan

 14
Chapter 2: Financial Reporting

14. Identify the accounting principle / concept undedicated by the following statement: “Stock-in-trade is
valued on the same basis as is being followed for last many years.”

(a) Prudence

(b) Consistency

(c) Materiality

(d) Historical cost

15. Identify the accounting principle / concept undedicated by the following statement: “Appropriate
provision is made for bad and doubtful debts.”

(a) Prudence

(b) Consistency

(c) Materiality

(d) Historical cost

16. Identify the accounting principle / concept undedicated by the following statement: “Sales revenue is
recorded on dispatch of goods to customers irrespective of the date of receipt of payment.”

(a) Accrual basis

(b) Consistency

(c) Materiality

(d) Historical cost

17. Identify the accounting principle / concept undedicated by the following statement: “Cost of sales is
recorded in the same period in which the revenue earned from the sale is recorded.”

(a) Prudence

(b) Materiality

(c) Matching

(d) Historical cost

18. The basic accounting equation is given by the formula:

Equity + Long term liabilities =
_________+ Current assets – Current liabilities.

19. Economic resources owned by a business are called its ________.

20. According to the ________ concept, the business is regarded as separate from the personal affairs of
its owners.

© Emile Woolf International 53 The Institute of Chartered Accountants of Pakistan

 15
Introduction to accounting

21. Name the accounting concept on which the following rule is based: “The financial statements must
disclose all the relevant information.”

___________

22. Name the accounting concept on which the following rule is based: “Leased vehicles might be
recorded as assets although these are not legally owned by the entity.”

___________

23. The main source(s) of Generally Accepted Accounting Principles (GAAP) is/are:

(a) Company Law

(b) International Finance Reporting Standards (IFRSs)

(c) Tax law

(d) Sales Tax Act

24. Which of the following is not the main objective of accounting?

(a) Systematic recording of transactions

(b) Ascertaining profit or loss

(c) Ascertainment of financial position

(d) Solving tax disputes with tax authorities

25. The concept that the entity will continue in a foreseeable future is known as

(a) Consistency

(b) True and fair view

(c) Going Concern

(d) Substance over form

26. Accounting procedures and practices should remain same from year to year under which of the
following accounting principles:

(a) Duality

(b) Materiality

(c) Timeliness

(d) Consistency

© Emile Woolf International 54 The Institute of Chartered Accountants of Pakistan

 16
Chapter 2: Financial Reporting

27. The concept that recognises the distinction between the receipt of cash and the right to receive the
cash is called

(a) Accrual concept

(b) Cash concept

(c) Materiality concept

(d) None of the above

28. When a machinery is purchased for cash, the cash balance is reduced and to that extent, the amount
of machinery as an asset is recorded. This is done to follow which of the following accounting
principles:

(a) Dual-aspect

(b) Materiality

(c) Timeliness

(d) Consistency

29. Using "lower of cost and net realisable value" for the purpose of inventory valuation is the
implementation of which of the following concepts?

(a) Going concern

(b) Separate entity

(c) Matching

(d) Prudence

30. The revenue recognition principle dictates that all types of income should be recorded or recognized
when

(a) Cash is received

(b) At the end of accounting period

(c) They are earned

(d) Interest is paid

31. The matching concept matches which of the following;

(a) Assets with liabilities

(b) Income with expenses

(c) Capital with reserves

(d) Expenses with capital

© Emile Woolf International 55 The Institute of Chartered Accountants of Pakistan

 17
Introduction to accounting

32. Human resources will not appear in the statement of financial position according to which concept?

(a) Accrual

(b) Going concern

(c) Reliable money measurement

(d) Matching

33. In which of the following cases, accounting estimates are needed?

(a) Doubtful debts

(b) Impairment loss

(c) Inventory obsolescence

(d) All of the above

34. Which of the following factor is not considered while selecting accounting policies?

(a) Prudence

(b) Accounting errors

(c) Substance over form

(d) Materiality

35. Historical cost concept requires the valuation of an asset at

(a) Original cost

(b) Replacement value

(c) Net realizable value

(d) Market value

36. For every debit there will be an equal credit according to which concept?

(a) Matching

(b) Consistency

(c) Money measurement

(d) Dual-aspect

37. Matching concept means

(a) Assets = capital + liabilities

(b) Transactions recorded at accrual concept

(c) Anticipate no profit but recognize all losses

(d) Expenses should be matched with the revenue of the period

© Emile Woolf International 56 The Institute of Chartered Accountants of Pakistan

 18
Chapter 2: Financial Reporting

5 OBJECTIVE BASED ANSWERS

01.
(i) False: In accounting, business is considered to be a separate entity from the proprietor and
the concept is applicable to all forms of business organizations.

(ii) True: closing inventory appears outside the trial balance in pre-closing trial balance but
after passing the closing entries when opening inventory and other revenue accounts are
closed, only statement of financial position items including closing inventories form part of
the post closing trial balance.

(iii) False: No specific period has been specified. The concept of going concern supposes that
the business is going to continue for the foreseeable future.

(iv) False: the allowance is required to arrive at net receivables (as would appear in the
statement of financial position) is calculated by age analysis. However, opening balance
has to be considered for making the adjusting entry.

(v) False: net realizable value is equal to selling price less the estimated cost of completion
and the costs necessary to make the sale.

(vi) False: The prudence concept does not allow a business to build excessive
reserves/allowances. However, prudence means the exercise of a degree of caution such
that assets or income are not overstated and liabilities and expenses are not understated.

02.
(i) Debit

(ii) more/higher/greater

(iii) purchases

(iv) Total payables/creditors

(v) understated/reduced

(vi) Non-current assets

(vii) Assets

(viii) Entity

03. (c)

04. (a)

05. (d)

06. (d) The objectives of financial statements are set out in the IASB Framework. Note that
providing information about changes in the financial position, as well as information
about financial position and financial performance, is included within these
objectives.

© Emile Woolf International 57 The Institute of Chartered Accountants of Pakistan

 19
Introduction to accounting

07. (b) (1) a liability is a present obligation that has arisen out of a past event, and (2) it is
certain or probable that settlement of this obligation will result in an outflow of
economic benefits, such as a payment of money. It is also necessary for the amount
of the liability to be measured reliably.

08. (b) & (d) It is important to learn that the two fundamental characteristics are relevance and
faithful representation.

09. (b) All other definitions include some part of the correct answer but are incomplete.

10. (a) There only has to be probable flow of economic benefits, rather than a certain flow.
Also, the cost or value must be capable of reliable measurement, or no amount can
be put into the financial statements.

11. (d) Information is relevant if it influences the economic decisions of the users. The other
definitions describe good treatment but are not explaining the concept of relevance.

12. (d) This is the actual amount of cash paid or received. For example, the historical cost
of an item of fixed assets is the amount that was paid to buy it in the past.

13. (c) Information is material if omitting it or misstating it could influence decisions that
users make on the basis of financial statements of an entity.

14. (b) The financial statements must be presented consistently from one period to another.
The presentation may be changed only if necessary to improve the quality of
information presented in terms of its usefulness to the users or if a new rule requires
a change.

15. (a) Prudence involves allowing for some caution in preparing financial statements, by
making reasonable and sensible allowance in order to avoid overstating assets or
income and to avoid understating liabilities and expenses.

16. (a) Revenue from sales and other income should be reported in the period when income
arises (which might not be the same as the period when the cash is received)

17. (c) The cost of sales in the statement of comprehensive income must be matched with
the sales.

18. Non-current
assets

19. Assets

20. Business
Entity

21. Completeness

22. Substance
over form

23. (a) & (b)

24. (d)

25. (c)

© Emile Woolf International 58 The Institute of Chartered Accountants of Pakistan

 20
Chapter 2: Financial Reporting

26. (d)

27. (a)

28. (a)

29. (d)

30. (c)

31. (b)

32. (c)

33. (d)

34. (b)

35. (a)

36. (d)

37. (d)

© Emile Woolf International 59 The Institute of Chartered Accountants of Pakistan

 21

Certificate in Accounting and Finance

Financial accounting and reporting I

CHAPTER
1
Accounting and reporting concepts

Contents
1 The conceptual framework of IASB

2 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

 22
Financial accounting and reporting I

2 OBJECTIVE BASED QUESTIONS

01. Which of the following measurement bases are referred to in the Board's Conceptual Framework?
(a) Current Cost, Residual Value, Fair Value, Present Value
(b) Current Cost, Historical Cost, Fair Value, Present Value
(c) Current Cost, Fair Value, Present Value, Future Value
(d) Fair Value, Present Value, Future value, Residual Value

02. Financial capital maintenance (money terms) is also referred to as:

(a) Historical cost accounting
(b) Current cost accounting
(c) Constant purchasing power accounting
(d) Fair value accounting

03. Which of the following concepts measures profit in terms of an increase in the productive capacity of
an entity?
(a) Physical capital maintenance
(b) Historical cost accounting
(c) Financial capital maintenance
(d) Going concern concept

04. Which of the following statements is true about historical cost accounts in times of rising prices?
(a) Profits will be overstated, and assets will be understated
(b) Asset values will be overstated
(c) Unrecognized gains will be recorded incorrectly
(d) Depreciation will be overstated

05. Which of the following criteria need to be satisfied in order for an element to be recognized within the
financial statements?
(i) It meets the definition of an element of the financial statements.
(ii) It is probable that future economic benefits will flow to or from the entity.
(iii) It is certain that future economic benefits will flow to or from the entity.
(iv) The item has a cost or value.
(v) The item has a cost or value that can be reliably measured.
(a) (i), (ii) and (v)
(b) (i), (iii) and (v)
(c) (i), (ii) and (iv)
(d) (i), (iii) and (iv)

© Emile Woolf International 14 The Institute of Chartered Accountants of Pakistan

 23
Chapter 1: Accounting and reporting concepts

06. Which of the following is NOT a purpose of the International Accounting Standards Board’s
Conceptual Framework?
(a) To assist the Board in the preparation and review of IFRS Standards.
(b) To assist auditors in forming an opinion on whether financial statements comply with IFRS
Standards.
(c) To assist in determining the treatment of items not covered by an existing IFRS Standards.
(d) To be authoritative where a specific IFRS Standard conflicts with the Conceptual
Framework.

07. Which of the following items should be recognized as an asset in the statement of financial position
of an entity?
(a) A skilled and efficient workforce which has been very expensive to train. Some of these
staff is still employed by the entity.
(b) A highly lucrative contract signed during the year which is due to commence shortly after
the year-end.
(c) A government grant relating to the purchase of an item of plant several years ago which
has a remaining life of four years.
(d) A receivable from a customer which has been sold (factored) to a finance company. The
finance company has full recourse to the entity for any losses.

08. Which of the following criticisms does NOT apply to historical cost financial statements during a
period of rising prices?
(a) They contain mixed values, some items are at current values, some at out-of-date values
(b) They are difficult to verify as transactions could have happened many years ago
(c) They understate assets and overstate profit
(d) They overstate gearing in the statement of financial position

09. Financial capital maintenance (real terms) is also referred to as:

(a) Historical cost accounting
(b) Current cost accounting
(c) Constant purchasing power accounting
(d) Fair value accounting

10. Physical capital maintenance is also referred to as:

(a) Historical cost accounting
(b) Current cost accounting
(c) Constant purchasing power accounting
(d) Fair value accounting

© Emile Woolf International 15 The Institute of Chartered Accountants of Pakistan

 24
Financial accounting and reporting I

11. In which of the following, no adjustment for inflation is considered?

(a) Financial capital maintenance (money terms)
(b) Financial capital maintenance (real terms)
(c) Physical capital maintenance
(d) Fair value accounting

12. In which of the following, inflation adjustment is made on general rate of inflation?
(a) Financial capital maintenance (money terms)
(b) Financial capital maintenance (real terms)
(c) Physical capital maintenance
(d) Fair value accounting

13. In which of the following, inflation adjustment is made on specific rate of inflation?
(a) Financial capital maintenance (money terms)
(b) Financial capital maintenance (real terms)
(c) Physical capital maintenance
(d) Fair value accounting

14. Financial capital maintenance is likely to be most relevant to:

(a) Investors
(b) Management and employees
(c) Neither (a) nor (b)
(d) Capital maintenance is always irrelevant to decision making

15. Physical capital maintenance is likely to be most relevant to:

(a) Investors
(b) Management and employees
(c) Neither (a) nor (b)
(d) Capital maintenance is always irrelevant to decision making

16. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting
principles. It had opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under money financial capital maintenance concept?
Rs. ___________

© Emile Woolf International 16 The Institute of Chartered Accountants of Pakistan

 25
Chapter 1: Accounting and reporting concepts

17. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting
principles. It had opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under real financial capital maintenance concept?
Rs. ___________

18. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting
principles. It had opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under physical capital maintenance concept?
Rs. ___________

19. An entity acquired an item of plant on 1 October 2012 at a cost of Rs. 500,000. It is being depreciated
over five years, using straight-line depreciation and an estimated residual value of 10% of its historical
cost or current cost as appropriate. As at 30 September 2014, the manufacturer of the plant still makes
the same item of plant and its current price is Rs. 600,000.
What is the correct carrying amount to be shown in the statement of financial position as at 30
September 2014 under historical cost accounting?
Rs. ___________

20. An entity acquired an item of plant on 1 October 2012 at a cost of Rs. 500,000. It is being
depreciated over five years, using straight-line depreciation and an estimated residual value of 10%
of its historical cost or current cost as appropriate. As at 30 September 2014, the manufacturer of
the plant still makes the same item of plant and its current price is Rs. 600,000.
What is the correct carrying amount to be shown in the statement of financial position as at 30
September 2014 under current cost accounting?
Rs. ___________

© Emile Woolf International 17 The Institute of Chartered Accountants of Pakistan

 26
Financial accounting and reporting I

2 OBJECTIVE BASED ANSWERS

01. (b)

02. (a)

03. (a) Physical capital maintenance looks at profit in terms of the physical productive
capacity of the business, taking into account specific price changes relevant to the
entity.

04. (a) In times of rising prices, asset values will be understated, as historical cost will not be
a true representation of the asset values. Additionally, the real purchase cost of
replacement items will not be
Incorporated, meaning that profits are overstated.

05. (a) There only has to be probable flow of economic benefits, rather than a certain flow.
Also, the cost or value must be capable of reliable measurement, or no amount can
be put into the financial statements.

06. (d) Where there is conflict between the conceptual framework and an IFRS Standard, the
IFRS Standard will prevail. An example of this is IAS 20 Government grants, where
deferred grant income is held as a liability, despite not satisfying the definition of a
liability.

07. (d) As the receivable is ‘sold’ with recourse it must remain as an asset on the statement
of financial position and is not derecognized.

08. (b) Historical cost is the easiest to verify as the cost can be proved back to the original
transaction. Fair value is often more difficult to verify as it may involve elements of
estimation.

09. (c)

10. (b)

11. (a)

12. (b)

13. (c)

14. (a)

15. (b)

16. Rs. 350,000 Money financial capital maintenance looks at the actual physical cash. No inflation
adjustment is required.

17. Rs. 300,000 Rs. 350,000 – (1,000,000 x 5%) = Rs. 300,000

18. Rs. 150,000 Rs. 350,000 – (1,000,000 x 20%) = Rs. 150,000

19. Rs. 320,000 Historical cost annual depreciation = Rs. 90,000 ((500,000 × 90%)/5 years).
After two years carrying amount would be Rs. 320,000 = (500,000 - (2×90,000)).

20. Rs. 384,000 Current cost annual depreciation = Rs. 108,000 ((600,000 × 90%)/5 years).
After two years carrying amount would be Rs. 384,000 = (600,000 - (2×108,000)).

© Emile Woolf International 18 The Institute of Chartered Accountants of Pakistan

 27

Certificate in Accounting and Finance

CHAPTER
Introduction to accounting

4
Double entry bookkeeping

Contents
1 Introduction to accounting systems
2 Basic rules of double entry bookkeeping
3 Account balances and the trial balance
4 The general journal
5 General ledger
6 Objective based questions and answers

© Emile Woolf International 87 The Institute of Chartered Accountants of Pakistan

 28
Introduction to accounting

6 OBJECTIVE BASED QUESTIONS

01. The process of transferring transaction from journal to ledgers is called?

(a) Journalizing

(b) Summarizing

(c) Posting

(d) Analyzing

02. Any transaction which cannot be recorded in any book of prime entry is recorded in?

(a) Cash book

(b) Petty cash book

(c) General journal

(d) Day books

03. What ledger entries would be made to record the purchase of an item of machinery on credit?

(a) Debit machinery, credit cash

(b) Debit machinery, credit accounts payables

(c) Debit purchases, credit trade payables

(d) Debit trade payables, credit machinery

04. What transaction is presented by the entries: debit bank, credit Receivables?

(a) Sale of goods for cash

(b) Purchase of goods for cash

(c) Receipt of cheque from receivables

(d) Payment of cheque to payables

05. A debit entry usually represents

(a) Assets and Income

(b) Liabilities and Income

(c) Assets and Expenses

(d) Liabilities and Expenses

© Emile Woolf International 136 The Institute of Chartered Accountants of Pakistan

 29
Chapter 4: Double entry bookkeeping

06. The double entry to record the withdrawal of cash from a business bank account by the owner is?

(a) Debit: drawings Credit: bank

(b) Debit: drawings Credit: capital

(c) Debit: liability Credit cash

(d) Debit: capital Credit: drawings

07. Which of the following would normally be a credit balance in the trial balance?
(i) Loan
(ii) Owner’s capital
(iii) Drawings
(iv) Purchases

(a) (i) and (ii)

(b) (i) and (iii)

(c) (ii) and (iii)

(d) (ii) and (iv)

08. A debit balance would be expected to arise when the accounts are balanced at the period end on
which of the following accounts?

(a) Capital

(b) Sales

(c) Electricity

(d) Loan

09. A business sells Rs. 100,000 worth of goods to a customer, the customer pays Rs. 50,000 in cash
immediately and will pay the remaining Rs. 50,000 in 30 days time.
What is the double entry to record the purchase in the customer’s accounting records?

(a) Dr. cash Rs. 50,000; Cr. payables Rs. 50,000; Cr. purchases Rs. 50,000

(b) Dr. payables Rs. 50,000; Dr. cash Rs. 50,000 ;Cr. purchases Rs. 100,000

(c) Dr. purchases Rs. 100,000 ;Cr. payables Rs. 50,000; Cr. cash Rs. 50,000

(d) Debit purchases Rs. 100,000; credit cash Rs. 100,000

10. A trial balance is made up of a list of debit balances and credit balances.
Which of the following statements is correct?

(a) Every debit balance represents an expense

(b) Assets are represented by debit balances

© Emile Woolf International 137 The Institute of Chartered Accountants of Pakistan

 30
Introduction to accounting

(c) Liabilities are represented by debit balances

(d) Income is included in the list of debit balances

11. Basheer has extracted the following list of balances from his general ledger at 31 October 2015:

Rs.
Sales 258,542
Opening inventory 9,649
Purchases 142,958
Expenses 34,835
Non-current assets (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525

What is the total of the debit balances in Basheer's trial balance at 31 October 2015?

(a) Rs. 267,049

(b) Rs. 275,282

(c) Rs. 283,148

(d) Rs. 284,931

12. At 31 October 2016 Zahid’s trial balance included the following balances:

Rs.
Machinery 12,890
Inventory 5,754
Trade receivables 11,745
Trade payables 7,830
Bank overdraft 1,675
Cash at bank 150

What is the value of Zahid's current assets at 31 October 2016?

(a) Rs. 17,649

(b) Rs. 17,499

(c) Rs. 15,974

(d) Rs. 13,734

© Emile Woolf International 138 The Institute of Chartered Accountants of Pakistan

 31
Chapter 4: Double entry bookkeeping

13. Mariam has the following transactions:

(i) Receipt of cash from Nauman in respect of an invoice for goods sold three weeks ago
(ii) Receipt of cash from Amjad for cash sales
What are the ledger entries required to record the above transactions?

(a) Dr Cash; Cr Sales

(b) Dr Cash; Cr Sales; Cr Trade Receivables

(c) Dr Sales; Cr Cash

(d) Dr Trade Receivables; Dr Sales; Cr Cash

14. A business has purchased machinery on credit. Which of the accounts mentioned below are affected
by the transactions?

(a) Trade payables

(b) Purchases

(c) Machinery

(d) Capital

15. A business has provided following information in the trial balance;

Rs.

Machinery 150,000

Equipment 120,220

Trade receivables 35,150

Trade payables 40,220

Bank overdraft 18,997

Cash at bank 32,112

What is the amount of non – current assets to be shown in the financial position?

(a) Rs. 337,482

(b) Rs. 270,220

(c) Rs. 356,479

(d) Rs. 318,485

16. A business buys machinery costing Rs. 120,000 and sells machinery costing Rs. 18,000 in the year.
The opening balance of the machinery account is Rs. 80,000.
What will be the balance brought down in the next period?

Rs. ___________

© Emile Woolf International 139 The Institute of Chartered Accountants of Pakistan

 32
Introduction to accounting

17. A company had a cash balance of Rs. 18,000 at the start of the month. During the month, the following
transactions occurred.
(i) Sales on credit Rs. 72,000
(ii) Cash from trade receivables Rs. 49,000
(iii) Purchases on credit Rs. 33,000
(iv) Payments to trade payables Rs. 35,000
What was the cash balance at the end of the month?

Rs. ___________

18. An accountant has inserted all the relevant figures into the trade payables account, but has not yet
balanced off the account.

Accounts payable a/c

Particulars Rs. Particulars Rs.

Bank a/c 100,750 b/d 250,225

Purchases 325,010

Assuming there are no other entries to be made, other than to balance off the account, what is the
closing balance on the trade payables account?

Rs. ___________

19. You are given the following information:

Rs.
Receivables at 1 January 2018 10,000
Receivables at 31 December 2018 9,000
Total receipts during 2018 (including cash sales of Rs.5,000) 85,000
What are sales on credit during 2018?

Rs. ___________

20. The following totals appear in the day books for March 2018.

Rs.
Sales day book 40,000
Purchases day book 20,000
Returns inwards day book 2,000
Returns outward day book 4,000
Opening and closing inventories are both Rs. 3,000.
What is the gross profit for March 2018?

Rs. ___________

© Emile Woolf International 140 The Institute of Chartered Accountants of Pakistan

 33
Chapter 4: Double entry bookkeeping

21. The terms accounting and book keeping are classified as

(a) Same

(b) Different

(c) Opposite

(d) None of these

22. Which one is the principle of Double Entry System?

(a) Purchase increases Debit, income decreases Credit

(b) Expense increases Debit, Income decreases Credit

(c) Receiver is Debit and Giver is Credit

(d) Receiver is Credit and Giver is Debit

23. Payment of insurance through the bank involves entries in which of the two accounts

(a) Insurance account (Debit) and petty cash account (Credit)

(b) Insurance account (Debit) and bank account (Credit)

(c) Insurance account (Debit) and rent account (Credit)

(d) Insurance account (Debit) and capital account (Credit)

24. X Ltd. purchases a vehicle for Rs. 1.5 million for business use, paying by cheque, what is the double
entry:

(a) Purchases account (debit) and bank account (credit)

(b) Vehicle account (debit) and bank account (credit)

(c) Vehicle account (credit) and bank account (debit)

(d) Debit vehicle account (debit) and petty cash account (credit)

25. The journal entry for return of goods purchased from Khan Limited on account is:

(a) Cash (debit) and purchases (credit)

(b) Accounts payable (debit) and purchases (credit)

(c) Accounts payable (debit) and purchases return (credit)

(d) None of the above

26. Accounting entry for payment of a telephone bill is;

(a) Telephone expense (debit) and cash (credit)

(b) Office equipment (debit) and cash (credit)

(c) Office supplies (debit) and cash (credit)

(d) Cash (debit) and utilities (credit)

© Emile Woolf International 141 The Institute of Chartered Accountants of Pakistan

 34
Introduction to accounting

27. Khalid is a dealer in electronic goods (refrigerator, washing machine, air conditioners, televisions,
etc.). He purchased two air conditioners and installed in his showroom. In the books of Khalid, the
cost two air conditioners will be debited to

(a) Drawing account

(b) Capital Account

(c) Fixed assets

(d) Purchases account

28. An asset was purchased for Rs.1,000,000 with the down payment of Rs.200,000 and bills accepted
for Rs.800,000/-.
What would be the effect on the total asset and total liabilities in the statement of financial position?

(a) Assets increased by Rs.800,000 and liabilities decreased by Rs.800,000

(b) Assets decreased by Rs.800,000 and liabilities increased by Rs.800,000

(c) Assets increased by Rs.1,000,000 and liabilities increased by Rs.800,000

(d) Assets increased by Rs.800,000 and liabilities increased by Rs.800,000

29. BS Corporation provides laptop repair services. It offers services on the advance part-payment policy.
A customer walked into their shop for services, paid Rs.2,000 in the beginning, and once the laptop
got repaired, he paid Rs.2,000 upon delivery. What would be the accounting entry?

(a) Laptop = 2,000 (debit) and Cash = 2,000 (credit)

(b) Labour = 2,000(debit) and Accounting receivable = 2,000 (credit)

(c) Cash= 2,000 (debit), Accounts receivable = 2,000(debit) and Service revenue = 4,000 (credit)
(d) Purchases = 2,000 (debit), Accounts receivable = 2,000 (debit) and Service revenue = 4,000
(credit)

30. BS Corporation provides laptop repair services. It offers services on the advance part-payment policy.
A customer walked into their shop for services, paid Rs.2,000 in the beginning, and once the laptop
got repaired, he paid Rs.2,000 upon delivery
Post the accounting entry for the above when the laptop is repaired and handed over to the customer.

(a) Cash = 2,000 (Debit) and Accounts receivable = 2,000 (credit)

(b) Cash = 2,000 (Debit) and Service revenue = 2,000 (credit)

(c) Cash = 2,000 (Debit) and Accounts payable = 2,000 (credit)

(d) Cash = 2,000 (Debit) and Other income = 2,000 (credit)

© Emile Woolf International 142 The Institute of Chartered Accountants of Pakistan

 35
Chapter 4: Double entry bookkeeping

6 OBJECTIVE BASED ANSWERS

01. (c)

02. (c)

03. (b)

04. (c)

05. (c)

06. (a)

07. (a)

08. (c)

09. (c)

10. (b)

11. (d)

12. (a)

13. (b)

14. (c)

15. (b)

16. Rs. 282,000

Machinery a/c
Particulars Rs. Particulars Rs.
b/d 80,000 Disposal 18,000
Purchases 120,000 c/d 282,000
300,000 300,000

17. Rs. 32,000

Cash a/c
Particulars Rs. Particulars Rs.
b/d 18,000 Payables 35,000
Receivables 49,000 c/d 32,000
67,000 67,000

18. Rs. 474,485

Accounts payable a/c
Particulars Rs. Particulars Rs.
Bank a/c 100,750 b/d 250,225
c/d 474,485 Purchases 325,010
575,235 575,235

© Emile Woolf International 143 The Institute of Chartered Accountants of Pakistan

 36
Introduction to accounting

19. Rs. 79,000

Accounts receivables a/c
Particulars Rs. Particulars Rs.
b/d 10,000 Cash 80,000
Sales 79,000 c/d 9,000
89,000 89,000

20. Rs. 22,000

Rs. Rs.
Sales 40,000
Returns inwards (2,000)
38,000
Opening inventory 3,000
Purchases 20,000
Returns outwards (4,000)
Closing inventory (3,000) (16,000)
Gross profit 22,000

21. (b)

22. (c)

23. (b)

24. (b)

25. (c)

26. (a)

27. (c)

28. (d)

29. (c)

30. (a)

© Emile Woolf International 144 The Institute of Chartered Accountants of Pakistan

 37

Certificate in Accounting and Finance

CHAPTER
Introduction to accounting

7
Accruals and prepayments

Contents
1 Accruals and prepayments introduced
2 Accruals
3 Prepayments
4 Unearned and accrued income
5 Objective based questions and answers

© Emile Woolf International 245 The Institute of Chartered Accountants of Pakistan

 38
Introduction to accounting

5 OBJECTIVE BASED QUESTIONS

01. In the year to 31 December 2018, Saira received Rs. 50,800 rental income. The amounts of rent
received in advance and due in arrears were as follows:

31 Dec 2018 31 Dec 2017

Rs. Rs.
Rent received in advance 4,000 3,000
Rent due in arrears (accrued) 2,500 1,700
What figure for rental income should be recorded in the statement of profit or loss for the year ended
31 December 2018?

(a) Rs. 50,800

(b) Rs. 50,600

(c) Rs. 54,500

(d) Rs. 56,000

02. On 1 March 2017, Zahra pays an insurance premium of Rs. 2,400 for the period to 28 February 2018.
What is the charge to the statement of profit or loss for the year ended 31 October 2017 and
prepayment in the Statement of Financial Position as at that date?

(a) Charge for SPL Rs. 800 and Prepayment Rs. Rs. 1,600

(b) Charge for SPL Rs. 1,600 and Prepayment Rs. 800

(c) Charge for SPL Rs. 2,400 and Prepayment 0

(d) Charge for SPL 0 and Prepayment Rs. 2,400

03. Zahra determines at year end that Salaries paid during the year include Rs. 10,000 in advance.
What is the correct year end adjustment for advance salary to be made?

(a) Dr Salaries Rs. 10,000 Cr Advance salaries Rs. 10,000

(b) Dr Salaries Rs. 10,000 Cr Accrued salaries Rs. 10,000

(c) Dr Advance salaries Rs. 10,000 Cr Salaries expense Rs. 10,000

(d) No entry required

04. On year end a business has outstanding electricity bills of Rs. 15,000. During the year electricity bills
paid are Rs. 190,000.
What adjustment will be required to utilities expense account regarding the outstanding bills?

(a) Cr Rs. 15,000

(b) Dr Rs. 15,000

(c) No impact

(d) Dr Rs. 190,000

© Emile Woolf International 276 The Institute of Chartered Accountants of Pakistan

 39
Chapter 7: Accruals and prepayments

05. Atif finalized his draft accounts and ignored a prepayment for Rs. 100 and accrued expense Rs. 300.
What will be the impact on profit for the year?

(a) Understated by Rs. 100

(b) Overstated by Rs. 100

(c) Overstated by Rs. 200

(d) Understated by Rs. 200

06. On finalizing the draft accounts Minhas identified that he has Rs. 1,000 rental income receivable.
Rental income received and recorded during the year is Rs. 11,000.
What is the correct entry to record the accrued income?

(a) Dr Rental income Rs. 1,000 Cr Accrued income Rs. 1,000

(b) Dr Cash Rs. 12,000 Cr Rental income Rs. 12,000

(c) Dr Cash Rs. 11,000 Cr Rental income Rs. 11,000

(d) Dr Accrued income Rs. 1,000 Cr Rental income Rs. 1,000

07. Which of the following is asset account?

(a) Prepaid expense

(b) Accrued expense

(c) Unearned income

(d) Rent payable

08. After finalizing the draft accounts of a business it was identified that salary expense payable for Rs.
9,000 has been ignored. Salary expense paid during the year was Rs. 110,000.
What will be the impact of recording the salaries payable?

(a) Profit will be reduced by Rs. 9,000

(b) Profit will be increased by Rs. 9,000

(c) Profit will be reduced by Rs. 110,000

(d) Profit will be increased by Rs. 110,000

09. Jasia has taken a loan of Rs. 250,000 from HBL as on 1st March 2018 for the construction of her office
building. The construction is completed as on June 30, 2018. She rented a portion of her office for Rs.
4,500 per month on July 1. Interest is accrued and paid annually @ 15% per annum on December
each year.
What amount of interest expenses and rent income should be shown in the statement of Profit or Loss
of Jasia’s business prepared on December 31, 2018?

© Emile Woolf International 277 The Institute of Chartered Accountants of Pakistan

 40
Introduction to accounting

(a) Interest expense Rs. 54,000, Rental income Rs. 37,500

(b) Interest expenseRs. 37,500, Rental income Rs. 54,000

(c) Interest expense Rs. 31,250, Rental income Rs. 27,000

(d) Interest expenseRs. 37,500, Rental income Rs. 4,500

10. What is the treatment of Pre - received income in the Statement of Financial Position of the business?

(a) Treated as a non – current asset

(b) Treated as a current asset

(c) Treated as a non – current liability

(d) Treated as a current liability

11. The annual rent expense for TTT for the period 1 July 2018 to 30 June 2019 is Rs. 35,000, which is
25% more than the previous year. Rent expense is paid on 1 July.
What is the charge of rent expense in the statement of profit or loss for the year ended 31 December
2018?

(a) Rs. 28,000

(b) Rs. 31,500

(c) Rs. 35,000

(d) Rs. 7,000

12. Which of the following statements is incorrect?

(a) Income received in advance is a current liability

(b) Accrued income is a current asset

(c) Prepaid insurance is a current liability

(d) Salaries payable is a current liability

13. After finalizing the draft accounts Arsalan identified that he has treated prepaid insurance of Rs. 1,000
as accrued expense.
What will be the impact of correction?

(a) Profit will be increased by Rs. 2,000

(b) Profit will be increased by Rs. 1,000

(c) Profit will be reduced by Rs. 1,000

(d) Profit will be reduced by Rs. 2,000

© Emile Woolf International 278 The Institute of Chartered Accountants of Pakistan

 41
Chapter 7: Accruals and prepayments

14. A business pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The
rent was increased from Rs. 150,000 per year to Rs. 180,000 per year as from 1 October 2007.
What rent expense and accrual should be included in the company’s financial statements for the year
ended 31 January 2008?

Rent expense Rs. Accruals Rs.

(a) 110,000 10,000

(b) 80,000 15,000

(c) 160,000 15,000

(d) 100,000 10,000

15. Helix Corporation has sublet part of its office and in the year ended 30 November 2008 the rent
receivable was:

Until 30 June 2008 Rs. 9,000 per year

From 1 July 2008 Rs. 12,000 per year

Rent was received quarterly in advance on 1 January, April, July, and October each year.
What amounts should appear in the company’s financial statements for the year ended 30 November
2008?

Rental income Statement of Financial Position

(a) Rs. 10,800 Rs. 1,000 in sundry payables

(b) Rs. 10,900 Rs. 1,000 in sundry payables

(c) Rs. 10,250 Rs. 1,000 in sundry receivables

(d) Rs. 9,900 Rs. 2,000 in sundry receivables

16. Sitara Industries has taken a loan from Crescent Bank. Interest on the loan is payable every quarter
i.e. on March 31, June 30, September 30 and December 31. Face amount of the loan is 500,000 and
the rate of interest is 10% per annum. Due to financial problems, two installments were not paid on
September 30 and December 31.
What is the amount of the interest liability to be shown in the Statement of Financial Position prepared
as on December 31?

Rs. ___________

17. Rent paid on 1 September 2017 for the year to 31 August 2018 was Rs. 15,000, and rent paid on 1
September 2018 for the year to 31 August 2019 was Rs. 18,000.
What figure for rent expense should be shown in the statement of profit or loss for the year ended 31
December 2018?

Rs. ___________

© Emile Woolf International 279 The Institute of Chartered Accountants of Pakistan

 42
Introduction to accounting

18. A business had deposited Rs. 500,000 into an annual fixed deposit on May 1, 2018. Interest is accrued
quarterly on March 31, June 30, September 30 and December 31 each year. Interest will be paid only
on maturity. Monthly interest amount is Rs. 3,000.
What amount of interest receivable should be shown in the Statement of Financial Position prepared
as on December 31, 2018?

Rs. ___________

19. A business has paid an annual salary of Rs. 36,000 in advance to one of its employees on 31 August
2017.
What is the amount of prepaid salaries at the end of the year on 31 December 2017?

Rs. ___________

20. A business was started on January 1, 2008 in a building which is on a 25 years lease. The rent of the
building is payable quarterly in advance. Payments of rent was made during the year as follows:

January 1, 2008 Rs. 7,500

March 29, 2008 Rs. 7,500

June 28, 2008 Rs. 7,500

September 30, 2008 Rs. 7,500

December 30, 2008 Rs. 7,500

What will be the rent expense charged to statement of profit or loss for the year ended December 31,
2008?

Rs. ___________

21. An accrual is:

(a) An expense relating to next year but not paid in current year

(b) An expense relating to the current year and paid within current year

(c) An expense relating to the current year but not paid in current year

(d) An expense relating to next year and already paid in current year

22. Earned but not yet received income is treated as

(a) Asset

(b) Liability

(c) Capital

(d) Loss

© Emile Woolf International 280 The Institute of Chartered Accountants of Pakistan

 43
Chapter 7: Accruals and prepayments

23. Unearned income is classified as

(a) Assets

(b) Liability

(c) Equity

(d) Loss

24. A prepayment can be defined as:

(a) Payments for expenses for that are not yet incurred and classified as non-current asset

(b) Expenses incurred but not yet paid and classified as current asset

(c) Payments for expenses for that are not yet incurred and classified as current asset

(d) None

25. Expenses relevant to the accounting period which remain unpaid by period end should be:

(a) Included with expenses paid and shown as an asset at the period end

(b) Ignored until they are paid for in the next period

(c) Deducted from amount already paid and shown as a liability at the period end

(d) Include in with the expenses and shown as a liability at the period end

26. Which of the following is not true?

(a) An accrual is an amount owing at the end of a period; a prepayment is an amount paid in
advance

(b) An accrual is a liability; a prepayment is an asset

(c) An accrual is a liability; a prepayment is a non-current asset

(d) An accrual is a current liability; a prepayment is a current asset

27. Staff salary remaining unpaid as at the year-end should be accounted for as:

(a) Prepaid salary (debit) and Staff salary expense (credit)

(b) Staff salary expense (debit) and Cash (credit)

(c) Accrued Salary (debit) and Staff salary expense (credit)

(d) Staff salary expense (debit) and accrued salary (credit)

© Emile Woolf International 281 The Institute of Chartered Accountants of Pakistan

 44
Introduction to accounting

28. A business has a year ended 30 September and receives an invoice for rent of Rs.600,000 for the six
months to 31 December. What accrual or prepayment is required for the invoice in the year end
accounts?

(a) Prepaid rent = Rs.300,000

(b) Accrued rent = Rs.300,000

(c) Prepaid rent = Rs.600,000

(d) Accrued rent = Rs.600,000

29. During the year, a business paid an electricity bill for Rs.900,000 for the 3 months to November. The
year end of the business is 30 September, what accrual or prepayment is needed at the year end?

(a) Prepaid electricity = Rs. 600,000

(b) Accrued electricity = Rs. 600,000

(c) Prepaid electricity = Rs. 300,000

(d) Accrued electricity = Rs. 300,000

30. A business has a beginning utilities accrual of Rs.50,000, an ending accrual of Rs.60,000, and during
the year, it pays for utilities of Rs. 80,000. What is the amount of utilities expense?

(a) Rs. 70,000

(b) Rs. 80,000

(c) Rs. 90,000

(d) Rs. 140,000

31. On 31 October 2019, a business pays annual insurance premium of Rs.600,000. What is the
prepayment at the end of the year (31 December 2019)?

(a) Nil

(b) Rs. 100,000

(c) Rs. 300,000

(d) Rs. 500,000

32. XYZ Ltd. receives interest of Rs.100,000 on bank deposit for the month of December 2011 on 3rd
January 2011. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry for such transaction?

(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000

(b) Cash (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000

(c) Cash (debit) = Rs.100,000 and Prepaid interest (credit) = Rs.100,000

(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000

© Emile Woolf International 282 The Institute of Chartered Accountants of Pakistan

 45
Chapter 7: Accruals and prepayments

33. XYZ Ltd. receives interest of Rs.100,000 on bank deposit for the month of December 2011 on 3rd
January 2011. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry when subsequently on 3rd January, payment for interest is
received?

(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000

(b) Cash (debit) = Rs.100,000 and Interest receivable (credit) = Rs.100,000

(c) Cash (debit) = Rs.100,000 and Prepaid interest (credit) = Rs.100,000

(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000

34. ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December in respect of
office rent for the following year.
ABC Ltd. has an accounting year end of 31st December. What accounting entry is to be passed in this
year?

(a) Cash (debit) = Rs.1 million and Advance rent – liability (credit) = Rs.1 million

(b) Cash (debit) = Rs.1 million and Accrued rent (credit) = Rs.1 million

(c) Cash (debit) = Rs.1 million and Rent income (credit) = Rs.1 million

(d) None

35. ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December in respect of
office rent for the following year.
What would be the accounting entry in the following year?

(a) Accrued rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million

(b) Advanced rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million

(c) Accrued rent (debit) = Rs.1 million and prepaid rent (credit) = Rs.1 million

(d) None

© Emile Woolf International 283 The Institute of Chartered Accountants of Pakistan

 46
Introduction to accounting

5 OBJECTIVE BASED ANSWERS

01. (b)
Rent
Particulars Rs. Particulars Rs.
Bal. b/d (accrued) 1,700 Bal. b/d (Advance) 3,000
Profit or loss 50,600 Cash received 50,800
Bal. c/d (Advance) 4,000 Bal. c/d (Accrued) 2,500
56,300 56,300

02. (b) Charge for SPL = Rs. 2,400/12x8 = Rs. 1,600

Prepayment = Rs. 24,00 - Rs. 1,600= Rs. 800
03. (c) Advance salaries are prepayment and an asset, so must be debited. This
reduces the current year expense, which shall be credited.
04. (b) The expense must be recorded (debited) under matching concept in the year it
has been incurred, even if the bill is outstanding.
05. (c) Prepayments are deducted from expenses and profit is increased and accruals
are added to the expenses and profit is reduced as a result. Therefore, the profit
has been overstated due to omissions.
06. (d) Accrued income is income receivable and must be recorded as an asset and
corresponding increase in income (credited).
07. (a)
08. (a) Rs. 110,000 is already recorded only further Rs. 9,000 is to be recorded as
expense on accrual basis, reducing the profit by Rs. 9,000.
09. (c) Interest expense = (Rs. 250,000x15%) x10/12=Rs. 31,250
Rental income = Rs. 4,500 x 6 = Rs. 27,000
10. (d) Income received in advance is an obligation to deliver goods or services in future
and therefore a liability. As such advances are not for long term, it is treated as
current liability.
11. (b) Rent Rs. Rs.
1 Jan 18 – 30 June 18 (35,000/100 x 125)/12 x 6 14,000
1 July 18 – 31 Dec 18 35,000/12x6 17,500
31,500

12. (c) Prepaid insurance is an asset as it is right to receive benefit from insurance
services in the future.
13. (a) Rs. 1,000 accrual will be reversed (reduction in expense and increase in profit) &
Rs. 1,000 prepayment will be recorded (reduction in expense and increase in
profit)
14. (c) Rent expense Rs. Rs.
1st Feb 2007 – 30 Sep 2007 150,000/12 x 8 100,000
1st Oct2007 – 31 Jan 2008 180,000/12 x 4 60,000
160,000
Accrued rent = 180,000/12 = Rs. 15,000

© Emile Woolf International 284 The Institute of Chartered Accountants of Pakistan

 47
Chapter 7: Accruals and prepayments

15. (c) Rental income Rs. Rs.

1st Dec 2007 – 30 June 2008 9,000/12 x 7 5,250
1st July 2008 – 30 Nov 2008 12,000 12 x 5 5,000
10,250
One month rent is receivable; Rs 12,000/12 = Rs. 1,000
16. Rs. 25,000 Interest per quarter = Rs. 500,000x10%=Rs. 50,000/4 Quarters
= Rs. 12,500x2 quarters =Rs. 25,000
17. Rs. 16,000 Rent for Jan to Aug 2018 = (Rs. 15,000/12x8)= Rs. 10,000
Rent for Sep to Dec 2018= (Rs. 18,000/12x4)=Rs. 6,000
Total = Rs. 16,000
18. Rs. 24,000 = Rs. 3,000x8 months = Rs. 24,000
All interest will be received on maturity, therefore, all is accrued.
19. Rs. 24,000 Advance salary = Rs. 36,000 x 8 /12 = 24,000
Four month salary is no more prepaid (services have been received against that).
20. Rs. 30,000 Rent
Particulars Rs. Particulars Rs.
SPL 30,000
Cash 7,500 x 5 37,500 c/d - advance 7,500

37,500 37,500

21. (c)
22. (a)
23. (b)
24. (c)
25. (d)
26. (c)
27. (d)
28. (b)
29. (a)
30. (c)
31. (d)
32. (d)
33. (b)
34. (a)
35. (b)

© Emile Woolf International 285 The Institute of Chartered Accountants of Pakistan

 48

Certificate in Accounting and Finance

CHAPTER
Introduction to accounting

10
Property, Plant and Equipment

Contents
1 Initial measurement
2 Depreciation and carrying amount
3 Methods of calculating depreciation
4 Derecognition
5 Objective based questions and answers

© Emile Woolf International 367 The Institute of Chartered Accountants of Pakistan

 49
Chapter 10: Property, Plant and Equipment

5 OBJECTIVE BASED QUESTIONS

01. A building contractor decides to construct an office building to be occupied by his own staff.
Which TWO of the following expenses incurred by the building contractor cannot be included as a part
of the cost of the office building?

(a) Interest incurred on a specific loan taken out to pay for the construction of the new offices
(b) A proportion of the contractor’s general administration costs
(c) Hire of plant and machinery for use on the office building site
(d) Additional design work caused by initial design errors

02. The purpose of depreciation is to:

(a) Allocate the cost less residual value on a systematic basis over the asset’s useful life
(b) Write the asset down to its realisable value each period
(c) Accumulate a fund for asset replacement
(d) Recognise that assets lose value over time

03. IAS 16 Property, Plant and Equipment requires an asset to be measured at cost on its original
recognition in the financial statements.
Alpha Trading Limited (ATL) used its own staff, assisted by contractors when required, to construct a
new warehouse for its own use.
Identify the costs listed below that cannot be capitalized.

(a) Clearance of the site prior to commencement of construction

(b) Professional surveyor fees for managing the construction work
(c) ATL’s own staff wages for time spent working on construction
(d) A proportion of ATL’s administration costs, based on staff time spent

04. Which TWO of the following items should be capitalised within the initial carrying amount of an item
of plant?
(a) Cost of transporting the plant to the factory
(b) Cost of installing a new power supply required to operate the plant
(c) A deduction to reflect the estimated residual value
(d) Cost of a three-year maintenance agreement

05. Hunza Limited acquired a new office building on 1 October 2014. Its initial carrying amount consisted
of:
Rs. 000
Land 2,000
Building structure 10,000
Air conditioning system 4,000
16,000
The estimated lives of the building structure and air conditioning system are 25 years and 10 years
respectively.

© Emile Woolf International 423 The Institute of Chartered Accountants of Pakistan

 50
Introduction to accounting

When the air conditioning system is due for replacement, it is estimated that the old system will be
dismantled and sold for Rs. 500,000.
Depreciation is time-apportioned where appropriate.
At what amount will the office building be shown in Hunza Limited’s statement of financial position as
at 31 March 2015?
(a) Rs. 15,625,000
(b) Rs. 15,250,000
(c) Rs. 15,585,000
(d) Rs. 15,600,000

06. Which of the following are items of property, plant and equipment?
(i) Standby generator expected to be used for seven years
(ii) A plot of land held for resale
(iii) A bus for pick-and-drop of staff members
(iv) A generator for rental to others
(a) (i) to (iv) all
(b) (i), (ii) and (iii) only
(c) (i), (iii) and (iv) only
(d) (ii), (iii) and (iv) only

07. An entity acquires a plant in exchange of old machinery which has carrying amount of Rs. 760,000
and fair value of Rs. 750,000 at the date of exchange. The list price of plant acquired is Rs. 850,000.
The entity is also required to pay cash of Rs. 55,000 in this exchange transaction.
At which amount the acquired plant should be initially recognised?

(a) Rs. 850,000

(b) Rs. 760,000
(c) Rs. 815,000
(d) Rs. 805,000

08. A company purchased some heavy machinery. The invoice for the machinery showed the following
items:
Rs.000
Cost of machinery 46,000
Cost of delivery 900
Cost of 12-month warranty on the machinery 1,600
Total amount payable 48,500
In addition, the company incurred Rs.3.4 million in making modifications to its factory so that the heavy
machinery could be installed.
What should be the cost of the machinery in the company’s machinery account in the ledger?
(a) Rs. 48,500,000
(b) Rs. 46,900,000
(c) Rs. 46,000,000
(d) Rs. 50,300,000

© Emile Woolf International 424 The Institute of Chartered Accountants of Pakistan

 51
Chapter 10: Property, Plant and Equipment

09. A business acquired new premises at a cost of Rs.400 million on 1 January 2015. In the period to the
year end of 31 March 2015 the following further costs were incurred.
Rs.000
Costs of initial adaptation of the building 12,000
Legal costs relating to the purchase 2,500
Monthly cleaning contract 3,400
Air conditioning unit necessary for machinery to be used 2,800
Cost of machinery 12,300
What amount should appear as the cost of premises in the company’s statement of financial position
at 31 March 2015?
(a) Rs. 414,500,000
(b) Rs. 412,000,000
(c) Rs. 425,800,000
(d) Rs. 417,800,000

10. An entity has built a new factory incurring the following costs:
Rs. '000
Land 1,200
Materials 2,400
Labour 3,000
Architect's fees 25
Surveyor's fees 15
Site overheads 300
Apportioned administrative overheads 150
Testing of fire alarms 10
Business rates for first year 12
7,112

What will be the total amount capitalised in respect of the factory?

(a) Rs. 6,112,000
(b) Rs. 6,950,000
(c) Rs. 7,112,000
(d) Rs. 7,100,000

11. A motor vehicle cost Rs.400,000. It has an expected residual value after 5 years of Rs.40,000.
If the sum of the digits method of depreciation is used, what will be the carrying amount of the asset
at the end of Year 2?

(a) Rs. 96,000

(b) Rs. 120,000
(c) Rs. 280,000
(d) Rs. 184,000

© Emile Woolf International 425 The Institute of Chartered Accountants of Pakistan

 52
Introduction to accounting

12. On 1 March 2018 Mercury Limited (ML) acquired a machine from Plant under the following terms:
Rs. 000
List price of machine 82,000
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
Purchase of a five-year maintenance contract with Plant 7,000
In addition to the above information ML was granted a trade discount of 10% on the initial list price of
the asset and a settlement discount of 5% if payment for the machine was received within one month
of purchase. ML paid for the plant on 25 March 2018.
On what amount, the plant should be initially measured on 1 March?

(a) Rs. 98,750,000

(b) Rs. 95,060,000
(c) Rs. 91,750,000
(d) Rs. 88,060,000

13. Construction of Venice Limited’s new store began on 1 April 2019. The following costs were incurred
on the construction:
Rs. 000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940
The store was completed on 1 January 2020.
Calculate the amount to be included as property, plant and equipment in respect of the new store

(a) Rs. 28,170,000

(b) Rs. 29,110,000
(c) Rs. 25,770,000
(d) Rs. 23,670,000

14. On 1 March 2010 Earth Limited (EL) purchased an upgrade package from Sun Limited at a cost of
Rs. 18 million for the machine it originally purchased in 2008. The upgrade took a total of two days
where new components were added to the machine. EL agreed to purchase the package as the new
components would lead to a reduction in production time per unit of 15%. This will enable EL to
increase production without the need to purchase a new machine.
What is appropriate accounting treatment?

(a) EL should expense this additional expenditure

(b) EL should capitalise this additional expenditure in the cost of existing plant
(c) EL should capitalise the 15% of Rs. 18 million in the cost of existing plant
(d) None of the above is appropriate treatment

© Emile Woolf International 426 The Institute of Chartered Accountants of Pakistan

 53
Chapter 10: Property, Plant and Equipment

15. An item of plant was purchased on 1 April 2008 for Rs. 2,000,000 and is being depreciated at 25% on
a reducing balance basis. What would be its residual value after its useful life of 5 years?
(a) Rs. 632,809
(b) Rs. NIL
(c) Rs. 474,609
(d) Rs. 400,000

16. On 1 April 2010 Mars Limited (ML) held non-current assets that cost Rs. 312 million and had
accumulated depreciation of Rs. 66 million at this date.
During the year ended 31 March 2011, ML disposed of non-current assets which had originally cost
Rs. 28 million and had a carrying amount of Rs. 11.2 million.
ML’s policy is to charge depreciation of 40% on the reducing balance basis, with no depreciation
charged in the year of disposal
What is the depreciation charge to the statement of profit or loss for the year ended 31 March 2011?

Rs. ___________

17. Jupiter Limited (JL) purchased a machine on 1 July 2017 for Rs. 500,000. It is being depreciated on
a straight line basis over its expected life of ten years. Residual value is estimated at Rs. 20,000. On
1 January 2018, following a change in legislation, JL fitted a safety guard to the machine. The safety
guard cost Rs. 25,000 and has a useful life of five years with no residual value.
What amount will be charged to profit or loss for the year ended 31 March 2018 in respect of
depreciation on this machine?

Rs. ___________

18. A non-current asset cost Rs.96,000 and was purchased on 1 June Year 1. Its expected useful life was
five years and its expected residual value was Rs.16,000. The asset is depreciated by the straight-
line method.
The asset was sold on 1 September Year 3 for Rs.68,000. There were no disposal costs. It is the
company policy to charge depreciation on a monthly basis. The financial year runs from 1 January to
31 December.
What was the gain or loss on disposal?

Rs. ___________

19. A non-current asset was purchased on 1 June Year 1 for Rs.216,000. Its expected life was 8 years
and its expected residual value was Rs.24,000. The asset is depreciated by the straight-line method.
The financial year is from 1 January to 31 December.
The asset was sold on 1 September Year 4 for Rs.163,000. Disposal costs were Rs.1,000.
It is the company policy to charge a proportionate amount of depreciation in the year of acquisition
and in the year of disposal, in accordance with the number of months for which the asset was held.
What was the gain or loss on disposal?

Rs. ___________

© Emile Woolf International 427 The Institute of Chartered Accountants of Pakistan

 54
Introduction to accounting

20. An asset was purchased on 1 July 2014 and it is being depreciated at 15% using reducing balance
method. It has carrying amount of Rs. 654,321 on June 30, 2019.
Work back and calculate the cost of the asset when purchased on 1 July 2014.

Rs. ___________

21. Which of the following is not an asset that falls under the scope of IAS 16?
(a) Tangible assets
(b) Assets held for the production or supply of goods or services
(c) Assets held for sale in the normal course of business
(d) Assets expected to be used for more than one period

22. Depreciable amount means;

(a) Cost of an asset + Residual value
(b) Cost of an asset – Residual value
(c) Cost of an asset – Residual value / useful life
(d) Residual value – Cost of an asset

23. A machine price was Rs.1, 000,000 and was carried through a truck. The truck’s fares were Rs. 20,
000. The engineers charged Rs. 45,000 for the installation.
The cost of the machine is?
(a) Rs.1,000,000
(b) Rs.1,020,000
(c) Rs.1,045,000
(d) Rs.1,065,000

24. Which of the following is not a component of cost of an asset?

(a) Purchase price
(b) Import duties
(c) Refundable sales tax
(d) Estimated dismantling costs

25. A company purchases land with an office building. The building has a useful life of 20 years. How
should the land be depreciated?
(a) Depreciate over 20 years
(b) Depreciate over useful life of the land
(c) Don’t depreciate the land
(d) None of these

26. If an asset is idle then?

(a) Depreciation is paused
(b) Depreciation for the entire period
(c) Depreciation is ignored
(d) Depreciation continues

© Emile Woolf International 428 The Institute of Chartered Accountants of Pakistan

 55
Chapter 10: Property, Plant and Equipment

27. Huge Ltd. purchases the machine for Rs.6 million. It has an estimated salvage value of Rs.1 million
and a useful life of five years.
What is the depreciation charged for the year under the straight line method?

(a) Rs.1,200,000
(b) Rs.1,000,000
(c) Rs.800,000
(d) None of the above

28. Small Ltd. purchases the equipment for Rs.600,000. It has an estimated salvage value of Rs.100,000
and a useful life of five years.
What is the book value of equipment under the reducing balance method at the end of its useful life?

(a) Rs.163,840
(b) Rs.165,000
(c) Rs.120,000
(d) Rs.100,000

29. Medium Ltd. purchases the car for Rs. 2,200,000. It has an estimated salvage value of Rs. 200,000
and a useful life of five years.
What is the depreciation charge for the first year under the sum-of-the-year digit method?

(a) Rs. 400,000

(b) Rs. 555,555
(c) Rs. 666,667
(d) None of the above

30. A change in depreciation method is a?

(a) Change in accounting policy
(b) Change in accounting estimate
(c) Change in accounting method
(d) Change in accounting standard
31. Which of these cost is capitalised as cost of an asset?
(a) Professional fees
(b) General overheads
(c) Initial operating losses
(d) Administration expenses

32. When an asset is sold or disposed of, where is the gain or loss recognised?
(a) Asset disposal account
(b) Profit and loss
(c) Revaluation reserve
(d) Depreciation

© Emile Woolf International 429 The Institute of Chartered Accountants of Pakistan

 56
Introduction to accounting

33. What is the net amount an entity expects to obtain for an asset at the end of its useful life?
(a) Residual value
(b) Depreciated value
(c) Present value
(d) Fair value

34. How often should the useful life of an asset be reviewed?

(a) Every six months
(b) As and when the market value will significantly change
(c) At least at each financial year end
(d) Never

35. Which of the following is not allowable as a directly attributable cost of a machine?
(a) Site preparation
(b) Initial testing cost
(c) Carriage inwards for fuel for the machinery
(d) Estimated dismantling cost

© Emile Woolf International 430 The Institute of Chartered Accountants of Pakistan

 57
Chapter 10: Property, Plant and Equipment

5 OBJECTIVE BASED ANSWERS

01. (b) & (d) Direct costs relating to the acquisition of the asset can be included such as labour
costs, interest on loans to acquire the asset and hire costs. The administration cost
is not a direct cost. Also costs relating to errors or wastage cannot be capitalised.
02. (a) The depreciation is systematic allocation of depreciable amount of an asset over its
useful life.
03. (d) Administration costs or share thereof cannot be capitalised.
04. (a) & (b) The maintenance costs should be expensed as incurred over three year. The
residual value should be taken into account for the purposes of calculating
depreciation, but not for the amount to be capitalised.
05. (a) Six months’ depreciation is required on the building structure and air conditioning
system.
Rs. 000
Land (not depreciated) 2,000
Building structure (10,000 – (10,000/25 × 6/12)) 9,800
Air conditioning system (4,000 – (3,500/10 × 6/12)) 3,825
15,625

06. (c) Plot of land held for resale is inventory and not PPE.
07. (d) Fair value of asset given up + cash paid
= Rs. 750,000 + 55,000 = Rs. 805,000
08. (d)
Cost of machinery: Rs. 000
Cost 46,000
Cost of delivery 900
Modification cost 3,400
Total 50,300

09. (a)
Cost of premises: Rs. 000
Cost 400,000
Adaptation 12,000
Legal fees 2,500
Total 414,500

10. (b)
Rs. 000
Land 1,200
Materials 2,400
Labour 3,000
Architects fees 25
Surveyors fees 15
Site overheads 300
Testing fire alarms 10
6,950

© Emile Woolf International 431 The Institute of Chartered Accountants of Pakistan

 58
Introduction to accounting

11. (d)
Sum of digits = 5 + 4 + 3 + 2 + 1 = 15 Rs.
Cost of asset 400,000
Year 1 Depreciation (400,000 – 40,000) x 5/15 (120,000)
Carrying amount at the end of year 1 280,000
Year 2 Depreciation (400,000 – 40,000) x 4/15 (96,000)
Carrying amount at the end of year 2 184,000

12. (c)
Rs. 000
List price of machine 82,000
Less: trade discount 10% (8,200)
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
91,750

13. (a)
Rs. 000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
28,170

14. (b) The additional amount should be capitalised as it is probable that economic benefits
would increase.
15. (c) Rs. 2,000,000 x (0.75)5 = 474,609
16. Rs. 93.92
million Rs. m
Carrying amount at 1 April 2010 (Rs. 312 – 66) 246
Carrying amount of disposal (11.2)
Carrying amount at 31 March 2011 234.8
Depreciation at 40% 93.92
..
17. Rs. 37,250
Rs. '000
Machine ((500,000 – 20,000) / 10 × 9/12) 36,000
Safety guard ((25,000/5) × 3/12) 1,250
37,250

© Emile Woolf International 432 The Institute of Chartered Accountants of Pakistan

 59
Chapter 10: Property, Plant and Equipment

18. Rs. 8,000

gain Rs.
Sale proceeds on disposal (Cash received) 68,000
Less: Disposal costs and cash paid 0
Net disposal proceeds 68,000

Asset at cost 96,000

Less: Acc. depreciation 80,000/ 5 years x 2.25 (36,000)
Carrying amount at date of disposal (60,000)

GAIN (LOSS) ON DISPOSAL 8,000

19. Rs. 24,000

gain Rs.
Sale proceeds on disposal (Cash received) 163,000
Less: Disposal costs and cash paid (1,000)
Net disposal proceeds 162,000
Asset at cost 216,000
Less: Accumulated depreciation W1 (78,000)
Carrying amount at date of disposal 138,000

GAIN (LOSS) ON DISPOSAL 24,000

W1 Rs.
Depreciation year 1
(Rs. 216,000 – 24,000) / 8 years = 24,000 x 7/12 14,000
Depreciation year 2 è Rs. 24,000 x 12/12 24,000
Depreciation year 3 è Rs. 24,000 x 12/12 24,000
Depreciation year 4 è Rs. 24,000 x 8/12 16,000
78,000

20. Rs.1,474,675 654,321 / (0.85)5 = Rs. 1,474,675

21. (c) Assets held for sale in the normal course of business are inventories.

22. (b) Depreciable amount = Cost less residual value

23. (d) Rs. 1,000,000 + 20,000 + 45,000 = Rs. 1,065,000

24. (c) Refundable sales tax is not a cost as it would be received back.

25. (c) Land is not depreciated because it has indefinite life.

26. (d) Depreciation continues even if the asset is not in use.

© Emile Woolf International 433 The Institute of Chartered Accountants of Pakistan

 60
Introduction to accounting

27. (b) (Rs. 6m – 1m) / 5 years = Rs. 1 million

28. (d) The carrying amount of an asset is equal to its residual value at the end of useful
life, under any depreciation method.

29. (c) (Rs. 2,200,000 – 200,000) x 5/15 = Rs. 666,667

30. (b) Change in depreciation method is change in accounting estimate.

31. (a) Professional fees are directly attributable expenditure. Other items are not.

32. (b) Gain or loss is recognised in profit or loss

33. (a) Residual value is amount expected at the end of useful life.

34. (c) Useful life is reviewed annually at each financial year end, at least.

35. (c) Carriage inwards for fuel for the machinery are revenue expenditure.

© Emile Woolf International 434 The Institute of Chartered Accountants of Pakistan

 61

Certificate in Accounting and Finance

CHAPTER
Financial accounting and reporting I

7
IAS 16: Property, plant
and equipment

Contents
1 Revaluation
2 Disclosure requirements of IAS 16
3 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 351 The Institute of Chartered Accountants of Pakistan

 62
Financial accounting and reporting I

3 OBJECTIVE BASED QUESTIONS

01. An entity purchased a property 15 years ago at a cost of Rs. 100,000 and have been depreciating it at
a rate of 2% per annum, on the straight-line basis. The entity has had the property professionally
revalued at Rs. 500,000.
What is the revaluation surplus that will be recorded in the financial statements in respect of this
property?

(a) Rs. 400,000

(b) Rs. 500,000

(c) Rs. 530,000

(d) Rs. 430,000

02. An entity owns two buildings, A and B, which are currently recorded in the books at carrying amounts
of Rs. 170,000 and Rs. 330,000 respectively. Both buildings have recently been valued as follows:
Building A Rs. 400,000
Building B Rs. 250,000
The entity currently has a balance on the revaluation surplus of Rs. 50,000 which arose when building
A was revalued several years ago. Building B has not previously been revalued.
What double entry will need to be made to record the revaluations of buildings A and B?

(a) Dr Non-current assets Rs. 150,000

Dr Statement of profit or loss Rs. 80,000
Cr Other comprehensive income (revaluation surplus) Rs. 230,000

(b) Dr Non-current assets Rs. 150,000

Dr Statement of profit or loss Rs. 30,000
Cr Other comprehensive income (revaluation surplus) Rs. 180,000

(c) Dr Non-current assets Rs. 150,000

Cr Other comprehensive income (revaluation surplus) Rs. 150,000

(d) Dr Non-current assets Rs. 150,000

Dr Statement of profit or loss Rs. 50,000
Cr Other comprehensive income (revaluation surplus) Rs. 200,000

03. An entity purchased property for Rs. 6 million on 1 July 2013. The land element of the purchase was
Rs. 1 million. The expected life of the building was 50 years and its residual value nil. On 30 June 2015
the property was revalued to Rs. 7 million, of which the land element was Rs. 1.24 million and the
buildings Rs. 5.76 million. On 30 June 2017, the property was sold for Rs. 6.8 million.
What is the gain on disposal of the property that would be reported in the statement of profit or loss for
the year to 30 June 2017?

(a) Gain Rs. 40,000

(b) Loss Rs. 200,000

(c) Gain Rs. 1,000,000

(d) Gain Rs. 1,240,000

© Emile Woolf International 392 The Institute of Chartered Accountants of Pakistan

 63
Chapter 7: IAS 16: Property, plant and equipment

04. Which of the following statements are correct?

1. If the revaluation model is used for property, plant and equipment, revaluations must
subsequently be made with sufficient regularity to ensure that the carrying amount does not
differ materially from the fair value at each reporting date.
2. When an item of property, plant and equipment is revalued, there is no requirement that the
entire class of assets to which the item belongs must be revalued.

(a) Only statement 1 is correct

(b) Only statement 2 is correct

(c) Both statements are correct

(d) None of the statement is correct

05. The following trial balance extract relates to a property which is owned by Maira Limited as at 1 April
2014.

Dr Cr
Rs. 000 Rs. 000
Property at cost (20 year original life) 12,000
Accumulated depreciation as at 1 April 2014 3,600
On 1 October 2014, following a sustained increase in property prices, Maira Limited revalued its
property to Rs. 10.8 million.
What will be the depreciation charge in Maira Limited’s statement of comprehensive income for the year
ended 31 March 2015?

(a) Rs. 540,000

(b) Rs. 570,000

(c) Rs. 700,000

(d) Rs. 800,000

06. A company purchased a building on 1 April 2007 for Rs. 10,000,000. The asset had a useful economic
life at that date of 40 years. On 1 April 2009 the company revalued the building to its current fair value
of Rs. 12,000,000.
What is the double entry to record the revaluation?

(a) Dr. Building 1,500,000

Dr. Accumulated depreciation 500,000
Cr. Other comprehensive income 2,000,000

(b) Dr. Building 2,000,000

Dr. Accumulated depreciation 500,000
Cr. Profit or loss 2,500,000

(c) Dr. Building 2,000,000

Dr. Accumulated depreciation 500,000
Cr. Other comprehensive income 2,500,000

© Emile Woolf International 393 The Institute of Chartered Accountants of Pakistan

 64
Financial accounting and reporting I

(d) Dr. Building 1,500,000

Dr. Accumulated depreciation 500,000
Cr. Profit or loss 2,000,000

07. The carrying value of property at the end of the year amounted to Rs. 108 million. On this date the
property was revalued and was deemed to have a fair value of Rs. 95 million. The balance on the
revaluation reserve relating to the original gain of the property was Rs. 10 million.
What is the double entry to record the revaluation?

(a) Dr. Profit or loss 3 million

Dr. Other comprehensive income 10 million
Cr. Property 13 million

(b) Dr. Profit or loss 10 million

Dr. Other comprehensive income 3 million
Cr. Property 13 million

(c) Dr. Profit or loss 13 million

Dr. Other comprehensive income 3 million
Cr. Property 16 million

(d) Dr. Profit or loss 13 million

Cr. Property 13 million

08. A company revalued its property on 1 April 2009 to Rs. 20m (Rs. 8m for the land). The property originally
cost Rs. 10m (Rs. 2m for the land) 10 years ago. The original useful economic life of 40 years is
unchanged. The company’s policy is to make a transfer to realized profits in respect of excess
depreciation.
At which amount the property be presented at as at 31 March 2010?

(a) Rs. 20 million

(b) Rs. 19.6 million

(c) Rs. 12 million

(d) Rs. 11.6 million

09. A company revalued its property on 1 April 2009 to Rs. 20m (Rs. 8m for the land). The property originally
cost Rs. 10m (Rs. 2m for the land) 10 years ago. The original useful economic life of 40 years is
unchanged. The company’s policy is to make a transfer to realized profits in respect of excess
depreciation.
What is amount of balance in revaluation surplus account as at 31 March 2010?

(a) Rs. 12 million

(b) Rs. 10 million

(c) Rs. 9.8 million

(d) Rs. 11.8 million

© Emile Woolf International 394 The Institute of Chartered Accountants of Pakistan

 65
Chapter 7: IAS 16: Property, plant and equipment

10. Which of the following is an optional disclosure requirement of IAS 16?

(a) Measurement bases for determining gross carrying amount

(b) Depreciation method

(c) Useful lives or depreciation rates

(d) The carrying amount of temporarily idle PPE

11. Following information is available for equipment account of a business on 1st January 2018:
Opening balance of equipment, a/c (Revalued amount) Rs. 7,500,000
Surplus on revaluation of equipment a/c Rs. 2,000,000
At start of year company sold equipment for Rs. 90,000,000.
Company has a policy of charging 20% depreciation on straight line basis.
What will be treatment of revaluation surplus at disposal of asset?

(a) Dr Surplus on revaluation Rs. 2,000,000

Cr Retained earnings Rs. 2,000,000

(b) Dr Retained earnings Rs. 2,000,000,

Cr Surplus on revaluation Rs. 2,000,000

(c) Dr Surplus on revaluation Rs. 3,500,000

Cr Retained earnings Rs. 3,500,000

(d) Dr Surplus on revaluation Rs. 2,0000,000

Cr Equipment account Rs. 2,000,000

12. A non–current asset costing Rs. 216,000 and carrying value Rs. 145,000 is revalued to Rs. 291,000.
How should revaluation be recorded?

(a) Dr Asset a/c Rs. 75,000,

Cr Surplus on revaluation Rs. 75,000

(b) Dr Asset a/c Rs. 75,000,

Dr Accumulated Depreciation Rs. 71,000,
Cr Surplus on revaluation Rs. 146,000

(c) Dr Surplus on revaluation Rs. 146,000,

Cr Asset a/c Rs. 75,000,
Cr Accumulated Depreciation Rs. 71,000

(d) Dr Accumulated depreciation Rs. 146,000,

Cr Surplus on revaluation Rs. 146,000

13. When items of property, plant and equipment are stated at revalued amounts the following must be
disclosed:
(i) the effective date of the revaluation
(ii) whether an independent valuer was involved

© Emile Woolf International 395 The Institute of Chartered Accountants of Pakistan

 66
Financial accounting and reporting I

(iii) the methods and significant assumptions applied in estimating the items’ fair values
(iv) the extent to which the items’ fair values were determined directly by reference to observable
prices in an active market or recent market transactions on arm’s length terms or were
estimated using other valuation techniques
(v) for each revalued class of property, plant and equipment, the carrying amount that would
have been recognised had the assets been carried under the cost model;
(vi) the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.

(a) (i), (ii) and (vi) only

(b) (i), (ii), (v) and (vi) only

(c) (i), (ii), (iii) and (iv) only

(d) (i) to (vi) all

14. IAS 16 encourages disclosure of the following information as users of financial statements might find it
to be useful.
(i) the carrying amount of temporarily idle property, plant and equipment
(ii) the gross carrying amount of any fully depreciated property, plant and equipment that is still
in use
(iii) the carrying amount of property, plant and equipment retired from active use and held for
disposal
(iv) when the cost model is used, the fair value of property, plant and equipment when this is
materially different from the carrying amount

(a) (i), (ii) and (iii) only

(b) (i), (ii) and (iv) only

(c) (i), (iii) and (iv) only

(d) (i) to (iv) all

15. Which of the following statements is correct?

(a) An entity may present PPE at gross carrying amount or net carrying amount under IAS 16

(b) Either useful lives or depreciation rates are to be disclosed, both are not required.

(c) Under revaluation model, PPE are revalued at end of each year

(d) If an entity chooses revaluation model, it must apply revaluation model to all of its PPE.

16. Waqas Limited purchased a machine for Rs. 30,000 on 1 January 2015 and assigned it a useful life of
12 years. On 31 March 2017 it was revalued to Rs. 32,000 with no change in useful life.
What will be depreciation charge in relation to this machine in the financial statements for the year
ending 31 December 2017?

Rs. ___________

© Emile Woolf International 396 The Institute of Chartered Accountants of Pakistan

 67
Chapter 7: IAS 16: Property, plant and equipment

17. A business purchased building costing Rs. 7,500,000 on 1 January 2018.

The policy of business is to charge straight line depreciation over its useful life of 20 years.
On 31 December 2020, building was revalued to Rs. 7,650,000.
What is the amount of incremental depreciation to be transferred to retained earnings at year ending 31
December 2021?

Rs. ___________

18. A business purchased an asset on 1 January 2016 costing Rs. 5,000,000 having a useful life of 10
years with nil residual value. On 1 January 2018 balance of accumulated depreciation was Rs.
1,000,000. Asset is revalued to Rs. 4,500,000 on 1 January 2018 (start of the year).
Business has a policy to charge straight line depreciation.
What is the depreciation charge for the year ended 31 December 2018?

Rs. ___________

19. A business purchased an asset on 1 January 2016 costing Rs. 5,000,000 having a useful life of 10
years with nil residual value. On 1 January 2018 balance of accumulated depreciation was Rs.
1,000,000. Asset is revalued to Rs. 4,500,000 on 1 January 2018 (start of the year).
Business has a policy to charge straight line depreciation.
What is the amount of revaluation surplus at the date of revaluation?

Rs. ___________

20. A business purchased an asset on 1 January 2016 costing Rs. 5,000,000 having a useful life of 10
years with nil residual value. On 1 January 2018 balance of accumulated depreciation was Rs.
1,000,000. Asset is revalued to Rs. 4,500,000 on 1 January 2018 (start of the year).
Business has a policy to charge straight line depreciation.
What is the amount of incremental depreciation for the year ended 31 December 2018?

Rs. ___________

21. A revaluation gain is credited into?

(a) Revaluation reserve

(b) Capital reserve

(c) Profit and loss

(d) Any of the above

22. After initial recognition, an entity has a choice to choose cost and?

(a) Realizable model

(b) Replacement model

(c) Revaluation model

(d) Carrying value model

© Emile Woolf International 397 The Institute of Chartered Accountants of Pakistan

 68
Financial accounting and reporting I

23. When an item of property, plant and equipment is revalued, what should be revalued?

(a) A selection of assets decided by management

(b) The whole class of assets to which it belongs

(c) The individual asset

(d) A selection of assets picked at random

24. If an asset increases in value, the increase is noted as?

(a) An increase in net profit in the SOCI

(b) An increase in retained earnings in SOFP

(c) An increase in revaluation surplus in the SOFP and other comprehensive income in the SOCI

(d) An increase in “other profit” in SOCI

25. Which of the following is not a valid reason for reporting non-current assets at revaluation amount rather
than cost?

(a) To prevent long life assets from being reported at out of date historical costs

(b) To keep owners of the business better informed of their equity in the business.

(c) To report performance correctly by matching earnings with the proper costs of assets used.

(d) To avoid having to pay higher taxes

26. An entity has a policy of revaluing its PPE. An asset cost Rs.5m on 1 January 2020 and has a useful
life of five years and is depreciated on a straight-line basis to a zero residual value. The value of the
asset at 31 December 2020 was Rs.3.8m. The fall in value will be accounted for as follows?

(a) Depreciation Rs.1m and fall in value of Rs.200,000 both to the reserves

(b) Depreciation Rs.1m to the income statement and fall in value of Rs.200,000 ignored until there
is a revaluation surplus

(c) Depreciation Rs.1m to income statement and fall in value of Rs.200,000 to the reserves

(d) Depreciation Rs.1m and fall in value of Rs.200,000 both to the income statement

27. During the financial year, Akmal Ltd had the following increases in reserves:
i. Rs. 5 million from a revaluation of freehold premises
ii. Rs.10 million in share premium
iii. Rs.25 million from trading profit retained
Which of these are increases in capital reserves?

(a) i only

(b) ii only

(c) i. and ii. Only

(d) iii. only

© Emile Woolf International 398 The Institute of Chartered Accountants of Pakistan

 69
Chapter 7: IAS 16: Property, plant and equipment

28. The following gains may legally be withdrawn from the company by shareholders:
i. gains that arise from the upward revaluation of non-current assets
ii. gains that arise from the sale of non-current assets
What is the validity of each statement?

(a) Both i. and ii are true

(b) i. is true and ii. is false

(c) Both i. and ii are false

(d) ii. is true and i. is false

29. The financial statements of Saadi Limited for the most recent year indicated the following:
i. a bonus issue of shares
ii. a transfer of profit retained to retained earnings
iii. an increase in the revaluation reserve due non-current assets
iv. a rights issue of shares
Which of the above involved a movement of cash?

(a) i. and ii

(b) ii. and iii.

(c) iii only

(d) iv only

30. An apartment is revalued upwards by Rs. 1 million. It was acquired 5 years ago for Rs. 5 million. Its
useful life remains same as 10 years.
What is the revised depreciation charge for the year after revaluation?

(a) Rs. 500,000

(b) Rs. 600,000

(c) Rs. 700,000

(d) Rs. 800,000

31. A building is revalued upwards by Rs. 2 million. It was acquired five years ago for Rs.10 million. Its
useful life remains same as 20 years. What is the incremental depreciation charge for the year?

(a) Rs.100,000

(b) Rs.133,333

(c) Rs.166,667

(d) Rs.200,000

© Emile Woolf International 399 The Institute of Chartered Accountants of Pakistan

 70
Financial accounting and reporting I

32. An IT equipment being carried at revaluation model has revaluation reserve balance of Rs. 50,000.
During the year, it reduces its value due to technological obsolescence. It has Rs. 70,000 decrease in
value. What would be the impact of this revaluation decrease?

(a) The decrease of Rs.50,000 is debited to revaluation reserve and Rs.20,000 to profit or loss for
the year

(b) The decrease of Rs.50,000 is debited to profit and loss account and Rs.20,000 to revaluation
reserve for the year

(c) The whole decrease is debited to revaluation reserve

(d) The whole decrease is debited to profit or loss for the year

© Emile Woolf International 400 The Institute of Chartered Accountants of Pakistan

 71
Chapter 7: IAS 16: Property, plant and equipment

3 OBJECTIVE BASED ANSWERS

01. (d) Rs.

Current value 500,000

Carrying amount
(100,000 – (100,000 × 2% × 15 yrs)) (70,000)

Revaluation gain 430,000

02. (a)
Building A Building B

Current value 400,000 250,000

Carrying amount (170,000) (330,000)

Revaluation gain/(loss) 230,000 (80,000)

The gain on Building A will be credited to other comprehensive income and the
revaluation surplus.
The loss on Building B will be debited to the statement of profit or loss expenses
because we do not have a balance on the revaluation surplus in respect of
building B to offset the loss.
We make an overall debit to non-current assets of Rs. 230,000 – Rs. 80,000 =
Rs. 150,000

03. (a) Land Buildings Total

Rs. Rs. m Rs. m

Cost 1 July 2013 1.00 5.00 6.00

Building depreciation
Rs. 5 million/50 years x 2 years (0.2) (0.2)

Carrying amount 30 June 2015 1.00 4.80 5.80

Revaluation gain 0.24 1.96 1.20

Revalued amount 1.24 5.76 7.00

Building depreciation
Rs. 5.76m/48 years x 2 years (0.24) (0.24)

Carrying amount 30 June 2017 1.24 5.52 6.76

Disposal proceeds 6.80

Gain on disposal 0.04

The gain on disposal is Rs. 40,000. The Rs. 1.2 million balance on the revaluation
reserve is transferred from the revaluation reserve to another reserve account
(probably retained earnings) but is not reported through the statement of profit or
loss for the year.

04. (a) IAS 16 (para 31) states that when the revaluation model is used, revaluations
should be made with sufficient regularity to ensure that the carrying value of the
assets remains close to fair value. IAS 16 also states (para 36) that, if one item
in a class of assets is revalued, all the assets in that class must be revalued.

© Emile Woolf International 401 The Institute of Chartered Accountants of Pakistan

 72
Financial accounting and reporting I

05. (c) Six months’ depreciation to the date of the revaluation will be Rs. 300,000
(12,000/20 years × 6/12). Six months’ depreciation from the date of revaluation
to 31 March 2015 would be Rs. 400,000 (10,800/13.5 years remaining life × 6/12).
Total depreciation is Rs. 700,000.

06. (c) Building a/c

Particulars Rs. Particulars Rs.
b/d 10,000,000 Acc. dep 500,000
Surplus 2,500,000 c/d 12,000,000
12,500,000 12,500,000

Building net debited by Rs. 2,000,000 (2,500,000 – 500,000)

07. (a) Total loss Rs. 13 million, Rs. 10 will be charged to revaluation surplus and
remaining to profit or loss.

08. (b) Depreciation (20 – 8) / 30 years = Rs. 0.4 million

Carrying amount Rs. 20 million less 0.4 million = Rs. 19.6 million

09. (c) Depreciation Now (20 – 8) / 30 years = Rs. 0.4 million

Depreciation Cost (10 – 2) / 40 years = Rs. 0.2 million
Revaluation surplus
= Land Rs. 6 million + Building Rs. 4 million - incremental depreciation 0.2 million
= Rs. 9.8 million

10. (d)

11. (a) On disposal of a revalued asset, the full balance of surplus on revaluation is
transferred to retained earnings.

12. (b) Accumulated depreciation = Rs. 216,000-Rs. 145,000=Rs. 71,000

Surplus = Rs. 291,000-Rs. 145,000=Rs. 146,000
Net amount debited to asset = Rs. 146,000-Rs. 71,000=Rs. 75,000

13. (d)

14. (d)

15. (b)

16. Rs. 3,087 The machine has been owned for 2 years 3 months, so the remaining useful life
at 31 March 2017 was 9 years 9 months.
Prior to revaluation it was being depreciated at Rs. 2,500 pa (30,000/12), so the
charge for the first three months of 2017 was Rs. 625.
The machine will now be depreciated over the remaining 9 years 9 months = 117
months. So the charge for the remaining 9 months of 2017 is Rs. 2,462 ((32,000
/ 117) × 9).
So total depreciation for the year ended 31.12.17 is (625 + 2,462) = Rs. 3,087

17. Rs. 75,000 Incremental depreciation = depreciation on revalued amount – depreciation at

cost
Dep. before revaluation = Rs. 7,500,000 / 20 years = Rs. 375,000
Dep. after revaluation = Rs. 7,650,000 / 17 years = Rs. 450,000
Incremental depreciation = Rs. 75,000

© Emile Woolf International 402 The Institute of Chartered Accountants of Pakistan

 73
Chapter 7: IAS 16: Property, plant and equipment

18. Rs. 562,500 Depreciation = Rs. 4,500,000/8= Rs. 562,500

19. Rs. 500,000 Revaluation surplus = Rs. 4,000,000 – 4,500,000= Rs. 500,000

20. Rs. 62,500 Incremental depreciation = Dep on revalued amount – Dep on cost
= (4,500,000/8)– (5,000,000/10)
=Rs. 562,500 – 500,000 = 62,500
Alternatively, Rs. 500,000 surplus / 8 years = Rs. 62,500

21. (a)

22. (c)

23. (b)

24. (c)

25. (d)

26. (d)

27. (c)

28. (d)

29. (d)

30. (c)

31. (b)

32. (a)

© Emile Woolf International 403 The Institute of Chartered Accountants of Pakistan

 74

Certificate in Accounting and Finance

CHAPTER
Introduction to accounting

11
Inventory

Contents
1 Scope and explanation
2 End-of-year adjustments
3 Other issues
4 Journal entries
5 Inventory counts (stock takes)
6 Disclosure
7 Objective based questions and answers

© Emile Woolf International 435 The Institute of Chartered Accountants of Pakistan

 75
Introduction to accounting

7 OBJECTIVE BASED QUESTIONS

01. In preparing its financial statements for the current year, a company’s closing inventory was
understated by Rs. 200,000.
What will be the effect of this error if it remains uncorrected?
(a) The current year’s profit will be overstated and next year’s profit will be understated
(b) The current year’s profit will be understated and next year’s profit will be overstated
(c) The current year’s profit will be understated but there will be no effect on next year’s profit
(d) The current year’s profit will be overstated but there will be no effect on next year’s profit

02. Which of the following cost should be deducted from Revenue to arrive at gross profit and what is
accounting concept behind this?
(a) Cost of goods purchased AND Prudence concept
(b) Cost of goods produced AND Matching concept
(c) Cost of goods sold AND Prudence concept
(d) Cost of goods sold AND Matching concept

03. Which of the following is included in the cost of purchases?

(a) Administrative Salaries
(b) Abnormal loss
(c) Freight in
(d) Rent of store

04. At 01 December 2018 Nida had opening inventory of Rs. 20,000 and at 31 December 2018 Nida
had closing inventory of Rs. 35,000.
Which of the following entries are required to account for opening and closing inventory when
preparing financial statements of the business?
(a) Dr Cost of sales Rs. 20,000 Cr Inventory Rs. 20,000 and Dr Inventory Rs. 35,000 Cr Cost
of sales Rs. 35,000
(b) Dr Cost of sales Rs. 35,000 Cr Inventory Rs. 35,000 and Dr Inventory Rs. 20,000 Cr Cost
of sales Rs. 20,000
(c) Dr Cost of sales Rs. 20,000 Dr Inventory Rs. 20,000 and Dr Inventory Rs. 35,000 Dr Cost
of sales Rs. 35,000
(d) Cr Cost of sales Rs. 35,000 Cr Inventory Rs. 35,000 and Cr Inventory Rs. 20,000 Cr Cost
of sales Rs. 20,000

05. Maria had opening inventory of 900 units at Rs. 5 unit at 01 January 2019. During the month she
made following purchases and sales transactions:
January 05 Purchased 1,000 units at Rs. 6 per unit
January 09 Sold 1,250 units
January 15 Purchased 600 units at Rs. 7 per unit
January 28 Sold 550 units
Maria uses periodic weighted average cost method for inventory valuation. What is value of closing
inventory at 31 January 2019?

© Emile Woolf International 476 The Institute of Chartered Accountants of Pakistan

 76
Chapter 11: Inventory

(a) Rs. 4,800

(b) Rs. 4,116
(c) Rs. 6,468
(d) None of the above

06. The accounting concept that requires valuation of Inventory at lower of cost and net realisable value
is?
(a) Accrual
(b) Materiality
(c) Prudence
(d) Going concern

07. Which of the following costs are included in conversion costs?

(a) Commission of selling staff
(b) Carriage in
(c) Carriage outwards
(d) Supervisor’s wages

08. What is impact on closing inventory if an item having cost of Rs. 2,500 and a net realizable value of
Rs. 3,000 has been omitted from year - end inventory count?
(a) Understated by Rs. 2,500
(b) Understated by Rs. 3,000
(c) Overstated by Rs. 2,500
(d) Understated by Rs. 500

09. If closing inventory is accounted for as Rs.240,000 instead of Rs.180,000 then;

(a) Gross profit as well as net profit will be exaggerated
(b) Gross profit and net profit would both be understated
(c) Gross profit will be exaggerated, and net profit understated
(d) Gross profit will be exaggerated but net profit correctly reported

10. An organization had opening inventory of 35,000 units @Rs. 3.5 per unit. During the month it made
purchases of 40,000 units @Rs. 5 per unit. Sales were 50,000 units.
What is value of cost of goods sold during the month if the company uses continuous weighted
average method for inventory valuation?
(a) Rs. 107,500
(b) Rs. 215,000
(c) Rs. 197,500
(d) Rs. 75,000

© Emile Woolf International 477 The Institute of Chartered Accountants of Pakistan

 77
Introduction to accounting

11. After preparing draft accounts, Saima reviews her closing inventory. She discovers that some items
included at cost of Rs. 2,600 can be sold for Rs. 2,550 after incurring selling costs of Rs. 65.
What effect will any required adjustment have on Saima’s profits?
(a) Profit decreases by Rs. 65
(b) Profit decreases by Rs. 115
(c) No change to profit
(d) Profit decreases by Rs. 50

12. Ali had opening inventory of Rs. 1,500,000. Purchases made during the period were Rs. 2,550,000.
Sales during the period were Rs. 4,500,000 and he had closing inventory of Rs. 1,000,000.
Gross profit for the period was?
(a) Rs. 1,950,000 Profit
(b) Rs. 450,000 Profit
(c) Rs. 1,450,000 Profit
(d) Rs. 550,000 Loss

13. What is correct entry for goods taken by owner for personal use?
(a) Cr Purchases account and Dr Drawings account with the cost price of the goods.
(b) Cr Opening Inventory account and Dr Drawings account with cost price of the goods.
(c) Cr Trading account and Dr Drawings account with the selling price of the goods.
(d) Cr Sales account and Dr Drawings account with the sale price of the goods.

14. Tasweeb Corporation sells three products – Alpha, Beta and Gamma. The following information
was available at the year end:

Alpha Beta Gamma

Rs. per unit Rs. per unit Rs. per unit

Original cost 10 13 15

Estimated selling price 15 14 14

Selling and distribution costs 3 5 2

Units Units Units

Inventory: units held 300 380 240

The value of inventory at the end of year should be?

(a) Rs. 8,300
(b) Rs. 5,700
(c) Rs. 9,300
(d) Rs. 6,150

© Emile Woolf International 478 The Institute of Chartered Accountants of Pakistan

 78
Chapter 11: Inventory

15. The following information is related to a mobile dealer about his inventory at year end.
Mobile Set Cost value (Rs.) Net realisable value (Rs.)
A 5,000 3,300
B 13,000 13,500
C 14,200 13,900
D 14,900 15,000
What value of inventory should be shown in his Statement of Financial Position prepared at the year
end?
(a) Rs. 39,800
(b) Rs. 45,900
(c) Rs. 40,000
(d) Rs. 45,100

16. On 1st July 2018, Imad had opening inventory of 50 units at a cost of Rs. 60 per unit. During July
2018 he has made following purchases and sales:
July 09 120 units purchased at a cost of Rs. 65 per unit
July 16 65 units sold
July 24 45 units purchased at a cost of Rs. 67 per unit
July 30 100 units sold
What is the value of inventory at 31 March using the FIFO method?
Rs. ___________

17. During August, Anum had sales of Rs. 158,000, which made a gross profit of Rs. 45,000. Purchases
amounted to Rs. 101,000 and opening inventory was Rs. 34,000.
The value of closing inventory was?
Rs. ___________

18. The closing stock of Daniel amounts to Rs. 130,200. But later on it was discovered that some
damaged items were included having cost of Rs. 25,000. Total repair cost is expected to be Rs.
3,500. After repair these could be sold for Rs. 18,000.
What is the correct value of Daniel inventory?
Rs. ___________

19. Following is the detail of inventory of Hamid at December 31, 2018:

Product Cost value (Rs. ) Net realisable value (Rs. )
A 15,000 17,000
B 12,000 10,000
C 13,500 11,000
D 12,600 14,000
TOTAL 53,100 52,000

© Emile Woolf International 479 The Institute of Chartered Accountants of Pakistan

 79
Introduction to accounting

What value of inventory should be shown by the corporation in its Statement of Financial Position
at year end?
Rs. ___________

20. Tahir and Taha are doing partnership business. The net profit earned by their business during the
year ended Dec 31 2008 is Rs. 250,000. In subsequent year it was realized that the ending inventory
of year 2007 was overstated by Rs. 10,000.
By what amount the profit for the year 2008 is understated?
Rs. ___________

21. Which of the following cost models is not permitted under IAS 2?
(a) First in, First out (‘FIFO’)
(b) Last in, Last out (‘LIFO’)
(c) Weighted Average
(d) Actual cost

22. Which of the following items are excluded from the scope of IAS 2 – Inventories?
(a) Inventories that are stated at Net Realisable Value
(b) Assets held for sale in the ordinary course of business
(c) Inventories whose fair value is more than the cost
(d) Agricultural produce at the point of harvest

23. Which of the following is not permitted as a cost of inventory?

(a) Non-recoverable taxes
(b) Storage costs
(c) Shipping
(d) Fixed manufacturing overheads

24. Which of the following items should be disclosed as per the requirements of IAS 2?
(a) Average holding period of inventories of the entity as at the end of the reporting period
(b) List of major customers to whom the inventories were sold during the reporting period
(c) Carrying amount of inventories pledged as security for liabilities
(d) Average lead time of procurement for major classes of inventories

25. A company sold goods of worth Rs.1 million, the manufacturing cost of the goods were Rs.600,000.
The carriage outwards is Rs.50,000 and commission paid to agent were also Rs.50,000. What is
the gross and net profit?
(a) Gross profit = 600,000 and net profit = 250,000
(b) Gross profit = 300,000 and net profit = 200,000
(c) Gross profit = 400,000 and net profit = 300,000
(d) Gross profit = 350,000 and net profit = 300,000

© Emile Woolf International 480 The Institute of Chartered Accountants of Pakistan

 80
Chapter 11: Inventory

26. Bazuka Limited (BL) manufacturers and sells office equipment for workplaces. The stock of
equipment was included in the closing inventory as of 31 December 2019 at a cost of Rs.50,000
per equipment.
During the final audit, the auditors noted that the subsequent selling price for the inventory at 15th
January 2020 was Rs.40,000 per item. Furthermore, inquiry reveals that during the physical stock
take, a water leakage has damaged the equipment. Accordingly, in the following week, BL spent a
total of Rs.15,000 per equipment for repairing the equipment.
The net realizable value and inventory write-down (loss) amount to?
(a) Rs. 40,000 and Rs.10,000 respectively
(b) Rs. 25,000 and Rs. 25,000 respectively
(c) Rs. 35,000and Rs. 25,000 respectively
(d) Rs. 30,000 and Rs.15,000 respectively

27. Which of the following is allowed as a cost of inventory?

(a) Abnormal waste
(b) Storage costs
(c) Selling costs
(d) Variable manufacturing overheads

28. Spice Limited, imported raw materials from China worth Rs.10 million. They paid Rs.800,000 as
import duties and Rs.200,000 as import taxes (the import taxes were subsequently refunded by the
government). They paid Rs.150,000 million for transportation of the materials from China and
another Rs.200,000 as port handling charges for loading the materials at China. Marketing
expenses were Rs.100,000 and the general administrative overheads amounted to Rs.200,000.
What will be the value of inventories?
(a) Rs.11,600,000
(b) Rs.11,400,000
(c) Rs.11,150,000
(d) Rs.10,950,000

29. Any amount of write-down of inventories to net realisable value should?

(a) Treated as a deferred expense and written off based on the average inventory holding
period
(b) Recognised as an expense in the period in which the write-down occurs
(c) Recognised as an expense in the subsequent period in which such write-down is warranted
(d) Recognized as a current liability in the statement of financial position

30. Phill Morris Limited (PML) is in the business of procuring a specific type of machine and sells them
to international markets. During the year, PML bought four machines costing Rs.12million ,Rs.14
million, Rs.13 million and Rs.10 million respectively. During the year it sold only one machine for
Rs.14 million and follows the FIFO method of valuation.
Which of the following statements is TRUE?
(a) The cost of Inventory is Rs.37 million and the cost of sales is Rs.10 million
(b) The cost of Inventory is Rs.39 million and the cost of sales is Rs.14 million
(c) The cost of Inventory is Rs.37million and the cost of sales is Rs.12 million
(d) The cost of Inventory is Rs.37 million and the cost of sales is Rs.13 million

© Emile Woolf International 481 The Institute of Chartered Accountants of Pakistan

 81
Introduction to accounting

31. The estimated selling price in the ordinary course of business less estimated cost of completion and
estimated cost of sale is called
(a) Market value
(b) Fair value
(c) Net realisable value
(d) Current value

32. Which of the following costs must be expensed?

(a) Costs of purchase that are paid to the suppliers of raw materials
(b) Import duties on raw materials that are paid to the authorities
(c) Variable production overheads that are allocated to each unit based on actual usage
(d) Distribution cost

© Emile Woolf International 482 The Institute of Chartered Accountants of Pakistan

 82
Chapter 11: Inventory

7 OBJECTIVE BASED ANSWERS

01. (b) Closing inventory is understated so current year’s profit will be understated as well.
However next year the effect will be opposite as it would become opening inventory.

02. (d) Due to matching concept, not all goods purchased are treated as expense and only cost
of goods sold is matched against revenue by adjusting changes in inventory.

03. (c) Freight in is necessary to bring the inventory in its present condition and location. All
other costs are period costs.

04. (a) Opening inventory is charged to cost of sales and closing inventory is credited in cost
of sales.

05. (b) Closing inventory units = 900+1,000+600-1,250-550 = 700

Average cost per unit = ((900x5)+(1,000x6)+(600x7))/2,500 units = Rs. 5.88
Closing inventory = 700xRs. 5.88 = Rs. 4,116

06. (c) The prudence concept states that assets must not be overstated and measuring
inventories at lower of cost and NRV ensures that.

07. (d) Conversion costs include direct labour and manufacturing overheads. Only supervisor’s
wages are part of overheads.

08. (a) Inventory is valued at lower of cost and NRV which is Rs. 2,500 in this case. Omission
would understate the inventory.

09. (a)

10. (b) Cost per unit = [(35,0000x3.5)+(40,000x5)]/(35,000+40,000) =Rs. 4.3

Cost of goods sold = 50,000 x Rs. 4.3 = Rs. 215,000

11. (b) The cost is Rs. 2,600 and NRV is Rs. 2,485 (2,550 – 65)
As NRV is lower, inventory will be written down by Rs. 115 (2,600 – 2,485). This would
reduce the profit by Rs. 115 as well.

12. (c) Sales – costs of sales = gross profit

Rs. 4,500,000 – (Rs. 1,500,000+2,550,000-1,000,000) = Rs. 1,450,000

13. (a) The correct entry for drawings is Debit sDrawings and Credit Purchases (or Cost of
Sales). The cost price of goods is relevant, not selling price.

14. (c)
Alpha Beta Gamma

Rs. per unit Rs. per unit Rs. per unit

Original cost 10 13 15

NRV 12 9 12

Inventory: units held 300 380 240

Valuation Rs. 3,000 3,420 2,880

Total valuation = 3,000 + 3,420 + 2,880 = Rs. 9,300

15. (d) Rs. 3,300 + 13,000 + 13,900 + 14,900 = Rs. 45,100

© Emile Woolf International 483 The Institute of Chartered Accountants of Pakistan

 83
Introduction to accounting

16. Rs. 3,340 The closing inventory units 50+120+45 – 65 – 100 = 50 units
45 units @ Rs. 67 per unit and 5 units @ Rs. 65 per unit = Rs. 3,340

17. Rs. 22,000 Gross profit = Sales – cost of goods sold; hence Cost of Goods sold = Sales – Gross
profit
Cost of Goods sold = Rs. 158,000 - Rs. 45,000 = Rs. 113,000
Cost of Goods sold = Opening inventory +Purchases – closing inventory
Rs. 113,000 = Rs. 34,000 + Rs. 101,000 – Closing inventory
Closing inventory = Rs. 22,000

18. Rs. 119,700 Balance given= Rs. 130,200

Less: cost of damaged item already included= Rs. 25,000
Add: NRV of damaged item Rs. 18,000-Rs. 3,500 = Rs. 14,500
Correct value of inventory Rs. 119,700

19. Rs. 48,600 Product A Rs. 15,000+ Product B Rs. 10,000+Product C Rs. 11,000+Product D Rs.
12,600 = Rs. 48,600
Cost and NRV comparison are to be made on item by item basis and not on the basis
of totals.

20. Rs. 10,000 Increase in opening inventory understates the profit for current year.

21. (b)

22. (d)

23. (b)

24. (c)

25. (c)

26. (b)

27. (d)

28. (c)

29. (b)

30. (c)

31. (c)

32. (d)

© Emile Woolf International 484 The Institute of Chartered Accountants of Pakistan

 84

Certificate in Accounting and Finance

CHAPTER
Introduction to accounting

12
Preparation of financial statements

Contents
1 Financial statements
2 Preparing financial statements
3 Objective based questions and answers

© Emile Woolf International 485 The Institute of Chartered Accountants of Pakistan

 85
Chapter 12: Preparation of financial statements

3 OBJECTIVE BASED QUESTIONS

01. A complete set of financial statement does not include;
(a) a statement of financial position as at the end of the period
(b) a statement of comprehensive income for the period
(c) Aging analysis of receivables
(d) a statement of changes in equity for the period

02. Following is the trial balance of Salman for the year ended 30 June 2014

Rs.
Insurance 2,000,000

Insurance is prepaid to the extent of Rs. 650,000.

What is the amount of insurance premium to be shown in the statement of comprehensive income
and statement of financial position?

(a) Insurance expense Rs. 2,000,000; Prepaid insurance Rs. 650,000

(b) Insurance expense Rs. 2,650,000; Prepaid insurance Rs. 650,000
(c) Insurance expense Rs. 650,000; Prepaid insurance Rs. 2,000,000
(d) Insurance expense Rs. 1,350,000; Prepaid insurance Rs. 650,000

03. Salman has prepared his trial balance for the year ended 30 June 2014.
He has provided following information relating to stock: Closing stock as on 30 June 2014 amounted
to Rs. 237,500 thousand.
What is the correct accounting entry to record the adjustment?

(a) Dr inventory Rs. 237,500,000 Cr Cost of sales Rs. Rs. 237,500,000

(b) Dr Cost of sales Rs. 237,500,000 Cr Inventory Rs. Rs. 237,500,000
(c) Dr inventory Rs. 237,500,000 Cr Purchases Rs. Rs. 237,500,000
(d) Dr Purchases Rs. 237,500,000 Cr Inventory Rs. Rs. 237,500,000

04. Salman has prepared his trial balance for the year ended 30 June 2014. He has provided following
information relating to drawings:

Debit Rs. 000

Drawings 30,500

Salman’s son works as the head of administration and received a salary of Rs. 150 thousand per
month, which has been included in drawings.
What is the amount of drawings to be shown in the statement of financial position?

(a) Rs. 30,500

(b) Rs. 30,350
(c) Rs. 32,300
(d) Rs. 28,700

© Emile Woolf International 563 The Institute of Chartered Accountants of Pakistan

 86
Introduction to accounting

05. Azam is in process of preparation of trial balance for the year ended 30 June 2015.

Debit Credit

Rs. in ‘000’

Purchases 105,950

Azam withdrew goods costing Rs. 4,000 thousand for personal use during the year. However, no entry
was made to record the withdrawal of goods.
What is the amount of purchases to be shown in statement of comprehensive income?

(a) Rs. 105,950,000

(b) Rs. 4,000,000
(c) Rs. 101,950,000
(d) Rs. 109,950,000

06. Following is the trial balance of Salman for the year ended 30 June 2014:
Rs. in ‘000
Debit Credit
Trade discount 2,432 Sales 353,300
Sales return 10,000
Discount allowed 4,500

What is the amount of sales to be shown in statement of comprehensive income?

(a) Rs. 353,300

(b) Rs. 340,868
(c) Rs. 336,368
(d) Rs. 346,368

07. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who deals
in office machines:

Debit Credit
Rs. in million
Bank loan 160
Interest on bank loan 8

Additional information
The bank loan was acquired on 1 April 2015. The principal amount is repayable in five equal annual
installments on 31 March each year. Interest is payable at 10% per annum on six monthly basis and
is recorded at the time of payment.
What adjusting entry is required to record interest payable as at 31 December 2015?

(a) Dr Interest expense Rs. 4 million Cr Interest payable Rs. 4 million

(b) Dr Interest expense Rs. 4 million Cr Bank loan Rs. 4 million
(c) Dr Interest expense Rs. 8 million Cr Interest payable Rs. 8 million
(d) Dr Interest expense Rs. 12 million Cr Interest payable Rs. 12 million

© Emile Woolf International 564 The Institute of Chartered Accountants of Pakistan

 87
Chapter 12: Preparation of financial statements

08. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who deals
in office machines:

Debit Credit
Rs. in million
Other income 15

Additional information
Review of other income revealed the following information:
On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a maintenance
contract covering the period from 1 September 2015 to 31 May 2016 and was credited to other income.
The balance amount would be paid on completion of the contract.
What is the amount of unearned income to be shown in statement of financial position?

(a) Rs. 1.8 million

(b) Rs. 3.6 million
(c) Rs. 0.2 million
(d) Rs. 1.6 million

09. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who deals
in office machines:

Debit Credit
Rs. in million
Other income 15

Additional information
On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a maintenance
contract covering the period from 1 September 2015 to 31 May 2016 and was credited to other income.
The balance amount would be paid on completion of the contract.
What is the amount of other income to be shown in statement of comprehensive income?

(a) Rs. 15 million

(b) Rs. 14.8 million
(c) Rs. 13.2
(d) Rs. 11.4

10. Which of the following is not a characteristic of service organization?

(a) A large percentage of assets comprise inventory
(b) A large percentage of assets comprise receivable
(c) The funds of service companies are usually tied up towards accounts receivable
(d) There is no line item for the cost of goods sold in the income statement of service
companies.

© Emile Woolf International 565 The Institute of Chartered Accountants of Pakistan

 88
Introduction to accounting

11. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4
Bad debts 3

Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and is
unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the amount of closing balance of provision for doubtful debts account?

(a) Rs. 5.94 million

(b) Rs. 3 million
(c) Rs. 6 million
(d) Rs. 5.76 million

12. A business has provided following extracts from trial balance as at 31 December 2018;

Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4.5
Bad debts 3

Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and is
unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the amount of bad and doubtful debts expense in statement of comprehensive income?

(a) Rs. 4.44

(b) Rs. 5.44 million
(c) Rs. 1.44
(d) Rs. 5.94

13. A business has provided following extracts from trial balance as at 31 December 2018;

Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4
Bad debts 3

© Emile Woolf International 566 The Institute of Chartered Accountants of Pakistan

 89
Chapter 12: Preparation of financial statements

Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and is
unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the number of receivables to be shown in statement of financial position?

(a) Rs. 92 million

(b) Rs. 94.06
(c) Rs. 91.06
(d) Rs. 90.06

14. A business has provided following extracts from trial balance as at 31 December 2018;

Debit Credit
Rs. in million
Administration expenses 150

Additional information
Electricity expense of Rs. 1.5 million is outstanding. No adjustment for bill payable has been recorded.
Electricity expense paid during the year have already been included in administration expenses.
Included in the administration expenses in trial balance advance rent is Rs. 1.2 million.
What is the amount of administration expenses to be shown in statement of comprehensive income?

(a) Rs. 150.3 million

(b) Rs. 151.5
(c) Rs. 152.7
(d) Rs. 150

15. A business has provided following extracts from trial balance as at 31 December 2018:

Debit Credit
Rs. in million
Administration expenses 150

Additional information
Electricity expense of Rs. 1.5 million is outstanding. No adjustment for bill payable has been recorded.
Electricity expense paid during the year have already been included in administration expenses.
Included in the administration expenses in trial balance advance rent is Rs. 1.2 million.
Which of the following is correct regarding administration expenses?

(a) Accrued expense Rs. 1.2 million; Prepayment Rs. 1.5 million
(b) Accrued expense Rs. 1.5 million; Prepayment Rs. 1.2 million
(c) Accrued expenses Rs. 2.7 million
(d) Prepayment Rs. 2.7 million

© Emile Woolf International 567 The Institute of Chartered Accountants of Pakistan

 90
Introduction to accounting

16. Following is the summarised trial balance of Fortune Traders (FT) for the year ended 30 June 2016;
Debit Credit
Rs. 000
Plant & machinery - cost 6,650
Plant & mach. – Acc. Dep. as at 1 July 2015 2,414
Additional information:
(i) On 1 March 2016, FT paid an advance of Rs. 330,000 for purchase of a machine and debited
it to plant and machinery. The machine was delivered on 1 September 2016.
(ii) FT depreciates its fixed assets from the month of addition. Depreciation is to be charged on
written-down value (WDV) as follows:

Plant & machinery 10%

What is the amount of depreciation to be charged to statement of profit or loss?

Rs. ___________

17. Following is the summarised trial balance of Fortune Traders (FT) for the year ended 30 June 2016;
Debit Credit
Rs. 000
Plant & machinery - cost 6,650
Plant & mach. – Acc. Dep. as at 1 July 2015 2,414
Additional information:
(iii) On 1 March 2016, FT paid an advance of Rs. 330,000 for purchase of a machine and debited
it to plant and machinery. The machine was delivered on 1 September 2016.
(iv) FT depreciates its fixed assets from the month of addition. Depreciation is to be charged on
written-down value (WDV) as follows:

Plant & machinery 10%

What is the amount of Plant & machinery to be shown in statement of financial position?

Rs. ___________

18. Azam owns a retail outlet with the name Azam Autoparts Store. The trial balance as at 30 June 2015
is as follows:

Debit Credit
Rs. in ‘000’
Bank loan 5,050
Interest expenses 600
167,436 167,436
Bank loan was received on 1 July 2014. Interest payable for the month of June 2015 has been credited
to the loan account.
What is the amount of interest payable to be shown in statement of financial position?

Rs. ___________

© Emile Woolf International 568 The Institute of Chartered Accountants of Pakistan

 91
Chapter 12: Preparation of financial statements

19. Rainbow Lights (RL) has prepared a trial for the year ended 31 December 2016:

Debit Credit
Rs. in million
Miscellaneous income 45

Additional information
Miscellaneous income includes Rs. 12 million received against an annual maintenance contract
expiring on 30 April 2017.
What is the amount of Miscellaneous income to be shown in statement of comprehensive income?

Rs. ___________

20. Rainbow Lights (RL) has prepared a trial for the year ended 31 December 2016:

Debit Credit
Rs. in million
Miscellaneous income 45

Additional information
Miscellaneous income includes Rs. 12 million received against an annual maintenance contract
expiring on 30 April 2017.
What is the amount of Miscellaneous income to be shown in statement of financial position as
unearned income?

Rs. ___________

21. An asset posses which of the following?

(a) Future economic benefits for the business
(b) All kind of benefits for the business
(c) Expenses for the business
(d) Merits and Demerits for the business

22. Liabilities are which of the following?

(a) Resources
(b) Obligations
(c) Future benefits
(d) Expenses

23. What is equity?

(a) Cash from the business
(b) Liability of a business
(c) Owner's claim on netl assets
(d) Owner's claim on total liabilities

© Emile Woolf International 569 The Institute of Chartered Accountants of Pakistan

 92
Introduction to accounting

24. Which of the following transactions represent an expense?

(a) The owner withdrew Rs. 1,600 from the business for personal use
(b) Purchased a photocopying machine for Rs. 2,750 cash
(c) Purchased medical supplies for cash from Healthcare Labs. Rs. 1,630
(d) Received a telephone bill amounting to Rs. 550 to be paid within ten days

25. Expense is recorded in the accounting records when:

(a) Cash is paid
(b) The purchase order is placed with the supplier
(c) Purchases are made
(d) None of these

26. The gross decrease in economic benefits for the business are what?
(a) Expenses
(b) Obligations
(c) Gain
(d) Income

27. Net loss occurs when

(a) Expenses are greater than income
(b) Expenses are less than Income
(c) Expenses=Income
(d) Liabilities are greater than income

28. _______ the withdrawal of cash and goods by the owner of the business for his/her personal use
(a) Depreciation
(b) Drawings
(c) Outflow of cash
(d) Appreciation

29. Which of the following will be debited if a business purchases goods on credit?
(a) Cash
(b) Debtor
(c) Creditor
(d) Purchases

30. Outsider’s claim against the assets of the business is called:

(a) Capital
(b) Liability
(c) Expense
(d) Income

© Emile Woolf International 570 The Institute of Chartered Accountants of Pakistan

 93
Chapter 12: Preparation of financial statements

31. Operating expenses in often named as:

(a) Manufacturing cost plus commercial expenses
(b) Prime cost plus factory overheads
(c) Direct material plus direct labour
(d) Selling plus administrative expenses

32. Discount for quick repayment of debt is normally referred as:

(a) Trade discount
(b) Prompt payment discount
(c) Cash discount
(d) Bulk discount

33. Identify the asset from the following

(a) Prepayment
(b) Creditors
(c) Notes payable
(d) Bank loan

34. Assets minus liabilities equal to

(a) Goodwill
(b) Working capita
(c) Net income
(d) Capital

© Emile Woolf International 571 The Institute of Chartered Accountants of Pakistan

 94
Introduction to accounting

3 OBJECTIVE BASED ANSWERS

01. (c)

02. (d) Prepaid insurance is deducted from the amount shown in trial to arrive at expense
for the year.

03. (a)

04. (d) Drawings = Rs. 30,500 – (150x12) = Rs. 28,700

05. (c) Purchases = 105,950 – 4,000 = Rs. 101,950

06. (b)
Rs. 000

Sales 353,300 – 2,432 trade discounts 350,868

Less: sales return (10,000)

340,868

07. (a) 160 x 10% x 3/12 = 4 million

08. (c) Total contract price 1.8 + 1.8 = 3.6 x 4/9 months = 1.6 less advance 1.8 = 0.2
million unearned

09. (b) Other income = 15 – 0.2 (unearned income) = 14.8

Total contract price 1.8 + 1.8 = 3.6 x 4/9 months = 1.6 less advance 1.8 = 0.2
million unearned

10. (a)

11. (a) Closing provision

Rs. million

Receivables as per trial 100

Bad debts (1)

Receivables 99

Provision @ 6% 5.94

12. (b) Bad and doubtful debts expense

Rs. million

Bad debts 3+1 4

Increase in provision = 5.94 – 4.5 1.44

5.44

© Emile Woolf International 572 The Institute of Chartered Accountants of Pakistan

 95
Chapter 12: Preparation of financial statements

Closing provision

Rs. million

Receivables as per trial 100

Bad debts (1)

Receivables 99

Provision @ 6% 5.94

13. (d)
Rs. million

Receivables as per trial 100

Bad debts 3+1 (4)

96

Closing provision (5.94)

90.06

Closing provision

Rs. million

Receivables as per trial 100

Bad debts (1)

Receivables 99

Provision @ 6% 5.94

14. (a) = Rs. 150 + 1.5 -1.2 = Rs. 150.3 million

15. (b)

16. Rs. 391,000 Depreciation charge = [6,650 – 330-2,414] x 10% = Rs. 391,000

17. Rs. 3,515,000 = 6,650 – 330 – 2,414 - 391 = 3,515

Depreciation charge = [6,650 – 330-2,414] x 10% = Rs. 391,000

18. Rs. 50,000 Interest classified to current liabilities 600 x 1/12 = 50

19. Rs. 41 million Misc. income = Rs. 45 million – 4 million = Rs. 41 million
Unearned income = 12 million x 4/12 = Rs. 4 million

20. Rs. 4 million Unearned income = 12 million x 4/12 = Rs. 4 million

21. (a)

© Emile Woolf International 573 The Institute of Chartered Accountants of Pakistan

 96
Introduction to accounting

22. (b)

23. (c)

24. (d)

25. (c)

26. (a)

27. (a)

28. (b)

29. (d)

30. (b)

31. (d)

32. (c)

33. (a)

34. (d)

© Emile Woolf International 574 The Institute of Chartered Accountants of Pakistan

 97

Certificate in Accounting and Finance

CHAPTER
Financial accounting and reporting I

2
IAS 1: Preparation of financial
statements

Contents
1 Statement of changes in Equity
2 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 19 The Institute of Chartered Accountants of Pakistan

 98
Chapter 2: IAS 1: Preparation of financial statements

2 OBJECTIVE BASED QUESTIONS

01. Which TWO of the following are separately identified in statement of changes in equity?
(a) Profit for the year
(b) Transactions with owners
(c) Other comprehensive income
(d) Non-owner changes in equity

02. Which of the following is not considered transaction with owners with reference to statement of
changes in equity?
(a) Share capital
(b) Redemption of equity shares
(c) Profit for the year
(d) Bonus issue of shares (no cash received from owners)

03. The maximum amount of share capital that a company is authorized to raise is called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

04. The total value of shares a company offers to subscribe is called:

(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

05. The monetary value of all the shares that the investors have committed to buy is called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

06. The amount of money a company has received from shareholders in exchange for its shares is called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital

© Emile Woolf International 35 The Institute of Chartered Accountants of Pakistan

 99
Financial accounting and reporting I

07. Which of the following issued by an entity is treated as liability?

(a) Ordinary share capital
(b) Redeemable preference share capital
(c) Irredeemable preference share capital
(d) None of above

08. A debit balance on the retained earnings account indicates that:

(a) The company has made more dividend payments than the profit earned.
(b) the company has accumulated losses
(c) the company has redeemed some of its share capital
(d) the company has issued bonus shares

09. A company has profit after tax of Rs. 80 million for the financial year ended on 30 June 2019. It has
share capital of Rs. 500 million. During the year company has declared interim dividend of 10%.
How this dividend shall be presented in financial statements for the year ended 30 June 2019?

(a) Rs. 8 million deducted from retained earnings in statement of changes in equity
(b) Rs. 50 million deducted from retained earnings in statement of changes in equity
(c) Rs. 50 million deducted from profit or loss as finance cost
(d) It shall not be recorded, only disclosure shall be made.

10. A company has profit after tax of Rs. 80 million for the financial year ended on 30 June 2019. It has
share capital of Rs. 500 million. The board of directors proposed a final dividend of 10% just after the
year end, for the year ended 30 June 2019
How this dividend shall be presented in financial statements for the year ended 30 June 2019?

(a) Rs. 8 million deducted from retained earnings in statement of changes in equity
(b) Rs. 50 million deducted from retained earnings in statement of changes in equity
(c) Rs. 50 million deducted from profit or loss as finance cost
(d) It shall not be recorded, only disclosure shall be made.

11. Which TWO of the following are usually shown in statement of changes in equity when right issue of
shares is made?
(a) Increase in share capital
(b) Decrease in share premium
(c) Increase in share premium
(d) Increase in retained earnings

12. Which TWO of the following are usually shown in statement of changes in equity when bonus issue of
shares is made?
(a) Increase in share capital
(b) Decrease in share premium
(c) Increase in share premium
(d) Increase in retained earnings

© Emile Woolf International 36 The Institute of Chartered Accountants of Pakistan

 100
Chapter 2: IAS 1: Preparation of financial statements

13. Transaction costs relating to issue of shares are usually debited to:
(a) Profit or loss
(b) Share capital
(c) Share premium
(d) Revaluation surplus

14. If there is no balance in share premium account, transaction costs relating to issue of shares are
usually debited to:
(a) Profit or loss
(b) Share capital
(c) Retained earnings
(d) Revaluation surplus

15. Incremental depreciation has following effects on statement of changes in equity:

(a) Increase in revaluation surplus and decrease in retained earnings
(b) Decrease in revaluation surplus and increase in retained earnings
(c) Decrease in revaluation surplus and decrease in retained earnings
(d) No effect

16. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
The company made a right issue of 1 for 5 shares already held at Rs. 145 per share.
What amount of share capital shall be presented in statement of changes in equity as at 31 December
2019?

Rs. ___________

17. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
The company made a right issue of 1 for 5 shares already held at Rs. 145 per share.
What amount of share premium shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

© Emile Woolf International 37 The Institute of Chartered Accountants of Pakistan

 101
Financial accounting and reporting I

18. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35

The company made a bonus issue of 2 for 5 shares already held.

What amount of share capital shall be presented in statement of changes in equity as at 31 December
2019?

Rs. ___________

19. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35

The company made a bonus issue of 2 for 5 shares already held.

What amount of share premium shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

20. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35

On 2 January 2019, all the revalued assets were disposed of for Rs. 90 million.
Profit for the year ended was Rs. 32 million.
Interim dividend of 5% was paid in July 2019 and final dividend of 8% has been proposed by directors.
What amount of retained earnings shall be presented in statement of changes in equity as at 31
December 2019?

Rs. ___________

21. Which of the following does not appear in statement of changes in equity?
(a) Share premium
(b) Retained earning
(c) Goodwill
(d) Revaluation surplus

© Emile Woolf International 38 The Institute of Chartered Accountants of Pakistan

 102
Chapter 2: IAS 1: Preparation of financial statements

22. Which of the following statements is likely to be true, for a company making profits?
(a) The operating profit will be less than the profit for the year.
(b) The profit for the year will be greater than the gross profit.
(c) Retained profits at the year-end will be greater than shareholders' equity.
(d) Retained profits at the year-end will be greater than retained profits at the beginning of the
year.

23. Which of the following is NOT a component of the statement of changes in equity?
(a) Total comprehensive income for the period
(b) The revaluation gain
(c) The amount of cash that the company has on hand
(d) Dividends paid to shareholders during the period

24. Which of the following statements is not true about preferred stock?
(a) The rate of dividend is usually fixed
(b) Shareholders always have a voting right
(c) Shareholders' usually have a preference as to assets upon liquidation of the corporation
(d) Shareholders' usually have a preference as to dividends

25. Redeemable preferred shares is required to be reported as:

(a) Liability
(b) Equity
(c) Asset
(d) None of the above

26. Any unpaid dividend is carried forward to the future periods for which type of stock?
(a) Ordinary shares
(b) Cumulative preferred shares
(c) Non-cumulative preferred shares
(d) All of the above

27. What is the impact of dividend payments to shareholders on the statement of changes in equity?
(a) It increases the retained earnings balance
(b) It decreases the retained earnings balance
(c) It increases the share capital balance
(d) It decreases the share capital balance

28. What is the impact of an additional share issue on the statement of changes in equity?
(a) It increases the share capital balance
(b) It increases the retained earnings balance

© Emile Woolf International 39 The Institute of Chartered Accountants of Pakistan

 103
Financial accounting and reporting I

(c) It decreases the share capital balance

(d) It decreases the retained earnings balance

29. Xavier Limited issued 5,000 shares of its Rs.10 par value to its shareholder. These shares were issued
at a premium at a price of Rs.25 per share.
The correct journal entry to record this transaction is:
(a) Cash Rs.125,000 (Debit); Share capital Rs.125,000 (Credit)
(b) Cash Rs.50,000 (Debit); Share capital Rs.50,000 (Credit)
(c) Share capital Rs.50,000 (Debit); Share premium Rs.75,000 (Debit); Cash Rs.125,000 (Credit)
(d) Cash Rs.125,000 (Debit); Share capital Rs.50,000 (Credit); Share premium Rs.75,000
(Credit)

30. Dynasty Limited issues 1 million, Rs.10 shares at Rs.50 for each share. Which of the following
statements is true?
(a) Ordinary share capital will increase by Rs.10 million and share premium will increase by Rs.50
million.
(b) Ordinary share capital will increase by Rs.10 million and share premium will increase by Rs.40
million.
(c) Ordinary share capital will increase by Rs.20 million and share premium will increase by Rs.50
million.
(d) Ordinary share capital will increase by Rs.10 million and share premium will increase by Rs.30
million.

31. Handsome Limited statement of financial position shows ordinary share capital of Rs.150 million and
share premium of Rs.50 million at the beginning of a financial year. If the ordinary share capital is
Rs.250 million and share premium is Rs.120 million at the end of the financial year, how much did the
ordinary share with share premium issue raise?
(a) Rs.100 million
(b) Rs.150 million
(c) Rs.160 million
(d) Rs.170 million

32. Gigantic Limited opening retained earning balance was Rs.150 million. It made a net profit for the year
ended 31 March 2020 of Rs.30 million. During that year, an ordinary dividend of Rs.50 paisa per share
was paid on 40 million ordinary shares. What was the retained profit for the year ended 31 March
2020?
(a) Rs.150 million
(b) Rs.160 million
(c) Rs.165 million
(d) Rs.170 million

© Emile Woolf International 40 The Institute of Chartered Accountants of Pakistan

 104
Chapter 2: IAS 1: Preparation of financial statements

33. SK Limited paid Rs.10 million in debenture interest and an ordinary dividend of 10 paisa per share on
Rs.50 million ordinary shares. The retained profit was Rs.120 million. What was SK Limited profit for
the year?
(a) Rs. 125 million
(b) Rs.135 million
(c) Rs. 130 million
(d) Rs.140 million

34. Which of the following would be an entry in the statement of changes in equity?
(a) Taxation
(b) Long term loans
(c) Revaluation gain
(d) Revaluation reserve

35. During the year ended 30 June 2021, a company's revaluation reserve increased from Rs. 300,000 to
Rs. 380,000 as a result of a property (land) revaluation. At the start of that financial year, the company's
property had been valued at Rs. 810,000. Assuming that no property was disposed of during the year,
which of the following statements is true?
(a) The property's revalued amount was Rs.890, 000.
(b) The property's revalued amount was Rs.1, 190,000.
(c) The property's revalued amount was Rs.380, 000.
(d) The property's revalued amount was Rs.1,310,000

© Emile Woolf International 41 The Institute of Chartered Accountants of Pakistan

 105
Financial accounting and reporting I

2 OBJECTIVE BASED ANSWERS

01. (b) & (d)

02. (c)

03. (a)

04. (b)

05. (c)

06. (d)

07. (b)

08. (b)

09. (b) Rs. 500 million x 10% = Rs. 50 million to be recognized in statement of changes in
equity.

10. (d) This dividend shall be recognized next year. This year the proposed dividend shall
be disclosed only.

11. (a) & (c)

12. (a) & (b)

13. (c)

14. (c)

15. (b)

16. Rs. 120 million Rs. 100 million +

Rs. 100 million / Rs. 100 x 1/5 x Rs. 100] = Rs. 120 million

17. Rs. 39 million Rs. 30 million +

Rs. 100 million / Rs. 100 x 1/5 x Rs. 45] = Rs. 39 million

18. Rs. 140 million Rs. 100 million +

Rs. 100 million / Rs. 100 x 2/5 x Rs. 100] = Rs. 140 million

19. Rs. Nil Rs. 100 million / Rs. 100 x 2/5 x Rs. 100] = Rs. 40 million shares issued
Rs. 30 million from share premium and remaining Rs. 10 million from retained
earnings.

20. Rs. 82 million Rs. 35 million + Rs. 20 million from revaluation surplus + Profit of Rs. 32 million –
Rs. 5 million dividends = Rs. 82 million
Proposed dividend shall be disclosed only.

21. (c)

22. (d)

© Emile Woolf International 42 The Institute of Chartered Accountants of Pakistan

 106
Chapter 2: IAS 1: Preparation of financial statements

23. (c)

24. (b)

25. (a)

26. (b)

27. (b)

28. (a)

29. (d)

30. (b)

31. (d)

32. (b)

33. (a)

34. (c)

35. (a)

© Emile Woolf International 43 The Institute of Chartered Accountants of Pakistan

 107

Certificate in Accounting and Finance

CHAPTER
Financial accounting and reporting I

3
IAS 7: Statement of cash flows

Contents
1 Introduction
2 Cash flows from operating activities: The indirect method
3 Cash flows from operating activities: The direct method
4 Cash flows from investing activities
5 Cash flows from financing activities
6 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 45 The Institute of Chartered Accountants of Pakistan

 108
Financial accounting and reporting I

6 OBJECTIVE BASED QUESTIONS

01. Faria Limited is involved in the business of furniture. At 1 January 2018 the company’s issued share
capital consists of 50,000 Rs. 1 shares. During the year 2018 company has made a bonus issue of 1
for 5 shares.
What is impact of bonus issue on cash flows of the business?
(a) Decrease in cash flows from operating activities
(b) Increase in cash flows from financing activities
(c) No impact
(d) Increase in cash generated from operations

02. A company has incurred a loss of Rs. 40,000 during the year 2018; however, the balance in the bank
account at end of the year is more than the balance at start of the year.
What does this mean?
(a) Company has allowed a longer credit period to the credit customers
(b) Company has purchased more stock
(c) Company has made a right issue during the year
(d) Company has purchased fixed assets during the year

03. A company has provided the following information:

2018 2017
Rs. Rs.
Share capital 110,000 100,000
Share premium 30,000 40,000
A bonus issue of 1 for every 10 shares held has been made during the year.
What is the amount to be reported in cash flow from financing activities for the year 2018?
(a) Rs. 10,000 Inflow
(b) 0
(c) Rs. 10,000 outflow
(d) Cannot be determined

04. A company has provided following balances

Rs.
Non–current asset – 31 December 2018 125,000
Accumulated depreciation 1 January 2018 25,000
Accumulated depreciation 31 December 2018 38,000
During the year an asset having cost Rs. 10,000 was sold for Rs. 6,000 and gain on disposal was Rs.
3,000.
What is the charge for depreciation for the year to be adjusted in statement of cash flows?
(a) Rs. 13,000
(b) Rs. 19,000
(c) Rs. 20,000
(d) Rs. 38,000

© Emile Woolf International 132 The Institute of Chartered Accountants of Pakistan

 109
Chapter 3: IAS 7: Statement of cash flows

05. A company has provided following information as at 31 March 2019:

2019 2018
Rs. Rs.
Retained earnings 50,000 38,000
Following adjustments were made during the year 2019:
Dividends paid Rs. 5,000
Transfer to general reserves Rs. 12,000
Tax charge Rs. 4,000
What is the amount of profit before tax for the year 2019 for the purposes of preparing statement of
cash flows?
(a) Rs. 29,000
(b) Rs. 33,000
(c) Rs. 24,000
(d) Rs. 25,000

06. A company has provided the following data:

Rs.
Receivables at 1 April 2018 12,000
Receivables at 31 March 2019 25,000
Credit sales during the year 75,000
Discount allowed during the year 3,000
What is the amount to be shown as cash received from customers in statement of cash flows using
direct method?
(a) Rs. 62,000
(b) Rs. 75,000
(c) Rs. 59,000
(d) Rs. 65,000

07. Which TWO of the following are considered as inflows in a company’s statement of cash flows?
(a) Bonus shares issued
(b) Decrease in accounts receivables
(c) Increase in inventory
(d) Increase in accounts payables

08. Which of the following item will appear in cash flows from financing activities section of statement of
cash flows?
(a) Cash paid to acquire non-current assets
(b) Dividends paid
(c) Bonus shares issued
(d) Depreciation for the year

© Emile Woolf International 133 The Institute of Chartered Accountants of Pakistan

 110
Financial accounting and reporting I

09. Following data is available for a company for the year ended 31 December 2018:
Rs.
Operating profit before working capital changes 30,000
Increase in accounts receivables 5,000
Increase in inventory 3,000
Increase in accounts payable 2,000
Interest paid 500
What is the net cash generated from cash flows from operating activities for the year ended 31
December 2018?
(a) Rs. 23,500
(b) Rs. 24,500
(c) Rs. 29,500
(d) Rs. 19,500

10. Which of the following is an advantage of statement of cash flows?

(a) It determines the profitability of a business
(b) It helps users to estimate the future expected cash flows of the business
(c) It determines the ratio of business debts and equity
(d) It helps in determining the net assets of a business

11. A company has made following investments during the year:

Rs.
6 months Advance rent paid to landlord 30,000
Short term investments bond (highly liquid) 25,000
Debentures purchased- redeemable after 7 years 50,000
Non–current assets purchased 45,000
What is the amount to be shown in investing activities for the year?
(a) Rs. 45,000
(b) Rs. 150,000
(c) Rs. 95,000
(d) Rs. 100,000

12. A company has provided following data at the end of year 2017:
2017
Rs.
Share capital Rs. 1 each 100,000
Share premium 3,000
The company has made a right issue of 1 for 5 shares during the year 2018 at Rs. 1.2 per share.
What is the amount to be shown in the cash flows from financing activities?
(a) Rs. 24,000 outflow

© Emile Woolf International 134 The Institute of Chartered Accountants of Pakistan

 111
Chapter 3: IAS 7: Statement of cash flows

(b) Rs. 24,000 inflow

(c) Rs. 20,000 inflow
(d) Rs. 4000 inflow

13. How should gain on sale of used equipment be reported in a cash flow statement, using indirect
approach?
(a) In operating activities as deduction from Profit before tax
(b) In investing activities as a reduction in cash inflow
(c) In investing activities as an increase in cash inflows
(d) In operating activities as addition to profit before tax

14. Which TWO of the following are added as non-cash adjustments to the profit before tax in the cash
flow from operating activities section of statement of cash flows?
(a) Interest expense
(b) Interest income
(c) Loss on sale of non–current assets
(d) Tax charge for the year

15. Where, in a company are financial statements complying with international accounting standards,
should you find the proceeds of non-current assets sold during the period?
(a) Statement of cash flows and statement of financial position
(b) Statement of changes in equity and statement of financial position
(c) Statement of profit or loss and statement of cash flows
(d) Statement of cash flows only

16. Zahid & Co. reported a profit Rs. 40,000 for the year, after charging the following:
Rs.
Depreciation 4,000
Loss on sale of assets 3,000
During the year there was a decrease in accounts receivables of Rs. 1,000.
What was the net cash flow generated from operations based on above data?
Rs. ___________

17. Asmat Limited made a profit for the year of Rs. 320,500, after accounting for depreciation Rs. 32,500.
During the year following transactions took place:
Rs.
Purchase of machinery 125,000
Increase in accounts receivables 45,000
Increase in inventory 28,000
Increase in accounts payable 12,600
What is the net increase in cash and bank balance during the year?
Rs. ___________

© Emile Woolf International 135 The Institute of Chartered Accountants of Pakistan

 112
Financial accounting and reporting I

18. A company has provided following information:

Rs.
4% Loan notes 1,000,000
Interest payable 1 January 2018 10,000
Interest payable 31 December 2018 20,000
What is the amount to be reported as interest paid during the year 2018 in the Statement of Cash
Flows?
Rs. ___________

19. Furqan Limited has provided following information about non–current assets:
Rs.
Cost as at 1 January 2018 350,000
Cost as at 31 December 2018 450,000
During the year an asset costing Rs. 100,000 and having net book value of Rs. 40,000 was sold at a
profit of Rs. 30,000.
What is the net to be shown as outflow in the “Cash flow from investing activities” section in Statement
of Cash Flows?
Rs. ___________

20. The following amounts have been calculated for inclusion in the statement of cash flow of House
Limited:
Rs.
Net cash inflow from financing activities 145,000
Net cash outflow from investing activities 160,000
Increase in cash and cash equivalents 24,000
Income taxes paid 65,000
Interest paid 12,000
How much cash has been generated from operations?
Rs. ___________

21. A cash flow statement provides information that enables users to evaluate the changes in:
(a) Solvency
(b) Net assets
(c) Its financial structure
(d) Its liquidity

22. Daily sales and purchases and employee costs comprise:

(a) Operating activities
(b) Investing activities
(c) Financing activity
(d) Component of cash and cash equivalent

© Emile Woolf International 136 The Institute of Chartered Accountants of Pakistan

 113
Chapter 3: IAS 7: Statement of cash flows

23. Which of the following involves a movement of cash?

(a) A rights issue
(b) Depreciation of fixed assets
(c) Creation of a provision for doubtful debts
(d) A bonus issue

24. Activities that result in changes in the size and composition of the equity capital and borrowings of an
entity are called:
(a) Operating activities
(b) Investing activities
(c) Financing activity
(d) None of these

25. Which of the following are not the operating activities?

(a) Interest paid
(b) Cash payments of income taxes
(c) Collections from customers
(d) Payment of dividends

26. Amplifier Limited had sales of Rs.120 million during the year. Trade and other receivables increased
from Rs.12 million to Rs.16 million, an increase of Rs. 4 million. What amount of cash was received
from customers during the year?
(a) Rs.124 million
(b) Rs.116 million
(c) Rs.120 million
(d) None of these

27. Cost of sales for Shah Textile Limited during the year was Rs.100 million. Opening inventory was
Rs.20 million and closing inventory was Rs. 28 million. Opening trade payables were Rs.5 million and
closing trade payables were Rs.9 million. What amount of cash was paid to suppliers?
(a) Rs.102 million
(b) Rs.104 million
(c) Rs.108 million
(d) Rs.110 million

28. Zaman Limited extracted general ledger from which it shows salaries and wages expense of Rs.50
million during the year. Its cash flow statement reported cash paid to employees of Rs.42 million. The
opening balance of accrued salaries and wages was Rs.3.6 million. What was the closing balance for
accrued salaries and wages?
(a) Rs.11.6 million
(b) Rs.11.8 million
(c) Rs.4.4 million
(d) Rs.3.8 million

© Emile Woolf International 137 The Institute of Chartered Accountants of Pakistan

 114
Financial accounting and reporting I

29. Sale proceeds from disposal of property, plant and equipment are classified as:
(a) Financing activities
(b) Operating activities
(c) Investing activities
(d) Either financing or operating activities, depending on which method (direct or indirect) is used
to determine cash flows from operating activities

30. Which one of the following events will increase the cash balances of a business?
(a) Loan repayment to banks
(b) Bank granting it an overdraft facility
(c) Debtors paying amounts owed
(d) Sale of stock on credit

31. A company with healthy profits is facing a cash shortage. Which of the following events could account
for this?
(a) Delaying payments to creditors
(b) The shortening of the credit period granted to debtors
(c) The recent acquisition of machinery
(d) An increase in dividend proposed by the directors

32. Which one of the following companies is most likely to run into cash flow problems?
(a) A loss making company making components of vital strategic importance to the government
(b) A profitable new retailer about to embark on ambitious expansion plans
(c) A company which has recently sold part of its operations so as to concentrate on its core
areas
(d) Reasonably profitable, long established company with no expansion plans

33. What is the immediate effect of making a capital repayment on a loan on cash flow and profits?
(a) On profit - None; On cash – Decrease
(b) On profit - Increase; On cash – Decrease
(c) On profit - Decrease; On cash – Decrease
(d) On profit - Decrease; On cash – None

34. A company has a negative cash flow from operating activities. What could explain this negative cash
flow?
(a) High levels of dividend payments
(b) A substantial investment in new fixed assets
(c) A sudden increase in credit sales
(d) The repayment of a loan

© Emile Woolf International 138 The Institute of Chartered Accountants of Pakistan

 115
Chapter 3: IAS 7: Statement of cash flows

35. Which of the following is NOT a cash outflow for the firm?
(a) Dividends
(b) Interest payments.
(c) Taxes
(d) Bad debts

© Emile Woolf International 139 The Institute of Chartered Accountants of Pakistan

 116
Financial accounting and reporting I

6 OBJECTIVE BASED ANSWERS

01. (c) Bonus issue of shares involves transfer from Reserves to share capital of the company.
There is no cash flow involved.
02. (c) The statement indicates that the company had net cash receipts (inflows) despite the
losses, which is indicative of receipts of cash by issuing right shares.
03. (b) No cash is paid or received for bonus issue of share capital.
Entry to record bonus issue
Dr CR
Rs. Rs.
Share premium 10,000
Share capital 10,000

Share Capital + Share premium

b/d 100,000+40,000 140,000
c/d
110,000 + 30,000 140,000
140,0000 140,000

04. (c)
Accumulated depreciation
Particulars Rs... Particulars Rs.
Disposal (see below) 7,000 b/f 25,000
c/f 38,000 Depreciation 20,000
45,000 45,000

Disposal
Particulars Rs... Particulars Rs.
Asset 10,000 Provision for dep. (bal) 7,000
Gain on disposal 3,000 Cash 6,000
13,000 13,000

05. (b)
Retained earnings
Particulars Rs... Particulars Rs.
Dividends paid 5,000 b/f 38,000
Transfer to reserves 12,000 Profit for the year 29,000
c/f 50,000
67,000 67,000
Profit after tax 29,000 + Tax 4,000 = Rs. 33,000 profit before tax

© Emile Woolf International 140 The Institute of Chartered Accountants of Pakistan

 117
Chapter 3: IAS 7: Statement of cash flows

06. (c)
Accounts receivables
Particulars Rs... Particulars Rs.
b/f 12,000 Cash (bal.) 59,000
Sales 75,000 Discount allowed 3,000
c/f 25,000
87,000 87,000

07. (b) & (d) Decrease in accounts receivables indicates that they have paid the debt, hence, inflow for
us.
Increase in accounts payable indicates that we have not paid them, thus reducing outflows
(or increasing cash flows)
Bonus shares issued do not affect cash flows.
Increase in inventory is cash outflows.
08. (b) Dividend is paid to shareholders who provide finance to the business; therefore, it is treated
as financing activity.
Cash paid to acquire non-current assets is shown in investing activities.
Bonus issues have no impact on cash flows of the business.
Depreciation is non-cash item and is adjusted in operating activities.
09. (a)
Rs.
Operating profit before working capital changes 30,000
Increase in accounts receivables (5,000)
Increase in inventory (3,000)
Increase in accounts payable 2,000
Interest paid (500)
23,500

10. (b) Users of financial statements may predict future cash flows from past data of how the entity
generates and uses its cash.
Profitability is reflected in statement of comprehensive income.
Debt/Equity and net assets are reflected in statement of financial position.
11. (c) Only debentures and non – current assets purchased are included in investing activities;
Rs. 50,000+45,000= Rs. 95,000
Investment in short term bonds will be considered cash equivalent and advance rent would
affect operating activities cash flows.
12. (b) Shares issued = 100,000/5 = 20,000
Cash received = 20,000xRs.1.2= Rs. 24,000
13. (a) The gain on disposal in included in profit before tax as other income. This is deducted back
in order to determine the cash figure.
14. (a & c) Interest expense is added back as interest paid is separately reported.
Loss on disposal is added back as this is included in profit before tax as an expense.
Interest income is deducted back.
Tax charge need not be added back as already the amount taken is profit before tax.
15. (d)

© Emile Woolf International 141 The Institute of Chartered Accountants of Pakistan

 118
Financial accounting and reporting I

16. Rs.
48,000
Rs.
Profit before tax 40,000
Adjustments for non-cash items
Depreciation 4,000
Loss on sale of fixed assets 3,000
Operating profit before working capital changes 47,000
Decrease in accounts receivables 1,000
Cash generated from operations 48,000

17. Rs.
167,600
Cash flows from operating activities Rs.
Profit before tax 320,500
Depreciation 32,500
Operating profit before working capital changes 353,000
Increase in accounts receivables (45,000)
Increase in inventory (28,000)
Increase in accounts payable 12,600
292,600

Cash flow from investing activities

Purchase of machinery (125,000)
167,600

18. Rs.
30,000
Interest payable
Particulars Rs. Particulars Rs.
Cash 30,000 b/f 10,000
c/f 20,000 Interest expense 40,000
50,000 50,000
Interest expense = Rs. 1,000,000x4%= Rs. 40,000
19. Rs.
130,000 Amounts to be shown in Cash flows from investing activities are;
Cash flows from investing activities Rs.
Cash paid to acquire assets (200,000)
Cash received on disposal 70,000
130,000

© Emile Woolf International 142 The Institute of Chartered Accountants of Pakistan

 119
Chapter 3: IAS 7: Statement of cash flows

Non-current assets
Particulars Rs. Particulars Rs.
b/f 350,000 Disposal 100,000
Cash 200,000 c/d 450,000
550,000 550,000

Disposal
Particulars Rs. Particulars Rs.
Asset 100,000 Acc. Dep [10,000 – 4,000] 60,000
Gain on disposal 30,000 Cash 70,000
130,000 130,000

20. Rs.
116,000
Rs.
Cash generated from operations (β) 116,000
Interest paid (12,000)
Income taxes paid (65,000)
Net cash from operating activities (β) 39,000
Net cash outflow from investing activities (160,000)
Net cash inflow from financing activities 145,000
Increase in cash and cash equivalents 24,000

21. (d)
22. (a)
23. (a)
24. (c)
25. (d)
26. (b)
27. (b)
28. (a)
29. (c)
30. (c)
31. (c)
32. (b)
33. (a)
34. (c)
35. (d)

© Emile Woolf International 143 The Institute of Chartered Accountants of Pakistan

 120

Certificate in accounting and Finance

Financial accounting and reporting I

CHAPTER
8
Non-current assets: sundry standards

Contents
1 IAS 20: Accounting for government grants and disclosure of
government assistance
2 IAS 23: Borrowing costs
3 IAS 40: Investment property
4 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 405 The Institute of Chartered Accountants of Pakistan

 121
Chapter 8: Non-current assets: sundry standards

4 OBJECTIVE BASED QUESTIONS

01. On 1 January 2021 Aim Limited (AL) received Rs. 1,000,000 from the local government on the condition
that they employ at least 150 persons each year for the next 4 years.
Due to an economic downturn and reduced consumer demand on 1 January 2022, AL no longer needed
to employ any more staff and the conditions of the grant required full repayment.
What should be recorded in the financial statements on 1 January 2022?

(a) Reduce deferred income balance by Rs. 750,000

(b) Reduce deferred income by Rs. 750,000 and recognize a loss of Rs. 250,000
(c) Reduce deferred income by Rs. 1,000,000
(d) Reduce deferred income by Rs. 1,000,000 and recognize a gain of Rs. 250,000

02. Which of the following are acceptable methods of accounting for a government grant relating to an asset
in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance?
(i) Set up the grant as deferred income
(ii) Credit the amount received to profit or loss
(iii) Deduct the grant from the carrying amount of the asset
(iv) Add the grant to the carrying amount of the asset

(a) (i) and (ii)

(b) (ii) and (iv)
(c) (i) and (iii)
(d) (iii) and (iv)

03. On 1 January 2019, Boom Limited (BL) received Rs. 2,000,000 from the local government on the
condition that they employ at least 200 staff each year for the next 4 years. On this date, it was virtually
certain that BL would meet these requirements.
However, on 1 January 2022, due to an economic downturn and reduced consumer demand, BL no
longer needed to employ 100 staff. The conditions of the grant required half repayment.
What should be recorded in the financial statements on 1 January 2022 for repayment of grant?

(a) Debit Deferred grant by Rs. 500,000 and PL by Rs. 500,000

(b) Debit Deferred grant by Rs. 250,000 and PL by Rs. 250,000
(c) Debit Deferred grant by Rs. 1,500,000 and PL by Rs. 500,000
(d) Debit Deferred grant by Rs. 500,000 and PL by Rs. 1,500,000

04. Which TWO of the following statements about IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance are true?
(a) A government grant related to the purchase of an asset must be deducted from the carrying
amount of the asset in the statement of financial position.
(b) A government grant related to the purchase of an asset should be recognised in profit or loss
over the life of the asset.

© Emile Woolf International 431 The Institute of Chartered Accountants of Pakistan

 122
Financial accounting and reporting I

(c) Free marketing advice provided by a government department is excluded from the definition of
government grants.
(d) Any required repayment of a government grant received in an earlier reporting period is treated
as prior period adjustment.

05. Which TWO of the statements below regarding IAS 23 Borrowing Costs are correct?
(a) Borrowing costs must be capitalised if they are directly attributable to qualifying assets
(b) Borrowing costs should cease to be capitalised once the related asset is substantially complete
(c) Borrowing costs must be capitalised if they are directly attributable to non-current assets
(d) Borrowing costs may be capitalised if they are directly attributable to qualifying assets

06. Fine Limited (FL) received a Rs.10 million loan at 7.5% on 1 April 2017. The loan was specifically issued
to finance the building of a new store.
Construction of the store commenced on 1 May 2017 and it was completed and ready for use on 28
February 2018 but did not open for trading until 1 April 2018.
How much should be recorded as finance costs in the statement of profit or loss for the year ended 31
March 2018?

(a) Rs. 250,000

(b) Rs. 750,000
(c) Rs. 125,000
(d) Rs. 625,000

07. Fine Limited (FL) received a Rs.10 million loan at 7.5% on 1 April 2017. The loan was specifically issued
to finance the building of a new store.
Construction of the store commenced on 1 May 2017 and it was completed and ready for use on 28
February 2018 but did not open for trading until 1 April 2018.
How much interest should be capitalised as part of property, plant and equipment as at 31 March 2018?

(a) Rs. 250,000

(b) Rs. 750,000
(c) Rs. 125,000
(d) Rs. 625,000

08. An entity decided that not all of the funds raised were needed immediately and temporarily invested
some of the funds for one month before the construction started, earning Rs.40, 000 interest.
How should the Rs. 40,000 be accounted for in the financial statements?

(a) Net off the amount capitalised in property, plant and equipment
(b) Taken to the statement of profit or loss as investment income
(c) Taken as other comprehensive income
(d) Deducted from the outstanding loan amount in the statement of financial position

© Emile Woolf International 432 The Institute of Chartered Accountants of Pakistan

 123
Chapter 8: Non-current assets: sundry standards

09. Shine Limited (SL) had the following bank loans outstanding during the whole of 2018:

Rs. m
9% loan repayable 2019 15
11% loan repayable 2022 24
SL began construction of a qualifying asset on 1 April 2018 and withdrew funds of Rs. 6 million on that
date to fund construction. On 1 August 2018 an additional Rs. 2 million was withdrawn for the same
purpose.
Calculate the borrowing costs which can be capitalised in respect of this project for the year ended 31
December 2018.

(a) Rs. 545,600

(b) Rs. 472,350
(c) Rs. 750,600
(d) Rs. 350,350

10. Jazz Limited (JL) has borrowed Rs. 24 million to finance the building of a factory. Construction is
expected to take two years.
The loan was drawn down and incurred on 1 January 2019 and work began on 1 March 2019. Rs. 10
million of the loan was not utilized until 1 July 2019 so JL was able to invest it until needed. JL is paying
8% on the loan and can invest surplus funds at 6%.
Calculate the borrowing costs to be capitalised for the year ended 31 December 2019 in respect of this
project.

(a) Rs. 1,400,000

(b) Rs. 1,920,000
(c) Rs. 1,300,000
(d) Rs. 1,620,000

11. A company has the following loans in place throughout the year ended 31 December 2018.

Rs. m
10% bank loan 140
8% bank loan 200
On 1 July 2018 Rs. 50 million was drawn down for construction of a qualifying asset which was
completed during 2019.
What amount should be capitalised as borrowing costs at 31 December 2018 in respect of this asset?

(a) Rs. 5.6 million

(b) Rs. 2.8 million
(c) Rs. 4.4 million
(d) Rs. 2.2 million

© Emile Woolf International 433 The Institute of Chartered Accountants of Pakistan

 124
Financial accounting and reporting I

12. An entity purchased an investment property on 1 January 2013 for a cost of Rs. 35m. The property had
an estimated useful life of 50 years, with no residual value, and at 31 December 2015 had a fair value
of Rs. 42m.
On 1 January 2016 the property was sold for net proceeds of Rs. 40m.
Calculate the profit or (loss) on disposal under both the cost and fair value (FV) model.

(a) Cost model: Rs. 7.1 m and FV model: (Rs. 2.0 m)

(b) Cost model: Rs. 2.0 m and FV model: Rs. 2.0 m
(c) Cost model: Rs. 5.0 m and FV model: (Rs. 2.0 m)
(d) Cost model: Rs. 7.1 m and FV model: Rs. 5.0 m

13. An investment property with a useful life of 10 years was purchased by Akram Limited on 1 January
2019 for Rs. 200 million. By 31 December 2019 the fair value of the property had risen to Rs. 300
million. Akram Limited measures its investment properties under the fair value model.
What values would go through the statement of profit or loss in the year?

(a) Gain: Rs. 100 million and Depreciation Rs. 30 million

(b) Gain: Rs. 0 and Depreciation of Rs. 30 million
(c) Gain: Rs. 100 million and Depreciation of 0
(d) Gain: Rs. 120 million and Depreciation of Rs. 20 million

14. Which of the following properties owned by an entity would be classified as an investment property?
(a) A property that had been leased to a tenant, but which is no longer required and is now being
held for resale
(b) Land purchased for its investment potential. Planning permission has not been obtained for
building construction of any kind
(c) A new office building used as entity’s head office, purchased specifically in order to exploit its
capital gains potential
(d) A bungalow used for executive training

15. Sarfraz Limited (SL) uses fair value accounting where possible and has an office building used by SL
for administrative purposes. At 1 April 2012 it had a carrying amount of Rs. 20 million and a remaining
life of 20 years. On 1 October 2012, the property was let to a third party and reclassified as an
investment property. The property had a fair value of Rs. 23 million at 1 October 2012, and Rs. 23.4
million at 31 March 2013.
What is the correct treatment when the above property is reclassified as an investment property?

(a) Take Rs. 3,500,000 gain to other comprehensive income

(b) Take Rs. 3,500,000 gain to the statement of profit or loss
(c) Take Rs. 4,000,000 gain to other comprehensive income
(d) Take Rs. 4,000,000 gain to the statement of profit or loss

© Emile Woolf International 434 The Institute of Chartered Accountants of Pakistan

 125
Chapter 8: Non-current assets: sundry standards

16. A manufacturing entity receives a grant of Rs. 1,000,000 towards the purchase of a machine on 1
January 2013. The grant will be repayable if the entity sells the asset within 4 years, which it does not
intend to do. The asset has a useful life of 5 years.
What is the deferred income liability balance at 30 June 2013?

Rs. ___________

17. A company receives a government grant of Rs. 500,000 on 1 April 2017 to facilitate purchase on the
same day of an asset which costs Rs. 750,000. The asset has a five-year useful life and is depreciated
on a 30% reducing balance basis. Company policy is to account for all grants received as deferred
income.
What amount of income will be recognized in respect of the grant in the year to 31 March 2019?

Rs. ___________

18. A manufacturing entity is entitled to a grant of Rs. 3 million for creating 50 jobs and maintaining them
for three years. Rs. 1.5m is received when the jobs are created and the remaining Rs. 1.5m is receivable
after three years, provided that the 50 jobs are still in existence. The entity creates 50 jobs at the
beginning of year one and there is reasonable assurance that this level of employment will be
maintained.
What is the deferred income balance at the end of the first year?

Rs. ___________

19. An entity uses funds from its general borrowings to build a new production facility. Details of the entity's
borrowings are shown below:
Rs.10 million 6% loan
Rs.6 million 8% loan
The entity used Rs.12 million of these funds to construct the facility, which was under construction for
the entire year.
How much interest should be capitalised as part of the cost of the asset?

Rs. ___________

20. Cool Limited acquired a building with a 40-year life for its investment potential for Rs. 8 million on 1
January 2013. At 31 December 2013, the fair value of the property was estimated at Rs. 9 million with
costs to sell estimated at Rs. 200,000.
If Cool Limited uses the fair value model for investment properties, what gain should be recorded in the
statement of profit or loss for the year ended 31 December 2013?

Rs. ___________

21. If a government grant must be repaid, then it is;

(a) An error
(b) A change in accounting policy
(c) A change in accounting estimate
(d) A new transaction

© Emile Woolf International 435 The Institute of Chartered Accountants of Pakistan

 126
Financial accounting and reporting I

22. If an entity receives a non-monetary asset as a grant, this is accounted for at the;
(a) Market value
(b) Fair value
(c) Net realizable value
(d) Present value

23. Which of the following is not covered by IAS 20 – Government Grants?

(a) Tax breaks
(b) Employment grants
(c) Subsidized loans
(d) Forgivable loans

24. Which of the following is not a correct treatment of government grants related to an asset?
(a) Deferred income
(b) Credit to income in period received
(c) Deducting the grant from the carrying amount of the asset
(d) None of the above

25. Which of the following is not a correct treatment of government grants related to income?
(a) Present as. Other income
(b) Deduct from the related expense
(c) Deduct from the cost of the asset
(d) None of the above

26. Which of the following is not considered a “borrowing cost” under IAS 23?
(a) Interest expense calculated by the effective interest method
(b) Finance charges in respect of loan
(c) Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs
(d) Principal repayments on a loan for property, plant and equipment

27. When activities to prepare an asset for its sale or use are suspended, borrowing costs must be?
(a) Capitalized
(b) Expensed
(c) Ignored
(d) Charged to equity

© Emile Woolf International 436 The Institute of Chartered Accountants of Pakistan

 127
Chapter 8: Non-current assets: sundry standards

28. Which of the following is not a condition to commence capitalisation of borrowing costs?
(a) Expenditures are being incurred
(b) Borrowing costs are being incurred
(c) Repayment of borrowings has commenced
(d) Activities to produce the asset for its intended use or sale have commenced

29. Ghazi Limited (GL) is constructing an office building and is capitalising borrowing costs in accordance
with IAS 23. The office is almost complete; the only remaining work is to install furniture. Is GL allowed
to continue capitalising the borrowing costs?
(a) Yes
(b) No
(c) Don’t know
(d) None of the above

30. Which of the following is not a “qualifying asset” under IAS 23?
(a) Mass produced inventory
(b) Manufacturing plants
(c) Made to order inventory
(d) Investment property

31. Under IAS 40 – Investment Property, where should a gain or loss on disposal be recognized?
(a) Statement of Financial Position
(b) Profit and loss statement
(c) Statement of changes in equity
(d) None

32. If an entity uses part of a building for their own use, and rents the remainder. How should this be treated?
(a) All as investment property under IAS 40 – Investment Property
(b) All under IAS 16 – Property, Plant and Equipment
(c) Account for separately under ‘IAS - 16 Property, Plant and Equipment’ and ‘IAS - 40 Investment
Property’
(d) None of these

33. An investment property should initially be measured at?

(a) Cost
(b) Fair value
(c) Market value
(d) Net realizable value

© Emile Woolf International 437 The Institute of Chartered Accountants of Pakistan

 128
Financial accounting and reporting I

34. If an entity wishes to change from a cost model to fair value model under IAS 40 – Investment Property,
when may it do so?
(a) When the board of directors approves a change
(b) When the value of the assets will improve with a revised model
(c) When a change will result in a more appropriate presentation
(d) When the market for these properties is fluctuation

35. Which two of the following properties fall under the definition of investment property and therefore within
the scope of IAS 40?
(a) Property occupied by an employee paying market rent
(b) A building owned by an entity and leased out under an operating lease
(c) Property being constructed on behalf of 3rd parties
(d) Land held for long term appreciation

© Emile Woolf International 438 The Institute of Chartered Accountants of Pakistan

 129
Chapter 8: Non-current assets: sundry standards

4 OBJECTIVE BASED ANSWERS

01. (b) This is a grant related to income and would therefore be released to the statement of
profit or loss over the 4 year life. By the end of year one, Rs. 250,000 would have
been credited to the statement of profit or loss, leaving Rs. 750,000 held in deferred
income. At this point the amount is repaid, meaning that the deferred income is
removed, as well as the Rs. 250,000 income previously recorded.

02. (c) The grant can be treated as deferred income or deducted from the carrying amount
of the asset. It cannot be credited directly to profit or loss.

03. (a) Half repayment is Rs. 1,000,000 (Rs. 2,000,000 x 50%)

At the date of repayment, the balance in deferred grant would be Rs. 500,000 and
additional Rs. 500,000 shall be charged to profit or loss.

04. (b, c) Item a is incorrect as the deferred income method can be used.
Item d is incorrect as any repayment is corrected in the current period, not
retrospectively.

05. (a, b) Borrowing costs must be capitalised if they are directly attributable to qualifying
assets, which are assets that take a substantial time to complete. Capitalization
should cease once substantially all the activities to prepare the asset are complete.

06. (c) Rs. 10 million x 7.5% x 2/12 = Rs. 125,000

07. (d) Rs. 10 million x 7.5% x 10/12 = Rs. 125,000

08. (b) Temporary investment income earned during the construction period should be
netted off the amount capitalised.
However, the interest was earned prior to the period of construction. Therefore the
investment income earned should be taken to the statement of profit or loss as
investment income.

09. (a) ,9- × 15./ 0 ,11- × 24./

!"#$!%#&!$#'()*!$+ = = 13.23%
15 0 24
Rs. 6m × 10.23% × 9/12 = Rs.460,350
Rs. 2m × 10.23% × 5/12 = Rs. 85,250
Total Rs. 545,600

10. (a) Rs.

March – December (Rs. 24m × 8% × 10/ 12) 1,600,000

Less investment income (Rs. 10m × 6% × 4/12) (200,000)

1,400,000

Temporary investment income before commencement would be recognized as

finance income in profit or loss.

© Emile Woolf International 439 The Institute of Chartered Accountants of Pakistan

 130
Financial accounting and reporting I

11. (d) (10% × 140 ) + (8% × 200 )

!"#$!&#'!$#()*+!$, = = 8.8%
140 + 200
Rs. 50 million × 8.8% × 6/12 = Rs. 2.2 million

12. (a) Under the cost model the property will be depreciated over 50 years for 3 years up to
the date of disposal. Therefore, at the disposal date the carrying value would have
been Rs. 35m – (Rs. 35m/50 × 3 years) = Rs. 32.9m and the profit on disposal Rs.
7.1m (Rs. 40m – Rs. 32.9).
Under the fair value model the property will not be depreciated hence the loss on
disposal would be Rs. 2m (Rs. 40m – Rs. 42m).

13. (c) Under the fair value model the property will not be depreciated hence the gain on
valuation would be Rs. 100 million (Rs. 300 million – Rs. 200 million).

14. (b) Asset A would be classed as a non-current asset held for sale under IFRS 5. Assets
C and D would both be classified as property, plant and equipment under IAS 16.

15. (a) As SL uses the fair value model for investment properties, the asset should be
revalued to fair value before being classed as an investment property. The gain on
revaluation should be taken to other comprehensive income, as the asset is being
revalued while held as property, plant and equipment.
At 1 October, the carrying amount of the asset is Rs. 19.5 million, being Rs. 20 million
less 6 months’ depreciation. As the fair value at 1 October is Rs. 23 million, this leads
to a Rs. 3,500,000 gain which will be recorded in other comprehensive income.

16. Rs. 900,000 The grant should be released over the useful life, not based on the possibility of the
item being repaid. Therefore, the Rs. 1m should be released over 5 years, being a
release of Rs. 200,000 a year. At 30 June 2013, 6 months should be released,
meaning Rs. 100,000 has been released (6/12 × Rs. 200,000). This leaves Rs.
900,000 in deferred income.

17. Rs. 105,000

Rs.

Grant received 1.4.17 500,000

Recognized year to 31.3.18 (500,000 × 30%) (150,000)

Balance 31.3.18 350,000

Recognized year to 31.3.19 (350,000 × 30%) 105,000

18. Rs. 500,000 The total grant income is Rs. 3m, to be recognized over a three-year period. Annual
income is therefore Rs. 1m. At the end of the first year the entity has received Rs.
1.5m of which Rs. 1m has been recognized in the statement of profit or loss, leaving
Rs. 500,000 deferred into future periods.

19. Rs. 810,000 Rs.12m × 6.75% = Rs. 810,000

Capitalisation rate
= ((Rs.10m × 6%) + (Rs.6m × 8%))/Rs.16m = 6.75%.

© Emile Woolf International 440 The Institute of Chartered Accountants of Pakistan

 131
Chapter 8: Non-current assets: sundry standards

20. Rs. The fair value gain of Rs. 1 million (Rs. 9m – Rs. 8m) should be taken to the statement
1,000,000 of profit or loss. Costs to sell are ignored and, since entity uses the fair value model,
no depreciation will be charged on the building.

21. (c)

22. (b)

23. (a)

24. (b)

25. (c)

26. (d)

27. (b)

28. (c)

29. (b)

30. (a)

31. (b)

32. (c)

33. (a)

34. (c)

35. (b) & (d)

© Emile Woolf International 441 The Institute of Chartered Accountants of Pakistan

 132

Certificate in Accounting and Finance

Financial accounting and reporting I

CHAPTER
9
IAS 36: Impairment of assets

Contents
1 Impairment of assets

2 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 443 The Institute of Chartered Accountants of Pakistan

 133
Chapter 9: IAS 36: Impairment of assets

2 OBJECTIVE BASED QUESTIONS

01. If the fair value less costs to sell cannot be determined

(a) The asset is not impaired.

(b) The recoverable amount is the value-in-use.

(c) The net realizable value is used.

(d) The carrying value of the asset remains the same.

02. Which TWO of the following could be an indication that an asset may be impaired according to IAS 36
Impairment of Assets?

(a) Decrease in market interest rates

(b) Increase in market values for the asset

(c) Damage caused to the asset

(d) Management intention to reorganise the business

03. IAS 36 Impairment of Assets contains a number of examples of internal and external events which
may indicate the impairment of an asset.
In accordance with IAS 36, which of the following would definitely NOT be an indicator of the potential
impairment of an asset (or group of assets)?

(a) An unexpected fall in the market value of one or more assets

(b) Adverse changes in the economic performance of one or more assets

(c) A significant change in the technological environment in which an asset is employed making
its software effectively obsolete

(d) The carrying amount of an entity’s net assets being below the entity’s market capitalisation

04. A fire at the factory on 1 October 2016 damaged the machine, leaving it with a lower operating
capacity. The accountant considers that entity will need to recognise an impairment loss in relation to
this damage. The accountant has ascertained the following information at 1 October 2016:
§ The carrying amount of the machine is Rs.60,750.
§ An equivalent new machine would cost Rs.90,000.
§ The machine could be sold in its current condition for a gross amount of Rs.45,000.
Dismantling costs would amount to Rs.2,000.
§ In its current condition, the machine could operate for three more years which gives it a value
in use figure of Rs.38,685.
What is the total impairment loss associated with the above machine at 1 October 2016?

(a) [Link]

(b) Rs.17,750

(c) Rs.22,065

(d) Rs.15,750

© Emile Woolf International 457 The Institute of Chartered Accountants of Pakistan

 134
Financial accounting and reporting I

05. Which of the following is NOT an indicator of impairment?

(a) Advances in the technological environment in which an asset is employed have an adverse
impact on its future use.

(b) An increase in interest rates which increases the discount rate an entity uses.

(c) The carrying amount of an entity’s net assets is higher than the entity’s number of shares in
issue multiplied by its share price.

(d) The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount.

06. Cost of disposal are

(a) Incremental costs, directly attributable to the disposal of an asset, excluding finance costs and
income tax expense

(b) Incremental costs, directly attributable to the disposal of an asset, plus finance costs, but
excluding income tax expense

(c) Incremental costs, directly attributable to the disposal of an asset, plus finance costs and
income tax expense

(d) Incremental costs, directly attributable to the disposal of an asset, plus tax expense, but
excluding finance costs

07. An asset is impaired if:

(a) Its carrying amount equals the amount to be recovered through use (or sale) of the asset

(b) Its carrying amount exceeds the amount to be recovered through use (or sale) of the asset

(c) The amount to be recovered through use (or sale) of the asset exceeds its carrying amount

(d) If it has been damaged

08. Value in use is:

(a) The market value

(b) The discounted present value of future cash flows arising from use of the asset and from its
disposal.

(c) The higher of an asset’s fair value less cost to sell and its market value.

(d) The amount at which an asset is recognized in the statement of financial position.

09. IAS 36 applied to which of the following assets:

(a) Inventories.

(b) Financial assets including property plant and equipment and intangible assets

(c) Assets held for sale.

(d) Property, plant, and equipment and intangible assets

© Emile Woolf International 458 The Institute of Chartered Accountants of Pakistan

 135
Chapter 9: IAS 36: Impairment of assets

10. In accordance with IAS 36 Impairment of Assets which of the following statements are true?
1. An impairment review must be carried out annually on all intangible assets.
2. If the fair value less costs to sell of an asset exceed the carrying amount there is no need to
calculate a value in use.
3. Impairment is charged to the statement of profit or loss unless it reverses a gain that has been
recognised in equity in which case it is offset against the revaluation surplus.
(a) All three

(b) 1 and 2 only

(c) 1 and 3 only

(d) 2 & 3 only

11. What is the recoverable amount of an asset?

(a) Its current market value less costs of disposal

(b) The lower of carrying amount and value in use

(c) The higher of fair value less costs of disposal and value in use

(d) The higher of carrying amount and market value

12. A machine has a carrying amount of Rs. 850,000 at the year end of 31 March 2019. Its market value
is Rs. 780,000 and costs of disposal are estimated at Rs. 25,000. A new machine would cost Rs.
1,500,000. The company which owns the machine expects it to produce net cash flows of Rs. 300,000
per annum for the next three years. The company has a cost of capital of 8%.
What is the impairment loss on the machine to be recognised in the financial statements at 31 March
2019?

(a) Rs. 76,870

(b) Rs. 95,000

(c) Rs. 1,66,700

(d) Rs. 220,000

13. IAS 36 Impairment of Assets suggests how indications of impairment might be recognised.
Which TWO of the following would be external indicators that one or more of an entity's assets may
be impaired?

(a) An unusually significant fall in the market value of one or more assets

(b) Evidence of obsolescence of one or more assets

(c) A decline in the economic performance of one or more assets

(d) An increase in market interest rates used to calculate value in use of the assets

© Emile Woolf International 459 The Institute of Chartered Accountants of Pakistan

 136
Financial accounting and reporting I

14. The following information relates to an item of plant.

§ Its carrying amount in the statement of the financial position is Rs. 3 million.
§ The company has received an offer of Rs. 2.7 million from a company in Karachi interested in
buying the plant.
§ The present value of the estimated cash flows from continued use of the plant is Rs. 2.6
million.
§ The estimated cost of transport the plant to Karachi is Rs. 50,000.
What is the amount of the impairment loss that should be recognised on the plant?

(a) Rs. 300,000

(b) Rs. 400,000

(c) Rs. 350,000

(d) Rs. 250,000

15. When calculating the estimates of the future cash flows, which of the following cash flows should not
be included?

(a) Cash flows from disposal.

(b) Income tax payments.

(c) Cash flows from the sale of assets produced by the asset.

(d) Cash outflows on the maintenance of the asset.

16. The following information relates to three assets held by a company:

Asset A Asset B Asset C
Rs. m Rs. m Rs. m
Carrying amount 200 100 80
Value in use 160 120 70
Fair value less cost to sell 180 130 60

What is the total impairment loss?

Rs. ___________

17. The following information relates to four assets held by the company:

A B C D
Rs.m Rs.m Rs.m Rs.m
Carrying amount 240 60 80 140
Value in use 160 140 160 40
Fair value less costs to sell 180 80 140 60

What is the total impairment loss?

Rs. ___________

© Emile Woolf International 460 The Institute of Chartered Accountants of Pakistan

 137
Chapter 9: IAS 36: Impairment of assets

18. A vehicle was involved in an accident exactly halfway through the year. The vehicle cost Rs. 10 million
and had a remaining life of 10 years at the start of the year. Following the accident, the expected present
value of cash flows associated with the vehicle was Rs. 3.4 million and the fair value less costs to sell
was Rs. 6.5 million.
What is the recoverable amount of the vehicle following the accident?

Rs. ___________

19. Radium Limited (RL) acquired a non-current asset on 1 October 2019 at a cost of Rs. 100 million which
had a useful life of ten years and a nil residual value. The asset had been correctly depreciated up to
30 September 2024.
At that date the asset was damaged and an impairment review was performed. On 30 September 2024,
the fair value of the asset less costs to sell was Rs. 30 million and the expected future cash flows were
Rs. 8.5 million per annum for the next five years.
The current cost of capital is 10% and a five year annuity of Rs. 1 per annum at 10% would have a
present value of Rs. 3.79.
What amount would be charged to profit or loss for the impairment of this asset for the year ended 30
September 2024?

Rs. ___________

20. Metal Limited (ML) owns an item of plant which has a carrying amount of Rs. 248 million as at 1 April
2013. It is being depreciated at 12.5% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a slow decline in sales.
ML has estimated that the plant will be retired from use on 31 March 2017.
The estimated net cash flows from the use of the plant and their present values are:

Net cash flows Present values

Rs.000 Rs.000

Year to 31 March 2015 120,000 109,200

Year to 31 March 2016 80,000 66,400

Year to 31 March 2017 52,000 39,000

252,000 214,600

On 1 April 2014, Metric had an offer from a rival to purchase the plant for Rs. 200 million
At what value should the plant appear in Metric’s statement of financial position as at 31 March 2014?

Rs. ___________

21. Which of the following is covered by IAS 36 – Impairment?

(a) Non-current assets held for sale

(b) Investment property carried at cost

(c) Investment property carried at fair value

(d) Inventories

© Emile Woolf International 461 The Institute of Chartered Accountants of Pakistan

 138
Financial accounting and reporting I

22. Which of the following is not covered by IAS 36 – Impairment?

(a) Goodwill

(b) Investment property carried at cost

(c) Investment property carried at fair value

(d) Intangible assets

23. When should an impairment loss be recognised?

(a) Immediately

(b) Over a number of accounting periods

(c) At management’s discretion

(d) When requested by the entity’s auditors

24. Value in use is?

(a) The undiscounted present value of future cash flows expected to arise from continuing use of
asset, and from its disposal at the end of its useful life.

(b) The undiscounted future value of present cash flows expected to arise from continuing use of
asset, and from its disposal at the end of its useful life.

(c) The discounted present value of future cash flows expected to arise from continuing use of
asset, and from its disposal at the end of its useful life.

(d) The discounted present value of historical cash flows expected to arise from continuing use of
asset, and from its disposal at the end of its useful life.

25. Which of the following element is not considered while computing value in use?

(a) expectations about possible variations in the amount or timing of those future cash flows

(b) the time value of money, represented by the current market risk-free rate of interest

(c) the price for bearing the uncertainty inherent in the asset

(d) estimated future restructuring cost

26. In measuring value in use, the discount rate used for discounting the cash flows should be the?

(a) Pre-tax rate that reflects the market assessment of time value of money and risks specific to
the asset

(b) Pre-tax rate that reflects the market assessment of time value of money and risks specific to
the entity’s competitors

(c) Post-tax rate that reflects the entity’s assessment of time value of money and risks specific to
the asset

(d) Pre-tax rate that reflects the entity’s assessment of time value of money and risks specific to
the asset

© Emile Woolf International 462 The Institute of Chartered Accountants of Pakistan

 139
Chapter 9: IAS 36: Impairment of assets

27. When the recoverable amount of an asset is less than its carrying value in the Statement of Financial
Position, the asset is?

(a) in a revaluation deficit

(b) Flawed

(c) In negative equity

(d) Impaired

28. Which of the following is an internal indication of impairment?

(a) Decline in market value

(b) Worse economic performance than expected

(c) Increase in market interest rates

(d) Technological obsolescence

29. Which of the following is an external indication of impairment?

(a) Physical damage

(b) Worse economic performance than expected

(c) Increase in market interest rates

(d) Asset is part of a restructuring program

30. Under IAS 36, what is the recoverable amount of an asset?

(a) The lower of its cost and net realisable value

(b) The higher of fair value less costs of disposal and value in use

(c) The lower of net present value and cost

(d) The higher of net present value and cost

31. Which of the following is not permitted as a cost to sell under IAS 36?

(a) Cost to dismantle machine

(b) Auctioneers fees

(c) Standard wages for employees

(d) Transport costs for machine

© Emile Woolf International 463 The Institute of Chartered Accountants of Pakistan

 140
Financial accounting and reporting I

32. If the fair value less costs to sell for an asset cannot be determined, then recoverable amount is its?

(a) Market value

(b) Fair value

(c) Value in use

(d) Replacement value

33. Which of the following is the best evidence of an asset's fair value less costs to sell?

(a) The carrying value of the asset

(b) The price in a binding sale agreement

(c) The disposal value of the asset in an arm`s length transaction

(d) An asset that is traded in an active market

34. When calculating the estimates of future cash flows which of the following cash flows should not be
included?

(a) Cash out flows on the maintenance of the asset

(b) Cash flows from disposal

(c) Cash flows from the sale of inventory produced by the asset

(d) Benefits from future restructuring

© Emile Woolf International 464 The Institute of Chartered Accountants of Pakistan

 141
Chapter 9: IAS 36: Impairment of assets

2 OBJECTIVE BASED ANSWERS

01. (b) The recoverable amount is higher of value in use and fair value less cost to sell
and in case fair value cannot be measured reliably, the recoverable amount is
value in use.

02. (c) & (d) A decrease in interest rates would reduce the discount applied to future cash
flows in calculating the value in use, therefore increasing the value in use. An
increase in market values will lead to the asset value increasing rather than
being impaired.

03. (d) The entity’s market capitalisation would not be reflected within the values on the
statement of financial position.

04. (b) Value in use of Rs.38,685 is lower than fair value less costs to sell of Rs.43,000,
so recoverable amount is Rs.43,000 and impairment is Rs.60,750 – Rs.43,000
= Rs.17,750.

05. (d) Although the estimated net realisable value is lower than it was (due to fire
damage), the entity will still make a profit on the inventory and thus it is not an
indicator of impairment.

06. (a) Tax and finance costs are not cost of disposal.

07. (b) Asset may not be impaired even after damage. Impairment loss is excess of
carrying amount over recoverable amount.

08. (b) This is definition of value in use

09. (d) (a), (b) and (c) are excluded from scope of IAS 36 as the prudence mechanism
is already incorporated in the relevant standards of these items.

10. (d) Item 1 is untrue. An annual impairment review is only required for intangible
assets with an indefinite life.

11. (c) The higher of fair value less costs of disposal and value in use.

12. (a)

Fair value – costs of disposal

(780,000 – 25,000) Rs. 75,500

Value in use:

300,000 × 1 / 1.08 277,780

300,000 × 1 / 1.082 257,200

300,000 × 1 / 1.083 238,150

Rs. 773,130

Recoverable amount is Rs. 773,130 and carrying amount is Rs. 850,000, so

impairment is Rs. 76,870.

© Emile Woolf International 465 The Institute of Chartered Accountants of Pakistan

 142
Financial accounting and reporting I

13. (a & d) The other options are internal indicators of impairment.

14. (c)
Rs.

Fair value less costs of disposal (2.7m – 50,000) 2,650,000

Value in use 2,600,000

Recoverable amount is therefore: 2,650,000

Impairment loss (balancing figure) 350,000

Carrying amount 3,000,000

15. (b) Cash flows related to taxations are ignored while calculating value in use.

16. Rs. 30 million 20 + Nil + 10 = Rs. 30 million

17. Rs. 140 million 60 + Nil + Nil +80 = Rs. 140 million

18. Rs. 6.5 million The recoverable amount of an asset is the higher of its value in use (being the
present value of future cash flows) and fair value less costs to sell. Therefore
the recoverable amount is Rs. 6.5 million.

19. Rs. 17.785

million Rs. m

Cost 1 October 2019 100

Depreciation (100 /10 x 5 years) (50)

Carrying amount 50

The recoverable amount is the higher of fair value less costs to sell (Rs. 30
million) and the value in use (Rs. 8.,5 x 3.79 = Rs. 32.215). Recoverable
amount is therefore Rs. 32.215.

Rs. m

Carrying amount 50

Recoverable amount (32.215)

Impairment to statement of profit or loss 17.785

20. Rs. Is the lower of its carrying amount (Rs. 217 million) and recoverable amount
214,600,000 (Rs. 214.6 million) at 31 March 2015.
Recoverable amount is the higher of value in use (Rs. 214.6 million) and fair
value less costs to (Rs. 200 million).
Carrying amount = Rs. 217 million (248 million – (248 million × 12.5%))
Value in use is based on present values = Rs. 214.6 million

21. (b)

© Emile Woolf International 466 The Institute of Chartered Accountants of Pakistan

 143
Chapter 9: IAS 36: Impairment of assets

22. (c)

23. (a)

24. (c)

25. (d)

26. (a)

27. (d)

28. (b)

29. (c)

30. (b)

31. (c)

32. (c)

33. (b)

34. (d)

© Emile Woolf International 467 The Institute of Chartered Accountants of Pakistan

 144

Certificate in Accounting and Finance

Financial accounting and reporting I

CHAPTER
10
IFRS 15: Revenue from contracts
with customers

Contents
1 IFRS 15: Revenue from contracts with customers
2 IFRS 15: The five step model
3 Other aspects of IFRS 15
4 Examinable Examples of IFRS 15
5 Objective based questions and answers

* The student must refer original handbook of IFRS.

w
© Emile Woolf International 469 The Institute of Chartered Accountants of Pakistan
 145
Chapter 10: IFRS 15: Revenue from contracts with customers

5 OBJECTIVE BASED QUESTIONS

01. Which of the following is not one of the 5 steps for recognizing revenue according to IFRS 15 Revenue
from contracts with customers?

(a) Identify the contract

(b) Assess the likelihood of economic benefits

(c) Determine the contract price

(d) Allocate the transaction price to the performance obligations in the contract.

02. Whale Limited (WL) is an agent who works on behalf of Dolphin, a famous performer. WL has just
collected Rs. 100 million from a promoter in terms of ticket sales for a recent show done by Dolphin.
WL earns commission of 10% in relation to Dolphin's work.
What is the correct double entry for the receipt of the Rs? 100 million?

(a) Dr Cash Rs. 100 million

Dr Trade Receivables Rs. 10 million
Cr Trade payables Rs. 100 million
Cr Revenue Rs. 10 million

(b) Dr Cash Rs. 100 million

Dr COS Rs. 90 million
Cr Revenue Rs. 100 million
Cr Trade payables Rs. 90 million

(c) Dr COS Rs. 90 million

Dr Cash Rs. 10 million
Cr Revenue Rs. 100 million

(d) Dr Cash Rs. 100 million

Cr Revenue Rs. 10 million
Cr Trade payables Rs. 90 million

03. Coin Limited (CL) sells a specialized piece of equipment to Orbit Limited on 1st September 2017 for
Rs. 4m. Due to the specialized nature of the equipment, CL has additionally agreed to provide a support
service for the next two years. The cost per annum to CL of providing this service will be Rs. 300,000.
CL usually earns a gross margin of 20% on such contracts.
What revenue should be included in the statement of profit or loss of CL for the year ended 31 December
2017?

(a) Rs. 3,343,750

(b) Rs. 3,250,000

(c) Rs. 3,375,000

(d) Rs. 4,000,000

© Emile Woolf International 505 The Institute of Chartered Accountants of Pakistan

 146
Financial accounting and reporting I

04. River Limited (RL) has prepared its draft financial statements for the year ended 30 September 2014.
It has included the following transactions in revenue at the amounts stated below.
Which of these has been correctly included in revenue according to IFRS 15 Revenue from Contracts
with Customers?

(a) Agency sales of Rs. 2.5 million on which RL is entitled to a commission of 10%.

(b) Sale proceeds of Rs. 20 million for motor vehicles which were no longer required by RL

(c) Sales of Rs. 15 million on 30 September 2014. The amount invoiced to and received from the
customer was Rs. 18 million, which includes Rs. 3 million for ongoing servicing work to be done
by RL over the next two years.

(d) Sales of Rs. 20 million on 1 October 2013 to an established customer who (with the agreement
of RL) will make full payment on 30 September 2015. RL has a cost of capital of 10%.

05. Cat Limited (CL) sold and installed an item of machinery for Rs. 800,000 on 1 November 2017. Included
within the price was 2 years servicing contract which has a value of Rs. 240,000 and a fee for installation
of Rs. 50,000.
How much should be recorded in CL’s revenue in its statement of profit or loss for the year ended 31
December 2017 in relation to the machinery sale?

(a) Rs. 530,000

(b) Rs. 680,000

(c) Rs. 560,000

(d) Rs. 580,000

06. Sales director of a company is close to selling a machine which it sells for Rs. 650,000, offering free
service, therefore selling the entire machine for Rs. 560,000 including installation. The company never
sells servicing separately.
How should this discount be applied in relation to the sale of the machinery?

(a) Machine only

(b) Machine and Installation only

(c) Machine and Service only

(d) Machine, Installation and Service

07. Cheetah Limited (CL) works as an agent for a number of smaller contractors, earning commission of
10%. CL’s revenue includes Rs. 6 million received from clients under these agreements with Rs. 5.4
million in cost of sales representing the amount paid to the contractors.
What adjustment needs to be made to revenue in respect of the commission sales?

(a) Reduce revenue by Rs. 6 million

(b) Reduce revenue by Rs. 5.4 million

(c) Increase revenue by Rs. 600,000

(d) No adjustment is required

© Emile Woolf International 506 The Institute of Chartered Accountants of Pakistan

 147
Chapter 10: IFRS 15: Revenue from contracts with customers

08. An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone
selling prices:

Product Stand-alone selling price Rs.

Product A 40

Product B 55

Product C 45

In addition, the entity regularly sells Products B and C together for Rs. 60.
The entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100.
Allocate the transaction price of Rs. 100 to Product A, B and C in accordance with IFRS 15

(a) A Rs. 40 and B Rs. 55 and C Rs. 45

(b) A Rs. 29 and B Rs. 39 and C Rs. 32

(c) A Rs. 40 and B Rs. 33 and C Rs. 27

(d) A Rs. 40 and B Rs. 27 and C Rs. 33

09. An entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100.

Product Stand-alone selling price

Product A 50

Product B 25

Product C 75

Total 150

Allocate the transaction price of Rs. 100 to Product A, B and C in accordance with IFRS 15

(a) A Rs. 50 and B Rs. 25 and C Rs. 75

(b) A Rs. 33 and B Rs. 17 and C Rs. 50

(c) A Rs. 33 and B Rs. 50 and C Rs. 17

(d) A Rs. 17 and B Rs. 33 and C Rs. 50

10. Which of the following items has correctly been included in Hakeem Limited (HL)’s revenue for the year
to 31 December 2011?

(a) Rs. 2 million in relation to a fee negotiated for an advertising contract for one of HL’s clients. HL
acted as an agent during the deal and is entitled to 10% commission.

(b) Rs. 500,000 relating to a sale of specialized equipment on 31 December 2011. The full sales
value was Rs. 700,000 but Rs. 200,000 relates to servicing that HL will provide over the next 2
years, so HL has not included that in revenue this year.

(c) Rs. 800,000 relating to a sale of some surplus land owned by HL.

(d) Rs. 1 million in relation to a sale to a new customer on 31 December 2011. Control passed to the
customer on 31 December 2011. The Rs. 1 million is payable on 31 December 2013. Interest
rates are 10%.

© Emile Woolf International 507 The Institute of Chartered Accountants of Pakistan

 148
Financial accounting and reporting I

11. Hover Limited (HL) is a car retailer. On 1 April 2014, HL sold a car to a customer on the following terms:
The selling price of the car was Rs. 25.3 million. The customer paid Rs. 12.65 million (half of the cost)
on 1 April 2014 and will pay the remaining Rs. 12.65 million on 31 March 2016 (two years after the
sale). The customer can obtain finance at 10% per annum.
What is the total amount which HL should credit to profit or loss in respect of this transaction in the year
ended 31 March 2015?

(a) Rs. 23.105 million

(b) Rs. 23.000 million

(c) Rs. 20.909 million

(d) Rs. 24.150 million

12. Determining the amount to be recognized in the first year of a long term contract with a customer is an
example of which step in the IFRS 15’s 5-step model?

(a) Determining the transaction price

(b) Recognizing revenue when a performance obligation is satisfied

(c) Identifying the separate performance obligations

(d) Allocating the transaction price to the performance obligations

13. X Limited wins a competitive bid to provide consulting services to a new customer. X Limited incurred
the following costs to obtain the contract:
Rs.
Commissions to sales employees for winning the contract 10,000
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Total costs incurred 50,000
How to recognize the above costs?

(a) Capitalize Rs. Nil and expense Rs. 50,000

(b) Capitalize Rs. 10,000 and expense Rs. 40,000

(c) Capitalize Rs. 25,000 and expense Rs. 25,000

(d) Capitalize Rs. 50,000 and expense Rs. Nil

14. On 1 January 2019, an entity enters into a non-cancellable contract to transfer a product to a customer
on 31 March 2019. The contract requires the customer to pay consideration of Rs. 1,000 in advance on
31 January 2019 but the customer pays the consideration on 1 March 2019. The entity transfers the
product on 31 March 2019.
What journal entry is required to be passed on 31 January 2019?

(a) No entry is required

(b) Debit Cash Rs. 1,000 and Credit Contract liability Rs. 1,000

(c) Debit Receivables Rs. 1,000 and Credit Contract liability Rs. 1,000

(d) Debit Receivables Rs. 1,000 and Credit Revenue Rs. 1,000

© Emile Woolf International 508 The Institute of Chartered Accountants of Pakistan

 149
Chapter 10: IFRS 15: Revenue from contracts with customers

15. An entity enters into 100 contracts on 31 December 2017 with customers. Each contract includes the
sale of one product for Rs.100.
Cash is received when control of a product transfers. The entity’s customary business practice is to
allow a customer to return any unused product within 30 days and receive a full refund. The entity’s
cost of each product is Rs. 60.
Using the expected value method, the entity estimates that 97 products will not be returned. The entity
estimates that the costs of recovering the products will be immaterial and expects that the returned
products can be resold at a profit.
What should be recognized in respect of above?

(a) Revenue Rs. Nil and Contract Liability Rs. 10,000

(b) Revenue Rs. 300 and Contract Liability Rs. 9,700

(c) Revenue Rs. 9,700 and Contract Liability Rs. 300

(d) Revenue Rs. 10,000 and Contract Liability Rs. Nil

16. Mechanical Limited (ML) sells machines, and also offers installation and technical support services. The
individual selling prices of each product are shown below.
Sale price of goods Rs. 75,000
Installation Rs. 30,000
One-year service Rs. 45,000
ML sold a machine on 1 May 2011, charging a reduced price of Rs. 100,000 including installation and
one year’s service. ML only offers discounts when customers purchase a package of products together.
According to IFRS 15 Revenue from Contracts with Customers, how much should ML record in revenue
for the year ended 31 December 2011?

Rs. ___________

17. Car Limited (CL) sold a large number of vehicles spare parts to a new customer for Rs. 10 million on 1
July 2017. The customer paid Rs. 990,000 up front and agreed to pay the remaining balance on 1 July
2018. CL has a cost of capital of 6%.
How much should initially be recorded in revenue in respect of the sale of vehicles spare parts in the
statement of profit or loss for the year ended 31 December 2017?

Rs. __________

18. Golden Limited enters into a contract with a major chain of retail stores. The customer commits to buy
at least Rs.20m of products over the next 12 months. The terms of the contract require Golden Limited
to make a payment of Rs.1 m to compensate the customer for changes that it will need to make to its
retail stores to accommodate the products.
By the 31 December 2011, Golden Limited has transferred products with a sales value of Rs.4m to the
customer.
How much revenue should be recognized by Golden Limited in the year ended 31 December 2011?

Rs. ___________

© Emile Woolf International 509 The Institute of Chartered Accountants of Pakistan

 150
Financial accounting and reporting I

19. Silver Limited sells a machine and one year’s free technical support for Rs. 100,000. It usually sells the
machine for Rs. 95,000 but does not sell technical support for this machine as a standalone product.
Other support services offered by Silver Limited attract a markup of 50%. It is expected that the technical
support will cost Silver Limited Rs. 20,000.
How much of the transaction price should be allocated to the technical support?

Rs. ___________

20. Jupiter Limited (JL) entered into a two-year contract on 1 January 2017, with a customer for the
maintenance of computer network. JL has offered the following payment options:
Option 1: Immediate payment of Rs. 200,000.
Option 2: Payment of Rs. 110,000 at the end of each year.
The applicable discount rate is 6.596%.
What amount of revenue should be recognized under option 2 on 31 December 2017?

Rs. ___________

21. Which two standards have been replaced by IFRS 15 Revenue from Contracts with Customers?

(a) IAS 20 Government Grants and IAS 36 Impairment of Assets

(b) IAS 36 Impairment of Assets and IAS 11 Construction Contracts

(c) IAS 18 Revenue and IAS 20 Government Grants

(d) IAS 18 Revenue and IAS 11 Construction Contracts

22. The accounting principle applied by IFRS 15 when determining whether or not revenue should be
recognized in respect of a repurchase agreement is:

(a) Prudence

(b) Relevance

(c) Substance over form

(d) Verifiability

23. With regard to the definition of revenue given by IFRS 15, which of the following statements is true?

(a) Revenue includes cash received from share issues

(b) Revenue includes cash received from borrowings

(c) Revenue may arise from either ordinary activities or extraordinary activities

(d) Revenue arises from ordinary activities only

© Emile Woolf International 510 The Institute of Chartered Accountants of Pakistan

 151
Chapter 10: IFRS 15: Revenue from contracts with customers

24. Identifying contract with customer under IFRS 15, a contract with customer exist when all the following
criteria are met when;

(a) It is approved and enforceable, can identify each party rights, payment terms, and probable to
collect consideration

(b) It is approved, can identify each party rights, payment terms, has commercial substance and
probable to collect consideration

(c) It is approved and enforceable, can identify each party rights, has commercial substance and
probable to collect consideration

(d) It is approved, can identify payment terms, has commercial substance and probable to collect
consideration

25. Step 1, “identifying the contract” of IFRS 15 states that certain conditions must be satisfied before an
entity can account for a contract with a customer. Which of the following is not one of these conditions?

(a) Each party's rights with regard to the goods or services concerned can be identified

(b) The payment terms can be identified

(c) The entity and the customer have approved the contract and are committed to perform their
contractual obligations

(d) It is certain that the entity will collect the consideration to which it is entitled

26. Step two requires the identification of the separate performance obligations in the contract. This is often
referred to as unbundling and is done at beginning of a contract. What is the key factor in identifying a
separate performance obligation?

(a) The passing of the risks and rewards to the customer

(b) The distinctiveness of the good or service

(c) The identification of the payment terms

(d) The enforceability of the contract

27. Step three requires the entity to determine the transaction price. This is the amount of consideration
that an entity expects to be entitled to in exchange for the promised goods or services. The transaction
price might include variable or contingent consideration. How does the entity estimate the amount of
the variable consideration?

(a) The expected value or the most likely amount whichever best predicts the consideration

(b) The lower of the expected value or the most likely amount

(c) The choice of the expected value or the most likely amount

(d) The higher of the expected value or the most likely amount

28. Step 4 requires the allocation of the transaction price to separate performance obligations. The
allocation is based on the relative standalone selling prices of the goods or services promised and are
made at inception of the contract. It is not adjusted to reflect subsequent changes in the standalone
selling prices of those goods or services. What is the best evidence of standalone selling price?

© Emile Woolf International 511 The Institute of Chartered Accountants of Pakistan

 152
Financial accounting and reporting I

(a) An estimate that maximizes the use of observable inputs

(b) The observable price of a good or service when the entity sells that good or service separately

(c) Unadjusted market prices for similar goods or services

(d) Expected cost

29. Step 5 allows an entity to recognize revenue when (or as) each performance obligation is satisfied.
Revenue is recognized in line with the pattern of transfer. If an entity does not satisfy its performance
obligation over time, it satisfies it at a point in time and revenue will be recognized when control is
passed at that point in time. Which of the following factors may not indicate the passing of control?

(a) The present right to payment for the asset

(b) The customer has legal title to the asset

(c) The entity has physical possession but has transferred a portion of the economic risks

(d) The entity has transferred physical possession of the asset

30. Which of the following is true regarding discounts offered on a bundle of products/services?

(a) The discount should be applied across each performance obligation in the contract

(b) The discount should be recorded within cost of sales

(c) The discount should be applied to the largest component of the contract

(d) The discount should be recorded as an administrative cost

31. An entity can only include variable consideration in the transaction price to the extent that it is highly
probable that a subsequent change in the estimated variable consideration will not result in a significant
revenue reversal. What action should the entity take if it is not appropriate to include all of the variable
consideration in the transaction price?

(a) The entity should not include any of the variable consideration

(b) The entity can use its judgment in all matters such as this

(c) The entity should assess whether it should include part of the variable consideration subject to
the revenue reversal test

(d) The entity should assess whether it should include part of the variable consideration without the
need to use the revenue reversal test

32. Which one of the following condition is not allow when performance condition to be satisfied over time?

(a) the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs

(b) the entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhance

(c) they customer has paid the consideration in advance and goods / services are still to be received

(d) the entity’s performance does not create an asset with an alternative use to the entity

© Emile Woolf International 512 The Institute of Chartered Accountants of Pakistan

 153
Chapter 10: IFRS 15: Revenue from contracts with customers

33. In general, contract costs incurred in relation to a contract with a customer must be:

(a) Recognized as an expense when incurred

(b) Recognized as an asset if they relate to a performance obligation which has been satisfied

(c) Recognized as an asset if they are not expected to be recovered

(d) Recognized as an asset if they relate to a performance obligation which has not yet been satisfied

34. A company enters into a construction contract to build a warehouse for a customer. The agreed price
is Rs.20 million and the specified completion date is 31 October 2020. However, the contract provides
that the company should receive an incentive payment of a further Rs.2.5 million if the warehouse is
completed before 30 June 2020. Similarly, the price will be reduced by Rs. 2 million if the warehouse is
not completed until after 31 December 2020.
The company estimates that there is a 15% probability that the warehouse will be completed before 30
June 2020, an 80% probability that it will be completed by 31 October 2020 and a 5% probability that it
will not be completed until after 31 December 2020.
What is the expected value of the transaction price for this contract?

(a) Rs. 20 million

(b) Rs. 20.275 million

(c) Rs.20.5 million

(d) Rs.20.75 million

© Emile Woolf International 513 The Institute of Chartered Accountants of Pakistan

 154
Financial accounting and reporting I

5 OBJECTIVE BASED ANSWERS

01. (b) Assessing the likelihood of economic benefits is not one of the five steps. It is one
of the criteria for identifying the contract with customer.

02. (d) As an agent, WL should only record the commission of Rs. 10 million in revenue.
As the cash has been received, WL must record that in cash and create a payable
for Rs. 90 million to Dolphin.

03. (c) There are two performance obligations here. The sale of the equipment should
be recognizing at a point in time, and the revenue in relation to the support should
be recognized over time. The services element costs Rs. 300,000 a year.
As CL makes a margin of 20% a year, this would be sold for Rs. 375,000 per year
(300,000 × 100/80). Therefore, the total revenue on the service for 2 years = Rs.
375,000 × 2 = Rs. 750,000.
The revenue on the goods = Rs.4m – Rs. 750,000 = Rs. 3,250,000.
The revenue in relation to the service is released over 2 years.
By 31 December, 4 months of the service has been performed so can be
recognized in revenue (Rs. 375,000 × 4/12 = Rs. 125,000).
Therefore, the total revenue = Rs.3,250,000 + Rs.125,000 = Rs.3,375,000

04. (c) Although the invoiced amount is Rs. 180,000, Rs. 30,000 of this has not yet been
earned and must be deferred until the servicing work has been completed. This
is only correct inclusion in sales.

05. (d) The revenue in relation to the installation and the machine itself can be
recognized, with the revenue on the service recognized over time as the service
is performed. The service will be recognized over the 2-year period. By 31
December 2017, 2 months of the service has been performed. Therefore, Rs.
20,000 can be recognized (Rs. 240,000 × 2/24). Total revenue is therefore Rs.
580,000, being the Rs. 800,000 less the Rs. 220,000 relating to the service which
has not yet been recognized.

06. (d) Discounts should be applied evenly across the components of a sale unless any
one element is regularly sold separately at a discount. As entity does not sell the
service and installation separately, the discount must be applied evenly to each
of the three elements.

07. (b) Revenue as an agent is made by earning commission. Therefore, the revenue on
these sales should only be Rs. 600,000 (10% of Rs. 6 million). As CL currently
has Rs. 6 million in revenue, Rs. 5.4 million needs to be removed, with Rs. 5.4
million also removed from cost of sales.

08. (c)
Product Allocated price
Product A 40 Remaining amount
Product B 33 (55/100 x Rs. 60)
Product C 27 (45/100 x Rs. 60)
Total 100

The entire discount relates to Product B and C as when Product A is added it total
stand-alone price has been added in the package price.

© Emile Woolf International 514 The Institute of Chartered Accountants of Pakistan

 155
Chapter 10: IFRS 15: Revenue from contracts with customers

09. (b)
Product Allocated price
Product A 33 (Rs. 50 / Rs. 150 × Rs. 100)
Product B 17 (Rs. 25 / Rs. 150 × Rs. 100)
Product C 50 (Rs. 75 / Rs. 150 × Rs. 100)
Total 100

10. (b) For item (b) the sale of the goods has fulfilled a contractual obligation so the
revenue in relation to this can be recognized. The service will be recognized over
time, so the revenue should be deferred and recognized as the obligation is
fulfilled.
For item (a) HL acts as an agent, so only the commission should be included in
revenue.
For item (c) any profit or loss on disposal should be taken to the statement of
profit or loss. The proceeds should not be included within revenue.
For item (d) the Rs. 1 million should be initially discounted to present value as
there is a significant financing component within the transaction. The revenue
would initially be recognized at Rs. 826,000, with an equivalent receivable. This
receivable would then be held at amortized cost with finance income of 10% being
earned each year.

11. (d) At 31 March 2015, the deferred consideration of Rs. 12.65 million would need to
be discounted by 10% for one year to Rs. 11.5 million (effectively deferring a
finance cost of Rs. 1.15 million).
The total amount credited to profit or loss would be Rs. 24.15 million (12.65 million
+ 11.5 million).

12. (b) Recognizing revenue when a performance obligation is satisfied, it may be a

point in time or over time.

13. (b) The commission to sales employees is incremental to obtaining the contract and
should be capitalized as a contract asset. The external legal fees and the
travelling cost are not incremental to obtaining the contract because they have
been incurred regardless of whether X Limited obtained the contract or not.

14. (c) The receivable is recorded when unconditional right to receive payment is
established and as entity has not performed its performance obligation yet; a
contract liability shall be recognized.

15. (c) Revenue Rs. 9,700 (97 x Rs. 100 for products expected to be not returned) and
remaining as contract liability.

16. Rs. 90,000 The discount should be allocated to each part of the bundled sale.
Applying the discount across each part gives revenue as follows:
Goods Rs. 50 (Rs. 75 × Rs. 100/Rs. 150)
Installation Rs. 20 (Rs. 30 × Rs. 100/Rs. 150)
Service Rs. 30 (Rs. 45 × Rs. 100/Rs. 150)
The revenue in relation to the goods and installation should be recognized on 1
May 2011.
As 8 months of the service has been performed (from 1 May to 31 December
2011), then Rs. 20 should be recognized (Rs. 30 × 8/12).
This gives a total revenue for the year of 50 + 20 + 20 = Rs. 90.

© Emile Woolf International 515 The Institute of Chartered Accountants of Pakistan

 156
Financial accounting and reporting I

17. Rs. 9,490,000 The fact that CL has given the customer a year to pay on such a large amount
suggests there is a significant financing component within the sale. The Rs.
990,000 received can be recognized in revenue immediately. The remaining Rs.
9.01 million must be discounted to its present value of Rs. 8.5 million. This is then
unwound over the year, with the interest recognized as finance income.
Therefore, total initial revenue = Rs. 990,000 + Rs. 8,500,000 = Rs. 9,490,000.

18. Rs. 3,800,000 The payment made to the customer is not in exchange for a distinct good or
service. Therefore, the Rs.1m paid to the customer is a reduction of the
transaction price.
The total transaction price is being reduced by 5% (Rs.1m/Rs.20m).
Therefore, Golden Limited reduces the transaction price of each good by 5% as
it is transferred. By 31 December 2011, Golden Limited should have recognized
revenue of Rs.3.8m (Rs.4m × 95%).

19. Rs. 24,000 The selling price of the service would be Rs. 30,000 (Rs. 20,000 × 150%).
The total standalone selling prices of the machine and support are Rs. 125,000
(Rs. 95,000 + Rs. 30,000).
The transaction price allocated to the machine is Rs. 76,000 (Rs. 95,000 ×
100,000 / 125,000). The transaction price allocated to the technical support is
Rs.24, 000 (Rs.30, 000 × 100,000 / 125,000).

20. Rs. 110,000 No need to calculate present value under option 2 as cash is being received
exactly when performance obligation is being satisfied.

21. (d)

22. (c)

23. (d)

24. (b)

25. (d)

26. (b)

27. (a)

28. (b)

29. (c)

30. (a)

31. (c)

32. (c)

33. (d)

34. (b) (20 x 80%) + (22.5 x 15%) + (18 x 5%) = Rs. 20.275 million

© Emile Woolf International 516 The Institute of Chartered Accountants of Pakistan

 157

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
3
Consolidated Accounts:
Statements of Financial Position
-Basic Approach

Contents
1 Key Definitions
2 The nature of a group and consolidated accounts
3 Consolidated statement of financial position
4 Consolidation adjusting entries
5 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 97 The Institute of Chartered Accountants of Pakistan

 158
Financial accounting and reporting II

5 OBJECTIVE BASED QUESTIONS

01. On what basis may a subsidiary be excluded from consolidation?

(a) The activities of the subsidiary are dissimilar to the activities of the rest of the group

(b) The subsidiary was acquired with the intention of reselling it after a short period of time

(c) The subsidiary is based in a country with strict exchange controls which make it difficult for it to
transfer funds to the parent

(d) There above three statements are not valid reasons for excluding a subsidiary from consolidation.

02. When negative goodwill arises IFRS 3 Business combinations requires that the amounts involved in
computing goodwill should first be reassessed.
When the amount of the negative goodwill has been confirmed, how should it be accounted for?

(a) Charged as an expense in profit or loss

(b) Capitalised and presented under non-current assets

(c) Credited to profit or loss

(d) Shown as a deduction from non-current assets

03. Which TWO of the following statements are correct when preparing consolidated financial statements?

(a) A subsidiary cannot be consolidated unless it prepares financial statements to the same reporting
date as the parent.

(b) A subsidiary with a different reporting date may prepare additional statements up to the group
reporting date for consolidation purposes.

(c) A subsidiary's financial statements can be included in the consolidation if the gap between the
parent and subsidiary reporting dates is five months or less.

(d) Where a subsidiary's financial statements are drawn up to a different reporting date from those
of the parent, adjustments should be made for significant transactions or events occurring
between the two reporting dates.

04. IFRS 10 Consolidated financial statements provides a definition of control and identifies three separate
elements of control.
Which one of the following is not one of these elements of control?

(a) Power over the investee

(b) The power to participate in the financial and operating policies of the investee

(c) Exposure to, or rights to, variable returns from its involvement with the investee

(d) The ability to use its power over the investee to affect the amount of the investor's returns

05. Chemist Limited (CL) owns 100% of the share capital of the following companies. The directors are
unsure of whether the investments should be consolidated.
In which of the following circumstances would the investment NOT be consolidated?

© Emile Woolf International 136 The Institute of Chartered Accountants of Pakistan

 159
Chapter 3: Consolidated accounts: Statements of financial position - Basic approach

(a) CL has decided to sell its investment in Alpha Limited as it is loss-making; the directors believe
its exclusion from consolidation would assist users in predicting the group's future profits

(b) Beta Limited is a bank and its activity is so different from the engineering activities of the rest of
the group that it would be meaningless to consolidate it

(c) Delta Limited is located in a country where local accounting standards are compulsory, and these
are not compatible with IFRS used by the rest of the group

(d) Gamma Limited is located in a country where a military coup has taken place and CL has lost
control of the investment for the foreseeable future

06. Ahmad Hassan Limited acquired 70% of the Rs. 100 million equity share capital of Asar Limited, its only
subsidiary, for Rs. 200 million on 1 January 2019 when the retained earnings of Asar Limited were Rs.
156 million.
At 31 December 2019 retained earnings are as follows.

Rs. million

Ahmad Hassan Limited 275

Asar Limited 177

Ahmad Hassan Limited considers that goodwill on acquisition is impaired by 50%. Non-controlling
interest is measured at fair value, estimated at Rs. 82.8 million.
What are group retained earnings at 31 December 2019?

(a) Rs. 276.3 million

(b) Rs. 289.7 million

(c) Rs. 280.32 million

(d) Rs. 269.2 million

07. On 1 April 2010 Golden Limited acquired 75% of Silver Limited’s equity shares by means of a share
exchange and an additional amount payable on 1 April 2011 that was contingent upon the post-
acquisition performance of Silver Limited. At the date of acquisition Golden Limited assessed the fair
value of this contingent consideration at Rs. 4.2 million but by 31 March 2011 it was clear that the
amount to be paid would be only Rs. 2.7 million. How should Golden Limited account for this Rs. 1.5
million adjustments in its financial statements as at 31 March 2011?

(a) Debit current liabilities/Credit goodwill

(b) Debit retained earnings/Credit current liabilities

(c) Debit goodwill/Credit current liabilities

(d) Debit current liabilities/Credit retained earnings

08. On 31 July 2018 Parveen Limited acquired 60% of the 18 million Rs. 10 ordinary shares of Sidra Limited
for a sum of Rs. 432 million. Sidra Limited had accumulated profits at 1 January 2018 of Rs. 360 million
and during the year to 31 December 2018 made a profit of Rs. 108 million.
Fair value of non-controlling interest at the date of acquisition is Rs. 200 million
What is the goodwill that should appear in the consolidated statement of financial position at 31
December 2018?

© Emile Woolf International 137 The Institute of Chartered Accountants of Pakistan

 160
Financial accounting and reporting II

(a) Rs. 108 million

(b) Rs. 29 million

(c) Rs. 171 million

(d) Rs. 43.2 million

09. Tanveer Limited acquired Tabeer Traders, an unincorporated entity, for Rs. 2.8 million. A fair value
exercise performed on Tabeer Traders’ net assets at the date of purchase showed:

Rs. 000

Property, plant and equipment 3,000

Identifiable intangible asset 500

Inventory 300

Trade receivables less payables 200

4,000

How would the purchase be reflected in the consolidated statement of financial position?

(a) Record the net assets at their above values and credit profit or loss with Rs. 1.2 million

(b) Record the net assets at their above values and credit goodwill with Rs. 1.2 million

(c) Ignore the intangible asset (Rs. 500,000), recording the remaining net assets at their values
shown above and crediting profit or loss with Rs. 700,000

(d) Record the purchase as a financial asset investment at Rs. 2.8 million

10. Which of the following definitions is not included within the definition of control per IFRS 10 Consolidated
Financial Statements?

(a) Having power over the investee

(b) Having exposure, or rights, to variable returns from its investment with the investee

(c) Having the majority of shares in the investee

(d) Having the ability to use its power over the investee to affect the amount of the investor’s returns

11. Sunshine Limited acquired 80% of the share capital of Sun Flower Limited on 1 January 2011. Part of
the purchase consideration was Rs. 200 million cash to be paid on 1 January 2014. The applicable cost
of capital is 10%.
What will the deferred consideration liability be at 31 December 2012?

(a) Rs. 150.262 million

(b) Rs. 165.288 million

(c) Rs. 200 million

(d) Rs. 181.818 million

© Emile Woolf International 138 The Institute of Chartered Accountants of Pakistan

 161
Chapter 3: Consolidated accounts: Statements of financial position - Basic approach

12. Which TWO of the following situations are unlikely to represent control over an investee?

(a) Owning 55% and being able to elect 4 of the 7 directors

(b) Owning 51%, but the constitution requires that decisions need the unanimous consent of
shareholders

(c) Having currently exercisable options which would take the shareholding in the investee to 55%

(d) Owning 35% of the ordinary shares and 80% of the preference shares of the investee

13. Which of the following is not a condition which must be met for the parent to be exempt from producing
consolidated financial statements?

(a) The activities of the subsidiary are significantly different to the rest of the group and to consolidate
them would prejudice the overall group position

(b) The ultimate parent produces consolidated financial statements that comply with IFRS Standards
and are publicly available

(c) The parent’s debt or equity instruments are not traded in a public market

(d) The parent itself is a wholly owned subsidiary or a partially owned subsidiary whose owners do
not object to the parent not producing consolidated financial statements

14. Consolidated financial statements are presented on the basis that the companies within the group are
treated as if they are a single economic entity.
Which TWO of the following are requirements of preparing consolidated financial statements?

(a) All subsidiaries must adopt the accounting policies of the parent in their individual financial
statements

(b) Subsidiaries with activities which are substantially different to the activities of other members of
the group should not be consolidated

(c) All assets and liabilities of subsidiaries should be included at fair value

(d) Unrealised profits within the group must be eliminated from the consolidated financial statements

15. High Limited has a number of relationships with other companies. In which of the following relationships
is High Limited necessarily the parent?
(i) Fall Limited has 50,000 non-voting and 100,000 voting equity shares in issue with each share
receiving the same dividend. High Limited owns all of Fall Limited’s non-voting shares and
40,000 of its voting shares.
(ii) Low Limited has 1 million equity shares in issue of which High Limited owns 40%. High Limited
also owns Rs. 800,000 out of Rs. 1 million 8% convertible debentures issued by Low Limited.
These debentures may be converted on the basis of 40 equity shares for each Rs. 100 of
debentures, or they may be redeemed in cash at the option of the holder.
(iii) High Limited owns 49% of the equity shares in Middle Limited and 52% of its non-redeemable
preference shares. As a result of these investments, High Limited receives variable returns from
Middle Limited and has the ability to affect these returns through its power over Middle Limited.

(a) (i) only

(b) (i) and (ii) only

© Emile Woolf International 139 The Institute of Chartered Accountants of Pakistan

 162
Financial accounting and reporting II

(c) (ii) and (iii) only

(d) All three

16. On 1 March 2019, Qazi Limited acquired 70% of the share capital of Hijazi Limited at a cost of Rs. 387
million.
At that date the fair value of the net assets of Hijazi Limited were Rs. 450 million. Transaction costs
incurred in making the acquisition were Rs. 0.045 million. Qazi Limited has decided to account for the
business combination using the full goodwill or fair value method, by attributing some goodwill to the
non-controlling interests in Hijazi Limited. It is estimated that at 1 March 2019 the fair value of the non-
controlling interests in Hijazi Limited was Rs. 153 million.
What was the total amount of goodwill recognised on the acquisition of Hijazi Limited by Qazi Limited?

Rs. ___________

17. Sound Limited obtained a 60% holding in the 10 million Rs. 10 shares of Cloud Limited on 1 January
2018, when the retained earnings of Cloud Limited were Rs. 850 million.
Consideration comprised Rs. 250 million cash, Rs. 400 million payable on 1 January 2019 and one
share in Sound Limited for each two shares acquired. Sound Limited has a cost of capital of 8% and
the market value of its shares on 1 January 2018 was Rs. 23.
Sound Limited measures non-controlling interest at fair value. The fair value of the non-controlling
interest at 1 January 2018 was estimated to be Rs. 400 million.
What was the goodwill arising on acquisition?

Rs. ___________

18. On 1 August 2017 Magnesium Limited purchased 1.8 million of the 2.4 million Rs. 10 equity shares of
Copper Limited. The acquisition was through a share exchange of two shares in Magnesium Limited
for every three shares in Copper Limited. The market price of a share in Magnesium Limited at 1 August
2017 was Rs. 57.5.
Magnesium Limited will also pay in cash on 31 July 2019 (two years after acquisition) Rs. 24.2 per
acquired share of Copper Limited. Magnesium Limited's cost of capital is 10% per annum.
What is the amount of the consideration attributable to Magnesium Limited for the acquisition of Copper
Limited?

Rs. ___________

19. Big Limited acquired 70% of Small Limited's 10 million Rs. 10 ordinary shares for Rs. 800 million when
the retained earnings of Small Limited were Rs. 570 million and the balance in its revaluation surplus
was Rs. 150 million. The non-controlling interest in Small Limited was judged to have a fair value of Rs.
220 million at the date of acquisition.
What was the goodwill arising on acquisition?

Rs. ___________

© Emile Woolf International 140 The Institute of Chartered Accountants of Pakistan

 163
Chapter 3: Consolidated accounts: Statements of financial position - Basic approach

20. Faiqa Limited acquired 75% of the 120,000 Rs. 10 ordinary shares in Saiqa Limited on 1 January
2014. At that date Saiqa Limited had accumulated profits of Rs. 700,000 and a share premium
account balance of Rs. 200,000. Faiqa Limited paid Rs. 1,680,000 for the shares in Saiqa Limited.
At 31 December 2017 Saiqa Limited had accumulated profits of Rs. 1,000,000 and Faiqa Limited had
accumulated profits of Rs. 1,600,000.
What are the consolidated accumulated profits as at 31 December 2017?

Rs. ___________

© Emile Woolf International 141 The Institute of Chartered Accountants of Pakistan

 164
Financial accounting and reporting II

5 OBJECTIVE BASED ANSWERS

01. (d)

02. (c)

03. (b) & (d)

04. (b) This is the definition of significant influence, not control.

05. (d) Consolidation is not appropriate in this case as the parent has lost control.

06. (c)
Rs. million Rs. million
Consideration 200
NCI at fair value 82.8
Net assets:
Shares 100
Retained earnings 156 (256)
Goodwill 26.8

Ahmad Hassan Limited 275

Asar Limited:(177 – 156) × 70% 14.7
Goodwill impairment (26.8 / 2) × 70% (9.38)
Group retained earnings 280.32

07. (d) This adjustment reduces (debits) the liability and credit it to retained
earnings. The remeasurement relates to the post-acquisition period, so
goodwill is not affected.

08. (b)
Rs. million
Cost of Investment 432
FV of NCI 200
632
Net assets acquired:
Share capital [18 x Rs. 10] 180
Opening accumulated profits 360
Profits up to 31 July (108 x 7/12) 63
603
Goodwill 29

09. (a) It is the correct treatment for a bargain purchase (negative goodwill)

10. (c) While having the majority of shares may be a situation which leads to control,
it does not feature in the definition of control per IFRS 10 Consolidated
Financial Statements.

© Emile Woolf International 142 The Institute of Chartered Accountants of Pakistan

 165
Chapter 3: Consolidated accounts: Statements of financial position - Basic approach

11. (d) At 31 December 2012 the deferred consideration needs to be discounted to

present value by one year.
Rs. 200 million/1.1 = Rs. 181.818 million
Alternatively, discount Rs. 200 million to present value and then add interest
for two years, compounded annually.

12. (b) & (d) The fact that unanimous consent is required would suggest that there is no
control over the investee. Preference shares carry no voting rights and
therefore are excluded when considering the control held over an investee.

13. (a) The activities of the subsidiary are irrelevant when making the decision as
to whether to produce consolidated financial statements or not.

14. (c) & (d) While the same accounting policies must be used in the consolidated
financial statements, the subsidiaries do not have to operate the same
policies as the parent. Having different activities is not an acceptable reason
for non-consolidation

15. (c) High Limited only owns 40% of Fall Limited’s voting shares so is unlikely to
exercise control.

16. Rs. 90 million

Rs. million
Cost of 70% shares in Hijazi Limited 387
Fair value of NCI 153
540
Fair value of net assets acquired (450)
Total goodwill at acquisition 90

17. Rs. 139.37 million Consideration transferred:

Rs. million Rs. million

Cash 250
Deferred consideration (400/ 1.08) 370.37
Shares (3 million × Rs. 23) 69
689.37
Fair value of non-controlling interest 400
1,089.37
Fair value of net assets:
Share Capital 100
Retained earnings 850 (950)
Goodwill 139.37

18. Rs. 105 million

Rs. million
Shares (1.8m × 2/3 × Rs. 57.5) 69
-2
Deferred consideration (1.8m × Rs. 24.2 × 1.1 ) 36
105

© Emile Woolf International 143 The Institute of Chartered Accountants of Pakistan

 166
Financial accounting and reporting II

19. Rs. 200 million

Rs. million
Consideration transferred 800
Fair value of non-controlling interest 220
1,020
Fair value of net assets:
Shares 100
Retained earnings 570
Revaluation surplus 150
(820)
200

20. Rs. 1,825,000

Rs.
Faiqa Limited 1,600,000
Saiqa Limited (1,000,000-700,000) × 75% 225,000
1,825,000

© Emile Woolf International 144 The Institute of Chartered Accountants of Pakistan

 167

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
4
Consolidated Accounts:
Statements of Financial Position -
Complications

Contents
1 Key Definition
2 Possible complications: Before consolidation
3 Possible complications: During consolidation
4 Possible complications: After consolidation
5 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 145 The Institute of Chartered Accountants of Pakistan

 168
Financial accounting and reporting II

5 OBJECTIVE BASED QUESTIONS

01. A bargain purchase is a business combination in which the calculation of goodwill leads to a negative
figure.
When this happens, which of the following are reviewed:
The identifiable assets acquired, and liabilities assumed
The non-controlling interest in the acquiree
The consideration transferred.
(a) (i) and (ii) only
(b) (i) and (iii) only
(c) (ii) and (iii) only
(d) (i), (ii) and (iii) all

02. How should the unrealised profit be posted?

(a) DR Cost of sales / CR Inventories
(b) DR Cost of sales / DR Non-controlling interest / CR Inventories
(c) DR Inventories / CR Cost of sales
(d) DR Inventories / CR Non-controlling interest / CR Cost of sales

03. Which of the following is not an intra group transaction?

(a) The sale of goods or rendering of services between the parent and subsidiary
(b) Transfers of non-current assets between the parent and subsidiary
(c) The payment of dividend by subsidiary
(d) The payment of dividend by parent

04. What is accounting treatment of acquisition related costs when goodwill is being measured at
acquisition?
(a) Added to cost of investment
(b) Deducted from cost of investment
(c) Charged as expense of parent entity
(d) Charged as expense of subsidiary entity

05. Haris Limited acquired 80% of the equity shares of Faris Limited on 1 July 2014, paying Rs. 300 for
each share acquired. This represented a premium of 20% over the market price of Faris Limited shares
at that date.
Faris Limited’s equity at 31 March 2015 comprised:
Rs. million Rs. million
Equity shares of Rs. 100 each 100
Retained earnings at 1 April 2014 80
Profit for the year ended 31 March 2015 40 120
220,000
The only fair value adjustment required to Faris Limited’s net assets on consolidation was a Rs. 20
million increase in the value of its land.

© Emile Woolf International 194 The Institute of Chartered Accountants of Pakistan

 169
Chapter 4: Consolidated accounts: Statements of financial position - Complications

Haris Limited’s policy is to value non-controlling interests at fair value at the date of acquisition.
For this purpose the market price of Faris Limited’s shares at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
What would be the carrying amount of the non-controlling interest of Faris Limited in the consolidated
statement of financial position of Haris Limited as at 31 March 2015?

(a) Rs. 54 million

(b) Rs. 50 million
(c) Rs. 56 million
(d) Rs. 58 million

06. IFRS Standards require extensive use of fair values when recording the acquisition of a subsidiary.
Which TWO of the following comments, regarding the use of fair values on the acquisition of a
subsidiary, are correct?

(a) The use of fair value to record a subsidiary’s acquired assets does not comply with the
historical cost principle.

(b) The use of fair values to record the acquisition of plant always increases consolidated post-
acquisition depreciation charges compared to the corresponding charge in the subsidiary’s
own financial statements.

(c) Cash consideration payable one year after the date of acquisition needs to be discounted to
reflect its fair value.

(d) When acquiring a subsidiary, the fair value of liabilities and contingent liabilities must also be
considered.

07. Wareesha Limited has an 80% subsidiary Irfan Limited. In the last month of the year, Wareesha
Limited sold inventory to Irfan Limited for Rs. 21.6 million making a mark-up of 20% on cost. The goods
are still held by Irfan Limited at the year end.
If Wareesha Limited has an inventory balance of Rs. 162 million and Irfan Limited has Rs. 108 million,
what will be the inventory figure in the consolidated statement of financial position?

(a) Rs. 270 million

(b) Rs. 266.4 million

(c) Rs. 265.68 million

(d) Rs. 248.4 million

08. Aliyan Limited is a subsidiary of Shaiq Limited. At the year-end Aliyan Limited has a current account
debit balance of Rs. 75 million, but Shaiq Limited has a current account credit balance of only Rs. 60
million.
Which of the following two reasons might explain the difference?
1. Shaiq Limited had posted a cheque for Rs. 15 million to Aliyan Limited on the last day of the year.
2. Aliyan Limited had despatched Rs. 15 million of inventory to Shaiq Limited on the last day of the year.

(a) Both may be the reason

(b) None is the reason

© Emile Woolf International 195 The Institute of Chartered Accountants of Pakistan

 170
Financial accounting and reporting II

(c) Only statement 1 may be the reason

(d) Only statement 2 may be the reason

09. A holding company sold goods to its wholly owned subsidiary for Rs. 18 million representing cost plus
20%. At the year-end two-thirds of the goods were still in stock.
The unrealised profit in inventory is?

(a) Rs. 2 million

(b) Rs. 2.4 million

(c) Rs. 3 million

(d) Rs. 3.6 million

10. ABC Limited buys goods from its 75% owned subsidiary XYZ Limited. XYZ Limited earns a markup of
25% on such transactions. At the group’s year end, 30 June 2011 ABC Limited had not yet taken
delivery of goods, at a sales value of Rs. 10 million, which were dispatched by XYZ Limited on 29
June 2011.
What would be the impact on inventory in the consolidated statement of financial position of the ABC
Limited group at 30 June 2011?

(a) Rs. 6 million

(b) Rs. 7.5 million

(c) Rs. 8 million

(d) Rs. 10 million

11. Thal Limited owns 80% of the ordinary share capital of its subsidiary Cholistan Limited. At the group’s
year end, 28 February 2011, Thal Limited’s payables include Rs. 3.6 million in respect of inventories
sold by Cholistan Limited. Cholistan Limited’s receivables include Rs. 6.7 million in respect of
inventories sold to Thal Limited. Two days before the year end Thal Limited sent a payment of Rs. 3.1
million to Cholistan Limited that was not recorded by the latter until two days after the year end.
What is the entry that should be made to remove the intragroup transaction from the group accounts
apart from cancelling intra group balances?

(a) Rs. 2.325 million to be added to cash

(b) Rs. 3.1 million to be added to payables

(c) Rs. 3.1 million to be added to inventories

(d) Rs. 3.1 million to be added to cash

12. P Limited transferred an item of plant to S Limited on 1 January 2013 for Rs. 30 million. The plant had
originally cost P Limited Rs. 30 million at 1 January 2011 and had a useful economic life of 10 years,
which is unchanged.
What is the unrealised profit on the plant at 31 December 2013?

(a) Rs. 5.250 million

(b) Rs. 12 million

© Emile Woolf International 196 The Institute of Chartered Accountants of Pakistan

 171
Chapter 4: Consolidated accounts: Statements of financial position - Complications

(c) Rs. 5.4 million

(d) Rs. 9 million

13. Python Limited acquired 75% of the share capital of Snake Limited on 1 January 2011. On this date,
the net assets of Snake Limited were Rs. 80 million. The non-controlling interest was calculated using
fair value, which was calculated as Rs. 40 million at the date of acquisition. At 1 January 2013 the net
assets of Snake Limited were Rs. 120 million and goodwill had been impaired by Rs. 10 million.
What was the value of the non-controlling interest at 1 January 2013?

(a) Rs. 50 million

(b) Rs. 47.5 million

(c) Rs. 107.5 million

(d) Rs. 87.5 million

14. King Limited acquired 60% of Queen Limited's Rs. 100 million share capital on 1 January 2013, when
Queen Limited also had retained earnings of Rs. 120 million. King Limited paid Rs. 50 million cash,
and also agreed to pay a further Rs. 90 million on 1 January 2015. King Limited also gave the owners
of Queen Limited 1 King Limited share for every 2 shares of Queen Limited purchased.
The fair value of King Limited's shares were Rs. 40 on 1 January 2013, and Rs. 60 on 31 December
2013. At 31 December 2013 King Limited had retained earnings of Rs. 210 million and Queen Limited
had retained earnings of Rs. 110 million. King Limited has a cost of capital of 10%.
King Limited measures the non-controlling interest at fair value. The fair value of the non-controlling
interest at 1 January 2013 was Rs. 25 million.
The Par value per share is Rs. 10 each.
What is the total goodwill at 1 January 2013?

(a) Rs. 49.38 million

(b) Rs. 24 million
(c) Rs. 109.38 million
(d) Rs. 65 million

15. King Limited acquired 60% of Queen Limited's Rs. 100 million share capital on 1 January 2013, when
Queen Limited also had retained earnings of Rs. 120 million. King Limited paid Rs. 50 million cash
and agreed to pay a further Rs. 90 million on 1 January 2015. King Limited also gave the owners of
Queen Limited 1 King Limited share for every 2 shares of Queen Limited purchased.
The fair value of King Limited's shares were Rs. 40 on 1 January 2013, and Rs. 60 on 31 December
2013. At 31 December 2013 King Limited had retained earnings of Rs. 210 million and Queen Limited
had retained earnings of Rs. 110 million. King Limited has a cost of capital of 10%.
King Limited measures the non-controlling interest at fair value. The fair value of the non-controlling
interest at 1 January 2013 was Rs. 25 million.
What is the group retained earnings at 31 December 2013?

(a) Rs. 256.562 million

(b) Rs. 271.438 million

(c) Rs. 196.562 million

(d) Rs. 211.438 million

© Emile Woolf International 197 The Institute of Chartered Accountants of Pakistan

 172
Financial accounting and reporting II

16. On 1 June 2011 Arsalan Limited acquired 80% of the equity share capital of Habib Limited. At the date
of acquisition, the fair values of Habib Limited's net assets were equal to their carrying amounts with
the exception of its property.
This had a fair value of Rs. 1.2 million below its carrying amount. The property had a remaining useful
life of eight years.
What effect will any adjustment required in respect of the property have on group retained earnings at
30 September 2011?

Rs. ___________

17. On 1 April 2017 Riyasat Limited acquired 116 million of Farasat Limited's 145 million ordinary shares
for an immediate cash payment of Rs. 210 million and issued at par one 10% Rs. 100 loan note for
every 200 shares acquired.
At the date of acquisition Farasat Limited owned a recently built property that was carried at its
depreciated construction cost of Rs. 62 million. The fair value of this property at the date of acquisition
was Rs. 82 million and it had an estimated remaining life of 20 years.
Farasat Limited also had an internally-developed brand which was valued at the acquisition date at
Rs. 25 million with a remaining life of 10 years.
The inventory of Farasat Limited at 31 March 2019 includes goods supplied by Riyasat Limited for a
sale price of Rs. 56 million. Riyasat Limited adds a mark-up of 40% on cost to all sales.
What is the total amount of the consideration transferred by Riyasat Limited to acquire the investment
in Farasat Limited?

Rs. ___________

18. On 1 April 2017 Riyasat Limited acquired 116 million of Farasat Limited's 145 million ordinary shares
for an immediate cash payment of Rs. 210 million and issued at par one 10% Rs. 100 loan note for
every 200 shares acquired.
At the date of acquisition Farasat Limited owned a recently built property that was carried at its
depreciated construction cost of Rs. 62 million. The fair value of this property at the date of acquisition
was Rs. 82 million and it had an estimated remaining life of 20 years.
Farasat Limited also had an internally-developed brand which was valued at the acquisition date at
Rs. 25 million with a remaining life of 10 years.
The inventory of Farasat Limited at 31 March 2019 includes goods supplied by Riyasat Limited for a
sale price of Rs. 56 million. Riyasat Limited adds a mark-up of 40% on cost to all sales.
What will be the amount of the adjustment to group retained earnings at 31 March 2019 in respect of
the movement on the fair value adjustments?

Rs. ___________

19. On 1 April 2017 Riyasat Limited acquired 116 million of Farasat Limited's 145 million ordinary shares
for an immediate cash payment of Rs. 210 million and issued at par one 10% Rs. 100 loan note for
every 200 shares acquired.

© Emile Woolf International 198 The Institute of Chartered Accountants of Pakistan

 173
Chapter 4: Consolidated accounts: Statements of financial position - Complications

At the date of acquisition Farasat Limited owned a recently built property that was carried at its
depreciated construction cost of Rs. 62 million. The fair value of this property at the date of acquisition
was Rs. 82 million and it had an estimated remaining life of 20 years.
Farasat Limited also had an internally-developed brand which was valued at the acquisition date at
Rs. 25 million with a remaining life of 10 years.
The inventory of Farasat Limited at 31 March 2019 includes goods supplied by Riyasat Limited for a
sale price of Rs. 56 million. Riyasat Limited adds a mark-up of 40% on cost to all sales.
What is the amount of the unrealised profit arising from intragroup trading?

Rs. ___________

20. Samreen Limited has a 75% owned subsidiary Narmeen Limited. During the year Samreen Limited
sold inventory to Narmeen Limited for an invoiced price of Rs. 800,000. Narmeen Limited have since
sold 75% of that inventory on to third parties.
The sale was at a mark-up of 25% on cost to Samreen Limited. Narmeen Limited is the only subsidiary
of Samreen Limited.
What is the adjustment to inventory that would be included in the consolidated statement of financial
position of Samreen Limited at the year-end resulting from this sale?

Rs. ___________

© Emile Woolf International 199 The Institute of Chartered Accountants of Pakistan

 174
Financial accounting and reporting II

5 OBJECTIVE BASED PRACTICE ANSWERS

01. (d)
02. (a) The correct answer is:
DR Cost of sales / CR Inventories
The unrealised profit is added to cost of sales and removed from inventories.
03. (d) Payment of dividend by parent is not intra group transaction. The payment is made to
shareholders of parent entity.
04. (c) The acquisition related costs are not capitalised and charged as expense by parent.
05. (c) Market price of Faris Limited shares at acquisition was Rs. 250 (Rs.300 × 100/120),
therefore non-controlling interest (NCI) at acquisition was Rs.50 million (1million × 20%
× Rs.250).
NCI share of the post-acquisition profit is Rs. 6 million (40 million × 9/12 × 20%).
Therefore, non-controlling interest as at 31 March 2015 is Rs.56 million.
06. (c) & (d) The fair value of deferred consideration is its present value. Fair values are applied to
the subsidiary’s assets, liabilities and contingent liabilities.
While the use of fair value seems to not comply with the historical cost principle, this will
effectively form part of the cost of the subsidiary to the parent, so the principle is still
applied. Depreciation will not increase if the fair value of assets is lower than the current
carrying amount.
07. (b) The consolidated inventory of the group is Rs.162 million + Rs.108 million but this must
be adjusted for the unrealised profit contained within the inventory of Irfan Limited of Rs.
3.6 million (20/120 × Rs.21.6 million).
= 162 million + 108 million – 3.6 million = Rs. 266.4 million
08. (a) If items (cash or inventory) are despatched on the last day of the year by Aliyan Limtied,
the recipient will not have recorded the transaction and so the current account balances
will not agree.
The transaction must be entered in the books of the parent before the consolidation takes
place, to ensure that the current account balances cancel each other on consolidation.
09. (a) PURP = Rs. 18 million x2/3 x20/120= Rs. 2 million
10. (c) Inventory in transit is valued at Rs.100,000 but we must remove PURP.
PURP is calculated as Rs. 10 million/125 × 25 = Rs.2 million. Hence we increase
inventory by Rs. 10 million but remove the PURP of Rs. 2 million.
The value of goods in transit to the group is Rs. 8 million.
11. (d) The double entry is:
Dr Cash 3.1 million, Cr Receivables Rs. 3.1 million.
The remaining Rs. 3.6 million would then be cancelled from receivables and payables.
12. (a) Carrying amount at the date of transfer would have been Rs. 24 million (Rs.30 million
less 2 years depreciation at Rs.3 million a year). To work out the unrealised profit, the
carrying amount at year end (after transfer) must be compared to the carrying amount at
year end if the asset had never been transferred:
Carrying amount at year end (Rs. 30 million less 1-year depreciation (Rs.30 million/8
year remaining life)) = Rs.30 million – Rs. 3.750 million = Rs.26.250 million
Carrying amount if asset had never been transferred = (Rs.24 million
less another Rs. 3 million depreciation) = Rs.21 million
Therefore, the unrealised profit = Rs. 26.250 – Rs. 21 = Rs.5.25 million.

© Emile Woolf International 200 The Institute of Chartered Accountants of Pakistan

 175
Chapter 4: Consolidated accounts: Statements of financial position - Complications

13. (b) The NCI at 1 January is calculated by taking the NCI value at acquisition, plus the NCI
share of post-acquisition net assets, deducting the NCI share of any impairment: Rs.40
million + (25% × (Rs.120 million – Rs. 80 million)) – (25% × Rs.10 million) = Rs.47.5
million.
14. (a)
Rs. million
Cash consideration 50
Deferred consideration (Rs.90 × (1 ÷ 1.10 ^2)) 74.38
Share consideration (100/10 x 60% × 1/2 × Rs.40) 120
Noncontrolling interest at acquisition 25
Less: Net assets at acquisition (Rs.100 + Rs.120) (220)
Total goodwill 49.38

15. (c)
Rs. million
100% King Limited's retained earnings 210
Queen Limited's 60% × (Rs.110 – Rs.120) (6)
Unwinding discount (Rs.74.38 × 10%) (7.438)
196.562

16. Rs. (Rs.1.2 million / 8 × 4/12) × 80% = Rs.40,000

40,000 The adjustment will reduce depreciation over the next 8 years, so it will increase retained
earnings.
17. Rs. 268
million
Rs. million
Cash 210
Shares (116m × 100/200) 58
268

18. Rs. 5.6

million Acquisition Movement (2 years)
Rs. million Rs. million
Property 20 (2)
Brand 25 (5)
(7)
Rs.7 million × 80% = Rs.5.6 million
19. Rs. 16 Rs.16 million i.e. Rs. 56 million × 40/140
million
20. Rs. The profit on the Rs.800,000 sale is Rs.160,000 (Rs.800,000 × 25/125).
40,000 As 75% of the goods have been sold on to third parties, 25% remain in inventory at the
year end. Unrealised profits only arise on goods remaining in inventory at the year end,
so the unrealised profit is Rs.40,000 (Rs.160,000 × 25%).

© Emile Woolf International 201 The Institute of Chartered Accountants of Pakistan

 176

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
5
Consolidated Accounts:
Statements of Comprehensive Income

Contents
1 Consolidated statement of comprehensive income
2 Complications
3 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 203 The Institute of Chartered Accountants of Pakistan

 177
Chapter 5: Consolidated accounts: Statements of comprehensive income

3 OBJECTIVE BASED PRACTICE QUESTIONS

01. Abrish Limited acquired 80% of Shazim Limited on 1 July 2012. In the post-acquisition period Abrish
Limited sold goods to Shazim Limited at a price of Rs. 12 million. These goods had cost Abrish Limited
Rs. 9 million. During the year to 31 March 2013 Shazim Limited had sold Rs. 10 million (at cost to
Shazim Limited) of these goods for Rs. 15 million.
How will this affect group cost of sales in the consolidated statement of comprehensive income of
Abrish Limited for the year ended 31 March 2013?

(a) Increase by Rs. 11.5 million

(b) Increase by Rs. 9.6 million
(c) Decrease by Rs. 11.5 million
(d) Decrease by Rs. 9.6 million

02. On 1 July 2017, Hareem Limited acquired 60% of the equity share capital of Maneha Limited and on
that date made a Rs. 10 million loan to Maneha Limited at a rate of 8% per annum.
What will be the effect on group retained earnings at the year-end date of 31 December 2017 when
this intragroup transaction is cancelled?

(a) Group retained earnings will increase by Rs. 400,000

(b) Group retained earnings will be reduced by Rs. 240,000
(c) Group retained earnings will be reduced by Rs. 160,000
(d) There will be no effect on group retained earnings

03. Maaz Limited acquired 80% of Hamza Limited on 1 January 2018. At the date of acquisition Hamza
Limited had a building which had a fair value Rs. 22 million and a carrying amount of Rs. 20 million.
The remaining useful life was 20 years. At the year-end date of 30 June 2018, the fair value of the
building was Rs. 23 million. It is group policy to use revaluation model for its building.
Hamza Limited's profit for the year to 30 June 2018 was Rs. 1.6 million which accrued evenly
throughout the year.
Maaz Limited measures non-controlling interest at fair value. At 30 June 2018 it estimated that goodwill
in Hamza Limited was impaired by Rs. 500,000. It is group policy to use revolution model for its
buildings.
What is the total comprehensive income attributable to the non-controlling interest at 30 June 2018?

(a) Rs. 250,000

(b) Rs. 260,000
(c) Rs. 360,000
(d) Rs. 400,000

04. Asim Limited acquires 80% of the share capital of Arif Limited on 1 August 2016 and is preparing its
group financial statements for the year ended 31 December 2016.
How will Arif Limited’s results be included in the group statement of comprehensive income?
(a) 80% of Arif Limited’s revenue and expenses for the year ended 31 December 2016
(b) 100% of Arif Limited’s revenue and expenses for the year ended 31 December 2016
(c) 80% of Arif Limited’s revenue and expenses for the period 1 August 2016 to 31 December
2016
(d) 100% of Arif Limited’s revenue and expenses for the period 1 August 2016 to 31 December
2016

© Emile Woolf International 229 The Institute of Chartered Accountants of Pakistan

 178
Financial accounting and reporting II

05. Which of the following would result in an unrealised profit within a group scenario?
(a) A parent sells a building originally costing Rs. 800,000 to its subsidiary for Rs. 900,000. The
subsidiary still holds this asset at the date of consolidation.
(b) A parent sells a building originally costing Rs. 800,000 to its subsidiary for Rs. 900,000. The
subsidiary has sold this asset before the date of consolidation.
(c) A parent sells goods which originally cost Rs. 14,000 to its subsidiary for Rs. 18,000. The
subsidiary has sold all of these goods at the date of consolidation.
(d) A parent sells goods which originally cost Rs. 14,000 to an associate for Rs. 18,000. The
associate has sold all of these goods at the date of consolidation.

06. Jerry Limited acquired an 80% holding in Tom Limited on 1 April 2016. From 1 April 2016 to 31
December 2016 Tom Limited sold goods to Jerry Limited for Rs. 4.3m at a mark-up of 10%. Jerry
Limited's inventory at 31 December 2016 included Rs. 2.2m of such inventory. The statements of
comprehensive income for each entity for the year to 31 December 2016 showed the following in
respect of cost of sales:
Jerry Limited Rs. 14.7m
Tom Limited Rs. 11.6m
What is the cost of sales figure to be shown in the consolidated statement of comprehensive income
for the year to 31 December 2016?

(a) Rs. 18,900,000

(b) Rs. 20,200,000
(c) Rs. 19,100,000
(d) Rs. 19,300,000

07. Sun Limited acquired a 60% holding in Moon Limited on 1 January 2016. At this date Moon Limited
owned a building with a fair value Rs. 200 million in excess of its carrying amount, and a remaining
life of 10 years.
All depreciation is charged to operating expenses. Goodwill had been impaired by Rs. 55 million in
the year to 31 December 2016. The balances on operating expenses for the year to 31 December
2017 are shown below:
Sun Limited Rs. 600 million
Moon Limited Rs. 350 million
What are consolidated operating expenses for the year to 31 December 2017?

(a) Rs. 930 million

(b) Rs. 970 million
(c) Rs. 950 million
(d) None of the above

08. A Limited acquired a 60% holding in B Limited on 1 July 2016. At this date, A Limited gave B Limited
a Rs. 500 million 8% loan. The interest on the loan has been accounted for correctly in the individual
financial statements.
The totals for finance costs for the year to 31 December 2016 in the individual financial statements
are shown below.
A Limited Rs. 200 million
B Limited Rs. 70 million

© Emile Woolf International 230 The Institute of Chartered Accountants of Pakistan

 179
Chapter 5: Consolidated accounts: Statements of comprehensive income

What are consolidated finance costs for the year to 31 December 2016?

(a) Rs. 215 million

(b) Rs. 225 million
(c) Rs. 230 million
(d) Rs. 250 million

09. Abeeha Limited has owned 80% of Seema Limited for many years. In the current year ended 30 June
2013, Abeeha Limited has reported total revenues of Rs. 5.5 million, and Seema Limited of Rs. 2.1
million. Abeeha Limited has sold goods to Seema Limited during the year with a total value of Rs. 1
million, earning a margin of 20%. Half of these goods remain in year-end inventories.
What is the consolidated revenue figure for the Abeeha group for the year ended 30 June 2013?

(a) Rs. 7.6 million

(b) Rs. 6.6 million
(c) Rs. 8.6 million
(d) Rs. 5.5 million

10. On 1 January 2014, Venice Limited acquired 80% of the equity share capital of Greece Limited.
Extracts of their statements of comprehensive income for the year ended 30 September 2014 are:

Venice Greece
Limited Limited
Rs. 000 Rs. 000
Revenue 64,600 38,000
Cost of sales (51,200) (26,000)

Sales from Venice Limited to Greece Limited throughout the year to 30 September 2014 had
consistently been Rs. 800,000 per month. Venice Limited made a mark-up on cost of 25% on these
sales.
Greece Limited had Rs. 1.5 million of these goods in inventory as at 30 September 2014.
What would be the cost of sales in Venice Limited’s consolidated statement of comprehensive income
for the year ended 30 September 2014?

(a) Rs. 63,500,000

(b) Rs. 70,700,000
(c) Rs. 63,800,000
(d) Rs. 77,900,000

11. Haris Limited has owned a 90% subsidiary Faris Limited for many years, but then purchased a 75%
subsidiary Suria Limited half way through this year. The revenue of each company is as follows:

Haris Limited Rs. 150 million

Faris Limited Rs. 135 million
Suria Limited Rs. 120 million

During the year, Faris Limited sold goods to Haris Limited for Rs. 30 million. These items were then
sold outside of the group by Haris Limited just before the end of the year.
What is the consolidated revenue figure for the year?

© Emile Woolf International 231 The Institute of Chartered Accountants of Pakistan

 180
Financial accounting and reporting II

(a) Rs. 255 million

(b) Rs. 375 million
(c) Rs. 315 million
(d) Rs. 435 million

12. Halim Limited owns 55% of Namal Limited. In 2018 Namal Limited made a profit after tax of Rs. 72
million. During the year Halim Limited sold goods costing Rs. 36 million to Namal Limited at a mark-
up of 40%. Two thirds of these goods had been sold outside of the group by the year end.
Calculate the non-controlling interest to be shown in the consolidated statement of comprehensive
income for 2018.

(a) Rs. 32.4 million

(b) Rs. 72 million
(c) Rs. Nil
(d) Cannot be determined with this information

13. Two years ago, Burhan Limited purchased 60% of Hussain Limited and 10% of Meerab Limited.
Burhan Limited is not able to exert significant influence over its investment in Meerab Limited. Revenue
for the three companies for the year to 30th June 2010 was:
Burhan Limited Hussain Limited Meerab Limited
Rs. million Rs. million Rs. million
Revenue 180 144 108
The group revenue in the consolidated statement of comprehensive income is:

(a) Rs. 266.4 million

(b) Rs. 277.2 million
(c) Rs. 324 million
(d) Rs. 432 million

14. Hareem Limited and its subsidiary Maneha Limited have the following results for the year 2014.
Hareem Limited Maneha Limited
Rs. million Rs. million
Revenue 900 450
Cost of sales 450 234
Gross profits 450 216
During the year, Hareem Limited sold goods to Maneha Limited for Rs. 90 million making a profit of
Rs. 18 million.
None of these goods remain in inventories at the year end.
What will be shown as revenue and gross profit in the 2014 consolidated Statement of comprehensive
income?

(a) Revenue Rs. 1,260 million, Gross profit Rs. 666 million
(b) Revenue Rs. 1,260 million, Gross profit Rs. 648 million
(c) Revenue Rs. 1,350 million, Gross profit Rs. 756 million
(d) Revenue Rs. 1,350 million, Gross profit Rs. 666 million

© Emile Woolf International 232 The Institute of Chartered Accountants of Pakistan

 181
Chapter 5: Consolidated accounts: Statements of comprehensive income

15. Bilal Limited sells inventory costing Rs. 30 million to his subsidiary Sohail Limited for Rs. 45 million.
By the end of the year, Sohail Limited has just half of this inventory remaining.
If the sales of the two companies were: Rs. 150 million and Rs. 120 million respectively, and the cost
of sales were Rs. 75 million and Rs. 60 million calculate the consolidated revenue and gross profit for
the year.

(a) Revenue Rs. 225 million; Gross profit Rs. 127.5 million
(b) Revenue Rs. 270 million; Gross profit Rs. 127.5 million
(c) Revenue Rs. 225 million; Gross profit Rs. 120 million
(d) Revenue Rs. 270 million; Gross profit Rs. 120 million

16. Abrar Limited acquired 60% of Haq Limited on 1 March 2019. In September 2019 Abrar Limited sold
Rs. 46 million worth of goods to Haq Limited. Abrar Limited applies a 30% mark-up to all its sales.
25% of these goods were still held in inventory by Haq Limited at the end of the year.
An extract from the draft statements of profit or loss of Abrar Limited and Haq Limited at 31 December
2019 is:

Abrar Limited Haq Limited

Rs. million Rs. million
Revenue 955 421.5
Cost of sales (407.3) (214.6)
Gross profit 547.7 206.9

All revenue and costs arise evenly throughout the year.

What will be shown as gross profit in the consolidated statement of comprehensive income of Abrar
Limited for the year ended 31 December 2019?

Rs. ___________

17. Shahzad Limited acquired 80% of Roy Limited on 1 June 2011. Sales from Roy Limited to Shahzad
Limited throughout the year ended 30 September 2011 were consistently Rs. 1 million per month. Roy
Limited made a mark-up on cost of 25% on these sales. At 30 September 2011 Shahzad Limited was
holding Rs. 2 million inventory that had been supplied by Roy Limited in the post-acquisition period.
By how much will the unrealised profit decrease the profit attributable to the non-controlling interest
for the year ended 30 September 2011?

Rs. ___________

18. Akbar Limited has owned 70% of Hamayuon Limited for many years. It also holds a Rs. 5 million 8%
loan note from Hamayuon Limited. One of Hamayuon Limited's non-current assets has suffered an
impairment of Rs. 50,000 during the year. There is a balance in the revaluation surplus of Hamayuon
Limited of Rs. 30,000 in respect of this asset. The impairment loss has not yet been recorded.
The entity financial statements of Hamayuon Limited show a profit for the year of Rs. 1.3 million.
What is the amount attributable to the non-controlling interests in the consolidated statement of profit
or loss?

Rs. ___________

© Emile Woolf International 233 The Institute of Chartered Accountants of Pakistan

 182
Financial accounting and reporting II

19. The following figures relate to Bushra Limited and its subsidiary Ansari Limited for the year ended 31
December 2015.

Rs. m
Bushra Limited 600
Ansari Limited 300

During the year Bushra Limited sold goods to Ansari Limited for Rs. 20 million making a profit of Rs.5
million. These goods were all sold by Ansari Limited before the year end.
What is the amount for total revenue in the consolidated statement of comprehensive income for
Bushra Limited for the year ended 31 December 2015?

Rs. ___________

20. Fahad Limited Ltd acquired 80% of the ordinary shares of Mustufa Limited on 31 December 2014
when Mustufa Limited’s retained earnings were Rs. 20 million. At 31st December 2015, Mustufa
Limited’s retained earnings stood at Rs. 25 million. Neither companies pay dividends or have made
any other reserve transfers.
Calculate the non-controlling interest in the consolidated statement of comprehensive income for the
year ended 31st December 2015.

Rs. ___________

© Emile Woolf International 234 The Institute of Chartered Accountants of Pakistan

 183
Chapter 5: Consolidated accounts: Statements of comprehensive income

3 OBJECTIVE BASED PRACTICE ANSWERS

01. (c)
Rs. million
Decrease (cancellation of intra group) 12.0
Increase (Rs. 2m × 25% (profit margin)) (0.5)
Net decrease 11.5

02. (c)
Rs. '000
Total investment income (10m × 8% × 6/12) (400)
Intra group (400 × 60%) 240
Net reduction in group retained earnings (160)

03. (a)
Rs.
Profit to 30 June 2018 (1.6m × 6/12) 800,000
Additional depreciation on FVA ((2m/20) × 6/12) (50,000)
Goodwill impairment (500,000)
Other comprehensive income – revaluation gain 1,000,000
1,250,000
NCI share 20% 250,000

04. (d) All of Arif Limited’s revenue and expenses will be time-apportioned from the date of
acquisition to the date of consolidation to reflect the period for which these were controlled
by Asim Limited.
05. (a) The asset has not been sold outside of the group and therefore there is an unrealised profit
to adjust for on consolidation.
06. (d) Cost of sales = Rs. 14.7m + Rs. 8.7m (9/12 × Rs. 11.6m) – Rs. 4.3m (intra-group sale) +
Rs. 0.2m (PURP) = Rs. 19.3m
The PUP is Rs. 2.2m × 10/110 = Rs. 0.2m
07. (b) Operating expenses = Rs. 600 million + Rs. 350 million + Rs. 20 million (FV depreciation)
= Rs. 970 million
The only adjustments to the statement of comprehensive income should be the current
year income or expenses. Therefore, the prior year fair value depreciation and goodwill
impairment are ignored.
08. (b) The finance costs for the subsidiary must be time apportioned for six months, as A has
only owned them for that period of time. Also, the intra-group interest must be split out.
The intra-group interest would not have existed in the first half of the year, as the loan was
only given to B in July.
The intra-group interest for the second 6 months would have been Rs. 20 million (Rs. 500×
8% × 6/12). Without this, B’s finance costs would have been Rs. 50 million for the year.
Splitting this evenly across the year would mean that Rs. 25 million was incurred in each
six-month period.
Therefore, the total finance costs would be Rs. 20 million + Rs. 25 million = Rs. 225 million.

© Emile Woolf International 235 The Institute of Chartered Accountants of Pakistan

 184
Financial accounting and reporting II

09. (b) Consolidated revenue:

Abeeha Limited Rs. 5.5m + Seema Limited Rs. 2.1m – Rs. 1m intra-group= Rs. 6.6 million
All intra-group sales and cost of sales are removed from the group accounts.
10. (c)
Rs. 000
Venice Limited 51,200
Greece Limited (26,000 × 9/12) 19,500
Intra-group purchases (800 × 9 months) (7,200)
PURP in inventory (1,500 × 25/125) 300
63,800

11. (c) Rs. 150+135 – 30 + (120 x 6/12) = Rs. 315 million

The results of Haris Limited and his subsidiaries must be combined, taking account of the
fact that Haris Limited has only controlled Suria Limited for 6 months of the year, and so
only the time apportioned figure should be included. In addition, the inter-company trading
must be cancelled as the sale has been double counted by the group. The Rs. 30m sale
by Faris Limited will be cancelled against the Rs. 30m purchase by Haris Limited. The
same adjustment is needed irrespective of whether the goods remain within the group at
the year-end or not.
12. (a) 45% × 72 million = Rs. 32.4 millio
There is no adjustment for the unrealised profit as the sale is from the parent.
13. (c)
Rs. million
Burhan Limited 180
Hussain Limited 144
324
Meerab Limited is an ordinary investment, and not a subsidiary or an associate. The
revenue of Meerab Limited is therefore irrelevant for the preparation of Burhan Limited’s
consolidated financial statements.
14. (a)
HL ML Adjustment Consolidated
Rs. m Rs. m Rs. m Rs. m
Revenue 900 450 (90) 1,260
COS. (450) (234) 90 (594)
GP 450 216 - 666
No adjustment for unrealised profit is required as all the goods had been sold outside the
group by the end of the reporting period.
15. (a) The inter-company sale by Bilal Limited must be cancelled in full to give revenue of Rs.
150 million + Rs. 120 million - Rs. 45 million = Rs. 225 million.
Sohail Limited will have recorded the associated purchase, so Rs. 45 million must also be
removed from cost of sales, together with the elimination of the unrealised profit of Rs. 7.5
million on the remaining inventory.
This gives cost of sales of Rs. 75 million + Rs. 60 million - Rs. 45 million + Rs. 7.5 million
= Rs. 97.5 million resulting in a profit figure of Rs. 225 million - Rs. 97.5 million = Rs. 127.5
million.

© Emile Woolf International 236 The Institute of Chartered Accountants of Pakistan

 185
Chapter 5: Consolidated accounts: Statements of comprehensive income

16. Rs.
717.463
Rs. million
million
Abrar Limited 547.7
Haq Limited (206.9 × 10/12) 172.417
PURP ((46 × 30 / 130) × 25%) (2.654)
717.463

17. Rs. Rs. 80,000

80,000 Rs. 2 million × 25 / 125 × 20% = Rs. 80,000
18. Rs.
264,000
Rs. '000
Profit for the year 1,300
Intra-group interest (5m × 8%) (400)
Impairment (50,000 – 30,000) (20)*
880
× 30% 264
* The revaluation surplus is eliminated first, and the remainder charged to profit or loss.
19. Rs. 880 Revenue = Rs. 600 million + Rs. 300 million – Rs.20 million intragroup sale = Rs. 880
million million
20. Rs. 1 Noncontrolling interest is calculated as the NCI% × Mustufa Limited's PAT for the year. i.e.
million Rs. 5 million x 20% = Rs. 1 million.
The change in retained earnings between year 2014 and year 2015 will be the PAT for the
year.

© Emile Woolf International 237 The Institute of Chartered Accountants of Pakistan

 186

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
7
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors

Contents
1 Key Definitions
2 Accounting policies
3 Accounting estimates
4 Errors
5 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 281 The Institute of Chartered Accountants of Pakistan

 187
Financial accounting and reporting II

5 OBJECTIVE BASED QUESTIONS

01. Which TWO of the following situations would not require a prior year adjustment as per IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors?
(a) In last year's financial statements, inventories were understated by a material amount due
to system error
(b) A company has changed its allowance for irrecoverable receivables from 10% of
outstanding debt to everything over 120 days old
(c) A new accounting standard has been issued that requires a company to change its
accounting policy but gives no guidance on the specific application of the change itself
(d) A company has decided to move from charging depreciation on the straight line basis to
the reducing balance basis

02. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how is
a change in accounting estimate accounted for?
(a) By changing the current year figures but not the previous years' figures
(b) By changing the current year figures and the previous years' figures
(c) No alteration of any figures but disclosure in the notes
(d) Neither alteration of any figures nor disclosure in the notes

03. According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how should
a material error in the previous financial reporting period be accounted for in the current period?
(a) By making an adjustment in the financial statements of the current period through the
statement of profit or loss, and disclosing the nature of the error in a note.
(b) By making an adjustment in the financial statements of the current period as a movement
on reserves, and disclosing the nature of the error in a note.
(c) By restating the comparative amounts for the previous period at their correct value, and
disclosing the nature of the error in a note.
(d) By restating the comparative amounts for the previous period at their correct value, but
without the requirement for a disclosure of the nature of the error in a note.

04. Which of these changes would be classified as ‘a change in accounting policy’ as determined by
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
(a) Increased the allowance for irrecoverable receivables from 5% to 10% of outstanding debts
(b) Changed the method of valuing inventory from FIFO to average cost
(c) Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation
(d) Changed the useful life of motor vehicles from six years to four years

05. In which TWO of the following situations can a change in accounting policy be made by an entity?
(a) If the change is required by an IFRS
(b) If the entity thinks that a new accounting policy would be easier to report
(c) If a new accounting policy would show more favourable results
(d) If a new accounting policy results in more reliable and relevant presentation of events or
transactions

© Emile Woolf International 304 The Institute of Chartered Accountants of Pakistan

 188
Chapter 7: IAS 8: Accounting policies, changes in accounting estimates and errors

06. Which one of the following would be treated under IAS 8 Accounting policies, changes in accounting
estimates and errors as a change of accounting policy?
(a) A change in valuation of inventory from a weighted average to a FIFO basis
(b) A change of depreciation method from straight line to reducing balance
(c) Adoption of the revaluation model for non-current assets previously held at cost
(d) Capitalisation of borrowing costs which have arisen for the first time

07. Which of the following would be a change in accounting policy in accordance with IAS 8 Accounting
policies, changes in accounting estimates and errors?
(a) Adjusting the financial statements of a subsidiary prior to consolidation as its accounting
policies differ from those of its parent
(b) A change in reporting depreciation charges as cost of sales rather than as administrative
expenses
(c) Depreciation charged on reducing balance method rather than straight line
(d) Reducing the value of inventory from cost to net realisable value due to a valid adjusting
event after the reporting period

08. Which of the following items is a change of accounting policy under IAS 8 Accounting policies,
changes in accounting estimates and errors?
(a) Classifying commission earned as revenue in the statement of profit or loss, having
previously classified it as other operating income
(b) Switching to purchasing plant using leases from a previous policy of purchasing plant for
cash
(c) Changing the value of a subsidiary's inventory in line with the group policy for inventory
valuation when preparing the consolidated financial statements
(d) Revising the remaining useful life of a depreciable asset

09. The directors of Tom Limited are disappointed by the draft profit for the year ended 30 September
2013. The company's assistant accountant, Jerry, has suggested following:
A major item of plant that cost Rs. 20 million to purchase and install on 1 October 2010 is being
depreciated on a straight-line basis over a five-year period. On 1 October 2012, the production
manager believed that the plant was likely to last eight years in total (i.e. from the date of its
purchase).
Jerry believes that as the useful life estimate has increased, the previous years’ depreciation was
overstated and it depreciation expense should be reversed in current year leading to increased
profit.
What is the nature of the change being proposed by Jerry and how should it be applied?
(a) Change of accounting policy : Retrospective application
(b) Change of accounting policy : Prospective application
(c) Change of accounting estimate : Retrospective application
(d) Change of accounting estimate : Prospective application

10. If it is impractical to make a retrospective application to a period:

(a) Make the change only to the current period
(b) Apply the change to the earliest period that is practical

© Emile Woolf International 305 The Institute of Chartered Accountants of Pakistan

 189
Financial accounting and reporting II

(c) Do not make the change at all

(d) Make the change in next year

11. Which TWO of the following would be treated as a change of accounting policy?
(a) Entity has received its first government grant and is applying the deferred income method.
(b) Entity has revalued its properties. Up to now they had all been carried at historical cost.
(c) Entity has reclassified development costs from other operating expenses to cost of sales.
(d) Entity has increased its irrecoverable debt allowance from 10% to 12%.

12. Correcting the recognition, measurement and disclosure of amounts in financial statements as if a
prior-period error had never occurred. This is:
(a) Retrospective restatement
(b) Retrospective application
(c) Change in accounting estimate
(d) Prospective restatement

13. Specific principles bases conventions rules and practices applied in presenting financial statements.
This defines:
(a) Accounting estimates
(b) Accounting policies
(c) Prospective application
(d) Accounting method

14. Adjustment of the carrying amount of an asset or a liability or the consumption of an asset as a
result of change in assessment. This defines:
(a) A change in accounting estimate
(b) Accounting policies
(c) Misstatements
(d) Correction of error

15. Applying a new policy to transactions as if that policy had always been applied. This is:
(a) Retrospective restatement
(b) Retrospective application
(c) Change in accounting estimate
(d) Prospective application

16. The directors of Tom Limited are disappointed by the draft profit for the year ended 30 September
2013. The company's assistant accountant, Jerry, has suggested following:
A major item of plant that cost Rs. 20 million to purchase and install on 1 October 2010 is being
depreciated on a straight-line basis over a five-year period. On 1 October 2012, the production
manager believed that the plant was likely to last eight years in total (i.e. from the date of its
purchase).

© Emile Woolf International 306 The Institute of Chartered Accountants of Pakistan

 190
Chapter 7: IAS 8: Accounting policies, changes in accounting estimates and errors

Jerry believes that as the useful life estimate has increased, the previous years’ depreciation was
overstated and it depreciation expense should be reversed in current year leading to increased
profit.
Adjusting for the change of useful life correctly, what will be the carrying amount of the plant at 30
September 2013?

Rs. ___________

17. Imad Textile Limited (ITL) purchased a plant on January 01, 2011 for Rs. 1,120,000. At this date
the useful life of the asset was estimated at 10 years after which it can be sold for Rs. 120,000.
However, during 2013 ITL estimates the remaining useful life of this plant as 6 years and expects
to fetch residual value of Rs. 170,000. ITL uses straight line method for depreciating such plants.
Calculate the amount of depreciation for the year ended on 31 December 2018.

Rs. ___________

18. A company is preparing its financial statements for the year ended 31 December 2019 and
discovered that in previous years following amounts were incorrectly capitalised in an intangible
asset with indefinite useful life.
Year Rs. m
2018 5
2017 4
2016 4
2015 3
The applicable tax rate is 30%.
What amount should be deducted from retained earnings in statement of changes in equity on 1
January 2018 for correction of above error?

Rs. ___________

19. A company is preparing its financial statements for the year ended 31 December 2019 and
discovered that in previous years following amounts were incorrectly capitalised in an intangible
asset with indefinite useful life.
Year Rs. m
2018 5
2017 4
2016 4
2015 3
The applicable tax rate is 30%.
Calculate the effect on profit after tax for the year ended 31 December 2018 correction of above
error.

Rs. ___________

© Emile Woolf International 307 The Institute of Chartered Accountants of Pakistan

 191
Financial accounting and reporting II

20. Most of entity’s competitors value their inventory using the average cost (AVCO) basis, whereas the
entity uses the first in first out (FIFO) basis.
The value of inventory at 30 September 2013 (on the FIFO basis) is Rs. 20 million, however on the
AVCO basis it would be valued at Rs. 18 million. By adopting the same method (AVCO) as its
competitors. The inventory at 30 September 2012 was reported as Rs. 15 million, however on the
AVCO basis it would have been reported as Rs. 13.4 million.
What will be the effect of the change on profits for the year ended 30 September 2013?

Rs. ___________

© Emile Woolf International 308 The Institute of Chartered Accountants of Pakistan

 192
Chapter 7: IAS 8: Accounting policies, changes in accounting estimates and errors

5 OBJECTIVE BASED ANSWERS

01. (b) & (d) A change in the calculation of the allowance for irrecoverable receivables, and a
change in the depreciation method, are changes in accounting estimate so
therefore require prospective adjustment only.

02. (a) Change in accounting estimates results in alteration of figures but not
retrospectively. The change is made prospectively.

03. (c) The prior period error is corrected by restating the comparative amounts for the
previous period at their correct value. A note to the accounts should disclose the
nature of the error, together with other details.

04. (b) A change in the method of inventory valuation would be classed as a change in
accounting policy under IAS 8. The allowance for receivables, useful life and
depreciation method are all accounting estimates.

05. (a) & (d) A change in accounting policy may be made firstly if this is required by an IFRS
Standard. If there is no requirement, an entity can choose to change their
accounting policy if they believe a new accounting policy would result in a more
reliable and relevant presentation of events and transactions. Entities cannot
change their accounting policies simply to make financial reporting easier, or to
try and show a more favourable picture of results.

06. (a) A change of depreciation method is treated as a change of accounting estimate.

Adoption of the revaluation method is dealt with under IAS 16. Application of a
new accounting policy (such as capitalisation of borrowing costs) for transactions
that did not previously occur is not a change in accounting policy according to IAS
8.

07. (b) This is a change in presentation which will affect calculation of gross profit and
will be retrospectively adjusted when presenting comparatives. (a( and (d) are
simply adjustments made during preparation of the financial statements, (c) is a
change of accounting estimate.

08. (a) This is a change in presentation so qualifies as a change in accounting policy.

09. (d) This is a change of accounting estimate so does not need to be retrospectively
applied.

10. (b) In this situation, change is applied to the earliest period possible.

11. (b) & (c) This is change in measurement basis, so it is a change in accounting policy.
This is a change in presentation, so it is a change of accounting policy.

12. (a) Correction of error in previous period is called retrospective restatement.

13. (b) Specific principles bases conventions rules and practices applied in presenting
financial statements are accounting policies.

14. (a) Change in assessment is change in estimate.

15. (b) Retrospective application is applying a policy as if it had always been applied.

© Emile Woolf International 309 The Institute of Chartered Accountants of Pakistan

 193
Financial accounting and reporting II

16. Rs. 10 million

Rs. m
Original cost 1 October 2010 20
Two years depreciation ((20/5) × 2) (8)
Carrying amount at 1 October 2012 12
Depreciation to 30 September 2013 (12 / 6) (2)
Carrying amount at 30 September 2013 10

17. Rs. 125,000

Per year depreciation Rs.
Year 2011 (Rs. 1,120,000 – 120,000) / 10 years 100,000
Year 2012 100,000

Year 2013 ((Rs. 920,000 – 170,000) / 6 years 125,000

18. Rs. 7.7 million Adjustment in opening balance of retained earnings (net of tax)
Rs. 4m + 4m + 3m = Rs. 11m x 70% = Rs. 7.7 million

19. Rs. 3.5 million Effect on profit for the year ended 31 December 2018 (net of tax)
Rs. 5m x 70% = Rs. 3.5 million

20. Rs. (400,000)

FIFO AVCO Profit
Rs. m Rs. m Rs. m
Year to 30 September 2012 15 13.4 (1.6)
B/f 1 October 2012 1.6
Year to 30 September 2013 20 18 ( 2.0)
At 30 September 2013 (0.4)

The net effect at 30 September 2013 of this will be to reduce current year profits
by Rs. 400,000.

© Emile Woolf International 310 The Institute of Chartered Accountants of Pakistan

 194

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
8
IAS 12: Income Taxes

Contents
1 Key Definitions
2 Accounting for taxation
3 Deferred tax: Introduction
4 Recognition of deferred tax: basic approach
5 Recognition and measurement rules
6 Presentation and disclosure
7 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 311 The Institute of Chartered Accountants of Pakistan

 195
Financial accounting and reporting II

7 OBJECTIVE BASED QUESTIONS

01. A piece of machinery cost Rs. 500,000. Tax depreciation to date has amounted to Rs. 220,000 and
depreciation charged in the financial statements to date is Rs. 100,000. The rate of income tax is 30%.
Which of the following statements is incorrect according to IAS 12 Income Taxes?
(a) The deferred tax liability in relation to the asset is Rs. 36,000
(b) The tax base of the asset is Rs. 280,000
(c) There is a deductible difference of Rs. 120,000
(d) There is a taxable temporary difference of Rs. 120,000

02. Tall Limited (TL)’s accounting records shown the following:

Rs. 000
Income tax payable for the year 60,000
Over provision in relation to the previous year 4,500
Opening deferred tax liability 2,600
Closing for deferred tax liability 3,200

What is the income tax expense that will be shown in the statement of profit or loss for the year?
(a) Rs. 54,900,000
(b) Rs. 67,700,000
(c) Rs. 65,100,000
(d) Rs. 56,100,000

03. The following information has been extracted from the accounting records of Candle Limited:
Rs. 000
Estimated income tax
for the year ended 30 September 2020 Rs. 75,000
Income tax paid
for the year ended 30 September 2020 Rs. 80,000
Estimated income tax
for the year ended 30 September 2021 Rs. 83,000
What figures will be shown in the statement of comprehensive income for the year ended 30 September
2021 in respect of income tax?
(a) Rs. 75,000,000
(b) Rs. 80,000,000
(c) Rs. 88,000,000
(d) Rs. 83,000,000

04. Home Limited (HL) has the following balances included on its trial balance at 30 June 2014.
Rs. 000
Taxation 4,000 Credit
Deferred taxation 12,000 Credit
The taxation balance relates to an over-provision from 30 June 2013.

© Emile Woolf International 372 The Institute of Chartered Accountants of Pakistan

 196
Chapter 8: IAS 12: Income taxes

At 30 June 2014, the directors estimate that the provision necessary for taxation on current year profits
is Rs. 15,000,000.
The carrying amount of HL’s non-current assets exceeds the tax written-down value by Rs. 30,000,000.
The rate of tax is 30%.
What is the charge for taxation that will appear in the statement of profit or loss for the year to 30 June
2014?
(a) Rs. 23,000,000
(b) Rs. 28,000,000
(c) Rs. 8,000,000
(d) Rs. 12,000,000

05. Hall Limited has the following balances included on its trial balance at 30 June 2014:
Rs. 000
Taxation 7,000 Credit
Deferred taxation 16,000 Credit
The taxation balance relates to an overprovision from 30 June 2013.
At 30 June 2014, the directors estimate that the provision necessary for taxation on current year profits
is Rs. 12 million. The balance on the deferred tax account needs to be increased to Rs. 23 million, which
includes the impact of the increase in property valuation below.
During the year Hall Limited revalued its property for the first time, resulting in a gain of Rs. 10 million.
The rate of tax is 30%.
What is the charge for taxation that will appear in the statement of profit or loss for the year to 30 June
2014?
(a) Rs. 9 million
(b) Rs. 12 million
(c) Rs. 23 million
(d) Rs. 1 million

06. Vase Limited (VL)’s assistant accountant has discovered that there is a debit balance on the trial
balance of Rs. 3,000 relating to the over/under-provision of tax from the prior year.
What impact will this have on VL’s current year financial statements?
(a) Increase the tax liability by Rs. 3,000 in the statement of financial position
(b) Decrease the tax liability by Rs. 3,000 in the statement of financial position
(c) Increase the tax expense by Rs. 3,000 in the statement of profit or loss
(d) Decrease the tax expense by Rs. 3,000 in the statement of profit or loss

07. A company's trial balance shows a debit balance of Rs. 2.1 million brought forward on current tax and
a credit balance of Rs. 5.4 million on deferred tax. The tax charge for the current year is estimated at
Rs. 16.2 million and the carrying amounts of net assets are Rs. 13 million in excess of their tax base.
The income tax rate is 30%.
What amount will be shown as income tax in the statement of profit or loss for the year?
(a) Rs. 15.6 million
(b) Rs. 12.6 million
(c) Rs. 16.8 million
(d) Rs. 18.3 million

© Emile Woolf International 373 The Institute of Chartered Accountants of Pakistan

 197
Financial accounting and reporting II

08. A company's trial balance at 31 December 2013 shows a debit balance of Rs. 700,000 on current tax
and a credit balance of Rs. 8,400,000 on deferred tax. The directors have estimated the provision for
income tax for the year at Rs. 4.5 million and the required deferred tax provision is Rs. 5.6 million, Rs.
1.2 million of which relates to a property revaluation.
What is the profit or loss income tax charge for the year ended 31 December 2013?
(a) Rs. 1 million
(b) Rs. 2.4 million
(c) Rs. 1.2 million
(d) Rs. 3.6 million

09. The following information relates to an entity.

(i) At 1 January 2018 the carrying amount of non-current assets exceeded their tax written down
value by Rs. 850,000.
(ii) For the year to 31 December 2018 the entity claimed depreciation for tax purposes of Rs.
500,000 and charged depreciation of Rs. 450,000 in the financial statements.
(iii) During the year ended 31 December 2018 the entity revalued a property. The revaluation
surplus was Rs. 250,000. There are no current plans to sell the property.
(iv) The tax rate was 30%.
What is the deferred tax liability required by IAS 12 Income Taxes at 31 December 2018?
(a) Rs. 240,000
(b) Rs. 270,000
(c) Rs. 315,000
(d) Rs. 345,000

10. The accountant of an entity is confused by the term 'tax base'. What is meant by 'tax base'?
(a) The amount of tax payable in a future period
(b) The tax regime under which an entity is assessed for tax
(c) The amount attributed to an asset or liability for tax purposes
(d) The amount of tax deductible in a future period

11. The carrying amount of Jewel Limited (JL)'s property, plant and equipment at 31 December 2013 was
Rs. 310,000 and the tax written down value was Rs. 230,000.
The following data relates to the year ended 31 December 2014:
(i) At the end of the year the carrying amount of property, plant and equipment was Rs. 460,000
and the tax written down value was Rs. 270,000. During the year some items were revalued by
Rs. 90,000. No items had previously required revaluation. In the tax jurisdiction in which JL
operates revaluations of assets do not affect the tax base of an asset or taxable profit. Gains
due to revaluations are taxable on sale.
(ii) JL began development of a new product during the year and capitalised Rs. 60,000 in
accordance with IAS 38. The expenditure was deducted for tax purposes as it was incurred.
None of the expenditure had been amortised by the year end.
What is the taxable temporary difference to be accounted for at 31 December 2014 in relation to
property, plant and equipment and development expenditure?
Property, plant and equipment Development expenditure
(a) Rs. 270,000 Rs. 60,000
(b) Rs. 270,000 Nil
(c) Rs. 190,000 Rs. 60,000
(d) Rs. 190,000 Nil

© Emile Woolf International 374 The Institute of Chartered Accountants of Pakistan

 198
Chapter 8: IAS 12: Income taxes

12. The carrying amount of Jewel Limited (JL)'s property, plant and equipment at 31 December 2013 was
Rs. 310,000 and the tax written down value was Rs. 230,000.
At the end of the year, 31 December 2014, the carrying amount of property, plant and equipment was
Rs. 460,000 and the tax written down value was Rs. 270,000. During the year some items were revalued
by Rs. 90,000. No items had previously required revaluation. In the tax jurisdiction in which JL operates
revaluations of assets do not affect the tax base of an asset or taxable profit. Gains due to revaluations
are taxable on sale.
The corporate income tax rate is 30%. The current tax charge was calculated for the year as Rs. 45,000.
What amount should be charged to the revaluation surplus at 31 December 2014 in respect of deferred
tax?
(a) Rs. 60,000
(b) Rs. 90,000
(c) Rs. 18,000
(d) Rs. 27,000

13. The carrying amount of Jewel Limited (JL)'s property, plant and equipment at 31 December 2013 was
Rs. 310,000 and the tax written down value was Rs. 230,000.
At the end of the year, 31 December 2014, the carrying amount of property, plant and equipment was
Rs. 460,000 and the tax written down value was Rs. 270,000. During the year some items were revalued
by Rs. 90,000. No items had previously required revaluation. In the tax jurisdiction in which JL operates
revaluations of assets do not affect the tax base of an asset or taxable profit. Gains due to revaluations
are taxable on sale.
The corporate income tax rate is 30%. The current tax charge was calculated for the year as Rs. 45,000.
What amount will be shown as current tax payable in the statement of financial position of JL at 31
December 2014?
(a) Rs. 45,000
(b) Rs. 72,000
(c) Rs. 63,000
(d) Rs. 75,000

14. Deferred tax assets and liabilities arise from taxable and deductible temporary differences. Which one
of the following is not a circumstance giving rise to a temporary difference?
(a) Depreciation accelerated for tax purposes
(b) Development costs amortised in profit or loss but tax was deductible in full when incurred
(c) Accrued expenses which have already been deducted for tax purposes
(d) Revenue included in accounting profit when invoiced but only liable for tax when the cash is
received.

15. Which of the following statements regarding taxation of lease arrangement are true?
(i) Depreciation expense and interest expense should be added back in accounting profit to
calculate current tax
(ii) Rental payments should be deducted from accounting profit for calculating current tax
(iii) Right of use asset has tax base of nil resulting in taxable temporary difference
(iv) Lease liabilities have tax base of nil resulting deductible temporary difference
(a) (i), (ii) and (iii)
(b) (ii), (iii) and (iv)

© Emile Woolf International 375 The Institute of Chartered Accountants of Pakistan

 199
Financial accounting and reporting II

(c) (i), (ii) and (iv)

(d) (i), (ii), (iii) and (iv) all

16. Venice Limited (VL)’s assistant accountant estimated the tax expense for the year ended 31 December
2018 at Rs. 43,000. However, he had ignored deferred tax. At 1 January 2018 VL had a deferred tax
liability of Rs. 130,000. At 31 December 2018 VL had temporary taxable differences of Rs. 360,000.
VL pays tax at 25%. All movements in deferred tax are taken to the statement of profit or loss.
What will be recorded as the tax expense in the statement of profit or loss for the year ended 31
December 2018?

Rs. ___________

17. The statements of financial position of Nitrogen Limited (NL) include the following extracts:
Statements of financial position 2012 2011
as at 30 September Rs. m Rs. m
Non-current liabilities
Deferred tax 310 140
Current liabilities
Taxation 130 160
The tax charge in the statement of profit or loss for the year ended 30 September 2012 is Rs. 270
million.
What amount of tax was paid during the year to 30 September 2012?

Rs. ___________

18. The trial balance of Hall Limited (HL) at 31 March 2016 showed credit balances of Rs. 800,000 on
current tax and Rs. 2.6 million on deferred tax.
A property was revalued during the year giving rise to deferred tax of Rs. 3.75 million. This has been
included in the deferred tax provision of Rs. 6.75 million at 31 March 2016.
The income tax charge for the year ended 31 March 2016 is estimated at Rs. 19.4 million.
What will be shown as the income tax charge in the statement of profit or loss of HL at 31 March 2016?

Rs. ___________

19. Orange Limited (OL) is in the process of finalizing its financial statements for the year ended 30 June
2018.
OL sells goods with a 1-year warranty and it is estimated that warranty expenses are 2% of annual
sales. Actual payments during the year related to warranty claims were Rs. 54 million. Of these, Rs. 38
million pertain to goods sold during the previous year. Opening balance of provision for warranty was
Rs. 49 million.
Sales for the year ended 30 June 2018 was Rs. 1,750 million. Under the tax laws, these expenses are
allowed on payment basis. Applicable tax rate is 30%.
What is the amount of deferred tax expense or income in respect of above for the year ended 30 June
2018?

Rs. ___________

© Emile Woolf International 376 The Institute of Chartered Accountants of Pakistan

 200
Chapter 8: IAS 12: Income taxes

20. Orange Limited (OL) is in the process of finalizing its financial statements for the year ended 30 June
2018.
Profit before tax for the year ended 30 June 2018 was Rs. 508 million.
OL sells goods with a 1-year warranty and it is estimated that warranty expenses are 2% of annual
sales. Actual payments during the year related to warranty claims were Rs. 54 million. Of these, Rs. 38
million pertain to goods sold during the previous year. Opening balance of provision for warranty was
Rs. 49 million.
Sales for the year ended 30 June 2018 was Rs. 1,750 million. Under the tax laws, these expenses are
allowed on payment basis. Applicable tax rate is 30%.
What is the amount of current tax after considering above information for the year ended 30 June 2018?

Rs. ___________

© Emile Woolf International 377 The Institute of Chartered Accountants of Pakistan

 201
Financial accounting and reporting II

7 OBJECTIVE BASED ANSWERS

01. (c) As carrying amount is greater than tax base of the asset, the resulting temporary
difference is taxable (not deductible).
02. (d) The tax expense in the statement of profit or loss is made up of the current year
estimate, the prior year over-provision and the movement in deferred tax. The prior
year over-provision must be deducted from the current year expense, and the
movement in deferred tax must be added to the current year expense, as the
deferred tax liability has increased.
Tax expense = Rs. 60,000,000 – Rs. 4,500,000 + Rs. 600,000
= Rs. 56,100,000
03. (c) The tax expense in the statement of profit or loss is made up of the current year
estimate and the prior year under-provision. The year-end liability in the statement
of financial position is made up of the current year estimate only.
Tax expense = Rs. 83,000 + Rs. 5,000 under provision = Rs. 88,000
04. (c)
Rs. 000
Deferred tax provision required (30,000 × 30%) 9,000
Opening balance per trial balance 12,000
Reduction in provision (3,000)

Tax expense: Rs. 000

Current year estimate 15,000
Prior year overprovision (4,000)
Deferred tax, as above (3,000)
Charge for year 8,000

05. (a)
Rs.000
Deferred taxation increase (23,000 – 16,000) 7,000
Less tax on revaluation [OCI] (10,000 × 30%) (3,000)
Charge to SPL 4,000

Tax expense: Rs. 000

Current year estimate 12,000
Prior year overprovision (7,000)
Deferred tax, as above 4,000
Charge for year 9,000

06. (c) A debit balance represents an under-provision of tax from the prior year. This should
be added to the current year’s tax expense in the statement of profit or loss.
An under or over-provision only arises when the prior year tax estimate is paid so
there is no adjustment required to the current year liability.

© Emile Woolf International 378 The Institute of Chartered Accountants of Pakistan

 202
Chapter 8: IAS 12: Income taxes

07. (c)
Rs. 000
Charge for year 16,200
Under provision 2,100
Adjust deferred tax (1,500)
Profit or loss charge 16,800

Deferred tax liability year end (13m × 30%) 3,900

Deferred tax liability opening balance (5,400)
Deferred tax income (1,500)
.
08. (c)
Rs. 000
Prior year under provision 700
Current provision 4,500
Movement of deferred tax (8.4 – 5.6) (2,800)
Deferred tax on revaluation surplus (1,200)
Tax charge for the year in profit or loss 1,200
.…
09. (d)
Temporary difference Rs. 000
B/f 850
Depreciation Year to 31.12.18 (500 – 450) (50)
Revaluation surplus 250
1,150

Deferred tax 1,150 @ 30% 345

10. (c) The amount attributed to an asset or liability for tax purposes.
11. (c) PPE 460,000 – 270,000 = Rs. 190,000
Development cost 60,000 – 0 = Rs. 60,000
12. (d) (90,000 × 30%) will go to the revaluation surplus
13. (a) Rs. 45,000. The tax charge for the year.
14. (c) Accrued expenses which have already been deducted for tax purposes will not give
rise to a temporary difference as there is no difference in accounting and tax in time
of recognition of tax expense.
15. (d) All the statements are true.
16. Rs. 3,000 The tax expense in the statement of profit or loss consists of the current tax estimate
and the movement on deferred tax in the year. The closing deferred tax liability is
Rs. 90,000, being the temporary differences of Rs. 360,000 at the tax rate of 25%.
This means that the deferred tax liability has decreased by Rs. 40,000 in the year.
This decrease should be deducted from the current tax estimate of Rs. 43,000 to
give a total expense of Rs. 3,000.

© Emile Woolf International 379 The Institute of Chartered Accountants of Pakistan

 203
Financial accounting and reporting II

17. Rs. 130 million

Rs. m
Opening balances (140 + 160) 300
Charge for year 270
Closing balances (310 + 130) (440)
Tax paid 130
..
18. Rs. 19 million
Rs. 000
Current charge 19,400
Overprovision (800)
Deferred tax (W) 400
19,000
Working
Required provision 6,750
Less revaluation (3,750)
3,000
Balance b/f (2,600)
Charge to income tax 400

19. Rs. 9 million

expense Provision for warranty
Bank (last year) 38 b/d 49
Bank (current year) 16 PL (1,750 x 2%) 35
PL (Reversal last year) 11
c/d 19
84 84

Rs. m
Opening deferred tax asset 49 x 30% 14.7
Closing deferred tax asset 19 x 30% 5.7
Deferred tax expense 9

20. Rs. 143.4

million Provision for warranty
Bank (last year) 38 b/d 49
Bank (current year) 16 PL (1,750 x 2%) 35
PL (Reversal last year) 11
c/d 19
84 84

© Emile Woolf International 380 The Institute of Chartered Accountants of Pakistan

 204
Chapter 8: IAS 12: Income taxes

Rs. m
Profit before tax 508
Add: Warranty expense as per accounting 35 - 11 24
Less: Warranty payments allowed in tax 38 + 16 (54)
478
478 million x 30% = Rs. 143.4 million

© Emile Woolf International 381 The Institute of Chartered Accountants of Pakistan

 205

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
10
IAS 38: Intangible Assets

Contents
1 Key Definitions
2 IAS 38: Intangible assets – Introduction
3 Internally generated intangible assets
4 Intangible assets acquired in a business combination
5 Measurement after initial recognition
6 Disclosure requirements
7 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 415 The Institute of Chartered Accountants of Pakistan

 206
Financial accounting and reporting II

7 OBJECTIVE BASED QUESTIONS

01. Power Limited has spent Rs. 200,000 researching new cleaning chemicals in the year ended 31
December 2020. They have also spent Rs. 400,000 developing a new cleaning product which will not
go into commercial production until next year. The development project meets the criteria laid down in
IAS 38 Intangible Assets.
How should these costs be treated in the financial statements of Power Limited for the year ended 31
December 2020?
(a) Rs. 600,000 should be capitalised as an intangible asset on the statement of financial
position.
(b) Rs. 400,000 should be capitalised as an intangible asset and should be amortised;
Rs.200,000 should be written off to the statement of profit or loss.
(c) Rs. 400,000 should be capitalised as an intangible asset and should not be amortised; Rs.
200,000 should be written off to the statement of profit or loss.
(d) Rs. 600,000 should be written off to the statement of profit or loss

02. Which TWO of the following items below could potentially be classified as intangible assets?
(a) purchased brand name
(b) training of staff
(c) internally generated brand
(d) licences and quotas

03. Star Limited has provided the following information as at 31 December 2016:
(i) Project A – Rs. 500,000 has been spent on the research phase of this project during the year.
(ii) Project B – Rs. 800,000 had been spent on this project in the previous year and Rs. 200,000
this year. The project was capitalised in the previous year however, it has been decided to
abandon this project at the end of the year.
(iii) Project C – Rs. 1,000,000 was spent on this project this year. The project meets the criteria
of IAS 38 and is to be capitalised.
Which of the following adjustments will be made in the financial statements as at 31 December 2016?
(a) Reduce profit by Rs. 700,000 and increase non-current assets by Rs. 1,000,000
(b) Reduce profit by Rs. 1,500,000 and increase non-current assets by Rs. 1,000,000
(c) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,800,000
(d) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,000,000

04. Which of the following statements concerning the accounting treatment of research and development
expenditure are true, according to IAS 38 Intangible Assets?
(i) Research is original and planned investigation undertaken with the prospect of gaining new
knowledge and understanding.
(ii) Development is the application of research findings.
(iii) Depreciation of plant used specifically on developing a new product can be capitalised as part
of development costs.
(iv) Expenditure once treated as an expense cannot be reinstated as an asset.

© Emile Woolf International 450 The Institute of Chartered Accountants of Pakistan

 207
Chapter 10: IAS 38: Intangible assets

(a) (i), (ii) and (iii)

(b) (i), (ii) and (iv)
(c) (ii), (iii) and (iv)
(d) All of the above

05. Which of the following should be included in a company’s statement of financial position as an
intangible asset under IAS 38 Intangible Assets?
(a) Internally developed brands
(b) Internally generated goodwill
(c) Expenditure on completed research
(d) Payments made on the successful registration of a patent.

06. Which TWO of the following criteria must be met before development expenditure is capitalised
according to IAS 38 Intangible Assets?
(a) the technical feasibility of completing the intangible asset
(b) future revenue is expected
(c) the intention to complete and use or sell the intangible asset
(d) there is no need for reliable measurement of expenditure

07. Which of the following shall be capitalised as intangible asset in financial statements?
(a) Rs. 400,000 developing a new process which will bring in no revenue but is expected to bring
significant cost savings
(b) Rs. 400,000 developing a new product. During development a competitor launched a rival
product and now the entity is hesitant to commit further funds to the process
(c) Rs. 400,000 spent on marketing a new product which has led to increased sales of Rs.
800,000
(d) Rs. 400,000 spent on designing a new corporate logo for the business

08. Which of the following CANNOT be recognised as an intangible non-current asset in Ghalib Limited
(GL)’s consolidated statement of financial position at 30 September 2021?
(a) GL spent Rs. 132 million developing a new type of product. In June 2021 management
worried that it would be too expensive to fund. The finances to complete the project came
from a cash injection from a benefactor received in November 2021.
(b) GL purchased a subsidiary during the year. During the fair value exercise, it was found that
the subsidiary had a brand name with an estimated value of Rs. 50 million but had not been
recognised by the subsidiary as it was internally generated.
(c) GL purchased a brand name from a competitor on 1 November 2020, for Rs. 65 million.
(d) GL spent Rs. 21 million during the year on the development of a new product, after
management concluded it would be viable in November 2020. The product is being launched
on the market on 1 December 2021 and is expected to be profitable.

© Emile Woolf International 451 The Institute of Chartered Accountants of Pakistan

 208
Financial accounting and reporting II

09. Which of the following could be classified as development expenditure in Mars Limited’s statement of
financial position as at 31 March 2020 according to IAS 38 Intangible Assets?
(a) Rs. 120,000 spent on developing a prototype and testing a new type of propulsion system.
The project needs further work on it as the system is currently not viable.
(b) A payment of Rs. 50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques.
(c) Rs. 35,000 developing an electric bicycle. This is near completion and the product will be
launched soon. As this project is first of its kind it is expected to make a loss.
(d) Rs. 65,000 developing a special type of new packaging for a new energy-efficient light bulb.
The packaging is expected to reduce Mars Limited distribution costs by Rs. 35,000 a year.

10. Which TWO of the following factors are reasons why key staff cannot be capitalised as an intangible
asset by an entity?
(a) They do not provide expected future economic benefits
(b) They cannot be controlled by an entity
(c) Their value cannot be measured reliably
(d) They are not separable from the business as a whole

11. Which of the following items should be recognised as intangible assets?

(i) Patent for new drug
(ii) Licence for new vaccine
(iii) Specialist training courses
(a) (i) and (ii)
(b) (ii) and(iii)
(c) (i) and (iii)
(d) (i) only

12. Home Limited (HL) has acquired a subsidiary Stairs Limited (SL) in the current year. SL has a brand
which has been reliably valued by HL at Rs. 500,000, and a customer list which HL has been unable
to value.
Which of these describes how HL should treat these intangible assets of SL in their consolidated
Financial Statements?
(a) They should be included in goodwill.
(b) The brand should be capitalised as a separate intangible asset, whereas the customer list
should be included within goodwill.
(c) Both the brand and the customer list should be capitalised as separate intangible assets.
(d) The customer list should be capitalised as a separate intangible asset, whereas the brand
should be included within goodwill.

© Emile Woolf International 452 The Institute of Chartered Accountants of Pakistan

 209
Chapter 10: IAS 38: Intangible assets

13. IAS 38 gives examples of activities that would be regarded as research and therefore not eligible for
recognition as an intangible asset.
Which one of the following would be an example of research costs?
(a) The design and construction of chosen alternative products or processes
(b) The design of pre-production prototypes and models
(c) The design of possible new or improved product or process alternatives
(d) The design, construction and operation of a pilot plant

14. Which of the following statements relating to intangible assets is true?

(a) All intangible assets must be carried at amortised cost or at an impaired amount, they cannot
be revalued upwards.
(b) The development of a new process which is not expected to increase sales revenues may
still be recognised as an intangible asset.
(c) Expenditure on the prototype of a new engine cannot be classified as an intangible asset
because the prototype has physical substance.
(d) Impairment losses for a cash generating unit are first applied to goodwill and then to other
intangible assets before being applied to tangible assets.

15. Hali Limited is developing a new product and expects to be able to capitalise the costs. Which one of
the following would preclude capitalisation of the costs?
(a) Development of the product is not yet complete.
(b) No patent has yet been registered in respect of the product.
(c) No sales contracts have yet been signed in relation to the product.
(d) It has not been possible to reliably allocate costs to development of the product.

16. During the year to 31 December 2018 Faiz Limited (FL) incurred Rs. 200,000 of development costs
for a new product. In addition, FL spent Rs. 60,000 on 1 January 2018 on machinery specifically used
to help develop the new product and Rs. 40,000 on building the brand identity.
Commercial production is expected to start during 2019.
The machinery is expected to last 4 years with no residual value.
What value should be included within Intangible Assets in respect of the above in FL’s Statement of
Financial Position as at 31 December 2018?

Rs. ___________

17. A company had Rs. 20 million of capitalised development expenditure at cost brought forward at 1
October 2017 in respect of products currently in production and a new project began on the same date.
The research stage of the new project lasted until 31 December 2017 and incurred Rs. 1.4 million of
costs. From that date the project incurred development costs of Rs. 800,000 per month.
On 1 April 2018 the directors became confident that the project would be successful and yield a profit
well in excess of costs. The project was still in development at 30 September 2018. Capitalised
development expenditure is amortised at 20% per annum using the straight-line method.

© Emile Woolf International 453 The Institute of Chartered Accountants of Pakistan

 210
Financial accounting and reporting II

What amount will be charged to profit or loss for the year ended 30 September 2018 in respect of
research and development costs?

Rs. ___________

18. At 30 September 2019 Shakir Limited (SL)'s trial balance showed a brand at cost of Rs. 30 million,
less accumulated amortisation brought forward at 1 October 2018 of Rs. 9 million. Amortisation is
based on a ten-year useful life.
An impairment review on 1 April 2019 concluded that the brand had a value in use of Rs. 12 million
and a remaining useful life of three years. However, on the same date SL received an offer to purchase
the brand for Rs. 15 million.
What should be the carrying amount of the brand in the statement of financial position of SL as at 30
September 2019?

Rs. ___________
19. Down Limited (DL) owns a pharmaceutical business with a year-end of 30 September 2014. DL
commenced the development stage of a new drug on 1 January 2014.
Rs. 40,000 per month was incurred until the project was completed on 30 June 2014, when the drug
went into immediate production. The directors became confident of the project’s success on 1 March
2014. The drug has an estimated life span of five years and time apportionment is used by DL where
applicable.
What amount will DL charge to profit or loss for development costs, including any amortisation, for the
year ended 30 September 2014?

Rs. ___________

20. Apollo Limited (AL) carries out research and development. In the year ended 30 June 2015 AL incurred
total costs in relation to project M of Rs. 750,000, spending the same amount each month up to 30
April 2015, when the project was completed. The product produced by the project went on sale from
31 May 2015.
The project had been confirmed as feasible on 1 January 2015, and the product produced by the
project was expected to have a useful life of five years.
What is the carrying amount of the development expenditure asset as at 30 June 2015?

Rs. ___________

© Emile Woolf International 454 The Institute of Chartered Accountants of Pakistan

 211
Chapter 10: IAS 38: Intangible assets

7 OBJECTIVE BASED ANSWERS

01. (c) Rs. 200,000 is research and should be written off as incurred.
Rs. 400,000 should be capitalised as a development asset but is not amortised
until commercial production begins.

02. (a) & (d) Training cannot be capitalised as a firm cannot control the future economic
benefits by limiting the access of others to the staff.
Internally generated brands cannot be capitalised

03. (b) The expenditure in relation to projects A and B should be written off.
Project C should be capitalised and will therefore increase the value of non-current
assets.

04. (d) All the statements are true.

05. (d) Internally generated intangible assets cannot be recognised, and research costs
are written off as incurred.

06. (a) & (c) There is no need for revenue, there needs to be probable economic benefits which
may come in the form of cost savings as well as revenue.

07. (a) Cost savings are inflow of economic benefits as well.

08. (a) The finance was only available after the year end. Therefore, the criteria of
recognising an asset were not met, as the resources were not available to
complete the project.
Even though the brand is internally generated in the subsidiary’s accounts, it can
be recognised at fair value for the group. Item (b) can be recognised as a
purchased intangible and item (d) meets the criteria for being capitalised as
development costs.

09. (d) Item (a) cannot be capitalised because it does not meet all the criteria as it is not
viable. Item (b) is research and cannot be capitalised. Item (c) cannot be
capitalised because it does not meet all the criteria as it is making a loss.

10. (b) & (c) Key staff cannot be capitalised as firstly they are not controlled by an entity.
Secondly, the value that one member of key staff contributes to an entity cannot
be measured reliably.

11. (a) The training courses should be charged to profit or loss.

12. (b) The brand can be measured reliably, so this should be accounted for as a separate
intangible asset on consolidation. The customer list cannot be valued reliably, and
so will form part of the overall goodwill calculation. It will be subsumed within the
goodwill value.

13. (c) This activity is still at the research stage.

14. (b) A new process may produce benefits (and therefore be recognised as an asset)
other than increased revenues, e.g. it may reduce costs.

15. (d) In order for capitalisation to be allowed it is not necessary for development to be
completed, patents to be registered or sales contracts signed. However, an
intangible asset can only be recognised if its cost can be reliably measured.

© Emile Woolf International 455 The Institute of Chartered Accountants of Pakistan

 212
Financial accounting and reporting II

16. Rs. 215,000 The development costs of Rs. 200,000 can be capitalised, as can the depreciation
on the asset while the project is being developed. The asset is used for a year on
the project, so the depreciation for the first year (Rs. 60,000/4 years = Rs. 15,000)
can be added to intangible assets. The Rs. 40,000 is an internally generated brand
and cannot be capitalised.

17. Rs. 7,800,000

Rs.
Research costs 1,400,000
Expensed development Jan-Mar (800 × 3) 2,400,000
Depreciation on capitalised amount b/f (20m × 20%) 4,000,000
7,800,000

Note that no depreciation is charged on the new project as it is still in development.

18. Rs. 12,500,000

Rs. m
Recoverable amount (fair value - costs of disposal) 15.0
Less depreciation 1.4.X9 – 30.9.X9 (15m / 3 × 6/12) ( 2.5)
12.5

19. Rs. 88,000

Rs.
Write off to 1 Jan 2014 to 28 Feb 2014 (2 x 40,000) 80,000
Capitalise March to June = 4 x 40,000 = 160,000
Amortisation 160,000/5 years x 3/12 (July to Sep) 8,000
88,000

20. Rs. 295,000 The costs of Rs. 750,000 relate to ten months of the year (up to April 2015).
Therefore, the costs per month were Rs. 75,000. As the project was confirmed as
feasible on 1 January 2015, the costs can be capitalised from this date. So, four
months of these costs can be capitalised = Rs. 75,000 × 4 = Rs. 300,000.
The asset should be amortised from when the products go on sale, so one month’s
amortisation should be charged to 30 June 2015. Amortisation is (Rs. 300,000/5)
× 1/12 = Rs. 5,000. The carrying amount of the asset at 30 June 2015 is Rs.
300,000 – Rs. 5,000 = Rs. 295,000.

© Emile Woolf International 456 The Institute of Chartered Accountants of Pakistan

 213

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
12
Financial instruments:
Recognition and measurement

Contents
1 Key Definitions
2 GAAP for financial instruments
3 IFRS 9: Recognition and measurement
4 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 479 The Institute of Chartered Accountants of Pakistan

 214
Chapter 12: Financial instruments: Recognition and measurement

4 OBJECTIVE BASED QUESTIONS

01. For a debt investment to be held under amortized cost, it must pass two tests. One of these is the
contractual cash flow characteristics test.
What is the other test which must be passed?

(a) The purchase agreement test

(b) The amortized cost test
(c) The business model test
(d) The fair value test

02. What is the default classification for an equity investment?

(a) Fair value through profit or loss
(b) Fair value through other comprehensive income
(c) Amortized cost
(d) Net proceeds

03. Diamond Limited purchased 10,000 shares on 1 September 2014, making the election to use the
alternative treatment under IFRS 9. The shares cost Rs. 35 each. Transaction costs associated with
the purchase were Rs. 5,000.
At 31 December 2014, the shares are trading at Rs. 45 each.
What is the gain to be recognized on these shares for the year ended 31 December 2014?

(a) Rs. 100,000

(b) Rs. 450,000
(c) Rs. 95,000
(d) Rs. 350,000

04. Copper Limited has purchased an investment of 15,000 shares on 1 August 2016 at a cost of Rs. 65
each. Copper Limited intend to sell these shares in the short term and are holding them for trading
purposes. Transaction costs on the purchase amounted to Rs. 15,000.
As at the year-end 30 September 2016, these shares are now worth Rs. 77.5 each.
What is the gain on this investment during the year ended 30 September 2016, and where in the
Financial Statements will it be recognized?

(a) Rs. 187,500 in Other Comprehensive Income

(b) Rs. 187,500 in Profit or Loss
(c) Rs. 172,500 in Other Comprehensive Income
(d) Rs. 172,500 in Profit or Loss

05. For which category of financial instruments are transaction costs excluded from the initial value, and
instead expensed to profit or loss?
(a) Financial Liabilities at amortized cost
(b) Financial Assets at fair value through profit or loss

© Emile Woolf International 495 The Institute of Chartered Accountants of Pakistan

 215
Financial accounting and reporting II

(c) Financial Assets at fair value through other comprehensive income

(d) Financial Assets at amortized cost

06. If a company had incurred transaction costs in issuing debentures, how should these have been
accounted for?
(a) Added to the proceeds of the debentures
(b) Deducted from the proceeds of the debentures
(c) Amortized over the life of the debentures
(d) Charged to finance costs

07. Sodium Limited (SL) purchased a debt instrument which will mature in five years' time. SL intends to
hold the debt instrument to maturity to collect interest payments. How should this debt instrument be
measured in the financial statements of SL?
(a) As a financial liability at fair value through profit or loss
(b) As a financial liability at amortized cost
(c) As a financial asset at fair value through profit or loss
(d) As a financial asset at amortized cost

08. A 5% debenture was issued on 1 April 2010 at total face value of Rs. 20 million. Direct costs of the
issue were Rs. 500,000. The debenture will be redeemed on 31 March 2013 at a substantial premium.
The effective interest rate applicable is 10% per annum.
At what amount will the debenture appear in the statement of financial position as at 31 March 2012?

(a) Rs. 21,000,000

(b) Rs. 20,450,000
(c) Rs. 22,100,000
(d) Rs. 21,495,000

09. How does IFRS 9 Financial Instruments require investments in equity instruments to be measured
and accounted for (in the absence of any election at initial recognition)?
(a) Fair value with changes going through profit or loss
(b) Fair value with changes going through other comprehensive income
(c) Amortized cost with changes going through profit or loss
(d) Amortized cost with changes going through other comprehensive income

10. On 1 January 2011 Oxygen Limited purchased a debt instrument for its fair value of Rs. 500,000. It
had a principal amount of Rs. 550,000 and was due to mature in five years. The debt instrument
carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%. It is held
at amortized cost. At what amount will the debt instrument be shown in the statement of financial
position of Oxygen Limited as at 31 December 2012?
(a) Rs. 514,560
(b) Rs. 566,000
(c) Rs. 564,560
(d) Rs. 520,800

© Emile Woolf International 496 The Institute of Chartered Accountants of Pakistan

 216
Chapter 12: Financial instruments: Recognition and measurement

11. Which of the following are not classified as financial instruments under IAS 32?
(a) Share options
(b) Intangible assets
(c) Trade receivables
(d) Redeemable preference shares

12. In order to hold a debt instrument at amortized cost, which TWO of the following tests must be applied?
(a) Fair value test
(b) Contractual cash flow characteristics test
(c) Investment appraisal test
(d) Business model test

13. Nickel Limited is uncertain of how to treat professional fees. For which of the following investments
should professional fees NOT be capitalized as part of initial value of the asset?
(a) Acquisition of a patent
(b) Acquisition of investment property
(c) Acquisition of fair value through other comprehensive income investments
(d) Acquisition of fair value through profit or loss investments

14. Iron Limited has 5% Rs. 30 million redeemable preference shares in issue which will be redeemed in
5 years’ time.
How should the preference share capital and preference dividend be presented in the financial
statements of Iron Limited?

(a) Preference share capital as equity and preference dividend in the statement of changes in
equity
(b) Preference share capital as equity and preference dividend in the statement of profit or loss
(c) Preference share capital as a liability and preference dividend in the statement of changes in
equity
(d) Preference share capital as a liability and preference dividend in the statement of profit or
loss

15. Mercury Limited purchased 1 million shares in Jupiter Limited, a listed company, for Rs. 40 million on
1 January 2017. By the year end, 31 December 2017, the fair value of a Jupiter Limited’s share had
moved to Rs. 48. If Mercury Limited were to dispose of the shares, broker fees of Rs. 500,000 would
be incurred.
What is the correct treatment for shares at year end?
(a) Hold shares in investments at Rs.47.5 million, with Rs. 7.5 million gain being taken to the
statement of profit or loss
(b) Hold shares in investments at Rs. 48 million, with Rs. 8 million gain being taken to the
statement of profit or loss

© Emile Woolf International 497 The Institute of Chartered Accountants of Pakistan

 217
Financial accounting and reporting II

(c) Hold shares in investments at Rs. 48 million, with Rs. 8 million gain shown in the statement
of changes in equity
(d) Hold shares in investments at Rs. 48 million, with Rs. 7.5 million gain shown in the statement
of changes in equity

16. Gold Limited’s draft statement of financial position as at 31 March 2018 shows financial assets at fair
value through profit or loss with a carrying amount of Rs. 12.5 million as at 1 April [Link] financial
assets are held in a fund whose value changes directly in proportion to a specified market index. At 1
April 2017 the relevant index was 1,200 and at 31 March 2018 it was 1,296. What amount of gain or
loss should be recognized at 31 March 2018 in respect of these assets?

Rs. ___________

17. On 1 January 2018 Silver Limited purchased 40,000 Rs. 10 listed equity shares at a price of Rs. 30
per share. An irrevocable election was made to recognize the shares at fair value through other
comprehensive income.
Transaction costs were Rs. 30,000. At the year end of 31 December 2018, the shares were trading at
Rs. 60 per share.
What amount in respect of these shares will be shown under 'investments in equity instruments' in the
statement of financial position as at 31 December 2018?

Rs. ___________

18. An entity acquires a 6% Rs. 1,000 Term Finance Certificate (TFC), a financial asset, for Rs. 970 at
the beginning of Year 1. Interest is receivable annually in arrears.
The TFC is redeemable at the end of Year 3 at a premium of 3%. The financial asset is measured at
amortized cost. The effective interest rate of the financial instrument has been calculated at 8.1%.
Calculate the closing statement of financial position figure at the end of Year 2. Work to the nearest
Rupee.

Rs. ___________

19. Wasim Limited issued Rs. 10 million 5% debentures on 1 January 2019, incurring issue costs of
Rs.400, 000. The debentures are redeemable at a premium, giving them an effective interest rate of
8%.
What expense should be recorded in relation to the debentures for the year ended 31 December
2019?

Rs. ___________

20. Platinum Limited issues Rs.100 million 5% debentures on 1 January 2014, incurring issue costs of
Rs.3 million.
These debentures are redeemable at a premium, meaning that the effective rate of interest is 8% per
annum.
What is the finance cost to be shown in the statement of profit or loss for the year ended 31 December
2015?

Rs. ___________ million (rounded to two decimal points)

© Emile Woolf International 498 The Institute of Chartered Accountants of Pakistan

 218
Chapter 12: Financial instruments: Recognition and measurement

4 OBJECTIVE BASED ANSWERS

01. (c) The business model test must also be passed, which means that the objective is
to hold the instrument to collect the cash flows rather than to sell the asset. The
others are irrelevant.

02. (a) The default position for equity investments is fair value through profit or loss,
meaning the investment is revalued each year end, with the gain or loss being
taken to the statement of profit or loss.

03. (c) The investment should be classified as Fair Value through other comprehensive
income.
As such, they will initially be valued inclusive of transaction costs.
Therefore, the initial value is 10,000 × Rs. 35 = Rs. 350,000 + Rs. 5,000 = Rs.
355,000.
At year-end, these will be revalued to fair value of Rs. 45 each, therefore 10,000
x Rs. 45 = Rs. 450,000.
The gain is therefore Rs. 450,000 – Rs. 355,000 = Rs. 95,000.

04. (b) Financial Assets held for trading will be valued at Fair Value through Profit or
Loss. These are therefore valued excluding any transaction costs (which will be
expensed to profit or loss). The initial value of the investment is therefore 15,000
× Rs. 65 = Rs. 975,000
The shares will be revalued to fair value as at year end, and the gain will be taken
to profit or loss. The year-end value of the shares is 15,000 × Rs. 77.5 = Rs.
1,162,500, giving a gain of Rs. 187,500. This is recognized within profit or loss.

05. (b) Transaction costs are included when measuring all financial assets and liabilities
at amortized costs, and when valuing financial assets valued at fair value through
other comprehensive income.
Financial assets valued at fair value through profit or loss are expensed through
the profit or loss account on initial valuation and not included in the initial value of
the asset.

06. (b) Deducted from the proceeds of the debentures. The effective interest rate is then
applied to the net amount.

07. (d) As a financial asset at amortized cost

08. (d)
Rs. '000
Proceeds (20m – 0.5m) 19,500
Interest 10% 1,950
Interest paid (20m × 5%) (1,000)
Balance 30 March 2011 20,450
Interest 10% 2,045
Interest paid (20m × 5%) (1,000)
Balance 30 March 2012 21,495

© Emile Woolf International 499 The Institute of Chartered Accountants of Pakistan

 219
Financial accounting and reporting II

09. (a) Fair value with changes going through profit or loss. Fair value through OCI would
be correct if an election had been made to recognize changes in value through
other comprehensive income. Amortized cost is used for debt instruments, not
equity instruments.

10. (a)
Rs.
1 January 2011 500,000
Interest 8% 40,000
Interest received (550,000 × 6%) (33,000)
31 December 2011 507,000
Interest 8% 40,560
Interest received (33,000)
31 December 2012 514,560

11. (b) Intangible assets. These do not give rise to a present right to receive cash or
other financial assets. The other options are financial instruments

12. (b) & (d) The other options are irrelevant.

13. (d) Transactions costs including professional fees are expensed in case of
investments classified as fair value through profit or loss

14. (d) Redeemable preference shares will be shown as a liability, with the payments
being shown as finance costs.

15. (b) The default category for equity investments is fair value through profit or loss so
the investments should be revalued to fair value (not fair value less costs to sell),
with the gain or loss taken to the statement of profit or loss.

16. Rs. 1,000,000

gain Rs. '000
Rs. 12,500 × 1,296 / 1,200 13,500
Carrying amount (12,500)
Gain 1,000

17. Rs. 2,400,000 40,000 shares @ Rs. 60 = Rs. 2,400,000

18. Rs. 1,009

Rs.
1 January Y1 970
Interest 8.1% 79
Interest received (1,000 × 6%) (60)
31 December y1 989
Interest 8.1% 80
Interest received (1,000 × 6%) (60)
31 December Y2 1,009

© Emile Woolf International 500 The Institute of Chartered Accountants of Pakistan

 220
Chapter 12: Financial instruments: Recognition and measurement

19. Rs. 768,000 The initial liability should be recorded at the net proceeds of Rs. 9.6 million. The
finance cost should then be accounted for using the effective rate of interest of
8%. Therefore, the finance cost for the year is Rs. 768,000 (Rs. 9.6 million × 8%).

20. Rs. 7.98 Initial recognition Rs. 100 million – Rs. 3 million = Rs. 97 million
million
Rs. million
1 January 2014 97
Interest 8% 7.76
Interest received (100 × 5%) (5)
31 December 2014 99.76
Interest 8% 7.98

© Emile Woolf International 501 The Institute of Chartered Accountants of Pakistan

 221

Certificate in Accounting and Finance

Financial accounting and reporting II

CHAPTER
13
IFRS 16: Leases

Contents
1 Key Definitions
2 Introduction
3 Lease classification
4 Accounting for lease by Lessee
5 Accounting for a finance lease: Lessor accounting
6 Accounting for an operating lease
7 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 503 The Institute of Chartered Accountants of Pakistan

 222
Financial accounting and reporting II

7 OBJECTIVE BASED QUESTIONS

01. During the year ended 30 September 2014 an entity entered into two lease transactions.
On 1 October 2013, the entity made a payment of Rs. 900,000 being the first of five equal annual
payments under a lease for an item of plant. The lease has an implicit interest rate of 10% and the
present value of the total lease payments on 1 October 2013 was Rs. 3,752,879.
On 1 January 2014, the entity made a payment of Rs. 180,000 for a one-year lease of an item of
equipment.
What amount in total would be charged to entity’s statement of profit or loss for the year ended 30
September 2014 in respect of the above transactions?

(a) Rs. 1,080,000

(b) Rs. 1,110,864

(c) Rs. 1,170,864

(d) Rs. 1,155,000

02. Zeta Limited entered into a five-year lease agreement on 1 November 2012, paying Rs. 109,750 per
annum, commencing on 31 October 2013. The present value of the lease payments was Rs. 450,000
and the interest rate implicit in the lease was 7%.
What is the amount to be shown within non-current liabilities at 31 October 2013?

(a) Rs. 262,072

(b) Rs. 288,023

(c) Rs. 371,750

(d) Rs. 364,070

03. IFRS 16 Leases permits certain assets to be exempt from the recognition treatment for right-of-use
assets. Which of the following assets leased to an entity would be permitted to be exempt?

(a) A used motor vehicle with an original cost of Rs. 1,500,000 and a current fair value of Rs.
70,000, leased for 24 months

(b) A new motor vehicle with a cost of Rs. 1,500,000, leased for 24 months

(c) A new motor vehicle with a cost of Rs. 1,500,000, leased for 24 months, to be rented to
customers on a daily rental basis

(d) A new motor vehicle with a cost of Rs. 1,500,000, leased for 12 months

04. On 1 January 2013 Rita Limited acquires a new machine with an estimated useful life of 6 years under
the following agreement:
An initial payment of Rs. 1,376,000 will be payable immediately and 5 further annual payments of Rs.
2,000,000 will be due, commencing 1 January 2013. The interest rate implicit in the lease is 8%.
The present value of the lease payments, excluding the initial payment, is Rs. 8,624,000
What will be recorded in financial statements at 31 December 2014 in respect of the lease liability?

© Emile Woolf International 546 The Institute of Chartered Accountants of Pakistan

 223
Chapter 13: IFRS 16: Leases

(a) Finance cost Rs. 412,314

Non-current liability Rs. 3,566,234
Current liability (including interest payable) Rs. 2,000,000

(b) Finance cost Rs. 529,900

Non-current liability Rs. 5,153,900
Current liability (including interest payable) Rs. 2,000,000

(c) Finance cost Rs. 531,200

Non-current liability Rs. 5,171,200
Current liability (including interest payable) Rs. 2,000,000

(d) Finance cost Rs. 585,100

Non-current liability Rs. 4,370,900
Current liability (including interest payable) Rs.1,528,100

05. On 1 April 2017 Pink Limited (PL) entered into a five-year lease agreement for a machine with an
estimated life of 7 years. Which of the following conditions would require the machine to be depreciated
over 7 years?

(a) PL has the option to extend the lease for two years at a market-rate rental

(b) PL has the option to purchase the asset at market value at the end of the lease

(c) Ownership of the asset passes to PL at the end of the lease period

(d) PL’s policy for purchased assets is to depreciate over 7 years

06. On 1 January 2014 Beta Limited (BL) entered into a lease agreement to lease an item of machinery
for 4 years with rentals of Rs. 210,000 payable annually in arrears. The asset has a useful life of 5
years and at the end of the lease term legal ownership will pass to BL. The present value of the lease
payments at the inception of the lease was Rs. 635,000 and the interest rate implicit in the lease is
12.2%.
For the year ended 31 December 2014 BL accounted for this lease by recording the payment of Rs.
210,000 as an operating expense. This treatment was discovered during 2015, after the financial
statements for 2014 had been finalised.
In the statement of changes in equity for the year ended 31 December 2015 what adjustment will be
necessary to retained earnings brought forward?

(a) Rs. 5,530 credit

(b) Rs. 132,530 credit

(c) Rs. 210,000 debit

(d) Rs. Nil

07. On 1 October 2013, Multan Limited acquired an item of plant under a five-year lease agreement.
The agreement had an implicit interest rate of 10% and required annual rentals of Rs. 6 million to be
paid on 30 September each year for five years.

© Emile Woolf International 547 The Institute of Chartered Accountants of Pakistan

 224
Financial accounting and reporting II

The present value of the annual rental payments was Rs. 23 million.
What would be the current liability for the leased plant in Multan Limited’s statement of financial
position as at 30 September 2014?

(a) Rs. 19,300,000

(b) Rs. 4,070,000

(c) Rs. 5,000,000

(d) Rs. 3,850,000

08. Which of the following would not be included within the initial cost of a right-of-use asset?

(a) Installation cost of the asset

(b) Estimated cost of dismantling the asset at the end of the lease period

(c) Payments made to the lessor before commencement of the lease

(d) Total lease rentals payable under the lease agreement

09. IFRS 16 Leases permits certain assets to be exempt from the recognition treatment for right-of-use
assets. Which of the following leases of assets leased to an entity would NOT be permitted to be
exempt?

(a) Vehicle with cost of Rs. 900,000 leased for 9 months

(b) Telephone system with cost of Rs. 45,000 leased for 24 months

(c) Vehicle with original cost of Rs. 900,000, current market value of Rs. 45,000 leased for 24
months

(d) An item of furniture of Rs. 30,000 leased for 24 months

10. Noor Limited leases a car for office use. The present value of lease payments is Rs. 2,735,500 and
the rate implicit in lease is 10%. The terms of the lease require three annual instalments of Rs.
1,000,000 each at the start of each year.
At the end of first year of lease what amount will be shown for the lease liability in the company’s
statement of financial position under the heading of non-current liabilities?

(a) Rs. 1,000,000

(b) Rs. 1,090,000

(c) Rs. 903,060

(d) Rs. 909,050

11. Which TWOof the following are disclosure requirements relating to a lessor?

(a) Selling profit or loss

(b) Income from subleasing right of use assets

© Emile Woolf International 548 The Institute of Chartered Accountants of Pakistan

 225
Chapter 13: IFRS 16: Leases

(c) A reconciliation of undiscounted lease payments to the net investment in the lease

(d) The charge related to short term leases

12. Jalal Leasing Limited (JLL) gave a plant under finance lease on 1 January 2011 to a customer. The
lease term is 4 years. The fair value of the asset is Rs. 11,000 and JL incurred initial direct costs of
Rs. 420. The interest rate implicit in lease is 15%. Rentals of Rs. 4,000 are receivable on 31 December
(also financial year end) each year.
What is amount of net investment in lease to be presented under current assets as at 31 December
2012?

(a) Rs. 9,133

(b) Rs. 2,630

(c) Rs. 3,025

(d) Rs. 6,503

13. A company leases a computer server with legal title of the asset passing after four years. The company
usually depreciate computers over six years.
The company also leases a machine for fourteen years, but legal title does not pass to the lessee at
the end of the agreement. The company usually depreciate machinery over twenty years.
Over what period of time should the computer and machine be depreciated?

(a) Computer (4 years) and Machine (14 years)

(b) Computer (4 years) and Machine (20 years)

(c) Computer (6 years) and Machine (14 years)

(d) Computer (6 years) and Machine (20 years)

14. Faheem Limited (FL) leased out its building on 1 January 2011 under an operating lease. The carrying
value of building is Rs. 239,000 and its remaining useful life is 25 years with no residual value.
FL also incurred Rs. 11,000 as initial direct costs. According to agreement, Rs. 16,000 was paid by
lessee as initial deposit and further rental of Rs. 10,000 per annum. shall be paid at the end of next
two years and then Rs. 32,000 per annum. shall be paid for following two years.
The lease term is 4 years.
What amount of lease income should be recognised in profit or loss for the year ended 31 December
2011?

(a) Rs. 10,000

(b) Rs. 26,000

(c) Rs. 25,000

(d) Rs. 16,000

© Emile Woolf International 549 The Institute of Chartered Accountants of Pakistan

 226
Financial accounting and reporting II

15. Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on 1 July 2013.
In this respect, the following information is available:

Rs. in million

Cost of equipment 28.69

Amount received on 1 July 2013 3.00

Four annual installments payable in arrears (on 30 June, each year) 7.80

Guaranteed residual value on expiry of the lease 5.00

Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
What amount will be presented in non-current assets for net investment in lease as at 30 June 2014?

(a) Rs. 25.69 million

(b) Rs. 24.48 million

(c) Rs. 18.60 million

(d) Rs. 16.69 million

16. Alpha Limited leases an asset with an estimated useful life of 6 years for an initial period of 5 years,
and an optional secondary period of 2 years during which a nominal rental will be payable.
The present value of the initial period lease payments is Rs. 870,000.
What will be the carrying amount of the asset in Alpha Limited's statement of financial position at the
end of the second year of the lease?

Rs. ___________

17. Kamil Limited (KL) is engaged in manufacturing of plants. The following data relates to an asset leased
out by the company on January 01, 2011.
Cost Rs. 200,000
Sales price (quoted) Rs. 240,000
Installment at the end of each year Rs. 40,000
Lease term 7 years
Unguaranteed residual value Rs. 2,000
Initial direct costs Rs. 1,000
Rate of interest (quoted) 4%
(the low rate is quoted to attract customers)
Market rate of interest 7%
What is the amount of net investment in lease as at January 01, 2011?

Rs. ___________

© Emile Woolf International 550 The Institute of Chartered Accountants of Pakistan

 227
Chapter 13: IFRS 16: Leases

18. Kamil Limited (KL) is engaged in manufacturing of plants. The following data relates to an asset leased
out by the company on January 01, 2011.
Cost Rs. 200,000
Sales price (quoted) Rs. 240,000
Installment at the end of each year Rs. 40,000
Lease term 7 years
Unguaranteed residual value Rs. 2,000
Initial direct costs Rs. 1,000
Rate of interest (quoted) 4%
(the low rate is quoted to attract customers)
Market rate of interest 7%
What is the amount to be charged in cost of sales in respect of above transaction on January 01,
2011?

Rs. ___________

19. DJ Products deals in large office machines. It also offers such machines on lease. One such machine
was leased to a customer on July 1, 2004. Its particulars are as follows:

Purchase cost of DJ Products Rs. 150,000

Useful life 8 years
Lease period 6 years
Unguaranteed residual value Rs. 10,000
Annual rental payable at beginning of each year Rs. 36,500

The customer's incremental borrowing rate is 10% whereas the discounting rate implicit in the lease
is 8%.
What is amount of net investment in lease that should be recognised on 1 st July 2004?

Rs. ___________

20. Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on
the following terms:
(i) The non-cancellable lease period is 3.5 years. Each semi-annual lease installment of Rs. 48
million is receivable in arrears.
(ii) The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease
instalment in the extended period will be of Rs. 15 million, receivable in arrears. It is
reasonably certain that HL will exercise this option.
(iii) The rate implicit in the lease is 10% per annum.
(iv) The useful life of machinery is 6 years.
(v) The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million. GLL
incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete
the transaction.
(vi) The net investment in lease at inception of lease has been calculated i.e. Rs. 319.06 million
What is the amount of interest income to be recognised in profit or loss for the year ended 30 June
2018?

Rs. _________ million

© Emile Woolf International 551 The Institute of Chartered Accountants of Pakistan

 228
Financial accounting and reporting II

6 OBJECTIVE BASED ANSWERS

01. (c) Depreciation of leased plant Rs. 750,576 (Rs. 3,752,879/5 years)
Finance cost Rs. 285,288 ((Rs.3,752,879 – 900,000) × 10%)
Rental of equipment (short term lease) Rs. 135,000 (180,000 × 9/12)
Total Rs. 1,170,864

02. (b)
Balance at Interest Principal Balance at
Time Rental
beginning @ 7% Element end
T Rupees
31.10.2013 450,000 31,500 109,750 (78,250) 371,750
31.10.2014 371,750 26,023 109,750 (83,727) 288,023

03. (d) Assets permitted to be exempted from recognition are low-value assets and those with a
lease term of 12 months or less. The use of the asset is irrelevant, and, although IFRS 16
Leases does not define low-value, it is the cost when new that is considered rather than
current fair value.

04. (a)
Time Opening Payment Subtotal Interest 8% Closing
Rupees
2013 8,624,000 (2,000,000) 6,624,000 529,920 7,153,920
2014 7,153,920 (2,000,000) 5,153,920 412,314 5,566,234
2015 5,566,234 (2,000,000) 3,566,234

05. (c) The transfer of ownership at the end of the lease indicates that PL will have use of the
asset for its entire life, and therefore 7 years is the appropriate depreciation period.
Potential transactions at market rate would be ignored as they do not confer any benefit
on PL, and PL’s depreciation policy for purchased assets is irrelevant.

06. (a) Reverse incorrect treatment of rental:

Dr Liability Rs. 210,000
Cr Retained Earnings Rs. 210,000

Charge asset depreciation (Rs. 635,000/5):

Dr Retained earnings Rs. 127,000
Cr Property, plant and equipment Rs. 127,000

Charge finance cost (Rs. 635,000 × 12.2%):

Dr Retained Earnings Rs. 77,470
Cr Liability Rs. 77,470

This gives a net adjustment of Rs. 5,530 to be credited to opening retained earnings.

© Emile Woolf International 552 The Institute of Chartered Accountants of Pakistan

 229
Chapter 13: IFRS 16: Leases

07. (b)
Balance at Interest @ Principal Balance at
Time Rental
beginning 10% Element end
T Rupees
30.09.14 23,000,000 2,300,000 6,000,000 (3,700,000) 19,300,000
30.09.15 19,300,000 1,930,000 6,000,000 (4,070,000)

08. (d) The value recognised in respect of the lease payments will be the present value of future
lease payments rather than the total value.

09. (c) Assets permitted to be exempted from recognition are low-value assets and those with a
lease term of 12 months or less. Although IFRS 16 Leases does not define low-value but
it lists examples which includes telephones and small items of furniture. Low value is
based on original cost and not on current market value.

10. (d)
Time Opening Payment Subtotal Interest 10% Closing
Rupees
1 2,735,500 (1,000,000) 1,735,500 173,550 1,909,050
2 1,909,050 (1,000,000) 909,050

11. (a) & (c) (b) and (d) are relevant to lessee not lessor.

12. (c)
Receivable at Interest Principal Receivable
Receipt time Rental
beginning @ 15% Element after receipt
T Rupees
31.12.2011 11,420 1,713 4,000 (2,287) 9,133
31.12.2012 9,133 1,370 4,000 (2,630) 6,503
31.12.2013 6,503 975 4,000 (3,025)

13. (c) Assets are usually depreciated over lease term, however, if ownership is transferred these
should be depreciated over useful life.

14. (c) Total payments = Rs. 16,000 + (10,000 x2) + (32,000 x 20 = Rs. 100,000
On straight line basis over four years Rs. 100,000 / 4 = Rs. 25,000

15. (d)
Opening Interest payments Principal Closing
Date balance @ 14% repayments balance
------------------------------ Rs. in million ------------------------------
01-Jul-2013 28.69 (3.00) (3.00) 25.69
30-Jun-2014 25.69 3.59 (7.80) (4.21) 21.48
30-Jun-2015 21.48 3.01 (7.80) (4.79) 16.69

© Emile Woolf International 553 The Institute of Chartered Accountants of Pakistan

 230
Financial accounting and reporting II

16. Rs. The asset would initially be capitalised at Rs. 870,000. This is then depreciated over six
580,000 years, being the shorter of the useful life and the lease term (including any secondary
period).
This would give a depreciation expense of Rs. 140,500 a year. After two years,
accumulated depreciation would be Rs. 290,000 and therefore the carrying amount would
be Rs. 580,000.

17. Rs. PV of MLP Rs. 40,000 x 5.3893 discount factor @7% = Rs. 215,572
216,818
PV of UGRV Rs. 2,000 x 0.6227 discount factor @7% = Rs. 1,246
Total Rs. 216,818

18. Rs. Cost of inventory transferred Rs. 200,000 less present value of unguaranteed residual
198,754 value Rs. 1,246 = Rs. 198,754

19. Rs.
188,545 Cash payment Discount Present
Year Particulars
Rs. factor value Rs.
0 First rentals 36,500 1.000 36,500
1-5 Other 5 rentals 36,500 3.993 145,745
PV of Lease Payment 182,245
6 URV 10,000 0.630 6,300
PV of GI 188,545

20. Rs. 30.3

million Opening Interest @ payments Principal Closing
Date balance 10%x6/12 repayments balance
------------------------------ Rs. in million ------------------------------
31-Dec-17 319.06 15.95 (48) (32.05) 287.01
30-Jun-18 287.01 14.35 (48) (33.66) 253.36
30.3

© Emile Woolf International 554 The Institute of Chartered Accountants of Pakistan

 231

Certificate in Accounting and Finance

CHAPTER
Financial accounting and reporting II

14
Other areas of IFRSs
(IFRS 8, IAS 10, IAS 37)

Contents
1 Key Definitions
2 IFRS 8: Operating Segments
3 IAS 10: Events After the Reporting Period
4 IAS 37: Provisions: Recognition
5 IAS 37: Provisions: Measurement
6 IAS 37: Provisions: Double Entry and Disclosures
7 IAS 37: Guidance on Specific Provisions
8 IAS 37: Contingent Liabilities and Contingent Assets
9 Objective based questions and answers

* The student must refer original handbook of IFRS.

© Emile Woolf International 555 The Institute of Chartered Accountants of Pakistan

 232
Chapter 14: IFRS 8, IAS 37 and IAS 10

9 OBJECTIVE BASED QUESTIONS

01. Which of the following would NOT be valid reason for recording a provision?

(a) A company has a policy of cleaning up any environmental contamination caused by its operations
but is not legally obliged to do so.

(b) A company is leasing an office building for which it has no further use. However, it is tied into the
lease for another year.

(c) A company is closing down a division. The Board has prepared detailed closure plans which
have been communicated to customers and employees.

(d) A company has acquired a machine which requires a major overhaul every three years. The cost
of the first overhaul is reliably estimated at Rs. 1,200,000.

02. Which of the following statements are correct in accordance with IAS 37 Provisions, contingent liabilities
and contingent assets?
(i) Provisions should be made for both constructive and legal obligations.
(ii) Discounting may be used when estimating the amount of a provision.
(iii) A restructuring provision must include the estimated costs of retraining or relocating continuing
staff.
(iv) A restructuring provision may only be made when a company has a detailed plan for the
restructuring and has communicated to interested parties a firm intention to carry it out.

(a) All four statements are correct

(b) (i), (ii) and (iv) only

(c) (i), (iii) and (iv) only

(d) (ii) and (iii) only

03. Talal Limited (TL) year end is 30 September 2014 and the following potential liabilities have been
identified:
Which TWO of the following should TL recognise as liabilities as at 30 September 2014?

(a) The signing of a non-cancellable contract in September 2014 to supply goods in the following
year on which, due to a pricing error, a loss will be made.

(b) The cost of a reorganisation which was approved by the board in August 2014 but has not yet
been implemented, communicated to interested parties or announced publicly

(c) An amount of deferred tax relating to the gain on the revaluation of a property during the current
year. TL has no intention of selling the property in the foreseeable future.

(d) The balance on the warranty provision which related to products for which there are no
outstanding claims and whose warranties had expired by 30 September 2014

04. Iron Limited (IL) deals extensively with foreign entities, and its financial statements reflect these foreign
currency transactions. After SFP date, and before the “date of authorization” of the issuance of financial
statements, there were abnormal fluctuations in foreign currency rates. IL should:

© Emile Woolf International 613 The Institute of Chartered Accountants of Pakistan

 233
Financial accounting and reporting II

(a) Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in
foreign exchange rates.

(b) Adjust the foreign exchange year-end balances to reflect all abnormal fluctuations in foreign
exchange rates (and not just abnormal movements).

(c) Disclose the post-SFP event in the notes as a non-adjusting event.

(d) Ignore the post-SFP event.

05. The following information has been extracted from the records of Simple Limited (SL):
1. SL operates a chemical plant which has polluted the surrounding countryside. The Board of
Directors has decided to clean up the environmental damage. This decision has been published in
the local press on 15 June 2018. However, SL is not legally required to clean up the environmental
damage.
2. SL has decided to close down one of its operating segment. However, the decision was made public
after 30 June 2018.
In the financial statements for the year ended 30 June 2018, SL should recognize a provision for the
best estimate of costs in respect of:

(a) (1) only

(b) (2) only

(c) Neither (1) nor (2)

(d) Both (1) and (2)

06. Which of the following events arising after the year end is an adjusting event?

(a) The discovery of fraud or error which shows that financial statements are incorrect.

(b) Announcement of a plan to discontinue an operation.

(c) Destruction of a major production plant by fire.

(d) Restructuring of a major loan

07. Operating segment information should:

(i) increase the number of reported segments and provide more information
(ii) enable users to see an undertaking through the eyes of management
(iii) enable an undertaking to provide timely segment information for external interim reporting with
relatively low incremental cost
(iv) enhance consistency with the management discussion and analysis or other annual report
disclosures
(v) provide various measures of segment performance
(vi) provide information about reduced staff

(a) (i) to (iii) only

(b) (i) to (vi) all

© Emile Woolf International 614 The Institute of Chartered Accountants of Pakistan

 234
Chapter 14: IFRS 8, IAS 37 and IAS 10

(c) (i) to (iv) only

(d) (i) to (v) only

08. An operating segment is a component of an undertaking

(i) that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same
undertaking)
(ii) whose operating results are regularly reviewed by the undertaking’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance
(iii) for which discrete financial information is available
(iv) which is taxed separately from other components

(a) (i) to (ii) only

(b) (i) to (iii) only

(c) (i) to (iv) all

(d) (i), (ii) and (iv)

09. A component of an undertaking that sells primarily or exclusively to other operating segments of the
undertaking.

(a) It must be classed as an operating segment

(b) It must be excluded from being an operating segment

(c) It is included as an operating segment if the undertaking is managed that way

(d) It is included as an operating segment if the management so desires

10. IFRS 8 shall apply to

(i) listed companies
(ii) any company reporting under IFRS that wishes to provide the information
(iii) all other companies reporting under IFRS

(a) (i) to (ii) only

(b) (i) to (iii) all

(c) (i) only

(d) (ii) only

11. An operating segment may engage in business activities for which it has yet to earn revenues, for
example, start-up operations and it:

(a) will be reportable segment before earning revenues

(b) may be reportable segment before earning revenues

© Emile Woolf International 615 The Institute of Chartered Accountants of Pakistan

 235
Financial accounting and reporting II

(c) will not be reportable segment before earning revenues

(d) None of above

12. Head office expenses:

(a) can be allocated to segments on a reasonable basis

(b) must not be allocated to segments

(c) must be allocated to segments based on their turnover

(d) must be allocated to segments based on their profit before tax

13. Two or more operating segments may be aggregated into a single operating segment if aggregation is
consistent with the core principle of IFRS 8, the segments have similar economic characteristics, and
the segments are similar in each of the following respects:
(i) the nature of the products and services
(ii) the nature of the production processes
(iii) the type or class of client for their products and services
(iv) the methods used to distribute their products or provide their services
(v) if applicable, the nature of the regulatory environment, for example, banking, insurance or public
utilities
(vi) staff numbers

(a) (i) to (vi) all

(b) (i) to (iii) only

(c) (i) to (iv) only

(d) (i) to (v) only

14. Which TWO of the following events which occur after the reporting date of an entity but before the
financial statements are authorised for issue are classified as adjusting events in accordance with IAS
10 Events after the Reporting Period?

(a) A change in tax rate announced after the reporting date, but affecting the current tax liability

(b) The discovery of a fraud which had occurred during the year

(c) The determination of the sale proceeds of an item of plant sold before the year end

(d) The destruction of a factory by fire

15. In a review of its provisions for the year ended 31 March 2015, entity’s assistant accountant has
suggested the following accounting treatments:
(i) Based on past experience, a Rs. 200,000 provision for unforeseen liabilities arising after the year
end.
(ii) The partial reversal (as a credit to the statement of profit or loss) of the accumulated depreciation
provision on an item of plant because the estimate of its remaining useful life has been increased
by three years.

© Emile Woolf International 616 The Institute of Chartered Accountants of Pakistan

 236
Chapter 14: IFRS 8, IAS 37 and IAS 10

(iii) Providing Rs. 1 million for deferred tax at 25% relating to a Rs. 4 million revaluation of property
during March 2015 even though entity has no intention of selling the property in the near future.
Which of the above suggested treatments of provisions is/are permitted by IFRS Standards?

(a) (i) only

(b) (i) and (ii)

(c) (ii) and (iii)

(d) (iii) only

16. Canon Limited (CL) is being sued by a customer for Rs. 2 million for breach of contract over a cancelled
order. CL has obtained legal opinion that there is a 20% chance that CL will lose the case. Accordingly,
CL has provided Rs. 400,000 (Rs. 2 million × 20%) in respect of the claim. The unrecoverable legal
costs of defending the action are estimated at Rs. 100,000. These have not been provided for as the
case will not go to court until next year.
What is the amount of the provision that should have been made by CL in respect of above information?

Rs. ___________

17. During the year Platinum Limited acquired an iron ore mine at a cost of Rs. 600 million. In addition,
when all the ore has been extracted (estimated ten years' time) the company will face estimated costs
for landscaping the area affected by the mining that have a present value of Rs. 200 million. These
costs would still have to be incurred even if no further ore was extracted.
At which amount the mine should be recognised?

Rs. ___________

18. Titanium Limited (TL) is preparing its financial statements for the year ended 30 September 2017. TL is
facing a number of legal claims from its customers with regards to a faulty product sold.
The total amount being claimed is Rs. 3.5 million. TL’s lawyers say that the customers have an 80%
chance of being successful.
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, what amount, if any,
should be recognised in respect of the above in TL’s statement of financial position as at 30 September
2017?

Rs. ___________

19. Alpha Limited has a year end of 31 December 2014. On 15 December 2014 the directors publicly
announced their decision to close an operating unit and make a number of employees redundant. Some
of the employees currently working in the unit will be transferred to other operating units within Alpha
Limited.

The estimated costs of the closure are as follows: Rs. 000

Redundancy costs 800
Lease termination costs 200
Relocation of continuing employees to new locations 400
Retraining of continuing employees 300
1,700

© Emile Woolf International 617 The Institute of Chartered Accountants of Pakistan

 237
Financial accounting and reporting II

What is the closure provision that should be recognised?

Rs. ___________

20. On 1 October 2013, X Limited commenced drilling for oil in an undersea oilfield. The extraction of oil
causes damage to the seabed which has a restorative cost (ignore discounting) of Rs. 10,000 per million
barrels of oil extracted. X Limited extracted 250 million barrels of oil in the year ended 30 September
2014.
X Limited is also required to dismantle the drilling equipment at the end of its five-year licence. This has
an estimated cost of Rs. 30 million on 30 September 2018. X Limited’s cost of capital is 8% per annum
and Re. 1 has a present value of 68 paisa in five years’ time.
What is the total provision (extraction plus dismantling) which X Limited would report in its statement of
financial position as at 30 September 2014 in respect of its oil operations?

Rs. ___________

© Emile Woolf International 618 The Institute of Chartered Accountants of Pakistan

 238
Chapter 14: IFRS 8, IAS 37 and IAS 10

9 OBJECTIVE BASED ANSWERS

01. (d) The cost of the overhaul will be capitalised when it takes place. No obligation
exists before the overhaul is carried out. The other options would all give rise to
valid provisions.

02. (b) A restructuring provision must not include the costs of retraining or relocating
staff.

03. (a) & (c) In (b) the obligation does not exist as it has not been communicated to those
affected by it. In (d) there is no obligation as warranty period has expired.

04. (c) This is non-adjusting event, however, being material, it should be disclosed.

05. (a) In (2) the decision was made public after year end, so it is non-adjusting event.

06. (a) The fraud existed at year end, it was only discovered after the year end.

07. (d) Information about reduced staff is not required by IFRS 8

08. (b) Taxation is not criteria for defining operating segment

09. (c) It may be included if entity is so managed (not based on desire).

10. (c) IFRS 8 is applicable to listed companies only.

11. (b) It may be reportable segment if it meets the criteria.

12. (a) These can be allocated on reasonable basis.

13. (d) Staff number is not the factor to combine two or more segments.

14. (b & c) The change in tax rate and the fire will be non-adjusting events as the conditions
did not exist at the reporting date.

15. (d) Deferred tax relating to the revaluation of an asset must be provided for even if
there is no intention to sell the asset in accordance with IAS 12 Income Taxes.

16. Rs. 100,000 Loss of the case is not 'probable', so no provision is made, but the legal costs will
have to be paid so should be provided for.

17. Rs. 800 million Rs. 600 million + Rs. 200 million = Rs. 800 million

18. Rs. 3,500,000 The amount payable relates to a past event (the sale of faulty products) and the
likelihood of payout is probable (i.e. more likely than not). Hence, the full amount
of the payout should be provided for.

19. Rs. 1,000,000 The costs associated with ongoing activities (relocation and retraining of
employees) should not be provided for.

20. Rs. 24,532,000 Extraction provision at 30 September 2014 is

Rs. 2.5 million (250 × 10).
Dismantling provision at 1 October 2013 is
Rs. 20.4 million (30,000 × 0.68).
his will increase by an 8% finance cost by 30 September 2014 = Rs. 22,032,000.
Total provision is Rs. 24,532,000.

© Emile Woolf International 619 The Institute of Chartered Accountants of Pakistan