THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Advanced Accounting and Financial Reporting

Examiners’ comments and Suggested answer
Certified Finance and Accounting Professional (CFAP)
Summer 2017 Examinations

Overall General Comment:

Only 5.69% students passed in this attempt as compared to 8.85% in the previous attempt. In
fact, the result in the paper has been on the decline for the last five attempts. The primary
reason is that the candidates seem unable to grasp the frequent and significant changes that are
being introduced in the IFRSs. The students would have to allocate sufficient time for
preparation and practice in order to be successful in this paper.

Question-wise Comments:

Question 1

25.34% candidates secured passing marks in this question.

Common errors:

1. Candidates missed the entire workings, especially the revaluation surplus and reversal of
exchange gain on investment in YL.
2. The following types of mistakes were made in the calculation of goodwill:
 Amount of bargain purchase in case of GL was adjusted against the amount of
goodwill of YL.
 WL’s existing investment in YL at the time of obtaining the control should have
been re-measured at fair value for computing goodwill. However the re-
measurement was either ignored or fair value on 1 January 2016 i.e. T$ 18 per
share was taken instead of T$ 23 per share i.e. fair value on the date of obtaining
the control (1 April 2016).
 Share in YL was taken as 100% or 72%, instead of 92%.
3. The following types of mistakes were made in the calculation of consolidated retained
earnings and / or non-controlling interest:
 Gain on de-recognition of associate and amount of bargain purchase were ignored.
 While computing nine months profit of YL, interim dividend paid by YL was not
taken into account.
 Indirect holding adjustment was ignored.
4. The investment property which was rented out to the holding company should have been
classified as Property Plant and Equipment, in the consolidated balance sheet but was
shown as investment property.

Suggested answer:

White Limited
Consolidated Statement of Finance Position
As on 31 December 2016
Rs. in million
Assets
Goodwill [56.7(W-1)×20] 1,134.00
Property, plant and equipment [14,900+3,000+(325×20)+800] 25,200.00
Investment property (800–800) -
Current assets [6,660+2,500+(305×20)] 15,260.00
Total assets 41,594.00
Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Equity & liabilities
Share capital 11,400.00
Retained earnings (W-2) 15,089.65
Exchange reserves (W-5) 1,270.65
27,760.30
Non controlling interest (W-3) 1,091.20
28,851.50
Revaluation surplus [150+650÷20] 182.50
Current liabilities [6,360+2,300+(195×20)] 12,560.00
Total equity and liabilities 41,594.00
W-1: Goodwill GL YL
Rs. in million T $ in million
Cash payment 4,200.00 243.00
(270×90%)

Fair value of previously held equity (4.5×23) 103.50

Total cash consideration and NCI 4,200.00 346.50
Less : Fair value of net assets acquired
Share capital 1,500.00 225.00
Retained earnings 3,500.00 90.00
5,000.00 315.00
WL's share in net assets (GL:5,000×90%),(YL:315×92%) 4,500.00 289.80
Bargain purchase/Goodwill (300.00) 56.70

W-2: Consolidated retained earnings Rs. in million

WL (Given) 9,500.00
Post acquisition - GL [(7,900–3500)×90% ] 3,960.00
Post acquisition - YL (2,148.75(W-2.1)×92%) 1,976.85
Bargain purchase (W-1) 300.00
Gain on derecognition of associate (W-4) 484.50
Reversal of exchange gain on investment in YL by WL [75×(20–17)] (225.00)
Reversal of exchange gain on investment in YL by GL (270×(20–17)×92% (745.20)
Elimination of income from investment property (800–650)×90% (135.00)
Depreciation expense to be booked for the year by GL (650÷20) (32.50)
Rent expense to be reversed in WL books 60.00
Rent income to be reversed in GL books (60×90%) (54.00)
15,089.65
W-2.1: Post acquisition profit of YL Rs. in million
Profit for nine month [{(210-90)120+(225×10%)}×18] 2,565.00
Less: 10% interim dividend (22.5×18.5) (416.25)
2,148.75

W-3: Non-controlling interest

Rs. in million
At acquisition (GL : (1500+3500)×10%)+(YL(225+90)×8%×17) 928.40
Post acquisition - GL [(7,900–3500)×10% ] 440.00
Post acquisition - YL (2,148.75×8%) 171.90
Reversal of exchange gain on investment in YL by GL [270×(20-17) × 8%] (64.80)
Elimination of income from investment property (800–650 )×10% (15.00)
Rent income to be reversed in GL books (60×10%) (6.00)
Exchange gain relating to year-end transactions (W-5) 95.70
Indirect holding adjustment (270×10%×17) (459.00)
1,091.20

Page 2 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
W-4: Gain on derecognition of associate
Rs. in million
Fair value of investments on 1 April 2016 (4.5×23×17) 1,759.50
Less: Cost of investment (75×17) (1,275.00)
Gain 484.50

W-5: Exchange reserves

Conversion
Relating to goodwill T$ Rs. in million
rate
Balance on acquisition date i.e. 1 April 2016 56.70 17.00 963.90
Balance as on 31 December 2016 56.70 20.00 1,134.00
170.10

Relating to translation of FS foreign Conversion

T$ Rs. in million
operations rate
Net assets as on 31 December 2016 435.00 20.00 8,700.00
Net assets on acquisition date 315.00 17.00 5,355.00
Profit since acquisition {120 + (225×10%)} 142.50 18.00 2,565.00
Dividend paid (22.50) 18.50 (416.25)
435.00 7,503.75
Exchange gain for the year ended
31 December 2016 - 1,196.25
Less: Exchange gain relating to NCI
(1,196.25×8%) 95.70
Exchange gain to parent 1,100.55

Total exchange reserves (170.10+1,100.55) 1,270.65

Question 2

05.35% candidates secured passing marks in this question.

Common errors:

Part (a)

1. Imputed dividend to class A preference shares was ignored (not deducted) in computing
the profit available to ordinary shareholders. Some of the candidates did consider the
dividend but made various types of errors in computing it as they could not compute the
impact of discounting.
2. Various types of errors were seen in determining the ratio of distribution of undistributed
earnings between ordinary and Class B preference shareholders.
3. Instead of computing the overall basic earnings per share, the distributed earnings per
share and the undistributed earnings per share were given.

Page 3 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017

Suggested answer:

Rs. in million
Profit for the year 150.00
Less: Dividend
Class A Preference shareholders (9÷1.09×2) 16.51
Class B Preference shareholders (300×6%) 18.00
Profit attributable to class B preference shareholders [90.49(W-
1)×3÷(20+3)(W-2)] 11.80
46.31
Profit available for ordinary shareholders 103.69

Earnings per share (103.16÷10) 10.37

W-1: Undistributed earnings

Profit after tax 150.00
Less: Imputed dividend (16.51)
Dividend to class B preference shares (18.00)
Dividend to ordinary shareholders (25.00)
Undistributed earnings 90.49

W-2: Determination of ratio for distribution of undistributed earnings between

ordinary and class B preference shareholders
No. of
outstanding shares Weight Product
(in million)
Ordinary shareholder 10 2 20
Class B preference
shareholder 3 1 3
23

Part (b)

1. According to IFRS 9, at initial recognition, the company may make an irrevocable

option to present subsequent changes in fair value in non-trading equity investments
in other comprehensive income instead of profit and loss account. The accounting
treatment for investment in KL depended on whether the option was taken or not.
Similar situation applied to investment in BL when it decided to hold the shares for a
longer period. Instead, only one of the two treatments was explained.
2. Investment in KL was classified as held to maturity or available for sale instead of
non-trading investment.
3. If company elected irrevocable option to record subsequent changes in fair value
through other comprehensive income then impairment loss against non-trading
investments as given in the question should be accounted for through other
comprehensive income rather than profit or loss account. This aspect was not
explained.
4. Incorrect treatment of transaction cost was made. In the case of investment in BL and
also in case of investment in KL where irrevocable option to charge subsequent
changes through OCI was not exercised, transaction costs should have been charged
to P&L, but were capitalized.

Page 4 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Suggested answer:

Investment in KL
Initial measurement
According to IFRS 9, at initial recognition, RIL may make irrevocable election to present
subsequent changes in fair value in equity investment in other comprehensive income instead of
profit or loss account.
If RIL opted as above, investment in KL would initially be recognized at fair value plus transaction
costs i.e. Rs. 20 million.
However, if RIL opted to measure the investment at fair value through profit and loss (FVTPL),
investment should initially be measured at Rs. 19.96 million (20/1.002) and transaction costs of Rs.
0.04 million (20–19.96) should be charged to profit and loss account.
Subsequent measurement
On 31 December 2016, if fair value through other comprehensive income has been opted,
investment in KL should be measured at fair value of Rs. 12.4 million and a loss of Rs. 7.6 million
[20–12.4(155,000×80)] (instead of Rs. 5 million) should be booked through other comprehensive
income.
According to IFRS 9, amount presented in other comprehensive income shall not be subsequently
transferred to profit or loss. However, the entity may transfer the cumulative gain / (loss) within
equity.

If fair value through profit or loss has been opted, then RIL should account for the loss of Rs. 7.56
million (20–0.04(transaction cost)–12.4) through profit and loss account.

Investment in BL

Initial measurement
The investment in BL should be recognized as held for trading at fair value of Rs. 64.87 million
(65÷1.002) and transaction cost of Rs. 0.13 million should be charged to profit and loss account.

Subsequent measurement
As at 30 November 2016, the investment should be re-measured to fair value at the market price of
Rs. 83.835 million (135,000×621) and a gain of Rs. 18.965 million (83.835–64.87) shall be booked
in the profit and loss account.

Reclassification of asset
On 30 November 2016 when RIL decided to hold the shares for a longer period, investment in BL
should be reclassified from held for trading to non-trading investment. Further, RIL may make
irrevocable election that investment in BL would be re-measured at fair value through other
comprehensive income, as discussed in the case of KL above. Similarly, treatment on 31 December
2016 would depend on whether RIL opted to re-measure at fair value through OCI or not.

Question 3

01.87% candidates secured passing marks in this question.

Common errors:

1. In computing the goodwill, market based replacement award was ignored while
determining the total consideration.
2. In computing the goodwill, deferred tax was ignored.

Page 5 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017

3. In the computation of deferred tax, tax on unrealized profit on closing stock held by PAL
was taken as 25% instead of 35% whereas tax on unrealized profit on closing stock held
by LG was taken as 35% instead of 25%. Similarly, tax rate of 35% was applied on
undistributed profit of NAL in both cases i.e. where such profit was to be realised by way
of dividend and also where the profit was to be realised through sale of investments.
4. Increase in intrinsic value of replacement award from Rs. 90 million to Rs. 150 million
was ignored in the computation of deferred tax.
5. Deferred tax was computed by applying the tax rate on the difference between fair value
and tax base without taking into account the deferred tax at acquisition i.e. Rs. 24 million.

Suggested answer:

Computation of goodwill
Cash consideration 2,000.00
Market based measure of replacement awards 140.00
Total consideration transferred 2,140.00

Net assets acquired

Fair value of assets 3,618.00
Fair value of liabilities (1,888.00)
Development expenditure 153.00
Contingent liability (25.00)
Adjustment in deferred tax (W-1) (70.85)
1,787.15
Goodwill 352.85

Impact on deferred tax as on 31 December 2016: Timing Tax Deferred

difference rate tax
Effect of deferred tax on acquisition (W-1) (70.85)
Unrealized profit on closing stock held by PAL (80×20%) (16.00) 35.0% (5.60)
Unrealized profit on closing stock held by LG (140×15%) (21.00) 25.0% (5.25)
Undistributed profit of NAL – Associate (to be realized through
dividend) [(50–20)×30%×60%)] (5.40) 12.5% (0.68)
Undistributed profit of NAL – Associate (Realized through
sale) [(50–30)×30%×40%)] (3.60) 17.5% (0.63)
Increase in intrinsic value (150–90) (60.00) 25.0% (15.00)
(98.01)
W-1: Adjustment for deferred tax on 1 January 2016
Impact on Taxable
Fair Carrying Tax Deferred tax
/(deductible) time
value value rate liability/(assets)
difference
Property, plant and equipment 1,532 1,259 273.00 35% 95.55
Investments 490 367 123.00 35% 43.05
Retirement benefit obligations 60 17 (43.00) 35% (15.05)
Development expenditure 153 - 153.00 35% 53.55
Contingent liability 25 - (25.00) 35% (8.75)
Unused tax losses 300 - (300.00) 25% (75.00)
Intrinsic value of share options 90 - (90.00) 25% (22.50)
Net adjustment in deferred tax 70.85

Page 6 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Question 4

0.96% candidates secured passing marks in this question.

Common errors:

1. Percentage of completion method was used without giving any reason to support such
approach whereas revenue is to be recognized when control is transferred. Since it was
clearly mentioned in the question that control was transferred after completion of the
building, there was no point in discussing the issue further.
2. Imputed interest was not taken into consideration.
3. Revenue from maintenance service was not separated from total revenue.
4. Cost of land was not considered in the fixed assets of 2015.
5. Contract liabilities were not classified further as current and non-current.

Suggested answer:

Builders & Developers

Extracts from statement of financial position
As on 31 December 2016
2016 2015
------ Rs. in million ------
Fixed Asset
Land - 50
Current Asset
Contract cost (80.20+32.60+5.8)÷18×12 - 79.07

Non current liabilities

Contract liability 27.30 35.10
(3.9×7) (39–3.9)

Current liabilities
Contract liability 7.80 264.65
(3.9×2) (236+3.9+24.75)

Builders & Developers

Extracts from statement of comprehensive income
As on 31 December 2016
2016 2015
------ Rs. in million ------
Revenue (sale of building) [275–39(3×10×1.3)]+38.24 274.24 -
Less: Contract cost
Land (50.00) -
Direct material (80.20) -
Direct labour (32.60) -
Other cost directly related to the contract (5.80) -
(168.60) -
Profit from sale of building 105.64
Revenue (maintenance service) (3×1.3) 3.90 -
Less : Contract cost (3.00) -
Profit from maintenance services 0.90 -
Gross profit 106.54
Interest expense [2016:(275+24.75)×9%×6/12; 2015:275×9%] (13.49) (24.75)
Net profit 93.05 (24.75)

Page 7 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Question 5

01.01% candidates secured passing marks in this question.

Common errors:

1. The hedge was treated as a cash flow hedge whereas it was a fair value hedge because the
company had entered into the swap agreement with the purpose of hedging the fair value
of the company’s debt rather than its repayment.
2. Swap has to be recorded initially at its fair value. Since the swap was entered at market
rates, its fair value was zero at the agreement date and therefore no accounting entry was
required. The students generally failed to explain this point.
3. The requirement was to explain the accounting treatment whereas many students gave
general entries.
4. No comments were offered with regard to the amount of brokerage.

Suggested answer:

On 1 October 2016

As the company entered into the swap agreement with the purpose of hedging the fair value of the
company’s own debt, therefore this is a fair value hedge.

The loan should initially be recognized at fair value. Swap has to be recorded initially at its fair
value. Since the swap was entered at ‘market rates’, its fair value is zero at the agreement date and
therefore no accounting entry is required on that date.

Brokerage of Rs. 1 million with respect to swap arrangement should be charged to profit and loss
account.

On 31 December 2016

PTL should record net interest expense of Rs. 17.483 million for the quarter ended 31 December
2016.

Rs. in million
Interest expense on TFC (900 × 8% × 3 ÷ 12) 18.000
Interest expense on SWAP (900 × 6.27% × 3 ÷ 12) 14.108
Interest income on SWAP (900 × 6.5% × 3 ÷ 12) (14.625)
17.483

At 31 December 2016, the hedge is required to be assessed and effectiveness of hedge is required to
be determined, to decide whether hedge accounting is to be continued or not.

Being ‘receive fixed’ and ‘pay variable’ interest rate swap, fair value hedge accounting rules are to
be applied.

Rs. in million
TFCs issued at par 900.00
Fair value at 31 December 2016 (992×0.9) 892.80
Gain in TFCs – Other income 7.20

The swap is deemed effective and hedge accounting shall continue to be used. By considering this,
swap liability of Rs. 7.29 million should be recorded through profit and loss account and debenture
liability should be reduced by Rs. 7.2 million. (changes being reported in profit and loss account)

Page 8 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017

Question 6

77.08% candidates secured passing marks in this question.

Common error:

Part (a)

The question was quite straight forward and the performance was good but there were many
students who did not have any knowledge of the Islamic Financial Accounting Standards and
could not write anything worthwhile. Many students used guesswork i.e. tried to answer in
terms of IFRS 16.

Suggested answer:

When an asset is sold with an intention to enter into an ljarah arrangement, gain or loss shall be
recorded as follows:

Sold at fair value:

Profit or loss should be recognized immediately.

Sold at below fair value:

If the sale price is below fair value, any profit or loss should be recognized immediately except that,
if the loss is compensated by future lease payments at below market price, it should be deferred and
amortized in proportion to the lease payments over the period for which the asset is expected to be
used.

Sold at above fair value:

If the sale price is above fair value, the excess over fair value should be deferred and amortized over
the period for which the asset is expected to be used.

Part (b)

Common error:

1. Net commission expenses and underwriting expenses were not computed or computed
incorrectly.
2. Proper headings were missing.

Page 9 of 10   
 Examiners’ comments and Suggested answers on Advanced Accounting and Financial Reporting,
CFAP Examination Summer 2017
Suggested answer:

Real General Insurance Limited

Statement of Expenses
For the year ended 31 December 2016

Deferred

Underwriting
Commissions

underwriting
management

Commission
commission
commissions

reinsurers
expense

expense

expense
Other
Class

from
Net

Net
Opening

Closing
Direct and
------------------------------- (Rs. in million) ------------------------
Facultative
Fire and
property 460 210 222 448 352 800 333 467
damage
Motor 189 87 89 187 640 827 - 827
Miscellaneous 73 27 30 70 104 174 136 38
722 324 341 705 1,096 1,801 469 1,332
Treaty
Proportional - - - - - - - -
Grand total 722 324 341 705 1,096 1,801 469 1,332

(The End)

Page 10 of 10