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CAF 07 Notes 2

The document summarizes lecture notes on IFRS 16 Leases. It includes examples of accounting entries for lease transactions from the perspective of the lessee. The first part discusses the basic concepts of leases and discounting lease payments. Sample journal entries are provided for years 2010 and 2011 of a company that acquired a machine on a 4-year lease. Extracts of the statement of financial position and statement of comprehensive income are also presented for 2010-2011. Homework questions with solutions provide additional examples of accounting for a lease over its term of 4 years.

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CAF 07 Notes 2

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FAR-2

LECTURE NOTES

AUTUMN 2020

SIR ADNAN RAUF

(FCA)
IFRS-16
LEASES
CAF-07 IFRS 16: LEASES

Lecture # 1

Class work
Basic concept of lease was discussed along with discussion of discounting and calculation of present
value of lease payments.

Rise School of Accountancy Page 1

(W-1) Calculation of PV of LP
= Rental + Rental x [1- (1+i)-(n-1)]
i
= 8,000 + 8,000 x [1- (1+0.10)-(4-1)]
0.10
= 27,895
(W-2) Lease amortization Schedule:
Date Installment Principal Interest Balance
1/4/09 27,895
1/4/09 8,000 8,000 - 19,895
1/4/10 8,000 6,010 1,990 13,885
1/4/11 8,000 6,611 1,389 7,274
1/4/12 8,000 7,274 726 -

Rise School of Accountancy Page 2

CAF-07 IFRS 16: LEASES

Lecture # 4

Question-1
On 1 July 2010, BTL acquired a machine on lease, from a bank. Details of the lease are as follows:
(i) Cost of Machine is Rs. 40 million.
(ii) The lease term and useful life is 3 years and 10 years respectively.
(iii) Installment of Rs. 6 million is to be paid semi-annually in arrears on 31 December and 30 June.
(iv) The interest rate implicit in the lease is 10% per annum.
Required
Prepare relevant extracts of the statement of financial position and related notes to the financial
statements for the year ended 30 June 2012 along with comparative figures. Ignore taxation (16)

Homework
Question-1
On 1st January, 1991 ABC & company obtained a machine on lease with an expected useful life of four
years on conditions which transfer substantially all the risks and rewards of ownership to the company.
The cost of the machine is Rs. 50,000 and the lease is for four years. A rental of Rs. 4,291 is payable at
the end of each quarter, so that the total lease payments will be 16 x Rs. 4,291 = Rs. 68,656.
The company depreciates machine of this kind over a period of four years.
The rate implicit in the lease is 16% per annum.
Required
Prepare journal entries in the books of lessee for the year ended 31 December, 1991.

Answer- 1
ABC & Co.
Entries in the books of lessee
Date Particulars Dr. Cr.
1/1/91 Right of use asset 50,000
Lease liability 50,000
(Asset acquired under lease )
31/3/91 Lease liability 2,291
Finance charges 2,000
Bank 4,291
(Payment of lease liability and finance charges)
30/6/91 Lease liability 2,383
Finance charges 1,908
Bank 4,291
(Payment of lease liability and finance charges)
30/09/91 Lease liability 2,478
Finance charges 1,813
Bank 4,291
(Payment of lease liability and finance charges)
31/12/91 Lease liability 2,577
Finance charges 1,714
Bank 4,291
(Payment of lease liability and finance charges)
31/12/91 Depreciation expense (50,000/4years) 12,500
Accumulated depreciation 12,500
(Recording of depreciation expense)
(W-1) Calculation of Present Value of LP

Adnan Rauf, FCA Page 1

CAF-07 IFRS 16: LEASES

LP = (4,291 x (4 x 4)) 68,656

PV of LP = 4,291 x [1-(1+0.04)-16] 50,000
0.04
(W-2) Lease Amortization Schedule
Quarterly rate (16%/4) 4%
Date Installment Principal Interest Balance
1/1/91 50,000
31/3/91 4,291 2,291 2,000 47,709
30/6/91 4,291 2,383 1,908 45,326
30/9/91 4,291 2,478 1,813 42,848
31/12/91 4,291 2,577 1,714 40,271
31/3/92 4,291 2,680 1,611 37,591
30/6/92 4,291 2,787 1,504 34,804
30/9/92 4,291 2,899 1,392 31,905
31/12/92 4,291 3,015 1,276 28,890
31/3/93 4,291 3,135 1,156 25,755
30/6/93 4,291 3,261 1,030 22,494
30/09/93 4,291 3,391 900 19,103
31/12/93 4,291 3,527 764 15,576
31/3/94 4,291 3,668 623 11,908
30/06/94 4,291 3,815 476 8,093
30/09/94 4,291 3.967 324 4,126
31/12/94 4,291 4,126 165 -

Adnan Rauf, FCA Page 2

CAF-07 IFRS 16: LEASES

Lecture # 5
Accounting in the books of lessor
Question-1
On 1 January 2015 a bank (lessor) purchased an asset for Rs. 2,019 and leased it on the same date to a
lessee.
(i) The lease term is 5 years.
(ii) Installment of Rs. 500 is to be paid annually in advance on 1 January.
(iii) The interest rate implicit in the lease is 12%.

Required:
(a) Prepare the journal entries, statement of financial position and statement of comprehensive income
for the years ending December 31, 2015 and 2016 in the books of bank.
(b) Prepare a note to the financial statements for the year ended December 31, 2015.

Home work
Question-1 [Question-19 of practice set]
XYZ limited (a lessor) leases equipment to ABC limited (a lessee) with a fair value of Rs. 37,908 in terms
of a lease agreement. The lease begins on 1 January 2005. There are 5 installments of Rs. 10,000 each,
paid annually in arrears and the discount rate (interest rate implicit) is 10%.

Required
In the books of XYZ Limited:
a) Prepare the journal entries for the year ended 31 December, 2005 and 2006.
b) Prepare extracts from statement of financial position as at 31 December, 2005.
c) Prepare notes to the financial statements for the year ended 31 December, 2005.

Question-2 [Question-21 of practice set]

A lease was signed on January 01, 2005 by Shaheen Ltd. for five years. Annual rentals payable at the
beginning of the year were agreed at Rs. 1,238.44. Useful life of equipment was 5 years and the interest
rate implicit in the lease was12%. Fair value of the equipment was Rs. 5,000.

Required
In the books of Shaheen Limited:
a) Prepare journal entries in the books of lessor for the year ended 31 December, 2005 and 2006.
b) Prepare extracts from statement of financial position as at 31 December, 2005.
c) Prepare notes to the financial statements for the year ended 31 December, 2005 .

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CAF-07 IFRS 16: LEASES

Answer-1
a) XYZ Ltd.
Entries in the books of lessor
Date Particulars Dr. Cr.
1/1/05 Lease receivable 37,908
Asset 37,908
(Transfer of asset under finance lease)
31/12/05 Bank 10,000
Finance income 3,791
Lease receivable 6,209
(Receipt of lease receivable and finance income)
31/12/06 Bank 10,000
Finance income 3,170
Lease receivable 6,830
(Receipt of lease receivable and finance income)

b)
XYZ Limited
Statement Of Financial Position (Extracts only)
As at 31 December 2005 2005
Assets
Non- current assets
Lease receivables (W-2) 24,869
Current assets
Current portion of lease receivables (W-2) 6,830
c)
XYZ Limited
Notes to the Financial Statements (Extracts only)
For the year ended 31 December 2005
19. Finance Lease
19.1 XYZ Ltd. has entered into lease agreement with ABC Ltd. Interest rate is 10% per annum.
Installment of Rs. 10,000 is to be paid annually in arears.

19.2 Maturity Analysis- Contractual undiscounted cash flows

Total lease payments receivables are as follows:
Rs.
Less than 1 Year 10,000
one to two years 10,000
two to three years 10,000
three to four years 10,000
Total Undiscounted lease receivable 40,000
19.3 Reconciliation
Rs.
Total lease receivable 40,000
Add: UGRV -
Gross investment in lease 40,000
Less: Unearned finance income (3,170+2,487+1,736+908) (8,301)
Net investment in lease (bal.) 31,699

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CAF-07 IFRS 16: LEASES

(W-1) Calculation of Net Investment

Gross investment = (10,000 x 5)
= 50,000
Net investment = 10,000 x [1-(1+0.10)-5]
0.10
= 37,908

(W-2) Lease Amortization Schedule

Date Installment Principal Interest Balance
1/1/05 37,908
31/12/05 10,000 6,209 3,791 31,699
31/12/06 10,000 6,830 3,170 24,869
31/12/07 10,000 7,513 2,487 17,356
31/12/08 10,000 8,264 1,736 9,092
31/12/09 10,000 9,092 908 -

Answer-2
a) Shaheen Limited
Entries in the books of lessor
Date Particulars Dr. Cr.
1/1/05 Lease receivable 5,000
Asset 5,000
(Transfer of asset under finance lease)
1/1/05 Bank 1,238.44
Lease receivable 1,238.44
(Recording of receipt of lease receivable)
31/12/05 Finance income receivable 451.39
Finance income 451.39
(Recording of finance income)
1/1/06 Bank 1,238.44
Finance income receivable 451.39
Lease receivable 787.05
(Receipt of lease receivable and finance income receivable)
31/12/06 Finance income receivable 356.94
Finance income 356.94
(Recording of finance income)

b) Shaheen Limited
Statement of Financial Position (Extracts only)
As at 31 December 2005 2005
Assets
Non-current assets
Lease receivable (W-2) 2,974.51
Current assets
Current portion of lease receivable (W-2) 787.05
Finance income receivable (W-2) 451.39

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CAF-07 IFRS 16: LEASES

c) Shaheen Limited
Notes To The Financial Statements (Extracts only)
For the year ended 31 December 2005

21. Finance Lease

21.1
Company has entered into a lease agreement as a lessor. Interest rate is 12% per annum. Installment of
Rs. 1,238.44 is to be paid annually in advance.
22.2 Maturity Analysis- Contractual undiscounted cash flows
Total lease payments receivables are as follows :
Rs.
Less than 1 Year 1,238.44
one to two years 1,238.44
two to three years 1,238.44
three to four years 1,238.44
Total Undiscounted lease receivable 4,953.76

22.3 Reconciliation
Rs.
Total lease receivable 4,953.76
Add: UGRV -
Gross investment in lease 4,953.76
Less: Unearned finance income (356.94+251.16+132.71) (740.81)
Net investment in lease (bal.) 4,212.95

(W-1) Calculation of Net Investment

Gross investment = ( 1,238.44 x 5)
= 6,192
Net investment = 1,238.44 + 1,238.44 x [1-(1+0.12)-(5-1)]
0.12
= 5,000

(W-2) Lease Amortization Schedule

Date Installment Principal Interest Balance
1/1/05 5,000.0
1/1/05 1,238.44 1,238.44 - 3,761.56
1/1/06 1,238.44 787.05 451.39 2,974.51
1/1/07 1,238.44 881.50 356.94 2,093.01
1/1/08 1,238.44 987.28 251.16 1,105.73
1/1/09 1,238.44 1,105.73 132.71 -

Rise School of Accountancy Page 4

CAF-07 IFRS 16: LEASES

Lecture # 6
Question-1
On 1 July 2010, Mouse Company acquired a machine on lease, from a bank. Details of the lease are as
follows:
(i) Cost of the machine is Rs. 51 million
(ii) The lease term and useful life is 3 years and 5 years respectively.
(iii) Installment of Rs. 10 million is to be paid semi-annually in advance on 1 July and 1 January.
(iv) The interest rate implicit in the lease is 14% per annum.

Required
Prepare relevant extracts of the statement of financial position and related note to the financial statements
for the year ended 30 June 2011 in the books of lessor.

Homework
Question-1
Following data is provided by lessor:
Lease commenced on 01 January 2012
Lease term 4 year
Cost of Asset Rs. 135.7 million
Interest rate 10% per annum
Semiannual installments of Rs. 20 million are payable in advance.

Required
Prepare Journal entries and relevant extracts of the statement of profit and loss for the year ended 31
December 2012 and 2013 in the books of lessor.

Answer
Do it yourself.

Rise School of Accountancy Page 1

CAF-07 IFRS 16: LEASES

Lecture # 7
Classwork
Question-1 (Past Paper Q.6)
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%.

Required
a) Prepare accounting entries for the year ended 30 June 2014 in the books of GLL to record the
transactions related to the above lease arrangement in accordance with the requirements of
International Financial Reporting Standards. (07)
b) Prepare a note for inclusion in GLL's financial statements for the year ended 30 June 2014, in
accordance with the requirements of International Financial Reporting Standards. (10)
{Autumn-14, Q#5}
Answer-1
a) All figures in Rs. in ‘million’
Entries in the books of Galaxy Leasing Limited
Date Particulars Dr. Cr.
1/7/13 Lease receivable (NI) (W-1) 28.69
Asset 28.69
(Transfer of asset on account of Finance Lease)
1/7/13 Bank 3.00
Lease receivable 3.00
(Receipt of down payment)
30/6/14 Bank 7.80
Finance income (W-2) 3.60
Lease receivable (W-2) 4.20
(Recording of receipt of Lease Receivable and finance income)
b)
Galaxy Leasing Limited
Notes to the Financial Statements (Extracts only)
For the year ended 30 June, 2014
6. Finance Lease
6.1The lease payments have been discounted on interest rate of 14% per annum to arrive at the present
value. Rentals are paid annually in arrears.
6.2 Maturity Analysis-Contractual undiscounted cash flows
Total lease payments receivables are as follows:
Rs.”m”
Less than one Year 7.8
One to two Years 7.8
Two to three Years (7.8 + 5) 12.8
Total Undiscounted lease receivable 28.4

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CAF-07 IFRS 16: LEASES

6.3 Reconciliation
Rs.”m”
Total lease receivable 28.4
Add: UGRV -
Gross investment in lease 28.4
Less: Unearned finance income (3.01+2.34+1.56) (6.91)
Net investment in lease (bal.) 21.49

(W-1) Calculation of Net Investment

= Down payment + Rental x [1- (1 + i )-n ] + GRV x (1 + i )-n
i
= 3 + {7.80 x [1- (1+0.14)-4]} + {5 x (1+0.14)-4}
0.14
= Rs. 28.69 million

(W-2) Lease Amortisation Schedule

Date Installment Principal Interest Balance
1/7/13 28.69
1/7/13 3.00 3.00 - 25.69
30/6/14 7.80 4.20 3.60 21.49
30/6/15 7.80 4.79 3.01 16.70
30/6/16 7.80 5.46 2.34 11.24
( 7.8 + 5 ) 30/6/17 12.80 11.24 1.56 0

Homework

Question-1 (Past Paper Q.5)

Adnan Rauf, FCA Page 1

CAF-07 IFRS 16: LEASES

Required
Classify lease as finance or operating and prepare journal entries for year ended December 31, 2005.

Question-2
Neptune Limited (NL) is a leasing company. During the year ended December 31, 2005 the company
entered into a lease with a lessee, the details of which are as follows:
(a) Date of commencement of lease is January 1, 2005.
(b) Fair value of asset is Rs. 748,000.
(c) Lease period is 3 years.
(d) Lease installments payable annually in arrears are Rs. 166,744.
(e) Economic life is 7 years
(f) There is no purchase option available to lessee at end of lease term.
(g) The discount rate is 9% per annum.
Required
Classify lease as finance or operating and prepare journal entries for year ended December 31, 2005.

Answer-1

Discussion on lease classification

a) Does ownership transfer to the lessee by the end of the
lease?
b) Does the lessee have an option to purchase asset at a price
expected to be lower than the fair value at the date the option
became exercisable?
c) Is the lease term for the major part of the economic life
of the asset?
d) At the inception of the lease, does the present value of the
lease payments is substantially equal to the fair value of the
asset?
e) Is the asset of such a specialized nature that only the
lessee can use it without major modifications?

Conclusion:

Entries
Date Particulars Dr. Cr.
1/1/05 Asset 748,000
Cash 748,000
(Asset purchased)
1/1/05 Lease receivable 748,000
Asset 748,000
(Asset is transferred to lessee)
31/12/05 Cash 166,744
Lease receivable 99,424
Interest income 67,320
(Receipt of first installment)

Adnan Rauf, FCA Page 2

CAF-07 IFRS 16: LEASES

Lease amortization schedule

b) Does the lessee have an option to purchase asset at a price

expected to be lower than the fair value at the date the option
became exercisable?
c) Is the lease term for the major part of the economic life
of the asset?
d) At the inception of the lease, does the present value of the
lease payments is substantially equal to the fair value of the
asset ?
e) Is the asset of such a specialized nature that only the lessee
can use it without major modifications?

Conclusion:

Entries
Date Particulars Dr. Cr.
1/1/05 Asset 748,000
Cash 748,000
(Asset purchased)
31/12/05 Cash 166,744
Rental income 166,744
(Received rental)
31/12/05 Depreciation Expense (748,000 / 7) 106,857
Accumulated depreciation 106,857
(Recording of depreciation)

Calculation of rental income on straight line method

- 31 Dec, 05 166,744
- 31 Dec, 06 166,744
- 31 Dec, 07 166,744
Total LP 500,232
Rental income (166,744/3) 166,744

Adnan Rauf, FCA Page 3

CAF-07 IFRS 16: LEASES
Lecture # 9

Question-1
Cost of asset Rs. 30,000

Date of commencement of lease is 1-1-2009

Useful life is 6 years
Lease term is 3 years

Annual Rentals payable in advance Rs 8,000 (to be reduced by 5% annually)

Required:
a) Prepare journal entries in the books of lessor for 31-12-2009, 31-12-2010 and 31-12-2011.
b) Prepare a disclosure in notes to the financial statements of lessor for the year ended 31-12-2009.
Home work
Question-1
MNC Ltd. entered into an operating lease contract with HTL Ltd. The terms of the lease contract are:
Fair value of asset purchased on 1/1/09 = Rs. 20,000
Commencement of lease = 01 January, 2009
Lease term = 3 years
Useful life = 8 years
Annual rentals payable in advance = Rs. 6,000 (with 5% reduction annually)
Required
Prepare journal entries for all the years in the books of HTL Ltd. (lessor) assuming year end is 31
December also prepare note for receivable under operating lease for the year ended 31 December, 2009.
Answer-1
HTL Ltd.

Entries in the books of lessor

Date Particulars Dr. Cr.
01/01/09 Asset 20,000
Cash 20,000
(Asset purchased)
01/01/09 Cash 6,000
Rent receivable 6,000
(Receipt of installment)
31/12/09 Rent receivable 5,705
Rental income 5,705
(Recording of rental income)
31/12/09 Depreciation expense (20,000/8years) 2,500
Accumulated depreciation 2,500
(Recording of depreciation expense)
01/01/10 Cash 5,700
Rent receivable 5,700
(Receipt of installment)
31/12/10 Rent receivable 5,705
Rental income 5,705
(Recording of rental income)
31/12/10 Depreciation expense (20,000/8years) 2,500
Rise School of Accountancy Page 1
CAF-07 IFRS 16: LEASES
Accumulated depreciation 2,500
(Recording of depreciation expense)
1/01/11 Cash 5,415
Rent receivable 5,415
(Receipt of installment)
31/12/11 Rent receivable 5,705
Rental income 5,705
(Recording of rental income)
31/12/11 Depreciation expense (20,000/8years) 2,500
Accumulated depreciation 2,500
(Recording of depreciation expense)

HTL Ltd.
Notes to the Financial Statements
For the year ended 31 December, 2009

38. Operating Lease

38.1 Maturity Analysis- Contractual undiscounted cash flows
Total lease payments receivable are as follows:
Rs.
Less than one year 5,700
one to two years 5,415
Total Undiscounted lease receivable 11,115
The company has entered into an operating lease agreement. Rentals are payable annually in advance of
Rs 6,000 (to be reduced by 5% annually). There are no financial restrictions in lease agreement.

(W-1)Calculation of Rental income on straight line basis

- 01 Jan, 09 6,000
- 01 Jan, 10 (6,000 x 95%) 5,700
- 01 Jan, 11 (5,700 x 95%) 5,415
Total LP 17,115
Rental income (17,115/3) 5,705

(W-2)
Dr. Rent receivable Cr.
31/12/ 09 Rental income 5,705 01/01/09 b/d -
31/12/ 09 c/d 295 01/01/09 Cash 6,000
31/12/ 10 Rental income 5,705 01/01/10 b/d 295
31/12/ 10 c/d 290 01/01/10 Cash 5,700
31/12/ 11 Rental income 5,705 01/01/11 b/d 290
31/12/ 11 c/d - 01/01/11 Cash 5,415

Rise School of Accountancy Page 2

CAF-07 IFRS 16: LEASES
Question-2
XYZ Limited entered into an operating lease with ABC Ltd. on 1 July, 2003. ABC Limited agreed to lease a plant
from XYZ Limited (which had cost XYZ Limited Rs. 15,000,000) on 1 July, 2003 on the following terms:
a) Inception of lease: 1 July, 2003
b) Lease period: 3 years
c) Useful life of plant: 6 years
d) Lease installments of (Rs. 3,000,000 to be reduced annually by 5%) are payable in arrears.
XYZ Limited depreciates its plant on the straight-line basis.
Required
Prepare the journal entries in the books of XYZ Limited for each of the years affected assuming year end is June
30.

Answer-2
XYZ Limited
Entries in the books of lessor
Date Particulars Dr. Cr.
1/7/03 Asset 15,000,000
Bank 15,000,000
(Purchase of Asset)
30/6/04 Bank 3,000,000
Rent receivable 3,000,000
(Recording of receipt of rental)
30/6/04 Rent receivable 2,852,500
Rental income (W-1) 2,852,500
(Recording of rental income)
30/6/04 Depreciation expense (15,000,000/6years) 2,500,000
Accumulated depreciation 2,500,000
(Recording of depreciation expense)
30/6/05 Bank 2,850,000
Rent receivable 2,850,000
(Recording of receipt of rental)
30/6/05 Rent receivable 2,852,500
Rental income (W-1) 2,852,500
(Recording of rental income)
30/6/05 Depreciation expense (15,000,000/6years) 2,500,000
Accumulated depreciation 2,500,000
(Recording of depreciation expense)
30/6/06 Bank 2,707,500
Rent receivable 2,707,500
(Recording of receipt of rental)
30/6/06 Rent receivable 2,852,500
Rental income 2,852,500
(Recording of rental income)
30/6/06 Depreciation expense (15,000,000/6years) 2,500,000
Accumulated depreciation 2,500,000
(Recording of depreciation)

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CAF-07 IFRS 16: LEASES
(W-1) Calculation of Rental Income on Straight Line basis
30 June, 2004 3,000,000
30 June, 2005 (3,000,000 x 95%) 2,850,000
30 June, 2006 (2,850,000 x 95%) 2,707,500
Total LP 8,557,500
Rental Income (8,557,500/3) 2,852,500

(W-2)
Dr. Rent receivable Cr.
30/06/ 04 Rental income 2,852,500 01/07/03 b/d -
30/06/ 04 c/d 147,500 30/06/04 Bank 3,000,000
30/06/ 05 Rental income 2,852,500 01/07/04 b/d 147,500
30/06/ 05 c/d 145,000 30/06/05 Bank 2,850,000
30/06/ 06 Rental income 2,852,500 01/07/05 b/d 145,000
30/06/ 06 c/d - 30/06/06 Bank 2,707,500

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CAF-07 IFRS 16: LEASES

Lecture # 10
Question-1
Cost of asset Rs 80,000
Date of commencement of lease is 1-7-2009
Useful life is 10 years
Lease term is 3 years
Semi-annual Rentals payable in advance Rs 5,000 (to be increased by 10% annually)
Required:
a) Prepare journal entries in the books of lessor for 31-12-2009 and 31-12-2010.
b) Prepare a disclosure in notes to the financial statements of lessor for the year ended 31-12-2009 and
31-12-2010.
Question-2
Continuing from Question-1, assume semi-annual rentals are payable in arrears.
Homework
Question-1
Aye Co. entered into an operating lease contract with Bee Co. The terms of the lease contract are:
Fair value of asset = Rs. 60,000
Commencement of lease = 01 July, 2009
Lease term = 3 years
Useful life = 10 years
Semi-annual rentals payable in advance = Rs. 2,500 (with 5% increase annually)
Required
Prepare journal entries for all the years in the books of Bee Co. assuming year end is 30 June.
Answer-1
Bee Co.
Entries in the books of lessor
Date Particulars Dr. Cr.
01/07/09 Cash 2,500
Rent receivable 2,500
(Receipt of installment)
31/12/09 Rent receivable 2,627
Rental income 2,627
(Recording of rental income)
01/01/10 Cash 2,500
Rent receivable 2,500
(Receipt of installment)
30/06/10 Rent receivable 2,627
Rental income 2,627
(Recording of rental income)
30/06/10 Depreciation expense (60,000/10years) 6,000
Accumulated depreciation 6,000
(Recording of depreciation expense)
01/07/10 Cash 2,625
Rent receivable 2,625
(Receipt of installment)
31/12/10 Rent receivable 2,627
Rental income 2,627
(Recording of rental income)

Adnan Rauf, FCA Page 1

CAF-07 IFRS 16: LEASES

01/01/11 Cash 2,625

Rent receivable 2,625
(Receipt of installment)
30/06/11 Rent receivable 2,627
Rental income 2,627
(Recording of rental income)
30/06/11 Depreciation expense (60,000/10years) 6,000
Accumulated depreciation 6,000
(Recording of depreciation expense)
1/7/11 Cash 2,756
Rent receivable 2,756
(Receipt of installment)
31/12/11 Rent receivable 2,627
Rental income 2,627
(Recording of rental income)
1/1/12 Cash 2,756
Rent receivable 2,756
(Receipt of installment)
30/6/12 Rent receivable 2,627
Rental income 2,627
(Recording of rental income)
30/6/12 Depreciation expense (60,000/10years) 6,000
Accumulated depreciation 6,000
(Recording of depreciation expense)
(W-1)Calculation of Rental income on straight line basis:
- 01 Jul, 09 2,500
- 01 Jan, 10 2,500
- 01 Jul, 10 (2,500 x 105%) 2,625
- 01 Jan, 11 2,625
- 01 Jul, 11 (2,625 x 105%) 2,756
- 01 Jan, 12 2,756
Total LP 15,762
Rental income for 6 months (15,762/6 installments) 2,627
(W-2)
Dr. Rent Receivable Cr.
01/07/ 09 b/d -
31/12/09 Rental income 2,627 01/07/09 Cash 2,500
30/06/10 Rental income 2,627 01/01/10 Cash 2,500
30/06/10 c/d 254
01/07/10 b/d 254
31/12/10 Rental income 2,627 01/07/10 Cash 2,625
30/06/11 Rental income 2,627 01/01/11 Cash 2,625
30/06/11 c/d 258
01/07/11 b/d 258
31/12/11 Rental income 2,627 01/07/11 Cash 2,756
30/06/12 Rental income 2,627 01/01/12 Cash 2,756
30/06/12 c/d -

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CAF-07 IFRS 16: LEASES

Question-2 (Advance + Semi - annual + Decrease)

Miller Ltd. entered into an operating lease contract with Smith Ltd. The terms of the lease contract are:
Fair value of asset purchased on 1/1/05 = Rs. 10,000
Commencement of lease = 01 January, 2005
Lease term = 3 years
Useful life = 8 years
Semi-annual rentals payable in advance = Rs. 600 (with 5% reduction annually)
Required
Prepare journal entries for all the years in the books of Smith Ltd. (lessor) assuming year end is 31
December.
Answer-2
Smith Ltd.
Entries in the books of lessor
Date Particulars Dr. Cr.
01/01/05 Asset 10,000
Cash 10,000
(Asset purchased)
01/01/05 Cash 600
Rent receivable 600
(Receipt of installment)
30/06/05 Rent receivable 571
Rental income 571
(Recording of rental income)
01/07/05 Cash 600
Rent receivable 600
(Receipt of installment)
31/12/05 Rent receivable 571
Rental income 571
(Recording of rental income)
31/12/05 Depreciation expense (10,000/8years) 1,250
Accumulated depreciation 1,250
(Recording of depreciation expense)
01/01/06 Cash 570
Rent receivable 570
(Receipt of installment)
30/06/06 Rent receivable 571
Rental income 571
(Recording of rental income)
01/07/06 Cash 570
Rent receivable 570
(Receipt of installment)
31/12/06 Rent receivable 571
Rental income(bal.) 571
(Recording of rental income)
31/12/06 Depreciation expense (10,000/8years) 1,250
Accumulated depreciation 1,250
(Recording of depreciation expense)
01/01/07 Cash 542
Rent receivable 542
(Receipt of installment)

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CAF-07 IFRS 16: LEASES

30/06/07 Rent receivable 571

Rental income
(Recording of rental income) 571
01/07/07 Cash 542
Rent receivable 542
(Receipt of installment)
31/12/07 Rent receivable 571
Rental income
(Recording of rental income) 571
31/12/07 Depreciation expense (10,000/8years) 1,250
Accumulated depreciation 1,250
(Recording of depreciation expense)

(W-1)Calculation of Rental income on straight line basis:

CAF-07 IFRS 16: LEASES

Lecture # 13

Initial Direct cost

Treatment of initial direct cost in case of lessee and lessor.

Question-1 (Already solved in Lecture#12)

Taimoor Biscuit manufacturing (TBM) entered into a 4 year lease of a machine on 1st January 2015.
TBM incurred following expenses on arranging lease on 1 January 2015:
Legal fees paid to lawyer 1,200
Commission paid to agent 600
Costs of negotiating lease terms 800
Costs of arranging collateral 1,300
Payments made to existing tenants to obtain the lease 500
Our own manager also spent 1 day on lease negotiation. His monthly salary is Rs. 30,000
The annual lease payments are Rs.25,000, payable at the end of each year.
The interest rate implicit in the lease is 12%.
Required
Prepare the journal entries in Taimoor Biscuit manufacturing books for the year ended 31 December, 2015.

Question-2
Silk Leasing Company (SLC) leased a machine to Amir. Lease commenced on 1 July, 2016.
1. The lease was a 4 year lease of a machine with annual lease payments of Rs.25,000, payable in
advance. Useful life is 4 years as well.
2. The estimated residual value of the asset at the end of the lease is Rs.6,000 and lessee has
guaranteed an amount of Rs. 2,000.
3. The fair value of the machine at the commencement of the lease was Rs. 85,000 and SLC incurred
initial direct costs of Rs.3,859 when arranging the lease.
4. The interest rate implicit in the lease is 12%.
Required:
Prepare the journal entries in books of SLC for the year ended 30 June, 2017.

Question-3
X leasing co. leased an equipment, Following is the detail:
Commencement Date = 01-01-2018
Cost of Machine = Rs. 600,000
Useful life = 10 years
Asset purchased on = 01-01-2018
Lease installments to be paid in arrears:
31-12-2018 = Rs. 5,000
31-12-2019 = Rs. 6,000
31-12-2020 = Rs. 7,000
Initial Direct Cost (IDC) paid by lessor on 1-1-2018 amounted to Rs.1,000.
Required:
Prepare journal entries in books of lessor.

Home work
Practice Q. 49 from page 72 of book

Adnan Rauf, FCA Page 1

CAF-07 IFRS 16: LEASES

Lease year end and accounting year end is different

Question-4
Lease commenced on 01 April 2007
Lease term 3 years
Annual rental payable in arrears (being 1st payment made on 31 March 2008) Rs. 30,000
Interest rate 15%

Required:
Pass journal entries for lessee for the year ended 31 December 2007, 2008 and 2009.

Hint for solving above question

Always prepare amortization schedule as per lease year end

Home work
Practice Q.10 from page 59 of book

Adnan Rauf, FCA Page 2

CAF-07 IFRS 16: LEASES
Lecture # 14

Class work Past Paper Q.9 of book (Pg. 153)

Note: Do not listen last 6 minutes and 26 seconds of class (from 1:22:30 till 1:28:56)

I will explain it in a later class

Home work Past Paper Q.8 of book (Pg. 152)

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CAF-07 IFRS 16: LEASES

Lecture # 15

1. Lecture 13 lecture last question was again discussed

Balance sheet and Note was prepared for the same question.

2. GUARANTEED RESIDUAL VALUE

A guarantee made to a lessor by a party unrelated to the lessor that the value of an asset at the end of a
lease will be at least a specified amount.

3. UNGUARANTEED RESIDUAL VALUE [UGRV]

Unguaranteed residual value is that portion of the residual value, the realization of which
 is not guaranteed by anyone or
 is guaranteed solely by a party related to the lessor.
Example If question say residual value is Rs. 10 and Rs. 7 is guaranteed by lessee than 3 is UGRV

4. Question 51 from book

5. INTEREST RATE IMPLICIT IN THE LEASE

The interest rate implicit in the lease is the interest rate that causes the present value of;
a) the lease payments and
b) the unguaranteed residual value to be equal to the sum of:
(i) The fair value of the underlying asset and
(ii) Any initial direct costs of the lessor.
The interest rate implicit in the lease is the IRR of the cash flows from the lessor’s viewpoint.
It is the responsibility of lessor to calculate implicit rate.

6. LESSEE'S INCREMENTAL BORROWING RATE OF INTEREST

The lessee's incremental borrowing rate of interest is the rate of interest that a lessee would have to
pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset
of a similar value to the right-of-use asset in a similar economic environment.
Note for lessee: The lease payments shall be discounted using the interest rate implicit in the lease, if
that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the
lessee’s incremental borrowing rate. (The rate at which lessee can borrow the extra funds)

Please do not listen the recording from 1 hour 14

minute and 45 seconds till 1 hour 15 minute and 2
seconds (1:14:45 till 1:15:02)

I will explain it in next class.

Rise School of Accountancy Page 1

CAF-07 IFRS 16: LEASES
QUESTIONS TO BE SOLVED
1. Practice Q.51 (already done)
2. Question bank Q.5 (Do it in home work)
3. MCQ as below

MCQs
Note: The manufacturer/dealer might offer artificially low rates of interest on finance transaction. In such
cases the selling profit is restricted if a market rate of interest were charged.

MCQ
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) (the low rate is quoted to attract customers) 4%
Market rate of interest 7%
a) What is the amount of net investment in lease as at January 01, 2011?
b) What is the amount to be charged in cost of sales in respect of above transaction on January 01,
2011?

Home work
Practice Q. 54, 57

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CAF-07 IFRS 16: LEASES

Lecture # 16
Class work

No. Discussion Made

1. Discussion of discount rate for lessee and lessor
2. Question-9 from Question bank question (Book page – 170)
On 1.1.15 a motor dealer acquires vehicles of a particular model from the manufacturer for
Rs.21,000, at 20% discount on the recommended retail price of Rs.26,250. It offers them for sale
at the recommended retail price with 0% finance over three years, provided three annual
payments of Rs.8,750 are made in advance. The market rate of interest is 8%.
Required:
Prepare journal entries for the year ended 31 December 2015.
Para 73 (Book Page 55)
The manufacturer or dealer might offer artificially low rates of interest on the finance
transaction. In such cases the selling profit is restricted to that which would apply if a market
rate of interest were charged.[Para 73]
3. Discussion of Past paper Q.9 (Requirement was explained that whether it is a lessee question or
lessor question)
4. Question-9 from Question bank question (Book page – 169)
Consider the following independent scenarios:
Sher Khan Limited (lessee) enters in to lease over a plant
Scenario 1:The lease is non-cancellable for a period of 3 years from commencement date after
which Sher Khan Limited then has the option to extend the lease for a further 2 years. Sher Khan
Limited is reasonably certain that it will exercise the renewal option.
Scenario 2:The lease is non-cancellable for a period of 3 years from commencement date after
which Sher Khan Limited then has the option to extend the lease for a further 2 years. Sher Khan
Limited is reasonably certain that it will not exercise the renewal option.
Scenario 3: The lease is for a 10-year period during which the first 7 years is non-cancellable.
At the end of the 7- year period, Sher Khan Limited has the option to terminate the lease. Sher
Khan Limited is reasonably certain that it will exercise the termination option.
Scenario 4:The lease is for a 10-year period during which the first 7 years is non-cancellable. At
the end of the 7- year period, Sher Khan Limited has the option to terminate the lease. Sher Khan
Limited is reasonably certain that it will not exercise the termination option.
Scenario 5: The lease is for a 10-year period during which the first 7 years is non-cancellable.
At the end of the 7- year period, both Sher Khan Limited and the lessor have the option to
terminate the lease. Sher Khan Limited is reasonably certain that it will not exercise the
termination option.
Required: Calculate lease term for each of the scenarios above along with explanation.
5. Lease The non-cancellable period for which a lessee has the right to use an underlying
term asset, together with both:
[Appendix  periods covered by an option to extend the lease if the lessee is reasonably
A – IFRS certain to exercise that option; and
16]  periods covered by an option to terminate the lease if the lessee is reasonably
certain not to exercise that option. [ICAP Q.B Q.5]
6. Extension A lease may be split into a primary period followed by an option to extend for
of lease further period (secondary period). The rent of secondary period may be small or
may be zero. If it is reasonably certain that lessee will extend the period than
secondary period will be a part of lease period.

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CAF-07 IFRS 16: LEASES

7. Disclosures/Notes
1. Lessee (Simple) Prepare 2 notes
a. Lease (Showing description and maturity analysis)
b. Right of use asset (Just like IAS-16) (Past paper Q.4 was referred)

2. Lessor (Finance lease) Prepare 1 note

(Showing description and maturity analysis and reconciliation)

3. Lessor (Operating lease) Prepare 2 notes

a. Operating lease (Showing description and maturity analysis)
b. Property, plant and equipment (Just like IAS-16)

8. Page 44 of book (Disclosure for lessee)

Disclosures for lessee:
A lessee shall disclose information about its leases for which it is a lessee in a single note or
separate section in its financial statements. However, a lessee need not duplicate information that
is already presented elsewhere in the financial statements, provided that the information is
incorporated by cross reference in the single note or separate section about leases. [Para 53]
1. A lessee shall disclose the following amounts for the reporting period:
(a) depreciation charge for right-of-use assets by class of underlying asset;
(b) interest expense on lease liabilities;
(c) the expense relating to short-term leases. This expense need not include the
expense relating to leases with a lease term of one month or less;
(d) the expense relating to leases of low-value assets.
(f) income from subleasing right-of-use assets;
(g) total cash outflow for leases;
(h) additions to right-of-use assets;
(i) gains or losses arising from sale and leaseback transactions; and
(j) the carrying amount of right-of-use assets at the end of the reporting period by
class of underlying asset.
2. A lessee shall provide the disclosures specified in paragraph 53 in a tabular format, unless
another format is more appropriate. The amounts disclosed shall include costs that a lessee
has included in the carrying amount of another asset during the reporting period.
3. If a lessee measures right-of-use assets at revalued amounts applying IAS 16, the lessee
shall disclose the information required by IAS 16 for those right-of-use assets.
4. If right-of-use assets meet the definition of investment property, a lessee shall apply the
disclosure requirements in IAS 40. [Para 56]
5. A lessee shall disclose the amount of its lease commitments for short-term leases
accounted if the portfolio of short-term leases to which it is committed at the end of the
reporting period is dissimilar to the portfolio of short-term leases to which the short-term
lease expense disclosed. [Para 55]
6. Matutity analysis
Under IFRS 16 the financial liability of lessee under lease arrangement requires a maturity
analysis that is dealt by IFRS 7. According to IFRS 7, the lessee is required to disclose maturity
analysis of lease liability for remaining contractual maturities. The contractual maturities are the
future lease payments (without discounting). [Para 58] Moreover, IFRS 7 requires that in
preparing the maturity analysis, a lessee uses its judgment to determine an appropriate number of
time bands.

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CAF-07 IFRS 16: LEASES

9. Presentation for lessee (Page 45 of book)

1. On the balance sheet, the right-of-use asset can be presented either separately or in the
same line item in which the underlying asset would be presented. The lease liability can be
presented either as a separate line item or together with other financial liabilities. If the right-of-
use asset and the lease liability are not presented as separate line items, an entity discloses in the
notes the carrying amount of those items and the line item in which they are included. [Para 47]
2. In statement of profit or loss and other comprehensive income, depreciation charge of the
right-of-use asset is presented in the same line item/items in which similar expenses (such as
depreciation of PPE) are shown. The interest expense on the lease liability is presented as part of
finance costs. However, amount of interest expense on lease liabilities has to be disclosed in the
notes. [Para 49]
3. In the statement of cash flows, lease payments are classified consistently with payments
on other financial liabilities: [Para 50]
 The part of the lease payment that represents cash payments for the principal portion of the
lease liability is presented as a cash flow resulting from financing activities.
 The part of the lease payment that represents interest portion of the lease liability is presented
either as an operating cash flow or a cash flow resulting from financing activities (in
accordance with the entity’s accounting policy regarding the presentation of interest
payments).
 Payments on short-term leases, for leases of low-value assets and variable lease payments not
included in the measurement of the lease liability are presented as an operating cash flow.
10. Disclosures for lessor (Finance Lease) Page 53 of book
A finance lessor must disclose the following: [Para 90(a), 93, 94]
a) Selling profit or loss (for manufacturer/dealor lessor)
b) Finance income on the net investment in the lease
c) Income relating to variable lease payments not included in the measurement of the net
investment in the lease
d) Qualitative and quantitative explanation of the significant changes in the carrying amount
of the net investment in the lease
e) Maturity analysis of undiscounted lease payment receivable for a minimum of each of the
first five years plus a total amount for the remaining years.
f) A lessor shall reconcile the undiscounted lease payments to the net investment in the
lease. The reconciliation shall identify the unearned finance income relating to the lease
payments receivable and any discounted unguaranteed residual value.
Qualitative and quantitate information [Para 92]
A lessor shall provide a qualitative and quantitative explanation of the significant changes in the
carrying amount of the net investment in finance leases.
a) Nature of the lessor’s leasing activities
b) Management of the risk associated with any rights that the lessor retains in underlying
assets.

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CAF-07 IFRS 16: LEASES

11. Disclosures for lessor (Operating Lease) Page 56 of book

Operating lessor presentation and disclosures [Para 90(b),97]
a) Lease income, separately disclosing income relating to variable lease payments that do not
depend on an index or a rate.
b) Maturity analysis of undiscounted lease payments to be received for a minimum of each of
the first five years plus a total amount for the remaining years
c) Disclosure requirements in IAS 36, IAS 38, IAS 40 and IAS 41 for assets subject to
operating leases
d) Disclosure requirements in IAS 16 for items of PPE subject to an operating lease.

Qualitative and quantitate information [Para 92]

A lessor shall provide a qualitative and quantitative explanation of the significant changes in the
carrying amount of the net investment in finance leases.
a) Nature of the lessor’s leasing activities
b) Management of the risk associated with any rights that the lessor retains in underlying
assets.
12. Page 56 A-E from book
(For these refer book. I am not reproducing these pages here again)

Home work
1. Practice Q. 58 (Book page 74)
2. MCQ No.3, 5, 8, 9,11 ,12 ,14 ,16 ,21

(MCQ Start from Page 180A in book)

Rise School of Accountancy Page 4

INCOME
TAXES
IAS-12
CAF-07 IAS 12: Income taxes

How we will proceed today

Description Duration as per lecture
Brief introduction From 0 minute till 4 minute 4 second (0:00 – 4:04)
Lecture#1 From 4 minute 5 second till 46 minute 34 second (4:05 - 46:34)
Lecture#2 From 46 minute 35 second till end (46:35 till end)

Lecture # 1 (IAS – 12) Lecture # 17 (Over all)

Question-1
Cost of an asset ( purchased on 01-01-10) Rs. 200
1. Depreciation as per accounting rules 10%
2. Depreciation as per tax rules 30%
3. You sold asset on 30 September 2011 for Rs. 160
4. Tax rate is 40%
Required:
Assuming profit before tax for the year ended 31 December 2010 and 2011 is Rs. 500 each, calculate
current tax.

Lecture # 2 (IAS – 12) Lecture # 17 (Over all)

Question-1
Cost of an asset ( purchased on 01-01-15) Rs. 30,000
Accounting depreciation rates as follows:
-2015 40%
-2016 60%
Tax depreciation rates as follows:
-2015 60%
-2016 40%

Tax rate 30%

Accounting profit for both years Rs.100,000
Accounting and tax depreciation both shall be charged on straight line basis.
Required: Statement of comprehensive income (extracts) for the year ended 31st Dec., 2015 and 2016.

Home work Covered in concept review questions

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

How we will proceed today

Description Duration as per lecture
Past papers Chapter of Lease From 0 minute till 22 minute 30 second
Pg. 153 (Q.10)
IAS-12 In Remaining part of lecture IAS-12 was discussed

Lecture # 3 (IAS – 12) Lecture # 18 (Over all)

Class work

Question-1
1) An organization started business of selling mobiles in 2018.At end of December it is estimated
that warranties offered would cost Rs. 40,000. In 2019 estimate appeared to be correct and repair
cost incurred on mobiles received is Rs. 40,000.
2) Tax authorities allow warranty expense to be deducted when paid.
3) Assume the company earned Profit before tax of Rs. 200,000 for both years.
4) Tax rate is 30%
Required:
1) Prepare profit and loss extracts for year ended 31, December 2018 and 2019.
2) Prepare note to the financial statements for the year ended 31, December 2018 and 2019.

Home work
Question-1
In January, 2002 Suzuki Ltd. purchased machinery for Rs. 550,000.Accounting depreciation is 10% on
straight line basis and tax depreciation is 25% on straight line. Profit before tax was Rs. 100,000,
Rs. 200,000 and Rs. 300,000 in 2002, 2003 and 2004 respectively. Tax rate is 30%. Opening balance of
deferred tax liability / asset was nil.
Required:
a) Calculate tax expense for the year ended December 31, 2002, 2003 and 2004.
b) Prepare the current tax and deferred tax Journal entries for all of the above mentioned years.

Answer-1
Answer-35
a) Taxation expense 2004 2003 2002
Current tax (W-1) (65,250) (35,250) (5,250)
Deferred tax (W-5) (24,750) (24,750) (24,750)
(90,000) (60,000) (30,000)
(W-1)
Calculation of current tax:
2004 2003 2002
Profit before tax 300,000 200,000 100,000
Add: Accounting depreciation (550,000 x 10%) 55,000 55,000 55,000
Less: Tax depreciation (550,000 x 25%) (137,500) (137,500) (137,500)
Taxable profit 217,500 117,500 17,500
Current tax @ 30% 65,250 35,250 5,250

(W-2)

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

Calculation of deferred tax – 2002:

Carrying T.T.D/
amount Tax base (D.T.D) D.T.L/(D.T.A)
Machinery(550,000 – 55,000):(550,000 – 137,500) 495, 000 412,500 82,500
Deferred tax liability (82,500 x 30%) 24,750
(W-3)
Calculation of deferred tax - 2003:
Carrying T.T.D/
amount Tax base (D.T.D) D.T.L/(D.T.A)
Machinery(495,000 – 55,000):(412,500 – 137,500) 440,000 275,000 165,000
Deferred tax liability (82,500 x 30%) 49,500
(W-4)
Calculation of deferred tax - 2004:
Carrying T.T.D/
amount Tax base (D.T.D) D.T.L/(D.T.A)
Machinery(440,000 – 55,000):(275,000 – 137,500) 385,000 137,500 247,500
Deferred tax liability (247,500 x 30%) 74,250
(W-5)
Deferred tax liability
b/d (1.1.2002) -
Def. tax exp (bal.) 24,750
c/d (31.12.2002) (W-2) 24,750
b/d (1.1.2003) 24,750
Def. tax exp (bal.) 24,750
c/d (31.12.2003) (W-3) 49,500
b/d (1.1.2004) 49,500
Def. tax exp (bal.) 24,750
c/d (31.12.2004) (W-4) 74,250
(b) Entries in the books of Suzuki Ltd.
Date Particulars Dr. Cr.
31/12/02 Current tax expense (W-1) 5,250
Current tax payable 5,250
(Recording of current tax expense)
31/12/02 Deferred tax expense (W-5) 24,750
Deferred tax liability 24,750
(Recording of Deferred tax expense)
31/12/03 Current tax expense (W-1) 35,250
Current tax payable 35,250
(Recording of Current tax)
31/12/03 Deferred tax expense (W-5) 24,750
Deferred tax liability 24,750
(Recording of Deferred tax expense)
31/12/04 Current tax expense (W-1) 65,250
Current tax payable 65,250
(Recording of current tax)
31/12/04 Deferred tax expense (W-5) 24,750
Deferred tax liability 24,750
(Recording of Deferred tax expense)

Adnan Rauf, FCA Page 2

CAF-07 IAS 12: Income taxes

How we will proceed today

Description Duration as per lecture
Discussion of Concept review From 0 minute till 5 minute 28 second
questions of Lecture-17 (0:00 – 5:28)
Lecture#4 Past paper Q.2 (IAS-12) Onwards

Note: At 1 hour 34 minute 50 seconds I mistakenly used

the word “deferred tax liability”. The correct word was
“Provision for doubtful debt”
Lecture # 4 (IAS – 12) Lecture # 19 (Over all)
Question-1 (Past paper Q.2 on Pg. 325 of book)
The following information relates to Apricot Limited (AL), a listed company, for the financial year ended
31 December 2011:
(i) The profit before tax for the year amounted to Rs. 60 million (2010: Rs. 45 million).
(ii) The accounting and tax written down value of fixed assets as on 31 December 2010 was
Rs. 95 million and Rs. 90 million respectively. Accounting depreciation for the year is Rs. 10
million (2010: Rs. 9 million) whereas tax depreciation for the year is Rs. 8 million (2010: Rs. 7
million).
(iii) During the year, AL sold a machine for Rs. 3 million and recognized a profit of Rs. 0.5 million.
The tax written down value of the machine as on 31 December 2010 was Rs. 2 million. There
were no other additions/disposals of fixed assets in 2010 and 2011.
(iv) AL earned capital gain of Rs. 6 million (2010:Nil) on sale of shares of a listed company. This
income is exempt from tax.
(v) Bad debt expenses recognized during the year was Rs. 5 million (2010: Rs. 7 million).
(vi) Bad debts written off during the year amounted to Rs. 3 million (2010: Rs. 4 million).
(vii) Deferred tax asset and provision for bad debts as on 31 December 2009 was Rs. 7.44 million and
Rs. 9 million respectively.
(vii) The Company’s assessed brought forward losses up to 31 December 2009 amounted to Rs. 19.25
million.
(viii) Applicable tax rate is 35%.
Required:
Prepare a note on taxation for inclusion in AL’s financial statements for the year ended 31 December
2011 giving appropriate disclosures relating to current and deferred tax expenses including comparative
figures for 2010 and a reconciliation to explain the relationship between tax expense and accounting
profit. (21 marks)
{Spring-12, Q#5}
{ICAP Question Bank, Q#13.11}

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

Lecture # 5 (IAS – 12) Lecture # 20 (Over all)

Note: After 1 hour 10 minutes IFRS-16 short class test

was conducted whose questions are included in
Concept review questions of today class.
Class work
1. Lecture-19 Question was completed in this lecture
2. Class test of IFRS-16 was conducted (Refer first 2 questions of concept review questions of this
class)

Home work
Question-1
The following information is available for calculation of tax liability for the year ended December 31,
2015:
a) The machine has a WDV and tax base of Rs. 80,000 and Rs. 65,000 respectively as on 31 December,
2014.
b) The details of accounting and tax depreciation for the year ended 31 December, 2015 on plant is as
follows:
Rs. in ‘000’
Accounting depreciation 15
Tax depreciation 8
c) During the year, the company incurred a fine of Rs. 20,000. This expense was not deductible for tax
purpose.
d) The deferred tax liability as on 31 December, 2014 is Rs. 1,870
e) The applicable tax rate is 40%.
Required:
Calculate deferred tax expense for the year ended 31 December, 2015.

Answer-1
Deferred tax expense for the year ended December 31, 2015 is Rs. 1,330 (W-2)
(W-1) Calculation of deferred tax – 2015
Carrying T.T.D/
amount Tax base (D.T.D) D.T.L/(D.T.A)
Machine (80,000 – 15,000) : (65,000 – 8,000) 65,000 57,000 8,000
Deferred tax liability (8,000 x 40%) 3,200

(W-2)
Deferred tax liability
b/d (1.1.2015) 1,870
Def. tax exp (bal.) 1,330
c/d (31.12.2015) (W-1) 3,200

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

Note: From 36 minutes till 36 minutes 25 seconds some pages

were shown by me in class relating to Lease summary and
MCQ’s. All of these are already made available to you at end of
lease lectures and in the form of Chapter Notes.
Lecture # 6 (IAS – 12) Lecture # 21 (Over all)
Question-1
Following are the relevant extracts from the financial statements of Floor & Tiles Limited (FTL) for the
year ended 31 December 2015:
Rs. in million
Profit before tax 80
Provision for gratuity for the year 12
Capital gain (exempt from tax) 5
Penalty to the provincial government due to non-compliance of environmental laws 1
The following information is also available:
i) Opening balances of deferred tax liability and provision for gratuity were Rs 5.28 million and Rs.
15 million respectively.
ii) The details of owned fixed assets are as follows:
Accounting Tax
Rupees in million
Opening balance - 01/01/2015 315 283.5
Purchased during the year 5.30 5.30
Depreciation for the year (20) (50)
Closing balance - 31/12/2015 300.30 238.80
iii) On 1 January 2015, a machine costing Rs. 120 million was acquired on lease.
Some of the relevant information is as follows:
 The lease term was 5 years and useful life is 6 years.
 Annual lease rentals amounting to Rs. 30 million are payable in advance.
 The interest rate implicit in the lease is 12.59%.
 As per company policy the machine would be depreciated over its useful life of 6 years.
 IDC (initial direct cost) paid by lessee is Rs. 3 million.
iv) The amount of gratuity paid to outgoing members was Rs. 10 million.
v) Applicable tax rate is 32%.
Required:
Prepare a note on taxation (expense) for inclusion in FTL’s financial statements for the year ended 31
December 2015 giving appropriate disclosures relating to current and deferred tax expenses including a
reconciliation to explain the relationship between tax expense and accounting profit. (14)

Home work
1. Past paper Q.8 (must) (Page no. 329 of Book)
2. Practice Q.62 (if you find time) (Page no. 249 of Book)

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CAF-07 IAS 12: Income taxes

Lecture # 7 (IAS – 12) Lecture # 22 (Over all)

New concept: Taxes in the books of lessor

Question-1
On 1 January 2015, a machine purchased for Rs. 120 million was given on lease. Some of the relevant
information is as follows:
(i) The lease term was 5 years and useful life is 6 years.
(ii) Annual lease rentals amounting to Rs. 30 million are payable in advance.
(iii) The interest rate implicit in the lease is 12.59%.
Applicable tax rate is 32%.
The tax department tax rental income on receipt basis. Tax depreciation rate is 20% using straight line
method.
Profit before tax for 2015 is Rs. 300 million and for 2016 is Rs. 400 million.
Required:
Prepare journal entries in the books of lessor for the year ended December 31, 2015 and December 31,
2016 to record the above transactions including current tax and deferred tax. (12)

Short Questions
1. What is the amount to be shown within non-current assets at 31 December 2017?
2. What will be recorded in financial statements at 31 December 2016 in respect of the lease
receivable for following?
 Finance income/ Interest income
 Non-current asset
 Current asset
3. What is amount of net investment (net investment means lease receivable) in lease to be
presented under current assets as at 31 December 2017?
4. The accountant of an entity is confused by the term 'tax base'. What is meant by 'tax base'?
 The amount of tax payable in a future period
 The tax regime under which an entity is assessed for tax
 The amount attributed to an asset or liability for tax purposes
 The amount of tax deductible in a future period
5. 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

Home work
1. IAS-12 from book notes Practice set Q.69 (Pg. 252), Q. 41 (Pg. 241)
2. IFRS-16 from book note MCQ 2- 4 (IFRS-16 book notes, Page 180A onwards)

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

This summary will be discussed in lecture-23

Summary relating to current and deferred

tax working in the books of lessor
Lessor

Finance lease Operating lease

Current tax (Finance lease) Current tax (Operating lease)

Profit before tax Profit before tax
Add: Rental income received Add: Rent received
Accounting depreciation – IFRS
Less: Interest income-IFRS Less: Rental income (S.L) – IFRS
Tax depreciation Tax depreciation

Taxable profit Taxable profit

Deferred tax as on C.A T.B Deferred tax as on C.A T.B

Asset 0  Asset  
Lease receivable  0 Unearned rental income/ Rent receivable  0
Interest receivable (Adv.)  0

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CAF-07 IAS 12: Income taxes

Lecture # 8 (IAS – 12) Lecture # 23 (Over all)

Question-1
Bilal Engineering Limited earned profit before tax amounting to Rs. 50 million during the year ended
December 31, 2009. The accountant of the company has submitted draft accounts to the Finance Manager
along with the following information which he believes could be useful in determining the amount of
taxation:
(i) Accounting deprecation for the year is Rs. 10 million.
(ii) A motor vehicle costing Rs. 1 million was taken on lease in 2009. Related clauses of the lease
agreement are as under:
 Annual installment of Rs. 0.3 million is payable annually in advance.
 The lease term and useful life is 4 years and 5 years respectively.
 The interest rate implicit in the lease is 13.701% per annum.
 Accounting depreciation on the leased vehicle is included in the depreciation referred to in
para (i) above.
(iii) Tax depreciation on the assets owned by the company is Rs. 7 million.
(iv) Research and development expenses of Rs. 15 million were incurred in 2007 and are being
amortized over a period of 15 years. For tax purposes research and development expenses are
allowed to be written off in 10 years. However, 10% of these expenses were not verifiable and
have not been claimed.
(v) The applicable tax rate is 35%.
Required:
a) Prepare journal entries in respect of taxation, for the year ended December 31, 2009.
b) Prepare a reconciliation to explain the relationship between tax expense and accounting profit as is
required to be disclosed under IAS-12. (15) {Spring-10, Q#5} {ICAP Question Bank, Q#13.9}

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CAF-07 IAS 12: Income taxes

Instructions for students for todays lecture:

1. The solution of question-1 below is attached as handwritten page-3.
2. In this lecture I have referred yesterday’s handwritten page # 1 a lot of
time. So please keep it with you for todays lecture.
Lecture # 11 (IAS – 12) Lecture # 26 (Over all)
Question-1
Continuing from Monkey Limited (ML) question of Lecture #10 assume that:
(i) Electricity is deductible for tax purposes when incurred (on accrual basis).
(ii) Insurance is also allowed for tax purposes when incurred.
(iii) Tax authorities tax interest income when earned (on accrual basis).
(iv) Rental income is taxable when earned (on accrual basis).
Required: Prepare note on taxation for inclusion in ML's financial statements for the year ended
31 December 2018 and a reconciliation to explain the relationship between tax expense and
accounting profit. (Show comparative figures)

Question-2
Rose Limited (RL) is finalizing its financial statements for the year ended 31 December 2017. In
this respect, the following information has been gathered:
(i) Applicable tax rate is 30% except stated otherwise.
(ii) During the year RL incurred advertising cost of Rs. 15 million.
This cost is to be allowed as tax deduction over 5 years from 2017 to 2021.
(iii) Unearned commission as on 31 December 2017 is Rs. 10 million. Commission is taxable when it
is earned by the company.
(iv) On 1 April 2017, RL invested Rs. 40 million in a fixed deposit account for one year at 10% per
annum. Interest will be received on maturity.
Interest was taxable on receipt basis at 10% in 2017. However, with effect from 1 January 2018,
interest received is taxable at 15%.
(v) Dividend receivable as on 31 December 2017 is Rs. 8 million.
Dividend income was taxable on receipt basis at 20% in 2017. However, with effect from 1
January 2018, dividend received is exempt from tax.
(vi) Trade and other payables amounted to Rs. 40 million as on 31 December 2017 which include
rent payable of Rs. 12 million.
Rent is allowed by tax authorities on payment basis. Tax base of remaining trade and other
payables is Rs. 25 million.
(vii) On 1 January 2016, a machine was acquired on lease for a period of 4 years at annual lease rental
of Rs. 28 million, payable in advance. Interest rate implicit in the lease is 10%.
Under the tax laws, all lease related payments are allowed in the year of payment.
(viii) On 1 July 2017 RL sold one of its four buildings for Rs. 60 million. These buildings
were acquired on 1 January 2013 at a cost of Rs. 100 million each having useful life of 30
years.
Tax depreciation rate for owned fixed assets is 10% on reducing balance method. Further, full
year’s tax depreciation is allowed in year of purchase while no depreciation is allowed in
year of disposal.
Required: Compute the deferred tax liability/asset to be recognized in RL’s statement of
financial position as on 31 December 2017. (16)

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

Instructions for students:

1. At 13:09 (13 minute 9 second) I said open solution at back. Actually it is Solution of
class work Q. of lecture 26 and given to you on handwritten page 4 today.
2. In first 15 minutes today, lecture-26 question was completed.
3. Further at some places I also referred to Handwritten page no. 1

Lecture # 12 (IAS – 12) Lecture # 27 (Over all)

Class work
Question-1
The following information relates to Galaxy International (GI), a listed company, which was incorporated
on January 1, 2009.
(i) The profit before taxation for the year ended December 31, 2010 amounted to Rs. 200
million.
(ii) The details of accounting and tax depreciation on fixed assets is as follows
2010 2009
Rs. in million
Accounting depreciation 15 15
Tax depreciation 6 45
st
(iii) On 1 April 2010 the Galaxy received loan of Rs. 25 million @ 8%. Interest is paid in arrears
on 30th September and 31th March each year. Assume that tax relief on interest expense is
only given when the interest is paid.
(iv) On 1st April 2010 Galaxy invested Rs. 20 million as a long term deposit. Interest at 15% pa is
receivable on 30th September and 31th March. Assume that interest income is not taxed until
the cash is actually received.
(v) Other income includes:
 commission receivable of Rs. 12 million.
 dividend receivable of Rs. 35 million.
Both incomes were taxable on receipt basis at 30% up to 31 December 2010. With effect
from 1 January 2011 commission income is exempt from tax whereas dividend income is
taxable at 10% on receipt basis.
(vi) Opening balance of deferred tax liability on January 1, 2010 is Rs. 10.5 million.
(vii) The applicable tax rate is 35%.

Required:
Prepare a note on taxation for inclusion in the company’s financial statements for the year ended
December 31, 2010 giving appropriate disclosures relating to current and deferred tax expenses including
a reconciliation to explain the relationship between tax expense and accounting profit.
(16 marks)

Home work
Past paper Q.6 (except adjustment vii which I will explain after 2 to 3 lectures) (Book page – 328)

Home work Question is Very important question.

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

Instructions for students:

Near 38 minutes handwritten page 5 was distributed in class which was
discussed after 1 hour 27 minutes.

Lecture # 13 (IAS – 12) Lecture # 28 (Over all)

Class work
Question-1 (It is Q. 77 of practice set of book on page 256 of book)
Following data relates to ABC & Co.
Cost of vehicle on 1 January 2001 Rs. 120,000
Depreciation on vehicle to nil residual value using straight line method 3 years
Capital Allowance (depreciation allowed by the tax authorities ) using straight line method 2 years
Income tax rate 30%
Profit or loss before tax (after deducting any depreciation on the vehicle ) for the year ended
31 December 2001 (40,000)
31 December 2002 (20,000)
31 December 2003 100,000
Required:
a. Calculate the taxable profits and current tax for year ended 2001, 2002 and 2003.
b. Calculate the Deferred tax balances as on year ended 2001, 2002 and 2003.
c. Prepare income statement (Extracts) for the year ended 31 December 2001, 2002 and 2003.
d. Prepare financial statement (Extracts) as on year ended 31 December 2001, 2002 and 2003.
(Only disclose the deferred tax balance).
e. Prepare a note on taxation (expense) for inclusion in ABC & Co.’s financial statements for the year
ended 31 December 2001, 2002 and 2003.

Question-2
Continuing from above question assume at 31 Dec, 2001 the entity thinks that there will be no future
taxable profits because of deteriorating position of business, how we will do working 2 now.

However as on 31 December 2002 management re-assessed the business position after doing some
restructuring and now it expects profits of only Rs. 70,000 in future. Prepare revised W-3.

Home work
IAS-12
1. Past paper Q.10 (Page 331) (Must do it before Lecture-29) (Very important question)
2. Practice Q. 78 (Page 256) (It is like Question-1 done in class above)
3. Practice Q. 65 (Page 250) (You may skip it if you do not find time)

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

How we will move today:

1. Past Paper Q. 10 (Home work of last class) was discussed in first 49 minutes.
2. I said at 49 minutes “Kal walay notes nikalin”. That is actually handwritten page 5
given in lect. 28.
Lecture # 14 (IAS – 12) Lecture # 29 (Over all)
Question-1 (Short questions relating to over and under provision) (This question is not in book)
1. Moin Limited accounting records shown the following for year ended December 31, 2009:
Rs. 000
Income tax payable for the year 60,000
Over provision in relation to the previous year 5,000
Opening deferred tax liability 26,000
Closing for deferred tax liability 36,000
What is the income tax expense in SOCI for the year ended December 31, 2009?

2. The following information has been extracted from the accounting records:
Rs. 000
Estimated income tax for the year ended 31 December 2008 Rs. 75,000
Income tax paid for the year ended 31 December 2008 Rs. 70,000
Estimated income tax for the year ended 31 December 2009 Rs. 60,000
Opening deferred tax liability 26,000
Closing for deferred tax liability 36,000
What is the income tax expense in SOCI for the year ended December 31, 2009?

3. Following balances are included on trial balance at 31 December 2009.

Rs. 000
Taxation 5,000 Credit
Deferred taxation 26,000 Credit
Other information:
1. The taxation balance relates to an over-provision from 31 December 2008.
2. At 31 December 2009, the directors estimate that the provision necessary for taxation on
current year profits is Rs. 60,000,000.
3. The carrying amount of non-current assets exceeds the tax written-down value by Rs.
120,000,000. 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
31 December 2009?
4. Past paper Q. 6 adjustment (vii) (It will be discussed in Lecture-30)
5. Past paper Q. 7 adjustment (v) (It will be discussed in Lecture-30)
Question-2 (This question is at Pg. 605 of book) (It will be discussed in Lecture-30)
We purchased an asset on 1st January, 2015 for Rs. 5,000. Accounting depreciation rate is 10% and tax
depreciation rate is 15%. Following are the tax rates:
 2015 30%
 2016 32%
Profit for both years is Rs. 1,200.
Required Prepare journal entries and note to financial statements for years ended 31st Dec., 2015 & 2016.
Short question On 1.1.2019 Opening accounting and tax WDV is Rs. 200 and Rs. 300 respectively and
on 31.12.2019 accounting and tax WDV is Rs. 880 and Rs. 820 respectively. Tax rate in 2018 was 30%
and in 2019 is 35%.

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

Required:
Prepare T a/c of 2019?
Also prepare extracts from Note of 2019?

Home work
1. MCQ 2, 3, 4 and 7 (Book page – 362A)
2. Question bank Q. 1 (Page 353)
3. Question bank Q.3 (Page 354)

Adnan Rauf, FCA Page 2

CAF-07 IAS 12: Income taxes

Instructions for Students: There is no need

to use these pages. Just open Lecture-14 notes
and listen the lecture. Just open up these pages
at last 1 minute of lecture.
Lecture # 15 (IAS – 12) Lecture # 30 (Over all)
Class work
1. Remaining portion of lecture # 14
2. Explained income statement approach of calculating deferred tax expense (recording/reversal)
and made revision form Question bank Q.5 and Past paper Q.6
3. Explained reconciliation in note with percentage (Past paper Q.6 and 10 from book)

Question-1
Discuss current and deferred tax consequences for following:
1. The SOFP shows net debtor at Rs. 73,000. The receivables figure is shown net of an allowance
for doubtful balances of Rs. 7,000. This is the first year that such an allowance has been
recognised. A deduction for debts is only allowed for tax purposes when the debtor enters
liquidation.
2. The SOFP shows stock at Rs. 5,000. The figure is shown net of NRV loss of Rs. 1,000. As per
tax laws there in no concept of NRV loss.
Home work
1. Past paper Q.5 (Very important, you must do it) (Page 327 of book)
2. Question as below of Sharakpoor Ltd. (It is a very good question for rate change concepts)

Question-1 (For Home work) (This question is not in book)

In January, 2005 Sharakpoor Ltd. purchased Fixed Assets for Rs. 550,000.Accounting depreciation for
all years is 10% on straight line basis and tax depreciation for 2007 is Rs. 35,000 (2006: 40,000 , 2005:
65,000). Profit before tax was Rs. 200,000 in all years. Tax rate is 40% for 2007 (2006:30%, 2005:35%).
Deferred tax liability as on December 31, 2004 was Rs. 0.
Required:
a) Prepare note to the financial statements for year ended December 31, 2005, 2006 and 2007.
b) Prepare the current tax and deferred tax Journal entries for all of the above mentioned years.

Answer-1 (Sharakpoor)
Sharakpoor Limited “All figures in Rs.”
Notes to the Financial Statements (Extracts only)
For the year ended 31 December, 2007
1 - Taxation
2007 2006 2005
Current tax (W-1) (88,000) (64,500) (66,500)
Deferred tax (W-5) (500 + 8,000) : (500 + 4,500) 8,500 5,000 (3,500)
(79,500) (59,500) (70,000)

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

1.1 Reconciliation between accounting Profit before tax with tax expense

Profit before tax 200,000 200,000 200,000

Tax Rate 40% 30% 35%
Tax on above 80,000 60,000 70,000
Effect of rate change (500) (500) -
79,500 59,500 70,000

(W-1) Calculation of current tax

2007 2006 2005
Profit before tax 200,000 200,000 200,000
Add: Accounting depreciation 55,000 55,000 55,000
Less: Tax depreciation (35,000) (40,000) (65,000)
Taxable profit 220,000 215,000 190,000
Current tax (2007 : 40%, 2006 : 30%, 2005 : 35%) 88,000 64,500 66,500

(W-2)Calculation of deferred tax - 2005:

Carrying T.T.D/
amount Tax base (D.T.D) D.T.L/(D.T.A)
Fixed Assets (550,000 – 55,000) : (550,000 – 65,000) 495,000 485,000 10,000
Deferred tax liability (10,000 x 35%) 3,500

(W-3)Calculation of deferred tax - 2006:

Carrying T.T.D/
amount Tax base (D.T.D) D.T.L/(D.T.A)
Fixed Assets (495,000 – 55,000) : (485,000 – 40,000) 440,000 445,000 (5,000)
Deferred tax liability ( 5,000 x 30%) (1,500)

(W-4)Calculation of deferred tax - 2007:

Carrying T.T.D/
amount Tax base (D.T.D) D.T.L/(D.T.A)
Fixed Assets (440,000 – 55,000) : (445,000 – 35,000) 385,000 410,000 (25,000)
Deferred tax liability ( 25,000 x 40%) (10,000)

(W-5) Deferred tax liability a/c

b/d (1.1.2005) 0
Def. tax exp (bal.) 3,500
c/d (31.12.2005) 3,500
b/d (1.1.2006) 3,500
Def. tax exp (Rate Change) (3,500/35 x 5) 500
Def. tax exp (bal.) 4,500
c/d (31.12.2006) 1,500
b/d (1.1.2007) 1,500
Def. tax exp (Rate Change) (1,500/30 x 10) 500
Def. tax exp (bal.) 8,000
c/d (31.12.2007) 10,000

Adnan Rauf, FCA Page 2

CAF-07 IAS 12: Income taxes

(b) Entries in the books of Sharakpoor Ltd.

Date Particulars Dr. Cr.
31/12/05 Current tax expense (W-1) 66,500
Current tax payable 66,500
(Recording of current tax expense)
31/12/05 Deferred tax expense (W-5) 3,500
Deferred tax liability 3,500
(Recording of Deferred tax expense)
31/12/06 Current tax expense (W-1) 64,500
Current tax payable 64,500
(Recording of Current tax expense)
31/12/06 Deferred tax liability (W-5) 500
Deferred tax expense 500
(Effect of rate change)
31/12/06 Deferred tax liability (W-5) 4,500
Deferred tax expense 4,500
(Reversal of Deferred tax expense)
31/12/07 Current tax expense (W-1) 88,000
Current tax payable 88,000
(Recording of current tax expense)
31/12/07 Deferred tax liability (W-5) 500
Deferred tax expense 500
(Effect of rate change)
31/12/07 Deferred tax liability (W-5) 8,000
Deferred tax expense 8,000
(Reversal of Deferred tax expense)

FURTHER PRACTICE QUESTIONS

(You can do as these 2 questions as home work after Lecture 31)
Question-1
The following information has been gathered for preparing the disclosures related to taxation for
the year ended 31 December 2018:
(i) Profit before tax for the year amounted to Rs. 80 million.
(ii) Other income includes dividend of Rs. 16 million.
(iii) Applicable tax rates are as follows:
2018
Dividend income 12%
General tax rate 30%
Prepare a note on taxation for the year ended 31 December 2018?

Question-2
The following information has been gathered for preparing the disclosures related to taxation for
the year ended 31 December 2015:
(i) Profit before tax for the year amounted to Rs. 60 million.
(ii) Other income includes dividend receivable of Rs. 12 million. Dividend is taxable on receipt basis
at 30% up to 31 December 2015. With effect from 1 January 2016 dividend income is taxable at
10%.
(iii) Applicable tax rates is 35%.
Prepare a note on taxation for the year ended 31 December 2015?

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CAF-07 IAS 12: Income taxes

Answer-1
Notes to The Financial Statements (Extracts)
For the year ended 31 December, 2018
Rs. ‘000’
Tax
Current Tax (W-1) (21,120)
Deferred Tax -
(21,120)

Reconciliation between accounting Profit before tax with tax expense

Profit before tax 80,000
Tax rate 30%

Tax on above 24,000

Tax effect of dividend income [16,000 x 18%] (2,880)
21,120

(W-1) Current tax

Rs. ‘000’
Profit before tax 80,000
Less: Dividend Income (taxable at separate rate) (16,000)
Taxable profit 64,000
Current tax @ 30% 19,200
Add: Tax on dividend income @ 12% (16,000 x 12%) 1,920
21,120

Answer-2
Notes to The Financial Statements (Extracts)
For the year ended 31 December, 2015
Rs. ‘000’
Tax
Current Tax (W-1) (16,800)
Deferred Tax (W-3) (1,200)
(18,000)

Reconciliation between accounting Profit before tax with tax expense

Profit before tax 60,000
Tax rate 35%

Tax on above 21,000

Tax effect of dividend income [12,000 x 25%] (3,000)
18,000
(W-1) Current tax
Rs. ‘000’
Profit before tax 60,000
Less: Dividend Income taxable in next year (12,000)
Taxable profit 48,000
Current tax @ 35% 16,800

Adnan Rauf, FCA Page 4

CAF-07 IAS 12: Income taxes

(W-2) Calculation of Deferred tax -2015

Carrying T.T.D/
amount Tax base (D.T.D) Tax @ 10%
Dividend receivable 12,000 - 12,000 T.T.D 1,200 D.T.L

(W-3)
Deferred tax Liability a/c
b/d (1/1/2015) -
Def. tax exp (bal.) 1,200
c/d (31/12/2015) 1,200

(W-4)
Dividend income

P/L 12,000
Closing receivable 12,000

ON NEXT PAGE YOU WILL FIND

SUMMARY OF IAS-12

Adnan Rauf, FCA Page 5

Summary of IAS-12 CAF-07

Current tax Deferred tax

Reverse Record Carrying amount Tax base
1. Lessee (IDC will always be deducted in current tax)
A. Normal lease 1. Interest expense Lease installment 1. Right of use Zero
2. Depreciation on right paid (including 2. Lease liability
of use Down payment) 3. Interest payable
B. Low value asset 1. Rent expense on Lease installment Rent payable/Rent Zero
straight line basis paid prepaid
C. Short term lease 1. Rent expense Lease installment Normally nothing Zero
paid
2. Lessor (IDC will always be deducted in current tax)
D. Finance lease Interest income 1. Lease installment 1. Lease receivable PPE – BV (after
received 2. Interest receivable deducting dep. as per
2. Tax depreciation tax rules)
E. Operating lease 1. Rental income on 1. Lease installment 1. PPE – BV (after PPE – BV (after
straight line basis received deducting dep. as per deducting dep. as per
2. Accounting 2. Tax depreciation accounting rules) tax rules)
Depreciation 2. Rent receivable/
unearned
3. Provision for Warranty/Gratuity Warrant expense/Gratuity Warranty Closing balance in a/c Zero
expense paid/Gratuity paid
4. Provision for doubtful debt Bad debt expense Bad debt written off Closing balance in a/c Zero
5. Owned PPE/Intangibles 1. Accounting 1. Tax depreciation PPE – BV (after PPE – BV (after
depreciation and initial deducting dep. as per deducting dep. as per
2. Accounting allowance accounting rules) tax rules)
gain/loss on disposal 2. Tax gain/loss on
disposal
6. Borrowing cost (Interest Nothing Interest expense CWIP/Building/Plant CWIP/Building/Plant
capitalized construction/ (including Interest) (excluding Interest)
installation of qualifying asset)
7. *Expenses/incomes
A. If tax authorities use cash basis Reverse income/expense and record cash Closing balance Zero
B. If tax authorities use accrual Do nothing Closing balance Closing balance
*Expenses (such as rent expense, electricity etc.) /incomes (such as rental income, interest income, commission income etc.)

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CAF-07 IAS 12: Income taxes

Instructions for Students: There is no need

to use these pages. Just open Lecture-15
(overall Lecture#30) notes and listen the
lecture. Just open up these pages end of
lecture.

Lecture # 16 (IAS – 12) Lecture # 31 (Over all)

Class work
Sr. Time Description
No.
1. 0 min to 11 min Discussed Past paper Q.5
2. 12 min to 41 min From Lecture-15 - Explained income statement approach of calculating
deferred tax expense (recording/reversal)
3. 42 min to 53 min From Lecture-15 - Explained reconciliation in note with percentage in past
paper Q.6 and Q.10
4. 54 min to 1 hour From Lecture-15 – Discussed Class work Question-1 dealing with debtors and
10 min NRV loss.
5. 1 hour 11 min to Practice set Q. 65 (2 adjustments discussed)
1 hour 14 min
6. 1 hour 15 min to Discussed Page 3 of lecture 15
1 hour 20 min
7. 1 hour 21 min to IAS-12 Summary page was discussed (It is actually page # 6 given with lecture
1 hour 25 min 30 overall)
8. 1 hour 25 min till Explained SOCI and SOFP format for explaining posting of revaluation of
end non-current assets

Home work
1. Lecture-15 Last 2 further practice questions from page 3 to 5.
2. Following 2 questions:

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CAF-07 IAS 12: Income taxes

Question-1
XYZ Limited had an accounting profit before tax of Rs. 90,000 for the year ended 31st December 2016.
The tax rate is 30%.
The following balances and information are relevant as at 31st December 2016.
Non-current assets Rs.
Property 1 63,000
Plant and machinery 2 100,000
Assets held under lease 3 80,000
Receivables:
Trade receivables 4 73,000
Interest receivable 5 1,000
Payables
Fine 10,000
Lease obligation 3 85,867
Interest payable 5 3,300

Note 1 The property cost the company Rs. 70,000 at the start of the year. It is being depreciated on a
10% straight line basis for accounting purposes.
The company’s tax advisers have said that the company can claim Rs. 42,000 accelerated
depreciation as a taxable expense in this year’s tax computation.
Note 2 The balance in respect of plant and machinery are after providing for accounting depreciation
of Rs.12,000. Tax base of plant and machinery 31 Dec. 2016 is Rs. 90,000. Tax depreciation is
Rs. 10,000.
Note 3 The asset held under the lease was acquired during the period. Depreciation and finance
charges recorded in books amounted to Rs. 20,000 and Rs. 14,667 respectively.
Rental expense for leases is tax deductible. The annual rental for the asset is Rs.28,800 and was
paid on 31st December 2016.
Note 4 The receivables figure is shown net of an allowance for doubtful balances of Rs. 7,000. This is
the first year that such an allowance has been recognised. A deduction for debts is only allowed
for tax purposes when the debtor enters liquidation.
Note 5 Interest income is taxed and interest expense is allowable on a cash basis. There were no
opening balances on interest receivable and interest payable.
Opening balance in deferred tax liability account is Rs. 3,600.

Required:
a. Calculate current tax expense for the year ended 31 December 2016.
b. Calculate deferred tax expense for the year ended 31 December 2016.
c. Prepare a note on taxation (expense) for inclusion in ITL’s financial statements for the year ended 31
December 2016 giving appropriate disclosures relating to current and deferred tax expenses.

Question-2
B Ltd. had an accounting profit before tax of Rs. 500,000.
This contained income of Rs. 20,000 which is not taxable (means exempt).
Accounting depreciation in the year was Rs. 100,000 and tax allowable depreciation was Rs. 150,000.
This means that a temporary difference of Rs. 50,000 originated in the year.
Tax rate is 30%.
Required:
Calculate the taxable profits and current tax for the year and prepare a note on taxation (expense) for
inclusion in B Ltd’s financial statements for the year in rupees and in percentage.

Adnan Rauf, FCA Page 2

CAF-07 IAS 12: Income taxes

Answer-1
(a) Calculation of current tax
2016
Rs
Profit before tax 90,000
Add: Accounting Depreciation on property (70,000 x 10%) 7,000
Accounting Depreciation on plant and machinery 12,000
Depreciation of leased asset 20,000
Interest Expense of leased asset 14,667
Increase in provision for doubtful debt 7,000
Interest expense 3,300
Fine 10,000
73,967
Less: Tax depreciation on property 42,000
Tax depreciation on plant and machinery 10,000
Lease rentals 28,800
Interest income 1,000
(81,800)
Taxable profit 82,167
Current tax @30% 24,650
(b) Calculation of deferred tax - 2016
Carrying
amount Tax Base T.T.D/(D.T.D) D.T.L/(D.T.A)
Property 63,000 28,000 35,000
(70,000 - 7,000) : (70,000 – 42,000)
Plant and machinery 100,000 90,000 10,000
Right of use 80,000 - 80,000
Lease liability 85,867 - (85,867)
Trade receivable 73,000 80,000 (7,000)
Interest receivable 1,000 - 1,000
Fine 10,000 10,000 -
Interest payable 3,300 - (3,300)
29,833
Deferred tax liability (29,833 x 30%) 8,950

c)
Notes to the Financial Statements
For the year ended 31 December, 2016
Taxation expense 2016
Current tax (24,650)
Deferred tax (5,350)
(30,000)
Reconciliation between accounting profit with tax expense
2016
Profit before tax 90,000
Tax rate @30% 27,000
Tax effect of Fine (10,000 x 30%) 3,000
30,000

Adnan Rauf, FCA Page 3

CAF-07 IAS 12: Income taxes

(W-1)
Deferred tax liabilty a/c
b/d 3,600
Deferred tax expense (Bal.) 5,350
c/d 8,950
(W-2)
Interset income a/c

P/L (Bal.) 1,000

c/d 1,000
(W-3)
Interset expense a/c

P/L (Bal.) 3,300

c/d 3,300

Homework
Question-1
Ghazi Fabrics International Ltd (GFIL) purchased a plant for Rs. 500 million on 1 July 2010. The plant
has an estimated useful life of 10 years and no residual value.
GFIL uses revaluation model for subsequent measurement of its property, plant and equipment and
accounts for revaluations on net replacement value method. The details of revaluations performed by an
independent firm of valuers are as follows:
Revaluation date Fair value
30 June 2011 Rs. 630 million
30 June 2012 Rs. 320 million
30 June 2013 Rs. 560 million

Other information:
1. Profit before tax for each year is 400 million. Tax rate is 30%.
2. Tax authorities allow depreciation over a period of 10 years.
3. Tax authorities do not consider revaluation model.

Required:
a) Prepare note relating to the tax for the year ended 30 June 2011, 2012, 2013 and 2014.
b) Prepare Journal entries for the year ended 30 June 2011, 2012, 2013 and 2014.

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

Answer-1
a)
Ghazi Fabrics International Ltd
Note to the Financial Statement
For The year ended
Rs. in million
2014 2013 2012 2011
1. Taxation
Current Tax (W-1) (129) (96) (150) (120)
Deferred Tax (W-2) 9 (24) 30 -
(120) (120) (120) (120)

1.1 Reconciliation of PBT with tax expense

PBT 400 400 400 400
Tax Rate 30% 30% 30% 30%
Tax on above 120 120 120 120

(W-1) Calculation of Taxable Profit:

2014 2013 2012 2011
Profit before tax 400 400 400 400
Add: Accounting Deprecation 80 40 70 50
Add : Revaluation Loss reversed - - 80 -
Less; Tax Depreciation (500/10) (50) (50) (50) (50)
Less:: Revaluation income reversed - (70) - -
430 320 500 400
Current Tax @ 30% 129 ` 96 150 120
(W-2) Deferred Tax Calculation
Calculation of deferred tax Liability/(Asset) as on
Carrying Difference Tax @ 30%
amount Tax Base T.T.D/(D.T.D) D.T.L./(D.T.A)
Plant - 30/06/11 630 450 180 54
Plant - 30/06/12 320 400 (80) (24)
Plant - 30/06/13 560 350 210 63
Plant - 30/06/14 480 300 180 54

Dr. Deferred tax liability Cr.

30/06/11 D.T.E (bal.) 0 01//07/10 b/d 0
30/06/11 c/d 54 30/06/11 Plant (W-3) 54
30/06/12 D.T.E (bal.) 30 01//07/11 b/d 54
30/06/12 Plant (W-3) 48 30/06/12 c/d 24
01//07/12 b/d 24 01//07/12 Plant (W-3) 63
30/06/13 c/d 63 30/06/13 D.T.E (bal.) 24
30/06/14 D.T.E (bal.) 9 01//07/13 b/d 63
30/06/14 c/d 54

Adnan Rauf, FCA Page 2

CAF-07 IAS 12: Income taxes

(W-3) Calculation of revaluation surplus and depreciation on Plant

Plant Rev. SOCI Tax on Net
Surplus (P/L) Surplus Surplus
Date Description (30%) (70%)
-----------Rs. in million-----------
01/7/10 Cost 500
30/6/11 Depreciation (500/10) (50)
30/6/11 WDV 450
30/6/11 Revaluation surplus (bal.) 180 180 54 126
30/6/11 Revalued amount 630 180 54 126
30/6/12 Depreciation over 9 years (70) (20) (6) (14)
30/6/12 WDV 560 160 48 112
30/6/12 Revaluation loss (bal.) (240) (160) (80) (48) (112)
30/6/12 Revalued amount 320 - (80) - -
30/6/13 Depreciation over 8 years (40) 10
30/6/13 WDV 280 (70)
30/6/13 Revaluation surplus (bal.) 280 210 70 63 147
01/7/13 Revalued amount 560 210 - 63 147
30/6/14 Depreciation over 7 years (80) (30) - (9) (21)
30/6/14 WDV 480 180 - 54 126
b)

Journal Entries
Date Particulars Dr. Cr.
01/07/10 Plant 500
Bank 500
(Recording of Asset )
30/06/11 Depreciation 50
Accumulated Depreciation 50
(Recording of depreciation expense)
30/06/11 Current Tax Expense 120
Current Tax Payable 120
(Recording of current tax expense)
30/06/11 Accumulated Depreciation 50
Plant 50
(Transfer of accumulated depreciation to Plant)
30/06/11 Plant 180
D.T.L 54
Revaluation Surplus 126
(Recording of revaluation)
30/06/12 Depreciation 70
Accumulated Depreciation 70
(Recording of depreciation expense)
30/06/12 Revaluation Surplus 14
Retained Earning 14
(Transfer of remaining Rev. surplus to retained earnings)
30/06/12 Current Tax Expense 150
Current Tax Payable 150
(Recording of current tax expense)

Adnan Rauf, FCA Page 3

CAF-07 IAS 12: Income taxes

30/06/12 D.T.L 30
Deferred Tax Expense 30
(Reversal of D.T.E)
30/06/12 Accumulated Depreciation 70
Plant 70
(Transfer of accumulated depreciation to Plant)
30/06/12 P/L 80
D.T.L 48
Revaluation Surplus 112
Plant 240
(Recording of revaluation )
30/06/13 Depreciation 40
Accumulated Depreciation 40
(Recording of depreciation expense)
30/06/13 Current Tax Expense 96
Current Tax Payable 96
(Recording of current tax expense)
30/06/13 Deferred Tax Expense 24
D.T.L 24
(Recording of D.T.E)
30/06/13 Accumulated Depreciation 40
Plant 40
(Transfer of accumulated depreciation to Plant)
30/06/13 Plant 280
P/L 70
Deferred Tax liability 63
Revaluation Surplus 147
(Recording of revaluation)
30/06/14 Depreciation 80
Accumulated Depreciation 80
(Recording of depreciation expense)
30/06/14 Revaluation Surplus 21
Revaluation Earnings 21
(Transfer of remaining revaluation)
30/06/14 Current Tax Expense 129
Current Tax Payable 129
(Recording of current tax expense)
30/06/14 Deferred Tax Liability 9
Deferred Tax Expense 9
(Reversal of D.T.E)

Adnan Rauf, FCA Page 4

CAF-07 IAS 12: Income taxes

Lecture # 19 (IAS – 12) Lecture # 34 Part B (Over all)

LO1 OF LECTURE 34 Part B: SOME IMPORTANT DEFINITIONS

1. Accounting profit It is profit or loss for a period before deducting tax expense.
(PBT)
2. Taxable profit (tax It is the profit (loss) for a period, determined in accordance with the rules established by
loss) the taxation authorities, upon which income taxes are payable (recoverable).
3. Tax expense (tax It is the aggregate amount included in the determination of profit or loss for the period
income) in respect of current tax and deferred tax.
4. Current tax It is the amount of income taxes payable (recoverable) in respect of the taxable profit
(tax loss) for a period.
5. Deferred tax It is an accounting measure, used to match the tax effects of transactions with their
accounting impact and thereby produce less distorted results. (It is following of accrual
concept)
6. Carrying amount It is the value at which an item is appearing in the statement of financial position.
7. Tax base The tax base of an asset or liability is the amount attributed to that asset or liability for
tax purposes.
8. Deferred tax These are the amounts of income taxes payable in future periods in respect of taxable
liabilities temporary differences.
9. Deferred tax assets These 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.
10. Temporary These are differences between the carrying amount of an asset or liability in the
differences 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.
11. Permanent These occur when certain items of revenue or expense are excluded from the
differences. computation of taxable profits (for example, certain expenses may not be allowable for
tax purposes and certain incomes may be exempt).

Adnan Rauf, FCA Page 1

CAF-07 IAS 12: Income taxes

LO2 OF LECTURE 34 Part B: TAX BASE OF LIABILITY AND ASSET

Tax base of liability [Para 8 IAS-12]

1. Normal liabilities
The tax base of a liability is its carrying amount, less any amount that will be deductible for tax
purposes in respect of that liability in future periods.
Formula for tax base of liability
Carrying amount X
Less: Future tax deductible amounts (X)
X
2. Revenue/Income in advance
In the case of revenue which is received in advance, the tax base of the resulting liability is its
carrying amount, less any amount of the revenue that will not be taxable in future periods.
Formula for tax base of income in advance
Carrying amount X
Less: Revenue not taxable in future (X)
X

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.
2. Current liabilities include accrued expenses with a carrying amount of 100. The related expense
has already been deducted for tax purposes.
3. Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and
penalties are not deductible for tax purposes.
4. A loan payable has a carrying amount of 100. The repayment of the loan will have no tax
consequences.
5. Current liabilities include rent revenue received in advance, with a carrying amount of 100. The
related rent revenue was taxed on a cash basis.

Required: Calculate tax base in each of the above cases.

Answer

Adjustment number 1-4 1 2 3 4

Carrying amount 100 100 100 100
Less: Future tax deductible amounts (100) (0) (0) (0)
Tax base 0 100 100 100

Adjustment number 5 Adj. 5

Carrying amount 100
Less: Revenue not taxable in future (100)
0

Adnan Rauf, FCA Page 2

CAF-07 IAS 12: Income taxes

Tax base of an asset [Para 7 IAS-12]

The tax base of an asset is the amount that will be deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those
economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.
Formula for tax base of asset
Carrying amount X
Less: Future taxable benefits (from recovery of carrying value) (X)
Add: Future deductible amounts X
X

Examples
1. Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a
cash basis.
2. Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not
taxable.
3. Trade receivables have a carrying amount of 100. The related revenue has already been included
in taxable profit (tax loss).
4. A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax
consequences.
5. Prepaid expenses at year end are Rs. 100. These are deductible when paid.
6. A machine cost 100. Carrying amount of machine is 90. For tax purposes, depreciation of 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.

Required: Calculate tax base in each of the above cases.

Answer

Adjustment number 1 2 3 4 5 6
Carrying amount 100 100 100 100 100 90
Less: Future taxable benefits (100) (0) (0) (0) (100) (90)
Add: Future deductible amounts - - - - 0 70
Tax base 0 100 100 100 0 70

Important note:
It is possible to have a temporary difference even if there is no asset or liability. In such cases there is a zero value
for the asset (or liability). For example, research costs may be expensed as incurred (in accordance with IAS 38) but
tax relief may be given for the costs at a later date. So there will be a deductible temporary difference which will
create deductible temporary difference.

Home work

MCQ 21 and 22 on page 362F of book

Adnan Rauf, FCA Page 3

CAF-07 IAS 12: Income taxes

Lecture # 20 (IAS – 12) Lecture # 35 (Over all)

Class work
How we will proceed:
1. Lecture – 32 Question was solved for IAS-16 Note
2. Yesterday’s Question note was discussed
3. Than following questions were solved:
Questions
01. Hall Limited has the following balances included on its trial balance at 31 December 2013:
Rs. 000
Taxation 700 Debit
Deferred taxation 1,000 Credit
The taxation balance relates to an under provision from 31 December 2012.
At 31 December 2013, the directors estimate that the provision necessary for taxation on current
year profits is Rs. 4.5 million. The balance on deferred tax account needs to be increased to Rs. 5.6
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. 4
million.
The rate of tax is 30%.
Required
What is the charge for taxation that will appear in the statement of profit or loss for the year to 31
December 2013?

02. Hall Limited has the following balances included on its trial balance at 31 December 2013:
Rs. 000
Taxation 700 Debit
Deferred taxation 1,000 Credit
The taxation balance relates to an under provision from 31 December 2012.
At 31 December 2013, the directors estimate that the provision necessary for taxation on current
year profits is 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.
The rate of tax is 30%.
Required
What is the profit or loss income tax charge for the year ended 31 December 2013?

03. Hall Limited has the following balances included on its trial balance at 31 December 2013:
Rs. 000
Taxation 700 Debit
Deferred taxation 1,000 Credit
The taxation balance relates to an under provision from 31 December 2012.
At 31 December 2013, the directors estimate that the provision necessary for taxation on current
year profits is Rs. 4.5 million
A property was revalued during the year giving rise to deferred tax of Rs. 1.2 million. This has been
included in the deferred tax provision of Rs. 5.6 million at 31 December 2013.
The rate of tax is 30%.
Required
What is the profit or loss income tax charge for the year ended 31 December 2013?

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CAF-07 IAS 12: Income taxes

04. 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.
The corporate income tax rate is 30%. The current tax charge was calculated for the year as Rs.
45,000.
Required
(a) What is the taxable temporary difference to be accounted for at 31 December 2014 in relation
to property, plant and equipment?
(b) What amount should be charged to the revaluation surplus at 31 December 2014 in respect of
deferred tax?
(c) What amount will be shown as current tax payable in the statement of financial position of JL
at 31 December 2014?

05. 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. ______________

OFFSETTING
OFFSET OF CURRENT TAX LIABILITIES AND ASSETS
A company can offset current tax assets and current tax liabilities if, and only if, it:
- has a legal (enforceable) right to set off; and
- intends to settle on a net basis.

OFFSET OF DEFERRED TAX LIABILITIES AND ASSETS

A company must offset deferred tax asset with deferred tax liability if:
- it has legal (enforceable) right to set off current tax assets against current tax liabilities (Note for
students: If company can offset current tax assets against current tax liabilities than obviously it
can also setoff deferred tax); and
- the income taxes is levied by the same taxation authority.
Homework
1. MCQ 5, 8, 11, 12 & 14 (Book page 362B onwards)
2. Practice Q.76 (Book page 255)
3. Question Bank Q.7 (Book page 356)

Adnan Rauf, FCA Page 2

CHAPTER-4 IAS 12: INCOME TAXES

Hand Written Page-5

Tax for current year (C.T.E) calculated by company is likely to be an estimate. Tax authorities may change that
amount, so tax charge is adjusted as follows:

Under estimate of tax on previous year profits Over estimate of tax on previous year profits

Recorded as an expense in current year Recorded as a reversal in expense in current year

Dr. Current tax expense - Prior year Xx Dr. Current tax payable Xx
Cr. Current tax payable Xx Cr. Current tax expense - Prior year Xx

Example-1 Example-2
In 2012 company calculated taxable Income at Rs. Same data as example-1 but in 2013 tax authorities
3,000. In 2013 tax authorities changed above amount to changed amount to Rs. 2,500.
Rs. 3,200. (Reason may be disallowance of an Required:
expense). Tax rate is 30%. Pass journal entry and prepare notes to the financial
Required: statements for 2013 only.
Pass journal entry and prepare notes to the financial
statements for 2013 only.
Answer-1 Answer-2
Entry in 2013 Entry in 2013
Dr. Cr. Dr. Cr.
Current tax expense - Prior year 60 Current tax payable 150
Current tax payable 60 Current tax expense - Prior year 150
[(200 x 30%) = 60] [(500 x 30%) = 150]
Co. x Co. x
Notes to the financial statements Notes to the financial statements
For the year ended 31 December 2013 For the year ended 31 December 2013
Taxation: Taxation:
Current tax expense (X) Current tax expense (X)
Deferred tax expense X/(X) Deferred tax expense X/(X)
(X) (X)
Current tax expense - Prior year (60) Current tax expense - Prior year 150
X X

1
INTANGIBLE
ASSETS
IAS-38
CAF-07 IAS-38

Lecture # 1 (IAS – 38) Lecture # 36 (Over all)

Class work
1. Discussed Page 1 of book to revise cost components as per IAS 16.
2. Discussed note of IAS-16 in detail for past paper Q.2 on page 26 of book.
3. Discussed page 190 of book (except discussion on Amortisation/impairment on that page)
4. Discussed page 191 of book (except acquired intangibles)
5. Practice Q.17 (Pg. 196) was solved from book.

Home work
Past paper Q.2 of IAS-16 on page 26 of book (It explain disposals concept of IAS-16)

Adnan Rauf, FCA Page 1

CAF-07 IAS-38

Lecture # 2 (IAS – 38) Lecture # 37 (Over all)

Class work
1. IAS 36 was revised with the help of following class question.
Question (It is on book page no. 611)
A company purchased a bus costing Rs. 500 on 1 January 2013. Its useful life is 5 years.
Following further information is available:
1. On 31 December 2015 a competitor came in market so we decided to check our
bus for impairment test.
2. On 31 December 2015 future cash flows are estimated as follows:
Rs.
Annual inflows ( Fare from Passenger) 70
Annual outflows (Petrol Etc.) 15
3. At the end of life bus can be sold at Rs. 25. Cost to sell will be Rs. 2.
4. If we sell bus today i.e. at 31 December 2015.
Rs.
Fair value 130
Cost to sell 14
5. Discount rate is 12%.

Required:
Calculate impairment loss on 31 December 2015?

2. Handwritten Page no.1 of IAS-38 was distributed and discussed

3. Para 54, 56, 57 and 59 of IAS 38 on page 184 and 185 of book was discussed.
4. On page 188 of book exchange of assets was discussed.

Adnan Rauf, FCA Page 1

CAF-07 IAS-38

Lecture # 3 (IAS – 38) Lecture # 38 (Over all)

Class work

1. Handwritten Page no. 2 and 3 of IAS-38 was discussed (Before this, Pg. 182 Government
grants was also discussed)
2. It was explained how to solve the theory based questions as below:
Solving Theory Questions(This table is available in book pg. 191 C)
1 Initial Recognition

IAS-38 allows the recognition of an identifiable non-monetary assets without

physical substance as intangible assets, if they fulfill following conditions:
 It is probable that expected future economic benefits that are
attributable to the asset will flow to the entity.
 The cost of the assets can be measured reliably.
Since ______ acquired/internally generated by organisation meet the above
conditions, it should recognized as an intangible asset in the statement of financial
position (SOFP) of the company.
2 Initial measurement

(i) It should initially be measured at cost. Entity should capitalize the development
Costs to be work, trial run cost, testing cost, cost to register, depreciation of another asset used
capitalised in its production i.e. Rs. ___ million as intangible asset.
(ii) IAS-38 does not allow capitalization of cost relating to the research work, staff
Costs to be training and advertisement. So these costs should be charged to statement of
expensed comprehensive income in the period in which they incurred.
3 Subsequent to initial recognition

(i) Finite life

Amortisation/ Since the product has a finite life of ___ years, therefore amortization expense
Impairment amounting to Rs. ____ should be recorded in the statement of comprehensive
income (SOCI) based on useful life. Residual value of intangible asset shall be
assumed to be zero (if no active market and no commitment by third party).

Note: If legal life (contractual life) and useful life are different the amortisation
should be charged at shorter of its legal life (i.e. __ years) and its useful life (i.e. ___
years).

Also discuss about impairment loss if there is any external or internal indicator
given in question.

Indefinite life
Since there is an indefinite useful life of the intangible asset, it should not be
amortized. Instead, organization should test the intangible asset for impairment by
comparing its recoverable amount with its carrying amount.
(ii) (a) IAS-38 permits an entity to adopt the cost or revaluation model as its
Measurement accounting policy.
model (b) The revaluation model can only be adopted if intangible assets are traded in
an active market.
(c) The cost model requires intangible assets to be carried at cost less
accumulated amortization and accumulated impairment losses. Revaluation
model requires intangible assets to be carried at revalued amount less
accumulated amortization and accumulated impairment losses.

Adnan Rauf, FCA Page 1

CAF-07 IAS-38

Home work Following 4 MCQ’s and Past Paper Q.9

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
Pg.
go into commercial production until next year. The development project meets the criteria laid down
226A
in IAS 38 Intangible Assets.
of
How should these costs be treated in the financial statements of Power Limited for the year ended 31
book
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?
Pg. (a) purchased brand name
226A (b) training of staff
of (c) internally generated brand
book (d) licences and quotas
03. Which of the following should be included in a company’s statement of financial position as an
intangible asset under IAS 38 Intangible Assets?
Pg. (a) Internally developed brands
226B (b) Internally generated goodwill
of (c) Expenditure on completed research
book (d) Payments made on the successful registration of a patent.
04. 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
Pg. Rs. 9 million. Amortisation is based on a ten-year useful life.
226D
of An impairment review on 1 April 2019 concluded that the brand had a value in use
book 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?
Answer-1 (c) Answer-2 (a) and (d) Answer-3 (d)
Answer-4 [Rs. 12,500,000]
Firstly we will calculate book value on 1.4.19 i.e. at the mid of year
Cost 30
30 6 (10.5)
Less: Accumulated Amortization ( 9+ 10 × 12 )
Book value on 1.4.19 19.5
Now we will calculate Impairment loss on 1.4.19
Book value on 1.4.19 19.5
Recoverable amount (1.4.19) (Higher of:)
 Value in use = 12 (15)
 Fair value = 15
Impairment loss 4.5
So book value after impairment is Rs. 15 which will now be amortised over its remaining life
Now we will calculate book value on 30.9.19
Book value after impairment (1.4.19) 15
15 6 (2.5)
Less: Amortization ( 3 × 12 )
12.5

Adnan Rauf, FCA Page 2

CAF-07 IAS-38

Lecture # 4 (IAS – 38) Lecture # 39 (Over all)

Class work
1. Solved past paper Q.6 (Page 208 of book) (Before this discuss yesterday’s home work MCQ)
2. Solved past paper Q.5 (b) (ii) (Page 208 of book)
3. MCQ 19 from book as below
MCQ (It is MCQ 19 on Page 226E of book)
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?

Adnan Rauf, FCA Page 1

CAF-07 IAS-38

Lecture # 5 (IAS – 38) Lecture # 40 (Over all)

Class work
1. Solved past paper Q.5 (iv)
2. Solved past paper Q.7 (Refer handwritten page many times which were given in previous
classes)
3. Solved past paper Q.8 (Point 7, point 4 and point 3)

Home work
1. MCQ 3,7,9,13,16,17 (Page of book 226A)
2. Past paper Q.3 and Q.5, 6, 7
3. IAS16 - Practice Q. 3 and 8 (Mid-year revaluation)

Adnan Rauf, FCA Page 1

CAF-07 IAS-38

Lecture # 6 (IAS – 38) Lecture # 41 (Over all)

Class work
1. Solved past paper Q.5 adj. (iii) (Class 3 notes were referred also. Actually it is on Page 191C
of book)
2. Solved past paper Q.4 (Class 3 notes were referred also, It is also on Page 191C of book)
3. Concept of deferred payment – It will be discussed in IAS 37 alongwith decommissioning
liabilities.
4. IAS 23 also applies for internally generated intangible (Means if internally generated
intangible takes substantial period of time for development than borrowing cost incurred on
loan obtained for project will be capitalized.)
5. Revaluation model
a. If an item is revalued, the entire class of assets to which that asset belongs should be
revalued. (Class may be brands, softwares, licenses)
b. Frequency of revaluation
Under the revaluation model, revaluations should be carried out regularly, so that the
carrying amount of an asset does not differ materially from its fair value at the
balance sheet date.
c. Net and gross replacement method of passing journal entries in revelation model was
discussed through handwritten page#4. (It is Practice Q.19 Pg. 197 of book)
6. Discussed LO6 and LO7 from book.
7. Continuing from Pg. 188 of book in scenario#1 if following statement is given in question:
“fair value of the acquired asset is more clearly evident”
than its fair value will be considered as cost for it.
8. Definitions given in below para were discussed

Active market (Now included in book page 191A)

An active market is a market in which all the following conditions exist:
(a) the items traded in the market are homogeneous;
(b) willing buyers and sellers can normally be found at any time; and
(c) Prices are available to the public.
Research (Now included in book page 191A)
Research is original and planned investigation undertaken with the prospect of gaining new scientific
or technical knowledge and understanding.
Development (Now included in book page 191A)
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.

Adnan Rauf, FCA Page 1

CAF-07 IAS-38

Lecture # 7 (IAS – 38) Lecture # 42 (Over all)

Class work
1. Past paper Q.4 was discussed initially
2. Website costs page in book (Page 186)
3. Practice Questions Q. 18 (Page 196)
4. MCQ. 15 (Page 226D)

Home work
1. Past paper Q.10 (Zinc Limited) (Page 211 of book) (Very good question)
2. MCQ 20

Class work
1. Past paper Q.5 (Adjustment No. 1 was explained) (Page 469 of book)
2. Handwritten notes Page no. 3 was discussed (Format of statement of changes in equity including
discussion of dividends and right issue)

Adnan Rauf, FCA Page 1

CAF-07 IAS 01: Final accounts

Lecture # 4 (Final Account) Lecture # 46

Class work
Completed Past paper Q.5 (Page 469 of book)

Home work
1. Practice Q. 2 (Page 389 of book) and
2. Practice Q. 10 (Page 397 of book)

Adnan Rauf, FCA Page 1

Lecture # 6 (Final Account) Lecture # 48 (Overall)

Class work
1. Completed question of Lecture-47
2. Discussed journal entries of sales tax and trade discount as below. (Page 388Q of book)
3. Discussed Disclosures of SOCI - Pg. 388N to Pg. 388P of book (Explained with the help
of handwritten pg. 6)
4. Started Past paper Q.1 (Page 464)
TREATMENT OF SALES/TRADE DISCOUNT (Pg. 388Q of book)
Example-1
Shopkeeper sold 10 items having market price of Rs. 2,000 each to customer at a discounted price of Rs.
1,800 due to bulk quantity purchase.
Original Entry
Dr. Cr.
Debtor (10 x 1,800) 18,000
*Sales 18,000
*sale is recorded in P/L net of trade discount.

What happens in final account question?

But sometimes accountant instead of passing above one entry, passes following wrong entry:
Entries Dr. Cr.
Debtor (10 x 1,800) 18,000
Sales discount/ Trade discount (10 x 200) 2,000
Sales (10 x 2,000) 20,000
Action Required?
Deduct sales discount from sale.

TREATMENT OF SALE TAX IN BOOKS OF SELLER

Example-2
Tyre seller sold tyres of Rs. 100,000(value exclusive of sales tax) for 117,000 (value inclusive of sales
tax) to Honda Atlas cars. Sale tax rate is 17%
Entry in the books of seller Dr. Cr.
Debtor 117,000
Sales* 100,000
Sales tax payable to Govt. 17,000
*sale is recorded in P/L net of sales tax.
What happens in final account question?
But sometimes accountant of seller instead of passing above one entry, passes following wrong entries:
Dr. Cr.
Debtor 117,000
Sales 117,000
Sales tax expense 17,000
Sales tax payable 17,000
Action Required? Deduct sales tax expense from sale.

Adnan Rauf, FCA Page 1

CAF-07 IAS 01: Final accounts

Question (For explanation of donation) (This is not in book)

PTCL Company donated Rs. 12 million in total during current year. Out of
this company made a single donation of Rs. 1.1 million to Shukat khannum
Hospital.
Is disclosure required for this donation?

Answer
No disclosure is required as donation of Rs. 1.1 million is less than Rs. 1.2
million (Refer working).

(Working) Calculation of higher figure

Higher of:
- 10% of 12 million = 1.2 million
- 1 million

Higher is Rs. 1.2 million

Lecture # 9 (Final Account) Lecture # 51 (Overall)

Adnan Rauf, FCA Page 2

CAF-07 IAS 01: Final accounts

Lecture # 12 (Final Account) Lecture # 54 (Overall)

COMPANIES ACT, 2017: FOURTH AND FIFTH SCHEDULE
Requirements with Respect to Statement of Financial Position
(In continuation of Yesterday Class)

4. Current assets [Page 388H and I of book] [For example Refer Q.1 on next page of these notes]
In respect of debts/receivables from associates and related parties there shall be disclosed.
(i) the name of each associate and related party;
(ii) the maximum aggregate amount outstanding at any time during the year calculated by
reference to month-end balances;
(iii) receivables, that are either past due or impaired, along with age analysis distinguishing
between trade debts, loans, advances and other receivables;
(iv) debts written off as irrecoverable, distinguishing between trade debts and other
receivables;
(v) provisions for doubtful or bad debts distinguishing between trade debts, loans, advances
and other receivables; and
(vi) justification for reversal of provisions of doubtful debts, if any;
In respect of loans and advances, other than those to employees as per company’s human resource policy
or to the suppliers of goods or services, the name of the borrower and terms of repayment if the loan or
advance exceeds rupees one million, together with the particulars of collateral security, if any, shall be
disclosed separately;
Note: The above para is not required in fifth schedule.
Provision, if any, made for bad or doubtful loans and advances or for diminution in the value of or loss in
respect of any asset shall be shown as a deduction from the gross amounts.

5. Share Capital and Reserves [Page 388J of book] [For example Refer Q.1 on next page of these
notes]

Capital reserves (Share premium and revaluation surplus) and revenue reserves (retained earnings and
general reserves) shall be clearly distinguished. Any reserve required to be maintained under the Act shall
be separately disclosed. Any legal or other restrictions, on the ability of the company to distribute or
otherwise, shall be disclosed for all kind of reserves maintained by the company;
In respect of issued share capital of a company following shall be disclosed separately:
(i) shares allotted for consideration paid in cash;
(ii) shares allotted for consideration other than cash, showing separately shares issued against
property and others (to be specified);
(iii) shares allotted as bonus shares; and
(iv) treasury shares;
Shareholders agreements for voting rights, board selection, right of first refusal and block voting shall be
disclosed.
6. Non-Current liabilities
Amount due to associated companies and related parties shall be disclosed separately.
Note: The word “related party” is not there in fifth schedule but the word associated company is there.
7. Current liabilities
Will be discussed in Lecture 55

Adnan Rauf, FCA Page 1

CAF-07 IAS 01: Final accounts

Question-1 (Page 613 of book)

Banana Limited (BL) is listed on Pakistan Stock Exchange.
Summarized trial balance of BL as at 30 June 2018 is given below:
Description Rs. in million
Ordinary share capital 6,000
Share premium 500
Trade and other receivables 1,470
Provision for doubtful receivables 80
Additional information:
(i) Trade and other receivables include receivables from BL’s associate i.e. Strawberry Limited
(SL) and BL’s subsidiary i.e. Pear Limited (PL) amounting to Rs. 50 million and Rs. 22 million
respectively. Provision for doubtful receivables includes provision of Rs. 10 million against
receivables from SL.
(ii) Bad debts of Rs. 35 million were written off during the year. These include an amount of Rs. 8
million receivable from SL.
(iii) Receivable from Pear Limited includes Rs. 5 million which are past due for more than 6 month
but less than 1 year.
(iv) Maximum aggregate amount outstanding at end of any month from Strawberry Limited (SL) and
BL’s subsidiary i.e. Pear Limited (PL) amounting to Rs. 60 million and Rs. 30 million
respectively.
(v) Authorized share capital consists of 1 billion shares of Rs. 10 each.
(vi) 80 million shares were issued as bonus shares in the previous years whereas 20 million shares
were issued as a consideration for purchase of building at market price of Rs. 15 per
share. Remaining shares were allotted for consideration paid in cash.
Required:
Prepare BL's statement of financial position as at 30 June 2018 along with the relevant notes showing
possible disclosures as required under the IFRSs and the Companies Act, 2017. (Comparative figures
and note on accounting policies are not required) (7)

Adnan Rauf, FCA Page 2

CAF-07 IAS 01: Final accounts

Lecture # 13 (IAS – 1) Lecture # 55 (Over all)

Class work
How we will proceed
1. Long term Loan and advances – Disclosure (Page 388G)
2. Started Q.1 appearing on next page
3. Contingencies and commitments – Disclosure (Page 388L)
4. Current liabilities – Disclosure (Page 388K)
5. MCQ 11 and 12 (Delete from book)
6. MCQ 13 - 15 (Home work)
7. Question bank Q.2 (analyzing expenses by nature)
8. Nestle Financial statements overall review
9. Different type of Question requirements from past papers were discussed

Question-1 (This question is not in book)

Sea Limited (SL) is listed on Pakistan Stock Exchange.
Extracts of trial balance of SL as at 30 June 2018 is given below:
Rs.
Description Dr. Cr.
Long term loans granted 11,000
Additional information:
(i) Long term loans granted include receivables from a director and a subsidiary i.e. Tree Limited
(TL) amounting to Rs. 5,000 and Rs. 6,000 respectively. Rs. 2,000 receivable from subsidiary is
due in the year ended 30 June 2019.
(ii) The loan to director in adjustment (i) is given for purchase of car and is in accordance with the
Company's policy. It is repayable after five years. The loan is interest free. The loan was given in
current year.
(iii) The loan to subsidiary in adjustment (i) represent loan for purchase of New Plant and are
repayable over a period of one to three years. The balance outstanding from subsidiary is
secured by way of land in Lahore. The maximum aggregate amounts due from subsidiary at
the end of any month during the year were Rs. 9,000. No provision and write-off is required in
respect of this loan.
(iv) On 25 July 2018, a customer lodged a claim of Rs. 10,000 for the goods delivered in March 2018
being not according to the agreed specifications. SL's legal counsel anticipates that SL would be
liable to pay approximately Rs. 3,000, to settle the claim.
(v) As at 30 June 2018, outstanding purchase orders and agreements for capital expenditure
amounted to Rs. 12,000.

Required:
For year ended 30 June 2018, prepare SL's notes to the financial statements showing possible disclosures
as required under the IFRSs and the Companies Act, 2017. (Comparative figures and note on accounting
policies are not required)

Adnan Rauf, FCA Page 1

CAF-07 IAS 01: Final accounts

Answer-1

Sea Limited
Notes to the financial statements
for the year ended 30 June 2018

Note 8 : LONG -TERM LOANS - considered good 2018

Due from: - Rs.
Director- unsecured 8.1, 8.2 5,000
Subsidiary – secured 8.3- 8.7 6,000
11,000
Less: receivable within one year
Employees 0
Subsidiary 2,000
(2,000)
9,000

8.1 Represents interest free general purpose loan for purchase of car in accordance with the
Company's policy and are repayable after five years.
8.2
2018
The reconciliation of the carrying amount of loans to Director:
Balance at beginning of the year -
Disbursements 5,000
Repayments (0)
Balance at end of the year 5,000

8.3 Loan from Subsidiary Represents general purpose loan for purchase of New Plant and are repayable
over a period of one to three years.
8.4 The balance outstanding from subsidiary is secured by way of land in Lahore.
8.5 The maximum aggregate amounts due from subsidiary at the end of any month during the year
were Rs. 9,000.
8.6 No provision and write-off is required in respect of this loan.

Note 9: CONTINGENCIES AND COMMITMENTS

9.1 Contingencies
In July, 2018 a claim for Rs. 10,000 was lodged by a customer against goods delivered in March,
2018 being not according to the agreed specifications. The legal council of the company
anticipates that SL would be required to pay approximately Rs. 3,000 to settle the claim.
Accordingly, a provision of Rs. 3,000 has been made.
9.2 Commitments
Commitments for capital expenditure outstanding as at 30, June 2018 amounted to
Rs. 12,000.

Adnan Rauf, FCA Page 2

CAF-07 IAS 01: Final accounts

ILLUSTRATIVE GUIDANCE (Page 388K-L)

Components of Financial Statements

Sr. Component Nestle
Financial
statement
Page
A. Statement of Financial Position 66-67
B. Statement of Comprehensive Income 68-69
C. Statement of Changes in equity 70
D. Statement of Cash Flows 71
E. Notes to the Financial Statements 72-118
1. Legal status and Nature of Business 72
2. Basis of preparation (Statement of Compliance and 72-83
accounting convection) and summary of significant
accounting policies (Property, plant and Equipment, Leases,
Revenue, Inventory)
3. Items linked with SOFP 84-100
4. Items linked with SOCI 100-103
5. Other Disclosures ( including General disclosures) 104-118

Adnan Rauf, FCA Page 7

IAS 8:
Accounting
policies,
changes in
accounting
estimates and
errors
CAF-07 IAS 08

Lecture # 1 (IAS-08) Lecture # 56 (Overall)

Class work (Final account)

1. Discussed 3rd Schedule (Page 387 of book)
2. Discussed MCQ. 8,9,18,20 (Page 518D of book and onwards)
3. Home work Question given in Lecture # 55 was discussed.

Home work (Final account)

1. MCQ 1 to 10 and 16 to 20 (Page 518C of book and onwards)

Class work
1. Solved past paper Q.4
2. Discussed Table on following page:

[Below table is also in book page

Adnan Rauf, FCA Page 1

CAF-07 IAS 08

6. 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?

[MCQ.19 Pg. 577D of book]

7. Disclosure requirements of IAS 8 in respect of change in accounting policy are NOT applicable
in case of:
(a) change in method for inventory valuation from FIFO to weighted average
(b) initial adoption of revaluation model for property, plant and equipment
(c) change in revenue recognition policy
(d) none of the above (Autumn 2019 Q 4)

Home work
Past paper Q.1 (IAS-08) (Page 554)

Adnan Rauf, FCA Page 1

Consolidated
accounts
CAF-07 Consolidation

Lecture # 1 (Ethics & Consolidation) Lec. # 66 (Overall)

Class work
Ethics
1. Last 3 threats were discussed. Further Safeguards from past paper Q.6 were discussed.
2. Past paper Q.4 was discussed.
3. Handwritten page was discussed.

Ethics
Class work
1. Past paper Q.5 (Pg. 589)

Consolidation
Class work
1. Theoretical definition given in Lecture#2 was discussed.
2. Following question was solved:

Question-1 (Pg. 451 of book)

P Ltd. acquired 2,100 shares of S Ltd. 5 years ago for Rs. 36,000. Following are the balance sheets as at
June 30, 2014:
P S
---------Rs---------
Non-current assets
Property, plant & equipment 105,000 78,000
Loan Receivable from S 20,000
Investments 40,000 10,000
165,000 88,000
Equity and liabilities
Share capital (Rs. 10 per share) 65,000 28,000
Retained earnings 100,000 40,000
Loan payable to P 20,000
165,000 88,000
Additional information:
1. At the time of acquisition retained earnings of S were Rs. 7,000.
2. Non-controlling interest is valued at proportionate share of net assets of S.
3. At year end, goodwill is deemed to be impaired by 20%.
Required:
Prepare consolidated statement of financial position as at 30 June 2014.

Question-2 (Pg. 451 of book)

Assume all the data is same as in Q.1 except that:
1. Non-controlling interest is valued at fair value which on acquisition date is Rs. 11,000.
2. At year end, goodwill is deemed to be impaired by 20%.
Required:
Prepare consolidated statement of financial position as at 30 June 2014.

Adnan Rauf, FCA Page 1

CAF-07 Consolidation

Consolidation
Home work
Question-1 (Pg. 451 of book)
P Ltd. acquired 2,400 shares of S Ltd. 3 years ago for Rs. 35,000. Following are the balance sheets as at
June 30, 2019:
P S
---------Rs---------
Non-current assets
Property, plant & equipment 80,000 70,000
Investments 41,000 12,000
Loan Receivable from S 10,000 -

Current assets 39,000 18,000

170,000 100,000
Equity
Share capital (Rs. 10 per share) 73,000 32,000
Retained earnings 60,000 38,000
Loan payable to P - 10,000

Current liabilities 37,000 20,000

170,000 100,000
Other information:
1. At the time of acquisition retained earnings of S were Rs. 8,000.
2. Non-controlling interest is valued at fair value which on acquisition date is Rs. 15,000.
3. At year end, goodwill is deemed to be impaired by Rs. 2,000.
Required:
Prepare consolidated statement of financial position as at 30 June 2019.

Adnan Rauf, FCA Page 2

CAF-07 Consolidation

Answer-1
P Ltd.
Consolidated Statement of Financial Position
as on June 30, 2019
Assets Rs.
Non-current assets
Property, plant and equipment (80,000 + 70,000) 150,000
Goodwill (10,000 – 2,000) 8,000
Investments (41,000 - 35,000 + 12,000) 18,000
176,000
Current assets (39,000 + 18,000) 57,000
233,000
Equity and liabilities
Equity
Share capital 73,000
Consolidated retained earnings (W-3) 81,000
154,000
Non-controlling interest (W-4) 22,000
176,000
Current liabilities
Trade payables (37,000 + 20,000) 57,000
233,000
(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 35,000 Share capital 32,000
Pre-Acquisition R.E. 8,000
NCI (At fair value) 15,000 40,000
Goodwill (bal.) 10,000

(W-2)
Dr. Subsidiary retained earning a/c Cr.
Pre-Acquisition R.E. 8,000 b/d (Balance sheet closing) (Post) 38,000
Goodwill (Impairment) 2,000

CRE (28,000 x 75%) 21,000

NCI (28,000 x 25%) 7,000
Percentage holding in S = 2,400/3,200 = 75%
(W-3)
Dr. Consolidated retained earnings a/c Cr.
Parent own R.E 60,000
c/d (bal.) 81,000 Subsidiary retained earning a/c 21,000

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 15,000
c/d (bal.) 22,000 Subsidiary retained earning a/c 7,000

Adnan Rauf, FCA Page 3

CAF-07 Consolidation

Lecture # 5 (Consolidation) Lec. # 70 (Overall)

Class work
Handwritten page 1 (Available in book at end) was discussed and following question was solved.

Question-1 (Page 453 of book)

The following summarized statements of financial position pertain to P and S as at 30 June, 2014.
P S
---Rs in million---
Assets
Non-current assets
Property, plant and equipment 460 200
Investment (2 million shares of S) 340 -
Long term loan granted to S 30 -
Current assets 595 400
1,425 600
Equity and liabilities
Equity
Share capital (Rs. 100 each) 600 250
Retained earnings 425 250
Non-Current liabilities
Long term borrowings 200 72
Current liabilities 200 28
1,425 600

Following relevant information is available:

(i) P acquired investment in S on 1 July 2012 when retained earnings of S were Rs. 140 million.
(ii) P values non-controlling interest on the date of acquisition at its fair value. S share price was Rs.
170 per share on acquisition date.
(iii) An impairment test has indicated that recoverable amount of goodwill on 30 June 2014 was Rs.
15 million.
(iv) Inter-company transactions during the year were as follows:
Sales Included in buyer’s Profit %
closing stock-in-trade
------------ Rs. In million ------------
P to S 300 180 20% of cost
S to P 120 75 50% of cost

Required:
Prepare a consolidated statement of financial position as at 30 June 2014 in accordance with the
requirements of International Financial Reporting Standards.

Adnan Rauf, FCA Page 1

CAF-07 Consolidation

Home work
Question-1 (Page 454 of book)
Following are the balance sheets as at December 31, 2012:
P S
----------Rs.----------
Non-current assets
Property, plant & equipment 100,000 78,000
Investment (2,700 shares of S) 47,600 -
Current assets
Inventories 14,800 13,000
Debtors 11,800 15,000
Cash & bank 8,000 9,000
182,200 115,000
Equity
Share capital (Rs. 10 per share) 75,000 45,000
Share premium 10,000 9,000
Retained earnings 76,000 41,000
Current liabilities
Creditors 21,200 20,000
182,200 115,000
Following further information is available:
(i) P acquired shares of S 6 years ago when retained earnings of S were Rs. 12,000.
(ii) P values non-controlling interest on the date of acquisition at its fair value. S share price was Rs.
17 on acquisition date.
(iii) An impairment test has indicated that recoverable amount of goodwill on 31 December 2012 was
Rs. 10,980 million.
(iv) Inter-company sales are invoiced at cost plus 20%. Details of inter-company transactions for the
year ended 31 December 2012 are as follows:
Sales Included in buyer’s
closing stock-in-trade
P to S 13,000 5,000
S to P 20,000 6,000
Required:
Prepare consolidated Statement of financial position as at December 31, 2012.
Answer-1
P Ltd.
Consolidated Statement of Financial Position
as on December 31, 2012
Assets Rs.
Non-current assets
Property, plant and equipment (100,000 + 78,000) 178,000
Goodwill [12,200(W-1) – 1,220(W-2)] 10,980
188,980
Current assets
Inventories (14,800 + 13,000 – 833 - 1,000) 25,967
Debtors (11,800 + 15,000) 26,800

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CAF-07 Consolidation

Cash and Bank (8,000 + 9,000) 17,000

69,767
258,747
Equity and liabilities
Equity
Share capital 75,000
Share premium 10,000
Consolidated retained earnings (W-3) 91,235
176,235
Non-controlling interest (W-4) 41,312
217,547
Current liabilities
Trade payables (21,200 + 20,000) 41,200
258,747
(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 47,600 Share Capital 45,000
NCI (at F.V) 30,600 Share Premium 9,000
(1,800 shares x Rs. 17 per share) Pre-Acquisition R.E. 12,000
66,000
Goodwill (bal.) 12,200
(W-2)
Dr. Subsidiary retained earnings a/c Cr.
Pre-Acquisition R.E. 12,000 b/d (Balance sheet closing) (Post) 41,000
Goodwill (Impairment) 1,220
(12,200 – 10,980)
Stock - URP (W-6) 1,000

CRE (26,780 x 60%) 16,068

NCI (26,780 x 40%) 10,712
Percentage holding in S = (2,700/4,500) = 60%
(W-3)
Dr. Consolidated retained earnings a/c Cr.
Stock - URP (W-5) 833 Parent own R.E 76,000
Subsidiary retained earnings a/c 16,068
c/d (bal.) 91,235
(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 30,600
c/d (bal.) 41,312 Subsidiary retained earnings a/c 10,712
(W-5) Sale of stock by P to S
Sold stock 13,000
Unsold stock 5,000
Profit on unsold stock (5,000/120 x 20) 833
(W-6) Sale of stock by S to P
Sold stock 20,000
Unsold stock 6,000
Profit on unsold stock (6,000/120 x 20) 1,000

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CAF-07 Consolidation

MCQ’s
MULTIPLE CHOICE QUESTIONS
1. (Page 284 of book – MCQ#1)
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. in 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

2. (Page 285 of book – MCQ#7)

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. 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. ___________
3. (Page 288 of book – MCQ#18)
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

4. (Page 288 of book – MCQ#20)

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

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CAF-07 Consolidation

SOLUTIONS
01. (c) (W-1) Rs. In million
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 200 Share Capital 100
NCI (at F.V) 82.8 Pre-Acquisition R.E. 156
256
Goodwill (bal.) 26.8
(W-2)
Dr. Subsidiary retained earnings a/c Cr.
Pre-Acquisition R.E. 156 b/d (Balance sheet closing) (Post) 177
Goodwill Impairment 13.4
(26.8 x 50%)
CRE (7.6 x 70%) 5.32
NCI (7.6 x 30%) 2.28
(W-3)
Dr. Consolidated retained earnings a/c Cr.
Parent own R.E 275
Subsidiary retained earnings a/c 5.32
c/d (bal.) 280.32
02. Rs. 90 (W-1) Rs. in million
million Dr. Cost of Investment (For calculating Goodwill Cr.
Investment 387 Share Capital Xx
NCI (At F.V) 153 Pre-Acquisition R.E. Xx
Net Assets (Given) 450
Goodwill (bal.) 90
03. (b) Rs. In ‘million’
Inventory [162 + 108 – (W-1) 3.6] 266.4
(W-1) Sale of stock by P to S
Sold 21.6
Unsold 21.6
Unsold profit (21.6/120 x 20) 3.6
04. (a) (W-1) Sale of stock by P to S
Sold 18
Unsold (18 x 2/3) 12
Unsold profit (12/120 x 20) 2

QUESTION OF ETHICS
Question-1 (Page 584 of book – Volume -1)
Amir Ali, ACA is CFO at Circle Limited (CL) and reports to Junaid, FCA who is the CEO. The financial
year of CL ends on 30 April and its profit for the nine months ended 31 January 2019 was below target.
In a management meeting held in February 2019, Junaid has proposed the following measures to improve
the results.
(i) Annual maintenance of the manufacturing plant which is due in March 2019 should be deferred
to May 2019. Production manager has warned that the deferral may affect the safety of the
plant. However, Junaid is of the view that the maintenance was delayed two years ago as well
and nothing adverse happened at that time.
(ii) Incorporation of the new revaluation report of CL’s buildings should be deferred to the next
year as the resulting increase in valuation is substantial and would result in increase in the
deprecation for the year. Amir had initiated the revaluation during the year since the fair values

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CAF-07 Consolidation

of the buildings had increased materially. Junaid is of the view that the buildings were revalued
last year and there is no need of such frequent revaluations.
Due to the dominant nature of Junaid, none of the participants opposed his views. The summary to
implement the above actions has been received by Amir.
Amir has recently applied for an interest free car loan from CL which is expected to be approved in few
days.
Required
Briefly explain how Junaid may be in breach of the fundamental principles of Code of Ethics for
Chartered Accountants. Also state the potential threats that Amir may face in the above circumstances and
how he should respond. (09)
(Spring 2019 Q.4)
Answer-1
In the given situation, Junaid may be in breach of the following fundamental principles of Code of Ethics
for Chartered Accountants:

(i) Professional behavior:

This principle imposes an obligation on all chartered accountants to comply with relevant laws
and regulations and avoid any action that discredits the profession. Junaid has breached this
principle as his proposed suggestion in respect of incorporation of the new revaluation report is
not in accordance with IAS 16. Under IAS 16, carrying amount of property carried at revaluation
model should not be materially different from its fair value so his proposal is against the
requirement of IAS 16.
(ii) Integrity:
Chartered Accountant should be straight forward and honest in all professional and business
relationship. It seems that Junaid’s decision to defer the maintenance of plant despite warning of
production manager in terms of safety of plant and non incorporation of new annual report in
financial statement would make them misleading.
(iii) Objectivity:
Chartered Accountant should not compromise his professional or business judgment because of
bias, conflict of interest or the undue influence of others. In this circumstance, he has
compromised his professional and business judgment by proposing unethical/unlawful measures
to just improve the falling profit of the company.

Potential threats:
Amir may face following threats:
(i) Self-interest threat:
Amir may face self-interest threat as the disbursement of his car loan may be at stake if he refuses
to obey the instructions.
(ii) Intimidation threat:
Amir may face intimidation threat from Junaid as refusal to obey instruction may risk his job.

Safeguards:
Identified threats are significant as the CFO is being instructed from the highest level of management. In
order to reduce the threat to an acceptable level, one or more of the following safeguards should be
applied:
(i) Discuss the matter with CEO and persuade him to follow code of ethics.
(ii) Consider informing appropriate authorities like audit committee.
(iii) Refuse to implement the given proposals.
(iv) Seek legal advice.
(iii) Resign

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CAF-07 Consolidation

Lecture # 6 (Consolidation) Lec. # 71 (Overall)

Class work
Question-1 (Page 456 of book)
P Ltd. acquired 70% shares of S Ltd on January 1, 2011 for Rs. 20,000.
Following are the balance sheets as at December 31, 2014.
P S
-------------Rs-------------
Non-current assets
Property, plant & equipment 70,500 60,500
Investments 33,500 5,000
Current assets
Debtor 7,000 2,500
Inventory 14,000 20,000
125,000 88,000
Equity
Share capital (Rs. 10 per share) 50,000 5,000
Share premium 5,000 2,500
Retained earnings 47,000 32,000
Capital reserves 8,000 10,500
Current liabilities
Creditors 15,000 38,000
125,000 88,000
Following further information is available:
a. At the time of acquisition S had a debit balance on retained earnings of Rs. 6,000 and reserves
had a credit balance of Rs. 2,000. On the acquisition date, fair value of S net assets was equal to
its book value except for following assets:
(i) PPE of S included a land at a cost of Rs. 3,000. This land had a fair value of Rs. 4,000 on
acquisition date.
(ii) An office building whose fair value exceeded its carrying value by Rs. 5,000. The
remaining useful life of the office building on the acquisition date was 20 years.
(iii) S has not recognised the value of brand in its books. At date of acquisition, the fair value
of brand was assessed at Rs. 2,500 and had a remaining life of 5 years.

Required:
Prepare consolidated Statement of financial position as at December 31, 2014.

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CAF-07 Consolidation

Home work
Question-1 (Page 457 of book)
Hamid & Co. acquired 2,800 shares of Shehzad &Co. 2 years ago.
Following are the balance sheets as at March 31, 2015:
Hamid & Shehzad
Co. & Co.
Assets ----------Rs----------
Non-current assets
Property, plant & equipment 90,000 78,000
Investments 45,000
Current assets 32,000 25,000
167,000 103,000
Equity
Share capital (Rs. 10 per share) 52,000 35,000
Share premium 5,000 4,000
Retained earnings 70,000 45,000
Capital reserves 17,000 13,000
Current liabilities 23,000 6,000
167,000 103,000
Following further information is available:
i. At the time of acquisition capital reserves were Rs. 3,000, retained earnings were Rs. 8,000 and
fair value of share of shehzad & Co. was Rs. 18 per share.
ii. At year end, goodwill recoverable amount is Rs. 2,000.
iii. The fair values of Shehzad assets on acquisition date were equal to their book values with the
following exceptions:
a. Included in non-current assets of Shehzad & Co, is a land, at a cost of Rs. 10,000. This
land had a fair value of Rs. 14,000 on acquisition date.
b. A plant, which had a fair value of Rs. 1,000 above than its book value at the date of
acquisition. The remaining useful life is 10 years.
iv. During the year, the following inter-company transactions took place:
Sales Included in buyer’s Profit Markup
closing inventories
------------------------------------Rs.---------------------------------
Hamid to Shehzad 5,000 2,000 20%
Shehzad to Hamid 10,000 4,000 30%
Required: Prepare consolidated Statement of financial position as at March 31, 2015.

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CAF-07 Consolidation

Answer-1
Hamid and Co.
Consolidated Statement of Financial Position
As on March 31, 2015
Assets Rs.
Non-current assets
Property, plant and equipment (90,000 + 78,000 + 4,000 + 1,000 – 200) 172,800
Goodwill (2,600 – 600) 2,000
174,800
Current assets (32,000 + 25,000 - 333 - 923) 55,744
230,544
Equity
Share capital 52,000
Share premium 5,000
Consolidated retained earnings (W-3) 97,889
Capital reserves (W-3.1) 25,000
179,889
Non-controlling interest (W-4) 21,655
201,544
Current liabilities (23,000 + 6,000 ) 29,000
230,544

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 45,000 Share capital 35,000
NCI (at F.V) (3,500 shares x 20%) = 12,600 Share premium 4,000
700 shares x Rs.18/share
Pre-Acquisition R.E. 8,000
Capital reserves 3,000
Revaluation surplus(Land) (14,000 – 10,000) 4,000
Revaluation surplus (Plant) 1,000
55,000
Goodwill (bal.) 2,600

(W-2)
Dr. Subsidiary retained earning a/c Cr.
Pre-Acquisition R.E. 8,000 b/d (Balance sheet closing) (Post) 45,000
Plant (Dep. on Rev. Surplus.) 200
(1,000/10y x 2y)
Stock - URP (W-6) 923
Goodwill (Imp.) (2,600 -2,000) 600

CRE (35,277 x 80%) 28,222

NCI (35,277 x 20%) 7,055
Percentage holding in S = (2,800/3,500) = 80%

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CAF-07 Consolidation

(W-2.1)
Dr. Subsidiary Capital Reserves a/c Cr.
Pre-Acquisition C.R. 3,000 b/d (Balance sheet closing) (Post) 13,000

Consolidated Capital reserve 8,000

(10,000 x 80%)
NCI (10,000 x 20%) 2,000

(W-3)
Dr. Consolidated retained earnings a/c Cr.
Stock - URP (W-5) 333 Parent own R.E 70,000
c/d (bal.) 97,889 Subsidiary retained earning a/c 28,222

(W-3.1)
Dr. Consolidated Capital Reserves a/c Cr.
Parent own R.E 17,000
c/d (bal.) 25,000 Subsidiary capital reserves a/c 8,000

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 12,600
Subsidiary retained earning a/c 7,055
c/d (bal.) 21,655 Subsidiary Capital reserves a/c 2,000

(W-5) Sale of stock by P to S

Sold 5,000
Unsold 2,000
Unsold profit (2,000/120 x 20) 333

(W-6) Sale of stock by S to P

Sold 10,000
Unsold 4,000
Unsold profit (4,000/130 x 30) 923

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CAF-07 Consolidation

Lecture # 7 (Consolidation) Lec. # 72 (Overall)

(W-5) Sale of stock by S to P

Sold stock 10,000
Unsold stock (10,000 x 20%) 2,000
Profit on unsold stock (2,000/133.33 x 33.33) 500

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CAF-07 Consolidation

Question-2 (Page 290 of book) (MCQ 28 Part b and c)

On 1 April 2017 Riyasat Limited acquired 116 million of Farasat Limited's 145 million ordinary
shares.
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.
(a) 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?
(b) What is the amount of the unrealised profit arising from intragroup trading?

Answer-2
(a) Rs. 5.6 Dr. Subsidiary retained earnings a/c Cr.
million Pre-Acquisition R.E. Xx b/d (Balance sheet closing) (Post) Xx
(W-2) P.P.E (Dep. on Rev. gain) 2
[(82-62)/20 y x 2 y]
Brand (Amor.) 5
(25/10y x 2y)
CRE (7 x 80%) 5.6
NCI (7 x 20%) 1.4
(b) Rs. 16 Sale of Stock by P to S
million Sold stock 56
Unsold stock 56
Profit on unsold stock (56 /140 x 40) 16
(pehle 3 paras irrelevant hain ku k sirf intra group trading ka pocha hai)

Also solve MCQ no. 11 (Pg. 286) and 29

(Pg.290) from book in homework (if you get
time).

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CAF-07 Consolidation

Lecture # 8 (Consolidation) Lec. # 73 (Overall)

Class work
Question- 1 (Page 464 of book)
The following summarized statement of financial position pertains to Alpha Limited (AL) and its
subsidiary Delta Limited (DL) as at 30 June, 2014.
AL DL
---Rs. in million---
Assets
Non-Current assets
Property, plant and equipment 460 200
Investment (2 million shares of DL) 340 -
Long term loan granted to DL 30 -
Current assets 595 400
1,425 600
Equity and liabilities
Equity
Share capital (Rs. 100 each) 600 250
Retained earnings 325 230
Non-Current liabilities
Long term borrowings 200 30
Current liabilities 300 90
1,425 600
Following relevant information is available:
(i) AL acquired investment in DL on 1 July 2013. Profit earned by DL for year ended June 30, 2014
amounted to Rs. 85 million. DL paid final dividend at 10% for year ended 30 June 2013 in
August 2013.
(ii) AL values non-controlling interest at the acquisition date at its fair value which was Rs. 60
million.
(iii) On 31 March 2014, AL sold certain equipment to DL as detailed below:
Rs. in million
Cost 40
Accumulated depreciation 30
Sale proceeds 25
Remaining life on date of sale is 5 years.
(iv) Inter-company receivables and payable details are as follows:
Rs. in million
Receivables from DL on 30 June 2014 as per AL’s books 19
Payable to AL on 30 June 2014 as per DL’s books 12
Difference in balances is due to goods sent by AL but yet not received by DL at year end. Goods
are sold cost plus 20%.
(v) Long term loan was granted to DL on 1 July 2013. It is repayable after five years and carries
interest at 12% per annum, payable on 01 Jan and 01 July each year.

Required:
Prepare a consolidated statement of financial position as at 30 June 2014 in accordance with the
requirements of International Financial Reporting Standards. (20)

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Home work
Question-1(Page 465 of book)
Following are the balance sheets as at June 30, 2015:
Ponting Stewart
--------Rs.--------
Non-current assets
Property, plant & equipment 80,000 65,000
Investments 60,000 10,000
Loan to Stewart 2,000

Current assets 48,125 42,000

190,125 117,000
Equity
Share capital (Rs. 10 per share) 60,000 35,000
Share premium 10,000 8,000
Capital reserves 18,000 -
Retained earnings 58,000 27,000
Non-current liabilities
Bank loan - 23,000
Loan from Ponting - 2,000

Current liabilities 44,125 22,000

190,125 117,000
Following further information is available:
a. Ponting acquired 80% shares of Stewart on 1st July, 2014 for Rs. 50,000. During the year ended June
30, 2015, Stewart earned profit after tax amounting to Rs. 15,000 and paid an interim dividend for the
year 2015 @ 10%.
b. P values non-controlling interest on the date of acquisition at its fair value. S share price was Rs. 15
per share on acquisition date.
c. During the year Stewart sold goods to Ponting for Rs. 10,000 @ margin of 10%. Ponting still has
worth Rs. 2,000 of these goods held in its inventory.
d. Ponting sold to Stewart a plant on 1st January, 2015 costing 20,000 which had a book value of 18,000
for Rs 22,000. Remaining life is 10 years on date of sale.
e. Long term loan was granted to Stewart on 1st July, 2014. It is repayable after ten years and carries
quarterly interest at 20% per annum, payable in arrears on first day after the end of each quarter.
f. Inter-company receivables and payable details are as follows:
Rs.
Receivables from P on 30 June 2015 as per S books 15,000
Payable to S on 30 June 2015 as per P books 12,000
Difference in balances is due to goods sent by S but not received by P at year end.
Required:
Prepare consolidated Statement of financial position as at June 30, 2015.
MCQ,s from book (Page 284 onwards)
MCQ no. 48, 50, 22, 27, 23, 19
Adnan Rauf, FCA Page 2
CAF-07 Consolidation

Answer-1
Ponting’s
Consolidated Statement of Financial Position
as on June 30, 2015
Assets Rs.
Non-Current Assets
Property, plant and equipment (80,000 + 65,000 - (W-6) 3,800) 141,200
Investments (60,000 - 50,000+ 10,000) 20,000
Loan to Stewart (2,000 - 2,000) -
Goodwill (W-1) 2,000
163,200
Current assets (48,125 + 42,000 - 200 (W-5) - 100 (W-8) - 15,000 + 3,000 - 300 (W-4)) 77,525
240,725
Equity and liabilities
Equity
Share capital 60,000
Share premium 10,000
Consolidated retained earnings (W-3) 63,000
Capital reserves (W-3.1) 18,000
151,000
Non-controlling interest (W-4) 12,700
163,700
Non-Current Liabilities
Bank loan 23,000
Loan from Ponting (2,000 - 2,000) -
23,000
Current Liabilities (44,125 + 22,000 - 100 (W-8) - 12,000) 54,025
240,725

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 50,000 Share Capital 35,000
NCI (at F.V) (3,500 shares x 20%) = 10,500 Share Premium 8,000
700 shares x Rs 15/ share
Pre-Acquisition R.E. (W-7) 15,500
58,500
Goodwill (bal.) 2,000
(W-2)
Dr. Subsidiary retained earnings a/c Cr.
Pre-Acquisition R.E. 15,500 b/d (Balance sheet closing) (Post) 27,000
Stock - URP (W-5) 200
Stock - URP (goods in transit)(W-9) 300

CRE (11,000 x 80%) 8,800

NCI (11,000 x 20%) 2,200

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CAF-07 Consolidation

(W-3)
Dr. Consolidated retained earnings a/c Cr.
P.P.E (Gain reversal net of dep.) (W-6) 3,800 Parent own R.E 58,000
c/d (bal.) 63,000 Subsidiary retained earnings a/c 8,800

(W-3.1)
Dr. Consolidated capital reserves a/c Cr.
Parent own C.R. 18,000
c/d (bal.) 18,000

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 10,500
c/d (bal.) 12,700 Subsidiary retained earnings a/c 2,200

(W-5) Sale of stock by S to P

Sold 10,000
Unsold 2,000
Profit on unsold (2,000/100 x 10) 200

(W-6)
Dr. Disposal account Cr.
Plant – BV 18,000
P/L (bal.) 4,000 Cash 22,000

Gain net of Depreciation

Gain 4,000
Less: Depreciation for 6 months (4,000/10 x 6/12) (200)
3,800

(W-7) Retained earnings of Stewart at date of acquisition (01.07.14):

Rs.
Opening retained earnings 01.07.14 (bal.) 15,500
Add: Profit for the year 2015 15,000
Less: Dividend (35,000 x 10%) (3,500)
Closing retained earnings 30.06.15 27,000

(W-8) Interest on loan for quarter ended June 30, 2015: (From April to June)
Rs.
Amount of interest included in payable/receivable 100
(2,000 x 20% x 3/12)

(W-9) Sale of stock by S to P

Goods in transit 3,000
Profit on above (3,000/100 x 10) 300

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CAF-07 Consolidation

Lecture # 9 (Consolidation) Lec. # 74 (Overall)

Class work
Question-1 (Page 468 of book)
Following balance sheet is of P and S for the year ended 30 June 2016.
Assets P S Equity & Liabilities P S
Rs. in million Rs. in million
Investment in S - at cost 450 Share capital (Rs. 10 each) 750 500
Current assets 675 793 Retained earnings 300 230
Current liabilities 75 63
1,125 793 1,125 793
(i) On 1 July 2015, P acquired 60% shares of S when S retained earnings were Rs. 20 million.
(ii) S declared a dividend of 10% before the year end.

Required:
Prepare a consolidated statement of financial position as at 30 June 2016 in the following Scenarios:
a) S Declared a dividend before year end. This transaction has not been accounted for.
b) S declared a dividend before year end which was paid after year end. The dividend has correctly
been recorded by both companies.
c) S declared a dividend before year end. P has correctly recorded the dividend. However S has yet not
accounted for the dividend.
d) S declared a dividend before year end. S has correctly recorded the dividend. However P has yet not
accounted for the dividend.
e) S paid a dividend before year end.
Home work
Question-2 (Page 468 of book)
Following are the balance sheets as at June 30, 2016:
Puttar Shuttar
Ltd. Ltd.
--------Rs.--------
Non-current assets
Property, plant & equipment 90,000 80,000
Investments 50,000 5,000
Current assets
Inventories 12,000 11,000
Trade Debtors 11,000 12,000
Cash 4,000 3,000
Bank 3,000 5,000
170,000 116,000
Equity
Share capital (Rs. 10 per share) 50,000 50,000
Share premium 5,000 5,000
Capital reserves 15,000 7,000
Retained earnings 81,000 42,000
Current liabilities
Trade Creditors 19,000 12,000
170,000 116,000

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CAF-07 Consolidation

Following further information is available:

(i) Puttar Ltd. acquired 60% shares of Shuttar Ltd. on July 1, 2015 for Rs. 15 per share when capital
reserves were Rs. 4,000 and retained earnings were Rs. 11,000.
(ii) NCI is measured on proportionate basis.
(iii) At acquisition date, fair value of plant and machinery was Rs. 4,000 less than the carrying
amount. Remaining life of plant and machinery at that date was 5 years.
(iv) On June 30, 2016 Shuttar Ltd. declared a dividend of 10%. Both Shuttar Ltd. and Puttar Ltd.
have not recorded this dividend.
(v) At year end Puttar Ltd’s payables include Rs. 3,600 in respect of inventories sold by Shuttar Ltd.
Shuttar Ltd’s receivables include Rs. 6,700 in respect of inventories sold to Puttar Ltd. Two days
before the year end Puttar Ltd sent a payment of Rs. 3,100 to Shuttar Ltd. that was not recorded
by the latter until two days after the year end.
(vi) At year end, goodwill is impaired by Rs. 2,000.
(vii) On 01 January 2016 Shuttar Ltd. sold a Plant to Puttar Ltd. for Rs. 6,000. It’s book value on that
date was Rs. 2,000. It’s remaining life on date of sale is 4 years.

Required:
Prepare consolidated Statement of financial position as at June 30, 2016.

Question-3 (Page 471 of book)

Khushaal Ltd acquired 80% of the ordinary share capital of Masoom Ltd several years ago when the
balance on the retained earnings of Masoom Ltd. was Rs.12,000. Their respective draft statement of
financial positions at 31December 2014 are as follows:

Khushaal Masoom
Ltd. Ltd.
--------Rs.--------
Non-current assets 100,000 92,000
Investment in Masoom Ltd 60,000 -
Current assets 40,000 31,000
200,000 123,000
Equity
Ordinary Share capital (Rs. 10 per share) 100,000 50,000
Retained earnings 80,000 42,000

Sundry payables 20,000 31,000

200,000 123,000

Following further information is available:

(i) On December 31, 2014, Masoom Ltd declared a dividend of 15%. Dividend income has been
properly booked by Khushaal Ltd. However, no adjustment has been made in books of Masoom
Ltd.
(ii) It’s the group policy to measure NCI at proportionate share of net assets at the date of acquisition.

Required:
Prepare consolidated Statement of financial position as at December 31, 2014

MCQ,s from book MCQ no. 10, 14, 21

Adnan Rauf, FCA Page 2
CAF-07 Consolidation

Answer-2
Puttar Ltd.
Consolidated Statement of Financial Position
As on June 30, 2016
Assets Rs.
Non-current assets
Property, plant and equipment [90,000 + 80,000 - 4,000 + 800 - 3,500 (W-5)] 163,300
Goodwill [5,400 - 2,000] 3,400
Investments (50,000 - (W-1) 45,000 + 5,000) 10,000
176,700
Current assets
Inventories (12,000 + 11,000) 23,000
Trade Debtors (11,000 + 12,000 - 6,700) 16,300
Dividend receivable (3,000 - 3,000) -
Cash (4,000 + 3,000) 7,000
Bank (3,000 + 5,000) 8,000
Cash in transit 3,100
57,400
234,100
Equity and liabilities
Equity
Share capital 50,000
Share premium 5,000
Consolidated retained earnings (W-3) 95,980
Capital reserves (W-3.1) 16,800
167,780
Non-controlling interest 36,920
204,700
Current liabilities
Trade Creditors (19,000 +12,000 - 3,600) 27,400
Dividend payable (5,000 - 3,000) 2,000
29,400
234,100
(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment (5,000 shares x 60% = 45,000 Share capital 50,000
3,000 shares x Rs. 15/share)
NCI (at Prop.) (66,000 x 40%) 26,400 Share premium 5,000
Pre-Acquisition R.E. 11,000
Capital reserves 4,000
Revaluation Loss (Plant) (4,000)
66,000
Goodwill (bal.) 5,400

(W-2)
Dr. Subsidiary retained earning a/c Cr.
Pre-Acquisition R.E. 11,000 b/d (Balance sheet closing) (Post) 42,000
Dividend (50,000 x 10%) 5,000 P.P.E (Dep. reversal on Rev. loss) 800
(4,000/5y x 1y)

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CAF-07 Consolidation

P.P.E (Gain reversal) (W-5) 3,500

CRE (23,300 x 60%) 13,980

NCI (23,300 x 40%) 9,320

(W-2.1)
Dr. Subsidiary Capital Reserves a/c Cr.
Pre-Acquisition C.R. 4,000 b/d (Balance sheet closing) (Post) 7,000

Consolidated Capital reserve 1,800

(3,000 x 60%)
NCI (3,000 x 40%) 1,200

(W-3)
Dr. Consolidated retained earnings a/c Cr.
Goodwill (Impairment) 2,000 Parent own R.E 81,000
Dividend Income (5,000 x 60%) 3,000
c/d (bal.) 95,980 Subsidiary retained earning a/c 13,980

(W-3.1)
Dr. Consolidated Capital Reserves a/c Cr.
Parent own R.E 15,000
c/d (bal.) 16,800 Subsidiary capital reserves a/c (W-2.1) 1,800

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 26,400
Subsidiary retained earning a/c 9,320
c/d (bal.) 36,920 Subsidiary Capital reserves a/c 1,200

(W-5)
Dr. Disposal account Cr.
Asset - B.V 2,000 Cash 6,000
P/L (bal.) 4,000

Gain net of Depreciation

Gain (as above) 4,000
Less: Accumulated Dep. (4,000/4 x 6/12) (500)
3,500

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CAF-07 Consolidation

Answer-3
Khushaal Ltd.
Consolidated Statement of Financial Position
as on December 31, 2014
Assets Rs.
Non-current assets (100,000 + 92,000) 192,000
Goodwill (W-1) 10,400
202,400
Current Assets (40,000 + 31,000 - 6,000*) 65,000
267,400
Equity and liabilities
Equity
Share capital 100,000
Consolidated retained earnings (W-3) 98,000
198,000
Non-controlling interest (W-4) 16,900
214,900
Sundry payables (20,000 + 31,000 + 7,500 - 6,000*) 52,500
267,400
*P share of S Dividend = 7,500 x 80% = 6,000

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 60,000 Share capital 50,000
NCI (at Prop.) (62,000 x 20%) 12,400 Pre-Acquisition R.E. 12,000
62,000
Goodwill (bal.) 10,400

(W-2)
Dr. Subsidiary retained earning a/c Cr.
Pre-Acquisition R.E. 12,000 b/d (Balance sheet closing) (Post) 42,000
Dividend (50,000 x 15%) 7,500

CRE (22,500 x 80%) 18,000

NCI (22,500 x 20%) 4,500

(W-3)
Dr. Consolidated retained earnings a/c Cr.
Parent own R.E 80,000
c/d (bal.) 98,000 Subsidiary retained earning a/c 18,000

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 12,400
c/d (bal.) 16,900 Subsidiary retained earning a/c 4,500

Adnan Rauf, FCA Page 5

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CAF-07 Consolidation

Required:
Prepare a consolidated statement of financial position as at 31 December 2016 in accordance with the
requirements of International Financial Reporting Standards. (17)
(Spring 2016)

Answer-1
GL ltd.
Consolidated Statement of Financial Position
as on 31st December , 2016
Assets Rs. Million
Non-current assets
Building (1,600 + 500 -80 +3 - (W-7) 9.87) 2,013.13
Plant and machinery (1,465 + 690 + (W-6) 19 ) 2,174
4,187.13
Current assets (2,068+780 - 50 – 9 – (W-5) 12.5) 2,776.5
6,963.63
Equity and liabilities
Equity
Share capital (800 + 18 x 10) 980
Share premium (694 + 18 x 2) 730
Consolidated retained earnings (W-3) 3,255.33
4,965.33
Non-controlling interest (W-4) 250.8
5,216.13
Current liabilities (600 + 1,160 – (W-5) 12.5) 1,747.5
6,963.63

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment (W-1.1) 318 Share Capital 450
NCI (at F.V) 198 Share Premium 150
(45 million x 40% x Rs.11/share)
Pre-Acquisition R.E. 100
Revaluation Loss (Building) (250 - 170) (80)
Revaluation Loss -Inventory (112 - 62) (50)
Revaluation Loss - Provision for Doubtful debt (9)
(24 - 15)
Negative Goodwill (bal.) 45 561

(W-1.1) Investment
As per question 111
Less: To be taken to expenses (6 + 3) (9)
Cash given 102
Shares given (*27 million shares x 2/3) = 18 mill. shares x Rs. 12 per share 216
318
* 45 x 60% = 27 mill. Shares of S acquired by P

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CAF-07 Consolidation

(W-2)
Dr. Subsidiary retained earnings a/c Cr.
Pre-Acquisition R.E. 100 b/d (Balance sheet closing) 210
Build. (Dep. reversal ) (80 x 5% x9/12) 3
Plant ( net Loss reversal) (W-6) 19

CRE (132 x 60%) 79.2

NCI (132 x 40%) 52.8

(W-3)
Dr. Consolidated retained earnings a/c Cr.
Acquisition Cost (W-1.1) 9 Parent own R.E 3,150
Building (net Gain reversal) (W-7) 9.87 Other income (Negative Goodwill) 45
c/d (bal.) 3,255.33 Subsidiary retained earnings a/c 79.2

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 198
c/d (bal.) 250.8 Subsidiary retained earnings a/c 52.8

(W-5)
Following amount is included in receivables of P and payable of S for the month of October, November
and December
Receivable/payable for management services provided by P to S (50 / 12M x 3M) 12.5

(W-6)
Dr Disposal( Plant)-in books of SL Cr.
Plant – BV 200 Accumulated depreciation 60
Fair value (Sale proceeds) 120
P/L (bal.) 20
Loss net of Depreciation
Loss (as above) 20
Less: Accumulated Dep. (20 x 20% x 3/12) (1)
19
(W-7)
Dr Disposal (Building)-in books of GL Cr.
Building – BV 240 Accumulated depreciation 130
P/L (bal.) 10 Fair value (Sale proceeds) 120

Gain net of Depreciation

Gain (as above) 10
Less: Accumulated Dep. (10 x 5% x 3/12) (0.13)
9.87

Adnan Rauf, FCA Page 4

CAF-07 Consolidation

Lecture # 11 (Consolidation) Lec. # 76 (Overall)

Class work
1. Home work of Lecture#10 was discussed
2. Following table for purchase consideration was discussed

DISCUSSION ON PURCHASE CONSIDERATION (Pg. 161E of book)

Description Explanation Journal Entries Dr. Cr
1. Cash paid for Investment
acquisition Cash
2. Shares of P issued Recording of cost of Investment
as purchase investment using fair Share Capital
consideration (Share value of shares of P at Share Premium
exchange) date of acquisition
3. Debt instruments / Investment
loan notes issued as Debt instruments
purchase
consideration
Recording of present Investment
value of deferred Deferred Liability
liability discounted
4. Deferred
using cost of capital
Consideration
Recording of unwinding Interest expense
of discount at each year Deferred Liability
end
5. Shares to be issued Investment
as purchase Purchase consideration
consideration payable
(Show in equity)
(No adjustment at year end)
Recording of contingent
liability at fair value on
date of acquisition.
Investment
Contingent liability will
Contingent liability
be recorded as purchase
consideration even if
6. Contingent outflow is not probable
consideration Recording of gain/(loss) Contingent liability
(Depending upon on contingent liability at P/L (CRE)
the performance of balance sheet date
Subsidiary) (in case of gain due to
decrease in liability)

P/L (CRE)
Contingent liability
(in case of loss due to increase
in liability)

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CAF-07 Consolidation

Question-1 (Pg. 477 of book)

P acquired 80% of S Rs. 200 million (Rs. 10 is face value of share) share capital on 1 January 2017, when
S also had retained earnings of Rs. 50 million. Parent:
 paid Rs. 50 million cash and
 agreed to pay a further Rs. 90 million on 1 January 2020 and
 also gave the owners of S 2 shares of P for every 3 shares of S purchased.
The fair value of P Limited's shares were Rs. 45 on 1 January 2017, and Rs. 55 on 31 December 2017. At
31 December 2017 P had retained earnings of Rs. 250 million and S had retained earnings of Rs. 230
million. P has a cost of capital of 10%.
P measures the non-controlling interest at fair value. The fair value of the non-controlling interest at 1
January 2017 was Rs. 60 million.

Required:
a) What is the total goodwill at 1 January 2017?
b) What is the group retained earnings at 31 December 2017?

Question-2 (Pg. 477 of book)

On 1st January 2018, P Limited acquired 80% of 150 million Rs.10 ordinary shares of S for an immediate
cash payment of Rs. 20 million and issued at par two 10% Rs.100 loan notes for every 50 shares acquired.
Required:
What is the amount of consideration transferred by (attributable to) P to acquire the investment in S?

Question-3 (Pg. 477 of book)

On 1 April 2014 P acquired 75% of S equity shares by means of a share exchange and an additional
amount payable on 1 April 2015 that was contingent upon the post-acquisition performance of S. At the
date of acquisition P assessed the fair value of this contingent consideration at Rs. 5.2 million but by 31
March 2015 it was clear that the amount to be paid would be only Rs. 4.1 million.
How should P account for this adjustment in its financial statements as at 31 March 2015?

Question-4 (Pg. 477 of book)

P acquired 10,000 shares of S on 1 January 2015. P agreed to give on 1 January 2019 its 4 shares for each
5 shares of S. P share price:
 On 1 January 2015 is Rs. 14 per share and
 on 31 December 2015 it has increased to Rs. 16 per share.

How should P account for this adjustment in its financial statements as at 31 December 2015?

Home work
1. MCQ no. 2, 15, 26, 28 (a), 8, 9
2. Practice set Q. 38 (Pg. 183 of book)

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CAF-07 Consolidation

IN CONTINUATION OF LECTURE#9

Dividend of S (Pg. 161 G of book)

A. UNPAID AND DECLARED BEFORE YEAR END
Sr. Scenario Entries already passed Action required
No.
P books S books
1. Not recorded by - - 1. Div. receivable 30
both Div. income 30

2. Div. 50
Div. payable 50

3. Cancel receivable/
payable with Rs. 30
2. Recorded by Div. receivable 30 Div. 50 Cancel receivable/
both Div. income 30 Div. payable 50 payable with Rs. 30

3. Recorded by P Div. receivable 30 - 1. Div. 50

Dividend of P
Sr. No. Scenario Action required
1. Announced and recorded/Paid Do nothing
2. Announced and not recorded Dividend (CRE) XX
Div. payable XX

Adnan Rauf, FCA Page 3

CAF-07 Consolidation

Lecture # 12 (Consolidation) Lec. # 77 (Overall)

Class work
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Question-1 (Pg. 478 of book)
P bought 75% of S several years ago. The income statements for year to 31.12.2010 are as follows.
P S
Rs. Rs.
Revenue 400 200
Cost of sales (250) (100)
Gross profit 150 100
Administrative expenses (20) (15)
Profit 130 85
Required:
Prepare consolidated statement of comprehensive income for the year ending 31st December, 2010.

Question-2 (Pg. 478 of book)

The summarized trial balances of P Ltd (PL) and S Ltd (SL) as at 31 December 2015 are as follows:

P Ltd (PL) S Ltd (SL)

Debit Credit Debit Credit

------------- Rs. In million -------------

Sales - 835 - 645
Cost of sales 525 - 396 -
Operating expense 115 - 102 -
Tax expense 65 - 48 -
Share capital (Rs. 10 each) - 600 - 250
Retained earnings as at 1 January 2015 - 265 - 179
Current liabilities - 115 - 105
Property, plant and equipment 285 - 518 -
Cost of investment 700 - - -
Current assets 125 - 115 -
1,815 1,815 1,179 1,179
Additional information:
(i) On 1 Jan 2015, PL acquired 80% shares of SL.
(ii) Other inter-company transactions during the year 2015 were as follows:
Sales Included in buyer’s Profit %
closing stock-in-trade
------------ Rs. In million ------------
PL to SL 60 20 25% of cost
SL to PL 30 5 20% of sales
(iii) The non-controlling interest is measured at the proportionate share of SL’s identifiable net assets.
Required: Prepare consolidated statement of comprehensive income for the year ended 31 December
2015 and consolidated statement of financial position as at 31 December 2015.

Homework Past paper Q.2 (Pg. 243 of book)

Adnan Rauf, FCA Page 1

CAF-07 Consolidation

Lecture # 13 (Consolidation) Lec. # 78 (Overall)

Class work
Handwritten pg. 5 distributed

Question-1 (Page 479 of book)

The following summarized trial balances pertain to Bow Limited (BL) and its subsidiary Spear Limited
(SL) for the year ended 31 December 2017:
BL SL
Debit Credit Debit Credit
------------ Rs. in million ------------
Sales - 10,354 - 7,992
Cost of sales 6,510 - 4,896 -
Operating expenses 1,426 - 1,272 -
Other income - 700 - 36
Tax expense 806 - 576 -
Share capital (Rs. 10 each) - 7,440 - 3,200
Share premium - 2,860 - 644
Retained earnings as at 1 January 2017 - 4,586 - 1,032
Current liabilities - 1,426 - 1,302
Property, plant and equipment 10,000 - 3,500 -
Intangibles 836 - 368 -
Investments 3,200 - - -
Current assets 4,588 - 3,594 -
27,366 27,366 14,206 14,206
Additional information:
(i) BL acquired 192 million shares of SL on 1 January 2017 at Rs. 13 per share.
(ii) BL measures the non-controlling interest at fair value. On the date of acquisition, the market price
of SL's shares was Rs. 11 per share.
(iii) On acquisition date, carrying value of SL's net assets was equal to fair value except an intangible
asset (brand) whose fair value was Rs. 40 million as against carrying value of Rs. 25 million. The
remaining useful life of the brand is estimated at 5 years.
(iv) Inter-company transactions during the year were as follows:
Sales Included in buyer’s Profit %
closing stock-in-trade
------------ Rs. In million ------------
SL to BL 60 10 20% of sales
(v) SL declared interim dividend of Rs. 1.50 per share in December 2017. It has not been accounted
for by both.

Required:
Prepare the following:
 Consolidated statement of profit or loss for the year ended 31 December 2017.
 Consolidated statement of financial position as at 31 December 2017.

Adnan Rauf, FCA Page 1

CAF-07 Consolidation

Home work
Question-1 (Page 480 of book)
Following are the statements of comprehensive income for the year ending December 31, 2015:
P S
Rs. Rs.
Sales 150,000 130,000
Cost of sales (80,000) (75,000)
Gross profit 70,000 55,000
Distribution cost (10,000) (8,000)
Admin expenses (15,000) (7,000)
Finance cost (7,000) (5,000)
Other income 4,000 1,000
Profit before tax 42,000 36,000
Tax (8,000) (7,000)
Profit after tax 34,000 29,000
1. P acquired 80% of S six years ago.
2. P has bought goods from S throughout the year at Rs. 2,000 per month. At the year-end P has sold
75% of these goods. The mark-up percentage is 20%.
3. P made sales to S totaling Rs. 5,000 in the year at a profit margin of 20%. At the year end the
statement of financial position of S included inventory of Rs. 1,500.
4. At acquisition date, fair value of S net assets was equal to its book value except for the following:
o Fair value of a plant exceeded its carrying value by Rs. 3,000. Remaining life of plant at the time
of acquisition is 20 years.
o Fair value of an office building is less than its carrying value by Rs. 800. Remaining life
of building at the time of acquisition is 10 years.
5. An impairment test at 31 December 2015 on the goodwill concluded that it should be written down by
Rs. 5,000 in current year. The NCI is kept at fair value.
6. On January 1, 2013 P gave a loan of Rs. 20,000 to S. Interest on this loan is 5% per annum payable
every six months.
Required:
Prepare consolidated statement of comprehensive income for the year ending December 31, 2015.
Answer-1
P Ltd.
Consolidated Statement of Comprehensive Income
for the year ended December 31st , 2015
Rupees
Sales (150,000 +130,000 - 24,000 - 5,000) 251,000
Less: Cost of sales [80,000 + 75,000 - 24,000 + 1,000 (W-2) (127,450)
- 5,000 + 300 (W-3) + 150 (W-4)]
Gross profit 123,550
Less: Distribution costs (10,000 + 8,000) (18,000)
Administrative costs (15,000 + 7,000 – 80 (W-5) + 5,000 (W-6)) (26,920)
Finance cost (7,000 + 5,000 - 1,000 (W-7)) (11,000)
67,630
Add: Other income (4,000+1,000 - 1,000 (W-7)) 4,000
Profit before taxation 71,630
Less: Taxation (8,000 + 7,000) (15,000)
Profit after taxation 56,630

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CAF-07 Consolidation

Attributable to:
Share of parent owners (bal.) 52,044
Non-controlling interest (W-1) 4,586
56,630

(W-1) Calculation of NCI figure in CSOCI:

Dr. S profit for the year Cr.
Stock – URP (W-2) 1,000 S profit 29,000
Plant (Dep. on Rev. Surplus) (W-4) 150 Building(Dep. reversal on Rev. loss) (W-4) 80
Goodwill (Imp.) (W-6) 5,000

CRE (22,930 x 80%) (No use) -

NCI (22,930x 20%) (CSOCI) 4,586

(W-2) Sale of goods by S to P

Cost of sale 1,000
Stock 1,000

Sold (2,000 x 12) 24,000

Sale price of stock unsold (24,000 x 25%) 6,000
Profit on stock (6,000/120 x 20) 1,000
(W-3) Sale of stock by P to S
Cost of sale 300
Stock 300

Sold stock 5,000

Sale price of stock unsold 1,500
Profit on stock (1,500/100 x 20) 300

(W-4) Recording of surplus on plant

PPE 3,000
Revaluation surplus in W-1 3,000

Recording of depreciation
COS (Depreciation) (3,000/20) 150
PPE 150

(W-5) Recording of overvaluation –building

Revaluation loss in W-1 800
PPE 800
Reversal of depreciation
PPE (800/10) 80
Admin(Depreciation) 80

(W-6) Impairment of loss good will

Admin expenses 5,000
Goodwill 5,000
(W-7) Interest (20,000 x 5%) = 1,000

Adnan Rauf, FCA Page 3

CAF-07 Consolidation

Lecture # 14 (Consolidation) Lec. # 79 (Overall)

Class work
Handwritten page 6 and 7 were discussed in detail.

Question-1 (Page 482 of book)

The following summarized trial balances pertain to Arrow Limited (AL) and its subsidiary Box Limited
(BL) for the year ended 31 December 2018:
AL BL
Debit Credit Debit Credit
------------ Rs. in million ------------
Sales - 190 - 180
Cost of sales 130 - 120 -
Operating expenses 40 - 40 -
Other income - 50 - 24
Tax expense 20 - 4 -
Share capital (Rs. 10 each) - 150 - 100
Share premium - 100 - 20
Retained earnings as at 1 January 2018 - 180 - 80
Current liabilities 70 - 60
Property, plant and equipment 140 - 164 -
Investments 220 - - -
Loan to BL's Director 10 - - -
Current assets 180 - 136 -
740 740 464 464
Additional information:
(i) AL acquired 8 million shares of BL on 1 April 2018 at following consideration:
 Cash payment of Rs. 160 million
 Issuance of 3 million shares of AL at Rs. 20 each
(ii) AL measures the non-controlling interest at fair value. On the date of acquisition, the fair value of
NCI was Rs. 30 million.
(iii) On acquisition date, carrying values of BL's net assets were equal to fair value except a brand
which had not been recognized by BL. The fair value of the brand was assessed at Rs. 20 million.
It is estimated that benefit would be obtained from it for the next 5 years.
(iv) On 1 July 2018 BL sold an equipment to AL for Rs. 40 million at a gain of Rs. 10 million. AL has
charged depreciation at 20% on this equipment.
(v) An impairment test, conducted on 31 December 2018, has indicated that goodwill of BL has been
impaired by 10%.
(vi) The incomes and expenses of BL may be assumed to have accrued evenly during the year.

Required: Prepare the following:

 Consolidated statement of profit or loss for the year ended 31 December 2018. (10)
 Consolidated statement of financial position as at 31 December 2018. (6)

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CAF-07 Consolidation

Home work
1. MCQs from Book Q. 13, 34, 37, 35, 42, 40 (Page 286-293 of book)
2. Past Paper Q.4 (Page 245 of book)
3. Question given below
Question-1 (Page 483 of book)
The summarized trial balances of P Ltd (PL) and S Ltd (SL) as at 31 December 2015 are as follows:
P Ltd (PL) S Ltd (SL)
Debit Credit Debit Credit
------------ Rs. in million ------------
Sales - 1,820 - 1,290
Cost of sales 1,050 - 792 -
Operating expense 230 - 204 -
Other income - 150 - -
Tax expense 130 - 96 -
Share capital (Rs. 10 each) - 1,200 - 500
Share premium - 300 - 120
Retained earnings as at 1 January 2015 - 530 - 358
Current liabilities - 230 - 210
Property, plant and equipment 980 - 700 -
Investments 900 - - -
Stock-in-trade 150 - 230 -
Trade receivables 280 - 250 -
Cash and bank 510 - 206 -
4,230 4,230 2,478 2,478
Additional information:
(i) On 1 March 2015, PL acquired 80% shares of SL. Cost of investment includes cash consideration
of Rs. 500 million and 12 million shares of P Ltd having fair value of Rs. 25 each.
(ii) PL measures the non-controlling interest at fair value. On the date of acquisition, the market price
of SL's shares was Rs. 15 per share.
(iii) At the date of acquisition fair value of following assets of S was not equal to book value:
a. An office building having remaining useful life of 10 years was overvalued by Rs. 100
million and;
b. A manufacturing plant having remaining useful life of 5 years, having carrying value of Rs.
200 million, was undervalued by Rs. 150 million.
(iv) Other income of PL includes a gain of Rs. 15 million in respect of office furniture sold to SL on
31 July 2015. Remaining useful life is 10 years.
(v) SL declared interim dividend of Rs. 2 per share in Dec. 2015. It has not been recorded by both.
(vi) Inter-company transactions after acquisition date were as follows:
Sales Included in buyer’s Profit %
closing stock-in-trade
Rs. in million (%) (%)
PL to SL 50 25 25% of cost
SL to PL 30 20 20% of sales
(vii) The incomes and expenses of SL may be assumed to have accrued evenly during the year.
Required: Prepare consolidated statement of comprehensive income for the year ended 31 December
2015 and consolidated statement of financial position as at 31 December 2015.

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CAF-07 Consolidation

Answer-1
P Ltd Consolidated Statement of Comprehensive Income
for the year ended December 31, 2015
Rs. in “million”
Sales (1,820 + 1,290 x 10/12 - 50 - 30) 2,815
Less: Cost of sales (1,050 + 792 x 10/12 + 25 - 50 + 2.5 - 30 + 1.2] (1,658.7)
Gross profit 1,156.3
Operating expenses (230 + 204 x 10/12 - 8.33 – 0.63) (391.04)
Other income (150 + 111(W-1) – 15 (W-9)) 246
Profit before taxation 1,011.26
Less: Taxation (130 + 96 x 10/12) (210)
Profit after taxation 801.26
Profit attributable to:
Parent owners (bal.) 771.83
Non controlling interest (W-5) 29.43
801.26
P Ltd Consolidated Statement of Financial Position
as on December 31, 2015
Assets Rs. in “million”
Non-current assets
Property, plant and equipment (980 + 700 - 100 + 8.33 + 150 - 25 - 14.37) 1,698.96
Investment (900 - 800(W-1)) 100
1,798.96
Current assets
Inventory (150 + 230 - 2.5 - 1.2) 376.3
Accounts receivable (280 + 250) 530
Dividend receivable (80 - 80) -
Cash and Bank (510 + 206) 716
1,622.3
3,421.26
Equity and liabilities
Share capital 1,200
Share premium 300
Consolidated Retained earnings (W-3) 1,301.83
2,801.83
Non-controlling interest (W-4) 159.43
2,961.26
Current liabilities (230 + 210 + 100 - 80) 460
3,421.26
(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment (W-1.1) 800 Share Capital 500
NCI (at F.V) (50 m shares x 20%)= 150 Share premium 120
10 m shares x Rs.15/share
Pre-Acquisition R.E. (358 + 198 x 2/12) 391
Revaluation loss (Office Building) (100)
Revaluation gain (Manufacturing plant) 150
1,061
Negative Goodwill (bal.) 111

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CAF-07 Consolidation

(W-1.1) Investment Rs. in million

Cash given 500
Shares given (12 mill shares x Rs. 25) 300
800
(W-2)
Dr. Subsidiary retained earnings a/c Cr.
Pre-Acquisition R.E. 391 b/d (Balance sheet closing) (W-6) 556
Manufac. Plant (Dep. Recording) 25 Office Building (Dep. reversal ) 8.33
(150 / 5 x 10/12) (100 / 10 x 10/12)
Dividend payable (500 x 20%) 100
Stock – URP (W-8) 1.2
CRE (47.13 x 80%) 37.7
NCI (47.13 x 20%) 9.43
(W-3)
Dr. Consolidated retained earnings a/c Cr.
P.P.E (net gain reversal) (W-9) 14.37 Parent own R.E (W-6) 1,090
Stock – URP (W-7) 2.5 Negative goodwill 111
Dividend income (100 x 80%) 80
c/d (bal.) 1,301.83 Subsidiary retained earnings a/c 37.7
(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 150
c/d (bal.) 159.43 Subsidiary retained earnings a/c 9.43
(W-5) Calculation of NCI figure in CSOCI:
Dr. S profit for the year Cr.
Manufac. Plant (Dep. Recording) 25 S profit (198 x 10/12) 165
(150 / 5 x 10/12)
Stock – URP (W-8) 1.2 Office Building (Dep. reversal ) 8.33
(100 / 10 x 10/12)
CRE (147.13 x 80%) (No use) -
NCI (147.13 x 20%) (CSOCI) 29.43
(W-6) Calculation of profits and retained earnings
PL SL
Opening Retained Earning – 01.01.15 530 358
Profit after tax (1,820 - 1,050 -230 + 150 - 130) : (1,290 - 792 - 204 - 96) 560 198
Less: Dividend - -
closing Retained Earning – 31.12.15 1,090 556
(W-7) Sale of stock by P to S
Rs. in million
Sold stock 50
Unsold stock (50 x 25%) 12.5
Profit on unsold stock (12.5/125 x 25) 2.5
(W-8) Sale of stock by S to P
Rs. in million
Sold stock 30
Unsold stock (30 x 20%) 6
Profit on unsold stock (6/100 x 20) 1.2

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CAF-07 Consolidation

(W-9) Gain net of depreciation

Gain (as given) 15
Less: Accumulated Depreciation (15/10 x 5/12) (0.63)
14.37

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CAF-07 Consolidation

CRE (770 x 80%) 616

NCI (770 x 20%) 154

(W-3)
Dr. Consolidated retained earnings a/c Cr.
Stock – URP (W-7) 500 Parent own R.E 25,600
c/d (bal.) 25,716 Subsidiary retained earnings a/c 616

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 2,500
c/d (bal.) 2,654 Subsidiary retained earnings a/c 154

(W-5) Calculation of NCI figure in CSOCI:

Dr. S profit for the year Cr.
P.P.E (Dep. on Rev. Surplus) 600 S profit (3,000 x 9/12) 2,250
(3,200/4y x 9/12)
P.P.E (net gain reversal) (W-8) 180
Goodwill(Impairment loss) 300

CRE (1,170 x 80%) (No use) -

NCI (1,170 x 20%) (CSOCI) 234

(W-6) Calculation of profits and retained earnings

PL SL
Opening Retained Earning – 01.04.02 (Bal.) 16,525 5,800
Profit after tax 9,075 3,000
Less: Dividend (if recorded by the accountant) (2,000 x 20%) - (400)
closing Retained Earning – 31.03.03 25,600 8,400
(W-7) Sale of stock by P to S
Sold 12,000
Unsold (12,000 – 10,000) 2,000
Unsold profit (2,000/100 x *25%) 500
*Margin calculation= 3/12 x 100 = 25%
(Cost =9, Sale price =12, Profit =3)

(W-8) Gain net of Depreciation

Gain (as given) 200
Less: Accumulated Depreciation (200/5 x 6/12) (20)
180

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CAF-07 Consolidation

TREATMENT OF INTEREST INCOMEEXPENSE AND MANAHEMENT FEE

INCOME/EXPENSE (Page 161H of book)
1. INTEREST
SCEN # 1
P Books S Books Only B/S Q P/L and B/S mix Q
Cash 12 Interest Exp. 12 Do nothing - Reduce 12 from
Int. Income 12 Cash 12 interest income and
12 from interest
Expense

SCEN # 2
P Books S Books Only B/S Q P/L and B/S mix Q
Cash 9 Int. Exp. 9 - Reduce 12 from
Int. Income 9 Cash 9 interest income and
interest Expense.
Int. Rec. 3 Int. Exp. 3 Reduce 3 from current - Reduce 3 from
Int. Income 3 Int. Payable 3 asset and current current assets and
liabilities current liability.

2. MANAGEMENT FEE
SCEN # 1
P Books S Books Only B/S Q P/L and B/S mix Q
Cash 12 Mange Fee Exp. 12 Do nothing - Reduce 12 from
Man. Fee Inc. 12 Cash 12 other income and
admin Exp.

SCEN # 2
P Books S Books Only B/S Q P/L and B/S mix Q
Cash 9 Mang. Fee Exp. 9 - Reduce 12 from
Mang Fee Inc. 9 Cash 9 admin exp. And
other income.
Mang. Fee rec. 3 Mang. Fee Exp.3 Reduce 3 from current - Reduce 3 from
Mg. Fee income 3 Mg. Fee Payable 3 assets and current current assets and
liabilities current liabilities

Dividend of P
Sr. Scenario ADJUSTMENT IN ADJ. IN CSOCI
No.
CSOFP
1. Announced and Do nothing Show in W-6
recorded/Paid
2. Announced and not Dividend (CRE) XX Do nothing
recorded Div. payable XX

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CAF-07 Consolidation

Dividend of S (Page 161I of book)

A. UNPAID AND DECLARED BEFORE YEAR END

ADJUSTMENT IN CSOFP ADJ. IN CSOCI
Sr. Scenario Entries already passed Action required Action required
No.
P books S books
1. Not recorded - - 1. Div. receivable 30 Do nothing
by both CRE (Div. income) 30
2. SRE (Dividend) 50
Div. payable 50
3. Cancel receivable/payable with Rs. 30
2. Recorded by Dividend rec. 30 SRE (Dividend) 50 Cancel receivable/ payable with Rs. 30 Show S full dividend
both CRE (Div. inc.) 30 Div. payable 50 in W-6

Deduct P share of S
dividend from other
income in CSOCI
3. Recorded by Dividend rec. 30 - 1. SRE (Dividend) 50 Deduct P share of S
P but not CRE (Div. inc.) 30 Div. payable 50 dividend from other
recorded by S 2. Cancel receivable/ payable with Rs. 30 income in CSOCI
4. Recorded by - SRE (Dividend) 50 1. Div. receivable 30 Show S full dividend
S but not Div. payable 50 CRE (Div. income) 30 in W-6
recorded by P 2. Cancel receivable/ payable with Rs. 30
B. PAID
Cash 30 SRE (Dividend) 50 Nothing Show S full dividend
CRE (Div. inc.) 30 Cash 50 in W-6
Deduct P share of S
dividend from other
income in CSOCI

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CAF-07 Consolidation

Lecture # 16 (Consolidation) Lec. # 81 (Overall)

Class work
Question-1 (Page 490 of book)
Statements of financial position as at 31 December 2015
Hanks Streep
Assets Rs. 000 Rs. 000
Non-current assets
Property, plant and equipment 32,000 25,000
Investments 33,500 -
Current assets 59,500 28,000
125,000 53,000
Equity and liabilities
Share capital 40,000 10,000
Share premium account 6,500 -
Retained earnings 55,000 37,000
101,500 47,000
Current liabilities 23,500 6,000
125,000 53,000
Statements of profit or loss for the year ended 31 December 2015
Hanks Streep
Rs. 000 Rs. 000
Revenue 125,000 117,000
Cost of sales (65,000) (64,000)
Gross profit 60,000 53,000
Less: Distribution and admin costs (48,000) (31,000)
Add: Other income 3,000 -
Profit after tax 15,000 22,000
Statement of changes in equity (extract) for the year ending 31 December 2015
Hanks Streep
Rs. 000 Rs. 000
Retained earnings brought forward 44,000 17,500
Profit for the financial year 15,000 22,000
Dividends- interim 2015 (4,000) (2,500)
Retained earnings carried forward 55,000 37,000
1) Hanks owns 80% of Streep’s shares. These were purchased on 1 January 2012 for Rs. 33.5
million cash, when the balance on Streep’s retained earnings stood at Rs. 7million.
The fair value of Streep net assets at the date of acquisition was determined to be Rs. 20
million. The difference between the book value and fair value of the net assets at the date of
acquisition was due to a plant which had a useful life of 10 years from the date of acquisition.
2) During the year Streep sold goods to Hanks at a price of Rs. 24 million. These goods had cost
Streep Rs. 18 million. During the year Hanks had sold Rs. 20 million (at cost to Hanks) of these
goods for Rs. 30 million.
3) Hanks has carried out annual impairment tests on goodwill in accordance with IFRS 3 and IAS
36. The estimated recoverable amount of goodwill at 31 December 2012 was Rs. 5 million and at
31 December 2015 was Rs. 4.5 million.
4) Hanks and Streep each proposed an interim dividend in September 2015 of 10% and 25%
respectively. Hanks share of dividend from Streep is appearing in other income.

Adnan Rauf, FCA Page 1

CAF-07 Consolidation

Required Prepare the consolidated statement of profit or loss and consolidated statement of financial
position at 31 December 2015.

Home work
Question-1 (Page 491 of book)
Statements of profit or loss for the year ended 30 June 2018
P Ltd S Ltd
Rs. Rs.
Sales 175,000 152,000
Cost of sales (95,000) (63,000)
Gross profit 80,000 89,000
Add: Other income 5,000 -
Less: Admin expenses (66,000) (75,500)
Profit 19,000 13,500
st
P acquired 70% of the shares in S for Rs. 50,000 on 1 July, 2015 when the balance on the retained
earnings of S Ltd was Rs. 8,000.
Statements of financial position as at 30 June 2018
Non-current assets P Ltd S Ltd
Property, plant & equipment 62,000 85,000
Investments 73,000 42,500
Current assets 54,000 60,500
189,000 188,000
Equity
Share capital (Rs. 10 per share) 74,000 50,000
Retained earnings 39,000 32,500
Current liabilities 76,000 105,500
189,000 188,000
Other information:
(1) On acquisition date, carrying value of net assets of S Ltd was equal to their fair value except:
 a plant whose fair value was Rs.60,000 as against carrying value of Rs. 45,000. The
remaining useful life of the plant is estimated to be 5 years.
 An office building of S Ltd whose fair value was less than its carrying value by Rs.
10,000. Building is being depreciated on straight line bases and its expected useful life, at
date acquisition, is estimated to be 10 years.
(2) It is the group policy to value the non-controlling interest at acquisition date at fair value. The
directors valued the non-controlling interest at Rs. 20,000 at the date of acquisition.
(3) S Ltd sold furniture to P Ltd on 01 January 2017 at a price of Rs. 8,550. S Ltd purchased furniture
on 01 January 2016 at a cost of Rs. 9,000. Useful life of furniture was assessed at 10 years at date
of purchase.
(4) Impairment loss on goodwill in year ended 30 June 2016 was calculated at Rs. 1,000 and in year
ended 30 June 2018, it was calculated at Rs. 500.
(5) During current year, S Ltd sold goods amounting to Rs. 15,000 to P Ltd at a profit markup of
25%. Out of these, goods amounting to Rs. 5,000 remained unsold till year end.
(6) P and S paid final cash dividend at the rate of 10% and 12% respectively in Sep 2017.

Adnan Rauf, FCA Page 2

CAF-07 Consolidation

Required: Prepare Parent consolidated statement of profit or loss, consolidated statement of financial
position for the year ended 30 June 2018.

Answer-1
P Limited
Consolidated Statement of Comprehensive Income
For the year ended June 30, 2018
Rs.
Sales (175,000 + 152,000 - 15,000) 312,000
Less: Cost of sales [95,000 + 63,000 + 3,000 (a) – 15,000 + 1,000 (W-7)] (147,000)
Gross Profit 165,000
Add: Other income [5,000 – 4,200 (e)] 800
Less: Admin expenses (66,000+75,500 - 1,000 (b) + 500 (d) – 50 (c)) (140,950)
Profit 24,850
Attributable to:
Share of Parent owners (bal.) 21,835
Non-controlling asset (W-5) 3,015
24,850

(a) 15,000/5 x 1 = 3,000

(b) 10,000/10 x 1 = 1,000
(c) Dep on gain (450/9 x 1 = 50)
(d) Impairment loss on goodwill during current year = 500
(e) P share of S dividend = 50,000 x 12% x 70% = 4,200

P Limited
Consolidated Statement of Financial Position
As on June 30, 2018
Rs.
Assets
Non-current assets
Property, Plant & Equipment (62,000 + 85,000 + 15,000 - 9,000 - 10,000 + 3,000 - 375) 145,625
Investments (73,000 + 42,500 – 50,000) 65,500
Good will [(W-1) 7,000 – 1,500] 5,500
216,625
Current assets (54,000 + 60,500 – 1,000) 113,500
330,125
Equity and liabilities
Equity
Share capital 74,000
Consolidated retained earnings (W-3) 49,938
123,938
Non-controlling interest (W-4) 24,687
148,625
Current liabilities (76,000 + 105,500) 181,500
330,125

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CAF-07 Consolidation

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 50,000 Share capital 50,000
NCI (at F.V) 20,000 Pre-Acquisition R.E. 8,000
Revaluation surplus-Plant 15,000
Revaluation loss -Office building (10,000)
Fair value of S net assets 63,000
Goodwill (bal.) 7,000

(W-2)
Subsidiary retained earning a/c Cr.
Pre-Acquisition R.E. 8,000 b/d (Balance sheet closing) (Post) 32,500
Plant (Dep.) (15,000/5y x 3y) 9,000 Office Build. (Dep. reversal on Rev. loss) 3,000
(10,000/10y x 3y)
P.P.E (net gain reversal) (W-8) 375
Goodwill 1,500
(Impairment loss) (1,000 + 500)
Stock-URP (W-7) 1,000

CRE (15,625 x 70%) 10,938

Share capital (Rs. 10 each) 70 20

Retained earnings 81 41
Current liabilities 119 23
270 84
(i) JL acquired 80% shares of SL on 1 April 2017. SL showed a net profit of Rs. 30 million for the
year ended 31 December 2017. The incomes and expenses of SL had accrued evenly during the
year except investment income of Rs. 5 which relates to month of June 2017 only.
(ii) On acquisition date, carrying value of SL's net assets was equal to fair value except:
• The value of a plant was impaired by Rs. 3 million. The impairment was also recorded by
SL on 2 April 2017.
• a contingent liability of Rs. 9 million as disclosed in financial statements of SL which had
an estimated fair value of Rs. 6 million. Subsequent to acquisition, the liability has been
recognised by SL in its books at Rs. 4 million.
• Fair value of a land exceeded its carrying value by Rs. 10 million. This land was sold by
SL subsequently at fair value.
Required: Prepare JL's consolidated statement of financial position as at 31 December 2017. (07)
ASSOCIATES (IAS-28)
Question-1 (Page 496 of book) Following are the balance sheets as at December 31, 2018:
PL SL AL
-------------Rs.-------------
Assets
Non-current assets
Property, plant and equipment 60,000 40,000 78,000
Investment in SL (2,700 shares of SL) 50,000 - -
Investment in AL (1,800 shares of AL) 32,000 - -
Current assets 17,000 20,600 28,000
129,000 60,600 106,000
Equity and liabilities
Ordinary share capital (Rs.10 each) 60,000 30,000 45,000
Retained earnings 74,000 19,600 41,000
Current liabilities 25,000 11,000 20,000
129,000 60,600 106,000
PL acquired shares in SL and AL on 01 Jan 2015 and 01 Jan 2016 respectively. On date of acquisition,
the retained earnings of S Ltd and A Ltd were Rs. 15,000 and Rs. 20,000 respectively.
Required: Prepare the Consolidated Statement of Financial Position as at 31 December 2018.

Adnan Rauf, FCA Page 1

CAF-07 Consolidation

Home work
1. Question bank Q.1 (IAS-28) (Page 328 of book)
2. Handwritten page 8 of consolidation attached with
lecture 82

Adnan Rauf, FCA Page 2

CAF-07 IAS-28: Associates

Lecture # 2 (Associates) Lecture # 84 (Overall)

Class work
Handwritten page distributed 1 and 2

Question-1 (Page 496 of book)

The following summarized statements of financial position pertain to P Ltd (PL), its subsidiary S Ltd (SL)
and its associate A Ltd (AL) as at 30 June, 2018.
PL SL AL
---------Rs. in million---------
Property, plant and equipment 430 200 300
Investments 500
Debtor – S 30
Debtor – A 25
Other current assets 440 400 350
1,425 600 650

Share capital (Rs. 10 each) 600 250 200

Retained earnings 325 200 240
Creditor – P 30
Creditor – P 25
Other current liabilities 500 120 185
1,425 600 650
Following relevant information is available:
(i) PL acquired 20 million shares in SL for Rs. 17/share and 8 million shares in AL for
Rs.16.25/share on 1 July 2015. On date of acquisition, retained earnings of SL and AL were
Rs.140 million and 100 million respectively.
(ii) Inter-company sales of goods are invoiced at a mark-up of 20%. The relevant details of inter-
company transactions after acquisition are as under:
Sales Included in buyer’s closing stock-in-
trade
---------- Rs. In million ----------
PL to SL 60 30
AL to PL 50 12
PL to AL 30 24
(iii) On 1 January 2018 entity P sold an item of plant to entity A at a price of Rs. 16.2 million at a
profit of 80%.At date of Disposal, remaining useful life of plant is 5 years.
(iv) PL values non-controlling interest at the acquisition date at proportionate share.
(v) As at June 30, 2018, an impairment test indicated that investment in AL has been impaired by 24
million.
Required:
Prepare a consolidated statement of financial position as at 30 June 2018 in accordance with the
requirements of International Financial Reporting Standards.

Adnan Rauf, FCA Page 1

CAF-07 IAS-28: Associates

Home work
Question-1 (Page 497 of book)
The following summarized statements of financial position pertain to Hamachi Ltd (HL), its Subsidiary
Saba Ltd (SL) and its associate Anoga Ltd (AL) as at 31 March 2016.
Hamachi Ltd Saba Ltd Anogo Ltd
-----------Rupees in ‘000’-----------
Asset
Non-current assets
Property, plant and equipment 8,050 3,600 1,650
Investments 4,000 910 Nil
12,050 4,510 1,650
Current assets
Inventory 830 340 250
Accounts receivable 520 290 350
Bank 240 Nil 100
1,590 630 700
Total assets 13,640 5,140 2,350

Equity and liabilities

Equity
Ordinary shares of Rs. 1 each 5,000 1,200 600
Retained earnings 7,500 2,300 1,400
12,500 3,500 2,000
Non-current liabilities
10% Loan notes 500 240 Nil
Current liabilities
Accounts payable 420 960 200
Taxation 220 250 150
Overdraft Nil 190 Nil
640 1,400 350
Total equity and liabilities 13,640 5,140 2,350
The following information is relevant
(i) Hamachi Ltd acquired 90% of Saba Ltd’s Rs. 1 ordinary shares on 1 April 2014 paying Rs. 3.00
per share. The balance on Saba Ltd’s retained earnings at this date was Rs. 800,000. On 1
October 2014, Hamachi Ltd acquired 30% of Anogo Ltd’s Rs. 1 ordinary shares for Rs. 3.50 per
share when balance on retained earnings was Rs. 600,000.
(ii) On 1 April 2014 Saba Ltd owned a Land that had a fair value of Rs. 120,000 in excess of its
carrying value (book value). The value of this property has not changed since acquisition.
(iii) Inter-company sales are invoiced at cost plus 40%. Details of inter-company transactions for the
year ended 31 March 2016 are as follows:
(a) SL sold goods amounting to Rs. 50,000 to HL. At year-end, inventory of HL included
Rs.24,000 in respect of such goods.
(b) HL sold goods amounting to Rs. 65,000 to AL. At year-end, inventory of AL included
Rs. 43,000 in respect of such goods.
(c) AL sold goods amounting to Rs.40,000 to HL. At year-end, inventory of HL included
Rs.12,000 in respect of such goods.
(iv) Detail of inter-company balances are as follows:

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CAF-07 IAS-28: Associates

Rs.
Receivables from HL on 31 March 2016 as per SL’s books 19,000
Payable to SL on 31 March 2016 as per HL’s books 15,000
Difference is due to a cheque of Rs. 4,000 issued by HL which was received by SL on 2 April
2016.
(v) On 1 October 2015 HL sold an equipment to AL for Rs. 40,000 at a gain of Rs. 10,000. AL has
charged depreciation at 20% on this equipment.
(vi) On 1 January 2016, AL sold a machine to HL having book value of Rs. 280,000 for Rs. 308,000.
At date of disposal, machine was assessed as having remaining useful life of 7 years.
(vii) An impairment test at 31 March 2016 on the investment in shares of Anoga Ltd concluded that it
should be written down by Rs. 217,000. No other assets were impaired.
Required: Prepare the consolidated statement of financial position of Hamachi Ltd as at 31 March 2016.
Home work

MCQ 17,19,12,13(Page 349-350 of book)

Answer-1
Hamachi Limited
Consolidated Statement of Financial Position
As on March 31, 2016
Assets Rs. in ‘000’
Non-current assets
Property, plant and equipment (8,050 + 3,600 + 120 - 8.1 (W-10)) 11,761.9
Good will (W-1) 1,332
Investment
- In Associates (W-5) 646.6
- Others (4,000 + 910 - 3,240 (W-1) - 630 (W-5) ) 1,040
1,686.6
Current assets
Inventory (830 + 340 - 6.9 (W-6) - 1(W-8)) 1,162.1
Accounts receivable (520 + 290 - 19) 791
Bank (including in transit) (240 + 0 + 4) 244
2,197.1
16,977.6
Equity and liabilities
Equity
Share capital 5,000
Consolidated retained earnings (W-3) 8,851.29
13,851.29
Non-controlling interest (W-4) 361.31
14,212.6
Non-current liabilities
10% Loan Notes (500 + 240) 740
Current liabilities
Accounts payable (420 + 960 - 15) 1,365
Taxation (220 + 250) 470
Overdraft (0 + 190) 190
2,025
16,977.6

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CAF-07 IAS-28: Associates

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment (1,200 shares x 90% = 3,240 Share Capital 1,200
1,080 shares x Rs. 3/share)
NCI (Prop. Share) (2,120 x 10%) 212 Pre-Acquisition R.E. 800
Revaluation Surplus-Land 120
2,120
Goodwill (bal.) 1,332
(W-2)
Dr. Subsidiary retained earnings a/c Cr.
Pre-Acquisition R.E. 800 b/d (Balance sheet closing) (Post) 2,300
Stock-URP (W-6) 6.9

CRE (1,493.1 x 90%) 1,343.79

Home work
Question-1 (Page 502 of book)
Below are the statements of profit or loss for the year ended 31 December 20X8.
P Ltd S Ltd A Ltd
Rs. 000 Rs. 000 Rs. 000
Revenue 385 100 60
Cost of sales (185) (60) (20)
Gross profit 200 40 40
Operating expenses (50) (15) (10)
Other income 100 25 -
Profit before tax 250 50 30
Tax (50) (20) (10)
Profit for the year 200 30 20
You are also given the following information:-
(i) P Ltd acquired 45,000 ordinary shares in S Ltd a number of years ago. SL has 50,000 shares.
(ii) P Ltd acquired 60,000 ordinary shares in A Ltd a number of years ago. A Ltd has 200,000 shares.
(iii) During the year,
a. SL sold goods to PL for Rs. 30,000. PL still holds some of these goods in inventory at the
year end. The profit element included in these remaining goods is Rs. 5,000.
b. AL sold goods to PL for Rs. 28,000. PL still holds some of these goods in inventory at
the year end. The profit element included in these remaining goods is Rs. 2,000.
c. PL sold goods to AL for Rs. 40,000 at a profit margin of 25%. AL still holds goods
amounting to Rs. 10,000 in inventory at the year end.
(iv) Non controlling interest is valued using the fair value method. Goodwill was impaired for the first
time during the year by Rs. 3,000.
(v) Investment in the associate was impaired for the first time during the year by Rs. 2,000.
(vi) On 1 July 20X8 PL sold an equipment to AL at a gain of Rs. 10,000. Remaining life on that date
is 5 years.
(vii) On 01 December 20X8, AL paid a dividend of Rs. 150,000 to all shareholders. PL has
appropriately recorded its share of dividend in other income.
Required:
Prepare the consolidated statement of profit or loss for PL including the results of its associated company
for the year ended 31 December 20X8.

Question-2(Page 504 of book)

The statements of comprehensive income of the PL, its Subsidiary SL and Associate AL at 31 December
2018 are shown below:
P Ltd S Ltd A Ltd
Revenue 15,000 7,500 9,000
Cost of sales and Operating expenses (12,000) (5,000) (6,000)
Profit before tax 3,000 2,500 3,000
Income tax (1,000) (750) (1,000)
Profit after taxation 2,000 1,750 2,000
The following information is relevant

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CAF-07 IAS-28: Associates

i) P Ltd acquired 60% of share capital of S Ltd on 1 March 2018 and 30% of share capital of A
Ltd’s on 1 July 2018.
ii) It may be assumed that profits of all companies had accrued evenly during the year.
Required: Prepare a consolidated statement of profit or loss for P for the year ended 31 December 2018.
Home work

MCQ 3, 4, 6, 9, 15(Page 347-349 of book)

Answer-1

Share in percentage of Subsidiary (45,000 shares/50,000 shares) = 90%

Share in percentage of Associate (60,000 shares/200,000 shares) = 30%

P Ltd
Consolidated Statement of Profit and loss
For the year ended December 31, 20X8
Rs. in ‘000’
Sales (385 + 100 - 30) 455
Less: Cost of sales (185 + 60 – 30 + 5 (W-6) + 0.75(W-8)) (220.75)
Gross Profit 234.25
Operating expenses (50 + 15 + 3) (68)
Other Income (100 + 25 – (a) 45 – 2.7 (W-9)) 77.3
Share of profit from Associate (W-5.1) 3.4
Profit before taxation 246.95
Less: Taxation (50 + 20) (70)
Profit after taxation 176.95
Profit Attributable to:
Share of parents owners (bal.) 174.75
Non-controlling interest (W-5) 2.2
176.95
(a) 150 x 30% = 45

(W-5) Calculation of NCI figure in CSOCI

Dr. S profit for the year Cr.
Stock - URP (W-6) 5 S profit 30
Impairment of Goodwill – NCI at F.V 3

CRE (22 x 90%) (No use) -

NCI (22 x 10%) (CSOCI) 2.2

(W-5.1) Calculation of share of profit from associate

Share of Profit of A as per P/L account (20 x 30%) 6
Less: P’s share of unrealized profit on sale of stock by A to P (W-7) (0.6)
Less: Impairment loss on Investment (2)
3.4

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CAF-07 IAS-28: Associates

(W-6) Sale of Stock by S to P

Sold stock 30
Unsold stock X
Profit on unsold stock 5

(W-7) Sale of Stock by A to P

Sold stock 28
Unsold stock X
Profit on unsold stock 2
Share of P (2 x 30%) 0.6
(W-8) Sale of Stock by P to A
Sold stock 40
Unsold stock 10
Profit on unsold stock (10 /100 x 25) 2.5
Share of P (2.5 x 30%) 0.75
(W-9) Fixed asset sold by P to A
Gain net of Depreciation
Gain 10
Less: Accumulated Dep. (10 x 20% x 6/12) (1)
9
P’s Share (9 x 30%) 2.7

Answer-2
P Ltd
Consolidated Statement of Profit and loss
For the year ended December 31, 20X8
Sales (15,000 + 7,500 x 10/12) 21,250
Less: Cost of sales and operating expenses (12,000 + 5,000 x 10/12) (16,167)
Gross Profit 5,083
Share of profit from Associate (W-5.1) 300
Profit before tax 5,383
Less: Taxation (1,000 + 750 x 10/12) (1,625)
Profit after taxation 3,758
Profit Attributable to:
Parent (bal.) 3,175
NCI (W-5) 583
3,758
(W-5) Calculation of NCI figure in CSOCI:
Dr. S profit for the year Cr.
S profit (1,750 x 10/12) 1,458

CRE (1,458 x 60%) (No use) -

NCI (1,458 x 40%) (CSOCI) 583
(W-5.1) Calculation of share of profit from associate
Share of Profit of A as per P/L account (2,000 x 6/12 x 30%) 300

Adnan Rauf, FCA Page 4

CAF-07 IAS-28: Associates

Lecture # 4 (Associates) Lecture # 86 (Overall)

Class work
Question-1 (Page 505 of book) The draft financial statements for the year ended June 30, 2018 are:-
Assets PL SL AL Equity & PL SL AL
Liabilities
---------Rs. in million--------- ---------Rs. in million---------
Non-current assets Share capital 1,000 400 220
PPE 995 920 442 (Rs. 1 each)
Intangibles - 350 27 R/E 1,370 929 361
Investment 345 - - 2,370 1,329 581
1,340 1,270 469 Current
Current assets 3,110 2,499 589 Liabilities 2,080 2,440 477
4,450 3,769 1,058 4,450 3,769 1,058

Statement of Comprehensive Income

For the year ended June 30, 2018
PL SL AL
Revenue 4,480 4,200 1,460
Cost of sales (2,690) (2,940) (1,020)
Gross profit 1,790 1,260 440
Distribution and administrative cost (620) (290) (196)
Finance cost (350) (80) (24)
Other income 260 - -
Profit before tax 1,080 890 220
Income tax expense (330) (274) (72)
Profit for the year 750 616 148
a) PL acquired the following non-current investments:
i) 320 million equity shares in SL on 01 July 2017, by paying Rs. 125 million in cash.
ii) 55 mill. equity shares in AL, on 01 April 2018. The purchase consideration was made up of:
 Rs. 220 million in cash, paid on acquisition; and
 1 million shares in PL. At the date of acquisition, P’s shares were being traded at Rs. 5 per
share but the price had risen to Rs. 6 per share by the time the shares were issued on 1 July
2018.
b) SL’s intangible assets include Rs. 87 million of training and marketing cost incurred during current
year. Directors of S intend to amortize it from 1 July 2018.
c) Following is relevant to inter-company transactions after acquisition and balances at year-end:
PL’s records SL AL
Sales to 1,300 1,000
Year-end stock out of inter-company sale held with 140 100
Profit margin earned by P from 30% 40%
Year-end receivables from 100 150
d) Annual impairment test indicate impairment of Rs. 20 million relating to the investment in AL.
e) PL, SL and AL all paid dividend of 10%, 10% and 5% respectively.
Required: Prepare the CSOFP and the CSOCI for the year ended June 30, 2018 for the PL Group.
Note: Do MCQ no. 3 after doing above question (Page 347 of book)

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CAF-07 IAS-28: Associates

Question-2 (Page 506 of book)

1. Entity P acquired 30% of the equity shares in Entity A during Year 1 at a cost of Rs. 147,000 when
the fair value of the net assets of Entity A was Rs. 350,000.
2. At 31 December Year 5, the net assets of Entity A were Rs. 600,000.
3. In the year to 31 December Year 5, the profits of Entity A after tax were Rs. 80,000.
Required:
Calculate the figures that must be included to account for the associate in the financial statements of
Entity P for the year to 31 December Year 5?
Note: MCQ no. 11 after doing above question (Page 348 of book)

Homework
Question-1(Page 506 of book)
Bilal Limited (BL), acquired 80% equity shares of subsidiary, Mishall Limited (ML), on July 01, 2017
and 25% shares of associate, Zoha Limited (ZL), on January 01, 2018.
Statement of Financial Position as at June 30, 2018:
BL ML ZL
---------------Rs. in million---------------
Assets
Non-current assets
Property, plant and equipment 1,012 920 442
Intangible assets - 350 27
Investment in ML 765 - -
Investment in ZL 203 - -
1,980 1,270 469
Current assets
Inventories 620 1,460 214
Trade receivables 950 529 330
Cash and cash equivalents 900 510 45
2,470 2,499 589
4,450 3,769 1,058
Equity and Liabilities
Equity
Share capital 1,000 400 220
Share premium 200 140 83
Retained earnings 1,370 776 361
2,570 1,316 664
Current liabilities
Trade and other payables 1,880 2,453 394
4,450 3,769 1,058

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CAF-07 IAS-28: Associates

Statement of Comprehensive Income for year ended June 30, 2018:

BL ML ZL
Revenue 4,000 3,000 1,500
Cost of sales (2,210) (1,740) (1,060)
Gross profit 1,790 1,260 440
Distribution and administrative cost (620) (290) (196)
Finance cost (55) (80) (24)
Other income 5 - -
Profit before tax 1,120 890 220
Income tax expense (330) (274) (72)
Profit for the year 790 616 148
Additional information:
a) The BL Group has the policy of measuring NCI at fair value at the date of acquisition and Fair Value
of NCI was Rs. 210 million at the date of acquisition.
b) The fair value of net assets of subsidiary at date of acquisition was Rs. 800 million. Difference in fair
value on the subsidiary relates to factory plant being depreciated through cost of sales over the
remaining useful life of 10 years from the acquisition date.
c) During the year ended June 30, 2018 ML sold goods to BL for Rs. 1,300 million. The company
makes a profit of 30% on the selling price. Rs. 140 million of these goods were held by BL on June
30, 2018.
d) BL sold goods worth Rs. 1,000 million to ZL during the year by charging 25% margin on sales, 10%
of the goods still remains unsold by ZL
e) ZL sold goods worth Rs. 1,500 million to BL during the year by charging 20% margin on sales,
1/10th of the goods still remains unsold by BL.
f) Annual impairment tests have indicated impairment losses of Rs. 20 million relating to the
recognized goodwill of ML and Rs. 2 million relating to the investment in ZL.
g) On April 1, 2018 BL sold a group of machines to ZL at their agreed fair value of Rs. 25 million. At
the time of sale, the carrying amount of the machines was Rs. 13 million. Machinery is depreciated
to a residual value of nil using straight-line depreciation and at April 1, 2018 the machines had an
estimated remaining life of three years.
h) Inter-company balances at year end are as follows:
Rs. In million
Receivables from ML as per BLs books 19
Payable to BL as per MLs books 19
Receivables from ZL as per BLs books 10
Payable to BL as per ZLs books 10

Required:
Prepare the Consolidated statement of financial position and the statement of comprehensive income for
the year ended June 30, 2018 for the BL Group.

MCQ. 8, 18 (Page 348 and 350 of book)

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CAF-07 IAS-28: Associates

Answer-1
Bilal Limited (BL)
Consolidated Statement of Financial Position
As on June 30, 2018
Assets Rs. in million
Non-current assets
Property, plant and equipment (1,012+ 920 + 100 - 10) 2,022
Intangible 350
Goodwill (175 - 20) 155
Investment in Associate (W-7) 210.75
2,737.75
Current assets
Inventory (620 + 1,460 - 42(W-8) – 7.5 (W-10)) 2,030.5
Trade Receivables (950 + 529 - 19) 1,460
Cash and Bank balances (900 + 510) 1,410
7,638.25
Equity and liabilities
Equity
Share capital 1,000
Share premium 200
Consolidated retained earnings (W-3) 1,805.25
3,005.25
Non-controlling interest (W-4) 319
3,324.25
Current liabilities (1,880 + 2,453 - 19) 4,314
7,638.25

Bilal Limited (BL)

Consolidated Statement of Profit and Loss
For the year ended June 30, 2018
Rs. in million
Sales (4,000 + 3,000 - 1,300) 5,700
Less: Cost of sales (2,210 + 1,740 + 10 - 1,300 + 42(W-8) + 6(W-9)) (2,708)
Gross Profit 2,992
Distribution and Administrative Cost (620 + 290 + 20) (930)
Finance Cost (55 + 80) (135)
Other income (5 – 2.75 (W-11)) 2.25
Share of profit from Associate (W-5.1) 9
Profit before taxation 1,938.25
Less: Taxation (330 + 274) (604)
Profit after taxation 1,334.25
Profit Attributable to:
Share of parents owners (bal.) 1,225.25
Non-controlling interest (W-5) 109
1,334.25

Adnan Rauf, FCA Page 4

The existence of significant influence is usually evidenced in one or more of the following ways:
 Representation on the board of directors;
 Participation in policy-making processes, including participation in decisions about distributions
(dividends);
 Material transactions between the two entities;
 An interchange of management personnel between the two entities; or
 The provision of essential technical information by one entity to the other.
[MCQ . 2] (Page 347 of book)

IAS 28 states that if an entity holds 20% or more of the voting power (equity) of another entity, it is
presumed that significant influence exists, and the investment should be treated as an associate.
AS 28 states that associates must be accounted for using the equity method. [MCQ . 5] (Page 347 of
book)

Equity method
Investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the
investor’s share of the investee’s net assets.
The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other
comprehensive income includes its share of the investee’s other comprehensive income.
Separate financial statements
When an entity “prepares separate financial statements” it shall account for Investments in
subsidiaries and associates either:
a) At cost;
b) In accordance with IFRS 9; or
c) Using the equity method
Example-1
Kashif Limited (KL) acquired 30% shares in Hasan Limited (HL) on January 01, 2019. Both company’s
year-end is December 31.
Following are the details of events during the year:
1) KL purchased 30% shares at a cost of Rs. 30 million.
2) HL Limited’s profit for the year 2019 is Rs. 10 million.
3) HL Limited distributed Rs. 4 million of dividend to its shareholders.
Prepare extract of statement of profit & loss and statement of financial position where:
a) Cost model is applied.
b) Equity method is applied.
MCQ 15 and 16 (Page 349 of book)

Adnan Rauf, FCA Page 7

IFRIC 1
CAF-07 IFRIC 1: Decommissioning

Lecture # 1 Lecture # 87 (Overall)

Associates and Consolidation
Question-1 (Page 191A of book)
The following balances are extracted from the records of P Limited (PL), S Limited (SL) and A
Limited (AL) for the year ended 30 June 2019:
PL SL AL
Gross Profit 50 35 25
Less: Operating expenses (10) (8) (12)
Profit before tax 40 27 13
Less: Income tax (6) (5) (8)
Profit after tax 34 22 5
Other comprehensive income
- Revaluation Surplus on PPE 10 4
Total comprehensive income 44 9
Additional information:
1. Details of PL’s investments are as follows:
Date of investment Holding % Investee
1 Jan 17 60% SL
1 Jul 18 20% AL
2. PL and AL follow revaluation model whereas SL follow cost model for subsequent measurement of
PPE. If SL had adopted revaluation model SL would have recorded revaluation surplus of Rs. 8 for
the year ended 30 June 2019.
Required:
Prepare PL’s consolidated ‘statement of profit or loss and other comprehensive income’ for the year
ended 30 June 2019.

Answer-1
P Limited (PL)
Consolidated Statement of Comprehensive Income
For the year ended June 30, 2019
Rs.
Gross profit (50 + 35) 85
Operating expenses (10 + 8) (18)
Share of profit from Associate (W-5.1) 1
Profit before tax 68
Tax (6 + 5) (11)
Profit after tax 57
Other Comprehensive Income
Revaluation surplus (10 + 8) 18
Share of Associate’s OCI (W-5.3) 0.8
Total comprehensive income 75.8

Profit after tax attributable to:

Parent (bal.) 48.2
N.C.I (W-5) 8.8
57

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CAF-07 IFRIC 1: Decommissioning

Total comprehensive income attributable to:

Parent (bal.) 63.8
N.C.I (8.8 (W-5) + 3.2(W-5.2)) 12
75.8
(W-5)
Dr. S profit for the year Cr.
S profit 22
CRE (22 x 60%) (No use) -
NCI (22 x 40%) (CSOCI) 8.8

(W-5.1) Share of Profit from Associate

Rs
Associate Profit (5 x 20%) 1

(W-5.2)
Dr. Subsidiary OCI for the year Cr.
Revaluation surplus 8
CRE (8 x 60%) (No Use) -
NCI (8 x 40%) (CSOCI) 3.2

(W-5.3) Share of OCI from Associate

Rs
Associate Profit (4 x 20%) 0.8

Question-2 (Page 191A of book)

The following summarized statement of financial position pertains to Ilm Limited (IL) and its subsidiary
Sun Limited (SL) as at 31 December, 2018.
IL SL
Property, plant and equipment 100 50
Investment in SL (80%) 40 -
Current assets 10 5
150 55

Share capital (Rs. 10 each) 100 25

Retained earnings 50 30
150 55
Following relevant information is available:
a) IL acquired 80% of SL on 1 January 2018 when retained earnings were Rs. 10. At the date of
acquisition SL had a land which had a fair value Rs. 30 and a carrying amount of Rs. 20. At the year-
end date of 31 December 2018, the fair value of the land was Rs. 32. It is group policy to use
revaluation model for its land.
b) IL values non-controlling interest at proportionate share of net assets.

Required:
Prepare a consolidated statement of financial position as at 31 December 2018 in accordance with the
requirements of International Financial Reporting Standards.

Adnan Rauf, FCA Page 2

CAF-07 IFRIC 1: Decommissioning

Answer-2
Ilm Limited (IL)
Consolidated Statement of Financial Position
As on December 31, 2018
Assets Rs.
Non-current assets
Property, plant and equipment (100 + 50 + 10 + 2) 162
Goodwill (W-1) 4
Current assets (10 + 5) 15
181
Equity and liabilities
Equity
Share capital 100
Revaluation surplus (32 - 30) 2
Consolidated retained earnings (W-3) 66
168
Non-controlling interest (W-4) 13
181

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 40 Share capital 25
NCI (Prop. share) (45 x 20%) 9 Pre-Acquisition R.E. 10
Revaluation Surplus 10
45
Goodwill (bal.) 4

(W-2)
Dr. Subsidiary retained earnings a/c Cr.
Pre-Acquisition R.E. 10 b/d (Balance sheet closing) (Post) 30

CRE (20 x 80%) 16

NCI (20 x 20%) 4

(W-3)
Dr. Consolidated retained earning a/c Cr.
Parent own R.E. 50
c/d (bal.) 66 Subsidiary retained earning a/c 16

(W-4)
Dr. Non-controlling interest a/c Cr.
Cost of Investment a/c 9
c/d (bal.) 13 Subsidiary retained earning a/c 4

Adnan Rauf, FCA Page 3

CAF-07 IFRIC 1: Decommissioning

This Page is not in book

In some questions I have observed that ICAP is demanding Movement in CRE which was not discussed
in class and even not included in book in a proper format:
So here it is for you:

Past paper – Q.2

Solve whole question is same was and use flowing format
Movement in CRE and NCI
C.R.E N.C.I
1. Retained earnings parent – opening (W-6) 50 -
2. Proportionate share of NCI (W-1) 50.8
4. Profit for the year (P/L) / (W-5) 32.92 2.8
5. Less: Dividend (Full dividend declared by P) :(NCI share in S - -
Dividend) (These both will be shown here even if accountant has or
has not recorded)
82.92 53.6

(Bacho ye to SOCIE hi hayyyyy)

Past paper – Q.4

Movement in CRE and NCI
C.R.E N.C.I
1. Retained earnings parent – opening (W-6) 265 -
2. Proportionate share of NCI (W-1) 113.4
4. Profit for the year (P/L) / (W-5) 173.92 11.98
5. Less: Dividend - -
438.92 125.38

Description Journal entry

If examiner demand journal entry of CRE CRE
adjustment Inventory

If examiner demand journal entry of SRE CRE

adjustment NCI
Inventory

Things to do:
1. Bargain purchase is also called as negative goodwill.
2. Positive goodwill
NCI at fair value - Full goodwill method
NCI at proportionate basis – Partial goodwill method

Home work
Associate Past Paper Q.1 Pg. 324 (Very good question)

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CAF-07 IFRIC 1: Decommissioning

IFRIC 1

IFRIC 1: Changes in Existing Decommissioning,

Restoration and Similar Liabilities
Question-1 (Page 511 of book)
A company purchased a plant costing Rs. 300 (including installation) having life of 12 years. It is
purchased on January 1, 2016. It is legally obliged to de-install plant. Expected future dismantling cost is
estimated at Rs. 100. The prevailing market based discount rate is 7%.

On January 1, 2018 estimate is revised and future dismantling cost is estimated at Rs. 140. Now the
prevailing market based discount rate is 6%.
Required:
Prepare journal entries and extracts of profit and loss and balance sheet for the year ended 31 December
2016 to 2019.

Home work
Question-1 (Page 107 of book)
A company purchased plant costing Rs. 70 (including installation) having life of 10 years. It is purchased
on 1.1.14. It is legally obliged to de-install plant. Expected future dismantling cost is Rs. 50. On 1.1.2016
estimate is revised and future dismantling is estimated at Rs. 80 now. Discount rate is 8%.
Required:
Prepare journal entries and extracts of profit and loss and balance sheet for the year ended 31 December
2014 to 2017.

Answer-1
Date Journal Entries Dr. Cr.
01/01/14 Asset (70 + 23.2) 93.2
Cash 70
Provision for Decommissioning 23.2
(Recording of asset purchased)
31/12/14 Interest expense 1.8
Provision for Decommissioning 1.8
(Recording of unwinding of discount )
31/12/14 Depreciation 9.3
Accumulated Depreciation 9.3
(Recording of depreciation )
31/12/15 Interest expense 2
Provision for Decommissioning 2
(Recording of unwinding of discount )
31/12/15 Depreciation 9.3
Accumulated Depreciation 9.3
(Recording of depreciation )
01/01/16 Asset 16.2
Provision for dismantling 16.2
(Recording of change in provision for dismantling )

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CAF-07 IFRIC 1: Decommissioning

31/12/16 Interest expense 3.5

Provision for Decommissioning 3.5
(Recording of unwinding of discount )
31/12/16 Depreciation 11.4
Accumulated Depreciation 11.4
(Recording of depreciation )
31/12/17 Interest expense 3.7
Provision for Decommissioning 3.7
(Recording of unwinding of discount )
31/12/17 Depreciation 11.4
Accumulated Depreciation 11.4
(Recording of depreciation )
Statement of Financial Position (Extracts)
As at 31 December
2017 2016 2015 2014
Assets
Non-Current assets
Asset (W-1) 68 79.4 74.6 83.9
Non-Current Liabilities
Provision for Decommissioning (W-1) 50.4 46.7 27 25
Statement of Comprehensive Income (Extracts)
For the year ended 31 December
2017 2016 2015 2014
Expenses
Depreciation on Asset 11.4 11.4 9.3 9.3
Interest Expense (W-1) 3.7 3.5 2 1.8

(W-1)
Date Description WDV Rev. SOCI Provision
Sur. (P/L) for Decom.
01/01/14 Cost (70 + 23.2) 93.2 - - 23.2 (50 x 1.08-10)
31/12/14 93.2 - - 1.8 (bal.)
Dep. ( ) /Int. expense (9.3)
10
31/12/14 WDV 83.9 - - 25.0 (50 x 1.08-9)
31/12/15 Dep./Int. expense (9.3) - - 2 (bal.)
31/12/15 WDV 74.6 - - 27.0 (50 x 1.08-8)
01/01/16 Inc. in provision 16.2 - - 16.2 (bal.)
01/01/16 Revised W.D.V 90.8 - - 43.2 (80 x 1.08-8)
90.8 - - 3.5 (bal.)
31/12/16 Dep. ( )/Int. expense (11.4)
8
31/12/16 W.D.V 79.4 - - 46.7 (80 x 1.08-7)
31/12/17 Dep./Int. expense (11.4) - - 3.7 (bal.)
31/12/17 WDV 68 - - 50.4 (80 x 1.08-6)

Adnan Rauf, FCA Page 6

CAF-07 IFRIC 1: Decommissioning

Lecture # 2 (IFRIC 1) Lecture # 88 (Overall)

Class work
Question-1 (Page 511 of book)
Wapda has installed a plant for generation of electricity. It had signed an agreement with the government
for allotment of a plot of land, free of cost, for 20 years. However, it has agreed to restore the site, at the
end of the agreement.
Other relevant information is as under:
(i) Initial cost of the plant was Rs. 450 million. It is estimated that the site restoration cost would
amount to Rs. 260 million.
(ii) It is the policy of the company to measure its plant and machinery using the revaluation model.
(iii) When the plant commenced its operations i.e. on January 1, 2015 the prevailing market based
discount rate was 7%.
(iv) On December 31, 2016 the plant was revalued at Rs. 410 million (net of restoration cost).
(v) On December 31, 2018 prevailing market based discount rate had increased to 8%.
(vi) On December 31, 2020 estimate of site restoration cost was revised to Rs. 400 million.
(vii) Useful life of the plant is 20 years and WML follows straight line method of depreciation.
(viii) Appropriate adjustments have been recorded in the prior years i.e. up to December 31, 2019.

Required:
Prepare accounting entries for the year ended December 31, 2020 based on the above information, in
accordance with International Financial Reporting Standards. (Ignore taxation.)

Home work
Question-1 (Page 132 of book)
Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity from
garbage collected by the civic agencies. WML had signed an agreement with the government for
allotment of a plot of land, free of cost, for 10 years. However, WML has agreed to restore the site, at the
end of the agreement.
Other relevant information is as under:
(ix) Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost would
amount to Rs. 10 million.
(x) It is the policy of the company to measure its plant and machinery using the revaluation model.
(xi) When the plant commenced its operations i.e. on April 1, 2005 the prevailing market based
discount rate was 10%.
(xii) On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.
(xiii) On March 31, 2009 prevailing market based discount rate had increased to 12%.
(xiv) On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million.
(xv) Useful life of the plant is 10 years and WML follows straight line method of depreciation.
(xvi) Appropriate adjustments have been recorded in the prior years i.e. up to March 31, 2010.

Required:
Prepare accounting entries for the year ended March 31, 2011 based on the above information, in
accordance with International Financial Reporting Standards. (Ignore taxation.)

Adnan Rauf, FCA Page 1

CAF-07 IFRIC 1: Decommissioning
Answer-1
Date Journal Entries Dr. Cr.
31/03/11 Depreciation (W-1) 8.75
Accumulated depreciation 8.75
(Recording of Depreciation)
31/03/11 Rev. Surplus (W-1) 0.46
Retained Earnings 0.46
(Recording of transfer of Rev. Surplus to retained earnings )
31/03/11 Interest Expense 0.69
Provision for Decommissioning(W-1) 0.69
(Recording of unwinding of discount )
31/03/11 Rev. Surplus 1.83
P/L (bal.) 0.71
Provision for Decommissioning (W-1) 2.54
(Increase in provision)

(W-1)
Date Description WDV Rev. SOCI Provision
Sur. (P/L) for Decom.
1/04/05 Cost (80 + 3.86) 83.86 - - 3.86 (10 x 1.1-10)
31/03/07 83.86 (16.77) - - 0.81 (bal.)
Acc. Dep. ( 𝑥 2)/Int.
10
31/03/07 WDV 67.09 - - 4.67 (10 x 1.1-8)
31/03/07 Revaluation Sur. (bal.) 2.91 2.91 - -
31/03/07 Revalued Amount 70 2.91 - 4.67
31/03/09 70 (17.5) (0.73) - 0.97 (bal.)
Acc. Dep. [( 𝑥 2):
8
2.91
( 𝑥 2)] / Int. expense
8
31/03/09 WDV 52.5 2.18 - 5.64 (10 x 1.1-6)
31/03/09 Decrease in Provision - 0.57 - (0.57) (bal.)
31/03/09 Revised W.D.V 52.5 2.75 - 5.07 (10 x 1.12-6)
31/03/10 52.5 2.75 (8.75) (0.46) - 0.60
Dep. [( ) :( )]
6 6
31/03/10 WDV 43.75 2.29 5.67 (10 x 1.12-5)
31/03/11 52.5 2.75 (8.75) (0.46) - 0.69 (bal.)
Dep. [( ) :( )]
6 6
31/03/11 W.D.V 35 1.83 - 6.36 (10 x 1.12-4)
31/03/11 Inc. in Provision - (1.83) (0.71) 2.54 (bal.)
31/03/11 Revised W.D.V 35 - (0.71) 8.90 (14 x 1.12-4)

Adnan Rauf, FCA Page 2

CAF-07 IFRIC 1: Decommissioning

Lecture # 3 (IFRIC 1) Lecture # 89 (Overall)

Class work
Question-1 (Pg. 511 of book)
A company has installed an oil extraction plant.
Other relevant information is as under:
1. It is purchased and installed on January 1, 2013 when the prevailing market based discount rate
was 10%.
2. Initial cost of the plant was Rs. 230 million. It is estimated that the site restoration cost would
amount to Rs. 140 million.
3. Useful life of the plant is 12 years and company follows straight line method of depreciation.
4. It is the policy of the company to measure its plant and machinery using the cost model.
5. On June 30, 2017 estimate of site restoration cost was revised to Rs. 210 million.
Required:
Prepare accounting entries for the year ended December 31, 2017?

Question-2 (Pg. 512 of book)

A company has installed a plant on seashore. It has agreed to restore the site, at the end of the agreement.
Other relevant information is as under:

(i) It was purchased and installed on January 1, 2012 when the prevailing market based discount rate
was 12%.
(ii) Cost of the plant was Rs. 800 million. At time of installation present value of decommissioning
liability was estimated Rs. 129.24 million.
(iii) It is the policy of the company to measure its plant and machinery using the revaluation model.
(iv) Useful life of the plant is 8 years and company follows straight line method of depreciation.
(v) On December 31, 2012 the plant was revalued at Rs. 690 million (net of restoration cost).
(vi) On December 31, 2013 it is estimated that site restoration would cost Rs. 550 million at time of
decommissioning.
(vii) On December 31, 2014 it is estimated that site restoration would cost Rs. 120 million at time of
decommissioning.

Required:
Prepare accounting entries for the year ended December 31, 2014 based on the above information, in
accordance with International Financial Reporting Standards. (Ignore taxation.)

Home work
1. Question bank Q.1 (Violet) (Pg. 131 of book)
2. March 2020 Attempt Question (At page 3 of these notes) (You
must do it) (It’s discussion is attached at Part B of this Lecture)

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CAF-07 IFRIC 1: Decommissioning

IFRIC 1: THEORATICAL DISCUSSSION (Pg 105 of book)

PROVISION FOR DECOMMISSIONING LIABILITY
IFRIC 1 mainly addresses how an entity accounts for any subsequent changes to the amount of the
liability that may arise from;
 a revision in the timing or amount of the estimated costs or
 a change in the current market-based discount rate.
ASSETS HELD AT COST MODEL
Increase In Liability Decrease In Liability
Asset (Dr.) Provision for decommissioning (Dr.)
Provision for decommissioning (Cr.) Asset (Cr.)
Note: In above case we may consider passing Note: In above case if asset falls below zero than
asset through impairment test. excess is recognized as income in profit
and loss.

ASSETS HELD AT REVALUATION MOEDL

Decrease in Liability (Happy happy)

In normal cases: If there is any previous revaluation loss appearing

in books:

Provision (Dr.) Provision (Dr.)

Revaluation Surplus (OCI) (Cr.) Profit and loss (Cr.)
Revaluation surplus (Bal.) (Cr.)

Increase in Liability (Sad sad)

In normal cases: If there is any previous revaluation surplus

appearing in books:

P/L (Dr.) Revaluation surplus (Dr.)

Provision (Cr.) Profit and loss (Bal.) (Dr.)
Provision (Cr.)
Notes on revaluation model:
1. The change in the revaluation surplus arising from a change in the provision is separately
identified and disclosed.
2. A change in the provision is an indication that the asset may have to be revalued.
3. If decrease in the provision > carrying amount (based on historical cost), the excess is recognised
immediately as income in profit or loss.

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CAF-07 IFRIC 1: Decommissioning
Disclosure
1. The periodic unwinding of discount is recognised in profit or loss as a finance cost as it occurs
2. Capitalisation under IAS 23 Borrowing Costs is not permitted.

Exam tips
1. If in question present value is given than convert it in future value before starting question.
2. If fair given in the question is net of decommissioning/restoration cost than you will add present
value of restoration cost in it and if question is silent than no need to add.
3. At each revaluation date and at date of change in in estimate, we will calculate remaining life for
calculating depreciation.
4. As a hint students should remember that whenever revaluation or change in in estimate takes
place we will use that date “4” times in our calculation.
5. Where revaluation of asset and re-measurement for provision for decommissioning occur on same
date, than:
a. firstly pass adjustment for re-measurement of provision for decommissioning and
b. than revalue

MARCH 2020 ATTEMPT QUESTION OF IFRIC 1

AND ETHICS
Question-1 (This question is not in book)
Atif Anwar, AC A is Finance Manager at Hot Coffee Limited (HCL) and reports to Jamal Ahmed, FCA
who is the CFO.
On returning from leaves, Atif noted that draft financial statements for the year ended 31 December 2019
have been prepared. He found that financial statements have not been updated for the revision in
decommissioning cost related to a plant, as advised by the engineering department at the start of 2019.
Atif discussed the matter with Jamal who advised him to finalize the financial statements without revising
the decommissioning cost as HCL’s profit would be decreased if revised cost would be taken into
account.
Decommissioning cost related to the plant has increased from initial estimate of Rs. 50 million to Rs. 88
million. Applicable discount rate is 12%. This plant had a useful life of 6 years when it was purchased on
1 July 2017 at a purchase price of Rs. 860 million. HCL uses cost model for subsequent measurement of
its property, plant and equipment and follows straight line method for charging depreciation.
Required:
(a) Compute the change in net profit, assets and liabilities if revised decommissioning cost is
included in the financial statements for the year ended 31 December 2019. (05)
(b) Briefly explain how Jamal may be in breach of the fundamental principles of ICAP’s Code of
Ethics for Chartered Accountants. (03)
(March 2020)

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CAF-07 IFRIC 1: Decommissioning
Answer-1
a)
Change in net profit:
Rs. in million
Increase in depreciation expense (152.62 - 147.56) (W-1) 5.06
Increase in finance cost (6.35 - 3.6) (W-1) 2.75
Decrease in net profit 7.81

Change in Assets:
Rs. in million
Increase in PPE (534.19 - 516.44) OR (22.81-5.06) 17.75

Change in liabilities:
Rs. in million
Increase in decommissioning liability (59.19 - 33.63) OR (22.81 + 2.75) 25.56

(W-1)
Date Description WDV Provision
for Decom.
01.07.17 Cost (860 + 25.33) 885.33 25.33 (50 x 1.12-6)
31.12.18 885.33 (221.33)
Acc. Dep. ( 6y 𝑥 1.5 y)
31.12.18 W.D.V 664 30.03 (50 x 1.12-4.5)

If change is recorded:
31.12.18 W.D.V 664 30.03
1.1.19 Inc. in Provision 22.81 22.81 (bal.)
1.1.19 W.D.V 686.81 52.84 (88 x 1.12-4.5)
31.12.19 686.81 (152.62) 6.35 (bal.)
Dep. ( )/ Int.
4.5y
31.12.19 Revised W.D.V 534.19 59.19 (88 x 1.12-3.5)

If change is not recorded:

31.12.18 W.D.V 664 30.03
31.12.19 885.33 (147.56) 3.60 (bal.)
Dep. ( 6y )/ Int.
31.12.19 W.D.V 516.44 33.63 (50 x 1.12-3.5)

b)
In the given scenario, Jamal may be in breach of the following fundamental principles of Code of Ethics
for Chartered Accountants:
(i) Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional and business
relationships. It seems that the decision to defer incorporation of new decommissioning cost would
make financial statements misleading.
(ii) Principle of professional behaviour:
This principle imposes an obligation on all chartered accountants to comply with the relevant laws
and regulation and avoid any action that discredits the profession. Jamal has breached this principle
as his decision to defer incorporation of new decommissioning cost is not in accordance with IFRSs.

Adnan Rauf, FCA Page 4

Original Wrong Rectifying
Asset 22.81 Asset 22.81
Prov. 22.81 Prov. 22.81

Int Exp 6.35 Int Exp 3.60 Int Exp 2.75

Prov. 6.35 Prov. 3.60 Prov. 2.75

Dep 152.62 Dep 147.56 Dep 5.06

Asset 152.62 Asset 147.56 Asset 5.06
IFRS 08
CAF-07 IFRS 08: Operating segments

Lecture # 1 (IFRS 08) Lecture # 90(Overall)

Class work
1. Consolidation: Handwritten page # 9 of consolidation was discussed
2. Consolidation: Past paper Q.4 (only concept of post-acquisition sale and sale during the year was
discussed)
3. IFRIC 1: Theoretical Discussion was completed
4. IFRS 08: Practice Q.2 (Page 74 of book Voolume-2)

Home work
1. IFRS 08: Practice Q.3 (Page 75 of book Voolume-2)
2. IAS 08: Past paper Q.8 (Page 558 of book Voolume-1) (Its
discussion in attached as
part B of today video – Very important discussion from exam point
if view.)

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CAF-07 IFRS 08: Operating segments

Lecture # 2 (IFRS 08) Lecture # 91(Overall)

Class work
1. Question bank Q.1 (Page 84 of book)

Home work
1. Practice Set Q.5 (Page 75 of book)
2. Past Paper Q.1 (Page 82 of book)
3. MCQ 1 and 4 (Page 87 of book)

IFRS 08: THEORATICAL DISCUSSSION

(Page 72-73D of book)
LO1: SEGMENT REPORTING
Segment reporting is required for any entity whose [Para 2, IFRS 08]:
 debt or equity is quoted on a public securities market (stock market) and
 entities that are in the process of becoming quoted.
In group accounts, only consolidated segmental information needs to be shown [Para 4, IFRS 08].

1.1 Operating Segment

This is a component of an entity that meets all the following three criteria: [Para 5]
1. It engages in business activities from which it may earn revenues and incur expenses (including
intersegment revenues from transactions with other components of the same entity)
A start-up operation not yet earning revenues may be an operating segment.
2. its operating results are regularly reviewed by the entity's "chief operating decision-maker" to
make decisions (about resources to be allocated) and to assess its performance and
chief operating decision-maker may be CEO or board of directors
3. Discrete financial information is available. (Separate accounting records are kept)
Note: Corporate headquarters or other departments that do not earn revenues (or only incidental revenues)
are not operating segments [Para 6, IFRS 08].

1.2 Aggregation of segments [Para 12, IFRS 08]

Two or more operating segments may be aggregated into a single operating segment if the segments have
similar economic characteristics and the segments are similar in each of the following respects:
- the nature of products and services (e.g. domestic or industrial);
- the nature of the production process (e.g. maturing or production line);
- types or class of customer (e.g. corporate or individual);
- distribution method (e.g. door-to-door or Web sales); and
- the regulatory environment (e.g. in shipping, banking, etc).

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CAF-07 IFRS 08: Operating segments

1.3 Identifying Reportable Operating Segments through Quantitative Thresholds

Separate information must be reported for an operating segment that meets any one of the following
quantitative thresholds: [Para 13, IFRS 08]
1. reported revenue (including both external and intersegment) is 10% or more of the combined
revenue (internal and external) of all operating segments;
2. profit or loss is 10% or more, in absolute amount, of the greater of:
(i) the combined profit of all operating segments that did not report a loss; and
(ii) the combined loss of all operating segments that reported a loss;
3. assets are 10% or more of the combined assets of all operating segments.
At least 75% of the entity's external revenue must be included in reportable segments. Thus operating
segments that fall below the quantitative thresholds may need to be identified as reportable. [Para 15,
IFRS 08]
The standard suggests 10 as a practical limit to the number of reportable segments separately disclosed,
as segment information may otherwise become too detailed. [Para 19, IFRS 08]

1.4 Non Reportable Operating Segments

Operating segments that do not meet any of the quantitative thresholds may be reported separately if
management believes that information would be useful to users. [Para 13, IFRS 08]
Non-reportable segments are required by IFRS 8 to be combined and disclosed in an 'all other
segments' category separate from other reconciling items in the reconciliations required by IFRS 8.
Entities must disclose the sources of revenue in the 'all other segments' category. [Para 16, IFRS 08]

LO2: DISCLOSURES

1. General 1. Factors used to identify the entity’s reportable segments, including the basis of
Disclosures organisation, (i.e. whether the entity is organised around different products
[Para 22, IFRS and services or geographical area).
08] 2. Judgements made by management in applying the aggregation criteria
3. Types of products and services from which each reportable segment derives
its revenue
2. Segment A measure of Segment Profit or loss.
analysis The following must also be disclosed if the specified amounts are regularly
provided to the chief operating decision-maker: [Para 23, IFRS 08]
1. Segment assets
2. Segment liabilities
3. revenues from external customers;
4. intersegment revenues;
5. interest revenue;
6. interest expense;
7. depreciation and amortisation;
8. other material items of income and expense required by IAS 1 (i.e.
write-downs, restructurings, disposals, litigation settlements);
9. entity's interest in the profit or loss of associates and joint ventures
accounted for by the equity method;
10. income tax expense or income
11. material non-cash items other than depreciation and amortisation
(impairment)

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CAF-07 IFRS 08: Operating segments

The amount of: [Para 24, IFRS 08]

 investment in associates and joint ventures accounted for by the equity
method and
 additions to non-current assets (excluding financial instruments, deferred
tax assets, post-employment benefit assets and rights arising under
insurance contracts),
if these amounts are included in segment assets.
3. Reconciliation Reconciliations of the total of the reportable segments with the entity are
[Para 28, IFRS required for all of the following:
08] 1. revenue;
2. profit or loss (before tax);
3. assets;
4. liabilities (if applicable); and
5. every other material item
4. Entity wide The reporting entity must also make the following disclosures in the
disclosures financial statements, even if it only has one reportable segment:
1. Revenues from external customers for each (group of) product and
service [Para 32, IFRS 08]
2. Geographical Area [Para 33, IFRS 08]
Revenues from external customers and non-current assets attributed to:
 the entity's country of domicile;
 all foreign countries in total (if material than for each country
separately); and
3. Major customer [Para 34, IFRS 08]
An entity discloses the extent of its reliance on major customers by
stating:
 if revenues from a single external customer amount to 10% or
more of the entity's total external revenue;
 the total revenues from each such customer; and
 the segment(s) reporting the revenues.
An entity need not disclose the identity of a major customer
5. Measurement IFRS 8 requires that the amount of each segment item reported shall be the
of items measure reported to the chief operating decision maker (CODM) for the
reported in purposes of making decisions about allocating resources to the segment and
Segmental assessing its performance. This is based on the internal structure of how division
Information of the entity reports their results to the CODM. Any adjustments and
[Para 25, IFRS eliminations made in preparing an entity’s financial statements shall be included
08] in determining segment results only if they are included in the measure of the
segment’s results used by the chief operating decision maker.

The minimum amount the entity must disclose is: [Para 27, IFRS 08]
1. The basis of accounting for any transactions between reportable segments
2. The nature of any differences between the measurement of:
- the reportable segments’ profit or loss before tax and the entity’s profit or
loss, (for example, the allocation of centrally incurred costs.)
- the reportable segments’ assets and assets of the entity.
- the reportable segments’ liabilities and the liabilities of the entity.
3. The nature of any changes from prior periods in measurement methods used
to determine segment profit or loss and the effect on profit or loss from those
changes.

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CAF-07 IFRS 08: Operating segments

4. The nature of asymmetrical allocations to reportable segments. For example,

a reportable segment may be charged the depreciation expense for a
particular asset but the related depreciable asset might not have been
allocated to the segment.

FORMAT OF WORKINGS FOR

IDENTIYFYING REPORTABLE SEGMENT
Answer
Conclusion: Following are the reportable segments
1.
2.
3.
(W-1) Basic Data
Segment Segment Segment Segment Segment Total
#1 #2 #3 #4 #5
1. External sale
2. Internal sale
3. Total sale

4. Profit
5. Assets

(W-2) 10% test

Criteria Reporting segment identified
10% of total sale = Rs.
10% of Profit before tax = Rs.
10% of assets = Rs.

(W-3) 75% test

Rep. segment as identified above External sale
Segment #1 %
Segment #3 %
%

Further segments need to be identified as external sale is less than 75% of total external sale.

Note: Highest in terms of sale % is segment # 2 which may be added now.

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CAF-07 IFRS 08: Operating segments

FORMAT OF DISCLOURE
(N-37) Segment information
Types of segment Nature of business
Packaging (P) Manufacturing of packaging product.
Consumer products (CP) Manufacturing of tissue papers
Real estate (RE) Construction of real estate
Others Milk and beauty items

Information regarding these is as under:

P CP RE OTHERS TOTAL
1. Revenue-external
2. Inter segment revenue-interval
3. Profit before tax / (loss)
4. Segment assets
5. Segment liabilities
6. Interest Revenue
7. Interest exp.
8. Depreciation / amortization
9. Capital expenditure

(N-37.1) Reconciliation of reportable segment revenues, profit or loss, assets and liabilities.
A B C D E
Reportable Other Elimination Other X
Particulars segment than of inter adjustments Limited’s
total reportable segment (From total
segment transactions question
total -
given)
------------------Rs. in millions-------------------
Total Revenue

Segment profit/(loss)

Segment asset

Segment liabilities

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CAF-07 IFRS 08: Operating segments

(N-37.2) Information by geographical area:

(a) Revenue (External Only)
Pakistan X
Foreign countries
1. Bangladesh X
2. japan X
X

(b) Non-Current assets

Pakistan X
Foreign country X
1. Bangladesh X
X

(N-37.3) Information about major customers (10% external at least)

Revenue from 3 customers is approximately Rs. x million. The revenue is included in
packaging segment.

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CAF-07 IFRS 08: Operating segments

Lecture # 3 (IFRS 08) Lecture # 92(Overall)

Class work
1. Discussion of disclosures given in previous class Lecture – 91 (1 hour 20 minutes)
2. Practice Q.1 was discussed (Page 74 of book)
3. MCQ 3 (Page 87 of book)

Home work
1. MCQ 2 (Page 87 of book)
2. Practice Set Q.1 and 3 (Page 74 and 75 of book)
3. Following 2 theoretical questions

Question-1 (Page 84A of book)

Shazad Industries Ltd has recently acquired 4 subsidiaries. These subsidiaries manufacture products
which are of different lines from those of the parent company. The parent company manufactures plastics
whereas the subsidiaries manufacture the following:
Product Location
Subsidiary 1 Textiles Karachi
Subsidiary 2 Car products Lahore
Subsidiary 3 Fashion garments Peshawar
Subsidiary 4 Furniture items Multan
The directors have purchased these subsidiaries in order to diversify their product base but do not have
any knowledge of the information required in the financial statements regarding these subsidiaries other
than the statutory requirements.
Required:
(a) Explain to the directors the purpose of segmental reporting of financial information.
(b) Explain to the directors the criteria which should be used to identify the separate reportable
segments.
(c) Critically evaluate IFRS 8, Operating segments, setting out any problems with standard.
Answer-1
A)
The purposes of segmental information are:
i) to provide users with:
- different rates of profitability,
- different opportunities for growth and
- different degrees of risk
that apply to an entity’s classes of business and various geographical locations.
ii) to appreciate more thoroughly the results of the entity by permitting a better understanding of
the entity’s past performance and of its future prospects.
iii) effect on changes in significant components of a business may have on business as a whole.

B) Refer para 13 and 15 of IFRS 08

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CAF-07 IFRS 08: Operating segments
C)

a. In IFRS-08 segments are analyzed in a way as management analyses them.

b. There are problems in the measurement of segmental performance if the segments trade with
each other. There is little guidance in disclosures on the policy for transfer pricing.
c. Different internal reporting structures could lead to inconsistent and incompatible segmental
reports, even from companies in the same industry.

Question-2 (Page 84A of book)

For enterprises that are engaged in different businesses with differing risks and opportunities, the
usefulness of financial information concerning these enterprises is greatly enhanced if it is supplemented
by information on individual business segments.
(i) Explain why the information content of financial statements is improved by the inclusion of
segmental data on individual business segments.
(ii) Discuss how IFRS 8 requires that segments be analysed.

Answer-2
i) Usefulness of segmental data: Refer part (a) of previous question
ii) Refer Para 5,6,12,13 of IFRS-08

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IAS 21
Foreign
Currency
Transactions
CAF-07 IAS 21: Foreign Currency Transactions

Lecture # 1 (IAS-21) Lecture # 93 (Over all)

Class work
Question-1 (Page 513 of book)
On 1 April 2008 Anjum Ltd. buys goods from an overseas supplier. The goods are priced at $ 540.
Payment is made on 31 May 2008.
The prevailing exchange rates are:
1 April 2008 $1: Rs. 112
31 May 2008 $1: Rs. 123
Required:
Record the journal entries for these transactions assuming Company’s year-end is 31 December 2008.
Question-2 (Page 513 of book)
Bashir Ltd. having year end of 30 June, buys goods from an overseas supplier on 1 May 2008. The goods
are priced at $ 230. Payment is made on 31 July 2008.
The prevailing exchange rates are:
1 May 2008 $1: Rs. 125
30 June 2008 $1: Rs. 134
31 July 2008 $1: Rs. 131
Required: Record the journal entries for these transactions.
Question-3 (Page 513 of book)
J. Brand sold goods to overseas customer on 28 March 2003. The goods are priced at $350. The customer
paid on 30 April 2003.
The prevailing exchange rates are:
28 March 2003 $1: Rs. 140
30 April 2003 $1: Rs. 148
Required: Show the accounting entries for the above transactions. Assume year end is June 30.
Question-4 (Page 513 of book)
Habib sold goods to overseas customer for UK £ 935 on 12 December 2011. Year end is 31 December
2011 and payment is received on 15.June.2012.
Rates of UK £ are as follows:
12 December 2011 UK £ 1 = Rs. 180
31 December 2011 UK £ 1 = Rs. 170
15 June 2012 UK £ 1 = Rs. 184
Required: Show the accounting entries for the above transactions.
Question-5 (Page 513 of book)
A Company purchased Plant on 1 November 2014 for UK £ 1,000 and made payment on 01 March 2015.
Rates of UK £ are as follows:
01 November 2014 UK £ 1 = Rs. 198
31 December 2014 UK £ 1 = Rs. 200
01 March 2015 UK £ 1 = Rs. 199
Company policy is to depreciate the asset at 10%.
Required:
a) Show the accounting entries for the above transactions in the books of the Company for the year
ended 31 December 2014 and 2015.
b) Prepare Balance Sheet and Profit and loss extracts for the year ended 31 December 2014 and 2015.
Definitions from book: (Page 412 of book)
Exchange rate, Spot rate, Closing rate, Monetary and non-monetary item
MCQ no. 4 (Page 440 of book)

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CAF-07 IAS 21: Foreign Currency Transactions

Homework
1. Associates Practice Q.5 (Pg. 331 of book)
2. MCQ no. 1 (IAS-21)
3. Following 5 questions
Question-1(Not available in book)
On 1 November 2018 Mahmood Ltd. buys goods from an overseas supplier. The goods are priced at $
300. Payment is made on 28 December 2018.
The prevailing exchange rates are:
1 November 2018 $1: Rs. 115
28 December 2018 $1: Rs. 110
Company’s year-end is 31 December 2018.
Required: Record the journal entries for these transactions.
Question-2(Not available in book)
Bunty Ltd. buys goods from an overseas supplier on 1 April 2018. The goods are priced at $ 200.
Payment is made on 31 July 2018.
The prevailing exchange rates are:
1 April 2018 $1: Rs. 125
30 June 2018 $1: Rs. 130
31 July 2018 $1: Rs. 135
Required: Record the journal entries for these transactions assuming year end is June 30.
Question-3(Not available in book)
Kabootar Ltd sold pigeons to overseas customer on 28 March 2018. The goods are priced at $500. The
customer pays on 30 April 2018.
The prevailing exchange rates are:
28 March 2018 $1: Rs. 160
30 April 2018 $1: Rs. 150
Required: Show the accounting entries for the above transactions. Assume year end is June 30.
Question-4(Not available in book)
Guy Limited sold cows to overseas customer for UK £ 1000 on 20 June 2019. Year end is 31 December
2019 and payment is received on 15 Jan 2020.
Rates of UK £ are as follows:
20 June 2019 UK £ 1 = Rs. 180
31 December 2019 UK £ 1 = Rs. 170
15 Jan 2020 UK £ 1 = Rs. 160
Required: Show the accounting entries for the above transactions.
Question-5(Page 418 of book)
Toyota Limited bought a manufacturing plant from a supplier at an agreed price of Japanese Yen ¥ 30,000
on 1 July 2018. The payment will be made on 1 March 2019.
Following exchange rates in rupees are available:
Date 1.07.18 31.12.18 1.03.19 31.12.19
Exchange Rate (Rs.) 1.32 1.38 1.28 1.33
The company uses the straight line method to depreciate its plant. The plant is expected to have useful life
of 10 years. The recoverable amount of plant was estimated of Rs. 25,000 on 31 December, 2019.
Company year-end is 31 December.
Required: a) Prepare Journal entries for 31 December 2018 and 2019.
b) Prepare Balance Sheet and Profit and loss extracts for the year ended 31 December 2018 and
2019.

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CAF-07 IAS 21: Foreign Currency Transactions

Answer-1
Date Particulars Dr. Cr.
Rupees (Rs.)
1 Nov Purchases 34,500
Payables (300 x 115) 34,500
(Recording of Purchases )
28 Dec Payables 34,500
Exchange gain (bal.) 1,500
Cash (300 x 110) 33,000
(Recording of Exchange gain on Settlement of Payables)
Answer-2
Date Particulars Dr. Cr.
Rupees (Rs.)
1 April Purchases 25,000
Payables (200 x 125) 25,000
(Recording of Purchases)
30 June Exchange loss 1,000
Payables (200 x 130 = 26,000 – 25,000) 1,000
(Retranslation of Payables at reporting date )
31 July Payables (25,000 + 1,000) 26,000
Exchange loss (Bal.) 1,000
Cash (200 x 135) 27,000
(Recording of Exchange gain at Settlement Date )
Answer-3
Date Particulars Dr. Cr.
Rupees (Rs.)
28 Mar Debtor 80,000
Sale (500 x 160) 80,000
(Recording of Revenue)
30 April Bank (500 x 150 ) 75,000
Exchange loss (bal.) 5,000
Debtor 80,000
(Recording of Exchange gain at time of settlement)
Answer-4
Date Particulars Dr. Cr.
Rupees (Rs.)
20/06/19 Debtor 180,000
Sale (1,000 x 180) 180,000
(Recording of Sales)
31/12/19 Exchange Loss 10,000
Debtor (1,000 x 170 = 170,000 – 180,000) 10,000
(Recording of Exchange loss)
15/01/20 Cash (1,000 x 160 ) 160,000
Exchange loss (bal.) 10,000
Debtor (180,000 – 10,000) 170,000
(Recording of Exchange loss at time of settlement)

Rise School of Accountancy Page 3

CAF-07 IAS 21: Foreign Currency Transactions

Answer-5
a)
Date Particulars Dr. Cr.
1.07.18 Plant (30,000 x 1.32) 39,600
Payable 39,600
(Purchase of Plant)
31.12.18 Exchange loss 1,800
Payable [(30,000 x 1.38)= 41,400 - 39,600] 1,800
(Year-end translation)
31.12.18 Depreciation (39,600/10 x 6/12) 1,980
Accumulated Depreciation 1,980
(Depreciation for the year)
1.03.19 Payable (39,600 + 1,800) 41,400
Exchange Gain (bal.) 3,000
Cash (30,000 x 1.28) 38,400
(Settlement of payable)
31.12.19 Depreciation (39,600/10) 3,960
Accumulated Depreciation 3,960
(Depreciation for the year)
31.12.19 Impairment loss (33,660 (W-1) - 25,000) 8,660
Accumulated Impairment 8,660
(Recording of Impairment loss)
(W-1)
WDV (39,600 - 1,980 - 3,960) 33,660
Recoverable Amount 25,000
b)
Toyota Limited
Statement of Financial Position (Extracts only)
As at year ended 2019

2019 2018
Assets
Non-current assets
Plant 25,000 37,620
2018: (39,600 - 1,980)
2019: (37,620 - 3,960 - 8,660)
Current liability
Payables (39,600 + 1,800) - 41,400
Toyota Limited
Statement of Profit and Loss (Extracts only)
For the year ended 2019
2019 2018
Expenses
Depreciation 3,960 1,980
Impairment loss 8,660 -
Exchange loss - 1,800
Other income
Exchange gain 3,000 -

Rise School of Accountancy Page 4

CAF-07 IAS 21: Foreign Currency Transactions

Lecture # 2 (IAS-21) Lecture # 94(Overall)

Class work
Question-1 (Page 515 of book)
MZA Limited, a company incorporated in Pakistan, was involved in the following transactions in foreign
currencies during the year ended December 31, 2018.
a) MZA Limited bought equipment for 130,000 Dinars on March 04, 2018 and paid for on August 25,
2018.
b) On February 27 2018 MZA Limited sold goods which had cost Rs. 46,000 for 476,000 Krams to a
company whose currency was Krams. The proceeds were received on May 25, 2018.
c) On September 02, 2018 MZA Limited sold goods which cost Rs. 17,000 for 53,376 Sarils to a
company whose currency was Sarils. The amount was outstanding at December 31, 2018 but the
proceeds were received in Sarils on February 07, 2019 when the exchange rate was Rs. 1 = S 2.306.
d) MZA Limited borrowed 426,000 Rolands on May 25, 2018 and is repayable in two years time.
Exchange rates relevant to the above transactions to Rs. 1 are given below:
Date Rolands Dinars Krams Saril
27-Feb-18 - - 5.00 -
4-Mar-18 - 0.50 - -
25-May-18 1.60 - 6.80 -
25-Aug-18 - 0.80 - -
2-Sep-18 - - - 2.224
31-Dec-18 1.40 0.64 7.20 2.250
Required:
Prepare Journal entries for the year ended 31 December 2018.

Question-2
Practice Q. 15 (Page 417 of book)

Homework
1. Practice Q. 18 (Page 418 of book)
2. MCQ no. 5 and 6 (Page 440 and 441 of book)
3. Question given below
Question-1(Page 435 of book)
Orlando is an entity whose functional currency is the PKR. It prepares its financial statements to 30 June.
1. The following transactions took place on 21 May 2014 when spot exchange rate was € 1 = Rs. 190.
o Goods were sold to Koln, a customer in Germany, for €96,000.
o A specialised piece of machinery was bought from Frankfurt, a German supplier. The
invoice for the machinery is for €1,000,000.
2. The company receives €96,000 from Koln on 12 June 2014.
3. At 30 June Year it still owns the machinery purchased from Frankfurt. No depreciation has been
charged on the asset for the current period to 30 June 2014.
4. The liability for the machine is settled on 31 July 2014.
5. Relevant PKR/€ exchange rates are:
12 June 2014 € 1 = Rs. 185
30 June 2014 € 1 = Rs. 195
31 July 2014 € 1 = Rs. 190
Required:
Show the effect on profit or loss of these transactions for years ending 30 June 2014 and 2015?

Rise School of Accountancy Page 1

CAF-07 IAS 21: Foreign Currency Transactions

Answer-1
Orlando Limited
Statement of Profit and Loss (Extracts)
For the year ended
‘Rs.’ in ‘000’
30.06.15 30.06.14
Sales - 18,240
Other income:
Exchange Gain on settlement 5,000 -
Expenses:
Exchange loss on settlement - 480
Exchange loss on retranslation - 5,000
Depreciation (Life is not Given) - -

(Entries are for understanding purpose only)

Date Particulars Dr. Cr.
Year ended 30.06.2014 Rs.’000’ Rs.’000’
21/05/14 Debtor 18,240
Sales (€ 96,000 x Rs.190/€) 18,240
(Recording of Sales)
21/05/14 Property plant and equipment 190,000
Payable (€ 1,000,000 x Rs.190/€) 190,000
(Recording of PPE)
12/06/14 Cash (€ 96,000 x Rs.185/€) 17,760
Exchange Loss (bal.) 480
Debtor (€ 96,000 x Rs.190/€) 18,240
(Recording of exchange loss due to settlement by debtor)
30/06/14 Exchange Loss 5,000
Payable [€ 1,000,000 x Rs.5/€ (195-190)] 5,000
(Recording of exchange loss at year end)
Year ended 30.06.2015
31/07/14 Payable (190,000 + 5,000) 195,000
Exchange Gain (bal.) 5,000
Cash (€1,000,000 x Rs.190/€) 190,000
(Settlement of Payables)

Rise School of Accountancy Page 2

CAF-07 IAS 21: Foreign Currency Transaction

Lecture # 3 (IAS-21) Lecture # 95(Overall)

Class work
Question-1 [Advance] (Page 516 of book)
During the year ended December 31, 2016, the company contracted to purchase plant from a US
Company. The terms are given below:
(i) Total cost of contract = US$ 100.
(ii) Payment to be made in accordance with the following schedule:
Payment Dates Amount Payable
On signing the contract July 01, 2016 US$ 20
On shipment* September 30, 2016 US$ 50
After installation and test run January 31, 2017 US$ 30
*(risk and rewards of ownership are transferred on shipment)
The following exchange rates are available:
Dates Exchange Rates
July 1, 2016 US$ 1 = Rs. 60.50
September 30, 2016 US$ 1 = Rs. 61.00
December 31, 2016 US$ 1 = Rs. 61.20
January 31, 2017 US$ 1 = Rs. 61.50
Required:
Prepare journals to show how the above contract should be accounted for under IAS 21.
(ICAP Study text)
Question-2
MCQ no. 8 (Page 440 of book)

Question-3
Discussed hand written page No. 1 of IAS-40 and then solved the questions on that page.

Question-4 [Bank deposits] (Page 516 of book)

A Pakistani company whose functional currency is the rupee deposited $70 into a dollar current account
in a bank on 1 March 2018.
The company paid an additional $12 into the account on 30 October 2018.

Exchange rates over the period were as follows:

1 March Rs.120/$.
30 October Rs.95/$.
31 December (year-end) Rs.97/$.
Required:
Calculate the exchange differences on 31 December 2018.

Rise School of Accountancy Page 1

CAF-07 IAS 21: Foreign Currency Transaction

Home work
1. MCQ. 9 (Page 441 of book)
2. Practice Q.11 (Page 416 of book)
3. Question given below

Question-1 Kangaroo Limited (Page 436 of book)

Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for the year
ended 31 December 2017. Following transactions were carried out during the year.
Foreign currency transactions:
1. KL purchased an investment property in United States for USD 2.6 million. 10% advance payment
was made on 1 May 2017 and 70% payment was made on 1 July 2017 on transfer of title and
possession of the property. The remaining amount was paid on 1 August 2017.
2. On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one year
and received full amount in advance on the same date.
3. KL uses fair value model for its investment property. On 31 December 2017, an independent valuer
determined that fair value of the property was USD 2.5 million.

Following spot exchange rates are available:

Date 1-May-2017 1-Jul-2017 1-Aug-2017 1-Sept-2017 31-Dec-2017
USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs. 116

Required:
a) Prepare balance sheet and profit and loss Extracts for the year ended 31 December 2017.
b) Prepare Journal entries for the year ended 31 December 2017.
(ICAP Study text)
Answer-1
a)
Kangaroo Limited (KL)
Statement of Profit and Loss (Extracts)
For the year ended 31 December 2017
‘Rs.’ in ‘million’
Income:
Rental income 8.8
Fair value gain 18.3

Expenses:
Exchange loss 1.56

Kangaroo Limited (KL)

Statement of Financial Position (Extracts)
As om 31 December 2017
‘‘Rs.’ in ‘million’
Non-current Asset
Investment Property (W-1) 290

Current Liability
Unearned rental income (26.4 - 8.8) 17.6

Rise School of Accountancy Page 2

CAF-07 IAS 21: Foreign Currency Transaction
b)
Payment Plan $
10% Advance on 01.May.2017 (2.6 x 10%) 0.26
70% Payment on 01.July.2017 (2.6 x 70%) 1.82
20% Payment on 01.August.2017 (2.6 x 20%) 0.52

Date Particulars Dr. Cr.

a) Rs. in ‘Million’
1.05.17 Advance 26
Cash (0.26 x 100) 26
(Recording of advance for Investment Property)
1.07.17 Property (bal.) 271.7
Advance 26
Cash (1.82 x 105) 191.1
Payable (0.52 x 105) 54.6
(Recording of Investment Property)
1.08.17 Payable 54.6
Exchange loss (bal.) 1.56
Cash (0.52 x 108) 56.16
(Recording of remaining Payment for Investment Property)
1.09.17 Cash 26.4
Unearned rental income (0.24 x 110) 26.4
(Recording of advance)
31.12.17 Unearned rental income 8.8
Rental income (26.4/12 x 4) 8.8
(Recording of Rental income on Investment Property)
31.12.17 Property 18.3
P/L (bal.) 18.3
(Fair value adjustment)
(W-1)
Dr. Investment Property a/c Cr.
1.7.17 Cost 271.7
P/L (bal.) 18.3 31.12.17 c/d (2.5 x 116) 290

Rise School of Accountancy Page 3

CAF-07 IAS 21: Foreign Currency Transaction

Lecture # 4 (IAS-21) Lecture # 96(Overall)

Class work
In first 10 minutes I discussed yesterday’s Home work
Functional currency Primary Indicators
(a) the currency:
(i) that mainly influences sales prices for goods and services and
(ii) of the country whose competitive forces and regulations
mainly determine the sales prices of its goods and services.
(b) the currency that mainly influences labour, material and other costs of
providing goods or services
Secondary indicators (Refer book page 412)
Presentation currency (Refer book page 412)
Foreign currency (Refer book page 412)
Foreign loans
There may be:
 the receipt of a loan from a foreign lender (Loan payable as per our books) or
 the granting of loan to foreign entity (Loan receivable as per our books).
Interest must be calculated based on the outstanding foreign currency amount.
Interest expense/income should be recorded at average rate over the period to which interest relate.
Question-1 (Page 517 of book)
BS Limited, a Pakistani company, obtained five year long term loan from Gill Bates in Mexican Peso ($) .
The terms of the loan were as follows:
Gill transfers Mex $100,000 into BS's bank account on 1 January 2014

The interest rate on the loan was 7. 931% p.a.

BS is required to make repayments of Mex $ 25,000 inclusive of principal and interest annually, with the
first payment falling due on 31 December 2014

BS Limited has the Rupees as its functional currency; the currency used in the Mexicans is the mexican
peso ($). BS Limited has a 31 December financial year-end.
Relevant exchange rates are:
Date Spot rates Average rates
1 January 2014 Mex $ 1: Rs 8 -
31 December 2014 Mex $ 1: Rs 8.5 -
31 December 2015 Mex $ 1: Rs 7.5 -
2014 - Mex $ 1: Rs 8.20
2015 - Mex $ 1: Rs 7.70
Required:
Show the journal entries required to record the above loan transaction in BS Limited's accounting records
for the years ended 31 December 2014 and 31 December 2015. (Gripping IFRS)

Question-2 (Page 517 of book)

On 1 January 2020 an American bank transfers USD 1,000 to a local company in Pakistan, Bilal Limited
in return for a promise to pay fixed interest of 8% per year for two years (due at the end of each year of
the loan period, i.e. 31 December) and a payment of $ 1,000 at the end of the two year period.
At the inception of the loan, 8% is the market rate for similar two-year fixed-interest $ denominated
loans. The BL’s functional currency is PKR. Exchange rates over the loan are:

Page 1
CAF-07 IAS 21: Foreign Currency Transaction
$ Rs.
 1 January 2020: 1 150
 Average exchange rate in 2020 1 150.5
 31 December 2020 1 151
 Average exchange rate in 2021 1 151.75
 31 December 2021 1 152.5

Required:
Prepare Journal entries for the year ended 31 December 2020 and 2021. (ICAP Study Text)

Homework
1. Past paper Q.1 (Page 433 of book)
2. MCQ 2,3,7 (Page 440 and 441 of book)
3. Practice Q.23 (Page 419 B of book)

Page 2
IAS 10
IAS 37
CAF-07 IAS 10 & 37

Lecture # 1 (IAS 10&37) Lecture # 97(Overall)

IAS-21
Class work
1. Following questions were discussed by preparing 3 columns i.e. Foreign currency, exchange rate
and local currency:
a. Past paper Q.1 (Page 433 of book)
b. Practice Q.11 (Page 416 of book)
c. Practice Q.12 (Page 416 of book)
2. Discussion of FOB and CIF basis.
3. Theoretical discussion as made from page 413 of book.
Question-1 (This is not in book) [This Question answer is available at the end of these notes]
Rocky Road Limited (RRL) owns some cows and has provided following details.
1. On 1 August 2019, RRL imported cattle feed of USD l50,000 against 70% payment. RRL also paid 5%
custom duty on import.
2. At year-end, 30% of the amount is payable whereas 40% of the feed is unused.
Following exchange rates are available:
Average Average for the
Date l-Aug-19 31-Dec-19
Aug-Dec year
1 USD Rs. 164 Rs. 152 Rs. 157 Rs. 159
Required:
Prepare journal entries in RRL's books to record the above information for the year ended 31 December 2019.
Home work
Additional Practice – Practice Set Questions in book Q.24,25,13,19,20,21 (Must do 24,25,20,21
today) (These questions start from Pg. 419 of book)
IAS-10,37
Class work
1. Book Pg. 96 was discussed
2. Definition of Legal and Constructive obligation from IAS 37
3. Book Page no.97 Example-4
4. Past paper Q.7 (d) (Page 114 of book)
Lecture # 2 (3.5 hour class) Lecture # 98 (Over all)
IAS-10,37
Class work
1. Book Page no.99 and 100 of book (Example-9 & 10) (Future events and expected gain)
2. Page no.95 of book
3. Past paper Q.7 (a) (Page 114 of book)
4. Past paper 8 (i),(ii) (Page 115 of book)
5. Examples from IFRS Part B (2B, 2A, 3, 6, 7, 11A, 11B) (Handwritten pages)
6. Re-imbursement
i. Example-12 on page 100 of book
ii. Para 53 & 54 from IAS 37

Page 1
CAF-07 IAS 10 & 37

Lecture # 3 Lecture # 99 (Over all)

Class work
1. MCQ 10, 11, 1(a) and (d) (Page 136-138 of book)
2. Past paper Q. 4 (b) (Page 112 of book)
3. Past paper Q. 2 (ii) (Page 111 of book)
4. Past paper Q. 6 (Page 114 of book)

Lecture # 4 Lecture # 100 (Over all)

Classwork
1. MCQ 9 (Page 137 of book)
2. Concept of Restructuring (from page 9 of handwritten notes)
3. Past paper Q. 5 (c) (Page 113 of book)
4. Onerous Contract (Page no.8 of notes - para 68 of IAS 37) (3 Examples as below)
5. Past paper Q. 1 (i) (Page 110 of book)
6. Discussion of journal entries and preparation of notes to the financial statements.

Home work
1. Past paper Q. 7 (c) (Page 114 of book)
2. Example 5A and 5B from IFRS Part B – Page 12 and 13 of notes
3. Past paper Q.1 (ii) and (iii) (Page 110 of book)
4. MCQ 1,2,3,5 (Page 136 of book)
ONEROUS CONTRACT – EXAMPLES
Question-1 (Services Contract) (Page 102 of book)
1. You made a contract with Rise principal that I will provide “cleaning services” in college.
2. Price / revenue agreed is Rs.100,000 p.a.
3. When you came home you estimated your “costs” for fulfilling contract Rs.160,000.
4. There was a clause in agreement, that you can cancel contract by paying Rs.23,000.
5. Assume that we are standing on 31 December 2020 and no work is done yet.

Required: Calculate amount of provision, if any to be made on 31 December 2020?

Answer-1
Provision is recorded at lower of:
If honor
Inflow in future 100,000
Outflow in future (160,000)
(60,000)
If cancel
Outflow in future (23,000)

Particulars Debit Credit

Rupees (Rs.)
Expense 23,000
Provision for onerous contract 23,000

Page 2
CAF-07 IAS 10 & 37

Question- 2 (Lease Contract) (Page 102 of book)

On 29 December 2018 we entered into a 3 year Non-cancelable lease which will start from 1 January
2019. On 31 December 2018 we realized that this asset is of no use. Annual rental is Rs.300,000. Effect
of discounting is immaterial.

Answer-2
Provision is recorded at lower of:
If honor
Inflow in future 0
Outflow in future (300,000  3 year) (900,000)
(900,000)
If cancel
Cannot be cancelled

Particulars Debit Credit

Rupees (Rs.)
Expense 900,000
Provision for onerous contract 900,000

Question- 3 (Supply of goods contract) (Page 103 of book)

1. Dawlance made a contract with Honda to supply 5 AC per month for Rs. 33,000 per unit for 3
years, starting from October 2016.
2. All deliveries till December 2016 were made on timely basis and Dawlance made a handsome
profit on it.
3. On 31 December 2016 due to increase in prices of material in local market Dawlance
manufacturing cost will increase in future.
4. From 2017 the manufacturing cost per unit is estimated at Rs. 45,000 per unit.
5. There was a clause in contract whereby contract can be cancelled by paying Rs.700,000.
Required:
Pass journal entry for provision on 31 December 2016 in books of Dawlance?

Answer- 3
Provision is recorded at lower of:
If honor
Inflow in future (33 months  5 units  33,000) 5,445,000
Outflow in future (33 months  5 units  45,000 (7,425,000)
(1,980,000)
If cancel
Outflow in future (700,000)

Particulars Debit Credit

Rupees (Rs.)
Expense 700,000
Provision for onerous 700,000

Page 3
CAF-07 IAS 10 & 37

IAS – 37 Journal Entries (Page 105 B of book)

No. Description Particulars Debit Credit

1. Provision Expense -
Provision -
2. Contingent liability No journal entry

3. Virtually certain asset Assets / Receivable -

Income -
4. Contingent asset No journal entry

5. Reimbursement Both entries as in point 1 and 3 above -

-
6. Reversal of provision Provision -
Expense -
7. Payment of provision Provision
(Use of provision) Cash
8. Provision for Assets
Dismantling Provision for dismantling

Disclosures (IAS – 37) (Page 105 B of book)

Format of Disclosure
Provisions
Warranty
Legal case Decomissioning
claims
Opening - - -
Unwinding of discount (interest) (Finance cost)(P/L) - - -
Increase / (Decrease) (P/L) -/(-) -/(-) -/(-)
Amounts Used during the year ( -) ( -) ( -)
Closing - - -

Provisions
1.
2.

Contingent liability
1.
2.

Contingent asset
1.
2.

Page 4
CAF-07 IAS 10 & 37

Question-1 (Page 107A of book)

X Co. has informed you that a court case was filed against it by an employee who got injured in
an explosion in factory.
Following is the detail of estimate made by lawyer in relevant years:
Year ended 31 Dec. Amount (Lawyer Estimate) Chance that we loose
2016 50 Possible
2017 70 Probable
2018 190 Probable
2019 115 Probable
2020 112 (Cash paid) Case decided
Required:
Disclose the above formation in the notes to the financial Statements?
OR Prepare a note relating to provisions?

Answer-1
X Co.
Notes to the financial statements
Provisions
2017 2018 2019 2020
Opening - 70 190 115
Increase/(Decrease) (P/L) (Bal.) 70 120 (75) (3)
Used/Cash paid - - - (112)
Closing 70 190 115 0

2016
Contingencies (Contingent liability)
Case has been filed against the company amounting to Rs. ____ by an employee who got injured
in an explosion in factory. Provision has not been made in these financial statements for the said
amount as lawyer is saying that there is a low chance that company will lose.

2017-2019
Provision
Case has been filed against the company by an employee who got injured in an explosion in
factory. No payment has yet been made to the claimant. If decided against the company, payment
of Rs. __ will be required. The recognized provision reflects the best estimate of the most likely
outcome. The outcome of case is expected in ____ year.

2020
No Disclosure

Page 5
CAF-07 IAS 10 & 37

Question-2 (Page 132 A of book)

Sahiwal Transformers Ltd (STL) is organised into several divisions.
The following events relate to the year ended 31 December 2015.
1. A number of products are sold with a warranty. At the beginning of the year the provision stood at
Rs.750,000. A number of claims have been settled during the period for Rs.400,000.
As at the year end balance of claims to be settled is Rs.630,000.
2. A transformer unit supplied to Rahim Yar Khan District Hospital exploded during the year.
The hospital has initiated legal proceedings for damages of Rs. 10 million against STL.
STL's legal advisors said that value of this claim has been estimated at Rs. 9 million.
The explosion was due to faulty components supplied to STL for inclusion in the transformer. Legal
proceedings have been started against the supplier. STL's legal advisors say that STL have a very
good chance of winning the case and will receive 40% of the amount that they have to pay to hospital.
3. On 31 December 2015 STL entered into an 18 moths, fixed price contract to supply a customer 100
units per month.
The forecast profit per unit was Rs.1,600 but, due to unforeseen cost increases and production
problems, each unit is anticipated to make a loss of Rs.800. Contract is non-cancellable.
Required
Prepare the provisions and contingencies note for the financial statements for the year ended
31 December 2015, including narrative commentary. (ICAP study text)
Answer-2
Notes to the financial statements
Provisions and contingencies
Warranty Legal Onerous Total
claim contract
Rs. 000 Rs. 000 Rs. 000 Rs. 000
At 1 January 2015 750 nil nil 750
Used in the year (400) (400)
Increase (bal.) (P/L) 280 9,000 1,440 10,720
At 31 December 2015 630 9,000 1,440 11,070
W1
Warranty:
The company grants warranties on certain categories of goods. The measurement of the provision is on
the company's experience of the likelihood and cost of paying out under the warranty.
Legal claim:
The legal claim provision is in respect of a claim made by a customer for damages as a result of faulty
equipment supplied by the company.
Contingent asset:
The company is making a claim against a supplier of components. These components led in part to the
legal claim against the company for which a provision has been made above. Legal advice is that this
claim is likely to succeed and should amount to around 40% of the total damages (Rs.3.6 million).
Onerous contract: The provision for the onerous contract is in respect of 18 month fixed-price contract
is as follows.

W-1 18 months x 100 units x Rs.800 = Rs.1,440,000.

Page 6
CAF-07 IAS 10 & 37

Question-1 Rocky Road Limited (RRL)

Answer-1;
(Workings) Payment plan = 150,000 $

70% 30%
= 105,000 $ = 45,000 $

Date Particulars Dr. Cr.

Rs. in ‘000’
1-Aug-19 Food inventory (bal.) 25,830
Bank ($ 105,000 x Rs. 164) 17,220
Payable ($ 45,000 x Rs. 164) 7,380
Bank [($ 150,000 x Rs. 164) x 5%] 1,230
(Recording of inventory)
31-Dec-19 Payable 540
P/L 540
[($45,000 × 152) = 6840,000 vs 7,380,000]
(Recording of Exchange gain on retranslation)
31-Dec-19 Food expense 15,498
Food inventory (25,830 x 60%) 15,498
(Recording of Food utilization)

Page 7
CAF-07 IAS 10 & 37

Lecture # 5(IAS-10,37) Lecture # 101 (Over all)

Class work
1. Discussion of homework given in previous class
2. Discussion of journal entries provided in last class (Page 105B of book)
3. Discussion on preparation of “disclosure notes” as provided in last class (Page 105B of book)
4. Future operating losses:
i. Notes Page no.8 (Standard para 63-65)
ii. Past Paper Q.8 (iv)
5. Time value (Where the effect of the time value of money is material, a provision is measured at
the present value. The discount rate used should be a pre-tax rate and the risks specific to the
liability. The need to discount is often found when accounting for decommissioning liabilities.
When a provision is included in the statement of financial position at a discounted value the
amount of the provision will increase over time, to reflect the passage of time. So the reported
provision increases. This increase in value is included in borrowing costs for the period.)
6. Warranty
a. Past paper Q. 14(i) (Page 118 of book)
b. Example 7 (Page 98 of book)
c. Example given below
d. Past paper Q. 2(i) (Page 111 of book)

Example of warranty (Not available in book)

What amount of provision should be recorded in the books of retailers assuming estimate of provision is
Rs. 10 million under following independent scenarios?
1. Retailer provides warranty to customers.
2. Manufacturer provide warranty to customer, retailer do not provide warranty.
3. Retailer provides warranty to customers and recover full cost from manufacturer.
4. Manufacturer provides warranty to customer and recover 60% from retailer.

Joint and several liability (Not available in book)

In case of joint and several liabilities each person shall recognize provision for his respective portion and
shall disclose contingent liability for which other parties are liable.

Page 1
CAF-07 IAS 10 & 37

Home work
1. Sahiwal Transformers (Page 132A of book)
2. MCQ 8,12 (Page 137 and 138 of book)
3. Past paper Q.3 (iii) and (iv) (Page 111 and 112 of book)
4. Question given below

Question-1 (Page 132 B of book)

A manufacturing company has the following litigations at year end. The outcome is not yet known.
1. A company expects to probably receive the damages
2. The company thinks it may receive damages, but it is not probable.
3. It expects to have to pay a penalty of about Rs.250,000.
4. The company expects to have to pay damages but is unable to estimate the amount.
5. The company expects to receive damages of Rs.100,000 and this is virtually certain.
Discuss whether provision, contingent liability and contingent asset should be recognised in each of the
following situations?

Answer-1
1. A contingent asset is disclosed because inflow is probable.
2. It is possible so it will not be accounted for and not be diclosed.
3. A provision for Rs.25,000 is recognised in current period.
4. A contingent liability is disclosed because reliable estimate cannot be made.
5. An asset is recognized.

Page 2
CAF-07 IAS 10 & 37

Lecture # 6 (IAS-10,37) Lecture # 102 (Over all)

IAS-10 Summary (Page 105C of book)
Sr Description Adjusting events Non Adjusting
1. Definition It is an event that occur between the end of the An event that occur b/w the end of
reporting period and the date when the reporting period and the date when
financial statements are authorised for issue. It financial statements are authorised
provide evidence of conditions that existed at for issue.
the end of the reporting period. It is indicative of conditions that
[Para 3] arose after the reporting period.
[Para 3]
2. Journal Required Not required
Entry
3. How to i. Explain why it is adjusting i. Explain why it is non-
write down ii. Explain the journal entry in descriptive adjusting
in paper form ii. Discuss about disclosure (if
it is material).
4. Examples 1) Settlement of court case after balance sheet 1) Fall in value of
as per IAS- date confirming an obligation which investments/investment
10 existed at balance sheet date. property after reporting date. It
2) Receipt of information after balance sheet normally reflect conditions that
date that asset was impaired at balance arose after the balance sheet
sheet date: date.
(i) - Debtor proved to be irrecoverable after 2) Acquisition / Disposal of major
year end. (Though there was no apparent subsidiary after year end.
problem at year end) 3) Announcement after year end
(ii) - Loss occurred on sale of inventory after plan of restructuring / closure
balance sheet date. (Though there was no of division
apparent problem at year end) 4) Destruction of plant / fixed
3) Determination of purchase / sale price of asset after reporting period by
fixed assets after balance sheet date which fire.
had already been purchased / sold before 5) Expropriation of assets by
year end. Government after year end.
4) Discovery of fraud and error after reporting 6) Change in currency rates after
date which occurred before reporting date. year end.
5) Amount received or paid in respect of legal 7) Major ordinary share
or insurance claim which were in transaction after year end
negotiation at the year end. (However bonus shares issued
6) The determination after the reporting are adjusting for calculating
period of the amount of profit-sharing or EPS)
bonus payments, if the entity had a present 8) Dividend declared/announced
legal or constructive obligation at the end for the year after year end
of the reporting period to make such
payments
5. Disclosure No disclosure Disclose (if material) the:
(i) Nature of event
(ii) Estimate of financial
effect.
Note: Dividends must be disclosed.

Page 1
CAF-07 IAS 10 & 37

GENERAL DISCLOSURES (Page 105D of book)

The following information should be disclosed:
i. the date the financial statements were authorised for issue;
ii. the person or persons who authorised the issue of the financial statements;
iii. Updating disclosure about conditions existed at end of reporting period (e.g. Court case
development details in narrative form)

GOING CONCERN (Page 105D of book)

1 A deterioration in operating results after balance sheet date may indicate that going
concern assumptions is not appropriate/valid
2 Now financial statements are adjusted even if circumstances arose after balance sheet
date. The company will disclose the basis for preparing them.
3 For example “Break-up value” basis may be used. Assets are shown at realisable value
and liabilities at settlement value.

If the entity is a going If the entity is not a GC If the entity is a GC but there is
concern significant doubt that it will be
continue operating as a GC:
The financial The financial statements: i. The financial statements:
statements: i. are not prepared on the GC basis: are prepared on the GC
- are prepared on ii. must include disclosure of the: basis;
the GC basis. (a) the fact that it is not a GC; ii. must include disclosure
(b) the reason why the entity is not of the material uncertainties
considered to be a GC; causing this doubt.
(c) the basis used to prepare the
financial statements (e.g. the
use of liquidation values).

Example
Realizable
Book Value Loss
Value
Building 70 60 10
Inventory 50 45 5
105 15

Page 2
CAF-07 IAS 10 & 37

Question-1 (Page 105 E of book)

Walnut Limited (WL) is engaged in the business of import and distribution of electronic appliances. The
following events took place:
1. On 28 December 2013, the factory of a debtor was destroyed in a fire. He was declared bankrupt
on 10 January 2014. He owed Rs. 3 million at year end.
2. On 6 January 2014, the factory of another debtor, who owed an amount of Rs. 22 million at year
end, was destroyed in a fire. He was declared bankrupt on 15 January 2014.
3. A customer who owed Rs. 35 million as at 31 December 2013 was declared bankrupt on 10
January 2014.
4. On 16 January 2014, LED TV sets valuing Rs. 3 million were stolen from a warehouse. These
sets were included in WL’s inventory as at 31 December 2013.
5. On 15 February 2014, it was revealed that company cashier withdrew Rs. 10 million fraudulently
from bank accounts. Of these, Rs. 7 million was withdrawn before 31 December 2013. WL and
its insurance company reached an agreement for settlement of the claim at Rs. 8 million.
6. Inventory carried at Rs. 25 million on December 31, 2013 was sold for Rs. 15 million after it had
been damaged in a flood, in January 2014.
7. A factory worker was seriously injured on 10 December 2013. On 26 January 2014, the worker
filed a claim and it is probable that we will pay Rs. 20 million.
8. A factory worker injured on 10 December 2013 and filed case against us on 28 December 2013.
On 31 December 2013 lawyer said it is probable that we will pay Rs. 10 million and we passed
this entry. On 12 January 14 Court decided that we should pay Rs. 8 million.
9. Company owns 150,000 shares of a listed company whose price on 31 December 2013 was Rs.
190 per share. In January 2014, after the government’s announcement of new trade policy, the
share price decreased by Rs. 40.
10. In January 2014, after the introduction of a new version of a mobile phone, WL reduced the
prices of the previous versions significantly.
11. In March 2013, WL issued a guarantee against a loan obtained by its subsidiary, RAY Limited
(RL) amounting to Rs. 40 million. In January 2014, the factory of RL was destroyed in a fire and
RL will not be able to repay the loan amount.
12. On 27 February 2014, WL announced issue of 25% bonus shares for the year ended 31 December
2013.
13. A refrigerator which was appearing in stock at cost of Rs. 10,000 on 31.12.13 is sold for Rs.6,000
on 10 January 2014.
14. We own investments costing Rs.40 on 31.Dec.13. These are sold on 4th January, 2014 for Rs.35.
15. On 3 April 2014, we came to know that mobiles valuing Rs. 3 million were stolen from a
warehouse in November 2013. These sets were included in WL’s inventory as at 31 December
2013.
16. Debtor balance which was translated at year end was changed after year end due to currency
fluctuation.

Required:
Describe how each of the above issues should be dealt with in the financial statements for the year ended
31 December 2013.
(Assume that WL’s financial statements are authorized for issue three months after the year-end by
directors and these are approved by shareholders 3.5 months after the year-end).

Page 3
CAF-07 IAS 10 & 37

Answer-1 (Extracts)
1. The bankruptcy after the balance sheet date provide evidence of the condition that existed at
reporting date so it an adjusting event. The fire occurred before balance sheet date therefore we
should adjust financial statement of 2013 by increasing bad debt and decreasing debtor.
2. Bankruptcy after the balance sheet relates to circumstances that arose after the balance sheet date
(reporting date) therefore it is a non-adjusting event.
However, if the amount is material then its nature and estimate of financial effect will be
disclosed in the notes to the financial statement for year ended 31 December, 2013.
3. Bad debt immediately after the balance sheet date confirm that the loss existed at the balance
sheet date so it is an adjusting event. So we will increase expense and decrease debtor by Rs. 35
million in the financial statements for the year ended 31 December, 2013.
4. Theft after the balance sheet relates to the circumstances that arose after the reporting date. So, it
is a non-adjusting event. However, if the amount is material then its nature and estimate of
financial effect will be disclosed in the notes to the financial statement for year ended 31
December, 2013.
5. Loss of Rs. 7 million existed at reporting date because it was drawn before 31 December, 2013.
So, it is an adjusting event. Therefore, we should adjust financial statement of 2013 by increasing
expense and decreasing bank by Rs. 7 million. Further proportionate recovery of 5.6 million (8 x
70%) will be recorded as an income.
However, loss of Rs. 3 million arose after balance sheet date. Therefore, it is a non-adjusting
event. However, if the amount is material then its nature and estimate of financial effect will be
disclosed in the notes to the financial statement for year ended 31 December, 2013.
6. Inventory damaged in flood in January relate to circumstances that arose after reporting date so it
is a non-adjusting event. However, if the amount is material then its nature and estimate of
financial effect will be disclosed in the notes to the financial statement for year ended 31
December, 2013.
7. The factory worker was injured before reporting date so the condition existed on balance sheet
date. It is an adjusting event. As the payment is probable, so will record a provision. Now we will
adjust financial statement for year ended 31 December, 2013 by increasing expense and
increasing provision by Rs.20 million.
8. In this case, we already recorded expense of Rs. 10 million. So we should reverse the provision
by Rs. 2 million because of development in case and keep liability at Rs. 8 million. It is an
adjusting event because, it provide evidence of the condition that existed at reporting date. The
injury occurred before reporting date.
9. Decrease in shares after reporting date, relates to circumstances which arose after date. Therefore,
it is non-adjusting event. However, if the amount is material then its nature and estimate of
financial effect will be disclosed in the notes to the financial statement for year ended 31
December, 2013.
10. Adjusting (Competitors do not come overnight)
11. Non-Adjusting
12. Since the declaration was announced after the year-end and there was no obligation at year-
end it is a non-adjusting event.
Details of the dividend declaration must, however, be disclosed.
13. Sale immediately after the reporting date confirms that the loss existed at reporting date. It is an
adjusting event. So we will increase cost of sale and decrease inventory at year end 2013.
14. Sale of investment at loss after the reporting date normally relates to circumstances that arose
after the reporting date. So it is a non-adjusting event.

Page 4
CAF-07 IAS 10 & 37

However, if the amount is material then its nature and estimate of financial effect will be
disclosed in the notes to the financial statement for year ended 31 December, 2013.
15. It is not an adjusting event and not a non-adjusting event as it occurred after the authorisation of
financial statements. So no accounting treatment will be made in 2013 financial statement.
16. Non-adjusting

Page 5
Financial
instruments-
Recognition
and
measurement
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture # 1(IFRS-9) Lecture # 103 (Over all)

Class work
INVESTMENT IN EQUITY INSTRUMENTS
(Page 380 of book)
Description FVTPL (Fair value through profit FVTOCI (Fair value through Other
and loss) (Default category) comprehensive income) (alternative)
1. Initial Fair value (Purchase price paid) Fair value (Purchase price paid +
measurement transaction cost)
2. Transaction cost Expensed Capitalized as above
3. Dividend Shown in profit and loss Shown in profit and loss
income
4. Subsequent Fair value with gain/(loss) shown in Fair value with gain/(loss) shown in OCI.
measurement profit and loss
5. On disposal Gain/(loss) shown in profit and loss Gain/(loss) shown in profit and loss
Balance in OCI may be shifted at time of
disposal to retained earnings
Question-1 (Page 518 of book)
1. PEL invested in 200 shares of PTCL in November 2007 at a cost of Rs. 16 per share.
2. Transaction costs paid to broker was Rs. 300.
3. The market price of shares of PTCL on 31 December 2007 was Rs. 22 per share.
4. The market price of shares of PTCL on 31 December 2008 was Rs. 18 per share.
5. PEL sold all the shares on 28 February 2009 for Rs. 27 per share. Transaction cost was paid at
2%.
Required:
a) Prepare accounting entries; if the investment in shares is held for trading purposes (means held for
short term purpose).
b) Prepare accounting entries; if this investment in shares is held for long term purposes to earn
dividend. (An irrevocable election is made at initial recognition to use alternative treatment i.e
investments are designated at fair value through OCI)

Home work
1. Firstly solve the question given below than solve MCQ No. 3,4 and 16(Page 406 and 408 of book)
Question-1 (Page 518 of book)
1. PEL invested in 950 shares of PTCL in on 1 October 2007 at a total cost of Rs. 25,000.
2. Transaction costs paid to broker was Rs. 3,000.
3. The market price of shares of PTCL on 31 December 2007 was Rs. 77,000.
4. The market price of shares of PTCL on 31 December 2008 was Rs. 55,000.
5. PEL sold all the shares on 28 February 2009 for Rs. 63,000. Transaction cost was paid at 3%.
Required:
a) Prepare accounting entries; if the investment in shares is held for trading purposes (means held for
short term purpose).
b) Prepare accounting entries; if this investment in shares is held for long term purposes to earn
dividend. (An irrevocable election is made at initial recognition to use alternative treatment i.e
investments are designated initially at fair value through OCI)

Adnan Rauf, FCA Page 1

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Answer-1
a)
Journal entries
Rs. ‘000’
Date Particular Dr. Cr.
01/10/07 Investment 25
Bank 25
01/10/07 Transaction cost expense 3
Bank 3
31/12/07 Investment 52
P/L 52
31/12/08 P/L 22
Investment 22
28/02/09 Bank (63 – 3% of 63) 61
Investment 55
P/L (bal.) 6

(W-1)
Dr. Investment A/c Cr.
b/d (Given) 25
Fair value gain (bal.) (P/L) 52 c/d 77
b/d 77 Fair value loss (bal.) (P/L) 22
c/d 55
b/d 55 Disposal 55
c/d -

PEL Limited
Statement of Financial Position (Extracts )
As on 31 December
Rs. in’000’
2009 2008 2007
Assets
Current assets
Investment - 55 77

PEL Limited
Statement of comprehensive income (Extracts )
For the year ended 31 December
Rs. ‘000’
2009 2008 2007
Expenses:
Transaction cost - - (3)
Fair value loss on investment - (22) -
Other income:
Fair value gain on investment - 52
Gain on disposal of investment 6 - -

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

b)
Journal entries
Rs. ‘000’
Date Particular Dr. Cr.
01/10/07 Investment (25 + 3) 28
Bank 28
31/12/07 Investment 49
OCI – Reserve 49
(OCI reserve has now credit balance of Rs. 49)
31/12/08 OCI – Reserve 22
Investment 22
(OCI reserve has now credit balance of Rs. 27) (49-22)
28/02/09 Bank (63 – 3% of 63) 61
Investment 55
P/L (bal.) 6
28/02/09 FV – Reserve 27
Retained earnings 27
(W-1)
Dr. Investment A/c Cr.
b/d (25 + 3) 28
Fair value gain (bal.) (OCI) 49 c/d 77
b/d 77 Fair value loss (bal.) (OCI) 22
c/d 55
b/d 55 Disposal 55
c/d -

PEL Limited
Statement of Financial Position (Extracts )
As on 31 December
Rs. in’000’
2009 2008 2007
Assets
Non-current assets
Investment - 55 77
Equity
OCI – Reserve - 27 49

PEL Limited
Statement of comprehensive income (Extracts )
For the year ended 31 December
Rs. ‘000’
2009 2008 2007
Other income:
Gain on disposal of investment 6 - -
Other Comprehensive Income
Fair value gain/(loss) - (22) 49

Adnan Rauf, FCA Page 3

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture # 2(IFRS-9) Lecture # 104 (Over all)

Class work
REFER DECISION TREE FOR “INVESTMENTS IN EQUITY SHARES”
IN BOOK (Page 380)

Question-1 (Page 521 of book)

On 1 May 2017 Kangaroo Limited (KL) acquired following equity investments:
Purchase price Transaction cost Total
-------------------- Rs. in million --------------------
Investment A 100 2 102
Investment B 150 3 153
1. Investment A was designated as measured at fair value through profit or loss whereas investment
B was irrevocably elected at initial recognition as measured at fair value through other
comprehensive income.
2. In October 2017, KL earned dividend of Rs. 12 million and Rs. 9 million on investment A and B
respectively.
3. 20% of investment A and 30% of investment B were sold for Rs. 23 million and Rs. 50 million
respectively in November 2017. Transaction cost was paid at 2%.
As on 31 December 2017, fair values of the remaining investments are given below:
Fair value Transaction cost on Net amount
disposal
-------------------- Rs. in million -----------------
Investment A 105 2.1 102.9
Investment B 130 2.6 127.4
Required:
Prepare the extracts relevant to the above transactions from KL’s statements of financial position and
comprehensive income for the year ended 31 December 2017, in accordance with the IFRSs.
(ICAP Study text)

IDENTIFY HOW FOLLOWING “INVESTMENTS IN EQUITY SHARES” (EQUITY

INVESTMENTS) WILL BE CLASSIFIED? (Page 521 of book)
Description FVTPL/FVTOCI
1. We purchased shares and made election to use the alternative treatment
under IFRS 9.
2. What is the default classification for an equity investment
3. We purchased shares with an intention to sell these shares in the short
term and are holding them for trading purposes
4. How does IFRS 9 require investments in equity instruments to be measured
and accounted for (in the absence of any election at initial recognition)
5. We purchased shares with an intention to sell these shares after a long term
6. We purchased shares with no intention to sell

Please open Pg. 378 and 379 of book.

Adnan Rauf, FCA Page 1

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Homework
MCQ No. 2,11,14,15 and following questions (Page 406-408 of book)

Question-1 (Page 522 of book)

1. Muzammil Limited purchased 5,000 shares for Rs.100 each on 01 January 2009.
2. Transaction cost 2% (in both buying and selling)
3. Fair Values per share at different dates are as follows:
Rupees
01 January 2009 100
31 December 2009 108
31 December 2010 111
31 December 2011 110
31 December 2012 (sold on the same date) 114
4. Dividend amounting Rs.4/share was announced on 30 June 2009
Required:
Prepare necessary entries assuming Muzammil Limited classifies the shares under:
a) Fair Value Through P/L
b) Fair Value Through OCI
(ICAP Study text)
Question-2 (Its solution is “VERY SPECIAL”) (Page 524 of book)
In February 2018, company XYZ purchased 20,000 Rs. 10 listed equity shares at a price of Rs. 40 per
share. Transaction costs were Rs. 2,000. At the year ended 31 December 2018 these shares were traded at
Rs. 55 per share. A dividend of Rs. 2 per share was received on 30th Sept. 2018
Required:
Show how the financial statements extracts of company XYZ as on 31 December 2018 relating to this
investment assuming separately that;
a) The shares were acquired for trading (therefore carried at FVTPL)
b) The shares were not acquired for trading and company has made an irrevocable FVTOCI election at
initial recognition.

Question-3 (Page 525 of book)

A company invested in 20,000 shares of a listed company in November 2017 at a cost of Rs. 21 per share.
Transaction costs relating to the investment were Rs. 2,000. At 31 December 2017 the shares have a
market value of Rs. 24.5 per share. The shares are held for trading purposes.
Required:
a) Prepare Journal entries and extracts for the statement of comprehensive income the year ended 31
December 2017 and statement of financial position as at that date.
b) Prepare Journal entries and extracts for the statement of comprehensive income for the year ended
31 December 2017 and statement of financial position as at that date if there was no plan to sell the
shares and entity has decided to designate these shares as fair value through OCI.

Question-4 (Page 526 of book)

ABC acquired 100,000 shares in XY & Co. on 15 November 2015 for Rs. 10 per share. The investment
resulted in ABC holding 1% of the equity shares of XY. The related transaction costs were Rs. 10,000.
XY's shares were trading at Rs. 15 per share on 31 December 2015. The investment has been classified as
held for trading.
Required:
The journal entry required to record change in fair value of investment in shares at 31 December 2015.

Adnan Rauf, FCA Page 2

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Question-5 (Page 527 of book)

Daily Deli Co. purchased 500,000 shares in Howdy limited on the 31 July 2015. They were purchased for
Rs. 1,000,000.
On the 31 December 2015 the fair value of these shares was Rs. 1,500,000.
These shares are held for long term and are not designated as FVTPL.
Required:
Prepare the relevant accounting entries for the year ended 31.12.2015.

Question-6 (Page 527 of book)

Dally limited purchased the following financial assets on 1 January 2011 using some of its excess cash
derived from a bumper year of exceptionally high profits.
a) 10,000 shares in Slow limited an unlisted company. The price paid was Rs. 10 per share and
transaction costs were Rs. 1,000. These shares were purchased for long-term capital growth.
b) 15,000 shares in Speedy limited a listed company. The price paid was Rs. 15 per share and transaction
costs came to Rs. 5,000. These shares were purchased for speculative purposes, (means short term
trading purposes)
Required:
Explain the categorization of each and calculate the initial amount that should be capitalized.

Question-7 (Page 528 of book)

Galaxy Co. purchased 10,000 shares of Star Ltd from open market on July 01, 2012 for Rs.30 per share.
The market price on June 30, 2013 was Rs.35 per share.
On October 01, 2013 Galaxy Ltd. sold its entire shares of Star Ltd for Rs.40 per share. Galaxy Ltd paid
the transaction cost of 10% of the purchase/sale price. The shares are classified as FVTOCI.
Required:
Prepare journal entries and the extracts of Statement of Profit or loss and other comprehensive income
and Statement of Financial Position of Galaxy Co. for the year ended June 30, 2013 and 2014.

Answer-1

a) The relevant entries for the whole tenure shall be prepared as follows:
Date Fair Value Through P/L Dr. Cr.
01/01/09 Financial Asset 500,000
Transaction Cost (500,000 x 2%) 10,000
Bank 510,000
(Recognition of Financial Asset)
30/06/09 Bank 20,000
Dividend income (P/L) (5,000 shares x Rs. 4/share) 20,000
(Recoding of Dividend income)
31/12/09 Financial Asset 40,000
P/L 40,000
(Recoding of fair value gain)
31/12/10 Financial Asset 15,000
P/L 15,000
(Recoding of fair value gain)
31/12/11 P/L 5,000
Financial Asset 5,000
(Recoding of fair value loss)
31/12/12 Bank [(5,000 x 114) = 570,000 x 98%] 558,600

Adnan Rauf, FCA Page 3

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Financial Asset 550,000

P/L (bal.) 8,600
(De-recognition of Financial Asset)

(Working)
Dr. Financial Asset a/c Cr.
01/01/09 Bank (5,000 x 100) 500,000
P/L (bal.) 40,000 31/12/09 c/d (5,000 x 108) 540,000
01/01/10 b/d 540,000
P/L (bal.) 15,000 31/12/10 c/d (5,000 x 111) 555,000
01/01/11 b/d 555,000 P/L (bal.) 5,000
31/12/11 c/d (5,000 x 110) 550,000
01/01/12 b/d 550,000 31/12/12 Disposal 550,000
31/12/12 c/d -

b) The relevant entries for the whole tenure shall be prepared as follows:
Date Fair Value Through OCI Dr. Cr.
01/01/09 Financial Asset 510,000
Bank 510,000
(Recognition of Financial Asset)
30/06/09 Bank 20,000
Dividend income (P/L) (5,000 shares x Rs. 4/share) 20,000
(Recoding of Dividend income)
31/12/09 Financial Asset 30,000
OCI (bal.) 30,000
(Recoding of fair value gain)
(Bal. in OCI = 30,000Cr.)
31/12/10 Financial Asset 15,000
OCI (bal.) 15,000
(Recoding of fair value gain)
(Bal. in OCI= 30,000Cr. 15,000 Cr. = 45,000Cr.)
31/12/11 OCI (bal.) 5,000
Financial Asset 5,000
(Recoding of fair value loss)
(Bal. in OCI=45,000Cr. 5,000Dr. = 40,000Cr.)
31/12/12 Bank [(5,000 x 114) = 570,000 x 98%] 558,600
Financial Asset 550,000
P/L (bal.) 8,600
(De-recognition of Financial Asset)
31/12/12 OCI 40,000
Retained earning 40,000
(Transfer of OCI reserves to retained earning)

Adnan Rauf, FCA Page 4

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

(Working)
Dr. Financial Asset a/c Cr.
01/01/09 Bank *510,000
OCI (bal.) 30,000 31/12/09 c/d (5,000 x 108) 540,000
01/01/10 b/d 540,000
OCI (bal.) 15,000 31/12/10 c/d (5,000 x 111) 555,000
01/01/11 b/d 555,000 OCI (bal.) 5,000
31/12/11 c/d (5,000 x 110) 550,000
01/01/12 b/d 550,000 31/12/12 Disposal 550,000
31/12/12 c/d -
[(5,000 x 100) = 500,000 + 500,000 of 2%]

Answer-2
a)
XYZ
Statement of Profit and loss (Extracts only)
For the year ended
Rupees
2018
Other incomes:
Fair vale gain [20,000 x (55 - 40)] 300,000
Dividend income (20,000 x 2) 40,000
Expenses:
Transaction cost (2,000)

XYZ
Statement of Financial Position (Extracts only)
As on
Rupees
2018
Non-current Assets
Investment in shares (20,000 x 55) 1,100,000
b)
XYZ
Statement of Profit and loss (Extracts only)
For the year ended
Rupees
2018
Other incomes:
Dividend income (20,000 x 2) 40,000
Other comprehensive income:
Fair value gain [(20,000 x 55) - (20,000 x 40 + 2,000)] 298,000

XYZ
Statement of Financial Position (Extracts only)
As on
2018
Non-current Assets
Investment in shares (20,000 x 55) 1,100,000
Equity
OCI Fair value – Reserve 298,000

Adnan Rauf, FCA Page 5

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Answer-3
a) Journal entries
Rs. ‘000’
Date Particular Dr. Cr.
Nov -17 Investment 420
Bank 420
Nov -17 Transaction cost expense 2
Bank 2
31/12/17 Investment 70
P/L 70

Statement of Financial Position (Extracts )

As on 31 December
Rs. in’000’
2017
Assets
Current assets
Investment 490

Statement of comprehensive income (Extracts )

For the year ended 31 December
Rs. ‘000’
2017
Expenses:
Transaction cost (2)
Other income:
Fair value gain on investment 70

(W-1)
Dr. Investment A/c Cr.
Cash (20 x 21) 420
Fair value gain (bal.) (P/L) 70 c/d (20 x 24.5) 490

b) Journal entries
Rs. ‘000’
Date Particular Dr. Cr.
Nov -17 Investment 422
Bank 422
31/12/17 Investment 68
OCI 68
(OCI reserve has now credit balance of Rs. 68)

(W-1)
Dr. Investment A/c Cr.
b/d (20 x 21 + 2) 422
Fair value gain (bal.) (OCI) 68 c/d (20 x 24.5) 490

Adnan Rauf, FCA Page 6

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Statement of Financial Position (Extracts )

As on 31 December 2017
Rs. in’000’
2017
Assets
Non-current assets
Investment 490
Equity
OCI Fair value – Reserve 68

Statement of comprehensive income (Extracts )

For the year ended 31 December 2017
Rs. ‘000’
2017
Other Comprehensive Income
Fair value gain 68

Answer-4
Journal entries Rs. ‘000’
Date Particular Dr. Cr.
31/12/15 Investment 500
P/L 500
(W-1) Rs. ‘000’
Dr. Investment a/c Cr.
b/d (100,00 x Rs. 10) 1,000
Fair value gain (bal.) (P/L) 500 c/d (100,000 x Rs. 15) 1,500

Answer-5
Journal entries Rs. In ‘000’
Date Particular Dr. Cr.
31/07/15 Investment 1,000
Bank 1,000
31/12/15 Investment 500
OCI 500
(W-1)
Dr. Investment A/c Cr.
b/d 1,000
OCI (Fair value gain) (bal.) 500 c/d 1,500

Answer-6
Investments made by Dally Limited should be categorized as follows:
a) Snow Limited
Category:
Investment in Slow Limited may be measured at FVOCI if entity at initial recognition make an
irrevocable option to designate through FVOCI. Transaction cost should be capitalized than.
At Initial recognition: Rs.
Investment at FVOCI (10,000 x 10) + 1,000 101,000
Note: However in this case entity can also go for FVTPL.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

b) Speedy Limited
Category:
Investment in Speedy Limited should be measured at Fair Value through Profit and loss as it is held
for trading. Investment should be capitalized and transaction cost should be expensed out.
Initial recognition: Rs.
Investment at FVTPL (15,000 x 15) 225,000

Answer-7
Journal entries Rs. ‘000’
Date Particular Dr. Cr.
01/07/12 Investment 330
Bank 330
30/06/13 Investment 20
OCI 20
(OCI reserve has now credit balance of Rs. 20)
01/10/13 Bank [(10,000 x 40) = 400,000 x 90%] 360
Investment 350
P/L (bal.) 10
01/10/13 OCI 20
Retained earnings 20
(W-1) Rs. ‘000’
Dr. Investment A/c Cr.
b/d *330
Fair value gain (bal.) (OCI) 20 c/d (10,000 x Rs. 35) 350
b/d 350 Disposal 350
c/d -
*(10,000 x Rs. 30) = 300,000 + 10% of 300,000 = 330,000
Statement of Financial Position (Extracts )
As on 31 December
Rs. in’000’
2014 2013
Non-current assets
Investment - 350
Equity
OCI Fair value – Reserve - 20

Statement of comprehensive income (Extracts )

For the year ended 31 December
Rs. ‘000’
2014 2013
Other income:
Gain on disposal of investment 10 -
Other Comprehensive Income
Fair value gain - 20

Adnan Rauf, FCA Page 8

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ADDITIONAL PRACTICE QUESTION

LEASE
Question-1
Lasani limited leased an asset from khan Limited following are the terms of lease agreement:
Particulars Amount
Fair value of asset 625,000
Initial direct cost paid by khan limited 100,000
Dismantling cost at the end of lease term 100,000
Further information
1. Lasani ltd Limited reimbursed 60% of the IDC to lessor
2. Guaranteed and un-guaranteed residual value was 20,000 & 30,000 respectively.
3. Incremental borrowing rate of Lasani limited was 10% (It will be used for dismantling).
4. khan limited desired/required rate of return was 15% (which is presumed to be known by Lasani
Limited).
5. Cost of capital of Lasani Limited was 12%.
6. Lease term 5 years.
Required:
Prepare journal entries in the books of Lasani Limited and relevant extracts of Financial Statements at
the end of year 1.

Answer-1
Firstly we will calculate missing rental by using lessor
formula. It is the responsibility of lessor to calculate
lease rentals.
(W-1) Calculation of lease rentals

FV + IDC of lessor = PV of LP + PV of URV

625,000 + 100,000 x 40% = R [1- (1+0.15)-5] + 20,000(1+0.15)-5 + 30,000(1+0.15)-5
0.15

665,000 = R (3.35216) + 9,944 + 14,915

Rentals = (665,000 – 9,944 – 14,915) / 3.35216
= 190,964

Now we apply lessee formula to start the question

(W-2) Calculation of PV of LP for Lessee
= 190,964 x {1- (1 + i )-n } + PV of GRV
i
= 190,964 x {1 - (1+0.15)-5 } + {20,000 x (1+0.15)-5}
0.15
= 650,085

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Now we will prepare Lease Amortisation Schedule for

lessee
(W-3) Lease Amortisation Schedule for lessee
Year Installment Principal Interest Balance
0 650,085
1 190,964 93,451 97,513 556,634
2 190,964 107,469 83,495 449,165
3 190,964 123,589 67,375 325,576
4 190,964 142,128 48,836 183,448
( 190,964 + 20,000 ) 5 210,964 183,448 27,516 0

Now we will do calculation of PV of dismantling

(W-4)
Date Description Provision for
Decom.
1.1.Yr1 R.O.U 62,092 (100,000 x 1.1-5)
Interest Expense 6,209 (bal.)
31.12.Yr1 closing 68,301 (100,000 x 1.1-4)
Lasani Limited
Entries in the books of lessee
Time Particulars Dr. Cr.
Date of Right of use Asset (bal.) 772,177
inception Lease Liability (W-2) 650,085
of lease Cash (IDC) (100,000 x 60%) 60,000
Provision for dismantling (W-4) 62,092
(Recording of Right to Use Asset and lease liability)
Year end Lease liability 93,451
Interest expense 97,513
Cash 190,964
(Payment of firs installment)
Year end Interest expense 6,209
Provision for dismantling 6,209
(Unwinding of provision for dismantling)
Year end Depreciation expense (772,177 / 5) 154,435
Accumulated depreciation 154,435
(Recording of depreciation expense)

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lasani Limited
Statement of Financial Position (Extracts only)
As on 31.December Yr.1
Rs in ‘000’
Assets
Non-current assets
Right of use asset (772,177 – 154,435) 617,742

Equity & Liabilities

Non- current liabilities
Obligation under lease (W-3) 449,165
Provision for dismantling (W-4) 68,301

Current liabilities
Current portion of obligation under lease (W-3) 107,469

Lasani Limited
Statement of Profit and Loss (Extracts only)
For the year ended 31.December Yr.1
Rs in ‘000’

Interest Expense on leased Asset (W-3) 97,513

Depreciation – R.O.U (772,177 / 5) 154,435
Interest Expense – Decommissioning (W-4) 6,209

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture # 3(IFRS-9) Lecture # 105 (Over all)

Class work
IMPORTANT TERMINOLOGIES FOR “INVESTMENT IN DEBT INSTRUMENTS”
(Page 382 of book)
Sr. Item Description
1. Face value/Par value/Nominal It is the value appearing on the face of the instrument
value/ Principal value
2. Purchase price Instrument can be purchased at face value or premium or
discount
3. Redemption value Instrument can be redeemed at face value or premium or
discount
4. Effective interest rate The interest rate that exactly discounts estimated future cash
flows . . .
5. Actual interest (coupon rate) Calculated on face value outstanding balance

Question-1 (Page 529 of book)

We purchased a debenture on 1 January 2015. Following further information is available:
1. It had a face value of Rs. 100,000.
2. It is purchased at a premium of 20%.
3. It carries annual interest at the rate of 10% payable annually in arrears. (Coupon rate)
4. Tenure is 3 years.
5. Redemption is on 31 December 2017 at 5% discount.
6. The effective interest rate is 1.4914%.
Required:
Prepare accounting entries if the intention is to hold investment till maturity to get contractual cash
flows.

Question-2(Page 529 of book)

We purchased 430 debentures on 1 January 2012. Following further information is available:
1. Face value is Rs. 100 per debenture.
2. It is purchased at a premium of 30%.
3. Transaction cost at time of purchase is Rs. 2,000.
4. It carries interest at the rate of 0%. (Zero coupon bond)
5. Tenure is 3 years.
6. These are redeemable (repayable) at a premium of 50%.
7. The effective interest rate is 3.6638%.
Required:
Prepare accounting entries if the intention is to hold investment till maturity to get contractual cash
flows.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Homework
Question-1 [Debt Instrument at Amortized Cost] (Page 530 of book)
MK Limited has invested in a debt instrument on 01/01/Y1, details of which are as follows:
Face Value Rs. 10,000
Premium paid on the investment of the instrument Rs. 800
Transaction cost paid on the investment of the instrument Rs. 200
Coupon rate of the Instrument 12%
Term of the instrument 4 years
IRR of the debt Instrument is 8.9188%
MK Limited has a policy to classify Investment in debt instruments at Amortized Cost.
Required:
a) Prepare Journal entries for the year ended Y1 to Y4.
b) Prepare statement of profit or loss and statement of financial position extracts for the financial asset
for years Y1 to Y4?
(ICAP study text)

Question-2(Page 531 of book)

ABC purchased TFCs of XYZ on 01.01.16 for Rs. 550,000 for holding them to receive contractual
cashflows. Following further information is available:
Principal value (Face Value) of TFCs Rs. 500,000
Interest rate payable annually in arrears 5%
Date of Maturity of investment 31.12.18
Redemption Value Rs.500,000
Effective interest rate 1.562%
Required:
Prepare accounting entries; if the investment in TFCs is held till maturity to get contractual cash flows.

MCQ 1,12,10,17(Page 406-408 of book)

Answer-1
a) The relevant entries for the whole tenure shall be prepared as follows:
Date Particulars Dr. Cr.
1/01/Y1 Financial Asset/ Investment in debentures 11,000
Bank 11,000
(Recognition of Financial Asset)
31/12/Y1 Financial Asset 981
Interest income 981
(Recording of interest income at effective rate)
31/12/Y1 Bank 1,200
Financial Asset 1,200
(Recording of interest received at coupon rate)
31/12/Y2 Financial Asset 962
Interest income 962
31/12/Y2 Bank 1,200
Financial Asset 1,200
31/12/Y3 Financial Asset 940
Interest income 940

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

31/12/Y3 Bank 1,200

Financial Asset 1,200
31/12/Y4 Financial Asset 917
Interest income 917
(Recording of interest income at effective rate)
31/12/Y4 Bank 1,200
Financial Asset 1,200
(Recording of interest received at coupon rate)
31/12/Y4 Bank 10,000
Financial Asset 10,000
(De-recognition of Financial Asset)

b)
MK Limited
Statement of Financial Position (Extracts only)
As at year ended

4 3 2 1
Assets
Financial Instrument-Debt - 10,283 10,543 10,781

MK Limited
Statement of Profit and Loss (Extracts only)
For the year ended

4 3 2 1
Incomes
Interest income 917 940 962 981

(W-1) Amortization schedule:

Date Effective Interest Cash flows coupon Balance
income @ 8.92% received @ 12% on
100,000
(10,000+800)=10,800+200 01/01/Y1 11,000
31/12/Y1 981 (1,200) 10,781
31/12/Y2 962 (1,200) 10,543
31/12/Y3 940 (1,200) 10,283
(1,200 + 10,000) 31/12/Y4 917 (11,200) -

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Answer-2 Journal entries

Date Particulars Dr. Cr.
01.01.16 Investment 550,000
Bank 550,000
(Recording of investment)
31.12.16 Investment 8,591
Interest income 8,591
(Recording of interest income at effective rate)
31.12.16 Bank 25,000
Investment 25,000
(Recording of interest received at coupon rate)
31.12.17 Investment 8,335
Interest income 8,335
31.12.17 Bank 25,000
Investment 25,000
31.12.18 Investment 8,074
Interest income 8,074
31.12.18 Bank 25,000
Investment 25,000
31.12.18 Bank 500,000
Investment 500,000
(Redemption of investment)

Working
Amortization schedule:
Date Effective Interest Cash flows coupon Balance
Income @ 1.562% Received @ 5% of
500,000
01/01/16 550,000
31/12/16 8,591 (25,000) 533,591
31/12/17 8,335 (25,000) 516,926
(25,000 + 500,000) 31/12/18 8,074 (525,000) -

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture # 4 (IFRS-9) Lecture # 106 (Over all)

Class work
Question-1(Page 532 of book)
On 1st January 2001, 8% debt instrument having face value of Rs. 10,000 was purchased at a premium of
5%. Transaction cost directly attributable to this transaction is Rs. 500. Debt instrument will be
redeemable at Rs. 9,500 on 1st January 2005. Interest will be received at the end of each year.
Accounting year end is 31st December every year.
Effective interest rate is 4.065%
Fair value of debt instrument at end of each year is as follows:
Year end 2001 2002
Fair value (Rs.) 11,200 10,500

Required:
Prepare accounting entries, using following accounting models, for year ended 31st December 2001 and
2002:
a) Investment in debt instruments is held till maturity to get contractual cash flows. At initial
recognition it is not designated at FVTPL.
b) Investment in debt instruments is held to collect contractual cash flows and to sell it if a better
opportunity arises. At initial recognition it is not designated at FVTPL.
c) Investment in debt instruments is held for trading.

Question-2(Page 532 of book)

Continuing from Q.1 assumed debt instruments are disposed off on 1 January 2003 for Rs. 10,700.
Required:
Prepare journal entries for disposal.

Homework
1. MCQ 7,9 (Page 407 of book)
2. Past paper Q.1(Page 399 of book)
3. Following questions

Question-1 [Debt Instrument at FV through OCI] (Page 532 of book)

Kaalaam Limited has invested in a debt instrument on 01/01/Y1, details of which are as follow:
Face Value of the Instrument Rs. 10,000
Premium paid on the investment of the instrument Rs. 1,245
Transaction cost paid on the investment of the instrument Rs. 325
Coupon rate of the Instrument 16%
Term of the instrument 4 years
IRR of the Instrument 10.95%
Kaalaam Limited has a policy to classify Investment in debt instruments at Fair Value through OCI.

Fair Values of the Instrument year wise is as follows:

Year 1 Rs. 11,500
Year 2 Rs. 11,200
Year 3 Rs. 10,700
Required: Prepare Journal entries for the year ended Y1 to Y3 only. Entries of last year are not required.
(ICAP study text)

Adnan Rauf, FCA Page 1

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Question-2 [Debt Instrument at FV through P/L] (Page 534 of book)

Haseena Limited has invested in a debt instrument on 01/01/Y1, details of which are as follows:
Face Value of the Instrument Rs. 100,000
Premium paid on the investment of the instrument Rs. 8,000
Transaction cost paid on the investment of the instrument Rs. 5,800
Coupon rate of the Instrument 12%
Term of the instrument 3 years
Haseena Limited has a policy to classify investment in debt instrument at Fair Value through P/L
IRR of the Instrument 8.848%
Market value of the Instrument at the end of year 1 Rs. 107,000

Required:
Prepare Journal entries for the year ended Y1.
(ICAP study text)

Question-3(Page 535 of book)

On 1st January 2018, 10% bond having face value of Rs. 1,000,000 were purchased for Rs. 1,200,000.
Transaction cost directly attributable to this transaction is Rs. 10,000. Bonds will be redeemable at a
discount of Rs. 10,000 on 31st December 2022. Actual interest will be received at the end of each year.
Accounting year end is 31st December every year.
Effective interest rate is 4.972%
Fair value of bonds at end of each year is as follows:
Year end 2018 2019
Fair value (Rs.) 1,250,000 1,130,000

Required:
Prepare accounting entries along with financial statements extracts, using following accounting models,
for year ended 31st December 2018 and 2019:
a) Investment in debt instruments is held till maturity to get contractual cash flows. At initial
recognition it is not designated at FVTPL.
b) Investment in debt instruments is held to collect contractual cash flows and to sell it if a better
opportunity arises. At initial recognition it is not designated at FVTPL.
c) Investment in debt instruments is held for trading.

Question-4(Page 538 of book)

ABC purchased an investment in 10% TFCs of GFC having principal value of Rs. 500,000 (Rs. 100 per
TFC). Following further information is available:
Transaction cost paid at time of investment Rs. 2,500
Effective interest rate 3.051%
Investment was made on 01.01.18 at a premium of Rs. 10 per TFC
Investment will be redeemed at end of year 3 at a discount of 10%.
Required:
Prepare accounting entries; if the investment in TFCs is held for maturity and is not classified as FVTPL.

Adnan Rauf, FCA Page 2

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Answer-1
The relevant entries for the whole tenure shall be prepared as follows:
Date Particulars Dr. Cr.
01/01/Y1 Financial Asset/Investment in debentures 11,570
Bank 11,570
(Recognition of Financial Asset)
31/12/Y1 Financial Asset 1,267
Interest income 1,267
(Recording of interest income at effective rate)
31/12/Y1 Bank 1,600
Financial Asset 1,600
(Recording of interest received at coupon rate)
31/12/Y1 Financial Asset (W-2) 263
OCI 263
31/12/Y2 Financial Asset 1,230
Interest income 1,230
(Recording of interest income at effective rate)
31/12/Y2 Bank 1,600
Financial Asset 1,600
(Recording of interest received at coupon rate)
31/12/Y2 Financial Asset (W-2) 70
OCI 70
(Recoding of fair value gain)
31/12/Y3 Financial Asset 1,190
Interest income 1,190
(Recording of interest income at effective rate)
31/12/Y3 Bank 1,600
Financial Asset 1,600
(Recording of interest received at coupon rate)
31/12/Y3 OCI 90
Financial Asset (W-2) 90
(Recoding of fair value loss)
Working:
(W-1)Amortization schedule:
Date Effective Interest Cash flows coupon Balance
Income @ 10.95% Received @ 16%
(10,000 +1,245) = 01/01/Y1 11,570
11,245 + 325
31/12/Y1 1,267 (1,600) 11,237
31/12/Y2 1,230 (1,600) 10,867
31/12/Y3 1,190 (1,600) 10,457

(W-2) Closing Book Value as per Fair Value (B) Gain/(Loss) (B - A)

Amortisation schedule (A)
Y1 11,237 11,500 263
Y2 11,130 11,200 70
(10,867 + 263)
Y3 10,790 10,700 (90)
(10,457 + 263 + 70)

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Answer-2

Date Particulars Dr. Cr.

1/1/Y1 Financial Asset (100,000 + 8,000) 108,000
Transaction cost expense 5,800
Bank 113,800
(Recognition of Financial Asset)
31/12/Y1 Bank (100,000 x 12%) 12,000
Interest income 12,000
(Recording of interest income on actual rate)
31/12/Y1 P/L 1,000
Investment 1,000
(Recognition of FV loss)

(Working)
Dr. Investment a/c Cr.
01/01/Y1 Cash (100,000 + 8,000) 108,000 P/L (bal.) 1,000
31/12/Y1 c/d 107,000

Answer-3
a)
Journal entries
Date Particulars Dr. Cr.
01/01/18 Investment 1,210,000
Bank 1,210,000
(Recording of investment)
31/12/18 Investment 60,161
Interest income 60,161
(Recording of interest income at effective rate)
31/12/18 Bank 100,000
Investment 100,000
(Recording of interest received at coupon rate)
31/12/19 Investment 58,180
Interest income 58,180
(Recording of interest income at effective rate)
31/12/19 Bank 100,000
Investment 100,000
(Recording of interest received at coupon rate)

Working
Amortization schedule:
Date Effective Interest Cash flows coupon Balance
Income @ 4.972% Receive @ 10% of
1,000,000
(1,200,000 + 10,000) 01/01/18 1,210,000
31/12/18 60,161 (100,000) 1,170,161
31/12/19 58,180 (100,000) 1,128,341

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Statement of Financial Position (Extracts )

As on 31 December
Rupees
2019 2018
Assets
Investment 1,128,341 1,170,161

Statement of comprehensive income (Extracts )

For the year ended 31 December
Rupees
2019 2018
Other income:
Interest income 58,180 60,161

b)
Journal entries
Date Particulars Dr. Cr.
01/01/18 Investment 1,210,000
Bank 1,210,000
(Recording of investment)
31/12/18 Investment 60,161
Interest income 60,161
(Recording of interest income at effective rate)
31/12/18 Bank 100,000
Investment 100,000
(Recording of interest received at coupon rate)
31/12/18 Investment 79,839
OCI 79,839
(OCI has now a credit balance of Rs. 79,839)
31/12/19 Investment 58,180
Interest income 58,180
(Recording of interest income at effective rate)
31/12/19 Bank 100,000
Investment 100,000
(Recording of interest received at coupon rate)
31/12/19 OCI 78,180
Investment 78,180
(OCI Bal. 79,839 Cr. 78,180 Dr. = 1,659 Cr)

Working:
(W-1) Amortization schedule:
Date Effective Interest Cash flows coupon Balance
Income @ 4.972% Receive @ 10% of
1,000,000
(1,200,000 + 10,000) 01/01/18 1,210,000
31/12/18 60,161 (100,000) 1,170,161
31/12/19 58,180 (100,000) 1,128,341

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

(W-2) Closing Book Value as per Fair Value (B) Gain/(Loss) (B - A)

Amortisation schedule (A)
2018 1,170,161 1,250,000 79,839
2019 1,208,180 1,130,000 (78,180)
(1,128,341 + 79,839)

Statement of Financial Position (Extracts )

As on 31 December
Rupees
2019 2018
Assets
Investment 1,130,000 1,250,000
Equity
OCI Fair value – Reserve 1,659 79,839

Statement of comprehensive income (Extracts )

For the year ended 31 December
Rupees
2019 2018
Other income:
Interest income 58,180 60,161
Other comprehensive income:
Fair value gain/(loss) (78,180) 79,839

c)
Journal entries
Date Particulars Dr. Cr.
01/01/18 Investment 1,200,000
Bank 1,200,000
(Recording of investment)
01/01/18 Transaction cost expense – P/L 10,000
Bank 10,000
(Recording of Transaction cost)
31/12/18 Cash 100,000
Interest income (1,000,000 x 10%) 100,000
(Recording of interest income at coupon rate)
31/12/18 Investment 50,000
P/L (W-1) 50,000
(Recording of fair value gain on investment)
31/12/19 Cash 100,000
Interest income (1,000,000 x 10%) 100,000
(Recording of interest income at coupon rate)
31/12/19 P/L 120,000
Investment (W-1) 120,000
(Recording of fair value loss on investment)

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

(W-1)
Dr. Investment Cr.
Bank 1,200,000
P/L (bal.) 50,000 c/d 1,250,000
b/d 1,250,000 P/L (bal.) 120,000
c/d 1,130,000

Statement of Financial Position (Extracts )

As on 31 December
Rupees
2019 2018
Non-current assets
Investment 1,130,000 1,250,000

Statement of comprehensive income (Extracts )

For the year ended 31 December
Rupees
2019 2018
Expenses;
Transaction cost - (10,000)
Fai value loss (120,000) -
Other income:
Interest income 100,000 100,000
Fai value gain - 50,000
Answer-4
Quantity of debentures purchased is Rs. 500,000/Rs. 100 = 5,000 Debentures
Journal entries
Date Particulars Dr. Cr.
01.01.18 Investment (5,000 x 110) + 2,500 552,500
Bank 552,500
(Recording of investment)
31.12.18 Investment 16,857
Interest income 16,857
(Recording of interest income at effective rate)
31.12.18 Bank 50,000
Investment 50,000
(Recording of interest received at coupon rate)
31.12.19 Investment 15,846
Interest income 15,846
(Recording of interest income at effective rate)
31.12.19 Bank 50,000
Investment 50,000
(Recording of interest received at coupon rate)
31.12.20 Investment 14,804
Interest income 14,804
(Recording of interest income at effective rate)
31.12.20 Bank 50,000
Investment 50,000

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

(Recording of interest received at coupon rate)

31.12.20 Bank 450,007
Investment 450,007
(Redemption of investment)
Working
Amortization schedule:
Date Effective Interest Cash flows coupon Balance
Income @ 3.051% Receive @ 10%
500,000
(5,000 x 110) + 2,500 01/01/18 552,500
31/12/18 16,857 (50,000) 519,357
31/12/19 15,846 (50,000) 485,203
(50,000 + *450,000) 31/12/20 14,804 (500,000) 7

500,000 – (Discount) 500,000 x 10% = 450,000 *

Adnan Rauf, FCA Page 8

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture # 5(IFRS-9) Lecture # 107 (Over all)

Class work
SOME IMPORTANT EXAM TIPS
1. Face value
Face value is also named as Par value / Principal value / Nominal value / Face value.

2. Purchase price of debt instruments/TFC/Bond/Redeemable preference shares

(Page 383 A of book)
No. Description What is
Purchase price
1. We purchased a debt instrument for its fair value of Rs. 800. It had a face value
(principal amount) of Rs. 1,000.
2. A debt instrument having face value of Rs. 1,000 is purchased at a discount of
20%.
3. A debt instrument having face value of Rs. 1,000 is purchased at a discount of
Rs. 200.
4. An entity acquires a 6% Rs. 1,000 Term Finance Certificate (TFC), a financial
asset, for Rs. 800.

3. Redemption value (Page 383 A of book)

No. Description What is
Redemption
value
1. We redeemed debt instrument at its fair value of Rs. 1,300. It had a face value
(principal amount) of Rs. 1,000.
2. Debt instruments having face value of Rs. 1,000 is redeemed at a premium of
30%.
3. A debt instrument having face value of Rs. 1,000 is redeemed at a premium of
Rs. 300.
4. An entity redeemed Rs. 1,000 Term Finance Certificate (TFC), a financial asset,
for Rs. 1,300.

4. Transaction costs (Page 379 of book)

5. Concept of preference shares (Page 379 of book)

6. Frequently asked questions

(Page 383 A of book)
1. We purchased shares for Rs. 120 (inclusive of 2% transaction cost). What is transaction cost?
2. A company purchased shares for Rs. 300 plus 1% transactions cost. What is transaction cost?
3. If effective rate is not given than actual coupon rate will be effective.
4. If redemption value is not given it will be considered as equal to face value.
5. If question is silent assume that interest will be received in arrears at year end.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ACCOUNTING OF FINANCIAL LIABILITIES

Class work
Question-1 [Financial Liability - Amortised cost] (Page 540 of book)
Bottle Limited issued following securities on 1st January 2001.
Type Effective rate Face value Other Information
(Rs.)
TFC’s 15.8507% p.a. 20,000 1. Issued at discount of 10%
2. Coupon rate is 5% per annum
3. No transaction cost has been incurred
4. TFC’s will be redeemed after 2 years on 31st
December 2002 at a premium of 10%
5. Interest will be paid annually in arrears
Redeemable 4.439% p.a. 10,000 1. Issued at premium of 22%
preference 2. Dividend rate is fixed at 15% per annum
shares 3. Transaction cost of Rs. 200 has been incurred
4. Shares will be redeemed after 2 years on 31st
December 2002 at par value
5. Interest will be paid semi-annually on 30th June and
31st December every year till maturity.

Required:
Prepare extracts of Statement of Comprehensive Income and Statement of Financial Position as at 31st
December 2001 and 2002.

Question-2 [Financial Liability - FVTPL] (Page 540 of book)

Debentures of Rs. 100,000 are issued on January 1, 2008. This financial liability is held for trading and
therefore measured at FVTPL
Fair value of debentures at end of year is as follows:
31.12.2018
Fair value (Rs.) 25,000
Decrease in Fair value of Debentures attributable to deterioration of own credit rating 20,000
(Own credit risk)
Remaining decrease in fair value is attributable to other market forces
Required:
Prepare all the journal entries relating to debentures for year ended December 31, 2018

Answer-2
Date Particulars Dr. Cr.
1/1/18 Bank 100,000
Debenture liability 100,000

31/12/18 Debenture Liability (100,000 - 25,000) 75,000

Other Comprehensive Income (own credit risk) 20,000
P/L (Bal.) 55,000

Adnan Rauf, FCA Page 2

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Question-3 [Financial Asset - Debt Instrument - Amortised Cost] (Page 541 of book)
On 1 January 2015 a company invested Rs. 5,000 in 10% loan notes with interest receivable on 1
January each year. The loan notes are redeemable on 1 January 2018 years at Rs. 5,337. The effective
rate of interest is 12%. The company intends to collect the contractual cash flows which consist solely of
repayments of interest and capital.
Required: What amounts will be shown in the statement of profit or loss and statement of financial
position for the financial asset for year ended 31 December 2015 and 2016?
Answer-3
This financial instrument will be measured at amortised cost.
ABC Co.
Statement of Financial Position (Extracts only)
As at year ended 31 December
2016 2015
Assets
Investment in debentures (5,100 + 612) : (5,000 + 600) 5,712 5,600
ABC Co.
Statement of Profit and Loss (Extracts only)
For the year ended
2016 2015
Investment Income 612 600
Amortization schedule:
Date Effective Interest Cash flows coupon Balance
Income @ 12% Received @ 10%
1.1.2015 5,000
1.1.2016 600 (500) 5,100
1.1.2017 612 (500) 5,212
(500 + 5,337) 1.1.2018 625 (5,837) -
The relevant entries for the whole tenure shall be prepared as follows:
Date Particulars Dr. Cr.
1/1/2015 Financial Asset 5,000
Bank 5,000
(Recognition of Financial Asset)
31/12/2015 Financial Asset 600
Interest income 600
(Recording of interest income at effective rate)
1/1/2016 Bank 500
Financial Asset 500
(Recording of interest received at coupon rate)
31/12/2016 Financial Asset 612
Interest income 612
1/1/2017 Bank 500
Financial Asset 500
31/12/2017 Financial Asset 625
Interest income 625
1/1/2018 Bank 500
Financial Asset 500
1/1/2018 Bank 5,337
Financial Asset 5,337
(De-recognition of Financial Asset)

Adnan Rauf, FCA Page 3

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Homework
Question-1
Ding Dong Limited issued the following bonds on 1st January 2019. (Page 542 of book)
Bond Effective rate Face value Other Information
(Rs.)
1st Bond 15.07% p.a. 225,000 1. Issued at discount of 5%.
2. Coupon rate is 10% p.a.
3. No transaction cost has been incurred.
4. Bond will be redeemed after 3 years on 31st
December 2021 at a premium of 10%.
5. Interest will be paid annually in arrears.
2nd Bond 11.63% p.a. 150,000 1. Issued at premium of 10%.
2. Coupon rate is 15% p.a.
3. Transaction cost of Rs. 2,500 has been incurred.
4. Bond will be redeemed after 3 years on 31st
December 2021 at par value.
5. Interest will be paid semi-annually on 30th June and
31st December every year till maturity.
3rd Bond 8.738% p.a. 90,000 1. Issued at discount of 20%.
2. It is a zero coupon bond i.e. Coupon rate is 0%.
3. Rs. 2,000 transaction cost has been incurred.
4. Bond will be redeemed after 3 years on 31st
December 2021 at par value.
Required:
1- Prepare extracts of Statement of Comprehensive Income and Statement of Financial Position as at
31st December 2019, 2020 and 2021.
2- Prepare amortization schedule for each of the above financial liabilities.
3- Prepare Journal entries for the year ended 31st December 2019.

MCQ 5,6,8,13,18,19 (Page 406-409 of book)

Answer-1
1)
Ding Dong limited
Statement of comprehensive income (Extract)
for the year ended 31st December
2021 2020 2019
Expenses:
Finance cost:
- Bond – 1 35,360 33,676 32,212
- Bond – 2 17,854 18,351 18,794
(2019: 9,449 + 9,345)
(2020: 9,234 + 9,117)
(2021: 8,993 + 8,861)
- Bond – 3 7,232 6,651 6,117

Adnan Rauf, FCA Page 4

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Ding Dong limited

The Statement of Financial position (Extract)
As At 31st December
2021 2020 2019
Equity and Liabilities
Liabilities
Bond – 1 - 234,638 223,462
Bond – 2 - 154,645 158,794
Bond – 3 - 82,768 76,117

2)
Amortization schedule for Bond -1
Date Effective Interest Cash flows coupon Balance
Expense @ 15.07% Paid @ 10% of
225,000
(225,000 - 5% of 225,000)
01/01/19 213,750
31/12/19 32,212 (22,500) 223,462
31/12/20 33,676 (22,500) 234,638
(22,500 + 247,500*) 31/12/21 35,360 (270,000) (2)
*Redemption = Face value + premium = 225,000 + 10% of 225,000 = 247,500

Amortization schedule for Bond -2

Semi-annul coupon rate = 15%/ 2 = 7.5%
Semi-annul effective rate = 11.63%/ 2 = 5.815%
Date Effective Interest Cash flows coupon Balance
Expense @ 5.815% Paid @ 7.5% of
150,000
(150,000 x 1.1 - 2,500) 01/01/19 162,500
30/06/19 9,449 (11,250) 160,699
31/12/19 9,345 (11,250) 158,794
30/06/20 9,234 (11,250) 156,778
31/12/20 9,117 (11,250) 154,645
30/06/21 8,993 (11,250) 152,388
(11,250 + 150,000) 31/12/21 8,861 (161,250) (1)

Amortization schedule for Bond -3

Date Effective Interest Cash flows coupon Balance
Expense @ 8.738% Paid @ 0%
01/01/19 *70,000
31/12/19 6,117 - 76,117
31/12/20 6,651 - 82,768
31/12/21 7,232 (90,000) -
*(90,000 - 20% of 90,000) = 72,000 - 2,000 = 70,000

Adnan Rauf, FCA Page 5

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

3)
Date Particulars Dr. Cr.
01/01/19 Bank 213,750
Financial Liability – 1 213,750
(Recording of financial liability)
01/01/19 Bank 162,500
Financial Liability – 2 162,500
(Recording of financial liability)
01/01/19 Bank 70,000
Financial Liability – 3 70,000
(Recording of financial liability)
30/06/19 Interest Expense 9,449
Financial Liability – 2 9,449
(Recording of interest expense at effective rate)
30/06/19 Financial Liability – 2 11,250
Bank 11,250
(Recording of interest paid at coupon rate)
31/12/19 Interest Expense 32,212
Financial Liability - 1 32,212
(Recording of interest expense at effective rate)
31/12/19 Financial Liability – 1 22,500
Bank 22,500
(Recording of interest paid at coupon rate)
31/12/19 Interest Expense 9,345
Financial Liability - 2 9,345
(Recording of interest expense at effective rate)
31/12/19 Financial Liability – 2 11,250
Bank 11,250
(Recording of interest paid at coupon rate)
31/12/19 Interest Expense 6,117
Financial Liability - 3 6,117
(Recording of interest expense at effective rate)

Note:
For further practice of questions on Financial liabilities Refer practice Q. 11-14 of
book.

Adnan Rauf, FCA Page 6

CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ADDITIONAL PRACTICE QUESTIONS

Question-1 [Different rate] (Page 544 of book)
A Company issued a bond on 01 January 2012. The bond is issued at par value of Rs. 2 million and pays
a coupon rate of 10% interest for first two years, then 14% interest for next two years (this is known as a
stepped bond). Interest is paid annually in arrears. The bond will be redeemed at par after four years.
The effective rate for this bond is 11.778%.
Required:
Prepare amortisation schedule showing relevant accounting treatment from issuance of bond till maturity
date.

Question-2 [Different rate] (Page 545 of book)

A Company issued a bond on 01 January 2012.The bond is issued at par value of Rs.1 million and pays a
coupon rate of 5% interest for first two years, then 7% interest for next two years (this is known as a
stepped bond). Interest is paid annually in arrears. The bond will be redeemed at par after four years and
the effective rate for this bond is 5.942%
Required:
Prepare the amortisation schedule

Question-3 (Page 545 of book)

Dell EMC Limited purchased bonds of FedEx Limited on 01 January 2010. Relevant information is as
follows:
Face value of bonds Rs. 100,000
Purchase Price Rs. 93,134
Interest rate 12%
Effective rate 14%
Interest payable each year 01 January
Bonds maturity date 01 January 2015
Required:
a) Prepare schedule of interest revenue and bond discount amortization assuming intention is to hold
bond till maturity.
b) Prepare journal entries in the books of accounts of Dell EMC Limited for the year ended 31
December 2010 and 2011.
c) Prepare extracts of Statement of Financial Position and Statement of Comprehensive Income for the
year ended 31 December 2010 and 2011 in the books of Dell EMC Limited.

Question-4 (Page 547 of book)

Subaru Corporation issued a bond on 01 January 2015. Following information is relevant to the bond:
Interest payable semi-annually on 01 July and 01 January 8%
Effective interest rate 14%
Issue date 01 January 2015
Redemption date 01 January 2018

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Rupees (Rs.)
Nominal value 700,000
Discount on issuance 95,000
Cost of issue (Transaction cost) 35,000
Discount on redemption 44,877
Required:
Prepare extracts of Statement of Financial Position and Statement of Comprehensive income for the year
ended 31 December 2015 and 2016.
Assume financial liability is not classified at Fair value through profit or loss.

Question-5 (Page 548 of book)

Large Limited (a public listed company) has following financial instruments in the financial statements
for the year- ended December 31, 2017:
 An Investment in the debentures of Small Limited, nominal value Rs.600,000, purchased on their
issuance on January 01, 2017 at a discount of Rs. 90,000 and carrying 4% coupon rate and
redeemable at Rs. 585,703. Large Limited plans to hold these until their redemption on December
31, 2020 and collect contractual cash flows. The internal rate of return (IRR) of debenture is 8%
(means effective rate).
 10,000 redeemable preference shares issued on 01 January 2017 at Rs.10 per share (their nominal
value) with an annual dividend payment of 6% redeemable in 2020 at their nominal value.
Required:
Being a chief Financial (CFO) of the Large Limited, advice the directors about the accounting for the
financial instruments, as required by the relevant International Financial Reporting standards (IFRS) on
financial instruments.

Question-6 (Page 549 of book)

On 1 January 2001 AJI Panca Ltd. has the following capital and reserves.
Rupees
Equity
Share capital (Rs. 1 ordinary shares) 1,000,000
Share premium 200,000
Retained earnings 5,670,300
6,870,300
During 2001 the following transactions took place.
1 January An issue of Rs. 100,000 8% Rs. 1 redeemable preference shares at a premium of 60%.
Issue costs are Rs. 2,237. Redemption is at 100% premium on 31 December 2005. The
effective rate of interest is 9.5%.
31 March An issue of 300,000 ordinary shares at a price of Rs. 1.30 per share. Issue costs were Rs.
20,000.
30 June 1 for 4 bonus issue of ordinary shares by first utilizing the share premium.

Profit for the year, before accounting for the above, was Rs. 508,500.
Required
a) Prepare extracts from statement of financial position as on 31 December 2001.
b) Prepare relevant accounting entries for the year ended 31 December 2001.
(ICAP Study Text)

Page 2
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Question-7 [ Loan year end and accounting year end are different] (Page 550 of book)
Ali Ltd. lent Rs. 50,000 to Umer Ltd. on 01 July 2018. Interest rate was charged at 15% per annum. The
principal amount is redeemable after five years.
Required:
Show the necessary journals for Ali Ltd. for the year ended 31 December 2018.

Question-8 [Principal repayment during the year] (Page 551 of book)

We purchased a debenture on 1 January 2015. Following further information is available:
1. It had a face value of Rs. 50,000.
2. Transaction cost is Rs. 8,000.
3. It carries annual interest at the rate of 8% payable annually in arrears. (Coupon rate)
4. Repayment of principal amount (face value) was received amounting to Rs. 25,000 each on 31
December 2016 and 31 December 2018.
5. The effective interest rate is 2.3886%.
Required: Prepare Amortisation schedule.

Question-9 [Final account question] (Page 552 of book)

Wah Agriport Ltd. trial on 31 December 2016 is as follows:
Rs. Rs.
Financial instruments 40,500
Sales Xx
Cash and Bank Xx
Total Xx Xx
The following information is available:
1. The financial instruments are investments in equities of public companies and had a fair value of Rs.
39,700 on 31 December 2016. There were no purchases or disposals of any of these investments
during the year. Wah Agriprod Ltd has not made the election in accordance with IFRS 9 on Financial
Instruments. The company adopts this standard when accounting for its financial assets.
Required:
 Prepare Statement of Comprehensive Income Extracts?
 Prepare Statement of Financial Position Extracts?

Question-10 [Final account question] (Page 553 of book)

The trial balance of Mingora Imports Limited at 31 December 2015 is as follows:
Debit Credit
-----------Rs. in million----------
Sales Xx
Cash and Bank Xx
Investments 100

The following information is also relevant:

1. The company has made an investment in Babluu Limited during the year and irrevocably elected at
initial recognition as measured at fair value through OCI. The fair value of the investment as at year
end was Rs. 127 million

Required:
 Prepare statement of Comprehensive Income for the year ended 31 December 2015.
 Prepare statement of Financial Position extracts as on 31 December 2015.

Page 3
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

 Prepare statement of Changes in Equity extracts for the year ended 31 December 2015.

Question-11 [Final account question] (Page 554 of book)

Following is the trial balance of Shaheen Limited (SL) as at June 30, 2017:
Debit Credit
-----------Rs. in ‘000’-----------
Sales Xx
Cash and Bank Xx
Investments 125

The following information is also relevant:

1. The company has made an investment in Mayfair Limited during the year and irrevocably elected at
initial recognition as measured at fair value through OCI. The fair value of the investment as at year
end was Rs. 100 million
Required:
 Prepare statement of Comprehensive Income extracts for the year ended 30 June, 2017.
 Prepare statement of Financial Position extracts as on 30 June, 2017.
 Prepare statement of Changes in Equity extracts for the year ended 30 June, 2017.

Page 4
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ADDITIONAL PRACTICE ANSWERS

Answer-1
The bond will be recognized as financial liability at amortized cost and interest expense will be
recognized in P/L @ effective interest rate.
Amortization schedule:
Date Effective Interest Cash flows Balance
Expense@11.778% coupon Paid@
10% and 14% of
2,000,000
01.01.12 2,000,000
31.12.12 235,560 (200,000) 2,035,560
31.12.13 239,748 (200,000) 2,075,308
31.12.14 244,430 (280,000) 2,039,738
(280,000 + 2,000,000) 31.12.15 240,240 (2,280,000) (22)

Answer-2
The bond will be recognized as a financial liability at amortized cost and interest expense using effective
interest rate will be charged to P/L.
Amortization schedule:
Date Effective Interest Cash flows Balance
Expense@ 5.942% coupon Paid @
5% and 7% of
1,000,000
01.01.12 1,000,0000
31.12.12 59,420 (50,000) 1,009,420
31.12.13 59,980 (50,000) 1,019,400
31.12.14 60,573 (70,000) 1,009,973
(70,000 + 1,000,000) 31.12.15 60,013 (1,070,000) (14)

Answer-3
a)
Amortization schedule: (Bonds (Financial Asset))
Date Effective Interest Cash flows Balance
Income @ 14% coupon Receive @
12% of 100,000
01/01/10 93,134
01/01/11 13,039 (12,000) 94,173
01/01/12 13,184 (12,000) 95,357
b)
01/01/10 Investment 93,134
Bank 93,134
31/12/10 Investment 13,039
Interest income 13,039

Page 1
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS
01/01/11 Bank 12,000
Investment 12,000
31/12/11 Investment 13,184
Interest income 13,184
c)
Dell EMC Limited
Statement of Financial Position (Extracts )
As on 31 December
Rupees
2011 2010
Assets
Investments 107,357 106,173
- (2010: 93,134 + 13,039)
- (2011: 94,173 + 13,184)

Dell EMC Limited

Statement of comprehensive income (Extracts )
For the year ended 31 December
Rupees
2011 2010
Other income:
Interest income 13,184 13,039

Answer-4
Subaru Corporation
Statement of Financial Position (Extracts )
As on 31 December
Rupees
2016 2015
Non-current Liabilities
Financial liability-Bonds 650,835 622,633
- (2015: 581,900 + 40,733)
- (2016: 608,257 + 42,578)

Subaru Corporation
Statement of comprehensive income (Extracts )
For the year ended 31 December
Rupees
2016 2015
Expenses:
Finance cost: 84,202 80,633
- (2015: 39,900 + 40,733)
- (2016: 41,624 + 42,578)

Page 2
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS
Amortization schedule:
Semi-annul coupon rate = 8%/ 2 = 4%
Semi-annul effective rate = 14%/2 = 7%
Date Effective Cash flows Balance
Interest coupon Paid@
Expense @7% 4% of 700,000
(700,000 – 95,000 – 35,000) 01.01.15 570,000
01.07.15 39,900 (28,000) 581,900
01.01.16 40,733 (28,000) 594,633
01.07.16 41,624 (28,000) 608,257
01.01.17 42,578 (28,000) 622,835

Answer-5
Investment in Debentures:
As debentures are planned to be held until redemption, under IFRS 9 - Financial instruments, they would
be measured at amortized cost (unless designated at fair value) on the basis that:
a) The contractual terms of the financial asset give rise to cash flows on specific dates that are solely
payments of principal and interest.
b) The objective of the business model within which the asset is held is to hold assets in order to collect
contractual cash flows, and
This means that they are initially shown at their cost (including any transaction cost) and this cost will
increase over time by applying a constant effective interest rate. Their value is reduced by interest
received i.e the coupon.
Redeemable Preference Shares
Redeemable preference shares, although called as shares, are not, in substance equity, they are a debt
instrument, i.e. a loan.
Consequently, they should be classified as a non-current liability in the statement of financial position,
The 'dividend' paid will be shown in profit or loss as finance costs.
The shares are consequently a financial liability held at amortized cost unless designed at fair value
through P/L. In this case the shares are issued and redeemed at the same value, the effective interest rate
and nominal coupon rate will be the same and each year Rs. 6,000 will be shown as a finance cost in
profit or loss.

Amortisation schedule for Redeemable Preference Shares may appear as follows for 2017.
Date Effective Interest Cash flows Balance
Expense @ 6% coupon Paid@ 6%
of 100,000
01.01.17 100,000
31.12.17 6,000 (6,000) 100,000

Page 3
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS
Answer-6
a)
AJI Panca Ltd.
Statement of Financial Position (Extracts)
As on 31 December, 2001
Rupees
Equity and liabilities
Equity
Share capital (W-1) 1,625,000
Share Premium (W-2) -
Retained earnings (W-3) 6,108,813
7,733,813
Liabilities
Financial Liability (W-4) 164,750

(W-1)
Dr. Share capital Cr.
b/d 1,000,000
Bank 300,000
c/d 1,625,000 Bonus issue 325,000

(W-2)
Dr. Share premium Cr.
Bank (issue cost) 20,000 b/d 200,000
Bonus issue 270,000 Cash 90,000
c/d -
(W-3)
Dr. Retained Earnings Cr.
Bonus issue 55,000 b/d 5,670,300
c/d 6,108,813 Profit (508,500 - 14,987) 493,513

(W-4)
Date Effective Interest Cash flows Balance
Expense @ 9.5% coupon Paid@ 8%
of 100,000
01.01.01 *157,763
31.12.01 14,987 (8,000) 164,750
*[100,000 + 60% of 100,000 = 160,000 - 2,237] =157,763

b)
Date Particular Dr. Cr.
Financial Liability
01/01/01 Bank 157,763
Share capital- redeemable preference shares 157,763
[(100,000 x 1.6) – 2,237]
(Recording Redeemable Preference Shares)
31/12/01 Interest Expense 14,987
Share capital- redeemable preference shares 14,987
(Recording of Interest paid at effective rate)

Page 4
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS
31/12/01 Share capital- redeemable preference shares (W-4) 8,000
Bank 8,000
(Recording of Interest expense at coupon rate)
Share Premium
31/03/01 Bank 390,000
Share Capital (300,000 x 1) 300,000
Share Premium (300,000 x 0.3) 90,000
(Recording of issuance of ordinary shares)
Share Premium 20,000
Bank 20,000
(Recording of Transaction cost)
Bonus Share
30/06/01 Retained Earnings (bal.) 55,000
Share Premium (200,000 + 90,000 - 20,000) 270,000
Share Capital [(1,000,000 + 300,000) x *25%] 325,000
(Recording of issuance of Bonus Shares)
*1/4 means 25% Bonus shares

Answer-7
The investment in Debt instruments will be measured at Amortised cost.
01/07/18 Loan Receivable 50,000
Bank 50,000
(Recording of grant of Loan)
31/12/18 Loan Receivable 3,750
Interest income (7,500(W) x 6/12) 3,750
(Recording of interest income)

(W)Amortization schedule:
Date Effective Interest Cash flows Balance
Income @ 15% coupon Paid@
15% of 50,000
01.07.18 50,000
30.6.19 7,500 (7,500) 50,000

Answer-8
Date Effective Interest Cash flows Balance
income @ coupon received
2.3886% @ 8% on 50,000
and 8% on 25,000
(50,000 + 8,000) 01/01/15 58,000
31/12/15 1,385 (4,000) 55,385
(4,000 + 25,000) 31/12/16 1,323 (29,000) 27,708
31/12/17 662 (2,000) 26,370
(2,000 + 25,000) 31/12/18 630 (27,000) 0

Page 5
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS
Answer-9
Wah Agriport
Statement of Comprehensive Income (Extracts only)
for the year ended December 31, 2016
Rupees.
Sales XX
Less: Cost of sales (XX)
Gross Profit XX
Less:
Administrative expenses (XX)
Fair value loss- investments (W-1) (800)
(xx)
Profit Before Tax Xx

Wah Agriport
Statement of Financial position (Extracts only)
As on December 31, 2016
Rupees.
Current assets
Financial instruments – Investments 39,700

(W-1)
Dr. Investment A/c Cr.
b/d 40,500 Fair value loss (bal.) (P/L) 800
c/d 39,700

Answer-10
Mingora Imports Limited
Statement of Comprehensive Income (Extracts only)
For the year ended 31 December 2015
Rs. in million
Profit after tax N/A
Add: Other comprehensive Income
Fair value gain 27
Total comprehensive Income N/A

Mingora Imports Limited

Statement of Comprehensive Income (Extracts only)
For the year ended 31 December 2015
Rs. in million
Assets
Non-Current assets
Investment (W-1) 127

Equity and Liabilities

Equity
Fair value reserve (W-1) 27
Mingora Imports Limited
Statement of Changes in Equity (Extracts only)

Page 6
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS
For the year ended 31 December 2015
Rs. in million
Share Fair value Retained
capital reserve on earnings Total
investment
Opening 01.01.15 Xx - Xx Xx
Total Comprehensive Income for 2015 Xx 27 Xx Xx
Closing 31.12.15 Xx 27 Xx Xx

(W-1)
Dr. Investment A/c Cr.
01/01/15 Balance 100
31/12/15 OCI (gain) (bal.) 27 31/12/15 c/d (given) 127

(W-2) Journal Entries

Date Particulars Dr. Cr.
31/12/15 Investment (127 – 100) 27
OCI 27
(OCI has now a credit balance of Rs. 27)

Answer-11
Shaheen Limited
Statement of Comprehensive Income (Extracts only)
For the year ended 30 June 2017
Rs. in ‘000’
Profit after tax N/A
Add: Other Comprehensive Income
Loss on investment (25)
Total Comprehensive Income N/A

Shaheen Limited
Statement of Comprehensive Income (Extracts only)
For the year ended 30 June 2017
Rs. in ‘000’
Assets
Non-Current assets
Investment (W-1) 100

Equity and Liabilities

Equity
Fair value reserve (W-1) (25)

Page 7
CAF-07 IFRS 9: FINANCIAL INSTRUMENTS
Shaheen Limited
Statement of Changes in Equity (Extracts only)
For the year ended 30 June 2017
Rs. in ‘000’
Share Fair value Retained
capital reserve on earnings Total
investment
Opening 1.07.16 Xx - Xx Xx
Total Comprehensive Income for 2017 Xx (25) Xx Xx
Closing 30.06.17 Xx (25) Xx Xx

(W-1)
Dr. Investment A/c Cr.
Balance 125 OCI (loss) (bal.) 25
30/06/17 c/d (given) 100

(W-2) Journal Entries

Date Particulars Dr. Cr.
30/06/17 OCI (125 – 100) 25
Investment 25
(OCI has now a debit balance of Rs. 25)

Page 8
IAS 41
Agriculture
CAF-07 IAS-41: Agriculture

Lecture # 1(IAS-41) Lecture # 108 (Over all)

IFRS-09
1. Discussed Q.3 and 2 given in last class (Page 540 and 541 of book)
2. Discussed page 381 and 383 of book
3. Discussed handwritten page 1
4. Transaction costs in all FVTPL scenarios from Lecture 1 -5 are expensed.
5. Trade receivable (Financial asset) that does not have a Significant financing component are not
measured at fair value rather they are always measured at the relevant transaction price as defined
by “IFRS 15” Transaction costs are also discussed in IFRS 15 for trade debts.
Conclusion:
a. If no financing component = Measure at relevant transaction price
b. If there is financing component = Record debtor at present value of future cash receipt
just like we do discounting in dismantling provision.
IAS-41

Question-1 (Page 556 of book)

Mr. Mehanti provided the following details:
1. He purchased three 4 years old sheep on 01st January 2018 for Rs. 50,000. The carriage in paid
was Rs. 5,000. If we sell them today we will have to incur carriage out of Rs. 5,000 and selling
commission of Rs. 2,000.
2. On 30.6.2018, a new baby lamb was born having fair value of Rs. 4,000. Cost to sell is Rs. 500.

3. On 28 November 2018, wool was sheared from mature sheep which had a fair value less cost to
sell of Rs. 5,000.
4. Information related to fair value less cost to sell is as follows:
Date Description Fair value less cost to sell
31/12/18 0.5 years old lamb Rs. 12,000
31/12/18 5 years old sheep Rs. 70,000
5. The wool sheared is still in stock on 31 December 2018 has net realizable value of Rs. 4,800.
6. Cost of land of Mehanti at 31 December 2018 cost Rs. 120,000.
Required: In accordance with the requirements of IAS-41, calculate the gain in respect of biological
assets that should be recognized. Also pass the Journal entries for year ended 31st December 2018.

Rise School of Accountancy Page 1

CAF-07 IAS-41: Agriculture

Home work
Question-2(Page 557 of book)
Dairy Co. has 50 two year old cows on 01st July 2015 having fair value less cost to sell of Rs. 10,000 per
cow.
On 31st December 2015, 2 new cows were born having fair value less cost to sell of Rs. 5,000 each.
Information related to fair value less cost to sell is as follows:
Date Description Fair value less
cost to sell/animal
30/06/16 0.5 years old cow Rs. 5,500
30/06/16 3 years old cow Rs. 11,000
Required:
Pass the Journal entries for year ended 30th June 2016.

Answer-2
The cows at start of year have fair value less cost to sell of Rs. 500,000 (10,000 x 50).

Date Particulars Dr. Cr.

31/12/15 Biological Asset (5,000 x 2) 10,000
Income 10,000
(Recording of new born animal)
30/06/16 Biological Asset 51,000
Income 51,000
[(11,000 x 50 + 5,500 x 2)] = 561,000 – 500,000 – 10,000
(Recording of Income due to fair value increase in price and
physical change)

IFRS-09
Home work
Following Additional practice questions of IFRS-09
1. Q. 9,10,11 (Only look into their solutions and do not solve them) (Q.33 to 35 on book page 552)
2. Q. 6 (Must do it) (Q.30 on book page 549)
3. Q. 3 (Q.27 on book page 545)

Rise School of Accountancy Page 2

CAF-07 IAS-41: Agriculture

Lecture # 2(IAS-41) Lecture # 109 (Over all)

Biological assets Agricultural produce Products that result from
(Page 357 A of book) processing after harvest
1. Sheep Wool Yarn, carpet etc.

2. Trees in a timber plantation Felled trees Logs, lumber

3. Dairy cattle Milk Cheese

4. Cotton plants Harvested cotton Thread, clothing etc.

5. Sugarcane Harvested cane Sugar

6. Tobacco plants Picked leaves Cured tobacco

7. Tea bushes Picked leaves Tea

8. Fruit tress Picked fruit Processed fruit

9. Oil palm Picked fruit Palm oil

10. Rubber trees Harvested latex Rubber products

Adnan Rauf, FCA Page 1

CAF-07 IAS-41: Agriculture

AGRICULTURAL ACTIVITY (Page 357 B of book)

Adnan Rauf, FCA Page 2

CAF-07 IAS-41: Agriculture

Lecture # 3 (IAS-41) Lecture # 110 (Over all)

Question-1 (Page 558 of book)
A herd of fifty 3-year old animals was held on 1 January 2013. On 1 July 2013 ten 3.5-year-old animal
were purchased for Rs. 40,000 each. The fair values less estimated cost to sell were:
 3-year-old animal at 1 January 2013 Rs. 32,000
 4-year-old animal at 31 December 2013 Rs. 43,000
Calculate the amount that will be taken to the statement of profit or loss for the year ended 31 December
2013.

Question-2 [IFRS Part B] (Page 558 of book)

A herd of 10 2-year old animals was held at 1 January 20X1. One animal aged 2.5 years was purchased
on 1 July 20X1 for Rs. 108, and one animal was born on 1 July 20X1. No animals were sold or disposed
of during the period. Per-unit fair values less costs to sell were as follows:
Rs.
2 year old animal at 1 January 20X1 100
Newborn animal at 1 July 20X1 70
2.5 year old animal at 1 July 20X1 108
Newborn animal at 31 December 20X1 72
0.5 year old animal at 31 December 20X1 80
2 year old animal at 31 December 20X1 105
2.5 year old animal at 31 December 20X1 111
3 year old animal at 31 December 20X1 120
Required:
Calculate gain/(loss) separately relating to price and physical change for year ended 31 December 20X1.

Question-3 (Not available in book)

An entity rears animals to be sold in a local market. At the measurement date the open market value is
Rs.120. The auctioneers charge a sales commission of 2% of market value and there is a government levy,
based on market value, of 1% on purchases and 3% on sales.

Answer-3
Fair Value 120
Less: Cost to sale
Commission (2% x Rs.120) (2.40)
Govt. Levy (3% x Rs.120) (3.6)
114

Question bank
Q. 2 and 4(Page 366 and 368 of book)

Discussed
1. Disclosures
2. Scope
3. Government Grants
4. Grouping
5. MCQ 16

Adnan Rauf, FCA Page 1

CAF-07 IAS-41: Agriculture

Government Grants
Unconditional )‫(کوئی شرط نہیں‬ Conditional
When received
Cash / Receivables (Dr.) X Cash (Dr.) X
Income (Cr.) X Liability (Cr.) X
When condition fulfilled
Liability (Dr.) X
Income (Cr.) X
(may be recorded on yearly basis may
be immediately on meeting condition)

Question (Not available in book)

On 1 January 2019 Government gave us grant of Rs. 500,000. Government said that you are supposed to
grow wheat for 5 year. At the end of first year i.e. 31 December 2019 wheat was grown as required.
Required
Prepare entries for year ended 31 December 2019.

Class Work
1. MCQ 15,9,12,16
2. Grouping of assets (Page 355 of book)
3. Discussion of Cost to sell
4. Discussion of Government Grants from Lecture -3 and (Page 356 of book)
5. Solved Khalis Ltd. Question form Pg. (559 of book)
6. Discuss Rocky Limited March 2020 Question as given below
7. Question bank Q.2 and 4 is discussed
8. Practice Set Q. 10 (Page 360 of book)

Question-1 (Not available in book)

Rocky Road Limited (RRL) had a stock of 2,000 cows on 1 January 2019.
On 1 May 2019, RRL purchased 750 cows at fair value of Rs. 56,000 per cow. Further Rs. 2 million were
incurred to transport the cows to the farm.
On 1 August 2019, RRL imported cattle feed of USD l50,000 against 70% payment. RRL also paid 5%
custom duty on import. The feed is specially designed to provide vital nutrients to cows that keep them
healthy and improve the quality of their produce. At year-end, 30% of the amount is payable whereas
40% of the feed is unused.

Following average fair values per cow are available:

Average for the
1-Jan-19 1-May-19 31-Dec-19
year
Rs. 50,000 Rs. 56,000 Rs. 61,000 Rs. 57,000

Auctioneers charge a 2% commission on fair value from seller. Further, there is a government levy of 3%
at the time of purchase and 4% at the time of sale on fair value.
Following exchange rates are available:
Average Average for the
Date l-Aug-19 31-Dec-19
Aug-Dec year
1 USD Rs. 164 Rs. 152 Rs. 157 Rs. 159
Required:
Prepare journal entries in RRL's books to record the above information for the year ended 31 December
2019. (08)
(March 2020 Q.1)
Answer-1

Payment plan = 150,000 $

70% 30%
= 105,000 $ = 45,000 $

Adnan Rauf, FCA Page 1

CAF-07 IAS-41: Agriculture

Date Particulars Dr. Cr.

Rs. in ‘000’
01-05-19 Biological Assets (F.V - C.T.S) (W-1) 39,480
Expense (P/L) (bal.) 5,780
Bank (56,000 × 750) (W-2) 45,260
(Initial Recognition for biological asset)
1-Aug-19 Food inventory (bal.) 25,830
Bank ($ 105,000 x Rs. 164) 17,220
Payable ($ 45,000 x Rs. 164) 7,380
Bank [($ 150,000 x Rs. 164) x 5%] 1,230
(Recording of inventory)
31-Dec-19 Biological Assets (W-3) 24,205
P /L 24,205
(Recording of re-measurement Gain on Biological Assets)
31-Dec-19 Payable 540
P/L 540
[($45,000 × 152) = 6840,000 vs 7,380,000]
(Recording of Exchange gain on retranslation)
31-Dec-19 Food expense 15,498
Food inventory (25,830 x 60%) 15,498
(Recording of Food utilization)

(W-1) Fair value less cost to sell of cows bought (1-May-2019)

Fair value (56,000 x 750) 42,000
Less: Cost to sell:
Auctioneer commission (42,000 x 2%) (840)
Garment levy (42,000 x 4%) (1,680)
39,480
(W-2) Cash Paid on 1-May-2019
Cash for Cows (56,000 x 750) 42,000
Garment levy on purchase (42,000 x 3%) 1,260
Transportation 2,000
45,260
(W-3) Gain on measurement at year end
Opening value (FV – CTS) [(2,000 x 50,000) x *94%] 94,000
Purchases (FV – CTS) (W-1) 39,480
Gain (bal.) 24,205
Closing (FV – CTS) [(2,750 x 61,000) x *94%] 157,685

100% – 2% - 4% = 94% *

Adnan Rauf, FCA Page 2

FAR-2 TOHFA Revision Plan: Sep 2020

REVISION PLAN FAR-2 (TOHFA)

Note:
1. I may add certain questions in it in few days (if required)
2. Refer Chapters to relevant Volume i.e 1 and 2 of Far-2 Book
3. In addition to below mentioned questions also refer all notes given in last 2 classes.
4. You may follow the order of chapters as we did in class
Chapter Description
1. Preparation of  Read Page 366 (discussion of transaction costs)
financial  Read Page 375 (Complete )
statements
Past Papers Questions
Q 1,2,4,5,6,8,10

ICAP Question Bank

Q. 2 (Analyzing expense by nature)

Practice Questions
Q. 17 (ignore adjustment (ii))

MCQ’s
35,36 (These are in Volume-2)

Other
1. Lecture 11-13(Complete covering all disclosures)
2. Handwritten pages (3,4,6,7,10)
2. Consolidation  Read page no. 160,161,161E,F,G,H,I of book
 Also Refer handwritten notes given in class (Pg. 1-9)

Past Paper Questions

Q 2-8

ICAP Question Bank

Q. 5

Practice set Questions

Q. 36,38,45,46,47,48

Class notes given in normal classes

a) Lecture # 2
b) Lecture # 9 (C.W)
c) Lecture # 10 (Q.1) (C.W)
d) Lecture # 14 -17(Classwork and also Homework)

MCQ’s
2,5,8,22,24,28,30,32,33,41,43,46,49

Page 1
FAR-2 TOHFA Revision Plan: Sep 2020

3. IAS 28  Read Page no. 308-309 of book

(Associates)  Also Refer handwritten notes

Past Paper Questions

ICAP Question Bank

Q.2,5,6,8

Practice set Questions

Q. 5

Class notes given in normal classes

a) Lecture # 2 (H.W)
b) Lecture # 3 (C.W)
c) Lecture # 4 (All pages)

MCQ’s
1,2,10,11,16,18
4. IAS-38 1. Pg. 182 Government grant
2. Pg. 184 to 185 (Paras of IFRS to be ticked in IFRS)
3. Page 191 A,B,C,D
4. Pg .186-189
5. Refer handwritten pages given in class (Page 1-4)

Practice Questions
Q. 14, 18

Past Papers Questions

Q. 4-9

Class notes given in normal classes

Lecture # 6

MCQ’s
8,12,14
5. IFRS 16 (Leases) See at last page
6. IAS 10, 37  Pg 93-95
 Pg. 98-100 (Ex. 7,9,10,11,12)
 All handwritten pages
 Examples from IFRS Part B discussed in class
 Lecture# 4,5 and 6 Complete
Past Papers Questions
Q. 1(except iv), 2-3, 4(except a), 5-10, 15

MCQ’s
1,6,7,9,13

Page 2
FAR-2 TOHFA Revision Plan: Sep 2020

IFRIC 1 ICAP Question Bank

Q.1 and 2 (It is in IAS 10 & 37 chapter)

Class notes given in normal classes

 Lecture# 1-3 (Complete)

8. IAS - 08  Page 519-521 of book

 Refer all handwritten notes given in class

Practice Questions
Q 1,9,10,11,12,13

Past Papers Questions

Q 3,4,7,8,9,10

ICAP Question Bank

Q 1,2,3,4

Class notes given in normal classes

 Lecture # 6,7,9

MCQ’s
2,15,17,18,19
9. IAS-12  Book page 230
 Refer handwritten pages given in class (1,2,5)

Practice Questions
Q. 39,69,71,75,76,77

Past Papers Questions

Q. 2,6,7,9,10

Class notes given in normal classes

Lecture # 9 [C.W and H.W] and handwritten page given in class
Lecture # 10 (C.W)
Lecture # 12 (C.W)
Lecture # 14 (C.W Q.2)
Lecture # 15,16
Lecture # 19 (Over 34 Part A and B)

MCQ’s
5,8,11,17
10. Ethics Main Notes in book and all past papers and handwritten page given in class.
Also do Question on Pg. 584 of book

Page 3
FAR-2 TOHFA Revision Plan: Sep 2020

11. IFRS 08 Read Pg. 72-73D

Practice Questions
Q.1-2

Past Paper Questions

Q.1

ICAP Question Bank

Q. 1, 2

Class notes given in normal classes

 Lecture # 2 and 3 (Complete)

MCQ’s
2,3
12. IAS 41  Read out Pg. 354-357B

Practice Questions
Q. 2,3,6,7,8

Class notes given in normal classes

 Lecture 1, 2,3,4 (Complete) and their homework as well

MCQ’s
12,15,16,18
13. IAS 21  Read Page no. 412, 413 of book
 Refer handwritten Pg. 1

Class notes given in normal classes

1. Lecture # 1 [C.W Q. 2,4,5]
2. Lecture # 2 [C.W Q. 1 and H.W Q. 1]
3. Lecture # 3 [C.W Q. 1,3,4 and H.W Q. 1]
4. Lecture # 4 [C.W Q. 1,2]

Practice Questions
Q. 15,19,20,21,22

Past Paper Questions

Q.1

MCQ’s
2,3,8,9

Page 4
FAR-2 TOHFA Revision Plan: Sep 2020

14. IFRS 09  Page no. 378-383 of book

Class notes given in normal classes

1. Lecture # 1 [C.W Q. 1]
2. Lecture # 2 [C.W Q. 1 and H.W Q. 2,5]
3. Lecture # 3 [Question Solved in Class]
4. Lecture # 4 [C.W Q. 1,2 and H.W Q. 1,2]
5. Lecture # 5 [First page & C.W Q. 1,2,3]

Practice Questions
Q. 4,9,11,14

Past Paper Questions

Q.1

Additional Practice Questions

Q. 1,5,6,7,8

MCQ’s
1,5,10

Page 5
FAR-2 TOHFA Revision Plan: Sep 2020

Lease
No. Scenario Practice Past Papers
Questions Questions
 Read out Pg. No. 35 point 7 and 8
 Pg 41 read theory in point a, b and c
 Pg 42
 Tree on page 43
 Pg. 44 Read disclosures of lessee
 Point 9 and 10 and 11 from page 45-48
 Read out Tree on page 52
 Pg. 53 Read disclosures of lessor (Finance lease)
 Pg. 55 Read out
 Page 56A,B,C,D,E
 Also read-out Big page of Summary given in class
1. Lessee Books
Questions in which payments made annually
- In Advance 11 4
- In Arrears 5
2. Questions in which payments made semi-annually/quarterly
- In Advance 12,14
- In Arrears 13
3. Lessor Books(finance)
- Annual payments in advance 23,30
- Annual payments in arrears 27 5,6,7
4. Semi-annually/Quarterly payments
- In Advance 24
- In Arrears 25
5. Manufacture and Dealer Questions
- Arrears 35 9, 10 (Imp.)
- Advance 11
6. Operating Lease
 Refer Lecture # 8, 9, 10
7. Initial Direct Cost (IDC) (Do Lecture # 13)
8. Calculation of IRR & Lease rentals 51,53,55
9. Question Bank Q 4,5 and 6
10. Also do lecture 15 and 16 Complete
11. MCQ’s (5,6,8,14,18) (MCQ 6 is of IAS-08 with lease)

Page 6

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