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Rise FAR 2 Lectures

This document contains lecture materials on IFRS 16 Leases. It includes sample questions and journal entries related to lease accounting from the perspective of both lessees and lessors. It also provides homework assignments asking students to prepare additional journal entries, financial statements, and notes for lease transactions with modified requirements from the sample questions. Key concepts covered are accounting for finance and operating leases, impairment of right-of-use assets, and revaluation of property, plant, and equipment.

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Rise FAR 2 Lectures

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CAF-07

Lectures

September 19 (Adnan Rauf,FCA)

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IFRS-16

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CAF-07 IFRS-16: Leases

Lecture # 1
Question-1
On 1 January 2010, Mujtaba Textile Limited (MTL) acquired a machine on lease, from a bank. Details of
the lease are as follows:
(i) The fair value of machine is Rs. 75 million.
(ii) The lease term is 4 years.
(iii) Installment of Rs. 20 million is to be paid annually in arrears on 31 December.
(iv) The interest rate implicit in the lease is 10%.
MTL depreciates the machine on the straight line method to a nil residual value.
Required:
a. Prepare the journal entries for the years ending December 31, 2010 and 2011 in the books of MTL.
b. Also prepare statement of financial position and statement of comprehensive income extracts for
2010-2011

Note for students: Fair value of asset given in the case of lessee will be ignored in the question.

Home work
Question-1 of practice set
Change in requirement of above question:
a) Prepare the journal entries for 2005, 2006 and 2007 in Company A’s books.
b) Prepare extracts from statement of financial position as at 31 December, 2005, 2006 and 2007.
c) Prepare extracts from statement of comprehensive income for year ended 31 December, 2005, 2006
and 2007.

Lecture # 2

Question-1
On 1 January 2015, Nasir Textile Limited (NTL) acquired a machine on lease, from a bank. Details of the
lease are as follows:
(i) The lease term is 4 years and useful life is 5 years.
(ii) Installment of Rs. 20 million is to be paid annually in advance on 1 January.
(iii) The interest rate implicit in the lease is 10%.
(iv) At the end of lease term, NTL has an option to purchase the machine on payment of Rs.10
million. The fair value of the machine at the end of lease term is expected to be Rs. 14 million.

NTL depreciates the machine on the straight line method to a nil residual value.
Required:
a. Prepare the journal entries for the years ending December 31, 2015 and 2016 in the books of NTL.
b. Also prepare statement of financial position and statement of comprehensive income extracts for
2015-2016

Home work
Question-5 of Change in requirement of question:
practice set 1. Prepare journal entries for the year ended December31, 1998 and 1999.
2. Prepare extracts of statement of financial position as at December 31, 1998 and 1999.
3. Prepare notes to financial statements for the year ended December31, 1998 and 1999.

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CAF-07 IFRS-16: Leases

Lecture # 3
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.
(v) At the end of lease term, BTL has an option to purchase the machine on payment of
Rs. 4 million. The fair value of the machine at the end of lease term is expected to be
Rs. 7 million.

BTL depreciates the machine on the straight line method to a nil residual value.
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)
Home work
Practice set Q.13 (Also prepare balance sheet and note for the first year)
Lecture # 4
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-19 of practice set

A CONCEPT OF IAS-16 (On request of some Students)

Note -7.3 of lecture No.5, Question-1 of PPE
- Had there been no revaluation, the remaining buildings would have appeared at Rs. 345 million
(as calculated below) on 31.12.19.
Rs. in million
2019
Cost of remaining buildings (600 – 107(W-1)) 493
Less: Accumulated depreciation on 31.12.19 (493/20 years x 6 years) (148)
WDV as on 31.12.19 345

(W-1) Calculation of Cost of Disposed of Building

In this Question Cost of Disposal is missing which is calculated by reverse working through WDV
% age
Cost (Assumed) 100
Less: Accumulated depreciation on 31-12-18 (100/20 years x 5 years) (25)
WDV in % age 75
Cost of disposed of Asset in Rs in million 80/75 x 100 = 107

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CAF-07 IFRS-16: Leases

A CONCEPT OF IAS-16 (On request of some Students)

(W-1) Calculation of Cost of Disposed of Building

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CAF-07 IFRS-16: Leases

Lecture # 7
Class work
Past Paper Q. 6

Home work
Practice Set Q. 28

Lecture # 8
New Concept
Classification of lease from point of view of lessor:
a. Finance lease (if it transfers substantially all the risks and rewards incidental to
ownership to lessee)
b. Operating lease (if it does not transfers substantially all the risks and rewards incidental
to ownership to lessee)

“Situations that (individually or in combination) lead to lease being classified as finance lease”.
a) Ownership is transferred to lessee at the end of the lease term
b) Lessee has the option to purchase the asset at a price, which is sufficiently expected to be lower than
the FV at the end of the lease term (means a PO)
c) Lease term is for the major part of the economic life of the asset (major means say 75% of economic
life).
d) PV of the LP is substantially equal to FV at the inception of the lese (Substantially means 90% or
more)
e) Leased asset is of such a specialized nature that only lessee can use it without major modification.

If answer of any of the above points is “yes”, lease will be Finance lease

Difference in accounting treatment of finance and operating lease in the books of lessor

Finance lease (Risk and rewards of Operating lease (Risk and rewards of ownership
ownership are transferred to lessee) are not transferred to lessee)
1. Asset will not be kept in lessor books Asset will be kept in lessor books
2. Obviously no depreciation will be charged Depreciation will be charged by lessor based on
because asset is not there in the books useful life of asset
3. Lessor will record the interest income Lessor will not record the interest income rather he
will record the rental income on straight line basis
4. Lessor will prepare the amortisation Lessor will not prepare the amortisation schedule
schedule staring with the figure of net
investment
Question-1
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 6 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.

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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)
Lease amortization schedule

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CAF-07 IFRS-16: Leases

Lecture # 5
Question-1
Lease started on 01 January ,2015
Lease Term 5 Years
Useful life of asset 5 Years
Interest Rate 12%
Annual Installments of Rs.80 are payable in arrears.

Requirement:
a. Prepare a note to the financial statements for the year ended 31 December 2015 in the books of
lessee.
b. Prepare a note to the financial statements for the year ended 31 December 2015 in the books of
lessor.

Further 2 more questions were referred in book for preparing note.

Question-2
Lease started on 01 January ,2015
Lease Term 5 Years
Useful life of asset 5 Years
Interest Rate 12%
Annual Installments of Rs.80 are payable in advance.

Home work
Practice Question 8 (Complete). Prepare only note for Practice Question 19, 20 and 21.

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:
(v) Cost of machine is Rs. 51 million.
(vi) The lease term and useful life is 3 years and 5 years respectively.
(vii) Installment of Rs. 10 million is to be paid semi-annually in advance on 1 July and 1 January.
(viii) 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.

Home work
 Past paper 4 and 5
 Practice Q. 12, 24, 25

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CAF-07 IFRS-16: Leases

Lecture # 7
Class work
Past Paper Q. 6

Home work
Practice Set Q. 28

If answer of any of the above points is “yes”, lease will be Finance lease

Difference in accounting treatment of finance and operating lease in the books of lessor

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CAF-07 IFRS-16: Leases

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

Answer-1

Discussion on lease classification

Conclusion:

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CAF-07 IFRS-16: Leases

Date Installment Principal Interest Balance

1/1/2005 748,000
31/12/05 166,744 99,424 67,320 648,576
31/12/06 166,744 108,372 58,372 540,204
31/12/07 166,744 118,126 48,618 422,078
31/12/08 166,744 128,757 37,987 293,321
31/12/09 166,744 140,345 26,399 152,976
31/12/10 166,744 152,976 13,768 -
Answer-2
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)
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

Homework
(a) Q.36 and Q. 37 of practice set
(b) Q.4 of past papers (optional) (Relates to lecture # 2)
Lecture # 9

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CAF-07 IFRS-16: Leases

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
Practice Set Q.38

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 5% 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
Solve Q.1 of lecture # 9 and Q.1 of lecture # 10 class work assuming that rentals are received in arrears.

Answer-2
Q.1 of Lecture # 9
Entries in the books of lessor
Date Particulars Dr. Cr.
01/01/09 Asset 30,000
Cash 30,000
(Asset purchased)
31/12/09 Cash 8,000
Rental income 7,607
Unearned rental income(bal.) 393
(Receipt of installment)
31/12/09 Depreciation expense (30,000/6years) 5,000
Accumulated depreciation 5,000
(Recording of depreciation expense)
31/12/10 Cash 7,600

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CAF-07 IFRS-16: Leases

Unearned rental income 393

Rental income 7,607
Unearned rental income(bal.) 386
(Receipt of installment)
31/12/10 Depreciation expense (30,000/6years) 5,000
Accumulated depreciation 5,000
(Recording of depreciation expense)
31/12/11 Cash 7220
Unearned rental income 386
Rental income 7,607
(Receipt of installment)
31/12/11 Depreciation expense (30,000/6years) 5,000
Accumulated depreciation 5,000
(Recording of depreciation expense)
ABC Ltd.
Notes to the Financial Statements
For the year ended 31 December, 2009
39 Operating Lease
39.1 Maturity Analysis- Contractual undiscounted cash flows
Total lease payments receivables are as follows:
Rs.
Less than 1 Year 7,600
one to two years 7,220
Total Undiscounted lease receivable 14,820
The company entered into an operating lease agreement. The lease payments are to be reduced annually.
There are no financial restrictions in lease agreement.

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

31 Dec 09 8,000
31 Dec 10 7,600
31 Dec 11 7,220
Total LP 22,800
Rental income (22,800/3) 7,607

Q.1 of Lecture # 10

Entries in the books of lessor

Date Particulars Dr. Cr.
01/07/09 Asset 80,000
Cash 80,000
(Asset purchased)
31/12/09 Cash 5,000
Rent receivable (bal.) 254
Rental income (W-1) 5,254
(Receipt of installment)
31/12/09 Depreciation expense (80,000/10years x 6/12) 4,000
Accumulated depreciation 4,000
(Recording of depreciation expense)
30/6/10 Cash 5,000

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CAF-07 IFRS-16: Leases

Lecture # 13
Treatment of initial direct cost in case of lessee and lessor.

Question-1
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 = 1-1-2018
Cost of Machine = 600,000
Useful life = 10 years
Asset purchased on = 1-1-2018

Lease installments to be paid in arrears:

31-12-2018 = 5,000
31-12-2019 = 6,000
31-12-2020 = 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
Optional Practice Q.48 - 49

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CAF-07 IFRS-16: Leases

Lecture # 14
Class work
Practice Q.10
Also discussed different types of maturity analysis
Home work
Self-prepared question

Lecture # 15
Class work
Past paper Q.9 (QAL)
Note for students
1. If P.P#9 is solved for lessee then amortization schedule will start from P.V of L.P(i.e. 9,101)
2. If P.P#9 is solved for lessor then amortization schedule will start from N.I(i.e. 9,449)
3. If in question UGRV is given then Amortization schedule for Lessor and Lessee will be
separately prepared.

Home work
Past paper Q.8

Lecture # 16
Class work
1. Definition of GRV and UGRV
2. Presentation and disclosure requirements in case of lessee and lessor
3. Substantive substitution right discussion
4. Interest rate discussion
5. Practice Q.51
6. A lease may be split into a primary period followed by an option to extend the lease for a further
period (a secondary period).
In some cases, the lessee might be able to exercise such an option with a small rental or even for
no rental at all. If such an option exists and it is reasonably certain that the lessee will exercise the
option, the second period is part of the lease term.

Home work
Past paper Q.7
Practice Q. 54, 57

THE END

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CAF-07 IFRS 16: LEASES

Rent receivable 38
Rent receivable (bal.) 80
Rental income (W-1.1) 840
(Receipt of installment)
31/12/10 Cash 882
Rent receivable 38
Rental income (W-1.1) 840
(Receipt of installment)
31/12/10 Depreciation expense (30,000/6years) 5,000
Accumulated depreciation 5,000
(Recording of depreciation expense)

(W-1.1) Calculation of Rental income on straight line basis:

30 Jun, 08 800
31 Dec, 08 800
30 Jun, 09 (800 x 105%) 840
31 Dec, 09 840
30 Jun, 10 (840 x 105%) 882
31 Dec, 10 882
Total LP 5,044
Rental income for 6 months (5,044/6 installments) 840

Self-Test #2

Question-1
Freeman Ltd. entered into a lease contract with Freddy Ltd. The terms of the lease contract are:
Fair value of car (Not a low value asset) purchased on 1/1/08 = Rs. 30,000
Commencement of lease = 01 January, 2008
Lease term = 3 years
Useful life = 6 years
Semi-annual rentals payable in arrears = Rs. 800 (with 5% increase annually)

Interest rate is 14%.

Required:
a) Prepare journal entries for years ending December 31, 2008, 2009 and 2010 in the books of
Freeman Ltd. (lessee).
b) Prepare journal entries for years ending December 31, 2008, 2009 and 2010 in the books of
Freddy Ltd. (lessor).
Self-Test # 2 Answer

Note for students

3. Lessee will not classify this lease as a low value asset lease because asset mentioned in the
question is car which is not a low value asset. Lessee will record this asset in his books as Right
of use.
4. Lessor will classify this lease as an operating lease because answer to all of five questions is NO
so he will classify this lease as an operating lease.

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CAF-07 IFRS 16: LEASES

a) Freeman Ltd.
Entries in the books of lessee
Date Particulars Dr. Cr.
01/01/08 R.O.U 3,990
Lease Liability 3,990
(Asset acquired under lease)
30/06/08 Lease Liability 521
Interest Expense 279
Cash 800
(Recording of payment of Rental)
31/12/08 Lease Liability 557
Interest Expense 243
Cash 800
(Recording of payment of Rental)
31/12/08 Depreciation Expense (3990/3years) 1,330
Accumulated Depreciation 1,330
(Recording of depreciation expense)
30/06/09 Lease Liability 636
Interest Expense 204
Cash 840
(Recording of payment of Rental)
31/12/09 Lease Liability 681
Interest Expense 159
Cash 840
(Recording of payment of Rental)
31/12/09 Depreciation Expense (3990/3years) 1,330
Accumulated Depreciation 1,330
(Recording of depreciation expense)
30/06/10 Lease Liability 770
Interest Expense 112
Cash 882
(Recording of payment of Rental)
31/12/10 Lease Liability 824
Interest Expense 58
Cash 882
(Recording of payment of Rental)
31/12/10 Depreciation Expense (3990/3years) 1,330
Accumulated Depreciation 1,330
(Recording of depreciation expense)

(W-1) Calculation of PV of LP
PV of LP = 800(1.07)-1 + 800(1.07)-2 + 840(1.07)-3 + 840(1.07)-4+ 882(1.07)-5
+ 882(1.07)-6
= 3,990
(W-1.1) Lease amortization Schedule:
Date Installment Principal Interest Balance
1/1/08 3,990
30/6/08 800 521 279 3,469
31/12/08 800 557 243 2,912
30/6/09 840 636 204 2,276

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CAF-07 IFRS 16: LEASES

31/12/09 840 681 159 1,595

30/6/10 882 770 112 825
31/12/10 882 824 58 -

(W-1.2)Calculation of Rental:
30 Jun, 08 800
31 Dec, 08 800
30 Jun, 09 (800 x 105%) 840
31 Dec, 09 840
30 Jun, 10 (840 x 105%) 882
31 Dec, 10 882
Total LP 5,044

b) Freddy Ltd.
Entries in the books of lessor
Date Particulars Dr. Cr.
01/01/08 Asset 30,000
Cash 30,000
(Asset purchased)
30/6/08 Cash 800
Rent receivable (bal.) 40
Rental income (W-2) 840
(Receipt of installment)
31/12/08 Cash 800
Rent receivable (bal.) 80
Rent receivable 40
Rental income (W-2) 840
(Receipt of installment)
31/12/08 Depreciation expense (30,000/6years) 5,000
Accumulated depreciation 5,000
(Recording of depreciation expense)
30/6/09 Cash 840
Rent receivable (bal.) 80
Rent receivable 80
Rental income (W-2) 840
(Receipt of installment)
31/12/09 Cash 840
Rent receivable (bal.) 80
Rent receivable 80
Rental income 840
(Receipt of installment)
31/12/09 Depreciation expense (30,000/6years) 5,000
Accumulated depreciation 5,000
(Recording of depreciation expense)
30/6/10 Cash 882
Rent receivable (bal.) 38
Rent receivable 80
Rental income (W-2) 840

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CAF-07 IFRS 16: LEASES

(Receipt of installment)
31/12/10 Cash 882
Rent receivable 38
Rental income (W-2) 840
(Receipt of installment)
31/12/10 Depreciation expense (30,000/6years) 5,000
Accumulated depreciation 5,000
(Recording of depreciation expense)

(W-2) Calculation of Rental income on straight line basis:

30 Jun, 08 800
31 Dec, 08 800
30 Jun, 09 (800 x 105%) 840
31 Dec, 09 840
30 Jun, 10 (840 x 105%) 882
31 Dec, 10 882
Total LP 5,044
Rental income for 6 months (5,044/6 installments) 840

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IAS 16

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CAF-07 IFRS 16: LEASES

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CAF-07 IFRS 16: LEASES

31/12/09 840 681 159 1,595

30/6/10 882 770 112 825
31/12/10 882 824 58 -

(W-1.2)Calculation of Rental:
30 Jun, 08 800
31 Dec, 08 800
30 Jun, 09 (800 x 105%) 840
31 Dec, 09 840
30 Jun, 10 (840 x 105%) 882
31 Dec, 10 882
Total LP 5,044

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CAF-07 IFRS 16: LEASES

(W-2) Calculation of Rental income on straight line basis:

30 Jun, 08 800
31 Dec, 08 800
30 Jun, 09 (800 x 105%) 840
31 Dec, 09 840
30 Jun, 10 (840 x 105%) 882
31 Dec, 10 882
Total LP 5,044
Rental income for 6 months (5,044/6 installments) 840

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CAF-07 IAS 16: PROPERTY, PLANT AND EQUIPMENT

On 1 April 2019, one of the office buildings was sold for Rs. 45 million. On 31 December 2018, written
down value before revaluation and revalued amount of the sold building amounted to Rs. 80 million and
Rs. 95 million respectively.

OCL uses straight line method of depreciation which is charged from the date the asset is available for use
upto the date of disposal. Revaluation is to be accounted for by using net replacement value method.

Required:

In the light of the requirements of the International Financial Reporting Standards, prepare accounting
entries from the above information for the year ended 31 December 2019.

(10)

Answer-1
Omega chemicals Limited
Accounting Entries
Rs.in millions
Date Particulars Dr. Cr.
31/12/18 Depreciation Expense(600/20) 30
Acc. Depreciation 30
31/12/18 Acc. Depreciation 150
Building 150
31/12/18 Building 350
Revaluation Surplus 350
1/4/19 Depreciation expense 1.6
Accumulated depreciation 1.6
1/4/19 Revaluation Surplus 0.3
Retained Earning 0.3
1/4/19 Accumulated Depreciation 1.6
Cash 45
P/L (bal.) 48.4
Building 95
1/4/19 Revaluation Surplus 14.7
Retained Earning 14.7
31/12/19 Depreciation Expense 47
Acc. Depreciation 47
31/12/19 Revaluation Surplus 22
Retained Earning 22

Omega chemicals Limiteds

Notes to the Financial Statements
For year ended December 31, 2019
N-1 Property, plant and equipment

Rs. in million
2019 2018
Cost
Opening 800 600
Transfer from accumulated depreciation - (150)

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CAF-07 IAS 16: PROPERTY, PLANT AND EQUIPMENT

Revaluation Surplus/(loss) - 350

Disposals (95) -
Closing 705 800
Accumulated depreciation
Opening (150-30) - 120
Depreciation expense (47 + 1.6) 48.6 30
Transfer to asset a/c - (150)
Disposals (1.6) -
Closing (47) (-)
Book value 658 800

(W-1) Calculation of revaluation surplus and depreciation on office building

Date Description Plant R. Surplus SOCI(P/L)
-----------Rs. in million-----------
31/12/18 WDV(600 - 150) 450
31/12/18 Revaluation surplus (bal.) 350 350
31/12/18 Revalued amount 800 350
1/4/19 Dep. on Disposal(95/15x3/12) : (15/15x3/12) (1.6) (0.3)
1/4/19 Disposal – WDV(95 - 1.6) : (15 - 0.3) (93.4) (14.7)
WDV 705 335
31/12/19 Depreciation(705/15:335/15) (47) (22)
31/12/19 WDV 658 313
(W-2) Calculation of remaining Life
Depreciation for the year (600/20) 30
Remaining Life (20 – 150/30 ) 15

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CAF-07 IAS 16: PROPERTY, PLANT AND EQUIPMENT

Lecture # 1
Class work
Started past paper Q.1 (First 2 years journal entries)
Lecture # 2
Class work
Started past paper Q.1 (Completed all journal entries and prepare note for all of the years)
Lecture # 3
Class work
Question-1
Asset purchased on 01-01-12
Cost of Asset 500
Use ful life 20 Years
Revaluation Details:
01-01-14 800
01-01-16 250
01-01-18 600
Required: Prepare Journal entries from 2012 to 2018.

Solution
Date Particulars Dr. Cr.
01/01/12 Asset 500
Cash 500
31/12/12 Depreciation 25
Accumulated depreciation 25
31/12/13 Depreciation 25
Accumulated depreciation 25
01/01/14 Accumulated depreciation (25+25) 50
Asset 50
(Transfer of accumulated depreciation to asset)
01/01/14 Asset 350
Revaluation Surplus 350
(Recording of revaluation surplus)
31/12/14 Depreciation 44
Accumulated depreciation 44
31/12/14 Revaluation Surplus 19
Retained Earning 19
(Transfer of revaluation surplus to retained earnings)
31/12/15 Depreciation 44
Accumulated depreciation 44
31/12/15 Revaluation Surplus 19
Retained Earning 19
01/01/16 Accumulated depreciation (44+44) 88
Asset 88
01/01/16 Revaluation Surplus 312
P/L (bal.) 150
Asset 462
(Recording of revaluation loss)
31/12/16 Depreciation 16
Accumulated depreciation 16

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CAF-07 IAS 16: PROPERTY, PLANT AND EQUIPMENT

Required:
Pass journal entries for year ended 2019.

Home work
Practice set Q.3 (optional), 4 , 6, 7 (disposal of asset having revaluation loss) , 8 (Mid of year revaluation)

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IAS-12

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CAF-07 IAS: 12 Income Tax

Lecture # 1
Class work
1. An example was solved explaining difference between accounting depreciation and tax
depreciation.
Home work
Practice Q. 5 and 13

Lecture # 2

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 December, 2015 and 2016.

Question-2
Cost of an asset ( purchased on 01-01-18) Rs. 50,000

Accounting depreciation rates as follows:

-2018 30%
-2019 70%

Tax depreciation rates as follows:

-2018 70%
-2019 30%

Tax rate 20%

Accounting profit for both years Rs. 200,000
Accounting and tax depreciation both shall be charged on straight line basis.

Required:
Statement of comprehensive income (extracts) for the year ended 31st December, 2018 and 2019.

Home work
Practice Q. 35

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CAF-07 IAS: 12 Income Tax

Lecture # 3
Class work
2. Explained deductible temporary difference by using following example of warranty expense
Example of warranty expense:
In 2010, a company started its business of selling mobiles. At the end of 2010, company estimated that
Rs. 20,000 will be incurred on repair cost of mobiles which are sold in 2010. In 2011, Rs. 20,000 repair
expense was actually paid.
Assume Profit for both years is 200,000 and tax rate is 40%.
Lecture # 4
Class work Started past paper Q.2
Lecture # 5
Class work
1. Completed past paper Q.2 and
2. Solved Past paper Q.10 of IFRS-16
Lecture # 6
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.
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
Past paper Q.8 (must), Practice Q.62 (optional)

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CAF-07 IAS: 12 Income Tax

Lecture # 7

New concept
1. 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)

Home work
Practice Q.69 (must), 24, 41, 48 (except adjustment.8)

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CAF-07 IAS: 12 Income Tax

Summary

Lessor

Finance lease Operating lease

IFRS Tax IFRS Tax

Asset Asset Asset Asset
Cash Cash Cash Cash
Lease receivable No entry Cash Cash
Asset Rental income Rental income
Cash Cash Unearned Rental income (Installment received)
Lease receivable Rental income Depreciation Depreciation
Interest income Acc. Dep. Acc. Dep.
Depreciation (depreciation based on useful life) (tax depreciation rate)
Acc. Dep.
(tax depreciation rate)

(W-1)
Current tax (Finance lease) Current tax (Operating lease)
Profit before tax Profit before tax
Add: Rental income 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

Lecture # 8
Question-1
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%
 2017 25%
Profit for all years is Rs. 1,200.

Required:

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CAF-07 IAS: 12 Income Tax

Prepare journal entries and note to the financial statements for years ended 31st December, 2015 and 2016
and 2017.

Question-2
XYZ
Statement of financial position (Extracts)
As at 31st December, 2016
2016 2015
Current assets
Prepaid electricity 25 20
Interest receivable 10 12
Current liabilities
Unearned rental income 30 40
Salary payable 42 32
XYZ
Statement of comprehensive income (Extracts)
For the year ended 31st December, 2016
2016 2015
Profit before tax 300 200

Other information:
 Tax authorities allow electricity expense to be deducted when paid.
 Tax authorities tax interest income on receipt basis.
 Tax authorities tax rental income on receipt basis.
 Tax authorities allow salary expense to be deducted when service is rendered.

Required:
Calculate current and deferred tax for the year ended 31st December,2015 and 2016 assuming tax rate is
30%.

Home work
 Past paper Q. 5
 Practice set Q. 38

Lecture # 9

Class work
1. Completed Question 2 of Lecture # 8
2. Also solved the following question

Question-1
Following data is available for the year ended 31-12-18
1. Tax rate is 30%
2. Profit before tax is Rs. 300.
3. Receivables include interest receivable of Rs. 30 (Interest is taxable on receipt basis)
4. Payable include unearned commission income of Rs. 50 (It is taxed when it is earned).
5. Prepayments include rent prepaid of Rs. 5 million (It is allowed to be deducted when paid).
Required:
Calculate current tax and deferred tax as on 31-12-18

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CAF-07 IAS 16: PROPERTY, PLANT AND EQUIPMENT

Required:
Pass journal entries for year ended 2019.

Home work
Practice set Q.3 (optional), 4 , 6, 7 (disposal of asset having revaluation loss) , 8 (Mid of year revaluation)

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IAS-12

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CAF-07 IAS: 12 Income Tax

Lecture # 12
Class work
3. Completed Question 2 of Lecture # 11 in first 30 minutes
4. Solved past paper Q.7

Lecture # 13
Class work
1. Explained income statement approach of calculating deferred tax expense (recording/reversal)
and made revision of this approach using Question band Q. 2 and 3 and past paper Q.2.
2. Explained the concept of “current tax – Prior year” with the help of 3 examples and than solved
Past Paper # 6 (Adj. 7).
Home work
 Past paper Q. 6 and 4
 Practice Q. 39

Lecture # 14
Class work

Question-1
Triangle Limited (TL) was incorporated in 2017. 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. 125 million.
(ii) On 1 January 2018 Accounting WDV of owned assets exceeded the tax base by Rs. 50 million.
(iii) Tax depreciation for the year exceeds accounting deprecation by Rs. 15 million.
(iv) Rent is allowed for tax purposes on payment basis. Rent accrued as at 31 December 2018
amounted to Rs. 1 million (2017: Rs. 3 million)
(v) Insurance is also allowed for tax purposes on accrual basis. Prepaid insurance as at 31 December
2018 amounted to Rs. 5 million (2017: Rs. 4 million)
(vi) Other income includes:
 interest of Rs. 10 million.
 dividend of Rs. 6 million.
(vii) Borrowing cost of Rs. 2 million was capitalized in 2018 on an under construction building.
Borrowing cost is allowed for tax purposes in the year in which it is incurred.
(viii) During 2018 Rs. 5 million has been capitalized as development expenditure as per IAS 38.
Assume that tax relief on this expenditure is taken in full in the period in which it is incurred.
(ix) Applicable tax rates are as follows:
2018
Dividend income 20%
Interest income 30%
All other incomes 30%
Required:
Prepare the following:
c) Note on taxation for inclusion in TL's financial statements for the year ended 31 December
2018 and a reconciliation to explain the relationship between tax expense and accounting
profit. (11)
d) Computation of deferred tax liability/asset in respect of each temporary difference as at 31
December 2017 and 2018. (07)

Home work
 Past paper Q. 10

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CAF-07 IAS: 12 Income Tax

Lecture # 15
1. 2 handwritten pages were given discussing operating lease, NRV loss.
2. Given a summary of IAS-12
3. Discussed past paper Q.10
4. Solved following examples

Question-1
The following information has been gathered for preparing the disclosures related to taxation for
the year ended 31 December 2018:
(x) Profit before tax for the year amounted to Rs. 80 million.
(xi) Other income includes dividend of Rs. 16 million.
(xii) 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?

Home work
 Past paper Q. 10

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CAF-07 IAS: 12 Income Tax

Current tax Deferred tax

Reverse Record Carrying amount Tax base
1. Lessee
A. Normal lease 1. Interest expense Lease installment 1. Right of use Zero
2. Depreciation on right paid 2. Lease liability
of use 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
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 As discussed in class 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 Tax

Summary

Lessor

Finance lease Operating lease

IFRS Tax IFRS Tax

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

Required:

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IAS 38

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CAF-07 IAS-38

Lecture # 1 (45 minutes)

Page 180 Discussion

Lecture # 2
Page 181 Discussion and Page 173 (PARA-56,57,59,63)

Lecture # 3
1. Hand written notes Page 2 and 3
2. IAS 36 impairment (Self prepared example)

Lecture # 4
Class work
1. P.P Q.7

Lecture # 5
Class work
1. Hand written notes Page 4 and 5
2. P.P Q.5 (i)

Lecture # 6
Class work
1. P.P Q.6
2. P.P Q.5 (ii)

Lecture # 7
Class work
1. P.P Q.5 (iii) and (iv)
2. P.P Q.4
3. Hand written notes Page 1
4. Page 177 of book (Exchange of assets)

Home work
Past paper Q. 9

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CAF-07 IAS: 12 Income Tax

Home work
Practice Set Q.73

Lecture # 10
Class work

Question-1
Following data is available for the year ended 31-12-18
1. Profit before tax is Rs. 200.
2. Profit includes interest income of Rs. 30 which is receivable at year end. Tax authorities say that we
will tax it on receipt basis.
3. General tax rate is 30%.
4. Tax rate on interest income is 10% in 2018. However in 2019 it will be 6%.

Required:
a) Compute of Current tax and deferred tax liability/asset on 31-12-18.
b) Note on taxation for inclusion in financial statements for the year ended 31 December 2018
and a reconciliation to explain the relationship between tax expense and accounting profit.

Question-2
Past paper Q.9 (Rose Limited except adjustment relating to plant)

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CAF-07 IAS: 12 Income Tax

Lecture # 15
1. 2 handwritten pages were given discussing operating lease, NRV loss.
2. Given a summary of IAS-12
3. Discussed past paper Q.10
4. Solved following examples

Prepare a note on taxation for the year ended 31 December 2018?

Prepare a note on taxation for the year ended 31 December 2015?

Home work
 Past paper Q. 10

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IAS-38 How to attempt theory question?

Solving Theory Questions

1 Initial IAS-38 allows the recognition of an identifiable non-monetary assets without
Recognition 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 It should initially be measured at cost. Entity should capitalize the development
measurement work, trial run cost, testing cost, cost to register, depreciation of another asset used
(Costs to be in its production i.e. Rs. ___ million as intangible asset.
capitalised)
3 Research work IAS-38 does not allow capitalization of cost relating to the research work. So these
costs should be charged to statement of comprehensive income in the period in
which they incurred.
4 Training of IAS-38 does not allow capitalization of cost relating to the staff training. So these
staff costs should be charged to statement of comprehensive income in the period in
which they incurred.
5 Advertisement Advertising and promotional costs should be recognised as an expense when
incurred. However, the advertising expense amounting to __ should be recognized
as prepayment.
6 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). IAS-38
includes renewal period in useful life if the renewal is at minimal cost. (Also discuss
impairment if there is any indication)

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

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IAS-01

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CAF-07 IAS 01: Final accounts

Lecture # 1
1. Explained statement of changes in equity
2. Started Past paper Q.8
(Discussed all adjustments)

Lecture # 2
1. Completed Past paper Q.8

Lecture # 3
1. 2 handwritten pages were given explaining deferred tax adjustment in final account and issues
related to share issue
2. Started Past paper Q. 5 (Discussed first 3 adjustments)

Lecture # 4
1. Completed Past paper Q.5

Lecture # 5
Class work
1. 1 handwritten page was given explaining dividend and different aspects of statement of changes
in equity
2. Started following question

Question-1
Figs Pakistan Limited is a listed company engaged in business of manufacturing and marketing of
personal care and food products. Following is an extract from its trial balance for year ended 31.12.2015:
Debit Credit
Rs. in million
Sales - Manufactured, goods 56,528
Sales - Imported goods 1,078
Scrap sales 16
Dividend income 12
Sales tax - Imported goods 53
Sales tax - Manufactured goods 10,201
Sales discount 2,594
Raw material stock as on 1 January 2015 1,751
Work in process as on 1 January 2015 73
Finished goods (manufactured) as on 1 January 2015 1,210
Finished goods (imported) as on 1 January 2015 44
Purchases - Raw material 22,603
Purchases - Imported goods 658
Stores and spares consumed 180
Salaries, wages and benefits 2,367
Depreciation and amortization 1,287
Advertisement and sales promotion 4,040
Outward freight and handling 1,279
Legal and professional charges 71
Auditor's remuneration 13
Donations 34
Workers Profit Participation Fund 257

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CAF-07 IAS 01: Final accounts

Worker Welfare Fund 98

Loss on disposal of property, plant and equipment 10
Financial charges on short term borrowings 133
Exchange loss 22
Financial charges on lease 11

Additional information:
(i) The position of inventories as at 31 December 2015 was as follows:
Rs. in million
Raw material 2,125
Work in process 125
Finished goods (manufactured) 1,153
Finished goods (imported) 66

(ii) The basis of allocation of various expenses among cost of sales, distribution costs and
administrative expenses are as follows:
Distribution Administrative
Cost of sales
costs expenses
% % %
Salaries, wages and benefits 55 30 15
Depreciation and amortization 70 20 10
(iii) Salaries, wages and benefits include contributions to provident fund (defined contribution plan)
and gratuity fund (defined benefit plan) amounting to Rs. 54 million and Rs. 44 million
respectively.
(iv) Auditor’s remuneration includes taxation services and out-of-pocket expenses amounting to
Rs. 4 million and Rs. 1 million respectively.
(v) Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of the company’s
directors, Mr. Peanut is a trustee of DCF.
(vi) The tax charge for the current year after making all related adjustments is estimated at
Rs. 1,440 million. The taxable temporary differences of Rs. 3,120 million originated in the year,
over the last year. The applicable income tax rate is 35%.
(vii) Rs. 274 million ordinary shares were outstanding as on 31 December 2015.
(viii) There is no other comprehensive income for the year.

Required:
Prepare the statement of comprehensive income for the year ended 31 December 2015 along with the
relevant notes showing required disclosures as per the Companies Act, 2017 and International Financial
Reporting Standards. Comparatives are not required. (20)

Lecture # 6
Class work
1. Completed question given in Lecture - 5

Lecture # 7
Class work
1. Discussed journal entries of sales tax and trade discount by giving a page.
2. Started Past paper Q.1 (Only first 2 adjustments were solved)

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CAF-07 IAS 01: Final accounts

Lecture # 8
Class work
Completed Past paper Q.1

Lecture # 9 (Sunday 3.5 hour class)

Class work
1. Hadi Limited question (given with handwritten notes)
2. Question bank Q.2 (analyzing expenses by nature)
3. Ethics – Fundamental Principles

Lecture # 10
Class work
1. Explained sale on return basis adjustment from handwritten notes
2. Started Past paper Q.4 (Adjustment 1-5)

Lecture # 11
Class work
1. Completed Question 4

Lecture # 12
Class work
1. Explained disclosure requirements of statement of financial position from Pg. 344 – 348 and from
hand written notes (Pg. 12 – 16)

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Entries of sales tax and trade discount IAS 01: Final Accounts

Treatment of sales/trade discount

Example
Shopkeeper sold 10 items having market price of 2,000 each to customer at a discounted price of Rs.
1,800 due to bulk quantity purchase.

Entry
Dr. Cr.
Debtor (10 x 1,800) 18,000
Sales 18,000

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

Page 1

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Entries of sales tax and trade discount IAS 01: Final Accounts

Treatment of sale tax in seller and buyer books

Example
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. Entry in the books Dr. Cr.
of buyer
If refundable
Debtor 117,000 Sales tax receivable 17,000
Sales* 100,000 Purchases 100,000
Sales tax payable to Govt. 17,000 Creditor 117,000
If non-refundable
Purchases 117,000
Creditor 117,000
*sale is recorded in P/L net of sales tax.

But sometimes accountant of seller instead of passing above one entry, passes following wrong entries:
Entries
Dr. Cr.
Debtor 117,000
Sales 117,000

Sales tax expense 17,000

Sales tax payable 17,000

Page 2

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IAS-38 How to attempt theory question?

Solving Theory Questions

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Lecture # 1
1. Explained statement of changes in equity
2. Started Past paper Q.8
(Discussed all adjustments)

Lecture # 2
1. Completed Past paper Q.8

Lecture # 3
1. 2 handwritten pages were given explaining deferred tax adjustment in final account and issues
related to share issue
2. Started Past paper Q. 5 (Discussed first 3 adjustments)

Lecture # 4
1. Completed Past paper Q.5

Lecture # 5
Class work
1. 1 handwritten page was given explaining dividend and different aspects of statement of changes
in equity
2. Started following question

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Entries of sales tax and trade discount IAS 01: Final Accounts

Treatment of sales/trade discount

Example
Shopkeeper sold 10 items having market price of 2,000 each to customer at a discounted price of Rs.
1,800 due to bulk quantity purchase.

Entry
Dr. Cr.
Debtor (10 x 1,800) 18,000
Sales 18,000

Page 1

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6

{IFRS 08}
Operating
Segment
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CAF-07 IFRS 08: Operating Segment

Lecture 1

Classwork
Practice Q.2, 1

Homework
Practice Q.3, 4

Lecture 2

Classwork
Question Bank Q.1 and 2

Homework
Practice Q.5

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Description 1. Accounting policies 2. Errors 3. Changes in accounting

estimates (Management
judgements)
Definition These are the specific principles, Prior period errors are It is an adjustment of
bases, conventions, rules and omissions/misstatements  the carrying amount of
practices applied by an entity in for one or more prior an asset or a liability, or
preparing and presenting financial periods because of failure  the amount of periodic
statements. to use information that: consumption of an
Selection of accounting policy a) was available when asset,
Apply relevant IFRS. If no IFRS financial statements that results from the
than apply similar IFRS. If no were prepared; and assessment of the present
similar IFRS use Framework. b) could reasonably be status or expected future
Note: Accounting policy is not expected to have been benefits.
applied when effect is immaterial. obtained Note: Sometimes it is
Change in accounting policy difficult to distinguish
Permitted only if the change is: between accounting policy
 required by IFRS; or and changes in estimate. In
 Provide reliable and more such case it is treated as a
relevant financial information. change in estimate.
Examples 1. Inventory valued at FIFO or 1. effects of 1. bad debts;
weighted average method mathematical 2. NRV/impairment loss;
2. Historical cost or revaluation mistakes, 3. the useful lives of non-
model 2. mistakes in applying current assets and their
3. Accruals basis accounting policies, residual value;
4. Measurement of financial assets 3. oversights or 4. depreciation method
and liabilities misinterpretations of 5. warranty provisions.
facts, and 6. the fair value of
4. fraud. financial assets or
liabilities;
Treatment/ Retrospectively. (Past + current + Retrospectively Prospectively
Apply future years). (Past + current + future (current + future years)
change However if new standard guides years)
than follow this.
Impractica- Retrospective application might be impracticable because the
ble information for earlier period might not be available. In this case
a company must apply it from earliest period possible. This may
be the current period.
Disclosure: If retrospective application is impracticable, an
explanation of how change has been applied.
Disclosures 1. The title of the Standard 1. nature of error The nature and amount of a
2. nature of the change 2. the amount of the change in an accounting
3. A description of any adjustment to estimate that has an effect:
transitional provisions/ reason each line item in  in the current
why the new policy provides the financial period or
reliable/relevant information statements  in future periods
4. adjustment to each line item in 3. correction at start (if practicable)
the financial statements of previous year
5. correction at start of previous
year
Exception Applying revaluation model in IAS-
16 and IAS-38 is not a change in
accounting policy.

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Consolidation
{IFRS 3& 7}
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CAF-07 Consolidation

Lecture # 1
Class work
Solved past paper Q.7 of IAS-08
Practice Q. 1 to 2 of consolidation.
Lecture # 2
Class work
Practice Q. 3 to 6
Lecture # 3
Class work
Practice Q. 7
Home work
Practice Q. 8 to 9

Lecture # 4
Class work
Solved the Q.1 as below and also discussed handwritten page#1.

Question-1
P Ltd. acquired 2,100 shares of S Ltd. 5 years ago. Following are the balance sheets as at June 30, 2014:
P S
---------Rs---------
Non-current assets
Property, plant & equipment 109,000 78,000
Loan Receivable from S 20,000
Investments 36,000 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 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
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.
Home work
Not given

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CAF-07 Consolidation

Lecture # 5

Class work
Question-1
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 on acquisition date.
(iii) An impairment test has indicated that goodwill of S was impaired by 10% on 30 June 2014. There
was no impairment during the previous year.
(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.

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CAF-07 Consolidation

Home work
Question-1
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 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 goodwill of S was impaired by 10% on 31 December 2012.
There was no impairment during the previous years.
(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 (W-1) [8,000 + 4,200] = 12,200 – 1,220 10,980
188,980

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CAF-07 Consolidation

Lecture # 6

Class work

Question-1
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.
b. The non-controlling interest is measured at fair value. S share price was Rs. 40 on the acquisition
date. An impairment test has indicated that recoverable amount of goodwill was Rs. 11,000 on 31
December 2014.

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

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CAF-07 Consolidation

Home work
Question-1
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.
Answer-1
P 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

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CAF-07 Consolidation

Equity
Share capital 52,000
Share premium 5,000
Consolidated retained earnings (W-2) 97,889
Capital reserves (17,000 + (W-1) 8,000) 25,000
179,889
Non-controlling interest (W-2) 21,655
201,544
Current liabilities (23,000 + 6,000 ) 29,000
230,544
(W-1) Analysis of equity of Shehzad Ltd.
At the date of acquisition Total Parent NCI
(2,800/3,500);(700/3,500) 80% 20%
Share capital 35,000
Share premium 4,000
Retained earnings 8,000
Capital reserves 3,000
Revaluation surplus on land (14,000 – 10,000) 4,000
Revaluation surplus on plant 1,000
55,000 44,000 11,000

Paid for investment 45,000

Fair value of NCI {(3,500 x 20%) x 18} 12,600
Goodwill 1,000 1,600 2,600

Change in equity and reserves from acquisition till balance sheet date
Retained earnings (45,000 - 8,000) 37,000 29,600 7,400
Capital reserves (13,000 - 3,000) 10,000 8,000 2,000

(W-2) Calculation of CRE/NCI CRE NCI

Parent retained earnings 70,000
NCI: Fair value 12,600
Subsidiary post acquisition (W-1) 29,600 7,400
Subsidiary post acquisition capital reserves (W-1) 2,000
Less: Recording of dep. on Revaluation surplus from acq. till B/S date (160) (40)
(1,000/10 years x 2 years) = 200 in 80:20
Less: Reversal of profit on sale of stock by P (W-3) (333) -
Less Reversal of profit on -sale of stock by S (W-4) 923 in 80:20 (738) (185)
Less: Impairment of goodwill when NCI is at fair value (480) (120)
2,600 -2,000 = 600 in 80:20
97,889 21,655
(W-3) Sale of stock by P to S
Sold 5,000
Unsold 2,000
Unsold profit (2,000/120 x 20) 333
(W-4) 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
Class work
Question-1
Following information has been extracted from the financial statements of P Limited (PL) and S Limited
(SL) for the year ended 30 June 2016.
Assets P S Equity & Liabilities P S
Rs. in million Rs. in million
Fixed assets 250 540 Share capital (Rs. 10 each) 750 500
Accumulated depreciation (70) (70) Retained earnings 300 230
180 470 Capital reserves 40 28
Investment in S – at cost 350 - 1,090 758
Stock in trade 176 150 Creditors & other liabilities 75 63
Debtors 71 50
Cash and bank 388 151
1,165 821 1,165 821
Additional information:
(i) On 1 July 2014, P acquired 75% shares of S when S retained earnings were Rs. 70 million and
capital reserves were Rs. 9 million. On the acquisition date, fair value of S’s net assets was equal
to its book value except for the following:
 Land is overvalued by Rs. 2 million.
 Book value of a plant exceeded its fair value by Rs. 25 million. Remaining life
of plant at the time of acquisition is 5 years.
(ii) P values non-controlling interest on the date of acquisition at its fair value. S share price was Rs.
9 per share on acquisition date.
(iii) Inter-company sales of goods are invoiced at a margin of 30%. The relevant details are as under:
Rs. In
million
P inventory includes goods purchased from S 60
Debtors of S include receivables from P on 30 June 2016 15
Creditors of P include payable to S on 30 June 2016 12
The difference in balances is due to cash sent by P on 28.6.2016 but received by S on 2.7.2016.
Required:
Prepare a consolidated statement of financial position as at 30 June 2016 in accordance with the
requirements of International Financial Reporting Standards.

Homework
Question-1
P Ltd. acquired 70% shares of S Ltd on January 1, 2012 for Rs. 8,000.
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

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CAF-07 Consolidation

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 5,000 11,000
Current liabilities
Creditors 18,000 37,500
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. 5,000. This land had a fair value of Rs. 13,000
on acquisition date.
(ii) An office building whose book value exceeded its fair value by Rs. 4,000. The remaining
useful life of the office building on the acquisition date was 16 years.
(iii) S has not recognised internally generated customer list in its books. At date of
acquisition, the fair value of customer list was assessed at Rs. 4,500 and had a remaining
life of 5 years.
b. The non-controlling interest is measured at fair value. S share price was Rs. 20 on the acquisition
date.
c. During the year S delivered goods having sale price of Rs. Rs.10,000 to P. 20% of the goods were
included in the closing inventory of P. S earned a profit of 33.33% on cost.
d. Inter-company receivable/payables:
Receivable from P Payable to S as
as per books of S per books of P
As on December 31, 2014 1,000 800
P made a payment of Rs. 200 on 31 December 2014 by issuing a cheque. However, the cheque
was received by S on 2 January 2015.
Required:
Prepare consolidated Statement of financial position as at December 31, 2014.

Answer-1
P Ltd.
Consolidated Statement of Financial Position
as on December 31st , 2014
Assets Rs.
Non-current assets
Property, plant and equipment (70,500 + 60,500 + 8,000 - 4,000 + 750) 135,750
Intangibles (4,500 - 2,700) 1,800
Investments (33,500 - 8,000 + 5,000) 30,500
168,050
Current assets
Debtors (7,000 + 2,500 – 1,000) 33,500
Cash in transit 200
Inventories (14,000 + 20,000 – 500) 8,500
42,200
210,250

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CAF-07 SIC 32 Website Cost

Lecture 1

Classwork
Refer Notes and Question from Volume 2

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CAF-07 Consolidation

Lecture # 8

Class work
Question- 1
The following summarized statement of financial position pertain 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) 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 10 years.
(iii) 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 cash in transit.
(iv) 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.
(v) AL values non-controlling interest at the acquisition date at its fair value which was Rs. 60
million.

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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CAF-07 Consolidation

Home work
Question-1
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. Profit included in this sale was Rs.
1,000. Ponting still has worth Rs. 5,000 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. in million
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 cash in transit.

Required:
Prepare consolidated Statement of financial position as at June 30, 2015.

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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-4) 4,000 + 200) 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 - 500 (W-3) – 100 (W-6) - 15,000 + 3,000) 77,525
240,725
Equity and liabilities
Equity
Share capital 60,000
Share premium 10,000
Consolidated retained earnings (W-2) 63,000
Capital reserves 18,000
151,000
Non-controlling interest (W-2) 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-6) – 12,000) 54,025
240,725

(W-1) Analysis of equity of Stewart Ltd.

At the date of acquisition
Total Parent NCI
80% 20%
Share capital 35,000
Share premium 8,000
Retained earnings (W-5) 15,500
58,500 46,800 11,700

Paid for investment 50,000

Fair value of NCI (3,500 x 20%) = 700 shares x Rs 15/ share 10,500
Goodwill/(Bargain purchase) 3,200 (1,200) 2,000

Changes in equity from acquisition till balance sheet date

Retained earnings [27,000 – 15,500] 11,500 9,200 2,300

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CAF-07 Consolidation

Lecture # 9

Question-1
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
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
Following further information is available:

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CAF-07 Consolidation

(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) On 1st October, 2015 SL sold a plant having carrying value of Rs 45,000 to PL against cash
consideration of Rs 60,000. The plant had a remaining life of 6 years on the date of disposal.
(vi) At year end, goodwill is impaired by Rs. 2,000.

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

Question-3
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 Manhoos 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 FV of net assets at the date of
acquisition.

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

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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 – (W-3) 15,000 + 1,875] 153,675
Goodwill [5,400 - 2,000] 3,400
Investments (50,000 – (W-1) 45,000 + 5,000) 10,000
167,075
Current assets
Inventories (12,000 + 11,000) 23,000
Trade Debtors (11,000 + 12,000) 23,000
Dividend receivable (3,000 – 3,000) -
Cash (4,000 + 3,000) 7,000
Bank (3,000 + 5,000) 8,000
61,000
228,075
Equity and liabilities
Equity
Share capital 50,000
Share premium 5,000
Consolidated retained earnings (W-2) 90,205
Capital reserves (15,000 + 1,800(W-1)) 16,800
162,005
Non-controlling interest 33,070
195,075
Current liabilities
Trade Creditors (19,000 +12,000) 31,000
Dividend payable (5,000 – 3,000) 2,000
33,000
228,075
(W-1) Analysis of equity of Shuttar Ltd.
At the date of acquisition Total Parent NCI
60% 40%
Share capital 50,000
Share premium 5,000
Retained earnings 11,000
Capital reserves 4,000
Revaluation loss on plant (4,000)
66,000 39,600 26,400
Paid for investment (5,000 x 60% = 3,000 shares x Rs. 15) 45,000
Goodwill 5,400
Changes in equity from acquisition till balance sheet date
Retained earnings (42,000 – 11,000) 31,000 18,600 12,400
Capital reserves (7,000 - 4,000) 3,000 1,800 1,200

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(W-2) Calculation of Consolidated retained earnings

C.R.E N.C.I
Parent retained earnings 81,000
Add: Subsidiary post acquisition (W-1) 18,600 12,400
Add: NCI-Proportionate share 26,400
Add: Capital reserves 1,200
Add: Reversal of depreciation on revaluation loss 480 320
(4,000/5 year x 1 year) = 800 in 60:40
Less: Dividend declared by S – (50,000 x 10%) = 5,000 in 60:40 (3,000) (2,000)
Add: Dividend Income of P (50,000 x 10%) = 5,000 x 60% 3,000 -
Less: Reversal of profit on sale of fixed asset by S(W-3) (15,000 in 60:40) (9,000) (6,000)
Add: Reversal of Depreciation from date of sale till balance sheet date 1,125 750
(15,000/6 years x 9/12 years) = 1,875 in 60:40
Less: Impairment of goodwill- when NCI at proportionate basis (2,000)
90,205 33,070

(W-3)
Dr. Disposal account Cr.
Plant – BV 45,000
P/L (bal.) 15,000 Cash 60,000

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-2) 98,000
198,000
Non-controlling interest 16,900
214,900
Sundry payables (20,000 + 31,000 + 7,500 – 6,000) 52,500
267,400

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(W-1) Analysis of equity of Stewart Ltd.

At the date of acquisition Total Parent NCI
80% 20%
Share capital 50,000
Retained earnings 12,000
62,000 49,600 12,400

Paid for investment 60,000

Goodwill 10,400

Changes in equity from acquisition till balance sheet date

Retained earnings [42,000 – 12,000] 30,000 24,000 6,000

(W-2) Calculation of CRE and NCI C.R.E N.C.I

Parent retained Earnings 80,000
NCI – Proportionate share 12,400
Add: Subsidiary post acquisition profits 24,000 6,000
Less: Dividend declared by S – (50,000 x 15%) = 7,500 in 80:20 (6,000) (1,500)
Total 98,000 16,900

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CAF-07 Consolidation

Lecture # 10 (3 Hour Class)

Class work
1. Concept of acquisition cost
2. Calculation of retained earnings of S at acquisition date if they are missing
3. Calculation of receivable and payable for management services
4. Sale of fixed asset by S to P

Question-1
The statements of financial position of P and its subsidiary S as at 31 December 2016 are as follows:
Rs. in million
P S P S
Property, plant and equipment 3,065 1,190 Share capital (Rs. 10) 980 500
Investment in S 327 - Share premium 730 15
Retained earnings 3,150 210
Current assets 2,068 780 Long term borrowings 200 72
Current Liabilities 400 1,173
5,460 1,970 5,460 1,970
(i) P acquired 60% of the shares of S on 1 January 2016 against the following consideration:
 Issuance of 3 million shares of P
 Cash payment of Rs. 252 million which includes consultancy charges of Rs. 20 million and
legal expenses of Rs. 7 million.
The market value of each share of P and S on acquisition date was Rs. 25 and Rs. 12 respectively.
NCI is valued at fair value.
(ii) Net profit of companies is given below:
2016
-- Rs. in million --
P 105
S 180
(iii) S paid interim dividend of 5% for 2015 and interim dividend of 10% for year 2016.
(iv) The following table sets out those items whose fair value on the acquisition date was different
from then book value. These values have not been incorporated in S’s books of account.
Book value Fair value
Rs. in million
Inventory 12 6
Provision for bad debts (15) (24)
(v) On 1 April 2016, a contract for management services was also signed under which P would
provide various management services to S at an annual fee of Rs. 24 million. The payment would
be made in two equal instalments payable in arrears on 1 April and 1 October.
(vi) On 1st April, 2016 S sold a plant having carrying value of Rs 30 million to P for Rs. 42 million.
The plant had a remaining useful life of 6 years on the date of disposal. No payment has yet been
made by P.

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

Home work
No Home Work

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CAF-07 Consolidation

Question-2
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-3
P acquired 80% of S 3 years ago.
Extracts of the income statements for the year to 31 December, 2001 are as follows.
P S
Rs. Rs.
Revenue 800,000 420,000
Cost of sales (300,000) (220,000)
Gross profit 500,000 200,000
Admin expenses (173,000) (163,000)
Other income 13,000 -
Profit before tax 340,000 37,000
Other information:
1. During the year, P sold goods for Rs. 65,000 to S at a mark-up of 20%. At year end, S inventory still
includes goods of Rs. 30,000 purchased from P.
2. Goodwill on acquisition was Rs. 200,000. The annual impairment test on goodwill has shown it to
have a recoverable amount of only Rs. 175,000.

Required:
Prepare consolidated statement of comprehensive income for the year ending December 31, 2001.

Question-4
P bought 75% of S on 1Sep 2010. 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 year ending 31.12. 2010.

Home work
 Practice Q.31

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CAF-07 Consolidation

Lecture # 11

Classwork
Past paper Q.2

Homework:
Question
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
Share premium 150 60
Retained earnings as at 1 January 2015 265 179
Current liabilities 115 105
Property, plant and equipment 390 350
Cost of investment 500
Stock-in-trade 125 115
Trade receivables 140 125
Cash and bank 105 103
1,965 1,965 1,239 1,239
Additional information:
(i) On 1 Jan 2015, PL acquired 80% shares of SL. SL has not recognised the value of brand in its
books of account. At the date of acquisition, the fair value of brand was assessed at Rs. 45
million. The remaining useful life of the brand was estimated as 15 years.
(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

SL settled the inter-company balance as on 31 December 2015 by issuing a cheque of Rs. 30

million. However, the cheque was received by PL on 1 January 2016.
(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.

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IAS 8: Accounting policies, changes in accounting estimates and errors

Description 1. Accounting policies 2. Errors 3. Changes in accounting

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(W-1) Analysis of Equity of S

At acquisition date Total Parent NCI
Share capital 250 80% 20%
Share premium 60
Retained earnings 179
Brand 45
534 427.2 106.8
Paid for Investment 500
Goodwill 72.8
Change in equity from acquisition till balance sheet date
R.E ((W-4) 278 – 179) 99 79.2 19.8

(W-2) Calculation of CRE/NCI CRE NCI

Parent’s retained earnings closing (W-4) 395 -
NCI – proportionate share - 106.8
Subsidiary post acquisition profits 79.2 19.8
Less: Amortisation on brand (45/15) = 3 in 80:20 (2.4) (0.6)
Less: Reversal of profit on stock sold by P (20/125 x 25) (4) -
Less: Reversal of profit on stock sold by S (5/100 x 20) = 1 in 80:20 (0.8) (0.2)
467 125.8
(W-3) Calculation of NCI figure in profit and loss
Rs in “million”
Profit of SL as per profit and loss account 99
Less: Recording of amortization on brand of S (3)
Less: Reversal of profit on stock sold by S (1)
Total 95
NCI share of profit (95 x 20%) 19

(W-4) Calculation of profits and retained earnings

PL SL
Opening Retained Earning – 01.01.15 265 179
Profit after tax (835-525-115-65) : (645-396-102-48) 130 99
Less: Dividend (if recorded by the accountant) - -
closing Retained Earning – 31.12.15 395 278

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Lecture # 12
Classwork
Question-1
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 - 5,177 - 3,996
Cost of sales 3,255 - 2,448 -
Operating expenses 713 - 636 -
Other income - 350 - 18
Tax expense 403 - 288 -
Share capital (Rs. 10 each) - 3,720 - 1,600
Share premium - 1,430 - 322
Retained earnings as at 1 January 2018 - 2,293 - 516
Current liabilities 713 - 651
Property, plant and equipment 5,418 - 1,934 -
Investments 1,600 - - -
Loan to BL's Director 10 - - -
Current assets 2,284 - 1,797 -
13,683 13,683 7,103 7,103
Additional information:
(i) AL acquired 96 million shares of BL on 1 May 2018 at Rs. 15 per share.
(ii) AL measures the non-controlling interest at fair value. On the date of acquisition, the market price
of BL's shares was Rs. 14 per share.
(iii) On acquisition date, carrying values of BL's net assets were equal to fair value except the
following:
 A building whose fair value and value-in-use were Rs. 390 million and Rs. 520 million
respectively as against carrying value of Rs. 480 million. The group follows cost model for
subsequent measurement of PPE. The remaining life of building on acquisition date was 20
years. Fair value of the building has increased to Rs. 440 million at 31 December 2018.
 A brand which had not been recognized by BL. The fair value of the brand was assessed at
Rs. 162 million. It is estimated that benefit would be obtained from it for the next 6 years.
(iv) On 1 July 2018 AL sold an equipment to BL for Rs. 250 million at a gain of Rs. 20 million. BL
has charged depreciation of Rs. 12.5 million on this equipment.
(v) Since acquisition in each month, BL sold goods costing Rs. 40 million to AL at cost plus 20%. At
year end, 75% of the goods purchased in December were included in stock of AL.
(vi) Total management fee charged by AL to BL since acquisition amounted to Rs. 16 million. BL has
not recorded this transaction.
(vii) BL declared interim dividend of Re. 0.50 per share in Dec. 2018. It has not been accounted for.
(viii) 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. (15)
 Consolidated statement of financial position as at 31 December 2018. (10)

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CAF-07 Consolidation

Home work
Question-1
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.

Answer
P Ltd
Consolidated Statement of Comprehensive Income
for the year ended December 31, 2015

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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 - 0.63 - 50 + 2.5 - 30 + 1.2] (1,633.07)
Gross profit 1,181.93
Operating expenses (230 + 204 x 10/12 - 8.33 + 25) (416.67)
Other income (150 + 111 - 15) 246
Profit before taxation 1,011.26
Less: Taxation (130 + 96 x 10/12) (210)
Profit after taxation 801.26
Non-controlling interest (W-3) (29.43)
Share of parents owners 771.83
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 -15 + 0.63) 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-2) 1,301.84
2,801.84
Non-controlling interest (W-2) 159.42
2,961.26
Current liabilities (230 + 210 + 100 - 80) 460
3,421.26
(W-1) Analysis of Equity at the date of acquisition
At acquisition date Total Parent NCI Total
80% 20%
Share capital 500
Share premium 120
Retained earnings (358 + 198 x 2/12) 391
Less: Revaluation loss –Office Building (100)
Less: Revaluation gain –Manufacturing plant 150
1,061 848.8 212.2
Paid for Investment (500 + 12 x 25) 800
Fair value of NCI (50 m shares x 20% =10 m shares x Rs.15 150
Goodwill/(Negative goodwill) (48.8) (62.2) (111)
Change in equity from acquisition till balance sheet date
R.E ((W-4) 556 – 391) 165 132 33

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CAF-07 Consolidation

Lecture # 14

Class work

Question-1
P bought 60% of S on 1 August 2015. The income statements for the year ended 30 June 2016 are below:
P S
Rs. Rs.
Revenue 500 300
Cost of sales (240) (100)
Gross profit 260 200
Other income 190 -
Administrative expenses (40) (20)
Profit 410 180
Following balance sheet is of P and S as on 30 June 2016.
Assets P S Equity & Liabilities P S
Fixed assets 700 600 Share capital (Rs. 10 each) 750 500
Investment in S – at cost 200 Retained earnings 800 430
Loan payable to P 10
current assets 725 393 Current liabilities 75 53
1,625 993 1625 993

The following information is relevant:

1. Investment in S include loan provided to S.
2. The fair values of S assets were equal to their books values with the exception of its plant, which had
a fair value of Rs. 200 less of its book value at the date of acquisition. The remaining life of plant is
10 years.
3. On 1 October 2015, P sold a machine to S for Rs. 24. The machine had been purchased on 1 October
2013 for Rs. 26. On the date of acquisition the machine was assessed as having a useful life of ten
years and that estimate has not changed. Gain on disposal was erroneously credited to sales account.
4. Other inter-company transactions during the year 2016 were as follows:
Sales Included in buyer’s Profit %
closing stock-in-trade
------------ Rs. ------------
S to P 60 20 25% of cost
5. S declared a final dividend of Rs. 3 per share in September 2015.

Required:
Prepare a consolidated statement of profit or loss and statement of financial position for P for the year to
30 June, 2016.

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Home work
Question
On 1 July, 2002 Hillusion acquired 80% of the ordinary share capital of Skeptik at a cost of
Rs. 10,280,000. The summarized draft financial statements of both companies are:
Statement of profit or loss for the year ended 31 March, 2003.
Hillusion Skeptik
Rs. ‘000’ Rs. ‘000’
Sales revenue 60,000 24,000
Cost of sales (42,000) (20,000)
Gross profit 18,000 4,000
Operating expenses (6,500) (200)
Other income 500 -
Loan interest received (paid) 75 (200)
Profit before tax 12,075 3,600
Income tax expense (3,000) (600)
Profit for the year 9,075 3,000
Statements of financial position as at 31 March, 2003
Assets
Tangible non-current Assets 19,320 8,000
Investments 11,280 Nil
30,600 8,000
Current assets 15,000 8,000
Total assets 45,600 16,000
Equity and liabilities
Equity
Ordinary shares of Rs. 1 each 10,000 2,000
Retained earnings 25,600 8,400
35,600 10,400
Non-current liabilities
10% loan notes Nil 2,000
Current liabilities 10,000 3,600
Total equity and liabilities 45,600 16,000
The following information is relevant:
(i) The fair values of Skeptik’s assets were equal to their books values with the exception of its plant,
which had a fair value of Rs. 3.2 million excess of its book value at the date of acquisition. The
remaining life of all of Skeptik’s plant at the date of its acquisition was four years.
(ii) In the post-acquisition period Hillusion sold goods to Skeptik at a price of Rs. 12 million. These
goods had cost Hillusion Rs. 9 million. During the year Skeptik had sold Rs. 10 million (at cost to
Skeptik) of these goods for Rs. 15 million.
(iii) Revenues and profits should be deemed to accrue evenly throughout the year.
(iv) The current accounts of the two companies were reconciled at the year-end with Skeptik owing
Hillusion Rs. 750,000.
(v) The goodwill was reviewed for impairment at the end of the reporting period and had suffered an
impairment loss of Rs. 300,000, which is to be treated as an operating expense.
(vi) S paid interim dividend in January 2003 @ 20%.
(vii) It is the group policy to value the non-controlling interest at acquisition at fair value. The
directors valued the non-controlling interest at Rs. 2.5 million at the date of acquisition.
Required:

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CAF-07 Consolidation

(W-1) Analysis of equity of Skeptik Ltd. Rs. in ‘000’

At the date of acquisition Total Parent NCI
80% 20%
Share capital 2,000
Retained earnings (5,800 + 3,000 x 3/12) 6,550
Revaluation surplus 3,200
11,750 9,400 2,350
Paid for investment 10,280
Fair value of NCI 2,500
Goodwill 880 150
Change in equity from acquisition till end of the year
Retained earnings (8,400 – 6,550) 1,850 1,480 370

(W-2) Consolidated retained earnings and NCI

C.R.E NCI
P’s Retained earning closing 25,600
Fair value of NCI - 2,500
Subsidiary post acquisition profits 1,480 370
Less: Recording of depreciation on Rev. surplus (3,200/4 x 9/12) =600 in 80:20 (480) (120)
Less: Reversal of profit on stock sold by P (W-4) (500) -
Less: Recording of impairment loss on goodwill (300 in 80:20) (240) (60)
25,860 2,690

(W-3) Calculation of NCI figure in profit and loss account

Profit of S as per profit and loss account (3,000 x 9/12) 2,250
Less: Recording of depreciation on revaluation surplus of asset (600)
Less: Impairment loss of goodwill if NCI is carried at fair value (300)
Total 1,350
Share of NCI (1,350 x 20%) 270

(W-4) 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

(W-5) 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

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CAF-07 Consolidation

Lecture # 15
Question-1
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) In the post-acquisition period 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
Streep) 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.

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

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Consolidation
{IFRS 3& 7}
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CAF-07 Consolidation

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* – 15,000 + 1,000 (W-4)] (147,000)
Gross Profit 165,000
Add: Other income [5,000 – (50,000 x 12% x 70%)] 800
Less: Admin expenses (66,000+75,500 - 1,000** + 500***) (141,000)
Profit 24,800
Non-controlling interest (W-3) (3,150)
Share of parent owners 21,650

* Extra depreciation on revaluation surplus of plant (15,000/5) = 3,000

** Reversal of extra depreciation on revaluation surplus of building (10,000/10) = 1,000
*** Impairment loss on goodwill during current year

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) 146,000
Investments (73,000 + 42,500 – 50,000) 65,500
Good will [(W-1) 5,900 – 1,500] 4,400
215,900
Current assets (54,000 + 60,500 – 1,000) 113,500
329,400
Equity and liabilities
Equity
Share capital 74,000
Consolidated retained earnings (W-2) 49,750
123,750
Non-controlling interest (W-2) 24,150
147,900

Current liabilities (76,000 + 105,500) 181,500

329,400

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CAF-07 Consolidation

(W-l) Analysis of equity of S Ltd.

At the date of acquisition Total Parent NCI
70% 30%
Share capital 50,000
Retained earnings 8,000
Revaluation surplus on Plant 15,000
Revaluation loss on Office building (10,000)
Fair value of S net assets 63,000 44,100 18,900
Paid for investment 50,000
Good will 5,900
Change in equity from acquisition till end of the year
Retained earnings (32,500 - 8,000) 24,500 17,150 7,350

(W-2) Consolidated retained earning and NCI

C.R.E N.C.I
Parent's retained earnings closing 39,000
Proportionate share of NCI (W-1) - 18,900
Subsidiary post acquisition till end of the year (W-1) 17,150 7,350
Less: Recording of depreciation on Rev. surplus on plant (6,300) (2,700)
(15,000/5 x 3) = 9,000 in 70:30
Add: Reversal of depreciation on Rev. loss on office building 2,100 900
(10,000/10 x 3) = 3,000 in 70:30
Less: Impairment loss on goodwill (1,000 + 500) (1,500)
Less: Reversal of profit on stock sold by S (W-4) = 1,000 in 70:30 (700) (300)
49,750 24,150

(W-3) Calculation of NCI figure in CSOCI

Subsidiary Profit for the year 13,500
Less: Recording of depreciation on revaluation surplus of plant (15,000 / 5) (3,000)
Add: Reversal of depreciation on revaluation surplus of building (10,000 / 10) 1,000
Less: Reversal of profit on stock sold by S (W-4) (1,000)
Total 10,500
Share on NCI (10,500 x 30%) 3,150

(W-4) Sale of stock by S to P

Sold 15,000
Unsold 5,000
Profit on unsold stock (5,000/125 x 25) 1,000

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CAF-07 Consolidation

Lecture # 16
Question-1
Statements of profit or loss for the year ended 31 December 2018
P S
Rs. Rs.
Sales 100 80
Admin expenses (30) (25)
Add: Other Income 20 0
Profit 90 55
Statement of changes in equity for the year end 31 December 2018 (extract)
Retained earnings brought forward - 1.1.18 15 30
Profit for the financial year 90 55
- Dividend – Final 17 (6) (10)
Retained earnings Closing – 31.12.18 99 75
Additional information:
1. P acquired 90% of the shares in S on 1st January, 2013 when the balance on the retained earnings
of S was Rs.5.
2. In 2018 goodwill is impaired by Rs. 10. NCI is measured at fair value.
Required:
Prepare consolidated profit and loss for the year ended 31.12.18 and show what figure of CRE will appear
in CSOFP as on 31.12.18.
Question-2
The following balances are extracted from the records of Present Limited (PL) and Future Limited (FL)
for the year ended 30 June 2017:
PL FL
Debit Credit Debit Credit
----------------Rs. in million----------------
Sales 2,060 1,524
Cost of sales and admin expenses 1,650 1,071
Investment income 190 50
Share capital (Rs. 10 each) 3,500 2,600
Retained earnings as on 30 June 2017 1,996 704
Additional information:
(i) PL acquired 65% shares of FL on 1 September 2016 against the following consideration:
 Cash payment of Rs. 900 million.
 Issuance of shares having nominal value of Rs. 1,000 million.
The fair value of each share of PL and FL on acquisition date was Rs. 16 and Rs. 12 respectively.
Retained earnings of PL and FL on the acquisition date were Rs. 1,671 million and Rs. 506.5
million respectively.
(ii) The incomes and expenses of FL had accrued evenly during the year except investment income.
The investment income is exempt from tax and had been recognised in August 2016 and received
in September 2016.
(iii) S paid interim cash dividend at the rate of 5% in May 2017.
(iv) PL measures the non-controlling interest at proportionate share of net assets.
Required:
(a) Prepare consolidated statement of profit or loss for the year ended 30 June 2017. (04)
(b) Compute CRE and NCI as would appear in the CSOFP as at 30 June 2017. (04)
Homework: Practice Question Q.46

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CAF-07 Consolidation

Lecture # 5

Following relevant information is available:

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

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CAF-07 Consolidation

Lecture # 6

Class work

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

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CAF-07 Consolidation

Dividend of S
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 60
both Div. income 60

2. Div. 100
Div. payable 100

3. Cancel receivable/
payable with Rs. 60
2. Recorded by Div. receivable 60 Div. 100 Cancel receivable/
both Div. income 60 Div. payable 100 payable with Rs. 60

3. Recorded by P Div. receivable 60 - 1. Div. 100

but not recorded Div. income 60 Div. payable 100
by S
2. Cancel receivable/
payable with Rs. 60
4. Recorded by S - Div. 100 1. Div. receivable 60
but not recorded Div. payable 100 Div. income 60
by P
2. Cancel receivable/
payable with Rs. 60
B. PAID
Entries already passed Action required
P books S books
Cash 60 Div. 100 Nothing
Div. income 60 Cash 100

Dividend of P
Sr. No. Scenario Action required
1. Announced and recorded/Paid Do nothing
2. Announced and not recorded Dividend (CRE) 100
Div. payable 100

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10
{IAS 28}
Investment in
Associates

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CAF-07 IAS 28: Associates

Lecture-1
Class work
Question-1
Following are the balance sheets as at December 31, 2018:
PL SL AL
---------------------Rs.-----------------------
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.

Home work
Question-2
The draft statements of financial position as at 31 December 2016 of three companies are set out below.
Helium Sulphur Arsenic
-----------Rupees in ‘000’-----------
Assets
Non-current assets
Property, plant and equipment 400 100 160
Investments:
- shares in Sulphur (60%) 75 - -
- shares in Arsenic (30%) 30 - -

Current assets 445 160 80

950 260 240
Equity and liabilities
Share capital 100 30 60
Retained earnings 650 180 100
Non-current loans 200 50 80
950 260 240
The reserves of Sulphur and Arsenic when the investments were acquired were Rs. 70,000 and Rs. 20,000
respectively
Required
Prepare the consolidated statement of financial position as at 31 December 2016.

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CAF-07 IAS 28: Associates

Answer-2
Helium Limited
Consolidated Statement of Financial Position
As on December 31, 2016
Rs. in ‘000’
Assets
Non-current assets
Property, plant and equipment (400 + 100) 500
Good will (W-1) 15
Investment in Associates (W-5) 54
569
Current assets (445 + 160) 605
1,174
Equity and liabilities
Equity
Share capital 100
Consolidated retained earnings (W-2) 740
840
Non-controlling interest (W-2) 84
924
Non-current liabilities
Long term borrowings (200 + 50) 250
1,174

(W-1) Analysis of equity of Subsidiary

At the date of acquisition Total Parent NCI
60% 40%
Share capital 30
Retained earnings 70
100 60 40
Paid for investment 75
Goodwill 15
Change in equity from acquisition till balance sheet date
Retained earnings (180 - 70) 110 66 44

(W-2) Calculation of CRE/NCI CRE NCI

Parent's retained earnings closing 650 -
NCI – Proportionate Share (W-1) - 40
Subsidiary post acquisition profits till end of the year (W-1) 66 44
Associate post acquisition profits till end of the year (W-5) 24 -
740 84

(W-5) Investment in Associate

Investment at Cost 30
Change in retained earnings from acquisition till B/S date [(100 - 20) x 30%] 24
Investment at Reporting Date 54

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CAF-07 IAS-28: Associates

Lecture 2
Question-1
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) PL values non-controlling interest at the acquisition date at proportionate share.
(iv) 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.
Home work
Question-2
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

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CAF-07 IAS-28: Associates

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:
Rs.
Receivables from HL on 31 March 2016 as per SL’s books 19
Payable to SL on 31 March 2016 as per HL’s books 15
Difference is due to a cheque of Rs. 4 million issued by HL which was received by SL on 2 April
2016.
v) Anogo Ltd is to be treated as an associated company of Hamachi Ltd.
vi) 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.

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CAF-07 IAS-28: Associates

Answer-2
Hamachi Limited
Consolidated Statement of Financial Position
As on March 31, 2016
Rs. in ‘000’
Assets
Non-current assets
Property, plant and equipment (8,050 + 3,600 + 120) 11,770
Good will 1,332
Investment
- In Associates (W-3) 649.3
- Others (4,000 + 910 - 3,240 (W-1) - 630 (W-3) ) 1,040
1,689.3
Current assets
Inventory (830 + 340 – 6.9 – 1) 1,162.1
Accounts receivable (520 + 290 - 19) 791
Bank (including in transit) (240 + 0 + 4) 244
2,197.1
16,988.4
Equity and liabilities
Equity
Share capital 5,000
Consolidated retained earnings (W-2) 8,862.1
13,862.1
Non-controlling interest (W-2) 361.3
14,223.4
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
16,988.4

(W-1) Analysis of equity of Subsidiary

At the date of acquisition Total Parent NCI
90% 10%
Share capital 1,200
Retained earnings 800
Land - Revaluation Surplus 120
2,120 1,908 212
Paid for investment (1,200 x 90% = 1,080 x 3) 3,240
Goodwill 1,332
Change in equity from acquisition till balance sheet date
R.E - Subsidiary (2,300 - 800) 1,500 1,350 150

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CAF-07 IAS-28: Associates

(W-2) Calculation of CRE/NCI CRE NCI

Hamachi own retained earnings 7,500 -
NCI – Proportionate Share - 212
Add: Subsidiary post acquisition profits from acquisition till B/S date 1,350 150
Add: Associate’s Post Acquisition profits (W-3) 240 -
Less: Unrealised profit share on sale of stock by S to P (W-4) 6.9 in 90:10 (6.2) (0.7)
Less: Unrealised profit share on sale of stock by P to A (W-5) (3.7) -
Less: Unrealised profit share on sale of stock by A to P (W-6) (1)
Less: Impairment of Investment in Associated Company (217) -
8,862.1 361.3
(W-3) Investment in Associates
Investment at Cost (600 x 30% = 180 x Rs. 3.5 per share ) 630
Change in retained earnings from acquisition till B/S date (1,400 – 600) x 30% 240
Less: Unrealised profits on sale of Inventory (W-5) (3.7)
Less: Impairment loss on investment (217)
Investment at Reporting Date 649.3

(W-4) Stock sold by S to P

Sold stock 50
Unsold stock 24
Profit on unsold stock (24 /140 x 40) 6.9

(W-5) Stock sold by P to A

Sold stock 65
Unsold stock 43
Profit on unsold stock (43 /140 x 40) 12.3
P’s Share (12.3 x 30%) 3.7

(W-6) Stock sold by A to P

Sold stock 40
Unsold stock 12
Profit on unsold stock (12 /140 x 40) 3.4
P’s Share (3.4 x 30%) 1.0

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CAF-07 IAS-28: Associates

Lecture 3

Question-1
Below are the statements of profit or loss for P, S and A for the year ended 30 September 2018.
P S A

Revenue 10,000 4,500 3,000

Cost of Sales (4,500) (1,500) (1,400)
Other Income 500 200 500
Operating expenses (2,750) (1,600) (1,050)
Finance Cost (750) (100) (50)
Profit before tax 2,500 1,500 1,000
Income tax (700) (500) (250)
Profit after taxation 1,800 1,000 750

Other information:
i) P acquired 80% of S several years ago.
ii) P acquired 30% of equity share capital of A on 1 October 2016.
iii) During the year S sold goods to P for Rs. 500 at a profit margin of 30%. At the year end, P still held
one third of these goods in inventory.
iv) Goodwill is deemed to be impaired by Rs. 650. NCI is measured at fair value.
v) P provided loan of Rs. 500 to S some years back. Interest charged is 10%.
vi) During the year P sold goods to A for Rs. 1,000. At the year end, A still held one quarter of these
goods in inventory and profit element on unsold stock is Rs. 200.
vii) During the year A sold goods to P for Rs. 1,200. At the year end, P still held 50% of these goods in
inventory. Goods were sold by A at a mark-up of 20%.
viii) At 30 September 2018, it was determined that the investment in the associate was impaired by Rs.
150 of which Rs. 50 relates to the current year.
ix) Included in other income of P is its share of dividend received from A. A announced an interim
dividend of Rs. 200 on 30 June 2018 for all its shareholders.

Required:
Prepare a consolidated statement of profit or loss for P for the year ended 30 September 2018.

Question-2
The statements of comprehensive income of the three companies at 30 June 2016 are shown below:
P Ltd S Ltd A Ltd
Revenue 12,614 6,160 8,640
Cost of sales and Operating expenses (11,318) (5,524) (7,614)
Profit before tax 1,296 636 1,026
Income tax (621) (275) (432)
Profit after taxation 675 361 594
The following information is relevant
i) P Ltd acquired 80% of S shares on 1 October 2015 and 30% of A Ltd’s shares on 1 April 2016.
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 30 June 2016.

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CAF-07 IAS-28: Associates

Homework
Question-1
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 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
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
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.

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CAF-07 IAS-28: Associates

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 + 0.75(W-6)) (220.75)
Gross Profit 234.25
Operating expenses (50 + 15 + 3) (68)
Other Income (100 + 25 – * 45) 80
Share of profit from Associate (W-3A) 3.4
Profit before taxation 249.65
Less: Taxation (50 + 20) (70)
Profit after taxation 179.65
Less: Non-controlling interest (W-3) (2.2)
Share of parent owners 177.45
*150 x 30% = 45

(W-3) Calculation of NCI figure in profit and loss:

Rs. in ‘000’
Profit 30
Unrealized profit on sale of stock by S to P (5)
Impairment of Goodwill –NCI at F.V (3)
22
NCI share of profit [22 x 10%] 2.2

(W-3A) 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-5) (0.6)
Less: Impairment loss on Investment (2)
3.4

(W-4) Sale of Stock by S to P

Sold stock 30
Unsold stock X
Profit on unsold stock 5

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CAF-07 IAS-28: Associates

(W-5) 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-6) 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

Answer-2
P Ltd
Consolidated Statement of Profit and Loss
For the year ended December 31, 2018

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-3A) 300
Profit before tax 5,383
Less: Taxation (1,000 + 750 x 10/12) (1,625)
Profit after taxation 3,758
Less: Non-controlling interest share of profit (W-1) (583)
Share of parent owners 3,175

(W-3) Calculation of NCI figure in profit and loss

Profit of S as per profit and loss account (1,750 x 10/12) 1,458
Figure of NCI to be posted in consolidated statement of profit and loss (1,458 x 40%) 583

(W-3A) 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

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CAF-07 IAS 28: Investment in Associates

Lecture # 4
Question-1
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
Additional information:
a) PL acquired the following non-current investments:
i) 320 million equity shares in SL on 01 July 2017, in a share exchange of 2 shares in PL
for every 5 shares acquired in S, plus Rs. 125 million in cash. The market price of shares
of PL at the date of the acquisition was Rs. 5 per share. Cash consideration has been
correctly recorded by PL however no adjustment has been made against share exchange.
ii) 55 mill. equity shares in AL, on 01 April 2018, for cash consideration of Rs. 220 million.
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.
Required: Prepare the CSOFP and the CSOCI for the year ended June 30, 2018 for the PL Group.

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CAF-07 Consolidation

Lecture # 9

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CAF-07 Consolidation

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

Sundry payables 20,000 31,000

200,000 123,000

Following further information is available:

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

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CAF-07 Consolidation

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CAF-07 IAS 28: Investment in Associates

(W-3) Calculation of NCI figure in profit and loss:

Rs. in million
Profit 616
Dep on Revaluation Surplus (100/10 ) (10)
Reversal of profit on stock (42)
Impairment of Goodwill –NCI at F.V (20)
544
NCI share of profit (544 x 20%) 109

(W-3A) Calculation of share of profit from associate

Share of Profit of A as per P/L account (418 x 6/12) x 25% 18.5
Less: P’s share of unrealized profit on sale of stock by A to P (W-8) (7.5)
Less: Impairment loss on investment (2)
9
(W-4) Calculation of profits and retained earnings
BL ML ZL
Opening Retained Earning – 01.07.17 (Bal.) 580 160 213
Profit after tax 790 616 148
Less: Dividend (if recorded by the accountant) - - -
closing Retained Earning – 30.06.18 1,370 776 361
(W-5) Investment in Associates
Investment at Cost 203
Share of post acq. Profit till end of the year (361 – *287) x 25% 18.5
Less: Reversal of profit on sale of stock by P (W-7) (6)
Less: Impairment loss (2)
Investment at Reporting Date / Balance sheet date 213.5
* (213 + 148 x 6/12) = 287

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

Sold stock 1,300
Unsold stock 140
Profit on unsold stock (140 /100 x 30) 42

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

Sold stock 1,000
Unsold stock (1,000 x 10%) 100
Profit on unsold stock (100 /100 x 25) 25
Share of P (25 x 25%) 6

(W-8) Sale of Stock by Associate to P

Sold stock 1,500
Unsold stock (1,500 x 1/10) 150
Profit on unsold stock (150/100 x 20) 30
Share of P (30 x 25%) 7.5

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CAF-07 Consolidation

(W-1) Analysis of equity of Stewart Ltd.

At the date of acquisition Total Parent NCI
80% 20%
Share capital 50,000
Retained earnings 12,000
62,000 49,600 12,400

Paid for investment 60,000

Goodwill 10,400

Changes in equity from acquisition till balance sheet date

Retained earnings [42,000 – 12,000] 30,000 24,000 6,000

(W-2) Calculation of CRE and NCI C.R.E N.C.I

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Self-test Questions: Consolidation & IAS 28 CAF-07

Question-1
Papilla acquired 70% of Satago three years ago, when Satago’s retained earnings were Rs.430,000.
The Financial Statements of each company for the year ended 31 March 20X7 are as follows:
Statements of financial position as at 31 March 20X7
P S
Rs.000 Rs.000
Non-current assets
Property, plant and equipment 900 400
Investment in S at cost 700 -
Current assets 300 600
1,900 1,000

Share capital (Rs.1) 200 150

Share premium 50
Retained earnings 1,350 700
1,600 850
Non-current liabilities 100 90
Current liabilities 200 60
1,900 1,000
Statements of profit or loss for the year ended 31 March 20X7
P S
Rs.000 Rs.000
Revenue 1,000 260
Cost of Sale (750) (80)
Gross profit 250 180
Operating expenses (60) (35)
Profit from operations 190 145
Finance costs (25) (15)
Other Income 20 -
Profit before tax 185 130
Tax (100) (30)
Profit for the year 85 100
You are provided with the following additional information:
(i) Satago had plant in its Statement of Financial Position at the date of acquisition with a carrying
amount of Rs.100,000 but a fair value of Rs.120,000. The plant had a remaining life of 10 years
at acquisition. Depreciation is charged to cost of sales.
(ii) The Papilla group values the non-controlling interests at fair value. The fair value of the non-
controlling interests at the date of acquisition was Rs.250,000. Goodwill has been impaired by a
total of 30% of its value at the reporting date, of which one third related to the current year.
(iii) At the start of the year Papilla transferred a machine to Satago for Rs.15,000. The asset had a
remaining useful economic life of 3 years at the date of transfer. It had a carrying amount of
Rs.12,000 in the books of Papilla at the date of transfer.
(iv) During the year Satago sold some goods to Papilla for Rs.60,000 at a mark-up of 20%. 40% of
the goods remained unsold at the year- end. At the year-end Satago’s books showed a receivables
balance of Rs.6,000 as being due from Papilla. This disagreed with the payables balance of
Rs.1,000 in Papilla’s books due to Papilla having sent a cheque to Satago shortly before the year
end which Satago had not yet received.

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Self-test Questions: Consolidation & IAS 28 CAF-07

(v) Satago paid a dividend of Rs.20,000 on 1 March 20X7.

Required:
Prepare the consolidated statement of financial position and consolidated statement of profit or loss for
the year ended 31 March 20X7.

Question-2
On 1 May 20X7 Karl bought 60% of Susan paying Rs.76,000 cash. The summarised Statements of
Financial Position for the two companies as at 30 November 20X7 are:
Statement of financial position
Karl Susan
Rs. Rs.
Property, plant & equipment 138,000 115,000
Investments 98,000 -
Inventory 15,000 17,000
Receivables 19,000 20,000
Cash 2,000 -
272,000 152,000
Share capital 50,000 40,000
Retained earnings 189,000 69,000
239,000 109,000
Non-current liabilities
8% Loan notes. - 20,000
Current liabilities 33,000 23,000
272,000 152,000

The following information is relevant:

(i) The inventory of Karl includes Rs.8,000 of goods purchased for cash from Susan at cost plus
25%.
(ii) On 1 June 20X7 Karl transferred an item of plant to Susan for Rs.15,000. Its carrying amount at
that date was Rs.10,000. The asset had a remaining useful economic life of 5 years.
(iii) The Karl Group values the non-controlling interest using the fair value method. At the date of
acquisition the fair value of the 40% non-controlling interest was Rs.50,000.
(iv) An impairment loss of Rs.1,000 is to be charged against goodwill at the year-end.
(v) Susan earned a profit of Rs.9,000 in the year ended 30 November 20X7.
(vi) The loan note in Susan’s books represents money borrowed from Karl on 30 November 20X7.
(vii) Included in Karl’s receivables is Rs.4,000 relating to inventory sold to Susan during the year.
Susan issued a cheque for Rs.2,500 and sent it to Karl on 29 November 20X7. Karl did not
receive this cheque until 4 December 20X7.

Required:
Prepare the consolidated Statement of Financial Position as at 30 November 20X7.

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Self-test Questions: Consolidation & IAS 28 CAF-07

Question-3
Hosterling purchased on 1 October 2003 80% of the issued share capital of Sunlee. The cost of
investment was Rs. 20,000.
The summarised income statements for the 2 companies for the year ended 30 September 2006 are:
Hosterling Sunlee
Revenue 105,000 62,000
Cost of sales (68,000) (36,500)
Gross profit/(loss) 37,000 25,500
Other income (note (i)) 400 nil
Distribution costs (4,000) (2,000)
Administrative expenses (7,500) (7,000)
Finance costs (1,200) (900)
Profit/(loss) before tax 24,700 15,600
Income tax (expense)/credit (8,700) (2,600)
Profit/(loss) for the period 16,000 13,000

The following information is relevant:

(i) The other income is a dividend received from Sunlee on 31 March 2006.
(ii) The details of share capital and retained earnings were:
Rs. Rs
Hosterling Sunlee
Equity shares of 10 each 50,000 20,000
Retained earnings 1 Oct 2003 20,000 18,000
Retained earnings 30 Sep 2006 100,000 60,000
(iii) A fair value exercise was carried out at the date of acquisition of Sunlee with the following results:
Rs. Rs.
Carrying amount fair value remaining life (straight line)
Intellectual property 18,000 22,000 still in development
Land 17,000 20,000 not applicable
Plant 30,000 25,000 five years
The fair values have not been reflected in Sunlee’s financial statements.
Plant depreciation is included in cost of sales.
(iv) In the year ended 30 September 2006 Hosterling sold goods to Sunlee at a selling price of 18,000.
Hosterling purchased these goods for Rs. 13,500. Rs. 7,500 (at cost to Sunlee) of these goods were
still in the inventories of Sunlee at 30 September 2006.
(v) In the year ended 30 September 2006 Sunlee sold goods to Hosterling for Rs.10,000. Sunlee made
a profit of Rs. 4,000 on these sales. One-quarter of these goods were still in the inventory of
Hosterling at 30 September 2006.
(vi) On 1 January 2004 Sunlee transferred a machine to Hosterling for Rs.10,000. The asset had a
remaining useful economic life of 10 years at the date of transfer. It had a carrying amount of Rs.
6,000 in the books of Sunlee at the date of transfer.
(vii) Hosterling charged Rs. 1,000 to Sunlee for management services in current year and has credited it
to admin expenses.
Required:
Prepare the consolidated income statement for the Hosterling Group for the year ended 30 September
2006 and calculate CRE as on 30 Sep 2006. (16)

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Self-test Questions: Consolidation & IAS 28 CAF-07

Question-4
On 1 April 2011, Pyramid acquired 80% of Square’s equity shares. The summarised statements of
financial position of the two companies as at 31 March 2012 are:
Pyramid Square
Assets Rs.000 Rs.000
Non-current assets
Property, plant and equipment 42,600 28,500
Investments - Square 30,000
72,600 28,500
Current assets
Inventory 13,900 10,400
Trade receivables 11,400 5,500
Bank 900 600
Total assets 98,800 45,000
Equity and liabilities
Equity
Equity shares of Rs.1 each 25,000 10,000
Share premium 17,600 nil
Retained earnings - at 1 April 2011 16,200 18,000
- for year ended 31 March 2012 14,000 8,000
72,800 36,000
Non-current liabilities
11% loan notes 12,000 4,000
Current liabilities 14,000 5,000
Total equity and liabilities 98,800 45,000
The following information is relevant:
(i) At the date of acquisition, Pyramid conducted a fair value exercise on Square’s net assets which
were equal to their carrying amounts with the following exceptions:
– An item of plant had a fair value of Rs.3 million above its carrying amount. At the date of
acquisition it had a remaining life of five years.
– Square had an unrecorded liability of Rs.1 million, which was unchanged as at 31 March
2012.
Pyramid’s policy is to value the non-controlling interest at fair value at the date of acquisition. For
this purpose a share price for Square of Rs.3.50 each is representative of the fair value of the shares
held by the non-controlling interest.
(ii) Pyramid sells goods to Square at cost plus 50%. Below is a summary of the recorded activities for
the year ended 31 March 2012 and balances as at 31 March 2012:
Pyramid Square
Sales to Square 16,000
Purchases from Pyramid 14,500
Included in Pyramid’s receivables 4,400
Included in Square’s payables 1,700
On 26 March 2012, Pyramid sold and despatched goods to Square, which Square did not record
until they were received on 2 April 2012. Square’s inventory was counted on 31 March 2012 and
does not include any goods purchased from Pyramid.
On 27 March 2012, Square remitted to Pyramid a cash payment which was not received by
Pyramid until 4 April 2012. This payment accounted for the remaining difference on the current
accounts.

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Self-test Questions: Consolidation & IAS 28 CAF-07

(iii) Pyramid declared a dividend of 10% at the year end and Snow declared one of 20%. These
transactions have not been accounted for.
Required:
Prepare the consolidated statement of financial position for Pyramid as at 31 March 2012.

Question-5
On 1 April 2008, Pedantic acquired 60% of the equity share capital of Sophistics.
Income statements for the year ended 30 September 2008
Pedantic Sophistic
Rs.000 Rs.000
Revenue 85,000 42,000
Cost of sales (63,000) (32,000)
Gross profit 22,000 10,000
Distribution costs (2,000) (2,000)
Administrative expenses (6,000) (3,200)
Finance costs (300) (400)
Profit before tax 13,700 4,400
Income tax expense (4,700) (1,400)
Profit for the year 9,000 3,000
Statements of financial position as at 30 September 2008
Assets
Non-current assets
Property, plant and equipment 20,600 12,600
Investment in Sophistic 20,000
Current assets 16,000 6,600
Total assets 56,600 19,200
Equity and liabilities
Equity shares of Rs.10 each 10,000 4,000
Retained earnings 35,400 6,500
45,400 10,500
Non-current liabilities
10% loan notes 3,000 4,000
Current liabilities 8,200 4,700
Total equity and liabilities 56,600 19,200
The following information is relevant:
(i) At the date of acquisition, the fair values of Sophistic’s assets were equal to their carrying
amounts with the exception of:
- an item of plant, which had a fair value of Rs. 2 million in excess of its carrying amount. It
had a remaining life of five years at that date.
- For many years Sophistic has been selling some of its products under the brand name of
‘Kyklop’. At the date of acquisition the directors of Pacemaker valued this brand at Rs.5
million with a remaining life of 10 years. The brand is not included in Sophistic’s statement
of financial position.
- In addition Sophistic owns the registration of a popular internet domain name which has
indefinite life. At the date of acquisition the domain name was valued by a specialist
company at Rs. 1 million. The domain name is not included in Sophistic’s statement of
financial position.

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Self-test Questions: Consolidation & IAS 28 CAF-07

(ii) Sales from Sophistic to Pedantic in the post acquisition period were Rs. 8 million. Sophistic made
a mark up on cost of 40% on these sales. Pedantic had sold Rs. 5·2 million (at cost to Pedantic) of
these goods by 30 September 2008.
(iii) Sophistic’s trade receivables at 30 September 2008 include Rs. 600,000 due from Pedantic which
did not agree with Pedantic’s corresponding trade payable. This was due to cash in transit of Rs.
200,000 from Pedantic to Sophistic.
(iv) Pedantic has a policy of accounting for any non-controlling interest at fair value. For this purpose
the fair value of the goodwill attributable to the non-controlling interest in Sophistic is Rs. 1·5
million.
(v) Sophistic has announced a dividend of Rs. 2 per share before year end which is not recorded in
books.
Required:
(a) Prepare the consolidated income statement for Pedantic for the year ended 30 September 2008.
(b) Prepare the consolidated statement of financial position for Pedantic as at 30 September 2008.

Question-6
The statements of financial position of the three companies at 30 June 2016 are shown below:
P Ltd S Ltd A Ltd
-----------Rupees in ‘000’-----------
Asset
Non-current assets
Property, plant and equipment 8,950 3,500 2,000
Investments:
- 960 Shares of SL 2,900 - -
- 180 Shares of AL 650 - -

Total assets 12,500 3,500 2,000

Equity and liabilities
Equity
Ordinary shares of Rs. 1 each 5,000 1,200 600
Retained earnings 7,500 2,300 1,400
Total equity and liabilities 12,500 3,500 2,000
The following information is relevant
i) P Ltd acquired 80% of S Ltd’s Rs. 1 ordinary shares for Rs. 2,900,000 on 1 October 2015 and 30%
of A Ltd’s Rs. 1 ordinary shares for Rs. 650,000 on 1 January 2016.
ii) net profit of all companies are as follows:
2016
Rs. In 000
PL 1,500
SL 900
AL 600

iii) The non-controlling interest is measured at the proportionate share of SL’s identifiable net assets. It
may be assumed that profits of all companies had accrued evenly during the year.
Required
Prepare the consolidated statement of financial position of P Ltd as at 30 June 2016.

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Self-test Questions: Consolidation & IAS 28 CAF-07

Question-7
The statements of financial position of 3 entities P, S and A are shown below, as at 31 December Year 5.
P S A
----------- Rupees -----------
Assets
Non-current assets
Property, plant and equipment 450,000 240,000 460,000
Investment in S at cost 320,000 - -
Investment in A at cost 140,000 - -
910,000 240,000 460,000
Current assets
Inventory 70,000 90,000 70,000
Current account with P - 60,000 -
Current account with A 20,000 - -
Other current assets 110,000 130,000 40,000
Total assets 1,110,000 520,000 570,000

Equity and reserves

Equity
Equity shares of Rs. 1 100,000 200,000 100,000
Share premium 160,000 80,000 120,000
Accumulated profits 650,000 140,000 250,000
910,000 420,000 470,000
Non- Current liabilities
Long-term liabilities 40,000 20,000 30,000
Current liabilities
Current account with P - - 20,000
Current account with S 60,000 - -
Other current liabilities 100,000 80,000 50,000
Total equity and liabilities 1,110,000 520,000 570,000
Additional information
1. P bought 150,000 shares in S several years ago when the book value of the net assets of S was Rs.
340,000.
2. P bought 30,000 shares in A several years ago when A’s accumulated profits were Rs. 150,000.
3. There has been no change in the issued share capital or share premium of either S or A since P
acquired its shares in them.
4. There has been impairment of Rs. 20,000 in the goodwill relating to the investment in S, and
impairment in the value of the investment in A is Rs. 10,000.
5. At 31 December Year 5, A holds inventory purchased during the year from P which is valued at Rs.
16,000 and P holds inventory purchased from S which is valued at Rs. 40,000. Sales from P to A and
from S to P are priced at a mark-up of one-third on cost.
6. None of the entities has paid a dividend during the year.
7. P uses the partial goodwill method to account for goodwill and no goodwill is attributed to the non-
controlling interests in S. (means NCI is being measured at proportionate share of net assets)
8. Associate paid cash dividend @ 20% on 01 December Year 5.

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Self-test Questions: Consolidation & IAS 28 CAF-07

Required
Prepare the consolidated statement of financial position of the P group as at 31 December Year 5.

Question-8
Qudsia Limited (QL) has investments in two companies as detailed below:
Manto Limited (ML)
 On 1 January 2010, QL acquired 40 million ordinary shares in ML, when its retained earnings were
Rs. 150 million.
 The fair value of ML’s net assets on the acquisition date was equal to their carrying amounts.
Hali Limited (HL)
 On 30 November 2012, QL acquired 16 million ordinary shares in HL, when its retained earnings
stood at Rs. 224 million.
 The purchase consideration was made up of:
- Rs. 190 million in cash, paid on acquisition; and
- 4 million shares in QL. At the date of acquisition, QL’s shares were being traded at Rs. 15 per
share but the price had risen to Rs. 16 per share by the time the shares were issued on 1 January
2013.
The draft summarised statements of financial position of the three companies on 31 December 2012 are
shown below:
QL ML HL
---------Rs. in million---------
Assets
Property, plant and equipment 5,000 550 500
Investment in ML 630 - -
Investment in HL 190 - -
Current assets 5,480 400 350
11,300 950 850
Equity and liabilities
Ordinary share capital (Rs.10 each) 6,000 500 400
Retained earnings 2,900 100 240
Current liabilities 2,400 350 210
11,300 950 850
The following additional information is available:
i) As on 31 December 2012, the impairment loss on Good-will of ML is Rs. 30 million.
ii) QL values the non-controlling interest at its proportionate share of the fair value of the subsidiary’s
net identifiable assets.
iii) On 1 October 2012, ML sold a machine to QL for Rs. 24 million. The machine had been purchased
on 1 October 2010 for Rs. 26 million. The machine was originally assessed as having a useful life
of ten years and that estimate has not changed.
iv) In December 2012, QL sold goods to HL at cost plus 30%. The amount invoiced was Rs. 52
million. These goods remained unsold at year end and the invoiced amount was also paid
subsequent to the year end.
v) HL also sold goods to QL at cost plus 25% in December 2012. The amount invoiced was Rs. 10
million. These goods remained unsold at year end.
vi) Impairment test at year end indicated that Investment in HL has been impaired by Rs. 10 million.
Required:
Prepare a consolidated statement of financial position for QL as on 31 December 2012 in accordance with
the requirements of International Financial Reporting Standards.

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Self-Tests Solution FAR-II

Answer-1
Papilla
Consolidated Statement of Financial Position
as on 31.3.20X7
Assets
Non-current assets
Property, plant and equipment (900 + 400 + 20 - 6 - (W-4) 3 + 1) 1,312
Goodwill (280 + 70 - 105) 245
1,557
Current assets
Current assets (300 + 600 - (W-5) 4 - (Adj.4) 6) 890
Cash in transit (Adj.4) 5
895
2,452
Equity and liabilities
Equity
Share capital 200
Share premium 50
Consolidated Retained earnings (W-2) 1,456.5
1,706.5
Non-controlling interest (W-2) 296.5
2,003
Liabilities
Non-current liabilities (100 + 90) 190
Current liabilities (200 + 60 - (Adj.4) 1) 259
2,452

Papilla
Consolidated Statement of Comprehensive Income
for the year ended 31.3.20X7
Rs. In
“000”
Sales (1,000 + 260 - 60) 1,200
Less: Cost of sales (750 + 80 + 2** - 1 - 60 + (W-5) 4) (775)
Gross profit 425
Less: Operating expenses (60 + 35 + 35*) (130)
Finance Cost (25 + 15) (40)
255
Add: Other Income (20 - (W-4) 3 - (Adj.5) 20 x 70%) 3
Profit before taxation 258
Less: Taxation (100 + 30) (130)
Profit after taxation 128
Non-controlling interest (W-3) (18)
Share of parents owners 110
*Impairment loss on goodwill during current year (105 x 1/3) = 35
** Recording of extra depreciation on revaluation surplus during current year (20/10) = 2

(W-1) Analysis of equity of Satago

At the date of acquisition Parent NCI
70% 30%
Share capital 150
Retained earnings 430
Revaluation surplus - Plant 20
600 420 180

Paid for investment 700

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CAF-07 Consolidation

Lecture # 13

Class work
Question-1
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 April 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) On 1 October 2017 BL sold a plant to SL for Rs. 100 million at a gain of Rs. 20 million. SL
charged depreciation of Rs. 5 million.
(v) Inter-company transactions after acquisition date were as follows:
Sales Included in buyer’s Profit %
closing stock-in-trade
------------ Rs. In million ------------
SL to BL 60 10 20% of sales
(vi) SL declared interim dividend of Rs. 1.50 per share in December 2017. It has not been accounted
for.
(vii) PL also declared interim dividend of Rs. 3 per share in December 2017. It has not been accounted
for.
(viii) The incomes and expenses of SL 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 2017.
 Consolidated statement of financial position as at 31 December 2017.

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CAF-07 Consolidation

Answer
P Ltd
Consolidated Statement of Comprehensive Income
for the year ended December 31, 2015

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CAF-07 Consolidation

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CAF-07 Consolidation

(W-2) Calculation of CRE/NCI CRE NCI

Parent’s retained earnings closing (W-4) 1,090 -
NCI – Fair value - 150
Subsidiary post acquisition profits 132 33
Add: Negative goodwill 111 -
Add: Reversal of dep. on Revaluation loss (100 / 10 x 10/12) = 8.33 in 80:20 6.67 1.66
Less: Recording of dep. on Revaluation gain (150 / 5 x 10/12) = 25 in 80:20 (20) (5)
Less: Reversal of profit on sale of fixed asset by P (15) -
Add: Reversal of Depreciation on above (15/10 years x 5/12) 0.63 -
Add: Recording of dividend income (500 x 20% x 80%) 80 -
Less: Recording of dividend declared by S (500 x 20% = 100 in 80:20) (80) (20)
Less: Reversal of profit on stock sold by P (W-5) (2.5) -
Less: Reversal of profit on stock sold by S Rs. 1.2 (W-6) in 80:20 (0.96) (0.24)
1,301.84 159.42
(W-3) Calculation of NCI figure in profit and loss
Rs in “million”
Profit of SL as per profit and loss account (198 x 10/12) 165
Add: Reversal of dep. on Revaluation loss 8.33
Less: Recording of dep. on Revaluation gain (25)
Less: Reversal of profit on stock sold by S (1.2)
Total 147.13
NCI share of profit (147.13 x 20%) 29.43

(W-4) 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-5) 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-6) 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

Lecture # 14

Class work

The following information is relevant:

Required:
Prepare a consolidated statement of profit or loss and statement of financial position for P for the year to
30 June, 2016.

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CAF-07 Consolidation

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CAF-07 Consolidation

Prepare a consolidated statement of profit or loss and statement of financial position for Hillusion for the
year to 31 March, 2003.

Answer
Hillusion Limited
Statement of Comprehensive Income
For the year ended March 31, 2003
Rs. in ‘000’
Revenue (60,000 + 24,000 x 9/12 - 12,000) 66,000
Less: Cost of sales [42,000 + 20,000 x 9/12 + 600 - 12,000 + (W-4) 500] (46,100)
Gross profit 19,900
Less: Operating expense (6,500 + 200 x 9/12 + 300) (6,950)
Interest expense (200 x 9/12) (150)
Add: Other income [75 + 500 – (2,000 x 20% x 80%)] 255
Profit before taxation 13,055
Less: Taxation [3,000 + (600 x 9/12)] (3,450)
Profit after taxation 9,605
Non-controlling asset (W-3) (270)
Share of Parent owners 9,335

Hillusion Limited
Consolidated Statement of Financial Position
as on March 31, 2003
Rs. in ‘000’
Assets
Non-current assets
Tangible non-current [19,320 + 8,000 + 3,200 – 600] 29,920
Goodwill [880 + 150 – 300] 730
Investments (11,280 – 10,280) 1,000
31,650
Current assets [15,000 + 8,000 – (W-4) 500 – 750] 21,750
53,400
Equity and liabilities
Equity
Share capital 10,000
Consolidated retained earnings (W-2) 25,860
35,860
Non-controlling interest (W-2) 2,690
38,550
Non-current liabilities
10% loan notes 2,000

Current liabilities (10,000 + 3,600 -750) 12,850

53,400

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Self-Tests Solution FAR-II

(W-3)Calculation of NCI figure in profit and loss

Rs.
S profit (3,000 x 6 / 12) 1,500
Less: Recording of depreciation on plant (200)
Less: Recording of amortization on Brand (250)
Add: Reversal of profit on sale of stock by S (W-5) (800)
Total 250
NCI share of profit (250 x 40%) 100

(W-4) Stock sold by S to P

Sold 8,000
Unsold ( 8,000 - 5,200) 2,800
Profit on unsold (2,800 / 140 x 40) 800

(W-5) Calculation of profits and retained earnings

PL SL
Opening Retained Earning - 01.10.17 Bal. 26,400 3,500
Profit after tax 9,000 3,000
Less: Dividend (if recorded by the accountant) - -
closing Retained Earning - 30.09.18 35,400 6,500

Answer-6
P Limited
Consolidated Statement of Financial Position
As on June 30, 2016
Rs. in ‘000’
Assets
Non-current assets
Property, plant and equipment (8,950 + 3,500) 12,450
Good will 640
Investment in Associate 740
13,830

Equity and liabilities

Equity
Share capital 5,000
Consolidated retained earnings (W-2) 8,130
13,130
Non-controlling interest (W-2) 700
13,830

(W-1) Analysis of equity of Subsidiary

At the date of acquisition Total Parent NCI
80% 20%
Share capital 1,200
Retained earnings (1,400 + 900 x 3/12) 1,625
2,825 2,260 565
Paid for investment 2,900
Goodwill 640
Change in equity from acquisition till balance sheet date
R.E - Subsidiary (2,300 – 1,625) 675 540 135

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Self-Tests Solution FAR-II

(W-2) Calculation of CRE/NCI CRE NCI

Parent own retained earnings 7,500 -
NCI – Proportionate Share - 565
Add: Subsidiary post acquisition profits from acquisition till B/S date 540 135
Add: Associate’s Post Acquisition profits (W-3) 90 -
8,130 700
(W-3) Investment in Associates
Investment at Cost 650
Change in retained earnings from acquisition till B/S date [1,400 - (800 + 600 x 6/12) x 30%] 90
Investment at Reporting Date 740

(W-4) Calculation of profits and retained earnings

PL SL AL
Opening Retained Earning – 01.04.02 Bal. 6,000 1,400 800
Profit after tax 1,500 900 600
Less: Dividend (if recorded by the accountant) - - -
closing Retained Earning – 31.03.03 7,500 2,300 1,400

Answer-7
P Limited
Consolidated Statement of Financial Position
As on December 31, Year 5
Assets Rs. ‘000’
Non-current assets
Property, plant and equipment (450 + 240) 690
Goodwill (65 (W-1) – 20) 45
Investment in Associate (W-3) 152.8
Current assets
Inventory (70 + 90 - 10(W-2)) 150
Other Current assets (20 + 110 + 130) 260
1,297.8
Equity and liabilities
Equity
Share capital 100
Share premium 160
Consolidated retained earnings (W-2) 695.3
955.3
Non-controlling interest (W-2) 102.5
1,057.8
Non-Current liabilities (40 + 20) 60
Long term liabilities
Current liabilities (100 + 80) 180
1,297.8

(W-1) Analysis of equity of S Ltd.

At the date of acquisition Total Parent NCI
(150/200);(50/200) 75% 25%
Share capital 200
Share premium 80
Retained earnings (bal.) 60
340 255 85
Paid for investment 320
Goodwill 65

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Self-Tests Solution FAR-II

Change in equity and reserves from acquisition till balance sheet date
Retained earnings (140 - 60) 80 60 20

(W-2) Calculation of CRE/NCI

CRE NCI
Parent retained earnings 650 -
NCI at Proportionate share - 85
Subsidiary post acquisition Profits 60 20
Share of Profit from Associate (W-3) 30 -
Impairment of Goodwill - NCI at Proportionate share (20) -
Impairment loss on investment (10) -
Reversal of profit on sale of stock by P to A (W-4) (1.2) -
Reversal of profit on sale of stock by S to P (W-5) 10 in 75:25 (7.5) (2.5)
Reversal of dividend from associate (6) -
695.3 102.5

(W-3) Investment in Associates (30,000 / 100,000 x 100 = 30% Equity Purchased)

Rs. ‘000’
Investment at Cost 140
Share of Post-Acquisition Profits (250 - 150) x 30% 30
Impairment loss (10)
Reversal of profit on sale of stock by P to A (W-1) (1.2)
Dividend from associate (100 x 20% x 30%) (6)
Investment at Reporting Date / Balance sheet date 152.8

(W-4) Sale of Stock by P to Associate

Sold stock X
Unsold stock 16
Profit on unsold stock (16 /133.33 x 33.33) 4
Share of P (4 x 30%) 1.2

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

Sold stock X
Unsold stock 40
Profit on unsold stock (40 /133.33 x 33.33) 10

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Self-Tests Solution FAR-II

Answer-8
Qudsia Limited (QL)
Consolidated Statement of Financial Position
As on December 31, 2012
Assets Rs. in million
Non-current assets
Property, plant and equipment (5,000 + 550 – 3.2 + 0.1) 5,546.9
Goodwill (110 – 30) 80
Investment in Associate (W-3) 241.6
5,868.5
Current assets [5,480 + 400 – 0.8(W-6)] 5,879.2
11,747.7
Equity and liabilities
Equity
Share capital 6,000
Purchase Consideration Payable (W-3) 60
Consolidated retained earnings 2,818.28
8,878.28
Non-controlling interest 119.42
8,997.7
Current liabilities
Other Current liabilities (2,400 + 350) 2,750
11,747.7

(W-1) Analysis of equity of S Ltd.

At the date of acquisition Total Parent NCI
(40/50) : (10/50) 80% 20%
Share capital 500
Retained earnings 150
650 520 130
Paid for investment 630
Goodwill 110
Change in equity and reserves from acquisition till balance sheet date
Retained earnings (100 – 150) (50) (40) (10)

(W-2) Calculation of CRE/NCI

CRE NCI
Parent retained earnings 2,900 -
NCI at Proportionate share - 130
Subsidiary Post acquisition Profits/(Losses) (W-1) (40) (10)
Share of Profit from Associate (W-3) 6.4 -
Impairment of goodwill - NCI at Proportionate share (30) -
Reversal of Gain on sale of F.A by S to P (W-4) 3.2 in 80:20 (2.6) (0.6)
Dep. on Profit Figure (3.2/8 x 3/12) = 0.1 in 80:20 0.08 0.02
Reversal of Profit share on Unsold Stock by P to A (W-5) (4.8) -
Reversal of Profit share on Unsold Stock by A to P (W-6) (0.8) -
Impairment loss on investment in HL (10) -
2,818.28 119.42

(W-3) Investment in Associates (16 Million/ 40 Million) = 40% holding

Rs. in million
Cost of Investment (W-3.1) 250
Add: Share of Post-Acquisition Profits (240 - 224) x 40% 6.4
Less: Reversal of Profit on unsold stock (W-5) (4.8)
Less: Impairment loss (10)
Investment at Reporting Date / Balance sheet date 241.6

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Self-Tests Solution FAR-II

(W-3.1)
Investment at Cost:
Cash Paid (Given) 190
Share of QM to be issued (4 x 15) 60
250

Following entry is not passed in the books of P Dr. Cr.

Investment (4 x 15) 60
Purchase consideration payable 60

(W-4)
Dr. Disposal A/C - machine Cr.
Book value (26 - 26/10 x 2) 20.8 Cash 24
P/L (bal.) 3.2

(W-5) Sale of Stock by P to Associate

Sold stock 52
Unsold stock 52
Profit on unsold stock (52 / 130 x 30) 12
Share of P (12 x 40%) 4.8

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

Sold stock 10
Unsold stock 10
Profit on unsold stock (10 / 125 x 25) 2
Share of P (2 x 40%) 0.8

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11

{IFRS 09}
Financial
Instruments
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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture 1

INVESTMENT IN EQUITY INSTRUMENTS (1% - 19.99% shares bought)

Description FVTPL (Fair value through profit FVTOCI (Fair value through Other
and loss) comprehensive income)
For trading purpose For other purpose

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
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.

Home work
Question-2
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.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Answer-2
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 loss (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 - (22) 49

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture # 2

DECISION TREE FOR “INVESTMENTS IN EQUITY SHARES”

Question-1
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 Question bank Q.9.4 (ii))

IDENTIFY HOW FOLLOWING “INVESTMENTS IN EQUITY SHARES” (EQUITY

INVESTMENTS) WILL BE CLASSIFIED?
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

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Comparison of ordinary shares and preference shares

Irredeemable Preference Redeemable Preference
Ordinary shares
shares shares
Variable – higher in a good
Dividend rate Fixed per annum Fixed per annum
year, lower in a bad year
Receives the dividend
Paid only if there are spare Receives the dividend
Dividend before Irredeemable
funds after the payment of before ordinary
distribution preference shareholders
preference dividend shareholders
and ordinary shareholders
Dividend In finance cost in profit
In SOCIE In SOCIE
presentation and loss
Amount of
capital In equity In equity In non-current liabilities
presentation

Homework
Question-1
A company invested in 20,000 shares of a listed company in November 2017 at a cost of 21 per share.
Transaction costs relating to the investment were 2,000. At 31 December 2017 the shares have a market
value of 24.5 per share. The shares are held for trading purposes.
Required:
a) Prepare Journal entries and extracts for the statement of profit or loss for the year ended 31
December 2017 and statement of financial position as at that date.
b) Explain how the treatment would differ if there was no plan to sell the shares and entity has decided
to designated these shares as fair value through profit and loss.
Answer-1
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

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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.
b/d (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 – Reserve 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

Statement of Financial Position (Extracts )

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

Statement of comprehensive income (Extracts )

For the year ended 31 December
Rs. ‘000’
2017
Other Comprehensive Income
Fair value gain 68
Question-2
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.

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Answer-4
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 FVTPL (10,000 x 10) + 1,000 101,000
Note: However in this case entity can also go for FVTPL also.
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

Question-5
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-5
Journal entries Rs. ‘000’
Date Particular Dr. Cr.
01/07/12 Investment (300 + 10% x 300) 330
Bank 330
30/06/13 Investment 20
OCI – Reserve 20
(OCI reserve has now credit balance of Rs. 20)
01/10/13 Bank (400 - 10% of 400) 360
Investment 350
P/L (bal.) 10
01/10/13 Fair value – Reserve 20
Retained earnings 20
(W-1)
Dr. Investment A/c Cr.
b/d (10 x 30) + 10% x 300 330
Fair value gain (bal.) (OCI) 20 c/d (10 x 35) 350
b/d 350 Disposal 350
c/d -

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Statement of Financial Position (Extracts )

As on 31 December
Rs. in’000’
2014 2013
Non-current assets
Investment - 350
Equity
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

Question-6
1. What is the default classification for an equity investment?
a) Fair value through profit or loss
b) Fair value through other comprehensive income
c) Amortised cost d) Net proceeds
2. Diamond Limited purchased 10,000 shares on 1 September 2014, making the election to use the
alternative treatment under IFRS 9. The shares cost Rs. 35 each. Transaction costs associated with
the purchase were Rs. 5,000.
At 31 December 2014, the shares are trading at Rs. 45 each.
What is the gain to be recognised on these shares for the year ended 31 December 2014?
a) Rs. 100,000 b) Rs. 450,000
c) Rs. 95,000 d) Rs. 350,000
3. Copper Limited has purchased an investment of 15,000 shares on 1 August 2016 at a cost of Rs. 65
each. Copper Limited intend to sell these shares in the short term and are holding them for
trading purposes. Transaction costs on the purchase amounted to Rs. 15,000.
As at the year-end 30 September 2016, these shares are now worth Rs. 77.5 each.
What is the gain on this investment during the year ended 30 September 2016, and where in the
Financial Statements will it be recognised?
a) Rs. 187,500 in Other Comprehensive Income
b) Rs. 187,500 in Profit or Loss
c) Rs. 172,500 in Other Comprehensive Income
d) Rs. 172,500 in Profit or Loss

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Answer-6
Sr. Solution Explanation/Working
1. a) The default position for equity investments is FVTPL
2. c) The investment should be classified as FVTOCI.

Dr. Investment A/c Cr.

Cash (350,000* + 5,000) 355,000
OCI (bal.) 95,000 c/d
(10,000 x 45) 450,000
*(10,000 x Rs. 35)
3. b) Financial Assets held for trading will be valued at Fair Value through Profit or
Loss. Transaction costs will be expensed.

Dr. Investment A/c

Cash 975,000
(15,000 x Rs. 65)
P/L (bal.) 187,500 c/d
(15,000 x Rs. 77.5) 1,162,500

4. a) Intangible assets. These do not give rise to a present right to receive cash or
other fi1nancial assets. The other options are financial instruments
5. d) Redeemable preference shares will be shown as a liability, with the payments
being shown as finance costs.
6. b) The default category for equity investments is fair value through profit or loss so
the investments should be revalued to fair value (not fair value less costs to sell),
with the gain or loss taken to the statement of profit or loss.
7. Rs.2,400,000 40,000 shares @ Rs. 60 = Rs. 2,400,000

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Lecture 3

IMPORTANT TERMINOLOGIES FOR “INVESTMENT IN DEBT INSTRUMENTS”

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

INVESTMENT IN DEBT INSTRUMENTS - AT AMORTISED COST

A financial asset must be measured at “amortised cost” if both of the following conditions are met:
1. The Contractual cash flow characteristics test:
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest.
2. The business model test:
The asset is held within a business model whose objective is to hold assets in order to collect
contractual cash flows; and

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Question-1
Honda purchased 620 debentures of Royal fan on 1 January 2016. Following further information is
available:
1. Face value is Rs. 100 each.
2. It purchased these debentures at a discount of 15%.
3. Transaction cost is Rs. 1,300.
4. These are redeemable (repayable) at the end of 2018 at face value.
5. It carries interest at the rate of 10% payable annually in arrears.
6. The effective interest rate of the financial instrument has been calculated at 15.72%.

Required:
Prepare accounting entries if the intention is to hold investment till maturity to get contractual cash flows.

Question-2
Honda purchased TFC’s of Royal fan on 1 January 2015. Following further information is available:
1. It had a face value of Rs. 43,000.
2. These are purchased at its fair value of Rs. 50,000.
3. Transaction cost is Rs. 2,000.
4. These are redeemable at the end of 2017 at face value.
5. It carries interest at the rate of 12% payable annually in arrears.
6. The effective interest rate of the financial instrument has been calculated at 4.40%.

Required:
Prepare accounting entries if the intention is to hold investment till maturity to get contractual cash flows.

Question-3
Honda purchased 8% bonds of Royal fan on 1 January 2012. Following further information is available:
1. It had a face value of Rs. 35,000.
2. These are purchased at its fair value of Rs. 28,000.
3. Transaction cost is Rs. 1,000.
4. These are redeemable on 1 January 2015 at a premium of Rs. 3,500.
5. It carries interest at the rate of 8% payable annually in arrears.
6. The effective interest rate of the financial instrument has been calculated at 18.76%.

The fair value of the bond was as follows:

Rupees
31/12/12 35,000
31/12/13 27,000
31/12/14 38,500

Required:
a) Prepare accounting entries if the intention is to hold investment till maturity to get contractual
cash flows.
b) Prepare accounting entries if the intention is to hold the investment to get contractual cash flows
and to sell it if good opportunity arises.

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Homework
Question-1
ABC purchased TFCs of XYZ on 01.01.16 for Rs. 550,000. 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 1.56%
Required:
Prepare accounting entries; if the investment in TFCs is held till maturity to get contractual cash flows.
Answer-1
Journal entries
Date Particulars Dr. Cr.
01.01.16 Investment 550,000
Bank 550,000
(Recording of investment)
31.12.16 Investment 8,580
Interest income 8,580
(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 8,324
Interest income 8,324
31.12.17 Bank 25,000
Investment 25,000
31.12.18 Investment 8,064
Interest income 8,064
31.12.18 Bank 25,000
Investment 25,000
31.12.18 Bank 499,968
Investment 499,968
(Redemption of investment)

Working
Amortization schedule:
Dr. Bonds (loan receivable a/c) (Financial Asset) Cr.
01/01/16 Bank 550,000 Bank (500,000 x 5%) 25,000
Int. income 8,580 31/12/16 c/d 533,580
(550,000 x 1.56%)
01/01/17 b/d 533,580 Bank (500,000 x 5%) 25,000
Int. income 8,324 31/12/17 c/d 516,904
(533,580 x 1.56%)
01/01/18 b/d 516,904 Bank (500,000 x 5%) 25,000
Int. income 8,064 31/12/18 Bank *499,968
(516,904 x 1.56%)
c/d -
*Redemption value is Rs, 500,000. Difference of Rs. 32 is due to rounding off.
Also Practice Q.2

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

DECISION TREE FOR “INVESTMENTS IN DEBT INSTRUMENTS”

ACCOUNTING TREATMENT INVESTMENT IN DEBT INSTRUMENTS

Classification Amortised cost Fair value through other Fair value through
comprehensive income profit and loss
Initial Fair value (purchase price + Fair value (purchase price + Fair value (purchase
measurement transaction cost) transaction cost) price)
Transaction Capitalized Capitalized Expense out
cost at time of
purchase
Interest Interest income calculated at Interest income calculated at Interest income
income effective rate will be effective rate will be calculated at nominal
recorded in profit and loss. recorded in profit and loss. rate will be recorded in
profit and loss.
Measurement The debt will appear at The amortised cost The investments are
at reporting amortised cost, calculation will be first made revalued to fair value
date means: with gain/(loss) shown
plus in profit and loss.
opening balance + interest
income – interest received = The investments are revalued
closing balance. to fair value with gain/(loss)
shown in OCI.
It will not be taken to fair
value.
Amortisation Will be made Will be made Will not be made
calculation
On disposal Profit and loss The gain/(loss) is shown in The gain/(loss) is shown
profit and loss in profit and loss

The gain in fair value (OCI)

reserve will be transferred
to profit and loss.

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Lecture 4

Question-1
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.

Homework

Question-2
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.

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Answer-2
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:
Dr. Bonds (loan receivable a/c) (Financial Asset) Cr.
01/01/18 Bank (1,200,000 + 10,000) 1,210,000 Bank (1,000,000 x 10%) 100,000
Int. income 60,161
(1,210,000 x 4.972%) 31/12/18 c/d 1,170,161
01/01/19 b/d 1,170,161 Bank (1,000,000 x 10%) 100,000
Int. income 58,180
(1,170,161 x 4.972%) 31/12/19 c/d 1,128,341

Statement of Financial Position (Extracts )

As on 31 December
Rupees
2019 2018
Non-current 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

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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 – Fair value reserve 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 – Fair value reserve 78,180
Investment 78,180
(OCI has now a credit balance of Rs. 1,659*)
*(79,839 - 78,180)
Working:
(W-1)
Dr. Bonds (loan receivable a/c) (Financial Asset) Cr.
01/01/18 Bank (1,200,000 + 10,000) 1,210,000 Bank (1,000,000 x 10%) 100,000
Int. income 60,161 31/12/18 c/d 1,170,161
(1,210,000 x 4.972%)
01/01/19 b/d 1,170,161 Bank (1,000,000 x 10%) 100,000
Int. income 58,180
(1,170,163 x 4.972%) 31/12/19 c/d 1,128,341

(W-2) Closing Book Value as per T a/c (A) Fair Value (B) Gain/(Loss) (B - 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
Non-current assets
Investment 1,130,000 1,250,000
Equity
Fair value – Reserve 1,659 79,839

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Current assets 445 160 80

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(W-1) Analysis of equity of Subsidiary

(W-2) Calculation of CRE/NCI CRE NCI

(W-5) Investment in Associate

Investment at Cost 30
Change in retained earnings from acquisition till B/S date [(100 - 20) x 30%] 24
Investment at Reporting Date 54

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Working
Amortization schedule:
Dr. Bonds (loan receivable a/c) (Financial Asset) Cr.
01/01/18 Bank 552,500 Bank (500,000 x 10%) 50,000
(5,000 x 110) + 2,500
Int. income 16,857 31/12/18 c/d 519,357
(552,500 x 3.051%)
01/01/19 b/d 519,357 Bank (500,000 x 10%) 50,000
Int. income 15,846 31/12/19 c/d 485,203
(519,357 x 3.051%)
01/01/20 b/d 485,203 Bank (500,000 x 10%) 50,000
Int. income 14,804 31/12/20 Bank 450,007
(485,203 x 3.051%)
c/d -

Question-4
1. Sodium Limited (SL) purchased a debt instrument which will mature in five years' time. SL intends
to hold the debt instrument to maturity to collect interest payments. How should this debt instrument
be measured in the financial statements of SL?
a) As a financial liability at fair value through profit or loss
b) As a financial liability at amortised cost
c) As a financial asset at fair value through profit or loss
d) As a financial asset at amortised cost

2. On 1 January 2011 Oxygen Limited purchased a debt instrument for its fair value of Rs. 500,000. It
had a principal amount of Rs. 550,000 and was due to mature in five years. The debt instrument
carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%. It is
held at amortised cost. At what amount will the debt instrument be shown in the statement of
financial position of Oxygen Limited as at31 December 2012?
a) Rs. 514,560 b) Rs. 566,000
c) Rs. 564,560 d) Rs. 520,800

3. An entity acquires a 6% Rs. 1,000 Term Finance Certificate (TFC), a financial asset, for Rs. 970 at
the beginning of Year 1. Interest is receivable annually in arrears.
The TFC is redeemable at the end of Year 3 at a premium of 3%. The financial asset is measured at
amortised cost. The effective interest rate of the financial instrument has been calculated at 8.1%.
Calculate the closing statement of financial position figure at the end of Year 2. Work to the nearest
Rupee.
Rs. ___________

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Answer-4
Sr. Solution Explanation/Working
1. d)
2. a)
Dr. Investment A/c Cr.
Bank 500,000 Bank (550,000 x 6%) 33,000
Int. income 40,000 c/d 507,000
(500,000 x 8%)
b/d 507,000 Bank (550,000 x 6%) 33,000
Int. income 40,560 c/d 514,560
(507,000 x 8%)

3. Rs. 1,009
Dr. Investment A/c Cr.
Bank 970 Bank (1,000 x 6%) 60
Int. income 79 c/d 989
(970 x 8.1%)
b/d 989 Bank (1,000 x 6%) 60
Int. income 80 c/d 1,009
(989 x 8.1%)

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture 5

DECISION TREE FOR “FINANCIAL LIABLITIES (LOAN RECEIVED)”

ACCOUNTING TREATMENT OF FINANCIAL LIABILITIES

Classification Amortised cost Fair value through profit and loss

Initial measurement Recorded at fair value (Amount of Fair value (Amount of Loan raised)
Loan raised) - transaction cost
Transaction cost at Deducted from loan proceeds Expense out
time of issue
Interest expense Interest expense calculated at Interest expense calculated at nominal
effective rate will be recorded in rate will be recorded in profit and loss.
profit and loss.
Measurement at The debt will appear at amortised The debt liability will be revalued to fair
reporting date cost, value with gain/(loss) shown in profit and
means: loss.

opening balance + interest expense However any change due to company’s

- interest paid = closing balance. *own credit risk is recorded in OCI.

It will not be taken to fair value.

Amortisation Will be made Will not be made
calculation
On disposal The gain/(loss) is shown in profit The gain/(loss) is shown in profit and loss
and loss

*Own credit risk is a situation in which our company is in a financial difficulty and we are not in a
position to pay our liabilities.

Note for students: For transaction cost explanation refer book.

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(W-1) Analysis of equity of Subsidiary

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(W-2) Calculation of CRE/NCI CRE NCI

(W-4) Stock sold by S to P

Sold stock 50
Unsold stock 24
Profit on unsold stock (24 /140 x 40) 6.9

(W-5) Stock sold by P to A

Sold stock 65
Unsold stock 43
Profit on unsold stock (43 /140 x 40) 12.3
P’s Share (12.3 x 30%) 3.7

(W-6) Stock sold by A to P

Sold stock 40
Unsold stock 12
Profit on unsold stock (12 /140 x 40) 3.4
P’s Share (3.4 x 30%) 1.0

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CAF-07 IAS-28: Associates

Lecture 3

Question-1
Below are the statements of profit or loss for P, S and A for the year ended 30 September 2018.
P S A

Revenue 10,000 4,500 3,000

Required:
Prepare a consolidated statement of profit or loss for P for the year ended 30 September 2018.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ADDITIONAL PRACTICE QUESTIONS

Question-1 [Debt instrument]

1. A Company purchased a debt instrument for Rs. 30,000 plus 1% transaction costs on 1 April 2006.
2. Company correctly classified the investment at FVTOCI.
3. At the end of financial year (31 December 2006) the investment has a value of Rs. 40,000.
4. On 01 January 2007 the investment was sold for Rs. 50,000.
5. Effective rate is 9.60%.
6. Coupon interest rate is 12% receivable in arrears annually.

Required:
Prepare necessary journal entries for the year ended 31 December 2006 and 2007.
(Assuming bond is held to receive contractual cash flows and to sell if good opportunity arises).

Question-2
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-3
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-4
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

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

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 bools of Dell EMC Limited.

Question-5
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

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-6
Large Limited (a public listed company) has following financial instruments in the financial statements
for the year- ended December 31, 2017:
 An Investments 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.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Question-7
On 1 January 2001 AJI Panca Ltd. has the following capital and reserves.
Equity Rupees
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 A 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 on31 December 2001.
b) Prepare relevant accounting entries for the year ended 31 December 2001.
(ICAP Question Bank)

Question-8 [Final account question]

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?
 Prepare Statement of Financial position?

Question-9
Ali Ltd. lent Rs. 50,000 to Umer Ltd. on 30 June 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.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Question-10
MCQs
1. For a debt investment to be held under amortised cost, it must pass two tests. One of these is the
contractual cash flow characteristics test.
What is the other test which must be passed?
a) The purchase agreement test b) The amortised cost test
c) The business model test d) The fair value test

2. For which category of financial instruments are transaction costs excluded from the initial value, and
instead expensed to profit or loss?
a) Financial Liabilities at amortised cost
b) Financial Assets at fair value through profit or loss
c) Financial Assets at fair value through other comprehensive income
d) Financial Assets at amortised cost

3. Platinum Limited issues Rs.100 million 5% debentures on 1 January 2014, incurring issue costs of
Rs.3 million.
These debentures are redeemable at a premium, meaning that the effective rate of interest is 8% per
annum.
What is the finance cost to be shown in the statement of profit or loss for the year ended
31 December 2015?
Rs. ___________ million (rounded to two decimal points)
4. If a company had incurred transaction costs in issuing debentures, how should these have been
accounted for?
a) Added to the proceeds of the debentures
b) Deducted from the proceeds of the debentures
c) Charged to finance costs

5. In order to hold a debt instrument at amortised cost, which TWO of the following tests must be
applied?
a) Fair value test
b) Contractual cash flow characteristics test
c) Investment appraisal test
d) Business model test

6. Nickel Limited is uncertain of how to treat professional fees. For which of the following investments
should professional fees NOT be capitalised as part of initial value of the asset?
a) Acquisition of a patent (IAS 38)
b) Acquisition of fair value through other comprehensive income investments
c) Acquisition of fair value through profit or loss investments

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ADDITIONAL PRACTICE ANSWERS

Answer-1[For similar questions refer lecture 4 Q.1 and Q.1A]
The following double entries are necessary:
01/04/06 Financial asset (30,000 + 1% of 30,000) 30,300
Cash 30,300
(Recording of investment)
31/12/06 Financial asset 2,182
Interest Income 2,182
(Recording of interest income at effective rate)
31/12/06 Financial asset 7,518
OCI – Fair value reserve (W-2) 7,518
(OCI has now a credit balance of Rs. 7,518)
01/01/07 Cash 50,000
Financial asset* 40,000
P/L 10,000
(Recognition of profit on disposal of financial asset)
01/01/07 OCI – Fair value reserve 7,518
Profit or loss 7,518
(Reclassification of OCI reserve to profit or loss)
*After passing 3rd entry it is appearing on fair value.
Dr. Financial Asset a/c Cr.
01/04/06 Bank 30,300
(30,000 + 1% x 30,000)
Int. income 2,182 31/12/06 c/d 32,482
(30,300 x 9.6% x 9/12)
01/01/07 b/d 32,482 01/01/07 32,482
31/12/07 c/d -

(W-2) Closing Book Value as per T a/c (A) Fair Value (B) Gain/(Loss) (B - A)
2006 32,482 40,000 7,518

Answer-2
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:
Dr. Financial Liability a/c Cr.
Bank (2,000,000 x 10%) 200,000 Y-12 Bank 2,000,000
c/d (bal.) 2,035,560 Int. expense 235,560
(2,000,000 x 11.778%)
Bank (2,000,000 x 10%) 200,000 Y-13 b/d 2,035,560
c/d (bal.) 2,075,308 Int. expense 239,748
(2,035,560 x 11.778%)
Bank (2,000,000 x 14%) 280,000 Y-14 b/d 2,075,308
c/d (bal.) 2,039,738 Int. expense 244,430
(2,075,308 x 11.778%)

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Bank (2,000,000 x 14%) 280,000 Y-15 b/d 2,039,738

Bank *1,999,978 Int. expense 240,240
(2,039,738 x 11.778%)
c/d -
*Redemption value is Rs. 2,000,000. The difference of Rs. 22 is due to rounding off.

Answer-3
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:
Dr. Financial Liability a/c Cr.
Bank (1,000,000 x 5%) 50,000 Y-1 Bank 1,000,0000
c/d (bal.) 1,009,420 Int. expense 59,420
(1,000,0000 x 5.942%)
Bank (1,000,000 x 5%) 50,000 Y-2 b/d 1,009,420
c/d (bal.) 1,019,400 Int. expense 59,980
Bank (1,000,000 x 7%) 70,000 Y-3 b/d 1,019,400
c/d (bal.) 1,009,973 Int. expense 60,573
Bank (1,000,000 x 7%) 70,000 Y-2 b/d 1,009,973
Bank *999,986 Int. expense 60,013
c/d -
*Redemption value is Rs. 1,000,000. The difference of Rs. 14 is due to rounding off.

Answer-4
a)
Amortization schedule:
Rupees
Dr. Bonds (Financial Asset) Cr.
Bank 93,134 Bank 12,000
Int. income 13,039 c/d (bal.) 94,173
b/d 94,173 Bank 12,000
Int. income 13,184 c/d (bal.) 95,357

b)
01/01/10 Investment 93,134
Bank 93,134
31/12/10 Investment 13,039
Interest income 13,039
01/01/11 Bank 12,000
Investment 12,000
31/12/11 Investment 13,184
Interest income 13,184

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

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-5
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)

Amortization schedule:
Semi-annul coupon rate = 8%/ 2 = 4%
Semi-annul effective rate = 14%/2 = 7%

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Dr. Debenture A/c (Financial Liability) Cr.

Bank (700,000 x 4%) 28,000 Bank (700 - 95 - 35) 570,000
c/d (bal.) 581,900 Int. expense 39,900
(570,000 x 7%)
Bank 28,000 b/d 581,900
c/d (bal.) 594,633 Int. expense 40,733
Bank 28,000 b/d 594,633
c/d (bal.) 608,257 Int. expense 41,624
Bank 28,000 b/d 608,257
c/d (bal.) (approx.) 622,835 Int. expense 42,578

Answer-6
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 received by the company.
Consequently, they should be classified as such, i.e. 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 may appear as follows for 2017.

Dr. Redeemable Preference Shares Cr.
Bank (100,000 x 6%) 6,000 Bank 100,000
c/d (bal.) 100,000 Int. expense (100,000 x 6%) 6,000
Answer-7
a)
AJI Panca Ltd.
Statement of Financial Position (Extracts)
As on 31 December, Year 01
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

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CAF-07 IAS 28: Investment in Associates

Question-2
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?

Homework
Question-1
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
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

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CAF-07 IAS 28: Investment in Associates

Distribution and administrative cost (620) (290) (196)

Finance cost (50) (80) (24)
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) 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.
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 (125 (W-1) + 50 (W-1) - 20) 155
Investment in Associate (W-5) 213.5
2,740.5
Current assets
Inventory (620 + 1,460 - 42 (W-6) – 7.5 (W-8)) 2,030.5
Trade Receivables (950 + 529 - 19) 1,460
Cash and Bank balances (900 + 510) 1,410
7,641

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CAF-07 IAS 28: Investment in Associates

Equity and liabilities

Equity
Share capital 1,000
Share premium 200
Consolidated retained earnings (W-2) 1,808
3,008
Non-controlling interest (W-2) 319
3,327
Current liabilities (1,880 + 2,453 - 19) 4,314
7,641
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-6) + 6(W-7)) (2,708)
Gross Profit 2,992
Distribution and Administrative Cost (620 + 290 + 20) (930)
Finance Cost (50 + 80) (130)
Share of profit from Associate (W-3A) 9
Profit before taxation 1,941
Less: Taxation (330 + 274) (604)
Profit after taxation 1,337
Less: Non-controlling interest (W-3) (109)
Share of parent owners 1,228
(W-1) Analysis of equity of S Ltd.
At the date of acquisition Total Parent NCI
80% 20%
Share capital 400
Share premium 140
Retained earnings (W-4) 160
Revaluation Surplus (bal.) 100
800 640 160
Paid for investment/NCI FV 765 210
Goodwill 125 50
Change in equity and reserves from acquisition till end of the year
Retained earnings ( 776 - 160) 616 493 123
(W-2) Calculation of CRE/NCI
CRE NCI
Parent retained earnings-closing 1,370 -
NCI at Fair value - 210
Subsidiary post acquisition Profits from Acq. till end of the year 493 123
Associate post Acquisition profit (W-3) 18.5
Less: Dep on revaluation Surplus (100/10) = 10 in 80:20 (8) (2)
Less: Reversal of profit on sale of stock by S to P (W-6) (42 in 80:20) (34) (8)
Less: Reversal of profit on sale of stock by P to A (W-7) (6) -
Less: Reversal of profit on sale of stock by A to P (W-8) (7.5) -
Less: Impairment of Goodwill - NCI at Fair value (20 in 80:20) (16) (4)
Less: Impairment loss on Investment in associate (2) -
1,808 319

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CAF-07 IAS 28: Investment in Associates

(W-3) Calculation of NCI figure in profit and loss:

Rs. in million
Profit 616
Dep on Revaluation Surplus (100/10 ) (10)
Reversal of profit on stock (42)
Impairment of Goodwill –NCI at F.V (20)
544
NCI share of profit (544 x 20%) 109

(W-3A) Calculation of share of profit from associate

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

Sold stock 1,300
Unsold stock 140
Profit on unsold stock (140 /100 x 30) 42

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

Sold stock 1,000
Unsold stock (1,000 x 10%) 100
Profit on unsold stock (100 /100 x 25) 25
Share of P (25 x 25%) 6

(W-8) Sale of Stock by Associate to P

Sold stock 1,500
Unsold stock (1,500 x 1/10) 150
Profit on unsold stock (150/100 x 20) 30
Share of P (30 x 25%) 7.5

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CAF-07 IAS 21: Foreign Currency Transactions

Lecture 1

Question-1
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-1A
On 1 June 2009 Sarfraz Ltd. buys goods from an overseas supplier. The goods are priced at $ 540.
Payment is made on 31 August 2009.
The prevailing exchange rates are:
01 June 2009 $1: Rs. 116
31 August 2009 $1: Rs. 114
Required:
Record the journal entries for these transactions assuming Company’s year-end is 31 December 2009.

Question-2
Bashir Ltd. having year end of 30 June, buys goods from an overseas supplier on 1 April 2008. The goods
are priced at $ 230. Payment is made on 31 July 2008.
The prevailing exchange rates are:
1 April 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
J. Brand sold goods to overseas customer on 28 March 2003. The goods are priced at $350. The customer
pays in 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
Habib sold goods to overseas customer for UK £ 935 on 12 December 2011. Year end is 31 December 11
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.

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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
Receivables 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)

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CAF-07 IAS 21: Foreign Currency Transactions

Lecture 2

Question-1
A Company purchased a 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%. On 31 December, 2015 fire broke out due to which
value of plant fell down. Its value in use and fair value less cost to sell on 31 December 2015 is
determined to be Rs. 120,000 and Rs. 90,000 respectively.

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.

Question-2
A self prepared question

Homework
Question-1
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 be 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
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 -

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Self-test Questions: Consolidation & IAS 28 CAF-07

Share capital (Rs.1) 200 150

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CAF-07 IAS 21: Foreign Currency Transactions

Required:
Prepare Journal entries for the year ended 30 June 2019.
Answer-1
Date Particulars Dr. Cr.
a) Rs. Rs.
19-03-19 Intangible (200,000 Din. / 0.65) 307,692
Accounts payable 307,692
(Recording of Purchase of an intangible)
25-06-19 Accounts payable 307,692
Exchange loss (bal.) 92,308
Bank (200,000 Din./ 0.5) 400,000
(Recording of Payment of accounts Payable)
b)
27-02-19 Accounts receivable (400,000 Baht / 7) 57,143
Sales 57,143
(Recording of Revenue recognition)
27-02-19 Cost of sales 40,000
Inventory 40,000
(Recording of Cost recognition)
25-05-19 Bank (400,000 Baht /6.7) 59,701
Accounts receivable 57,143
Exchange Gain (bal.) 2,558
(Receipt of accounts receivable)
c)
2-04-19 Accounts receivable (52,694 Rand / 0.096) 548,896
Sales 548,896
(Recording of Revenue )
2-04-19 Cost of sales 200,000
Inventory 200,000
(Recording of Cost)
30-06-19 Exchange loss 21,956
Accounts receivable 21,956
(52,694 /0.1 = 526,940 - 548,896)
(Recording at Year end closing rate)
7-08-19* Bank (52,694 / 0.088 ) 598,795
Exchange gain (bal.) 71,855
Accounts receivable (548,896 - 21,956) 526,940
(Recording of Receipt of accounts receivable)
*This entry is not a part of a Question requirement.
d)
25-05-19 Loan receivable (600,000 Ringgit / 1.5) 400,000
Bank 400,000
(Recording of Loan receivable)
30-06-19 Exchange loss 100,000
Loan receivable
(600,000 Ringgit / 2.0 = 300,000 - 400,000) 100,000
(Recording at Year-end closing rate)

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CAF-07 IAS 21: Foreign Currency Transaction
Lecture # 4
Foreign loans
A possible transaction is:
 the receipt of a loan from a foreign lender or
 the granting of loans to foreign entities.

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
Jin Ltd, a company listed on Pakistan Stock Exchange whose functional currency is Pak Rupees (Rs.),
obtained a foreign loan from Kind Bank Limited on 01 January 2010. Details of the loan agreement with
bank are as follows:
Principal $ 400
Interest payable annually in arrears 10%
Loan is repayable in 8 equal annual installments starting from 31 December 2010.

Relevant exchange rates are:

Date/Period Spot rates Average rates
1 January 2010 US $ 1: Rs 148 -
31 December 2010 US $ 1: Rs 152 -
31 December 2011 US $ 1: Rs 149 -
1 January 2010 - 31 December 2010 - US $ 1: Rs 151
1 January 2011 - 31 December 2011 - US $ 1: Rs 149.5
Required:
Show the journal entries required to record the above loan transactions in Jin Ltd's accounting records for
the years ended 31 December 2010 and 31 December 2011.

Question-2
Refer book (Q – 13 Practice Set)

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CAF-07 IAS 21: Foreign Currency Transaction
Homework
Question-1
Majboor Ltd, a company incorporated in Pakistan whose functional currency is Rupees (Rs.), obtained a
Loan from Gracious Bank of America on 01 January 2017. Details of the loan agreement with bank are as
follows:
Principal $ 5,000
Interest payable annually in arrears 5%
Loan is repayable in 5 equal annual installments starting from 31 December 2017.

Relevant exchange rates are:

Date/ Period Spot rates Average rates
1 January 2017 US $ 1: Rs 150 -
31 December 2017 US $ 1: Rs 145 -
31 December 2018 US $ 1: Rs 160 -
1 January 2017 - 31 December 2017 - US $ 1: Rs 148
1 January 2018 - 31 December 2018 - US $ 1: Rs 155
Required:
Show the journal entries required to record the above loan transaction in Jin Ltd's accounting records for
the years ended 31 December 2017 and 31 December 2018.
Answer-1
Date Particulars Dr. Cr.
Rupees (Rs.)
01/01/17 Bank 750,000
Loan (5,000 x 150) 750,000
(Loan received)
31/12/17 Interest Expense (5,000 x 5% = 250 $ x 148) 37,000
Exchange Gain (bal.) 750
Cash (5,000 x 5 % = 250 $ x 145) 36,250
(Interest paid)
31/12/17 Loan (1,000 x 150) 150,000
Exchange Gain (bal.) 5,000
Bank (1,000 x 145) 145,000
(1st installment Paid)
31/12/17 Loan 20,000
Exchange gain 20,000
[(4,000 x 145) 580,000 – 600,000 (4,000 x 150)]
(Retranslation of remaining loan)
31/12/18 Interest Expense (4,000 x 5% = 200 $ x 155) 31,000
Exchange Loss (bal.) 1,000
Cash (4,000 x 5% = 200 $ x 160) 32,000
(Interest paid)
31/12/18 Loan (1,000 x 145) 145,000
Exchange Loss (Bal.) 15,000
Bank (1,000 x 160) 160,000
(2nd installment Paid)
31/12/18 Exchange loss 45,000
Loan 45,000
[(3,000 x 145) 435,000 – 480,000 (3,000 x 160)]
(Retranslation of remaining loan)

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CAF-07 IAS 21: Foreign Currency Transaction
Question-2
Green Limited, a company incorporated in Pakistan whose functional currency is Pak Rupees (Rs.),
obtained five year long term loan from International Support Fund in US Dollars ($) . The terms of the
loan were as follows:
ISF transferred US $5,000 into on 1 January 2017. The interest rate on the loan was 6. 4022% per annum.
BS is required to make repayments of US $ 1,200 inclusive of principal and interest annually, with the
first payment falling due on 31 December 2017
Relevant exchange rates are:
Date Spot rates Average rates
1 January 2017 US $ 1: Rs 100 -
31 December 2017 US $ 1: Rs 110 -
31 December 2018 US $ 1: Rs 105 -
1 January 2017 - 31 December 2017 - US $ 1: Rs 107.50
1 January 2018 - 31 December 2018 - US $ 1: Rs 102.50
Required:
Show the journal entries required to record the above loan transaction in Green Limited's accounting
records for the years ended 31 December 2017 and 31 December 2018.
Answer-2
Date Particulars Dr. Cr.
Rupees (Rs.)
01/01/17 Bank 500,000
Loan (5,000 x 100) 500,000
(Loan received)
31/12/17 Loan (880 x 100) 88,000
Interest Expense (320 x 107.5) 34,400
Exchange Loss (bal.) 9,600
Cash (1,200 x 110) 132,000
(1ST installment Paid)
31/12/17 Exchange Loss 41,200
Loan [(4,120 x 110) 453,200 – 412,000 (4,120 x 100)] 41,200
(Retranslation of remaining loan)
31/12/18 Loan (936 x 110) 102,960
Interest Expense (264 x 102.5) 27,060
Exchange Gain (bal.) 4,020
Cash (1,200 x 105) 126,000
nd
(2 installment Paid)
31/12/18 Loan 15,920
Exchange gain 15,920
[(3,184 x 105) 334,320 – 350,240 (3,184 x 110)]
(Retranslation of remaining loan)
(W-1) Amortisation Schedule in US Dollars ($)
Date Installment Principal Interest Balance
01/01/17 5,000
31/12/17 1,200 880 320 4,120
31/12/18 1,200 936 264 3,184
31/12/19 1,200 996 204 2.188
31/12/20 1,200 1,060 140 1,128
31/12/21 1,200 1,128 72 0

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CAF-07 IAS 21: Foreign Currency Transaction
Lecture # 5

Question-1 [Loan]
A Pakistani company whose functional currency is the rupee borrowed $90 on 30 June 2018. The
company recognised an interest accrual of $20 at its year-end (31 December 2018).
Exchange rates over the period were as follows:
30 June: Rs.100/$.
Average for the period from 30th June to 31st Dec 2018 is Rs.99/$.
31 December (year-end): Rs.95/$.
Required:
Prepare Journal entries for the year ended 31 December 2018 and also Prepare Balance sheet and P/L extracts.

Question-2 [Bank deposits]

A Pakistani company whose functional currency is the rupee deposited $900 into a dollar current account
in a bank on 30 June 3018.
The company paid an additional $100 into the account on 30 September 2018.

Exchange rates over the period were as follows:

30 June Rs.100/$.
September Rs.99/$.
December (year-end): Rs.95/$.
Required:
Calculate the exchange differences on 31 December 2018.

Question-3 [Advance]
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 Question bank Q.9.1)

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CAF-07 IAS 21: Foreign Currency Transaction
Question-4 [Revaluation]
Star Limited functional currency is Pak Rupees. It bought a property in New York for $5 million on 2
July 2019. The 25% amount was paid immediately and remaining is to be paid on 31 October 2019.
Star Limited financial year ends on 30 September each year.
Relevant exchange rates are:
02 July 2019 $1 = PKR 164
30 September 2019 $1 = PKR 168
31 October 2019 $1 = PKR 166
The fair value of property is $5.1 million on 30 September 2019.
The property is being used for administrative purposes and has a useful life of 50 years. Moon Limited
uses revaluation model.
Requirement:
a) At which amount the above property shall be presented in statement of financial position on 30
September 2019?
b) What is the total charge/credit (net) in profit or loss in respect of the above for the year ended 30
September 2019?
c) What is the total credit in revaluation surplus (OC) in respect of the above for the year ended 30
September 2019?
d) At which amount the payables for property shall be presented in statement of financial position
on 30 September 2019?
e) For this part of requirement, assume cost model is used at which amount the above property shall
be presented in statement of financial position on 30 September 2019?

Question-5
Which of the following is NOT a primary indicator for determining functional currency of an entity?
(a) The currency that mainly influences sales prices for goods and services
(b) The currency of the country whose competitive forces and regulations mainly determine
the sales prices of its goods and services
(c) The currency in which funds from financing activities (raising loans and issuing equity)
are generated
(d) The currency that mainly influences labour, material and other costs
(e) The currency in which receipts from operating activities are usually retained
(f) The currency of the country in which the entity is registered

Question-6
Which of the following is NOT a monetary item?
(a) Cash at bank (Fixed deposit in Pakistani Rupees)
(b) Investment equity instruments of other companies
(c) Trade receivables
(d) Loan payable

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CAF-07 IAS 21: Foreign Currency Transaction
Question-7
Ali Limited (AL) is a retailer of fine furniture based in Pakistan. On October 19, 2017, AL purchase
identical tables from a US based supplier for a total of US $1,500.
The exchange rates, on various dates during the year, are as follows:
Date 1 Rs : US $ (OR) 1 US $ : Rs
October 19, 2017 1 Rs. : $ 0.0080 1 $. : Rs. 125
December 15, 2017 1 Rs. : $ 0.0085 1 $. : Rs. 117.64
December 31, 2017 1 Rs. : $ 0.0095 1 $. : Rs. 105.26
February 03, 2018 1 Rs. : $ 0.0100 1 $. : Rs. 100.00
It sold 75% tables on December 15, 2017 with the remaining 25% tables being sold on February 03, 2018.
The tables were paid for by AL on February 03, 2018.
Required:
Determine, in accordance with the IAS 21 the impact of the above transaction on:
 the profit of Ali Limited (AL) for the year ended December 31, 2017 and
 the statement of financial position at December 31, 2017

Answer-7

Date Description Dr. Cr.

19-10-17 Purchases 187,500
Payables (1,500/ .008) 187,500

31-12-17 Payables 29,605

Exchange Gain [(1,500 / 0.0095) - 187,500] 29,605

Ali Limited (AL)

Income Statement (Extracts )
For the year ended 31 December 2017
Rs. in ‘000’
Sale Not given

Purchases 187,500
Closing Stock [187,500 x 25%] (46,875)
Cost of Sales 140,625
Other Income
Exchange Gain 29,605

Ali Limited (AL)

Statement of Financial Position (Extracts)
As on 31 December 2017
Rs. in ‘000’
Assets
Current Assets
Stock 46,875

Equity and liabilities

Current Liabilities
Payables (187,500 - 29,605) 157,894

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Self-test Questions: Consolidation & IAS 28 CAF-07

Required
Prepare the consolidated statement of financial position of the P group as at 31 December Year 5.

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CAF-07 IAS 10 & 37

Lecture 1
Classwork
1. Book Pg. 41 Definition of Provision
2. Definition of contingent liability from IAS 37
3. Book Page no.42 Example-4
4. Past paper Q.5 (d)
Lecture 2
Classwork
1. Book Page no.44 Example-9 & 10
2. Page no.40 (Assets, Liability treatment theory concepts)
3. Past paper Q.5 (a)
Lecture 3
Classwork
1. Revision of Page no.40
2. Question no (i),(ii) Page no.61
3. Re-imbursement
i. Example-12 on page 45 of book
ii. Para 53 & 54 (Page no.8 of Notes)
Lecture 4
Classwork
1. Past paper Q.2(b) reimbursement
2. Restructuring (notes page no.5 & 9)
3. Past paper Q.3 (c)
4. Past paper Q.5 (c)
Lecture 5 (Sunday class)
Classwork
1. Past Paper Q.9(ii)
2. Future operating losses:
i. Notes Page no.8 (Standard para 63-65)
ii. Past PaperQ.6 (IV)
3. Onerous Contract (Class examples) (Notes page no.8 of notes para 68 of IAS)
4. MCQ no.1
5. IFRS Part B 1,2,2B,5,6
6. Past Paper Q.2 (c) & Q.1 (c)
7. Future repair (IFRS Part B 11A and 11B)
8. Warranty (Past paper Q.12(i))

Lecture 6
Classwork
1. Page no.11 (Example 2A IFRS) based on Para 22
2. Hand written page of journal entries
3. Hand written page discussing Note to the financial statements
4. IAS 10 started

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Self-Tests Solution FAR-II

Answer-2
Note for students:
- As per question investment appearing in Karl books is 98. It includes 76 cost of investment. Further
on the face of balance sheet of Karl we do not find loan receivable from S therefore 20 is also
included in investment figure of balance sheet.
- In this question intercompany balance in the books of S is not given rather C.I.T figure of Rs. 2.5 is
given. Therefore if P is showing a figure of Rs. 4 and C.I.T is 2.5 than it means 1.5 (bal.) is included
in payables of S only.
Karl Limited
Consolidated Statement of Financial Position
As on November 30, 2007
Rs in ’000’
Assets
Non-current assets
Property, plant and equipment (138 + 115 - 5 (W-4) + 0.5 (W-4)) 248.5
Investment (98 - 76 - 20) 2
Goodwill (13.75 (W-1) + 8.5 (W-1) - 1) 21.25
271.75
Current assets
Inventory (15 + 17 - 1.6 (W-3)) 30.4
Accounts receivable (19 + 20 - (Adj. vii) 4) 35
Cash and Bank 2
Cash in transit 2.5
69.9
341.65
Equity and liabilities
Equity
Share capital 50
Consolidated Retained earnings (W-2) 186.09
236.09
Non-controlling interest (W-2 ) 51.06
287.15
Current liabilities (33 + 23 - (Adj. vii) 1.5) 54.5
341.65

(W-1) Analysis of equity of Karl

At the date of acquisition Parent NCI
60% 40%
Share capital 40
Retained earnings (W-5) 63.75
103.75 62.25 41.5

Paid for investment 76

Fair value of NCI 50
Goodwill 13.75 8.5
Change in equity from acquisition till balance sheet date
Changes in retained earnings (69 - 63.75) 5.25 3.15 2.1

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Self-Tests Solution FAR-II

Answer-3

Hosterling
Consolidated Statement of Comprehensive Income
for the year ended 30.9.20X6
Rs.
Sales (105,000 + 62,000 - 18,000- 10,000) 139,000
Less: Cost of sales (68,000 + 36,500 - 1,000* - 18,000 + 1,875 (W-4) - (77,975)
10,000 + 1,000 (W-5) - 400**)
Gross profit 61,025
Less: Distribution (4,000 + 2,000) (6,000)
Admin (7,500 + 7,000 + 1,000 (adj. vii) - 1,000 (adj. vii)) (14,500)
Finance Cost (1,200 + 900) (2,100)
38,425
Add: Other Income (400 - 400) -
Profit before taxation 38,425
Less: Taxation (8,700 + 2,600) (11,300)
Profit after taxation 27,125
Non-controlling interest (W-3) (2,680)
Share of parents owners 24,445

*Reversal of depreciation on rev. loss on plant (5,000/5) = 1,000

** Reversal of depreciation on sale of fixed by S to P (4,000/10) = 400

CRE is Rs. 143,005.

(W-1) Analysis of equity of S Ltd.

At the date of acquisition Total Parent NCI
80% 20%
Share capital 20,000
Retained earnings 18,000
Revaluation surplus - intellectual property 4,000
Revaluation surplus – Land 3,000
Revaluation loss – plant (5,000)
40,000 32,000 8,000
Paid for investment 20,000
Goodwill (12,000)

Change in equity from acquisition till end of the year

Retained earnings (60,000 - 18,000) 42,000 33,600 8,400

(W-2) Calculation of Consolidated retained earnings:

CRE
Retained Earnings of P - closing 100,000
Subsidiary post acquisition profits 33,600
Add: Negative goodwill (W-1) 12,000
Add: Reversal of depreciation on Rev. loss - Plant 2,400
(5,000/5 x 3) = 3,000 x 80%
Less: Reversal of profit on stock sold by P (W-4) (1,875)
Less: Reversal of profit on stock sold by S = 1,000 (W-5) x 80% (800)
Less: Reversal of profit on sale of fixed asset by S = 4,000 (W-6) x 80% (3,200)
Add: Reversal of Depreciation from date of sale till balance sheet date 880
[4,000/10 years x (2 years + 9/12 years)] = 1,100 x 80%
143,005

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Summary of adjustments relating to IAS 37 CAF-07

A provision should be made for redundancy cost of Rs. ___ as it pertains to

the closing of ____ unit. [Para 80]

Costs for staff training and relocation of staff and marketing and cost of
investment in new systems relate to future conduct of the business and should
not be recorded in the current year ended _______. [Para 81]

Salary of existing operation manager should not be recorded as it is not

incremental cost, and would be incurred whether relocation takes place or not.

IAS-37 prohibits the recognition of future operating losses and profits on

sale of assets. [Para 82 and 83]
Guidance on specific issues relating to creation of “provision”
10 Future Q.6 (iv) IAS-37 prohibits the recognition of future operating losses. [Para
operating 63]
losses An expectation of future operating losses is an indication that
certain assets of the operation may be impaired. [Para 65]
11 Expected Pg. 45 Gains from the expected disposal of assets shall not be taken into
disposal Ex-10 account in measuring a provision. [ Para 51]
of assets An entity recognises gains on expected disposals of assets at the
time specified by the Standard dealing with the assets concerned.
[Para 52]
12 Future Pg. 44 Future events that may affect the amount required to settle an
events Ex-9 obligation shall be reflected in the amount of a provision where
there is sufficient objective evidence that they will occur. [Para 48]
13 Onerous Q.2(a) If an entity has a contract that is onerous, the present obligation
contract Q.12 (ii), under the contract shall be recognised and measured as a provision.
Examples Pg. [Para 66]
52 Provision is recorded at lower of:
- the cost of fulfilling contract and
- any compensation or penalties arising from failure to fulfil
it
14 Decomm Q.13m The amount of a provision for decommissioning shall be the present
issioning Ex. pg. 47 value of the expenditures expected to be required to settle the
Q.B (Q.1,2&3) obligation. [Para 45]
15 Future IFRS Part B IAS 37 states that a provision cannot be recognised for the cost of
repairs Ex. 11 A,B future repairs
16 Warranty Q.12 (i)
costs
Ex.7 Pg.43

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Self-Tests Solution FAR-II

(W-2) Calculation of CRE/NCI CRE NCI

(W-4) Calculation of profits and retained earnings

(W-1) Analysis of equity of S Ltd.

At the date of acquisition Total Parent NCI
(150/200);(50/200) 75% 25%
Share capital 200
Share premium 80
Retained earnings (bal.) 60
340 255 85
Paid for investment 320
Goodwill 65

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Self-Tests Solution FAR-II

(W-3.1)
Investment at Cost:
Cash Paid (Given) 190
Share of QM to be issued (4 x 15) 60
250

Following entry is not passed in the books of P Dr. Cr.

Investment (4 x 15) 60
Purchase consideration payable 60

(W-4)
Dr. Disposal A/C - machine Cr.
Book value (26 - 26/10 x 2) 20.8 Cash 24
P/L (bal.) 3.2

(W-5) Sale of Stock by P to Associate

Sold stock 52
Unsold stock 52
Profit on unsold stock (52 / 130 x 30) 12
Share of P (12 x 40%) 4.8

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

Sold stock 10
Unsold stock 10
Profit on unsold stock (10 / 125 x 25) 2
Share of P (2 x 40%) 0.8

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

(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

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

BASIC THEME OF IFRS-09

Following is an example to illustrate the basic concepts of IFRS-09:
Description Royal Books Honda
1. Royal fan purchased goods Purchase 50 Debtor 50
from Honda for Rs. 50 Creditor 50 Sale 50
(Creditor is financial liability) (Debtor is financial asset)
2. Royal fan received loan Cash 1,000 Loan Receivable 1,000
from Honda of Rs. 1,000 Loan payable 1,000 Cash 1,000
(Loan payable is financial liability) (Loan receivable is a financial
asset)
3. Royal fan issued 500 new Cash (500 x 12) 6,000 Investment 6,000
shares (face value Rs. 10 S/C (500 x 10) 5,000 Cash 6,000
each) to Honda for Rs. 12 S/P (500 x 2) 1,000 (Investment is a financial asset)
per share. (Share capital is equity instrument)
4. Royal fan issued 10% Cash 50,000 Investment in debenture 50,000
debentures to Honda Debenture payable 50,000 Cash 50,000
having face value of Rs. (Debenture loan payable is (Investment in debenture (loan
50,000. financial liability) receivable) is a financial asset)
Financial Asset A financial asset is any asset that is:
1. cash;
2. An equity instrument of another entity;
3. A contractual right to receive cash or another financial asset from another entity
Examples
Financial assets include:
1. Cash/Bank
2. Investment in Shares
3. Loan receivable
4. Investments in Debentures/Bonds
5. Accounts receivable
Note: All of these are not financial assets as they does not fall in any of above 3 categories:
1. Property, plant and equipment/ intangibles/ inventory
2. Prepayments, Advance tax (No contract exist)
Financial Liability
A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset
to another entity; or
Examples
Financial liabilities include:
1. Creditors/Payables/Accrued liabilities
2. Loan payable/Interest payable
3. Debentures/Bonds payables/ Redeemable preference shares
Note: All of these are not financial liabilities
1. Tax payable, Unearned incomes (such as unearned rental income)
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
Financial Instrument
A financial instrument is any contract that gives rise to both:
 A financial asset in one entity, and
 A financial liability or equity instrument in another entity.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Required:
The journal entry required to record change in fair value of investment in shares at 31 December 2015.
Answer-2
Journal entries Rs. ‘000’
Date Particular Dr. Cr.
31/12/15 Investment 500
P/L 500
(W-1)
Dr. Investment A/c Cr.
b/d (100 x 10) 1,000
Fair value gain (bal.) (P/L) 500 c/d (100 x 15) 1,500

Question-3
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.
Answer-3
Journal entries Rs. In ‘000’
Date Particular Dr. Cr.
31/07/15 Investment 1,000
Bank 1,000
31/12/15 Investment 500
P/L 500
(W-1)
Dr. Investment A/c Cr.
b/d 1,000
Fair value gain (bal.) (P/L) 500 c/d 1,500

Question-4
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.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

4. Which of the following are not classified as financial instruments under IAS 32?
a) Intangible assets
b) Trade receivables c) Redeemable preference shares
5. Iron Limited has 5% Rs. 30 million redeemable preference shares in issue which will be redeemed in
5 years’ time.
How should the preference share capital and preference dividend be presented in the
financial statements of Iron Limited?
a) Preference share capital as equity and preference dividend in the statement of changes in equity
b) Preference share capital as equity and preference dividend in the statement of profit or loss
c) Preference share capital as liability and preference dividend in the statement of changes in equity
d) Preference share capital as a liability and preference dividend in the statement of profit or loss
6. Mercury Limited purchased 1 million shares in Jupiter Limited, a listed company, for Rs. 40 million
on 1 January 2017. By the year end, 31 December 2017, the fair value of a Jupiter Limited’s share
had moved to Rs. 48 million. If Mercury Limited were to dispose of the shares, broker fees of Rs.
500,000 would be incurred.
What is the correct treatment for shares at year end?
a) Hold shares in investments at Rs.47.5 million, with Rs. 7.5 million gain being taken to the
statement of profit or loss
b) Hold shares in investments at Rs. 48 million, with Rs. 8 million gain being taken to the
statement of profit or loss
c) Hold shares in investments at Rs. 48 million, with Rs. 8 million gain shown in the statement of
changes in equity
d) Hold shares in investments at Rs. 48 million, with Rs. 7.5 million gain shown in the
statement of changes in equity
7. On 1 January 2018 Silver Limited purchased 40,000 Rs. 10 listed equity shares at a price of Rs. 30
per share. An irrevocable election was made to recognise the shares at fair value through other
comprehensive income.
Transaction costs were Rs. 30,000. At the year end of 31 December 2018, the shares were trading at
Rs. 60 per share.
What amount in respect of these shares will be shown under 'investments in equity instruments' in
the statement of financial position as at 31 December 2018?

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture 3

IMPORTANT TERMINOLOGIES FOR “INVESTMENT IN DEBT INSTRUMENTS”

Sr. Item Description

INVESTMENT IN DEBT INSTRUMENTS - AT AMORTISED COST

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

DECISION TREE FOR “INVESTMENTS IN DEBT INSTRUMENTS”

ACCOUNTING TREATMENT INVESTMENT IN DEBT INSTRUMENTS

The gain in fair value (OCI)

reserve will be transferred
to profit and loss.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Lecture 4

Homework

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Statement of Financial Position (Extracts )

As on 31 December
Rupees
2019 2018
Non-current 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

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

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)
(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

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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

Question-3
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.

Answer-3
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
(Recording of interest received at coupon rate)
31.12.20 Bank 450,007
Investment 450,007
(Redemption of investment)

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3. Rs. 1,009
Dr. Investment A/c Cr.
Bank 970 Bank (1,000 x 6%) 60
Int. income 79 c/d 989
(970 x 8.1%)
b/d 989 Bank (1,000 x 6%) 60
Int. income 80 c/d 1,009
(989 x 8.1%)

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2)
Amortization schedule for Bond -1
Dr. Bond - 1 (Financial Liability a/c) Cr.
Cash (225,000 x 10%) 22,500 01/01/19 Bank 213,750
(225,000 - 5% x 22,5000)
31/12/19 c/d 223,462 Int. expense 32,212
(213,750 x 15.07%)
Cash 22,500 01/01/20 b/d 223,462
31/12/20 c/d 234,638 Int. expense 33,676
(223,462 x 15.07%)
Cash 22,500 01/01/21 b/d 234,638
Bank (bal.) 247,498* Int. expense 35,360
(234,638 x 15.07%)
31/12/21 c/d -
*Redemption on value is Rs. 247,500. The difference of Rs. 2 is due to rounding off.

Amortization schedule for Bond -2

Semi-annul coupon rate = 15%/ 2 = 7.5%
Semi-annul effective rate = 11.63%/ 2 = 5.815%
Dr. Bond - 2 (Financial Liability a/c) Cr.
30/06/19 Cash (150,000 x 7.5%) 11,250 01/01/19 Bank (150,000 x 1.1 - 2,500) 162,500
30/06/19 c/d 160,699 30/06/19 Int. expense 9,449
(162,500 x 5.815%)
31/12/19 Cash 11,250 01/07/19 b/d 160,699
31/12/19 c/d 158,794 31/12/19 Int. expense 9,345
30/06/20 Cash 11,250 01/01/20 b/d 158,794
30/06/20 c/d 156,778 30/06/20 Int. expense 9,234
31/12/20 Cash 11,250 01/07/20 b/d 156,778
31/12/20 c/d 154,645 31/12/20 Int. expense 9,117
30/06/21 Cash 11,250 01/01/21 b/d 154,645
30/06/21 c/d 152,388 30/06/21 Int. expense 8,993
31/12/21 Cash 11,250 01/07/21 b/d 152,388
31/12/21 Bank *149,999 31/12/21 Int. expense 8,861
31/12/21 c/d -
*Redemption on value is Rs. 150,000. The difference of Rs.1 is due to rounding off.

Amortization schedule for Bond -3

Dr. Bond - 3 (Financial Liability a/c) Cr.
Cash (90,000 x 0%) - 01/01/19 Bank *70,000
31/12/19 c/d 76,117 Int. expense 6,117
(70,000 x 8.738%)
Cash - 01/01/20 b/d 76,117
31/12/20 c/d 82,768 Int. expense 6,651
Cash - 01/01/21 b/d 82,768
Bank 90,000 Int. expense 7,232
31/12/21 c/d -

*(90,000 - 20% of 90,000) = 72,000 - 2,000 = 70,000

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CHAPTER-9 IAS 10 & 37 & IFRIC-1

IFRIC 1

ADDITIONAL PRACTICE QUESTIONS

Question-1
Violet Power Limited is running a coal based power project in Pakistan. The Company has built its plant
in an area which contains large reserves of coal. The company has signed a 20 years agreement for sale of
power to the Government. The period of the agreement covers a significant portion of the useful life of
the plant. The company is liable to restore the site by dismantling and removing the plant and associated
facilities on the expiry of the agreement.
Following relevant information is available:
(i) The plant commenced its production on July 1, 2015. It is the policy of the company to measure the
related assets using the cost model;
(ii) Initial cost of plant was Rs. 6,570 million including erection, installation and borrowing costs but
does not include any decommissioning cost;
(iii) Residual value of the plant is estimated at Rs. 320 million;
(iv) Initial estimate of amount required for dismantling of plant, at the time of installation of plant was
Rs. 780 million. However, such estimate was reviewed as of June 30, 2016 and was revised to Rs.
1,012 million;
(v) The Company follows straight line method of depreciation; and
(vi) Real risk-free interest rate prevailing in the market was 8% per annum when initial estimates of
decommissioning costs were made. However, at the end of the year such rate has dropped to 6% per
annum.
Required:
Work out the carrying value of plant and decommissioning liability as of June 30, 2016.
(Question bank)
Question-2
The financial statements of Bravo Limited (BL) for the year ended 31st December 2013 are under
finalisation and the following matters are under consideration:
BL’s plant was commissioned and became operational on 01st July 2008 at a cost of Rs. 130 million.
At the time of commissioning its useful life and present value of decommissioning liability was estimated
at 20 years and Rs. 19 million respectively.
BL’s discount rate is 10%.
There has been no change in the above estimates till 31st December 2013 except for the decommissioning
liability whose present value as at 01st July 2013 was estimated at Rs. 25 million.
Required:
Compute the related amounts as they would appear in the statements of financial position and
comprehensive income of Bravo Limited for the year ended 31st December 2013 in accordance with
IFRS.
(Question bank)

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CHAPTER-9 IAS 10 & 37 & IFRIC-1

Question-3
Mujju company purchased plant costing Rs. 2,000 on 01 January 2018 and it is installed on the same date
for Rs. 500. It is expected to be dismantled at the end of the year 2027 i.e. 31 December 2027. Discount
rate is 10%. Estimate of future dismantling cost made on 01 January 2018 is Rs. 200. Life of plant is 10
years.
Mujju uses fair value model for its fixed assets and fair value of plant at 31 st December 2018 was
estimated to be Rs. 2,700.
On 30th June 2019 estimate is revised and future dismantling is estimated at Rs. 250 now.
Required
Prepare journal entries for the year ended 31 December 2018 and 2019.
Question-4
Karim Limited (KL) bought a special purpose engineering plant on 1 January 2015 at a cost of Rs. 1,755
million inclusive of sales tax @ 17% (refundable).

KL is required to decommission the plant after a period of 2 years. Decommissioning cost is estimated at
Rs. 300 million. The applicable discount rate is 11%.

KL uses the cost model for subsequent measurement of its property, plant and equipment. Plant is being
depreciated using the straight line method over its useful life.

Required:
Prepare journal entries to record the above transactions for the years 2015 and 2016. (10)
{March 17, Q.7}

Question-5
Sony Corporation purchased a plant costing Rs. 120 on 01 January 2014 and it is installed on the same
date. It is expected to be dismantled in 10 years time. Discount rate on the date of purchase of plant is 8%.
Estimate of future dismantling cost made on 01 January 2014 is Rs. 20.
Life of plant is 10 years and Company uses straight line method to depreciate plant over its useful life.
Sony Corporation subsequently measured the plant at revaluation model.
Date of Revaluation Rupees
31 December 14 140
 01 January 2017 Company re-estimated decommissioning cost at Rs. 24.
 On 01 April 2018 discount rate is revised and new rate was 5%.
Sony Corporation year end is 31 December.

Required:
Prepare extracts of Statement of comprehensive income and Statement of financial Position for the year
end 2018.

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ADDITIONAL PRACTICE QUESTIONS

Question-1 [Debt instrument]

Required:
Prepare necessary journal entries for the year ended 31 December 2006 and 2007.
(Assuming bond is held to receive contractual cash flows and to sell if good opportunity arises).

Required:
Prepare amortisation schedule showing relevant accounting treatment from issuance of bond till maturity
date.

Required:
Prepare the amortisation schedule

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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

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

Profit for the year, before accounting for the above, was Rs. 508,500.

Required
a) Prepare extracts from statement of financial position as on31 December 2001.
b) Prepare relevant accounting entries for the year ended 31 December 2001.
(ICAP Question Bank)

Question-8 [Final account question]

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:

Required:
 Prepare Statement of Comprehensive Income?
 Prepare Statement of Financial position?

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CAF-07 IFRS 9: FINANCIAL INSTRUMENTS

ADDITIONAL PRACTICE ANSWERS

(W-2) Closing Book Value as per T a/c (A) Fair Value (B) Gain/(Loss) (B - A)
2006 32,482 40,000 7,518

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Bank (2,000,000 x 14%) 280,000 Y-15 b/d 2,039,738

Bank *1,999,978 Int. expense 240,240
(2,039,738 x 11.778%)
c/d -
*Redemption value is Rs. 2,000,000. The difference of Rs. 22 is due to rounding off.

Answer-4
a)
Amortization schedule:
Rupees
Dr. Bonds (Financial Asset) Cr.
Bank 93,134 Bank 12,000
Int. income 13,039 c/d (bal.) 94,173
b/d 94,173 Bank 12,000
Int. income 13,184 c/d (bal.) 95,357

b)
01/01/10 Investment 93,134
Bank 93,134
31/12/10 Investment 13,039
Interest income 13,039
01/01/11 Bank 12,000
Investment 12,000
31/12/11 Investment 13,184
Interest income 13,184

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CAF-07 IAS-41: Agriculture

Lecture # 1

Question-1
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 30th June 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 Flock of 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.

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CAF-07 IAS-41: Agriculture

Home work
Question-2
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)

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CAF-07 IAS-41: Agriculture

Lecture # 2
Biological assets Agricultural produce Products that result from
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

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CAF-07 IAS-41: Agriculture

DEFINITIONS

1. Agricultural 1. Agricultural Activity is the management of the biological transformation

Activity (such as biological growth) of a biological asset for the purpose of sale of
that asset; or
2. Agricultural activity is the management of biological transformation
(reproduction) of a biological asset for the purpose of creating additional
biological assets, or
3. Agricultural activity is the management of biological transformation of a
biological asset for the purpose of harvesting agricultural produce from that
asset.
2. Biological means the processes of:
transformation  growth (calves grow in mature cattle, trees grow),
 production (cow gave milk, sheep give wool),
 degeneration (decrease in quantity may be through death or cut down)
 procreation/reproduction (calves are born)
that cause changes in the quality or the quantity of a biological asset.
3. Biological a living animal or plant, such as sheep, cows, plants, trees and so on.
asset
4. Agricultural is the harvested product of the entity’s biological assets. (such as milk from cow,
produce meat from cow, eggs, fruits)
5. Harvest the detachment of produce from a biological asset or the cessation of a biological
asset’s life.
6. Bearer plant is a living plant that:
(IAS 41 does a. is used in the production or supply of agricultural produce;
not apply on b. is expected to bear produce for more than one period; and
these) c. has a remote (low) chance of being sold as agricultural produce, however
it may be sold as scrap sale.

Bearer plants
Mango trees, tea bushes, grape vines and rubber trees normally fall under IAS 16
and measured on cost model or revaluation model after deducting accumulated
depreciation and accumulated impairment loss. We start depreciation when these
are available for use.
Not a bearer plant
 Produce grown on bearer plants falls under IAS 41, for example,
mangoes on mangoe tree, tea leaves, grapes and oil palm fruit
 Annual crops such as maize, rice, wheat and potatoes.

Note: There is no concept of bearer animal.

Illustrative example-1
1. A farmer has a field of lambs (‘biological assets’).
2. As the lambs grow they go through biological transformation.
3. As sheep they are able to procreate and lambs will be born (additional biological assets) and the
wool from the sheep provides a source of revenue for the farmer (‘agricultural produce’).
4. Once the wool has been sheared from the sheep (‘harvested’), IAS 2 requires that it be accounted
for as regular inventory.

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CAF-07 IAS-41: Agriculture

Broaden the Concept

1. All Biological assets are No

covered under IAS 41?  If animal is held in zoo or park for recreational purpose, it
does not fall under IAS 41 as there is no biological
transformation.
 Watch dog in Pearl Continental hotel.
 Cart horses
All of above are dealt by IAS 16
2. Are all Biological assets are No
measured at fair value less  Refer above examples
cost to sell

RECOGNITION AND MEASUREMENT

1. Recognition Biological asset An entity should recognise when (and only when):
and  the entity controls the asset as a result of past events
agricultural produce  it is probable that future benefits will flow from the
asset to the entity, and
 the fair value or cost of the asset can be measured
reliably.
2.Measurement Initial and subsequent Fair value minus ultimate selling costs with the gain or loss
measurement of included in profit or loss for the period in which it arises.
biological asset
Note: If you have thousands of animals you can group them
for measuring fair value.
Initial Measurement Fair value minus ultimate selling costs at point of harvest.
of agricultural The gain or loss on is included in the profit or loss for that
produce at point of period.
harvest
“Ultimate selling costs” include commissions to brokers and dealers, levies to regulators, transfer taxes
and duties. (These exclude finance cost and income tax expense). (Note in exam if you are given with
transportation cost you will treat it as selling cost)
“Fair value” is quoted price in an active market.
Note: If fair values cannot be measured reliably, the biological asset should be measured at its cost less
any accumulated depreciation/impairment under IAS 16. Depreciation will start when it matured. If fair
value is subsequently available you can switch back to fair value less cost to sell.

GOVERNMENT GRANTS
Type Treatment
1.Unconditional grant An unconditional grant should be recognised as income when
the grant becomes receivable.
2. Conditional grant (For example, the The grant should be recognised only when the conditions are
entity may be asked not to engage in a met.
specific agricultural activity.)
If the biological asset has been measured at cost, then the requirements of ‘IAS 20 ACCOUNTING FOR
GOVERNMENT GRANTS’ should be applied.

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CAF-07 IAS-41: Agriculture

Lecture # 3

Question-1
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
A herd of twenty 4-year old animals was held on 1 January 2013 at Rs. 250 per animal.

The fair values less estimated cost to sell were:

 4-year-old animal at 31 December 2013 Rs. 300
 5-year-old animal at 31 December 2013 Rs. 320

Calculate gain/(loss) separately relating to price and physical change.

Question-3 [IFRS Part B]

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.

Discussed Question bank Q. 2 and 4

Discussed Disclosures

Homework
Practice Q. 3, 2, 6, 7, 8 (Ignore all other questions of practice set)

SCOPE OF IAS-41
Include Exclude
1. Biological assets 1. Harvested agricultural produce
2. Agricultural produce at point of harvest 2. Land relating to agriculture
3. Governemt grant for agriculture 3. Bearer plants
4. Intangible relating to agriculture

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15
ICAP Additional
Practice Questions of
Lease with
decommissioning

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CAF-07 IAS 10 & 37

Lecture 6
Classwork
1. Page no.11 (Example 2A IFRS) based on Para 22
2. Hand written page of journal entries
3. Hand written page discussing Note to the financial statements
4. IAS 10 started

Page 1

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CAF-07 IFRS 16: LEASES

Question-3 (Operating lease – Simple question)

Jojo Mojo Limited entered into an operating lease with Mojo Jojo Limited on 1 January 2001.
The lease was over a plant (which Jojo Mojo Limited had bought on 1 January 2001 for Rs. 600,000).
The terms of the lease is as follows commencement date: 1 January 2001 lease term: 3 years fixed lease
instalments, payable as follows:
- 31 December 2001: Rs. 200,000
- 31 December 2002: Rs. 220,000
- 31 December 2003: Rs. 300,000
Mojo Jojo Limited may purchase the leased asset at its market price on 31 December 2003 Unguaranteed
residual value: Rs. 60,000.
Jojo Mojo Limited depreciates its plant over three years on the straight-line basis.

Required:
Prepare the journal entries for all the years w.r.t. books of jojo mojo limited.

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CAF-07 IFRS 16: LEASES

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

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 ) 5 210,964 183,447 27,516 0

Now we will calculate 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)

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CAF-07 IFRS 16: LEASES

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 154,435
Accumulated depreciation 154,435
(Recording of depreciation expense)

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 16: LEASES

Answer-2
Scenario 1: Lease term = 3 years + 2 years = 5 years
Scenario 2: Lease term = 3 years
Scenario 3: Lease term = 7 years
Scenario 4: Lease term = 7 years + 3 years = 10 years
Scenario 5: Lease term = 7 years

Answer-3
Jojo Mojo Ltd.
Entries in the books of lessor
Date Particulars Dr. Cr.
01/01/01 Plant 600,000
Bank 600,000
( Purchase of Asset )
31/12/01 Bank 200,000
Rent receivable (bal.) 40,000
Rental income (W-1) 240,000
(Recording of rental income)
31/12/01 Depreciation expense {(600,000-60,000)/3years} 180,000
Accumulated depreciation 180,000
(Recording of depreciation expense)
31/12/02 Bank 220,000
Rent receivable (bal.) 60,000
Rent receivable 40,000
Rental income (W-1) 240,000
(Recording of rental income)
31/12/02 Depreciation expense {(600,000-60,000)/3years} 180,000
Accumulated depreciation 180,000
(Recording of depreciation expense)
31/12/03 Bank 300,000
Rent receivable 60,000
Rental income (W-1) 240,000
(Recording of rental income)
31/12/03 Depreciation expense {(600,000-60,000)/3years} 180,000
Accumulated depreciation 180,000
(Recording of depreciation expense)

(W-1) Calculation of Rental Income on Straight Line basis

31 December 2001 200,000
31 December 2002 220,000
31 December 2003 300,000
Total LP 720,000
Rental Income (720,000/3) 240,000

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16
IAS 12
Revaluation at
year end

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Income Tax IAS: 12 Income Tax

Concept:
Deferred Tax and Revaluation at year end

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:
Prepare
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.

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
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

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Income Tax IAS: 12 Income Tax

(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

(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

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Income Tax IAS: 12 Income Tax

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 60
Current Tax Payable 60
(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 90
Current Tax Payable 90
(Recording of current tax expense)
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 36
Current Tax Payable 36
(Recording of current tax expense)
30/06/13 Deferred Tax Expense 24
D.T.L 24
(Recording of D.T.E)

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Income Tax IAS: 12 Income Tax

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 69
Current Tax Payable 69
(Recording of current tax expense)
30/06/14 Deferred Tax Liability 9
Deferred Tax Expense 9
(Reversal of D.T.E)

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