CAF-05

Financial Accounting
and Reporting II

Vol. I

Practice Manual Examination

Questions & Answers

Book Contains Translations of

QURANIC AYATS & AHADITHS,
Therefore, Handle Carefully.
 Table OF Contents
Chapter Topics Page No.
No.

1 Lease Part 1 01

2 IAS 21 Complete 19

3 IAS 12 Income Tax 64

4 IAS-16 130

5 Consolidation 134

6 IAS-28 Complete 237

6 (a) Consolidation and IAS-28 Extra Questions 265

6 (b) Extra Discussion of Consolidation Complete 288

7 Test Questions 309

8 Extra Practice Questions All 326

IFRS 16 Lease[Part 1]
Present Value

Discounting Annuity
(1+i)-n 1-(1+i)-n
i

i=interest rate
n= no of years

A company is required to pay 100,000 at the end of five years and suppose interest rate is 10%.Calculate PV.
=100,000 (1.1)-5
=Rs 62,092
A company is required to pay 100,000 at the end of each year for next five years.
− Interest rate = 10%
− Suppose today’s date is 1-1-2014

31-12-2014 100,000 x (1+0.1)-1 90,909

31-12-2015 100,000 x (1+0.1)-2 82,645
31-12-2016 100,000 x (1+0.1)-3 75,131
31-12-2017 100,000 x (1+0.1)-4 68,301
31-12-2018 100,000 x (1+0.1)-5 62,092
379,079

Important

Annuity 1-(1+i)-n
i

In order to simplify the above calculation of PV, we can use formula of annuity if there are more than
one instalments. However this formula can only be used if amounts are same and interval between
the amounts is constant.

100,000 [1-(1+0.1)-5]
0.1
= Rs 379,079

• Four annual instalments of Rs 71,465 payable at the end of each year. Interest rate is 16%.
= 71,465 [1-(1+0.16)-4]
0.16
= Rs 199,972
• Four annual instalments of Rs 2,000 payable at the beginning of each year. Interest rate is 10%.

1-1-2014 2,000
1-1-2015 2,000

1-1-2016 2,000
1-1-2017 2,000

PV = 2,000 + 2,000 [1-(1.1)-3]

0.1

1
 PV = Rs 6,974

Leases (IFRS – 16)

A contract that conveys *right to use an asset for a period of time in exchange for consideration.
*For example property, plant and machinery, vehicles etc.
There are two parties involved in a lease contract.
Lessor:
An entity that provides the right of use an asset for a period of time in exchange for consideration.
Lessee:
An entity that obtains the right of use an asset for a period for time in exchange for the consideration.

Q.1 On 1 January 2000 a company obtains a small bottling and labeling machine from a leasing company under a lease. The
cash price of the machine was Rs 7,710 while the amount to be paid was Rs 10,000. The agreement required the
immediate payment of a Rs 2,000 deposit with the balance being settled in four equal annual Installments commencing
on 31 December 2000. The charge of Rs 2,290 represents Interest of 15% per annum, calculated on the remaining
balance of the liability during each accounting period. Depreciation on the plant is to be provided for at the rate of 20%
per annum on a straight line basis assuming a residual value of nil. Ownership of asset is expected to be transferred to
lessee at the end of lease term.
Required:
a) Calculate lease payments (LP) and PV of LP.
b) Prepare journal entries in the books of lessee for the year ended 31-12-2000 and 31-12-2001.
c) Prepare extracts from statement of financial position as on 31 December 2001 and statement of comprehensive
income for the year then ended including comparatives.

Q.2 An asset with a cash value of Rs 200,000 is leased over a period of 4 years.
• The asset is depreciated over 4 years to a nil residual value.
• Annual installments of Rs 71,475 are payable in arrears.
• The discount rate (interest rate implicit) is 16% per annum.
• The lease commenced on 1 March 2005. The first installment is payable on 28 February 2006 and the financial year
of the lessee ends on 31 December.

Required: For lessee:

a) Draft the journal entries for the year ended 31 December 2005
b) Draft the journal entries for the year ended 31 December 2006
c) Statement of Financial Position extracts as on 31 December 2006 (with comparatives)
d) Statement of Comprehensive Income extracts for the year ended 31 December 2006 (with comparatives)

2
Treatment of Lease in the Books of Lessee:
At the commencement date*, a lessee shall recognise a right of use asset and a lease liability.
*Commencement date; means the date, lessor makes the asset available for use to the lessee.
Initial Measurement:
The entry shall initially be made at the present value of lease payments*.
Lease Payments: means all relevant payments that a lessee expects to make over the lease term.
Subsequent Measurement of Right to use Asset:
After the commencement date, a lessee shall measure the right of use asset applying the cost model or revaluation
model. If right of use asset relates to property, plant and equipment (IAS 16) and revaluation model is applied then lessee
shall apply the revaluation model to all of the right to use assets that relate to that class of property, plant & equipment.
If right of use asset relates to Investment Property (IAS 40) the lessee can use fair value model of IAs 40.
Cost Model: [Para 30]
If asset is measured at cost model, then lessee shall measure the right of use the asset at cost less accumulated
depreciation and accumulated impairment losses (as in IAS 16).
Depreciation Policy: [Para 32]
If the lease transfers ownership of the asset to lessee by the end of the lease term or if it is reasonably certain that lessee
will exercise the purchase option available in the lease contract, lessee shall depreciate the asset over useful life. If this is
not the case, the lessee shall depreciate the asset over the shorter of lease term and useful life e.g. lets consider the
following examples by assuming no transfer of ownership or purchase option in lease contract.

Lease A Lease B
Commencement date 1-1-2015 1-1-2015
Useful life 31-12-2020 (6 Years) 31-12-2025(11 Years)
Lease term 31-12-2025(11 Years) 31-12-2020 (6 Years)
Depreciate over 6 years 6 years

Presentation: [Para 47]

A lessee shall present in statement of Financial Position [Para 47]:
(a) Right to use assets separately from other assets in non current assets.
(b) Lease liabilities separately from other liabilities by segregating the amounts into current and non current liabilities.
In the statement of profit or loss, a lessee shall present interest expense on lease liability and depreciation charge for the
right to use asset. Interest expense is a component of financial charges in statement of profit or loss. [Para 49]
In statement of cash flows; a lessee shall classify:
(a) Payment of principal portion of lease liability from lease rental in financing activities;
(b) Payment of interest portion from lease rental in either operating or financing activities; preferably in operating
activities [Para 50]
Disclosures
• A schedule of right to use asset as like in IAS-16 [Para 53]
• If the lessee measures the right to use asset at revalued amounts as per IAS-16 or IAS 40, the lessee shall disclose
the revaluation related disclosures for that right to use asset (as discussed in IAS 16 or IAS 40) [Para 57]
• A lessee shall disclose the maturity analysis of lease liability for the remaining contractual future lease payments
(without discounting) of each of the first five years plus a total amount for the remaining years.
• A narrative disclosure about leasing activities of lessee [Para 59] e.g:
(a) Nature of lessee’s leasing activities
(b) Information about purchase options or guarnteed residual values (if any)
(c) Interest rate
(d) amount of instalments
(e) Restrictions imposed by lessors in lease agreements.

3
Q.3 On 1 July 2010, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank. Details of the lease are as
follows:
1) Cost of machine is Rs. 20 million.
2) The lease term and useful life is 4 years and 10 years respectively.
3) Installment of Rs. 5.80 million is to be paid annually in advance on 1 July
4) The interest rate implicit in the lease is 15.725879%.
5) At the end of lease term, MTL has an option to purchase the machine on payment of Rs. 2 million. The fair value of
the machine at the end of lease term is expected to be Rs. 3 million. It is reasonably certain at the inception of the
lease that lessee will exercise the option to purchase the asset.
MTL depreciates the machine on the straight line method to a nil residual value.

Required:
a) Prepare journal entries for the year ended 30-6-2011, 2012 & 2013.
b) 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 figure.
Note:
1. If notes are required in case of lease, lessee will disclose the leased asset (as per IAS-16) as well as maturity
analysis of lease liability (as per IFRS 16).
2. In addition a narrative information about lease (as given in question) is also required to be written after the
disclosure.
3. If the question is silent that in whose books working is required then follow the sequence of the question to
identify the entity.

Q.4 A lease was signed on April 1, 2004 for five years. Annual rental payable at the beginning of each year is Rs. 5,000. Useful
life of equipment was 8 years and interest rate implicit in the lease was 25%.
Fair value of the equipment was Rs. 17,037. The lease contains a purchase option to be exercised at 700. It is reasonably
certain that option will be excercised by lessee. Year end of lessee is 31 December.
Required:
a) Lease amortization schedule for entire lease [ Finance Charge Allocation Table]
b) Extracts from the lessee's statement of financial position as at December 31,2004
c) Also prepare a disclosure of lease in the notes to the financial statements for the year ended December 31, 2004.

Q.5 On 31 December 2020 a company leases a machine with an expected useful life of four years. The cost of the machine is
Rs 50,000 and the lease is for four years. A rental of Rs 4,291 is payable at the end of each quarter, so that the total lease
payment will be (16 X Rs 4,291 = Rs. 68,656)
The company depreciate plant of this type over a period of four year by straight line method.
The allocation of interest is based on the use of an implicit rate of 16% as a discounting factor.
Required:
a) Indicate the way in which the right of use machine and the lease liability will appear in the company's statement of
financial position in the year 31-12-2020 to 31-12-2024.
b) Prepare disclosures for the year ended 31-12-2020 and 31-12-2021 related to maturity analysis of lease liability.

Q.5A Nouman Engineering entered into a lease arrangement for which following information is available:
a. Fair value of Assets is Rs. 20,000,000.
b. Date of agreement is 1.07.2009
c. Lease payments are Rs. 2,500,000 semi annual in arrears.
d. Useful life is 8 Years.
e. Interest rate implicit in lease is 13.731% p.a
f. Lease term are 6 years.

Required:
a) Prepare journal Entries(in lessee’s Book) for the year ended 30.06.2010 and 30.06.2011.
b) Prepare statement of Financial Position extracts and notes to financial statements for the year ended 30.06.2011
along with comparatives.
Note: if question is silent regarding transfer of ownership or purchase option then ignore it.

Q.6 Mr. A entered into a lease arrangement, for which following information is available
• Fair value of Assets is Rs. 150,000.
• Date of agreement is 1-1-2005
• Lease payments are Rs. 30,000(per Annum) in arrears and a lump sum amount of Rs. 58,424 on 31 December
2009.

4
 • Useful life is 10 Years.
• Ownership of asset is expected to be transferred to lessee at the end of lease term.
• Interest rate implicit in lease is 10%
• Lease term is 5 years.

Required:
1. Prepare journal Entries(in lessee’s Book) for the year ended 31 December 2005 & 31 December 2009
2. Prepare statement of Financial Position extracts and notes as on 31 December 2005.
Note: if more than one payments are on the same date them simply combine them while preparing the finance charge
allocation table (repayment schedule).

Q.6A
Commencement of lease 1-1-2011
Lease term 12 years
Fair Value of Asset Rs 80,000
Annual Rental Payments Rs 10,791 (Payable at beginning of Year)
Interest rate 12%
Economic Life 12 years
Purchase option Rs 20,000
Required:
Prepare a maturity analysis of future contractual lease payments as on 31.12.2011. Calculate the current and non current
portion of lease liability at 31.12.2011.

5
Solutions
A.1
a) LP
= 2,000 + 2,000 x 4
=10,000
PV of LP
=2,000 + 2,000 [1-(1+0.15)-4]
0.15
=7,710

b) i) Accounting entries for the year ended 31-12-2000

1-1-2000 Right of use 7,710
Lease Liability 7,710
1-1-2000 Lease Liability 2,000
Cash 2,000
31-12-2000 Lease Liability 1,144
Interest Expense 856
Cash 2,000
31-12-2000 Depreciation 1,542
Acc Depreciation 1,542
(7,710 x 20%)

ii) Accounting entries for the year ended 31-12-2001

31-12-2001 Lease Liability 1,315
Interest Expense 685
Cash/Bank 2,000
31-12-2001 Depreciation 1,542
Acc Depreciation 1,542

c)i) Statement of Financial Position (Extracts)

As on 31-12-2001
Non-Current Assets 2001 2000
Right of use 7,710 7,710
Accumulated Depreciation (3,084) (1542)
4,626 6,168
Non-Current Liability
Lease liability 1,739 3,251

Current Liability
Current Portion of Lease 1,512 1,315

ii) Statement of Comprehensive Income (Extracts)

For the year ended 31-12-2001
2001 2000
Depreciations 1,542 1,542
Interest Expense 685 856

6
 Working
Lease Amortization Schedule/ Finance charge allocation table
Date Rental Principal Interest Balance
1-1-2000 7,710
1-1-2000 2,000 2,000 - 5,710
31-12-2000 2,000 1,144 856 4,566
31-12-2001 2,000 1,315 685 3,251
31-12-2002 2,000 1,512 488 1,739
31-12-2003 2,000 1,739 261 -

A.2
a) Journal Entries
For the year ended 31-12-2005
1-3-2005 Right of use 200,000
Leased Liability 200,000
31-12-2005 Depreciation 41,667
Acc Depreciation 41,667
(200,000/4 x 10/12)
31-12-2005 Interest expense 26,667
Interest expense payable 26,667
(32,000 x 10/12)

LP = 71,475 x 4 = Rs 285,900

PV of LP

= 71,475 1-(1.16)-4
0.16

= Rs 200,000

Finance Charge Allocation table

Table is always based on the date of agreement

Date Rentals Principal Interest Balance

1-3-2005 - 200,000
28-2-2006 71,475 39,475 32,000 160,525
28-2-2007 71,475 45,791 25,684 114,734
28-2-2008 71,475 53,118 18,357 61,616
28-2-2009 71,475 61,616 9,859 -

(b) Accounting Entries for the year ended 31-12-2006

28-2-2006 Interest payable 26,667
Leased Liability 39,475
Interest Expense 5,333
Bank 71,475

31-12-2006 Depreciation 50,000

Acc Depreciation 50,000
(200,000/4)
31-12-2006 Interest Expense 21,403
Interest Expense payable 21,403
(25,684 x 10/12 )

7
c) Statement of Financial Position (Extracts)
As on 31-12-2006
2006 2005
Non-current Asset
Right of use 200,000 200,000
Less Acc depreciation (91,667) (41,667)
108,333 158,333

Non-current Liability
Leased Liability 114,734 160,525

Current Liability
Portion of Lease liability 45,791 39,475
Interest Expense Payable 21,403 26,667

(d) Statement of Comprehensive Income

For the year ended 31-12-2006
2006 2005
Interest Expense (5,333 26,736 26,667
+ 21,403)
Depreciation Expense 50,000 41,667

A.3 Miracle Textile Limited

a)
Journal Entries for the year ended 30-6-2011
1-7-2010 Right of use 20,000,000
Leased Liability 20,000,000
1-7-2010 Leased Liability 5,800,000
Cash/Bank 5,800,000
30-6-2011 Depreciation (20,000,000/10) 2,000,000
Accumulated depreciation 2,000,000
30-6-2011 Interest Expense 2,233,075
Interest Expense Payable 2,233,075

Journal Entries for the year ended 30-6-2012

1-7-2011 Leased liability 3,566,925
Interest Expense Payable 2,233,075
Cash/Bank 5,800,000
30-6-12 Depreciation 2,000,000
Acc Depreciation 2,000,000
30-6-12 Interest Expense 1,672,145
Interest Expense Payable 1,672,145

Journal Entries for the year ended 30-6-2013

1-7-2012 Leased liability 4,127,855
Interest Expense Payable 1,672,145
Cash/Bank 5,800,000
30-6-13 Depreciation 2,000,000
Acc Depreciation 2,000,000
30-6-13 Interest Expense 1,023,003
Interest Expense Payable 1,023,003

8
 b)
Statement of financial position (Extracts)
As at 30 June 2012
2012 2011
ASSETS Rupees
Non-current assets
Property, plant and equipment (Right of use) 16,000,000 18,000,000

LIABILITIES
Non-current liabilities
Obligation under lease 6,505,219 10,633,074

Current liabilities 4,127,856 3,566,925

Current portion of obligation under lease
Interest Payable 1,672,144 2,233,075
Miracle Textile Limited
Notes to the financial statements (Extracts)
For the year ended 30 June 2012
Property, plant and equipment 2012 2011
Right of use Asset Rupees
Gross carrying amount
Opening balance 20,000,000 -
Addition during the year - 20,000,000
20,000,000 20,000,000
Accumulated depreciation
Opening balance (2,000,000) -
Depreciation for the year (2,000,000) (2,000,000)
(4,000,000) (2,000,000)
Carrying Amount 16,000,000 18,000,000

Disclosures of Lease
For the year ended 30-Jun-2012
Maturity analysis – contractual undiscounted lease payments
Less than one year 5,800,000
One to two year (5,800,000 + 2,000,000) 7,800,000
Two to three years -
Total undiscounted lease payments 15,600,000

For the year ended 30-Jun-2011

Maturity analysis – contractual undiscounted lease payments

Less than one year 5,800,000

One to two year 5,800,000
Two to three years (5,800,000 + 2,000,000) 7,800,000
Total undiscounted lease payments 19,400,000

The Company has entered into a lease agreement with a bank in respect of a machine. The lease liability bears interest at
the rate of 15.725879% per annum. The company has the option to purchase the machine by paying an amount of Rs. 2
million at the end of the lease term. The lease rentals are payable in annual installments. There are no financial
restriction in the lease agreement.

9
Workings
(W-1)
LP = 5,800,000 x 4 + 2,000,000
=23,200,000 + 2,000,000
= Rs 25,200,000
PV of LP
= 5,800,000 + 5,800,000 1- (1+0.15725879)-3 +2,000,000 (1+0.15725879)-4
= 18,884,914.63 + 1,115,085.178
= 20,000,000 (approx.)
(W-2)
Payment Rentals Principal Interest @ Closing
Date Repayment 15.725879% Principal
01-Jul-10 - 20,000,000
01-Jul-10 5,800,000 5,800,000 - 14,200,000
01-Jul-11 5,800,000 3,566,925 2,233,075 10,633,075
0l-Jul-12 5,800,000 4,127,856 1,672,144 6,505,219
0l-Jul-13 5,800,000 4,776,997 1,023,003 1,728,222
30-Jun-14 2,000,000 1,728,222 271,778 -
25,200,000 20,000,000 5,200,000

This schedule is not a part of financial statements. It is an internal working of management of the entity for the purpose
of preparing accounting records.
A.4
a) Lease Amortization Schedule
Date Rental Principal Interest Balance
1-4-2004 17,037
1-4-2004 5,000 5,000 - 12,037
1-4-2005 5,000 1,991 3,009 10,046
1-4-2006 5,000 2,488 2,512 7,558
1-4-2007 5,000 3,110 1,890 4,448
1-4-2008 5,000 3,888 1,112 560
31-3-2009 700 560 140 -
Note: This table starts from date of agreement.

b) Company Name
Statement of financial position (Extracts)
As on 31-12-04
Non-Current Asset
Right of use Asset 17,037
Less: Accumulated Depreciation (1,597)
15,440

Non-Current Liabilities
Lease Liability 10,046

Current Liabilities
Interest Payable (3009 x 9/12) 2,257
Current portion of lease liability 1,991

c) Company Name
Notes to the Financial Statements
For the year ended 31-12-2004
Maturity analysis – contractual undiscounted lease payments

Less than one year 5,000

One to two year 5,000
Two to three years 5,000

10
 Three to four years 5,000
Four to five years 700
Total undiscounted lease payments 20,700

(schedule of fixed assets missing)

The Company has entered into a lease agreement with a bank in respect of an equipment. The lease liability bears
interest at the rate of 25% per annum. The company has the option to purchase the equipment by paying an amount of
Rs. 700 at the end of the lease term. The lease rentals are payable in annual installments. There are no financial
restriction in the lease agreement.
Workings
LP = 5000 x 5 + 700
= 25,000 + 700
= 25,700
Present Value of LP
5,000 + 5000 [1- (1 + 0.25)-4 ] + 700 (1.25)-5 = 17,037
0.25
Depreciation = 17037/8 x 9/12 = 1,597
If purchase option is reasonably certain, asset is depreciated over useful life.

A.5
a) Company Name
Statement of Financial Position (Extracts)
As on 31-12 ….
2020 2021 2022 2023 2024
Non-Current Assets

Right of use Asset 50,000 50,000 50,000 50,000 50,000

Less Accumulated (-) (12,500) (25,000) (37,500) (50,000)
Depreciation
50,000 37,500 25,000 12,500 -

Non-Current Liabilities
Liability Under lease 40,271 28,890 15,576 - -

Current Liabilities
Current Maturity 9,729 11,381 13,314 15,576 -

b) Company Name
Notes to Financial Statements
Disclosure for the year ended 31-12-2020
Maturity analysis – contractual undiscounted lease payments
Less than one year (4,291 x 4) 17,164
One to two years (4,291 x 4) 17,164
Two to three years (4,291 x 4) 17,164
Three to four years (4,291 x 4) 17,164
Total undiscounted lease payments 68,656

Disclosure for the year ended 31-12-2021

Maturity analysis – contractual undiscounted lease payments
Less than one year (4,291 x 4) 17,164
One to two years (4,291 x 4) 17,164
Two to three years (4,291 x 4) 17,164
Total undiscounted lease payments 51,492

11
Workings
LP = 16 x 4,291
= Rs 68,656
PV of LP = 4,291 1-(1+ 16%/4)-16
16%/4

= Rs 50,000

Finance charge allocation

Date Rental Principal Finance Charge Balance

31-12-2020 - - 50,000
31-3-2021 4,291 2,291 2,000 47,709
30-6-2021 4,291 2,383 1,908 46,326
30-9-2021 4,291 2,478 1,813 42,848
31-12-2021 4,291 2,577 1,714 40,271
31-3-2022 4,291 2,680 1,611 37,591
30-6-2022 4,291 2,787 1,504 34,804
30-9-2022 4,291 2,899 1,392 31,905
31-12-2022 4,291 3,015 1,276 28,890
31-3-2023 4,291 3,135 1,156 25,755
30-6-2023 4,291 3,261 1,030 22,494
30-9-2023 4,291 3,391 900 19,103
31-12-2023 4,291 3,527 764 15,576
31-3-2024 4,291 3,668 623 11,908
30-6-2024 4,291 3,815 476 8,093
30-9-2024 4,291 3,967 324 4,126
31-12-2024 4,291 4,126 165 Nil
68,656 50,000 18,656 Nil
5A. Solution
a) Journal entries for the year ended 30-6-2010
Debit Credit
Date Description
Rupees in 000
l-Jul-2009 Right of use 20,000
Lease liability (at present of lease payments) 20.000

31-Dec-2009 Lease liability W.l 1.127

Interest expense W.l 1.373
Bank 2,500
(Payment of 1st. Instalment of lease liability)

30-Jun-2010 Lease liability 1,204

Interest expense 1,296
Bank 2,500
(Payment of 2nd. Instalment of lease liability)

30-Jun-2010 Depreciation expense (20,000/6) 3,333

Accumulated depreciation 3,333
(Depreciation for the year for plant)

Journal entries for the year ended 30-6-2011

31-Dec-2010 Lease Liability 1,287
Interest expense 1,213
12
 Bank 2,500

30-Jun-11 Lease Liability 1,375

Interest expense 1,125
Bank 2,500

30-Jun-11 Depreciation (20,000/6) 3,333

Acc Depreciation 3,333

W-1
Date Rentals Principals Interest Balance
1-7-09 - - - 20,000,000
31-12-09 2,500,000 1,126,900 1,373,100 18,873,100
30-6-10 2,500,000 1,204,267 1,295,733 17,668,833
31-12-10 2,500,000 1,286,946 1,213,054 16,381,887
30-6-11 2,500,000 1,375,302 1,124,698 15,006,585
31-12-11 2,500,000 1,469,723 1,030,277 13,536,862
30-6-12 2,500,000 1,570,627 929,373 11,966,235
31-12-12 2,500,000 1,678,458 821,542 10,287,777
30-6-13 2,500,000 1,793,693 706,307 8,524,084
31-12-13 2,500,000 1,914,779 585,221 6,609,305
30-6-14 2,500,000 2,046,238 453,762 4,563,067
31-12-14 2,500,000 2,186,723 313,277 2,376,344
30-6-15 2,500,000 2,336,852 163,148
30,000,000 20,000,000 10,000,000

b)
Noman Engineering Limited
Statement of Financial Position
As at 30-6-2011
2011 2010
Non-current Asset
Right of use 13,333,334 16,666,667

Non-current Liabilities
Leased Liability 11,966,235 15,006,585

Current Liabilities
Portion of current liability 3,040,350 2,662,248

c) Noman Engineering Limited

Notes to the Financial Statements
For the year ended 30-6-2010
i)Lease Liability

Disclosure for the year ended 31-12-2010

Maturity analysis – contractual undiscounted lease payments
Less than one year (2,500,000 x 2) 5,000,000
One to two years (2,500,000 x 2) 5,000,000
Two to three years (2,500,000 x 2) 5,000,000
Three to four years (2,500,000 x 2) 5,000,000
Four to five years (2,500,000 x 2) 5,000,000
Total undiscounted lease payments 25,000,000

13
 The company has entered into a lease agreement with a bank. It bears interest @ 13.731% per annum. Lease rentals are
payable semi-annually in arrears.
ii) Asset
2010
Cost:
Opening Balance -
Addition 20,000,000
Closing Balance 20,000,000
Acc Depreciation:
Opening balance -
For the year 3,333,333
Closing Balance 3,333,333
Carrying Amount 16,666,667

A.6 Mr A
a) Journal Entries:
For the Year ended 31-12-2005
1-1-2005 Right to use asset 150,000
Leased Liability 150,000
31-12-2005 Depreciation 15,000
Acc Depreciation 15,000
31-12-2005 Lease Liability 15,000
Interest Expense 15,000
Cash/Bank 30,000

For the Year ended 31-12-2009

31-12-2009 Depreciation 15,000
Acc Depreciation 15,000
31-12-2009 Leased Liability 80,385
Interest Expense 8,039
Cash/Bank 88,424

Working
Date Rental Principal Interest Balance
1-1-05 - - - 150,000
31-12-05 30,000 15,000 15,000 135,000
31-12-06 30,000 16,500 13,500 118,500
31-12-07 30,000 18,150 11,850 100,350
31-12-08 30,000 19,965 10,035 80,385
31-12-09 88,424 80,385 8,039 -
(30,000+58,424)
208,424 150,000 58,424

LP =30,000 x 5 + 58,424
=150,000 + 58,424
= Rs 208,424
PV of LP = 30,000 [1-(1+0.1)-5] + 58,424, (1.1)-5
0.1
= 113,724 + 36,277
= Rs 150,000

14
 b) I)
Mr A
Statement of Financial Position (Extracts)
As on 31-12-2005
Non-current Assets 2005
Right to use Asset (150,000 – 15,000) 135,000

Non-current Liabilities
Lease Liability 118,500

Current Liabilities
Current portion of lease 16,500

i) Mr A
Notes to the Financial Statements
For the year ended 31-12-2005
Maturity analysis – contractual undiscounted lease payments
Less than one year 30,000
One to two years 30,000
Two to three years 30,000
Three to four years 88,424
Total undiscounted lease payments 178,424

The Company has entered into a lease agreement with a bank. The lease liability bears interest at the rate of 10% per
annum. Ownership is expected to be transferred at the end of lease term. The lease rentals are payable in annual
installments. There are no financial restriction in the lease agreement.
ii) Note of Property Plant & Equipment
For the year ended 31-12-2005
Leased Asset 2005
Cost;
Opening balance -
Addition 150,000
Closing balance 150,000
Accumulated depreciation:
Opening balance -
For the year 15,000
Closing balance 15,000

Carrying Amount 135,000

A.6A
= 10,791 + 10,791 [ 1-(1+0.12)-11] + 20,000 (1+0.12)-12
0.12
=74,865 + 5,133 = 79,998
Approximately = 80,000
Maturity Analysis – contractual undiscounted lease payments
Less than one year 10,791
One to two years 10,791
Two to three years 10,791
Three to four years 10,791
Four to five years 10,791
More than five years (10,791 x 6 + 20,000) 84,746
Total undiscounted lease payments 138,701

15
Working
Amortization Schedule
W-1
Rental Principle Interest Balance
1-1-2011 80,000
1-1-2011 10,791 10,791 - 69,209
1-1-2012 10,791 2,486 8,305 66,723
1-1-2013 10,791 2,784 8,007 63,939
1-1-2014 10,791 3,118 7,673 60,821
1-1-2015 10,791 3,492 7,299 57,329
1-1-2016 10,791 3,912 6,879 53,417
1-1-2017 10,791 4,381 6,410 49,036
1-1-2018 10,791 4,907 5,884 44,129
1-1-2019 10,791 5,495 5,296 38,634
1-1-2020 10,791 6,155 4,636 32,479
1-1-2021 10,791 6,894 3,897 25,585
1-1-2022 10,791 7,721 3,070 17,864
31-12-2022 20,000 17,864 2,144
149,492 80,000 69,492

At the end of 31.12.2011

Current Portion of Lease is 2,486
Non-current Portion of lease is 66,723
69,209

16
Test Question IFRS 16 Lease
Q. Coal Limited (CL) is preparing its financial statements for the year ended 30 June 2019.
Following information is available:
On 1 January 2019, CL acquired a machine on lease from a bank. Fair value of machine on acquisition was Rs. 70
million.

The terms agreed with the bank are as follows:

• The lease term and useful life are 4 years and 10 years respectively.
• Installment of Rs. 17 million is to be paid annually in advance on 1 January.
• The rate implicit in the lease is 15.096% per annum.
• At the end of the lease term, CL has an option to purchase the machine at its
estimated fair value of Rs. 25 million. It is not reasonably certain that CL will
exercise this option.
Required:
Prepare extracts from CL’s statement of financial position and related notes to the financial statements for the year
ended 30 June 2019 along with comparative figures for the above.
(Note on Property, plant and equipment is not required) (12)

17
A. Coal Limited
Statement of financial position
As on 30 June 2019
2019 2018
Non-current assets:

Right of use asset (W-1) 48.78125 -

Non current liabilities:

Lease liabilities (W-2) 27.60 -
Current liabilities:
Current portion of lease liabilities (W-2) 11.15 -
Interest payable [5.85(W-2)x6/12] 2.93 -

Coal Limited
Notes to the financial statements
For the year ended 30 June 2019
1. Maturity analysis – contractual undiscounted lease payments 2019 2018
Less than one year 17 -
One to two years 17 -
Two to three years 17 -
Total undiscounted lease payments 51 -

Coal Limited (CL) acquired a machine on lease from a bank. There are four Installments of Rs. 17 million is to
be paid annually in advance. The rate implicit in the lease is 15.096% per annum. At the end of the lease term,
CL has an option to purchase the machine at its estimated fair value of Rs. 25 million. It is not reasonably
certain that CL will exercise this option. There are no financial restriction in lease agreement.

W-1: Right of use asset Rs. in million

17× 1-(1+0.15096)-3
Present value of lease payments 17+ 0.15096 55.75
Accumulated Depreciation (55.75÷4*)×(6÷12) (6.96875)
*Shorter of lease term and useful life as no transfer of ownership or certainty of purchase
option. 48.78125

W-2 Lease schedule

Date Rental Principal Interest Balance
1-1-2019 55.75
1-1-2019 17 17.00 38.75
1-1-2020 17 11.15 5.85 27.60

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18
 Concept of Foreign exchange rates
PURCHASE TRANSACTION:

1) A Pakistani company bought goods from an Australian supplier on 1-12-2016 for AU$10,000 paying by cheque
on the same date.
Exchange rate on 1-12-2016 was Rs.75 per 1 AU$.

01-12-2016:
Purchases 750,000
Bank (10,000 x 75) 750,000

2) Suppose purchase was on credit and amount was paid on 15-12-2016 when exchange rate was Rs.78 per 1
AU$.

01-12-2016:
Purchases 750,000
Payable (10,000 x 75) 750,000

15-12-2016:
Payable 750,000
Exchange Loss (bal.) 30,000
Bank (10,000 x 78) 780,000

3) Suppose purchase was on credit but amount was paid on 15-1-2017 when exchange rate was Rs.77 per 1 AU$.
Year-end of Pakistani company is 31-12-2016, when exchange rate was Rs. 79 per 1 AU$.

01-12-2016:
Purchases 750,000
Payable (10,000 x 75) 750,000

31-12-2016:
Exchange Loss 40,000
Payable (10,000 x 79 –750,000) 40,000

15-01-2017:
Payable (750,000 + 40,000) 790,000
Exchange gain(bal.) 20,000
Bank (10,000 x 77) 770,000

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19
SALE TRANSACTION:

1) A Pakistani company sells goods to a customer in Saudi Arabia on 15-6-2018 for 10,00 Riyals, receiving the
amount on the same date, by cheque.
Exchange rate on 15-6-2018 was Rs.30 per 1 Riyal.

15-06-2018:
Bank(10,000 x 30) 300,000
Sales 300,000

2) Suppose sale was on credit and amount was received on 25-06-2018 when exchange rate was Rs.32 per 1
Riyal.

15-06-2018:
Debtor (10,000 x 30) 300,000
Sales 300,000

25-06-2018:
Bank(10,000 x 32) 320,000
Forex Gain (bal.) 20,000
Debtor 300,000

3) Suppose sale was on credit and amount was received on 05-07-2018 when exchange rate was Rs.33 per 1
Riyal. Year-end of Pakistani company is 30-06-2018, when exchange rate was Rs. 34 per Riyal.

15-06-2018:
Debtor 300,000
Sales 300,000

30-06-2018:
Debtor [(10,000 x 34) – 300,000] 40,000
Forex Gain 40,000

05-07-2018:
Bank(10,000 x 33) 330,000
Forex loss (bal.) 10,000
Debtor (300,000+40,000) 340,000

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20
Foreign Currency Transactions IAS 21
Many businesses have transactions that are denominated in a foreign currency.
Individual companies often enter into transactions in a foreign currency. These transactions need to be
translated into the company’s own currency in order to record them in its ledger accounts. For example:
•
a Pakistani company may take out a loan from a French bank in Euros but will record the loan in
its ledger accounts in Rupees; or
•
a Pakistani company may sell goods to a Japanese company invoiced in Yen but will record
the sale and the trade receivable in Rupees in its ledger accounts.

IAS 21 deals with the translation of these transactions when they occur and at subsequent reporting
dates when re-translation at a different exchange rate may be necessary.

The two main accounting issues

Transactions, receivables and payables in foreign currencies are translated or converted from the foreign
currency into the currency of the reporting entity. The process of translation would be quite simple if
exchange rates between currencies remained fixed. However, exchange rates are changing continuously.
The two main accounting issues when accounting for foreign currency items are:
• What exchange rate(s) should be used for translation?
• How to account for the gains or losses that arise when exchange rates change?

Terms and definitions used in IAS 21

IAS 21 uses the following terms to describe which exchange rate should be used in the
translation.

Definitions
Exchange rate: The rate of exchange between two currencies
Example: quoted exchange rates
You are quoted an exchange rate on 1 March 2011 of £1: $2.
Required:
A. If you had £1 000 to exchange, how many $ would you receive (i.e. buy) from the currency
dealer?
B. If you had $1 000 to exchange, how many £ would you receive (i.e. buy) from the currency
dealer?
C. Restate the exchange rate in the format £ …: $1.

Solution to example : quoted exchange rates

A: £1 000 / 1 x 2 = $2 000
B: $1 000 / 2 x 1 = £500
C: £1 / 2 = £0.5 therefore, the exchange rate would be £0.5: $1

Spot rate: The exchange rate at the date of the transaction

Closing rate: The spot exchange rate at the end of the reporting period

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21
For example, suppose that on 16 November a Pakistani company buys goods from a US supplier, and the
goods are priced in US dollars. The financial year of the Pakistani company ends on 31 December, and at
this date the goods have not yet been paid for.
The spot rate is the rupees/dollar exchange rate on 16 November, when the transaction occurred.
The closing rate is the exchange rate at 31 December.

Exchange difference: A difference resulting from translating a given number of units of one currency
into another currency at different exchange rates.

Monetary items: Units of currency held and assets and liabilities to be received or paid (in cash), in a fixed
number of currency units. Examples of monetary items include cash itself, loans, trade payables, trade
receivables and interest payable etc. [in other words monetary items include receivables and payables]

Non-monetary items: they are items that are not monetary items. They include non-current assets,
investment properties and inventories and investment in other companies etc.

Types of transactions:
The rules of IAS 21 apply when an entity:
•
buys or sells goods or services that will be paid for in a foreign currency;
•
borrows or lends money when the interest payments and repayments of principal are in a foreign
currency;
•
purchases or disposes of non-current assets in another currency; or
•
receives or pays dividends in another currency
Dates

Dates involved with foreign currency transactions are very important because exchange rates differ
from day-to-day. The following dates are significant when recording the foreign currency transaction:
• transaction date – this is when a loan is raised (obtained)/made (given) or an item is purchased or
sold;
• settlement date – this is when cash changes hands in settlement of the transaction (e.g. the
creditor is paid or payment is received from the debtor); and
• translation date – this is the financial year-end of the local entity.
Initial measurement:
The foreign currency transaction is measured by applying to the foreign currency amount the spot rate
between the foreign currency and the functional (means local) currency.

If the company purchases goods on many different dates during the period in the foreign currency, it
might be administratively difficult to record every transaction at the actual spot rate. For practical reasons,
IAS 21 therefore allows entities to use an average rate for a time period (means average rate of the past
week or month), provided that the exchange rate does not fluctuate significantly over the period.
For example, an entity might use an average exchange rate for a week or a month for translating all the
foreign currency-denominated transactions in that time period.

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22
Subsequent measurement: monetary items
Overview
As an exchange rate changes (and most exchange rates fluctuate on a daily basis), the measurement of
amounts owing to or receivable from a foreign entity changes. For example, an exchange rate of US$1:
Rs.140 in January can change to an exchange rate of US$1: Rs.145 in February and strengthen back to
US$1: Rs.142 in March. Due to this, a foreign debtor or creditor will owe different amounts depending
on which date the balance is measured.

Monetary items (amounts payable or receivable) are translated to the latest exchange rates:
• on each subsequent reporting date; and
• on settlement date.

Exchange differences

The translation of monetary items will almost always result in exchange differences: gains or losses
(unless there is no change in the exchange rate since transaction date).

Treatment:
The exchange differences on monetary items are recognised in profit or loss in the period in which they
arise.

Example: foreign loans

BS Limited, a Pakistani company, obtained a five year long term loan from Gill Bates, living in the
Cayman Islands. The terms of the loan were as follows:
Gill transfers EUR100 000 into BS’s bank account on 1 January 2014.
The interest rate on the loan was 7. 931% p.a.
BS is required to make repayments of EUR25 000 inclusive of principal and interest annually, with the
first payment falling due on 31 December 2014.

BS Limited has the Rupees as its functional currency. The

currency used in the Cayman Islands is the EUR (Euro). BS Limited has a 31
December financial year-end.

Relevant exchange rates are:

Date Spot rates Average rates
1 January 2014 EUR1: Rs8
31 December 2014 EUR1: Rs8.5
31 December 2015 EUR1: Rs7.5
2014 EUR1: Rs8.20
2015 EUR1: Rs7.70
Required:
Show the journal entries required to record the above loan transaction in BS Limited’s
accounting records for the years ended 31 December 2014 and 31 December 2015.

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23
Solution to example: foreign loans

Journals:
Debit Credit
1 January 2014
Bank 100 000 x 8 800 000
Long-term loan 800 000
Proceeds received on the foreign loan raised from Cayman
Islands

31 December 2014
Finance cost 7 931 (W1) x 8.2 = 65 034 65 034
Long-term loan 65 034
Interest expense on the foreign loan (converted at average
rates)

Long-term loan 25 000 x 8.5 212 500

Bank 212 500
Payment of instalment on loan: (at spot rate on pmt date)
82 931 (W1) x 8.5 – balance so
Foreign exchange loss far: 52 380
(800 000 + 65 034 – 212
Long-term loan 500)=652,534 52 380
Translating foreign loan at year end (at spot rate at year-end)

31 December 2015
Finance cost 6 577 (W1) x 7.70 50 643
Long-term loan 50 643
Interest expense raised on loan (converted at average rates)

Long-term loan 25 000 x 7.5 187 500

Bank 187 500
Payment of instalment on loan: (at spot rate on pmt date)
64 508 (W1) x 7.5 – balance so
Long-term loan far: 84 247
(82 931 x 8.5 + 50 643 – 187
Foreign exchange gain 500)=568,057 84 247
Translating foreign loan at year end (at spot rate at year-end)

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24
Working
Effective interest rate table in foreign currency: Euros
Date Rental Principal Interest Balance
1-1-2014 100,000
31-12-2014 25,000 17,069 7,931 82,931
31-12-2015 25,000 18,423 6,577 64,508
31-12-2016 25,000 19,884 5,116 44,624
31-12-2017 25,000 21,461 3,539 23,163
31-12-2018 25,000 23,163 1,837 0

Example:
A Pakistani company whose functional currency is the rupee deposited $90,000 into a dollar current
account in a bank on 30 June 2018.
The company paid an additional $10,000 into the account on 30 September 2018.
There were no other movements on this account.
Exchange rates over the period were as follows:
30 June: Rs.100/$.
30 September Rs.99/$.
31 December (year-end): Rs.95/$.
Required:
Calculate the exchange differences on 31 December 2018.
Solution:
The exchange difference arising at 31 December can be calculated as follows:

The following approach simply records all items at the appropriate rates and identifies the exchange
difference as a balancing figure.
$ Rate Rs.
Amount deposited on (30 June) 90,000 100 9,000,000
Amount paid in (30 Sept.) 10,000 99 990,000
Exchange loss (bal) (490,000)

Balance at end (31 Dec.) 100,000 95 9,500,000

Example:
A Pakistani company whose functional currency is the rupee borrowed $90,000 on 30 June 2018.
The company recognised an interest accrual of $10,000 at its year-end (31 December 2018).
Exchange rates over the period were as follows:
30 June: Rs.100/$.
Average for the period from 30th june to 31st Dec 2018 is Rs.99/$.
31 December (year-end): Rs.95/$.
Required: Calculate the total loan payable inclusive of interest as on 31 December 2018.
Page 7 of 45

25
 Exchange difference (interest at average
rate)
$ Rate Rs.
Amount borrowed on (30 June) 90,000 100 9,000,000
Interest 10,000 99 990,000
Exchange gain(bal) (490,000)

Balance at end (31 Dec.) 100,000 95 9,500,000

There is an exchange gain because the company has a dollar liability but the dollar has
weakened against the rupee over the period.

Practice question
A Pakistani company bought a machine from a German supplier for €200,000 on 1 March 2018
when the exchange rate was Rs. 120/€.
By 31 December 2018, the end of the company’s accounting year, the exchange rate was Rs.
110/€.
At 31 December 2018, the Pakistani company had not yet paid the German supplier any of the
money that it owed for the machine.
Required
Show the journal entries that must be recorded for the year ended 31.12.2018..
Solution:
1.03.
Debit Credit
Machinery 24,000,000
Payable (200,000 x 120) 24,000,000

31.12
Payable 2,000,000
Foreign exchange Gain 2,000,000
[24,000,000 – (200,000 x 110)]

Practice question
A Pakistani company sells goods to a customer in Saudi Arabia for SR 72,000 on 12 September 2018,
when the exchange rate was Rs.28/SR (Saudi riyal).
It received payment on 19 November 2018, when the exchange rate was Rs.30/SR.
The financial year-end is 31 December 2018.
Required
Show the journal entries that must be recorded for the year ended 31.12.2018..

Page 8 of 45

26
Solution:
The sale will be initially translated at the spot rate giving rise to revenue and receivables of Rs.
2,016,000 (SR 72,000 x Rs.28).

The receipt of the payment is recorded at Rs. 2,160,000 (SR 72,000 x Rs.30).
The necessary double entries are as follows:

On 12 September
Debit Credit
Receivables 2,016,000
Revenue (72,000 x 28) 2,016,000

On 19 November
Debit Credit
Bank (72,000 x 30) 2,160,000
Receivables 2,016,000
Foreign exchange Gain 144,000

Summary of the rules for monetary and non monetary items:

Asset or liability Accounting treatment Treatment of exchange difference

Monetary items Re-translate at the closing Recognised in P&L

rate.

Non-monetary items No re-translation. The Not applicable

carried at cost model transaction is left at the
original spot rate.
Non-monetary items Re-translate at the exchange reognise in the same
carried at fair value rate ruling at the date of the location as gain/loss
fair value adjustment.

Subsequent measurement: non-monetary items

Non-monetary items include assets such as:

• property, plant and equipment;
• intangible assets; and
• inventories.

They could have been purchased using foreign currency, in which case they are converted into the local
currency at the spot rate, and are thereafter denominated in the local currency (also called the
functional currency)

The subsequent measurement of non-monetary items occurs simply in terms of the relevant IFRS.
These items are not affected by subsequent changes in exchange rates if carried at cost model. For
example, if an item of plant is purchased where the purchase was denominated in a foreign currency,
this is converted into the local currency and the plant is then measured in terms of IAS 16 Property,

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27
plant and equipment. e.g. plant purchased 100,000 Riyals on 01.01.2018, when exchange rate was Rs.
30 / 1 Riyal to be paid after 30 days.
01.01.2018
Debit Credit
Plant 3,000,000
Payable (100,000 x 30) 3,000,000
After that plant will be measured according to requirements of IAS 16 and 3,000,000 will be treated as
cost.

Impairment loss: if carrying amount is more than recoverable amount, difference is called as impairment loss.
Recoverable amount is higher of:
• Fair value less cost to sell
• Value in use.

Example: non-monetary item: measurement of plant bought from a foreign supplier (At Cost Model)
On 1 January 2011, a Pakistani company bought plant from an American company for $100 000. The
Pakistani company settled the debt on 31 March 2011.

Spot rates
Date (Rupees: Dollar)
1 January 2011 Rs6.0: $1
31 March 2011 Rs6.3: $1
31 December 2011 Rs6.5: $1
31 December 2012 Rs6.2: $1

The plant is depreciated to a nil residual value over 5 years using the straight-line method.
The recoverable amount was calculated on 31 December 2012: Rs320 000.

Required:
Show all journal entries relating to plant for the years ended 31 December 2011 and 2012 in the books
of the Pakistani company.
Solution to example: non-monetary item: journals

1 January 2011 Debit Credit

Plant: cost $100 000 x Rs6 600 000
Foreign creditor 600 000
Purchased plant from a foreign supplier (translated at spot rate)

31 March 2011
$100 000 x Rs6.30 – R600
Foreign exchange loss 000 30 000

Foreign creditor 600 000

Bank ($100 000 x Rs6.30) 630 000
Payment of foreign creditor

Page 10 of 45

28
 31 December 2011

Depreciation (600 000 – 0) / 5 years 120 000

Plant: accumulated depreciation 120 000
Depreciation of plant

31 December 2012
Depreciation (600 000 – 0) / 5 years 120 000
Plant: accumulated depreciation 120 000
Depreciation of plant
CA: 600 000 –120 000 –120
Impairment loss 000 40 000
Plant: accumulated impairment – Recoverable amount: 320
loss 000 40 000
CA= 360,000; Recoverable amount
= 320,000 = 40,000

Notice how the measurement of the non-monetary asset (plant) is not affected by the changes in
the exchange rates.

Revaluation of non-current assets

If the company is using revaluation model in IAS 16 for the property,plant and equipment then these non
current assets might be revalued.
For example, a Pakistani company might own a property in Thailand. The cost of the property would have
been recorded at the spot rate when the property was originally purchased. However, it might
subsequently have been revalued if revaluation model of IAS 16 is applied. The revaluation will almost
certainly be in Thai baht (foreign currency). This revalued amount must be translated into the functional
currency of the entity (in this example, rupees).

Example:
A Pakistani company (with the rupee as its functional currency) has a financial year ending on 31
December.
It bought a building classified as property, plant and equipment in Bahrain on 1 jan 2016 for 100,000
Bahraini dinar (BD) by paying the amount on same date. Building has a useful life of 50 years.
The building was revalued to BD 120,000 on 31 December 2016.
Exchange rates:
1 jan 2016 Rs.275/BD1
31 December 2016 Rs.290/BD1
The transaction would be recorded as follows:

On 1 jan 2016
Debit Credit
Property, plant and equipment 27,500,000
Bank (Rs. 275 x BD100,000) 27,500,000

Being the initial recognition of building bought in a foreign currency

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29
 On 31 December 2016
BD Rate Rs.
Building on initial
recognition 100,000 275 27,500,000
Depreciation 550,000
(27,500,000/50)
Carrying amount 26,950,000
Revaluation surplus 7,850,000
and Exchange gain
(balance)

Building at year end 120,000 290 34,800,000

Accounting entries will be:

Debit Credit
Accumulated depreciation 550,000
Building 550,000
Debit Credit
Building 7,850,000
Revaluation surplus (OCI) 7,850,000

Being the recognition of revaluation gain and exchange gain on retranslation of carrying amount of a
building denominated in a foreign currency.

Treatment of exchange gain or loss:

Any gain or loss arising on retranslation of this property is recognised in the same place as the gain or
loss arising on the revaluation that led to the retranslation.
If a revaluation gain is recognised in other comprehensive income (i.e within equity) in accordance with IAS
16, the exchange difference would also be recognised in other comprehensive income. If however
revaluation loss is recognised in profit or loss in accordance with IAS 16, the exchange difference would also
be recognised in profit or loss.

Investment property (IAS 40)

it is a property (land or buildings or part of a building or both)
held by an owner
to earn rentals or for capital appreciation or both, rather than for:
• use in the production or supply of goods and services or for administrative use (Owner-
occupied property IAS 16);or
• sale in ordinary course of business ( Inventories IAS 2)

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30
Measurement at initial recognition
Investment property should be measured initially at cost plus any directly attributable expenditure
(means transaction taxes e.g. legal fees, property transfer taxes and other transaction costs) incurred
to acquire the property.
Measurement after initial recognition
After initial recognition an entity may choose as its accounting policy:
• the fair value model; or
• the cost model.

The chosen policy must be applied to all the investment properties of the entity unless fair value of an
investment property is not reliably measurable.

1. Under the fair value model the entity should:

• revalue its investment property to ‘fair value’ at the end of each financial year; and
• recognise any resulting gain or loss in profit or loss for the period.

This is different to the revaluation model of IAS 16, where gains are reported as other
comprehensive income and accumulated as a revaluation surplus.
The investment property measured under fair value model would not be depreciated.

2. Cost model for investment property

The cost model in IAS 40 follows the provisions of IAS 16. The property is measured at cost less
accumulated depreciation (related to the non-land element) and less impairment loss if any.
Example: Accounting for investment property under both the models
On 1 January 2011 Entity P purchased a property for its investment potential. The property cost Rs. 1
million with transaction costs of Rs. 10,000.
The building component of the property at this date was Rs. 300,000 and the remaining portion is land.
The building has a useful life of 50 years.
At the end of 2011 the property’s fair value had risen to Rs. 1.3 million.
The amounts which would be included in the financial statements of Entity P at 31 December 2011,
under the cost model are as follows:
Cost model
The property will be included in the statement of financial position as follows:
Rs.
Cost (1,000,000 + 10,000) 1,010,000
Accumulated depreciation (300,000 ÷ 50 years) (6,000)

Carrying amount 1,004,000

The statement of profit or loss will include depreciation of Rs. 6,000.Fair value of Rs. 1.3 millions will be only
disclosed in notes to financial statements.

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31
Fair value model
The amounts which would be included in the financial statements of Entity P at 31 December 2011,
under the fair value model are as follows:
The property will be included in the statement of financial position at its fair value of Rs.
1,300,000.
The statement of profit or loss will include a gain of Rs. 290,000 (Rs. 1,300,000 – Rs.
1,010,000) in respect of the fair value adjustment.
The investment property measured under fair value model would not be depreciated.

IAS 40 with IAS 21

The subsequent measurement of non-monetary items occurs simply in terms of the relevant IFRS. For
example, if an investment property is purchased and purchase was denominated in a foreign currency,
this is converted into the local currency and the investment property is then measured in terms of IAS
40. These items are not affected by subsequent changes in exchange rates if carried at cost model.

Revaluation of non-current assets

If the company is using fair value model in IAS 40 for the investment properties then these non current
assets might be revalued.
Example:
A Pakistani company (with the rupee as its functional currency) has a financial year ending on 31
December.
It bought a building classified as investment property in Bahrain on 1 December 2016 for 100,000 Bahraini
dinar (BD) by paying the amount on same date. Building has a useful life of 50 years.
The building was revalued to BD 120,000 on 31 December 2016 according to fair value model in IAS 40.
Exchange rates:
1 December 2016 Rs.275/BD1
31 December 2016 Rs.290/BD1
The transaction would be recorded as follows:

On 1 December 2016
Debit Credit
Investment property 27,500,000
Bank (Rs. 275 x BD 100,000) 27,500,000

Being the initial recognition of building bought in a foreign currency

As fair value model of IAS 40 is used therefore there is no concept of any

depreciation.
31 December 2016

Building at year end 120,000 290 34,800,000

Fair value gain is [34,800,000 – 27,500,000 = 7,300,000]

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As the building is an investment property carried at fair value, revalued following the rules in IAS 40 the
credit of Rs.7,300,000 would be to the statement of profit or loss.

Debit Credit
Building 7,300,000

P.L Other income 7,300,000

Determining the transaction date (Further discussion )

The first thing that must be determined in a foreign currency transaction is the transaction date. A
general rule for purchase or sale transaction is that the transaction date would be when the risks and
rewards of ownership transfer from one entity to the other entity.

For regular import or export transactions, establishing the date that risks and rewards are transferred is
complicated by the fact that goods sent to or ordered from other countries usually spend a considerable
time in transit.

Common ways of shipping goods between countries:

• Free on Board (F.O.B); or

• Cost, Insurance, Freight (C.I.F).

If a transaction is arranged on a Free on Board (F.O.B) basis, the situation is:

• generally, as soon as the entity shipping the goods has delivered the goods to the port of
departure and they have been loaded onto a ship, the risks of the remaining voyage transfers to
the entity that will be receiving those goods; and therefore
• the transaction date will generally be the date that the goods are loaded onto a ship (by seller).
If a transaction is arranged on a Cost Insurance Freight (C.I.F) basis, the situation is:
• generally, the entity shipping the goods retains the risks of the voyage until the goods arrive in
the receiving port and are cleared through customs; and therefore
• the transaction date will generally be the date that the goods are offloaded at the destination
harbor (means port) and are cleared through customs (means goods arrive at the buyer’s
port).

The exact wording of the terms of the shipping documentation must, however, always be investigated
first before determining the transaction date.
Determining the settlement date
The settlement date is the date on which:
• a foreign creditor is fully or partially paid; or

• full or partial payment is received from a foreign debtor.

Determining the translation date:

It is possible for a foreign currency transaction to spread over more than one financial year. In other
words, where such a transaction is spread over more than one financial year, at least one year-end
occurs between transaction date and settlement date. The year-end/s falling between transaction and
settlement date is known as the translation date.

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Example: determining transaction, settlement and translation dates

• On 13 January 2014, Home Limited faxed an order for 1 000 yellow bicycles to Far Away Limited,
a bicycle manufacturer in Iceland, to be paid on 30 April 2014.
• On 16 January 2014, Home Limited received a faxed confirmation from Far Away Limited
informing them that the order had been accepted.
• On 25 January 2014, Far Away Limited finished production of the required bicycles and packed
them for delivery.
• On 1 February 2014, the bicycles were delivered to one of Iceland’s many harbours and were
loaded onto a ship.
• The ship set sail on 4 February 2014.
• Due to stormy weather it only arrived at the port in Home Limited’s country on 31 March 2014.
• The bicycles were offloaded and released from customs on the same day.
• On 5 April 2014, the bicycles finally arrived in Home Limited’s warehouse.
• Far Away Limited was paid on 30 April 2014.
• Home Limited has a 28 February financial year-end.

Required:
A. State the transaction, translation and settlement dates assuming the bicycles were shipped
F.O.B.
B. State the transaction, translation and settlement dates assuming the bicycles were shipped
C.I.F.

Solution to example: determining transaction, settlement and translation dates

A. If shipped on FOB basis:

The transaction date is 1 February 2014: in terms of an F.O.B. transaction, the risks of ownership of
the bicycles would pass to Home Limited on the date the bicycles are loaded onto the ship.

The translation date is 28 February 2014 since this is Home Limited’s year-end on which date the
foreign currency monetary item (foreign creditor) still exists, (the transaction date has occurred and
the settlement has not yet happened).

The settlement date is 30 April 2014 being the date on which Home Limited pays the foreign creditor.

B. If shipped on CIF basis:

The transaction date is 31 March 2014: in terms of a C.I.F. transaction, the risks of ownership of the
bicycles would pass to Home Limited on the date that the bicycles are cleared from customs.

There is no translation date because at 28 February 2014 no foreign currency monetary item
(foreign creditor) existed. Thus there are no items to translate at either year-end.

The settlement date is 30 April 2014 being the date when the foreign creditor was paid.

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Terms and definitions used in IAS 21:
IAS 21 identifies three types of currency: the presentation currency, the functional currency and foreign
currency.

Presentation currency: The currency in which the financial statements of an entity are presented
Functional currency: The currency of the primary economic environment in which an entity
operates.
Foreign currency: A currency other than the functional currency of the entity

Example
Madina limited is a UK-registered mining company whose shares are traded on the London Stock Exchange.
Its operating activities take place in the gold and diamond mines of South Africa.
• What is the presentation currency of Madina limited?
• What is its functional currency?
• Madina limited bought specialised mining equipment from the US, invoiced in US dollars. What
type of currency is the US dollar
Answer
• The presentation currency (reporting currency) is sterling (UK pounds).
This is a requirement of the UK financial markets regulator for UK listed
companies.
• The functional currency is likely to be South African Rand, even though the
company is based in the UK. This is because its operating activities take place in
South Africa and so the company will be economically dependent on the Rand if
the salaries of most of its employees, and most operating expenses and sales are in
Rand.
• The US dollars are ‘foreign currency’ for the purpose of preparing Madina limited’s
accounts.

Presentation currency
An entity is permitted to present its financial statements in any currency. This reporting currency is often
the same as the functional currency, but does not have to be. [Generally the presentation currency is
same as functional currency].
Functional currency
When a reporting entity records transactions in its financial records, it must identify its functional currency
and make entries in that currency. It will also, typically, prepare its financial statements in its functional
currency.

Steps to be followed (summary of above paragraph)

• Record the transactions in functional currency.
• If presentation currency is different from functional currency then translate the accounting records
prepared in functional currency into accounting records prepared in presentation currency.

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IAS 21 describes the functional currency as
1. The currency that mainly influences: [Para 9]
•
sales prices for goods and services
•
labour, material and other costs of providing goods or services.

2. The following factors may also provide an evidence of an entity’s

functional currency: [Para 10]
•
The currency in which funds are generated by issuing debt and equity
instrument.
•
The currency in which receipts from operating activities are usually
retained.

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IAS -21 Self Test questions
Q. 1:
An entity based in America sells goods to the UK for £200,000 on 28 February 2013 when the exchange rate was £0.55:
$1.
The customer pays on 15 April 2013 when the rate was £0.60: $1.
The functional currency of the entity in America is the $.
Required:
How does the US entity account for the transaction in its financial statements for the year ended 31 July 2013.

Q. 2:
A US entity sells apples to an entity based in Moldovia where the currency is the Moldovian pound (Mol). The apples
were sold on 1 October 2011 for Mol 200,000 and were paid for in February 2012.
The rate on 1 October 2011 is US $1: Mol 1.55.
The rate on 31 December 2011 (the reporting date) is US $1: Mol 1.34.
The functional currency of the entity is the $.
Required:
How does the US entity account for the transaction in its financial statements for the year ended 31 December 2011?

Q.3
On August 1, 2018, a Pakistani firm purchased goods costing US$ 10,000 from a US firm to be paid on January 31,
2019
The firm’s accounting year is December 31.
Spot rates at various dates were:
Transaction date at Aug 1, 2018 Rs. 120
SOFP date at Dec. 31, 2018 Rs. 122
Settlement date at Jan 31, 2019 Rs. 121
Required:
Prepare all necessary journal entries in the books of Pakistani firm
Q.4
On August 1, 2018 a Pakistani firm sold goods costing US Dollar 10,000 to a US firm to be received on January 31,
2019
The firm’s accounting year is December 31,

Spot rates al various dates were

Transaction date August 1, 2018 Rs, 120
SOFP date December 31, 2018 Rs. 122
Settlement dated January 31, 2019 Rs. 121
Required:
Prepare all necessary journal entries in the books of Pakistani firm
Q.5
Safeer (Pakistan) Textile limited (SPTL) is a multinational company. The company is principally engaged in
manufacturing and selling of Men’s wear. The company exports designer dresses to the United Kingdom (UK), United
Arab Emirates (UAE) and United States of America (USA). The company prepares its financial statements on June 30.
During the year, following transactions were incurred in foreign currency.
• On April 15, 2017 SPTL sold dresses to a customer in UAE on account for Dhs 20,000. The customer settled the
transaction after one month and the company received Dhs 20,000 on May 15, 2017.
• On May 01, 2017, the company has imported a machinery from the USA. The invoice for the machinery was
for US $110,000 which will be paid to the vendor on August 20, 2017.
• The company’s functional currency is Pakistan Rupee (PKR) and its exchange rate to UAE Dhs and US $ are as
follows:

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 PKR TO US $ PKR to UAE Dhs
April 15,2017 103.50 27.50
May 01, 2017 103.75 27.30
May 15, 2017 102.50 28.50
June 30, 2017 102.75 29.00
August 20, 2017 103.50 27.00

Required:
Prepare accounting entries for the year ended 30-06-2017 and 2018.
Q 6:
Akram International Limited (AIL) is a retailer of fine furniture based in Pakistan. On October 19, 2017, AIL purchased
identical tables from a US-based supplier for a total of US $1,500,000. AIL has a year-end of December 31 and uses Pak
Rupees (PKR) as its functional currency. The exchange rates, on various dates during the year, are as follows:

Date PKR US $
October 19, 2017 1 0.0080
December 15, 2017 1 0.0085
December 20, 2017 1 0.0090
December 31, 2017 1 0.0095
February 03, 2018 1 0.0100
OR
Date US $ PKR
October 19, 2017 1 125 (1/0.0080)
December 15, 2017 1 117.64
December 20, 2017 1 111.11
December 31, 2017 1 105.26
February 03, 2018 1 100.00

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Solutions:
Answer 1:
On the sale [28.02.2013]:
Translate the sale at the spot rate prevailing on the transaction date.
£200,000/0.55 = $ 363,636
Receivables 363,636
Sales 363,636

When the cash is received [15.04.2013]:

Dollar value of amount received = £200,000/0.60 = $333,333
Loss on transaction = 363,636 – 333,333 = 30,303
Bank 333,333
Exchange 30,303
loss
-
Receivables 363,636

Answer 2:
Translate the sale at the spot rate prevailing on the transaction date.
Mol 200,000/1.55 = $129,032
Receivables 129,032
Sales 129,032

At the reporting date [31.12.2011]:

The receivables balance is a monetary item and so must be retranslate using the closing rate.
Mol 200,000/1.34 = $149,254
Gain = 149,254 – 129,032 = 20,222
Receivables 20,222
Forex gain 20,222

Answer 3:
The Pakistani firm will prepare following journal entries:
Rs. Rs.
1/8/2018 Inventory 1,200,000
Accounts payable 1,200,000

31/12/2018 Exchange loss 20,000

Accounts payable 20,000
[(10,000 x 122) - 1,200,000]

31/1/2019 Accounts payable (10,000 x 122) 1,220,000

Exchange gain (bal.) 10,000
Bank (10,000 x121) 1,210,000

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Answer 4:
The Pakistani firm will prepare following journal entries

1/8/2018 Accounts receivable 1,200,000

Sales 1,200,000
At December 31, 2018, foreign currency monetary item, i.e., receivable will be reported at closing rate.

31/12/2018 Accounts receivable 20,000

Exchange gain 20,000
[(10,000 x 122) - 1,200,000]
31/1/2019 At January 31, 2019, the settlement will be recorded by the following entry
Bank (10,000 x 121) 1,210,000
Exchange loss (bal.) 10,000
Accounts receivable (10,000 x 122) 1,220,000

Answer 5:
Accounting entries for the year ended 30-6-2017
Sales:
15-4-2017:
Debtor 550,000
(20,000 x 27.5)
Sales 550,000

15-5-2017:
Bank 570,000
(20,000 x 28.5)
Exchange gain (bal) 20,000
Debtor 550,000

Purchase of Machinery:

1-5-2017:
Machinery 11,412,500
(110,000 x 103.75)
Payable 11,412,500

30-6-2017:
Payable 110,000
Exchange gain 110,000

[(110,000 x 102.75) – 11,412,500] = 110,000

Closing balance of payable is (110,000 x 102.75) = 11,302,500
Or (11,412,500 – 110,000) = 11,302,500

Accounting entries for the year ended 30-06-2018

20-08-2017:
Payable 11,302,500
Exchange loss (bal) 82,500
Bank 11,385,000
(110,000 x 103.5)

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Extra practice questions:
Question 1

Musketeers Limited, a Pakistani tourist company, bought 16 cartwheels to use in the construction of a

seventeenth century ox-wagon. The cartwheels were imported from a specialist in Great Britain for a
total of GBP 20 000. The cartwheels were ordered to the British specialist on 25 March 2015, were
shipped on 15 July 2015 and arrived in Pakistan on 25 July 2015. The cartwheels were shipped free on
board (FOB).
The ox-wagons are to be used to transport tourists. The ox-wagons were completed on 31 July 2015 (at a
further cost of Rs 55 000), were available for use on 1 September 2015 and were first brought into use on
1 Octob er 2015. The ox-wagons have a residual value of Rs 30 000 and a useful life of 10 years.
Musketeers Limited paid the British specialist on 31 August 2015.
The relevant exchange rates between Rupees and GBP were as follows:
Date Spot Rate

Pak Rupees: GB Pound

25 March 2015 9.00:1
15 July 2015 9.25:1
25 July 2015 9.60:1
31 August 2015 9.90:1

Required:
Show all related journal entries in the books of Musketeers Limited for the year ended 31 December
2015.
Question 2
Spyware Limited is a Pakistani company involved in private investigation and the supply of related products.
Spyware Limited imported a large batch of advanced monitoring devices from an American company
for a total invoice price of USD 100 000. The advanced monitoring devices were ordered from the
American company on 25 March 2015, were shipped on 15 July 2015 (customs, insurance and freight
basis: CIF) and arrived in Pakistan on 25 July 2015.
The advanced monitoring devices are to be sold via one of its retail outlets. On 31 December 2015,
80% of the advanced monitoring devices had been sold(at a mark-up of 20% on cost).
Spyware Limited paid the American company on 2 February 2016.
Spyware Limited has a 31 December year end.

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41
The relevant exchange rates were as follows:
Date Spot Rate

Pak Rupees: US Dollar

25 March 2015 7.00:1
15 July 2015 7.20:1
25 July 2015 7.60:1
31 December 2015 7.10:1
2 February 2016 6.90:1

Required;
Show all related journal entries in the books of Spyware Limited for its years ended 31 December 2015 and
2016.

Question 3
Badar Limited is an American company that sells bed sheets. Badar Limited sold a batch of bed sheets to a
British company for GBP 50 000. The order from the British company was received on 25 March 2015, the
sheets were loaded on 15 July 2015 and arrived in Great Britain on 25 July 2015. The bed sheets were
loaded free on board (FOB).
The bed sheets cost the American company USD 20 000.

The British company paid badar Limited as follows:

• GBP 25 000 on 31 October 2015

• GBP 25 000 on 31 January 2016
Related exchange rates are as follows:
Date Spot Rate

US Dollar: GB POUND
25 March 2015 2.00:1
15 July 2015 2.20:1
25 July 2015 2.50:1
31 October 2015 2.65:1
31 December 2015 2.40:1
31 January 2016 2.90:1

Badar has a 31 December year end.

Required:
Show all related journal entries in the books of Badar Limited for its years ended 31 December 2015 and
2016.

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Question 4
On 1 July 2017, Warren Limited (a Pakistani company) granted a loan of AU$20 000 to a foreign
company based in Australia, Byron Limited.
• The loan is repayable in 8 instalments of AUS $3,000 each (including both principal and interest),
payable annually in arrears.
• Warren limited has a functional currency of Rupees.
• Interest is compounded annually at an effective rate of 4.24% p.a
The spot and average exchange rates on the
respective dates were as follows:
Date Spot Rate

Rs : AUS $
1 July 2017 1:0.20
31 December 2017 1:0.17
30 June 2018 1:0.22
31 December 2018 1:0.24
Average for 1 July 2017 1:0.19
to 31 12 2017
Average for 1. 1 .2018 1:0.21
to 30.06.2018
Average for 1 July 2018 1:0.22
to 31 12 2018

Required:
Prepare journal entries to record the above information in the books of Warren Limited for the year
ended 31 December 2017 and 2018.

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Solution 1
Debit Credit
15 July 2015
Cartwheels in transit 185,000
Foreign creditor 185,000
FOB Importation of 16 cartwheels: GBP 20 000 x 9.25
(spot rate on transaction date)
25 July 2015
Cartwheels 185,000
Cartwheels in transit 185,000
31 July 2015
Vehicles: cost 240,000
Cartwheels 185,000
Bank 55,000
Further costs incurred on construction of the ox-wagons
31 August 2015
Foreign creditor 185,000
Foreign exchange loss (expense) 13,000
Bank 198,000
Payment of foreign creditor: GBP 20 000 x 9.90 (spot
rate on payment date); foreign exchange loss 198 000 –
185 000 = 13 000
31 December 2015
Depreciation 7,000
Vehicles: accumulated depreciation 7,000
Depreciation of ox wagons from date first available for
use: (185 000+ 55 000 – 30 000) / 10 years x 4/12)

Note:
When goods are shipped on a FOB basis (free on board), the risks and rewards of ownership
transfer on the date that the goods are loaded onto the ship:

In this case, it means that the transaction date is 15 July 20X5.

Solution 2

Rupees
Debit Credit
25 July 2015
Inventory 760 000
Foreign creditor 760 000
CIF Importation of advanced monitoring devices: USD 100 000 x 7.60
(spot rate on transaction date)
31 December 2015
Foreign creditor 50 000
Foreign exchange gain 50 000
Translation of foreign creditor at year-end: 100 000 x 7.10 (spot rate
at year-end) – 760 000
Cost of inventory expense 608 000
Inventory 608 000
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 Cost of goods sold (760 000 x 80%)
Debtors/ Bank 729 600
Sales 729 600
Revenue from sale of goods (608 000/100 x
120)

2 February 2016
Foreign creditor (760,000 – 50,000) 710 000
Bank (10,000 x 6.9) 690 000
Foreign exchange gain 20 000
Payment of foreign creditor; gain made 710 000 – 690 000

Note:
When goods are shipped on a CIF basis (customs, insurance and freight), the risks and rewards
of ownership transfer on the date that the goods arrive safely at their destination:

In this case, it means that the transaction date is 25 July 2015.

Had the transaction been FOB, the risks and rewards of ownership would have transferred on the
date that the goods were shipped – in which case the transaction date would have been 15 July
2015.
Solution 3
US Dollars
Debit Credit
$
15 July 2015
Foreign debtor 110 000
Sales 110 000
Export of sheets to British company: GBP 50 000 x 2.20 (spot
rate on
the FOB transaction date) see note 1
Cost of inventory expense 20 000
Inventory 20 000
Cost of goods sold (given: 20 000)

31 October 2015
Foreign exchange gain 11,250
Bank (25 000 x 2.65) 66 250
Foreign debtor (25,000 x 2.2) 55,000
31 December 2015
Foreign debtor 5 000
Foreign exchange gain 5 000

Translation of foreign debtor at year-end:

[(25,000 x 2.4)-(25,000 x 2.2)]
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45
 31 January 2016
Foreign exchange gain 12 500
Bank (25 000 x 2.90) 72 500
Foreign debtor (25,000 2.2 +5,000) 60 000

Note 1:
If the goods had been shipped on a CIF basis (customs, insurance and freight), the risks
and rewards of ownership would have transferred on the date that the goods arrive safely
at their destination, in which case the transaction date would have been 25 July 20X5.

Solution 4

Debit Credit

1 July 2017
Foreign loan receivable 20 000 / 0.2 100 000
Bank 100 000
Issue of loan

31 December 2017
Foreign loan receivable (W1: 848 x 6/12) / 0.19 2 232
Interest income 2 232
Interest for the year

(W1: c/b 20 424 / 0.17) –

Foreign loan receivable (capital 17 909
100 000 + interest 2 232)
Forex gain (P/L) 17 909
Exchange difference on translation of loan balance at year-
end
20,000/0.17 = 117 647 (loan receivable)
Breakup
Current assets (2,152/0.17)=12,658
Non Current assets (17,848/0.17)=104,988
Interest receivable in current assets=848 x 6/12/0.17=2,494

30 June 2018
Foreign loan receivable (W1: 848 x 6/12) / 0.21 2 019
Interest income 2 019
Interest for 6 months

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46
 Bank 3 000 / 0.22 13 636
Foreign loan receivable 13 636
1st instalment received

31 December 2018
Foreign loan receivable (W1: 757 x 6/12) / 0.22 1 720
Interest income 1 720
Interest for 6 months

Forex loss (expense) 34 301

Foreign loan receivable 34 301
Exchange difference on translation of loan balance at year-end
[(17 848+757x6/12)0/.24=75,943-(100 000+2 232+17 909+2 019+1 720 -13 636)]=34 301

17,848/0.24 = 74 367 (loan receivable)

Breakup
Current assets (2,243/0.24)=9,346
Non Current assets (15,605/0.24)=65,021
Interest receivable in current assets=757 x 6/12/0.24=1,577
The table (in Aus Dollars) for the entire 8 years
Working
Effective interest rate table in foreign currency: AUS Dollars
Date Rental Principal Interest Balance
01-07-2017 20,000
30-06-2018 3,000 2,152 848 17,848
30-06-2019 3,000 2,243 757 15,605
30-06-2020 3,000 2,338 662 13,267
30-06-2021 3,000 2,437 563 10,830
30-06-2022 3,000 2,541 459 8,289
30-06-2023 3,000 2,649 351 5,640
30-06-2024 3,000 2,761 239 2,879
30-06-2025 3,000 2,878 122 0

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47
IAS-21 Q.B

Question-1:
DND Ltd is a listed company, having its operations within Pakistan. During the year ended December 31,2016, the
company contracted to purchase plants and machineries from a US company. The terms and conditions thereof are
given below:
I. Total cost of contract = US$ 100,000
II. Payment to be in accordance with the following schedule :
Payment dates Amount Payable
On signing the contract July 01, 2016 US$ 20,000
On shipment* September 30,2016 US$ 50,000
After installation and test run January 31,2017 US$ 30,000

*(risk and rewards of ownership are transferred on shipment)

The contract went through in accordance with the schedule and the company made all the payments on time. 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.

Question-2:
Orlando is the company whose functional currency is the US dollar. It prepares its financial statements to 30 June each
year. The following transactions take place on 21, May 2014 when the spot exchange rate was $1=€0.8.
1. Goods were sold to Koln, a customer in Germany, for €96,000.
2. A specialized piece of machinery was bought from Frankfurt, a German supplier.The invoice for the machinery
is for €1,000,000.
The company receives €96,000 from Koln on 12, June 2014.
At 30 June 2014 the machinery purchased from Frankfurt is not yet available for use.
The liability for the machine is settled on 31, July 2014

Relevant $/€ exchange rates are:

12 June 2014 $1=€0.9
30, June 2014 $1=€0.7
31 July 2014 $1=€0.8

Required:
Show the effect on profit or loss of these transactions for :
(a) The year to 30 June 2014; and
(b) The year to 30 June 2015

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Question-3:
MZA Limited a dollar based entity, was involved in the following transactions in foreign currencies during the year
ended December 31, 2018.

a) MZA Limited bought equipment for 130,000 Dinars on March 04, 2018 and paid for on August 25, 2018.

b) On February 27, 2018 MZA Limited sold goods which had cost $ 46,000 for 476,000 Krams to a company whose
functional currency was Krams. The proceeds were received on May 25, 2018.

c) On September 02, 2018 MZA Limited sold goods which cost $ 17,000 for 53,376 Sarils to a company whose
functional currency was Sarils. The amount was outstanding at December 31, 2018 but the proceeds were
received in sarils on February 07, 2019 when the exchange rate was S 2.306 = $1.
d) MZA Limited borrowed 426,000 rolands on May 25, 2018 and is repayable in two years’ time. Ignore interest for
the period.

Exchange rate is relevant to the above transactions to $1 are given below:

Date Rolans Dinars Krams Sarils

27-Feb-18 - - 7.000 -
4-Mar-18 - 0.650 - -
25-May-18 1.500 - 6.700 -
25-Aug-18 - 0.500 - -
2-Sep-18 - - - 2.224
31-Dec-18 1.800 0.540 7.500 2.250

Required:
For each of the above transactions prepare accounting entries for the year ended December 31, 2018 and December
31, 2019 as required by IAS-21.

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Answer-1:
Date Description Dr. Cr.
Rs. Rs.
1- July-16 Advance to suppliers 1,210,0000
Cash/Bank (20,000 x 60.5) 1,210,000
30- Sep-16 PPE in-transit (bal) 6,090,000
Advance to suppliers 1,210,000
Cash/Bank(50,000x61) 3,050,000
Payable to suppliers(30,000x61) 1,830,000

(Recording of asset on the delivery date as risk and

rewards are transferred to the company)
31- Dec-16 Exchange loss 6,000
Payable to suppliers 6,000

(Adjustment of exchange rate as of reporting date.

Exchange rate was Rs. 30,000x61.2-1,830,0000 )
31-Jan-17 Property, Plant and Equipment 6,090,000
PPE(in-transit)
6,090,000
(Transfer of the in transit plants and machineries to
Property, Plant and Equipment)
31-Jan-17 Payable to suppliers(1,830,000+6,000) 1,836,000
Exchange loss(Bal.) 9,000
Bank(30,000x61.5) 1,845,000

(Final payment to supplier. Exchange rate was Rs.

61.5/US$1)

Answer-2:
(a) Year to June 2014
On 21.05.2014, the revenue and receivable for the sale of €96,000 should be translated at the spot rate
of 0.8 (i.e 96,000/0.8) $120,000

21-5-2014
Debtor $120,000
Sales $120,000
The capital expenditure of €1m should also be translated at the spot rate of 0.8:

Debit: Property, Plant and Equipment $1,250,000

Credit: Payables $1,250,000 (1,000,000/0.8)

The receipt on 12 June relating to the receivable is translated at the rate of 0.9 on that date. This
generates cash of $106,667 to settle a receivable of $ 120,000. Hence an exchange loss of $ 13,333 is
recognized in profit and loss.

12-6-2014
Bank (96,000/0.9) $106,667
Forex loss (bal.) $13,333
Debtor $120,000
The non-current asset is not re-translated at the year-end because it is a non monetary asset, but the
outstanding payable (a monetary item) must be re-stated to the year–end exchange rate of 0.7. This gives

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50
 a year-end payable of $1,428,571. This has increased from the initial $1,250 000; therefore an exchange
loss of $178,571 will be recognized in profit and loss.

30-6-2014
Forex loss 178,571
Payable 178,571
[(1,000,000/0.7)-1,250,000]
(b) Year to June 2015

When the payable is settled after the year end at the spot of 0.8, it results in a payment of $1,250,000. There
is an exchange gain of $178,571 compared with the carrying value at the end of 2014.
Payable $1,428,571
Gain (bal.) $178,571
Bank (100,000/0.8) $1,250,000
Answer-3:

Dr. Cr.
Date Description
a) $ $
4-Mar-18 Equipment 200,000.00
Accounts payable (130,000 / 0.65) 200,000.00
Purchase of equipment
25-Aug-18 Accounts payable 200,000.00
Exchange gain (bal.) 60,000.00
Bank (130,000/0.5) 260,000.00
Payment of accounts payable
b)
27-Feb-18 Accounts receivable (476,000/7) 68,000.00
Sales 68,000.00
Revenue recognition

27-Feb-18 Cost of sales 46,000.00

Inventory 46,000.00
Cost recognition
25-May-18 Bank (476,000/6.7) 71,044.78
Accounts receivables 68,000.00
Exchange gain 3,044.78
Receipt of accounts receivable
c)
2-Sep-18 Accounts receivable (53,376/2.224) 24,000.00
Sales 24,000.00
Revenue recognition

2-Sep-18 Cost of sales 17,000.00

Inventory 17,000.00
Cost recognition

31-Dec-18 Exchange loss 277.33

Accounts receivable 277.33
Year-end closing rate
[24,000-(53,376/2.25)]

7-Feb-19 Bank (53,376/2.306) 23,146.57

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51
 Exchange loss (bal.) 576.09
Accounts receivable (53,376/2.25) 23,722.67
Receipt of accounts receivable

25-May-18 Bank 284,000.00

Loan (426,000 x 1.5) 284,000.00
Receipt of loan

31-Dec-18 Loan 47,333.33

Exchange gain 47,333.33
Year-end closing rate
[284,000 – (426,000/1.8)]

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52
Extra practice questions
Q.1 Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:
1. On 1 October 2018, CL imported a machine from China for USD 250,000 against
60% advance payment which was made on 1 July 2018. The remaining payment was
made on 1 April 2019.
2. On 1 January 2019, CL sold goods to a Dubai based company for USD 40,000 on
credit. CL received 25% amount on 1 April 2019, however, the remaining amount is
still outstanding.
Following exchange rates are available:
Date 1 Jul 2018 1 Oct 2018 1 Jan 2019 1 Apr 2019 30 Jun 2019 Average
1 USD Rs. 121 Rs. 124 Rs. 137 Rs. 140 Rs. 163 Rs. 135

Required:
Prepare journal entries in CL’s books to record the above transactions for the year ended 30
June 2019. (08)

A.1 Copper Limited

General Journal

Debit Credit
Date Particulars --------- Rupees ---------

1-Jul-18 Advance payment – Machine 250,000×60%×121 18,150,000

Cash/Bank 18,150,000

1-Oct-18 Machine (bal) 30,550,000

Advance payment 18,150,000
Payable 250,000×40%×124 12,400,000

1-Jan-19 Account receivable 40,000×137 5,480,000

Sales 5,480,000

1-Apr-19 Cash/Bank 40,000×25%×140 1,400,000

Account receivable 5,480,000×25% 1,370,000
Exchange gain (P&L) Balancing figure 30,000

1-Apr-19 Payable 12,400,000

Exchange loss (P&L) Balancing figure 1,600,000
Cash/Bank 250,000×40%×140 14,000,000

30-Jun-19 Account receivable 780,000

Exchange gain (P&L) 780,000
(5,480,000 – 1,370,000) -40,000 x 75% x 163

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53
Test Date:

Q.1 Ahmad Limited (AL) is a group of companies based in Pakistan. Following Foreign Currency
transactions were carried out during theyear.

(a) On August 1, 2019, AL purchase identical mobiles for resale from a US based supplier
for a total of US $25,000 on credit.
It sold 65% mobiles on December 20, 2019 with the remaining 35% mobiles being sold
on February 27, 2020. 70% of the amount was paid on 15 September and remaining on
27 January 2020.

(b) AL purchased an investment property in United States for USD 115,000. 10% advance
payment was made on 1 May 2019 and 70% payment was made on
01 July 2019 after transfer of title and possession of the property. The remaining
amount was paid on 1 August 2019.
AL uses fair value model for its investment property. On 31 December 2019, an
independent valuer determined that fair value of the property was USD 110,000.
(c) On 1 August 2019, AL imported cattle feed amounted to USD 150,000 against 70%
payment for its live stock. AL also paid 5% custom duty on import. The feed is specially
designed to provide vital nutrients to cows that keep them healthy and improve the
quality of their produce. At year-end, 30% of the amount is payable whereas 40% of the
feed is unused.

Following spot exchange rates are available:

1-May-2019 1-Jul-2019 1-Aug-2019 15-Sept-2019 31-Dec-2019

USD 1 Rs. 140 Rs. 145 Rs. 150 Rs. 155 Rs. 160
Requirement :
(a) Pass the necessary Journal Entries to record these transactions in the books of Ali Limited for the year
ended 31 December 2019. (12)
(b) Prepare extracts from statement of comprehensive income for the year ended 31-12-2019 and
statement of financial position as on that date. (4)

Q.2 On 1 January 2014, SL acquired five vehicles costing Rs. 8.5 million on lease. As per the lease
agreement, four annual installments of Rs. 2.5 million each are payable in advance on 1
January, each year. The market rate of interest is 14%.

Required:
a) Prepare journal Entries(in lessee’s Book) for the year ended 31.12.2014 and 31.12.2015. (4)
b) Prepare statement of Financial Position extracts and notes to financial statements for the (6)
year ended 31.12.2015 along with comparatives.

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54
Q-1
A) Journal Entries ‘000’

Date Accounting Entries Dr. Cr.

(a)
01-08-2019 Inventory / Purchases 3,750
Creditors 3,750
(25,000 x 150)
15-09-2019 Creditor (25,000 x 70% x 150) 2,625
Forex Loss (bal.) 87.5
Bank (25,000 x 70% x 155) 2,712.5
20-12-2019 Debtor xx
Sales xx
Cost of sales 2,437.5
Inventory 2,437.5
(3,750 x 65%)
31-12-2019 Forex Loss (w-1) 75
Creditor 75

(b)
01-05-2019 Advance for investment property 1,610
Bank 1,610
(115,000 x 10% x 140)
01-07-2019 Investment Property (bal.) 16,617.5
Advance 1,610
Bank (115,000 x 70% x 145) 11,672.5
Payable (115,000 x 20% x 145) 3,335
01-08-2019 Forex Loss 115
Payable 3,335
Bank (115,000 x 20% x 150) 3,450
31-12-2019 Investment Property (w-2) 982.5
F.V Gain (P.L) 982.5

(c)
01-08-2019 Cattle feed inventory (150,000 x 150) 22,500
Bank (150,000 × 70% × 150) 15,750
Payable (150,000 x 30% x 150) 6,750
01-08-2019 Cattle feed inventory (22,500 x 5%) 1,125
Cash / Bank 1,125
31-12-2019 Cattle feed consumed 14,175
Cattle feed inventory 14,175
(22,500 + 1,125) x
60%
31-12-2019 Forex Loss (w-3) 450
Payable 450

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55
W-1)
Creditors [as per entries] (25,000 x 30% x 150) 1,125
Creditors [Should be] (25,000 x 30% x 160) or (3,750-2,625) 1,200
Forex Loss 75
W-2)
Investment Property C.A 1,617.5
F.V (110000 x 160) 17,600
F.V Gain 982.5

W-3) Payable recorded in books 6,750

Payable as on 31-12-2019 7,200
(150000 x 30% x 160)
Forex Loss 450

B) Statement of Comprehensive Income

[Extracts] For the year ended 31-12-
2019
Rs. ‘000’
Cost of sales 2,437.5
Fair value gain 982.5
Forex Loss (87.5 + 75 + 115 + 450) (727.5)
Cattle feed consumed (14,175)

Balance Sheet [Extracts]

As on 31-12-2019

Rs.’000’
Non-Current Assets
Investment Property 17,600
Current Assets
Inventory (3,750 x 35%) 1,312.5
Cattle feed inventory (22,500 + 1,125) x 40% or (22,500 + 1,125 -14,175) 9,450

Current Liabilities
Creditors for mobiles 1,200
Payable for feed 7,200

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56
Q-2
a) SL
Journal Entries
For the Year Ended 31 December 2014
Rs. In “millions”
Dr. Cr.
01-01-2014 Right of use-machines (w-2) 8.3
Lease Liability 8.3
01-01-2014 Lease Liability 2.5
Bank 2.5
31-12-2014 Interest expense 0.81
Interest payable 0.81
31-12-2014 Depreciation (8.3/4) 2.08
Accumulated depreciation 2.08
For the Year Ended 31 December 2015
01-01-2015 Lease Liability 1.69
Interest payable 0.81
Bank 2.5
31-12-2015 Interest expense 0.58
Interest payable 0.58
31-12-2015 Depreciation 2.08
Accumulated depreciation 2.08

b)
SL
Statement of Financial Position
(extracts) As on 31 December 2015
Rs. In “millions”
2015 2014
Assets:
Non-Current Assets:
Right of Use – Machines 8.3 8.3
Less: Accumulated Depreciation (4.16) (2.08)
4.14 6.22
Liabilities:
Non-Current Liabilities:
Lease Liability 2.19 4.11

Current Liabilities:
Lease Liability 1.92 1.69
Interest payable 0.58 0.81

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57
 SL
Notes to Financial Statements
For the Year Ended 31 December 2015
Rs. “millions”
In 2014
2015
1- Schedule of Property Plant and Equipment
Cost: Opening Balance 8.3 -
Additions - 8.3
Closing balance 8.3 8.3
Accumulated Depreciation: Opening Balance 2.08 -
Depreciation for the year 2.08 2.08
Closing balance 4.16 2.08
Carrying amount 4.16 6.22

2- Maturity Analysis- contractual undiscounted lease payments 2015 2014

Less than one year 2.5 2.5
One to two years 2.5 2.5
Two to three years - 2.5
Total undiscounted lease payments 5 7.5

SL has entered into a lease agreement to acquire five vehicles. The market price of these vehicles is Rs.
8.5 million. Four annual installments of Rs 2.5 million each are payable in advance on 1 January each
year. Market rate of interest is 14%. No financial restrictions were imposed by lessor.
Worki
ngs
W-1)
Finance Charge Allocation
Table
Date Rental Principa Interest Balance
l
01-01-2014 - - - 8.30
01-01-2014 2.5 2.5 - 5.8
01-01-2015 2.5 1.69 0.81 4.11
01-01-2016 2.5 1.92 0.58 2.19
01-01-2017 2.5 2.19 0.31 -

W-2)
1−(1+0.14)
−3
PV = 2.5 + 2.5 ×[ ] = 8.30
0.14

58
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 IAS 21 FOREIGN CURRENCY TRANSACTIONS
INTRODUCTION
Exchange rates [IAS 21: 8][take on page 45 of Vol 1]
Term Definition

Exchange rate The rate of exchange between two currencies.

Spot rate The exchange rate at the date of the transaction for immediate delivery.

Closing rate The spot exchange rate at the end of the reporting period.

Exchange A difference resulting from translating a given number of units of one currency into another
difference currency at different exchange rates.

There are two ways in which exchange rates are quoted in markets, direct quote and indirect quote. The direct
quote is often used in Pakistan in which variable units of PKR are quoted for one unit of foreign currency e.g. US$ 1
= PKR 176. The indirect quote would quote variable units of foreign currency for one unit of PKR e.g. PKR 1 =
US$0.00568.
Based on these quotes, we can derive conversion formulas as follows:
Direct quote FCY units are taken as base means as 1(normally used in Pakistan)

Indirect quote FCY units are taken as base means as 1(normally used in Pakistan)

⯈ Example
Perform the following currency conversions:
(a) US$ 500 into Pak rupees if US$1= PKR 174.52
(b) US$ 500 into Pak rupees if PKR 1 = US$ 0.00573
(c) Rs. 87,260 into US$ if US$1= PKR 174.52
(d) Rs. 87,260 into US$ if PKR 1 = US$ 0.00573
Answer:
(a) US$ 500 x 174.52 = PKR 87,260
(b) US$ 500 / 0.00573 = PKR 87,260
(c) PKR 87,260 / 174.52 = US$500
(d) PKR 87,260 x 0.00573 = US$500

Monetary vs. non-monetary items [IAS 21: 8 & 16][set on page 70 of Vol 1]
Assets

Monetary Non-monetary

• Deferred tax assets (IAS 12 Para 78) • Property, plant & equipment

• Net investment in lease • Investment property

• Investments in debt securities • Biological assets

• Trade receivables • Intangible assets (including goodwill)

• Other receivables • Right of use assets

• Advances (to be received back in cash) • Investments in equity shares

• Cash and bank (including term deposits) • Inventories

• Advances for goods/services

• Prepayments for expenses

59
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Liabilities

Monetary Non-monetary

• Refund liability (to be settled in cash) • Advance from customer (contract liability)

• Provisions (to be settled in cash) • Provisions (to be settled by delivery of non-

monetary assets)
• Provisions for employee benefits
• Deferred Government Grant
• Lease liability

• Deferred tax liability

• Current tax liability

• Loans and borrowings

• Trade payables

• Accruals (to be paid in cash)

• Cash dividend payable

In practice, equity items (share capital and reserves) are usually treated as non-monetary items.

Retranslation with frequent movement on the account

Sometimes there might be a movement on the carrying amount of a balance denominated in

STICKY NOTES
a foreign currency during a period. The exchange difference could be calculated by applying
the above approach.
⯈ Example
A Pakistani company whose functional currency is the rupee paid $90,000 into a dollar
account on 30 June.
The company paid an additional $10,000 into the account on 30 September, $15,000 on 31
October and $20,000 on 30 November.
There were no other movements on this account.
Exchange rates over the period were as follows:
30 June 30 Sep 31 Oct 30 Nov 31 Dec

Rs. 160/$ Rs. 161/$ Rs. 164/$ Rs. 165/$ Rs. 162/$

Required: Calculate the exchange gain/loss on each deposit separately.

⯈ ANSWER:
Gain (loss)
Initial deposit 30 June Rs. Rs.
On 30 June $90,000 x 160 14,400,000
On 31 Dec $90,000 x 162 14,580,000 180,000
Additional deposit 30 Sep
On 30 Sep $10,000 x 161 1,610,000
On 31 Dec $10,000 x 162 1,620,000 10,000
Additional deposit 31 Oct
60
Page 42 of 45
On 31 Oct $15,000 x 164 2,460,000
On 31 Dec $15,000 x 162 2,430,000 (30,000)
Additional deposit 30 Nov
On 30 Nov $20,000 x 165 3,300,000
On 31 Dec $20,000 x 162 3,240,000 (60,000)
100,000
However, this can be time consuming where there is a lot of movements. An easier approach
is to find the exchange difference as a balancing figure.
⯈ Example
A Pakistani company whose functional currency is the rupee paid $90,000 into a dollar
account on 30 June.
The company paid an additional $10,000 into the account on 30 September, $15,000 on 31
October and $20,000 on 30 November.
There were no other movements on this account. Exchange rates over the period were as
follows:
30 June 30 Sep 31 Oct 30 Nov 31 Dec
Rs. 160/$ Rs. 161/$ Rs. 164/$ Rs. 165/$ Rs. 162/$
Required: Calculate the total exchange gain/loss on the deposit account.
Answer:
$ Rate Rs.
Initial deposit 30 June 90,000 160 14,400,000
Additional deposit 30 Sep 10,000 161 1,610,000
Additional deposit 31 Oct 15,000 164 2,460,000
Additional deposit 30 Nov 20,000 165 3,300,000
Exchange gain (balancing) 100,000
At year end 31 Decemebr 135,000 162 21,870,000
Retranslation of accrual of interest
There is no rule in IAS 21 as to what rate should be used for the accrual of interest. The
accrual could be deemed to arise over the period in which case the average rate would be
used or it could be treated as a year-end transaction in which case the closing rate would be
used. The profit for the period is not affected by the choice of rate as there would be a
compensating adjustment in the amount of the exchange difference.
⯈ Example
A Pakistani company whose functional currency is the rupee borrowed $90,000 on 30 June.
The company recognised an interest accrual of $10,000 at its year-end (31 December). There
were no other movements on this account.
Exchange rates over the period were as follows:
• 30 June: Rs.160/$.
• Average for the period Rs.161/$.
61
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• 31 December (year-end): Rs.162/$.
Required: Calculate the amount of expense to be recognised in profit or loss using average
rate approach.
Answer:
Exchange difference (interest at average rate) $ Rate Rs.
Balance at start (30 June) 90,000 160 14,400,000
Interest (PL) 10,000 161 1,610,000
Exchange loss (PL) 190,000
Balance at end (31 Dec.) 100,000 162 16,200,000
The total expense is Rs. 1,800,000 (i.e. Interest 1,610,000 + exchange loss 190,000).
⯈ Example
A Pakistani company whose functional currency is the rupee borrowed $90,000 on 30 June.
The company recognised an interest accrual of $10,000 at its year-end (31 December). There were no other
movements on this account.
Exchange rates over the period were as follows:
• 30 June: Rs.160/$.
• Average for the period Rs.161/$.
• 31 December (year-end): Rs.162/$.
Required: Calculate the amount of expense to be recognised in profit or loss using closing rate approach.
Answer:
Exchange difference (interest at closing rate) $ Rate Rs.

Balance at start (30 June) 90,000 160 14,400,000

Interest (PL) 10,000 162 1,620,000

Exchange loss (PL) 180,000

Balance at end (31 Dec.) 100,000 162 16,200,000

The total expense is Rs. 1,800,000 (i.e. Interest 1,620,000 + exchange loss 180,000).
⯈ Example [take as test question]
Tabrez Limited (TL), having operations in Lahore, purchases machinery from Schneider Plc for
€200,000 on 31 May 2019 when the exchange rate was Rs.150 / Euro. TL also sells goods to a UK buyer for
€150,000 on 30 September 2019, when the exchange rate was Rs.155 / Euro. At the TL’s year end of 31 December
2019, both amounts are still outstanding and have not been paid. The closing exchange rate was Rs.160 to €1.
Required: Journal entries for the year ended 31 December 2019.
Answer:
Debit Rs. m Credit Rs. m

Date Particulars

31 May 2019 PPE (machinery) 30

Other payables 30

[€ 200,000 x 150 = Rs. 30m]

30 Sep 2019 Trade receivable 23.25

Revenue 23.25

[€ 150,000 x 155 = Rs. 23.25m]

31 Dec 19 Exchange loss (PL) 2

Other payables 2

62
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 [€ 200,000 x 160 = Rs. 32m] [Rs. 32m – 30m =
Rs. 2m]

31 Dec 19 Trade receivable 0.75

Exchange gain (PL) 0.75

[€ 150,000 x 160 = Rs. 24m] [Rs. 24m – 23.25m

= Rs. 0.75m]

63
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 Income Taxes (IAS-12)

Income Tax

Current Tax Deferred Tax Prior Period Tax

Current Tax:
Amount of tax on taxable profits for the period.
Accounting Profit
Profit which is calculated on the basis of requirements of IFRS (Accounting Standards).
Profit before tax calculated in income statements is known as Accounting Profit for the purpose of IAS-12.
Taxable Profit:
Profit which is calculated on the basis of requirements of Income Tax Ordinance.

It means to calculate the current tax, company needs to convert the accounting profits into taxable profits.

For example
Working of Current Tax
Rs
Profit before tax (Accountings Profit) 1,000,000
Add Accounting Depreciation (calculated as per IAS-16) 500,000
Less Tax Depreciation (calculated as per ITO) (400,000)
Taxable Profit 1,100,000
Tax @30%
Current Tax 330,000

Accounting Entry of Current Tax

Current Tax Expense 330,000
Current Tax Payable 330,000

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64
 Summary of Accounting and Tax Treatments of different items
S.No Particulars As Per IFRS As Per Income Tax ordinance

1 IAS-2 Inventory Lower of Cost or NRV Lower of Cost or NRV

2 IAS-16 Tangible Assets Depreciation IAS-16 → Tax Depreciation (Including initial
IAS-38 Intangible Assets Amortization IAS-38 & Normal)
→ Tax Amortization
3 Disposal of Assets Accounting Gain / Loss = Sale Tax Gain/ Loss = Sale proceed - Tax
proceeds - Carrying Amount Base
4 Exempt Incomes (e.g Recognize on Accrual Basis Not Taxable
Agricultural income)
5 Inadmissible Expense (Fines Recognize on Accrual basis Not Deductible
and Penalties)
6 Revenue from sale of Goods Recognize on Accrual basis Taxable on Accrual basis
*7 Routine business expenses Recognize on Accrual basis Deductible on Accrual basis
8 Provision for Gratuity Recognize on Accrual basis Deductible on Cash basis
9 Allowance for Bad Debts On estimated basis Actual Bad Debts are allowed
10 Borrowing cost Capitalize if it relates to a Allowed as an Expense, when
qualifying asset incurred (Not allowed to be
capitalized).
11 Treatment of Dividend Not Allowed as an Expense Not Allowed as an Expense
declared/paid
12 Treatment of Revaluation Treatment as per IAS-16 No concept in ITO
Surplus/transfer to
Retained earnings
13 Treatment of Revaluation Treatment as per IAS-16 No concept in ITO
Loss
14 Treatment of Impairment Treatment as per IAS-16 and No concept in ITO
Loss IAS-36
15 Treatment of Lease in the Depreciation on Leased Lease Rentals (Principal+Interest)
books of lessee. assets. paid are allowed as an Expense.
Interest charge on lease
liability

 * Examples of routine business expenses.

• Salaries and wages
• Utilities
• Entertainment
• Travelling expenses etc

 Incomes are taxable; while expenses are deductible.

 Detailed discussion of points related to lease is before the Self-Tested Questions on page number 24.

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65
Discussions of Important Adjustments
1. Gratuity:
Amount payable to employees at the time of their retirement/termination.

Accounting Entries:
Gratuity Expense xxx
Gratuity Payable xxx
(As the services are provided on yearly basis)

Gratuity Payable xxx

Cash xxx
(When the amount is paid to employees)

Treatment in calculation of current tax:

Gratuity expense is added back in profit before tax, while gratuity payment is deducted.

2. Bad Debts:
Actual bad debts if no allowance
Bad debt xxx
Debtor xxx

Entry of estimated bad debts:

Estimated bad debt= Debtor x Rate
Suppose in 2014, Rs 15,000 allowance is made:
Bad debt 15,000
Allowance for bad debts 15,000

Statement of Financial Position

Debtors xxx
Less: Allowance for bad debts (15,000)
xxx

2014: Current Tax Rs

Profit before tax-Assumed 800,000
Add: Bad debt expense 15,000
Taxable profit 815,000

Now suppose actual bad debts are Rs 15,000 in 2015

Allowance for bad debts 15,000
Debtor 15,000
(This entry will have no effect on statement of profit or loss)

2015: Current Tax Rs

Profit before tax- Assumed 900,000
Less: Bad debt written off (actual bad debts) (15,000)
Taxable profit 885,000

Treatment in calculation of current tax:

 Bad debts expense is added back while bad debts written off is deducted.

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66
3. Borrowing Cost:
As per IAS-23 Borrowing cost is recognized as an expense unless it relates to a qualifying asset. However, it is
treated as an expense in income tax ordinance.
Suppose during the year, Rs 20,000 borrowing cost is capitalized.

Current Tax Rs
Profit before tax-Assumed 1,200,000
Less: Borrowing cost (20,000)
Taxable profit 1,180,000
Calculation of carrying amount and tax base in case of borrowing cost capitalized:
IFRS Income Tax Ordinance
CWIP-Building (Assumed) 500,000 CWIP-Building (Assumed) 500,000
Borrowing cost 20,000 Borrowing cost -
Carrying Amount 520,000 Tax Base 500,000
4.
Dividend

Company Shareholder
When dividend is declared: When dividend is declared:
Dividend(R/E) xxx Dividend Receivable xxx
Dividend Payable xxx Dividend Income xxx
(No effect on profit or loss) (Dividend income is added in other
income)

When dividend is paid:

When dividend is received
Dividend Payable xxx
Cash/Bank xxx
Cash/Bank xxx
Dividend Receivable xxx
(No effect on of profit or loss)
(No effect on of profit or loss)

Dividend declared/paid by company to its shareholders is neither an accounting expense nor a tax expense.

Scenario 1
Accounting Profit (Profit before Tax) for each of the first four years of business = Rs 100,000/ annum.
Purchase of machinery for Rs 100,000 at the start of Y1.
Useful life is = 4 years
Tax Depreciation is follows
Y1 40,000
Y2 30,000
Y3 20,000
Y4 10,000
Assume tax @ 30%.
Required:
Calculate the current tax, deferred tax and also prepare extracts from statement of comprehensive income for
four years.
Note: If a tax treatment is given in question then follow the question. If however, tax treatment is not given
then follow the income tax ordinance.

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67
Solution
a)Current Tax
Y1 Y2 Y3 Y4
Profit before Tax 100,000 100,000 100,000 100,000
Add Accounting Depreciation 25,000 25,000 25,000 25,000
Less Tax Depreciation (40,000) (30,000) (20,000) (10,000)

Taxable Profit 85,000 95,000 105,000 115,000

Tax @ 30% 25,500 28,500 31,500 34,500

Deferred Tax:
Year 1

• In the first year we have earned profit of Rs 100,000 according to accounting standards. However, we are
paying tax on Rs 85,000 according to Income Tax Ordinance, in the current period.
• Tax on Rs 15,000 amounting to Rs 4,500 (15,000 x 30%) will be paid in future.
• According to accrual concept this tax of Rs 4,500 should be recognized as an expense in the year 1.
• This tax (Rs 4,500) which is deferred to future years is called as deferred tax.
Deferred tax expense (DTE) 4,500
Deferred tax liability (DTL) 4,500
At the end of year 1:

Carrying Amount = 100,000 – 25,000 = Rs 75,000

Tax base = 100,000 – 40,000 = Rs 60,000

Difference 15,000
15,000 x 30% Rs 4,500 DTL

Year 2:
• In the second year we have earned profit of Rs 100,000 according to accounting standards. However we
are paying tax on Rs 95,000 according to Income Tax Ordinance, in the current period.
• Tax on Rs 5,000 amounting to Rs 1,500 (5,000 x 30%) will be paid in future.
• According to accrual concept this tax of Rs 1,500 should be recognized as an expense in the year 2.
• This tax (Rs 1,500) is called deferred tax.
Deferred tax expense (DTE) 1,500
Deferred tax liability (DTL) 1,500

At the end of year 2:

Carrying Amount = 100,000 – 50,000 = Rs 50,000

Tax base = 100,000 – 70,000 = Rs 30,000

Difference 20,000
20,000 x 30% Rs 6,000 DTL

• If we compare profits it will result into income statement figure (for the year)
• If we compare carrying amount with tax base it will result into statement of financial position figures
(closing balance)

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Year 3:
• We have earned profit of Rs 100,000 according to accounting standards. However, we are paying tax on
Rs 105,000 according to Income Tax Ordinance, in the current period.
• During the year we are paying extra tax of Rs 1,500 (5,000 x 30%) related to previous years, therefore
our DTL is starting to be settled and reversed.
Deferred tax liability 1,500
Deferred tax expense 1,500

At the end of year 3:

Carrying Amount = 100,000 – 75,000 = Rs 25,000

Tax base = 100,000 – 90,000 = Rs 10,000

Difference 15,000
15,000 x 30% Rs 4,500 DTL

Year 4:
• We have earned profit of Rs 100,000 according to accounting standards. However we are paying tax on
Rs 115,000 according to Income Tax Ordinance, in the current period.
• During the year we have paid extra tax of Rs 4,500 (15,000 x 30%) related to previous year, therefore our
DTL is fully settled and reversed.
Deferred tax liability 4,500
Deferred tax expense 4,500

At the end of year 4:

Carrying Amount = 100,000 – 100,000 = 0

Tax base = 100,000 – 100,000 = 0

Difference 0
0 x 30% 0 DTL

Summary
If DTL increases
Deferred tax expense xxx
Deferred tax liability xxx
If DTL decreases
Deferred tax liability xxx
Deferred tax expense xxx

Important Definitions:
Carrying Amount:
Amount at which asset or liability is presented in statement of financial position (figures in statement of
financial position; if it is prepared according to accounting standards).
Tax Base:
Amount attributed to asset or liability for tax purposes (figures in statement of financial position; if it is
prepared according to income tax ordinance)

Summary of carrying amounts at tax base discussed in the scenario:

Carrying Amount Tax Base Difference x 30%
END OF Y1 75,000 60,000 15,000 4,500 DTL
END OF Y2 50,000 30,000 20,000 6,000 DTL
END OF Y3 25,000 10,000 15,000 4,500 DTL
END OF Y4 - - - - DTL

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End of Year 1:

Future accounting depreciation will be Rs 75,000. However future tax depreciation will be Rs 60,000. It
means future tax depreciation will be less by Rs 15,000. It will result into increase in future taxable profits by
Rs 15,000. Therefore we have to pay extra tax of Rs 4,500 (15,000 x 30%) in future.

End of Year 2:
Future accounting depreciation will be Rs 50,000, however future tax depreciation will be Rs 30,000. It means
future tax depreciation will be less by Rs 20,000. It will result into increase in future taxable profits by
Rs 20,000. Therefore we have to pay extra tax of Rs 6,000 (20,000 x 30%) in future.

End of Year 3:
Future accounting depreciation will be Rs 25,000.However future tax depreciation will be Rs 10,000. It means
future tax depreciation will be less by Rs 15,000. It will result into increase in future taxable profits by
Rs 15,000. Therefore we have to pay extra tax of Rs 4,500 in future.

End of Year 4:
Future accounting depreciation will be Nil. Future tax depreciation will also be Nil. It means we have to pay
no extra tax in future periods, therefore we have no deferred tax liability.

Deferred Tax Liability

Year 1
Bal b/d -
Bal c/d 4,500 DTE 4,500
Year 2
Bal b/d 4,500
Bal c/d 6,000 DTE 1,500
Year 3
DTE 1,500 Bal b/d 6,000
Bal c/d 4,500
Year 4
DTE 4,500 Bal b/d 4,500
Bal c/d -

b)
Income Statement (Extracts)
For the year ended
Y1 Y2 Y3 Y4
Profit before tax 100,000 100,000 100,000 100,000
Current Tax (25,500) (28,500) (31,500) (34500)
Deferred Tax (4,500) (1,500) 1,500 4,500
(30,000) (30,000) (30,000) (30,000)
Profit after Tax 70,000 70,000 70,000 70,000

Scenario 2:
Bad Debts
End of First year of Business i.e 30-6-2014
Carrying Amount Tax Base Difference
Debtor 500,000 500,000
Less Allowance (5%) (25,000) -
475,000 500,000 25,000

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Current Tax:
30-6-2014
Rs
Profit before tax-Assumed 200,000
Add bad debt expense 25,000
Taxable Profits 225,000
Current Tax (225,000 x 30%) 67,500

Deferred Tax
We have earned accounting profits of Rs 200,000 however we are paying tax on taxable profits of
Rs 225,000.It means we are paying extra tax on Rs 25,000 amounting to Rs 7,500 (25,000 x 30%), related to
future periods. This prepaid tax as on 30-6-2014 is called as deferred tax asset.

Deferred tax Asset (DTA) 7,500

Deferred tax expense ( DTE) 7,500

Income Statement (Extracts)

For the year ended 30-6-2014
Rs
Profit before Tax 200,000
Tax:
Current Tax (67,500)
Deferred Tax 7,500
(60,000)
Profit after Tax 140,000

Let’s assume during the year ended 30-6-2015 Rs 25,000 becomes actual bad debts and no additional
allowance was required at the end of the year:
Allowance for bad debt 25,000
Debtor 25,000

Current Tax:
30-6-2015
Rs
Profit before tax-Assumed 300,000
Less Actual bad debt (25,000)
Taxable Profits 275,000
Current Tax (275,000 x 30%) 82,500

Deferred Tax
We have earned accounting profits of Rs 300,000 however we are paying tax on taxable profits of Rs
275,000.It means we are paying less tax on Rs 25,000 amounting to Rs 7,500 (25,000 x 30%), because it had
been paid already in previous period. Therefore we have obtained benefit of our deferred tax asset created
last period. It means our deferred tax asset is reversed in this year.
Deferred tax expense 7,500
Deferred tax asset 7,500

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 Income Statement (Extracts) 30-6-2015
Rs
Profit before tax-Assumed 300,000
Less: Tax
Current tax (82,500)
Deferred Tax expense (7,500)
(90,000)
Profit after tax 210,000

Deferred Tax Asset (For both years)

Year 1
Bal b/d -
DTE 7,500 Bal c/d 7,500

Year 2
Bal b/d 7,500 DTE 7,500
Bal c/d -

Summary of Entries
If liability increases If Asset increases
DTE xxx DTA xxx
DTL xxx DTE xxx
If liability decreases If Asset decreases
DTL xxx DTE xxx
DTE xxx DTA xxx

Scenario 2 Summary
End of 2014:
• Bad debts expense of Rs 25,000 has been recognized in 2014 on estimated bases as per accounting
standards. However this expense will be allowed on actual basis in future according to Income Tax
Ordinance.
• It will result into reduction in future taxable profit. Therefore future tax expense will be less by Rs 7,500
(25,000 x 30%). This future tax saving is called as deferred tax asset.

Deferred Tax Asset 7,500

Deferred Tax Expense 7,500

End of 2015:
As the tax has been saved during 2015 because of actual bad debts, therefore DTA has been reversed.
Deferred tax expense 7,500
Deferred tax asset 7,500

Scenario 3
Gratuity:
Gratuity is an employee benefit payable at the time of retirement/termination. It is recognized as an expense
on accrual basis in accounting. However, it is deductible for tax purposes on payment basis.
Suppose first year of business i.e 30-6-2014
Gratuity Expense 100,000
Provision for Gratuity/Gratuity Payable 100,000
Suppose no payment on account of gratuity is made during the year

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 Statement of Financial Position
As on 30-6-2014
Carrying Amount Tax Base Difference
Gratuity Payable 100,000 - 100,000
Deferred Tax
This amount of Rs 100,000 has been recognized as an expense as per accounting standards on accrual basis
however, this amount will be allowed as an expense on cash basis in future while calculating future taxable
profits. It will result into reduction in future taxable profits. Therefore we are expecting tax saving of
Rs 30,000 in future (100,000 x 30%).This saving is called as deferred tax asset.
Deferred Tax Asset 30,000
Deferred Tax Expense 30,000

• When the gratuity will be paid to employees in future periods then tax saving will occur and DTA will
reverse.
Summary:
→ If carrying amount of an asset is more than Tax base it results into Deferred Tax Liability.
→ If carrying amount of an asset is less than Tax base it results into Deferred Tax Asset.
→ If carrying amount of a liability is more than Tax base it results into Deferred Tax Asset.
→ If carrying amount of a liability is less than Tax base it results into Deferred Tax Liability.

Q.1 The following Information for the financial year ended 31 Dec 2010 related to Galaxy Limited (Gl); a listed
company which was incorporated on Jan 1, 2009:
• The profit before tax for the year amounted to Rs. 60 million (2009: Rs. 45 million)
• The detail of accounting and tax depredation on fixed assets is as follows:

Rs. millions
2010 2009
Accounting Dep. 15 15
Tax Dep. 6 45

GI Purchased the fixed assets on 1-1-2009 for Rs. 100 Million

• Gl operates a gratuity scheme. The provision made during the year 2009 and 2010 amounting to Rs.
1.7 million and 2.2 million respectively. No payment has been made on account of gratuity during
these periods.
• During the year, GI sold an assets for Rs, 3 million and recognized a profit of Rs. 0.5 million. The tax
base of asset was 2 million. No other addition or deletion was made during 2009 & 2010.
• Bad debts expense recognized during the year was 5 million(2009: Rs. 7million)
• Bad debts written off during the year amounted to Rs. 3 million (2009:Rs 4million)
• Applicable tax rate is 35%.
Required:
Prepare Extracts from Statement of comprehensive Income for the year ended 31 Dec, 2010 (including
comparatives); starting from profit before tax.

(International Accounting Standard 12: Income Taxes Para:7)

The tax base of an asset
Examples
1) A machine cost 100. For tax purposes, depreciation of 30 has already been deducted in the current and
prior periods and the remaining cost will be deductible in future periods, either as depreciation or
through a deduction on disposal. The tax base of the machine is 70.
2) Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a cash
basis. The tax base of the interest receivable is nil.
3) Trade receivables have a carrying amount of 100. The related revenue has already been included in
taxable profit. The tax base of the trade receivables is 100.
4) Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not taxable.
The tax base of the dividends receivable is 100.
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 (International Accounting Standard 12: Income Taxes Para:8)
The tax base of a liability
Examples
1) Current liabilities include accrued expenses with a carrying amount of 100. The related expense will be
deducted for tax purposes on a cash basis. The tax base of the accrued expenses is nil.
2) Current liabilities include interest revenue received in advance, with a carrying amount of 100. The
related interest revenue was taxed on a cash basis. The tax base of the interest received in advance is
nil.
3) Current liabilities include accrued expenses with a carrying amount of 100. The related expense has
already been deducted for tax purposes. The tax base of the accrued expenses is 100.
4) Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and penalties
are not deductible for tax purposes. The tax base of the accrued fines and penalties is 100.

Differences

Temporary Differences Permanent Differences

 
Differences arise in one period Differences which arise
and then reverse in one or more in one period and then
subsequent periods. do not reverse in
 subsequent periods.
Deferred tax is only on temporary 
differences. There is no concept of
deferred tax on
permanent differences
Taxable Deductible
Temporary Temporary
Differences Differences
Exempt Income Inadmissible Expenses
(TTD) (DTD)
are examples of permanent differences.
In case of permanent differences, assume
carrying amount is equal to tax base

Differences which Differences which

result into increase in result into decrease
future taxable profits in future taxable
profits
 
It will result into DTL It will result into DTA

Conclusion
Therefore; deferred tax is taxation effect of temporary differences.

• If an income or expense is taxable / deductible on cash basis then there will be no tax base.
• There will be no tax base against allowance for bad debts.
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Q.2 Given below is the statement of comprehensive income of Shakir Industries for the year ended December 31,
2008:
2008
Rupees in million
Sales 143.00
Cost of goods sold (96.60)
Gross profit 46.40
Operating expenses (28.70)
Operating profit 17.70
Other income 3.40
Profit before interest and tax 21.10
Financial charges (5.30)
Profit before tax 15.80

Following information is available:

i. Operating expenses include an amount of Rs. 0.7 million paid as penalty to SECP on noncompliance of
certain requirements of the Companies Act 2017.
ii. During the year, the company made a provision of Rs. 2.4 million for gratuity. The actual payment on
account of gratuity to outgoing members was Rs. 1.6 million.
iii. Lease payments made during the year amounted to Rs. 0.65 million which include financial charges of Rs.
0.15 million. As at December 31, 2008, obligations against assets subject to lease stood at Rs.1.2 million.
The movement in assets held under lease is as follows:
Rupees in million
Opening balance - 01/01/2008 2.50
Depreciation for the year (0.7)
Closing balance - 3 1/12/2008 1.80

iv. The details of owned fixed assets are as follows:

Accounting Tax
Rupees in million
Opening balance - 01/01/2008 12.50 10.20
Purchased during the year 5.30 5.30
Depreciation for the year (1.1) (1.65)
Closing balance - 31/12/2008 16.70 13.85
v. Capital work-in-progress as on December 31, 2008 include financial charges of Rs. 2.3 million which have
been capitalized in accordance with IAS-23 “Borrowing Costs”. However, the entire financial charges are
admissible, under the Income Tax Ordinance, 2001.
vi. Deferred tax liability and provision for gratuity as at January 1, 2008 was Rs. 0.84 million and Rs. 0.7
million respectively.
vii. Applicable income tax rate is 35%.
Required:
Based on the available information, compute the current and deferred tax expenses for the year ended
December 31, 2008.

Q. Mars Limited (ML) on next pages

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Q.3 The draft statement of comprehensive income of Hobbit Ltd. For the year ended 31 December 2001 is shown
below
Hobbit Limited
Draft Statement of Comprehensive Income
Revenue 1,000,000
Cost of sales (400,000)
Gross profit 600,000
other income 300,000
other expenses (403,000)
Profit before taxation 497,000

The following end of year adjustments need to be accounted for:

(i) Rent received in advance of Rs. 5,000 is included in “other Income” (taxable in 2001)
(ii) Rates prepaid of Rs. 6,000 is respect of 2002 are included in “other expenses” (deductible for tax
purposes in 2001).
(iii) Advertising costs payable at year-ended total Rs. 10,000 (deductible for tax purposes in 2001).
(iv) Interest income of Rs, 20,000 is receivable at year-end (taxable in 2001)
Other relevant Information:
• Dividend income of Rs 30,000 is included in ‘other income’ (exempt from tax).
• Fines of Rs. 9,000 are included in "other expenses’ (not deductible for tax purposes).
• Dividends of Rs. 80,000 have been declared on 30 December 2001.
• The deferred tax account at 31 December 2000 had a credit balance of Rs 12,000 which related purely to
taxable temporary differences arising from capital allowances (tax depreciation) on plant. The tax base of
the plant at 31 December 2000 was Rs 115,000. At 31 December 2001 the carrying amount of the plant
amounted to Rs 120,000 and the tax base amounted to Rs. 85,000: No plant was sold or purchased during
the year.
Assume that tax rate has remained unchanged for many years at 30%.
Required:
a) Prepare an extract from statement of comprehensive income of Hobbit Limited for Dec 31, 2001
starting with profit before tax.
b) Prepare extracts from statement of financial position as on 31-12-2001 with comparatives.

Note:
Deferred tax liability is presented as a non current liability in statement of financial position.

Deferred tax asset is presented as a non current asset in statement of financial position.

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Effect of Rate Change:
Current Tax:
Use the tax rate which is applicable in relevant period. E.g
2014  40% → use this rate against taxable profit.
2015  35% → use this rate against taxable profit etc.

Deferred Tax:
Use the tax rate which is applicable at the end of reporting period.

Example 1
Opening DTL=10,000 calculated @ 30%
Closing DTL = 25,000 calculated @ 35%

DTL
b/d (30%) 10,000
DTE [rate change] 1,667
c/d (35%) 25,000 DTE (bal) [other than rate change] 13,333

=10,000 x 5% =1,667
30%

If there is change in tax rate during an accounting period then the opening balance is remeasured according
to the revised rate. Difference if any is recognized in income statement for the period, as an effect of rate
change.

Statement of PL (Extracts)
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (13.333 + 1.667) (15,000)

Example 2
Opening DTL=4,000 calculated @ 35%
Closing DTL = 2,000 calculated @ 40%

DTL
b/d (35%) 4,000
DTE (bal) [other than rate change] 2,571 DTE [rate change] 571
c/d (40%) 2,000
=4,000 x 5% =571
35%

Statement of PL (Extracts)
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (2,571-571) 2,000
Note: increase in tax rate results into increase in deferred tax liability and vice versa. Similarly,
increase in tax rate results into increase in deferred tax assets and vice versa.
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Example 3
Opening DTA=5,000 calculated @ 25%
Closing DTA = 6,000 calculated @ 35%
DTA
b/d (25%) 5,000
DTE [rate change] 2,000 DTE (bal)[other than rate change] 1,000
c/d (35%) 6,000
=5,000 x 10% =2,000
25%
Statement of PL (Extracts)
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (2,000-1,000) 1,000

Example 4
Opening DTL=5,000 calculated @ 35%
Closing DTA = 6,000 calculated @ 30%
DTA/DTL
b/d (35%) 5,000
DTE [rate change] 714

DTE(bal) [other than rate change] 10,286 C/D (30%) 6,000

=5,000 x 5% =714
35%
Statement of PL (Extracts)
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (10,286+714) 11,000

Example 5
Opening DTA=10,000 calculated @ 30%
Closing DTL = 12,000 calculated @ 35%

DTA\DTL a/c
b/d (30%) 10,000
DTE [rate change] 1,667 DTE (bal) [other than rate change] 23,667
c/d (35%) 12,000
=10,000 x 5% = 1,667
30%
Statement of PL (Extracts)
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (23,667-1,667) (22,000)
Waqar ltd Q.9

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Deferred Tax

1. It is a taxation effect of temporary differences.

Taxable Temporary Deductible temporary

Differences Differences
 
DTL DTA

2. It is a taxation effect of carry forward of unused tax loses.

Tax Losses:-

Working of Current Tax

Rs
Profit before Tax -
-
-
Tax Loss (-)
If there is a negative figure as a result in working of current tax, it is called as tax loss.

For the year ended 30-6-2015

Current Tax: Working

Tax Loss (500,000)

Current Tax Nil

As per ITO 2001 Tax loss can be carry forward and set off against taxable profits of next six years.
Continuing from previous example;
For the year ended 30-6-2016
Current Tax Rs
Profit before Tax -
-
-
Taxable Profit 700,000
Less: C/f losses (500,000)
Taxable Profit after adjustment of losses 200,000
Current tax @ 30% 60,000

Deferred Tax:
As on 30-6-2015
Tax loss (500,000)
This tax loss will reduce future taxable profits therefore it will result into future tax saving.
500,000 x 30% = 150,000 DTA As on 30-6-2015

Accounting Entry
Deferred tax asset 150,000
Deferred tax expense 150,000
First Scenario: If during the year ended 30-06-2016, taxable profits are Rs 700,000 (as discussed above)
then all tax loss brought forward will be adjusted and therefore no closing deferred tax asset (which means
deferred tax asset is reversed).

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 Second Scenario: If suppose during the year ended 30-06-2016; instead of taxable profits of Rs 700,000,
taxable profit are Rs 400,000, then:
Current Tax Working
Taxable Profit 400,000
Less C/F tax losses (500,000)
Tax loss after adjustment of losses (100,000)
Current Tax Nil
Now, closing balance of DTA will be 100,000 x 30% = Rs 30,000 as on 30-06-2016.

Third Scenario: if suppose during the year ended 30-06-2016, instead of taxable profits of Rs 700,000, there
is a tax loss of Rs 200,000 then:
Current Tax Working
Tax Loss (200,000)
Less C/F tax losses (500,000)
Tax loss after adjustment of losses (700,000)
Current Tax Nil
Now closing of DTA will be 700,000 x 30% = 210,000

→ 200,000 out of 700,000 can be c/f for next 6 years from 2016.Remaining 500,000 can be c/f to next 5
years.

Q.4
Cost of vehicle purchased on 1 January 2001 120,000
Depreciation on vehicles to nil residual value 3 years straight-line
Capital allowance (depreciation allowed by the tax authorities) 2 years straight-line
Income tax rate 30%

Profit or loss before tax (after deducting any depreciation on the vehicle) for the year ended:
31 December 2001 Loss: 40,000
31 December 2002 Loss: 20,000
31 December 2003 Profit: 100,000

Required:
A. Calculate the taxable profits and current tax per the tax legislation for 2001 to 2003.
B. Calculate the Deferred tax balances for 2001 to 2003.
C. Prepare:
(i) Statement of profit or loss (Extracts) for the year ended 31-12-2003, 2002 & 2001
(ii) Statement of Financial position extracts as on 31-12-2003, 2002 & 2001. (Only disclose the deferred
tax balance).

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Q.5 The following information relates to Aman Ltd for financial year ended 31-12-2013

i. Profit before tax Rs 120M (2012 : 75M)

ii. Company paid a penalty for non-compliance with income tax ordinance Rs 2M during the year.
iii. Accounting depreciation for the year is 15M (2012: 8M), whereas tax depreciation for the year is
12M(2012: 6M)
iv. During the year company started a construction of new factory building and capitalized borrowing
cost of Rs 1M. Building is not yet complete.
v. Company operates a gratuity scheme for its eligible employees. Expense recognized for the year
ended 31-12-2013 and 2012 was 1M and 2M respectively. There was no payment made during the
respective years, on account of gratuity.
vi. Carrying amount of Property, Plant and Equipment was 290M and tax base was 180M as on 31-12-
2012.
vii. Company earned a capital gain of Rs 12M (2012: NIL) on sale of shares of listed company. The
income is exempt from tax.
viii. During the year company sold a machine for Rs 6M and recognized a profit of 1M. The tax WDV of the
machine was 4M. There were no other additions/disposals of fixed assets in 2013 and 2012.
ix. Bad debts expense recognized during the year was Rs 10M (2012: 14M)
x. Bad debts expense written off during the year amounting to Rs 6M (2012: 8M).
xi. The balances of provision for gratuity and provision for bad debts were 10M and 18M respectively as
on 31-12-2011.
xii. Company’s assessed losses up to 31-12-2011 amounted to Rs 40M.
xiii. Applicable tax rates were:
31-12-2011 30%
31-12-2012 40%
31-12-2013 35%
Required:
Prepare a note on taxation for inclusion in the company’s financial statements for the year ended
31-12-2013 giving an appropriate disclosure relating to current and deferred tax expense including
comparative figures for 2012 and a tax expense reconciliation.

Q.6 The following information relates to Galaxy International (GI), a listed company, which was incorporated on
January 1, 2009.
i. The (loss) / profit before taxation for the years ended December 31, 2009 and 2010 amounted to (Rs.
1.75 million) and Rs. 23.5 million respectively.
ii. The details of accounting and tax depreciation on fixed assets is as follows:
2010 2009
Rs. in million
Accounting depreciation 15 15
Tax depreciation 6 45
iii. In 2009, GI accrued certain expenses amounting to Rs. 2 million which were disallowed by the tax
authorities. However, these expenses will be allowed on the basis of payment in 2010.
iv. GI earned interest on Special Investment Bonds amounting to Rs. 1.0 million and Rs. 1.25 million in the
years 2009 and 2010 respectively. This income is exempt from tax.
v. GI operates an unfunded gratuity scheme. The provision during the years 2009 and 2010 amounted to
Rs. 1.7 million and Rs. 2.2 million respectively. No payment has so far been made on account of gratuity.
vi. The applicable tax rate is 35%.
Required:
Prepare a note on taxation for inclusion in the company’s financial statements for the year ended December
31, 2010 giving appropriate disclosures relating to current and deferred tax expenses including a
reconciliation to explain the relationship between tax expenses and accounting profit.

Note: Even if the question of taxation is silent regarding comparative figures and those figures are available,
then always prepare one year comparative figures as well.

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Q.7 The following information relates to Apricot Limited (AL), a listed company, for the financial year ended 31
December 2011:
i. The profit before tax for the year amounted to Rs. 60 million (2010: Rs. 45 million).
ii. The accounting and tax written down value of fixed assets as on 31 December 2010 was Rs.95 million
and Rs. 90 million respectively. Accounting depreciation for the year is Rs. 10 million (2010: Rs. 9
million) whereas tax depreciation for the year is Rs. 8 million (2010: Rs. 7 million).
iii. During the year, AL sold a machine for Rs. 3 million and recognized a profit of Rs. 0.5 million. The tax
written down value of the machine as on 31 December 2010 was Rs. 2 million. There were no other
additions/disposals of fixed assets in 2010 and 2011.
iv. AL earned capital gain of Rs. 6 million (2010: Nil) on sale of shares of a listed company. This income is
exempt from tax.
v. Bad debt expenses recognized during the year was Rs. 5 million (2010: Rs. 7 million).
vi. Bad debts written off during the year amounted to Rs. 3 million (2010: Rs. 4 million).
vii. Deferred tax asset and provision for bad debts as on 31 December 2009 was Rs.7.4375 million and Rs. 9
million respectively.
viii. The company’s assessed brought forward losses up to 31 December 2009 amounted to Rs. 19.25 million.
ix. Applicable tax rate is 35%.
Required:
Prepare a note on taxation for inclusion in AL’s financial statements for the year ended 31 December 2011
giving appropriate disclosures relating to current and deferred tax expenses including comparative figures
for 2010 and a reconciliation to explain the relationship between tax expense and accounting profit.

Q.8 Following information relates to H limited for the year ended June 30, 2014:
i. Property plant and equipment has a net book value at year end of Rs. 24.5 million. During the year
equipment having carrying amount of Rs.3.5 million was sold at a loss of Rs. 0.1 million. Tax gain on this
sale was Rs. 0.3 million. There was no other disposal during the year. Additions during the year amount
to Rs. 6 million. Tax written down value of property plant and equipment at start of year was Rs. 19.5
million. Accounting depreciation for the year was 4.75 million whereas tax depreciation for the year was
Rs. 7 million.
ii. Provision for gratuity at start of year was Rs. 8.25 million. During the year a further provision for Rs. 1.5
million was recognized. Gratuity payment during the year amount to Rs. 5 million.
iii. During the year Rs. 0.45 million were spent on advertisement and treated as expense. As per tax rules
such expense are allowed over 3 years on straight line basis.
iv. Bad debts written off during the year were Rs. 0.1 million. Whereas bad debt expense charged to profit
and loss during the year was Rs. 0.175 million. Provision for doubtful debts at start of year was Rs. 0.35
million.
v. Profit before tax for the year amounts to Rs. 6.5 million. It includes an income of Rs. 0.05 million
received during the year which is exempt from tax.
vi. Corporation tax rate is 35%.
Required:
a) Calculate current tax expense for the year ended and deferred tax liability as at June30, 2014.
b) Prepare reconciliation between accounting profit and tax expense for the year ended 30 June2014.

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Q.9 Waqar Limited has provided you the following information for determining its tax and deferred tax expense
for the year 2014 and 2015:
• During the year ended December 31, 2015, the company’s accounting profit before tax amounted to Rs.
40 million (2014: Rs. 30 million). The profit includes capital gains amounting to Rs. 10 million (2014: Rs.
8 million) which are exempt from tax.
• The accounting written down values of the fixed assets, as at December 31, 2013 were as follows:
Accumulated Written down

Cost Accumulated Written down

Depreciation value

Rs. M Rs. m Rs. m

Machinery 200 25 175

Furniture and fittings 50 10 40

• Machinery was acquired on January 1, 2013 and is being depreciated on straight- line basis over its
estimated useful life of 8 years. The tax base of machinery as at December 31, 2013 was Rs. 90 million.
• Furniture and fittings are also depreciated on the straight line basis at the rate of 10% per annum. The
tax base of furniture and fittings as at December 31, 2013 was Rs. 40.5 million.
• Normal rate of tax depreciation on both types of assets is 10% on written down value.
• The tax rates for 2013, 2014 and 2015 were 35%, 35% and 30% respectively.

Required
For each year:
a) Calculate the corporate income tax liability for the year.
b) Calculate the deferred tax balance that is required in the statement of financial position as at the year
end.
c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax
charge for the year.
d) Prepare the statement of profit or loss note which shows the compilation of the tax expense.
e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax expense.
(QB#12.6)
*Note: If a movement on deferred tax account is required in a question then prepare a ledger and then its
information is presented in a statement form.

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Q.10 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:

• Profit before tax for the year amounted to Rs. 125 million (2017: Rs. 110 million)
• Accounting depreciation for the year was Rs. 25 million (2017: Rs. 18 million)
• Tax depreciation for the year was Rs. 21 million (2017: Rs. 42 million)
• 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)
• Insurance is also allowed for tax purposes on payment basis. Prepaid insurance as at 31
December 2018 amounted to Rs. 5 million (2017: Rs. 4 million)
• Other income includes:
(i) Interest received of Rs. 10 million (2017: Rs. 7 million). Interest income is exempt from tax.
(ii) Dividend received of Rs. 6 million (2017: Rs. 8 million). Dividend was taxable as a separate block
of income @ 15% (2017: 15%)
• 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.
• Applicable tax rates for 2018 is 35% (2017: 30%).

Required:
Prepare the following:
a) 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.
(Show comparative figures). (11)
b) Computation of deferred tax liability/asset in respect of each temporary difference as at 31
December 2017 and 2018. (07)

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 Taxes

Current Tax Deferred Tax Prior Period Tax

Prior Period Tax (Under/Over Provision of tax of Previous Periods)

Suppose in 2014 current tax is 500,000.
Current Tax 500,000
Tax Payable 500,000
• A tax return is filed with income tax department.
• Income tax department will verify the figures (Assessment)
• Suppose assessment of 2014 is finalized in 2016, and tax assessed is Rs 550,000. Therefore under
Provision (Under charge) of tax is Rs 50,000 in 2014.
• In 2016, this Rs 50,000 is recorded as a change in accounting estimate as follows
Prior Period tax 50,000
Tax Payable/cash 50,000

Income Statement (Extracts)

Tax Rs
Current Tax (-)
Deferred Tax (-)
Prior period tax (50,000)

Suppose in 2016, instead of tax assessed Rs 550,000, tax assessed is Rs 460,000. Therefore over provision
(over charged) of tax is Rs 40,000 in 2014. In this case in 2016, this Rs 40,000 is recorded as a change in
accounting estimate as follows

Cash/Tax Receivable 40,000

Prior Period tax 40,000

Income Statement (Extracts)

Tax Rs
Current Tax (-)
Deferred Tax (-)
Prior period tax 40,000

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Tax Treatment of Lease
Books of Lessee

→ LEASE
IFRS TAX
➢ Capitalized the asset and depreciate. ➢ Rental are allowed as an expense, when
paid.
➢ Interest is recognized as an expense ➢ No asset or liability is recorded

Current Tax
Profit before tax -
Add: Accounting Depreciation -
Add: Interest Expense -
Less: Rentals Paid (-)
Taxable Profit -

Deferred Tax
There will be carrying amount of right to use asset and lease liability and in some cases interest
payable but there will be no corresponding tax base against any accounting head.

Example
Mars Limited (ML) is engaged in the manufacturing of chemicals. On July 1, 2008 it obtained a motor vehicle
on lease from a bank. Details of the lease agreement are as follows:
i. Cost of motor vehicle is Rs. 1,600,000.
ii. Installments of Rs. 480,000 are to be paid annually in advance.
iii. The lease term and useful life is 4 years and 5 years respectively.
iv. The interest rate implicit in the lease is 13.701%.
ML follows a policy of depreciating the motor vehicle on the straight-line method. However, the tax
department allows only the lease payments as a deduction from taxable profits.
The tax rate applicable to the company is 30%. ML’s accounting profit before tax for the year ended June 30,
2009 is Rs. 4,900,000.
There are no temporary differences other than those evident from the information provided above.
Required:
a) Prepare journal entries in the books of Mars Limited for the year ended June 30, 2009 to record the
above transactions including current tax and deferred tax.
b) Prepare a note to the financial statements related to disclosure of maturity analysis of lease liability, in
accordance with the requirements of International Accounting Standards.
(Ignore comparative figures.)

Solution
Date Particulars Debit Credit

l-Jul-08 Right of use Vehicle 1,600,000

Obligations under the lease 1,600,000
(Capitalize the lease assets and recoding of corresponding
liability)

l-Jul-08 Obligations under the lease 480,000

Bank 480,000
(Record the first lease payment made in advance)

30-Jun-09 Finance charges 153,451

Accrued finance charges 153,451
(Accrue the finance charges for the year ended June 30,
2009)

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30-Jun-09 Depreciation 400,000
Accumulated depreciation - Motor Vehicle 400,000
(Charge the depreciation for the year ended June 30, 2009)
Working: Rs. 1,600,000/4 = Rs. 400,000.
(Assuming that there is no reasonable certainty about transfer
of ownership at the end of lease term).

30-Jun-09 Current Tax (W-1) 1,492,035

Tax payable 1,492,035
(To record the tax expense for the year ended June 30, 2009)

30-Jun-09 Deferred Tax Asset (W-2) 22,035

Deferred tax Expense 22,035
(To raise the deferred tax asset)

W-1 Tax computation Rupees

Accounting profit before tax 4,900,000
Add: Depreciation on leased assets 400,000
Add: Finance charges 153,451
Less: Lease payment (480,000)
Taxable profit 4,973,451

Tax @ 30% 1,492,035

W-2 Deferred tax

Carrying amount Tax base Difference
Right of use Vehicle 1,200,000 - 1.200.000 TTD
Obligations under finance lease 1,120,000 - 1,120,000 DTD
Accrued finance charges 153,451 153,451 DTD
Net Deductible temporary difference 73,451 DTD
Deferred tax @ 30% (Asset) 22,035

b) Mars Limited
Notes to the Financial Statements
For the year ended 30-6-2009

Maturity analysis – contractual undiscounted lease payments

Less than one year 480,000

One to two year 480,000
Two to three years 480,000
Total undiscounted lease payments 1,440,000

The company has entered into a lease agreement. The lease payment has been discounted at an interest rate
of 13.701% to arrive at their present value. Rentals are paid in annual installments in advance.

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W-3: Repayment Schedule
Dates Annual Principal Interest Closing
payment Repayment 13.701% Balance

1-7-2008 1,600,000
1-7-2008 480,000 480,000 - 1,120,000
1-7-2009 480,000 326,549 153,451 793,451
1-7-2010 480,000 371,289 108,711 422,162
1-7-2011 480,000 422,162 57,838 -

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 Self-Test Questions

Q.1 Intelligent Technologies Limited (ITL) earned profit before tax amounting to Rs. 11 million, during the year
ended 31 December 2012. The following information is available for calculation of tax liability:
i. Accounting depreciation for the year is Rs. 30 million, whereas tax depreciation is Rs. 25.6 million.
ii. The accounting and tax written-down values of the fixed assets as at 31 December 2012 were Rs. 90
million and Rs. 102.4 million respectively.
iii. During the year, ITL realized capital gain of Rs. 2 million on sale of shares of listed companies. This
income is exempt from tax.
iv. It is expected that taxation authorities would add back expenses amounting to Rs. 0.9 million of which
Rs. 0.5 million would be allowed in 2015.
v. During the year, expenses amounting to Rs. 3 million that pertained to year ended 31 December 2010
were disallowed. ITL had initially expected that the entire expense would be allowed but now has
decided not to file an appeal against the decision.
vi. As at 31 December 2011, ITL had assessed carried forward losses of Rs. 21 million.
vii. Deferred tax asset as on 01 January 2012 amounted to Rs. 10.15 million.
viii. Applicable tax rate for the company is 35%.
Required:
Prepare a note on taxation (expense) for inclusion in ITL’s financial statements for the year ended 31
December 2012 giving appropriate disclosures relating to current and deferred tax expenses and a
reconciliation to explain the relationship between tax expenses and accounting profit.
(Ignore comparative figures and minimum turnover tax)

Q.2 Bilal Engineering Limited earned profit before tax amounting to Rs. 50 million during the year ended December
31, 2009. The accountant of the company has submitted draft accounts to the Finance Manager along with the
following information which he believes could be useful in determining the amount of taxation:
(i) Accounting deprecation for the year is Rs. 10 million.
(ii) A motor vehicle was taken on lease on 1-1-2009. Related clauses of the lease agreement are as under:
• Annual installment of Rs. 0.3 million is payable annually in advance.
• The lease term and useful life is 4 years and 5 years respectively.
• The interest rate implicit in the lease is 13.701% per annum.
• Accounting depreciation on, the leased vehicle is not included in the depreciation referred to in
para (i) above.
(iii) Tax depreciation on the assets owned by the company is Rs. 7 million.
(iv) Research and development expenses of Rs. 15 million were incurred in 2007 and are being
amortized over a period of 15 years. For tax purposes research and development expenses are
allowed to be written off in 10 years. However, 10% of these expenses were not verifiable and have
not been claimed.
(v) Expenses amounting to Rs. 0.25 million were disallowed in 2006. Out of these Rs. 0.15 million were
allowed in appeal, during the current year. The company had initially expected that the full amount
would be allowed but has decided not to file a further appeal
(vi) The applicable tax rate is 35%.
Required:
a) Prepare journal entries in respect of taxation, for the year ended December 31, 2009.
b) Prepare a reconciliation to explain the relationship between tax expense and accounting profit as is
required to be disclosed under IAS-12 (Income Taxes).

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 SOLUTION
A.1
Galaxy Limited
Statement of Comprehensive Income(Extracts)
For the year ended 31-12-2010
2010 2009
Profit before tax 60 45
Tax:
Current Tax (W-1) (25.795) (6.895)
Deferred Tax (W-2) 4.795 (8.855)
(21.00) (15.75)
Profit after Tax 39.00 29.25

W-1 Current Tax: 2010 2009

Profit before Tax 60 45
Add
Accounting depreciation 15 15
Gratuity Expense 2.2 1.7
Taxable Gain (3-2) 1 -
Bad Debts expense 5 7

Less
Tax depreciation (6) (45)
Accounting Gain (0.5) -
Bad Debts written off (3) (4)
Taxable Profits 73.7 19.7
Tax @ 35% 25.795 6.895

Deferred Tax

Statement Of FP Approach Statement of PL Approach

 
Compare carrying amount of an asset Compare accounting profits and tax
and liability with its tax base profits
 
Differences Differences

DTA DTL Deferred tax expense Reversal of DTE

According to this approach, closing balances are According to this approach amounts for the period are
calculated. calculated. This approach is only used if required by
This is recommended by IAS-12 question or there is no information of carrying
amounts and tax bases of assets and liabilities.
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W-2 Deferred Tax as on 31-12-2009
Carrying Amount Tax Base Difference

Fixed Assets 85 55 30 T.T.D

Gratuity Payable 1.7 - 1.7 D.T.D
Allowance for bad debts 3 3 D.T.D
- 25.3 T.T.D
x 35% 8.855 D.T.L

DTL
- B/D -
C/D 8.855 DTE 8.855

As on 31-12-2010
Carrying Amount Tax Base Difference
Fixed Asset (w) 67.5 47 20.5 T.T.D
Gratuity Payable 3.9 - 3.9 D.T.D
Allowance for bad 5 - 5 D.T.D
Debts
11.6 T.T.D
x 35% 4.06 D.T.L

Allowance
Debtors 4 B/D -
Bad Debts 7
C/D 3
Debtors 3 B/D 3
Bad Debts 5
C/D 5

DTL
DTE 4.795 B/D 8.855
C/D 4.06

(W) Fixed Assets:

Carrying Amount = 85 – 15 – 2.5 = 67.5
Tax Base = 55 – 6 – 2 = 47.0

Gratuity Payable
b/d -
c/d 1.7 Gratuity exp 1.7

b/d 1.7
c/d 3.9 Gratuity exp 2.2

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A.2 Shakir Limited
a) Current Tax
Rs in millions
Profit before tax 15.8
Add: Penality 0.7
Gratuity 2.4
Finance Charges 0.15
Depreciation 0.7
Depreciation – Other Asset 1.1

Less
Lease Rentals (0.65)
Depreciation-Tax Base (1.65)
Financial Charges- CWIP (2.3)
Gratuity Paid (1.60)
Taxable profit 14.65

Current Tax 35% 5.13

b) Deferred Tax Calculation

Assets
Carrying Amount Tax Base Difference
Lease hold Asset 1.8 - 1.8
Owned Assets 16.70 13.85 2.85
CWIP 2.3 - 2.3
Taxable Temporary Difference 6.95

Liabilities

Provisions for gratuity (w-2) 1.5 - 1.5

Obligation under finance lease 1.2 - 1.2
Deductible Temporary Difference 2.7
Net Taxable Temporary Difference 4.25
@35% 1.49 DTL

W-1 W-2
Deferred Tax Liability Provision Gratuity
B/D 0.84 B/D 0.7
DTE 0.65 Cash 1.6 Expense 2.4
C/D 1.49 C/D 1.5

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A.3 Solution
Hobbit Limited
a)
Income Statement Extracts for the year ended 31-12-01
Profit before tax (W-1) 508,000
Tax
Current Tax (W-2) (147,300)
Deferred Tax (W-3) 1,200
(146,100)
Profit after Tax 361,900

W-1 Calculation of corrected Profit before Tax

Profit before tax 497,000
Less: Rent received in advance (5,000)
Advertisement Expense (10,000)

Add: Interest income 20,000

Prepared Rates 6,000
Profit before Tax 508,000

W-2 Current Tax

Profit before tax (W-1) 508,000
Add:
Fines 9,000
Accounting Depreciation (w) 35,000
Rental income 5,000

Less
Exempt Income (30,000)
Tax Depreciation (w) (30,000)
Rates Prepaid (6,000)

Taxable Profit 491,000

Current Tax (491,000 x 30%) 147,300

W-3 Deferred tax as on 31-12-01

Carrying Amount Tax Base Difference
Plant 120,000 85,000 35,000 T.T.D
Unearned rental income 5,000 - 5,000 D.T.D
Prepaid rates 6,000 - 6,000 T.T.D
Advertisement payable 10,000 10,000 -
Interest Receivable 20,000 20,000 -
Dividend Receivable 30,000 30,000 -
Fines Payable 9,000 9,000 -
Dividend Payable 80,000 80,000 -
Net differences 36,000 T.T.D
x 30% 10,800 D.T.L

DTL
DTE 1,200 b/d 12,000
c/d 10,800

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Journal Entries (Not required in question just for additional information)
Adjustment 1 Other income 5,000
Unearned rental income 5,000

Adjustment 2 Prepaid Rates 6,000

Other Expense 6,000

Adjustment 3 Advertisement Expense 10,000

Advertisement Expense Payable 10,000

Adjustment 4 Interest Receivable 20,000

Interest Income 20,000

Calculation of Accounting and Tax Depreciation:

Carrying Amount Tax Base Difference
Opening 155,000 115,000 40,000 X 30% = 12,000
Depreciation 35,000 30,000
Closing 120,000 85,000

Deferred Tax Income Statement Approach (Not required in question only for additional Information)

1. If accounting profits (after adjustment of permanent differences) are more than taxable profits it will
result into deferred tax expense.
2. If accounting profits (after adjustment of permanent differences) are less than taxable profits it will
result into reversal of deferred tax expense.

Income Statement Approach to calculate Deferred Tax

Rs
Profit before Tax 508,000
Adjustment of permanent difference
Dividend Income (30,000)
Fines Expense 9,000
Profit before tax after adjustment of permanent differences 487,000

Taxable Profits 491,000

Difference 4,000

4,000 x 30% = 1,200 (reversal of deferred tax expense)

Another method to calculate the deferred tax for the period:

If for example accounting profits are not available even then we can calculate the deferred tax for the period
as follows:
1. If in current tax working add backs (ignoring permanent differences) are more, than accounting
profits will be less resulting into reversal of deferred tax expense. (credit of DTE)
2. If in current tax working add backs (ignoring permanent differences)are less, than accounting profits
will be more resulting into increase in deferred tax expense. (debit of DTE)

For example:
Accounting Depreciation 35,000
Rental received in advance 5,000

Less
Tax Depreciation (w) (30,000)
Rates Prepaid (6,000)

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Net increase / (decrease) in taxable profits (Ignoring permanent differences)[add 4,000
backs are more]
4,000 x 30% = 1,200 (reversal of deferred tax expense)

Rule of Tax Expense:

If accounting profits are multiplied with tax rate; then the resulting figure should be equal to sum of
current tax and deferred tax (means tax expense).

This rule is applicable if there is no permanent difference and no effect of rate change.
Sometimes in questions of IAS-12 a reconciliation between expected tax and actual tax is required in notes as
a disclosure.

Notes:
Disclosure
Reconciliation of Accounting profit with Tax Expense:
For the year ended 31-12-2001
Rs
Profit before Tax 508,000
Tax Rate 30%
Expected Tax Expense 152,400

Effect of permanent differences

Dividend Income (30,000 x 30%) (9,000)

Fines Expenses (9,000 x 30%) 2,700
Actual Tax Expense 146,100

Or tax rate Reconciliation if required in question

2001
Applicable Tax Rate 30%
Tax effect of permanent difference:
Dividend income (9,000/508,000x100) (1.77%)

Penalty (2,700/508,000x100) 0.53%

Actual tax rate (146,100/508,000x100) 28.76%

b)
Hobbit Limited
Extracts of Statement of Financial Position
As on 31-12-2001
Rs Rs
2001 2000
Non-current Asset
Plant 120,000 155,000

Current Asset
Prepaid Rates 6,000
Interest Receivable 20,000
Dividend Receivable 30,000

Non-current Liability
Deferred tax liability 10,800 12,000

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 Current Liability
Unearned rental Income 5,000
Advertisement Payable 10,000
Fines Payable 9,000
Dividend Payable 80,000
Current tax Payable 147,300

A.4 Solution:
a)
Calculation of current normal tax 20X3 20X2 20X1
Profit/loss before tax 100,000 (20,000) (40,000)
Add back depreciation (120,000 / 3 years) 40,000 40,000 40,000
Less capital allowance (120,000 / 2 years) 0 (60,000) (60,000)
Taxable Profit/Tax Loss for the period 140,000 (40,000) (60,000)
Tax loss brought forward (100,000) (60,000) 0
Net Taxable profits/ (tax loss) 40,000 (100,000) (60,000)
Current normal tax at 30% 12,000 nil Nil
b) Deferred Tax
Carrying Temporary Deferred
Tax base
amount difference tax at 30% Deferred
Vehicles
tax

31 December 20X1 80,000 60,000 20,000 6,000 D.T.L

31 December 20X2 40,000 0 40,000 12,000 D.T.L
31 December 20X3 0 0 0 0 D.T.L

Tax loss as on Tax base (IAS-12) Deferred tax at 30% Deferred tax
31 December 20X1 60,000 18,000 D.T.A
31 December 20X2 100,000 30,000 D.T.A
31 December 20X3 0 0 D.T.A

DTA
b/d -
DTE 12,000 c/d 12,000
b/d 12,000
DTE 6,000 c/d 18,000
b/d 18,000 DTE 18,000
c/d -

c) (i) Income Statement (Extracts) for the year ended 31-12

2003 2002 2001
Profit/Loss before tax 100,000 (20,000) (40,000)
Tax:
Current Tax (12,000) -- --
Deferred Tax (18,000) 6,000 12,000
(30,000) 6,000 12,000

Profit/(Loss) after Tax 70,000 (14,000) (28,000)

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(ii) Statement of Financial Position (Extracts) as on 31-12
2003 2002 2001
Non-current Assets
Deferred Tax Asset -- 18,000 12,000

A.5

Solution: Aman Ltd

a) Note on Taxation Rs. millions
2013 2012
Current tax (W-1) (41.3) (18)
Deferred tax (W-2) 6.5 (16.4)
(34.8) (34.4)

b) Reconciliation of accounting profits with Tax expense

2013 2012
Profit after Tax 120 75
Tax Rate 35% 40%
Expected Tax 42 30
Tax effect of permanent difference:
Penalty (2M x 35%) 0.7 -

Capital Gain (12M x 35%) (4.2) -

Effect of rate change (3.7) 4.4

Tax Expense 34.8 34.4

Or tax rate Reconciliation if required in question

2013 2012
Applicable Tax Rate 35% 40%
Tax effect of permanent difference:
Penalty (0.7/120x100) 0.58% -

Capital Gain (4.2/120x100) (3.5%) -

Effect of rate change(3.7/120x100);(4.4/75x100) (3.08%) 5.87%

Actual Tax rate (34.8/120x100);(34.4/75x100) 29% 45.87%

Workings
W-1 Current Tax
2013 2012
Profit before tax 120 75
Penalty 2 -
Accounting depreciation 15 8
Tax Depreciation (12) (6)
Financial Charges (1) -
Gratuity Expense 1 2
Capital Gain (12) -
Accounting Profit (1) -
Taxable Gain 2 -
Bad debts expense 10 14
Bad debts written off (6) (8)
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Taxable Profit 118 85
B/F losses - (40)
Taxable Profit 118 45
Tax Rate 35% 40%
Current Tax 41.3 18

W-2
Deferred tax as on 31-12-2011 (To calculate opening balance of 31-12-2012, which is not given in
question)
Carrying Amount Tax Base Difference
Property Plant & Equipment 298 (298 + 8) 186 (180+6) 112 TTD
Gratuity Payable 10 - 10 DTD
Provisions for bad debts 18 - 18 DTD
Tax Losses 40
Net Differences 44 TTD
x30% 13.2 DTL

As on 31-12-2012
Carrying Amount Tax Base Difference
Property Plant & Equipment 290 180 110 TTD
Gratuity Payable (10 +2) 12 - 12 DTD
Provisions for bad debts (w) 24 - 24 DTD
Net Differences 74 TTD
x 40% 29.6 DTL

Provision D.T.L
Debtor 8 B/D 18 B/D 13.2
D.T.E (Rate change) 4.4
C/D 24 Expense 14
C/D 29.6 D.T.E 12

Effect of rate change 13.2 x 10% = 4.4

30%

As on 31-12-2013
Carrying Amount Tax Base Difference
Property Plant & Equipment (W) 270 164 106 TTD
Capital Work in progress X+1 X+0 1 TTD
Gratuity Payable (12 + 1) 13 - 13 DTD
Provisions for bad debts (W) 28 - 28 DTD
Net Differences 66 TTD
x 35% 23.1 DTL

D.T.L
DTE (Rate change) 3.7 B/D 29.6
DTE 2.8
C/D 23.1

Effect of rate change 29.6 x 5% = 3.7

40%

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 PPE – C.A PPE – Tax Base
B/D 290 Depreciation 15 B/D 180 Depreciation 12
Disposal 5 Disposal 4
C/D 270 C/D 164

Provision
Debtors 6 B/D 24
C/D 28 Exp 10

Not required (for additional information)

Income statement approach (Deferred Tax)
Profit before tax 110 75
Taxable Profits 118 45
Difference 8 30
35% 40%
Deferred Tax 2.8 12
Reversal of D.T.E D.T.E

A.6 Solution
Galaxy International
2010 2009
a)Taxation Rs. in million
Current - for the year (W - 1) (0.84) -
Deferred (W - 2) (6.95) 0.96
(7.79) 0.96
b)Relationship between tax expense and accounting profit
Profit/(Loss) before taxation 23.50 (1.75)
Tax rate 35% 35%
Expected Tax 8.23 (0.61)
Effect of Permanent Differences:
Tax effect of exempt income (1.25 x 35%) / (1 x 35%) (0.44) (0.35)
Actual Tax 7.79 (0.96)

W-1 : Computation of Current Tax

(Loss) / profit before tax 23.50 (1.75)

Accounting depreciation 15.00 15.00

Gratuity expense 2.20 1.70
Accrued expenses (2.00) 2.00

Tax depreciation (6.00) (45.00)

Interest income from SIBs (Exempt) (1.25) (1.00)
Taxable income / (loss) 31.45 (29.05)
Loses carried forward (29.05) -
Net Taxable Profit/Loss 2.4 (29.05)
Current Tax @ 35% 0.84 -

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 W-2 Deferred Tax as on 31-12-2009
Carrying Amount Tax Base Difference
Acc Depreciation 15 45 30 TTD
Accrued Expenses 2 - 2 DTD
Provision for gratuity 1.7 - 1.7 DTD
Net differences 26.3 TTD
Tax losses c/f 29.05
2.75
@ 35% 0.96 DTA
DTA
b/d -
DTE 0.96 c/d 0.96

W-2 Deferred Tax as on 31-12-2010

Carrying Amount Tax Base Difference
Acc Depreciation 30 51 21 TTD
Accrued Expenses - - - DTD
Provision for gratuity 3.9 - 3.9 DTD
Net differences 17.1 TTD
Tax losses c/f -
17.1
@ 35% 5.985 DTL
DTA
b/d 0.96
DTE 6.945
c/d 5.985
Deferred tax income statement approach (For additional information not required in question)
2010 2019
Profit before Tax 23.5 (1.75)
Permanent difference -
Exempt Income (1.25) (1.0)
Profit before tax-After adjustment 22.25 (2.75)
Taxable Profit 2.4 -
Difference 19.85 (2.75)
Tax Rate 35% 35%
6.9475 0.9625
DTE Reversal of
DTE
Important points to remember while applying income statement approach of deferred tax
• If there is accounting profit (after adjustment of permanent differences) and tax loss then simply multiply
the rate with accounting profits to calculate deferred tax for the year.
• If there is an accounting loss (after adjustment of permanent differences) and tax loss then simply
multiply the rate with adjusted accounting loss and it results into reversal of deferred tax expense.

A.7 Solution
Apricot
a) Taxation 2011 2010
Rs. in million
Current (W-l) (20.48) (10.76)
Deferred (W-2) 1.58 (4.99)
(18.90) 15.75

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b) Relationship between tax expense and accounting profit
2011 2010
Profit before taxation 60.00 45.00

Expected Tax at the applicable rate of 35% 21.00 15.75

Less: Tax effect of exempt income (2.10) -
Actual Tax expense 18.90 15.75
W-l: Computation of Current Tax
Profit before tax as per books 60.00 45.00
Add: Allowable income / Disallowed expenses
Accounting depreciation 10.00 9.00
Tax profit on sale of fixed assets 1.00 -
Bad debt expense 5.00 7.00
Less: Disallowed income / Allowable expenses
Tax depreciation (8.00) (7.00)
Accounting profit on sale of fixed assets (0.50) -
Capital gain (6.00) -
Bad debts written off (3.00) (4.00)

Taxable income-before adjustment of losses 58.50 50.00

Tax losses to be brought forward - (19.25)
Taxable income 58.50 30.75
Tax liability (@ 35%) 20.48 10.76

2011 2010
Rs. in million
W-2: Computation of Deferred Tax
Fixed assets (2010: 95-90,2011: 82.5-80) (W-2.1) 0.87 DTL 1.75 DTL
Provision for bad debts (2010:12x35%, 2011:14x35%) [W-2.2] 4.90 DTA 4.20 DTA
Closing Balance of deferred tax 4.03 DTA 2.45 DTA

D.T.L / D.T.A
b/d 7.4375 D.T.E 4.9875
C/D 2.45
B/D 2.45
D.T.E 1.58 C/D 4.03

W-2.1 Movement of Fixed Assets Accounting Tax

Opening balance 95.00 90.00
Disposal during the year (2.50) (2.00)
Depreciation for the year – 2011 (10.00) (8.00)
Closing balance 82.50 80.00

W-2.2 Movement of provision for bad debts 2011 2010

Opening balance 12.00 9.00
Expenses for the year 5.00 7.00
Write off during the year (3.00) (4.00)
Closing balance 14.00 12.00

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A.8 Solution
H Limited
a)
(i) Current tax expense for the year
Rs. 000
Accounting profit 6,500
Accounting depreciation 4,750
Capital allowance (7,000)
Loss on disposal (W-2) 100
Tax gain on disposal (W-2) 300
Gratuity expense 1,500
Gratuity Paid (5,000)
Advertisement [450 -150] 300
Bad Debts expense 175
Bad Debts written off (100)
Exempt income (50)
1,475
Current Tax 35% 516

(ii)Calculation Of Deferred Tax Liability CA TB Diff

PPE - Given 24,500 15,400 (W-1) 9,100 T.T.D
Advertisement - 300 300 D.T.D
Provision for bad debt [350+175-100] 425 - 425 D.T.D
Provision for Gratuity [8,250+1,500-5,000] 4,750 - 4,750 D.T.D
Net difference 3,625 T.T.D
Deferred Tax liability 35% 1,269

W-1 Tax Base of PPE

Rs. OOO
Year start balance 19,500
Addition 6,000
Disposal [1300 -100 - 300] (3,100)
Depreciation (7,000)
Year end balance 15,400

W-2
Disposal Accounting Disposal Tax
Asset 3,500,000 Cash 3,400,000 Asset 3,100,000 Cash 3,400,000
Loss 100,000 Gain 300,000

b) Reconciliation between accounting profit and tax expense

Rs 000
Profit before tax 6,500
Tax Rate 35%
Expected Tax 2,275
Effect of exempt income (50x35%) (17.5)

Tax Expense 2,257.5

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 Not required (Just for additional Information)
Question does not requires deferred tax for the year because opening balance is not available. However a
reverse working can be made to calculate the opening balance of deferred tax.

Total Tax Expense As per reconciliation 2,257.5

Current Tax (516)
Deferred Tax expense 1,714.5

D.T.L / D.T.A
B/D (Bal) 472.5
D.T.E 1,741.5
C/D (a ii) 1,269

However to make the concepts clear, opening balance can also be calculated as follows:
Figures in millions
Carrying Amount Tax Base Difference
PPE (W-1) 26.75 19.5 7.25 T.T.D
Provisions for bad debts 0.35 - 0.35 D.T.D
Provision for gratuity 8.25 - 8.25 D.T.D
Net Difference 1.35 D.T.D
x35% 0.4725 D.T.A

(W 1)PPE - C.A
B/D (bal) 26.75 Disposal 3.5
Depreciation 4.75
Cash 6 C/D 24.5

A.9
Solution
Waqar Limited
a) Computation of current period income tax liability
2015 2014
Rs.m Rs.m
Accounting profit before tax 40 30

Add:
Accounting depreciation on machinery 25 25
Accounting depreciation on furniture and fittings 5 5
Less:
Exempt Income-Capital Gain (10.00) (8.00)
Tax depreciation on furniture and fittings
40.5 x 10% (4.05)
40.5 (1-10%) x 10% (3.65)
Tax depreciation on Machinery
90 x 10% (9)
90 (1-10%) x 10% (8.10)

Taxable profit 48.25 38.95

Tax rate 30% 35%
Current tax 14.4765 13.6325

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b) Deferred taxation computation
Carrying Amount Tax base Temporary
difference
Rs.m Rs.m Rs.m
At December 31, 2013
Machinery 175 90 85 TTD
Furniture and fittings 40 40.5 0.5 DTD
84.5 DTL
Deferred tax liability at December 31, 2013 (35%) Rs 29.575
At December 31, 2014
Machinery 150 81 69 TTD
Furniture and fittings 35 36.45 1.45 DTD
67.55 TTD
Deferred tax liability at December 31, 2014 (35%) Rs 23.6425
As at December 31, 2015
Machinery 125 72.90 52.10 TTD
Furniture and fittings 30 32.80 2.80 DTD
49.295 TTD
Deferred tax liability at December 31, 2015 (30%) Rs 14.7885

c)Movement on deferred taxation account 2015 2014

At January 1 23.64 29.57
Change due to change in rate (23.64 x 5/35) (W-1) (3.38) -
20.26 29.57
For the year (balancing figure) (W-1) (5.47) (5.93)
At December 31 14.79 23.64

d)Tax expense 2015 2014

Current tax (14.48) (13.63)
Deferred tax 5.47 5.93
Due to change in rate 3.38
Tax expense (5.6225) (7.7)

e)Tax reconciliation 2015 2014

Accounting profit 40.0 30.0
Tax rate 30% 35%
Expected tax expense 12.0 10.5
Effect of Permanent Difference
Capital Gain 30% x 10.0 (3.0)
35% x 8.0 (2.8)
Effect of rate change (3.37)
Tax expense 5.6225 7.7

W-1
Deferred Tax Liability

31-12-13 c/d 29.575

1-1-14 b/d (35%) 29.575
DTE 5.9325
31-12-14 c/d (35%) 23.6425
1-1-15 b/d (35%) 23.6425
DTE [rate change] 3.3775

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 DTE 5.4765
31-12-15 c/d (30%) 14.7885

Ans.10 Triangle Limited (TL)

a) Note in TL’s financial statements
For the year ended 31-12-2018.
2018 2017
Current Tax (W-1) (38.7) (22.2)
Deferred Tax (W-2) (1.6) (7.5)
(40.3) (29.7)

Reconciliation b/w tax expense and accounting profit

2018 2017
Accounting Profit 125 110
Tax@ 35% ; 30% 35% 30%
Expected tax expense 43.75 33

Effect of Permanent difference:

Interest income (2017 : 7 x 30%), (2018 : 10 x 35%) (3.5) (2.1)

Dividend income (2017 : 8 x 15%), (2018 : 6 x 20%) (1.2) (1.2)
Effect of rate change 1.25 -
40.3 29.7

W-1 Current tax :

2018 2017
Profit before tax 125 110
Add: Accounting depreciation 25 18
Rent expense 1 3
On tax insurance expense 4 -

Less: Tax depreciation (21) (42)

Rent (W) (3) -
Insurance paid (5) (4)
Borrowing cost (2) -
Interest income (10) (7)
Dividend income (6) (8)
Taxable profit 108 70
35% 30%
37.8 21
Dividend taxed as a separate block of income (6 x 15%) ; (8 x 15%) 0.9 1.2
Current tax 38.7 22.2

Rent Accrual
Payment 3 b/d 3
Expense 1
c/d 1

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 Prepaid Insurance
b/d 4
Cash 5 Expense
4
c/d 5
Interest Income
b/d
7
Cash
3
c/d
10

b) Deferred tax Asset/ Liability as at 31 – 12 - 2017

CA TB Difference
Accrued Rent 3 - 3 DTD
Prepaid Insurance 4 - 4 TTD
Acc. depreciation 18 42 24 TTD
25 TTD
7.5
(25 x 30%)

DTL
b/d -
DTE
7.5
c/d 7.5

Deferred tax Asset/ Liability as at 31 – 12 - 2018

CA TB Difference
CWIP 2 - 2 TTD
Accrued Rent 1 - 1 DTD
Prepaid Insurance 5 - 5 TTD
Accumulated depreciation 43 63 20 TTD
(18+25) (42+21)
26 TTD
9.1
(26 x 35%)

DTL
b/d 7.5
DTE (rate change) 1.25
c/d 9.1 DTE 0.35

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 Self-Test Question Solution
A.1
Intelligent Technologies Limited
For the year ended 31 December 2012
Rs. in million
a) Taxation

Current (W-l) -
Deferred (W-2) (3.29)
(3.29)
Prior Period (3 x 35%) (W-3) (1.05)
(4.34)

b) Reconciliation of tax charge for the year

2012
Rs. in million
Accounting profit before tax 11.00

Applicable tax rate 35%

Expected Tax 3.85

Effect of Permanent Differences:
Less: Effect of exempt income (2 x 35%) (0.70)
Add: Permanent difference (0.4 million x 35%) 0.14
Actual Tax Expense 3.29

W-l : Computation of current tax expense

2012
Rs. in million
Profit before tax 11.00
Add: Allowable income / disallowed expenses
Accounting depreciation 30.00
Expenses expected to be disallowed 0.90
Less: Exempt income / allowable expenses
Tax depreciation (25.60)
Capital gain (2.00)
Taxable Profit 14.30
Less: Assessed brought forward losses (21.00)
Taxable loss to be carried forward (6.70)
Current Tax @ 35% Nil

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 W-2 Deferred Tax as on 31-12-2012
Carrying Amount Tax Base Difference
Fixed Asset 90 102.4 12.4 DTD
Prepaid Expenses - 0.5 0.5 DTD
Net differences 12.9 DTD
Tax losses c/f 6.7
19.6
@ 35% 6.86 DTA

DTA
b/d 10.15 DTE 3.29
c/d 6.86

W-3 Prior period tax: The Company would have paid less tax after deducting Rs 3 million in 2010 because it
has claimed Rs 3 million as an expense. Now Rs 3 million has been disallowed and the company has decided
not to file an appeal; therefore on this Rs 3 million company has to pay tax. This tax related to 2010 has been
finalized in 2012 so it is a prior period tax.

A.2
Solution Debit Credit
Bilal Engineering Limited
(a) Journal entries
Rs. In million
1 Income tax expenses (W-1) 18.4436
Provision for taxation 18.4436
(Tax provision for 2009)
2 Deferred tax liability/asset (W-2) 0.9436
Deferred Tax expense 0.9436
(Deferred tax credit 2009)
3 Current tax Expense-prior Period (W-3) 0.035
Provision for Current Tax (0.1 x 35%) 0.035

(b) Bilal Engineering Limited

Notes to the Financial Statements
for the year ended December 31, 2009
1.1 Relationship between tax expense and accounting profit 2009
Rs. in million
Accounting profit before tax 50.000
Tax Rate 35%
Expected tax expense 17.50
Actual tax expense (W-4) 17.5

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Workings:
W-1
a) Computation of current taxation Rs. in million
Profit before tax 50.000
Add: Accounting depreciation 10.000
Add: Accounting depreciation on right of use asset (1(W1.1) /4) 0.250
Financial charges on lease liability (1.00 - 0.3) x 13.701% 0.096
Amortization of research and development cost for the year (15/15) 1.000
Less: Tax depreciation (7.000)
Annual installment of lease payment (0.300)
Tax Amortization of research and development cost (15 x 0.9/10) (1.350)
Current year taxable income 52.696
Tax liability for the year (52.696 x 35%) 18.4436

W1.1 [0.3+0.3 x [1-(1 + 0.13701)-3/0.13701]= 1 million.

W-2 Deferred Taxation:

Deferred tax: As on 31-12-2009

Acc. Dep. 10 7 3 DTD

Right of use (1-0.25) 0.75 - 0.75 TTD
Lease liability 0.7 - 0.7 DTD
Interest payable 0.096 - 0.096 DTD
Research and development 12(13-1) 10.95(12.3-1.35) 1.05 TTD
Total 1.996 DTD
X35% 0.6986 DTA

DTL/DTA
b/d (W2.1) 0.245
DTE 0.9436
c/d 0.6986

W-2.1 Deferred Taxation:

Deferred tax: As on 31-12-2008

Research and development 13[15(15/15x2)] 12.3[15x10%=1.5+15x90%=13.5- 0.7 TTD

(13.5/10x2)]

X35% 0.245 DTL

W-2.2 Deferred Taxation (income statement approach):
Profit before Tax 50.00
Taxable Profit (W-1) 52.696
Difference 2.696
x35% 0.9436
(Reversal of DTE)
If for example accounting profits are not available even then we can calculate the deferred tax for the period
as follows:

1. If in current tax working add backs (ignoring permanent differences) are more, than taxable profits
will be more resulting into reversal of deferred tax expense. (credit of DTE)
2. If in current tax working add backs (ignoring permanent differences)are less, than taxable profits will
be less resulting into increase in deferred tax expense. (debit of DTE)

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For example:

Add: Accounting depreciation 10.000

Add: Accounting depreciation on right of use asset (1(W1.1) /4) 0.250
Financial charges on lease liability (1.00 - 0.3) x 13.701% 0.096
Amortization of research and development cost for the year 1.000
Less: Tax depreciation (7.000)
Annual installment of lease payment (0.300)
Tax Amortization of research and development cost (15 x 0.9/10) (1.350)
Net increase / (decrease) in taxable profits (Ignoring permanent 2.696
differences)[add backs are more]

2.696 x 35% = 0.9436(reversal of deferred tax expense)

W-3 Prior Period Tax Liability

Tax liability for prior periods (0.100 x 35%) 0.035
Note: The company would have paid less tax after deducting Rs 0.25M in 2006 because it has claimed
Rs 0.25 M as an expense. Now company has been allowed 0.15M but on remaining amount of Rs 0.1M it has to
pay tax. This tax related to 2006 has been finalized in 2009 so it is prior period tax.

W-4 Note of Taxation

Current Tax (W-1) (18.4436)
Deferred Tax (W-2) 0.9436
(17.50)
Prior Period Tax (W-3) (0.035)
(17.535)

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Extra practice Question
Q. 1 IAS 12 with lease
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
Bad debts expense for the year 10
Capital gain (exempt from tax) 5

The following information is also available:

(i) Opening balances of deferred tax liability, provision for bad debts and provision for gratuity were
Rs. 5.28 million, Rs. 2 million and Rs. 13 million respectively.
(ii) The cost and other details related to buildings (owned) included in property, plant and equipment
are as follows:

Rs. In million
Opening balance (purchased on 1, January 2013) 350
Cost of a building sold on 30 April 2015 (for Rs. 35 million) 30
Purchased on 1 July 2015 40
(iii) Accounting depreciation on buildings is calculated @ 5% per annum on straight line basis whereas
tax depreciation is calculated @ 10% on reducing balance method. Accounting depreciation of all
other owned assets included in property, plant and equipment is same as tax depreciation.
(iv) 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 as well as the useful life is 5 years.
- Annual lease rentals amounting to Rs. 30 million are payable in advance.
- The interest rate implicit in the lease is 12.59%.
- This machine would be depreciated over its useful life on straight line method.
The lease of machine is not a low value asset lease.
(v) On 1 June 2015, an amount of Rs. 1 million was paid as penalty to the provincial government due
to non-compliance of environmental laws.
(vi) The amount of gratuity paid to outgoing members was Rs. 10 million.
(vii) During the year, entertainment expenses and repair expenses amounting to Rs. 6 million and Rs. 8
million respectively, pertaining to year ended 31 December 2013 were disallowed. FTL has decided
to file appeal only against the decision regarding repair expenses.
(viii) 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. (17)

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Answer 1
Note of Taxation:
Rs. In millions
Current tax (W-1) (26.60)
Deferred tax (w-2) 2.28
(24.32)
Prior period tax (W-3) [6 × 32%] (1.92)
(26.24)

Reconciliation of Accounting Profits with tax expense:

Rs. In millions
Profit before tax 80
Tax rate 32%
Expected tax 25.60
Effect of Permanent differences:
Penalty (1 × 32%) 0.32
Exempt Income (5 × 32%) (1.60)
Actual tax expense 24.32

Workings:
(W-1) Current Tax:
Profit before tax 80
Add: Accounting depreciation 17.5
Depreciation on leased Asset (120 ÷ 5) 24
Tax gain 10.7
Finance charge on lease 11.33
Bad debts 10
Gratuity expense 12
Penalty paid 1
Less: Taxation depreciation (29.92)
Accounting gain (8.5)
Gratuity paid (10)
Lease revtal paid (30)
Capital gain (5)
Taxable profits 83.11 × 32% = 26.60

Further Detail Working:

Provision for Bad Debts

b/d 2
Expenses 10
c/d 12

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 Provision for Gratuity

Cash 10 b/d 13
Expenses 12
c/d 15
Lease:
Rental Principal Interest Balance
1-1-2015 120*
1-1-2015 30 30 -- 90
1-1-2016 30 18.669 11.331 --
PV of LP:
1 − (1 + 0.1259) −4 
= 30 + 30  
 0.1259 
= 120 M
Depreciation (Accounting)
PPE (Cost)

b/d 350 Disposal 30

Cash 40
c/d 360
Accumulated Depreciation – Accounting

Disposal (1.5 × 2 + 0.5) 3.5 b/d (350 × 5% × 2) 35

Depreciation (W) 17.5
c/d 49
Disposal – Accounting

PPE 30 Cash 35
Accumulated Depreciation 3.5
Gain 8.5
Depreciation for the year:
[350 – 30] × 5% = 16
40 × 5% × 6/12 = 1
30 × 5% × 4/12 = 0.5
Total 17.5
In accounting; as nothing is mentioned therefore time basis of depreciation.
Depreciation (Tax)
PPE (Cost)

b/d 350 Disposal 30

Cash 40
c/d 360
Accumulated Depreciation – Tax

Disposal (3 + 2.7) 5.7 b/d (W) 66.5

Depreciation 29.92
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c/d 90.72
Disposal – Account - Tax

PPE 30 Cash 35
Accumulated Depreciation 5.7
Gain 10.7

Workings:

350 × 10% = 35
[350 – 35] × 10 = 31.5
66.5

For the year:

[350 – 30] = 320
[66.5 – 5.7] = (60.8)
259.2
× 10% = 25.92
+ 40 × 10% = 4.00
29.92

In tax; as nothing is mentioned therefore we should follow income tax ordinance, i.e full year basis.

(W 2) Deferred tax as on 31.12.2015

Carrying amount Tax base Difference

PPE 311 269.28 41.72 TTD
[360-49] [360-90.72]
Leased asset 96 - 96 TTD
[120-24] 90 DTD
Lease liability 90 - 11.3 DTD
Interest payable 11.3 - 15.0 DTD
Provision for Gratuity 15 - 12.0 DTD
Provision for bad debts 12 -
Net differences 9.39 TTD
X 32% 3.00 DTL

Deferred tax liability

DTE 2.28 b/d 5.28

c/d 3.0
(W3) FTL would have claimed 6 millions as entertainment expense during the year ended 31.12.2013. in
2015, that expense is disallowed. Now FTL has decided not to file the appeal (means FTL has accepted the
decision). It means FTL will have to pay extra tax on 6 millions amounting to Rs. 1.92 (6 x 32%). Entry will be

Prior period tax 1.92

Provision for tax 1.92

As the FTL has decided to file appeal against decision regarding repair expenses, therefore that tax is not yet
final.
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Q.2 Rose Limited (RL) is finalizing its financial statements for the year ended 31 December 2017. In
this respect, the following information has been gathered:

(i) Applicable tax rate is 30% except stated otherwise.

(ii) During the year RL incurred advertising cost of Rs. 15 million. This cost is to be allowed as tax
deduction over 5 years from 2017 to 2021.
(iii) Trade and other payables amounted to Rs. 40 million as on 31 December 2017 which
include unearned commission of Rs. 10 million. Commission is taxable when it is earned
by the company. Tax base of remaining trade and other payables is Rs. 25 million.
(iv) Other receivables amounted to Rs. 17 million as on 31 December 2017 which include
dividend receivable of Rs. 8 million. Dividend income was taxable on receipt basis at
20% in 2017. However, with effect from 1 January 2018, dividend received is exempt
from tax. Tax base of remaining other receivables is Rs. 6 million.
(v) On 1 April 2017, RL invested Rs. 40 million in a fixed deposit account for one year at
10% per annum. Interest will be received on maturity. Interest was taxable on receipt
basis at 10% in 2017. However, with effect from 1 January 2018, interest received is
taxable at 15%.
(vi) On 1 January 2016, a machine was acquired on lease for a period of 4 years at annual
lease rental of Rs. 28 million, payable in advance. Interest rate implicit in the lease is
10%. Under the tax laws, all lease related payments are allowed in the year of payment.
(vii) Details of fixed assets are as follows:

On 1 July 2017 RL sold one of its four buildings for Rs. 60 million. These buildings
were acquired on 1 January 2013 at a cost of Rs. 100 million each having useful life of 30
years.
Tax depreciation rate for all owned fixed assets is 10% on reducing balance method. Further,
full year’s tax depreciation is allowed in year of purchase while no depreciation is allowed in
year of disposal.

Required:

Compute the deferred tax liability/asset to be recognised in RL’s statement of financial

position as on 31 December 2017. (16)

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 A. 2
Rose Limited
Computation of deferred tax liability / assets:
As on 31 December 2017 Rs. In millions
Carrying
Tax Base Differences Tax Rate DTA/DTL
Amount
Advertisement -- 12 12 DTD × 30% 3.6 DTA
[15(15÷5)]
Trade and other Payables:
unearned commission 10 10 --
Others 30 25 5 DTD × 30% 1.5 DTA
Other Receivables:
Dividend receivables 8 8 --
Others 9 6 3 TTD × 30% 0.9 D.T.L
Interest receivable 3 -- 3 TTD × 15% 0.45 D.T.L
[40 × 10% × 9/12]
Right of use Machine (W-1) 48.82 -- 48.82 TTD × 30% 14.65 D.T.L
Lease Liability (W-2) 48.60 -- 48.60 DTD × 30% 14.58 D.T.A
Interest payable on lease 4.86 -- 4.86 DTD × 30% 1.46 D.T.A
(W-2)
Building 250 177.147 72.85 TTD × 30% 21.86 D.T.L
(W-3) (W-4)
Net D.T.L 16.72

Workings:
(W-1) Present Value of Lease Payment(Machine):
1 − (1 + 0.1)−3 
28 + 28   = 97.63
 0.1 
Carrying Amount = [97.63 – (97.63 ÷ 4 × 2)]
= 48.82

(W-2) Finance Charge Table:

1-1-2016 97.63
1-1-2016 28 28 -- 69.63
1-1-2017 28 21.037 6.963 48.593

1-1-2018 28 23.1407 4.859 25.4523

(W-3) Building (Carrying Amount)

b/d 346.67 1-7 Disposal 85
400 100
[400 − ( × 4)] [100 − ( × 4.5)]
30 30
31-12 Depreciation 11.67
300 + 100  6
30 30 12

c/d 250
(W-4) Building (Tax Base)
b/d 262.44 Disposal 65.61
[400×0.9×0.9×0.9×0.9] [100×0.9×0.9×0.9×0.9]
Depreciation 19.683
[262.44 – 65.61] × 10%
c/d 177.147

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Q.3 Dua Limited (DL) is in the process of finalizing its financial statements for the year ended 31
December 2019. The following information have been gathered for preparing the
disclosures relating to taxation:
(i) Accounting loss before tax for the year amounted to Rs. 140 million. It includes:
an amount of Rs. 2 million recovered from a customer whose debt had been written off
in 2018. As per tax laws, receivable written offs are allowed as deduction.
dividend of Rs. 16 million earned against equity investment in a UK based company.
As per tax laws, this dividend income is exempt from tax in Pakistan as 20% tax was
paid in UK.

(ii) The movement of owned property, plant and equipment for 2019 is as follows:

Accounting WDV Tax base

------ Rs. in million -------
Opening balance 1,700 1,116
Additions 460 480
Impairment (72) -*
Depreciation (470) (284)
Disposals (144) (92)
Closing balance 1,474 1,220
* impairment is not allowed for tax purposes.

Difference of Rs. 20 million in ‘Additions’ represents foreign exchange loss on acquisition which
was considered as part of the cost of the asset as per tax laws.

(iii) As per tax laws, research expense for the year is allowable in the next year. Research expense for
the year amounted to Rs. 25 million (2018: Rs. 64 million).
(iv) Rent expense is allowed for tax purposes on payment basis. Rent prepaid as at 31 December
2019 amounted to Rs. 6 million (2018: Rs. 1 million).
(v) As on 31 December 2018, DL had carried forward tax losses of Rs. 90 million against which DL
had always expected that it is probable that future taxable profit will be available.
(vi) Tax rate is 35%.

Required:
(a) Prepare a note on taxation for inclusion in DL's financial statements for the year ended 31
December 2019 and a reconciliation to explain the relationship between tax expense and
accounting profit.
(11)
(b) Compute deferred tax liability/asset in respect of each temporary difference as at 31 December
2019 and 2018. (05)

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A.8 (a)Dua Limited:

Notes to the financial statements

For the year ended 31 Dec 2019

Tax expense:

Rs. In Million
Current tax (w-1) (17.2)
Deferred tax (82.25 – 150.85) [req. (b)] 68.6
51.4
Reconciliation between tax expense and accounting profit:

Rs. In Million
Loss before tax (140.0)
Tax 35% (49.0)
Effect of low rate on dividend 16 x 15% (35% - 20%) (2.4)
(51.4)

W-1: Current Tax:

Rs. In Million
Loss before tax (140)
Dividend income (16)
Exchange loss capitalized 20
Accounting depreciation 470
Tax depreciation (284)
Impairment loss 72
Lower tax base of disposals (N-1) 52
Research for the year disallowed 25
Research for the previous allowed (64)
Rent expense 1
Rent paid (6)
130
Adjustment of unused tax losses (90)
Taxable income 40
Tax @ 35% 14.0
Tax on dividend 16×20% 3.2
17.2

b) Deferred tax liability / (asset) as at 31 December 2019 :

Carrying value Tax Base Difference

----------Rs. In millions------------
PPE 1,474 1,220 254 TTD
Research - 25 25 DTD
Prepaid rent 6 - 6 TTD
235 TTD X 35% = 82.25 DTL

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Deferred tax liability/ (asset) as at 31 December 2018 :

Carrying value Tax Base Difference

----------Rs. In millions------------
PPE 1,700 1,116 584 TTD
Research - 64 64 DTD
Prepaid rent 1 - 1 TTD
525 TTD X 35% = 182.35
DTL
Deferred tax assets on unused tax loss [90 x 35%] (31.50) DTA
Net 150.85 DTL

D.T.L
D.T.E 68.6 b/d 150.85
c/d 82.25

Note-1:

Difference
Cash 200 200
WDV (144) (92)
Gain 56 108 52 Add
Or

Cash 100 100

WDV (144) (92)
Loss (44) 8 Gain*

Add: loss 44

Add: gain 8

Total Add: 52

If rate is to be reconciled:
Applicable tax rate (35%)
Tqx effect of permanent differences
Dividend income (2.4/140 x 100) (1.71%)
Actual tax rate (51.4/140 x 100) (36.71%)

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ICAP study text
IAS 12 INCOME TAXES

⯈ Example[take as test question]

Jhelum Traders (JT) had an accounting profit of Rs. 789,000 for the year ended 31 December 2017. The
following information is relevant:

(i) The accounting profit was after depreciation of Rs. 70,000 and included a profit on disposal
(capital gain) of Rs. 97,000. Accounting depreciation is not allowable for tax purposes. Capital gains are
not taxable.

(ii) At 1 January 2017 the tax written down value of machinery was Rs. 120,000 and for buildings
was Rs. 600,000. Tax depreciation is claimable at 10% per annum for buildings and 15% per annum for
machinery applied to tax written down value at the start of the year.

(iii) JT had incurred borrowing costs of Rs. 70,000 in the year of which Rs. 10,000 had been
capitalised in accordance with IAS 23. All borrowing costs are deductible for tax purposes.

(iv) JT had paid fines of Rs. 125,000 due to non-compliances with the requirements of the
Companies Act, 2017. Fines are not tax deductible.

(v) JT holds some assets under leases. During the year it had recognised finance cost in respect of
the leases was Rs. 15,000 and rentals paid were Rs. 80,000. The depreciation on right of use assets is
included in accounting depreciation above. Lease rentals are deductible in full for tax purposes. Tax is
paid at 30%

Required: Compute the current tax payable for JT for the year 2017.

Answer:

Jhelum Traders – Tax computation Rs.

Accounting profit before tax 789,000

Add: Accounting depreciation (i) 70,000

Less: Capital gain (i) (97,000)

Less: Tax depreciation (Rs. 120,000 x 15% + Rs. 600,000 x 10%) (ii) (78,000)

Less: Borrowing costs (iii) (10,000)

Add: Fine paid (iv) 125,000

Add: Finance cost on lease (v) 15,000

Less: Lease rental paid (v) (80,000)

Taxable profit 734,000

Tax rate 30%

Current tax payable 220,200

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Example

Calculate the temporary differences for each of following situations independently and also identify
whether such temporary difference is taxable or deductible

(i) A plant was acquired at start of the year for Rs. 100 million. It has useful life of
five years and nil residual value. Tax authorities allow 30% depreciation on
reducing balance basis.

(ii) An inventory costing Rs. 10 million was written down to its net realisable value of
Rs. 8 million. Tax authorities do not allow write down adjustments.

(iii) A provision for litigation has been recognised at Rs. 4 million. Tax authorities will
allow the expense only when paid.

(iv) A financial liability has been measured at fair value of Rs. 7 million. However, tax
base of this liability is Rs. 8 million.

Answer:

(i) The carrying amount of plant at year end would be Rs. 80 million (i.e. Rs. 100
million less depreciation over five years useful life). The tax base would be Rs. 70
million (i.e. Rs. 100 million less 30% tax depreciation.

This would result in taxable temporary difference of Rs. 10 million.

On disposal, the tax gain will be Rs. 10 million more resulting in payment of more
tax.

(ii) The carrying amount of inventory is Rs. 8 million while tax base is Rs. 10 million.
This would result in deductible temporary difference of Rs. 2 million.

On sale, the tax authorities will allow Rs. 2 million extra deduction resulting in tax
savings in the future.

(iii) The carrying amount of provision is Rs. 4 million and tax base is Nil. The
temporary difference of Rs. 4 million is deductible.

On payment, the tax authorities will allow deduction resulting in tax savings in
the future.
(iv) The carrying amount of provision is Rs. 7 million and tax base is Rs. 8 million. The
temporary difference of Rs. 1 million is taxable.

On settlement, the tax loss shall be lower (or tax gain shall be higher) resulting in
more payment of tax.
Measurement/Tax rate [IAS 12: 47, 53 & 54]

Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have
been enacted or substantively enacted by the end of the reporting period.

There could be different tax rates for different assets and liabilities and for deferred tax calculations,
relevant rates need to be taken. For example, if dividend receivable is recorded in an entity’s financial
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statement and tax authorities only tax dividend when it is received, although corporate rate of tax on
entity is 29%, but tax on dividends is 15%, therefore, deferred tax liability will be recorded on taxable
temporary difference using the rate of 15% and not 29%.

Deferred tax assets and liabilities are not discounted.

Deferred tax liability [IAS 12: 5, 15 & 22]

Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable
temporary differences.

A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent
that the deferred tax liability arises from:

(a) the initial recognition of goodwill (not in syllabus); or

(b) the initial recognition of an asset or liability in a transaction that:

(i) is not a business combination (not in syllabus); and

(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

⯈ Example

An entity intends to use an asset which cost Rs. 1,000 throughout its useful life of five years and then
dispose of it for a residual value of nil. The tax rate is 40%. Depreciation of the asset is not deductible for
tax purposes. On disposal, any capital gain would not be taxable and any capital loss would not be
deductible.

Required: Briefly discuss the accounting treatment of deferred tax for the above asset.

Answer:

This particular difference of carrying amount and tax base is in fact of permanent nature as depreciation
charged to profit or loss will never be allowed as deduction by tax authorities. [therefore, assume
carrying amount is equal to tax base]

Deferred tax asset [IAS 12: 5, 24, 33 & 37]

Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:

(a) deductible temporary differences;

(b) the carry forward of unused tax losses; and

(c) the carry forward of unused tax credits.

A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is
probable that taxable profit will be available against which the deductible temporary difference can be
utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a
transaction that

(i) is not a business combination (not in syllabus); and

(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

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⯈ Example

An entity received government grant of Rs. 2 million related to an asset. The grant shall be recognised
over two years. The grant income is exempt under the law and has no tax consequences when received
or when recognised in profit or loss.

Required: Briefly discuss the accounting treatment of deferred tax for the above deferred grant
presented as liability.

Answer:

The government grant shall have carrying amount of Rs. 2 million and tax base of Nil on initial
recognition. This particular difference of carrying amount and tax base is in fact of permanent nature as
grant income recognised in profit or loss will never be considered as taxable income by tax authorities.
Therefore, no deferred tax shall arise. [therefore assume carrying amount is equal to tax base]

Current and deferred tax charge [IAS 12: 58, 59, 61A & 64]

Accounting for the current and deferred tax effects of a transaction or other event is consistent with the
accounting for the transaction or event itself.

Transaction Related tax Examples

recognised in: effect:

Other Comprehensive Other Gain on revaluation (IAS 16)

Income Comprehensive
Gain on FVTOCI Investments (IFRS 9)
Income

Directly in Equity Directly in Retrospective application on change of accounting policy or

Equity retrospective adjustment for correction of prior period errors
(IAS 8)

Transfer within An entity may transfer the amount from Revaluation Surplus to Retained
equity Earnings, (for incremental depreciation or on disposal) in accordance with IAS
16 or IAS 38. Such transfer is presented in statement of changes in equity net
of tax.

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Example [Include in test questions]

XYZ Limited had an accounting profit before tax of Rs. 90,000 for the year ended 31st December 2016.
The tax rate is 30%. Opening deferred tax balance was Rs. 3,600.

The following balances and information are relevant as at 31st December 2016.

Carrying
amount
Tax base Note

Non-current assets Rs. Rs.

Property 63,000 1

Plant and machinery 100,000 90,000 2

Right of use assets (under lease) 80,000 3

Receivables:

Trade receivables 73,000 4

Interest receivable 1,000 5

Payables

Fine (not allowed as tax deduction) 10,000

Lease liability 85,867 3

Interest payable 3,300 5

Note 1: The property cost the company Rs.70,000 at the start of the year. It is being depreciated on a
10% straight line basis for accounting purposes. The company’s tax advisers have said that the company
can claim Rs.42,000 accelerated depreciation as a taxable expense in this year’s tax computation.

Note 2: The balances in respect of plant and machinery are after providing for accounting depreciation
of Rs.12,000 and tax allowable depreciation of Rs.10,000 respectively.

Note 3: The asset under lease was acquired on 1 Jan 2016 and have been depreciated over useful life of
5 years. Rental expense for leases is tax deductible. The annual rental for the asset is Rs. 28,800
(including Rs. 14,667 for interest) and was paid on 31st December 2016.

Note 4: The receivables figure is shown net of an allowance for doubtful balances of Rs. 7,000. This is
the first year that such an allowance has been recognised. A deduction for debts is only allowed for tax
purposes when the debtor enters liquidation.

Note 5: Interest income is taxed, and interest expense is allowable on a cash basis. There were no
opening balances on interest receivable and interest payable.

Required:

Calculate current and deferred tax, movement of deferred tax liability, note showing components of tax
expense and reconciliation disclosure for the year ended 31 December 2016.

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Answer:

Current tax computation Rs.

Accounting profit 90,000

Add: Accounting depreciation on property 7,000

Less: Tax depreciation on property (42,000)

Add: Accounting depreciation on plant and machinery 12,000

Less: Tax depreciation on plant and machinery (10,000)

Add: Depreciation of leased asset [100,000 / 5 ] 20,000

Add: Interest expense (on lease) 14,667

Less: Lease rental paid (28,800)

Add: Increase in allowance for doubtful debts 7,000

Add: Interest not paid yet 3,300

Add: Fines (disallowed) 10,000

Less: Interest not received yet (1,000)

Tax profit 82,167

Tax rate 30%

Current tax 24,650

Carryin Tax base Temp. Diff.

g value
Deferred tax
Rs. Rs. Rs.

Property 63,000 28,000 35,000 T

[74,000 -42,000]

Plant and machinery 100,000 90,000 10,000 T

Right of use assets 80,000 0 80,000 T

Lease liability 85,867 0 85,867 D

Trade receivables 73,000 80,000 7,000 D

Interest receivables 1,000 0 1,000 T

Interest payable 3,300 0 3,300 D

Total taxable temporary differences 29,833 T

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 Tax rate 30%

Deferred tax 8,950

Opening balance 3,600

Profit or loss 5,350

Tax expense Rs.

Current tax expense 24,650

Deferred tax expense 5,350

Tax expense 30,000

Tax Reconciliation Rs.

Profit @ applicable rate [90,000 x 30%] 27,000

Add: Effect of disallowed expenses: fines [10,000 x 30%] 3,000

Tax expense 30,000

Carry forward of un-used tax losses and tax credits [para 34]
A deferred tax asset shall be recognised for the carry forward of un-used tax losses and un-used
tax credits to the extent that it is probable that future taxable profit will be available against
which they can be utilised. However, the existence of unused tax losses is strong evidence that
future taxable profit may not be available. Hence, it should recognise deferred tax asset on
these items, only when there is convincing other evidence that sufficient taxable profit will be
available. Carry forward of un-used tax losses or tax credits create future tax relief for companies
and are therefore very valuable.
[para 36] An entity considers the following criteria in assessing the probability that taxable
profit will be available against which the unused tax losses or unused tax credits can be utilised:
1. whether the entity has sufficient taxable temporary differences relating to the same
taxation authority and the same taxable entity, which will result in taxable amounts
against which the unused tax losses or unused tax credits can be utilised before they
expire;
2. whether it is probable that the entity will have taxable profits before the unused tax
losses or unused tax credits expire;
3. whether the unused tax losses result from identifiable causes which are unlikely to
recur; and
4. whether tax planning opportunities are available to the entity that will create taxable
profit in the period in which the unused tax losses or unused tax credits can be utilised.

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Reassessment of unrecognised deferred tax assets [para 37]
At the end of each reporting period, an entity reassesses unrecognised deferred tax assets. The
entity recognises a previously unrecognised deferred tax asset to the extent that it has become
probable that future taxable profit will allow the deferred tax asset to be recovered. For
example, an improvement in trading conditions may make it more probable that the entity will
be able to generate sufficient taxable profit in the future for the deferred tax asset to meet the
recognition criteria.
Example : Reassessment of unrecognised deferred tax assets

F Limited disclosed in its financial statements for the year ended December 31, 2018, that it has
available tax losses of Rs.60 million. The company losses are available for only 5 years. The company
expects that it is unlikely to utilize all the losses and, therefore, does not recognize a deferred tax
asset. Tax rate is 35% for the year and will remain same for future periods.
In 2019, the company restructures its business and expects that this restructuring will result in future
taxable profits upto Rs.50 million in next 5 years. The company, therefore, shall recognize at December
31, 2019 a deferred tax asset for the available tax losses to the extent future taxable profits will be
available i.e., Rs.17.5 (Rs.50 million x 35%).

Presentation
IAS 12: Income taxes contains rules on when current tax liabilities may be offset against current
tax assets
Offset of current tax liabilities and assets [para 71]
A company must offset current tax assets (advance tax) and current tax liabilities (current tax payable) if,
and only if, it:
1. has a legally enforceable right to set off the recognised amounts; and
2. intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
These are the same rules as apply to assets and liabilities in general as described in IAS 1.(contra entry)
In the context of taxation balances whether a current tax liability and asset may be offset is
usually specified in tax law, thus satisfying the first criterion.
In most cases, where offset is legally available the asset would then be settled on a net basis (i.e.
the company would pay the net amount).
Offset of deferred tax liabilities and assets [para 74]
A company must offset deferred tax assets and deferred tax liabilities if, and only if:
1. the entity has a legally enforceable right to set off current tax assets against current tax
liabilities; and
2. the deferred tax assets and the deferred tax liabilities relate to income taxes levied by
the same taxation authority on either:
• the same taxable entity; or
• different taxable entities which intend either to settle current
tax liabilities and assets on a net basis, or to realise the assets
and settle the liabilities simultaneously, in each future period
in which significant amounts of deferred tax liabilities or
assets are expected to be settled or recovered.(group
companies)
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Disclosure [para 80]
Components of tax expense (income)
The major components of tax expense (income) must be disclosed separately.
Components of tax expense (income) may include:
• current tax expense (income);
• any adjustments recognised in the period for current tax of prior periods;
• the amount of deferred tax expense (income) relating to the origination and
reversal of temporary differences;
• the amount of deferred tax expense (income) relating to changes in tax rates or
the imposition of new taxes;
• the amount of the benefit arising from a previously unrecognised tax loss, tax
credit or temporary difference of a prior period that is used to reduce current
tax expense;
• deferred tax expense arising from the write-down, or reversal of a previous
write-down, of a deferred tax asset;
• the amount of tax expense (income) relating to those changes in accounting
policies and errors that are included in profit or loss in accordance with IAS 8,
because they cannot be accounted for retrospectively. (because of
impractibility)
Tax reconciliation
The following must also be disclosed:
an explanation of the relationship between tax expense (income) and accounting profit in either
or both of the following forms:
1. a numerical reconciliation between tax expense (income) and the product of accounting
profit multiplied by the applicable tax rate(s), disclosing also the basis on which the
applicable tax rate(s) is (are) computed; or
2. a numerical reconciliation between the average effective tax rate and the applicable tax
rate, disclosing also the basis on which the applicable tax rate is computed;
Example: Tax reconciliations

B Ltd. had an accounting profit before tax of Rs. 500,000. This

contained income of Rs. 20,000 which is not taxable.

Accounting depreciation in the year was Rs. 100,000 and tax allowable depreciation was Rs. 150,000.
This means that a temporary difference of Rs. 50,000 originated in the year.

B Ltd.’s taxation computation is as Rs.

follows: Accounting profit 500,000
Add back inadmissible deductions
Depreciation 100,000
Deduct admissible deduction
Tax allowable depreciation 150,000
Income not taxed 20,000
(170,000)
Taxable profit 430,000

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Tax at 30% 129,000

Rs.

Tax expense
Current tax 129,000

Deferred taxation (30%  Rs. 50,000) 15,000

Tax expense 144,000

Tax reconciliation (in absolute numbers) Rs.

Accounting profit 500,000
Applicable tax rate 30%

Accounting profit  applicable tax rate 150,000

Tax effect of untaxed income (30% of Rs. 20,000) (6,000)
Tax expense 144,000

Tax reconciliation (in percentages)

Applicable tax rate 30.0%
Tax effect of untaxed income (6,000/500,000) (1.2%)
Effective tax rate (144,000/500,000) 28.8%

For further practice refer answer of question number 5.

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Extra questions of IAS 16
Q. On 1st January 2014, Omega Chemicals Limited (OCL) changed its valuation model from cost to
revaluation for its buildings. The following information pertains to its buildings as at 31 December 2013:
Prior to revaluation–as at 31-12-2013 Revalued
Estimated useful
Accumulated Amounts as per
life as originally Cost
depreciation* valuation report
estimated
-------------- Rs. In million --------------
Factory buildings 20 years 100.00 37.50 52.00
Office buildings 25 years 164.50 26.32 149.94
*Including depreciation for the year ended 31 December 2013

As per the report of the professional valuer, there was no change in estimated useful life of the buildings.
On 1 July 2014, one of the office buildings was sold for Rs. 30 million. On 31 December 2013, written
down value before revaluation and revalued amount of the sold building amounted to Rs. 27.72 million
and Rs. 31.92 million respectively.
On 31 December 2014, factory buildings were revalued at Rs. 64 million whereas there was no change in
value of the office buildings.
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 2014. (17)

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Answer No.
Omega Chemicals Limited
Accounting entries for the year ended 31 December 2014

Debit Credit
Date Description
Rs. ‘000’ Rs. ‘000’
Factory buildings
1-1-2014 Accumulated depreciation - Factory buildings 37.50
Factory buildings 37.50
(Reversal of accumulated depreciation on revaluation of
factory buildings on 31 December 2013)
1-1-2014 Revaluation loss [52 – (100 – 37.5) 10.50
Factory buildings 10.50
(2013 Revaluation loss of factory buildings accounted for in
2014)
31-Dec-2014 Depreciation expense (52 ÷ 12.5 W-1) 4.16
Accumulated depreciation – Factory buildings 4.16
(Depreciation expenses for the year ended 31 December
2014)
31-Dec-2014 Accumulated depreciation – Factory buildings 4.16
Factory buildings 4.16
(Reversal of accumulated depreciation on revaluation of
factory buildings on 31 December 2014)
31-Dec-2014 Factory buildings [64 – (52 – 4.16)] 16.16
Reversal of revaluation loss [10.5-(10.55÷12.5W-1)] 9.66
Revaluation surplus – factory buildings (Bal.) 6.50
(revaluation of factory buildings on 31 December 2014 and
reversal of previous revaluation loss).
WDV = 52 – 4.16 = 47.84
HCA = 100 – 37.5 – 5 = 57.5
FV = 64
Office buildings
1-1-2014 Accumulated depreciation 26.32
Office building 26.32
1-1-2014 Office building 11.76
Revaluation surplus [149.94 – (164.5 – 26.32)] 11.76
1-Jul-2014 Depreciation expense [31.92 5 ÷ 21 × 0.5] 0.76
Accumulated depreciation-Office buildings 0.76
(Depreciation expenses for the six months ended 1 July
2014 for the office building block sold)
1-Jul-2014 Revaluation surplus [(31.92-27.72=4.2) 5 ÷ 21 × 0.5] 0.10
Retained earnings 0.10
(Transfer of incremental depreciation for the six months

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 ended 31 December 2014 to retained earnings)
1-Jul-2014 Bank 30.00
Accumulated depreciation 0.76
Loss on sale of Office building (bal) 1.16
Office buildings 31.92
(Sale of office building)
1-Jul-2014 Revaluation surplus 4.1
Retained earnings 4.1
(4.2 - 0.1)
31-Dec-2014 Depreciation expense (149.94 – 31.92) ÷ 21 5.62
Accumulated depreciation-Office buildings 5.62
(Depreciation expenses for the year ended 31 December
2014)
31-Dec-2014 Revaluation surplus-Office building [149.94-(164.5-26.32)-4.21÷21 0.36
Retained earnings 0.36
(Transfer of incremental depreciation for the year ended 31
December 2014 to retained earnings)

(W-1: Remaining useful life of the buildings on the revaluation date of 31 December 2013

Years
100 37.5 
Factory buildings:  = 5; = 7.5; 20 − 7.5 = 12.5 12.50
 20 5 
164.5 26.32 
Office buildings:  = 6.58; = 4; 25 − 24 = 21 21.00
 25 6.58 

Q.PQR Enterprise was incorporated on 1 July 2012. The company depreciates its property, plant and
equipment on straight line basis over their useful life. It uses revaluation model for subsequent
measurement of the property, plant and equipment and has a policy of revaluing these after every two
years.
Following information pertains to its property, plant and equipment:
Value as determined Useful life in years
Cost as on WDV as on
by professional
Assets 01-07-2013 01-07-2013 Original at Remaining as
valuer on 30-06-2014
acquisition determined by
----------------- Rs. In million -------------- valuer
Office building 6,000 5,500 5,750 12 8
Factory building 4,400 3,960 3,320 10 9
Warehouse 4,500 4,050 3,350 10 8

During the year there were no addition or deletion in the above assets.
As per policy, PQR transfers the maximum possible amount from the revaluation surplus to retained
earnings on an annual basis.
Required:
Prepare necessary journal entries for the year ended 30 June 2014 and 2015. (12)

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Answer No. (b)
Journal Entries

Debit Credit
Date Particulars
Rs. In million
30-Jun-14 Depreciation for the year (W-1) 1,390
Accumulated depreciation – Office building 500
Accumulated depreciation – Factory building 440
Accumulated depreciation – Warehouse 450
30-Jun-14 Accumulated depreciation – Office building (W-1) 1,000
Accumulated depreciation – Factory building (W-1) 880
Accumulated depreciation – Warehouse (W-1) 900
Office building 1,000
Factory building 880
Warehouse 900
30-June-14 Office building (W-1) 750
Loss on revaluation - buildings and warehouse 450
Surplus on revaluation 750
Factory building (W-1) 200
Warehouse (W-1) 250
30-Jun-15 Depreciation expense (W-1) 1,507
Accumulated depreciation – Office building 719
Accumulated depreciation – Factory building 369
Accumulated depreciation – Warehouse 419
30-Jun-15 Surplus on revaluation (750 ÷ 8) 94
Retained earnings (incremental depreciation) 94

W-1:
Revaluation
Dep. For Revalued Dep. For
Acc. Dep. surplus/
Cost (A) WDV (B) the year amount the year
Assets D = A-B+C (impairment)
2014 (C) (E) 2015
F = E-(A-D)
------------------------------------- rupees in million -------------------------------------
Office building 6,000 5,500 500 1,000 5,750 750 719
Factory building 4,400 3,960 440 880 3,320 (200) 369
Warehouse 4,500 4,050 450 900 3,350 (250) 419
1,390 1,507

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 The journey of millions of kilometres begins with one step.

CONSOLIDATION
Company “A” purchased more than 50% shares of company “B”

Company “A” is parent/holding Company of company “B”

Company “B” is the subsidiary of company “A”

In this case parent has control over subsidiary’s decision making.

According to IFRS-3 following set of financial statements are to be prepared in this case:

1. Separate financial statements of parent company;

2. Separate financial statements of subsidiary; and
3. Consolidated financial statements by parent assuming as if parent and subsidiary are a combined entity
(means the financial statements of a group presented as if they are single economic entity).

Illustration: Single economic entity

A Limited (a car manufacturer) buys 100% of B Limited (an automotive parts manufacturer).
The 100% ownership gives A Limited complete control over B Limited.
A Limited’s business has changed as a result of buying B Limited.
It was a car manufacturer. Now it is a car manufacturer and a manufacturer of automotive parts.
The two parts of the business are operated by two separate legal entities (A

Limited and B Limited). However, the two parts of the business are controlled by the management of A
Limited.

In substance, the two separate legal entities are a single economic entity.

Definitions:
Group: A parent and its subsidiaries
Parent: An entity that controls one or more entities.
Subsidiary: An entity that is controlled by another entity.

In the vast majority of cases obtaining a controlling interest means buying shares which give the holder
more than 50% of the voting rights in the other company.

Illustration: Wholly owned subsidiary

A owns 100% of B’s voting share capital. This 100% holding is described as a controlling interest and gives.
A complete control of B. B would be described as a wholly owned subsidiary.

A company does not have to own all of the shares in another company in order to control it.

Illustration: Partly owned subsidiary

A owns 80% of B’s voting share capital. This 80% holding is described as a controlling interest and gives a
complete control of B. B would be described as a partly owned subsidiary. Other parties own the remaining
20% of the shares. They have an ownership interest in B but do not have control.
This is described as a non-controlling interest.

Non-controlling interest (NCI) is defined by IFRS 10 as: “the equity in a subsidiary not attributable… to a
parent.”

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Company A Company B Consolidation A+B

1. Goods sold by Company A to Company B for Rs. 100,000

Entry: If the businesses are combined, it is

neither a purchase nor a sale. Similarly, it
Co.B 100,000 Purchases 100,000 is neither receivable nor payable.
Sales 100,000 Co.A So entry will be cancelled out.
100,000
(Co.B is
debtor) (Co. A is creditor)

2. Co. A has given a loan of Rs. 600,000 to Co. B

If the businesses are combined

Loan receivable - Company B Cash 600,000 then it is an
600,000 Loan payable - Company A Internal receivable and payable
600,000 therefore cancelled out
Cash 600,000

3. Company A purchased shares of company B for Rs. 700,000

Cash 700,000 In combined SOFP it is an internal

Investment 700,000 Share Capital 500,000 investment and issue of shares. So cash
Cash 700,000 Share Premium 200,000 will be cancelled and remaining entry will
Suppose shares were issued at be reversed.
premium. Share Capital 500,000
Share Premium 200,000
Investment 700,000

4. Company B declared dividend and suppose share of dividend payable to Company A is Rs.
200,000

Dividend receivable 200,000 Dividend 200,000 If we combine the business, then

(From B) Dividend payable 200,000 receivables and payables will be
Dividend income 200,000 (to Co. A) cancelled out.
So entries will be cancelled out.

Equity = Total Assets – Total Liabilities or

Equity = Net Assets or

Equity = Share capital + Reserves

(Reserve includes Share premium, retained earnings, general reserves and capital reserves etc.)

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 If you learn from failure then it becomes like success rather than failure

Example (When 100% acquisition by parent company and the date of acquisition of shares and the
date of consolidation are same.)

• P acquired 100% of the equity shares of S on incorporation of S

• The date of acquisition of shares was 31-12-2001
• The cost of investment was Rs.120,000
• S had net assets of Rs.120,000 at the date of acquisition.

The Statement of financial position of P and S at 31-12-2001 were as follows:

P S
Rs. Rs.
Non-Current Assets:
Property, Plant and Equipment 640,000 125,000
Investment in S at cost 120,000 -
Current Assets: 140,000 20,000
900,000 145,000
Equity:
Share Capital 200,000 80,000
Share Premium 250,000 40,000
Retained Earnings 350,000
800,000 120,000
Current Liabilities: 100,000 25,000
900,000 145,000
Required: Consolidated statement of financial position at 31-12-2001
Note:
1. The date at which shares are purchased by parent is called as acquisition date.
2. The date at which consolidated statement of financial position is prepared is called as consolidation
date.
3. It is always assumed that before consolidation all accounting adjustments in the separate financial
statements of parent and subsidiary should have been correctly made and recorded unless otherwise
mentioned.
Important points to remember:
Parent purchased shares in subsidiary means parent has purchased net assets of subsidiary up to its
shareholding.
Therefore we compare net assets of subsidiary at the date of acquisition with cost of investment and then
cancel them. E.g. in the above question
Net asset of S at the date of acquisition (Share capital + Share premium) = 120,000
Cost of investment of shares of parent in S is = 120,000
It means parent has paid exactly the amount equal to its share in the net asset of S. Finally the consolidation
entry becomes
Share capital 80,000
Share premium 40,000
Investment in S 120,000

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Solution

P Group
Consolidated statement of financial position at 31-12-2001
Non-Current Assets: Rs.
Property, Plant and equipment (640+125) 765,000
Current Assets (140+20) 160,000
925,000
Equity:
Share Capital (Parent Co. only) 200,000
Share Premium (Parent Co. only) 250,000
Consolidated Retained Earnings 350,000
800,000
Current Liabilities (100+25) 125,000
925,000

Note: Consider that share capital and share premium in the statement of financial position of S and
investment in S appearing in statement of financial position of P are not shown in consolidated statement
of financial position (because of cancellation).

Example (When there is 100% acquisition of subsidiary and the dates of acquisition and
consolidation are different.)

• P acquired 100% of the share capital of S on 1-1-2001 for Rs. 200,000 (cost of investment)
• The balance of retained earnings of S was Rs. 80,000 at this date.

The Statement of financial position of P and S at 31-12-2001 were as follows:

P S
Rs. Rs.
Non-Current Assets:
Property, Plant and equipment 680,000 245,000
Investment in S at cost 200,000
Current Assets: 175,000 90,000
1,055,000 335,000
Equity:
Share Capital 150,000 30,000
Share Premium 280,000 90,000
Retained Earnings 470,000 140,000
900,000 260,000
Current Liabilities 155,000 75,000
1,055,000 335,000

Required:
Consolidated Statement of financial position as at 31-12-2001

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 Don’t try to justify your failure with excuse, You need to make improvements

Important points to remember:

 Retained earnings can be categorized as pre-acquisition retained earnings and post-acquisition
retained earnings.

Pre-acquisition retained earnings: Which are at the date of acquisition. Profits which are earned before
acquisition (i.e. Rs 80,000)

Post-acquisition retained earnings: Which are earned after the date of acquisition till the statement of
financial position date (i.e. Rs 140,000 – Rs 80,000 = Rs 60,000)

 If question is silent then assume no change in the share capital and share premium since acquisition
till consolidation date (means statement of financial position date).
 While consolidation we calculate Net Assets (Share Capital + Reserves) of subsidiary at the date of
acquisition and compare it with cost of investment of parent company (and then cancel them).

Net Assets of S at date of acquisition = Share Capital + Share Premium + Retained Earnings

200,000 = 30,000 + 90,000 + 80,000

Consolidation Entry:

Share Capital of S 30,000

Share Premium (S) 90,000

*Retained earnings (S) 80,000

Investment in S 200,000

*(It should be pre-acquisition retained earnings.)

Solution
P Group
Consolidated Statement of financial position
As at 31-12-2001 Rs.
Non-Current Assets:
Property, Plant and equipment (680 + 245) 925,000
Current Assets (175 + 90) 265,000
1,190,000
Equity:
Share Capital (Parent only) 150,000
Share Premium (Parent only) 280,000
Consolidated Retained earnings* (470,000+60,000) 530,000
960,000
Current Liabilities: (155 + 75 ) 230,000
1,190,000

*Parent’s retained earnings + parents share in post-acquisition retained earnings of S

= 470,000 + 60,000(140,000 – 80,000)

= 530,000

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Partial Acquisition of Subsidiary by the Parent

Suppose

In Subsidiary

Parent has Others has

80% Shares 20% Shares

(These others are called as non-controlling interest (NCI))

In that case, net assets of subsidiary are distributed between parent’s share and NCI’s share according to
their respective ratio of shareholding.

Before going further, remember that we compare net assets of subsidiary at the date of acquisition with the
cost of investment of the parent in subsidiary (and cancel them).

If the cost of investment is more than the parent’s share in *the fair value of subsidiary’s net assets at
the date of acquisition then the balance will be Goodwill. It will be shown as non-current asset in
consolidated Statement of financial position.
*If the question is silent then carrying amounts are equal to fair value.
Example
P acquired 80% of S on 1-1-2001 for Rs. 230,000 (cost of investment)
The retained earnings of S were Rs. 100,000 at that date.
It is policy of P to recognize NCI at the date of acquisition at a proportionate share of net assets.
The statement of financial position of P and S as at 31-12-2001 were as follows:
P S
Rs. Rs.
Assets:
Investment in S at cost 230,000 -
Other assets 570,000 240,000
800,000 240,000
Equity:
Share Capital 200,000 50,000
Share premium 100,000 20,000
Retained earnings 440,000 125,000
740,000 195,000
Current Liabilities 60,000 45,000
800,000 240,000

Required: Prepare consolidated statement of financial position as at 31-12-2001

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 “Cleanse your heart and remove negative thinking, Negative thinking leads you to failure.”

Solution
P Group
Consolidated Statement of Financial Position
As at 31-12-2001 Rs.
Assets:
Goodwill 94,000
Other Assets [570+240] 810,000
904,000
Equity:
Share Capital 200,000
Share Premium 100,000
Consolidated retained earnings [440,000 + 20,000 (w-1)] 460,000
Share of parent (in total equity of combined business) 760,000
Share of NCI (34,000 + 5,000) (w-1) 39,000
Total equity (of combined business) 799,000
Current Liabilities (60,000+45,000) 105,000
904,000
(W-1) Analysis of equity of S:
P (80%) NCI (20%)
At acquisition (1-1-2001)
Share capital 50,000
Share premium 20,000
Retained earnings 100,000
Net assets at the date of acquisition 170,000 136,000 34,000
Paid by parent (cost of investment) 230,000
Goodwill (balancing figure) 94,000
Change in equity after acquisition till the SOFP date:
Retained earnings (125,000 - 100,000) 25,000 20,000 5,000

(W-2) Consolidation Entry on 1-1-2001

1. Share Capital (80%) 40,000
Share premium (80%) 16,000
Retained earnings (80%) 80,000 (80% of pre-acquisition retained
earnings)
Goodwill (balancing figure) 94,000
Investment 230,000
2. Transfer of net assets to NCI on 1-1-2001
Share capital (20%) 10,000
Share premium (20%) 4.000
Retained earnings (20%) 20.000
NCI (W-1) 34,000

A compound entry can be made from the above two entries as follows
Share capital 50,000
Share premium 20,000

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Retained earnings 100,000
Goodwill (balancing figure) 94,000
Investment 230,000
Non-controlling interest 34,000

Important points to remember:

✓ By investing in subsidiary, Parent effectively purchased net assets of subsidiary up to its shareholding.
✓ Therefore first step is to identify whether purchase consideration (cost of investment) is more or less
than parent’s share of F.V of net assets of subsidiary at the date of acquisition
✓ If question is silent then assume that carrying amount of net assets is equal to FV.

If cost of investment is more than parent’s share If cost of investment is less than parent’s share of
of F.V of Net assets of S, then difference is F.V of net Assets of S, then the difference is gain
on bargain purchase.
Goodwill. It is recognized in consolidated SOCI as another
It is not amortized but tested for impairment income.
annually In only consolidated SOFP is prepared, then
added to consolidated retained earnings.
(Question 3 on page No. 17)

✓ While consolidation, it is important to identify equity at the date of acquisition which will be used to
calculate Goodwill or gain on bargain purchase.
✓ If parent acquires subsidiary when it is incorporated, then its equity (net assets) will comprise of share
capital (and share premium, if any) at the date of acquisition. There will be no balance of retained
earnings.
✓ If parent acquires subsidiary after it is incorporated, then its equity will comprise of share capital, share
premium, retained earnings and other reserves (if any) at the date of acquisition.
✓ If consolidation date is after some time from acquisition date, then pre-acquisition and post-acquisition
equity needs to be separated.
✓ Equity of subsidiary at acquisition date (Pre-acquisition equity) should be used to calculate Goodwill or
gain on bargain purchase.
✓ Only post-acquisition changes in equity of subsidiary are included in consolidated retained earning up
to parent’s share in subsidiary

Non-Controlling Interest (NCI):

When a parent acquires less than 100% shares in a subsidiary, the remainder of shares in subsidiary are
held by other shareholders. These are called Non-Controlling Interest (NCI). Figure of NCI is recognized
in the equity of consolidated statement of financial position to show their ownership interest in net assets
of subsidiary.

Negative goodwill and bargain purchases

A bargain purchase is a business combination in which the calculation of goodwill leads to a negative
figure.
When this happens the acquirer must then review the procedures used to measure the amounts
recognised at the acquisition date for all of the following:
• The identifiable assets acquired and liabilities assumed;
• The non-controlling interest in the acquiree (if any); and
• The consideration transferred.

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 “Cleanse your heart and remove negative thinking, Negative thinking leads you to failure.”

Any amount remaining after applying the above requirements is recognised as a gain in profit or loss on
the acquisition date.
This means that in most cases when a bargain purchase occurs, the ‘negative goodwill’ should be added
to the consolidated profit for the group for the year.

Acquisition of subsidiary during the period:

Example
P bought 70% of S on 31-3-2001
S’s profit for the year was Rs. 12,000
The statement of financial position of P and S at 31-12-2001 is as:

P S
Rs. Rs.
Property, plant & equipment 100,000 20,000
Investment in S 50,000 -
Other assets 30,000 12,000
180,000 32,000
Share Capital 10,000 1,000
Retained earnings 160,000 30,000
Liabilities 10,000 1,000
180,000 32,000
Required: Consolidated statement of financial position as at 31-12-2001
Solution:
P Group
Consolidated statement of financial position as at 31-12-2001
Non-current assets: Rs.
Property, plant & equipment (100+20) 120,000
Goodwill 34,600
Other assets (30+12) 42,000
196,600
Equity:
Share capital 10,000
Consolidated retained earnings (160,000+6300) 166.300
176.300
Non-controlling Interest (6,600+2,700) 9,300
Total equity 185,600
Current liabilities (10+1) 11,000
196,600

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W-1 Analysis of equity of S Parent (70%) NCI (30%)
At acquisition 31-3-2001
Share Capital 1,000
Retained earnings (w-2) 21,000
22,000 15,400 6,600
Cost of investment 50,000
Goodwill 34,600
Change since acquisition till SOFP date:
Retained earnings 9,000 6,300 2,700
W-2 Pre-acquisition retained earning
If question is silent, then assume that profit is evenly earned during the year. In this question, means Rs.
1,000 (12,000/12) is earned every month.

The amount of retained earnings of S given In question includes profit for the whole year. If we deduct this
profit then we will get the figure of retained earnings at the start of the year. Therefore we will calculate pre-
acquisition retained earnings at 31-3-2001 as follows:

Retained earnings on 1-1-2001 Rs.

(30,000-12,000) 18,000
Add: Profit upto 31-3-2001
(12,000/12) x 3 3,000
Retained earnings as on 31-3-2001 21,000

Journal entries
Consolidation entry:
Share Capital 1,000
Retained earnings 21,000
Goodwill (Balancing Figure) 34,600
Investment 50,000
NCI 6,600

Q.1 HALL
Statements of financial position at 31 December 2015
Hall Stand
Assets Rs. 000 Rs. 000
Non-current assets
Property, plant and equipment 35,000 20,000
Investment in Stand 12,000 —
Current assets 16,000 14,000
63,000 34,000
Equity and liabilities
Capital and reserves
Share capital 10,000 4,000
Retained earnings 13,000 12,000
Non-current liabilities 23,000 16,000

8% Debenture loans 20,000 9,000

Current liabilities 20,000 9,000
63,000 34,000

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 “Success is achieved by honest efforts but not just dream.”

On 1 January 2013 Hall acquired 75% of Stand for Rs. 12,000,000. At that date the balance on Stand’s
retained earnings was Rs. 8,000,000.

Required
Prepare the consolidated statement of financial position of Hall as at 31 December 2015. [QB#4.1]

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Q.2 HYMN
The following are the summarized statements of financial position of a group of companies as at 31
December 2015.
Hymn Psalm
Assets Rs. Rs.
Non-current assets
Property, plant and equipment 105,000 65,000
Investment 85,000
Current assets 220,000 55,000
410,000 120,000
Equity and liabilities
Equity
Share capital 100,000 50,000
Retained earnings 155,000 49,000
255,000 99,000
Current liabilities 155,000 21,000
410,000 120,000

Hymn purchased 80% of Psalm’s shares on 1 January 2015 when there was a credit balance on that
company’s retained earnings of Rs. 20,000.

Required
Prepare the Hymn group consolidated statement of financial position as at 31 December 2015.
[QB#4.3]

Fair value Adjustments

Goodwill is the excess of cost of investment over parents share in FV of net assets of subsidiary at the date
of acquisition. The statement of financial position of a subsidiary at the date it was acquired may not be a
guide to the FV of net assets. E.g. the market value of a building may be different but it may appear in the
statement of financial position at historical cost less accumulated depreciation. Therefore’ before calculating
goodwill carrying amount must be same as their FV.

(a) If FV adjustment has not been made in the books of the subsidiary at the date of acquisition, the
following entries should be made at that date:

If revaluation surplus If revaluation loss

Asset xxx Revaluation Loss xxx
Revaluation surplus xxx Asset xxx

Depreciation adjustment: If fair value is more than carrying amount then extra depreciation has to be
charged in the books of S on the amount of difference from the date of acquisition till the date of
consolidated statement of financial position.

Depreciation xxxx

Accumulated depreciation xxxx

If only statement of financial position is to be prepared then the effect of depreciation has to be incorporated
in retained earnings of subsidiary:

Retained earnings of S xxxx

Accumulated depreciation xxxx

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Some people are left behind just because they become hopeless after witnessing the failure while some people
learn from failure and try again and get success in their life.

Now consider that any change in retained earnings of subsidiary will affect both the consolidated retained
earnings and Non-controlling Interest;

Therefore finally the consolidation entry should be made as follows:

Consolidated retained XX
earnings
Non-controlling Interest XX
Accumulated depreciation / Asset X
X

This entry will be made with the amount of incremental depreciation because this amount would not been
charged after the date of acquisition till the reporting date (statement of financial position date).

Reversal entries will be made if there is a revaluation loss (means value of asset has decreased)

Example
P bought 80% of S 2 years ago on 1.1.2000.

At the date of acquisition S’s retained earnings stood at Rs. 600,000 and the fair value of its net assets
were Rs. 1,000,000. This was Rs. 300,000 above the carrying amount of the net assets at this date.

The revaluation was due to an asset that has remaining useful life of 10 years as at the date of acquisition.

Statement of financial position of P and S as at 31-12-2001 as follows:

P S
Property, Plant and equipment 1,800,000 1,000,000
Investment in S at Cost 1,000,000 -
Other Assets 400,000 300,000
3,200,000 1,300,000
Share Capital 100,000 100,000
Retained earnings 2,900,000 1,000,000
Liabilities 200,000 200,000
3,200,000 1,300,000
Requirement:

Consolidated Statement of Financial Position as at 31-12-2001

Note: If the question is silent regarding revaluation entries, then assume that revaluation entries have not
been made.

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Solution

P Group
Consolidated Statement of financial position As at 31-12-2001
Assets Rs.
PPE(1800+1000+300-60) 3,040,000
Goodwill 200,000
Other Assets 700,000
3,940,000
Equity and Liabilities:
Share Capital 100,000
Consolidated retained earnings (2900+320-48) 3,172,000
3,272,000
Non-controlling Interest (200+80-12) 268,000
3,540,000
Current Liabilities (200+200) 400,000
3,940,000

(W-1) Analysis of Equity: P (80%) NCI (20%)

At acquisition:
Share Capital 100,000
Retained earnings 600,000
700,000
Revaluation surplus 300,000
1,000,000 800,000 200,000
Payment by P 1,000,000
Goodwill 200,000
Change since acquisition:
Retained earnings 400,000 320,000 80,000

(W-2) Entries:
a) Asset 300,000
Revaluation Surplus 300,000

b) Share Capital 100,000

Retained earnings 600,000
Rev. Surplus 300,000
Goodwill (bal) 200,000
Investment 1,000,000
Non-controlling Interest 200,000

After these two entries, pre-acquisition surplus will cancel out just like pre-acquisition retained earnings.

Therefore there is no question of transfer of surplus to retained earnings in subsequent years.

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c) Incremental depreciation because of revaluation

Consolidated retained earnings 48,000

NCI 12,000
Accumulated depreciation/Asset 60,000

(300,000/10 x 2)

(b) If fair value adjustment has already been incorporated in the subsidiary’s books at the date of
acquisition, then pre-acquisition surplus should be taken in the calculation of goodwill or gain on bargain
purchase. Any post acquisition surplus will be distributed just like post acquisition retained earnings
between the parent and non-controlling Interest (Q. 21).

Adjustment of un-realized profits:

Example
First year of operation

P S Combined
Sales 150 220 220
Purchases 100 150 100
Closing Stock - - -
Cost of Sales (100) (150) (100)
Gross Profit 50 70 120
Explanation of the example:
We have to understand two terms:

Unrealized Profits:

A profit which is intergroup/inter company (earned by parent from subsidiary or vice versa).

Realized Profits:

A profit which has been earned from a third party (earned from a party outside the group).

Now explanation of the above example.

➢ Parent sold goods to its subsidiary for Rs. 150.

➢ These goods cost parent Rs. 100.
➢ All goods purchased by subsidiary from parent are sold to third parties for Rs. 220.
➢ While consolidation, we will take that sale price on which goods are sold to third parties. Similarly
purchase price will be that price on which group purchased from an outsider.
➢ So, Rs. 120 is the realized profit for the group (which includes profit earned by parent Rs 50 as well as
profit earned by subsidiary Rs 70)
➢ Rs. 50 was unrealized profit when earned by P from S but when the S sold the goods to an outsider
this 50 has also been realized by the group. It means that if all the stock is sold to a third party then
unrealized profit is also converted into a realized profit and therefore there is no need of any adjustment.

If however suppose S has not yet sold the goods to an outsider then profit of parent amounting to Rs 50 is
unrealized with respect of group as a whole. Similarly stock in S’s statement of financial position is
overstated by Rs 50, with respect to group as a whole.

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Conclusion:
Group as a whole should not make profit while transacting with each other. It is quite possible that the
parent makes a sale of inventories or other assets to subsidiary or vice versa (at a profit in the separate
financial statements). Therefore, while consolidating, this profit has to be eliminated and realized profit for
the group is only that which is made from third parties (because for consolidation purposes group
companies are treated as a single entity.)

Sale of Goods:
The problem of unrealized profit will not arise if whole of stock is sold to outside parties. This problem arises
where some of the stock is still in statement of financial position of either the parent or the subsidiary.

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 “Indeed, ALLAH does not wrong the people at all, but it is the people who are wronging themselves.”

Sale by parent to subsidiary:

In this case, profit is in the parent’s books and stock is in the subsidiary’s books. So, we need to adjust
consolidated retained earnings and stock of the subsidiary.

Consolidated retained earnings X X

Stock XX
(With the amount of unrealized profit within stock)

[Non-controlling Interest will not be affected by this entry as it has no share in profits of parent].

Sale by subsidiary to parent:

In this case, profit is in subsidiary’s books and stock is in the parent’s books.

Consolidated retained earnings X X

Non-controlling Interest XX

Stock XX

(With the amount of unrealized profit within stock)

(Non-controlling Interest will be affected by this entry as it has share in profits of subsidary)

Cash in transit / cheque in transit

Suppose S paid cash to H, then S will pass the following entry:

Receivable from H XX

Cash XX

On receipt of cash from S then H will pass the following entry:

Cash XX

Payable to S XX

Scenario-1
Keeping in mind the above two entries, assume if cash is sent by S but not received by H then:

S should have already made the entry i.e:

Receivable from H XX
Cash XX

So, reconciling entry will be made by H at the end of the accounting period as follows:
Cash in transit X X
Payable to S XX

Scenario-2
If cash is returned by H to S, then entry would have been made by H as follows:
Payable to S XX
Cash XX

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Assuming that cash is not yet received by S then in this case, reconciling entry will be made by S as follows:
Cash in transit X X
Receivable from H XX

Q.3 HAIRY

The summarized statements of financial position of Hairy and Spider as at 31 December 2015 were as
follows.

Hairy Spider
Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment 120,000 60,000
Investments 55,000 -
Current assets
Cash 11,000 4,000
Investments - 3,000
Trade receivables 72,600 19,100
Current account – Hairy - 3,200
Inventory 17,000 11,000
275,600 100,300
Equity and liabilities
Share capital 100,000 60,000
Share premium 20,000 -
Capital reserve 23,000 16,000
Retained earnings 91,900 7,300
Trade payables 38,000 17,000
Current account — Spider 2,700 -

275,600 100,300
The following information is relevant.

(1) On 31 December 2012, Hairy acquired 48,000 shares in Spider for Rs. 55,000,000 cash. Spider has
60,000 shares in total.
(2) The inventory of Hairy includes Rs. 4,000,000 goods from Spider invoiced to Hairy at cost plus 25%.
(3) The difference on the current account balances is due to cash in transit.
(4) The balance on Spider’s retained earnings was Rs. 2,300,000 at the date of acquisition. There has
been no movement in the balance on Spider’s capital reserve since the date of acquisition.

Required
Prepare the consolidated statement of financial position of Hairy and its subsidiary Spider as at 31
December 2015.

[QB#5.2]

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 Patience plays major role in our life, never let run out your patience.

Q.4 HANG
On 31 December 2012, Hang acquired 60% of Swing for Rs. 140,000. At that date Swing had a retained
earnings balance of Rs. 50,000 and a share premium account balance of Rs. 49,000.

The following statements of financial position have been prepared as at 31 December 2015.
Hang Swing
Assets Rs. Rs.
Non-current assets
Property, plant and equipment 240,000 180,000
Investment in Swing 140,000
Current assets 250,000 196,000
630,000 376,000
Equity and liabilities
Equity
Share capital 200,000 90,000
Share premium 25,000 49,000
Retained earnings 180,000 80,000
405,000 219,000
Current liabilities 225,000 157,000
630,000 376,000
Required
Prepare the consolidated statement of financial position of Hang and its subsidiary as at 31 December
2015.

[QB#4.4]

Q.5 HASH
Statements of financial position at 31 December 2015
Hash Stash
Rs. 000 Rs. 000
Investment in Stash (80%) 100,000 -
Sundry assets 207,500 226,600
307,500 226,600
Share capital 120,000 50,000
Retained earnings 87,500 70,000
Liabilities 100,000 106,600
307,500 226,600

Hash purchased the shares in Stash on 30th September 2015.

Stash’s retained profit for the year ended 31st December 2015 was Rs. 24,000,000.

Required
Prepare the consolidated statement of financial position at 31 December 2015.

[QB#4.5]

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Q.6 HASSLE
Statements of financial position at 31 December 2015
Hassle Strife
Rs. Rs.
Investment in Strife 60,000 —
Sundry assets 247,500 226,600
307,500 226,600
Share capital 120,000 50,000
Retained earnings 87,500 70,000
Liabilities 100,000 106,600
307,500 226,600

Hassle bought 80% of Strife when the balance on Strife’s retained profit was Rs. 50,000.

Required
Prepare the consolidated statement of financial position at 31 December 2015.

[QB#4.2]

Dividend adjustments
(a) If dividend are not recorded then:

Suppose
H books S Books

Dividend (CRE) 3,000 Dividend CRE-90% 1,800

Dividend payable 3,000 NCI-10% 200
(H declared dividend) Dividend payable 2,000
(S declared dividend)

Dividend receivable 1,800

Dividend Income (CRE) 1,800 X

(Dividend income from S to be recorded by H)

Dividend receivable by H and dividend payable by subsidiary of Rs. 1,800 will be cancelled out and any
amount payable to outsiders of group (NCI) should be disclosed as current liability.

(b) If dividends are already recorded then no further adjustment is required. Only cancel out the related
dividend payable and receivable appearing in separate financial statements of parent and subsidiary.

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 Everyone is facing hardships in their life; difference is that some are expert in hiding their hardships

Q.7 HAIL

The following are the draft statements of financial position of Hail and its subsidiary Snow as at 31
December 2015.

Hail Snow
Rs. 000 Rs. 000
Assets
Non-current assets
Property, plant and equipment 161,000 85,000
Investments 68,000
Current assets
Cash 7,700 25,200
Trade receivables 92,500 45,800
Snow current account 15,000 -
Inventory 56,200 36,200
400,400 192,200
Equity and liabilities
Shareholders’ equity
Share capital 100,000 50,000
Retained earnings 185,400 41,200
Share premium - 5,000
Capital reserve - 20,000
285,400 116,200
Current liabilities 115,000 68,000
Hail current account - 8,000
400,400 192,200

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Notes

(1) Snow has 50,000 shares in issues. Hail acquired 45,000 of these on 1 January 2012 for a cost of Rs.
65,000,000 when the balances on Snow’s reserves were
Rs. 000
Share premium account 5,000
Capital reserve -
Retained earnings 10,000

(2) Hail declared a dividend of Rs. 3,000,000 before the year end and Snow declared one of Rs.
2,000,000. These transactions have not been accounted for.
(3) The current account difference is due to cash in transit.

Required
Prepare the consolidated statement of financial position as at 31 December 2015 of Hail.

[QB#5.1]

Q.8 HALE

On 1 July 2012 Hale acquired 128,000 of Sowen’s 160,000 shares. The following statements of financial
position have been prepared as at 31 December 2015.
Hale Sowen
Rs. 000 Rs. 000
Property, plant and equipment 152,000 129,600
Investment in Sowen 203,000 —
Inventory at cost 112,000 74,400
Receivables 104,000 84,000
Bank balance 41,000 8,000
612,000 296,000
Share capital 100,000 160,000
Retained earnings 460,000 112,000
Payables 52,000 24,000
612,000 296,000
The following information is available.

(1) At 1 July 2012 Sowen had a debit balance of Rs. 11 million on retained earnings.
(2) Property, plant and equipment of Sowen included land at a cost of Rs. 72 million. This land had a fair
value of Rs. 100,000,000 at the date of acquisition.
(3) The inventory of Sowen includes goods purchased from Hale for Rs. 16 million. Hale invoiced those
goods at cost plus 25%.

Required
Prepare the consolidated statement of financial position of Hale as at 31 December 2015.

[QB#5.4]

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 Every hardship in your life don’t come to destabilize your life, But some of them come to make your path
clear and to bring stability in your life

Q.9 HELLO

On 1 January 2014, Hello acquired 60% of the ordinary share capital of Solong for Rs. 110,000. At that
date Solong had a retained earnings balance of Rs. 60,000. The following statements of financial position
have been prepared as at 31 December 2015.
Hello Solong
Assets Rs. Rs.
Non-current assets
Property, plant and equipment 225,000 175,000
Investments in Solong 110,000
Current assets 271,000 157,000
606,000 332,000

Equity and liabilities

Capital and reserves
Share capital 100,000 100,000
Retained earnings 275,000 90,000
375,000 190,000
Current liabilities 231,000 142,000
606,000 332,000

The fair value of Solong’s net assets at the date of acquisition was determined to be Rs. 170,000.

The difference between the book value and the fair value of the net assets at the date of acquisition was
due to an item of plant which had a useful life of 10 years from the date of acquisition.

Required
Prepare the consolidated statement of financial position of Hello and its subsidiary as at 31 December 2015.

[QB#5.5]

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Consolidated Statement of profit or loss
Example
Entity P bought 80% of S several years ago.
The income statement for the year ended 31-12-2001 is as follows:
P S
Rs. Rs.
Revenue 500,000 250,000
Cost of sales (200,000) (80,000)
Gross Profit 300,000 170,000
Other Income 25,000 6,000
Distribution Cost (70,000) (60,000)
Administration expense (90,000) (50,000)
Other expenses (30,000) (18,000)
Finance Costs (15,000) (8,000)
Profit before Tax 120,000 40,000
Income tax expense (45,000) (16,000)
Profit for the period 75,000 24,000
Requirement: Prepare consolidated statement of profit or loss for the year ended 31-12-2001.
Solution:
P Group
Consolidated Statement of profit or loss
For the year ended 31-12-2001
Rs.
Revenue (500+250) 750,000
Cost of sales (200+80) (280,000)
Gross Profit 470,000
Other Income (25+6) 31,000
Distribution Cost (70+60) (130,000)
Admin expenses (90+50) (140,000)
Other expenses (30+18) (48,000)
Finance Cost (15+8) (23,000)
Profit before tax 160,000
Income tax expense (45+16) (61,000)
Profit for the period 99,000
Attributed to:
Owners of the Parent 94,200
Non-controlling Interest (20% of Rs. 24,000) 4,800
99,000

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 Spend your life by serving the people and doing good deeds

Acquisition of subsidiary during an accounting period

Only post acquisition profits are consolidated when a parent acquires a subsidiary during a financial year,
the profits of the subsidiary have to be divided into pre-acquisition and post-acquisition profits.

Example:

Entity P acquired 80% of S on 1-10-2001. Year end is 31 December. It means 3/12 of the subsidiary’s profit
for the year is post-acquisition profits.

Statement of profit or loss for 31-12-2001 is as follows:

P S
Revenue 400,000 260,000
Cost of sales (200,000) (60,000)
Gross profit 200,000 200,000
Other income 20,000 -
Distribution cost (50,000) (30,000)
Administration expense (90,000) (95,000)
Profit before tax 80,000 75,000
Income tax expense (30,000) (15,000)
Profit for the period 50,000 60,000

Requirement: Consolidated statement of profit or loss for 31-12-2001

Solution
Consolidated Statement of profit or loss:
For the year ended 31-12-2001
Working
P S (3/12) Consolidated
Revenue 400,000 65,000 465,000
Cost of sales (200,000) (15,000) (215,000)
Gross Profit 200,000 50,000 250,000
Other Income 20,000 - 20,000
Distribution cost (50,000) (7,500) (57,500)
Administration expenses (90,000) (23,750) (113,750)
Profit before tax 80,000 18,750 98,750
Tax expense (30,000) (3,750) (33,750)
Profit for the period 50,000 15,000 65,000
Attributed to:
Owner of Parent 62,000
Non-controlling Interest (15,000 x 20%) (3,000)
65,000

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Before any further discussion PLEASE recall:
Group as a whole should not make profit while transacting with each other. It is quite possible that the
parent makes a sale of inventories or other assets to subsidiary or vice versa (at a profit in the separate
financial statements). Therefore, while consolidating, this profit has to be eliminated and realized profit for
the group is only that which is made from third parties (because for consolidation purposes group
companies are treated as a single entity.)

Sale of Goods:

The problem of unrealized profit will not arise if whole of stock is sold to outside parties. This problem arises
where some of the stock is still in statement of financial position of either the parent or the subsidiary.

Sale by parent to subsidiary:

In this case, profit is in the parent’s books and stock is in the subsidiary’s books. So, we need to adjust
consolidated retained earnings and stock of the subsidiary.

Consolidated retained earnings X X

Stock XX
(With the amount of unrealized profit within stock)

[NCI will not be affected by this entry as it has no share in profits of parent].

Sale by subsidiary to parent:

In this case, profit is in subsidiary’s books and stock is in the parent’s books.

Consolidated retained earnings X X

NCI XX

Stock XX

(With the amount of unrealized profit within stock)

If income statement is also prepared, then instead of the above, profit is reduced by increasing cost of
sales.

Sale by parent to subsidiary:

Cost of sales XX

Stock XX
(No adjustment is required in S’s profit while calculating profit attributable to NCI)

Sale by subsidiary to parent:

Cost of sales X X

Stock XX

(Adjust the profits of S while calculating profit attributable to NCI)

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 Sometimes we meet such people in our life, who don’t promise a lot but they do a lot

Example:

P acquired 80% of S 3 years ago.

During the year S sold goods to P for Rs. 50,000 at a mark-up of 25% on cost. At year end, P still had
15,000 of the goods in inventory.

Extracts of statement of profit or loss for 31-12-2001 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
Expenses (173,000) (123,000)
Profit 327,000 77,000
Required:
Consolidated statement of profit or loss for 31-12-2001 and journal entries regarding intergroup sale and
elimination of unrealized profit.

Solution
Consolidated Statement of profit or loss
Rs.
Revenue(800+420-50) 1,170,000
Cost of sales (300+220-50+3) (473,000)
Gross Profit 697,000
Expenses (173+123) (296,000)
Profit 401,000
Attributable to:
Owners of Parent (bal) 386,200
Non-controlling Interest (77,000-3,000) x 20% 14,800
401,000

Journal Entries:

Cancellation of intergroup Sale/Purchase

Sales 50,000
Purchases 50,000

Elimination of unrealized profits

Cost of sales 3,000

Stock 3,000
(15,000 x 25/125)

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Example: Fair Value and Depreciation Adjustment

P acquired 80% of S 3 years ago from the reporting date.

At the date of acquisition S had a depreciable asset with a fair value of Rs. 120,000 in excess of its book
value. This revaluation adjustment has not been made by the S in its books.

This asset had a useful life of 10 years at the date of acquisition.

Extracts of the statement of profit or loss for the year to 31-12-2001 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
Expenses (173,000) (163,000)
Profit 327,000 37,000

Requirement: Consolidated statement of profit or loss

Analysis of example:

After acquisition 3 years ago, group has to recognize extra depreciation of Rs. 12,000 per year. Therefore
a total depreciation of 12000 x 3 = 36,000 should be recognized.

However, remember that only one year’s depreciation will be shown in income statement because income
statement is for the year. Remaining two years depreciation should be adjusted against retained earnings
in statement of changes in equity (to be discussed later on)

Solution

Consolidated Statement of profit or loss:

For the year to 31-12-2001 Rs.
Revenue (800,000+420,000) 1,220,000
Cost of sales (300,000+220,000+12,000) (532,000)
Gross Profit 688,000
Expenses (173,000 + 163,000) (336,000)
Profit 352,000
Attributable to:
Owners of the Parent 347,000
Non-controlling Interest (37,000-12,000) x 20% 5,000
352,000

Entry:
Asset 120,000
Revaluation surplus 120,000

Depreciation (Cost of sales) 12,000

Accumulated depreciation/Asset 12,000

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 You always remain kind towards the people; you don’t know what kind of hardship they are going through

Accounting For Goodwill:

Goodwill is carried as non-current asset in consolidated statement of financial position.

It is not depreciated or amortized because generally it has an indefinite useful life. Instead it is subjected to
an annual impairment review. If there is an impairment loss, then following entry is required if only statement
of financial position is prepared:

Consolidated retained earnings X X

Goodwill XX

(No effect on NCI if it is not measured at F.V)

If income statement also is prepared then entry is:

Administrative expenses X X

Goodwill XX

(No effect on NCI if it is not measured at F.V)

Summary of discussion

When purchased Goodwill is impaired, the impairment does not affect the individual financial statements of
the parent or the subsidiary. Instead, it will affect only consolidated statement of financial position and
consolidated statement of comprehensive income.

If goodwill is impaired:

1. It is written down in value in the consolidated statement of financial position; and

2. The amount of write-down is charged as an expense in the consolidated statement of comprehensive
income normally in administrative expenses.

Example: Impairment of Goodwill

P acquired 80% of S 3 years ago.
Goodwill on acquisition was Rs. 200,000
The annual impairment test on G/W has shown it to have recoverable amount of only Rs. 175,000
Extracts of the statement of profit or loss for the year 31-12-2001 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

Expenses (173,000) (163,000)

Profit 327,000 37,000

Requirement Consolidated Statement of Comprehensive Income as at 31-12-2001.

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Solution
Consolidated Statement of profit or loss:
For the year ended 31-12-2001

Sales (800+420) 1,220,000

Cost of sales (300+220) (520,000)

Gross Profit 700,000

Expenses (173,000+163,000+25,000) (361,000)

Profit 339,000

Attributed to

Owners of Parent 331,600

Non-controlling Interest (37,000 x 20%) 7,400

339,000
Journal Entry:
Admin expenses 25,000
Goodwill 25,000

Comprehensive Example: Dividend + Goodwill + Sale of Goods + Depreciation Adjustment

P acquired 80% of S 3 years ago. Good will on acquisition was Rs. 80,000. The recoverable amount of
Good will at the year end was estimated to be Rs. 65,000. This was the first time that the recoverable
amount of Good will had fallen below the amount of initial recognition.
S sells goods to P. The total sales in the year were 100,000. At year end P retains inventory from S which
had cost to S Rs. 30,000 but was in P’s books at Rs. 35,000.
The distribution cost of S includes depreciation of an asset which had been subjected to a fair value increase
of Rs. 100,000 on acquisition. This asset is being written off on a straight line basis over remaining useful
life of 10 years. Assume that revaluation adjustment has not been made in the books of S.
Statement of comprehensive income for 31-12-2001 is as follows:
P S
Rs’000’ Rs’000’
Revenue 1,000 800

Cost of sales (400)_ (250)_

Gross Profit 600 550

Distribution cost (120) (75)

Admin expenses (80)_ (20)_

400_ 455_

Dividend from S 80 -

Finance Cost (25)_ (15)_

Profit before tax 455 440

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Tax (45)_ (40)_

Profit after tax 410_ 400_

Consolidated Statement of Comprehensive Income:

For the year ended 31-12-2001
Rs. 000

Revenue (1,000+800-100) 1,700

Cost of sales (400+250-100+5) (555)

1,145

Distribution Cost (120+75+10) (205)

Admin Expenses (80+20+15) (115)

Finance Cost (25+15) (40)

Profit before tax 785

Tax (45+40) (85)

Profit after tax 700

Attributed to:

Owners of Parent (balancing figure) 623

Non-controlling Interest (400-5-10) x 20% (77)

700

Entries:
Cancellation of intergroup sales

Sales to P 100,000

Purchases from S 100,000

Elimination of unearned profit

Cost of sales 5,000

Stock 5,000

(As sale is made by S therefore NCI will be affected)

Extra depreciation:

Depreciation 10,000

Accumulated Depreciation/Asset 10,000

(100,000/10)

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(As asset of S is revalued therefore NCI will be affected)

Dividend: It will be cancelled out in the following entries

P S

Dividend receivable 80,000 Dividend CRE 80,000

Dividend income 80,000 NCI 20,000
Dividend Payable 100,000
(Total dividend declared = 80 x 100/80 = 100)

Impairment loss

Impairment loss (admin expenses) 15,000

Goodwill 15,000

(as nothing is mentioned therefore NCI should not be at fair value, means impairment loss will not affect
NCI)

Q.10 HARRY

The following are the statements of profit or loss for the year ended 31 December 2015 of Harry and its
subsidiary Sally.
Harry Sally
Rs. 000 Rs. 000
Revenue 1,120 390
Cost of sales (610) (220)
Gross profit 510 170
Distribution costs (50) (40)
Administration costs (55) (45)
Operating profit 405 85
Investment income 20 4
Finance costs (18) (4)
Profit before tax 407 85
Income tax expense (140) (25)
Profit for the year 267 60

Movement of retained earnings:

Rs. 000 Rs. 000
Retained profit brought forward 100 45
Profit for year 267 60
Dividends paid and proposed (50) (20)
Retained profit carried forward 317 85

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 Don’t break heart of anyone but do your best to mend the broken hearts

The following information is relevant.

(1) Harry acquired 75% of Sally six years ago when Sally’s retained earnings were Rs.9, 000.
(2) Harry made sales to Sally totaling Rs.100, 000 in the year. At the year end the statement of financial
position of Sally included inventory purchased from Harry. Harry had taken a profit of Rs.3, 000 on this
inventory.
(3) Harry’s investment income includes Rs.15, 000 being its share of Sally’s dividends.

Required
Prepare a consolidated statement of profit or loss and a working showing the movement on consolidated
retained profit for the year ended 31 December 2015.

[QB#6.1]

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Q.10A HORN
Statements of profit or loss for the year ended 31 December 2015.
Horn Smooth
Rs. 000 Rs. 000
Revenue 304,900 195,300
Cost of sales (144,200) (98,550)
Gross profit 160,700 96,750
Operating costs (76,450) (52,100)
Operating profit 84,250 44,650
Investment income 10,500 2,600
Profit before tax 94,750 47,250
Income tax expense (42,900) (16,500)
Profit for the year 51,850 30,750

Statement of changes in equity (extracts) for the year ended 31 December 2015
Horn Smooth
Rs. 000 Rs. 000
Retained earnings brought forward 80,200 31,000
Profit for the year 51,850 30,750
Proposed ordinary dividend (20,000) -
112,050 61,750
The following information is also available.
(1) Horn acquired 75% of the share capital of Smooth on 31 August 2015.
(2) *Negative goodwill of Rs. 3.8 million arose on the acquisition.
(3) Profits of both companies are deemed to accrue evenly over the year except for the investment
income of Smooth all of which was accrued and received in November 2015.
(4) Horn has bought goods from Smooth throughout the year at Rs. 2 million per month. At the year-end
Horn does not hold any inventory purchased from Smooth.
Required
Prepare the consolidated statement of profit or loss and a working showing the movement on consolidated
retained profit for the year ended 31 December 2015.
[QB#6.2]
*Negative goodwill is another name of gain on bargain purchase.

Sale of Non-Current Asset between the group companies:

Sale by Parent:

Suppose a machine is sold by the parent to subsidiary. It had a WDV of 100and was sold for 150 resulting
in gain of RS. 50 to parent. This gain is intergroup which needs to be eliminated.

In this case, profit is in the books of parent and asset is in the books of subsidiary. The adjusting entry of
gain (net of any depreciation effect) if only consolidated statement of financial position is prepared should
be recorded as follows:

CRE xxx

Non-Current Asset xxx

If consolidated statement of comprehensive income is also prepared, then entry will be:

Gain on disposal xxx

Non-Current Asset xxx

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 Don’t stress nor consider your life as burden, no matter what

(This entry will not affect Non-controlling Interest)

Reversal entries will be passed if there is a loss on disposal.

Sale by subsidiary:

Suppose a machine is sold by the subsidiary to parent. It had a WDV of 100and was sold for 150 resulting
in gain of 50 to subsidiary. This gain is intergroup which needs to be eliminated.

In this case, profit is in the books of subsidiary and asset is in the books of parent. The adjusting entry of
gain (net of any depreciation effect) if only consolidated statement of financial position is prepared should
be recorded as follows:

CRE xxx

NCI xxx

Non-Current Asset xxx

If SOCI is also prepared, then entry will be:

Gain on disposal xxx

Non-Current Asset xxx

(This entry will affect Non-controlling Interest)

Reversal entries will be passed if there is a loss on disposal.

Q.11 Sale of good, sale of fixed assets and post-acquisition losses

Statement of Financial Position

As on 31-12-2008
H Ltd S Ltd
Non-current assets
Fixed assets 150,000 80,000
Cost of investment (60%) 100,000 ----
Current assets
Stocks 30,000 20,000
Other current assets 70,000 30,000
350,000 130,000

Equity
Share Capital (Rs.1 per share) 200,000 100,000
Reserves 150,000 30,000
350,000 130,000

The following additional information is also available:

1. H invested when reserves were Rs.50000. Acquisition date is 1-1-05.
2. During the year, “S” sold goods for Rs.50, 000 to “H” at profit of 25% on cost. Stock include 25,000 of
goods purchased from “S”.
3. “H” sold a fixed asset to “S” for Rs40, 000 at a profit of 25% on sale price on 1-1-07.
4. Group charges depreciation on reducing balance method @20%.

Required: Prepare a Consolidated Statement of financial position as on 31.12.2008

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 Q.12 Question with statement of changes in equity
P acquired 85% of ‘S’ for Rs 150,000 on 1-1-08 when equity of S included:
I. Share Capital Rs 10,000
II. Retained Earrings Rs 100,000
On the date of acquisition, P believed that the plant owned by ‘S’ was undervalued by Rs 2,000. This
revaluation adjustment has not been incorporated by S. The trial balances of P and S for the year ended
31.12.2009 are as follows:

Trail Balance
For the year ended 31-12-09
P S
Rs
Share Capital 100,000 10,000
R.E on 1-1-09 1,050,000 107,000
Profit for the period 60,000 7,000
Account Payable 180,000 5,000
Plant 672,000 69,000
Intangible Asset 523,000 -
Account Receivable 45,000 60,000
Investment in ‘S’ 150,000 -
Assume Depreciation rate is 10% straight line.

Required: Prepare:
• Consolidated statement of financial position as on 31-12-09
• Consolidated statement of comprehensive income for the year ended 31-12-09
• Consolidated statement of changes in equity for the year ended 31-12-09

Q.13 On 1-10-2000, ‘H’ acquired 80% of ‘S’ for Rs 900,000. Summarized financial statements of both
are as follows:
Statement of profit or loss H S
For the year ended 31-03-2001
Rs 000
Sales 1,200 1,000
Cost of Sales (650) (660)
Gross Profit 550 340
Operating Expenses (120) (88)
Finance Cost - (12)
Profit before Tax 430 240
Tax (100) (40)
Profit after Tax 330 200

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 Kindness is a mark of faith, and whoever is not kind has no faith

Statement of financial position Rs 000

As on 31-03-2001
H S
PPE 620 660
Investment 920 10
Inventory 240 280
Accounts Receivable 170 210
Bank 20 40
1,070 1,200
Share Capital-Rs 1 each 700 150
Share Premium 600 -
Retained Earnings 450 700
1,750 850
8% debentures - 150
Trade Payable 170 155
Current Tax Payable 50 45
1,070 1,200
The following information is relevant:
i. The FV of S’s assets were equal to their BV with the exception of its land which had a FV of Rs 125,000
in excess of its BV at date of acquisition.
ii. In post-acquisition period, ‘H’ sold goods to ‘S’ for RS 100,000 at 25% markup. ‘S’ had half of these
goods in inventory at year end.
iii. At 31-03-2001, impairment loss of goodwill was Rs 20,000.
iv. The current A/c’s of the two Co’s disagreed due to a cash remittance of Rs 20,000 to ‘H’ on 26-3-2001
not being received until after the year end. Before adjusting for this, ‘S’ debit balance in H’s books was
Rs 56,000.
v. It is the group’s policy to value Non-controlling interest at acquisition at its proportionate share of the
FV of the subsidiary’s identifiable net assets.

Required
1. Prepare consolidated statement of comprehensive income, consolidated statement of financial position
and consolidated statement of changes in equity for the year ended 31.03.2001 if
i. Acquisition date is 1-10-2000 (as in question)
ii. Acquisition date is 01-01-2001
iii. Acquisition date is 01-04-2000
2. Solve the same question by assuming as if only consolidated statement of financial position is required
(on the basis of acquisition date as per original question).

Important Points to Remember:

(1) If only consolidated SOFP is required then prepare working of analysis of equity upto the end of the
SOFP date; pass necessary accounting entries related to SOFP and then prepare the consolidated
SOFP.
(2) If consolidated SOFP and consolidated SOCI both are is required, then prepare working of analysis
of equity up to the end of the previous period, pass necessary accounting entries related to income
statement and SOFP then prepare income statement and then statement of charges in equity. After
all the working prepare consolidated SOFP.

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(3) If only consolidated SOCI is required then prepare working of Analysis of equity upto the calculation
of goodwill or gain if information is available. The purpose is only to identify gain on bargain purchase
which is to be included in consolidated SOCI as an other income. Pass necessary accounting entries
related to income statement, and then prepare the consolidated income statement.
(4) If consolidated SOCI and consolidated SOCE both are required; then prepare working of analysis of
equity up to the end of the previous period pass necessary accounting entries related to consolidated
SOCI and consolidated SOCE.

Measurement of NCI:
There are two methods of measurement of NCI:
1- Measure NCI at proportionate share of F.V of net assets attributable to NCI at the date of acquisition.
This method is called as Partial Goodwill Method as goodwill is recognized only of parent.
2- Measure NCI at F.V of NCI at the date of acquisition. It is called as Full Goodwill Method, as the
goodwill of NCI is also recognized.

IFRS gives the entity an option of valuing NCI at its F.V. The concept behind this is that the NCI in
purchasing the shares would also have purchased goodwill in the subsidiary, but the traditional method
which is Partial Goodwill Method does not show goodwill of NCI.

The FV of NCI at the acquisition date:

• Can be given in question; or

• Needs to be calculated from given share price of the subsidiary just before the acquisition

If nothing is mentioned then use partial goodwill method.

Impairment of Goodwill if NCI is at F.V:

If only SOFP is prepared:

CRE

NCI

Goodwill

If income statement is prepared

Admin Expenses

Goodwill

(NCI will also be affected by this entry)

Q.14 You are provided with the following statement of financial position for SHARK and MINNOW:

Statement of financial position as on 31.10.2000

Assets: Rupees in “000”

Shark Minnow
Plant 325 70
Fixtures 200 50
Investment in Minnow 200 ---
Inventory 220 70
Receivables 145 105
Bank 100 ---
Total Assets 1190 295

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 Equity and Liabilities:
Ordinary Shares (Rs. 1 per share) 700 170
Retained Earnings 215 50
915 220
Payables 275 55
Bank Overdraft --- 20
1190 295

The following additional information is available:

1- Shark purchased 70% of Minnow 4 years ago when retained earnings of Minnow were Rs 20,000.
2- Plant of Minnow having book value of Rs 50,000 was revalued to its Fair value of Rs 60,000. The
revaluation was not recorded in the accounts of Minnow. Depreciation is charged at 20% using
straight line method.
3- At 31-10-2000, the inventories of Minnow included Rs 45,000 of goods purchased from Shark at
the rate of 25% mark up.
4- It is the group’s policy to value the non-controlling interest at fair value. The market price of shares
of non-controlling shareholders just before the acquisition was Rs.1.5 per share.

Required: Consolidated Statement of financial position as at 31-10-2000.

Acquisition related costs: These are those costs that the parent incurs for the business combination. For
example legal, accounting, valuation and other financial or consultancy fees.

These costs are not capitalized as part of cost of investment but expensed in the statement of profit or loss
of the periods in which they are incurred.

A question may incorrectly capitalize the costs. You would have to correct this before consolidation.

Goods in transit:

Suppose parent sold goods to subsidiary for Rs. 100,000

Parent books Subsidiary books

Receivable from S 100, Purchases
000 100,000
Sales 100,000 Payable to P 100,000

If suppose parent sold goods to S but not yet received by S then S will make an entry of goods in transit as
follows:

Parent books Subsidiary books

Receivable from S 100, Goods in transit
000 100,000
Sales 100,000 Payable to P 100,000

However, goods are at sale price therefore profit is to be eliminated from the goods in transit. The entry of
profit elimination will only effect the parent’s share in profits. If however goods were sold by subsidiary then
parent as well as NCI’s share of profit will be affected.

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Q.15 The following summarized Statement of financial position pertains to Alpha Limited (AL) and its
subsidiary Delta Limited (DL) as at 30-06-2014:

Rupees in millions
AL DL
Property, plant & equipment 460 200
Investment (2m shares of DL) 340 ---
Long term loan granted to DL 30 ---
Current Assets 595 400
1425 600
Share Capital (Rs.100 each) 600 250
Retained Earnings 325 200
Long Term borrowings 200 72
Current Liabilities 300 78
1425 600

Following additional information is available:

1- AL acquired investments in DL on 01-07-2013 when retained earnings of DL were Rs.140m and the
F.V of DL’s net assets was equal to their carrying amount.
2- Both Companies depreciate equipment at 10% on straight line Method. On 30-06-2014, Al sold certain
equipment to DL as detailed below:
Rupees in millions
Cost 40
Acc. Depreciation 30
Sale proceeds 25

3- Inter-company sale of goods are involved at a markup of 20%. The relevant details are as under
Rupees in millions
AL’s inventory includes goods purchased from DL 27
DL’s inventory includes goods purchased from AL 24
Receivable from DL on 30-06-2014 19
Payable to AL on 30-06-2014 19

4- Long term loan was granted to DL on 01-07-2013. It is repayable after 5 years and carries interest at
12% per annum payable on 30Th June and 31St December each year.
5- AL values Non-controlling Interest at the acquisition date at its fair value which was Rs.80 million.

Required: Prepare a Consolidated Statement of financial position as at 30-06-2014.

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173
 Be with the people who have good heart but not good face. Face will fade with the time but heart will never

Keep your thoughts and attitude positive, your life will be awesome.”

Q.16 B acquired 60% of M’s ordinary share capital on 01-10-2002 at a price of 5.3 per share, when the
retained earnings of M were Rs.104m and general reserves were Rs.11m. Their statements of financial
positions as at 30.09.2006 are:

B M
Millions Millions
Non-current assets
Property, plant & equipment 2,848 354
Patents 45 ---
Investment in M 159 ---
Current assets
Inventories 895 225
Trade Debtors 1,348 251
Cash & Cash Equivalents 212 34
5,507 864
Equity and liabilities
Share Capital (Rs.1 per share) 920 50
Retained Earnings 2,086 394
General Reserves 775 46
3,781 490
Non-current liabilities:
Long Term Borrowings 558 168
Current liabilities:
Trade & Other Payables 1,168 183
Current portion of long term loan --- 23
5,507 864

1- At the date of acquisition, M’s inventory had Fair value of Rs.8m above its Carrying amount. This
inventory had all been sold by 30-09-2006.
2- M’s Land & building had Fair value of Rs.26m above their carrying amount. Rs.20m is attributable to
building which had a remaining useful life of 10 years at the date of acquisition.
3- It is the group’s policy to value NCI at full (fair) value. The F.V of NCI at acquisition was Rs.86m.
4- Annual impairment tests have revealed cumulative Impairment losses relating to recognized goodwill
is Rs.20m to date.

Required: Prepare consolidated statement of financial position as at 30-09-2006

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Acquired intangible assets (other than goodwill)
A question might provide information about an unrecognized asset of the subsidiary.

When a company acquires a subsidiary, it may identify intangible assets of the acquired subsidiary, which
are not included in the subsidiary’s statement of financial position as per IAS-38 because they may be
internally generated. If these assets are separately identifiable and can be measured reliably then should
be included in the consolidated statement of financial position as intangible assets, and accounted for as
such.

This can result in the recognition of assets and liabilities in consolidated financial statements which are not
previously recognized by the subsidiary. This adjustment should be treated as just like revaluation
adjustment.

Q.21 Following are the Statement of financial position as at 30-06-2014:

(Rupees in ‘000’)
M N
Non-current assets
PPE 75,000 70,000
Investments 42,000 7,000
Current assets
Inventories 15,000 8,000
Debtors 11,000 12,000
Cash & Bank 9,000 5,000
152,000 102,000
Equity and liabilities
Share Capital (Rs.10 per share) 30,000 20,000
Share Premium 6,000 4,000
Retained Earnings 88,000 45,000
Rev. Surplus 8,000 5,000
132,000 74,000
Non-current liabilities
Debentures - 12,000
Current liabilities
Creditors 16,000 10,000
Other Liabilities 4,000 6,000
152,000 102,000

Following additional information is available:

1. On 01-01-2012, ‘M’ acquired 1.6 million shares of ‘N’ at a price of Rs 23 per share. One year later it
also purchased one-fourth of the debentures of ‘N’ at face value.
2. At acquisition date, retained earnings and revaluation surplus of ‘N’ were Rs.15m and Rs.1m
respectively. At that date, its internally generated brand had a fair value of Rs.7m and an indefinite
useful life.
3. At acquisition date, a plant of ‘N’ was overvalued by Rs.2m. Its remaining useful life was 5 years. This
revaluation adjustment has not been incorporated by N in its books.
4. During the year, ‘N’ sold goods to ‘M’ for Rs 240,000 @ 20% markup. Only 25% of these goods were
sold by ‘M’ till year end.
5. At the year end, ‘M’ and ‘N’ declared dividend of 20% and 10% respectively but neither company had
accounted for the dividend.

Required: Prepare Consolidated Statement of financial Position as at 30-06-2014.

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Q.22 In recent years Hillusion has acquired a reputation for buying modestly performing businesses and
selling them at a substantial profit within a period of two to three years of their acquisition. On 1
July 20X2 Hillusion acquired 80% of the ordinary share capital of Skeptik at a cost of Rs 10,280,000.
On the same date it also acquired 50% of Skeptik’s 10% loan notes at par. The summarized draft
financial statements of both companies are:

STATEMENTS OF PROFIT OR LOSS: YEAR TO 31 MARCH 20X3

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 (6,000) (200)
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
20X3
Assets
Tangible non-current Assets 19,320 8,000
Investments 11,280 Nil
30,000 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:

(1) The fair values of Skeptik's assets were equal to their book values with the exception of its plant, which
had a fair value of Rs 3.2 million in 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 and this period has not changed
as a result of the acquisition. Depreciation of plant is on a straight-line basis and charged to cost of
sales. Skeptik has not adjusted the value of its plant as a result of the fair value exercise.
(2) 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.
(3) Hillusion bears almost all of the administration costs incurred on behalf of the group (invoicing, credit
control etc). It does not charge Skeptik for this service as to do so would not have a material effect on
the group profit.
(4) Revenues and profits should be deemed to accrue evenly throughout the year.
(5) The current accounts of the two companies were reconciled at the year-end with Skeptik owing Hillusion
Rs 750,000.
(6) 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.
(7) Hillusion's opening retained earnings were Rs 16,525,000 and Skeptik's were Rs 5,400,000. No
dividends were paid or declared by either entity during the year.

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(8) 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 2,500,000 at the date of acquisition.

Required
1.
(a) Prepare a consolidated statement of profit or loss and statement of financial position for Hillusion
for the year to 31 March 20X3.
(b) Also prepare statement of changes in equity for the year to 31 March 20X3.

2. Solve the same question by assuming as if only statement of financial position is required to be prepared.

Q. 23 The following summarized Trial Balances pertain to Rivera Limited (RL) and its subsidiary Chenab
Limited (CL) for the year ended 31 December 2014:
RL CL
Debit Credit Debit Credit
Rs. in million
Sales - 285 - 320
Cost of sales 186 - 240 -
Selling and distribution expenses 27 - 25 -
Administration expenses 17 - 15 -
Finance charges 8 - 10 -
Tax expense 19 - 12 -
Share capital (Rs. 100 each) - 350 - 200
Retained earnings - 1 January 2014 - 50 - 36
Property, plant and equipment 190 - 263 -
Current assets 23 - 35 -
Investment in CL (1.6 million shares) 250 - - -
Current liabilities 35 - 44
720 720 600 600

Other relevant information is as under:

(i) RL acquired the controlling interest in CL on 1 January 2014. On the acquisition date, fair value of
CL's net assets was equal to its book value except for an office building whose fair value exceeded its
carrying value by Rs. 18 million. The remaining useful life of the office building on the acquisition date
was 15 years.
(ii) Inter-company sales are invoiced at cost plus 20%. Details of inter-company transactions for the year
ended 31 December 2014 are as follows:
■ RL sold goods amounting to Rs. 60 million to CL. At year-end, inventory of CL included Rs. 9.60
million in respect of such goods.
■ CL sold goods amounting to Rs. 48 million to RL. At year-end, inventory of RL included Rs. 16.80
million in respect of such goods.
(iii) There were no inter-company balances outstanding at the year-end.
(iv) RL values the non-controlling interest at its proportionate share of CL's identifiable net assets.
(v) As at 31 December 2014, goodwill of CL was impaired by 10%.

Required:
1. In accordance with the requirements of International Financial Reporting Standards, prepare:
(a) Consolidated Statement of Comprehensive Income for the year ended 31 December 2014.
(b) Consolidated Statement of Financial Position as at 31 December 2014.
2. Solve the same question by assuming as if only statement of financial position is required to be prepared.

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SOLUTION
A.1

Hall
Consolidated Statement of Financial Position
As at 31-12-2013
Assets: Rs. ‘000'
Property, plant & equipment 55,000
Goodwill 3,000
Current Assets 30,000
88,000
Equity and Liabilities
Share Capital 10,000
Consolidated retained earnings (13,000+3,000) 16,000
26,000
Non-controlling Interest (3,000+1,000) 4,000
30,000
Non-Current Liabilities:
8% debentures 29,000
Current Liabilities 29,000
88,000

W-1 Analysis of Equity: H (75%) NCI (25%)

At acquisition:
Share capital 4,000
Retained earnings 8,000
12,000 9,000 3,000
Payment by Parent 12,000
Goodwill 3,000
Change in equity since acquisition till balance sheet date:
Retained earnings 4,000 3,000 1,000

W-2 Entries
Consolidation entry:
Share capital 4,000
Retained earnings 8,000
Goodwill (bal) 3,000
Investment 12,000
NCI 3,000

A.2

Hymn
Consolidated Statement of Financial Position

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As at 31-12-2013
Assets:
Property, plant & equipment 170,000
Goodwill 29,000
Current Assets 275,000
474,000

Equity and Liabilities

Share Capital 100,000
Consolidated retained earnings 178,200
278,200
Non-controlling Interest (14,000 + 5,800) 19,800
298,000
Current Liabilities 176,000
474,000

W-1 Analysis of Equity:

H (80%) NCI (20%)
At acquisition:
Share capital 50,000
Retained earnings 20,000
70,000 56,000 14,000
Payment by Parent 85,000
Goodwill 29,000

Change in equity since acquisition till balance sheet date:

Retained earnings 29,000 23,200 5,800

W-2 Entries
Consolidation entry:
Share capital 50,000

Retained earnings 20,000

Goodwill (bal) 29,000

Investment 85,000
Non-controlling Interest 14,000

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A.3 Hairy
Consolidated Statement of Financial Position
As at 31-12-2015
Rs
Non-Current
Assets:
PPE (120+60) 180,000
Current Assets:
Cash (11+4) 15,000
Investment 3,000
Trade receivable (72.6+19.1) 91,700
Cash in transit 500
Inventory (17,000+11,000-800) 27,200
317,400
Equity:
Share Capital 100,000
Share Premium 20,000
Capital Reserves 23,000
Consolidated Retained earnings (91,900 +4,000+7,640-640) 102,900
245,900
Non-controlling Interest (15,660+1,000-160) 16,500
Total equity 262,400
Current Liabilities:
Payables (38+17) 55,000
317,400

Workings:

(W-1) % of holding

= number of shares acquired by Hairy X 100

Total number of shares of spider

= 48,000/60,000 X 100 = 80%

(W-2) Analysis of Equity of S:

P(80%) S(20%)
At acquisition:
Share Capital 60,000
Capital Reserves 16,000
Retained earnings 2,300
78,300 62,640 15,660
Paid by P 55,000
Gain on bargain purchase (Add in CRE) 7,640
Change since acquisition
Retained earnings (7,300-2,300) 5,000 4,000 1,000

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(W-2) Accounting Entries:

Consolidated retained earnings – 80% 640

NCI – 20% 160
Stock 800

(4,000 x 25/125)

(W-3) Cash in transit

H S 2,700

Receivable by S from H - 3,200

500

Payable by H to S 2,700

Payable and receivable amounting to Rs. 2,700 will be cancelled out and remaining Rs. 500 is Cash in
transit.

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 Do good to others and wish good for others, It will bring peace in your life

A.4

Hang Rs.
Consolidated Statement of Financial Position
As at 31-12-2015
Property, plant & equipment 420,000
Goodwill 26,600
Current Assets 446,000
892,000
Equity
Share Capital 200,000
Share Premium 25,000
Retained earnings (180,000+30,000 x 60%) 198,000
423,000
Non-controlling Interest (75,600+12,000) 87,600
510,600
Current Liabilities (225+157) 382,000
892,600

W-1 Analysis of Equity of S:

At acquisition: Hang (60%) NCI (40%)
Share Capital 90,000
Share Premium 49,000
Retained Earnings 50,000
189,000 113,400 75,600
Paid by Hang 140,000
Goodwill 26,600
Change in equity since acquisition
Retained earnings 30,000 18,000 12,000

A.5
Hash Rs.
Consolidated Statement of Financial Position
Sundry Assets 434,100
Goodwill 8,800
442,900
Share Capital 1,200
Consolidated retained earnings (87,500+4,800) 92,300
212,300
NCI (22,800+1,200) 24,000
236,300
Liabilities (100+106.6) 206,600
Total equity and Liabilities 442,900

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W-1 Analysis of equity of S Hash (80%) Stash (20%)
At acquisition:
Share Capital 50,000
Retained earnings [(70-24) + (24/12 x 9)] 64,000
114,000 91,200 22,800
Cost of investment 100,000
Goodwill 8,800
Change in equity since acquisition:
Retained earnings - 24/12 x 3 6,000 4,800 1,200

A.6
Hassle
Consolidated Statement of Financial Position
Assets Rs.
Sundry Assets 474,100
Total Assets 474,100
Equity:
Share Capital 120,000
Consolidated Retained earnings (87,500+20,000+16,000) 123,500
243,500
Non-controlling Interest (20,000+4,000) 24,000
Total equity 267,500
Current Liabilities 206,600
Total equity and Liabilities 474,100

W-1 Analysis of equity of S H (80%) NCI (20%)

At acquisition:
Share Capital 50,000
Retained earnings 50,000
100,000 80,000 20,000
Cost of investment 60,000
Gain on bargain purchase 20,000
Change in equity since acquisition:
Retained earnings 20,000 16,000 4,000

A.7 Hail

Consolidated Statement of Financial Position

Non-current Assets Rs.'000'
Property, plant & equipment (161+85) 246,000
Investment (68-65) 3,000
Goodwill 6,500
Current Assets
Cash (7,700+25,200) 32,900
Trade receivable (92,500+45,800) 138,300
Cash in transit (15,000-8,000) 7,000
Inventory (56,200+36,200) 92,400
526,100

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Equity and Liabilities
Share Capital 100,000
Consolidated retained earnings (185,400+28,080-3,000) 210,480
Consolidated capital reserve (0+18,000) 18,000
328,480
Non-controlling Interest (6,500+5,120-200) 11,420
339,900
Current Liabilities (115,000+68,000) 183,000
Dividend payable by H 3,000
Dividend payable by S to NCI 200
526,100

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Workings

(W-1) % of holding = 45,000/50,000 x 100 = 90%

(W-2) Analysis of equity of S

Hail (90%) NCI(10%)
At acquisition:
Share Capital 50,000
Share Premium 5,000
Capital Reserves -
Retained Earnings 10,000
65,000 58,500 6,500
Paid by H 65,000
Goodwill 6,500
Change in equity since acquisition:
Retained earnings 31,200 28,080 3,120
Capital Reserves 20,000 18,000 2,000

(W-3) Entries:
Dividend declared:
By Hail By Snow
Dividend (CRE) 3,000 Dividend CRE-90% 1,800
Dividend payable 3,000 NCI-10% 200
Dividend Payable 2,000

Dividend receivable 1,800

Dividend Income (CRE) 1,800

A.8
Consolidated Statement Of Financial Position
Non-current Assets Rs.
Property, plant & equipment 309,600
Goodwill 61,400
Current Assets
Inventory (112,000+74,400-3,200) 183,200
Receivables (104,000+84,000) 188,000
Bank 49,000
791,200
Equity and Liabilities:
Share Capital 100,000
Consolidated retained earnings (460,000+98,400-3,200) 555,200
655,200
NCI (35,400+24,600) 60,000
715,200
Current Liabilities (52,000+24,000) 76,000
791,200

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Workings Hail (80%) NCI (20%)
(W-1) Analysis of equity:
At acquisition:
Share Capital 160,000
Retained Earnings (11,000)
Revaluation Surplus 28.000
177,000 141,600 35,400
Paid by Hail 203,000
Goodwill 61,400
Change in equity since acquisition:
Retained earnings (W-2) 98,400 24,600
123,000

(W-2) Retained Earnings

b/d 11,000 Profit after tax (B.F) 123,000

c/d 112,000 post acquisition profits

W-3 Journal Entries:

Asset 28,000

Rev. Surplus 28,000

Consolidated retained earnings 3,200

Stock 3,200

(16,000 x 25/125)

(No effect on Non-controlling Interest as parent sold goods to subsidiary)

A.9 Hello
Consolidated Statement of financial position
As at 31-12-2013
Asset: Rs.
PPE (225,000+175,000+10,000-2,000) 408,000
Goodwill 8,000
Current Assets (271,000+157,000) 428,000
844,000
Equity:
Share Capital 100,000
Consolidated retained earnings (275,000+18,000-1,200) 291,800
391,800
NCI (68,000+12,000-800) 79,200
471,000
Current Liabilities (231,000+142,000) 373,000
844,000

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(W-1) Analysis of equity of S:
H-60% NCI-40%
At acquisition:
Share Capital 100,000
Retained earnings 60,000 W-2
160,000 Entries:
Revaluation Surplus (170,000-160,000) 10,000 Plant
170,000 102,000 68,000
10,000
Paid by H 110,000
Goodwill 8,000
Change since acquisition: Rev. surplus
Retained earnings 30,000 18,000 12,000 10,000

Extra Depreciation:

CRE 1,200

NCI 800

Acc. Dep/Asset 2,000

(10,000/10 x 2)

A.10 Consolidated Statement of Comprehensive Income

For the year ended 31-12-2015
Rs. '000'
Revenue (1,120+390-100) 1,410
Cost of sales (610+220-100+3) (733)
Gross profit 677
Distribution Cost (50+40) (90)
Admin Cost (55+45) (100)
Operating Profit 487
Investment income [(20-15)+ 4] 9
Finance Cost (18+4) (22)
Profit before tax 474
Tax (140+25) (165)
Profit after tax 309
Attributed to:
Owners of the Parent (balancing figure) 294
Non-controlling Interest (60 x 25%) 15
309

Movement in consolidated retained earnings

For the year ended 31-12-2015

Rs.000

Opening balance as on 1-1-13* 127

Share in consolidated profit for the year 294

Dividend paid by H (50)

Closing balance as on 31-12-13* 371

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 Never lose hope, face the situation with wisdom and patience

*Opening balance of consolidated retained earnings will consist of:

Rs. 000

Opening balance of consolidated R.E 100

+ Parent’s share in post-acquisition retained earnings of subsidiary 27

(45-9) x 75% 127

A.10A
Consolidated Statement of Comprehensive Income
For the year ended 31-12-2015
Amount in rupees
Sales (304900+195300*4/12-8000) 362,000
Cost of Sales (144200+98550*4/12-8000) (169,050)
Gross Profit 192,950
Other Income – gain on bargain purchase 3,800
Investment Income (10500+2600) 13,100
Operating Expenses (76450+52100*4/12) (93,817)
Profit before tax 116,033
Tax (42900+16500*4/12) (48,400)
Profit after tax 67,633

Attributable to
Owners of Parent (bal) 64,638
Non-controlling Interest [(30750-2600)*4/12*25%+2600*25%] 2,995
67,633

Movement in Consolidated Retained Earnings:

Amount in Rupees
Balance as on 1-1-2015 80,200
Profit for the year 64,638
Dividend (20,000)
Balance as on 31-12-2015 124,838

A.11 Consolidation Statement of financial position

As at 31-12-08.
Non-current Assets
Fixed assets (150000+80000-6400) 223,600
Goodwill 10,000
Current assets
Stock (30000+20000-5000) 45,000
Other current assets (70000+30000) 100,000
378,600

Equity
Share Capital 200,000
Consolidated retained earnings (150000-3000-12000-6400) 128,600
328,600
Non-controlling Interest (60000-8000-2000) 50,000
Total equity and liabilities 378,600

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Workings
(W-1)
Analysis of equity
At acquisition H 60% NCI 40%
Share capital 100,000
Reserves 50,000
150,000 90,000 60,000
Paid by “H” 100,000
Goodwill 10,000
Change in equity since acquisition
Retained Loss (50000-30000)=(20000) (12,000) (8,000)

Entries:
Fixed asset sold by H to S:
Gain on disposal [40,000/100 x 25] 10,000
Extra depreciation [working below] (3,600)
Net un realized gain to be reversed 6,400

CRE 6,400
Asset 6,400
(Asset sold by Parent)

Working of extra depreciation:

Date of Disposal 1-1-2007

Depreciation on gain that should be reversed:

10,000 x 20% 2,000

8,000 x 20% 1,600
3,600

Elimination of Un-Realized Profit:

CRE-60% 3,000
NCI-40% 2,000
Stock 5,000
(25,000 x _25_ )
125

A.12 Consolidated statement of financial position

As on 31-12-09
Assets:
Plant (672,000 + 69,000 + 2,000 – 200-200) 742,600
Intangibles 523,000
Goodwill 54,800
Accounts Receivable (45,000 + 60,000) 105,000
1,425,400
Equity & Liabilities:
Share Capital 100,000
CRE 1,121,560
1,221,560
NCI 18,840
1,240,400
Accounts payable (180,000 + 5,000) 185,000
1,425,400

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 W-1 Analysis of Equity of S
P-85% NCI-15%
At Acquisition 1-1-08
Share Capital 10,000
Retained Earnings 100,000
110,000
Revaluation Surplus 2,000
112,000 95,200 16,800
Paid by P 150,000
Good will 54,800

Since acquisition i.e. 1.01.08

Till 31.12.09
Retained Earnings 14,000 11,900 2,100
(107,000+7,000-100,000)

W-2 Entries
i. Asset 2000
Rev Surplus 2000

ii. Depreciation up to last year i.e. 31.12.2008

CRE-85% 170
NCI-15% 30
Asset 200
(2,000 x 10% )

iii. Depreciation for the year:

Depreciation 200
Asset 200
(2,000 x 10% )

Consolidated statement of comprehensive income

For the year ended 31-12-09

Profit for the year (60,000+7,000-200) 66,800

Attributable to:
Owners of the parent (balancing figure) 65,780
NCI (7,000-200) x 15% 1,020

66,800

Consolidated statement of changes in equity

For the year ended 31-12-09

Share CRE NCI Total

Capital
Balance as on 01-01-09 (W) 100,000 1,055,780 17,820 1,173,600
Profit ---- 65,780 1,020 66,800
Balance as on 01-01-09
100,000 1,121,560 18,840 1,240,400

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Working

Calculation of the opening balances:

For the purpose of calculating opening balances, we have to calculate the closing balances of the last year,
i.e. 31.12.08 which will be the opening balances as on 01.01.09.

Analysis of Equity of S
At Acquisition 1-1-08 P-85% NCI-15%
Share Capital 10,000
Retained Earnings 100,000
110,000
Revaluation Surplus 2,000
112,000 95,200 16,800
Paid by P 150,000
Good will 54,800

Change since acquisition till 31.12.08

Retained Earnings (107,000-100,000) 7000 5,950 1,050
Entries
Asset 2000
Rev Surplus 2000
Depreciation for the year ended 31.12.08:

CRE-85% 170
NCI-15% 30
Asset 200
(2,000 x 10% )
So as on 31.12.08
CRE 1,050,000 + 5,950 -170 =1,055,780
NCI 16,800 +1,050 -30 = 17,820

Therefore after the above discussion remember:

The opening balance of the CRE comprises of 100% b/d of the parent; plus
Parent’s share in in post-acquisition reserves of S upto the beginning of the period after adjustments (if
any)
The opening balance of NCI comprises of
NCI at acquisition; plus
NCI’s share in in post-acquisition reserves of S upto the beginning of the period after adjustments (if any)

A.13 1. Scenario i: If acquisition date is 01-10-2000

a) H Group
Consolidated statement of financial position
As on 31-03-01
Assets: Rupees in (000)
PPE (620+660+125) 1405
Investment (20+10) 30
Goodwill (200-20) 180
Stock (240+280-10) 510
Receivable (170+210-20-36) 324
Cash in Transit 20
Bank (20+40) 60
Total Assets: 2529

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 Trust in the plans of Allah. Be patient, Keep smiling and never overthink.”

Equity and Liabilities:

Share Capital 700
Share Premium 600
CRE (450+80-10-20) 500
1800
NCI (175+20) 195
Total Equity 1995
Debentures 150
Payables (170+155-36) 289
Current tax payables (50+45) 95
Total Equity and Liabilities: 2529

b) H Group
Consolidated statement of comprehensive income
For the year ended 31-03-01
Rupees in (000)
Sales (1200+1000*6/12-100) 1600
Cost of Sales (650+660*6/12-100+10) (890)
Gross Profit 710
Operating Expenses (120+88*6/12+20) (184)
Finance Cost (12*6/12) (6)
Profit before tax 520
Tax (100+40*6/12) (120)
Profit after tax 400
Attributable to:
Owners of the parent 380
NCI (200*6/12*20%) (20)
400

c) H group
Consolidated statement of changes in equity
For the year ended 31-03-01

Share Share Premium CRE NCI Total

Capital
Balance as on 01-04-2000 700 600 *120 ----- 1420
(450-330)
NCI at acquisition __ __ __ 175 175
Profit ---- --- 380 20 400
Balance as on 31-03-2001 700 600 500 195 1995

*Only brought down balance of parent because acquisition of subsidiary is during the period.

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(W-1) Analysis of Equity:
At Acquisition:
H 80% NCI 20%
Share Capital 150
Share Premium ---
Retained Earnings (w-2) 600
750
Rev. Surplus 125
875 700 175
Payment by H 900
Goodwill 200

(W-2) Calculation of retained earnings at acquisition:

Amount
01-04-2000 (700-200) 500
01-10-2000 (200 x 6/12) 100
600
(W-3) Entries:
1- Asset 125
Rev. surplus 125
2- Sale of Goods: (goods sold by H)
Cost of sale 10
Stock 10 (100*50% * 25/125)
3- Impairment of Goodwill:
Admin Exp. 20
Goodwill 20
4- Cash in Transit:
“H” “S”
Receivable from “S” 56000
Payable to “H” 36000

Cash in transit 20000

Receivable from “S” 20000

Payable to “H” 36000

Receivable from “S” 36000

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 ALLAH does not love sins, but ALLAH loves the repenter

Scenario ii: If acquisition date is 01-01-2001

a) H Group

Consolidated statement of financial position

As on 31-03-01
Rupees
Assets:
Non-current assets:
PPE (620+660+125) 1,405
Investment (20+10) 30
Goodwill (160-20) 140
Current assets:
Inventory (240+280-10) 510
Receivable (170+210-20-36) 324
Cash in transit 20
Bank 60
Total Assets 2,489

Equity & Liabilities:

Share Capital 700

Share Premium 600
CRE (450+40-10-20) 460
1,760
NCI (185+10) 195
1,955
Liabilities:
Non-current liabilities
Debentures 150
Current liabilities
Payables (170+155-36) 289
Current tax payables 95
Total Equity & Liabilities 2,489

b) H Group
Consolidated statement of comprehensive income
For the year ended 31-03-01
Sales (1,200+1,000*3/12-100) 1,350
COS (650+660*3/12-100+10) (725)
Gross Profit 625
Operating Expenses (120+88*3/12)+20 (162)
Finance Cost (12+3/12) (3)
Profit before tax 460
Tax (100+40*3/12) (110)
Profit after tax 350
Attributable to
Owners of the parent 340
Non-controlling Interest (200*3/12)*20% 10
350

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c) H Group
Consolidated statement of changes in equity
For the year ended 31-03-01

Share capital Share premium CRE NCI Total

Balance as on 01-04- 700 600 120 ---- 1420
2000
NCI at acquisition --- --- --- 185 185
Profit --- --- 340 10 350
Balance as on 31-03- 700 600 460 195 1955
2001

Workings
(W-1)
Analysis of Equity
P-80% NCI-20%
At Acquisition:
Share Capital 150
Retained Earnings 650
(500+200 x 9/12)
Revaluation Surplus 125
925 740 185
Paid 900
Goodwill 160

Scenario iii: If Acquisition date is 01-04-2000

a) H Group
Consolidated statement of financial position
As on 31-03-01
Assets: Amount in
rupees
Non-current assets
PPE (620+660+125) 1,405
Investment (20+10) 30
Goodwill (280-20) 260
Current assets
Inventory (240+280-10) 510
Receivable (170+120-20-36) 324
Cash in transit 20
Bank 60
Total Assets 2,609

Equity & Liabilities:

Share Capital 700
Share Premium 600
CRE (450+160-10-20) 580
1,880
NCI (155+40) 195
2,075

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 Liabilities:
Non-current liabilities
Debentures 150
Current liabilities
Payables (170+155-36) 289
Current tax payable 95
Equity & Liabilities 2,609

b) H Group
Consolidated statement of comprehensive income Amount in
For the year ended 31-03-01 rupees
Sales (1200+1000-100) 2,100
Cost of Sales (650+660-100+10) (1,220)
Gross Profit 880
Operating Expenses (120+88+20) (228)
Finance Cost (12)
Profit before tax 640
Tax (100+40) (140)
Profit after tax 500
Attributable to
Owners of the parent 460
Non-controlling Interest (200*20%) 40
500

c) H Group
Consolidated statement of changes in equity
For the year ended 31-03-01

Share capital Share premium CRE NCI Total

Balance as on 01-04-2000 700 600 120 ---- 1420
NCI at acquisition --- --- --- 155 185
Profit --- --- 460 40 350
Balance as on 31-03-2001 700 600 580 195 1955

(W-1)

Analysis of Equity
P-80% NCI-20%
At Acquisition:
Share Capital 150
Retained Earnings 500
650
Revaluation Surplus 125
775 620 155
Paid 900
Goodwill 280

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2. Same previous question assuming as if acquisition date is 1-10-2000: however only statement
of financial position is required to be prepared:

H Group
STATEMENTS OF FINANCIAL POSITION
AS AT 31 MARCH 20X3
Non-current Assets
Property, Plant and Equipment (620+660+125) 1,405
Investment (20+10) 30
Goodwill (200-20) 180
Inventory (240+280-10) 510
Account receivable (170+210-36-20) 324
Bank (20+40+20) 80
2,529
Equity and liabilities Equity
Equity
Share capital 700
Share Premium 600
Consolidated Retained earnings (450+80-10-20) 500
1,800
NCI (175+20) 195
1,995
Non-current liabilities
8% debentures 150

Current liabilities
Account Payable (170+155-36) 289
Taxation Payable(50+45) 95
2,529

Workings
W-1 Analysis of Equity S:
At Acquisition:
H 80% NCI 20%
Share Capital 150
Revaluation Surplus 125
Retained earnings-Openings (700-200) 500
Pre-Acquisition Profit for the period (200x6/12) 100
875 700 175
Paid 900
Goodwill 200
Change since Acquisition
200 x 6/12 100 80 20

W-2 Accounting Entries

a) CRE 10
Stock 10
(50,000/125 x 25)
(H sold goods to S, so no effect on NCI)
b) Cash in transit 20
Receivable from S 20
c) CRE 20
Goodwill 20

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 Ramadan gives us an opportunity to strengthen our imaan.”

A.14 Consolidated Statement of Financial Position

As on 31-10-2000
Assets:
Non-current assets:
Plant (325+70+10-8) 397
Fixtures (200+50) 250
Goodwill (60+16.5) 76.5
Current assets:
Inventory (220+70-9) 281
Receivable (145+105) 250
Bank 100
1354.5
Equity & Liabilities:
Share Capital 700
CRE (215+21-5.6-9) 221.4
921.4
NCI (76.5+9-2.4) 83.10
1004.5

Payables (275+55) 330

Bank Overdraft 20
1354.5
W-1 Analysis of equity:

At Acquisition:

Shark 70% NCI 30%

Share Capital 170
R.E 20
Rev. Surplus 10
200 140 60
Payment by Shark 200

F.V of NCI (170*30%*1.5) 76.5

Goodwill 60 16.5
Total Goodwill 76.5 (60 + 16.5)
Change sine acquisition:
Retained Earnings: 30 21 9

Accounting entries

a) CRE 5,600
NCI 2,400
Asset 8,000
(10,000/5 = 2,000x4 = 8,000)
b) CRE 9,000
Stock 9,000

(45,000 x 25/125)

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A15 Alpha Limited
Consolidated Statement of financial position
As on 30-06-2014
Assets: Rupees in
millions
PPE (460+200-15) 645
Goodwill 30
Current Assets (595+400- 4.5 – 4 – 19) 967.5
Total Assets 1642.5

Share Capital 600

Consolidated retained earnings (325+48-15-3.6-4) 350.4
950.4
Non-controlling Interest (80+12-0.9) 91.1
1041.5
Long term loan (200+72-30) 242

Current liabilities (300+78-19) 359

Total 1642.5
Workings
(W-1) Analysis of equity:
At Acquisition:
AL 80% NCI 20%
Share Capital 250
Retained earnings 140
390 312 78
Paid 340
Goodwill
F.V of NCI 80
Goodwill 28 2
Total goodwill = 30
Change in equity since acquisition:
Retained Earnings 60 48 12

(W-1.1) % of holding:

200/250*100=80%

(W-2) Entries:

1- Inter-company gain on sale of fixed asset:

CRE 15
Equipment 15
(Sale proceed = 25 – WDV = 10)

No depreciation adjustment is required because asset is sold on the last day of the accounting period.

2- Sales of goods:
(a) Sale by subsidiary:

CRE 3.6

NCI 0.9

Stock 4.5 (27*20/120)

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 The way it is is difficult to rise a tear spilled from the eyes, in the same way it is difficult for a person to rise
when he is fallen from the eyes of someone

(b) Sale by parent:

CRE 4

Stock 4 (24*20/120)

A.16 B Group

Consolidated statement of financial position

As on 30-09-2006
Assets: Rupees in
millions
Non-current assets
Property, plant & equipment (2,848+354+26-8) 3,220
Patents 45
Goodwill (46-20) 26
Current assets
Inventories (895+225+8-8) 1,120
Receivables (1,348+251) 1,599
Cash & Bank (212+34) 246
6,256
Equity and liabilities:
Share Capital 920
Consolidated retained earnings 2,086+174-4.8-4.8-12) 2,238.4
General Reserves (775+21) 796
3,954.4
Non-controlling Interest (86+116+14-3.2-3.2-8) 201.6
4,156.0
Non-current liabilities
Long term loans (558+168) 726
Current liabilities:
Payables (1,168+183) 1,351
Current portion of Loans 23
6256

(W-1) Analysis of Equity:

At Acquisition:
P 60% S 40%
Share Capital 50
R.E 104
General Reserves 11
Rev. Surplus 34 (8+26)
199 119.4 79.6
Payment by parent (50*60%*5.3) 159
F.V of NCI 86
Goodwill 39.6 6.4

Total Goodwill is 39.6+6.4 = 46

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Change since acquisition:
Retained Earnings (394-104)290 174 116
General Reserves (46-11)35 21 14

(W-2) Entries:
1. Inventory Revaluation: Consolidation is requirement of IFRS-3 & 10 which requires that all the
assets and liabilities of subsidiary should be revalued at the date of acquisition.

Inventory 8

Rev. Surplus 8

Inventory was undervalued at the date of acquisition. If it was not mentioned in the question that inventory
has been sold, then we would prepare the above entry only. As the inventory is sold, further adjustment is
required.

When the inventory was sold, this entry would have been passed as follows:

Cost of Sales xxx

Inventory xxx

(At carrying amount)

But remember if inventory was undervalued then the above entry was also undervalued by the same
amount. So to correct the above entry, we will have to prepare an additional entry:

Cost of Sales 8

Inventory 8

However as we are only preparing SOFP and cost of sale of subsidiary is to be increased, therefore the
above entry will be passed as follows:

CRE 60% 4.8

NCI 40% 3.2

Inventory 8

Reversal entry will be made if inventory is overvalued at the date of acquisition.

2. Revaluation of land and buildings:

PPE 26
Rev. Surplus 26

Effect of depreciation of building:

CRE 4.8

NCI 3.2

PPE 8

(20/10*4)

3. Impairment of Goodwill:
CRE 12
NCI 8
Goodwill 20

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 “No one besides ALLAH can rescue a soul from Hardship” Quran 53 : 58

A.21 M Group
Consolidated Statement of financial position
As on 30-6-2014
Amount in 000
Non-current Assets:
Property, plant & equipment (75000+70000-2000+1000) 144,000
Investment (42000+7000-36800-3,000) 9,200
Goodwill 800
Brand 7,000
Current assets
Inventories (15000+8000-30) 22,970
Debtors (11000+12000) 23,000
Cash & Bank (9000+5000) 14,000
220,970

Equity and liabilities

Share Capital 30,000
Share Premium 6,000
Consolidated retained earnings (88000+24000-24+800-6000) 106,776
Consolidated Revaluation Surplus (8000+3200) 11,200
153,976
Non-controlling interest (9000+6000+800+200-6-400) 15,594
169,570

Non-current liabilities
Debentures (12,000-3,000) 9,000
Current liabilities
Creditors (16,000+10,000) 26,000
Dividend (6000+400) 6,400
Other Liabilities 10,000
220,970

(W-1) Analysis of Equity:

At Acquisition:
M 80% NCI 20%
Share Capital 20000
Share Premium 4000
Revaluation Surplus 1000
Retained earnings 15000
40000
Revaluation Surplus – Brand 7000
Revaluation Loss – Plant (2000)
45000 36000 9000
Paid by ‘M’ 1600 x 23 36800
Goodwill 800

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 Every good job seems impossible in the initial phase
Change in equity since acquisition:
Retained earnings (45000 -15000) 30,000 24,000 6,000
Revaluation Surplus (5,000-1,000) 4,000 3,200 800

(W-2) Entries:
1. Depreciation of Plant to be reversed:

Plant 1000
CRE 800
NCI 200 (2000/5*2.5)

(Extra depreciation charged by N as plant was overvalued)

2. Adjustment of unrealized profit (subsidiary sold goods to parent)

CRE 24

NCI 6
Stock 30 (240*75%*20/120)

(W 3) Adjustment of Dividend
Dividend by ‘P’: Dividend by ‘S’:
Dividend 6000 Dividend 2000

Dividend Payable 6000 Dividend Payable

(30000*20%) 2000
(20000*10%)

Dividend receivable 1600

Dividend income 1600
(30000*20%)

A.22 HILLUSION GROUP

a) STATEMENTS OF PROFIT OR LOSS
FOR YEAR TO 31 MARCH 20X3
Hillusion
Rs 000
Sales revenue (60,000+24,000x9/12)-12,000) 66,000
Cost of sales (42,000+20,000x9/12-12,000+500+600) (46,100)
Gross profit 19,900
Operating expenses(6,000+200x9/12)+300 (6,450)
Finance Income (1,000 x 10% x 9/12) 75
Finance Charge (200 x 9/12) (150) (75)
Profit before tax 13,375
Income tax expense (3,000 + 600 x 9/12) (3,450)
Profit for the year 9,925
Profit attributable to
Owners of the Parent (bal) *9,655
Non-controlling interest [(3,000x9/12-600-300)x20%] 270
9,925
*Not required to be calculated; just for additional information
[9,075 + (3,000 x 9/12-600-300) x 80% - 500] = 9,655

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A. b) HILLUSION GROUP
STATEMENTS OF FINANCIAL POSITION
AS AT 31 MARCH 20X3
Non-current Assets
Property, Plant and Equipment (19,320+8,000+3,200-600) 29,920
Goodwill (1,430 - 300) 1,130
Investment (11,280-10,280-1,000) -
Current assets (15,000+8,000-500-750) 21,750
52,800
Equity and liabilities Equity
Equity
Share capital 10,000
Consolidated Retained earnings 26,180
36,180
Non-controlling interest 2,770
38,950
Non-current liabilities (0+2,000-1,000) 1,000
Current liabilities (10,000+3,600-750) 12,850
52,800
c) HILLUSION GROUP
Statement of Change in Equity
For the year ended 31 March 20X3
Share capital Consolidated NCI Total
Retained Earnings
Balance as on 1-4-20X2 10,000 *16,525 - 26,525
NCI at acquisition 2,500 2,500
Profit for the year 9,655 270 9,925
Balance as on 31-3-20X3 10,000 26,180 2,770 38,950
*Only brought forward balance of parent because acquisition of subsidiary is during the period.

Workings

1) Analysis of equity of S:
At acquisition (1-7-20X2) H (80%) NCI (20%)
Share capital 2,000
Retained Earnings 6,150
(5,400+3,000 x 3/12)
8,150
Revaluation Surplus 3,200
11,350 9,080 2,270
Paid by H 10,280
Fair value of non-controlling interest 2,500
Goodwill 1,200 230
Total Goodwill 1,430

W-2 Accounting Entries:

a) Plant 3,200
Revaluation Surplus 3,200
b) Cost of sales 600
Plant 600
(3,200 ÷ 4 x 9/12)
(Non-controlling interest will be affected because asset is of subsidiary)

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c) Cost of sales 500
Stock 500
(2,000 x 25% = 500)
(3/12 x 100 = 25% of sales)
(Parent sold to subsidiary therefore no effect on non-controlling interest)
d) Operating Expenses 300
Goodwill 300
(As non-controlling interest is at Fair value therefore non-controlling interest will be affected by impairment
of goodwill)
If only consolidated statement of financial position is in this question required to be prepared:

HILLUSION GROUP
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH 20X3
Assets
Property plant and equipment (19,320 + 8,000 + 3,200 - 600) 29,920
Investments (11,280 – 10,280 - 1000) -
Goodwill (1,430 – 300) 1,130
Current assets (15,000+8,000-750-500) 21,750
Total assets 52,800
Equity and liabilities Equity
Ordinary shares capital 10,000
Consolidated Retained Earnings (25,600+1,800-,480-500-
240) 26,180
36,180
Non-controlling Interest (2,500+450-120-60) 2,770
Non-current liabilities 38,950

10% loan notes (2,000-1,000) 1,000

Current liabilities (10,000+3,600-750)) 12,850
Total equity and liabilities 52,800
Workings
Analysis of Equity S:
W-1 At Acquisition:
H 80% NCI 20%
Share Capital 2,000
Rev. Surplus 3,200
Retained earnings 6,150
(8,400-3000+3000x3/12)
11,350 9,080 2,270
Paid 10,280
NCI at FV 2,500
1,200 230
Total Good will 1,430
Change since Acquisition:
3,000 x 9/12 = 2,250 1,800 450

W-2 Accounting Entries:

a) Plant 3,200
Revaluation Surplus 3,200
b) CRE (80%) 480
NCI (20%) 120
Plant 600

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205
 (3,200÷4 x 9/12 = 600)
c) CRE 500
Stock 500

(2,000 x 25/100 = 500)

(3/12 x 100=25% of sale price)

(H to S so no effect on non-controlling interest)
d) CRE (80%) 240
NCI (20%) 60
Goodwill 300

(Non-controlling interest at fair value therefore non-controlling interest will be affected by impairment of
goodwill)

A.23

(a) Rivera Limited

Consolidated Statement of Comprehensive Income for the year ended 31 December
2014
Rs. in
million

Sales - net (285+320-60-48) 497.00

Cost of sales (186+240-60-48+1.6+2.8) (322.40)
Gross profit 174.60
Selling and distribution expenses (27+25) (52.00)
Administration and other expenses (17+15+1.2+4.68) (37.88)
Operating profit 84.72
Finance charges (8+10) (18.00)
Profit before tax 66.72
Taxation (19+12) (31.00)
Net profit for the year 35.72
Attributable to:
- Owners of the parent Balancing 32.92
- Non-controlling interest (18(W3)-2.8-1.2) x 20% 2.80
35.72
(b) Rivera Limited
Consolidated Statement of Financial Position as at 31 December 2014

Rs. in
million
ASSETS
Non-current assets:
Property, plant and equipment (190+263+18-1.2) 469.80
Goodwill (46.8 – 4.68) 42.12
511.92
Current assets (23+35-2.8-1.6) 53.60
565.52
EQUITY AND LIBILITIES
Equity
Share capital 350.00
Retained earnings (50+32.92) 82.92
432.68

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 A person should never feel proud of his time
Non-controlling interest (50.8+2.8) 53.60
486.52
Current liabilities (35+44) 79.00
565.52
Workings
W-1 Analysis of Equity S:
At Acquisition: 1-1-2014
RL 80% NCI 20%
Share Capital 200
Rev. Surplus 18
Retained earnings 36
254 203.2 50.8
Paid 250
Goodwill 46.8

W-2 Accounting Entries

a) Office Building 18
Revaluation Surplus 18
b) Depreciation 1.2

Accumulated depreciation 1.2

(18/15)
(As the asset is of S; so it will affect non-controlling interest as well)
c) Intra company sale
 Sale by parent
Cost of sale 1.6
Inventory 1.6
(9.6 x 20/120 = 1.6)

(As the sale is by parent, therefore no effect on non-controlling interest)

 Sale by subsidiary
Cost of sale 2.8
Inventory 2.8
(16.8/120 x 20 = 2.8)
(As the sale is by subsidiary therefore non-controlling interest will be affected)
d) Impairment Loss
Admin expenses 4.68
Good will 4.68
(46.8 / 10)
(As non-controlling interest is not at fair value therefore no effect on non-controlling interest)

W-3
Income Statement of Subsidiary (CL) to calculate its Net profit
Sales 320
Cost of sales 240

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 Gross profit 80
Selling and distribution expenses 25
Administration and other expenses 15
Operating profit 40
Finance charges 10
Profit before tax 30
Taxation 12
Net profit for the year 18

If a statement of changes in equity is also required in the exam then:

Rivera Limited
Statement of Change in Equity
For the year ended 31-12-2014
Share capital Consolidated NCI Total
Retained Earnings
Balance as on 1-1-2014 350 *50 - 400
NCI at acquisition 50.8 50.8
Profit for the period 32.92 2.8 35.72
Balance as on 31-12-2014 350 82.92 53.6 486.52

*Only brought forward balance of parent because acquisition of subsidiary during the period.

If only statement of financial position is required in exam question then:

Rivera Limited
Consolidated Statement of Financial Position as at 31 December
2014
Rs. in
million
ASSETS
Non-current assets:
Property, plant and equipment (190+263+18-1.2) 469.80
Goodwill (46.8 – 4.68) 42.12
511.92
Current assets (23+35-2.8-1.6) 53.60
565.52
EQUITY AND LIBILITIES
Equity
Share capital 350.00
Retained earnings (50+28+14.4-0.96-1.6-2.24-4.68) 82.92
432.68
Non-controlling interest (50.8+3.6-0.24-0.56) 53.60
486.52
Current liabilities (35+44) 79.00
565.52

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Workings
W-1 Analysis of Equity of Subsidiary: “Inspire people to do positive things in positive ways.”
At Acquisition:

RL 80% NCI 20%

Share Capital 200
Revaluation Surplus 18
Retained earnings 36
254 203.2 50.8
Paid by RL 250
Goodwill 46.8
Change since Acquisition
Retained Earnings 18 14.4 3.6

W-2 Accounting Entries

a) Office Building 18
Revaluation Surplus 18
b) CRE 0.96
NCI 0.24
Acc Depreciation 1.2

c) Intra company sale

 Sale by parent
CRE 1.6
Inventory 1.6
 Sale by subsidiary
CRE 2.24
NCI 0.56
Inventory 2.8

d) Impairment Loss
CRE 4.68
Good will 4.68

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Extra practice questions:
Question No. 1
Following information has been extracted from the financial statements of Yasir Limited (YL) and Bilal
Limited (BL) for the year ended 30 June 2016.
YL BL YL BL
Assets Equity & Liabilities
Rs. In million Rs. In million
Fixed assets 250 540 Share capital (Rs. 10 each) 750 500
Accumulated depreciation (70) (70) Retained earnings 340 258
180 470 1,090 758
Investment in BL – at cost 675 - Loan from YL - 12
Loan to BL 16 - Creditors & other liabilities 75 51
Stock in trade 160 150
Other current assets 71 50
Cash and bank 63 151
1,165 821 1,165 821

Additional information:
(i) On 1 July 2014, YL acquired 75% shares of BL at Rs. 18 per share. On the acquisition date, fair
value of BL’s net assets was equal to its book value except for an officer building whose fair value
exceeded its carrying value by Rs. 12 million. Both companies provide depreciation on building at
5% on straight line basis.
(ii) Year wise net profit of both companies are given below:

2016 2015
------- Rs. In million --------
YL 219 105
BL 11 168
(iii) The following inter-company sales were made during the year ended 30 June 2016:

Included in buyer’s closing stock

Sales
in trade Profit %
------------- Rs. In million --------------
YL to BL 120 20 30% on cost
BL to YL 80 32 15% on sale
(iv) BL declared interim dividend of 12% in the year 2015 and final dividend of 20% for the year 2016.
(v) The loan was granted by YL to BL on 1 July 2014 and carries interest rate of 12% payable annually.
The principal is repayable in five equal annual instalments of Rs. 4 million each. On 30 June 2016.
BL issued a cheque of Rs. 5.92 million which was received by YL on 2 July 2016. No interest has
been accrued by YL.
(vi) YL values non-controlling interest on the date of acquisition at its fair value. BL’s share price was Rs.
15 on acquisition date.
(vii) An impairment test has indicated that goodwill of BL was impaired by 10% on 30 June 2016. There
was no impairment during the previous year.
Required:

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Prepare a consolidated statement of financial position as at 30 June 2016 in accordance with the
requirements of International Financial Reporting Standards. (18)

Answer No. 1
YL Group
Consolidated statement of financial position
As on 30-6-2016
Rs. Rs.
Non-Current Assets:
Fixed Assets (180 + 470 + 12 – 1.2) 660.8
Goodwill (211.5 – 21.15) 190.35
Current Assets:
Stock (160 + 150 – 4.62 – 4.8) 300.58
Other Current Assets (71 + 50) 121.00
Cash and bank (63 + 151 + 5.92) 219.92
Total Assets 1,492.65
Equity & Liabilities:
Equity:
Share Capital 750
Consolidated Retained Earning (340 + 89.25 – 0.9 – 4.62 – 3.6 + 1.92 – 406.19 1,156.19
15.86)
Non-Controlling Interest (187.5 + 29.75 – 0.3 – 1.2 – 5.29) 210.46
1,366.65
Current Liabilities:
Creditors and other liabilities (75 + 51) 126.00
Total Equity & Liabilities 1,492.65

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Workings:
Analysis of Equity of BL:
P (75%) NCI (25%)
At Acquisition 1-7-2014
S.C 500
R.E (Working ii) 139*
639
Revaluation surplus 12
651 488.25 162.75
COI (500/10 × 75% × 18) 675.00
Fv of NCI (v) 187.50
Goodwill 186.75 24.75

Total goodwill 211.5

Change in equity since the date of acquisition till the SOFP 119 89.25 29.75
date [258 – 139]

Workings:
(i) Office building 12
Revaluation surplus 12

CRE (75%) 0.9

NCI (25%) 0.3
Office building (12 × 5% × 2) 1.2
(ii) Pre – Acquisition profit of BL on 1-7-2014 is
BL – RE

b/d (bal) 139

Dividend (500 × 12%) 60 PAT 168
c/d 247
b/d 247
PAT 11
c/d 258
(iii) P→S
20
 30 = 4.62
130
CRE 4.62
Stock 4.62
S→P
32
 15 = 4.8
100

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 CRE 3.6
NCI 1.2
Stock 4.8
(iv) Entry in the books of YL:
Cheque in transit 5.92
Interest income (CRE) 1.92
Loan – BL 4
Working:
Loan given on 1-7-2014 20
Repayment (annual) (4)
Loan as on 30-6-2015 16
Interest × 12% 1.92
(v) FV of NCI: 500/10 = 50 × 25% = 12.5 × 15 = 187.5 M
(vi) Impairment Loss = 211.5 × 10% = 21.15
CRE 15.86
NCI 5.29
Goodwill 21.15
Question No. 2
On 1 July 2014, Galaxy Limited (GL) acquired controlling interest in Beta Limited (BL). The following
information has been extracted from the financial statements of GL and BL for the yeare ended 30 June
2015.
GL BL
Rs. In million
Share capital (Rs. 100 each) 100 50
Retained earnings – 1 July 2014 40 18
Profit for the year ended 30 June 2015 20 6
Shareholders equity / Net assets 160 74

Investment in BL (300,000 shares) 50 -

Inter-company sales (at invoice value) 25 30
Inter-company purchases remained unsold at year end 9 5
Inter-company current account balances 7 (4)

Other relevant information is as under:

(i) On the date of acquisition, fair value of BL’s net assets was equal to their book value except for the
following:
• Fair value of a land exceeded its carrying value by Rs. 20 million.
• The value of a plant was impaired by Rs. 10 million. The impairment was also recorded by BL
on 2 July 2014.
• BL measures its property, plant and equipment using cost model.
(ii) There is no change in share capital since 1 July 2014.

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(iii) Inter-company sales are invoiced at cost plus 20%. The difference between the current account
balances is due to goods dispatched by GL on 30 June 2015 which were received by BL on 5 July
2015.
(iv) GL values non-controlling interest at the acquisition date at its fair value which was Rs. 35 million.
(v) As at 30 June 2015, goodwill of BL was impaired by 10%.
Required:
Compute the amounts of goodwill, consolidated retained earnings and non-controlling interest as they
would appear in GL’s consolidated statement of financial position as at 30 June 2015.
Answer No. 2
Analysis of Equity of BL:
P (60%) NCI (40%)
At Acquisition
S.C 50
R.E 18
68
Revaluation surplus 20
Impairment loss (10)
78 46.8 31.2
Cost of investment 50
FV of NCI 35
Goodwill 3.2 3.8
Total goodwill (3.2 + 3.8 = 7)
Since Acquisition till the SOFP date 6 3.6 2.4
Working notes:
(i) As land so no depreciation impact.
(ii) As impairment loss is subsequently also charged by BL so depreciation would have been properly
charged on recoverable amount, during the year by BL.
(iii) Unsold Stock
P→S=5 S→P=9
5 9
× 20 = 0.83 × 20 = 1.5
120 120
CRE 0.83 CRE 0.9
Stock 0.83 NCI 0.6
Stock 1.5
(iv) Goods in transit
P → S = 3 (7 – 4)
Goods in transit 3
Payable to GL 3
3
× 20 = 0.5
120
CRE 0.5

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 Goods in transit 0.5
(v) Goodwill Impairment: 7 × 10% = 0.7
CRE 0.42
NCI 0.28
Goodwill 0.7
(NCI is at Fair value)
vi)
Plant 10
CRE 6.0
NCI 4.0

Calculation of goodwill = 7 – 0.7 = 0.63

Calculation of CRE:
GL retained earnings [40+20] 60
+ post acquisition profits of S 3.6
+post acquisition reversal of impairment loss 6.0
(recorded by BL)
- unsold stock of P 0.83
- unsold stock of S 0.9
- Goods in transit 0.5
- impairment of goodwill 0.42
66.95
Calculation of NCI:
NCI = 35 + 2.4 – 0.6 – 0.28 + 4.0 = 40.52

Question No. 3
The summarized trial balances of Oscar Limited (OL) and United Limited (UL) as at 31 December 2015 are
as follows:

Oscar Limited (OL) United Limited (UL)

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

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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

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216
Additional information:
(i) On 1 May 2015, OL acquired 80% shares of UL. UL 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) OL charged Rs. 2.5 million monthly to UL for management services provided from the date of
acquisition and has credited it to operating expenses.
(iii) On 1 October 2015, UL sold a machine to OL for Rs. 24 million. The machine had been purchased
on 1 October 2013 for Rs. 26 million. 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.
(iv) Other inter-company transactions during the year 2015 were as follows:

Included in buyer’s
Sales closing stock-in-
trade Profit %
------------ Rs. In million -------------
OL to UL (P – S) 60 20 25% of cost
UL to OL (S – P) 30 5 20% of sales
UL settled the inter-company balance as on 31 December 2015 by issuing a cheque of Rs. 30 million.
However, the cheque was received by OL on 1 January 2016.
(v) The non-controlling interest is measured at the proportionate share of UL’s identifiable net assets.
It may be assumed that profits of both companies had 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. (18)
Answer No. 3
Oscar Limited
Consolidated Statement of Comprehensive Income
For the year ended 31-12-2015
Rs. In
million
Sales [835 + 645 × 8/12 – 60 × 8/12 – 30 × 8/12] – 3.2 1,201.8
Cost of sale [525 + 396 × 8/12 – 60 × 8/12 – 30 × 8/12] + 4 + 1- 0.1 (733.9)
Gross profit 467.9
Other income [3.2+2-3.2-2] 0
Operating expenses [115 + 102 × 8/12] + 2 + 2 - 2 (185)
Profit before tax 282.9
Tax expense [65 + 48 × 8/12] (97.00)
Profit after tax 185.9
Attributable to:
Owners of Parent (bal.) 173.92
Non-controlling Interest (99* × 8/12 – 3.2 + 0.1 – 1 – 2) × 20% 11.98
185.90

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*(645-396-102-48)
Statement of changes in equity

S.C S.P CRE NCI Total

Balance as on 1-1-2015 600 150 265 -- 1,015
NCI at Acquisition 113.4 113.4
Profit for the year 173.92 11.98 185.9
600 150 438.92 125.38 1,314.30

Oscar Limited
Consolidated Statement of Financial Position
As on 31-12-2015
Rs. In Rs. In
million million
Non-Current Assets:
Property, plant & equipment (390 + 350 – 3.2 + 0.1) 736.9
Brand (45 – 2) 43.0
Goodwill 46.4
Current Assets:
Stock (125 + 115 – 4 – 1) 235.0
Trade receivables (140 + 125 – 30) 235.0
Cash and bank (105 + 103 + 30) 238.0
1,534.3

Equity & Liabilities:

Share capital 600
Share premium 150
Con. Retained Earnings 438.92 1,188.92
Non-Controlling Interest 125.38
1,314.30
Current Liabilities (115 + 105) 220.00
1,534.3

Analysis of Equity of S:

P (80%) NCI (20%)

Acquisition (1-5-2015)
Share capital 250
Share premium 60
Retained Earnings 212
Brand – FV 45 567 453.6 113.4
Cost of Investment 500.0
Goodwill 46.4

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 “Speak truth and avoid bad company.”

Profit for the year of UL = (645 – 396 – 102 – 48) = 99

Accounting Entries:

Brand 45
Revaluation Surplus 45
Amortization (45 ÷ 15 × 8/12) 2
Brand 2
(NCI will be affected)

Disposal of machine [by subsidiary to parent]:

01.01.2013
UL (Subsidiary)
Entry that would have been made:
Cash 24
*Accumulated Depreciation 5.2
Machine 26
Gain (sales) 3.2
*26 ÷ 10 × 2 = 5.2
Consolidation Adjustment
Sales 3.2
Other income 3.2
Other income 3.2
Machine 3.2

Reversal of extra depreciation:

3.2/8 x 3/12 = 0.1
Machine 0.1
Depreciation (cost of sales) 0.1
[NCI will also be affected by net gain of 3.1 (3.2 – 0.1) as machine is sold by subsidiary]
(iii) UL would have charged management fee as an expense in operating expenses. OL has recorded
the income by crediting the operating expenses therefore net affect is already cancelled. If we make
an entry it will be:
Operating expenses OL 20
Other income OL 20
Other income OL 20
Operating expenses UL 20
(2.5 × 8 = 20)
Therefore no need of any adjustment.

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(iv) (a) OL to UL (P – S)
20
× 25 = 4
125
COS 4
Stock 4
(No effect on NCI)
(b) UL to OL (S – P)
5
× 20 = 1
100
COS 1
Stock 1
(NCI will be affected)
In addition UL would have made entry as follows:
Payable to OL 30
Bank 30
Therefore at the year end, OL will make a reconciling entry as follows:
Cash in transit 30
UL (Receivable from UL) 30
Entries that have already been made:

OL UL
(UL) Debtor 60 Purchases 60
Sale 60 (OL) Payable 60
Purchases 30 Debtor (OL) 30
(UL) payable 30 Sales 30

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Question 4
The draft summarized statements of financial position of Golden Limited (GL) and its subsidiary Silver
Limited (SL) as at 31 December 2016 are as follows:
GL SL
---------- Rs. in million ----------
Building 1,600 500
Plant & machinery 1,465 690
Investment in SL 387 -
Current assets 2,008 780

5,460 1,970

Share capital (Rs. 10 each) 980 450

Share premium 730 150
Retained earnings 3,150 210

4,860 810
Liabilities 600 1,160

5,460 1,970

GL acquired 60% of the shares of SL on 1 April 2016 at following consideration:

• Issuance of 20 million ordinary shares at premium of Rs. 5 each;

• Cash amounting to Rs. 87 million, which includes consultancy charges of Rs. 10 million and legal
expenses of Rs. 5 million.

The market value of each share of GL and SL on acquisition date was Rs. 25 and Rs. 15 respectively. At
acquisition date, retained earnings of SL were Rs. 100 million.
The following table sets out those items whose fair value on the acquisition date was different from their
book value. These values have not been incorporated in SL’s books of account.
Book value Fair value
---------Rs. in million---------
Building 250 170
Inventory 112 62
Provision for bad debts (15) (24)

Buildings are depreciated at the rate of 5%

Upon acquisition of SL, a contract for management services was also signed under which GL would provide
various management services to SL at an annual fee of Rs. 50 million from the date of acquisition. The
payment would be made in two equal instalments payable in arrears on 1 April and 1 October.
SL paid an interim cash dividend of 10% on 31 July 2016.

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GL values non-controlling interest at the acquisition date at its fair value.
Required:
Prepare a consolidated statement of financial position as at 31 December 2016 in accordance with the
requirements of International Financial Reporting Standards.

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222
Answer.4
Golden Limited
Consolidated Statement of Financial Position
As on 31-12-2016
Millions
Non-Current Assets:
Building [1,600 + 500 – 80 + 3] 2,023
Plant & Machinery [1,465 + 690] 2,155
Goodwill 81
Current Assets:
Current Assets [2,008 + 780 – 50 – 9 – 12.5] 2,716.5
6,975.5
Equity & Liabilities:
Share Capital 980.0
Share premium 730.0
Consolidated Retained Earnings [3,150 + 66 – 15 + 1.8] 3,202.8
4,912.8
Non-Controlling Interest [270 + 44 + 1.2] 315.2
5,228
Liabilities [600 + 1,160 – 12.5] 1,747.5
6,975.5

Workings:
Analysis of Equity of SL

GL (60%) NCI (40%)

At Acquisition:
Share capital 450
Share premium 150
Retained earnings 100
700
Revaluation Loss (80 + 50 + 9) (139)
561 336.6 224.4
Cost of Investment (20 × 15 + 72) or [387 -15] 372.00
FV of NCI [450 ÷ 10 × 40% × 15] 270.0
Goodwill 35.4 45.6
Total goodwill 81
Since Acquisition till the SOFP date:
Retained earnings (210 – 100) 110 66 44

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 Strive to bring goodness in your behavior and character

Entries:
(i) CRE (10 + 5) 15
Investment 15
(ii) R. Loss 80
Building 80

(iii) 80 × 5% × 9/12 = 3

Building 3
CRE 1.8
NCI 1.2
(iii) R. Loss 50
Inventory 50
(iv) Revaluation Loss 9
Provision 9
(v) Payable – S.L 12.5
Receivable – G.L 12.5
50/2 = 25 × 3/6 = 12.5
Note: No effect of interim dividend declared during the year, it should have been recorded by SL.

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Consolidation Test:
Q.1: HASAN LIMITED Question: On 1 April 2014, Hasan Limited acquired 90% of the equity shares in
Shakeel Limited. On the same day Hasan Limited accepted a 10% loan note from Shakeel Limited for Rs.
200,000 which was repayable at Rs. 40,000 per annum (on 31 March each year) over the next five years.
Shakeel Limited’s retained earnings at the date of acquisition were Rs. 2,200,000.

Statement of financial position as at 31.03.2015

Hasan Shakeel
Limited Limited
Rs. 000 Rs. 000
Non-current assets
Property, plant and equipment 2,120 1,990
Intangible – software – 1,800
Investments – equity in Shakeel Limited 4,110 –
Investments – 10% loan note Shakeel Limited 200 –
Investments – others 65 210
6,495 4,000
Current assets
Inventories 719 560
Trade receivables 524 328
Shakeel Limited current account 75 –
Cash 20
1,338 888
Total assets 7,833 4,888

Hasan Shakeel
Limited Limited
Rs. 000 Rs. 000
Equity and liabilities:
Capital and reserves
Equity shares of Rs. 1 2,000 1,500
each
Share premium 2,000 500
Retained earnings 2,900 1,955
6,900 3,955
Non-current liabilities
10% Loan note from Hasan Limited – 160
Government grant 230 40
230 200
Current liabilities
Trade payables 475 472
Hasan Limited current account – 60
Income taxes payable 228 174
Operating overdraft – 27

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 703 733
Total equity and liabilities 7,833 4,888
The following information is relevant:
1. Included in Shakeel Limited’s property at the date of acquisition was a leasehold property recorded at its
depreciated historical cost of Rs. 400,000. The leasehold had been sub-let for its remaining life of only four
years at an annual rental of Rs. 80,000 payable in advance on 1 April each year. The directors of Hasan
Limited are of the opinion that the fair value of this leasehold is best reflected by the present value of its
future cash flows. An appropriate cost of capital for the group is 10% per annum.
The present value of a Rs. 1 annuity received at the end of each year where interest rates are 10% can
be taken as:
3 year annuity Rs. 2.50
4 year annuity Rs. 3.20
2. The software of Shakeel Limited represents the depreciated cost of the development of an integrated
business accounting package. It was completed at a capitalised cost of Rs. 2,400,000 and became
available for use on 1 April 2013. Shakeel Limited’s directors are depreciating the software on a straight-
line basis over an eight-year life (i.e. Rs. 300,000 per annum). However, the directors of Hasan Limited are
of the opinion that a five-year life would be more appropriate as sales of business software rarely exceed this
period.
3.The inventory of Hasan Limited on 31 March 2015 contains goods at a transfer price of Rs. 25,000 that
were supplied by Shakeel Limited who had marked them up with a profit of 25% on cost. Unrealised profits
are adjusted for against the profit of the company that made them.
4. On 31 March 2015 Shakeel Limited remitted to Hasan Limited a cash payment of Rs. 55,000. This was
not received by Hasan Limited until early April. It was made up of an annual repayment of the 10% loan note
of Rs. 40,000 (the interest had already been paid) and Rs. 15,000 of the current account balance.
5. The accounting policy of Hasan Limited for non-controlling interests (NCI) in a subsidiary is to value NCI
at a proportionate share of the net assets.
6. An impairment test at 31 March 2015 on the consolidated goodwill concluded that it should be written down
by Rs. 120,000. No other assets were impaired.
Required:
Prepare the consolidated statement of financial position of Hasan Limited as at 31 March 2015.

Answer:
Hasan Limited Group
Consolidated statement of financial position as at 31
March 2015
Rs.000 Rs.000
Assets
Non-current assets
Property, plant and equipment (2,120+1,990-121+30) 4,019
Goodwill (601-120) 481
Software (1,800-180-180) 1,440
Investments (65 + 210) 275

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 Current assets
Inventories (719+560-5) 1,274
Trade receivables (524 + 328) 852
Cash and bank (20 + 55 cash in transit) 75
Total assets 8,416

Equity and liabilities

Capital and reserves
Equity capital 2,000
Share premium 2,000
Retained earnings (2,900-221+27-162-4.5-120) 2,420
6,420
Non-controlling interest (390-24+3-18-0.5) 350
Non-current liabilities
Government grants (230 + 40) 270
Current liabilities
Trade payables (475 + 472) 947
Operating overdraft 27
Income tax liability (228 + 174) 402
Total equity and liabilities 8,416

Workings:
Analysis of Equity of SL:

P (90%) NCI (10%)

At Acquisition:
Share capital 1,500
Share premium 500
Retained earnings 2,200
4,200
R.Loss (Property) (121)
Depreciation (retained earnings) (180)
3,899 3,509 390
Cost of investment 4,110
Goodwill 601

Since Acq till SOFP date:

Retained earnings (1,200-1,955) (245) (221) (24)

Adjutments:
Fair value of the leasehold based on the present value of the future rentals (receivable in advance)
would be as an annuity at 10%:

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227
 Rs.000
PV of rental receipts: [ 80+80 x [1-(1 + 0.1)-3/0.1] 279
Carrying value on acquisition is (400)

Fair value reduction of leasehold (121)

R. Loss 121
PPE 121
(At Acquisition)
Reversal of extra depreciaton [121/4 = 30]
Acc. dep 30
CRE(90%) 27
NCI(10%) 3
Software:

Shakeel Consolidated Difference

Limited’s figures
accounts
Rs.000 Rs.000
Capitalised amount 2,400 2,400
Depreciation to 31
March 2014 (300) 8 year life (480) 5 year life

Value at date of acquisition 180 fair

2,100 1,920 value adjustment
Depreciation to 31 180 additional
March 2015 (300) (480) amortisation

Carrying value 31
March 2015 1,800 1,440

Dep (R. E) 180

Software 180
(At Acquisition)

CRE 162
NCI 18
Software 180
S to P

25 x 25 = 5(Unrealized profit)

125

CRE 4.5
NCI 0.5
Stock 5

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228
Entry to be recorded by H.L:

Cash in transit 55
Investment in the loan notes of SL 40
Current account SL 15
Impairment of goodwill:

CRE 120
Goodwill 120

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229
Extra practice questions
Q.1 Following are the draft statement of financial position of Jasmine Limited (JL) and its subsidiary,
Sunflower Limited (SL) as on 31 December 2017:

JL SL
------ Rs. in million ------
Property, plant and equipment 880 330
Intangible assets 40 50
Investment in SL 520 -
Loan to JL - 120
Current assets 640 345
2,080 845

Share capital (Rs. 10 each) 700 200

Share premium 240 -
Retained earnings 720 410
Loan from SL 96 -
Current liabilities 324 235
2,080 845

Additional information:
(i) JL acquired 75% shares of SL on 1 January 2017. Cost of investment in JL’s books consists of:
▪ 10 million JL's ordinary shares issued at Rs. 24 per share; and
▪ cash payment of Rs. 280 million (including professional fee of Rs. 10 million for advice on
acquisition of SL)

(ii) 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. The recoverable amount of the brand at 31
December 2017 was estimated at Rs. 28 million.
(iii) JL values non-controlling interest at fair value. The market price of SL's shares was
Rs. 36 at the date of acquisition, which has increased to Rs. 40 as of 31 December 2017.
■ JL and SL showed a net profit of Rs. 200 million and Rs. 60 million respectively for the year
ended 31 December 2017.
■ The loan was granted on 1 July 2017 and carries mark-up of 10% per annum. A
cheque of Rs. 30 million including interest was dispatched by JL on 31 December 2017 but
was received by SL after the year end. No interest has been accrued by SL in its financial
statements.
(vi) On 1 May 2017 SL sold a machine to JL for Rs. 52 million at a gain of Rs. 12 million. However, no
payment has yet been made by JL. The remaining useful life of the machine at the time of disposal
was 2 years.
(vii) During the year, JL made sales of Rs. 250 million to SL at 20% above cost. 60% of these goods are
included in SL’s closing stock.
(viii) SL declared interim cash dividend of 10% in November 2017 which was paid on 2 January 2018.
The dividend has correctly been recorded by both companies.
Required:
Prepare JL's consolidated statement of financial position as at 31 December 2017. (15)

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230
Answer: 1
JL Group
Consolidated Statement of Financial Position
As on 31-12-2017
Rs. in Million
Non-Current Assets:
PPE (880+330- 8) 1,200
Intangible Assets (40+50 +15–3–4) 98
Goodwill 105
Current assets (640+345–25–15)-52 893
Cash in transit 30
Total Assets 2,328
Equity & Liabilities:
Equity:
Share capital 700
Share premium 240
Consolidated retained earnings (720+30-10-2.25-3+4.5-6-25) 708.25
1,648.25
Non-Controlling interest (180+10-0.75-1+1.5-2) 187.75
Total Equity of group 1,836
Current Liabilities:
(324+235-15)52 492
Total Equity & Liabilities 2,328

Workings:
Analysis of Equity of SL:
P (75%) NCI(25%)
At Acquisition:
Share capital 200
Share premium -
Retained earnings (iv) 370
570
R.S 15
585 438.75 146.25
Cost of investment 510.00
FV of NCI (iii) 180.00
Goodwill 71.25 33.75

Total Goodwill (71.25 + 33.75) = 105 M

Since Acq till SOFP date:

Retained earnings (370 – 410) 40 30 10

(i) CRE 10 (Professional fee as an initial direct cost)

Investment in SL 10

Final cost of Acquisition is:

10M x 24 = 240M
Add Cash payment = 270M (280 – 10)
= 510M

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231
 Oh ALLAH, I ask you for a Good end.

(ii) (a) Brand 15

R.S 15
(At Acquisition)
(b) CRE(75%) 2.25
NCI(25%) 0.75
Brand 3
(15÷3)
(c) CRE 3
NCI 1
Brand 4

Carrying amount [40-(40÷5)] = 32

Recoverable amount = 28
Impairment loss 4

(iii) NCI at Fair value

200 + 10 = 20 x 25% x 36 = 180 M (FV of NCI)

(iv) Pre-acquisition retained earnings of SL:

Retained earnings
b/d (01/01/2017) 370
Dividend (200 x 10%) 20 PAT 60
c/d 410

(v) Interest on loan = 120 x 10% x 6/12 = 6M

Entry to be recorded by S.L:
Cash in transit 30
CRE(75%) 4.5
NCI(25%) 1.5
Loan to JL 24
Loan from SL 96
Loan to JL 96

(vi) Sale of machinery by SL to JL:

Unrealized gain = 12M
Depreciation on gain to be reversed (12/2 x 8/12) = (4M)
Net gain to be reversed in the books of SL = 8M

CRE(75%) 6
NCI(25%) 2
Asset(PPE) 8
Payable to SL 52
Receivable from JL 52
(vii) 250 x 60% = 150
150 x 20 = 25(Unrealized profit)
120
JL to SL
CRE 25
Stock 25

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232
(viii) Interim dividend = 200 x 10% = 20
Dividend payable to JL 15
Dividend receivable from SL 15
(20 x 75%) = 15

Q.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 1,300 846
Selling and administrative expenses 350 225
Investment income 190 50
Gain on disposal of fixed assets - net 35
Taxation 80 60
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. 13 respectively.
Retained earnings of PL and FL on the acquisition date were Rs. 1,671 million and Rs. 506.5 million
respectively.

At acquisition date, fair value of FL’s net assets was equal to their book value except a brand which
had not been recognised by FL. The fair value of the brand is assessed at Rs. 90 million. PL
estimates that benefit would be obtained from the brand for the next 10 years.

(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) On 1 January 2017 PL sold a manufacturing plant having carrying value of Rs. 42 million to FL
against cash consideration of Rs. 30 million. The plant had a remaining useful life of 6 years on the
date of disposal.
(iv) On 1 February 2017 FL delivered goods having sale price of Rs. 100 million to PL on ‘sale or return
basis’. 40% of these goods were returned on 1 May 2017 and the remaining were accepted by PL.
20% of the goods accepted were included in the closing inventory of PL. FL earned a profit of 33.33%
on cost.
(v) Both companies paid interim cash dividend at the rate of 5% in May 2017.
(vi) An impairment test carried out at year end has indicated that goodwill of FL has been impaired by
10%.
(vii) PL measures the non-controlling interest at its fair value.

Required:
(a) Prepare consolidated statement of profit or loss for the year ended 30 June 2017. (13)
(b) Compute the amounts of consolidated retained earnings and non-controlling interest as
would appear in the consolidated statement of financial position as at 30 June 2017. (04)

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233
Ans.2 :

a) Present Limited
Consolidated statement of profit or loss
For the year ended 30-06-2017
Rupees in
(Million)
Sales (2,060+(1,524*10/12-60) 3,270
Cost of Sales (1,300+(846*10/12-60+3) (1,948)
Gross Profit 1,322
Investment income (190+50-50-84.5) 105.5
Gain on disposal (35+11) 46
Admin and selling Expenses [350+(225*10/12)+7.5+48.65] (593.65)
Profit before tax 879.85
Tax (80+60*10/12) (130)
Profit after tax 749.85
Attributable to:
Owners of the parent (balancing) 655.93
NCI [(443-50) x 10/12 - 7.5 – 3 - 48.65] x 35% 93.92
749.85

(b) Present Limited

Consolidated statement of changes in equity (to calculate amounts of consolidated retained earnings
and Non controlling interest]

For the year ended 30-6-2017

CRE NCI

Opening balance 1,616 -

[1,996 + 175 - 555]
NCI at acquisition - 1,183
Profit 655.93 93.92
Dividend (175) (45.5)
[2,600 x 5% x 35%]
Closing balance 2,096.93 1,231.42

(W-1) Analysis of Equity:

At Acquisition: 1-9-2016
P 65% NCI 35%
Share Capital 2,600
Retained Earnings * 506.5
3,106.5
Rev. Surplus 90
3,196.5 2,077.5 1,119
Cost of investment (900 + 1,000 / 10 x 2,500
16)
FV of NCI (2,600/10 x 35% x 13) 1,183

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234
 Goodwill 422.5 64
Total Goodwill =486.5

*[As this is retained earnings as on acquisition date (rather than at the begning of the period) therefore
investment income of FL should be in it as it is pre acquisition income]

Entries:

1- Brand 90
Rev. surplus 90

2- Amortization 7.5 (included in selling expanses)

Brand 7.5 (90 / 10 x 10/12)

3- Sale of plant (by parent to subsidiary)

Plant 11
Loss (Gain) 11 (Loss to be reversed)

Loss to be reversed: 42 -30 = 12

Depreciation to be charged: 12 / 6 x 6/12 = 1
net loss to be reversed : [12-1 = 11]
[NCI will not be affected because asset is sold by parent]

4- Goods sold by subsidiary to parent [100-40=60]

Cost of sale 3
Stock 3
60 x 20%=12 / 133.33*33.33 = 3
( NCI will be affected)

5- Entries of dividend that should have been recorded( interim dividend)

Parent Subsidiary

Dividend (CRE) 175 Dividend 130

Dividend payable 175 Dividend payable 130
(3,500*5%) (2,600*5%)

Dividend Receivable 84.5

Dividend income 84.5
(130 x 65%)

6- Impairment of Goodwill:
Impairment 48.65 (Admin.)
Goodwill 48.65
(It will affect NCI as it is at fair value)

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235
 Be Patient! the best ending is for the righteous [11:49]
Separate income statement ( to get profit for the year) PL SL
Rupees in Rupees in
(Million) (Million)
Sales 2,060 1,524
Cost of sale (1,300) (846)
Gross profit 760 678
Investment income 190 50
Gain on disposal 35 -
Selling and admin. expenses (350) (225)
Profit before Tax 635 503
Taxation (80) (60)
Profit after tax 555 443

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236
 But ALLAH is your protector, and He is best of helpers
IAS-28: [Accounting For [3:150]

Associates]
Associate: An entity over which an investor has a significant influence (rather than control; means not a subsidiary)

Significant influence: is the power to participate in the financial and operating policy decisions of investee but not
control of those policies.

Point To remember:
If an entity holds 20% or more but less than 50% of the equity of another entity (investee), it is presumed that entity has
significant influence over investee (means an associate).

Separate Financial Statements: [Para 10 of IAS-27]

An investor shall account for the investment in an associate in its separate financial statements
i) At cost (it means record the investment at cost and then only account for the dividend income from associate in
the statement of comprehensive income); or
ii) In accordance with IFRS 9; or
iii) Using equity method as per IAS-28

Consolidated Financial statements: [means investor has investment in one or more subsidiaries and also investment
in associates].

IAS-28 requires investment in associates to be accounted for in consolidated financial statements using equity
method.

Summary of Accounting of associates

In Separate financial statement of investor [if cost model]
Investment
Cash/Payable/Share Capital
Dividend Receivable
Dividend income
Cash
Dividend Receivable

In consolidated financial statement [Equity Method]

Investment in associate
Cash /Payable/ Share Capital
Investment in Associate
Share of profit
(Post acquisition changes in equity)
When dividend from associate is declared then record the dividend receivable up to the extent of our
share in associate
Dividend Receivable
Investment
We have already added in investment our share of profits in associate and when associate declared
dividend from it, it will result in increase in short term asset ( i.e Receivable) and decrease in long term
asset (i.e Investment)
Cash
Dividend Receivable

237
 But ALLAH is your protector, and He is best of helpers [3:150]

Equity Method: It is a method of accounting whereby investment is initially recorded at cost and adjusted thereafter for
post-acquisition changes in the investor’s share of net assets of the investee(means associate).
The profit or loss of the investor includes the investor’s share of profit or loss of the investee. In addition, the other
comprehensive income of the investor includes the investor’s share of other comprehensive income of the investee.

Example 1.P acquired 40% of the equity of A on 1 January 2018 for 45,000. At the date of acquisition, the share
capital and retained earnings of A were 1,000 and 99,000 respectively.
The trial balances of P and A as on 31.12.2019 are as follows:

Trial Balance P A

Share capital 1,000,000 1,000

Retained earnings (31 Dec 2018) 9,000,000 120,000
Profit after tax 800,000 25,000
Land and buildings 10,555,000 145,000
Investment in A 45,000 0

Required: Explain the accounting treatment.

Solution to example:
Workings: Analysis of Equity

P (40%) No NCI
At Acquisition:1.1.2018
Share capital 1,000
Retained earnings 99,000
100,000 40,000 0
Cost of investment 45,000
Difference is Goodwill Xxx
(no separate disclosure
required)
Since Acq. Till the end of
previous period
R.E. (120,000 -99,000) 21,000 8,400 0
Current period 25,000 10,000 0
(from income statement)

• P’s 40% share of the associate’s net assets on date of acquisition is 40,000 [(1,000+99,000) x 40%] and therefore
an excess of 5,000 was paid.
• This is referred to as goodwill but is not separately disclosed.
• This goodwill would have been included as part of the carrying amount of the investment in the associate when the
full amount paid of 45,000 was debited to the investment asset account.
• Since the goodwill does not require separate disclosure, no further journal entry to account for the excess of 5,000
is required.
Accounting entries to record the share of profits:
Up to previous period Debit Credit
Investment 8,400
Opening CRE 8,400
Current period
Investment 10,000
Share of profit 10,000

Therefore the investment in Associate will appear in consolidated statement of financial position at: (45,000 + 8,400 +
10,000) =63,400
238
Example 2.P acquired 40% of the equity of A on 1 January 2018 for 35,000. At the date of acquisition, the share capital
and retained earnings of A were 1,000 and 99,000 respectively.

The trial balances of P and A as on 31.12.2019 are as follows:

Trial Balance P A
Share capital 1,000,000 1,000
Retained earnings (31 Dec 2018) 9,000,000 120,000
Profit after tax 800,000 25,000
Land and buildings 10,565,000 145,000
Investment in A 35,000 0

Required: Explain the accounting treatment.

Solution to example
Workings: Analysis of Equity
P (40%) No NCI
At Acquisition:1.1.2018
Share capital 1,000
Retained earnings 99,000
100,000 40,000 0
Cost of investment 35,000
Difference is Gain 5,000
(to be accounted for)
Since Acq. Till the end of
previous period
R.E. (120,000 -99,000) 21,000 8,400 0
Current period 25,000 10,000 0
(from income statement)

• In this case, P has debited the investment with the cost of 35,000.
• P’s 40% share of the associate’s net assets on date of acquisition is 40,000 and therefore 5,000 less was paid,
means a gain on acquisition.
• In terms of IAS 28.32, the gain must be accounted for as part of the profit from the associate.
• Since this gain is not recorded in the separate financial statements, so we would need to debit the investment by
5,000 and credit this gain to the profit from associate account in the equity-accounted consolidated financial
statements (but as this gain is in previous periods, therefore rather than recording in the profit or loss of this year,
record in opening CRE).

Accounts Debit Credit Comment

Investment in 5,000 The gain of 5,000 is recognized
associate as part of the share of the
Profit from 5,000 associate’s profit. The
associate(opening investment is increased to show
CRE) the value of the investor’s share
of the net assets acquired
(35,000 + 5,000 = 40,000)

Gain on bargain purchase is recognized in profit or loss of the

current period, unless arise in prior periods.

After that all other things remain same:

Accounting entries to record the share of profits:
Up to previous period Debit Credit
Investment 8,400
Opening CRE 8,400
Current period
Investment 10,000
Share of profit 10,000

Therefore the investment in Associate will appear in consolidated statement of financial position at: (35,000 + 5,000 +
8,400 + 10,000) = 58,400
239
 And who can forgive sins except ALLAH [3:135]

Summary of equity method:

The following will be relevant when applying the equity method:
1) Only the investor’s proportionate share is accounted for and thus non-controlling interest is not recognized.
2) Only a single line item, the investment in associate is reflected in the statement of financial position. Therefore
unlike consolidated statement of financial position the assets and liabilities of associate are not added. Similarly a
single line item i.e. share of profit from associate is reflected in statement of comprehensive income. Therefore
unlike consolidated statement of comprehensive income, income and expenses of associate are not added.

Presentation of Share of Profit of associate in statement of profit or loss:

The share of profit of associate is presented in consolidated statement of comprehensive Income immediately before
calculating the group profit before tax.
3) Any goodwill arising at acquisition (i.e. where the consideration given is more than the investor’s share of fair
value of associate’s net assets at the date of acquisition) is simply included as part of carrying amount of investment
in associate and is not disclosed separately. There is no concept of amortization of this goodwill.
4) A gain made on bargain purchase (i.e. where the consideration given is less than the investor’s share of fair value
of associate’s net assets at the date of acquisition) must be recognized in profit or loss as part of the investor’s
share of profit from associate.

Accounting For goodwill or gain on bargain purchase

If the amount paid by investor was more than the share of associate’s net assets (i-e goodwill is assumed to have been
purchased) the goodwill will be automatically recognized as an asset when debiting the Investment with the total amount
paid. This goodwill is not required to be separately disclosed and therefore no further entry is required.
Conversely, if the amount paid by the investor was less than its share of the associate’s net assets, the gain on bargain
purchase must be included in share of profit from associate by making an entry.

Investment xxx
Profit from associate Xxx

Question-1:
The draft statements of financial position as at 31 December 2016 of three companies are set out below:

Helium Sulphur Arsenic

Rs. 000 Rs. 000 Rs. 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. 30,000 respectively.

Required:
Prepare the consolidated statement of financial position as at 31 December 2016.

240
Question-2:
Hide holds 80% of the ordinary share capital of Seek (acquired on 1 February 2016) and 30% of the ordinary share
capital of Arrive (acquired on 1 July 2015).

The draft statements of profit or loss for the year ended 30 June 2016, are set out below.
Hide Seek Arrive
Rs.000 Rs.000 Rs.000
Revenue 12,614 6,160 8,640
Cost of sales (11,318) (5,524) (7,614)
Other income 150 - -
profit before tax 1,446 636 1,026
Income tax (621) (275) (432)
Profit after taxation 825 361 594

Included in the inventory of Seek at 30 June 2016 was Rs. 50,000 for goods purchased from Hide in May 2016 which
the latter company had invoiced at cost plus 25%.

There was no gain on acquisition of subsidiary and associate.

Required:
Prepare a consolidated statement of profit or loss for Hide for the year ended 30 June 2016.

Answer-1:
Helium Group
Consolidated statement of financial position
As at 31 December 2016
Rs.000
Assets
Non-current assets:
Property, plant and equipment (400+100) 500
Interest in associate (30+21) 51
Goodwill 15

Current assets: (445+160) 605

Total assets 1,171

Equity and liabilities

Capital and reserves:
Share capital 100
Retained earnings (650+66+21) 737
837
Non-controlling interest (40+44) 84

Long-term liabilities: (200+50) 250

Total equity and liabilities 1,171

241
Workings: Indeed, My Lord hears all Prayers [14:39]

Analysis of equity of S:
P (60%) NCI (40%)
At Acq:
S. C 30
R. E 70
100 60 40
Cost of investment 75
Goodwill 15
Since Acq. till SOFP date:
R. E (180 – 70) 110 66 44

Analysis of equity of A:
P (30%)
At Acq:
S. C 60
R. E 30
90 27
Cost of investment 30

No need of any entry as difference x

is Good Will

Since Acq. till SOFP date:

R. E (100 – 30) 70 21

Investment in ‘A’ 21
Share of profit (CRE) 21

Answers-2:
Hide Group
Consolidated statement of profit or loss
For the year ended 30 June 2016
Sales (12,614 + 6160 x 5/12 – 50) 15,131
Cost of sales (11,318+5,524 x 5/12 – 50+10) (13,580)
Gross profit 1,551
Other income 150
Share from associate (594 x 30%) 178
Profit before tax 1,879
Tax (621+275 x 5/12) (736)
Profit after tax 1,143
Attributable to:
Owners of parent (bal.) 1,113
NCI (361 x 5/12) x 20% 30
1,143
Workings:
P S
50,000
x25 = 10
125

Cost of sales 10
Stock 10
(No effect on NCI)

Share of profit from associate:

594 x 30% = 178
Investment in ‘A’ 178
Share of profit (CRE) 178

242
Example:
Entity P acquired 30% of the equity shares in Entity A during 2011 at a cost of Rs. 147,000 when the net assets of Entity
A were Rs. 350,000.

At 31 December 2015, the net assets of Entity A were Rs. 600,000.

In the year to 31 December 2015, the profits after tax of Entity A were Rs. 80,000.
Required:
what figures would be included for the associate in the consolidated financial statements of entity P for the year to
31.12.2015?

Solution:
The figures that must be included to account for the associate are as follows:

Workings: Analysis of Equity

P (30%) No NCI
At Acquisition:
Value of net assets 350,000 105,000 0
Cost of investment 147,000
Difference is Goodwill Xxx
(no separate disclosure
required)
Since Acq. Till the end of
previous year
R.E. (600,000-80,000- 170,000 51,000 0
350,000)
Current period 80,000 24,000 0
(from income statement)

The journal entry is:

Investment in Associate 75,000
Opening CRE 51,000
Share of profit (income statement) 24,000

The investment in Associate in consolidated Statement of financial position will appear as follows:
The investment in the associate is as follows: Rs.
Investment at cost 147,000
Investor’s share of post-acquisition profits of A (51,000+24,000) 75,000

Investment in the associate 222,000

Statement of profit or loss

The share of the associate’s profit after-tax for the year is shown as a separate line:
Share of profits of associate (30% × Rs. 80,000): Rs. 24,000.

Example:
Entity P acquired 40% of the equity shares in Entity A during 2011 at a cost of Rs.
128,000 when the net assets of Entity A were Rs. 250,000.

Since acquisition of the investment, there has been no change in the issued share capital of Entity A, nor in its share
premium.

On 31 December 2015, the net assets of Entity A were Rs. 400,000.

In the year to 31 December 2015, the profits after tax of Entity A were Rs. 50,000.
Required: What figures would be included for the associate in the consolidated financial statements of Entity P for the
year to 31 December 2015?

243
Solution:

The figures that must be included to account for the associate are as follows:
Workings: Analysis of Equity

P (40%) No NCI
At Acquisition:
Value of net assets 250,000 100,000 0
Cost of investment 128,000
Difference is Goodwill Xxx
(no separate disclosure
required)
Since Acq. Till the end of
previous year
R.E. (400,000-50,000- 100,000 40,000 0
250,000)
Current period 50,000 20,000 0
(from income statement)

The journal entry is:

Investment in Associate 60,000

Opening CRE 40,000
Share of profit (statement of profit or loss) 20,000

The investment in Associate in consolidated Statement of financial position will appear as follows:
The investment in the associate is as follows: Rs.
Investment at cost 128,000
Investor’s share of post-acquisition profits of A(40,000+20,000) 60,000

Investment in the associate 188,000

Statement of profit or loss

The share of the associate’s profit after-tax for the year will be:
Share of profits of associate (40% × Rs. 50,000): Rs. 20,000.

Dividend distributions by Associate:

Dividend distributions that are declared by the associate must be set-off against the carrying amount of the investment
in associate in the equity-accounted financial statements and should not be reflected in statement of comprehensive
income.

Example:
P. Co a company with subsidiaries (means P. Co will prepare consolidated financial statements), acquires 25,000 of the
100,000 ordinary shares in Almond Co. for Rs. 60,000 on 1-1-2018 when net assets of Almond were 150,000. In the
year to 31-12-2018, Almond Co. earns profit after tax of 24,000 from which it declared a dividend of 6,000 at 31-12-
2018.

Required:
How will Almond Co.’s results be accounted for in separate and consolidated financial statements of P. Co for the year
ended 31-12-2018?

Answer:
In the separate financial statements of P. Co:
Investment in Almond Co. 60,000
Cash/Bank 60,000

The only other entry in P. Co.’s separate income statement will be to record dividend declared as other income, at the
end of 31-12-2018.
Dividend receivable 1,500
Dividend Income 1,500
(6,000 X 25%) 244
 He (ALLAH) Knows what is in every heart

In the Consolidated financial statements of P. Co. , P. Co. will use equity method to account for the investment in
Almond Co.

Workings: Analysis of Equity

P (25%) No NCI
At Acquisition:
Value of net assets 150,000 37,500 0
Cost of investment 60,000
Difference is Goodwill Xxx
(no separate disclosure
required)
Since Acq. Till the end of
previous year
R.E. 0 0 0
Current period 24,000 6,000 0
(from income statement)

Consolidated profit after tax will include the group’s share of Almond Co’s profit after tax i-e 24,000 x 25% = 6,000. The
double entry will be:
Investment in Associate 6,000
Share of Profit of associate 6,000

In addition, as the P. Co. has already taken credit of dividend income in its separate financial statements, therefore
another adjustment is required i.e:
Dividend Income 1,500
Investment in Associate 1,500

The “Investment in associates” is then stated at (60,000 + 6,000 – 1,500) = 64,500 in consolidated statement of
financial position.

Example: [difference between Cost method and Equity method]

Kashif Limited (KL) acquired 30% shares in Hasan Limited (HL) on January 01, 2016. Both company’s year-end is
December 31.
Following are the details of events during the year:
1) KL purchased 30% shares at a cost of Rs. 30 million.
2) HL Limited’s profit for the year 2016 is Rs. 10 million.
3) HL Limited distributed Rs. 5 million of dividend to its shareholders.

The extract of statement of profit & loss and statement of financial position where Cost model is applied is presented
below.

Solution:
Cost method
Extract in statement of profit and loss
Dividend income from associate (5,000,000 * 30%) (Under the head of other income) 1,500,000
Extract in statement of financial position
Investment in associate – at cost 30,000,000

245
The extract of statement of profit & loss and statement of financial position where Equity model is applied is presented
below.

Equity method

1) Extract in statement of profit and loss

Share of profit from associate (10,000,000 x30%) 3,000,000
(immediately before profit before tax)
2) Extract in statement of financial position
Investment in associate (working) 31,500,000
Working
Investment at cost 30,000,000
add: share of profit for the year (10,000,000 x 30) 3,000,000
Less: dividend income (5,000,000 x 30%) (1,500,000)
CLOSING VALUE OF INVESTMENT 31,500,000

Inter group Transactions: (Also termed as “Upstream” and “Downstream” transactions)

 “Upstream” Transactions are, for example, sale of assets from an associate to investor.
 “Downstream” Transactions for example, sale of assets from investor to associate.

Transaction between an associate and its investor would include unrealized gains and losses. Only the investor’s
share in profit and loss of such transactions must thus be eliminated in equity-accounted financial statements. There
is no such adjustment with regard to sale of inventory or property, plant and equipment if company opt other than equity
method. [Please remember unrealized gains and losses between parent and subsidiary were eliminated in full on
consolidation]

Example: Inter-group transactions

A. P is a 40% shareholder of A. P sells inventory to A:
• During the year, P sold inventory to A for 3,000.
• The inventory cost P 2,500 and was sold at a 20% mark-up (i.e. for 3,000).
• None of the inventory had been sold by A by year-end.

Required:
Prepare the necessary journal entries in equity accounted consolidated financial statements.
B. Use the same information as above, except that:
• Only 80% of the inventory that was sold to A was on hand at year-end.

Required:
Prepare the necessary journal entries in equity accounted consolidated financial statements.
C. P is a 40% shareholder of A. P buys inventory from A:
• During the year, P bought inventory from A for 3,000.
• This inventory had cost A 2,500.
• 80% of this inventory was on hand at year-end.
Required:
Prepare the necessary journal entries in equity accounted consolidated financial statements.
D. P is a 40% shareholder of A. A sold a plant (property, plant and equipment) to P:
• At the beginning of the current year with a carrying amount of 20,000 to P for 25,000.
• On the date of sale, the asset had a remaining useful life of five years.

Required:
Prepare the necessary journal entries in equity accounted consolidated financial statements.
E. Discuss how the journals in example D would alter if P had sold the asset to A (i.e. as opposed to A having sold to
P).

246
Solution to example A: Inter-group sale of inventory (investor to associate) – all still unsold
3,000/120 x 20 = 500 (unrealized profit)
40% investor’s share (relevant) = 200
60% other’s share (irrelevant) Faith is trusting ALLAH even when you do not understand his plan.

Journal entry:
According to the discussion in the parent and subsidiary relationship:
Cost of sales (investor) 200
Stock (associate) 200

stock of associate does not appear in consolidated statement of financial position therefore stock is replaced with
investment in associate because net assets of associate (including stock) were recorded at higher amount without
considering the above unrealized gain, resultantly investment was debited with higher amount while applying the equity
method.

Cost of sales (investor) 200

Investment in associate 200

If only consolidated statement of financial position is prepared then

Accounts Debit Credit
CRE 200
Investment in 200
associate (500
x 40%)

Solution to example B: Inter-group sale of inventory (investor to Associate) – some still unsold
3,000 x 80% = 2,400/120 x 20 = 400 (unrealized profit)
40% investor’s share (relevant) = 160
60% other’s share (irrelevant)

Journal entry:
Cost of sales (investor) 160
Investment in associate 160

If only consolidated statement of financial position is prepared then

Accounts Debit Credit

CRE 160
Investment in 160
associate (500
x 80% x 40%)

Solution to example C: Inter-group sale of inventory (Associate to investor)

3,000 x 80% = 2,400/120 x 20 = 400 (unrealized profit)
40% investor’s share (relevant) = 160
60% other’s share (irrelevant)

Journal entry:
According to the discussion in the parent and subsidiary relationship:
Cost of sales (associate) 160
Stock (investor) 160

Stock of investor appears in consolidated statement of financial position, so adjustment can be made, but cost of sales
of associate does not appear in consolidated income statement therefore share of profit in associate should be reduced
to incorporate the effect of decrease in profit.

Share of profit in associate 160

Stock (investor) 160

247
If only consolidated statement of financial position is prepared then

Consolidated 160
Retained earnings
(CRE)
Inventory 160
(investor)

Solution to example D: Inter-group sale of property, plant and equipment (Associate to investor)
Gain 5,000 Dr.

Deprecation (5,000/5) 1,000 Cr

Net gain (to be reversed) 4,000 x 40% = 1,600

Journal entry:
According to the discussion in the parent and subsidiary relationship:
Gain (associate) 1,600
Plant (investor) 1,600

Plant of investor appears in consolidated statement of financial position, so adjustment can be made, but gain of
associate does not appear in consolidated income statement therefore share of profit in associate should be reduced to
incorporate the effect of decrease in gain.

Share of profit in associate 1,600

Plant (investor) 1,600

If only consolidated statement of financial position is prepared then

Consolidated
Retained earnings 1,600
(CRE)
Plant 1,600
(investor)

Solution to example E: Inter-group sale of property, plant and equipment (investor to associate)
Gain 5,000 Dr.

Deprecation (5,000/5) 1,000 Cr

Net gain (to be reversed) 4,000 x 40% = 1,600

Journal entry:
According to the discussion in the parent and subsidiary relationship:
Gain (investor) 1,600
Plant (associate) 1,600

Plant of associate does not appear in consolidated statement of financial position therefore is replaced with investment
in associate because net assets of associate (including plant) were recorded at higher amount without considering the
above unrealized gain, resultantly investment was debited with higher amount while applying the equity method.

Gain (investor) 1.600

Investment in associate 1.600

If only consolidated statement of financial position is prepared then

Consolidated 1,600
Retained earnings
(CRE)
Investment in
Associate 1,600

248
Example: My success is only by ALLAH [11:88]
Entity P acquired 40% of the equity shares of Entity A on 01.01.2016. The cost of the investment was Rs. 205,000.
Assume no gain at acquisition.
As at 31 December 2016 Entity A had made profits of Rs. 275,000 since the date of acquisition (means post acquisition).
In the year to 31 December 2016, Entity P sold goods to Entity A at a sales price of Rs. 200,000 at a mark-up of 100%
on cost.
Goods amounted to Rs. 30,000 were still held as inventory by Entity A at the year-end.

Required: prepare necessary journal entries.

Solution:
The necessary adjustments for unrealised profit, and the double entries are as follows:
Unrealised profit adjustment Rs.

Unrealised profit (30,000/200 x 100) 15,000

Entity P’s share (40%) 6,000

Journal entries: Dr (Rs.) Cr (Rs.)

Investment in associate 110,000
Share of profits 110,000

Being: Share of post-acquisition profits (40% of Rs.275, 000)

Dr (Rs.) Cr (Rs.)
Cost of sales 6,000
Investment in associate 6,000
Being: Elimination of share of unrealised profit
If only statement of financial position is required to be prepared:
Dr (Rs.) Cr (Rs.)
CRE 6,000
Investment in associate 6,000

Investment in associate Rs.

Cost of the investment 205,000
Entity P’s share of post-acquisition profits of Entity A 110,000
Minus: Entity P’s share of unrealised profit in inventory (6,000)

309,000

249
Example:
Entity P acquired 30% of the equity shares of Entity A on 01.01.2016.at a cost of Rs. 275,000. Assume no gain at
acquisition.
In the year to 31 December 2016, the reported profits after tax of Entity A were My success is only by ALLAH [11:88]
Rs. 100,000.
In the year to 31 December 2016, Entity P sold goods to Entity A for Rs. 180,000 at a mark-up of 20% on cost.
Goods amounted to Rs. 60,000 were still held as inventory by Entity A at the year-end.
Required:
1. Calculate the unrealised profit adjustment and state the double entry.
2. Calculate the investment in associate balance that would be included in Entity P’s statement of financial position as
at 31 December 2016.

Solution
a) Unrealised profit adjustment Rs.

Unrealised profit (60,000/120 x 20) 10,000

Entity P’s share (30%) 3,000

Journal entry

Cost of sales 3,000

Investment in associate 3,000
Being: Elimination of share of unrealised profit

If only statement of financial position is required to be prepared:

CRE 3,000
Investment in associate 3,000

b) Investment in associate (see above for adjustments) Rs.

Cost of the investment 275,000
Entity P’s share of post-acquisition profits of Entity A (30% of
Rs.100,000) 30,000
Minus: Entity P’s share of unrealised profit in inventory (3,000)

302,000
Impairment losses: In case there is an impairment loss against investment in associates; the accounting entry would
be:
Impairment loss Xx
Investment in Associate Xx

If only consolidated statement of financial position is prepared then impairment loss is deducted from CRE. If income
statement is to be prepared then include in admin expenses. Definitely of course, NCI will not be affected as this
impairment loss belongs to investor in associate (means parent with respect to consolidated financial statements)

Finally in Statement of Financial Position, calculation of equity method can be summarized as follows:
1) Cost
2) Plus: Gain on acquisition (if any)
3) Plus/(Minus): investor’s share of profit/(loss) of associate since Acquisition till statement of financial position
date(means Post-Acq)
4) Plus(Minus): Investor share of OCI in associate since Acquisition till statement of financial position date (means
Post-Acq) [will be discussed in questions]
5) Minus: dividend income

6) Minus: Impairment loss (if any) [will be discussed in questions]

250
Finally in Statement of profit or loss and other comprehensive income, calculation of equity method can be
summarized as follows:

There should be separate lines for:

• Share of profit of associate in profit and loss section of SOCI immediately before profit before tax .
• Share of other comprehensive income of associate in OCI section of SOCI [will be discussed in questions].

Inter – Company balances:

Inter company balances: between the members of a group (parent and subsidiaries) are cancelled out on
consolidation.

Inter company balances between the members of a group and associates are not cancelled out (because Associate’s
balances are not included in Consolidated Financial statements). An associate is not a member of the group but is rather
an investment made by the group.

(Para 6) Significant Influence: (for reading only)

IAS-28 sates that associates “20% or more” rule is a general guideline; however, the existence of significant influence
is usually evidenced in one or more of the following ways:
• Representation on board of directors.
• Participation in policy – making process, including representation in decisions about dividends.
• Material transactions between entities;
• An interchange of management personnel between the two entities : or
• Providing of essential technical information by one entity to the other.

Accounting for associates

Example : Recognition
Entity A has following shareholders with their Shareholding percentages:
Entity Percentage of Shareholding
Entity B 1%
Entity C 99%

Entity A is a group Company of Entity B & C and all Board of directors of Entity A are on the Board of Directors of Entity
B and C. Entity B and C have other directors as well.
How should Entity B accounts for Investment in Entity A?
Answer: Although Entity B has only 1% shareholding of Entity A, but Entity B has significant influence on the decision
making of Entity A as all directors of Entity A are also the directors of Entity B, therefore, Entity B shall account for
Equity Method of Accounting for Entity A and for all purposes, Entity A is Entity B’s Associated Company.

Exemptions from applying the equity method.[para 17]

An entity is exempt from applying the equity method if the investment meets one of the following conditions:
The entity is a parent that is exempt from preparing consolidated financial statements under IFRS 10 Consolidated
Financial Statements or if all of the following four conditions are met (in which case the entity need not apply the equity
method):
1. The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners,
including those not otherwise entitled to vote, have been informed about, and do not object to, the investor not
applying the equity method;
2. The investor or joint venturer's debt or equity instruments are not traded in a public market;
3. The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public market; and
4. The ultimate or any intermediate parent of the entity produces financial statements available for public use that
comply with IFRSS, in which subsidiaries
5. Are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10.

251
 Fajr – A chance to judge yourself how close you are to ALLAH… how much do you want Jannah?

Practice Questions:
Question 1
The statement of financial position of J Co and its investee companies, P Co and G Co, at 31 December 2015 are shown
below.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2015

J Co P Co G Co
000 000 000

Non-Current assets
Freehold property 1,950 1,250 500
Plant and machinery 795 375 285
Investment 1,500 - -
4,245 1,625 785
Current assets
Inventories 575 300 265
Trade receivables 330 290 370
Cash and cash equivalent 50 120 20
955 710 655
Total assets 5,200 2,335 1,440

Equity and liabilities

Equity
Share capital – Rs.1 shares 2,000 1,000 750
Retained earnings 1,460 885 390
3,460 1,885 1,140
Non-current liabilities
12% loan stock 500 100
Current liabilities
Trade and other payables 680 350 300
Bank overdraft 560 - -
1,240 350 300
Total equity and liabilities 5,200 2,335 1,440

Additional Information
1. J Co acquired 600,000 ordinary shares in P Co on 1 January 2010 for 1,000,000 when the retained earnings of P
Co were 200,000.
2. At the date of acquisition of P Co, the fair value of its freehold property was considered to be 400,000 greater than
its value in P Co.’s statement of financial position. P Co had acquired the property in January 2000 and the buildings
element (comprising 50% of the total value) is depreciated on cost over 50 years.
3. J Co acquired 225,000 ordinary shares in G Co on 1 January 2014 for 500,000 when the retained earnings of G Co
were 150,000.
4. P Co manufactures a component, the Ringo, used by J Co. Transfer are made by P Co at cost plus 25%. J Co held
100,000 inventory of the Ringo at 31 December 2015. In the same period J Co sold goods to G Co of which G Co
had 80,000 in inventory at 31 December 2015. J Co had marked these goods up by 25%.
5. The goodwill in P Co is impaired ad should be fully written off. An impairment loss of 92,000 is to be recognized on
the investment in G Co.
6. Non-controlling interest is valued at full fair value. P Co shares were trading at 1.80 just prior to the acquisition by J
Co.

Required:
Prepare, in a format suitable for inclusion in the annual report of the J Group, the consolidated statement of financial
position at 31 December 2015.

252
Question 2
Hever Co. has held shares in two companies. Spiro Co and Aldridge Co. for a number of years. As at 31
December 2014 they have the following statements of financial position:

Hever Co Spiro Co Aidridge Co

000 000 000

Non-current assets
Property, plant & equipment 370 190 260
Investments 218 - -
586 190 260
Current assets
Inventories 160 100 180
Trade receivables 170 90 100
Cash and cash equivalents 50 40 10
380 230 290
968 420 550
Equity
Share capital (1 ords) 200 80 50
Share premium 100 80 30
Retained earnings 568 200 400
868 360 480
Current liabilities
Trade and other payables 100 60 70
968 420 550

You ascertain the following additional information:

(i) The ‘investment’ in the statement of financial position comprise solely Hever’s investment in Spiro
Co (128,000) and in Aidridge Co (90,000).
(ii) The 48,000 shares in Spiro Co were acquired when Spiro Co retained earnings stood at 20,000.
The 15,000 shares in Aidridge Co were acquired when that company had a retained earnings
balance of 150,000.
(iii) When Hever Co acquired its shares in Spiro Co the fair value of Spiro Co.’s net assets equaled their
book values with the following exceptions:
000
Property, plant and equipment 50 higher
Inventories 20 lower (sold during 2014)

Depreciation arising on the fair value adjustment to non-current assets since this date is 5,000.
(iv) During the year, Hever Co sold inventories to Spiro Co for 16,000, which originally cost Hever Co
10,000. Three-quarters of these inventories have subsequently been sold by Spiro Co.
(v) No impairment losses on goodwill had been necessary by 31 December 2014.
(vi) It is group policy to value non-controlling interests at full (on fair) value. The fair value of the non-
controlling interests at acquisition was 90,000.
Required:
Produce the consolidated statement of financial position for the Hever group (incorporating the associate).

Solutions:
A. 1 J GROUP
Consolidated Statement of Financial Position
As on 31-12-2015. Rs. ‘000’
Non-Current Assets:
Freehold property (1,950 + 1,250 + 400 - 30) 3,570
Plant and Machinery (795 + 375) 1,170
Goodwill (120-120) -
Investment in Associate (500 + 72 - 4.8 - 92) 475.2

Current Assets:
Inventories (575 + 300 - 20) 855
Receivables (330 + 290) 620
Cash and Cash equivalents (50 + 120) 170
Total Assets 6,860.2

253
 Equity and Liabilities:
Equity:
Share Capital 2,000.0
Con. Retained Earnings
(1,460 + 411 - 18 - 12 - 72 +72 - 4.8 - 92) 1,744.2 3,744.20

Non-Controlling Interest 926

(720 + 274 - 12 - 8 - 48)
4,670.2
Non-Current Liabilities:
12% loan stock (500 + 100) 600

Current liabilities:
Trade payables (680 + 350) 1,030
Bank overdraft 560
6,860.2
Analysis of Equity of Subsidiary
P(600/1000 = 60%) NCI (40%)

At Acquisition: 1-1-2010
S.C 1,000
R.E 200
1,200
R.S 400
1,600 960 640
Cost of investment 1,000
FV of NCI (400 X 1.8) 720
40 80
Total Goodwill 120
Since Acq. Till SOFP
R.E. (885 – 200) 685 411 274

Accounting
entries:
Property 400
R.S 400

CRE (60%) 18
NCI (40%) 12
Property 30
(400 x 50% ÷ 40 x 6)

S–P
100/125 x 25 = 20
CRE (60%) 12
NCI (40%) 8
Inventory 20

Impairment Loss:
CRE (60%) 72
NCI (40%) 48
G.W 120
(goodwill fully written off)

254
 And speak to people kindly [2:83]
Analysis of Equity of Associate:
P(225/750 = 30%) No. NCI

At Acquisition: 1-1-2014
S.C 750
R.E 150
900 270
Cost of investment 500
No goodwill to be recorded separately x
Since Acq. till SOFP date:
R.E (390 - 150) 240 72

Investment 72
CRE 72

Investor to Associate:
80 /125 x 25 = 16 x 30% = 4.8
CRE 4.8
Investment in Associate 4.8
[80/125 x 25 x 30%]
(As associate inventory is not consolidated).
It however income statement is also prepared, then
Cost of
sale 4.8

Investment 4.8
CRE 92
investment in associate 92
If income statement also prepare then
Admin 92
Investment in associate 92

A. Hever Co
Consolidated Statement of Financial Position

As on 3-12-2014
Non-Current Assets: Rs. ‘000’
Property Plant & Equipment (370 + 190 + 605
50 - 5)
Goodwill 8
Investment in Associate (90 + 75) 165

Current Assets:
Inventories (160 + 100 – 20 + 20 - 1.5) 258.5
Trade receivables (170 + 90) 260
Cash and Bank (50+40) 90
1,386.5
Equity and Liabilities:
Equity:
Share Capital 200
Share Premium 100
Con. Retained Earnings 758.5 1,058.5
(568 + 108 - 3 + 12 - 1.5 + 75)
Non-Controlling Interest (90+72-2+8) 168
1,226.5
Current Liabilities:
Trade payables (100+60) 160
1,386.5

255
Workings:
Analysis of Equity of Subsidiary: P (48/80 = 60%) NCI (40%)
At Acquisition:
S.C 80
S.P 80
R.E 20
180
R.S 50
R.L (20)
210 126 84
Cost of Investment 128
FV of NCI 90
2 6
Total Goodwill 8
Since Acquisition till SOFP date:
R.E (200 – 20) 180 108 72

Entries:
iii) PPE 50
R.S 50
R. Loss 20
Inventory 20

CRE 3
NCI 2
PPE 5
[adjustment
of
depreciation]
Inventory 20
CRE 12
NCI 8
[adjustment
of sale of
inventory]
iv) P – S:
16,000 x 1/4 = 4,000
Profit % = 6,000/16,000 x 100 = 37.5% of sales
4,000/100 x 37.5 = 1,500
CRE 1.5
Stock 1.5

Analysis of Equity of Associate:

At Acq:
S.C 50 P (15/50 X 100 = 30%)
S.P 30
R.E 150
230 69
Cost of investment 90
Goodwill not to be recorded separately X

Since Acq. Till SOFP date:

R.E (400 – 150) 250 75
Investment 75
Profit from Associate 75
(CRE)

256
Past paper questions:
Q.6

Following are the summarized statements of financial position of Pistachio Limited (PL), Mint Limited (ML) and Jalapeno
Limited (JL) as on 31 December 2019:

PL ML JL
--------- Rs. in million ---------
Property, plant and equipment 850 750 500
Investment in ML at cost 900 - -
Investment in JL at cost 170 - -
Inventories 300 340 200
Trade receivables 240 200 150
Cash and bank balances 60 170 50
2,520 1,460 900

Share capital (Rs. 10 per share) 1,400 700 400

Share premium - 100 -
Retained earnings 780 480 340
Liabilities 340 180 160
2,520 1,460 900

Additional information:
(i) Details of PL's investments are as follows:

Date of investment Retained earnings of

Holding % Investee investee
Rs. in million
1-Jan-19 25% JL 200
1-Apr-19 80% ML 360

(ii) The following considerations relating to acquisition of ML’s shares are still unrecorded:
▪ Transfer of PL's freehold land having carrying value and fair value of Rs. 88 million and Rs. 108 million
respectively.
▪ Cash of Rs. 115 million would be paid in January 2020 if ML's net profit for the year 2019 would increase
by 20% as compared to last year. Fair value of this consideration on acquisition date was estimated at Rs.
70 million. At the year end, said target of profit is achieved by ML.
(iii) On the date of investment, the fair values of each share of ML and JL were Rs. 18 and Rs. 16 respectively.
(iv) At the date of acquisition of ML, carrying values of ML’s net assets were equal to fair value except for inventory
which was carried at Rs. 130 million and had a fair value of Rs. 180 million. 20% of this inventory is still
included in ML's inventory as at 31 December 2019.
(v) On 1 July 2019, ML sold a machine to PL for Rs. 55 million at a gain of Rs. 10 million. The remaining useful life
of the machine at the time of disposal was 5 years.
(vi) JL paid 10% dividend for the half year ended 30 June 2019. PL recorded this as other income.
(vii) During the year, PL made sales of Rs. 72 million to JL at 20% above cost. 60% of these goods were sold by JL
during the year.
(viii) As at 31 December 2019, PL has receivable of Rs. 8 million from JL.
(ix) An impairment test carried out at year-end has indicated that goodwill of ML has been impaired by 10%.
(x) PL measures non-controlling interest at the acquisition date at its fair value.

Required:
Prepare PL’s consolidated statement of financial position as at 31 December 2019 in accordance with the
requirements of IFRSs. (18)

257
A.6:

Pistachio Group
Consolidated statement of Financial Position
As on 31-12-2019
Non-Current Assets:
Property, Plant & Equipment (850 + 750 - 88 - 9) 1,503
Goodwill (120 – 12) 108
Investment in JL (170 + 35 - 10 - 1.2) 193.8
Current Assets:
Inventories (300 + 340 + 50 - 40) 650
Trade receivables (240 + 200) 440
Cash and Bank balances (60 + 170) 230
Total 3,124.8
Equity:
Share capital 1,400
Share premium -
Con. Retained earnings 826 2,226
(780 + 96 + 35 + 20 - 45 - 32 - 7.2 - 10 - 1.2 - 9.6)
Non-Controlling Interest (252 + 24 - 8 - 1.8 - 2.4) 263.8
2,489.8
Liabilities (340 + 180 +70 +45) 635
Total 3,124.8

Analysis of Equity of ML: (S)

P (80%) NCI (20%)
At Acq: 1-4-2019
S.C 700
S.P 100
R.E 360
1,160
R.S (Inventory) 50
1,210 968 242 1,210
Cost of Investment (900 + 108 + 70) 1,078 1,078
FV of NCI 252 252
1,330
Goodwill 110 10 120
Since Acq till the SOFP date:
R.E (480 - 360) 120 96 24
Analysis of Equity of JL: (A)

25%
At Acq: 1-1-2019
S,C 400
R.E 200
600 150
Investment 170
Goodwill not to be recorded x
Since Acq. Till the SOFP date:
R.E (340 - 200) 140 35*

*Investment 35
CRE 35

Workings:
At Acq:
ii) Investment in ML 108
Land 88
CRE (Gain as per IFRS - 10) 20

At Acq:
Investment in ML 70
Payable 70
258
 At the SOFP date: (115 - 70) = 45
CRE (exp) 45
Payable 45
Adjustment of change in estimate when the target is achieved.
Ramadan gives us an opportunity to strengthen our imaan

iii) Fair value of NCI: 700/10 = 70 x 20% = 14 x 18 = 252

iv) At Acq:
Inventory 50
R.S 50

80% inventory sold on balance sheet date:

CRE (80%) 32
NCI (20%) 8
Inventory 40
(50 x 80% = 40)

v) S P
Gain to be reversed 10 Dr.
Depreciation to be reversed 1 Cr.
( 10/5 x 6/12)
Net gain to be reversed 9 Dr.

CRE (80%) 7.2

NCI (20%) 1.8
PPE (machine) 9

vi) Dividend of JL to PL: 400 x 10% = 40 x 25% = 10

Dividend income (CRE) 10
Investment in JL 10

vii) P A:
70 x 40% = 28.8/120 x 20 = 4.8 x 25% = 1.2
CRE 1.2
Investment 1.2

viii) No adjustment of inter group receivable between investor and associate.

ix) CRE (80%) 9.6

NCI (20%) 2.4
Goodwill 12
120 x 10% = 12

Impairment of goodwill
(a) Information to be ignored:
• Receivable from JL.

259
Q.5 Following are the summarized statements of financial position of Safawi Limited (SL) and Khudri Limited
(KL) as at 30 June 2021:

SL KL
--- Rs. in million ---
Property, plant and equipment 2,390 1,210
Intangible assets 525 135
Investment in Anbara Limited – at cost 540 -
Inventories 1,200 600
Other current assets 1,485 445
6,140 2,390

Share capital (Rs. 10 per share) 2,500 1,000

Share premium 1,040 -
Retained earnings 1,280 1,200
Liabilities 1,320 190
6,140 2,390

Additional information:
(i) On 1 October 2020, SL acquired 80% shareholdings in KL through share exchange of one share
in SL for every share in KL. At acquisition date, KL’s retained earnings were Rs. 1,000 million
and the fair values of each share of SL and KL were Rs. 25 and Rs. 23 respectively. Shares
issued by SL have not been recorded in the books.
(ii) On acquisition date, carrying values of KL’s net assets were equal to their fair values except
the following:
▪ Inventories were carried at Rs. 240 million and had a fair value of Rs. 340 million. 60% of
these were sold during the year ended 30 June 2021.
▪ Land was carried at nil value and had a fair value of Rs. 50 million. The land was allotted
unconditionally to KL by the government free of cost in 2018 when its fair value was Rs. 40
million.
(iii) On 1 January 2021, SL disposed of a software license to KL for Rs. 120 million. Its carrying
value and remaining useful life at that date was Rs. 90 million and 3 yearsrespectively.
(iv) Due to temporary adverse economic conditions, an impairment test carried out at 30 June
2021 indicated that goodwill has been impaired by Rs. 60 million.
(v) On 1 July 2020, SL acquired 3 million shares of Anbara Limited (AL) representing 25%
shareholdings. On that date, AL’s retained earnings and fair value of each share were Rs. 2,000
million and Rs. 172 respectively.
(vi) During the year ended 30 June 2021, AL reported net loss of Rs. 280 million and other
comprehensive income(e.g revaluation surplus) of Rs. 60 million.
(vii) On 1 July 2020, SL disposed of machinery to AL for Rs. 200 million at a gain of 100%. The
remaining useful life of the machinery at the time of disposal was 5 years.
(viii) An impairment test carried out at year end has indicated that investment in AL hasbeen
impaired by Rs. 130 million.
(ix) SL values non-controlling interest on the acquisition date at its fair value.

Required:
Prepare SL’s consolidated statement of financial position as at 30 June 2021 in accordance
with the requirements of IFRSs. (18)

260
A.
Safawi Limited
Consolidated Statement of Financial Position
As on 31-03-2021
Rupees
Assets: In “M”
Non-current assets:
Property, plant and equipment (2,390+1,210+50) 3,650

Intangible Assets (525+135-25(iii)) 635

Goodwill (310(w-1)-60(iv)) 250

Investment in associates (w-5) 335
Current assets:

Inventory (1,200+600+100-60(ii)) 1,840

Other Current Assets (1,485+445) 1,930

Total Assets 8,640

Equity & Liabilities:

Share Capital (Rs.10 each) (2,500+800(i)) 3,300

Share Premium (1,040+1,200(i)) 2,240

Consolidated Retained Earnings 1,099
Consolidation revaluation surplus (0+15)
15
6,654
Non-Controlling Interest (W-4) 476

Total Equity 7,130

Liabilities (1,320+190) 1,510
Total Equity & Liabilities 8,640

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W-1) Analysis of Equity of KL:

At Acquisition: 1-10-2020 P(80%) NCI(20%) Total

Share Capital 1000
Share Premium -
Retained Earnings 1000
2000
Rev. Surplus (Inventory) 100
Rev. Surplus (Land) 50
2,150 1720 430 2,150
Cost of Investment (i) 2,000 2,000
Fair Value of N.C.I 460 460
(2,460)
Good Will 280 30 310
Since acquisition till the date of SOFP date: 160 40 200
Retained Earnings (1200-1000) 200
W-2) Analysis of Equity of AL:

At Acquisition: 1-10-2020 25%

Share Capital (3/25x100x10) 120

Retained Earnings 2000

2120 530
Cost of Investment 540
Difference in good will xx
Since acquisition till the date of SOFP date: (70)
Net Loss (280)
OCI(Rev, surplus) 60 15

CRE 70
INVESTMENT 70

INVESTMENT 15
(CRE) OCI 15
(W-3) Consolidated Retained earnings
[1,280 + 160 – 48 – 48 -25 – 70 – 20 – 130 ) = 1,099
(W-4) Non – Controlling Interest
[460 + 40 -12 -12 ] = 476

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262
(W-5) Investment in associate – AL
At Cost 540
Share of Net Loss (70)
Share of OCI 15
Impairment of Investment (130)
Unrealized Gain (20)
Total 335
Accounting entries

(i) 1,000/10 = 100 × 80 % × 1 = 80 × 25 = 2,000

Investment 2,000
Share Capital ( 80 × 10 ) 800
Share premium ( 80× 15) 1,200

(ii) Inventory 100

Rev . Surplus 100
CRE ( 80%) 48
NCI (20%) 12
Inventory 60

Land 50
Rev . Surplus 50
[Fair value At Acquisition date ]

(iii) CRE 25
Software 25
P→S
Gains to be reversed 30 Dr.
Amortization to be reversed 5 Cr.
[30/10×6/12]
Net Gain to be Reversed 25 Dr.

(iv) CRE (80%) 48

NCI (20%) 12
Goodwill 60 (Impairment of Goodwill)
(v) CRE 20
Investment 20
P→A
Gain to be reversed 100 Dr.
Depreciation to be reversed 20 Cr.
(100/5)
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 80 Dr.
80 ×25 % = 20 ( Unrealized Gain to be reversed )
(vi) CRE 130
Investment 130 (Impairment of Investment )
(vii) Fair value of NCI =1000/10 = 100×20%
20 M Shares ×23 = 460

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 Tawakkul is having full faith that ALLAH will take care of us even when things look Impossible

Consolidation and IAS 28 Q.B

Question-1:
The statements of financial position of three entities P, S and A are shown below, as at 31 December
2015.
P S A
Rs. Rs. Rs.
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 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

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:
P bought 150,000 shares in S several years ago when the carrying amount of the net assets of S was Rs.
340,000, which was equal to fair value.

P bought 30,000 shares in A several years ago when A’s accumulated profits were Rs. 150,000.

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.

There has been impairment of Rs. 20,000 in the goodwill relating to the investment in S, but no
impairment in the value of the investment in A.

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At 31 December 2015, 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.

None of the entities has paid a dividend during the year.

P uses the partial goodwill method to account for goodwill and no goodwill is attributed to the non
controlling interest in S.

Required:
Prepare the consolidated statement of financial position of the P group as at 31 December 2015.

Question-2:
Qudsia Limited (QL) has investments in two companies as detailed below:

M 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.

H 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 of:

- Rs. 290 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 share issuance has not yet been recorded by QL in its books.

• The fair value of the net assets of HL on the date of acquisition by QL was equal to their carrying
amounts.

The draft summarized 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 290 - -

Current assets: 5,380 400 350

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

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 If someone keeps reminding you of ALLAH, then know that there love for you is true

The following additional information is available:

1. As on 31 December 2012, the recoverable amount of the Goodwill was estimated at Rs. 70 million.
2. QL values the non-controlling interest at its proportionate share of the fair value of the subsidiary’s net
identifiable assets.
3. 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.
4. 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.

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.

Question-3: [concept of IFRS 9 included]

Hark acquired the following non-current investments on 1 April 2015:
1) 4 million equity shares in Spark, by means of an exchange of one share in Hark for every one share
in Spark, plus Rs. 6.05 million in cash. The professional fees associate with the acquisition amounted
to Rs. 1 million. The market price of shares in Hark at the date of acquisition was Rs. 9 per share.
The market price of Spark shares just before the acquisition was Rs. 7. The cash part of the
consideration is deferred and will not be paid until two years after the acquisition, i.e 1.4.2017.
2) 25% of the equity shares in Ark, at a cost of Rs. 6 per share. The money to make this payment was
obtained by issuing one million new shares in Hark at Rs. 9 per share.

None of these transactions has yet been recorded in the summary statements of financial position that
are shown below.

The summarized draft statement of financial position of the three companies at 31 March 2016 are as
follows:
Hark Spark Ark
Rs. million Rs. million Rs. million
Assets
Non-current assets:
Property, plant and equipment 60.0 31.0 16.0
Other equity investments 0.8 - -

Current assets: 18.2 8.0 9.0

Total assets 79.0 39.0 25.0

Equity and liabilities

Equity shares of Rs. 1 each 16.0 5.0 6.0
Share premium 2.0 4.0 4.0
Retained earnings: at 1 April 2015 36.0 16.0 8.0
- For year ended 31 March 2016 8.0 3.0 2.0
62.0 28.0 20.0
Non-current liabilities:
6% loan notes 10 - -
7% loan notes - 6.0 3.0

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Current liabilities: 7.0 5.0 2.0

Total equity and liabilities 79.0 39.0 25.0

The following information is relevant:

1) Hark has chosen to value the non-controlling interest in Spark using the fair value method permitted
by IFRS-3 (revised). The fair value of the non-controlling interests at the acquisition date is estimated
to be the market value of the shares before the acquisition.

2) At the date of acquisition of Spark, the fair values of its assets were equal to their carrying amounts.

3) The cost of capital of Hark is 10% per year.

4) During the year ended 31 March 2016, Spark sold goods to Hark for Rs. 3.6 million, at a mark-up of
50% on cost. Hark had 75% of these goods in its inventory at 31 March 2016.
5) There were no intra-group receivables and payables at 31 March 2016.

6) On 1 April 2015, Hark sold a group of machines to Spark at their agreed fair value of Rs. 3 million. At
the time of the sale, the carrying amount of the machine was Rs. 2 million. Plant and machinery is
depreciated to a residual value of nil using the straight-line method and at 1 April 2015 the machines
had an estimated remaining life of five years.

7) “Other equity investments” are included in the summary statement of financial position of Hark at their
fair value on 1 April 2015. Their fair value at 31 March 2016 is Rs. 0.65 million. These investments
are held for trading.

8) Impairment tests were carried out on 31 March 2016. These show that there is no impairment in the
value of the investment in Ark or in the consolidated goodwill.

9) No dividends were paid during the year by any of the three companies.

Required:
Prepare the consolidated statement of financial position for Hark as at 31 March 2016.

Question-4:[Concept of Investment property]

Hamachi Ltd acquired 90% of S Ltd’s Rs. 1 ordinary shares on 1 April 2014 by paying Rs. 3.00 per share.
The balance on S Ltd’s retained earnings at this date was Rs. 800,000. On 1 October 2015, Hamachi Ltd
acquired 30% of A Ltd’s Rs. 1 ordinary shares for Rs. 3.50 per share. The statements of financial position
of the three companies at 31 March 2016 are shown below:

Hamachi Ltd S Ltd A Ltd

Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs.
000
Non-current assets:
Property, plant and equipment 8,050 3,600 1,650
Investments 4,000 910 -
12,050 4,510 1,650
Current assets:
Inventory 830 340 250
Accounts receivable 520 290 350
Bank 240 - 100
1,590 630 700
Total assets 13,640 5,140 2,350

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 Allah knows what the best is for us and when it’s best for us to have it.”

Hamachi Ltd S Ltd A Ltd

Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000
Equity and liabilities
Equity:
Ordinary shares of Rs. 1 each 5,000 1,200 600
Reserves:
Retained earnings b/f 6,000 1,400 800
Profit year to 31 March 2016 1,500 900 600
7,500 2,300 1,400
12,500 3,500 2,000
Non-current liabilities:
10% loan notes 500 240 -
Current liabilities:
Accounts payable 420 960 200
Taxation 220 250 150
Overdraft - 190 -
640 1,400 350
Total equity and liabilities 13,640 5,140 2,350

The following information is relevant:

1) Fair value adjustments

On 1 April 2014 S Ltd owned an investment property 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. This
property is included within investments in the balance sheet.

Just prior to its acquisition, S Ltd was successful in applying for a six-year license to dispose of
hazardous waste. The license was granted by the government at no cost, however Hamachi Ltd
estimated that the license was worth Rs. 180,000 at the date of acquisition.
2) In January 2016 Hamachi Ltd sold goods to A ltd for Rs. 65,000. These were transferred at a mark-up
of 30% on cost. Two thirds of these goods were still in the inventory of A Ltd at 31 March 2016.

3) To facilitate the consolidation procedures the group insists that all inter-company current account
balances are settled prior to the year-end. However a cheque 40,000 from S Ltd to Hamachi Ltd
against an amount receivable from S was not received until early April 2016. Inter-company balances
are included in accounts receivables and payables as appropriate.

4) A Ltd is to be treated as an associated company of Hamachi Ltd.

5) An impairment test at 31 March 2016 on the consolidated goodwill of S Ltd concluded that it should
be written down by Rs. 468,000. 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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Question-5: [Comprehensive question including changes in equity and IAS 38]

Bilal limited (BL), acquired a subsidiary, M limited (ML), on July 01, 2014 and associate, Z limited (ZL), on
January 01, 2017. The details of the acquisition at the respective dates are as follows:

Fair value Ordinary

Investment Ordinary Reserves Share of net Cost of Share
share Retained Premium assets at investment capital
capital earnings acquisition acquired
Rs. 1 each

---------------------------------Rs. in million------------------------------------

ML 400 160 140 800 765

320 (80%)
ZL 220 269 83 572 203 55
(25%)

The draft financial statements for the year ended June 30, 2018 are:

Statement of financial position

As at June 30, 2018
BL ML ZL
------------------Rs. in million-------------------
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:
Share capital 1,000 400 220
Share premium 200 140 83
Retained earnings 1,370 929 361
2,570 1,469 664
Current liabilities:
Trade and other payables 1,880 2,300 394
4,450 3,769 1,058

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 Tawakkul is having full faith that ALLAH will take care of us even when things look Impossible

Statement of comprehensive income

For the year ended June 30, 2018
BL ML ZL
------------------Rs. in million-------------------

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 (50) (80)
(24)
Dividend income 260 - -
Profit before tax 1,380 890 220
Income tax expense (330) (114)
(72)
Profit for the year 1,050 776
148

Dividend declared/paid for the year 250 300 80

Additional information:

1) 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.

2) Neither ML nor ZL had reserves other than retained earnings and share premium at the date of
acquisition. Neither issued new shares since acquisition.

3) The fair value difference on the subsidiary relates to property, plant and equipment being depreciated
through cost of sales over the remaining useful life of 10 years from the acquisition date.

4) ML’s intangible assets include Rs. 87 million of training and marketing cost incurred during the year
ended June 30, 2018. The directors of ML believe that these should be capitalized as they relate to
the startup period of a new business, and intend to amortize the balance over five years from July 01,
2018.th directors of the BL decide to write off this amount during the year ended 30.06.2018 in
accordance with IAS 38.

5) Dividend income of BL relates to dividend income from ML and ZL. (300x80%+80x25%=260)

6) ML and ZL sold goods to BL amounting to Rs. 1,000 and 500 respectively. At the end of the period,
BL inventory include stock purchased from ML and ZL. Unrealized profit within the stock is 42 million
and 25 million respectively. In addition BL sold goods to ML for Rs. 300, which remains in stock of ML
till the end of reporting period. Unrealized profit within the goods is 18 million.

7) Goodwill in ML is impaired by Rs. 100 million by the end of the reporting period.

Required:
Prepare consolidated statement of financial position, consolidated statement of comprehensive income
and consolidated statement of changes in equity for the year ended 30 June 2018.

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Question-6:
Following is the summarized trial balance of FL and its subsidiary AL for the year ended December 31,
2018:
FL AL
---------Rs. In million--------
Cash and bank balances 4,920 2,700
Accounts receivables 6,240 6,580
Stock in trade – closing 14,460 5,680
Investment in AL 10,500 -
Other investments 20,100 -
Property, plant and equipment 22,500 5,940
Cost of sales 49,200 21,000
Operating expenses 3,600 5,400
Accumulated depreciation (5,760) (1,260)
Ordinary share capital (Rs. 10 each) (30,000) (6,000)
Retained earnings – opening (33,780) (4,800)
Sales (57,600) (33,800)
Accounts payable (2,760) (1,440)
Gain on sale of fixed assets (540) -
Dividend income (1,080) -

Following additional information is also available:

1. On January, 2018, FL acquired 480 million shares of AL from its major shareholders for Rs. 10,500
million.
2. The following inter-company sales were made during the year 2018:
Sales Including in buyer’s Amount Gross profit
closing stocks in receivable/payable at year % on sales
trade end
------------------Rs. In million-----------------
FL to AL 2,800 900 300 20
AL to FL 5,000 1,300 500 30

3. On Jan 1, 2018, FL sold certain plants and machines to AL. Details of the transaction are as follows:

Rs. In million
Sales value 144
Less: Cost of plant and machines 150
Accumulated depreciation (60)
Net book value 90
Gain on sale of plant 54

4. The plants and machineries were purchased on January 1, 2016, and were being depreciated on
straight line method over a period of five years. AL computed depreciation thereon using the same
method based on the remaining useful life, using full year policy.

5. FL billed Rs. 100 million to subsidiary for management services provided during the year 2018 and
credited it to operating expenses. The invoices were paid and recorded by subsidiary on December
15, 2018.

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 Faith is trusting ALLAH even when you do not understand his plan.

6. Details of cash dividends are as follows:

Dividend
Date of declaration Date of payment %
FL November 25, January 5, 2019 20
2018
AL October 15, 2018 November 20, 2018 10

These dividends are not yet accounted for by both the companies. However, the share in dividend income
of parent from subsidiary is already accounted for in the books of parent.

Required:
a) Prepare consolidated statement of financial position and statement of comprehensive income of FL
for the year ended December 31, 2018. Ignore tax and corresponding figures.
b) Also prepare a consolidated statement of changes in equity for the year ended 31-12-2018.

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Solutions:

Answer-1:
P Group
Consolidated statement of financial position
As at 31 December 2015

Assets Rs.
Non-current assets:
Property, plant and equipment (450,000+240,000) 690,000
Goodwill (65,000 – 20,000) 45,000
Investment in associate (140,000+30,000-1,200) 168,800

Current-assets:
Inventory (70,000+90,000-10,000) 150,000
Current A/c with A (as it is not part of group) 20,000
Other current assets (110,000+130,000) 240,000

Total assets 1,313,800

Equity and liabilities

Equity:
Share capital 100,000
Share premium 160,000
Consolidated accumulated profits 711,300
(650,000+60,000+30,000-20,000-1,200-7,500)
971,300
Non-controlling interest in S (85,000+20,000-2,500) 102,500
Total equity 1,073,800

Long-term liabilities: 60,000

(40,000+20,000)

Current liabilities: 180,000

(100,000+80,000)

Total equity and liabilities 1,313,800

Workings
P own 75% of the equity of S and 30% of the equity of A. Therefore S is a subsidiary and A is an
associate.
W-1) Analysis of equity of S:
P [75%(150/200)] NCI (25%)
At Acq:
S.C 200,000
S.P 80,000
R. E (bal.) 60,000
340,000 255,000 85,000
Cost of investment 320,000
Goodwill 65,000
Since Acq. till SOFP date:
R. E (140 – 60) 80,000 60,000 20,000

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ALLAH made you a muslim because he wants to see you in Jannah, All you have to do is to prove that you are
worthy of it.

Analysis of equity of A:
P [30%(30/100)]
At Acq:
S. C 100,000
S. P 120,000
R. E 150,000
370,000 111,000
Cost of investment 140,000

Difference is G. W which is not to be disclosed

separately.
Since acquisition till SOFP date: Investment 30
R. E (250 – 150) 100,000 30,000 Share of profit (CRE)
30

Impairment loss (CRE) 20,000

G. W 20,000
(no effect on NCI as it is not at FV)

P A (100+33.33 = 133.33)
16,000
x 33.33 = 4,000 x 30% = 1,200
133.33

CRE 1,200
Investment in A 1,200

If income statement is also required to be

Prepared then;
COS 1,200
Investment 1,200
S P
40,000
x 33.33 = 10,000
133.33

CRE 7,500
NCI 2,500
Stock 10,000

Answers-2:
QL Group
Consolidated statement of financial position
As on 31 December 2012
Rs. in million
Assets
Non-current assets:
Property, plant and equipment (5,000+550-3.1) 5,546.90
Goodwill (110-40) 70
Investment in associate [(290+60-4.8)+6.4] 351.60

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Current assets: 5,780
(5,380+400)
11,748.50
Equity and liabilities
Equity attributable to owners of QL:
Ordinary share capital 6,000.00
Reserve for issue of shares[4x15] 60.00
Retained earnings 2,819.12
(2,900-40-2.48-4.8+6.4-40)
8,879.12

Non-controlling interest 119.38

(130-10-0.62)
8,998.50
Current liabilities: 2,750.00
(2,400+350)
11,748.50
Workings
W-1) Analysis of equity of ML (subsidiary):
P (80%(40/50)) NCI (20%)
At Acq: 1-1-2010
S.C 500
R. E 150
650 520 130
Cost of investment 630
Goodwill 110

Since Acq. till SOFP date:

R. E (100-150) (50) (40) (10)
i)
S P:
Date of sale 1-10-2012
Sale proceeds 24
Carrying amount (20.8)
[26 – (26÷10x2)]
Gain (to be reversed) 3.2 Dr.
Extra depreciation 0.1 Cr.
(to be reversed)
(3.2/8 x 3/12)
Net gain 3.1 Dr.

CRE (80%) 2.48

NCI (20%) 0.62
PPE 3.1
Impairment loss (CRE) 40
G. W 40
[110-70]

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 No matter what is our physical appearance, when we have kindness in our heart, we are the most beautiful
person in the world

W-2) Analysis of equity of HL (Associate):

P (40% (16/40))
At Acq: 30-11-2012
S.C 400
R. E 224
624 249.9

Cost of investment (290+60) 350

Difference is G.W

Since Acq. till SOFP date:

R. E (240 – 224) 16 6.4

Investment 6.4
Share of profit (CRE) 6.4
i)
30-11-2012:
(Entry is made on the basis of share price on the date of acquisition rather than price on the date of
issuance)

Investment (4x15) 60
Reserve for issue of shares 60
(Subsequently on 1-1-2013 on issuance of shares; entry will be)

Reserves 60
S.C (4X10) 40
S.P (4X5) 20

(However investment in associate can be remeasured according to the requirements of other standards)

ii)
Parent to Associate:
(52/130 x 30 x 40%) = 4.8

CRE 4.8
Investment in associate 4.8

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Answer-3:
Hark Group
Consolidated statement of financial position
As at 31 March 2016
Rs. 000
Non-current assets:
Property, plant and equipment (60+31-0.8) 90,200
Goodwill 23,000
Investment in associate (9+0.5) 9,500
Other investments (0.8-0.15) 650

Current assets:
[18.2+8-0.9+9-9] 25,300

Total assets 148,650

Equity and liabilities

Equity shares of Rs. 1 each (16+4+1) 21,000
Share premium (2+32+8) 42,000
Retained earnings 43,730
[36+8+2.4-1-0.5-0.72-0.8-0.15+0.5 (from associate)] 85,730
106,730
Non-controlling interests (7+0.6-0.18) 7,420
Total equity 114,150

Non-current liabilities:
Deferred consideration for Spark shares (5+0.5) 5,500
6% loan notes 10,000
7% loan notes 6,000 21,500

Current liabilities: 12,000

(7+5) 1,000
Professional charges payable
Total equity and liabilities 148,650

Workings
W-1) Analysis of equity of Spark:
P (80% (4/5)) NCI (20%) Total
At Acq: 1-4-2015
S.C 5
S.P 4
R.E 16
25 20 5 25
Cost of investment (36+5) 41 41
FV of NCI (5x20%x7) 7 7
48
21 2 23

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 My Lord, eliminate from my heart the love of everything that you do not love

Since Acq. till SOFP date:

R.E 3 2.4 0.6

Investment (4x9) 36 H S: (Sale of machine)

S.C 4 Cash = 3
S.P 32 C.A = 2
Gain 1 Dr. (to be
reversed)
Investment 5 Extra dep 0.2 Cr. (to be reversed)
Payable 5 (1/5)
[6.05 (1+0.1)-2] = 5 Net gain 0.8 Dr.

Expense (CRE) 1 CRE 0.8

Payable 1 Mach 0.8

Finance cost (CRE) 0.5 Investment of Hark: (At FVTPL)

Payable 0.5 CRE (loss) 0.15
(5x10%) = 0.5 Investment 0.15
[unwinding of discount] (0.8 – 0.65)

S P:

3.6 x 75% = 2.7/150 x 50 = 0.9

CRE (80%) 0.72

NCI (20%) 0.18
Stock 0.9

W-2) Analysis of equity of Ark (Associate):

P (25%)
At Acq: 1-4-2015
S.C 6
S.P 4
R.E 8
18 4.5
Cost of investment 9
Difference is G.W (no separate disclosure required)

Since Acq. till SOFP date:

R.E (2 x 25%) 0.5

Investment 0.5
Profit from associate(CRE) 0.5

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Cash (1x9) 9
S.C 1
S.P 8

Investment in Ark 9
Cash 9
(6 x 25% x 6)

Answer-4:
Hamachi Ltd
Consolidated statement of financial position
As at 31 March 2016
Rs. 000
Non-current assets:
Property, plant and equipment (8,050-3,600) 11,650
Goodwill (1,170-468) 702
License (180-60) 120

Investments:
Associate (630+90-3) 717
Others (4,000+910-3,240-630+120 FV adjustment of investment property) 1,160

14,349
Current assets:
Inventory (830+340) 1,170
Accounts receivable (520+290-40) 770
Cash in transit 40
Bank 240
2,220
Total assets 16,569

Equity and liabilities

Equity attributable to equity holder of the parent:
Ordinary shares of Rs. 1 each 5,000
Retained earnings 8,415
(6,000+1,500+1,350-54-468+90-3)
13,415
Non-controlling interest 374
(230+150-6)
13,789

Non-current liabilities:
10% loan notes (500+240) 740

Current liabilities:
Accounts payable (420+960) 1,380
Taxation (220+250) 470
Overdraft 190

Total equity and liabilities 16,569

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Workings:
W-1) Analysis of equity of S:
P (90%) NCI (10%)
At Acq: 1-4-2014
S.C 1,200
R.E 800
2,000
R.S 120
R.S 180
2,300 2,070 230
Cost of investment 3,240
(1,200 x 90% x 3)
G.W 1,170

Since Acq. till SOFP date:

R.E (1,400-800+900) 1,500 1,350 150

Investment in property 120

R.S 120

If investment property is at fair value model; then there is no concept of depreciation

License 180
R.S 180

CRE (90%) 54
NCI (10%) 6
License 60
(180/6 x 2)

CIT 40
Receivable from S 40

CRE 468
G.W 468

W-2) Analysis of equity of A:

P (30%)
At Acq: 1-10-2015
S.C 600
R.E (800+600x6/12) 1,100
1,700 510
Cost of investment 630
(600 x 30% x 3.5)
Difference is G.W

(no need of separate disclosure)

Since Acq. till SOFP date:

R.E (800+600-1,100) 300 90

Investment 90
Profit of associate (CRE) 90

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H A:
43.333
65 x 2/3 = x30 = 10 x 30% = 3
130

Profit from associate (CRE) 3

Investment 3

Answer-5:
a)
BL Group
Consolidated statement of financial position
As on 30-6-2018
“Rs. in million”
Non-current assets:
Property, plant and equipment (1,012+920+100-40) 1,992
Goodwill (175-100) 75
Intangible assets (350-87) 263
Investment in ZL (203+6+37(from income statement)-20) 226

Current assets:
Stock (620+1,460-42-18-6.25) 2,013.75
Trade and other receivables (950+529) 1,479
Cash and bank balances (900+510) 1,410
7,458.75
Equity and liabilities
Equity:
Share capital 1,000
Share premium 200
Consolidated retained earnings 2,968.75
1768.75
Non-controlling interest 310
3,278.75
Current liabilities: (1,880+2,300) 4,180

7,458.75
b)
BL Group
Consolidated statement of profit or loss
For the year ended 30-6-2018

Sales (4,480+4,200-1,000-300) 7,380

Cost of sales (2,690+2,940-1,000-300+10+42+18) (4,400)
Gross profit 2,980
Distribution and admin expenses (620+290+87+100) (1,097)
Finance cost (50+80) (130)
Dividend income (260-240-20) -
Share of profit of Z [(148 x 25%) =37*-6.25) 30.75
Profit before tax 1,783.75
Taxation (330+114) (444)
Profit after tax 1,339.75
Attributable to:
Owners of parent (bal.) 1,232.35
NCI (776-10-87-42-100) x 20% 107.4
1,339.75

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 Serving your parents in their old age is as good as opening the doors of PARADISE, so don’t miss out.

*
Investment 37
Share of profit 37

c)
BL Group
Consolidated statement of changes in equity
For the year ended 30-6-2018

Share Share Consolidated NCI Total

Capital Premium Retained
earnings
Balance as on 1-7-2017 1,000 200 786.4* 262.6** 2,249
Profit for the year 1,232.35 107.4 1,339.75
Dividend (250) (60) (310)
(300-240)
Balance as on 30-6- 1,000 200 1,768.75 310 3,278.75
2018

*(1,370+250-1,050 = 570)570+234.4+6-24 = 786.4

**210+58.6-6 = 262.6

Workings:
W-1) Analysis of equity of ML: (Subsidiary)
P (80%(320/400)) NCI (20%)
At Acq: 1-7-2014
S.C 400
S.P 140
R.E 160
700
R.S (PPE) 100

FV (Given) 800 640 160 800

Cost of investment 765 765

FV of NCI 210 210

G.W 125 50 175

Since Acq. till the end of previous year:

R.E (453 W-160) 293 234.4 58.6

Workings
Retained earnings
b/d
Dividend 300 453
Profit 776
c/d 929

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i)
PPE 100
R.S 100

24 (CRE opening)
Opening R.E (S) 30 6 (NCI opening)
Depreciation (COS) 10
PPE 40
[100/10 x 4] = 40
(Effect on NCI)

ii)
Selling and marketing 87
Intangible asset 87
(NCI will be affected)

iii)
Dividend income (P) 240
Dividend declared (S) 240
(300 x 80%)

iv)
ML to BL: (S P)
Cost of sales 42
Stock 42
(NCI will be affected)

BL to ML: (P S)
Cost of sales 18
Stock 18
(NCI will not be affected)

v)
Impairment 100
G.W 100
(NCI will be affected as it is at FV)

W-2) Analysis of equity of ZL: (Associate)

P (25% (55/220))
At Acq: 1-1-2017
S.C 220
S.P 83
R.E 269
572 143

Cost of investment 203

Difference is goodwill for which no separate disclosure is required.

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Since Acq. till the beginning of the period:
R.E (293 W – 269) 24 6

Investment 6
Workings CRE (opening) 6

Retained earnings
b/d 293
Div. 80 PAT 148

c/d 361

Share of profit for the year:

148 x 25% = 37 Investment 37
Profit from associate 37

i)
Dividend income 20
Investment in associate 20

ii)
ZL to BL: [25x25%] = 6.25

Profit from associate 6.25

Inventory 6.25
Answer-6:
a)
FL Group
Statement of financial position
As on 31-12-2018
Rs. In million
Non-current assets:
Property, plant and equipment (22,500-5,760+5,940-1,260-36) 21,384
Goodwill 1,860
Other investment 20,100

Current assets:
Stock (14,460+5,680-180-390) 19,570
Accounts receivable (6,240+6,580-300-500) 12,020
Cash and bank balances (4,920+2,700-600) 7,020
81,954
Equity & liabilities:
Equity:
Share capital 30,000.00
Consolidated retained earnings 39,112 69,112

NCI 3,442
72,554
Accounts payable (2,760+1,440-300-500) 3,400
Dividend payable 6,000
81,954

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 FL Group
Income statement
For the year ended 31-12-2018
Rs. In million
Sales (57,600+33,800-2,800-5,000) 83,600
Cost of sales (49,200+21,000-2,800-5,000+180+390) 62,970
Gross profit 20,620
Other income (100-100)
Operating expenses (3,600+5,400+100-100) (9,000)
Gain on disposal (540-36) 504
Dividend income (1,080-480) 600
Profit before tax 12,734

Attributable to:
Owners of parent (bal.) 11,332
NCI (7,400* - 390) x 20% 1,402
12,734
*[33,800-21,000-5,400]

b)
FL Group
Consolidated statement of changes in equity
For the year ended 31-12-2018

Share Consolidated NCI Total

Capital Retained Earnings
Balance as on 1-1-2018 30,000 33,780 - 63,780

NCI at acquisition 2,160 2,160

Profit for the year 11,332 1,402 12,734
Dividend (6,000) (120) (6,120)
(600x20%)
Balance as on 31-12-2018 30,000 39,112 3,442 72,554

Workings:

Analysis of equity of S:
P [80%(480/600)] NCI (20%)
At Acq: 1-1-2018
S. C 6,000
R. E (All opening pre) 4,800
10,800 8,640 2,160
Cost of investment 10,500
G. W 1,860

Since Acq. till the end of previous year

(not relevant because acquisition is during the year)

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 Only in ISLAM do the king and peasant bow down together side by side proclaiming ALLAH’s greatness

Workings:
i) P S
900
x20 = 180 COS 180
100
Stock 180
(No effect on NCI)
S P
1,300
x30 = 390 COS 390
100
Stock 390
(Effect on NCI)

ii) Machine sold by P S

Gain on disposal 54 Dr.

(to be reversed)
Extra depreciation 18.0 Cr.
(to be reversed)
[54/3]
Net Gain 36.0 Dr.

Gain 36
Asset 36
(As sold by parent so no effect on NCI)

iii) Services provided by FL (Parent)

Operating exp (P) 100
Gain (P) 100
Gain (P) 100
Operating expenses (S) 100
As the net effect will be zero therefore no need to make any further entry.

iv)
P S
Dividend 6,000 Dividend (S) 600
Dividend payable 6,000 Dividend payable 600
(30,000 x 20%) (6,000 x 10%)

Dividend Payable 600

Cash 600

No effect of dividend of Parent, however dividend declared by subsidiary will be cancelled out up
to parent’s share.

Dividend income (P) 480

Dividend declared (S) 480
(600 x 10% x 80%)

As dividend of S is paid before the reporting date therefore there is no need for any cancellation
of dividend receivable/payable.

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 “Do good deeds and fear Allah. Allah will help
you.”
Introduction to IFRS 3
Definitions [Appendix A defined terms]
A business combination is a transaction or other event in which an acquirer obtains control of one or
more businesses.

A business is an integrated set of activities and assets that is capable of being conducted and managed
for the purpose of providing a return in the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or participants.

Objective of IFRS 3 [Para 1]

The objective of IFRS 3 is to improve the relevance, reliability and comparability of information reported
about business combinations and their effects.
It establishes principles and requirements for:
•
the recognition and measurement of identifiable assets acquired, liabilities assumed and non-
controlling interest in the acquiree;
•
the recognition and measurement of goodwill (or a gain from a bargain purchase); and
•
disclosures that enable users to evaluate the nature and financial effects of a business combination.

Acquisition method [IFRS 3 Para 5 ]

• All business combinations are accounted for by the acquisition method which involves: identifying
the acquirer;
• determining the acquisition date;
• recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquiree; and
• recognising and measuring goodwill or a gain from a bargain purchase

Identifying the acquirer [IFRS 3 Para 6 and 7] and [B 15]

•
The acquirer is usually the combining entity whose relative size is significantly greater than that of
the other(s).
•
In a business combination affected by transferring cash (other assets) or by incurring liabilities the
acquirer is usually the entity that makes the transfer or incurs the liabilities.
•
In a business combinations affected by exchange of equity interests the acquirer is usually the entity
that issues equity.
Also note that the acquirer is usually the entity:
•
whose owners have the largest portion of the voting rights in the combined entity;
•
whose owners have the ability to determine the composition of the governing body of the combined
entity;
•
whose (former) management dominates the management of the combined entity;
•
that pays a premium (extra over fair value) over the pre-combination fair value of the equity interests
of the others

288
Determining the acquisition date [IFRS 3 Para 8]
Acquisition date is the date on which the acquirer effectively obtains control of the acquiree.
This generally is the date of transfer of consideration and when net assets are acquired but might be
before or after this date depending on circumstances.

Cost [means purchase consideration is the sum of]

IFRS 3 states that the purchase consideration for an acquisition (business combination) is the sum of:
•
the fair values, at the acquisition date, of the assets transferred by the acquirer, such as cash
•
the liabilities incurred by the acquirer to the former owners of the acquire (e.g payable)
•
equity instruments issued by the acquirer in exchange for control of the acquire (shares)
The purchase consideration may include some deferred consideration (discussed next)
Parent issues shares as part of the purchase consideration:
When the acquirer issues shares as part of the purchase consideration and the shares are quoted
equity instruments (means listed shares), they are normally valued at their market price at the
acquisition date for the purpose of measuring the consideration/acquisition cost.
Costs of acquisition: transaction costs
Transaction costs incurred in making an acquisition, such as the cost of the fees of advisers and
lawyers, must not be included in the cost of the acquisition. These costs must be treated as an
expense as incurred and written off to profit or loss.
The amount of transaction costs associated with an acquisition and written off during the period to profit
or loss must be disclosed in a note to the financial statements.

Example:
Company P acquired 80% of the shares of Company S when the fair value of the net assets of S was
Rs. 800,000. Date of acquisition of shares is 01.01.2019.
The purchase price was Rs. 300,000 in cash plus 10,000 new shares in Company P.
The new shares were to be issued 1 month after the date of acquisition.
The market value of P’s shares at the date of acquisition was Rs.40 each. One month later the market
value had increased to Rs.45. The nominal value of P’s shares is Rs.10 each
The transaction costs of making the acquisition comprising of fees of advisors and lawyers were Rs.
80,000.

Required: Discuss the relevant accounting treatment.

Answer:
The cost of the investment in the shares of S = Rs. 300,000 + (10,000 × Rs.40) = Rs. 700,000. The
share price at the date of acquisition is used not that at the date of issue.

Investment 700,000
Share capital (10,000 x 10) 100,000
Share premium (10,000 x 30) 300,000
Cash 300,000

The costs of making the acquisition i.e 80,000 should be written off to profit or loss.
The parent company’s share of the net assets of S at the acquisition date was Rs. 640,000 (80% Rs.
800,000). Purchased goodwill attributable to owners of the parent company is therefore Rs. 60,000 (Rs.
700,000 - Rs. 640,000).

289
 Fear Allah because of his punishment. Love Allah because he is
full of mercy
Example: Share exchange
The parent has acquired 12,000 shares in the subsidiary by issuing 5 of its own Rs.1 shares for every
4 shares in the subsidiary. The market value of the parent company’s shares on the date of acquisition
was 6.

Cost of the combination:

12,000 x 5/4 = 15,000 shares x 6 90,000

Debit Credit
Investment in subsidiary 90,000
Share capital (15,000 x 1) 15,000
Share premium (15,000 x 5) 75,000

If an entity borrows money to finance an acquisition, the costs associated with arranging the borrowing
are treated in accordance with the rules of IFRS 9. These costs are deducted from the value of the
debt and amortised over the term of the debt using the effective rate of interest (i.e. the amortised cost
method).

Before next discussion:

Seller
01.01.2018 31.12.2018 31.12.2019
Sale Receipt
100,000

Buyer
01.01.2018 31.12.2018 31.12.2019
Purchase Payment
100,000

Deferred consideration
Sometimes all or part of the cost of an acquisition is deferred and does not become payable until a
later date (e.g one or two years)
The amount of any deferred consideration (the amount not payable immediately) is discounted
to its present value at the acquisition date.
Example
The parent acquired 75% of the subsidiary’s 80m Rs.1 shares on 1 January 2016. It paid 3.50 per
share and agreed to pay a further 108m on 1 January 2017.

The parent company’s cost of capital is 8%.

In the financial statements for the year to 31 December 2016 the cost of the combination will be:

Rs. m
80m shares x 75% x 3.50 210
Deferred consideration:
108m x (1 + 0.08)-1
100
Total consideration 310

290
01.01.2016
Investment 310
Cash 210
Payable 100

At 31 December 2016
8m will be charged to finance cost as per IAS 37, being the unwinding of the discount (meams time
value of money) on the deferred consideration.

Finance Cost (CRE) 8

Payable
8

Point to remember:
If the consideration includes assets or liabilities of the acquirer carried at amounts different from their
fair values at the acquisition date, these are revalued and any gain or loss is recorded in profit or loss.
It is sort of a disposal of assets against shares so a realized gain or loss.

Question:
The draft statements of financial position of Ping Co and Pong Co on 30 June 2018 were as follows.

STATEMENT OF FINANCIAL POSITIONAS AT 30 JUNE 2O18

Ping Co Pong Co

Assets
Non-current assets
Property, plant and equipment 50,000 40,000
20,000 ordinary shares in Pong Co at cost 30,000
80,000
Current assets
Inventories 3,000 8,000
Owed by Ping Co 10,000
Trade receivables 16,000 7,000
Cash and cash equivalents 2,000 -
21,000 25,000
Total assets 101,000 65,000
Equity and liabilities
Equity
Ordinary shares of 1 each 45,000 25,000
Revaluation surplus 12,000 5,000
Retained earnings 26,000 28,000
83,000 58,000
Current liabilities
Owed to Pong Co 8,000 -
Trade and other payables 10,000 7,000
18,000 7,000
Total equity and liabilities 101,000 65,000

Ping Co acquired its investment in Pong Co on 1 July 2017 when the retained earnings of Pong Co
stood at 6,000. The agreed consideration was 30,000 cash and a further 10,000 on 1 July 2019, which
is not yet recorded by Ping Co. Ping Co.’s cost of capital is 7%. Pong Co.’s has an internally-developed
brand name – ‘Pongo’ – which was valued at 5,000 at the date of acquisition. It has an indefinite useful
life. There have been no changes in the share capital or revaluation surplus of Pong Co since that date.
The difference between the current A/C was due to cash in transit.

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 Worries Ends When SALAH (NAMAZ)
Begins

There is no impairment of goodwill. It is group policy to value NCI at full fair value. At the acquisition
date the NCI was valued at 9,000.

Required:
Prepare the consolidated statement of financial position of Ping Co as at 30 June 2018.

Solution:
PING CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018

Assets
Non-current assets 90,000
Property, plant and equipment (50,000 + 40,000) 6,734
Intangible assets: Goodwill 5,000
Brand name
Current assets
Inventories ( 3,000 + 8,000) 11,000
Trade receivables (16,000 + 7,000) 23,000
Cash in transit 2,000
Cash and cash equivalents 2,000
38,000
Total assets 139,734
Equity and liabilities
Equity
Ordinary shares of 1 each 45,000
Revaluation surplus 12,000
Retained earnings [26,000 + 17,600 - 612] 42,988
99,988

NCI [9,000 + 4,400] 13,400

113,388

Non current liabilities

Deferred consideration [8,734+612] 9,346

Current liabilities
Trade and other payables (10,000 + 7,000) 17,000

Total equity and liabilities 139,734

292
Workings:
Example: Analysis of equity of Pong Co:
P (80%) NCI (20%)
At Acq: 1-7-20x7
Share Capital 25,000
Rev surplus(Because 100% Pre;because no change
after acquisition) 5,000
Retained earnings 6,000
Rev surplus (Brand) 5,000
32,800 8,200 41,000
41,000
Investment (30,000 + 8,734) 38,734 38,734
FV of NCI (given) 9,000 9,000
5,934 800 6,734
Change Since Acq
Retained earnings (28,000 – 6,000) 17,600 4,400
22,000

Deferred consideration:
10,000 (1.07)-2 = 8,734
Investment 8,734
Payable 8,734
30.06.2018
Finance cost 612
(CRE)
Payable 612
8,734 x 7% = 612
Brand 5,000
R.S 5,000

293
Contingent consideration (conditional consideration)
Any Contingent consideration should also be included in cost of investment as long as it can
be measured reliable even if it is not probable of payment at the date of acquisition.
This is indicated where relevant in exam question.
A post acquisition change in contingent consideration is charged to profit or loss of parent.(as a
change in estimate)
Example:
Company X purchased 100% of the issued capital of Company S on 1 January Year 2014.
The purchase agreement required Company X to pay Rs. 300,000 in cash immediately and an
additional sum of Rs. 100,000 on 31 December Year 2016 if the earnings of Company S increase at
an annual rate of 25% per year in each of the three years following the acquisition.
Required: How should the contingent payment be recognised in calculating the goodwill arising at the
date of acquisition?
Answer:
The contingent consideration should be included in the cost of investment (the purchase
consideration) whether or not it is probable that it will have to be paid. The contingent consideration of
Rs. 100,000 should be measured at fair value.
If it is fairly certain that the contingent consideration will have to be paid, an appropriate measure of
fair value might be the present value of the future payment, discounted at an appropriate cost of
capital. The purchase consideration is therefore Rs. 300,000 plus the present value of the contingent
consideration.
Example
Hamid Limited (HL) bought 60% ordinary shares of Rashid Limited (RL) on 1st January 2022.
Additional information:
• HL’s total share capital (before this acquisition) is Rs. 300 million consisted of 30 million
shares of Rs. 10 each.
• RL’s total share capital is Rs. 100 million consisted of 10 million shares of Rs. 10 each.
• On 1st January 2022, market value of one share of HL and RL was Rs. 29 and Rs. 21
respectively.
• Appropriate discount rate is 10%
Amounts paid or commitments made for the acquisition:
i. One share in HL was given for every two shares in RL.
ii. Rs. 4 per share was paid immediately to previous owners of RL. Further Rs. 3 per share shall
be paid three years later. Furthermore, Rs. 2 per share shall be paid two year later provided that
profits of RL exceed a certain benchmark. The fair value of this conditional payment has been
estimated at Rs. 5.48 million.
iii. Legal advisor was paid Rs. 0.5 million and a consultancy fee of Rs. 1.5 million was paid to
financial consultant.
Required:
a) Calculate Investment in RL at cost in the above business combination.
b) Calculate fair value of NCI at the date of acquisition.

294
Answer:
Part (a) Investment in RL Rs. million

Share consideration [10m shares x 60% ÷2 x 1 x Rs. 29] 87

Cash consideration [10m shares x 60% x Rs. 4] 24

Deferred consideration [10m shares x 60% x Rs. 3 x 1.10-3] 13.52

Contingent consideration [at fair value] 5.48

130

Note 1: For share consideration Rs. 30 million (i.e. 6m shares x ½ x Rs. 10) shall be added to share
capital and Rs. 57 million (i.e. 6m shares x ½ x Rs. 19) shall be added to share premium.
Note 2: Transaction costs (legal and consultancy fee) of Rs. 2 million( 0.5 + 1.5) shall be charged to
PL.
Part (b) Fair value of NCI at the date of acquisition Rs. million

[10m shares x 40% x Rs. 21] 84

Some exam questions give aggregate “investment” figure which includes investment in subsidiary and
other investments and need to be separated as only investment in equity of subsidiary is used for
goodwill calculation.
Example
M Limited (ML) acquired 90% ordinary shares of S Limited (SL) on 1 July 2021. The statements of
financial position of both companies as at 30 June 2022 are as under:
ML SL
Rs. m Rs. m
Non-current assets
Property, plant and equipment 500 600
Investments (see note (i)) 430
Current assets 280 410
1,210 1,010

Equity
Ordinary Share capital (Rs. 10 each) 800 500
Retained earnings 260 280
1,060 780
Liabilities 150 230
1,210 1,010
The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

ML SL
Rs. m Rs. m
Revenue 1,478 1,230
Cost of sales (990) (970)
Gross profit 488 260
Distribution costs (80) (40)

295
 Administrative expenses (120) (65)
Finance costs (10) -
Profit before tax 278 155
Taxation (98) (45)
Profit after tax 180 110
Notes:
(i) The break-up of investment figure is as follows:
Rs. million

Investment in SL (paid in cash) 135

Acquisition costs related to SL (paid in cash) 5*

Other investments measured at FVTPL 290

430

*legal and consultancy fee

(ii) The arrangement for acquisition of SL also included following which have not been accounted
for yet:
Share exchange: One share in ML for every two shares acquired in SL. At the date of acquisition
market value of one share of ML and SL was Rs. 28 and Rs. 21 respectively.
Future cash payment: (deferred consideration) Additional Rs. 4 per share shall be paid on 30 June
2024.
Conditional cash payment: (contingent consideration)Another additional Rs. 2 per share shall be
paid on 30 June 2023 provided that SL continues to earn profit of Rs. 100 million or above till then.
The fair value of this conditional payment was estimated to be Rs. 50 million on 1 July 2021.
However, on 30th June 2022 the fair value has been estimated at Rs. 48 million only.
The appropriate discount rate is 9%.
(iii) ML measures non-controlling interest at fair value on the date of acquisition.
Required: Prepare for ML, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended

296
Answer:
M Limited’s Consolidated statement of financial position As at 30 June 2022
Non-current assets Rs. million
PPE 500 + 600 1,100
Investments 430 – 135 - 5 290
Goodwill 389

Current assets 280 + 410 690

2,469

Equity
Share capital 800 + 225 1,025

AT A GLANCE
Share premium 0 + 405 405
Retained earnings 343.49

Non-controlling interest 116

Liabilities 150 + 230 + [139 + 12.51] + [50 – 2] 579.51

2,469
M Limited’s Consolidated statement of comprehensive income For the year ended 30 June 2022
Rs. million

Revenue 1,478 + 1,230 2,708

SPOTLIGHT
Cost of sales 990 + 970 (1,960)

Gross profit 748

Distribution costs 80 + 40 (120)

Administrative expenses 120 + 65 + 5-2 (188)

Finance cost 10 + 0 + 12.51 (22.51)

Profit before tax 417.49

Taxation 98 + 45 (143)

Profit after tax 274.49

Profit attributable to:

Parent (balancing) 263.49

Non-controlling interest 110 x 10% 11

274.49

297
Statement of changes in equity
Share capital Share premium Consolidated Non controlling
retained interest
earnings
b/d 800 - 80 -
(260-180)
NCI at Acq. 105
Issue of share 225 405
Profit of year 263.49 11
c/d 1,025 405 343.49 116

Analysis of Equity of S:
P (90%) NCI (40%)

At Acquisition:
Share capital
500
Retained Earnings
170
[280 – 110]
603 67 670
670
Cost Of Investment 954 954
[430 – 290 – 5 + 630 +
139 +50]
FV of NCI 105 105
[500/10 = 50 x 10% x
21]
1059
Goodwill 351 38 389

At Acquisition:
Expense 5
Investment 5
At Acquisition:
Investment 630
Share Capital (22.5 x 10) 225
Share Premium (22.5 x 18) 405
[500/10 x 90% = 45/2 x 1 = 22.5 million shares x
28 = 630]
Investment 139
Payable 139
[45M x 4 = 180(1 + 0.09)-3 = 139
30-06-2022:
Finance Cost 12.51
Payable 12.51
139 x 9% = 12.51
At Acquisition:
Investment 50
Payable 50
30-06-2022
Payable 2

298
 Expense 2
Example
Statements of comprehensive income for the year ended 31 December 2015.
Bumpy Smooth

Rs. 000 Rs. 000

STICKY NOTES

Revenue 304,900 195,300

Cost of sales (144,200) (98,550)

Gross profit 160,700 96,750

Operating costs (76,450) (52,100)

Operating profit 84,250 44,650

Investment income 10,500 2,600

Profit before tax 94,750 47,250

Income tax expense (42,900) (16,500)
Profit for the year 51,850 30,750

Bumpy Smooth

Other comprehensive income

Gain on revaluation 5,000 2,500

Total comprehensive income 56,850 33,250

The following information is also available.

(i) Bumpy acquired 75% of the share capital of Smooth on 31 August 2015.
(ii) Negative goodwill of Rs. 3.8 million arose on the acquisition.
(iii) Profits of both companies are deemed to accrue evenly over the year except for the
investment income of Smooth all of which was received in November 2015.
(iv) The revaluation of asset was carried on by both companies on 1 July 2015.
(v) Bumpy has bought goods from Smooth throughout the year at Rs. 2 million per month. At the
year-end Bumpy does not hold any inventory purchased from Smooth.
Required: Prepare the consolidated statement of comprehensive income for the year ended 31
December 2015.
Answer: Consolidated statement of comprehensive income For the year ended 31 December 2015
Rs. 000

Revenue 304,900 + 195,300 x 4/12 – (2,000 x 4 months) 362,000

Cost of sales 144,200 + 98,550 x 4/12 – (2,000 x 4 months) (169,050)

SPOTLIGHT

Gross profit 192,950

Operating costs 76,450 + 52,100 x 4/12 (93,817)

Investment income 10,500 + 2,600* 13,100

299
ES
 Gain on bargain purchase 3,800

Profit before tax 116,033

Tax 42,900 + 16,500 x 4/12 (48,400)

Profit after tax 67,633

Other comprehensive income

Gain on revaluation 5,000 + 0** 5,000

Total comprehensive income 72,633

Profit attributable to:

Parent (balancing) 64,637

Non-controlling interest(30750-2600) x 4/12 x 25% + 2600x 25%) 2,996

67,633

Total comprehensive income attributable to:

Parent (balancing)[64,637+5,000] 69,637

Non-controlling interest(2996 + 0) 2,996

72,633

*all relates to post-acquisition period

**all relates to pre-acquisition period
Example
T Limited (TL) acquired 80% ordinary shares of M Limited (ML) on 1 July 2021. The statements of

AT A GLANCE
financial position of both companies as at 30 June 2022 are as under:
TL ML

Rs. m Rs. m

Non-current assets

Property, plant and equipment 500 600

Investment in ML 530

Current assets 280 410

1,310 1,010

Equity

Ordinary Share capital (Rs. 10 each) 800 500

Retained earnings 260 280

1,060 780

Liabilities 250 230

1,310 1,010

300
 SPOT
The statements of comprehensive income of both companies for the year ended 30 June 2022 are as
under:

STICKY NOTES
TL ML

Rs. m Rs. m

Revenue 1,478 1,230

Cost of sales (990) (970)

Gross profit 488 260

Other income 45 40

Distribution costs (80) (40)

Administrative expenses (175) (105)

Profit before tax 278 155

Taxation (98) (45)

Profit after tax 180 110

Additional information:
• During the year ML sold goods to TL for Rs. 75 million. These goods were priced at cost plus
25% mark-up. TL has sold 80% of these goods at further mark-up of 15% to entities outside
group. By the year-end, TL has paid (and ML has received) 50% of the amount due.
• On 1st January 2022, TL transferred one of its plant to ML for Rs. 140 million. The book value
of this plant on the date of transfer was Rs. 100 million and it had remaining useful life of 8
years at this date. ML had immediately paid this amount to TL.

TL measures non-controlling interest at fair value as at the date of acquisition that was measured at
Rs. 225 million.
Required: Prepare for TL, consolidated statement of financial position as at June 30, 2022 and
consolidated statement of comprehensive income for the year then ended.

301
Answer:
Consolidated statement of financial position
As at 30 June 2022
Non-current assets Rs. million

Property, plant & equipment 500 + 600 – 37.5 1,062.5

Goodwill 85

Current assets 280 + 410 – 37.5 – 3 649.5

1,797

Equity

Share capital 800 800

Retained earnings 308.1

Non-controlling interest 246.4

Liabilities 250 + 230 – 37.5 442.5

SPOTLIGHT
1,797

Consolidated statement of comprehensive income For the year ended 30 June 2022
Rs. million

Revenue 1,478 + 1,230 – 75 2,633

Cost of sales 990 + 970 – 75 + 3 (1,888)

Gross profit 745

Other income 45 + 40 – 37.5 47.5

STICKY NOTES
Distribution costs 80 + 40 (120)

Administrative expenses 175 + 105 (280)

Profit before tax 392.5

Taxation 98 + 45 (143)

Profit after tax 249.5

Profit attributable to:

Parent (balancing) 228.1

Non-controlling interest [ 110 – 3 ] x 20% 21.4
249.5

302
 Share capital Retained Non Total
earning controlling
interest
b/d 800 80 - 1060

(260-180)

NCI at Acq. 225 225

Profit 228.1 21.4 249.5

c/d 800 308.1 246.4

Statement of changes in equity

Analysis of Equity of ML:

P (80%) NCI (20%) Total

At Acquisition:

Share capital
500

Retained Earnings
170

[280 – 110]

536 134 670

670

Cost Of Investment 530 530

FV of NCI 225 225

755

(6) 91 85

Workings:
S P
75 x 20% = 15/125 x 25 = 3
Cost of Sale 3
Stock 3
(NCI will be affected)
Payable 37.5
Receivable 37.5
[75 x 50%]
P S
Gain to be Reversed 40 Dr.
Extra Dep to be reversed 2.5 Cr.
(40/8 x 6/12) 37.5 Dr.

Gain 37.5
PPE 37.5
(NCI will not be affected).

303
Acquisition date amounts of assets acquired and liabilities assumed
Core principle
An acquirer of a business must recognise assets acquired and liabilities assumed at their
acquisition date fair values.

The acquiree’s identifiable assets and liabilities might include assets and liabilities not previously
recognized in the acquiree’s financial statements. For example internally generated brands or
customer lists and contingent liabilities under IAS 37.

Contingent liabilities
Many acquired businesses will contain contingent liabilities such as contingent liabilities for the
settlement of legal disputes or for warranty liabilities. IFRS 3 states that contingent liabilities should be
recognised at acquisition ‘even if it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation.’
This is a departure from the normal rules in IAS 37; i.e. they are not recognized but only disclosed.

The contingent liabilities should be measured at fair value at the acquisition date.

Contingent assets are not recognised.

Restructuring costs and future losses:
An acquirer should not recognise a liability for the cost of restructuring a subsidiary or for any
other costs expected to be incurred as a result of the acquisition (including future losses).
This is because a plan to restructure a subsidiary after an acquisition cannot be a liability at the
acquisition date. For there to be a liability (and for a provision to be recognised) there must have been
a past obligating event. This can only be the case if the subsidiary was already committed to the
restructuring before the acquisition.
This means that the acquirer cannot recognize a provision for restructuring at the acquisition and then
release (reverse) it to profit or loss in order to increase profits or reduce losses after acquisition.
Spring 2021

304
CONSOLIDATION
Definitions : the concept of group [IFRS 10: Appendix A and IAS 27.4]
“Group” means a parent and its subsidiaries.
“Parent” is an entity that controls one or more entities.
“Subsidiary” is an entity that is controlled by another entity (i.e. parent).
“Consolidated financial statements” are the financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as
those of a single economic entity.
“Separate financial statements” are those presented by an entity in which the parent entity presents
its investment in subsidiary at cost or in accordance with IFRS 9 (at fair value) or using the equity
method.
The individual/separate financial statement of parent and subsidiary are not affected by consolidation
specific adjustments. Consolidation specific adjustments are not part of individual entity double-entry
accounting system. In practice, consolidation is one-time year-end procedure, often performed using
specialized software.

Requirement [IFRS 10: 4 & 4B and Companies Act, 2017: Section 228]
Companies Act, 2017 requires that there shall be attached to the financial statements of a holding
company having a subsidiary or subsidiaries, at the end of the financial year at which the holding
company‘s financial statements are made out, consolidated financial statements of the group
presented as those of a single enterprise and such consolidated financial statements shall comply
with the disclosure requirements of the relevant Schedule and financial reporting standards notified by
the Commission.
IFRS 10 also requires that an entity that is a parent shall present consolidated financial statements
and must include all the subsidiaries of the parent. However, a parent need not present consolidated
financial statements if it meets all the following conditions:
(a) it is a wholly‑ owned subsidiary or is a partially‑ owned subsidiary of another entity and all its
other owners, including those not otherwise entitled to vote, have been informed about, and do not
object to, the parent not presenting consolidated financial statements;
(b) its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over‑ the‑ counter market, including local and regional markets);
(c) it did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments in a
public market; and
(d) its ultimate or any intermediate parent produces financial statements that are available for
public use and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair
value through profit or loss in accordance with this IFRS.
A parent that is an investment entity shall not present consolidated financial statements if it is required
to measure all of its subsidiaries at fair value through profit or loss.

Whether an investor is parent? [IFRS 10: 5 to 7, 10, B15, B56 to B58]

An investor, regardless of the nature of its involvement with an entity (the investee), shall determine
whether it is a parent by assessing whether it controls the investee.
An investor controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee.
An investor controls an investee if and only if the investor has all the following:
(a) Power over the investee: this is when the investor has existing rights that give it the current
ability to direct the relevant activities, i.e. the activities that significantly affect the investee’s returns.
(b) Exposure, or rights, to variable returns from its involvement with the investee: variable
returns are returns that are not fixed and have the potential to vary as a result of the performance of
an investee. Variable returns can be positive and/or negative. Examples of returns include dividends,
capital gain from investment in investee, remuneration from providing services to investee, residual
interest in the assets of investee on liquidation, tax benefits, economies of scale, cost savings and
gaining access to proprietary knowledge, etc.

305
(c) The ability to use its power to affect the amount of returns: it shall determine whether it is
a principal or an agent.
In practice, the vast majority of cases involve a company achieving control of another through buying
a controlling interest in its shares.
Furthermore, in the vast majority of cases obtaining a controlling interest means buying shares which
give the holder more than 50% of the voting rights in the other company.
⯈ Example
A owns 100% of B’s voting share capital.
A

This 100% holding is described as a controlling interest and

100% gives A complete control of B.

B would be described as a wholly owned subsidiary.

A company does not have to own all of the shares in another company in order to control it.
⯈ Example
A owns 80% of B’s voting share capital.
A This 80% holding is described as a controlling interest and gives

80% A complete control of B.

B would be described as a partly owned subsidiary.

B
Other parties own the remaining 20% of the shares. They have
an ownership interest in B but do not have control. This is
described as a non-controlling interest.

Non-controlling interest (NCI) is defined by IFRS 10 as: “the

equity in a subsidiary not attributable, directly or indirectly, to a
parent.”

Control is assumed to exist when the parent owns directly, or indirectly through other subsidiaries,
more than half of the voting power of the entity, unless in exceptional circumstances it can be clearly
demonstrated that such control does not exist.
⯈ Example
A

60% A owns a controlling interest in B. B owns a controlling interest

in C.
B
Therefore, A controls C indirectly through its ownership of B. C
70% is described as being a sub-subsidiary of A.

Consolidation of sub-subsidiaries is not part of this syllabus

In certain circumstances, a company might control another company even if it owns shares which give
it less than half of the voting rights. Such a company is said to have de facto control over the other
company. (De facto is a Latin phrase which translates as of fact. It is used to mean in reality or to
refer to a position held in fact if not by legal right).

306
⯈ Example
A owns 45% of B’s voting share capital.
The other shares are held by a large number of unrelated investors none of whom individually own
more than 1% of B.
A This 45% holding probably gives A complete control of B.

45% It would be unlikely that a sufficient number of the other

shareholders would vote together to stop A directing the
B company B as it wishes.

A company might control another company even if it owns shares which give it less than half of the
voting rights because it has an agreement with other shareholders which allow it to exercise control.
⯈ Example
A owns 45% of B’s voting share capital.
A further 10% is held by A’s bank who have agreed to use their vote as directed by A.
A

45% This 45% holding together with its power to use the votes
attached to the bank’s shares gives A complete control of B.

It is important to understand that control is different from ownership. A 60% ownership means 60%
share in profit and net assets of investee but control either exists or does not exist, it is not expressed
in percentage.
Acquisition method of consolidation [IFRS 3: 4, 5 & Appendix A]
IFRS 3 defines a “business combination” as a transaction or other event in which an acquirer obtains
control of one or more businesses. It also requires that an entity shall account for each business
combination by applying the acquisition method.
Applying the acquisition method requires:
• identifying the acquirer;
• determining the acquisition date (the date on which acquirer obtains the control);
• recognising and measuring the identifiable assets acquired, the liabilities assumed and any
non‑controlling interest in the acquiree; and
• recognising and measuring goodwill or a gain from a bargain purchase.

Uniform accounting policies [IFRS 10: B87]

If a member of the group uses accounting policies other than those adopted in the consolidated
financial statements for like transactions and events in similar circumstances, appropriate adjustments
are made to that group member’s financial statements in preparing the consolidated financial
statements to ensure conformity with the group’s accounting policies.

Common reporting date [IFRS 10: B92 & B93]

The financial statements of the parent and its subsidiaries used in the preparation of the consolidated
financial statements shall have the same reporting date (period-end).
When period-end is different, the subsidiary prepares, for consolidation purposes, additional financial
information as of the same date as the financial statements of the parent to enable the consolidation,
unless it is impracticable to do so.
If it is impracticable to do so, subsidiary’s most recent financial statements may be used with
adjustments of significant transactions and events.
In any case, the difference between reporting dates shall be no more than three months, and the
length of the reporting periods and any difference between the dates of the financial statements shall
be the same from period to period.

307
Classification Principle [IFRS 3: 15][add on page 302 of Vol 1]
At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and
liabilities assumed as necessary to apply other IFRSs subsequently.
⯈ Example
S Limited owns a property that has been rented to its subsidiary M Limited which uses it as its
administrative office.
Required: Briefly discuss how the above property should be classified by S Limited in its separate
financial statements and in its consolidated financial statements.
Answer:
In separate financial statements, the property will be classified as investment property in accordance
with IAS 40 as it has been rented to another entity. However, in consolidated financial statements, the
property will be classified as property, plant and equipment in accordance with IAS 16 since group is
to be considered as single economic unit and the property in that context is owner occupied property.

308
Test IAS-12 DATE: ………………
Q. Ravi Limited has provided you the following information for determining its tax and deferred tax expense for the year
2008 and 2009. Ravi limited was incorporated on 01.01.2008.
1. Lease payments made during the year amounted to Rs. 1.3 million which include financial charges of Rs. 0.3
million. As at December 31, 2009, obligations against assets subject to lease stood at Rs. 4 million. The movement
in assets held under lease is as follows:
Rupees in million
Opening balance – 01/01/2009 0
Asset taken on lease 5
Depreciation for the year (1.4)
Closing balance – 31/12/2009 3.60
2. During the years ended December 31, 2008 and 2009 financial charges of Rs. 1.2 million and 4.6 million
respectively have been capitalized in capital work in progress in accordance with 1AS-23 "Borrowing Costs".
However, the entire financial charges are admissible, under the Income Tax Ordinance, 2001 in the year in which
they are incurred.
3. Operating expenses of 2008 and 2009 include an amount of Rs. 0.6 million and 1.4 million respectively paid as
penalty to SECP on noncompliance of certain requirements of the Companies Act.
4. The details of owned fixed assets are as follows: Rs in million
2009 2008
Accounting Tax Accounting Tax
Opening balance 25 23.8 - -
Purchased during the year 10.6 6 28.4 28.4
Depreciation for the year (2.2) (3.3) (3.4) (4.6)
Closing balance 33.40 31.1 25 23.8
5. As on 31.12.2009 rent received in advance of Rs. 0.1 million is included in current liabilities (taxable in 2009)
6. Rates prepaid of Rs. 0.2 million is respect of 2010 are included in current assets as on 31.12.2009. (deductible for
tax purposes in 2009).
7. During the year ended 31.12.2009 Rs. 0.9 million were spent on advertisement and treated as expense. As per tax
rules such expense are allowed over 3 years on straight line basis.
8. Profit before tax for the year 2008 and 2009 amounts to Rs. 10 million and Rs13 million respectively. It includes
an income of Rs. 0.2 million and 0.1 million for the year 2008 and 2009 respectively, which is exempt
from tax.
9. The tax rate for 2008, and 2009 was 35% and 30% respectively.
Required:
Prepare a note on taxation for inclusion in Ravi limited's financial statements for the year ended 31 December 2009 giving
appropriate disclosures relating to current and deferred tax expenses including comparative figures for 2008 and a
reconciliation to explain the relationship between tax expense and accounting profit.

Page 1 of 42
309
Solution:
Ravi Limited
Note of Taxation
For the year ended 31.12.2009
“……Rs in Millions… .. ”
2009 2008
Current Tax (W-1) (2.85) (2.8)
Deferred Tax (W-2) [1.44-0.12] (1.32) (0.84 )
(4.17) (3.64)

Reconciliation between tax expense and accounting profits:

2009 2008
Profit before tax 13 10
Expected tax at 30%/35% 3.9 3.5
Effect of permanent differences:
Tax effect of exempt income (0.130%):(0.235%) (0.03) (0.07)
Penalty (1.430%):(0.635%) 0.42 0.21
Tax effect of change in tax rate (0.12) -
Actual Tax Expense 4.17 3.64

W-1 Current Tax 2009 2008

Accounting Profit before tax 13 10
Lease Financial charges 0.3 -
Depreciation of right of use 1.4 -
Penalty to SECP 1.4 0.6
Accounting Depreciation 2.2 3.4
Advertisement Expense 0.9 -
Rent received in advance 0.1 -
Prepaid rates (0.2) -
Lease rental paid (1.3) -
Borrowing cost capitalized (4.6) (1.2)
Tax deprecation (3.3) (4.6)
Advertisement expense (0.9/3) (0.3) -
Exempt income (0.1) (0.2)
Taxable profits 9.5 8
Tax Rate 30% 35%
Current Tax Expense 2.85 2.8

Deferred Tax Liability as on 31-12-2008:

C.A T.B Diff

CWIP 1.2 - 1.2 TTD

Fixed Assets 25 23.8 1.2 TTD
Total 2.4 TTD

Deferred tax Liability = 2.4 x 35% = 0.84

D.T.L
b/d -
D.T.E. 0.84
c/d 0.84

D.T.E 0.84
D.T.L 0.84

Page 2 of 42
310
 Deferred Tax Liability as on 31-12-2009:

C.A T.B Diff

Lease liability 4 - 4 DTD

Right of use 3.6 - 3.6 TTD
CWIP 5.8 - 5.8 TTD
Fixed assets 33.40 31.1 2.3 TTD
Rent received in advance 0.1 - 0.1 DTD
Prepaid rates 0.2 - 0.2 TTD
0.6
Prepaid advertisement - (0.9-0.3) 0.6 DTD
Total 7.2 TTD

Deferred tax Liability = 7.12 x 30% = 2.136

D.T.L
b/d (35%) 0.84
D.T.E. 0.12 D.T.E. 1.44
(rate change)
c/d (30%) 2.16

D.T.L 0.12*
D.T.E. 0.12
[0.84/35% x 5% = 0.12*]

D.T.E 1.44
D.T.L. 1.44

Page 3 of 42
311
Test IAS-21 DATE: ………………
Question 1:
On 1 January 2020 an American bank transfers USD 1 million to a local company in Pakistan, Bilal Limited (BL)
in return for a promise to pay fixed interest of 8% per year for two years (due at the end of each year of the
loan period, i-e. 31 December) and a payment of $ 1 million at the end of the two year period.
At the inception of the loan, 8% is the market rate for similar two –year fixed-interest $ denominated loans.
The BL’s functional currency is PKR. Exchange rates over the period of loan are:
• 1 January 2020: Rs. 150 = $ 1
• Average exchange rate in 2020: Rs. 150.5 = $ 1
• 31 December 2020: Rs. 151 = $ 1
• Average exchange rate in 2021: Rs 151.75 = $ 1
• 31 December 2021: Rs. 152.5 = $ 1

Required:
Prepare journal entries for the year ended 31-12-2020 and 2021 in the books of BL.. (10)
Question 2:
MZA Limited a rupee based entity, was involved in the following transactions in foreign currencies during the
year ended December 31, 2018.

a) MZA Limited bought equipment for 130,000 Dinars on March 04, 2018 and paid for on August 25, 2018.

b) On February 27, 2018 MZA Limited sold goods which had cost PKR 7,000,000 for Krams 425,000 to a
company whose currency was Krams. The proceeds were received on May 25, 2018.

c) On September 02, 2018 MZA Limited sold goods which cost PKR 5,000,000 for Sarils 258,621 to a company
whose currency was Sarils. The amount was outstanding at December 31, 2018 but the proceeds were
received in Sarils on February 07, 2019 when the exchange rate was Rs. 27 = Saril 1.

d) MZA Limited borrowed 426,000 Rolands on May 25, 2018 and is repayable in two years’ time.
(Ignore interest)

Exchange rate is relevant to the above transactions to 1 unit of foreign currency are given below:

Date Rolans Dinars Krams Saril

27-Feb-18 - - Rs 20 -
4-Mar-18 - Rs. 180 - -
25-May-18 Rs. 40 - Rs. 19 -
25-Aug-18 - Rs.230 - -
2-Sep-18 - - - Rs. 29
31-Dec-18 Rs. 42 Rs. 195 Rs. 22 Rs. 28

Required:
Prepare all related journal entries for the year ended 31-12-2018. (10)

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Solution: 1
As there are no transaction costs, the effective interest rate (which is computed in the currency
in which the loan is denominated (i-e. $)) is 8%.

Time Carrying amount Interest at 8% Cash outflow Carrying amount

at 31 December

2020 1,000,000 0.08 (80,000) 1,000,000

2021 1,000,000 0.08 (1,080,000) -

The journal entries are:

On 1 January 2020 the loan is recorded on initial recognition as follows:
Debit Credit

Amount in PKR

Bank 150,000,000

Loan payable — financial liability 150,000,000

($1,000,000 x Rs.150/$)
To recognise the borrowing transaction.
Year ended 31 December 2020
During 2020 BL records interest expense as follows:

Interest expense 12,040,000

Loan payable—financial liability 12,040,000

($80,000 x 150.5)
To recognise interest on loan payable in 2020.

On 31 December 2020 the year’s interest is paid and the following journal entry needs to
be recognised:

Loan payable—financial liability 12,080,000

Bank 12,080,000
($80,000 x Rs.151/$)
To recognise the payment of 2020 interest on financial liability.
At 31 December 2020 the loan is to be recorded at Rs.151 million ($1 million x Rs.151/$).
An exchange loss of Rs.1,040,000 arises, which is due to the difference between Rs.151 million
(calculation: USD 1 million x Rs.151/$) recorded at 31 December 2020 and the opening loan
balance (Rs.150 million) adjusted for the interest expense (Rs.12,040,000) and its cash payment
(Rs.12,080,000).
Consequently, a further journal entry on 31 December 2020 is:
Exchange loss (P&L) 1,040,000

Loan payable — financial liability 1,040,000

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 [(150,000 + 12,040,000 – 12,080,000) – (1,000,000 x 151)] = 1040,000

To recognise differences arising on translating monetary items at rates different from those at
which they were translated on prior recognition

Year ended 31 December 2021

In 2021 BL records interest expense as follows:

Profit or loss — interest expense 12,140,000

Loan payable — financial liability 12,140,000

($ 1 million @ 8% p.a x Rs.151.75 / $)
To recognise interest on loan payable in 2021.
On 31 December 2021 yearly interest and loan principal are paid, so the following journal
entry is recognised:

Loan payable—financial liability 164,700,000

Bank 164,700,000
[$1,080,000 x Rs.152.5 / $]
To recognise the payment of 2021 interest and principal

At 31 December 2021 the loan is fully repaid (last interest payment plus principal).

An exchange loss of Rs.1.56 million arises due to the difference between the Rs.164.7 million
paid on 31 December 2021 and the opening loan balance adjusted for the interest.
Consequently, a further journal entry on 31 December 2021 is:

Exchange loss (P/L) 1,560,000

Loan payable — financial liability 1,560,000

To recognise differences arising on translating monetary items at rates different from those at
which they were translated on prior recognition (calculation Rs.164.7 million less (Rs.151 million
+ Rs.12.14 million).
(151,000,000 + 12,140,000 – 164,700,000) – 0 = 1,560,000

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Solution 2:
Journal Entries
a) Dr. Cr.

Date Description
PKR PKR

4-Mar-18 Equipment 23,400,000

Accounts payable 23,400,000

Purchase of equipment
(130,000 x 180)

25-Aug-18 Accounts payable 23,400,000

Exchange Loss (Bal) 6,500,000

Bank 29,900,000
(130,000 x 230)
Payment of accounts payable

b) 27-Feb-18 Accounts receivable 8,500,000

Sales 8,500,000
(425,000 x 20)
Revenue recognition
(425,000 x 20)

27-Feb-18 Cost of sales 7,000,000

Inventory 7,000,000

Cost recognition

25-May-18 Bank 8,075,000

(425,000 x 19)
Exchange loss 425,000

Accounts receivable 8,500,000

Receipt of accounts receivable

c) 2-Sep-18 Accounts receivable 7,500,000

Sales 7,500,000

Revenue recognition
(258,621) x 29)

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 2-Sep-18 Cost of sales 5,000,000

Inventory 5,000,000

Cost recognition

31-Dec-18 Exchange Loss 258,621

Accounts receivable 258,621

Year end closing rate

[(258,621 x 28) – 7,500,000]

7-Feb-19 Bank 6,982,759

(258,621 x 27)
Exchange Loss (Bal) 258,621

Accounts receivable 7,241,379

(7,500,000 – 258,621)
Receipt of accounts receivable

d) 25-May-18 Bank 17,040,000

(426,000 x 40)
Loan 17,040,000

Receipt of loan

31-Dec-18 Exchange loss 852,000

Loan 852,000

Year end closing rate

[(426,000 x 42) – 17,040,000)

Page 8 of 42
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Test IAS-10 & 37 DATE: ………………
Q.Turquoise Limited (TL) is in the process of finalizing its financial statements for the year ended
30 June 2019. Following matters are under consideration:
(i) On 10 July 2019, the owner of the adjacent building filed a case against TL claiming Rs. 50
million. The claim is made in respect of severe damage to his building during a fire incident
in TL’s head office in June 2019. He is of the view that TL was negligent in maintaining fire
safety systems in its head office. According to TL’s lawyers, there is
70% probability that TL would be found negligent and would need to pay 40% of the
amount claimed. (04)

(ii) In May 2019, TL’s board of directors decided to relocate its regional office from Multan to
Lahore. In this respect, a detailed plan was approved by the management and a formal
public announcement was made in June. TL has planned to complete the relocation by
December 2019. The related costs have been estimated as under:

Rs. in million

Redundancy payments 20
Costs of moving office equipment to Lahore 3
Compensation to employees agreeing to relocate 10
Salary of existing operation manager (responsible to
supervise the relocation) 2 (04)
(iii) TL had 6,000 unsold units of product A as on 30 June 2019 acquired at
Rs. 500 per unit. In June 2019, the selling price of product A has fallen to

Rs. 350 per unit.

TL acquires product A under the contract in which TL has to buy 10,000 units of product A
per month for Rs. 500 per unit. The contract is valid till 31 August 2019 and if TL decides to
cancel the contract, then it must pay a cancellation penalty of Rs. 4 million. TL is of view
that the market may not improve in near future.
(iv) TL sells product B with a warranty of 12 months, though the manufacturer i.e. Sulphur
Limited (SL) provides a warranty of 8 months only. Warranty services are provided by SL.
However, TL is responsible if SL fails to honour its obligation for this warranty. If warranty
claim arises within 8 months, SL does not charge any cost. However, SL
(04
charges Rs. 500, Rs. 1,000 and Rs. 2,500 for a minor, moderate and major defect
respectively in each unit if the defect arises in the extended warranty period of 4 months
offered by TL. The probability that a warranty claim in respect of a unit sold may arise, is as
under:
Nature of defect First 8 months Last 4 months
Minor 12% 6%
Moderate 7% 10%
Major 4% 5%

During the year ended 30 June 2019, a total of 12,000 units of product B has been sold
by TL and warranty cost of Rs. 1.2 million has been paid to SL in respect of these units. (05)
Required:
Discuss how the above issues should be dealt with in the financial statements of TL for
the year ended 30 June 2019. Support your answers in the context of relevant IFRSs.
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 A.TL should recognize the provision of Rs. 20 million(50×40%) due to the following:

(i) Filing of case by owner of adjacent building is considered as an adjusting event because the
fire incident was occurred in June consequently evidence of conditions i.e. severe
damage to such building was exist at reporting date.

The payment is probable as according to TL’s lawyers, there is 70% probability that TL
would be determined to be negligent.
Amount can also be estimated reliably as TL’s lawyers is of view that TL will have to pay
40% of the amount claimed.
(ii) A provision for restructuring cost is to be recognised, as a formal restructuring plan has been
finalised and approved by the management and a formal public announcement was made
prior to 30 June 2019.
However, a provision should only be made for redundancy cost of Rs. 20 million as it pertains
to the closing of Multan unit.
Costs of moving machinery to the Lahore and compensation to employees agreeing to transfer
Lahore relate to future conduct of the business / ongoing business of TL should not be
recorded in the year ended 30 June 2019.
Salary of the existing operation manager should not be recorded as it is not incremental cost,
and would be incurred whether relocation takes place or not.
(iii) In the given scenario, following two adjustments in respect of product A are required:

Since selling price is lower than cost so NRV adjustment in respect of closing inventory at year
end should be made by Rs. 900,000 [6,000×150(500-350)]
Further, as the contract become onerous, TL should also record provision for unavoidable cost
of Rs. 3 million being lower of:
• Cost of fulfilling the contract i.e. Rs. 3 million [10,000×2×150(500–350)]
• Cancel the contract (penalty) i.e. Rs. 4 million
(iv) In the given scenario, warranty period is divided into two i.e. First eight months and subsequent
four months. Both periods are discussed separately below:
First 8 months:
Since SL is responsible for warranty claim arising in this period and no cost is charged by SL so no
provision is required in TL’s books. However since TL is responsible if SL does not honour its
obligation for this warranty period, TL should disclose this fact as contingent liability.
Subsequent 4 months:

Since SL charges an amount from TL depend upon nature of defect, provision should be recorded in
TL’s books as there is present obligation as a result of past event (Sale of Product B). Computation is
as follows:

Nature of defect No. of units Rs. per unit Rupees

Minor (12,000 x 6%) 720 500 360,000

Moderate (12,000 x 10%) 1,200 1,000 1,200,000
Major (12,000 x 5%) 600 2,500 1,500,000
3,060,000

Less: Already claimed (1,200,000)

Provision to be made 1,860,000

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 Test Lease and Dismantling Cost DATE: ………………
Q.1 Shalimar Industries (SI) is engaged in the manufacturing of tractors. The tractors are sold both on
cash and finance lease basis. The cash selling price and cost of each tractor is Rs. 2.0 million and Rs. 1.6
million respectively.
On 1 January 2015, SI sold ten tractors to Caravan Transport (CT) on lease. The terms of the lease and
related information are as follows:
(i) The lease period is 4 years, whereas useful life of each tractor is 5 years.
(ii) The total unguaranteed residual value at the end of lease term is Rs. 1 million. Ownership is not expected to
be transferred.
(iii) Lease rentals amounting to Rs. 6,375,454 per annum are payable in arrears
The rate implicit in the lease is 12%.
Required:
In accordance with the requirements of International Financial Reporting Standards, prepare:
(a) Journal entries in the books of SI to record the transactions for the year ended 31 December 2015. (8)
(b) A note for inclusion in SI‘s financial statements, for the year ended 31 December 2015. (7)
(c)

Q.2 Sahiwal Limited is a manufacture of harvesting equipment. Sahiwal Limited sells the equipment to
farmers all around the country. Some customers purchase the equipment for cash and others purchase
under Sahiwal Limited’s finance lease agreement.
Mr. Asad purchased a harvester from Sahiwal Limited and make use of their finance lease
agreement. The details of the lease are as follows:
• The lease period is 5 years (signed on 1st January,2003)
• Lease installments of Rs. 142,440 are payable annually in advance on 1st January.
• The expected residual value at the end of lease term is Rs. 50,000.Rs. 20,000 is guaranteed by
lessee.[which means lessee is not expected to pay GRV at the end of lease term.] The equipment will be
returned to Sahiwal Limited at the end of lease term.
A fair market interest rate for the type of lease is 10%.
The cost to Sahiwal Limited to manufacture this harvester was Rs. 500,000. Sahiwal limited implements
a mark-up of cost plus 25% on their cash sales.
Required:
a) Prepare journal entries for the year ended December 31, 2003 and 2004 in Sahiwal Limited’s books.
b) Produce extracts from the balance sheet as at December 31,2004 to show how the transactions carried
out in 2004 would be reflected in the financial statements of Sahiwal Limited (including comparatives).
c) Produce extracts from the balance sheet as at December 31,2004 to show how the transactions carried
out in 2004 would be reflected in the financial statements of Mr. Asad Limited (including comparatives)
(18)

Q.3
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 & 2016. (10)
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 Answers:
Shalimar Industries

a) i) Accounting entries for the year ended 31-12-2015

1-1-2015 Lease Receivable 20,000,000
Sale 19,364,481
Cost of sales(10 x 1,600,000) - 635,518 15,364,482
Stock 16,000,000
FV of Trucks (2,000,000 x 10) = 20,000,000
PV of LP = 19,364,481

Gross investment = LP + URV

= 6,375,454 x 4 + 1,000,000
= 26,501,816

Net investment =PV of LP +PV of URV

= 6,375,454[ ] x 4 + 1,000,000
= 19,364,481 + 635,518
=20,000,000

FV of tractors = 10 x 2,000,000
= 20,000,000
31-12-2015 Cash 6,375,454
Lease Receivable 3,975,454
Interest income 2,400,000
b) Shalimar Industries Ltd
Notes to the Financial Statements
For the year ended 31-12-2015
Maturity analysis – contractual undiscounted cash flows:

Less than one year 6,375,454

One to two year 6,375,454
Two to three years 6,375,454
Total undiscounted lease payments 19,126,362
Note: URV is not part of lease payments
The company entered into a finance lease with Carvan Transport. It carries interest at the rate of 12%.
There are four annual rentals of Rs.6,375,545 payable in arrears.

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Reconciliation:

Total Lease Receivable (6,375,454 x 3) 19,126,362

Add URV 1,000,000

20,126,362

Less; UFI (1,922,946 + 1,388,645 (4,101,818)

+790,227)

Net investment 16,024,544

Less: current portion of lease (4,452,508)

Long term portion of lease 11,572,038

Date Rental Principal Interest Balance

01-01-2015 - - - 20,000,000
31-12-2015 6,375,454 3,975,454 2,400,000 16,024,546
31-12-2016 6,375,454 4,452,508 1,922,946 11,572,038
31-12-2017 6,375,454 4,986,809 1,388,645 6,585229
31-12-2018 7,375,454 6,585,229 790,227 -
(6,375,454 + 1,000,000)

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Sahiwal Limited

a) Entries in books of Sahiwal Limited.

Lease Receivable 625,000

01-01-03 Sales (593,955 + 12,418) 606,373

Cost of sales (500,000 - 18,627) 481,373
Stock 500,000

(recording of sale and decreasing of inventory)

Bank 142,440
01-01-03
Lease receivable 142,440

(Receipt of lease receivable)

31-12-03 Finance income receivable 48,256

Finance income 48,256
(Receipt of lease receivable and finance income)

Bank 142,440
01-01-04 Finance income receivable 48,256

Lease receivable 94,184

(Receipt of lease receivable and finance income)

Finance income receivable 38,838

31-12-04
Finance income 38,838

(Receipt of lease receivable and finance income)

b) Sahiwal Limited
Statement of Financial Position (Extracts)
As on 31-12-2004
Assets: 2004 2003

Non-current Asset:

Receivable under finance lease 284,774 388,376

Current assets:

Current portion of receivable under finance lease 103,602 94,184

Finance income receivable 38,383 48,256

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c) Mr. Asad
Statement of Financial Position (Extracts)
For the year ended 31-12-2004
2004 2003

Assets:

Non-current asset:

Leased asset [593,955 - (593,955 / 5 *2)] : [593,955-(593,955 / 5)] 356,373 475,164

Equity and liabilities:

Non-current liabilities;

Obligation under lease 247,209 354,226

Current liabilities

Current portion of lease 107,017 97,289

Finance charges payable 35,423 45,152

(W-1)Lease liability schedule (Sahiwal Limited)

Fair value (Sale price) =(500,000 x 125%) =625,000

Gross investment = LP + URV

= 142,440 x 5 + 30,000
= 732,200 +30 000

=762,200

Net investment = PV of LP+PV of URV

= (593,955+12,418) +18,627
= 625,000
Date Instalment Principal Interest Balance
1/1/03 625,000
1/1/03 142,440 142,440 - 482,560
1/1/04 142,440 94,184 48,256 388,376
1/1/05 142,440 103,602 38,838 284,774
1/1/06 142,440 113,963 28,477 170,811
1/1/07 142,440 125,359 17,081 45,452
(Guaranteed &Unguaranteed)31/12/11 50,000 45,445 4,545 (3)

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(W-2) Lease Amortization Schedule (Mr. Asad)
PV of LP = 593,955

Date Instalment Principal Interest Balance

1/1/03 593,955
1/1/03 142,440 142,440 - 451,515
1/1/04 142,440 97,289 45,152 354,226
1/1/05 142,440 107,017 35,423 247,209
1/1/06 142,440 117,719 24,721 129,490
1/1/07 142,440 129,490 12,949 0
Ans.3

Date Description Debit credit

……..Rs. in millions……
1-Jan-2015 Plant (w-1) (1,500 + 243.49) 1,743.49
Sales tax refundable 255.00
Bank 1,755.00
Provision for decommissioning (w-2) 243.49
(To record purchases of plant and provision
for decommissioning)
31-Dec-2015 Finance cost (W-2) 26.78
Provision for decommissioning 26.78
(To record the finance cost on unwinding of
discount) (243.49 x 11%)
31-Dec-2015 Depreciation expense (1,743.49/2) 871.75
Accumulated depreciation 871.75
(To record the depreciation for the year)
31-Dec-2016 Finance Cost (w-2) 29.73
Provision for decommissioning 29.73
(To record the finance cost on unwinding of
discount) (243.49 + 26.78) x 11%
31-Dec-2016 Depreciation expense (1,743.49/2) 871.75
Accumulated depreciation 871.75

31-Dec-2016 Provision for decommissioning 300.00

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 Bank 300.00
(To record payment of decommissioning liability)

w-1

Rs. in millions

Amount inclusive of sales tax 1,755.00

Less: Sales tax (1,755 x 17/117) (255.00)

Amount net of sales tax 1,500.00

w-2: Provision for decommissioning cost

Rs. in millions

Date Amount of Discount factor @ Liability balance Finance charges

liability 11%

1-Jan-15 300 0.8116 243.49 -

31-Dec-15 300 0.9009 270.27 26.78

31-Dec-16 300 1.0000 300.00 29.73

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 EXTRA PRACTICE QUESTIONS
Revaluation with IAS - 8

QUESTION
The following information pertains to the property, plant and equipment of Orchid Limited (OL), a listed
company:
Description Date of Cost Rs. In Original useful Depreciation Subsequent
purchase millions life method measurement
model
Buildings 01.01.2015 600 30 years Straight line Revaluation
Plant 01.01.2015 475 25 years Straight line Cost

Buildings
The revalued amount of buildings as determined by Shabbir Associates, an independent valuer, on 31.12.2015
and 31.12.2017 was Rs. 700 million and Rs. 463 million respectively.

On 30.06.2017 a building having original cost of Rs. 66 million was sold to Baqir limited for Rs. 85 million. It
was last revalued at 87 million. OL incurred a cost of Rs. 2 million on disposal.

OL transfers maximum possible amount from revaluation surplus to retained earnings on an annual basis.

Plant
On 31.12.2016 the recoverable amount of plant was assessed at Rs.360 million with no change in useful life.

During 2017, OL has decided to change the depreciation method for plant from straight line to reducing
balance method. The new depreciation rate would be 10%.

Required:
In accordance with International Financial Reporting Standards, prepare following notes (along with
comparative figures) to be presented in the OL’s financial statements for the year ended 31 December 2017
in accordance with the requirements of the relevant IFRSs and Companies Act 2017:
1. Property, plant and equipment
2. Change in depreciation method (18)

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A.
Orchid Limited
Notes to financial statements
For the year ended 31-12-2017

Property, plant and equipment

2017
Building Plant Total
-------- Rs. In million ---------
Cost / Revalued amount :
Opening balances 700 475 1,175
Addition … … …
Disposal (87) … (87)
Elimination (42.28) … (42.28)
Revaluation:
Revaluation surplus (90.12) … (90.12)
Income statement (revaluation loss) (17.6) … (17.6)
Closing Balance 463 475 938
Accumulated depreciation
Opening balance 24.14 38 62.14
Depreciation 22.64 36 58.64
Disposal (4.5) … (4.5)
Elimination (42.28) … (42.28)
Closing balance … 74 74
Accumulated impairment loss
Opening balance - 77 77
For the year - - -
Closing balance - 77 77
Carrying amount 463 324 787

Property, plant and equipment

2016
Building Plant Total
-------- Rs. In million ---------
Cost / Revalued amount
Opening balance 700 475 1,175
Addition/Deletion … … …
Closing balance 700 475 1,175
Accumulated depreciation
Opening balance … 19 19
For the year 24.14 19 43.14
Closing balance 24.14 38 62.14
Accumulated impairment loss
Opening balance - - -
For the year - 77 77
Closing balance - 77 77
Closing net book value 675.86 360 1,035.86
Disclosures:
Measurement base Revaluation model Cost model
Useful life 30 years 10%
Method of depreciation Straight line Reducing balance
The last revaluation was performed by Shabbir Associates, an independent firm of valour’s on 31-12-2017.
Carrying Amount of building if carried at cost model:
2017 2016
Cost 534 600
Accumulated depreciation (53.4) (40)
Carrying Amount 480.6 560

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Working for the above figures
Building A/c
1-1-2015 Cash 600
c/d 600
b/d 600
c/d 600
b/d 600 30-6-2017 Disposal 66
c/d 534

Accumulated Depreciation A/c

31-12-2015 Depreciation 600/20 20
c/d 20
b/d 20
c/d 40 31-12-15 Depreciation600/20 20
30-6-2017 Disposal[66/30x2.5] 5.5
b/d 40
c/d 53.4 Depreciation[600- 18.9
66)/30+(66/30x6/12)]

Disclosure of disposal of building

Name of purchaser Baqir limited
Cost / revalued amount 66 millions
Carrying Amount [87-4.5] 82.5 millions
Sale price 85 millions
Cost of disposal 2 millions
Gain on disposal 0.5 millions
Mode of disposal (tender / negotiation) Not available

2. Change in Accounting Estimate

In 2003, the company changed the method of depreciation from straight line to reducing balance. The rate of
depreciation would now be 10%..
The effect on profits due to change in estimate is as follows.
Current period 2017
Original depreciation [360/23] 15.65
Revised depreciation [360 x 10%] 36.00
Decrease in profits of 2017 20.35
Future periods
Original depreciation [360-(360/23)] 344.35
Revised depreciation [360-(360 x 10%)] 324.00
increase in future profits 20.35

Ledgers according to question:

Building
1-1-2015 b/d ----
1-1-2015 Cash 600 31-12-2015 Acc Depreciation 20
31-12-2015 Revaluation Surplus(w-1) 120 c/d 700

1-12-2016 b/d 700 c/d 700

b/d 700 31-06-2017 Disposal 87
31-12-2017 Acc. Depreciation 42.28
R.surplus 90.12
R.loss(W-2) 17.6
31-12-2017 c/d 463

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328
 Accumulated Depreciation
1-1-2015 b/d ----
31-12-2015 Building 20 31-12-2015 Depreciation (600/30) 20
c/d -
b/d -
c/d 24.14 Depreciation(700/29) 24.14
30-06-2017 Disposal(87/29X1.5) 4.5 b/d
Building 42.28 31-12-2017 Depreciation 22.64
[700-87]/29+[87/29X6/12]
c/d -

Revaluation Surplus
1-1-2015 b/d ----
31-12-2015 Building 120
c/d 120

Retained earnings 4.14 b/d 120

[120/29]
c/d 115.86
30-06-2017 Retained earnings 0.4 b/d 115.86
30-06-2017 Retained earnings 22
31-12-2017 Retained earnings 3.34
31-12-2017 Building 90.12
c/d -

Workings :

W-1) 30.6.2015
WDV [ 600 – 20] = 580
FV = 700
Rev. Surplus = 120

W-2) 30.6.2017 (Rev. Surplus related to disposal)

WDV [ 66 – (66/30)] = 63.8
FV = 87.0
Rev. Surplus = 23.2

W-3) 31.12.2017
WDV
FV [ 700 – 87 ] = 613
Accumulated Depreciation = 42.28
[ 613 / 29 x 2 ] 570.72

FV = 463.0
Rev. Loss 107.72

Journal Enteries : (for the year ended 31-12-2017)

Dr. Cr.
30-06-2017
Depreciation 1.5
Accumulated Depreciation 1.5
[ 87 / 29 x 6/12 ]

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Revaluation Surplus 0.4
Retained Earnings 0.4
[ 23.2(w-2) / 29 x 6/12 ]
Cash ( 85 – 2 ) 83
Accumulated Depreciation 4.5
( 87 / 29 x 1.5 years )
Building 87
Gain ( P.L ) 0.5

Revaluation Surplus 22
Retained Earnings 22
[ 23.2 – (23.2 / 29 x 1.5 ] = 22
31-12-2017
Depreciation 21.14
Accumulated Depreciation 21.14
[ 700 – 87 ] / 29 = 21.14
31-12-2017
Rev.Surplus 3.34
Retained Earnings 3.34
[ 120 – 23.2 ] / 29 = 3.34
31-12-2017 90.12
Revaluation Surplus 17.60
Revaluation Loss ( P.L ) 107.72
Building ( W-3 )

Plant
1-1-2015 Cash 475
c/d 475
b/d 475
c/d 475
b/d 475
c/d 475

Accumulated depreciation
31-12-2015 Depreciation 19
[475/25]
c/d 19
b/d 19
c/d 38 Depreciation 19
b/d 38
c/d 74 Depreciation 36
[360 X 10%]*
*change in method
Accumulated impairment loss

b/d -
c/d 77 For the year (W 1) 77
b/d 77
c/d 77 For the year -

W 1) 31.12.2016

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Carrying amount [475-38] = 437
Recoverable amount = 360
Impairmaent loss = 77

IAS – 23, IAS- 12, IFRS-16

Q.1 Emotional Limited (EL) is preparing its financial statements for the year ended 30 June 2017.
Following are the details of additions to property, plant and equipment made during the year:

Addition 1: Construction of tanks and pipelines

• The construction of tanks and pipeline was started on 01 August 2016 and were put into operation upon
completion on 1 April 2017. The construction was capitalized through own funds and the remaining
amount was arranged through different running finance facilities. The amount which was capitalized in
the statement of financial position was Rs. 1,890.76 million.
• In order to finance the project, EL obtained a 3 year loan of Rs. 1,200 million at the rate of 12% per
annum on 1 August 2016. The principal is payable in three equal annual installments along with interest,
from 1 August 2017. No amount was repaid in this regard during the year.
• Running finance facility of Rs. 5,000 million which was obtained on 01 January 2015 had 1,100 million
payable as on 30 June 2017.
• Borrowing cost capitalized during the year was Rs. 90.76 million.

Addition 2: Acquisition of machinery on lease

On 1 January 2017 EL acquired machinery having fair value of Rs. 185 million, on lease for a non-cancellable
period of four years. Rentals of Rs. 54 million are to be paid annually in advance on 1 January. EL’s incremental
borrowing rate is 13.7%. EL also paid initial direct cost of Rs. 10 million in respect of the machinery.

The following information is also available:

(i) During the year ended 30 June 2017, EL made a profit before tax of Rs. 500 million, after incorporating the
effects of above transactions.
(ii) EL charges depreciation at the rate of 10% on tanks and pipelines.
(iii) EL’s tax rate is 30%. Tax authorities allow depreciation at the rate of 20% on tanks and pipelines.
Full year’s tax depreciation is allowed in the year of addition.
(iv) As per tax laws:
• all lease related payments are allowed in the year of payment and
• Borrowing costs are allowed when incurred.
• Investment income is taxable when earned.
(v) There are no temporary differences in current and previous years other than those evident from
the information provided above.

Required:
Prepare relevant extracts from EL’s statement of financial position as on 30 June 2017. Notes to the financial
statements are not required. Borrowing costs are to be calculated on the basis of number of months. (14)

Page 6 of 28
331
Ans.1
Emotional Limited Rs. in
Extracts from Statement of Financial Position million
As on 30 June 2017

Property, plant & equipment

Tanks and pipelines [1,890.76 - (1890.76 × 10% × 3/12)] 1,843.49
Right of use asset [180(W-3)+10 – 23.75 (190/4×6/12)] 166.25

Non-current liabilities
Liabilities against asset subject to lease (W-3) 89.26
Bank loan (1,200 – 400) 800.00
Deferred tax liability (W-5) 130.53

Current liabilities
Running finance 1,100.00
Bank loan 400.00
Liabilities against asset subject to lease (W-3) 36.74
Accrued interest on lease [17.26(W-3)/2] 8.63
Interest payable on bank loan (1,200×12%×11/12] [August - June] 132.00
Provision for taxation (W-4) 19.47

W-3: Amortization schedule

Year ended Lease Installment Interest @ 13.7% Principal PV of Lease

------------------------------------Rs in million ------------------------------------
180
[[{1–(1+0.137)–3/0.137}+1]×54]
1-Jan-17 54.00 - 54.00 126.00
1-Jan-18 54.00 17.26 36.74 89.26

W-4: Computation of current tax Rs. in million

Profit before taxation 500.00
Add: Accounting depreciation – pipelines 47.27
Less: Tax depreciation – pipelines [(1,890.76 – 90.76) ×20%] (360.00)
Less: borrowing cost capitalized (90.76)
Add: Accounting depreciation – Machinery 23.75
Add: Finance cost – lease [(17.26 x 6/12)] 8.63
Less: Lease rental paid (54.00)
Less: Direct cost on leased machinery (10.00)
Taxable profit 64.89
Taxation (64.89×30%) 19.47

Carrying Timing
W-5 Computation of deferred tax Tax base
amount difference
Rs. in million
Tanks and pipelines 1,843.49 1,440 (W-6) 403.49 TTD
Machinery 166.25 - 166.25 TTD
Liability against asset subject to finance lease 126.00 - (126.00) DTD
Accrued interest on finance lease 8.63 - (8.63) DTD
435.11
Deferred tax expense/liabilities (435.11 x 30%) 130.53

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(W-6) Tax base of tanks and pipes

Construction cost 1,800

Tax depreciation (1,800 x 20%) 360
Tax base 1,440

Page 8 of 28
333
 Revaluation and IAS 40 with IAS 21
Q.1 A Pakistani company (with the rupee as its functional currency) has a financial year ending on 31
December.

It bought a building classified as property, plant and equipment in Bahrain on 1 January 2016 for 100,000
Bahraini dinar (BD) by paying the amount on same date. Building has a useful life of 50 years.

The building was revalued to BD 120,000 on 31 December 2016.

The building was revalued to BD 90,000 on 31 December 2017.

The building was revalued to BD 115,000 on 31 December 2018.

Exchange rates:
1 January 2016 Rs.275/BD
31 December 2016 Rs.290/BD
31 December 2017 Rs.280/BD
31 December 2018 Rs.295/BD

Required:
Prepare relevant accounting entries

Ans. 1
On 1 January 2016
Debit Credit
Property, plant and equipment 27,500,000
Bank (Rs. 275 x BD100,000) 27,500,000

Being the initial recognition of building bought in a foreign currency

On 31 December 2016
BD Rate Rs.
Building on initial
recognition 100,000 275 27,500,000
Depreciation 550,000
(27,500,000/50)
Carrying amount 26,950,000
Revaluation surplus 7,850,000
and Exchange gain
(balance)

Building at year end 120,000 290 34,800,000

Accounting Entry Dr Cr
Acc depreciation 550,000
Building 550,000
Building 7,850,000
Revaluation Surplus 7,850,000

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334
 On 31 December 2017
BD Rate Rs.
Depreciation 710,204
(34,800,000/49 )
Carrying amount 34,089,796
Building at year end 90,000 280 25,200,000
Revaluation loss 8,889,796
Transfer of surplus 149,914
(7,850,000/49)
Remaining surplus 7,689,796
(7,850,000-160,204)
Accounting entry
Acc depreciation 710,204
Building 710,204
Revaluation surplus 7,689,79
6
Revaluation loss (bal) 1,200,00
0
Building 8,889,796

On 31 December 2018
Rat
BD e Rs.
Depreciation 525,000
(25,200,000/48 )
Carrying amount 24,675,000
Building at year end 115,000 295 33,925,000
Revaluation surplus 9,250,000
Revaluation loss to be
reversed 1,200,000 Cr
Extra depreciation to
be charged
(27,500,000/50=550,00
0-525,000) 25,000 Dr
Net loss to be reversed 1,175,000 Cr
Revaluation surplus (9,250,000-
(bal) 1,175,000) 8,075,000 Cr
Accounting entry
Dr Cr
Acc depreciation 525,000
Building 525,000
Building 9,250,000
Reversal of loss 1,175,000
Revaluation surplus 8,075,000

After revaluation from the year ended 31.12.2019; depreciation charge will be (33,925,000/47 = 721,809) and
transferred to retained earnings will be (8,075,000/47 = 171,809).

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335
Q.2 A Pakistani company (with the rupee as its functional currency) has a financial year ending on 31
December.

It bought a building classified as investment property on 1 December 2016 for 100,000 Bahraini dinar (BD) by
paying the amount on same date. Building has a useful life of 50 years.

The building was revalued to BD 120,000 on 31 December 2016.

The building was revalued to BD 90,000 on 31 December 2017.

The building was revalued to BD 115,000 on 31 December 2018.

Exchange rates:
1 December 2016 Rs.275/BD
31 December 2016 Rs.290/BD
31 December 2017 Rs.280/BD
31 December 2018 Rs.295/BD

Required:
Prepare relevant accounting entries

Ans .2
On 1 December 2016
Debit Credit
Property, plant and equipment 27,500,000
Bank (Rs. 275 x BD100,000) 27,500,000

Being the initial recognition of building bought in a foreign currency

As fair value model of IAS 40 is used therefore there is no concept of any

depreciation.
31 December 2016

Building at year end 120,000 290 34,800,000

Fair value gain is [34,800,000 – 27,500,000 = 7,300,000]

As the building is an investment property carried at fair value, revalued following the rules in IAS 40 the credit
of Rs.7,300,000 would be to the statement of profit or loss.

Building 7,300,000
P.L Other income 7,300,000

As fair value model of IAS 40 is used therefore there is no concept of any

depreciation.
31 December 2017

Building at year end 90,000 280 25,200,000

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336
Fair value loss is [34,800,000 – 25,200,000 = 9,600,000]

As the building is an investment property carried at fair value, revalued following the rules in IAS 40 the credit
of Rs.7,300,000 would be to the statement of profit or loss.

P.L Other expenses 9,600,000

Building 9,600,000

As fair value model of IAS 40 is used therefore there is no concept of any

depreciation.
31 December 2018

Building at year end 115,000 295 33,925,000

Fair value gain is [25,200,000-33,925,000 = 8,725,000]

As the building is an investment property carried at fair value, revalued following the rules in IAS 40 the credit
of Rs.7,300,000 would be to the statement of profit or loss.

Building 8,725,000
P.L Other income 8,725,000

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 IAS-8 and Dismantling Cost
Q.Following information has been extracted from the draft financial statements of Marvellous Limited (ML)
for the year ended 30 June 2017:

Statement of financial position

2017 2016
Rs. in million
Property, plant and equipment 700 612
Retained earnings 275 240
Deferred tax liability 58 52
Provision for taxation 12 16

Statement of profit or loss

Profit before taxation 65 85
Taxation 30 25
Profit after taxation 35 60

The following matters are under consideration of the management:

• It was identified that ML’s obligation to incur decommissioning cost related to a plant has not been
recognised. The plant was acquired on 1 July 2014 and had been depreciated on straight line basis
over a useful life of four years. The expected cost of decommissioning at the end of the life is Rs. 50
million. Applicable discount rate is 8%.

• In view of significant change in the expected pattern of economic benefits from an item of the
equipment, it has been decided to change the depreciation method from reducing balance to straight
line. The equipment was purchased on 1 July 2015 at a cost of Rs. 80 million having estimated useful
life of 5 years and residual value of Rs. 16 million. The depreciation at the rate of 27.5% on reducing
balance method is included in the above draft financial statements.

The following balances pertain to ML’s statement of financial position as on 30 June 2015:

Rs. in million
Property, plant and equipment 650
Retained earnings 180
Deferred tax liability 40
Provision for taxation 24

Applicable tax rate is 30%. Tax authorities consider decommissioning cost as an expense when paid.

Required:
Prepare extracts from the following (including comparative figures) for the year ended 30 June 2017:
a) Statement of financial position
b) Statement of profit or loss
c) Correction of error note

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338
Ans 6
Marvellous Ltd.
Statement of Financial Position (Extracts)
As on 30-06-2017
Restated Restated
2017 2016 2015
Property , Plant & Equipment: 714.68 630.37 677.56
(2015: 650+36.75-9.19);(2016: 612+36.75-9.19 X 2)
(2017: 700+36.75-(9.19 X3) +5.5)
Retain earnings (W-3) 252.88 222.85 171.51
Deferred Tax Liability: 48.52 44.67 36.37
(2015: 40-3.63);(2016: 52-3.63-3.7);(2017: 52-3.63-
3.7-3.8+1.65)
Provision for decommissioning : 46.29 42.86 39.69
(2015: 36.75+2.93);(2016: 39.68+ 3.18);(2017:
42.86 + 3.43)
Provision for taxation (given) 12 16 24

b) ML
Statement of profit or loss (extracts)
For the year ended 30-06-2017
Restated
2017 2016
Profit before tax 57.88 72.63
(2016: 85-3.18-9.19);(2017: 65-3.43-9.19+5.5)
Less : Tax (27.85) (21.3)
(2016: 25-3.7);(2017: 30-3.8+1.65)
Profit after tax 30.03 51.33

c) Correction of error note

It was identified in current year that the company did not recognize decommissioning liability related to plant which was
acquired 0n 1-07-2014. The effects of this error as follows:
Effect on statement of profit or loss 2016
Increase in finance cost (3.18)
Increase in Dep. (9.19)
Decrease in deferred tax exp. 3.7
Decrease in profit after tax (8.67)

Effect on Statement of Financial Position:

2016 2015
Increase in P.P.E 18.37 27.56
(630.7-612) (677.5-650)
Increase in provision for Decommissioning 42.86 39.69
Decrease in Deferred tax liability (7.33) (3.63)
[52-44.67] [40-36.37]
Decrease in R.E (17.15) (8.5)

Page 14 of 28

339
Workings:
W-1)
1-07-2014 Plant 36.75
Provision for decommissioning 36.75
50(1+0.08)-4 = 36.75
30-06- Finance cost 2.93
2015
Provision for decommissioning 2.93
50(1+0.08)-3 = 39.69-36.75 =2.93
30-06- Dep. 9.19
2015
Plant 9.19
(36.75/4 =9.19)
30-06- D.T.L. 3.64
2015
D.T.E. 3.64
(9.19+ 2.93 ) X 30% =3.64
For 30-06-2016:
30-06-2016 Finance cost 3.18
Provision for 3.18
Decommissioning
50(1+0.08)-2 = 42.87 -39.69 = 3.18
30-06-2016 Dep. 9.19
Plant (36.75/4) 9.19
30-06-2016 D.T.L 3.7
D.T.E 3.7
(9.19+3.18) X 30% = 3.7
For 30-06-2017:
30-06-2017 Finance Cost 3.43

Provision for dismantling 3.43

50(1+0.08)-1 = 46.30- 42.87 =3.43
30-06-2017 Dep. 9.19
Plant (36.75/4) 9.19
30-06-2017 D.T.L 3.8
D.T.E 3.8
(9.19+3.43 ) X 30% =3.8
W- 2) Change in estimate
1-07-2015 Equipment cost 80
30-06-2016 Dep. (80 X 27.5%) (22)
30-06-2016 WDV 58
30-06-2016 Dep. (16)
30-06-2017 WDV 42

Dep. Charged during 2017 = 16

Dep. to be charged (58-16/4) = 10.5

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340
30-06-2017 Acc. Dep/ Equipment 5.5
Dep. 5.5
(16-10.5) = 5.5
30-06-2017 D.TE 1.65
D.T.L. 1.65

(W-3) Statement of changes in equity:

Balance on 1-07-2015 180
Effect of error (2.93+9.19-3.64) (8.48)
Balance as on 1-07-2015- Restated 171.52
PAT for 2016 –Restated 51.33
Balance as on 30-06-2016- Restated 222.85
PAT- 2017 30.03
Balance as on 30-06-2017 252.88

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IAS 12 with dismantling
Q.1 Rose Limited (RL) is finalizing its financial statements for the year ended 31 December 2017. In this
respect, the following information has been gathered:

Applicable tax rate is 30% except stated otherwise.

During the year RL incurred advertising cost of Rs. 15 million. This cost is to be allowed as tax deduction over 5 years
from 2017 to 2021.
Trade and other payables amounted to Rs. 40 million as on 31 December 2017 which include unearned commission of
Rs. 10 million. Commission is taxable when it is earned by the company. Tax base of remaining trade and other payables
is Rs. 25 million.
Other receivables amounted to Rs. 17 million as on 31 December 2017 which include dividend receivable of Rs. 8 million.
Dividend income was taxable on receipt basis at 20% in 2017. However, with effect from 1 January 2018, dividend
received is exempt from tax. Tax base of remaining other receivables is Rs. 6 million.
On 1 April 2017, RL invested Rs. 40 million in a fixed deposit account for one year at 10% per annum. Interest will be
received on maturity. Interest was taxable on receipt basis at 10% in 2017. However, with effect from 1 January 2018,
interest received is taxable at 15%.
On 1 January 2016, a machine was acquired on lease for a period of 4 years at annual lease rental of Rs. 28 million,
payable in advance. Interest rate implicit in the lease is 10%. Under the tax laws, all lease related payments are allowed
in the year of payment.
Details of fixed assets are as follows:
On 01.01.2017 RL acquired a plant at a cost of Rs. 250 millions. It has been depreciated on a straight line basis over a
useful life of six years. RL is also obliged to incur decommissioning cost of Rs. 50 million at the end of useful life of the
plant. Applicable discount rate is 8%.

On 1 July 2017 RL sold one of its four buildings for Rs. 60 million. These buildings were acquired on 1 January 2013 at
a cost of Rs. 100 million each having useful life of 30 years.
The dismantling costs will be allowed for tax purposes when paid.Tax depreciation rate for all owned fixed assets is 10%
on reducing balance method. Further, full year’s tax depreciation is allowed in year of purchase while no depreciation is
allowed in year of disposal.

Required:
Compute the deferred tax liability/asset to be recognised in RL’s statement of financial
position as on 31 December 2017. (16)

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342
A.Rose Limited
Computation of deferred tax liability / assets:
As on 31 December 2017 Rs. In millions
Carrying
Tax Base (Deductible)/TTD Tax Rate DTA/DTL
Amount
Advertisement -- 12 12 DTD × 30% 3.6 DTA
[15(15÷5)]
Trade and other Payables:
unearned commission 10 10 --
Others 30 25 5 DTD × 30% 1.5 DTA
Other Receivables:
Dividend receivables 8 8 --
Others 9 6 3 TTD × 30% 0.9 D.T.L
Interest receivable 3 -- 3 TTD × 15% 0.45 D.T.L
[40 × 10% × 9/12]
Right of use Machine (W-1) 48.82 -- 48.82 TTD × 30% 14.65 D.T.L
Lease Liability (W-2) 48.60 -- 48.60 DTD × 30% 14.58 D.T.A
Interest payable on lease 4.86 -- 4.86 DTD × 30% 1.46 D.T.A
(W-2)
Plant (W 4) 234.59 225 9.59 TTD x 30% 2.88 DTL
(250x90%)
Provision for dismantling 34.03 -- 34.03 DTD x 30% 10.21 DTA
(W 3)
250 177.147 72.85 TTD × 30% 21.86 D.T.L
Building (W-5) (W-6)
Net D.T.L 9.39

Workings:
(W-1) Present Value of Lease Payment(Machine):
1 − (1 + 0.1)−3 
 
 0.1 
28 + 28 = 97.63
Carrying Amount = [97.63 – (97.63 ÷ 4 × 2)]
= 48.82
(W-2) Finance Charge Table:
1-1-2016 97.63
1-1-2016 28 28 -- 69.63
1-1-2017 28 21.037 6.963 48.593

1-1-2018 28 23.1407 4.859 25.4523

(W-3) PV of provision for decommissioning

01.01.2017 50 (1.08)-6 = 31.5
31.12.2017 50 (1.08)-5 = 34.03

(W-4) carrying amount of plant

250 + 31.5 =281.5/6 = 46.92
281.5 – 46.92 = 234.59

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343
(W-5) Building (Carrying Amount)
b/d 346.67 1-7 Disposal 85
400 100
[400 − ( × 4)] [100 − ( × 4.5)]
30 30
31-12 Depreciation 11.67
300 30 + 100 30  612
c/d 250

(W-6) Building (Tax Base)

b/d 262.44 Disposal 65.61
[400×0.9×0.9×0.9×0.9] [100×0.9×0.9×0.9×0.9]
Depreciation 19.683
[262.44 – 65.61] × 10%
c/d 177.147

Page 19 of 28

344
 Page 20 of 28

345
 IAS-12
Q.1 Tahir & Co is in the process of finalizing its financial statements for the year ended 30 June 2018. The
following information has been gathered for preparing the disclosures related to taxation:

(i) Profit before tax for the year ended 30 June 2018 was Rs. 508 million.
(ii) Accounting depreciation for the year exceeds tax deprecation by Rs. 45 million.
(iii) During the year, OL sold a machine whose accounting WDV exceeded tax WDV by Rs. 15 million.
(iv) OL carries trademark of Rs. 90 million having indefinite useful life which was acquired on 1 July 2015.
Tax authorities allow its amortization over 10 years on straight line basis.
(v) OL sells goods with a 1-year warranty and it is estimated that warranty expenses are 2% of annual
sales. Actual payments during the year related to warranty claims were Rs. 54 million. Of these, Rs. 38 million
pertain to goods sold during the previous year. Sales for the year ended 30 June 2018 was Rs. 1,750 million.
Under the tax laws, these expenses are allowed on payment basis.
(vi) During the year, OL expensed out payments of Rs. 17.5 million related to restructuring of one of its
business segments. As per tax laws, these expenses are to be allowed as tax expense over a period of 5 years
from 2018 to 2022.
(vii) Expenses include:
• Accruals of Rs. 26 million which will be allowed for tax purpose on payment basis.
• Cash donations of Rs. 5 million which are not allowed as tax expense.
(viii) Other income includes:
• Commission receivable of Rs.12 million.
• Dividend receivable of Rs. 35 million.
Both incomes were taxable on receipt basis at 30% up to 30 June 2018. With effect from 1 July 2018
commission income is exempt from tax whereas dividend income is taxable at 10% on receipt basis.
(ix) On 30 June 2018, OL received advance rent of Rs. 16 million. Rent income is taxable on receipt basis.
(x) Net deferred tax liability as on 1 July 2017 arose on account of:

Rs. in million
Property, plant and equipment 34.5
Trademark 5.4
Provision for warranty (14.7)
25.2

(xi) Applicable tax rate is 30% except stated otherwise.

Required:

(a) Prepare a note on taxation for inclusion in OL's financial statements for the year ended 30 June 2018
including a reconciliation to explain the relationship between tax expense and accounting profit.

(b) Compute the deferred tax liability/asset in respect of each temporary difference. (Comparative
figures are not required)

346
Page 21 of 28
Ans 1(a)
Tahir & Co
Notes to the Financial Statement
For year ended 30-6-2018

Rs in million
Tax:
Current Tax (W-1) (162.9)
Deferred Tax (b) 19.6
(143.3)

Reconciliation between accounting profit and tax expense:

Profit before tax 508
Tax rate 30%
Expected tax 152.4

Effect of permanent difference:

Commission income (12 x 30%) (3.6)
Dividend income (35 x 20%) (7.0)
Donation expense (5 x 30%) 1.5
Actual tax expense 143.3

W-1: Computation of Current tax

Accounting profit 508.0
Excess accounting depreciation 45.0
Excess tax gain on disposal/ lower tax loss 15.0
Amortization of trademark (90/10) (9)
Warranty expense [35-11] 24.0
Payments against warranty (54)
Restructuring expense not allowed 17.5
Restructuring expense allowed over 5 year (17.5/5) (3.5)
Unpaid expense allowable upon payment 26.0
Cash donation not allowable 5.0
Exempt commission income (12.0)
Dividend income taxable at lover rate (35)
Unearned rent taxable on receipt 16
Taxable income 543.0
Tax @ 30% 162.9

b) Deferred tax liability /Asset:

C.A T.B Differences D.TA/D.T.L
Property plant and equipment 370 (W-1) 315 (W-2) 55 TTD x30% 16.5 D.T.L

Dividend receivable 35 - 35 TTD x10% 3.5 D.T.L

Accrued expenses 26 - 26 DTD x30% 7.8 D.T.A
Provision for warranty (W3) 19 - 19 DTD x30% 5.7 D.T.A
Unearned rent 16 - 16 DTD x30% 4.8 D.T.A

347
Page 22 of 28
Trade Mark 90 (W-4) 63 (W5) 27 TTD x30% 8.1 D.T.L
- 14 14 DTD x30% 4.2 D.T.A
Restructuring Cost (17-3.5)
(17/5)

W-1 W-2
PPE-WDV PPE-T.B
b/d 500 Dep 100 b/d Dep
385 55
Cash - disposal 30 disposal 15
c/d 370 c/d 315

I. 34.5/30% =115 TTD (Carrying amount will be more at the beginning of the previous year). Suppose C.A
was 500 so opening tax base would be 385.
II. Accounting depreciation was 45 more than tax therefore suppose accounting dep was 100 so tax
depreciation would be 55.
III. Accounting WDV exceeds tax WDV by 15 so suppose :
Accounting Tax
Cash (Sale proceed) 50 50
WDV/ Tax base (30) (15)
Gain 20 35

15 to be added back

W-3
Provision for warranty
Expense 11* b/d 49
(49-38) (14.7 /30%) W-4
Cash 54 Expense 35 Trade mark (carrying amount)
(1,750x2%) b/d 90
c/d 19 c/d 90
*
1 year warranty to be reversed after 1 year.

W-6
W-5 DTL
Trade mark (Tax base) DTE 19.6 b/d 25.2
b/d (90-18) 72 Amortization 9 c/d 5.6
c/d 63
2 year OR (5.4/30%)

348
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 Consolidation with IAS-28
Q.The following balances are extracted from the records of Golden Limited (GL), Silver Limited (SL) and Bronze
Limited (BL) for the year ended 30 June 2019:

GL SL BL
---------- Rs. in million ----------
Sales 2,500 2,050 1,000
Cost of sales 1,550 1,150 590
Operating expenses 810 520 288
Other income 350 180 50
Finance cost 90 60 35
Surplus arising on revaluation of property,
plant and equipment during the year 60 - 20
Investment in SL - at cost 1,400 - -
Investment in BL - at cost 2,500 - -
Retained earnings as at 30 June 2019 8,000 3,500 2,200

Additional information:

(i) Details of GL’s investments are as follows:

Share capital
Date of (Rs. 10 each) Retained earnings
investment Holding % Investee of investee of investee
---------- Rs. in million ----------
1 Jan 17 35% BL 5,000 1,800
1 Jul 18 70% SL 6,000 3,000

(ii) Cost of investment in SL includes professional fee of Rs. 20 million incurred on acquisition of SL.
(iii) The following considerations relating to acquisition of SL's shares are still unrecorded:
▪ Issuance of 275 million ordinary shares of GL.
▪ Cash payment of Rs. 1,000 million after three years.
On the date of investment, the market price of shares of GL and SL were Rs. 20 and Rs. 17 respectively.
Applicable discount rate is 12%.
(iv) At the date of acquisition of SL, carrying values of its net assets were equal to fair value except the
following:
▪ an internally developed software by SL which had a fair value of Rs. 150 million. The
cost of Rs. 120 million incurred by SL on development had been expensed out by SL
since the software did not meet the criteria for capitalization during development. At
acquisition date, the software had a remaining useful life of 5 years.
▪ a contingent liability of Rs. 90 million as disclosed in financial statements of SL which
had an estimated fair value of Rs. 60 million. Subsequent to acquisition, the liability
has been recognised by SL in its books at Rs. 40 million.

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(v) Following inter-company sales at cost plus 15% were made during the year ended
30 June 2019:

Included in buyer's
Sales closing stock-in-trade
-------------Rs. in million -------------
SL to GL 506 138
GL to BL 161 69

(vi) On 1 January 2019, GL granted loans of Rs. 150 million and Rs. 130 million to SL and BL respectively, at
interest rate of 12% per annum.
(vii) GL and BL follow revaluation model whereas SL follows cost model for subsequent measurement of
property, plant and equipment. If SL had adopted the revaluation model, SL would have recorded revaluation
surplus of Rs. 35 million for the year ended 30 June 2019. [uniform accounting policies]
(viii) GL measures non-controlling interest at the acquisition date at its fair value.

Required:
(a) Prepare GL’s consolidated ‘statement of profit or loss and other comprehensive income’ for the year
ended 30 June 2019. (17)
(b) Compute the amount of investment in associate as would appear in GL’s consolidated statement of
financial position as at 30 June 2019. (03)

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A. Golden Limited
Consolidated statement of profit or loss and other comprehensive income
For the year ended 30 June 2019

Rs. in million
(a) Sales [2,500+2,050–506] 4,044.00
Cost of sales [1,550+1,150–506+18+3.15] (2,215.15)
Gross profit 1,828.85
Other Income 350+180–9 521
Operating expenses 810+520+20–40+30 (1,340.00)
Finance cost 90+60+85.41–9 (226.41)
Share of Associate’s profit 137 [(1,000–590–288+50–35)×35%] 47.95
Net Profit 831.39

Other Comprehensive Income

Revaluation surplus 60+35 95.00
Share of Associate’s OCI 20×35% 7.00
Total comprehensive income 933.39

Profit attributable to:

Parent (Bal.) 683.79
NCI (W-1) 147.60
831.39

Total comprehensive income attributable to:

Parent (Bal.) [683.79+60+35 x 70%+7] 775.29
NCI 147.60+10.5(35×30%) 158.10
933.39

W-1: Profit attributable to NCI Rs. in million

Profit after tax for 2019 2,050–1,150–520+180–60 500.00
Amortization of software 150÷5 (30.00)
Adjustment of unrealized profit 138÷1.15×15% (18.00)
Reversal of contingent liability 40.00
492.00
492×30% 147.60

(b) Investment in Associates Rs. in million

Cost 2,500.00
Share in post acquisition profit (92.05 +47.95) 140.00
Share in OCI 20×35% 7.00
Unrealized profit in inventory (PL) (3.15)
2,643.85

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351
Workings:
Sr.No Particulars Dr Cr
(i) Expense 20
Investment in S.L 20
(No effect on NCI)
(ii) Investment in S.L (27520) 5,500
Share capital (27510) 2,750
Share premium (27510) 2,750
(iii) 1.7.2018 Investment in S.L 711.78
Payable 711.78
-3
[1,000(1.12) ]=711.78
30.6.2019 Finance cost 85.41
Payable 85.41
[711.7812%=85.41]
No effect on NCI
(iv) Software 150
R.S 150
Amortization 30
Software 30
(150÷5) (Effect on NCI)
(v) R. loss (contingent liability) 60
Payable 60
(vi) Payable 40
Expense 40
Reversal of liability already recorded by S.L in post-acquisition period
(effect on NCI)
(vii) Cost of sales 18
S P
Stock 18
[(138÷115)15=18]
Effect on NCI
(viii) Cost of sales 3.15
P A
Investment in associates 3.15
[(69÷115)15]=935%=3.15
(ix) Loan from GL to SL
6
15012% 12 = 9
Inter company interest income and expense to be cancelled.
(ix) Asset 35
Revaluation Surplus 35
Revaluation surplus of SL in post acquisition period

(x) FV of NCI = 6000÷10 = 60030% 17 = 3,060

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352
Analysis of Equity of SL ( Subsidiary):
P (70%) NCI (30%)
At Acq : 1-7-2018
S.C 6,000
R.E 3,000
9,000
R.S (Software) 150
R. Loss (Liability) (60)
9,090 6,363 2,727
Cost of Investment:
[1,400-20+5,500+711.78] 7,591.78
FV of NCI 3,060
Goodwill 1,228.78 333
Total Goodwill = 1,561.78

Analysis of Equity of BL (Associate)

GL (35%)
At Acq : 1-1-2017
S.C 5,000
R.E 1,800
6,800 2,380
Cost of Investment 2,500
Goodwill ( Not to be recognized) X
Since Acq. Till the end of last year
R.E (2,200 -137) - 1,800 = 263 92.05
Journal Entry :
Investment 92.05
Opening 92.05
CRE

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