CMA MAY-2022 EXAMINATION

ADVANCEDLEVEL-I
FR342: ADVANCED FINANCIAL REPORTING

Model Solution
Solution to the Q. No. 1
(a) (i) The IASB issues three major types of pronouncements: 1. International Financial
Reporting Standards. 2. Conceptual Framework for Financial Reporting. 3. International
Financial Reporting Standards Interpretations. IASB standards are financial accounting
standards issued by the IASB and are referred to as International Financial Reporting
Standards (IFRS). The Conceptual Framework for Financial Reporting sets forth the
fundamental objective and concepts that the Board uses in developing accounting standards
that will serve as tools for solving existing and emerging problems in a consistent manner.
(ii) The hierarchy of IFRS to determine what recognition, valuation, and disclosure
requirements should be used is: 1. International Financial Reporting Standards. 2.
International Accounting Standards. 3. Interpretations from the International Financial
Reporting Standards Interpretations Committee. Any company indicating that it is preparing
its financial statements in conformity with IFRS must comply with all these standards and
interpretations.
(b) The chairman of the IASB was indicating that too much attention is put on the bottom
line and not enough on the development of quality products. Managers should be less
concerned with short-term results and be more concerned with the long-term results. In
addition, short-term tax benefits often lead to long-term problems. The second part of
his comment relates to accountants being overly concerned with following a set of rules,
so that if litigation ensues, they will be able to argue that they followed the rules exactly.
The problem with this approach is that accountants want more and more rules with less
reliance on professional judgment. Less professional judgment leads to inappropriate
use of accounting procedures in difficult situations. In the accountants’ defense, recent
legal decisions have imposed vast new liability on accountants. The concept of
accountant’s liability that has emerged in these cases is broad and expansive; the
number of classes of people to whom the accountant is held responsible is almost
limitless.
(c) The answers are as follows-
1. HAG:
Selling Price of the bonds (Tk.3,000,000103%)Tk.3,090,000
Accrued interest from Jan.1 to Feb.28,2019
(Tk.3,000,0009%2/12) Tk.45,000
Total cash received from issuance of the bond Tk.3,135,000
Less: Bond issuance costs (Tk.27,000)
Net amount of cash received Tk.3,108,000
2. RSA
Face value of bonds = Tk.500,000
Issue price = (469,280)
Bond discount on issue date = 30,720
3. CBC: Maturities and sinking fund requirements on long-term debt for the next
five year are as follows:
2020: Tk.400,000
2021: Tk.350,000
2022: Tk.200,000
2023: Tk.200,000
2024: Tk.350,000

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Solution to the Q. No. 2

(a) open ended

(b)

Consolidated statements of changes in equity

For the year ended 31.12.2021
Particulars Badsha Group MHM
BDT in “000” BDT in “000”
Equity 01.07.2020 (w4/w5) 456 84
Comprehensive Income (w3/w2) 311 8
Dividends:
Parents Dividend (50)
NCI% × Subsidiaries dividend
(20% × 30) (6)
Disposal of subsidiary (86)
Equity 30.06.2021 717 ----

Workings:

W1: NCI share of Comprehensive Income

Up to the date of disposal = BDT 80,000 ×6/12 × 20% = BDT 8,000

W2: Parent share of comprehensive income (BDT in “000”)

Parent comprehensive income 145
Less: Inter-co. dividend (24)
Parents share on sub. com. Income [(80×6/12) – 8 (w1)] 32
Group profit on disposal of subsidiary (w5) 146
Share of associate profit 12
311

W3: Parents share of equity (1.7.20) (BDT in “000”)

Parents equity 400
Sub: P% × post acquisition reserves [80%× (250-180)] 56
456

W4: NCI share of equity at 1.7.20(BDT in “000”)

NCI at acquisition at fair value 70
NCI % × post acquisition reserves [20%× (250-180)] 14
84

W5: Group profit on disposal of subsidiary (BDT in “000”)

Sale proceeds 300
Fair value of retained interest 160
Less: carrying value of subsidiary disposed of:

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Net assets of subsidiary at disposal date
[250+(6/12×80)-30] 260
Goodwill at disposal date
[250+70-180] 140
Less: NCI at disposal (w6) (86)
(314)
Consolidated profit on disposal 146

W6: NCI at disposal(BDT in “000”)

NCI at acquisition at fair value 70
NCI% × post acquisition reserves [20 %×( 260-180)] 16
86

W7: Parents share of equity closing balance (BDT in “000”)

Parents closing equity 495
Sub: Parents % × post acquisition reserves [80% × (260-180)] 64
Profit on disposal of subsidiary (w5) 146
Associates proportion [30%× (300-260)] 12
717
Solution to the Q. No. 3
The following working notes are pertinent to the solution:
W#1Calculate goodwill
Group
Tk.
Consideration transferred (W#2) 40,000
Fair value of NCI 9,000
Net assets acquired as represented by:
Ordinary share capital 25,000
Revaluation surplus on acquisition 5,000
Retained earnings on acquisition 6,000
Intangible asset – brand name 5,000
(41,000)
Goodwill 8,000
This goodwill must be capitalized in the consolidated statement of financial position.
W#2 Consideration transferred
Tk.
Cash paid 30,000
Further cash paid 10,000
40,000
W#3 Calculate consolidated reserves
Consolidated revaluation surplus Tk.
King Co 12,000
Share of Queen Co's post acquisition revaluation surplus –
Consolidated retained earnings 12,000
King Queen
Tk. Tk.
Retained earnings per question 26,000 28,000
Less pre-acquisition (6,000)
22,000
Share of Queen: 80% ×Tk.22,000 17,600
43,600

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W#4 Calculate non-controlling interest at year end
Tk.
Fair value of non-controlling interest 9,000
Share of post-acquisition retained earnings (22,000 x 20%) 4,400
13,400
W#5 Agree current accounts
Queen Co has cash in transit of Tk.2,000 which should be added to cash and deducted from
the amount owed by King Co.
Cancel common items: these are the current accounts between the two companies of Tk.8,000
each.
KING CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2020
Tk. Tk.
Assets
Non-current assets
Property, plant and equipment (50,000 + 40,000) 90,000
Intangible assets: Goodwill (W1) 8,000
Brand name (W1) 5,000
Current assets
Inventories (3,000 + 8,000) 11,000
Receivables (16,000 + 7,000) 23,000
Cash (2,000+2000) 4,000
38,000
Total assets 141,000
Equity and liabilities
Equity
Ordinary shares of Tk.1 each 45,000
Revaluation surplus (W3) 12,000
Retained earnings (W3) 43,600
100,600
Non-controlling interest (W4) 13,400
114,000
Current liabilities
Trade payables (10,000 + 7,000) 17,000
Suspense 10,000
Total equity and liabilities 141,000

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Solution to the Q. NO. 4

(a) Open Ended

(b) Open Ended
(c) Open Ended
(d) Goodwill on consolidation of KFK Co Tk. in million Tk. in million
Consideration transferred (Tk.2.00 X 6m) 12.0
Non-controlling interest (Tk.2.00 X 2m) 4.0
Fair value of net assets acquired
Share capital 8.0
Pre-acquisition reserves 4.4
Fair value adjustments
Property, plant and equipment (16.6 – 16.0) 0.6
Inventories (4.2 – 4.0) 0.2
(13.2)
Goodwill 2.8
Notes on treatment
i. Share capital and pre-acquisition profits represent the book value of the net
assets of KFK Co at the date of acquisition. Adjustments are then required to
this book value in order to give the fair value of the net assets at the date of
acquisition. For short-term monetary items, fair value is their carrying value on
acquisition.
ii. IFRS 3 states that the fair value of property, plant and equipment should be
determined by market value or, if information on a market price is not
available (as is the case here), then by reference to depreciated replacement
cost, reflecting normal business practice. The net replacement cost (i.e.
Tk.16.6m) represents the gross replacement cost less depreciation based on
that amount, and so further adjustment for extra depreciation is unnecessary.
iii. IFRS 3 also states that raw materials should be valued at replacement cost.
In this case that amount is Tk. 4.2m.
iv. The rationalization costs cannot be reported in pre-acquisition results under
IFRS 3 as they are not a liability of KFK Co at the acquisition date.

Solution to the Q. No. 5

(a) Open Ended
(b) Trading A/c of Z Ltd for the Current Year ended March 31
To Cost of sales Tk. 69,000 By Sales Tk. 70,000
To Gross profit c/f to P&L A/c 1,000
70,000 70,000
Profit and Loss A/c for the Current Year ended March 31
To General Expenses Tk. 14,000 By Gross profit b/f from Tk. 1,000
trading A/c
To Depreciation 3,000
Net loss 16,000
17,000 17,000
Balance Sheet as at March 31, Current Year
Liabilities Amount Assets Amount
Capital Tk. 47,000 Fixed assets Tk. 15,000
Less Net loss 16,000 Less: 3,000 Tk. 12,000
Depreciation

Less: Drawings 5,000 Tk. 26,000 Current assets

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 Cash 20,350
Creditors 23,000 Debtors 8,400
Suspense 9,000 Stock 17,250 46,000
Total 58,000 Total 58,000
Working Notes
1. Determination of current assets and current liabilities:
CA-CL = Tk. 23,000 ...........................(1)
0.5 CA- CL = 0..........................................(2)
Subtracting equation (2) from equation (1)
0.5 CA = Tk. 23,000
CA = Tk. 46,000
CL = Tk. 23,000 = Creditors as there are no other current liabilities.
2. Determination of fixed assets: Depreciation rate, 20 per cent = Tk. 3,000
𝟏𝟎𝟎
Cost of fixed assets = Tk. 3,000x 𝟐𝟎 = 𝑻𝒌. 𝟏𝟓, 𝟎𝟎𝟎

𝐒𝐚𝐥𝐞𝐬
3. Determination of sales = 𝐅𝐢𝐱𝐞𝐝 𝐚𝐬𝐬𝐞𝐭𝐬+𝐖𝐨𝐫𝐤𝐢𝐧𝐠 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 = 𝟐
𝐒𝐚𝐥𝐞𝐬
=𝟐
𝐓𝐤.𝟏𝟐,𝟎𝟎𝟎+𝐓𝐤.𝟐𝟑,𝟎𝟎𝟎

Sales = Tk. 70,000

𝑳𝒊𝒒𝒖𝒊𝒅 𝒂𝒔𝒔𝒆𝒕𝒔 𝑳𝒊𝒒𝒊𝒊𝒅 𝒂𝒔𝒔𝒆𝒕𝒔
4. Determination of liquid assets: liquid ratio =𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒕𝒊𝒆𝒔 , 𝟏. 𝟐𝟓 = 𝑻𝒌.𝟐𝟑,𝟎𝟎𝟎
Tk. 28,750 = Liquid assets (cash +debtors)
(a) Debtors are 12 per cent of annual sales = Tk. 8,400 (0.12xTk.70,000)
(b) Cash = Tk. 28,750-Tk.8,400 = Tk. 20,350
5. Determination of stock = Current assets- Liquid assets
Tk. 46,000-Tk. 28,750= Tk. 17,250
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔
6. Determination of cost of sales: Stock turnover ratio = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒔𝒕𝒐𝒄𝒌
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔
4= 𝑻𝒌.𝟏𝟕,𝟐𝟓𝟎
Tk. 69,000 = Cost of sales.
(b) The acid-test ratio is a rigorous measure of a firm’s ability to service short-term
liabilities. The usefulness of the ratio lies in the fact that it is widely accepted as the
best available test of the liquidity position of a firm. That the acid-test ratio is superior
to t he current ratio is evident from the given table. The current ratio of the firm is 2:1
and can certainly be considered satisfactory. This interpretation of the liquidity
position of the firm needs modification in the light of the quick ratio. Generally, an
acid-test ratio of 1:1 is considered satisfactory as a firm can easily meet all current
claims. In the case of the firm the quick ratio (0.5:1) is less than the standard/norm,
the satisfactory current ratio notwithstanding. The interpretation that can be placed
on current ration (2: 1) and acid-test (0.5: 1) is that a large part of the current assets
of the firm is tied up in slow moving and unsaleable inventories and slow paying
debts. The firm would find it difficult to pay its current liabilities. The acid-test ratio
provides, in a sense, a check on the liquidity position of a firm as shown by its current
ratio. The quick ratio is a more rigorous and penetrating test of the liquidity position of
a firm. Yet, it is not a conclusive test. Both the current and quick ratios should be
considered in relation to the industry average to infer whether the firm’s short-term
financial position is satisfactory or not.
= THE END =

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